UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
- --------------------------------------------------------------------------------
FORM 10-QSB
Quarterly Report Under Section 13 or 15 (d)
Of the Securities Exchange Act of 1934
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For the quarterly period ended September 30, 2002 Commission file number
000-27931
DESERT HEALTH PRODUCTS, INC.
(Exact name of registrant as specified in its charter)
Arizona 86-0699108
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
8221 East Evans Road
Scottsdale Arizona 85260
(Address of Principal executive offices) (Zip Code)
480.951.1941
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange act of 1934 during
the preceding 12 months (or for shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes |X| No |_|
As of September 30, 2002, there were 9,961,321 Shares of common stock
outstanding.
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Note 1 - Basis of Presentation
The financial statements are unaudited and have been prepared in
accordance with generally accepted accounting principles for interim financial
information and pursuant to the rules and regulations of the Securities and
Exchange Commission ("SEC"). The financial statements reflect all adjustments
(consisting only of normal recurring adjustments) which are, in the opinion of
management, necessary for a fair presentation of the Company's financial
position and operating results for the interim period.
DESERT HEALTH PRODUCTS, INC.
BALANCE SHEET
September 30, 2002
ASSETS
Current Assets
Cash $ 39,759
Accounts receivable 29,827
Notes receivable 602,118
Interest receivable 99,510
Inventory 129,428
Advances 2,500
Prepaid expenses 67,364
-----------
Total Current Assets 970,506
Property and Equipment, net 108,097
Other Assets
Intangibles, net 1,189,994
Deposits 10,000
-----------
1,199,994
-----------
$ 2,278,597
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Checks issued in excess of cash balance $ 14,837
Accounts payable and accrued expenses 251,408
Deferred revenue 63,000
Interest payable 257,867
Current portion of obligations payable 1,347,706
-----------
Total Current Liabilities 1,934,818
Long Term Liabilities
Obligations payable, net of current portion 328,183
-----------
Total Liabilities 2,263,001
Stockholders' Equity
Preferred Stock, $.001 par value, 10,000,000 shares
authorized and 1,508,500 shares issued and outstanding 1,508
Common stock, $.001 par value, 25,000,000 shares
authorized and 9,961,321 issued and outstanding 9,961
Subscriptions receivable 1,061,000
Additional paid in capital in excess of par value 4,436,648
Accumulated deficit (5,493,521)
-----------
15,596
-----------
$ 2,278,597
===========
DESERT HEALTH PRODUCTS, INC
STATEMENT OF OPERATIONS AND ACCUMULATED DEFICIT
Quarter Ended September 30, 2002
Revenue, net $ 19,373
Cost of Sales 14,333
-----------
Gross Profit 5,040
Operating Expenses 630,820
-----------
Loss from operations (625,780)
Other Income (Expense)
Interest expense (67,611)
Loan inducement fees (20,500)
Miscellaneous expense (5,575)
Interest income 6,205
Relinquishment of debt --
-----------
(87,481)
-----------
Net Loss (713,261)
Beginning accumulated deficit (4,780,260)
-----------
Ending accumulated deficit $(5,493,521)
===========
(Loss) Per Common Share $ (0.0725)
===========
DESERT HEALTH PRODUCTS, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
Quarter Ended September 30, 2002
Common Stock Preferred Stock
---------------------- ------------------ Additional Stock
Par Value Par Value paid-in subscription Accumulated
Shares $.001 sh Shares $.001 sh Capital receivable Deficit Total
----------------------- ------------------ ---------- ---------- ----------- ---------
Balances, September 30, 2002 9,446,321 $9,446 1,358,500 $1,358 $4,312,238 $ 561,000 $(4,780,260) $ 103,782
Preferred shares issued in third
quarter of 2002
Services -- -- 150,000 150 15,675 -- -- 15,825
Common shares issued in third
quarter of 2002
Services 425,000 425 -- -- 88,325 -- -- 88,750
Loan inducement fees 90,000 90 -- -- 20,410 -- -- 20,500
Subscription receivable -- -- -- -- -- 500,000 -- 500,000
Net loss for quarter ended
September 30, 2002 -- -- -- -- -- -- (713,261) (713,261)
----------------------- ------------------ ---------- ---------- ----------- ---------
Balances, September 30, 2002 9,961,321 $9,961 1,508,500 $1,508 $4,436,648 $1,061,000 $(5,493,521) $ 15,596
======================= ================== ========== ========== =========== =========
DESERT HEALTH PRODUCTS, INC.
STATEMENT OF CASH FLOWS
Quarter Ended September 30, 2002
Cash Flows from Operating Activities
Cash received from customers $ 27,439
Cash paid to suppliers and employees (382,964)
Miscellaneous expense (5,575)
Interest income 52
Interest expense (41,299)
---------
Net Cash (Used) in Operating Activities (402,347)
Cash Flows from Investing Activities
Increase in notes receivable (17,000)
Advances (563)
Purchase of assets (7,038)
---------
Net Cash (Used) by Investing Activities (24,601)
Cash Flows from Financing Activities
Increase in stock subscription receivable 500,000
Payments on loans (25,512)
---------
Net Cash Provided by Financing Activities 474,488
---------
Net (Decrease) in Cash and Cash Equivalents 47,540
Beginning Cash and Cash Equivalents (22,618)
---------
Ending Cash and Cash Equivalents $ 24,922
=========
Reconciliation of Changes in Net Operations to Net Cash Used
by Operating Activities:
Loss from operations $(713,261)
Adjustments to reconcile change in loss from operations to
net cash (used) by operating activities:
Depreciation 5,455
Amortization 170,338
Loan inducement fees 20,500
Stock issued for services 104,575
(Increase) decrease in operating assets
Accounts receivable 8,066
Inventory 37
Interest receivable (6,153)
Prepaid expenses (12,460)
Increase (decrease) in operating liabilities
Interest payable 17,537
Deferred revenue (2,000)
Accounts payable 5,019
---------
Net Cash (Used) by Operating Activities $(402,347)
=========
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion and analysis should be read in conjunction with our
Financial Statements and the notes thereto appearing elsewhere in this document.
RISK FACTORS AND CAUTIONARY STATEMENTS
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Actual results and events could differ materially from
those projected, anticipated, or implicit, in the forward-looking statements as
a result of the risk factors below and elsewhere in this report.
With the exception of historical matters, the matters of discussion herein
are forward-looking statements that involve risks and uncertainties. Forward
looking statements include, but are not limited to, statements concerning
anticipated trends in revenues and net income, the date of introduction or
completion of our products, projections concerning operations and available cash
flow. Our actual results could differ materially from the results discussed in
such forward-looking statements. The following discussion of our financial
condition and results of operations should be read in conjunction with our
financial statements and their related notes thereto appearing elsewhere herein.
Cautionary Statement Regarding Forward-looking Statements
The Company's Form 10KSB, the Company's Annual Report to Shareholders,
this or any other Form 10QSB of the Company or any other written or oral
statements made by or on behalf of the Company may include forward-looking
statements which reflect the Company's current views with respect to future
events and financial performance. The words "believe", "expect", "anticipate",
"intends", "estimate", "forecast", "project" and similar expressions identify
forward-looking statements.
The Company wishes to caution investors that any forward-looking
statements made by or on behalf of the Company are subject to uncertainties and
other factors that could cause actual results to differ materially from such
statements. These uncertainties and other factors include, but are not limited
to the Risk Factors listed below (many of which have been discussed in prior SEC
filings by the Company). Though the Company has attempted to list
comprehensively these important factors, the Company wishes to caution investors
that other factors could in the future prove to be important in affecting the
Company's results of operations. New factors emerge from time to time and it is
not possible for management to predict all of such factors, nor can it assess
the impact of each such factor on the business or the extent to which any
factor, or combination of factors, may cause actual results to differ materially
from those contained in any forward-looking statements.
Investors are further cautioned not to place undue reliance on such
forward-looking statements as they speak only of the Company's views as of the
date the statement was made. The Company undertakes no obligation to publicly
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise.
Risk Factors
Our operating results are difficult to predict in advance and may
fluctuate significantly, and a failure to meet the expectations of analysts or
our stockholders would likely result in a substantial decline in our stock
price.
Factors that are likely to cause our results to fluctuate include the
following:
o The gain or loss of significant customers or significant changes to
purchasing volume;
o The amount and timing of our operating expenses and capital
expenditures;
o Changes in the volume of our product sales and pricing concessions
on volume sales;
o The timing, rescheduling or cancellation of customer orders;
o The varying length of our sales cycles;
o Our ability to specify, develop, complete, introduce and market new
products and bring them to volume production in a timely manner;
o The rate of adoption and acceptance of new industry standards in our
target markets;
o The effectiveness of our product cost reduction efforts and those of
our suppliers;
o Changes in the mix of products we sell; and
o Changes in the average selling prices of our products.
There is a limited public market for our common stock. Although our common
stock is listed on the OTC Bulletin Board, there is a limited volume of sales,
thus providing a limited liquidity into the market for our shares. As a result
of the foregoing, stockholders may be unable to liquidate their shares.
Our success depends heavily upon the continued contributions of Johnny
Shannon, our President, whose knowledge, leadership and technical expertise
would be difficult to replace. The Company has an Employment Agreement with Mr.
Shannon that expires January 31, 2004.
To grow our business successfully and maintain a high level of quality, we
will need to recruit, retain and motivate additional highly skilled sales,
marketing, and finance personnel. If we are not able to hire, train and retain a
sufficient number of qualified employees, our growth will be impaired. In
particular, we will need to expand our sales and marketing organizations in
order to increase market awareness of our products and to increase revenue.
In addition, as a company focused on development of complex products, we
will need to hire additional staff of various experience levels in order to meet
our product roadmap.
We are subject to various risks associated with technological change and
if we do not adapt our products to the changes our business will be adversely
affected.
Our performance will partially depend on our ability to enhance our
existing services, and respond to technological advances and emerging industry
standards and practices on a timely and cost-effective basis. We cannot predict
if we will use new methodologies effectively or adapt our products to consumer,
vendor, advertising or emerging industry standards. If we were unable, for
technical, legal, financial or other reasons, to adapt in a timely manner in
response to changing market conditions or customer requirements, our business,
results of operations and financial condition could be materially adversely
affected.
If we need additional financing, we may not be able to raise further
financing or it may only be available on terms unfavorable to us or to our
stockholders.
We believe that our available cash resources will not be sufficient to
meet our anticipated working capital and capital expenditure requirements for at
least twelve months. We might need to raise additional funds, however, to
respond to business contingencies, which could include the need to:
o Fund more rapid expansion;
o Fund additional marketing expenditures;
o Develop new products or enhance existing products;
o Enhance our operating infrastructure;
o Hire additional personnel;
o Respond to competitive pressures; or
o Acquire complementary businesses or technologies.
If we raise additional funds through the issuance of equity or convertible
debt securities, the percentage ownership of our stockholders would be reduced,
and these newly issued securities might have rights, preferences or privileges
senior to those of existing stockholders. Additional financing might not be
available on terms favorable to us, or at all. If adequate funds were not
available or were not available on
acceptable terms, our ability to fund our operations, take
advantage of unanticipated opportunities, develop or enhance our products or
otherwise respond to competitive pressures would be significantly limited.
Overview
Desert Health Products, Inc., an Arizona corporation, ("the Company") was
formed in 1991. The Company is engaged in the packaging, sale and distribution
of branded and store brand (private label) vitamins, nutritional supplements,
skin care and animal care products. Desert Health has focused its marketing and
registration efforts primarily in the foreign marketplace. This is a very time
consuming and expensive project, but the nutriceutical and nutritional
supplement market is growing at a faster pace internationally than the domestic
market. One of the many rewards of having customers in the international market
is that once the registrations are in place, the customer becomes a partner in
developing that market in the long-term.
Desert Health markets over 100 products, which are packaged under various
labels and bottle counts. They are sold in Vitamin and Mineral combinations,
Chinese Herbal Products, Specialty Supplements, Weight Management Products,
Herbal/Botanical Products, FemAid Product Support Systems, Ayurvedic Products,
Skin Care Products, Pet Care Products, and Water Purification Products. The
Company has traditionally outsourced its raw materials manufacturing.
On January 26, 2000, pursuant to an Acquisition Agreement and Plan of
Merger entered into by and between Desert Health Products, Inc., and
Intercontinental Capital Fund, Inc., (Intercontinental) a Nevada Corporation, (a
company subject to the reporting requirements of the Securities and Exchange Act
of 1934) all of the outstanding shares of common stock of Intercontinental were
exchanged for 400,000 shares of Rule 144 restricted common stock of Desert
Health, in a transaction in which Desert Health was the successor and took on
the reporting requirements of Intercontinental Capital Fund, Inc.
RESULTS OF OPERATIONS
Three months ended September 30, 2002.
Revenues. Revenues for the three months ended September 30, 2002, were
$19,373, a decrease of $142,341, or 88% from $161,714, for the three months
ended September 30, 2001. This decrease was principally attributable to the
continued problems resulting from the events on September 11, 2001, and the
negative market environment making it increasingly difficult to re-establish
sales. The Company is continuing its efforts to launch new distribution outlets
in Europe, Asia and in the Domestic market. The Company anticipates joining the
World Trade Center Association located in Long Beach, California, in order to
create additional sources of distribution in the foreign market.
Operating Expenses. Operating expenses for the three months ended
September 30, 2002, were $630,820, which was a decrease of $213,837, or 25% as
compared to $844,657, for the three months ended September 30, 2001. This
decrease was primarily the result of reductions in amounts paid to officers and
other cost saving measures being implemented by the Company.
Net loss for the Company was $713,261 for the three months ended September
30, 2002, as compared to a net loss of $776,904 for the three months ended
September 30, 2001.
LIQUIDITY AND CAPITAL RESOURCES
As indicated in the Company's financial statements attached, the Company's
gross revenue was not sufficient to meet its operating expenses for the three
months ended September 30, 2002. In addition, as of September 30, 2002, the
Company's current liabilities exceeded its current assets by $964,312, as
compared to $1,046,500 for the comparable three-month period ended September 30,
2001. Those factors create an uncertainty regarding the Company's ability to
continue as a going concern. Management believes agreements being negotiated
subsequent to end of quarter, September 30, 2002, and new product
orders as product registrations in foreign countries are completed, will provide
the Company with additional cash and liquidity to sustain operations.
Since inception, the Company has financed its cash flow requirements
through debt financing, issuance of common stock for cash and services, and
minimal cash balances. As the Company continues its marketing activities in
Europe, China and North America, it may continue to experience net negative cash
flows from operations, pending receipt of sales revenues, and will be required
to obtain additional financing to fund operations through common and preferred
stock offerings and bank borrowings to the extent necessary to provide its
working capital.
Over the next twelve months, the Company intends to increase its revenues
by releasing new products under development to its target markets. The Company
believes that existing capital and anticipated funds from operations will not be
sufficient to sustain operations and planned expansion in the next twelve
months. Consequently, the Company will be required to seek additional capital in
the future to fund growth and expansion through additional equity or debt
financing or credit facilities. Considering the state of market conditions, no
assurance can be made that such financing would be available, and if available
it may take either the form of debt, equity, or a combination thereof. The down
turn in the capital market will substantially impact the Company's ability to
sell securities in planned amounts and in turn its ability to meet its capital
requirements. In either case, the financing could have a negative impact on the
financial condition of the Company and its Shareholders.
ITEM 3. CONTROLS AND PROCEDURES
Within 90 days prior to the date of this quarterly report, the Company
carried out an evaluation, under the supervision and with the participation of
the Company's management, including the Company's Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures. The Company's Chief Executive
Officer and Chief Financial Officer concluded, based on this evaluation, that
the Company's disclosure controls and procedures are effective. There were no
significant changes in the Company's internal controls or in other factors that
could significantly affect these controls subsequent to the date of their
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
On May 9, 2002, the Company brought suit against GHC Associates, Inc., an
Arizona-based distributor of a skin care system marketed for use by diabetes
sufferers. The complaint, filed with the United States District Court in Phoenix
Arizona, alleges that the defendant's marketing and packaging of its product
violates the Company's rights under the Federal Lanham Trademark Act. The
Complaint seeks an accounting, the impoundment of infringing materials, and
unspecified monetary damages
The Company is named in a suit filed May 29, 2002, in the Superior Court
of the State of Arizona, CV2002-010351, brought by Coleman, Lee & Associates,
Inc., claiming to hold an assignment of a note previously given to a former
consultant to the Company. The Company's records show the note was paid prior to
the alleged assignment, and the company intends to vigorously defend the suit.
On June 28, 2002, and received by the Company in July 2002, the Securities
Division of the Arizona Corporation Commission ("ACC") commenced an
investigation of the Company. The ACC stated in a letter to the Company's
president, Johnny Shannon, that the ACC had information that the Company may
have been offering and selling shares of stock in the Company within or from the
State of Arizona prior to the Company's merger with Intercontinental Capital
Fund, Inc. Under both Arizona law and federal law it is unlawful for any person
to offer or sell securities within or from the state unless both the securities
and the dealer or salesman have been registered under the Securities Act or
there is an exemption from registration. Based upon the investigation, the ACC
may commence a legal proceeding for damages and/or
sanctions against the Company. The Company is currently assembling the requested
information and intends to comply fully with the ACC.
ITEM 2. Changes in Securities
None
ITEM 3. Defaults by the Company upon its Senior Securities.
None
ITEM 4. Submission of Matters to a Vote of Security Holders
None
ITEM 5. Other Information
In July 2002, the Company reached a preliminary agreement to reduce
approximately $774,000 of its debt through the issuance of 900,000 shares of
Preferred Stock. The debt was originally loaned to the Company in 2000 and 2001
and bore an interest rate of 15% APR. The Company expects to complete the
transaction during the fourth quarter of 2002.
In July 2002, The Company appointed Rayfield Wright head of The Company's
Sports Nutrition and Sports Skin Care Product Lines. Mr. Wright is a
thirteen-year veteran of the legendary Dallas Cowboys. Mr. Wright displayed his
leadership abilities as one of the offensive captains for seven years, five of
which led to the Super Bowl and two World Championships. Mr. Wright is
professionally known in the sports field and also in business, financial, and
management development sectors.
Since retirement from professional football in 1980, Mr. Wright has
enjoyed success in Sales, Marketing, Insurance and especially working with
Inter-City and At Risk Students. Mr. Wright is one of the founders of
Kids-4-Tomorrow, a non-profit organization of professional athletes that work in
the schools with children from kindergarten through the 12th grade.
ITEM 6. Exhibits and Reports of Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
During the quarter ended September 30, 2002, the Company did
not file any reports on Form 8-K.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
DESERT HEALTH PRODUCTS, INC.
(Registrant)
By: /s/ Johnny Shannon
----------------------------------
Johnny Shannon
President
By: /s/ Johnny Shannon November 14, 2002
----------------------------------
Johnny Shannon/Chief Financial Officer
CERTIFICATIONS PURSUANT TO SECTION 302 OF THE SARBANES OXLEY ACT OF 2002
I, Johnny Shannon, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Desert
Health Products, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this quarterly report;
4. I am responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-14 and
15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. I have disclosed, based on our most recent evaluation, to the
registrant's auditors and the registrant's board of directors,
acting as an audit committee:
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls: and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. I have indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that
could significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
By: Johnny Shannon
------------------
Johnny Shannon
Chief Executive Officer, Chief Financial Officer and President
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Desert Health Products, Inc., (the
"Company") on Form 10-Q for the period ended September 30, 2002, as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), each
of the undersigned, in the capacities and on the dates indicated below, hereby
certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, that to the best of his knowledge:
1. The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operation
of the Company.
By: /s/ Johnny Shannon
---------------------------
Johnny Shannon Date: November 14, 2002
Chief Executive Officer
Chief Financial Officer
President