SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACTS OF 1934
For the quarterly period ended June 30, 2004
or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACTS OF 1934
For the transition period from to
Commission File Number: 000-27931
DESERT HEALTH PRODUCTS, INC.
(Exact name of registrant as specified in its charter)
Arizona
(State of other jurisdiction of other jurisdiction of incorporation or
organization)
86-0699108
(I.R.S. Employer Identification Number)
8221 East Evans Road, Scottsdale Arizona 85260
(Address of Principal executive office)
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 such 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 |_|
The number of shares of Common Stock outstanding as of August 19, 2004:
14,743,821
Transitional Small Business Disclosure Format (check one): Yes |_| No |X|
DESERT HEALTH PRODUCTS, INC.
CONSOLIDATED BALANCE SHEETS
Part I - Financial Information
Item I - Financial Statements
June 30, December 31,
2004 2003
(Unaudited) (Audited)
------------ ------------
ASSETS
Current Assets
Cash $ 10,370 $ 11,420
Accounts receivable, net 23,251 25,793
Inventory 114,575 99,770
Advances 2,010 1,010
------------ -----------
Total Current Assets 150,206 137,993
------------ -----------
Property and Equipment, net 73,254 79,779
------------ -----------
Other Assets
Intangibles, net -- 756,822
Goodwill, net -- 233,645
Deferred financing costs 286,050 100,996
Deposits 20,076 21,326
------------ -----------
306,126 1,112,789
------------ -----------
Total Assets $ 529,586 $ 1,330,561
============ ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Loan inducement fees payable $ 11,340 $ 11,340
Accounts payable and accrued expenses 464,929 314,920
Deferred revenue 75,442 60,750
Interest payable 287,877 212,718
Dividends payable 157,604 157,604
Current portion of obligations payable 1,746,218 1,282,256
------------ -----------
Total Current Liabilities 2,743,410 2,039,588
Long Term Liabilities
Shares subject to mandatory redemption 1,100,000 1,100,000
Long term note payable, net of current portion -- 7,000
------------ -----------
Total Liabilities 3,843,410 3,146,588
------------ -----------
Stockholders' Deficit
Preferred Stock, convertible, $.001 par value, 10,000,000 shares
authorized and 3,179,125 and 1,708,500 shares issued and outstanding
as of June 30, 2004 and December 31, 2003, respectively 3,179 1,708
Common stock, $.001 par value, 25,000,000 shares
authorized, 14,083,821 and 13,163,821 issued and 13,658,821
and 12,738,821 outstanding as of June 30, 2004 and
December 31, 2003, respectvely 14,084 13,164
Stock subscribed 461,975 1,744,000
Treasury stock, 425,000 shares at cost (191,250) (191,250)
Additional paid in capital in excess of par value 7,910,060 5,390,025
Accumulated deficit (11,511,872) (8,773,674)
------------ -----------
(3,313,824) (1,816,027)
------------ -----------
Total Liabilities and Stockholder Deficit $ 529,586 $ 1,330,561
============ ===========
See accompanying notes to the condensed financial statements
F-1
DESERT HEALTH PRODUCTS, INC
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------- -------------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Revenue $ 72,279 $ 22,266 $ 118,814 $ 55,846
Cost of Sales 29,237 15,759 60,530 37,054
------------ ------------ ------------ ------------
Gross Profit 43,042 6,507 58,284 18,792
Operating Expenses
General and administrative 496,974 193,577 1,381,497 616,253
Impairment of intangibles 756,822 -- 756,822 --
Impairment of goodwill 233,645 -- 233,645 --
------------ ------------ ------------ ------------
1,487,441 193,577 2,371,964 616,253
------------ ------------ ------------ ------------
Loss from operations (1,444,399) (187,070) (2,313,680) (597,461)
Other Income (Expense)
Other income 85 -- 14,334 --
Interest expense (210,967) (56,739) (312,644) (124,355)
Miscellaneous expense (3,883) (949) (5,718) (5,828)
Financing costs (91,194) -- (120,527) --
Interest income -- 8 37 68
------------ ------------ ------------ ------------
(305,959) (57,680) (424,518) (130,115)
------------ ------------ ------------ ------------
Net Loss $ (1,750,358) $ (244,750) $ (2,738,198) $ (727,576)
============ ============ ============ ============
Basic and diluted loss per common share $ (0.13) $ (0.02) $ (0.20) $ (0.06)
============ ============ ============ ============
Weighted Average Common Shares Outstanding 13,516,348 12,531,488 13,379,923 12,384,733
============ ============ ============ ============
See accompanying notes to the condensed financial statements
F-2
DESERT HEALTH PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT (Unaudited)
Convertible
Preferred Stock Common Stock Treasury Stock
------------------------- ------------------------ -----------------------
Par Value Par Value
Shares $.001 sh Shares $.001 sh Shares Cost
---------- --------- ---------- --------- -------- ---------
Balances, December 31, 2003 1,708,500 $ 1,708 13,163,821 $13,164 (425,000) $(191,250)
Preferred shares activity for the six
months ended June 30, 2004
Interest payment 130,625 131 -- -- -- --
Stock conversion (90,000) (90) 90,000 90 -- --
Stock subscribed 1,430,000 1,430 265,000 265 -- --
Common shares issued for the six
months ended June 30, 2004
Services and fees -- -- 380,000 380 -- --
Cash -- -- 185,000 185 -- --
Warrants issued -- -- -- -- -- --
Net loss for the six months ended
June 30, 2004 -- -- -- -- -- --
---------- ------- ---------- ------- -------- ---------
Balances, June 30, 2004 3,179,125 $ 3,179 14,083,821 $14,084 (425,000) $(191,250)
========== ======= ========== ======= ======== =========
Additional
paid-in Subscribed Accumulated
Capital Stock Deficit Total
---------- ----------- ------------ -----------
Balances, December 31, 2003 $5,390,025 $ 1,744,000 $ (8,773,674) $(1,816,027)
Preferred shares issued for the six
months ended June 30, 2004
Interest payment 123,963 -- -- 124,094
Stock conversion -- -- -- --
Stock subscribed 1,696,305 (1,282,025) -- 415,975
Common shares issued for the six
months ended June 30, 2004
Services and fees 349,620 -- -- 350,000
Cash 184,815 185,000
Warrants 165,332 -- -- 165,332
Net loss for the six months ended
June 30, 2004 -- -- (2,738,198) (2,738,198)
---------- ----------- ------------ -----------
Balances, June 30, 2004 $7,910,060 $ 461,975 $(11,511,872) $(3,313,824)
========== =========== ============ ===========
See accompanying notes to the condensed financial statements
F-3
DESERT HEALTH PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
For The Six Months Ended June 30,
2004 2003
--------- ---------
Cash Flows from Operating Activities
Cash received from customers $ 121,356 $ 55,523
Cash paid to suppliers and employees (809,028) (552,752)
Miscellaneous expense (5,518) (5,493)
Miscellaneous income 14,334 --
Interest income 37 68
Interest expense (45,131) (20,875)
--------- ---------
Net Cash Used in Operating Activities (723,950) (523,529)
Cash Flows from Investing Activities
Proceeds from advances -- 5,500
Deposits 1,250 --
Purchase of assets (2,850) (3,070)
Payments on advances (1,000) (6,900)
--------- ---------
Net Cash Used by Investing Activities (2,600) (4,470)
Cash Flows from Financing Activities
Proceeds from notes payable 307,500 94,000
Payments on notes payable (25,000) (7,500)
Proceeds from sale of stock 185,000 --
Increase in stock subscribed 258,000 364,000
--------- ---------
Net Cash Provided by Financing Activities 725,500 450,500
--------- ---------
Net Decrease in Cash and Cash Equivalents (1,050) (77,499)
Beginning Cash and Cash Equivalents 11,420 55,515
--------- ---------
Ending Cash and Cash Equivalents $ 10,370 $ (21,984)
========= =========
See accompanying notes to the condensed financial statements
F-4
DESERT HEALTH PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
For The Six Months Ended June 30,
2004 2003
----------- ---------
Reconciliation of Changes in Net Operations to Net Cash Used
by Operating Activities:
Loss from operations $(2,738,198) $(727,576)
Adjustments to reconcile change in loss from operations to
net cash used by operating activities:
Miscellaneous expense -- 168
Depreciation 9,375 11,376
Preferred Stock issued for interest payment 124,094 --
Common Stock issued as loan inducement fees 155,522 --
Impairment of intangibles and goodwill 990,467 --
Conversion of debt for stock -- 239,156
Financing costs 120,527 --
Common Stock issued for services 380,000 42,542
(Increase) decrease in operating assets
Accounts receivable 2,542 (323)
Prepaid expenses -- (9,818)
Inventory (14,805) 7,064
Increase (decrease) in operating liabilities
Interest payable 81,825 (135,675)
Deferred revenue 14,692 --
Accounts payable 150,009 49,557
----------- ---------
Net Cash Used by Operating Activities $ (723,950) $(523,529)
=========== =========
See accompanying notes to the condensed financial statements
F-5
Notes to Financial Statements
Note 1. Summary Of Significant Accounting Policies
Basis of Presentation and Interim Consolidated Financial Statements
The accompanying unaudited condensed consolidated balance sheet as of June
30, 2004 and the related unaudited condensed consolidated statements of
operations, stockholders deficit and cash flows for the six months ended June
30, 2004 and 2003 presented herein have been prepared in accordance with
accounting principles ("GAAP") generally accepted in the United States of
America for interim financial information and in accordance with the
instructions to Form 10-QSB. Accordingly, certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted.
Accounting principles assume the continuation of the Company as a going concern.
The Company's auditors, in their opinion on the financial statements for the
year ended December 31, 2003, expressed a concern about this uncertainty. The
accompanying financial statements do not include any adjustment that might arise
from the outcome of this assumption. In our opinion, the accompanying condensed
consolidated financial statements include all adjustments necessary for a fair
presentation of such condensed consolidated financial statements. Such necessary
adjustments consist of normal recurring items and the elimination of all
significant intercompany balances and transactions.
These interim condensed consolidated financial statements should be read
in conjunction with the Company's December 31, 2003, Annual Report on Form
10-KSB. Interim results are not necessarily indicative of results for a full
year. Certain reclassifications have been made to conform prior period
financials to the presentation in the current reporting period. The
reclassifications had no effect on net loss.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statement and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from these estimates.
Earnings (Loss)Per Share
Basic earnings (loss) per share (EPS) excludes dilution and is computed by
dividing net income (loss) by the weighted average number of shares outstanding.
Diluted EPS reflects potential dilution that would occur if securities or other
contracts to issue common stock were exercised or converted into common stock.
The following is the reconciliation of earnings per share:
Three Months Three Months Six Months Six Months
Ended June 30, Ended June 30, Ended June 30, Ended June 30,
2004 2003 2004 2004
-------------- -------------- -------------- --------------
Loss applicable to basis and diluted
loss per share $ (1,750,358) $ (244,750) $ (2,738,198) $ (727,576)
Weighted average number of common
shares assuming no dilution 13,516,348 12,531,488 13,379,923 12,384,733
Weighted average number of common
Shares assuming full dilution 13,516,348 12,531,488 13,379,923 12,384,733
------------ ------------ ------------ ------------
Basic loss per common share $ (0.13) $ (0.02) $ (.20) $ (.06)
============ ============ ============ ============
Diluted loss per common share $ (0.13) $ (0.02) $ (.20) $ (.06)
============ ============ ============ ============
The impact of outstanding stock options and warrants has not been included in
the computation of diluted loss per common share as it would be anti-dilutive
(reduces the loss per share).
2
Stock Based Compensation
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and the related
interpretations in accounting for its employee stock options. Under APB 25,
because the exercise price of employee stock options equals or exceeds the
market price of the underlying stock on the date of grant, no compensation
expense is recorded. The Company has adopted the disclosure-only provision of
Statement of Financial accounting Standards No. 123., "Account for Stock Based
Compensation".
The company has no issuances of stock options for the periods presented
and, as such has no pro forma earnings per share presentation.
Warrants
During the quarter ended June 30, 2004, the company granted a total of
443,500 warrants to various parties as loan inducement fees.
Weighted
Warrants Exercise
Exercisable Price
----------- --------
Balance- outstanding December 31, 2003 -- $ --
Granted -- --
Canceled -- --
Expired -- --
------- -------
Balance -outstanding March 31, 2004 -- --
Granted 443,500 .50
Canceled --
Expired --
Exercised --
------- -------
Balance -outstanding June 30, 2004 443,500 $ 0.50
======= =======
The fair value of warrants granted was estimated at the date of grant using a
Black-Scholes options valuation model with the following weighted-average
assumptions for the three and six months ended June 30, 2004. risk-free interest
rates of 5.00%, no dividend yield, volatility factor of the expected market
price of the Company's common stock of 100% and approximate expected life of 6
months and 1 year. A deferred financing cost was recorded in the amount of
$165,332 and will be amortized over the life of the agreements as financing
costs. The average value of warrants granted was $0.37. Amortization/financing
costs recorded for the three and six months ended June 30, 2004 was $50,986.
Remaining life of the warrants outstanding as of June 30, 2004, is approximately
1.4 years.
The Black Scholes options valuation model was developed for use in estimating
the fair value of traded options that have no vesting or trading restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Changes in the subjective assumptions can materially affect the fair
value estimate.
Inventory
Inventory consists primarily of health food supplements and vitamin
products and are stated at the lower of cost (first-in, first-out) or market
value. At June 30, 2004 the Company had no allowance for potentially obsolete
inventory, as all items are deemed to be saleable within their remaining shelf
lives.
3
Intangible Assets
Goodwill and other intangible assets were not amortized in 2004. Statement
of Financial Accounting Standards No. 142 was implemented requiring goodwill and
other intangible assets to be adjusted to fair value by recording an impairment
loss when applicable. Fair value of each intangible and goodwill was determined
by calculating the net present value of management's estimate of future cash
flows expected to be generated by the intangible or goodwill over the next three
years. An impairment loss to goodwill and intangibles was recorded in the
amounts of $233,645 and $756,822 in the second quarter of 2004, respectively.
Note 2. New Financing
During the second quarter of 2004 the Company obtained new short term
financing from various individuals in the total amount of $165,500. Maturity
dates range from November 10, 2004 to October 16, 2004, with interest per annum
of 10%. All of the $165,500 in new financing has terms in which all interest and
principal is due upon maturity. In order for the Company to obtain the above
referenced financing, 178,500 shares of the Company's common stock are to be
issued to the individual lenders as loan inducement fees valued at $84,400.
Additionally, warrants were offered on 143,500 shares to support loan
inducements during the quarter of the Company's common stock.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Unless the context otherwise requires, the terms "Desert Health",
"Company", "we", "us" and "our" in this Quarterly Report on Form 10-QSB refer to
Desert Health Products, Inc., an Arizona corporation.
The following discussion and analysis should be read in conjunction with
our Financial Statements and the notes thereto appearing elsewhere in this
document.
Cautionary Statement Regarding Forward-looking Statements
Our Annual Report on Form 10-KSB, this or any other quarterly reports on
Form 10-QSB filed by us or any other written or oral statements made by or on
our behalf may include forward-looking statements which reflect our 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.
We wish to caution investors that any forward-looking statements made by
or on our behalf 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 which have
been discussed in prior filings with the Securities and Exchange Commission
("SEC"). Though we have attempted to list comprehensively these important
factors, we wish to caution investors that other factors could in the future
prove to be important in affecting our 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 our views as of the date the
statement was made. We undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
4
Overview
We are engaged in the packaging, sale and distribution of branded and
store brand (private label) vitamins, nutritional supplements, skin care and
animal care products. We have focused our marketing and registration efforts
primarily in the foreign marketplace. This is a very time consuming and
expensive project, but the nutraceutical 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. However, we are taking steps to offer our products to
mid-size chain store operations as an initial step towards penetrating the
domestic market.
We market 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. We have
traditionally outsourced our raw materials manufacturing.
On January 26, 2000, pursuant to an Acquisition Agreement and Plan of
Merger entered into by and between Desert Health and Intercontinental Capital
Fund, Inc., ("Intercontinental"), a Nevada corporation (a company subject to the
reporting requirements of the Securities and Exchange Act of 1934, as amended)
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.
Critical Accounting Policies
This summary of critical accounting policies is presented to assist in
understanding our financial statements. The financial statements and notes are
representations of our management who is responsible for their integrity and
objectivity. These accounting policies conform to generally accepted accounting
principals and have been consistently applied in the preparation of the
financial statements.
Basis of Consolidation
The consolidated financial statements include the accounts of Royal
Products, Inc., a wholly owned subsidiary. All significant intercompany accounts
and transactions have been eliminated in the consolidation.
Depreciation
Depreciation is computed by using the straight-line method for financial
reporting purposes and the accelerated cost recovery method for federal income
tax purposes
Revenue and Cost Recognition
Revenues are recognized when earned, and expenses are recognized when
incurred. We generally recognize revenue upon shipment of our products in
accordance with the terms and conditions of firm orders placed with us by our
customers.
RESULTS OF OPERATIONS.
Three months ended June 30, 2004 and 2003
Revenues. Revenues for the three months ended June 30, 2004 were $72,279,
an increase of $50,013 or 225%, from $22,266 for the three months ended June 30,
2003. This increase was principally attributable to the increased acceptance of
our registrations in the foreign markets and to continuing
5
penetration into the domestic market. We are continuing our efforts to launch
new distribution outlets in Europe, Asia and in the domestic market.
Gross Profit Margin. Gross profit was $43,042 or 60% for the three months
ended June 30, 2004, an increase of $36,535 or 561%, from $6,507 or 29% for the
three months ended June 30, 2003. This increase is primarily the result of
increased sales in foreign markets and lower packaging and distribution costs.
Operating Expenses. Operating expenses for the three months ended June 30,
2004 were $1,487,441, an increase of $1,293,864 or 668%, from $193,577 for the
three months ended June 30, 2003. Approximately $1,000,000 of this increase is
the result of the complete write-off of intangibles to comply with generally
accepted accounting principles. Additionally, approximately $200,000 and
$100,000 was due to increased professional fees and loan inducement fees,
respectively.
Interest Expense. Interest expense for the three months ended June 30,
2004 was $210,967, an increase of $154,228, or 272%, from $56,739 for the three
months ended June 30, 2003. This increase is primarily the result of prior and
additional loans made to the company.
Net Income (Loss). Net loss was $1,750,358 for the three months ended June
30, 2004, as compared to a net loss of $244,750 for the three months ended June
30, 2003. This increase is primarily the result of increased operating costs as
discussed in the operating expenses section and additional financing and
interest costs.
Six Months Ended June 30, 2004 and 2003
Revenues. Revenues for the six months ended June 30, 2004 were $118,814,
an increase of $62,968, or 113% increase from $55,846 for the six months ended
June 30 2003. This increase was principally attributable to the increased
acceptance of our registrations in the foreign markets and to continuing
penetration into the domestic market. We are continuing our efforts to launch
new distribution outlets in Europe, Asia and in the domestic market.
Gross Profit Margin. Gross profit was $58,284 or 49%, for the six months
ended June 30, 2004, an increase of $39,492 or 210% from $18,792, or 33%, for
the six months ended June 30, 2003. This increase is primarily the result of
increased sales in foreign markets and lower packaging and distribution costs.
Operating Expenses. Operating expenses for the six months ended June 30,
2004 were $2,371,964, an increase of $1,755,711 or 285% from $616,253 for the
six months ended June 30, 2003. Approximately $1,000,000 of this increase is the
result of the complete write-off of intangibles to comply with generally
accepted accounting principles. Additionally, approximately $300,000 of the
increase is due to increased professional fees and $400,000 increase in loan
inducement fees, and $40,000 increase in travel and entertainment.
Interest Expense. Interest expense for the six months ended June 30, 2004,
was $312,644, an increase of $188,289, or 151%, from $124,355 for the six months
ended June 30, 2003. This increase is primarily the result of additional loans
made to the company.
Net Income (Loss). Net loss was $2,738,198 for the six months ended June
30, 2004, as compared to a net loss of $727,576 for the six months ended June
30, 2003. This increase is primarily the result of the matters discussed in the
Operating Expenses section above. Additionally, approximately $500,000 of the
loss can be attributed to stock conversion costs and approximately $1,000,000 of
the loss can be attributed to recording impairment losses on intangibles and
goodwill, during the six months ended June 30, 2004.
6
Liquidity And Capital Resources
As indicated in our attached financial statements, our gross revenue was
not sufficient to meet our operating expenses for the three months ended June
30, 2004. In addition, as of June 30, 2004, our current liabilities exceeded our
current assets by $2,593,204, as compared to $1,449,976 for the comparable three
month period ended June 30, 2003.
Since inception, we have financed our cash flow requirements through debt
financing, issuance of common stock for cash and services, and minimal cash
balances. As we continue our marketing activities in Europe, China and North
America, we will 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 working capital.
Over the next 12 months, we intend to increase our revenues by releasing
new products under development to our target markets. We believe that existing
capital and anticipated funds from operations will not be sufficient to sustain
operations and planned expansion in the next 12 months. Consequently, we 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 our ability to sell securities in planned amounts and in
turn our ability to meet our capital requirements. In either case, the financing
could have a negative impact on our financial condition and our stockholders.
Our auditors have indicated uncertainty concerning our ability to continue
as a going concern as of the most recent audited financial statements. We cannot
assure you that our ability to obtain additional customers or financing sources
will be impaired as a result of this qualification. Additionally, we cannot
assure you that our proposed projects and services, if fully developed, can be
successfully marketed or that we will ever achieve significant revenues or
profitable margins and therefore remain as a going concern.
Recent Developments
William "Bill" Randoll has agreed to head up Royal Products, Inc., a
wholly owned subsidiary of Desert Health. Randoll brings an extensive background
in network marketing experience from both the distributor and the corporate side
of the industry.
Mr. Randoll served as the President of Soaring Eagle/SupraLife, taking the
company from $400,000 in sales per month to $4 million a month in less than two
years. He has also initiated successful turnarounds, including D'essence
designer fragrances, where he reduced operating losses over 90% in less than six
months, and successfully negotiated the sale of the company to investors.
Most recently Mr. Randoll helped create a network marketing organization
for Dr. Barry Sears, author of "The Zone" and "The OmegaRX Zone". Mr. Randoll's
industry experience spans nearly twenty years and includes work with some of the
top leaders and business builders in the field of network marketing.
An Ohio based company is commencing marketing of several of our
nutritional supplements throughout the US and its territories.
Websites for Royal Products, Inc., www.royalproducts.net and for Desert
Health www.deserthealth.com have been updated and are now e-commerce ready and
focused toward our specialty products.
7
ITEM 3. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of June 30, 2004, our Chief Executive Officer, or "CEO", and Chief
Financial Officer, or "CFO", performed an evaluation of the effectiveness and
the operation of our disclosure controls and procedures as defined in Rules 13a
- - 15 (e) or 15d-15 (e) under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"). Based on that evaluation, the CEO and CFO concluded that
our disclosure controls and procedures were effective as of June 30, 2004.
Changes in Internal Controls
There have been no changes in our internal control over financial
reporting identified in connection with the evaluation required by paragraph (d)
of Rule 13a-15 or 15d-15 under the Exchange Act that occurred during the quarter
ended June 30, 2004, that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are named in a suit filed June 2, 2002, in the Maricopa County Superior
Court, brought by a plaintiff claiming to hold an assignment of note in the
amount of $50,000 from Nicholas M. Simak, a former consultant to the Company The
Company asserts that the note was paid in full prior to the alleged assignment
and intends to vigorously defend our position. The matter is set for jury trial
in January 2005. Additionally, Nicholas M. Simak and NMS Solutions Group, Inc.,
filed a complaint in Maricopa County Superior Court of the State of Arizona
against the company May 11, 2004, alleging non-payment of various loans. The
company has retained counsel and has demanded the return of all intellectual
property, which includes customer lists and contacts belonging to the company.
The Company's position is that the damages caused by loss of this intellectual
property will offset claims being made by Mr. Simak.
Michael Medina and Marti Medina filed a complaint in Maricopa County
Superior Court of the State of Arizona against the company June 14, 2004,
alleging non-payment of a loan in the amount of $25,000, and seeking payment of
principle and interest. Desert Health's counsel is preparing a settlement offer.
ITEM 2. CHANGES IN SECURITIES
During the six months ended June 30, 2004 the following shares of common and
preferred stock were issued:
Preferred stock subscribed to in 2003 1,430,000
Preferred stock issued as interest payment 130,625
Common stock issued for cash 185,000
Common stock issued for services and fees 380,000
Common stock subscribed as loan inducement fees 265,000
Additionally, 90,000 shares of preferred stock was converted to common stock
during the 6 months ended June 30, 2004.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS OF FORM 8-K
(a) Exhibits
Registrant is filing the following exhibits:
31.1. Certification of Chief Executive Officer pursuant to Item
601(b)(31) of Regulation S-B, as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
31.2. Certification of Chief Financial Officer pursuant to Item
601(b)(31) of Regulation S-B, as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
32.1. Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2. Certification of Chief Financial Officer pursuant to 18 U.S.D.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, 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 August 19, 2004
-------------------
Johnny Shannon,
President
By: /s/ Johnny Shannon August 19, 2004
-------------------
Johnny Shannon,
Chief Financial Officer
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