SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10QSB
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACTS OF 1934
For the quarterly period ended September 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 November 15, 2004:
15,543,821
Transitional Small Business Disclosure Format (check one): Yes |_| No |X|
DESERT HEALTH PRODUCTS, INC. CONSOLIDATED STATEMENTS (Unaudited)
FORM 10QSB INDEX
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited):
a. Consolidated Balance Sheets as of September 30, 2004 F-1
and December 31, 2003
b. Consolidated Statements of Operations F-2
c. Consolidated Statements of Stockholders Deficit F-3
d. Consolidated Statements of Cash Flow for the nine months F-4
ended September 30, 2004 and 2003
e. Notes to Unaudited Consolidated Financial Statements 3
Item 2. Management's Discussion and Analysis of Financial Condition 5
and Results of Operations
Item 3. Controls and Procedures 10
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 10
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 10
Item 3. Defaults Upon Senior Securities 11
Item 4. Submission of Matters to a Vote of Security Holders 11
Item 5. Other Information 11
Item 6. Exhibits 11
Signatures 12
2
DESERT HEALTH PRODUCTS, INC.
CONSOLIDATED BALANCE SHEETS
Part I - Financial Information
Item I - Financial Statements
September 30, December 31,
2004 2003
(Unaudited) (Audited)
------------ ------------
ASSETS
Current Assets
Cash $ -- $ 11,420
Accounts receivable, net 35,424 25,793
Prepaids 7,500 --
Inventory 87,918 99,770
Advances 2,010 1,010
------------ ------------
Total Current Assets 132,852 137,993
Property and Equipment, net 69,159 79,779
Other Assets
Intangibles, net -- 756,822
Goodwill, net -- 233,645
Deferred financing costs 207,699 100,996
Deposits 20,076 21,326
------------ ------------
Total Other Assets 227,775 1,112,789
------------ ------------
TOTAL ASSETS $ 429,786 $ 1,330,561
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Loan inducement fees payable $ 11,340 $ 11,340
Bank Overdraft 968 --
Accounts payable and accrued expenses 500,488 314,920
Deferred revenue 55,269 60,750
Interest payable 347,021 212,718
Dividends payable 157,604 157,604
Current portion of obligations payable 1,846,460 1,282,256
------------ ------------
Total Current Liabilities 2,919,150 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 4,019,150 3,146,588
Stockholders' Deficit
Preferred Stock, convertible, $.001 par value, 10,000,000 shares
authorized and 3,379,125 and 1,708,500 Shares issued and outstanding
as of September 30, 2004 and December 31, 2003, respectively 3,380 1,708
Common stock, $.001 par value, 25,000,000 shares authorized;
14,743,821 And 13,163,821 issued; and 14,318,821 and 12,738,821
outstanding as of September 30, 2004 and December 31, 2003,
respectively 14,743 13,164
Stock Subscribed 290,781 1,744,000
Treasury Stock, 425,000 shares at cost (191,250) (191,250)
Additional paid in capital in excess of par value 8,319,525 5,390,025
Accumulated deficit (12,026,543) (8,773,674)
------------ ------------
TOTAL STOCKHOLDERS' DEFICIT (3,589,364) (1,816,027)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 429,786 $ 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 Nine Months Ended
September 30, September 30,
-------------------------------- --------------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Revenue $ 91,757 $ 74,822 $ 210,571 $ 130,668
Cost of Sales 59,730 59,121 120,260 96,175
------------ ------------ ------------ ------------
Gross Profit 32,027 15,701 90,311 34,493
Operating Expenses
General and administrative 392,544 472,854 1,774,041 1,089,107
Impairment of intangibles -- -- 756,822 --
Impairment of goodwill -- -- 233,645 --
------------ ------------ ------------ ------------
Total operating expenses 392,544 472,854 2,764,508 1,089,107
------------ ------------ ------------ ------------
Loss from operations (360,517) (457,153) (2,674,197) (1,054,614)
Other Income (Expense)
Other income -- -- 14,334 --
Loan inducement fees (95,678) (8,937) (216,204) (8,937)
Interest expense (58,477) (47,320) (371,121) (171,675)
Miscellaneous expense -- (3,915) (5,718) (9,743)
Interest income -- 56 37 124
------------ ------------ ------------ ------------
Total other income (expense) (154,155) (60,116) (578,672) (190,231)
------------ ------------ ------------ ------------
Net Loss $ (514,672) $ (517,269) $ (3,252,869) $ (1,244,845)
============ ============ ============ ============
Basic and diluted loss per common share $ (0.04) $ (0.04) $ (0.24) $ (0.10)
============ ============ ============ ============
Weighted Average Common Shares 14,192,731 13,076,321 13,653,348 12,738,821
============ ============ ============ ============
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)
Equity transactions for the nine
months ended September 30, 2004
Interest payment 130,625 131 -- -- -- --
Stock conversion (90,000) (90) 90,000 90 -- --
Stock subscribed 1,630,000 1,631 665,000 664 -- --
Services and fees -- -- 640,000 640 -- --
Cash -- -- 185,000 185 -- --
Warrants -- -- -- -- -- --
Net loss for the nine months
ended September 30, 2004 -- -- -- -- -- --
------------ ------------ ----------- ------------ ----------- ------------
Balances, September 30, 2004 3,379,125 $ 3,380 14,743,821 $ 14,743 (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)
Equity transactions for the nine
months ended September 30, 2004
Interest payment 123,962 -- -- 124,093
Stock conversion -- -- --
Stock subscribed 1,995,705 (1,453,219) -- 544,781
Services and fees 442,360 -- -- 443,000
Cash 184,815 -- -- 185,000
Warrants 182,658 -- -- 182,658
Net loss for the nine months
ended September 30, 2004 -- -- (3,252,869) (3,252,869)
------------ ------------ ------------ ------------
Balances, September 30, 2004 $ 8,319,525 $ 290,781 $(12,026,543) $ (3,589,364)
============ ============ ============ ============
See accompanying notes to the condensed financial statements
F-3
DESERT HEALTH PRODUCTS, INC
CONSOLIDATED STATEMENTS OF CASH FLOW (Unaudited)
For The Nine Months Ended September 30,
2004 2003
----------- -----------
Cash Flows from Operating Activities
Cash received from customers $ 205,209 $ 131,366
Cash paid to suppliers and employees (1,112,223) (966,643)
Miscellaneous expense -- (8,493)
Interest income 37 124
Interest expense (54,427) (62,148)
----------- -----------
Net Cash Used in Operating Activities (961,404) (905,794)
Cash Flows from Investing Activities
Deposits 1,250 20
Purchase of assets (3,442) (7,935)
Payments on advances (1,000) (4,010)
----------- -----------
Net Cash Used by Investing Activities (3,192) (11,925)
Cash Flows from Financing Activities
Proceeds from notes payable 421,400 439,000
Increase in paid in capital 17,325 199,800
Payments on notes payable (38,659) (107,500)
Proceeds from sale of stock 185,000 200
Increase in stock subscribed 368,110 364,000
----------- -----------
Net Cash Provided by Financing Activities 953,176 895,500
----------- -----------
Net Decrease in Cash and Cash Equivalents (11,420) (22,219)
Beginning Cash and Cash Equivalents 11,420 55,515
----------- -----------
Ending Cash and Cash Equivalents $ -- $ 33,296
=========== ===========
See accompanying notes to the condensed financial statements
F-4
DESERT HEALTH PRODUCTS, INC
CONSOLIDATED STATEMENTS OF CASH FLOW (Unaudited)
For The Nine Months Ended September 30,
2004 2003
----------- -----------
Reconciliation of Changes in Net Operations to Net Cash Used
by Operating Activities:
Loss from operations $(3,252,869) $(1,244,845)
Adjustments to reconcile change in loss from operations to
net cash used by operation activities:
Miscellaneous expense -- 168
Depreciation 14,062 17,154
Stock issued for interest payment 124,094 --
Stock issued as loan inducement fees 193,327 8,937
Impairment of intangibles and goodwill 990,467 --
Conversion of interest for stock -- 239,156
Financing costs 217,404 --
Stock issued for services 443,000 42,542
(Increase) decrease in operating assets
Accounts receivable (9,631) 698
Prepaid expenses (7,500) 24,666
Inventory 11,852 16,910
Increase (decrease) in operating liabilities
Interest payable 134,303 (128,713)
Deferred revenue (5,481) --
Accounts payable 185,568 117,533
----------- -----------
Net Cash Used by Operating Activities $ (961,404) $ (905,794)
=========== ===========
See accompanying notes to the condensed financial statements
F-5
Notes to Unaudited Consolidated 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
September 30, 2004 and the related unaudited condensed consolidated statements
of operations, stockholders deficit and cash flows for the nine months ended
September 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 10QSB. 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 Nine Months Nine Months
Ended Sept 30, Ended Sept 30, Ended Sept 30, Ended Sept 30,
2004 2003 2004 2003
-------------- -------------- -------------- --------------
Loss applicable to basis and diluted
loss per share $ (514,672) $ (517,269) $ (3,252,869) $ (1,244,845)
Weighted average number of common
shares assuming no dilution 14,192,731 13,076,321 13,653,348 12,738,821
Weighted average number of common
shares assuming full dilution 14,192,731 13,076,321 13,653,348 12,738,821
------------ ------------ ------------ ------------
Basic loss per common share $ (0.04) $ (0.04) $ (.24) $ (.10)
============ ============ ============ ============
Diluted loss per common share $ (0.04) $ (0.04) $ (.24) $ (.10)
============ ============ ============ ============
3
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).
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
Weighted
Warrants Exercise
Exercisable Price
------------------------------
Balance- outstanding December 31, 2003 -- $ --
Granted 491,300 .50
-------- --------
Balance -outstanding Sept 30, 2004 491,300 .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 nine months ended September 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 204.16% and approximate expected
life of 6 months. A deferred financing cost was recorded in the amount of
$17,325 and will be amortized over the life of the agreements as financing
costs. Amortization/financing costs recorded for the three and nine months ended
September 30, 2004 was $55,470. Weighted average remaining life of the warrants
outstanding as of September 30, 2004, is approximately 10 months.
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 September 30, 2004 the Company had no allowance for potentially
obsolete inventory, as all items are deemed to be saleable within their
remaining shelf lives.
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
4
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 third quarter of 2004 the Company obtained new short term
financing from various individuals in the total amount of $23,900. Maturity
dates range from August 13, 2004 to February 16, 2005, with interest per annum
of 10%. All of the $23,900 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, 48,700 shares of the Company's common stock are to be
issued to the individual lenders as loan inducement fees valued at $18,306.
Additionally in the third quarter we issued 65,000 shares of common stock valued
at $19,500 to individuals for extension of existing loans. In September 2004, an
officer of the company made a loan to the company of $86,342, with principle and
interest of 6% due September 2005.
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 10QSB 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 10KSB, this or any other quarterly reports on
Form 10QSB 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"). The following factors, among others, could cause actual results to
differ from those indicated in the forward-looking statements:
o The gain or loss of significant customers or significant changes in
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;
5
o Changes in the mix of products we sell;
o Changes in the average selling prices of our products; and
o The risk factors described in other documents and reports filed with
the SEC, including our Annual Report on Form 10-KSB for the year
ended December 31, 2003.
Though we have attempted to identify 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.
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.
6
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
Good Will and Other Intangible Assets
Good will and other intangible assets consist primarily of marketing
rights, trademarks, and registrations. We periodically review the carrying
values of good will and intangibles and record an impairment loss, if
anticipated future cash flows do ot equal or exceed the carrying value. Such a
determination was made as of June 30, 2004.
Results of Operations.
Three months ended September 30, 2004 and 2003
Revenues. Revenues for the three months ended September 30, 2004 were
$91,757, an increase of $16,935 or 23%, from $74,822 for the three months ended
September 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. All foreign
sales are denominated in U.S. Dollars.
Gross Profit Margin. Gross profit was $32,027 or 34.9% for the three
months ended September 30, 2004, an increase of $16,326 or 104%, from $15,701 or
21% for the three months ended September 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
September 30, 2004 were $392,544, a decrease of $80,310 or 17%, from $472,854
for the three months ended September 30, 2003. This decrease is primarily
attributable to the result of not amortizing goodwill or other intangible
assets.
Interest Expense. Interest expense for the three months ended September
30, 2004 was $58,477, an increase of $11,157, or 23.6%, from $47,320 for the
three months ended September 30, 2003. This increase is primarily the result of
prior and additional loans made to the company.
Loan Inducement Fees. Loan inducement fees for the three months ended
September 30, 2004 were $95,678, an increase of $86,741 or 970%, from $8,937 for
the three months ended September 30, 2003. This increase is the result of
granting common stock and warrants to lenders as loan inducements.
Net Income (Loss). Net loss was $(514,672) for the three months ended
September 30, 2004, as compared to a net loss of $(517,269) for the three months
ended September 30, 2003.
Nine Months Ended September 30, 2004 and 2003
Revenues. Revenues for the nine months ended September 30, 2004 were
$210,571, an increase of $79,903, or 61.2 % increase from $130,668 for the nine
months ended September 30 2003. This increase
7
was principally attributable to the increased acceptance of our registrations in
the foreign markets and to continuing penetration into the domestic market.
International sales comprise 64% of total sales, and domestic sales comprise 36%
of total sales. We are continuing our efforts to launch new distribution outlets
in Europe, Asia and in the domestic market. All foreign sales are denominated in
U.S. Dollars.
Gross Profit Margin. Gross profit was $90,311 or 42.9%, for the nine
months ended September 30, 2004, an increase of $55,818 or 161.8% from $34,493,
or 26.4%, for the nine months ended September 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 nine months ended September
30, 2004 were $2,764,508 an increase of $1,675,401 or 154% from $1,089,107 for
the nine months ended September 30, 2003. Approximately $1,000,000 of this
increase is the result of the complete write-off in the second quarter of 2004
of intangibles to comply with generally accepted accounting principles.
Approximately $650,000 of this increase is due to increases in the general and
administrative costs which includes approximately $400,000 in expenses related
to costs of stock given to obtain loans to us, and approximately $250,000
increase in contract labor costs, commissions, and professional fees.
Interest Expense. Interest expense for the nine months ended September 30,
2004, was $371,121, an increase of $199,446, or 116%, from $171,675 for the nine
months ended September 30, 2003. This increase is primarily the result of
additional loans made to the company.
Loan Inducement Fees. Loan inducement fees for the nine months ended
September 30, 2004 were $216,204, an increase of $207,267, or 2319% from $8,937
for the nine months ended September 30, 2003. This increase is the result of
granting common stock and warrants to lenders as loan inducements.
Net Income (Loss). Net loss was $(3,252,869) for the nine months ended
September 30, 2004, as compared to a net loss of $(1,244,845) for the nine
months ended September 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 nine months ended
September 30, 2004.
Liquidity and Capital Resources
As indicated in our attached financial statements, our gross revenue was
not sufficient to meet our operating expenses for the nine months ended
September 30, 2004. In addition, as of September 30, 2004, our current
liabilities exceeded our current assets by $2,786,298, as compared to $1,526,998
for the comparable three month period ended September 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.
8
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
In a press release dated November 18, 2004, we reported the following on
Desert Health's ongoing relationship with Dallas Cowboys Ring of Honor Star,
Rayfield Wright:
Rayfield Wright, recipient of Dallas Cowboys Ring of Honor 2004, is
completing an expanded marketing plan for his company Wright Sports & Nutrition
LLC's sports nutrition and skin care products developed in cooperation with
Desert Health.
Sales of Wright Sports & Nutrition products began in 2003 in the central
region of the U.S. and plans for sales throughout the US and internationally
have been completed. The product line although originally formulated for
athletes, is currently available to all consumers and markets. Wright Sports &
Nutrition products are available in numerous regional markets.
Rayfield Wright, Dallas Cowboy tackle 1967 - 1979 was selected to six
consecutive Pro Bowls and was named All Pro four times. In 13 seasons with the
Cowboys he was a member of 12 playoff teams and played in five Super Bowls
winning two. Rayfield anchored a Cowboy offensive line that led the NFL/NFC in
total yards gained in 1968, 1969, 1971, 1974, 1975, 1977, 1978, and 1979.
Rayfield was drafted by the Cowboys in 1967, played tight end for a few
years, until the Cowboys moved Wright to the offensive line where he became a
mainstay for the next 10 years. He was the first dominating offensive lineman
for the Cowboys and one of the teams most decorated of his era. Rayfield is the
first offensive lineman to be inducted into the Cowboys Ring of Honor.
Rayfield played with every player in the Cowboys Ring of Honor. Rayfield
says, "The Cowboy's Coach, Tom Landry, taught us about teamwork. I still believe
that! That is why I am excited about working with the DHPI team in this venture
marketing sports nutrition products that can help everyone do and feel their
best."
As a State of Georgia, Hall of Famer, since 1985, Rayfield will also
receive the Honor into the Texas Hall of Fame, February 9, 2005.
Johnny Shannon, Chairman and CEO for Desert Health says, "Desert Health is
proud to have this opportunity to be on the team with Rayfield Wright in
developing and marketing this exceptional line of products. His philosophy of
teamwork and pulling together towards common goals is very exciting."
In the first quarter of 2005, we will introduce to our international and
domestic market our new anti-aging cream. Dr. Gene Conte, nationally known
dermatologist, has done extensive studies on the product with good acceptance.
This product was developed for us by Dr. Shelley Friedman and Dr. Gene Conte.
During the last 15 months we have worked aggressively to bring in the
first bulk shipment of the burn and scald product. This product will be packed
in 30 ml units and 150 ml units. It is anticipated that this product will be
brought to market under the Desert Health label in 2005 and will also be private
labeled.
In December 2004 we will be going to the market with our pharmaceutical
grade omega three product. It is packaged 180 capsules per bottle.
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Websites for Royal Products, Inc., www.royalproducts.net and for Desert
Health www.deserthealth.com have been updated..
ITEM 3. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of September 30, 2004, Johnny Shannon, 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
September 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 September 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
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. They have been awarded a judgment against Desert Health
in the amount of $29,180.10. Desert Health is arranging payment for this
judgment.
Please see our Quarterly Reports filed on Form 10QSB for the periods ended
March 31, 2004 and June 30, 2004, and our Annual Report filed on Form 10KSB for
the year ended December 31, 2003, for discussion of pending legal proceedings.
ITEM 2. UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS
During the three months ended September 30, 2004 the following shares of common
and preferred stock were issued:
Preferred stock issued for cash received in August 2001 @
$.50 per share for a total of $100,000 (1) 200,000 shares $100,000
Common stock issued for cash received in July 2003 @ $.50
per share for a total of $200,000 (1) 400,000 shares 200,000
Common stock issued for services and fees 170,000 shares 66,000
Common stock issued as
loan inducement fees 65,000 shares 19,500
Common stock issued as contribution 25,000 shares 7,500
(1) Proceeds from sale of stock used for general corporate purposes.
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All preferred and common shares issued during the three months ended
September 30, 2004, were issued in reliance upon exemptions from registration
pursuant to Section 4(2) under the Securities Act of 1933, as amended.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. 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 *
* This exhibit shall not be deemed "filed" for purposes of
section 18 of the Securities Exchange Act of 1934 or otherwise
subject to the liabilities of that section, nor shall it be
deemed incorporated by reference in any filing under the
Securities Act of 1933 or the Securities Exchange Act of 1934,
whether before or after the date hereof and irrespective of
any general incorporation language in any filings.
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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 December 6, 2004
-------------------
Johnny Shannon,
President
By: /s/ Johnny Shannon December 6, 2004
-------------------
Johnny Shannon,
Chief Financial Officer
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