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 ACT OF 1934 For the quarterly period ended March 31, 2005 or |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT 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 May 10, 2005: 15,463,821 1 DESERT HEALTH PRODUCTS, INC. CONSOLIDATED STATEMENTS (Unaudited) FORM 10QSB INDEX PART 1. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited): a. Consolidated Balance Sheets as of March 31, 2005 and December 31, 2004 F-1 b. Consolidated Statements of Operations F-2 c. Consolidated Statements of Stockholders Deficit F-3 d. Consolidated Statements of Cash Flow for the three months ended F-4 March 31, 2005 and 2004 e. Notes to Unaudited Consolidated Financial Statements 3 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 4 Item 3. Controls and Procedures 9 PART II - OTHER INFORMATION Item 1. Legal Proceedings 10 Item 2. Unregistered Sale of Equity Securities and Use of Proceeds 10 Item 3. Defaults by the Company Upon Its Senior Securities 10 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 March 31, December 31 2005 2004 (Unaudited) (Audited) ------------ ------------ ASSETS Current Assets Cash and cash equivalents $ 2,052 $ 2,135 Accounts receivable, net 175 175 Inventory 81,692 75,141 Prepaids 7,500 7,500 Funds held in trust 44,656 -- ------------ ------------ Total Current Assets 136,075 84,951 ------------ ------------ Property and Equipment, net 58,736 64,410 ------------ ------------ Other Assets Deferred financing costs 77,207 129,122 Intangible assets 6,137 -- ------------ ------------ Total Other Assets 83,344 129,122 ------------ ------------ TOTAL ASSETS $ 278,155 $ 278,483 ============ ============ LIABILITIES AND STOCKHOLDERS' DEFICIT Current Liabilities Bank Overdraft $ 25,556 $ 809 Accounts payable and accrued expenses 630,930 609,212 Loan inducement fees payable 11,340 11,340 Deferred revenue 44,372 26,000 Interest payable 411,062 417,246 Other deferred liability 142,500 -- Dividends payable 274,387 274,387 Current portion of obligations payable 2,121,466 1,935,193 ------------ ------------ Total Current Liabilities 3,661,613 3,274,187 Long Term Liabilities Shares subject to mandatory redemption 1,100,000 1,100,000 Long term note payable, net of current portion 225,000 225,000 ------------ ------------ TOTAL LIABILITIES 4,986,613 4,599,187 ------------ ------------ Commitments and Contingencies Stockholders' Deficit Preferred Stock, convertible, $.001 par value, 10,000,000 shares authorized and 3,359,125 and 1,708,500 shares issued and outstanding as of March 31, 2005 and December 31, 2004, respectively 3,360 3,360 Common stock, $.001 par value, 25,000,000 shares authorized, 16,213,821 and 15,663,821 issued; and 15,038,821 and 15,238,821 outstanding as of March 31, 2005 and December 31, 2004, respectively 16,214 15,664 Stock subscribed 442,381 404,881 Treasury stock, 1,175,000 shares at cost (333,750) (191,250) Additional paid in capital 8,877,324 8,758,124 Accumulated deficit (13,713,987) (13,311,483) ------------ ------------ TOTAL STOCKHOLDERS' DEFICIT (4,708,458) (4,320,704) ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 278,155 $ 278,483 ============ ============ See accompanying notes to the consolidated financial statements F-1 DESERT HEALTH PRODUCTS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) Three Months Ended March 31, 2005 2004 ------------ ------------ Revenues, net $ 3,826 $ 46,535 Cost of Revenues 4,485 31,293 ------------ ------------ Gross Profit (Loss) (659) 15,242 Operating Expenses General and administrative 232,492 913,856 ------------ ------------ Total operating expenses 232,492 913,856 ------------ ------------ Net Loss From Operations (233,151) (898,614) ------------ ------------ Other Income (Expense) Interest expense (169,353) (62,749) Other expense -- (1,835) Other income -- 14,249 Interest income -- 37 ------------ ------------ (169,353) (50,298) ------------ ------------ Net Loss (402,504) (948,912) Preferred Stock Dividends -- (38,928) ------------ ------------ Net Loss Available to Common Shareholders $ (402,504) $ (987,840) ============ ============ Basic and Diluted Loss Per Share $ (0.03) $ (0.08) ============ ============ Weighted Average Common Shares Outstanding 15,112,710 13,136,019 ============ ============ See accompanying notes to the consolidated financial statements F-2 DESERT HEALTH PRODUCTS, INC CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT (Unaudited) Convertible Preferred Stock Common Stock Treasury Stock ----------------------------- ------------------------- ------------------------- Shares Par Value Shares Par Value Shares Cost ----------- ----------- ----------- ----------- ----------- ----------- Balances, December 31, 2004 3,359,125 $ 3,360 15,663,821 $ 15,664 425,000 $ (191,250) Shares canceled for the three months ended March 31, 2005: Loan inducement reversal 750,000 (142,500) Shares issued for the three months ended March 31, 2005: Loan inducement -- -- 275,000 275 -- -- Services and fees -- -- 175,000 175 -- -- Stock subscribed - issued -- -- 100,000 100 -- -- Stock subscribed Net loss for the three months ended March 31, 2005 -- -- -- -- -- -- ----------- ----------- ----------- ----------- ----------- ----------- Balances, March 31, 2005 3,359,125 $ 3,360 16,213,821 $ 16,214 1,175,000 $ (333,750) =========== =========== =========== =========== =========== =========== Additional paid-in Stock Accumulated Total Equity Capital Subscribed Deficit (Deficit) ------------- ------------- ------------- ------------- Balances, December 31, 2004 $ 8,758,124 $ 404,881 $ (13,311,483) $ (4,320,704) Shares canceled for the three months ended March 31, 2005: Loan inducement reversal (142,500) Shares issued for the three months ended March 31, 2005: Loan inducement 51,975 -- 52,250 Services and fees 29,825 -- -- 30,000 Stock subscribed - issued 37,400 (37,500) -- -- Stock subscribed 75,000 75,000 Net loss for the three months ended March 31, 2005 -- -- (402,504) (402,504) ------------- ------------- ------------- ------------- Balances, March 31, 2005 $ 8,877,324 $ 442,381 $ (13,713,987) $ (4,708,458) ============= ============= ============= ============= See accompanying notes to the consolidated financial statements F-3 DESERT HEALTH PRODUCTS, INC CONSOLIDATED STATEMENTS OF CASH FLOW (Unaudited) For The Three Months Ended March 31, 2005 2004 --------- --------- Cash Flows from Operating Activities Loss from operations $(402,504) $(987,840) Adjustments to reconcile change in loss from operations to net cash used by operating activities: Depreciation 5,674 4,688 Loan inducement fees and financing costs 104,165 164,100 Interest capitalized to note 60,573 -- Stock issued for services and fees 30,000 239,985 Bad debt expense 5,248 -- (Increase) decrease in operating assets: Accounts receivable (5,248) 17,061 Inventory (6,551) (30,328) Funds held in trust (44,656) -- Increase (decrease) in operating liabilities: Accounts payable 21,718 48,373 Deferred revenue 18,372 (7,250) Bank overdraft 24,747 -- Interest payable (6,184) 26,732 --------- --------- Net Cash Used by Operating Activities (194,646) (524,479) --------- --------- Cash Flows from Investing Activities Purchase of intangibles (6,137) (2,850) Payments on advances -- (1,000) Deposits 1,250 --------- --------- Net Cash Used by Investing Activities (6,137) (2,600) --------- --------- Cash Flows from Financing Activities Proceeds from notes payable 135,000 142,000 Payments on notes payable (9,300) (25,000) Proceeds from sale of stock -- 185,000 Stock subscribed 75,000 258,000 --------- --------- Net Cash Provided by Financing Activities 200,700 560,000 --------- --------- Net Decrease in Cash and Cash Equivalents (83) 32,921 Beginning Cash and Cash Equivalents 2,135 11,420 --------- --------- Ending Cash and Cash Equivalents $ 2,052 $ 44,341 ========= ========= Non-cash financing and investing transactions Loan inducement fees and financing costs $ 51,975 $ 164,100 Treasury stock $ 142,500 Stock issued that was subscribed $ 37,500 $ -- Stock issued for compensation and services $ 30,000 $ 239,985 See accompanying notes to the consolidated financial statements F-4 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 March 31, 2005 and the related unaudited condensed consolidated statements of operations, stockholders deficit and cash flows for the three months ended March 31, 2005 and 2004 of Desert Health Products, Inc., (the "Company", "we", "us" or "our") 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, 2004, 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, 2004, 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 Ended March 31, Ended March 31, 2005 2004 --------------- --------------- Loss applicable to basic and diluted loss per share $ (402,504) $ (987,840) Weighted average number of common shares assuming no dilution 15,112,710 13,136,019 Weighted average number of common shares assuming full dilution 15,112,710 13,136,019 ------------- ------------- Basic loss per common share $ (0.03) $ (0.08) ============= ============= Diluted loss per common share $ (0.03) $ (0.08) ============= ============= 3 The impact of outstanding stock options, warrants, convertible preferred stock, and common stock pledged as collateral for debt has not been included in the computation of diluted loss per common share as it would be anti-dilutive (reduces the loss per share). At March 31, 2005, the number of potential dilutive shares of common stock would have been an estimated 9.5 million. 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 or warrants for the periods presented and, as such has no pro forma earnings per share presentation. 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. Note 2. New Financing During the first quarter of 2005 the Company obtained new short term financing from an entity in the total amount of $135,000. Maturity date is May 31, 2005, with interest per annum of 7%. All of the $135,000 in new financing has terms in which all interest and principal is due upon maturity. Additionally in the first quarter we issued 275,000 shares of common stock valued at $52,250 to entities for extensions of existing loans. Note 3. Deferred Liability During the first quarter of 2005, the Company cancelled 750,000 shares of common stock which had been originally issued as loan inducements. The value of the shares at the cancellation date, $142,500, is reflected as a deferred liability until all related contingencies are resolved. The remaining amount is reflected as treasury 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 4 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; 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, 2004. 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. 5 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 significant accounting policies of Desert Health Products, Inc. (the "Company") is presented to assist in understanding the Company's 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 March 31, 2005 and 2004. Revenues. Revenues for the three months ended March 31, 2005, were $3,826, a decrease of $42,709 or 92% from $46,535, for the three months ended March 31, 2004. This decrease is primarily due to lack of sales activity in the first quarter of 2005. The lack of sales was created by the result of a major investor stopping funding. This funding was partially for support of Desert Health's sales projects that were in place for the first quarter of 2005, and are now being implemented for the second and third quarters of 2005. Gross Profit Margin. Gross profit was a negative $659 or (17%) for the three months ended March 31, 2005, a decrease of $15,901 or 104% from $15,242 or 33% for the three months ended March 31, 2004. This decrease is primarily the result of a lack of sales activity in the first quarter of 2005 to offset the cost of samples. Operating Expenses. Operating expenses for the three months ended March 31, 2005, were $232,492, which was a decrease of $681,364 or 75% as compared to $913,856, for the three months ended March 31, 2004. This decrease is primarily the result of reductions in professional fees and decreased travel expenses. Interest Expense. Interest expense for the three months ended March 31, 2005, was $169,353, an increase of $106,604 or 170%, from $62,749 for the three months ended March 31, 2004. This increase is primarily the result of increased levels of debt and amortization of deferred financing costs and loan inducement fees. 6 Other Income. Other income for the three months ended March 31, 2005, was $0, a decrease of $14,249 or 100%, from $14,249 for the three months ended March 31, 2004. This decrease is primarily due to no other income earned in the first quarter of 2005. Net Loss. Net loss was $402,504 for the three months ended March 31, 2005, as compared to a net loss of $987,840 for the three months ended March 31, 2004. The decrease in net loss is primarily the result of the decrease in Operating expenses explained above. LIQUIDITY AND CAPITAL RESOURCES As indicated in our attached financial statements, our revenues were not sufficient to meet our operating expenses for the three months ended March 31, 2005. In addition, as of March 31, 2005, our current liabilities exceeded our current assets by $3,525,538. 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 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 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. A down turn in the capital market would 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. We are continuing to position ourselves in the lucrative North American market. We believe that trademark and logo registrations under Class 5 filed in Mexico and Canada will contribute to the presence of our products in the network marketing, private label and branded label markets. Over the next 12 months, we intend to increase our revenues through the strong support from our international and domestic clients and registrations from various countries around the world are continuing to be approved. Sales of private labeled products for Wright's Sports and Nutrition Inc., have been established. Rayfield Wright, President of Wright's Sports and Nutrition, was a star football player with the Dallas Cowboys, making five Super Bowl and six Pro Bowl appearances. He was a candidate for the National Professional Football Hall of Fame and has been inducted into the Ring of Honor with the Dallas Cowboys. This product line focuses primarily on professional athletes and aging baby boomers that associate themselves with professional athletes and have similar needs for supplements. The area of Minority Health has recently been a focal point. Mr. Wright is a prominent member of the Heroes of Football, an organization currently in alliance with the National Minority Health Month Foundation. Their objective is to build awareness and to disseminate information about the impact of chronic health disparities. EIC, Inc. (Engaged In Caring) , a Scottsdale, Arizona based company, has the exclusive rights to market its private label Skin Care Naturally Foot Care system to the Native American communities in the United States. This product was designed exclusively to treat the dry skin and other conditions often associated with diabetes. The epidemic of diabetes related complications is the primary focus of directing this skin care system to the Native American Diabetes treatment centers. Additionally, EIC has begun 7 marketing this product to the spa industry. The Phoenician Resort in Scottsdale, Arizona is featuring this product in its spa as a therapeutic herbal treatment. Joanne Cavanagh, H.N.T., A.H.G., National Director of Sales, is on our staff as an on-site nutrition therapist. Ms. Cavanagh has certifications in the fields of Nutrition, Supplements, Stress Management, Nutrition Therapies, Weight Management and Western Herbalism. Ms. Cavanagh provides insight into special formulations and developments in the natural products industry. The ability to provide education and information to both the wholesale and retail divisions has increased our potential to penetrate numerous markets. Ms. Cavanagh is establishing private label customers and is developing signature lines for these clients. The ability to provide exclusive, specific information and product training has propelled private label customers to begin to set their sales and marketing strategies in place. We believe the development of private label customers will aid in sales growth. A fast growing segment of the over fifty billion dollar U.S. nutritional supplement market is being reached through the use of infomercials. Thus, we have entered into a joint venture to participate in this form of marketing with our new Celadrin Pain Management System, our Foot Care skin care system, and our doctor tested and approved anti-aging products. These items are also being offered to private label customers. During 2005, we are continuing to develop Royal Products, Inc., a wholly owned subsidiary, which promotes sales in the network marketing arena. Interest in this form of product sales is increasing as can be seen by the success of major network marketing companies such as Forever Living, Herbalife, Shaklee and others. There is increasing interest in our product lines from the international markets. We have orders from our Middle East and United Kingdom customers and have renewed the lease for the coming year at our office in Beijing, China, and we are also becoming more aggressive in the domestic market. Management believes the implementation of events as described above will bring liquidity and profitability to the Company in the coming year. We believe exclusive marketing rights to the new health products, and other products being negotiated for, will bring significant volume and profitability. We will increase the number of our employees, and expand our facilities where necessary to meet product development and completion deadlines. 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. A 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 that of our shareholders. Recent Developments In March 2005, we received an order from one of our major customers for $76,400. The order is expected be fulfilled by end of May 2005. This customer has advised us that their market is expanding and they intend to add three to five new products from our product lines within the next two years. On May 3, 2005, we issued a press release announcing that we have entered into an agreement with Wilkerson Creative, Inc., a producer of Direct Response Radio, TV Commercials and Infomercials. Wilkerson Creative, Inc., has agreed to create direct response radio and television commercials as well as radio and television infomercials and to enter into arrangements with entities to cause such commercials 8 and infomercials to be aired. Additionally, we believe that Wilkerson Creative, Inc. will provide the necessary talent to contribute to the success of these projects. The first of three infomercials scheduled for airtime will focus on Desert Health's Celadrin(R)-based pain and joint support products. With recent disclosures by the FDA concerning some pharmaceutical medications for arthritis and pain relief either being removed from the market, or warnings being posted, this natural pain relief product is being released in timely fashion. Over 70 million individuals in the U.S. have arthritis. The Arthritis Foundation reports that arthritis is the leading disability of Americans, resulting in over 39 million medical visits per year and $65 billion dollars annually in medical expenses and lost wages. The second scheduled set of media attention through Wilkerson Creative, Inc., will concentrate on Desert Health's Anti-Aging Cream. Clinical studies conducted by dermatologist, Dr. Eugene Conte, concluded that patients responded to treatment with remarkable skin improvement and consumer approval. The last set of media scheduled for completion by Wilkerson Creative, Inc., will focus on Desert Health's Foot and Body Care system. This skin care system was designed specifically to treat the dry skin and other conditions often associated with diabetes. Unlike most exfoliation processes, this system is non-irritating, yet highly effective .The following actions apply to this skin care system: Cleanser; Incredible exfoliant; Antixoidant; Enhances natural skin repair; Potent invigorator; Fantastic moisturizer. On May 4, 2005 we issued a press release announcing that Rayfield Wright, President and CEO of Wright's Sports and Nutrition, LLC, attended the Minority Health Month's summit on health disparities on April 26-27, 2005, in Washington, D.C. The National Minority Health Month Foundation, Inc. (NMHMF) was established to support the implementation of integrated solutions to the problem of minority population health disparities. Former football legends, Charlie Taylor, Mel Renfro, Abner Haynes, Sr., and Rayfield Wright, along with other prominent members of the Heroes of Football, Inc., are in alliance with the NMHMF to tackle the prevalence of chronic diseases among communities around the country. The organization of former football players will collaborate with the Foundation to implement campaigns, which will include health screenings and health fairs, to address illnesses like diabetes, cancer and cardiovascular disease. Rayfield Wright continues to be a supportive member of the quest for optimal health through Wright's Sports and Nutrition's line of natural health supplements. These supplement and skin care lines were designed and formulated exclusively by Desert Health Products, Inc., for Wright's Sports and Nutrition, LLC. ITEM 3. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures As of March 31, 2005, 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 March 31, 2005. 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) Rule 13a-15 or 15d-15 under the Exchange Act 9 that occurred during the quarter ended March 31, 2005, 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 William Carter and Jewel Lorentzen filed a complaint in Maricopa County Superior Court in the State of Arizona against the Company April 7, 2005, alleging non-payment of loans in the amount of $50,000 and seeking payment of principal and interest. February 22, 2005, the Company filed suit in the Maricopa County Superior Court of the State of Arizona against ParTrusT "Beheer" B.V., a foreign business entity, for Breach of Contract, Breach of covenant, based on a three year loan agreement for $500,000, of which only $225,000 has been funded. ParTrusT has filed a counterclaim. Its prayer for relief does not contain specific dollar amounts. Please see our Annual Report filed on Form 10-KSB for the period ended December 31, 2004, for discussion of pending legal proceedings. ITEM 2. UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS During the three months ended March 31, 2005, the following shares of common and preferred stock were issued: On January 14, 2005, 25,000 shares of common stock were issued to an entity for consulting services, with a value of $4,500. On January 28, 2005, 275,000 shares of common stock were issued to two entities as loan inducements for loan extensions, with a value of $52,250. On January 28, 2005, 100,000 shares of common stock were issued to a director of the Company as reimbursement for issuing 100,000 shares of free trading common stock to a sophisticated investor as a loan inducement. On February 2, 2005, 750,000 shares of common stock that had been issued to three foreign entities as loan inducements, with a value of $142,500, were cancelled because of breach of contract. On February 15, 2005, 150,000 shares of common stock with a value of $25,500 were issued to an entity as consideration for services The shares of common stock were offered and sold to the consultants in a private placement transaction made in reliance upon exemptions from registration pursuant to Section 4(2) under the Securities Act of 1933 and Rule 506 promulgated thereunder. No advertising or general solicitation was employed in offering the securities. The offerings and sales were made to a limited number of persons, all of whom were accredited investors, business associates of our company or executive officers of the Company, and transfer was restricted by our company in accordance with the requirements of the Securities Act of 1933. ITEM 3. DEFAULTS BY THE COMPANY UPON ITS SENIOR SECURITIES None. 10 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS (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 11 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 May 16, 2005 ------------------- Johnny Shannon, President By: /s/ Johnny Shannon May 16, 2005 ------------------- Johnny Shannon, Chief Financial Officer 12