PACIFICHEALTH LABORATORIES INC - FORM 10-Q

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EX-32 - EXHIBIT 32 - PACIFICHEALTH LABORATORIES INC	v238889_ex32.htm
EX-31.1 - EXHIBIT 31-1 - PACIFICHEALTH LABORATORIES INC	v238889_ex31-1.htm
EXCEL - IDEA: XBRL DOCUMENT - PACIFICHEALTH LABORATORIES INC	Financial_Report.xls
EX-31.2 - EXHIBIT 31-2 - PACIFICHEALTH LABORATORIES INC	v238889_ex31-2.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2011

-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 No. 333-36379

PACIFICHEALTH LABORATORIES, INC.

(Exact name of registrant as specified in its charter)

DELAWARE		22-3367588
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification Number)

100 Matawan Road, Suite 150
Matawan, NJ		07747
(Address of principal executive offices)		(Zip Code)

Registrant's telephone number, including area code: (732) 739-2900

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 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 ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files)

Yes ¨ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ¨		Accelerated filer ¨
Non-accelerated filer ¨	(Do not check if a smaller reporting company)	Smaller reporting company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-25 of the Exchange Act) Yes ¨ No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 20,865,257 shares of common stock, par value $0.0025, outstanding as of November 4, 2011.

PACIFICHEALTH LABORATORIES, INC.

TABLE OF CONTENTS

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS		3

PART I. FINANCIAL INFORMATION

ITEM 1.	FINANCIAL STATEMENTS

Balance Sheets (Unaudited) as of September 30, 2011 and December 31, 2010		4

Statements of Operations (Unaudited) for the three and nine months ended September 30, 2011 and 2010		5

Statements of Cash Flows (Unaudited) for the nine months ended September 30, 2011 and 2010		6

Notes to Unaudited Financial Statements		7

ITEM 2.	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	13

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	16

ITEM 4.	CONTROLS AND PROCEDURES	16

PART II. OTHER INFORMATION

ITEM 1.	LEGAL PROCEEDINGS	16

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	16

ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	16

ITEM 4.	REMOVED AND RESERVED	16

ITEM 5.	OTHER INFORMATION	16

ITEM 6.	EXHIBITS	16

SIGNATURES		16

Cautionary Note Regarding Forward-Looking Statements

As used herein, unless we otherwise specify, the terms the “Company,” "we," "us," and "our" means PacificHealth Laboratories, Inc.

This Report contains forward-looking statements concerning our financial condition, results of operations and business, including, without limitation, statements pertaining to:

The development, testing, and commercialization of new products and the expansion of markets for our current products;

The receipt of royalty payments from our agreements with business partners;

Implementing aspects of our business plan;

Financing goals and plans;

Our existing cash and whether and how long these funds will be sufficient to fund our operations; and

Our raising of additional capital through future equity financings.

These and other forward-looking statements are primarily in the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations". Generally, you can identify these statements because they include phrases such as "anticipates," "believes," "expects," "future," "intends," "plans," and similar terms. These statements are only predictions. Although we do not make forward-looking statements unless we believe we have a reasonable basis for doing so, we cannot guarantee their accuracy, and actual results may differ materially from those we anticipated due to a number of uncertainties, many of which are unforeseen. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this Report on Form 10-Q. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons, including those stated in this Report. We undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

We believe it is important to communicate our expectations to our investors. There may be events in the future, however, that we are unable to predict accurately or over which we have no control. Cautionary language in this Report provides examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements.

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

PACIFICHEALTH LABORATORIES, INC.

BALANCE SHEETS

(UNAUDITED)

	September 30,			December 31,
	2011			2010
ASSETS
Current assets:
Cash and cash equivalents	$	1,039,840		$	134,165
Other short-term investments		75,000			150,000
Accounts receivable, net		728,414			416,722
Inventories, net		711,596			596,317
Prepaid expenses		124,726			64,780
Total current assets		2,679,576			1,361,984

Property and equipment, net		26,939			52,531

Deposits		10,895			10,895

Total assets	$	2,717,410		$	1,425,410

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Line of credit	$	37,500		$	75,000
Notes payable		39,354			20,670
Accounts payable and accrued expenses (Includes related party of $48,000 and $11,000, respectively)		872,507			713,184
Deferred revenue		65,801			60,836
Total current liabilities		1,015,162			869,690

Stockholders' equity:
Common stock, $.0025 par value; authorized 50,000,000 shares; issued and outstanding: 20,865,257 and 16,485,257 shares, respectively		52,163			41,213
Additional paid-in capital		21,296,223			20,162,969
Accumulated deficit		(19,646,138	)		(19,648,462	)

		1,702,248			555,720

Total liabilities and stockholders' equity	$	2,717,410		$	1,425,410

The accompanying notes should be read in conjunction with the financial statements.

PACIFICHEALTH LABORATORIES, INC.

STATEMENTS OF OPERATIONS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010

(UNAUDITED)

	Three Months						Nine Months
	Ended September 30,						Ended September 30,
	2011			2010			2011			2010
Revenues:
Net product sales	$	1,971,624		$	1,999,489		$	5,948,461		$	6,204,060

Cost of goods sold		1,120,865			1,123,711			3,332,367			3,369,381

Gross profit		850,759			875,778			2,616,094			2,834,679

Operating expenses:
Sales and marketing		414,453			324,056			983,496			908,403
General and administrative (Includes related party consulting of $48,000, $22,000, $139,000 and $22,000, respectively)		529,585			637,654			1,578,059			2,146,247
Research and development		16,141			-			40,936			-
		960,179			961,710			2,602,491			3,054,650

(Loss) income before other (expense) income and provision for income taxes		(109,420	)		(85,932	)		13,603			(219,971	)

Other (expense) income:
Other income		-			-			2,100			4,000
Interest income		112			286			391			791
Interest expense		(7,367	)		(1,725	)		(13,770	)		(4,696	)
		(7,255	)		(1,439	)		(11,279	)		95

(Loss) income before provision for income taxes		(116,675	)		(87,371	)		2,324			(219,876	)

Provision for income taxes		-			-			-			-

Net (loss) income	$	(116,675	)	$	(87,371	)	$	2,324		$	(219,876	)

Basic (loss) income per share	$	(0.01	)	$	(0.01	)	$	0.00		$	(0.01	)

Diluted (loss) income per share	$	(0.01	)	$	(0.01	)	$	0.00		$	(0.01	)

Weighted average common shares - basic		20,865,257			16,366,561			19,100,056			16,032,559

Weighted average common shares - diluted		20,865,257			16,366,561			19,330,073			16,032,559

The accompanying notes should be read in conjunction with the financial statements.

PACIFICHEALTH LABORATORIES, INC.

STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010

(UNAUDITED)

	2011			2010
Cash flows from operating activities:
Net income (loss)	$	2,324		$	(219,876	)
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:
Depreciation		32,968			84,361
Bad debts		9,000			9,144
Equity instrument-based expense		49,204			111,276
Changes in assets and liabilities:
Accounts receivable		(320,692	)		210
Inventories		(115,279	)		29,931
Prepaid expenses		(59,946	)		(9,319	)
Tax loss receivable		-			303,931
Accounts payable and accrued expenses (Includes related party of $48,000 and $11,000, respectively)		159,323			(2,035	)
Deferred revenue		4,965			(254,205	)
Net cash (used in) provided by operating activities		(238,133	)		53,418

Cash flows from investing activities:
Proceeds from sales of other short-term investments		75,000			25,000
Purchase of property and equipment		(7,376	)		(36,649	)
Net cash provided by (used in) investing activities		67,624			(11,649	)

Cash flows from financing activities:
Net (repayments) borrowings on line of credit		(37,500	)		75,000
Issuances of notes payable		65,427			70,293
Repayments of notes payable		(46,743	)		(40,660	)
Common stock issued		1,095,000			-
Net cash provided by financing activities		1,076,184			104,633

Net increase in cash and cash equivalents		905,675			146,402

Cash and cash equivalents, beginning balance		134,165			281,159

Cash and cash equivalents, ending balance	$	1,039,840		$	427,561

Supplemental disclosures of cash flow information:
Cash paid for interest	$	13,770		$	4,696

Cash paid for income taxes	$	15,636		$	17,157

Non-cash operating activity:
Issuance of common stock as payment for consulting services	$	-		$	8,590

The accompanying notes should be read in conjunction with the financial statements.

PACIFICHEALTH LABORATORIES, INC.

NOTES TO FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010

(UNAUDITED)

1. Basis of Presentation

The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the rules and regulations of the SEC. Accordingly they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011. The unaudited financial statements should be read in conjunction with the financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 2010.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make certain 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 statements and the reported amount of revenue and expenses during the reporting period. Actual results may differ from these estimates. The significant estimates and assumptions made by the Company are in the area of revenue recognition, as it relates to customer returns, inventory obsolescence, allowance for doubtful accounts, valuation allowances for deferred tax assets, and valuation of share-based payments issued under Accounting Standards Codification (“ASC”) 718, “Compensation - Stock Compensation”.

2. Revenue Recognition

Revenue is recognized upon the sale of products as they are sold to customers when title to the goods has passed, the price to the customer is fixed and determinable, and collection from the customer is reasonably assured. All sales revenue is recorded on a net basis, net of incentives paid and discounts offered to customers, and excludes sales tax collected from being reported as sales revenue and sales tax remitted from being reported as a cost.

The Company has a sales agreement with GNC, a significant customer of the Company, whereby unsold product is subject to return provisions. In determining revenue recognition for products shipped to this customer, the Company follows the guidance in ASC 605,”Revenue Recognition” (“ASC 605”). Certain of the products shipped are under a “pay on scan” model and revenue is deferred by the Company until such time as the customer sells through such products to the end consumer. The amount of deferred revenue relating to pay on scan products reflected in the accompanying balance sheets as of September 30, 2011 and December 31, 2010 amounted to $65,801 and $60,836, respectively.

3. Other Short-Term Investments

Excess cash is invested in auction rate securities with long-term maturities, the interest rates of which are reset periodically (typically between 7 and 35 days) through a competitive bidding process often referred to as a "Dutch auction".

Accordingly, the Company has classified such investments as other short-term investments. During the nine months ended September 30, 2011, the Company redeemed $75,000 of these investments.

The Company measures fair value utilizing a hierarchy that prioritizes into three levels the components of valuation techniques that are used to measure fair value. The fair value hierarchy gives the highest priority to quoted market prices (unadjusted) in active markets for identical assets or liabilities (Level 1); lower priority to inputs other than quoted prices that are observable for assets or liabilities, either directly or indirectly (Level 2); and the lowest priority to unobservable inputs (Level 3).

The Company has measured these investments as Level 2 inputs.

4. Inventories

Inventories consist of the following:

	September 30,		December 31,
	2011		2010
Raw materials	$	2,505	$	-
Packaging supplies		14,540		58,277
Finished goods		647,223		508,174
Finished goods on consignment		47,328		29,866
	$	711,596	$	596,317

Included above are reserves against finished goods of $37,121 at both September 30, 2011 and December 31, 2010, respectively.

5. Property and Equipment

Property and equipment consist of the following:

	September 30,		December 31,
	2011		2010
Furniture and equipment	$	529,219	$	521,843
Molds and dies		116,366		116,366
		645,585		638,209

Less accumulated depreciation		618,646		585,678
	$	26,939	$	52,531

6. Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses consist of the following:

	September 30,		December 31,
	2011		2010
Trade payables	$	777,981	$	512,448
Accrued expenses		94,526		190,516
Commissions payable		-		10,220
	$	872,507	$	713,184

7. Common Stock Issuances and Stock-Based Compensation

The Company accounts for equity instrument issuances (including common stock, options, and warrants) in accordance with ASC 718. Such equity issuances encompass transactions in which an entity exchanges its equity instruments for goods or services including such transactions in which an entity obtains employee services in share-based payment transactions and issuances of stock options to employees. The Company recorded charges of $16,402 and $30,971, respectively, in the three month periods ended September 30, 2011 and 2010, representing the effect on loss from operations, loss before provision for income taxes and net loss. The Company recorded charges of $49,204 and $111,276, respectively, in the nine month periods ended September 30, 2011 and 2010, representing the effect on income (loss) from operations, income (loss) before provision for income taxes and net income (loss).

Employee Compensation

The Company recorded charges of $14,292 and $7,355 in the three month periods ended September 30, 2011 and 2010, respectively, for previously issued equity instruments to employees. The Company recorded charges of $42,876 and $22,281 in the nine month periods ended September 30, 2011 and 2010, respectively, for previously issued equity instruments to employees.

The Company did not grant any options to employees during the three and nine months ended September 30, 2011. The Company granted 500,000 stock options to employees during the three months ended September 30, 2010 with an exercise price of $0.145 per share. Of these options, 166,664 of these options vested in the third quarter of 2011; 166,667 of these options vest in the third quarter of 2012; and 166,669 of these options vest in the third quarter of 2013. The Company granted 750,000 stock options to employees during the nine months ended September 30, 2010 with exercise prices ranging from $0.122 per share to $0.145 per share. Of these options, 83,333 vested in the first quarter of 2011; 166,664 of these options vested in the third quarter of 2011; 83,333 of these options vest in the first quarter of 2012; 166,667 of these options vest in the third quarter of 2012; 83,334 of these options vest in the first quarter of 2013; and 166,669 of these options vest in the third quarter of 2013. These options were determined to have a total fair value of approximately $80,750. Compensation expense recognized during the three and nine months ended September 30, 2010 for these options amounted to $3,507 and $6,667, respectively.

The Company did not recognize any stock-based compensation as payment of directors’ fees during the three and nine months ended September 30, 2011. The Company recognized $18,000 and $72,000, respectively, for the three and nine month periods ended September 30, 2010 as a component of employee compensation for common shares issuable as payment of directors’ fees. The Company recognized $3,363 for the nine month period ended September 30, 2010 as a component of employee compensation for common shares issuable as payment to a director of the Company for advisory services.

Non-Employee Compensation

The Company granted no stock options to consultants during the three and nine months ended September 30, 2011 and 2010.

The Company recorded charges of $2,110 and $2,051, respectively, in the three month periods ended September 30, 2011 and 2010 for previously issued warrants to non-employee athlete endorsers. The Company recorded charges of $6,328 and $6,791, respectively, in the nine month periods ended September 30, 2011 and 2010 for previously issued warrants to non-employee athlete endorsers.

The Company did not grant any warrants to non-employee athlete endorsers during the three and nine month periods ended September 30, 2011. The Company did not grant any warrants to non-employee athlete endorsers during the three month period ended September 30, 2010. The Company granted 10,000 warrants to non-employee athlete endorsers during the nine month period ended September 30, 2010 with an exercise price of $0.12 per share. Of these warrants, 5,000 warrants vested in the fourth quarter of 2010 and 5,000 of these warrants vest in the fourth quarter of 2011. These warrants were determined to have a total fair value of $460. Compensation expense recognized during the three and nine months ended September 30, 2010 for these warrants amounted to $58 and $174, respectively. These amounts were charged to operations and added to additional paid-in capital in accordance with ASC 718.

In summary, compensation charges to operations for the periods presented are as follows:

	Three Months				Nine Months
	Ended September 30,				Ended September 30,
	2011		2010		2011		2010

Employee compensation	$	14,292	$	28,862	$	42,876	$	104,311
Consultant compensation		2,110		2,109		6,328		6,965
	$	16,402	$	30,971	$	49,204	$	111,276

A summary of employee options activity under the plans as of September 30, 2011 and changes during the nine-month period then ended are presented below:

						Weighted-
				Weighted-		Average
				Average		Remaining		Aggregate
				Exercise		Contractual		Intrinsic
Options	Shares			Price		Term (Years)		Value
Balance, January 1, 2011		2,368,500		$	0.47
Granted during the period		-			-
Exercised during the period		-			-
Expired during the period		(435,000	)		0.60
Outstanding, September 30, 2011		1,933,500		$	0.44		2.53	$	142,820
Exercisable, September 30, 2011		1,050,997		$	0.68		1.56	$	41,291

The market value of the Company’s common stock as of September 30, 2011 was $0.28 per share.

A summary of the non-vested stock options for employees during the nine months ended September 30, 2011 is as follows:

				Weighted
				Average
				Exercise Price
				Per Share
Non-vested Options	Shares			Outstanding
Non-vested, January 1, 2011		1,220,000		$	0.17
Granted during the period		-			-
Vested during the period		(337,497	)		0.17
Non-vested, September 30, 2011		882,503		$	0.16

As of September 30, 2011, the total fair value of non-vested awards amounted to $90,869. The weighted average remaining period over which such options are expected to be recognized is 1.80 years.

On March 22, 2011, the Company closed on a private placement, of which certain officers and directors of the Company participated, that consisted of 1,800,000 shares of the Company’s common stock and warrants to purchase 1,080,000 shares of the Company’s common stock. The total proceeds received in connection with this private placement were $450,000. The warrants have a three year term. 900,000 of the warrants are exercisable at $0.31 per share, 180,000 of the warrants are exercisable at $0.38 per share, and all warrants are fully vested at the date of issuance. The exercise price of the warrants would be adjusted in the event the Company declares or pays a dividend, or issues Company capital stock, other than shares of currently authorized common stock, as described in the warrant agreement.

On May 23, 2011, the Company closed on a private placement, of which certain officers and directors of the Company participated, that consisted of 2,580,000 shares of the Company’s common stock and warrants to purchase 1,548,000 shares of the Company’s common stock. The total proceeds received in connection with this private placement were $645,000. The warrants have a three year term. 1,290,000 of the warrants are exercisable at $0.31 per share, 258,000 of the warrants are exercisable at $0.38 per share, and all warrants are fully vested at the date of issuance. The exercise price of the warrants would be adjusted in the event the Company declares or pays a dividend, or issues Company capital stock, other than shares of currently authorized common stock, as described in the warrant agreement.

A summary of warrant activity as of September 30, 2011 and changes during the nine-month period then ended is presented below:

			Weighted-
			Average		Aggregate
			Exercise		Intrinsic
Warrants	Shares		Price		Value
Balance, January 1, 2011		322,500	$	0.14
Granted during the period		2,628,000		0.32
Expired during the period		-		-
Outstanding, September 30, 2011		2,950,500	$	0.30	$	45,350
Exercisable, September 30, 2011		2,799,667	$	0.31	$	24,133

A summary of the non-vested warrants during the nine months ended September 30, 2011 is as follows:

				Weighted
				Average
				Exercise Price
				Per Share
Non-vested Warrants	Shares			Outstanding
Non-vested, January 1, 2011		155,000		$	0.14
Granted during the period		2,628,000			0.32
Vested during the period		(2,632,167	)		0.32
Non-vested, September 30, 2011		150,833		$	0.14

As of September 30, 2011, the total fair value of non-vested awards amounted to $8,563. The weighted average remaining period over which such options are expected to be recognized is 1.18 years.

8. Income Taxes

The Company has approximately $17,207,000 in Federal and $3,844,000 in state net operating loss carryovers available as of September 30, 2011 that can be used to offset future taxable income in calendar years 2011 through 2030. The net operating loss carryovers begin to expire in the year 2016 through the year 2030. As of September 30, 2011, the Company has fully reserved for these net operating loss carryovers.

ASC 740, “Income Taxes”, clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. It prescribes a threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC 740 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure, and transition.

The Company has recorded a liability related to uncertain tax positions in the amount of approximately $9,000 and $23,000, respectively, at September 30, 2011 and December 31, 2010 relating to certain states in which the Company is required to file state tax returns as they have effectively established nexus in these states. These amounts have been recorded as a component of accounts payable and accrued expenses on the balance sheet.

The Company’s 2008, 2009 and 2010 Federal and state income tax returns are open for examination.

9. Concentrations

Significant customer sales and vendor inventory purchase concentrations are summarized as follows:

	Net Sales						Net Sales
	Three Months Ended						Nine Months Ended						A/R Balance			A/R Balance
	09/30/11			09/30/10			09/30/11			09/30/10			09/30/11			12/31/10
Customer A		14	%		24	%		16	%		19	%		33	%		37	%
Customer B		16	%		10	%		13	%		15	%		5	%		7	%
Customer C		*			*			*			10	%		*			*

	Net Inventory Purchases						Net Inventory Purchases
	Three Months Ended						Nine Months Ended						A/P Balance			A/P Balance
	09/30/11			09/30/10			09/30/11			09/30/10			09/30/11			12/31/10
Vendor A		77	%		76	%		73	%		76	%		53	%		41	%
Vendor B		18	%		18	%		23	%		17	%		7	%		7	%

* - Not applicable

10. Line of Credit

In April 2008, the Company obtained a one-year revolving line of credit with a financial institution with an interest rate equal to the Wall Street Journal Prime Rate (3.25% as of September 30, 2011) with a floor of 5.00%. This line is collateralized by the short-term investments. The maximum amount that the Company may borrow is limited to 50% of the value of these short-term investments. The Company renewed this one-year revolving line of credit that now matures on May 21, 2012 in the amount of $50,000. On February 22, 2010, the Company drew down $87,500, the maximum amount allowed under this line of credit at that time. The Company paid back $12,500 of this line in May 2010, January 2011, April 2011, and May 2011, respectively.

11. CEO Separation Agreement

The Company entered into a Separation and Release Agreement with a former CEO on January 27, 2010. Under the terms of the agreement, the former CEO agreed to provide consulting services for a period of 90 days following the date of the agreement for which he was entitled to $5,673 per week. During the one-year period commencing on January 11, 2010, the former CEO was entitled to the sum of $295,000, less the sum of consulting fees paid during such period and less any income, wages and/or salary received by him during such period in respect of full-time or substantially full-time employment. The Company also agreed to pay the former CEO $50,000 for relocation costs under certain circumstances, the cost of life insurance premiums during the period in which he provides consulting services, and the cost of health insurance coverage for a period of six months. In the three months ended September 30, 2011 and 2010, the Company recognized $0 and $88,750, respectively, of expense under this Agreement. In the nine months ended September 30, 2011 and 2010, the Company recognized $15,364 and $261,868, respectively, of expense under this Agreement.

12. CEO Employment Agreement

On April 12, 2011, the Company entered into an employment agreement with its President and Chief Executive Officer, Frederick Duffner. Prior to this agreement, Mr. Duffner, who is also a member of the Company’s Board of Directors, had been serving in such capacities without an employment agreement. The employment agreement provides for a term expiring December 31, 2012, subject to automatic annual renewals unless either party elects not to renew by 30-day prior notice to the other. Mr. Duffner may terminate his employment at any time with 30 days prior written notice.

The Company will pay Mr. Duffner a base salary of $250,000 per year, subject to potential increases, and a potential bonus that cannot exceed his base salary. Mr. Duffner’s eligibility for the bonus, and the amount of the bonus, will be based upon the Company and/or Mr. Duffner achieving certain milestones to be established by the Compensation Committee of the Board of Directors in consultation with Mr. Duffner.

If the Company terminates Mr. Duffner’s employment other than for cause, or he terminates for good reason, as both terms are defined in the agreement, the Company will pay him nine (9) months of his base salary as severance. Upon termination of Mr. Duffner’s employment, the Company may impose a restrictive covenant on him for up to twelve (12) months, provided that the Company must continue his severance payments to continue the covenant beyond nine (9) months.

13. Consulting Agreement

On February 4, 2011, the Company entered into a consulting agreement with Signal Nutrition LLC (“Signal”), a company controlled by a director of the Company, which superseded the July 27, 2010 agreement (see below). Under terms of the Agreement, Signal will work with outside researchers, assist in developing new products, and formulate sales and marketing plans for the Company. The Agreement has an indefinite term with an option by either party to terminate the agreement on thirty (30) days notice. The Company will pay Signal a fee of $16,000 per month, commencing March 1, 2011, during the term of the Agreement. Expense for the three months ended September 30, 2011 and 2010 is $48,000 and $22,000, respectively. Expense for the nine months ended September 30, 2011 and 2010 is $139,000 and $22,000, respectively.

Included in accounts payable and accrued expenses at September 30, 2011 and December 31, 2010 is $48,000 and $11,000, respectively, relating to this agreement.

On July 27, 2010, the Company entered into a consulting agreement with Signal. Under terms of the Agreement, Signal worked with outside researchers, assisted in developing new products, and formulated sales and marketing plans for the Company. The Agreement had an initial term of six months, with options by either party to renew for an additional six months, subject, however, to the right of either party to terminate on 15 days notice. The Company paid Signal a fee of $11,000 per month, commencing September 1, 2010, during the term of the Agreement.

14. Vendor Agreement

On February 9, 2011, the Company entered into an agreement with its largest vendor whereby extended payment terms were granted to the Company up to 90 days from invoice date and up to a maximum credit limit of $750,000. In the second quarter of 2011, the credit limit was increased to $850,000. Unpaid invoices under this agreement will bear simple interest at an annual rate of 5%, calculated on a per diem basis, during the period commencing 31 days following the invoice date until paid, payable monthly. Additionally, the vendor has an interest in the Company’s accounts receivable.

Item 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

In this Report on Form 10-Q, the terms the “Company,” “we”, “us,” and “our” refer to PacificHealth Laboratories, Inc.

(a)	Introduction

PacificHealth Laboratories is a leading nutrition company that was incorporated in the State of Delaware in April 1995. We focus on the development, marketing and selling of patented premium nutrition tools that enable our consumers to enhance their health and improve their performance. Our principal area of focus is exercise performance and recovery, including optimal weight management. Our products can be marketed without prior Food and Drug Administration (“FDA”) approval under current regulatory guidelines.

We are a sales and marketing driven company that derives value from our own brands that are based on the latest nutrition technology. We will continue to expand on the benefits of our core endurance nutrition products while exploring the latest science in order to introduce cutting edge new brands and products that allow our core endurance athletes to work out and compete more effectively. We will also direct new research and development in the endurance nutrition category to drive product development and consumer communications across both existing and new brands.

Endurance

Our research into factors influencing exercise performance, muscle endurance, and recovery has led to the development and commercialization of a new generation of sports and recovery drinks. The key to our technology is the specific ratio in which protein is combined with carbohydrates. We have received two patents on this technology and over 18 studies have been published demonstrating that products based on this technology can extend endurance, reduce muscle damage, improve rehydration, and accelerate muscle recovery. Our research in exercise performance has led to the introduction and commercialization of a number of products for the aerobic athlete including:

· ENDUROX R4® Recovery Drink – Introduced in February 1999

· ACCELERADETM Sports Drink – Introduced in May 2001

· ACCEL GEL® Advanced Sports Gel – Introduced in February 2004

· 2ND SURGE® Ultra Energy Gel – Introduced in March 2011

· ACCEL RECOVERTM Muscle Recovery Bar – Introduced in March 2011

· ENDUROX® EXCEL® Natural Workout Supplement – Introduced in March 1997

· ACCELERADE HYDROTM Sports Drink with less calories and sugar – Introduced in June 2008

In the first quarter of 2011, we launched two new products: 2ND SURGE and ACCEL RECOVER. 2ND SURGE is an energy gel that is the first all-natural product specifically formulated to delay the onset of both muscle and brain fatigue. The product’s proprietary formula contains rapidly acting carbohydrates, specific proteins, caffeine and selected antioxidants that are proven to increase the delivery of critical nutrients to brain and muscle cells, maintain metabolic energy needs, inhibit the release of fatigue signals in the brain, and reduce muscle damage, an important trigger for the release of fatigue signals. ACCEL RECOVER is the first bar nutritionally engineered for maximum muscle recovery with a breakthrough formula that incorporates a unique blend of three carbohydrates to rapidly and completely replenish depleted muscle glycogen stores, a proprietary combination of three proteins enriched with glutamine, arginine and leucine, the amino acids that drive the repair and rebuilding of muscle protein and the rapid transport of nutrients to muscles, medium-chain triglycerides that rapidly convert into energy rather than fat and antioxidants to protect muscles from free-radical damage and to regenerate the body’s natural antioxidant pathways.

Weight Regulation

Satiety peptides have been shown to suppress appetite and reduce food intake. Our research has specifically focused on developing nutritional formulations that can stimulate cholecystokin (CCK), one of the body’s primary satiety peptides. CCK is normally released after a meal, particularly one high in fat and protein. CCK is often called the “feel full” protein because when it is released it gives a feeling of fullness and signals the brain to terminate the meal. The objective of our research is to develop a nutritional composition that stimulates and extends the duration of action of CCK in a calorically efficient way, i.e. to cause a release of CCK with 45-50 calories of specific nutrients rather than 1,000 calories. We have seven patents on our appetite suppressant technology.

In the first quarter of 2009, we launched FORZE GPS™ in our sports specialty channel. FORZE GPS was the first appetite management nutrition tool designed specifically for athletes. We were not successful in 2009 in achieving adequate sales for this product line. We therefore decided not to continue to aggressively market this product in 2010 as we did in 2009 but we will continue to sell this product line on a limited basis in 2011.

(b) Results of Operations – Three and Nine Months Ended September 30, 2011 and 2010

Revenues for the three-month period ended September 30, 2011 were $1,971,624 as compared to $1,999,489 for the same period in 2010. Revenues for the nine months ended September 30, 2011 were $5,948,461 as compared to $6,204,060 for the same period in 2010. Total endurance sales for the quarter ended September 30, 2011 were even with same period in 2010 with strong growth in some of our key channels: ecommerce up 75%, sports specialty retail up 32%, outdoor retailers up 50%, and international up 26%. This growth was offset by a reduction in inventory purchases of $250,000 by our three largest nutritional chains during the three-month period ended September 30, 2011 as well as the decrease in sales from FORZE, which we no longer market, of $35,787 and $184,039 respectively, for the three and nine months ended September 30, 2011. We also continue to see momentum from our new products, 2ND SURGE and ACCEL RECOVER, as well as with ENDUROX EXCEL Workout supplement, which we re-launched in the third quarter of 2010.

For the three months ended September 30, 2011, gross profit margin on product sales was 43.2% compared to 43.8% for the three months ended September 30, 2010. For the nine months ended September 30, 2011, gross profit margin on product sales was 44.0% compared to 45.7% for the nine months ended September 30, 2010. The nine-month period ended September 30, 2010 includes the effects of sales of $177,692 with no associated cost of goods sold (other than freight out) as this inventory was previously reserved in the fourth quarter of 2009. We have also been challenged this year with increased cost of goods as a result of higher protein and packaging costs.

Sales and marketing (“S & M”) expenses increased $90,397 to $414,453 for the three-month period ended September 30, 2011 from $324,056 for the three-month period ended September 30, 2010. S & M expenses increased $75,093 to $983,496 for the nine months ended September 30, 2011 from $908,403 for the nine months ended September 30, 2010. These increases are primarily due to increased advertising expenses as part of our 2011 marketing plan, offset by a decrease in commission expense as we discontinued our commissioned sales representation organization in the third quarter of 2010.

General and administrative (“G & A”) expenses decreased $108,069, or approximately 17%, to $529,585 for the three-month period ended September 30, 2011 from $637,654 for the three-month period ended September 30, 2010. G & A expenses decreased $568,188, or approximately 26%, to $1,578,059 for the nine months ended September 30, 2011 from $2,146,247 for the nine months ended September 30, 2010. Included in G & A in the three month periods ended September 30, 2011 and 2010 is approximately $0 and $89,000, respectively, paid to the former CEO in the form of a non-compete clause pursuant to his Separation Agreement. Included in G & A in the nine month periods ended September 30, 2011 and 2010 is approximately $15,000 and $262,000, respectively, paid to the former CEO in the form of a non-compete clause pursuant to his Separation Agreement. These payments ended under the terms of the Separation Agreement on January 27, 2011. The decreases in G & A in both the three months and nine months ended September 30, 2011 as compared to the same periods in 2010 is also due to less salaries and related personnel expenses due to decreases in the number of employees, lower legal and accounting expenses due to negotiated fee arrangements, lower directors fees due to the 2011 Board Compensation Policy whereby directors will not receive any compensation for 2011, and lower depreciation expense due to less purchases of equipment over the last two years.

Research and development (“R & D”) expenses were $16,141 and $40,936, respectively, for the three and nine month periods ended September 30, 2011 compared to $-0- for the same periods in 2010. We will continue to incur R & D expenses for the remainder of 2011and into 2012 as we invest in science and new products based on this science.

We recorded a net loss of ($116,675), or ($0.01) per share (basic and diluted), for the quarter ended September 30, 2011 compared to a net loss of ($87,371), or ($0.01) per share (basic and diluted), for the quarter ended September 30, 2010. The greater net loss in the quarter ended September 30, 2011 as compared to the same period in 2010 is due primarily to lower revenues and higher S & M expenses offset by lower G & A expenses in the quarter ended September 30, 2011 than in the quarter ended September 30, 2010. We recorded net income of $2,324, or $0.00 per share (basic and diluted), for the nine months ended September 30, 2011 compared to a net loss of ($219,876), or ($0.01) per share (basic and diluted), for the nine months ended September 30, 2010. The net income for the nine months ended September 30, 2011 as compared to the net loss in the same period in 2010 is due primarily to lower G & A expenses in the nine months ended September 30, 2011 as compared to the same period in 2010 offset by lower revenues in the nine months ended September 30, 2011 as compared to the same period in 2010.

At September 30, 2011, our current assets exceeded our current liabilities by approximately $1,664,000 with a ratio of current assets to current liabilities of approximately 2.6 to 1. At September 30, 2011, cash on hand was $1,039,840, an increase of $905,675 from December 31, 2010, primarily as the result of two private placements of our Common Stock for $1,095,000 as well as an increase in accounts receivable (net of reserves) of $311,692, an increase in inventory of $115,279 (net of reserves), an increase in prepaid expenses of $59,946, sales of other short-term investments of $75,000, repayments of a line of credit of $37,500, issuances of notes payable of $65,427, repayments of notes payable of $46,743, an increase in accounts payable and accrued expenses of $159,323, and an increase in deferred revenue of $4,965 from December 31, 2010. Accounts receivable increased as 3rd quarter 2011 sales were significantly higher than 4th quarter 2010 sales. Inventories increased due to higher sales in the 3rd quarter of 2011 compared to the 4th quarter of 2010. Accounts payable and accrued expenses increased due to better payment terms negotiated with our main inventory suppliers.

Net cash used in operating activities for the nine months ended September 30, 2011 was $238,133 compared to net cash provided by operating activities for the same period in 2010 of $53,418. The net cash used in operating activities for the nine months ended September 30, 2011 as compared to the net cash provided by operating activities in the same period in 2010 is due to an increase in accounts receivable in 2011, an increase in inventories in 2011 as opposed to a decrease in inventories in 2010 offset by an increase in accounts payable and accrued expenses in 2011, a slight increase in deferred revenues in 2011 as compared to a large decrease in 2010, and the receipt of the net proceeds from a tax loss sale in 2010. Accounts receivable increased in 2011 compared to the increase in 2010 primarily due to the implementation of customers taking advantage of early payment discounts starting in early 2010. Average days’ sales outstanding are approximately 26 days as of September 30, 2011 compared to approximately 29 days at December 31, 2010. Inventories increased in 2011 compared to a decrease in inventories in 2010 due to new products being introduced in 2011 as well as anticipated increased sales. Inventories are expected to decrease significantly in the last quarter of 2011. Accounts payable and accrued expenses increased in 2011 due to better payment terms negotiated with our main inventory suppliers. Historically, we have funded inventory purchases through trade credit and we expect that to continue.

As of September 30, 2011, we had $75,000 invested in auction rate securities that are presented as short-term investments on the balance sheet. During the first nine months of 2011, we were able to redeem $75,000 of these investments. We have obtained a revolving line of credit with a financial institution with a maturity of May 2012 that will accept these securities as collateral. The maximum amount that we may borrow is limited to 50% of the value of these auction rate securities. As of December 31, 2010, the balance of this line of credit was $75,000. In January 2011 we paid down $12,500 on this line from the proceeds of redeemed securities, in April 2011 we paid down another $12,500 on this line from the proceeds of redeemed securities, and in May 2011 we paid down another $12,500 on this line from the proceeds of redeemed securities.

We have no material commitments for capital expenditures.

(d) Off-Balance Sheet Arrangements

There are no off-balance sheet arrangements between us and any other entity that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources that are material to investors.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Per Item 305(e) of Regulation S-K, a smaller reporting company is not required to provide the information required by this item.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures. Based on their evaluation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Exchange Act) as of September 30, 2011, the end of the period covered by this Report, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms; that such information is accumulated and disclosed to management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure; and that such disclosure controls and procedures are effective.

Changes in internal control over financial reporting. During the quarter ended September 30, 2011, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. REMOVED AND RESERVED

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

Exhibit Number		Description of Exhibit
31.1*		Rule 13a-14(a) Certification of Chief Executive Officer

31.2*		Rule 13a-14(a) Certification of Chief Financial Officer

32*		Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101*		The following financial information from PacificHealth Laboratories, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2011, formatted in XBRL (eXtensible Business Reporting Language): (i) Balance Sheets (unaudited) at September 30, 2011, and December 31, 2010, (ii) Statements of Operations (unaudited) for the three and nine months ended September 30, 2011 and 2010, (iii) Statements of Cash Flows (unaudited) for the nine months ended September 30, 2011 and 2010

* Filed herewith

SIGNATURES

In accordance with the requirements of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	PACIFICHEALTH LABORATORIES, INC.

	By:	/S/ STEPHEN P. KUCHEN
	STEPHEN P. KUCHEN
	Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)

	Date:	November 4, 2011

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