t61914_10ksb.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2007

Commission File No. 333-36379

PACIFICHEALTH LABORATORIES, INC.
(Name of Small Business Issuer in Its Charter)

Delaware
  
22-3367588
(State or jurisdiction of
  
(I.R.S. Employer
incorporation or organization)
  
Identification No.)

100 Matawan Road, Suite 420
Matawan, NJ 07747
(Address of principal executive offices)

732/739-2900
(Issuer’s telephone number)

Internet Website: www.pacifichealthlabs.com

Securities registered under Section 12(b) of the Exchange Act: None

Securities registered under Section 12(g) of the Exchange Act: Common Stock, par value $.0025 per share.

Check whether the issuer is not required to file reports pursuant to Section 13 or 15 (d) of the Exchange Act. o
 
Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 o
 
Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB.  x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 under the Exchange Act).   Yes o No x
 
The issuer’s revenues for its most recent fiscal year were $7,427,857.
 
As of March 5, 2008, the aggregate market value of the common stock held by non-affiliates based on the closing sale price of Common Stock was $4,848,154.
 
As of March 5, 2008, the issuer had 13,501,426 shares of common stock outstanding.
 
Transitional Small Business Disclosure Format (check one): Yes o No x
 


PACIFICHEALTH LABORATORIES, INC.
FORM 10-KSB
 
FISCAL YEAR ENDED DECEMBER 31, 2007
 
 
TABLE OF CONTENTS
 
Note Concerning Forward Looking Information
3
     
PART I
    
     
ITEM 1.
BUSINESS.
4
ITEM 2.
DESCRIPTION OF PROPERTY
10
ITEM 3.
LEGAL PROCEEDINGS
10
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
10
     
PART II
    
     
ITEM 5.
MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND SMALL
 
  BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES
10
ITEM 6.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
  
 
CONDITION AND RESULTS OF OPERATIONS
11
ITEM 7.
FINANCIAL STATEMENTS
15
ITEM 8.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
  
 
ACCOUNTING AND FINANCIAL DISCLOSURE
15
ITEM 8A(T)
CONTROLS AND PROCEDURES
15
ITEM 8B.
OTHER INFORMATION
16
     
PART III
    
     
ITEM 9.
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND CORPORATE
 
  GOVERNANCE; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT 16
ITEM 10.
EXECUTIVE COMPENSATION
19
ITEM 11.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
 
  RELATED STOCKHOLDER MATTERS
24
ITEM 12.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
 
  INDEPENDENCE
27
ITEM 13.
EXHIBITS
28
ITEM 14.
PRINCIPAL ACCOUNTANTS’ FEES AND SERVICES
28
 
 
2
 
 
 
NOTE CONCERNING FORWARD-LOOKING STATEMENTS

 
This Annual Report on Form 10-KSB contains forward-looking statements concerning our financial condition, results of operations and business, including, without limitation, statements pertaining to:

 
 
·
The development of new products and the expansion of the market for our current products;
 
·
Implementing aspects of our business plans;
 
·
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 sections entitled "Item 6  - Management's Discussion and Analysis of Financial Conditions and Results of Operations" and "Item 1 - Business." Generally, you can identify these statements because they use phrases like "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. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons, including those stated in this Report.

 
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. Such factors include, among other things, risks and uncertainties discussed throughout Item 1 – Business and Item 6 – Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 
We are not obligated to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except as otherwise required by law. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this Report and other statements made from time to time from us or our representatives might not occur. For these statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.
 
 
3
 
 
PART I

 

 
ITEM 1.                      BUSINESS.

 
1(a)         Business Development

 
PacificHealth Laboratories (hereinafter referred to as “the Company”, “us”, or “we”) is a nutrition technology company that was incorporated in the state of Delaware in April 1995.  Our mission is to conceive, develop and commercialize specific and scientifically validated nutrition tools in the areas of fitness development and weight regulation to improve our consumer’s performance in life. Our products are substantiated by clinical trials conducted at leading university research centers. Our principal areas of focus include sports performance, weight loss, and management of Type II diabetes. Our products can be marketed without prior Food and Drug Administration (“FDA”) approval under current regulatory guidelines. We commercialize our technologies using multiple strategies including licensing and/or direct sales via targeted consumer channels.  As detailed in Item 1(b) below, on February 22, 2006, we sold to Mott’s LLP the patents, trademarks, web sites and other intellectual property related to our ACCELERADE® and ENDUROX® sports nutrition product lines, and we entered into a license agreement with Mott’s that gives us the exclusive, royalty-free right to continue to sell these products in powder, gel and pill form.

 
1(b)         Business of the Issuer

 
We are focused on developing patented protein-based nutrition products using two core technology platforms.  One platform involves the activation of biochemical pathways by specific nutritional compositions to enhance muscle growth, energy, and transport pathways.  Using this nutritional technology platform, our research efforts have been directed to product development for 1) improving exercise performance, 2) post-surgical muscle recovery, and 3) oral rehydration.  The second technology platform involves stimulation of specific satiety peptides that are released in the stomach.  Using this nutritional technology platform, our research efforts have been directed in product development for 1) appetite suppression and weight loss, and 2) management of Type II diabetes.

 
Activation of Muscle Growth, Energy, and Transport Pathways

 
Exercise Performance
Our research into factors influencing exercise performance and muscle growth and recovery has led to the development and commercialization of a new generation of sports/recovery drinks and supplements.  The key to our drink technology is the specific ratio in which protein is combined with carbohydrate.  We have two patents on this technology.   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.  Based on this research, we have commercialized a number of products including:

 
 
·
ENDUROX EXCEL®  - Introduced in March 1997
 
 
·
ENDUROX R4® Recovery Drink – Introduced in February 1999
 
 
·
ACCELERADE® Sports Drink – Introduced in May 2001
 
 
·
ACCEL GEL® Energy Gel – Introduced in February 2004
 

 
On February 22, 2006, pursuant to an Asset Purchase Agreement of the same date, we sold to Mott’s LLP (“Mott’s”), a division of Cadbury Schweppes Americas Beverages (“CSAB”), the patents, trademarks, web sites, and other intellectual property related to the our ACCELERADE and ENDUROX sports nutrition product lines for $4,000,000 in cash and potential future royalty payments.  Simultaneously, we entered into a License Agreement with Mott’s giving us the exclusive, royalty-free right to continue to sell our sports nutrition products in powder, gel and pill form.  Consequently, we will continue to sell our current sports nutrition products in the same manner as prior to the sale of the intellectual property assets.
 
 
4
 
 
We will receive royalty payments from Mott’s for a finite period, subject to an annual limitation on the amount of the royalty.  There are no annual minimum royalties. Mott’s launched ACCELERADE Ready To Drink (“RTD”) in the second quarter of 2007. Going forward, we believe Mott’s intends to focus ACCELERADE RTD exclusively on targeted channels and classes of trade and accounts where they expect the product to be financially viable.

 
Post-Surgical Muscle Recovery
Scientific insights emanating from our discoveries in sports nutrition have led to a potentially new and exciting medical application.  Individuals undergoing orthopedic surgery, particularly involving the shoulder, hip or knee, experience muscle atrophy that occurs as a normal consequence of muscle immobilization in the post-surgical period. The degree of muscle atrophy a patient experiences significantly impacts health care costs and quality of life. We are currently evaluating a novel nutritional formulation that has the potential of slowing muscle atrophy following a period of forced immobilization.  Such a product could have enormous benefit for the 1.6 million patients who undergo arthroscopy and muscle and knee replacement operations each year, and the 5 million patients who suffer a sports related injury.  A clinical study to examine the effectiveness of this formulation is underway. We have filed one patent on this technology and plan to file additional patents in the future.

 
Oral Rehydration
Another scientific byproduct of our research on the effects of protein has been the identification of nutritional formulas that can enhance sodium transport. Such products would have widespread medical application in treating dehydration commonly associated with vomiting and diarrhea. We will continue our studies and may file patents for this indication in 2008.

 
Activation of Satiety Peptides

 
Weight Loss.
Satiety peptides have been shown to reduce food intake and suppress appetite in humans.  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.
 
The first product we commercialized using this technology was SATIETROL® that was released in April 2000.  This was followed by the introduction of a meal replacement product called SATIETROL COMPLETE® in January 2001.  Clinical studies showed that both of these products could reduce hunger and reduce caloric intake.  In June 2001, we signed an exclusive worldwide licensing agreement with GlaxoSmithKline (“GSK”) for our weight loss technology. Under the agreement, we received an initial payment of $1,000,000 and received a subsequent milestone payment of $250,000. GSK subsequently terminated the agreement in September 2002 with all rights reverting back to us.
 
We have continued research in this area in order to develop a more effective composition that could be incorporated into different forms (ready-to-drink beverage and chewable tablet) and also has the potential to be added to food and increase the satiation property of the food to which it was added.  Starting in the third quarter of 2003, the Company funded a number of clinical studies on an improved formulation.  The new formulation was shown to be significantly better than the previous product in reducing caloric intake, slowing gastric emptying, and extending a feeling of satiation following a meal.  We have seven patents on our appetite suppressant technology with additional patents pending.  We launched a ready-to-drink beverage using this improved technology under the trade name SATIATRIM® in January 2007.
 
Type II Diabetes
Our appetite suppression technology may also have potential for the treatment of Type II diabetes, the fastest growing chronic condition in the U.S., affecting an estimated 46 million people. We have instituted clinical trials to measure the effectiveness of our formulation in controlling blood glucose.
 
All of our existing and proposed products are expected to be manufactured in the United States by third parties.  See item 1(b)(i) below.
 
 
5
 
 
1(b)(i)  Principal Products and Markets

 
        (a) ENDUROX EXCEL Dietary Supplement

 
ENDUROX EXCEL is a dietary supplement of which the principal ingredient is the herb ciwujia.  Laboratory studies funded by us during 1995 at the University of North Texas Health Science Center in Fort Worth, Texas and the Institute of Nutrition and Food in China, have demonstrated that ENDUROX EXCEL can have a beneficial effect on exercise performance. In December 1996, we were issued United States Patent No. 5,585,101 for our ENDUROX product.

 
(b) ENDUROX R4 Recovery Drink

 
We launched ENDUROX R4 Recovery Drink in March 1999.  Clinical trials funded by us during 1998 at the University of North Texas Health Science Center in Fort Worth, Texas and the Human Performance Lab at St. Cloud University in St. Cloud, Minnesota showed that when tested against the nation’s leading sports drink, ENDUROX R4 delivered equal hydration effectiveness while enhancing performance and extending endurance by 55%, decreasing post-exercise muscle stress by 36%, reducing free radical build-up by 69%, and increasing the replenishment of muscle glycogen following exercise. These results have been published in a peer-reviewed journal. In April 2000, we were issued patent United States Patent No. 6,051,236 for ENDUROX R4.  Patent office acceptance of specific claims does not necessarily permit us to make any specific claims to the public regarding this product.  Our ability to make those claims is governed by the FDA, Federal Trade Commission, and other federal government agency regulations and guidelines.

 
(c) ACCELERADE Sports Drink

 
In June 2001, we introduced ACCELERADE Sports Drink.  ACCELERADE Sports Drink is the first sports drink that contains protein.  Studies sponsored by the Company and done independently by university researchers and published in peer-reviewed journals have demonstrated that, compared to a conventional sports drink such as Gatorade, ACCELERADE improves endurance by 29%, decreases muscle damage by 83%, improves muscle recovery by 46%, and improves rehydration by 15%.  To date, there are over 18 published studies on ACCELERADE.  In January 2006, we received a specific patent on this formula.

 
(d) ACCEL GEL Energy Gel

 
In February 2004, we introduced ACCEL GEL.  ACCEL GEL is an energy gel that contains the patented 4:1 ratio found in ENDUROX R4 and ACCELERADE.  ACCEL GEL is designed to provide athletes in all sports with a quick and rapid source of carbohydrate energy.  Studies sponsored by the Company and published in a peer-reviewed journal have shown that Accel Gel, compared to the leading carbohydrate gel, improves endurance performance by 13%.

 
ENDUROX R4, ACCELERADE, and ACCEL GEL are distributed in health foods chains (GNC, Vitamin Shoppe, Vitamin World), sporting goods retailers (REI), cycling stores and catalogs (Performance Bike), running stores and catalogs (Road Runner Sports), and sports specialty stores.

 
1(b)(ii)  Distribution Methods

 
We have pursued a “multi-channel” distribution strategy in marketing our endurance products. At the present time, these products are being sold in over 9,000 retail outlets including GNC, sports specialty stores, independent health food retailers, independent bike retailers, health clubs, catalogs, and Internet sites. We now sell all of our products in various foreign countries through independent distributors.

 
To support our marketing efforts, we may use a variety of marketing methods including advertising in trade and consumer sports and health food magazines that are intended to reach our targeted consumer. In addition, we may attend trade shows and exhibitions, sponsor promotional programs/events and in-store promotions, and engage in public relations efforts that has resulted and may continue to result in articles in numerous sports, health, fitness, trade and natural product publications, newspaper coverage, radio, and television spots.
 
 
6
 
 
In the years ended December 31, 2007 and December 31, 2006, our expenditures for product advertising and promotion were approximately $159,000 and $105,000, respectively. Advertising expenditures increased in 2007 due to the launch of SATIATRIM, our natural appetite suppressant product.
 
1(b)(iii)  Status of Publicly Announced New Products
 
The status of all products that have been the subject of or mentioned in public announcements by us in the past year are discussed above under the caption “1(b)(ii) - Principal Products and Markets”.
 
1(b)(iv)  Competition
 
In the exercise performance market, following the asset sale of our sports drink intellectual property to Mott’s, we will only be manufacturing and distributing powder versions of ACCELERADE and ENDUROX R4 as well as ACCEL GEL.  Our primary marketing focus will be the serious endurance athlete (cyclist, runner, triathlete and swimmer), as well as team sports.  There are a number of companies that currently market products that compete with ENDUROX R4 and ACCELERADE.  The major companies include Cytosport, PowerBar, EAS, and Clif Bar. Increased competitive activity from such companies could make it more difficult for us to establish market share since such companies have greater financial and other resources available to them and possess far more extensive manufacturing, distribution and marketing capabilities than we do.
 
The weight loss market in which SATIATRIM will compete is highly competitive.  Weight loss products tend to fall into four categories including: herbal supplements, meal replacement products (e.g., Slim Fast), food plans (e.g., Weight Watchers) and prescription products (e.g., Xenical). Today, weight loss products are manufactured by dietary supplement manufacturers, pharmaceutical manufacturers, diet food companies, and over-the-counter drug companies. Intense competitive activity in this market could make it difficult for us to establish market share, as most of the companies that have products in this category have greater financial, marketing, sales, manufacturing, and distribution resources than we have.
 
We believe that long-term success in the marketplace for any of our products will be dependent on the proprietary nature of our formulas, as well as such factors as distribution and marketing capabilities.
 
1(b)(v)  Suppliers of Raw Materials
 
We do not have manufacturing facilities and have no present intention to manufacture any products ourselves.  We fulfill product needs through relationships with independent manufacturers.  We generally do not have long-term contracts with any of these manufacturers.  Competitors that do their own manufacturing may have an advantage over us with respect to pricing, availability of product, and in other areas because of their control of the manufacturing process.
 
Generally, our contract manufacturers obtain raw materials necessary for the manufacture of our products from numerous sources. We generally do not have contracts with suppliers of materials required for the production of our products.  All raw materials used in our existing products are available from multiple sources.
 
There is no assurance that suppliers will provide the raw materials needed by us in the quantities requested or at a price we are willing to pay.  Because we do not control the source of these raw materials, we are also subject to delays caused by interruption in production of materials based on conditions outside of our control.
 
1(b)(vi)  Dependence on Major Customers
 
GNC and Performance, Inc. accounted for approximately 21% and 15%, respectively, of net sales in 2007 and 43% and 19%, respectively, of net accounts receivable at December 31, 2007. Deferred revenue for consigned inventory at GNC was $559,876 as of December 31, 2007. The loss of these customers, a significant reduction in purchase volume by these customers, or the financial difficulty of such customers, for any reason, could significantly reduce our revenues. We have no agreement with or commitment from either of these customers with respect to future purchases.
 
 
7
 
 
1(b)(vii)  Patents and Trademarks
 
The following describes the patents and trademarks we have obtained related to our sports nutrition products and our weight loss technology.  On February 22, 2006, we sold the patents and trademarks related to our ACCELERADE and ENDUROX line of sports nutrition products to Mott’s, subject to an exclusive license back to us to continue to market the powder, gel and pill form of these products.
 
We received a use patent, United States Patent No. 5,585,101, in December 1996 covering the use of ciwujia, the principal active herb in ENDUROX and ENDUROX EXCEL caplets, entitled Method to Improve Performance During Exercise Using the Ciwujia Plant. This patent expires in December 2013.
 
We received a composition of matter patent, United States Patent No. 6,051,236, in April 2000 entitled Composition for Optimizing Muscle Performance During Exercise (see Item 1(b)(i)(b)). This patent expires in April 2017.
 
We received a composition of matter patent, United States Patent No. 6,207,638, in March 2001 entitled Nutritional Intervention Composition for Enhancing and Extending Satiety (see Item 1(b)(i)(c)). This patent expires in March 2018.
 
We received a use patent, United States Patent No. 6,429,190, in August 2002 entitled Method For Extending The Satiety Of Food By Adding A Nutritional Composition Designed To Stimulate Cholecystokinin (CCK). This patent expires in August 2019.
 
We received a composition of matter patent, United States Patent No. 6,436,899, in August 2002 entitled Nutritional Intervention Composition for Enhancing and Extending Satiety. This patent expires in August 2019.
 
We received a composition of matter patent, United States Patent No. 6,468,962, in October 2002 entitled Nutritional Intervention Composition for Enhancing and Extending Satiety. This patent expires in October 2019.
 
We received a composition of matter patent, United States Patent No. 6,558,690, in May 2003 entitled Nutritional Intervention Composition for Improving Efficacy of a Lipase Inhibitor. This patent expires in May 2020.
 
We received a composition of matter patent, United States Patent No. 6,716,815, in April 2004 entitled Nutritional Intervention Composition for Enhancing and Extending Satiety. This patent expires in April 2021.
 
We received a composition of matter patent, United States Patent No. 6,838,431, in January 2005 entitled Nutritional Intervention Composition Containing Protease Inhibitor Extending Post Meal Satiety. This patent expires in January 2022.
 
We received a composition of matter patent, United States Patent No. 6,989,171, in January 2006 entitled Sports Drink Composition For Enhancing Glucose Uptake and Extending Endurance During Physical Exercise. This patent expires in January 2023.
 
We also have several patents pending on our technology.  To the extent these are improvements on our existing sports drink patents, Mott’s will own these patents, but we will have an exclusive license to use them in powder, gel and pill products.
 
The patent holder for all patents is our CEO and President, Dr. Robert Portman.  Our policy is to have all patents assigned to us upon filing. Patent Nos. 6,051,236 and 6,989,171 above have been assigned to Mott’s. To the extent we do not have patents on our products, there can be no assurance that another company will not replicate one or more of our products.  Nor is there any assurance that existing or future patents will provide meaningful protection or significant competitive advantages over competing products. For example, our use patent on ciwujia would not prevent the sale of a product containing that herb with a claim or for a use that was not covered by our patent.
 
 
8
 
 
We also obtained federal trademark registrations for ENDUROX EXCEL, ENDUROX R4, ACCELERADE, ACCEL GEL, and SATIATRIM among others. We also have filed our trademarks in most Western European countries, Canada, Mexico and Japan. Our policy is to pursue registrations for all of the trademarks associated with our key products, and to protect our legal rights concerning the use of our trademarks. We rely on common law trademark rights to protect our unregistered trademarks.
 
1(b)(viii) and (ix)  Governmental Regulation
 
We have determined that all of our existing and proposed products, as described above, are nutritional or dietary supplements as defined under federal statutes and regulations of the FDA. Neither nutritional supplements nor dietary supplements require FDA or other governmental approval prior to their marketing in the United States.  No governmental agency or other third party makes a determination as to whether our products qualify as nutritional supplements, dietary supplements, or neither.  We make this determination based on the ingredients contained in the products and the claims made for the products.  The processing, formulation, packaging, labeling and advertising of such products, however, are subject to regulation by one or more federal agencies, including the FDA, the Federal Trade Commission, the Consumer Products Safety Commission, the Department of Agriculture and the Environmental Protection Agency. Our activities also are subject to regulation by various agencies of the states and localities in which our products are sold.
 
We market products that are covered under two types of FDA regulations, Nutritional Supplements and Dietary Supplements.  Nutritional Supplements contain food and GRAS (Generally Regarded as Safe) ingredients and do not require FDA approval or notification.  Such products must follow labeling guidelines outlined by the FDA.

 
Dietary Supplements is a classification of products resulting from the enactment of the Dietary Supplement Health and Education Act of 1994 (the "DSHEA") in October 1994. The DSHEA amended and modified the application of certain provisions of the Federal Food, Drug and Cosmetics Act (the "FFDC Act") as they relate to dietary supplements, and required the FDA to promulgate regulations consistent with the DSHEA.

 
The DSHEA defines a dietary supplement to include (i) any product intended to supplement the diet that bears or contains a vitamin, mineral, herb or other botanical, an amino acid, a substance to supplement the diet by increasing the total dietary intake, or any concentrate, constituent, extract, or combination of any such ingredient, provided that such product is either intended for ingestion in tablet, capsule, powder, softgel, gelcap, or liquid droplet form, (ii) or, if not intended to be ingested in such form, is not represented for use as a conventional food or as a sole item of a meal or the diet, and (iii) is labeled as a dietary supplement. The practical effect of such an expansive definition is to ensure that the new protections and requirements of the DSHEA will apply to a wide class of products.

 
Under the DSHEA, companies that manufacture and distribute dietary supplements are allowed to make any of the following four types of statements with regard to nutritional support on labeling without FDA approval: (i) a statement that claims a benefit related to a classical nutrient deficiency disease and discloses the prevalence of such disease in the United States; (ii) a statement that describes the role of a nutrient or dietary ingredient intended to affect structure or function in humans; (iii) a statement that characterizes the documented mechanism by which a nutrient or dietary ingredient acts to maintain or function; or (iv) a statement that "describes general well-being" from consumption of a nutrient or dietary ingredient. In addition to making sure that a statement meets one of these four criteria, a manufacturer of the dietary supplement must have substantiation that such statement is truthful and not misleading, must not claim to diagnose, mitigate, treat, cure, or prevent a specific disease or class of diseases, and must contain the following disclaimer, prominently displayed in boldface type: "This statement has not been evaluated by the Food and Drug Administration. This product is not intended to diagnose, treat, cure, or prevent any disease."

 
In 2000, the FDA issued new guidelines concerning statements made for dietary supplements. These regulations have important implications for the marketing of weight loss products, such as SATIATRIM. Previously the regulations made it clear that a product that made a claim for obesity must be treated as a drug. Under the regulations issued in 2000, the FDA makes a distinction between obesity and overweight. Overweight is no longer considered a disease but rather a natural life process. Overweight is considered a condition that affects the structure and function of the body. As now defined, dietary supplements can make a claim for ordinary weight loss rather than as a treatment for obesity.  Furthermore, these regulations also permit the use of appetite suppressant as a structure/function claim under DSHEA. The issuance of these regulations will give us greater latitude in the types of claims that we can make for SATIATRIM as long as we can substantiate such claims by the necessary studies.

 
 
9
 
 
1(b)(x)  Expenditures for Research and Development

 
Our research and development expenditures in the past two fiscal years, exclusive of market research and marketing related expenditures, were approximately as follows: 2007 - $211,000; 2006 - $196,000. We anticipate R & D expenses will increase as we conduct additional clinical trials to seek out additional patents and claims for our products.
 
1(b)(xi)  Compliance with Environmental Laws
 
Except as described above under Item 1(b)(viii) and (ix), we are not aware of any administrative or other costs that we may incur which are directly related to compliance with environmental laws, and we have not experienced any other significant effect from the impact of environmental laws.
 
1(b)(xii)  Employees
 
At the present time, we have fourteen (14) full time employees and one (1) part time employee. Of these, three employees are executive, seven are in sales and marketing, and five are in accounting, operations and administration. We employ a number of consultants who devote limited portions of their time to our business. None of our employees are represented by a union, and we believe that our employee relations are good.
 
ITEM 2.                      DESCRIPTION OF PROPERTY
 
We have a lease agreement for office space in Matawan, NJ for the rental of 5,500 square feet expiring June 2012. Rent including utilities will be $140,250 annually for the first 36 months; $145,750 annually for the next 12 months; and $151,250 annually for the last 12 months.
 
We do not intend to develop our own manufacturing capabilities, because management believes that the availability of manufacturing services from third parties on a contract basis is more than adequate to meet our needs in the foreseeable future.
 
We do not own any real property nor do we have any real estate investments.
 
  ITEM 3.                    LEGAL PROCEEDINGS
 
None.
 
ITEM 4.                      SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
We did not submit any matters to a vote of our security holders in the fourth quarter of the fiscal year ended December 31, 2007.
 

 
PART II

 
ITEM 5.                      MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES.

 
5(a)         Market Information.

 
Our common stock is currently traded on the over-the-counter market on the OTC Bulletin Board, under the symbol "PHLI".

 
 
10
 
 
The following table sets forth the high and low sales prices of our common stock since January 1, 2006, as reported by the OTC Bulletin Board. These quotations reflect inter-dealer prices, without retail mark up, mark down or commissions and may not represent actual transactions.

 

 
Year ended December 31, 2007
High       Low
  

 
First Quarter
$2.35       $1.08
Second Quarter
$2.65       $1.65
Third Quarter
$3.38       $1.55
Fourth Quarter
$1.80       $0.55

 
Year ended December 31, 2006
High       Low
  

 
First Quarter
$1.24       $0.17
Second Quarter
$2.75       $0.84
Third Quarter
$2.08       $1.02
Fourth Quarter
$1.49       $0.99

 
On March 5, 2008, the closing price of our common stock as reported by the OTC Bulletin Board was $0.48 per share.
 
5(b)         Holders
 
As of March 5, 2008, there were approximately 102 holders of record of our common stock. However, we believe that there are significantly more beneficial holders of our stock as many beneficial holders have their stock in “street name”.
 
5(c)         Dividends
 
We have never paid or declared dividends upon our common stock, and we do not contemplate or anticipate paying any dividends on our common stock in the foreseeable future.
 
 
5(d)         Recent Sales of Unregistered Securities
 
5(d)(i)     Recent Sales of Unregistered Securities
 
There were no sales of unregistered securities other than as reported in prior reports on Forms 10-KSB, 10-QSB or 8-K.
 
Company Repurchases
 
We did not repurchase any shares of our common stock in the fourth quarter of 2007.
 
ITEM 6.                      MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The following discussion and analysis should be read in conjunction with our financial statements, including the notes thereto, appearing elsewhere in this Report.
 
 
11
 
 
6(a)         Introduction
 
We were incorporated in April 1995 to discover, develop and commercialize nutritional products that are patentable and substantiated by well-controlled clinical trials conducted at leading university research centers.  Our principal areas of focus include sports performance, weight loss, and management of Type II diabetes.  We introduced our first product, ENDUROX, in March 1996.  We extended our exercise performance products with the introduction of ENDUROX R4 Recovery Drink in February 1999, ACCELERADE Sports Drink in May 2001, and ACCEL GEL in February 2004.  These products are based on our patented technology that involves the combination of carbohydrate and protein in a specific ratio.  A number of studies, both funded by our company and also conducted independently, demonstrate that this technology can extend endurance, decrease post-exercise muscle damage, speed recovery and improve rehydration.
 
In April 2000, we introduced our first product for weight loss that was based upon a novel mode of action – the stimulation of one of the body’s principal satiety peptides, cholecystokinin (CCK).  This technology was launched under the brand name SATIETROL.  In June 2001, we licensed this product to GSK and discontinued promotion of our brand.  In September 2002, the license was returned to us and we initiated a program to improve both the efficacy and form versatility of the technology.  We launched a new ready-to-drink beverage based on this enhanced technology under the brand name SATIATRIM in January 2007.
 
In February 2006, we entered into an asset sale with Mott’s, LLC, a division of Cadbury Schweppes, (see Item 1(b)).  As part of the agreement, we will continue to sell the powder, gel and pill forms of ACCELERADE, ENDUROX R4 and ACCEL GEL, both in the United States and in those countries where we are presently doing business.
 
6(b)         Results of Operations - Years Ended December 31, 2007 and 2006
 
We recorded a net loss applicable to common stockholders of ($1,276,059), or ($0.10) per share basic and diluted, for the year ended December 31, 2007, compared to generating a net income applicable to common stockholders of $2,258,577, or $0.17 per diluted share, for the year ended December 31, 2006. The year ended December 31, 2006 would have resulted in a net loss (non-GAAP measure) of ($372,628), or ($0.03) per share (basic and diluted), if $2,631,205 (net of income taxes of $1,278,000) from the sale of patents and technology to CSAB were excluded from net income. See Part I, Item 1(b) above for a description of the CSAB transaction.  The loss for the year ended December 31, 2007 was primarily the result of three circumstances: (i) increased marketing and other expenses of $514,901 for the launch of SATIATRIM, (ii) lower gross margins as detailed below, and (iii) the write-off of $439,208 of SATIATRIM inventory as noted below. Without the inventory write-off, we would have recorded a net loss of ($836,851) (non-GAAP measure) for the year ended December 31, 2007.
 
Revenues increased 20% in the year ended December 31, 2007 to $7,427,857 from $6,209,846 for the year ended December 31, 2006. Approximately 15% of this increase represented volume increase and approximately 5% represented price increases that took effect on July 1, 2007. Revenues increased for the year ended December 31, 2007 as compared to the year ended December 31, 2006 as a result of the implementation of a new retailer program which involved free-standing racks, the CSAB ACCELERADE Ready-to-Drink advertising and promotional launch, increased serving sizes per canister that resulted in additional sales dollars per canister, and the expansion of the number of ACCELERADE and ACCEL GEL products carried by some of our larger accounts. CSAB launched ACCELERADE Ready-to-Drink on June 21, 2007.
 
For the year ended December 31, 2007, gross profit margin was 34.2% compared to 44.0% for the year ended December 31, 2006. For the year ended December 31, 2007, gross profit margin on product sales (non-GAAP measure, see SATIATRIM write off below) was 40.1% compared to 44.0% for the year ended December 31, 2006. We experienced a change in our product mix and, in order to fully take advantage of the CSAB advertising spend, we redesigned all ACCELERADE and ACCEL GEL packaging to conform to the new CSAB ACCELERADE RTD packaging. To flush out old inventory, we aggressively discounted these products in early 2007, leading to lower gross profit margins. We wrote off approximately $49,000 of non CSAB-type packaging material, which is the equivalent of 0.7% of 2007 revenues.  We experienced cost of production and raw material price increases, specifically whey protein, in our finished products from 2006 to 2007. We also experienced a significant increase in freight costs coupled with our decision to provide free freight to more customers as a sales incentive. To address these issues, we implemented our first ever price increase effective July 1, 2007.  This price increase met no resistance in the market place.
 
 
12
 
 
During the quarter ended September 30, 2007, we wrote off $439,208 of SATIATRIM inventory that had expiration dates between December 2007 and January 2008. We used this inventory as sample product during its remaining useful life which management believes will assist in its promotional efforts. Our marketing efforts to date did not result in sufficient sales to be able to project that we would be able to sell through this inventory before it expires.

 
Selling, general, and administrative (“S, G, & A”) expenses increased to $3,595,960 for the year ended December 31, 2007 from $2,917,450 for the year ended December 31, 2006. S, G, & A expenses increased primarily due to the investment in marketing and other expenses of $514,901 associated with the launch of SATIATRIM. Late in the second quarter, we officially launched the product via a major public relations campaign that involved the Internet, radio, television, and print media.

 
Research and development expenses were $211,078 for the year ended December 31, 2007 compared to $196,020 for the year ended December 31, 2006.  We anticipate R & D expenses will increase as we conduct additional clinical trials and seek out additional patents and claims for all of our products.

 
Depreciation expense was $96,374 for the year ended December 31, 2007 compared to $50,905 for the year ended December 31, 2006. Depreciation expense increased due to the purchase of free-standing racks implemented as a result of a new retailer program. We anticipate depreciation expense will increase as we continue to expand this successful retailer program in 2008.

 
Interest expense was $3,496 for the year ended December 31, 2007 compared to $31,416 for the year ended December 31, 2006. There was $24,634 of interest expense in 2006 incurred in connection with our accounts receivable funding from USA Funding that was paid off upon the completion of the CSAB transaction in the first quarter of 2006.

 
6(c)         Liquidity and Capital Resources

 
Our cash and liquidity position significantly improved with the sale on February 22, 2006 of our sports drink patents and trademarks to Mott’s for $4,000,000 cash plus future potential royalties.  We used a portion of the cash proceeds of this transaction to repay $277,067 owed under our accounts receivable facility, to repay the $500,000 interest-bearing convertible note held by Hormel Health Labs, LLC, and approximately $611,981 owed to our exclusive contract manufacturer (an affiliate of Hormel).  Prior to this transaction, we had experienced significant liquidity problems. As part of our growth plan, we hired two new executives focused primarily on innovation in the areas of sports nutrition and weight loss products. The compensation associated with these individuals will increase our overall S, G & A for 2008. In addition, we plan to increase our discretionary marketing expenses during the same time frame. Although these additional cash outlays will have a direct impact upon our statement of operations, management believes that the effects of the price increases and estimated future sales will partially offset the above-noted cash outlays. In consideration of the above, management believes it has sufficient liquidity to meet its obligations as they come due. There can be no assurance that we will not experience cash and liquidity problems again in the future.

 
At December 31, 2007, our current assets exceeded our current liabilities by approximately $3,496,000 with a ratio of current assets to current liabilities of approximately 4.3 to 1. At December 31, 2006, our current assets exceeded our current liabilities by approximately $3,874,000 with a ratio of current assets to current liabilities of approximately 4.1 to 1. At December 31, 2007, cash on hand was $1,712,713, a decrease of $851,325 from December 31, 2006, primarily as the result of an increase of $207,389 in accounts receivable, an increase in inventory of $97,171, a decrease in prepaid expenses of $32,387, a decrease in accounts payable and accrued expenses of $488,282, net repayments of notes payable of $28,122 and an increase in deferred revenue of $315,679 from December 31, 2006. Accounts receivable increased at December 31, 2007 from December 31, 2006 due to higher revenues in the fourth quarter of 2007 as compared to the fourth quarter of 2006.  Deferred revenue increased as a major customer took on additional products and increased its inventories in 2007. In addition, we issued common stock in connection with sales of common stock and exercises of options and warrants resulting in proceeds of $733,586 during 2007.

 
 
13
 
 
In 2007, capital expenditures amounted to $207,218 consisting mostly of permanent point of display racks for our retail customer base. We have no material commitments for capital expenditures.

 
6(d)         Impact of Inflation

 
We expect to be able to pass inflationary increases for raw materials and other costs on to our customers through price increases, as required, and do not expect inflation to be a significant factor in our business. However, our operating history is very limited, and this expectation is based more on observations of our competitors' historic operations than our own experience.

 
6(e)         Seasonality

 
Sports nutrition products tend to be seasonal, especially in the colder climates. Lower sales are typically realized during the first and fourth quarters and higher sales are typically realized during the second and third fiscal quarters. We also plan our advertising and promotional campaigns for the ENDUROX R4 and ACCELERADE products around these seasonal demands. Weight loss products also have seasonality with greater sales seen in the first and second quarters as a result of consumers’ New Year’s resolutions and desire to “get into shape” for the summer. Similarly, we planned advertising and promotional expenditures for SATIATRIM to take advantage of this seasonality.  We believe that the impact of new product introductions and marketing promotions associated with the introduction of new products will have a far greater impact on our operations than industry and product seasonality.
 
6(f)          Impact of Recently Issued Financial Accounting Standards
 
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value, and expands disclosure requirements regarding fair value measurement. Where applicable, this statement simplifies and codifies fair value related guidance previously issued within U.S. generally accepted accounting principles. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years.  We do not expect SFAS 157 to have a material impact on our results of operations or financial condition.
 
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities - Including an Amendment of FASB Statement No. 115”  (“SFAS 159”). SFAS 159 provides companies with an option to measure, at specified election dates, certain financial instruments and other items at fair value that are not currently measured at fair value. A company that adopts SFAS 159 will report unrealized gains and losses on items for which the fair value option has been elected in its financial results during each subsequent reporting date. SFAS 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. SFAS 159 is effective for fiscal years beginning after November 15, 2007. We do not expect SFAS 159 to have a material impact on our results of operations or financial condition.
 
In December 2007, the SEC issued Staff Accounting Bulletin No. 110, “Amendment of Topic14, Shared-Based Payment” (“SAB 110”).  SAB 110 expresses the views of the staff regarding the use of a “simplified” method, as discussed in SAB No. 107, in developing an estimate of the expected term of “plain vanilla” share options in accordance with SFAS 123R (revised 2004).  We do not expect SAB 110 to have a material impact on its results of operations or financial condition.
 
6(g)         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 is material to investors.
 
 
14
 

 
6(h)         Critical Accounting Policies

 
Our financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. Certain accounting policies have a significant impact on amounts reported in financial statements. A summary of those significant accounting policies can be found in Note A to our financial statements.  The more significant accounting policies involving estimates are described below.
 
In preparing financial statements in conformity with generally accepted accounting principles in the United States of America, we are required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses for the reporting period covered thereby. Actual results could differ from those estimates.
 
Among such estimates made by management in the preparation of our financial statements are the determinations of the allowance for doubtful accounts, inventory valuation, and revenue recognition as it relates to customer returns. The allowance for doubtful accounts is determined by assessing the realizability of accounts receivable by taking into consideration the value of past due accounts and collectability based on credit worthiness of such customers. We assess the realizability of inventories by reviewing inventory to determine the value of items that are slow moving, lack marketability, and by analysis of the shelf life of products. Estimates are made for sales returns based on historical experience with actual returns. Certain of our products are subject to minimum sales thresholds by a significant retail customer. These sales thresholds are based on quantities sold- through at the retail level. We record revenue with respect to these products at the time the goods are sold-through to the end user as reported to us by the customer. We analyze retail sell-through data provided by the customer and our expectations of future customer sell-through trends. Based upon this information, we determine if any reserves for returns are necessary. Our financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America.

 
ITEM 7.                      FINANCIAL STATEMENTS

 
Financial information required in response to this Item of Form 10-KSB is set forth at pages F-1 through F-15 of this Report.
 
ITEM 8.                      CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 
None.

 
ITEM 8A(T)               CONTROLS AND PROCEDURES

 
(a)           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 Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of December 31, 2007, 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 and is accumulated and communicated to the company’s management, as appropriate, to allow timely decisions regarding required disclosure, and are operating in an effective manner.
 
(b)           Changes in Internal Controls Over Financial Reporting
 
During the fiscal quarter ended December 31, 2007, 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.
 
 
15
 
 
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
 
The management of the company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. The company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  The company’s internal control over financial reporting includes those policies and procedures that:
 
 
(i)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;
 
 
(ii)
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and
 
 
(iii)
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.
 
Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
The company’s management assessed the effectiveness of the company’s internal control over financial reporting as of December 31, 2007. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on management’s assessment and those criteria, management has concluded that the company’s internal control over financial reporting was effective as of December 31, 2007.
 
This annual report does not include an attestation report of the company’s registered public accounting firm regarding internal control over financial reporting.  Management’s report was not subject to attestation by the company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the company to provide only management’s report in this annual report.
 
 
ITEM 8B                    OTHER INFORMATION
 
None.
 
PART III
 
ITEM 9.                      DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS, AND CORPORATE GOVERNANCE; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
 
9(a)         Directors and Executive Officers
Our directors and executive officers as of the date of this Report are as follows:
 
Name
Position
   
Robert Portman, Ph.D.
Chairman of the Board of Directors, Chief Executive Officer, and Chief Scientific Officer
Jason Ash
President, Chief Operating Officer, and Director
 
 
16
 
 
Stephen P. Kuchen
Chief Financial Officer, Treasurer, Secretary, and Director
David Portman Director
Michael Cahr Director 1,2
Adam Mizel Director 1,2
Marc Particelli
Director 2
   
      1 Member of Audit Committee
      2 Member of Compensation Committee
 
MANAGEMENT AND DIRECTORS
 
DR. ROBERT PORTMAN, age 63, currently serves as our Chief Executive Officer, Chief Scientific Officer, and Chairman of the Board of Directors. He has served as Chief Executive Officer since June 2005 and Chairman of the Board of Directors and Chief Scientific Officer since September 2004. He served as President from June 2005 through the end of calendar year 2007. From our inception to September 2004, Dr. Portman served as our President, Chief Executive Officer, and Chairman of the Board of Directors. Dr. Portman has a Ph.D. in Biochemistry and worked as a senior scientist at Schering Laboratories before co-founding M.E.D. Communications in 1974. In 1987, Dr. Portman started a consumer agency and, in 1993, he merged both agencies to form C&M Advertising with billings in excess of $100 million. Dr. Portman is coauthor of two books, Nutrient Timing and The Performance Zone. He has authored hundreds of articles on the role of nutrition in improving sports performance. He is a frequent guest on TV and radio and has been a keynote speaker at national coaches meetings on how nutritional intervention during and after exercise can improve athletic performance and speed muscle recovery. As Chief Scientific Officer of PacificHealth Laboratories, he holds 12 patents for nutritional inventions to improve sports performance as well as to control appetite and help in the management of Type II diabetes.
 
JASON ASH, age 33, has served as President, Chief Operating Officer, and a Director since January 2008. Prior to joining the company, Mr. Ash worked internationally for Cadbury Schweppes in broad commercial management and consumer marketing, most recently as General Manager and Vice President of Cadbury Schweppes Americas Beverages (“CSAB”) Sports, Energy & Water Category Unit. Mr. Ash has served in various positions at Cadbury Schweppes both in the USA and Europe since 2002. During his tenure, Mr. Ash was responsible for the strategic development and commercialization of the growing Sports Energy and Water pipeline of CSAB in North America as well as a number of key business-changing roles in the UK, Turkey and Middle East. In addition to his considerable experience at Cadbury Schweppes, Mr. Ash has also held Marketing and Finance positions at Masterfoods and Unilever and his work has been nominated for a number of marketing industry awards.
 
STEPHEN P. KUCHEN, age 47, has served as our Chief Financial Officer, Treasurer, Secretary and a Director, since September 2004. From September 2004 through the end of 2007, Mr. Kuchen also served as our Chief Operating Officer. From June 2000 through September 2004, Mr. Kuchen served as our Vice President - Finance, Chief Financial Officer, Treasurer, Assistant Secretary and a Director. Mr. Kuchen initially joined us in February of 2000 as Controller. Prior to joining us, Mr. Kuchen was employed from 1996 to 1999 as the Controller of Able Laboratories, a public company located in South Plainfield, New Jersey that manufactures and sells generic pharmaceuticals. Prior to his employment by Able Laboratories, Mr. Kuchen was the Controller of Jerhel Plastics, a privately owned manufacturer of women's compact cases from 1993 to 1996. Mr. Kuchen is a graduate of Seton Hall University in South Orange, NJ, and is a Certified Management Accountant.
 
DAVID I. PORTMAN, age 67, has served as a Director from our inception. Mr. Portman has a BS in Pharmacy and an MBA. He worked as a sales representative and marketing manager for Eli Lilly, Beecham-Massengill, Winthrop Laboratories and Sandoz Pharmaceuticals before co-founding M.E.D. Communications in 1974. Currently, Mr. Portman is President of TRIAD Development, a real estate Company that has numerous commercial and rental properties in New Jersey.
 
 
17
 
 
MICHAEL CAHR, age 68, was appointed to the Board of Directors in April 2002. Since September 2004, Mr. Cahr has been a General Partner at Focus Equity Partners, a private equity investment and management firm that acquires middle market companies and assists them in reaching their performance potential.  Prior to Focus, he was President of Saxony Consultants, a company that provides financial and marketing expertise to organizations in the United States and abroad. From February 2000 to March 2002, Mr. Cahr served as President and Chief Executive Officer of Ikadega, Inc., a Northbrook, Illinois server technology company developing products and services for the healthcare, data storage and hospitality fields. Mr. Cahr was Chairman of Allscripts, Inc., the leading developer of hand-held devices that provide physicians with real-time access to health, drug and other critical information from September 1997 through March 1999 and President, CEO and Chairman from June 1994 to September 1997. Prior to Allscripts, Mr. Cahr was Venture Group Manager for Allstate Venture Capital where he oversaw investments in technology, healthcare services, biotech and medical services from October 1987 to June 1994.
 
ADAM MIZEL, age 38, was appointed to the Board of Directors in February 2007. Since September 2005, Mr. Mizel has been the Managing Principal of the General Partner of the Aquifer Opportunity Fund, L.P., an investment fund that takes a private equity approach to investing in small capitalization public companies.  Mr. Mizel previously was Managing Director and Chief Operating Officer of Azimuth Trust, LLC., an alternative asset management firm from 2001 until 2005.  Earlier, Mr. Mizel was a partner at Capital Z Partners, L.P., a private equity and alternative investment firm, and Managing Director at Zurich Centre Investments, Inc., the North American private equity unit of Zurich Financial Services Group.  Mr. Mizel began his investment career at Morgan Stanley Capital Partners in 1991.
 
MARC PARTICELLI, age 62, was appointed to the Board of Directors in February 2007. Since July 2006, Mr. Particelli has been Chairman of the Board of Coactive Marketing Group (NASDAQ: CMKG), an integrated marketing communications agency. Mr. Particelli served as interim President and Chief Executive Officer of Coactive from July 2006 through October 2006. From August 2005 until March 2006, Mr. Particelli was the Chief Executive Officer of TSM Corporation, a telecommunications company serving the Hispanic market. Mr. Particelli was Chairman of the Board, President and Chief Executive Officer of Modem Media, an interactive marketing services firm, from January 1991 until its acquisition by Digitas Inc. in October 2004. Earlier, Mr. Particelli was a partner at Oak Hill Capital Management, a private equity investment firm, and managing director at Odyssey Partners L.P., a hedge fund. Prior to entering the private equity business, Mr. Particelli spent 20 years with Booz Allen where he helped create the Marketing Industries Practice and led its expansion across Europe, Asia and South America. Mr. Particelli also currently serves as a director of, and investor in, several private companies and as an advisor to several private equity firms.
 
All directors hold office until the next annual meeting of stockholders and until their successors have been elected and qualified. Officers serve at the discretion of the Board of Directors.
 
9(b)         Scientific Advisory Boards
 
We have established a Scientific Advisory Board to provide us with on-going advice and counsel regarding research direction, product development, analysis of data, and general counseling. As the need arises, we consult with individual members of this board on a non-scheduled basis.
 
9(c)         Family Relationships
 
Robert Portman and David Portman are brothers. There are no other family relationships among our directors, executive officers or persons nominated or chosen to become directors or executive officers of ours.
 
9(d)         Involvement in Certain Legal Proceedings
 
No events have occurred during the past five years that are required to be disclosed pursuant to Item 401(d) of Regulation S-B.
 
CORPORATE GOVERNANCE
 
9(e)         Audit Committee
                The Board of Directors has established a separately designated, standing Audit Committee that performs the role described in section 3(a)(58)(A) of the Exchange Act.  During the fiscal year ended December 31, 2007, the Audit Committee consisted of Michael Cahr and Adam Mizel.  Messrs. Cahr and Mizel met the criteria for independence set forth in Rule 10A-3(b)(1) of the Exchange Act.
 
 
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9(f)         Audit Committee Financial Expert
 
Michael Cahr, a member of the Audit Committee of our Board of Directors, is the Audit Committee Financial Expert, as that term is defined in Item 407 of Regulation S-B.  Mr. Cahr is “independent” as that term is defined in Item 7(d)(3)(iv) of Schedule 14A under the Exchange Act. 
 
9(g)        Section 16(a) Beneficial Ownership Reporting Compliance
 
           Section 16(a) of the Exchange Act requires that our directors and executive officers, and any persons who own more than ten percent of our common stock, file with the Securities and Exchange Commission, or SEC, initial reports of ownership and reports of changes in ownership of our common stock and other equity securities. Such persons are required by SEC regulations to furnish us with copies of all such reports that they file. To our knowledge, based upon our review of these reports, all Section 16 reports required to be filed by our directors, executive officers and beneficial owners during the fiscal year ended December 31, 2007 were filed on a timely basis.
 
9(i)         Code of Ethics
 
Our Board of Directors has adopted a code of ethics, which applies to all our directors, officers and employees. Our code of ethics is intended to comply with the requirements of Item 406 of Regulation S-B.
 
Our code of ethics is posted on our Internet website at www.pacifichealthlabs.com.  We will provide our code of ethics in print without charge to any stockholder who makes a written request to:  Corporate Secretary, PacificHealth Laboratories, Inc., 100 Matawan Road, Suite 420, Matawan, NJ  07747.  Any waivers of the application and any amendments to our code of ethics that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions must be made by our Board of Directors. Any waivers of, and any amendments to, our code of ethics will be disclosed promptly on our Internet website, www.pacifichealthlabs.com.
 
ITEM 10.                   EXECUTIVE COMPENSATION
 
The table below sets forth information concerning compensation paid to Dr. Robert Portman and Stephen Kuchen in 2007 and 2006. None of our executive officers other than Dr. Portman and Mr. Kuchen received compensation of $100,000 or more in fiscal 2007 and 2006.  As set forth below, our compensation program for our named executive officers consists of base salary and discretionary option awards.
 
 
Summary Compensation Table
 
Name and Principal
Position
Year
Salary
($)
Bonus
($)
Stock
Awards
($)
Option
Awards
($)
Non-
Equity
Incentive
Plan
Compen-
sation
($)
Nonqualified
Deferred
Compensa-
tion Earnings
($)
 
All Other
Compensa-
tion ($)
Total ($)
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
(j)
Robert Portman,
Chairman of the Board, Chief Executive Officer, President and Chief Scientific Officer
2007
2006
$295,000 (1)
$275,000 (1)
__
__
__
__
$134,484 (2)
$103,282 (2)
__
__
__
__
$11,700 (3)
$0 (4)
$441,184
$378,282
 
 
 
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Stephen P. Kuchen,
Chief Financial Officer, Chief Operating Officer, Treasurer, Secretary and Director
2007
2006
 
$150,000 (5)
$137,500 (5)
$4,000
$2,000
__
__
$43,528 (2)
$32,451 (2)
__
__
__
__
$0 (4)
$0 (4)
$197,528
$171,951
 
(1) Under the terms of his employment agreement in effect during 2006, Dr. Portman received an annual base salary of $225,000 and received a payment of the accrued amount $50,000 following the February 22, 2006 closing of our sale to Mott’s LLP of patents, trademarks, web sites and other intellectual property related to our ACCELERADE and ENDUROX sports nutrition product lines.  Effective as of January 1, 2007, Dr. Portman’s annual base salary was increased to $295,000.
 
(2) The amounts in column (f) reflect the dollar amount recognized for financial statement reporting purposes for the fiscal year ended December 31, 2007, in accordance with SFAS 123(R) of awards of stock options and thus include amounts from awards granted in and prior to 2007. Assumptions used in the calculation of this amount are included in Note A[10] of our audited financial statements for the fiscal year ended December 31, 2007 included in Part II – Item 7,  Financial Statements of this Annual Report on Form 10-KSB and in Note A[10] of our audited financial statements for the year ended December 31, 2006 included in our Annual Report on Form 10-KSB filed with the SEC on March 13, 2007.
 
(3) Consists of an auto allowance.
 
(4) Perquisites and other personal benefits in the aggregate were less than $10,000.
 
(5) Effective as of January 1, 2008, Mr. Kuchen’s base salary was increased to $154,500.
 
Employment Agreements
 
The annual base salary reflected in the Summary Compensation Table for Dr. Portman is fixed in his employment agreement, which is described below. We do not have a written or unwritten employment agreement with Mr. Kuchen.  His annual base salary is determined by our Compensation Committee and is adjusted periodically.
 
During 2006, we employed Dr. Portman under an extension of his employment agreement.  This agreement provided that Dr. Portman was entitled to receive salary compensation of $275,000 per year, but that he would receive $225,000 as an annual base salary until our financial condition significantly improved.  When our financial condition improved, he would receive the accrued difference of $50,000.   Following the closing of our sale of intellectual property assets to Mott’s in February 2006, Dr. Portman received $50,000 pursuant to this provision of the extension employment agreement. In addition, the extension employment agreement provided that Dr. Portman was entitled to an annual bonus not to exceed 100% of his base salary.  Dr. Portman’s eligibility for, and the amount of, this bonus, was to be based upon attainment of milestones by the company and/or Dr. Portman.   No milestones for this bonus were established during 2007, and no bonus was paid in 2007.
 
    Under the extension employment agreement, Dr. Portman received options to purchase up to 450,000 shares of our common stock not issued pursuant to any of our Stock Option Plans but will be similar to those of our 2000 Incentive Stock Option Plan. The exercise price of the options was set at $0.65 per share, which was the prevailing market price of our common stock at September 1, 2004.  One-third of the options vested on September 1, 2004, one-third on September 1, 2005, and the remaining one-third on September 1, 2006.
 
Under the extension employment agreement, Dr. Portman was also entitled to payments upon his termination or upon a change-in-control of the company as described below under the heading “Post-Termination or Change-In-Control Payments.”  The term of the extension employment agreement terminated on December 31, 2006.
 
 
20
 
 
                    On December 13, 2006, our Compensation Committee recommended, and our full Board of Directors approved, the terms of a new employment agreement with Dr. Portman, effective January 1, 2007.  Under the new employment agreement, Dr. Portman receives a salary of $295,000 per year, as well as a car allowance in the amount of $975 per month.  In addition, Dr. Portman will be entitled to an annual bonus not to exceed 100% of his base salary.  Dr. Portman’s eligibility for, and the amount of, this bonus will be based upon attainment of milestones by the company and/or Dr. Portman.  The milestones will be agreed upon by Dr. Portman and our Compensation Committee.  No milestones have been determined at this time.  The term of Dr. Portman’s employment agreement will terminate on December 31, 2008, unless terminated earlier by either Dr. Portman or the company.  Dr. Portman has the right to terminate the employment agreement without cause on thirty days’ prior written notice, or with cause.  The company also has the right to terminate Dr. Portman’s employment agreement with or without cause. In addition, if Dr. Portman’s employment is terminated by us without cause, or by Dr. Portman for cause, any stock options granted to Dr. Portman, to the extent not already vested, will vest.  Under the new employment agreement, Dr. Portman also will be entitled to payments upon his termination or upon a change-in-control of the company as described below under the heading “Post-Termination or Change-In-Control Payments.”
 
We entered into an employment agreement with Mr. Ash with an initial term beginning January 3, 2008 and ending December 31, 2009.  The agreement automatically extends for a one-year period unless either party gives the other party at least 120 days written notice prior to the end of the initial term.  Thereafter, the agreement will automatically extend for successive additional periods of one year unless either party gives the other party at least 90 days written notice prior to the end of the then current term.  Notice by either party of a change in base salary, benefits or termination provisions of the agreement will be deemed a notice of non-renewal.  In the event notice of non-renewal is given, but Mr. Ash continues to be employed by us following the expiration of a term, Mr. Ash’s base salary and benefits will continue to be governed by the terms of the agreement, and either party may terminate the agreement on not less than 90 days written notice to the other party.
 
Under his employment agreement, Mr. Ash receives an initial annual base salary of $295,000.  The amount of Mr. Ash’s annual base salary will be adjusted with a market increase consistent with his position, company performance, and Mr. Ash’s responsibilities, and such increase will be no less than the change in the consumer price index for urban consumers in each year of renewal of his employment agreement.  Mr. Ash is also entitled to receive annual bonus compensation, beginning with calendar year 2008, not to exceed 100% of Mr. Ash’s base salary, the eligibility for and amount of which shall be based upon the attainment of certain milestones agreed upon by Mr. Ash and the Compensation Committee of the Board of Directors. Mr. Ash is entitled to participate in all benefit plans offered from time to time to our senior executives.  In addition, we provide Mr. Ash with an all-inclusive relocation/travel/car stipend of $55,000 for his first year of employment and $40,000 for the second year of employment.  We also agreed to reimburse Mr. Ash for air travel to and from the UK for one trip per month during the first six months of his employment agreement up to a maximum of $2,500 per trip and to pay for all legal costs associated with obtaining a visa and through green card for Mr. Ash and his spouse.
 
On November 28, 2007, the date Mr. Ash’s employment agreement was executed, and pursuant to Mr. Ash’s employment agreement, the Board of Directors approved the issuance of options to purchase 600,000 shares of our common stock (the “Options”) at an exercise price of $0.65 per share, the closing price on the day of the Board’s approval, to vest as follows: 150,000 shares on January 3, 2009, 150,000 shares on January 3, 2010, 150,000 shares on January 3, 2011 and 150,000 shares on January 3, 2012.  To the extent not previously exercised, the Options will terminate upon the earlier of (i) January 3, 2013 or (ii) 90 days following the termination of Mr. Ash’s employment with us.  The Options were not issued pursuant to any of our Stock Option Plans but will be similar to those of our 2000 Incentive Stock Option Plan.
 
Equity Awards in 2007
 
During 2007, our Compensation Committee did not recommend any stock option or other equity awards to our named executive officers.  On November 28, 2007, the date Mr. Ash’s employment agreement was executed, and pursuant to Mr. Ash’s employment agreement, the Board of Directors approved the issuance to him of options to purchase 600,000 shares of the company’s common stock at an exercise price of $0.65 per share, the closing price on the day of the Board’s approval, to vest as follows: 150,000 shares on January 3, 2009, 150,000 shares on January 3, 2010, 150,000 shares on January 3, 2011 and 150,000 shares on January 3, 2012.  Mr. Ash’s employment with us became effective January 3, 2008, thus he was not one of our named executive officers in 2007.
 
 
21
 
 
Outstanding Equity Awards at Fiscal Year-End
 
The following table sets forth information with respect to the value of all unexercised options previously awarded to the executive officers named above at the fiscal year end, December 31, 2007.
 
 
 
Option Awards
 
Stock Awards
 
Name
Number
of
Securities
Underlying Unexercised
Options
(#)
Exercisable
Number of
Securities
Underlying Unexercised
Options
(#)
Unexercisable
Equity
Incentive
Plan Awards:
Number of
Securities Underlying Unexercised Unearned
Options
(#)
Option
Exercise Price
($)
Option
Expiration Date
Number of
Shares or
Units of
Stock That
Have Not
Vested
(#)
Market
Value of
Shares or
Units of
Stock That
Have Not
Vested
($)
Equity
Incentive Plan
Awards:
Number of
Unearned
Shares, Units
or Other Rights
That Have Not
Vested
(#)
Equity
Incentive Plan
Awards:
Market or
Payout Value
of Unearned
Shares, Units
or Other Rights
That Have Not
Vested
($)
 
 
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
(j)
 
Robert Portman,
Chairman of the Board, Chief Executive Officer, and Chief Scientific Officer
 
91,667 (1)
 
100,000 (2)
 
450,000 (3)
 
 
 
183,333 (1)
 
200,000 (2)
 
__
 
 
 
__
 
__
 
__
 
 
 
$1.13
 
$0.60
 
$0.65
 
 
 
12/12/2011
 
02/13/2011
 
08/21/2009
 
 
 
__
 
__
 
__
 
__
 
Stephen P. Kuchen,
Chief Financial Officer, Chief Operating Officer, Treasurer, Secretary and Director
 
16,667 (1)
 
33,333 (2)
 
120,000 (4)
 
20,000 (5)
 
33,333 (1)
 
66,667 (2)
 
__
 
__
 
__
 
__
 
__
 
__
 
$1.13
 
$0.60
 
$0.70
 
$1.92
 
12/12/2011
 
02/13/2011
 
10/01/2009
 
03/06/2008
 
 
__
 
__
 
__
 
__
 
 
(1) These options vest in three equal annual installments beginning on December 13, 2007.
 
(2) These options vest in three equal annual installments beginning on February 13, 2007.
 
(3) These options vested in three equal annual installments beginning on September 1, 2004.
 
(4) These options vested in four equal annual installments beginning on October 1, 2004.
 
(5) These options vested in two equal annual installments beginning on March 6, 2004.
 
Post-Termination or Change-In-Control Payments
 
Under his employment agreement with us, Dr. Portman has the right to receive payments upon his termination in certain circumstances and in the event of a change-in-control of the company.  The terms relating to post-termination and change-in-control payments in Dr. Portman’s new employment agreement that became effective January 1, 2007 are identical to those in the extension employment agreement that was effective during 2006.
 
 
22
 
 
                If Dr. Portman's employment is terminated for any reason whatsoever (except by us with cause), Dr. Portman will be entitled to receive a lump sum payment of an amount equal to the base salary which would have been paid during the period beginning on the date of termination of employment and ending on the earlier of (1) the scheduled termination date, or (2) the first anniversary date of the termination date.   Upon Dr. Portman's termination for any reason, including his voluntary termination, Dr. Portman will not be bound by any non-competition agreement unless we continue to pay his salary, in which case he will be subject to a one-year non-competition agreement.  In addition, if Dr. Portman’s employment is terminated by us without cause or by Dr. Portman for cause, any stock options granted to Dr. Portman, to the extent not already vested, will vest.
 
                In the event of a change-in-control of the company, Dr. Portman will be entitled to be paid, as additional compensation, a lump sum equal to his annual base salary in effect immediately prior to the change-in-control, payable at closing or completion of the change-in-control, or otherwise as required under Section 409A of the Internal Revenue Code.  At the same time, all of his unvested options will vest.   A change-in-control means:
 
 
•
the acquisition of beneficial ownership, by any stockholder or group of stockholders, not including stockholders who are our officers or directors on the date of the employment agreement or any affiliate of such officer or director, of shares of our capital stock entitled to cast at least 50% of all votes which may be cast in the election of our directors, or
 
 
•
any sale of the company, including
 
 
•
any merger or consolidation involving the company if the stockholders of the company prior to the merger hold less than 50% of the shares of the combined entity after the merger, or
 
 
•
the transfer or sale of all or substantially all of the assets of the company.
 
If we terminate Mr. Ash’s employment without cause or if Mr. Ash terminates his employment for good reason, Mr. Ash will be entitled to receive twelve months base salary at the then current rate, payable in accordance with our usual practices.  In the event that Mr. Ash continues to receive any other cash compensation from us following such termination or if Mr. Ash commences any substantially full-time employment during such twelve-month period, the remaining amount of severance pay due shall be reduced dollar-for-dollar.
 
If Mr. Ash’s employment is terminated by us for any reason other than Mr. Ash’s death, we, at our election, by notice to Mr. Ash given not later than ten days after such termination, shall have the right to require Mr. Ash to agree to a restrictive covenant prohibiting Mr. Ash from competing with us for a period of one year.  As a condition to Mr. Ash’s observance of this restrictive covenant, we will pay Mr. Ash twelve months base salary at the then current rate, payable in accordance with our usual practices.  Such payment shall be in lieu of, rather than in addition to, any other severance payments, other than the Change in Control Payment, due under the employment agreement.  In addition, in the event that Mr. Ash receives compensation from any other substantially full-time employment, we shall have the option to continue such payments in full without any dollar-for-dollar reduction.
 
In the event of a “change in control and a contemporaneous or subsequent termination of employment by Mr. Ash for Good Reason or termination by us without cause, Mr. Ash will be paid, in addition to any other severance payments due to Mr. Ash, a lump sum equal to half his annual base salary in effect immediately prior to the change in control.  In addition, upon such a termination, all unvested stock options held by Mr. Ash will immediately become accelerated and vested.  Any payment due in the event of a Change in Control will be paid upon the completion of the Change in Control
 
Under our arrangement with Mr. Kuchen, in the event of a sale, merger or change in control of the company, Mr. Kuchen will receive one-half of his annual salary and all of his options would become immediately vested.  If Mr. Kuchen were subsequently terminated, Mr. Kuchen would receive one-half of his annual salary as severance.
 
DIRECTOR COMPENSATION
 
In the past, we have compensated our non-employee Directors with awards of options to purchase shares of our common stock at an exercise price equal to the closing trading price of our common stock on the Over-the-Counter Bulletin Board on the date of grant. On occasions, we have also used the closing price on the date prior to grant.
 
 
23
 
 
Dr. Robert Portman, our Chairman of the Board, Chief Executive Officer, and Chief Scientific Officer, and Stephen Kuchen, our Chief Financial Officer, Treasurer and Secretary, receive no compensation for their services as Directors because they are employees of the company. The compensation received by Dr. Portman and Mr. Kuchen as employees of the company is shown in the Summary Compensation Table on page 21.
 
On February 16, 2007, our Board of Directors increased the size of our Board from four to six members and appointed Mr. Mizel and Mr. Particeclli to fill the two new vacancies.  On the same day, the Board approved the issuance to each of Mr. Mizel and Mr. Particelli of options to purchase 10,000 shares of the company’s common stock at an exercise price of $2.14 per share, the closing price on the date prior to the Board's approval, to vest over one year beginning February 16, 2007. These options were issued pursuant to the terms and conditions of the company’s 2000 Incentive Stock Option Plan.
 
Director Compensation Table
 
The table below summarizes the compensation that we paid to non-employee Directors for the fiscal year ended December 31, 2007.
 
Name
Fees Earned or
Paid in
Cash
($)
Stock
Awards
($)
Option
Awards
($)
Non-Equity
Incentive Plan
Compensation
($)
Nonqualified
Deferred
Compensation
Earnings
($)
 
 
 
 
All Other
Compensation
($)
Total
($)
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
 
David I. Portman
 
__
 
__
 
 
$19,214 (1)
 
__
 
__
 
__
 
$19,214
 
Michael Cahr
 
 
__
 
__
 
$19,214 (1)
 
__
 
 
 
__
 
 
 
__
 
$19,214
 
Adam Mizel
 
 
__
 
__
 
$25,561 (1)
 
__
 
__
 
__
 
$25,561
 
Marc Particelli
 
__
 
__
 
 
$25,561 (1)
 
__
 
__
 
__
 
$25,561
 
 
(1) The amounts in column (d) reflect the dollar amount recognized for financial statement reporting purposes for the fiscal year ended December 31, 2007, in accordance with SFAS 123(R) of awards of stock options and thus include amounts from awards granted in and prior to 2007. Assumptions used in the calculation of this amount are included in Note A[10] of our audited financial statements for the fiscal year ended December 31, 2007 included in Part II – Item 7. Financial Statements of this Annual Report on Form 10-KSB and in Note A[10] of our audited financial statements for the year ended December 31, 2006 included in our Annual Report on Form 10-KSB filed with the SEC on March 13, 2007.  As of December 31, 2007, each Director had the following number of options outstanding:  David I. Portman – 115,000; Michael Cahr – 60,000; Adam Mizel – 40,000; Marc Particelli – 40,000.
 
 
ITEM 11.                  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
 
As of March 5, 2008, we had 13,501,426 shares of common stock outstanding. The following table sets forth information concerning the present ownership of our common stock by our directors, executive officers and each person known to us to be the beneficial owner of more than five percent of the outstanding shares of our common stock.
 
 
24
 
 
 
 
Name and Address (1)
Common Stock (2)
Amount Beneficially Owned
Common Stock (2)
Percentage of Class
 
Robert Portman (3)
Chairman of the Board, Chief
Executive Officer, Chief Scientific Officer
 
         3,122,718
        21.7%
Jason Ash
President, Chief Operating Officer
and a Director
 
                    -0-
            *
Stephen P. Kuchen (4)
Vice President, Chief Financial
Officer and a Director
 
           249,378
         1.8%
David I. Portman (5)
Secretary and a Director
 
           533,928
         3.9%
Michael Cahr (6)
Director
 
           247,500
         1.8%
Adam Mizel (7)
Director
 
           467,780
         3.5%
Marc Particelli (8)
Director
 
            99,054
           *
Executive Officers and Directors as
a group (7 persons)
 
        4,720,358
       31.3%
Matthew Smith (9)
241 Central Park West
New York, NY 10024
 
            953,862          6.8%
Diker Management, LLC (10)
745 Fifth Ave., Suite 1409
New York, NY 10151
 
         1,123,518          8.3%
 
*
Less than one percent
 
(1)
Except as otherwise indicated, the address of each person named in the above table is c/o PacificHealth Laboratories, Inc., 100 Matawan Road, Suite 420, Matawan,   NJ 07747.
 
(2)
Common Stock which is issuable upon the exercise of a stock option which is presently exercisable or which becomes exercisable within sixty days is considered outstanding for the purpose of computing the percentage ownership (x) of persons holding such options, and (y) of officers and directors as a group with respect to all options held by officers and directors.
 
(3)
Includes 741,667 shares issuable upon the exercise of options not under any Incentive Stock plan (“NON-ISO”); and 160,428 shares issuable upon the exercise of warrants issued pursuant to a 2003 Private Placement. Does not include 200,000 shares of Common Stock owned by Jennifer Portman, Dr. Portman's wife, individually and as Trustee for his and her minor children, as to which Dr. Portman disclaims beneficial ownership.
 
 
25
 
 
(4)
Includes 103,334 shares issuable upon the exercise of options granted under our 1995 Plan; 120,000 shares issuable upon the exercise of options granted not covered under any Plan (“NON-ISO”) and 5,348 shares issuable upon the exercise of warrants issued pursuant to a 2003 Private Placement.
 
(5)
Includes 60,000 shares issuable upon the exercise of options granted under our 1995 Plan; 15,000 shares issuable upon the exercise of options granted under our 2000 Plan; and 53,476 shares issuable upon the exercise of warrants granted pursuant to a 2003 Private Placement.
 
(6)
Includes 20,000 shares issuable upon the exercise of options granted under our 1995 Plan.
 
(7)
Includes 447,780 shares that are owned by Acquifer Opportunity Fund, L.P., of which Mr. Mizel is the managing principal of the general partner and 20,000 shares issuable upon the exercise of options granted under our 2000 Plan.  Mr. Mizel disclaims beneficial ownership of the shares owned by Acquifer Opportunity Fund, L.P. except to the extent of his pecuniary interest therein.
 
(8)
Includes 20,000 shares issuable upon the exercise of options granted under our 2000 Plan.
 
(9)
Includes 318,048 shares issuable upon the exercise of warrants granted pursuant to a 2003 Private Placement and 127,500 shares issuable upon the exercise of warrants granted pursuant to consulting services pursuant to a 2003 Private Placement.
 
(10)
As reported in an amendment to Schedule 13G filed with the SEC on February 12, 2008, Diker GP, LLC, a Delaware limited liability company ("Diker GP"), is the general partner of the Diker Value Tech Fund, LP, Diker Value Tech QP Fund, LP, Diker Micro-Value Fund, LP, the Diker Micro-Value QP Fund, LP, Diker Micro & Small Cap Fund LP, and Diker M&S Cap Master Ltd, each of which is a Delaware limited partnership (collectively, the “Diker Funds”).  As the sole general partner of the Diker Funds, Diker GP, has the power to vote and dispose of the shares of our common stock owned by the Diker Funds and, accordingly, may be deemed the beneficial owner of such shares. Pursuant to investment advisory agreements, Diker Management, LLC, a Delaware limited liability company ("Diker Management"), serves as the investment manager of the Diker Funds. Accordingly, Diker Management may be deemed the beneficial owner of shares held by the Diker Funds. Charles M. Diker and Mark N. Diker are the managing members of each of Diker GP and Diker Management, and in that capacity direct their operations. Therefore, Charles M. Diker and Mark N. Diker may be beneficial owners of shares beneficially owned by Diker GP and Diker Management. Diker GP, Diker Management, Charles M. Diker and Mark N. Diker disclaim all beneficial ownership as affiliates of a Registered Investment Adviser, and in any case disclaim beneficial ownership except to the extent of their pecuniary interest in the shares.
 
Securities Authorized For Issuance Under Equity Compensation Plans
 
The following table sets forth information as of the end of 2007 regarding our existing compensation plans and individual compensation arrangements pursuant to which our equity securities are authorized for issuance to employees or non-employees (such as directors, consultants and advisors) in exchange for consideration in the form of services:
 
 
 
26
 
 
 
Plan Category
Number of securities to be
issued upon exercise of
outstanding options,
warrants and rights
Weighted-average exercise
price of outstanding
options, warrants and rights
Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities
reflected in column (a))
 
(a)
(b)
(c)
Equity compensation plans
approved by security
holders
   663,750
$0.88
375,250
Equity compensation plans
not approved by security
holders
 
1,745,000
$0.72
N/A
Total
2,408,750
$0.76
375,250
 
Pursuant to the terms of Dr. Portman’s and Mr. Ash’s employment agreements with us and pursuant to Mr. Kuchen’s arrangement with us, each of our named executive officers hold some options to purchase shares of our common stock that have not been approved by our stockholders.  Specifically, Dr. Portman holds options to purchase an aggregate of 1,025,000 shares of our common stock, Mr. Ash holds options to purchase 600,000 shares of our common stock, and Mr. Kuchen holds options to purchase 120,000 shares of our common stock that have not been approved by our shareholders. The terms of the non-qualified options granted to Dr. Portman and Mr. Ash are similar to those of our 2000 Incentive Stock Option Plan.  The terms of the non-qualified options granted to Mr. Kuchen are similar to those of our 1995 Incentive Stock Plan.  The material terms of the 1995 Incentive Stock Plan and the 2000 Incentive Stock Option Plan are described in Note H to our audited financial statements for the fiscal year ended December 31, 2007 included in “Part II – Item 7, Financial Statements” of this Annual Report on Form 10-KSB.  For information about the vesting schedule and exercise prices of these options, see the footnotes in the above table captioned “Outstanding Equity Awards at Fiscal Year-End” and the description under “Equity Awards in 2007” under “Item 10, Executive Compensation” above.
 
ITEM 12.                  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
 
Related Transactions
 
During the last two fiscal years, we have not entered into any material transactions or series of transactions which, in the aggregate, would be considered material in which any officer, director or beneficial owner of 5% or more of any class of our capital stock, or any immediate family member of any of the preceding persons, had a direct or indirect material interest, nor are any such transactions presently proposed, except as follows:
 
(a)              On February 22, 2006, we sold to Mott's LLP the patents, trademarks, web sites and other intellectual property related to our ACCELERADE® and ENDUROX® sports nutrition product lines, and we entered into a license agreement with Mott’s that gives us the exclusive, royalty free right to continue to sell these products in powder, gel and pill form.  In connection with these transactions, Dr. Robert Portman, our Chairman, CEO, President and Chief Scientific Officer, entered into a Consulting, License and Non-Competition Agreement for a period ending on the later of the second anniversary of launch of a product by Mott's or February 22, 2009.  Under the consulting agreement, Dr. Portman will consult with Mott's with respect to research, development, enhancement, testing, marketing and sale of products related to the transferred intellectual property.  Dr. Portman will not receive any compensation for these services, other than for personal appearances at certain speaking engagements and media opportunities.  Dr. Portman is significantly limited in his ability to engage in the research, development, testing, marketing, sale or distribution of sports drinks, except with respect to our activities under the License Agreement or on behalf of Mott's.  Under the consulting agreement, Dr. Portman has licensed, for no additional compensation, the non-exclusive right to use his name, in connection with the packaging, marketing and sale of any products by Mott's under the ACCELERADE and ENDUROX brands.  In the license agreement between the company and Mott’s, we granted Mott's similar rights to use the company's name. The breach of certain covenants by Dr. Portman in the consulting agreement may give Mott's the right to terminate the company's rights under the license agreement or the royalty payments under the asset purchase agreement.
 
 
27
 
 
(b)              Effective January 5, 2007, we terminated the amended and restated Investors Rights Agreement that we initially entered in with Hormel Health Labs LLC on January 28, 2005.  The other party to this transaction was Diamond Crystal Sales, LLC, which acted in its capacity as successor to Hormel following Hormel’s merger with and into Diamond effective October 31, 2006.   In addition, effective as of January 5, 2007, we, Diamond and Dr. Robert Portman terminated the Right of First Refusal and Co-Sale Agreement into which we, Hormel and Dr. Portman had previously entered on January 28, 2005.  The termination of the Investors Rights Agreement and the Co-Sale Agreement occurred in connection with Diamond’s sale of the 909,091 shares of our common shares previously held by Hormel in a private transaction to certain purchasers effective January 5, 2007.   Hormel had acquired the 909,091 shares of our common stock upon its conversion of the 90,909 shares of our Series A Convertible Preferred Stock that it purchased pursuant to the Series A Preferred Stock Purchase Agreement on January 28, 2005. Upon the closing of Diamond’s sale of the common stock, the Investor Rights Agreement and the Co-Sale Agreement, and all rights, duties, obligations and liabilities of the parties under the agreements, terminated.  This included termination of any liability for breach or non-fulfillment of either agreement prior to the sale of the common stock.  The purchasers of the shares of common stock sold by Diamond included Dr. Robert Portman and our Directors, David Portman and Michael Cahr, each of whom purchased 100,000 shares at $0.95 per share. Messrs. The purchasers also included the Aquifer Opportunity Fund of which Adam Mizel is the Managing Principal. At the time of the transaction, Mr. Mizel was not yet one of our Directors.
 
(c)              On February 16, 2007, our Board of Directors approved the sale of an aggregate of 243,243 shares of our common stock to newly appointed Director Mr. Particelli and Aquifer Opportunity Fund, L.P., of which Mr. Mizel, is the Managing Principal of the General Partner, for an aggregate purchase price of $450,000. The purchase price of $1.85 per share was based on the 10-day average closing price as of February 15, 2007. The shares were issued pursuant to the terms and conditions of a Stock Purchase Agreement, dated February 22, 2007 entered into by the company with Aquifer Opportunity Fund, L.P. and Mr. Particelli. Pursuant to the terms of the Purchase Agreement, the holders of the Shares are entitled to piggyback registration rights and demand registration rights in the event Mr. Mizel is no longer a Director.  Under the Purchase Agreement, Mr. Particelli acquired 54,054 shares for $100,000 and Aquifer Opportunity Fund L.P. acquired 189,189 for $350,000.
 
Director Independence
 
During 2007, the following members of our Board of Directors were independent under the relevant Marketplace Rules of The NASDAQ Stock Market LLC:  Michael Cahr, Adam Mizel, and Marc Particelli.  During 2007, Mr. Cahr served on the Audit Committee, the Compensation Committee and the Nominating Committee.  During 2007, Mr. Mizel served on the Audit Committee and the Compensation Committee. During 2007, Mr. Particelli served on the Compensation Committee. Messrs. Cahr, Mizel, and Particelli satisfied the criteria set forth under the Marketplace Rules of The NASDAQ Stock Market LLC relating to the independence standards for members of the Audit Committee.  The Board of Directors did not consider any transaction, relationship or arrangement not otherwise disclosed above in this Item 12 under the heading Related Transactions in determining the independence of Messrs. Cahr, Mizel, or Particelli.
 
ITEM 13.                  EXHIBITS
 
(a)           A list of the exhibits filed as a part of this report is set forth in the Exhibit Index starting after page 30 hereof.
 
ITEM 14.                  PRINCIPAL ACCOUNTANTS’ FEES AND SERVICES
 
Weiser LLP served as our independent auditors for the years ended December 31, 2007 and December 31, 2006. We have been billed the fees set forth below in connection with services rendered by the independent auditors to us:
 
Fee Category
  
Fiscal 2007
    
Fiscal 2006
  
Audit Fees¹
   $ 90,463     $ 109,575  
Audit-Related Fees2
   $ - 0 -     $ - 0 -  
Tax Fees3
   $ 10,105     $ 6,500  
All Other Fees4
   $ 5,000     $ 16,500  
TOTAL
   $ 105,568     $ 132,575  
 
 
 
28
 
 
¹Audit fees consisted of fees for the audit of our annual financial statements and review of quarterly financial statements as well as services normally provided in connection with statutory and regulatory filings or engagements, comfort letters, consents and assistance with and review of company documents filed with the SEC.
 
2Audit-related fees consisted of fees for assurance and related services, including primarily employee benefit plan audits, due diligence related to acquisitions, accounting consultations in connection with acquisitions, consultation concerning financial accounting and reporting standards and consultation concerning matters related to Section 404 of the Sarbanes Oxley Act of 2002.
 
3Tax fees consisted primarily of fees for tax compliance, tax advice and tax planning services.
 
4Other fees consisted of prior auditors consents in conjunction with 1933 Act filings.
 
Policy for Pre-Approval of Audit and Non-Audit Services
 
The Audit Committee's policy is to pre-approve all audit services and all non-audit services that our independent auditor is permitted to perform for us under applicable federal securities regulations. As permitted by the applicable regulations, the Audit Committee's policy utilizes a combination of specific pre-approval on a case-by-case basis of individual engagements of the independent auditor and general pre-approval of certain categories of engagements up to predetermined dollar thresholds that are reviewed annually by the Audit Committee. Specific pre-approval is mandatory for the annual financial statement audit engagement, among others.
 
The pre-approval policy was implemented effective as of March 16, 2004. All engagements of the independent auditor to perform any audit services and non-audit services since that date have been pre-approved by the Audit Committee in accordance with the pre-approval policy. The policy has not been waived in any instance. All engagements of the independent auditor to perform any audit services and non-audit services prior to the date the pre-approval policy was implemented were approved by the Audit Committee in accordance with its normal functions.
 
SUPPLEMENTAL INFORMATION
 
We have not sent an annual report or proxy statement to security holders in respect of the fiscal year ending December 31, 2007.  Such report and proxy statement will be furnished to security holders in connection with our Annual Meeting scheduled to be held in the second quarter of 2008. Copies of such material will be furnished to the Commission when it is sent to security holders.
 

 
SIGNATURES
 
In accordance with Section 13 or 15(d) 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/ Robert Portman                          
      
Robert Portman, President and Chief Executive Officer
      
Date: March 5, 2008
      
       
 
 
 
29
 
 
In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dated indicated.
 
/s/ Robert Portman                                                 
Chairman of the Board and Chief
March 5, 2008
Robert Portman
 Executive Officer (Principal Executive  
  Officer)  
     
/s/ Stephen P. Kuchen                                           
Director, Principal
March 5, 2008
Stephen P. Kuchen
Financial and Accounting
  
 
Officer, Secretary
  
     
/s/ David I. Portman                                               
Director
March 5, 2008
David I. Portman
    
     
/s/ Michael Cahr                                                     
Director
March 5, 2008
Michael Cahr
    
     
/s/ Adam Mizel                                                       
Director
March 5, 2008
Adam Mizel
    
     
/s/ Marc Particelli                                                    
Director
March 5, 2008
Marc Particelli
    


 
 
30
 
 
EXHIBIT INDEX
 
 
Exhibit No.
      
 
Description
  
Incorporated
by Reference
3.1
  
--
  
Certificate of Incorporation of PacificHealth Laboratories, Inc.
and all amendments thereto
  
A
             
3.2
  
--
  
Amended and Restated Bylaws of PacificHealth
Laboratories, Inc.
  
 
C
             
3.3
  
--
  
Certificate of Amendment of Certificate of
Incorporation of PacificHealth Laboratories, Inc.
  
 
H
             
3.4
  
--
  
Certificate of Designations For Series A Preferred Stock
  
I
             
4.1
  
--
  
Specimen Common Stock Certificate
  
C
             
4.2
  
--
  
Stock Purchase Agreement dated June 1, 2001
between Pacific Health Laboratories, Inc. and
Glaxo Wellcome International B.V.
  
 
 
E
             
10.1†
  
--
  
Incentive Stock Option Plan of 1995
  
A
             
10.2
  
--
  
Strategic Alliance Agreement between the Company
and the Institute of Nutrition and Food Hygiene
  
 
A
             
10.3
  
--
  
Exclusive Licensing Agreement between the
Company and the INFH
  
 
A
             
10.4
  
--
  
Shareholders Agreement
  
A
             
10.5†
  
--
  
2000 Incentive Stock Option Plan
  
D
             
10.6†
      
Employment Extension Agreement between PacificHealth
Laboratories, Inc. and Robert Portman effective
September 1, 2004, executed February 28, 2006
  
 
 
J
             
10.8
      
Asset Purchase Agreement dated February 22, 2006
between PacificHealth Laboratories, Inc. and Mott’s
LLP (redacted, subject to request for confidential treatment)
  
 
 
L
             
10.9
      
License Agreement dated February 22, 2006
between PacificHealth Laboratories, Inc. and Mott’s
LLP (redacted, subject to request for confidential treatment)
  
 
 
L
             
10.10
      
Consulting, License and Noncompetition Agreement dated
February 22, 2006 among PacificHealth Laboratories, Inc.,
Mott’s LLP, and Robert Portman (redacted, subject to
request for confidential treatment)
  
 
 
 
L
             
10.11†
      
Option Certificate for grant to Robert Portman
  
M
             
10.12†
      
Option Certificate for grant to Stephen Kuchen under
the PacificHealth Laboratories, Inc. 1995 Incentive Stock
Option Plan.
  
 
 
M
 
 
31
 
 
10.13
      
Form of Stock Purchase Agreement entered into among
the Company, Aquifer Opportunity Fund, L.P.
and Marc C. Particelli.
  
 
 
N
             
10.14
      
Form of Grant Instrument under PacificHealth
Laboratories, Inc. 2000 Incentive Stock Option Plan
for Adam M. Mizel.
  
 
 
N
             
10.15
      
Form of Grant Instrument under PacificHealth
Laboratories, Inc. 2000 Incentive Stock Option Plan
for Marc C. Particelli
  
 
 
N
             
10.16
      
Employment Agreement, effective January 3, 2008,
by and between PacificHealth Laboratories, Inc. and
Jason Ash
  
 
 
O
             
10.17†
      
Summary of Compensation for Executive Officers
of PacificHealth Laboratories, Inc.
  
 
*
             
23.1
      
Consent of Weiser LLP
  
*
             
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
  
 
 
*

_______________________
*
Filed herewith
 
†
Management contract or management compensatory plan or arrangement.
 
A
Filed with Registration Statement on Form SB-2 (Registration No. 333-36379) (the “1997 SB-2”) on September 25, 1997.
 
B 
Filed with Amendment No. 1 to the 1997 SB-2 on October 23, 1997.
 
C 
Filed with Amendment No. 3 to the 1997 SB-2 on December 17, 1997.
 
D
Filed with Definitive Proxy Statement (Schedule 14A) for annual meeting held on August 16, 2000, filed on July 11, 2000.
 
E
Filed with Current Report on Form 8-K dated June 1, 2001, filed on June 14, 2001.
 
F
Filed with Annual Report on Form 10-KSB for the year ended December 31, 2001.
 
G
Filed with Amendment to Current Report on Form 8-K dated June 1, 2001, filed July 5, 2001.
 
H
Filed with Annual Report on Form 10-KSB for the year ended December 31, 2002.
 
I 
Filed as Exhibit 3.1 to Current Report on Form 8-K, dated January 24, 2005, filed on January 28, 2005.
 
 
 
32
 
 
J 
Filed as Exhibit 10.1 to Current Report on Form 8-K, dated and filed on September 9, 2004.
 
K
Filed with Annual Report on Form 10-KSB for the year ended December 31, 2004.
 
L 
Filed with Annual Report on Form 10-KSB for the year ended December 31, 2005.
 
M 
Filed as Exhibit to Current Report on Form 8-K, dated December 13, 2006 and filed on December 19,2006.
 
N 
Filed as Exhibit to Current Report on Form 8-K, dated February 22, 2007 and filed February 27, 2007.
 
O 
Filed as Exhibit to Current Report on Form 8-K, dated November 28, 2007 and filed December 3, 2007.
 
Note:  In the case of incorporation by reference to documents filed by the Registrant under the Exchange Act, the Registrant’s file number under the Exchange Act is 0-23495.
 
 
 
33
 

PACIFICHEALTH LABORATORIES, INC.
 
FINANCIAL STATEMENTS
 
DECEMBER 31, 2007 and 2006
 
 
 
 
 
PACIFICHEALTH LABORATORIES, INC.
 
Contents
 
 
 
Page
Financial Statements
  
   
Report of independent registered public accounting firm
F-1
   
Balance sheets as of December 31, 2007 and 2006
F-2
   
Statements of operations for the years ended December 31, 2007 and 2006
F-3
   
Statements of changes in stockholders’ equity for the years ended December 31, 2007 and 2006
F-4
   
Statements of cash flows for the years ended December 31, 2007 and 2006
F-5
   
F-6
 
 
 
 
 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 
 
To the Board of Directors and
Stockholders of PacificHealth Laboratories, Inc.
 
 
We have audited the accompanying balance sheets of PacificHealth Laboratories, Inc. as of December 31, 2007 and 2006 and the related statements of operations, changes in stockholders' equity and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of PacificHealth Laboratories, Inc. as of December 31, 2007 and 2006, and the results of its operations and its cash flows for the years then ended in conformity with U.S. generally accepted accounting principles.
 
 
 
 
 
 
Weiser LLP
New York, New York
March 5, 2008
 
 
 
F-1
 
 
PACIFICHEALTH LABORATORIES, INC.
 
Balance Sheets
 
   
December 31,
  
   
2007
    
2006
  
             
ASSETS
            
Current assets:
            
Cash and cash equivalents
   $ 1,712,713     $ 2,564,038  
Accounts receivable, net of allowances of $20,000 and $31,000, respectively
     709,623       502,234  
Inventories (including consigned inventory of approximately $261,000 and
    $97,000, respectively)
     2,010,446       1,913,275  
Prepaid expenses
     111,672       144,059  
                 
Total current assets
     4,544,454       5,123,606  
                 
Property and equipment, net
     185,007       74,163  
Deposits
     10,895       10,895  
                 
                                                 TOTAL ASSETS
   $ 4,740,356     $ 5,208,664  
                 
LIABILITIES
                
Current liabilities:
                
Notes payable
   $ 16,205     $ 44,327  
Accounts payable and accrued expenses
     472,475       960,757  
Deferred revenue
     559,876       244,197  
                 
      1,048,556       1,249,281  
                 
Commitments
                
                 
STOCKHOLDERS' EQUITY
                
   Preferred stock, no par value; 1,000,000 shares authorized,
    -0- shares issued and outstanding at December 31, 2007
    and December 31, 2006
Common stock, $0.0025 par value, authorized 50,000,000 shares;
        -          -  
issued and outstanding 13,501,426 shares at December 31, 2007 and
                
12,776,690 shares at December 31, 2006
     33,754       31,942  
Additional paid-in capital
     18,874,609       17,867,945  
Accumulated deficit
     (15,216,563 )     (13,940,504 )
                 
      3,691,800       3,959,383  
                 
        TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
   $ 4,740,356     $ 5,208,664  
 
See notes to financial statements
 
 
F-2
 
 
PACIFICHEALTH LABORATORIES, INC.
 
Statements of Operations
 
   
Years Ended
  
   
December 31,
  
   
2007
    
2006
  
             
Revenue:
            
Net product sales
   $ 7,427,857     $ 6,209,846  
                 
Cost of goods sold:
                
Product sales
     4,445,978       3,472,955  
Write-down of inventories
     439,208       -  
                 
      4,885,186       3,472,955  
                 
Gross profit
     2,542,671       2,736,891  
                 
Operating expenses:
                
Selling, general and administrative
     3,595,960       2,917,450  
Research and development
     211,078       196,020  
Depreciation
     96,374       50,905  
                 
      3,903,412       3,164,375  
                 
Loss before other income (expense) and provision for income taxes
     (1,360,741 )     (427,484 )
                 
Other income (expense):
                
    Gain on sale of patents/technology, net of expenses of $90,795
     -       3,909,205  
Interest income
     71,734       96,697  
Interest expense
     (3,496 )     (31,416 )
Other income
     16,444       -  
                 
      84,682       3,974,486  
                 
(Loss) income before income taxes
     (1,276,059 )     3,547,002  
Provision for income taxes
     -       1,278,000  
                 
Net (loss) income
     (1,276,059 )     2,269,002  
                 
Less preferred dividends
     -       (10,425 )
                 
Net (loss) income applicable to common stockholders
   $ (1,276,059 )   $ 2,258,577  
                 
                 
Net (loss) income per common share - basic
   $ (0.10 )   $ 0.19  
                 
Net (loss) income per common share - diluted
   $ (0.10 )   $ 0.17  
                 
                 
Weighted average shares outstanding - basic
     13,313,995       11,906,777  
                 
Weighted average shares outstanding – diluted
     13,313,995       13,397,154  
 
See notes to financial statements
 
 
F-3
 
 
PACIFICHEALTH LABORATORIES, INC.
 
Statements of Changes in Stockholders' Equity
Years Ended December 31, 2007 and 2006
 
   
Preferred Stock
    
Common Stock
    
Additional
Paid In
    
Accumulated
        
   
Shares
    
Amount
    
Shares
    
Amount
    
Capital
    
Deficit
    
Total
  
Balance, January 1, 2006
     90,909     $ 966,387       10,267,045     $ 25,667     $ 15,790,335     $ (16,209,506 )   $ 572,883  
                                                         
Fair value of stock options issued
                                     189,880               189,880  
Preferred stock converted into common stock
     (90,909 )     (966,387 )     909,091       2,273       964,114               -  
Stock options/warrants exercised
                     1,600,554       4,002       923,616               927,618  
Net income
                                             2,269,002       2,269,002  
                                                         
Balance, December 31, 2006
     -       -       12,776,690       31,942       17,867,945       (13,940,504 )     3,959,383  
                                                         
Fair value of stock options issued
                                     274,890               274,890  
Common stock issued
                     243,243       608       449,392               450,000  
Stock options/warrants exercised
                     481,493       1,204       282,382               283,586  
Net loss
                                             (1,276,059 )     (1,276,059 )
                                                         
Balance, December 31, 2007
     -     $ -       13,501,426     $ 33,754     $ 18,874,609     $ (15,216,563 )   $ 3,691,800  
                                                         
 
See notes to financial statements
 
 
F-4
 
 
PACIFICHEALTH LABORATORIES, INC.
 
Statements of Cash Flows
 
   
Years Ended December 31,
  
   
2007
    
2006
  
             
Cash flows from operating activities:
            
Net (loss) income
   $ (1,276,059 )   $ 2,269,002  
Adjustments to reconcile net (loss) income to net cash used in operating activities:
                
Deferred tax benefit
     -       1,278,000  
Depreciation
     96,374       50,905  
        Allowance for doubtful accounts
     (10,516 )     12,000  
Equity instrument-based compensation/consulting expense
     274,890       189,880  
Write-off of packaging inventories
     49,135       -  
Write-off of inventories
     439,208       -  
Gain on sale of patents/technology, net of expenses of $90,795
     -       (3,909,205 )
Changes in:
                
Accounts receivable
     (196,873 )     (326,399 )
Prepaid expenses
     32,387       (25,057 )
Inventories
     (585,514 )     (603,496 )
Deposits
     -       9,498  
Accounts payable and accrued expenses
     (488,282 )     (586,201 )
Deferred revenue
     315,679       (124,871 )
                 
Net cash used in operating activities
     (1,349,571 )     (1,765,944 )
                 
Cash flows from investing activities:
                
Purchase of property and equipment
     (207,218 )     (59,711 )
Proceeds from sale of patents and technology, net of expenses of $90,795
     -       3,909,205  
                 
                Net cash (used in) provided by investing activities
     (207,218 )     3,849,494  
                 
Cash flows from financing activities:
                
    Proceeds from common stock issuance
     450,000       -  
    Proceeds from common stock options/warrants exercised
     283,586       927,618  
    Repayments of convertible notes payable
     -       (500,000 )
Proceeds of note payable
     79,305       861,200  
Repayment of note payable
     (107,427 )     (946,817 )
                 
Net cash provided by financing activities
     705,464       342,001  
                 
Net (decrease) increase in cash and cash equivalents
     (851,325 )     2,425,551  
Cash and cash equivalents at beginning of year
     2,564,038       138,487  
                 
Cash and cash equivalents at end of year
   $ 1,712,713     $ 2,564,038  
                 
Supplemental disclosures of cash flow information:
                
Cash paid for interest
   $ 3,496     $ 48,082  
Cash paid for income taxes
   $ 20,408     $ 2,609  
                 
Schedule of non-cash financing activity:
                
Conversion of 90,909 shares of Series A Preferred Stock into 909,091
                
shares of common stock
   $ -     $ 966,387  
 
See notes to financial statements
 
 
F-5
 
 
PACIFICHEALTH LABORATORIES, INC.
 
Notes to Financial Statements
December 31, 2007 and 2006
 
 
Note A - The Company and Significant Accounting Policies
 
[1]
The Company:
 
The Company was incorporated in April 1995 to discover, develop, and commercialize nutritional products that are patentable and substantiated by well-controlled clinical trials conducted at leading university research centers. The Company’s principal areas of focus include sports performance, weight loss, and management of type II diabetes. The Company utilizes third-party contractors to manufacture all products.
 
On February 22, 2006, the Company sold the trademarks, technology, and patents for its sports nutrition brands, Accelerade® and Endurox® R4 ® to Mott’s LLP (“Mott’s”). Such patents were held by the Company’s CEO, Robert Portman, and assigned to the Company when such patents were issued. Under the terms of the agreement, the Company received a $4 million upfront payment and will receive a royalty based on future sales for a defined period, subject to an annual limitation on the amount of the royalty.  There are no minimum royalties. Simultaneously, the Company and Mott’s entered into a License Agreement giving the Company the exclusive, royalty-free right to continue to sell these products in powder, gel and pill form.  Consequently, the Company will continue to market its current sports nutrition products in the same manner as prior to the sale of the intellectual property assets.  The Company’s CEO is required to provide consulting services to Mott’s on an as-needed basis not to exceed 130 hours per year.
 
[2]
Cash and cash equivalents:
 
The Company considers all highly liquid investments with original maturities of three months or less at the date of purchase to be cash equivalents.
 
[3]
Allowance for doubtful accounts:
 
Accounts receivable consist of trade receivables recorded at original invoice amount, less an estimated allowance for uncollectible accounts. Trade credit is generally extended on a short-term basis; thus trade receivables do not bear interest. Trade receivables are periodically evaluated for collectibility by considering a number of factors including the length of time an invoice is past due, the customers' credit worthiness and historical bad debt experience. Changes in the estimated collectibility of trade receivables are recorded in the results of operations for the period in which the estimate is revised. Trade receivables that are deemed uncollectible are offset against the allowance for uncollectible accounts. The Company generally does not require collateral for trade receivables.
 
[4]
Inventories:
 
Inventories are recorded at the lower of cost or market using the first-in, first-out ("FIFO") method. The Company determines its reserve for obsolete inventory by considering a number of factors, including product shelf life, marketability, and obsolescence. The Company determines the need to write down inventories by analyzing product expiration, market conditions, and salability of its products.
 
[5]
Property and equipment:
 
Property and equipment are stated at cost and are depreciated using the straight-line method over their estimated useful lives ranging from 2 to 5 years.
 
[6]
Earnings (loss) per share:
 
Basic earnings (loss) per common share are computed by dividing net income (loss) applicable to common shareholders by the weighted average number of common shares outstanding during the year. Diluted earnings per share gives effect to all dilutive potential common shares outstanding during the year. The dilutive effect of the outstanding stock warrants and options is computed using the treasury stock method.  For the year ended December 31, 2007, diluted loss per share did not include the effect of 2,408,750 options outstanding and 938,930 warrants outstanding, respectively, as their effect would be anti-dilutive. For the year ended December 31, 2006, diluted income per share did not include the effect of 779,500 options outstanding, as their effect would be anti-dilutive.
 
 
F-6
 
 
PACIFICHEALTH LABORATORIES, INC.
 
Notes to Financial Statements
December 31, 2007 and 2006
 
 
[7]
Revenue recognition:
 
Sales are recognized when all of the following criteria are met: (1) persuasive evidence that an arrangement exists; (2) delivery has occurred or services have been rendered; (3) the seller’s price to the buyer is fixed and determinable; and, (4) collectibility is reasonably assured. Sales are recorded net of incentives paid and discounts offered to customers.
 
The Company has a purchasing agreement with a significant customer for all products sold to this customer whereby all unsold product is subject to a right of return provision if certain minimum levels of retail sales in a 12-month period of time from the date of initial sale are not achieved. Through December 31, 2004, in addition to the four criteria described above, the Company recognized revenue related to these products after analyzing retail sell-through data provided by the customer and the Company’s expectation of future customer sell-through trends. A new agreement was signed in April 2005 that increased minimum levels of retail sell-through requirements. Since January 1, 2005, the Company recognizes revenue when its major customer sells through its products to the consumer. This change was made due to the inability to accurately estimate future returns from this customer as the Company has previously agreed to accept returns/discounts of product from this customer that it was not contractually obligated to do so as well as because the Company entered into a new purchasing agreement with this customer that increased certain sell-through minimums. As of December 31, 2007 and 2006, shipments to this customer amounting to $559,876 and $244,197, respectively, have been reflected as deferred revenue in the Company’s balance sheet.
 
[8]
Research and development:
 
Costs of research and development activities are expensed as incurred.
 
[9]
Advertising costs:
 
Advertising costs are expensed as incurred.  During 2007 and 2006, the Company recorded advertising expense of $158,716 and $104,705, respectively.
 
[10]
Stock-based compensation:
 
Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 123R, "Share-Based Payment" ("SFAS 123R") utilizing the modified prospective method which establishes standards for transactions in which an entity exchanges its equity instruments for goods or services. SFAS 123R focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions, including issuances of stock options to employees. The Company recorded a charge of $272,334 in the year ended December 31, 2007, representing the effect on income from continuing operations, income before income taxes, and net income. The Company recorded a charge of $176,261 in the year ended December 31, 2006, representing the effect on income from continuing operations, income before income taxes, and net income. The impact of the adoption of 123R was to reduce basic and diluted earnings per share by $0.02 and $0.01, respectively, in the year ended December 31, 2006.
 
The fair value of each option grant on the date of grant is estimated using the Black-Scholes option-pricing model with a volatility ranging from 110% to 119% for 2007 and from 102% to 117% for 2006, expected life of the options of 5 years, risk-free interest rate of approximately 4% in 2007 and 5% in 2006 and a dividend yield of 0%. The weighted average fair values of options granted during the years ended December 31, 2007 and 2006 were $0.76 and $0.80, respectively.
 
 
F-7
 
 
PACIFICHEALTH LABORATORIES, INC.
 
Notes to Financial Statements
December 31, 2007 and 2006

[11]
Segment information:
 
The Company operates in one business segment:  the design, development and marketing of dietary and nutritional supplements that enhance health and well-being.
 
[12]
Income taxes:
 
The Company recognizes deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns.  Under this method, deferred tax liabilities and assets are determined on the basis of the differences between the tax basis of assets and liabilities and their respective financial reporting amounts ("temporary differences") at enacted tax rates in effect for the years in which the differences are expected to reverse. Any resulting deferred tax asset is reduced, if necessary, by a valuation allowance for any tax benefits that are not expected to be realized. Effective January 1, 2007, the Company adopted Financial Interpretation No. 48, “Accounting for Uncertainty in Income Taxes”, (“FIN 48”). The impact of the adoption of FIN 48 had no material effect on the Company’s results of operations or financial position.
 
[13]
Impairment of long-lived assets:
 
Long-lived assets, to be held and used, are reviewed for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable using expected future undiscounted cash flows.  When required, impairment losses on assets to be held and used are recognized based on the excess of the assets' carrying amount over their fair values as determined by selling prices for similar assets or application of other appropriate valuation techniques.  Long-lived assets to be disposed of are reported at the lower of their carrying amounts or fair values less disposal costs.
 
[14]
Comprehensive income (loss):
 
The Company does not have any comprehensive income (loss) items at December 31, 2007 and 2006.
 
[15]
Recent accounting pronouncements:
 
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value, and expands disclosure requirements regarding fair value measurement. Where applicable, this statement simplifies and codifies fair value related guidance previously issued within U.S. generally accepted accounting principles. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years.  The Company does not expect SFAS 157 to have a material impact on its results of operations or financial condition.
 
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities - Including an Amendment of FASB Statement No.115  (“SFAS 159”). SFAS 159 provides companies with an option to measure, at specified election dates, certain financial instruments and other items at fair value that are not currently measured at fair value. A company that adopts SFAS 159 will report unrealized gains and losses on items for which the fair value option has been elected in its financial results during each subsequent reporting date. SFAS 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. SFAS 159 is effective for fiscal years beginning after November 15, 2007. The Company does not expect SFAS 159 to have a material impact on its results of operations or financial condition.
 
In December 2007, the SEC issued Staff Accounting Bulletin No. 110 “Amendment of Topic 14, Share-Based Payment”, (“SAB 110”).  SAB 110 expresses the views of the staff regarding the use of a “simplified” method, as discussed in SAB No. 107, in developing an estimate of the expected term of “plain vanilla” share options in accordance with SFAS 123R (revised 2004).  The Company does not expect SAB 110 to have a material impact on its results of operations or financial condition.
 
 
F-8
 
 
PACIFICHEALTH LABORATORIES, INC.
 
Notes to Financial Statements
December 31, 2007 and 2006

 
[16]
Use of estimates:
 
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, 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 areas of revenue recognition, inventory obsolescence, allowance for doubtful accounts, and valuation allowances for deferred tax assets.
 
[17]  Shipping and handling fees and costs:
 
 
 Shipping and handling costs are included in cost of sales.
 
Note B - Inventories
 
Inventories, which are held at third-party warehouses and on consignment with customers, consist of the following and include obsolescence reserves of $176,363 at December 31, 2007 and $545,648 at December 31, 2006 which are netted against finished goods at third party warehouse:
 
   
2007
    
2006
  
             
Raw materials (at contract manufacturer)
   $ 266,624     $ 531,995  
Work in process (at contract manufacturer)
     67,920       77,771  
Packaging supplies (at third party warehouse)
     56,480       41,378  
Finished goods (at third party warehouse)
     1,358,378       1,165,188  
Finished goods (on consignment)
     261,044       96,943  
                 
    $ 2,010,446     $ 1,913,275  
 
Note C - Property and Equipment
 
Property and equipment consist of the following:
 
   
2007
    
2006
  
             
Furniture and equipment
   $ 616,675     $ 431,624  
Molds and dies
     159,494       137,327  
                 
      776,169       568,951  
Less accumulated depreciation
     591,162       494,788  
                 
    $ 185,007     $ 74,163  
 
Depreciation expense aggregated $96,374 and $50,905 for the years ended December 31, 2007 and 2006, respectively.
 
 
 
 
F-9
 
 
PACIFICHEALTH LABORATORIES, INC.
 
Notes to Financial Statements
December 31, 2007 and 2006

 
Note D - Notes Payable
 
The Company has notes payable as follows:
 
   
2007
    
2006
  
Installment note payable to insurance finance company
            
due in monthly installments of $8,168, including
            
interest at 6.48% through February 2008
   $ 16,205       -  
Installment note payable to insurance finance company
                
due in monthly installments of $7,104, including
                
interest at 6.50% through February 2007
     -     $ 7,104  
Installment note payable to insurance finance company
                
due in monthly installments of $3,722, including
                
interest at 7.53% through October 2007
      -       37,223  
    $ 16,205     $ 44,327  
 
Note E – Convertible notes payable
 
On August 24, 2005, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with Hormel Health Labs, LLC (“Hormel”).  Pursuant to the Purchase Agreement, Hormel loaned the Company the principal amount of $500,000 in exchange for a Secured Convertible Promissory Note, which amount would accrue interest at a rate of 8% per annum (the “Note”).  The outstanding principal balance under the Note and any accrued but unpaid interest thereon was due and payable on August 24, 2007 to the extent that Hormel had not exercised certain conversion rights under the Note. In the event we defaulted, interest on the outstanding principal balance would accrue at the rate of 10% per annum.  The Note was collateralized by a subordinated lien on and security interest on the Company’s assets pursuant to the terms of a Security Agreement between the Company and Hormel dated August 24, 2005.  As additional consideration for the loan, Hormel had the right at Hormel’s option to convert the outstanding principal amount and accrued and unpaid interest of the Note into shares of the common stock of the Company (the “Common Stock”), at a price per share equal to the product of (x) the weighted average closing price of the Common Stock for the five trading days preceding the notice of conversion of the Note and (y) 0.85.  Hormel agreed that it would not convert the Note if such conversion would cause Hormel, together with its affiliates, to beneficially own, on an as-converted basis, more than 9.9% of the shares of Common Stock then outstanding. However, Hormel had the ability to waive this limitation by providing written notice of such waiver to the Company with the waiver to be effective seventy-five days after receipt. On February 22, 2006, the Company repaid the principal and accrued interest of this Note in full.
 
Note F - Stockholders' Equity
 
The total number of shares of all classes of stock which the Company has authority to issue is 51,000,000 shares, consisting of (a) fifty million (50,000,000) shares of common stock, par value $.0025 per share, and (b) one million (1,000,000) shares of preferred stock, par value $.01 per share. The preferred stock may be issued in one or more series, and may have such voting powers, full or limited, or no voting powers, and such designations and preferences as shall be stated in the resolution or resolutions providing for the issue thereof adopted by the Board of Directors of the Company, from time to time.
 
On January 28, 2005, the Company entered into a Series A Preferred Stock Purchase Agreement and related agreements with Hormel pursuant to which the Company issued and sold 90,909 shares of Series A Preferred Stock for an aggregate purchase price of $1,000,000 or $11.00 per share. The Series A Preferred Stock issued to Hormel was convertible into an aggregate 909,091 shares of common stock, subject to adjustment. The Series A Preferred Stock was converted on June 23, 2006.
 
 
F-10
 
 
PACIFICHEALTH LABORATORIES, INC.
 
Notes to Financial Statements
December 31, 2007 and 2006

Note G - Commitments
 
[1]
Employment agreements:
 
The Company entered into a new employment agreement on January 1, 2007, with the CEO of the Company that provides for minimum annual compensation of $295,000. In the event of a change in control, as defined in the employment agreement, the CEO shall be paid, as additional compensation, a lump sum equal to his annual base salary in effect immediately prior to the change in control. If the CEO is terminated without cause, as defined in the employment agreement, the Company shall pay the CEO, at the time of termination, an amount equal to the base salary which would have been paid during a period beginning on the date of termination of employment and ending on the later of the scheduled termination date, as defined in the employment agreement, or the first anniversary of the termination date.
 
The Company entered into an employment agreement on January 3, 2008, with the new President and Chief Operating Officer of the Company that provides for minimum annual compensation of $295,000. In the event of a change in control, as defined in the employment agreement, and a contemporaneous or subsequent termination of Employee for Good Reason, the President shall be paid, as additional compensation, a lump sum equal to half his annual base salary in effect immediately prior to the change in control. If the President is terminated without cause, as defined in the employment agreement, the Company shall pay the President, at the time of termination, an amount equal to his annual base salary which would have been paid during a period beginning on the date of termination of employment and ending on the later of the scheduled termination date, as defined in the employment agreement, or the first anniversary of the termination date, to be offset by any compensation earned in other full-time employment.
 
The Company entered into an employment agreement on January 3, 2008, with the new Vice President, Product Development and Supply Chain of the Company that provides for minimum annual compensation of $190,000. If this Vice President is terminated without cause, as defined in the employment agreement, the Company shall pay him, at the time of termination, an amount equal to four months of his base salary which would have been paid during a period beginning on the date of termination of employment and ending on the later of the scheduled termination date, as defined in the employment agreement, or four months from the termination date, to be offset by any compensation earned in other full-time employment.
 
[2]
Lease:
 
The Company has a lease agreement for office space for the rental of 5,500 square feet expiring June 2012.
 
The future minimum lease payments due under the lease is as follows:
 
Years Ending
      
December 31,
      
       
        2008
   $ 140,250  
        2009
     140,250  
        2010
     143,000  
        2011
     148,500  
        2012
     75,625  
         
    $ 647,625  
 
Rent expense amounted to $118,145 and $136,125 in 2007 and 2006, respectively.
 
Note H - Stock Option Plans and Warrants
 
The Company has two stock option plans (the "Plans") under which 375,250 shares of common stock are available for issuance under the Plans. In 1995, the Company established an incentive stock option plan (the "Plan") in which options to purchase the common stock of the Company may be awarded to employees.  In 2000, the Company established another stock option plan to increase the number of options under the Plans.
 
 
F-11
 
 
PACIFICHEALTH LABORATORIES, INC.
 
Notes to Financial Statements
December 31, 2007 and 2006

Stock options may be granted as either incentive stock options intended to qualify under Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), or as options not qualified under Section 422 of the Code.  All options are issued with an exercise price at or above 100% of the fair market value of the common stock on the date of grant.  Incentive stock option plan awards of restricted stock are intended to qualify as deductible performance-based compensation under Section 162(m) of the Code.  Incentive stock option awards of unrestricted stock are not designed to be deductible by the Company under Section 162(m).  The Board of Directors determines the option price (not to be less than fair market value for incentive options) at the date of grant. The options have a maximum term of 5 years and outstanding options expire at various times through December 2012.  Vesting ranges from immediate to over five years.
 
Stock option transactions for employees during 2007 and 2006 were as follows:
 
                     
Weighted
  
               
Exercise
    
Average
  
               
Price Per
    
Exercise Price
  
   
Option
    
Vested
    
Common
    
Per Share
  
   
Shares
    
Shares
    
Share
    
Outstanding
  
                         
Balance, January 1, 2006
     1,970,000       1,747,000     $ 0.313 - $4.34     $ 1.11  
                                 
Granted/vested during the year
     913,000       193,000     $ 0.20 - $1.13     $ 0.81  
Exercised during the year
     (648,000 )     (648,000 )   $ 0.313 - $1.00     $ 0.46  
Expired during the year
     (223,500 )     (222,500 )   $ 0.20 - $4.34     $ 1.63  
                                 
Balance, December 31, 2006
     2,011,500       1,069,500     $ 0.20 - $3.80     $ 1.12  
                                 
Granted/vested during the year
     741,000       418,668     $ 0.65 - $2.14     $ 0.76  
Exercised during the year
     (81,000 )     (81,000 )   $ 0.20 - $1.00     $ 0.65  
Expired during the year
     (333,000 )     (333,000 )   $ 2.79 - $3.80     $ 2.89  
                                 
Balance, December 31, 2007
     2,338,500       1,074,168     $ 0.20 - $2.14     $ 0.77  
                                 
Aggregate Intrinsic Value,                                
December 31, 2007
   $ 13,825     $ 13,825                  
 
 
The market value of the Company’s common stock as of December 31, 2007 was $0.55 per share.
 
As of December 31, 2007, the total fair value of non-vested awards amounted to $705,336. The weighted average remaining period over which such options are expected to be recognized is 3.11 years.
 
Information with respect to employee stock options outstanding and employee stock options exercisable at December 31, 2007 is as follows:
 
           
Weighted
                    
           
Average
    
Weighted
          
Weighted
  
           
Remaining
    
Average
          
Average
  
Range of
    
Number
    
Contractual
    
Exercise
    
Number
    
Exercise
  
Exercise Prices
    
Outstanding
    
Life (in Years)
    
Price
    
Exercisable
    
Price
  
                                 
$ 0.31 - $2.00       2,312,500       3.35     $ 0.76       1,074,168     $ 0.74  
$ 2.01 - $4.00       26,000       4.19     $ 2.12       -       -  
                                             
          2,338,500       3.36     $ 0.77       1,074,168     $ 0.74  
 
In addition to options granted to employees under the Plans, the Company issued stock and stock options pursuant to contractual agreements to non-employees.  Stock and stock options granted under these agreements are expensed when the related service or product is provided. The Company used the Black-Scholes method of valuing stock options to recognize an expense of $2,556 and $13,619 for such stock and stock options issued in 2007 and 2006, respectively.
 
 
F-12
 
 
PACIFICHEALTH LABORATORIES, INC.
 
Notes to Financial Statements
December 31, 2007 and 2006

Stock option transactions for non-employees during 2007 and 2006 were as follows:
 
                     
Weighted
  
               
Exercise
    
Average
  
               
Price Per
    
Exercise Price
  
   
Option
    
Vested
    
Common
    
Per Share
  
   
Shares
    
Shares
    
Share
    
Outstanding
  
                         
Balance, January 1, 2006
     155,500       155,500     $ 0.20 - $6.30     $ 1.57  
                                 
Granted/vested during the year
     90,500       90,500     $ 0.20 - $1.23     $ 0.23  
Exercised during the year
     (58,000 )     (58,000 )   $ 0.20     $ 0.20  
Expired during the year
     (97,500 )     (97,500 )   $ 0.89 - $6.30     $ 1.34  
                                 
Balance, December 31, 2006
     90,500       90,500     $ 0.20 - $4.88     $ 1.35  
                                 
Granted/vested during the year
     2,250       2,250     $ 1.21 - $2.10     $ 1.61  
Expired during the year
     (22,500 )     (22,500 )   $ 0.90 - $4.88     $ 4.36  
                                 
Balance, December 31, 2007
     70,250       70,250     $ 0.20 - $2.10     $ 0.39  
 
Information with respect to non-employee stock options outstanding and non-employee stock options exercisable at December 31, 2007 is as follows:
 
           
Weighted
        
     
Number
    
Average
    
Weighted
  
     
Outstanding
    
Remaining
    
Average
  
Range of
    
and
    
Contractual
    
Exercise
  
Exercise Prices
    
Exercisable
    
Life (in Years)
    
Price
  
                     
$0.20 - $2.00
       69,250       1.53     $ 0.37  
$2.01 - $2.10
       1,000       2.16     $ 2.10  
                           
          70,250       1.54     $ 0.39  
 
Stock warrant transactions during 2007 and 2006 were as follows:
 
         
Exercise
    
Weighted
  
         
Price
    
Average
  
         
Per
    
Exercise Price
  
         
Common
    
Per
  
   
Warrants
    
Share
    
Common Share
  
                   
Balance, January 1, 2006
     2,271,275     $ 0.63 - $0.88     $ 0.67  
Exercised during the year
     (919,565 )   $ 0.63 - $0.85     $ 0.72  
Balance, December 31, 2006
     1,351,710     $ 0.63 - $0.88     $ 0.64  
Exercised during the year
     (412,780 )   $ 0.63     $ 0.63  
                         
Balance, December 31, 2007
     938,930     $
0.63 - $0.88
     $ 0.64  
 
 
 
F-13
 
 
 
PACIFICHEALTH LABORATORIES, INC.
 
Notes to Financial Statements
December 31, 2007 and 2006

Note I - Income Taxes
 
The difference between the statutory federal income tax rate on the Company's pre-tax income (loss) and the Company's effective income tax rate is summarized as follows:
 
   
2007
    
2006
  
   
Amount
    
Percent
    
Amount
    
Percent
  
                         
U.S. federal income tax provision
                        
(benefit) at federal statutory rate
   $ (446,620 )     35%     $ 1,241,450       35%  
Effect of state taxes, net of
                                
federal benefit
     (76,560 )     6%       212,820       6%  
Change in valuation allowance
     411,600       (32% )     (11,000 )     0%  
Stock compensation expense,  (SFAS123R)
     112,700       (9% )     -0-       0%  
Other
     (1,120 )     (0% )     (165,270 )     (5% )
                                 
    $ 0       0%     $ 1,278,000       36%  
 
Included in the other component in 2006 is the utilization of net operating losses in excess of the expected amount as recorded as of December 31, 2006.
 
At December 31, 2007, the Company has approximately $13,390,000 in federal and $4,066,000 in state net operating loss carryovers that can be used to offset future taxable income.  The net operating loss carryforwards begin to expire in the year 2015 through the year 2027.
 
The components of the Company's deferred tax assets are as follows:
 
   
2007
    
2006
  
             
Net operating loss carryforwards
   $ 4,931,000     $ 4,380,000  
Inventory reserve
     72,000       224,000  
Other
     62,000       49,000  
Valuation allowance
     (5,065,000 )     (4,653,000 )
                 
Deferred tax asset
   $ - 0 -     $ - 0 -  
 
 
 
Note J - Concentrations of Credit Risks, Major Customers, and Major Vendors
 
[1]
Concentrations of credit risk:
 
Financial instruments, which potentially subject the Company to concentrations of credit risk, consist primarily of cash, cash equivalents and trade accounts receivable.
 
The Company has concentrated its credit risk for cash by maintaining substantially all of its depository accounts in two financial institutions. Amounts at one of the institutions are insured by the Federal Deposit Insurance Corporation up to $100,000 and amounts at the other institution are insured by the Securities Investor Protection Corporation up to $500,000. Uninsured balances aggregated approximately $1,150,000 at December 31, 2007 that exceeded these insured amounts. These financial institutions have a strong credit rating, and management believes that credit risk relating to these deposits is minimal.
 
 
F-14
 
 
PACIFICHEALTH LABORATORIES, INC.
 
Notes to Financial Statements
December 31, 2007 and 2006

The Company does not require collateral on its trade accounts receivable.  Historically, the Company has not suffered significant losses with respect to trade accounts receivable.
 
[2]
Fair value of financial instruments:
 
Cash, cash equivalents, accounts receivable, accounts payable and notes payable approximate their fair values due to the short-term maturity of these instruments.
 
[3]
Major customers:
 
For the years ended December 31, the Company had product sales from two customers that accounted for approximately 21% and 15% in 2007 and 20% and 19% in 2006, of net product sales.  Accounts receivable outstanding related to these customers at December 31, 2007 and 2006 were $435,845 and $207,235, respectively.  Deferred revenue from one of these customers was $559,876 as of December 31, 2007 and $244,197 as of December 31, 2006. Such amounts are included in the accompanying balance sheet. The loss of these customers, a significant reduction in purchase volume by these customers, or the financial difficulty of such customers, for any reason, could significantly reduce our revenues. We have no agreement with or commitment from either of these customers with respect to future purchases.
 
[4]
Major vendors:
 
Two suppliers accounted for approximately 69% and 22%, respectively, of total inventory purchases for the year ended December 31, 2007 and two suppliers accounted for 54% and 18%, respectively, of total inventory purchases for the year ended December 31, 2006.  At December 31, 2007, amounts due to these two vendors represented approximately 45% and 1%, respectively, of accounts payable and accrued expenses.  At December 31, 2006, amounts due to two vendors represented approximately 25% and 20%, respectively, of accounts payable and accrued expenses.
 
Note K - Segment and Related Information
 
In 2007 and 2006, the Company has one reportable segment:
Dietary and nutritional supplements.
 
The following table presents revenues by region:
   
2007
    
2006
  
             
United States
   $ 6,778,183     $ 5,751,148  
Canada
     208,649       178,556  
Other
     441,025       280,142  
                 
Total
   $ 7,427,857     $ 6,209,846  
 
Product sales for the years ended December 31, 2007 and 2006 are net of credits of $318,094 and $216,177, respectively, for marketing promotions, customer rebates, and returns of certain products.  These credits primarily relate to the sports performance product line.
 
Note L – Related Party Transactions
 
In connection with the Hormel preferred stock agreement, the Company entered into an Exclusive Manufacturing Agreement with a subsidiary of Hormel. The initial term of the agreement was for one year commencing on January 28, 2005 and was extended until January 28, 2007 as part of the convertible note transaction. During the years 2007 and 2006, the Company purchased approximately $166,000 and $1,991,000, respectively, of finished goods from this Hormel subsidiary. At December 31, 2007 and December 31, 2006, the Company owed this Hormel subsidiary approximately $-0- and $195,000, respectively, that has been included on the balance sheet in accounts payable and accrued expenses.
 
F-15