Raw materials used in the production of the cold-remedy products are available from numerous sources. Currently, they are being procured from a single vendor in order to secure purchasing economies and qualitative security. In a situation where this one vendor is not able to supply the ingredients, other sources have been identified. Any situation where the vendor is not able to supply the contract manufacturer with ingredients may result in a temporary delay in production until replacement supplies are obtained to meet the Company’s production requirements.
Website Access
The Company’s website address is www.quigleyco.com. The Company’s filings with the SEC are available at no cost on its website as soon as practicable after filing of such reports with the SEC.
The Company Has A History of Losses and Limited Working Capital and Expects to Increase Spending.
The Company has experienced net losses for four of the past seven fiscal years. Although the Company earned net income of approximately $3,217,000, $453,000 and $675,000, respectively, in the fiscal years ended December 31, 2005, December 31, 2004 and 2003, it incurred net losses of $5,534,000, $2,458,000, $1,748,000, and $6,454,000, respectively, in the fiscal years ended December 31, 2008, December 31, 2007, December 31, 2006, December 31, 2002. As of December 31, 2008, The Company had working capital of approximately $14,072,000. Since the Company continues to spend significant amounts on research and development in connection with Pharma’s product development, it is uncertain whether the Company will generate sufficient revenues to meet expenses or to operate profitably in the future.
The Company Holds Patents Which It May Not Be Able to Develop Into Pharmaceutical Medications.
Future success depends in part on Pharma’s ability to research and develop prescription medications based on patents, which currently are:
· Item1A. | A Patent (No. 6,555,573 B2) entitled “Method and Composition for the Topical Treatment of Diabetic Neuropathy.” The patent extends through March 27, 2021.Risk Factors |
· | A Patent (No. 6,592,896 B2) entitled “Medicinal Composition and Method of Using It” (for Treatment of Sialorrhea and other Disorders) for a product to relieve sialorrhea (drooling) in patients suffering from Amyotrophic Lateral Sclerosis (ALS), otherwise known as Lou Gehrig’s Disease. The patent extends through August 5, 2021. |
Any of the following risks could materially affect our business, financial condition, or results of operations. These risks could also cause our actual results to differ materially from those indicated in the forward-looking statements contained herein and elsewhere. The risks described below are not the only risks facing us. Additional risks not currently known to us or those we currently deem to be immaterial may also materially and adversely affect our business, financial condition or results of operations.
· | A Patent (No. 6,596,313 B2) entitled “Nutritional Supplement and Method of Using It” for a product to relieve sialorrhea (drooling) in patients suffering from Amyotrophic Lateral Sclerosis (ALS), otherwise known as Lou Gehrig’s Disease. The patent extends through April 14, 2022. |
Our business is subject to significant competitive pressures· | A Patent (No. 6,753,325 B2) entitled “Composition and Method for Prevention, Reduction and Treatment of Radiation Dermatitis,” a composition for preventing, reducing or treating radiation dermatitis. The patent extends through November 5, 2021. |
The OTC healthcare product, pharmaceutical and consumer product industries are highly competitive. Many of our competitors have substantially greater capital resources, technical staffs, facilities, marketing resources, product development, distribution and experience than we do. As a consequence, our competitors may have certain advantages, including the ability to allocate greater resources for new product development, marketing and other purposes.
· | A Patent (No. 6,827,945 B2) entitled “Nutritional Supplements and Method of Using Same” for a method for treating at least one symptom of arthritis. The patent extends through April 22, 2023. |
We believe that our ability to compete depends on a number of factors, including product quality and price, availability, speed to market, consumer marketing, reliability, credit terms, brand name recognition, delivery time and post-sale service and support, and new and existing product innovation and commercialization. There can be no assurance that we will be able to compete successfully in the future. If we are unable to compete effectively, our earnings may be significantly negatively impacted.
· | A Patent (No. 7,083,813 B2) entitled “Methods for The Treatment of Peripheral Neural and Vascular Ailments.” The patent extends through August 4, 2023. |
We have aligned our operations to focus principally in the research, development, manufacture, marketing and sale of OTC cold remedy and consumer products, natural base health products and other supplements and cosmeceuticals products. In addition, we may seek to acquire from third parties or enter into other arrangements with respect to new formulations, ingredients, applications and other products developed by third parties who may be seeking our commercialization, marketing and distribution expertise.
· | A Patent (No. 7,166,435 B2) entitled “Compositions and Methods for Reducing the Tranmissivity of Illnesses.” This patent will provide additional protection to an existing composition patent (number 6,592,896), which the Company received in July 2003 and will support on-going investigations and potential commercialization opportunities. The Company will be continuing its studies to test the effects of the referenced compound against avian flu and human influenza. The patent extends through November 5, 2021. |
business and, if we are successful in doing so, there can be no assurance that such new business will achieve profitability.
· | A Patent (No. 7,175,987 B2) entitled “Compositions and Methods for The Treatment of Herpes.” The patent extends through November 5, 2021. |
We will need to obtain additional capital to support long term product development and commercialization programs
· | A Patent (No. 7,396,546 B2) entitled “Anti-Microbial Compositions and Methods of Using Same” The patent extends through August 6, 2021. |
· | A Patent (No. 7,399,783 B2) entitled “Methods for the Treatment of Scar Tissue.” The patent extends through September 4, 2026. |
· | A Patent (No. 7,405,046 B2) entitled “Compositions and Methods for Treatment of Rhinovirus.” The patent extends through August 6, 2021. |
· | A Patent (No. 7,410,659 B2) entitled “Methods for the Treatment of Peripheral Neural and Vascular Ailments.” The patent extends through November 6, 2022. |
· | A Patent (No. 7,435,725 B2) entitled “Oral Compositions and Methods for Prevention, Reduction and Treatment of Radiation Injury.” The patent extends through January 14, 2022. |
· | A Mexican Patent (No. 236311) entitled “Method and Composition for the Treatment of Diabetic Neuropathy.” The patent extends through December 18, 2020. |
· | A Mexican Patent (No. 259329) entitled “Nutritional Supplements and Methods for Prevention, Reduction and Treatment of Radiation Injury” the patent extends through April 30, 2022. |
· | A New Zealand Patent (No. 533439) entitled “Methods for The Treatment of Peripheral Neural and Vascular Ailments.” The patent extends through November 6, 2022. |
· | A New Zealand Patent (No. 526041) entitled “Method and Composition for the Treatment of Diabetic Neuropathy.” The patent extends through December 18, 2021. |
· | A New Zealand Patent (No. 530187) entitled “Nutritional Supplements and Methods of Using Same.” The patent extends through August 6, 2022. |
· | A New Zealand Patent (No. 537821) entitled “Anti-Microbial Compositions and Methods of Using Same.” The patent extends through July 23, 2023. |
· | A New Zealand Patent (No. 532775) entitled “Topical Compositions and Methods for Treatment of Adverse Effects of Ionizing Radiation,” The patent extends through November 6, 2022. |
· | An Australian Patent (No. 2002231095) entitled “Method and Composition for the Treatment of Diabetic Neuropathy.” The patent extends through December 18, 2021. |
· | An Australian Patent (No. 2002352501) entitled “Method for The Treatment of Peripheral Neural and Vascular Ailments.” The patent extends through November 5, 2022. |
· | An Australian Patent (No. 2002232464) entitled “Nutritional Supplements and Methods of Using Same.” The patent extends through August 5, 2022. |
· | An Australian Patent (No. 2002365155) “Topical Compositions and Methods for Treatment of Adverse Effects of Ionizing Radiation,” the patent extends through November 5, 2022. |
· | An Australian Patent (No. 2002309615) “Nutritional Supplements and Methods for Prevention, Reduction and Treatment of Radiation Injury” the patent extends through April 30, 2022. |
· | A South African Patent (No. 2003/4247) entitled “Methods and Composition for the Treatment of Diabetic Neuropathy.” The patent extends through December 18, 2021. |
· | A South African Patent (No. 2004/3364) “Nutritional Supplements and Methods for Prevention, Reduction and Treatment of Radiation Injury” the patent extends through May 1, 2022. |
· | A South African Patent (No. 2003/9802) entitled “Nutritional Supplements and Methods of Using Same” for a method for treating at least one symptom of arthritis. The patent extends through August 5, 2022. |
· | A South African Patent (No. 2004/4614) entitled “Methods for The Treatment of Peripheral Neural and Vascular Ailments.” The patent extends through November 5, 2022. |
· | A South African Patent (No. 2005/0517) entitled “Anti-Microbial Compositions & Methods for Using Same,” the patent extends through July 23, 2023. |
· | A South African Patent (No. 2004/3365) “Topical Compositions and Methods for Treatment of Adverse Effects of Ionizing Radiation,” the patent extends through November 5, 2022. |
· | An Israeli Patent (No. 159357) entitled “Nutritional Supplements and Methods of Using Same,” the patent extends through August 6, 2022. |
·
| An Indian Patent (No. 00004/MUMP/2004) entitled “A Nutritional Supplement.” The patent extends through August 6, 2022. |
These potential new products are in the development stage and no assurances can be given that commercially viable products will be developed from these patent applications. Prior to any new product being ready for sale, substantial resources will have to be committed for research, development, preclinical testing, clinical trials, manufacturing scale-up and regulatory approval. The Company faces significant technological risks inherent in developing these products. The Company may abandon some or all of the proposed new products before they become commercially viable. Even if the Company develops and obtains approval of a new product, if the Company cannot successfully commercialize it in a timely manner, its business and financial condition may be materially adversely affected.
The Company Will Need To Obtain Additional Capital To Support Long-Term Product Development And Commercialization Programs.
The Company’sOur ability to achieve and sustain operating profitability depends in large part on theour ability to commence, execute and complete new and existing product innovation and commercialization, including the Joint Venture product development initiatives, and, if required, clinical programs for, andto obtain additional regulatory approvals for, prescription medications developed by Pharma, particularly in the U.S.United States and Europe. There iselsewhere. We can give no assurance that the Companywe will everbe able to achieve such product innovation and commercialization, to obtain suchany required approvals or to achieve significant levels of sales.
Should research or commercialization activity progress on certain formulations, resulting expenditures may require substantial financial support. The current sales levels of Cold-Eeze®OTC cold remedy products may not generate all the funds the Company anticipateswe anticipate will be needed to support current plans forfuture product acquisition or development.
The Company Accordingly, in addition to funding from operations, we may needin the short and long term seek to obtain additionalraise capital through the issuance of securities or to secure other financing sources to support its long-termour research, new product technologies, applications, licensing, commercialization and other development and commercialization programs. Additional funds may be soughtopportunities. If we obtain such funding through public and private stock offerings, arrangements with corporate partners, borrowings under linesthe issuance of credit or other sources. Access to, and availability of, funding for such activities may prove difficult or unattainable due to several factors including weak current and future economic conditions, reductionequity securities, it would result in the availabilitydilution of credit,current stockholders’ ownership in the Company. Any debt financing, if available, may include financial market volatility and recession.other covenants that could restrict use of proceeds of such financing or impose other business and financial restrictions on us. In addition, we may consider alternative approaches such as, licensing, joint venture, or partnership arrangements that meet our long term goals and objectives.
The amount of capital that may be needed to complete product development of Pharma’s potential productsinitiatives will depend on many factors including;which may include but are not limited to (i) the cost involved in applying for and obtaining FDA, international regulatory or other technical approvals, (ii) whether we elect to establish partnering arrangements for development, sales, manufacturing and marketing of such products, (iii) the level of future sales of OTC cold remedy products, and expense levels for marketing efforts, (iv) whether we can establish and maintain strategic arrangements for development, sales, manufacturing and marketing of our products, and (v) whether any or all of the options for our Common Stock issued to employees of the Company are exercised and the timing and amount of these exercises.
| · | the cost involved in applying for and obtaining FDA and international regulatory approvals; |
We may not be able to commercialize new products through our Joint VentureThe Joint Venture is at its early stage of development where product and market research has been initiated and new product initiatives are being evaluated and prioritized for future development and commercialization. Prior to any new product being available for sale, substantial resources will have to be committed to commercialize a product which may include research, development, preclinical testing, clinical trials, manufacturing scale-up and regulatory approval.
We face significant technological risks inherent in developing these products. The Joint Venture may be subject to delays and/or ultimately unable to successfully implement its business plan and strategy to develop and commercialize one or more non-prescription remedies using certain patented and proprietary TPMTM that exploit certain compounds that embody the TPMTM for use in a product combining one or more of such compounds with an OTC drug. The commercialization and ultimate product market acceptance is subject to, among other influences, consumer purchasing trends, demand for our OTC drug, health and wellness trends, regulatory factors, retail acceptance and overall economic and market conditions. As a consequence, we may suspend or abandon some or all of our proposed new products before they become commercially viable. Even if we develop and obtain approval of a new product, if we cannot successfully commercialize it in a timely manner, our business and financial condition may be materially adversely affected.
Instability and volatility in the financial markets could have a negative impact on our business, financial condition, results of operations and cash flows
During Fiscal 2008 through 2010, there has been substantial volatility in financial markets due at least in part to the global economic environment. In addition, there has been substantial uncertainty in the capital markets and access to financing is uncertain. Moreover, customer spending habits may be adversely affected by the current economic recession and prevailing high unemployment rates in the United States. These conditions could have an adverse effect on our industry and business, including our access to funding sources, demand for our products and our customers’ ability to continue to purchase our products, which could have a material adverse effect on our financial condition, results of operations and cash flows.
To the extent that we do not generate sufficient cash from operations, we may need to issue equity or to incur indebtedness to finance our growth. Recent turmoil and volatility in the credit markets and the potential impact on the liquidity of major financial institutions may have an adverse effect on our ability to fund our business strategy through borrowings, under either existing or newly created instruments in the public or private markets on terms that we believe to be reasonable, or at all.
| · | whether the Company elects to establish partnering arrangements for development, sales, manufacturing and marketing of such products; |
The sales of our primary product fluctuates by season and from Cold Season to Cold SeasonOur sales are derived principally from our OTC cold remedy products. As a consequence, a significant portion of our business is highly seasonal, which causes major variations in operating results from quarter to quarter. The third and fourth quarters generally represent the largest sales volume for our OTC cold remedy products. In addition, our sales are influenced by and subject to fluctuations in the timing of purchase and the ultimate level of demand for our products which are a function of the timing, length and severity of each cold season. Generally, a cold season is defined as the period of September to March (“Cold Season”) when the incidence of the common cold rises as a consequence of the change in weather and other factors.
| · | the level of future sales of Cold-Eeze® products, and expense levels for international sales and marketing efforts; |
There can be no assurance that we will be able to manage our working capital needs and inventory to meet the fluctuating demand for these products. Failure to accurately predict and respond to consumer demand may result in the production of excess inventory which may be expensive to store or which we may be required to dispose if such excess inventory remains unsold. Conversely, if products achieve greater success than anticipated for any given quarter, this may result in insufficient inventory to meet customer demand.
| · | whether the Company can establish and maintain strategic arrangements for development, sales, manufacturing and marketing of its products; and |
Our performance may fluctuate when our retail customers are affected simultaneously by the same economic, regulatory or health and wellness factors | · | whether any or all of the outstanding options are exercised and the timing and amount of these exercises. |
Manybusiness based upon consumer purchasing trends, demand for cold remedy products and overall economic and market conditions. Consequently, many retailers will likely be influenced at the same time by similar economic conditions, regulatory factors or health and wellness trends, which can affect the level of the foregoing factors are not within the Company’s control. If additional funds are requireddemand for our products. It is reasonable to expect that, if one retailer reduces or delays its purchasing in response to a general economic, regulatory or health and such funds are not available on reasonable terms, the Companywellness factor, other retailers may havealso decide to reduce its capital expenditures, scale back its developmentor delay their purchasing at approximately the same time. Accordingly, our sales are subject to fluctuations as a result of such factors.
We have a concentration of sales to and accounts receivable from several large retail customers
Although we have a broad range of retail customers that includes many large wholesalers, mass merchandisers and multiple outlet pharmacy and food chains, our five largest customers account for a significant percentage of our sales – 61% and 56% of total sales for Fiscal 2010 and 2009, respectively. In addition, retail customers comprising the five largest accounts receivable balances represented 51% and 66% of total accounts receivable balances at December 31, 2010 and 2009, respectively. We extend credit to retail customers based upon an evaluation of their financial condition and credit history, and collateral is not generally required. If one or more of these large retail customers cannot pay, the write-off of their accounts receivable could have a material adverse effect on our operations and financial condition. The loss of sales to any one or more of these large retail customers would also have a material adverse effect on our financial condition, results of operations and cash flows.
Our future success depends on the continued sales of our principal product
For Fiscal 2010 and 2009, our cold remedy products, principally Cold-EEZE®, represented approximately 96% and 92%, respectively, of our total sales. Accordingly, we depend on the continued acceptance of Cold-EEZE® products by our customers. However, there can be no assurance that Cold-EEZE® products will continue to receive or maintain market acceptance. The inability to successfully commercialize Cold-EEZE® in the future, for any reason, would have a material adverse effect on our financial condition, prospects and ability to continue operations.
Our products and potential new products reduce its workforce and out-licenseare or may be subject to others, products or technologies that the Company otherwise would seek to commercialize itself. Any additional equity financing will be dilutive to stockholders, and any debt financing, if available, may include restrictive covenants.extensive governmental regulation
The Company’s Products and Potential New Products Are Subject to Extensive Governmental Regulation.
The Company’sOur business is regulated by various agencies of the states and localities where itsour products are sold. Governmental regulations in foreign countries where the Company planswe plan to commence or expand sales may prevent or delay entry into a market or prevent or delay the introduction, or require the reformulation of certain of itsour products. In addition, no prediction can be made as to whether new domestic or foreign legislation regulating our activities will be enacted. Any new legislation could have a material adverse effect on itsour business, financial condition and operations. Non-compliance with any applicable requirements may subject the Companyus or the manufacturers of itsour products to sanctions,agency action, including warning letters, fines, product recalls, seizures and seizures.injunctions.
Cold Remedy Products. The manufacturing, processing, formulation, packaging, labeling and advertising of theour cold remedy products are subject to regulation by several federal agencies, including:
·including (i) the FDA;
·FDA, (ii) the Federal Trade Commission (“FTC”);
·, (iii) the Consumer Product Safety Commission;
·Commission, (iv) the United States Department of Agriculture;
·Agriculture, (v) the United States Postal Service;
·Service, (vi) the United States Environmental Protection Agency;Agency and
· (vii) the United States Occupational Safety and Health Administration.
In particular,addition to OTC and prescription drug products, the FDA regulates the safety, manufacturing, labeling and distribution of dietary supplements, including vitamins, minerals and herbs, food additives, food supplements, over-the-counter and prescription drugs and cosmetics. The FTC also has overlapping jurisdiction with the FDA to regulate the promotion and advertising of vitamins, over-the-counter drugs, cosmetics and foods. In addition, theour cold remedy products are homeopathic remedies which are regulatedsubject to standards established by the Homeopathic Pharmacopoeia of the United States (“HPUS”). HPUS sets the standards for source, composition and preparation of homeopathic remedies which are officially recognized inunder the Federal Food, Drug and Cosmetics Act, of 1938.as amended.
Pharma. The preclinicalPreclinical development, clinical trials, product manufacturing, labeling, distribution and marketing of Pharma’s potential new products are also subject to federal and state regulation in the United States and other countries. Clinical trials and product marketing and manufacturing are subject to the rigorous review and approval processes of the FDA and foreign regulatory authorities. To obtain approval of a new drug product, a company must demonstrate through adequate and well-controlled clinical trials that the drug product is safe and effective for its intended use. Obtaining FDA and other required regulatory approvals is lengthy and expensive. Typically, obtaining regulatory approval for pharmaceutical products requires substantial resources and takes several years. The length of this process depends on the type, complexity and novelty of the product and the nature of the disease or other indication to be treated. Preclinical studies must comply with FDA regulations. Clinical trials must also comply with FDA regulations to ensure safety of the human subjects in the trial and may require large numbers of test subjects, complex protocols and possibly lengthy follow-up periods. Consequently, satisfaction of government regulations may take several years, may cause delays in introducing potential new products for considerable periods of time and may require imposing costly procedures upon the Company’sour activities. If regulatory approval of new products is not obtained in a timely manner or not at all, the Companywe could be materially adversely affected. Even if regulatory approval of new products is obtained, such approval may impose limitations on the indicated uses for which the products may be marketed which could also materially adversely affect theour business, financial condition and future operationsoperations.
We have a history of losses and limited working capital
We have experienced net losses and declining sales for each of the Company.past four fiscal years. As a consequence, we have aligned our operations in Fiscal 2010 to focus principally in the research, development, manufacture, marketing and sale of OTC cold remedy and consumer products, natural base health products and other supplements and cosmeceuticals products.
The Company’s Business is Very Competitive and Increased Competition Could Have a Significant Impact on Earnings.
Both the non-prescription healthcare product and pharmaceutical industries are highly competitive. Many of the Company’s competitors have substantially greater capital resources, research and development staffs, facilities and experience than it does. These and other entities may have or may develop new technologies. These technologies may be used to develop products that compete with the Company.
The Company believes that the primary cold remedy product, Cold-Eeze®, has a competitive advantage over other cold remedy products because it has been clinically proven to reduce the severity and duration of common cold symptoms. Competition in Pharma’s potential product areas would most likely come from large pharmaceutical companies as well as other companies, universities and research institutions, many of which have resources far in excess of the Company’s resources.
The Company believes that its ability to compete depends on a number of factors, including price, product quality, availability, reliability and name recognition of its cold remedy products and Pharma’s ability to successfully develop and market prescription medications. There can be no assurance that this strategic focus will provide any revenue growth or that we will be successful in initiating or acquiring any new lines of business, or that any such new lines of business will achieve profitability. Furthermore as part of our strategic initiatives, we have implemented certain cost reduction programs and expanded our marketing investments during Fiscal 2010 that, in of themselves, may not be sufficient to return the Company will be able to compete successfully in the future. If the Company is unable to compete, its earnings may be significantly impacted.profitability. As of December 31, 2010, we had working capital of approximately $7.5 million.
The Company’s Future SuccessOur success is Dependentdependent on the Continued Services of Key Personnel Including The Chairman of the Board of Directors, President and Chief Executive Officer.key personnel
The Company’s futureOur success depends, in large part, onupon the continued service of key personnel. In particular,personnel, such as Mr. Ted Karkus, Chairman and Chief Executive Officer, Mr. Robert V. Cuddihy, Jr., Chief Operating Officer and Interim Chief Financial Officer, and certain managers and strategists within the Company. The loss of the services of Guy J. Quigley, Chairmanany one of the Board, President and Chief Executive Officerthem could have a material adverse effect on operations. The Company had an employment agreement with Mr. Quigley which expired on December 31, 2005. Future success and growth also depends on the Company’s ability to continue to attract, motivate and retain highly qualified employees. If the Company is unable to attract, motivate and retain qualified employees, our business and operations could be materially adversely affected.us.
The Company’s Future Success Depends onWe may not be able to hire, train, motivate, retain and manage professional staff; transitions in management may affect our business
We must hire, train, motivate, retain and manage highly skilled employees. Competition for skilled employees who can perform the Continued Employment of Richard A. Rosenbloom, M.D., Ph.D.,services that we require is intense and hiring, training, motivating, retaining and managing employees with Pharma.
Pharma’s potential new productsthe skills required is time-consuming and expensive. If we are being developed throughnot be able to hire sufficient professional staff to support our operations, or to train, motivate, retain and manage the efforts of Dr. Rosenbloom. The loss of his servicesemployees we do hire, it could have a material adverse effect on the Company’s product development and future operations.our business operations or financial results.
The Company’s Future Success DependsWe are dependent on our manufacturing facility and suppliers for certain of our cold remedy products
Our manufacturing, warehousing and distribution center is located in Lebanon, Pennsylvania. In the Continued Salesevent of its Principal Product.
For the fiscal year ended December 31, 2008, the Cold-Eeze®a disruption of this facility, we would outsource, at least temporarily, to third parties our manufacturing, warehousing and distribution requirements. While such secondary sources have been identified for our products, represented approximately 89% of the Company’s total sales. The Cold-Eeze® products continuesif we are unable to befind other sources or there were a major part of its business. Accordingly, the Company has to depend on the continued acceptance of Cold-Eeze® products by its customers. However, there can be no assurance that the Cold-Eeze® products will continue to receive market acceptance. The inability to successfully commercialize Cold-Eeze®delay in the future,ramp-up for any reason, wouldthe production and distribution operations for some of our products, it could have a material adverse effect on the financial condition, prospects and ability to continue operations of the Company.
The Company Has a Concentration of Sales to, and Accounts Receivable from, Several Large Customers.
Although the Company has a broad range of customers that includes many large wholesalers, mass merchandisers and multiple outlet pharmacy chains, the five largest customers account for a significant percentage of sales. These five customers accounted for 48% of total sales for the fiscal year ended December 31, 2008 and 49% of total sales for the fiscal year ended December 31, 2007. In addition, customers comprising the five largest accounts receivable balances represented 55% and 40% of total accounts receivable balances at December 31, 2008 and 2007, respectively. Credit is extended to customers based upon an evaluation of their financial condition and credit history, and collateral is not generally required. If one or more of these large customers cannot pay, the write-off of their accounts receivable would have a material adverse effect on the Company’s operations and financial condition. The loss of sales to any one or more of these large customers would also have a material adverse effect on the operations and financial condition of the Company.our operations.
The Company is Dependent on Third-Party Manufacturers and Suppliers for Certain of the Cold Remedy Products.
Allraw material active ingredients that are raw materials used in connection with the Cold-Eeze®Cold-EEZE® product are purchased from a single unaffiliated supplier. Should any of these relationshipsthe relationship terminate or the Company believesvendor become unable supply material, we believe that thecurrent contingency plans which have been formulated would prevent asuch termination from materially affecting its operations. However, if any of these relationships are terminated,our operations, although there may be delays in production of the Company’sour products until an acceptable replacement facilitysupplier is located. The Company continues
We continue to look for safe and reliable multiple-location sources for products and raw materials so that itwe can continue to obtain products and raw materials in the event of a disruption in itsour business relationship with any single manufacturer or supplier. While secondary sources have been identified for some of the Company’s productsour manufacturing and raw materials itsneeds, our inability to find otheralternative sources for some of its other productsour manufacturing and raw materials may have a material adverse effect on its operations.our operations and financial condition. In addition, the terms on which manufacturers and suppliers will make products and raw materials available to us could have a material effect on the Company’sour success.
The Companymanufacturing of OTC products and dietary supplements is Uncertainsubject to applicable current good manufacturing practice regulations and FDA inspections. We believe we are in substantial compliance with material provisions of the applicable cGMP regulations. Contract manufacturers are also subject to these same requirements and we require such compliance in our contractual relationships with such manufacturers. However, we cannot assure that the FDA will agree with our determination of compliance. If the FDA disagrees, it could, upon inspection of our facility, issue a notice of violations, referred to as a form FDA-483, or issue a Warning Letter, or both. If the FDA concludes that there is an imminent public health threat or if we fail to take timely corrective actions to the satisfaction of the FDA, the agency can initiate legal actions, such as seizure and injunction, which could include a recall order or the entry of a consent decree, or both. In addition, we could be subject to monetary penalties and even criminal prosecution for egregious conduct. The FDA could initiate similar legal actions against the contract manufacturer if it concludes its facility is not in compliance, which would affect the availability our products. While secondary sources have been identified for our products, our inability to find other sources or a delay in the ramp-up for the production and distribution operations for some of its products may have a material adverse effect on our operations.
We are uncertain as to Whether It Can Protect Its Proprietary Rights.
whether we can protect our proprietary rights
The strength of the Company’sour patent position and proprietary formulations and compounds may be important to itsour long-term success. The CompanyWe currently owns thirteenown numerous U.S. and twenty foreign patents in connection with potential products that are being developed by Pharma. In addition, the Company has been granted an exclusive agreement for worldwide representation, manufacturing, marketing and distribution rights to a zinc/gluconate/glycine lozenge formulation. That formulation has been patented in the United States, Germany, France, Italy, Sweden, Canada and Great Britain and a patent is pending in Japan. However, this patent in the United States expired in August 2004 and expired in June 2005 in all countries except Japan.
Thereproducts; however there can be no assurance that these patents and the Company’s exclusive licenseproprietary formulations and compounds will effectively protect itsour products from duplication by others. In addition, the Companywe may not be able to afford the expense of any litigation which may be necessary to enforce itsour rights under any of the patents. Furthermore, there can be no assurance that third parties will not obtain access to or independently develop our technologies, know-how, ideas, concepts and documentation, which could have a material adverse effect on our financial condition.
Although the Company believeswe believe that current and future products do not and will not infringe upon the patents or violate the proprietary rights of others, if any of theour current or future products do infringe upon the patents or proprietary rights of others, the Companywe may have to modify the products or obtain an additional license for the manufacture and/or sale of such products. The CompanyWe could also be prohibited from selling the infringing products. If the Company iswe were found to infringe on the proprietary rights of others, it is uncertain whether the Company willwe would be able to take corrective actions in a timely manner, upon acceptable terms and conditions, or at all, and the failure to do so could have a material adverse effect upon itsour business, financial condition and operations.
The Company also uses non-disclosure agreements with its employees, suppliers, consultantsOur existing products and customerspotential new products expose us to establish and protect the ideas, concepts and documentation of its confidential non-patented and non-copyright protected proprietary technology and know-how. However, these methods may not afford complete protection. There can be no assurance that third parties will not obtain access to or independently develop the Company’s technologies, know-how, ideas, concepts and documentation, which could have a material adverse effect on the Company’s financial condition.potential product liability claims
The Sales of the Company’s Primary Product Fluctuates by Season.
A significant portion of the Company’s business is highly seasonal, which causes major variations in operating results from quarter to quarter. The third and fourth quarters generally represent the largest sales volume for the cold remedy products. There can be no assurance that the Company will be able to manage its working capital needs and its inventory to meet the fluctuating demand for these products. Failure to accurately predict and respond to consumer demand may result in the production of excess inventory. Conversely, if products achieve greater success than anticipated for any given quarter, this may result in insufficient inventory to meet customer demand.
The Company’s Existing Products and Potential New Products Under Development Expose the Company to Potential Product Liability Claims.
The Company’sOur business results in exposure to an inherent risk of potential product liability claims, including claims for serious bodily injury or death caused by the sales of the Company’sour existing products and the clinical trials of products which are being developed. These claims could lead to substantial damage awards. The CompanyWe currently maintainsmaintain product liability insurance in the amount of, and with a maximum payout of, $25 million. A successful claim brought against the Companyus in excess of, or outside of, existing insurance coverage could have a material adverse effect on the Company’sour results of operations and financial condition. Claims against the Company,us, regardless of their merit or eventual outcome, may also have a material adverse effect on the consumer demand for its products.
The Company is Involved in Lawsuits Regarding Claims Relating to Certain of the Cold-Eeze® Products® products and other Business Matters.business matters
The Company is,We are, from time to time,time-to-time, subject to various legal proceedings and claims, either asserted or unasserted. Any such claims, including those contained in Item 3 of this report, whether with or without merit, couldcan be time-consuming and expensive to defend and couldcan divert management's attention and resources. While management believes that the Company haswe have adequate insurance coverage and, if applicable, accrued loss contingencies for all known matters, there is no assurance that the outcome of all current or future litigation will not have a material adverse effect on the Company.us.
A Substantial AmountCertain Officers, Directors, PSI Parent and former executives and their families own a substantial amount of the Company’s Outstandingour Common Stock is Owned by the Chairman
As of the Board and President and Executive Officers and Directors, as a Group Can Significantly Influence All Matters Voted on by Stockholders.
Guy J. Quigley, Chairman of the Board, President and Chief Executive Officer, through his beneficial ownership, has the power to vote approximately 25.4% of The Company’s common stock. Mr. Quigley and the otherMarch 1, 2011, our executive officers and directors, collectivelyand PSI Parent beneficially ownowned approximately 36.7%9.1% and 9.8%, respectively, of the common stock.our Common Stock and our former executives, Mr. Guy J. Quigley and Mr. Charles Phillips, and their immediate families beneficially owned, approximately 27.1% of our Common Stock. These individuals have significant influence over the outcome of all matters submitted to stockholders for approval, including the election of directors. Consequently, they exercise substantial controlinfluence over all major decisions including major corporate actions such as mergers and other business combinations transactions which could result in or prevent a change of control of the Company. Circumstances may occur in which the interests of these shareholders could be in conflict with the interests of other shareholders. Accordingly, your ability to influence us through voting your shares may be limited or the market price of our Common Stock may be adversely affected.
The Company’s Stock PriceOur stock price is Volatile.
volatile
The market price of the Company’s common stockour Common Stock has experienced significant volatility. From January 1, 2005 to January 31, 2009, the per share bid price has ranged from a low of approximately $2.85 to a high of approximately $16.94. There are several factors which could affect the price of the common stock,our Common Stock, including some of which are announcements of technological innovations for new commercial products by us or our competitors, developments concerning propriety rights, new or revised governmental regulation or general conditions in the market for the Company’sour products. Sales of a substantial number of shares by existing stockholders could also have an adverse effect on the market price of the common stock.our Common Stock.
Future Salessales of Sharesshares of the Company’sour Common Stock in the Public Market Could Adversely Affectpublic market could adversely affect the Trading Pricetrading price of Sharesshares of the Common Stock and the Company’s Abilityour ability to Raise Fundsraise funds in New Stock Offerings.
new stock offerings
Future sales of substantial amounts of shares of the Company’s common stockour Common Stock in the public market, or the perception that such sales are likely to occur, could affect prevailing trading prices of the common stock.our Common Stock. As of December 31, 2008, the CompanyMarch 1, 2011, we had 12,908,38314,749,877 shares of common stockCommon Stock outstanding.
The CompanyAs of March 1, 2011 we also hashave outstanding options, which are fully vested, to purchase an aggregate of 2,268,250363,250 shares of common stockour Common Stock at an average exercise price of $7.76$7.98 per share. If these options are exercised, and the holders of these options were to attempt to sell a substantial amount of their holdings at once, the market price of the common stockour Common Stock would likely decline. Moreover, the perceived risk of this potential dilution could cause stockholders to attempt to sell their shares and investors to “short” theour stock, a practice in which an investor sells shares that he or she does not own at prevailing market prices, hoping to purchase shares later at a lower price to cover the sale. As each of these events would cause the number of shares of common stockCommon Stock being offered for sale to increase, the common stock’sour Common Stock’s market price would likely further decline. All of these events could combine to make it very difficult for the Companyus to sell equity or equity-related securities in the future at a time and price that it deemswe deem appropriate.
The Company Does Not IntendWe do not intend to Pay Cash Dividendspay cash dividends in the Foreseeable Future.foreseeable future
The Company hasWe have not paid cash dividends on its common stockour Common Stock since our inception. TheOur intention of the Company is to retain earnings, if any, for use in the business and doeswe do not anticipate paying any cash dividends to stockholders in the foreseeable future.
The Company’sOur Articles of Incorporation and By-laws Contain Certain Provisionscontain certain provisions that May Be Barriersmay be barriers to a Takeover.takeover
The Company’sOur Articles of Incorporation and By-laws contain certain provisions which may deter, discourage, or make it difficult for another person or entity to assumegain control of the Company by another corporation or person through a tender offer, merger, proxy contest or similar transaction or series of transactions. These provisions may deter a future tender offer or other takeover attempt. Some stockholders may believe such an offer to be in their best interest because it may include a premium over the market price of the common stockour Common Stock at the time. In addition, these provisions may assist current management in retaining its position and place it in a better position to resist changes which some stockholders may want to make if dissatisfied with the conduct of the Company’sour business.
Instability And Volatility In The Financial Markets Could Have A Negative Impact On The Company’s Business, Financial Condition, Results Of Operations And Cash Flows.
During recent months, there has been substantial volatility and a decline in financial markets due at least in partWe have agreed to the deteriorating global economic environment. In addition, there has been substantial uncertainty in the capital markets and access to financing is uncertain. Moreover, customer spending habits may be adversely affected by the current economic crisis. These conditions could have an adverse effect on the Company’s industry and business, including the Company’s financial condition, results of operations and cash flows.
To the extent that the Company does not generate sufficient cash from operations, it may need to incur indebtedness to finance plans for growth. Recent turmoil in the credit markets and the potential impact on the liquidity of major financial institutions may have an adverse effect on the Company’s ability to fund its business strategy through borrowings, under either existing or newly created instruments in the public or private markets on terms that the Company believes to be reasonable, if at all.
The Company Has Agreed to Indemnify Itsindemnify our Officers and Directors From Liability.from liability
SectionsIn accordance with sections 78.7502 and 78.751 of the Nevada General Corporation Law allow the Company toour Articles of Incorporation provide that we will indemnify any person who is or was made a party to, or is or was threatened to be made a party to, any pending, completed, or threatened action, suit or proceeding because he or she is or was a director, officer, employee or agent of the Company or is or was serving at the Company’s request as a director, officer, employee or agent of any corporation, partnership, joint venture, trust or other enterprise. These provisions permit the Companyus to advance expenses to an indemnified party in connection with defending any such proceeding, upon receipt of an undertaking by the indemnified party to repay those amounts if it is later determined that the party is not entitled to indemnification. In August 2009, we entered into a standard form of indemnity agreement with each member of our Board of Directors, Mr. Karkus and Mr. Cuddihy. These agreements provide, among other things, that we will indemnify each director, Mr. Karkus and Mr. Cuddihy in the event they become a party or otherwise a participant in any action or proceeding on account of their service as a director or officer of the Company (or service for another corporation or entity in any capacity at the request of the Company) to the fullest extent permitted by applicable law. These indemnity provisions may also reduce the likelihood of derivative litigation against directors and officers and discourage or deter stockholders from suing directors or officers for breaches of their duties to the Company, even though such an action, if successful, might otherwise benefit the Company or its stockholders. In addition, to the extent that the Company expendswe expend funds to indemnify directors and officers, funds will be unavailable for operational purposes.
We have identified material weaknesses in our internal control environment for the period from April 1, 2009 through December 31, 2009 and Fiscal 2010
ITEM 1B. UNRESOLVED STAFF COMMENTSA material weakness is a deficiency, or combination of deficiencies in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the financial statements will not be prevented or detected on a timely basis. In relation to our Financial Statements for Fiscal 2009, in connection with its review of the Company’s internal control process over financial reporting, management identified as a consequence of certain events occurring during the second quarter of Fiscal 2009 the following material weaknesses in our internal control environment: (i) lack of management continuity due to changes in executive management and (ii) lack of documentation and/or the availability of documentation or records within our files of business transactions, contracts and/or evaluations conducted by the Company. Additionally, during a portion of Fiscal 2009, we also identified and initiated remediation program to address our lack of sufficient subject matter expertise in at least two of the following significant areas: (a) accounting for and the disclosure of complex transactions and (b) the selection, monitoring and evaluation of certain vendors that provided services to Pharma.
In relation to our Financial Statements for Fiscal 2010, during the third and fourth quarter, we implemented a new accounting and operating software and hardware platform (“ERP System”) to upgrade and integrate the company’s operations onto a common, state-of-the-art ERP System. The new ERP System is projected to provide management with improved data gathering, processing, retrieval and analysis on a more timely and cost effective basis than its prior methods and systems. The installation and transition period of the new ERP System was from June to December 2010.
However, during the transition period, certain personnel had significant access to and certain initial processing responsibilities within the ERP System as part of the installation, integration testing, launch, shakedown and training processes. Specifically, such personnel had access to certain processing functions within the various software applications whereby they could, enter, process, record and report transactions without our customary level of segregation of duties. Although there was significant oversight by management during the transition period, there were limited, appropriately trained staff available to provide adequate separation of duties during the transition period.
Following the identification of these material weaknesses, management took measures and plans to continue to take measures to remediate these weaknesses and deficiencies. However, the implementation of these measures may not fully address these weaknesses. A failure to correct these weaknesses or other control deficiencies or a failure to discover and address any other control deficiencies could result in inaccuracies in our consolidated financial statements and could impair our ability to comply with applicable financial reporting requirements and related regulatory filings on a timely basis or could cause investors to lose confidence in our reported financial information, which could have a negative impact on our financial condition and stock price.
Item 1B. | Unresolved Staff Comments |
Not Applicableapplicable.
TheOur corporate office of The Quigley Corporationheadquarters is located at 621 Shady Retreat Road,in Doylestown, Pennsylvania. ThisWe purchased this property with an area ofin 1998. Our headquarters is approximately 13,000 square feet and is comprised principally of office space and limited warehousing and storage area.
Our principal manufacturing facility is located in Lebanon, Pennsylvania. The facility was purchased in November 1998 and refurbished during 1999.October 2004. The Company occupies warehouse space in Las Vegas, Nevada at a current monthly cost of $2,772. This Nevada locationfacility has a three-year lease that expires in July 2009. In addition to storage facilities at the manufacturing subsidiary’s locations, the Company also stores product in a number of additional warehouses in Pennsylvania with storage charges based upon the quantities of product being stored.
The manufacturing facilities of the Company are located in each of Elizabethtown and Lebanon, Pennsylvania. The facilities were purchased effective October 1, 2004. In total, the facilities have a total area of approximately 73,00057,500 square feet, combining bothcomprised of manufacturing, warehousing and office space. On February 2,Effective in June 2009, the Company announced its intention to close thewe closed our 15,500 square foot Elizabethtown, Pennsylvania manufacturing location which may resultand consolidated our manufacturing operations in the disposalLebanon facility. At December 31, 2010, the net value of thisthe Elizabethtown facility in the future.amount of $138,000 is classified as an asset held for sale. In February 2011, the Elizabethtown facility was sold and we derived net proceeds from the sale of approximately $166,000.
The Company believesIn addition to warehousing and storage capacity at the Lebanon facility, we also stored certain inventory on a short term basis at an outside side warehouse. We believe that itsour existing facilities are adequate at this time.
ITEM 3. LEGAL PROCEEDINGS
TESAURO AND ELEY, ET AL. VS. THE QUIGLEY CORPORATION (currently PROPHASE LABS, INC.) VS. JOHN C. GODFREY, ET AL.
(CCP of Phila., August Term 2000, No. 001011)
In September 2000, the CompanyThis action was suedcommenced by two individuals (Jason Tesauro and Elizabeth Eley, both residents of Georgia), allegedly on behalf of a "nationwide class" of "similarly situated individuals,"us in November 2004 in the Court of Common Pleas of PhiladelphiaBucks County, Pennsylvania. The Complaint further alleges that the plaintiffs purchased certain Cold-Eeze products between August 1996, and November 1999, based upon cable television, radio and internet advertisements, which allegedly misrepresented the qualities and benefits of the Company's products. The Complaint, as pleaded originally, requested an unspecified amount of damages for violations of Pennsylvania's consumer protection law, breach of implied warranty of merchantability and unjust enrichment, as well as a judicial determination that the action be maintained as a class action. In October 2000, the Company filed Preliminary Objections to the Complaint seeking dismissal of the action. The court sustained certain objections, thereby narrowing plaintiffs' claims.
In May 2001, plaintiffs filed a motion to certify the putative class. The Company opposed the motion. In November 2001, the court held a hearing on plaintiffs' motion for class certification. In January 2002, the court denied in part and granted in part plaintiffs' motion. The court denied plaintiffs' motion to certify a class based on plaintiffs' claims under Pennsylvania's consumer protection law, under which plaintiffs sought treble damages, effectively dismissing this cause of action; however, the court certified a class based on plaintiffs' secondary breach of implied warranty and unjust enrichment claims. In August, 2002, the court issued an order adopting a form of Notice of Class Action to be published nationally. Significantly, the form of Notice approved by the court included a provision which limits the potential class members who may potentially recover damages in this action to those persons who present a proof of purchase of Cold-Eeze during the period August 1996 and November 1999.
Afterward, a series of pre-trial motions were filed raising issues concerning trial evidence and the court's jurisdiction over the subject matter of the action. In March, 2005, the court held oral argument on these motions.
Significantly, on November 8, 2006, the Court entered an Order dismissing the case in its entirety on the basis that the action was preempted by federal law. The plaintiffs appealed the Court's decision in December, 2006 to the Superior Court of the Commonwealth of Pennsylvania. On February 19, 2008, the Superior Court upheld defendant's appeal and remanded the case to the Philadelphia County Court of Common Pleas for trial.
The case commenced trial on February 2, 2009. On February 6, 2009, the jury returned a verdict in favor of the Company on all counts. Plaintiffs had to February 17, 2009, to file post-trial motions, the first step in the appeal process. No post-trial motions were filed by the plaintiffs. At this time the Company has no notice as to whether the plaintiffs will attempt to perfect an appeal.
THE QUIGLEY CORPORATION VS. JOHN C. GODFREY, ET AL.
(Bucks Co. CCP, No. 04-07776)
In this action, which was commenced in November 2004, the Company is seeking declaratory and injunctive reliefPennsylvania against John C. Godfrey, Nancy Jane Godfrey, and Godfrey Science and Design, Inc. requestingfor injunctive relief regarding the Cold-Eeze trade name andCold-EEZE® trademark; injunctive relief relating to the Cold-EezeCold-EEZE® formulations and manufacturing methods; injunctive relief for breach of the duty of loyalty, and declaratory judgment pendingregarding various payments that the Company's payment of commissionsdefendants assert are owing to defendants. The Company's Complaintthem. Our complaint is based in part upon certain contracts with defendants whereby we obtained the Exclusive Representationexclusive right to manufacture and Distribution Agreementdistribute product pursuant to a basic patent and also obtained various consulting services (the "Agreements"). Subsequent to entering into the Agreements, the defendants took various actions that we believe were in breach of the Agreements. We instituted the action because of defendants' threats to deal with other parties and to use the Company’s Cold-EEZE® trademark and the Consulting Agreement (together the "Agreements") entered into between the defendantstrade secrets that we developed during our manufacture of Cold-EEZE®. Both because of their breaches and the Company. The Companyexpiration of the basic patent, we terminated the Agreements for the defendants' alleged material breaches of the Agreements. Defendants have answered the complaint and asserted counterclaims against the Company seeking remediescounterclaims. They seek monetary damages and counter injunctive and declaratory relief relative to the Company's trademark and other intellectual property. The monetary relief sought by the defendants is based on their claim that they were not paid various amounts asserted to be due under the Agreements. The Company believesThis claim is estimated to be in excess of $5.0 million. We believe that the defendants' counterclaims are without merit and isare vigorously defending those counterclaims and isare prosecuting itsour action on itsthe complaint.
The discovery phase of pre-trialPre-trial discovery is nearing completion.ongoing. Defendants moved for partial summary judgment, and the Companywe filed a response and cross-motion for summary judgment. On August 21, 2008, the court denied both motions for summary judgment. The case has not been assigned to a trial calendar, although it is possible that the case will be listed for trial in 2009.2011.
At this time no prediction as to the outcome of this action can be made.
NICODROPS, INC. VS. QUIGLEY MANUFACTURING, INC.
On January 30, 2006, Quigley Manufacturing, Inc., a wholly-owned subsidiary of The Quigley Corporation, was put on notice of a claim by Nicodrops, Inc. Nicodrops, Inc. has claimed that the packaging contained incorrect expiration dates and caused it to lose sales through two (2) retailers. The total alleged sales of Nicodrops was approximately $250,000 and Nicodrops is claiming unspecified damages exceeding $2,000,000.
No suit has been filed. The Company is investigating this claim. Based on its investigation to date, the Company believes the claim is without merit. However, at this time no prediction can be made as to the outcome of this case.
THE QUIGLEY CORPORATION (currently PROPHASE LABS, INC.)VS. WACHOVIA INSURANCE SERVICES, INC. AND FIRST
UNION INSURANCE SERVICES AGENCY, INC.
The Quigley CorporationWe instituted a Writ of Summons against Wachovia Insurance Services, Inc. and First Union Insurance Services Agency, Inc. on December 8, 2005.2005 in the Court of Common Pleas of Bucks County, Pennsylvania. The purpose of this suit was to maintain an action and toll the statute of limitation against The Quigley Corporation'sour insurance broker who failed to place excess limits coverage for the Companyus for the period from November 29, 2003 until April 6, 2004. As a result of the defendant's failure to place insurance and to notify the Company of its actions,us thereof, certain pending actions covered by the Company'sour underlying insurance at the present time may result in certain cases presentlywhich are currently being defended by insurance counsel and the underlying insurance carrier tomay cause an exhaustion of the underlying insurance for the policy periods ending November 29, 2004 and November 29, 2005. Any case in which an alleged action arose byrelating to the use of COLD-EEZECold-EEZE® Nasal Spray from November 29, 2003 to April 6, 2004 is not covered by excess insurance.
The Company'sOur claim against Wachovia Insurance Services, Inc. and First Union Insurance Services Agency, Inc. is for negligence and for equitable insurance for these claims based on the Company'sour undertaking of certain attorneys'attorneys’ fees and costs of settlement for claims that should have been covered by underlying insurance placed by Wachovia Insurance Services, Inc.
At this time no prediction can be made as to the outcome of any action against Wachovia Insurance Services, Inc. and First Union Insurance Services Agency, Inc.
TERMINATED LEGAL PROCEEDINGS
CAROLYN SUNDERMEIERTHOMAS A. SIMONIAN VS. THE QUIGLEY CORPORATION (currently PROPHASE LABS, INC.)
(Pa. C.C.P., Bucks County, Docket No.: 07-01324-26-2)On February 24, 2010, an action was commenced in the United States District Court for the Northern District of Illinois Eastern Division by Mr. Thomas Simonian against us for false patent marketing under 35 U.S.C. § 292. Mr. Simonian claims that our Cold-EEZE® packaging references certain patents which have been expired since June 10, 2005 and August 3, 2007. On such information and belief, Mr. Simonian claims that the Company marks certain of its Cold-EEZE® branded products with the expired patents with the intent to deceive the public and to gain a competitive advantage in the market. Mr. Simonian is seeking an award of monetary damages.
We are investigating this claim. At this time no prediction can be made as to the outcome of this case.
PUBLIC PATENT FOUNDATION, INC. VS. THE QUIGLEY CORPORATION (currently PROPHASE LABS, INC.)
On February 16, 2007, plaintiff24, 2010, an action was commenced in the United States District Court for the Southern District of New York by Public Patent Foundation, Inc. (“PPF”) against us for false patent marketing under 35 U.S.C. § 292. PPF claims that our Cold-EEZE® packaging references certain patents which have been expired since June 10, 2005 and August 3, 2007. On such information and belief, PPF claims that the Company marks certain of its Cold-EEZE® branded products with the expired patents with the intent to deceive the public and to gain a competitive advantage in the market. PPF is seeking an award of monetary damages.
We are investigating this claim. In the interim, we have filed a Motion to Dismiss for Failure to State a Claim which is currently pending before the court. At this time no prediction can be made as to the outcome of this case.
PROPHASE LABS, INC (formerly THE QUIGLEY CORPORATION) VS. GUY QUIGLEY, GARY QUIGLEY, SCANDA SYSTEMS LIMITED, SCANDA SYSTEMS LTD, CHILESHA HOLDINGS LTD, KEVIN BROGAN, INNERLIGHT HOLDINGS, INC., GEORGE LONGO, GRAHAM BRANDON, PACIFIC RIM PHARMACEUTICALS LTD AND JOHN DOE DEFENDANTS
On August 23, 2010, we initiated an action in the Court of Common Pleas offor Bucks County, Pennsylvania. The complaint was served onThis action is against certain former officers and directors of the Company, on February 20, 2007.including a shareholder that beneficially owns approximately 20.2% of our Common Stock, and against certain third parties (a “Complaint”). The action allegesCompany has asserted claims arising from, among other things, a variety of transactions and payments previously made or entered into by the plaintiff suffered certain lossesCompany. All of the transactions and injuries as a resultevents that are the subject of using the Company's nasal spray product. Plaintiff's complaint consistsComplaint occurred prior to June 2009 and the installation of counts for negligence, strict products liability (failure to warn), strict products liability (defective design), breachthe current Board of express and implied warranties, and violations under the Pennsylvania Unfair Trade Practices and Consumer Protection Law and other consumer protection statutes.Directors.
Other Litigation
This action was recently settled atIn the directionnormal course of the insurance carrier outits business, we are named as defendant in legal proceedings. It is our policy to vigorously defend litigation and/or enter into settlements of insurance proceeds.claims where management deems appropriate.
MONIQUE FONTENOT DOYLE VS. THE QUIGLEY CORPORATION
(U.S.D.C., W.D. La. Docket No.: 6:06CV1497)
On August 31, 2006, the plaintiff filed an action against the Company in the United States District Court for the Western District of Louisiana (Lafayette-Opelousas Division). The action alleges that the plaintiff suffered certain losses and injuries as a result of the Company's nasal spray product. Among the allegations of plaintiff are breach of express warranties and damages pursuant to the Louisiana Products Liability Act.
This case was turned over to The Quigley Corporation for defense and settlement and it was settled for less than the cost of defense after discovery was partially completed. The cost of defense and the settlement remain claims against Wachovia Insurance Services, Inc. and First Union Insurance Services Agency, Inc. The Company's claim against Wachovia Insurance Services, Inc. and First Union Services Agency, Inc. is for negligence and for equitable insurance.
HOWARD POLSKI AND SHERYL POLSKI VS. THE QUIGLEY CORPORATION, ET AL.
(U.S.D.C., D. Minn. Docket No.: 04-4199 PJS/JJG)
On August 12, 2004, plaintiffs filed an action against the Company in the District Court for Hennepin County, Minnesota, which was not served until September 2, 2004. On September 17, 2004, the Company removed the case to the United States District Court for the District of Minnesota. The action alleges that plaintiffs suffered certain losses and injuries as a result of the Company's nasal spray product. Among the allegations of plaintiffs are negligence, products liability, breach of express and implied warranties, and breach of the Minnesota Consumer Fraud Statute.
On September 5, 2007, the Company obtained a judgment in its favor, as a matter of law, and that decision was appealed to the Eighth Circuit Court of Appeals. On August 13, 2008, the Eighth Circuit Court of Appeals upheld the judgment in favor of the Company. The plaintiffs had until December 3, 2008 to file a Petition for Allocatur to the Supreme Court of the United States. No Petition for Allocatur was filed in this case and the Company has a final judgment in its favor.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDERMATTERS AND ISSUER PURCHASES OF EQUITY SECURITIESItem 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
PERFORMANCE CHART
The following graph reflects a five-year comparison, calculated on a dividend reinvested basis, of the cumulative total stockholder return on the Common Stock of the Company, a “peer group” index classified as drug related products by Hemscott Group Ltd., (“Hemscott Group Index”) and the NASDAQ Market Index. The comparisons utilize an investment of $100 on December 31, 2003 for the Company and the comparative indices, which then measure the values for each group at December 31 of each year presented. There can be no assurance that the Company’s stock performance will continue with the same or similar trends depicted in the following performance graph.
Market Information
The Company’sOur Common Stock $.0005 par value, is currently traded on The NASDAQ Global Market under the trading symbol “QGLY.“PRPH.” The price set forth in the following table represents the high and low bid prices for our Common Stock for each quarter of the Company’s Common Stock.
| | Common Stock | |
| | | | | | | | | | | | |
| | 2008 | | | 2007 | |
Quarter Ended | | High | | | Low | | | High | | | Low | |
| | | | | | | | | | | | |
March 31 | | $ | 5.74 | | | $ | 4.17 | | | $ | 7.99 | | | $ | 5.09 | |
June 30 | | $ | 5.85 | | | $ | 4.54 | | | $ | 7.49 | | | $ | 4.55 | |
September 30 | | $ | 5.65 | | | $ | 4.58 | | | $ | 5.24 | | | $ | 2.92 | |
December 31 | | $ | 5.39 | | | $ | 2.85 | | | $ | 6.13 | | | $ | 3.75 | |
Such quotations reflect inter-dealer prices, without mark-up, mark-down or commissionFiscal 2010 and may not represent actual transactions.
The Company’s securities are traded2009, as reported on The NASDAQ Global Market and consequently stock prices are available daily as generated by The NASDAQ Global Market established quotation system.Market.
HoldersCommon Stock
| | 2010 | | | 2009 | |
Quarter Ended | | High | | | Low | | | High | | | Low | |
| | | | | | | | | | | | |
March 31, | | $ | 2.25 | | | $ | 1.90 | | | $ | 5.00 | | | $ | 3.86 | |
June 30, | | $ | 2.24 | | | $ | 1.09 | | | $ | 6.70 | | | $ | 3.53 | |
September 30, | | $ | 1.85 | | | $ | 0.80 | | | $ | 4.01 | | | $ | 1.58 | |
December 31, | | $ | 1.52 | | | $ | 1.00 | | | $ | 2.50 | | | $ | 1.45 | |
Holders
As of December 31, 2008,March 1, 2011, there were approximately 300272 holders of record of the Company’sour Common Stock, including brokerage firms, clearing houses, and/or depository firms holding the Company’s securities for their respective clients. The exact number of beneficial owners of the Company’sour securities is not known but exceeds 400.
The Company hasWe have not declared, nor paid, any cash dividends on itsour Common Stock.Stock since our Company’s inception. At this time, the Company intendswe intend to retain itsour earnings to finance future growth and maintain liquidity. Future cash dividends, if any, will be at the discretion of our Board of Directors and will depend upon, among other things, our future operations and earnings, capital requirements, general financial condition, contractual and financing restrictions and such other factors as our Board of Directors may deem relevant.
Warrants and Options
In addition to the Company’sour outstanding Common Stock, there are,were reserved for issuance 363,250 shares of our Common Stock underlying outstanding unexercised and vested options as of December 31, 2008, issued and outstanding Common Stock Purchase Warrants and Options that are exercisable2010 at the price-per-share stated and expire on the date indicated, as follows:
Description | | Number | | | Exercise Price | | Expiration Date |
Option Plan | | | 331,000 | | | $ | 5.1250 | | April 6, 2009 |
Option Plan | | | 160,500 | | | $ | 0.8125 | | December 20, 2010 |
Option Plan | | | 153,500 | | | $ | 1.2600 | | December 10, 2011 |
Option Plan | | | 291,250 | | | $ | 5.1900 | | July 30, 2012 |
Option Plan | | | 42,500 | | | $ | 5.4900 | | December 17, 2012 |
Option Plan | | | 370,500 | | | $ | 8.1100 | | October 29, 2013 |
Option Plan | | | 435,500 | | | $ | 9.5000 | | October 26, 2014 |
Option Plan | | | 483,500 | | | $ | 13.8000 | | December 11, 2015 |
At December 31, 2008, there were 2,268,250 unexercised and vested options of the Company’s Common Stock available for exercise.Description | | | Number | | | Exercise Price | | Expiration Date | | | Number | | | Exercise Price | | Expiration Date |
Option Plan | * | | | 45,500 | | | $ | 1.00 | | December 2017 | * | | | 6,000 | | | $ | 8.11 | | January 2012 |
Option Plan | * | | | 10,000 | | | $ | 1.26 | | December 2011 | * | | | 32,000 | | | $ | 8.11 | | October 2013 |
Option Plan | * | | | 1,000 | | | $ | 1.26 | | May 2011 | * | | | 10,000 | | | $ | 9.50 | | May 2011 |
Option Plan | * | | | 2,500 | | | $ | 1.26 | | June 2011 | * | | | 22,500 | | | $ | 9.50 | | June 2011 |
Option Plan | * | | | 7,500 | | | $ | 5.19 | | May 2011 | * | | | 10,000 | | | $ | 9.50 | | October 2011 |
Option Plan | * | | | 13,000 | | | $ | 5.19 | | June 2011 | * | | | 6,000 | | | $ | 9.50 | | November 2011 |
Option Plan | * | | | 4,000 | | | $ | 5.19 | | October 2011 | * | | | 6,000 | | | $ | 9.50 | | January 2012 |
Option Plan | * | | | 1,000 | | | $ | 5.19 | | November 2011 | * | | | 40,500 | | | $ | 9.50 | | October 2014 |
Option Plan | * | | | 5,000 | | | $ | 5.19 | | January 2012 | * | | | 4,000 | | | $ | 13.80 | | May 2011 |
Option Plan | * | | | 19,750 | | | $ | 5.19 | | July 2012 | * | | | 17,500 | | | $ | 13.80 | | June 2011 |
Option Plan | * | | | 12,000 | | | $ | 8.11 | | May 2011 | * | | | 15,000 | | | $ | 13.80 | | October 2011 |
Option Plan | * | | | 20,500 | | | $ | 8.11 | | June 2011 | * | | | 2,500 | | | $ | 13.80 | | November 2011 |
Option Plan | * | | | 8,000 | | | $ | 8.11 | | October 2011 | * | | | 10,000 | | | $ | 13.80 | | January 2012 |
Option Plan | * | | | 5,000 | | | $ | 8.11 | | November 2011 | * | | | 26,500 | | | $ | 13.80 | | December 2015 |
| | | | | | | | | | | | | | | | | | | | |
Subtotal | | | | 154,750 | | | | Subtotal | | | | 208,500 | | | | | | |
| | | | | | | | Grand Total Options | | | | 363,250 | | | | | | |
Securities Authorized Under Equity Compensation
The following table sets forth certain information regarding stock option and warrant grants made to employees, directors and consultants:
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
Plan Category | Number of Securities to be Issued Upon Exercise of Outstanding Options & Warrants (A) | | Weighted Average Exercise Price of Outstanding Options & Warrants (B) | | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column A) ( C ) | | Number of Securities to be Issued Upon Exercise of Outstanding Options & Warrants (A) | | | Weighted Average Exercise Price of Outstanding Options & Warrants (B) | | | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column A) ( C ) | |
| | | | | | | | | | | | | | | | |
Equity Plans Approved by Security Holders (1) | 2,268,250 | | $7.76 | | | 1,753,750 | | |
Equity Plans Approved by Security Holders (1,2,3) | | | | 1,299,750 | | | $ | 2.99 | | | | 1,000,375 | |
| (1) | An incentive stock option plan was instituted in 1997, (the “1997 Stock Option Plan”) and approved by the stockholders in 1998. Options pursuant to the 1997 Stock Option Plan have been granted to directors, executive officers, and employees. |
(1) An incentive stock option plan was instituted in Fiscal 1997, (the “1997 Plan”) and approved by the stockholders in Fiscal 1998. Options pursuant to the 1997 Option Plan have been granted to directors, executive officers and employees. At December 31, 2010, we are precluded from issuing any additional options or grants in the future under the 1997 Option Plan pursuant to the terms of the plan document. Options previously granted may continue to be available for exercise at any time prior to such options’ respective expiration dates.
ITEM 6. (2) On May 5, 2010, our shareholders approved the 2010 Equity Compensation Plan. The 2010 Equity Compensation Plan provides that the total number of shares of Common Stock that may be issued is equal to 900,000 shares plus up to 900,000 shares that are authorized for issuance but unissued under the 1997 Plan, an aggregate of 1.8 million shares. The 1997 Plan expired on December 2, 2007 and no additional awards may be made; however, as of March 31, 2010, there remained 1,449,750 shares subject to vested options that were authorized for issuance (the “Issued Options”) but were unissued under the 1997 Plan. As of December 31, 2010, 1,039,500 of the Issued Options under the 1997 Plan expired unexercised or were terminated (the “Expired Options”). As a consequence, these shares are deemed and remain unissued which up to a maximum of 900,000 shares become available for issuance under the 2010 Equity Compensation Plan and the remaining 139,500 options were deemed cancelled.
All of the Company’s employees, including employees who are officers or members of the Board are eligible to participate in the 2010 Equity Compensation Plan. Consultants and advisors who perform services for the Company are also eligible to participate in the 2010 Equity Compensation Plan. At December 31, 2010, we have granted 982,000 stock options, subject to vesting, under the 2010 Equity Compensation Plan and have charged to operations $42,000 for compensation expense for the fair value of the vested portion of the stock options as of December 31, 2010 (see Note 8 to Notes to Consolidated Financial Statements).
(3) On May 5, 2010, our shareholders approved the 2010 Directors’ Equity Compensation Plan. A primary purpose of the 2010 Directors’ Equity Compensation Plan is to provide us with the ability to pay all or a portion of the fees of Directors in restricted stock instead of cash. The 2010 Directors’ Equity Compensation Plan provides that the total number of shares of Common Stock that may be issued under the 2010 Directors’ Equity Compensation Plan is equal to 250,000. As of December 31, 2010, we granted 67,625 shares of our Common Stock valued at $90,000 for director compensation. At December 31, 2010, there are 182,375 shares of Common Stock that may be issued pursuant to the 2010 Directors Equity Compensation Plan.
Other Stock Issuances
SELECTED FINANCIAL DATAPursuant to the terms of Mr. Cuddihy’s employment agreement, which has a three year term, Mr. Cuddihy receives an annual grant of shares of Common Stock equal to $50,000, payable quarterly, promptly following the close of each quarter. The value of the shares is calculated based on the average closing price of the Company’s shares for the last five (5) trading days of the quarter in which the shares are earned. Mr Cuddihy earned and was issued an aggregate of 35,075 shares for Fiscal 2010 pursuant to the terms of the employment agreement.
Pursuant to the Original License Agreement with PSI Parent, we issued 1,440,000 shares of Common Stock having an aggregate value of approximately $2.6 million to PSI Parent. This issuance of the PSI Shares was in part the consideration paid for (i) an exclusive, royalty-free, world-wide (subject to certain limitations), paid-up license to exploit OTC drugs (and certain other products) that embody certain of PSI Parent’s PSI Technology and (ii) a non-exclusive, royalty-free, world-wide (subject to certain limitations) paid-up license to exploit certain compounds that embody the PSI Technology for use in a product combining one or more of such compounds with an OTC drug or in a product that is part of a regimen that includes the application of an OTC drug.
Item 6. | Selected Financial Data |
The following table sets forth the selected financial data of the Companyappearing in or derived from our consolidated financial statements for and at the end of the years ended December 31, 2010, 2009, 2008, 2007 2006, 2005 and 2004.
2006. The selected financial data presented below should be read in conjunction with “Management’sthe consolidated financial statements appearing elsewhere herein, and with Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operation” and the Company’s financial statements and notes thereto appearing elsewhere herein.Operations (in thousands, except per share amounts):
(Amounts in thousands, except per share data) | | Year Ended December 31, 2008 | | | Year Ended December 31, 2007 | | | Year Ended December 31, 2006 | | | Year Ended December 31, 2005 | | | Year Ended December 31, 2004 | | |
| | | Year Ended December 31, | |
| | | 2010 | | | 2009 | | | 2008 | | | 2007 | | | 2006 | |
Statement of Income Data: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net sales | | $ | 20,507 | | | $ | 28,242 | | | $ | 26,850 | | | $ | 33,185 | | | $ | 23,587 | | | $ | 14,502 | | | $ | 19,816 | | | $ | 20,507 | | | $ | 28,241 | | | $ | 26,850 | |
Gross profit | | $ | 11,413 | | | $ | 18,556 | | | $ | 17,545 | | | $ | 21,301 | | | $ | 13,546 | | | $ | 8,830 | | | $ | 11,569 | | | $ | 11,413 | | | $ | 18,556 | | | $ | 17,545 | |
(Loss) income - continuing operations | | $ | (6,410 | ) | | $ | (1,856 | ) | | $ | (547 | ) | | $ | 2,339 | | | $ | (1,060 | ) | |
Loss - continuing operations | | | $ | (3,501 | ) | | $ | (3,842 | ) | | $ | (6,409 | ) | | $ | (1,856 | ) | | $ | (547 | ) |
Income (loss) - discontinued operations (1) | | $ | 876 | | | $ | (602 | ) | | $ | (1,201 | ) | | $ | 878 | | | $ | 1,513 | | | | - | | | | - | | | | 875 | | | | (602 | ) | | | (1,201 | ) |
Net (loss) income | | $ | (5,534 | ) | | $ | (2,458 | ) | | $ | (1,748 | ) | | $ | 3,217 | | | $ | 453 | | |
Net loss | | | $ | (3,501 | ) | | $ | (3,842 | ) | | $ | (5,534 | ) | | $ | (2,458 | ) | | $ | (1,748 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Basic (loss) earnings per share: Continuing operations | | $ | (0.50 | ) | | $ | (0.14 | ) | | $ | (0.04 | ) | | $ | 0.20 | | | $ | (0.09 | ) | |
Basic earnings (loss) per share: | | | | | | | | | | | | | | | | | | | | | |
Continuing operations | | | $ | (0.25 | ) | | $ | (0.30 | ) | | $ | (0.50 | ) | | $ | (0.14 | ) | | $ | (0.04 | ) |
Discontinued operations | | $ | 0.07 | | | $ | (0.05 | ) | | $ | (0.10 | ) | | $ | 0.08 | | | $ | 0.13 | | | | - | | | | - | | | | 0.07 | | | | (0.05 | ) | | | (0.10 | ) |
Net (loss) income | | $ | (0.43 | ) | | $ | (0.19 | ) | | $ | (0.14 | ) | | $ | 0.28 | | | $ | 0.04 | | |
Diluted (loss) earnings per share: Continuing operations | | $ | (0.50 | ) | | $ | (0.14 | ) | | $ | (0.04 | ) | | $ | 0.17 | | | $ | (0.07 | ) | |
Net loss | | | $ | (0.25 | ) | | $ | (0.30 | ) | | $ | (0.43 | ) | | $ | (0.19 | ) | | $ | (0.14 | ) |
Diluted earnings (loss) per share: | | | | | | | | | | | | | | | | | | | | | |
Continuing operations | | | $ | (0.25 | ) | | $ | (0.30 | ) | | $ | (0.50 | ) | | $ | (0.14 | ) | | $ | (0.04 | ) |
Discontinued operations | | $ | 0.07 | | | $ | (0.05 | ) | | $ | (0.10 | ) | | $ | 0.07 | | | $ | 0.10 | | | | - | | | | - | | | | 0.07 | | | | (0.05 | ) | | | (0.10 | ) |
Net income (loss) | | $ | (0.43 | ) | | $ | (0.19 | ) | | $ | (0.14 | ) | | $ | 0.24 | | | $ | 0.03 | | |
Net loss | | | $ | (0.25 | ) | | $ | (0.30 | ) | | $ | (0.43 | ) | | $ | (0.19 | ) | | $ | (0.14 | ) |
Weighted average shares outstanding: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Basic | | | 12,878 | | | | 12,729 | | | | 12,245 | | | | 11,661 | | | | 11,541 | | | | 14,285 | | | | 12,963 | | | | 12,878 | | | | 12,729 | | | | 12,245 | |
Diluted | | | 12,878 | | | | 12,729 | | | | 12,245 | | | | 13,299 | | | | 14,449 | | | | 14,285 | | | | 12,963 | | | | 12,878 | | | | 12,729 | | | | 12,245 | |
| | As of December 31, 2008 | | | As of December 31, 2007 | | | As of December 31, 2006 | | | As of December 31, 2005 | | | As of December 31, 2004 | | | | | | | | | | | | | | | | | | | | | |
| | | As of December 31, | |
| | | 2010 | | | 2009 | | | 2008 | | | 2007 | | | 2006 | |
Balance Sheet Data: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Working capital | | $ | 14,072 | | | $ | 18,578 | | | $ | 20,541 | | | $ | 20,682 | | | $ | 17,853 | | | $ | 7,521 | | | $ | 11,475 | | | $ | 14,071 | | | $ | 18,578 | | | $ | 20,541 | |
Total assets | | $ | 24,369 | | | $ | 33,502 | | | $ | 34,845 | | | $ | 35,976 | | | $ | 31,530 | | | $ | 21,695 | | | $ | 21,330 | | | $ | 24,369 | | | $ | 33,502 | | | $ | 34,845 | |
Debt | | $ | - | | | $ | - | | | $ | - | | | $ | 1,464 | | | $ | 2,893 | | |
Stockholders’ equity | | $ | 17,774 | | | $ | 23,244 | | | $ | 25,529 | | | $ | 25,320 | | | $ | 21,902 | | | $ | 13,460 | | | $ | 14,059 | | | $ | 17,774 | | | $ | 23,244 | | | $ | 25,529 | |
(1) On February 29, 2008, the Companywe sold Darius to InnerLight Holdings, Inc. (See(see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, and Note 3 “Discontinued Operations” for additional information.)14 to the Financial Statements). The sale of this segment has been treated as discontinued operations and all periods presented have been reclassified.
Item 7. | | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSManagement’s Discussion and Analysis of Financial Condition and Results of Operations |
OverviewOur Business.
The Company, headquartered in Doylestown, Pennsylvania, is We are a leading manufacturer, marketer and distributor of a diversified range of homeopathic and health products which comprisethat are offered to the Cold Remedy and Contract Manufacturing segments. The Company isgeneral public. We are also involvedengaged in the research and development of potential natural base health products including, but not limited to, prescription medicines along with supplements and cosmeceuticals for human and veterinary use, which comprise the Ethical Pharmaceutical segment.products.
The Company’sOur primary business is currently the manufacture, distribution, marketing and distributionsale of over-the-counter (“OTC”) cold remedy products to the consumerconsumers through the over-the-counter marketplace.national chain, regional, specialty and local retail stores. One of the Company’s keyour principal products in its Cold Remedy segment is Cold-EezeCold-EEZEÒ, a zinc gluconate glycine product proven in two double-blind clinical studies to reduce the duration and severity of the common cold symptoms by nearly half. Cold-EezeCold-EEZEÒ is an established product in the health care and cold remedy market.
Effective October 1, 2004, the Company acquired substantially all of the assets of JoEl, Inc., the previous manufacturer of the Cold-Eeze lozenge product. This manufacturing entity, now called QMI, a wholly-owned subsidiary of the Company, will continue to produce lozenge product along with performing such operational tasks as warehousing For Fiscal 2010, 2009 and shipping the Company’s Cold-Eeze products. In addition, QMI, which is an FDA approved facility, has produced a variety of hard and organic candy for sale to third party customers in addition to performing contract manufacturing activities for non-related entities. On February 2, 2009, the Company announced its intention to close the Elizabethtown location of QMI and discontinue the hard candy business resulting in the consolidation of manufacturing2008, our revenues from continuing operations at the Lebanon location. This consolidation will have no impact on the production or distribution of the Cold-EezeÒ brand ofcome principally from our OTC cold remedy products.
The Company’s Cold Remedy segment reported a sales decrease in 2008 compared to 2007. This decrease may be attributable to continued customer review of inventory levels and product mix particularly in light of current market and economic conditions including higher than normal product returns. The cough/cold segment has been adversely affected in the past two cold seasons by the least incidence of colds by consumers in the last several years. The 2008 sales activity reflects the market wide decrease in cold remedy product consumption as supported by recent Information Resources Inc. (“IRI”) data, which was consistent throughout 2008. Cold-Eeze continues to compete with new products entering the category despite many of these products being without any evidence of clinical effectiveness, unlike Cold-Eeze which has been clinically proven to treat the common cold.Recent Developments
In 2008,Joint Venture – Phusion Laboratories, LLC
On March 22, 2010, the marginCompany, Phosphagenics Limited (“PSI Parent”), an Australian corporation, Phosphagenics Inc. (“PSI”), a Delaware corporation and subsidiary of PSI Parent, and Phusion Laboratories, LLC (the “Joint Venture”), a Delaware limited liability company, entered into a Limited Liability Company Agreement (the “LLC Agreement”) of the Cold Remedy segment was adversely affected as a result of decreased salesJoint Venture and higher than normal products returns along with product obsolescence costs. The consolidated margin was also impacted by reduced production at the manufacturing facilities resulting in a negative impact to margin. The 2008 margin was supported as a result of the discontinuation in May 2007 of royalty costs associated with the developer of Cold-Eeze along with a price increase of Cold-Eeze to the trade in July 2007. In 2008, the Company recognized an impairment charge of $300,000 due to adverse profit marginsadditional related to the hard candy business of QMI with such expense reflected in cost of sales. In February 2009, the Company announced plans to discontinue its hard candy business resulting in the closure of the Elizabethtown, Pennsylvania, manufacturing location in 2009 and consolidate its manufacturing capabilities to one location in order to improve manufacturing efficiencies. The facility located in Lebanon, Pennsylvania, currently manufactures the Cold-Eeze lozenge product and will continue to do so along with warehousing and distributing the Company’s range of cold remedy products.
In January 2001, the Company formed an Ethical Pharmaceutical segment, Pharma, that is under the direction of its Executive Vice President and Chairman of its Medical Advisory Committee. Pharma was formedagreements for the purpose of developing potential natural base health products, including, but not limitedand commercializing, for worldwide distribution and sale, a wide range of non-prescription remedies using PSI Parent’s proprietary patented TPM™ technology (“TPM”). TPM facilitates the delivery and depth of penetration of active molecules in pharmaceutical, nutraceutical, and other products. Pursuant to prescription medicines alongthe LLC Agreement, we and PSI each own a 50% membership interest in the Joint Venture.
In connection with supplementsthe LLC Agreement, PSI Parent granted to us, pursuant to the terms of a License Agreement, dated March 22, 2010 (the “Original License Agreement”), (i) an exclusive, royalty-free, world-wide (subject to certain limitations), paid-up license to exploit OTC drugs (and certain other products) that embody certain of PSI Parent’s TPM-related patents and cosmeceuticalsrelated know-how (collectively, the “PSI Technology”) and (ii) a non-exclusive, royalty-free, world-wide (subject to certain limitations) paid-up license to exploit certain compounds that embody the PSI Technology for humanuse in a product combining one or more of such compounds with an OTC drug or in a product that is part of a regimen that includes the application of an OTC drug.
Pursuant to the Original License Agreement, we issued 1,440,000 shares of our $0.0005 par value common stock (“Common Stock”) having an aggregate value of approximately $2.6 million to PSI Parent (such shares, the “PSI Shares”), and veterinary use. Pharma is currently undergoingmade a one-time payment to PSI Parent of $1.0 million. In accordance with a Contribution Agreement, dated March 22, 2010 (the “Contribution Agreement”), by and among us, PSI Parent, PSI, and the Joint Venture, we transferred, conveyed and assigned to the Joint Venture all of our rights, title and interest in, to and under the Original License Agreement, and the Joint Venture assumed, and undertook to pay, discharge and perform when due, all of our liabilities and obligations under and arising pursuant to the Original License Agreement (such actions, collectively, the “Assignment and Assumption”).
PSI Parent will conduct and oversee much of the product development, formulation, testing and other research and development activityneeded by the Joint Venture, and we will oversee much of the production, distribution, sales and marketing. The LLC Agreement provides that each member may be required, from time to time and subject to certain limitations, to make capital contributions to the Joint Venture to fund its operations, in complianceaccordance with regulatory requirements. The Company isagreed upon budgets for products to be developed. Specifically, in Fiscal 2010 we contributed $500,000 of initial capital. In addition, we are committed to fund up to $2.0 million, subject to agreed upon budgets (which have not yet been formally established), toward the initial stagesdevelopment and marketing costs of what may be a lengthy process to develop these patent applications into commercial products. The Company continues to invest significantly with ongoing research and development activities of this segment.
On February 29, 2008, the Company sold Darius to InnerLight Holdings, Inc., whose major shareholder is Mr. Kevin P. Brogan, the current president of Darius. The terms of the agreement included a cash purchase price of $1,000,000 by InnerLight Holdings, Inc.,new products for the stockJoint Venture. In Fiscal 2010, the newly formed Joint Venture incurred a loss of Darius$77,000. The Joint Venture has not engaged in any financial transactions, other than certain organizational expenses and its subsidiaries without guarantees, warranties or indemnifications. Darius, through its wholly-owned subsidiary, Innerlight Inc., constituted the Healthgeneral market and Wellness segment of the Company. The divestiture of Darius will provide clarityproduct analysis, as formal operations are not expected to commence until Fiscal 2011. At December 31, 2010, cash and equivalents includes $425,000 related to the Company’s strategic planJoint Venture which is expected to focus itsbe used by the Joint Venture to fund future endeavors inproduct development initiatives currently under consideration by PSI Parent, PSI and us. As of December 31, 2010, we have not established a pharmaceutical entity withformal commercialization program timeline for any specific OTC drug covered under the product license and we do not project that any OTC drug products and a pipeline of potential formulations that may lead to prescription and other medicinal products. The sale of this Health and Wellness segment has been treated as discontinued operations and all periods presented have been reclassified.will be available for shipment within the next twelve months.
Future revenues, costs, margins, and profits will continue to be influenced by the Company’s ability to maintain its manufacturing availability and capacity together with its marketing and distribution capabilities and the requirements associated with the development of Pharma’s potential prescription drugs and other medicinal products in order to continue to compete on a national and international level. The business development of the Company is dependent on continued conformity with government regulations, a reliable information technology system capable of supporting continued growth and continued reliable sources for product and materials to satisfy consumer demand.
Effect of Recent Accounting Pronouncements
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities”, including an amendment of FASB No. 115 ("FAS 159"). The Statement permits companies to choose to measure many financial instruments and certain other items at fair value in order to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. FAS 159 is effective for the Company beginning January 1, 2008. The adoption of this standard has not had a significant impact on the Company’s consolidated financial position, results of operations or cash flows.
In December 2007, the FASB issued Statement of Financial Accounting Standard No. 160, “Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51” (“FAS 160”). FAS 160 establishes accounting and reporting standards for the non-controlling interest in a subsidiary and for the retained interest and gain or loss when a subsidiary is deconsolidated. This statement is effective for financial statements issued for fiscal years beginning on or after December 15, 2008 with earlier adoption prohibited. The adoption of this standard is not expected to have a significant impact on the Company’s consolidated financial position, results of operations or cash flows.
In December 2007, the FASB issued SFAS No. 141R, "Business Combinations," (“SFAS 141R”) which establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquiree. SFAS 141R also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. SFAS 141R applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008, and interim periods within those fiscal years. The adoption of this standard will not have any impact on the Company’s consolidated financial position, results of operations or cash flows.
Critical Accounting Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
The Company is organized into three different but related business segments, Cold Remedy, Contract Manufacturing and Ethical Pharmaceutical. Revenue Recognition – Sales Allowances
When providing for the appropriate sales returns, allowances, cash discounts and cooperative incentive promotion costs each segment applies(“Sales Allowances”), we apply a uniform and consistent method for making certain assumptions for estimating these provisionsprovisions. These estimates and assumptions are based on historical experience, current trends and other factors that management believes to be relevant at the time the financial statements are applicable to that specific segment. Traditionally, these provisions are not material to net income inprepared. Management reviews the Contract Manufacturing segment. The Ethical Pharmaceutical segment does not have any revenues.accounting policies, assumptions, estimates and judgments on a quarterly basis. Actual results could differ from those estimates.
TheOur primary product, in the Cold Remedy segment, Cold-EezeCold-EEZEÒ, has been clinically proven in two double-blind studies to reduce the severity and duration of common cold symptoms. Accordingly, factors considered in estimating the appropriate sales returns and allowances for this product include it being:being (i) a unique product with limited competitors;competitors, (ii) competitively priced; promoted;priced, (iii) promoted, (iv) unaffected for remaining shelf lifeshelf-life as there is no product expiration date;date, and (v) monitored for inventory levels at major customers and third-party consumption data, such as IRI.data. In addition to Cold-EEZE®
At December 31,, we market and distribute Kids-EEZE® Chest Relief, Kids-EEZE® Cough Cold and Kids-EEZE® Allergy children OTC cold remedies (“Kids-EEZE® Products”). We introduced Kids-EEZE® Chest Relief in Fiscal 2008 and 2007expanded the Company included reductionsproduct line to accounts receivableinclude Kids-EEZE® Cough Cold and Kids-EEZE® Allergy in Fiscal 2010. We also manufacturer, market and distribute an organic cough drop and a Vitamin C supplement (“Organix”). Each of the Kids-EEZE® Products and Organix® products do carry shelf-life expiration dates for which we aggregate such new product market experience data and update its sales returns and allowances of $1,427,000 and $296,000, respectively, and cash discounts of $150,000 and $169,000, respectively. Additionally, current liabilitiesestimates accordingly. Sales Allowances estimates are tracked at December 31, 2008 and 2007 include $1,058,962 and $1,137,650, respectively for cooperative incentive promotion costs.
The roll-forward of the sales returns and allowance reserve ending at December 31 is as follows:
Account – Sales Returns & Allowances | | 2008 | | | 2007 | |
| | | | | | |
Beginning balance | | $ | 295,606 | | | $ | 473,176 | |
Provision made for future charges relative to sales for each period presented | | | 2,354,346 | | | | 1,104,161 | |
Current provision related to discontinuation of Cold-EezeÒ nasal spray | | | - | | | | - | |
Actual returns & allowances recorded in the current period presented | | | (1,222,907 | ) | | | (1,281,731 | ) |
Ending balance | | $ | 1,427,045 | | | $ | 295,606 | |
The increase in the 2008 provision was principally due to non-routine returns of obsolete productspecific customer and product mix realignment by certain of our customers. Also, the Company applies specific limits on product returns from customers,line levels and evaluates return requests from customers relative to the Cold Remedy segment.
Management believes there are no material charges to net income in the current period, related to sales from a prior period.
Revenue
Provisions to reserves to reduce revenues for cold remedy products that do not have an expiration date, include the use of estimates, which are applied or matched to the current sales for the period presented. These estimates are based on specific customer tracking and an overall historical experience to obtain an effective applicable rate, which is tested on an annual historical basis, and reviewed quarterly to ascertain the most applicable effective rate.quarterly. Additionally, the monitoring of current occurrences, developments by customer, market conditions and any other occurrences that could affect the expected provisions relative to net sales for the period presented are also performed.
We do not impose a period of time within which product may be returned. All requests for product returns must be submitted to us for pre-approval. The main components of our returns policy are: (i) we will accept returns that are due to damaged product that is un-saleable and such return request activity fall within an acceptable range, (ii) we will accept returns for products that have reached or exceeded designated expiration dates and (iii) we will accept returns in the event that we discontinue a product provided that the customer will have the right to return only such item that it purchased directly from us. We will not accept return requests pertaining to customer inventory “Overstocking” or “Resets”. We will only accept return requests for product in its intended package configuration. We reserve the right to terminate shipment of product to customers who have made unauthorized deductions contrary to our return policy or pursue other methods of reimbursement. We compensate the customer for authorized returns by means of a credit applied to amounts owed or to be owed and in the case of discontinued product only, also by way of an exchange. We do not have any significant product exchange history.
We classify product returns into principally three categories, (i) non-routine returns, (ii) obsolete product and (iii) product mix realignment by certain of our customers. “Non-routine” returns are defined as product returned to us as a consequence of unanticipated circumstances principally due to (i) retail store closings or (ii) unexpected poor retail sell through to consumers causing us to discontinue the product. “Obsolete” returns are defined as product returned to us as a consequence of product shelf-life “use by” expiration date. “Product mix realignment” returns are defined as product returned to us due to initiatives by the trade to discontinue purchasing certain of our products. Product mix realignment returns are generally nominal and are frequently related to discontinued or soon to be discontinued products.
Our return policy accommodates returns for (i) discontinued products, (ii) store closings and (iii) products that have reached or exceeded designated expiration date. The following is a summary of the change in the return provision for the years ended December 31, 2010 and 2009 (in thousands):
| | Amount | |
Return provision at December 31, 2008 | | $ | 1,427 | |
Net change in the return provision Fiscal 2009 | | | 86 | |
Return provision at December 31, 2009 | | | 1,513 | |
Net change in the return provision Fiscal 2010 | | | 33 | |
Return provision at December 31, 2010 | | $ | 1,546 | |
For Fiscal 2010, 2009 and 2008, net sales of products with limited shelf-life and expiration dates were $617,000, $311,000 and $265,000, respectively.
For Fiscal 2010, the return provision increased by $33,000. The increase in the return provision was principally due to (i) a charge of $815,000, including $462,000 for products with shelf-life expiration dates (obsolete returns) offset by (ii) net returns of $782,000 associated principally with Fiscal 2009 and Fiscal 2010 received and processed during Fiscal 2010.
For Fiscal 2009, the return provision increased by $86,000 to $1.5 million. The increase in the return provision was principally due to (i) a charge of $827,000 for products with shelf-life expiration dates (obsolete returns) offset by (ii) net returns associated with Fiscal 2008 and Fiscal 2009 received and processed during Fiscal 2009 of $741,000 as a consequence of an increase in product returns experienced during the period. We continue to experience higher than expected return provisions as a consequence of excess inventories at retail for new products launched in Fiscal 2008 that carried limited shelf lives.
A one percent deviation for these consolidated reservesales allowance provisions for the years ended December 31,Fiscal 2010, 2009 and 2008 2007 and 2006 would affect net sales by approximately $276,000, $348,000$188,000, $261,000 and $318,000,$276,000, respectively. A one percent deviation for cooperative incentive promotions reserve provisions for the years ended December 31, 2008, 20072010, 2009 and 20062008 could affect net sales by approximately $252,000, $323,000$182,000, $245,000 and $298,000,$252,000, respectively.
Income Taxes
The Company has recordedAs of December 31, 2010, we have net operating loss carry-forwards of approximately $28.7 million for federal purposes that will expire beginning in fiscal 2020 through 2030. Additionally, there are net operating loss carry-forwards of $19.9 million for state purposes that will expire beginning in Fiscal 2018 through 2030. Until sufficient taxable income to offset the temporary timing differences attributable to operations, the tax deductions attributable to option, warrant and stock activities are assured, a valuation allowance against its netequaling the total deferred tax assets. Managementasset is being provided. As a consequence of the accumulated losses of the Company, management believes that this allowance is required due to the uncertainty of realizing these tax benefits in the future.
Seasonality of the Business
Our sales are derived principally from our OTC cold remedy products. As a consequence, a significant portion of our business is highly seasonal, which causes major variations in operating results from quarter to quarter. The uncertainty arises becausethird and fourth quarters generally represent the Company may incur substantial researchlargest sales volume for our OTC cold remedy products with a corresponding increase in marketing and development costsadvertising expenditures designed to promote our products during the Cold Season (defined below). In addition, our sales are influenced by and subject to fluctuations in the timing of purchase and the ultimate level of demand for our products which are a function of the timing, length and severity of each cold season. Generally, a cold season is defined as the period of September to March (“Cold Season”) when the incidence of the common cold rises as a consequence of the change in weather and other factors. We track health and wellness trends and develop retail promotional strategies to align its Ethical Pharmaceutical segment.production scheduling, inventory management and marketing programs to optimize consumer purchases.
Results of Operations
Year ended December 31, 2008Fiscal 2010 compared with same period 2007Fiscal 2009
Net sales for 2008Fiscal 2010 were $20,506,612 compared to $28,241,502 for 2007, reflecting a decrease of $7,734,890 or 27.4% in 2008. Revenues, by segment, for 2008 were Cold Remedy, $18,185,510 and Contract Manufacturing, $2,321,102;$14.5 million as compared to 2007, when$19.8 million for Fiscal 2009. Net sales decreased $5.3 million in Fiscal 2010 as compared to Fiscal 2009. The decline in net sales is principally due (i) an acceleration in Fiscal 2009 of our retail customer purchases and stocking for the revenues2009-2010 Cold Season into the fourth quarter of Fiscal 2009 which skewed net sales for each respective segment were $25,730,016that cold season, (ii) a decrease by our retail customers purchases in the fourth quarter of Fiscal 2010 in an effort to better align their purchases and $2,511,486.inventory levels with the projected timing of the incidence levels of upper respiratory disorders during the 2010-2011 Cold Season, (iii) a decrease associated with our retail customers reducing the number, timing and value of our promotional and/or display programs as a consequence of, among other influences, (a) limited space availability, (b) allocation of more promotional space to private label brands and/or other products and (c) a general reduction in off-shelf, price promotion opportunities for the 2010-2011 Cold Season. In addition, our net sales of our contract manufacturing operations decreased $911,000 in Fiscal 2010 to $594,000 as compared to $1.5 million in Fiscal 2009 due to (i) the decline in candy product sales as a consequence of the closure of the Elizabethtown manufacturing facility in June 2009 and (ii) fluctuations in contract manufacturing orders from non-related third party entities to produce lozenge-based products.
TheData suggests that the highest incidence of upper respiratory disorders for the 2009-2010 Cold Remedy segment reported a sales decrease in 2008 of $7,544,506 or 29.3%. This decrease may be attributable to continued customer review of inventory levels and product mix particularly in light of current market and economic conditions including higher than normal product returns. The cough/cold segment has been adversely affectedSeason occurred in the past two cold seasons byfourth quarter of Fiscal 2009 and were at significantly lower levels during the leastfirst, second and third quarters of Fiscal 2010 when compared to the 2008-2009 and prior Cold Seasons. As a consequence, there was a reduced consumer demand at retail and therefore a corresponding reduction in retailer purchases and stocking during Fiscal 2010 as compared to Fiscal 2009. Furthermore, a significant increase in the incidence of colds by consumersupper respiratory disorders for the 2010-2011 Cold Season was not observed until late in the last several years. The 2008 sales activity reflects the market wide decreasefourth quarter in cold remedyFiscal 2010. Our flagship product, consumption as supported by recent IRI data, which was consistent throughout 2008. Cold-EezeCold-EEZE® continues to compete for market share with new products entering the category despiteand many retailer initiatives to reduce the number of these products being without any evidence of clinical effectiveness, unlike Cold-Eeze which has been clinically proven to treatit carries on shelf within the common cold.
The Company iscold and flu remedy category. We are continuing to strongly support Cold-EezeCold-EEZE® as a clinically proven cold remedy product through in-store promotion, media advertising and coupon programs.
The Contract Manufacturing segment refers to the third party sales generated by QMI. In addition to the manufacture of the Cold-EezeÒ product, QMI also manufactures a variety of hard and organic candies under its own brand names along with other products on a contract manufacturing basis for other customers. Sales for this segment in 2008 decreased by $190,384 or 7.6%.
ConsolidatedCost of sales decreased $2.5 million for Fiscal 2010 to $5.7 million as compared to $8.2 million for Fiscal 2009. The decrease in cost of sales is principally due to (i) lower revenues from continuing operationsperiod to period, offset by (ii) an improvement in gross margin. We realized gross margins of 60.9% for 2008Fiscal 2010 as compared to 58.4% in Fiscal 2009, an improvement of 2.5%. Our improved gross margin reflects the net effect of (i) the elimination of the production and facility overhead expenses attributable to the closing of the Elizabethtown manufacturing facility, (ii) improved production margins of the OTC cold remedy segment, (iii) improved overhead cost management at our Lebanon production and distribution facility, offset by (iv) an adverse impact of a percentage ofreduction to net sales was 44.3%to absorb fixed production overhead expenses at our manufacturing facility and (v) increased product promotion with retailers to support the launch of our new products. Gross margins are influenced by fluctuations in quarter-to-quarter production volume, fixed production costs and related overhead absorption, and the timing of shipments to customers which are factors of the seasonality of our sales activities and products.
Sales and marketing expense for Fiscal 2010 increased $724,000, or 14.9%, to $5.6 million as compared to 34.3%$4.9 million for 2007.Fiscal 2009. The cost ofincrease in sales percentageand marketing expense for the Cold Remedy segment increased in 2008 by 5.4% primarily dueFiscal 2010 as compared to higher than normal product returns along with product obsolescence costs in 2008, with these two items increasing 2008 cold remedy costs of sales by 6.4% over 2007. The 2007 cost of sales also reflects a royalty charge which amounted to 1.2% of sales with no such expense in 2008Fiscal 2009 was principally due to the expirationnet effect of (i) the implementation of more cost effective and targeted marketing programs, (ii) improved timing of marketing campaigns to better match the timing and product demand of the royalty agreement.2010-2011 Cold Season, (iii) the discontinuation of certain ineffective marketing programs, offset by (iv) an increase in traditional media purchases in print, digital, out-of-home and television, and (v) an increase in marketing research and development costs associated with the development of new product packaging for our Cold-EEZE® and Kids-EEZE® product lines introduced during the 2010-2011 Cold Season.
The 2008 gross margin was reduced due to decreased cold remedy product sales along with increased returns and costs of product obsolescence. The 2008 margin was also impacted by reduced production in the Contract Manufacturing segment. In 2008, the Company recognized an impairment charge of $300,000 due to adverse profit margins related to the hard candy business of Quigley Manufacturing Inc. with such expense reflected in cost of sales. In February 2009, the Company announced plans to discontinue its hard candy business resulting in the closure of the Elizabethtown, Pennsylvania, manufacturing location in 2009 and consolidate its manufacturing capabilities to one location in order to improve manufacturing efficiencies. The facility located in Lebanon, Pennsylvania, currently manufactures the Cold-Eeze lozenge product and will continue to do so along with warehousing and distributing the Company’s range of cold remedy products.
Selling, marketingGeneral and administrative (“G&A”) expenses for 2008Fiscal 2010 were $13,901,159$6.0 million as compared to $14,621,612$9.3 million in 2007.Fiscal 2009. The decrease in 2008G&A expense of $3.3 million for Fiscal 2010 as compared to Fiscal 2009 was primarily due to increased outside advertising, marketing and promotionalthe net effects of (i) a decrease in stock promotion costs of $1,548,937, primarily due$2.3 million, principally related to increased media advertising; decreased sales brokerage commission coststhe Board of $252,000 due to less 2008 cold remedy sales; payroll costs decreased by $1,100,000, mainly due to decreased 2008 general payrollDirectors proxy contest in Fiscal 2009 and bonus costs; legal costs decreased by $455,000(ii) a decrease in professional fees and stock promotion decreased by $173,000. Selling, marketingother expenses of $601,000 and administrative expenses, by segment,(iii) a decrease of $606,000 in 2008 were Cold Remedy $11,662,725; Pharma, $718,076; and Contract Manufacturing, $1,520,358; as compared to expenses in 2007 of $12,387,758, $602,409 and $1,631,445, respectively.personnel expenses.
Research and development costs for 2008Fiscal 2010 and 20072009 were $4,241,724$794,000 and $6,482,485,$1.3 million, respectively. Principally, theThe decrease of $514,000 in research and development expenditurecosts for Fiscal 2010 as compared to Fiscal 2009 was due to a decline in the scope, timing and amount of research and development activity from period to period. In Fiscal 2009 and as a result of a strategic review, we determined to curtail and now have discontinued further investment in certain of our wholly owned subsidiary’s, Pharma, products then under development. This was determined in light of our view concerning market opportunities, regulatory pathways, the need for further robust and consistent preclinical and clinical testing and continued requirements in the areas of commercial formulation and development. However, we continue to engage in other research and development activities that we determine are appropriate and we may increase our research and development activities in future periods as a consequence of the Joint Venture.
Interest and other income for Fiscal 2010 was $53,000 as compared to $9,000 for Fiscal 2009. The increase of $44,000 for Fiscal 2010 as compared to Fiscal 2009 was principally the result of decreased Pharma study coststhe allocation of approximately $2,200,000 in 2008.funds into interest bearing accounts.
During 2008, the Company’s majorAs noted above, we have net operating expensesloss carry-forwards for both federal and certain states. For Fiscal 2010, we had a current tax benefit of salaries, brokerage commissions, promotion, advertising, and legal costs accounted for approximately $12,412,984 (68.4%)$40,000 as a consequence of a carry back of an alternative minimum tax net operating loss to a prior period.
As a consequence of the total operating expenseseffects of $18,142,883,the above, the net loss for Fiscal 2010, was $3.5 million, or ($.25) per share, as compared to a net loss of $3.8 million, or ($0.30) per share, for Fiscal 2009.
Fiscal 2009 compared with Fiscal 2008
Net sales for Fiscal 2009 were $19.8 million as compared to $20.5 million for Fiscal 2008. Net sales decreased $691,000 in Fiscal 2009 as compared to Fiscal 2008. The decline in net sales is due to the net effect of (i) an increase in net sales of OTC cold remedy products, of $124,000, offset by (ii) a decrease of 3.0% over the 2007 amountnet sales of $12,790,768 (60.6%)contract manufacturing product of total operating expenses of $21,104,097, largely the result of increased advertising and promotion, decreased brokers commission, decreased legal costs and decreased payroll costs in 2008.
Total assets of the Company at December 31, 2008 and 2007 were $24,368,631 and $33,501,921, respectively. Working capital decreased by $4,505,948$815,000 which declined to $14,071,676 at December 31, 2008. The primary influences on working capital during 2008 were: the decrease in cash balances; decreased accounts receivable balances; decreased inventory on hand; decreased other liabilities and decreased advertising payable balances due to variations in advertising scheduling and strategies between years and related seasonal factors.
On February 29, 2008, the Company sold Darius to InnerLight Holdings, Inc. Darius, through its wholly-owned subsidiary, Innerlight Inc., constituted the Health and Wellness segment of the Company. The divestiture of Darius will provide clarity to the Company’s strategic plan to focus its future endeavors in a pharmaceutical entity with OTC products and a pipeline of potential formulations that may lead to prescription and other medicinal products. The sale of this segment has been treated as discontinued operations and all periods presented have been reclassified.
Year ended December 31, 2007 compared with same period 2006
Net sales$1.5 million for 2007 were $28,241,502 compared to $26,850,030 for 2006, reflecting an increase of 5.2% in 2007. Revenues, by segment, for 2007 were Cold Remedy, $25,730,016 and Contract Manufacturing, $2,511,486;Fiscal 2009 as compared to 2006, when the revenues$2.3 million for each respective segment were $24,815,851 and $2,034,179.
Fiscal 2008. The Cold Remedy segment reporteddecline in contract manufacturing product sales is principally a sales increase in 2007 of $914,165 or 3.7%. This increase reflects the launchresult of the Organix™closure of the Elizabethtown manufacturing facility and Immune products in the third quarter 2007, contributing combined netelimination of certain low margin products. Net sales of $2,017,316. Additionally, the Cold-Eeze price increase to the trade on July 1, 2007 contributed additional net sales amount of approximately $2,250,000. The 2007 sales activity indicates reduced unit sales of Cold-Eeze to retail which is reflective of IRI reports indicating a substantial decrease in unit consumption of Cold-Eeze in 2007, both in the fourth quarter andOTC cold remedy products have remained stable over the twelve month period. Available IRI reports indicate thatpast two Fiscal years as the 2007 cough/cold season hadand flu seasons have indicated comparable levels of the lowest reported incidence of the common cold in over eight years, a factor which had consequences across the cough/cold category. Revenues of this segment were also negatively impactedcolds by the reduction in warehouse and retail inventory levels of several key retail outlets. New competitor products continueconsumers. Our flagship product, Cold-EEZE® continues to enter into the retail arena and viecompete for visibility in an already congested category. Unlike Cold-Eeze, which is clinically proven to treat the common cold, many of thesemarket share with new products are without any evidenceentering the category and many retailer initiatives to reduce the number of clinical effectiveness. The Company isproducts it carries on shelf within the cold and flu remedy category. We are continuing to strongly support Cold-EezeCold-EEZE® as a clinically proven cold remedy product through in-store promotion, media advertising and the introduction of new flavors.
The Contract Manufacturing segment refers to the third party sales generated by QMI. In addition to the manufacture of the Cold-EezeÒ product, QMI also manufactures a variety of hard and organic candies under its own brand names along with other products on a contract manufacturing basis for other customers. Sales for this segment in 2007 increased by $477,307 or 23.5%.coupon programs.
Cost of sales from continuing operationsdecreased $847,000 for 2007Fiscal 2009 to $8.2 million as a percentage of net sales was 34.3%, compared to 34.7%$9.1 million for 2006.Fiscal 2008. The decrease in cost of sales percentageis principally due to (i) lower revenues from period to period and (ii) an improvement in gross margin. We realized gross margins of 58.4% for Fiscal 2009 as compared to 55.7% in Fiscal 2008, an improvement of 2.7%. The 2.7% increase in the Cold Remedy segmentgross margin was principally due to the net effect of (i) the elimination of the production and facility overhead expenses attributable to the closing of the Elizabethtown manufacturing facility, (ii) improved production margins of the OTC cold remedy products, offset by (iii) an adverse impact to net sales as a consequence of the inventory reduction programs maintained by our larger retail customers. Gross margins are influenced by fluctuations in quarter-to-quarter production volume, fixed production costs and related overhead absorption, and the timing of shipments to customers which are factors of the seasonality of our sales activities and products.
Sales and marketing expense for Fiscal 2009 decreased $1.1 million, or 18.6%, to $4.9 million as compared to $6.0 million for Fiscal 2008. The decrease in 2007 by 1.6%sales and marketing expense for Fiscal 2009 as compared to Fiscal 2008 was principally due to as we implemented more efficient in-store, digital and consumer-based marketing initiatives versus print and radio advertising programs launched in Fiscal 2008.
G&A expenses for Fiscal 2009 were $9.3 million as compared to $7.9 million in Fiscal 2008. The increase in G&A expense of $1.4 million for Fiscal 2009 as compared to Fiscal 2008 was primarily due to the impactnet effects of the discontinuation of the Company’s royalty obligations to the developers in May 2007, a favorable effect of 3.4% in 2007, the launch of the two new products and the impact of the Cold-Eeze price increase resulted in a combined(i) an increase in cost of 0.7% and the adverse impact of the coupon programs on cost of goods was 1.4%.
The 2007 and 2006 consolidated cost of sales were both favorably impacted as a result of the consolidation effects of the manufacturing facility as it relates to Cold-EezeÒ. These gross profit gains of the Cold Remedy segment were mitigated by substantially lower gross profit margins for the Contract Manufacturing segment, which is significantly lower than the other operating segments.
Selling, marketing and administrative expenses for 2007 were $14,621,612 compared to $14,921,437 in 2006. The decrease in 2007 was primarily due to decreased outside advertising product marketing and promotionalstock promotion costs of $2,054,000, primarily$2.3 million, principally related to Board of Directors proxy contest and (ii) an increase in professional fees and other expenses of $256,000, offset by, (iii) a decrease of $1.2 million in personnel costs principally due to a reductiondecrease in media advertising with a change to various coupon programs the costs of which are accounted for as a reduction from sales. Sales brokerage commission costs increased by $275,000 due to increased 2007 cold remedy sales; payroll costs increased by $1,157,000, mainly due to increased 2007 bonuses; legal costs increased by $127,000, insurance costs decreased by $419,000, stock promotion increased by $184,000. Selling, marketingexecutive salaries, bonuses and administrative expenses, by segment, in 2007 were Cold Remedy $12,387,758; Pharma $602,409; and Contract Manufacturing $1,631,445; as compared to 2006 of $12,605,400, $743,465 and $1,572,572, respectively.head count.
Research and development costs for 2007Fiscal 2009 and 20062008 were $6,482,485$1.3 million and $3,787,498,$4.2 million, respectively. Principally, the increaseThe decrease in research and development expenditure of $2.9 million in was principally the result of increased(i) decreased Pharma study costs of approximately $2,772,000$2.6 million and (ii) a reduction in 2007.personnel costs of $223,000. The decreased spending for the Fiscal 2009 as compared to Fiscal 2008 was principally due to (i) the completion of the Phase IIb study for QR-333 Diabetic Peripheral Neuropathy in November 2008 and (ii) a subsequent slowdown in related Fiscal 2009 spending pending the availability of the final results of the study. In addition, we strategically determined to curtail and ultimately suspend further investment certain of Pharma’s then existing products under development in light of our view concerning market opportunities, regulatory pathways, the need for further robust and consistent preclinical and clinical testing and continued requirements in the areas of commercial formulation and development.
During 2007, the Company’s majorAs noted above, we have net operating expenses of salaries, brokerage commissions, promotion, advertising,loss carry-forwards for both federal and legal costs accounted for approximately $12,790,768 (60.6%) of the total operating expenses of $21,104,097, a decrease of 2.0% over the 2006 amount of $13,054,170 (69.8%) of total operating expenses of $18,708,935, largely the result of decreased advertising, increased brokers commission and increased payroll costs in 2007.
Total assets of the Company atcertain states. However, effective December 31, 20072009, we elected to conform our tax reporting year, historically a fiscal period ending September 30, to our financial reporting period ending December 31. As a consequence, we will file a full period tax return for the fiscal year ended September 30, 2009 with the Internal Revenue Service (“IRS”) and 2006 were $33,501,921 and $34,845,034, respectively. Working capital decreased by $1,963,649 to $18,577,624 atwill also file with the IRS a “short period return” for the three months ended December 31, 2007. The primary influences on working capital during 2007 were: the decrease in cash balances, increased inventory on hand; increased accrued royalties and sales commissions as a result of litigation between the Company and the developer of Cold-Eeze, increased other liabilities and decreased advertising payable balances due to variations in advertising scheduling and strategies between years and related seasonal factors.
Material Commitments and Significant Agreements
Effective October 1, 2004, the Company acquired certain assets and assumed certain liabilities of JoEl, Inc., the sole manufacturer of the Cold-EezeÒ lozenge product. As part of the acquisition, the Company entered into a loan obligation in the amount of $3.0 million payable to PNC Bank, N.A. The loan was collateralized by mortgages on real property located in each of Lebanon, Pennsylvania and Elizabethtown, Pennsylvania and was used to finance the majority of the cash portion of the purchase price. The Company could elect interest rate options of either the Prime Rate or LIBOR plus 200 basis points. The loan was payable in eighty-four equal monthly principal payments of $35,714 commencing November 1, 2004, and such amounts payable were reflected in the consolidated balance sheet as current portion of long-term debt amounting to $428,571 and long-term debt amounting to $1,035,715 at December 31, 2005. The loan was completely repaid in 2006. During the duration of the loan, the Company was2009 in compliance with all related loan covenants.the election. For Fiscal 2009, we had a current tax benefit of $26,000 for certain federal and state alternative minimum income taxes incurred for the “short period return”, inclusive of an alternative minimum tax refund due us of $110,000 as a consequence of a carry back of an alternative minimum tax net operating loss to a prior period. In future fiscal periods, our tax and financial reporting periods will be the same, the period ending December 31.
With the exceptionAs a consequence of the Company’s Cold-EezeÒ brand lozenge products and QMI’s sales to third party customers, the Company’s products are manufactured by outside sources. The Company has agreements in place with these manufacturers, which ensure a reliable source of product for the future.
The Company has agreements in place with independent brokers whose function is to represent the Company’s Cold-EezeÒ products, in a product sales and promotion capacity, throughout the United States and internationally. The brokers are remunerated through a commission structure, based on a percentage of sales collected, less certain deductions.
The Company has maintained a separate representation and distribution agreement relating to the developmenteffects of the zinc gluconate glycine product formulation. In returnabove, the net loss for exclusive distribution rights, the Company must pay the developerFiscal 2009, was $3.8 million, or ($.30) per share, as compared to a 3% royalty and a 2% consulting fee based on sales collected, less certain deductions, throughout the termnet loss of this agreement, which expired in May 2007. However, the Company and the developer are in litigation and as such, no potential offset$5.5 million, or ($0.43) per share, for these fees from such litigation has been recorded. A founder’s commission totaling 5%, on sales collected, less certain deductions, has been paid to two of the officers of the Company, who are also directors and stockholders of the Company, and whose agreements expired in May 2005. The expenses for the respective periods relating to such agreements amounted to zero, $293,266 and $1,153,354 for the year ended December 31, 2008, 2007 and 2006, respectively. Amounts accrued for these expenses at December 31, 2008 and 2007 were $3,524,031 on both dates.
On February 24, 2009, The Quigley Corporation announced that it had signed a license with assignment of ownership agreement for its patented formulation QR-340 developed by its wholly owned subsidiary, Pharma. The compound has been clinically tested and shown to improve the appearance of scars in a comparative study. The Agreement is with Levlad, LLC/Natures Gate, a manufacturer and marketer of personal care products based on botanicals.
The general terms of the agreement allow the assignee to further refine, develop and commercialize the product with exclusivity and eventual full ownership of the patent within five years, beginning January 2009. The agreement is based on required royalty payments totaling $1.1 million to The Quigley Corporation over the time period. Under the terms of the agreement, if the minimum payments and terms are not met within the five year period, the Company retains full rights and ownership of the property. However, Levlad can continue to pay per unit royalties beyond five years for a non-exclusive license.
Certain operating leases for office and warehouse space maintained by the Company resulted in rent expense for the years ended December 31, 2008, 2007 and 2006, of $53,200, $68,436, and $60,735, respectively. The future minimum lease obligations under these operating leases are approximately $19,400.Fiscal 2008.
Liquidity and Capital Resources
The Company had working capitalOur aggregate cash and cash equivalents as of $14,071,676 and $18,577,624December 31, 2010 were $8.2 million compared to $12.8 million at December 31, 20082009. Our working capital was $7.5 million and 2007,$11.5 million as of December 31, 2010 and December 31, 2009, respectively. Changes in working capital overall have been primarilyfor Fiscal 2010 were principally due to the following items:net effect of (i) cash used in operations of $3.5 million, (ii) capital expenditures of $153,000, (iii) the cash payment of $1.0 million to acquire the product license in connection with the Joint Venture, offset by, (iv) proceeds of $133,000 from the exercise of stock options. Significant factors impacting working capital for Fiscal 2010 included (i) an increase in accounts receivable and inventory balances, decreasedoffset by, $3,176,750; account receivable balances, net, decreased by $2,125,019 due to decreased cold remedy sales(ii) an increase in other accrued advertising and effective collection practices; inventory decreased by $1,134,510 primarily due to reduced cold remedy sales and obsolescence provisions, other current liabilities decreased by $1,739,074 primarily due to reduced payroll, legal and research and development accruals; accrued royalties and sales commissions decreased by $67,768 largely due to decreased cold remedy sales. Total cash balances at December 31, 2008 were $11,956,796 compared to $15,133,546 at December 31, 2007.allowances.
Management believes that its strategy to establish Cold-Eezemaintain Cold-EEZEÒ as a recognized brand name, its broader range of products, its adequate manufacturing capacity, together with its current working capital, should provide an internal source of capital to fund the Company’s normal business operations. TheOur operations of the Company contribute tosupport the current research and development expenditures of the Ethical Pharmaceutical segment.related to new products. In addition to the funding from operations, the Companywe may in the short and long term raise capital through the issuance of equity securities or secure other financing resourcessources to support such research. Asproduct development research, progressesnew product acquisitions or a venture investment or acquisition. Such funding through the issuance of equity securities would result in the dilution of current stockholders’ ownership in the Company. Should our product development initiatives progress on certain formulations, additional development expenditures of the Pharma segment willmay require substantial financial support and wouldmay necessitate the consideration of otheralternative approaches such as licensing, joint venture, or partnership arrangements that we determine will meet the Company’sour long term goals and objectives. Ultimately, should internal working capital or internal funding be insufficient there is no guarantee thatand external funding methods or other financing resources willbusiness arrangements become available, thereby deferringunattainable, it would likely result in the deferral or abandonment of future growthdevelopment relative to current and prospective product development of certaininitiatives and formulations.
On February 29, 2008, the Company sold Darius to InnerLight Holdings, Inc., whose major shareholder is Mr. Kevin P. Brogan, the current president of Darius. The terms of the agreement include a cash purchase price of $1,000,000 by InnerLight Holdings, Inc. for the stock of Darius and its subsidiaries without guarantees, warranties or indemnifications. Darius markets health and wellness products through its wholly-owned subsidiary, Innerlight Inc., which constituted the Health and Wellness segment of the Company. Losses from this segment in recent times have reduced the resources available for the research and development activities of the Pharma segment. Additionally, the divestiture of Darius will provide clarity to the Company’s strategic plan to focus its future endeavors in a pharmaceutical entity with OTC products and a pipeline of potential formulations that may lead to prescription and other medicinal products. The sale of this segment has been treated as discontinued operations and all periods presented have been reclassified.
Management is not aware of any trends, events or uncertainties that have or are reasonably likely to have a material negative impact upon the Company’s (a)our (i) short-term or long-term liquidity, or (b)(ii) net sales or income from continuing operations. Any challenge to the Company’sour patent rights could have a material adverse effect on future liquidity of the Company;our future; however, the Company iswe are not aware of any condition that would make such an event probable. Our business is subject to seasonal variations thereby impacting liquidity and working capital during the course of our fiscal year.
Management believes that cash generated from operations, along with its current cash balances, will be sufficient to finance working capital and capital expenditure requirements for at least the next year.twelve months. However, in the longer term, as previously discussed, we may require additional capital to support, among other items, (i) new product introductions, (ii) expansion of our product marketing and promotion activities, (iii) additional research development activities, (iv) further investment in our Joint Venture, (iv) venture investments or acquisitions and/or (v) support current operations. Since late Fiscal 2008, there has been substantial volatility and a decline in the capital and financial markets due at least in part to the constricted global economic environment resulting in substantial uncertainty and access to financing is uncertain. Moreover, consumer and as a consequence, customer spending habits may be adversely affected by the current economic crisis. These conditions could have an adverse effect on our industry and business, including our financial condition, results of operations and cash flows.
Contractual ObligationsTo the extent that we do not generate sufficient cash from operations, we may need to incur indebtedness to finance plans for growth. Recent turmoil in the credit markets and the potential impact on the liquidity of major financial institutions may have an adverse effect on our ability to fund our business strategy through borrowings, under either existing or newly created instruments in the public or private markets on terms that we believe to be reasonable, if at all.
The Company’sOur future contractual obligations and commitments at December 31, 20082010 consist of the following:
Year | | Employment Contracts | | | Advertising (1) | | | Total | |
2011 | | $ | 1,075 | | | $ | 1,206 | | | $ | 2,281 | |
2012 | | | 582 | | | | - | | | | 582 | |
2013 | | | | | | | - | | | | - | |
2014 | | | - | | | | - | | | | - | |
2015 | | | - | | | | - | | | | - | |
Total | | $ | 1,657 | | | $ | 1,206 | | | $ | 2,863 | |
| | Payment Due by Period | |
Contractual Obligations | | Total | | | Less than 1 year | | | 1-3 years | | | 4-5 years | | | More than 5 years | |
Operating Lease Obligations | | $ | 19,406 | | | $ | 19,406 | | | $ | - | | | $ | - | | | $ | - | |
Purchase Obligations | | | 3,347,000 | | | | 1,355,000 | | | | 1,992,000 | | | | - | | | | - | |
Research and Development | | | 442,000 | | | | 442,000 | | | | - | | | | - | | | | - | |
Advertising | | | 1,920,173 | | | | 1,920,173 | | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | |
Total Contractual Obligations | | $ | 5,728,579 | | | $ | 3,736,579 | | | $ | 1,992,000 | | | $ | - | | | $ | - | |
(1) Additional advertising costs are expected to be incurred during Fiscal 2011.Off-Balance Sheet Arrangements
It is not the Company'sour usual business practice to enter into off-balance sheet arrangements such as guarantees on loans and financial commitments and retained interests in assets transferred to an unconsolidated entity for securitization purposes. Consequently, the Company haswe have no off-balance sheet arrangements that have, or are reasonably likely to have, a material current or future effect on itsour financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Impact of Inflation
The Company isWe are subject to normal inflationary trends and anticipatesanticipate that any increased costs would be passed on to itsour customers. Inflation has not had a material effect on our business.
Effect of Recent Accounting Pronouncements
In November 2008, the SEC issued for comment a proposed roadmap regarding the potential use by U.S. issuers of financial statements prepared in accordance with International Financial Reporting Standards (“IFRS”). IFRS is a comprehensive series of accounting standards published by the International Accounting Standards Board (“IASB”). Under the proposed roadmap, we could be required in fiscal 2014 to prepare financial statements in accordance with IFRS. The SEC will make a determination in 2011 regarding the mandatory adoption of IFRS. We are currently assessing the impact that this potential change would have on our consolidated financial statements and we will continue to monitor the development of the potential implementation of IFRS.
In June 2009, the Financial Accounting Standards Board (“FASB”) modified the accounting standard related to consolidation. This standard, as modified, intends to improve financial reporting by enterprises involved with variable interest entities. This standard, as modified, addresses the effects on certain provisions relating to the Consolidation of Variable Interest Entities, as a result of the elimination of the qualifying special-purpose entity concept in the accounting standard related to transfers and servicing, and constituent concerns about the application of certain key provisions of this standard, including those in which the accounting and disclosures under the standard do not always provide timely and useful information about an enterprise’s involvement in a variable interest entity. This standard, as modified, is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Earlier application is prohibited. The adoption of the consolidation standard, as modified, did not have a material effect on our consolidated financial statements.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKIn October 2009, the FASB issued Accounting Standards Update No. 2009-13, "Multiple-Deliverable Revenue Arrangements" ("ASU No. 2009-13"). ASU No. 2009-13 amends guidance included within ASC Topic 605-25 to require an entity to use an estimated selling price when vendor specific objective evidence or acceptable third party evidence does not exist for any products or services included in a multiple element arrangement. The arrangement consideration should be allocated among the products and services based upon their relative selling prices, thus eliminating the use of the residual method of allocation. ASU No. 2009-13 also requires expanded qualitative and quantitative disclosures regarding significant judgments made and changes in applying this guidance. ASU No. 2009-13 is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption and retrospective application are also permitted. We elected to adopt ASU No. 2009-13 early and the adoption did not have a material effect on our consolidated financial statements.
In January 2010, the FASB issued ASU 2010-06, “Improving Disclosures about Fair Value Measurements”. ASU 2010-06 amends ASU 820 to require a number of additional disclosures regarding fair value measurements. The Company'samended guidance requires entities to disclose the amounts of significant transfers between Level 1 and Level 2 of the fair value hierarchy and the reasons for these transfers, the reasons for any transfers in or out of Level 3, and information in the reconciliation of recurring Level 3 measurements about purchases, sales, issuances and settlements on a gross basis. This ASU also clarifies the requirement for entities to disclose information about both the valuation techniques and inputs used in estimating Level 2 and Level 3 fair value measurements as well as the level of disaggregation required for each class of asset and liability disclosed. The amended Level 1 and 2 guidance is effective for interim and annual financial periods beginning after December 15, 2009 while the amended Level 3 guidance is effective for interim and annual financial periods beginning after December 15, 2010. The adoption of ASU 2010-06 did not have a material effect on our consolidated financial statements.
Item 7A. | Quantitative and Qualitative Disclosures About Market Risk |
Like virtually all commercial enterprises, we can be exposed to the risk (“market risk”) that the cash flows to be received or paid relating to certain financial instruments could change as a result of changes in interest rate, exchange rates, commodity prices, equity prices and other market changes.
Our operations are not subject to risks of material foreign currency fluctuations, nor does itdo we use derivative financial instruments in itsour investment practices. The Company places itsWe place our marketable investments in instruments that meet high credit quality standards. The Company doesWe do not expect material losses with respect to itsour investment portfolio or excessive exposure to market risks associated with interest rates. The impact on the Company'sour results of one percentage point change in short-term interest rates would not have a material impact on the Company’sour future earnings, fair value, or cash flows related to investments in cash equivalents or interest-earning marketable securities.
Current economic conditions may cause a decline in business and consumer spending which could adversely affect the Company’sour business and financial performance including the collection of accounts receivables, realization of inventory and recoverability of assets. In addition, the Company’sour business and financial performance may be adversely affected by current and future economic conditions, including due to a reduction in the availability of credit, financial market volatility and recession.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAINDEX TO CONSOLIDATED FINANCIAL STATEMENTSItem 8. | | |
| | Page |
| | |
Balance Sheets as of December 31, 2008 and 2007 | | F-1 |
| | |
Statements of Operations for the years ended December 31, 2008, 2007, and 2006 | | F-2 |
| | |
Statements of Stockholders’ Equity for the years ended December 31, 2008, 2007, and 2006 | | F-3 |
| | |
Statements of Cash Flows for the years ended December 31, 2008, 2007, and 2006 | | F-4 |
| | |
Notes to Financial Statements | | F-5 to F-21 |
| | |
Responsibility for Financial Statements | | F-22 |
| | |
Report of Independent Registered Public Accounting Firm Amper, Politziner & Mattia, LLP
| | F-23 and Supplementary Data |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of ProPhase Labs, Inc.
We have audited the accompanying consolidated balance sheet of ProPhase Labs, Inc. and Subsidiaries (the “Company”) as of December 31, 2010 and the related consolidated statements of operations, stockholders’ equity, and cash flows for the year ended December 31, 2010. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly we express no such opinion. 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of ProPhase Labs, Inc. and Subsidiaries as of December 31, 2010 and the consolidated results of their operations and their cash flows for the year ended December 31, 2010 in conformity with accounting principles generally accepted in the United States of America.
/S/ EisnerAmper LLP
Edison, New Jersey
March 15, 2011
To the Board of ContentsDirectors and
Stockholders of ProPhase Labs, Inc.
We have audited the accompanying consolidated balance sheet of ProPhase Labs, Inc. and Subsidiaries (the “Company” and formerly The Quigley Corporation) as of December 31, 2009 and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the two years ended December 31, 2009. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated 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 audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of ProPhase Labs, Inc. and Subsidiaries as of December 31, 2009 and the consolidated results of their operations and their cash flows for each of the two years ended December 31, 2009 in conformity with accounting principles generally accepted in the United States of America.
/S/ Amper, Politziner & Mattia, LLP
Edison, New Jersey
March 24, 2010
THE QUIGLEY CORPORATIONPROPHASE LABS, INC AND SUBSIDARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
ASSETS
| | December 31, | |
| | 2010 | | | 2009 | |
ASSETS | | | | | | |
Cash and cash equivalents (Note 2) | | $ | 8,232 | | | $ | 12,801 | |
Accounts receivable, net of allowance for doubtful accounts of $13 and $23, respectively (Note 2) | | | 4,821 | | | | 3,599 | |
Inventory, net (Note 2) | | | 1,682 | | | | 1,405 | |
Prepaid expenses and other current assets | | | 883 | | | | 803 | |
Assets held for sale (Notes 2 and 4) | | | 138 | | | | 138 | |
Total current assets | | | 15,756 | | | | 18,746 | |
| | | | | | | | |
Intangible asset, licensed technology (Note 3) | | | 3,577 | | | | - | |
| | | | | | | | |
Property, plant and equipment, net of accumulated depreciation of $3,389 and $3,155, respectively (Note 4) | | | 2,362 | | | | 2,572 | |
Other assets | | | - | | | | 12 | |
| | $ | 21,695 | | | $ | 21,330 | |
| | | | | | | | |
LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | | | | |
LIABILITIES | | | | | | | | |
Accounts payable | | $ | 489 | | | $ | 708 | |
Accrued royalties and sales commissions (Note 5) | | | 3,665 | | | | 3,681 | |
Accrued advertising and other allowances | | | 3,524 | | | | 2,124 | |
Other current liabilities | | | 557 | | | | 758 | |
Total current liabilities | | | 8,235 | | | | 7,271 | |
| | | | | | | | |
COMMITMENTS AND CONTINGENCIES (Note 7) | | | | | | | | |
| | | | | | | | |
STOCKHOLDERS' EQUITY | | | | | | | | |
Common Stock, $.0005 par value; authorized 50,000,000;Issued: 19,353,672 and 17,679,436 shares, respectively (Note 8) | | | 10 | | | | 9 | |
Additional paid-in-capital | | | 40,627 | | | | 37,726 | |
Retained earnings (accumulated deficit) | | | (1,989 | ) | | | 1,512 | |
Treasury stock, at cost, 4,646,053 and 4,646,053 shares, respectively | | | (25,188 | ) | | | (25,188 | ) |
| | | 13,460 | | | | 14,059 | |
| | $ | 21,695 | | | $ | 21,330 | |
| | December 31, 2008 | | December 31, 2007 | |
CURRENT ASSETS: | | | | |
Cash and cash equivalents | | $ | 11,956,796 | | | $ | 15,133,546 | |
Accounts receivable (net of doubtful accounts of $131,162 and $178,144) | | | 4,523,519 | | | | 6,648,538 | |
Inventory | | | 3,001,001 | | | | 4,135,511 | |
Prepaid expenses and other current assets | | | 1,185,113 | | | | 810,106 | |
Assets of discontinued operations | | | - | | | | 2,107,589 | |
TOTAL CURRENT ASSETS | | | 20,666,429 | | | | 28,835,290 | |
| | | | | | | | |
PROPERTY, PLANT AND EQUIPMENT – net | | | 3,666,748 | | | | 4,337,540 | |
| | | | | | | | |
OTHER ASSETS: | | | | | | | | |
Other assets | | | 35,454 | | | | 280,654 | |
Assets of discontinued operations | | | - | | | | 48,437 | |
TOTAL OTHER ASSETS | | | 35,454 | | | | 329,091 | |
| | | | | | | | |
TOTAL ASSETS | | $ | 24,368,631 | | | $ | 33,501,921 | |
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES: | | | | | | |
Accounts payable | | $ | 693,839 | | | $ | 454,963 | |
Accrued royalties and sales commissions | | | 3,791,519 | | | | 3,859,287 | |
Accrued advertising | | | 1,306,341 | | | | 1,369,759 | |
Other current liabilities | | | 803,054 | | | | 2,542,128 | |
Liabilities of discontinued operations | | | - | | | | 2,031,529 | |
TOTAL CURRENT LIABILITIES | | | 6,594,753 | | | | 10,257,666 | |
| | | | | | | | |
COMMITMENTS AND CONTINGENCIES (Note 9) | | | | | | | | |
| | | | | | | | |
STOCKHOLDERS’ EQUITY: | | | | | | | | |
Common stock, $.0005 par value; authorized 50,000,000; Issued: 17,554,436 and 17,499,186 shares | | | 8,777 | | | | 8,750 | |
Additional paid-in-capital | | | 37,599,405 | | | | 37,535,523 | |
Retained earnings | | | 5,353,855 | | | | 10,888,141 | |
Less: Treasury stock, 4,646,053 and 4,646,053 shares, at cost | | | (25,188,159 | ) | | | (25,188,159 | ) |
TOTAL STOCKHOLDERS’ EQUITY | | | 17,773,878 | | | | 23,244,255 | |
| | | | | | | | |
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | | $ | 24,368,631 | | | $ | 33,501,921 | |
See accompanying notes to consolidated financial statements
PROPHASE LABS, INC & SUBSIDARIES
THE QUIGLEY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
| | Year Ended December 31, | |
| | 2010 | | | 2009 | | | 2008 | |
| | | | | | | | | |
Net sales (Notes 2 and 12) | | $ | 14,502 | | | $ | 19,816 | | | $ | 20,507 | |
| | | | | | | | | | | | |
Cost of sales (Note 2) | | | 5,672 | | | | 8,247 | | | | 9,094 | |
| | | | | | | | | | | | |
Gross profit | | | 8,830 | | | | 11,569 | | | | 11,413 | |
| | | | | | | | | | | | |
Operating expenses: | | | | | | | | | | | | |
Sales and marketing | | | 5,576 | | | | 4,852 | | | | 5,958 | |
Administrative | | | 6,054 | | | | 9,344 | | | | 7,943 | |
Research and development (Note 2) | | | 794 | | | | 1,308 | | | | 4,241 | |
Total operating expense | | | 12,424 | | | | 15,504 | | | | 18,142 | |
| | | | | | | | | | | | |
Loss from operations | | | (3,594 | ) | | | (3,935 | ) | | | (6,729 | ) |
| | | | | | | | | | | | |
Interest income | | | 53 | | | | 9 | | | | 320 | |
| | | | | | | | | | | | |
Loss from continuing operations before taxes | | | (3,541 | ) | | | (3,926 | ) | | | (6,409 | ) |
| | | | | | | | | | | | |
Income tax expense (benefit) (Note 10) | | | (40 | ) | | | (84 | ) | | | - | |
| | | | | | | | | | | | |
Loss from continuing operations | | | (3,501 | ) | | | (3,842 | ) | | | (6,409 | ) |
| | | | | | | | | | | | |
Discontinued operations (Note 14): | | | | | | | | | | | | |
Gain on disposal of health and wellness operations | | | - | | | | - | | | | 736 | |
Income from discontinued operations | | | - | | | | - | | | | 139 | |
| | | | | | | | | | | | |
Net loss | | $ | (3,501 | ) | | $ | (3,842 | ) | | $ | (5,534 | ) |
| | | | | | | | | | | | |
Basic earnings (loss) per share: | | | | | | | | | | | | |
Loss from continuing operations | | $ | (0.25 | ) | | $ | (0.30 | ) | | $ | (0.50 | ) |
Income from discontinued operations | | | - | | | | - | | | | 0.07 | |
Net loss | | $ | (0.25 | ) | | $ | (0.30 | ) | | $ | (0.43 | ) |
| | | | | | | | | | | | |
Diluted earnings (loss) per share: | | | | | | | | | | | | |
Loss from continuing operations | | $ | (0.25 | ) | | $ | (0.30 | ) | | $ | (0.50 | ) |
Income from discontinued operations | | | - | | | | - | | | | 0.07 | |
Net loss | | $ | (0.25 | ) | | $ | (0.30 | ) | | $ | (0.43 | ) |
| | | | | | | | | | | | |
Weighted average common shares outstanding: | | | | | | | | | | | | |
Basic | | | 14,285 | | | | 12,963 | | | | 12,878 | |
Diluted | | | 14,285 | | | | 12,963 | | | | 12,878 | |
| | Year Ended | | | Year Ended | | | Year Ended | |
| | December 31, 2008 | | | December 31, 2007 | | | December 31, 2006 | |
NET SALES | | $ | 20,506,612 | | | $ | 28,241,502 | | | $ | 26,850,030 | |
| | | | | | | | | | | | |
COST OF SALES | | | 9,093,593 | | | | 9,685,361 | | | | 9,305,132 | |
| | | | | | | | | | | | |
GROSS PROFIT | | | 11,413,019 | | | | 18,556,141 | | | | 17,544,898 | |
| | | | | | | | | | | | |
OPERATING EXPENSES: | | | | | | | | | | | | |
Sales and marketing | | | 5,958,031 | | | | 4,994,947 | | | | 6,812,630 | |
Administration | | | 7,943,128 | | | | 9,626,665 | | | | 8,108,807 | |
Research and development | | | 4,241,724 | | | | 6,482,485 | | | | 3,787,498 | |
TOTAL OPERATING EXPENSES | | | 18,142,883 | | | | 21,104,097 | | | | 18,708,935 | |
| | | | | | | | | | | | |
LOSS FROM OPERATIONS | | | (6,729,864 | ) | | | (2,547,956 | ) | | | (1,164,037 | ) |
| | | | | | | | | | | | |
OTHER INCOME (EXPENSE) | | | | | | | | | | | | |
Interest income | | | 320,062 | | | | 691,684 | | | | 726,627 | |
Interest expense | | | - | | | | - | | | | (21,644 | ) |
TOTAL OTHER INCOME, NET | | | 320,062 | | | | 691,684 | | | | 704,983 | |
| | | | | | | | | | | | |
LOSS FROM CONTINUING OPERATIONS BEFORE TAXES | | | (6,409,802 | ) | | | (1,856,272 | ) | | | (459,054 | ) |
| | | | | | | | | | | | |
INCOME TAXES | | | - | | | | - | | | | 88,599 | |
| | | | | | | | | | | | |
LOSS FROM CONTINUING OPERATIONS | | | (6,409,802 | ) | | | (1,856,272 | ) | | | (547,653 | ) |
| | | | | | | | | | | | |
DISCONTINUED OPERATIONS: | | | | | | | | | | | | |
Gain on disposal of health and wellness operations | | | 736,252 | | | | - | | | | - | |
| | | | | | | | | | | | |
Income (Loss) from discontinued operations | | | 139,264 | | | | (602,065 | ) | | | (1,200,692 | ) |
| | | | | | | | | | | | |
NET LOSS | | $ | (5,534,286 | ) | | $ | (2,458,337 | ) | | $ | (1,748,345 | ) |
| | | | | | | | | | | | |
(Loss) Earnings per common share: | | | | | | | | | | | | |
Loss from continuing operations | | $ | (0.50 | ) | | $ | (0.14 | ) | | $ | (0.04 | ) |
Income (Loss) from discontinued operations | | $ | 0.07 | | | $ | (0.05 | ) | | $ | (0.10 | ) |
Net Loss | | $ | (0.43 | ) | | $ | (0.19 | ) | | $ | (0.14 | ) |
| | | | | | | | | | | | |
Diluted earnings per common share: | | | | | | | | | | | | |
Loss from continuing operations | | $ | (0.50 | ) | | $ | (0.14 | ) | | $ | (0.04 | ) |
Income (Loss) from discontinued operations | | $ | 0.07 | | | $ | (0.05 | ) | | $ | (0.10 | ) |
Net Loss | | $ | (0.43 | ) | | $ | (0.19 | ) | | $ | (0.14 | ) |
| | | | | | | | | | | | |
Weighted average common shares outstanding: | | | | | | | | | | | | |
Basic | | | 12,877,983 | | | | 12,728,706 | | | | 12,245,073 | |
| | | | | | | | | | | | |
Diluted | | | 12,877,983 | | | | 12,728,706 | | | | 12,245,073 | |
See accompanying notes to consolidated financial statements
THE QUIGLEY CORPORATIONPROPHASE LABS, INC & SUBSIDARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except share data)
| | | | | | | | | | | Retained | | | | | | | |
| | | | | | | | Additional | | | Earnings | | | | | | | |
| | Common Stock | | | Par | | | Paid-In | | | (Accumulated | | | Treasury | | | | |
| | Shares | | | Value | | | Capital | | | Deficit) | | | Stock | | | Total | |
Balance at December 31, 2007 | | | 12,853,133 | | | $ | 9 | | | $ | 37,535 | | | $ | 10,888 | | | $ | (25,188 | ) | | $ | 23,244 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net loss | | | | | | | | | | | | | | | (5,534 | ) | | | | | | | (5,534 | ) |
Proceeds from exercise of stock options | | | 55,250 | | | | | | | | 64 | | | | | | | | | | | | 64 | |
Tax benefits from exercise of stock options | | | | | | | | | | | 68 | | | | | | | | | | | | 68 | |
Tax benefit allowance | | | | | | | | | | | (68 | ) | | | | | | | | | | | (68 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2008 | | | 12,908,383 | | | | 9 | | | | 37,599 | | | | 5,354 | | | | (25,188 | ) | | | 17,774 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net loss | | | | | | | | | | | | | | | (3,842 | ) | | | | | | | (3,842 | ) |
Proceeds from exercise of stock options | | | 125,000 | | | | | | | | 127 | | | | | | | | | | | | 127 | |
Tax benefits from exercise of stock options | | | | | | | | | | | 88 | | | | | | | | | | | | 88 | |
Tax benefit allowance | | | | | | | | | | | (88 | ) | | | | | | | | | | | (88 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2009 | | | 13,033,383 | | | | 9 | | | | 37,726 | | | | 1,512 | | | | (25,188 | ) | | | 14,059 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net loss | | | | | | | | | | | | | | | (3,501 | ) | | | | | | | (3,501 | ) |
Proceeds from exercise of stock options | | | 130,500 | | | | | | | | 133 | | | | | | | | | | | | 133 | |
Common Stock Issued to Phosphangenics Limited pursuant to an Exclusive License Agreement (Note 3) | | | 1,440,000 | | | | 1 | | | | 2,576 | | | | | | | | | | | | 2,577 | |
Common stock granted pursuant to an employment agreement | | | 36,111 | | | | | | | | 60 | | | | | | | | | | | | 60 | |
Common stock granted pursuant to a compensation agreement | | | 67,625 | | | | | | | | 90 | | | | | | | | | | | | 90 | |
Share-based compensation expense | | | | | | | | | | | 42 | | | | | | | | | | | | 42 | |
Tax benefits from exercise of stock options | | | | | | | | | | | 42 | | | | | | | | | | | | 42 | |
Tax benefit allowance | | | | | | | | | | | (42 | ) | | | | | | | | | | | (42 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2010 | | | 14,707,619 | | | $ | 10 | | | $ | 40,627 | | | $ | (1,989 | ) | | $ | (25,188 | ) | | $ | 13,460 | |
| | Common Stock Shares | | | Issued Amount | | | Additional Paid-in- Capital | | | Treasury Stock | | | Retained Earnings | | | |
Balance December 31, 2005 | | | 11,714,471 | | | $ | 8,180 | | | $ | 35,404,803 | | | $ | (25,188,159 | ) | | $ | 15,094,823 | | | $ | 25,319,647 | |
Tax benefits from options, warrants & common stock | | | | | | | | | | | 2,484,330 | | | | | | | | | | | | 2,484,330 | |
Tax benefit allowance | | | | | | | | | | | (2,484,330 | ) | | | | | | | | | | | (2,484,330 | ) |
Proceeds from options and warrants exercised | | | 1,011,155 | | | | 505 | | | | 1,957,630 | | | | | | | | | | | | 1,958,135 | |
Stock Cancellation | | | (40,993 | ) | | | (20 | ) | | | 20 | | | | | | | | | | | | - | |
Net Loss | | | | | | | | | | | | | | | | | | | (1,748,345 | ) | | | (1,748,345 | ) |
Balance December 31, 2006 | | | 12,684,633 | | | | 8,665 | | | | 37,362,453 | | | | (25,188,159 | ) | | | 13,346,478 | | | | 25,529,437 | |
Tax benefits from options, warrants & common stock | | | | | | | | | 153,631 | | | | | | | | | | 153,631 | |
Tax benefit allowance | | | | | | | | | (153,631 | ) | | | | | | | | | (153,631 | ) |
Proceeds from options and warrants exercised | | | 168,500 | | | | 85 | | | | 173,070 | | | | | | | | | | 173,155 | |
Net Loss | | | | | | | | | | | | | | | | | | (2,458,337 | ) | | | (2,458,337 | ) |
Balance December 31, 2007 | | | 12,853,133 | | | | 8,750 | | | | 37,535,523 | | | | (25,188,159 | ) | | | 10,888,141 | | | | 23,244,255 | |
Tax benefits from options, warrants & common stock | | | | | | | | | | | 67,717 | | | | | | | | | | | | 67,717 | |
Tax benefit allowance | | | | | | | | | | | (67,717 | ) | | | | | | | | | | | (67,717 | ) |
Proceeds from options exercised | | | 55,250 | | | | 27 | | | | 63,882 | | | | | | | | | | | | 63,909 | |
Net Loss | | | | | | | | | | | | | | | | | | | (5,534,286 | ) | | | (5,534,286 | ) |
Balance December 31, 2008 | | | 12,908,383 | | | $ | 8,777 | | | $ | 37,599,405 | | | $ | (25,188,159 | ) | | $ | 5,353,855 | | | $ | 17,773,878 | |
See accompanying notes to consolidated financial statements
THE QUIGLEY CORPORATIONPROPHASE LABS, INC & SUBSIDARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
| | Year Ended December 31, | |
| | 2010 | | | 2009 | | | 2008 | |
Cash flows from operating activities: | | | | | | | | | |
Net loss | | $ | (3,501 | ) | | $ | (3,842 | ) | | $ | (5,534 | ) |
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | | | | | | | | | | | | |
Impairment charge | | | - | | | | 74 | | | | 100 | |
Depreciation and amortization | | | 363 | | | | 522 | | | | 745 | |
Share-based compensation expense | | | 192 | | | | - | | | | - | |
Gain on disposal of health and wellness operations | | | - | | | | - | | | | (736 | ) |
Loss on the sales of fixed assets | | | - | | | | 104 | | | | 17 | |
Sales discounts and provision for bad debts | | | (33 | ) | | | (133 | ) | | | (376 | ) |
Inventory valuation provision | | | (728 | ) | | | 633 | | | | 832 | |
Changes in operating assets and liabilities: | | | | | | | | | | | | |
Accounts receivable | | | (1,189 | ) | | | 2,485 | | | | 1,366 | |
Inventory | | | 451 | | | | 963 | | | | 323 | |
Prepaid expenses and other current assets | | | (80 | ) | | | 381 | | | | (353 | ) |
Other assets | | | 12 | | | | 9 | | | | 53 | |
Accounts payable | | | (219 | ) | | | (109 | ) | | | 434 | |
Accrued royalties and sales commissions | | | (16 | ) | | | (38 | ) | | | (32 | ) |
Accrued advertising and other allowance | | | 1,400 | | | | (559 | ) | | | 956 | |
Other current liabilities | | | (201 | ) | | | (45 | ) | | | (1,845 | ) |
Net cash provided by (used in) operating activities | | | (3,549 | ) | | | 445 | | | | (4,050 | ) |
| | | | | | | | | | | | |
Cash flows from investing activities: | | | | | | | | | | | | |
Proceeds from the sale of health and wellness operations | | | - | | | | - | | | | 1,000 | |
Capital expenditures | | | (153 | ) | | | (208 | ) | | | (200 | ) |
Acquisition of product license | | | (1,000 | ) | | | | | | | | |
Proceeds from the sale of fixed assets | | | - | | | | 480 | | | | 10 | |
Net cash flows provided by (used in) investing activities | | | (1,153 | ) | | | 272 | | | | 810 | |
| | | | | | | | | | | | |
Cash flows from financing activities: | | | | | | | | | | | | |
Proceeds from the exercise of stock options | | | 133 | | | | 127 | | | | 64 | |
Net cash provided by financing activities | | | 133 | | | | 127 | | | | 64 | |
| | | | | | | | | | | | |
Net increase (decrease) in cash and cash equivalents | | | (4,569 | ) | | | 844 | | | | (3,176 | ) |
| | | | | | | | | | | | |
Cash and cash equivalents at beginning of year | | | 12,801 | | | | 11,957 | | | | 15,133 | |
| | | | | | | | | | | | |
Cash and cash equivalents at end of year | | $ | 8,232 | | | $ | 12,801 | | | $ | 11,957 | |
| | | | | | | | | | | | |
Supplemental disclosures of cash flow information: | | | | | | | | | | | | |
Income taxes paid | | $ | 34 | | | $ | 43 | | | $ | - | |
| | | | | | | | | | | | |
Common stock issued to Phosphagenics Limited pursuant to a product license agreement | | $ | 2,577 | | | $ | - | | | $ | - | |
| | | | | | | | | |
| | Year Ended December 31, 2008 | | | Year Ended December 31, 2007 | | | Year Ended December 31, 2006 | |
OPERATING ACTIVITIES: | | | | | | | | | |
Net loss | | $ | (5,534,286 | ) | | $ | (2,458,337 | ) | | $ | (1,748,345 | ) |
Adjustments to reconcile net loss to net cash provided by continuing operations: | | | | | | | | | | | | |
Loss on asset impairment | | | 100,000 | | | | - | | | | - | |
Depreciation and amortization | | | 743,670 | | | | 937,852 | | | | 1,145,792 | |
Loss on the sales of fixed assets | | | 10,188 | | | | - | | | | - | |
Bad debts provision | | | (403 | ) | | | 8,647 | | | | (14,901 | ) |
(Increase) decrease in assets: | | | | | | | | | | | | |
Accounts receivable | | | 2,125,436 | | | | (139,741 | ) | | | 1,282,751 | |
Inventory | | | 1,134,510 | | | | (781,098 | ) | | | (88,188 | ) |
Prepaid expenses and other current assets | | | (375,007 | ) | | | 7,504 | | | | 333,268 | |
Other assets | | | 245,200 | | | | (97,766 | ) | | | (72,031 | ) |
Increase (decrease) in liabilities: | | | | | | | | | | | | |
Accounts payable | | | 238,876 | | | | (206,992 | ) | | | 120,415 | |
Accrued royalties and sales commissions | | | (67,768 | ) | | | 342,788 | | | | 494,548 | |
Accrued advertising | | | (63,418 | ) | | | (770,498 | ) | | | (710,155 | ) |
Other current liabilities | | | (1,739,074 | ) | | | 1,288,253 | | | | (232,906 | ) |
Total adjustments | | | 2,352,210 | | | | 588,949 | | | | 2,258,593 | |
NET CASH (USED) PROVIDED BY OPERATING ACTIVITIES | | | (3,182,076 | ) | | | (1,869,388 | ) | | | 510,248 | |
INVESTING ACTIVITIES: | | | | | | | | | | | | |
Capital expenditures | | | (199,764 | ) | | | (521,287 | ) | | | (587,642 | ) |
Proceeds from the sale of fixed assets | | | 16,697 | | | | - | | | | 118,276 | |
NET CASH FLOWS USED IN INVESTING ACTIVITIES | | | (183,067 | ) | | | (521,287 | ) | | | (469,366 | ) |
| | | | | | | | | | | | |
FINANCING ACTIVITIES: | | | | | | | | | | | | |
Principal payments on debt | | | - | | | | - | | | | (1,464,286 | ) |
Stock options and warrants exercised | | | 63,909 | | | | 173,155 | | | | 1,958,135 | |
NET CASH FLOWS PROVIDED BY FINANCING ACTIVITIES | | | 63,909 | | | | 173,155 | | | | 493,849 | |
DISCONTINUED OPERATIONS: | | | | | | | | | | | | |
(Gain) Loss from discontinued operations | | | (875,516 | ) | | | 1,060,447 | | | | (628,000 | ) |
Proceeds from sale of discontinued operations | | | 1,000,000 | | | | - | | | | - | |
NET CASH FLOWS PROVIDED (USED) BY DISCONTINUED OPERATIONS | | | 124,484 | | | | 1,060,447 | | | | (628,000 | ) |
NET DECREASE IN CASH & CASH EQUIVALENTS | | | (3,176,750 | ) | | | (1,157,073 | ) | | | (93,269 | ) |
CASH & CASH EQUIVALENTS, BEGINNING OF PERIOD | | | 15,133,546 | | | | 16,290,619 | | | | 16,383,888 | |
CASH & CASH EQUIVALENTS, END OF PERIOD | | $ | 11,956,796 | | | $ | 15,133,546 | | | $ | 16,290,619 | |
| | | | | | | | | | | | |
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | | | | | | | | | | | | |
| | | | | | | | | | | | |
Cash paid for: | | | | | | | | | | | | |
Interest | | $ | - | | | $ | - | | | $ | 21,644 | |
Taxes | | $ | - | | | $ | - | | | $ | 88,599 | |
See accompanying notes to consolidated financial statements
THE QUIGLEY CORPORATIONPROPHASE LABS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – ORGANIZATION AND BUSINESS
The Company, headquartered in Doylestown, Pennsylvania,ProPhase Labs, Inc (“we”, “us” or the “Company”), organized under the laws of the State of Nevada, is a leading manufacturer, marketer and distributor of a diversified range of homeopathic and health products which comprisethat are offered to the Cold Remedy and Contract Manufacturing segments. The Company isgeneral public. We are also involvedengaged in the research and development of potential prescriptionover-the-counter (“OTC”) drug, natural base health products along with supplements, personal care and other medicinal products that comprise the Ethical Pharmaceutical segment.cosmeceutical products.
The Company’sOur primary business is currently the manufacture, distribution, marketing and distributionsale of OTC cold remedy products to the consumerconsumers through the over-the-counter marketplace.national chain, regional, specialty and local retail stores. One of the Company’s keyour principal products in its Cold Remedy segment is Cold-EezeCold-EEZEÒ, a zinc gluconate glycine product proven in two double-blind clinical studies to reduce the duration and severity of the common cold symptoms by nearly half. Cold-Eeze®Cold-EEZEÒ is now an established product in the health care and cold remedy market.
Effective October 1, 2004, the Company acquired substantially all of the assets of JoEl, Inc. For Fiscal 2010, Fiscal 2009 and Fiscal 2008 (as each is defined below), the previous manufacturer of the Cold-EezeÒ lozenge product. This manufacturing entity, now called Quigley Manufacturing Inc. (“QMI”), a wholly-owned subsidiary of the Company, will continue to produce lozenge product along with performing such operational tasks as warehousing and shipping the Company’s Cold-EezeÒ products. In addition, QMI produces a variety of hard and organic candy for sale to third party customers in addition to performing contract manufacturing activities for non-related entities. On February 2, 2009, the Company announced its intention to close the Elizabethtown location of Quigley Manufacturing Inc., and discontinue the hard candy business resulting in the consolidation of manufacturingour revenues from continuing operations at the Lebanon location. This consolidation will have no impact on the production or distribution of the Cold-EezeÒ brand ofcome principally from our OTC cold remedy products.
In January 2001,On March 22, 2010, the Company, formedPhosphagenics Limited (“PSI Parent”), an Ethical Pharmaceutical segment, Quigley PharmaAustralian corporation, Phosphagenics Inc. (“Pharma”PSI”), that is undera Delaware corporation and subsidiary of PSI Parent, and Phusion Laboratories, LLC (the “Joint Venture”), a Delaware limited liability company, entered into a Limited Liability Company Agreement (the “LLC Agreement”) of the direction of its Executive Vice PresidentJoint Venture and Chairman of its Medical Advisory Committee. Pharma was formedadditional related agreements for the purpose of researchdeveloping and developmentcommercializing, for worldwide distribution and sale, a wide range of potential natural base health products, including, but not limitednon-prescription remedies using PSI Parent’s proprietary patented TPM™ technology (“TPM”). TPM facilitates the delivery and depth of penetration of active molecules in pharmaceutical, nutraceutical, and other products. Pursuant to prescription medicines along with supplementsthe LLC Agreement, we and cosmeceuticals for human and veterinary use. Pharma is currently undergoing research and development activity in compliance with regulatory requirements. The Company isPSI each own a 50% membership interest in the initial stages of what may be a lengthy process to develop these patent applications into commercial products.Joint Venture (see Note 3).
On February 29, 2008,May 5, 2010, our shareholders approved, among other corporate matters, the Company sold Darius InternationalBoard of Directors’ proposal to change our name to ProPhase Labs, Inc. (“Darius”)from The Quigley Corporation.
We use a December 31 year-end for financial reporting purposes. References herein to InnerLight Holdings, Inc., whose major shareholder is Mr. Kevin P. Brogan, the then president of Darius. Darius marketed healthfiscal year ended December 31, 2010 shall be the term “Fiscal 2010” and wellness products through its wholly-owned subsidiary, Innerlight Inc. that constitutedreferences to other “Fiscal” years shall mean the Health and Wellness segmentyear, which ended on December 31 of the Company.year indicated. Our consolidated balance sheet at December 31, 2009 and our consolidated statement of cash flows for Fiscal 2009 and 2008 have been reclassified to conform with our Fiscal 2010 presentation. The terms ofterm the sale agreement included a cash purchase price of $1,000,000 by InnerLight Holdings, Inc. for“we”, “us: or the stock of Darius and its subsidiaries without guarantees, warranties or indemnifications. Financial information related“Company” as used herein also refer, where appropriate, to this former segment is presented as Discontinued Operations. See discussion in Note 3 to Consolidated Financial Statements.
Future revenues, costs, margins, and profits will continue to be influenced by the Company’s ability to maintain its manufacturing availability and capacityCompany, together with its marketing and distribution capabilities andsubsidiaries unless the requirements associated with the development of Pharma’s potential prescription drugs and other medicinal products in order to continue to compete on a national and international level. The business development of the Company is dependent on continued conformity with government regulations, a reliable information technology system capable of supporting continued growth and continued reliable sources for product and materials to satisfy consumer demand.context otherwise requires.
The business of the Company is subject to federal and state laws and regulations adopted for the health and safety of users of the Company’s products. Cold-Eeze® is a homeopathic remedy that is subject to regulations by various federal, state and local agencies, including the FDA and the Homeopathic Pharmacopoeia of the United States.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The Consolidated consolidated financial statements (“Financial StatementsStatements”) include the accounts of the Company and its wholly-owned subsidiaries.wholly owned subsidiaries and its Joint Venture, a variable interest entity (see Note 3). All inter-companyintercompany transactions and balances have been eliminated. Effective
Seasonality of the Business
Our net sales are derived principally from our cold remedy products. Currently, our sales are influenced by and subject to fluctuations in the timing of purchase and the ultimate level of demand for our products which are a function of the timing, length and severity of each cold season. Generally, a cold season is defined as the period of September to March 31, 2004,when the financial statements include consolidated variable interest entities (“VIEs”)incidence of which the Company iscommon cold rises as a consequence of the primary beneficiary. (See discussionchange in Note 4, “Variable Interest Entity.”)weather and other factors. We generally experience in the third and fourth quarter higher levels of net sales along with a corresponding increase in marketing and advertising expenditures designed to promote its products during the cold season. Revenues and related marketing costs are generally at their lowest levels in the second quarter when consumer demand generally declines. We track health and wellness trends and develop retail promotional strategies to align our production scheduling, inventory management and marketing programs to optimize consumer purchases.
PROPHASE LABS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Use of Estimates
The Company’s consolidated financial statements are preparedpreparation of the Financial Statements and the accompanying notes thereto, in accordanceconformity with generally accepted accounting principles (GAAP) in the United Sates of America. In connection with the preparation of the consolidated financial statements, the Company is requiredStates (“GAAP”), requires management to make assumptionsestimates and estimates about future events, and apply judgmentsassumptions that affect the reported amounts of assets and liabilities revenue,and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the respective reporting periods. Examples include the provision for bad debt, sales returns and allowances, inventory obsolescence, useful lives of property and equipment and intangible assets, impairment of property and equipment and intangible assets, income tax valuations and assumptions related disclosures.to accrued advertising. When providing for the appropriate sales returns, allowances, cash discounts and cooperative incentive promotion costs (“Sales Allowances”), we apply a uniform and consistent method for making certain assumptions for estimating these provisions. These assumptions, estimates and judgmentsassumptions are based on historical experience, current trends and other factors that management believes to be relevant at the time the consolidated financial statements are prepared. Management reviews the accounting policies, assumptions, estimates and judgments on a quarterly basis to ensure the financial statements are presented fairly and in accordance with GAAP. However, because future events and their effects cannot be determined with certainty, actualbasis. Actual results could differ from these assumptions and estimates, and such differences could be material.those estimates.
The Company is organized into three different but related business segments, Cold Remedy, Contract ManufacturingOur primary product, Cold-EEZEÒ, utilizes a proprietary zinc formulation which has been clinically proven to reduce the severity and Ethical Pharmaceutical. When providing forduration of common cold symptoms. Accordingly, factors considered in estimating the appropriate sales returns and allowances cash discountsfor this product include it being (i) a unique product with limited competitors, (ii) competitively priced, (iii) promoted, (iv) unaffected for remaining shelf-life as there is no product expiration date, and cooperative incentive program costs, each(v) monitored for inventory levels at major customers and third-party consumption data. We market certain new products to our OTC Personal Care marketplace segment applies a uniformsuch as (i) Organix Organic Cough and consistent methodSore Throat Drops and (ii) three unique Kids-EEZEÒ products, Chest Relief, Cough Cold and Allergy. Each of these new products do carry shelf-life expiration dates for making certain assumptions for estimating these provisions that are applicable to each specific segment. Traditionally, these provisions are not material to reported revenues in the Contract Manufacturing segmentswhich we aggregate such new product market experience data and the Ethical Pharmaceutical segment does not have any revenues.
Provisions to these reserves within the Cold Remedy segment include the use of such estimates, which are applied or matched to the current sales for the period presented. These estimates are based on specific customer tracking and an overall historical experience to obtain an applicable effective rate. Estimates forupdate our sales returns and allowances estimates accordingly. Sales Allowances estimates are tracked at the specific customer leveland product line levels and are tested on an annual historical basis, and reviewed quarterly, as is the estimate for cooperative incentive promotion costs. Cash discounts follow the terms of sales and are taken by virtually all customers.quarterly. Additionally, the monitoring of current occurrences, developments by customer, market conditions and any other occurrences that could affect the expected provisions for any future returns or allowances, cash discounts and cooperative incentive promotion costs relative to net sales for the period presented are also performed.
Cash Equivalents
The Company considersWe consider all highly liquid investments with an initial maturity of three months or less at the time of purchase to be cash equivalents. Cash equivalents include cash on hand and monies invested in money market funds. The carrying amount approximates the fair market value due to the short-term maturity of these investments.
Inventories
Inventory is valued at the lower of cost, determined on a first-in, first-out basis (FIFO), or market. Inventory items are analyzed to determine cost and the market value and appropriate valuation reserves are established. The consolidated financial statementsAt December 31, 2010 and 2009, the Financial Statements include a reservean allowance for excess or obsolete inventory of $1,200,803$1.1 million and $368,491 as of$1.8 million, respectively. At December 31, 20082010 and 2007, respectively. Inventories2009, inventory included raw material, work in progress and packaging amounts of approximately $975,000$742,000 and $1,197,000 at December 31, 2008$610,000, respectively, and December 31, 2007, respectively, with the remainder comprising finished goods.goods of $940,000 and $795,000, respectively.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. The Company usesWe use a combination of straight-line and accelerated methods in computing depreciation for financial reporting purposes. The annual provision for depreciation has been computed in accordance with the following ranges of estimated asset lives: building and improvements - twenty to thirty nine years; machinery and equipment - five to seven years; computer software - three years; and furniture and fixtures – seven years.lives.
Concentration of Risks
Future revenues, costs, margins and profits will continue to be influenced by our ability to maintain our manufacturing availability and capacity together with our marketing and distribution capabilities and the requirements associated with the development of OTC Personal Care products in order to continue to compete on a national and/or international level.
Our business is subject to federal and state laws and regulations adopted for the health and safety of users of our products. Our OTC cold remedy products are subject to regulations by various federal, state and local agencies, including the Food and Drug Administration (“FDA”) and, as applicable, the Homeopathic Pharmacopoeia of the United States.
PROPHASE LABS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Financial instruments that potentially subject the Companyus to significant concentrations of credit risk consist principally of cash investments and trade accounts receivable.
The Company maintainsWe maintain cash and cash equivalents with severalcertain major financial institutions. Due toAs of December 31, 2010, our cash was $8.2 million and our bank balance was $8.7 million. Of the nature of the funds maintainedtotal bank balance, $708,000 was covered by the Company, all fund balances are completely guaranteed due to the Temporary Guarantee Program for Money Market Fundsfederal depository insurance and the unlimited FDIC coverage available to non-interest bearing transaction accounts. The Company will continue to monitor these programs as they contain future expiry dates and to limit the amount of credit exposure with any one financial institution.$8.0 million was uninsured.
Trade accounts receivable potentially subjects the Companyus to credit risk. The Company extendsWe extend credit to itsour customers based upon an evaluation of the customer’s financial condition and credit history and generally doeswe do not require collateral. The Company’sOur broad range of customers includes many large wholesalers, mass merchandisers and multi-outlet pharmacy chains, five of which account for a significant percentage of sales volume, representing 48% for the year ended December 31,and chain drug store (see Note 12). During Fiscal 2010, 2009 and 2008, 49% for the year ended December 31, 2007, and 47% for the year ended December 31, 2006. Customers comprising the five largest accounts receivable balances represented 55% and 40% of total trade receivable balances at December 31, 2008 and 2007, respectively. During 2008, 2007 and 2006, effectively all of the Company’sour revenues were related to domestic markets.
The Company’sOur revenues are currentlyprincipally generated from the sale of the Cold Remedycold remedy products which approximated 89%96%, 91%92% and 92%89% of total revenues for Fiscal 2010, 2009 and 2008, respectively. A significant portion of our business is highly seasonal, which causes major variations in operating results from quarter to quarter. The third and fourth quarters generally represent the twelve month periods ended December 31, 2008, 2007 and 2006, respectively. The Contract Manufacturing segment approximated 11%, 9% and 8%largest sales volume for the year ended December 31, 2008, 2007 and 2006, respectively.OTC cold remedy products.
Raw materials used in the production of the products are available from numerous sources. Raw materials forCertain raw material active ingredients used in connection with the Cold-EezeCold-EEZEÒ® lozenge product are currently procuredpurchased from a single vendor in order to secure purchasing economies. In a situation where this one vendor is not able to supply QMI withunaffiliated supplier. Should the ingredients, other sources have been identified. Should these product sourcesrelationship terminate or discontinue for any reason, the Company has formulatedvendor become unable supply material, we believe that the current contingency plans would prevent a contingency plan in order to prevent such discontinuancetermination from materially affecting our operations. However, if the Company’s operations. Any such terminationrelationship was terminated, there may however, result in a temporary delaybe delays in production of our products until thean acceptable replacement facilitysupplier is able to meet the Company’s production requirements.located.
Long-lived Assets
The Company reviews itsWe review our long-lived assets for impairment on an exception basis whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable through future undiscounted cash flows. In Fiscal 2009 and 2008, we recognized impairment charges of $74,000 and $100,000, respectively, principally for the Company recognizedland and building assets of our Elizabethtown manufacturing. As of December 31, 2010, the Elizabethtown land and building assets are reported as an impairment charge of $300,000 due to adverse profit margins related toasset held for sale at fair value, less the hard candy business of QMI with such expense reflected in cost of sales.disposal. In February 2011, the Elizabethtown facility was sold and we derived net proceeds from the sale of approximately $166,000.
Revenue Recognition
Sales are recognized at the time ownership is transferred to the customer, which for the Cold Remedy segment is the time the shipment is received by the customer and for the Contract Manufacturing segment, when the product is shipped to the customer. Revenue is reduced for trade promotions, estimated sales returns, cash discounts and other allowances in the same period as the related sales are recorded. The Company makesWe make estimates of potential future product returns and other allowances related to current period revenue. The Company analyzesWe analyze historical returns, current trends, and changes in customer and consumer demand when evaluating the adequacy of the sales returns and other allowances.
We do not impose a period of time within which product may be returned. All requests for product returns must be submitted to us for pre-approval. The consolidated financial statements include reservesmain components of $1,427,045our returns policy are: (i) we will accept returns that are due to damaged product that is un-saleable and such return request activity fall within an acceptable range, (ii) we will accept returns for futureproducts that have reached or exceeded designated expiration dates and (iii) we will accept returns in the event that we discontinue a product provided that the customer will have the right to return only such items that it purchased directly from us. We will not accept return requests pertaining to customer inventory “Overstocking” or “Resets”. We will only accept return requests for product in its intended package configuration. We reserve the right to terminate shipment of product to customers who have made unauthorized deductions contrary to our return policy or pursue other methods of reimbursement. We compensate the customer for authorized returns by means of a credit applied to amounts owed or to be owed and in the case of discontinued product only, also by way of an exchange. We do not have any significant product exchange history.
PROPHASE LABS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
As of December 31, 2010 and December 31, 2009, we included a provision for sales returnsallowances of $106,000 and $280,973$127,000, respectively, which are reported as a reduction to account receivables. We also included an estimate of the uncollectability of our accounts receivable as an allowance for doubtful accounts of $13,000 and $23,000 as of December 31, 2010 and 2009, respectively. Additionally, accrued advertising and other allowances as of December 31, 20082010 include $1.5 million for estimated future sales returns, $1.2 million for cooperative incentive promotion costs and $295,606$828,000 for certain other advertising and $347,103 atmarketing promotions. As of December 31, 2007, respectively. The reserves also2009 accrued advertising and other allowances include an estimate of the uncollectability of accounts receivable resulting in a reserve of $131,162 at December 31, 2008$1.5 million for estimated future sales returns and $178,144 at December 31, 2007.
Cost of Sales
For the Cold Remedy segment, in accordance with contract terms, payments calculated based upon net sales collected to the patent holder of the Cold-Eeze formulation and payments to the corporation founders (this agreement terminated in 2005) and developers of the final saleable Cold-Eeze product (this agreement terminated in 2007) amounting to zero, $293,266 and $1,153,354, respectively, at December 31, 2008, 2007 and 2006 are presented in the financial statements as cost of sales.
Operating expenses
Agreements relating to the Cold Remedy segment with a major national sales brokerage firm are$586,000 for this firm to sell the manufactured Cold-Eeze product to our customers. Such related costs are presented in the financial statements as selling expenses.cooperative incentive promotion costs.
Shipping and Handling
Product sales relating to the Cold Remedy and Contract Manufacturing segments carry shipping and handling charges to the purchaser, included as part of the invoiced price, which is classified as revenue. In all cases, costs related to this revenue are recorded in cost of sales.
Stock Compensation
We recognize all share-based payments to employees and directors, including grants of stock options, as compensation expense in the financial statements based on their fair values. Fair values of stock options are determined through the use of the Black-Scholes option pricing model. The compensation cost is recognized as an expense over the requisite service period of the award, which usually coincides with the vesting period.
Stock options and warrants for purchase of the Company’sour common stock, $0.0005 par value, (“Common Stock”) have been granted to both employees and non-employees sincepursuant to the date the Company became publicly traded.terms of certain agreements and stock option plans (see Note 8). Options and warrants are exercisable during a period determined by the Company,us, but in no event later than ten years from the date granted. In Fiscal 2010, we charged to operations $192,000 in share-based compensation expense for the aggregate fair value of the stock grants and vested stock options issued during the year. There was no share-based compensation expense for Fiscal 2009 or 2008.
No stock options were granted to employeesVariable Interest Entity
The Joint Venture, of which we own a 50% membership interest effective March 22, 2010, qualifies as a variable interest entities (“VIE”) and non-employees in 2008, 2007 and 2006, respectively.we have consolidated the Joint Venture beginning with the quarter ended March 31, 2010 (see Note 3).
Advertising and Incentive Promotions
Advertising and incentive promotion costs are expensed within the period in which they are utilized. Advertising and incentive promotion expense is comprised of media advertising, presented as part of sales and marketing expense; co-operativecooperative incentive promotions and coupon program expenses, which are accounted for as part of net sales; and free product, which is accounted for as part of cost of sales. Advertising and incentive promotion costs incurred for the years ended December 31,Fiscal 2010, 2009 and 2008 2007were $6.9 million, $5.8 million, and 2006 were $7,654,452, $7,290,065, and $7,703,426,$7.7 million, respectively. Included in prepaid expenses and other current assets was $241,971$189,000 and $158,428$170,000 at December 31, 20082010 and 20072009, respectively, relating to prepaid advertising and promotion expenses.
Research and Development
Research and development costs are charged to operations in the period incurred. Expenditures for the years ended December 31,Fiscal 2010, 2009 and 2008 2007were $794,000, $1.3 million and 2006 were $4,241,724, $6,482,485 and $3,787,498,$4.2 million, respectively. Principally,For Fiscal 2010, research and development costs are related principally to Pharma’s study activitiesnew product development initiatives and costs associated with Cold-EezeÒ.OTC cold remedy products. For Fiscal 2009 and 2008, research and development costs are related principally to the Pharma’s study activities; such studies and initiatives are no longer actively being commercialized.
Income Taxes
The Company utilizesWe utilize the asset and liability approach which requires the recognition of deferred tax assets and liabilities for the future tax consequences of events that have been recognized in the Company’sour financial statements or tax returns. In estimating future tax consequences, the Companywe generally considersconsider all expected future events other than enactments of changes in the tax law or rates. Until sufficient taxable income to offset the temporary timing differences attributable to operations and the tax deductions attributable to option, warrant and stock activities are assured, a valuation allowance equaling the total net current and non-current deferred tax asset is being provided. (Seeprovided (see Note 13 – “Income Taxes” for further discussion.)10).
PROPHASE LABS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Effective January 1, 2007, the Company adopted Financial Interpretation ("FIN") No. 48, Accounting for Uncertainty in Income Taxes - An Interpretation of FASB Statement No. 109. This interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The interpretation containsNOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
We utilize a two-step approach to recognizing and measuring uncertain tax positions accounted for in accordance with SFAS No. 109.positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount which is more than fifty percent likely of being realized upon ultimate settlement. The interpretation also provides guidance on derecognition, classification,Any interest andor penalties and other matters. The adoption did not have an effect on the consolidated financial statements.related to uncertain tax positions will be recorded as interest or administrative expense, respectively.
As a result of the Company’sour continuing tax losses, the Company haswe have recorded a full valuation allowance against a net deferred tax asset.asset, except for an alternative minimum tax credit carryforward in the amount of $51,000. Additionally, the Company haswe have not recorded a liability for unrecognized tax benefits forat December 31, 2008 and 2007.2010 or 2009.
The major jurisdiction for which the Company fileswe file income tax returns is the United States. The Internal Revenue Service (“IRS”) has examined the Company’sour tax year ended September 30, 2005 and has made no changes to the filed tax returns. The tax years 2006 and forward remain open to examination by the IRS. The tax years 2004 and forward remain open to examination by the various state taxing authorities to which we are subject.
Effective December 31, 2009, we elected to conform our tax reporting year, historically a fiscal period ending September 30, to our financial reporting period ending December 31. As a consequence, we filed a full period tax return for the Company is subject.fiscal year ended September 30, 2009 with the IRS and also filed with the IRS a “short period return” for the three months ended December 31, 2009 in compliance with the election. In future fiscal periods, our tax and financial reporting periods will be the same, the period ending December 31.
Fair Value of Financial Instruments
Cash and cash equivalents, accounts receivable and accounts payable are reflected in the consolidated financial statementsFinancial Statements at carrying value which approximates fair value because of the short-term maturity of these instruments. The fair value of past periods’ long-term debt was approximately equivalent to its carrying value due to the fact that the interest rates then available to the Company for debt with similar terms were approximately equal to the interest rates for the Company’s debt. Determination of the fair value of related party payables, if any, is not practicable due to their related party nature.
Recently Issued Accounting Standards
In November 2008, the SEC issued for comment a proposed roadmap regarding the potential use by U.S. issuers of financial statements prepared in accordance with International Financial Reporting Standards (“IFRS”). IFRS is a comprehensive series of accounting standards published by the International Accounting Standards Board (“IASB”). Under the proposed roadmap, we could be required in fiscal 2014 to prepare financial statements in accordance with IFRS. The SEC will make a determination in 2011 regarding the mandatory adoption of IFRS. We are currently assessing the impact that this potential change would have on our consolidated financial statements and we will continue to monitor the development of the potential implementation of IFRS.
In September 2006,June 2009, the Financial Accounting Standards Board (FASB) issued Statement(“FASB”) modified the accounting standard related to consolidation. This standard, as modified, intends to improve financial reporting by enterprises involved with variable interest entities. This standard, as modified, addresses the effects on certain provisions relating to the Consolidation of Financial Accounting Standards No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair value, establishesVariable Interest Entities, as a framework for measuring fair valueresult of the elimination of the qualifying special-purpose entity concept in generally acceptedthe accounting principles (GAAP)standard related to transfers and expandsservicing, and constituent concerns about the application of certain key provisions of this standard, including those in which the accounting and disclosures under the standard do not always provide timely and useful information about fair value measurements. SFAS 157an enterprise’s involvement in a variable interest entity. This standard, as modified, is effective for fiscal yearsas of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2007 and2009, for interim periods within those fiscal years.that first annual reporting period, and for interim and annual reporting periods thereafter. Earlier application is prohibited. The adoption of thisthe consolidation standard, hasas modified, did not hadhave a significant impactmaterial effect on the Company’sour consolidated financial position, results of operations or cash flows.statements.
PROPHASE LABS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In February 2007,October 2009, the FASB issued SFASAccounting Standards Update No. 159, “2009-13, The Fair Value Option for Financial Assets and Financial Liabilities"Multiple-Deliverable Revenue Arrangements" ”, including an amendment of FASB("ASU No. 115 ("FAS 159"2009-13"). ASU No. 2009-13 amends guidance included within ASC Topic 605-25 to require an entity to use an estimated selling price when vendor specific objective evidence or acceptable third party evidence does not exist for any products or services included in a multiple element arrangement. The Statement permits companies to choose to measure many financial instrumentsarrangement consideration should be allocated among the products and certain other items at fair valueservices based upon their relative selling prices, thus eliminating the use of the residual method of allocation. ASU No. 2009-13 also requires expanded qualitative and quantitative disclosures regarding significant judgments made and changes in order to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. FAS 159applying this guidance. ASU No. 2009-13 is effective prospectively for the Company beginning January 1, 2008. The adoption of this standard has not had a significant impact on the Company’s consolidated financial position, results of operationsrevenue arrangements entered into or cash flows.
In December 2007, the FASB issued Statement of Financial Accounting Standard No. 160, “Noncontrolling Interestsmaterially modified in Consolidated Financial Statements — an amendment of ARB No. 51” (“FAS 160”). FAS 160 establishes accounting and reporting standards for the non-controlling interest in a subsidiary and for the retained interest and gain or loss when a subsidiary is deconsolidated. This statement is effective for financial statements issued for fiscal years beginning on or after DecemberJune 15, 2008 with earlier2010. Early adoption prohibited. Theand retrospective application are also permitted. We elected to adopt ASU No. 2009-13 early and the adoption of this standard isdid not expected to have a significant impactmaterial effect on the Company’sour consolidated financial position, results of operations or cash flows.statements.
In December 2007,January 2010, the FASB issued SFAS No. 141R, ASU 2010-06, “"Business Combinations," Improving Disclosures about Fair Value Measurements”.(“SFAS 141R”) which establishes principles ASU 2010-06 amends ASU 820 to require a number of additional disclosures regarding fair value measurements. The amended guidance requires entities to disclose the amounts of significant transfers between Level 1 and requirementsLevel 2 of the fair value hierarchy and the reasons for how an acquirer recognizesthese transfers, the reasons for any transfers in or out of Level 3, and measures in its financial statements the identifiable assets acquired, the liabilities assumed and any non-controlling interestinformation in the acquiree. SFAS 141Rreconciliation of recurring Level 3 measurements about purchases, sales, issuances and settlements on a gross basis. This ASU also establishes disclosure requirementsclarifies the requirement for entities to enabledisclose information about both the evaluationvaluation techniques and inputs used in estimating Level 2 and Level 3 fair value measurements as well as the level of the naturedisaggregation required for each class of asset and liability disclosed. The amended Level 1 and 2 guidance is effective for interim and annual financial effects of the business combination. SFAS 141R applies prospectively to business combinations for which the acquisition date is on or after theperiods beginning of the first annual reporting period beginning on or after December 15, 2008,2009 while the amended Level 3 guidance is effective for interim and interimannual financial periods within those fiscal years. beginning after December 15, 2010. The adoption of this standard willASU 2010-06 did not have any impacta material effect on the Company’sour consolidated financial position, results of operations or cash flows.statements.
NOTE 3 – DISCONTINUED OPERATIONSINVESTMENT IN PHUSION LABORATORIES, LLC.
On February 29, 2008,March 22, 2010, the Company, sold DariusPSI Parent, an Australian corporation, PSI, a Delaware corporation and subsidiary of PSI Parent, and the Joint Venture, a Delaware limited liability company, entered into the LLC Agreement of the Joint Venture and additional related agreements for the purpose of developing and commercializing, for worldwide distribution and sale, a wide range of non-prescription remedies using PSI Parent’s proprietary patented TPM. TPM facilitates the delivery and depth of penetration of active molecules in pharmaceutical, nutraceutical and other products.
In connection with the LLC Agreement, PSI Parent granted to InnerLight Holdings, Inc.us, pursuant to the terms of a License Agreement, dated March 22, 2010 (the “Original License Agreement”), whose major shareholder(i) an exclusive, royalty-free, world-wide (subject to certain limitations), paid-up license to exploit OTC drugs and certain other products that embody certain of PSI Parent’s TPM-related patents and related know-how (collectively, the “PSI Technology”) and (ii) a non-exclusive, royalty-free, world-wide (subject to certain limitations), paid-up license to exploit certain compounds that embody the PSI Technology for use in a product combining one or more of such compounds with an OTC drug or in a product that is Mr. Kevin P. Brogan,part of a regimen that includes the then presidentapplication of Darius.an OTC drug.
Pursuant to the Original License Agreement, we issued 1,440,000 shares of our Common Stock having an aggregate value of approximately $2.6 million to PSI Parent (such shares, the “PSI Shares”), and made a one-time payment to PSI Parent of $1.0 million. PSI Parent has agreed, pursuant to a Share Transfer Restriction Agreement, dated March 22, 2010 (the “Share Transfer Restriction Agreement”), between us and PSI Parent, that, with certain exceptions, it will not sell or otherwise dispose of any of the PSI Shares prior to June 1, 2012. The Quigley Corporation formed DariusPSI Shares were issued pursuant to an exemption from registration under the Securities Act, by virtue of Section 4(2) of the Securities Act and by virtue of Rule 506 of Regulation D under the Securities Act. Such sale and issuance did not involve any public offering and was made without general solicitation or advertising. Additionally, PSI Parent represented to us, among other things, that PSI Parent is not a US Person (as defined in 2000Regulation S under the Securities Act), that PSI Parent is an accredited investor with access to introduceall relevant information necessary to evaluate its investment and that the PSI Shares were being acquired for investment purposes only.
PROPHASE LABS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 – INVESTMENT IN PHUSION LABORATORIES, LLC. (CONTINUED)
In accordance with a Contribution Agreement, dated March 22, 2010 (the “Contribution Agreement”), by and among us, PSI Parent, PSI, and the Joint Venture, we transferred, conveyed and assigned to the Joint Venture all of our rights, title and interest in, to and under the Original License Agreement, and the Joint Venture assumed, and undertook to pay, discharge and perform when due, all of our liabilities and obligations under and arising pursuant to the Original License Agreement (such actions, collectively, the “Assignment and Assumption”).
Pursuant to the Contribution Agreement and in order to reflect the Assignment and Assumption, we, PSI Parent and the Joint Venture entered into an Amended and Restated License Agreement, dated March 22, 2010 (the “Amended License Agreement”), which amends and restates the Original License Agreement to reflect that the Joint Venture is the licensee thereunder and which otherwise contains substantially the same terms as the Original License Agreement. The Joint Venture has the right to grant one or more sub-licenses of the rights granted under the Amended License Agreement to one or more third parties for reasonable consideration in any part of the applicable territory. The Amended License Agreement provides that PSI Parent shall not, directly or through third parties, exploit the covered intellectual property during the term thereof, subject to certain limitations. The Amended License Agreement will remain in effect until the expiration of the last to expire of the patents included within the PSI Technology or any extensions thereof. Either party may terminate the Amended License Agreement upon written notice to the other party in the event of certain events involving bankruptcy or insolvency. The Amended License Agreement also contains, among other things, provisions concerning the treatment of confidential information, the ownership of intellectual property and indemnification obligations.
Pursuant to the LLC Agreement, we and PSI each own a 50% membership interest in the Joint Venture. PSI Parent will conduct and oversee much of the product development, formulation, testing and other research and development needed by the Joint Venture, and we will oversee much of the production, distribution, sales and marketing. The LLC Agreement provides that each member may be required, from time to time and subject to certain limitations, to make capital contributions to the Joint Venture to fund its operations, in accordance with agreed upon budgets for products to be developed. Specifically, we contributed $500,000 in cash as initial capital. In addition, we are committed to fund up to $2.0 million, subject to agreed upon budgets (which have not yet been established), toward the initial development and marketing costs of new products for the Joint Venture. The newly formed Joint Venture has not engaged in any financial transactions, other than organizational expenses and general market and product analysis. Formal operations are not expected to commence until Fiscal 2011. At December 31, 2010, cash and equivalents includes $425,000 related to the marketplace through a network of independent distributor representatives. Darius marketed healthJoint Venture which is expected to be used by the Joint Venture to fund future product development initiatives currently under consideration by PSI Parent, PSI and wellness products through its wholly-owned subsidiary, Innerlight Inc. that constituted the Health and Wellness segment of the Company. The terms of the sale agreement include a cash purchase price of $1,000,000 by InnerLight Holdings, Inc. for the stock of Darius and its subsidiaries without guarantees, warranties or indemnifications.
Sales of Darius in 2008 until date of disposal on February 29, 2008 and for the twelve month periods ended December 31, 2007 and 2006 were, respectively, $2,188,815, $11,233,879 and $15,274,940. Net income (losses) for 2008 until date of disposal on February 29, 2008 and for the twelve month periods ended December 31, 2007 and 2006, were $139,264, ($602,065) and ($1,200,692), respectively. Results of Darius are presented as discontinued operations in the Consolidated Statements of Operations and Cash Flows and in the Consolidated Balance Sheets. The major classes of balance sheet items of discontinued operations at December 31, 2007 were cash, inventory, prepaid expenses and other current liabilities.us.
The Joint Venture is managed by a four-person Board of Managers, with two managers appointed by each member. The initial Board of Managers is comprised of four representatives, two representatives from each of the Company recorded a gainand PSI Parent. The initial Company representatives on the disposalBoard of DariusManagers are Mr. Ted Karkus and Mr. Robert Cuddihy. Mr. Karkus, on our behalf, and Mr. Harry Rosen, on behalf of $736,252,PSI, are the Co-Chief Executive Officers of the Joint Venture. The LLC Agreement contains other normally found terms in such arrangements, including provisions relating to governance of the Joint Venture, indemnification obligations of the Joint Venture, allocation of profits and losses, the distribution of funds to the members and restrictions on transfer of a member’s interest.
Our initial determination is that the Joint Venture qualifies as a result of sales proceeds of $1,000,000 less residual investment of $5,000VIE and net assets of Darius of $258,748 onthat we are the date of sale.
NOTE 4 – VARIABLE INTEREST ENTITY
In December 2003,primary beneficiary. As a consequence, we have consolidated the Financial Accounting Standards Board (FASB or the “Board”) issued FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities (FIN 46R), to address certain implementation issues. FIN 46R varies significantly from FASB Interpretation No. 46, Consolidation of Variable Interest Entities (“VIE”) (FIN 46), which it supersedes. FIN 46R requires the application of either FIN 46 or FIN 46R by “Public Entities” to all Special Purpose Entities (“SPEs”) at the end of the first interim or annual reporting period ending after December 15, 2003. FIN 46R is applicable to all non-SPEs created prior to February 1, 2003 by Public Entities that are not small business issuers at the end of the first interim or annual reporting period ending after March 15, 2004. Effective March 31, 2004, the Company adopted FIN 46R for VIE’s formed prior to February 1, 2003. The Company had determined that Scandasystems, a related party, qualified as a variable interest entity and the Company consolidated ScandasystemsJoint Venture financial statements beginning with the quarter ended March 31, 2004. Due2010. For Fiscal 2010, the newly formed Joint Venture has not engaged in any financial transactions, other than certain organizational expenses and general market and product analysis, as formal operations are not expected to commence until Fiscal 2011. Furthermore, the factliabilities and other obligations incurred, if any, by the Joint Venture is without recourse to us and do not create a claim on our general assets. At December 31, 2010, we have recorded the $3.6 million payment representing the estimated fair value to acquire the product license as an intangible asset. We currently estimate the expected useful life of the product license to be approximately 12 years which we will begin amortizing the cost of intangible asset once production commercialization is completed with PSI Parent and the OTC drug products begin to ship to our retail customers. As of December 31, 2010, we have not established a formal commercialization program timeline for any specific OTC drug covered under the product license and we do not project that any OTC drug products will be available for shipment within the Company had no long-term contractual commitments or guarantees, the maximum exposure to loss was insignificant.next twelve months.
PROPHASE LABS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 – PROPERTY, PLANT AND EQUIPMENT
The components of Contents
property and equipment are as follows (in thousands):
The Company has determined that the conditions that applied in the past giving rise to the application of FIN 46R to the relationship between the Company and Scandasystems no longer apply. Therefore, effective with quarter ended March 31, 2008, Scandasystems balances were no longer consolidated with the Company’s financial results and balances. | | December 31, | | |
| | 2010 | | | 2009 | | Estimated Useful Life |
| | | | | | | |
Land | | $ | 504 | | | $ | 504 | | |
Buildings and improvements | | | 2,281 | | | | 2,281 | | 20 - 39 years |
Machinery and equipment | | | 2,592 | | | | 2,535 | | 3 - 7 years |
Computer software | | | 192 | | | | 215 | | 3 years |
Furniture and fixtures | | | 182 | | | | 192 | | 5 years |
| | | 5,751 | | | | 5,727 | | |
| | | | | | | | | |
Less: Accumulated depreciation | | | 3,389 | | | | 3,155 | | |
| | $ | 2,362 | | | $ | 2,572 | | |
Depreciation expense for Fiscal 2010, 2009 and 2008 was $363,000, $522,000, and $745,000, respectively. We disposed of certain automobiles in Fiscal 2009 with an aggregate net book value of $114,000. The automobiles were purchased by certain former executive officers at our then book value of the automobiles.
NOTE 5 – PROPERTY, PLANT AND EQUIPMENT
Consisted of the following as of:
| | December 31, 2008 | | | December 31, 2007 | |
Land | | $ | 538,791 | | | $ | 538,791 | |
Buildings and improvements | | | 2,691,610 | | | | 2,688,158 | |
Machinery and equipment | | | 4,933,197 | | | | 4,988,292 | |
Computer software | | | 134,007 | | | | 113,013 | |
Furniture and fixtures | | | 238,788 | | | | 235,544 | |
| | | 8,536,393 | | | | 8,563,798 | |
Less: Accumulated depreciation | | | 4,869,645 | | | | 4,226,258 | |
Property, Plant and Equipment, net | | $ | 3,666,748 | | | $ | 4,337,540 | |
Depreciation expense for the years ended December 31, 2008, 2007 and 2006 was $743,670, $937,852, and $1,145,792, respectively. During the year ended December 31, 2008, the Company retired equipment with an original cost of approximately $127,169 and accumulated depreciation of approximately $100,283. In addition, an amount of $100,000 was recorded during the year ended December 31, 2008 representing impairment costs of fixed assets at the Elizabethtown, Pennsylvania, manufacturing facility.
NOTE 6 – PATENT RIGHTS AND RELATED ROYALTY COMMITMENTS
The Company hasWe have maintained a separate representation and distribution agreement relating to the development of the zinc gluconate glycine product formulation. In return for exclusive worldwide distribution rights, the Company mustwe agreed to pay the developer a 3% royalty and a 2% consulting fee based on sales collected, less certain deductions, throughout the term of this agreement, which expired May 2007. However, the Companywe and the developer are in litigation (see Note 9)7) and as such no potential offset for these fees from such litigation has been recorded.
The expense for the respective periods relating to this agreement amounted to zero, $293,266 and $1,153,354, for the years ended December 31, 2008, 2007 and 2006, respectively. Amountamount accrued for this expense at each of December 31, 20082010 and 20072009 was $3,524,031, on both dates.$3.5 million.
NOTE 76 – LONG-TERM DEBTOTHER CURRENT LIABILITIES
In connection with the Company’s acquisition of certain assets of JoEl, Inc. in October 2004, the Company entered into a term loan in the amount of $3 million payableAt December 31, 2010 and 2009, other current liabilities include $483,000 and $386,000, respectively, related to PNC Bank, N.A. which was collateralized by mortgages on real property located in each of Lebanon and Elizabethtown, Pennsylvania. The Company could elect interest rate options at either the Prime Rate or LIBOR plus 200 basis points. The loan was payable in eighty-four equal monthly principal payments of $35,714 that commenced on November 1, 2004. In April 2005, the Company prepaid an amount of $1.0 million against the outstanding balance on the long-term loan. In April 2006, the Company prepaid the total outstanding balance of approximately $1.3 million.accrued compensation.
NOTE 8 – OTHER CURRENT LIABILITIES
Included in other current liabilities are $215,350 and $1,240,767 related to accrued compensation at December 31, 2008 and 2007, respectively.
NOTE 97 – COMMITMENTS AND CONTINGENCIES
Certain operating leases for office and warehouse space maintained by the Companyus resulted in rent expense for the years ended December 31,Fiscal 2010, 2009 and 2008 2007of $11,000, $44,000 and 2006, of $53,200, $68,436, and $60,735,$53,000, respectively. The Company hasWe have approximate future obligations over the next five years as follows:
Year | | Research and Development | | | Property and Other Leases | | | Advertising | | | Product Purchases | | | Total | |
2009 | | $ | 442,000 | | | $ | 19,406 | | | $ | 1,920,173 | | | $ | 1,355,000 | | | $ | 3,736,579 | |
2010 | | | - | | | | - | | | | - | | | | 1,321,000 | | | | 1,321,000 | |
2011 | | | - | | | | - | | | | - | | | | 671,000 | | | | 671,000 | |
2012 | | | - | | | | - | | | | - | | | | - | | | | - | |
2013 | | | - | | | | - | | | | - | | | | - | | | | - | |
Total | | $ | 442,000 | | | $ | 19,406 | | | $ | 1,920,173 | | | $ | 3,347,000 | | | $ | 5,728,579 | |
follows (in thousands):
Year | | Employment Contracts | | | Advertising(1) | | | Total | |
2011 | | $ | 1,075 | | | $ | 1,206 | | | $ | 2,281 | |
2012 | | | 582 | | | | - | | | | 582 | |
2013 | | | - | | | | - | | | | - | |
2014 | | | - | | | | - | | | | - | |
2015 | | | - | | | | - | | | | - | |
Total | | $ | 1,657 | | | $ | 1,206 | | | $ | 2,863 | |
(1) Additional advertising and research and development costs are expected to be incurred during the remainder of 2009.Fiscal 2011.
During July 2008,PROPHASE LABS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 – COMMITMENTS AND CONTINGENCIES (CONTINUED)
In August, 2009, we entered into a standard form of indemnity agreement with each member of our Board of Directors, Mr. Ted Karkus, our Chairman and Chief Executive Officer, and Mr. Robert V. Cuddihy, Jr., our Chief Operating Officer. These agreements provide, among other things, that we will indemnify each director, Mr. Karkus and Mr. Cuddihy in the event that they become a party or otherwise a participant in any action or proceeding on account of their service as a director or officer of the Company entered into an(or service for another corporation or entity in any capacity at the request of the Company) to the fullest extent permitted by applicable law. Under the indemnity agreement, withwe will pay, in advance of the final disposition of any such action or proceeding, expenses (including attorneys’ fees) incurred by our directors or officers in defending or otherwise responding to such action or proceeding upon receipt of a vendorwritten undertaking from the directors or officers to purchase a minimum order of product, withrepay the amount advanced consistent with applicable law in the event that a court shall ultimately determine that he or she is not entitled to be indemnified for such expenses. The contractual rights to indemnification provided by the indemnity agreements are subject to the limitations and conditions specified in the agreements, and are in addition to any other rights each director and officer may have under our Articles of approximately $3,347,000 remaining, over a three year period in its capacityIncorporation and Amended and Restated Bylaws, each as an exclusive reseller, marketeramended from time to time, and distributor of a cough and cold product incorporating a patented, proprietary delivery system.applicable law.
On August 19, 2009, we entered into employment agreements, effective as of July 2, 2008,15, 2009, with each of Mr. Karkus and Mr. Cuddihy.
Pursuant to the terms of Mr. Karkus’ employment agreement, which has a three year term, Mr. Karkus (i) will earn a salary of $750,000 per year as Chief Executive Officer, (ii) will receive regular benefits routinely provided to our senior executives and (iii) is eligible to receive an annual increase in base salary and may be awarded a bonus, payable in cash or stock, each in the sole discretion of the Board of Directors. Mr. Karkus is also subject to non-competition restrictions for the entire duration of the agreement and for a period of 18 months thereafter. In the event of the termination by the Company entered into anof the employment of Mr. Karkus without cause or due to a voluntary resignation by him without Good Reason (as defined in the agreement), Mr. Karkus will be paid a lump sum severance payment in cash equal to the greater of (A) the amount equal to 18 months base salary or (B) the amount equal to his base salary for the remainder of the term as if the agreement with Dr. Richard Rosenbloom, Executive Vice President andhad not been terminated. Additionally, Mr. Karkus is entitled to receive a lump sum severance payment in cash equal to the greater of A or B, if he, within 24 months of a Change in Control (as defined in the agreement) of the Company, is terminated without cause or due to a voluntary resignation by him without Good Reason (as defined in the agreement).
Pursuant to the terms of Mr. Cuddihy’s employment agreement, which has a three year term, Mr. Cuddihy (i) will earn a salary of $275,000 per year as Chief Operating Officer, (ii) will receive regular benefits routinely provided to our senior executives, (iii) is eligible to receive an annual increase in base salary and may be awarded a bonus, payable in cash or stock, each in the sole discretion of Pharma, wherebythe Board of Directors and (iv) will receive an annual grant of shares of Common Stock that is equal to $50,000, payable quarterly, promptly following the close of each quarter. The value of the shares is calculated based on the average closing price of our shares for the last five (5) trading days of the quarter in which the shares are earned. Mr. Cuddihy earned an aggregate of 35,075 shares valued at $50,000, and 11,004 shares valued $23,000 for Fiscal 2010 and 2009, respectively, pursuant to the terms of the employment agreement, 36,111 of such shares were issued during Fiscal 2010. Mr. Cuddihy is also subject to non-competition restrictions for the entire duration of the agreement and for a period of 18 months thereafter. In the event of the termination by the Company agreedof the employment of Mr. Cuddihy without cause or due to compensate Dr. Rosenbloom for assigning,a voluntary resignation by him without Good Reason (as defined in the agreement), Mr. Cuddihy will be paid a lump sum severance payment in cash equal to the Company,greater of (Y) the entire right, title and interest in andamount equal to Dr. Rosenbloom’s concepts and/18 months of base salary plus $50,000, or inventions made prior(Z) the amount equal to base salary, plus any amounts owed to Mr. Cuddihy under Section 4(c) of the agreement with respect to the dategrant of shares equal to $50,000 per year, owed throughout the remainder of the term as if the agreement had not been terminated. Additionally, Mr. Cuddihy is entitled to receive a lump sum severance payment in cash equal to the greater of Y or Z, if he, became an employeewithin 24 months of The Quigley Corporation. In consideration of, and as full compensation for, the covenants madea Change in Control (as defined in the agreement,agreement) of the Company, shall pay Dr. Rosenbloom compensationis terminated without cause or due to a voluntary resignation by him without Good Reason (as defined in the amount of five percent (5%) of net sales collected, less certain deductions, of royalty bearing products. This agreement has no current financial impact to the Company due to the absence of Pharma related sales.agreement).
PROPHASE LABS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company has had other contractual agreements. (See Note 6.)NOTE 7 – COMMITMENTS AND CONTINGENCIES (CONTINUED)
TESAURO AND ELEY, ET AL. VS. THE QUIGLEY CORPORATION (currently PROPHASE LABS, INC.) VS. JOHN C. GODFREY, ET AL.
(CCP of Phila., August Term 2000, No. 001011)
In September 2000, the CompanyThis action was suedcommenced by two individuals (Jason Tesauro and Elizabeth Eley, both residents of Georgia), allegedly on behalf of a "nationwide class" of "similarly situated individuals,"us in November 2004 in the Court of Common Pleas of PhiladelphiaBucks County, Pennsylvania. The Complaint further alleges that the plaintiffs purchased certain Cold-Eeze products between August 1996, and November 1999, based upon cable television, radio and internet advertisements, which allegedly misrepresented the qualities and benefits of the Company's products. The Complaint, as pleaded originally, requested an unspecified amount of damages for violations of Pennsylvania's consumer protection law, breach of implied warranty of merchantability and unjust enrichment, as well as a judicial determination that the action be maintained as a class action. In October 2000, the Company filed Preliminary Objections to the Complaint seeking dismissal of the action. The court sustained certain objections, thereby narrowing plaintiffs' claims.
In May 2001, plaintiffs filed a motion to certify the putative class. The Company opposed the motion. In November 2001, the court held a hearing on plaintiffs' motion for class certification. In January 2002, the court denied in part and granted in part plaintiffs' motion. The court denied plaintiffs' motion to certify a class based on plaintiffs' claims under Pennsylvania's consumer protection law, under which plaintiffs sought treble damages, effectively dismissing this cause of action; however, the court certified a class based on plaintiffs' secondary breach of implied warranty and unjust enrichment claims. In August, 2002, the court issued an order adopting a form of Notice of Class Action to be published nationally. Significantly, the form of Notice approved by the court included a provision which limits the potential class members who may potentially recover damages in this action to those persons who present a proof of purchase of Cold-Eeze during the period August 1996 and November 1999.
Afterward, a series of pre-trial motions were filed raising issues concerning trial evidence and the court's jurisdiction over the subject matter of the action. In March, 2005, the court held oral argument on these motions.
Significantly, on November 8, 2006, the Court entered an Order dismissing the case in its entirety on the basis that the action was preempted by federal law. The plaintiffs appealed the Court's decision in December, 2006 to the Superior Court of the Commonwealth of Pennsylvania. On February 19, 2008, the Superior Court upheld defendant's appeal and remanded the case to the Philadelphia County Court of Common Pleas for trial.
The case commenced trial on February 2, 2009. On February 6, 2009, the jury returned a verdict in favor of the Company on all counts. Plaintiffs had to February 17, 2009, to file post-trial motions, the first step in the appeal process. No post-trial motions were filed by the plaintiffs. At this time the Company has no notice as to whether the plaintiffs will attempt to perfect an appeal.
THE QUIGLEY CORPORATION VS. JOHN C. GODFREY, ET AL.
(Bucks Co. CCP, No. 04-07776)
In this action, which was commenced in November 2004, the Company is seeking declaratory and injunctive reliefPennsylvania against John C. Godfrey, Nancy Jane Godfrey, and Godfrey Science and Design, Inc. requestingfor injunctive relief regarding the Cold-Eeze trade name andCold-EEZE® trademark; injunctive relief relating to the Cold-EezeCold-EEZE® formulations and manufacturing methods; injunctive relief for breach of the duty of loyalty, and declaratory judgment pendingregarding various payments that the Company's payment of commissionsdefendants assert are owing to defendants. The Company's Complaintthem. Our complaint is based in part upon certain contracts with defendants whereby we obtained the Exclusive Representationexclusive right to manufacture and Distribution Agreementdistribute product pursuant to a basic patent and also obtained various consulting services (the "Agreements"). Subsequent to entering into the Agreements, the defendants took various actions that we believe were in breach of the Agreements. We instituted the action because of defendants' threats to deal with other parties and to use the Company’s Cold-EEZE® trademark and the Consulting Agreement (together the "Agreements") entered into between the defendantstrade secrets that we developed during our manufacture of Cold-EEZE®. Both because of their breaches and the Company. The Companyexpiration of the basic patent, we terminated the Agreements for the defendants' alleged material breaches of the Agreements. Defendants have answered the complaint and asserted counterclaims against the Company seeking remediescounterclaims. They seek monetary damages and counter injunctive and declaratory relief relative to the Company's trademark and other intellectual property. The monetary relief sought by the defendants is based on their claim that they were not paid various amounts asserted to be due under the Agreements. The Company believesThis claim is estimated to be in excess of $5.0 million. We believe that the defendants' counterclaims are without merit and isare vigorously defending those counterclaims and isare prosecuting itsour action on itsthe complaint.
The discovery phase of pre-trialPre-trial discovery is nearing completion.ongoing. Defendants moved for partial summary judgment, and the Companywe filed a response and cross-motion for summary judgment. On August 21, 2008, the court denied both motions for summary judgment. The case has not been assigned to a trial calendar, although it is possible that the case will be listed for trial in 2009.2011.
At this time no prediction as to the outcome of this action can be made.
NICODROPS, INC. VS. QUIGLEY MANUFACTURING, INC.
On January 30, 2006, Quigley Manufacturing, Inc., a wholly-owned subsidiary of The Quigley Corporation, was put on notice of a claim by Nicodrops, Inc. Nicodrops, Inc. has claimed that the packaging contained incorrect expiration dates and caused it to lose sales through two (2) retailers. The total alleged sales of Nicodrops was approximately $250,000 and Nicodrops is claiming unspecified damages exceeding $2,000,000.
No suit has been filed. The Company is investigating this claim. Based on its investigation to date, the Company believes the claim is without merit. However, at this time no prediction can be made as to the outcome of this case.
THE QUIGLEY CORPORATION (currently PROPHASE LABS, INC.) VS. WACHOVIA INSURANCE SERVICES, INC. AND FIRST
UNION INSURANCE SERVICES AGENCY, INC.
The Quigley CorporationWe instituted a Writ of Summons against Wachovia Insurance Services, Inc. and First Union Insurance Services Agency, Inc. on December 8, 2005.2005 in the Court of Common Pleas of Bucks County, Pennsylvania. The purpose of this suit was to maintain an action and toll the statute of limitation against The Quigley Corporation'sour insurance broker who failed to place excess limits coverage for the Companyus for the period from November 29, 2003 until April 6, 2004. As a result of the defendant's failure to place insurance and to notify the Company of its actions,us thereof, certain pending actions covered by the Company'sour underlying insurance, at the present time may result in certain cases presentlywhich are currently being defended by insurance counsel and the underlying insurance carrier tomay cause an exhaustion of the underlying insurance for the policy periods ending November 29, 2004 and November 29, 2005. Any case in which an alleged action arose byrelating to the use of COLD-EEZECold-EEZE® Nasal Spray from November 29, 2003 to April 6, 2004 is not covered by excess insurance.
The Company'sOur claim against Wachovia Insurance Services, Inc. and First Union Insurance Services Agency, Inc. is for negligence and for equitable insurance for these claims based on the Company'sour undertaking of certain attorneys' fees and costs of settlement for claims that should have been covered by underlying insurance placed by Wachovia Insurance Services, Inc.
At this time no prediction can be made as to the outcome of any action against Wachovia Insurance Services, Inc. and First Union Insurance Services Agency, Inc.
TERMINATED LEGAL PROCEEDINGS
CAROLYN SUNDERMEIER VS.PROPHASE LABS, INC.(formerly THE QUIGLEY CORPORATION
(Pa. C.C.P.CORPORATION) VS. GUY QUIGLEY, GARY QUIGLEY, SCANDA SYSTEMS LIMITED, SCANDA SYSTEMS LTD, CHILESHA HOLDINGS LTD, KEVIN BROGAN, INNERLIGHT HOLDINGS, INC., Bucks County, Docket No.: 07-01324-26-2)
GEORGE LONGO, GRAHAM BRANDON, PACIFIC RIM PHARMACEUTICALS LTD AND JOHN DOE DEFENDANTS
On February 16, 2007, plaintiff filedAugust 23, 2010, we initiated an action in the Court of Common Pleas offor Bucks County, Pennsylvania. The complaint was served onThis action is against certain former officers and directors of the Company, on February 20, 2007.including a shareholder that beneficially owns approximately 20.2% of our Common Stock, and against certain third parties (a “Complaint”). The action allegesCompany has asserted claims arising from, among other things, a variety of transactions and payments previously made or entered into by the plaintiff suffered certain losses and injuries as a result of using the Company's nasal spray product. Plaintiff's complaint consists of counts for negligence, strict products liability (failure to warn), strict products liability (defective design), breach of express and implied warranties, and violations under the Pennsylvania Unfair Trade Practices and Consumer Protection Law and other consumer protection statutes.
This action was recently settled at the directionCompany. All of the insurance carrier out of insurance proceeds.
MONIQUE FONTENOT DOYLE VS. THE QUIGLEY CORPORATION
(U.S.D.C., W.D. La. Docket No.: 6:06CV1497)
On August 31, 2006,transactions and events that are the plaintiff filed an action against the Company in the United States District Court for the Western District of Louisiana (Lafayette-Opelousas Division). The action alleges that the plaintiff suffered certain losses and injuries as a resultsubject of the Company's nasal spray product. Among the allegations of plaintiff are breach of express warranties and damages pursuantComplaint occurred prior to the Louisiana Products Liability Act.
This case was turned over to The Quigley Corporation for defense and settlement and it was settled for less than the cost of defense after discovery was partially completed. The cost of defenseJune 2009 and the settlement remain claims against Wachovia Insurance Services, Inc. and First Union Insurance Services Agency, Inc. The Company's claim against Wachovia Insurance Services, Inc. and First Union Services Agency, Inc. is for negligence and for equitable insurance.
HOWARD POLSKI AND SHERYL POLSKI VS. THE QUIGLEY CORPORATION, ET AL.
(U.S.D.C., D. Minn. Docket No.: 04-4199 PJS/JJG)
On August 12, 2004, plaintiffs filed an action against the Company in the District Court for Hennepin County, Minnesota, which was not served until September 2, 2004. On September 17, 2004, the Company removed the case to the United States District Court for the District of Minnesota. The action alleges that plaintiffs suffered certain losses and injuries as a resultinstallation of the Company's nasal spray product. Among the allegationscurrent Board of plaintiffs are negligence, products liability, breach of express and implied warranties, and breach of the Minnesota Consumer Fraud Statute.
On September 5, 2007, the Company obtained a judgment in its favor, as a matter of law, and that decision was appealed to the Eighth Circuit Court of Appeals. On August 13, 2008, the Eighth Circuit Court of Appeals upheld the judgment in favor of the Company. The plaintiffs had until December 3, 2008 to file a Petition for Allocatur to the Supreme Court of the United States. No Petition for Allocatur was filed in this case and the Company has a final judgment in its favor.Directors.
PROPHASE LABS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 108 – TRANSACTIONS AFFECTING STOCKHOLDERS’ EQUITY AND STOCK COMPENSATION
Stockholder Rights Plan
On September 8, 1998, the Company’sour Board of Directors declared a dividend distribution of Common Stock Purchase Rights (individually,(each individually, a “Right” and collectively, the “Rights”), thereby creating a Stockholder Rights Plan (the “Plan”). The dividend was payable to the stockholders of record on September 25, 1998. Each1998, thereby creating a Stockholder Rights Plan (the “Rights Agreement”). The Plan was amended effective May 23, 2008 (“First Amendment”) and further amended effective August 18, 2009 (“Second Amendment”). The Rights Agreement, as amended, provides that each Right entitles the stockholder of record to purchase from the Company that number of common shares having a combined market value equal to two times the Rights exercise price of $45. The Rights are not exercisable until the distribution date, which will be the earlier of a public announcement that a person or group of affiliated or associated persons has acquired 15% or more of the outstanding common shares, or the announcement of an intention by a similarly constituted party to make a tender or exchange offer resulting in the ownership of 15% or more of the outstanding common shares. The dividend has the effect of giving the stockholder a 50% discount on the share’s current market value for exercising such right. In the event of a cashless exercise of the Right, and the acquirer has acquired less than 50% beneficial ownership of the Company, a stockholder may exchange one Right for one common share of the Company. The final expiration date of the Plan was September 25, 2008, prior to the amendment.
On May 23, 2008, the Company entered into an amendment ("Amendment No. 1") to the Rights Agreement, dated as of September 15, 1998, between the Company and American Stock Transfer & Trust Company (the "Rights Agreement") dated as of May 20, 2008, pursuant to which the term of the Rights Agreement was extended until September 25, 2018. In addition, Amendment No. 1 addedamended, includes a provision pursuant to which the Company's boardour Board of directorsDirectors may exempt from the provisions of the Rights Agreement an offer for all outstanding shares of the Company's common stockour Common Stock that the directors determine to be fair and not inadequate and to otherwise be in the best interests of the Company and its stockholders, after receiving advice from one or more investment banking firms.
Since the inception The expiration date of the stock buy-back program in January 1998, the Board has subsequently increased the authorization on five occasions, for a total authorized buy-back of 5,000,000 shares or approximately 38% of the previous shares outstanding. Such shares are reflectedRights Agreement, as treasury stock and will be available for general corporate purposes. From the initiation of the plan until December 31, 2008, 4,159,191 shares have been repurchased at a cost of $24,042,801 or an average cost of $5.78 per share. No shares were repurchased during 2008 or 2007.amended, is September 25, 2018.
During the year ended December 31, 2008, a total of 55,250 options were exercised.
In July 2004, the Company announced that its Board of Directors had approved a distribution-in-kind to its stockholders of approximately 500,000 shares of common stock of Suncoast Naturals, Inc., now called Patient Portal Technologies, Inc. (OTCBB: PPRG), which it acquired through a sale of the Company’s 60% equity interest in Caribbean Pacific Natural Products, Inc. These shares were distributed on the basis of approximately .0434 shares of Suncoast common stock for each share of the Company’s common stock owned of record on September 1, 2004, with fractional shares paid in cash. As a result of the Company’s dividend-in-kind to stockholders and the issuance of 499,282 shares of common stock of Suncoast in September 2004, representing approximately two-thirds of its common stock ownership, the remaining 25,072 shares (250,718 reverse split 1 for 10 in September 2006) and subsequent shares acquired through a conversion of Suncoast’s Preferred stock owned by the Company and now totaling 875,072 shares, owned by the Company which are valued at $26,455 and such amount is included in Other Assets in the Consolidated Balance Sheet at December 31, 2008.
NOTE 11 – STOCK COMPENSATION
Stock options for purchase of the Company’s common stock have been granted to both employees and non-employees. Options are exercisable during a period determined by the Company, but in no event later than ten years from the date granted.
The 1997 Option Plan
On December 2, 1997, the Company’sour Board of Directors approved a new Stock Option Plan (“(the “1997 Plan”), which was amended in 2005, and providesprovided for the granting of up to four4.5 million five hundred thousand shares of which 1,753,750 remain available for grant at December 31, 2008.Common Stock. Under thisthe 1997 Plan, the Company maywe were permitted to grant options to employees, officers or directors of the Company at variable percentages of the market value of stock at the date of grant. No incentive stock option shallcould be exercisable more than ten years after the date of grant or five years after the date of grant where the individual owns more than ten percent of the total combined voting power of all classes of stock of the Company.stock. Stockholders approved the 1997 Plan in Fiscal 1998. No options were granted under this Plan during the years endedFiscal 2010, 2009 or 2008.
At December 31, 2008,2009, we are precluded from issuing any additional options or grants in the future under the 1997 Plan pursuant to the terms of the plan document. Options previously granted continue to be available for exercise at any time prior to such options’ respective expiration dates, but in no event later than ten years from the date granted. At December 31, 2010, there are 317,750 options outstanding with various expiration dates ranging from May 2011 through December 2015, depending upon the date of grant.
The 2010 Equity Compensation Plan
On May 5, 2010, our shareholders approved the 2010 Equity Compensation Plan. The 2010 Equity Compensation Plan provides that the total number of shares of Common Stock that may be issued is equal to 900,000 shares plus up to 900,000 shares that are authorized for issuance, Issued Options (defined below) but unissued under the 1997 Plan Stock Options Plan (the “1997 Plan”), an aggregate of 1.8 million shares. The 1997 Plan expired on December 2, 2007 and 2006, respectively.no additional awards may be made; however, as of March 31, 2010, there remained 1,449,750 shares subject to vested options that were authorized for issuance (the “Issued Options”) but were unissued under the 1997 Plan. As of December 31, 2010, 1,039,500 of the Issued Options under the 1997 Plan expired unexercised or were terminated (the “Expired Options”). As a consequence, these shares are deemed and remain unissued which up to a maximum of 900,000 shares become available for issuance under the 2010 Equity Compensation Plan and the remaining 139,500 options are deemed cancelled.
In December 2010, we granted 982,000 options to acquire our Common Stock at an exercise price of $1.00 per share to employees pursuant to the terms of 2010 Equity Compensation Plan. Pursuant to the terms of the grant of options, the options are subject to vesting over a three to six year period and are exercisable no later than December 2017. At December 31, 2010, 45,500 of the options granted were vested and 936,500 are subject to vesting. The fair value of the stock options at the time of the grant was approximately $618,000. Each of the stock options granted were subject to vesting such that the fair value of the stock options granted is charged to operations over the vesting period. For Fiscal 2010, we charged to operations $42,000 in share-based compensation expense for the aggregate fair value of the stock grants and vested stock options issued. There was no share-based compensation expense for Fiscal 2009 or 2008.
PROPHASE LABS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 – STOCKHOLDERS’ EQUITY AND STOCK COMPENSATION (CONTINUED)
The weighted average fair value using the Black-Scholes option pricing model of Contentsthe options granted during Fiscal 2010 was $0.65. Based upon our limited historical experience, we estimated approximately 27,300 may ultimately be forfeited. The fair value of the stock options at the date of grant was estimated using the Black-Scholes option pricing model for each option classification assuming (i) an expected option life of 4.5 to 6.5 years, (ii) risk free interest rate of 2.1%, (iii) a dividend yield of 0% and (iv) an expected volatility of 72% to 77%.
The expected volatility of the stock options is based on our historical stock volatility. As a consequence of different vesting terms of the options granted, we determined the expected term of the stock option grants to be a range between 4.5 to 6.5 years, calculated using the “simplified” method in accordance with the SEC Staff Accounting Bulletin 110. We use the “simplified” method since we changed the vesting terms, tax treatment and the recipients of our stock options beginning in 2010 such that we believe our historical data does not provide a reasonable basis upon which to estimate expected term.
All of the Company’s employees, including employees who are officers or members of the Board are eligible to participate in the 2010 Equity Compensation Plan. Consultants and advisors who perform services for the Company are also eligible to participate in the 2010 Equity Compensation Plan. At December 31, 2010, there are 818,000 options available for grant to purchase shares of Common Stock that may be issued pursuant to the terms of the 2010 Equity Compensation Plan.
The 2010 Directors Equity Compensation Plan
On May 5, 2010, our shareholders approved the 2010 Directors’ Equity Compensation Plan. A primary purpose of the 2010 Directors’ Equity Compensation Plan is to provide us with the ability to pay all or a portion of the fees of Directors in restricted stock instead of cash. The 2010 Directors’ Equity Compensation Plan provides that the total number of shares of Common Stock that may be issued under the 2010 Directors’ Equity Compensation Plan is equal to 250,000. As of December 31, 2010, we granted 67,625 shares of our Common Stock valued at $90,000 for director compensation. At December 31, 2010, there are 182,375 shares of Common Stock that may be issued pursuant to the terms of the 2010 Directors Equity Compensation Plan.
Stock Option Exercises and Status of Stock Option Plans
For Fiscal 2010, 2009 and 2008, we derived net proceeds of $133,000, $127,000 and $64,000, respectively, as a consequence of the exercise of options to acquire 130,500, 125,000 and 55,250 shares, respectively, of our Common Stock pursuant to the terms of our 1997 Option Plan.
A summary of the status of the Company’sour stock options and warrants granted to both employees and non-employees as of December 31, 2008, 20072010, 2009 and 20062008 and changes during the years then ended is presented below:below (in thousands, except per share data):
Year Ended December 31, 2008:
| | Employees | | | Non-Employees | | | Total | |
| | | | | | | | | | | | | | | | | | |
| | | | | Weighted | | | | | | Weighted | | | | | | Weighted | |
| | | | | Average | | | | | | Average | | | | | | Average | |
| | Shares | | Exercise | | | Shares | | Exercise | | | Shares | | Exercise | |
| | (,000) | | Price | | | (,000) | | Price | | | (,000) | | Price | |
Options/warrants outstanding | | | | | | | | | | | | | | | | | | | | | |
at beginning of period | | | 1,967 | | | | $7.25 | | | | 515 | | | | $9.42 | | | | 2,482 | | | | $7.70 | |
Additions/deductions: | | | | | | | | | | | | | | | | | | | | | | | | |
Granted | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Exercised | | | 55 | | | | 1.16 | | | | - | | | | - | | | | 55 | | | | 1.16 | |
Cancelled | | | 159 | | | | 9.15 | | | | - | | | | - | | | | 159 | | | | 9.15 | |
Options/warrants outstanding | | | | | | | | | | | | | | | | | | | | | | | | |
at end of period | | | 1,753 | | | | $7.27 | | | | 515 | | | | $9.42 | | | | 2,268 | | | | $7.76 | |
Options/warrants exercisable | | | | | | | | | | | | | | | | | | | | | | | | |
at end of period | | | 1,753 | | | | $7.27 | | | | 515 | | | | $9.42 | | | | 2,268 | | | | $7.76 | |
Weighted average fair value of | | | | | | | | | | | | | | | | | | | | | | | | |
grants for the year | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Price range of options/warrants: | | | | | | | | | | | | | | | | | | | | | | | | |
Exercised | | $ 0.81 - $ 1.26 | | | - | | | $ 0.81 - $ 1.26 | |
Outstanding | | $ 0.81 - $13.80 | | | $ 0.81 - $13.80 | | | $ 0.81 - $13.80 | |
Exercisable | | $ 0.81 - $13.80 | | | $ 0.81 - $13.80 | | | $ 0.81 - $13.80 | |
Year Ended December 31, 2007: | | Year Ended December 31, | |
| | 2010 | | | 2009 | | | 2008 | |
| | | | | Weighted Average | | | | | | Weighted Average | | | | | | Weighted Average | |
| | Shares | | | Exercise Price | | | Shares | | | Exercise Price | | | Shares | | | Exercise Price | |
Options outstanding - beginning of year | | | 1,488 | | | $ | 8.64 | | | | 2,268 | | | $ | 7.76 | | | | 2,482 | | | $ | 7.70 | |
Granted | | | 982 | | | | 1.00 | | | | - | | | | - | | | | - | | | | - | |
Exercised | | | (131 | ) | | | 1.02 | | | | (125 | ) | | | 1.01 | | | | (55 | ) | | | 1.16 | |
Cancelled | | | (1,039 | ) | | | 9.45 | | | | (655 | ) | | | 7.02 | | | | (159 | ) | | | 9.15 | |
Options outstanding - end of year | | | 1,300 | | | $ | 2.99 | | | | 1,488 | | | $ | 8.64 | | | | 2,268 | | | $ | 7.76 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Options granted and subject to future vesting | | | 936 | | | $ | 1.00 | | | | - | | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Exercisable, at end of year | | | 363 | | | | | | | | 1,488 | | | | | | | | 2,268 | | | | | |
Available for grant | | | 818 | | | | | | | | - | | | | | | | | - | | | | | |
Weighted average fair value per share of options granted during year | | $ | 0.65 | | | | | | | $ | - | | | | | | | $ | - | | | | | |
| | Employees | | | Non-Employees | | | Total | |
| | | | | | | | | | | | | | | | | | |
| | | | | Weighted | | | | | | Weighted | | | | | | Weighted | |
| | | | | Average | | | | | | Average | | | | | | Average | |
| | Shares | | Exercise | | | Shares | | Exercise | | | Shares | | Exercise | |
| | (,000) | | Price | | | (,000) | | Price | | | (,000) | | Price | |
Options/warrants outstanding | | | | | | | | | | | | | | | | | | | | | |
at beginning of period | | | 3,072 | | | | $7.71 | | | | 525 | | | | $9.42 | | | | 3,597 | | | | $7.96 | |
Additions/deductions: | | | | | | | | | | | | | | | | | | | | | | | | |
Granted | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Exercised | | | 169 | | | | 1.03 | | | | - | | | | - | | | | 169 | | | | 1.03 | |
Cancelled | | | 936 | | | | 9.87 | | | | 10 | | | | 9.68 | | | | 946 | | | | 9.87 | |
Options/warrants outstanding | | | | | | | | | | | | | | | | | | | | | | | | |
at end of period | | | 1,967 | | | | $7.25 | | | | 515 | | | | $9.42 | | | | 2,482 | | | | $7.70 | |
Options/warrants exercisable | | | | | | | | | | | | | | | | | | | | | | | | |
at end of period | | | 1,967 | | | | $7.25 | | | | 515 | | | | $9.42 | | | | 2,482 | | | | $7.70 | |
Weighted average fair value of | | | | | | | | | | | | | | | | | | | | | | | | |
grants for the year | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Price range of options/warrants: | | | | | | | | | | | | | | | | | | | | | | | | |
Exercised | | $ 0.81 - $ 1.26 | | | - | | | $ 0.81 - $ 1.26 | |
Outstanding | | $ 0.81 - $13.80 | | | $ 0.81 - $13.80 | | | $ 0.81 - $13.80 | |
Exercisable | | $ 0.81 - $13.80 | | | $ 0.81 - $13.80 | | | $ 0.81 - $13.80 | |
Year EndedPROPHASE LABS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 – STOCKHOLDERS’ EQUITY AND STOCK COMPENSATION (CONTINUED)
The unrecognized share-based compensation expense related to the options granted but not vested, (options to acquire 936,500 shares) was approximately $590,000 at December 31, 2006:2010. These options subject to vesting (i) vest over the next 3 to 6 years, (ii) have a 7 year term, (iii) are exercisable at a weighted average price of $1.00 and (iv) the unrecognized share-based compensation expense is expected to be recognized over a weighted average period of 5.1 years.
| | Employees | | | Non-Employees | | | Total | |
| | | | | | | | | | | | | | | | | | |
| | | | | Weighted | | | | | | Weighted | | | | | | Weighted | |
| | | | | Average | | | | | | Average | | | | | | Average | |
| | Shares | | Exercise | | | Shares | | Exercise | | | Shares | | Exercise | |
| | (,000) | | Price | | | (,000) | | Price | | | (,000) | | Price | |
Options/warrants outstanding | | | | | | | | | | | | | | | | | | | | | |
at beginning of period | | | 4,099 | | | | $6.28 | | | | 525 | | | | $9.42 | | | | 4,624 | | | | $6.64 | |
Additions/deductions: | | | | | | | | | | | | | | | | | | | | | | | | |
Granted | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Exercised | | | 1,012 | | | | 1.94 | | | | - | | | | - | | | | 1,012 | | | | 1.94 | |
Cancelled | | | 15 | | | | 7.24 | | | | - | | | | - | | | | 15 | | | | 7.24 | |
Options/warrants outstanding | | | | | | | | | | | | | | | | | | | | | | | | |
at end of period | | | 3,072 | | | | $7.71 | | | | 525 | | | | $9.42 | | | | 3,597 | | | | $7.96 | |
Options/warrants exercisable | | | | | | | | | | | | | | | | | | | | | | | | |
at end of period | | | 3,072 | | | | $7.71 | | | | 525 | | | | $9.42 | | | | 3,597 | | | | $7.96 | |
Weighted average fair value of | | | | | | | | | | | | | | | | | | | | | | | | |
grants for the year | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Price range of options/warrants: | | | | | | | | | | | | | | | | | | | | | | | | |
Exercised | | $1.75 - $ 9.50 | | | - | | | $1.75 - $ 9.50 | |
Outstanding | | $0.81 - $13.80 | | | $0.81 - $13.80 | | | $0.81 - $13.80 | |
Exercisable | | $0.81 - $13.80 | | | $0.81 - $13.80 | | | $0.81 - $13.80 | |
The following table summarizes information about stock options outstanding and stock options exercisable as granted to both employees and non-employees, at December 31, 2008:2010 (in thousands, except remaining life and per share data):
| | | Employees | | | Non-Employees | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | Weighted | | | | | | | | | Weighted | | | | |
| | | | | | Average | | | | | | | | | Average | | | | |
| | | | | | Remaining | | | Weighted | | | | | | Remaining | | | Weighted | |
Range of | | | Number | | | Contractual | | | Average | | | Number | | | Contractual | | | Average | |
Exercise | | | Outstanding | | | Life | | | Exercise Price | | | Outstanding | | | Life | | | Exercise Price | |
Prices | | | | | | | | | | | | | | | | | | | |
$ | 0.81 - $5.49 | | | | 903,750 | | | 2.1 | | | | $3.90 | | | | 75,000 | | | 2.6 | | | | $3.23 | |
$ | 8.11 - $13.80 | | | | 1,099,500 | | | 6.0 | | | | $10.65 | | | | 190,000 | | | 6.2 | | | | $11.09 | |
| | | | | 2,003,250 | | | | | | | | | | | | 265,000 | | | | | | | | | |
Options outstanding as of December 31, 2008 expire from April 6, 2009 through December 11, 2015, depending upon the date of grant. | | Options Outstanding and Exercisable | |
Range of Exercise Prices | | Number Outstanding | | | Weighted Average Remaining Contractual Life | | | Weighted Average Exercise Price Per Share | |
$0.81 - $1.26 | | | 59 | | | | 5.6 | | | $ | 1.05 | |
$1.27 - $5.19 | | | 50 | | | | 1.1 | | | $ | 5.19 | |
$5.20 - 8.11 | | | 84 | | | | 1.6 | | | $ | 8.11 | |
$8.12 - $9.50 | | | 95 | | | | 2.1 | | | $ | 9.50 | |
$9.51 - $13.80 | | | 75 | | | | 1.7 | | | $ | 13.80 | |
Total | | | 363 | | | | | | | $ | 8.11 | |
The total intrinsic value of options exercised during the year ended December 31,Fiscal 2010, 2009 and 2008 was $207,154.$107,000, $226,000 and $207,000, respectively. The aggregate intrinsic value of (i) options outstanding, (ii) options outstanding and expected to vest in the future and (iii) options outstanding and exercisable at December 31, 2010 was $196,000, $187,000 and $9,000, respectively.
NOTE 9 – DEFINED CONTRIBUTION PLANS
We maintain the ProPhase Labs, Inc 401(k) Savings and Retirement Plan, a defined contribution plan for our employees. Our contributions to the plan are based on the amount of the employee plan contributions and compensation. Our contributions to the plan in Fiscal 2010, 2009 and 2008 were $90,000, $141,000, and $375,000, respectively.
PROPHASE LABS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 – INCOME TAXES
The components of the provision (benefit) for income taxes, in the consolidated statement of operations are as follows (in thousands):
| | Year Ended December 31, | |
| | 2010 | | | 2009 | | | 2008 | |
Current | | | | | | | | | |
Federal | | $ | (40 | ) | | $ | (84 | ) | | $ | - | |
State | | | - | | | | - | | | | - | |
| | | (40 | ) | | | (84 | ) | | | - | |
Deferred | | | | | | | | | | | | |
Federal | | | (107 | ) | | | (2,297 | ) | | | (2,459 | ) |
State | | | 160 | | | | (61 | ) | | | (906 | ) |
| | | 53 | | | | (2,358 | ) | | | (3,365 | ) |
Total | | $ | 13 | | | $ | (2,442 | ) | | $ | (3,365 | ) |
| | | | | | | | | | | | |
Income taxes from continuing operations before valuation allowance | | | 13 | | | | (2,442 | ) | | | (3,365 | ) |
Change in valuation allowance | | | (53 | ) | | | 2,358 | | | | 3,365 | |
Income taxes from continuing operations | | | (40 | ) | | | (84 | ) | | | - | |
Income taxes from discontinued operations before valuation allowance | | | - | | | | - | | | | 1,228 | |
Change in valuation allowance from discontinued operations | | | - | | | | - | | | | (1,228 | ) |
Total | | $ | (40 | ) | | $ | (84 | ) | | $ | - | |
A reconciliation of the statutory federal income tax expense (benefit) to the effective tax is as follows (in thousands):
| | Year Ended December 31, | |
| | 2010 | | | 2009 | | | 2008 | |
| | | | | | | | | |
Statutory rate - federal | | $ | (1,204 | ) | | $ | (1,335 | ) | | $ | (2,179 | ) |
State taxes, net of federal benefit | | | - | | | | (61 | ) | | | (598 | ) |
Permanent differences and other | | | (143 | ) | | | (1,046 | ) | | | (588 | ) |
Income tax from continuing operation before valuation allowance | | | (1,347 | ) | | | (2,442 | ) | | | (3,365 | ) |
| | | | | | | | | | | | |
Change in valuation allowance | | | 1,307 | | | | 2,358 | | | | 3,365 | |
| | | | | | | | | | | | |
Income taxes from continuing operations | | | (40 | ) | | | (84 | ) | | | - | |
Income taxes from discontinued operations before valuation allowance | | | - | | | | - | | | | 1,228 | |
Change in valuation allowance | | | - | | | | - | | | | (1,228 | ) |
Total | | $ | (40 | ) | | $ | (84 | ) | | $ | - | |
PROPHASE LABS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 – INCOME TAXES (CONTINUED)
The components of permanent and other differences are as follows (in thousands):
| | Year Ended December 31, | |
| | 2010 | | | 2009 | | | 2008 | |
Permanent items: | | | | | | | | | |
Meals and Entertainment | | $ | 5 | | | $ | 6 | | | $ | 6 | |
Officers life insurance | | | - | | | | 9 | | | | 36 | |
Return to accrual for prior year, permanent items | | | - | | | | (479 | ) | | | 27 | |
Effective rate adjustment (1) | | | - | | | | - | | | | (215 | ) |
Capital loss carryforward utilization (2) | | | - | | | | (582 | ) | | | (442 | ) |
Contribution of inventory(3) | | | (162 | ) | | | - | | | | - | |
Share-based compensation expense for stock options granted (4) | | | 14 | | | | - | | | | - | |
| | $ | (143 | ) | | $ | (1,046 | ) | | $ | (588 | ) |
| (1) | This item represents an adjustment to the overall effective state tax rate due to the addition of multi-jurisdiction tax filings, with recent additions having higher tax rates. |
| (2) | This item represents the utilization for tax purposes of prior year capital losses. |
| (3) | This item represents the additional tax deduction available as a consequence of the contribution of certain inventory to qualified charitable organization. |
| (4) | This item relates to share-based compensation expense for financial reporting purposes not deducted for tax purposes until such options are exercised. |
The tax effects of the primary “temporary differences” between values recorded for assets and liabilities for financial reporting purposes and values utilized for measurement in accordance with tax laws giving rise to our deferred tax assets are as follows (in thousands):
| | Year Ended December 31, | |
| | 2010 | | | 2009 | | | 2008 | |
| | | | | | | | | |
Net operating loss and capital loss carryforward | | $ | 12,135 | | | $ | 10,808 | | | $ | 9,008 | |
Consulting-royalty costs | | | 1,431 | | | | 1,431 | | | | 1,431 | |
Depreciation | | | 253 | | | | 250 | | | | 55 | |
Other | | | 877 | | | | 801 | | | | 438 | |
Valuation allowance | | | (14,696 | ) | | | (13,290 | ) | | | (10,932 | ) |
Total | | $ | - | | | $ | - | | | $ | - | |
A valuation allowance for all of our net deferred tax assets has been provided as we are unable to determine, at this time, that the generation of future taxable income against which the net operating loss (“NOL”) carryforwards could be used can be predicted to be more likely than not. The net change in the valuation allowance for Fiscal 2010, 2009 and 2008 was approximately $932,184.$1.4 million, $2.4 million and $2.1 million, respectively. Certain exercises of options and warrants, and restricted stock issued for services that became unrestricted resulted in reductions to taxes currently payable and a corresponding increase to additional-paid-in-capital for prior years. In addition, certain tax benefits for option and warrant exercises totaling $6.9 million are deferred and will be credited to additional-paid-in-capital when the NOL’s attributable to these exercises are utilized. As a result, these NOL’s will not be available to offset income tax expense. The net operating loss carry-forwards currently approximate $28.7 million for federal purposes will expire beginning in Fiscal 2018 through 2030. Additionally, there are net operating loss carry-forwards of $19.9 million for state purposes that will expire beginning in Fiscal 2018 through 2030.
PROPHASE LABS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 – INCOME TAXES (CONTINUED)
As noted above, we have net operating loss carry-forwards for both federal and certain states. However, effective December 31, 2009, we elected to conform our tax reporting year, historically a fiscal period ending September 30, to our financial reporting period ending December 31. As a consequence, we filed a full period tax return for the fiscal year ended September 30, 2009 with the IRS and also filed with the IRS a “short period return” for the three months ended December 31, 2009 in compliance with the election. In future fiscal periods, our tax and financial reporting periods will be the same, the period ending December 31. For Fiscal 2010, we had a current tax benefit of $40,000 for an alternative minimum tax refund due us as a consequence of a carry back of an alternative minimum tax net operating loss to a prior period. For Fiscal 2009, we had a current tax benefit of $84,000 for certain federal and state alternative minimum income taxes incurred for the “short period return”, inclusive of an alternative minimum tax refund of $110,000 due us as a consequence of a carry back of an alternative minimum tax net operating loss to a prior period.
NOTE 12 – DEFINED CONTRIBUTION PLANS
During 1999, the Company implemented a 401(k) defined contribution plan for its employees. The Company’s contribution to the plan is based on the amount of the employee plan contributions and compensation. The Company’s contribution to the plan in 2008, 2007 and 2006 was approximately $405,000, $456,000, and $449,000, respectively. The plan was amended in October 2004 to accommodate the participation of employees of QMI.
NOTE 13 – INCOME TAXES
The provision (benefit) for income taxes, consists of the following:
| | Year Ended | | | Year Ended | | | Year Ended | |
| | December 31, | | | December 31, | | | December 31, | |
| | 2008 | | | 2007 | | | 2006 | |
Current: | | | | | | | | | |
Federal | | $ | - | | | $ | - | | | $ | 45,270 | |
State | | | - | | | | - | | | | 43,329 | |
| | $ | - | | | $ | - | | | $ | 88,599 | |
Deferred: | | | | | | | | | | | | |
Federal | | $ | (2,459,264 | ) | | $ | (111,384 | ) | | $ | (1,426,015 | ) |
State | | | (905,606 | ) | | | (50,926 | ) | | | 106,354 | |
| | $ | (3,364,870 | ) | | $ | (162,310 | ) | | $ | (1,319,661 | ) |
Income Taxes from Continuing Operations before | | | | | | | | | | | | |
Valuation Allowance | | | (3,364,870 | ) | | | (162,310 | ) | | | (1,231,062 | ) |
| | | | | | | | | | | | |
Change in Valuation Allowance | | | 3,364,870 | | | | 162,310 | | | | 1,319,661 | |
| | | | | | | | | | | | |
Income Taxes from Continuing Operations | | | - | | | | - | | | | 88,599 | |
| | | | | | | | | | | | |
Income Taxes from Discontinued Operations before | | | | | | | | | | | | |
Valuation Allowance | | | 1,227,674 | | | | 89,468 | | | | 94,012 | |
| | | | | | | | | | | | |
Change in Valuation Allowance from Discontinued | | | | | | | | | | | | |
Operations | | | (1,227,674 | ) | | | (89,468 | ) | | | (94,012 | ) |
| | | | | | | | | | | | |
Total | | $ | - | | | $ | - | | | $ | 88,599 | |
A reconciliation of the statutory federal income tax expense (benefit) to the effective tax is as follows:
| | Year Ended | | | Year Ended | | | Year Ended | |
| | December 31, | | | December 31, | | | December 31, | |
| | 2008 | | | 2007 | | | 2006 | |
| | | | | | | | | |
Statutory rate - Federal | | $ | (2,179,333 | ) | | $ | (761,890 | ) | | $ | (359,299 | ) |
State taxes net of federal benefit | | | (597,700 | ) | | | (33,611 | ) | | | (98,792 | ) |
Permanent differences and other | | | (587,837 | ) | | | 633,192 | | | | (772,970 | ) |
Income tax from Continuing Operations before | | | | | | | | | | | | |
Valuation Allowance | | | (3,364,870 | ) | | | (162,310 | ) | | | (1,231,061 | ) |
| | | | | | | | | | | | |
Change in Valuation Allowance | | | 3,364,870 | | | | 162,310 | | | | 1,319,661 | |
| | | | | | | | | | | | |
Income Taxes from Continuing Operations | | | - | | | | - | | | | 88,599 | |
| | | | | | | | | | | | |
Income Taxes from Discontinued Operations before | | | | | | | | | | | | |
Valuation Allowance | | | 1,227,674 | | | | 89,468 | | | | 94,012 | |
| | | | | | | | | | | | |
Change in Valuation Allowance | | | (1,227,674 | ) | | | (89,468 | ) | | | (94,012 | ) |
| | | | | | | | | | | | |
Income Taxes from Discontinued Operations | | | - | | | | - | | | | - | |
| | | | | | | | | | | | |
Total | | $ | - | | | $ | - | | | $ | 88,599 | |
The tax effects of the primary “temporary differences” between values recorded for assets and liabilities for financial reporting purposes and values utilized for measurement in accordance with tax laws giving rise to the Company’s deferred tax assets are as follows:
| | Year Ended December 31, 2008 | | | Year Ended December 31, 2007 | | | Year Ended December 31, 2006 | |
Net operating loss carry-forward | | $ | 9,007,912 | | | $ | 5,731,224 | | | $ | 6,314,828 | |
Consulting–royalty costs | | | 1,430,524 | | | | 1,739,375 | | | | 1,457,076 | |
Bad debt expense | | | 55,476 | | | | 109,532 | | | | 107,498 | |
Other | | | 438,336 | | | | 1,144,687 | | | | 618,943 | |
Valuation allowance | | | (10,932,248 | ) | | | (8,724,818 | ) | | | (8,498,345 | ) |
Total | | $ | - | | | $ | - | | | $ | - | |
Certain exercises of options and warrants, and restricted stock issued for services that became unrestricted resulted in reductions to taxes currently payable and a corresponding increase to additional-paid-in-capital for prior years. In addition, certain tax benefits for option and warrant exercises totaling $6,805,323 are deferred and will be credited to additional-paid-in-capital when the NOL’s attributable to these exercises are utilized. As a result, these NOL’s will not be available to offset income tax expense. The net operating loss carry-forwards that currently approximate $21.8 million for federal purposes will be expiring through 2028. Additionally, there are net operating loss carry-forwards of $20.9 million for state purposes that will be expiring through 2028. Until sufficient taxable income to offset the temporary timing differences attributable to operations, the tax deductions attributable to option, warrant and stock activities and alternative minimum tax credits of $110,270 are assured, a valuation allowance equaling the total deferred tax asset is being provided.
NOTE 1411 – EARNINGS PER SHARE
Basic earnings per share (“EPS”) excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that shared in the earnings of the entity. Diluted EPS also utilizes the treasury stock method which prescribes a theoretical buy back of shares from the theoretical proceeds of all options and warrants outstanding during the period. Since there is a large number of options and warrants outstanding, fluctuations in the actual market price can have a variety of results for each period presented.
A reconciliation of the applicable numerators and denominators of the income statement periods presented is as follows (millions,(in thousands, except earnings per share amounts):
| | Year Ended December 31, | |
| | 2010 | | | 2009 | | | 2008 | |
| | Loss | | | Shares | | | EPS | | | Loss | | | Shares | | | EPS | | | Loss | | | Shares | | | EPS | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Basic EPS | | $ | (3,501 | ) | | | 14,285 | | | $ | (0.25 | ) | | $ | (3,842 | ) | | | 12,963 | | | $ | (0.30 | ) | | $ | (5,534 | ) | | | 12,878 | | | $ | (0.43 | ) |
Dilutives: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Options/Warrants | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Diluted EPS | | $ | (3,501 | ) | | | 14,285 | | | $ | (0.25 | ) | | $ | (3,842 | ) | | | 12,963 | | | $ | (0.30 | ) | | $ | (5,534 | ) | | | 12,878 | | | $ | (0.43 | ) |
For Fiscal 2010, 2009 and 2008, diluted earnings per share is the same as basic earnings per share due to (i) the inclusion of common stock, in the form of stock options and warrants (“Common Stock Equivalents”), would have an anti-dilutive effect on the loss per share. For Fiscal 2010, 2009 and 2008, there were Common Stock Equivalents in the amount of 359,188, 133,792 and 247,869, respectively, which were in the money, that were excluded in the earnings per share computation due to their dilutive effect.
NOTE 12 – SIGNIFICANT CUSTOMERS
Our products are distributed through numerous food, multi-outlet pharmacy, chain drug stores, large wholesalers and mass merchandisers throughout the United States. The loss of sales to any one or more of these large retail customers could have a material adverse effect on our business operations and financial condition. Revenues for Fiscal 2010, Fiscal 2009 and Fiscal 2008 were $14.5 million, $19.8 million and $20.5 million, respectively. Walgreen Company (“Walgreens”), Wal-Mart Stores, Inc. (“Wal-Mart”) and Rite-Aid Corp accounted for approximately 23%, 14% and 10% our of Fiscal 2010 revenues. CVS Caremark Corporation, Walgreens and Wal-Mart accounted for approximately 15%, 15% and 13% of our revenues for Fiscal 2009. Walgreens and Wal-Mart accounted for approximately 14% and 14% of our revenues for Fiscal 2008. | | Year Ended | | | Year Ended | | | Year Ended | |
| | December 31, 2008 | | | December 31, 2007 | | | December 31, 2006 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Loss | | | Shares | | | EPS | | | Loss | | | Shares | | | EPS | | | Loss | | | Shares | | | EPS | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Basic EPS | | | $(5.5 | ) | | | 12.9 | | | | $(0.43 | ) | | | $(2.5 | ) | | | 12.7 | | | | $(0.19 | ) | | | $(1.7 | ) | | | 12.3 | | | | $(0.14 | ) |
Dilutives: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Options and | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Warrants | | | - | | | | - | | | | | | | | - | | | | - | | | | | | | | - | | | | - | | | | | |
Diluted EPS | | | $(5.5 | ) | | | 12.9 | | | | $(0.43 | ) | | | $(2.5 | ) | | | 12.7 | | | | $(0.19 | ) | | | $(1.7 | ) | | | 12.3 | | | | $(0.14 | ) |
Options
PROPHASE LABS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 – SIGNIFICANT CUSTOMERS (CONTINUED)
We are subject to account receivable credit concentrations from time-to-time as a consequence of the timing, payment pattern and warrants outstandingultimate purchase volumes or shipping schedules with our customers. These concentrations may impact our overall exposure to credit risk, either positively or negatively, in that our customers may be similarly affected by changes in economic, regulatory or other conditions that may impact the timing and collectability of amounts due to us. Customers comprising the five largest accounts receivable balances represented 51% and 66% of total trade receivable balances at December 31, 2008, 20072010 and 2006 were 2,268,250, 2,482,000,2009, respectively. Management believes that the provision for possible losses on uncollectible accounts receivable is adequate for our credit loss exposure. At December 31, 2010 and 3,597,0002009, the allowance for doubtful accounts was $13,000 and $23,000, respectively. No options and warrants were included in the 2008, 2007 and 2006 computations of diluted earnings because the effect would be anti-dilutive due to losses in the respective years.
NOTE 15 – RELATED PARTY TRANSACTIONS
The Company may continue the process of acquiring licenses in certain countries through related party entities whose stockholders include Mr. Gary Quigley, a relative of the Company’s Chief Executive Officer. Fees amounting to zero, $45,750, $145,500 have been paid to a related entity during 2008, 2007 and 2006, respectively to assist with the regulatory aspects of obtaining such licenses.
NOTE 16 – SEGMENT INFORMATION
The basis for presenting segment results generally is consistent with overall Company reporting. The Company reports information about its operating segments in accordance with Financial Accounting Standard Board Statement No. 131, “Disclosure About Segments of an Enterprise and Related Information,” which establishes standards for reporting information about a company’s operating segments. All consolidating items are included in Corporate & Other.
The Company’s operations are divided into three reportable segments as follows: The Quigley Corporation (Cold Remedy), whose main product is Cold-EezeÒ, a proprietary zinc gluconate glycine lozenge for the common cold; QMI (Contract Manufacturing), which is the production facility for the Cold-EezeÒ brand lozenge product and also performs contract manufacturing services for third party customers together with third party sales of its own products; and Pharma, (Ethical Pharmaceutical), currently involved in research and development activity to develop patent applications for potential pharmaceutical products. As discussed in Note 3 “Discontinued Operations”, the Company disposed of its Health and Wellness segment on February 29, 2008.
Financial information relating to 2008, 2007 and 2006 continuing operations by business segment follows:
| |
As of and for the year | | | |
ended December 31, | | Cold | | | Contract | | | Ethical | | | Corporate & | | | | |
2008 | | Remedy | | | Manufacturing | | | Pharmaceutical | | | Other | | | Total | |
Revenues | | | | | | | | | | | | | | | |
Customers-domestic | | $ | 18,185,510 | | | $ | 2,321,102 | | | $ | - | | | $ | - | | | $ | 20,506,612 | |
Inter-segment | | $ | - | | | $ | 4,381,085 | | | $ | - | | | $ | (4,381,085 | ) | | $ | - | |
Segment operating profit (loss) | | $ | (689,829 | ) | | $ | (1,293,592 | ) | | $ | (4,873,169 | ) | | $ | 126,726 | | | $ | (6,729,864 | ) |
Depreciation | | $ | 318,163 | | | $ | 425,507 | | | $ | - | | | $ | - | | | $ | 743,670 | |
Capital expenditures | | $ | 62,682 | | | $ | 137,082 | | | $ | - | | | $ | - | | | $ | 199,764 | |
Total assets | | $ | 26,459,739 | | | $ | 4,847,049 | | | $ | - | | | $ | (6,938,157 | ) | | $ | 24,368,631 | |
| |
As of and for the year | | | | | | | | | | | | | | | |
ended December 31, | | Cold | | | Contract | | | Ethical | | | Corporate & | | | | |
2007 | | Remedy | | | Manufacturing | | | Pharmaceutical | | | Other | | | Total | |
Revenues | | | | | | | | | | | | | | | |
Customers-domestic | | $ | 25,730,016 | | | $ | 2,511,486 | | | $ | - | | | $ | - | | | $ | 28,241,502 | |
Inter-segment | | $ | - | | | $ | 6,660,694 | | | $ | - | | | $ | (6,660,694 | ) | | $ | - | |
Segment operating profit (loss) | | $ | 4,801,260 | | | $ | (279,816 | ) | | $ | (7,001,752 | ) | | $ | (67,648 | ) | | $ | (2,547,956 | ) |
Depreciation | | $ | 414,469 | | | $ | 523,383 | | | $ | - | | | $ | - | | | $ | 937,852 | |
Capital expenditures | | $ | 187,137 | | | $ | 334,150 | | | $ | - | | | $ | - | | | $ | 521,287 | |
Total assets | | $ | 32,838,899 | | | $ | 6,106,567 | | | $ | - | | | $ | (5,443,545 | ) | | $ | 33,501,921 | |
| | | | | | | | | | | | | | | |
As of and for the year | | | | | | | | | | | | | | | |
ended December 31, | | Cold | | | Contract | | | Ethical | | | Corporate & | | | | |
2006 | | Remedy | | | Manufacturing | | | Pharmaceutical | | | Other | | | Total | |
Revenues | | | | | | | | | | | | | | | |
Customers-domestic | | $ | 24,815,851 | | | $ | 2,034,179 | | | $ | - | | | $ | - | | | $ | 26,850,030 | |
Inter-segment | | $ | - | | | $ | 6,596,371 | | | $ | - | | | $ | (6,596,371 | ) | | $ | - | |
Segment operating profit (loss) | | $ | 3,588,285 | | | $ | (432,911 | ) | | $ | (4,309,183 | ) | | $ | (10,228 | ) | | $ | (1,164,037 | ) |
Depreciation | | $ | 449,580 | | | $ | 696,212 | | | $ | - | | | $ | - | | | $ | 1,145,792 | |
Capital expenditures | | $ | 562,144 | | | $ | 25,498 | | | $ | - | | | $ | - | | | $ | 587,642 | |
Total assets | | $ | 38,125,367 | | | $ | 6,065,104 | | | $ | - | | | $ | (9,345,437 | ) | | $ | 34,845,034 | |
NOTE 1713 – QUARTERLY INFORMATION (UNAUDITED)
The following table presents unaudited quarterly financial information for Fiscal 2010 and Fiscal 2009 (in thousands, except per share amounts):
| | Quarter Ended | |
| | March 31, | | | June 30, | | | September 30, | | | December 31, | |
Fiscal 2010 | | | | | | | | | | | | |
Net sales | | $ | 1,976 | | | $ | 1,131 | | | $ | 5,204 | | | $ | 6,191 | |
Gross profit | | $ | 1,170 | | | $ | 471 | | | $ | 3,610 | | | $ | 3,579 | |
Income (loss) from continuing operations | | $ | (1,062 | ) | | $ | (2,254 | ) | | $ | 947 | | | $ | (1,132 | ) |
Net income (loss) | | $ | (1,062 | ) | | $ | (2,254 | ) | | $ | 947 | | | $ | (1,132 | ) |
| | | | | | | | | | | | | | | | |
Basic earnings per share: | | | | | | | | | | | | | | | | |
Income (loss) from continuing operations | | $ | (0.08 | ) | | $ | (0.15 | ) | | $ | 0.06 | | | $ | (0.08 | ) |
Net income (loss) | | $ | (0.08 | ) | | $ | (0.15 | ) | | $ | 0.06 | | | $ | (0.08 | ) |
| | | | | | | | | | | | | | | | |
Diluted earnings per share: | | | | | | | | | | | | | | | | |
Income (loss) from continuing operations | | $ | (0.08 | ) | | $ | (0.15 | ) | | $ | 0.06 | | | $ | (0.08 | ) |
Net income (loss) | | $ | (0.08 | ) | | $ | (0.15 | ) | | $ | 0.06 | | | $ | (0.08 | ) |
| | | | | | | | | | | | | | | | |
Fiscal 2009 | | | | | | | | | | | | | | | | |
Net sales | | $ | 3,987 | | | $ | 1,748 | | | $ | 4,977 | | | $ | 9,104 | |
Gross profit | | $ | 2,353 | | | $ | 291 | | | $ | 3,615 | | | $ | 5,310 | |
Income (loss) from continuing operations | | $ | (2,199 | ) | | $ | (4,625 | ) | | $ | 1,201 | | | $ | 1,781 | |
Net income (loss) | | $ | (2,199 | ) | | $ | (4,625 | ) | | $ | 1,201 | | | $ | 1,781 | |
| | | | | | | | | | | | | | | | |
Basic earnings per share: | | | | | | | | | | | | | | | | |
Income (loss) from continuing operations | | $ | (0.17 | ) | | $ | (0.36 | ) | | $ | 0.09 | | | $ | 0.14 | |
Net income (loss) | | $ | (0.17 | ) | | $ | (0.36 | ) | | $ | 0.09 | | | $ | 0.14 | |
| | | | | | | | | | | | | | | | |
Diluted earnings per share: | | | | | | | | | | | | | | | | |
Income (loss) from continuing operations | | $ | (0.17 | ) | | $ | (0.36 | ) | | $ | 0.09 | | | $ | 0.14 | |
Net income (loss) | | $ | (0.17 | ) | | $ | (0.36 | ) | | $ | 0.09 | | | $ | 0.14 | |
| | Quarter Ended | |
| | March 31, | | | June 30, | | | September 30, | | | December 31, | |
2008 | | | | | | | | | | | | |
| | | | | | | | | | | | |
Net Sales | | $ | 5,305,034 | | | $ | 2,068,285 | | | $ | 6,354,451 | | | $ | 6,778,842 | |
Gross Profit | | $ | 3,569,518 | | | $ | 897,906 | | | $ | 4,082,239 | | | $ | 2,863,356 | |
Administration | | $ | 2,508,206 | | | $ | 2,029,885 | | | $ | 1,661,555 | | | $ | 1,743,482 | |
Operating expenses | | $ | 6,150,749 | | | $ | 3,860,982 | | | $ | 3,268,197 | | | $ | 4,862,955 | |
(Loss) Income from operations | | $ | (2,581,231 | ) | | $ | (2,963,076 | ) | | $ | 814,042 | | | $ | (1,999,599 | ) |
(Loss) Income from continuing operations | | $ | (2,444,966 | ) | | $ | (2,878,696 | ) | | $ | 879,102 | | | $ | (1,965,242 | ) |
Net (Loss) Income | | $ | (1,569,450 | ) | | $ | (2,878,696 | ) | | $ | 879,102 | | | $ | (1,965,242 | ) |
| | | | | | | | | | | | | | | | |
Basic EPS | | | | | | | | | | | | | | | | |
(Loss) Income from continuing operations | | $ | (0.19 | ) | | $ | (0.22 | ) | | $ | 0.07 | | | $ | (0.15 | ) |
Net (Loss) Income | | $ | (0.12 | ) | | $ | (0.22 | ) | | $ | 0.07 | | | $ | (0.15 | ) |
| | | | | | | | | | | | | | | | |
Diluted EPS | | | | | | | | | | | | | | | | |
(Loss) Income from continuing operations | | $ | (0.19 | ) | | $ | (0.22 | ) | | $ | 0.07 | | | $ | (0.15 | ) |
Net (Loss) Income | | $ | (0.12 | ) | | $ | (0.22 | ) | | $ | 0.07 | | | $ | (0.15 | ) |
| | Quarter Ended | |
| | March 31, | | | June 30, | | | September 30, | | | December 31, | |
2007 | | | | | | | | | | | | |
| | | | | | | | | | | | |
Net Sales | | $ | 6,149,951 | | | $ | 2,217,146 | | | $ | 9,131,610 | | | $ | 10,742,795 | |
Gross Profit | | $ | 3,938,161 | | | $ | 995,331 | | | $ | 5,979,746 | | | $ | 7,642,903 | |
Administration | | $ | 2,145,183 | | | $ | 2,436,408 | | | $ | 1,867,671 | | | $ | 3,177,403 | |
Operating expenses | | $ | 5,787,398 | | | $ | 4,614,382 | | | $ | 4,750,979 | | | $ | 5,951,338 | |
(Loss)Income from operations | | $ | (1,849,237 | ) | | $ | (3,619,051 | ) | | $ | 1,228,767 | | | $ | 1,691,565 | |
(Loss) Income from continuing operations | | $ | (1,640,785 | ) | | $ | (3,417,172 | ) | | $ | 1,384,089 | | | $ | 1,817,596 | |
Net (Loss) Income | | $ | (1,928,206 | ) | | $ | (3,519,692 | ) | | $ | 1,328,823 | | | $ | 1,660,738 | |
| | | | | | | | | | | | | | | | |
Basic EPS | | | | | | | | | | | | | | | | |
(Loss) Income from continuing operations | | $ | (0.13 | ) | | $ | (0.27 | ) | | $ | 0.11 | | | $ | 0.13 | |
(Loss) Net Income | | $ | (0.15 | ) | | $ | (0.28 | ) | | $ | 0.10 | | | $ | 0.12 | |
| | | | | | | | | | | | | | | | |
Diluted EPS | | | | | | | | | | | | | | | | |
(Loss) Income from continuing operations | | $ | (0.13 | ) | | $ | (0.27 | ) | | $ | 0.11 | | | $ | 0.13 | |
(Loss) Net Income | | $ | (0.15 | ) | | $ | (0.28 | ) | | $ | 0.10 | | | $ | 0.12 | |
FOURTH QUARTER SEGMENT DATA (UNAUDITED)
PROPHASE LABS, INC. AND SUBSIDIARIES As of and for the three months ended December 31, 2008 | | Cold Remedy | | | Contract Manufacturing | | | Ethical Pharmaceutical | | | Corporate & Other | | | Total | |
Revenues | | | | | | | | | | | | | | | |
Customers-domestic | | $ | 6,272,586 | | | $ | 506,256 | | | $ | - | | | $ | - | | | $ | 6,778,842 | |
Inter-segment | | $ | - | | | $ | 962,473 | | | $ | - | | | $ | (962,473 | ) | | $ | - | |
Segment operating profit (loss) | | $ | (760,315 | ) | | $ | (637,937 | ) | | $ | (787,130 | ) | | $ | 185,783 | | | $ | (1,999,599 | ) |
Depreciation | | $ | 76,485 | | | $ | 111,020 | | | $ | - | | | $ | - | | | $ | 187,505 | |
Capital expenditures | | $ | 12,096 | | | $ | 38,356 | | | $ | - | | | $ | - | | | $ | 50,452 | |
As of and for the three months ended December 31, 2007 | | Cold Remedy | | | Contract Manufacturing | | | Ethical Pharmaceutical | | | Corporate & Other | | | Total | |
Revenues | | | | | | | | | | | | | | | |
Customers-domestic | | $ | 10,072,442 | | | $ | 670,353 | | | $ | - | | | $ | - | | | $ | 10,742,795 | |
Inter-segment | | $ | - | | | $ | 1,880,647 | | | $ | - | | | $ | (1,880,647 | ) | | $ | - | |
Segment operating profit (loss) | | $ | 3,275,343 | | | $ | (68,027 | ) | | $ | (1,839,786 | ) | | $ | 324,035 | | | $ | 1,691,565 | |
Depreciation | | $ | 104,775 | | | $ | 135,093 | | | $ | - | | | $ | - | | | $ | 239,868 | |
Capital expenditures | | $ | 18,833 | | | $ | 61,215 | | | $ | - | | | $ | - | | | $ | 80,048 | |
As of and for the three months ended December 31, 2006 | | Cold Remedy | | | Contract Manufacturing | | | Ethical Pharmaceutical | | | Corporate & Other | | | Total | |
Revenues | | | | | | | | | | | | | | | |
Customers-domestic | | $ | 10,697,062 | | | $ | 527,072 | | | $ | - | | | $ | - | | | $ | 11,224,134 | |
Inter-segment | | $ | - | | | $ | 1,798,932 | | | $ | - | | | $ | (1,798,932 | ) | | $ | - | |
Segment operating profit (loss) | | $ | 2,645,269 | | | $ | (11,639 | ) | | $ | (1,420,522 | ) | | $ | 326,644 | | | $ | 1,539,752 | |
Depreciation | | $ | 97,637 | | | $ | 180,249 | | | $ | - | | | $ | - | | | $ | 277,886 | |
Capital expenditures | | $ | 220,632 | | | $ | 7,604 | | | $ | - | | | $ | - | | | $ | 228,236 | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1814 – SUBSEQUENT EVENTSDISCONTINUED OPERATIONS
On February 2, 2009,29, 2008, we sold our wholly owned subsidiary, Darius International, Inc. (“Darius”), the former health and wellness segment, to InnerLight Holdings, Inc. (“InnerLight”). On February 29, 2008, Mr. Kevin P. Brogan, the then president of Darius was a significant shareholder of InnerLight. In addition, Mr. Gary Quigley, then an employee and stockholder of the Company announced its intentionand also the brother of Mr. Guy Quigley, our then Chairman, President and Chief Executive Officer (as well as a shareholder), became a significant shareholder of InnerLight either before or shortly after the sale of Darius. Mr. Gary Quigley was also a principal of Scandasystems, Ltd. (“Scandasystems”), which entered into an agreement to close the Elizabethtown, Pennsylvania location of QMIreceive royalties from InnerLight. The results and discontinue the hard candy business resultingbalances associated with Darius are presented as discontinued operations in the consolidation of manufacturing operations at the Lebanon, Pennsylvania location. This consolidation will have no impact on the production or distribution of the Cold-EezeÒ brand of cold remedy products.
RESPONSIBILITY FOR FINANCIAL STATEMENTS
The management of The Quigley Corporation is responsible for the information and representations contained in this report. Management believes that the financial statements have been prepared in conformity with generally accepted accounting principles and that the other information in this annual report is consistent with those statements. In preparing the financial statements, management is required to include amounts based on estimates and judgments, which it believes are reasonable under the circumstances.
In fulfilling its responsibilities for the integrity of the data presented and to safeguard the Company’s assets, management employs a system of internal accounting controls designed to provide reasonable assurance, at appropriate cost, that the Company’s assets are protected and that transactions are appropriately authorized, recorded, and summarized. This system of control is supported by the selection of qualified personnel, by organizational assignments that provide appropriate delegation of authority and division of responsibilities, and by the dissemination of policies and procedures.
| |
| |
Guy J. Quigley, Chairman of the Board,
(President, Chief Executive Officer)
| Date |
| |
| |
| March 9, 2009 |
Gerard M. Gleeson, Vice President, Chief Financial Officer
(Principal Financial and Accounting Officer)
| Date |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Stockholders of The Quigley Corporation
We have audited the accompanying consolidated balance sheets of The Quigley Corporation as of December 31, 2008 and 2007, and the related statements of operations, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2008. We also have audited The Quigley Corporation’s internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). The Quigley Corporation’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying management’s report. Our responsibility is to express an opinion on these financial statements and an opinion on the company’s internal control over financial reporting based on our audits.operations.
We conducted our auditsformed Darius in accordance with the standards2000 to market health and wellness products. The terms of the Public Company Accounting Oversight Board (United States). Those standards require that we plansale agreement include a cash purchase price of $1.0 million by InnerLight for the stock of Darius and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, onits subsidiaries without guarantees, warranties or indemnifications. We recorded a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control basedgain on the assessed risk. Our audits also included performing such other procedures,disposal of Darius of $736,000, as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliabilityresult of financial reportingsales proceeds of $1.0 million less residual investment of $5,000 and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of thenet assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparationDarius of financial statements in accordance with 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 (3) 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$259,000 on the financial statements.
Becausedate of its 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 the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.sale.
In our opinion,Sales attributable to Darius from January 1, 2008 until date of disposal on February 29, 2008 were $2.2 million. Net income from January 1, 2008 until date of disposal on February 29, 2008 was $139,000. Financial results from operations of Darius for Fiscal 2008 are presented as discontinued operations in the financialconsolidated statements referred to above present fairly, in all material respects, the financial position of The Quigley Corporation as of December 31, 2008 and 2007, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2008 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, The Quigley Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control-Integrated Frameworkflows. issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).
Amper Politziner & Mattia LLP
Edison, New Jersey
March 9, 2009
Item 9. | | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSUREChanges in and Disagreements with Accountants on Accounting and Financial Disclosure |
None
Item 9A. | | CONTROLS AND PROCEDURESControls and Procedures |
Disclosure Controls and Procedures
As of December 31, 2008, the Company carried out an evaluation, under the supervision and with the participation of our chief executive officer and chief financial officer, of the effectiveness of the design and operations of ourWe maintain disclosure controls and procedures as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934.
Our chief executive officer and chief financial officer concludeddesigned to provide reasonable assurance that as of the evaluation date, such disclosure controls and procedures were effective to ensure thatmaterial information required to be disclosed by us in the reports we filefiled or submitsubmitted under the Securities Exchange Act areof 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, ofand that the Securities and Exchange Commission, andinformation is accumulated and communicated to our management, including our chief executive officerChief Executive Officer and chief financial officer,Interim Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Management's report on our internal controls over financial reporting can be found We performed an evaluation, under the supervision and with the attached financial statements. The Independent Registered Public Accounting Firm's attestation reportparticipation of our management, including our Chief Executive Officer and Interim Chief Financial Officer, of the effectiveness of the design and operation of the disclosure controls and procedures as of the end of the period covered by this report. Based on the existence of the material weaknesses discussed below under the heading “Material Weaknesses” our internal control over financial reporting can also be found withmanagement, including our Chief Executive Officer and Interim Chief Financial Officer, concluded that the attached financial statements.Company’s disclosure controls and procedures were not effective at the reasonable assurance level as of the end of the period covered by this Report.
Management's Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining an adequate system of internal control over financial reporting. Our system of 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 accounting principles generally accepted in the United States of America.
Our internal control over financial reporting includes those policies and procedures that:
| · | pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect our transactions and dispositions of our assets; |
| · | provide reasonable assurance that our transactions are recorded as necessary to permit preparation of our financial statements in accordance with accounting principles generally accepted in the United States of America, and that our receipts and expenditures are being made only in accordance with authorizations of our management and our directors; and |
| · | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements. |
Material Weaknesses
As a consequence of management’s review of its effectiveness of the design and operation of the internal controls over financial reporting and management’s determination of the existence of material weaknesses, our management, including our Chief Executive Officer and Interim Chief Financial Officer, concluded that our internal controls over financial reporting were not effective at the reasonable assurance level as of the end of the period covered by this Report. A material weakness is a deficiency, or combination of deficiencies in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the financial statements will not be prevented or detected on a timely basis.
Material Weakness – Control environment
Lack of documentation and/or the availability of documentation or records in the Company’s files of business transactions, contracts and/or evaluations engaged by the Company. As new management was installed in Fiscal 2009 by the Board of Directors, it was discovered during the second quarter of Fiscal 2009 that the Company was either missing or lacked pertinent information regarding its operations, including but not limited to certain business commitments to product supply agreements, advertising programs, product placement initiatives and other promotional initiatives, and asset sales. As a consequence of this lack of documentation or availability of documentation or records, management has concluded that this control deficiency constitutes a material weakness.
Lack of sufficient segregation of duties during the transition to a new ERP System. During the third and fourth quarter of Fiscal 2010, we implemented a new accounting and operating software and hardware platform (“ERP System”) to upgrade and integrate the company’s operations onto a common, state-of-the-art ERP System. The new ERP System is projected to provide management with improved data gathering, processing, retrieval and analysis on a more timely and cost effective basis than its prior methods and systems. The installation and transition period of the new ERP System was from June to December 2010.
However, during the transition period, certain personnel had significant access to and certain initial processing responsibilities within the ERP System as part of the installation, integration testing, launch, shakedown and training processes. Specifically, such personnel had access to certain processing functions within the various software applications whereby they could, enter, process, record and report transactions without our customary level of segregation of duties. Although there was significant oversight by management during the transition period, there were limited, appropriately trained staff available to provide adequate separation of duties during the transition period.
As a consequence of the above, management has determined that during this period of transition, there was inadequate separation of duties which is deemed a control deficiency and a material weakness.
Remediation Plan for Material Weaknesses
Management is making progress on its remediation plan for the segregation of duties which includes (i) the completion of the personnel training of each aspect of the ERP System such personnel would be responsible for (i.e. entering, processing, recording or reporting), (ii) designate and document specific personnel assess rights, roles and responsibilities within the ERP System and (iii) eliminate the ability of an individual to have the ability to enter, process, record and report transactions.
Additionally, management continues to seek and review the underlying documentation of the Company for significant agreements, contracts, transactions and other material commitments entered into by the Company.
Though management has implemented a series of remediation actions as noted above, there was insufficient time to fully evaluate the effectiveness of these actions prior to the end of Fiscal 2010. However, we believe that these measures, if effectively implemented and maintained, will remediate the material weaknesses discussed above.
Changes in Internal Control Over Financial Reporting
We are currently undertaking a number of measures to remediate the material weaknesses discussed above. Those measures, described under “Remediation Plan for Material Weaknesses,” implemented during the third and fourth quarter of Fiscal 2009 as it related to documentation review and the fourth quarter of Fiscal 2010 regarding the segregation of duties, will materially affect, or are reasonably likely to materially affect, our internal control over financial reporting. In addition, our new ERP System is designed to further enhance our operational and internal controls, our system of financial reporting and improve our general operational efficiencies. Although our basic internal control system has not and will not change as a direct consequence of our the implementation of the ERP System, we believe that our ERP System provides significant improvement to our financial and operational visibility further consolidating and streamlining our operations while providing significantly more relevant, easy to assess data to manage our day-to-day operations. Other than as described above, there have been no changes in our internal control over financial reporting during Fiscal 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Because of its inherent limitations, a system of internal control over financial reporting can provide only reasonable assurance and may not prevent or detect misstatements. Further, because of changes in conditions, effectiveness of internal controls over financial reporting may vary over time. Our system contains self-monitoring mechanisms, and actions are taken to correct deficiencies as they are identified.
Our management conducted an evaluation of theour effectiveness of the system of internal control over financial reporting based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, our management concluded that our system of internal control over financial reporting was effective as of December 31, 2008. Our internal control over financial reporting has been audited by Amper, Politziner & Mattia, LLP, an independent registered public accounting firm, as stated in their report which is included herein.
Item 9B. | | OTHER INFORMATIONOther Information |
NoneUpon the recommendation of our Compensation Committee, our Chief Executive Officer has agreed to accept his Fiscal 2010 cash bonus (see below) in shares of restricted stock of the Company, provided that the amendments to our 2010 Equity Compensation Plan are ratified by our stockholders at the 2011 Annual Meeting of Stockholders. Our Chief Executive Officer, Mr. Karkus, has also expressed a willingness to our Compensation Committee to receive shares of restricted stock in lieu of the cash compensation for salary payable to him pursuant to the terms of his employment agreement with the Company. Any such stock grants to Mr. Karkus in lieu of cash compensation could only occur following (i) the ratification by stockholders of the proposed amendments to the 2010 Equity Compensation Plan and (ii) the approval of such arrangements by our Compensation Committee.
On March 10, 2011, our Compensation Committee approved bonuses for our named executive officers with respect to 2010 performance. The Compensation Committee awarded Ted Karkus a $150,000 bonus to be paid in shares of our stock, but such award may not be issued until stockholders ratify proposed amendments to our 2010 Equity Compensation Plan contained in proposal 3 of our 2011 Proxy Statement. If stockholders do ratify the amendments to the plan, at our annual shareholders meeting to be held on April 21, 2011, the value of the shares to be issued to Mr. Karkus will be calculated based on the average closing price of the Company’s shares for the last five (5) trading days prior to the issuance date. If stockholders do not ratify the amendments to the plan, the bonus will be paid to Mr. Karkus in cash.
PART III
Item 10. | | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCEDirectors, Executive Officers and Corporate Governance |
The information required under this item is incorporated by reference to the Company’s Proxy Statement for the 20092011 Annual Meeting of Stockholders.Stockholders (the “2011 Proxy Statement”) which is to be filed with the SEC not later than 120 days after the close of our fiscal year ended December 31, 2010 and is hereby incorporated by reference.
Item 11. | | EXECUTIVE COMPENSATIONExecutive Compensation |
The information required under this item is incorporated by reference to the Company’s2011 Proxy Statement for the 2009 Annual Meeting of Stockholders.Statement.
Item 12. | | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERSSecurity Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
The information required under this item is incorporated by reference to the Company’s2011 Proxy Statement for the 2009 Annual Meeting of Stockholders.Statement.
Item 13. | | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCECertain Relationships and Related Transactions and Director Independence |
The information required under this item is incorporated by reference to the Company’s2011 Proxy Statement for the 2009 Annual Meeting of Stockholders.Statement.
Item 14. | | PRINCIPAL ACCOUNTANT FEES AND SERVICESPrincipal Accountant Fees and Services |
The information required under this item is incorporated by reference to the Company’s2011 Proxy Statement for the 2009 Annual Meeting of Stockholders.Statement.
PART IV
Item 15. | | EXHIBITS AND FINANCIAL STATEMENT SCHEDULESExhibits and Financial Statement Schedules |
(a) Exhibits:
| 3.1 | | Articles of Incorporation of the Company, as amended (incorporated by reference to Exhibit 3.1 of Form 10-KSB/A filed on April 4, 1997). | |
| | | |
| 3.2** 3.2 | A complete copy | Certificate of Amendment to the by-lawsArticles of Incorporation effective May 5, 2010 (incorporated by reference to Exhibit 3.1 of Form 8-K filed on May 10, 2010). |
| | | |
| 3.3 | | By-laws of the Company as most recently amended and restated effective August 18, 2009, (incorporated by reference to Exhibit 3.1 of Form 8-K filed on December 16, 2008, and as currently in effect. | August 18, 2009) |
| | | |
| 4.1 | | Specimen Common Stock Certificate (incorporated by reference to Exhibit 4.1 of Form 10-KSB/A filed on April 4, 1997). | |
| | | |
| 10.1* | | 1997 Stock Option Plan (incorporated by reference to Exhibit 10.1 of the Company’s Registration Statement on Form S-8 (File No. 333-61313) filed on August 13, 1998). | |
| | | |
| 10.2 | | Exclusive Representation and Distribution Agreement dated May 4, 1992 between the Company and Godfrey Science and Design, Inc. et al (incorporated by reference to Exhibit 10.2 of Form 10-KSB/A filed on April 4, 1997). | |
| | | |
| 10.3 | | Consulting Agreement dated May 4, 1992 between the Company and Godfrey Science and Design, Inc. et al. (incorporated by reference to Exhibit 10.5 of Form 10-KSB/A filed on April 4, 1997). | |
| | | |
| 10.4 | | Rights Agreement dated September 15, 1998 between the Company and American Stock Transfer and Trust Company (incorporated by reference to Exhibit 1 to the Company’s Registration Statement on Form 8-A filed on September 18, 1998). | |
| | | |
| 10.5 | | First Amendment to the Rights Agreement, dated as of May 20, 2008 between the Company and American Stock Transfer and Trust Company (incorporated by reference to Exhibit 99.1 of Form 8-K filed on May 23, 2008). | |
| | | |
| 10.6 | | Sale agreement of Darius to Innerlight Holdings, Inc. dated February 29, 2008 incorporated by reference to Exhibit 99.1 of Form 8-K filed on March 3, 2008). |
| | | |
| 10.7 | | Second Amendment to the Rights Agreement, dated as of August 18, 2009 between the Company and American Stock Transfer and Trust Company (incorporated by reference to Exhibit 10.1 of Form 8-K filed on August 18, 2009) |
| | | |
| 10.8 | | Form of Indemnification Agreement between the Company and each of its Officers and Directors dated August 19, 2009 (incorporated by reference to Exhibit 10.1 of Form 8-K filed on August 19, 2009) |
| | | |
| 10.9* | | Employment Agreement dated August 15, 2009 between Ted Karkus and the Company (incorporated by reference to Exhibit 10.2 of Form 8-K filed on August 19, 2009) |
| | | |
| 10.10* | | Employment Agreement dated August 15, 2009 between Robert V. Cuddihy, Jr., and the Company (incorporated by reference to Exhibit 10.3 of Form 8-K filed on August 19, 2009) |
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| 10.11 | | Limited Liability Company Agreement, dated March 22, 2010, between the Company, Phosphagenics Limited, Phosphagenics Inc., and Phusion Laboratories, LLC. (incorporated by reference to Exhibit 10.11 of Form 10-K filed on March 24, 2010) |
| 10.12 | | Contribution Agreement, dated March 22, 2010, between the Company, Phosphagenics Limited, Phosphagenics Inc., and Phusion Laboratories, LLC. (incorporated by reference to Exhibit 10.12 of Form 10-K filed on March 24, 2010) |
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| 10.13 | | License Agreement, dated March 22, 2010, between the Company and Phosphagenics Limited. (incorporated by reference to Exhibit 10.13 of Form 10-K filed on March 24, 2010) |
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| 10.14 | | Amended and Restated License Agreement, dated March 22, 2010, between the Company, Phosphagenics Limited, Phosphagenics Inc., and Phusion Laboratories, LLC. (incorporated by reference to Exhibit 10.14 of Form 10-K filed on March 24, 2010) |
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| 10.15 | | Share Transfer Restriction Agreement, dated March 22, 2010, between the Company, and Phosphagenics Limited. (incorporated by reference to Exhibit 10.15 of Form 10-K filed on March 24, 2010) |
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| 10.16* | | 2010 Equity Compensation Plan (incorporated by reference to Exhibit B of the Company’s Annual Proxy Statement on Schedule 14A filed on April 2, 2010). |
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| 10.17 * | | 2010 Directors’ Equity Compensation Plan (incorporated by reference to Exhibit C of the Company’s Annual Proxy Statement on Schedule 14A filed on April 2, 2010). |
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| 10.18* | | Amendment to 2010 Directors’ Equity Compensation Plan (incorporated by reference to Exhibit 10.3 of Form 8-K filed on May 10, 2010). |
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| 10.19* | | Form of Option Agreement pursuant to 2010 Equity Compensation Plan (incorporated by reference to Exhibit 10.4 of Form 8-K filed on May 10, 2010). |
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| 10.20* | | Form of Option Agreement pursuant to 2010 Directors Equity Compensation Plan (incorporated by reference to Exhibit 10.5 of Form 8-K filed on May 10, 2010). |
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| 10.21* | | Form of Restricted Stock Award Agreement pursuant to 2010 Directors Equity Compensation Plan (incorporated by reference to Exhibit 10.6 of Form 8-K filed on May 10, 2010). |
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| 14.1 | | Code of Ethics (incorporated by reference to Exhibit II of the Proxy Statement on Schedule 14A filed on March 31, 2003). | |
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| 21.1** | | Subsidiaries of The Quigley Corporation. | ProPhase Labs, Inc. |
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| 23.1** | | Consent of EisnerAmper LLP, Independent Registered Public Accounting Firm, dated March 15, 2011. |
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| 23.2** | | Consent of Amper, Politziner & Mattia, LLP, Independent Registered Public Accounting Firm, dated March 9, 2009. | 24, 2010. |
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| 31.1** | | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
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| 31.2** | | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
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| 32.1** | | Certification of the Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
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| 32.2** | | Certification of the Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
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| | * Indicates a management contract or compensatory plan or arrangement | |
| | ** Filed herewith | |
* Indicates a management contract or compensatory plan or arrangement
** Filed herewith
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | THE QUIGLEY CORPORATION | PROPHASE LABS, INC. |
| | | Registrant |
| | | | |
/s/ Guy J. QuigleyDate: | March 15, 2011 | | By: | | /s/ Ted Karkus |
Guy J. Quigley, Chairman of the Board, President,
Chief Executive Officer and Director
| | | | DateTed Karkus, Chairman of the Board, |
| | | Chief Executive Officer and Director |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
SignaturePrincipal Executive Officer | | Title | | Principal Financial and Accounting Officer |
| |
By: | /s/Ted Karkus | | By: | /s/Robert V. Cuddihy, Jr. |
Ted Karkus | Robert V. Cuddihy, Jr. |
Chairman of the Board and | Chief Operating Officer and Interim Chief |
Chief Executive Officer | Financial Officer |
| |
Date: | March 15, 2011 | | |
| |
Directors |
/s/ Guy J. QuigleyMark Burnett | | Chairman of the Board, President,
| | |
| | Chief Executive Officer and DirectorMark Burnett | | |
| | |
/s/Mark Frank | | /s/Louis Gleckel |
Mark Frank | | Louis Gleckel |
| | | | |
Mark Leventhal | | Executive Vice President, Chief Operating
/s/James McCubbin |
Mark Leventhal | | James McCubbin |
| | Officer and Director | | |
| | | | |
| | | | |
/s/ DateGerard M. Gleeson:
| | Vice President, Chief Financial
| | |
| | Officer and Director (Principal
Financial and Accounting Officer)
| | |
| | | | |
| | | | |
/s/ Jacqueline F. Lewis | | | | |
Jacqueline F. Lewis | | | | |
| | | | |
| | | | |
/s/ Rounsevelle W. Schaum | | | | |
Rounsevelle W. Schaum | | | | |
| | | | |
| | | | |
/s/ Stephen W. Wouch | | | | |
Stephen W. Wouch | | | | |
| | | | |
| | | | |
/s/ Terrence O. Tormey | | | | |
Terrence O. Tormey | 15, 2011 | | | |