- 8 -
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 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 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.
- 9 -
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 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.
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
- 10 -
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.
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.
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.
Our manufacturing, warehousing and distribution center is located in Lebanon, Pennsylvania. In the Continued Salesevent of its Principal Product.
Certain of the Cold Remedy Products.
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.
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.
- 12 -
As of the Board and President and Executive Officers and Directors, as a Group Can Significantly Influence All Matters Voted on by Stockholders.
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.
We have identified material weaknesses in our internal control environment for the period from April 1, 2009 through December 31, 2009 and Fiscal 2010
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.
- 14 -
| Item 2. | Properties |
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.
At this time no prediction as to the outcome of this action can be made.
THE QUIGLEY CORPORATION (currently PROPHASE LABS, INC.)VS. WACHOVIA INSURANCE SERVICES, INC. AND FIRST
UNION INSURANCE SERVICES AGENCY, INC.
- 15 -
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.
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
PART II
| Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
Market Information
| 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 | ||||||||
| 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.
| Dividends |
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 | |||||
| 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 | |||||||||||||||
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
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.
- 18 -
| 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. |
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 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.
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.
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.
| 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 | ||||
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.
- 21 -
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
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.
- 22 -
Results of Operations
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.
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.
- 23 -
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.
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.
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.
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%.
- 24 -
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.
Liquidity and Capital Resources
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.
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.
- 25 -
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.
| 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 | $ | - | $ | - | ||||||||||
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
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.
- 26 -
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.
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.
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
- 29 -
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
| 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 | ||||
| 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
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 | ) | ||||||
| (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 | ) | |||
| 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
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 | Total | ||||||||||||||||||||
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
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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – ORGANIZATION AND BUSINESS
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.
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.
Cash Equivalents
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.
- 35 -
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.
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.
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
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.
- 36 -
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.
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.
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
- 37 -
PROPHASE LABS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
- 38 -
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,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.
- 39 -
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.
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.
PROPHASE LABS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 – PROPERTY, PLANT AND EQUIPMENT
The components of Contents
| 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
| 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 | ||||
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
NOTE 8 – OTHER CURRENT LIABILITIES
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 | ||||||||||
| 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.
- 41 -
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).
- 42 -
PROPHASE LABS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At this time no prediction as to the outcome of this action can be made.
THE QUIGLEY CORPORATION (currently PROPHASE LABS, INC.) VS. WACHOVIA INSURANCE SERVICES, INC. AND FIRST
UNION INSURANCE SERVICES AGENCY, 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.
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.
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.
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):
| 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, | ||||||||||||||||||||||||
| 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 | |||||||||||||||||||||
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 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.
- 46 -
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 | ) | $ | - | ||||
- 47 -
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.
- 48 -
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
| 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 | ||||||
| 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 | ||||||
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 | $ | - | $ | - | $ | - | ||||||
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 | ) | |||||||||||||||||||||
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
| 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 | |||||||||
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 | ||||||
| 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.
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.
| Item 9. |
None
| Item 9A. |
Disclosure Controls and Procedures
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.
- 52 -
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. |
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. |
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. |
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. |
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. |
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. |
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. |
(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) | |||
| Certificate of Amendment to the | ||||
| 3.3 | By-laws of the Company as | 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) | |||
| 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) |
- 55 -
| 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) | |||
| 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) | |||
| 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) | |||
| 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) | |||
| 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). | |||
| 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). | |||
| 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). | |||
| 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). | |||
| 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). | |||
| 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). | |||
| 14.1 | Code of Ethics (incorporated by reference to Exhibit II of the Proxy Statement on Schedule 14A filed on March 31, 2003). | |||
| 21.1** | Subsidiaries of | ProPhase Labs, Inc. | ||
| 23.1** | Consent of EisnerAmper LLP, Independent Registered Public Accounting Firm, dated March 15, 2011. | |||
| 23.2** | Consent of Amper, Politziner & Mattia, LLP, Independent Registered Public Accounting Firm, dated March | 24, 2010. | ||
| 31.1** | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |||
| 31.2** | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |||
| 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. | |||
| 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. | |||
* Indicates a management contract or compensatory plan or arrangement
** Filed herewith
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.
| PROPHASE LABS, INC. | |||||
| Registrant | |||||
| March 15, 2011 | By: | ||||
| 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:
| 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/ | ||||||
| /s/Mark Frank | /s/Louis Gleckel | |||||
| Mark Frank | Louis Gleckel | |||||
/s/ | ||||||
| Mark Leventhal | ||||||
March | ||||||
| 15, 2011 | ||||||
- 57 -