x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
¨ | ||
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
(Exact name of registrant as specified in its charter)
(Exact name of registrant as specified in its charter) |
Nevada | 23-2577138 | |
(State or other jurisdiction | (I.R.S. Employer | |
of incorporation or organization) | Identification No.) |
621 N. Shady Retreat Road, Doylestown, Pennsylvania | 18901 | |
(Address of principal executive offices) | (Zip Code) |
(215) 345-0919
Title of each class | Name of each exchange on which registered | |
Common Stock, $0.0005 par value per share | NASDAQ Global Market | |
Common Share Purchase Rights | NASDAQ Global Market |
Common stock, $0.0005 par value per share: 14,484,387
Common share purchase rights: —
Common stock, $0.0005 par value per share: | 14,749,877 | |||
Common share purchase rights: | - |
Page | ||||
Part I | ||||
Item | 1. | Business | 3 | |
1A. | Risk Factors | 8 | ||
1B. | Unresolved Staff Comments | 14 | ||
2. | Properties | 15 | ||
3. | Legal Proceedings | 15 | ||
Part II | ||||
5. | Market for Registrant’s Common Equity, Related Stockholder | |||
Matters and Issuer Purchases of Equity Securities | 17 | |||
6. | Selected Financial Data | 19 | ||
7. | Management’s Discussion and Analysis of Financial Condition | |||
and Results of Operations | 20 | |||
7A. | Quantitative and Qualitative Disclosures About Market Risk | 27 | ||
8. | Financial Statements and Supplementary Data | 28 | ||
9. | Changes in and Disagreements with Accountants on | |||
Accounting and Financial Disclosure | 52 | |||
9A | Controls and Procedures | 52 | ||
9B. | Other Information | 54 | ||
Part III | ||||
10. | Directors, Executive Officers and Corporate Governance | 54 | ||
11. | Executive Compensation | 54 | ||
12. | Security Ownership of Certain Beneficial Owners and | |||
Management and Related Stockholder Matters | 54 | |||
13. | Certain Relationships and Related Transactions and Director Independence | 54 | ||
14. | Principal Accountant Fees and Services | 54 | ||
Part IV | ||||
15. | Exhibits and Financial Statement Schedules | 55 | ||
Signatures | 57 |
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i
· | The ability of our management to successfully implement our business plan and strategy; |
· | Our ability to fund our operations including the cost and availability of capital and credit; |
· | Our ability to compete effectively, including our ability to maintain and increase our markets and/or market share in the markets in which we do business; |
· | Our dependence on sales from our main product, Cold-EEZEÒ, and our ability to successfully develop and commercialize new products; |
· | The uncertain length and severity of the current general financial and economic downturn, the timing and strength of an economic recovery, if any, and their impacts on our business including demand for our products; |
· | Our ability to protect our proprietary rights; |
· | Our continued ability to comply with regulations relating to our current products and any new products we develop, including our ability to effectively respond to changes in laws and regulations or the interpretation thereof including changing market rules and evolving federal, state and regional laws and regulations; |
· | Potential disruptions in our ability to manufacture our products or our access to raw materials; |
· | Seasonal fluctuations in demand for our products; |
· | Our ability to attract, retain and motivate key employees; |
· | The ability of Phusion Laboratories, LLC, a 50% owned joint venture (see below for further details), to successfully implement its business plan and strategy to develop and commercialize one or more non-prescription remedies using certain patented and proprietary technology; and |
· | Other risks identified in this Report. |
cosmeceutical products.
Prior to 2009, we were organized into three business segments: (i) cold remedy, (ii) contract manufacturing and (iii) ethical pharmaceutical. We historically managed each of our segments separately as a consequence of different marketing, manufacturing and/or research and development strategies. However, as a consequence of a strategic review, as further described below, completed in the fourth quarter of 2009, we realigned our operations to focus principally on the research, development, manufacture, marketing and sale of OTC cold remedy and consumer products, natural base health products and other supplements and cosmeceuticals for human and veterinary use. As a consequence of this strategic review, as of December 31, 2009, we are engaged principally in the OTC/Personal Care marketplace segment.
Our strategic review included a review and evaluation of (i) evolving market conditions for OTC cold remedy opportunities in respect of our current product offerings, (ii) our manufacturing and distribution operations and capacity, (iii) product line financial performance criteria, current returns on investment and marketing strategy, (iv) current research and development initiatives and (v) opportunities to develop prescription pharmaceutical and new OTC products.
As a result of our strategic review, management determined that it is in our best interests to focus primarily on the OTC/Personal Care marketplace, which may include but is not limited to our Cold-EEZE® and Kids-EEZE® brands, as well as other homeopathic, dietary supplement, cosmetic, cosmeceutical, first aid, functional food and beverage products.
We also determined to curtail further investment in certain products under development by our wholly-owned subsidiary, Quigley Pharma, Inc. (“Pharma”) 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 have identified certain Pharma products that we feel may warrant further investment in order to determine whether they present significant commercial opportunities. The products we will continue to investigate include compounds QR-333 (potential topical symptomatic relief of diabetic peripheral neuropathy); QR-440 (potential relief of inflammation and joint pain); and QR-448 (potential anti-infective against infectious bronchitis in poultry).
We use a December 31 year-end for financial reporting purposes. References herein to the fiscal year ended December 31, 20092010 shall be the term “Fiscal 2009”2010” and references to other “Fiscal” years shall mean the year, which ended on December 31 of the year indicated.
In April 2009,
Stockholders of the Company were solicited by the Company and the Karkus Group (the “Proxy Contest”) to support either the Incumbent Ballot or the Alternative Ballot prior to the Company’s 2009 Annual Meeting. The results certified by an independent inspector of elections on June 1, 2009, showed that the Alternative Ballot received more votes than the Incumbent Ballot. The election was contested by the Company and made subject to a Standstill Order by a District Court Judge in the United States District Court for the Eastern District of Pennsylvania (“District Court”). However, on Friday, June 12, 2009, the District Court issued a decision and order rejecting the last of the Company’s challenges to the election and the slate of directors nominatedus, pursuant to the Alternative Ballotterms 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 electedrelated 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 part of a regimen that includes the application of an OTC drug.
On June 12, 2009, Mr. Guy Quigley, then Chairman, Presidentproduct development, formulation, testing and Chief Executive Officerother research and development needed by the Joint Venture, and we will oversee much of the Company, resignedproduction, distribution, sales and marketing. The LLC Agreement provides that each member may be required, from his positionstime 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, 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 Company. Mr. Quigley’s resignation had been precededinitial development and marketing costs of new products for the Joint Venture. In Fiscal 2010, the newly formed Joint Venture incurred a loss of $77,000. The Joint Venture has not engaged in any financial transactions, other than certain organizational expenses and general market and product analysis, as formal operations are not expected to commence until Fiscal 2011. At December 31, 2010, cash and equivalents includes $425,000 related to the Joint Venture which is expected to be used by the resignationJoint Venture to fund future product development initiatives currently under consideration by PSI Parent, PSI and us. As of Mr. Charles Phillips, formerlyDecember 31, 2010, we have not established a formal commercialization program timeline for any specific OTC drug covered under the Executive Vice Presidentproduct license and Chief Operating Officer ofwe do not project that any OTC drug products will be available for shipment within the Company, effective May 29, 2009.
Additionally on June 12, 2009, following the seating of the newly elected Board of Directors, Mr. Karkus was elected Chairman of the Board of Directors and the Board elected members to its Audit Committee, Compensation Committee, and Corporate Governance and Nominating Committee. Mr. Karkus was appointed as our interim Chief Executive Officer effective June 18, 2009 and effective July 15, 2009, the Board appointed (i) Mr. Karkus as our permanent Chief Executive Officer and (ii) appointed Mr. Robert V. Cuddihy, Jr. as Executive Vice President and Chief Operating Officer. Effective October 21, 2009, Mr. Cuddihy also was named our interim Chief Financial Officer.
As a consequence of the Proxy Contest we recognized a charge to operations of approximately $2.5 million in costs associated with the Proxy Contest and related litigation.
Our wholly owned subsidiary, Quigley Manufacturing, Inc. (“QMI”), produces our Cold-EEZE® and other lozenge products along with performing such operational tasks as warehousing and shipping our Cold-EEZE® and other cold remedy products. Additionally, QMI maintains a United States Food and Drug Administration (“FDA”) registered facility that engages in contract manufacturing and distribution activities of lozenge-based products for unaffiliated third parties. QMI also produces and sells therapeutic lozenges to wholesale and distribution outlets. On February 2, 2009, we announced our intention to close QMI’s production facility in Elizabethtown, Pennsylvania and consolidate its manufacturing operations at its Lebanon, Pennsylvania facility. Effective in June 2009, the Elizabethtown facility was closed. QMI’s Lebanon facility continues production and distribution of the Cold-EEZE® brand and other cold remedy products.
On April 30, 2009, we announced preliminary results that the Diabetic Peripheral Neuropathy Phase IIb clinical study demonstrated a significant improvement in two key measures of distal sensory nerve function in the group treated with our investigational new drug, QR-333. The compound was applied topically to the feet of subjects suffering from painful diabetic neuropathy and over the course of 12 weeks, significantly improved both maximal conduction velocity and compound sensory amplitude in the sural nerve. The mean improvement in nerve conduction velocity exceeded the change considered by thought leaders to be “clinically meaningful” in clinical studies. The sural nerve carries sensation from the feet and its pathology is the fundamental cause of foot pain and ultimately foot ulcers and amputation in some diabetic subjects.
On July 22, 2009, we announced the final results from our Phase IIb double-blind, placebo-controlled, study of topical compound QR-333 for the treatment of symptomatic diabetic peripheral neuropathy. The study was completed with fewer than expected evaluable patients with the final and comprehensive conclusions revealing that (i) the compound is safe and well tolerated, and (ii) there were nominal trends, but no statistical differences, between active and placebo groups for the primary and secondary endpoints measuring efficacy by (a) the reduction of pain, (b) symptomatic improvements, (c) improved quality of life and (d) improved sleep.
However, we are encouraged by the positive, clinical and statistically significant improvement for efficacy in sural nerve conduction velocity and amplitude unexpectedly found in a sub-set of the patient population. This data may indicate the potential benefit of this compound as a disease modifying agent which, if validated through additional clinical trials, potentially broadens the therapeutic market opportunity. Additional clinical work would be required and future study considerations might include, a longer duration period to improve patient compliance as well as an assessment of sural nerve function and measures of distal nerve sensory thresholds in the feet to provide more detail to the potential for disease modification. There can be no assurance that we will undertake additional clinical studies or that the results thereof would lead to a marketable product that can achieve regulatory approvals.
A preliminary analysis of the lack of adequate primary and secondary end point data indicates that the results may have been attributed to fewer than expected evaluable patients due to a shortage of drug and a high number of patients terminated early due to a lack of compliance with application and usage protocols.
All required end of study regulatory and reporting documentation and procedures will be completed in Fiscal 2010. We will continue to consider licensing, partnering or collaborative relationship opportunities to further the development and potential commercialization of the QR-333 candidate and other formulations.
Cold-EEZE®
On February 29, 2008, we sold our wholly owned subsidiary, Darius International, Inc. (“Darius”), our 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 of the Company (as well as a shareholder) and the brother of Mr. Guy Quigley, the Company’s 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 receive royalties from Innerlight. The results and balances associated with Darius are presented as discontinued operations in our consolidated statements of operations (see Notes 3 and 12Note 14 to Consolidated Financial Statements).
In April 2002, we were assigned a Patent Application which was filed with the Patent Office of the United States Commerce Department for the use of Cold-EEZE® as a prophylactic for cold prevention. The new Patent Application follows the results of the adolescent study at the Heritage School facility.
We are currently focused on the research and development of potential natural base health products, particularly compounds QR-333 (potential topical symptomatic relief of diabetic peripheral neuropathy); QR-440 (potential relief of inflammation and joint pain); and QR-448 (potential anti-infective against infectious bronchitis in poultry). We are also in the initial stages of what may be a lengthy process to develop our patent applications into or acquire rights for commercial products employing these compounds.
QR-333 — In April 2002, we initiated a Proof of Concept Study in France for treatment of diabetic neuropathy, which was concluded in 2003. We proceeded through a series of product development stages including (i) proof of concepts, (ii) filing an Investigational New Drug (“IND”) application for the relief of symptoms of diabetic symmetrical peripheral neuropathy lab evaluations, and (iii) the execution of variety of clinical and other studies.
As discussed above under “Recent Developments”, on July 22, 2009, we announced the final results from our Phase IIb double-blind, placebo-controlled, study of topical compound QR-333 for the treatment of symptomatic diabetic peripheral neuropathy. The study was completed with fewer than expected evaluable patients with the final and comprehensive conclusions revealing that (i) the compound is safe and well tolerated, and (ii) there were nominal trends, but no statistical differences, between active and placebo groups for the primary and secondary endpoints measuring efficacy by (a) the reduction of pain, (b) symptomatic improvements, (c) improved quality of life and (d) improved sleep.
However, we are encouraged by the positive, clinical and statistically significant improvement for efficacy in sural nerve conduction velocity and amplitude unexpectedly found in a sub-set of the patient population. Those data may indicate the potential benefit of this compound as a disease modifying agent which, if validated through additional clinical trials, potentially broadens the therapeutic market opportunity. Additional clinical work would be required and future study considerations might include, a longer duration period to improve patient compliance as well as an assessment of sural nerve function and measures of distal nerve sensory thresholds in the feet to provide more detail to the potential for disease modification. There can be no assurance that we will undertake such additional clinical studies or that the results thereof would lead to a marketable product that can achieve regulatory approvals.
A preliminary analysis of the lack of adequate primary and secondary end point data indicates that the results may have been attributed to fewer than expected evaluable patients due to a shortage of drug and a high number of patients whose participation was terminated early due to a lack of compliance with application and usage protocols.
All required end of study regulatory and reporting documentation and procedures will be completed. We will continue to consider licensing, partnering or collaborative relationship opportunities to further the development and potential commercialization of the QR-333 candidate and other formulations.
QR-440 (a) — We received an additional Investigational New Animal Drug (“INAD”) number from the Center for Veterinary Medicine of the FDA. In previous studies, QR-440 has been shown to reduce inflammation and also suggests possible disease-modifying potential.
QR-448(a) — In May 2008, we announced positive results from a study conducted in chickens to evaluate the anti-viral activity of our veterinary drug compound QR-448(a). The compound was administered to chicks that had been infected with Infectious Bronchitis Virus (“IBV”). The data from the study indicated that QR-448(a) is efficacious against an IBV challenge in two week old specific pathogen free (“SPF”) chicks, confirming previous results indicating that treatment with QR-448(a) before or after viral exposure has the potential to lessen or prevent disease.
We initiated our investigations into the effectiveness of this compound based on feedback from poultry industry leaders who expressed an increasing need for additional products to combat IBV. With the completion of this latest study and the current dossier of data, we plan to solicit the poultry industry for additional guidance and potential interest and opportunities for developing this compound jointly toward commercialization.
In September 2008, we announced successful results from a follow up study designed to determine the duration of the anti-viral effect of QR-448(a) against IBV in commercial broiler chickens, a consumer meat type bird. Results demonstrated longer duration of protection from IBV and reduction of clinical signs in chickens. Additionally, in September 2008, we announced that the anti-viral QR-448(a) compound successfully prevents transmission of infectious bronchitis in chickens. Veterinary poultry products industry experts and those familiar with prevention and control of IBV recognize that abating transmission is perhaps one of the most important ways to economically prevent, control and manage potential losses due to infectious bronchitis outbreaks.
QR-340 — On February 24, 2009, we and Levlad, LLC/Natures Gate (“Levlad”), a manufacturer and marketer of personal care products based on botanicals, signed a license with assignment of ownership agreement for our patented formulation QR-340. The compound was clinically tested and shown to improve the appearance of scars in a comparative study. The license agreement provides, among other matters, that Levlad to further refine, develop and commercialize the product with exclusivity and eventual full ownership of the patent within five years, beginning January 2009 and required Levlad to make minimum royalty payments totaling $1.1 million to us over the time period. Under the terms of the license agreement, if the minimum payments and terms are not met within the five-year period, we will retain full rights and ownership of the property, however, Levlad can continue to pay per unit royalties beyond five years for a non-exclusive license.
Organix®.
under such patents.
2008.
We have historically invested significantly in research and development activities. Our research and development costs for Fiscal, 2009, 2008 and 2007 were $1.3 million, $4.2 million and $6.5 million, respectively. Such research and development expenditures in each year were principally for the development, including certain clinical studies, of natural base health products. We have determined that further material investment certainQuigley Pharma products under development would be curtailed in light of our view, following our strategic analysis undertaken in Fiscal 2009 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,subsidiary, (ii) we have identified certain Pharma products thatsuspended Quigley Pharma’s operations and (iii) we believe may warrantare not making any further investmentinvestments in order to determine whether they present significant commercial opportunities, including QR-440 (potential relief of inflammation and joint pain), and QR-448 (potential anti-infective against infectious bronchitis in poultry). Additionally, future research and development expenditures are anticipated in order to develop extensions of the Cold-EEZE® product and potential unrelated new products in the OTC and consumer health care industry.
Quigley Pharma.
exemption is pending FDA review and we cannot assure that the exemption will be permanently implemented. We also cannot assure that the FDA will agree with our determination of compliance. If the FDA disagrees, the FDA could, upon inspection, issue a notice of violations, referred to as a form FDA-483, or issue a Warning Letter, or both. If we fail to take timely corrective actions to the satisfaction of 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. Management believes that we are in compliance with all such laws, regulations, and standards currently in effect including the Food, Drug, and Cosmetics Act as amended from time to time, and the standards established under the Homeopathic Pharmacopoeia of the United States.
States.
The principal
Certain of our investments and initiatives have been in the process of a strategic transformation as new management assesses the status of various product development initiatives. In connection with this assessment, we have determined to curtail investment in certain of Pharma’s 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.
The amount of capital that may be needed to complete product development initiatives will depend on many factors which may include but are not limited to (i) the cost involved in applying for and obtaining FDA, and 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 Cold-EEZE®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, $0.0005 par value per share (the “Common Stock”)Common Stock issued to former executives and employees of the Company are exercised and the timing and amount of these exercises.
A and from Cold Season to Cold Season
There can be no assurance that this strategic realignmentfocus will provide any revenue growth or that we will be successful in initiating or acquiring any new lines of business, or that any such new lines of business will achieve profitability. Furthermore as part of our strategic realignment,initiatives, we have implemented certain cost reduction programs and expanded our marketing investments during Fiscal 2010 that, in of themselves, may not be sufficient to return the Company to profitability. As of December 31, 2009,2010, we had working capital of approximately $11.5$7.5 million.
As a consequence of the current curtailment of investment in Pharma, we may not have the ability to research and develop prescription medications based on our existing patents and no assurances can be given that commercially viable products will be developed from these patents or our pending patent applications. 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. 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.
In 2009, as a result of the successful Proxy Contest, our former Chief Executive Officer and former Chief Operating Officer resigned. Both these positions are now occupied by individuals, Mr. Karkus and Mr. Cuddihy, who are new to the Company. Additionally, in October, the employment of our then Chief Financial Officer ended and the duties of chief financial officer were assumed, on an interim basis, by Mr. Cuddihy. This change in management may cause some concern among vendors, customers, investors or stockholders during the period of time within which our new management becomes familiar with the administration of our business, completes its strategic assessment of the Company and implements our new business plan.
may have a material adverse effect on 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 our success.
and Fiscal 2010
area.
In February 2011, the Elizabethtown facility was sold and we derived net proceeds from the sale of approximately $166,000.
2011.
(currently PROPHASE LABS, INC.)
Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
2009 | 2008 | |||||||||||||||
Quarter Ended | High | Low | High | Low | ||||||||||||
March 31, | $ | 5.00 | $ | 3.86 | $ | 5.74 | $ | 4.17 | ||||||||
June 30, | $ | 6.70 | $ | 3.53 | $ | 5.85 | $ | 4.54 | ||||||||
September 30, | $ | 4.01 | $ | 1.58 | $ | 5.65 | $ | 4.58 | ||||||||
December 31, | $ | 2.50 | $ | 1.45 | $ | 5.39 | $ | 2.85 |
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 |
Dividends |
Description | Number | Exercise Price | Expiration Date | Number | Exercise Price | Expiration Date | ||||||||||||||||||||||||||
Option Plan | * | 70,000 | $ | 0.81 | May 2010 | * | 48,000 | $ | 8.11 | October 2010 | ||||||||||||||||||||||
Option Plan | * | 20,000 | $ | 0.81 | June 2010 | * | 83,500 | $ | 8.11 | October 2013 | ||||||||||||||||||||||
Option Plan | * | 500 | $ | 0.81 | December 2010 | * | 5,000 | $ | 9.50 | March 2010 | ||||||||||||||||||||||
Option Plan | * | 60,000 | $ | 1.26 | May 2010 | * | 45,000 | $ | 9.50 | May 2010 | ||||||||||||||||||||||
Option Plan | * | 25,000 | $ | 1.26 | June 2010 | * | 169,500 | $ | 9.50 | June 2010 | ||||||||||||||||||||||
Option Plan | * | 13,500 | $ | 1.26 | December 2011 | * | 42,000 | $ | 9.50 | October 2010 | ||||||||||||||||||||||
Option Plan | * | 7,000 | $ | 5.19 | March 2010 | * | 95,000 | $ | 9.50 | October 2014 | ||||||||||||||||||||||
Option Plan | * | 42,000 | $ | 5.19 | May 2010 | * | 3,000 | $ | 13.80 | March 2010 | ||||||||||||||||||||||
Option Plan | * | 117,000 | $ | 5.19 | June 2010 | * | 2,500 | $ | 13.80 | April 2010 | ||||||||||||||||||||||
Option Plan | * | 15,000 | $ | 5.19 | October 2010 | * | 80,000 | $ | 13.80 | May 2010 | ||||||||||||||||||||||
Option Plan | * | 50,250 | $ | 5.19 | July 2012 | * | 213,500 | $ | 13.80 | June 2010 | ||||||||||||||||||||||
Option Plan | * | 8,000 | $ | 8.11 | March 2010 | * | 30,000 | $ | 13.80 | October 2010 | ||||||||||||||||||||||
Option Plan | * | 45,000 | $ | 8.11 | May 2010 | * | 75,500 | $ | 13.80 | December 2015 | ||||||||||||||||||||||
Option Plan | * | 122,000 | $ | 8.11 | June 2010 | * | ||||||||||||||||||||||||||
Subtotal | 595,250 | Subtotal | 892,500 | |||||||||||||||||||||||||||||
Grand Total Options | 1,487,750 |
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 |
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) | |||||||||
Equity Plans Approved by Security Holders(1) | 1,487,750 | $ | 8.64 | — |
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 ) | |||||||||
Equity Plans Approved by Security Holders (1,2,3) | 1,299,750 | $ | 2.99 | 1,000,375 |
Year Ended December 31, | ||||||||||||||||||||
2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
Statement of Income Data: | ||||||||||||||||||||
Net sales | $ | 19,816 | $ | 20,507 | $ | 28,241 | $ | 26,850 | $ | 33,185 | ||||||||||
Gross profit | $ | 11,569 | $ | 11,413 | $ | 18,556 | $ | 17,545 | $ | 21,301 | ||||||||||
Income (loss) – continuing operations | $ | (3,842 | ) | $ | (6,409 | ) | $ | (1,856 | ) | $ | (547 | ) | $ | 2,339 | ||||||
Income (loss) – discontinued operations(1) | — | 875 | (602 | ) | (1,201 | ) | 878 | |||||||||||||
Net income (loss) | $ | (3,842 | ) | $ | (5,534 | ) | $ | (2,458 | ) | $ | (1,748 | ) | $ | 3,217 | ||||||
Basic earnings (loss) per share: | ||||||||||||||||||||
Continuing operations | $ | (0.30 | ) | $ | (0.50 | ) | $ | (0.14 | ) | $ | (0.04 | ) | $ | 0.20 | ||||||
Discontinued operations | — | 0.07 | (0.05 | ) | (0.10 | ) | 0.08 | |||||||||||||
Net income (loss) | $ | (0.30 | ) | $ | (0.43 | ) | $ | (0.19 | ) | $ | (0.14 | ) | $ | 0.28 | ||||||
Diluted earnings (loss) per share: | ||||||||||||||||||||
Continuing operations | $ | (0.30 | ) | $ | (0.50 | ) | $ | (0.14 | ) | $ | (0.04 | ) | $ | 0.17 | ||||||
Discontinued operations | — | 0.07 | (0.05 | ) | (0.10 | ) | 0.07 | |||||||||||||
Net income (loss) | $ | (0.30 | ) | $ | (0.43 | ) | $ | (0.19 | ) | $ | (0.14 | ) | $ | 0.24 | ||||||
Weighted average shares outstanding: | ||||||||||||||||||||
Basic | 12,963 | 12,878 | 12,729 | 12,245 | 11,661 | |||||||||||||||
Diluted | 12,963 | 12,878 | 12,729 | 12,245 | 13,299 |
As of December 31, | ||||||||||||||||||||
2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
Balance Sheet Data: | ||||||||||||||||||||
Working capital | $ | 11,475 | $ | 14,071 | $ | 18,578 | $ | 20,541 | $ | 20,682 | ||||||||||
Total assets | $ | 19,817 | $ | 24,369 | $ | 33,502 | $ | 34,845 | $ | 35,976 | ||||||||||
Debt | $ | — | $ | — | $ | — | $ | — | $ | 1,464 | ||||||||||
Stockholders’ equity | $ | 14,059 | $ | 17,774 | $ | 23,244 | $ | 25,529 | $ | 25,320 |
Year Ended December 31, | ||||||||||||||||||||
2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
Statement of Income Data: | ||||||||||||||||||||
Net sales | $ | 14,502 | $ | 19,816 | $ | 20,507 | $ | 28,241 | $ | 26,850 | ||||||||||
Gross profit | $ | 8,830 | $ | 11,569 | $ | 11,413 | $ | 18,556 | $ | 17,545 | ||||||||||
Loss - continuing operations | $ | (3,501 | ) | $ | (3,842 | ) | $ | (6,409 | ) | $ | (1,856 | ) | $ | (547 | ) | |||||
Income (loss) - discontinued operations (1) | - | - | 875 | (602 | ) | (1,201 | ) | |||||||||||||
Net loss | $ | (3,501 | ) | $ | (3,842 | ) | $ | (5,534 | ) | $ | (2,458 | ) | $ | (1,748 | ) | |||||
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 | ) | |||||||||||||
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 | ) | |||||||||||||
Net loss | $ | (0.25 | ) | $ | (0.30 | ) | $ | (0.43 | ) | $ | (0.19 | ) | $ | (0.14 | ) | |||||
Weighted average shares outstanding: | ||||||||||||||||||||
Basic | 14,285 | 12,963 | 12,878 | 12,729 | 12,245 | |||||||||||||||
Diluted | 14,285 | 12,963 | 12,878 | 12,729 | 12,245 | |||||||||||||||
As of December 31, | ||||||||||||||||||||
2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
Balance Sheet Data: | ||||||||||||||||||||
Working capital | $ | 7,521 | $ | 11,475 | $ | 14,071 | $ | 18,578 | $ | 20,541 | ||||||||||
Total assets | $ | 21,695 | $ | 21,330 | $ | 24,369 | $ | 33,502 | $ | 34,845 | ||||||||||
Stockholders’ equity | $ | 13,460 | $ | 14,059 | $ | 17,774 | $ | 23,244 | $ | 25,529 |
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
products.
Strategic Review. Prior to Fiscal 2009, we were organized into three business segments: (i) cold remedy, (ii) contract manufacturing and (iii) ethical pharmaceutical. We historically managed each of our segments separately as a consequence of different marketing, manufacturing and/or research and development strategies. However, as a consequence of our strategic review, as described below, completed in the fourth quarter of Fiscal 2009, we realigned our operations to focus principally on the research, development, manufacture, marketing and sale of OTC cold remedy and consumer products, natural base health products and other supplements and cosmeceuticals for human and veterinary use. As a consequence of this strategic review, as of December 31, 2009, we are engaged principally in the OTC/Personal Care marketplace segment.
Our strategic review included a review and evaluation of (i) evolving market conditions of OTC cold remedy opportunities in conjunction with our current product offerings, (ii) manufacturing and distribution operations and capacity, (iii) product line financial performance criterion, current returns on investment and marketing strategy, (iv) current research and development initiatives and (v) opportunities to develop prescription pharmaceutical and new OTC products. We determined as a result of this review to curtail further investment in certain of our wholly owned subsidiary’s, Quigley Pharma, Inc. (“Pharma”), 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. However, we continue to engage in research and development activities that we determine are appropriate as discussed below.
Management continues to assess our entire business operations, including but not limited to our (i) fundamental market and operations strategies, (ii) product development methodologies and current product development initiatives and focus, (iii) product line and brand marketing, (iv) consumer and retailer relationships, and (v) current internal and external operational resources and needs. During Fiscal 2009, management made initial progress in cost control and fundamental marketing initiatives in an effort to reduce overhead expenses while marketing our existing products. However, management believes we will need to continue our restructuring activities well into Fiscal 2010 and will make meaningful investments therein in order to (i) build greater consumer awareness for our products, (ii) properly formulate new products, (iii) develop effective product launch strategies, (iv) seek to reduce the effects of the significant seasonality of the current business with new product development initiatives for potential launch in Fiscal 2011/2012 and (v) operate our business more efficiently.
Research and Development. We have invested significantly in research and development activities. Our current research and development activity is specifically targeted to potential natural base health products, including, compounds QR-333 (potential topical symptomatic relief of diabetic peripheral neuropathy); QR-440 (potential relief of inflammation and joint pain); and QR-448 (potential anti-infective against infectious bronchitis in poultry). In addition, we may seek to acquire (or enter into other arrangements regarding) new formulations, ingredients, applications and other products developed by third parties who may be seeking our commercialization, marketing and distribution expertise. We are currently undergoing limited research and development activity in compliance with regulatory requirements and are evaluating various new product technologies, applications, licensing, commercialization and other development opportunities. We are in the initial stages of what may be a lengthy process to develop our patent applications into or acquire rights for commercial products.
Pursuant to the LLC Agreement, we and PSI each own a 50% membership interest in the Joint Venture.
Proxy Contest.
On June 12, 2009, Mr. Guy Quigley, then Chairman, President and Chief Executive Officer of the Company, resigned his positions with the Company. Mr. Quigley’s resignation had been preceded by the resignation of Mr. Charles Phillips, formerly the Executive Vice President and Chief Operating Officer of the Company, effective May 29, 2009.
Additionally on June 12, 2009, following the seating of the newly elected Board of Directors, Mr. Karkus was elected Chairman of the Board of Directors and the Board elected members to its Audit Committee, Compensation Committee, and Corporate Governance and Nominating Committee. Mr. Karkus was appointed as our interim Chief Executive Officer effective June 18, 2009 and effective July 15, 2009, the Board appointed (i) Mr. Karkus as our permanent Chief Executive Officer and (ii) Mr. Robert V. Cuddihy, Jr. as our Executive Vice President and Chief Operating Officer. Effective October 21, 2009, Mr. Cuddihy also was named our interim Chief Financial Officer.
As a consequence of the Proxy Contest between the Incumbent Ballot and the Alternative Ballot, for Fiscal 2009 we charged to operations approximately $2.5 million in costs associated with the proxy solicitation and related litigation.
Manufacturing Facility Consolidation. Our wholly owned subsidiary, QMI, produces our Cold-EEZE® and other lozenge products along with performing such operational tasks as warehousing and shipping our Cold-EEZE® and other cold remedy products. Additionally, QMI maintains a FDA approved facility that engages in contract manufacturing and distribution activities of lozenge-based products for unaffiliated third parties. QMI also produces and sells therapeutic lozenges to wholesale and distribution outlets. On February 2, 2009, we announced its intention to close QMI’s production facility in Elizabethtown, Pennsylvania and consolidate our manufacturing operations at our Lebanon, Pennsylvania facility. Effective in June 2009, the Elizabethtown facility was closed. QMI’s Lebanon facility continues production and distribution of our Cold-EEZE® brand and other cold remedy products.
Research and Development. On April 30, 2009, we announced preliminary results that the Diabetic Peripheral Neuropathy Phase IIb clinical study demonstrated a significant improvement in two key measures of distal sensory nerve function in the group treated with its investigational new drug, QR-333. The compound was applied topically to the feet of subjects suffering from painful diabetic neuropathy and over the course of 12
weeks, significantly improved both maximal conduction velocity and compound sensory amplitude in the sural nerve. The mean improvement in nerve conduction velocity exceeded the change considered by thought leaders to be “clinically meaningful” in clinical studies. The sural nerve carries sensation from the feet and its pathology is the fundamental cause of foot pain and ultimately foot ulcers and amputation in some diabetic subjects.
On July 22, 2009, we announced the final results from our Phase IIb double-blind, placebo-controlled, study of topical compound QR-333 for the treatment of symptomatic diabetic peripheral neuropathy. The study was completed with fewer than expected evaluable patients with the final and comprehensive conclusions revealing that (i) the compound is safe and well tolerated, and (ii) there were nominal trends, but no statistical differences, between active and placebo groups for the primary and secondary endpoints measuring efficacy by (a) the reduction of pain, (b) symptomatic improvements, (c) improved quality of life and (d) improved sleep.
However, we are encouraged by the positive, clinical and statistically significant improvement for efficacy in sural nerve conduction velocity and amplitude unexpectedly found in a sub-set of the patient population. This data may indicate the potential benefit of this compound as a disease modifying agent which, if validated through additional clinical trials, potentially broadens the therapeutic market opportunity. Additional clinical work would be required and future study considerations might include, a longer duration period to improve patient compliance as well as an assessment of sural nerve function and measures of distal nerve sensory thresholds in the feet to provide more detail to the potential for disease modification. There can be no assurance that we will undertake additional clinical studies or that the results of any such studies would lead to a marketable product that can achieve regulatory approvals.
A preliminary analysis of the lack of adequate primary and secondary end point data indicates that the results may have been attributed to fewer than expected evaluable patients due to a shortage of drug and a high number of patients terminated early due to a lack of compliance with application and usage protocols.
All required end of study regulatory and reporting documentation and procedures will be completed. We will continue to consider licensing, partnering or collaborative relationship opportunities to further the development and potential commercialization of the QR-333 candidate and other formulations.
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.
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.
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 |
Amount | ||||
Return provision at December 31, 2007 | $ | 296 | ||
Net change in the return provision Fiscal 2008 | 1,131 | |||
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 |
For Fiscal 2009, 2008 and 2007, net sales of products with limited shelf-life and expiration dates were $617,000, $311,000 and $265,000, and $2.4 million, respectively.
Fiscal 2010.
Selling,
Net sales for Fiscal 2008 were $20.5 million compared to $28.2 million for Fiscal 2007, a decrease of $7.7 million or 27.4%, principally due to lower cold remedy product sales. The sales of cold remedy products decreased in Fiscal 2008 by $7.5 million, or 29.3%, as compared to Fiscal 2007. This decrease may be attributable to certain customer reviews of inventory levels and product mix carried particularly in light of declining market and economic conditions, including higher than normal product returns. The cough cold retail category in general, and the Company in particular, was adversely affected in Fiscal 2008 by a reduction in the incidence of colds by consumers as compared to prior years.
Cost of sales decreased $591,000 for Fiscal 2008 to $9.1 million as compared to $9.7 million for Fiscal 2007. The decrease in cost of sales was principally due to (i) lower revenues from period to period, offset by (ii) a decline in gross margin. We realized gross margins of 55.7% for Fiscal 2008 as compared to 65.7% in Fiscal 2007, a decrease of 10.0%. The 10.0% decrease in the gross margin was principally due to (i) an increase in product returns, expired shelf-life and obsolete product of 5.4%, (ii) an impairment charge of $300,000 related to our closure plans for the Elizabethtown manufacturing facility and (iii) declining production volumes and reduced margins realized from certain contract manufacturing products. Certain of these contract manufacturing products were discontinued in Fiscal 2009 as
SG&A expensenet loss for Fiscal 2008 were $13.92009, was $3.8 million, or ($.30) per share, as compared to $14.6a net loss of $5.5 million, in Fiscal 2007. The decrease in SG&A expense of $721,000 was principally due to the net effects of (i) increased outside advertising, marketing and promotional costs of $1.5 million, primarily due to increased media advertising, offset by (ii) a decrease of $252,000 for sales brokerage and commission costs due to the lower net sales in Fiscal 2008, (iii) a decrease of $1.1 million in personnel costs principally due to a decrease in general payroll and bonus costs; (iv) a decrease of $455,000 in legal costs as a consequence of lower litigation and legal services required during Fiscal 2008 as compared to Fiscal 2007 and (v) a decrease of $173,000 in stock promotion.
Research and development costsor ($0.43) per share, for Fiscal 2008 and 2007 were $4.2 million and $6.5 million, respectively. Principally, the decrease in research and development expenditure was the result of decreased Pharma study costs of approximately $2.2 million in Fiscal 2008.
On February 29, 2008, we sold our wholly owned subsidiary, Darius, our former health and wellness segment, to 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 and 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, which entered into an agreement to receive royalties from InnerLight. The results and balances associated with Darius are presented as discontinued operations in the condensed consolidated statements of operations.
The terms of the sale agreement include a cash purchase price of $1.0 million by InnerLight for the stock of Darius and its subsidiaries without guarantees, warranties or indemnifications. We recorded a gain on the disposal of Darius of $736,000, as a result of sales proceeds of $1.0 million less residual investment of $5,000 and net assets of Darius of $259,000 on the date of sale.
Sales attributable to Darius from January 1, 2008 until date of disposal on February 29, 2008 and for Fiscal 2007 were $2.2 million and $11.3 million, respectively. Net income (loss) from January 1, 2008 until date of disposal on February 29, 2008, and for Fiscal 2007 were $139,000 and ($602,000), respectively. Financial results from operations of Darius are presented as discontinued operations in our Financial Statements.
other allowances.
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 | Product and Other Purchases | Total | ||||||||||||
2010 | $ | 1,075 | $ | 235 | $ | 660 | $ | 1,970 | ||||||||
2011 | 1,075 | — | — | 1,075 | ||||||||||||
2012 | 582 | — | — | 582 | ||||||||||||
2013 | — | — | — | — | ||||||||||||
2014 | — | — | — | — | ||||||||||||
Total | $ | 2,732 | $ | 235 | $ | 660 | $ | 3,627 |
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 |
Effective July 2009, we adopted the “FASB Accounting Standards Codification” and the Hierarchy of Generally Accepted Accounting Principles (ASC-105). This standard establishes only two levels of U.S. generally accepted accounting principles (“GAAP”), authoritative and nonauthoritative. The Financial Accounting Standard Board (“FASB”) Accounting Standards Codification (the “Codification”) became the source of authoritative, nongovernmental GAAP, except for rules and interpretive releases of the SEC, which are sources of authoritative GAAP for SEC registrants. All other non-grandfathered, non-SEC accounting literature not included in the Codification became nonauthoritative. We began using the new guidelines and numbering system prescribed by the Codification when referring to GAAP for the three months and nine months ended September 30, 2009. As the Codification was not intended to change or alter existing GAAP, it did not have any impact on our consolidated financial statements.
In February 2008, the FASB issued an accounting standard update that delayed the effective date of fair value measurements accounting for all non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), until fiscal years beginning after November 15, 2008. These include goodwill and other non-amortizable intangible assets. We adopted this accounting standard update effective January 1, 2009. The adoption of this update to non-financial assets and liabilities, as codified in ASC-820, has not had a significant impact on our consolidated financial position, results of operations or cash flows.
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”). IFRS is a comprehensive series of accounting standards published by the International Accounting Standards Board (IASB)(“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.
Effective January
Effective Januaryout 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 we adopted an accounting standard which establishes accountingwhile the amended Level 3 guidance is effective for interim and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary, as codified in ASC-810. This accounting standard states that accounting and reporting for minority interests are to be recharacterized as noncontrolling interests and classified as a component of equity. The calculation of earnings per share continues to be based on income amounts attributable to the parent.annual financial periods beginning after December 15, 2010. The adoption of these accounting updates hasASU 2010-06 did not hadhave a significant impactmaterial effect on our consolidated financial position, results of operations or cash flows.
Effective January 2009, we adopted an accounting standard update regarding the determination of the useful life of intangible assets. As codified in ASC-350, this update amends the factors considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under intangibles accounting. It also requires a consistent approach between the useful life of a recognized intangible asset under prior business combination accounting and the period of expected cash flows used to measure the fair value of an asset under the new business combinations accounting (as currently codified under ASC-850). The update also requires enhanced disclosures when an intangible asset’s expected future cash flows are affected by an entity’s intent and/or ability to renew or extend the arrangement. The adoption of these accounting updates has not had a significant impact on our consolidated financial position, results of operations or cash flows.
Effective January 2009, we adopted a new accounting standard update from the Emerging Issues Task Force (“EITF”) consensus regarding the accounting of defensive intangible assets. This update, as codified in ASC-350, clarifies accounting for defensive intangible assets subsequent to initial measurement. It applies to acquired intangible assets which an entity has no intention of actively using, or intends to discontinue use of, the intangible asset but holds it to prevent others from obtaining access to it (i.e. a defensive intangible asset). Under this update, a consensus was reached that an acquired defensive asset should be accounted for as a separate unit of accounting (i.e. an asset separate from other assets of the acquirer); and the useful life assigned to an acquired defensive asset should be based on the period during which the asset would diminish in value. The adoption of this accounting update has not had a significant impact on our consolidated financial position, results of operations or cash flows.
Effective April 2009, we adopted a new accounting standard for subsequent events, as codified in ASC-855. The update modifies the names of the two types of subsequent events either as recognized subsequent events (previously referred to in practice as Type I subsequent events) or non-recognized subsequent events (previously
referred to in practice as Type II subsequent events). In addition, the standard modifies the definition of subsequent events to refer to events or transactions that occur after the balance sheet date, but before the financial statements are issued (for public entities) or available to be issued (for nonpublic entities). It also requires the disclosure of the date through which subsequent events have been evaluated. The update did not result in significant changes in the practice of subsequent event disclosures, and therefore the adoption has not had a significant impact on our consolidated financial position, results of operations or cash flows. As a consequence of the adoption of ASC-855, we have evaluated and disclosed subsequent events relating to the year ended December 31, 2009 in our Financial Statements.
Effective April 2009, we adopted three accounting standard updates which were intended to provide additional application guidance and enhanced disclosures regarding fair value measurements and impairments of securities. They also provide additional guidelines for estimating fair value in accordance with fair value accounting. The first update, as codified in ASC-820 (formerly FASB Staff Positions (“FSP”) No.157-4,Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly), provides additional guidelines for estimating fair value in accordance with fair value accounting. The second accounting update, as codified in ASC-320 (formerly FSP No. 115-2,Recognition and Presentation of Other-Than-Temporary Impairments), changes accounting requirements for other-than-temporary-impairment (OTTI) for debt securities by replacing the current requirement that a holder have the positive intent and ability to hold an impaired security to recovery in order to conclude an impairment was temporary with a requirement that an entity conclude it does not intend to sell an impaired security and it will not be required to sell the security before the recovery of its amortized cost basis. The third accounting update, as codified in ASC-825 (formerly Accounting Principles Board (“APB”) Opinion No. 28-1,Interim Disclosures about Fair Value of Financial Instruments), increases the frequency of fair value disclosures. These updates were effective for fiscal years and interim periods ended after June 15, 2009. The adoption of these accounting updates has not had a significant impact on our consolidated financial position, results of operations or cash flows.
Item 7A. | Quantitative and Qualitative Disclosures About Market Risk |
Item 8. | Financial Statements and Supplementary Data |
ProPhase Labs, Inc.
December 31, | ||||||||
2009 | 2008 | |||||||
ASSETS | ||||||||
Cash and cash equivalents (Note 2) | $ | 12,801 | $ | 11,957 | ||||
Accounts receivable, net of doubtful accounts of $23 and $131, respectively (Note 2) | 2,086 | 4,524 | ||||||
Inventory, net (Note 2) | 1,405 | 3,001 | ||||||
Prepaid expenses and other current assets | 803 | 1,184 | ||||||
Assets held for sale (Notes 2 and 4) | 138 | — | ||||||
Total current assets | 17,233 | 20,666 | ||||||
Property, plant and equipment, net of accumulated depreciation of $3,155 and $4,870, respectively (Note 4) | 2,572 | 3,668 | ||||||
Other assets | 12 | 35 | ||||||
$ | 19,817 | $ | 24,369 | |||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
LIABILITIES | ||||||||
Accounts payable | $ | 482 | $ | 694 | ||||
Accrued royalties and sales commissions (Note 5) | 3,787 | 3,792 | ||||||
Accrued advertising | 731 | 1,306 | ||||||
Other current liabilities | 758 | 803 | ||||||
Total current liabilities | 5,758 | 6,595 | ||||||
COMMITMENTS AND CONTINGENCIES (Note 7) | ||||||||
STOCKHOLDERS' EQUITY | ||||||||
Common Stock, $.0005 par value; authorized 50,000,000; Issued: 17,679,436 and 17,554,436 shares, respectively (Note 8) | 9 | 9 | ||||||
Additional paid-in-capital | 37,726 | 37,599 | ||||||
Retained earnings | 1,512 | 5,354 | ||||||
Treasury stock, at cost, 4,646,053 and 4,646,053 shares, respectively | (25,188 | ) | (25,188 | ) | ||||
14,059 | 17,774 | |||||||
$ | 19,817 | $ | 24,369 |
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 |
Year Ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Net sales (Notes 2 and 15) | $ | 19,816 | $ | 20,507 | $ | 28,241 | ||||||
Cost of sales (Note 2) | 8,247 | 9,094 | 9,685 | |||||||||
Gross profit | 11,569 | 11,413 | 18,556 | |||||||||
Operating expenses: | ||||||||||||
Sales and marketing | 4,852 | 5,958 | 4,995 | |||||||||
Administration | 9,344 | 7,943 | 9,627 | |||||||||
Research and development (Note 2) | 1,308 | 4,241 | 6,482 | |||||||||
Total operating expense | 15,504 | 18,142 | 21,104 | |||||||||
Loss from operations | (3,935 | ) | (6,729 | ) | (2,548 | ) | ||||||
Other income (expense) | ||||||||||||
Interest income | 9 | 320 | 692 | |||||||||
Total other income | 9 | 320 | 692 | |||||||||
Loss from continuing operations before taxes | (3,926 | ) | (6,409 | ) | (1,856 | ) | ||||||
Income tax expense (benefit) (Note 10) | (84 | ) | — | — | ||||||||
Loss from continuing operations | (3,842 | ) | (6,409 | ) | (1,856 | ) | ||||||
Discontinued operations (Note 3) | ||||||||||||
Gain on disposal of health and wellness operations | — | 736 | — | |||||||||
Income (loss) from discontinued operations | — | 139 | (602 | ) | ||||||||
Net loss | $ | (3,842 | ) | $ | (5,534 | ) | $ | (2,458 | ) | |||
Earnings (loss) per common share: | ||||||||||||
Loss from continuing operations | $ | (0.30 | ) | $ | (0.50 | ) | $ | (0.14 | ) | |||
Income (loss) from discontinued operations | — | 0.07 | (0.05 | ) | ||||||||
Net loss | $ | (0.30 | ) | $ | (0.43 | ) | $ | (0.19 | ) | |||
Diluted earnings (loss) per common share: | ||||||||||||
Loss from continuing operations | $ | (0.30 | ) | $ | (0.50 | ) | $ | (0.14 | ) | |||
Income (loss) from discontinued operations | — | 0.07 | (0.05 | ) | ||||||||
Net loss | $ | (0.30 | ) | $ | (0.43 | ) | $ | (0.19 | ) | |||
Weighted average common shares outstanding: | ||||||||||||
Basic | 12,963 | 12,878 | 12,729 | |||||||||
Diluted | 12,963 | 12,878 | 12,729 |
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 |
Common Stock Shares | Par Value | Additional Pain-In Capital | Retained Earnings (Deficit) | Treasury Stock | Total | |||||||||||||||||||
Balance at December 31, 2006 | 12,684,633 | $ | 9 | $ | 37,362 | $ | 13,346 | $ | (25,188 | ) | $ | 25,529 | ||||||||||||
Net loss | (2,458 | ) | (2,458 | ) | ||||||||||||||||||||
Proceeds from exercise of stock options | 168,500 | 173 | 173 | |||||||||||||||||||||
Tax benefits from exercise of stock options | 154 | 154 | ||||||||||||||||||||||
Tax benefit allowance | (154 | ) | (154 | ) | ||||||||||||||||||||
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 |
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 |
Year Ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Cash flows from operating activities: | ||||||||||||
Net loss | $ | (3,842 | ) | $ | (5,534 | ) | $ | (2,458 | ) | |||
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | ||||||||||||
Impairment charge | 74 | 100 | — | |||||||||
Depreciation and amortization | 522 | 745 | 996 | |||||||||
Gain on disposal of health and wellness operations | (736 | ) | — | |||||||||
Loss on the sales of fixed assets | 104 | 17 | 20 | |||||||||
Sales allowance and provision for bad debts | (47 | ) | 1,283 | (298 | ) | |||||||
Inventory valuation provision | 633 | 832 | 438 | |||||||||
(Increase) decrease in assets and liabilities: | ||||||||||||
Accounts receivable | 2,485 | 778 | 182 | |||||||||
Inventory | 963 | 323 | (987 | ) | ||||||||
Prepaid expenses and other current assets | 381 | (353 | ) | (48 | ) | |||||||
Other assets | 9 | 53 | 83 | |||||||||
Accounts payable | (212 | ) | 311 | (348 | ) | |||||||
Accrued royalties and sales commissions | (5 | ) | 41 | 328 | ||||||||
Accrued advertising | (575 | ) | (63 | ) | (770 | ) | ||||||
Other current liabilities | (45 | ) | (1,847 | ) | 1,551 | |||||||
Net cash provided by (used in) operating activities | 445 | (4,050 | ) | (1,311 | ) | |||||||
Cash flows from investing activities: | ||||||||||||
Proceeds for the sale of health and wellness operations | — | 1,000 | — | |||||||||
Capital expenditures | (208 | ) | (200 | ) | (533 | ) | ||||||
Proceeds from the sale of fixed assets | 480 | 10 | — | |||||||||
Net cash flows provided by (used in) investing activities | 272 | 810 | (533 | ) | ||||||||
Cash flows from financing activities: | ||||||||||||
Stock options and warrants exercised | 127 | 64 | 173 | |||||||||
Net cash provided by financing activities | 127 | 64 | 173 | |||||||||
Net increase (decrease) in cash and cash equivalents | 844 | (3,176 | ) | (1,671 | ) | |||||||
Cash and cash equivalents at beginning of period | 11,957 | 15,133 | 17,757 | |||||||||
Less: cash and cash equivalents of discontinued operations at end of period reported as a component assets of discontinued operations | — | — | (953 | ) | ||||||||
Cash and cash equivalents at end of period | $ | 12,801 | $ | 11,957 | $ | 15,133 | ||||||
Supplemental disclosures of cash flow information: | ||||||||||||
Interest | $ | — | $ | — | $ | — | ||||||
Taxes | $ | 43 | $ | — | $ | — |
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 | $ | - | $ | - |
The Quigley Corporation
cosmeceutical products.
Prior to Fiscal 2009, we were organized into three business segments: (i) cold remedy, (ii) contract manufacturing and (iii) ethical pharmaceutical. We historically managed each of our segments separately as a consequence of different marketing, manufacturing and/or research and development strategies. Following a strategic review, as described further below, completed in the fourth quarter of Fiscal 2009, we realigned our operations to focus principally in the research, development, manufacture, marketing and sale of OTC cold remedy products.
Our strategic review included a review and evaluationJoint Venture (see Note 3).
Corporation.
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.
Pursuant to certain contract terms, we charged to cost ofDecember 31, 2009 accrued advertising and other allowances include $1.5 million for estimated future sales certain contingent royaltyreturns and consulting payments, calculated based upon net sales collected by us, to the then patent holders and the developers of the zinc gluconate glycine product formulation use in Cold-EEZE® (see Notes 5 and 7). The last remaining agreements expired in Fiscal 2007. We charged to cost of sales $293,000 in Fiscal 2007.
respectively. Included in prepaid expenses and other current assets was $170,000$189,000 and $242,000$170,000 at December 31, 20092010 and 2008,2009, respectively, relating to prepaid advertising and promotion expenses.
Any interest or penalties related to uncertain tax positions will be recorded as interest or administrative expense, respectively.
2009.
Effective July 2009, we adopted the “FASB Accounting Standards Codification” and the Hierarchy of Generally Accepted Accounting Principles (ASC-105). This standard establishes only two levels of U.S. generally accepted accounting principles (“GAAP”), authoritative and nonauthoritative. The Financial Accounting Standard Board (“FASB”) Accounting Standards Codification (the “Codification”) became the source of authoritative, nongovernmental GAAP, except for rules and interpretive releases of the SEC, which are sources of authoritative GAAP for SEC registrants. All other non-grandfathered, non-SEC accounting literature not included in the Codification became nonauthoritative. We began using the new guidelines and numbering system
prescribed by the Codification when referring to GAAP for the three months and nine months ended September 30, 2009. As the Codification was not intended to change or alter existing GAAP, it did not have any impact on our consolidated financial statements.
In February 2008, the FASB issued an accounting standard update that delayed the effective date of fair value measurements accounting for all non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), until fiscal years beginning after November 15, 2008. These include goodwill and other non-amortizable intangible assets. We adopted this accounting standard update effective January 1, 2009. The adoption of this update to non-financial assets and liabilities, as codified in ASC-820, has not had a significant impact on our consolidated financial position, results of operations or cash flows.
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”). IFRS is a comprehensive series of accounting standards published by the International Accounting Standards Board (IASB)(“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.
Effective January
Effective January 2009, we adopted an accounting standard which establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary, as codified in ASC-810. This accounting standard states that accounting and reporting for minority interests are to be recharacterized as noncontrolling interests and classified as a component of equity. The calculation of earnings per share continues to be based on income amounts attributable to the parent. The adoption of these accounting updates has not had a significant impact on our consolidated financial position, results of operations or cash flows.
Effective January 2009, we adopted an accounting standard update regarding the determination of the useful life of intangible assets. As codified in ASC-350, this update amends the factors considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under intangibles accounting. It also requires a consistent approach between the useful life of a recognized intangible asset under prior business combination accounting and the period of expected cash flows used to measure the fair value of an asset under the new business combinations accounting (as currently codified under ASC-850). The update also requires enhanced disclosures when an intangible asset’s expected future cash flows are affected by an entity’s intent and/or ability to renew or extend the arrangement. The adoption of these accounting updates has not had a significant impact on our consolidated financial position, results of operations or cash flows.
Effective January(CONTINUED)
Effective April 2009, we adopted a new accounting standard for subsequent events, as codified in ASC-855.additional disclosures regarding fair value measurements. The update modifiesamended guidance requires entities to disclose the namesamounts of significant transfers between Level 1 and Level 2 of the two typesfair value hierarchy and the reasons for these transfers, the reasons for any transfers in or out of subsequent events eitherLevel 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 recognized subsequent events (previously referred to in practicewell as Type I subsequent events) or non-recognized subsequent events (previously referred to in practice as Type II subsequent events). In addition, the standard modifieslevel 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 definitionamended Level 3 guidance is effective for interim and annual financial periods beginning after December 15, 2010. The adoption of subsequent events to refer to events or transactions that occur after the balance sheet date, but before the financial statements are issued (for public entities) or available to be issued (for nonpublic entities). It also requires the disclosure of the date through which subsequent events have been evaluated. The updateASU 2010-06 did not result in significant changes in the practice of subsequent event disclosures, and therefore the adoption has not hadhave a significant impactmaterial effect on our consolidated financial position, resultsstatements.
Effective April 2009,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 PSI 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 Regulation S under the Securities Act), that PSI Parent is an accredited investor with access to all relevant information necessary to evaluate its investment and that the PSI Shares were being acquired for investment purposes only.
On February 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 presidentManagers, with two managers appointed by each member. The initial Board of Darius was a significant shareholderManagers is comprised of InnerLight. In addition, Mr. Gary Quigley, then an employee and stockholderfour representatives, two representatives from each of the Company and alsoPSI Parent. The initial Company representatives on the brotherBoard of Managers are Mr. Guy Quigley,Ted Karkus and Mr. Robert Cuddihy. Mr. Karkus, on our then Chairman, Presidentbehalf, and ChiefMr. Harry Rosen, on behalf of PSI, are the Co-Chief Executive Officer (as wellOfficers 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.
of Scandasystems, Ltd. (“Scandasystems”) (see Note 12), which entered into an agreement to receive royalties from InnerLight. The results and balances associated with Darius are presented as discontinued operations in the consolidated statements of operations.
We formed Darius in 2000 to market health and wellness products. The terms of the sale agreement include a cash purchase price of $1.0 million by InnerLight for the stock of Darius and its subsidiaries without guarantees, warranties or indemnifications. We recorded a gain on the disposal of Darius of $736,000, as a result of sales proceeds of $1.0 million less residual investment of $5,000 and net assets of Darius of $259,000 on the date of sale.
Sales attributable to Darius from January 1, 2008 until date of disposal on February 29, 2008 and for Fiscal 2007 were $2.2 million and $11.3 million, respectively. Net income (loss) from January 1, 2008 until date of disposal on February 29, 2008, and for Fiscal 2007 were $139,000 and ($602,000), respectively, Financial results from operations of Darius are presented as discontinued operations in the consolidated statements of operations and cash flows.
December 31, | Estimated Useful Life | |||||||||||
2009 | 2008 | |||||||||||
Land | $ | 504 | $ | 539 | ||||||||
Buildings and improvements | 2,281 | 2,692 | 20 – 39 years | |||||||||
Machinery and equipment | 2,535 | 4,933 | 5 – 7 years | |||||||||
Computer software | 215 | 135 | 3 years | |||||||||
Furniture and fixtures | 192 | 239 | 5 years | |||||||||
5,727 | 8,538 | |||||||||||
Less: Accumulated depreciation | 3,155 | 4,870 | ||||||||||
$ | 2,572 | $ | 3,668 |
On February 2, 2009, we announced our intention to close our production facility in Elizabethtown, Pennsylvania and consolidate our manufacturing operations at our Lebanon, Pennsylvania facility. Effective in June 2009, the Elizabethtown facility was closed. As of December 31, 2009, the Elizabethtown land and building assets are reported as an asset held for sale.
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 |
Year | Employment Contracts | Advertising(1) | Product and Other Purchases | Total | ||||||||||||
2010 | $ | 1,075 | $ | 235 | $ | 660 | $ | 1,970 | ||||||||
2011 | 1,075 | — | — | 1,075 | ||||||||||||
2012 | 582 | — | — | 582 | ||||||||||||
2013 | — | — | — | — | ||||||||||||
2014 | — | — | — | — | ||||||||||||
Total | $ | 2,732 | $ | 235 | $ | 660 | $ | 3,627 |
(1) Additional advertising |
In July 2008, we entered into an agreement with a vendor to purchase a minimum order of product, initially over a three year period, incorporating a patented, proprietary delivery system. This agreement was amended, first in July 2009 and further amended in February 2010 resulting in, but not limited to, (i) a reduction in the (a) term of agreement and (b) purchase commitment, and (ii) reformulation of the flavor of the product. In addition, a new agreement was entered into in February of 2010 for the development of two new products. The aggregate purchase commitment under the term of these agreements, as amended, was $660,000 at December 31, 2009.
On July 2, 2008, we entered into an agreement with Dr. Richard Rosenbloom, the then Executive Vice President and Chief Operating Officer of Pharma, whereby we agreed to compensate Dr. Rosenbloom for assigning, to us, the entire right, title and interest in and to Dr. Rosenbloom’s concepts and/or inventions (“Inventions”) made prior to the date he became an employee of the Company. In consideration of, and as full compensation for, the covenants made in the agreement, we agreed to pay Dr. Rosenbloom compensation in the amount of five percent (5%) of net sales collected, less certain deductions, of royalty bearing products developed as a consequence of the Inventions. Effective October 22, 2009, the employment of Dr. Rosenbloom was terminated when the position of Executive Vice President of Pharma was eliminated. In November 2009, we and Dr. Rosenbloom entered into an Assignment and Release Agreement which, among other matters, provided for (i) the payment of $120,000 to Dr. Rosenbloom which was charged to operations inbe incurred during Fiscal 2009 and (ii) Dr. Rosenbloom waived and released (a) any and all claims, rights, title or interest in the Inventions, including, but not limited to, any ownership interest in the Inventions and (b) claims for any future royalty compensation.
2011.
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 Incorporation and Amended and Restated Bylaws, each as amended from time to time, and applicable law.
Pre-trial discovery is complete.ongoing. Defendants moved for partial summary judgment, and we filed a response and cross-motion for summary judgment. On August 21, 2008, the court denied both motions for summary judgment. The case has not been assigned to a trial calendar, although it is possible that the case will be listed for trial in 2010. 2011.
In
For Fiscal 2009, 2008 and 2007, we derived net proceeds of $127,000, $64,000 and $173,000, respectively, as a consequence of the exercise of options to acquire 125,000, 55,250 and 168,500 shares, respectively, of our Common Stock.
Stock options for purchase of our Common Stock have been granted to both employees and non-employees. Options are exercisable during a period determined by us, but in no event later than ten years from the date granted.
On December 2, 1997, our Board of Directors approved a new Stock Option Plan (the “1997 Option Plan”), which was amended in 2005, and providesprovided for the granting of up to 4.5 million shares of Common Stock. Under the 1997 Option Plan, we 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 could 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. Stockholders approved the 1997 Option Plan in Fiscal 1998. No options were granted under this Plan during Fiscal 2010, 2009 2008 or 2007. 2008.
Year Ended December 31, | ||||||||||||||||||||||||||||||||||||||||||||||||
Year Ended December 31, | 2010 | 2009 | 2008 | |||||||||||||||||||||||||||||||||||||||||||||
2009 | 2008 | 2007 | Weighted Average | Weighted Average | Weighted Average | |||||||||||||||||||||||||||||||||||||||||||
Shares | Weighted Average Exercise Price | Shares | Weighted Average Exercise Price | Shares | Weighted Average Exercise Price | Shares | Exercise Price | Shares | Exercise Price | Shares | Exercise Price | |||||||||||||||||||||||||||||||||||||
Options outstanding – beginning of year | 2,268 | $ | 7.76 | 2,482 | $ | 7.70 | 3,597 | $ | 7.96 | |||||||||||||||||||||||||||||||||||||||
Options outstanding - beginning of year | 1,488 | $ | 8.64 | 2,268 | $ | 7.76 | 2,482 | $ | 7.70 | |||||||||||||||||||||||||||||||||||||||
Granted | — | — | — | — | — | — | 982 | 1.00 | - | - | - | - | ||||||||||||||||||||||||||||||||||||
Exercised | (125 | ) | 1.01 | (55 | ) | 1.16 | (169 | ) | 1.03 | (131 | ) | 1.02 | (125 | ) | 1.01 | (55 | ) | 1.16 | ||||||||||||||||||||||||||||||
Cancelled | (655 | ) | 7.02 | (159 | ) | 9.15 | (946 | ) | 9.87 | (1,039 | ) | 9.45 | (655 | ) | 7.02 | (159 | ) | 9.15 | ||||||||||||||||||||||||||||||
Options outstanding – end of year | 1,488 | $ | 8.64 | 2,268 | $ | 7.76 | 2,482 | $ | 7.70 | |||||||||||||||||||||||||||||||||||||||
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 | 1,488 | 2,268 | 2,482 | 363 | 1,488 | 2,268 | ||||||||||||||||||||||||||||||||||||||||||
Available for grant | — | — | — | 818 | - | - | ||||||||||||||||||||||||||||||||||||||||||
Weighted average fair value per share of options granted during year | $ | — | $ | — | $ | — | $ | 0.65 | $ | - | $ | - |
(CONTINUED)
Options Outstanding | ||||||||||||
Range of Exercise Prices | Number Outstanding | Weighted Average Remaining Contractual Life | Weighted Average Exercise Price Per Share | |||||||||
$0.81 – $1.26 | 189 | 0.6 | $ | 1.05 | ||||||||
$1.27 – $5.19 | 231 | 1.0 | $ | 5.19 | ||||||||
$5.20 – 8.11 | 307 | 1.4 | $ | 8.11 | ||||||||
$8.12 – $9.50 | 357 | 1.7 | $ | 9.50 | ||||||||
$9.51 – $13.80 | 404 | 1.5 | $ | 13.80 | ||||||||
Total | 1,488 | $ | 8.64 |
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 |
Year Ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Current | ||||||||||||
Federal | $ | (84 | ) | $ | — | $ | — | |||||
State | — | — | — | |||||||||
(84 | ) | — | — | |||||||||
Deferred | ||||||||||||
Federal | (2,297 | ) | (2,459 | ) | (111 | ) | ||||||
State | (61 | ) | (906 | ) | (51 | ) | ||||||
(2,358 | ) | (3,365 | ) | (162 | ) | |||||||
Total | $ | (2,442 | ) | $ | (3,365 | ) | $ | (162 | ) | |||
Income taxes from continuing operations before valuation allowance | (2,442 | ) | (3,365 | ) | $ | (162 | ) | |||||
Change in valuation allowance | 2,358 | 3,365 | 162 | |||||||||
Income taxes from continuing operations | (84 | ) | — | — | ||||||||
Income taxes from discontinued operations before valuation allowance | — | 1,228 | 89 | |||||||||
Change in valuation allowance from discontinued operations | — | (1,228 | ) | (89 | ) | |||||||
Total | $ | (84 | ) | $ | — | $ | — |
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 | ) | $ | - |
Year Ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Statutory rate – federal | $ | (1,335 | ) | $ | (2,179 | ) | $ | (762 | ) | |||
State taxes, net of federal benefit | (61 | ) | (598 | ) | (33 | ) | ||||||
Permanent differences and other | (1,046 | ) | (588 | ) | 633 | |||||||
Income tax from continuing operation before valuation allowance | (2,442 | ) | (3,365 | ) | (162 | ) | ||||||
Change in valuation allowance | 2,358 | 3,365 | 162 | |||||||||
Income taxes from continuing operations | (84 | ) | — | — | ||||||||
Income taxes from discontinued operations before valuation allowance | — | 1,228 | 89 | |||||||||
Change in valuation allowance | — | (1,228 | ) | (89 | ) | |||||||
Income taxes from discontinued operations | — | — | — | |||||||||
Total | $ | (84 | ) | $ | — | $ | — |
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 | ) | $ | - |
Year Ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Permanent items: | ||||||||||||
Meals and Entertainment | $ | 6 | $ | 6 | $ | 5 | ||||||
Officers life insurance | 9 | 36 | 36 | |||||||||
Return to accrual for prior year, permanent items | (479 | ) | 27 | 46 | ||||||||
Effective rate adjustment(1) | — | (215 | ) | — | ||||||||
Capital loss carryforward utilization(2) | (582 | ) | (442 | ) | — | |||||||
Deductions for stock options(3) | — | — | 546 | |||||||||
$ | (1,046 | ) | $ | (588 | ) | $ | 633 |
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 |
The tax effects of the primary “temporary differences” between values recorded for assetsassets 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, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Net operating loss, capital loss and tax credit carryforward | $ | 10,808 | $ | 9,008 | $ | 5,731 | ||||||
Consulting-royalty costs | 1,431 | 1,431 | 1,739 | |||||||||
Depreciation | 250 | 55 | 110 | |||||||||
Other | 801 | 438 | 1,145 | |||||||||
Valuation allowance | (13,290 | ) | (10,932 | ) | (8,725 | ) | ||||||
Total | $ | — | $ | — | $ | — |
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 | $ | - | $ | - | $ | - |
2030.
A reconciliation of the applicable numerators and denominators of the income statement periods presented is as follows (in thousands, except per share amounts):
Year Ended December 31, | ||||||||||||||||||||||||||||||||||||
2009 | 2008 | 2007 | ||||||||||||||||||||||||||||||||||
Loss | Shares | EPS | Loss | Shares | EPS | Loss | Shares | EPS | ||||||||||||||||||||||||||||
Basic EPS | $ | (3,842 | ) | 12,963 | $ | (0.30 | ) | $ | (5,534 | ) | 12,848 | $ | (0.43 | ) | $ | (2,458 | ) | 12,729 | $ | (0.19 | ) | |||||||||||||||
Dilutives: | ||||||||||||||||||||||||||||||||||||
Options/Warrants | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
Diluted EPS | $ | (3,842 | ) | 12,963 | $ | (0.30 | ) | $ | (5,534 | ) | 12,848 | $ | (0.43 | ) | $ | (2,458 | ) | 12,729 | $ | (0.19 | ) |
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 | ) |
We have sought to acquire sale and distribution licenses for our Cold-EEZE® products in certain countries through related party entities whose stockholders include Mr. Gary Quigley, then an employee of the Company and a relative of our former Chief Executive Officer, Mr. Guy Quigley (see Note 3). We paid fees to a related entity aggregating $46,000 during Fiscal 2007 (see Note 13) to assist with the regulatory aspects of obtaining such licenses. No fees were paid to related parties for Fiscal 2009 or 2008.
We disposed of certain automobiles in Fiscal 2009 and 2008 in the aggregate net book value of $114,000 and $25,000, respectively. The automobiles were purchased by certain former executive officers at our then book value of the automobiles.
ASC-810 provides guidance for theConsolidation of Variable Interest Entities requiring the application by “Public Entities” to all Special Purpose Entities (“SPEs”) at the end of the first interim or annual reporting period ending after December 15, 2003. Effective March 31, 2004, we adopted the provisions of ASC-810 for VIE’s formed prior to February 1, 2003. We determined that Scandasystems, a related party, qualified as a variable interest entity and we consolidated Scandasystems beginning with the quarter ended March 31, 2004. Due to the fact that we had no long-term contractual commitments or guarantees, the maximum exposure to loss was insignificant.
We have determined that the conditions that applied in the past giving rise to the application of ASC-810 to the relationship between us and Scandasystems no longer apply. Therefore, effective with quarter ended March 31, 2008, Scandasystems balances were no longer consolidated with our financial results and balances.
The basis for our presentation of segment results generally is consistent with our overall reporting. We report information about our operating segments in accordance with ASC-280 which establishes standards for reporting information about a company’s operating segments. All consolidating items are included in Corporate & Other.
Prior to Fiscal 2009, we were organized into three business segments: (i) cold remedy, (ii) contract manufacturing and (iii) ethical pharmaceutical. We historically managed each of our segments separately as a consequence of different marketing, manufacturing and/or research and development strategies. However, as a
consequence of our strategic review, as previously described, we realigned our operations to focus principally on the research, development, manufacture, marketing and sale of OTC cold remedy and consumer products, natural base health products and other supplements and cosmeceuticals for human and veterinary use. Research and development expenditures in the previously identified segment “Ethical Pharmaceutical” have been de-emphasized. Additionally, the previously identified segment “Contract Manufacturing” is now managed and considered an integrated component of our operations and no longer meets the criteria of a reportable segment. As a consequence, as of December 31, 2009, we are engaged principally in the OTC/Personal Care marketplace segment and currently report as a single segment.
Financial information relating to the historical reportable segment for Fiscal 2008 and 2007 for continuing operations by business segment follows (in thousands):
Cold Remedy | Contract Manufacturing | Ethical Pharmaceutical | Corporate & Other | Total | ||||||||||||||||
Fiscal 2008 | ||||||||||||||||||||
Revenues | ||||||||||||||||||||
Customers-domestic | $ | 18,186 | $ | 2,321 | $ | — | $ | — | $ | 20,507 | ||||||||||
Inter-segment | $ | — | $ | 4,381 | $ | — | $ | (4,381 | ) | $ | — | |||||||||
Segment operating profit (loss) | $ | (690 | ) | $ | (1,294 | ) | $ | (4,872 | ) | $ | 127 | $ | (6,729 | ) | ||||||
Depreciation | $ | 319 | $ | 426 | $ | — | $ | — | $ | 745 | ||||||||||
Capital expenditures | $ | 63 | $ | 137 | $ | — | $ | — | $ | 200 | ||||||||||
Total assets | $ | 26,460 | $ | 4,847 | $ | — | $ | (6,938 | ) | $ | 24,369 | |||||||||
Fiscal 2007 | ||||||||||||||||||||
Revenues | ||||||||||||||||||||
Customers-domestic | $ | 25,730 | $ | 2,511 | $ | — | $ | — | $ | 28,241 | ||||||||||
Inter-segment | $ | — | $ | 6,661 | $ | — | $ | (6,661 | ) | $ | — | |||||||||
Segment operating profit (loss) | $ | 4,801 | $ | (280 | ) | $ | (7,001 | ) | $ | (68 | ) | $ | (2,548 | ) | ||||||
Depreciation | $ | 414 | $ | 523 | $ | — | $ | — | $ | 937 | ||||||||||
Capital expenditures | $ | 187 | $ | 334 | $ | — | $ | — | $ | 521 | ||||||||||
Total assets | $ | 32,839 | $ | 6,107 | $ | — | $ | (5,444 | ) | $ | 33,502 |
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 and Fiscal 2007 were $14.5 million, $19.8 million and $20.5 million, respectively. Walgreen Company (“Walgreens”), Wal-Mart Stores, Inc. (“Wal-Mart”) and $28.2 million, respectively.Rite-Aid Corp accounted for approximately 23%, 14% and 10% our of Fiscal 2010 revenues. CVS Caremark Corporation, Walgreen CompanyWalgreens and Wal-Mart Stores, Inc. accounted for approximately 15%, 15% and 13% of our revenues for Fiscal 2009. Walgreen CompanyWalgreens and Wal-Mart Stores, Inc. accounted for approximately 14% and 14%, respectively, and 13% and 14%, respectively of our revenues for Fiscal 2008 and 2007, respectively.
collectability of amounts due to us. Customers comprising the five largest accounts receivable balances represented 66%51% and 55%66% of total trade receivable balances at December 31, 20092010 and 2008,2009, respectively. Management believes that the provision for possible losses on uncollectible accounts receivable is adequate for our credit loss exposure. At December 31, 20092010 and 2008,2009, the allowance for doubtful accounts was $13,000 and $23,000, and $131,000, respectively.
Quarter Ended | ||||||||||||||||
March 31, | June 30, | September 30, | December 31, | |||||||||||||
Fiscal 2009 | ||||||||||||||||
Net sales | $ | 3,987 | $ | 1,748 | $ | 4,977 | $ | 9,104 | ||||||||
Gross profit | $ | 2,353 | $ | 291 | $ | 3,615 | $ | 5,310 | ||||||||
Income (loss) from operations | $ | (2,211 | ) | $ | (4,629 | ) | $ | 1,197 | $ | 1,708 | ||||||
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 | ||||||
Fiscal 2008 | ||||||||||||||||
Net sales | $ | 5,306 | $ | 2,068 | $ | 6,354 | $ | 6,779 | ||||||||
Gross profit | $ | 3,570 | $ | 898 | $ | 4,082 | $ | 2,863 | ||||||||
Income (loss) from operations | $ | (2,581 | ) | $ | (2,963 | ) | $ | 814 | $ | (1,999 | ) | |||||
Income (loss) from continuing operations | $ | (2,444 | ) | $ | (2,879 | ) | $ | 879 | $ | (1,965 | ) | |||||
Net income (loss) | $ | (1,569 | ) | $ | (2,879 | ) | $ | 879 | $ | (1,965 | ) | |||||
Basic earnings per share: | ||||||||||||||||
Income (loss) from continuing operations | $ | (0.19 | ) | $ | (0.22 | ) | $ | 0.07 | $ | (0.15 | ) | |||||
Net income (loss) | $ | (0.12 | ) | $ | (0.22 | ) | $ | 0.07 | $ | (0.15 | ) | |||||
Diluted earnings per share: | ||||||||||||||||
Income (loss) from continuing operations | $ | (0.19 | ) | $ | (0.22 | ) | $ | 0.07 | $ | (0.15 | ) | |||||
Net income (loss) | $ | (0.12 | ) | $ | (0.22 | ) | $ | 0.07 | $ | (0.15 | ) |
On March 22, 2010, the Company, 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 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 TPMTM technology (“TPM”). TPM facilitates the delivery and depth of penetration of active molecules in pharmaceutical, nutraceutical, and other products.
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 |
In connection with the 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 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 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 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 PSI 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 Regulation S under the Securities Act), that PSI Parent is an accredited investor with access to all relevant information necessary to evaluate its investment and that the PSI Shares were being acquired for investment purposes only.
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”). Additionally, we agreed to contribute $500,000 to the Joint Venture as part of our initial capital contribution.
Pursuant to the Contribution Agreement and in order to reflect the Assignment and Assumption, we, PSI Parent, the Company 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
Our initial determination is that the Joint Venture will qualify$736,000, as a variable interest entityresult of sales proceeds of $1.0 million less residual investment of $5,000 and we will consolidatenet assets of Darius of $259,000 on the Joint Venture financial statements beginning with the quarter ended March 31, 2010.
Item 9A. | Controls and Procedures |
· | 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. |
Lack of management continuity due to changes in executive management of the Company. Asdetected on a consequence of the Proxy Contest, our former Chief Executive Officer and our former Chief Operating Officer resigned without the benefit of a transition period between the effective date of their respective resignations and the recruitment of new management. We have filled both these positions with personnel who are new to the Company. Additionally, in October, the employment of our Chief Financial Officer ended and the role was consolidated, on an interim basis, with that of the new Chief Operating Officer. As a consequence of a lack of continuity of management with limited or no transition or consultation period with prior management, current management has concluded that this control deficiency constitutes a material weakness.
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.
Furthermore, as previously reported, on May 19, 2009, Pharma’s Executive Vice President and Chief Operating Officer, Dr. Richard Rosenbloom, was suspended from the Company for allegedly receiving payments from external sources, including vendors of the Company, without disclosure to the Company’s management. On June 23, 2009, our Board of Directors agreed to reinstate Dr. Rosenbloom and to form a Special Committee of the Board of Directors to investigate the allegations with respect to Dr. Rosenbloom’s alleged receipt of payments and in due course to report its findings and recommendations to the full Board of Directors. Effective October 22, 2009, the employment of Dr. Rosenbloom was terminated when the position of Executive Vice President of the Pharma subsidiary was eliminated.
The material weaknesses described above comprise control deficiencies that were discovered during the financial close process for the June 30, 2009 fiscal period.
Company.
Our management conducted an evaluation of our effectiveness of the system of internal control over financial reporting based on the framework inInternal Control — IntegratedControl-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
In connection with the LLC Agreement, PSI Parent grantedsalary payable to us,him 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 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 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 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 PSI 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 Regulation S under the Securities Act), that PSI Parent is an accredited investor with access to all relevant information necessary to evaluate its investment and that the PSI Shares were being acquired for investment purposes only.
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”). Additionally, we agreed to contribute $500,000 to the Joint Venture as part of our initial capital contribution.
Pursuant to the Contribution Agreement and in order to reflect the Assignment and Assumption, we, PSI Parent, the Company 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 agreed to contribute $500,000 of initial capital and are committed to fund up to $2.0 million, subject to agreed upon budgets, toward the initial development and marketing costs of new products for the Joint Venture. The Joint Venture will be 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 and PSI Parent. The initial Company representatives on the Board of Managers are Mr. Karkus and Mr. Cuddihy. Mr. Karkus, on our behalf, and Mr. Harry Rosen, on behalf of 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 will qualify as a variable interest entity and we will consolidate the Joint Venture financial statements beginning with the quarter ended March 31, 2010.
The foregoing description of the terms of the LLC Agreement, Original License Agreement, the Contribution Agreement, the Amended License Agreement and the Share Transfer Restriction Agreement is qualified in its entirety by reference to the provisions of each such agreement, which are filed as Exhibits 10.11, 10.12, 10.13, 10.14 and 10.15, respectively, and the foregoing descriptions are qualified in their entirety by reference to such Exhibits. The above disclosure is being provided in this Report in lieu of in a Current Report on Form 8-K under Items 1.01 and 3.02.
On March 24, 2010, the Compensation Committee of the Board approved the payment of bonuses to Mr. Karkus, our Chairman and Chief Executive Officer, and Mr. Cuddihy, our Executive Vice President, Chief Operating Officer and Interim Chief Financial Officer in the amount of $87,500 and $27,500, respectively, for work performed by each executive in Fiscal 2009. Each executive was eligible to receive a bonus in the discretion of the Compensation Committee or the Board pursuant to each executive’shis employment agreement with the Company. These bonuses were awardedAny such stock grants to each executive principally, but not limited to, each of their contributions to (i) the redefinition of the strategic vision for our business, (ii) their leadership and management through a series of operational transitions, (iii) the realignment of our product development strategies, initiatives and research and development costs, (iv) new product branding initiatives, and (v) various restructuring and corporate overhead reduction and cost control initiatives. The disclosure provided in this paragraph is being provided in this ReportMr. Karkus in lieu of in a Current Report on Form 8-K under Item 5.02.
Item 10. | Directors, Executive Officers and Corporate Governance |
Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
Item 13. | Certain Relationships and Related Transactions and Director Independence |
Item 15. | Exhibits and Financial Statement Schedules |
3.1 | Articles of Incorporation of the Company, as amended (incorporated by reference to Exhibit 3.1 of Form 10-KSB/A filed on April 4, 1997) | ||
3.2 | Certificate of Amendment to the Articles of Incorporation effective May 5, 2010 (incorporated by reference to Exhibit 3.1 of Form 8-K filed on May 10, 2010). | ||
3.3 | By-laws of the Company as amended and restated effective August 18, 2009, (incorporated by reference to Exhibit 3.1 of Form 8-K filed on 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) |
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 | ||
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. |
PROPHASE LABS, INC. | ||||
Registrant | ||||
Date: | March 15, 2011 | By: | /s/ Ted Karkus | |
Ted Karkus, Chairman of the Board, | ||||
Chief Executive Officer and Director |
Principal Executive Officer | Principal Financial and Accounting Officer | ||||
By: | /s/Ted Karkus | By: | /s/Robert V. Cuddihy, Jr. | ||
Ted Karkus | Robert V. Cuddihy, Jr. | ||||
Chairman of the Board and |
| ||||
Chief Executive Officer | Financial Officer |
Date: March 24, 2010
Directors
Date: | March 15, 2011 | |||
Directors |
/s/ Mark Burnett | ||||
Mark Burnett | ||||
/s/ Mark Frank | /s/ Louis Gleckel | |||
Mark Frank | Louis Gleckel | |||
/s/ Mark Leventhal | /s/ James McCubbin | |||
Mark Leventhal | James McCubbin | |||
Date: | March 15, 2011 |
Date: March 24, 2010
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