x
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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Nevada
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23-2577138
|
|
(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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Large accelerated filer
|
o
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Accelerated filer
|
o
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Non-accelerated filer
|
o
|
Smaller reporting company
|
x
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Class
|
Outstanding at August 12, 2011
|
|
Common Stock, $0.0005 par value
|
15,281,146
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PAGE
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|||
PART I.
|
FINANCIAL INFORMATION
|
||
Item 1.
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Financial Statements
|
||
Condensed Consolidated Balance Sheets as of June 30, 2011 and December 31, 2010 (unaudited)
|
3
|
||
Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2011 and 2010 (unaudited)
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4
|
||
Condensed Consolidated Statement of Stockholders’ Equity for the Six Months Ended June 30, 2011 (unaudited)
|
5
|
||
Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2011 and 2010 (unaudited)
|
6
|
||
Notes to Condensed Consolidated Financial Statements
|
7
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||
Item 2.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations
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20
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|
Item 3.
|
Quantitative and Qualitative Disclosures About Market Risk
|
29
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Item 4.
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Controls and Procedures
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29
|
|
PART II.
|
OTHER INFORMATION
|
||
Item 1.
|
Legal Proceedings
|
31
|
|
Item 1A.
|
Risk Factors
|
31
|
|
Item 2.
|
Unregistered Sales of Equity Securities and Use of Proceeds
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31
|
|
Item 3.
|
Defaults Upon Senior Securities
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31
|
|
Item 5.
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Other Information
|
31
|
|
Item 6.
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Exhibits
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31
|
|
Signatures
|
32
|
||
Certifications
|
33
|
June 30,
2011
|
December 31,
2010
|
|||||||
ASSETS
|
||||||||
Cash and cash equivalents (Note 2)
|
$ | 8,743 | $ | 8,232 | ||||
Accounts receivable, net of doubtful accounts of $10 and $13 respectively (Note 2)
|
1,162 | 4,821 | ||||||
Inventory, net (Note 2)
|
1,594 | 1,682 | ||||||
Prepaid expenses and other current assets
|
298 | 883 | ||||||
Assets held for sale (Note 2)
|
- | 138 | ||||||
Total current assets
|
11,797 | 15,756 | ||||||
Intangible asset, licensed technology (Note 3)
|
3,577 | 3,577 | ||||||
Property, plant and equipment, net of accumulated depreciation of $3,583 and $3,389, respectively (Note 2)
|
2,372 | 2,362 | ||||||
$ | 17,746 | $ | 21,695 | |||||
LIABILITIES AND STOCKHOLDERS' EQUITY
|
||||||||
LIABILITIES:
|
||||||||
Accounts payable
|
$ | 131 | $ | 489 | ||||
Accrued royalties (Note 4)
|
3,524 | 3,524 | ||||||
Accrued advertising and other allowances
|
1,802 | 3,524 | ||||||
Other current liabilities
|
331 | 698 | ||||||
Total current liabilities
|
5,788 | 8,235 | ||||||
Commitments and contingencies (Note 4)
|
- | - | ||||||
STOCKHOLDERS' EQUITY:
|
||||||||
Common Stock, $.0005 par value; authorized 50,000,000; issued: 19,862,869 and 19,353,672 shares, respectively (Note 5)
|
10 | 10 | ||||||
Additional paid-in-capital
|
41,112 | 40,627 | ||||||
Accumulated deficit
|
(3,976 | ) | (1,989 | ) | ||||
Treasury stock, at cost, 4,646,053 and 4,646,053 shares, respectively
|
(25,188 | ) | (25,188 | ) | ||||
Total stockholders' equity
|
11,958 | 13,460 | ||||||
$ | 17,746 | $ | 21,695 |
Three Months Ended
|
Six Months Ended
|
|||||||||||||||
June 30, 2011
|
June 30, 2010
|
June 30, 2011
|
June 30, 2010
|
|||||||||||||
Net sales (Note 2)
|
$ | 1,744 | $ | 1,131 | $ | 4,910 | $ | 3,107 | ||||||||
Cost of sales (Note 2)
|
848 | 660 | 2,020 | 1,466 | ||||||||||||
Gross profit
|
896 | 471 | 2,890 | 1,641 | ||||||||||||
Operating expenses:
|
||||||||||||||||
Sales and marketing
|
663 | 780 | 2,218 | 1,514 | ||||||||||||
Administration
|
1,040 | 1,819 | 2,285 | 3,231 | ||||||||||||
Research and development
|
176 | 150 | 395 | 238 | ||||||||||||
1,879 | 2,749 | 4,898 | 4,983 | |||||||||||||
Loss from operations
|
(983 | ) | (2,278 | ) | (2,008 | ) | (3,342 | ) | ||||||||
Interest and other income
|
9 | 24 | 21 | 26 | ||||||||||||
Loss before income taxes
|
(974 | ) | (2,254 | ) | (1,987 | ) | (3,316 | ) | ||||||||
Income tax (benefit) (Note 6)
|
- | - | - | - | ||||||||||||
Net loss
|
$ | (974 | ) | $ | (2,254 | ) | $ | (1,987 | ) | $ | (3,316 | ) | ||||
Basic and diluted loss per share:
|
||||||||||||||||
Loss from operations
|
$ | (0.06 | ) | $ | (0.15 | ) | $ | (0.13 | ) | $ | (0.24 | ) | ||||
Net loss
|
$ | (0.06 | ) | $ | (0.15 | ) | $ | (0.13 | ) | $ | (0.24 | ) | ||||
Weighted average common shares outstanding:
|
||||||||||||||||
Basic and diluted
|
14,990 | 14,593 | 14,864 | 13,896 |
Common Stock Shares
|
Par Value
|
Additional Paid-In Capital
|
Accumulated Deficit
|
Treasury Stock
|
Total
|
|||||||||||||||||||
Balance at December 31, 2010
|
14,707,619 | $ | 10 | $ | 40,627 | $ | (1,989 | ) | $ | (25,188 | ) | $ | 13,460 | |||||||||||
Net loss
|
- | - | (1,987 | ) | - | (1,987 | ) | |||||||||||||||||
Share-based compensation expense
|
- | 60 | - | - | 60 | |||||||||||||||||||
Common stock granted pursuant to employment agreements
|
444,347 | - | 344 | - | - | 344 | ||||||||||||||||||
Common stock granted pursuant to a compensation plan
|
64,850 | - | 81 | - | - | 81 | ||||||||||||||||||
Balance at June 30, 2011
|
15,216,816 | $ | 10 | $ | 41,112 | $ | (3,976 | ) | $ | (25,188 | ) | $ | 11,958 |
Six Months Ended
|
||||||||
June 30, 2011
|
June 30, 2010
|
|||||||
Cash Flows from operating activities:
|
||||||||
Net loss
|
$ | (1,987 | ) | $ | (3,316 | ) | ||
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
|
||||||||
Depreciation and amortization
|
194 | 167 | ||||||
Share-based compensation expense
|
191 | 35 | ||||||
Gain on sale of asset
|
(28 | ) | - | |||||
Sales discounts and provision for bad debts
|
(54 | ) | (105 | ) | ||||
Inventory valuation provision
|
(20 | ) | (823 | ) | ||||
Changes in operating assets and liabilities:
|
||||||||
Accounts receivable
|
3,713 | 2,849 | ||||||
Inventory
|
108 | 1,075 | ||||||
Accounts payable
|
(358 | ) | (476 | ) | ||||
Accrued advertising and other allowances
|
(1,722 | ) | (255 | ) | ||||
Other operating assets and liabilities, net
|
512 | 194 | ||||||
Net cash provided by (used in) operating activities
|
549 | (655 | ) | |||||
Cash flows from investing activities:
|
||||||||
Capital expenditures
|
(204 | ) | (116 | ) | ||||
Proceeds from the sale of fixed assets
|
166 | - | ||||||
Acquisition of product license
|
- | (1,000 | ) | |||||
Net cash flows used in investing activities
|
(38 | ) | (1,116 | ) | ||||
Cash flows from financing activities:
|
||||||||
Proceeds from exercise of stock options
|
- | 133 | ||||||
Net cash provided by financing activities
|
- | 133 | ||||||
Net increase (decrease) in cash and cash equivalents
|
511 | (1,638 | ) | |||||
Cash and cash equivalents at beginning of period
|
8,232 | 12,801 | ||||||
Cash and cash equivalents at end of period
|
$ | 8,743 | $ | 11,163 | ||||
Supplemental disclosures of cash flow information:
|
||||||||
Income taxes paid
|
$ | - | $ | - | ||||
Common stock issued to Phosphagenics Limited pursuant to a product license agreement
|
$ | - | $ | 2,577 |
Fiscal Year
|
Employment Contracts
|
Total
|
||||||
2011
|
$ | 538 | $ | 538 | ||||
2012
|
1,075 | 1,075 | ||||||
2013
|
- | - | ||||||
2014
|
- | - | ||||||
2015
|
||||||||
Total
|
$ | 1,613 | $ | 1,613 |
Three Months Ended
June 30, 2011
|
Three Months Ended
June 30, 2010
|
Six Months Ended
June 30, 2011
|
Six Months Ended
June 30, 2010
|
|||||||||||||||||||||||||||||||||||||||||||||
Income
|
Shares
|
EPS
|
Loss
|
Shares
|
EPS
|
Income
|
Shares
|
EPS
|
Loss
|
Shares
|
EPS
|
|||||||||||||||||||||||||||||||||||||
Basic loss per share
|
$ | (974 | ) | 14,990 | $ | (0.06 | ) | $ | (2,254 | ) | 14,593 | $ | (0.15 | ) | $ | (1,987 | ) | 14,864 | $ | (0.13 | ) | $ | (3,316 | ) | 13,896 | $ | (0.24 | ) | ||||||||||||||||||||
Dilutives:
|
||||||||||||||||||||||||||||||||||||||||||||||||
Options/Warrants
|
- | - | - | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||
Diluted loss per share
|
$ | (974 | ) | 14,990 | $ | (0.06 | ) | $ | (2,254 | ) | 14,593 | $ | (0.15 | ) | $ | (1,987 | ) | 14,864 | $ | (0.13 | ) | $ | (3,316 | ) | 13,896 | $ | (0.24 | ) |
·
|
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 our Joint Venture 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.
|
(1)
|
Exhibit 31.1
|
Certification by the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
(2)
|
Exhibit 31.2
|
Certification by the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
(3)
|
Exhibit 32.1
|
Certification by the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
(4)
|
Exhibit 32.2
|
Certification by the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
ProPhase Labs, Inc.
|
|||
Date: August 12, 2011
|
By:
|
/s/ Ted Karkus
|
|
Ted Karkus
|
|||
Chairman of the Board and Chief Executive Officer
(Principal Executive Officer)
|
Date: August 12, 2011
|
By:
|
/s/ Robert V. Cuddihy, Jr.
|
|
Robert V. Cuddihy, Jr.
|
|||
Chief Operating Officer and Chief Financial Officer
(Principal Accounting and Financial Officer)
|
|||
1.
|
I have reviewed this Quarterly Report on Form 10-Q of ProPhase Labs, Inc.;
|
2.
|
Based on my knowledge, this Quarterly Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Quarterly Report;
|
3.
|
Based on my knowledge, the financial statements, and other financial information included in this Quarterly Report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this Quarterly Report;
|
4.
|
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f) and 15d-15(f) for the registrant and have:
|
(a)
|
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Quarterly Report is being prepared;
|
(b)
|
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
|
(c)
|
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this Quarterly Report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
|
(d)
|
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
|
5.
|
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
|
(a)
|
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
|
(b)
|
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controlover financial reporting.
|
Date: August 12, 2011
|
By:
|
/s/ Ted Karkus | |
Ted Karkus
|
|||
Chairman of the Board and Chief Executive Officer
(Principal Executive Officer)
|
|||
1.
|
I have reviewed this Quarterly Report on Form 10-Q of ProPhase Labs, Inc.;
|
2.
|
Based on my knowledge, this Quarterly Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Quarterly Report;
|
3.
|
Based on my knowledge, the financial statements, and other financial information included in this Quarterly Report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this Quarterly Report;
|
4.
|
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f) and 15d-15(f) for the registrant and have:
|
(a)
|
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Quarterly Report is being prepared;
|
(b)
|
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
|
(c)
|
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this Quarterly Report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
|
(d)
|
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
|
5.
|
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
|
(a)
|
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
|
(b)
|
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controlover financial reporting.
|
Date: August 12, 2011
|
By:
|
/s/ Robert V. Cuddihy, Jr. | |
Robert V. Cuddihy, Jr.
|
|||
Chief Operating Officer and Chief Financial Officer
(Principal Accounting and Financial Officer)
|
(1)
|
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
|
(2)
|
The information contained in the Report fairly presents, in all material respects, the financial condition and resultsof operations of the Registrant.
|
|
|
/s/ Ted Karkus
|
|
Ted Karkus
|
|||
Chairman of the Board and Chief Executive Officer
|
|||
(Principal Executive Officer)
August 12, 2011
|
(1)
|
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, a amended; and
|
(2)
|
The information contained in the Report fairly presents, in all material respects, the financial condition and resultsof operations of the Registrant.
|
|
|
/s/ Robert V. Cuddihy, Jr.
|
|
Robert V. Cuddihy, Jr.
|
|||
Chief Operating Officer and Chief Financial Officer
|
|||
(Principal Accounting and Financial Officer)
August 12, 2011
|
Condensed Consolidated Balance Sheets [Parenthetical] (USD $)
In Thousands, except Share data |
Jun. 30, 2011
|
Dec. 31, 2010
|
---|---|---|
Allowance for doubtful accounts (in dollars) | $ 10 | $ 13 |
Accumulated depreciation (in dollars) | $ 3,583 | $ 3,389 |
Common Stock, par value (in dollars per share) | $ 0.0005 | $ 0.0005 |
Common Stock, shares authorized | 50,000,000 | 50,000,000 |
Common Stock, shares issued | 19,862,869 | 19,353,672 |
Treasury stock, shares | 4,646,053 | 4,646,053 |
Condensed Consolidated Statements of Operations (USD $)
In Thousands, except Per Share data |
3 Months Ended | 6 Months Ended | ||
---|---|---|---|---|
Jun. 30, 2011
|
Jun. 30, 2010
|
Jun. 30, 2011
|
Jun. 30, 2010
|
|
Net sales (Note 2) | $ 1,744 | $ 1,131 | $ 4,910 | $ 3,107 |
Cost of sales (Note 2) | 848 | 660 | 2,020 | 1,466 |
Gross profit | 896 | 471 | 2,890 | 1,641 |
Operating expenses: | Â | Â | Â | Â |
Sales and marketing | 663 | 780 | 2,218 | 1,514 |
Administration | 1,040 | 1,819 | 2,285 | 3,231 |
Research and development | 176 | 150 | 395 | 238 |
Operating Expenses, Total | 1,879 | 2,749 | 4,898 | 4,983 |
Loss from operations | (983) | (2,278) | (2,008) | (3,342) |
Interest and other income | 9 | 24 | 21 | 26 |
Loss before income taxes | (974) | (2,254) | (1,987) | (3,316) |
Income tax (benefit) (Note 6) | 0 | 0 | 0 | 0 |
Net loss | $ (974) | $ (2,254) | $ (1,987) | $ (3,316) |
Basic and diluted loss per share: | Â | Â | Â | Â |
Loss from operations (in dollars per share) | $ (0.06) | $ (0.15) | $ (0.13) | $ (0.24) |
Net loss (in dollars per share) | $ (0.06) | $ (0.15) | $ (0.13) | $ (0.24) |
Weighted average common shares outstanding: | Â | Â | Â | Â |
Basic and diluted (in shares) | 14,990 | 14,593 | 14,864 | 13,896 |
Document and Entity Information
|
6 Months Ended | |
---|---|---|
Jun. 30, 2011
|
Aug. 12, 2011
|
|
Entity Registrant Name | ProPhase Labs, Inc. | Â |
Entity Central Index Key | 0000868278 | Â |
Current Fiscal Year End Date | --12-31 | Â |
Entity Filer Category | Smaller Reporting Company | Â |
Trading Symbol | prph | Â |
Entity Common Stock, Shares Outstanding | Â | 15,281,146 |
Document Type | 10-Q | Â |
Amendment Flag | false | Â |
Document Period End Date | Jun. 30, 2011 | |
Document Fiscal Period Focus | Q2 | Â |
Document Fiscal Year Focus | 2011 | Â |
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Income Taxes
|
6 Months Ended |
---|---|
Jun. 30, 2011
|
|
Income Tax Disclosure [Abstract] | Â |
Income Tax Disclosure [Text Block] | Note 6 – Income Taxes
We utilize the asset and liability approach which requires the recognition of deferred tax assets and liabilities for the future tax consequences of events that have been recognized in our financial statements or tax returns. In estimating future tax consequences, we generally consider all expected future events other than enactments of changes in the tax law or rates. Until sufficient taxable income to offset the temporary timing differences attributable to operations and the tax deductions attributable to option, warrant and stock activities are assured, a valuation allowance equaling the total deferred tax asset is being provided.
We utilize a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount which is more than fifty percent likely of being realized upon ultimate settlement.
Certain exercises of options and warrants, and restricted stock issued for services that became unrestricted resulted in reductions to taxes currently payable and a corresponding increase to additional-paid-in-capital for prior years. In addition, certain tax benefits for option and warrant exercises totaling $6.9 million are deferred and will be credited to additional-paid-in-capital when our net operating loss carry-forward attributable to these exercises are utilized. Consequently, these net operating loss carryforward will not be available to offset our current income tax expense. As of December 31, 2010, we had net operating loss carry-forwards of approximately $28.7 million for federal purposes that will expire beginning in Fiscal 2018 through 2030. Additionally, there are net operating loss carry-forwards of $19.9 million for state purposes that will expire beginning Fiscal 2018 through 2030. Until sufficient taxable income to offset the temporary timing differences attributable to operations and the tax deductions attributable to option, warrant and stock activities are assured, we have recorded a full valuation allowance equaling the total deferred tax asset at June 30, 2011 and December 31, 2010. As of June 30, 2011 and December 31, 2010, we have no unrecognized tax benefits.
The major jurisdiction for which we file income tax returns is the United States. The Internal Revenue Service (“IRS”) has examined our tax year ended September 30, 2005 and has made no changes to the filed tax returns. The tax years 2006 and forward remain open to examination by the IRS. The tax years 2004 and forward remain open to examination by the various state taxing authorities to which we are subject.
|
Summary of Significant Accounting Policies
|
6 Months Ended |
---|---|
Jun. 30, 2011
|
|
Accounting Policies [Abstract] | Â |
Significant Accounting Policies [Text Block] | Note 2 – Summary of Significant Accounting Policies
Basis of Presentation
The unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial statements and within the rules of the Securities and Exchange Commission (“SEC”) applicable to interim financial statements and therefore do not include all disclosures that might normally be required for financial statements prepared in accordance with generally accepted accounting principles. The accompanying unaudited condensed consolidated financial statements have been prepared by management without audit and should be read in conjunction with our consolidated financial statements, including the notes thereto, appearing in our Annual Report on Form 10-K for the year ended December 31, 2010. In the opinion of management, all adjustments necessary for a fair presentation of the consolidated financial position, consolidated results of operations and consolidated cash flows, for the periods indicated, have been made. The results of operations for the three and six months ended June 30, 2011 are not necessarily indicative of operating results that may be achieved over the course of the full year.
Seasonality of the Business
Our net sales are derived principally from our OTC cold remedy products. Currently, our sales are influenced by and subject to fluctuations in the timing of purchase and the ultimate level of demand for our products which are a function of the timing, length and severity of each cold season. Generally, a cold season is defined as the period of September to March when the incidence of the common cold rises as a consequence of the change in weather and other factors. We generally experience in the fourth quarter higher levels of net sales along with a corresponding increase in marketing and advertising expenditures designed to promote our 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 and retail customers balance their inventory positions as cold season consumer demand subsides. 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.
Use of Estimates
The preparation of financial statements and the accompanying notes thereto, in conformity with generally accepted accounting principles, requires management to make estimates and assumptions that affect our reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the respective reporting periods. Examples include the provision for bad debt, sales returns and allowances, inventory obsolescence, useful lives of property and equipment and intangible assets, impairment of property and equipment and intangible assets, income tax valuations and assumptions related to accrued advertising. These estimates and assumptions are based on historical experience, current trends and other factors that management believes to be relevant at the time the financial statements are prepared. Management reviews the accounting policies, assumptions, estimates and judgments on a quarterly basis. Actual results could differ from those estimates.
Our primary product, Cold-EEZEÒ
, utilizes a proprietary zinc formulation which has been clinically proven to reduce the severity and duration of common cold symptoms. Factors considered in estimating the appropriate sales returns and allowances for this product include it being (i) a unique product with limited competitors, (ii) competitively priced, (iii) promoted, (iv) unaffected for remaining shelf-life as there is no product expiration date and (v) monitored for inventory levels at major customers and third-party consumption data. In addition to Cold-EEZE®
, we market and distribute Kids-EEZE®
Chest Relief, Kids-EEZE®
Cough Cold and Kids-EEZE®
Allergy children OTC cold remedies (“Kids-EEZE®
Products”). We introduced Kids-EEZE®
Chest Relief in Fiscal 2008 and expanded the product line to include Kids-EEZE®
Cough Cold and Kids-EEZE®
Allergy in Fiscal 2010. We also manufacture, market and distribute an organic cough drop and a Vitamin C supplement (“Organix”). Each of the Kids-EEZE®
Products and Organix®
products do carry shelf-life expiration dates for which we aggregate such new product market experience data and update its sales returns and allowances estimates accordingly. Sales allowances estimates are tracked at the specific customer and product line levels and are tested on an annual historical basis, and reviewed quarterly. Additionally, we monitor current developments by customer, market conditions and any other occurrences that could affect the expected provisions relative to net sales for the period presented.
Cash Equivalents
We consider all highly liquid investments with an initial maturity of three months or less at the time of purchase to be cash equivalents. Cash equivalents include cash on hand and monies invested in money market funds. The carrying amount approximates the fair market value due to the short-term maturity of these investments.
Inventory Valuation
Inventory is valued at the lower of cost, determined on a first-in, first-out basis (“FIFO”), or market. Inventory items are analyzed to determine cost and the market value and, if appropriate, an inventory write-down to market (adjusted basis) is charged to operations in the applicable period. At June 30, 2011 and December 31, 2010, inventory included raw material, work in progress and packaging amounts of $592,000 and $742,000, respectively, and finished goods of $1.0 million and $940,000, respectively.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. We use a combination of straight-line and accelerated methods in computing depreciation for financial reporting purposes. Depreciation expense is computed in accordance with the following ranges of estimated asset lives: building and improvements - twenty to thirty-nine years; machinery and equipment - three to seven years; computer software - three years; and furniture and fixtures – five years.
Concentration of Risks
Future revenues, costs, margins, and profits will continue to be influenced by our ability to maintain our manufacturing availability and capacity together with our marketing and distribution capabilities and the regulatory requirements associated with the development of OTC drug, personal care or other products in order to
continue to compete on a national level and/or international level.
Our business is subject to federal and state laws and regulations adopted for the health and safety of users of our products. Our OTC cold remedy
products are subject to regulations by various federal, state and local agencies, including the Food and Drug Administration (“FDA”) and, as applicable, the Homeopathic Pharmacopoeia of the United States.
Financial instruments that potentially subject us to significant concentrations of credit risk consist principally of cash investments and trade accounts receivable.
We maintain cash and cash equivalents with certain major financial institutions. As of June 30, 2011, our cash balance was $8.7 million and bank balance was $9.1 million. Of the total bank balance, $902,000 was covered by federal depository insurance and $8.2 million was uninsured.
Trade accounts receivable potentially subjects us to credit concentrations from time-to-time as a consequence of the timing, payment pattern and ultimate purchase volumes or shipping schedules with our customers. We extend credit to our customers based upon an evaluation of the customer’s financial condition and credit history and generally we do not require collateral. Our broad range of customers includes many large wholesalers, mass merchandisers and multi-outlet pharmacy and chain drug stores. These credit concentrations may impact our overall exposure to credit risk, either positively or negatively, in that our customers may be similarly affected by changes in economic, regulatory or other conditions that may impact the timing and collectability of amounts due to us. Customers comprising the five largest accounts receivable balances represented approximately 47% and 51% of total trade receivable balances at June 30, 2011 and December 31, 2010, respectively.
Our revenues are principally generated from the sale of OTC cold remedy products which represented approximately 94% and 95% of total revenues for the six months ended June 30, 2011 and 2010, respectively. A significant portion of our business is highly seasonal, which causes major variations in operating results from quarter to quarter. The third and fourth quarters generally represent the largest sales volume for the OTC cold remedy products. For the three and six months ended June 30, 2011 and 2010, effectively all of our net sales were related to domestic markets.
Long-lived Assets
We review our carrying value of our long-lived assets with definite lives whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. When indicators of impairment exist, we determine whether the estimated undiscounted sum of the future cash flows of such assets is less than their carrying amounts. If less, an impairment loss is recognized in the amount, if any, by which the carrying amount of such assets exceeds their respective fair values. The determination of fair value is based on quoted market prices in active markets, if available, or independent appraisals; sales price negotiations; or projected future cash flows discounted at a rate determined by management to be commensurate with our business risk. The estimation of fair value utilizing discounted forecasted cash flows includes significant judgments regarding assumptions of revenue, operating and marketing costs; selling and administrative expenses; interest rates; property and equipment additions and retirements; industry competition; and general economic and business conditions, among other factors.
Fair value is based on the prices that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In order to increase consistency and comparability in fair value measurements, a three-tier fair value hierarchy prioritizes the inputs used to measure fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its own assumptions.
The fair value of the reported Assets Held For Sale
at December 31, 2010
of $138,000
was arrived at through bids generated from interested third party purchasers and guidance from a third party real estate advisor thereby relating to Level 3 fair value hierarchy. In February 2011, we derived net proceeds from the sale of these assets of $166,000.
Fair Value of Financial Instruments
We categorize our financial instruments into a three-level fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure fair value fall within different levels of the hierarchy, the category level is based on the lowest priority level input that is significant to the fair value measurement of the instrument.
Financial assets recorded at fair value on our consolidated balance sheets are categorized as either (i) Level 1: unadjusted quoted prices for identical assets in an active market, (ii) Level 2: quoted prices in markets that are not active or inputs that are observable either directly or indirectly for substantially the full-term of the asset or (iii) Level 3: prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement.
Cash and cash equivalents, accounts receivable and accounts payable are reflected in the Condensed Consolidated Financial Statements at carrying value which approximates fair value because of the short-term maturity of these instruments. Determination of fair value of related party payables, if any, is not practicable due to their related party nature.
Revenue Recognition
Sales are recognized at the time ownership is transferred to the customer. Revenue is reduced for trade promotions, estimated sales returns, cash discounts and other allowances in the same period as the related sales are recorded. We make estimates of potential future product returns and other allowances related to current period revenue. We analyze historical returns, current trends, and changes in customer and consumer demand when evaluating the adequacy of the sales returns and other allowances.
We do not impose a period of time within which product may be returned. All requests for product returns must be submitted to us for pre-approval. The 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 falls 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 items that it purchased directly from us. We will not accept return requests pertaining to customer inventory “Overstocking” or “Resets”. We will only accept return requests for product in its intended package configuration. We reserve the right to terminate shipment of product to customers who have made unauthorized deductions contrary to our return policy or pursue other methods of reimbursement. We compensate the customer for authorized returns by means of a credit applied to amounts owed or to be owed and in the case of discontinued product only, also by way of an exchange. We do not have any significant product exchange history.
As of June 30, 2011 and December 31, 2010, we included a provision for sales allowances of $54,000 and $106,000, respectively, which are reported as a reduction to account receivables. We also included an estimate of the uncollectability of our accounts receivable as an allowance for doubtful accounts of $10,000 and $13,000 as of June 30, 2011 and December 31, 2010, respectively. Additionally, accrued advertising and other allowances as of June 30,
2011 include $1.1 million for estimated future sales returns, $537,000 for cooperative incentive promotion costs and $159,000 for certain other advertising and marketing promotions. As of December 31, 2010 accrued advertising and other allowances included $1.5 million for estimated future sales returns, $1.2 million for cooperative incentive promotion costs and $828,000 for certain other advertising and marketing promotions.
Shipping and Handling
Product sales carry shipping and handling charges to the purchaser, included as part of the invoiced price, which is classified as revenue. In all cases, costs related to this revenue are recorded in cost of sales.
Stock Compensation
We recognize all share-based payments to employees and directors, including grants of stock options, as compensation expense in the financial statements based on their fair values. Fair values of stock options are determined through the use of the Black-Scholes option pricing model. The compensation cost is recognized as an expense over the requisite service period of the award, which usually coincides with the vesting period.
Stock options for purchase of our common stock, $0.0005 par value, (“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. For the three months ended June 30, 2011 and 2010, we charged to operations an aggregate of $107,000 and $13,000, respectively, for share-based compensation expense for the grant of stock and stock options pursuant to our stock option plans and certain employment arrangements (see Note 5). For the six months ended June 30, 2011 and 2010, we charged to operations an aggregate of $191,000 and $35,000, respectively, for share-based compensation expense for the grant of stock and stock options pursuant to our stock option plans and certain employment arrangements
Variable Interest Entity
The Joint Venture, of which we own a 50% membership interest since March 22, 2010, qualifies as a variable interest entities (“VIE”) and we have consolidated the Joint Venture beginning with the quarter ended March 31, 2010 (see Note 3).
Advertising and Incentive Promotions
Advertising and incentive promotion costs are expensed within the period in which they are utilized. Advertising and incentive promotion expense is comprised of media advertising, presented as part of sales and marketing expense, cooperative incentive promotions and coupon program expenses, which are accounted for as part of net sales, and free product, which is accounted for as part of cost of sales. Advertising and incentive promotion costs incurred for the three months ended June 30, 2011 and 2010 were $555,000 and $633,000, respectively. Advertising and incentive promotion costs incurred for the six months ended
June 30, 2011 and 2010 were $2.2 million and $1.4 million, respectively. Included in prepaid expenses and other current assets was zero and $189,000 at June 30, 2011 and December 31, 2010, respectively, relating to prepaid advertising and promotion expense.
Research and Development
Research and development costs are charged to operations in the period incurred. Research and development costs for the three months ended June 30, 2011 and 2010 were $176,000 and $150,000, respectively. Research and development costs for the six months ended June 30, 2011 and 2010 were $395,000 and $238,000, respectively. Research and development costs are principally related to new product development initiatives and costs associated with our OTC cold remedy products.
Income Taxes
We utilize the asset and liability approach which requires the recognition of deferred tax assets and liabilities for the future tax consequences of events that have been recognized in our financial statements or tax returns. In estimating future tax consequences, we generally consider all expected future events other than enactments of changes in the tax law or rates. Until sufficient taxable income to offset the temporary timing differences attributable to operations and the tax deductions attributable to option, warrant and stock activities are assured, a valuation allowance equaling the total deferred tax asset is being provided (see Note 6).
We utilize a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount which is more than fifty percent likely of being realized upon ultimate settlement. Any interest or penalties related to uncertain tax positions will be recorded as interest or administrative expense, respectively.
As a result of our continuing tax losses, we have recorded a full valuation allowance against a net deferred tax asset. Additionally, we have not recorded a liability for unrecognized tax benefits. The tax years 2004 through 2010 remain open to examination by the major taxing jurisdictions to which we are subject.
Recently Issued Accounting Standards
In November 2008, the SEC issued for comment a proposed roadmap regarding the potential use by U.S. issuers of financial statements prepared in accordance with International Financial Reporting Standards (“IFRS”). IFRS is a comprehensive series of accounting standards published by the International Accounting Standards Board (“IASB”). The proposed roadmap has since been superseded by an SEC work plan and no date is currently proposed that we could be required to prepare financial statements in accordance with IFRS. The SEC has targeted late 2011 to make a determination regarding the mandatory adoption of IFRS. We are currently
assessing the impact that this potential change would have on our consolidated financial statements and we will continue to monitor the development of the potential implementation of IFRS.
In June 2011, the Financial Accounting Standards Board issued Accounting Standards Update No. 2011-05, “Comprehensive Income (ASC Topic 220): Presentation of Comprehensive Income,” (“ASU 2011-05”) which amends current comprehensive income guidance. This accounting update eliminates the option to present the components of other comprehensive income as part of the statement of shareholders’ equity. Instead, comprehensive income must be presented in either a single continuous statement of comprehensive income which contains two sections, net income and other comprehensive income, or in two separate but consecutive statements. ASU 2011-05 will be effective for fiscal periods beginning after December 15, 2011 with early adoption permitted. The adoption of ASU 2011-05 will not have a material impact on our consolidated financial position, results of operations or cash flows.
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Earnings (Loss) Per Share
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Earnings Per Share [Text Block] | Note 7 – Earnings (Loss) Per Share
Basic earnings per share is computed by dividing net income or loss to common stockholders by the weighted-average number of shares of our Common Stock outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue Common Stock were exercised or converted into Common Stock or resulted in the issuance of Common Stock that shared in the earnings of the entity. Diluted earnings per share also utilizes the treasury stock method which prescribes a theoretical buy-back of shares from the theoretical proceeds of all options and warrants outstanding during the period. Options and warrants outstanding to acquire shares of our Common Stock at June 30, 2011 and 2010 were 1,284,250 and 453,250, respectively.
For the three and six months ended June 30, 2011 and 2010 dilutive earnings per share is the same as basic earnings per share due to (i) the inclusion of Common Stock, in the form of stock options and warrants (“Common Stock Equivalents”), would have an anti-dilutive effect on the loss per share or (ii) there were no Common Stock Equivalents for the respective period. For the three months ended June 30, 2011 and 2010, there were zero and 4,109 Common Stock Equivalents, respectively, which were in the money, that were excluded from the earnings per share computation. For the six months ended June 30, 2011 and 2010, there were 150,224 and 4,814 Common Stock Equivalents, respectively, which were in the money, that were excluded from the earnings per share computation.
A reconciliation of the applicable numerators and denominators of the income statement periods presented, as reflected in the results of continuing operations, is as follows (in thousands, except per share amounts):
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Investment in Phusion Laboratories LLC
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Investments in and Advances to Affiliates, Schedule of Investments [Abstract] | Â |
Investments in and Advances to Affiliates, Schedule of Investments [Text Block] | Note 3 – Investment in Phusion Laboratories, LLC.
On March 22, 2010, the Company, PSI Parent, PSI and the Joint Venture entered into the LLC Agreement of the Joint Venture and additional related agreements for the purpose of developing and commercializing, for worldwide distribution and sale, a wide range of non-prescription remedies using PSI Parent’s proprietary patented TPM.
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”).
Pursuant to the Contribution Agreement and in order to reflect the Assignment and Assumption, we, PSI Parent and the Joint Venture entered into an Amended and Restated License Agreement, dated March 22, 2010 (the “Amended License Agreement”), which amends and restates the Original License Agreement to reflect that the Joint Venture is the licensee thereunder and which otherwise contains substantially the same terms as the Original License Agreement. The Joint Venture has the right to grant one or more sub-licenses of the rights granted under the Amended License Agreement to one or more third parties for reasonable consideration in any part of the applicable territory. The Amended License Agreement provides that PSI Parent shall not, directly or through third parties, exploit the covered intellectual property during the term thereof, subject to certain limitations. The Amended License Agreement will remain in effect until the expiration of the last to expire of the patents included within the PSI Technology or any extensions thereof. Either party may terminate the Amended License Agreement upon written notice to the other party in the event of certain events involving bankruptcy or insolvency. The Amended License Agreement also contains, among other things, provisions concerning the treatment of confidential information, the ownership of intellectual property and indemnification obligations.
Pursuant to the LLC Agreement, we and PSI each own a 50% membership interest in the Joint Venture. PSI Parent will conduct and oversee much of the product development, formulation, testing and other research and development needed by the Joint Venture, and we will oversee much of the production, distribution, sales and marketing. The LLC Agreement provides that each member may be required, from time to time and subject to certain limitations, to make capital contributions to the Joint Venture to fund its operations, in accordance with agreed upon budgets for products to be developed. Specifically we contributed in Fiscal 2010 $500,000 in cash as initial capital and we are committed to fund up to $2.0 million, subject to agreed upon budgets (which have not been established to date), toward the initial development
and marketing costs of new products for the Joint Venture. The newly formed Joint Venture has not engaged in any financial transactions, other than organizational expenses and general market and product analysis. At June 30, 2011, cash and equivalents includes $425,000 which is expected to be used by the Joint Venture to fund future product development initiatives currently under consideration by PSI Parent, PSI and us.
The Joint Venture is managed by a four-person Board of Managers, with two managers appointed by each member. The LLC Agreement contains other normally found terms in such arrangements, including provisions relating to governance of the Joint Venture, indemnification obligations of the Joint Venture, allocation of profits and losses, the distribution of funds to the members and restrictions on transfer of a member’s interest.
Our initial determination is that the Joint Venture qualifies as a VIE and that we are the primary beneficiary. As a consequence, we have consolidated the Joint Venture financial statements beginning with the quarter ended March 31, 2010. Since inception and including the six months ended June 30, 2011, the newly formed Joint Venture has not engaged in any financial transactions, other than certain organizational expenses and general market and product analysis, as formal operations are not expected to commence until later in Fiscal 2011. Furthermore, the liabilities and other obligations incurred, if any, by the Joint Venture is without recourse to us and do not create a claim on our general assets. At June 30, 2011, we have recorded the $3.6 million payment representing the estimated fair value to acquire the product license as an intangible asset. We currently estimate the expected useful life of the product license to be approximately 11 years which we will begin amortizing the cost of intangible asset once production commercialization is completed with PSI Parent and the OTC drug products begin to ship to our retail customers. As of June 30, 2011, we have not established a formal commercialization program timeline for any specific OTC drug covered under the product license but we do not project that any OTC drug products will be available for shipment within the next twelve months.
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Commitments and Contingencies
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Commitments and Contingencies Disclosure [Text Block] | Note 4 – Commitments and Contingencies
We have maintained a separate representation and distribution agreement relating to the development of the zinc gluconate glycine product formulation. In return for exclusive distribution rights, we agreed to pay the developer a 3% royalty and a 2% consulting fee based on sales collected, less certain deductions, throughout the term of this agreement, which expired in May 2007. However, we and the developer are in litigation and as such no potential offset from such litigation for these fees have been recorded. The amount accrued for this expense at each of June 30, 2011 and December 31, 2010 is $3.5 million.
We have estimated future obligations over the next five years, including the remainder of Fiscal 2011, as follows (in thousands):
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Transactions Affecting Stockholders' Equity
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Stockholders' Equity Note [Abstract] | Â |
Stockholders' Equity Note Disclosure [Text Block] | Note 5 – Transactions Affecting Stockholders’ Equity
Stockholder Rights Plan
On September 8, 1998, our Board of Directors declared a dividend distribution of Common Stock Purchase Rights (each individually, a “Right” and collectively, the “Rights”) payable to the stockholders of record on September 25, 1998, thereby creating a Stockholder Rights Plan (the “Rights Agreement”). The Plan was amended effective May 23, 2008 (“First Amendment”) and further amended effective August 18, 2009 (“Second Amendment”). The Rights Agreement, as amended, provides that each Right entitles the stockholder of record to purchase from the Company that number of common shares having a combined market value equal to two times the Rights exercise price of $45. The Rights are not exercisable until the distribution date, which will be the earlier of a public announcement that a person or group of affiliated or associated persons has acquired 15% or more of the outstanding common shares, or the announcement of an intention by a similarly constituted party to make a tender or exchange offer resulting in the ownership of 15% or more of the outstanding common shares. The dividend has the effect of giving the stockholder a 50% discount on the share’s current market value for exercising such right. In the event of a cashless exercise of the Right, and the acquirer has acquired less than 50% beneficial ownership of the Company, a stockholder may exchange one Right for one common share of the Company. The Rights Agreement, as amended, includes a provision pursuant to which our Board of Directors may exempt from the provisions of the Rights Agreement an offer for all outstanding shares of our Common Stock that the directors determine to be fair and not inadequate and to otherwise be in the best interests of the Company and its stockholders, after receiving advice from one or more investment banking firms. The expiration date of the Rights Agreement, as amended, is September 25, 2018.
Equity Compensation Plans
Our shareholders have approved and we maintain three different equity compensation plans, (i) the 1997 Option Plan, as amended, (the “1997 Plan”), (ii) the 2010 Equity Compensation Plan, as amended, (the “2010 Plan”) and (iii) the 2010 Directors Equity Compensation Plan (the “Directors’ Plan”), together known as our “Equity Compensation Plans”.
The 1997 Plan, which was amended in 2005, provided for the granting of up to 4.5 million shares of Common Stock. Under the 1997 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. At December 31, 2009, we are precluded from issuing any additional options or grants in the future under the 1997 Plan pursuant to the terms of the plan document. Options previously granted continue to be available for exercise at any time prior to such options’ respective expiration dates, but in no event later than ten years from the date granted. At June 30, 2011, there are 207,250 options outstanding under the 1997 Plan with various expiration dates ranging from October 2011 through December 2015, depending upon the date of grant.
The 2010 Plan provides that the total number of shares of Common Stock, as adjusted, that may be issued is equal to an aggregate of 1.8 million shares. All of our employees, including employees who are officers or members of the Board are eligible to participate in the 2010 Plan. Consultants and advisors who perform services for us are also eligible to participate in the 2010 Plan.
Stock Options and Stock Grants Pursuant to Equity Compensation Plans
On April 21, 2011, the Compensation Committee of the Board of Directors approved an amendment to Chief Executive Officer Ted Karkus’ employment agreement, dated August 19, 2009 (the “Amendment
”) to lower his annual salary by $150,000 (or $12,500 per month) in exchange for a grant of restricted stock equal in value to the salary reduction. Pursuant to the Amendment, Mr. Karkus’ annual base salary was decreased from $750,000 per year to $600,000 per year, effective May 1, 2011 thru July 15, 2012, which is the end of the term of his employment agreement, as amended. As a consequence of the Amendment, a restricted stock grant under the 2010 Plan equal to $12,500 of shares per month thru the end of the term (14.5 months). The restricted stock grant was made in an upfront grant of 161,830 shares, subject to certain future vesting conditions, at a value of $181,000 as of the grant date. The grant was made on April 21, 2011, and the amount of the shares issued was calculated based on the average closing price of our Common Stock for the last five (5) trading days prior to and including the issuance date of April 21, 2011. For the three months ended June 30, 2011, we have charged to operations $25,000 as share-based compensation expense for the restricted stock grant and we have unrecognized compensation expense of $156,000 at June 30, 2011 that will be charged to operations in equal monthly installments of $12,500 over the remaining vesting period ending July 15, 2012.
In addition, on April 21, 2011, the Compensation Committee of the Board of Directors granted Mr. Karkus 133,928 shares of Common Stock under the 2010 Plan as payment for his Fiscal 2010 bonus. Mr. Karkus agreed to accept his Fiscal 2010 cash bonus of $150,000 in shares of our Common Stock. Furthermore, Mr. Karkus agreed to convert into shares of our Common Stock $144,000 of deferred cash compensation owed to him thru April 2011, resulting in an issuance of 128,571 shares under the 2010 Plan. The amount of these shares issued to Mr. Karkus was calculated based on the average closing price of the Company’s shares for the last five (5) trading days prior to and including the issuance dates of April 21, 2011. Furthermore in May 2011, we granted to certain employees 100,000 options to acquire our Common Stock under the 2010 Plan that vest over a four year period and at carry an exercise price of $1.08 per share.
At June 30, 2011, there are 1,077,000 options outstanding and subject to vesting over a three to six year period under the 2010 Plan. At June 30, 2011, 44,250 of such options have vested and 1,032,750 options are subject to vesting. At June 30, 2011, there are 298,671 shares available for future grant under the 2010 Plan. For the three months and six months ended June 30, 2011, we charged to operations $30,000 and $60,000, respectively, for share-based compensation expense relating to stock options. At June 30, 2011, the unrecognized share-based compensation expense related to stock options granted but not vested was approximately $586,000 which will be recognized over a weighted average period of approximately 4.6 years.
The primary purpose of the 2010 Directors’ Plan is to provide us with the ability to pay all or a portion of the fees of directors in restricted stock instead of cash. The 2010 Directors’ Plan provides that the total number of shares of Common Stock that may be issued under the 2010 Directors’ Plan is equal to 250,000. For the three months and six months ended June 30, 2011, we issued 32,560 and 64,850 shares, respectively, of our Common Stock valued at $40,000 and $81,000, respectively, for share-based director compensation expense. There was no share-based compensation expense related to the 2010 Directors’ Plan for the six month ended June 30, 2010. At June 30, 2011, there are 117,525 shares available for future grant under the 2010 Directors’ Plan.
Stock Option Exercise and Other Grants
During the six months ended June 30, 2011 no options were exercised. For the six months ended June 30, 2010, we derived net proceeds of $133,000 as a consequence of the exercise of options to acquire 130,500 shares of our Common Stock.
Pursuant to the terms of Mr. Cuddihy’s, our Chief Operating Officer and Chief Financial Officer, employment agreement, Mr. Cuddihy receives
an annual grant of shares of Common Stock that is equal to $50,000, payable quarterly,
promptly following the close of each quarter. For the three months ended June 30, 2011 and 2010, Mr. Cuddihy earned 15,170 and 9,045 shares, respectively, valued each at $12,500 as share-based compensation. For the six months ended June 30, 2011 and 2010, Mr. Cuddihy earned 25,220, and 15,295 shares, respectively, valued each at $25,000 as share-based compensation.
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Condensed Consolidated Statements of Stockholders' Equity (USD $)
In Thousands, except Share data |
Common Stock
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Additional Paid-In Capital
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Accumulated Deficit
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Treasury Stock
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Total
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Balance at Dec. 31, 2010 | $ 10 | $ 40,627 | $ (1,989) | $ (25,188) | $ 13,460 |
Balance (in shares) at Dec. 31, 2010 | 14,707,619 | Â | Â | Â | Â |
Net loss | 0 | 0 | (1,987) | 0 | (1,987) |
Share-based compensation expense | 0 | 60 | 0 | 0 | 60 |
Common stock granted pursuant to employment agreements | 0 | 344 | 0 | 0 | 344 |
Common stock granted pursuant to employment agreements (in shares) | 444,347 | Â | Â | Â | Â |
Common stock granted pursuant to a compensation plan | 0 | 81 | 0 | 0 | 81 |
Common stock granted pursuant to a compensation plan (in shares) | 64,850 | Â | Â | Â | Â |
Balance at Jun. 30, 2011 | $ 10 | $ 41,112 | $ (3,976) | $ (25,188) | $ 11,958 |
Balance (in shares) at Jun. 30, 2011 | 15,216,816 | Â | Â | Â | Â |
Organization and Business
|
6 Months Ended |
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Jun. 30, 2011
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Organization, Consolidation and Presentation of Financial Statements [Abstract] | Â |
Organization, Consolidation and Presentation of Financial Statements Disclosure [Text Block] | Note 1 – Organization and Business
ProPhase Labs, Inc. (“we”, “us” or the “Company”), organized under the laws of the State of Nevada, is a manufacturer, marketer and distributor of a diversified range of homeopathic and health products that are offered to the general public. We are also engaged in the research and development of potential over-the-counter (“OTC”) drug, natural base health products along with supplements, personal care and cosmeceutical products.
Our primary business is currently the manufacture, distribution, marketing and sale of OTC cold remedy products to consumers through national chain, regional, specialty and local retail stores. One of our principal products is Cold-EEZEÒ
, a zinc gluconate glycine product proven in clinical studies to reduce the duration and severity of the common cold symptoms by nearly half. Cold-EEZEÒ
is an established product in the health care and cold remedy market. For the three and six months ended June 30, 2011 and 2010, our revenues from continuing operations have come principally from our OTC cold remedy products.
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 TPM technology (“TPM”). TPM facilitates the delivery and depth of penetration of active molecules in pharmaceutical, nutraceutical, and other products. Pursuant to the LLC Agreement, we and PSI each own a 50% membership interest in the Joint Venture (see Note 3).
We use a December 31 year-end for financial reporting purposes. References herein to the fiscal year ended December 31, 2011 shall be the term “Fiscal 2011” and references to other “Fiscal” years shall mean the year, which ended on December 31 of the year indicated. The term “we”, “us” or the “Company” as used herein also refer, where appropriate, to the Company, together with its subsidiaries unless the context otherwise requires.
Our balance sheet at December 31, 2010 has been reclassified to conform to our current period ended June 30, 2011 presentation.
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