VINTAGE − SYSTEM Session: 81 Date: April 20, 2015 Time: 11:47
@PRNNY-VFXPP03/vintage/CLS_HouseStyle/GRP_fin38/JOB_v407655_print-ar/DIV_00-AR_wrappages Page 1 of 4
ANNUAL REPORT
2015
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2015
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission file number 01-21617
ProPhase Labs, Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction
of incorporation or organization)
621 N. Shady Retreat Road, Doylestown, Pennsylvania
(Address of principal executive offices)
Registrant’s telephone number, including area code (215) 345-0919
Securities registered pursuant to Section 12(b) of the Act:
23-2577138
(I.R.S. Employer
Identification No.)
18901
(Zip Code)
Title of each class
Name of each exchange on which registered
Common Stock, $0.0005 par value per share
Common Share Purchase Rights
NASDAQ Global Market
NASDAQ Global Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No
[X]
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§229.405 of this chapter) during the
preceding 12 months (or such shorter period that the registrant was required to submit and post such files). Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not
contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller
reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of
the Exchange Act. (Check one):
Large accelerated filer [ ]
Accelerated filer [ ]
Non-accelerated filer [ ]
Smaller reporting company [X]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ] No [X]
The aggregate market value of the registrant’s voting and non-voting common stock held by non-affiliates was $13,643,485 as of June
30, 2015, based on the closing price of the common stock on The NASDAQ Global Market.
Number of shares of each of the registrant’s classes of securities outstanding on March 25, 2016
Common stock, $0.0005 par value per share:
Common share purchase rights:
17,080,776
-
DOCUMENTS INCORPORATED BY REFERENCE
Information set forth in Part III of this report is incorporated by reference to the registrant’s proxy statement for the 2016 annual
meeting of stockholders.
TABLE OF CONTENTS
Page
Part I
Item 1. Business ...................................................................................................................................................... 3
1A. Risk Factors ............................................................................................................................................. 8
1B. Unresolved Staff Comments ..................................................................................................................... 16
2. Properties .................................................................................................................................................... 16
3. Legal Proceedings ....................................................................................................................................... 16
4. Mine Safety Disclosures .............................................................................................................................. 16
Part II
5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities ........................................................................................................................................................
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 ..................................................................................................................................... 52
17
Part III
10. Directors, Executive Officers and Corporate Governance ........................................................................... 53
11. Executive Compensation ........................................................................................................................... 53
12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters ........ 53
13. Certain Relationships and Related Transactions and Director Independence .............................................. 53
14. Principal Accountant Fees and Services ..................................................................................................... 53
Part IV
15. Exhibits and Financial Statement Schedules ............................................................................................... 54
Signatures ............................................................................................................................................................... 58
Forward-Looking Statements
PART I
This Annual Report on Form 10-K (“Report”) contains “forward looking statements” within the meaning of
Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange
Act of 1934, as amended (the “Exchange Act”). These forward looking statements relate to future events or our future
financial performance and involve known and unknown risks, uncertainties and other factors that may cause our or our
industry’s actual results, levels of activity, performance or achievements to be materially different from any future
results, levels of activity, performance or achievements expressed or implied by the forward-looking statements. Many of
these factors are beyond our ability to predict. Given the risks and uncertainties surrounding forward-looking statements,
you should not place undue reliance on these statements. Forward-looking statements typically are identified by use of
terms such as “anticipate”, “believe”, “plan”, “expect”, “intend”, “may”, “will”, “should”, “estimate”, “predict”,
“potential”, “continue” and similar words although some forward-looking statements are expressed differently. This
Report may contain forward-looking statements attributed to third parties relating to their estimates regarding the growth
of our markets. You are cautioned that such forward looking statements are not guarantees of future performance and that
all forward-looking statements address matters that involve risk and uncertainties, and there are many important risks,
uncertainties and other factors that could cause our actual results, levels of activity, performance, achievements and
prospects, as well as those of the markets we serve, to differ materially from the forward-looking statements contained in
this Report.
Such risks and uncertainties include, but are not limited to:
● 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 principal product, Cold-EEZE®, and our ability to successfully develop and
commercialize our new products within the cough-cold category or other categories such as dietary
supplements;
● Changes in our retail and distribution customers strategic business plans including, but not limited to, (i)
expansions, mergers, and/or consolidations, (ii) retail shelf space allocations for products within each outlet and
in particular the cough/cold category in which we compete, (iii) changes in their private label assortment and
(iv) product selections, distribution allocation, merchandising programs and retail pricing of our products as
well as competitive products;
● The general financial and economic uncertainty, fluctuations in consumer confidence and the strength of the
United States economy, 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 our key employees;
● Our ability to pay our debts and meet our liquidity needs; and
● Other risks identified in this Report.
You should also consider carefully the statements under other sections of this Report, including the Risk Factors
included in Item 1A, which address additional risks that could cause our actual results to differ from those set forth in any
forward-looking statements. Our forward-looking statements speak only as the date of this Report. We undertake no
obligation to publicly update or review any forward-looking statements, whether as a result of new information, future
developments or otherwise.
2
Where You Can Find Other Information
ProPhase Labs, Inc. (“we”, “us” or the “Company”) files periodic and current reports, proxy statements and
other information with the Securities and Exchange Commission (the “SEC”). We make available on our website
(www.ProPhaseLabs.com) free of charge our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current
Reports on Form 8-K and any amendments to or exhibits included in those reports as soon as reasonably practical after
we electronically file such materials with or furnish them to the SEC. Information appearing on our website is not part of
this Annual Report on Form 10-K. You can also read and copy any materials we file with the SEC at the SEC’s Public
Reference Room at 100 F Street, NE, Washington D.C. 20549-1004. You may request copies of these documents, upon
payment of a duplication fee, by writing the SEC at its principal office at 100 F Street, NE Room 1580, Washington,
D.C. 20549-1004. In addition, the SEC maintains an Internet site (www.sec.gov) that contains reports, proxy and
information statements regarding issuers that file electronically with the SEC, including the Company.
Item 1. Business
General Development of Business
We are a manufacturer, marketer and distributor of a diversified range of homeopathic and health care 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 the manufacture, distribution, marketing and sale of OTC health care and cold remedy
products to consumers through national chain, regional, specialty and local retail stores. Our flagship brand is Cold-
EEZE® and our principal product is Cold-EEZE® cold remedy zinc gluconate lozenges, proven in clinical studies to
reduce the duration and severity of symptoms of the common cold. In addition to Cold-EEZE® cold remedy lozenges, we
market and distribute non-lozenge forms of our proprietary zinc gluconate formulation, (i) Cold-EEZE® cold remedy
QuickMelts® and (ii) Cold-EEZE® cold remedy Oral Spray. In Fiscal 2013, we expanded our Cold-EEZE® cold remedy
QuickMelts® product line and began shipments to retailers in July 2013 Cold-EEZE® Plus Immune Support + Energy
QuickMelts®. In Fiscal 2014 we began shipments in June 2014 of Cold-EEZE® Plus Natural Multi-Symptom
QuickMelts®. Each of these new Cold-EEZE® QuickMelts® products are based on our proprietary zinc gluconate
formulation in combination with certain natural (i) immune system support, (ii) energy, (iii) sleep and relaxation, and/or
(iv) cold and flu symptom relieving active ingredients. In Fiscal 2015, we introduced three new Cold-EEZE® product line
extensions: (i) a Cold-EEZE® Multi-Symptom Relief for Cold and Flu lozenge, (ii) a Cold-EEZE® Daytime and
Nighttime Multi-Symptom Relief in liquid form for each of adults and children, and (iii) Cold-EEZE® Natural Allergy
Relief caplets for indoor and outdoor allergies. Shipments for these three new Cold-EEZE® product line extensions began
in the third quarter of Fiscal 2015.
Cold-EEZE® is an established product in the health care and cough-cold market. For Fiscal 2015, 2014 and
2013, our revenues have come principally from our OTC health care and cold remedy products. For Fiscal 2015, 2014
and 2013, our net sales for each period were related to markets in the United States.
We use a December 31 year-end for financial reporting purposes. References herein to the fiscal year ended
December 31, 2015 shall be the term “Fiscal 2015” and references to other “Fiscal” years shall mean the year, which
ended on December 31 of the year indicated.
We were initially organized as a corporation in Nevada in July 1989. Effective June 18, 2015, we changed our
state of incorporation from the State of Nevada to the State of Delaware. Our principal executive offices are located at
621 N. Shady Retreat Road, Doylestown, Pennsylvania 18901 and our telephone number is 215-345-0919. The terms,
“we”, “us” and the “Company” refer to the Company together with its consolidated subsidiaries unless the context
otherwise requires.
Description of Business Operations
Cold-EEZE® is our most popular OTC health care and cold remedy product. Cold-EEZE cold remedy lozenges,
QuickMelts® and Oral Spray product benefits are derived from our proprietary zinc gluconate formulation. Cold-EEZE®
cold remedy lozenges effectiveness has been substantiated in two double-blind clinical studies proving that Cold-EEZE®
cold remedy lozenges reduce the duration of the common cold by 42%. We acquired worldwide manufacturing and
distribution rights to our lozenge formulation in 1992 and commenced national marketing in 1996. In addition to our
lozenge product, the Cold-EEZE® Cold Remedy proprietary zinc gluconate formulation is available in two additional
cold remedy delivery forms, (i) a fast dissolving QuickMelt and (ii) an Oral Spray. We also offer our product line
extensions (i) Cold-EEZE® Daytime and Nighttime Multi-Symptom Relief in liquid for each of adults and children (ii)
Cold-EEZE® Natural Allergy Relief caplets for indoor and outdoor allergies. The demand for our OTC cold remedy
products is seasonal and the first and fourth quarters of each year generally have the largest sales volume.
3
Our business operations are concentrated on the development, manufacturing, marketing and distribution of our
proprietary Cold-EEZE® cold remedy lozenge products and on the development of various product extensions. Our
product line of OTC health care and cold remedy products are reviewed regularly to identify new consumer opportunities
and/or trends in flavor, convenience, packaging and delivery systems or forms to help improve market share for our
products.
Although we continue to expand our Cold-EEZE® product offerings, some retailers are limiting and/or
reallocating shelf and promotional space away from the cough-cold category to other product categories. With cough-
cold shelf and promotional space at a premium, opportunities in the future to introduce new Cold-EEZE® products in the
cough-cold category may be limited. Therefore, to continue to grow our Company, we are in the process of implementing
a series of new product development and pre-commercialization initiatives in the dietary supplement category.
Initial dietary supplement product development activities were completed in the fourth quarter of Fiscal 2015
under the brand name of TK SupplementsTM. The inaugural TK SupplementsTM product line is comprised of three men’s
health products: (i) Legendz XLTM for sexual health, (ii) Triple Edge XLTM, a daily energy booster plus testosterone
support, and (iii) Super ProstaFlow PlusTM for prostate and urinary health. The first of these three TK SupplementsTM
products, Legendz XLTM, is scheduled for launch in the first half of Fiscal 2016. Initially, it will be introduced to
consumers through direct to consumer marketing including DRTV. If this initial launch is successful, Legendz XL (as
well as the other products under development) may ultimately be distributed to retailers, leveraging our Cold-EEZE
distribution platform and infrastructure. While management anticipates the growth potential in this category may be
better, the risks associated with introducing new products that do not leverage the Cold-EEZE® brand name may be
higher. Therefore, no assurance can be made that our new product efforts will be successful.
Additionally, we are active in exploring new product technologies, applications, product line extensions and
other new product opportunities consistent with our Company and brand image, and our standard of proven consumer
benefit and efficacy.
Manufacturing Facility
Our wholly owned subsidiary, Pharmaloz Manufacturing, Inc. (“PMI”), produces our Cold-EEZE® cold remedy
lozenges and other lozenge products in addition to performing operational tasks such as warehousing, customer order
processing and shipping. Our PMI facility is located in Lebanon, Pennsylvania. Additionally, our PMI facility is a United
States Food and Drug Administration (“FDA”) registered facility that engages in contract manufacturing and distribution
activities. PMI also produces and sells therapeutic lozenges to unaffiliated third party retail, wholesale and distribution
outlets.
Products
OTC Health Care and Cold-Remedy Products
In May 1992, we entered into an exclusive agreement for worldwide representation, manufacturing and
marketing of a zinc gluconate formulation. This zinc gluconate formulation is the foundation of our brand; Cold-EEZE®
health care and cold remedy products which are distributed principally in the United States. Cold-EEZE® cold remedy
products are an OTC consumer product used to reduce the duration of the common cold. We have substantiated the
effectiveness of Cold-EEZE® cold remedy lozenges through a variety of studies. A randomized double-blind placebo-
controlled study, conducted at Dartmouth College of Health Science, Hanover, New Hampshire, concluded that the
lozenge formulation treatment, initiated within 48 hours of symptom onset, resulted in a significant reduction in the total
duration of the common cold.
On May 22, 1992, “Zinc and the Common Cold, a Controlled Clinical Study,” was published in England in the
Journal of International Medical Research, Volume 20, Number 3, Pages 234-246. According to this publication, (a)
flavorings used in other zinc lozenge products (citrate, tartrate, separate, orotate, picolinate, mannitol or sorbitol) render
the zinc inactive and unavailable to the patient’s nasal passages, mouth and throat where cold symptoms have to be
treated, (b) this patented formulation delivers approximately 93% of the active zinc to the mucosal surfaces and (c) the
patient has the same sequence of symptoms as in the absence of treatment but goes through the phases at an accelerated
rate and with reduced symptom severity.
On July 15, 1996, results of a randomized double-blind placebo-controlled study on the common cold, which
commenced at the Cleveland Clinic Foundation on October 3, 1994, were published. The study “Zinc Gluconate
Lozenges for Treating the Common Cold” was completed and published in The Annals of Internal Medicine – Volume
125 Number 2. Using a 13.3 mg lozenge (almost half the strength of the lozenge used in the Dartmouth study), the result
still showed a 42% reduction in the duration of common cold symptoms.
4
In addition to our Cold-EEZE® cold remedy lozenges, we also market and distribute non-lozenge forms of our
proprietary zinc gluconate formulation, (i) Cold-EEZE® cold remedy QuickMelts® are fast dissolving tablets that are
taken orally and (ii) Cold-EEZE® cold remedy Oral Spray a liquid form of our zinc gluconate formulation that is sprayed
in the mouth. The Cold-EEZE® cold remedy QuickMelts® product line is comprised of (i) Cold-EEZE®
Daytime/Nighttime QuickMelts® (launched in Fiscal 2012) (ii) Cold-EEZE® Plus Immune Support + Energy
QuickMelts® (launched in Fiscal 2013) and (iii) Cold-EEZE® Plus Multi-Symptom QuickMelts® (launched in Fiscal
2014).
We also manufacture, market and distribute organic cough drops and a Vitamin C supplement and perform
contract manufacturing services of cough drop, dietary supplements, and other OTC cold remedy products for third
parties.
In Fiscal 2015, we introduced (i) a Cold-EEZE® Multi-Symptom Relief for Cold and Flu lozenge, (ii) a Cold-
EEZE® Daytime and Nighttime Multi-Symptom Relief in liquid form for each of adults and children, and (iii) Cold-
EEZE® Natural Allergy Relief caplets for indoor and outdoor allergies. Shipments for these three new Cold-EEZE®
product line extensions began in the third quarter of Fiscal 2015. Our new multi-symptom lozenge contains the same
proprietary cold shortening zinc gluconate formulation plus additional active ingredients for temporary relief of flu
symptoms, cough, and sore and irritated throat. Our Cold-EEZE® Daytime and Nighttime Multi-Symptom Relief in
liquid form provide temporary relief of cold and flu symptoms. Our Cold-EEZE® Natural Allergy Relief caplets provide
temporary relief of indoor and outdoor allergy symptoms.
Our business is subject to federal and state health and safety laws and regulations. Our OTC health care and cold
remedies are subject to regulations by various federal, state and local agencies, including the FDA. Additionally, Cold-
EEZE® homeopathic cold remedy lozenges, QuickMelts®, Oral Spray and Allergy caplets are subject to the Homeopathic
Pharmacopoeia of the United States. See “Regulatory Matters” below for more information.
Patents, Trademarks, Royalty and Commission Agreements
Patents and Trademarks
We do not currently own patents for our OTC health care and cold-remedy products. We maintain various
trademarks for each of our products including Cold-EEZE®, QuickMelts®, Organix Rx Complete® and Organix Rx
Defense®, ORXx CompleteTM and ORXx DefenseTM, TK SupplementsTM, Legendz XLTM, TripleEdge XLTM and Super
ProstaFlow PlusTM.
We currently own various domestic and international patents covering certain product development initiatives
principally developed under our Pharma subsidiary operations. To date, we have not realized any meaningful levels of
revenues from such patents and we suspended in Fiscal 2009 any further commercialization efforts for various products
under such patents.
Joint Venture
On March 22, 2010, we, Phosphagenics Limited (“PSI Parent”), an Australian corporation, Phosphagenics Inc.
(“PSI”), a Delaware corporation and subsidiary of PSI Parent, and Phusion LLC (“Phusion”), a Delaware limited liability
company, entered into a Limited Liability Company Agreement (the “LLC Agreement”) of the Phusion 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 Phusion joint venture.
Our Phusion joint venture has (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 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 (see Note 10 to Notes to Consolidated Financial Statements).
On October 17, 2014, we initiated a demand for arbitration with the American Arbitration Association, case
number 01-14-0001-7373. This demand for arbitration pertains to our Phusion joint venture and the matter is against PSI
Parent and PSI (collectively known as the “Phosphagenics Entities”) (see Item 3. Legal Proceedings).
5
TK SupplementsTM
On June 30, 2015, we executed a Direct Response Production Agreement (“DRPA”) with Pacific Custom Video
Productions Inc. (“PCV”) to produce a series of direct response television commercials for certain TK SupplementsTM
products. The cost of the commercial development was $300,000 which was paid in Fiscal 2015 and is included as a
component of prepaid expenses at December 31, 2015. As TK SupplementsTM products are launched in Fiscal 2016,
these costs will be charged to operations as the products are shipped and television commercial air time is purchased and
broadcasted. In addition, the Company agreed to pay to PCV a three percent performance incentive in the form of a
royalty (aka commission) of net sales collected, as defined in the agreement, of certain TK SupplementsTM products
marketed and promoted with PCV. Performance incentive fees have not been incurred in Fiscal 2015 and will not be
incurred until the TK SupplementsTM product line is launched which is scheduled to commence in the first half of Fiscal
2016.
Product Distribution and Customers
Currently, our products are distributed through national chain, regional, specialty and local retail stores
throughout the United States. Revenues for Fiscal 2015, 2014 and 2013 were $20.6 million, $22.1 million and $25.0
million, respectively. Walgreen Company (“Walgreens”) and Wal-Mart Stores Inc (“Wal-Mart”) accounted for
approximately 15.8% and 11.3%, respectively, for Fiscal 2015. Walgreens, Wal-Mart and CVS Health Corporation
(“CVS”) accounted for approximately 18.9%, 16.9% and 11.3%, respectively, of our Fiscal 2014 revenues. Walgreens,
Wal-Mart and CVS accounted for approximately 20.4%, 14.3% and 11.6%, respectively, of our Fiscal 2013 revenues.
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.
In addition, we have entered into multiple broker, distributor and representative agreements with third parties
which provide for commission compensation based on sales performance.
Research and Development
We have historically invested significantly in research and development activities. Our research and
development costs for Fiscal 2015, 2014 and 2013 were $1.1 million, $1.3 million and $824,000 respectively. Our
research and development initiatives have been principally focused on product line development and/or line extensions
for OTC health care and cold remedy products under the Cold-EEZE® and TK SupplementsTM brands.
Currently, we fund our research and development costs with cash generated from operations. In addition to
funding from operations, we may seek to raise capital through the issuance of securities or to other financing sources to
support our research and development activities including new product technologies, applications, licensing,
commercialization and other development opportunities, as well as acquisitions of new formulations, ingredients,
applications and other products. Any such funding through the issuance of our equity securities would result in the
dilution of current stockholder ownership. Should research or commercialization activity progress on certain
formulations, resulting expenditures may require substantial financial support and may necessitate the consideration of
alternative approaches such as licensing, joint venture or partnership arrangements that meet our long term goals and
objectives. Ultimately, should internal working capital be insufficient and external funding methods or other business
arrangements become unattainable, it could result in the deferral or loss of future growth and development opportunities.
Regulatory Matters
We are subject to federal and state laws and regulations adopted for the health and safety of users of
pharmaceutical and health care products. Our OTC health care and cold remedy products are subject to regulation by
various federal, state, and local agencies, including the FDA. In addition, our Cold-EEZE® cold remedy products are
subject to the standards established by the Homeopathic Pharmacopoeia of the United States. These regulatory authorities
have broad powers, and we may be subject to regulatory and legislative changes that can affect the economics of the
industry by requiring changes in operating practices or by influencing the demand for and the costs of manufacturing or
distributing its products. Our Cold-EEZE® cold remedy products are considered a homeopathic drug and are exempt from
pre-approval requirements and other, but not all, FDA requirements.
6
Many homeopathic drug and dietary supplement products, including Cold-EEZE® cold remedy and TK
SupplementsTM products, are manufactured and distributed under FDA enforcement policies that provide criteria needed
to market a homeopathic OTC drug or dietary supplement products without FDA approval. We believe we meet those
requirements, which include registration of our manufacturing facility, listing of the product in FDA’s product database,
and packaging, labeling, and manufacturing homeopathic drugs and dietary supplements in compliance with current good
manufacturing practice (“cGMP”) regulations. In addition, the FDA is currently not enforcing the requirement for a
laboratory determination of identity and strength of each active ingredient prior to release for distribution, although this
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. We believe 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.
Pre-clinical development, clinical trials, product manufacturing, labeling, marketing, distribution and licensing
and/or acquisition of potential new products are also generally subject to federal and state regulation in the United States
and other countries. Obtaining FDA and any other required regulatory approval for certain OTC products, or seeking the
issuance of a final monograph from the FDA for certain OTC products, can require substantial resources and take several
years. The length of this process depends on the type, complexity and novelty of the product and the nature of the disease
or other indications to be treated. If we cannot obtain regulatory approval of, or final OTC monograph for, a new
product(s) in a timely manner or if patents are not granted or are subsequently challenged, it could have a material
adverse effect on our business and financial condition.
Competition
We compete with other suppliers of OTC cold remedy and health care products. These suppliers range widely in
size. Some of our competitors have significantly greater financial, technical or marketing resources than we do.
Management believes that our Cold-EEZE® cold remedy lozenge products, which have been clinically proven in two
double-blind studies to reduce the severity of common cold symptoms, offer a significant advantage over many of our
competitors in the OTC cold remedy market. We believe that our ability to compete depends on a number of factors,
including product quality and price, availability, speed to market, consumer marketing, reliability, credit terms, brand
name recognition, delivery time and post-sale service and support.
Employees
At December 31, 2015, we employed 54 full-time employees and no part-time employee, the majority of which
were employed at our manufacturing facility in a production function. The remaining employees were involved in an
executive, sales, marketing or administrative capacity. None of our employees are covered by a collective bargaining
agreement or are members of a union.
Suppliers; Raw Materials
We derive our sales principally from our Cold-EEZE® cold remedy zinc gluconate products which are available
in various forms– lozenges, oral spray and QuickMelts® – and various flavors for purchase by consumers at retail stores.
We also produce private label lozenge products for sale to certain retail customers. We manufacture our zinc lozenge
products at our Lebanon, Pennsylvania facility. The constituent raw materials and packaging used in the manufacture and
presentation of these items are procured from various sources with additional suppliers having been identified in the
event that alternatives are required. While the absence of a current raw materials or packaging source may cause short
term interruption, we expect that identified alternative sources would fill our needs in a short time and any transition
period would be mitigated by adequate levels of finished product available for sale. Certain products within our line of
products such as Cold-EEZE® cold remedy Oral Spray, Cold-EEZE® cold remedy QuickMelts®, Cold-EEZE® Daytime
and Nighttime Multi-Symptom Relief in liquid form and Cold-EEZE® Natural Allergy Relief caplets are manufactured
for us by various third party contract manufacturers and while currently purchased from single sources, we have
identified additional suppliers in the event that alternatives are required. We anticipate that if alternative supplies become
necessary, they would fill our needs in a short time and any transition period would be mitigated by adequate levels of
finished product available for sale.
7
Item 1A. Risk Factors
Any of the following risks could materially affect our business, financial condition, or results of operations.
These risks could also cause our actual results to differ materially from those indicated in the forward-looking statements
contained herein and elsewhere. The risks described below are not the only risks facing us. Additional risks not currently
known to us or those we currently deem to be immaterial may also materially and adversely affect our business, financial
condition or results of operations.
Our business is subject to significant competitive pressures
The OTC healthcare product, pharmaceutical, dietary supplement and consumer product industries are highly
competitive. Many of our competitors have substantially greater capital resources, technical staffs, facilities, marketing
resources, product development, distribution and experience than we do. Our competitors may have certain advantages,
including the ability to allocate greater resources for new product development, marketing and other purposes.
We believe that our ability to compete depends on a number of factors, including product quality and price,
availability, speed to market, consumer marketing, reliability, credit terms, brand name recognition, delivery time and
post-sale service and support, and new and existing product innovation and commercialization. There can be no
assurance that we will be able to compete successfully in the future. If we are unable to compete effectively, our earnings
may be significantly negatively impacted.
Cough-cold category and product innovation
Our flagship Cold-EEZE® cold remedy brand is an established brand within the cough-cold category. However,
some retailers are reallocating shelf space away from the cough-cold category to other product categories. With cough-
cold shelf space at a premium, opportunities in the future to introduce new Cold-EEZE® branded products in the cough-
cold category may be limited. Therefore, to continue to grow our Company, we are in the process of implementing a
series of new product development and pre-commercialization initiatives in the dietary supplement category. While
management anticipates the growth potential in this product category may be better, the risks associated with introducing
new products that do not leverage the Cold-EEZE® brand name may be significant. Therefore, no assurance can be made
that our new product efforts will be successful.
New product development; our long range business plan may not be successful
We face significant technological risks inherent in developing new products. We may be subject to delays
and/or ultimately unable to successfully implement our business plan and strategy to develop and commercialize one or
more non-prescription remedies and/or dietary supplements. The commercialization and ultimate product market
acceptance is subject to, among other influences, consumer purchasing trends, demand for our product, health and
wellness trends, regulatory factors, retail acceptance and overall economic and market conditions. As a consequence, we
may suspend or abandon some or all of our proposed new products before they become commercially viable. Even if we
develop and obtain approval of a new product, if we cannot successfully commercialize it in a timely manner, our
business and financial condition may be materially adversely affected.
We have aligned our operations to focus principally in the research, development, manufacture, marketing and
sale of OTC health care and cold remedy consumer products, natural based health products and more recently, dietary
supplement products. In addition, we may seek to acquire from third parties or enter into other arrangements with respect
to new formulations, ingredients, applications and other products developed by third parties who may be seeking our
commercialization, marketing and distribution expertise.
There can be no assurance that we will be able to effectuate our business plan successfully or that our revenue
will grow. In addition, we may not be successful in acquiring or otherwise entering into any new lines of business,
including dietary supplement products, and, if we are successful in doing so, there can be no assurance that such new
business will achieve profitability.
We will need to obtain additional capital to support long term product development and commercialization programs
Our ability to achieve and sustain operating profitability depends in large part on our ability to commence,
execute and complete new and existing product innovation and commercialization and, if required, clinical programs to
obtain regulatory approvals in the United States and elsewhere. We can give no assurance that we will be able to achieve
such product innovation and commercialization, to obtain any required approvals or to achieve significant levels of sales.
8
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, international
regulatory or other technical approvals, (ii) whether we elect to establish partnering arrangements for development, sales,
manufacturing and marketing of such products, (iii) the level of future sales of OTC health care, cold remedy or dietary
supplement 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, (“Common Stock”) issued to employees of the Company are exercised
and the timing and amount of these exercises.
Should research or commercialization activity progress on certain formulations, resulting expenditures may
require substantial financial support. The current sales level of our OTC health care and cold remedy products may not
generate all the funds we anticipate will be needed to support future product acquisition or development. Accordingly, in
addition to funding from operations, we may in the short and long term seek to raise capital through the issuance of
securities or to secure other financing sources to support our research, new product technologies, applications, licensing,
commercialization and other development opportunities. If we obtain such funding through the issuance of equity
securities, it would result in the dilution of current stockholders’ ownership in the Company. Any debt financing, if
available, may include financial and other covenants that could restrict use of proceeds of such financing or impose other
business and financial restrictions on us. In addition, we may consider alternative approaches such as licensing, joint
venture, or partnership arrangements to provide long term capital. There can be no assurances that we will have access to
the capital required to fun these aspects of our business on favorable terms or at all.
We may not be able to access our Equity Line of Credit under commercially reasonable terms
On July 30, 2015 we executed a new equity line of credit agreement (such arrangement, the “2015 Equity Line”)
with Dutchess Opportunity Fund II LP (“Dutchess”) whereby, Dutchess committed to purchase, subject to certain
restrictions and conditions, up to 3,200,000 shares of the Company’s Common Stock, over a period of 36 months
expiring August 2018.
In Fiscal 2015, we sold an aggregate of 438,480 shares of Common Stock to Dutchess under a previous 2014
equity line of credit with Dutchess in which we derived net proceeds of $524,000. In addition, we sold an aggregate of
750,000 shares of Common Stock to Dutchess under the 2015 Equity Line in which we derived net proceeds of $1.0
million. At March 25, 2016, we have 2,450,000 shares of our Common Stock available for sale, at our discretion, under
the terms of the 2015 Equity Line and covered pursuant to a registration statement.
Pursuant to the 2015 Equity Line, Dutchess is committed to purchase, subject to certain conditions, the
remaining 2,450,000 shares of our Common Stock from time to time through August 2018. Dutchess will not be
obligated to purchase shares under the 2015 Equity Line unless certain conditions are met, which include, among
others: effectiveness of the registration statement; the continued listing of our stock on either the NASDAQ Global
Market (our current listing), NASDAQ Capital Market or OTC Bulletin Board; our compliance with our obligations
under the purchase agreement and registration rights agreement entered into with Dutchess; the absence of injunctions or
other governmental actions prohibiting the issuance of our Common Stock to Dutchess; the absence of violations of
shareholder approval requirements with respect to such issuance of our Common Stock to Dutchess and the accuracy of
representations and warranties made to Dutchess. If we are unable to access funds through the 2015 Equity Line, we may
be unable to access capital on favorable terms or at all.
To the extent that we do not generate sufficient cash from operations, we may need to access our 2015 Equity
Line to finance our growth. Our 2015 Equity Line is limited and may not be sufficient to meet our capital requirements.
If we need to seek other sources of capital, uncertainty in the credit markets and the potential impact on the liquidity of
major financial institutions may have an adverse effect on our ability to fund our business strategy through our 2015
Equity Line on terms that we believe to be reasonable, or at all.
Any draw downs under our 2015 Equity Line with Dutchess may result in dilution to our shareholders
If we sell shares to Dutchess under the 2015 Equity Line, it will have a dilutive effect on the holdings of our
current shareholders, and may result in downward pressure on the price of our Common Stock. If we draw down amounts
under the 2015 Equity Line, we will issue shares to Dutchess at a discount of 5% from the average price of our Common
Stock. If we draw down amounts under the 2015 Equity Line when our share price is decreasing, we will need to issue
more shares to raise the same amount than if our stock price was higher. Issuances in the face of a declining share price
will have an even greater dilutive effect than if our share price were stable or increasing, and may further decrease our
share price.
9
We may be unable to generate sufficient cash flows from operations to meet our debt service payments
On December 11, 2015, we executed two Subscription Agreements (the “Subscription Agreements”) with the
investors named therein (the “Investors”) providing for the purchase of 12% Secured Promissory Notes – Series A
(“Notes”) in the aggregate principal amount of up to $3.0 million and warrants to purchase shares of our Common Stock
( the “Warrants” ). The Warrants grant the Investors the right to purchase 17,000 shares of common stock for every
$500,000 of principal amount of Notes purchased by the Investors.
Notes in the amount of $1,500,000 and 51,000 Warrants, at an exercise price of $1.35 per share, were issued by the
Company and its wholly-owned subsidiaries Pharmaloz Manufacturing Inc. and Quigley Pharma Inc. (collectively, the
“Obligors”) and funded on December 11, 2015. The Notes are secured by all of our tangible and intangible assets. The
Notes bear interest at the rate of 12% per annum, payable semi-annually and the principal is due and payable on June 15,
2017. The Notes may be pre-paid at any time prior to maturity without penalty.
As of December 31, 2015, we had total secured Notes outstanding of $1.5 million, excluding $34,000 in
unamortized interest for loan origination costs and the fair value of the Warrants. We may incur additional debt to
finance future research and development, and product launch and related marketing activities.
Our ability to generate sufficient cash flows from operations to make scheduled debt service payments depends on
a range of economic, competitive and business factors, many of which are outside of our control. Our business may
generate insufficient cash flows from operations to meet our debt service and other obligations, and currently anticipated
cost savings, capital investment plans, working capital reductions and operating improvements may not be realized on
schedule, or at all. To the extent our cash flow from operations is insufficient to fund our debt service obligations, aside
from our current liquidity, we would be dependent on outside capital to meet the funding of our debt service obligations
and to fund capital expenditures and other obligations.
If we are unable to meet our expenses and debt service obligations, we may need to refinance all or a portion of
our indebtedness on or before maturity, sell assets or issue additional equity securities. We may be unable to refinance
any of our indebtedness, sell assets or issue equity securities on commercially reasonable terms, or at all, which could
cause us to default on our obligations and result in the acceleration of our debt obligations. Our inability to generate
sufficient cash flows to satisfy our outstanding debt obligations, or to refinance our obligations on commercially
reasonable terms, would have a material adverse effect on our business, financial condition and results of operations.
Instability and volatility in the financial markets could have a negative impact on our business, financial condition,
results of operations and cash flows
In recent years, there has been substantial volatility in financial markets due at least in part to the global
economic environment. In addition, there has been substantial uncertainty in the capital markets and access to financing
is uncertain. Moreover, customer spending habits may be adversely affected by the current economic environment and
prevailing high under employment rates in the United States. These conditions could have an adverse effect on our
industry and business, including our access to funding sources, demand for our products and our customers’ ability to
continue to purchase our products, which could have a material adverse effect on our financial condition, results of
operations and cash flows.
To the extent that we do not generate sufficient cash from operations, we may need to issue equity or to incur
indebtedness to finance our growth. Turmoil and volatility in the credit markets and the potential impact on the liquidity
of major financial institutions may have an adverse effect on our ability to fund our business strategy through
borrowings, under either existing or newly created instruments in the public or private markets on terms that we believe
to be reasonable, or at all.
Commodity price increases will increase our operating costs and may negatively affect financial results
Commodity prices impact our business directly through the cost of raw materials used to make our products
(such as corn syrup, sucrose and other commodities and ingredients) and the amount we pay to purchase packaging for
our products (such as paper, board and plastic). Commodities such as these are susceptible to price volatility caused by
conditions outside of our control, including fluctuations in commodities markets, currency fluctuations, availability of
supply, weather, consumer demand and changes in governmental agricultural programs. Increases in the price of our
commodities and other raw materials would negatively impact our gross margins and/or our sales volume if we were
unable to offset such increases through increases in our selling price, changes in product mix or cost
reduction/productivity enhancement efforts.
10
The sales of our primary product fluctuates by season and from Cold Season to Cold Season
Our sales are derived principally from our OTC health care and cold remedy products. A significant portion of
our business is highly seasonal, which causes major variations in operating results from quarter to quarter. The first and
fourth quarters generally represent the largest sales volume for our OTC health care and cold remedy products. In
addition, our sales are influenced by and subject to fluctuations in the timing of purchase and the ultimate level of
demand for our products which are a function of the timing, length and severity of each cold season. Generally, a Cold
Season is defined as the period of September to March when the incidence of the common cold rises as a consequence of
the change in weather and other factors.
There can be no assurance that we will be able to manage our working capital needs and inventory to meet the
fluctuating demand for these products. Failure to accurately predict and respond to consumer demand may result in the
production of excess inventory which may be expensive to store or which we may be required to dispose if such excess
inventory remains unsold. Conversely, if products achieve greater success than anticipated for any given quarter, this
may result in insufficient inventory to meet customer demand. If we do not manage our working capital needs and
inventory, our business and financial condition may be materially adversely affected.
Our performance may fluctuate when our retail customers are affected simultaneously by the same economic, regulatory
or health and wellness factors
Our revenues are significantly concentrated in our OTC health care and cold remedy products. Our retail
customers are subject to fluctuations of business based upon consumer purchasing trends, demand for cold remedy
products and overall economic and market conditions. Consequently, many retailers will likely be influenced at the same
time by similar economic conditions, regulatory factors or health and wellness trends, which can affect the level of
demand for our products. It is reasonable to expect that, if one retailer reduces or delays its purchasing in response to a
general economic, regulatory or health and wellness factor, other retailers may also decide to reduce or delay their
purchasing at approximately the same time. Accordingly, our sales are subject to fluctuations as a result of such factors.
We have a concentration of sales to and accounts receivable from several large retail customers
Although we have a broad range of retail customers that includes many national chain, regional, specialty and
local retail stores, our five largest customers accounted for a significant percentage of our sales, approximately 48% and
58% of total revenues for Fiscal 2015 and 2014, respectively. In addition, retail customers comprising the five largest
accounts receivable balances represented 60% and 67% of total accounts receivable balances at December 31, 2015 and
2014, respectively. We extend credit to retail customers based upon an evaluation of their financial condition and credit
history, and collateral is not generally required. If one or more of these large retail customers cannot pay, the write-off of
their accounts receivable could have a material adverse effect on our operations and financial condition. The loss of sales
to any one or more of these large retail customers would also have a material adverse effect on our financial condition,
results of operations and cash flows.
Retail customer’s strategic business plans may negatively influence the distribution of our products to consumer
Changes in our retail and distribution customers strategic business plans including, but not limited to, (i)
expansions, mergers, and/or consolidations, (ii) retail shelf space allocations for products within each outlet and in
particular the cough/cold category in which we compete, (iii) changes in their private label assortment and (iv) product
selections, distribution allocation, merchandising programs, commercial terms and retail pricing of our products as well
as competitive products could affect the consumer sales of our products and result in a material adverse effect to our
business and financial condition.
Our future success depends on the continued sales of our principal product
For Fiscal 2015 and 2014, our health care and cold remedy products, principally Cold-EEZE®, represented
approximately 90% and 95%, respectively, of our total sales. Accordingly, we depend on the continued acceptance of
Cold-EEZE® products by our customers. Our investments in and strategies used for our brand marketing are critical to
achieve brand awareness with current consumers, educate potential new consumers and convert potential consumers into
customers. However, there can be no assurance that Cold-EEZE® products will continue to receive, maintain or increase
market acceptance. The inability to successfully commercialize Cold-EEZE® products in the future and/or expand the
product line, for any reason, would have a material adverse effect on our financial condition, prospects and ability to
continue operations.
11
Our products and potential new products are or may be subject to extensive governmental regulation
Our business is regulated by various agencies of the states and localities where our products are sold.
Governmental regulations in foreign countries where we plan to commence or expand sales may prevent or delay entry
into a market or prevent or delay the introduction, or require the reformulation of certain of our products. In addition, no
prediction can be made as to whether new domestic or foreign legislation regulating our activities will be enacted. Any
new legislation could have a material adverse effect on our business, financial condition and operations. Non-compliance
with any applicable requirements may subject us or the manufacturers of our products to agency action, including
warning letters, fines, product recalls, seizures and injunctions.
The manufacturing, processing, formulation, packaging, labeling and advertising of our health care and cold
remedy products are subject to regulation by several federal agencies, including (i) the FDA, (ii) the Federal Trade
Commission (“FTC”), (iii) the Consumer Product Safety Commission, (iv) the United States Department of Agriculture,
(v) the United States Postal Service, (vi) the United States Environmental Protection Agency and (vii) the United States
Occupational Safety and Health Administration.
In addition to OTC and prescription drug products, the FDA regulates the safety, manufacturing, labeling and
distribution of dietary supplements, including vitamins, minerals and herbs, food additives, food supplements, over-the-
counter and prescription drugs and cosmetics. The FTC also has overlapping jurisdiction with the FDA to regulate the
promotion and advertising of vitamins, over-the-counter drugs, cosmetics and foods. In addition, our cold remedy
products are homeopathic remedies which are subject to standards established by the Homeopathic Pharmacopoeia of the
United States (“HPUS”). HPUS sets the standards for source, composition and preparation of homeopathic remedies
which are officially recognized under the Federal Food, Drug and Cosmetics Act, as amended.
Preclinical development, clinical trials, product manufacturing, labeling, distribution and marketing of potential
new products are also subject to federal and state regulation in the United States and other countries. Clinical trials and
product marketing and manufacturing are subject to the rigorous review and approval processes of the FDA and foreign
regulatory authorities. To obtain approval of a new drug product, a company must demonstrate through adequate and
well-controlled clinical trials that the drug product is safe and effective for its intended use. Obtaining FDA and other
required regulatory approvals is lengthy and expensive. Typically, obtaining regulatory approval for pharmaceutical
products requires substantial resources and takes several years. The length of this process depends on the type,
complexity and novelty of the product and the nature of the disease or other indication to be treated. Preclinical studies
must comply with FDA regulations. Clinical trials must also comply with FDA regulations to ensure safety of the human
subjects in the trial and may require large numbers of test subjects, complex protocols and possibly lengthy follow-up
periods. Consequently, satisfaction of government regulations may take several years: may cause delays in introducing
potential new products for considerable periods of time and may require imposing costly procedures upon our activities.
If regulatory approval of new products is not obtained in a timely manner or not at all, we could be materially adversely
affected. Even if regulatory approval of new products is obtained, such approval may impose limitations on the indicated
uses for which the products may be marketed which could also materially adversely affect our business, financial
condition and future operations.
We have a history of losses and limited working capital
We have experienced net losses for each of the four of the past five fiscal years. There can be no assurance that
our strategic focus will result in 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. As of December 31, 2015, we had working
capital of approximately $7.3 million which we believe is an acceptable and adequate level of working capital to support
our business for at least the next twelve months ending March 31, 2017. Our ability to fund working capital and debt
service needs will depend on our ability to generate cash in the future.
Our ability to use our net operating loss carryforwards to offset future taxable income may be subject to certain
limitations
In general, under Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), a corporation
that undergoes an “ownership change” is subject to limitations on its ability to use its pre-change net operating loss
carryforwards, or NOLs, to offset future taxable income. Future changes in our stock ownership, some of which are
outside of our control, could result in an ownership change under Section 382 of the Code. Furthermore, our ability to
use NOLs of companies that we may acquire in the future may be subject to limitations. For these reasons, we may not be
able to use a material portion of the NOLs reflected on our balance sheet, even if we attain profitability.
12
Our success is dependent on key personnel
Our success depends, in part, upon the continued service of key personnel, such as Mr. Ted Karkus, Chairman
and Chief Executive Officer, Mr. Robert V. Cuddihy, Jr., Chief Operating Officer and Chief Financial Officer, and
certain managers and strategists within the Company. If we are unable to attract and retain such personnel, the loss of the
services of any one of them could have a material adverse effect on us.
In order to be successful, we must retain and motivate executives and other key employees, including those in
managerial, technical, marketing and health product positions. In particular, our product generation efforts depend on
hiring and retaining qualified health and science professionals. Competition for skilled employees who can perform the
services that we require is intense and hiring, training, motivating, retaining and managing employees with the skills
required is time-consuming and expensive. If we are not be able to hire sufficient professional staff to support our
operations, or to train, motivate, retain and manage the employees we do hire, it could have a material adverse effect on
our business operations or financial results.
We are dependent on our manufacturing facility and suppliers for certain of our cold remedy products
Our manufacturing, warehousing and distribution center is located in Lebanon, Pennsylvania. In the event of a
disruption of this facility, we would need to outsource to third parties, at least temporarily, our manufacturing,
warehousing and distribution requirements. While such secondary sources have been identified for our products, if we
are unable to find other sources or there were a delay in the ramp-up for the production and distribution operations for
some of our products, it could have a material adverse effect on our operations.
Certain raw material active ingredients used in connection with the Cold-EEZE® products are purchased from a
single unaffiliated supplier. Should the relationship terminate or the vendor become unable to supply material, we believe
that current contingency plans would prevent such termination from materially affecting our operations, although there
may be delays in production of our products until an acceptable replacement supplier is located.
Our inability to find alternative sources for some of our manufacturing and raw materials 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.
The manufacturing of OTC products and dietary supplements is subject to applicable current good
manufacturing practice (“cGMP”) regulations and FDA inspections. We believe we are in substantial compliance with
material provisions of the applicable cGMP regulations. Contract manufacturers are also subject to these same
requirements and we require such compliance in our contractual relationships with such manufacturers. However, we
cannot assure that the FDA will agree with our determination of compliance. If the FDA disagrees, it could, upon
inspection of our facility, issue a notice of violations, referred to as a form FDA-483, or issue a Warning Letter, or both.
If the FDA concludes that there is an imminent public health threat or if we fail to take timely corrective actions to the
satisfaction of the FDA, the agency can initiate legal actions, such as seizure and injunction, which could include a recall
order or the entry of a consent decree, or both. In addition, we could be subject to monetary penalties and even criminal
prosecution for egregious conduct. The FDA could initiate similar legal actions against the contract manufacturer if it
concludes its facility is not in compliance, which would affect the availability of our products. While secondary sources
have been identified for our products, our inability to find other sources or a delay in the ramp-up for the production and
distribution operations for some of its products may have a material adverse effect on our operations.
We are uncertain as to whether we can protect our proprietary rights
The strength of our patent position and proprietary formulations and compounds may be important to our long-
term success. We currently own numerous U.S. and foreign patents in connection with potential products; however there
can be no assurance that these patents and proprietary formulations and compounds will effectively protect our products
from duplication by others. In addition, we may not be able to afford the expense of any litigation which may be
necessary to enforce our rights under any of the patents. Furthermore, there can be no assurance that third parties will not
obtain access to or independently develop our technologies, know-how, ideas, concepts and documentation, which could
have a material adverse effect on our financial condition.
Although we believe that current and future products do not and will not infringe upon the patents or violate the
proprietary rights of others, if any of our current or future products do infringe upon the patents or proprietary rights of
others, we may have to modify the products or obtain an additional license for the manufacture and/or sale of such
products. We could also be prohibited from selling the infringing products. If we were found to infringe on the
proprietary rights of others, it is uncertain whether we would be able to take corrective actions in a timely manner, upon
acceptable terms and conditions, or at all, and the failure to do so could have a material adverse effect upon our business,
financial condition and operations.
13
Our existing products and potential new products expose us to potential product liability claims
Our business results in exposure to an inherent risk of potential product liability claims, including claims for
serious bodily injury or death caused by the sales of our existing products and the products which are being developed.
These claims could lead to substantial damage awards. While we currently maintain product liability insurance, a
successful claim brought against us in excess of, or outside of, existing insurance coverage could have a material adverse
effect on our results of operations and financial condition. Claims against us, regardless of their merit or eventual
outcome, may also have a material adverse effect on the consumer demand for our products.
We are involved in litigation matters
We are, from time-to-time, subject to various legal proceedings and claims, either asserted or unasserted. Any
such claims, whether with or without merit, can be time-consuming and expensive to defend and can divert
management’s attention and resources. Furthermore, there is no assurance that the outcome of all current or future
litigation will not have a material adverse effect on us.
We incur significant costs as a result of operating as a public company, and our management devotes substantial time to
new compliance initiatives
We have incurred and will continue to incur significant legal, accounting and other expenses as a public
company, including costs resulting from public company reporting obligations under the Exchange Act and regulations
regarding corporate governance practices. The listing requirements of The NASDAQ Global Market require that we
satisfy certain corporate governance requirements relating to director independence, distributing annual and interim
reports, stockholder meetings, approvals and voting, soliciting proxies, conflicts of interest and a code of conduct. Our
management and other personnel will need to devote a substantial amount of time to all of these requirements. Moreover,
the reporting requirements, rules and regulations will increase our legal and financial compliance costs and will make
some activities more time-consuming and costly. These reporting requirements, rules and regulations, coupled with the
increase in potential litigation exposure associated with being a public company, could make it more difficult for us to
attract and retain qualified persons to serve on our board of directors or board committees or to serve as executive
officers.
In addition, the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”) and the related rules of the Securities and
Exchange Commission require that we maintain effective internal control over financial reporting and disclosure controls
and procedures. During the course of our review and testing, we may identify deficiencies and be unable to remediate
them before we must provide the required reports. We may not be able to conclude on an ongoing basis that we have
effective internal control over financial reporting, which could harm our operating results, cause investors to lose
confidence in our reported financial information and cause the trading price of our stock to fall.
Our compliance with Section 404 of Sarbanes-Oxley may require that we incur substantial expense and expend
significant management time on compliance related issues. Moreover, if we are not able to comply with the requirements
of Section 404 in a timely manner, or if we or our independent registered public accounting firm identify deficiencies in
our internal control over financial reporting that are deemed to be material weaknesses, the market price of our stock
would likely decline and we could be subject to sanctions or investigations by Nasdaq, the SEC or other regulatory
authorities, which would require additional financial and management resources.
Our stock price is volatile
The market price of our Common Stock has experienced significant volatility. From January 1, 2015 to March
25, 2016, the closing price of our stock has ranged from $1.16 to $1.71 per share. There are several factors which could
affect the price of our Common Stock, including announcements of technological innovations for new commercial
products by us or our competitors, developments concerning propriety rights, new or revised governmental regulation or
general conditions in the market for our products. Sales of a substantial number of shares by existing stockholders could
also have an adverse effect on the market price of our Common Stock.
Future sales of shares of our Common Stock in the public market could adversely affect the trading price of shares of the
Common Stock and our ability to raise funds in new stock offerings
Future sales of substantial amounts of shares of our Common Stock in the public market, or the perception that
such sales are likely to occur, could affect prevailing trading prices of our Common Stock. As of March 25, 2016, we had
17,080,776 shares of Common Stock outstanding.
14
As of March 25, 2016, there are outstanding options, which are fully vested, to purchase an aggregate of
1,709,250 shares of our Common Stock at an average exercise price of $1.21 per share. If these options are exercised,
and the holders of these options were to attempt to sell a substantial amount of their holdings at once, the market price of
our Common Stock would likely decline. Moreover, the perceived risk of this potential dilution could cause stockholders
to attempt to sell their shares and investors to “short” our stock, a practice in which an investor sells shares that he or she
does not own at prevailing market prices, hoping to purchase shares later at a lower price to cover the sale. As each of
these events would cause the number of shares of Common Stock being offered for sale to increase, our Common Stock’s
market price would likely further decline. All of these events could combine to make it very difficult for us to sell equity
or equity-related securities in the future at a time and price that we deem appropriate.
Our Common Stock may be delisted from The NASDAQ Global Market, which would adversely affect the price and
liquidity of our Common Stock
Our Common Stock is currently listed on The NASDAQ Global Market. If our Common Stock is delisted, it
could reduce the price of our Common Stock and the levels of liquidity available to our stockholders. In addition, the
delisting of our Common Stock could materially adversely affect our access to the capital markets, and any limitation on
liquidity or reduction in the price of our Common Stock could materially adversely affect our ability to raise capital on
terms acceptable to us or at all. Delisting from The NASDAQ Global Market could also result in other negative
implications, including the potential loss of confidence by suppliers, customers and employees, the loss of institutional
investor interest and fewer business development opportunities.
If securities or industry analysts do not publish research or reports about our business or if they issue an adverse or
misleading opinion regarding our stock, our stock price and trading volume could decline
The trading market for our Common Stock will be influenced by the research and reports that industry or
securities analysts publish about us or our business. If any of the analysts who cover us issue an adverse or misleading
opinion regarding us, our business model, products or stock performance, our stock price would likely decline. If one or
more of these analysts cease coverage of us or fail to publish reports on us regularly, we could lose visibility in the
financial markets, which in turn could cause our stock price or trading volume to decline. Moreover, the unpredictability
of our financial results likely reduces the certainty, and therefore reliability, of the forecasts by securities or industry
analysts of our future financial results, adding to the potential volatility of our stock price.
Our officers and directors own a substantial amount of our Common Stock
As of March 25, 2016, our executive officers and directors beneficially owned approximately 30.0% of our
Common Stock. These individuals have significant influence over the outcome of all matters submitted to stockholders
for approval, including the election of directors. Consequently, they exercise substantial influence over all major
decisions including major corporate actions such as mergers and other business combinations transactions which could
result in or prevent a change of control of the Company. Circumstances may occur in which the interests of our officers
and directors could be in conflict with the interests of other shareholders. Accordingly, a shareholder’s ability to
influence us through voting their shares may be limited or the market price of our Common Stock may be adversely
affected.
We do not intend to pay cash dividends in the foreseeable future
We have not paid cash dividends on our Common Stock since our inception. Our intention is to retain earnings,
if any, for use in the business and we do not anticipate paying any cash dividends to stockholders in the foreseeable
future.
Our Certificate of Incorporation and By-laws contain certain provisions that may be barriers to a takeover
Our Certificate of Incorporation and By-laws contain certain provisions which may deter, discourage, or make it
difficult for another person or entity to gain control of the Company through a tender offer, merger, proxy contest or
similar transaction or series of transactions. These provisions may deter a future tender offer or other takeover attempt
which could include a premium over the market price of our Common Stock at the time. Such provisions could depress
the trading price of our Common Stock
15
We have agreed to indemnify our Officers and Directors from liability
Our Certificate of Incorporation and our By-laws provide that we will indemnify, to the fullest extent permitted
by the Delaware General Corporation Law, any person who is or was made a party to, or is or was threatened to be made
a party to, any pending, completed, or threatened action, suit or proceeding because he or she is or was a director, officer,
employee or agent of the Company or is or was serving at the Company’s request as a director, officer, employee or
agent of any corporation, partnership, joint venture, trust or other enterprise. These provisions permit us to advance
expenses to an indemnified party in connection with defending any such proceeding, upon receipt of an undertaking by
the indemnified party to repay those amounts if it is later determined that the party is not entitled to indemnification. We
entered into indemnity agreements with each member of our board of directors and Mr. Cuddihy. These agreements
provide, among other things, that we will indemnify each officer and director in the event they become a party or
otherwise a participant in any action or proceeding on account of their service as a director or officer of the Company (or
service for another corporation or entity in any capacity at the request of the Company) to the fullest extent permitted by
applicable law. These indemnity provisions may reduce the likelihood of derivative litigation against directors and
officers and discourage or deter stockholders from suing directors or officers for breaches of their duties to the Company,
even though such an action, if successful, might otherwise benefit the Company or its stockholders. In addition, to the
extent that we expend funds to indemnify directors and officers, funds will be unavailable for operational purposes.
Item 1B. Unresolved Staff Comments
Not applicable.
Item 2. Properties
Our corporate headquarters is located in Doylestown, Pennsylvania. We purchased this property in 1998. Our
headquarters is approximately 13,000 square feet and is comprised of office space and a storage area. Our principal
manufacturing facility is located in Lebanon, Pennsylvania. The facility was purchased in October 2004. The facility has
a total area of approximately 57,500 square feet, comprised of manufacturing, warehousing and office space. We believe
that our existing facilities are adequate at this time and do not anticipate the need for additional facilities in the
foreseeable future.
Item 3. Legal Proceedings
PROPHASE LABS, INC. PROPHASE LABS, INC. FOR THE BENEFIT OF PHUSION LABORATORIES, LLC vs.
Phosphagenics, Inc., Phosphagenics, LTD and Phusion Laboratories, LLC as a nominal defendant
On October 17, 2014, we initiated a demand for arbitration with the American Arbitration Association, case
number 01-14-0001-7373. This demand for arbitration pertains to our Phusion joint venture and the matter is against
Phosphagenics, Inc. and Phosphagenics LTD (collectively known as the “Phosphagenics Entities”). We have raised
certain claims based upon the Phosphagenics Entities’ alleged breach of a certain amended and restated license
agreement for the exploitation of certain intellectual property and, separately, breach of the Phusion joint venture
operating agreement as between the Company and the Phosphagenics Entities. The Phosphagenics Entities have made
counter claims of breaches against the Company and Phusion. The arbitration hearing was held during December 2015
and January 2016 and the evidentiary hearing is now concluded. Each of the parties submitted to the arbitrator their post-
hearing briefs on or before March 15, 2016. At this time, no prediction as to the outcome of this action can be made, and
we anticipate an arbitral ruling will likely be rendered in or about June 2016.
Other Litigation
In the normal course of our business, we are named as defendant in legal proceedings. It is our policy to
vigorously defend litigation and/or enter into settlements of claims where management deems appropriate.
Item 4. Mine Safety Disclosures
Not applicable.
16
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Market Information
Our Common Stock is currently traded on The NASDAQ Global Market under the trading symbol “PRPH.” The
price set forth in the following table represents the high and low closing bid prices for our Common Stock for each
quarter of the Fiscal 2015 and 2014, as reported on The NASDAQ Global Market.
Common Stock
Quarter Ended
High
Low
High
Low
2015
2014
March 31, ........................................ $
June 30, ........................................... $
September 30, ................................. $
December 31, .................................. $
1.67 $
1.42 $
1.71 $
1.62 $
1.30 $
1.23 $
1.33 $
1.20 $
2.25 $
2.05 $
1.68 $
1.50 $
1.66
1.50
1.38
1.25
Holders
As of March 16, 2016, there were approximately 219 holders of record of our Common Stock, including
brokerage firms, clearing houses, and/or depository firms holding the Company’s securities for their respective clients.
The exact number of beneficial owners of our securities is not known but exceeds 400.
Dividends
We have not declared, nor paid any cash dividends on our Common Stock since our Company’s inception. At
this time, we intend to retain our earnings to finance future growth and maintain liquidity. Future cash dividends, if any,
will be at the discretion of our Board of Directors and will depend upon, among other things, our future operations and
earnings, capital requirements, general financial condition, contractual and financing restrictions and such other factors as
our Board of Directors may deem relevant.
Warrants and Options
In addition to our outstanding Common Stock, there were reserved for issuance 1,760,250 shares of our
Common Stock underlying outstanding unexercised and vested options and Warrants as of December 31, 2015 at the
price-per-share stated and expiration date indicated, as follows:
Description
Number of
Options
Exercise
Price
Expiration Date
Option Plan ................................. 935,000 $
75,000 $
Option Plan .................................
20,000 $
Option Plan .................................
Warrants......................................
51,000 $
Option Plan ................................. 100,000 $
Option Plan ................................. 405,500 $
15,000 $
Option Plan .................................
Option Plan .................................
11,250 $
Option Plan ................................. 147,500 $
Total ........................................... 1,760,250
1.00 December 14, 2017
1.08 May 28, 2018
0.87 November 5, 2018
1.35 December 10, 2018
1.17 December 18, 2018
1.65 December 18, 2019
1.36 December 20, 2019
1.48 April 9, 2020
1.39 April 20, 2020
17
Securities Authorized Under Equity Compensation
The following table sets forth certain information regarding stock option and warrant grants made to employees,
directors and consultants:
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
Number of
Securities to be
Issued Upon
Exercise of
Outstanding
Options
(A)
Weighted
Average
Exercise Price
of Outstanding
Options
(B)
Number of Securities
Remaining Available for
Future Issuance Under Equity
Compensation Plans
(Excluding Securities
Reflected in Column A)
( C )
Plan Category
Equity Plans Approved by Security Holders (1,2)
1,713,000 $
1.21
167,467
(1) On May 5, 2010, our shareholders approved the 2010 Equity Compensation Plan, which was subsequently
amended, restated and approved by shareholders on April 24, 2011 and further amended and approved by
our shareholders on May 6, 2013 (the “2010 Plan”). The 2010 Plan provides that the total number of shares
of Common Stock that may be issued is equal to 2.5 million shares, including 900,000 shares that were
authorized for issuance but unissued under a 1997 incentive stock option plan (“1997 Plan). 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. At December 31, 2015, we have outstanding 1,713,000 stock options, subject to vesting, under the
2010 Plan. For Fiscal 2015, we charged to operations $135,000 for compensation expense for the fair value
of the vested portion of the stock options (see Note 6 to Notes to Consolidated Financial Statements). At
December 31, 2015, there are 19,659 shares of Common Stock that may be issued in the future pursuant to
the 2010 Plan.
(2) On May 5, 2010, our shareholders approved the 2010 Directors’ Equity Compensation Plan which was
subsequently amended and approved by our shareholders on May 6, 2013. The 2010 Directors’ Equity
Compensation Plan provides that the total number of shares of Common Stock that may be issued under the
2010 Directors’ Equity Compensation Plan is equal to 425,000. For Fiscal 2015 there were no shares of our
Common Stock granted under the 2010 Directors’ Equity Compensation Plan. At December 31, 2015, there
are 147,808 shares of Common Stock that may be issued pursuant to the 2010 Directors Equity
Compensation Plan.
2014 Equity Line of Credit
On May 28, 2014 we entered into an equity line of credit agreement (such arrangement, the “2014 Equity Line”)
with Dutchess whereby Dutchess committed to purchase, subject to certain restrictions and conditions, up to 3,000,000
shares of the Company’s Common Stock, over a period of 36 months from the effectiveness of the registration statement
registering the resale of shares purchased by Dutchess pursuant to the 2014 Equity Line. On May 29, 2014, we filed a
registration statement with the SEC to register for sale up to 3,000,000 shares of our Common Stock and the registration
statement was declared effective by the SEC on June 4, 2014.
In June 2015, we sold an aggregate of 438,480 shares of our Common Stock to Dutchess under and pursuant to
the 2014 Equity Line and we derived net proceeds of $524,000. During the period June 4, 2014 through September 30,
2014, we sold an aggregate of 2,561,520 shares of our Common Stock to Dutchess under and pursuant to the 2014 Equity
Line and we derived net proceeds of $3.7 million. The sales of the shares under the 2014 Equity Line were deemed to be
exempt from registration under the Securities Act of 1933, as amended in reliance upon Section 4(a)(2) (or Regulation D
promulgated thereunder). At June 30, 2015, there were no shares of our Common Stock available for sale under the terms
of the 2014 Equity Line. As a consequence of the utilization of the 2014 Equity Line, on July 23, 2015 we filed a post-
effective amendment to the underlying registration statement for the 2014 Equity Line to terminate the registration
statement.
2015 Equity Line of Credit
On July 30, 2015, we entered into the 2015 Equity Line with Dutchess. Pursuant to the 2015 Equity Line,
Dutchess committed to purchase, subject to certain restrictions and conditions, up to 3,200,000 shares of our Common
Stock, over a period of 36 months from the effectiveness of the registration statement registering the resale of shares
purchased by Dutchess pursuant to the Investment Agreement.
18
We may, at our discretion, draw on the 2015 Equity Line from time to time, as and when we determine
appropriate in accordance with the terms and conditions of the 2015 Equity Line. The maximum number of shares that
we are entitled to put to Dutchess in any one draw down notice shall not exceed 500,000 shares with a purchase price
calculated in accordance with the 2015 Equity Line. We may deliver a notice for a subsequent put from time to time,
following the one day pricing period for the prior put.
The purchase price shall be set at ninety-five percent (95%) of the volume weighted average price (VWAP) of
the Common Stock during the one trading day immediately following our put notice. We have the right to withdraw all
or any portion of any put, except that portion of the put that has already been sold to a third party, including any portion
of a put that is below the minimum acceptable price set forth on the put notice, before the closing. In the event Dutchess
receives more than a five percent (5%) return on the net sales for a specific put, Dutchess must remit such excess
proceeds to us; however, in the event Dutchess receives less than a five percent (5%) return on the net sales for a specific
put, Dutchess will have the right to deduct from the proceeds of the put amount on the applicable closing date so
Dutchess’s return will equal five percent (5%).
There are put restrictions applied on days between the draw down notice date and the closing date with respect
to that particular put. In addition, Dutchess will not be obligated to purchase shares if Dutchess’ total number of shares
beneficially held at that time would exceed 4.99% of the number of shares of Common Stock as determined in
accordance with Rule 13d-1(j) of the Securities Exchange Act of 1934, as amended. In addition, we are not permitted to
draw on the facility unless there is an effective registration statement to cover the resale of the shares.
Pursuant to the terms of the 2015 Equity Line, we are obligated to file one or more registrations statements with
the SEC to register the resale by Dutchess of the shares of Common Stock issued or issuable under the 2015 Equity Line.
In addition, we are obligated to use all commercially reasonable efforts to have the registration statement declared
effective by the SEC within 90 days after the registration statement is filed. On August 4, 2015, we filed a registration
statement for the underlying shares of the 2015 Equity Line with the SEC and the registration statement was declared
effective by the SEC on August 21, 2015.
During the period August 21, 2015 through December 31, 2015, we sold an aggregate of 750,000 shares of
Common Stock to Dutchess under and pursuant to the 2015 Equity Line and we derived net proceeds of $1.0 million.
The sales of the shares under the 2015 Equity Line were deemed to be exempt from registration under the Securities Act
of 1933, as amended in reliance upon Section 4(2) (or Regulation D promulgated thereunder). At December 31, 2015 we
have 2,450,000 shares of our Common Stock available for sale, at our discretion, under the terms of the 2015 Equity Line
and covered pursuant to a registration statement.
Item 6. Selected Financial Data
The following table sets forth the selected financial data appearing in or derived from our consolidated financial
statements for and at the end of the years ended December 31, 2015, 2014, 2013, 2012 and 2011. The selected financial
data should be read in conjunction with the consolidated financial statements appearing elsewhere herein, and with Item
7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations (in thousands, except per
share amounts):
2015
Year Ended December 31,
2013
2012
2014
2011
Statement of Income Data:
Net sales ................................................. $
Gross profit ............................................. $
Income (loss) from operations before
taxes ....................................................... $
Net income (loss) .................................... $
20,604 $
12,178 $
22,070 $
14,179 $
25,032 $
16,671 $
22,406 $
14,252 $
17,453
11,282
(3,600) $
(3,600) $
(7,834) $
(7,834) $
405 $
405 $
(1,091) $
(1,091) $
(2,710)
(2,710)
Basic income (loss) per share .................. $
Diluted income (loss) per share................ $
(0.22) $
(0.22) $
(0.47) $
(0.47) $
0.03 $
0.03 $
(0.07) $
(0.07) $
(0.18)
(0.18)
Weighted average shares outstanding:
Basic ...................................................
Diluted ................................................
16,398
16,398
16,773
16,773
15,839
16,276
14,843
14,843
14,817
14,817
19
2015
2014
As of December 31,
2013
2012
2011
Balance Sheet Data:
Working capital...................................... $
Total assets ............................................ $
Long term debt and other obligations ...... $
Stockholders’ equity ............................... $
7,345 $
14,829 $
1,466 $
8,829 $
8,217 $
16,057 $
100 $
10,716 $
6,655 $
17,420 $
200 $
12,596 $
5,809 $
16,661 $
300 $
11,451 $
5,342
19,079
-
11,226
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Our Business. We are a manufacturer, marketer and distributor of a diversified range of homeopathic and health
care products that are offered to the general public. We are also engaged in the research and development of potential
natural based health products along with supplement and cosmeceutical products.
Our primary business is the manufacture, distribution, marketing and sale of OTC health care and cold remedy
products to consumers through national chain, regional, specialty and local retail stores. Our flagship brand is Cold-
EEZE and our principal product is Cold-EEZE cold remedy zinc gluconate lozenges, proven in clinical studies to
reduce the duration and severity of symptoms of the common cold. In addition to Cold-EEZE® cold remedy lozenges, we
market and distribute non-lozenge forms of our proprietary zinc gluconate formulation, (i) Cold-EEZE® cold remedy
QuickMelts® and (ii) Cold-EEZE® cold remedy Oral Spray. Each of our Cold-EEZE® QuickMelts® products are based on
our proprietary zinc gluconate formulation in combination with certain natural (i) immune system support, (ii) energy,
(iii) sleep and relaxation, and/or (iv) cold and flu symptom relieving active ingredients. In Fiscal 2015, we introduced
three new Cold-EEZE® product line extensions (see Product Development below). We also manufacture, market and
distribute organic cough drops and a Vitamin C supplement, and perform contract manufacturing services of cough drop
and other OTC cold remedy products for third parties.
Product Development
Our flagship Cold-EEZE® brand has generally performed well within the cough-cold category over the past
several years. We began shipping in the third quarter of Fiscal 2015 three new Cold-EEZE® product line extensions: (i) a
Cold-EEZE® Multi-Symptom Relief for Cold and Flu lozenge, (ii) a Cold-EEZE® Daytime and Nighttime Multi-
Symptom Relief in liquid form for each of adults and children, and (iii) Cold-EEZE® Natural Allergy Relief caplets for
indoor and outdoor allergies.
Although we continue to expand our Cold-EEZE® product offerings, some retailers are limiting and/or
reallocating shelf and promotional space away from the cough-cold category to other product categories. With cough-
cold shelf and promotional space at a premium, opportunities in the future to introduce new Cold-EEZE® products in the
cough-cold category may be limited. Therefore, to continue to grow our Company, we are in the process of implementing
a series of new product development and pre-commercialization initiatives in the dietary supplement category.
Initial dietary supplement product development activities were completed in the fourth quarter of Fiscal 2015
under the brand name of TK SupplementsTM. The inaugural TK SupplementsTM product line is comprised of three men’s
health products: (i) Legendz XLTM for sexual health, (ii), Triple Edge XLTM, a daily energy booster plus testosterone
support, and (iii) Super ProstaFlow PlusTM for prostate and urinary health. The first of these three TK SupplementsTM
products, Legendz XLTM is scheduled for launch in the first half of Fiscal 2016.
While management anticipates the growth potential in this category may be better, the risks associated with
introducing new products that do not leverage the Cold-EEZE® brand name may be higher. Therefore, no assurance can
be made that our new product efforts will be successful.
Secured Promissory Notes
On December 11, 2015, we executed two Subscription Agreements (the “Subscription Agreements”) with the
investors named therein (the “Investors”) providing for the purchase of 12% Secured Promissory Notes – Series A
(“Notes”) in the aggregate principal amount of up to $3.0 million and warrants to purchase shares of our Common Stock
( the “Warrants” ). The Warrants grant the Investors the right to purchase 17,000 shares of common stock for every
$500,000 of principal amount of Notes purchased by the Investors
Notes in the amount of $1,500,000 and 51,000 Warrants, at an exercise price of $1.35 per share, which is equal
to the closing price of our Common Stock on the date of investment, were issued by the Company and its wholly-owned
subsidiaries Pharmaloz Manufacturing Inc. and Quigley Pharma Inc. (collectively, the “Obligors”) and funded on
December 11, 2015.
20
The Notes are secured by all of our tangible and intangible assets. The Notes bear interest at the rate of 12% per
annum, payable semi-annually and the principal is due and payable on June 15, 2017. The Notes may be pre-paid at any
time prior to maturity without penalty. The effective interest, inclusive of the Warrants and loan origination costs, is
14.3% per annum. The net proceeds from the Notes will be used for general working capital.
In connection with the issuance of the Notes, we entered into a security agreement with John E. Ligums, Jr., an
Investor and a shareholder in the Company, as collateral agent for the Investors (the “Security Agreement”) to secure the
timely payment and performance in full of the Obligors’ obligations under the Notes. Under the Security Agreement, the
Obligors grant to the Collateral Agent, for the benefit of the Investors a lien upon and security interest in the property and
assets listed as collateral in the Security Agreement, including without limitation, all of the Obligors’ personal property,
inventory, equipment, general intangibles, cash and cash equivalents, and proceeds.
Seasonality of the Business
Our net sales are derived principally from our OTC health care and 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 (“Cold Season”) when the incidence of the common cold and flu rises as a consequence of
the change in weather and other factors. We generally experience in the third and fourth quarter higher levels of net sales
along with a corresponding increase in marketing and advertising expenditures designed to promote 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. 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.
Income Taxes
As of December 31, 2015, we have net operating loss carry-forwards of approximately $44.5 million for federal
purposes that will expire beginning in Fiscal 2020 through 2034. Additionally, there are net operating loss carry-forwards
of $21.9 million for state purposes that will expire beginning in Fiscal 2020 through 2034. 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. As
a consequence of the accumulated losses of the Company, we believe that this allowance is required due to the
uncertainty of realizing these tax benefits in the future.
Results of Operations
Fiscal 2015 compared with Fiscal 2014
Net sales for Fiscal 2015 decreased $1.5 million, or 6.6%, to $20.6 million as compared to $22.1 million for
Fiscal 2014. The decrease in net sales from Fiscal 2014 to Fiscal 2015 is due principally to the net effects of (i) the
timing of customer purchases, product mix shipped from period to period and lower consumer demand as a consequence
of several factors including the decreased incidence and severity of upper respiratory illnesses, from period to period,
offset by (ii) an increase of $1.0 million in our contract manufacturing operations from non-related third party entities to
produce lozenge-based products. According to IMS Health (a healthcare industry information provider), key industry
statistics reveal that the incidence of upper respiratory illness across the country has been down 12.6% for the period
September through December 2015 as compared to the prior year September through December 2014. The category of
cough and cold product sales, including our Cold-EEZE® sales, are highly correlated to the incidence of upper respiratory
illness.
Cost of sales for Fiscal 2015 were $8.4 million as compared to $7.9 million for Fiscal 2014. For Fiscal 2015 and
Fiscal 2014, we realized a gross margin of 59.1% and 64.2%, respectively. The decrease of 5.1% in gross margin from
the prior period is principally due to (i) a reduction in the absorption of fixed production costs, (ii) fluctuations in our
product mix shipped from period to period and (iii) an increase in contract manufacturing net sales which carry lower
gross margins. Gross margins are generally influenced by fluctuations in quarter-to-quarter production volume, fixed
production costs and related overhead absorption, raw ingredient costs, inventory mark to market write-downs, if any,
retail cooperative incentive promotion and the timing of shipments to customers which are factors of the seasonality of
our sales activities and products.
Sales and marketing expense for Fiscal 2015 decreased $1.3 to $7.7 million as compared to $9.0 million for
Fiscal 2014. The decrease in sales and marketing expense for Fiscal 2015 as compared to Fiscal 2014 was principally due
to a decrease in advertising expenditures as we managed the scope and timing of our media and product promotion
advertising campaigns from period to period.
21
General and administrative (“G&A”) expenses decreased $1.1 million for Fiscal 2015 to $7.0 million as
compared to $8.1 million in Fiscal 2014. The decrease in G&A expense for Fiscal 2015 as compared to Fiscal 2014 was
principally due to a decrease in professional and legal fees related to certain, now resolved, litigation matters, and in
corporate personnel expenses.
Research and development costs for Fiscal 2015 and 2014 were $1.1 million and $1.3 million, respectively. The
decrease of $244,000 in research and development costs for Fiscal 2015 as compared to Fiscal 2014 was principally due
a decrease in the scope, timing, cost and amount of research and development activity from period to period.
Additionally, we continue to engage in other research and development activities that we determine are appropriate and
we may increase our research and development activities in future periods.
Interest income and expense for Fiscal 2015 was $2,000 and $18,000, respectively, as compared to $4,000 and
$10,000, respectively for Fiscal 2014. The decline in interest income in Fiscal 2015 as compared to Fiscal 2014 is due
principally to lower invested cash balances from period to period. The increase in interest expense for Fiscal 2015 as
compared to Fiscal 2014 was due principally to the interest expense incurred pursuant to the issuance of the Notes in
December 2015.
As noted above, we have net operating loss carry-forwards for both federal and certain states. As a consequence
of these loss carry-forwards, we did not incur income tax expense for Fiscal 2015 or Fiscal 2014.
As a consequence of the effects of the above, the net loss for Fiscal 2015, was $3.6 million, or ($0.22) per share,
as compared to a net loss of $7.8 million, or ($0.47) per share, for Fiscal 2014.
Fiscal 2014 compared with Fiscal 2013
Net sales for Fiscal 2014 decreased $2.9 million, or 11.8%, to $22.1 million as compared to $25.0 million for
Fiscal 2013. The decrease in net sales from Fiscal 2013 to Fiscal 2014 is principally due to the net effects of (i) a
reduction in promotional display programs shipped due principally to certain retail customers reducing their allocation of
display space for the cough-cold category, (ii) an increase in our cooperative incentive promotion and coupon costs,
which are recorded as a reduction to our revenues, offset by (iii) an increase in shipments of our QuickMelts® products.
In addition, net sales of our contract manufacturing operations decreased $433,000 in Fiscal 2014 to $1.4 million as
compared to $1.8 million in Fiscal 2013 due to fluctuations in contract manufacturing orders from non-related third party
entities to produce lozenge-based products.
Cost of sales for Fiscal 2014 were $7.9 million as compared to $8.4 million for Fiscal 2013. For Fiscal 2014 and
Fiscal 2013, we realized a gross margin of 64.2% and 66.6%, respectively. The decrease of 2.4% in gross margin from
the prior period is principally due to (i) an increase in our cooperative incentive promotion and coupon costs and (ii) a
reduction in the absorption of fixed production costs as a consequence of a decline in net sales, (iii) fluctuations in our
product mix shipped from period to period and (iv) the initial expenses incurred as a consequence of a packaging
transition to a slightly narrower package of our Cold-EEZE® Cold Remedy lozenges at certain retail accounts to obtain
additional/new distribution of our Cold-EEZE® Cold Remedy QuickMelts® products for Fiscal 2014. Gross margins are
principally influenced by fluctuations in quarter-to-quarter production volume, fixed production costs and related
overhead absorption, raw ingredient costs, inventory mark to market write-downs, if any, retail cooperative incentive
promotion and the timing of shipments to customers which are factors of the seasonality of our sales activities and
products.
Sales and marketing expense for Fiscal 2014 decreased $573,000 to $9.0 million as compared to $9.5 million for
Fiscal 2013. The decrease in sales and marketing expense for Fiscal 2014 as compared to Fiscal 2013 was principally due
to a decrease in advertising expenditures as we managed the scope and timing of our media and product promotion
advertising campaigns from period to period. We continue to make significant, strategic marketing investments in an
effort to build and grow the sales of our OTC cold remedy products.
General and administrative (“G&A”) expenses increased $2.2 million for Fiscal 2014 to $8.1 million as
compared to $5.9 million in Fiscal 2013. The increase in G&A expense for Fiscal 2014 as compared to Fiscal 2013 was
primarily due to an increase in professional and legal fees related to certain, now resolved, litigation matters, and in
personnel expenses.
Research and development costs for Fiscal 2014 and 2013 were $1.3 million and $824,000, respectively. The
increase of $498,000 in research and development costs for Fiscal 2014 as compared to Fiscal 2013 was principally due
an increase in the scope, timing, cost and amount of research and development activity from period to period.
Additionally, we continue to engage in other research and development activities that we determine are appropriate and
we may increase our research and development activities in future periods.
22
As a consequence of our impairment assessment, we determined that a full impairment occurred of the Phusion
intangible asset, license technology. As a consequence, for Fiscal 2014 we charged to operation a $3.6 million
impairment charge.
Interest and other income for Fiscal 2014 and 2013 was $4,000 and $2,000 respectively. Interest expense for
Fiscal 2014 was $10,000 as compared to $13,000 for Fiscal 2013 as a consequence of interest paid pursuant to the terms
of the Godfrey Settlement Agreement consummated in December 2012.
As noted above, we have net operating loss carry-forwards for both federal and certain states. As a consequence
of these loss carry-forwards, we did not incur income tax expense for Fiscal 2014 or Fiscal 2013.
As a consequence of the effects of the above, the net loss for Fiscal 2014, was $7.8 million, or ($0.47) per share,
as compared to a net income of $405,000, or $0.03 per share, for Fiscal 2013.
Liquidity and Capital Resources
Our aggregate cash and cash equivalents as of December 31, 2015 were $1.7 million as compared to $2.9
million at December 31, 2014. Our working capital was $7.3 million and $8.2 million as of December 31, 2015 and
December 31, 2014, respectively. Changes in our working capital for Fiscal 2015 is principally due to the net effect of (i)
cash used in operations of $3.5 million comprised principally of (a) net loss of $3.6 million, (b) a decrease in accrued
advertising of $1.2 million, (c) increase to inventory of $1.0 million offset by (d) decrease to accounts receivable of $1.8
million, (ii) capital expenditures of $718,000 and (iii) the installment payment of $100,000 pursuant to the terms of the
Godfrey Settlement Agreement, offset by (iv) net proceeds of $1.6 million from the sales of our Common Stock and (v)
proceeds of $1.5 million from the Notes.
2014 Equity Line of Credit
On May 28, 2014, we entered into a equity line of credit agreement (such arrangement, the “2014 Equity Line”)
with Dutchess whereby Dutchess committed to purchase, subject to certain restrictions and conditions, up to 3,000,000
shares of our Common Stock, over a period of 36 months from the effectiveness of the registration statement registering
the resale of shares purchased by Dutchess pursuant to the Investment Agreement. On May 29, 2014, we filed a
registration statement with the SEC to register for sale up to 3,000,000 shares of our Common Stock and the registration
statement was declared effective by the SEC on June 4, 2014.
During the period June 4, 2014 through September 30, 2014, we sold an aggregate of 2,561,520 shares of our
Common Stock to Dutchess under and pursuant to the 2014 Equity Line and we derived net proceeds of $3.7 million. In
June 2015, we sold an aggregate of 438,480 shares of our Common Stock to Dutchess under and pursuant to the 2014
Equity Line and we derived net proceeds of $524,000. The sales of the shares under the 2014 Equity Line were deemed
to be exempt from registration under the Securities Act of 1933, as amended in reliance upon Section 4(a)(2) (or
Regulation D promulgated thereunder). At June 30, 2015, there were no shares of our Common Stock available for sale
under the terms of the 2014 Equity Line. As a consequence of the utilization of the 2014 Equity Line, on July 23, 2015
we filed a post-effective amendment to the underlying registration statement for the 2014 Equity Line to terminate the
registration statement.
2015 Equity Line of Credit
On July 30, 2015, we entered into a new equity line of credit agreement (such arrangement, the “2015 Equity
Line”) with Dutchess. Pursuant to the 2015 Equity Line, Dutchess committed to purchase, subject to certain restrictions
and conditions, up to 3,200,000 shares of our Common Stock, over a period of 36 months from the effectiveness of the
registration statement registering the resale of shares purchased by Dutchess pursuant to the Investment Agreement.
We may, at our discretion, draw on the 2015 Equity Line from time to time, as and when we determine
appropriate in accordance with the terms and conditions of the 2015 Equity Line. The maximum number of shares that
we are entitled to put to Dutchess in any one draw down notice shall not exceed 500,000 shares with a purchase price
calculated in accordance with the 2015 Equity Line. We may deliver a notice for a subsequent put from time to time,
following the one day pricing period for the prior put.
The purchase price shall be set at ninety-five percent (95%) of the volume weighted average price (VWAP) of
the Common Stock during the one trading day immediately following our put notice. We have the right to withdraw all
or any portion of any put, except that portion of the put that has already been sold to a third party, including any portion
of a put that is below the minimum acceptable price set forth on the put notice, before the closing. In the event Dutchess
receives more than a five percent (5%) return on the net sales for a specific put, Dutchess must remit such excess
proceeds to us; however, in the event Dutchess receives less than a five percent (5%) return on the net sales for a specific
put, Dutchess will have the right to deduct from the proceeds of the put amount on the applicable closing date so
Dutchess’s return will equal five percent (5%).
23
There are put restrictions applied on days between the draw down notice date and the closing date with respect
to that particular put. In addition, Dutchess will not be obligated to purchase shares if Dutchess’ total number of shares
beneficially held at that time would exceed 4.99% of the number of shares of Common Stock as determined in
accordance with Rule 13d-1(j) of the Securities Exchange Act of 1934, as amended. In addition, we are not permitted to
draw on the facility unless there is an effective registration statement to cover the resale of the shares.
Pursuant to the terms of the 2015 Equity Line, we are obligated to file one or more registrations statements with
the SEC to register the resale by Dutchess of the shares of Common Stock issued or issuable under the 2015 Equity Line.
In addition, we are obligated to use all commercially reasonable efforts to have the registration statement declared
effective by the SEC within 90 days after the registration statement is filed. On August 4, 2015, we filed a registration
statement for the underlying shares of the 2015 Equity Line with the SEC and the registration statement was declared
effective by the SEC on August 21, 2015.
During the period August 21, 2015 through December 31, 2015, we sold an aggregate of 750,000 shares of our
Common Stock to Dutchess under and pursuant to the 2015 Equity Line and we derived net proceeds of $1.0 million.
The sales of the shares under the 2015 Equity Line were deemed to be exempt from registration under the Securities Act
of 1933, as amended in reliance upon Section 4(2) (or Regulation D promulgated thereunder). At December 31, 2015 we
have 2,450,000 shares of our Common Stock available for sale, at our discretion, under the terms of the 2015 Equity Line
and covered pursuant to a registration statement.
As a consequence of the seasonality of our business, we realize variations in operating results and demand for
working capital from quarter to quarter. As of December 31, 2015, we had working capital of approximately $7.3 million
and 2,450,000 shares of Common Stock available for sale under the 2015 Equity line. We believe our current working
capital and available equity line of credit and an available $1.5 million in additional debt financing through the
Subscription Agreements is an acceptable and adequate level of working capital to support our business for at least the
next twelve months ending March 31, 2017.
Our future contractual obligations and commitments at December 31, 2015 consist of the following (in
thousands):
Year
$
2016 .........................................
2017 .........................................
2018 .........................................
2019 .........................................
2020 .........................................
Total ........................................
$
2015
Employment
Contracts
1,025 $
1,025
512
-
-
2,562 $
Godfrey
Settlement
Agreement Notes Total
100 $
- $
- 1,500
-
-
100 $ 1,500 $
1,125
2,525
512
-
-
4,162
Off-Balance Sheet Arrangements
It is not our usual business practice to enter into off-balance sheet arrangements such as guarantees on loans and
financial commitments and retained interests in assets transferred to an unconsolidated entity for securitization purposes.
We have no off-balance sheet arrangements that have, or are reasonably likely to have, a material current or future effect
on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources.
Impact of Inflation
We are subject to normal inflationary trends and anticipate that any increased costs would be passed on to our
customers. Inflation has not had a material effect on our business.
Critical Accounting Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the
United States (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent liabilities at the dates of the financial statements and the reported
amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Our
significant accounting policies are described in Note 2 of the Notes to Consolidated Financial Statements included under
Item 8 of this Part II. However, certain accounting policies are deemed “critical”, as they require management’s highest
degree of judgment, estimates and assumptions. These accounting estimates and disclosures have been discussed with the
Audit Committee of our Board of Directors. A discussion of our critical accounting policies, the judgments and
uncertainties affecting their application and the likelihood that materially different amounts would be reported under
different conditions or using different assumptions are as follows:
24
Revenue Recognition – Sales Allowances
When providing for the appropriate sales returns, allowances, cash discounts and cooperative incentive
promotion costs (“Sales Allowances”), we apply a uniform and consistent method for making certain assumptions for
estimating these provisions. These 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-EEZE® cold remedy lozenges, utilizes a proprietary zinc gluconate 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® cold remedy lozenges, we market and distribute a variety of Cold-EEZE® cold remedy QuickMelts®, a
Cold-EEZE® cold remedy Oral Spray, Cold-EEZE® Natural Allergy Relief caplets and Cold-EEZE® Daytime and
Nighttime Multi-Symptom Relief in a liquid form. We also manufacture, market and distribute an organic cough drop
and a Vitamin C supplement. Each of the Cold-EEZE® cold remedy Oral Spray and QuickMelts® products, Cold-EEZE®
Natural Allergy Relief caplets, Cold-EEZE® liquid forms and organic lozenge products carry shelf-life expiration dates
for which we aggregate such new product market experience data and update our 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.
Our return policy accommodates returns for (i) discontinued products, (ii) store closings and (iii) products that
have reached or exceeded their designated expiration date. 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 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.
We classify product returns into principally three categories, (i) non-routine returns, (ii) obsolete product and
(iii) product mix realignment by certain of our customers. “Non-routine” returns are defined as product returned to us as
a consequence of unanticipated circumstances principally due to (i) retail store closings or (ii) unexpected poor retail sell
through to consumers causing us to discontinue the product. “Obsolete” returns are defined as product returned to us as a
consequence of product shelf-life “use by” expiration date. “Product mix realignment” returns are defined as product
returned to us due to initiatives by the trade to discontinue purchasing certain of our products. Product mix realignment
returns are generally nominal and are frequently related to discontinued or soon to be discontinued products.
Our return policy accommodates returns for (i) discontinued products, (ii) store closings and (iii) products that
have reached or exceeded designated expiration date. The following is a summary of the change in the return provision
for the years ended December 31, 2015 and 2014 (in thousands):
Return provision at December 31, 2013............................ $
Net change in the return provision Fiscal 2014 .................
Return provision at December 31, 2014............................
Net change in the return provision Fiscal 2015 .................
Return provision at December 31, 2015............................ $
1,519
(1)
1,518
(103)
1,415
Amount
For Fiscal 2015, 2014 and 2013, net sales of products with limited shelf-life and expiration dates were $3.7
million, $5.1 million and $4.3 million, respectively.
25
For Fiscal 2015, the return provision decreased by $103,000. The decrease in the return provision was
principally due to (i) a charge of $886,000, including $514,000 for products with shelf-life expiration dates (obsolete
returns), offset by (ii) net returns of $989,000 associated principally with Fiscal 2015 and Fiscal 2014 received and
processed during Fiscal 2015.
For Fiscal 2014, the return provision decreased by $1,000. The decrease in the return provision was principally
due to (i) a charge of $1.2 million, including $571,000 for products with shelf-life expiration dates (obsolete returns),
offset by (ii) net returns of $1.2 million associated principally with Fiscal 2014 and Fiscal 2013 received and processed
during Fiscal 2014.
A one percent deviation for these sales allowance provisions for the Fiscal 2015, 2014 and 2013 would affect net
sales by approximately $248,000, $278,000 and $303,000, respectively. A one percent deviation for cooperative
incentive promotions reserve provisions for Fiscal 2015, 2014 and 2013 could affect net sales by approximately
$224,000, $263,000 and $285,000, respectively.
Effect of Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-09, “Revenue from
Contracts with Customers”, on revenue recognition. The new standard provides for a single five-step model to be applied
to all revenue contracts with customers as well as requires additional financial statement disclosures that will enable users
to understand the nature, amount, timing and uncertainty of revenue and cash flows relating to customer contracts.
Companies have an option to use either a retrospective approach or cumulative effect adjustment approach to implement
the standard. As amended by ASU No. 2015-14 issued in August 2015, this ASU is effective for fiscal years and interim
periods within those years beginning after December 15, 2017, with early adoption permitted. We are currently assessing
the impact of this update, and believe that its adoption will not have a material impact on our consolidated financial
statements.
In June 2014, the FASB issued ASU No. 2014-12, “Accounting for Share-Based Payments When the Terms of
an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period”. The amendments
in this update require that a performance target that affects vesting and that could be achieved after the requisite service
period be treated as a performance condition. Companies should apply existing guidance in ASC 718, “Compensation -
Stock Compensation”, as it relates to awards with performance conditions that affect vesting to account for such awards.
The amendments in this update will be effective as of January 1, 2016. Earlier adoption is permitted. We may apply the
amendments in this update either: (1) prospectively to all awards granted or modified after the effective date; or (2)
retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual
period presented in the financial statements and to all new or modified awards thereafter. If a retrospective transition is
adopted, the cumulative effect of applying this update as of the beginning of the earliest annual period presented in the
financial statements should be recognized as an adjustment to the opening retained earnings balance at that date. In
addition, if a retrospective transition is adopted, we may use hindsight in measuring and recognizing the compensation
cost. The adoption of ASU 2014-12 on January 1, 2016 did not have a material impact on our consolidated financial
statements.
In August 2014, the FASB issued ASU No. 2014-15, “Disclosure of Uncertainties about an Entity’s Ability to
Continue as a Going Concern”. The amendments in this update state that in connection with preparing financial
statements for each annual and interim reporting period, an entity’s management should evaluate whether there are
conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year
after the date that the financial statements are issued (or within one year after the date that the financial statements are
available to be issued, when applicable). The amendments in this update are effective for the annual reporting period
beginning after December 15, 2016 and for annual periods and interim periods thereafter. Early application is permitted.
The adoption of ASU 2014-15 is not expected to have a material impact on our consolidated financial statements.
In February 2015, the FASB ASU No. 2015-2 “Amendments to the Consolidation Analysis” which issued
guidance that changes the evaluation criteria for consolidation and related disclosure requirements. This guidance
introduces evaluation criteria specific to limited partnerships and other similar entities, as well as amends the criteria for
evaluating variable interest entities with which the reporting entity is involved and certain investment funds. The
guidance will become effective for us at the beginning of our first quarter of Fiscal 2017. We do not expect the adoption
of this guidance will have a material impact on our consolidated financial statements.
In April 2015, the FASB issued ASU No. 2015-3, Interest - Imputation of Interest, requiring that debt issuance
costs be presented in the balance sheet as a deduction from the carrying amount of the related liability, rather than as a
deferred charge. The updated guidance is effective retroactively for financial statements covering fiscal years beginning
after December 15, 2015, and interim periods within those fiscal years, which for us is the first quarter of fiscal 2016.
Early adoption was permitted and we elected early adoption. As of December 31, 2015, we have $21,000 of unamortized
debt issuance costs.
26
In July 2015, the FASB issued ASU No. 2015-11 “Simplifying the Measurement of Inventory” which requires
an entity to measure inventory balances at the lower of cost and net realizable value. Net realizable value is the estimated
selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and
transportation. Subsequent measurement is unchanged for inventory measured using LIFO or the retail inventory method.
The amendments in this update are effective for the annual period ending after December 15, 2016, and for annual
periods and interim periods thereafter. We are currently assessing the impact of this update, and believe that its adoption
on January 1, 2017 will not have a material impact on our consolidated financial statements.
In January 2016, the FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and
Financial Liabilities. The new standard requires equity investments to be measured at fair value with changes in fair
value recognized in net income, simplifies the impairment assessment of equity investments without readily determinable
fair values, eliminates the requirement to disclose the methods and significant assumptions used to estimate fair value,
requires use of the exit price notion when measuring fair value, requires separate presentation in certain financial
statements, and requires an evaluation of the need for a valuation allowance on a deferred tax asset related to available-
for-sale securities. The new standard is effective for fiscal years beginning after December 15, 2017, which for us is the
first quarter of fiscal 2018. We are currently evaluating the impact this ASU will have on its consolidated financial
statements and related disclosures.
In February 2016, the FASB ASU No. 2016-02, Leases. The new standard will require most leases to be
recognized on the balance sheet which will increase reported assets and liabilities. Lessor accounting remains
substantially similar to current guidance. The new standard is effective for annual and interim periods in fiscal years
beginning after December 15, 2018, which for us is the first quarter of fiscal 2019 and mandates a modified retrospective
transition method. We are currently assessing the impact of this update, and believe that its adoption will not have a
material impact on our consolidated financial statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Like virtually all commercial enterprises, we can be exposed to the risk (“market risk”) that the cash flows to be
received or paid relating to certain financial instruments could change as a result of changes in interest rate, exchange
rates, commodity prices, equity prices and other market changes.
Our operations are not subject to risks of material foreign currency fluctuations, nor do we use derivative
financial instruments in our investment practices. We place our marketable investments in instruments that meet high
credit quality standards. We do not expect material losses with respect to our investment portfolio or excessive exposure
to market risks associated with interest rates. The impact on our results of one percentage point change in short-term
interest rates would not have a material impact on our future earnings, fair value, or cash flows related to investments in
cash equivalents or interest-earning marketable securities. Our Notes bear interest at fixed rates, and therefore are not
subject to market risk.
Current economic conditions may cause a decline in business and consumer spending which could adversely
affect our business and financial performance including the collection of accounts receivables, realization of inventory
and recoverability of assets. In addition, our business and financial performance may be adversely affected by current and
future economic conditions, including a reduction in the availability of credit, financial market volatility and recession.
27
Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
ProPhase Labs, Inc.
We have audited the accompanying consolidated balance sheets of ProPhase Labs, Inc. and Subsidiaries (the
“Company”) as of December 31, 2015 and 2014, and the related consolidated statements of operations, stockholders’
equity, and cash flows for each of the years in the three-year period ended December 31, 2015. The financial statements
are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to
perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control
over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the
purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.
Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated
financial position of ProPhase Labs, Inc. and Subsidiaries as of December 31, 2015 and 2014, and the consolidated
results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2015, in
conformity with accounting principles generally accepted in the United States of America.
/s/ EisnerAmper LLP
Iselin, New Jersey
March 29, 2016
28
PROPHASE LABS, INC AND SUBSIDARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
December 31,
2015
2014
ASSETS
Cash and cash equivalents (Note 2)............................................................ $
Accounts receivable, net (Note 2) ..............................................................
Inventory (Note 2) .....................................................................................
Prepaid expenses and other current assets (Note 2) .....................................
Total current assets ................................................................................
Property, plant and equipment, net of accumulated depreciation of $4,708
and $4,341, respectively (Note 3) ..............................................................
Total assets ........................................................................................... $
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES
Accounts payable ...................................................................................... $
Accrued advertising and other allowances (Note 2) ....................................
Other current liabilities (Notes 4 and 5) .....................................................
Total current liabilities...........................................................................
Other long term obligation (Note 5) ...........................................................
Secured promissory notes, net (Note 5) ......................................................
Total long term liabilities .......................................................................
1,664 $
4,000
4,331
1,884
11,879
2,950
14,829 $
990 $
2,508
1,036
4,534
-
1,466
1,466
COMMITMENTS AND CONTINGENCIES (Note 9) ...............................
-
STOCKHOLDERS’ EQUITY
Preferred stock, authorized 1,000,000, $.0005 par value, no shares issued
(Note 6) ....................................................................................................
Common stock, $.0005 par value; authorized 50,000,000; issued:
26,313,593 and 25,125,113 shares, respectively (Note 6) ...........................
Additional paid-in-capital ..........................................................................
Accumulated deficit ..................................................................................
Treasury stock, at cost, 9,232,817 shares (Note 6) ......................................
Total stockholders’ equity......................................................................
Total liabilities and stockholders’ equity ................................................ $
-
13
56,377
(16,819)
(30,742)
8,829
14,829 $
See accompanying notes to consolidated financial statements
2,926
5,836
3,292
1,404
13,458
2,599
16,057
667
3,685
889
5,241
100
-
100
-
-
13
54,664
(13,219)
(30,742)
10,716
16,057
29
PROPHASE LABS, INC & SUBSIDARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Net sales (Notes 2 and 12) .................................... $
Cost of sales (Note 2) ...........................................
Gross profit ..........................................................
Operating expenses:
Sales and marketing.........................................
Administrative.................................................
Research and development (Note 2) .................
Impairment charge (Note 10) ...........................
Total operating expense ...................................
Income (loss) from operations ..............................
Interest income .....................................................
Interest expense (Note 5) ......................................
Income (loss) from operations before taxes ...........
Income tax (benefit) (Note 8)................................
Net income (loss) ................................................. $
Basic income (loss) per share:
2015
Year Ended December 31,
2014
2013
20,604 $
8,426
12,178
7,698
6,986
1,078
-
15,762
(3,584 )
2
(18 )
(3,600 )
-
(3,600 ) $
22,070 $
7,891
14,179
8,965
8,143
1,322
3,577
22,007
(7,828)
4
(10)
(7,834)
-
(7,834) $
25,032
8,361
16,671
9,538
5,893
824
-
16,255
416
2
(13)
405
-
405
Net income (loss) ............................................
$
(0.22 ) $
(0.47) $
0.03
Diluted income (loss) per share:
Net income (loss) ............................................
$
(0.22 ) $
(0.47) $
0.03
Weighted average common shares outstanding:
Basic ...............................................................
Diluted ............................................................
16,398
16,398
16,773
16,773
15,839
16,276
See accompanying notes to consolidated financial statements
30
PROPHASE LABS, INC & SUBSIDARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except share data)
Common Stock
Shares
Outstanding,
Additional Retained
Net of Shares of Par
Paid-In
Treasury Stock Value Capital
Earnings Treasury
(Deficit) Stock
Total
Balance at December 31, 2012.......................
15,720,062 $
11 $ 42,867 $ (5,790) $(25,637) $ 11,451
Net income ....................................................
Proceeds from exercise of stock options .........
Share-based compensation expense ................
Common stock granted pursuant to a
compensation plan .........................................
Common stock issued (Note 6) ......................
Balance at December 31, 2013.......................
Net loss .........................................................
Share-based compensation expense ................
Common stock issued for services
performed (Note 5) ........................................
Common stock granted pursuant to a
compensation plan .........................................
Common stock issued (Note 6) ......................
Treasury stock acquired pursuant to a
settlement agreement (Note 6) .......................
Balance at December 31, 2014.......................
Net loss .........................................................
Issuance of warrants in connection with
secure promissory notes (Note 5) ...................
Share-based compensation expense ................
Common shares issued ................................
Balance at December 31, 2015.......................
25,000
405
27
160
405
27
160
66,470
289,474
16,101,006
109
444
43,607
109
444
(5,385) (25,637) 12,596
11
300,000
(7,834)
472
393
128,327
3,259,727
179
4,908
2
(7,834)
472
393
179
4,910
(3,896,764)
15,892,296
5,105
-
54,664 (13,219) (30,742) 10,716
(5,105)
13
(3,600)
(3,600)
1,188,480
17,080,776 $
14
135
1,564
13 $ 56,377 $ (16,819) $(30,742) $ 8,829
14
135
1,564
See accompanying notes to consolidated financial statements
31
PROPHASE LABS, INC & SUBSIDARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Cash flows from operating activities:
Net (loss) income .................................................... $
Adjustments to reconcile net (loss) income to net
cash provided by (used in) operating activities:
Depreciation ..........................................................
Gain on the sale of fixed assets ..............................
Impairment charge.................................................
Share-based compensation expense ........................
Changes in operating assets and liabilities:
Accounts receivable..............................................
Inventory ..............................................................
Prepaid expenses and other assets .........................
Accounts payable .................................................
Accrued advertising and other allowances .............
Other operating assets and liabilities, net ...............
Net cash provided by (used in) operating
activities ................................................................
Cash flows from investing activities:
Capital expenditures ..............................................
Proceeds from the sale of fixed assets ....................
Net cash flows used in investing activities .............
Cash flows from financing activities:
Proceeds from the exercise of stock options ...........
Proceeds from issuance of common stock ..............
Payment of long term obligation ............................
Secured promissory note issuance costs .................
Proceeds from secured promissory note .................
Net cash provided by financing activities ..............
2015
Year Ended December 31,
2014
2013
(3,600 ) $
(7,834) $
367
(9 )
-
135
1,836
(1,039 )
(480 )
323
(1,177 )
147
277
(6)
3,577
1,044
(517)
(771)
397
(344)
838
123
405
243
-
-
269
90
(470)
886
(285)
87
(88)
(3,497 )
(3,216)
1,137
(718 )
9
(709 )
-
1,564
(100 )
(20 )
1,500
2,944
(312)
6
(306)
-
4,910
(100)
-
-
4,810
Net increase (decrease) in cash and cash equivalents
(1,262 )
1,288
Cash and cash equivalents at beginning of year ........
2,926
1,638
Cash and cash equivalents at end of year.................. $
1,664 $
2,926 $
Supplemental disclosures of cash flow information:
Issuance of warrants in connection with secured
promissory notes ................................................... $
Treasury stock acquired pursuant to a settlement
agreement.............................................................. $
Interest paid .......................................................... $
Common stock issued, in lieu of cash, as
payment for service ............................................... $
14 $
- $
6 $
- $
- $
5,105 $
10 $
393 $
See accompanying notes to consolidated financial statements
32
(442)
-
(442)
27
444
(100)
-
-
371
1,066
572
1,638
-
-
13
-
PROPHASE LABS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – ORGANIZATION AND BUSINESS
ProPhase Labs, Inc (“we”, “us” or the “Company”) was initially organized as a corporation in Nevada in July
1989. Effective June 18, 2015, we changed our state of incorporation from the State of Nevada to the State of Delaware.
We are a manufacturer, marketer and distributor of a diversified range of homeopathic and health care 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 based health products along with supplement, personal care and cosmeceutical products.
Our primary business is the manufacture, distribution, marketing and sale of OTC health care and cold remedy
products to consumers through national chain, regional, specialty and local retail stores. Our flagship brand is Cold-
EEZE ®and our principal product is Cold-EEZE® cold remedy zinc gluconate lozenges, proven in clinical studies to
reduce the duration and severity of symptoms of the common cold. In addition to Cold-EEZE® cold remedy lozenges, we
market and distribute non-lozenge forms of our proprietary zinc gluconate formulation, (i) Cold-EEZE® cold remedy
QuickMelts® and (ii) Cold-EEZE® cold remedy Oral Spray. Each of these new Cold-EEZE® QuickMelts® products are
based on our proprietary zinc gluconate formulation in combination with certain natural (i) immune system support, (ii)
energy, (iii) sleep and relaxation, and/or (iv) cold and flu symptom relieving active ingredients. In Fiscal 2015, we
introduced three new Cold-EEZE® product line extensions: (i) a Cold-EEZE® Multi-Symptom Relief for Cold and Flu
lozenge, (ii) a Cold-EEZE® Daytime and Nighttime Multi-Symptom Relief in liquid form for each of adults and children,
and (iii) Cold-EEZE® Natural Allergy Relief caplets for indoor and outdoor allergies. Shipments for these three new
Cold-EEZE® product line extensions began in the third quarter of Fiscal 2015. We also manufacture, market and
distribute organic cough drops and a Vitamin C supplement, and perform contract manufacturing services of cough drop
and other OTC cold remedy products for third parties.
Cold-EEZE® is an established product in the health care and cold remedy market. For Fiscal 2015, 2014 and
2013, our revenues have come principally from our OTC health care and cold remedy products. For Fiscal 2015, 2014
and 2013, our net sales for each period were related to markets in the United States.
Our business is subject to seasonal variations thereby impacting liquidity and working capital during the course
of our fiscal year.
We use a December 31 year-end for financial reporting purposes. References herein to the fiscal year ended
December 31, 2015 shall be the term “Fiscal 2015” and references to other “Fiscal” years shall mean the year, which
ended on December 31 of the year indicated. The term the “we”, “us: or the “Company” as used herein also refer, where
appropriate, to the Company, together with its subsidiaries unless the context otherwise requires.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements (“Financial Statements”) include the accounts of the Company and its
wholly owned subsidiaries and Phusion Laboratories LLC (“Phusion”), a variable interest entity (see Note 10). All
intercompany transactions and balances have been eliminated.
Seasonality of the Business
Our net sales are derived principally from our OTC health care and 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 and flu rises as a consequence of the change in
weather and other factors. We generally experience in the third and fourth quarter higher levels of net sales along with a
corresponding increase in marketing and advertising expenditures designed to promote its products during the cold
season. Revenues and related marketing costs are generally at their lowest levels in the second quarter when consumer
demand generally declines. We track health and wellness trends and develop retail promotional strategies to align our
production scheduling, inventory management and marketing programs to optimize consumer purchases.
33
PROPHASE LABS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (continued)
As a consequence of the seasonally of our business, we realize variations in operating results and demand for
working capital from quarter to quarter. As of December 31, 2015, we had working capital of approximately $7.3 million
and we have 2,450,000 shares of our common stock, $.0005 par value (“Common Stock”) available for sale under our
2015 equity line of credit (see Note 6). Additionally, on December 11, 2015, we executed two Subscription Agreements
(the “Subscription Agreements”) with the investors named therein (the “Investors”) providing for the purchase of 12%
Secured Promissory Notes – Series A (“Notes”) in the aggregate principal amount of up to $3.0 million and warrants to
purchase shares of our Common Stock ( the “Warrants”). We issued Notes in the amount of $1,500,000 and 51,000
Warrants, at an exercise price of $1.35 per share (see Note 5). We believe our current working capital and available
equity line of credit and an available $1.5 million in additional debt financing through the Subscription Agreements is an
acceptable and adequate level of working capital to support our business for at least the next twelve months ending
March 31, 2017.
Use of Estimates
The preparation of financial statements and the accompanying notes thereto, in conformity with generally
accepted accounting principles in the United States of America (“GAAP”), requires management to make estimates and
assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and reported amounts of revenues and expenses during the respective reporting periods.
Examples include the provision for bad debt, sales returns and allowances, inventory obsolescence, useful lives of
property and equipment and intangible assets, impairment of property and equipment and intangible assets, income tax
valuations and assumptions related to accrued advertising. When providing for the appropriate sales returns, allowances,
cash discounts and cooperative incentive promotion costs (“Sales Allowances”), we apply a uniform and consistent
method for making certain assumptions for estimating these provisions. These 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-EEZE® cold remedy lozenges, utilizes a proprietary zinc gluconate 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® cold remedy lozenges, we market and distribute a variety of Cold-EEZE® cold remedy QuickMelts®, a
Cold-EEZE® cold remedy Oral Spray, Cold-EEZE® Natural Allergy Relief caplets and Cold-EEZE® Daytime and
Nighttime Multi-Symptom Relief in a liquid form. We also manufacture, market and distribute an organic cough drop
and a Vitamin C supplement. Each of the Cold-EEZE® cold remedy Oral Spray and QuickMelts® products, Cold-EEZE®
Natural Allergy Relief caplets, Cold-EEZE® liquid forms and organic lozenge products carry shelf-life expiration dates
for which we aggregate such new product market experience data and update our 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.
34
PROPHASE LABS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (continued)
Inventory
Inventory is valued at the lower of cost, determined on a first-in, first-out basis (FIFO), or market. Inventory
items are analyzed to determine cost and the market value and appropriate valuation adjustments are established. At
December 31, 2015 and 2014, the financial statements include adjustments to reduce inventory for excess or obsolete
inventory of $501,000 and $797,000, respectively. The components of inventory are as follows (in thousands):
December 31,
2015
2014
Raw materials .................................. $
Work in process ...............................
Finished goods .................................
$
1,303 $
530
2,498
4,331 $
798
418
2,076
3,292
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. We use the straight-line method in computing depreciation
for financial reporting purposes. The depreciation expense is computed in accordance with the estimated asset lives (see
Note 3).
Concentration of Risks
Future revenues, costs, margins and profits will continue to be influenced by our ability to maintain our
manufacturing availability and capacity together with our marketing and distribution capabilities and the requirements
associated with the development of OTC and other personal care products in order to continue to compete on a national
and/or international level.
Our business is subject to federal and state laws and regulations adopted for the health and safety of users of our
products. Our OTC cold remedy products are subject to regulations by various federal, state and local agencies, including
the Food and Drug Administration (“FDA”) and, as applicable, the Homeopathic Pharmacopoeia of the United States.
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 December 31, 2015, our
cash and cash equivalents were $1.7 million and our bank balance was $2.2 million. Of the total bank balance, $660,000
was covered by federal depository insurance and $1.6 million was uninsured.
Trade accounts receivable potentially subjects us to credit risk. 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 national chain, regional, specialty and local retail stores (see Note 12). During Fiscal
2015, 2014 and 2013, effectively all of our net revenues were related to domestic markets.
Our revenues are principally generated from the sale of OTC health care and cold remedy products which
approximated 90%, 94% and 94% of total revenues for Fiscal 2015, 2014 and 2013, respectively. A significant portion of
our business is highly seasonal, which causes major variations in operating results from quarter to quarter. The first and
fourth quarters generally represent the largest sales volume for the OTC health care and cold remedy products.
Raw materials used in the production of the products are available from numerous sources. Certain raw material
active ingredients used in connection with Cold-EEZE® products are purchased from a single unaffiliated supplier.
Should the relationship terminate or the vendor become unable to supply material, we believe that the current
contingency plans would prevent a termination from materially affecting our operations. However, if the relationship was
terminated, there may be delays in production of our products until an acceptable replacement supplier is located.
35
PROPHASE LABS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (continued)
Long-lived Assets
We review the 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.
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.
Our return policy accommodates returns for (i) discontinued products, (ii) store closings and (iii) products that
have reached or exceeded their designated expiration date. 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 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 December 31, 2015 and 2014, we included a provision for sales allowances of $83,000 and $129,000,
respectively, which are reported as a reduction to account receivables. Additionally, accrued advertising and other
allowances as of December 31, 2015 include $1.4 million for estimated future sales returns and $786,000 for cooperative
incentive promotion costs. As of December 31, 2014, accrued advertising and other allowances include $1.5 million for
estimated future sales returns and $2.1 million for cooperative incentive promotion costs.
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.
36
PROPHASE LABS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (continued)
Stock and stock options for purchase of our Common Stock have been granted to both employees and non-
employees pursuant to the terms of certain agreements and stock option plans (see Note 6). Stock options are exercisable
during a period determined by us, but in no event later than ten years from the date granted. In Fiscal 2015, 2014 and
2013, we charged to operations $135,000, $1.0 million and $269,000, respectively, for share-based compensation
expense for the aggregate fair value of stock and stock grants issued, and vested stock options earned.
Variable Interest Entity
The Joint Venture, of which we own a 50% membership interest, qualifies as a variable interest entity (“VIE”)
and we have consolidated the Phusion joint venture (see Note 10).
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
Fiscal 2015, 2014 and 2013 were $8.5 million, $10.9 million and $10.8 million, respectively. At December 31, 2015 and
2014, prepaid expenses and other current assets included $854,000 and $885,000, respectively, relating to prepaid
deposits for advertising and promotion programs scheduled principally for the first quarter of Fiscal 2016 and 2015,
respectively.
Research and Development
Research and development costs are charged to operations in the period incurred. Expenditures for Fiscal 2015,
2014 and 2013 were $1.1 million, $1.3 million, and $824,000, respectively. For Fiscal 2015, Fiscal 2014 and Fiscal 2013,
research and development costs are related principally to new product development initiatives and costs associated with
OTC health care and 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 net
current and non-current deferred tax asset is being provided (see Note 8).
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.
The major jurisdiction for which we file income tax returns is the United States.
Fair Value of Financial Instruments
Cash and cash equivalents, accounts receivable, accounts payable, accrued expense and notes payable are
reflected in the Financial Statements at carrying value which approximates fair value.
37
PROPHASE LABS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (continued)
Recently Issued Accounting Standards
In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-09, “Revenue from
Contracts with Customers”, on revenue recognition. The new standard provides for a single five-step model to be applied
to all revenue contracts with customers as well as requires additional financial statement disclosures that will enable users
to understand the nature, amount, timing and uncertainty of revenue and cash flows relating to customer contracts.
Companies have an option to use either a retrospective approach or cumulative effect adjustment approach to implement
the standard. As amended by ASU No. 2015-14 issued in August 2015, this ASU is effective for fiscal years and interim
periods within those years beginning after December 15, 2017, with early adoption permitted. We are currently assessing
the impact of this update, and believe that its adoption will not have a material impact on our consolidated financial
statements.
In June 2014, the FASB issued ASU No. 2014-12, “Accounting for Share-Based Payments When the Terms of
an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period”. The amendments
in this update require that a performance target that affects vesting and that could be achieved after the requisite service
period be treated as a performance condition. Companies should apply existing guidance in ASC 718, “Compensation -
Stock Compensation”, as it relates to awards with performance conditions that affect vesting to account for such awards.
The amendments in this update will be effective as of January 1, 2016. Earlier adoption is permitted. We may apply the
amendments in this update either: (1) prospectively to all awards granted or modified after the effective date; or (2)
retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual
period presented in the financial statements and to all new or modified awards thereafter. If a retrospective transition is
adopted, the cumulative effect of applying this update as of the beginning of the earliest annual period presented in the
financial statements should be recognized as an adjustment to the opening retained earnings balance at that date. In
addition, if a retrospective transition is adopted, we may use hindsight in measuring and recognizing the compensation
cost. The adoption of ASU 2014-12 on January 1, 2016 did not have a material impact on our consolidated financial
statements.
In August 2014, the FASB issued ASU No. 2014-15, “Disclosure of Uncertainties about an Entity’s Ability to
Continue as a Going Concern”. The amendments in this update state that in connection with preparing financial
statements for each annual and interim reporting period, an entity’s management should evaluate whether there are
conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year
after the date that the financial statements are issued (or within one year after the date that the financial statements are
available to be issued, when applicable). The amendments in this update are effective for the annual reporting period
beginning after December 15, 2016 and for annual periods and interim periods thereafter. Early application is permitted.
The adoption of ASU 2014-15 is not expected to have a material impact on our consolidated financial statements.
In February 2015, the FASB ASU No. 2015-2 “Amendments to the Consolidation Analysis” which issued
guidance that changes the evaluation criteria for consolidation and related disclosure requirements. This guidance
introduces evaluation criteria specific to limited partnerships and other similar entities, as well as amends the criteria for
evaluating variable interest entities with which the reporting entity is involved and certain investment funds. The
guidance will become effective for us at the beginning of our first quarter of Fiscal 2017. We do not expect the adoption
of this guidance will have a material impact on our consolidated financial statements.
In April 2015, the FASB issued ASU No. 2015-3, Interest - Imputation of Interest, requiring that debt issuance
costs be presented in the balance sheet as a deduction from the carrying amount of the related liability, rather than as a
deferred charge. The updated guidance is effective retroactively for financial statements covering fiscal years beginning
after December 15, 2015, and interim periods within those fiscal years, which for us is the first quarter of fiscal 2016.
Early adoption was permitted and we elected early adoption. As of December 31, 2015, we have $21,000 of unamortized
debt issuance costs.
In July 2015, the FASB issued ASU No. 2015-11 “Simplifying the Measurement of Inventory” which requires
an entity to measure inventory balances at the lower of cost and net realizable value. Net realizable value is the estimated
selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and
transportation. Subsequent measurement is unchanged for inventory measured using LIFO or the retail inventory method.
The amendments in this update are effective for the annual period ending after December 15, 2016, and for annual
periods and interim periods thereafter. We are currently assessing the impact of this update, and believe that its adoption
on January 1, 2017 will not have a material impact on our consolidated financial statements.
38
PROPHASE LABS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (continued)
In January 2016, the FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and
Financial Liabilities. The new standard requires equity investments to be measured at fair value with changes in fair
value recognized in net income, simplifies the impairment assessment of equity investments without readily determinable
fair values, eliminates the requirement to disclose the methods and significant assumptions used to estimate fair value,
requires use of the exit price notion when measuring fair value, requires separate presentation in certain financial
statements, and requires an evaluation of the need for a valuation allowance on a deferred tax asset related to available-
for-sale securities. The new standard is effective for fiscal years beginning after December 15, 2017, which for us is the
first quarter of fiscal 2018. We are currently evaluating the impact this ASU will have on its consolidated financial
statements and related disclosures.
In February 2016, the FASB ASU No. 2016-02, Leases. The new standard will require most leases to be
recognized on the balance sheet which will increase reported assets and liabilities. Lessor accounting remains
substantially similar to current guidance. The new standard is effective for annual and interim periods in fiscal years
beginning after December 15, 2018, which for us is the first quarter of fiscal 2019 and mandates a modified retrospective
transition method. We are currently assessing the impact of this update, and believe that its adoption will not have a
material impact on our consolidated financial statements.
NOTE 3 – PROPERTY, PLANT AND EQUIPMENT
The components of property and equipment are as follows (in thousands):
December 31,
2015
2014
Estimated Useful Life
Land ................................................ $
Buildings and improvements ............
Machinery and equipment ................
Computer equipment and software ....
Furniture and fixtures .......................
Less: Accumulated depreciation .......
$
504 $
3,016
3,623
319
196
7,658
4,708
2,950 $
10 - 39 years
3 - 7 years
3 - 5 years
5 years
504
3,016
2,933
291
196
6,940
4,341
2,599
Depreciation expense for Fiscal 2015, 2014 and 2013 was $367,000, $277,000 and $243,000, respectively.
NOTE 4 – OTHER CURRENT LIABILITIES
At December 31, 2015 and 2014, other current liabilities include $484,000 and $372,000, respectively, related to
accrued compensation and $100,000 and $200,000, respectively, related to the Godfrey Settlement Agreement (see Note
5).
NOTE 5 – SECURED PROMISSORY NOTES AND OTHER OBLIGATIONS
Secured Promissory Notes
On December 11, 2015, we executed two Subscription Agreements with Investors providing for the purchase of the
Notes in the aggregate principal amount of up to $3.0 million and Warrants. The Warrants grant the Investors the right to
purchase 17,000 shares of common stock for every $500,000 of principal amount of Notes purchased by the Investors.
39
PROPHASE LABS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 – SECURED PROMISSORY NOTES AND OTHER OBLIGATIONS - (continued)
Notes in the amount of $1,500,000 and 51,000 Warrants, at an exercise price of $1.35 per share, which is equal
to the closing price of our Common Stock on the date of investment, were issued by the Company and its wholly-owned
subsidiaries Pharmaloz Manufacturing Inc. and Quigley Pharma Inc. (collectively, the “Obligors”) and funded on
December 11, 2015. We incurred loan origination costs of $22,000 which was recorded as a reduction of the Notes and
the origination costs are charged to interest expense over the term of the loan. The Warrants have an exercise term equal
to three years and are exercisable commencing on the date of issuance. The fair value of the Warrants at the date of grant
was $14,000 which is recorded as a reduction of the Notes and is charged to interest expense over the term of the loan
(see Note 6). At December 31, 2015, the $1.5 million Notes are reported net of $34,000 of the unamortized interest for
the loan origination costs and unamortized interest for the Warrants. At December 31, 2015, other current liabilities
include $10,000 for accrued interest under the terms of the Notes.
The Notes are secured by all of our tangible and intangible assets. The Notes bear interest at the rate of 12% per
annum, payable semi-annually and the principal is due and payable on June 15, 2017. The Notes may be pre-paid at any
time prior to maturity without penalty. The effective interest, inclusive of the Warrant and loan origination costs, is
14.3% per annum. We charged to interest expense $11,000 for the period December 11, 2015 to December 31, 2015 in
connection with the Notes.
The offers and sales of the Notes and Warrants were made without registration under the Securities Act, or the
securities laws of certain states, in reliance on the exemptions provided by Section 4(a)(2) of the Securities Act and
Regulation D under the Securities Act and in reliance on similar exemptions under applicable state laws.
In connection with the issuance of the Notes, we entered into a security agreement with John E. Ligums, Jr. (an
Investor and a shareholder in the Company), as collateral agent for the Investors (the “Security Agreement”) to secure the
timely payment and performance in full of the Obligors’ obligations pursuant to the Notes. Under the Security
Agreement, the Obligors grant to the Collateral Agent, for the benefit of the Investors a lien upon and security interest in
the property and assets listed as collateral in the Security Agreement, including without limitation, all of the Obligors’
personal property, inventory, equipment, general intangibles, cash and cash equivalents, and proceeds.
Godfrey Settlement Agreement
In November 2004 we commenced an action against John C. Godfrey, Nancy Jane Godfrey, and Godfrey
Science and Design, Inc. (together the “Godfreys”) for injunctive relief regarding the ownership of the Cold-EEZE®
trademark. The Godfreys subsequently asserted against us counterclaims and sought monetary damages and injunctive
and declaratory relief relative to the Cold-EEZE® trademark and other intellectual property.
On December 20, 2012, we and the Godfreys, including the Estate of Nancy Jane Godfrey, entered into a
Settlement Agreement and Mutual General Release (the “Godfrey Settlement Agreement”), pursuant to which we
resolved all disputes, including claims asserted by us and counterclaims asserted against us in the action. Pursuant to the
terms of the Godfrey Settlement Agreement, we paid the Godfreys $2.1 million in December 2012 and we agreed to
make four additional annual payments of $100,000 due in December of each of the next four years. Each annual payment
in the amount of $100,000 accrues interest at the per annum rate of 3.25%. The annual installment of $107,000, $110,000
and $113,000, inclusive of accrued interest, were paid in December 2015, 2014 and 2013, respectively. Under the
Godfrey Settlement Agreement, the Godfreys assigned, transferred and conveyed to us all of their right, title, and interest
in U.S. Trademark Registration No. 1,838,542 for the trademark Cold-EEZE®, among other intellectual property
associated with such trademark. At December 31, 2015, other current liabilities include $100,000, for the remaining
annual installment payment due in Fiscal 2016.
The future obligations of our Notes and Settlement Agreement over the next five years are as follows:
Godfrey
Settlement
Agreement
Year
2016 ........................
$
2017 ........................
2018 ........................
2019 ........................
2020 ........................
$
Total ........................
100 $
-
-
-
-
100 $
40
Notes
Total
- $
1,500
-
-
-
1,500 $
100
1,500
-
-
-
1,600
PROPHASE LABS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 – STOCKHOLDERS’ EQUITY AND STOCK COMPENSATION
Our authorized capital stock consists of 50 million shares of Common Stock and 1 million shares of preferred
stock, $.0005 par value (“Preferred Stock”).
Preferred Stock
On June 16, 2015, our shareholders approved the change our state of incorporation from the State of Nevada to
the State of Delaware pursuant to a plan of conversion (“Conversion Plan”) and the filing of a certificate of incorporation
in the State of Delaware. The Preferred Stock authorized under our certificate of incorporation may be issued from time
to time in one or more series. As of December 31, 2015, no shares of Preferred Stock have been issued. Our board of
directors has the full authority permitted by law to establish, without further stockholder approval, one or more series and
the number of shares constituting each such series and to fix by resolution voting powers, preferences and relative,
participating, optional and other special rights of each series of Preferred Stock, and the qualifications, limitations or
restrictions thereof, if any. Subject to the limitation on the total number of shares of Preferred Stock that we have
authority to issue under our certificate of incorporation, the board of directors is also authorized to increase or decrease
the number of shares of any series, subsequent to the issue of that series, but not below the number of shares of such
series then-outstanding. In case the number of shares of any series is so decreased, the shares constituting such decrease
will resume the status that they had prior to the adoption of the resolution originally fixing the number of shares of such
series. We may amend from time to time our certificate of incorporation and bylaws to increase the number of authorized
shares of Preferred Stock or Common Stock or to make other changes or additions.
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 Rights Agreement was subsequently
amended effective each of (i) May 23, 2008, (ii) August 18, 2009 and (iii) June 2014. The Rights Agreement, as
amended and restated, provides that each Right entitles the stockholder of record to purchase from the Company that
number of common shares of Common Stock 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 of
Common Stock, 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 of Common Stock (such person, the
“acquirer”). The Rights Agreement, as amended and restated, allows for an exemption for Ted Karkus, our Chairman and
Chief Executive Officer, to acquire up to 20% of our Common Stock without our Board of Directors declaring a dividend
distribution.
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 and restated, 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 and retstated, is June 18, 2024.
2012 Equity Line of Credit
On November 21, 2012, we entered into the equity line of credit agreement (such arrangement, the “2012 Equity
Line”) with Dutchess Opportunity Fund II, LP (“Dutchess”) whereby Dutchess committed to purchase, subject to certain
restrictions and conditions, up to 2,500,000 shares of our Common Stock, over a period of 36 months from the first
trading day following the effectiveness of the registration statement registering the resale of shares purchased by
Dutchess pursuant to the 2012 Equity Line. On November 26, 2012, we filed a registration statement with the SEC to
register for sale for up to 2,500,000 shares of our Common Stock and the registration statement was deemed effective by
the SEC on December 12, 2012. We amended this registration statement effective May 29, 2014 to withdraw and remove
from registration all unissued and unsold shares. We also agreed with Dutchess to terminate the 2012 Equity Line as of
May 28, 2014.
During Fiscal 2013, we sold an aggregate of 289,474 shares of Common Stock to Dutchess under the and
pursuant to the 2012 Equity Line and we derived net proceeds of $445,000. During the period January 1, 2014 through
May 23, 2014, we sold an aggregate of 698,207 shares of Common Stock to Dutchess under and pursuant to the 2012
Equity Line and we derived net proceeds of $1.2 million. The sales of the shares under the 2012 Equity Line were
deemed to be exempt from registration under the Securities Act of 1933, as amended in reliance upon Section 4(2) (or
Regulation D promulgated thereunder).
41
PROPHASE LABS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 – STOCKHOLDERS’ EQUITY AND STOCK COMPENSATION - (continued)
2014 Equity Line of Credit
On May 28, 2014, we entered into a equity line of credit agreement (such arrangement, the “2014 Equity Line”)
with Dutchess whereby Dutchess committed to purchase, subject to certain restrictions and conditions, up to 3,000,000
shares of our Common Stock, over a period of 36 months from the effectiveness of the registration statement registering
the resale of shares purchased by Dutchess pursuant to the Investment Agreement. On May 29, 2014, we filed a
registration statement with the SEC to register for sale up to 3,000,000 shares of our Common Stock and the registration
statement was declared effective by the SEC on June 4, 2014.
During the period June 4, 2014 through September 30, 2014, we sold an aggregate of 2,561,520 shares of our
Common Stock to Dutchess under and pursuant to the 2014 Equity Line and we derived net proceeds of $3.7 million. In
June 2015, we sold an aggregate of 438,480 shares of our Common Stock to Dutchess under and pursuant to the 2014
Equity Line and we derived net proceeds of $524,000. The sales of the shares under the 2014 Equity Line were deemed
to be exempt from registration under the Securities Act of 1933, as amended in reliance upon Section 4(a)(2) (or
Regulation D promulgated thereunder). At June 30, 2015, there were no shares of our Common Stock available for sale
under the terms of the 2014 Equity Line. As a consequence of the utilization of the 2014 Equity Line, on July 23, 2015
we filed a post-effective amendment to the underlying registration statement for the 2014 Equity Line to terminate the
registration statement.
2015 Equity Line of Credit
On July 30, 2015, we entered into a new equity line of credit agreement (such arrangement, the “2015 Equity
Line”) with Dutchess. Pursuant to the 2015 Equity Line, Dutchess committed to purchase, subject to certain restrictions
and conditions, up to 3,200,000 shares of our Common Stock, over a period of 36 months from the effectiveness of the
registration statement registering the resale of shares purchased by Dutchess pursuant to the Investment Agreement.
We may, at our discretion, draw on the 2015 Equity Line from time to time, as and when we determine
appropriate in accordance with the terms and conditions of the 2015 Equity Line. The maximum number of shares that
we are entitled to put to Dutchess in any one draw down notice shall not exceed 500,000 shares with a purchase price
calculated in accordance with the 2015 Equity Line. We may deliver a notice for a subsequent put from time to time,
following the one day pricing period for the prior put.
The purchase price shall be set at ninety-five percent (95%) of the volume weighted average price (VWAP) of
the Common Stock during the one trading day immediately following our put notice. We have the right to withdraw all
or any portion of any put, except that portion of the put that has already been sold to a third party, including any portion
of a put that is below the minimum acceptable price set forth on the put notice, before the closing. In the event Dutchess
receives more than a five percent (5%) return on the net sales for a specific put, Dutchess must remit such excess
proceeds to us; however, in the event Dutchess receives less than a five percent (5%) return on the net sales for a specific
put, Dutchess will have the right to deduct from the proceeds of the put amount on the applicable closing date so
Dutchess’s return will equal five percent (5%).
There are put restrictions applied on days between the draw down notice date and the closing date with respect
to that particular put. During such time, we are entitled to deliver another draw down notice. In addition, Dutchess will
not be obligated to purchase shares if Dutchess’ total number of shares beneficially held at that time would exceed 4.99%
of the number of shares of Common Stock as determined in accordance with Rule 13d-1(j) of the Securities Exchange
Act of 1934, as amended. In addition, we are not permitted to draw on the facility unless there is an effective registration
statement to cover the resale of the shares.
Pursuant to the terms of the 2015 Equity Line, we are obligated to file one or more registrations statements with
the SEC to register the resale by Dutchess of the shares of Common Stock issued or issuable under the 2015 Equity Line.
In addition, we are obligated to use all commercially reasonable efforts to have the registration statement declared
effective by the SEC within 90 days after the registration statement is filed. On August 4, 2015, we filed a registration
statement for the underlying shares of the 2015 Equity Line with the SEC and the registration statement was declared
effective by the SEC on August 21, 2015.
42
PROPHASE LABS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 – STOCKHOLDERS’ EQUITY AND STOCK COMPENSATION - (continued)
During the period August 21, 2015 through December 31, 2015, we sold an aggregate of 750,000 shares of our
Common Stock to Dutchess under and pursuant to the 2015 Equity Line and we derived net proceeds of $1.0 million.
The sales of the shares under the 2015 Equity Line were deemed to be exempt from registration under the Securities Act
of 1933, as amended in reliance upon Section 4(2) (or Regulation D promulgated thereunder). At December 31, 2015 we
have 2,450,000 shares of our Common Stock available for sale, at our discretion, under the terms of the 2015 Equity Line
and covered pursuant to a registration statement.
The 2010 Equity Compensation Plan
On May 5, 2010, our shareholders approved the 2010 Equity Compensation Plan which was subsequently
amended, restated and approved by our shareholders on April 24, 2011 and further amended and approved by
shareholders on May 6, 2013 (the “2010 Plan”). The 2010 Plan provides that the total number of shares of Common
Stock that may be issued under the 2010 Plan is equal to 2.5 million shares, including 900,000 shares that are authorized
for issuance but unissued under the 1997 incentive stock option (“1997 Plan”). At December 31, 2014, there are
1,713,000 options outstanding under the 2010 Equity Compensation Plan (see “Stock Options” below).
Stock Options and Warrants Fair Value
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.
For Fiscal 2015, there were no options granted under the 2010 Plan. Pursuant to the terms of the Subscriptions
Agreements for the Notes (see Note 5), we issued 51,000 Warrants in December 2015. For Fiscal 2014 and 2013, we
granted, 147,500 and 420,500 options, respectively, to employees to acquire our Common Stock pursuant to the terms of
2010 Plan. Presented below is a summary of the terms of the grant of options and warrants:
Number of options granted .............................
Number of Warrants granted ..........................
Vesting period................................................
Maximum term of option or Warrants from
date of grant ...................................................
Exercise price per share .................................. $
Weighted average fair value per share of
options and Warrants granted during the year . $
2015
Year Ended December 31,
2014
-
51,000
none
147,500
-
none
2013
420,500
-
2 - 3 years
3 years
1.35 $
7 years
1.39
6 - 7 years
$1.48 - $1.65
0.26 $
0.59 $
0.56
We used the Black-Scholes option pricing model during Fiscal 2015, 2014 and 2013 to determine the fair value
of the stock options and warrants at the date of grant. Based upon our limited historical experience, we determined the
expected term of the stock option grants to be a range between 2.5 to 6.5 years, calculated using the “simplified” method
in accordance with the SEC Staff Accounting Bulletin 110. We use the “simplified” method since our historical data does
not provide a reasonable basis upon which to estimate expected term.
Presented below is a summary of assumptions used in determining the fair value of the stock options and
Warrants at the date of grant:
2015
Year Ended December 31,
2014
3.5 years 3.75 - 4.5 years
0.36%
0%
52.43% 47.33% - 82.09%
0.10%
0%
3 years
0.88%
0%
26.42%
2013
Expected option or Warrant life ......................
Weighted average risk free rate ......................
Dividend yield ...............................................
Expected volatility .........................................
43
PROPHASE LABS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 – STOCKHOLDERS’ EQUITY AND STOCK COMPENSATION - (continued)
The fair value of the stock options and Warrants at the time of the grant in Fiscal 2015, 2014 and 2013 was
$14,000, $87,000 and $237,000, respectively. For Fiscal 2015 and 2014 stock options and Warrants granted were not
subject to a vesting period. Additionally, the remaining vesting period for options originally issued in Fiscal 2010 of
200,000 was accelerated to be fully vested at December 31, 2014. The aggregate fair value of $217,000 for each of the
stock options granted in Fiscal 2014 and the accelerated vesting period of previously issued options of $255,000 were
charged to operations in Fiscal 2014. The stock options granted for Fiscal 2013 were subject to vesting such that the fair
value of the stock options granted is charged to operations over the vesting period. For Fiscal 2015, 2014 and 2013, we
charged to operations $135,000, $472,000 and $160,000, respectively, for share-based compensation expense for the
aggregate fair value of the vested stock options earned.
Stock Options
At December 31, 2014, of the options granted under the 2010 Equity Compensation Plan 1,709,250 were vested
and 3,750 are subject to vesting. At December 31, 2015, there are 19,659 options available for grant to purchase shares of
Common Stock that may be issued pursuant to the terms of the 2010 Plan.
A summary of the status of our stock options granted pursuant the 1997 Plan and the 2010 Plan as of December
31, 2015, 2014 and 2013 and changes during the years then ended is presented below (in thousands, except per share
data):
2015
Year Ended December 31,
2014
2013
Weighted
Average
Exercise
Price
Shares
Shares
Weighted
Average
Exercise
Price
Shares
Weighted
Average
Exercise
Price
Options outstanding - beginning of
year ...................................................... 1,740 $
-
-
(27)
Options outstanding - end of year ......... 1,713 $
Granted..............................................
Exercised ...........................................
Cancelled...........................................
1.40 1,638 $
-
148
-
-
(46)
13.50
1.21 1,740 $
1.60 1,307 $
420
1.39
-
(25)
(64)
9.50
1.40 1,638 $
1.72
1.64
1.08
4.53
1.60
Options granted and subject to future
vesting..................................................
4 $
1.48
263 $
1.54
884 $
1.32
Exercisable, at end of year .................... 1,709
20
Available for grant ................................
1,477
20
1,085
262
The unrecognized share-based compensation expense related to the options granted but not vested, (options to
acquire 3,750 shares) was $2,000 at December 31, 2015. These options subject to vesting (i) vest over the next year, (ii)
have a 7 year term from the date of grant, (iii) are exercisable at a weighted average price of $1.48 and (iv) the
unrecognized share-based compensation expense is expected to be recognized over a weighted average period of 4
months.
The following table summarizes information about stock options outstanding and stock options exercisable at
December 31, 2015 (in thousands, except remaining life and per share data):
Range of
Exercise Prices
Number
Outstanding
$0.87 - $1.17 ................
$1.36 - $1.65 ................
Total ............................
1,130
579
1,709
Weighted Average
Exercise Price Per Share
1.02
1.57
1.37
2.9 $
4.2 $
$
Options Outstanding and Exercisable
Weighted Average
Remaining
Contractual Life
There were no options exercised during Fiscal 2015 or 2014. The total intrinsic value of options exercised
during Fiscal 2013 was $12,000. The aggregate intrinsic value of (i) options outstanding, (ii) options outstanding and
expected to vest in the future and (iii) options outstanding and exercisable at December 31, 2015 was $563,000, zero and
$563,000, respectively.
44
PROPHASE LABS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 – STOCKHOLDERS’ EQUITY AND STOCK COMPENSATION - (continued)
Stock Option Exercises
There were no stock options exercised in Fiscal 2015 or 2014. For Fiscal 2013, we derived net proceeds of
$27,000, as a consequence of the exercise of options to acquire 25,000 of our Common Stock pursuant to the terms of our
2010 Option Plan.
Stock Grants and Other Issuances
In December 2014, we issued 300,000 shares of our Common Stock valued at $1.31 per share for an aggregate
of $393,000, as payment for a portion of the litigation costs incurred prior to December 31, 2014 related to the Settlement
Agreement (defined below). The 300,000 shares of our Common Stock 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.
In December 2014, the Compensation Committee of the Board of Directors granted Mr. Karkus 100,000 shares
of Common Stock, respectively, under the 2010 Plan valued at $139,000 as payment for a portion of his Fiscal 2014
bonus.
The 2010 Directors Equity Compensation Plan
On May 5, 2010, our shareholders approved the 2010 Directors’ Equity Compensation Plan which was
subsequently amended and approved by shareholders on May 6, 2013 (the “2010 Directors’ Plan). A 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 425,000 shares. In Fiscal 2015, 2014 and 2013 we granted zero, 28,327 and
16,470 shares, respectively, of our Common Stock valued at zero, $41,000 and $27,000, respectively, for director
compensation. At December 31, 2015, there are 147,808 shares of Common Stock that may be issued pursuant to the
terms of the 2010 Directors’ Equity Compensation Plan.
Treasury Stock Acquired Pursuant to a Settlement Agreement
Effective September 4, 2014, we consummated a definitive, global Settlement Agreement (“Settlement
Agreement”) resolving all of our litigation with certain of the Company’s former managers and with certain shareholders.
The cases that have been settled include ProPhase Labs, Inc. v. Quigley, et al., Court of Common Pleas of Bucks
County, Pennsylvania, Civ. A. No. 2010-08227; ProPhase Labs, Inc. v. Quigley, et al., Court of Common Pleas of Bucks
County, Pennsylvania, Civ. A. No. 2011-09815; the appeal filed by the plaintiff in the matter Quigley v. ProPhase Labs.
Inc.’s Officers and Directors, el al, Court of Common Pleas of Philadelphia County, December Term, 2011, No.
111200409; together with certain ancillary litigation.
The Settlement Agreement amicably resolved these matters and provided, in part, that the parties adverse to the
Company in the two Bucks County cases (i) returned to the Company 3,896,764 shares of the Company’s Common
Stock for which they are listed as the record owners to the Company; and (ii) paid $440,000 to the Company. In addition,
the Company paid $500,000 to the benefit of one of the defendants and $37,000 to a third party, to defray certain costs
and expenses associated with the Settlement Agreement. Exclusive of legal related costs, the payments received and the
payments made pursuant to the Settlement Agreement resulted in a net charge to administrative expense of $97,000 for
Fiscal 2014. Pursuant to the Settlement Agreement, the parties also have agreed to (i) a mutual release of all claims, (ii) a
standstill agreement whereby, for a period of ten years, the adverse parties will not acquire Company shares, and (iii) the
dismissal of all pending litigation involving the Company, its directors and affiliates on the one hand, and the other
parties.
The 3,896,764 shares of Common Stock received pursuant to the terms of the Settlement Agreement were
recorded as treasury stock and as an additional contribution to our additional paid-in capital, valued at $5.1 million, or
$1.31 per share, representing the fair value of the shares at September 4, 2014.
NOTE 7 – DEFINED CONTRIBUTION PLANS
We maintain the ProPhase Labs, Inc 401(k) Savings and Retirement Plan, a defined contribution plan for our
employees. Our contributions to the plan are based on the amount of the employee plan contributions and compensation.
Our contributions to the plan in Fiscal 2015, 2014 and 2013 were $134,000, $101,000 and $100,000, respectively.
45
PROPHASE LABS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 – INCOME TAXES
The components of the provision (benefit) for income taxes, in the consolidated statements of operations are as
follows (in thousands):
Current
Federal ...................................................... $
State..........................................................
Deferred
Federal ......................................................
State..........................................................
Total
$
Income taxes from continuing operations
before valuation allowance ............................. $
Change in valuation allowance .......................
Income tax (benefit) ..................................
Total .............................................................. $
2015
Year Ended December 31,
2014
2013
- $
-
-
(1,403)
(73)
(1,476)
(1,476) $
(1,476) $
1,476
-
- $
- $
-
-
(2,471 )
(74 )
(2,545 )
(2,545 ) $
(2,545 ) $
2,545
-
- $
-
-
-
1,216
(999)
217
217
217
(217)
-
-
A reconciliation of the statutory federal income tax expense (benefit) to the effective tax is as follows (in
thousands):
2015
Year Ended December 31,
2014
2013
Statutory rate – federal ................................... $
State taxes, net of federal benefit ....................
Permanent differences and other .....................
Income tax from continuing operation
before valuation allowance ..........................
(1,224) $
(305)
53
(2,662 ) $
(51 )
168
(1,476)
(2,545 )
138
17
62
217
Change in valuation allowance .......................
1,476
2,545
(217)
Income tax (benefit) .......................................
Total .............................................................. $
-
- $
-
- $
The components of permanent and other differences are as follows (in thousands):
2015
Year Ended December 31,
2014
2013
Permanent items:
Meals and Entertainment ............................. $
Return to provision adjustment ....................
Charitable contributions ..................................
Share-based compensation expense for stock
options granted ..............................................
$
7 $
-
-
46
53 $
7 $
-
1
160
168 $
-
-
7
-
1
54
62
46
PROPHASE LABS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 – INCOME TAXES - (continued)
The tax effects of the primary “temporary differences” between values recorded for assets and liabilities for
financial reporting purposes and values utilized for measurement in accordance with tax laws giving rise to our deferred
tax assets are as follows (in thousands):
2015
Year Ended December 31,
2014
2013
Net operating loss and capital loss
carryforward .................................................. $
Consulting-royalty costs .................................
Trademark .....................................................
Investment in Phusion ....................................
Depreciation ..................................................
Other .............................................................
Valuation allowance .......................................
Total .............................................................. $
16,921 $
(8)
671
1,103
(103)
802
(19,386)
- $
14,983 $
39
752
(483 )
(45 )
2,508
(17,754 )
- $
13,569
80
819
(387)
(34)
1,009
(15,056)
-
A valuation allowance for all of our net deferred tax assets has been provided as we are unable to determine, at
this time, that the generation of future taxable income against which the net operating loss (“NOL”) carryforwards could
be used can be predicted to be more likely than not. The net change in the valuation allowance for Fiscal 2015, 2014 and
2013 was $1.6 million, $2.7 million and $266,000, respectively. Certain exercises of options and warrants, and restricted
stock issued for services that became unrestricted resulted in reductions to taxes currently payable and a corresponding
increase to additional-paid-in-capital for prior years. In addition, certain tax benefits for option and warrant exercises
totaling $6.6 million are deferred and will be credited to additional-paid-in-capital when the NOL’s attributable to these
exercises are utilized. As a result, these NOL’s will not be available to offset income tax expense. The net operating loss
carry-forwards currently approximate $44.5 million for federal purposes will expire beginning in Fiscal 2020 through
2034. Additionally, there are net operating loss carry-forwards of $21.9 million for state purposes that will expire
beginning in Fiscal 2020 through 2034.
NOTE 9 – COMMITMENTS AND CONTINGENCIES
PROPHASE LABS, INC. PROPHASE LABS, INC. FOR THE BENEFIT OF PHUSION LABORATORIES, LLC vs.
Phosphagenics, Inc., Phosphagenics, LTD and Phusion Laboratories, LLC as a nominal defendant
On October 17, 2014, we initiated a demand for arbitration with the American Arbitration Association, case
number 01-14-0001-7373. This demand for arbitration pertains to our Phusion joint venture and the matter is against
Phosphagenics, Inc. and Phosphagenics LTD (collectively known as the “Phosphagenics Entities”). We have raised
certain claims based upon the Phosphagenics Entities’ alleged breach of a certain amended and restated license
agreement for the exploitation of certain intellectual property and, separately, breach of the Phusion joint venture
operating agreement as between the Company and the Phosphagenics Entities. The Phosphagenics Entities have made
counter claims of breaches against the Company and Phusion. The arbitration hearing was held during December 2015
and January 2016 and the evidentiary hearing is now concluded. Each of the parties submitted to the arbitrator their post-
hearing briefs on or before March 15, 2016. At this time, no prediction as to the outcome of this action can be made, and
we anticipate an arbitral ruling will likely be rendered in or about June 2016.
Other Litigation
In the normal course of our business, we are named as defendant in legal proceedings. It is our policy to
vigorously defend litigation and/or enter into settlements of claims where management deems appropriate.
47
PROPHASE LABS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 – COMMITMENTS AND CONTINGENCIES - (continued)
Employment Agreements
On January 14, 2015, we entered into new employment agreements, effective as of January 1, 2015, with Mr.
Karkus and Mr. Cuddihy. These January 2015 employment agreements supersede the 2012 Employment Agreements that
had been scheduled to terminate on July 15, 2015. On May 29, 2015 we entered into amended and restated employment
agreements with each of Mr. Karkus and Mr. Cuddihy (the “2015 Employment Agreements”). The Employment
Agreements supersede the employment agreements of Messrs. Karkus and Cuddihy, dated January 1, 2015. The 2015
Employment Agreements were approved by our Compensation Committee.
Under his new amended and restated employment agreement, Mr. Karkus agreed to an annual base salary of
$675,000 as Chief Executive Officer. Mr. Karkus is eligible to receive an annual increase in base salary and may be
awarded a bonus in the sole discretion of the Compensation Committee and also will receive regular benefits routinely
provided to other senior executives of the Company. In the event of the termination by the Company of the employment
of Mr. Karkus without cause or due to a voluntary resignation by Mr. Karkus with Good Reason (as defined in his
employment agreement), Mr. Karkus will be paid 1.5 times his base salary (“Mr. Karkus Severance”), with one-half of
such amount as a lump sum severance payment in cash and the remaining one-half paid in 12 equal consecutive, monthly
installments commencing on the first business day of the month following the effective date of the termination; and all of
the stock options and/or restricted stock held by Mr. Karkus shall automatically vest concurrently upon such termination
of employment, regardless of any prior existing vesting schedules. If Mr. Karkus is terminated without cause or leaves
with Good Reason in contemplation of (or within 24 months following) a change in control of the Company, then, in lieu
of the Mr. Karkus Severance payment described above, Mr. Karkus shall instead receive a one-time severance payment
in cash equal to the greater of (i) $1.5 million, and (ii) 199 percent of his average annual total Form W-2 compensation
for the three calendar years immediately preceding the date of termination.
Under his new amended and restated employment agreement, Mr. Cuddihy agreed to an annual base salary of
$350,000 as Chief Financial Officer and Chief Operating Officer. Mr. Cuddihy is eligible to receive an annual increase in
base salary and may be awarded a bonus in the sole discretion of the Compensation Committee and also will receive
regular benefits routinely provided to other senior executives of the Company. In the event of the termination by the
Company of the employment of Mr. Cuddihy without cause or due to a voluntary resignation by Mr. Cuddihy with Good
Reason (as defined in his Employment Agreement), Mr. Cuddihy will be paid 1.5 times his base salary (“Mr. Cuddihy
Severance”), with one-half of such amount as a lump sum severance payment in cash and the remaining one-half paid in
12 equal consecutive, monthly installments commencing on the first business day of the month following the effective
date of the termination; and all of the stock options and/or restricted stock held by Mr. Cuddihy shall automatically vest
concurrently upon such termination of employment, regardless of any prior existing vesting schedules. If Mr. Cuddihy is
terminated without cause or leaves with Good Reason in contemplation of (or within 24 months following) a change in
control of the Company, then, in lieu of the Mr. Cuddihy Severance payment described above, Mr. Cuddihy shall instead
receive a one-time severance payment in cash equal to the greater of (i) $900,000 and (ii) 199 percent of his average
annual total Form W-2 compensation for the three calendar years immediately preceding the date of termination.
Direct Response Contact
On June 30, 2015, we executed a Direct Response Production Agreement (“DRPA”) with Pacific Custom Video
Productions Inc. (“PCV”) to produce a series of direct response television commercials for certain TK SupplementsTM
products. The cost of the commercial development was $300,000 which was paid in Fiscal 2015 and is included as a
component of prepaid expenses at December 31, 2015. As TK SupplementsTM products are launched in Fiscal 2016,
these costs will be charged to operations as the products are shipped and television commercial air time is purchased and
broadcasted. In addition, the Company agreed to pay to PCV a three percent performance incentive in the form of a
royalty (aka commission) of net sales collected, as defined in the agreement, of certain TK SupplementsTM products
marketed and promoted with PCV. Performance incentive fees have not been incurred in Fiscal 2015 and will not be
incurred until the TK SupplementsTM product line is launched which is scheduled to commence in the first half of Fiscal
2016.
48
PROPHASE LABS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 – COMMITMENTS AND CONTINGENCIES - (continued)
Future Obligations
We have approximate future obligations over the next five years as follows (in thousands):
Year
2016 ................
$
2017 ................
2018 ................
2019 ................
2020 ................
$
Total ................
2015
Employment
Agreements
Godfrey
Settlement
Agreement
1,025 $
1,025
512
-
-
2,562 $
Notes
Total
100 $
-
-
-
-
100 $
- $
1,500
-
-
-
1,500 $
1,125
2,525
512
-
-
4,162
NOTE 10 – INVESTMENT IN A JOINT VENTURE
On March 22, 2010, we, Phosphagenics Limited (“PSI Parent”), an Australian corporation, Phosphagenics Inc.
(“PSI”), a Delaware corporation and subsidiary of PSI Parent, and Phusion, a Delaware limited liability company,
entered into a Limited Liability Company Agreement (the “LLC Agreement”) of the Phusion 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 Phusion joint venture.
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”, which PSI no longer owns),
and made a one-time payment to PSI Parent of $1.0 million. We recorded an intangible asset valued at $3.6 million in
March 2010 for the acquisition of the PSI Technology license.
In September 2014, we began implementing a series of new product development and pre-commercialization
initiatives principally in the dietary supplement category. While several of our product development initiatives have
advanced, including those specific to the dietary supplement category, our Phusion product development initiatives had
not progressed to management’s satisfaction. At that time, management believed that any products embodying the
licensed technology to be developed by Phusion would not be available until Fiscal 2016 or 2017 at the earliest, and may
be more limited than previously forecasted and may encompass fewer products or have limited retail distribution.
During the third quarter of Fiscal 2014, our evaluation of the Company’s progress in its new product
development pipeline and delays in Phusion product development caused management to reassess projections (including
income projections) relied upon in December 2013. Accordingly, management performed an impairment analysis for the
period ended September 30, 2014 for the licensed technology. As a consequence of our impairment assessment, we
determined that a full impairment occurred of the intangible asset, licensed technology. As a consequence, we charged to
operations a $3.6 million impairment charge during the third quarter of Fiscal 2014.
On October 17, 2014, we initiated a demand for arbitration with the American Arbitration Association, case
number 01-14-0001-7373. The Phosphagenics Entities have made counter claims of breaches against the Company and
Phusion (see Note 9). At December 31, 2015, cash and cash equivalents includes $366,000 which is available to be used
by Phusion to fund future product development initiatives currently under consideration by PSI Parent, PSI and us.
49
PROPHASE LABS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 – EARNINGS PER SHARE
Basic earnings per share (“EPS”) excludes dilution and is computed by dividing income available to common
stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into
common stock or resulted in the issuance of common stock that shared in the earnings of the entity. Diluted EPS also
utilizes the treasury stock method which prescribes a theoretical buy back of shares from the theoretical proceeds of all
options and warrants outstanding during the period. Since there is a large number of options and Warrants outstanding,
fluctuations in the actual market price can have a variety of results for each period presented.
A reconciliation of the applicable numerators and denominators of the income statement periods presented is as
follows (in thousands, except per share amounts):
2015
Year Ended December 31,
2014
2013
Loss Shares EPS
Loss Shares EPS
Income Shares EPS
Basic EPS........... $(3,600) 16,398 $ (0.22) $(7,834) 16,773 $ (0.47) $
Dilutives:
Options/Warrants
-
-
-
-
-
-
405 15,839 $ 0.03
-
437
-
Diluted EPS ........ $(3,600) 16,398 $ (0.22) $(7,834) 16,773 $ (0.47) $
405 16,276 $ 0.03
For Fiscal 2015 and 2014, diluted earnings per share is the same as basic earnings per share due to the inclusion
of Common Stock, in the form of stock options and warrants (“Common Stock Equivalents”), would have an anti-
dilutive effect on the loss per share. For Fiscal 2015 and 2014, there were Common Stock Equivalents in the amount of
337,186 and 598,609, respectively, which were in-the-money, that were excluded in the earnings per share computation
due to their dilutive effect. In addition, for Fiscal 2015, 2014 and 2013, there were Common Stock Equivalents in the
amount of 420,500, 26,500 and 472,500, respectively, which were out-of-the-money (the exercise price of the stock
option was greater than the average market price for the period), that were excluded in the earnings per share
computation due to their dilutive effect.
NOTE 12 – SIGNIFICANT CUSTOMERS
Our products are distributed through national chain, regional, specialty and local retail stores throughout the
United States. Revenues for Fiscal 2015, 2014 and 2013 were $20.6 million, $22.1 million and $25.0 million,
respectively. Walgreen Company (“Walgreens”) and Wal-Mart Stores Inc (“Wal-Mart”) accounted for approximately
15.8% and 11.3% respectively, for Fiscal 2015. Walgreens, Wal-Mart and CVS Health Corporation (“CVS”) accounted
for approximately 18.9%, 16.9% and 11.3%, respectively, of our Fiscal 2014 revenues. Walgreens, Wal-Mart and CVS
accounted for approximately 20.4%, 14.3% and 11.6%, respectively, of our Fiscal 2013 revenues. 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.
We are subject to account receivable credit concentrations from time-to-time as a consequence of the timing,
payment pattern and ultimate purchase volumes or shipping schedules with our customers. These concentrations may
impact our overall exposure to credit risk, either positively or negatively, in that our customers may be similarly affected
by changes in economic, regulatory or other conditions that may impact the timing and collectability of amounts due to
us. Customers comprising the five largest accounts receivable balances represented 60% and 67% of total trade
receivable balances at December 31, 2015 and 2014, respectively. Management believes that the provision for possible
losses on uncollectible accounts receivable is adequate for our credit loss exposure. The allowance for doubtful accounts
was zero for both December 31, 2015 and 2014.
50
PROPHASE LABS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 – QUARTERLY INFORMATION (UNAUDITED)
The following table presents unaudited quarterly financial information for Fiscal 2015 and Fiscal 2014 (in
thousands, except per share amounts):
Quarter Ended
March 31,
June 30,
September
30,
December
31,
Fiscal 2015
Net sales ............................................... $
Gross profit ........................................... $
Net income (loss) .................................. $
5,860 $
3,662 $
(1,380) $
2,191 $
1,008 $
(1,566 ) $
4,390 $
2,719 $
602 $
8,163
4,788
(1,256)
Basic and diluted income (loss) per
share:
Net loss ............................................. $
(0.09) $
(0.10 ) $
0.04 $
(0.07)
Fiscal 2014
Net sales ............................................... $
Gross profit ........................................... $
Net income (loss) .................................. $
6,171 $
3,980 $
(804) $
1,797 $
792 $
(3,138 ) $
5,130 $
3,510 $
(3,216) $
8,972
5,896
(676)
Basic and diluted loss per share
Net loss .............................................. $
(0.05) $
(0.19 ) $
(0.18) $
(0.05)
51
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
We maintain disclosure controls and procedures designed to provide reasonable assurance that material
information required to be disclosed by us in the reports filed or submitted under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and that the
information is accumulated and communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate to allow timely decisions regarding required disclosure. We performed an evaluation,
under the supervision and with the participation of our management, including our Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of the disclosure controls and procedures as of the end
of the period covered by this report. Based on our review, our management, including our Chief Executive Officer and
Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective at the
reasonable assurance level as of the end of the period covered by this Report.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining an adequate system of internal control over
financial reporting. Our system of internal control over financial reporting is designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with accounting principles generally accepted in the United States of America.
Our internal control over financial reporting includes those policies and procedures that:
● pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect our transactions
and dispositions of our assets;
● provide reasonable assurance that our transactions are recorded as necessary to permit preparation of our
financial statements in accordance with accounting principles generally accepted in the United States of
America, and that our receipts and expenditures are being made only in accordance with authorizations of
our management and our directors; and
● provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of our assets that could have a material effect on the financial statements.
Because of its inherent limitations, a system of internal control over financial reporting can provide only
reasonable assurance and may not prevent or detect misstatements. Further, because of changes in conditions,
effectiveness of internal controls over financial reporting may vary over time. Our system contains self-monitoring
mechanisms, and actions are taken to correct deficiencies as they are identified.
Our management conducted an evaluation of our effectiveness of the system of internal control over financial
reporting based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (2013 Framework). Based upon our review, our management, including our
Chief Executive Officer and Chief Financial Officer, concluded that the Company’s internal controls over financial
reporting were effective as of December 31, 2015.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting during Fiscal 2015 that have materially
affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
None
52
Item 10. Directors, Executive Officers and Corporate Governance
PART III
The information required under this item is incorporated by reference to the Company’s Proxy Statement for the
2016 Annual Meeting of Stockholders (the “2016 Proxy Statement”) which is to be filed with the SEC not later than 120
days after the close of our fiscal year ended December 31, 2015 and is hereby incorporated by reference.
Item 11. Executive Compensation
The information required under this item is incorporated by reference to the 2016 Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required under this item is incorporated by reference to the 2016 Proxy Statement.
Item 13. Certain Relationships and Related Transactions and Director Independence
The information required under this item is incorporated by reference to the 2016 Proxy Statement.
Item 14. Principal Accountant Fees and Services
The information required under this item is incorporated by reference to the 2016 Proxy Statement.
53
Item 15. Exhibits and Financial Statement Schedules
(a) Exhibits:
PART IV
3.1
3.2
4.1
4.2
Certificate of Incorporation of the Company, (incorporated by reference to Exhibit 3.3 of Form 8-
K filed on June 19, 2015).
By-laws of the Company as amended and restated effective June 18, 2015 (incorporated by
reference to Exhibit 3.4 of Form 8-K filed on June 19, 2015).
Specimen Common Stock Certificate (incorporated by reference to Exhibit 4.1 of Form 10-KSB/A
filed on April 4, 1997).
Form of Warrant (incorporated by reference to Exhibit 10.3 of Form 8-K filed on December 16,
2015).
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
10.3
10.4
10.5
10.6
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).
Amended and Restated Rights Agreement, dated as of June 18, 2014 between the Company and
American Stock Transfer and Trust Company (incorporated by reference to Exhibit 4.1 of Form 8-
K filed on June 19, 2014).
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).
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).
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).
10.7
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).
54
10.08 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).
10.09
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).
10.10*
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).
10.11*
Amendment to 2010 Directors’ Equity Compensation Plan (incorporated by reference to Exhibit
10.3 of Form 8-K filed on May 10, 2010).
10.12 *
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).
10.13*
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).
10.14* 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).
10.15* 2010 Amended and Restated Equity Compensation Plan (incorporated by reference to Exhibit A of
the Company’s Annual Proxy Statement on Schedule 14A filed on March 14, 2011).
10.16 Redemption Agreement with Phosphagenics Ltd. (incorporated by reference to Exhibit 10.1 of
Form 8-K filed on September 23, 2011).
10.17
Investment Agreement by and between ProPhase Labs, Inc. and Dutchess Opportunity Fund II,
LP, dated as of May 28, 2014 (incorporated by reference to Exhibit 10.1 of Form 8-K filed on
May 28, 2014).
10.18 Registration Rights Agreement by and between ProPhase Labs, Inc. and Dutchess Opportunity
Fund II, LP, dated as of May 28, 2014 (incorporated by reference to Exhibit 10.2 of Form 8-K
filed on May 28, 2014).
10.19 Settlement Agreement and Mutual Release between ProPhase Labs, Inc. f/k/a The Quigley
Corporation and John C. Godfrey, the Estate of Nancy Jane Godfrey, and Godfrey Science and
Design, Inc. dated December 20, 2012. (incorporated by reference to Exhibit 10.25 of Form 10-K
filed on March 28, 2013).
10.20* Amendment to Amended and Restated 2010 Equity Compensation Plan (incorporated by reference
to Appendix A of the Company’s Annual Proxy Statement on Schedule 14A filed on April 3,
2013).
10.21* Amendment to 2010 Directors’ Equity Compensation Plan (incorporated by reference to Appendix
B of the Company’s Annual Proxy Statement on Schedule 14A filed on April 3, 2013).
10.22* Global Settlement Agreement between ProPhase Labs, Inc. and certain of the Company’s former
managers and with certain shareholders dated September 4, 2014 resolving all litigation matters
between the parties (incorporated by reference to Exhibit 99.3 of Form 8-K dated September 4,
2014)
10.23* Employment Agreement dated May 29, 2015 between Ted Karkus and the Company
(incorporated by reference to Exhibit 99.2 of Form 8-K filed on June 1, 2015).
10.24* Employment Agreement dated May 29, 2015 between Robert V. Cuddihy, Jr. and the Company
(incorporated by reference to Exhibit 99.1 of Form 8-K filed on June 1, 2015).
55
10.25 Registration Rights Agreement by and between ProPhase Labs, Inc. and Dutchess Opportunity
Fund II, LP, dated as of July 30, 2015 (incorporated by reference to Exhibit 4.2 of the registration
statement on Form S-8 filed on August 5, 2015).
10.26
Investment Agreement by and between ProPhase Labs, Inc. and Dutchess Opportunity Fund II,
LP, dated as of July 30, 2015 (incorporated by reference to Exhibit 4.1 of the registration
statement on Form S-8 filed on August 5, 2015).
10.27 Subscription Agreements by and between ProPhase Labs, Inc. and John Ligums and Justin
Leonard dated December 11, 2015 (incorporated by reference to Exhibit 10.1 of Form 8-K filed
on December 16, 2015).
10.28 Form of 12% Secured Promissory Note dated December 11, 2015 (incorporated by reference to
Exhibit 10.2 of Form 8-K filed on December 16, 2015).
10.29 Form of Security Agreement by and between ProPhase Labs, Inc. and John Ligums dated
December 11, 2015 (incorporated by reference to Exhibit 10.4 of Form 8-K filed on December 16,
2015).
14.1
Code of Ethics (incorporated by reference to Exhibit II of the Proxy Statement on Schedule 14A
filed on March 31, 2003).
21.1** Subsidiaries of ProPhase Labs, Inc.
23.1** Consent of EisnerAmper LLP, Independent Registered Public Accounting Firm.
56
31.1** Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
31.2** Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
32.1** Certification of the Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2** Certification of the Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
* Indicates a management contract or compensatory plan or arrangement
** Filed herewith
40 ** 101 INS — XBRL Instance Document
41 ** 101 SCH — XBRL Taxonomy Extension Schema Document
42 ** 101 CAL — XBRL Taxonomy Extension Calculation Linkbase Document
43 ** 101 DEF — XBRL Taxonomy Extension Definition Linkbase Document
44 ** 101 LAB — XBRL Taxonomy Extension Label Linkbase Document
45 ** 101 PRE — XBRL Taxonomy Extension Presentation Linkbase Document
57
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Date: March 29, 2016
PROPHASE LABS, INC.
Registrant
By: /s/ Ted Karkus
Ted Karkus, Chairman of the Board,
Chief Executive Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following
persons on behalf of the registrant and in the capacities and on the dates indicated:
Principal Executive Officer
Principal Financial and Accounting Officer
By: /s/ Ted Karkus
Ted Karkus
Chairman of the Board and
Chief Executive Officer
Date: March 29, 2016
/s/ Jason Barr
Jason Barr
/s/ Mark Burnett
Mark Burnett
/s/ Mark Leventhal
Mark Leventhal
Date: March 29, 2016
By: /s/ Robert V. Cuddihy, Jr.
Robert V. Cuddihy, Jr.
Chief Operating Officer and Chief
Financial Officer
Directors
/s/ Louis Gleckel
Louis Gleckel
/s/ James McCubbin
James McCubbin
58
EXHIBIT 21.1
SUBSIDIARIES OF PROPHASE LABS, INC.
Subsidiaries
State or other
Jurisdiction of
Incorporation
Ownership
Percentage
Pharmaloz Manufacturing Inc. ......................................... Delaware
Phusion Laboratories, LLC .............................................. Delaware
Phusion Labs Manufacturing, Inc. .................................... Delaware
Quigley Pharma Inc. ........................................................ Delaware
TK Supplements, Inc. ...................................................... Delaware
100%
50%
100%
100%
100%
The above subsidiaries are included in the consolidated financial statements for the year ended December 31,
2015.
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the Registration Statements of ProPhase Labs, Inc. and
Subsidiaries on Forms S8 (No. 333-73456, No. 333-61313, No. 333-10059, No. 333-14687, No. 333-26589, No. 333-
132770 and No. 333-169697), Form SB-2 (No. 333-31241) and Forms S-3 (No. 333-86976, No. 333-104148, No. 333-
119748, No. 333-185167, No. 333-196352, No. 333-206090) of our report dated March 29, 2016, on our audits of the
consolidated financial statements of ProPhase Labs, Inc. and Subsidiaries as of December 31, 2015 and 2014 and for
each of the years in the three-year period ended December 31, 2015, which report is included in this Annual Report on
Form 10-K to be filed on or about March 29, 2016.
EXHIBIT 23.1
/s/ EISNERAMPER LLP
Iselin, New Jersey
March 29, 2016
EXHIBIT 31.1
OFFICER’S CERTIFICATION PURSUANT TO
RULE 13a-14(a)/15d-14(a) OF THE SECURITIES EXCHANGE ACT OF 1934
I, Ted Karkus, certify that:
1.
I have reviewed this Annual Report on Form 10-K of ProPhase Labs, Inc.;
2. Based on my knowledge, this Annual 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 Annual Report;
3. Based on my knowledge, the financial statements, and other financial information included in this Annual 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 Annual 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 131-15(f) and 15d015(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 Annual 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 Annual
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 control over financial reporting.
Date: March 29, 2016
By: /s/ Ted Karkus
Ted Karkus
Chairman of the Board and Chief Executive Officer
(Principal Executive Officer)
EXHIBIT 31.2
OFFICER’S CERTIFICATION PURSUANT TO
RULE 13a-14(a)/15d-14(a) OF THE SECURITIES EXCHANGE ACT OF 1934
I, Robert V. Cuddihy, Jr., certify that:
1.
I have reviewed this Annual Report on Form 10-K of ProPhase Labs, Inc.;
2. Based on my knowledge, this Annual 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 Annual Report;
3. Based on my knowledge, the financial statements, and other financial information included in this Annual 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 Annual 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 131-15(f) and 15d015(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 Annual 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 Annual
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 control over financial reporting.
Date: March 29, 2016
By: /s/ Robert V. Cuddihy, Jr.
Robert V. Cuddihy, Jr.
Chief Operating Officer and Chief Financial Officer
(Principal Accounting and Financial Officer)
PROPHASE LABS, INC.
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO RULE 13a-14(b) OF THE SECURITIES EXCHANGE ACT OF 1934
AND 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 32.1
I, Ted Karkus, Chief Executive Officer of ProPhase Labs, Inc., a Delaware corporation (the “Registrant”), in
connection with the Registrant’s Annual Report on Form 10-K for the period ended December 31, 2015, as filed with the
Securities and Exchange Commission on the date hereof (the “Report”), do hereby represent, warrant and certify, in
compliance with Rule 13a-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:
(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 results of
operations of the Registrant.
/s/ Ted Karkus
Ted Karkus
Chairman of the Board and Chief Executive Officer
(Principal Executive Officer)
March 29, 2016
PROPHASE LABS, INC.
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO RULE 13a-14(b) OF THE SECURITIES EXCHANGE ACT OF 1934
AND 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 32.2
I, Robert V. Cuddihy, Jr., Chief Financial Officer of ProPhase Labs, Inc., a Delaware corporation (the
“Registrant”), in connection with the Registrant’s Annual Report on Form 10-K for the period ended December 31, 2015,
as filed with the Securities and Exchange Commission on the date hereof (the “Report”), do hereby represent, warrant
and certify, in compliance with Rule 13a-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:
(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 results of
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)
March 29, 2016
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PROPHASE LABS, INC.
CORPORATE OFFICERS AND DIRECTORS
CORPORATE INFORMATION
Ted Karkus
Form 10-K Exhibits
Chairman & Chief Executive Officer
Robert V. Cuddihy, Jr.
Executive Vice President, Chief Operating
Officer & Chief Financial Officer
A copy of exhibits to the Company’s Annual Report
on Form 10-K will be furnished upon payment of a
specified fee to any stockholder upon written
the following
request
address:
to Investor Relations at
Investor Relations
ProPhase Labs, Inc.
Mr. Ted Karkus
621 N. Shady Retreat Road
Doylestown, PA 18901
Stock Exchange Listing
NASDAQ Capital Market
Stock Symbol: PRPH
Transfer Agent
American Stock Transfer & Trust Company, LLC
59 Maiden Lane
New York, NY 10038
Independent Registered Public Accounting Firm
EisnerAmper, LLP
Iselin, NJ 08830
Attorneys
Reed Smith LLP
New York, NY 10022
JasonBarr
Director
Mark Burnett
Director
Louis Gleckel, MD
Director
Mark Leventhal
Director
James McCubbin
Director
SUBSIDIARIES
SUBSIDIARIES
STATE OR OTHER
JURISDICTION OF
INCORPORATION
Pharmaloz Manufacturing Inc.
Phusion Laboratories, LLC
Phusion Labs Manufacturing, Inc.
Quigley Pharma Inc.
TK Supplements, Inc.
Delaware
Delaware
Delaware
Delaware
Delaware
The above subsidiaries are included in the consolidated
financial statements for the year ended December 31, 2015.
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PROPHASE LABS, INC.
621 N. SHADY RETREAT ROAD • DOYLESTOWN, PA 18901
PHONE 215.345.0919 • WWW.PROPHASELABS.COM
(cid:3) PROPHASE LABS, INC. ALL RIGHTS RESERVED. PRINTED IN USA.