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Document and Entity Information

v2.4.0.6
Document and Entity Information (USD $)
12 Months Ended
Dec. 31, 2012
Mar. 15, 2013
Jun. 30, 2012
Entity Registrant Name ProPhase Labs, Inc.    
Entity Central Index Key 0000868278    
Current Fiscal Year End Date --12-31    
Entity Filer Category Smaller Reporting Company    
Trading Symbol prph    
Entity Common Stock, Shares Outstanding   15,845,062  
Document Type 10-K    
Amendment Flag false    
Document Period End Date Dec. 31, 2012    
Document Fiscal Period Focus FY    
Document Fiscal Year Focus 2012    
Entity Well-Known Seasoned Issuer No    
Entity Voluntary Filers No    
Entity Current Reporting Status Yes    
Entity Public Float     $ 10,139,208

CONSOLIDATED BALANCE SHEETS

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CONSOLIDATED BALANCE SHEETS (USD $)
In Thousands, unless otherwise specified
Dec. 31, 2012
Dec. 31, 2011
ASSETS    
Cash and cash equivalents (Note 2) $ 572 $ 5,541
Accounts receivable (Note 2) 5,409 3,219
Inventory (Note 2) 2,051 2,688
Prepaid expenses and other current assets (Note 2) 2,687 1,747
Total current assets 10,719 13,195
Property, plant and equipment, net of accumulated depreciation of $3,860 and $3,608, respectively (Note 3) 2,365 2,307
Intangible asset, licensed technology (Note 8) 3,577 3,577
Total assets 16,661 19,079
LIABILITIES AND STOCKHOLDERS' EQUITY    
Accounts payable 1,296 885
Accrued advertising and other allowances (Note 2) 2,760 2,959
Other current liabilities (Note 4) 854 485
Accrued royalties and sales commissions (Note 5) 0 3,524
Total current liabilities 4,910 7,853
Other long term obligation (Note 5) 300 0
Total long term liabilities 300 0
COMMITMENTS AND CONTINGENCIES (Note 5) 0 0
STOCKHOLDERS' EQUITY    
Common stock, $.0005 par value; authorized 50,000,000; issued: 21,056,115 and 20,161,636 shares, respectively (Note 6) 11 10
Additional paid-in-capital 42,867 41,552
Accumulated deficit (5,790) (4,699)
Treasury stock, at cost, 5,336,053 and 5,336,053 shares, respectively (Note 6) (25,637) (25,637)
Total stockholders' equity 11,451 11,226
Liabilities and Stockholders' Equity, Total $ 16,661 $ 19,079

CONSOLIDATED BALANCE SHEETS [Parenthetical]

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CONSOLIDATED BALANCE SHEETS [Parenthetical] (USD $)
In Thousands, except Share data, unless otherwise specified
Dec. 31, 2012
Dec. 31, 2011
Accumulated depreciation (in dollars) $ 3,860 $ 3,608
Common Stock, par value (in dollars per share) $ 0.0005 $ 0.0005
Common Stock, shares authorized 50,000,000 50,000,000
Common Stock, shares issued 21,056,115 20,161,636
Treasury stock, shares (in shares) 5,336,053 5,336,053

CONSOLIDATED STATEMENTS OF OPERATIONS

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CONSOLIDATED STATEMENTS OF OPERATIONS (USD $)
In Thousands, except Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2012
Dec. 31, 2011
Dec. 31, 2010
Net sales (Notes 2 and 11) $ 22,406 $ 17,453 $ 14,502
Cost of sales (Note 2) 8,154 6,171 5,672
Gross profit 14,252 11,282 8,830
Operating expenses:      
Sales and marketing 8,946 7,904 5,576
Administrative 6,127 5,028 6,054
Research and development (Note 2) 1,301 1,088 794
Settlement benefit (Note 5) (1,024) 0 0
Total operating expense 15,350 14,020 12,424
Loss from operations (1,098) (2,738) (3,594)
Interest income 7 28 53
Loss from operations before taxes (1,091) (2,710) (3,541)
Income tax (benefit) (Note 9) 0 0 (40)
Net loss $ (1,091) $ (2,710) $ (3,501)
Basic and dilutive loss per share (in dollars per share) $ (0.07) $ (0.18) $ (0.25)
Weighted average common shares outstanding:      
Basic and diluted (in shares) 14,843 14,817 14,285

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

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CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (USD $)
In Thousands, except Share data
Common Stock [Member]
Additional Paid-In Capital [Member]
Retained Earnings [Member]
Treasury Stock [Member]
Total
Balance at Dec. 31, 2009 $ 9 $ 37,726 $ 1,512 $ (25,188) $ 14,059
Balance (in shares) at Dec. 31, 2009 13,033,383        
Net loss     (3,501)   (3,501)
Proceeds from exercise of stock options   133     133
Proceeds from exercise of stock options (In shares) 130,500        
Common Stock Issued to Phosphangenics Limited pursuant to an Exclusive License Agreement (Note 8) 1 2,576     2,577
Common Stock Issued to Phosphangenics Limited pursuant to an Exclusive License Agreement (Note 8 ) (In shares) 1,440,000        
Common stock granted pursuant to employment agreements   60     60
Common stock granted pursuant to an employment agreement (In shares ) 36,111        
Common stock granted pursuant to a compensation agreement   90     90
Common stock granted pursuant to a compensation agreement (In shares ) 67,625        
Tax benefits from exercise of stock options   42     42
Share-based compensation expense   42     42
Tax benefit allowance   (42)     (42)
Balance at Dec. 31, 2010 10 40,627 (1,989) (25,188) 13,460
Balance (in shares) at Dec. 31, 2010 14,707,619        
Net loss     (2,710)   (2,710)
Common stock granted pursuant to employment agreements   294     294
Common stock granted pursuant to an employment agreement (In shares ) 341,254        
Common stock granted pursuant to a compensation agreement   500     500
Common stock granted pursuant to a compensation agreement (In shares ) 466,710        
Share-based compensation expense   131     131
Treasury stock purchase (Note 8)       (449) (449)
Treasury stock purchase (Note 8) (in shares) (690,000)        
Balance at Dec. 31, 2011 10 41,552 (4,699) (25,637) 11,226
Balance (in shares) at Dec. 31, 2011 14,825,583        
Net loss     (1,091)   (1,091)
Common stock granted pursuant to employment agreements   93     93
Common stock granted pursuant to an employment agreement (In shares ) 10,757        
Share-based compensation expense   153     153
Common stock issued (Note 6) 1 1,069     1,070
Common stock issued (Note 6) (in shares) 883,722        
Balance at Dec. 31, 2012 $ 11 $ 42,867 $ (5,709) $ (25,637) $ 11,451
Balance (in shares) at Dec. 31, 2012 15,720,062        

CONSOLIDATED STATEMENTS OF CASH FLOWS

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CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2012
Dec. 31, 2011
Dec. 31, 2010
Cash flows from operating activities:      
Net loss $ (1,091) $ (2,710) $ (3,501)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:      
Depreciation and amortization 252 355 363
Gain on the sale of fixed assets 0 (28) 0
Reduction of payment obligation, settlement benefit (1,024) 0 0
Share-based compensation expense 246 631 192
Changes in operating assets and liabilities:      
Accounts receivable (2,190) 1,602 (1,222)
Inventory 637 (1,006) (277)
Prepaid expenses and other assets (940) (864) (68)
Accounts payable 411 396 (219)
Accrued advertising and other allowances (199) (565) 1,384
Accrued royalties and commissions (2,100) 0 0
Other operating assets and liabilities, net 269 81 (201)
Net cash used in operating activities (5,729) (2,108) (3,549)
Cash flows from investing activities:      
Capital expenditures (310) (300) (153)
Acquisition of product license 0 0 (1,000)
Proceeds from the sale of fixed assets 0 166 0
Net cash flows used in investing activities (310) (134) (1,153)
Cash flows from financing activities:      
Proceeds from the exercise of stock options 0 0 133
Proceeds from issuance of common stock 1,070 0 0
Purchase of treasury stock 0 (449) 0
Net cash provided by (used in) financing activities 1,070 (449) 133
Net decrease in cash and cash equivalents (4,969) (2,691) (4,569)
Cash and cash equivalents at beginning of year 5,541 8,232 12,801
Cash and cash equivalents at end of year 572 5,541 8,232
Supplemental disclosures of cash flow information:      
Income taxes paid 0 0 34
Common stock issued to Phosphagenics Limited pursuant to a product license agreement 0 0 2,577
Common stock issued, in lieu of cash, as payment of accrued compensation $ 0 $ 294 $ 0

ORGANIZATION AND BUSINESS

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ORGANIZATION AND BUSINESS
12 Months Ended
Dec. 31, 2012
Organization, Consolidation and Presentation Of Financial Statements [Abstract]  
Organization, Consolidation and Presentation of Financial Statements Disclosure [Text Block]

NOTE 1 – ORGANIZATION AND BUSINESS

 

ProPhase Labs, Inc (“we”, “us” or the “Company”), organized under the laws of the State of Nevada, is a manufacturer, marketer and distributor of a diversified range of homeopathic and health products that are offered to the general public. We are also engaged in the research and development of potential over-the-counter (“OTC”) drug, natural based health products along with supplement, personal care and cosmeceutical products.

 

Our primary business is the manufacture, distribution, marketing and sale of OTC cold remedy products to consumers through national chain, regional, specialty and local retail stores. Our flagship brand is Cold-EEZEÒCold Remedy and our principal product is Cold-EEZEÒ zinc gluconate lozenges, proven in clinical studies to reduce the duration of the common cold by 42%. In addition to Cold-EEZE® cold remedy lozenges, we market and distribute two non-lozenge forms of our proprietary zinc gluconate formulation, Cold-EEZE® Daytime/Nighttime QuickMelts® and Cold-EEZE® Oral Spray, each a new product launched in August 2012 and 2011, respectively. Cold-EEZEÒ is an established product in the health care and cold remedy market. For Fiscal 2012, Fiscal 2011 and Fiscal 2010 (as each is defined below), our revenues from operations have come principally from our OTC cold remedy products.

 

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 Laboratories, LLC (the “Joint Venture”), a Delaware limited liability company, entered into a Limited Liability Company Agreement (the “LLC Agreement”) of the Joint Venture and additional related agreements for the purpose of developing and commercializing, for worldwide distribution and sale, a wide range of non-prescription remedies using PSI Parent’s proprietary patented TPM™ technology (“TPM”). TPM facilitates the delivery and depth of penetration of active molecules in pharmaceutical, nutraceutical, and other products. Pursuant to the LLC Agreement, we and PSI each own a 50% membership interest in the Joint Venture (see Note 8).

 

Our business is subject to seasonal variations thereby impacting liquidity and working capital during the course of our fiscal year.

 

For Fiscal 2012, 2011 and 2010, we have incurred a net loss as a consequence of our strategic initiatives to preserving the Cold-EEZE® brand, then repositioning the Cold-EEZE® brand for growth and then leveraging the Cold-EEZE® brand. Our strategy required significant investments in product development, retail merchandising and consumer marketing and advertising. As a consequence of these investments, our revenues have increased an aggregate of 54.5% from Fiscal 2010 to Fiscal 2012. Additionally our working capital for Fiscal 2012 increased $467,000 to $5.8 million as compared to $5.3 million for Fiscal 2011. Management believes that cash generated from operations, along with its current cash balances, will be sufficient to finance working capital and capital expenditure requirements for at least the next twelve months. In addition, we successfully resolved various disputes with certain third parties (see Note 5).

 

We use a December 31 year-end for financial reporting purposes. References herein to the fiscal year ended December 31, 2012 shall be the term “Fiscal 2012” 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.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
12 Months Ended
Dec. 31, 2012
Accounting Policies [Abstract]  
Significant Accounting Policies [Text Block]

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 its Joint Venture, a variable interest entity (see Note 8). All intercompany transactions and balances have been eliminated.

  

Seasonality of the Business

Our net sales are derived principally from our OTC cold remedy products. Currently, our sales are influenced by and subject to fluctuations in the timing of purchase and the ultimate level of demand for our products which are a function of the timing, length and severity of each cold season. Generally, a cold season is defined as the period of September to March when the incidence of the common cold rises as a consequence of the change in weather and other factors. We generally experience in the 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.

 

Use of Estimates

The preparation of financial statements and the accompanying notes thereto, in conformity with generally accepted accounting principles in the United States (“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-EEZEÒ lozenges, utilizes a proprietary zinc formulation which has been clinically proven to reduce the duration of the common cold. 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® lozenges we market and distribute Cold-EEZE® Cold Remedy Daytime/Nighttime QuickMelts®, Cold-EEZE® Oral Spray and Kids-EEZE® Cough Cold and Kids-EEZE® Allergy (“Kids-EEZE® Products”), children’s OTC cold remedies. In August 2012 we introduced our, Cold-EEZE® Cold Remedy Daytime/Nighttime QuickMelts®. Cold-EEZE® Oral Spray containing our proprietary zinc formulation in a liquid spray form was introduced in August 2011. We introduced Kids-EEZE® Chest Relief in Fiscal 2008 and expanded the product line to include Kids-EEZE® Cough Cold and Kids-EEZE® Allergy in Fiscal 2010. We also manufacture, market and distribute an organic cough drop and a Vitamin C supplement (“Organix®”). Each of the Cold-EEZE® QuickMelts and Oral Spray products, Kids-EEZE® Products and Organix® 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.

 

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, 2012 and 2011 the financial statements include adjustments to reduce inventory for excess or obsolete inventory of $890,000 and $991,000, respectively. At December 31, 2012 and 2011, inventory included raw material, work in progress and packaging amounts of $1.0 million and $981,000, respectively, and finished goods of $1.0 million and $1.7 million, respectively.

  

Property, Plant and Equipment

Property, plant and equipment are recorded at cost. We use a combination of straight-line and accelerated methods in computing depreciation for financial reporting purposes. 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, 2012, our cash was $572,000 and our bank balance was $1.1 million. Of the total bank balance, $633,000 was covered by federal depository insurance and $462,000 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 mass merchandisers, food retailers, multi-outlet pharmacy and chain drug stores and large wholesalers (see Note 11). During Fiscal 2012, 2011 and 2010, effectively all of our net revenues were related to domestic markets.

 

Our revenues are principally generated from the sale of OTC cold remedy products which approximated 95%, 95% and 96% of total revenues for Fiscal 2012, 2011 and 2010, respectively. A significant portion of our business is highly seasonal, which causes major variations in operating results from quarter to quarter. The third and fourth quarters generally represent the largest sales volume for the OTC cold remedy products.

 

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 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.

 

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, 2012 and December 31, 2011, we included a provision for sales allowances of $109,000 and $101,000, respectively, which are reported as a reduction to account receivables. Additionally, accrued advertising and other allowances as of December 31, 2012 include $1.3 million for estimated future sales returns and $1.5 million for cooperative incentive promotion costs. As of December 31, 2011 accrued advertising and other allowances include $1.7 million for estimated future sales returns, $1.0 million for cooperative incentive promotion costs and $279,000 for certain other advertising and marketing promotions.

 

Shipping and Handling

Product sales carry shipping and handling charges to the purchaser, included as part of the invoiced price, which is classified as revenue. In all cases, costs related to this revenue are recorded in cost of sales.

 

Stock Compensation

We recognize all share-based payments to employees and directors, including grants of stock options, as compensation expense in the financial statements based on their fair values. Fair values of stock options are determined through the use of the Black-Scholes option pricing model. The compensation cost is recognized as an expense over the requisite service period of the award, which usually coincides with the vesting period.

 

Stock and stock options for purchase of our common stock, $0.0005 par value, (“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 2012, 2011 and 2010, we charged to operations $246,000, $631,000 and $192,000, respectively, for share-based compensation expense for the aggregate fair value of 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 Joint Venture beginning with the quarter ended March 31, 2010 (see Note 8).

 

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 2012, 2011 and 2010 were $10.2 million, $8.8 million, and $6.9 million, respectively. Included in prepaid expenses and other current assets was $2.2 million and $1.2 million at December 31, 2012 and 2011, respectively, relating to prepaid deposits for advertising and promotion programs scheduled principally for the first quarter of Fiscal 2013 and 2012, respectively.

 

Research and Development

Research and development costs are charged to operations in the period incurred. Expenditures for Fiscal 2012, 2011 and 2010 were $1.3 million, $1.1 million and $794,000, respectively. For Fiscal 2012, Fiscal 2011 and Fiscal 2010, research and development costs are related principally to new product development initiatives and costs associated with OTC cold remedy products.

 

Income Taxes

We utilize the asset and liability approach which requires the recognition of deferred tax assets and liabilities for the future tax consequences of events that have been recognized in our financial statements or tax returns. In estimating future tax consequences, we generally consider all expected future events other than enactments of changes in the tax law or rates. Until sufficient taxable income to offset the temporary timing differences attributable to operations and the tax deductions attributable to option, warrant and stock activities are assured, a valuation allowance equaling the total net current and non-current deferred tax asset is being provided (see Note 9).

 

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. The Internal Revenue Service (“IRS”) has examined our then tax year ended September 30, 2005 and has made no changes to the filed tax returns. The tax years 2006 and forward remain open to examination by the IRS. The tax years 2004 and forward remain open to examination by the various state taxing authorities to which we are subject.

 

Fair Value of Financial Instruments

Cash and cash equivalents, accounts receivable and accounts payable are reflected in the Financial Statements at carrying value which approximates fair value because of the short-term maturity of these instruments. Determination of the fair value of related party payables, if any, is not practicable due to their related party nature.

 

Recently Issued Accounting Standards

In November 2008, the SEC issued for comment a proposed roadmap regarding the potential use by U.S. issuers of financial statements prepared in accordance with International Financial Reporting Standards (“IFRS”). IFRS is a comprehensive series of accounting standards published by the International Accounting Standards Board (“IASB”). The proposed roadmap has since been superseded by an SEC work plan and no date is currently proposed that we could be required to prepare financial statements in accordance with IFRS. The SEC has targeted Fiscal 2013 to make a determination regarding the mandatory adoption of IFRS. We are currently assessing the impact that this potential change would have on our consolidated financial statements and we will continue to monitor the development of the potential implementation of IFRS.

  

In June 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2011-05, “Comprehensive Income (ASU Topic 220): Presentation of Comprehensive Income,” (“ASU 2011-05”) which amends current comprehensive income guidance. This accounting update eliminates the option to present the components of other comprehensive income as part of the statement of shareholders’ equity. Instead, comprehensive income must be presented in either a single continuous statement of comprehensive income which contains two sections, net income and other comprehensive income, or in two separate but consecutive statements. ASU 2011-05 was effective for fiscal periods beginning after December 15, 2011 with early adoption permitted. In December 2011, the FASB issued ASU 2011-12 “Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05.” This accounting update stated that the specific requirement to present items that are reclassified from other comprehensive income to net income alongside their respective components of net income and other comprehensive income will be deferred. In February 2013, the FASB issued ASU 2013-02 “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income”. This accounting update requires companies to present the effects on the line items of net income of significant reclassifications out of accumulated other comprehensive income if the amount being reclassified is required under U.S. generally accepted accounting principles to be reclassified in its entirety to net income in the same reporting period.  ASU 2013-02 is effective prospectively for fiscal years beginning after December 15, 2012. We do not expect the adoption of the amended guidance to have a significant impact on our consolidated financial position, results of operations or cash flows.

 

In September 2011, the FASB issued Accounting Standards Update No. 2011-08, “Intangibles – Goodwill and Other Topics” (“ASU 2011-08”) which provides authoritative guidance on testing goodwill for impairment that will become effective beginning January 1, 2012, with earlier adoption permitted. The revised standard is intended to reduce the cost and complexity of the annual goodwill impairment test by providing entities an option to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. Under ASU 2011-08, an entity would not be required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The amendments include a number of events and circumstances for an entity to consider in conducting the qualitative assessment. The adoption of ASU 2011-08 did not have a material impact on our consolidated financial position, results of operations or cash flows.

 

In July 2012, the FASB provided further guidance pertaining to the testing of goodwill for impairment with the issuance of Accounting Standards Update No. 2012-02, “Intangibles – Goodwill and Other Topics” (“ASU 2012-02”). The new guidance gives the option to first assess qualitative factors to determine if it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount as a basis for determining whether it is necessary to perform a quantitative valuation test. We adopted this accounting standard in the fourth quarter of Fiscal 2012 and this adoption did not have a significant impact on our financial position, results of operations or cash flows.

PROPERTY, PLANT AND EQUIPMENT

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PROPERTY, PLANT AND EQUIPMENT
12 Months Ended
Dec. 31, 2012
Property, Plant and Equipment [Abstract]  
Property, Plant and Equipment Disclosure [Text Block]

NOTE 3 – PROPERTY, PLANT AND EQUIPMENT

 

The components of property and equipment are as follows (in thousands):

 

  December 31,   
  2012  2011  Estimated Useful Life
         
Land $504  $504   
Buildings and improvements  2,597   2,494  15 - 39 years
Machinery and equipment  2,771   2,567  3 - 7 years
Computer software  164   161  3 years
Furniture and fixtures  189   189  5 years
   6,225   5,915   
           
Less: Accumulated  depreciation  3,860   3,608   
  $2,365  $2,307   

 

Depreciation expense for Fiscal 2012, 2011 and 2010 was $252,000, $355,000, and $363,000, respectively. In Fiscal 2010, we maintained certain operating leases for office and warehouse space maintained by us and we were charged rent expense of $11,000. We did not incur rent expense in Fiscal 2012 or Fiscal 2011.

OTHER CURRENT LIABILITIES

v2.4.0.6
OTHER CURRENT LIABILITIES
12 Months Ended
Dec. 31, 2012
Other Liabilities Disclosure [Abstract]  
Other Liabilities Disclosure [Text Block]

NOTE 4 – OTHER CURRENT LIABILITIES

 

At December 31, 2012 and 2011, other current liabilities include $548,000 and $237,000, respectively, related to accrued compensation.

COMMITMENTS AND CONTINGENCIES

v2.4.0.6
COMMITMENTS AND CONTINGENCIES
12 Months Ended
Dec. 31, 2012
Commitments and Contingencies Disclosure [Abstract]  
Commitments and Contingencies Disclosure [Text Block]

NOTE 5 – COMMITMENTS AND CONTINGENCIES

 

Employment Agreements

On November 8, 2011, we entered into new employment agreements, effective as of January 1, 2012, with each of Mr. Ted Karkus and Mr. Cuddihy (the “Employment Agreements”). The Employment Agreements supersede the employment agreements of Mr. Karkus and Mr. Cuddihy, dated August 19, 2009, that had been scheduled to terminate on July 15, 2012. The scheduled termination dates of the Employment Agreements is July 15, 2015, which is three years following the scheduled expiration date set forth in the executives’ former employment agreements.

 

Under his new employment agreement with the Company, Mr. Karkus agreed to an annual base salary of $675,000 as Chief Executive Officer. Under the terms of his former employment agreement with the Company, as amended, Mr. Karkus was entitled to annual base compensation of $750,000, consisting of a $600,000 base salary and $150,000 in stock based compensation. He 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.

 

Under his new employment agreement with the Company, Mr. Cuddihy agreed to an annual base salary of $350,000 as Chief Financial Officer and Chief Operating Officer. Under the terms of his former employment agreement with the Company as the Company’s Chief Operating Officer, Mr. Cuddihy was entitled to annual base compensation of $325,000, consisting of a $275,000 base salary and $50,000 in stock based compensation. 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.

 

Each executive is subject to non-competition restrictions for up to a period of either six (6) months or eighteen (18) months following termination of employment depending on the nature of the termination. Each executive is also eligible for a gross up payment in the event that any amounts payable under the agreements (or any other plan, program, policy or arrangement with the Company) become subject to the excise tax imposed by Section 4999 of the Internal Revenue Code.

 

The Employment Agreements also provide for payments upon certain terminations and change in control benefits to ensure that they work to secure the best outcome for stockholders in the event of a possible change in control, even if it means that they lose their jobs as a result. Under the Employment Agreements, in the event of the termination by the Company of the employment of Mr. Karkus or Mr. Cuddihy without cause or due to a voluntary resignation by either executive with Good Reason (as defined in the agreements), each executive will be paid a lump sum severance payment in cash equal to the greater of (A) the amount equal to eighteen (18) months base salary or (B) the amount equal to the his base salary for the remainder of the term as if the agreement had not been terminated.

 

Additionally, each executive is entitled to receive a lump sum severance payment in cash equal to the greater of A or B, if he, within twenty four (24) months of a Change in Control (as defined in the agreements) of the Company, is terminated without cause or due to a voluntary resignation by him with Good Reason (as defined in the agreements). Each executive may also participate at Company expense in all medical and dental plans for the remainder of the term of his employment agreement in the event the Company terminates the employment agreement for any reason, except for the Company’s termination for Cause (as defined in the agreements) or a voluntary resignation by him without Good Reason (as defined in the agreements).

 

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 “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 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 will accrue interest at the per annum rate of 3.25%. Under the 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. As a result of the Settlement Agreement, we realized $1.0 million benefit due to the reduction of the previously recorded accrued royalties and commission obligation of $3.5 million. At December 31, 2012, other current liabilities and other long term obligation include $100,000 and $300,000, respectively, for the four additional annual installment payments.

 

PROPHASE LABS, INC.(formerly THE QUIGLEY CORPORATION) vs. Guy Quigley, Gary Quigley, Scanda Systems Limited, Scanda Systems LTD, Chilesha Holdings LTD, Kevin Brogan, Innerlight Holdings, Inc., George Longo, Graham Brandon AND Pacific Rim Pharmaceuticals LTD

On August 23, 2010, we initiated an action in the Court of Common Pleas of Bucks County, Pennsylvania Civil Action No. 2010-08227. This action is against certain former officers and directors of the Company, including a shareholder that beneficially owns approximately 9.5% of our Common Stock, and against certain third parties. The Company has asserted claims arising from, among other things, a variety of transactions and payments previously made or entered into by the Company. All of the transactions and events that are the subject of this litigation occurred prior to June 2009 and the installation of the current board of directors. We are seeking recovery of monetary damages and other relief. Pre-trial discovery is on-going at this time and no prediction as to the outcome of this action can be made.

  

GUY QUIGLEY VS. TED KARKUS, ROBERT V. CUDDIHY, JR., MARK BURNETT, MARK LEVENTHAL, MARK FRANK, LOUIS GLECKEL, MD, JAMES McCUBBIN AND PROPHASE LABS, INC. AS A NOMINAL DEFENDANT

We were named as a nominal defendant in a purported derivative complaint filed on February 2, 2012 by stockholder and former director and Chief Executive Officer Guy Quigley in the Court of Common Pleas of Philadelphia County, Pennsylvania (No. 111200409). The complaint also names as a defendant each of our directors and executive officers. Among other things, the suit alleges various breaches of fiduciary and other duties, and seeks recovery of unspecified damages and other relief. Prior to filing this complaint, the plaintiff applied to the same court for permission to take pre-complaint discovery on the basis that the plaintiff required such discovery in order to assert claims. The court denied the plaintiff's request. We believe the lawsuit is without merit and intend to vigorously defend against it. Pre-trial discovery is on-going at this time and no prediction as to the outcome of this action can be made.

 

As noted above, we previously commenced litigation against the plaintiff, Guy Quigley, and other parties in August 2010 in the Bucks County Court of Common Pleas, Pennsylvania (No. 2010-08227). The August 2010 action remains pending.

 

PROPHASE LABS, INC.(formerly THE QUIGLEY CORPORATION) vs. Guy Quigley, KARIBA HOLDINGS, LIMITED, WENDY QUIGLEY, Gary Quigley, FRANCES QUIGLEY (A/K/A FRANCES BOSTON) AND JOSEPHINE QUIGLEY (A/K/A JOSEPHINE GLEESON)

On July 19, 2012, we initiated an action in the Court of Common Pleas of Bucks County, Pennsylvania (“Kariba Complaint”) (No. 2011-09815). The Kariba Complaint names as defendants (i) a former officer and director of the Company, who is a shareholder that beneficially owns approximately 9.5% of our Common Stock, (ii) certain family members of such former officer and director, some of whom are former employees of the Company, and (iii) certain third parties. The Company has asserted claims arising from, among other things, a variety of transactions and payments previously made or entered into by the Company. The Kariba Complaint asserts additional claims not previously asserted in the action ProPhase Labs, Inc. (formerly The Quigley Corporation) vs. Guy Quigley, Gary Quigley, Scanda Systems Limited, Scanda Systems LTD, Chilesha Holdings LTD, Kevin Brogan, Innerlight Holdings, Inc., George Longo, Graham Brandon, Pacific Rim Pharmaceuticals LTD and Joe Doe Defendants (No. 2010-08227). All of the transactions and events that are the subject of the Kariba Complaint occurred prior to June 2009 and the installation of the current board of directors.  We are seeking recovery of monetary damages and other relief. Pre-trial discovery is on-going and at this time, no prediction as to the outcome of this action can be made.

 

Future Obligations

We have approximate future obligations over the next five years as follows (in thousands):

 

Year   Employment
Contracts
    Settlment
Agreement
    Total  
2013   $ 1,025     $ 100     $ 1,125  
2014     1,025       100       1,125  
2015     555       100       655  
2016     -       100       100  
2017     -       -       -  
Total   $ 2,605     $ 400     $ 3,005  

 

Equity Line of Credit

On November 21, 2012, we entered into the equity line of credit agreement (such arrangement, the “Equity Line”) with 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 Equity Line. On November 26, 2012, we filed a registration statement with Securities and Exchange Commission (“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.

STOCKHOLDERS' EQUITY AND STOCK COMPENSATION

v2.4.0.6
STOCKHOLDERS' EQUITY AND STOCK COMPENSATION
12 Months Ended
Dec. 31, 2012
Stockholders' Equity Note [Abstract]  
Stockholders' Equity Note Disclosure [Text Block]

NOTE 6 – STOCKHOLDERS’ EQUITY AND STOCK COMPENSATION (CONTINUED)

 

We may draw on the facility from time to time, as and when we determine appropriate in accordance with the terms and conditions of the Equity Line. The maximum amount that we are entitled to put to Dutchess in any one draw down notice is the greater of (i) 500% of the average daily volume of our Common Stock traded on the NASDAQ Global Market for the one (1) trading day prior to the date of delivery of the applicable draw down notice, multiplied by the closing price for such trading day, or (ii) $250,000.

 

The purchase price under the Equity Line is set at ninety-five percent (95%) of the lowest daily volume weighted average price (VWAP) of our Common Stock during the five (5) consecutive trading day period beginning on the date of delivery of the applicable draw down 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 has the right to use any such excess proceeds to off-set against the aggregated deficit proceeds.

 

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 not allowed to deliver another draw down notice. In addition, Dutchess is not obligated to purchase shares if its total number of shares beneficially held at that time would exceed 9.99% of the number of shares of our 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.

 

In December 2012, we sold an aggregate of 883,722 shares of Common Stock to Dutchess under and pursuant to the Equity Line.  We derived approximately $1.1 million in net proceeds through the usage of the Equity Line of which we received $839,000 of such proceeds prior to December 31, 2012 and we have included in receivables the balance of $230,000 which we received on January 4, 2013. On March 6, 2013, we sold an aggregate of 125,000 shares of our Common Stock under and pursuant to the Equity Line and derived net proceeds of $195,000. The sales of the shares under the 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 March 15, 2013, we have 1,491,278 shares of our Common Stock available for sale, at our discretion, under the terms of the Equity Line and covered pursuant to a registration statement

 

Stockholder Rights Plan

On September 8, 1998, our Board of Directors declared a dividend distribution of Common Stock Purchase Rights (each individually, a “Right” and collectively, the “Rights”) payable to the stockholders of record on September 25, 1998, thereby creating a Stockholder Rights Plan (the “Rights Agreement”). The Plan was amended effective May 23, 2008 (“First Amendment”) and further amended effective August 18, 2009 (“Second Amendment”). The Rights Agreement, as amended, provides that each Right entitles the stockholder of record to purchase from the Company that number of common shares having a combined market value equal to two times the Rights exercise price of $45. The Rights are not exercisable until the distribution date, which will be the earlier of a public announcement that a person or group of affiliated or associated persons has acquired 15% or more of the outstanding common shares, or the announcement of an intention by a similarly constituted party to make a tender or exchange offer resulting in the ownership of 15% or more of the outstanding common shares. The dividend has the effect of giving the stockholder a 50% discount on the share’s current market value for exercising such right. In the event of a cashless exercise of the Right, and the acquirer has acquired less than 50% beneficial ownership of the Company, a stockholder may exchange one Right for one common share of the Company. The Rights Agreement, as amended, includes a provision pursuant to which our Board of Directors may exempt from the provisions of the Rights Agreement an offer for all outstanding shares of our Common Stock that the directors determine to be fair and not inadequate and to otherwise be in the best interests of the Company and its stockholders, after receiving advice from one or more investment banking firms. The expiration date of the Rights Agreement, as amended, is September 25, 2018.

  

The 1997 Option Plan

On December 2, 1997, our Board of Directors approved a Stock Option Plan (the “1997 Plan”), which was amended in 2005, and provided for the granting of up to 4.5 million shares of Common Stock. Under the 1997 Plan, we were permitted to grant options to employees, officers or directors of the Company at variable percentages of the market value of stock at the date of grant. No incentive stock option could be exercisable more than ten years after the date of grant or five years after the date of grant where the individual owns more than ten percent of the total combined voting power of all classes of stock. Stockholders approved the 1997 Plan in Fiscal 1998. No options were granted under this Plan during Fiscal 2012, 2011 or 2010.

 

At December 31, 2012, we are precluded from issuing any additional options or grants in the future under the 1997 Plan pursuant to the terms of the plan document. Options previously granted continue to be available for exercise at any time prior to such options’ respective expiration dates, but in no event later than ten years from the date granted. At December 31, 2012, there are 99,000 options outstanding with various expiration dates ranging from October 2013 through December 2015, depending upon the date of grant.

 

The 2010 Equity Compensation Plan

On May 5, 2010, our shareholders approved the 2010 Equity Compensation Plan which was subsequently amended, restated and approved by shareholders on April 24, 2011 (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 900,000 shares plus up to 900,000 shares that are authorized for issuance but unissued under the 1997 Plan for an aggregate of 1.8 million shares. The 1997 Plan expired on December 2, 2007 and no additional awards may be made. As of December 31, 2012, 1,449,750 of the options issued under the 1997 Plan prior to December 2007 expired unexercised or were terminated (the “Expired Options”). As a consequence, these shares are deemed and remain unissued which up to a maximum of 900,000 shares became available for issuance under the 2010 Plan and the remaining 450,750 options are deemed cancelled.

 

Stock Options

All of the Company’s 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 the Company are also eligible to participate in the 2010 Plan. For Fiscal 2012, 2011 and 2010, we granted 15,000, 220,000 and 982,000 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:

 

  Year Ended December 31, 
  2012  2011  2010 
Number of options granted  15,000   220,000   982,000 
Vesting period  3 years   4 years   3-6 years 
Maximum term of option from date of grant  7 years   7 years   7 years 
Exercise price per share $1.36  $0.87 - $1.17  $1.00 
Weighted average fair value per share of options granted during the year $0.85  $0.58  $0.65 

 

 

We used the Black-Scholes option pricing model during Fiscal 2012, 2011 and 2010 to determine the fair value of the stock options at the date of grant. Based upon our limited historical experience, we estimated approximately zero, 33,000 and 27,300, respectively, of the options granted in Fiscal 2012, 2011 and 2010 may ultimately be forfeited. Additionally, we determined the expected term of the stock option grants to be a range between 4.5 to 6.5 years, calculated using the “simplified” method in accordance with the SEC Staff Accounting Bulletin 110. We use the “simplified” method since we changed the vesting terms, tax treatment and the recipients of our stock options beginning in Fiscal 2010 such that we believe 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 at the date of grant:

 

  Year Ended December 31, 
  2012  2011  2010 
Expected option life  4.5 years   4.75 years   4.5 - 6.5 years 
Weighted average risk free rate  0.75%  1.28%  2.10%
Dividend yield  0%  0%  0%
Expected volatility  83.06%  75.84% - 78.62%  72.17% - 77.63%

 

The fair value of the stock options at the time of the grant in Fiscal 2012, 2011 and 2010 was approximately $13,000, $127,000 and $618,000, respectively. Each of the stock options granted were subject to vesting such that the fair value of the stock options granted is charged to operations over the vesting period. For Fiscal 2012, 2011 and 2010, we charged to operations $153,000, $131,000 and $42,000, respectively, for share-based compensation expense for the aggregate fair value of the vested stock options earned.

 

At December 31, 2012, of the options granted in Fiscal 2012, 2011 and 2010 488,165 were vested and 719,335 are subject to vesting. At December 31, 2012, there are 159 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 to both employees and non-employees as of December 31, 2012, 2011 and 2010 and changes during the years then ended is presented below (in thousands, except per share data):

 

  Year Ended December 31, 
  2012  2011  2010 
     Weighted Average     Weighted Average     Weighted Average 
  Shares  Exercise Price  Shares  Exercise Price  Shares  Exercise Price 
Options outstanding - beginning of year  1,333  $1.88   1,300  $2.99   1,488  $8.64 
Granted  15   1.36   220   1.10   982   1.00 
Exercised  -   -   -   -   (131)  1.02 
Cancelled  (41)  8.11   (187)  8.67   (1,039)  9.45 
Options outstanding - end of year  1,307  $1.72   1,333  $1.88   1,300  $2.99 
                         
Options granted and subject to future vesting  719  $1.01   957   1.02   937   1.00 
                         
Exercisable, at end of year  588       376       363     
Available for grant  -       14       818     

 

The unrecognized share-based compensation expense related to the options granted but not vested, (options to acquire 719,335 shares) was approximately $445,000 at December 31, 2012. These options subject to vesting (i) vest over the next 1 to 4 years, (ii) have a 7 year term from the date of grant, (iii) are exercisable at a weighted average price of $1.01 and (iv) the unrecognized share-based compensation expense is expected to be recognized over a weighted average period of 3.2 years.

  

The following table summarizes information about stock options outstanding and stock options exercisable at December 31, 2012 (in thousands, except remaining life and per share data):

 

  Options Outstanding and Exercisable 
Range of
Exercise Prices
 Number
Outstanding
  Weighted Average
Remaining
Contractual Life
  Weighted Average
Exercise Price Per
Share
 
$0.87 - $1.36  488   5.6  $1.10 
$1.37 - $8.11  32   0.8  $8.11 
$8.12 - $9.50  41   1.8  $9.50 
$9.51 - $13.80  27   3.0  $13.80 
Total  588      $2.56 

 

The total intrinsic value of options exercised during Fiscal 2010 was$107,000. There were no options exercised during Fiscal 2012 or 2011. 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, 2012 was $388,000, $224,000 and $164,000, respectively.

 

Stock Grants

In April 2011, the Compensation Committee of the Board of Directors approved an amendment to Mr. Karkus’ then employment agreement, dated August 19, 2009 (the “Amendment”) to lower his annual salary by $150,000 (or $12,500 per month) in exchange for a grant of restricted stock equal in value to the salary reduction. Pursuant to the Amendment, Mr. Karkus’ annual base salary was decreased from $750,000 per year to $600,000 per year, effective May 1, 2011 thru July 15, 2012, which was the end of the term of his then employment agreement, as amended. As a consequence of the Amendment, a restricted stock grant under the 2010 Plan equal to $12,500 of shares per month thru the end of the term (14.5 months). The restricted stock grant was made in an upfront grant of 161,830 shares, subject to certain future vesting conditions, at a value of $181,000 as of the grant date. The grant was made in April 2011, and the amount of the shares issued was calculated based on the average closing price of our Common Stock for the last five (5) trading days prior to and including the issuance date of April 21, 2011. For Fiscal 2012 and 2011, we have charged to operations $81,000 and $100,000, respectively, as share-based compensation expense for the restricted stock grant.

 

In addition, in April 2011, the Compensation Committee of the Board of Directors granted Mr. Karkus 133,928 shares of Common Stock under the 2010 Plan as payment for his Fiscal 2010 bonus. Furthermore, in December 2011, the Compensation Committee of the Board of Directors granted Mr. Karkus 134,409 shares of Common Stock under the 2010 Plan as payment for his Fiscal 2011 bonus. Mr. Karkus agreed to accept his Fiscal 2011 and Fiscal 2010 cash bonus of $150,000 for each year in shares of our Common Stock.

 

In April 2011, Mr. Karkus also agreed to convert into shares of our Common Stock $144,000 of deferred and unpaid cash compensation owed to him thru April 2011, resulting in an issuance of 128,571 shares under the 2010 Plan. The amount of these shares issued to Mr. Karkus was calculated based on the average closing price of the Company’s shares for the last five (5) trading days prior to and including the issuance dates of April 21, 2011.

 

In December 2011, the Compensation Committee of the Board of Directors granted Mr. Cuddihy 33,603 shares of Common Stock, under the 2010 Plan valued at $37,500 as payment for 50% of his Fiscal 2011 bonus.

  

The 2010 Directors Equity Compensation Plan

On May 5, 2010, our shareholders approved the 2010 Directors’ Equity Compensation Plan. A primary purpose of the 2010 Directors’ Equity Compensation Plan is to provide us with the ability to pay all or a portion of the fees of Directors in restricted stock instead of cash. The 2010 Directors’ Equity Compensation Plan provides that the total number of shares of Common Stock that may be issued under the 2010 Directors’ Equity Compensation Plan is equal to 250,000 shares. In Fiscal 2012 no shares were granted to directors. In Fiscal 2011 and 2010, we granted 164,770 and 67,625 shares, respectively, of our Common Stock valued at $162,000 and $90,000, respectively, for director compensation. At December 31, 2012, there are 17,605 shares of Common Stock that may be issued pursuant to the terms of the 2010 Directors’ Equity Compensation Plan.

 

Stock Option Exercises and Other Grants

Pursuant to the terms of Mr. Cuddihy’s prior employment agreement dated August 19, 2009, Mr. Cuddihy received an annual grant of shares of Common Stock that is equal to $50,000, payable quarterly,promptly following the close of each quarter calculated based on the average closing price of our Common Stock for the last five (5) trading days of the quarter. Under the new employment agreement no stock was earned in Fiscal 2012. For Fiscal, 2011 and 2010, Mr. Cuddihy earned, 51,642 and 35,075 shares, respectively, valued at $50,000 and $50,000, respectively, as share-based compensation.

 

There were no stock options exercised in Fiscal 2012 or 2011. For Fiscal 2010, we derived net proceeds of $133,000, as a consequence of the exercise of options to acquire 130,500 of our Common Stock pursuant to the terms of our 1997 Option Plan.

 

Purchase of Treasury Stock

In September 2011, we entered into a redemption agreement with PSI Parent. Under the terms of the redemption agreement, we redeemed 690,000 shares of our Common Stock held by PSI Parent for the aggregate redemption price of $448,500 in cash (see Note 8). The redemption price was equal to $0.65 per share.

DEFINED CONTRIBUTION PLANS

v2.4.0.6
DEFINED CONTRIBUTION PLANS
12 Months Ended
Dec. 31, 2012
Compensation and Retirement Disclosure [Abstract]  
Pension and Other Postretirement Benefits Disclosure [Text Block]

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 2012, 2011 and 2010 were $104,000, $88,000 and $90,000, respectively.

INVESTMENT IN PHUSION LABORATORIES, LLC.

v2.4.0.6
INVESTMENT IN PHUSION LABORATORIES, LLC.
12 Months Ended
Dec. 31, 2012
Investments In and Advances To Affiliates, Schedule Of Investments [Abstract]  
Investments in and Advances to Affiliates, Schedule of Investments [Text Block]

NOTE 8 – INVESTMENT IN PHUSION LABORATORIES, LLC.

 

On March 22, 2010, we, PSI Parent, PSI and the Joint Venture entered into the LLC Agreement of the Joint Venture and additional related agreements for the purpose of developing and commercializing, for worldwide distribution and sale, a wide range of non-prescription remedies using PSI Parent’s proprietary patented TPM.

 

In connection with the LLC Agreement, PSI Parent granted to us, pursuant to the terms of a License Agreement, dated March 22, 2010 (the “Original License Agreement”), (i) an exclusive, royalty-free, world-wide (subject to certain limitations), paid-up license to exploit OTC drugs and certain other products that embody certain of PSI Parent’s TPM-related patents and related know-how (collectively, the “PSI Technology”) and (ii) a non-exclusive, royalty-free, world-wide (subject to certain limitations), paid-up license to exploit certain compounds that embody the PSI Technology for use in a product combining one or more of such compounds with an OTC drug or in a product that is part of a regimen that includes the application of an OTC drug.

 

The Joint Venture is managed by a four-person Board of Managers, with two managers appointed by each member. The LLC Agreement contains other normally found terms in such arrangements, including provisions relating to governance of the Joint Venture, indemnification obligations of the Joint Venture, allocation of profits and losses, the distribution of funds to the members and restrictions on transfer of a member’s interest.

  

Pursuant to the Original License Agreement, we issued 1,440,000 shares of our Common Stock having an aggregate value of approximately $2.6 million to PSI Parent (such shares, the “PSI Shares”), and made a one-time payment to PSI Parent of $1.0 million.

 

On the date the PSI Shares were issued, PSI Parent agreed, pursuant to a Share Transfer Restriction Agreement, dated March 22, 2010 (the “Share Transfer Restriction Agreement”), between us and PSI Parent, that, with certain exceptions, it would not sell or otherwise dispose of any of the PSI Shares prior to June 1, 2012 (see discussion below). The PSI Shares were issued pursuant to an exemption from registration under the Securities Act, by virtue of Section 4(2) of the Securities Act and by virtue of Rule 506 of Regulation D under the Securities Act. Such sale and issuance did not involve any public offering and was made without general solicitation or advertising. Additionally, PSI Parent represented to us, among other things, that PSI Parent is not a US Person (as defined in Regulation S under the Securities Act), that PSI Parent is an accredited investor with access to all relevant information necessary to evaluate its investment and that the PSI Shares were being acquired for investment purposes only.

 

In September 2011, PSI Parent entered into certain Private Resale Agreements (“PSAs”) with seven third party purchasers, under which Phosphagenics sold, with our consent, an aggregate of 750,000 shares of our Common Stock. Under the PSAs, the purchasers may not, without the prior written consent of the Company, prior to the one year anniversary of the PSAs, directly or indirectly, sell, give, pledge, hypothecate, assign or otherwise transfer the purchased shares, in whole or in part. Contemporaneously with PSI Parent consummating the PSAs, we consummated an agreement with PSI Parent to redeem the then remaining 690,000 PSI Shares held by PSI Parent.

 

In accordance with a Contribution Agreement, dated March 22, 2010 (the “Contribution Agreement”), by and among us, PSI Parent, PSI, and the Joint Venture, we transferred, conveyed and assigned to the Joint Venture all of our rights, title and interest in, to and under the Original License Agreement, and the Joint Venture assumed, and undertook to pay, discharge and perform when due, all of our liabilities and obligations under and arising pursuant to the Original License Agreement (such actions, collectively, the “Assignment and Assumption”).

 

Pursuant to the Contribution Agreement and in order to reflect the Assignment and Assumption, we, PSI Parent and the Joint Venture entered into an Amended and Restated License Agreement, dated March 22, 2010 (the “Amended License Agreement”), which amends and restates the Original License Agreement to reflect that the Joint Venture is the licensee thereunder and which otherwise contains substantially the same terms as the Original License Agreement. The Joint Venture has the right to grant one or more sub-licenses of the rights granted under the Amended License Agreement to one or more third parties for reasonable consideration in any part of the applicable territory. The Amended License Agreement provides that PSI Parent shall not, directly or through third parties, exploit the covered intellectual property during the term thereof, subject to certain limitations. The Amended License Agreement will remain in effect until the expiration of the last to expire of the patents included within the PSI Technology or any extensions thereof. Either party may terminate the Amended License Agreement upon written notice to the other party in the event of certain events involving bankruptcy or insolvency. The Amended License Agreement also contains, among other things, provisions concerning the treatment of confidential information, the ownership of intellectual property and indemnification obligations.

 

Pursuant to the LLC Agreement, we and PSI each own a 50% membership interest in the Joint Venture. PSI Parent will conduct and oversee much of the product development, formulation, testing and other research and development needed by the Joint Venture, and we will oversee much of the production, distribution, sales and marketing. The LLC Agreement provides that each member may be required, from time to time and subject to certain limitations, to make capital contributions to the Joint Venture to fund its operations, in accordance with agreed upon budgets for products to be developed. Specifically, we contributed in Fiscal 2010 $500,000 in cash as initial capital and we are committed to fund up to $2.0 million, subject to agreed upon budgets (which have not been established to date), toward the initial development and marketing costs of new products for the Joint Venture. The newly formed Joint Venture has not engaged in any financial transactions, other than organizational expenses and general market and initial product evaluation and analysis. At December 31, 2012, cash and equivalents includes $381,000 which is expected to be used by the Joint Venture to fund future product development initiatives currently under consideration by PSI Parent, PSI and us.

  

Our determination is that the Joint Venture qualifies as a VIE and that we are the primary beneficiary. As a consequence, we have consolidated the Joint Venture financial statements beginning with the quarter ended March 31, 2010. In Fiscal 2010, we recorded the $3.6 million payment noted above representing the estimated fair value to acquire the product license as an intangible asset. We currently estimate the expected remaining useful life of the product license to be approximately 14 years which we will begin amortizing the cost of intangible asset once product commercialization is completed with PSI Parent and the OTC drug products begin to ship to our retail customers. Since inception and including Fiscal 2012, the newly formed Joint Venture has not engaged in any financial transactions, other than certain organizational expenses and general market and product evaluation and analysis. Furthermore, the liabilities and other obligations incurred, if any, by the Joint Venture is without recourse to us and do not create a claim on our general assets.

 

During Fiscal 2012 and due to multiple factors affecting our capital position, including the payment we made in December 2012 under the Settlement Agreement (see Note 5) and some of the product market research performed, we expect to modify the Joint Venture’s product development plans to stagger and/or deferr into future periods certain product development initiatives due to the pre-commercialization investments required. We expect to continue pre-commercialization research and product development initiatives during the latter half of Fiscal 2013. Furthermore, we do not expect that the Joint Venture will derive any meaningful revenues, if any, until its commercialization efforts are completed which is not expected to occur until at the earliest the latter half of Fiscal 2014 when we traditionally seek to launch new products.

INCOME TAXES

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INCOME TAXES
12 Months Ended
Dec. 31, 2012
Income Tax Disclosure [Abstract]  
Income Tax Disclosure [Text Block]

NOTE 9 – INCOME TAXES

 

The components of the provision (benefit) for income taxes, in the consolidated statement of operations are as follows (in thousands):

 

    Year Ended December 31,  
    2012     2011     2010  
Current                        
Federal   $ -     $ -     $ (40 )
State     -       -       -  
      -       -       (40 )
Deferred                        
Federal     (618 )     (877 )     (107 )
State     1,377       (21 )     160  
      759     (898 )     53  
Total   $ 759   $ (898 )   $ 13  
                         
Income taxes from continuing operations before valuation allowance   $ 759   $ (898 )   $ 13  
Change in valuation allowance     (759 )     898       (53 )
Income tax (benefit)     -       -       (40 )
Total   $ -     $ -     $ (40 )

  

A reconciliation of the statutory federal income tax expense (benefit) to the effective tax is as follows (in thousands):

 

    Year Ended December 31,  
    2012     2011     2010  
                   
Statutory rate - federal   $ (661 )   $ (925 )   $ (1,204 )
State taxes, net of federal benefit     1,377       (21 )     -  
Permanent differences and other     43       48       (143 )
Income tax from continuing operation before valuation allowance     759     (898 )     (1,347 )
                         
Change in valuation allowance     (759 )     898     1,307  
                         
Income tax (benefit)     -       -       (40 )
Total   $ -     $ -     $ (40 )

 

The components of permanent and other differences are as follows (in thousands):

 

    Year Ended December 31,  
    2012     2011     2010  
Permanent items:                        
Meals and Entertainment   $ 6     $ 2     $ 5  
Return to provision adjustment     (46 )     -       -  
Contribution of inventory(1)     4       -       (162 )
Share-based compensation expense for stock options granted  (2)     79       45       14  
    $ 43     $ 47     $ (143 )

 

(1) This item represents the additional tax deduction available as a consequence of the contribution of certain inventory to qualified charitable organization.
(2) This item relates to share-based compensation expense for financial reporting purposes not deducted for tax purposes until such options are exercised.

 

The tax effects of the primary “temporary differences” between values recorded for assets and liabilities for financial reporting purposes and values utilized for measurement in accordance with tax laws giving rise to our deferred tax assets are as follows (in thousands):

 

    Year Ended December 31,  
    2012     2011     2010  
                   
Net operating loss and capital loss carryforward   $ 14,158     $ 13,170     $ 12,135  
Consulting-royalty costs     121       1,431       1,431  
Depreciation     60       235       253  
Other     983       757       877  
Valuation allowance     (15,322 )     (15,593 )     (14,696 )
Total   $ -     $ -     $ -  

  

A valuation allowance for all of our net deferred tax assets has been provided as we are unable to determine, at this time, that the generation of future taxable income against which the net operating loss (“NOL”) carryforwards could be used can be predicted to be more likely than not. The net change in the valuation allowance for Fiscal 2012, 2011 and 2010 was $271,000, ($898,000) and ($424,000), 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 $6.4 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 $37.7 million for federal purposes will expire beginning in Fiscal 2020 through 2032. Additionally, there are net operating loss carry-forwards of $21.4 million for state purposes that will expire beginning in Fiscal 2018 through 2032.

 

For Fiscal 2010, we had a current tax benefit of $40,000 for an alternative minimum tax refund due us as a consequence of a carry back of an alternative minimum tax net operating loss to a prior period. Our income tax classifications for Fiscal 2011 and Fiscal 2010 have been reclassified to conform to our Fiscal 2012 presentation.

EARNINGS PER SHARE

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EARNINGS PER SHARE
12 Months Ended
Dec. 31, 2012
Earnings Per Share [Abstract]  
Earnings Per Share [Text Block]

NOTE 10 – 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):

 

  Year Ended December 31, 
  2012  2011  2010 
  Loss  Shares  EPS  Loss  Shares  EPS  Loss  Shares  EPS 
                            
Basic EPS $(1,091)  14,843  $(0.07) $(2,710)  14,817  $(0.18) $(3,501)  14,285  $(0.25)
Dilutives:                                    
Options/Warrants  -   -   -   -   -   -   -   -   - 
                                     
Diluted EPS $(1,091)  14,843  $(0.07) $(2,710)  14,817  $(0.18) $(3,501)  14,285  $(0.25)

 

For Fiscal 2012, 2011 and 2010, 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 2012, 2011 and 2010, there were Common Stock Equivalents in the amount of 177,035, 48,375 and 359,188, respectively, which were in the money, that were excluded in the earnings per share computation due to their dilutive effect.

SIGNIFICANT CUSTOMERS

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SIGNIFICANT CUSTOMERS
12 Months Ended
Dec. 31, 2012
Significant Customers [Abstract]  
Significant Customers [Text Block]

NOTE 11 – SIGNIFICANT CUSTOMERS

 

Our products are distributed through numerous food, multi-outlet pharmacy and chain drug stores, large wholesalers and mass merchandisers throughout the United States. Revenues for Fiscal 2012, 2011 and 2010 were $23.4 million, $17.5 million and $14.5 million, respectively. Walgreen Company (“Walgreens”), Wal-Mart Stores Inc (“Wal-Mart”) and CVS Caremark Corporation (“CVS”) accounted for approximately 19%, 14% and 13% of our Fiscal 2012 revenues. Walgreen, Wal-Mart, CVS and Rite-Aid Corp (“Rite Aid”) accounted for approximately 17%, 14%, 13% and 12% of our Fiscal 2011 revenues. Walgreens, Wal-Mart and Rite Aid accounted for approximately 23%, 14% and 10% of our Fiscal 2010 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 65% and 53% of total trade receivable balances at December 31, 2012 and 2011, 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, 2012 and 2011.

QUARTERLY INFORMATION (UNAUDITED)

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QUARTERLY INFORMATION (UNAUDITED)
12 Months Ended
Dec. 31, 2012
Quarterly Financial Information Disclosure [Abstract]  
Quarterly Financial Information [Text Block]

NOTE 12 – QUARTERLY INFORMATION (UNAUDITED)

 

The following table presents unaudited quarterly financial information for Fiscal 2012 and Fiscal 2011 (in thousands, except per share amounts):

 

  Quarter Ended 
  March 31,  June 30,  September 30,  December 31, 
Fiscal 2012            
Net sales $6,018  $1,894  $5,415  $9,079 
Gross profit $4,340  $825  $3,399  $5,688 
Net income (loss) $(688) $(1,930) $1,074  $453 
                 
Basic and diluted earnings (loss) per share:                
Net income  (loss) $(0.05) $(0.13) $0.07  $0.04 
                 
Fiscal 2011                
Net sales $3,166  $1,744  $5,083  $7,460 
Gross profit $1,994  $896  $3,596  $4,796 
Net income (loss) $(1,013) $(976) $1,110  $(1,831)
                 
Basic and diluted earnings (loss) per share:                
Net income  (loss) $(0.07) $(0.07) $0.07  $(0.12)

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies)

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies)
12 Months Ended
Dec. 31, 2012
Accounting Policies [Abstract]  
Organization, Consolidation, Basis of Presentation, Business Description and Accounting Policies [Policy Text Block]

Basis of Presentation

The consolidated financial statements (“Financial Statements”) include the accounts of the Company and its wholly owned subsidiaries and its Joint Venture, a variable interest entity (see Note 8). All intercompany transactions and balances have been eliminated.

Nature Of Operations [Policy Text Block]

Seasonality of the Business

Our net sales are derived principally from our OTC cold remedy products. Currently, our sales are influenced by and subject to fluctuations in the timing of purchase and the ultimate level of demand for our products which are a function of the timing, length and severity of each cold season. Generally, a cold season is defined as the period of September to March when the incidence of the common cold rises as a consequence of the change in weather and other factors. We generally experience in the 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.

Use of Estimates, Policy [Policy Text Block]

Use of Estimates

The preparation of financial statements and the accompanying notes thereto, in conformity with generally accepted accounting principles in the United States (“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-EEZEÒlozenges, utilizes a proprietary zinc formulation which has been clinically proven to reduce the duration of the common cold. 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® lozenges we market and distribute Cold-EEZE® Cold Remedy Daytime/Nighttime QuickMelts®, Cold-EEZE® Oral Spray and Kids-EEZE® Cough Cold and Kids-EEZE® Allergy (“Kids-EEZE® Products”), children’s OTC cold remedies. In August 2012 we introduced our, Cold-EEZE® Cold Remedy Daytime/Nighttime QuickMelts®. Cold-EEZE® Oral Spray containing our proprietary zinc formulation in a liquid spray form was introduced in August 2011. We introduced Kids-EEZE® Chest Relief in Fiscal 2008 and expanded the product line to include Kids-EEZE® Cough Cold and Kids-EEZE® Allergy in Fiscal 2010. We also manufacture, market and distribute an organic cough drop and a Vitamin C supplement (“Organix®”). Each of the Cold-EEZE® QuickMelts and Oral Spray products, Kids-EEZE® Products and Organix® 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 and Cash Equivalents, Policy [Policy Text Block]

Cash Equivalents

We consider all highly liquid investments with an initial maturity of three months or less at the time of purchase to be cash equivalents. Cash equivalents include cash on hand and monies invested in money market funds. The carrying amount approximates the fair market value due to the short-term maturity of these investments.

Inventory, Policy [Policy Text Block]

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, 2012 and 2011 the financial statements include adjustments to reduce inventory for excess or obsolete inventory of $890,000 and $991,000, respectively. At December 31, 2012 and 2011, inventory included raw material, work in progress and packaging amounts of $1.0 million and $981,000, respectively, and finished goods of $1.0 million and $1.7 million, respectively.

Property, Plant and Equipment, Policy [Policy Text Block]

Property, Plant and Equipment

Property, plant and equipment are recorded at cost. We use a combination of straight-line and accelerated methods in computing depreciation for financial reporting purposes. The depreciation expense is computed in accordance with the estimated asset lives (see Note 3).

Concentration Risk Disclosure [Policy Text Block]

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, 2012, our cash was $572,000 and our bank balance was $1.1 million. Of the total bank balance, $633,000 was covered by federal depository insurance and $462,000 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 mass merchandisers, food retailers, multi-outlet pharmacy and chain drug stores and large wholesalers (see Note 11). During Fiscal 2012, 2011 and 2010, effectively all of our net revenues were related to domestic markets.

 

Our revenues are principally generated from the sale of OTC cold remedy products which approximated 95%, 95% and 96% of total revenues for Fiscal 2012, 2011 and 2010, respectively. A significant portion of our business is highly seasonal, which causes major variations in operating results from quarter to quarter. The third and fourth quarters generally represent the largest sales volume for the OTC cold remedy products.

 

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 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.

Impairment or Disposal of Long-Lived Assets, Policy [Policy Text Block]

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, Policy [Policy Text Block]

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, 2012 and December 31, 2011, we included a provision for sales allowances of $109,000 and $101,000, respectively, which are reported as a reduction to account receivables. Additionally, accrued advertising and other allowances as of December 31, 2012 include $1.3 million for estimated future sales returns and $1.5 million for cooperative incentive promotion costs. As of December 31, 2011 accrued advertising and other allowances include $1.7 million for estimated future sales returns, $1.0 million for cooperative incentive promotion costs and $279,000 for certain other advertising and marketing promotions.

Shipping and Handling Cost, Policy [Policy Text Block]

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.

Compensation Related Costs, Policy [Policy Text Block]

Stock Compensation

We recognize all share-based payments to employees and directors, including grants of stock options, as compensation expense in the financial statements based on their fair values. Fair values of stock options are determined through the use of the Black-Scholes option pricing model. The compensation cost is recognized as an expense over the requisite service period of the award, which usually coincides with the vesting period.

 

Stock and stock options for purchase of our common stock, $0.0005 par value, (“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 2012, 2011 and 2010, we charged to operations $246,000, $631,000 and $192,000, respectively, for share-based compensation expense for the aggregate fair value of stock grants issued and vested stock options earned.

Consolidation, Variable Interest Entity, Policy [Policy Text Block]

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 Joint Venture beginning with the quarter ended March 31, 2010 (see Note 8).

Advertising and Incentive Promotions [Policy Text Block]

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 2012, 2011 and 2010 were $10.2 million, $8.8 million, and $6.9 million, respectively. Included in prepaid expenses and other current assets was $2.2 million and $1.2 million at December 31, 2012 and 2011, respectively, relating to prepaid deposits for advertising and promotion programs scheduled principally for the first quarter of Fiscal 2013 and 2012, respectively.

Research and Development Expense, Policy [Policy Text Block]

Research and Development

Research and development costs are charged to operations in the period incurred. Expenditures for Fiscal 2012, 2011 and 2010 were $1.3 million, $1.1 million and $794,000, respectively. For Fiscal 2012, Fiscal 2011 and Fiscal 2010, research and development costs are related principally to new product development initiatives and costs associated with OTC cold remedy products.

Income Tax, Policy [Policy Text Block]

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 9).

 

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. The Internal Revenue Service (“IRS”) has examined our then tax year ended September 30, 2005 and has made no changes to the filed tax returns. The tax years 2006 and forward remain open to examination by the IRS. The tax years 2004 and forward remain open to examination by the various state taxing authorities to which we are subject.

Fair Value of Financial Instruments, Policy [Policy Text Block]

Fair Value of Financial Instruments

Cash and cash equivalents, accounts receivable and accounts payable are reflected in the Financial Statements at carrying value which approximates fair value because of the short-term maturity of these instruments. Determination of the fair value of related party payables, if any, is not practicable due to their related party nature.

New Accounting Pronouncements, Policy [Policy Text Block]

Recently Issued Accounting Standards

In November 2008, the SEC issued for comment a proposed roadmap regarding the potential use by U.S. issuers of financial statements prepared in accordance with International Financial Reporting Standards (“IFRS”). IFRS is a comprehensive series of accounting standards published by the International Accounting Standards Board (“IASB”). The proposed roadmap has since been superseded by an SEC work plan and no date is currently proposed that we could be required to prepare financial statements in accordance with IFRS. The SEC has targeted Fiscal 2013 to make a determination regarding the mandatory adoption of IFRS. We are currently assessing the impact that this potential change would have on our consolidated financial statements and we will continue to monitor the development of the potential implementation of IFRS.

  

In June 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2011-05, “Comprehensive Income (ASU Topic 220): Presentation of Comprehensive Income,” (“ASU 2011-05”) which amends current comprehensive income guidance. This accounting update eliminates the option to present the components of other comprehensive income as part of the statement of shareholders’ equity. Instead, comprehensive income must be presented in either a single continuous statement of comprehensive income which contains two sections, net income and other comprehensive income, or in two separate but consecutive statements. ASU 2011-05 was effective for fiscal periods beginning after December 15, 2011 with early adoption permitted. In December 2011, the FASB issued ASU 2011-12 “Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05.” This accounting update stated that the specific requirement to present items that are reclassified from other comprehensive income to net income alongside their respective components of net income and other comprehensive income will be deferred. In February 2013, the FASB issued ASU 2013-02 “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income”. This accounting update requires companies to present the effects on the line items of net income of significant reclassifications out of accumulated other comprehensive income if the amount being reclassified is required under U.S. generally accepted accounting principles to be reclassified in its entirety to net income in the same reporting period.  ASU 2013-02 is effective prospectively for fiscal years beginning after December 15, 2012. We do not expect the adoption of the amended guidance to have a significant impact on our consolidated financial position, results of operations or cash flows.

 

In September 2011, the FASB issued Accounting Standards Update No. 2011-08, “Intangibles – Goodwill and Other Topics” (“ASU 2011-08”) which provides authoritative guidance on testing goodwill for impairment that will become effective beginning January 1, 2012, with earlier adoption permitted. The revised standard is intended to reduce the cost and complexity of the annual goodwill impairment test by providing entities an option to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. Under ASU 2011-08, an entity would not be required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The amendments include a number of events and circumstances for an entity to consider in conducting the qualitative assessment. The adoption of ASU 2011-08 did not have a material impact on our consolidated financial position, results of operations or cash flows.

 

In July 2012, the FASB provided further guidance pertaining to the testing of goodwill for impairment with the issuance of Accounting Standards Update No. 2012-02, “Intangibles – Goodwill and Other Topics” (“ASU 2012-02”). The new guidance gives the option to first assess qualitative factors to determine if it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount as a basis for determining whether it is necessary to perform a quantitative valuation test. We adopted this accounting standard in the fourth quarter of Fiscal 2012 and this adoption did not have a significant impact on our financial position, results of operations or cash flows.

PROPERTY, PLANT AND EQUIPMENT (Tables)

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PROPERTY, PLANT AND EQUIPMENT (Tables)
12 Months Ended
Dec. 31, 2012
Property, Plant and Equipment [Abstract]  
Property, Plant and Equipment [Table Text Block]

The components of property and equipment are as follows (in thousands):

 

  December 31,   
  2012  2011  Estimated Useful Life
         
Land $504  $504   
Buildings and improvements  2,597   2,494  15 - 39 years
Machinery and equipment  2,771   2,567  3 - 7 years
Computer software  164   161  3 years
Furniture and fixtures  189   189  5 years
   6,225   5,915   
           
Less: Accumulated  depreciation  3,860   3,608   
  $2,365  $2,307   

COMMITMENTS AND CONTINGENCIES (Tables)

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COMMITMENTS AND CONTINGENCIES (Tables)
12 Months Ended
Dec. 31, 2012
Commitments and Contingencies Disclosure [Abstract]  
Schedule Of Future Contingency Obligation [Table Text Block]

We have approximate future obligations over the next five years as follows (in thousands):

 

Year Employment
Contracts
  Settlment
Agreement
  Total 
2013 $1,025  $100  $1,125 
2014  1,025   100   1,125 
2015  555   100   655 
2016  -   100   100 
2017  -   -   - 
Total $2,605  $400  $3,005 

STOCKHOLDERS' EQUITY AND STOCK COMPENSATION (Tables)

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STOCKHOLDERS' EQUITY AND STOCK COMPENSATION (Tables)
12 Months Ended
Dec. 31, 2012
Stockholders' Equity Note [Abstract]  
Schedule Of Share-Based Compensation, Terms Of Grant Of Stock Options [Table Text Block]

Presented below is a summary of the terms of the grant of options:

 

  Year Ended December 31, 
  2012  2011  2010 
Number of options granted  15,000   220,000   982,000 
Vesting period  3 years   4 years   3-6 years 
Maximum term of option from date of grant  7 years   7 years   7 years 
Exercise price per share $1.36  $0.87 - $1.17  $1.00 
Weighted average fair value per share of options granted during the year $0.85  $0.58  $0.65 
Schedule of Share-based Payment Award, Stock Options, Valuation Assumptions [Table Text Block]

Presented below is a summary of assumptions used in determining the fair value of the stock options at the date of grant:

 

  Year Ended December 31, 
  2012  2011  2010 
Expected option life  4.5 years   4.75 years   4.5 - 6.5 years 
Weighted average risk free rate  0.75%  1.28%  2.10%
Dividend yield  0%  0%  0%
Expected volatility  83.06%  75.84% - 78.62%  72.17% - 77.63%
Schedule of Share-based Compensation, Stock Options, Activity [Table Text Block]

A summary of the status of our stock options granted to both employees and non-employees as of December 31, 2012, 2011 and 2010 and changes during the years then ended is presented below (in thousands, except per share data):

 

  Year Ended December 31, 
  2012  2011  2010 
     Weighted Average     Weighted Average     Weighted Average 
  Shares  Exercise Price  Shares  Exercise Price  Shares  Exercise Price 
Options outstanding - beginning of year  1,333  $1.88   1,300  $2.99   1,488  $8.64 
Granted  15   1.36   220   1.10   982   1.00 
Exercised  -   -   -   -   (131)  1.02 
Cancelled  (41)  8.11   (187)  8.67   (1,039)  9.45 
Options outstanding - end of year  1,307  $1.72   1,333  $1.88   1,300  $2.99 
                         
Options granted and subject to future vesting  719  $1.01   957   1.02   937   1.00 
                         
Exercisable, at end of year  588       376       363     
Available for grant  -       14       818     
Schedule of Share-based Compensation, Shares Authorized under Stock Option Plans, by Exercise Price Range [Table Text Block]

The following table summarizes information about stock options outstanding and stock options exercisable at December 31, 2012 (in thousands, except remaining life and per share data):

 

  Options Outstanding and Exercisable 
Range of
Exercise Prices
 Number
Outstanding
  Weighted Average
Remaining
Contractual Life
  Weighted Average
Exercise Price Per
Share
 
$0.87 - $1.36  488   5.6  $1.10 
$1.37 - $8.11  32   0.8  $8.11 
$8.12 - $9.50  41   1.8  $9.50 
$9.51 - $13.80  27   3.0  $13.80 
Total  588      $2.56 

INCOME TAXES (Tables)

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INCOME TAXES (Tables)
12 Months Ended
Dec. 31, 2012
Income Tax Disclosure [Abstract]  
Schedule of Components of Income Tax Expense (Benefit) [Table Text Block]

The components of the provision (benefit) for income taxes, in the consolidated statement of operations are as follows (in thousands):

 

    Year Ended December 31,  
    2012     2011     2010  
Current                        
Federal   $ -     $ -     $ (40 )
State     -       -       -  
      -       -       (40 )
Deferred                        
Federal     (618 )     (877 )     (107 )
State     1,377       (21 )     160  
      759     (898 )     53  
Total   $ 759   $ (898 )   $ 13  
                         
Income taxes from continuing operations before valuation allowance   $ 759   $ (898 )   $ 13  
Change in valuation allowance     (759 )     898       (53 )
Income tax (benefit)     -       -       (40 )
Total   $ -     $ -     $ (40 )
Schedule of Effective Income Tax Rate Reconciliation [Table Text Block]

A reconciliation of the statutory federal income tax expense (benefit) to the effective tax is as follows (in thousands):

 

    Year Ended December 31,  
    2012     2011     2010  
                   
Statutory rate - federal   $ (661 )   $ (925 )   $ (1,204 )
State taxes, net of federal benefit     1,377       (21 )     -  
Permanent differences and other     43       48       (143 )
Income tax from continuing operation before valuation allowance     759     (898 )     (1,347 )
                         
Change in valuation allowance     (759 )     898     1,307  
                         
Income tax (benefit)     -       -       (40 )
Total   $ -     $ -     $ (40 )
Income Tax Reconciliation Components Permanent and Other Differences [Table Text Block]

The components of permanent and other differences are as follows (in thousands):

 

    Year Ended December 31,  
    2012     2011     2010  
Permanent items:                        
Meals and Entertainment   $ 6     $ 2     $ 5  
Return to provision adjustment     (46 )     -       -  
Contribution of inventory(1)     4       -       (162 )
Share-based compensation expense for stock options granted  (2)     79       45       14  
    $ 43     $ 47     $ (143 )

 

(1) This item represents the additional tax deduction available as a consequence of the contribution of certain inventory to qualified charitable organization.
(2) This item relates to share-based compensation expense for financial reporting purposes not deducted for tax purposes until such options are exercised.
Income Tax Reconciliation Component Temporary Differences In Assets and Liabilities [Table Text Block]

The tax effects of the primary “temporary differences” between values recorded for assets and liabilities for financial reporting purposes and values utilized for measurement in accordance with tax laws giving rise to our deferred tax assets are as follows (in thousands):

 

    Year Ended December 31,  
    2012     2011     2010  
                   
Net operating loss and capital loss carryforward   $ 14,158     $ 13,170     $ 12,135  
Consulting-royalty costs     121       1,431       1,431  
Depreciation     60       235       253  
Other     983       757       877  
Valuation allowance     (15,322 )     (15,593 )     (14,696 )
Total   $ -     $ -     $ -  

EARNINGS PER SHARE (Tables)

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EARNINGS PER SHARE (Tables)
12 Months Ended
Dec. 31, 2012
Earnings Per Share [Abstract]  
Schedule of Calculation of Numerator and Denominator in Earnings Per Share [Table Text Block]

A reconciliation of the applicable numerators and denominators of the income statement periods presented is as follows (in thousands, except per share amounts):

 

  Year Ended December 31, 
  2012  2011  2010 
  Loss  Shares  EPS  Loss  Shares  EPS  Loss  Shares  EPS 
                            
Basic EPS $(1,091)  14,843  $(0.07) $(2,710)  14,817  $(0.18) $(3,501)  14,285  $(0.25)
Dilutives:                                    
Options/Warrants  -   -   -   -   -   -   -   -   - 
                                     
Diluted EPS $(1,091)  14,843  $(0.07) $(2,710)  14,817  $(0.18) $(3,501)  14,285  $(0.25)

QUARTERLY INFORMATION (UNAUDITED) (Tables)

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QUARTERLY INFORMATION (UNAUDITED) (Tables)
12 Months Ended
Dec. 31, 2012
Quarterly Financial Information Disclosure [Abstract]  
Schedule of Quarterly Financial Information [Table Text Block]

The following table presents unaudited quarterly financial information for Fiscal 2012 and Fiscal 2011 (in thousands, except per share amounts):

 

  Quarter Ended 
  March 31,  June 30,  September 30,  December 31, 
Fiscal 2012            
Net sales $6,018  $1,894  $5,415  $9,079 
Gross profit $4,340  $825  $3,399  $5,688 
Net income (loss) $(688) $(1,930) $1,074  $453 
                 
Basic and diluted earnings (loss) per share:                
Net income  (loss) $(0.05) $(0.13) $0.07  $0.04 
                 
Fiscal 2011                
Net sales $3,166  $1,744  $5,083  $7,460 
Gross profit $1,994  $896  $3,596  $4,796 
Net income (loss) $(1,013) $(976) $1,110  $(1,831)
                 
Basic and diluted earnings (loss) per share:                
Net income  (loss) $(0.07) $(0.07) $0.07  $(0.12)

ORGANIZATION AND BUSINESS (Details Textual)

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ORGANIZATION AND BUSINESS (Details Textual) (USD $)
12 Months Ended 1 Months Ended
Dec. 31, 2012
Dec. 31, 2011
Mar. 31, 2010
Limited Liability Company Agreement [Member]
Entity, Principal Product Proven Effeciency Percentage Description Our flagship brand is Cold-EEZE Cold Remedy and our principal product is Cold-EEZE zinc gluconate lozenges, proven in clinical studies to reduce the duration of the common cold by 42%.    
Variable Interest Entity, Qualitative or Quantitative Information, Ownership Percentage     50.00%
Working Capital Before Implementation Of Strategy   $ 5,300,000  
Working Capital After Implementation Of Strategy 5,800,000    
Strategy Description As a consequence of these investments, our revenues have increased an aggregate of 54.5% from Fiscal 2010 to Fiscal 2012    
Increase Of Working Capital $ 467,000    

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Details Textual)

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Details Textual) (USD $)
12 Months Ended 15 Months Ended 3 Months Ended 12 Months Ended 12 Months Ended
Dec. 31, 2012
Dec. 31, 2011
Dec. 31, 2010
Jul. 15, 2012
Dec. 31, 2009
Mar. 31, 2010
Limited Liability Company Agreement [Member]
Dec. 31, 2012
Stock Options [Member]
Dec. 31, 2011
Stock Options [Member]
Dec. 31, 2010
Stock Options [Member]
Dec. 31, 2012
Estimated Future Sales Return [Member]
Dec. 31, 2011
Estimated Future Sales Return [Member]
Dec. 31, 2012
Cooperative Incentive [Member]
Dec. 31, 2011
Cooperative Incentive [Member]
Dec. 31, 2011
Other Advertising and Marketing Promotions [Member]
Dec. 31, 2012
Accounts Receivable [Member]
Dec. 31, 2011
Accounts Receivable [Member]
Dec. 31, 2012
Sales Revenue, Goods, Net [Member]
Dec. 31, 2011
Sales Revenue, Goods, Net [Member]
Dec. 31, 2010
Sales Revenue, Goods, Net [Member]
Dec. 31, 2012
Advertising and Incentive Promotion Costs [Member]
Dec. 31, 2011
Advertising and Incentive Promotion Costs [Member]
Inventory Adjustments $ 890,000 $ 991,000                                      
Cash and Cash Equivalents, At Carrying Value 572,000 5,541,000 8,232,000   12,801,000                                
Cash, FDIC Insured Amount 633,000                                        
Cash, Uninsured Amount 462,000                                        
Inventory, Work in Process and Raw Materials 1,000,000 981,000                                      
Inventory, Finished Goods 1,000,000 1,700,000                                      
Due from Banks 1,100,000   1,800,000                                    
Concentration Risk, Percentage                             65.00% 53.00% 95.00% 95.00% 96.00%    
Sales Allowances, Goods 109,000 101,000                                      
Accrued Liabilities                   1,300,000 1,700,000 1,500,000 1,000,000 279,000              
Share-based compensation expense 246,000 631,000 192,000 50,000     246,000 631,000 192,000                        
Variable Interest Entity, Qualitative or Quantitative Information, Ownership Percentage           50.00%                              
Marketing and Advertising Expense 10,200,000 8,800,000 6,900,000                                    
Prepaid Expense and Other Assets, Current 2,687,000 1,747,000                                   2,200,000 1,200,000
Research and Development Expense $ 1,301,000 $ 1,088,000 $ 794,000                                    
Common Stock, Par Or Stated Value Per Share $ 0.0005 $ 0.0005