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Document and Entity Information

v2.4.0.6
Document and Entity Information
3 Months Ended
Mar. 31, 2013
May 10, 2013
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-Q  
Amendment Flag false  
Document Period End Date Mar. 31, 2013  
Document Fiscal Period Focus Q1  
Document Fiscal Year Focus 2013  

Condensed Consolidated Balance Sheets

v2.4.0.6
Condensed Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Mar. 31, 2013
Dec. 31, 2012
ASSETS    
Cash and cash equivalents (Note 2) $ 4,536 $ 572
Accounts receivable 3,080 5,409
Inventory (Note 2) 2,147 2,051
Prepaid expenses and other current assets 488 2,687
Total current assets 10,251 10,719
Property, plant and equipment, net of accumulated depreciation of $3,922 and $3,860, respectively (Note 2) 2,311 2,365
Intangible asset, licensed technology (Note 6) 3,577 3,577
Total assets 16,139 16,661
LIABILITIES AND STOCKHOLDERS' EQUITY    
Accounts payable 678 1,296
Accrued advertising and other allowances 2,520 2,760
Other current liabilities 666 854
Total current liabilities 3,864 4,910
Other long term obligations 300 300
Total long term liabilities 300 300
Commitments and contingencies (Note 3) 0 0
STOCKHOLDERS' EQUITY:    
Common Stock, $.0005 par value; authorized 50,000,000; issued: 21,181,115 and 21,056,115 shares, respectively (Note 4) 11 11
Additional paid-in-capital 43,101 42,867
Accumulated deficit (5,500) (5,790)
Treasury stock, at cost 5,336,053 and 5,336,053 shares, respectively (25,637) (25,637)
Total stockholders' equity 11,975 11,451
Total liabilities and stockholders' equity $ 16,139 $ 16,661

Condensed Consolidated Balance Sheets [Parenthetical]

v2.4.0.6
Condensed Consolidated Balance Sheets [Parenthetical] (USD $)
In Thousands, except Share data, unless otherwise specified
Mar. 31, 2013
Dec. 31, 2012
Accumulated depreciation (in dollars) $ 3,922 $ 3,860
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 21,181,115 21,056,115
Treasury stock, shares (in shares) 5,336,053 5,336,053

Condensed Consolidated Statements of Operations

v2.4.0.6
Condensed Consolidated Statements of Operations (USD $)
In Thousands, except Per Share data, unless otherwise specified
3 Months Ended
Mar. 31, 2013
Mar. 31, 2012
Net sales (Note 2) $ 7,542 $ 6,018
Cost of sales (Note 2) 2,203 1,678
Gross profit 5,339 4,340
Operating expenses:    
Sales and marketing 3,363 3,177
Administration 1,498 1,492
Research and development 188 361
Total operating expense 5,049 5,030
Income (loss) from operations 290 (690)
Interest income 0 2
Income (loss) before income taxes 290 (688)
Income tax (benefit) (Note 5) 0 0
Net income (loss) $ 290 $ (688)
Basic income (loss) per share:    
Net income (loss) (in dollars per share) $ 0.02 $ (0.05)
Diluted income (loss) per share:    
Net income (loss) (in dollars per share) $ 0.02 $ (0.05)
Weighted average common shares outstanding:    
Basic (in shares) 15,752 14,796
Diluted (in shares) 16,199 14,796

Condensed Consolidated Statements of Stockholders' Equity

v2.4.0.6
Condensed 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, 2012 $ 11 $ 42,867 $ (5,790) $ (25,637) $ 11,451
Balance (in shares) at Dec. 31, 2012 15,720,062        
Net income 0 0 290 0 290
Share-based compensation expense 0 39 0 0 39
Common shares issued (Note 4) 0 195 0 0 195
Common shares issued (Note 4) (in shares) 125,000        
Balance at Mar. 31, 2013 $ 11 $ 43,101 $ (5,500) $ (25,637) $ 11,975
Balance (in shares) at Mar. 31, 2013 15,845,062        

Condensed Consolidated Statements of Cash Flows

v2.4.0.6
Condensed Consolidated Statements of Cash Flows (USD $)
In Thousands, unless otherwise specified
3 Months Ended
Mar. 31, 2013
Mar. 31, 2012
Cash flows from operating activities:    
Net income (loss) $ 290 $ (688)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:    
Depreciation and amortization 62 58
Share-based compensation expense 39 88
Changes in operating assets and liabilities:    
Accounts receivable 2,329 677
Inventory (96) 77
Accounts payable (618) (63)
Accrued advertising and other allowances (240) (527)
Other operating assets and liabilities, net 2,011 1,153
Net cash provided by (used in) operating activities 3,777 775
Cash flows from investing activities:    
Capital expenditures (8) (48)
Net cash flows used in investing activities (8) (48)
Cash flows from financing activities:    
Proceeds from issuance of common stock 195 0
Net cash provided by financing activities 195 0
Net increase in cash and cash equivalents 3,964 727
Cash and cash equivalents at beginning of period 572 5,541
Cash and cash equivalents at end of period $ 4,536 $ 6,268

Organization and Business

v2.4.0.6
Organization and Business
3 Months Ended
Mar. 31, 2013
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 base 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-EEZEÒ Cold 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 the three months ended March 31, 2013 and 2012, our revenues from operations have come principally from our OTC cold remedy products.

 

We use a December 31 year-end for financial reporting purposes. References herein to the fiscal year ended December 31, 2013 shall be the term “Fiscal 2013” 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

v2.4.0.6
Summary of Significant Accounting Policies
3 Months Ended
Mar. 31, 2013
Accounting Policies [Abstract]  
Significant Accounting Policies [Text Block]

Note 2 – Summary of Significant Accounting Policies

 

Basis of Presentation

The unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial statements and within the rules of the Securities and Exchange Commission (“SEC”) applicable to interim financial statements and therefore do not include all disclosures that might normally be required for financial statements prepared in accordance with generally accepted accounting principles in the United States (“GAAP”). The accompanying unaudited condensed consolidated financial statements have been prepared by management without audit and should be read in conjunction with our consolidated financial statements, including the notes thereto, appearing in our Annual Report on Form 10-K for the year ended December 31, 2012. In the opinion of management, all adjustments necessary for a fair presentation of the consolidated financial position, consolidated results of operations and consolidated cash flows, for the periods indicated, have been made. The results of operations for the three months ended March 31, 2013 are not necessarily indicative of operating results that may be achieved over the course of the full year.

 

Seasonality of the Business

Our net sales are derived principally from our OTC cold remedy products. Currently, our sales are influenced by and subject to fluctuations in the timing of purchase and the ultimate level of demand for our products which are a function of the timing, length and severity of each cold season. Generally, a cold season is defined as the period of September to March when the incidence of the common cold rises as a consequence of the change in weather and other factors. We generally experience in the third and fourth quarter higher levels of net sales along with a corresponding increase in marketing and advertising expenditures designed to promote our products during the cold season. Revenues and related marketing costs are generally at their lowest levels in the second quarter when consumer demand generally declines. We track health and wellness trends and develop retail promotional strategies to align our production scheduling, inventory management and marketing programs to optimize consumer purchases.

 

Use of Estimates

The preparation of financial statements and the accompanying notes thereto, in conformity with 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® and Cold-EEZE® Oral Spray. In August 2012 and 2011, we introduced two new forms of our proprietary zinc formulation, Cold-EEZE® Cold Remedy Daytime/Nighttime QuickMelts® and Cold-EEZE® Oral Spray, respectively. We also manufacture, market and distribute an organic cough drop and a Vitamin C supplement (“Organix®”). Each of the Cold-EEZE® QuickMelts®, Cold-EEZE® Oral Spray and Organix® products carry shelf-life expiration dates for which we aggregate such 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 a maturity of three months or less at the time of purchase to be cash equivalents. Cash equivalents include cash on hand and monies invested in money market funds. The carrying amount approximates the fair market value due to the short-term maturity of these investments.

 

Inventory Valuation

Inventory is valued at the lower of cost, determined on a first-in, first-out basis (FIFO), or market. Inventory items are analyzed to determine cost and the market value and appropriate valuation adjustments are established. At March 31, 2013 and December 31, 2012, inventory included raw material, work in progress and packaging amounts of $1.0 million and $1.0 million respectively, and finished goods of $1.1 million and $1.0 million, respectively.

 

Property, Plant and Equipment

Property, plant and equipment are recorded at cost. We compute depreciation using the straight-line method for financial reporting purposes. Depreciation expense is computed in accordance with the following ranges of estimated asset lives: building and improvements - fifteen to thirty-nine years; machinery and equipment - three to seven years; computer software - three years; and furniture and fixtures – five years.

 

Concentration of Risks

Future revenues, costs, margins, and profits will continue to be influenced by our ability to maintain our manufacturing availability and capacity together with our marketing and distribution capabilities and the regulatory requirements associated with the development of OTC drug, personal care or other products in order to continue to compete on a national level and/or international level.

 

Our business is subject to federal and state laws and regulations adopted for the health and safety of users of our products. Our OTC cold remedy products are subject to regulations by various federal, state and local agencies, including the Food and Drug Administration (“FDA”) and, as applicable, the Homeopathic Pharmacopoeia of the United States.

 

Financial instruments that potentially subject us to significant concentrations of credit risk consist principally of cash investments and trade accounts receivable.

 

We maintain cash and cash equivalents with certain major financial institutions. As of March 31, 2013, our cash balance was $4.5 million and our bank balance was $4.7 million. Of the total bank balance, $1.4 million was covered by federal depository insurance and $3.3 million was uninsured at March 31, 2013.

 

Trade accounts receivable potentially subject us to credit concentrations from time-to-time as a consequence of the timing, payment pattern and ultimate purchase volumes or shipping schedules with our customers. We extend credit to our customers based upon an evaluation of the customer’s financial condition and credit history and generally we do not require collateral. Our broad range of customers includes many large wholesalers, mass merchandisers and multi-outlet pharmacy and chain drug stores. These credit concentrations may impact our overall exposure to credit risk, either positively or negatively, in that our customers may be similarly affected by changes in economic, regulatory or other conditions that may impact the timing and collectability of amounts due to us. Our largest accounts receivable balances are with three customers representing approximately 69.1% and 53.8% of total trade receivable balances at March 31, 2013 and December 31, 2012, respectively.

 

Our revenues are principally generated from the sale of OTC cold remedy products which represented approximately 94% and 95% of total revenues for each of the three months ended March 31, 2013 and 2012, respectively. A significant portion of our business is highly seasonal, which causes major variations in operating results from quarter to quarter. The third and fourth quarters generally represent the largest sales volume for the OTC cold remedy products. For the three months ended March 31, 2013 and 2012, our net sales were principally related to domestic markets.

 

Raw materials used in the production of our products are available from numerous sources. Certain raw material active ingredients used in connection with Cold-EEZE® products are purchased from a single unaffiliated supplier. Should the relationship terminate or the vendor become unable to supply material, we believe that the current contingency plans would prevent a termination from materially affecting our operations. However, if the relationship was terminated, there may be delays in production of our products until an acceptable replacement supplier is located.

 

Long-lived Assets

We review our carrying value of our long-lived assets with definite lives whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. When indicators of impairment exist, we determine whether the estimated undiscounted sum of the future cash flows of such assets is less than their carrying amounts. If less, an impairment loss is recognized in the amount, if any, by which the carrying amount of such assets exceeds their respective fair values. The determination of fair value is based on quoted market prices in active markets, if available, or independent appraisals; sales price negotiations; or projected future cash flows discounted at a rate determined by management to be commensurate with our business risk. The estimation of fair value utilizing discounted forecasted cash flows includes significant judgments regarding assumptions of revenue, operating and marketing costs; selling and administrative expenses; interest rates; property and equipment additions and retirements; industry competition; and general economic and business conditions, among other factors.

 

Fair value is based on the prices that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In order to increase consistency and comparability in fair value measurements, a three-tier fair value hierarchy prioritizes the inputs used to measure fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its own assumptions.

 

Fair Value of Financial Instruments 

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

 

Revenue Recognition

Sales are recognized at the time ownership is transferred to the customer. Revenue is reduced for trade promotions, estimated sales returns, cash discounts and other allowances in the same period as the related sales are recorded. We make estimates of potential future product returns and other allowances related to current period revenue. We analyze historical returns, current trends, and changes in customer and consumer demand when evaluating the adequacy of the sales returns and other allowances.

 

We do not impose a period of time within which product may be returned. All requests for product returns must be submitted to us for pre-approval. The main components of our returns policy are: (i) we will accept returns that are due to damaged product that is un-saleable and such return request activity falls within an acceptable range, (ii) we will accept returns for products that have reached or exceeded designated expiration dates and (iii) we will accept returns in the event that we discontinue a product provided that the customer will have the right to return only such items that it purchased directly from us. We will not accept return requests pertaining to customer inventory “Overstocking” or “Resets”. We will only accept return requests for product in its intended package configuration. We reserve the right to terminate shipment of product to customers who have made unauthorized deductions contrary to our return policy or pursue other methods of reimbursement. We compensate the customer for authorized returns by means of a credit applied to amounts owed or to be owed and in the case of discontinued product only, also by way of an exchange. We do not have any significant product exchange history.

 

As of March 31, 2013 and December 31, 2012, we included a provision for sales allowances of $74,000 and $109,000, respectively, which are reported as a reduction to account receivables. Additionally, accrued advertising and other allowances as of March 31, 2013 included $1.6 million for estimated future sales returns and $924,000 for cooperative incentive promotion costs. As of December 31, 2012 accrued advertising and other allowances included $1.3 million for estimated future sales returns and $1.5 million for cooperative incentive promotion costs.

 

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 expenses incurred for the three months ended March 31, 2013 and 2012 were $3.9 million and $3.4 million, respectively. Included in prepaid expenses and other current assets was $122,000 and $2.2 million at March 31, 2013 and December 31, 2012, respectively, relating to prepaid advertising and promotion expenses.

 

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 the 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 4). Stock options are exercisable during a period determined by us, but in no event later than ten years from the date granted. For the three months ended March 31, 2013 and 2012, we charged to operations $39,000 and $88,000, respectively, for share-based compensation expense for the aggregate fair value of stock grants issued and vested stock options earned.

 

Variable Interest Entity

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. The Joint Venture, of which we own a 50% membership interest, qualifies as a variable interest entity (“VIE”), we are the current primary beneficiary and we have consolidated the Joint Venture beginning with the quarter ended March 31, 2010. Expenses incurred to date by the Joint Venture have been principally for certain product research and development activities which have been charged to research and development expense by the Company.

 

Research and Development

Research and development costs are charged to operations in the period incurred. Research and development costs for the three months ended March 31, 2013 and 2012 were $188,000 and $361,000, respectively. Research and development costs are principally related to new product development initiatives and costs associated with our OTC cold remedy products.

 

Income Taxes

We utilize the asset and liability approach which requires the recognition of deferred tax assets and liabilities for the future tax consequences of events that have been recognized in our financial statements or tax returns. In estimating future tax consequences, we generally consider all expected future events other than enactments of changes in the tax law or rates. Until sufficient taxable income to offset the temporary timing differences attributable to operations and the tax deductions attributable to option, warrant and stock activities are assured, a valuation allowance equaling the total deferred tax asset is being provided (see Note 5).

 

We utilize a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount which is more than fifty percent likely of being realized upon ultimate settlement. Any interest or penalties related to uncertain tax positions will be recorded as interest or administrative expense, respectively.

 

As a result of our continuing tax losses, we have recorded a full valuation allowance against a net deferred tax asset. Additionally, we have not recorded a liability for unrecognized tax benefits. The tax years 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.

 

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. The adoption of ASU 2013-02 did not have a material impact on our consolidated financial position, results of operations or cash flows.

Commitments and Contingencies

v2.4.0.6
Commitments and Contingencies
3 Months Ended
Mar. 31, 2013
Commitments and Contingencies Disclosure [Abstract]  
Commitments and Contingencies Disclosure [Text Block]

Note 3 – Commitments and Contingencies

 

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.

 

We have estimated future minimum obligations over the next five years, including the remainder of Fiscal 2013, as follows (in thousands):

 

Fiscal Year   Employment
Contracts
    Settlement
Agreement
    Total  
2013   $ 769     $ 100     $ 869  
2014     1,025       100       1,125  
2015     555       100       655  
2016     -       100       100  
2017     -                  
          Total   $ 2,349     $ 400     $ 2,749

Transactions Affecting Stockholders' Equity

v2.4.0.6
Transactions Affecting Stockholders' Equity
3 Months Ended
Mar. 31, 2013
Transactions Affecting Stock Holders Equity [Abstract]  
Transactions Affecting Stock Holders Equity [Text Block]

Note 4 – Transactions Affecting Stockholders’ Equity

 

Stockholder Rights Plan

On September 8, 1998, our Board of Directors declared a dividend distribution of Common Stock Purchase Rights (each individually, a “Right” and collectively, the “Rights”) payable to the stockholders of record on September 25, 1998, thereby creating a Stockholder Rights Plan (the “Rights Agreement”). The Plan was amended effective May 23, 2008 and further amended effective August 18, 2009. 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 for the three month periods ended March 31, 2013 or 2012.

 

As of March 31, 2013, 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 March 31, 2013, there are 99,000 options outstanding under the 1997 Plan 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 March 31, 2013, 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. No options were granted under the 2010 Plan for the three months ended March 31, 2013. At March 31, 2013, there are 15,159 shares of Common Stock that may be issued pursuant to the terms of the 2010 Equity Compensation Plan.

 

The 2010 Directors’ Equity Compensation Plan

On May 5, 2010, our shareholders approved the 2010 Directors’ Equity Compensation Plan. A primary purpose of the 2010 Directors’ Equity Compensation Plan is to provide us with the ability to pay all or a portion of the fees of directors in restricted stock instead of cash. The 2010 Directors’ Equity Compensation Plan provides that the total number of shares of Common Stock that may be issued under the 2010 Directors’ Equity Compensation Plan is equal to 250,000. No shares were granted under this plan for the three months ended March 31, 2013. At March 31, 2013, there are 17,605 shares of Common Stock that may be issued pursuant to the terms of the 2010 Directors’ Equity Compensation Plan.

 

There were no stock options exercised for the three months ended March 31, 2013 or 2012.

 

Equity Line of Credit

On November 21, 2012, we entered into the equity line of credit agreement (such arrangement, the “Equity Line”) with Dutchess Opportunity Fund II, LP (“Dutchess”) whereby Dutchess committed to purchase, subject to certain restrictions and conditions, up to 2,500,000 shares of our Common Stock, over a period of 36 months from the first trading day following the effectiveness of the registration statement registering the resale of shares purchased by Dutchess pursuant to the 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.

 

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 March 2013, we sold an aggregate of 125,000 shares of Common Stock to Dutchess under and pursuant to the Equity Line and we derived approximately $195,000 in net proceeds. 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 to Dutchess.

Income Taxes

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Income Taxes
3 Months Ended
Mar. 31, 2013
Income Tax Disclosure [Abstract]  
Income Tax Disclosure [Text Block]

Note 5 – Income Taxes

 

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

 

We utilize a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount which is more than fifty percent likely of being realized upon ultimate settlement.

 

Certain exercises of options and warrants, and restricted stock issued for services that became unrestricted resulted in reductions to taxes currently payable and a corresponding increase to additional-paid-in-capital for prior years. In addition, certain tax benefits for option and warrant exercises totaling $6.4 million are deferred and will be credited to additional-paid-in-capital when our net operating loss carry-forward attributable to these exercises are utilized. Consequently, these net operating loss carryforward will not be available to offset our current income tax expense. As of December 31, 2012, we had net operating loss carry-forwards of approximately $37.7 million for federal purposes that 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 Fiscal 2018 through 2032. Until sufficient taxable income to offset the temporary timing differences attributable to operations and the tax deductions attributable to option, warrant and stock activities are assured, we have recorded a full valuation allowance equaling the total deferred tax asset at March 31, 2013 and December 31, 2012. As of March 31, 2013 and December 31, 2012, we have no unrecognized tax benefits.

 

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

Investment in a Joint Venture

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Investment in a Joint Venture
3 Months Ended
Mar. 31, 2013
Investments In and Advances To Affiliates, Schedule Of Investments [Abstract]  
Investments in and Advances to Affiliates, Schedule of Investments [Text Block]

Note 6 – Investment in a Joint Venture

 

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.

 

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 March 31, 2013, 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 13.75 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, 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.

 

Due to multiple factors affecting our capital position, including the payment we made in December 2012 under the Settlement Agreement (see Note 3) and some of the product market research performed, we expect to modify the Joint Venture’s product development plans to stagger and/or defer 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.

Earnings (Loss) Per Share

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Earnings (Loss) Per Share
3 Months Ended
Mar. 31, 2013
Earnings Per Share [Abstract]  
Earnings Per Share [Text Block]

Note 7 – Earnings (Loss) Per Share

 

Basic earnings (loss) per share is computed by dividing net income or loss attributable to common stockholders by the weighted-average number of shares of our Common Stock outstanding for the period. Diluted earnings (loss) per share reflects the potential dilution that could occur if securities or other contracts to issue Common Stock were exercised or converted into Common Stock or resulted in the issuance of Common Stock that shared in the earnings of the entity. Diluted earnings per share also utilizes the treasury stock method which prescribes a theoretical buy-back of shares from the theoretical proceeds of all options and warrants outstanding during the period. Options and warrants outstanding to acquire shares of our Common Stock at March 31, 2013 and 2012 were 1,291,500 and 1,312,750, respectively.

 

For the three months ended March 31, 2013 there were 446,642 Common Stock Equivalents, which were in the money, that were included in the earnings per share computation. For the three months ended March 31, 2013, dilutive earnings per share is the same as basic earnings per share due to (i) the inclusion of Common Stock, in the form of stock options and warrants (“Common Stock Equivalents”), would have an anti-dilutive effect on the loss per share or (ii) there were no Common Stock Equivalents for the respective period. For the three months ended March 31, 2012, there were 90,721 Common Stock Equivalents, which were in the money, that were excluded from the earnings per share computation.

 

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

 

    Three Months Ended     Three Months Ended  
    March 31, 2013     March 31, 2012  
    Income     Shares     EPS     Income     Shares     EPS  
Basic earnings (loss) per share   $ 290       15,752     $ 0.02     $ (688 )     14,796     $ (0.05 )
                                                 
Dilutives:                                                
Options     -       447       -       -       -       -  
                                                 
Diluted loss per share   $ 290       16,199     $ 0.02     $ (688 )     14,796     $ (0.05 )

Summary of Significant Accounting Policies (Policies)

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Summary of Significant Accounting Policies (Policies)
3 Months Ended
Mar. 31, 2013
Accounting Policies [Abstract]  
Organization, Consolidation, Basis of Presentation, Business Description and Accounting Policies [Policy Text Block]

Basis of Presentation

The unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial statements and within the rules of the Securities and Exchange Commission (“SEC”) applicable to interim financial statements and therefore do not include all disclosures that might normally be required for financial statements prepared in accordance with generally accepted accounting principles in the United States (“GAAP”). The accompanying unaudited condensed consolidated financial statements have been prepared by management without audit and should be read in conjunction with our consolidated financial statements, including the notes thereto, appearing in our Annual Report on Form 10-K for the year ended December 31, 2012. In the opinion of management, all adjustments necessary for a fair presentation of the consolidated financial position, consolidated results of operations and consolidated cash flows, for the periods indicated, have been made. The results of operations for the three months ended March 31, 2013 are not necessarily indicative of operating results that may be achieved over the course of the full year.

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 our products during the cold season. Revenues and related marketing costs are generally at their lowest levels in the second quarter when consumer demand generally declines. We track health and wellness trends and develop retail promotional strategies to align our production scheduling, inventory management and marketing programs to optimize consumer purchases.

Use of Estimates, Policy [Policy Text Block]

Use of Estimates

The preparation of financial statements and the accompanying notes thereto, in conformity with 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® and Cold-EEZE® Oral Spray. In August 2012 and 2011, we introduced two new forms of our proprietary zinc formulation, Cold-EEZE® Cold Remedy Daytime/Nighttime QuickMelts® and Cold-EEZE® Oral Spray, respectively. We also manufacture, market and distribute an organic cough drop and a Vitamin C supplement (“Organix®”). Each of the Cold-EEZE® QuickMelts®, Cold-EEZE® Oral Spray and Organix® products carry shelf-life expiration dates for which we aggregate such 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 a 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 Valuation

Inventory is valued at the lower of cost, determined on a first-in, first-out basis (FIFO), or market. Inventory items are analyzed to determine cost and the market value and appropriate valuation adjustments are established. At March 31, 2013 and December 31, 2012, inventory included raw material, work in progress and packaging amounts of $1.0 million and $1.0 million respectively, and finished goods of $1.1 million and $1.0 million, respectively.

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

Property, Plant and Equipment

Property, plant and equipment are recorded at cost. We compute depreciation using the straight-line method for financial reporting purposes. Depreciation expense is computed in accordance with the following ranges of estimated asset lives: building and improvements - fifteen to thirty-nine years; machinery and equipment - three to seven years; computer software - three years; and furniture and fixtures – five years.

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 regulatory requirements associated with the development of OTC drug, personal care or other products in order to continue to compete on a national level and/or international level.

 

Our business is subject to federal and state laws and regulations adopted for the health and safety of users of our products. Our OTC cold remedy products are subject to regulations by various federal, state and local agencies, including the Food and Drug Administration (“FDA”) and, as applicable, the Homeopathic Pharmacopoeia of the United States.

 

Financial instruments that potentially subject us to significant concentrations of credit risk consist principally of cash investments and trade accounts receivable.

 

We maintain cash and cash equivalents with certain major financial institutions. As of March 31, 2013, our cash balance was $4.5 million and our bank balance was $4.7 million. Of the total bank balance, $1.4 million was covered by federal depository insurance and $3.3 million was uninsured at March 31, 2013.

 

Trade accounts receivable potentially subject us to credit concentrations from time-to-time as a consequence of the timing, payment pattern and ultimate purchase volumes or shipping schedules with our customers. We extend credit to our customers based upon an evaluation of the customer’s financial condition and credit history and generally we do not require collateral. Our broad range of customers includes many large wholesalers, mass merchandisers and multi-outlet pharmacy and chain drug stores. These credit concentrations may impact our overall exposure to credit risk, either positively or negatively, in that our customers may be similarly affected by changes in economic, regulatory or other conditions that may impact the timing and collectability of amounts due to us. Our largest accounts receivable balances are with three customers representing approximately 69.1% and 53.8% of total trade receivable balances at March 31, 2013 and December 31, 2012, respectively.

 

Our revenues are principally generated from the sale of OTC cold remedy products which represented approximately 94% and 95% of total revenues for each of the three months ended March 31, 2013 and 2012, respectively. A significant portion of our business is highly seasonal, which causes major variations in operating results from quarter to quarter. The third and fourth quarters generally represent the largest sales volume for the OTC cold remedy products. For the three months ended March 31, 2013 and 2012, our net sales were principally related to domestic markets.

 

Raw materials used in the production of our products are available from numerous sources. Certain raw material active ingredients used in connection with Cold-EEZE® products are purchased from a single unaffiliated supplier. Should the relationship terminate or the vendor become unable to supply material, we believe that the current contingency plans would prevent a termination from materially affecting our operations. However, if the relationship was terminated, there may be delays in production of our products until an acceptable replacement supplier is located.

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

Long-lived Assets

We review our carrying value of our long-lived assets with definite lives whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. When indicators of impairment exist, we determine whether the estimated undiscounted sum of the future cash flows of such assets is less than their carrying amounts. If less, an impairment loss is recognized in the amount, if any, by which the carrying amount of such assets exceeds their respective fair values. The determination of fair value is based on quoted market prices in active markets, if available, or independent appraisals; sales price negotiations; or projected future cash flows discounted at a rate determined by management to be commensurate with our business risk. The estimation of fair value utilizing discounted forecasted cash flows includes significant judgments regarding assumptions of revenue, operating and marketing costs; selling and administrative expenses; interest rates; property and equipment additions and retirements; industry competition; and general economic and business conditions, among other factors.

 

Fair value is based on the prices that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In order to increase consistency and comparability in fair value measurements, a three-tier fair value hierarchy prioritizes the inputs used to measure fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its own assumptions.

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 Condensed Consolidated Financial Statements at carrying value which approximates fair value because of the short-term maturity of these instruments. Determination of fair value of related party payables, if any, is not practicable due to their related party nature.

Revenue Recognition, 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.

 

We do not impose a period of time within which product may be returned. All requests for product returns must be submitted to us for pre-approval. The main components of our returns policy are: (i) we will accept returns that are due to damaged product that is un-saleable and such return request activity falls within an acceptable range, (ii) we will accept returns for products that have reached or exceeded designated expiration dates and (iii) we will accept returns in the event that we discontinue a product provided that the customer will have the right to return only such items that it purchased directly from us. We will not accept return requests pertaining to customer inventory “Overstocking” or “Resets”. We will only accept return requests for product in its intended package configuration. We reserve the right to terminate shipment of product to customers who have made unauthorized deductions contrary to our return policy or pursue other methods of reimbursement. We compensate the customer for authorized returns by means of a credit applied to amounts owed or to be owed and in the case of discontinued product only, also by way of an exchange. We do not have any significant product exchange history.

 

As of March 31, 2013 and December 31, 2012, we included a provision for sales allowances of $74,000 and $109,000, respectively, which are reported as a reduction to account receivables. Additionally, accrued advertising and other allowances as of March 31, 2013 included $1.6 million for estimated future sales returns and $924,000 for cooperative incentive promotion costs. As of December 31, 2012 accrued advertising and other allowances included $1.3 million for estimated future sales returns and $1.5 million for cooperative incentive promotion costs.

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 expenses incurred for the three months ended March 31, 2013 and 2012 were $3.9 million and $3.4 million, respectively. Included in prepaid expenses and other current assets was $122,000 and $2.2 million at March 31, 2013 and December 31, 2012, respectively, relating to prepaid advertising and promotion expenses.

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 the 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 4). Stock options are exercisable during a period determined by us, but in no event later than ten years from the date granted. For the three months ended March 31, 2013 and 2012, we charged to operations $39,000 and $88,000, 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

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. The Joint Venture, of which we own a 50% membership interest, qualifies as a variable interest entity (“VIE”), we are the current primary beneficiary and we have consolidated the Joint Venture beginning with the quarter ended March 31, 2010. Expenses incurred to date by the Joint Venture have been principally for certain product research and development activities which have been charged to research and development expense by the Company.

Research and Development Expense, Policy [Policy Text Block]

Research and Development

Research and development costs are charged to operations in the period incurred. Research and development costs for the three months ended March 31, 2013 and 2012 were $188,000 and $361,000, respectively. Research and development costs are principally related to new product development initiatives and costs associated with our 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 deferred tax asset is being provided (see Note 5).

 

We utilize a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount which is more than fifty percent likely of being realized upon ultimate settlement. Any interest or penalties related to uncertain tax positions will be recorded as interest or administrative expense, respectively.

 

As a result of our continuing tax losses, we have recorded a full valuation allowance against a net deferred tax asset. Additionally, we have not recorded a liability for unrecognized tax benefits. The tax years 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.

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. The adoption of ASU 2013-02 did not have a material impact on our consolidated financial position, results of operations or cash flows.

Commitments and Contingencies (Tables)

v2.4.0.6
Commitments and Contingencies (Tables)
3 Months Ended
Mar. 31, 2013
Commitments and Contingencies Disclosure [Abstract]  
Schedule Of Future Contingency Obligation [Table Text Block]

We have estimated future minimum obligations over the next five years, including the remainder of Fiscal 2013, as follows (in thousands):

 

Fiscal Year   Employment
Contracts
    Settlement
Agreement
    Total  
2013   $ 769     $ 100     $ 869  
2014     1,025       100       1,125  
2015     555       100       655  
2016     -       100       100  
2017     -                  
          Total   $ 2,349     $ 400     $ 2,749  

 

Earnings (Loss) Per Share (Tables)

v2.4.0.6
Earnings (Loss) Per Share (Tables)
3 Months Ended
Mar. 31, 2013
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, as reflected in the results of continuing operations, is as follows (in thousands, except per share amounts):

 

    Three Months Ended     Three Months Ended  
    March 31, 2013     March 31, 2012  
    Income     Shares     EPS     Income     Shares     EPS  
Basic earnings (loss) per share   $ 290       15,752     $ 0.02     $ (688 )     14,796     $ (0.05 )
                                                 
Dilutives:                                                
Options     -       447       -       -       -       -  
                                                 
Diluted loss per share   $ 290       16,199     $ 0.02     $ (688 )     14,796     $ (0.05 )

Organization and Business (Details Textual)

v2.4.0.6
Organization and Business (Details Textual)
3 Months Ended
Mar. 31, 2013
Entity, Principal Product Proven Efficiency 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%.

Summary of Significant Accounting Policies (Details Textual)

v2.4.0.6
Summary of Significant Accounting Policies (Details Textual) (USD $)
3 Months Ended 3 Months Ended 3 Months Ended 12 Months Ended 3 Months Ended
Mar. 31, 2013
Mar. 31, 2012
Dec. 31, 2012
Dec. 31, 2011
Mar. 31, 2010
Limited Liability Company Agreement [Member]
Mar. 31, 2013
Estimated Future Sales Return [Member]
Dec. 31, 2012
Estimated Future Sales Return [Member]
Mar. 31, 2013
Cooperative Incentive [Member]
Dec. 31, 2012
Cooperative Incentive [Member]
Mar. 31, 2013
Accounts Receivable [Member]
Three Customer [Member]
Dec. 31, 2012
Accounts Receivable [Member]
Three Customer [Member]
Mar. 31, 2013
Sales Revenue, Goods, Net [Member]
Mar. 31, 2012
Sales Revenue, Goods, Net [Member]
Mar. 31, 2013
Building and Building Improvements [Member]
Maximum [Member]
Mar. 31, 2013
Building and Building Improvements [Member]
Minimum [Member]
Mar. 31, 2013
Machinery and Equipment [Member]
Maximum [Member]
Mar. 31, 2013
Machinery and Equipment [Member]
Minimum [Member]
Mar. 31, 2013
Software [Member]
Mar. 31, 2013
Furniture and Fixtures [Member]
Mar. 31, 2013
Advertising and Incentive Promotion Costs [Member]
Dec. 31, 2012
Advertising and Incentive Promotion Costs [Member]
Cash and cash equivalents (Note 2) $ 4,536,000 $ 6,268,000 $ 572,000 $ 5,541,000                                  
Cash, FDIC Insured Amount 1,400,000                                        
Cash, Uninsured Amount 3,300,000                                        
Inventory, Work in Process and Raw Materials 1,000,000   1,000,000                                    
Inventory, Finished Goods 1,100,000   1,000,000                                    
Property Plant and Equipment Useful Life                           39 years 15 years 7 years 3 years 3 years 5 years    
Due from Banks 4,700,000                                        
Concentration Risk, Percentage                   69.10% 53.80% 94.00% 95.00%                
Sales Allowances, Goods 74,000 109,000                                      
Accrued Liabilities           1,600,000 1,300,000 924,000 1,500,000                        
Share-based compensation expense 39,000 88,000                                      
Variable Interest Entity, Qualitative or Quantitative Information, Ownership Percentage         50.00%                                
Marketing and Advertising Expense 3,900,000 3,400,000                                      
Prepaid expenses and other current assets 488,000   2,687,000                                 122,000 2,200,000
Research and development $ 188,000 $ 361,000                                      
Common Stock, par value (in dollars per share) $ 0.0005   $ 0.0005                                    

Commitments and Contingencies (Details)

v2.4.0.6
Commitments and Contingencies (Details) (USD $)
In Thousands, unless otherwise specified
Mar. 31, 2013
2013 $ 869
2014 1,125
2015 655
2016 100
2017 0
Total 2,749
Employment Contracts [Member]
 
2013 769
2014 1,025
2015 555
2016 0
2017 0
Total 2,349
Settlment Agreement [Member]
 
2013 100
2014 100
2015 100
2016 100
2017 0
Total $ 400

Commitments and Contingencies (Details Textual)

v2.4.0.6
Commitments and Contingencies (Details Textual) (USD $)
1 Months Ended 12 Months Ended
Dec. 20, 2012
Dec. 31, 2012
Mar. 31, 2013
Payments for Legal Settlements $ 2,100,000    
Settlement benefit (Note 3)   1,000,000  
Additional Royalties and Commissions, Accrual Interest Percentage   3.25%  
Additional Royalties and Commissions Payable, Installment Amount   100,000  
Accrued royalties and sales commissions (Note 3)   3,500,000  
Additional Royalties and Commissions Payable, Number Of Installements     4
Additional Annual Installment Includes In Other Current Liability   100,000  
Additional Annual Installment Includes In Other Long Term Obligation   $ 300,000  

Transactions Affecting Stockholders' Equity (Details Textual)

v2.4.0.6
Transactions Affecting Stockholders' Equity (Details Textual) (USD $)
1 Months Ended 3 Months Ended 3 Months Ended
Nov. 21, 2012
Mar. 31, 2013
Mar. 15, 2013
Mar. 31, 2013
Plan 1997 [Member]
May 05, 2010
Plan 1997 [Member]
Mar. 31, 2013
Plan 2010 [Member]
Mar. 31, 2013
Directors Plan 2010 Fiscal 2011 Bonus [Member]
Chief Operating Officer and Chief Financial Officer [Member]
Mar. 31, 2013
Amended Option Plan 1997 [Member]
Mar. 31, 2013
Common Stock [Member]
Dutchess [Member]
Maximum Number Of Common Stock Authorized For Issuance Over 36 Months 2,500,000                
Maximum Amount Entitled To Put To Investor In One Draw Down Notice, Percentage Of Average Daily Volume On Trading Day 500.00%                
Maximum Amount Entitled To Put To Investor In One Draw Down Notice $ 250,000 $ 250,000              
Investory Right To Use Excess Proceeds, Maximum Percentage 5.00%                
Share Purchase Put Restrictions Maximum Percentage Of Ownership Held By Investor To Purchase Shares In Equity Line Of Credit 9.99%                
Stock Issued During Period Shares Under Specific Agreement                 125,000
Stock Issued During Period Value Specific Agreement                 $ 195,000
Common Stock, Capital Shares Reserved for Future Issuance     1,491,278            
Options outstanding - Shares       99,000          
Share-based Compensation Arrangement by Share-based Payment Award, Number of Shares Authorized   15,159   900,000   17,605      
Share Based Compensation Arrangement By Share Based Payment Award, Options, Deemed Cancelled           450,750      
Shares Issued During Period Share Based Compensation, Bonus Percentage             50.00%    
Share-based Compensation Arrangement by Share-based Payment Award, Options, Grants in Period, Net of Forfeitures               4,500,000  
Share Based Compensation Arrangement By Share Based Payment Award Options Grants In Period Common Stock Shares Unissued         1,800,000        
Equity Method Investment Ownership Percentage Required For Rights Exercisable Under Right Agreement   15.00%              
Share-based Compensation Arrangement by Share-based Payment Award, Options, Vested and Expected to Vest, Exercisable, Number       1,449,750          
Class of Warrant or Right, Exercise Price of Warrants or Rights   45              
Equity Line, Purchase Price Percentage 95.00%                

Investment in a Joint Venture (Details Textual)

v2.4.0.6
Investment in a Joint Venture (Details Textual) (USD $)
3 Months Ended 12 Months Ended
Mar. 31, 2013
Dec. 31, 2010
Dec. 31, 2012
Mar. 31, 2012
Dec. 31, 2011
Stock Issued During Period, Value, New Issues $ 195,000        
Payments To Fund Joint Venture Investments   500,000      
Maximum Amount Committed Towards Contributions In Joint Venture   2,000,000      
Cash and cash equivalents 4,536,000   572,000 6,268,000 5,541,000
Ownership Percentage In Joint Venture 50.00%        
PSI Parent [Member]
         
Stock Issued During Period, Shares, New Issues   1,440,000      
Stock Issued During Period, Value, New Issues   2,600,000      
Payments to Acquire Interest in Joint Venture   1,000,000      
Corporate Joint Venture [Member]
         
Cash and cash equivalents 381,000        
Acquisition of product license   $ 3,600,000      
Finite-Lived Intangible Assets, Useful Life (in years)   13 years 9 months      

Income Taxes (Details Textual)

v2.4.0.6
Income Taxes (Details Textual) (USD $)
In Millions, unless otherwise specified
3 Months Ended
Mar. 31, 2013
Dec. 31, 2012
Deferred Tax Benefits From Options and Warrants Exercises $ 6.4  
Deferred Tax Assets, Operating Loss Carryforwards, Domestic   37.7
Operating Loss Carryforwards, Expiration Dates Fiscal 2020 through 2032  
Deferred Tax Assets, Operating Loss Carryforwards, State and Local $ 21.4  
State and Local Jurisdiction [Member]
   
Operating Loss Carryforwards, Expiration Dates Fiscal 2018 through 2032  

Earnings (Loss) Per Share (Details)

v2.4.0.6
Earnings (Loss) Per Share (Details) (USD $)
In Thousands, except Share data, unless otherwise specified
3 Months Ended
Mar. 31, 2013
Mar. 31, 2012
Basic earnings (loss) per share EPS - Income $ 290 $ (688)
Basic earnings (loss) per share EPS - Share (in shares) 15,752,000 14,796,000
Basic earnings (loss) per share EPS - EPS (in dollars per share) $ 0.02 $ (0.05)
Dilutives:    
Options - Income 0 0
Options - Share (in shares) 447 0
Options - EPS (in dollars per share) $ 0 $ 0
Diluted loss per share EPS - Income $ 290 $ (688)
Diluted loss per share EPS - Share (in shares) 16,199,000 14,796,000
Diluted loss per share EPS - EPS (in dollars per share) $ 0.02 $ (0.05)

Earnings (Loss) Per Share (Details Textual)

v2.4.0.6
Earnings (Loss) Per Share (Details Textual) (USD $)
3 Months Ended 3 Months Ended
Mar. 31, 2012
Mar. 31, 2013
Mar. 31, 2013
Common Stock Equivalents [Member]
Antidilutive Securities Excluded from Computation of Earnings Per Share, Amount 90,721    
Warrants and Options Outstanding $ 1,312,750 $ 1,291,500  
Weighted Average Number Diluted Shares Outstanding Adjustment     446,642