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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2015

OR

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______ to ______

Commission file number 01-21617

ProPhase Labs, Inc.
(Exact name of registrant as specified in its charter)

Delaware 23-2577138
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)

621 N. Shady Retreat Road, Doylestown, Pennsylvania 18901
(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code (215) 345-0919

Securities registered pursuant to Section 12(b) of the Act:

Title of each class Name of each exchange on which registered
Common Stock, $0.0005 par value per share Nasdaq Global Market
Common Share Purchase Rights Nasdaq Global Market

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [  ] No [X]

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [  ] No [X]

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [  ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§229.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files). Yes [X] No [  ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer [  ] Accelerated filer [  ] Non-accelerated filer [  ] Smaller reporting company [X]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [  ] No [X]

The aggregate market value of the registrant’s voting and non-voting common stock held by non-affiliates was $13,643,485 as of June 30, 2015, based on the closing price of the common stock on The NASDAQ Global Market.

Number of shares of each of the registrant’s classes of securities outstanding on March 25, 2016

Common stock, $0.0005 par value per share: 17,080,776
Common share purchase rights: -

DOCUMENTS INCORPORATED BY REFERENCE

Information set forth in Part III of this report is incorporated by reference to the registrant’s proxy statement for the 2016 annual meeting of stockholders.

TABLE OF CONTENTS

Page
Part I
Item 1. Business 2
1A. Risk Factors 7
1B. Unresolved Staff Comments 16
2. Properties 16
3. Legal Proceedings 17
4. Mine Safety Disclosures 17
Part II
5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
18
6. Selected Financial Data 21
7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 22
7A. Quantitative and Qualitative Disclosures About Market Risk 30
8. Financial Statements and Supplementary Data 31
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 55
9A Controls and Procedures 55
9B. Other Information 55
Part III
10. Directors, Executive Officers and Corporate Governance 56
11. Executive Compensation 56
12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
13. Certain Relationships and Related Transactions and Director Independence 56
14. Principal Accountant Fees and Services 56
Part IV
15. Exhibits and Financial Statement Schedules 57
Signatures 61

PART I

Forward-Looking Statements

This Annual Report on Form 10-K (“Report”) contains “forward looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward looking statements relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by the forward-looking statements. Many of these factors are beyond our ability to predict. Given the risks and uncertainties surrounding forward-looking statements, you should not place undue reliance on these statements. Forward-looking statements typically are identified by use of terms such as “anticipate”, “believe”, “plan”, “expect”, “intend”, “may”, “will”, “should”, “estimate”, “predict”, “potential”, “continue” and similar words although some forward-looking statements are expressed differently. This Report may contain forward-looking statements attributed to third parties relating to their estimates regarding the growth of our markets. You are cautioned that such forward looking statements are not guarantees of future performance and that all forward-looking statements address matters that involve risk and uncertainties, and there are many important risks, uncertainties and other factors that could cause our actual results, levels of activity, performance, achievements and prospects, as well as those of the markets we serve, to differ materially from the forward-looking statements contained in this Report.

Such risks and uncertainties include, but are not limited to:

The ability of our management to successfully implement our business plan and strategy;
Our ability to fund our operations including the cost and availability of capital and credit;
Our ability to compete effectively, including our ability to maintain and increase our markets and/or market share in the markets in which we do business;
Our dependence on sales from our principal product, Cold-EEZE ® , and our ability to successfully develop and commercialize our new products within the cough-cold category or other categories such as dietary supplements;
Changes in our retail and distribution customers strategic business plans including, but not limited to, (i) expansions, mergers, and/or consolidations, (ii) retail shelf space allocations for products within each outlet and in particular the cough/cold category in which we compete, (iii) changes in their private label assortment and (iv) product selections, distribution allocation, merchandising programs and retail pricing of our products as well as competitive products;
The general financial and economic uncertainty, fluctuations in consumer confidence and the strength of the United States economy, and their impacts on our business including demand for our products;
Our ability to protect our proprietary rights;
Our continued ability to comply with regulations relating to our current products and any new products we develop, including our ability to effectively respond to changes in laws and regulations or the interpretation thereof including changing market rules and evolving federal, state and regional laws and regulations;
Potential disruptions in our ability to manufacture our products or our access to raw materials;
Seasonal fluctuations in demand for our products;
Our ability to attract, retain and motivate our key employees;
Our ability to pay our debts and meet our liquidity needs; and
Other risks identified in this Report.

You should also consider carefully the statements under other sections of this Report, including the Risk Factors included in Item 1A, which address additional risks that could cause our actual results to differ from those set forth in any forward-looking statements. Our forward-looking statements speak only as the date of this Report. We undertake no obligation to publicly update or review any forward-looking statements, whether as a result of new information, future developments or otherwise.

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Where You Can Find Other Information

ProPhase Labs, Inc. (“we”, “us” or the “Company”) files periodic and current reports, proxy statements and other information with the Securities and Exchange Commission (the “SEC”). We make available on our website ( www.ProPhaseLabs.com ) free of charge our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to or exhibits included in those reports as soon as reasonably practical after we electronically file such materials with or furnish them to the SEC. Information appearing on our website is not part of this Annual Report on Form 10-K. You can also read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington D.C. 20549-1004. You may request copies of these documents, upon payment of a duplication fee, by writing the SEC at its principal office at 100 F Street, NE Room 1580, Washington, D.C. 20549-1004. In addition, the SEC maintains an Internet site ( www.sec.gov ) that contains reports, proxy and information statements regarding issuers that file electronically with the SEC, including the Company.

Item 1. Business

General Development of Business

We are a manufacturer, marketer and distributor of a diversified range of homeopathic and health care products that are offered to the general public. We are also engaged in the research and development of potential over-the-counter (“OTC”) drug, natural base health products along with supplements, personal care and cosmeceutical products.

Our primary business is the manufacture, distribution, marketing and sale of OTC health care and cold remedy products to consumers through national chain, regional, specialty and local retail stores. Our flagship brand is Cold-EEZE ® and our principal product is Cold-EEZE ® cold remedy zinc gluconate lozenges, proven in clinical studies to reduce the duration and severity of symptoms of the common cold. In addition to Cold-EEZE ® cold remedy lozenges, we market and distribute non-lozenge forms of our proprietary zinc gluconate formulation, (i) Cold-EEZE ® cold remedy QuickMelts ® and (ii) Cold-EEZE ® cold remedy Oral Spray. In Fiscal 2013, we expanded our Cold-EEZE ® cold remedy QuickMelts ® product line and began shipments to retailers in July 2013 Cold-EEZE ® Plus Immune Support + Energy QuickMelts ® . In Fiscal 2014 we began shipments in June 2014 of Cold-EEZE ® Plus Natural Multi-Symptom QuickMelts ® . Each of these new Cold-EEZE ® QuickMelts ® products are based on our proprietary zinc gluconate formulation in combination with certain natural (i) immune system support, (ii) energy, (iii) sleep and relaxation, and/or (iv) cold and flu symptom relieving active ingredients. In Fiscal 2015, we introduced three new Cold-EEZE ® product line extensions: (i) a Cold-EEZE ® Multi-Symptom Relief for Cold and Flu lozenge, (ii) a Cold-EEZE ® Daytime and Nighttime Multi-Symptom Relief in liquid form for each of adults and children, and (iii) Cold-EEZE ® Natural Allergy Relief caplets for indoor and outdoor allergies. Shipments for these three new Cold-EEZE ® product line extensions began in the third quarter of Fiscal 2015.

Cold-EEZE ® is an established product in the health care and cough-cold market. For Fiscal 2015, 2014 and 2013, our revenues have come principally from our OTC health care and cold remedy products. For Fiscal 2015, 2014 and 2013, our net sales for each period were related to markets in the United States.

We use a December 31 year-end for financial reporting purposes. References herein to the fiscal year ended December 31, 2015 shall be the term “Fiscal 2015” and references to other “Fiscal” years shall mean the year, which ended on December 31 of the year indicated.

We were initially organized as a corporation in Nevada in July 1989. Effective June 18, 2015, we changed our state of incorporation from the State of Nevada to the State of Delaware. Our principal executive offices are located at 621 N. Shady Retreat Road, Doylestown, Pennsylvania 18901 and our telephone number is 215-345-0919. The terms, “we”, “us” and the “Company” refer to the Company together with its consolidated subsidiaries unless the context otherwise requires.

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Description of Business Operations

Cold-EEZE ® is our most popular OTC health care and cold remedy product. Cold-EEZE cold remedy lozenges, QuickMelts ® and Oral Spray product benefits are derived from our proprietary zinc gluconate formulation. Cold-EEZE ® cold remedy lozenges effectiveness has been substantiated in two double-blind clinical studies proving that Cold-EEZE ® cold remedy lozenges reduce the duration of the common cold by 42%. We acquired worldwide manufacturing and distribution rights to our lozenge formulation in 1992 and commenced national marketing in 1996. In addition to our lozenge product, the Cold-EEZE ® Cold Remedy proprietary zinc gluconate formulation is available in two additional cold remedy delivery forms, (i) a fast dissolving QuickMelt and (ii) an Oral Spray. We also offer our product line extensions (i) Cold-EEZE ® Daytime and Nighttime Multi-Symptom Relief in liquid for each of adults and children (ii) Cold-EEZE ® Natural Allergy Relief caplets for indoor and outdoor allergies. The demand for our OTC cold remedy products is seasonal and the first and fourth quarters of each year generally have the largest sales volume.

Our business operations are concentrated on the development, manufacturing, marketing and distribution of our proprietary Cold-EEZE ® cold remedy lozenge products and on the development of various product extensions. Our product line of OTC health care and cold remedy products are reviewed regularly to identify new consumer opportunities and/or trends in flavor, convenience, packaging and delivery systems or forms to help improve market share for our products.

Although we continue to expand our Cold-EEZE ® product offerings, some retailers are limiting and/or reallocating shelf and promotional space away from the cough-cold category to other product categories. With cough-cold shelf and promotional space at a premium, opportunities in the future to introduce new Cold-EEZE ® products in the cough-cold category may be limited. Therefore, to continue to grow our Company, we are in the process of implementing a series of new product development and pre-commercialization initiatives in the dietary supplement category.

Initial dietary supplement product development activities were completed in the fourth quarter of Fiscal 2015 under the brand name of TK Supplements TM . The inaugural TK Supplements TM product line is comprised of three men’s health products: (i) Legendz XL TM for sexual health, (ii) Triple Edge XL TM , a daily energy booster plus testosterone support, and (iii) Super ProstaFlow Plus TM for prostate and urinary health. The first of these three TK Supplements TM products, Legendz XL TM , is scheduled for launch in the first half of Fiscal 2016.  Initially, it will be introduced to consumers through direct to consumer marketing including DRTV.  If this initial launch is successful, Legendz XL (as well as the other products under development) may ultimately be distributed to retailers, leveraging our Cold-EEZE distribution platform and infrastructure. While management anticipates the growth potential in this category may be better, the risks associated with introducing new products that do not leverage the Cold-EEZE ® brand name may be higher. Therefore, no assurance can be made that our new product efforts will be successful.

Additionally, we are active in exploring new product technologies, applications, product line extensions and other new product opportunities consistent with our Company and brand image, and our standard of proven consumer benefit and efficacy.

Manufacturing Facility

Our wholly owned subsidiary, Pharmaloz Manufacturing, Inc. (“PMI”), produces our Cold-EEZE ® cold remedy lozenges and other lozenge products in addition to performing operational tasks such as warehousing, customer order processing and shipping. Our PMI facility is located in Lebanon, Pennsylvania. Additionally, our PMI facility is a United States Food and Drug Administration (“FDA”) registered facility that engages in contract manufacturing and distribution activities. PMI also produces and sells therapeutic lozenges to unaffiliated third party retail, wholesale and distribution outlets.

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Products

OTC Health Care and Cold-Remedy Products

In May 1992, we entered into an exclusive agreement for worldwide representation, manufacturing and marketing of a zinc gluconate formulation. This zinc gluconate formulation is the foundation of our brand; Cold-EEZE ® health care and cold remedy products which are distributed principally in the United States. Cold-EEZE ® cold remedy products are an OTC consumer product used to reduce the duration of the common cold. We have substantiated the effectiveness of Cold-EEZE ® cold remedy lozenges through a variety of studies. A randomized double-blind placebo-controlled study, conducted at Dartmouth College of Health Science, Hanover, New Hampshire, concluded that the lozenge formulation treatment, initiated within 48 hours of symptom onset, resulted in a significant reduction in the total duration of the common cold.

On May 22, 1992, “Zinc and the Common Cold, a Controlled Clinical Study,” was published in England in the Journal of International Medical Research , Volume 20, Number 3, Pages 234-246. According to this publication, (a) flavorings used in other zinc lozenge products (citrate, tartrate, separate, orotate, picolinate, mannitol or sorbitol) render the zinc inactive and unavailable to the patient’s nasal passages, mouth and throat where cold symptoms have to be treated, (b) this patented formulation delivers approximately 93% of the active zinc to the mucosal surfaces and (c) the patient has the same sequence of symptoms as in the absence of treatment but goes through the phases at an accelerated rate and with reduced symptom severity.

On July 15, 1996, results of a randomized double-blind placebo-controlled study on the common cold, which commenced at the Cleveland Clinic Foundation on October 3, 1994, were published. The study Zinc Gluconate Lozenges for Treating the Common Cold” was completed and published in The Annals of Internal Medicine – Volume 125 Number 2. Using a 13.3 mg lozenge (almost half the strength of the lozenge used in the Dartmouth study), the result still showed a 42% reduction in the duration of common cold symptoms.

In addition to our Cold-EEZE ® cold remedy lozenges, we also market and distribute non-lozenge forms of our proprietary zinc gluconate formulation, (i) Cold-EEZE ® cold remedy QuickMelts ® are fast dissolving tablets that are taken orally and (ii) Cold-EEZE ® cold remedy Oral Spray a liquid form of our zinc gluconate formulation that is sprayed in the mouth. The Cold-EEZE ® cold remedy QuickMelts ® product line is comprised of (i) Cold-EEZE ® Daytime/Nighttime QuickMelts ® (launched in Fiscal 2012) (ii) Cold-EEZE ® Plus Immune Support + Energy QuickMelts ® (launched in Fiscal 2013) and (iii) Cold-EEZE ® Plus Multi-Symptom QuickMelts ® (launched in Fiscal 2014).

We also manufacture, market and distribute organic cough drops and a Vitamin C supplement and perform contract manufacturing services of cough drop, dietary supplements, and other OTC cold remedy products for third parties.

In Fiscal 2015, we introduced (i) a Cold-EEZE ® Multi-Symptom Relief for Cold and Flu lozenge, (ii) a Cold-EEZE ® Daytime and Nighttime Multi-Symptom Relief in liquid form for each of adults and children, and (iii) Cold-EEZE ® Natural Allergy Relief caplets for indoor and outdoor allergies. Shipments for these three new Cold-EEZE ® product line extensions began in the third quarter of Fiscal 2015. Our new multi-symptom lozenge contains the same proprietary cold shortening zinc gluconate formulation plus additional active ingredients for temporary relief of flu symptoms, cough, and sore and irritated throat. Our Cold-EEZE ® Daytime and Nighttime Multi-Symptom Relief in liquid form provide temporary relief of cold and flu symptoms. Our Cold-EEZE ® Natural Allergy Relief caplets provide temporary relief of indoor and outdoor allergy symptoms.

Our business is subject to federal and state health and safety laws and regulations. Our OTC health care and cold remedies are subject to regulations by various federal, state and local agencies, including the FDA. Additionally, Cold-EEZE ® homeopathic cold remedy lozenges, QuickMelts ® , Oral Spray and Allergy caplets are subject to the Homeopathic Pharmacopoeia of the United States. See “Regulatory Matters” below for more information.

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Patents, Trademarks, Royalty and Commission Agreements

Patents and Trademarks

We do not currently own patents for our OTC health care and cold-remedy products. We maintain various trademarks for each of our products including Cold-EEZE ® , QuickMelts ® , Organix Rx Complete ® and Organix Rx Defense ® , ORXx Complete TM and ORXx Defense TM , TK Supplements TM , Legendz XL TM , TripleEdge XL TM and Super ProstaFlow Plus TM .

We currently own various domestic and international patents covering certain product development initiatives principally developed under our Pharma subsidiary operations. To date, we have not realized any meaningful levels of revenues from such patents and we suspended in Fiscal 2009 any further commercialization efforts for various products under such patents.

Joint Venture

On March 22, 2010, we, Phosphagenics Limited (“PSI Parent”), an Australian corporation, Phosphagenics Inc. (“PSI”), a Delaware corporation and subsidiary of PSI Parent, and Phusion LLC (“Phusion”), a Delaware limited liability company, entered into a Limited Liability Company Agreement (the “LLC Agreement”) of the Phusion joint venture and additional related agreements for the purpose of developing and commercializing, for worldwide distribution and sale, a wide range of non-prescription remedies using PSI Parent’s proprietary patented TPM™ technology (“TPM”). TPM facilitates the delivery and depth of penetration of active molecules in pharmaceutical, nutraceutical, and other products. Pursuant to the LLC Agreement, we and PSI each own a 50% membership interest in the Phusion joint venture.

Our Phusion joint venture has (i) an exclusive, royalty-free, world-wide (subject to certain limitations), paid-up license to exploit OTC drugs (and certain other products) that em

The above information was disclosed in a filing to the SEC. To see the filing, click here. ProPhase Labs next reports earnings on March 29, 2016.

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Other recent filings from the company include the following:

Prophase Labs Reports Financial Results - Nov. 13, 2017
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