Other preliminary proxy statements

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of

the Securities Exchange Act of 1934

Filed by the Registrant [X]

Filed by a Party other than the Registrant [  ]

Check the appropriate box:

[X] Preliminary Proxy Statement
[  ] Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e) (2))
[  ] Definitive Proxy Statement
[  ] Definitive Additional Materials
[  ] Soliciting Material under §240.14a-12

ProPhase Labs, Inc.

(Name of Registrant as Specified In Its Charter)

(Name of Person(s) Filing Proxy Statement if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

[  ] No fee required.
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1. Title of each class of securities to which transaction applies: N/A
2. Aggregate number of securities to which transaction applies: N/A
3. Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee is calculated and state how it was determined):
$50,000,000 (cash purchase price of the assets)
4. Proposed maximum aggregate value of transaction:
$50,000,000
5. Total fee paid:
$5,795
[  ] Fee paid previously with preliminary materials.
[  ] Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.
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ProPhase Labs, Inc.

621 N. Shady Retreat Road

Doylestown, Pennsylvania 18901

SPECIAL MEETING OF STOCKHOLDERS

[●], 2017

Dear Stockholder:

You are cordially invited to attend a special meeting of stockholders of ProPhase Labs, Inc. (the “Company”), to be held on [●],[●], 2017, beginning at [●]:00 a.m., local time, at the offices of Reed Smith LLP, 599 Lexington Avenue, New York, New York 10022.

At the special meeting, you will be asked to vote on a proposal to sell substantially all of the assets of the Company, which are comprised of the intellectual property and other assets related to the Company’s ColdEEZE ® brand and product line, to Meda Consumer Healthcare Inc. (“MCH”), a Delaware corporation, and an affiliate of Mylan Inc. (together with MCH, “Mylan”), a Pennsylvania corporation, for cash, pursuant to the terms and conditions of that certain Asset Purchase Agreement, dated as of January 6, 2017, as amended, by and among the Company, MCH and Mylan Inc., and the other transactions contemplated thereby (the “Asset Sale”). The terms of the Asset Sale are described more fully in the accompanying proxy statement.

We urge you to read the proxy statement materials in their entirety and consider them carefully. Please pay particular attention to the “Risk Factors” beginning on page 31 for a discussion of the risks related to the proposed Asset Sale. There are a number of material risks inherent in the Asset Sale, including the fact that, if the Asset Sale is completed, we will have sold our primary intellectual property and primary source of revenue. Our remaining assets will consist primarily of the net proceeds from the Asset Sale, our manufacturing facility and manufacturing business located in Lebanon, Pennsylvania and the Company’s headquarters in Doylestown, Pennsylvania, and assets relating to our ORXx and TK Supplements ® brands, product lines and operations.

After careful consideration, our board of directors has unanimously approved the Asset Sale and unanimously recommends that you vote “FOR” approval of the Asset Sale. The approval of the Asset Sale requires the affirmative vote of the holders of a majority of the outstanding shares of our common stock entitled to vote on this matter as of the record date. Failure to vote is the equivalent of a “No” vote.

It is important that your shares be represented at the special meeting, regardless of the size of your holdings. Accordingly, whether or not you expect to attend the special meeting, we urge you to vote promptly by returning the enclosed proxy card. You may revoke your proxy at any time before it has been voted. Voting by proxy will not prevent you from voting your shares in person if you subsequently choose to attend the special meeting.

Thank you for your cooperation and continued support.

Very truly yours,
Ted Karkus
Chairman and Chief Executive Officer

ProPhase Labs, Inc.

621 N. Shady Retreat Road

Doylestown, Pennsylvania 18901

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS

TO BE HELD [●], 2017

Dear Stockholder:

You are hereby given notice of and invited to attend in person or by proxy a special meeting of stockholders of ProPhase Labs, Inc. (the “Company”), to be held at the offices of Reed Smith LLP, 599 Lexington Avenue, New York, New York 10022, on [●], 2017, at [●]:00 a.m., local time, for the following purposes:

1. To consider and act upon a proposal to sell substantially all of the assets of the Company, which are comprised of the intellectual property and other assets relating to its Cold-EEZE ® brand and product line, to Meda Consumer Healthcare Inc. (“MCH”), a Delaware corporation, and an affiliate of Mylan Inc. (together with MCH, “Mylan”), a Pennsylvania corporation, for cash, pursuant to that certain Asset Purchase Agreement, dated as of January 6, 2017, as amended, by and among the Company, MCH and Mylan Inc., and the other transactions contemplated thereby.
2. To consider and act upon a proposal to grant the persons named as proxies discretionary authority to vote to adjourn the special meeting, if necessary, to solicit additional proxies to vote in favor of Proposal No. 1.
3. To transact such other business as may properly come before the special meeting and any adjournment thereof.

The board of directors has fixed the close of business on [●], 2017, as the record date for the determination of stockholders entitled to notice of and to vote at the special meeting and any adjournments thereof. Only stockholders at the close of business on the record date are entitled to notice of and to vote at the special meeting.

For the reasons set forth in the proxy statement, our board of directors unanimously recommends that you vote “FOR” Proposal Nos. 1 and 2.

You are cordially invited to attend the special meeting. However, whether or not you expect to attend the special meeting, it is very important for your shares to be represented at the meeting. We respectfully request that you promptly date, execute and mail the enclosed proxy in the enclosed stamped envelope for which no additional postage is required if mailed in the United States. A proxy may be revoked by a stockholder by executing and delivering a subsequent dated proxy or a written notice of revocation to the Secretary of the Company before the vote at the special meeting, or by personally appearing at the special meeting and casting your vote, each as specified in the enclosed proxy statement.

YOUR VOTE IS IMPORTANT. PLEASE PROMPTLY EXECUTE AND RETURN THE ENCLOSED PROXY CARD IN THE ENVELOPE PROVIDED.

By Order of the Board of Directors,
Ted Karkus
Chairman and Chief Executive Officer
[●], 2017
Doylestown, Pennsylvania

TABLE OF CONTENTS

SUMMARY TERM SHEET 1
Parties to the Transaction 1
The Companies 2
Assets to be Sold 3
Assets to be Retained 3
Liabilities to be Assumed by Mylan 4
Retained Liabilities 5
Purchase Price 5
Nature of Our Business Following the Sale of Assets 6
Reasons for the Sale of the Acquired Assets 7
Potential Drawbacks of the Sale to Mylan 7
Asset Purchase Agreement 8
Representations and Warranties of the Parties 8
Conditions to Completion of the Sale of the Acquired Assets 9
No Solicitation 10
Our Indemnification Obligations 10
Mylan’s Indemnification Obligations 10
Termination of the Asset Purchase Agreement 11
ProPhase’s Obligations upon Termination 12
Post-Closing Agreements 12
Recommendation of Our Board of Directors 14
Appraisal Rights 14
Material Federal Income Tax Consequences 14
Regulatory Approvals 14
Accounting Treatment 14
QUESTIONS AND ANSWERS ABOUT THE SPECIAL MEETING OF STOCKHOLDERS 15
GENERAL INFORMATION 19
Voting Procedures 19
Voting of Proxies 20
Revocation of Proxies 20
Persons Making the Solicitation 21
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS 22
PROPOSAL NO. 1—SALE OF THE ACQUIRED ASSETS 23
The Companies 23
Background of the Sale of the Acquired Assets 25
Reasons for the Sale of the Acquired Assets to Mylan 27
Potential Drawbacks of the Sale to Mylan 28
Recommendation of the Board of Directors 30
Regulatory Approvals 30
Appraisal Rights 30
Federal Income Tax Consequences 30
Accounting Treatment of the Asset Sale 30

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RISK FACTORS 31
ASSET PURCHASE AGREEMENT 34
Assets to Be Sold 34
Assets to be Retained 35
Assumed Liabilities 36
Retained Liabilities 36
Closing Date 37
Purchase Price 37
Proceeds from the Sale of Assets 37
Nature of Our Business Following the Sale to Mylan 37
Representations and Warranties 38
Covenants 40
Solicitation; Withdrawal of Recommendation by Our Board of Directors 43
Conditions to Closing 45
Termination of the Asset Purchase Agreement 46
Effect of Termination 47
Payment of Termination Fee 47
Survival of Representations 48
Our Indemnification Obligations 48
Mylan’s Indemnification Obligations 48
Expenses 48
Other Agreements Relating to the Proposed Transaction 48
Manufacturing Agreement 49
Transition Services Agreement 49
Rights Agreement Amendment 49
Escrow Agreement 50
Voting Agreement 50
Vote Required and Board Recommendation 50
UNAUDITED PRO FORMA FINANCIAL INFORMATION 51
PROPOSAL NO. 2—GRANT OF DISCRETIONARY AUTHORITY TO ADJOURN THE SPECIAL MEETING TO SOLICIT ADDITIONAL PROXIES 57
Vote Required 57
BENEFICIAL OWNERSHIP OF COMMON STOCK 58
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE 59
STOCKHOLDER PROPOSALS 59
HOUSEHOLDING OF PROXY MATERIALS 60
OTHER MATTER 60
ADDITIONAL INFORMATION 61
INDEX TO UNAUDITED FINANCIAL STATEMENTS OF COLD-EEZE® BUSINESS DIVISION 62
Appendix A Asset Purchase Agreement

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We are providing this Proxy Statement to you in connection with a special meeting of the stockholders of ProPhase Labs, Inc. The special meeting will be held at the offices of Reed Smith LLP, 599 Lexington Avenue, New York, New York 10022, on [●], 2017, at [●]:00 a.m., local time.

Our board of directors is soliciting your proxy to vote at the special meeting, including at any adjournments or postponements. You are invited to attend the special meeting to vote on the proposals described in this proxy statement. However, you do not need to attend the special meeting to vote your shares. Instead, you may simply complete, sign and return the enclosed proxy card.

We intend to mail this proxy statement and accompanying proxy card on or about [●], 2017, to all stockholders entitled to notice of the special meeting.

SUMMARY TERM SHEET

This summary highlights the material terms of the Asset Purchase Agreement, dated as of January 6, 2017 (as amended, the “Asset Purchase Agreement”), by and among ProPhase Labs, Inc. (“ProPhase” or the “Company”), Meda Consumer Healthcare Inc. (“MCH”) and Mylan Inc. (together with MCH, “Mylan”), and the proposed sale of assets by ProPhase, consisting principally of our intellectual property rights and other assets relating to our Cold-EEZE ® brand and product line (collectively, referred to herein as the “Cold-EEZE ® Business”) to Mylan, including all current and pipeline over-the-counter allergy, cold, flu and multi-symptom relief and immune support treatments for adults and children to the extent each is, or is intended to be, branded “Cold-EEZE ® ”, and all private label versions thereof, including all formulations and derivatives thereof as set forth in the Asset Purchase Agreement (collectively, referred to herein as the “Products”), but not including the manufacturing facility and manufacturing business located in Lebanon, Pennsylvania or the Company’s headquarters in Doylestown, Pennsylvania. As part of the transaction, the Company, through its PMI (as defined below) subsidiary, will enter into a manufacturing and supply agreement with Mylan. This summary highlights selected information in this proxy statement and may not contain all of the information that may be important to you when evaluating the proposed transaction. To understand the proposed transaction fully and for a more complete description of the terms of the transaction, you should carefully read this proxy statement and the Asset Purchase Agreement, a copy of which is attached to this proxy statement as Appendix A . We have included page references in this summary to direct you to a more complete discussion in the proxy statement. Capitalized terms used but not defined herein have the meanings assigned to them in the Asset Purchase Agreement.

Parties to the Transaction

The parties to the proposed transaction are ProPhase, as the seller, MCH, as the buyer, and Mylan Inc., as the guarantor of MCH’s obligations under the Asset Purchase Agreement. See “Proposal No. 1—Sale of the Acquired Assets—The Companies” beginning on page 23. MCH may designate one of its affiliates as buyer under the Asset Purchase Agreement.

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The Companies

ProPhase

ProPhase is 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 other potential over-the-counter (“OTC”) drugs and natural base health products, including supplements, personal care and cosmeceutical products.

The Company and PMI’s 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 ® , (ii) Cold-EEZE ® Gummies Multi-Symptom Relief for Cold and Flu, and (iii) Cold-EEZE ® cold remedy Oral Spray.

In addition, we market and distribute OTC lozenge and dietary supplement products under the ORXx brand name. The ORXx brand includes the products sold under the following names: ORXx Complete TM and ORXx Defense TM .

We are also pursuing 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 ® . The TK Supplements ® product line comprises three men’s health products: (i) Legendz XL ® 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.

In addition to the Company’s products, PMI manufactures a large and diverse amount of OTC lozenge products and supplements for third parties, in addition to Cold-EEZE ® lozenges, which business the Company plans to continue and grow post-closing.

Mylan

Mylan was incorporated in Pennsylvania in 1970 and maintains its principal executive offices in Canonsburg, Pennsylvania. Mylan is a global pharmaceutical company, which develops, licenses, manufactures, markets and distributes generic, branded generic and specialty pharmaceuticals. Mylan offers one of the industry’s broadest product portfolios, including more than 2,700 marketed products, to customers in more than 165 countries and territories. Mylan operates a global, high quality vertically-integrated manufacturing platform, which includes more than 50 manufacturing and research and development (“R&D”) facilities around the world and one of the world’s largest active pharmaceutical ingredient operations. Mylan also operates a strong R&D network that has consistently delivered a robust product pipeline.

Mylan’s principal executive office is currently located at 1000 Mylan Boulevard, Canonsburg, Pennsylvania 15317, and its telephone number there is (724) 514-1800.

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MCH

MCH is the U.S. over-the-counter division of Stockholm-based Meda AB, a global specialty pharmaceutical company, which was acquired by Mylan N.V., the parent company of Mylan, on August 5, 2016.

Assets to be Sold

In the proposed transaction, we have agreed to sell to Mylan the Cold-EEZE ® Business, but not including the manufacturing facility and equipment located in Lebanon, Pennsylvania or the corporate headquarters and facility located in Doylestown, Pennsylvania.

See “Proposal No. 1—Sale of the Acquired Assets—Asset Purchase Agreement—Assets to be Sold” beginning on page 34.

Assets to be Retained

If the proposed transaction is completed, we will retain the following (the “Excluded Assets”), in addition to our Pharmaloz Manufacturing, Inc. (“PMI”) manufacturing business (including all contract manufacturing), equipment and facility located in Lebanon, Pennsylvania (the “PMI Business”), our headquarters, including real estate owned, in Doylestown, Pennsylvania (“Company Headquarters”), and our ORXx and TK Supplements ® brands, product lines and operations:

the corporate seals, charter documents, minute books, books of account or other records having to do with the corporate organization of the Company;
the tax returns and books of account or other records with respect to the taxes and financial records of the Company;
all income tax net operating loss carryforwards of the Company;
all accounts receivable;
all cash and cash equivalents;
all rights which accrue or will accrue to the Company under the Asset Purchase Agreement;
the Company’s personnel records and copies of any other records that the Company and its affiliates are required by law to retain in their possession;
all known or unknown, liquidated or unliquidated, contingent or fixed, rights, claims or causes of action, choses in action, rights of recovery and rights of set-off of any kind, and indemnities against any person that the Company may have against any person but only to the extent related to the Excluded Assets or Retained Liabilities (as defined below);
all claims for refunds of taxes and other governmental charges of whatever nature with respect to the Acquired Assets for pre-closing periods;
all rights of the Company under legally binding written agreements, contracts, leases, licenses, instruments, commitments or other arrangements (collectively, “Contracts”) related to the Cold-EEZE ® Business (the “Cold-EEZE ® Business Contracts”) that are not assigned to Mylan;

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all causes of action (including counterclaims) whether known or unknown, absolute, contingent (or based on a contingency) or otherwise, and defenses (A) to the extent not arising from or relating to the Acquired Assets or Assumed Liabilities (as defined below) as well as any books, records and privileged information relating thereto or (B) relating to any period through the closing to the extent that the assertion of such cause of action or defense is necessary or useful in defending any claim that may be asserted against the Company;
all insurance policies and related Contracts and all rights thereunder (including the right to make claims thereunder and to the proceeds thereof);
all claims and rights against any officer, director, member, manager, or employee of the Company (in their capacity as an employee but not in any other capacity) following the closing;
all benefit plans and all trust agreements, insurance policies and administrative service and other contracts relating to such;
all records and reports prepared or received by the Company or any of its affiliates in connection with the sale of the Acquired Assets and the transactions contemplated hereby, including all analyses relating to the Acquired Assets or Mylan so prepared or received;
all vendor numbers associated with the Acquired Assets or the Cold-EEZE ® Business;
all plants, real property and equipment, other than such equipment or other assets and properties identified in the Asset Purchase Agreement;
all brands that are not related to or used in the Cold-EEZE ® Business;
all confidentiality agreements with prospective purchasers of the Acquired Assets or any portion thereof, and all bids and expressions of interest received from third parties with respect to the Acquired Assets;
all privileged materials, documents and records of the Company or the Company’s affiliates that are not related to the Cold-EEZE ® Business or the Acquired Assets; and
inventory, finished goods, bulk, raw materials, packaging, supplies, components and other inventories of the Cold-EEZE ® Business, which will be sold to Mylan pursuant to the terms of the manufacturing and supply agreement to be entered into with Mylan, and other non-Cold-EZEE ® Business and PMI Business (defined below), which will be retained by us.

See “Proposal No. 1—Sale of the Acquired Assets—Asset Purchase Agreement—Assets to be Retained” beginning on page 35.

Liabilities to be Assumed by Mylan

In connection with the sale, transfer, conveyance, assignment and delivery of the Acquired Assets to Mylan pursuant to the Asset Purchase Agreement, at the closing, Mylan will assume and agree to pay, perform and discharge all liabilities arising out of the ownership and operation of the Acquired Assets on or after the closing date, whether absolute, accrued, contingent, known or unknown, asserted or unasserted, fixed or otherwise, or whether due or to become due, other than the Retained Liabilities (the “Assumed Liabilities”).

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See “Proposal No. 1—Sale of the Acquired Assets—Asset Purchase Agreement—Assumed Liabilities” on page 36.

Retained Liabilities

ProPhase will retain all liabilities that are not the Assumed Liabilities, including the following (the “Retained Liabilities”):

claims related to the Acquired Assets regarding adulterated products manufactured by the Company;
all accounts payable;
all indebtedness of the Company and all other liabilities arising out of the Acquired Assets prior to the closing date, whether absolute, accrued, contingent, known or unknown, asserted or unasserted, fixed or otherwise, or whether due or to become due, including without limitation any and all liabilities for any rebates, promotions, charge-backs or other changes in pricing with respect to sales of the Products for the period prior to the closing, which includes the $1,500,000 liability pursuant to those certain secured promissory notes, dated December 11, 2015, issued by the Company, PMI and other parties thereto (the “Secured Promissory Notes”), which Secured Promissory Notes are required to be repaid by the Company at closing pursuant to the terms of the Asset Purchase Agreement;
claims or liabilities arising out of or associated with the Company’s Amended and Restated Rights Agreement, dated as of June 18, 2014, between the Company and American Stock Transfer and Trust Company (as amended, the “Rights Agreement”);
all taxes of the Company unrelated to the ownership or operation of the Acquired Assets and the Cold-EEZE ® Business or related to the direct or indirect ownership or operation of the Acquired Assets and the Cold-EEZE ® Business for all periods prior to the closing; all taxes, if any, imposed on the Company and any consolidated, combined or unitary group of which the Company is a member as a result of the sale or transfer of the Acquired Assets and the Cold-EEZE ® Business; and any liability of the Company for the unpaid taxes of any person under Treasury Regulation Section 1.1502-6 (or any similar provision of state, local, or non-U.S. law), as a transferee or successor, by contract or otherwise;
credits and payments for any returns of non-conforming Products sold by the Company on or before the closing date; and
claims or liabilities of the business and operations of the Company or any of its affiliates at any time, other than the Assumed Liabilities.

Purchase Price

Mylan has agreed to purchase the Acquired Assets for a purchase price of $50,000,000 in cash (the “Purchase Price”), plus the assumption of the Assumed Liabilities.

We have indemnification obligations to Mylan under the Asset Purchase Agreement that may require us to make future payments to Mylan, and any amounts that we may become required to pay to Mylan pursuant to the indemnification provisions of the Asset Purchase Agreement will reduce the net proceeds to us resulting from the transaction.

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Pursuant to the terms of the Asset Purchase Agreement, at closing, Mylan will deposit $5,000,000 of the Purchase Price (the “Escrow Amount”) into an escrow account established with Citibank, N.A. (the “Escrow Agent”) in order to satisfy, in whole or in part, certain indemnity obligations of the Company under the Asset Purchase Agreement.

See “Proposal No. 1—Sale of the Acquired Assets—Asset Purchase Agreement—Purchase Price” and “—Our Indemnification Obligations” on pages 37 and 48, respectively.

Nature of Our Business Following the Sale of Assets

Following the closing of the proposed asset sale to Mylan, our remaining business will consist of our manufacturing business in Lebanon, Pennsylvania, conducted by our wholly owned subsidiary, PMI, and our ORXx and TK Supplements ® brands, product lines and operations.

We will continue to be a public reporting company after the sale of the Acquired Assets to Mylan, if the sale is approved by our stockholders.

Our PMI facility is a United States Food and Drug Administration (“FDA”) registered facility that engages in contract manufacturing and distribution activities. Following the transaction, PMI will continue to manufacture a large and diverse amount of OTC lozenge products and supplements for the Company and third parties. In addition, PMI plans to expand its contact manufacturing business going forward. As part of the transaction, PMI will enter into a manufacturing and supply agreement with Mylan for a term of five years, pursuant to which Mylan will purchase the current inventory of the Cold-EEZE ® Business and PMI will manufacture certain of the Products for Mylan. The term of this agreement may be renewed for up to five successive one year periods by Mylan.

The TK Supplements ® product line is comprised of three men’s health products: (i) Legendz XL ® 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. Our lead product from the TK Supplements ® product line is Legendz XL ® , a men’s dietary supplement in the male enhancement category. We recently completed a broad series of clinical studies that support important product claims, which have now been incorporated in our product packaging and marketing communications. Our next goal is to introduce Legendz XL ® in retail stores, leveraging our infrastructure and retail distribution platform. If we are successful in achieving retail distribution, we then plan to increase the media spend for television and other media advertising to support this retail launch with the likely benefit that it would also generate additional direct to consumer, e-commerce sales.

The Company will also consider and pursue all other alternatives and strategies including, but not limited to, investments and acquisitions in other sectors and industries.

See “Proposal No. 1—Sale of the Acquired Assets—Asset Purchase Agreement—Nature of Our Business Following the Sale to Mylan” beginning on page 37.

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Reasons for the Sale of the Acquired Assets

Our board of directors believes the proposed sale of the Acquired Assets to Mylan is in the best interests of the Company and our stockholders. Our board of directors has identified, among others, the following reasons for engaging in the proposed transaction:

We have limited capital resources thus limiting our ability to further innovate and expand our Cold-EEZE ® product offerings to compete in the competitive cough and cold category where many other OTC product suppliers are larger and have significantly greater financial, technical or marketing resources than we do.
While our sales are currently derived principally from our Cold-EEZE ® product offerings, this business is highly seasonal and has historically resulted in significant variations in operating results from quarter to quarter and from year to year. The category of cough and cold product sales, including our Cold-EEZE ® sales, is highly correlated to the incidence of upper respiratory illness.
The Company desires to focus on and grow its PMI manufacturing business, ORXx and TK Supplements ® product lines and to pursue other opportunities.
The ability of the Company to realize its net operating loss carryforwards prior to their expiration.
The ability of the Company to pay-off and retire its Secured Promissory Notes in advance of their maturity date of June 15, 2017.
The ability to return value to the stockholders. The Company seeks to deliver higher value to stockholders with greater market presence, but the ability to acquire brands has been limited due to the Company’s stock price and business fundamentals.

See “Proposal No. 1—Sale of the Acquired Assets—Reasons for the Sale of the Acquired Assets to Mylan” beginning on page 27.

Potential Drawbacks of the Sale to Mylan

In deciding how to vote on the proposal to sell the Acquired Assets to Mylan, you should consider the following potential drawbacks and other risks:

If the sale to Mylan is completed, we will have sold our primary intellectual property and primary source of revenue. Our remaining assets will consist primarily of the net proceeds from the transaction, our PMI Business, our Company Headquarters and assets relating to our ORXx and TK Supplements ® brands, product lines and operations.
The prospects for our remaining operations, which will be limited to our PMI manufacturing business and facility and our ORXx and TK Supplements ® product lines, are uncertain. Our ability to grow our PMI manufacturing business and operate it profitably is uncertain, and while management anticipates that the growth potential in the OTC dietary supplement line may be better than the OTC cold remedy line, 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.

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As with any new product launch, we anticipate initial losses from the TK Supplements ® product line as we optimize our strategy.
After the closing of the transaction, Mylan may assert claims for indemnification under the provisions of the Asset Purchase Agreement, and if successful, we would be required to pay to Mylan some or all of the net proceeds from the transaction, thus effectively reducing the Purchase Price.
One or more of our creditors, parties with which we have agreements, stockholders, or other third parties could assert claims against us, either before or after the closing, and seek damages or other remedies. We might be required to spend substantial time and resources defending any such claims, and any amounts paid to any such third parties would reduce the net amount received from the transaction.
The stockholders will not have any dissenter’s rights of appraisal under Delaware law.
The risks and costs to the Company if the sale of the Cold-EEZE ® Business does not close, including the diversion of management and employee attention and disruption in our customer and distributor relationships.

See also those risks identified under the heading “Proposal No. 1—Sale of the Acquired Assets—Risk Factors” beginning on page 31.

Asset Purchase Agreement

The Asset Purchase Agreement is attached to this proxy statement as Appendix A . We encourage you to read the Asset Purchase Agreement in its entirety, as it is the legal document that governs the proposed transaction by and among us, MCH and Mylan Inc.

Representations and Warranties of the Parties

The Asset Purchase Agreement contains various customary representations and warranties made by each of the parties to the agreement. The principal representations and warranties we are making to Mylan include, among other things, the following representations and warranties: corporate organization and qualification; authority and enforceability of the Asset Purchase Agreement against us; no conflict between the transactions contemplated by the Asset Purchase Agreement and any Company charter document or any resolution adopted by our board of directors, any Cold-EEZE ® Business Contract, or any law or governmental order applicable to the Company and the Cold-EEZE ® Business; no governmental authorizations required to consummate the transactions contemplated by the Asset Purchase Agreement (except as otherwise described in the Asset Purchase Agreement); contracts and commitments; title, ownership and maintenance of the intellectual property included in the Acquired Assets; no infringement of any third parties’ intellectual property rights; no channel stuffing; title to Acquired Assets; permits; and regulatory compliance.

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The principal representations and warranties made by Mylan to us include, among other things, the following representations and warranties: corporate organization; authority and enforceability of the Asset Purchase Agreement against Mylan; no conflict between the transactions contemplated by the Asset Purchase Agreement and any Mylan charter document, indenture, mortgage or loan or other agreement or instrument to which Mylan is a party, or any law or governmental order applicable to Mylan or any of its properties; no governmental authorizations required to consummate the transactions contemplated by the Asset Purchase Agreement; and sufficient funds to pay the Purchase Price.

For a more complete listing of representations and warranties made by the parties, please see “Proposal No. 1—Sale of the Acquired Assets—Asset Purchase Agreement—Representations and Warranties” beginning on page 38.

Conditions to Completion of the Sale of the Acquired Assets

Each party’s obligation to complete the sale of the Acquired Assets under the Asset Purchase Agreement is subject to the prior satisfaction or waiver of certain conditions. The following list sets forth the material conditions that must be satisfied or waived before completion of the proposed transaction:

our stockholders have approved the sale of the Acquired Assets to Mylan;
no injunction, writ, temporary restraining order or other order or Law will be in effect which restrains or prohibits the sale of the Acquired Assets; and
all authorizations, orders and consents from any governmental authorities required under the Asset Purchase Agreement will have been obtained.

Our obligations to effect the transactions contemplated by the Asset Purchase Agreement are subject to the satisfaction or fulfillment, at or before the closing, of a number of additional conditions, any of which may be waived, in writing, exclusively by us, including the following:

the representations and warranties of Mylan contained in the Asset Purchase Agreement will be true and correct in all material respects as of the closing date, with the same effect as if made on and as of the closing date (except as otherwise provided);
Mylan will have performed and complied in all material respects with all agreements, covenants and conditions required by the Asset Purchase Agreement and each of the other Transaction Documents (as defined below) to be performed or complied with by Mylan on or before the closing date; and
Mylan will have delivered to the Company all deliverables required by the Asset Purchase Agreement.

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Mylan’s obligations to effect the transactions contemplated by the Asset Purchase Agreement are subject to the satisfaction or fulfillment, at or before the closing, of a number of additional conditions, any of which may be waived, in writing, exclusively by Mylan, including the following:

the representations and warranties of ProPhase contained in the Asset Purchase Agreement will be true and correct in all material respects as of the closing date, with the same effect as if made on and as of the closing date (except as otherwise provided);
we will have performed and complied in all material respects with all agreements, covenants and conditions required by the Asset Purchase Agreement and each of the other Transaction Documents to be performed or complied with by it on or before the closing date;
no material adverse effect, event, development or change in the results of operations of the Cold-EEZE ® Business or the Acquired Assets will have occurred; and
we will have delivered to Mylan all deliverables required by the Asset Purchase Agreement.

See “Proposal No. 1—Sale of the Acquired Assets—Asset Purchase Agreement—Conditions to Closing” beginning on page 45.

No Solicitation

Until the date of closing or earlier termination of the Asset Purchase Agreement, we have agreed that we will not solicit, initiate, seek or knowingly encourage any Seller Acquisition Proposal (as defined below) or otherwise participate in discussions or negotiations or approve or recommend any Seller Acquisition Proposal, except in compliance with the terms of the Asset Purchase Agreement.

See “Proposal No. 1—Sale of the Acquired Assets—Asset Purchase Agreement—Solicitation; Withdrawal of Recommendation by Our Board of Directors” beginning on page 43.

Our Indemnification Obligations

Subject to the limitations in the Asset Purchase Agreement, we have agreed to indemnify Mylan and other related persons for any damages incurred by Mylan or such related persons in connection with any breaches of our representations, warranties, covenants or agreements contained in the Asset Purchase Agreement, or in connection with the Retained Liabilities, and certain third party claims specified in the Asset Purchase Agreement. Generally, our representations and warranties survive for a period of 24 months after the closing date, other than the Fundamental Representations which survive until the expiration of the applicable statute of limitations, and Mylan may assert claims for indemnity during that period. In addition, there exists a limited indemnification cap with respect to a majority of the Company’s indemnification obligations with the exception of actual fraud, the breach of Fundamental Representations and certain other items, which have a larger indemnification cap (e.g., the Purchase Price).

See “Proposal No. 1—Sale of the Acquired Assets—Asset Purchase Agreement—Our Indemnification Obligations” on page 48.

Mylan’s Indemnification Obligations

Mylan has agreed to indemnify us and other related persons for any damages incurred in connection with a breach of its representations and warranties, covenants and agreements contained in the Asset Purchase Agreement, and in connection with the Assumed Liabilities and certain third party claims specified in the Asset Purchase Agreement. Mylan’s representations and warranties survive for a period of 24 months after the closing date, and we may assert claims for indemnity during that period. In addition, there exists a limited indemnification cap with respect to a majority of Mylan’s indemnification obligations with the exception of actual fraud and certain other items, which have a larger indemnification cap (e.g., the Purchase Price).

See “Proposal No. 1—Sale of the Acquired Assets—Asset Purchase Agreement—Our Indemnification Obligations” on page 48.

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Termination of the Asset Purchase Agreement

The Asset Purchase Agreement may be terminated at any time prior to the closing:

by mutual written consent of the Company and Mylan;
by either the Company or Mylan, if:

the transaction has not been consummated by March 31, 2017 or such other date as the parties may agree in writing (the “Termination Date”) (subject to certain exceptions); provided, that Mylan may, in its sole discretion, upon written notice to the Company extend the Termination Date for up to 30 days;
a governmental entity or court issues an order, decree, ruling or other action which permanently restrains, enjoins or otherwise prohibits the completion of the sale of the Acquired Assets; or
our stockholders do not approve the proposed transaction.

by Mylan, upon written notice to the Company, if:

the Company materially breaches any representation, warranty, covenant or agreement such that Mylan’s conditions to closing would not be satisfied, subject to the Company’s opportunity to cure the breach as provided in the Asset Purchase Agreement;
our board of directors withdraws its recommendation to stockholders to vote in favor of the approval of Proposal No. 1; or
our management or board of directors, for any reason, fails to call and hold, within 60 days of the filing of this proxy statement, a special meeting to consider and approve the Asset Purchase Agreement or fails to include its recommendation to stockholders to vote in favor of the approval of Proposal No. 1 in the proxy statement; provided that such 60 day period will be automatically extended to 120 days in the event ProPhase is working in good faith to reconcile any outstanding claims, causes of action or comments of the Securities and Exchange Commission (the “SEC”).

by the Company, if:

Mylan materially breaches any representation, warranty, covenant or agreement such that the Company’s conditions to closing would not be satisfied, subject to Mylan’s opportunity to cure the breach as provided in the Asset Purchase Agreement; or
our board of directors authorizes a Seller Superior Offer (as defined below) and substantially concurrent with the termination of the Asset Purchase Agreement, we enter into an agreement with respect to such Seller Superior Offer that did not result from a material breach of the Asset Purchase Agreement.

See “Proposal No. 1—Sale of the Acquired Assets—Asset Purchase Agreement—Termination of the Asset Purchase Agreement” beginning on page 46.

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ProPhase’s Obligations upon Termination

If the Asset Purchase Agreement is terminated for certain reasons, including a termination in connection with our board of directors approving a Seller Superior Offer, we will be required to pay Mylan a termination fee in the amount of $1,500,000.

If the Asset Purchase Agreement is terminated due to a material breach of the Asset Purchase Agreement by Mylan that would cause the closing conditions not to be satisfied or due to any decree, judgment injunction or other order permanently restraining, enjoining or otherwise prohibiting Mylan from consummating the transactions contemplated by the Asset Purchase Agreement, Mylan will be required to pay the Company a termination fee in the amount of $5,000,000.

See “Proposal No. 1—Sale of the Acquired Assets—Asset Purchase Agreement—Payment of Termination Fee” on page 47.

Post-Closing Agreements

The Asset Purchase Agreement contains certain covenants that will survive the closing of the transaction, including:

Generally, the Company and Mylan will each maintain in confidence, and cause their respective representatives to maintain in confidence, any information obtained from the other party (with certain limited exceptions) for a period of two years from the closing date and the Company will perpetually maintain in confidence information associated with the intellectual property rights acquired by Mylan;
the Company will not, and will not permit its subsidiaries to, directly or indirectly, for the period beginning on the closing date and ending on a specified date thereafter, develop, manufacture, sell, promote or distribute, including as a partner, stockholder, member, employee, principal, agent, trustee or consultant, any product in the United States that is used or indicated for cough, cold or flu (subject to certain limited exemptions, including the manufacturing of certain products currently marketed by the Company and other third party contract manufacturing operations);
Mr. Ted Karkus, our Chairman and Chief Executive Officer, directly or indirectly, for the period beginning on the closing date and ending on a specified date thereafter, develop, manufacture, sell, promote or distribute, including as a partner, stockholder, member, employee, principal, agent, trustee or consultant, any product in the United States that is used or indicated for cough, cold or flu (subject to certain limited exemptions, including the manufacturing of certain products currently marketed by the Company and other third party contract manufacturing operations);

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Mr. Robert V. Cuddihy, Jr., our Executive Vice President, Chief Operating Officer and Chief Financial Officer, will not, directly or indirectly, for the period beginning on the closing date and ending on the specified dates thereafter, develop, manufacture, sell, promote or distribute, including as a partner, stockholder, member, employee, principal, agent, trustee or consultant, any product in the United States that is used or indicated for, as applicable, (i) cough, cold or flu or (ii) cough, cold or flu with zinc as the primary active ingredient (subject to certain limited exemptions, including the manufacturing of certain products currently marketed by the Company and other third party contract manufacturing operations);
Dr. Raouf Ghaderi, Head of Research and Development, will not, directly or indirectly, for the period of time beginning on the closing date and ending on a specified date thereafter, develop, manufacture, sell, promote or distribute, including as a partner, stockholder, member, employee, principal, agent, trustee or consultant, any product in the United States that is used or indicated for cough, cold or flu with zinc as the primary active ingredient (subject to certain limited exemptions, including the manufacturing of certain products currently marketed by the Company and other third party contract manufacturing operations);
For the period beginning on the closing date and ending on a specified date thereafter, the Company, Mr. Ted Karkus, Mr. Robert V. Cuddihy, Jr. and Dr. Raouf Ghaderi (each, a “Restricted Party”) will not, and will cause the Company’s subsidiaries not to solicit, offer employment to or hire any person that is employed by Mylan in connection with the Cold-EEZE ® Business; provided, however, that such Restricted Party shall not be prohibited from (i) initiating searches for employees or contractors through the use of non-directed general advertisement or through the engagement of firms to conduct searches that are not targeted or focused on persons employed by Mylan or (ii) soliciting, offering employment to or hiring a former employee of Mylan, whose employment has been terminated by Mylan; and
For the period beginning on the closing date and ending on a specified date thereafter, Mylan will not solicit, offer employment to or hire any person that is employed by the Company; provided, however, that Mylan shall not be prohibited from (i) initiating searches for employees or contractors through the use of non-directed general advertisement or through the engagement of firms to conduct searches that are not targeted or focused on persons employed by the Company or (ii) soliciting, offering employment to or hiring a former employee of the Company, whose employment has been terminated by the Company.

See “Proposal No. 1—Sale of the Acquired Assets—Asset Purchase Agreement—Covenants” beginning on page 40.

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Recommendation of Our Board of Directors

Our board of directors has unanimously approved the proposed sale of the Acquired Assets to Mylan and recommends that you vote FOR Proposal No. 1.

See “Proposal No. 1—Sale of the Acquired Assets—Vote Required and Board Recommendation” on page 50.

Appraisal Rights

Under Delaware law, our stockholders will not have appraisal rights in connection with the proposed transaction.

See “Proposal No. 1—Sale of the Acquired Assets—Appraisal Rights” on page 30.

Material Federal Income Tax Consequences

The sale to Mylan is a taxable event to us. We will recognize a taxable gain in an amount equal to the cash received under the Asset Purchase Agreement, less our adjusted tax basis in the Acquired Assets (as defined below). Based upon preliminary estimates, we believe that all, or a significant portion, of our taxable gain for federal income tax purposes from the sale of the Acquired Assets will be offset to the extent of our current year losses from operations, the write-off for tax purposes of the tax-basis of the Acquired Assets and the available net operating loss carryforwards. However, for state income tax purposes, based upon the available state net operating loss carryforwards and corresponding limitations and we estimate an income tax expense arising from the sale of the Acquired Assets of $2.1 million. Our preliminary estimates could change depending upon the final income and expense components and related tax determination upon the sale of the Acquired Assets. The $2.1 million income tax expense has been reflected as a reduction in the net proceeds from the sale of the Acquired Assets. We do not anticipate any direct tax consequence to you as a result of the sale of the Acquired Assets to Mylan. At a future date, if ProPhase were to declare and pay a dividend to its stockholders, repurchase any outstanding shares in order to provide additional liquidity to stockholders or otherwise distribute net proceeds from the transaction to its stockholders, the stockholders may recognize a gain or loss in connection with any such dividend, repurchase or distribution.

See “Proposal No. 1—Sale of the Acquired Assets—Federal Income Tax Consequences” on page 30.

Regulatory Approvals

There are no material United States or state regulatory approvals required for the completion of the sale of the Acquired Assets to Mylan other than the approval of the Asset Purchase Agreement by our stockholders under the corporate law of the State of Delaware.

See “Proposal No. 1—Sale of the Acquired Assets—Regulatory Approvals” on page 30.

Accounting Treatment

If the sale of the Acquired Assets to Mylan is completed, we will record the sale in accordance with generally accepted accounting principles in the United States. Upon the completion of the sale, we will recognize a financial reporting gain equal to the net proceeds (the sum of the Purchase Price less the expenses relating to the asset sale) less the net book value of the assets sold and the fair value of the indemnification liability retained.

See “Proposal No. 1—Sale of the Acquired Assets—Accounting Treatment of the Asset Sale” on page 30.

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QUESTIONS AND ANSWERS ABOUT THE SPECIAL MEETING OF STOCKHOLDERS

Where and when is the special meeting of stockholders?

The special meeting will be held at [●]:00 a.m., local time, on [●], 2017, at the offices of Reed Smith LLP, 599 Lexington Avenue, New York, New York 10022.

Who is soliciting my proxy?

Our board of directors is soliciting proxies from each of our stockholders. We will pay the expenses of preparing and distributing this proxy statement and soliciting proxies, including the reasonable expenses incurred by brokers, dealers, banks and trustees or their nominees for forwarding solicitation materials to beneficial owners. In addition, the Company may retain an outside firm to assist in the solicitation of proxies for a fee.

Who is entitled to vote on the proposals?

Stockholders of record as of the close of business on [●], 2017, the record date, are entitled to notice of and to vote at the special meeting. Each share of common stock is entitled to one vote.

What am I being asked to vote on?

The first proposal you are being asked to approve is the sale of the Acquired Assets, consisting of intellectual property rights and other assets related to our Cold-EEZE ® Business, to Mylan pursuant to the terms of the Asset Purchase Agreement, and the other transactions contemplated thereby. See “Proposal No. 1—Sale of the Acquired Assets” for a more detailed description of the proposed transaction with Mylan.
The second proposal you are being asked to approve is to grant discretionary authority to the persons named as proxies to adjourn the special meeting to solicit additional proxies in favor of Proposal No. 1. See “Proposal No. 2—Grant Of Discretionary Authority To Adjourn The Special Meeting To Solicit Additional Proxies” for a more detailed description of Proposal No. 2.

What will happen if the sale to Mylan is approved by our stockholders?

If the sale of the Acquired Assets to Mylan is approved by our stockholders and the other conditions to closing of the sale are satisfied or waived, we will sell the Acquired Assets to Mylan under the terms of the Asset Purchase Agreement, as described in this proxy statement. Following the completion of the sale to Mylan, our remaining assets will consist primarily of the net proceeds from the transaction, our PMI Business, our Company Headquarters and our ORXx and TK Supplements ® brands, product lines and operations.

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Will any of the proceeds from the sale to Mylan be distributed to me as a stockholder?

It is not yet determined whether any of the proceeds from the sale will be distributed to stockholders. The proposed transaction described in this proxy statement does not contemplate an immediate distribution, by way of dividend or otherwise, to our stockholders of the net proceeds from the transaction, but our board of directors may in the future decide to declare a dividend of some portion of the Purchase Price, repurchase any outstanding shares in order to provide additional liquidity to stockholders or take some other action that might result in the stockholders receiving some of the net proceeds from the transaction. There can be no assurances that any such plan will be adopted or implemented. Please note that our representations and warranties in the Asset Purchase Agreement survive for a period of two years after the closing (subject to certain limited exceptions), most or all of the net proceeds from the transaction may need to be retained in order to fund continuing operations, satisfy our existing obligations to creditors and to provide for the possibility that Mylan will assert one or more claims for indemnity under the provisions of the Asset Purchase Agreement.

Will our common stock still be publicly traded if the sale to Mylan is completed?

Our common stock is currently traded on the NASDAQ Capital Market under the symbol “PRPH.” Following the completion of the proposed transaction, we expect that the common stock will continue to be traded on the NASDAQ Capital Market. However, it is not possible to predict the trading price of our common stock following the closing of the sale to Mylan. Accordingly, you may find it more difficult to dispose of your shares of common stock, and you may not be able to sell some or all of your shares of common stock when you desire. See “Risk Factors” on page 31 for a further discussion of some of these risks.

What are the risks of the proposed sale to Mylan?

If the sale to Mylan is completed, we will have sold our primary intellectual property and source of revenue. Our remaining assets will consist primarily of the net proceeds from the transaction and assets, our PMI Business, our Company Headquarters and our ORXx and TK Supplements ® brands, product lines and operations.
While management anticipates that the growth potential in the OTC dietary supplement line 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.
The risk also exists that after the closing of the transaction, Mylan may assert claims for indemnification under the provisions of the Asset Purchase Agreement, and if successful, we would be required to pay to Mylan some or all of the net proceeds from the transaction, thus effectively reducing the Purchase Price.
One or more of our creditors, parties with which we have agreements, stockholders, or other third parties could assert claims against us after the closing and seek damages or other remedies. We might be required to spend substantial time and resources defending any such claims, and any amounts paid to any such third parties would reduce amounts available for potential distribution to stockholders.

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The stockholders will not have any dissenter’s rights of appraisal under Delaware law.
The risks and costs to the Company if the sale of the Cold-EEZE ® Business does not close, including the diversion of management and employee attention and disruption in our customer and distributor relationships.

These and other risks relating to the sale to Mylan that you should consider are more fully described under the heading “Risk Factors” starting on page 31.

What will happen if the sale to Mylan is not approved by our stockholders or is otherwise not completed?

If the stockholders of the Company do not approve the sale of the Acquired Assets to Mylan, then the sale to Mylan will not be consummated.
The Company may be required to raise additional capital or take on additional debt in order to fund current operations and pay any outstanding liabilities as they come due (e.g., the Secured Promissory Notes).
The Company would be obligated to pay to Mylan a termination fee of $1,500,000 if the Asset Purchase Agreement were terminated for certain reasons, including a termination in connection with our board of directors approving a Seller Superior Offer.

When is the sale to Mylan expected to be completed?

We expect to complete the sale to Mylan as soon as practicable after all of the conditions to closing the transaction have been satisfied or waived. We currently plan to complete the transaction as soon as possible following the special meeting of our stockholders, assuming our stockholders approve the sale to Mylan and the other conditions to the Asset Purchase Agreement are satisfied or waived. However, because the sale is subject to some conditions which are beyond our control, the exact timing of the completion of the transaction cannot be predicted. For a more complete description of the conditions to completion of the sale, see the section of this proxy statement entitled “Proposal No. 1—Sale of the Acquired Assets—The Asset Purchase Agreement—Conditions to Closing” on page 45.

What vote is required to approve Proposal No. 1, the sale of the assets of the Acquired Assets to Mylan as contemplated by the Asset Purchase Agreement?

The affirmative vote of the holders of a majority of the outstanding shares of our common stock entitled to vote on this matter is required to approve Proposal No. 1, the sale of the Acquired Assets to Mylan as contemplated by the Asset Purchase Agreement. Our board of directors recommends that you vote “FOR” Proposal No. 1.

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What vote is required to approve Proposal No. 2, the granting of discretionary authority to the persons named as proxies to adjourn the special meeting to solicit additional proxies in favor of Proposal No. 1?

Assuming that a quorum is present for the meeting, the affirmative vote of the holders of a majority of the shares of our common stock present in person or represented by proxy and entitled to vote at the special meeting is required to approve Proposal No. 2, granting discretionary authority to the persons named as proxies to adjourn the special meeting to solicit additional proxies for Proposal No. 1. Our board of directors recommends that you vote “FOR” Proposal No. 2.

What do I need to do now?

After carefully reading and considering the information contained in this proxy statement, we urge you to complete, sign and date the enclosed proxy card and return it to us in the postage prepaid envelope as soon as possible so that your shares may be represented and voted at the special meeting. A majority of the outstanding shares of our common stock entitled to vote must be represented at the special meeting to enable us to conduct business at the special meeting. For a further discussion on the voting process, please see “General Information—Voting Procedures.”

Can I change my vote after I have mailed my signed proxy?

Yes. You can change your vote at any time before proxies are voted at the special meeting. You can change your vote in any one of three ways. First, you can send a written notice to our corporate Secretary at our principal executive offices, stating that you would like to revoke your proxy. Second, you can complete and submit a new proxy. If you choose either of these two methods, we must receive the notice of revocation or the new proxy at our principal executive offices prior to the vote at the special meeting of stockholders. Third, you can attend the meeting and vote in person.

If my shares are held in “street name” by my broker, will my broker vote my shares for me?

If you do not give your broker or nominee specific instructions, your shares will not be voted on the proposals, and will not be counted in determining the number of shares voted in favor of the proposals. Your failure to give your broker or nominee specific instructions will have the same effect as a vote against Proposal No. 1, but will have no effect on Proposal No. 2, granting discretionary authority to the persons named as proxies to adjourn the special meeting to solicit additional proxies in favor of Proposal No. 1. You should follow the directions provided by your broker regarding how to instruct your broker to vote your shares.

What happens if I do not indicate how to vote my proxy?

If you sign and send in your proxy, but do not include instructions on how to vote your properly signed proxy card, your shares will be voted FOR Proposal No. 1 and 2.

Who can help answer my questions about the proposals?

If you have any questions about the proposals presented in this proxy statement, you should contact:

ProPhase Labs, Inc.

621 N. Shady Retreat Road

Doylestown, PA 18901

Attention: Ted Karkus

Chairman and Chief Executive Officer

(215) 345-0919

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GENERAL INFORMATION

Voting Procedures

This proxy statement is being furnished in connection with the solicitation by the board of directors of ProPhase of proxies to be voted at the special meeting of stockholders of ProPhase to be held at the offices of Reed Smith LLP, 599 Lexington Avenue, New York, New York 10022, on [●], 2017, at [●]:00 a.m., local time, and at any postponements or adjournments thereof. Only stockholders of record on [●], 2017 (the “Record Date”) will be entitled to vote at the special meeting. On the Record Date there were [●] outstanding shares of common stock. Each share of common stock outstanding on the Record Date is entitled to one vote on each matter to come before the special meeting.

At the special meeting, stockholders will be asked to vote to (i) approve the sale of the Acquired Assets, which constitutes the intellectual property and other assets relating to its Cold-EEZE ® brand and product line, for cash pursuant to, and the other transactions contemplated by, the terms of the Asset Purchase Agreement (Proposal No. 1); (ii) grant discretionary authority to the persons named as proxies to adjourn the special meeting to solicit additional proxies in favor of Proposal No. 1 (Proposal No. 2); and (iii) transact such other business as may properly come before the special meeting, as set forth in the notice of special meeting.

A quorum, consisting of a majority of our outstanding shares of common stock entitled to vote at the special meeting, will be required to be present in person or by proxy for the transaction of business at the special meeting.

The affirmative vote of the holders of a majority of the outstanding shares of our common stock entitled to vote on this matter is required to approve Proposal No. 1, the Sale of the Acquired Assets to Mylan pursuant to the Asset Purchase Agreement, as described in this proxy statement. The affirmative vote of the holders of a majority of shares of our common stock present in person or represented by proxy and entitled to vote at the special meeting is required to approve Proposal No. 2, to grant discretionary authority to the persons named as proxies to adjourn the special meeting to solicit additional proxies in favor of Proposal No. 1.

Absent specific instructions from the beneficial owner of the shares, brokers are not allowed to exercise their voting discretion on non-routine matters, such as the sale of the Acquired Assets to Mylan pursuant to the Asset Purchase Agreement or the decision to grant discretionary authority to the persons named as proxies to vote in favor of any adjournments of the special meeting for the purpose of soliciting additional proxies, resulting in “broker non-votes.” Please note that:

Abstentions will be counted for the purpose of establishing a quorum at the special meeting, broker non-votes will not be counted for this purpose.
Abstentions and “broker non-votes” will have the same effect as a vote against Proposal No. 1, the Sale of the Acquired Assets to Mylan pursuant to the Asset Purchase Agreement.
Abstentions will have the same effect as a vote against Proposal No. 2, to grant discretionary authority to the persons named as proxies to vote in favor of any adjournments of the special meeting for the purpose of soliciting additional proxies, but “broker non-votes” will have no effect on Proposal No. 2.

All votes will be tabulated by the inspector of election appointed for the special meeting, who will separately tabulate affirmative and negative votes, abstentions and broker non-votes.

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Voting of Proxies

General

Shares represented by a proxy will be voted at the special meeting as specified in the proxy.

Proxies without voting instructions

Proxies that are properly signed and dated but which do not contain voting instructions will be voted “FOR” each of the proposals.

Voting shares held through broker by proxy

If your shares of common stock are held by your broker, your broker will vote your shares for you if you provide instructions to your broker on how to vote your shares. You should follow the directions provided by your broker regarding how to instruct your broker to vote your shares. Your broker generally cannot vote your shares without specific instructions from you.

Voting of shares held through broker in person

If your shares of common stock are held by your broker and you wish to vote those shares in person at the special meeting, you must obtain from the nominee holding your shares a properly executed legal proxy, identifying you as a stockholder of our company, authorizing you to act on behalf of the nominee at the special meeting and specifying the number of shares with respect to which the authorization is granted.

Other matters

If you sign and return the enclosed proxy card, you grant to the persons named in the proxy the authority to vote in their discretion on any other matters that may properly come before the special meeting or any adjournments or postponements of the special meeting. Our management does not presently know of any other matters to be brought before the special meeting.

Revocation of Proxies

Signing the enclosed proxy card will not prevent a record holder from voting in person at the special meeting or otherwise revoking the proxy. A record holder may revoke a proxy at any time before the special meeting in the following ways:

filing with our corporate Secretary, before the vote at the special meeting, a written notice of revocation bearing a later date than the proxy;
by executing a subsequently dated proxy relating to the same shares and delivering it to us before the vote at the special meeting; or
attending the special meeting and voting in person, although attendance at the special meeting will not by itself constitute a revocation of the proxy.

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Record holders should send any written notice of revocation or subsequent proxy to our corporate Secretary, c/o ProPhase Labs, Inc., 621 N. Shady Retreat Road, Doylestown, Pennsylvania 18901, or hand deliver the notice of revocation or subsequent proxy to our corporate Secretary before the vote at the special meeting. No revocation will be effective unless and until notice of such revocation has been received by us at or prior to the special meeting.

Persons Making the Solicitation

The enclosed proxy is solicited on behalf of our board of directors. Our employees may participate in the solicitation but will not receive any separate or additional compensation in connection therewith. The cost of soliciting proxies in the accompanying form will be borne by us. Proxies may also be solicited personally or by telephone by our directors and officers, without additional compensation therefor. Upon request, we will reimburse brokers, dealers, banks and trustees or their nominees, for reasonable expenses incurred by them in forwarding proxy material to beneficial owners of shares of common stock.

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain statements made in this proxy statement are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by terminology such as “may,” “will,” “should,” “expects,” “intends,” “anticipates,” “believes,” “estimates,” “predicts,” or “continue” or the negative of these terms or other comparable terminology and include, without limitation, statements regarding: completion of the sale of the Acquired Assets to Mylan; potential indemnification payments relating to the sale to Mylan; the proceeds remaining from the Purchase Price after the payment of taxes; the transaction costs incurred in the sale to Mylan and the payment of unforeseen liabilities; management’s projections; our plans following the closing, including our ability to operate our remaining business; or our ability to distribute funds to stockholders following the closing, should the board decide to do so. These statements are based upon our current expectations, forecasts, and assumptions that are subject to risks, uncertainties and other factors that could cause actual outcomes and results to differ materially from those indicated by these forward-looking statements. These risks, uncertainties, and other factors include, but are not limited to: the ability to satisfy the conditions to closing, including, among others, our ability to obtain stockholder approval; the risk that unforeseen liabilities or contingencies will reduce the amount of net proceeds to us from the transaction; the risk that we will not have sufficient funds to operate our remaining business following the closing; the risk that we may have liabilities and expenses after the closing that are currently unforeseen; the risk that our operations will be disrupted in the event the proposed transaction does not close; the risk of unanticipated reactions of our creditors, stockholders or third parties with whom we have contracts to the proposed asset sale transaction; the risk that one or more third parties may seek to initiate bankruptcy proceedings against us or may initiate litigation challenging the proposed transaction; a change in economic conditions; our ability to retain needed qualified personnel; our ability to comply with the covenants contained in the Asset Purchase Agreement and other Transaction Documents; uncertainty regarding future actions by the FDA and other regulatory authorities concerning our products; and the other risks and uncertainties discussed under the heading “Risk Factors” in this proxy statement, our Annual Report on Form 10-K for the year ended December 31, 2015, and other reports we file from time to time with the SEC. We undertake no obligation to update any of the information included in this proxy statement, except as otherwise required by law.

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PROPOSAL NO. 1—SALE OF THE ACQUIRED ASSETS

This section of the proxy statement describes certain aspects of the sale of the Acquired Assets. However, we recommend that you read carefully the complete Asset Purchase Agreement for the precise terms of the agreement and other information that may be important to you. The Asset Purchase Agreement is included in this proxy statement as Appendix A .

The Companies

ProPhase

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, including a large amount of OTC products and supplements (see “Manufacturing Facility” on page 24). We are also engaged in the research and development of potential OTC drugs, 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. Our Cold-EEZE ® QuickMelts ® products are based on our proprietary zinc gluconate formulation in combination with certain (i) immune system support, (ii) energy, (iii) sleep and relaxation, and/or (iv) cold and flu symptom relieving active ingredients.

In Fiscal 2016, we expanded our Cold-EEZE ® product line further to include (i) Cold-EEZE ® Gummies Multi-Symptom Relief for Cold and Flu and (ii) Cold-EEZE ® Nighttime Multi-Symptom Relief for Cold and Flu QuickMelts ® . Shipments began for these two new products in the third quarter of Fiscal 2016. 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. Our revenues have come principally from our OTC health care and cold remedy products. Our net sales are related to markets in the United States.

We are also pursuing 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 ® . The inaugural TK Supplements ® product line is comprised of three men’s health products: (i) Legendz XL ® 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.

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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 ® , Gummies and Oral Spray 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 three additional cold remedy delivery forms, (i) a fast dissolving QuickMelts ® (ii) Gummies and (iii) an Oral Spray. We also offer our 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.

Our business operations are currently 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.

Initial dietary supplement product development activities were completed in the fourth quarter of Fiscal 2015 under the brand name of TK Supplements ® . The inaugural TK Supplements ® product line is comprised of three men’s health products: (i) Legendz XL ® 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.

Additionally, we are actively 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 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 FDA registered facility that engages in contract manufacturing and distribution activities. PMI will continue to manufacture a large and diverse amount of OTC products and supplements for the Company and third parties.

OTC Health Care and Cold-Remedy Products

The 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.

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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.

Patents, Trademarks, Royalty and Commission Agreements

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 ® , ORXx Complete and ORXx Defense , TK Supplements ® , Legendz XL ® , 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 PMI 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.

Mylan

Mylan was incorporated in Pennsylvania in 1970 and maintains its principal executive offices in Canonsburg, Pennsylvania. Mylan is a global pharmaceutical company, which develops, licenses, manufactures, markets and distributes generic, branded generic and specialty pharmaceuticals. Mylan offers one of the industry’s broadest product portfolios, including more than 2,700 marketed products, to customers in more than 165 countries and territories. Mylan operates a global, high quality vertically-integrated manufacturing platform, which includes more than 50 manufacturing and R&D facilities around the world and one of the world’s largest active pharmaceutical ingredient operations. Mylan also operates a strong R&D network that has consistently delivered a robust product pipeline.

MCH

MCH is the U.S. over-the-counter division of Stockholm-based Meda AB, a global specialty pharmaceutical company, which was acquired by Mylan N.V., the parent company of Mylan, on August 5, 2016.

Background of the Sale of the Acquired Assets

The terms and conditions of the Asset Purchase Agreement and the asset sale are the result of arm’s length negotiations between the representatives of Mylan and the Company’s management. Set forth below is a summary of the background of events that led to the decisions of the board of directors to enter into negotiations with Mylan and the asset sale transaction.

The board of directors and management have continually engaged in a review of the Company’s business plans and other strategic opportunities, including the evaluation of the market in which ProPhase competes, the possibility of pursuing strategic alternatives, such as acquisitions, and the possible sale of the Company, each with the view towards maximizing stockholder value. In the spring of 2016, the Company initiated a process to explore and evaluate a wide range of strategic initiatives and alternatives to further enhance stockholder value. These alternatives included the possible sale of the Cold-EEZE ® Business and a range of potential acquisitions. In June of 2016, the Company engaged Bourne Partners, a boutique investment bank focused on the consumer health and pharmaceutical industries, to assist in the strategic review. This process was approved by the board of directors.

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On October 27, 2016, the board of directors held a telephonic meeting and received an update from management on the initial sales process. Management and Bourne Partners initiated the sales process by distributing a one-page summary detailing the opportunity to acquire the Cold-EEZE ® Business to approximately 70 potential acquirers. Following the distribution of the one-page summaries, approximately 35 potential acquirers entered into non-disclosure agreements to facilitate due diligence on ProPhase and the Cold-EEZE ® Business. Of the approximately 35 potential acquirers who entered into non-disclosure agreements, approximately ten potential acquirers provided non-binding bids for the Cold-EEZE ® Business. The board of directors and management reviewed each bid thoroughly and determined that four were worth pursuing in view of the proposed consideration to be paid to the Company and such bidder’s ability to consummate the transaction. Management then provided a full presentation to such bidders, and each was provided with access to a data-site to undertake the due diligence process on the Cold-EEZE ® Business. The board of directors authorized management to continue the sales process.

On December 14, 2016, the board of directors held a telephonic meeting and received an update from management informing the board of directors that two of the four final bidders would not proceed on terms the Company would find acceptable. Regarding the other two bidders, the board of directors was advised of the general terms of each bid. The board of directors directed management to continue the sales process. Accordingly, the Company continued to negotiate with the bidders and revise the draft transaction documents.

During this process, management of the Company concluded that the Mylan bid was more favorable to the Company and that a transaction with Mylan was more likely to be consummated.

On December 19, 2016, the board of directors held a telephonic meeting and received an update on the status of the sales process from management. The board of directors advised management to continue to actively pursue the Mylan proposal regarding the sale of the Cold-EEZE ® Business. Management, Bourne Partners and the Company’s legal counsel continued to negotiate with Mylan and revise the draft transaction documents accordingly.

On January 5, 2017, the board of directors held a telephonic meeting and engaged in a discussion regarding the proposed sale of the Cold-EEZE ® Business. Approximately two days prior to the meeting, the board of directors received copies of the Asset Purchase Agreement and other transaction documents. At the meeting, Management and the Company’s legal counsel also summarized in detail the terms and conditions of the Asset Purchase Agreement and other transaction documents. In addition to discussing the documents in depth (including any changes incorporated in the Asset Purchase Agreement and other transaction documents between the time of the distribution of the documents to the board of directors and the telephonic meeting), management informed the board of directors that a new bidder had surfaced. After a thorough discussion, the board of directors determined that the new bidder’s proposal was less favorable than the proposal submitted by Mylan due, in part, to the conditionality and other terms of that offer. The board of directors also concluded that the proposed transaction with Mylan was the more favorable alternative for maximizing the return to the Company’s stockholders and enabling the Company to focus on its PMI manufacturing business and facility and pursue its TK Supplements ® product line, and other opportunities. The board of directors noted that to delay negotiations for the new bidder’s proposal would increase the risk of losing Mylan’s proposal. The board of directors unanimously voted to approve the sale of the Cold-EEZE ® Business to Mylan on the terms presented to the board. In addition, the board of directors authorized management to continue to negotiate, finalize and thereafter enter into the Asset Purchase Agreement and Transaction Documents relating to the asset sale. The board of directors also authorized soliciting the vote of the stockholders with respect to the proposed asset sale.

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During the course of negotiations with Mylan, the Company inquired whether Mylan would have any interest in the purchase of PMI (including the manufacturing facility owned and operated by PMI), and whether Mylan would consider a transaction structured as an acquisition of all of the issued and outstanding shares of the Company. Mylan indicated that it would not be interested in such a transaction, in part because such a transaction would require Mylan to acquire the Company’s plant, property, equipment, employees and lines of business, and assume liabilities, unrelated to the Cold-EEZE ® brand.

The board of directors did not seek or obtain a fairness opinion from an investment bank or other firm that the consideration to be paid for the Acquired Assets is fair from a financial point of view to ProPhase’s stockholders. The board of directors considered both the extensive sales process and arm’s length negotiations engaged in by the Company as providing an effective market check. The board of directors considered the costs and time involved in seeking and obtaining a fairness opinion, particularly in light of the Company’s cash position and prospects, and concluded that the costs of obtaining a fairness opinion from a third party would be disproportionately higher than any corresponding benefits that would be realized by obtaining such an opinion and that the proposed transaction with Mylan was the best alternative for maximizing the return to the Company’s stockholders.

Reasons for the Sale of the Acquired Assets to Mylan

The following discussion of the reasons for the asset sale of ProPhase contains a number of forward-looking statements that reflect the current views of ProPhase with respect to future events that may have an effect on its financial performance. There can be no assurance that the benefits of the transaction anticipated by the board will actually be achieved. See “Risk Factors.” Forward-looking statements are subject to risks and uncertainties. Actual results and outcomes may differ materially from the results and outcomes discussed in the forward-looking statements. Cautionary statements that identify important factors could cause or contribute to differences in results and outcomes include those discussed in “Forward Looking Statements” and “Risk Factors.”

The ProPhase board of directors has unanimously determined that the terms of the Asset Purchase Agreement are fair to and in the best interests of ProPhase and its stockholders, and has unanimously approved the Asset Purchase Agreement. In reaching its determination to approve the sale of the Acquired Assets to Mylan pursuant to the Asset Purchase Agreement and related agreements, the board of directors consulted with our management and considered the advice of legal counsel, and considered a number of factors. In reaching its determination to sell the Acquired Assets, our board of directors identified and considered a number of factors, including those described below:

We have limited capital resources thus limiting our ability to further innovate and expand our Cold-EEZE ® product offerings to compete in the competitive cough and cold category where many other OTC product suppliers are larger and have significantly greater financial, technical or marketing resources than we do.

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While our sales are currently derived principally from our Cold-EEZE ® product offerings, this business is highly seasonal and has historically resulted in significant variations in operating results from quarter to quarter. The category of cough and cold product sales, including our Cold-EEZE ® sales, is highly correlated to the incidence of upper respiratory illness.
The Company desires to focus on and grow its PMI manufacturing business, ORXx and TK Supplements ® brands, product lines and operations, and to pursue other opportunities.
The ability of the Company to realize its net operating loss carryforwards prior to their expiration.
The ability of the Company to pay-off and retire its Secured Promissory Notes in advance of their maturity date of June 15, 2017.
The ability to return value to the stockholders. The Company seeks to deliver higher value to stockholders with greater market presence, but the ability to acquire brands has been limited due to the Company’s stock price and business fundamentals.

The foregoing discussion of these factors is not meant to be exhaustive, but includes all of the material factors considered by the ProPhase board of directors. The ProPhase board of directors viewed its recommendation to approve the asset sale transaction as being based upon its business judgment in light of ProPhase’s financial position and the totality of the information presented and considered, and the overall effect of the asset sale on the stockholders of ProPhase compared to continuing to own the Acquired Assets to be sold to Mylan or pursuing other discussions with other parties concerning a possible transaction.

Potential Drawbacks of the Sale to Mylan

In deciding how to vote on the proposal to sell the Acquired Assets to Mylan, you should consider the following potential drawbacks and other risks:

If the sale to Mylan is completed, we will have sold our primary intellectual property and primary source of revenue. Our remaining assets will consist primarily of the net proceeds from the transaction, our PMI Business, our Company Headquarters, and assets relating to our ORXx and TK Supplements ® brands, product lines and operations.
The prospects for our remaining operations, which will be limited to our PMI manufacturing business and facility and our ORXx and TK Supplements ® product lines, are uncertain. Our ability to grow our PMI manufacturing business and operate it profitably is uncertain, and while management anticipates that the growth potential in the OTC dietary supplement line may be better than the OTC health care and cold remedy line, 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.

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As with any new product launch, we anticipate losses from the TK Supplements ® product line as we optimize our strategy.
After the closing of the transaction, Mylan may assert claims for indemnification under the provisions of the Asset Purchase Agreement, and if successful, we would be required to pay to Mylan some or all of the net proceeds from the transaction, thus effectively reducing the Purchase Price.
One or more of our creditors, parties with which we have agreements, stockholders, or other third parties could assert claims against us, either before or after the closing, and seek damages or other remedies. We might be required to spend substantial time and resources defending any such claims, and any amounts paid to any such third parties would reduce the net amount received from the transaction.
The stockholders will not have any dissenter’s rights of appraisal under Delaware law.
The risks and costs to the Company if the sale of the Cold-EEZE ® Business does not close, including the diversion of management and employee attention and disruption in our customer and distributor relationships.

Our board of directors also considered the numerous risks associated with either engaging in the proposed sale to Mylan or failing to engage in the proposed sale, as further described below under the heading “Risk Factors—Special Considerations Regarding the Proposal to Sell the Acquired Assets to Mylan.” These risks, which should be considered by you in determining how to vote for this proposal, include the following:

the risk that the transaction with Mylan may not be completed due to the failure to satisfy or waive conditions to closing;
the fact that our stockholders will not receive any of the proceeds from the sale of the Acquired Assets unless we subsequently distribute those funds to our stockholders by means of a special dividend, repurchase of any outstanding shares in order to provide additional liquidity to stockholders or take alternative action;
the fact that under the Asset Purchase Agreement, we remain exposed to certain contingent liabilities relating to the Acquired Assets, which could adversely affect our ability to pursue our remaining business operations following the closing;
the fact that unforeseen liabilities and expenses may be incurred that may limit the amount of after tax net proceeds from the sale to Mylan that are available to fund our remaining business activities;
the fact that under certain circumstances, we may be required to pay a termination fee to Mylan if the transaction is not completed and we engage in another Seller Acquisition Transaction (defined below);
the fact that if our stockholders do not approve the sale of the Acquired Assets, there may not be any other offers from potential acquirers;
the fact that the failure to complete the sale to Mylan may result in a decrease in the market value of our common stock and may increase doubt about our continued viability; and
the fact that following the closing of the sale to Mylan, our stockholders’ ability to sell their stock may be limited.

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The foregoing discussion of the information and factors considered by our board of directors is not intended to be exhaustive, but does include the material factors considered. In view of the complexity and wide variety of information and factors, both positive and negative, considered by the board of directors, it is not practical to quantify, rank, or otherwise assign relative or specific weights to the factors considered. In addition, the board of directors did not reach any specific conclusion with respect to each of the factors considered, or any aspect of any particular factor. Instead, the board of directors conducted an overall analysis of the factors described above, including discussions with management and legal advisors. In considering the factors described above, individual members of the board of directors may have given different weight to different factors. After taking into consideration all of the factors set forth above, our board of directors, following consultation with its legal advisors, concluded that the sale to Mylan is fair to, and in the best interests of, the Company and our stockholders, and that we should proceed with the sale.

Recommendation of the Board of Directors

The board of directors has determined that the sale of the Acquired Assets to Mylan is fair to, and in the best interests of, the Company and our stockholders. The board of directors unanimously approved the Asset Purchase Agreement and the proposed sale contemplated thereby, and unanimously recommends that the stockholders vote in favor of the proposal to sell the assets of the Acquired Assets to Mylan, pursuant to the Asset Purchase Agreement, including the transactions contemplated thereby.

Regulatory Approvals

There are no material United States or state regulatory approvals required for the completion of the sale to Mylan other than the approval of the Asset Purchase Agreement by our stockholders under the corporate law of the State of Delaware.

Appraisal Rights

Under Delaware law, our stockholders do not have appraisal rights in connection with the proposed asset sale transaction.

Federal Income Tax Consequences

The following is a summary of the principal material United States federal income tax consequences relating to the proposed sale of the Acquired Assets to Mylan. The summary does not consider the effect of any applicable foreign, state, local or other tax laws nor does it address tax consequences applicable to stockholders that may be subject to special federal income tax rules. The following summary is based on the current provisions of the Internal Revenue Code, existing, temporary, and proposed Treasury regulations thereunder, and current administrative rulings and court decisions. Future legislative, judicial or administrative actions or decisions, which may be retroactive in effect, may affect the accuracy of any statements in this summary with respect to the transactions entered into or contemplated prior to the effective date of those changes.

The sale to Mylan is a taxable event to us. We will recognize taxable gain in an amount equal to the cash received under the Asset Purchase Agreement, less our adjusted tax basis in the Acquired Assets. Based upon preliminary estimates, we believe that all, or a significant portion, of our taxable gain for federal income tax purposes from the sale of the Acquired Assets will be offset to the extent of our current year losses from operations, the write-off for tax purposes of the tax-basis of the Acquired Assets and the available net operating loss carryforwards. However, for state income tax purposes, based upon the available state net operating loss carryforwards and corresponding limitations and we estimate an income tax expense arising from the sale of the Acquired Assets of $2.1 million. Our preliminary estimates could change depending upon the final income and expense components and related tax determination upon the sale of the Acquired Assets. The $2.1 million income tax expense has been reflected as a reduction in the net proceeds from the sale of the Acquired Assets. We do not anticipate any direct tax consequence to you as a result of the sale to Mylan. At a future date, if ProPhase were to declare and pay dividend to its stockholders, repurchase any outstanding shares in order to provide additional liquidity to stockholders or otherwise distribute proceeds from the transaction to its stockholders, the stockholders may recognize gain or loss in connection with any such dividend, repurchase or distribution.

The taxable gain will differ from the gain to be reported in our financial statements due to temporary tax differences and certain other differences between the tax laws and generally accepted accounting principles.

We do not anticipate any direct tax consequence to you as a result of the sale to Mylan. Each holder of our common stock is urged to consult his or her own tax advisor as to the federal income tax consequences of the sale, and also as to any state, local, foreign or other tax consequences based on his or her own particular facts and circumstances.

Accounting Treatment of the Asset Sale

If the Asset Purchase Agreement and the sale of the Acquired Assets to Mylan are approved by our stockholders as described in this proxy statement, we will record the sale in accordance with generally accepted accounting principles in the United States. Upon the completion of the sale to Mylan, we will recognize a financial reporting gain equal to the net proceeds (the sum of the purchase price less the expenses relating to the sale) less the net book value of the assets sold and the fair value of the indemnification liability retained.

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RISK FACTORS

You should carefully consider the special considerations described below as well as other information provided to you in this proxy statement in deciding how to vote on the proposal to sell the Acquired Assets.

Special Considerations Regarding the Proposal to Sell the Acquired Assets to Mylan

By completing the sale to Mylan, our remaining business and assets will be limited.

By selling the Acquired Assets, we will be selling substantially all of our intellectual property assets. Our remaining assets will consist primarily of the net proceeds from the transaction, our PMI Business, our Company Headquarters and our ORXx and TK Supplements ® brands, product lines and operations. We may invest in other intellectual property in the future or seek to merge, be acquired by or combine with another company that has products or technologies, but we have no current specific plans to do so at this time. This increases our business risk because we will be less diversified than before the sale of the Acquired Assets to Mylan and because our remaining business is very limited.

You will have no continuing rights or interest in the Cold-EEZE ® Business being sold to Mylan.

If Mylan is successful in operating the Cold-EEZE ® Business or ultimately sells it to a third party at a profit, current stockholders will not be entitled to receive profits or returns.

The amount of net proceeds that we will receive is subject to uncertainties.

Pursuant to the Asset Purchase Agreement, the amount that we receive from Mylan is subject to reduction after the closing if Mylan successfully asserts claims to indemnification pursuant to the indemnification provisions of the Asset Purchase Agreement. Further, we may have unforeseen liabilities and expenses that must be satisfied from the after tax net proceeds of the sale to Mylan, leaving less to fund our remaining operations. If we do not have sufficient cash to fund our remaining operations, we may need to seek to raise equity or debt financing or sell additional assets, which may not be possible under satisfactory terms, if at all.

The Asset Purchase Agreement will expose us to contingent liabilities up to an amount equal to the Purchase Price for the Acquired Assets, which could adversely affect our ability to pursue our remaining business operations or our ability to pursue other alternatives following the closing.

In the Asset Purchase Agreement we have made customary representations and warranties to Mylan, which are described below under the heading “Asset Purchase Agreement; Representations and Warranties.” Pursuant to the Asset Purchase Agreement, we agreed to indemnify Mylan for any losses from breaches of most of our representations, warranties or covenants that occur, in most cases, within 24 months after the closing date of the sale to Mylan. A breach by us of the Fundamental Representations would expose us to indemnification payments up to the Purchase Price. The payment of any such indemnification obligations could adversely impact our cash resources following the completion of the sale to Mylan and our ability to pursue other alternatives after the closing, including transactions with third parties, distribution of funds to stockholders or dissolution or liquidation of our company.

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You are not guaranteed to receive any of the proceeds from the sale of the Acquired Assets.

The Purchase Price for the Acquired Assets (less the Escrow Amount) will be paid directly to ProPhase. We have not, at this time, approved or adopted any plans to distribute any of the net proceeds to our stockholders by way of dividend, issuer tender offer, dissolution or otherwise. For that reason, as well as the possibility of indemnification claims or other unforeseen obligations after the closing that reduce the amount of net proceeds to us from the transaction, there is no assurance that you will receive any specific amount of net proceeds from the sale of the Acquired Assets. At a future date, the board of directors may declare and pay a dividend to its stockholders, repurchase any outstanding shares in order to provide additional liquidity to stockholders or otherwise distribute net proceeds from the transaction to the stockholders.

We may be required to pay a termination fee to Mylan if the transaction is not completed and we engage in another transaction.

The Asset Purchase Agreement requires us to pay Mylan a termination fee if the Asset Purchase Agreement is terminated prior to completion under certain cases. If Mylan terminates the Asset Purchase Agreement as a result of a triggering event (as described herein under “Termination of the Asset Purchase Agreement”), which includes approval by ProPhase of a Seller Superior Offer with a third party that our board of directors concludes is superior to the proposed transaction with Mylan, then we must pay Mylan a termination fee equal to $1,500,000. If we are required to pay Mylan a termination fee we might not have sufficient funds to pay the termination fee, and, our business could be seriously harmed.

The Company may not receive any competing transaction proposals or Seller Superior Offers, including as a result of the termination fee payable to Mylan.

The Asset Purchase Agreement requires us to pay Mylan a termination fee equal to $1,500,000 if the Asset Purchase Agreement is terminated prior to completion, including in the event of an approval by ProPhase of a Seller Superior Offer with a third party that our board of directors concludes is superior to the proposed transaction with Mylan. The amount of this termination fee may have the effect of causing other potential third-party buyers to not submit a proposal to buy either the Company and its subsidiaries or their assets at a higher price or to enter into a more favorable alternative transaction.

If the sale to Mylan is not completed, we may explore other potential transactions but there may not be any other offers from potential acquirers.

If the sale to Mylan is not completed, we may explore other strategic alternatives, including a sale of our assets to, or a business combination with, another party. There can be no assurance that any potential transaction will provide consideration equal to or greater than the price proposed to be paid by Mylan in the transaction, or that we will be able to complete any alternative transaction.

If the sale to Mylan is not completed, we may need to raise additional capital.

If the sale to Mylan is not completed, we may be required to raise additional capital or take on additional debt to fund current operations. In addition, the Company is obligated to pay off the Secured Promissory Notes in 2017 and may need to find additional capital to do so.

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Our common stock may be less liquid after the transaction, and you may find it more difficult to dispose of your shares.

Our common stock is currently traded on the NASDAQ Capital Market under the symbol “PRPH.” Following the completion of the proposed transaction, we expect that the common stock will continue to be traded on the NASDAQ Capital Market. However, it is not possible to predict the trading price of our common stock following the closing of the sale to Mylan. It is likely that there will only be limited trading volume in our common stock following the closing of the sale to Mylan. Accordingly, you may find it more difficult to dispose of your shares of common stock and you may not be able to sell some or all of your shares of common stock when and at such times as you desire.

The failure to complete the sale of the Acquired Assets will likely result in a decrease in the market value of our common stock and will create substantial doubt as to our ability to continue as an ongoing business.

The sale of the Acquired Assets is subject to a number of contingencies, including approval by our stockholders and other customary closing conditions. We cannot predict whether we will succeed in obtaining the approval of our stockholders. As a result, we cannot assure you that the sale of the Acquired Assets will be completed. If our stockholders fail to approve the proposal to sell the Acquired Assets to Mylan at the special meeting or if the sale of the Acquired Assets is not completed for any other reason, the market price of our common stock would likely decline, and there would be substantial doubt as to our ability to continue as a going concern.

While the sale of the Acquired Assets is pending, it creates uncertainty about our future which could have a material adverse effect on our business, financial condition and results of operations.

While the sale of the Acquired Assets is pending, it creates uncertainty about our future. As a result of this uncertainty, our current or potential business partners may decide to delay, defer or cancel entering into new business arrangements with us pending completion or termination of the sale of the Acquired Assets. In addition, while the sale of the Acquired Assets is pending, we are subject to a number of risks, including:

the diversion of management and employee attention from our day-to-day business;
the potential disruption to business partners and other service providers;
the loss of employees who may depart due to their concern about losing their jobs following the sale of the Acquired Assets; and
we may be unable to respond effectively to competitive pressures, industry developments and future opportunities.

The occurrence of any of these events individually or in combination could have a material adverse effect on our business, financial condition and results of operations. Additionally, we have incurred substantial transaction costs and diversion of management resources in connection with the sale of the Acquired Assets, and we will continue to do so until the closing.

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ASSET PURCHASE AGREEMENT

We believe this summary describes the material terms of the Asset Purchase Agreement. However, we recommend that you read carefully the complete agreement for the precise terms of the Asset Purchase Agreement and other information that may be important to you. The Asset Purchase Agreement is included in this proxy statement as Appendix A .

Assets to Be Sold

Subject to and upon the terms and conditions of the Asset Purchase Agreement, we are selling to Mylan all of our right, title and interest in and to the assets and properties used in connection with or relating to the Cold-EEZE ® Business (the “Acquired Assets“). The Acquired Assets include:

certain Contracts related to the Cold-EEZE ® Business;
the Company’s books, records, files, designs, specifications, customer lists, supplier lists, information, reports, correspondence, literature and other sales material, computer software, magnetic media, and other data and similar materials related to or used in the Cold-EEZE ® Business or the Acquired Assets (other than board minutes and stockholder minutes);
all Intellectual Property related to the Business and the Acquired Assets, including written license agreements relating to intellectual property to which the Company is a party and which are included in the Acquired Assets;
certain non-U.S. Intellectual Property;
all advertising, marketing and promotional materials used in the marketing of the Products;
all existing and available technical information, know-how and data, including inventions (whether patentable or not), discoveries, trade secrets, specifications, instructions, processes, formulae, materials, drawings and other technology related to the Cold-EEZE ® Business or the manufacture, registration, use or commercialization of the Products, including all biological, chemical, pharmacological, biochemical, toxicological, pharmaceutical, physical, safety, quality control, preclinical and clinical data and studies relevant to the manufacture, registration, use or commercialization of the Products, in each case that are in existence, reasonably accessible, owned by and available to the Company and/or its affiliates on the closing date (the “Know-How”);
the license of certain trademarks pursuant to a Trademark Consent Letter, to be executed by the Company and Mylan on the closing date;
certain tools, dies, cuts, stamps and other machinery used in the Cold-EEZE ® Business or containing the term “Cold-EEZE ® ” (but not including items that can be used for other products or that have a use outside of the Cold-EEZE ® branded products; and
certain other assets and properties identified in the Asset Purchase Agreement.

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Assets to be Retained

If the proposed transaction is completed, we will retain the following Excluded Assets related to the Cold-EEZE ® Business, in addition to our PMI Business, our Company Headquarters, and our ORXx and TK Supplements ® brands, product lines and operations:

the corporate seals, charter documents, minute books, books of account or other records having to do with the corporate organization of the Company;
the tax returns and books of account or other records with respect to the taxes and financial records of the Company;
all income tax net operating loss carryforwards of the Company;
all accounts receivable;
all cash and cash equivalents;
all rights which accrue or will accrue to the Company under the Asset Purchase Agreement;
the Company’s personnel records and copies of any other records that the Company and its affiliates are required by law to retain in their possession;
all known or unknown, liquidated or unliquidated, contingent or fixed, rights, claims or causes of action, choses in action, rights of recovery and rights of set-off of any kind, and indemnities against any person that the Company may have against any person but only to the extent related to the Excluded Assets or Retained Liabilities;
all claims for refunds of taxes and other governmental charges of whatever nature with respect to the Acquired Assets for pre-closing periods;
all rights of the Company under the Cold-EEZE ® Business Contracts that are not assigned to Mylan;
all causes of action (including counterclaims) whether known or unknown, absolute, contingent (or based on a contingency) or otherwise, and defenses (A) to the extent not arising from or relating to the Acquired Assets or Assumed Liabilities as well as any books, records and privileged information relating thereto or (B) relating to any period through the closing to the extent that the assertion of such cause of action or defense is necessary or useful in defending any claim that may be asserted against the Company;
all insurance policies and related Contracts and all rights thereunder (including the right to make claims thereunder and to the proceeds thereof);
all claims and rights against any officer, director, member, manager, or employee of the Company (in their capacity as an employee but not in any other capacity) following the closing;
all benefit plans and all trust agreements, insurance policies and administrative service and other contracts relating to such;

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all records and reports prepared or received by the Company or any of its affiliates in connection with the sale of the Acquired Assets and the transactions contemplated hereby, including all analyses relating to the Acquired Assets or Mylan so prepared or received;
all vendor numbers associated with the Acquired Assets or the Cold-EEZE ® Business;
all plants, real property and equipment, other than such equipment or other assets and properties identified in the Asset Purchase Agreement;
all brands that are not related to or used in the Cold-EEZE ® Business;
all confidentiality agreements with prospective purchasers of the Acquired Assets or any portion thereof, and all bids and expressions of interest received from third parties with respect to the Acquired Assets;
all privileged materials, documents and records of the Company or the Company’s affiliates that are not related to the Cold-EEZE ® Business or the Acquired Assets; and
inventory, finished goods, bulk, raw materials, packaging, supplies, components and other inventories of the Cold-EEZE ® Business, which will be sold to Mylan pursuant to the terms of the manufacturing and supply agreement to be entered into with Mylan, and other non-Cold-EZEE ® Business and PMI Business, which will be retained by us.

Assumed Liabilities

In connection with the sale, transfer, conveyance, assignment and delivery of the Acquired Assets to Mylan pursuant to the Asset Purchase Agreement, at the closing, Mylan will assume and agree to pay, perform and discharge all liabilities arising out of the ownership and operation of the Acquired Assets on or after the closing date, whether absolute, accrued, contingent, known or unknown, asserted or unasserted, fixed or otherwise, or whether due or to become due, other than the Retained Liabilities.

Retained Liabilities

ProPhase will retain the Retained Liabilities, including the following:

claims related to the Acquired Assets regarding adulterated products manufactured by the Company;
all accounts payable;
all indebtedness of the Company and all other liabilities arising out of the Acquired Assets prior to the closing date, whether absolute, accrued, contingent, known or unknown, asserted or unasserted, fixed or otherwise, or whether due or to become due, including without limitation any and all liabilities for any rebates, promotions, charge-backs or other changes in pricing with respect to sales of the Products for the period prior to the closing, which includes the Secured Promissory Notes;
claims or liabilities arising out of or associated with the Company’s Rights Agreement;
all taxes of the Company unrelated to the ownership or operation of the Acquired Assets and the Cold-EEZE ® Business or related to the direct or indirect ownership or operation of the Acquired Assets and the Cold-EEZE ® Business for all periods prior to the closing; all taxes, if any, imposed on the Company and any consolidated, combined or unitary group of which the Company is a member as a result of the sale or transfer of the Acquired Assets and the Cold-EEZE ® Business; and any liability of the Company for the unpaid taxes of any person under Treasury Regulation Section 1.1502-6 (or any similar provision of state, local, or non-U.S. law), as a transferee or successor, by contract or otherwise;
credits and payments for any returns of non-conforming Products sold by the Company on or before the closing date; and
claims or liabilities of the business and operations of the Company or any of its affiliates at any time, other than the Assumed Liabilities.

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Closing Date

The closing of the sale of the Acquired Assets will take place no later than three business days after all of the conditions to closing are either satisfied or waived (other than conditions which, by their nature, are to be satisfied on the closing date), or such other date as we agree with Mylan.

Purchase Price

Mylan has agreed to purchase the Acquired Assets for a purchase price of $50,000,000 in cash, plus the assumption of the Assumed Liabilities.

We have indemnification obligations to Mylan under the Asset Purchase Agreement, and any amounts that we may become required to pay to Mylan pursuant to the indemnification provisions of the Asset Purchase Agreement will reduce the net proceeds to us resulting from the transaction.

Pursuant to the terms of the Asset Purchase Agreement, at closing, Mylan will deposit the Escrow Amount into an escrow account established with Escrow Agent in order to satisfy, in whole or in part, certain indemnity obligations of the Company under the Asset Purchase Agreement.

Proceeds from the Sale of Assets

We estimate that we will incur an estimated $2.1 million tax liability as a result of the sale of the Acquired Assets to Mylan. We estimate approximately $2.2 million of transaction related costs will be payable in connection with the transaction, including accounting and legal fees and expenses, and we will repay the Secured Promissory Notes.

We expect to have approximately $41.3 million remaining to fund our working capital requirements.

Nature of Our Business Following the Sale to Mylan

Following the closing of the proposed asset sale to Mylan, our remaining business will consist primarily of our PMI Business and manufacturing facility and our ORXx and TK Supplements ® brands, product lines and operations.

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Our PMI facility is a FDA registered facility that engages in contract manufacturing and distribution activities. Following the transaction, PMI will continue to manufacture a large and diverse amount of OTC products and supplements for the Company and third parties. PMI plans to expand its contract manufacturing business going forward. As part of the transaction, PMI will enter into a manufacturing and supply agreement with Mylan for a term of five years, pursuant to which Mylan will purchase the current inventory of the Cold-EEZE ® Business and PMI will manufacture certain of the Products for Mylan. The term of this agreement may be renewed for up to five successive one year periods by Mylan.

The TK Supplements ® product line is comprised of three men’s health products: (i) Legendz XL ® 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. Our lead product from the TK Supplements ® product line is Legendz XL ® , a men’s dietary supplement in the male enhancement category. We recently completed a broad series of clinical studies which support important product claims. Through media and digital testing, we believe that we have optimized the wording of these claims which have now been incorporated in our product packaging and marketing communications. Our next goal is to introduce Legendz XL ® in retail stores, leveraging our existing infrastructure and retail distribution platform. If we are successful in achieving retail distribution, we then plan to increase the media spend for television and other media advertising to support this retail launch with the likely benefit that it would also generate additional direct to consumer, e-commerce sales.

The Company will also consider and pursue all other alternatives and strategies including, but not limited to, investments and acquisitions in other sectors and industries.

We will continue to be a public reporting company after the sale of the Acquired Assets to Mylan, if the sale is approved by our stockholders.

Representations and Warranties

Representations and Warranties of ProPhase

In the Asset Purchase Agreement, we make certain representations and warranties to Mylan and, subject to certain limitations and disclosures, we have agreed to indemnify Mylan for any breach of the representations and warranties. These representations and warranties include, among other things, the following:

due organization, valid existence, good standing and qualification to do business;
authority, approvals, validity and enforceability of the Asset Purchase Agreement and the transactions contemplated thereby;
the absence of conflicts with or violations, breaches, defaults under, (i) our charter documents or resolutions of our board of directors, (ii) the Cold-EEZE ® Business Contracts, or (iii) any applicable law, rule, regulation, judgment, order or decree of any court or governmental entity having jurisdiction over the Company, caused by the Asset Purchase Agreement and the transactions contemplated thereby;

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no authorizations or approvals or other actions, including notices or filings, with any court or governmental entity are required in order to execute and deliver the Asset Purchase Agreement and perform the transactions contemplated thereby;
financial information;
ownership and title to the Intellectual Property included in the Acquired Assets;
maintenance of IP Licenses and their enforceability;
absence of third party infringement of ProPhase’s Intellectual Property rights;
absence of infringement on any third party intellectual property rights;
enforceability of Cold-EEZE ® Business Contracts and the absence of breaches or defaults thereunder;
tax matters;
litigation matters;
title to the Acquired Assets;
no broker, finder or agent fees owed by the Company in connection with the transactions contemplated by the Asset Purchase Agreement;
compliance with laws;
solvency;
stockholder vote required to approve the sale of the Acquired Assets to Mylan;
no channel stuffing;
board of director recommendation in favor of sale of the Acquired Assets to Mylan;
enforceability and compliance with permits;
regulatory compliance;
absence of administrative or enforcement actions against ProPhase;
compliance of this proxy statement; and
no “Acquiring Persons” and no triggering event under the Rights Agreement.

For a complete text of the representations and warranties made by us, see Article 4 of the Asset Purchase agreement.

Representations and Warranties of Mylan

In the Asset Purchase Agreement, Mylan makes certain representations and warranties to us and, subject to certain limitations, Mylan has agreed to indemnify us for any breach of the representations and warranties. These representations and warranties include, among other things, the following:

due organization, valid existence and good standing;

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authority, approvals, validity and enforceability of the Asset Purchase Agreement and the transactions contemplated thereby;
the absence of conflicts with or violations, breaches, defaults under, (i) Mylan’s charter documents, (ii) any indenture, mortgage or loan or any other agreement or instrument to which Mylan is a party or by which it is bound or to which its properties may be subject, or (iii) any applicable law, rule, regulation, judgment, order or decree of any court or governmental entity having jurisdiction over Mylan or any of its properties, caused by the Asset Purchase Agreement and the transactions contemplated thereby;
no governmental authorizations required;
no broker, finder or agent fees owed by the Company in connection with the transactions contemplated by the Asset Purchase Agreement;
no litigation;
sufficient immediately available funds to pay the Purchase Price; and
no ownership of ProPhase common stock.

For a complete text of the representations and warranties made by Mylan, refer to Article 5 of the Asset Purchase Agreement.

Covenants

Under the Asset Purchase Agreement, each of the parties has agreed to perform certain pre- and post-closing covenants. These covenants include, among other things, the following:

until the closing date, we will not take certain actions including: (i) the sale, assignment or encumbrance of any of the Acquired Assets; (ii) the modification, amendment or termination of certain Cold-EEZE ® Business Contracts; (iii) changing or modifying the pricing of any Products or any promotional allowances, discounts or coupons offered to customers, or any advertising, marketing or promotional materials; and we will continue to (v) pay the debts, taxes and other obligations of the Cold-EEZE ® Business when due, (w) maintain the properties and assets included in the Acquired Assets and the Acquired Intellectual Property, and maintain the Non-US IP consistent with past practice, (x) perform all obligations under the Cold-EEZE ® Business Contracts, (y) comply in all material respects with all laws applicable to the Cold-EEZE ® Business and (z) continue in full force all insurance policies;
the Company and Mylan will each maintain in confidence, and cause their respective representatives to maintain in confidence, any information obtained from the other party (with certain limited exceptions) for a period of two years from the closing date and the Company will perpetually maintain in confidence information associated with the intellectual property rights acquired by Mylan;

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the Company and Mylan will consult with each other concerning the initial press release and other public statements with respect to the proposed transaction and to cooperate with each other concerning subsequent public statements;
the Company will not, and will not permit its subsidiaries to, directly or indirectly, for the period beginning on the closing date and ending on a specified date thereafter, develop, manufacture, sell, promote or distribute, including as a partner, stockholder, member, employee, principal, agent, trustee or consultant, any product in the United States that is used or indicated for cough, cold or flu (subject to certain limited exemptions, including the manufacturing of certain products currently marketed by the Company and other third party contract manufacturing operations);
Mr. Ted Karkus, our Chairman and Chief Executive Officer, directly or indirectly, for the period beginning on the closing date and ending on a specified date thereafter, develop, manufacture, sell, promote or distribute, including as a partner, stockholder, member, employee, principal, agent, trustee or consultant, any product in the United States that is used or indicated for cough, cold or flu (subject to certain limited exemptions, including the manufacturing of certain products currently marketed by the Company and other third party contract manufacturing operations);
Mr. Robert V. Cuddihy, Jr., our Executive Vice President, Chief Operating Officer and Chief Financial Officer, will not, directly or indirectly, for the period beginning on the closing date and ending on the specified dates thereafter, develop, manufacture, sell, promote or distribute, including as a partner, stockholder, member, employee, principal, agent, trustee or consultant, any product in the United States that is used or indicated for, as applicable, (i) cough, cold or flu or (ii) cough, cold or flu with zinc as the primary active ingredient (subject to certain limited exemptions, including the manufacturing of certain products currently marketed by the Company and other third party contract manufacturing operations);
Dr. Raouf Ghaderi, Head of Research and Development, will not, directly or indirectly, for the period of time beginning on the closing date and ending on a specified date thereafter, develop, manufacture, sell, promote or distribute, including as a partner, stockholder, member, employee, principal, agent, trustee or consultant, any product in the United States that is used or indicated for cough, cold or flu with zinc as the primary active ingredient (subject to certain limited exemptions, including the manufacturing of certain products currently marketed by the Company and other third party contract manufacturing operations);
for the period beginning on the closing date and ending on a specified date thereafter, the Restricted Parties will not, and will cause the Company’s subsidiaries not to solicit, offer employment to or hire any person that is employed by Mylan in connection with the Cold-EEZE ® Business; provided, however, that such Restricted Party shall not be prohibited from (i) initiating searches for employees or contractors through the use of non-directed general advertisement or through the engagement of firms to conduct searches that are not targeted or focused on persons employed by Mylan or (ii) soliciting, offering employment to or hiring a former employee of Mylan, whose employment has been terminated by Mylan;
for the period beginning on the closing date and ending on a specified date thereafter, Mylan will not solicit, offer employment to or hire any person that is employed by the Company; provided, however, that Mylan shall not be prohibited from (i) initiating searches for employees or contractors through the use of non-directed general advertisement or through the engagement of firms to conduct searches that are not targeted or focused on persons employed by the Company or (ii) soliciting, offering employment to or hiring a former employee of the Company, whose employment has been terminated by the Company;

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we and Mylan will execute and deliver such further instruments and take such other actions as the other party may reasonably request to carry out the transactions contemplated by the Asset Purchase Agreement;
prior to the closing, we will disclose all Know-How to Mylan that is necessary or reasonably useful to conduct the Cold-EEZE ® Business;
we will not engage in any channel stuffing;
we have agreed to promptly prepare and file this proxy statement with the SEC, to respond to and promptly resolve any comments with the SEC concerning this proxy statement, and to cause this proxy statement to be mailed to our stockholders and the earliest practicable time; and we have agreed to include in the proxy statement the recommendation of our board of directors in favor of adoption and approval of the Asset Purchase Agreement and the proposed transaction;
we have agreed to convene a special meeting of our stockholders as promptly as reasonably practicable for the purpose of voting upon the Asset Purchase Agreement and the transaction; and we have agreed that, subject to the provisions described below concerning Seller Superior Offers, that our board of directors will recommend that our stockholders vote in favor of the adoption and approval of the Asset Purchase Agreement and the proposed transaction;
we have agreed to use commercially reasonable efforts to obtain the consents required from any third parties and to deliver all notices required to be delivered under any Cold-EEZE ® Business Contracts that are being assigned to Mylan;
the Company and Mylan have agreed to jointly provide notice to certain customers and suppliers of the sale of the Cold-EEZE ® Business to Mylan and the Company agreed to use commercially reasonable efforts to facilitate ongoing relationships between such customers and suppliers and Mylan;
we agreed to take certain actions with respect to our Rights Agreement if there is a public disclosure that a person other than Mylan or its affiliates became an “Acquiring Person” prior to the date of the Asset Purchase Agreement;
the Company has agreed to transfer any additional rights relating solely to any previously marketed Cold-EEZE ® products that were not transferred at the closing; and
between the date of the Asset Purchase Agreement and 180 days after the closing, the Company has agreed to use its commercially reasonable efforts to obtain consents, waivers and approvals under any of ProPhase’s agreements, contract, licenses, or leases.

For a complete text of the foregoing covenants and additional covenants, please refer to Article 6 of the Asset Purchase Agreement.

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Solicitation; Withdrawal of Recommendation by Our Board of Directors

Non-Solicitation

Until the sale to Mylan is completed or the Asset Purchase Agreement is terminated, we have agreed that we, our subsidiaries and any of our officers, directors, or employees, and each of their respective representatives, will not directly or indirectly, do any of the following (except under certain limited circumstances):

solicit, initiate, seek or knowingly encourage the making, submission or announcement of any Seller Acquisition Proposal;
furnish any non-public information regarding ProPhase or any of its subsidiaries to any person in connection with or in response to a Seller Acquisition Proposal;
continue or otherwise engage or participate in any discussions or negotiations with any person with respect to any Seller Acquisition Proposal;
approve, endorse or recommend any Seller Acquisition Proposal; or
enter into any letter of intent, arrangement, agreement or understanding relating to any Seller Acquisition Transaction (as defined below).

Before the approval of the Asset Purchase Agreement by our stockholders, however, we are not prohibited from complying with our obligations to make a recommendation with respect to a third party tender offer, and we are not prohibited from furnishing information about us to, entering into a confidentiality agreement with or entering into discussions with, any person in response to a Seller Superior Offer submitted by that person, if:

our board of directors or any committee thereof concludes in good faith, after consultation with outside legal counsel, that the failure to take such action with respect to any Seller Acquisition Proposal would be reasonably likely to result in a breach of its fiduciary duties under applicable law;
we have not violated the non-solicitation restrictions described above;
we have provided the required notification to Mylan regarding the Seller Acquisition Proposal; and
contemporaneously with furnishing any nonpublic information to such person, we also furnish that information to Mylan (if not previously provided to Mylan).

Notification to Mylan of Acquisition Proposal

We have agreed to advise Mylan orally and in writing within 24 hours after receipt of a Seller Acquisition Proposal or any request we receive for nonpublic information which we reasonably believe would lead to a Seller Acquisition Proposal (including, subject to the terms of any applicable confidentiality agreement, providing the identity of the person making or submitting such Seller Acquisition Proposal or request, and to provide a copy of such Seller Acquisition Proposal, if in writing, or otherwise provide a reasonably detailed summary thereof. We also agreed to keep Mylan informed on a prompt basis with respect to any change in the material terms of any such request, acquisition proposal or inquiry.

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Definition of Seller Acquisition Proposals and Seller Acquisition Transaction

Under the Asset Purchase Agreement, a “Seller Acquisition Proposal” means any offer, proposal or indication of interest relating to any “Seller Acquisition Transaction,” which includes any of the following transactions:

any merger, consolidation, share exchange, recapitalization, business combination or similar transaction involving us or any of our subsidiaries;
any direct or indirect acquisition of securities, tender offer, exchange offer or other similar transaction in which a person or a “group” (as defined in the Securities Exchange Act of 1934, as amended) of persons directly or indirectly acquires beneficial or record ownership of securities representing 20% or more of our voting power;
any direct or indirect acquisition of any business or businesses or of assets that constitute or account for 20% or more of the consolidated net sales, net income or assets of ProPhase and its subsidiaries, taken as a whole;
any liquidation or dissolution of ProPhase or any of our material subsidiaries; or
any combination of the foregoing.

Definition of Seller Superior Offer

Under the Asset Purchase Agreement, a “Seller Superior Offer” means a bona fide written Seller Acquisition Proposal (for purposes of this definition, replacing all references to 20% in the above definition with 50%) that our board of directors or any committee thereof determines, in good faith, after consultation with outside legal counsel and a financial advisor (i) is on terms that are more favorable from a financial point of view to our stockholders than the transactions contemplated by the Asset Purchase Agreement or the Transaction Documents (including any proposal by Mylan to amend the terms of the Asset Purchase Agreement) after taking into account all of the terms and conditions of such proposal and (ii) is likely to be completed (without material modification of its terms), in each of the cases of clause (i) and (ii) taking into account all financial, regulatory, legal and other aspects of such Seller Acquisition Proposal (including the timing and likelihood of consummation thereof) and the payment of the termination fee.

Withdrawal of Recommendation of Board of Directors

We have agreed that we would include in this proxy statement our board of directors’ recommendation that our stockholders vote in favor of the sale of the Acquired Assets pursuant to the Asset Purchase Agreement and agreed not to withhold, withdraw or modify, or propose to withhold, withdraw or modify in a manner adverse to Mylan, this recommendation. Notwithstanding the foregoing, our board of directors is permitted to withhold, withdraw, or modify any such recommendation previously made if a Seller Superior Offer (as defined above) is made and our board of directors reasonably concludes in good faith, that to not withhold, withdraw, or modify such recommendation would constitute a breach of the fiduciary duties of the board of directors under applicable law.

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Conditions to Closing

Each party’s obligation to complete the sale of assets is subject to the prior satisfaction or waiver of certain conditions. The following list sets forth the material conditions that must be satisfied or waived before completion of the proposed transaction:

our stockholders have approved the sale of the Acquired Assets to Mylan;
no injunction, writ, temporary restraining order or other order or Law will be in effect which restrains or prohibits the sale of the Acquired Assets; and
all authorizations, orders and consents from any governmental authorities required under the Asset Purchase Agreement will have been obtained.

Our obligations to effect the transactions contemplated by the Asset Purchase Agreement are subject to the satisfaction or fulfillment, at or before the closing, of a number of additional conditions, any of which may be waived, in writing, exclusively by us, including the following:

the representations and warranties of Mylan contained in the Asset Purchase Agreement will be true and correct in all material respects as of the closing date, with the same effect as if made on and as of the closing date (except as otherwise provided);
Mylan will have performed and complied in all material respects with all agreements, covenants and conditions required by the Asset Purchase Agreement and each of the other Transaction Documents (as defined below) to be performed or complied with by Mylan on or before the closing date; and
Mylan will have delivered to the Company all deliverables required by the Asset Purchase Agreement.

Mylan’s obligations to effect the transactions contemplated by the Asset Purchase Agreement are subject to the satisfaction or fulfillment, at or before the closing, of a number of additional conditions, any of which may be waived, in writing, exclusively by Mylan, including the following:

the representations and warranties of ProPhase contained in the Asset Purchase Agreement will be true and correct in all material respects as of the closing date, with the same effect as if made on and as of the closing date (except as otherwise provided);
we will have performed and complied in all material respects with all agreements, covenants and conditions required by the Asset Purchase Agreement and each of the other Transaction Documents to be performed or complied with by it on or before the closing date;
no material adverse effect, event, development or change in the results of operations of the Cold-EEZE® Business or the Acquired Assets will have occurred; and
we will have delivered to Mylan all deliverables required by the Asset Purchase Agreement.

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The Asset Purchase Agreement defines a “Material Adverse Effect” to include any material adverse effect, event, development or change on the results of operations of the Cold-EEZE ® Business or the Acquired Assets, taken as a whole; provided, however, that a Material Adverse Effect will not include the impact on such results of operations of the Cold-EEZE ® Business arising out of or attributable to (a) conditions or effects that generally affect the industries and classes of trade in which the Cold-EEZE ® Business operates (including legal and regulatory changes), (b) general economic conditions, (c) effects resulting from changes affecting equity or debt market conditions (including in each of clauses (a), (b) and (c), any effects or conditions resulting from an outbreak or escalation of hostilities, acts of terrorism, political instability or other national or international calamity, crisis or emergency, or any governmental or other response to any of the foregoing, in each case whether or not involving the United States or any other country in which the Cold-EEZE ® Business operates), (d) acts of God (including earthquakes, storms, fires, floods and natural catastrophes), (e) effects arising from changes in laws or accounting principles, (f) effects relating to or arising from the announcement of the execution of the Asset Purchase Agreement or the transactions contemplated thereby or the identity of Mylan or its affiliates, including the loss of any customers, suppliers or employees directly thereto, (g) effects resulting from compliance with the terms and conditions of the Asset Purchase Agreement by us or consented to in writing by Mylan, (h) the seasonal nature of the Cold-EEZE ® Business or the relative incidence of cold or influenza in any given year, or (i) any act or omission of Mylan; except, in the case of clauses (a)-(e), to the extent that such effects have a materially disproportionate impact on the Cold-EEZE ® Business relative to other participants in the industry. A Material Adverse Effect will be measured only against past performance of the Cold-EEZE ® Business, taken as a whole, and not against any forward-looking statements, financial projections or forecasts of the Cold-EEZE ® Business.

Termination of the Asset Purchase Agreement

The Asset Purchase Agreement may be terminated at any time prior to the closing:

by mutual written consent of the Company and Mylan;
by either the Company or Mylan, if:

the transaction has not been consummated by March 31, 2017 or such other date as the parties may agree in writing (the “Termination Date”) (subject to certain exceptions); provided, that Mylan may, in its sole discretion, upon written notice to the Company extend the Termination Date for up to 30 days;
a governmental entity or court issues an order, decree, ruling or other action which permanently restrains, enjoins or otherwise prohibits the completion of the sale of the Acquired Assets; or
our stockholders do not approve the proposed transaction.

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by Mylan, upon written notice to the Company, if:

the Company materially breaches any representation, warranty, covenant or agreement such that Mylan’s conditions to closing would not be satisfied, subject to the Company’s opportunity to cure the breach as provided in the Asset Purchase Agreement;
our board of directors withdraws its recommendation to stockholders to vote in favor of the approval of Proposal No. 1; or
our management or board of directors, for any reason, fails to call and hold, within 60 days of the filing of this proxy statement, a special meeting to consider and approve the Asset Purchase Agreement or fails to include its recommendation to stockholders to vote in favor of the approval of Proposal No. 1 in the proxy statement; provided that such 60 day period will be automatically extended to 120 days in the event ProPhase is working in good faith to reconcile any outstanding claims, causes of action or comments of the SEC.

by the Company, if:

Mylan materially breaches any representation, warranty, covenant or agreement such that the Company’s conditions to closing would not be satisfied, subject to Mylan’s opportunity to cure the breach as provided in the Asset Purchase Agreement; or
our board of directors authorizes a Seller Superior Offer and substantially concurrent with the termination of the Asset Purchase Agreement, we enter into an agreement with such Seller Superior Offer that did not result from a material breach of the Asset Purchase Agreement.

Effect of Termination

If the Asset Purchase Agreement is terminated because of any the reasons described above, the Asset Purchase Agreement will be of no further force or effect, except for certain specified obligations, including the return of information to the party furnishing the information and the preservation of confidentiality. In limited circumstances, described in the section below entitled “Payment of Termination Fee,” we may be obligated to pay Mylan a termination fee at or following the termination of the Asset Purchase Agreement. Neither party will be relieved from liability for any intentional breach of the Asset Purchase Agreement.

Payment of Termination Fee

The Asset Purchase Agreement requires us to pay Mylan a termination fee if the agreement is terminated prior to completion under certain cases. Specifically, if Mylan terminates the Asset Purchase Agreement as a result of a triggering event (as described above under “Termination of the Asset Purchase Agreement”) or if we terminate the Asset Purchase Agreement as a result of having received a Seller Superior Offer, then we must pay Mylan a termination fee equal to $1,500,000 upon the earlier of (i) 90 days after termination of the Asset Purchase Agreement and (ii) the closing of the transaction with respect to a Seller Superior Offer.

If the Asset Purchase Agreement is terminated due to a material breach of the Asset Purchase Agreement by Mylan that would cause the closing conditions not to be satisfied or due to any decree, judgment injunction or other order permanently restraining, enjoining or otherwise prohibiting Mylan from consummating the transactions contemplated by the Asset Purchase Agreement, Mylan will be required to pay us a termination fee in the amount of $5,000,000.

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Survival of Representations

Generally, t he representations and warranties contained in the Asset Purchase Agreement (other than the Fundamental Representations) will survive the closing until the 24 month anniversary of the closing date. The Fundamental Representations will survive the closing until the expiration of the statute of limitations. The covenants and agreements contained in the Asset Purchase Agreement requiring performance after the closing date will survive in accordance with their respective terms.

Our Indemnification Obligations

Subject to the limitations in the Asset Purchase Agreement, we have agreed to indemnify Mylan and other related persons for any damages incurred by Mylan or such related persons in connection with any breaches of our representations, warranties, covenants or agreements contained in the Asset Purchase Agreement, or in connection with the Retained Liabilities, and certain third party claims specified in the Asset Purchase Agreement. Generally, our representations and warranties survive for a period of 24 months after the closing date, other than the Fundamental Representations which survive until the expiration of the applicable statute of limitations, and Mylan may assert claims for indemnity during that period. In addition, there exists a limited indemnification cap with respect to a majority of the Company’s indemnification obligations with the exception of actual fraud, the breach of Fundamental Representations and certain other items, which have a larger indemnification cap (e.g., the Purchase Price).

Mylan’s Indemnification Obligations

Mylan has agreed to indemnify us and other related persons for any damages incurred in connection with a breach of its representations and warranties, covenants and agreements contained in the Asset Purchase Agreement, and in connection with the Assumed Liabilities and certain third party claims specified in the Asset Purchase Agreement. Mylan’s representations and warranties survive for a period of 24 months after the closing date, and we may assert claims for indemnity during that period. In addition, there exists a limited indemnification cap with respect to a majority of Mylan’s indemnification obligations with the exception of actual fraud and certain other items, which have a larger indemnification cap (e.g., the Purchase Price).

Expenses

Except as otherwise provided in the Asset Purchase Agreement, all costs and expenses incurred in connection with the Asset Purchase Agreement and the transactions contemplated thereby will be paid by the party incurring such costs and expenses.

Other Agreements Relating to the Proposed Transaction

Below is a description of the various ancillary agreements to be entered into in connection with the Asset Purchase Agreement (the “Transaction Documents”).

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Manufacturing Agreement

Pursuant to the terms of the Asset Purchase Agreement, Mylan, ProPhase and PMI, our wholly owned subsidiary, will enter into a Manufacturing Agreement at closing. Pursuant to the terms of the Manufacturing Agreement, Mylan will purchase the current inventory of the Cold-EEZE ® Business and PMI will manufacture certain of the Products for Mylan. Unless terminated sooner by the parties, the Manufacturing Agreement will remain in effect for a period of five years from the closing date. Thereafter, the Manufacturing Agreement may be renewed by Mylan for up to five successive one year periods by providing notice of its intent to renew not less than 90 days prior to the expiration of the then-current term. PMI’s liability arising under the Manufacturing Agreement will not exceed a specified amount, excluding third party claims for bodily injury or death from PMI’s gross negligence or willful misconduct.

Transition Services Agreement

Pursuant to the terms of the Asset Purchase Agreement, Mylan and ProPhase will enter into a Transition Services Agreement at closing. Pursuant to the terms of the Transition Services Agreement, ProPhase will provide litigation support, insurance coverage, supply chain, customer support, finance, accounting, commercial advertising and packaging services, quality control, IT and research and development services to Mylan for time periods ranging from two to nine months from the closing date.

Rights Agreement Amendment

On January 5, 2017, prior to the execution of the Asset Purchase Agreement, the board of directors of the Company approved an amendment (the “Amendment to Rights Agreement”) to the Rights Agreement. The Amendment to Rights Agreement was executed on January 6, 2017, immediately prior to the execution of the Asset Purchase Agreement.

The Amendment to Rights Agreement renders the Rights Agreement inapplicable to the Asset Purchase Agreement, the Voting Agreement and the transactions contemplated thereby. Specifically, the Amendment to Rights Agreement, among other matters, provides that none of (i) the approval, execution, delivery, performance or public announcement of the Asset Purchase Agreement (including any amendments, modifications or supplements thereto), (ii) the consummation of the transactions contemplated by the Asset Purchase Agreement, or (iii) the execution, delivery or performance of the Voting Agreements described below will result in Mylan or any of their respective Affiliates or Associates (as such terms are defined in the Rights Agreement) being deemed an “Acquiring Person.”

In addition, the definition of “Beneficial Owner” under the Rights Agreement was revised such that it no longer includes beneficial ownership of securities that may result from the execution, delivery or performance of the Voting Agreements.

Further, Section 13(i) of the Rights Agreement will not apply to the sale of the Acquired Assets to Mylan or as a result of execution, delivery or performance of the Voting Agreements, and will not apply to Mylan as an “other Person,” provided that neither individual becomes an “Acquiring Person” (as such term is defined in the Rights Agreement).

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Escrow Agreement

Pursuant to the terms of the Asset Purchase Agreement, Mylan, ProPhase and the Escrow Agent will enter into an Escrow Agreement at closing, pursuant to which Mylan will deposit $5,000,000 of the Purchase Price into an escrow account established with the Escrow Agent in order to satisfy, in whole or in part, certain indemnity obligations of ProPhase under the Asset Purchase Agreement. If, on the 18 th month anniversary of the closing date, there are funds remaining in the escrow account, then the escrow account will be reduced by the difference, if a positive number, of (i) $2,500,000 minus (ii) the aggregate amount of all escrow claims asserted by Mylan prior to this date that have either been paid out of the escrow account or are pending as of such date, and, within two business days of such date, the Escrow Agent will disburse such difference, if a positive number, to ProPhase. Within two business days of the second anniversary of the closing date, the Escrow Agent will release any funds remaining in the escrow account to ProPhase minus any amounts being reserved for escrow claims asserted by Mylan prior to such date. Upon the resolution of any pending escrow claims, the Escrow Agent will, within two business days of receipt of joint instructions or a final order from a court (as described in the Escrow Agreement) disburse such reserved amount to the parties entitled to such funds.

Voting Agreements

On January 6, 2017, in connection with the execution of the Asset Purchase Agreement, Mylan and each of our directors and Robert V. Cuddihy, Jr. (solely in their capacity as stockholders of the Company) entered into a Voting Agreement (collectively, the “Voting Agreements”). The shares subject to the Voting Agreements represent approximately 24.1% of the outstanding common stock of the Company. The Voting Agreements generally require that the stockholders party thereto (i) vote all of their shares of the Company’s voting stock in favor of the Asset Purchase Agreement and all transactions contemplated by the Asset Purchase Agreement; (ii) vote against any alternative transaction or third party proposal; (iii) not transfer their shares or deposit (or permit the deposit of) any of their shares in a voting trust or grant a proxy or enter into any voting agreement or similar agreement in contravention of the obligations of the stockholders under the Voting Agreement; and (iv) not take any action that would constitute a violation of the non-solicitation provisions of the Asset Purchase Agreement if taken by the Company, with the limitations and exceptions of such provisions contemplated thereby that are applicable to the Company or its board of directors being similarly applicable to the stockholders. The Voting Agreements terminate upon the first to occur of (x) the termination of the Asset Purchase Agreement, or (y) such date and time as transaction becomes effective in accordance with the terms and provisions of the Asset Purchase Agreement.

Vote Required and Board Recommendation

The approval of the sale of the Acquired Assets to Mylan requires the affirmative vote of the holders of a majority of the outstanding shares of our common stock entitled to vote on this matter.

Our board of directors unanimously believes that the proposed sale to Mylan pursuant to, and the other transactions contemplated by, the Asset Purchase Agreement are in the best interests of our company and our stockholders and unanimously recommends that stockholders vote “FOR” the proposal to sell the Acquired Assets to Mylan pursuant to the Asset Purchase Agreement, including the transactions contemplated thereby.

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UNAUDITED PRO FORMA FINANCIAL INFORMATION

We are providing the following information to aid you in your financial analysis of the proposed asset sale. The following unaudited pro forma condensed consolidated financial data gives effect to the sale of the Acquired Assets. The unaudited pro forma consolidated balance sheet as of September 30, 2016 has been prepared assuming the sale of the Acquired Assets occurred as of that date. The unaudited pro forma consolidated statements of operations for the nine months ended September 30, 2016 and the years ended December 31, 2015 and 2014 have been prepared in accordance with the SEC’s pro forma rules under S-X Article 11 assuming that the sale of the Acquired Assets occurred as of January 1, of each period presented. All material adjustments required to reflect the sale of the Acquired Assets are set forth in the columns labeled “Pro Forma Adjustments.” The data contained in the columns labeled “ProPhase As Reported” is derived from ProPhase’s historical unaudited consolidated balance sheet as of September 30, 2016 and unaudited consolidated statement of operations for the nine month period ended September 30, 2016, and ProPhase’s historical audited consolidated statements of operations for the years ended December 31, 2015 and 2014. We have assumed that of the total consideration of $50 million, $45 million in cash will be paid to us at closing and $5 million will be held in escrow. The unaudited pro forma condensed consolidated financial data is presented for informational purposes only and is not necessarily indicative of the results of future operations or future financial position of the Company or the actual results of operations or financial position that would have occurred had the sale of the Acquired Assets been consummated as of the dates indicated above.

The pro forma adjustments were based upon available information at the date of this filing and upon certain assumptions as described in the notes to the unaudited pro forma condensed consolidated financial statements that our management believes are reasonable under the circumstances.

The pro forma financial statements do not include severance payments, restructuring expenses, additional compensation expenses or anticipated overhead and operating expenses associated with the fulfillment of the manufacturing services agreements and transition services agreement. Furthermore, we can estimate approximately $2.1 million of state income taxes arising from this transaction. However, because this transaction will be reported as a 2017 taxable event with respect to federal corporate income taxes, and because our 2017 federal income tax liability cannot be accurately estimated until 2017 financial results are more certain, we cannot accurately estimate the extent of our 2017 federal income tax expenses and the extent to which our net operating loss carryforwards will offset our 2017 federal corporate income tax expense.

The unaudited pro forma consolidated financial statements and accompanying notes should be read in conjunction with our historical consolidated financial statements and accompanying notes thereto, and our “Management’s Discussion and Analysis of Financial Condition and Results of Operation”, in our Annual Report on Form 10-K for the years ended December 31, 2015 and 2014 and our Quarterly Report on Form 10-Q for the nine months ended September 30, 2016, copies of which will be sent to you upon request as described at the end of this proxy statement.

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PROPHASE LABS, INC.
UNAUDITED PRO FORMA BALANCE SHEET
AS OF September 30, 2016
(in thousands, except share amounts)
ProPhase Pro Forma ProPhase
As Reported Adjustments As Adjusted
ASSETS
Cash and cash equivalents $ 375 $ 42,825 (a) $ 41,646
(1,554 )(b)
Accounts receivable, net 3,833 3,833
Inventory 4,198 (1,393 )(d) 2,805
Assets held for sale 1,393 (d) 1,393
Prepaid expenses and other current assets 1,329 1,329
Total current assets 9,735 51,006
Property, plant and equipment, net 3,052 (18 )(c) 3,034
Escrow receivable 5,000 (a) 5,000
Total assets $ 12,787 $ 59,040
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Secured promissory notes, net $ 1,484 (1,484 )(b) $
Accounts payable 1,968 1,968
Accrued advertising and other allowances 2,298 2,298
Income tax payable 2,100 (a) 2,100
Other current liabilities 503 (54 )(b) 449
Total current liabilities 6,253 6,815
COMMITMENT AND CONTIGENCIES
STOCKHOLDERS' EQUITY
Preferred stock
Common stock 13 13
Additional paid-in-capital 56,378 56,378
Retained earnings (accumulated deficit) (19,115 ) 45,725 (a) 26,576
(16 )(b)
(18 )(c)
Treasury stock (30,742 ) (30,742 )
Total stockholders' equity 6,534 52,225
Total liabilities and stockholders' equity $ 12,787 $ 59,040

See accompanying notes to unaudited Pro Forma consolidated financial statements

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PROPHASE LABS, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Nine Months Ended September 30, 2016 Year Ended  December 31, 2015 Year Ended  December 31, 2014
ProPhase Pro Forma ProPhase ProPhase Pro Forma ProPhase ProPhase Pro Forma ProPhase
As Reported Adjustments As Adjusted As Reported Adjustments As Adjusted As Reported Adjustments As Adjusted
Net sales $ 13,405 $ (10,005 )(e) $ 5,739 $ 20,604 $ (18,171 )(e) $ 6,670 $ 22,070 $ (20,629 )(e) $ 6,556
2,339 (f) 4,237 (f) 5,115 (f)
Cost of sales 7,185 (3,931 )(e) 5,033 8,426 (6,335 )(e) 5,363 7,891 (7,547 )(e) 4,304
1,779 (f) 3,272 (f) 3,960 (f)
Gross profit 6,220 706 12,178 1,307 14,179 2,252
Operating expenses:
Sales and marketing 4,043 (3,366 )(e) 677 7,698 (7,336 )(e) 362 8,965 (8,624 )(e) 341
Administration 3,941 3,941 6,986 6,986 8,143 8,143
Research and development 374 (48 )(e) 326 1,078 (40 )(e) 1,038 1,322 (32 )(e) 1,290
Impairment charge - - - - 3,577 3,577
8,358 4,944 15,762 8,386 22,007 13,351
Loss from operations (2,138 ) (4,238 ) (3,584 ) (7,079 ) (7,828 ) (11,099 )
Interest income 1 1 2 2 4 4
Interest expense (159 ) 159 (g) - (18 ) 18 (g) - (10 ) (g) (10 )
Loss before income tax (2,296 ) (4,237 ) (3,600 ) (7,077 ) (7,834 ) (11,105 )
Income tax - - - - - -
Net loss $ (2,296 ) $ (4,237 ) $ (3,600 ) $ (7,077 ) $ (7,834 ) $ (11,105 )
Basic and diluted loss per share:
Net loss $ (0.13 ) $ (0.25 ) $ (0.22 ) $ (0.43 ) $ (0.47 ) $ (0.66 )
Weighted average common shares outstanding: