UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the quarterly period ended
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _____to _____
Commission
file number
| (Exact name of registrant as specified in its charter) |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
| (Address of principal executive office) | (Zip Code) |
| (Registrant’s telephone number, including area code) |
Securities Registered Pursuant to Section 12(b) of the Exchange Act:
| Title of Each Class | Trading Symbol | Name of Each Exchange on Which Registered | ||
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2)
has been subject to such filing requirements for the past 90 days.
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T during the preceding 12 months (or shorter period that the registration was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company, See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ |
| Smaller
reporting company | |
| Emerging
growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
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Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
| Class | Outstanding August 13, 2021 | |
| Common Stock, $0.0005 par value |
ProPhase Labs, Inc. and Subsidiaries
TABLE OF CONTENTS
| 2 |
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
ProPhase Labs, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in thousands, except share and per share amounts)
| June 30, | December 31, | |||||||
| 2021 | 2020 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Marketable debt securities, available for sale | ||||||||
| Marketable equity securities, available for sale | - | |||||||
| Accounts receivable, net | ||||||||
| Inventory, net | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| Property, plant and equipment, net | ||||||||
| Secured promissory note receivable | ||||||||
| Prepaid expenses, net of current portion | ||||||||
| Right-of-use asset, net | ||||||||
| Intangible asset, net | ||||||||
| Goodwill | ||||||||
| Other assets | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued advertising and other allowances | ||||||||
| Lease liabilities | ||||||||
| Other current liabilities | ||||||||
| Total current liabilities | ||||||||
| Non-current liabilities: | ||||||||
| Deferred revenue, net of current portion | ||||||||
| Unsecured convertible promissory notes, net | ||||||||
| Lease liabilities, net of current portion | ||||||||
| Total non-current liabilities | ||||||||
| Total liabilities | ||||||||
| COMMITMENTS AND CONTINGENCIES | ||||||||
| Stockholders’ equity | ||||||||
| Preferred stock authorized , $ par value, shares issued and outstanding | - | - | ||||||
| Common stock authorized , $ par value, issued and shares, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Treasury stock, at cost, and shares, respectively | ( | ) | ( | ) | ||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| Total stockholders’ equity | ||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | $ | ||||||
See accompanying notes to condensed consolidated financial statements
| 3 |
ProPhase Labs, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
and Other Comprehensive Loss
(in thousands, except per share amounts)
(unaudited)
| For the three months ended | For the six months ended | |||||||||||||||
| June 30, 2021 | June 30, 2020 | June 30, 2021 | June 30, 2020 | |||||||||||||
| Revenues, net | $ | $ | $ | $ | ||||||||||||
| Cost of revenues | ||||||||||||||||
| Gross profit | ||||||||||||||||
| Operating expenses: | ||||||||||||||||
| Diagnostic expenses | - | - | ||||||||||||||
| General and administration | ||||||||||||||||
| Research and development | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Income (loss) from operations | ( | ) | ( | ) | ( | ) | ||||||||||
| Interest income, net | ||||||||||||||||
| Interest expense | ( | ) | - | ( | ) | - | ||||||||||
| Change in fair value of investment securities | ||||||||||||||||
| Net income (loss) | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | ||||||
| Other comprehensive loss: | ||||||||||||||||
| Unrealized gain (loss) on marketable debt securities | ( | ) | ( | ) | ( | ) | ||||||||||
| Total comprehensive income (loss) | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | ||||||
| Earnings (loss) per share: | ||||||||||||||||
| Basic | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | ||||||
| Diluted | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | ||||||
| Weighted average common shares outstanding: | ||||||||||||||||
| Basic | ||||||||||||||||
| Diluted | ||||||||||||||||
See accompanying notes to condensed consolidated financial statements
| 4 |
ProPhase Labs, Inc. and Subsidiaries
Condensed Consolidated Statements of Stockholders’ Equity
(in thousands, except share data)
(unaudited)
| For the Three Months Ended June 30, 2021 | ||||||||||||||||||||||||||||
| Common Stock Shares Outstanding, Net of Shares of Treasury Stock | Par Value | Additional Paid in Capital | Accumulated Deficit | Accumulated Comprehensive Income (Loss) | Treasury Stock | Total | ||||||||||||||||||||||
| Balance as of April 1, 2021 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||
| Cash dividends | - | - | ( | ) | - | - | - | ( | ) | |||||||||||||||||||
| Unrealized
loss on marketable debt securities, net of realized gains of $ | - | - | - | - | ( | ) | - | ( | ) | |||||||||||||||||||
| Stock-based compensation | - | - | - | - | ||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | - | - | ( | ) | |||||||||||||||||||
| Balance as of June 30, 2021 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||
| For the Three Months Ended June 30, 2020 | ||||||||||||||||||||||||||||
| Common Stock Shares Outstanding, Net of Shares of Treasury Stock | Par Value | Additional Paid in Capital | Retained Earnings | Accumulated Comprehensive Income (Loss) | Treasury Stock | Total | ||||||||||||||||||||||
| Balance as of April 1, 2020 | $ | $ | $ | ( | ) | $ | | $ | ( | ) | $ | |||||||||||||||||
| Unrealized
loss on marketable debt securities, net of realized gains of $ | - | - | - | - | ( | ) | - | ( | ) | |||||||||||||||||||
| Stock-based compensation | - | - | - | - | ||||||||||||||||||||||||
| Net income | - | - | - | - | - | |||||||||||||||||||||||
| Balance as of June 30, 2020 | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||||||||||||
| For the Six Months Ended June 30, 2021 | ||||||||||||||||||||||||||||
| Common Stock Shares Outstanding, Net of Shares of Treasury Stock | Par Value | Additional Paid in Capital | Accumulated Deficit | Accumulated Comprehensive Income (loss) | Treasury Stock | Total | ||||||||||||||||||||||
| Balance as of January 1, 2021 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||
| Issuance
of common stock and warrants for cash from public offering, net of $ | - | - | - | |||||||||||||||||||||||||
| Issuance of common stock and warrants for cash from private offering | - | - | - | - | ||||||||||||||||||||||||
| Cash dividends | - | - | ( | ) | - | - | - | ( | ) | |||||||||||||||||||
| Unrealized loss on marketable debt securities, net of taxes | - | - | - | - | ( | ) | - | ( | ) | |||||||||||||||||||
| Stock-based compensation | - | - | - | - | ||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | - | - | ( | ) | |||||||||||||||||||
| Balance as of June 30, 2021 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||
| For the Six Months Ended June 30, 2020 | ||||||||||||||||||||||||||||
| Common Stock Shares Outstanding, Net of Shares of Treasury Stock | Par Value | Additional Paid in Capital | Accumulated Deficit | Accumulated Comprehensive Income (loss) | Treasury Stock | Total | ||||||||||||||||||||||
| Balance as of January 1, 2020 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||
| Unrealized
loss on marketable debt securities, net of realized losses of $ | - | - | - | - | - | |||||||||||||||||||||||
| Stock-based compensation | - | - | - | - | ||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | - | - | ( | ) | |||||||||||||||||||
| Balance as of June 30, 2020 | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||||||||||||
See accompanying notes to condensed consolidated financial statements
| 5 |
ProPhase Labs, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
| For the six months ended | ||||||||
| June 30, 2021 | June 30, 2020 | |||||||
| Cash flows from operating activities | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | ||||||||
| Realized loss on marketable debt securities | - | |||||||
| Depreciation and amortization | ||||||||
| Amortization of debt discount | - | |||||||
| Amortization on right-of-use assets | - | |||||||
| Lower of cost or net realizable value inventory adjustment | - | |||||||
| Stock-based compensation expense | ||||||||
| Change in fair value of investment securities | ( | ) | - | |||||
| Non-cash interest income on secured promissory note receivable | ( | ) | - | |||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ||||||
| Escrow receivable | - | |||||||
| Inventory | ( | ) | ( | ) | ||||
| Prepaid and other assets | ||||||||
| Other assets | ( | ) | - | |||||
| Accounts payable and accrued expenses | ||||||||
| Lease liabilities | - | |||||||
| Other liabilities | ||||||||
| Net cash (used in) provided by operating activities | ( | ) | ||||||
| Cash flows from investing activities | ||||||||
| Issuance of secured promissory note receivable | ( | ) | - | |||||
| Purchase of marketable securities | ( | ) | ( | ) | ||||
| Proceeds from sale of marketable debt securities | ||||||||
| Capital expenditures | ( | ) | ( | ) | ||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Cash flows from financing activities | ||||||||
| Proceeds from issuance of common stock from public offering, net | - | |||||||
| Proceeds from issuance of common stock and warrants from private offering | - | |||||||
| Payment of dividends | ( | ) | ||||||
| Net cash provided by financing activities | - | |||||||
| Increase in cash and cash equivalents | ||||||||
| Cash and cash equivalents, at the beginning of the period | ||||||||
| Cash and cash equivalents, at the end of the period | $ | $ | ||||||
| Supplemental disclosures: | ||||||||
| Cash paid for income taxes | $ | $ | ||||||
| Interest payment on the promissory notes | $ | $ | ||||||
| Supplemental disclosure of non-cash investing and financing activities: | ||||||||
| Net unrealized gain (loss), investments in marketable debt securities | $ | ( | ) | $ | ||||
See accompanying notes to condensed consolidated financial statements
| 6 |
ProPhase Labs, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
Note 1 – Organization and Business
ProPhase Labs, Inc. (“ProPhase”, “we”, “us”, “our” or the “Company”) is a diversified biotech and genomics company with deep experience with over-the- counter (“OTC”) consumer healthcare products and dietary supplements. We currently conduct our operations through two operating segments: diagnostic services and consumer products. Until late Fiscal 2020, we were engaged primarily in the research, development, manufacture, distribution, marketing and sale of OTC consumer healthcare products and dietary supplements in the United States. However, commencing in December 2020, we also began offering COVID-19 and other Respiratory Pathogen Panel (RPP) molecular tests through our new diagnostic services business.
Our
wholly-owned subsidiary, ProPhase Diagnostics, Inc. (“ProPhase Diagnostics”), which was formed on October 9, 2020,
offers a variety of medical tests, including COVID-19 and Respiratory Pathogen Panel (RPP) molecular tests. On October 23, 2020, we completed
the acquisition of all of the issued and outstanding shares of Confucius Plaza Medical Laboratory Corp. (“CPM”), which
operates a 4,000 square foot Clinical Laboratory Improvement Amendments (“CLIA”) accredited laboratory located in Old Bridge,
New Jersey, for approximately $
Our wholly-owned subsidiary, Pharmaloz Manufacturing, Inc. (“PMI”), is a full-service contract manufacturer and private label developer of a broad range of non- GMO, organic and natural-based cough drops and lozenges and OTC drug and dietary supplement products.
On August 10, 2021, we acquired Nebula Genomics, Inc., a privately owned personal genomics company, through our new wholly-owned subsidiary, ProPhase Precision Medicine, Inc. (see Note 15, Subsequent Events).
In addition, we continue to actively pursue acquisition opportunities for other companies, technologies and products within and outside the consumer products industry.
We use a December 31 year-end for financial reporting purposes. References herein to “Fiscal 2020” mean the fiscal year ended December 31, 2020 and references to other “Fiscal” years mean the year that ended on December 31 of the year indicated. The term “we”, “us” or the “Company” as used herein also refer, where appropriate, to the Company, together with its subsidiaries unless the context otherwise requires.
Note 2 – Summary of Significant Accounting Policies
Basis of Presentation
The unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial statements and the rules of the Securities and Exchange Commission (“SEC”) applicable to interim financial statements, and therefore do not include all disclosures that might normally be required for financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The accompanying unaudited condensed consolidated financial statements have been prepared by management without audit and should be read in conjunction with our audited consolidated financial statements, including the notes thereto, appearing in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020. In the opinion of management, all adjustments necessary for a fair presentation of the consolidated financial position, consolidated results of operations and other comprehensive loss and consolidated cash flows, for the periods indicated, have been made. The results of operations for the six months ended June 30, 2021 are not necessarily indicative of operating results that may be achieved over the course of the full year.
| 7 |
Segments
Operating segments are defined as components of an enterprise that engage in business activities for which separate financial information is available and is evaluated by the Chief Operating Decision Maker (“CODM”), which for the Company is its Chief Executive Officer, in deciding how to allocate resources and assess performance. For the six months ended June 30, 2021, we maintain two operating segments: diagnostic services and consumer products. For the six months ended June 30, 2020, we only had the consumer products operating segment. (see Note 14, Segment Information).
Business and Liquidity Uncertainties
For the six months ended June 30, 2021, our net revenues were derived from both our diagnostic services and consumer products segments. For the six months ended June 30, 2020, our net revenues were derived solely from our consumer products segment.
The diagnostic service business commenced in December 2020 and expanded in February 2021 with the opening of our new Garden City, New York CLIA accredited laboratory. Our diagnostic service business is and will continue to be influenced by the level of demand for COVID-19 and other diagnostic testing, the price we are able to receive for performing our testing services, and the length of time for which that demand persists, as well as the availability of COVID-19 testing from other laboratories and the period of time for which we are able to serve as an authorized laboratory offering COVID-19 testing under various Emergency Use Authorizations.
While our revenues increased for the six months ended June 30, 2021 as a result of our new diagnostic services business line, we have made and will continue to make substantial investments to secure the necessary equipment, supplies and personnel to provide these testing services. There can be no assurance that our efforts to offer and perform COVID-19 or other diagnostic testing will be successful in the future or that the revenue and operating profits from such business will increase or maintain their current level.
There are still numerous uncertainties associated with the COVID-19 pandemic, including the efficacy of the vaccines that have been developed to treat the virus and their ability to protect against new strains of the virus, people’s willingness to receive a vaccine, possible resurgences of the coronavirus and/or new strains of the virus, the extent and duration of protective and preventative measures that may be adopted by local, state and/or the federal government in the future as a result of future outbreaks, the duration of any future business closures, the ongoing impact of COVID-19 on the U.S. and world economy and consumer confidence, and various other uncertainties.
The COVID-19 pandemic has also had a negative impact on the global capital markets and economies worldwide and could ultimately have a material adverse impact on our ability to raise capital needed to operate our business.
Our consumer sales are influenced by and subject to (i) the timing of acceptance of our TK Supplements® consumer products in the marketplace, and (ii) fluctuations in the timing of purchase and the ultimate level of demand for the OTC healthcare and cold remedy products that we manufacture for others, which are a function of the timing, length and severity of each cold season. Generally, a cold season is defined as the period from September to March when the incidence of the common cold rises as a consequence of the change in weather and other factors. We generally experience in the first, third and fourth quarter higher levels of net sales from our contract manufacturing of OTC healthcare and cold remedy products. Revenues are generally at their lowest levels in the second quarter when customer demand generally declines.
| 8 |
Use of Estimates
The preparation of financial statements and the accompanying notes thereto, in conformity with GAAP, requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the respective reporting periods. Examples include the provision for bad debt, sales returns and allowances, diagnostic services reimbursements, inventory obsolescence, useful lives of property and equipment, impairment of goodwill, intangibles and property and equipment, income tax valuations and assumptions related to accrued advertising. These estimates and assumptions are based on historical experience, current trends and other factors that management believes to be relevant at the time the financial statements are prepared. Management reviews the accounting policies, assumptions, estimates and judgments on a quarterly basis. Actual results could differ from those estimates.
Cash and Cash Equivalents
We consider all highly liquid investments with a maturity of three months or less at the time of purchase to be cash equivalents. Cash equivalents include cash on hand and monies invested in money market funds. The carrying amount approximates the fair market value due to the short-term maturity of these securities.
Marketable Debt Securities
We
have classified our investments in marketable debt securities as available-for-sale and as a current asset. Our investments in marketable
debt securities are carried at fair value, with unrealized gains an as a separate component of stockholders’ equity. Realized gains
and losses from our marketable debt securities are recorded as interest income (expense). These investments in marketable debt securities,
carry maturity dates between one and three years from date of purchase and interest rates of
| As of June 30, 2021 | ||||||||||||
| Amortized | Unrealized | Fair | ||||||||||
| Cost | Losses | Value | ||||||||||
| U.S. government obligations | $ | $ | ( | ) | $ | |||||||
| Corporate obligations | ( | ) | ||||||||||
| $ | $ | ( | ) | $ | ||||||||
| As of December 31, 2020 | ||||||||||||
| Amortized | Unrealized | Fair | ||||||||||
| Cost | Losses | Value | ||||||||||
| U.S. government obligations | $ | $ | ( | ) | $ | |||||||
| Corporate obligations | ( | ) | ||||||||||
| $ | $ | ( | ) | $ | ||||||||
| 9 |
We believe that the unrealized gains or losses generally are the result of a change in the risk premiums required by market participants rather than an adverse change in cash flows or a fundamental weakness in the credit quality of the issuer or underlying assets.
Marketable Equity Securities
Marketable equity securities are recorded at fair value in the consolidated balance sheets. The change in fair value of marketable equity securities is recognized within other non-operating income, net in the consolidated statements of income.
On
June 25, 2021, we were issued common
shares (the “Investment Shares”) by the consultant as an interest payment under the Secured Note (see note 13) with a
fair value of $.
The fair value of the Investment Shares as of June 30, 2021 was based upon the closing stock price of $per
share. The investment was classified as a Level 1 financial instrument. We recorded a $
Inventories, net
Inventory
is valued at the lower of cost, determined on a first-in, first-out basis (FIFO), or net realizable value. Inventory items are analyzed
to determine cost and the net realizable value and appropriate valuation adjustments are then established. At June 30, 2021 and December
31, 2020, the financial statements include non-cash adjustments to adjust inventory for excess, obsolete or short-dated shelf-life inventory
by $
| June 30, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Diagnostic services testing material | $ | $ | ||||||
| Raw materials | ||||||||
| Work in process | ||||||||
| Finished goods | ||||||||
| $ | $ | |||||||
Property, Plant and Equipment
Property,
plant and equipment are recorded at cost. We use the straight-line method in computing depreciation for financial reporting purposes.
Depreciation expense is computed in accordance with the following
We did not identify any indicators of our property, plant and equipment for the six months ended June 30, 2021 and 2020 and concluded there were no impairments or changes in useful lives.
Concentration of Risks
Future revenues, costs, margins and profits will continue to be influenced by our ability to maintain our manufacturing availability and capacity together with our marketing and distribution capabilities and the regulatory requirements associated with the development of OTC consumer healthcare products, dietary supplements and other remedies in order to compete on a national level and/or international level. Our diagnostic services business will be influenced by demand for our diagnostic testing services, particularly COVID-19, as well as our marketing and service capabilities and regulatory requirements associated with operating under and maintaining our CLIA license.
Our business is subject to federal and state laws and regulations adopted for the health and safety of users of our products. The manufacturing and distribution of OTC healthcare and dietary supplement products are subject to regulations by various federal, state and local agencies, including the Food and Drug Administration (“FDA”) and, as applicable, the Homeopathic Pharmacopoeia of the United States. The FDA is also responsible for the regulation of diagnostic testing instruments, test kits, reagents and other devices used by clinical laboratories.
Financial instruments that potentially subject us to significant concentrations of credit risk consist principally of cash investments, marketable debt securities, and trade accounts receivable. Our marketable securities are fixed income investments, which are highly liquid and can be readily purchased or sold through established markets.
We
maintain cash and cash equivalents with certain major financial institutions. As of June 30, 2021, our cash and cash equivalents balance
were $
| 10 |
Accounts receivable subject us to credit risk concentrations from time-to-time. We extend credit to our consumer healthcare product customers based upon an evaluation of the customer’s financial condition and credit history and generally do not require collateral. Our diagnostic services receivable credit risk is based on payer reimbursement experience, which includes government agencies and healthcare insurers, the period the receivables have been outstanding and the historical collection. The collectability of the diagnostic services receivables is also directly linked to the quality of our billing processes, which depend on information provided and billing services of third parties. These credit concentrations impact our overall exposure to credit risk, which could be further affected by changes in economic, regulatory or other conditions that may impact the timing and collectability of trade receivables and diagnostic test receivables. Additionally, the reimbursement receivables from the diagnostic service business are subject to billing errors and related disputes.
We also assess the financial condition of the debtor under the Secured Note (see Note 13), balances due to us and other factors, and based on this assessment, we did not offset our note receivable with an allowance at June 30, 2021 and June 30, 2020.
Leases
At the inception of an arrangement, we determine whether the arrangement is or contains a lease based on the unique facts and circumstances present in the arrangement. Most leases with a term greater than one year are recognized on the balance sheet as right-of-use assets and short-term and long-term lease liabilities, as applicable. We have elected not to recognize on the balance sheet leases with terms of 12 months or less. We typically only include an initial lease term in its assessment of a lease arrangement. Options to renew a lease are not included in our assessment unless there is reasonable certainty that we will renew.
Operating lease liabilities and their corresponding right-of-use assets are recorded based on the present value of lease payments over the expected remaining lease term. Certain adjustments to the right-of-use asset may be required for items such as incentives received. The interest rate implicit in our leases is typically not readily determinable. As a result, we utilize our incremental borrowing rate, which reflects the fixed rate at which we could borrow on a collateralized basis the amount of the lease payments in the same currency, for a similar term and in a similar economic environment (see Note 10, Lease).
The components of a lease should be allocated between lease components (e.g., land, building, etc.) and non-lease components (e.g., common area maintenance, consumables, etc.). The fixed and in-substance fixed contract consideration (including any consideration related to non-components) must be allocated based on the respective relative fair values to the lease components and non-lease components.
Goodwill and Long-lived Assets
We review our goodwill at least annually for impairment as well as the carrying value of goodwill and our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of these assets may not be fully recoverable. When it is determined that the carrying amount of long-lived assets or goodwill is impaired, impairment is measured by comparing an asset’s estimated fair value to its carrying value. The determination of fair value is based on quoted market prices in active markets, if available, or independent appraisals; sales price negotiations; or projected future cash flows discounted at a rate determined by management to be commensurate with our business risk. The estimation of fair value utilizing discounted forecasted cash flows includes significant judgments regarding assumptions of revenue, operating and marketing costs; selling and administrative expenses; interest rates; property and equipment additions and retirements; and industry competition, general economic and business conditions, among other factors.
Management has determined that there was no impairment to our long-lived assets and goodwill on the basis of a review of a discounted cash flow analysis, which for goodwill is performed at the level of the subsidiaries to which the goodwill relates. There were no events or circumstances that required an assessment to be performed on our long-lived assets with definite lives. If there is a material change in the assumptions used in the determination of fair value or a material change in the conditions or circumstances influencing fair value, we could be required to recognize a material impairment charge.
| 11 |
Fair Value of Financial Instruments
We measures assets and liabilities at fair value based on expected exit price as defined by the authoritative guidance on fair value measurements, which represents the amount that would be received on the sale date of an asset or paid to transfer a liability, as the case may be, in an orderly transaction between market participants. As such, fair value may be based on assumptions that market participants would use in pricing an asset or liability. The authoritative guidance on fair value measurements establishes a consistent framework for measuring fair value on either a recurring or nonrecurring basis whereby inputs, used in valuation techniques, are assigned a hierarchical level.
The following are the hierarchical levels of inputs to measure fair value:
| ● | Level 1: Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets. |
| ● | Level 2: Inputs reflect quoted prices for identical assets or liabilities in markets that are not active; quoted prices for similar assets or liabilities in active markets; inputs other than quoted prices that are observable for the assets or liabilities; or inputs that are derived principally from or corroborated by observable market data by correlation or other means. |
| ● | Level 3: Unobservable inputs reflecting the Company’s assumptions incorporated in valuation techniques used to determine fair value. These assumptions are required to be consistent with market participant assumptions that are reasonably available. |
The carrying amounts of our financial assets and liabilities, such as cash, accounts receivable, accounts payable, secured note receivable and unsecured note payable, approximate their fair values because of the current nature of these instruments.
We account for our marketable securities at fair value, with the net unrealized gains or losses of marketable debt securities reported as a component of accumulated other comprehensive income or loss and marketable equity change in fair value reported on the condensed consolidated statement of operations (see note 13, Secured Promissory Note Receivable and Consulting Agreement). The components of marketable securities and are as follows (in thousands):
| As of June 30, 2021 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Marketable debt securities | ||||||||||||||||
| U.S. government obligations | $ | $ | $ | $ | ||||||||||||
| Corporate obligations | ||||||||||||||||
| Marketable equity securities | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
| As of December 31, 2020 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Marketable debt securities | ||||||||||||||||
| U.S. government obligations | $ | $ | $ | $ | ||||||||||||
| Corporate obligations | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
There were no transfers of marketable debt securities between Levels 1, 2 or 3 for the six months ended June 30, 2021.
Revenue Recognition
We recognize revenue that represents the transfer of promised goods or services to customers at an amount that reflects the consideration that is expected to be received in exchange for those goods or services. We recognize revenue when performance obligations with our customers have been satisfied. At contract inception, we evaluate the contract to determine if revenue should be recognized using the following five steps: (1) identify the contract with the customer; (2) identify the performance obligations; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations; and (5) recognize revenue when (or as) the entity satisfies a performance obligation.
Performance Obligations
A
performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account.
A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the
performance obligation is satisfied. We had historically generated sales principally through two types of customers, contract manufacturing
and retail customers for our consumer products. Sales from product shipments to contract manufacturing and retailer customers are recognized
at the time ownership is transferred to the customer. As of December 2020, we also began generating revenues through diagnostic
services. Revenue from diagnostic services is recognized when the results are made available to the customer. Net revenues
from consumer products were $
The Company’s performance obligation for contract manufacturing and retail customers is to provide the goods ordered by the customer. For diagnostic services, the Company has one performance obligation, which is to provide the results of the laboratory test to the customer.
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Transaction Price
For contract manufacturing and retail customers, the transaction price is fixed based upon either (i) the terms of a combined master agreement and each related purchase order, or (ii) if there is no master agreement, the price per individual purchase order received from each customer. The customers are invoiced at an agreed upon contractual price for each unit ordered and delivered by the Company.
Revenue from retail customers is reduced for trade promotions, estimated sales returns and other allowances in the same period as the related sales are recorded. No such allowance is applicable to our contract manufacturing customers. We estimate potential future product returns and other allowances related to current period revenue. We analyze historical returns, current trends, and changes in customer and consumer demand when evaluating the adequacy of the sales returns and other allowances.
We do not accept returns in the contract manufacturing revenue stream. Our return policy for retail customers accommodates returns for (i) discontinued products, (ii) store closings and (iii) products that have reached or exceeded their designated expiration date. We do not impose a period of time during which product may be returned. All requests for product returns must be submitted to us for pre-approval. We will not accept return requests pertaining to customer inventory “Overstocking” or “Resets”. We will accept return requests only for products in their intended package configuration. We reserve the right to terminate shipment of product to customers who have made unauthorized deductions contrary to our return policy or pursue other methods of reimbursement. We compensate the customer for authorized returns by means of a credit applied to amounts.
Accrued
advertising and other allowances operations as of June 30, 2021 included (i) $
For our diagnostic services business, a revenue transaction is initiated when we receive a requisition order to perform a diagnostic test. The information provided on the requisition form is used to determine the party that will be billed for the testing performed and the expected reimbursement. We provide diagnostic services to a range of customers, including health plans, government agencies and consumers. In many cases, the customer that orders our services is not responsible for paying for these services. Depending on the billing arrangement and applicable law, the payer may be the patient or a third party, such as a health plan, Medicare or Medicaid program and other government reimbursement programs. We bill the providers at standard price and take into consideration negotiated discounts and anticipated reimbursement remittance adjustments based on, the payer portfolio, when revenue is recorded. We use the most expected value method to estimate the transaction price for reimbursements that vary from the listed contract price.
Recognize Revenue When the Company Satisfies a Performance Obligation
Performance obligations related to contract manufacturing and retail customers are satisfied at a point in time when the goods are shipped to the customer as (i) we have transferred control of the assets to the customers upon shipping, and (ii) the customer obtains title and assumes the risks and rewards of ownership after the goods are shipped. For diagnostic services, the Company satisfies its performance obligation at the point in time that the results are made available to the customer, which is when the customer benefits from the information contained in the results and obtains control.
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Contract Balances
As
of June 30, 2021 and December 31, 2020, we have deferred revenue of $
The following table disaggregates our deferred revenue by recognition period (in thousands):
| As
of June 30, 2021 | As
of December 31, 2020 |
|||||||
| Recognition Period | ||||||||
| 0-12 Months | $ | $ | |
|||||
| 13-24 Months | ||||||||
| Over 24 Months | ||||||||
| Total | $ | $ | ||||||
Disaggregation of Revenue
We disaggregate revenue from contracts with customers into three categories: contract manufacturing, retail customers and diagnostic services. We determined that disaggregating revenue into these categories achieves the disclosure objective to depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.
The following table disaggregates our revenue by revenue source for the three and six months ended June 30, 2021 and 2020 (in thousands):
| For the three months ended | For the six months ended | |||||||||||||||
| Revenue by Customer Type | June 30, 2021 | June 30, 2020 | June 30, 2021 | June 30, 2020 | ||||||||||||
| Contract manufacturing | $ | $ | $ | $ | ||||||||||||
| Retail and others | ||||||||||||||||
| Diagnostic services | ||||||||||||||||
| Total revenue | $ | $ | $ | $ | ||||||||||||
Customer Consideration
The Company makes payments to certain diagnostic services customers for distinct services that approximate fair value for those services. Such services include specimen collection, the collection and delivery of insurance and patient information necessary for billing and collection, logistics services, as well as other information requirements. Consideration associated with specimen collection services is classified in cost of revenues and the remaining costs are classified as diagnostic expenses within operating expenses in the accompanying statement of operations. Diagnostic services cost of revenue includes specimen collection payments to customers and other costs incurred in connection with the company operated laboratories, including reagent and other raw material costs, direct and indirect labor and other laboratory facility overhead (see Note 14, Segment Information).
Shipping and Handling Activities
We account for shipping and handling activities that we perform as activities to fulfill the promise to transfer the goods.
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Advertising and Incentive Promotions
Advertising
and incentive promotion costs are expensed within the period in which they are utilized. Advertising and incentive promotion expense
is comprised of (i) media advertising, presented as part of sales and marketing expense, (ii) cooperative incentive promotions and coupon
program expenses, which are accounted for as part of net sales, and (iii) free product, which is accounted for as part of cost of sales.
Advertising and incentive promotion expenses incurred for the three months ended June 30, 2021 and 2020 were $
Share-Based Compensation
We recognize all share-based payments to employees and directors, including grants of stock options, as compensation expense in the financial statements based on their fair values. Fair values of stock options are determined through the use of the Black-Scholes option pricing model. The compensation cost is recognized as an expense over the requisite service period of the award, which usually coincides with the vesting period. We account for forfeitures as they occur.
Stock and stock options to purchase our common stock have been granted to employees pursuant to the terms of certain agreements and stock option plans. Stock options are exercisable during a period determined by us, but in no event later than seven years from the date granted. For the three months ended June 30, 2021 and 2020, we charged to operations $and $, respectively, for share-based compensation expense associated with vesting of outstanding equity awards. For the six months ended June 30, 2021 and 2020, we charged to operations $ and $, respectively, for share-based compensation expense associated with vesting of outstanding equity awards.
Research and Development (“R&D”)
R&D
costs are charged to operations in the period incurred. R&D costs incurred for the three months ended June 30, 2021 and 2020 were
$
Income Taxes
We utilize the asset and liability approach, which requires the recognition of deferred tax assets and liabilities for the future tax consequences of events that have been recognized in our financial statements or tax returns. In estimating future tax consequences, we generally consider all expected future events other than enactments of changes in the tax law or rates. Until sufficient taxable income to offset the temporary timing differences attributable to operations and the tax deductions attributable to option, warrant and stock activities are assured, a valuation allowance equaling the total deferred tax asset is being provided.
We utilize a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than fifty percent likely of being realized upon ultimate settlement. Any interest or penalties related to income taxes will be recorded as interest or administrative expense, respectively.
As a result of our historical losses from continuing operations, we have recorded a full valuation allowance against a net deferred tax asset. Additionally, we have not recorded a liability for unrecognized tax benefit.
Recently Issued Accounting Standards, Not Yet Adopted
In September 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326). The ASU sets forth a “current expected credit loss” (CECL) model which requires the Company to measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions, and reasonable supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost and applies to some off-balance sheet credit exposures. In February 2020, the FASB issued ASU 2020-02, Financial Instruments - Credit Losses (Topic 326), which amends the effective date of the original pronouncement for smaller reporting companies. ASU 2016-13 and its amendments will be effective for the Company for interim and annual periods in fiscal years beginning after December 15, 2022. We are currently assessing the impact of the adoption of this ASU on our financial statements.
| 15 |
The FASB recently issued ASU 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470- 20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, to reduce complexity in applying GAAP to certain financial instruments with characteristics of liabilities and equity. The guidance in ASU 2020-06 simplifies the accounting for convertible debt instruments and convertible preferred stock by removing the existing guidance that requires entities to account for beneficial conversion features and cash conversion features in equity, separately from the host convertible debt or preferred stock. The guidance in ASC 470-20 applies to convertible instruments for which the embedded conversion features are not required to be bifurcated from the host contract and accounted for as derivatives. In addition, the amendments revise the scope exception from derivative accounting in ASC 815-40 for freestanding financial instruments and embedded features that are both indexed to the issuer’s own stock and classified in stockholders’ equity, by removing certain criteria required for equity classification. These amendments are expected to result in more freestanding financial instruments qualifying for equity classification (and, therefore, not accounted for as derivatives), as well as fewer embedded features requiring separate accounting from the host contract. The amendments in ASU 2020-06 further revise the guidance in ASC 260, Earnings Per Share, to require entities to calculate diluted earnings per share (EPS) for convertible instruments by using the if-converted method. In addition, entities must presume share settlement for purposes of calculating diluted EPS when an instrument may be settled in cash or shares. The amendments in ASU 2020-06 are effective for public entities, excluding smaller reporting companies, for fiscal years beginning after December 15, 2021. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2023. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020. We are currently assessing the impact of the adoption of this ASU on our financial statements
Note 3 – Business Acquisition
On
October 23, 2020, we completed the acquisition of all of the issued and outstanding shares of capital stock of CPM for approximately
$
Based on the preliminary valuation, the total consideration of $2.5 million has been allocated to assets acquired and liabilities assumed based on their respective fair values as follows (amount in thousands):
| Clinical lab material | $ | |||
| Lab equipment | ||||
| Definite-lived intangible asset | ||||
| Total assets acquired | ||||
| Liabilities assumed | ||||
| Net identifiable assets acquired | ||||
| Goodwill | ||||
| Total consideration | $ |
Goodwill
has been measured as the excess of the total consideration over the amounts assigned to the identifiable assets acquired and liabilities
assumed in the amount of $
The preliminary purchase price allocation is adjusted, as necessary, up to one year after the acquisition closing date if management obtains more information regarding asset valuations and liabilities assumed.
| 16 |
Note 4 – Property, Plant and Equipment
The components of property and equipment are as follows (in thousands):
June 30, 2021 | December 31, 2020 | Estimated Useful Life | ||||||||
| Land | $ | $ | ||||||||
| Building improvements | ||||||||||
| Machinery | ||||||||||
| Lab equipment | ||||||||||
| Computer equipment | ||||||||||
| Furniture and fixtures | ||||||||||
| Less: accumulated depreciation | ( | ) | ( | ) | ||||||
| Total property, plant and equipment, net | $ | $ | ||||||||
Depreciation
expense incurred for the six months ended June, 2021 and 2020 was $
Note 5 –Unsecured Convertible Promissory Notes Payable
On
The
September 2020 Notes are due and payable on September 15, 2023, and accrue interest at a rate of
The September 2020 Notes contain customary events of default. If a default occurs and is not cured within the applicable cure period or is not waived, any outstanding obligations under the September 2020 Notes may be accelerated. The September 2020 Notes also contain certain restrictive covenants which, among other things, restrict our ability to create, incur, assume or permit to exist, directly or indirectly, any lien (other than certain permitted liens described in the September 2020 Notes) securing any indebtedness of the Company, and prohibits us from distributing or reinvesting the proceeds from any divestment of assets (other than in the ordinary course) without the prior approval of the Lenders.
For
the six months ended June 30, 2021 and 2020, we incurred $
Note 6 – Stockholders’ Equity
Our authorized capital stock consists of million shares of common stock, $par value, and million shares of preferred stock, $par value.
Preferred Stock
The preferred stock authorized under our certificate of incorporation may be issued from time to time in one or more series. As of June 30, 2021 and December 31, 2020, shares of preferred stock have been issued.
Common Stock Dividends
On
May 13, 2021, the Board declared a special cash dividend of $per share on the Company’s common stock
to holders of record on May 25, 2021, resulting in the payment of $
In Fiscal 2020, cash dividends were declared.
Common Stock
Registered Direct Offering
On
January 5, 2021, we entered into a securities purchase agreement with certain accredited investors and qualified institutional buyers,
pursuant to which we issued and sold to the purchasers an aggregate of (i) shares of our common stock, and (ii) warrants
to purchase up to
The
shares and warrants were sold at a purchase price of $
Public Offering
On
January 18, 2021, we entered into an underwriting agreement for the public offering of million shares of common stock, at a price to
the public of $per share. We also issued to the Underwriters
warrants to purchase up to an aggregate of
| 17 |
The 2010 Directors’ Equity Compensation Plan
On May 20, 2021, the stockholders of the Company approved the Amended and Restated 2010 Directors’ Equity Compensation Plan (the “Amended 2010 Directors’ Plan”) at the 2021 Annual Meeting of Stockholders of the Company (the “2021 Annual Meeting”). The Amended 2010 Directors’ Plan had been previously approved by the board of directors of the Company on April 7, 2021, subject to stockholder approval at the 2021 Annual Meeting.
The Amended 2010 Directors’ Plan provides for an increase in the number of shares reserved for issuance under the plan by shares, from shares to shares.
During the three and six months ended June 30, 2021, shares of common stock and options were granted to our directors under the 2010 Directors’ Plan.
During the three and six months ended June 30, 2020, and shares of common stock, respectively were granted to our directors under the 2010 Directors’ Plan. We recorded $of director fees during the six months ended June 30, 2020 in connection with these grants, which represented the fair value of the shares calculated based on the average closing price of our shares of common stock for the last five trading days of the quarter in which the Board fee was earned.
At June 30, 2021, there were options outstanding and there were shares of common stock available to be issued pursuant to the terms of the 2010 Directors’ Plan. stock options were exercised during the six months ended June 30, 2021.
The 2010 Equity Compensation Plan
On May 20, 2021, the stockholders of the Company approved the Amended and Restated 2010 Equity Compensation Plan (the “Amended 2010 Plan”) at the 2021 Annual Meetings. The Amended 2010 Plan had been previously approved by the board of directors of the Company on April 7, 2021, subject to stockholder approval at the 2021 Annual Meeting.
The Amended 2010 Plan provides for an increase in the number of shares reserved for issuance under the plan by shares, from shares to shares.
There were options granted under the 2010 Plan during the six months ended June 30, 2021 for a total fair value of $.
As of June 30, 2021, there were options outstanding and options available to be issued pursuant to the terms of the 2010 Plan. We will recognize an aggregate of approximately $of remaining share-based compensation expense related to outstanding stock options over a weighted average period of years. stock options were exercised during the six months ended June 30, 2021.
The 2018 Stock Incentive Plan
On April 12, 2018, our stockholders approved the 2018 Stock Incentive Plan (the “2018 Stock Plan”). At April 12, 2018, all million shares available for issuance under the 2018 Stock Plan have been granted in the form of a stock option with an initial exercise price of $per share, which are exercisable in 36 monthly installments, to Ted Karkus (the “CEO Option”), our Chief Executive Officer. No stock options have been exercised during the six months ended June 30, 2021 and 2020.
The 2018 Plan requires certain proportionate adjustments to be made to stock options granted upon the occurrence of certain events, including a special distribution (whether in the form of cash, shares, other securities, or other property) in order to maintain parity. Accordingly, the Compensation Committee of the board of directors, as required by the terms of the 2018 Stock Plan, adjusted the terms of the CEO Option, such that the per share, effective as of September 5, 2018, the date a special $special cash dividend was paid to the Company’s stockholders. to $per share, effective as of January 24, 2019, the date a $special cash dividend was paid to the Company’s stockholders. to $per share, effective as of December 12, 2019, the date another $special cash dividend was paid to Company’s stockholders. to $per share, effective as of June 3, 2021, the date another $special cash dividend was paid to Company’s stockholders.
| 18 |
| Number of Shares | Weighted Average Exercise Price | Weighted
Average Remaining Contractual Life (in years) | Total Intrinsic Value | |||||||||||||
| Outstanding as of January 1, 2021 | $ | $ | ||||||||||||||
| Granted | ||||||||||||||||
| Forfeited | ( | ) | ||||||||||||||
| Outstanding as of June 30, 2021 | $ | $ | ||||||||||||||
| Options vested and exercisable | $ | $ | ||||||||||||||
| For the six months ended | ||||
| June 30, 2021 | ||||
| Exercise price | $ | |||
| Expected term (years) | ||||
| Expected stock price volatility | % | |||
| Risk-free rate of interest | % | |||
| Expected dividend yield (per share) | % | |||
During
the six months ended June 30, 2021, we issued warrants to purchase
| Number of Shares | Weighted Average Exercise Price | Weighted
Average Remaining Contractual Life (in years) | ||||||||||
| Outstanding as of January 1, 2021 | $ | |||||||||||
| Warrants granted | ||||||||||||
| Outstanding as of June 30, 2021 | $ | |||||||||||
| Warrants vested and exercisable | $ | |||||||||||
The following table summarizes weighted average assumptions used in determining the fair value of the warrants at the date of grant during the six months ended June 30, 2021:
| For the six months ended | ||||
| June 30, 2021 | ||||
| Exercise price | $ | |||
| Expected term (years) | ||||
| Expected stock price volatility | % | |||
| Risk-free rate of interest | % | |||
| Expected dividend yield (per share) | % | |||
As
of June 30, 2021, there were
Note 7 – Defined Contribution Plans
We
maintain the ProPhase Labs, Inc. 401(k) Savings and Retirement Plan, a defined contribution plan for our employees. Our contributions
to the plan are based on the amount of the employee plan contributions and compensation. Our contributions to the plan in the three and
six months ended June 30, 2021 were $
| 19 |
Note 8 – Other Current Liabilities
The following table sets forth the components of other current liabilities at June 30, 2021 and December 31, 2020, respectively (in thousands):
| June 30, 2021 | December 31, 2020 | |||||||
| Accrued diagnostic services | $ | $ | ||||||
| Accrued commissions | ||||||||
| Accrued payroll | ||||||||
| Accrued expenses | ||||||||
| Accrued returns | ||||||||
| Accrued income tax payable | ||||||||
| Accrued benefits and vacation | ||||||||
| Deferred revenue | ||||||||
| Total other current liabilities | $ | $ | ||||||
Note 9– Commitments and Contingencies
Manufacturing Agreement
In
connection with the asset purchase agreement, the Company and its wholly-owned subsidiary, PMI, entered into a manufacturing agreement
(the “Manufacturing Agreement”) with Mylan Consumer Healthcare Inc. (formerly known as Meda Consumer Healthcare Inc.)
(“MCH”) and Mylan Inc. (together with MCH, “Mylan”. Pursuant to the terms of the Manufacturing Agreement,
Mylan (or an affiliate or designee) purchased the inventory of the Company’s Cold-EEZE® brand and product line, and PMI agreed
to manufacture certain products for Mylan, as described in the Manufacturing Agreement, at prices that reflect current market conditions
for such products and include an agreed upon mark-up on our costs. On May 1, 2021, the Manufacturing Agreement was assigned by Mylan
to Nurya Brands, Inc. (“Nurya”) in connection with Nurya’s acquisitions of certain assets from Mylan, including the
Cold-EEZE® brand and product line. Unless terminated sooner by the parties, the Manufacturing Agreement will remain in effect
until
| 20 |
Employment Agreement Obligations:
We have estimated future minimum obligations for an executive’s employment agreement over the next five years, including the remainder of Fiscal 2021, as follows (in thousands):
Employment Contracts | ||||
| 2021 | $ | |||
| 2022 | ||||
| 2023 | ||||
| 2024 | ||||
| 2025 | | |||
| Total | $ | |||
Litigation
In the normal course of our business, we may be named as a defendant in legal proceedings. It is our policy to vigorously defend litigation or to enter into a reasonable settlements where management deems it appropriate.
Note 10 – Leases
On
October 23, 2020, we completed the acquisition of CPM. CPM (which is now known as ProPhase Diagnostics NJ, Inc.) is the lessee
of a
On December 8, 2020, we entered into a Lease Agreement (the “New York Lease”) with BRG Office L.L.C. and Unit 2 Associates L.L.C. (the “Landlord”), pursuant to which the Company has agreed to lease certain premises located on the second floor (the “Leased Premises”) of 711 Stewart Avenue, Garden City, New York (the “Building”). The Leased Premises serve as the Company’s second laboratory location, offering a wide range of laboratory testing services for diagnosis, screening and evaluation of diseases, including COVID-19 and Respiratory Pathogen Panel Molecular tests.
The
New York Lease was effective as of December 8, 2020 and commenced in December 2020 when the facility was made available to us
by the Landlord. Payments on the lease begin upon the date of the Landlord’s substantial completion of certain improvements to
the Leased Premises (the “Commencement Date”), as set forth in the New York Lease. The initial term of the New York
Lease is
| 21 |
At
June 30, 2021, we had operating lease liabilities for the New York and New Jersey leases of approximately $
The following summarizes quantitative information about our operating leases (amounts in thousands):
For the Six Months Ended June 30, 2021 | ||||
| Operating leases | ||||
| Operating lease cost | $ | |||
| Variable lease cost | - | |||
| Operating lease expense | ||||
| Short-term lease rent expense | - | |||
| Total rent expense | $ | |||
For the Six Months Ended June 30, 2021 | ||||
| Operating cash flows used in operating leases | $ | ( | ) | |
| Right-of-use assets obtained in exchange for operating lease liabilities | $ | |||
| Weighted-average remaining lease term – operating leases (in years) | | |||
| Weighted-average discount rate – operating leases | % | |||
Maturities of the Company’s operating leases, excluding short-term leases, are as follows (amounts in thousands):
| Remaing Months Ended December 31, 2021 | $ | |||
| Year Ended December 31, 2022 | ||||
| Year Ended December 31, 2023 | ||||
| Year Ended December 31, 2024 | ||||
| Year Ended December 31, 2025 | ||||
| Thereafter | ||||
| Total | ||||
| Less present value discount | ( | ) | ||
| Operating lease liabilities | $ |
Note 11– Significant Customers
Revenue
for the three months ended June 30, 2021 and 2020 was $
Revenue
for the six months ended June 30, 2021 and 2020 was $
Three
diagnostic services clients generated
| 22 |
Basic earnings per share (“EPS”) excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or otherwise result in the issuance of common stock that shared in the earnings of the entity. Diluted EPS also utilizes the treasury stock method which prescribes a theoretical buy back of shares from the theoretical proceeds of all options outstanding during the period, and the if-converted method for convertible debt. The potentially anti-dilutive effect of stock options, warrants, and convertible debt for the three and six months ended June 30, 2021 was and shares, respectively.
For the three and six months ended June 30, 2021, dilutive loss per share were the same as basic earnings per share due to the exclusion of Common Stock in the form of stock options (“Common Stock Equivalents”), which in a net loss position would have an anti-dilutive effect on loss per share.
For the three months ended June 30, 2020, there were Common Stock Equivalents that were in the money that were included in the fully diluted earnings per share computation. For the six months ended June 30, 2020, dilutive loss per share were the same as basic earnings per share due to the exclusion of Common Stock Equivalents, which in a net loss position would have an anti-dilutive effect on loss per share.
Note 13 – Secured Promissory Note Receivable and Consulting Agreement
Consulting Agreement
On September 25, 2020 (the “Effective Date”), we entered into a consulting agreement with a consultant (the “Consulting Agreement”). The Consulting Agreement was to be effective through September 1, 2022; provided, however, that we could terminate this agreement at any time on five days’ prior written notice.
The consultant’s duties were to include, among other things, (i) identifying and introducing us to new opportunities in the medical technology and testing fields, (ii) assisting and advising us in acquiring one or more CLIA certified labs suitable for COVID-19 and other testing (“Test Labs”); (iii) assisting us in equipping and staffing any Test Labs acquired by us; (iv) advising and assisting in the operation of such Test Labs; (v) validating and obtaining certification of such Test Labs; and (vi) assisting us in obtaining a flow of business, orders and revenues from multiple sources in the industry, including but not limited to at least one significant, nation-wide manufacturer and distributor of COVID-19 saliva sample collection test kits (“COVID-19 Test Kits”).
All compensation earned by the consultant would first be applied to the acceleration and prepayment of all sums due to us, including but not limited to sums due pursuant to the Amended and Restated Promissory Note (“Secured Note”) described below. Under the terms of the Consulting Agreement, the consultant would not be entitled to receive any payments pursuant to the Consulting Agreement unless and until the Secured Note was paid in full. The total compensation that the consultant would be entitled to earn or to receive under the Consulting Agreement (inclusive of amounts credited against the Secured Note) would be capped at $million.
| 23 |
Promissory Note and Security Agreement
On September 25, 2020 (the “Restatement Effective Date”), we entered into the Secured Note with the consultant, pursuant to which we loaned $million to the consultant described above (inclusive of $million in the aggregate previously loaned to the consultant, as described below).
The Secured Note amended and restated in its entirety (i) that certain Promissory Note and Security Agreement, dated July 21, 2020 (the “Original July 21 Note”), pursuant to which we loaned $to the consultant and (ii) that certain Promissory Note and Security Agreement, dated July 29, 2020 (the “Original July 29 Note”, and, together with the Original July 21 Note, the “Original Notes”), pursuant to which we loaned $to the consultant.
The Secured Note bears interest at a rate of % per annum from and including the Restatement Effective Date until the principal amount is repaid in full plus any Principal Increases (as defined below) together with any accrued interest that has not been capitalized; provided, however, that upon the occurrence and during an Event of Default (as defined in the Secured Note), the interest rate payable under the Secured Note will automatically increase to % above the rate of interest then applicable to the Secured Note.
Interest under the Secured Note will be payable monthly in arrears on the first day of each month for the prior monthly period, as well as at maturity (whether upon demand, by acceleration or otherwise) (each such date, a “Payment Date”); provided, however, that prior to September 1, 2021, interest will be paid and capitalized in kind by increasing the principal amount of the Secured Note (any such increase, a “Principal Increase”) by an amount equal to the interest accrued on the principal amount (as increased by the Principal Increases) during the prior month. On each Payment Date commencing after September 1, 2021, in addition to payments of interest described in the preceding sentence, the consultant will also make payments on the principal amount of the loan equal to 1/36 of the then outstanding principal amount. The amount of the monthly payments will be equal to the amount required to amortize fully the outstanding principal amount of the loan, together with interest, over a period of .
The entire remaining unpaid principal amount of the Secured Note, together with all accrued and unpaid interest thereon and all other amounts payable under the Secured Note, will be due and payable, if not sooner paid, on September 30, 2022 or an earlier date as a result of a maturity, whether by acceleration or otherwise. The Secured Note may be prepaid in full or in part at any time without penalty or premium.
The Secured Note contains customary events of default. If a default occurs and is not cured within the applicable cure period or is not waived, any outstanding obligations under the Secured Note may be accelerated.
The Secured Note contains customary representation and warranties and certain restrictive covenants which, among other things, restrict the consultant’s ability to (i) sell, transfer, finance, lease, license, or dispose of all or substantially all of its property or assets, liquidate, windup, or dissolve, (ii) acquire all or substantially all of the property or assets of, or the equity interests in, any other person, (iii) participate in any merger, consolidation, share exchange, division, conversion, reclassification, or other absorption or reorganization, (iv) except for those existing as of the Restatement Effective Date, create, incur, assume, permit, or suffer to exist any pledges, liens, security interests, and other encumbrances of its property or assets, whether now owned or hereafter owned or acquired, and (v) create, incur or permit to exist any debt that is senior to, or pari passu with the Secured Note.
In order to secure the consultant’s obligations under the Secured Note, the consultant granted to the Company a continuing security interest in certain property and assets.
Total
interest income recorded in the three and six months ended June 30, 2021 was
Amendment and Termination Agreement
On
January 14, 2021, we entered into an Amendment and Termination Agreement (the “Termination Agreement”) with the consultant
pursuant to which the parties amended the Secured Note and the Consulting Agreement. Pursuant to the terms of the Termination Agreement,
the Company loaned an additional $million to the consultant in consideration for
the termination of the Consulting Agreement and termination of the Company’s obligation to pay the consultant additional consulting
fees beyond the $
Under
the terms of the Termination Agreement, the consultant will sell and process its viral test by RT-PCR (together with other viral and
other types of tests). Until the Secured Note is paid in full, each COVID-19 Test Kit sold or processed from and after January 14, 2021,
and for which payment of at least the specified amount as defined for the test, is received by the consultant, the consultant will pay
us a specified amount (the “Test Fee”). The total payments will not exceed the aggregate amounts due under the Secured Note
and shall be applied first to interest and other amounts due under the Secured Note and then to the then-current outstanding
principal. Test Fees will be due and payable on the 10th business day after the end of each month commencing in February, 2021, and until
the Secured Note is paid in full. We received the first payment in the amount of $
On each payment date commencing on or after September 1, 2021, in addition to payments of the Test Fees described above, the consultant will also make payments in an amount equal to the greater of (x) the Test Fee, or (y) 1/36th of the then outstanding principal amount together with interest thereon and interest accruing on the Secured Note, in accordance with the Secured Note. Accordingly, commencing on September 1, 2021, the minimum number of monthly payments due and payable will be equal to the amount required to amortize fully the outstanding principal amount of the Secured Note, together with interest over a period of with level monthly payments.
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Note 14 – Segment Information
The
Company has identified
The following table is a summary of segment information for three and six months ended June 30, 2021 and 2020 (amounts in thousands):
| For the three months ended | For the six months ended | |||||||||||||||
| June 30, 2021 | June 30, 2020 | June 30, 2021 | June 30, 2020 | |||||||||||||
| Net revenues | ||||||||||||||||
| Diagnostic services | $ | $ | $ | $ | ||||||||||||
| Consumer products | ||||||||||||||||
| Consolidated net revenue | ||||||||||||||||
| Cost of revenue | ||||||||||||||||
| Diagnostic services | - | - | ||||||||||||||
| Consumer products | ||||||||||||||||
| Consolidated cost of revenue | ||||||||||||||||
| Depreciation and amortization expense | ||||||||||||||||
| Diagnostic services | - | - | ||||||||||||||
| Consumer products | ||||||||||||||||
| Total Depreciation and amortization expense | ||||||||||||||||
| Operating and other expenses | ||||||||||||||||
| Income (loss) from continuing operations, before income taxes | ||||||||||||||||
| Diagnostic services | - | - | ||||||||||||||
| Consumer products | ||||||||||||||||
| Unallocated corporate | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total income (loss) from continuing operations, before income taxes | ( | ) | ( | ) | ( | ) | ||||||||||
| Net income (loss) | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | ||||||
The following table is a summary of segment balance sheets information as of June 30, 2021 and December 31, 2020 (in thousands):
| June 30, | December 31, | |||||||
| 2021 | 2020 | |||||||
| ASSETS | ||||||||
| Diagnostic services | $ | $ | ||||||
| Consumer products | ||||||||
| Unallocated corporate | ||||||||
| Total assets | $ | $ | ||||||
Note 15 – Subsequent Events
On
August 10, 2021, the Company and its wholly-owned subsidiary, ProPhase Precision Medicine, Inc. (“ProPhase Precision”), entered
into and closed a Stock Purchase Agreement (the “Nebula Stock Purchase Agreement”) with Nebula Genomics, Inc., a privately
owned personal genomics company (“Nebula”), each of the stockholders of Nebula (the “Seller Parties”), and Kamal
Obbad, as Seller Party Representative. Pursuant to the terms of the Nebula Stock Purchase Agreement, ProPhase Precision acquired all
of the issued and outstanding shares of common stock of Nebula (the “Nebula Shares”) from the Seller Parties, for an aggregate
purchase price of approximately $
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis should be read in conjunction with our interim unaudited condensed financial statements and related notes included in this Quarterly Report on Form 10-Q (“Quarterly Report”) and the audited condensed financial statements and notes thereto as of and for the year ended December 31, 2020 and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 31, 2021 (the “2020 Annual Report”). As used in this Quarterly Report, unless the context suggests otherwise, “we,” “us,” “our,” or “ProPhase” refer to ProPhase Labs, Inc. and its subsidiaries, unless the context otherwise requires.
Forward-Looking Statements
This Quarterly Report contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements relate to future events or our future financial performance. Forward-looking statements typically are identified by use of terms such as “anticipate”, “believe”, “plan”, “expect”, “intend”, “may”, “will”, “should”, “estimate”, “predict”, “potential”, “continue” and similar words although some forward-looking statements are expressed differently. This Quarterly Report may also contain forward-looking statements attributable to third parties relating to their estimates regarding the growth of our markets.
You are cautioned that forward-looking statements are not guarantees of performance and are subject to known and unknown risks, uncertainties and other factors that may cause our or our industry’s actual results, levels of activity, performance, achievements or prospects to be materially different from any future results, levels of activity, performance or achievements expressed or implied by the forward-looking statements. Many of these factors are beyond our ability to predict.
Such risks and uncertainties include, but are not limited to:
| ● | Our dependence on our largest manufacturing customers; | |
| ● | Our ability to successfully offer, perform and generate revenues from our new diagnostic and genomics sequencing services; | |
| ● | Our ability to generate sufficient profits from Respiratory Pathogen Panel (“ RPP”) Molecular tests if and when demand for COVID-19 testing decreases or becomes no longer necessary; | |
| ● | Our ability to secure additional capital, when needed to support our diagnostic services business and product development and commercialization programs; | |
| ● | Potential disruptions to our supply chain or increases to the price of or adulteration of key raw materials or supplies; | |
| ● | Potential disruptions in our ability to manufacture our products and those of others; | |
| ● | Seasonal fluctuations in demand for the products we manufacture at our manufacturing facility; | |
| ● | Our ability to successfully develop and commercialize our existing products and any new products; | |
| ● | Our ability to compete effectively, including our ability to maintain and increase our markets and/or market share in the markets in which we do business; | |
| ● | Our ability to attract, retain and motivate our key employees; | |
| ● | Our ability to protect our proprietary rights; | |
| ● | Our ability to comply with regulatory requirements applicable to our businesses; and | |
| ● | Our dependence on third parties to provide services critical to our lab diagnostic services business; |
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Given the risks and uncertainties surrounding forward-looking statements, you should not place undue reliance on these statements. You should also consider carefully the statements we make under other sections of this Quarterly Report and in our 2020 Annual Report, as well as in other documents we file from time to time with the SEC that address additional risks that could cause our actual results to differ from those set forth in any forward-looking statements. Our forward-looking statements speak only as the date of this Quarterly Report. We undertake no obligation to publicly update or review any forward-looking statements, whether as a result of new information, future developments or otherwise, except as required by law.
General
We are a diversified biotech and genomics company with deep experience with over-the-counter (“OTC”) consumer healthcare products and dietary supplements. We conduct our operations through two operating segments; diagnostic services and consumer products. Until late fiscal year 2020, we were engaged primarily in the research, development, manufacture, distribution, marketing and sale of OTC consumer healthcare products and dietary supplements in the United States. This includes the development and marketing of dietary supplements under the TK Supplements® brand. However, commencing in December 2020, we also began offering COVID- 19 and other RPP Molecular tests through our new diagnostic service business.
Our wholly-owned subsidiary, Pharmaloz Manufacturing, Inc. (“PMI”), is a full-service contract manufacturer and private label developer of a broad range of non- GMO, organic and natural-based cough drops and lozenges and OTC drug and dietary supplement products.
Our wholly-owned subsidiary, ProPhase Diagnostics, Inc., (“ProPhase Diagnostics”), which was formed on October 9, 2020, offers a variety of medical tests, including COVID-19 and RPG Molecular tests. On October 23, 2020, we completed the acquisition of all of the issued and outstanding shares of capital stock of Confucius Plaza Medical Laboratory Corp. (“CPM”), which operates a 4,000 square foot Clinical Laboratory Improvement Amendments (“CLIA”) accredited laboratory located in Old Bridge, New Jersey for approximately $2.5 million. As a result of the acquisition of CPM in October 2020, we entered into a new business line, diagnostic services. In December 2020, we expanded our diagnostic service business with the signing of a lease and the recent build out of a second, larger CLIA accredited laboratory in Garden City, New York. Operations at this second facility commenced in February 2021.
On August 10, 2021, we acquired Nebula Genomics, Inc., a privately owned personal genomics company, through our new wholly-owned subsidiary, ProPhase Precision Medicine, Inc. We intend to offer whole genome sequencing and related services through this new subsidiary.
Our diagnostic service business is influenced by the level of demand for COVID-19, the price we are able to receive for performing our testing services, and the length of time for which that demand persists, as well as the availability of COVID-19 testing from other laboratories and the period of time for which we are able to serve as an authorized laboratory offering COVID-19 testing under various Emergency Use Authorizations.
While our revenues increased for the six months ended June 30, 2021 as a result of our new diagnostic services business line, we have made and will continue to make substantial investments to secure the necessary equipment, supplies and personnel to provide these testing services. There can be no assurance that our efforts to offer and perform COVID-19 or other diagnostic testing will continue to be successful and the revenue and operating profits from such business will increase from or maintain their current level.
In addition, we continue to actively pursue acquisition opportunities for other companies, technologies and products within and outside the consumer products industry.
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Financial Condition and Results of Operations Results for the Three Months Ended June 30, 2021 as Compared to the Three Months Ended June 30, 2020
For the three months ended June 30, 2021, net revenue was $9.1 million as compared to $3.6 million for the three months ended June 30, 2020. We experienced higher net revenue for the three months ended June 30, 2021, primarily as a result of an increase of $7.5 million related to our new diagnostic services business, which was offset by, a decrease of $2.0 million in customer orders from our consumer products business as a result of the timing and demand of third party contract manufacturing customers.
Cost of revenues for the three months ended June 30, 2021 were $4.7 million as compared to $2.3 million for the three months ended June 30, 2020. For the three months ended June 30, 2021 and 2020, we realized a gross margin of 48.9% and 35.3%, respectively. The increase in gross margin from the prior period is principally due to increased margins generally associated with our new diagnostic services business. Gross margins are generally influenced by fluctuations in quarter-to-quarter diagnostic testing and OTC production volume, fixed operating costs and related overhead absorption, raw ingredient costs, testing supplies and labor costs and inventory mark to market write-downs.
Diagnostic expenses for the three months ended June 30, 2021 were $830,000 compared to no diagnostics expenses for the three months ended June 30, 2020. The $830,000 in diagnostic expenses for the three months ended June 30, 2021 was comprised of network providers expenses associated with our new diagnostic services business.
Sales, general and administration expenses for the three months ended June 30, 2021 were $5.0 million as compared to $1.2 million for the three months ended June 30, 2020. The increase of $3.8 million in general and administration expenses was principally related to growth in personnel expenses and professional fees associated with our new diagnostic services business.
Research and development costs for the three months ended June 30, 2021 were $93,000 as compared to $65,000 for the three months ended June 30, 2020. The increase in research and development costs for the three months ended June 30, 2021 as compared to the three months ended June 30, 2020 were principally due to additional professional fees associated with our new diagnostics services business.
Interest and other income for the three months ended June 30, 2021 and 2020 was $214,000 and $11,000, respectively. The increase in interest income for the three months ended June 30, 2021 as compared to the three months ended June 30, 2020 was principally due to the issuance of the new Secured Note receivable that bears interest at a rate of 15% per annum.
Interest expense for the three months ended June 30, 2021 was $323,000 compared to no interest expense for the three months ended June 30, 2020. The increase in interest expense for the three months ended June 30, 2021 as compared to the three months ended June 30, 2020 was principally due the new unsecured convertible September 2020 Notes payable that accrues interest at a rate of 10% per year.
Gain from change in fair value of investment securities for the three months ended June 30, 2021 was $164,000, which was due to the increase of stock price as of June 30, 2021 compared to stock price on the acquired date on June 25, 2021.
As a consequence of the effects of the above, net loss from operations for the three months ended June 30, 2021 was $1.4 million, or ($0.09) per share, as compared to the net income for the three months ended June 30, 2020 of $70,000, or $0.01 per share.
Financial Condition and Results of Operations Results for the Six Months Ended June 30, 2021 as Compared to the Six Months Ended June 30, 2020
For the six months ended June 30, 2021, net revenue was $24.4 million as compared to $5.5 million for the six months ended June 30, 2020. We experienced higher net revenue for the six months ended June 30, 2021, primarily as a result of our receipt of $20.3 million from our new diagnostic services business, which was offset by, a decrease of $1.4 million in customer orders from our consumer products business as a result of the timing and demand of third party contract manufacturing customers.
Cost of revenues for the six months ended June 30, 2021 were $11.0 million as compared to $3.8 million for the six months ended June 30, 2020. For the six months ended June 30, 2021 and 2020, we realized a gross margin of 54.9% and 30.7%, respectively. The increase in gross margin from the prior period is principally due to increased margins generally associated with our new diagnostic services business. Gross margins are generally influenced by fluctuations in quarter-to-quarter diagnostic testing and OTC production volume, fixed operating costs and related overhead absorption, raw ingredient costs, testing supplies and labor costs and inventory mark to market write-downs.
Diagnostic expenses for the six months ended June 30, 2021 were $4.6 million compared to no diagnostics expenses for the six months ended June 30, 2020. The $4.6 million in diagnostic expenses for the six months ended June 30, 2021 was comprised of network providers expenses associated with our new diagnostic services business.
Sales, general and administration expenses for the six months ended June 30, 2021 were $8.8 million as compared to $2.3 million for the six months ended June 30, 2020. The increase of $6.5 million in general and administration expenses was principally related to growth in personnel expenses and professional fees associated with our new diagnostic services business.
Research and development costs for the six months ended June 30, 2021 were $208,000 as compared to $124,000 for the six months ended June 30, 2020. The increase in research and development costs for the six months ended June 30, 2021 as compared to the six months ended June 30, 2020 were principally due to additional professional fees associated with our new diagnostics services business.
Interest and other income for the six months ended June 30, 2021 and 2020 was $301,000 and $14,000, respectively. The increase in interest income for the six months ended June 30, 2021 as compared to the six months ended June 30, 2020 was principally due to the issuance of the new Secured Note receivable that bears interest at a rate of 15% per annum.
Interest expense for the six months ended June 30, 2021 was $574,000 compared to no interest expense for the six months ended June 30, 2020. The increase in interest expense for the six months ended June 30, 2021 as compared to the six months ended June 30, 2020 was principally due the new unsecured convertible September 2020 Notes payable that accrues interest at a rate of 10% per year.
Gain from change in fair value of investment securities for the six months ended June 30, 2021 was $164,000, which was due to the increase of stock price as of June 30, 2021 compared to stock price on the acquired date on June 25, 2021.
As a consequence of the effects of the above, net loss from operations for the six months ended June 30, 2021 was $338,000, or ($0.02) per share, as compared to the net loss for the six months ended June 30, 2020 of $739,000, or ($0.06) per share.
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Liquidity and Capital Resources
Our aggregate cash and cash equivalents and marketable debt securities as of June 30, 2021 was $35.8 million as compared to $8.5 million at December 31, 2020. Our working capital was $44.3 million and $9.6 million as of June 30, 2021 and December 31, 2020, respectively. The increase of $27.3 million in our cash and cash equivalents and marketable debt securities balance for the six months ended June 30, 2021 was principally due to our receipt of aggregate net proceeds of $40.6 million from the issuance of common stock and warrants in a registered direct offering and public offering offset by (i) capital expenditures of $4.2 million, (ii) cash dividend payments of $4.5 million (iii) issuance of a promissory note of $1.0 million, and, (iv) cash used in operations of $3.5 million.
COVID-19
The COVID-19 pandemic has not had a material adverse impact on our business to date. We experienced higher than normal net revenue for the last six months ended June 30, 2020, primarily as a result of revenue from our new diagnostic services business, which offers COVID-19 testing.
There are still numerous uncertainties associated with the COVID-19 pandemic, including the efficacy of the vaccines that have been developed to treat the virus and their ability to protect against new strains of the virus, people’s willingness to receive a vaccine, possible resurgences of the coronavirus and/or new strains of the virus, the extent and duration of protective and preventative measures that may be adopted by local, state and/or the federal government in the future as a result of future outbreaks, including business closures, the ongoing impact of COVID-19 on the U.S. and world economy and consumer confidence, and various other uncertainties.
The COVID-19 pandemic has had a negative impact on the global capital markets and economies worldwide and could ultimately have a material adverse impact on our ability to raise capital needed to develop and commercialize products.
General
Management is not aware of any other trends, events or uncertainties that have had or are reasonably likely to have a material negative impact upon our (i) short-term or long-term liquidity, or (ii) net revenue or income from operations. Any challenge to our patent or trademark rights could have a material adverse effect on our future; however, we are not aware of any condition that would make such an event probable. Our business is generally subject to seasonal variations thereby impacting our liquidity and working capital during the course of our fiscal year.
During the six months ended June, 2021, we used $3.5 million in cash from operations. To the extent that we do not generate sufficient cash from operations, our cash balances will decline. We may also use our cash to explore and/or acquire new product technologies, applications, product line extensions, new contract manufacturing applications and other new product opportunities. In the event that our available cash is insufficient to support such initiatives, we may need to incur indebtedness or issue common stock to finance our plans for growth. Volatility in the credit markets and the liquidity of major financial institutions, including as a result of the COVID-19 pandemic, may have an adverse impact on our ability to fund our business strategy through future borrowings, under either existing or newly created instruments in the public or private markets on terms that we believe to be reasonable, if at all.
Off-Balance Sheet Arrangements
It is not our usual business practice to enter into off-balance sheet arrangements such as guarantees on loans and financial commitments and retained interests in assets transferred to an unconsolidated entity for securitization purposes. We have no off-balance sheet arrangements that have, or are reasonably likely to have, a material current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Impact of Inflation
We are subject to normal inflationary trends and anticipate that any increased costs would be passed on to our customers. Inflation has not had a material effect on our business.
Critical Accounting Policies and Estimates
The condensed consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”), which require the use of estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent liabilities at the date of the financial statements, and the reported amounts of expenses in the periods presented. We believe that the accounting estimates employed are appropriate and resulting balances are reasonable; however, due to inherent uncertainties in making estimates, actual results could differ from the original estimates, requiring adjustments to these balances in future periods. The critical accounting estimates that affect the consolidated financial statements and the judgments and assumptions used are consistent with those described under Part II, Item 7 of the 2020 Annual Report.
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Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Like virtually all commercial enterprises, we can be exposed to the risk (“market risk”) that the cash flows to be received or paid relating to certain financial instruments could change as a result of changes in interest rate, exchange rates, commodity prices, equity prices and other market changes.
Our operations are not subject to risks of material foreign currency fluctuations, nor do we use derivative financial instruments in our investment practices. We place our marketable investments in instruments that meet high credit quality standards. We do not expect material losses with respect to our investment portfolio or excessive exposure to market risks associated with interest rates. The impact on our results of one percentage point change in short-term interest rates would not have a material impact on our future earnings, fair value, or cash flows related to investments in cash equivalents or interest-earning marketable securities.
Current economic conditions may cause a decline in business and consumer spending which could adversely affect our business and financial performance including the collection of accounts receivables, notes receivable, realization of inventory and recoverability of assets. In addition, our business and financial performance may be adversely affected by current and future economic conditions, including a reduction in the availability of credit, financial market volatility and recession.
Except for the broad effects of COVID-19 including its negative impact on the global economy and major financial markets, there have been no material changes to our market risk exposures since December 31, 2020.
Item 4. Controls and Procedures. Disclosure Controls and Procedures
We carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of June 30, 2021. This evaluation was carried out under the supervision and with the participation of our Principal Executive Officer and Principal Financial and Accounting Officer. Based upon that evaluation, our Principal Executive Officer and Principal Financial and Accounting Officer concluded that our disclosure controls and procedures were effective as of June 30, 2021.
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed with or submitted to the SEC under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to management, including our Principal Executive Officer and Principal Financial and Accounting Officer, to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
No change in internal control over financial reporting occurred during the most recent quarter with respect to our operations, which materially affected, or is reasonable likely to materially affect, our internal controls over financial reporting.
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Part II. Other Information
Item 1. Legal Proceedings.
From time to time, we have been and may again become involved in legal proceedings arising in the ordinary course of business. We are not presently a party to any material litigation.
Item 1A. Risk Factors.
There have been no material changes to the risks described in Item 1A. Risk Factors of the 2020 Annual Report.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None
Item 4. Mine Safety Disclosures.
Not applicable
Item 5. Other Information.
None
Item 6. Exhibits
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| ProPhase Labs, Inc. | ||
| By: | /s/ Ted Karkus | |
| Ted Karkus | ||
Chairman of the Board and Chief Executive Officer (Principal Executive Officer) | ||
Date: August 13, 2021
| By: | /s/ Monica Brady | |
| Monica Brady | ||
Chief Financial Officer (Principal Financial Officer) |
Date: August 13, 2021
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