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. ☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
| Class | Outstanding November 10, 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)
| September 30, | December 31, | |||||||
| 2021 | 2020 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Restricted cash | - | |||||||
| Marketable debt securities, available for sale | ||||||||
| Marketable equity securities, at fair value | - | |||||||
| 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 assets, net | ||||||||
| Goodwill | ||||||||
| Other assets | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued diagnostic services | - | |||||||
| Accrued advertising and other allowances | ||||||||
| Lease liabilities | ||||||||
| Deferred revenue | - | |||||||
| Other current liabilities | ||||||||
| Total current liabilities | ||||||||
| Non-current liabilities: | ||||||||
| Deferred revenue, net of current portion | ||||||||
| Note payable | - | |||||||
| 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, and shares outstanding, 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 nine months ended | |||||||||||||||
| September 30, 2021 | September 30, 2020 | September 30, 2021 | September 30, 2020 | |||||||||||||
| Revenues, net | $ | $ | $ | $ | ||||||||||||
| Cost of revenues | ||||||||||||||||
| Gross profit | ||||||||||||||||
| Operating expenses: | ||||||||||||||||
| Diagnostic expenses | ||||||||||||||||
| General and administration | ||||||||||||||||
| Research and development | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Interest income, net | ||||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Change in fair value of investment securities | ( | ) | ( | ) | ||||||||||||
| Loss from continuing operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Discontinued Operations: | ||||||||||||||||
| Income from discontinued operations | ||||||||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Other comprehensive loss: | ||||||||||||||||
| Unrealized loss on marketable debt securities | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total comprehensive loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Basic and diluted earnings (loss) per share: | ||||||||||||||||
| Loss from continuing operations | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Income from discontinued operations | ||||||||||||||||
| Net loss per share | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Weighted average common shares outstanding: | ||||||||||||||||
| Basic and 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 September 30, 2021 | ||||||||||||||||||||||||||||
Common Stock Shares Outstanding | Par Value | Additional Paid in Capital | Accumulated Deficit | Accumulated Comprehensive Income (Loss) | Treasury Stock | Total | ||||||||||||||||||||||
| Balance as of July 1,2021 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||
| Issuance of common shares related to business acqusition | ||||||||||||||||||||||||||||
| Unrealized loss on marketable debt securities, net of taxes | - | ( | ) | ( | ) | |||||||||||||||||||||||
| Cashless warrants exercise | ||||||||||||||||||||||||||||
| Stock-based compensation | ||||||||||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||||||||||
| Balance as of September 30, 2021 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||
| For the Three Months Ended September 30, 2020 | ||||||||||||||||||||||||||||
| Common Stock Shares Outstanding | Par Value | Additional Paid in Capital | Accumulated Deficit | Accumulated Comprehensive Income (Loss) | Treasury Stock | Total | ||||||||||||||||||||||
| Balance as of July 1, 2020 | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||||||||||||
| Unrealized loss on marketable debt securities, net of realized gains of
$ | - | ( | ) | ( | ) | |||||||||||||||||||||||
| Stock-based compensation | ||||||||||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||||||||||
| Balance as of September 30, 2020 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||
| 5 |
ProPhase Labs, Inc. and Subsidiaries
Condensed Consolidated Statements of Stockholders’ Equity
(in thousands, except share data)
(unaudited)
| For the Nine Months Ended September 30, 2021 | ||||||||||||||||||||||||||||
| Common Stock Shares Outstanding | 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 | ||||||||||||||||||||||||||||
| Issuance of common shares related to business acqusition | ||||||||||||||||||||||||||||
| Cash dividends | - | ( | ) | ( | ) | |||||||||||||||||||||||
| Unrealized loss on marketable debt securities, net of taxes | - | ( | ) | ( | ) | |||||||||||||||||||||||
| Cashless warrants exercise | ||||||||||||||||||||||||||||
| Stock-based compensation | ||||||||||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||||||||||
| Balance as of September 30, 2021 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||
| For the Nine Months Ended September 30, 2020 | ||||||||||||||||||||||||||||
| Common Stock Shares Outstanding | 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 September 30, 2020 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||
See accompanying notes to condensed consolidated financial statements
| 6 |
ProPhase Labs, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
| For the nine months ended | ||||||||
| September 30, 2021 | September 30, 2020 | |||||||
| Cash flows from operating activities | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | ||||||||
| Realized (gain) 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 | ( | ) | ||||||
| Accrued diagnostic services | ||||||||
| Deferred revenue | ||||||||
| Lease liabilities | ||||||||
| Other liabilities | ( | ) | ||||||
| Net cash (used in) provided by operating activities | ( | ) | ||||||
| Cash flows from investing activities | ||||||||
| Business acquisitions, net of cash acquired | ( | ) | ||||||
| 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 | ||||||||
| Proceeds from unsecured convertible promissory notes | ||||||||
| Issuance costs on unsecured convertible promissory notes | ( | ) | ||||||
| Payment of issuance costs in connection with ATM | ( | ) | ||||||
| Payment of dividends | ( | ) | ||||||
| Net cash provided by financing activities | ||||||||
| Increase in cash, cash equivalents and restricted cash | ||||||||
| Cash, cash equivalents and restricted cash, at the beginning of the period | ||||||||
| Cash, cash equivalents and restricted cash, 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: | ||||||||
| Issuance of common shares related to business acqusition | $ | $ | ||||||
| Net unrealized loss, investments in marketable debt securities | $ | ( | ) | $ | ( | ) | ||
See accompanying notes to condensed consolidated financial statements
| 7 |
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 and in August 2021 we began offering personal genomics products and services.
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 acquired Confucius Plaza Medical Laboratory Corp. (“CPM”), including a 4,000 square foot Clinical Laboratory Improvement Amendments (“CLIA”) accredited laboratory located in Old Bridge, New Jersey (see Note 3, Business Acquisitions). As part 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 build out of a second, larger CLIA accredited laboratory in Garden City, New York. Operations at this second facility commenced in February 2021.
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 3, Business Acquisitions).
In addition, we continue to actively pursue acquisition opportunities for other companies, technologies and products within and outside the consumer products industry.
Note 2 - Business and Liquidity Uncertainties
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 three and nine months ended September 30, 2021 are not necessarily indicative of operating results that may be achieved over the course of the full year.
| 8 |
ProPhase Labs, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
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 three and nine months ended September 30, 2021, we maintained two operating segments: diagnostic services (which includes our COVID-19 and other diagnostic testing services) and consumer products (which includes our contract manufacturing, retail customers and personal genomics products and services). For the three and nine months ended September 30, 2020, we only had the consumer products operating segment. (see Note 15, Segment Information).
Business and Liquidity Uncertainties
We launched our diagnostic service business 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 prices 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 three and nine months ended September 30, 2021 as a result of revenues from 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.
We acquired and commenced our personal genomics business in August 2021. This business will be influenced by demand for our genetic testing products and services, our marketing and service capabilities, and our ability to comply with applicable regulatory requirements.
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 Company used cash in operating activities of $
The Company’s future capital needs and the adequacy of its available funds will depend on many factors, including, but not necessarily limited to, the actual cost and time necessary to achieve sustained profitability within its newly launched diagnostic services and personal genomics businesses. The Company may be required to raise additional funds through equity or debt securities offerings or strategic collaboration and/or licensing agreements in order to fund operations until it is able to generate enough revenues. Such financing may not be available on acceptable terms, or at all, and the Company’s failure to raise capital when needed could have a material adverse effect on its strategic objectives, results of operations and financial condition.
| 9 |
ProPhase Labs, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
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 and 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 September 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 | ( | ) | ||||||||||
| $ | $ | ( | ) | $ | ||||||||
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”)
as an interest payment under our note receivable (see Note 14, Secured Promissory Note Receivable and Consulting Agreement)
with a fair value of $.
The fair value of the Investment Shares as of September 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 $
| 10 |
ProPhase Labs, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
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 September 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 $
| September 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 impairment of our property, plant and equipment for the nine months ended September 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 and marketing and distribution capabilities, as well as our ability to comply with 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 testing services, our marketing and service capabilities, and our ability to comply with regulatory requirements associated with operating under and maintaining our CLIA license. Our personal genomics business is and will continue to be influenced by demand for our genetic testing products and services, our marketing and service capabilities, and our ability to comply with applicable regulatory requirements.
Our business is subject to federal and state laws and regulations adopted for the health and safety of users of our products and services. 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 September 30, 2021, our cash and cash equivalents
balance were $
| 11 |
ProPhase Labs, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
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 our note receivable (see Note 14, Secured Promissory Note Receivable and Consulting Agreement), balances due to us. As of September 30, 2021, December 31, 2020 and the financial statements reporting date, the Company expects full realization upon maturity.
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 11, Leases).
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 Intangible Assets
Goodwill represents the excess of the fair value of the consideration transferred over the fair value of the underlying identifiable assets and liabilities acquired in a business combination. Goodwill and intangible assets deemed to have an indefinite life are not amortized, but instead are assessed for impairment annually. Additionally, if an event or change in circumstances occurs that would more likely than not reduce the fair value of the reporting unit below its carrying value, we would evaluate goodwill and other intangibles at that time.
In testing for goodwill impairment, we have the option to first assess qualitative factors to determine whether the existence of events or circumstances lead to a determination that it is more likely than not that the fair value of the reporting unit is less than its carrying amount. If, after assessing the totality of events and circumstances, we conclude that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is not required. If we conclude otherwise, we are required to perform the two-step impairment test. The goodwill impairment test is performed at the reporting unit level by comparing the estimated fair value of a reporting unit with its respective carrying value. If the estimated fair value exceeds the carrying value, goodwill at the reporting unit level is not impaired. If the estimated fair value is less than the carrying value, an impairment charge will be recorded to reduce the reporting unit to fair value.
| 12 |
ProPhase Labs, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
Intangible assets deemed to have finite lives are amortized on a straight-line basis over their estimated useful lives, where the useful life is the period over which the asset is expected to contribute directly, or indirectly, to our future cash flows.
Impairment of Long-Lived Assets
The Company reviews long-lived assets, including property and equipment and finite-lived intangible assets, for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. An impairment loss is recognized when the asset’s carrying value exceeds the total undiscounted cash flows expected from its use and eventual disposition. The amount of the impairment loss is determined as the excess of the carrying value of the asset over its fair value. For the three and nine months ended September 30, 2021 and 2020, the Company did not have an impairment of the intangible assets.
Fair Value of Financial Instruments
We measure 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 14, Secured Promissory Note Receivable and Consulting Agreement). The components of marketable securities and are as follows (in thousands):
| As of September 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 nine months ended September 30, 2021.
| 13 |
ProPhase Labs, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
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.
Contract with Customers and 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 and in August 2021 we acquired a personal genomics business, which we now include in our consumer products revenue. See Note 3, Business Acquisitions, for additional information on our October 2020 and August 2021 acquisitions. Revenue from diagnostic services is recognized when the results are made available to the customer. Revenue from our personal genomics business is recognized when the genetic testing results are provided to the customer. For subscription services associated with our genomic testing, we recognize revenue over time as the services are provided to the customer.
The Company’s performance obligation for contract manufacturing and retail customers is to provide the goods ordered by the customer. The Company’s has one performance obligation for its diagnostic services, which is to provide the results of the laboratory test to the customer. Our personal genomics business has separate performance obligations to provide initial testing and genome results and subscriptions services to our customers.
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 from our contract manufacturing customers. 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 owed.
| 14 |
ProPhase Labs, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
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.
For our personal genomics business, a revenue transaction is initiated
by a DNA test kit sale direct to the consumer sales via our website or through online retailers. If the customer does not return the test
kit, services cannot be completed by the Company, potentially resulting in unexercised rights (“breakage”) revenue. The Company
recognizes the breakage amounts as revenue, proportionate to the pattern of revenue recognition of the returning test kits. The Company
estimates breakage for the portion of test kits not expected to be returned using an analysis of historical data and considers other factors
that could influence customer test kit return behavior. The Company recognized breakage revenue from unreturned test kits of $
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. For genomic services, the Company satisfies its product performance obligation at a point in time when the genetics testing results are provided to the customer. For subscriptions services associated with its genomic testing, the Company satisfies its performance obligation over time as the applicable services are provided to the customer.
Contract Balances
As
of September 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 September 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 four categories: contract manufacturing, retail and others, diagnostic services and genomic products and 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.
| 15 |
ProPhase Labs, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
The following table disaggregates our revenue by revenue source for the three and nine months ended September 30, 2021 and 2020 (in thousands):
| For the three months ended | For the nine months ended | |||||||||||||||
| Revenue by Customer Type | September 30, 2021 | September 30, 2020 | September 30, 2021 | September 30, 2020 | ||||||||||||
| Contract manufacturing | $ | $ | $ | $ | ||||||||||||
| Retail and others | ||||||||||||||||
| Diagnostic services | ||||||||||||||||
| Total revenue, net | $ | $ | $ | $ | ||||||||||||
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 15, 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.
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 September 30, 2021 and 2020 were $
Share-Based Compensation
We recognize all share-based payments to employees, directors and consultants, including grants of stock options and common shares, 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 September 30, 2021 and 2020, we charged to operations $,000 and $,000, respectively, for share-based compensation expense associated with vesting of outstanding equity awards and common shares issued for services. For the nine months ended September 30, 2021 and 2020, we charged to operations $,000 and $,000, respectively, for share-based compensation expense associated with vesting of outstanding equity awards and common shares issued for services.
| 16 |
ProPhase Labs, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
Research and Development
R&D
costs are charged to operations in the period incurred. R&D costs incurred for the three months ended September 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.
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.
| 17 |
ProPhase Labs, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
In May 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt-Modifications and Extinguishments (Subtopic 470-50), Compensation-Stock Compensation (Topic 718), and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40). This ASU reduces diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options (for example, warrants) that remain equity classified after modification or exchange. This ASU provides guidance for a modification or an exchange of a freestanding equity-classified written call option that is not within the scope of another Topic. It specifically addresses: (1) how an entity should treat a modification of the terms or conditions or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange; (2) how an entity should measure the effect of a modification or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange; and (3) how an entity should recognize the effect of a modification or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange. This ASU will be effective for all entities for fiscal years beginning after December 15, 2021. An entity should apply the amendments prospectively to modifications or exchanges occurring on or after the effective date of the amendments. Early adoption is permitted, including adoption in an interim period. The adoption of ASU 2021-04 is not expected to have a material impact on the Company’s financial statements or disclosures.
In October 2021, the FASB issued ASU 2021-08, Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (“ASU 2021-08”). The standard improves the accounting for acquired revenue contracts with customers in a business combination by addressing diversity in practice and inconsistency related to (1) recognition of an acquired contract liability and (2) payment terms and their effect on subsequent revenue recognized by the acquirer. ASU 2021-08 will be effective for the Company for interim and annual periods in fiscal years beginning after December 15, 2022. We are in the process of evaluating the impact that ASU 2021-08 will have on our condensed consolidated financial statements and associated disclosures.
Note 3 - Business Acquisitions
Nebula Acquisition
On
August 10, 2021 (the “Effective Date”), 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 from the Seller Parties, for an aggregate purchase
price of approximately $
In connection with the Nebula Acquisition, ProPhase Precision entered into an employment agreement with Kamal Obbad, the Chief Executive Officer of Nebula, on the Effective Date, pursuant to which Mr. Obbad will serve as Senior Vice President, Director of Sales and Marketing of ProPhase Precision. As a condition to the employment agreement, Mr. Obbad was awarded a stock option to purchase shares of Company common stock at an exercise price equal to $per share, the closing price of the Company common stock on the Effective Date. The award was issued as a material inducement to Mr. Obbad’s acceptance of employment with ProPhase Precision in accordance with Nasdaq Listing Rule 5635(c)(4) and was approved by the Company’s Compensation Committee (see Note 7, Stockholders’ Equity).
| 18 |
ProPhase Labs, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
Based
on the preliminary valuation, the total consideration of $
| Short term investments | $ | |||
| Accounts receivable | ||||
| Inventory | ||||
| Prepaid and other current assets | ||||
| Definite-lived intangible assets | ||||
| Total assets acquired | ||||
| Accounts payable | ( | ) | ||
| Accrued expenses and other current liabilities | ( | ) | ||
| Deferred revenue | ( | ) | ||
| Note payable | ( | ) | ||
| Total liabilities assumed | ( | ) | ||
| Net identifiable assets acquired | ||||
| Goodwill | ||||
| Total consideration, net of cash acquired (1) | $ |
| (1) |
Goodwill represents the excess of the purchase price over the net identifiable tangible and intangible assets acquired. The Company believes the goodwill related to the acquisition was a result of the expected synergies to be realized from combining operations and is not deductible for income tax purposes. 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.
The intangible assets preliminarily identified in conjunction with the Nebula Acquisition are as follows (amount in thousands):
| Gross Carrying Value | Estimated Useful Life (in years) | |||||||
| Trade names | $ | |||||||
| Proprietary intellectual property | ||||||||
| Customer relationships | ||||||||
| Total | $ | |||||||
The
Company recognized $
| 19 |
ProPhase Labs, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
Pro Forma Results
The following table summarizes, on a pro forma basis, the combined results of the Company as though the Nebula Acquisition had occurred as of January 1, 2020. These pro forma results are not necessarily indicative of the actual consolidated results had the acquisition occurred as of that date or of the future consolidated operating results for any period. Pro forma results are (in thousands):
| For the three months ended | For the nine months ended | |||||||||||||||
| September 30, 2021 | September 30, 2020 | September 30, 2021 | September 30, 2020 | |||||||||||||
| Revenue, net | $ | $ | $ | $ | ||||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
CPM Acquisition
On
October 23, 2020, the Company acquired all of the issued and outstanding shares of capital stock of CPM for approximately $
Based
on valuation, the total consideration of $
| 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 $
Note 4 – Goodwill and Acquired Intangible Assets
Goodwill
Changes in goodwill for the nine months ended September 30, 2021 are as follows (in thousands):
| September 30, 2021 | ||||
| Goodwill, beginning of period | $ | |||
| Acquisition of Nebula | ||||
| Goodwill, end of period | $ | |||
| 20 |
ProPhase Labs, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
Intangible Assets, Net
Intangible assets as of September 30, 2021 and December 31, 2020 consisted of the following (in thousands):
| September 30, | December 31, | Estimated Useful | ||||||||||
| 2021 | 2020 | Life (in years) | ||||||||||
| Trade names | $ | $ | ||||||||||
| Proprietary intellectual property | ||||||||||||
| Customer relationships | ||||||||||||
| CLIA license | ||||||||||||
| Less: accumulated amortization | ( | ) | ( | ) | ||||||||
| Total intangible assets, net | $ | $ | ||||||||||
Amortization
expense for acquired intangible assets was $
| Three 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 | ||||
| $ |
Note 5 - Property, Plant and Equipment
The components of property and equipment are as follows (in thousands):
| September 30, | December 31, | |||||||||
| 2021 | 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 for
the three months ended September 30, 2021 and 2020 was $
| 21 |
ProPhase Labs, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
Note 6 -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 three months ended September 30, 2021 and 2020, we incurred $
Note 7 - 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 September 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 $
| 22 |
ProPhase Labs, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
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. On January 21, 2021, we completed the offering for net proceeds of $
Nebula Acquisition
As part of Nebula Acquisition (see Note 3, Business Acquisitions), a portion of the purchase price was paid in shares to certain Seller Parties and noteholders of Nebula, based on their election to receive shares of Company common stock in lieu of cash, which shares have been valued at a price per share of $, which is equal to the average closing price of the Company’s common stock on Nasdaq for the five trading days preceding the signing of the Nebula Stock Purchase Agreement.
The
Company issued shares of common stock in in lieu of $
Stock Repurchase Program
On September 8, 2021, the Company announced that its board of directors (the “Board”) had approved a new stock repurchase program. Under the stock repurchase program, the Company is authorized to repurchase up to $million of its outstanding shares of common stock from time to time, over a six month period. The number of shares to be repurchased and the timing of the repurchases, if any, will depend on a number of factors, including, but not limited to, price, trading volume and general market conditions, along with the Company’s working capital requirements and general business conditions. The Board will re-evaluate the program from time to time, and may authorize adjustments to its terms.
The Company did not repurchase any shares of common stock during the three and nine months ended September 30, 2021.
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 authorizes the issuance of up to shares of common stock.
During the three and nine months ended September 30, 2021, stock options to purchase an aggregate of shares of our common stock were granted to our directors in lieu of director fees under the 2010 Directors’ Plan with a strike price of $per share under the Amended 2010 Directors’ Plan. During the three and nine months ended September 30, 2020, common stock and stock options to purchase an aggregate of and shares of common stock, respectively, were granted to our directors under the 2010 Directors’ Plan in lieu of director fees.
| 23 |
ProPhase Labs, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
At September 30, 2021, there were stock options outstanding and there were shares of common stock available to be issued pursuant to the terms of the Amended 2010 Directors’ Plan. No stock options were exercised during the three and nine months ended September 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 authorizes the issuance of up to shares of common stock.
There were stock options granted under the 2010 Plan during the nine months ended September 30, 2021 for a total fair value of $.
There were stock options granted under the 2010 Plan during the three and nine months ended September 30, 2020 for a total fair value of $.
As of September 30, 2021, there were stock options outstanding and there were shares of common stock available to be issued pursuant to the terms of the Amended 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.
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 is exercisable in 36 monthly installments, to Ted Karkus (the “CEO Option”), our Chief Executive Officer. portion of the CEO Option was exercised during the nine months ended September 30, 2021 and 2020.
The 2018 Stock 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 exercise price of the CEO Option was reduced from $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. 1.50 to $per share, effective as of June 3, 2021, the date another $special cash dividend was paid to Company’s stockholders.
Inducement Option Award
As part of Nebula Acquisition, the Company issued a non-qualified stock option to Kamal Obbad, the Chief Executive Officer of Nebula, as an inducement to his employment with the Company (the “Inducement Award”). The Inducement Award entitles Mr. Obbad to purchase up to shares of the Company’s common stock at an exercise price of $per share, the closing price of the Company’s common stock on the closing date of the Nebula Acquisition. The Inducement Award was granted to Mr. Obbad on the closing date of the Nebula Acquisition. The Inducement Award vested % on the grant date and will vest % per year for the next three years subject to Mr. Obbad’s continued employment with the Company. The Inducement Award expires on the seventh anniversary of the grant date. Any portion of the Inducement Award that does not vest and become exercisable will be forfeited for no consideration. The grant date fair value of the Inducement Award was approximately $.
For the three months ended September 30, 2021 and 2020, we charged to operations an aggregate of $ and $, respectively, for share-based compensation expense associated with the vesting of outstanding equity awards under the Amended 2010 Directors’ Plan, the Amended 2010 Plan, the 2018 Stock Plan and the Inducement Award. For the nine months ended September 30, 2021 and 2020, we charged to operations an aggregate of $ and $, respectively, for share-based compensation expense associated with the vesting of outstanding equity awards under the 2010 Directors’ Plan, the 2010 Plan, the 2018 Stock Plan and the Inducement Award..
| 24 |
ProPhase Labs, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
| 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 September 30, 2021 | $ | $ | ||||||||||||||
| Options vested and exercisable | $ | $ | ||||||||||||||
| For the nine months ended | ||||
| September 30, 2021 | ||||
| Exercise price | $ | |||
| Expected term (years) | ||||
| Expected stock price volatility | % | |||
| Risk-free rate of interest | % | |||
| Expected dividend yield (per share) | % | |||
Stock Warrants Issued
During
the nine months ended September 30, 2021, we issued warrants to purchase
During
the nine months ended September 30, 2021, we issued
The following table summarizes warrant activities during the nine months ended September 30, 2021 (in thousands, except per share data).
| Number of Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life (in years) | ||||||||||
| Outstanding as of January 1, 2021 | $ | |||||||||||
| Warrants granted | ||||||||||||
| Cashless exercise | ( | ) | ||||||||||
| Outstanding as of September 30, 2021 | $ | |||||||||||
| Warrants vested and exercisable | $ | |||||||||||
| 25 |
ProPhase Labs, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
The following table summarizes weighted average assumptions used in determining the fair value of the warrants at the date of grant for the nine months ended September 30, 2021:
| For the nine months ended | ||||
| September 30, 2021 | ||||
| Exercise price | $ | |||
| Expected term (years) | ||||
| Expected stock price volatility | % | |||
| Risk-free rate of interest | % | |||
| Expected dividend yield (per share) | % | |||
As
of September 30, 2021, there were warrants to purchase
Note 8 - 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
nine months ended September 30, 2021 were $
Note 9 - Other Current Liabilities
The following table sets forth the components of other current liabilities at September 30, 2021 and December 31, 2020, respectively (in thousands):
| September 30, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Accrued commissions | $ | $ | ||||||
| Accrued payroll | ||||||||
| Accrued expenses | ||||||||
| Accrued returns | ||||||||
| Accrued income tax payable | - | |||||||
| Accrued benefits and vacation | ||||||||
| Deferred revenue | - | |||||||
| Total other current liabilities | $ | $ | ||||||
| 26 |
ProPhase Labs, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
Note 10- Commitments and Contingencies
Manufacturing 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”) in connection with the asset purchase agreement
we entered into with Mylan in 2017. 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
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 11 – Leases
On
October 23, 2020, we completed the acquisition of CPM, which included the acquisition of a
On December 8, 2020, we entered into a Lease Agreement (the “New York Lease”) 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. The initial term of the New York Lease is
At
September 30, 2021, we had operating lease liabilities for the New York and New Jersey leases of approximately $
| 27 |
ProPhase Labs, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
The following summarizes quantitative information about our operating leases (amounts in thousands):
For the Nine Months Ended September 30, 2021 | ||||
| Operating leases | ||||
| Operating lease cost | $ | |||
| Variable lease cost | - | |||
| Operating lease expense | ||||
| Short-term lease rent expense | - | |||
| Total rent expense | $ | |||
| For the Nine Months Ended September 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 12- Significant Customers
Revenue
for the three months ended September 30, 2021 and 2020 was $
Revenue
for the nine months ended September 30, 2021 and 2020 was $
Five
diagnostic services clients generated
| 28 |
ProPhase Labs, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
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.