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 _____
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Securities Registered Pursuant to Section 12(b) of the Exchange Act:
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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
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| Large accelerated filer ☐ | Accelerated filer ☐ |
| Smaller
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| Emerging
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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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| Class | Outstanding November 10, 2022 | |
| 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 2022 | December 31, 2021 | |||||||
| (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 | ||||||||
| Prepaid expenses, net of current portion | ||||||||
| Operating lease right-of-use asset, net | ||||||||
| Intangible assets, net | ||||||||
| Goodwill | ||||||||
| Deferred tax asset | ||||||||
| Other assets | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued diagnostic services | ||||||||
| Accrued advertising and other allowances | ||||||||
| Operating lease liabilities | ||||||||
| Deferred revenue | ||||||||
| Income tax payable | ||||||||
| Other current liabilities | ||||||||
| Total current liabilities | ||||||||
| Non-current liabilities: | ||||||||
| Deferred revenue, net of current portion | ||||||||
| Note payable | ||||||||
| Unsecured convertible promissory notes, net | ||||||||
| Operating 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 | ||||||||
| Retained earnings | ||||||||
| 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 Comprehensive Income (Loss)
(in thousands, except per share amounts)
(unaudited)
| For the three months ended | For the nine months ended | |||||||||||||||
| September 30, 2022 | September 30, 2021 | September 30, 2022 | September 30, 2021 | |||||||||||||
| 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 | ( | ) | ( | ) | ( | ) | ||||||||||
| Income (loss) from operations before income taxes | ( | ) | ( | ) | ||||||||||||
| Income tax expense | ( | ) | ( | ) | ||||||||||||
| Income (loss) from operations after income taxes | ( | ) | ( | ) | ||||||||||||
| Net income (loss) | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
| Other comprehensive loss: | ||||||||||||||||
| Unrealized loss on marketable debt securities | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total comprehensive income | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
| 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 September 30, 2022 | ||||||||||||||||||||||||||||
Common Stock Shares | Par Value | Additional Paid in | Retained Earnings | Treasury Stock | Accumulated Other Comprehensive Loss | Total | ||||||||||||||||||||||
| Balance as of July 1, 2022 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||
| Repurchase of common shares | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||
| Unrealized loss on marketable debt securities, net of realized loss of $ | - | ( | ) | ( | ) | |||||||||||||||||||||||
| Issuance of common stock upon stock options cashless exercise | ||||||||||||||||||||||||||||
| Treasury shares repurchased to satisfy tax withholding obligations | - | ( | ) | ( | ) | |||||||||||||||||||||||
| Stock-based compensation | ||||||||||||||||||||||||||||
| Net income | - | |||||||||||||||||||||||||||
| Balance as of September 30, 2022 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||
| For the Three Months Ended September 30, 2021 | ||||||||||||||||||||||||||||
Common Stock Shares | Par Value | Additional Paid in | Accumulated Deficit | Treasury Stock | Accumulated Other Comprehensive Loss | Total | ||||||||||||||||||||||
| Balance as of July 1, 2021 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||
| Issuance of common shares related to business acquisition | ||||||||||||||||||||||||||||
| Unrealized loss on marketable debt securities, net of taxes | - | ( | ) | ( | ) | |||||||||||||||||||||||
| Cashless warrants exercise | ||||||||||||||||||||||||||||
| Stock-based compensation | ||||||||||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||||||||||
| Balance as of September 30, 2021 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||
See accompanying notes to condensed consolidated financial statements
| 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, 2022 | ||||||||||||||||||||||||||||
Common Stock Shares | Par Value | Additional Paid in | Retained Earnings | Treasury Stock | Accumulated Other Comprehensive Loss | Total | ||||||||||||||||||||||
| Balance as of January 1, 2022 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||
| Issuance of common shares for debt conversion | ||||||||||||||||||||||||||||
| Cash dividends | - | ( | ) | ( | ) | |||||||||||||||||||||||
| Repurchases of common shares | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||
| Issuance of common stock upon stock options cashless exercise | ||||||||||||||||||||||||||||
| Treasury shares repurchased to satisfy tax withholding obligations | - | ( | ) | ( | ) | |||||||||||||||||||||||
| Unrealized loss on marketable debt securities, net of realized loss of $ | - | ( | ) | ( | ) | |||||||||||||||||||||||
| Stock-based compensation | ||||||||||||||||||||||||||||
| Net income | - | |||||||||||||||||||||||||||
| Balance as of September 30, 2022 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||
| For the Nine Months Ended September 30, 2021 | ||||||||||||||||||||||||||||
Common Stock Shares | Par Value | Additional Paid in | Accumulated Deficit | Treasury Stock | Accumulated Other Comprehensive Loss | 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 acquisition | ||||||||||||||||||||||||||||
| 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 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||
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, 2022 | September 30, 2021 | |||||||
| Cash flows from operating activities | ||||||||
| Net income (loss) | $ | $ | ( | ) | ||||
| Adjustments to reconcile net income (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 operating lease right-of-use assets | ||||||||
| Loss on sale of assets | ||||||||
| Stock-based compensation expense | ||||||||
| Change in fair value of investment securities | ||||||||
| Accounts receivable allowances | ||||||||
| Inventory valuation reserve | ( | ) | ||||||
| Non-cash interest income on secured promissory note receivable | ( | ) | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ( | ) | ||||
| Inventory | ( | ) | ( | ) | ||||
| Prepaid expenses and other current assets | ||||||||
| Deferred tax asset | ( | ) | ||||||
| Other assets | ( | ) | ( | ) | ||||
| Accounts payable | ( | ) | ( | ) | ||||
| Accrued diagnostic services | ( | ) | ||||||
| Accrued advertising and other allowances | ( | ) | ||||||
| Deferred revenue | ||||||||
| Operating lease liabilities | ( | ) | ||||||
| Income tax payable | ||||||||
| Other current liabilities | ( | ) | ||||||
| Net cash provided by (used in) 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 | ||||||||
| Proceeds from dispositions of property and other assets, net | ||||||||
| Capital expenditures | ( | ) | ( | ) | ||||
| Net cash provided by (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 | ||||||||
| Repayment of note payable | ( | ) | ||||||
| Repurchases of common shares | ( | ) | ||||||
| Payment of dividends | ( | ) | ( | ) | ||||
| Repurchase of common stock for payment of statutory taxes due on cashless exercise of stock option | ( | ) | ||||||
| Net cash (used in) 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 for debt conversion | $ | $ | ||||||
| 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 company that offers a range of services including diagnostic testing, genomics testing and contract manufacturing. We provide traditional CLIA molecular laboratory services, including SARS-CoV-2 (“COVID-19”) testing and seek to leverage our Clinical Laboratory Improvement Amendments (“CLIA”) accredited laboratory services to provide whole genome sequencing and research direct to consumers, while building a genomics database to be used for further research. In addition, we have 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 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. However, commencing in December 2020, we also began offering COVID-19 and were prepared to validate other Respiratory Pathogen Panel (RPP) molecular tests through our 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 broad array of clinical diagnostic and testing services at its CLIA certified laboratories including polymerase chain reaction (“PCR”) testing for COVID-19. Critical to COVID-19 testing, we provide fast turnaround times for results. We also offer rapid antigen testing for COVID-19. On October 23, 2020, we acquired Confucius Plaza Medical Laboratory Corp. (“CPM”), which included a non-operating but certified 4,000 square foot CLIA accredited laboratory located in Old Bridge, New Jersey. 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 January 2021.
On August 10, 2021, we acquired Nebula Genomics, Inc. (“Nebula”), a privately owned personal genomics company, through our new wholly owned subsidiary, ProPhase Precision Medicine, Inc. (“ProPhase Precision”) (see Note 3, Business Acquisitions). ProPhase Precision focuses on genomics sequencing technologies, a comprehensive method for analyzing entire genomes, including the genes and chromosomes in DNA. The data obtained from genomic sequencing can be used to help identify inherited disorders and tendencies, help predict disease risk, help identify expected drug response, and characterize genetic mutations, including those that drive cancer progression.
Our wholly owned subsidiary, ProPhase BioPharma, Inc. (“PBIO”) was formed on June 28, 2022, for the licensing, development and commercialization of novel drugs, dietary supplements and compounds beginning with Equivir and Equivir G. PBIO announced a second licensing agreement for two small molecule PIM kinase inhibitors, Linebacker LB-1 and LB-2, in July 2022, with plans to pursue development and commercialization of LB-1 as a cancer co-therapy.
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.
We also develop and market dietary supplements under the TK Supplements® brand.
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, 2021. 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, 2022, 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
In accordance with FASB ASC 280, “Segment Reporting” (“ASC 280”), the Company discloses financial and descriptive information about its reportable operating segments.
ASC 280 establishes standards for reporting information about operating segments in annual and interim financial statements and requires that companies report financial and descriptive information about their reportable segments based on a management approach. ASC 280 also establishes standards for related disclosures about products and services, geographic areas and major customers.
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. We maintain 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) (see Note 15 Segment Information).
Business and Liquidity Risks and Uncertainties
Our diagnostic service business is and will continue to be impacted by the level of demand for COVID-19 and other diagnostic testing, how long this demand persists, the prices we are able to receive for performing our testing services, our ability to collect payment or reimbursement for our testing services, 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 significantly since the launch of our diagnostic services business, we have been dependent on both government agency and insurance company reimbursement as well as the prevalence of COVID-19 associated strains.
In
March 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), was enacted, providing for reimbursement
to healthcare providers for COVID-19 tests provided to uninsured individuals, subject to continued available funding. Approximately
On March 22, 2022, the Health Resources & Services Administration (HRSA) program stopped accepting claims for COVID-19 testing and treatment due to lack of sufficient funds. As a result of the suspension of the HRSA uninsured program, we have not recognized any revenue related to COVID-19 testing that we performed for uninsured individuals from March 22, 2022 through September 30, 2022.
For
the nine months ended September 30, 2022, $
The Company’s future capital needs and the adequacy of its available funds will depend on its ability to achieve sustained profitability from its diagnostic services, the Company’s ability to successfully diversify its diagnostic services revenue streams and the Company’s ability to market and grow its personal genomics business. 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 condensed consolidated 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 condensed consolidated financial statements and reported amounts of revenues and expenses during the respective reporting periods. Examples include revenue recognition and the impact of the variable consideration of diagnostic test reimbursement rates, the provision for uncollectible receivables and billing errors, allowances, slow moving and/or dated inventory and associated provisions, the potential impairment of long-lived assets, stock based compensation valuations, income tax asset valuations and assumptions related to accrued advertising.
Our estimates and assumptions are based on historical experience, current trends and other factors that management believes to be relevant at the time the condensed consolidated 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.
Restricted Cash
Restricted
cash as of December 31, 2021 includes approximately $
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.
The following is a summary of the components of our marketable debt securities and the underlying fair value input level tier hierarchy (in thousands) (see fair value of financial instruments):
| As of September 30, 2022 | ||||||||||||||||
| Amortized | Unrealized | Unrealized | Fair | |||||||||||||
| Cost | Gains | Losses | Value | |||||||||||||
| U.S. government obligations | $ | $ | $ | ( | ) | $ | ||||||||||
| Corporate obligations | ( | ) | ||||||||||||||
| $ | $ | $ | ( | ) | $ | |||||||||||
| As of December 31, 2021 | ||||||||||||||||
| Amortized | Unrealized | Unrealized | Fair | |||||||||||||
| Cost | Gains | Losses | Value | |||||||||||||
| U.S. government obligations | $ | $ | $ | $ | ||||||||||||
| Corporate obligations | ( | ) | ||||||||||||||
| $ | $ | $ | ( | ) | $ | |||||||||||
Marketable Equity Securities
Marketable equity securities are recorded at fair value in the condensed consolidated balance sheets. The change in fair value of marketable equity securities is recognized within other non-operating income, net in the condensed consolidated statements of operations and comprehensive income (loss).
On
June 25, 2021, we were issued common shares (the “Investment Shares”) as an interest payment under our note receivable
(see Note 13, Consulting Agreement and Secured Promissory Note Receivable) with a fair value of $ at the time of issuance and
a fair value of $ at December 31, 2021. 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)
Accounts Receivable, net
Accounts receivable consists primarily of amounts due from government agencies and healthcare insurers for our diagnostic services. Unbilled accounts receivable relates to the delivery of our diagnostic testing services for which the related billings will occur in a future period, after a patient’s insurance information has been validated, and represent amounts for which we have a right to receive payment. Unbilled accounts receivable is classified as accounts receivable on the condensed consolidated balance sheet. We carry our accounts receivable at the amount of consideration for which we expect to be entitled less allowances. When estimating the allowances for our diagnostics business, the Company pools its receivables based on the following payer types: healthcare insurers and government payers. The Company principally estimates the allowances by pool based on historical collection experience, current economic conditions, government and healthcare insurer payment trends, and the period of time that the receivables have been outstanding. Should a payer’s reimbursement policy change or their credit quality deteriorate, the Company removes the payer from their respective pools and establishes allowances based on the individual risk characteristics of such payer.
Accounts are written off as uncollectible at the time we determine that collections are unlikely. Accounts receivable, net is comprised of the following (in thousands):
| September 30, 2022 | December 31, 2021 | |||||||
| Trade accounts receivable | $ | $ | ||||||
| Unbilled accounts receivable | ||||||||
| Less allowances | ( | ) | ( | ) | ||||
| Total accounts receivable | $ | $ | ||||||
Inventory, 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 established.
At September 30, 2022 and December 31, 2021, the components of inventory are as follows (in thousands):
| September 30, 2022 | December 31, 2021 | |||||||
| Diagnostic services testing material | $ | $ | ||||||
| Raw materials | ||||||||
| Work in process | ||||||||
| Finished goods | ||||||||
| Inventory | $ | $ | ||||||
| Inventory valuation reserve | ( | ) | ( | ) | ||||
| Inventory, net | $ | $ | ||||||
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
Concentration of Financial Risks
Financial instruments that potentially subject us to significant concentrations of credit risk consist principally of cash investments, marketable debt securities, and 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, 2022, our cash and cash equivalents was $
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 rates. The collectability of the diagnostic services receivables is also directly linked to the quality of our billing processes, which depends on information provided to the payors and meeting their requirements for reimbursement.
| 11 |
ProPhase Labs, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
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 condensed consolidated 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 condensed consolidated balance sheet leases with terms of 12 months or less. We typically only include an initial lease term in our 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 12, 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 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. There have been no triggering events during the nine months ended September 30, 2022 and thus, there has been no adjustment to goodwill as of September 30, 2022.
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.
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.
| 12 |
ProPhase Labs, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
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, and unsecured note payable, approximate their fair values because of the short-term 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 securities change in fair value reported on the condensed consolidated statements of operation and comprehensive income (loss). The components of marketable securities are as follows (in thousands):
| As of September 30, 2022 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| U.S. government obligations | $ | $ | $ | $ | ||||||||||||
| Corporate obligations | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
| As of December 31, 2021 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| U.S. government obligations | $ | $ | $ | $ | ||||||||||||
| Corporate obligations | ||||||||||||||||
| Marketable equity securities | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
There were no transfers of marketable debt securities between Levels 1, 2 or 3 for the nine months ended September 30, 2022 and 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.
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. Sales from product shipments to contract manufacturing and retailer customers are recognized at the time ownership is transferred to the customer. 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 ratably over the term of the subscription.
| 13 |
ProPhase Labs, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
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.
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. 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 via our website or through online retailers. The kit sales and subscriptions are billed at a standard price and take into consideration any discounts when revenue is recorded.
Recognize Revenue When the Company Satisfies a Performance Obligation
Recognition for contract manufacturing and retail customers is 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, recognition occurs 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, we satisfy our product performance obligation at a point in time when the genetic testing results are provided to the
customer. For subscriptions services associated with our genomic testing, we satisfy our performance obligation ratably over the subscription
period. If the customer does not return the test kit, services cannot be completed by us, potentially resulting in unexercised rights
(“breakage”) revenue, including lifetime subscription services. We estimate breakage for the portion of test kits not expected
to be returned using an analysis of historical data and consider other factors that could influence customer test kit return behavior.
When breakage revenue is recognized on a kit, we recognize breakage on any associated subscription services ratably over the term of
the subscription. The Company recognized breakage revenue from aggregate unreturned test kits and subscriptions of $
| 14 |
ProPhase Labs, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
Contract Balances
Deferred
revenues primarily consist of amounts that have been billed to or received from customers in advance of revenue recognition and prepayments
received from customers in advance of services performed for the research and development (“R&D”) work. As of September
30, 2022 and December 31, 2021, we have deferred revenue of $
The following table disaggregates our deferred revenue by recognition period (in thousands):
| Recognition Period | September 30, 2022 | December 31, 2021 | ||||||
| 0-12 Months | $ | $ | ||||||
| 13-24 Months | ||||||||
| Over 24 Months | ||||||||
| Total | $ | $ | ||||||
Disaggregation of Revenue
We disaggregate revenue from contracts with customers into four categories: diagnostic services, contract manufacturing, retail and others, 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.
The following table disaggregates the Company’s revenue by revenue source for the three and nine months ended September 30, 2022 and 2021 (in thousands):
| For the three months ended | For the nine months ended | |||||||||||||||
| Revenue by Customer Type | September 30, 2022 | September 30, 2021 | September 30, 2022 | September 30, 2021 | ||||||||||||
| Diagnostic services | $ | $ | $ | $ | ||||||||||||
| Contract manufacturing | ||||||||||||||||
| Retail and others | ||||||||||||||||
| Genomic products and services | ||||||||||||||||
| Total revenue, net | $ | $ | $ | $ | ||||||||||||
Customer Consideration
The Company makes payments to certain diagnostic services customers for distinct services that approximate the fair value for those services. Such services include specimen collection, the collection and delivery of insurance and patient information necessary for billing and collection, and logistics services. 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 condensed consolidated statements of operations and comprehensive income (loss).
Sales Tax Exclusion from the Transaction Price
We exclude from the measurement of the transaction price all taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected by the Company from the customer.
| 15 |
ProPhase Labs, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
Shipping and Handling Activities
We account for shipping and handling activities that we perform as activities to fulfill the promise to transfer the good.
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 general and administrative expense, (ii) cooperative incentive promotions
and coupon program expenses, which are accounted for as part of net revenue, and (iii) free product, which is accounted for as part of
cost of revenues. Advertising and incentive promotion expenses incurred for the three months ended September 30, 2022 and 2021 were $
Stock-Based Compensation
The Company accounts for stock-based compensation in accordance with FASB ASC 718, “Compensation - Stock Compensation.” Under the fair value recognition provision of the ASC, stock-based compensation cost is estimated at the grant date based on the fair value of the award. The Company estimates the fair value of stock options and warrants granted using the Black-Scholes-Merton option pricing model and stock grants at their closing reported market value. We recognize all stock-based payments to employees and directors, including grants of stock options, as compensation expense in the condensed consolidated financial statements based on their grant date fair values. The grant date 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 (see Note 7, Stockholders’ Equity). Stock options are exercisable during a period determined by us, but in no event later than seven years from the date granted.
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, 2022 and 2021
were $
Income Taxes
The Company recognizes deferred tax liabilities and assets based on the differences between the financial statement carrying amounts and the tax bases of assets and liabilities, using enacted tax rates in effect in the years the differences are expected to reverse.
The provision for, or benefit from, income taxes includes deferred taxes resulting from the temporary differences in income for financial and tax purposes using the liability method. Future realization of deferred income tax assets requires sufficient taxable income within the carryback, carryforward period available under tax law. We evaluate, on a quarterly basis whether, based on all available evidence, it is probable that the deferred income tax assets are realizable. Valuation allowances are established when it is more likely than not that the tax benefit of the deferred tax asset will not be realized. The evaluation, as prescribed by ASC 740- 10, “Income Taxes,” includes the consideration of all available evidence, both positive and negative, regarding historical operating results including recent years with reported losses, the estimated timing of future reversals of existing taxable temporary differences, estimated future taxable income exclusive of reversing temporary differences and carryforwards, and potential tax planning strategies which may be employed to prevent an operating loss or tax credit carryforward from expiring unused.
The Company accounts for uncertainties in income taxes under the provisions of FASB ASC 740-10-05 (the “Subtopic”). The Subtopic clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. The Subtopic prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Subtopic provides guidance on the de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.
| 16 |
ProPhase Labs, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
Recently Issued Accounting Standards, Adopted
The Financial Accounting Standards Board (“FASB”) recently issued Accounting Standards Update (“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. The Company adopted ASU 2020-06 on January 1, 2022. The adoption of ASU 2020-06 did not have a material impact on the Company’s condensed consolidated financial statements or disclosures.
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 Company adopted ASU 2021-04 on January 1, 2022. The adoption of ASU 2021-04 did not have a material impact on the Company’s condensed consolidated financial statements or disclosures.
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 condensed consolidated financial statements.
In June 2022, the FASB issued ASU 2022-03, ASC Subtopic 820 “Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions”. The FASB is issuing this Update (1) to clarify the guidance in Topic 820, Fair Value Measurement, when measuring the fair value of an equity security subject to contractual restrictions that prohibit the sale of an equity security, (2) to amend a related illustrative example, and (3) to introduce new disclosure requirements for equity securities subject to contractual sale restrictions that are measured at fair value in accordance with Topic 820. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years. Early adoption is permitted for both interim and annual financial statements that have not yet been issued or made available for issuance. We are currently assessing the impact of the adoption of this ASU on our condensed consolidated financial statements.
| 17 |
ProPhase Labs, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
Note 3 - Business Acquisition
Nebula Acquisition
On
August 10, 2021 (the “Nebula Effective Date”), the Company and its wholly owned subsidiary, ProPhase Precision, entered into
and closed a Stock Purchase Agreement (the “Nebula Stock Purchase Agreement”) with 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 Nebula Effective Date, pursuant to which Mr. Obbad serves 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 Nebula Effective Date (see Note 7, Stockholders’ Equity).
Based
on the valuation, the total consideration of $
| Account | Amount | |||
| Short term investments | $ | |||
| Accounts receivable | ||||
| Inventory | ||||
| Prepaid expenses and other current assets | ||||
| Definite-lived intangible assets | ||||
| Total assets acquired | ||||
| Accounts payable | ( | ) | ||
| Accrued expenses and other current liabilities | ( | ) | ||
| Deferred revenue | ( | ) | ||
| Note payable | ( | ) | ||
| Deferred tax liability | ( | ) | ||
| 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 identified in conjunction with the Nebula Acquisition are as follows (in thousands):
| Gross Carrying Value | Estimated Useful Life (in years) | |||||||
| Trade names | $ | |||||||
| Proprietary intellectual property | ||||||||
| Customer relationships | ||||||||
| Total | $ | |||||||
| 18 |
ProPhase Labs, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
Note 4 - Intangible Assets, Net
Intangible assets as of September 30, 2022 and December 31, 2021 consisted of the following (in thousands):
| September 30, 2022 | December 31, 2021 | Estimated Useful 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 $
| Remaining periods in the year ended December 31, 2022 | $ | |||
| Year ended December 31, 2023 | ||||
| Year ended December 31, 2024 | ||||
| Year ended December 31, 2025 | ||||
| Year ended December 31, 2026 | ||||
| Thereafter | ||||
| $ |
Note 5 - Property, Plant and Equipment
The components of property, plant and equipment are as follows (in thousands):
| September 30, 2022 | December 31, 2021 | 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 three months ended September 30, 2022 and 2021 was $
| 19 |
ProPhase Labs, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
Note 6 -Unsecured Convertible Promissory Notes Payable
On
September 15, 2020, we issued two unsecured, partially convertible, promissory notes (the “September 2020 Notes”) for an
aggregate principal amount of $
On
February 28, 2022, we entered into a letter agreement (the “Letter Agreement”) with one of the Lenders providing for the
payoff of its September 2020 Note in the principal amount of $
Pursuant
to the terms of the Letter Agreement, (i) the Lender converted $
The
September 2020 Note that remains outstanding as of September 30, 2022 is due and payable on September 15, 2023 and accrues interest at
a rate of
The September 2020 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 September 2020 Note may be accelerated. The September 2020 Note 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 Note) 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 Lender.
For
the three months ended September 30, 2022 and 2021, we incurred $
Note 7 - Stockholders’ Equity
Our authorized capital stock consists of million shares of common stock, $ par value, and 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, 2022 and December 31, 2021, shares of preferred stock have been issued.
Common Stock Dividends
On
February 14, 2022, the board of directors of the Company declared a special cash dividend of $ per share on the Company’s common
stock, paid on March 10, 2022, in the amount of $
On
May 9, 2022, the board of directors of the Company declared a special cash dividend of $ per share on the Company’s common
stock, paid on June 4, 2022, in the amount of $
| 20 |
ProPhase Labs, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
Note 7 - Stockholders’ Equity (continued)
Common Stock
Stock Repurchase Program
On September 8, 2021, the Company’s board of directors approved a stock repurchase program under which the Company was authorized to repurchase up to $million of its outstanding shares of common stock from time to time, over a six-month period. During the nine months ended September 30, 2022, the Company did not make any common shares repurchases under the stock repurchase program. The stock repurchase program expired on March 30, 2022.
On
July 24, 2022, the Company’s board of directors authorized a new stock repurchase program of up to $
Following the Commencement Date, and for a period of six months thereafter, repurchases may be made through open market transactions (based on prevailing market prices), privately negotiated transactions, block trades, or any combination thereof, in accordance with applicable federal securities laws, including Rule 10b-18 of the Securities Exchange Act of 1934, as amended. 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 of directors of the Company will re-evaluate the program from time to time, and may authorize adjustments to its terms. The Company expects to utilize its existing funds to fund any repurchases under the repurchase program.
The 2022 Directors’ Equity Compensation Plan
On May 19, 2022, the stockholders of the Company approved the 2022 Directors’ Equity Compensation Plan (the “2022 Directors’ Plan”) at the 2022 Annual Meeting of Stockholders of the Company (the “2022 Annual Meeting”). The 2022 Directors’ Plan amended and restated the Company’s Amended and Restated 2010 Directors’ Equity Compensation Plan and provides for an increase in the number of shares reserved for issuance under the plan by shares and provides for the adjustment of the per share exercise price of stock options granted under the 2022 Plan in the event of any change in the outstanding shares of common stock of the Company as a result of, among other things, any distribution or special dividend to stockholders of shares, cash or other property (other than regular cash dividends).
As of September 30, 2022, there were stock options outstanding and there were shares of common stock available to be issued under the 2022 Directors’ Plan.
The 2022 Equity Compensation Plan
On May 19, 2022, the stockholders of the Company approved the 2022 Equity Compensation Plan (the “2022 Plan”) at the 2022 Annual Meeting. The 2022 Plan amended and restated the Company’s Amended and Restated 2010 Equity Compensation Plan and provides for an increase in the number of shares reserved for issuance under the plan by shares and provides for the adjustment of the per share exercise price of stock options granted under the 2022 Plan in the event of any change in the outstanding shares of common stock of the Company as a result of, among other things, any distribution or special dividend to stockholders of shares, cash or other property (other than regular cash dividends).
As of September 30, 2022, there were stock options outstanding and shares of common stock available to be issued under the 2022 Plan.
The 2018 Stock Incentive Plan
On April 12, 2018, our stockholders approved the 2018 Stock Incentive Plan (the “2018 Stock Plan”). The 2018 Stock Plan provides for the grant of incentive stock options to eligible employees of the Company, and for the grant of non-statutory stock options to eligible employees, directors and consultants. The 2018 Stock Plan provides that the total number of shares that may be issued pursuant to the 2018 Stock Plan is shares. At April 12, 2018, all shares have been granted in the form of stock options to Ted Karkus (the “CEO Option”), our Chief Executive Officer. During the nine months ended September 30, 2022, stock options were exercised under the 2018 Stock Plan. No share based compensation expense will be recognized in forward periods related to the 2018 Stock Plan.
The 2018 Stock Plan requires certain proportionate adjustments to be made to the stock options granted under the 2018 Stock Plan 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, has adjusted the exercise price of the CEO Option in connection with each special cash dividend paid by the Company proportionately to the amount of the dividend paid. The current exercise price of the CEO Option is $ per share after the latest special cash dividend paid on June 3, 2022.
| 21 |
ProPhase Labs, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
Note 7 – Stockholders’ Equity (continued):
Inducement Option Award
As part of Nebula Acquisition, the Company issued a non-qualified stock option to the Chief Executive Officer of Nebula (the “Nebula CEO”, as an inducement to his employment with the Company (the “2021 Inducement Award”). The 2021 Inducement Award entitles the Nebula CEO 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 2021 Inducement Award was granted to the Nebula CEO on the closing date of the Nebula Acquisition. The 2021 Inducement Award vested % on the grant date and will vest % per year for the next three years subject to the Nebula CEO’s continued employment with the Company. The 2021 Inducement Award expires on the seventh anniversary of the grant date. Any portion of the 2021 Inducement Award that does not vest and become exercisable will be forfeited for no consideration. The grant date fair value of the 2021 Inducement Award was approximately $.
Also, during the year ended December 31, 2021, we issued an inducement award to a prospective employee to purchase up to shares of the Company’s common stock at an exercise price of $, the closing price of the common stock on the date of grant. The award vests in four equal installments from the date of grant. The award expires on the seventh anniversary of the grant date.
On May 9, 2022, the Company issued a non-qualified stock option to the Chief Financial Officer of the Company (the “CFO”), as an inducement to his employment with the Company, effective May 23, 2022 (the “2022 Inducement Award”). The 2022 Inducement Award entitled the CFO of the Company to purchase up to shares of the Company’s common stock (the “CFO Option”) at an exercise price of $per share, the closing price of the Company’s common stock on May 9, 2022. The CFO Option provided for certain proportionate adjustments to be made in the event of any change in the outstanding shares of common stock of the Company as a result of, among other things, any distribution or special dividend to stockholders of shares, cash or other property (other than regular cash dividends) in order to maintain parity. The exercise price of the CFO Option was reduced from $to $per share, effective as of June 3, 2022, the date $special cash dividend was paid to Company’s stockholders. The grant date fair value of the Inducement Award was approximately $. In connection with CFO’s separation from service on October 4, 2022, these options were forfeited on October 4, 2022 (see Note 18).
During the three and nine months ended September 30, 2022, we also issued an inducement award to a prospective employee to purchase up to shares of the Company’s common stock at an exercise price of $, the closing price of the common stock on the date of grant. The award vested 50 shares on the date of grant and the remaining portion will vest % per year for the next two years. The award expires on the seventh anniversary of the grant date.
All inducement awards have been granted outside of the Company’s equity compensation plans.
During the nine months ended September 30, 2022, the Company issued options to purchase shares of the Company’s common stock to various employees and consultants. The options were valued at $ fair value, using the Black-Scholes option pricing model to calculate the grant-date fair value of the options. The fair value of stock options for employees are expensed over the vesting term in accordance with the terms of the related stock option agreements and are expensed over the terms of the consulting agreement for consultants.
| Number of Shares | Weighted Average Exercise Price | Weighted Remaining Contractual Life (in years) | Total Intrinsic Value (1) | |||||||||||||
| Outstanding as of January 1, 2022 | $ | $ | ||||||||||||||
| Granted | - | |||||||||||||||
| Cashless exercised | ( | ) | - | - | ||||||||||||
| Forfeited | ( | ) | - | - | ||||||||||||
| Outstanding as of September 30, 2022 | $ | $ | ||||||||||||||
| Options vested and exercisable | $ | $ | ||||||||||||||
| (1) |
The following table summarizes weighted average assumptions used in determining the fair value of the options at the date of grant during the nine months ended September 30, 2022 and 2021:
| For the nine months ended | ||||||||
| September 30, | ||||||||
| 2022 | 2021 | |||||||
| Exercise price | $ | $ | ||||||
| Expected term (years) | ||||||||
| Expected stock price volatility | % | % | ||||||
| Risk-free rate of interest | % | % | ||||||
| Expected dividend yield (per share) | % | % | ||||||
| 22 |
ProPhase Labs, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
Note 7 – Stockholders’ Equity (continued):
During
the nine months ended September 30, 2022 certain holders of stock options elected to exercise their stock options pursuant to a cashless
exercise provision resulting in the net issuance of shares of common stock and the return of shares to the Company. The Company also made
a cash payment of approximately $
Stock Warrants
The following table summarizes warrant activity during the nine months ended September 30, 2022 (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, 2022 | $ | |||||||||||
| Warrants granted | ||||||||||||
| Outstanding as of September 30, 2022 | $ | |||||||||||
| Warrants vested and exercisable | $ | |||||||||||
We recognized $ and $ of share-based compensation expense during the three months ended September 30, 2022 and 2021, respectively. We recognized $ and $ of share-based compensation expense during the nine months ended September 30, 2022 and 2021, respectively. 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.
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 months
ended September 30, 2022 and 2021 were $
| 23 |
ProPhase Labs, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
Note 9 – Income Taxes
We recognize tax assets and liabilities for future tax consequences related to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and for net operating loss carryforwards. Management evaluated the deferred tax assets for recoverability using a consistent approach that considers the relative impact of negative and positive evidence, including historical profitability and projections of future reversals of temporary differences and future taxable income. We are required to establish a valuation allowance for deferred tax assets if management determines, based on available evidence at the time the determination is made, that it is not more likely than not that some portion or all of the deferred tax assets will be realized. As of September 30, 2022 the Company has net deferred tax liabilities for federal and combined states jurisdictions compared to net deferred tax assets with a full valuation allowance as of December 31, 2021. The decrease in deferred tax assets with a corresponding decrease in valuation allowance against those assets as of September 30, 2022 is primarily due to utilization of net operating losses. The Company has net deferred tax assets in other states jurisdictions where we maintain a full valuation allowance. Judgment is required to estimate forecasted future taxable income, which may be impacted by future business developments, actual results, tax initiatives, legislative, and other economic factors. The Company will continue to monitor income levels and potential changes to its operating and tax model, and other legislative or global developments in its determination.
The
Company’s effective tax rate for the nine months ended September 30, 2022 is
Note 10 – Other Current Liabilities
The following table sets forth the components of other current liabilities at September 30, 2022 and December 31, 2021, respectively (in thousands):
| September, 30 2022 | December 31, 2021 | |||||||
| Accrued commissions | $ | $ | ||||||
| Accrued payroll | ||||||||
| Accrued expenses | ||||||||
| Accrued returns | ||||||||
| Accrued benefits and vacation | ||||||||
| Total other current liabilities | $ | $ | ||||||
Note 11 – 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 March 29, 2023. Thereafter, the Manufacturing Agreement may be renewed by Nurya for up to four successive one-year periods by providing notice of its intent to renew not less than 90 days prior to the expiration of the then-current term.
License Agreement
On July 19, 2022, the Company through its wholly-owned subsidiary ProPhase BioPharma entered into a License Agreement (the “License Agreement”) with Global BioLife, Inc. (the “Licensor”), with an effective date of July 18, 2022 (the “Linebacker Effective Date”), pursuant to which it acquired from Licensor a worldwide exclusive right and license under certain patents identified in the License Agreement (the “Licensed Patents”) and know-how (collectively, the “Licensed IP”) to exploit any compound covered by the Licensed Patents (the “Licensed Compound”), including Linebacker LB1 and LB2, and any product comprising or containing a Licensed Compound (“Licensed Products”) in the treatment of cancer, inflammatory diseases or symptoms, memory-related syndromes, diseases or symptoms including dementia and Alzheimer’s Disease (the “Field”). Under the terms of the License Agreement, the Licensor reserves the right, solely for itself and for GRDG Sciences, LLC (“GRDG”) to use the Licensed Compound and Licensed IP solely for research purposes inside the Field and for any purpose outside the Field.
Subject to certain conditions set forth in the License Agreement, the Company may grant sublicenses (including the right to grant further sublicenses) to its rights under the License Agreement to any of its affiliates or any third party with the prior written consent of Licensor, which consent may not be unreasonably withheld. Either party to the License Agreement may assign its rights under the License Agreement (i) in connection with the sale or transfer of all or substantially all of its assets to a third party, (b) in the event of a merger or consolidation with a third party or (iii) to an affiliate; in each case contingent upon the assignee assuming in writing all of the obligations of its assignor under the License Agreement.
| 24 |
ProPhase Labs, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
Under
the terms of License Agreement, the Company is required to pay to Licensor a one-time upfront license fee of $
During
the term of the License Agreement, the Company is also required to pay to Licensor
Under the terms of the License Agreement, the development of the Licensed Compound and the first Licensed Product for the United States will be governed by a clinical development plan, including anticipated timeline goals in connection with the clinical trials for the first Licensed Product (the “Development Plan”). The Development Plan may be amended by the mutual written agreement of the parties to the License Agreement based upon results of preclinical studies or clinical trials, including safety and effectiveness, guidance by the FDA, or upon the agreement of the parties.
The License Agreement will expire automatically on a country-by-country basis upon the last to occur of the expiration of the last to expire Licensed Patents (the “Term”). Following the expiration of the Term, and on a country-by-country basis, the License will become non-exclusive, perpetual, fully-paid, unrestricted, royalty-free and irrevocable.
The License Agreement may be terminated by ProPhase BioPharma for any reason or for convenience in its sole discretion: (i) on a Licensed Product-by-Licensed Product or a country-by-country basis or (ii) in its entirety, in either case ((i) or (ii)) for convenience upon 180 days prior written notice to Lessor. Lessor may terminate the License Agreement solely for a material breach of the License Agreement by ProPhase BioPharma, which is not cured within 60 days’ of written notice to ProPhase BioPharma of such breach.
In connection with the License Agreement, the Company has incurred approximately $
Future Obligations
We have estimated future minimum obligations for an executive’s employment agreement over the next five years as of September 30, 2022, as follows (in thousands):
| Employment | ||||
| Contracts | ||||
| Remaining periods in 2022 | $ | |||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 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 settlement where management deems it appropriate.
Note 12 – Leases
On
October 23, 2020, we completed the acquisition of CPM, which included the acquisition of a
New York Second Floor Lease
On December 8, 2020, the Company entered into a Lease Agreement (the “NY Second Floor Lease”) with BRG Office L.L.C. and Unit 2 Associates L.L.C. (the “Landlord”), pursuant to which the Company leases certain premises located on the second floor (the “Second Floor Leased Premises”) of 711 Stewart Avenue, Garden City, New York (the “Building”). The Second Floor Leased Premises serve as the Company’s second location and corporate headquarters, offering a wide range of laboratory testing services for diagnosis, screening and evaluation of diseases, including COVID-19 and Respiratory Pathogen Panel Molecular tests.
| 25 |
ProPhase Labs, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
New York Second Floor Lease (continued)
The
NY Second Floor Lease was effective as of December 8, 2020, and commenced in January 2021 (the “Second Floor Commencement Date”)
when the facility was made available to us by the landlord. The initial term of the NY Second Floor Lease is
For
the first year of the NY Second Floor Lease, we paid a base rent of $
On June 10, 2022, we entered into a First Amendment to the NY Second Floor Lease (the “Second Floor Lease Amendment”). The Second Floor Lease Amendment amends the NY Second Floor Lease to provide that any uncured default by the Company or any of its affiliate under the NY First Floor Lease (defined below) will constitute a default by the Company under the NY Second Floor Lease.
New York First Floor Lease
On
June 10, 2022, the Company entered into a second Lease Agreement (the “NY First Floor Lease”) with Landlord, pursuant to
which the Company leases approximately
The
NY First Floor Lease became effective as of June 10, 2022 and will commence upon the date of the Landlord’s substantial completion
of certain improvements to the NY First Floor Leased Premises (the “First Floor Commencement Date”), as set forth in
the NY First Floor Lease, targeted to be approximately five months from the execution of the NY First Floor Lease. The initial term of
the NY First Floor Lease will expire on July 15, 2031, unless sooner terminated as provided in the NY First Floor Lease. The Company
may extend the term of the NY First Floor Lease for one additional option period of
For
the first year of the NY First Floor Lease, the Company will pay a base rent of $
At
September 30, 2022, 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 three months ended | For the nine months ended | |||||||||||||||
| September 30, 2022 | September 30, 2021 | September 30, 2022 | September 30, 2021 | |||||||||||||
| Operating leases | ||||||||||||||||
| Operating lease cost | $ | $ | $ | $ | ||||||||||||
| Operating lease expense | ||||||||||||||||
| Total rent expense | $ | $ | $ | $ | ||||||||||||
| For the nine months ended | ||||||||
| September 30, 2022 | September 30, 2021 | |||||||
| Operating cash flows used in operating leases | $ | ( | ) | $ | ( | ) | ||
| Weighted-average remaining lease term – operating leases (in years) | ||||||||
| Weighted-average discount rate – operating leases | % | % | ||||||
| 26 |
ProPhase Labs, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
Maturities of the Company’s operating leases, excluding short-term leases, are as follows (in thousands):
| Remaining periods in the year ended December 31, 2022 | $ | |||
| Year Ended December 31, 2023 | ||||
| Year Ended December 31, 2024 | ||||
| Year Ended December 31, 2025 | ||||
| Year Ended December 31, 2026 | ||||
| Thereafter | ||||
| Total | ||||
| Less present value discount | ( | ) | ||
| Operating lease liabilities | $ |
Note 13 – Consulting Agreement and Secured Promissory Note Receivable
Promissory Note and Security Agreement
On September 25, 2020 (the “Restatement Effective Date”), we entered into the Secured Note with a company consulting for us (“the Consultant”), pursuant to which we loaned $ million to the Consultant (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.
Commencing after September 1, 2021, in addition to payments of interest, the Consultant is also required to make payments on the principal amount of the loan equal to 1/36 of the then outstanding principal amount.
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, was due and payable on September 30, 2022. As discussed in Amendment and Termination Agreement below, the Company issued a Notice of Default to the Consultant on October 11, 2021.
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 terminated the former consulting agreement with the Consultant (the “Consulting Agreement”). Pursuant to the terms of the Termination Agreement, the Company loaned an additional $1 million to the Consultant in consideration for the termination of the Consulting Agreement and termination of the Company’s obligation to pay any additional consulting fees. As a result, the initial principal amount due under the Secured Note was increased from $ million to $ million plus all accrued and unpaid interest arising under the Secured Note through and including January 14, 2021.
Under
the terms of the Termination Agreement, the Consultant will continue to 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”). We received the first payment in the amount of $
Effective September 1, 2021, in addition to the payment of the Test Fees described above, the Consultant is also required to make payments to us 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. The Company did not receive any payments from the Consultant for either contractual principal or interest.
On
October 11, 2021, the Company provided the Consultant with a Notice of Default and demanded the Secured Note be paid in full immediately.
On January 25, 2022, the Company filed a complaint with the United States District Court for the District of Delaware for judgment against
the Consultant for money damages consisting of principal, interest, default interest and other fees and costs. As a result, the Company
considered that it is not probable that it will collect all amounts due under the Secured Note and reduced the carrying value of the
Secured Note to $
| 27 |
ProPhase Labs, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
Note 14 - Significant Customer Concentrations
Revenue
for the three months ended September 30, 2022 and 2021 was $
Revenue
for the nine months ended September 30, 2022 and 2021 was $
One
diagnostic services payer comprised
Currently, we rely on a sole supplier to manufacture our saliva collection kits used by customers who purchase our personal genomics services. Change in the supplier or design of certain of the materials that we rely on, in particular the saliva collection kit, could result in a requirement for additional premarket review from the FDA before making such a change.
Note 15 - Segment Information
The Company has identified two operating segments, diagnostic services and consumer products, based on the manner in which the Company’s CEO as CODM assesses performance and allocates resources across the organization. The operating segments are organized in a manner that depicts the difference in revenue generating synergies that include the separate processes, profit generation and growth of each segment. The diagnostic services segment provides COVID-19 diagnostic information services to a broad range of customers in the United States, including health plans, third party payers and government organizations. The consumer products segment is engaged in the research, development, manufacture, distribution, marketing and sale of OTC consumer healthcare products and dietary supplements in the United States and also provides personal genomics products and services. The unallocated corporate expenses mainly included professional fees associated with the public company.
The following table is a summary of segment information for three and nine months ended September 30, 2022 and 2021 (amounts in thousands):
| For the three months ended | For the nine months ended | |||||||||||||||
| September 30, 2022 | September 30, 2021 | September 30, 2022 | September 30, 2021 | |||||||||||||
| 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 operations, before income taxes | ||||||||||||||||
| Diagnostic services | ( | ) | ||||||||||||||
| Consumer products | ( | ) | ( | ) | ( | ) | ( | |||||||||