Note 7 - Stockholders’ Equity

Our authorized capital stock consists of 50 million shares of common stock, $0.0005 par value, and one million shares of preferred stock, $0.0005 par value.

Preferred Stock

The preferred stock authorized under our certificate of incorporation may be issued from time to time in one or more series. As of June 30, 2022 and December 31, 2021, no 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 $0.30 per share on the Company’s common stock, paid on March 10, 2022, in the amount of $4.6 million to holders of record of the Company’s common stock on March 1, 2022.

On May 9, 2022, the board of directors of the Company declared a special cash dividend of $0.30 per share on the Company’s common stock, paid on June 4, 2022, in the amount of $4.7 million to holders of record of the Company’s common stock as of May 25, 2022.

ProPhase Labs, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(unaudited)

Common Stock

Stock Repurchase Program

On September 8, 2021, the board of directors (the “Board”) approved a stock repurchase program under which the Company was authorized to repurchase up to $6.0 million of its outstanding shares of common stock from time to time, over a six-month period.

During the six months ended June 30, 2022, the Company did not make any common shares repurchase under the stock repurchase program. The stock repurchase program expired on March 30, 2022.

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 300,000 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).

At June 30, 2022, there were 425,126 stock options outstanding and there were 300,000 shares of common stock available to be issued under the Amended 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 1,000,000 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 June 30, 2022, there were 4,920,000 stock options outstanding and 1,295,785 stock options available to be issued under the 2022 Plan. We will recognize an aggregate of approximately $1,470,000 of remaining share-based compensation expense related to outstanding stock options over a weighted average period of 3.9 years.

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 2,300,000 shares. At April 12, 2018, all 2,300,000 shares have been granted in the form of stock options to Ted Karkus (the “CEO Option”), our Chief Executive Officer. To date, no stock options have been 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 $0.60 per share after the latest special cash dividend paid on June 3, 2022.

ProPhase Labs, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(unaudited)

Inducement Option Award

As part of Nebula Acquisition, the Company issued a non-qualified stock option to Kamal Obbad, the Chief Executive Officer of Nebula, as an inducement to his employment with the Company (the “2021 Inducement Award”). The 2021 Inducement Award entitles Mr. Obbad to purchase up to 250,000 shares of the Company’s common stock at an exercise price of $7.67 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 Mr. Obbad on the closing date of the Nebula Acquisition. The 2021 Inducement Award vested 25% on the grant date and will vest 25% per year for the next three years subject to Mr. Obbad’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 $1,128,000.

Also during the year ended December 31, 2021, we issued an inducement award to a prospective employee to purchase up to 100,000 shares of the Company’s common stock at an exercise price of $5.76, 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 Bill White, the Chief Financial Officer of the Company, as an inducement to his employment with the Company, effective May 23, 2022 (the “2022 Inducement Award”). The 2022 Inducement Award entitles Mr. White to purchase up to 400,000 shares of the Company’s common stock (the “CFO Option”) at an exercise price of $6.74 per share, the closing price of the Company’s common stock on May 9, 2022. The CFO Option requires 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 $6.74 to $6.44 per share, effective as of June 3, 2022, the date $0.30 special cash dividend was paid to Company’s stockholders. The CFO Option vests over a four-year period, with 12.5% vesting every six months following the date his employment began, and contingent upon his continued service through each vesting date. The CFO Option expires on the seventh anniversary of the grant date. Any portion of the Inducement Award that does not vest and become exercisable will be forfeited for no consideration. The grant date fair value of the Inducement Award was approximately $1,604,000.

All inducement awards have been granted outside of the Company’s equity compensation plans.

The following table summarizes stock options activity during the six months ended June 30, 2022 for the 2022 Plan, the 2022 Directors’ Plan, the 2018 Stock Plan and the Inducement Awards (in thousands, except per share data).

Schedule of Stock Options Activity 

ProPhase Labs, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(unaudited)

The following table summarizes weighted average assumptions used in determining the fair value of the options at the date of grant during the six months ended June 30, 2022 and 2021:

Summary of Weighted Average Assumptions Used in Determining Fair Value of Warrants 

During the six months ended June 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 236,927 shares of common stock and the return of 333,573 shares to the Company. The Company also made a cash payment of approximately $1.5 million to repurchase 172,110 shares of treasury stock to satisfy tax withholding obligations related to these cashless exercise of stock options.

As of June 30, 2022, there were 4,920,000 stock options outstanding and 1,595,785 stock options available to be issued. We will recognize an aggregate of approximately $3,821,000 of remaining share-based compensation expense related to outstanding stock options over a weighted average period of 3.9 years.

Stock Warrants

The following table summarizes warrant activity during the six months ended June 30, 2022 (in thousands, except per share data):

 Schedule of Warrant Activity

We recognized $0 and $88,000 of share-based compensation expense during the three months ended June 30, 2022 and 2021, respectively. We recognized $0 and $193,000 of share-based compensation expense during the six months ended June 30, 2022 and 2021, respectively.