Annual report pursuant to Section 13 and 15(d)

Business Acquisitions

v3.23.1
Business Acquisitions
 12 Months Ended
Dec. 31, 2022
Business Combination and Asset Acquisition [Abstract]  
Business Acquisitions Business Acquisitions
Nebula Acquisition
On August 10, 2021 (the “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 Genomics, each of the stockholders of Nebula Genomics (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 Genomics from the Seller Parties, for an aggregate purchase price of approximately $14.6 million, subject to post-closing adjustments (the “Nebula Acquisition”). A portion of the purchase price equal to $3.6 million was paid in shares of the Company’s common stock to certain Seller Parties and noteholders of Nebula Genomics, based on their election to receive shares of the Company’s common stock in lieu of cash, which shares were valued at a price per share of $7.46, which is equal to the average closing price of the Company’s common stock on Nasdaq for the five trading days preceding the signing of the Nebula Stock Purchase Agreement. A portion of the purchase price equal to $1,080,000 (the “Escrow Amount”) was held in escrow by Citibank, N.A. (the “Escrow Agent”) until February 23, 2023 (“Escrow Termination Date”), pursuant to the terms and conditions of an escrow agreement ("Escrow Agreement") entered into with the Escrow Agent, as security for the indemnification obligations of the Seller Parties.
In connection with the Nebula Acquisition, ProPhase Precision entered into an employment agreement with Kamal Obbad, the Chief Executive Officer of Nebula Genomics, on the Effective Date, pursuant to which Mr. Obbad serves as Senior Vice President, Director of Sales and Marketing of ProPhase Precision Medicine, Inc. As a condition to the employment agreement, Mr. Obbad was awarded a stock option to purchase 250,000 shares of Company common stock at an exercise price equal to $7.67 per share, the closing price of the Company's common stock on the Effective Date. The award was issued as a material inducement to Mr. Obbad’s acceptance of employment with ProPhase Precision in accordance with Nasdaq Listing Rule 5635(c)(4) and was approved by the Company’s Compensation Committee (see Note 7, Stockholders’ Equity).
Based on the preliminary valuation, the total consideration of $12.7 million, which is net of $1.6 million in cash acquired and $0.3 million anticipated to be paid back to the Company from the Escrow Amount, has been allocated to assets acquired and liabilities assumed based on their respective fair values as follows (in thousands):
Account Amount
Short term investments $ 1,800 
Accounts receivable 222 
Inventory 82 
Prepaid and other current assets 379 
Definite-lived intangible assets 10,990 
Total assets acquired 13,473 
Accounts payable (805)
Accrued expenses and other current liabilities (43)
Deferred revenue (2,391)
Note payable (81)
Deferred tax liability (1,925)
Total liabilities assumed (5,245)
Net identifiable assets acquired 8,228 
Goodwill 4,446 
Total consideration, net of cash acquired (1) $ 12,674 
(1)
Net of $1.6 million cash acquired and $0.3 million anticipated amounts due back to the Company from the escrow account.
On March 8, 2023, pursuant to the terms of the Escrow Agreement, the Company received a $0.5 million payment as a return of a portion of the purchase price. The remainder of the escrow of $0.6 million was disbursed to the Sellers of Nebula Genomics.
The Company recorded measurement period adjustments during Fiscal 2021 to (a) increase deferred revenue and increase goodwill related to the adoption of ASU 2021-08, (b) increase inventory and increase accounts payable for additional accounts payable invoices that arose subsequent to the third quarter of 2021, (c) increase inventory and decrease goodwill for adjustments to the inventory valuation as of the acquisition date, (d) increase deferred tax liability and increase goodwill, and (e) decrease accounts receivable and increase goodwill to for adjustments to the accounts receivable valuation as of the acquisition date.
Goodwill represents the excess of the purchase price over the net identifiable tangible and intangible assets acquired. The Company believes the goodwill related to the acquisition was a result of the expected synergies to be realized from combining operations and is not deductible for income tax purposes. The preliminary purchase price allocation is adjusted, as necessary, up to one year after the acquisition closing date if management obtains more information regarding asset valuations and liabilities assumed.
The intangible assets preliminarily identified in conjunction with the Nebula Acquisition are as follows (in thousands):
  Gross Carrying Value Estimated Useful
Life (in years)
Trade names $ 5,550  15
Proprietary intellectual property 4,260  5
Customer relationships 1,180  1
Total $ 10,990 
The Company recognized $1.9 million and $0.9 million amortization expense on the above identified intangible assets during the year ended December 31, 2022 and 2021, respectively.
Pro Forma Results
The following table summarizes, on a pro forma basis, the combined results of the Company as though the Nebula Acquisition had occurred as of January 1, 2021. These pro forma results are not necessarily indicative of the actual consolidated results had the acquisition occurred as of that date or of the future consolidated operating results for any period. Pro forma results are (in thousands):
  For the year ended
  December 31, 2021
Revenue, net $ 81,164 
Net income (loss) $ 6,135