Notes
to Condensed Consolidated Financial Statements
(unaudited)
Note
1 – Organization and Business
ProPhase
Labs, Inc. (“ProPhase”, “we”, “us”, “our” or the “Company”) is a diversified
biotech and genomics company with deep experience with over-the- counter (“OTC”) consumer healthcare products and
dietary supplements. We currently conduct our operations through two operating segments: diagnostic services and consumer products.
Until late Fiscal 2020, we were engaged primarily in the research, development, manufacture, distribution, marketing and sale of OTC
consumer healthcare products and dietary supplements in the United States. However, commencing in December 2020, we also began offering
COVID-19 and other Respiratory Pathogen Panel (RPP) molecular tests through our new diagnostic services business.
Our
wholly-owned subsidiary, ProPhase Diagnostics, Inc. (“ProPhase Diagnostics”), which was formed on October 9, 2020,
offers a variety of medical tests, including COVID-19 and Respiratory Pathogen Panel (RPP) molecular tests. On October 23, 2020, we completed
the acquisition of all of the issued and outstanding shares of Confucius Plaza Medical Laboratory Corp. (“CPM”), which
operates a 4,000 square foot Clinical Laboratory Improvement Amendments (“CLIA”) accredited laboratory located in Old Bridge,
New Jersey, for approximately $2.5
million in cash (see Note 3, Business Acquisition).
As a result of the acquisition of CPM in October 2020, we entered into a new business line, diagnostic services. In December 2020, we
expanded our diagnostic service business with the signing of a lease and build out of a second, larger CLIA accredited laboratory in
Garden City, New York. Operations at this second facility commenced in February 2021.
Our
wholly-owned subsidiary, Pharmaloz Manufacturing, Inc. (“PMI”), is a full-service contract manufacturer and private label
developer of a broad range of non- GMO, organic and natural-based cough drops and lozenges and OTC drug and dietary supplement products.
On
August 10, 2021, we acquired Nebula Genomics, Inc., a privately owned personal genomics company, through our new wholly-owned subsidiary,
ProPhase Precision Medicine, Inc. (see Note 15, Subsequent Events).
In
addition, we continue to actively pursue acquisition opportunities for other companies, technologies and products within and outside
the consumer products industry.
We
use a December 31 year-end for financial reporting purposes. References herein to “Fiscal 2020” mean the fiscal year ended
December 31, 2020 and references to other “Fiscal” years mean the year that ended on December 31 of the year indicated. The
term “we”, “us” or the “Company” as used herein also refer, where appropriate, to the Company, together
with its subsidiaries unless the context otherwise requires.
Note
2 – Summary of Significant Accounting Policies
Basis
of Presentation
The
unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles
for interim financial statements and the rules of the Securities and Exchange Commission (“SEC”) applicable to interim financial
statements, and therefore do not include all disclosures that might normally be required for financial statements prepared in accordance
with accounting principles generally accepted in the United States of America (“GAAP”). The accompanying unaudited condensed
consolidated financial statements have been prepared by management without audit and should be read in conjunction with our audited consolidated
financial statements, including the notes thereto, appearing in our Annual Report on Form 10-K for the fiscal year ended December 31,
2020. In the opinion of management, all adjustments necessary for a fair presentation of the consolidated financial position, consolidated
results of operations and other comprehensive loss and consolidated cash flows, for the periods indicated, have been made. The results
of operations for the six months ended June 30, 2021 are not necessarily indicative of operating results that may be achieved over the
course of the full year.
Segments
Operating
segments are defined as components of an enterprise that engage in business activities for which separate financial information is available
and is evaluated by the Chief Operating Decision Maker (“CODM”), which for the Company is its Chief Executive Officer, in
deciding how to allocate resources and assess performance. For the six months ended June 30, 2021, we maintain two operating segments:
diagnostic services and consumer products. For the six months ended June 30, 2020, we only had the consumer products operating segment.
(see Note 14, Segment Information).
Business
and Liquidity Uncertainties
For
the six months ended June 30, 2021, our net revenues were derived from both our diagnostic services and consumer products segments. For
the six months ended June 30, 2020, our net revenues were derived solely from our consumer products segment.
The
diagnostic service business commenced in December 2020 and expanded in February 2021 with the opening of our new Garden City,
New York CLIA accredited laboratory. Our diagnostic service business is and will continue to be influenced by the level of demand
for COVID-19 and other diagnostic testing, the price we are able to receive for performing our testing services, and the length of time
for which that demand persists, as well as the availability of COVID-19 testing from other laboratories and the period of time for which
we are able to serve as an authorized laboratory offering COVID-19 testing under various Emergency Use Authorizations.
While
our revenues increased for the six months ended June 30, 2021 as a result of our new diagnostic services business line, we have
made and will continue to make substantial investments to secure the necessary equipment, supplies and personnel to provide these testing
services. There can be no assurance that our efforts to offer and perform COVID-19 or other diagnostic testing will be successful in
the future or that the revenue and operating profits from such business will increase or maintain their current level.
There
are still numerous uncertainties associated with the COVID-19 pandemic, including the efficacy of the vaccines that have been developed
to treat the virus and their ability to protect against new strains of the virus, people’s willingness to receive a vaccine, possible
resurgences of the coronavirus and/or new strains of the virus, the extent and duration of protective and preventative measures that
may be adopted by local, state and/or the federal government in the future as a result of future outbreaks, the duration of any future
business closures, the ongoing impact of COVID-19 on the U.S. and world economy and consumer confidence, and various other uncertainties.
The
COVID-19 pandemic has also had a negative impact on the global capital markets and economies worldwide and could ultimately have a material
adverse impact on our ability to raise capital needed to operate our business.
Our
consumer sales are influenced by and subject to (i) the timing of acceptance of our TK Supplements® consumer products
in the marketplace, and (ii) fluctuations in the timing of purchase and the ultimate level of demand for the OTC healthcare and cold
remedy products that we manufacture for others, which are a function of the timing, length and severity of each cold season. Generally,
a cold season is defined as the period from September to March when the incidence of the common cold rises as a consequence of the change
in weather and other factors. We generally experience in the first, third and fourth quarter higher levels of net sales from our contract
manufacturing of OTC healthcare and cold remedy products. Revenues are generally at their lowest levels in the second quarter when customer
demand generally declines.
Use
of Estimates
The
preparation of financial statements and the accompanying notes thereto, in conformity with GAAP, requires management to make estimates
and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and reported amounts of revenues and expenses during the respective reporting periods. Examples include the
provision for bad debt, sales returns and allowances, diagnostic services reimbursements, inventory obsolescence, useful lives of property
and equipment, impairment of goodwill, intangibles and property and equipment, income tax valuations and assumptions related to accrued
advertising. These estimates and assumptions are based on historical experience, current trends and other factors that management believes
to be relevant at the time the financial statements are prepared. Management reviews the accounting policies, assumptions, estimates
and judgments on a quarterly basis. Actual results could differ from those estimates.
Cash
and Cash Equivalents
We
consider all highly liquid investments with a maturity of three months or less at the time of purchase to be cash equivalents. Cash equivalents
include cash on hand and monies invested in money market funds. The carrying amount approximates the fair market value due to the short-term
maturity of these securities.
Marketable
Debt Securities
We
have classified our investments in marketable debt securities as available-for-sale and as a current asset. Our investments in marketable
debt securities are carried at fair value, with unrealized gains an as a separate component of stockholders’ equity. Realized gains
and losses from our marketable debt securities are recorded as interest income (expense). These investments in marketable debt securities,
carry maturity dates between one and three years from date of purchase and interest rates of 0.94%
to 3.35%
during the first two quarters of Fiscal 2021. For the three and six months ended June 30, 2021, we reported unrealized losses of $67,000
and $78,000,
respectively. Unrealized gains and losses are classified as other comprehensive loss and the cost is determined on a specific identification
basis. The following is a summary of the components of our marketable debt securities and the underlying fair value input level tier
hierarchy (see fair value of financial instruments) (in thousands):
Summary
of Components of Marketable Securities
|
|
As
of June 30, 2021
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Losses
|
|
|
Value
|
|
U.S.
government obligations
|
|
$
|
2,556
|
|
|
$
|
(22
|
)
|
|
$
|
2,534
|
|
Corporate
obligations
|
|
|
15,628
|
|
|
|
(67
|
)
|
|
|
15,561
|
|
|
|
$
|
18,184
|
|
|
$
|
(89
|
)
|
|
$
|
18,095
|
|
|
|
As
of December 31, 2020
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Losses
|
|
|
Value
|
|
U.S.
government obligations
|
|
$
|
1,021
|
|
|
$
|
(7
|
)
|
|
$
|
1,014
|
|
Corporate
obligations
|
|
|
629
|
|
|
|
(4
|
)
|
|
|
625
|
|
|
|
$
|
1,650
|
|
|
$
|
(11
|
)
|
|
$
|
1,639
|
|
We
believe that the unrealized gains or losses generally are the result of a change in the risk premiums required by market participants
rather than an adverse change in cash flows or a fundamental weakness in the credit quality of the issuer or underlying assets.
Marketable
Equity Securities
Marketable
equity securities are recorded at fair value in the consolidated balance sheets. The change in fair value of marketable equity securities
is recognized within other non-operating income, net in the consolidated statements of income.
On
June 25, 2021, we were issued 1,260,619 common
shares (the “Investment Shares”) by the consultant as an interest payment under the Secured Note (see note 13) with a
fair value of $315,000.
The fair value of the Investment Shares as of June 30, 2021 was based upon the closing stock price of $0.38 per
share. The investment was classified as a Level 1 financial instrument. We recorded a $164,000 increase
in fair value of investment securities for the six months ended June 30, 2021.
Inventories,
net
Inventory
is valued at the lower of cost, determined on a first-in, first-out basis (FIFO), or net realizable value. Inventory items are analyzed
to determine cost and the net realizable value and appropriate valuation adjustments are then established. At June 30, 2021 and December
31, 2020, the financial statements include non-cash adjustments to adjust inventory for excess, obsolete or short-dated shelf-life inventory
by $87,000 and
$167,000,
respectively. The components of inventory are as follows (in thousands):
Schedule
of Components of Inventory
|
|
June
30,
|
|
|
December
31,
|
|
|
|
2021
|
|
|
2020
|
|
Diagnostic
services testing material
|
|
$
|
13,240
|
|
|
$
|
1,028
|
|
Raw
materials
|
|
|
1,249
|
|
|
|
1,404
|
|
Work
in process
|
|
|
345
|
|
|
|
437
|
|
Finished
goods
|
|
|
335
|
|
|
|
170
|
|
Inventory,
net
|
|
$
|
15,169
|
|
|
$
|
3,039
|
|
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 ranges of estimated asset lives: building and improvements –
ten to thirty-nine years; machinery and equipment including lab equipment – three to seven years; computer equipment and software – three to five years; and furniture and fixtures – five
years.
We
did not identify any indicators of our property, plant and equipment for the six months ended June 30, 2021 and 2020 and concluded there
were no impairments or changes in useful lives.
Concentration
of Risks
Future
revenues, costs, margins and profits will continue to be influenced by our ability to maintain our manufacturing availability and capacity
together with our marketing and distribution capabilities and the regulatory requirements associated with the development of OTC consumer
healthcare products, dietary supplements and other remedies in order to compete on a national level and/or international level. Our diagnostic
services business will be influenced by demand for our diagnostic testing services, particularly COVID-19, as well as our marketing and
service capabilities and regulatory requirements associated with operating under and maintaining our CLIA license.
Our
business is subject to federal and state laws and regulations adopted for the health and safety of users of our products. The manufacturing
and distribution of OTC healthcare and dietary supplement products are subject to regulations by various federal, state and local agencies,
including the Food and Drug Administration (“FDA”) and, as applicable, the Homeopathic Pharmacopoeia of the United States.
The FDA is also responsible for the regulation of diagnostic testing instruments, test kits, reagents and other devices used by clinical
laboratories.
Financial
instruments that potentially subject us to significant concentrations of credit risk consist principally of cash investments, marketable
debt securities, and trade accounts receivable. Our marketable securities are fixed income investments, which are highly liquid and can
be readily purchased or sold through established markets.
We
maintain cash and cash equivalents with certain major financial institutions. As of June 30, 2021, our cash and cash equivalents balance
were $17.7 million
and our bank balance was $17.9 million.
Of the total bank balance, $0.5 million
was covered by federal depository insurance and $17.4
million was uninsured at June 30, 2021.
Accounts
receivable subject us to credit risk concentrations from time-to-time. We extend credit to our consumer healthcare product customers
based upon an evaluation of the customer’s financial condition and credit history and generally do not require collateral. Our
diagnostic services receivable credit risk is based on payer reimbursement experience, which includes government agencies and healthcare
insurers, the period the receivables have been outstanding and the historical collection. The collectability of the diagnostic services
receivables is also directly linked to the quality of our billing processes, which depend on information provided and billing services
of third parties. These credit concentrations impact our overall exposure to credit risk, which could be further affected by changes
in economic, regulatory or other conditions that may impact the timing and collectability of trade receivables and diagnostic test receivables.
Additionally, the reimbursement receivables from the diagnostic service business are subject to billing errors and related disputes.
We
also assess the financial condition of the debtor under the Secured Note (see Note 13), balances due to us and other factors,
and based on this assessment, we did not offset our note receivable with an allowance at June 30, 2021 and June 30, 2020.
Leases
At
the inception of an arrangement, we determine whether the arrangement is or contains a lease based on the unique facts and circumstances
present in the arrangement. Most leases with a term greater than one year are recognized on the balance sheet as right-of-use assets
and short-term and long-term lease liabilities, as applicable. We have elected not to recognize on the balance sheet leases with terms
of 12 months or less. We typically only include an initial lease term in its assessment of a lease arrangement. Options to renew a lease
are not included in our assessment unless there is reasonable certainty that we will renew.
Operating
lease liabilities and their corresponding right-of-use assets are recorded based on the present value of lease payments over the expected
remaining lease term. Certain adjustments to the right-of-use asset may be required for items such as incentives received. The interest
rate implicit in our leases is typically not readily determinable. As a result, we utilize our incremental borrowing rate, which reflects
the fixed rate at which we could borrow on a collateralized basis the amount of the lease payments in the same currency, for a similar
term and in a similar economic environment (see Note 10, Lease).
The
components of a lease should be allocated between lease components (e.g., land, building, etc.) and non-lease components (e.g., common
area maintenance, consumables, etc.). The fixed and in-substance fixed contract consideration (including any consideration related to
non-components) must be allocated based on the respective relative fair values to the lease components and non-lease components.
Goodwill
and Long-lived Assets
We
review our goodwill at least annually for impairment as well as the carrying value of goodwill and our long-lived assets for impairment
whenever events or changes in circumstances indicate that the carrying amount of these assets may not be fully recoverable. When it is
determined that the carrying amount of long-lived assets or goodwill is impaired, impairment is measured by comparing an asset’s
estimated fair value to its carrying value. The determination of fair value is based on quoted market prices in active markets, if available,
or independent appraisals; sales price negotiations; or projected future cash flows discounted at a rate determined by management to
be commensurate with our business risk. The estimation of fair value utilizing discounted forecasted cash flows includes significant
judgments regarding assumptions of revenue, operating and marketing costs; selling and administrative expenses; interest rates; property
and equipment additions and retirements; and industry competition, general economic and business conditions, among other factors.
Management
has determined that there was no impairment to our long-lived assets and goodwill on the basis of a review of a discounted cash flow
analysis, which for goodwill is performed at the level of the subsidiaries to which the goodwill relates. There were no events or circumstances
that required an assessment to be performed on our long-lived assets with definite lives. If there is a material change in the
assumptions used in the determination of fair value or a material change in the conditions or circumstances influencing fair value, we
could be required to recognize a material impairment charge.
Fair
Value of Financial Instruments
We
measures assets and liabilities at fair value based on expected exit price as defined by the authoritative guidance on fair value measurements,
which represents the amount that would be received on the sale date of an asset or paid to transfer a liability, as the case may be,
in an orderly transaction between market participants. As such, fair value may be based on assumptions that market participants would
use in pricing an asset or liability. The authoritative guidance on fair value measurements establishes a consistent framework for measuring
fair value on either a recurring or nonrecurring basis whereby inputs, used in valuation techniques, are assigned a hierarchical level.
The
following are the hierarchical levels of inputs to measure fair value:
|
●
|
Level
1: Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities
in active markets.
|
|
●
|
Level
2: Inputs reflect quoted prices for identical assets or liabilities in markets that are not
active; quoted prices for similar assets or liabilities in active markets; inputs other than
quoted prices that are observable for the assets or liabilities; or inputs that are derived
principally from or corroborated by observable market data by correlation or other means.
|
|
●
|
Level
3: Unobservable inputs reflecting the Company’s assumptions incorporated in valuation
techniques used to determine fair value. These assumptions are required to be consistent
with market participant assumptions that are reasonably available.
|
The
carrying amounts of our financial assets and liabilities, such as cash, accounts receivable, accounts payable, secured note receivable
and unsecured note payable, approximate their fair values because of the current nature of these instruments.
We
account for our marketable securities at fair value, with the net unrealized gains or losses of marketable debt securities reported
as a component of accumulated other comprehensive income or loss and marketable equity change in fair value reported on the condensed
consolidated statement of operations (see note 13, Secured Promissory Note Receivable and Consulting Agreement). The components
of marketable securities and are as follows (in thousands):
Schedule
of Fair Value of Financial Instruments
|
|
As
of June 30, 2021
|
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
Marketable
debt securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
government obligations
|
|
$
|
-
|
|
|
$
|
2,534
|
|
|
$
|
-
|
|
|
$
|
2,534
|
|
Corporate
obligations
|
|
|
-
|
|
|
|
15,561
|
|
|
|
-
|
|
|
|
15,561
|
|
Marketable
equity securities
|
|
|
479
|
|
|
|
-
|
|
|
|
-
|
|
|
|
479
|
|
|
|
$
|
479
|
|
|
$
|
18,095
|
|
|
$
|
-
|
|
|
$
|
18,574
|
|
|
|
As
of December 31, 2020
|
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
Marketable
debt securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
government obligations
|
|
$
|
-
|
|
|
$
|
1,014
|
|
|
$
|
-
|
|
|
$
|
1,014
|
|
Corporate
obligations
|
|
|
-
|
|
|
|
625
|
|
|
|
-
|
|
|
|
625
|
|
|
|
$
|
-
|
|
|
$
|
1,639
|
|
|
$
|
-
|
|
|
$
|
1,639
|
|
There
were no transfers of marketable debt securities between Levels 1, 2 or 3 for the six months ended June 30, 2021.
Revenue
Recognition
We
recognize revenue that represents the transfer of promised goods or services to customers at an amount that reflects the consideration
that is expected to be received in exchange for those goods or services. We recognize revenue when performance obligations with our customers
have been satisfied. At contract inception, we evaluate the contract to determine if revenue should be recognized using the following
five steps: (1) identify the contract with the customer; (2) identify the performance obligations; (3) determine the transaction price;
(4) allocate the transaction price to the performance obligations; and (5) recognize revenue when (or as) the entity satisfies a performance
obligation.
Performance
Obligations
A
performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account.
A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the
performance obligation is satisfied. We had historically generated sales principally through two types of customers, contract manufacturing
and retail customers for our consumer products. Sales from product shipments to contract manufacturing and retailer customers are recognized
at the time ownership is transferred to the customer. As of December 2020, we also began generating revenues through diagnostic
services. Revenue from diagnostic services is recognized when the results are made available to the customer. Net revenues
from consumer products were $1.6
million and $4.1
million for the three and six months ended June
30, 2021, respectively. Net revenue from diagnostic services was $7.5
million and $20.3
million for the three and six months ended June
30, 2021, respectively. Net revenues for consumer products were $3.6
million and $5.5
million and zero sales from diagnostic
services for the three and six months ended June 30, 2020, respectively.
The
Company’s performance obligation for contract manufacturing and retail customers is to provide the goods ordered by the customer.
For diagnostic services, the Company has one performance obligation, which is to provide the results of the laboratory test to the customer.
Transaction
Price
For
contract manufacturing and retail customers, the transaction price is fixed based upon either (i) the terms of a combined master agreement
and each related purchase order, or (ii) if there is no master agreement, the price per individual purchase order received from each
customer. The customers are invoiced at an agreed upon contractual price for each unit ordered and delivered by the Company.
Revenue
from retail customers is reduced for trade promotions, estimated sales returns and other allowances in the same period as the related
sales are recorded. No such allowance is applicable to our contract manufacturing customers. We estimate potential future product returns
and other allowances related to current period revenue. We analyze historical returns, current trends, and changes in customer and consumer
demand when evaluating the adequacy of the sales returns and other allowances.
We
do not accept returns in the contract manufacturing revenue stream. Our return policy for retail customers accommodates returns for (i)
discontinued products, (ii) store closings and (iii) products that have reached or exceeded their designated expiration date. We do not
impose a period of time during which product may be returned. All requests for product returns must be submitted to us for pre-approval.
We will not accept return requests pertaining to customer inventory “Overstocking” or “Resets”. We will accept
return requests only for products in their intended package configuration. We reserve the right to terminate shipment of product to customers
who have made unauthorized deductions contrary to our return policy or pursue other methods of reimbursement. We compensate the customer
for authorized returns by means of a credit applied to amounts.
Accrued
advertising and other allowances operations as of June 30, 2021 included (i) $321,000
for estimated returns and allowances, which is
reported as a liability and (ii) $214,000
for cooperative and incentive promotion costs,
which is also reported as a liability. As of December 31, 2020, accrued advertising and other allowances included (i) $291,000
for estimated returns, which is reported as a
liability and (ii) $463,000
for cooperative and incentive promotion costs,
which was also reported as a liability.
For
our diagnostic services business, a revenue transaction is initiated when we receive a requisition order to perform a diagnostic test.
The information provided on the requisition form is used to determine the party that will be billed for the testing performed and the
expected reimbursement. We provide diagnostic services to a range of customers, including health plans, government agencies and consumers.
In many cases, the customer that orders our services is not responsible for paying for these services. Depending on the billing arrangement
and applicable law, the payer may be the patient or a third party, such as a health plan, Medicare or Medicaid program and other government
reimbursement programs. We bill the providers at standard price and take into consideration negotiated discounts and anticipated reimbursement
remittance adjustments based on, the payer portfolio, when revenue is recorded. We use the most expected value method to estimate the
transaction price for reimbursements that vary from the listed contract price.
Recognize
Revenue When the Company Satisfies a Performance Obligation
Performance
obligations related to contract manufacturing and retail customers are satisfied at a point in time when the goods are shipped to the
customer as (i) we have transferred control of the assets to the customers upon shipping, and (ii) the customer obtains title and assumes
the risks and rewards of ownership after the goods are shipped. For diagnostic services, the Company satisfies its performance obligation
at the point in time that the results are made available to the customer, which is when the customer benefits from the information contained
in the results and obtains control.
Contract
Balances
As
of June 30, 2021 and December 31, 2020, we have deferred revenue of $233,000
and $331,000,
respectively, in relation to R&D stability and release testing programs recognized as contract manufacturing revenue. 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 R&D work. We recognize deferred revenues as revenues when the services are
performed and the corresponding revenue recognition criteria are met. Customer prepayments are generally applied against invoices issued
to customers when services are performed and billed.
The
following table disaggregates our deferred revenue by recognition period (in thousands):
Schedule
of Deferred Revenue
|
|
|
As
of
June 30, 2021
|
|
As
of
December 31, 2020
|
|
Recognition
Period
|
|
|
|
|
|
|
|
|
0-12
Months
|
|
|
$
|
112
|
|
$
|
169
|
|
13-24
Months
|
|
|
|
74
|
|
|
84
|
|
Over
24 Months
|
|
|
|
47
|
|
|
78
|
|
Total
|
|
|
$
|
233
|
|
$
|
331
|
|
Disaggregation
of Revenue
We
disaggregate revenue from contracts with customers into three categories: contract manufacturing, retail customers and diagnostic
services. We determined that disaggregating revenue into these categories achieves the disclosure objective to depict how the nature,
amount, timing and uncertainty of revenue and cash flows are affected by economic factors.
The
following table disaggregates our revenue by revenue source for the three and six
months ended June 30, 2021 and 2020 (in thousands):
Schedule
of Disaggregation by Revenue
|
|
For
the three months ended
|
|
|
For
the six months ended
|
|
Revenue
by Customer Type
|
|
June
30, 2021
|
|
|
June
30, 2020
|
|
|
June
30, 2021
|
|
|
June
30, 2020
|
|
Contract
manufacturing
|
|
$
|
1,041
|
|
|
$
|
3,472
|
|
|
$
|
2,949
|
|
|
$
|
5,195
|
|
Retail
and others
|
|
|
565
|
|
|
|
151
|
|
|
|
1,190
|
|
|
|
316
|
|
Diagnostic
services
|
|
|
7,536
|
|
|
|
-
|
|
|
|
20,274
|
|
|
|
-
|
|
Total
revenue
|
|
$
|
9,142
|
|
|
$
|
3,623
|
|
|
$
|
24,413
|
|
|
$
|
5,511
|
|
Customer
Consideration
The
Company makes payments to certain diagnostic services customers for distinct services that approximate fair value for those services.
Such services include specimen collection, the collection and delivery of insurance and patient information necessary for billing and
collection, logistics services, as well as other information requirements. Consideration associated with specimen collection services
is classified in cost of revenues and the remaining costs are classified as diagnostic expenses within operating expenses in the accompanying
statement of operations. Diagnostic services cost of revenue includes specimen collection payments to customers and other
costs incurred in connection with the company operated laboratories, including reagent and other raw material costs, direct and
indirect labor and other laboratory facility overhead (see Note 14, Segment Information).
Shipping
and Handling Activities
We
account for shipping and handling activities that we perform as activities to fulfill the promise to transfer the goods.
Advertising
and Incentive Promotions
Advertising
and incentive promotion costs are expensed within the period in which they are utilized. Advertising and incentive promotion expense
is comprised of (i) media advertising, presented as part of sales and marketing expense, (ii) cooperative incentive promotions and coupon
program expenses, which are accounted for as part of net sales, and (iii) free product, which is accounted for as part of cost of sales.
Advertising and incentive promotion expenses incurred for the three months ended June 30, 2021 and 2020 were $111,000
and $49,000,
respectively. Advertising and incentive promotion expenses incurred for the six months ended June 30, 2021 and 2020 were $279,000
and $96,000,
respectively.
Share-Based
Compensation
We
recognize all share-based payments to employees and directors, including grants of stock options, as compensation expense in the financial
statements based on their fair values. Fair values of stock options are determined through the use of the Black-Scholes option pricing
model. The compensation cost is recognized as an expense over the requisite service period of the award, which usually coincides with
the vesting period. We account for forfeitures as they occur.
Stock
and stock options to purchase our common stock have been granted to employees pursuant to the terms of certain agreements and stock option
plans. Stock options are exercisable during a period determined by us, but in no event later than seven years from the date granted.
For the three months ended June 30, 2021 and 2020, we charged to operations $1,076,000
and $198,000,
respectively, for share-based compensation expense associated with vesting of outstanding equity awards.
For the six months ended June 30, 2021 and 2020, we charged to operations $1,504,000
and $396,000,
respectively, for share-based compensation expense associated with
vesting of outstanding equity awards.
Research
and Development (“R&D”)
R&D
costs are charged to operations in the period incurred. R&D costs incurred for the three months ended June 30, 2021 and 2020 were
$93,000 and
$65,000,
respectively. R&D costs are principally related to personnel expenses and new product development initiatives and costs associated
with our OTC health care products, dietary supplements and validation fees in association with the diagnostic services business including
the validation work of the diagnostic services business
Income
Taxes
We
utilize the asset and liability approach, which requires the recognition of deferred tax assets and liabilities for the future tax consequences
of events that have been recognized in our financial statements or tax returns. In estimating future tax consequences, we generally consider
all expected future events other than enactments of changes in the tax law or rates. Until sufficient taxable income to offset the temporary
timing differences attributable to operations and the tax deductions attributable to option, warrant and stock activities are assured,
a valuation allowance equaling the total deferred tax asset is being provided.
We
utilize a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for
recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained
on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the
largest amount that is more than fifty percent likely of being realized upon ultimate settlement. Any interest or penalties related to
income taxes will be recorded as interest or administrative expense, respectively.
As
a result of our historical losses from continuing operations, we have recorded a full valuation allowance against a net deferred tax
asset. Additionally, we have not recorded a liability for unrecognized tax benefit.
Recently
Issued Accounting Standards, Not Yet Adopted
In
September 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326). The ASU sets forth a “current expected
credit loss” (CECL) model which requires the Company to measure all expected credit losses for financial instruments held at the
reporting date based on historical experience, current conditions, and reasonable supportable forecasts. This replaces the existing incurred
loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost and applies to some off-balance
sheet credit exposures. In February 2020, the FASB issued ASU 2020-02, Financial Instruments - Credit Losses (Topic 326), which amends
the effective date of the original pronouncement for smaller reporting companies. ASU 2016-13 and its amendments will be effective for
the Company for interim and annual periods in fiscal years beginning after December 15, 2022. We are currently assessing the impact of
the adoption of this ASU on our financial statements.
The
FASB recently issued ASU 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470- 20) and Derivatives and Hedging
– Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s
Own Equity, to reduce complexity in applying GAAP to certain financial instruments with characteristics of liabilities and equity.
The guidance in ASU 2020-06 simplifies the accounting for convertible debt instruments and convertible preferred stock by removing the
existing guidance that requires entities to account for beneficial conversion features and cash conversion features in equity, separately
from the host convertible debt or preferred stock. The guidance in ASC 470-20 applies to convertible instruments for which the embedded
conversion features are not required to be bifurcated from the host contract and accounted for as derivatives. In addition, the amendments
revise the scope exception from derivative accounting in ASC 815-40 for freestanding financial instruments and embedded features that
are both indexed to the issuer’s own stock and classified in stockholders’ equity, by removing certain criteria required
for equity classification. These amendments are expected to result in more freestanding financial instruments qualifying for equity classification
(and, therefore, not accounted for as derivatives), as well as fewer embedded features requiring separate accounting from the host contract.
The amendments in ASU 2020-06 further revise the guidance in ASC 260, Earnings Per Share, to require entities to calculate diluted
earnings per share (EPS) for convertible instruments by using the if-converted method. In addition, entities must presume share settlement
for purposes of calculating diluted EPS when an instrument may be settled in cash or shares. The amendments in ASU 2020-06 are effective
for public entities, excluding smaller reporting companies, for fiscal years beginning after December 15, 2021. For all other entities,
the amendments are effective for fiscal years beginning after December 15, 2023. Early adoption is permitted, but no earlier than fiscal
years beginning after December 15, 2020. We are currently assessing the impact of the adoption of this ASU on our financial statements
Note
3 – Business Acquisition
On
October 23, 2020, we completed the acquisition of all of the issued and outstanding shares of capital stock of CPM for approximately
$2.5
million in cash, subject to certain adjustments,
pursuant to the terms of a Stock Purchase Agreement, by and among the Company, CPM, Pride Diagnostics LLC (“Pride Diagnostics”)
and the members of Pride Diagnostics (together with Pride Diagnostics, the “Seller Parties”), and Arvind Gurnani, as representative
of the Seller Parties. CPM (now known as ProPhase Diagnostics NJ, Inc.) owns a 4,000
square foot (CLIA) accredited laboratory located
in Old Bridge, New Jersey. On October 23, 2020, we entered into a Consulting Agreement with Mr. Gurnani for a six-month period for an
aggregate total of $300,000,
which was subsequently terminated after two months of service.
Based
on the preliminary valuation, the total consideration of $2.5
million has been allocated to assets acquired
and liabilities assumed based on their respective fair values as follows (amount in thousands):
Schedule
of Assets Acquired and Liabilities Assumed
|
|
|
|
|
Clinical
lab material
|
|
$
|
180
|
|
Lab
equipment
|
|
|
112
|
|
Definite-lived
intangible asset
|
|
|
1,307
|
|
Total
assets acquired
|
|
|
1,599
|
|
Liabilities
assumed
|
|
|
-
|
|
Net
identifiable assets acquired
|
|
|
1,599
|
|
Goodwill
|
|
|
901
|
|
Total
consideration
|
|
$
|
2,500
|
|
Goodwill
has been measured as the excess of the total consideration over the amounts assigned to the identifiable assets acquired and liabilities
assumed in the amount of $901,000,
which was primarily related to the acquisition of the assembled workforce. Other definite-lived intangible asset of approximate $1.3
million were related to the CLIA license, which
was determined to have an estimated useful life of three years. The Company recognized $109,000
and $207,000
amortization expense during the three
and six months June 30, 2021, respectively.
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.
Note
4 – Property, Plant and Equipment
The
components of property and equipment are as follows (in thousands):
Schedule
of Property, Plant and Equipment
|
|
June
30, 2021
|
|
|
December
31, 2020
|
|
|
Estimated
Useful Life
|
Land
|
|
$
|
352
|
|
|
$
|
352
|
|
|
|
Building
improvements
|
|
|
1,859
|
|
|
|
1,729
|
|
|
10-39
years
|
Machinery
|
|
|
4,669
|
|
|
|
4,441
|
|
|
3-7
years
|
Lab
equipment
|
|
|
4,316
|
|
|
|
1,002
|
|
|
3-7
years
|
Computer
equipment
|
|
|
1,182
|
|
|
|
881
|
|
|
3-5
years
|
Furniture
and fixtures
|
|
|
457
|
|
|
|
194
|
|
|
5
years
|
|
|
|
12,835
|
|
|
|
8,599
|
|
|
|
Less:
accumulated depreciation
|
|
|
(5,921
|
)
|
|
|
(5,021
|
)
|
|
|
Total
property, plant and equipment, net
|
|
$
|
6,914
|
|
|
$
|
3,578
|
|
|
|
Depreciation
expense incurred for the six months ended June, 2021 and 2020 was $900,000
and $167,000,
respectively. Depreciation expense for the three months ended June 30, 2021 and 2020 was $474,000
and $900,000,
respectively.
Note
5 –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 $10
million to two investors (collectively, the “Lenders”).
The
September 2020 Notes are due and payable on September 15, 2023, and accrue interest at a rate of 10%
per year from the closing date, payable on a quarterly basis, until the September 2020 Notes are repaid in full. We
have the right to prepay the September 2020 Notes at any time after the 13 month anniversary of the closing date after providing written
notice to the Lenders, and may prepay the September 2020 Notes prior to such time with the consent of the Lenders. The Lenders have the
right, at any time, and from time to time, on and after the 13-month anniversary of the closing date to convert up to an aggregate of
$3.0
million
of the September 2020 Notes into common stock of the Company at a conversion price of $3.00
per
share. Repayment of the September 2020 Notes has been guaranteed by our wholly-owned subsidiary, PMI.
The
September 2020 Notes contain customary events of default. If a default occurs and is not cured within the applicable cure period or is
not waived, any outstanding obligations under the September 2020 Notes may be accelerated. The September 2020 Notes also contain
certain restrictive covenants which, among other things, restrict our ability to create, incur, assume or permit to exist, directly or
indirectly, any lien (other than certain permitted liens described in the September 2020 Notes) securing any indebtedness of the Company,
and prohibits us from distributing or reinvesting the proceeds from any divestment of assets (other than in the ordinary course) without
the prior approval of the Lenders.
For
the six months ended June 30, 2021 and 2020, we incurred $574,000
and $0,
respectively, in interest expense under the September 2020 Notes and $323,000
and $0
for the three months ended June 30, 2021
and 2020.
Note
6 – 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,
2021 and December 31, 2020, no shares
of preferred stock have been issued.
Common
Stock Dividends
On
May 13, 2021, the Board declared a special cash dividend of $0.30
per share on the Company’s common stock
to holders of record on May 25, 2021, resulting in the payment of $4.5
million to stockholders on June 3, 2021.
In
Fiscal 2020, no cash
dividends were declared.
Common
Stock
Registered
Direct Offering
On
January 5, 2021, we entered into a securities purchase agreement with certain accredited investors and qualified institutional buyers,
pursuant to which we issued and sold to the purchasers an aggregate of (i) 550,000
shares of our common stock, and (ii) warrants
to purchase up to 275,000
shares of common stock in a registered direct
offering.
The
shares and warrants were sold at a purchase price of $10.00
per share for net proceeds of $5.5
million. Each Warrant has an exercise price equal
to $11.00
per share of common stock, will be exercisable
at any time and from time to time, subject to certain conditions described in the Warrant, after the date of issuance, and will expire
on the date that is three years from the date of issuance. The Shares and the Warrants are immediately separable and were issued separately.
Public
Offering
On
January 18, 2021, we entered into an underwriting agreement for the public offering of 3
million shares of common stock, at a price to
the public of $12.50
per share. We also issued to the Underwriters
warrants to purchase up to an aggregate of 180,000
shares of common
stock (6% of the shares of common stock sold in the offering) at an exercise price of $15.625
per
share (equal to 125% of the public offering price per share). On
January 21, 2021, we completed the offering for net proceeds of $35.1
million, after deducting the underwriting discounts
and commissions and estimated offering expenses.
The
2010 Directors’ Equity Compensation Plan
On
May 20, 2021, the stockholders of the Company approved the Amended and Restated 2010 Directors’ Equity Compensation Plan (the “Amended
2010 Directors’ Plan”) at the 2021 Annual Meeting of Stockholders of the Company (the “2021 Annual Meeting”).
The Amended 2010 Directors’ Plan had been previously approved by the board of directors of the Company on April 7, 2021, subject
to stockholder approval at the 2021 Annual Meeting.
The
Amended 2010 Directors’ Plan provides for an increase in the number of shares reserved for issuance under the plan by 100,000
shares, from 675,000
shares to 775,000
shares.
During
the three and six months ended June 30, 2021, no
shares of common stock and options were granted
to our directors under the 2010 Directors’ Plan.
During
the three and six months ended June 30, 2020, 9,709
and 18,055
shares of common stock, respectively were granted
to our directors under the 2010 Directors’ Plan. We recorded $35,000
of director fees during the six months ended
June 30, 2020 in connection with these grants, which represented the fair value of the shares calculated based on the average closing
price of our shares of common stock for the last five trading days of the quarter in which the Board fee was earned.
At
June 30, 2021, there were 200,000
options outstanding and there were 228,126
shares of common stock available to be issued
pursuant to the terms of the 2010 Directors’ Plan. No
stock options were exercised during the six months
ended June 30, 2021.
The
2010 Equity Compensation Plan
On
May 20, 2021, the stockholders of the Company approved the Amended and Restated 2010 Equity Compensation Plan (the “Amended 2010
Plan”) at the 2021 Annual Meetings. The Amended 2010 Plan had been previously approved by the board of directors of the Company
on April 7, 2021, subject to stockholder approval at the 2021 Annual Meeting.
The
Amended 2010 Plan provides for an increase in the number of shares reserved for issuance under the plan by 1,000,000
shares, from 3,900,000
shares to 4,900,000
shares.
There
were 675,000
options granted under the 2010 Plan during the
six months ended June 30, 2021 for a total fair value of $1,973,000.
As
of June 30, 2021, there were 1,890,250
options outstanding and 340,659
options available to be issued pursuant to the terms of the 2010
Plan. We will recognize an aggregate of approximately $1,583,000
of remaining share-based compensation expense related
to outstanding stock options over a weighted average period of 3.0
years. No
stock options were exercised during the six months ended
June 30, 2021.
The
2018 Stock Incentive Plan
On
April 12, 2018, our stockholders approved the 2018 Stock Incentive Plan (the “2018 Stock Plan”). At April 12, 2018, all 2.3
million shares available for issuance under the
2018 Stock Plan have been granted in the form of a stock option with an initial exercise price of $3.00
per share, which are exercisable in 36 monthly
installments, to Ted Karkus (the “CEO Option”), our Chief Executive Officer. No stock options have been exercised during
the six months ended June 30, 2021 and 2020.
The
2018 Plan requires certain proportionate adjustments to be made to stock options granted upon the occurrence of certain events, including
a special distribution (whether in the form of cash, shares, other securities, or other property) in order to maintain parity. Accordingly,
the Compensation Committee of the board of directors, as required by the terms of the 2018 Stock Plan, adjusted the terms of the CEO
Option, such that the exercise
price of the CEO Option was reduced from $3.00 per share to $2.00
per
share, effective as of September 5, 2018, the date a
special $1.00
special cash dividend was paid to the Company’s
stockholders. The
exercise price of the CEO Option was further reduced from $2.00
to
$1.75
per
share, effective as of January 24, 2019, the date a $0.25
special cash dividend was paid to the Company’s
stockholders. The
exercise price of the CEO Option was further reduced from $1.75
to
$1.50
per
share, effective as of December 12, 2019, the date another
$0.25
special cash dividend was paid to Company’s
stockholders. The
exercise price of the CEO Option was further reduced from $1.50
to
$1.20
per
share, effective as of June 3, 2021, the date another
$0.30
special cash dividend was paid to Company’s
stockholders.
The
following table summarizes stock options activity during the six months ended June 30, 2021 for the Amended 2010 Plan, the
Amended 2010 Directors’ Plan and the 2018 Stock Plan (in thousands, except per share data):
Schedule
of Stock Options Activity
|
|
Number
of Shares
|
|
|
Weighted
Average Exercise Price
|
|
|
Weighted
Average Remaining Contractual Life
(in years)
|
|
|
Total
Intrinsic Value
|
|
Outstanding
as of January 1, 2021
|
|
|
3,795
|
|
|
$
|
2.21
|
|
|
|
3.4
|
|
|
$
|
26,441
|
|
Granted
|
|
|
675
|
|
|
|
9.13
|
|
|
|
5.1
|
|
|
|
-
|
|
Forfeited
|
|
|
(92
|
)
|
|
|
5.31
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding
as of June 30, 2021
|
|
|
4,378
|
|
|
$
|
3.06
|
|
|
|
3.2
|
|
|
$
|
16,182
|
|
Options
vested and exercisable
|
|
|
3,573
|
|
|
$
|
2.22
|
|
|
|
2.7
|
|
|
$
|
15,183
|
|
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, 2021:
Summary
of Weighted Average Assumptions Used In Determining Fair Value of Options
|
|
For
the six months ended
|
|
|
|
June
30, 2021
|
|
Exercise
price
|
|
$
|
9.13
|
|
Expected
term (years)
|
|
|
3.5
|
|
Expected
stock price volatility
|
|
|
83
|
%
|
Risk-free
rate of interest
|
|
|
0.6
|
%
|
Expected dividend
yield (per share)
|
|
|
0
|
%
|
During
the six months ended June 30, 2021, we issued warrants to purchase 275,000
shares of common stock in a registered direct
offering and warrants to purchase 180,000
shares of common stock to the underwriters in
a public offering. The following table summarizes warrant activities during the six months ended June 30, 2021 (in thousands,
except per share data).
Schedule
of Warrant Activity
|
|
Number
of Shares
|
|
|
Weighted
Average Exercise Price
|
|
|
Weighted
Average Remaining Contractual Life
(in years)
|
|
Outstanding
as of January 1, 2021
|
|
|
450
|
|
|
$
|
3.22
|
|
|
|
2.7
|
|
Warrants
granted
|
|
|
455
|
|
|
|
12.83
|
|
|
|
3.0
|
|
Outstanding
as of June 30, 2021
|
|
|
905
|
|
|
$
|
8.05
|
|
|
|
2.4
|
|
Warrants
vested and exercisable
|
|
|
815
|
|
|
$
|
8.61
|
|
|
|
2.4
|
|
The
following table summarizes weighted average assumptions used in determining the fair value of the warrants at the date of grant during
the six months ended June 30, 2021:
Summary
of Weighted Average Assumptions Used in Determining Fair Value of Warrants
|
|
For
the six months ended
|
|
|
|
June
30, 2021
|
|
Exercise
price
|
|
$
|
12.83
|
|
Expected
term (years)
|
|
|
3.0
|
|
Expected
stock price volatility
|
|
|
81
|
%
|
Risk-free
rate of interest
|
|
|
0.2
|
%
|
Expected dividend
yield (per share)
|
|
|
0
|
%
|
As
of June 30, 2021, there were 905,000
warrants outstanding and we recognized $105,000
and
$193,000
of share-based compensation expense during the
three and six months ended June 30, 2021. We had no
compensation expense during the six months ended
June 30, 2020.
Note
7 – Defined Contribution Plans
We
maintain the ProPhase Labs, Inc. 401(k) Savings and Retirement Plan, a defined contribution plan for our employees. Our contributions
to the plan are based on the amount of the employee plan contributions and compensation. Our contributions to the plan in the three and
six months ended June 30, 2021 were $23,000
and $35,000,
respectively. Our contributions to the plan in the three and six months ended June 30, 2020 were $17,000
and $33,000,
respectively.
Note
8 – Other Current Liabilities
The
following table sets forth the components of other current liabilities at June 30, 2021 and December 31, 2020, respectively (in thousands):
Schedule
of Other Current Liabilities
|
|
June
30, 2021
|
|
|
December
31, 2020
|
|
Accrued
diagnostic services
|
|
$
|
4,353
|
|
|
$
|
-
|
|
Accrued
commissions
|
|
|
639
|
|
|
|
461
|
|
Accrued
payroll
|
|
|
240
|
|
|
|
464
|
|
Accrued
expenses
|
|
|
467
|
|
|
|
304
|
|
Accrued
returns
|
|
|
321
|
|
|
|
291
|
|
Accrued
income tax payable
|
|
|
8
|
|
|
|
8
|
|
Accrued
benefits and vacation
|
|
|
71
|
|
|
|
34
|
|
Deferred
revenue
|
|
|
112
|
|
|
|
169
|
|
Total
other current liabilities
|
|
$
|
6,211
|
|
|
$
|
1,731
|
|
Note
9– Commitments and Contingencies
Manufacturing
Agreement
In
connection with the asset purchase agreement, the Company and its wholly-owned subsidiary, PMI, entered into a manufacturing agreement
(the “Manufacturing Agreement”) with Mylan Consumer Healthcare Inc. (formerly known as Meda Consumer Healthcare Inc.)
(“MCH”) and Mylan Inc. (together with MCH, “Mylan”. Pursuant to the terms of the Manufacturing Agreement,
Mylan (or an affiliate or designee) purchased the inventory of the Company’s Cold-EEZE® brand and product line, and PMI agreed
to manufacture certain products for Mylan, as described in the Manufacturing Agreement, at prices that reflect current market conditions
for such products and include an agreed upon mark-up on our costs. On May 1, 2021, the Manufacturing Agreement was assigned by Mylan
to Nurya Brands, Inc. (“Nurya”) in connection with Nurya’s acquisitions of certain assets from Mylan, including the
Cold-EEZE® brand and product line. Unless terminated sooner by the parties, the Manufacturing Agreement will remain in effect
until March
29, 2022. Thereafter, the Manufacturing Agreement
may be renewed by Nurya for up to five 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.
Employment
Agreement Obligations:
We
have estimated future minimum obligations for an executive’s employment agreement over the next five years, including the remainder
of Fiscal 2021, as follows (in thousands):
Schedule
of Estimated Future Minimum Obligations
|
|
Employment
Contracts
|
|
2021
|
|
$
|
338
|
|
2022
|
|
|
675
|
|
2023
|
|
|
675
|
|
2024
|
|
|
675
|
|
2025
|
|
|
675
|
|
Total
|
|
$
|
3,038
|
|
Litigation
In
the normal course of our business, we may be named as a defendant in legal proceedings. It is our policy to vigorously defend litigation
or to enter into a reasonable settlements where management deems it appropriate.
Note
10 – Leases
On
October 23, 2020, we completed the acquisition of CPM. CPM (which is now known as ProPhase Diagnostics NJ, Inc.) is the lessee
of a 4,000
square foot CLIA accredited laboratory located
in Old Bridge, New Jersey, which ProPhase Diagnostics acquired as part of the transaction. The lease acquired is for a term of 24 months
with a monthly base lease payment of $5,950.
On
December 8, 2020, we entered into a Lease Agreement (the “New York Lease”) with BRG Office L.L.C. and Unit 2 Associates L.L.C.
(the “Landlord”), pursuant to which the Company has agreed to lease certain premises located on the second floor (the “Leased
Premises”) of 711 Stewart Avenue, Garden City, New York (the “Building”). The Leased Premises serve as the Company’s
second laboratory location, offering a wide range of laboratory testing services for diagnosis, screening and evaluation of diseases,
including COVID-19 and Respiratory Pathogen Panel Molecular tests.
The
New York Lease was effective as of December 8, 2020 and commenced in December 2020 when the facility was made available to us
by the Landlord. Payments on the lease begin upon the date of the Landlord’s substantial completion of certain improvements to
the Leased Premises (the “Commencement Date”), as set forth in the New York Lease. The initial term of the New York
Lease is 10
years and seven months (the “Initial Term”),
unless sooner terminated as provided in the New York Lease. We may extend the term of the New York Lease for one additional option period
of five years. We
have the option to terminate the New York Lease on the sixth anniversary of the Commencement Date, provided that we give the Landlord
written notice not less than nine months and not more than 12 months in advance and that we pay the Landlord a termination fee as more
particularly described in the New York Lease. The
Landlord provided a construction allowance to the Company in an aggregate amount not to exceed $250,795,
to reimburse the Company for the cost of certain improvements to be made by the Company to the Leased Premises.
For
the first year of the New York Lease, we will pay a base rent of $56,963
per
month (subject to a seven month abatement period), with a gradual rental rate increase of 2.75%
for each 12 month period thereafter in lieu of paying its proportionate share of common area operating expenses, culminating in a monthly
base rent of $74,716
during
the final months of the Initial Term. In addition to
the monthly base rent, we are responsible for our proportionate share of real estate tax escalations in accordance with the terms of
the New York Lease.
We
also have a right of first refusal to lease certain additional space located on the ground floor of the Building containing 4,500 square
feet and 4,600 square feet, as more particularly described in the New York Lease. We also have a right of first offer to purchase the
Building during the term of the New York Lease.
At
June 30, 2021, we had operating lease liabilities for the New York and New Jersey leases of approximately $4.9
million and right of use assets of approximately
$4.6
million, which were included in the consolidated balance sheet.
The
following summarizes quantitative information about our operating leases (amounts in thousands):
Summary
of Quantitative Information About Operating Leases
|
|
For
the Six Months Ended
June
30, 2021
|
|
Operating
leases
|
|
|
|
|
Operating
lease cost
|
|
$
|
408
|
|
Variable
lease cost
|
|
|
-
|
|
Operating
lease expense
|
|
|
408
|
|
Short-term
lease rent expense
|
|
|
-
|
|
Total
rent expense
|
|
$
|
408
|
|
|
|
For
the Six Months Ended
June
30, 2021
|
|
Operating
cash flows used in operating leases
|
|
$
|
(36
|
)
|
Right-of-use
assets obtained in exchange for operating lease liabilities
|
|
$
|
-
|
|
Weighted-average
remaining lease term – operating leases (in years)
|
|
|
9.9
|
|
Weighted-average
discount rate – operating leases
|
|
|
10.00
|
%
|
Maturities
of the Company’s operating leases, excluding short-term leases, are as follows (amounts in thousands):
Schedule
of Maturity of Operating Leases
|
|
|
|
|
Remaing
Months Ended December 31, 2021
|
|
$
|
321
|
|
Year Ended December
31, 2022
|
|
|
774
|
|
Year Ended December
31, 2023
|
|
|
738
|
|
Year Ended December
31, 2024
|
|
|
747
|
|
Year Ended December
31, 2025
|
|
|
768
|
|
Thereafter
|
|
|
4,659
|
|
Total
|
|
|
8,007
|
|
Less
present value discount
|
|
|
(3,071
|
)
|
Operating
lease liabilities
|
|
$
|
4,936
|
|
Note
11– Significant Customers
Revenue
for the three months ended June 30, 2021 and 2020 was $9.1
million and $3.6
million, respectively. Two diagnostic services
clients accounted for 24.9%
and 16.8%
of our revenue for the three months ended June 30, 2021. No contract manufacturing customer accounted for a significant portion
of our revenue for the three months ended June 30, 2021. Three third-party contract manufacturing customers accounted for 58.7%,
16.6%
and 12.2%,
respectively, of our revenue from continuing operations for the three months ended June 30, 2020. The loss of sales to any of these large
customers could have a material adverse effect on our business operations and financial condition.
Revenue
for the six months ended June 30, 2021 and 2020 was $24.4
million and $5.5
million, respectively. Two diagnostic services
clients accounted for 38.5%
and 24.0%,
respectively, of our revenue for the six months ended June 30, 2021. Two third-party contract manufacturing customers accounted for 55.2%
and 17.1%,
respectively, of our revenue for the six months ended June 30, 2020. The loss of sales to any of these large customers could have a material
adverse effect on our business operations and financial condition.
Three
diagnostic services clients generated 38.9%,
21.0%
and 10.2%
of our total reimbursement receivable balances from government agencies
and healthcare issuers at June 30, 2021. Two consumer product customers represented 72.4%,
and 12.8%
of our total trade receivable balances at June 30, 2020.
Note
12 – Earnings (Loss) Per Share
Basic
earnings per share (“EPS”) excludes dilution and is computed by dividing income available to common stockholders by the weighted-average
number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock or otherwise result in the issuance of common stock that
shared in the earnings of the entity. Diluted EPS also utilizes the treasury stock method which prescribes a theoretical buy back of
shares from the theoretical proceeds of all options outstanding during the period, and the if-converted method for convertible debt.
The potentially anti-dilutive effect of stock options, warrants, and convertible debt for the three and six months ended June
30, 2021 was 3,024,000
and 3,393,000
shares, respectively.
For
the three and six months ended June 30, 2021, dilutive loss per share were the same as basic earnings per share due to the exclusion
of Common Stock in the form of stock options (“Common Stock Equivalents”), which in a net loss position would have an anti-dilutive
effect on loss per share.
For
the three months ended June 30, 2020, there were 2,307,000
Common Stock Equivalents that were in the money
that were included in the fully diluted earnings per share computation. For the six months ended June 30, 2020, dilutive loss per share
were the same as basic earnings per share due to the exclusion of Common Stock Equivalents, which in a net loss position would have an
anti-dilutive effect on loss per share.
Note
13 – Secured Promissory Note Receivable and Consulting Agreement
Consulting
Agreement
On
September 25, 2020 (the “Effective Date”), we entered into a consulting agreement with a consultant (the “Consulting
Agreement”). The Consulting Agreement was to be effective through September 1, 2022; provided, however, that we could terminate
this agreement at any time on five days’ prior written notice.
The
consultant’s duties were to include, among other things, (i) identifying and introducing us to new opportunities in the medical
technology and testing fields, (ii) assisting and advising us in acquiring one or more CLIA certified labs suitable for COVID-19 and
other testing (“Test Labs”); (iii) assisting us in equipping and staffing any Test Labs acquired by us; (iv) advising and
assisting in the operation of such Test Labs; (v) validating and obtaining certification of such Test Labs; and (vi) assisting us in
obtaining a flow of business, orders and revenues from multiple sources in the industry, including but not limited to at least one significant,
nation-wide manufacturer and distributor of COVID-19 saliva sample collection test kits (“COVID-19 Test Kits”).
All
compensation earned by the consultant would first be applied to the acceleration and prepayment of all sums due to us, including but
not limited to sums due pursuant to the Amended and Restated Promissory Note (“Secured Note”) described below. Under the
terms of the Consulting Agreement, the consultant would not be entitled to receive any payments pursuant to the Consulting Agreement
unless and until the Secured Note was paid in full. The total compensation that the consultant would be entitled to earn or to receive
under the Consulting Agreement (inclusive of amounts credited against the Secured Note) would be capped at $4.0
million.
Promissory
Note and Security Agreement
On
September 25, 2020 (the “Restatement Effective Date”), we entered into the Secured Note with the consultant, pursuant to
which we loaned $3.0
million to the consultant described above (inclusive
of $1.0
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 $750,000
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 $250,000
to the consultant.
The
Secured Note bears interest at a rate of 15%
per annum from and including the Restatement Effective Date until the principal amount is repaid in full plus any Principal Increases
(as defined below) together with any accrued interest that has not been capitalized; provided, however, that upon the occurrence
and during an Event of Default (as defined in the Secured Note), the interest rate payable under the Secured Note will automatically
increase to 9%
above the rate of interest then applicable to the Secured Note.
Interest
under the Secured Note will be payable monthly in arrears on the first day of each month for the prior monthly period, as well as at
maturity (whether upon demand, by acceleration or otherwise) (each such date, a “Payment Date”); provided, however, that
prior to September 1, 2021, interest will be paid and capitalized in kind by increasing the principal amount of the Secured Note (any
such increase, a “Principal Increase”) by an amount equal to the interest accrued on the principal amount (as increased by
the Principal Increases) during the prior month. On each Payment Date commencing after September 1, 2021, in addition to payments of
interest described in the preceding sentence, the consultant will also make payments on the principal amount of the loan equal to 1/36
of the then outstanding principal amount. The amount of the monthly payments will be equal to the amount required to amortize fully the
outstanding principal amount of the loan, together with interest, over a period of 36
months.
The
entire remaining unpaid principal amount of the Secured Note, together with all accrued and unpaid interest thereon and all other amounts
payable under the Secured Note, will be due and payable, if not sooner paid, on September 30, 2022 or an earlier date as a result of
a maturity, whether by acceleration or otherwise. The Secured Note may be prepaid in full or in part at any time without penalty or premium.
The
Secured Note contains customary events of default. If a default occurs and is not cured within the applicable cure period or is not waived,
any outstanding obligations under the Secured Note may be accelerated.
The
Secured Note contains customary representation and warranties and certain restrictive covenants which, among other things, restrict the
consultant’s ability to (i) sell, transfer, finance, lease, license, or dispose of all or substantially all of its property or
assets, liquidate, windup, or dissolve, (ii) acquire all or substantially all of the property or assets of, or the equity interests in,
any other person, (iii) participate in any merger, consolidation, share exchange, division, conversion, reclassification, or other absorption
or reorganization, (iv) except for those existing as of the Restatement Effective Date, create, incur, assume, permit, or suffer to exist
any pledges, liens, security interests, and other encumbrances of its property or assets, whether now owned or hereafter owned or acquired,
and (v) create, incur or permit to exist any debt that is senior to, or pari passu with the Secured Note.
In
order to secure the consultant’s obligations under the Secured Note, the consultant granted to the Company a continuing security
interest in certain property and assets.
Total
interest income recorded in the three and six months ended June 30, 2021 was zero
and $233,000
respectively.
Amendment
and Termination Agreement
On
January 14, 2021, we entered into an Amendment and Termination Agreement (the “Termination Agreement”) with the consultant
pursuant to which the parties amended the Secured Note and the Consulting Agreement. Pursuant to the terms of the Termination Agreement,
the Company loaned an additional $1
million to the consultant in consideration for
the termination of the Consulting Agreement and termination of the Company’s obligation to pay the consultant additional consulting
fees beyond the $250,000
already earned by the consultant under the Consulting
Agreement. As a result, the initial principal amount due under the Secured Note was increased from $2.75
million to $3.75
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 sell and process its viral test by RT-PCR (together with other viral and
other types of tests). Until the Secured Note is paid in full, each COVID-19 Test Kit sold or processed from and after January 14, 2021,
and for which payment of at least the specified amount as defined for the test, is received by the consultant, the consultant will pay
us a specified amount (the “Test Fee”). The total payments will not exceed the aggregate amounts due under the Secured Note
and shall be applied first to interest and other amounts due under the Secured Note and then to the then-current outstanding
principal. Test Fees will be due and payable on the 10th business day after the end of each month commencing in February, 2021, and until
the Secured Note is paid in full. We received the first payment in the amount of $95,000
with respect to the Test Fees from January 15
through February 2021. On June 25, 2021, we were issued 1,260,619
common shares of the consultant
with a fair value of $315,000
as an interest payment with respect to the Test
Fees from March through June, 2021.
On
each payment date commencing on or after September 1, 2021, in addition to payments of the Test Fees described above, the consultant
will also make payments in an amount equal to the greater of (x) the Test Fee, or (y) 1/36th of the then outstanding principal amount
together with interest thereon and interest accruing on the Secured Note, in accordance with the Secured Note. Accordingly, commencing
on September 1, 2021, the minimum number of monthly payments due and payable will be equal to the amount required to amortize fully the
outstanding principal amount of the Secured Note, together with interest over a period of 36
months with level monthly payments.
Note
14 – 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. 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 six months ended June 30, 2021 and 2020 (amounts in thousands):
Schedule
of Segment Information
|
|
June
30, 2021
|
|
|
June
30, 2020
|
|
|
June
30, 2021
|
|
|
June
30, 2020
|
|
|
|
For
the three months ended
|
|
|
For
the six months ended
|
|
|
|
June
30, 2021
|
|
|
June
30, 2020
|
|
|
June
30, 2021
|
|
|
June
30, 2020
|
|
Net
revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diagnostic
services
|
|
$
|
7,537
|
|
|
$
|
-
|
|
|
$
|
20,274
|
|
|
$
|
-
|
|
Consumer
products
|
|
|
1,605
|
|
|
|
3,623
|
|
|
|
4,139
|
|
|
|
5,511
|
|
Consolidated
net revenue
|
|
|
9,142
|
|
|
|
3,623
|
|
|
|
24,413
|
|
|
|
5,511
|
|
Cost
of revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diagnostic
services
|
|
|
3,479
|
|
|
|
-
|
|
|
|
7,824
|
|
|
|
-
|
|
Consumer
products
|
|
|
1,197
|
|
|
|
2,344
|
|
|
|
3,196
|
|
|
|
3,817
|
|
Consolidated
cost of revenue
|
|
|
4,676
|
|
|
|
2,344
|
|
|
|
11,020
|
|
|
|
3,817
|
|
Depreciation
and amortization expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diagnostic
services
|
|
|
392
|
|
|
|
-
|
|
|
|
737
|
|
|
|
-
|
|
Consumer
products
|
|
|
3
|
|
|
|
5
|
|
|
|
6
|
|
|
|
10
|
|
Total
Depreciation and amortization expense
|
|
|
395
|
|
|
|
5
|
|
|
|
743
|
|
|
|
10
|
|
Operating
and other expenses
|
|
|
5,466
|
|
|
|
1,204
|
|
|
|
12,988
|
|
|
|
2,423
|
|
Income
(loss) from continuing operations, before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diagnostic
services
|
|
|
1,164
|
|
|
|
-
|
|
|
|
4,004
|
|
|
|
-
|
|
Consumer
products
|
|
|
540
|
|
|
|
1,274
|
|
|
|
505
|
|
|
|
1,684
|
|
Unallocated
corporate
|
|
|
(3,099
|
)
|
|
|
(1,204
|
)
|
|
|
(4,847
|
)
|
|
|
(2,423
|
)
|
Total
income (loss) from continuing operations, before income taxes
|
|
|
(1,395
|
)
|
|
|
70
|
|
|
|
(338
|
)
|
|
|
(739
|
)
|
Net
income (loss)
|
|
$
|
(1,395
|
)
|
|
$
|
70
|
|
|
$
|
(338
|
)
|
|
$
|
(739
|
)
|
The
following table is a summary of segment balance sheets information as of June 30, 2021 and December 31, 2020 (in thousands):
|
|
June
30,
|
|
|
December
31,
|
|
|
|
2021
|
|
|
2020
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Diagnostic
services
|
|
$
|
32,222
|
|
|
$
|
13,410
|
|
Consumer
products
|
|
|
5,294
|
|
|
|
6,261
|
|
Unallocated
corporate
|
|
|
38,807
|
|
|
|
11,734
|
|
Total
assets
|
|
$
|
76,323
|
|
|
$
|
31,405
|
|
Note
15 – Subsequent Events
On
August 10, 2021, the Company and its wholly-owned subsidiary, ProPhase Precision Medicine, Inc. (“ProPhase Precision”), entered
into and closed a Stock Purchase Agreement (the “Nebula Stock Purchase Agreement”) with Nebula Genomics, Inc., a privately
owned personal genomics company (“Nebula”), each of the stockholders of Nebula (the “Seller Parties”), and Kamal
Obbad, as Seller Party Representative. Pursuant to the terms of the Nebula Stock Purchase Agreement, ProPhase Precision acquired all
of the issued and outstanding shares of common stock of Nebula (the “Nebula Shares”) from the Seller Parties, for an aggregate
purchase price of approximately $14.6 million, subject to post-closing adjustments. A portion of the purchase price will be paid in shares
to certain Seller Parties and noteholders of Nebula, based on their election to receive shares of Company common stock in lieu of cash,
which shares have been valued at a price per share of $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”) will be 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 entered into with
the Escrow Agent, as security for the indemnification obligations of the Seller Parties. At the Escrow Termination Date, the remaining
amount, if any, of the Escrow Amount, less any amount reasonably necessary to pay any claim with respect to which a notice of claim has
been timely and properly given, will be delivered to the Seller Parties, as applicable.