# ProPhase Labs, Inc.: Form 10-Q for the period ended Mar 31, 2019 - Company: [ProPhase Labs, Inc.](/companies/prph.md) (CIK 868278) - Form: 10-Q - Filed: 2019-05-14 - Accepted by EDGAR: May 14, 2019, 20:31 ET - Period: 2019-03-31 - Accession: 0001493152-19-007096 - Inline XBRL: yes - Main document: https://www.sec.gov/Archives/edgar/data/868278/000149315219007096/form10-q.htm - All documents and exhibits: https://www.sec.gov/Archives/edgar/data/868278/000149315219007096/ ## Figures reported in this filing Standardized XBRL line items for the period ended 2019-03-31. | Line item | Period | Value | XBRL concept | | --- | --- | ---: | --- | | Revenue | 3 months, 2019-01-01 to 2019-03-31 | $2.3m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax | | Cost of revenue | 3 months, 2019-01-01 to 2019-03-31 | $1.8m | us-gaap:CostOfGoodsAndServicesSold | | Gross profit | 3 months, 2019-01-01 to 2019-03-31 | $520.0k | us-gaap:GrossProfit | | Research and development | 3 months, 2019-01-01 to 2019-03-31 | $94.0k | us-gaap:ResearchAndDevelopmentExpense | | Operating income | 3 months, 2019-01-01 to 2019-03-31 | −$1.0m | us-gaap:OperatingIncomeLoss | | Net income | 3 months, 2019-01-01 to 2019-03-31 | −$1.0m | us-gaap:NetIncomeLoss | | Diluted EPS | 3 months, 2019-01-01 to 2019-03-31 | −$0.09 | us-gaap:EarningsPerShareDiluted | | Basic EPS | 3 months, 2019-01-01 to 2019-03-31 | −$0.09 | us-gaap:EarningsPerShareBasic | | Diluted shares (weighted) | 3 months, 2019-01-01 to 2019-03-31 | 11,557,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding | | Operating cash flow | 3 months, 2019-01-01 to 2019-03-31 | $1.4m | us-gaap:NetCashProvidedByUsedInOperatingActivities | | Capital expenditure | 3 months, 2019-01-01 to 2019-03-31 | $48.0k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment | | Dividends paid | 3 months, 2019-01-01 to 2019-03-31 | $2.9m | us-gaap:PaymentsOfDividends | | Cash and equivalents | at 2019-03-31 | $2.5m | us-gaap:CashAndCashEquivalentsAtCarryingValue | | Current assets | at 2019-03-31 | $14.1m | us-gaap:AssetsCurrent | | Total assets | at 2019-03-31 | $16.6m | us-gaap:Assets | | Current liabilities | at 2019-03-31 | $870.0k | us-gaap:LiabilitiesCurrent | | Shareholders' equity | at 2019-03-31 | $15.7m | us-gaap:StockholdersEquity | ## Management's discussion and analysis As filed, 12,711 characters. *The following discussion and analysis should be read in conjunction with our interim unaudited condensed financial statements and related notes included in this Quarterly Report on Form 10-Q (“Quarterly Report”) and the audited financial statements and notes thereto as of and for the year ended December 31, 2018 and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 26, 2019 (the “2018 Annual Report”). As used in this Quarterly Report, unless the context suggests otherwise, “we,” “us,” “our,” or “ProPhase” refer to ProPhase Labs, Inc. and its subsidiaries and consolidated variable interest entities, unless the context otherwise requires.* ### Forward-Looking Statements This Quarterly Report contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by the forward-looking statements. Many of these factors are beyond our ability to predict. Given the risks and uncertainties surrounding forward-looking statements, you should not place undue reliance on these statements. Forward-looking statements typically are identified by use of terms such as “anticipate”, “believe”, “plan”, “expect”, “intend”, “may”, “will”, “should”, “estimate”, “predict”, “potential”, “continue” and similar words although some forward-looking statements are expressed differently. This Quarterly Report may contain forward-looking statements attributable to third parties relating to their estimates regarding the growth of our markets. You are cautioned that such forward-looking statements are not guarantees of future performance and that all forward-looking statements address matters that involve risk and uncertainties, and that there are many important risks, uncertainties and other factors that could cause our actual results, levels of activity, performance, achievements and prospects, as well as those of the markets we serve, to differ materially from the forward-looking statements contained in this Quarterly Report. Such risks and uncertainties include, but are not limited to: - The ability of our management to successfully implement our business plan and strategy; - Our ability to compete effectively, including our ability to maintain and increase our markets and/or market share in the markets in which we do business; - Our ability to fund our operations including the cost and availability of capital and credit; - Our ability to grow our manufacturing business and operate it profitably; - Potential disruptions in our ability to manufacture our products and those of others or our access to raw materials; - Our ability to successfully develop and commercialize our existing products and new products; - The general financial and economic uncertainty, fluctuations in consumer confidence and the strength of the United States economy, and their impacts on our business including demand for our products; - Our ability to protect our proprietary rights; - Our continued ability to comply with regulations relating to our current products and those we manufacture for others, and any new products we develop, including our ability to effectively respond to changes in laws and regulations or the interpretation thereof including changing market rules and evolving federal, state and regional laws and regulations; - Seasonal fluctuations in demand for the products we manufacture at our manufacturing facility; and - Our ability to attract, retain and motivate our key employees. You should also consider carefully the statements we make under other sections of this Quarterly Report and in our 2018 Annual Report, as well as in other documents we file from time to time with the SEC, that address additional risks that could cause our actual results to differ from those set forth in any forward-looking statements. Our forward-looking statements speak only as the date of this Quarterly Report. We undertake no obligation to publicly update or review any forward-looking statements, whether as a result of new information, future developments or otherwise, except as required by law. ### General We are a vertically integrated and diversified branding, marketing and technology company with deep experience with OTC consumer healthcare products and dietary supplements. We are engaged in the research, development, manufacture, distribution, marketing and sale of OTC consumer healthcare products and dietary supplements in the United States. This includes the development and marketing of dietary supplements under the TK Supplements® brand. Our wholly-owned subsidiary, Pharmaloz Manufacturing, Inc. (“PMI”), is a full service contract manufacturer and distributor of a broad range of non-GMO, organic and/or natural-based cough drops and lozenges and OTC drug and dietary supplement products. In August 2017, we formed ProPhase Digital Media Inc. (“PDM”), a Delaware corporation and wholly-owned subsidiary. Our objective is for PDM to become an independent full-service direct marketing agency. PDM’s first initiative will be to market the TK Supplements® product line. If successful, this may lead to the marketing of other companies’ consumer products. In addition, we also continue to actively pursue acquisition opportunities for other companies, technologies and products within and outside the consumer products industry. ### Financial Condition and Results of Operations ### Results from Operations for the Three Months Ended March 31, 2019 ### as Compared to the Three Months Ended March 31, 2018 For the three months ended March 31, 2019, net sales were $2.3 million as compared to $3.4 million for the three months ended March 31, 2018. The decrease in net sales from period to period was principally due to a decrease in contract manufacturing net sales. Cost of sales for the three months ended March 31, 2019 were $1.8 million as compared to $2.0 million for the three months ended March 31, 2018. For the three months ended March 31, 2019 and 2018, we realized a gross margin of 22.4% and 41.8%, respectively. The decrease of 19.4% in gross margin from the prior period is principally due to (i) a decrease in the absorption of fixed production costs and (ii) fluctuations in our product mix shipped from period to period. Gross margins are generally influenced by fluctuations in quarter-to-quarter production volume, fixed production costs and related overhead absorption, raw ingredient costs, inventory mark to market write-downs, if any and timing of shipments to customers. Sales and marketing expense for the three months ended March 31, 2019 was $266,000 as compared to $172,000 for the three months ended March 31, 2018. The increase of $94,000 in sales and marketing expense for the three months ended March 31, 2019 as compared to the three months ended March 31, 2018 was principally due to the development costs associated with launching TK Supplements product lines during the current period. Administration expenses for the three months ended March 31, 2019 were $1.2 million as compared to $1.2 million for the three months ended March 31, 2018. Administrative expenses for the three months ended March 31, 2019 were consistent with administrative expenses for the three months ended March 31, 2018. Research and development costs during the three months ended March 31, 2019 were $94,000, as compared to $87,000 for the three months ended March 31, 2018. The increase of $7,000 in research and development costs for the three months ended March 31, 2019 as compared to the three months ended March 31, 2018 was principally due to the timing of product research expenses in the current period. Interest income for the three months ended March 31, 2019 and 2018 was $31,000 and $96,000, respectively. The decrease in interest income for the three months ended March 31, 2019 as compared to March 31, 2018 was principally due a lower balance in our investment account available to earn interest. As a consequence of the effects of the above, the net loss for the three months ended March 31, 2019 was approximately $1.0 million, or ($0.09) per share as compared to net income of $43,000, or $0.00 per share for the three months ended March 31, 2018. ### Liquidity and Capital Resources Our aggregate cash and cash equivalents and marketable debt securities as of March 31, 2019 were $6.7 million as compared to $8.2 million at December 31, 2018. Our working capital was $13.3 million and $14.0 million as of March 31, 2019 and December 31, 2018, respectively. The decrease of $1.5 million in our cash and cash equivalents and marketable securities balance for the three months ended March 31, 2019 was principally due to the $2.9 million payment of a $0.25 special cash dividend in January 2019 offset by, (i) higher cash balance in our investment account and (ii) cash provided by operating activities. #### General We believe our current working capital is an acceptable and adequate level of working capital to support our business for at least the next twelve months. Management is not aware of any other trends, events or uncertainties that have or are reasonably likely to have a material negative impact upon our (i) short-term or long-term liquidity, or (ii) net sales or income from operations. Any challenge to our patent or trademark rights could have a material adverse effect on our future; however, we are not aware of any condition that would make such an event probable. Our business is subject to seasonal variations thereby impacting our liquidity and working capital during the course of our fiscal year. To the extent that we do not generate sufficient cash from operations, our cash balances will decline. We may also use our cash to explore and/or acquire new product technologies, applications, product line extensions, new contract manufacturing applications and other new product opportunities. In the event that our available cash is insufficient to support such initiatives, we may need to incur indebtedness or issue Common Stock to finance plans for growth. Volatility in the credit markets and the liquidity of major financial institutions may have an adverse effect on our ability to fund our business strategy through borrowings, under either existing or newly created instruments in the public or private markets on terms that we believe to be reasonable, if at all. ### Off-Balance Sheet Arrangements It is not our usual business practice to enter into off-balance sheet arrangements such as guarantees on loans and financial commitments and retained interests in assets transferred to an unconsolidated entity for securitization purposes. We have no off-balance sheet arrangements that have, or are reasonably likely to have, a material current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. ### Impact of Inflation We are subject to normal inflationary trends and anticipate that any increased costs would be passed on to our customers. Inflation has not had a material effect on our business. ### Critical Accounting Policies and Estimates The condensed consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”), which require the use of estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent liabilities at the date of the financial statements, and the reported amounts of expenses in the periods presented. We believe that the accounting estimates employed are appropriate and resulting balances are reasonable; however, due to inherent uncertainties in making estimates, actual results could differ from the original estimates, requiring adjustments to these balances in future periods. The critical accounting estimates that affect the consolidated financial statements and the judgments and assumptions used are consistent with those described under Part II, Item 7 of the 2018 Annual Report. ## Market risk As filed, 1,425 characters. Like virtually all commercial enterprises, we can be exposed to the risk (“market risk”) that the cash flows to be received or paid relating to certain financial instruments could change as a result of changes in interest rate, exchange rates, commodity prices, equity prices and other market changes. Our operations are not subject to risks of material foreign currency fluctuations, nor do we use derivative financial instruments in our investment practices. We place our marketable investments in instruments that meet high credit quality standards. We do not expect material losses with respect to our investment portfolio or excessive exposure to market risks associated with interest rates. The impact on our results of one percentage point change in short-term interest rates would not have a material impact on our future earnings, fair value, or cash flows related to investments in cash equivalents or interest-earning marketable securities. Current economic conditions may cause a decline in business and consumer spending which could adversely affect our business and financial performance including the collection of accounts receivables, realization of inventory and recoverability of assets. In addition, our business and financial performance may be adversely affected by current and future economic conditions, including a reduction in the availability of credit, financial market volatility and recession. ## Controls and procedures As filed, 1,968 characters. #### Disclosure Controls and Procedures We maintain disclosure controls and procedures designed to provide reasonable assurance that material information required to be disclosed by us in the reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and that the information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. We performed an evaluation, under the supervision and with the participation of our management, including our principal executive officer (our Chief Executive Officer) and our principal financial officer (our Chief Financial Officer), of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on this review, our Chief Executive Officer and Chief Financial Officer concluded that due to the material weakness described in the 2018 Annual Report, the Company’s disclosure controls and procedures were not effective at the reasonable assurance level as of the end of the period covered by this Quarterly Report. #### Changes in Internal Control Over Financial Reporting As part of our plan to remediate the deficiency in internal controls described in the 2018 Annual Report, management continued to take steps to improve our income tax controls during the three months ended March 31, 2019, including consulting with our third-party tax consultant throughout the period while formalizing our review procedures. In addition, we implemented a new tax provision software during the three months ended March 31, 2019 to strengthen the transparency in the overall tax process. We will continue to assess and enhance our internal control processes and retrain personnel in the accounting department. Filed May 14, 2019. Source: SEC EDGAR, the filing index for accession 0001493152-19-007096. Last ingested by Listed: Oct 24, 2026, 14:58 ET. No prices; not investment advice.