# ProPhase Labs, Inc.: Form 10-Q for the period ended Jun 30, 2020

- Company: [ProPhase Labs, Inc.](/companies/prph.md) (CIK 868278)
- Form: 10-Q
- Filed: 2020-08-11
- Accepted by EDGAR: Aug 11, 2020, 21:00 ET
- Period: 2020-06-30
- Accession: 0001493152-20-015271
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/868278/000149315220015271/form10-q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/868278/000149315220015271/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2020-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2020-04-01 to 2020-06-30 | $3.6m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 6 months, 2020-01-01 to 2020-06-30 | $5.5m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2020-04-01 to 2020-06-30 | $2.3m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 6 months, 2020-01-01 to 2020-06-30 | $3.8m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2020-04-01 to 2020-06-30 | $1.3m | us-gaap:GrossProfit |
| Gross profit | 6 months, 2020-01-01 to 2020-06-30 | $1.7m | us-gaap:GrossProfit |
| Research and development | 3 months, 2020-04-01 to 2020-06-30 | $65.0k | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 6 months, 2020-01-01 to 2020-06-30 | $124.0k | us-gaap:ResearchAndDevelopmentExpense |
| Operating income | 3 months, 2020-04-01 to 2020-06-30 | $59.0k | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2020-01-01 to 2020-06-30 | −$753.0k | us-gaap:OperatingIncomeLoss |
| Net income | 3 months, 2020-04-01 to 2020-06-30 | $70.0k | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2020-01-01 to 2020-06-30 | −$739.0k | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2020-04-01 to 2020-06-30 | $0.01 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2020-01-01 to 2020-06-30 | −$0.06 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2020-04-01 to 2020-06-30 | $0.01 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2020-01-01 to 2020-06-30 | −$0.06 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2020-04-01 to 2020-06-30 | 11,618 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2020-01-01 to 2020-06-30 | 11,587 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2020-01-01 to 2020-06-30 | $4.7m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2020-01-01 to 2020-06-30 | $147.0k | us-gaap:PaymentsToAcquireProductiveAssets |
| Cash and equivalents | at 2020-06-30 | $2.5m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2020-06-30 | $10.2m | us-gaap:AssetsCurrent |
| Total assets | at 2020-06-30 | $12.4m | us-gaap:Assets |
| Current liabilities | at 2020-06-30 | $1.4m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2020-06-30 | $1.5m | us-gaap:Liabilities |
| Shareholders' equity | at 2020-06-30 | $10.9m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 17,134 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 condensed financial statements and notes thereto as of and for the year ended December 31, 2019 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, 2020 (the “2019 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, 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. 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 also contain forward-looking statements attributable to third parties relating to their estimates regarding the growth of our markets.

You are cautioned that forward-looking statements are not guarantees of performance and are subject to known and unknown risks, uncertainties and other factors that may cause our or our industry’s actual results, levels of activity, performance, achievements or prospects 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.

Such risks and uncertainties include, but are not limited to:

- Our ability to successfully manage the demand, supply, and operational challenges associated with the effects of the COVID-19 pandemic and its effects on the global economy generally.
- Our history of losses;
- Our dependence on our largest manufacturing customers;
- Potential disruptions in our ability to manufacture our products and those of others or our access to raw materials;
- Seasonal fluctuations in demand for the products we manufacture at our manufacturing facility;
- Our ability to successfully develop and commercialize our existing products and any new products;
- Our ability to secure additional capital, when needed, to support our product development and commercialization programs;
- 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 protect our proprietary rights;
- 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 continued ability to comply with regulations relating to our current products and those we manufacture for others, 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; and
- Our ability to attract, retain and motivate our key employees.

Given the risks and uncertainties surrounding forward-looking statements, you should not place undue reliance on these statements. You should also consider carefully the statements we make under other sections of this Quarterly Report and in our 2019 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 manufacturing and marketing 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 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.

In addition, we 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 for the Three Months Ended June 30, 2020 as Compared to the Three Months Ended June 30, 2019

For the three months ended June 30, 2020, net sales were $3.6 million as compared to $1.7 million for the three months ended June 30, 2019. The increase in net sales from period to period was principally due to an increase in contract manufacturing net sales as a result of the timing and demand of third-party customers. We experienced higher than normal net sales for the three months ended June 30, 2020, primarily as a result of increased customer demand for our OTC healthcare and cold remedy products as a result of the COVID-19 pandemic.

Cost of sales for the three months ended June 30, 2020 were $2.3 million as compared to $1.4 million for the three months ended June 30, 2019. For the three months ended June 30, 2020 and 2019, we realized a gross margin of 35.3% and 15.8%, respectively. The increase of 19.5% in gross margin from the prior period is principally due to fluctuations in our product mix shipped and pricing fluctuations 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 and timing of shipments to customers.

Sales and marketing expense for the three months ended June 30, 2020 was $125,000 as compared to $342,000 for the three months ended June 30, 2019. The decrease of $217,000 in sales and marketing expense for the three months ended June 30, 2020 as compared to the three months ended June 30, 2019 was principally related to a reduction in marketing expenses associated with our digital media business, which has since been terminated.

Administration expenses for the three months ended June 30, 2020 were $1 million as compared to $1.1 million for the three months ended June 30, 2019. The decrease of $62,000 in administrative expenses for the three months ended June 30, 2020 as compared to the three months ended June 30, 2019 was principally due to a decrease in professional fees.

Research and development costs during the three months ended June 30, 2020 were $65,000 as compared to $95,000 for the three months ended June 30, 2019. The decrease of $30,000 in research and development costs for the three months ended June 30, 2020 as compared to the three months ended June 30, 2019 was principally due to the timing of product research expenses.

Interest and other income for the three months ended June 30, 2020 and 2019 was $11,000 and $30,000, respectively. The decrease in interest income for the three months ended June 30, 2020 as compared to June 30, 2019 was principally due to a lower average balance in our investment account.

For the reasons described above, net income for the three months ended June 30, 2020 was approximately $70,000, or $0.01 per share, as compared to the net loss for the three months ended June 30, 2019 of $1.2 million, or ($0.11) per share.

### Financial Condition and Results of Operations Results for the Six Months Ended June 30, 2020 as Compared to the Six Months Ended June 30, 2019

For the six months ended June 30, 2020, net sales were $5.5 million as compared to $4.0 million for the six months ended June 30, 2019. The increase in net sales from period to period was principally due to an increase in contract manufacturing net sales as a result of the timing and demand of third-party customers. We experienced higher than normal net sales for the three months ended June 30, 2020, primarily as a result of increased customer demand for our OTC healthcare and cold remedy products as a result of the COVID-19 pandemic.

Cost of sales for the six months ended June 30, 2020 were $3.8 million as compared to $3.2 million for the six months ended June 30, 2019. For the six months ended June 30, 2020 and 2019, we realized a gross margin of 30.7% and 19.7%, respectively. The increase of 11% in gross margin from the prior period is principally due to fluctuations in our product mix shipped and pricing fluctuations 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 and timing of shipments to customers.

Sales and marketing expense for the six months ended June 30, 2020 was $295,000 as compared to $608,000 for the six months ended June 30, 2019. The decrease of $313,000 in sales and marketing expense for the six months ended June 30, 2020 as compared to the six months ended June 30, 2019 was principally related to a reduction in marketing expenses associated with our digital media business, which has since been terminated.

Administration expenses for the six months ended June 30, 2020 were $2 million as compared to $2.3 million for the six months ended June 30, 2019. The decrease of $268,000 in administrative expenses for the six months ended June 30, 2020 as compared to the six months ended June 30, 2019 was principally due to a decrease in professional fees.

Research and development costs during the six months ended June 30, 2020 were $124,000 as compared to $189,000 for the six months ended June 30, 2019. The decrease of $65,000 in research and development costs for the six months ended June 30, 2020 as compared to the six months ended June 30, 2019 was principally due to the timing of product research expenses.

Interest and other income for the six months ended June 30, 2020 and 2019 was $14,000 and $61,000, respectively. The decrease in interest income for the six months ended June 30, 2020 as compared to June 30, 2019 was principally due to a lower average balance in our investment account.

For the reasons described, net loss for the six months ended June 30, 2020 was approximately $0.7 million, or ($0.06) per share, as compared to the net loss for the six months ended June 30, 2019 of $2.2 million, or ($0.19) per share.

### Liquidity and Capital Resources

Our aggregate cash and cash equivalents and marketable debt securities as of June 30, 2020 was $5.9 million as compared to $1.4 million at December 31, 2019. Our working capital was $8.8 million and $9.0 million as of June 30, 2020 and December 31, 2019, respectively. The increase of $4.5 million in our cash and cash equivalents and marketable debt securities balance for the six months ended June 30, 2020 was principally due to an increase in cash provided by operating activities and the $4.8 million released to us from the escrow account with Mylan.

#### 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 after the date that the unaudited condensed consolidated financial statements are issued.

On May 3, 2020, we entered into a promissory note and agreement with Wells Fargo, N.A. for an aggregate principal amount of $295,250 (the “PPP Loan”), pursuant to the Paycheck Protection Program established by the Coronavirus Aid, Relief, and Economic Security Act, which became effective in May 2020. On May 15, 2020, the Company returned the PPP Loan to Well Fargo, N.A. in light of its receipt of $4.8 million from the Mylan escrow account

The COVID-19 pandemic has not had a material impact on our business to date, although we did experience higher than normal net sales for the three months ended June 30, 2020, primarily as a result of increased customer demand for our OTC healthcare and cold remedy products as a result of the COVID-19 pandemic. Based on our current assessment, we do not expect the pandemic to have a material impact on our long-term liquidity. However, we will continue to monitor its impact on our operations. The extent to which the COVID-19 pandemic could impact our business and operations in the long-term will depend on future developments that are highly uncertain and cannot be predicted with confidence at this time, such as the duration of the pandemic and the duration and extent of business disruptions caused by the pandemic, including as a result of travel restrictions, quarantines, social distancing requirements and business closures in the United States and other countries in order to contain and treat the disease. The COVID-19 pandemic has had a negative impact on the global capital markets and economies worldwide and could ultimately have a material adverse impact on our operating results, our ability to raise capital needed to develop and commercialize products and our overall financial condition, which could affect the value of our common stock.

Management is not aware of any other trends, events or uncertainties that have had 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 generally 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, including as a result of the COVID-19 pandemic, may have an adverse impact 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 2019 Annual Report.

## Market risk

As filed, 1,638 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.

Except for the broad effects of COVID-19 including its negative impact on the global economy and major financial markets, there have been no material changes to our market risk exposures since December 31, 2019.

## Controls and procedures

As filed, 1,617 characters.

#### Disclosure Controls and Procedures

We carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of June 30, 2020. This evaluation was carried out under the supervision and with the participation of our Principal Executive Officer and Principal Financial and Accounting Officer. Based upon that evaluation, our Principal Executive Officer and Principal Financial and Accounting Officer concluded that our disclosure controls and procedures were effective as of June 30, 2020.

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed with or submitted to the SEC under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to management, including our Principal Executive Officer and Principal Financial and Accounting Officer, to allow timely decisions regarding required disclosure.

#### Changes in Internal Control Over Financial Reporting

No change in internal control over financial reporting occurred during the most recent quarter with respect to our operations, which materially affected, or is reasonable likely to materially affect, our internal controls over financial reporting.

Filed Aug 11, 2020.
Source: SEC EDGAR, the filing index for accession 0001493152-20-015271. Last ingested by Listed: Oct 24, 2026, 14:58 ET. No prices; not investment advice.