# ProPhase Labs, Inc.: Form 10-Q for the period ended Jun 30, 2021

- Company: [ProPhase Labs, Inc.](/companies/prph.md) (CIK 868278)
- Form: 10-Q
- Filed: 2021-08-13
- Accepted by EDGAR: Aug 13, 2021, 20:01 ET
- Period: 2021-06-30
- Accession: 0001493152-21-019696
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/868278/000149315221019696/form10-q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/868278/000149315221019696/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2021-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2021-04-01 to 2021-06-30 | $9.1m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 6 months, 2021-01-01 to 2021-06-30 | $24.4m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2021-04-01 to 2021-06-30 | $4.7m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 6 months, 2021-01-01 to 2021-06-30 | $11.0m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2021-04-01 to 2021-06-30 | $4.5m | us-gaap:GrossProfit |
| Gross profit | 6 months, 2021-01-01 to 2021-06-30 | $13.4m | us-gaap:GrossProfit |
| Research and development | 3 months, 2021-04-01 to 2021-06-30 | $93.0k | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 6 months, 2021-01-01 to 2021-06-30 | $208.0k | us-gaap:ResearchAndDevelopmentExpense |
| Operating income | 3 months, 2021-04-01 to 2021-06-30 | −$1.4m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2021-01-01 to 2021-06-30 | −$229.0k | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2021-04-01 to 2021-06-30 | $323.0k | us-gaap:InterestExpense |
| Interest expense | 6 months, 2021-01-01 to 2021-06-30 | $574.0k | us-gaap:InterestExpense |
| Net income | 3 months, 2021-04-01 to 2021-06-30 | −$1.4m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2021-01-01 to 2021-06-30 | −$338.0k | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2021-04-01 to 2021-06-30 | −$0.09 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2021-01-01 to 2021-06-30 | −$0.02 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2021-04-01 to 2021-06-30 | −$0.09 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2021-01-01 to 2021-06-30 | −$0.02 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2021-04-01 to 2021-06-30 | 15,154 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2021-01-01 to 2021-06-30 | 14,860 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2021-01-01 to 2021-06-30 | −$3.5m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2021-01-01 to 2021-06-30 | $4.2m | us-gaap:PaymentsToAcquireProductiveAssets |
| Dividends paid | 6 months, 2021-01-01 to 2021-06-30 | $4.5m | us-gaap:PaymentsOfDividends |
| Cash and equivalents | at 2021-06-30 | $17.7m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2021-06-30 | $58.5m | us-gaap:AssetsCurrent |
| Total assets | at 2021-06-30 | $76.3m | us-gaap:Assets |
| Current liabilities | at 2021-06-30 | $14.2m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2021-06-30 | $28.6m | us-gaap:Liabilities |
| Shareholders' equity | at 2021-06-30 | $47.7m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 20,181 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, 2020 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 31, 2021 (the “2020 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 dependence on our largest manufacturing customers;
- Our ability to successfully offer, perform and generate revenues from our new diagnostic and genomics sequencing services;
- Our ability to generate sufficient profits from Respiratory Pathogen Panel (“ RPP”) Molecular tests if and when demand for COVID-19 testing decreases or becomes no longer necessary;
- Our ability to secure additional capital, when needed to support our diagnostic services business and product development and commercialization programs;
- Potential disruptions to our supply chain or increases to the price of or adulteration of key raw materials or supplies;
- Potential disruptions in our ability to manufacture our products and those of others;
- 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 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 attract, retain and motivate our key employees;
- Our ability to protect our proprietary rights;
- Our ability to comply with regulatory requirements applicable to our businesses; and
- Our dependence on third parties to provide services critical to our lab diagnostic services business;

26

*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 2020 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 diversified biotech and genomics company with deep experience with over-the-counter (“OTC”) consumer healthcare products and dietary supplements. We conduct our operations through two operating segments; diagnostic services and consumer products. Until late fiscal year 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. This includes the development and marketing of dietary supplements under the TK Supplements® brand. However, commencing in December 2020, we also began offering COVID- 19 and other RPP Molecular tests through our new diagnostic service business.

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.

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 RPG Molecular tests. On October 23, 2020, we completed the acquisition of all of the issued and outstanding shares of capital stock 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. 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 the recent build out of a second, larger CLIA accredited laboratory in Garden City, New York. Operations at this second facility commenced in February 2021.

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. We intend to offer whole genome sequencing and related services through this new subsidiary.

Our diagnostic service business is influenced by the level of demand for COVID-19, 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 continue to be successful and the revenue and operating profits from such business will increase from or maintain their current level.

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, 2021 as Compared to the Three Months Ended June 30, 2020

For the three months ended June 30, 2021, net revenue was $9.1 million as compared to $3.6 million for the three months ended June 30, 2020. We experienced higher net revenue for the three months ended June 30, 2021, primarily as a result of an increase of $7.5 million related to our new diagnostic services business, which was offset by, a decrease of $2.0 million in customer orders from our consumer products business as a result of the timing and demand of third party contract manufacturing customers.

Cost of revenues for the three months ended June 30, 2021 were $4.7 million as compared to $2.3 million for the three months ended June 30, 2020. For the three months ended June 30, 2021 and 2020, we realized a gross margin of 48.9% and 35.3%, respectively. The increase in gross margin from the prior period is principally due to increased margins generally associated with our new diagnostic services business. Gross margins are generally influenced by fluctuations in quarter-to-quarter diagnostic testing and OTC production volume, fixed operating costs and related overhead absorption, raw ingredient costs, testing supplies and labor costs and inventory mark to market write-downs.

Diagnostic expenses for the three months ended June 30, 2021 were $830,000 compared to no diagnostics expenses for the three months ended June 30, 2020. The $830,000 in diagnostic expenses for the three months ended June 30, 2021 was comprised of network providers expenses associated with our new diagnostic services business.

Sales, general and administration expenses for the three months ended June 30, 2021 were $5.0 million as compared to $1.2 million for the three months ended June 30, 2020. The increase of $3.8 million in general and administration expenses was principally related to growth in personnel expenses and professional fees associated with our new diagnostic services business.

Research and development costs for the three months ended June 30, 2021 were $93,000 as compared to $65,000 for the three months ended June 30, 2020. The increase in research and development costs for the three months ended June 30, 2021 as compared to the three months ended June 30, 2020 were principally due to additional professional fees associated with our new diagnostics services business.

Interest and other income for the three months ended June 30, 2021 and 2020 was $214,000 and $11,000, respectively. The increase in interest income for the three months ended June 30, 2021 as compared to the three months ended June 30, 2020 was principally due to the issuance of the new Secured Note receivable that bears interest at a rate of 15% per annum.

Interest expense for the three months ended June 30, 2021 was $323,000 compared to no interest expense for the three months ended June 30, 2020. The increase in interest expense for the three months ended June 30, 2021 as compared to the three months ended June 30, 2020 was principally due the new unsecured convertible September 2020 Notes payable that accrues interest at a rate of 10% per year.

Gain from change in fair value of investment securities for the three months ended June 30, 2021 was $164,000, which was due to the increase of stock price as of June 30, 2021 compared to stock price on the acquired date on June 25, 2021.

As a consequence of the effects of the above, net loss from operations for the three months ended June 30, 2021 was $1.4 million, or ($0.09) per share, as compared to the net income for the three months ended June 30, 2020 of $70,000, or $0.01 per share.

Financial Condition and Results of Operations Results for the Six Months Ended June 30, 2021 as Compared to the Six Months Ended June 30, 2020

For the six months ended June 30, 2021, net revenue was $24.4 million as compared to $5.5 million for the six months ended June 30, 2020. We experienced higher net revenue for the six months ended June 30, 2021, primarily as a result of our receipt of $20.3 million from our new diagnostic services business, which was offset by, a decrease of $1.4 million in customer orders from our consumer products business as a result of the timing and demand of third party contract manufacturing customers.

Cost of revenues for the six months ended June 30, 2021 were $11.0 million as compared to $3.8 million for the six months ended June 30, 2020. For the six months ended June 30, 2021 and 2020, we realized a gross margin of 54.9% and 30.7%, respectively. The increase in gross margin from the prior period is principally due to increased margins generally associated with our new diagnostic services business. Gross margins are generally influenced by fluctuations in quarter-to-quarter diagnostic testing and OTC production volume, fixed operating costs and related overhead absorption, raw ingredient costs, testing supplies and labor costs and inventory mark to market write-downs.

Diagnostic expenses for the six months ended June 30, 2021 were $4.6 million compared to no diagnostics expenses for the six months ended June 30, 2020. The $4.6 million in diagnostic expenses for the six months ended June 30, 2021 was comprised of network providers expenses associated with our new diagnostic services business.

Sales, general and administration expenses for the six months ended June 30, 2021 were $8.8 million as compared to $2.3 million for the six months ended June 30, 2020. The increase of $6.5 million in general and administration expenses was principally related to growth in personnel expenses and professional fees associated with our new diagnostic services business.

Research and development costs for the six months ended June 30, 2021 were $208,000 as compared to $124,000 for the six months ended June 30, 2020. The increase in research and development costs for the six months ended June 30, 2021 as compared to the six months ended June 30, 2020 were principally due to additional professional fees associated with our new diagnostics services business.

Interest and other income for the six months ended June 30, 2021 and 2020 was $301,000 and $14,000, respectively. The increase in interest income for the six months ended June 30, 2021 as compared to the six months ended June 30, 2020 was principally due to the issuance of the new Secured Note receivable that bears interest at a rate of 15% per annum.

Interest expense for the six months ended June 30, 2021 was $574,000 compared to no interest expense for the six months ended June 30, 2020. The increase in interest expense for the six months ended June 30, 2021 as compared to the six months ended June 30, 2020 was principally due the new unsecured convertible September 2020 Notes payable that accrues interest at a rate of 10% per year.

Gain from change in fair value of investment securities for the six months ended June 30, 2021 was $164,000, which was due to the increase of stock price as of June 30, 2021 compared to stock price on the acquired date on June 25, 2021.

As a consequence of the effects of the above, net loss from operations for the six months ended June 30, 2021 was $338,000, or ($0.02) per share, as compared to the net loss for the six months ended June 30, 2020 of $739,000, or ($0.06) per share.

Liquidity and Capital Resources

Our aggregate cash and cash equivalents and marketable debt securities as of June 30, 2021 was $35.8 million as compared to $8.5 million at December 31, 2020. Our working capital was $44.3 million and $9.6 million as of June 30, 2021 and December 31, 2020, respectively. The increase of $27.3 million in our cash and cash equivalents and marketable debt securities balance for the six months ended June 30, 2021 was principally due to our receipt of aggregate net proceeds of $40.6 million from the issuance of common stock and warrants in a registered direct offering and public offering offset by (i) capital expenditures of $4.2 million, (ii) cash dividend payments of $4.5 million (iii) issuance of a promissory note of $1.0 million, and, (iv) cash used in operations of $3.5 million.

#### COVID-19

The COVID-19 pandemic has not had a material adverse impact on our business to date. We experienced higher than normal net revenue for the last six months ended June 30, 2020, primarily as a result of revenue from our new diagnostic services business, which offers COVID-19 testing.

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, including 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 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 develop and commercialize products.

#### General

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 revenue 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.

During the six months ended June, 2021, we used $3.5 million in cash from operations. 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 our 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 future 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 2020 Annual Report.

## Market risk

As filed, 1,656 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, notes receivable, 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, 2020.

## Controls and procedures

As filed, 1,575 characters.

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, 2021. 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, 2021.

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 13, 2021.
Source: SEC EDGAR, the filing index for accession 0001493152-21-019696. Last ingested by Listed: Oct 24, 2026, 14:58 ET. No prices; not investment advice.