UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

~~[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934~~

For the quarterly period ended ~~March 31,~~June 30, 2021

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

~~[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934~~

For the transition period from ~~______________ to ______________~~_____to _____

Commission file number 000-21617

ProPhase Labs, Inc.

(Exact name of registrant as specified in its charter)

Delaware

23-2577138

(State or other jurisdiction

of incorporation or organization)

(I.R.S. Employer

Identification No.)

711 Stewart Ave, Suite 200

~~Garden City, New York~~

~~11530~~

Garden City, New York

11530

(Address of principal executive office)

(Zip Code)

	(215) 345-0919
	(Registrant’s telephone number, including area code)

Securities Registered Pursuant to Section 12(b) of the Exchange Act:

~~Securities Registered Pursuant to Section 12(b) of the Exchange Act:~~

Title of Each Class	Trading Symbol	Name of Each Exchange on Which Registered
Common Stock, par value $0.0005	PRPH	Nasdaq Capital Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ~~[X]~~☒ No ~~[ ]~~☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or shorter period that the registration was required to submit such files). Yes ~~[X]~~☒ No ~~[ ]~~☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company, See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ~~[ ]~~☐		Accelerated filer ~~[ ]~~☐
Non-accelerated filer ~~[X]~~☒		Smaller reporting company ~~[X]~~☒
		Emerging growth company ~~[ ]~~☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ~~[ ]~~☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ~~[ ]~~ ☐ No ~~[X]~~☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class		Outstanding ~~at May 14,~~August 13, 2021
Common Stock, $0.0005 par value		15,154,253

ProPhase Labs, Inc. and Subsidiaries

TABLE OF CONTENTS

				PAGE
PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)

	Condensed Consolidated Balance Sheets as of ~~March 31,~~June 30, 2021 and December 31, 2020		3

	Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three and Six Months Ended ~~March 31,~~June 30, 2021 and 2020		4

	Condensed Consolidated Statements of Stockholders’ Equity for the Three and Six Months Ended ~~March 31,~~June 30, 2021 and 2020		5

	Condensed Consolidated Statements of Cash Flows for the ~~Three~~Six Months Ended ~~March 31,~~June 30, 2021 and 2020		6

	Notes to Condensed Consolidated Financial Statements		7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		26

Item 3.	Quantitative and Qualitative Disclosures about Market Risk		30

Item 4.	Controls and Procedures		30

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings		31
Item 1A.	Risk Factors		31
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		3231
Item 3.	Defaults Upon Senior Securities		3231
Item 4.	Mine Safety Disclosures		3231
Item 5.	Other Information		3231
Item 6.	Exhibits		3231

Signatures		3332

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

ProPhase Labs, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(in thousands, except share and per share amounts)

	March 31,			December 31,			June 30,			December 31,
	2021			2020			2021			2020
	(Unaudited)						(Unaudited)
ASSETS
Current assets
Cash and cash equivalents	$	32,727		$	6,816		$	17,677		$	6,816
Marketable debt securities, available for sale		3,531			1,639			18,095			1,639
Marketable equity securities, available for sale								479			-
Accounts receivable, net		14,344			3,155			6,644			3,155
Inventory, net		16,026			3,039			15,169			3,039
Prepaid expenses and other current assets		619			1,238			428			1,238
Total current assets		67,247			15,887			58,492			15,887

Property, plant and equipment, net		7,078			3,578			6,914			3,578
Secured promissory note receivable		3,739			2,750			3,727			2,750
Prepaid expenses, net of current portion		460			2,084			460			2,084
Right-of-use asset, net		4,646			4,731			4,564			4,731
Intangible asset, net		1,125			1,234			1,017			1,234
Goodwill		901			901			901			901
Other assets		248			240			248			240
TOTAL ASSETS	$	85,444		$	31,405		$	76,323		$	31,405

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	7,780		$	3,771		$	7,114		$	3,771
Accrued advertising and other allowances		258			463			214			463
Lease liabilities		484			329			635			329
Other current liabilities		9,767			1,731			6,211			1,731
Total current liabilities		18,289			6,294			14,174			6,294

Non-current liabilities:
Deferred revenue, net of current portion		149			162			121			162
Unsecured convertible promissory notes, net		9,993			9,991			9,994			9,991
Lease liabilities, net of current portion		4,348			4,402			4,301			4,402
Total non-current liabilities		14,490			14,555			14,416			14,555
Total liabilities		32,779			20,849			28,590			20,849

COMMITMENTS AND CONTINGENCIES								-			-

Stockholders’ equity
Preferred stock authorized 1,000,000, $.0005 par value, no shares issued and outstanding		-			-
Common stock authorized 50,000,000, $.0005 par value, issued 31,806,275 and 28,256,275 shares, respectively		16			14
Preferred stock authorized 1,000,000, $.0005 par value, 0 shares issued and outstanding								-			-
Common stock authorized 50,000,000, $.0005 par value, issued 31,806,275 and 28,256,275 shares, respectively								16			14
Additional paid-in capital		102,735			61,674			99,265			61,674
Accumulated deficit		(2,574	)		(3,631	)		(3,969	)		(3,631	)
Treasury stock, at cost, 16,652,022 and 16,652,022 shares, respectively		(47,490	)		(47,490	)		(47,490	)		(47,490	)
Accumulated other comprehensive loss		(22	)		(11	)		(89	)		(11	)
Total stockholders’ equity		52,665			10,556			47,733			10,556
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	85,444		$	31,405		$	76,323		$	31,405

See accompanying notes to condensed consolidated financial statements

ProPhase Labs, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

and Other Comprehensive Loss

(in thousands, except per share amounts)

(unaudited)

	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
Revenues, net	$	9,142		$	3,623		$	24,413		$	5,511
Cost of revenues		4,676			2,344			11,020			3,817
Gross profit		4,466			1,279			13,393			1,694

Operating expenses:
Diagnostic expenses		830			-			4,639			-
General and administration		4,993			1,155			8,775			2,323
Research and development		93			65			208			124
Total operating expenses		5,916			1,220			13,622			2,447
Income (loss) from operations		(1,450	)		59			(229	)		(753	)

Interest income, net		214			11			301			14
Interest expense		(323	)		-			(574	)		-
Change in fair value of investment securities		164						164
Net income (loss)	$	(1,395	)	$	70		$	(338	)	$	(739	)

Other comprehensive loss:
Unrealized gain (loss) on marketable debt securities		(67	)		(5	)		(78	)		6
Total comprehensive income (loss)	$	(1,462	)	$	65		$	(416	)	$	(733	)

Earnings (loss) per share:
Basic	$	(0.09	)	$	0.01		$	(0.02	)	$	(0.06	)
Diluted	$	(0.09	)	$	0.01		$	(0.02	)	$	(0.06	)

Weighted average common shares outstanding:
Basic		15,154			11,592			14,860			11,587
Diluted		15,154			11,618			14,860			11,587

For the three months ended
March 31, 2021 March 31, 2020
Revenues, net $ 15,271 $ 1,888
Cost of revenues 6,344 1,473
Gross profit 8,927 415

Operating expenses:
Diagnostic expenses 3,809 -
General and administration 3,782 1,168
Research and development 115 59
Total operating expenses 7,706 1,227
Income (loss) from operations 1,221 (812 )

Interest income, net 87 3
Interest expense (251 ) -
Net income (loss) $ 1,057 $ (809 )

Other comprehensive loss:
Unrealized gain (loss) on marketable debt securities (11 ) 11
Total comprehensive income (loss) $ 1,046 $ (798 )

Earnings (loss) per share:
Basic $ 0.07 $ (0.07 )
Diluted $ 0.06 $ (0.07 )

Weighted average common shares outstanding:
Basic 14,563 11,582
Diluted 18,200 11,582

See accompanying notes to condensed consolidated financial statements

~~roPhase~~ProPhase Labs, Inc. and Subsidiaries

Condensed Consolidated Statements of

Stockholders’ Equity

(in thousands, except share data)

(unaudited)

Common Stock
Shares Outstanding, Net of Shares Additional Accumulated
of Treasury Par Paid in Accumulated Comprehensive Treasury
Stock Value Capital Deficit Income (loss) Stock Total
Balance as of January 1, 2021 11,604,253 $ 14 $ 61,674 $ (3,631 ) $ (11 ) $ (47,490 ) $ 10,556

Issuance of common stock and warrants for cash from public offering, net of $2,365 offering cost 3,000,000 2 35,133 - - - 35,135

Issuance of common stock and warrants for cash from private offering 550,000 - 5,500 - - - 5,500

Unrealized loss on marketable debt securities, net of taxes - - - - (11 ) - (11 )

Stock-based compensation - - 428 - - - 428

Net income - - - 1,057 - - 1,057

Balance as of March 31, 2021 15,154,253 $ 16 $ 102,735 $ (2,574 ) $ (22 ) $ (47,490 ) $ 52,665

	Common Stock Shares Outstanding, Net of Shares of Treasury Stock		Par Value		Additional Paid in Capital			Accumulated Deficit			Accumulated Comprehensive Income (Loss)			Treasury Stock			Total
	For the Three Months Ended June 30, 2021
	Common Stock Shares Outstanding, Net of Shares of Treasury Stock		Par Value		Additional Paid in Capital			Accumulated Deficit			Accumulated Comprehensive Income (Loss)			Treasury Stock			Total
Balance as of April 1, 2021		15,154,253	$	16	$	102,735		$	(2,574	)	$	(22	)	$	(47,490	)	$	52,665

Issuance of common stock and warrants for cash from public offering, net of $2,365 offering cost
Issuance of common stock and warrants for cash from public offering, net of $2,365 offering cost, shares
Issuance of common stock and warrants for cash from private offering
Issuance of common stock and warrants for cash from private offering, shares
Cash dividends		-		-		(4,546	)		-			-			-			(4,546	)

Unrealized loss on marketable debt securities, net of realized gains of $2, net of taxes		-		-		-			-			(67	)		-			(67	)

Stock-based compensation		-		-		1,076			-			-			-			1,076

Net loss		-		-		-			(1,395	)		-			-			(1,395	)

Balance as of June 30, 2021		15,154,253	$	16	$	99,265		$	(3,969	)	$	(89	)	$	(47,490	)	$	47,733

	For the Three Months Ended June 30, 2020
	Common Stock Shares Outstanding, Net of Shares of Treasury Stock		Par Value		Additional Paid in Capital		Retained Earnings			Accumulated Comprehensive Income (Loss)			Treasury Stock			Total
Balance as of April 1, 2020		11,581,939	$	14	$	60,413	$	(2,315	)	$	9		$	(47,490	)	$	10,631

Unrealized loss on marketable debt securities, net of realized gains of $3, net of taxes		-		-		-		-			(5	)		-			(5	)

Stock-based compensation		9,709		-		198		-			-			-			198

Net income		-		-		-		70			-			-			70

Balance as of June 30, 2020		11,591,648	$	14	$	60,611	$	(2,245	)	$	4		$	(47,490	)	$	10,894

	For the Six Months Ended June 30, 2021
	Common Stock Shares Outstanding, Net of Shares of Treasury Stock		Par Value		Additional Paid in Capital			Accumulated Deficit			Accumulated Comprehensive Income (loss)			Treasury Stock			Total
Balance as of January 1, 2021		11,604,253	$	14	$	61,674		$	(3,631	)	$	(11	)	$	(47,490	)	$	10,556

Issuance of common stock and warrants for cash from public offering, net of $2,365 offering cost		3,000,000		2		35,133			-			-			-			35,135

Issuance of common stock and warrants for cash from private offering		550,000		-		5,500			-			-			-			5,500

Cash dividends		-		-		(4,546	)		-			-			-			(4,546	)

Unrealized loss on marketable debt securities, net of taxes		-		-		-			-			(78	)		-			(78	)

Stock-based compensation		-		-		1,504			-			-			-			1,504

Net loss		-		-		-			(338	)		-			-			(338	)

Balance as of June 30, 2021		15,154,253	$	16	$	99,265		$	(3,969	)	$	(89	)	$	(47,490	)	$	47,733

	For the Six Months Ended June 30, 2020
	Common Stock Shares Outstanding, Net of Shares of Treasury Stock		Par Value		Additional Paid in Capital		Accumulated Deficit			Accumulated Comprehensive Income (loss)			Treasury Stock			Total
Balance as of January 1, 2020		11,573,593	$	14	$	60,215	$	(1,506	)	$	(2	)	$	(47,490	)	$	11,231

Unrealized loss on marketable debt securities, net of realized losses of $3, net of taxes		-		-		-		-			6			-			6
Unrealized (gain) loss on marketable debt securities, net of realized losses, net of taxes											6						6

Stock-based compensation		18,055		-		396		-			-			-			396

Net loss		-		-		-		(739	)		-			-			(739	)
Net income loss								(739)									(739)

Balance as of June 30, 2020		11,591,648	$	14	$	60,611	$	(2,245	)	$	4		$	(47,490	)	$	10,894

Common Stock
Shares Outstanding, Net of Shares Additional Accumulated
of Treasury Par Paid in Accumulated Comprehensive Treasury
Stock Value Capital Deficit Income (loss) Stock Total
Balance as of January 1, 2020 11,573,593 $ 14 $ 60,215 $ (1,506 ) $ (2 ) $ (47,490 ) $ 11,231

Unrealized loss on marketable debt securities, net of realized losses of $3, net of taxes - - - - 11 - 11

Stock-based compensation 8,346 - 198 - - - 198

Net loss - - - (809 ) - - (809 )

Balance as of March 31, 2020 11,581,939 $ 14 $ 60,413 $ (2,315 ) $ 9 $ (47,490 ) $ 10,631

See accompanying notes to condensed consolidated financial statements

ProPhase Labs, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

							June 30, 2021			June 30, 2020
	For the three months ended						For the six months ended
	March 31, 2021			March 31, 2020			June 30, 2021			June 30, 2020
Cash flows from operating activities
Net income (loss)	$	1,057		$	(809	)
Net loss							$	(338	)	$	(739	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Realized loss on marketable debt securities		2			3			7			-
Depreciation and amortization		536			82			1,118			167
Amortization of debt discount		2			-			3			-
Amortization on right-of-use assets		85			-			167			-
Lower of cost or net realizable value inventory adjustment		-			12			-			32
Stock-based compensation expense		428			198			1,504			396
Change in fair value of investment securities								(164	)		-
Non-cash interest income on secured promissory note receivable								(315	)		-
Changes in operating assets and liabilities:
Accounts receivable		(11,178	)		797			(3,466	)		80
Escrow receivable								-			4,812
Inventory		(12,987	)		(256	)		(12,130	)		(620	)
Prepaid and other assets		2,243			64			2,434			91
Other assets		(8	)		-			(8	)		-
Accounts payable and accrued expenses		4,009			263			3,343			412
Lease liabilities		101			-			205			-
Other liabilities		7,818			(69	)		4,190			26
Net cash (used in) provided by operating activities		(7,892	)		285			(3,450	)		4,657

Cash flows from investing activities
Issuance of secured promissory note receivable		(1,000	)		-			(1,000	)		-
Purchase of marketable securities		(2,005	)		(706	)		(16,841	)		(3,436	)
Proceeds from sale of marketable debt securities		100			800			300			1,029
Capital expenditures		(3,927	)		(116	)		(4,237	)		(147	)
Net cash used in investing activities		(6,832	)		(22	)		(21,778	)		(2,554	)

Cash flows from financing activities
Proceeds from issuance of common stock from public offering, net		35,135			-			35,135			-
Proceeds from issuance of common stock and warrants from private offering		5,500						5,500			-
Payment of dividends								(4,546	)
Net cash provided by financing activities		40,635			-			36,089			-

Increase in cash and cash equivalents		25,911			263			10,861			2,103
Cash and cash equivalents, at the beginning of the period		6,816			434			6,816			434
Cash and cash equivalents, at the end of the period	$	32,727		$	697		$	17,677		$	2,537

Supplemental disclosures:
Cash paid for income taxes	$	-		$	-		$	-		$	-
Interest payment on the promissory notes	$	250		$	-		$	500		$	-

Supplemental disclosure of non-cash investing and financing activities:
Net unrealized gain (loss), investments in marketable debt securities	$	(11	)	$	11		$	(78	)	$	6

See accompanying notes to condensed consolidated financial statements

ProPhase Labs, Inc. and Subsidiaries

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 ~~medical science~~biotech and ~~technology~~genomics company with deep experience with ~~over-the-counter~~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 ~~service~~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 ~~capital stock of~~ Confucius Plaza Medical Laboratory Corp. (“CPM”) ~~for approximately $2.5 million in cash (see Note 3)~~, which operates a 4,000 square foot Clinical Laboratory Improvement Amendments (“CLIA”) accredited laboratory located in Old Bridge, New ~~Jersey.~~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 ~~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.

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,~~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 ~~three~~six months ended ~~March 31,~~June 30, 2021 are not necessarily indicative of operating results that may be achieved over the course of the full year.

~~Segments~~

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 ~~our~~for the Company is its Chief Executive Officer, in deciding how to allocate resources and assess performance. For the ~~three~~six months ended ~~March 31,~~June 30, 2021, we maintain two operating segments: diagnostic services and consumer products. For the ~~three~~six months ended ~~March 31,~~June 30, 2020, we only had the consumer products operating segment.~~See~~ (see Note ~~14.~~14, Segment Information).

Business and Liquidity Uncertainties

For the ~~three~~six months ended ~~March 31,~~June 30, 2021, our net revenues were derived from both our diagnostic services and consumer products segments. For the ~~three~~six months ended ~~March 31,~~June 30, 2020, our net ~~sales~~revenues were derived solely from our consumer products segment.

The diagnostic service business commenced in ~~October~~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 ~~three~~six months ended ~~March 31,~~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 ~~duration of business closures, 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 ~~and losses included~~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% - 3.35%~~0.94% to 3.35% during the first ~~quarter~~two quarters of Fiscal 2021. For the three and six months ended ~~March 31,~~June 30, 2021, ~~and 2020,~~ we reported unrealized losses of ~~$11,000~~ $67,000 and ~~$11,000,~~$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
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As of March 31, 2021
Amortized Unrealized Fair
Cost Losses Value
U.S. government obligations $ 1,021 $ (12 ) $ 1,009
Corporate obligations 2,533 (11 ) 2,522
$ 3,554 $ (23 ) $ 3,531
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 ~~March 31,~~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 ~~$89,000~~ $87,000and ~~$167,000,~~$167,000, respectively. The components of inventory are as follows (in thousands):
Schedule of Components of Inventory
March 31, December 31, June 30, December 31,
2021 2020 2021 2020
Lab material $ 14,414 $ 1,028
Diagnostic services testing material $ 13,240 $ 1,028
Raw materials 1,305 1,404 1,249 1,404
Work in process 185 437 345 437
Finished goods 122 170 335 170
$ 16,026 $ 3,039
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.~~years.
We did not identify any indicators of our property, plant and equipment for the ~~three~~six months ended ~~March 31,~~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 ~~March 31,~~June 30, 2021, our cash and cash equivalents balance ~~was $32.7~~ were $17.7million and our bank balance was ~~$33.0~~ $17.9million. Of the total bank balance, ~~$0.5~~ $0.5million was covered by federal depository insurance and ~~$32.5~~ $17.4 million was uninsured at ~~March 31,~~June 30, 2021.
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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 ~~our note holder’s~~the financial condition of the debtor under the Secured Note (see Note 13) ~~financial condition,~~, balances due to us and other factors, and based on this assessment, we did not offset our note receivable with an allowance at ~~March 31,~~June 30, 2021 and ~~March 31,~~June 30, 2020.
Leases
~~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~~environment (see Note ~~10)~~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~~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~~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.
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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 ~~debt~~ 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.~~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 ~~debt~~ securities and are as follows (in thousands):
As of March 31, 2021
Level 1 Level 2 Level 3 Total
Marketable debt securities
U.S. government obligations $ - $ 1,009 $ - $ 1,009
Corporate obligations - 2,522 - 2,522
$ - $ 3,531 $ - $ 3,531
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 ~~three~~six months ended ~~March 31,~~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 ~~October~~December 2020, we also began generating ~~sales~~revenues through diagnostic services. Revenue from diagnostic services ~~are~~is recognized when the results are made available to the customer. Net ~~sales~~revenues from consumer products ~~was $2.5~~ were $1.6 million and ~~net~~$4.1 million for the three and six months ended June 30, 2021, respectively. Net revenue from diagnostic services was ~~$12.7~~$7.5 million and $20.3 million for the three and six months ended ~~March 31, 2021.~~June 30, 2021, respectively. Net ~~sales was $1.9 million~~revenues for consumer products were $3.6 million and ~~nil~~$5.5 million and zero sales from diagnostic services for the three and six months ended ~~March 31, 2020.~~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.
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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 ~~from continuing~~ operations as of ~~March 31,~~June 30, 2021 included (i) ~~$299,000~~ $321,000 for estimated returns and allowances, which is reported as a liability and (ii) ~~$258,000~~ $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~~ $291,000 for estimated returns, which is reported as a liability and (ii) ~~$463,000~~ $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.
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Contract Balances
As of ~~March 31,~~June 30, 2021 and December 31, 2020, we have deferred revenue of ~~$278,000~~ $233,000 and ~~$331,000,~~$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
Deferred Revenue As of
June 30, 2021 As of
December 31, 2020
Recognition Period
0-12 Months $ 129 $ 112 $          169
13-24 Months 123 74 84
Over 24 Months 26 47 78
Total $ 278 $ 233 $ 331
Disaggregation of Revenue
We disaggregate revenue from contracts with customers into three categories: contract manufacturing, ~~and~~ 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 sixmonths ended ~~March 31,~~June 30, 2021 and 2020 (in thousands):
Schedule of Disaggregation by Revenue
For the Three Months Ended For the three months ended For the six months ended
Revenue by Customer Type March 31, 2021 March 31, 2020 June 30, 2021 June 30, 2020 June 30, 2021 June 30, 2020
Contract manufacturing $ 1,908 $ 1,723 $ 1,041 $ 3,472 $ 2,949 $ 5,195
Retail and others 625 165 565 151 1,190 316
Diagnostic services 12,738 - 7,536 - 20,274 -
Total revenue $ 15,271 $ 1,888 $ 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. ~~These costs are classified as Diagnostic Service Costs within operating expenses in the accompanying statement of operations.~~ 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 ~~all~~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.
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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 ~~March~~June 30, 2021 and 2020 were ~~$168,000~~ $111,000 and ~~$47,000,~~$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 ~~March 31,~~June 30, 2021 and 2020, we charged to operations ~~$428,000~~ $1,076,000 and ~~$198,000,~~$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 ~~the aggregate fair value~~share-based compensation expense associated with vesting of ~~stock grants issued and vested stock options earned.~~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 ~~March 31,~~June 30, 2021 and 2020 were ~~$115,000~~ $93,000and ~~$59,000,~~$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.
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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~~ $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,~~$300,000, which was subsequently terminated after two months of service.
Based on the preliminary valuation, the total consideration of ~~$2.5~~ $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,~~$901,000, which was primarily related to the acquisition of the assembled workforce. Other definite-lived intangible asset of approximate ~~$1.3~~ $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.
We have not presented unaudited pro forma combined results of operations as if CPM was acquired as of the beginning of fiscal year 2020 because CPM had no revenue and minimal expenses and, as such, would have been immaterial to our reported losses.
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.
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Note 4 – Property, Plant and Equipment
The components of property and equipment are as follows (in thousands):
Schedule of Property, Plant and Equipment
March 31, December 31,
2021 2020 Estimated Useful Life
June 30, 2021
December 31, 2020 Estimated Useful Life
Land $ 352 $ 352 $ 352 $ 352
Building improvements 1,729 1,729 10-39 years 1,859 1,729 10-39 years
Machinery 4,639 4,441 3-7 years 4,669 4,441 3-7 years
Lab equipment 4,316 1,002 3-7 years 4,316 1,002 3-7 years
Computer equipment 1,049 881 3-5 years 1,182 881 3-5 years
Furniture and fixtures 440 194 5 years 457 194 5 years
12,525 8,599 12,835 8,599
Less: accumulated depreciation (5,447 ) (5,021 ) (5,921 ) (5,021 )
Total property, plant and equipment, net $ 7,078 $ 3,578 $ 6,914 $ 3,578
Depreciation expense incurred for the ~~three~~six months ended ~~March 31,~~June, 2021 and 2020 was ~~$428,000~~ $900,000 and ~~$82,000,~~$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~~–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~~ $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%~~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~~ $3.0 million of the September 2020 Notes into common stock of the Company at a conversion price of ~~$3.00~~ $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 ~~three~~six months ended ~~March 31,~~June 30, 2021 and 2020, we incurred ~~$251,000~~ $574,000 and ~~$0,~~$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 50million shares of common stock, ~~$0.0005~~ $0.0005 par value, and one million shares of preferred stock, ~~$0.0005~~ $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 ~~March 31,~~June 30, 2021 and December 31, 2020, no 0shares 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, 0cash 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~~ $10.00 per share for net proceeds of ~~$5.5~~ $5.5 million. Each Warrant has an exercise price equal to ~~$11.00~~ $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~~ $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~~ $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~~ $35.1 million, after deducting the underwriting discounts and commissions and estimated offering expenses.
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The 2010 Directors’ Equity Compensation Plan
On May ~~5, 2010, our~~20, 2021, the stockholders of the Company approved the Amended and Restated 2010 Directors’ Equity Compensation Plan ~~which has been subsequently amended and restated by our stockholders~~ (the ~~“2010~~“Amended 2010 Directors’ Plan”)~~. A primary purpose~~ at the 2021 Annual Meeting of Stockholders of the Company (the “2021 Annual Meeting”). The Amended 2010 Directors’ Plan ishad been previously approved by the board of directors of the Company on April 7, 2021, subject to ~~provide us with~~stockholder approval at the ~~ability to pay all or a portion of director service fees in stock instead of cash.~~ 2021 Annual Meeting.
The Amended 2010 Directors’ Plan provides ~~that~~for an increase in the ~~total~~ number of shares ~~of common stock that may be issued~~reserved for issuance under the ~~2010 Directors’ Plan is equal~~plan by 100,000 shares, from 675,000 shares to ~~675,000~~ 775,000 shares.
During the three and six months ended ~~March 31,~~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 ~~March 31,~~June 30, 2020, ~~8,346~~ 9,709 and 18,055 shares of common stock, respectively were granted to our ~~directors.~~directors under the 2010 Directors’ Plan. We recorded ~~$17,000~~ $35,000 of director fees during the ~~three~~six months ended ~~March 31,~~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 ~~March 31,~~June 30, 2021, there were 200,000 options outstanding and there were ~~128,126~~ 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 ~~three~~six months ended ~~March 31,~~June 30, 2021.
The 2010 Equity Compensation Plan
On May ~~5, 2010, our~~20, 2021, the stockholders of the Company approved the Amended and Restated 2010 Equity Compensation Plan ~~which was subsequently amended and restated~~(the “Amended 2010 Plan”) at the 2021 Annual Meetings. The Amended 2010 Plan had been previously approved by ~~our stockholders (the “2010 Plan”).~~ 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 ~~that~~for an increase in the ~~total~~ number of shares ~~of common stock that may be issued~~reserved for issuance under the ~~2010 Plan is 3.9 million~~ plan by 1,000,000 shares, from 3,900,000 shares to 4,900,000 shares.
There were ~~50,000~~ 675,000 options granted under the 2010 Plan during the ~~three~~six months ended ~~March 31,~~June 30, 2021 ~~in excess~~for a total fair value of the total amount allocated for the plan. These options were excluded from the stock compensation expense calculation as the options require stockholder approval before we recognize the compensation expense. In addition, 510,000 options were granted during Fiscal 2020 in excess of the total amount allocated to the 2010 Plan. These options were excluded from the stock compensation expense calculation as the options require stockholder approval before we recognize the compensation expense.$1,973,000.
As of ~~March 31,~~June 30, 2021, there were ~~1,295,000~~ 1,890,250 options outstanding and ~~15,659~~ 340,659 options available to be issued pursuant to the terms of the 2010 Plan. We will recognize an aggregate of approximately ~~$779,000~~ $1,583,000 of remaining share-based compensation expense related to outstanding stock options over a weighted average period of ~~2.8~~ 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~~ $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 ~~three~~six months ended ~~March 31,~~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~~ $2.00 per share, effective as of September 5, 2018, the date a special ~~$1.00~~ $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~~ $2.00 to ~~$1.75~~ $1.75 per share,effective as of January 24, 2019, the date a ~~$0.25~~ $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~~ $1.75 to ~~$1.50~~ $1.50 per share, effective as of December 12, 2019,the date another ~~$0.25~~ $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.
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The following table summarizes stock options activity during the ~~three~~six months ended ~~March 31,~~June 30, 2021 for the Amended 2010 Plan, the Amended 2010 ~~Director~~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 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 3,795 $ 2.21 3.4 $ 26,441
Granted - - - - 675 9.13 5.1 -
Outstanding as of March 31, 2021 3,795 $ 2.21 3.2 $ 19,828
Forfeited (92 ) 5.31 - -
Outstanding as of June 30, 2021 4,378 $ 3.06 3.2 $ 16,182
Options vested and exercisable 3,273 $ 1.90 2.7 $ 18,085 3,573 $ 2.22 2.7 $ 15,183
~~Warrants~~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 ~~three~~six months ended ~~March 31,~~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 ~~warrants~~warrant activities during the ~~three~~six months ended ~~March 31,~~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) Number of Shares Weighted Average Exercise Price Weighted Average Remaining Contractual Life
(in years)
Outstanding as of January 1, 2021 450 $ 3.22 2.7 450 $ 3.22 2.7
Warrants granted 455 12.83 3.0 455 12.83 3.0
Outstanding as of March 31, 2021 905 $ 8.05 2.6
Outstanding as of June 30, 2021 905 $ 8.05 2.4
Warrants vested and exercisable 680 $ 9.65 2.7 815 $ 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 ~~three~~six months ended ~~March 31,~~June 30, 2021:
Summary of Weighted Average Assumptions Used in Determining Fair Value of Warrants
For the three months ended For the six months ended
March 31, 2021 June 30, 2021
Exercise price $ 12.83 $ 12.83
Expected term (years) 3.0 3.0
Expected stock price volatility 81 % 81 %
Risk-free rate of interest 0 % 0.2 %
Expected dividend yield (per share) 0 % 0 %
As of ~~March 31,~~June 30, 2021, there were 905,000 warrants outstanding and we recognized ~~$147,000~~ $105,000 and $193,000 of share-based compensation expense during the three and six months ended ~~March 31,~~June 30, 2021.We had no compensation expense during the ~~three~~six months ended ~~March 31,~~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 ~~March 31,~~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 ~~$13,000~~ $17,000 and ~~$16,000,~~$33,000, respectively.
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Note 8 – Other Current Liabilities
The following table sets forth the components of other current liabilities at ~~March 31,~~June 30, 2021 and December 31, 2020, respectively (in thousands):
Schedule of Other Current Liabilities
March 31, December 31, June 30, 2021 December 31, 2020
2021 2020
Accrued Diagnostic Services $ 5,145 $ -
Accrued diagnostic services $ 4,353 $ -
Accrued commissions 3,494 461 639 461
Accrued payroll 347 464 240 464
Accrued expenses 305 304 467 304
Accrued returns 299 291 321 291
Accrued income tax payable 8 8 8 8
Accrued benefits and vacation 40 34 71 34
Deferred revenue 129 169 112 169
Total other current liabilities $ 9,767 $ 1,731 $ 6,211 $ 1,731
Note 9– Commitments and Contingencies
~~Manufacturing Agreement~~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.~~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~~^®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.~~2022. Thereafter, the Manufacturing Agreement may be renewed by ~~Mylan~~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:~~
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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
Employment
Contracts

2021 $ 506 $ 338
2022 675 675
2023 675 675
2024 675 675
2025 675          675
Total $ 3,206 $ 3,038
~~Litigation~~
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 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 and other parties named therein.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.~~$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 iswas 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 ~~will~~ 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, targeted to be 35 days from the execution of the New York~~ Lease. The initial term of the New York Lease is 10 yearsand 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,~~$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~~ $56,963 per month (subject to a seven month abatement period), with a gradual rental rate increase of ~~2.75%~~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~~ $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.
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At ~~March 31,~~June 30, 2021, we had operating lease liabilities for the New York and New Jersey leases of approximately ~~$4.6~~ $4.9 million and right of use assets of approximately ~~$4.8~~ $4.6 million, which were included in the consolidated balance sheet.
The following summarizes quantitative information about our operating leases (amounts in thousands):

For the Three
Months Ended
March 31, 2021

Operating leases
Operating lease cost $ 204
Variable lease cost -
Operating lease expense 204
Short-term lease rent expense -
Total rent expense $ 204

For the Three
Months Ended
March 31, 2021

Operating cash flows used in operating leases $ (18 )
Right-of-use assets obtained in exchange for operating lease liabilities $ -
Weighted-average remaining lease term – operating leases (in years) 10.1
Weighted-average discount rate – operating leases 10.00 %
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 $ 339 $ 321
Year Ended December 31, 2022 774 774
Year Ended December 31, 2023 738 738
Year Ended December 31, 2024 747 747
Year Ended December 31, 2025 768 768
Thereafter 4,659 4,659
Total 8,025 8,007
Less present value discount (3,193 ) (3,071 )
Operating lease liabilities $ 4,832 $ 4,936
Note ~~11 –~~ 11– Significant Customers
Revenue for the three months ended ~~March 31,~~June 30, 2021 and 2020 was ~~$15.3~~ $9.1 million and ~~$1.9~~ $3.6 million, respectively. Two diagnostic services clients accounted for ~~46.1%~~24.9% and ~~31.6%~~16.8% of our revenue for the three months ended ~~March 31,~~June 30, 2021. No contract manufacturing ~~customer’s~~customer accounted for a significant portion of our revenue for the three ~~month~~months ended ~~March 31,~~June 30, 2021. Three third-party contract manufacturing customers accounted for ~~48.6%~~58.7%, 16.6% and ~~18% and 17.3%~~12.2%, respectively, of our revenue from continuing operations for the three months ended ~~March 31,~~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 ~~64%~~38.9%, 21.0% and ~~25%~~ 10.2% of our total reimbursement receivable balances from government agencies and healthcare issuers at ~~March 31,~~June 30, 2021. ~~Four~~Two consumer product customers represented ~~49%, 18%, 12%~~72.4%, and ~~11%~~12.8% of our total trade receivable balances at ~~March 31,~~June 30, 2020.
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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 .~~debt. The ~~dilutive~~potentially anti-dilutive effect of stock options, warrants, and convertible debt for the three and six months ended ~~March 31,~~June 30, 2021 was ~~3,637,000 shares.~~3,024,000 and 3,393,000 shares, respectively.
For the three and six months ended ~~March 31,~~June 30, 2021, ~~and 2020, there were 455,000 and 3,082,000, respectively common stock equivalents which were excluded from the diluted earnings per share computation because their impact would have been antidilutive.~~
~~For the three months ended March 31, 2020,~~ 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 ~~March 31,~~June 30, 2020, there were ~~3,082,000 potential dilutive~~ 2,307,000 Common Stock Equivalents that were ~~excluded from~~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 ~~computation~~were the same as basic earnings per share due to the exclusion of Common Stock Equivalents, which in a ~~consequence of their~~net loss position would have an anti-dilutive ~~effect.~~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~~ $4.0 million.
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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~~ $3.0 million to the consultant described above (inclusive of ~~$1.0~~ $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~~ $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~~ $250,000 to the consultant.
The Secured Note bears interest at a rate of ~~15%~~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%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.~~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 passuwith 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 0and $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 $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~~ $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~~ $2.75 million to ~~$3.75~~ $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~~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~~ $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 monthswith level monthly payments.
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Note 14 – Segment Information
The Company has identified ~~two~~ 2operating 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 ~~March 31,~~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 )
For the three months ended
March 31, 2021 March 31, 2020
Net revenues
Diagnostic services $ 12,737 $ -
Consumer products 2,534 1,888
Consolidated net revenue 15,271 1,888
Cost of revenue
Diagnostic services 4,345 -
Consumer products 1,999 1,473
Consolidated cost of revenue 6,344 1,473
Depreciation and amortization expense
Diagnostic services 345 -
Consumer products 3 5
Total Depreciation and amortization expense 348 5
Operating and other expenses 7,522 1,219
Income (loss) from continuing operations, before income taxes
Diagnostic services 2,839 -
Consumer products (35 ) 410
Unallocated corporate (1,748 ) (1,219 )
Total income (loss) from continuing operations, before income taxes 1,057 (809 )
Net income (loss) $ 1,057 $ (809 )
The following table is a summary of segment balance sheets information ~~for three months ended March 31,~~as of June 30, 2021 and December 31, 2020 ~~(amounts in~~(in thousands):
March 31 December 31, June 30, December 31,
2021 2020 2021 2020

ASSETS
Diagnostic services $ 40,349 $ 13,410 $ 32,222 $ 13,410
Consumer products 5,589 6,261 5,294 6,261
Unallocated corporate 39,506 11,734 38,807 11,734
Total assets $ 85,444 $ 31,405 $ 76,323 $ 31,405
Note 15 – Subsequent Events

On ~~May 12,~~August 10, 2021, ~~our board of directors declared~~the Company and its wholly-owned subsidiary, ProPhase Precision Medicine, Inc. (“ProPhase Precision”), entered into and closed a ~~special cash dividend of $0.30 per share for shareholders on record as of May 25, 2021 which will approximate $4.5 million. On the same date, the Compensation Committee~~Stock Purchase Agreement (the “Nebula Stock Purchase Agreement”) with Nebula Genomics, Inc., a privately owned personal genomics company (“Nebula”), each of the ~~board~~stockholders of ~~directors approved an adjustment to the stock option granted to Mr. Karkus on February 23, 2018~~Nebula (the ~~“CEO Option”~~“Seller Parties”), and Kamal Obbad, as ~~required under the Company’s 2018 Stock Plan, as a consequence of the special cash dividend. The board of directors has adjusted~~Seller Party Representative. Pursuant to the terms of the ~~CEO~~Nebula Stock ~~Option, such that~~Purchase Agreement, ProPhase Precision acquired all of the ~~exercise~~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 ~~CEO Option~~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 ~~reduced from $1.50 per share~~held in escrow by Citibank, N.A. (the “Escrow Agent”) until February 23, 2023 (“Escrow Termination Date”), pursuant to ~~$1.20 per share, effective~~the terms and conditions of an escrow agreement entered into with the Escrow Agent, as security for the indemnification obligations of ~~June 3, 2021,~~ the ~~date~~Seller Parties. At the ~~special cash dividend is~~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 ~~paid.~~delivered to the Seller Parties, as applicable.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
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 ~~RPP~~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;
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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 ~~medical science~~biotech and ~~technology~~genomics company with deep experience with ~~OTC~~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 ~~over-the-counter (“OTC”)~~OTC consumer healthcare products and dietary supplements in the United States. This includes the development and marketing of dietary supplements under the TK ~~Supplements~~^®Supplements® brand. However, commencing in December 2020, we also began offering ~~COVID-19~~COVID- 19 and other ~~Respiratory Pathogen Panel (“RPP”)~~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,~~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”) ~~for approximately $2.5 million in,~~, which operates a 4,000 square foot Clinical Laboratory Improvement Amendments (“CLIA”) accredited laboratory located in Old Bridge, New ~~Jersey.~~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 ~~three~~six months ended ~~March 31,~~June 30, 2021 as a result of our new diagnostic services business ~~segment,~~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.
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Financial Condition and Results of Operations Results for the Three Months Ended ~~March 31,~~June 30, 2021 as Compared to the Three Months Ended ~~March 31,~~June 30, 2020
For the three months ended ~~March 31,~~June 30, 2021, net revenue was ~~$15.3~~$9.1 million as compared to ~~$1.9~~$3.6 million for the three months ended ~~March 31,~~June 30, 2020. We experienced higher net revenue for the three months ended ~~March 31,~~June 30, 2021, primarily as a result of ~~$12.7~~an increase of $7.5 million related to our new diagnostic services business, ~~and, to~~which was offset by, a ~~lesser extent, increased third party~~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 ~~business.~~customers.
Cost of revenues for the three months ended ~~March 31,~~June 30, 2021 were ~~$6.3~~$4.7 million as compared to ~~$1.5~~$2.3 million for the three months ended ~~March 31,~~June 30, 2020. For the three months ended ~~March 31,~~June 30, 2021 and 2020, we realized a gross margin of ~~58.5%~~48.9% and ~~22.0%~~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 ~~services costs~~expenses for the three months ended ~~March 31,~~June 30, 2021 were ~~$3.8 million~~$830,000 compared to no diagnostics expenses for the three months ended ~~March 31,~~June 30, 2020. The ~~increase~~$830,000 in diagnostic expenses for the three months ended June 30, 2021 was comprised of ~~$3.8 million was due to~~ network providers expenses associated with our new diagnostic servicesbusiness.
~~General~~Sales, general and administration expenses for the three months ended ~~March 31,~~June 30, 2021 were ~~$3.8~~$5.0 million as compared to $1.2 million for the three months ended ~~March 31,~~June 30, 2020. The increase of ~~$2.6~~$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 ~~March 31,~~June 30, 2021 were ~~$115,000~~$93,000 as compared to ~~$59,000~~$65,000 for the three months ended ~~March 31,~~June 30, 2020. The increase in research and development costs for the three months ended ~~March 31,~~June 30, 2021 as compared to the three months ended ~~March 31,~~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 ~~March 31,~~June 30, 2021 and 2020 was ~~$87,000~~$214,000 and ~~$3,000,~~$11,000, respectively. The increase in interest income for the three months ended ~~March 31,~~June 30, 2021 as compared to the three months ended ~~March 31,~~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 ~~March 31,~~June 30, 2021 was ~~$251,000~~$323,000 compared to no interest expense for the three months ended ~~March 31,~~June 30, 2020. The increase in interest expense for the three months ended ~~March 31,~~June 30, 2021 as compared to the three months ended ~~March 31,~~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 ~~income~~loss from operations for the three months ended ~~March 31,~~June 30, 2021 was ~~$1.1~~$1.4 million, or ~~$0.07~~($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 ~~three~~six months ended ~~March 31,~~June 30, 2020 of ~~$798,000,~~$739,000, or ($~~0.07)~~0.06) per share. ~~Diluted earnings per share for the three months ended March 31, 2021 were $0.06.~~
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Liquidity and Capital Resources
Our aggregate cash and cash equivalents and marketable debt securities as of ~~March 31,~~June 30, 2021 was ~~$36.3~~$35.8 million as compared to $8.5 million at December 31, 2020. Our working capital was ~~$49.0~~$44.3 million and $9.6 million as of ~~March 31,~~June 30, 2021 and December 31, 2020, respectively. The increase of ~~$27.8~~$27.3 million in our cash and cash equivalents and marketable debt securities balance for the ~~three~~six months ended ~~March 31,~~June 30, 2021 was principally due to ~~(i)~~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 ~~(ii)~~(i) capital expenditures of ~~$3.9~~$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 ~~operation~~operations of ~~$7.9~~$3.5 million.
~~On May 12, 2021, our board of directors declared a special cash dividend of $0.30 per share for shareholders on record as of May 25, 2021 which will approximate $4.5 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 ~~three~~six months ended ~~March 31,~~June 30, 2020, primarily as a result of revenue from our new diagnostic services business, which offers COVID-19 ~~testing, and increased customer demand for our OTC healthcare and cold remedy products as a result of the COVID-19 pandemic.~~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 ~~duration of business closures, 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 ~~three~~six months ended ~~March 31,~~June, 2021, we used ~~$7.9~~$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.
~~The Diagnostic business has unpaid receivables of $950,000 from services provided and billings in 2020. Total amount outstanding greater than 90 days as of March 31 was $1.0 million~~. ~~Of this amount, greater than 90 days as of March 31, $950,000 amount has not yet been paid as of May 1, 2021.~~
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.
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Item 3. Quantitative and Qualitative Disclosures about Market Risk.
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.
Item 4. Controls and Procedures.
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 ~~March 31,~~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 ~~March 31,~~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.
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Part II. Other Information
Item 1. Legal Proceedings.
From time to time, we have been and may again become involved in legal proceedings arising in the ordinary course of ~~business, including the lawsuit discussed below.~~business. We are not presently a party to any material litigation.
Item 1A. Risk Factors.
There have been no material changes to the risks described in Item 1A. Risk Factors of the 2020 Annual ~~Report~~.Report.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
On January 21, 2021, in connection with the Company’s public offering of common stock, the Company issued 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) to the underwriters for the offering, at an exercise price of $15.625 per share (equal to 125% of the public offering price per share sold in the offering).None.
These securities were issued without registration under the Securities Act of 1933, as amended, by reason of the exemption from registration afforded by the provisions of Section 4(a)(2) thereof as transactions by an issuer not involving any public offering. No selling commissions were paid in connection with the issuance of these securities.
Item 3. Defaults Upon Senior Securities.
None
Item 4. Mine Safety Disclosures.
Not applicable
Item 5. Other Information.
None
Item 6. Exhibits
Exhibit No. Description
~~31.1~~10.1 Amended and Restated 2010 Equity Compensation Plan (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K (File No. 000-21617) filed on May 21, 2021)
10.2 Amended and Restated 2010 Directors’ Equity Compensation Plan (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K (File No. 000-21617) filed on May 21, 2021)
31.1 Certification by the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification by the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification by the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification by the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101. INS# XBRL Instance Document
101.SCH# XBRL Taxonomy Extension Schema Document
101.CAL# XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF# XBRL Taxonomy Extension Definition Linkbase Document
101.LAB# XBRL Taxonomy Extension Label Linkbase Document
101.PRE# XBRL Taxonomy Extension Presentation Linkbase Document
~~SIGNATURES~~
31
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
ProPhase Labs, Inc.
By: /s/ Ted Karkus
Ted Karkus
Chairman of the Board and Chief Executive Officer
~~(Principal~~ (Principal Executive Officer)
Date: ~~May 14,~~August 13, 2021
By: /s/ Monica Brady
Monica Brady
Chief Financial Officer
(Principal Financial Officer)
Date: ~~May 14,~~August 13, 2021
3332

	Common Stock
	Shares Outstanding, Net of Shares				Additional					Accumulated
	of Treasury		Par		Paid in		Accumulated			Comprehensive			Treasury
	Stock		Value		Capital		Deficit			Income (loss)			Stock			Total
Balance as of January 1, 2021		11,604,253	$	14	$	61,674	$	(3,631	)	$	(11	)	$	(47,490	)	$	10,556

Issuance of common stock and warrants for cash from public offering, net of $2,365 offering cost		3,000,000		2		35,133		-			-			-			35,135

Issuance of common stock and warrants for cash from private offering		550,000		-		5,500		-			-			-			5,500

Unrealized loss on marketable debt securities, net of taxes		-		-		-		-			(11	)		-			(11	)

Stock-based compensation		-		-		428		-			-			-			428

Net income		-		-		-		1,057			-			-			1,057

Balance as of March 31, 2021		15,154,253	$	16	$	102,735	$	(2,574	)	$	(22	)	$	(47,490	)	$	52,665

	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

	As of March 31, 2021
	Amortized		Unrealized			Fair
	Cost		Losses			Value
U.S. government obligations	$	1,021	$	(12	)	$	1,009
Corporate obligations		2,533		(11	)		2,522
	$	3,554	$	(23	)	$	3,531

	As of March 31, 2021
	Level 1		Level 2		Level 3		Total
Marketable debt securities
U.S. government obligations	$	-	$	1,009	$	-	$	1,009
Corporate obligations		-		2,522		-		2,522
	$	-	$	3,531	$	-	$	3,531

	Deferred Revenue		As of June 30, 2021		As of December 31, 2020
Recognition Period
0-12 Months	$	129	$	112	$	169
13-24 Months		123		74		84
Over 24 Months		26		47		78
Total	$	278	$	233	$	331


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

	Number of Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (in years)		Total Intrinsic Value		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		3,795		$	2.21		3.4	$	26,441
Granted		-		-		-		-		675			9.13		5.1		-
Outstanding as of March 31, 2021		3,795	$	2.21		3.2	$	19,828
Forfeited										(92	)		5.31		-		-
Outstanding as of June 30, 2021										4,378		$	3.06		3.2	$	16,182
Options vested and exercisable		3,273	$	1.90		2.7	$	18,085		3,573		$	2.22		2.7	$	15,183

	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	%

	Employment
	Contracts		Employment Contracts
2021	$	506	$	338
2022		675		675
2023		675		675
2024		675		675
2025		675		675
Total	$	3,206	$	3,038

	For the Three Months Ended March 31, 2021
Operating leases
Operating lease cost	$	204
Variable lease cost		-
Operating lease expense		204
Short-term lease rent expense		-
Total rent expense	$	204

	For the Three Months Ended March 31, 2021
Operating cash flows used in operating leases	$	(18	)
Right-of-use assets obtained in exchange for operating lease liabilities	$	-
Weighted-average remaining lease term – operating leases (in years)		10.1
Weighted-average discount rate – operating leases		10.00	%

	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


Remaing Months Ended December 31, 2021	$	339		$	321
Year Ended December 31, 2022		774			774
Year Ended December 31, 2023		738			738
Year Ended December 31, 2024		747			747
Year Ended December 31, 2025		768			768
Thereafter		4,659			4,659
Total		8,025			8,007
Less present value discount		(3,193	)		(3,071	)
Operating lease liabilities	$	4,832		$	4,936

	March 31		December 31,		June 30,		December 31,
	2021		2020		2021		2020

ASSETS
Diagnostic services	$	40,349	$	13,410	$	32,222	$	13,410
Consumer products		5,589		6,261		5,294		6,261
Unallocated corporate		39,506		11,734		38,807		11,734
Total assets	$	85,444	$	31,405	$	76,323	$	31,405

	●	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 ~~RPP~~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;

Exhibit No.		Description

~~31.1~~10.1		Amended and Restated 2010 Equity Compensation Plan (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K (File No. 000-21617) filed on May 21, 2021)

10.2		Amended and Restated 2010 Directors’ Equity Compensation Plan (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K (File No. 000-21617) filed on May 21, 2021)

31.1		Certification by the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification by the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1		Certification by the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2		Certification by the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101. INS#		XBRL Instance Document

101.SCH#		XBRL Taxonomy Extension Schema Document

101.CAL#		XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF#		XBRL Taxonomy Extension Definition Linkbase Document

101.LAB#		XBRL Taxonomy Extension Label Linkbase Document

101.PRE#		XBRL Taxonomy Extension Presentation Linkbase Document

	ProPhase Labs, Inc.

	By:	/s/ Ted Karkus
		Ted Karkus
		Chairman of the Board and Chief Executive Officer
		~~(Principal~~ (Principal Executive Officer)

	By:	/s/ Monica Brady
		Monica Brady
		Chief Financial Officer
		(Principal Financial Officer)