ProPhase Labs(PRPH) - 2021 Q4 - Annual Report

PART I Business The company operates as a diversified entity in diagnostic services and consumer products, with a significant pivot to COVID-19 testing driving substantial revenue growth in FY2021 - The company is diversified across diagnostic testing, genomics testing, and contract manufacturing, operating through two segments: diagnostic services and consumer products[15] - In August 2021, ProPhase acquired personal genomics company Nebula Genomics, Inc to offer whole genome sequencing and expand into genomics testing technologies[18][33] - The diagnostic services business, initiated in December 2020, includes two CLIA certified laboratories with a combined capacity to process up to 60,000 COVID-19 tests per day[17][25] Financial Performance Overview (FY2021 vs FY2020) | Metric | Fiscal 2021 | Fiscal 2020 | | :--- | :--- | :--- | | Revenues | $79.0 million | $14.5 million | | Net Income (Loss) | $6.3 million | ($2.1 million) | Business Segments The company's revenue is primarily driven by the Diagnostic Services segment, which exhibits significant customer concentration, followed by Contract Manufacturing and personal genomics - In Fiscal 2021, three diagnostic services customers accounted for 23.5%, 17.9%, and 11.9% of total revenues, highlighting significant customer concentration in this new segment[26] - The payer mix for diagnostic services in FY2021 was dominated by government agencies (primarily HRSA) at 60%, followed by insurance providers (35%) and client payers (5%)[26] - In Fiscal 2020, the contract manufacturing business was the primary revenue source, with two customers accounting for 47.1% and 17.2% of revenues[29] Government Regulation Operations are subject to extensive and complex regulations from U.S agencies like the FDA, CLIA, and CMS, covering everything from testing and manufacturing to billing and data privacy - Diagnostic testing services are regulated by the FDA, which oversees instruments and test kits, and by CLIA, which requires federal certification for clinical laboratories[41][58] - Manufacturing of OTC drugs and dietary supplements is subject to FDA's cGMP regulations, with dietary supplements also governed by the Dietary Supplement Health and Education Act (DSHEA)[44][48][49] - The company must comply with federal and state fraud and abuse laws, including the Anti-Kickback Statute, which prohibits offering value for referrals, and the Stark Law, which prohibits physician self-referrals[83][88] - Billing for diagnostic services is complex and subject to rules from various payers; the Protecting Access to Medicare Act (PAMA) requires laboratories to report private payor rates to CMS to set Medicare payment rates[75][76] Human Capital Management As of year-end 2021, the company employed 129 full-time staff, primarily in diagnostic services, with a focus on talent retention and employee safety - The company had 129 full-time employees at year-end 2021, with 82 dedicated to diagnostic services and 47 to contract manufacturing operations[93] - Key human capital objectives include identifying, recruiting, and retaining employees through incentive plans designed to increase stockholder value[95] Risk Factors The company faces significant risks from its heavy reliance on COVID-19 testing, the cessation of government funding for the uninsured, and a material weakness in internal financial controls - A critical risk is the company's ability to collect payment for tests, particularly from the HRSA program for uninsured individuals, which generated approximately 59.5% of Fiscal 2021 revenue and was announced to stop accepting claims in March 2022 due to lack of funding[105] - The company's business could be materially affected if demand for COVID-19 testing decreases due to vaccination or containment efforts and it cannot generate sufficient profits from other molecular tests[103] - A material weakness was identified in internal controls over financial reporting concerning the diagnostic billing process, which could adversely affect the accuracy and timing of financial reports[191] - The company faces significant competition in all its business areas: lab diagnostics (from large players like Quest and LabCorp), contract manufacturing, OTC products, and the personal genomics market[114][115][117] Unresolved Staff Comments There are no unresolved staff comments - Not applicable[204] Properties The company operates from key leased and owned facilities in New York, New Jersey, and Pennsylvania for its lab, manufacturing, and administrative functions - The company's main properties include a leased 25,000 sq ft headquarters and lab in Garden City, NY, and an owned 57,500 sq ft manufacturing facility in Lebanon, PA[205] Legal Proceedings The company is not currently a party to any material litigation - As of the report date, the company is not involved in any material legal proceedings[206] Mine Safety Disclosures This item is not applicable to the company - Not applicable[207] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on Nasdaq, and a $6 million stock repurchase program was active in the fourth quarter of 2021 - The company's common stock is traded on The Nasdaq Capital Market under the symbol "PRPH"[209] - A stock repurchase program authorizing up to $6 million was announced on September 8, 2021, expiring March 30, 2022; as of November 30, 2021, approximately $5.06 million remained available for repurchases[213] Q4 2021 Stock Repurchases | Period | Shares Purchased | Average Price Paid | Total Value (approx) | | :--- | :--- | :--- | :--- | | Oct 2021 | 136,444 | $5.44 | $742,255 | | Nov 2021 | 30,380 | $5.73 | $174,077 | | Total | 166,824 | $5.50 | $916,332 | Management's Discussion and Analysis of Financial Condition and Results of Operations Fiscal 2021 saw a dramatic 445% revenue increase to $79.0 million, driven by the new diagnostic services segment, though future revenue is uncertain due to the cessation of the HRSA program - The increase in net revenue was primarily due to a $67.2 million contribution from the new diagnostic services business, which had a full year of operations in 2021 compared to one month in 2020[224] - The HRSA program for uninsured COVID-19 testing, which generated 59.5% of FY2021 revenue, stopped accepting claims on March 22, 2022, creating significant uncertainty for future revenue and collections[245] - Working capital increased to $45.8 million at year-end 2021 from $9.6 million in 2020, largely due to net proceeds of $40.6 million from stock offerings[238] Key Financial Results (FY2021 vs FY2020) | Metric | FY2021 | FY2020 | | :--- | :--- | :--- | | Net Revenue | $79.0M | $14.5M | | Gross Profit | $42.0M | $4.6M | | Gross Margin | 53.1% | 31.7% | | Net Income (Loss) | $6.3M | ($2.1M) | | Adjusted EBITDA | $18.1M | ($0.3M) | Quantitative and Qualitative Disclosures About Market Risk The company has minimal exposure to market risks such as foreign currency fluctuations and interest rate changes - The company has minimal exposure to market risks such as foreign currency fluctuations and interest rate changes[269] Financial Statements and Supplementary Data The FY2021 financial statements reflect significant growth in assets and equity, driven by diagnostic services revenue, though auditors noted risks related to revenue estimation and HRSA funding cessation - The independent auditor's report identified a Critical Audit Matter concerning the estimation of variable consideration and allowances for diagnostic services revenue due to the high degree of judgment required[281] - The auditor's report also included an Emphasis of Matter paragraph highlighting the March 2022 cessation of the HRSA uninsured program, which accounted for 57.6% of the company's 2021 diagnostic service revenue[283][488] Consolidated Balance Sheet Highlights (As of Dec 31) | Metric (in thousands) | 2021 | 2020 | | :--- | :--- | :--- | | Total Current Assets | $61,317 | $15,887 | | Accounts Receivable, net | $37,708 | $3,155 | | Total Assets | $89,295 | $31,405 | | Total Liabilities | $30,667 | $20,849 | | Total Stockholders' Equity | $58,628 | $10,556 | Consolidated Statement of Operations Highlights (Year Ended Dec 31) | Metric (in thousands) | 2021 | 2020 | | :--- | :--- | :--- | | Revenues, net | $79,042 | $14,514 | | Gross Profit | $41,988 | $4,606 | | Income (Loss) from Operations | $9,801 | ($2,081) | | Net Income (Loss) | $6,273 | ($2,125) | | Diluted EPS | $0.40 | ($0.18) | Note 3 – Business Acquisitions The company completed two key acquisitions in 2020 and 2021, purchasing Nebula Genomics for $14.6 million and CPM for $2.5 million to expand its genomics and lab capabilities - On August 10, 2021, the company acquired Nebula Genomics for ~$14.6 million, allocating $11.0 million to definite-lived intangible assets (trade names, IP, customer relationships) and $4.4 million to goodwill[378][384] - On October 23, 2020, the company acquired CPM for ~$2.5 million, gaining a CLIA lab and recording $1.3 million for the CLIA license intangible asset and $1.3 million in goodwill[386][387][388] Note 15 – Segment Information In FY2021, the Diagnostic Services segment became the primary revenue and profit driver, generating $68.6 million in revenue, a major shift from the prior year Segment Performance (FY2021 vs FY2020, in thousands) | Segment | Net Revenues 2021 | Net Revenues 2020 | Income (Loss) from Cont Ops 2021 | Income (Loss) from Cont Ops 2020 | | :--- | :--- | :--- | :--- | :--- | | Diagnostic Services | $68,559 | $1,277 | $18,197 | ($270) | | Consumer Products | $10,483 | $13,237 | ($1,714) | $1,962 | Note 18 – Subsequent Events Subsequent to year-end, the company declared a special cash dividend, settled a promissory note, and faced the critical cessation of the HRSA program for uninsured COVID-19 testing - On March 15, 2022, HRSA announced its program for uninsured COVID-19 testing would stop accepting claims, impacting a revenue source that constituted 57.6% of the company's fiscal 2021 diagnostic service revenue[488] - A special cash dividend of $0.30 per share was declared on February 14, 2022, and paid in March 2022[485] - In February 2022, the company paid off a $2.0 million promissory note through a cash payment of $1.44 million and a conversion/repurchase of $600,000 principal for a total cash outlay of $2.59 million[486][487] Controls and Procedures Management concluded that disclosure controls were not effective as of year-end 2021 due to a material weakness in internal control over the diagnostic billing and revenue process - Management identified a material weakness in internal controls over financial reporting as of December 31, 2021[495] - The weakness is related to the diagnostic billing and revenue process, specifically the lack of standard operating procedures, system controls, and proper documentation for reimbursement receivable allowances[496] - As a result of this material weakness, management concluded that the company's disclosure controls and procedures were not effective[490] PART III Directors, Executive Officers and Corporate Governance Information regarding directors, executive officers, and corporate governance is incorporated by reference from the company's 2022 Proxy Statement - The required information is incorporated by reference from the Registrant's definitive proxy statement for its 2022 annual meeting of stockholders[505] Executive Compensation Information regarding executive compensation is incorporated by reference from the company's 2022 Proxy Statement - The required information is incorporated by reference from the Registrant's definitive proxy statement for its 2022 annual meeting of stockholders[506] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding security ownership and equity compensation plans is incorporated by reference from the company's 2022 Proxy Statement - The required information is incorporated by reference from the Registrant's definitive proxy statement for its 2022 annual meeting of stockholders[506] Certain Relationships and Related Transactions, and Director Independence Information regarding related party transactions and director independence is incorporated by reference from the company's 2022 Proxy Statement - The required information is incorporated by reference from the Registrant's definitive proxy statement for its 2022 annual meeting of stockholders[507] Principal Accountant Fees and Services Information regarding principal accountant fees and services is incorporated by reference from the company's 2022 Proxy Statement - The required information is incorporated by reference from the Registrant's definitive proxy statement for its 2022 annual meeting of stockholders[507] PART IV Exhibits and Financial Statement Schedules This section lists the financial statements and exhibits filed with the Form 10-K - This item lists the consolidated financial statements and various exhibits filed as part of the Annual Report on Form 10-K[509][512] Form 10-K Summary No Form 10-K summary was provided - None[514]