ProPhase Labs(PRPH) - 2023 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements The company's H1 2023 financial statements reflect a significant revenue decline and net loss, driven by reduced diagnostic demand, with increased assets and liabilities from acquisitions and debt, and negative operating cash flow Condensed Consolidated Balance Sheets As of June 30, 2023, total assets increased to $91.1 million, liabilities rose to $31.8 million due to new debt, and stockholders' equity decreased to $59.3 million Condensed Consolidated Balance Sheet Summary (in thousands) | Account | June 30, 2023 (Unaudited) | December 31, 2022 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $3,824 | $9,109 | | Total current assets | $54,966 | $60,833 | | Intangible assets, net | $13,769 | $8,475 | | TOTAL ASSETS | $91,058 | $87,648 | | Liabilities & Equity | | | | Total current liabilities | $13,675 | $16,075 | | Total liabilities | $31,801 | $24,017 | | Total stockholders' equity | $59,257 | $63,631 | | TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $91,058 | $87,648 | Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) Q2 2023 reported a $3.4 million net loss, a sharp reversal from Q2 2022's net income, primarily due to a 50%+ revenue drop to $13.2 million Statement of Operations Summary (in thousands, except per share data) | Metric | Q2 2023 | Q2 2022 | Six Months 2023 | Six Months 2022 | | :--- | :--- | :--- | :--- | :--- | | Revenues, net | $13,217 | $29,092 | $32,520 | $76,623 | | Gross profit | $6,448 | $18,720 | $16,968 | $47,397 | | (Loss) income from operations | $(4,658) | $10,587 | $(3,783) | $26,733 | | Net (loss) income | $(3,440) | $7,446 | $(2,890) | $19,940 | | Basic EPS | $(0.20) | $0.48 | $(0.17) | $1.28 | | Diluted EPS | $(0.20) | $0.40 | $(0.17) | $1.07 | Condensed Consolidated Statements of Stockholders' Equity Stockholders' equity decreased to $59.3 million by June 30, 2023, primarily due to a $2.9 million net loss and $5.9 million in treasury stock repurchases - Key changes in stockholders' equity for the six months ended June 30, 2023 include a net loss of $2.89 million, stock repurchases of $0.59 million, and treasury shares repurchased for tax withholding of $5.38 million[16] - In contrast, for the six months ended June 30, 2022, the company had a net income of $19.94 million and paid cash dividends totaling $9.35 million[16] Condensed Consolidated Statements of Cash Flows H1 2023 saw a significant shift to net cash used in operating activities of $6.5 million, leading to an overall $5.3 million decrease in cash and cash equivalents Cash Flow Summary (in thousands) | Cash Flow Activity | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | $(6,481) | $25,108 | | Net cash (used in) provided by investing activities | $(437) | $3,596 | | Net cash provided by (used in) financing activities | $1,633 | $(13,403) | | (Decrease) increase in cash | $(5,285) | $15,301 | Notes to Condensed Consolidated Financial Statements Notes detail business structure, accounting policies, and key events, including the BE-Smart acquisition, new debt, stock repurchase program, and segment performance - The company operates through two segments: diagnostic services (COVID-19 testing, genomics) and consumer products (contract manufacturing, dietary supplements). It has recently expanded into biopharma and cancer diagnostics[20][21][24] - In January 2023, the company acquired the BE-Smart Esophageal Pre-Cancer Diagnostic Screening Test from Stella Diagnostics for total consideration of $6.8 million, accounted for as an asset acquisition[44][45][48] - In January 2023, the company issued a $7.6 million unsecured promissory note due 2026 with a 10% interest rate, along with warrants to purchase 76,000 shares[51][52] - A new stock repurchase program was approved in March 2023, authorizing the repurchase of up to $6.0 million of common stock over six months[61] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes revenue and profitability decline to decreased COVID-19 testing, noting consumer product growth and increased expenses, while affirming sufficient liquidity despite cash decrease and program risks Q2 2023 vs Q2 2022 Performance (in millions) | Metric | Q2 2023 | Q2 2022 | Change | | :--- | :--- | :--- | :--- | | Net Revenue | $13.2 | $29.1 | $(15.9) | | Gross Profit | $6.4 | $18.7 | $(12.3) | | Net (Loss) Income | $(3.4) | $7.4 | $(10.8) | - The decrease in diagnostic services revenue was driven by a drop in testing volume from 521,000 tests in H1 2022 to 246,000 in H1 2023[143] - Revenue from the HRSA uninsured program, which constituted 79.1% of diagnostic revenue in H1 2022, was zero in H1 2023 as the program stopped accepting claims in March 2022[143][162] - General and administration expenses increased by $3.6 million in Q2 2023 compared to Q2 2022, due to higher personnel, marketing, and professional fees for strategic initiatives[138][139] - Cash and cash equivalents decreased by $5.3 million during the first six months of 2023 to $3.8 million. Management believes current liquidity is sufficient to fund operations for at least the next 12 months[157][158] Item 3. Quantitative and Qualitative Disclosures about Market Risk The company faces no material foreign currency or interest rate risks, but acknowledges potential adverse impacts from broad economic conditions on its business - The company does not have material exposure to foreign currency fluctuations or derivative financial instruments[180] - A one percentage point change in short-term interest rates is not expected to have a material impact on earnings, fair value, or cash flows[180] - The company acknowledges that adverse economic conditions, including reduced consumer spending and financial market volatility, could negatively affect its business, including the collection of receivables and asset recoverability[181] Item 4. Controls and Procedures Management, including CEO and CFO, deemed disclosure controls and procedures effective as of June 30, 2023, with no material changes to internal controls - Management, including the principal executive officer and principal financial officer, concluded that the company's disclosure controls and procedures were effective at a reasonable assurance level as of June 30, 2023[184] - No material changes to internal control over financial reporting occurred during the most recent quarter[185] PART II. OTHER INFORMATION Item 1. Legal Proceedings The company is not a party to material litigation, but its subsidiary, TK Supplements, Inc., is defending a class action lawsuit alleging false advertising - A purported class action lawsuit was filed on April 27, 2023, against the company's subsidiary, TK Supplements, Inc., alleging false advertising of its Legendz XL male enhancement supplement in violation of California's Consumer Legal Remedies Act[188] - The company believes the lawsuit is without merit and plans to defend against the litigation vigorously[188] Item 1A. Risk Factors No material changes to risk factors previously disclosed in the company's Annual Report on Form 10-K filed on March 29, 2023, have occurred - As of the filing date of this Form 10-Q, there have been no material changes to the risk factors disclosed in the company's Annual Report on Form 10-K filed on March 29, 2023[190] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company issued a warrant for 250,000 shares at $9.00 per share and repurchased 6,012 shares at an average of $7.94 per share - On April 6, 2023, the company issued a warrant to Vencap Consulting LLC to purchase 250,000 shares of common stock at an exercise price of $9.00 per share, with a five-year term. This was issued in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act[191][192] Issuer Purchases of Equity Securities (Q2 2023) | Period | Total Shares Purchased | Average Price Paid per Share | Approximate Dollar Value of Shares that May Yet Be Purchased | | :--- | :--- | :--- | :--- | | April 2023 | 6,012 | $7.94 | $5,411,119 | | May 2023 | — | — | $5,411,119 | | June 2023 | — | — | $5,411,119 | | Total | 6,012 | $7.94 | $5,411,119 | Item 3. Defaults Upon Senior Securities The company reported no defaults upon senior securities during the period - None[194] Item 4. Mine Safety Disclosures This item is not applicable to the company - Not applicable[194] Item 5. Other Information The company reported no other information for this item - None[194] Item 6. Exhibits This section lists exhibits filed with the Form 10-Q, including bylaws, warrants, equity plans, and CEO/CFO certifications Signatures