Stockholders’ Equity

9 Months Ended

Sep. 30, 2021

Equity [Abstract]

Stockholders’ Equity

Note 7 - Stockholders’ Equity

Our authorized capital stock consists of 50 million shares of common stock, $0.0005 par value, and one million shares of preferred stock, $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 September 30, 2021 and December 31, 2020, no shares 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, no cash 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 per share for net proceeds to us of $5.5 million. Each Warrant has an exercise price equal to $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.

ProPhase Labs, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(unaudited)

Public Offering

On January 18, 2021, we entered into an underwriting agreement for the public offering of three million shares of common stock, at a price to the public of $12.50 per share. On January 21, 2021, we completed the offering for net proceeds of $35.1 million, after deducting the underwriting discounts and commissions and estimated offering expenses. As part of the offering, 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 per share (equal to 125% of the public offering price per share).

Nebula Acquisition

As part of Nebula Acquisition (see Note 3, Business Acquisitions), a portion of the purchase price was 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 Company’s common stock on Nasdaq for the five trading days preceding the signing of the Nebula Stock Purchase Agreement.

The Company issued 483,685 shares of common stock in in lieu of $3.6 million cash payment to Seller Parties and noteholders of Nebula.

Stock Repurchase Program

On September 8, 2021, the Company announced that its board of directors (the “Board”) had approved a new stock repurchase program. Under the stock repurchase program, the Company is authorized to repurchase up to $6.0 million of its outstanding shares of common stock from time to time, over a six month period. The number of shares to be repurchased and the timing of the repurchases, if any, will depend on a number of factors, including, but not limited to, price, trading volume and general market conditions, along with the Company’s working capital requirements and general business conditions. The Board will re-evaluate the program from time to time, and may authorize adjustments to its terms.

The Company did not repurchase any shares of common stock during the three and nine months ended September 30, 2021.

The 2010 Directors’ Equity Compensation Plan

On May 20, 2021, the stockholders of the Company approved the Amended and Restated 2010 Directors’ Equity Compensation Plan (the “Amended 2010 Directors’ Plan”) at the 2021 Annual Meeting of Stockholders of the Company (the “2021 Annual Meeting”). The Amended 2010 Directors’ Plan authorizes the issuance of up to 775,000 shares of common stock.

During the three and nine months ended September 30, 2021, stock options to purchase an aggregate of 224,874 shares of our common stock were granted to our directors in lieu of director fees under the 2010 Directors’ Plan with a strike price of $5.28 per share under the Amended 2010 Directors’ Plan. During the three and nine months ended September 30, 2020, common stock and stock options to purchase an aggregate of 212,605 and 230,660 shares of common stock, respectively, were granted to our directors under the 2010 Directors’ Plan in lieu of director fees.

ProPhase Labs, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(unaudited)

At September 30, 2021, there were 424,874 stock options outstanding and there were 3,252 shares of common stock available to be issued pursuant to the terms of the Amended 2010 Directors’ Plan. No stock options were exercised during the three and nine months ended September 30, 2021.

The 2010 Equity Compensation Plan

On May 20, 2021, the stockholders of the Company approved the Amended and Restated 2010 Equity Compensation Plan (the “Amended 2010 Plan”) at the 2021 Annual Meetings. The Amended 2010 Plan authorizes the issuance of up to 4,900,000 shares of common stock.

There were 975,000 stock options granted under the 2010 Plan during the nine months ended September 30, 2021 for a total fair value of $2,891,000.

There were 250,000 stock options granted under the 2010 Plan during the three and nine months ended September 30, 2020 for a total fair value of $269,000.

As of September 30, 2021, there were 1,884,449 stock options outstanding and there were 184,657 shares of common stock available to be issued pursuant to the terms of the Amended 2010 Plan. We will recognize an aggregate of approximately $1,373,000 of remaining share-based compensation expense related to outstanding stock options over a weighted average period of 2.8 years.

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 per share, which is exercisable in 36 monthly installments, to Ted Karkus (the “CEO Option”), our Chief Executive Officer. No portion of the CEO Option was exercised during the nine months ended September 30, 2021 and 2020.

The 2018 Stock 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 per share, effective as of September 5, 2018, the date a special $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 to $1.75 per share, effective as of January 24, 2019, the date a $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 to $1.50 per share, effective as of December 12, 2019, the date another $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.

Inducement Option Award

As part of Nebula Acquisition, the Company issued a non-qualified stock option to Kamal Obbad, the Chief Executive Officer of Nebula, as an inducement to his employment with the Company (the “Inducement Award”). The Inducement Award entitles Mr. Obbad to purchase up to 250,000 shares of the Company’s common stock at an exercise price of $7.67 per share, the closing price of the Company’s common stock on the closing date of the Nebula Acquisition. The Inducement Award was granted to Mr. Obbad on the closing date of the Nebula Acquisition. The Inducement Award vested 25% on the grant date and will vest 25% per year for the next three years subject to Mr. Obbad’s continued employment with the Company. The Inducement Award expires on the seventh anniversary of the grant date. Any portion of the Inducement Award that does not vest and become exercisable will be forfeited for no consideration. The grant date fair value of the Inducement Award was approximately $1,128,000.

For the three months ended September 30, 2021 and 2020, we charged to operations an aggregate of $863,000 and $267,000, respectively, for share-based compensation expense associated with the vesting of outstanding equity awards under the Amended 2010 Directors’ Plan, the Amended 2010 Plan, the 2018 Stock Plan and the Inducement Award. For the nine months ended September 30, 2021 and 2020, we charged to operations an aggregate of $2,175,000 and $663,000, respectively, for share-based compensation expense associated with the vesting of outstanding equity awards under the 2010 Directors’ Plan, the 2010 Plan, the 2018 Stock Plan and the Inducement Award..

ProPhase Labs, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(unaudited)

The following table summarizes stock options activity during the nine months ended September 30, 2021 for the Amended 2010 Plan, the Amended 2010 Directors’ Plan, the 2018 Stock Plan and the Inducement Award (in thousands, except per share data): 

	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
Granted		1,450			7.48		5.0		-
Forfeited		(398	)		8.32		-		-
Outstanding as of September 30, 2021		4,847		$	3.15		3.5	$	12,559
Options vested and exercisable		3,829		$	2.46		2.7	$	12,012

The aggregate weighted average grant date fair value for the options granted during the three and nine months ended September 30, 2021 was approximately $2.7 and $4.7 million, respectively. The following table summarizes weighted average assumptions used in determining the fair value of the options at the date of grant for the nine months ended September 30, 2021:

	For the nine months ended
	September 30, 2021
Exercise price	$	7.48
Expected term (years)		3.9
Expected stock price volatility		80	%
Risk-free rate of interest		0.7	%
Expected dividend yield (per share)		0	%

Stock Warrants Issued

During the nine months ended September 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.

During the nine months ended September 30, 2021, we issued 5,986 shares of common stock through a cashless exercise of 50,000 common stock warrants.

The following table summarizes warrant activities during the nine months ended September 30, 2021 (in thousands, except per share data).

	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
Warrants granted		455			12.83		3.0
Cashless exercise		(50	)		5.00		-
Outstanding as of September 30, 2021		855		$	8.23		2.1
Warrants vested and exercisable		805		$	8.56		2.1

ProPhase Labs, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(unaudited)

The following table summarizes weighted average assumptions used in determining the fair value of the warrants at the date of grant for the nine months ended September 30, 2021:

	For the nine months ended
	September 30, 2021
Exercise price	$	12.83
Expected term (years)		3.0
Expected stock price volatility		81	%
Risk-free rate of interest		0.2	%
Expected dividend yield (per share)		0	%

As of September 30, 2021, there were warrants to purchase 855,000 shares of our common stock outstanding and we recognized $59,000 and $252,000 of share-based compensation expense during the three and nine months ended September 30, 2021, respectively. We recognized $16,000 in share-based compensation expense during the three and nine months ended September 30, 2020.