See accompanying notes to condensed consolidated financial statements

ProPhase Labs, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

See accompanying notes to condensed consolidated financial statements

ProPhase Labs, Inc. and Subsidiaries

(unaudited)

Note 1 – Organization and Business

ProPhase Labs, Inc. (“we”ProPhase”, “we”, “us”, “our” or the “Company”) was initially organized asis a corporation in Nevada in July 1989. Effective June 18, 2015, we changed our state of incorporation from the State of Nevada to the State of Delaware. We are a manufacturingdiversified medical science and marketingtechnology company with deep experience with OTCover-the-counter (“OTC”) consumer healthcare products and dietary supplements. We areconduct 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. This includesHowever, commencing in December 2020, we also began offering COVID-19 and other Respiratory Pathogen Panel (RPP) molecular tests through our new diagnostic service 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 developmentacquisition of all of the issued and marketingoutstanding shares of dietary supplements undercapital 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. As a result of the TK Supplements^® brand.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, organic and natural-based cough drops and lozenges and OTC drug and dietary supplement products.

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” shall mean the fiscal year ended December 31, 2020 and references to other “fiscal”“Fiscal” years shall mean the year whichthat 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

For the three and six months ended June 30, 2020 and 2019, our revenues have come principally from our OTC healthcare and dietary supplement contract manufacturing business and sales to retail customers of dietary supplement product.

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, 2019.2020. In the opinion of management, all adjustments necessary for a fair presentation of the consolidated financial position, consolidated results of operations and other comprehensive income (loss)loss and consolidated cash flows, for the periods indicated, have been made. The results of operations for the sixthree months ended June 30, 2020March 31, 2021 are not necessarily indicative of operating results that may be achieved over the course of the full year.

Product Innovation, Seasonality of the Business and LiquiditySegments

Our net salesOperating segments are derived principally from our contract manufacturingdefined as components of OTC healthcare products and the sale of our dietary supplement productsan enterprise that engage in the United States. In addition, we are engaged in marketingbusiness activities for which separate financial information is available and is evaluated by the Chief Operating Decision Maker (“CODM”), which our TK Supplements^® product line of dietary supplements.Chief Executive Officer, in deciding how to allocate resources and assess performance. For the three months ended March 31, 2021, we maintain two operating segments: diagnostic services and consumer products. For the three months ended March 31, 2020, we only had the consumer products operating segment.See Note 14.

Business and Liquidity Uncertainties

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

The diagnostic service business commenced in October 2020 and expanded in February 2021 with the opening of our new Garden City, New York CLIA accredited laboratory. Our diagnostic service business is 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 months ended March 31, 2021 as a result of our new 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 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 declinesdeclines., although we did experience higher than normal net sales for the three months ended June 30, 2020, primarily as a result of increased customer demand for our OTC healthcare and cold remedy products as a result of the COVID-19 pandemic.

As a consequence of the timing of acceptance of our TK Supplements^® products in the marketplace and the seasonality of our business, we realize variations in operating results and demand for working capital from quarter to quarter. As of June 30, 2020, we had working capital of approximately $8.8 million, including $3.3 million in marketable securities available for sale. We believe our current working capital at June 30, 2020 is at an acceptable and adequate level to support our business for at least the next twelve months after the date that the unaudited condensed consolidated financial statements are issued.

The COVID-19 pandemic has not had a material impact on our business to date, although we did experience higher than normal net sales for the three months ended June 30, 2020, primarily as a result of increased customer demand for OTC healthcare and cold remedy products as a result of the COVID-19 pandemic. Based on our current assessment, we do not expect the pandemic to have a material impact on our long-term liquidity. However, we will continue to monitor its impact on our operations. The extent to which the COVID-19 pandemic could impact our business and operations in the long term will depend on future developments that are highly uncertain and cannot be predicted with confidence at this time, the duration of the pandemic and the duration and extent of business disruptions caused by the pandemic, including as a result of travel restrictions, quarantines, social distancing requirements and business closures in the United States and other countries in order to contain and treat the disease. 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 operating results, our ability to raise capital needed to develop and commercialize products and our overall financial condition, which could affect the value of our common stock. In addition, a prolonged recession or market correction resulting from the spread of the coronavirus could affect the value of our common stock.

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. When providing for the appropriate sales returns, allowances, cash discounts and cooperative incentive promotion costs (“sales allowances”), we apply a uniform and consistent method for making certain assumptions for estimating these provisions. 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 itsthe 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.

On May 3, 2020, the Company entered into a promissory note and agreement with Wells Fargo, N.A. for an aggregate principal amount of $295,250 (the “PPP Loan”), pursuant to the Paycheck Protection Program established by the Coronavirus Aid, Relief, and Economic Security Act, which became effective in March 2020. On May 15, 2020, the Company returned the PPP Loan to Well Fargo, N.A. in light of its receipt of $4.8 million from the Mylan escrow account (see Note 7).

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 as a separate component of stockholders’ equity. Realized gains and losses from our marketable debt securities are recorded as interest income (expense). We initiated short termThese investments in marketable debt securities, which carry maturity dates between one and three years from date of purchase withand interest rates of 1.875%0.94% - 4.00%3.35% during the first two quartersquarter of Fiscal 2020.2021. For the three months and six months ended June 30,March 31, 2021 and 2020, we reported unrealized losslosses of $5,000$11,000 and an unrealized gain of $6,000,$11,000, respectively. Unrealized gains and losses are classified as other comprehensive income (loss)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 long-lived assets below)fair value of financial instruments) (in thousands):

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.

InventoryInventories, 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 June 30,March 31, 2021 and December 31, 2020, and June 30, 2019, the financial statements include non-cash adjustments to adjust inventory for excess, obsolete or short-dated shelf-life inventory by $32,000$89,000 and $0,$167,000, respectively. The components of inventory are as follows (in thousands):

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.

We have revieweddid not identify any indicators of our property, plant and equipment for the sixthree months ended June 30,March 31, 2021 and 2020 and 2019 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 compliance with 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 June 30, 2020,March 31, 2021, our cash and cash equivalents balance was $2.5$32.7 million and our bank balance was $2.6$33.0 million. Of the total bank balance, $0.4$0.5 million was covered by federal depository insurance and $2.2$32.5 million was uninsured at June 30, 2020.March 31, 2021.

Trade accountsAccounts receivable potentially subject us to credit risk concentrations from time-to-time as a consequence of the timing, payment pattern and ultimate purchase volumes or shipping schedules with our customers.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 we do not require collateral. Our customers include consumer products companiesdiagnostic services receivable credit risk is based on payer reimbursement experience, which includes government agencies and large national chain, regional, specialtyhealthcare insurers, the period the receivables have been outstanding and local retail stores.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 may impact our overall exposure to credit risk, either positively or negatively, in that our customers maywhich could be similarlyfurther affected by changes in economic, regulatory or other conditions that may impact the timing and collectability of amounts duetrade receivables and diagnostic test receivables. Additionally, the reimbursement receivables from the diagnostic service business are subject to us. As a consequence of an evaluation ofbilling errors and related disputes.

We also assess our customer’snote holder’s (see Note 13) financial condition, payment patterns, balancebalances due to us and other factors, and based on this assessment, we did not offset our accountnote receivable with an allowance for bad debt at June 30, 2020March 31, 2021 and DecemberMarch 31, 2019.2020.

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 Note 10)

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.

Long-livedGoodwill and 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 with definite livesfor impairment whenever events or changes in circumstances indicate that the carrying amount of thethese assets may not be fully recoverable. When indicators of impairment exist, we determine whether the estimated undiscounted sum of the future cash flows of such assetsit is less than their carrying amounts. If less, an impairment loss is recognized in the amount, if any, by whichdetermined that the carrying amount of suchlong-lived assets exceeds their respectiveor goodwill is impaired, impairment is measured by comparing an asset’s estimated fair values.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; andcompetition, 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 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.

Fair Value of Financial Instruments

Fair

We measures assets and liabilities at fair value is based on expected exit price as defined by the pricesauthoritative guidance on fair value measurements, which represents the amount that would be received to sellon 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 at the measurement date. In order to increase consistency and comparabilitywould use in pricing an asset or liability. The authoritative guidance on fair value measurements establishes a three-tierconsistent framework for measuring fair value hierarchy prioritizeson 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 used to measure fair value. These tiers include: Level 1, defined as observablevalue:

The carrying amounts of our financial assets and liabilities, such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable;cash, accounts receivable, accounts payable, secured note receivable and Level 3, defined as unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its own assumptions.unsecured note payable, approximate their fair values because of the current nature of these instruments.

Marketable securities and assets held for sale are reflected in the consolidated financial statements at carrying value which approximates fair value. We account for our marketable debt securities at fair value, with the net unrealized gains or losses reported as a component of accumulated other comprehensive income or loss. The components of marketable debt securities are as follows (in thousands):

There were no transfers of marketable debt securities between Levels 1, 2 or 3 for the sixthree months ended June 30, 2020.March 31, 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

We generate sales principally through two types of customers, contract manufacturing and retail customers. Sales from product shipments to contract manufacturing and retailer customers are recognized at the time ownership is transferred to the customer. Net sales from contract manufacturing and retail customers were $3.5 million and $0.1 million, respectively, for the three months ended June 30, 2020 and $1.5 million and $0.2 million, respectively, for the three months ended June 30, 2019. Net sales from contract manufacturing and retail customers were $5.2 million and $0.3 million, respectively, for the six months ended June 30, 2020 and $3.6 million and $0.4 million, respectively, for the six months ended June 30, 2019. Revenue from retailer 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 make estimates of 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.

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 2020, we also began generating sales through diagnostic services. Revenue from diagnostic services are recognized when the results are made available to the customer. Net sales from consumer products was $2.5 million and net revenue from diagnostic services was $12.7 for the three months ended March 31, 2021. Net sales was $1.9 million for consumer products and nil sales from diagnostic services for the three months ended March 31, 2020.

The combined duties and responsibilities within each contract are considered one singleCompany’s performance obligation as these items would not be separately identifiable from each other promise infor contract manufacturing and retail customers is to provide the contract and wegoods ordered by the customer. For diagnostic services, the Company has one performance obligation, which is to provide a significant servicethe results of integrating the duties with other promises inlaboratory test to the contracts.

customer.

Transaction Price

TheFor contract manufacturing and retail customers, the transaction price is fixed based upon either (i) the terms of a combined Master Agreementmaster agreement and each related purchase order, or (ii) if there is no Master Agreement,master agreement, the price per the 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 CompanyCompany.

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, 2021 included (i) $299,000 for estimated returns and allowances, which is reported as a liability and (ii) $258,000 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 for estimated returns, which is reported as a liability and (ii) $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 researchexpected reimbursement. We provide diagnostic services to a range of customers, including health plans, government agencies and development (“R&D”)consumers. In many cases, the customer that orders our services are recognized at the time the performance is completed.

The Company does not collect sales tax or other similar taxes from customers. As such, there is no effectresponsible for paying for these services. Depending on the measurement ofbilling 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 sales to 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.

We do not accept returns from our contract manufacturing customers. Our return policy for retailer 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 within which products must be returned. All requests for product returns must be submitted to us for pre-approval. The main components of our returns policy are: (i) we will accept returns that are due to damaged product that is un-saleable and such return request activity falls within an acceptable range, (ii) we will accept returns for products that have reached or exceeded designated expiration dates and (iii) we will accept returns in For diagnostic services, the event that we discontinue a product provided thatCompany satisfies its performance obligation at the customer will have the right to return only such items that it purchased directly from us. We will not accept return requests pertaining to customer inventory “Overstocking” or “Resets”. We will accept return requests for only products in its 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 owed or to be owed and in the case of discontinued product only, also by way of an exchange. We do not have any significant product exchange history.

We continue to recognize revenue from contract manufacturing and retail customers at a point in time as we have an enforceable rightthat the results are made available to payment for goods as products are shipped to customers.the customer, which is when the customer benefits from the information contained in the results and obtains control.

Accrued advertising and other allowances from continuing operations as of June 30, 2020 included (i) $53,000 for estimated returns which is reported as a liability and (ii) $43,000 for cooperative and incentive promotion costs which is also reported as a liability. Accrued advertising and other allowances from discontinued operations as of June 30, 2020 included (i) $131,000 for estimated returns, which is reported as a reduction to account receivables, and (ii) $69,000 for cooperative incentive promotion costs, which is reported as accrued advertising and other allowances under current liabilities. As of December 31, 2019, accrued advertising and other allowances from continuing operations included (i) $37,000 for estimated returns which is reported as a liability and (ii) $92,000 for cooperative and incentive promotion costs which is also reported as a liability. Accrued advertising and other allowances from discontinued operations as of December 31, 2019 included (i) $132,000 for estimated returns, which is reported as a reduction to account receivables, and (ii) $76,000 for cooperative incentive promotion costs, which is reported as accrued advertising and other allowances under current liabilities.Contract Balances

As of June 30,March 31, 2021 and December 31, 2020, we have deferred revenue of $221,115$278,000 and $331,000, respectively, in relation to R&D stability and release testing programs. As of December 31, 2019, deferred revenue was $214,000.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 implementation, maintenance and other services, as well as initial subscription fees.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 the Company’sour deferred revenue expected by recognition period (in thousands):

Disaggregation of Revenue

We disaggregate revenue from contracts with customers into twothree categories: contract manufacturing and retail customers.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 the Company’sour revenue by revenue source for the three and six months ended June 30,March 31, 2021 and 2020 and 2019 (in thousands):

Sales Tax Exclusion from the Transaction PriceCustomer Consideration

We exclude fromThe 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 measurementaccompanying statement of operations. Such services include specimen collection, the transaction pricecollection and delivery of insurance and patient information necessary for billing and collection, logistics services, as well as other information requirements. Diagnostic services cost of revenue includes all taxes assessed by a governmental authority that are both imposed oncosts incurred in connection with the company operated laboratories including reagent and concurrent with a specific revenue-producing transactionother raw material costs, direct and collected by the Company from the customer.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.

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 from continuing operations for the three months ended JuneMarch 30, 2021 and 2020 were $168,000 and 2019 were $49,000 and $55,000, respectively. Advertising and incentive promotion expenses incurred from continuing operations for the six months ended June 30, 2020 and 2019 were $96,000 and $82,000,$47,000, 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 (see Note 4).plans. Stock options are exercisable during a period determined by us, but in no event later than tenseven years from the date granted. For the three months ended June 30,March 31, 2021 and 2020, and 2019, we charged to operations $198,000$428,000 and $180,000,$198,000, respectively, for share-based compensation expense for the aggregate fair value of stock grants issued and vested stock options earned.

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 June 30,March 31, 2021 and 2020 were $115,000 and 2019 from continuing operations were $65,000 and $95,000, respectively. R&D costs incurred for the six months ended June 30, 2020 and 2019 from continuing operations were $124,000 and $189,000,$59,000, 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 other remedies.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 whichthat 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. The Company isWe are currently assessing the impact of the adoption of this ASU on itsour financial statements.

In December 2019, theThe FASB recently issued ASU No. 2019-12, “Income Taxes (Topic 740)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): Simplifying the Accounting for Income Taxes (“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 2019-12”), which is intended to simplify various aspects related to2020-06 simplifies the accounting for income taxes. ASU 2019-12 removes certain exceptionsconvertible 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 general principlesissuer’s own stock and classified in Topic 740 and also clarifies and amends existingstockholders’ 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 improve consistent application. This guidance isrequire 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 fiscal years, and interim periods within thosepublic entities, excluding smaller reporting companies, for fiscal years beginning after December 15, 2020, with early2021. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2023. Early adoption permitted. The Company is permitted, but no earlier than fiscal years beginning after December 15, 2020. We are currently evaluatingassessing the impact of the adoption of this standardASU on its consolidatedour financial statements and related disclosures.

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 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, which was subsequently terminated after two months of service.

Based on the preliminary valuation, the total consideration of $2.5 million has been allocated to assets acquired and liabilities assumed based on their respective fair values as follows (amount in thousands):

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, which was primarily related to the acquisition of the assembled workforce. Other definite-lived intangible asset of approximate $1.3 million were related to the CLIA license, which was determined to have an estimated useful life of three years.

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.

Note 34 – Property, Plant and Equipment

The components of property and equipment are as follows (in thousands):

Depreciation expense incurred for the sixthree months ended June 30,March 31, 2021 and 2020 was $428,000 and 2019 was $167,000 and $202,000,$82,000, respectively. During the six months ended June 30, 2020, we wrote off fully depreciated assets and accumulated depreciation totaling $38,000.

On June 27, 2020, we initiated negotiations to sell our Doylestown property. As a result the Doylestown building and land were classified as assets held for sale on our condensed consolidated balance sheet at June 30, 2020. We reported the assets held for sale at the lower of the carrying amount or fair value, less estimated costs to sell. On July 10, 2020, we entered into a Purchase and Sale Agreement to sell our Doylestown property.

Note 45 –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 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% 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 million of the September 2020 Notes into common stock of the Company at a conversion price of $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 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 months ended March 31, 2021 and 2020, we incurred $251,000 and $0, respectively, in interest expense.

Note 6 – Transactions Affecting 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 June 30, 2020March 31, 2021 and December 31, 2019,2020, no shares of preferred stock have been issued.

Common Stock Dividend

Registered Direct Offering

On December 24, 2018,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 Board declared a special cash dividend of $0.25 per share on the Company’s common stock resulting in $2.9 million payable on January 24, 2019 to holders of record of the Company’s common stock on January 10, 2019. On January 24, 2019, the Company paidpurchasers an aggregate of $2.9(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 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.

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 Company’s stockholders entitledpublic of $12.50 per share. We also issued to receive such dividend.

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). 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.

The 2010 Directors’ Equity Compensation Plan

On May 5, 2010, our stockholders approved the 2010 Directors’ Equity Compensation Plan, which has been subsequently amended and restated by our stockholders (the “2010 Directors’ Plan”). A primary purpose of the 2010 Directors’ Plan is to provide us with the ability to pay all or a portion of thedirector service fees of directors in stock instead of cash. The 2010 Directors’ Plan provides that the total number of shares of common stock that may be issued under the 2010 Directors’ Plan is equal to 675,000 shares.

During the three and six months ended June 30, 2020, 9,709 and 18,055March 31, 2021, no shares of common stock respectivelyand options were granted to our directors under the 2010 Directors’ Plan.

During the three months ended March 31, 2020, 8,346 shares of common stock were granted to our directors. We recorded $34,875$17,000 of director fees during the sixthree months ended June 30,March 31, 2020 in connection with these grants, which represented the fair value of the shares calculated based on the average closing price of the Company’s shares of common stock for the last five trading days of the quarter in which the Board fee was earned.

During the three and six months ended June 30, 2019, 6,571 and 10,737 shares of common stock, respectively were granted to our directors under the 2010 Directors’ Plan. We recorded $33,750 of director fees during the six months ended June 30, 2019 in connection with these grants, which represented the fair value of the shares calculated based on the average closing price of the Company’s shares of common stock for the last five trading days of the quarter in which the Board fee was earned.

At June 30, 2020,March 31, 2021, there were 340,731200,000 options outstanding and there were 128,126 shares of common stock that mayavailable to be issued pursuant to the terms of the 2010 Directors’ Plan. No stock options were exercised during the three months ended March 31, 2021.

The 2010 Equity Compensation Plan

On May 5, 2010, our stockholders approved the 2010 Equity Compensation Plan, which was subsequently amended and restated by our stockholders (the “2010 Plan”). The 2010 Plan provides that the total number of shares of common stock that may be issued under the 2010 Plan is 3.9 million shares.

NoThere were 50,000 options were granted under the 2010 Plan for the three and six months ended June 30, 2020 and 2019. In addition, no stock options were exercised during the three and six months ended June 30,March 31, 2021 in excess 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 and 2019.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.

As of June 30, 2020,March 31, 2021, there were 782,0001,295,000 options outstanding and 528,65915,659 options available to be issued pursuant to the terms of the 2010 Plan. We will recognize approximately $300,000$779,000 of share-based compensation expense over a weighted average period of 1.62.8 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 options atoption with an initial exercise price of $3.00 per share, which isare exercisable in 36 monthly installments, to Ted Karkus (the “CEO Option”), our Chief Executive Officer and noOfficer. No stock options have been exercised underduring the 2018 Stock Plan.three months ended March 31, 2021 and 2020.

The 2018 Plan requires certain proportionate adjustments to be made to the stock options granted under the 2018 Stock Plan 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 thea 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 thea $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. We will recognize approximately $318,000 of share-based compensation expense over a weighted average period of 0.7 years.

The following table summarizes stock options activity during the three months ended June 30, 2020March 31, 2021 for both the 2010 Plan, 2010 Director Plan and 2018 Stock Plan (in thousands, except per share data):

Warrants

During the three months ended March 31, 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 activities during the three months ended March 31, 2021 (in thousands, except per share data).

The following table summarizes weighted average assumptions used in determining the fair value of the warrants at the date of grant during the three months ended March 31, 2021:

As of March 31, 2021, there were 905,000 warrants outstanding and we recognized $147,000 of share-based compensation expense during the three months ended March 31, 2021.We had no compensation expense during the three months ended March 31, 2020.

Note 57 – 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 June 30,March 31, 2021 and 2020 were $17,000$13,000 and $33,000, respectively, and for the three and six months ended June 30, 2019 were $21,000 and $42,000,$16,000, respectively.

Note 68 – Other Current Liabilities

The following table sets forth the components of other current liabilities at June 30, 2020March 31, 2021 and December 31, 2019,2020, respectively (in thousands):

Note 7–9– Commitments and Contingencies

Escrow Receivable

We had indemnification obligations to Mylan Consumer Healthcare Inc. (formerly known as Meda Consumer Healthcare Inc.) (“MCH”) and Mylan Inc. (together with MCH, “Mylan”) under the asset purchase agreement pursuant to which we sold the Cold-EEZE^® business to Mylan in 2017, that may require us to make future payments to Mylan and other related persons for any damages incurred by Mylan or such related persons as a result of any breach by us of our representations, warranties, covenants or agreements contained in the asset purchase agreement, or arising from the Retained Liabilities (as such term is defined in the asset purchase agreement) or as a result of certain third party claims specified in the asset purchase agreement. Generally, our representations and warranties survive for a period of 24 months from the closing date, which was March 29, 2017, other than certain fundamental representations which survive until the expiration of the applicable statute of limitations. There is a limited indemnification cap with respect to a majority of the Company’s indemnification obligations under the asset purchase agreement with the exception of claims for actual fraud, the breach of any fundamental representations and certain other items, which have a larger indemnification cap (i.e., the purchase price).

Pursuant to the terms of the asset purchase agreement, we, Mylan, and an escrow agent entered into an Escrow Agreement at closing, pursuant to which Mylan deposited $5 million of the aggregate purchase price for the Cold-EEZE^® business into an escrow account established with the Escrow Agent in order to satisfy, in whole or in part, certain of our indemnity obligations under the asset purchase agreement.

The terms of the Escrow Agreement provide that if, as of September 29, 2018, there were funds remaining in the escrow account, then the escrow account would be reduced by the difference, if a positive number, of (i) $2.5 million minus (ii) the aggregate amount of all escrow claims asserted by Mylan prior to this date that had either been paid out of the escrow account or were pending as of such date, and, within two business days of such date, the Escrow Agent would disburse such difference, if a positive number, to us. In addition, within two business days of March 29, 2019, the Escrow Agent was required to release any funds remaining in the escrow account to us minus any amounts being reserved for escrow claims asserted by Mylan prior to such date. Upon the resolution of any pending escrow claims, the Escrow Agent would then, within two business days of receipt of joint instructions or a final order from a court (as described in the Escrow Agreement) disburse such reserved amount to the parties entitled to such funds. As described below, in August 2018, Mylan asserted an indemnification claim against us. Accordingly, the distributions were not released to us on September 29, 2018 or March 29, 2019.

On May 31, 2018, we received notice of a claim for $800,000 in losses against the escrow amount. We resolved this claim pursuant to a settlement agreement, effective October 16, 2018, pursuant to which $160,000 of the funds held in escrow were released to Mylan. This expense is reflected in discontinued operations in the third quarter of 2018.

On August 2, 2018, we received notice of an indemnification claim from Mylan in relation to certain product advertising claims brought against Mylan related to certain Cold-EEZE^® products. Pursuant to the terms of the asset purchase agreement, we elected to assume the defense of these claims on behalf of Mylan, which we disputed and vigorously contested. Although we believed these claims were without merit, we negotiated a settlement with the plaintiffs.

On May 4, 2020, the final pending claim against the Company’s escrow account with Mylan was resolved and, as a result, the Escrow Agent released all funds from the escrow account to the Company on May 7, 2020, in the amount of $4.8 million.

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. Pursuant to the terms of the Manufacturing Agreement, Mylan (or an affiliate or designee) purchased the inventory of the Company’s 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. Unless terminated sooner by the parties, the Manufacturing Agreement will remain in effect until March 29, 2022. Thereafter, the Manufacturing Agreement may be renewed by Mylan 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.

FutureEmployment Agreement Obligations:

We have estimated future minimum obligations for an executive’s employment agreement over the next five years, including the remainder of Fiscal 2020,2021, as follows (in thousands):

Other Litigation

On November 12, 2019, an action was filed in the United States District Court for the Eastern District of Texas against TK Supplements, Inc., one of our wholly-owned subsidiaries (“TK Sub”), asserting two class action claims and alleging that, by sending plaintiff text messages to his cellular telephone number without his prior express consent and notwithstanding its listing on the Do No Call Registry, TK Sub violated the Telephone Consumer Protection Act, 47 U.S.C. § 227(b)(3)(B) and 47 U.S.C. § 227(c)(5). Plaintiff seeks to represent a class of (i) all residents within the United States to whom TK Sub or its agents sent text messages to the person’s cellular telephone number in the past four years and (ii) all residents within the United States to whom TK Sub or its agents placed two or more telemarketing phone calls to the person’s residential telephone number that was listed on the Do Not Call Registry in the past four years. On January 8, 2020, TK Sub filed its Answer and Defenses to the Complaint. We intend to defend this matter vigorously.

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 810 – Earnings (Loss) Per ShareLeases

Basic earnings per share (“EPS”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 (which is now known as ProPhase Diagnostics NJ, Inc.) excludes dilutionis 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.

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 is computed by dividing incomeeffective as of December 8, 2020 and commenced in December 2020 when the facility was made available to common stockholdersus by the weighted-average numberLandlord. Payments on the lease will begin upon the date of common shares outstandingthe 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 years and 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, to reimburse the Company for the period. Diluted EPS reflectscost of certain improvements to be made by the potential dilution that could occur if securities or other contractsCompany to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock (“Common Stock Equivalents”) 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. Since there are options outstanding, fluctuations in the actual market price can have a variety of results for each period presented. Options outstanding to acquire shares of our common stock at June 30, 2020 and 2019 were 3,082,000 and 2,950,000, respectively.Leased Premises.