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Stockholders’ Equity | 9 Months Ended
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Sep. 30, 2022
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, 2022 and December 31, 2021, no shares of preferred stock have been issued. Common Stock Dividends On February 14, 2022, the board of directors of the Company declared a special cash dividend of $0.30 per share on the Company’s common stock, paid on March 10, 2022, in the amount of $4.6 million to holders of record of the Company’s common stock on March 1, 2022. On May 9, 2022, the board of directors of the Company declared a special cash dividend of $0.30 per share on the Company’s common stock, paid on June 4, 2022, in the amount of $4.7 million to holders of record of the Company’s common stock as of May 25, 2022. ProPhase Labs, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (unaudited) Note 7 - Stockholders’ Equity (continued) Common Stock Stock Repurchase Program On September 8, 2021, the Company’s board of directors approved a stock repurchase program under which the Company was authorized to repurchase up to $6.0 million of its outstanding shares of common stock from time to time, over a six-month period. During the nine months ended September 30, 2022, the Company did not make any common shares repurchases under the stock repurchase program. The stock repurchase program expired on March 30, 2022. On July 24, 2022, the Company’s board of directors authorized a new stock repurchase program of up to $6 million of shares of the Company’s common stock, which became effective August 17, 2022 (the “Commencement Date”). There were 5,048 shares repurchased under this new program during the three and nine months ended September 30, 2022. Following the Commencement Date, and for a period of six months thereafter, repurchases may be made through open market transactions (based on prevailing market prices), privately negotiated transactions, block trades, or any combination thereof, in accordance with applicable federal securities laws, including Rule 10b-18 of the Securities Exchange Act of 1934, as amended. 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 of directors of the Company will re-evaluate the program from time to time, and may authorize adjustments to its terms. The Company expects to utilize its existing funds to fund any repurchases under the repurchase program. The 2022 Directors’ Equity Compensation Plan On May 19, 2022, the stockholders of the Company approved the 2022 Directors’ Equity Compensation Plan (the “2022 Directors’ Plan”) at the 2022 Annual Meeting of Stockholders of the Company (the “2022 Annual Meeting”). The 2022 Directors’ Plan amended and restated the Company’s Amended and Restated 2010 Directors’ Equity Compensation Plan and provides for an increase in the number of shares reserved for issuance under the plan by 300,000 shares and provides for the adjustment of the per share exercise price of stock options granted under the 2022 Plan in the event of any change in the outstanding shares of common stock of the Company as a result of, among other things, any distribution or special dividend to stockholders of shares, cash or other property (other than regular cash dividends). As of September 30, 2022, there were 120,000 stock options outstanding and there were 180,000 shares of common stock available to be issued under the 2022 Directors’ Plan. The 2022 Equity Compensation Plan On May 19, 2022, the stockholders of the Company approved the 2022 Equity Compensation Plan (the “2022 Plan”) at the 2022 Annual Meeting. The 2022 Plan amended and restated the Company’s Amended and Restated 2010 Equity Compensation Plan and provides for an increase in the number of shares reserved for issuance under the plan by 1,000,000 shares and provides for the adjustment of the per share exercise price of stock options granted under the 2022 Plan in the event of any change in the outstanding shares of common stock of the Company as a result of, among other things, any distribution or special dividend to stockholders of shares, cash or other property (other than regular cash dividends). As of September 30, 2022, there were 3,797,000 stock options outstanding and 1,130,785 shares of common stock available to be issued under the 2022 Plan. The 2018 Stock Incentive Plan On April 12, 2018, our stockholders approved the 2018 Stock Incentive Plan (the “2018 Stock Plan”). The 2018 Stock Plan provides for the grant of incentive stock options to eligible employees of the Company, and for the grant of non-statutory stock options to eligible employees, directors and consultants. The 2018 Stock Plan provides that the total number of shares that may be issued pursuant to the 2018 Stock Plan is 2,300,000 shares. At April 12, 2018, all 2,300,000 shares have been granted in the form of stock options to Ted Karkus (the “CEO Option”), our Chief Executive Officer. During the nine months ended September 30, 2022, 600,000 stock options were exercised under the 2018 Stock Plan. No share based compensation expense will be recognized in forward periods related to the 2018 Stock Plan. The 2018 Stock 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, has adjusted the exercise price of the CEO Option in connection with each special cash dividend paid by the Company proportionately to the amount of the dividend paid. The current exercise price of the CEO Option is $0.60 per share after the latest special cash dividend paid on June 3, 2022. ProPhase Labs, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (unaudited) Note 7 – Stockholders’ Equity (continued): Inducement Option Award As part of Nebula Acquisition, the Company issued a non-qualified stock option to the Chief Executive Officer of Nebula (the “Nebula CEO”, as an inducement to his employment with the Company (the “2021 Inducement Award”). The 2021 Inducement Award entitles the Nebula CEO 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 2021 Inducement Award was granted to the Nebula CEO on the closing date of the Nebula Acquisition. The 2021 Inducement Award vested 25% on the grant date and will vest 25% per year for the next three years subject to the Nebula CEO’s continued employment with the Company. The 2021 Inducement Award expires on the seventh anniversary of the grant date. Any portion of the 2021 Inducement Award that does not vest and become exercisable will be forfeited for no consideration. The grant date fair value of the 2021 Inducement Award was approximately $1,128,000. Also, during the year ended December 31, 2021, we issued an inducement award to a prospective employee to purchase up to 100,000 shares of the Company’s common stock at an exercise price of $5.76, the closing price of the common stock on the date of grant. The award vests in four equal installments from the date of grant. The award expires on the seventh anniversary of the grant date. On May 9, 2022, the Company issued a non-qualified stock option to the Chief Financial Officer of the Company (the “CFO”), as an inducement to his employment with the Company, effective May 23, 2022 (the “2022 Inducement Award”). The 2022 Inducement Award entitled the CFO of the Company to purchase up to 400,000 shares of the Company’s common stock (the “CFO Option”) at an exercise price of $6.74 per share, the closing price of the Company’s common stock on May 9, 2022. The CFO Option provided for certain proportionate adjustments to be made in the event of any change in the outstanding shares of common stock of the Company as a result of, among other things, any distribution or special dividend to stockholders of shares, cash or other property (other than regular cash dividends) in order to maintain parity. The exercise price of the CFO Option was reduced from $6.74 to $6.44 per share, effective as of June 3, 2022, the date $0.30 special cash dividend was paid to Company’s stockholders. The grant date fair value of the Inducement Award was approximately $1,604,000. In connection with CFO’s separation from service on October 4, 2022, these options were forfeited on October 4, 2022 (see Note 18). During the three and nine months ended September 30, 2022, we also issued an inducement award to a prospective employee to purchase up to 250,000 shares of the Company’s common stock at an exercise price of $13.00, the closing price of the common stock on the date of grant. The award vested 50 shares on the date of grant and the remaining portion will vest 25% per year for the next two years. The award expires on the seventh anniversary of the grant date. All inducement awards have been granted outside of the Company’s equity compensation plans. During the nine months ended September 30, 2022, the Company issued options to purchase 935,000 shares of the Company’s common stock to various employees and consultants. The options were valued at $5,638,000 fair value, using the Black-Scholes option pricing model to calculate the grant-date fair value of the options. The fair value of stock options for employees are expensed over the vesting term in accordance with the terms of the related stock option agreements and are expensed over the terms of the consulting agreement for consultants. The following table summarizes stock option activity during the nine months ended September 30, 2022, (in thousands, except per share data). Schedule of Stock Options Activity
|  | Number of Shares |  |  | Weighted Average Exercise Price |  |  | Weighted Average Remaining Contractual Life (in years) |  |  | Total Intrinsic Value (1) |
Outstanding as of January 1, 2022 |  |  | 5,110 |  |  | $ | 3.27 |  |  |  | 3.4 |  |  | $ | 20,820 |
Granted |  |  | 935 |  |  |  | 9.60 |  |  |  | 6.6 |  |  |  | - |
Cashless exercised |  |  | (1,233 | ) |  |  | 1.91 |  |  |  | - |  |  |  | - |
Forfeited |  |  | (20 | ) |  |  | 2.02 |  |  |  | - |  |  |  | - |
Outstanding as of September 30, 2022 |  |  | 4,792 |  |  | $ | 4.55 |  |  |  | 3.7 |  |  | $ | 32,899 |
Options vested and exercisable |  |  | 3,280 |  |  | $ | 3.18 |  |  |  | 2.6 |  |  | $ | 26,819 |
(1) | The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying options and the closing stock price of $11.28 for the Company’s common stock on September 30, 2022.
The following table summarizes weighted average assumptions used in determining the fair value of the options at the date of grant during the nine months ended September 30, 2022 and 2021: Summary of Weighted Average Assumptions Used in Determining Fair Value of Warrants
|  | For the nine months ended |
|  | September 30, |
|  | 2022 |  |  | 2021 |
Exercise price |  | $ | 9.73 |  |  | $ | 7.48 |
Expected term (years) |  |  | 4.5 |  |  |  | 3.9 |
Expected stock price volatility |  |  | 79 | % |  |  | 80 | %
Risk-free rate of interest |  |  | 2.3 | % |  |  | 0.7 | %
Expected dividend yield (per share) |  |  | 0 | % |  |  | 0 | %
ProPhase Labs, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (unaudited) Note 7 – Stockholders’ Equity (continued): During the nine months ended September 30, 2022 certain holders of stock options elected to exercise their stock options pursuant to a cashless exercise provision resulting in the net issuance of 545,312 shares of common stock and the return of 692,736 shares to the Company. The Company also made a cash payment of approximately $4.5 million to repurchase 283,395 shares of treasury stock to satisfy tax withholding obligations related to the cashless exercise of these stock options. Stock Warrants The following table summarizes warrant activity during the nine months ended September 30, 2022 (in thousands, except per share data): Schedule of Warrant Activity
|  | Number of Shares |  |  | Weighted Average Exercise Price |  |  | Weighted Average Remaining Contractual Life (in years) |
Outstanding as of January 1, 2022 |  |  | 855 |  |  | $ | 8.23 |  |  |  | 1.9 |
Warrants granted |  |  | - |  |  |  | - |  |  |  | - |
Outstanding as of September 30, 2022 |  |  | 855 |  |  | $ | 8.23 |  |  |  | 1.1 |
Warrants vested and exercisable |  |  | 855 |  |  | $ | 8.23 |  |  |  | 1.1 |
We recognized $1,969,000 and $59,000 of share-based compensation expense during the three months ended September 30, 2022 and 2021, respectively. We recognized $2,976,000 and $252,000 of share-based compensation expense during the nine months ended September 30, 2022 and 2021, respectively. We will recognize an aggregate of approximately $5,907,000 of remaining share-based compensation expense related to outstanding stock options over a weighted average period of 3.9 years.

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