SEC Form 10-Q filed by ProPhase Labs Inc.

11/13/24 4:49:55 PM ET

Biotechnology: Pharmaceutical Preparations

Health Care

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prph-20240930

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q


x			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2024


o			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____ to _____

Commission file number 000-21617

ProPhase Labs, Inc.

(Exact name of registrant as specified in its charter)


Delaware						23-2577138
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification No.)


711 Stewart Ave, Suite 200
Garden City, New York						11530
(Address of principal executive office)						(Zip Code)

(215) 345-0919

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Exchange Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.0005

PRPH

Nasdaq Capital Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or shorter period that the registrant was required to submit such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.


Class						Outstanding shares as of November 12, 2024
Common Stock, $0.0005 par value						23,874,029

ProPhase Labs, Inc. and Subsidiaries

TABLE OF CONTENTS


		PAGE
PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)	3

	Condensed Consolidated Balance Sheets as of September 30, 2024 and December 31, 2023	3

	Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2024 and 2023	5

	Condensed Consolidated Statements of Stockholders’ Equity for the Three and Nine Months Ended September 30, 2024 and 2023	6

	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2024 and 2023	8

	Notes to Condensed Consolidated Financial Statements	10

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	39

Item 4.	Controls and Procedures	39

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	41

Item 1A.	Risk Factors	41

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	41

Item 3.	Defaults Upon Senior Securities	41

Item 4.	Mine Safety Disclosures	41

Item 5.	Other Information	41

Item 6.	Exhibits	42

Signatures		43

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

ProPhase Labs, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(in thousands, except share and per share amounts)


	September 30, 2024		December 31, 2023
	(Unaudited)
ASSETS
Current assets
Cash and cash equivalents	$	501	$	1,609

Restricted cash	593		540
Marketable securities, available for sale	2		3,127
Accounts receivable, net	31,638		36,313
Inventory, net	3,966		3,841
Prepaid expenses and other current assets	5,535		2,155
Total current assets	42,235		47,585

Property, plant and equipment, net	13,851		12,898
Prepaid expenses, net of current portion	431		832
Operating lease right-of-use asset, net	4,234		4,572
Intangible assets, net	10,396		12,333
Goodwill	5,231		5,231
Deferred tax asset	14,576		7,313
Other assets	854		1,163
TOTAL ASSETS	$	91,808	$	91,927

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	15,459	$	9,383
Accrued diagnostic services	38		314
Accrued advertising and other allowances	122		24
Finance lease liabilities	3,897		1,840
Operating lease liabilities	971		953
Short-term loan payable, net of discount of $418	2,670		—
Deferred revenue	1,647		2,382
Income tax payable	2,274		3,278
Other current liabilities	1,620		2,683
Total current liabilities	28,698		20,857

Non-current liabilities:
Secured long-term debt, net of discount of $324 and $341	2,925		2,924
Unsecured promissory notes, net of discount of $142 and $266	9,858		7,334
Unsecured long-term debt, net of discount of $476	1,725		—
Due to sellers (see Note 3)	2,000		2,000


Deferred revenue, net of current portion	928		1,100
Operating lease liabilities, net of current portion	3,663		4,237
Finance lease liabilities, net of current portion	3,885		4,092
Total non-current liabilities	24,984		21,687
Total liabilities	53,682		42,544

COMMITMENTS AND CONTINGENCIES

Stockholders’ equity
Preferred stock authorized 1,000,000, $0.0005 par value, no shares issued and outstanding	—		—
Common stock authorized 50,000,000, $0.0005 par value, 19,078,529 and 18,045,029 shares outstanding, respectively	18		18
Additional paid-in capital	126,339		118,694
Accumulated deficit	(24,034)		(5,029)
Treasury stock, at cost, 18,940,967 and 18,940,967 shares, respectively	(64,000)		(64,000)
Accumulated other comprehensive loss	(197)		(300)
Total stockholders’ equity	38,126		49,383
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	91,808	$	91,927

See accompanying notes to these condensed consolidated financial statements

ProPhase Labs, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)

(in thousands, except per share amounts)

(unaudited)


	For the three months ended				For the nine months ended
	September 30, 2024		September 30, 2023		September 30, 2024		September 30, 2023
Revenues, net	$	3,146	$	8,365	$	9,254	$	40,885
Cost of revenues	3,311		6,038		10,328		21,590
Gross (loss) profit	(165)		2,327		(1,074)		19,295

Operating expenses:
Diagnostic expenses	—		132		—		1,932
General and administration	7,650		8,245		22,455		26,480
Research and development	122		428		533		1,144
Total operating expenses	7,772		8,805		22,988		29,556
Loss from operations	(7,937)		(6,478)		(24,062)		(10,261)

Interest income, net	—		1		—		39
Interest expense	(1,158)		(275)		(2,316)		(781)
Other (expense) income	—		(33)		12		(132)
Loss from operations before income taxes	(9,095)		(6,785)		(26,366)		(11,135)
Income tax benefit	2,508		1,644		7,361		3,104
Loss from operations after income taxes	(6,587)		(5,141)		(19,005)		(8,031)
Net loss	$	(6,587)	$	(5,141)	$	(19,005)	$	(8,031)

Other comprehensive income (loss):
Unrealized gain (loss) on marketable securities	1		(2,032)		103		(2,201)
Total comprehensive loss	$	(6,586)	$	(7,173)	$	(18,902)	$	(10,232)

Loss per share:
Basic	$	(0.35)	$	(0.30)	$	(1.02)	$	(0.47)
Diluted	$	(0.35)	$	(0.30)	$	(1.02)	$	(0.47)

Weighted average common shares outstanding:
Basic	19,079		17,175		18,672		16,924
Diluted	19,079		17,175		18,672		16,924

See accompanying notes to these condensed consolidated financial statements

ProPhase Labs, Inc. and Subsidiaries

Condensed Consolidated Statements of Stockholders’ Equity

(in thousands, except share data)

(unaudited)


	For the Three Months Ended September 30, 2024
	Common Stock Shares Outstanding	Par Value		Additional Paid in Capital		Accumulated Deficit		Treasury Stock		Accumulated Other Comprehensive Loss		Total
Balance as of July 1, 2024	19,078,529	$	18	$	125,703	$	(17,447)	$	(64,000)	$	(198)	$	44,076
Unrealized gain on marketable debt securities	—	—		—		—		—		1		1
Stock-based compensation (including $683 in prepaid expense)	—	—		636		—		—		—		636
Net loss	—	—		—		(6,587)		—		—		(6,587)
Balance as of September 30, 2024	19,078,529	$	18	$	126,339	$	(24,034)	$	(64,000)	$	(197)	$	38,126


	For the Three Months Ended September 30, 2023
	Common Stock Shares Outstanding	Par Value		Additional Paid in Capital		Retained Earnings		Treasury Stock		Accumulated Other Comprehensive Income		Total
Balance as of July 1, 2023	16,845,029	$	17	$	113,789	$	8,863	$	(64,000)	$	588	$	59,257
Issuance of common stock to convert outstanding convertible notes	800,000	1		2,399		—		—		—		2,400
Issuance of common stock upon exercise of warrants	400,000	—		1,200		—		—		—		1,200
Unrealized loss on marketable debt securities	—	—		—		—		—		(2,032)		(2,032)
Stock-based compensation (including $1,138 in prepaid expense)	—	—		744		—		—		—		744
Net loss	—	—		—		(5,141)		—		—		(5,141)
Balance as of September 30, 2023	18,045,029	$	18	$	118,132	$	3,722	$	(64,000)	$	(1,444)	$	56,428


	For the Nine Months Ended September 30, 2024
	Common Stock Shares Outstanding	Par Value		Additional Paid in Capital		Accumulated Deficit		Treasury Stock		Accumulated Other Comprehensive Loss		Total
Balance as of January 1, 2024	18,045,029	$	18	$	118,694	$	(5,029)	$	(64,000)	$	(300)	$	49,383
Issuance of common stock for cash, net of offering cost of $94	1,033,500	—		4,624		—		—		—		4,624
Unrealized gain on marketable debt securities	—	—		—		—		—		103		103
Stock-based compensation (including $683 in prepaid expense)	—	—		3,021		—		—		—		3,021
Net loss	—	—		—		(19,005)		—		—		(19,005)
Balance as of September 30, 2024	19,078,529	$	18	$	126,339	$	(24,034)	$	(64,000)	$	(197)	$	38,126


	For the Nine Months Ended September 30, 2023
	Common Stock Shares Outstanding	Par Value		Additional Paid in Capital		Retained Earnings		Treasury Stock		Accumulated Other Comprehensive Income (Loss)		Total
Balance as of January 1, 2023	16,210,776	$	16	$	109,138	$	11,753	$	(58,033)	$	757	$	63,631
Issuance of common stock in asset acquisition	100,000	1		999		—		—		—		1,000
Repurchases of common shares	(69,628)	—		—		—		(588)		—		(588)
Issuance of common stock to convert outstanding convertible notes	800,000	1		2,399		—		—		—		2,400
Issuance of common stock upon exercise of warrants	400,000	—		1,200		—		—		—		1,200
Issuance of common stock upon stock options cashless exercise	603,881	—		—		—		—		—		—
Issuance of warrants with unsecured promissory note	—	—		398		—		—		—		398
Treasury shares repurchased to satisfy tax withholding obligations	—	—		—		—		(5,379)		—		(5,379)
Unrealized loss on marketable debt securities	—	—		—		—		—		(2,201)		(2,201)
Stock-based compensation (including $1,138 in prepaid expense)	—	—		3,998		—		—		—		3,998
Net loss	—	—		—		(8,031)		—		—		(8,031)
Balance as of September 30, 2023	18,045,029	$	18	$	118,132	$	3,722	$	(64,000)	$	(1,444)	$	56,428

See accompanying notes to these condensed consolidated financial statements

ProPhase Labs, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)


	For the nine months ended
	September 30, 2024		September 30, 2023
Cash flows from operating activities
Net loss	$	(19,005)	$	(8,031)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Realized loss on marketable debt securities	18		(3)
Depreciation and amortization	5,693		4,435
Amortization of debt discount	1,000		97
Amortization on operating lease right-of-use assets	338		325
Stock-based compensation expense	3,021		2,860
Accounts receivable allowances	—		718
Credit loss expense, direct write-off	—		74
Inventory reserve	21		—
Gain from disposal of fixed assets	(91)		—
Changes in operating assets and liabilities:
Accounts receivable	4,675		(2,380)
Inventory	(146)		(1,078)
Prepaid expenses and other current assets	(4,218)		(938)
Deferred tax asset	(7,427)		(4,350)
Other assets	853		—
Accounts payable and accrued expenses	6,069		(438)
Accrued diagnostic services	(276)		(768)
Accrued advertising and other allowances	98		14
Deferred revenue	(907)		(315)
Deferred tax liability	—		(307)
Operating lease liabilities	(1,710)		(139)
Income tax payable	(1,004)		(881)
Other liabilities	(969)		(30)
Net cash used in operating activities	(13,967)		(11,135)

Cash flows from investing activities
Business acquisitions, escrow received	—		478
Asset acquisitions, net of cash acquired	—		(2,904)
Purchase of marketable securities	—		(3,819)
Proceeds from maturities of marketable securities	—		4,168
Proceeds from sales of marketable securities	3,374		3,817
Proceeds from sales of fixed assets	229		—
Capital expenditures	(1,141)		(1,845)
Net cash provided by (used in) investing activities	2,462		(105)


Cash flows from financing activities


Proceeds from issuance of note payable, net	8,334		7,600
Proceeds from issuance of common shares, net	4,624		—
Proceeds from exercise of warrants	—		1,200
Repurchases of common shares	—		(588)
Repurchase of common stock for payment of statutory taxes due on cashless exercise of stock option	—		(5,379)
Repayment of note payable	(2,508)		—
Net cash provided by financing activities	$	10,450	$	2,833


Decrease in cash, cash equivalents and restricted cash	(1,055)		(8,407)
Cash, cash equivalents and restricted cash at the beginning of the period	2,149		9,109
Cash, cash equivalents and restricted cash at the end of the period	$	1,094	$	702

Supplemental disclosures:
Cash paid for income taxes	$	860	$	3,000
Interest payment on the promissory notes	$	2,126	$	740

Supplemental disclosure of non-cash investing and financing activities:
Issuance of common shares for debt conversion	$	—	$	2,400
Stock-based compensation included in the prepaid expense	$	—	$	1,138
Net unrealized loss, investments in marketable debt securities	$	267	$	2,083
Assets obtained in exchange for new finance lease obligations	$	3,699	$	6,201
Reclassification between prepaid expenses and other assets	$	544	$	—
Issuance of warrants with unsecured promissory note	$	—	$	398
Common stock issued in asset acquisition	$	—	$	1,000

See accompanying notes to these condensed consolidated financial statements

ProPhase Labs, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(unaudited)

Note 1 - Organization and Business

ProPhase Labs, Inc. (“ProPhase”, “we”, “us”, “our” or the “Company”) is a diversified company that offers a range of services including genomics testing, diagnostic testing and contract manufacturing. We are also focused on licensing, developing and commercializing novel drugs, dietary supplements, compounds and diagnostics.

Until late fiscal year 2020, the Company was engaged primarily in the research, development, manufacture, distribution, marketing and sale of over-the-counter ("OTC") consumer healthcare products and dietary supplements in the United States.

In October 2020, the Company completed the acquisition of all of the issued and outstanding shares of capital stock of Confucius Plaza Medical Laboratory Corp. (“CPM”), which owned a 4,000 square foot Clinical Laboratory Improvement Amendments (“CLIA”) accredited laboratory located in Old Bridge, New Jersey for approximately $2.5 million, and began offering COVID-19 diagnostic tests through our wholly-owned subsidiary, ProPhase Diagnostics, Inc. ("ProPhase Diagnostics") in December 2020. Also in December 2020, we expanded our diagnostic service business with the build-out of a second, larger CLIA accredited laboratory in Garden City, New York. Operations at this second facility commenced in January 2021. We offered a broad array of COVID-19 related clinical diagnostic and testing services including polymerase chain reaction testing for COVID-19 and Influenza A and B through ProPhase Diagnostics, as well as rapid antigen and antibody/immunity testing for COVID-19. Due to the significant decrease in demand and reimbursement rate for our diagnostic testing service, we do not currently provide diagnostic testing services. Nonetheless we are prepared to provide an increased volume of our diagnostic testing service if diagnostic testing is required due to a new COVID-19 outbreak. In addition, in order to maintain licenses in certain states in which we operate, we currently perform several diagnostic tests each quarter to maintain our certified lab status, and we currently plan to do so for the foreseeable future.

In August 2021, the Company acquired Nebula Genomics, Inc. (“Nebula”), a privately owned personal genomics company, through our wholly-owned subsidiary, ProPhase Precision Medicine Inc. Nebula focuses on genomics sequencing technologies, a comprehensive method for analyzing entire genomes, including the genes and chromosomes in deoxyribonucleic acidDNA. The data obtained from genomic sequencing can be used to help identify inherited disorders and tendencies, help predict disease risk, help identify expected drug response, and characterize genetic mutations, including those that drive cancer progression.

The Company's wholly owned subsidiary, ProPhase BioPharma, Inc. (“PBIO”), was formed in June 2022, for the licensing, development and commercialization of novel drugs, dietary supplements and compounds. Licensed compounds currently include Equivir (a OTC, dietary supplement candidate) and Equivir G (prescription drug candidate), two broad-based anti-virals, and Linebacker LB-1 and LB-2, two small molecule proviral integration site for moloney murine leukemia virus kinase inhibitors. The Company also own the exclusive rights to the BE-Smart Esophageal Pre-Cancer Diagnostic Screening test and related intellectual property assets.

In connection with the activities of PBIO, in January 2023, the Company acquired exclusive rights to BE-Smart Esophageal Pre-Cancer Diagnostic Screening test and related intellectual property assets. The BE-Smart test is focused on the early detection of esophageal cancer, and is intended to provide health care providers and patients with data to help determine treatment options. The development of these novel drugs and compounds is highly dependent on how each performs during the testing and development stage, the demand for these product and services once entered into the marketplace, our marketing and service capabilities and our ability to comply with applicable regulatory requirements.

The Company's 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.

The Company also develops and markets dietary supplements under the TK Supplements® brand. The TK Supplements® product line includes Legendz XL®, a sexual health formula product intended for men, and Triple Edge XL®, an energy and stamina support product.

The Company's wholly owned subsidiary, Pharmaloz Real Estate Holdings, Inc. (“PREH”), was formed in November 2023, for the purpose to receive additional investment to expand its current facility. There were no operations for PREH as of September 30, 2024.

ProPhase Labs, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(unaudited)

The Company's wholly-owned subsidiary, DNA Complete, Inc. (“DNA Complete”), which was formed on September 24, 2024, for the offering of whole genome sequencing and related services. DNA Complete sequences specimens at Nebula as well as at other laboratories. DNA Complete focuses on genomics testing technologies, a comprehensive method for analyzing entire genomes, including the genes and chromosomes in deoxyribonucleic acid (“DNA”). The data obtained from genomic sequencing may help to identify inherited disorders and tendencies, predict disease risk, identify expected drug response, and characterize genetic mutations, including those that drive cancer progression. DNA Complete currently offers DNA Complete’s whole genome sequencing products direct-to-consumers online with plans to sell in food, drug and mass retail stores and to provide testing for universities conducting genomic research.

The Company continues to actively pursue acquisition opportunities for other companies, technologies and products within and outside the consumer products industry.

Note 2 - Summary of Significant Accounting Policies

Basis of Presentation

The unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles accepted in the United States of America (“GAAP”) for interim financial statements and the rules of the Securities and Exchange Commission (“SEC”) applicable to interim financial statements. Certain information or footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted, pursuant to the rules and regulations of the SEC for interim financial reporting. Accordingly, they do not include all the information and footnotes necessary for a complete presentation of financial position, results of operations, or cash flows. 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, 2023. In the opinion of management, all adjustments necessary for a fair presentation of the consolidated financial position, consolidated results of operations and other comprehensive loss and consolidated cash flows, for the periods indicated, have been made. The results of operations for the three and nine months ended September 30, 2024 are not necessarily indicative of operating results that may be achieved over the course of the full year.

Use of Estimates

The preparation of condensed consolidated 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 condensed consolidated financial statements and reported amounts of revenues and expenses during the respective reporting periods. Examples include revenue recognition and the impact of the variable consideration of diagnostic test reimbursement rates, the allowance for credit losses and billing errors, allowances, slow moving and/or dated inventory and associated provisions, the potential impairment of long-lived assets, stock based compensation valuations, income tax asset valuations and assumptions related to accrued advertising.

Our estimates and assumptions are based on historical experience, current trends and other factors that management believes to be relevant at the time the condensed consolidated financial statements are prepared. Management reviews the accounting policies, assumptions, estimates and judgments on a quarterly basis. Actual results could differ from those estimates.

Fair Value of Financial Instruments

We measure assets and liabilities at fair value based on expected exit price as defined by the authoritative guidance on fair value measurements, which represents the amount that would be received on 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 would use in pricing an asset or liability. The authoritative guidance on fair value measurements establishes a consistent framework for measuring fair value on either a recurring or nonrecurring basis whereby inputs, used in valuation techniques, are assigned a hierarchical level.

ProPhase Labs, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(unaudited)

The following are the hierarchical levels of inputs to measure fair value:

•Level 1: Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.

•Level 2: Inputs reflect quoted prices for identical assets or liabilities in markets that are not active; quoted prices for similar assets or liabilities in active markets; inputs other than quoted prices that are observable for the assets or liabilities; or inputs that are derived principally from or corroborated by observable market data by correlation or other means.

•Level 3: Unobservable inputs reflecting the Company’s assumptions incorporated in valuation techniques used to determine fair value. These assumptions are required to be consistent with market participant assumptions that are reasonably available.

The carrying amounts of our financial assets and liabilities, such as cash, accounts receivable, accounts payable, and unsecured note payable, approximate their fair values because of the short-term nature of these instruments.

We account for our marketable securities at fair value, with the net unrealized gains or losses of marketable debt securities reported as a component of accumulated other comprehensive income or loss and marketable equity securities change in fair value reported on the condensed consolidated statements of operation and comprehensive income (loss). The components of marketable securities are as follows (in thousands):


	As of September 30, 2024
	Level 1		Level 2		Level 3		Total
Corporate stock	2		—		—		2
	$	2	$	—	$	—	$	2


	As of December 31, 2023
	Level 1		Level 2		Level 3		Total
Corporate stock	$	3,127	$	—	$	—	$	3,127
	$	3,127	$	—	$	—	$	3,127

There were no transfers of marketable securities between Levels 1, 2 or 3 for the nine months ended September 30, 2024 and 2023.

Goodwill

Goodwill represents the excess of the fair value of the consideration transferred over the fair value of the underlying identifiable assets and liabilities acquired in a business combination. Goodwill and intangible assets deemed to have an indefinite life are not amortized, but instead are assessed for impairment annually. Additionally, if an event or change in circumstances occurs that would more likely than not reduce the fair value of the reporting unit below its carrying value, we would evaluate goodwill at that time.

During the nine months ended September 30, 2023, the Company received $0.5 million in connection with terms from an escrow agreement from the purchase of Nebula. The receipt of this escrow payment reduced the excess consideration paid for Nebula and was recorded as a reduction of the Goodwill at the time of receipt.

Revenue Recognition and Accounts Receivable

The Company recognizes revenues in accordance with Financial Accounting Standards Board (“FASB”)’s Accounting Standards Codification ("ASC") 606, Revenues from Contracts with Customers. The Company recognizes 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. The Company recognizes revenue when performance obligations with our customers have been satisfied. At contract inception, we evaluate the contract to

ProPhase Labs, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(unaudited)

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.

The Company carries its accounts receivable at cost less an allowance for credit losses. Allowances for credit losses are based upon the Company’s judgment regarding collectability. On a periodic basis, the Company evaluates its receivables and establish an allowance for credit losses, based on a history of past write-offs, collections, current credit conditions or generally accepted future trends in the industry and/or local economy. Accounts are written off as uncollectible at the time we determine that collections are unlikely. The reserve is not intended to address return activity or disputed balances with ongoing customers, as this should be addressed in a reserve for credit memos with a corresponding charge to revenue.

Income Taxes

The Company recognizes deferred tax liabilities and assets based on the differences between the financial statement carrying amounts and the tax bases of assets and liabilities, using enacted tax rates in effect in the years the differences are expected to reverse.

The provision for, or benefit from, income taxes includes deferred taxes resulting from the temporary differences in income for financial and tax purposes using the liability method. Future realization of deferred income tax assets requires sufficient taxable income within the carryback, carryforward period available under tax law. We evaluate, on a quarterly basis whether, based on all available evidence, it is probable that the deferred income tax assets are realizable. Valuation allowances are established when it is more likely than not that the tax benefit of the deferred tax asset will not be realized. The evaluation, as prescribed by ASC 740-10, “Income Taxes,” includes the consideration of all available evidence, both positive and negative, regarding historical operating results including recent years with reported losses, the estimated timing of future reversals of existing taxable temporary differences, estimated future taxable income exclusive of reversing temporary differences and carryforwards, and potential tax planning strategies which may be employed to prevent an operating loss or tax credit carryforward from expiring unused.

The Company accounts for uncertainties in income taxes under the provisions of FASB ASC 740-10-05 (the “Subtopic”). The Subtopic clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. The Subtopic prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Subtopic provides guidance on the de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

Recently Issued Accounting Standards, Not Yet Adopted

In November 2023, the FASB issued ASU No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which requires an enhanced disclosure of significant segment expenses on an annual and interim basis. This guidance will be effective for the annual periods beginning the year ended December 31, 2024, and for interim periods beginning January 1, 2025. Early adoption is permitted. Upon adoption, the guidance should be applied retrospectively to all prior periods presented in the financial statements. The Company does not expect the adoption of this guidance to have a material impact on its condensed consolidated financial statements.

In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which improves the transparency of income tax disclosures by requiring consistent categories and greater disaggregation of information in the effective tax rate reconciliation and income taxes paid disaggregated by jurisdiction. It also includes certain other amendments to improve the effectiveness of income tax disclosures. This guidance will be effective for the annual periods beginning the year ended December 31, 2025. Early adoption is permitted. Upon adoption, the guidance can be applied prospectively or retrospectively. The Company does not expect the adoption of this guidance to have a material impact on its condensed consolidated financial statements.

Recently Issued Accounting Standards, Adopted

ProPhase Labs, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(unaudited)

which illustrates how to apply the scope guidance to determine whether profits interests and similar awards should be accounted for as share-based payment arrangements under Topic 718 or under other topics of GAAP. ASU 2024-01 is effective for annual periods beginning after December 15, 2024, although early adoption is permitted. Upon adoption, ASU 2024-01 is not expected to have an impact on the Company’s condensed consolidated financial statements.

In March 2024, the FASB issued ASU 2024-02 Codification Improvements - Amendments to Remove References to the Concept Statements to provide amendments to the Codification that remove references to various FASB Concepts Statements. ASU 2024-02 is effective for annual periods beginning December 15, 2024, with early adoption permitted. ASU 2024-02 is not expected to have an impact on the Company’s condensed consolidated financial statements.

Note 3 - Asset Acquisition

Stella Diagnostics - Asset Purchase Agreement

On December 15, 2022, the Company entered into an Asset Purchase Agreement (the “Stella Purchase Agreement”), with Stella Diagnostics Inc. (“Stella”) and Stella DX, LLC (“Stella DX” and, together with Stella, the “Stella Sellers”), pursuant to which, on January 3, 2023, the Company purchased all of the assets, rights and interests of the Stella Sellers and their affiliates pertaining to the Stella Sellers’ BE-Smart Esophageal Pre-Cancer Diagnostic Screening Test and certain clinical assets, including all intellectual property rights (the “Stella Purchased Assets”).

As consideration for the Stella Purchased Assets, at closing, the Company (i) paid to the Stella Sellers $3.5 million in cash, minus (a) the Secured Note Amount of $0.5 million, (b) the Liability Payoff Amount of $1.6 million and (c) the Promissory Note Payoff Amount of $0.4 million, and (ii) issued to Stella DX 100,000 shares of common stock, par value $0.0005 per share, of the Company at a value of $10.00 per share. Total consideration paid was $4.6 million. The Secured Note Amount of $0.5 million and the Promissory Note Payoff of $0.4 million were paid in 2022. The balance of the consideration was paid at closing on January 3, 2023.

In addition to the consideration paid at closing, the Company will issue shares of common stock valued at $2.0 million to the Stella Sellers upon the Commercialization Event (as defined in the Stella Purchase Agreement). Such stock was recorded at closing as a non-current liability at its fair value of $2.0 million. Also, the Company is required to pay to the Stella Sellers for each of the seven calendar years during the seven year period commencing on the first day of the calendar year following the date of the Commercialization Event, a non-refundable, non-creditable royalty of 5% of the Adjusted Gross Margin (as defined in the Stella Purchase Agreement) for such annual period. As of September 30, 2024, the Commercialization Event had not occurred.

The asset purchase does not qualify as a business combination under ASC 805, Business Combinations, and has therefore been accounted for as an asset acquisition. In connection with the Stella Purchased Assets, the Company incurred $0.2 million in transaction costs, which were capitalized into the purchase price of the Stella Purchased Assets. The total purchase price for the Stella Purchased Assets was $6.8 million (including the value of the stock to be issued upon the Commercialization Event), which was allocated to the proprietary technology intangible asset acquired. The Company is amortizing the acquired intangible asset on a straight-line basis over its estimated useful life of five years.

ProPhase Labs, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(unaudited)

Note 4 - Intangible Assets, Net

Intangible assets as of September 30, 2024 and December 31, 2023 consisted of the following (in thousands):


	September 30, 2024		December 31, 2023		Estimated Useful Life (in years)
Trade names	$	5,550	$	5,550	15
Proprietary intellectual property	11,064		11,064		5
Customer relationships	1,180		1,180		1
CLIA license	1,307		1,307		3
	19,101		19,101
Less: accumulated amortization	(8,705)		(6,768)
Total intangible assets, net	$	10,396	$	12,333

Amortization expense for acquired intangible assets was $0.6 million and $0.8 million during the three months ended September 30, 2024 and 2023, respectively. Amortization expense for acquired intangible assets was $1.9 million and $2.3 million during the nine months ended September 30, 2024 and 2023, respectively. The estimated future amortization expense of acquired intangible assets as of September 30, 2024 is as follows (in thousands):


Remaining periods in the year ended December 31, 2024	$	646
Year ended December 31, 2025	2,583
Year ended December 31, 2026	2,251
Year ended December 31, 2027	1,731
Year ended December 31, 2028	370
Thereafter	2,815
	$	10,396

Note 5 - Outstanding Debt

ERC Claim and Risk Participation Agreement

In August 2023, the Company filed for the Employee Retention Credit (“ERC”) for $2.2 million. The ERC is a refundable tax credit for businesses that continued to pay employees while sustaining a full or partial suspension of operations limiting commerce, travel or group meetings due to COVID-19 pandemic and orders from an appropriate governmental authority or had significant declines in gross receipts from second quarter of 2020 to second quarter of 2021. The Company sustained a partial suspension of operations during this time due to governmental orders. Eligible employers can claim the ERC on an original or adjusted employment tax return for a period within those dates.

On September 16, 2024, the Company, as seller, received $1.9 million as a purchase price (the “Purchase Price”) for the sale of the Company’s rights, title and interest per a Risk Participation of ERC Claim Agreement, dated September 13, 2024 (“Agreement”) by and between the Company and 1861 Acquisition LLC (the “Buyer”). The Company also incurred an issuance cost of $154,000.

The Agreement transferred all of the Company’s rights to receive any and all payments, proceeds or distributions of any kind (without set-off, deduction or withholding of any kind), including interest, from the United States Internal Revenue Service (the “IRS”) in respect of the employee retention credits duly and timely claimed by Seller on account of qualified wages paid by Seller and identified as a “Claim for Refund” under Form 941-X Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund for the second (2nd), third (3rd) and fourth (4th) quarters of 2020, and the first

ProPhase Labs, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(unaudited)

(1st) and second (2nd) quarters of 2021 (the “Tax Refund Claim”) in the aggregate amount of $2.2 million (“Transferred Interests”).

The Company expects the IRS to approve or deny its claim within the next 24 months. Upon approval and payment of the claim, the Company will settle the outstanding balance in cash to the Buyer. In the event that the IRS disallows all or a portion of the ERC, the Buyer has the demand right to put all or a part of the disallowed portion back to the Company at a price equal to 85% of the impaired amount, plus interest at 10% per annum, calculated from the date of September 13, 2024 until payment is made.

The Company recognized a long-term obligation at September 30, 2024 for $1.7 million, which is net of discount of $476,000.

2024 Third Future Receipts Financing

On August 1, 2024, the Company entered into an agreement of sale of future receipts (“Third Future Receipts Financing Agreement”) with RDM Capital Funding (“RDM”) by which RDM purchased from the Company, its future accounts and contract rights arising from the sale of goods or rendition of services to the Company’s customers. The purchase price was $500,000, which was paid to the Company on August 2, 2024, net of $17,500 origination fee. The Company also incurred a $17,500 brokerage fee. The Third Future Receipts Financing Agreement requires thirty two weekly payments of $21,094 for a total repayment of $675,000 over the term of the agreement.

During the three and nine months ended September 30, 2024, the Company recognized $84,000 interest expense from the amortization of debt discount using the effective interest rate method, respectively. As of September 30, 2024, the outstanding balance under the Third Future Receipts Financing Agreement was $380,000, net of debt discount of $126,000.

2024 Second Future Receipts Financing

On June 27, 2024, the Company entered into an agreement of sale of future receipts (“Second Future Receipts Financing Agreement”) with Slate Advance (“Slate”) by which Slate purchased from the Company, its future accounts and contract rights arising from the sale of goods or rendition of services to the Company’s customers. The purchase price was approximate $1.5 million, which was paid to the Company on June 28, 2024, net of $42,000 origination fee. The Company also incurred $22,000 brokerage fee which was paid subsequently in July 2024. The Second Future Receipts Financing Agreement requires thirty two weekly payments of $60,718 for a total repayment of approximate $1.9 million over the term of the agreement.

During the three and nine months ended September 30, 2024, the Company recognized $334,000 and $343,000 interest expense from the amortization of debt discount using the effective interest rate method, respectively. As of September 30, 2024, the outstanding balance under the Second Future Receipts Financing Agreement was $1,072,000, net of debt discount of $214,000.

2024 Future Receipts Financing

On February 14, 2024 (the “Commencement Date”), the Company entered into an agreement of sale of future receipts (“Future Receipts Financing Agreement”) with Libertas Funding, LLC (“Libertas”) by which Libertas purchased from the Company, its future accounts and contract rights arising from the sale of goods or rendition of services to the Company’s customers. The purchase price was approximate $2.5 million, which was paid to the Company on February 16, 2024, net of $50,000 origination fee. The Future Receipts Financing Agreement requires twelve equal payments of $247,000 to be paid monthly for a total repayment of approximate $3.0 million (“Future Receipts”) over the term of the agreement. On February 14, 2024, the Company and Libertas executed an addendum to the Future Receipts Financing Agreement, pursuant to which the monthly payment term was revised to be $185,000 for the first two months and $259,000 for the remaining ten months. The Company has made payments in the aggregate amount of $166,000 to Libertas through September 30, 2024. The Company has the right to pay to end this financing transaction early by repurchasing the Future Receipts sold to Libertas but not yet delivered. The repurchase price is equal to the discount factor ranging between 1.075-1.165 each month following the Commencement Date up to six months. This shall be multiplied by the purchase price unless amounts collected prior to the date in which the repurchase price is paid.

During the three and nine months ended September 30, 2024, the Company recognized $132,000 and $425,000 interest expense from the amortization of debt discount using the effective interest rate method, respectively. As of

ProPhase Labs, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(unaudited)

September 30, 2024, the outstanding balance under the Future Receipts Financing Agreement was $1.2 million, net of debt discount of $78,000.

2023 Secured Mortgage Loan

On December 20, 2023, the Company's wholly-owned subsidiary PREH entered into an Open-End Mortgage Agreement (the "Mortgage Agreement"). The Mortgage provided for a loan of $3.3 million (the "Mortgage Loan") with stated maturity date on January 6, 2034, bore a fixed interest rate of 8.25% per annum and required monthly mortgage payments of principal and interest of $25,000. The obligations under the Mortgage Agreement were secured by PREH's certain real property in Pennsylvania. The Company incurred $341,000 issuance cost, which was recognized as a debt discount and will be amortized using the effective interest method over the term of the Mortgage Loan. During the three and nine months ended September 30, 2024, the Company recognized $4,000 and $15,000 interest expense from the amortization of debt discount using the effective interest rate method, respectively. As of September 30, 2024, the unamortized debt discount was $324,000. The Company retains $593,000 and $540,000 cash in an escrow account which was recognized as a restricted cash on the Company's consolidated balance sheet as of September 30, 2024 and December 31, 2023, respectively.

2023 Unsecured Promissory Note Payable

On January 26, 2023, the Company issued an unsecured promissory note (the “JXVII Note”) and guaranty for an aggregate principal amount of $7.6 million to JXVII Trust ("JXVII"). The JXVII Note is due and payable on January 27, 2026, the third anniversary of the date on which the JXVII Note was funded (the “Note Closing Date”), and accrues interest at a rate of 10% per year from the Note Closing Date, payable on a quarterly basis, until the JXVII Note is repaid in full. The Company has the right to prepay the JXVII Note at any time after the Note Closing Date and prior to the maturity date without premium or penalty upon providing seven days’ written notice to the note holder. Repayment of the JXVII Note has been guaranteed by the Company’s wholly-owned subsidiary, PMI. In addition to the JXVII Note, the Company issued warrants to purchase 76,000 shares of the Company's common stock at an exercise price of $9.00 for a term of 5 years, vesting immediately. The warrants were valued at $400,000 fair value, using the Black-Scholes option pricing model to calculate the grant date fair value of the warrants, with the following assumptions: no dividend yield, expected volatility of 81.5%, risk free interest rate of 3.62% and expected warrant life of 5 years. The relative fair value of the warrant was $380,000 and was recorded as a discount to the note payable in accordance with ASC 835-30-25, Recognition, and is being accreted over the term of the note payable for financial statement purposes.

On August 15, 2024, the Company and JXVII entered into an amended and restated unsecured promissory note for the JXVII Note (the “Amended JXVII Note”), increasing the principal amount by $2.4 million to $10.0 million, increasing the interest rate from 10% to 15% per annum, and extending the maturity date from January 27, 2026 to August 15, 2027. The Company received $2.3 million cash and exchanged the outstanding interest of $94,000. The amendment was accounted for as a debt modification, and the remaining unamortized debt discount as of the amendment date from the JXVII Note will be amortized over the remaining term of the Amended JXVII Note.

As of September 30, 2024, the outstanding balance of the Amended JXVII Note was $9.9 million, net of debt discount of $142,000.

Note 6 - 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, 2024 and December 31, 2023, no shares of preferred stock had been issued.

Common Stock Dividends

No dividends were declared during the three and nine months ended September 30, 2024 or 2023.

Common Stock

ProPhase Labs, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(unaudited)

Stock Repurchase Program

On March 15, 2023, the Company announced that its board of directors had approved a new stock repurchase program. Under the stock repurchase program, 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. This repurchase program expired on September 15, 2023. There were 69,628 shares repurchased under this program at an aggregate purchase price of $0.6 million during the nine months ended September 30, 2023.

Common ATM Offering

As previously disclosed, on December 28, 2021, the Company entered into an Sales Agreement (the “Sales Agreement”) with ThinkEquity LLC (the “Sales Agent”), pursuant to which the Company may offer and sell, from time to time through the Sales Agent, shares of our common stock having an aggregate offering price of up to $100,000,000, subject to the terms and conditions of the Sales Agreement.

During the nine months ended September 30, 2024, the Company sold 1,033,500 shares of common stock pursuant to the Sales Agreement. The Company received cash proceeds of $4.6 million, which is net of $94,000 offering cost incurred by the Sales Agent.

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 provided for an increase in the number of shares reserved for issuance under the plan by 300,000 shares and 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).

During the nine months ended September 30, 2024 and 2023, there were 210,000 and 120,000 stock options issued under the 2022 Directors Plan, respectively.

As of September 30, 2024, there were 300,000 shares of common stock available to be issued under the 2022 Directors’ Plan.

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 authorized the issuance of up to 775,000 shares of common stock. This plan was amended and restated on April 11, 2022 (to become the 2022 Directors' Plan), subject to stockholder approval, which was obtained at the 2022 Annual Meeting.

The 2022 Equity Compensation Plan

On May 9, 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 provided for an increase in the number of shares reserved for issuance under the plan by 1,000,000 shares and for the adjustment of the per share exercise price of stock options granted under the 2022 Plan in the

ProPhase Labs, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(unaudited)

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).

During the nine months ended September 30, 2024 and 2023, there were 1,080,000 and 1,005,000 stock options issued under the 2022 Plan, respectively.

As of September 30, 2024, there were 367,035 shares of common stock available to be issued under the 2022 Plan.

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 Meeting. The Amended 2010 Plan authorized the issuance of up to 4,900,000 shares of common stock. This plan was amended and restated on April 11, 2022 (to become the 2022 Plan), subject to stockholder approval, which was obtained at the 2022 Annual Meeting.

The 2018 Stock Incentive Plan

On April 12, 2018, the Company's 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 had been granted in the form of stock options to Ted Karkus (the “CEO Option”), our Chief Executive Officer ("CEO").

The 2018 Stock Plan required 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 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 final exercise price of the CEO Option was $0.60 per share after the latest special cash dividend paid on June 3, 2022.

During the nine months ended September 30, 2024 and 2023, 0 and 1,100,000 options were exercised, respectively, under the 2018 Stock Plan.

Inducement Option Awards

On January 1, 2024, the Company issued a non-qualified stock option to Jed A. Latkin, the Company's Chief Operational Officer (the “COO”), as an inducement to his employment with the Company, effective January 1, 2024 (the “COO Award”). The COO Award entitles the COO to purchase up to 500,000 shares of the Company’s common stock at an exercise price of $6.00 per share. The COO Award vested 25% on the date of grant and the remaining portion will vest 25% per year for the next three years on each of the first three anniversaries of the commencement date of Mr. Latkin’s employment, subject to his continued service on each vesting date. The COO Award expires on the seventh anniversary of the grant date. The COO Award provides 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 grant date fair value of the COO Award was approximately $1.3 million.

On April 15, 2024, the Company issued an inducement award to an employee pursuant to his employment agreement to purchase up to 50,000 shares (the "April Award") of the Company’s common stock at an exercise price of $6.20 per share. The April Award will vest 25% per year for the next four years on each of the first four anniversaries of the commencement date of the employment, subject to his continued service on each vesting date. The April Award expires on the seventh anniversary of the grant date. The April Award provides 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 grant date fair value of the April Award was approximately $201,000.

ProPhase Labs, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(unaudited)

There were no issuances of inducements awards during the nine months ended September 30, 2023.

All inducement awards have been granted outside of the Company’s equity compensation plans.

Summary of all option grants

The following table summarizes stock option activity during the nine months ended September 30, 2024, (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, 2024	2,951	$	7.30	4.8	$	693
Granted	1,840	6.01		7.0	—
Forfeited	(872)	7.53		—	—
Outstanding as of September 30, 2024	3,919	$	6.64	5.2	23
Options vested and exercisable	2,031	$	6.55	4.3	23

The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying options and the closing stock price of $2.42 for the Company’s common stock on September 30, 2024.

During the nine months ended September 30, 2024, the Company granted options to purchase 1,840,000 shares of the Company’s common stock to various employees and consultants. The options grant date fair value was valued at $5.5 million during the nine months ended September 30, 2024, 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 weighted average assumptions used in determining the fair value of the stock options at the date of grant during the nine months ended September 30, 2024 and 2023:


	For the nine months ended
	September 30, 2024			September 30, 2023
Exercise price	$	6.01		$	8.65
Expected term (years)	4.5			4.7
Expected stock price volatility	79.6		%	80.0		%
Risk-free rate of interest	4.2		%	3.7		%
Expected dividend yield (per share)	0		%	0		%

The expected stock price volatility is based on the Company’s historical common stock trading prices and the expected term is based on the period that the Company’s stock-based awards are expected to be outstanding based on the simplified method.

Stock Warrants

During the nine months ended September 30, 2024, there were no warrants issued.

ProPhase Labs, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(unaudited)

The following table summarizes warrant activity during the nine months ended September 30, 2024 (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, 2024	831	$	11.16	1.9
Forfeited	(455)	12.83
Outstanding as of September 30, 2024	376	$	9.13	3.4
Warrants vested and exercisable	376	$	9.13	3.4

The Company recognized $0.6 million and $0.9 million of share-based compensation expense during the three months ended September 30, 2024 and 2023, respectively. The Company recognized $3.0 million and $2.9 million of share-based compensation expense during the nine months ended September 30, 2024 and 2023, respectively. The Company will recognize an aggregate of approximately $6.0 million of remaining share-based compensation expense related to outstanding stock options over a weighted average period of 3.5 years.

Note 7 – Income Taxes

We recognize tax assets and liabilities for future tax consequences related to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and for net operating loss carryforwards. Management evaluated the deferred tax assets for recoverability using a consistent approach that considers the relative impact of negative and positive evidence, including historical profitability and projections of future reversals of temporary differences and future taxable income. We are required to establish a valuation allowance for deferred tax assets if management determines, based on available evidence at the time the determination is made, that it is not more likely than not that some portion or all of the deferred tax assets will be realized. As of September 30, 2024 the Company has net deferred tax liabilities for federal and combined states jurisdictions compared to net deferred tax assets with a full valuation allowance as of December 31, 2023. The decrease in deferred tax assets with a corresponding decrease in valuation allowance against those assets as of September 30, 2024 is primarily due to utilization of net operating losses. The Company has net deferred tax assets in other states jurisdictions where we maintain a full valuation allowance. Judgment is required to estimate forecasted future taxable income, which may be impacted by future business developments, actual results, tax initiatives, legislative, and other economic factors. The Company will continue to monitor income levels and potential changes to its operating and tax model, and other legislative or global developments in its determination.

The Company’s effective tax rate for the nine months ended September 30, 2024 is 28.0% and it is primarily driven by federal tax at 21%, state taxes at 0.20%, offset by permanent differences, the research and development credit and state deferred tax benefits.

Note 8 – Commitments and Contingencies

Manufacturing Agreement

The Company and its wholly owned subsidiary, PMI, entered into a manufacturing agreement (the “Manufacturing Agreement”) with Mylan Consumer Healthcare Inc. (formerly known as Meda Consumer Healthcare Inc.) (“MCH”) and Mylan Inc. (together with MCH, “Mylan”) in connection with the asset purchase agreement we entered into with Mylan in 2017. 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. On May 1, 2021, the Manufacturing Agreement was assigned by Mylan to Nurya Brands, Inc. (“Nurya”), now operating as Vespyr Brands, Inc. ("Vespyr"), in connection with Nurya’s acquisitions of certain assets from Mylan, including the Cold-EEZE® brand and product line. Unless terminated sooner by the parties,

ProPhase Labs, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(unaudited)

the Manufacturing Agreement remained in effect until March 29, 2023 and is currently being negotiated for renewal. Thereafter, the Manufacturing Agreement could be renewed by Vespyr for up to four 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.

On November 15, 2022, the Company was notified by Vespyr of its election to renew the Manufacturing agreement for one year. As a result, the Manufacturing Agreement remained in effect until March 29, 2024 and is currently in negotiation of extension.

License Agreements

Linebacker LB1 and LB2

On July 19, 2022, the Company through its wholly-owned subsidiary ProPhase BioPharma entered into a License Agreement (the “Linebacker License Agreement”) with Global BioLife, Inc. (the “Licensor”), with an effective date of July 18, 2022 (the “Linebacker Effective Date”), pursuant to which it acquired from Licensor a worldwide exclusive right and license under certain patents identified in the Linebacker License Agreement (the “Licensed Patents”) and know-how (collectively, the “Licensed IP”) to exploit any compound covered by the Licensed Patents (the “Licensed Compound”), including Linebacker LB1 and LB2, and any product comprising or containing a Licensed Compound (“Licensed Products”) in the treatment of cancer, inflammatory diseases or symptoms, memory-related syndromes, diseases or symptoms including dementia and Alzheimer’s Disease (the “Field”). Under the terms of the Linebacker License Agreement, the Licensor reserves the right, solely for itself and for GRDG Sciences, LLC (“GRDG”) to use the Licensed Compound and Licensed IP solely for research purposes inside the Field and for any purpose outside the Field.

Subject to certain conditions set forth in the Linebacker License Agreement, the Company may grant sublicenses (including the right to grant further sublicenses) to its rights under the Linebacker License Agreement to any of its affiliates or any third party with the prior written consent of Licensor, which consent may not be unreasonably withheld. Either party to the Linebacker License Agreement may assign its rights under the Linebacker License Agreement (i) in connection with the sale or transfer of all or substantially all of its assets to a third party, (b) in the event of a merger or consolidation with a third party or (iii) to an affiliate; in each case contingent upon the assignee assuming in writing all of the obligations of its assignor under the Linebacker License Agreement.

Under the terms of Linebacker License Agreement, the Company is required to pay to Licensor a one-time upfront license fee of $50,000 within ten days of the Linebacker Effective Date and must pay an additional $900,000 following the achievement of a first Phase 3 study which may be required by United States Food and Drug Administration for the first Licensed Product and an additional $1.0 million upon the receipt of regulatory approval of a New Drug Application for the first Licensed Product.

During the term of the Linebacker License Agreement, the Company is also required to pay to Licensor 3% royalties on Net Revenue (as defined in the Linebacker License Agreement) of each Licensed Product, but no less than the minimum royalty of $250,000 of Net Revenue per year minus any royalty payments for any required third party licenses.

In connection with the Linebacker License Agreement, the Company has incurred minimal costs for the three and nine months ended September 30, 2024 and 2023 in general and administrative expenses that are included in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). No clinical studies have begun under this agreement.

Equivir

In March 2023, we commenced patient enrollment in a randomized, placebo-controlled clinical trial of Equivir to evaluate its effect on upper respiratory tract infections. Vedic Lifesciences (“Vedic”), a leading clinical research organization, is contracted to conduct the combination prophylactic and therapeutic study, which is being conducted at eight sites. Vedic produced interim results in February of 2024 which showed enough data to continue the trial to completion. The trial is expected to be completed by the end of the fourth quarter 2024. In connection with the agreement, the Company has incurred approximately $0.1 million and $0.2 million and in general and administrative expenses that are included in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the three and

ProPhase Labs, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(unaudited)

nine months ended September 30, 2024, respectively, and $0.1 million and $0.2 million for the three and nine months ended September 30, 2023, respectively.

BE-Smart Esophageal Pre-Cancer Diagnostics Screening Test

In March 2023, and in connection with the asset acquisition of Stella, the Company announced a collaboration for the continued development of its BE-Smart Esophageal Pre-Cancer diagnostic screening test. The Company is pursuing initial commercialization of the BE-Smart test as an LDT (Laboratory Developed Test) and RUO (Research Use Only) for the third quarter of 2025 with full commercialization backed by insurance expected by the third quarter of 2025.

In connection with the license agreement relating to BE-Smart, the Company has incurred approximately $0.1 million and $0.2 million and in general and administrative expenses that are included in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the three and nine months ended September 30, 2024, respectively, and $0.4 million and $1.1 million for the three and nine months ended September 30, 2023, respectively. No clinical studies have begun under this agreement.

Litigation

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 settlement where management deems it appropriate.

Note 9 – Leases

Operating Leases

New Jersey Laboratory Lease

On October 23, 2020, we completed the acquisition of CPM, which included the acquisition of a 4,000 square foot CLIA accredited laboratory located in Old Bridge, New Jersey, which was owned by CPM (which is now known as ProPhase Diagnostics NJ, Inc.). The lease was renewed in February 2023, for an additional 36 months until February 2026. The monthly base rent remains the same at $5,500 per month. The lease renewal resulted in the recognition of an additional right-of-use asset and operating lease liability of $170,000, respectively in Fiscal 2023.

New York Second Floor Lease

On December 8, 2020, the Company entered into a Lease Agreement (the “NY Second Floor Lease”) with BRG Office L.L.C. and Unit 2 Associates L.L.C. (the “Landlord”), pursuant to which the Company leases certain premises located on the second floor (the “Second Floor Leased Premises”) of 711 Stewart Avenue, Garden City, New York (the “Building”). The Second Floor Leased Premises serve as the Company’s second location and corporate headquarters, offering a wide range of laboratory testing services for diagnosis, screening and evaluation of diseases, including COVID-19 and Respiratory Pathogen Panel Molecular tests.

On June 10, 2022, we entered into a First Amendment to the NY Second Floor Lease (the “Second Floor Lease Amendment”). The Second Floor Lease Amendment amends the NY Second Floor Lease to provide that any uncured default by the Company or any of its affiliate under the NY First Floor Lease (defined below) will constitute a default by the Company under the NY Second Floor Lease.

New York First Floor Lease

On June 10, 2022, the Company entered into a second Lease Agreement (the “NY First Floor Lease”) with Landlord, pursuant to which the Company leases approximately 4,516 sq. feet located on the first floor (the “NY First Floor Leased Premises”) of the Building. As described above, the Company currently leases space on the second floor of the Building. The First Floor Leased Premises will be used to expand the Company’s in-house lab capabilities to include traditional clinical testing across multiple specialty areas and Next Generation Sequencing (NGS) to perform Whole Genome Sequencing (WGS) and an array of genetic diagnostic test offerings for both clinical and research purposes.

ProPhase Labs, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(unaudited)

The NY First Floor Lease became effective as of June 10, 2022, and the initial term of the NY First Floor Lease will expire on July 15, 2031, unless sooner terminated as provided in the NY First Floor Lease. The Company may extend the term of the NY First Floor Lease for one additional option period of five years pursuant to the terms described in the NY First Floor Lease. The Company has the option to terminate the NY First Floor Lease effective July 31, 2027 (the “Early Termination Date”), provided the Company gives the Landlord written notice not less than nine months and not more than 12 months prior to the Early Termination Date and pays the Landlord a termination fee as more particularly described in the Lease.

For the first year of the NY First Floor Lease, the Company paid a base rent of $11,290 per month (subject to an eight month abatement period). The base rent gradually increases at a rental rate of approximately 2.75% for each twelve month period thereafter, culminating in a monthly base rent of $14,026 during the final months of the initial term of the NY First Floor Lease. In addition to the monthly base rent, the Company is responsible for its proportionate share of real estate tax escalations in accordance with the terms of the NY First Floor Lease. The Landlord will provide a construction allowance to the Company in an aggregate amount not to exceed $203,000, to reimburse the Company for the cost of certain improvements to be made by the Company to the First Floor Leased Premises.

At September 30, 2024 and December 31, 2023, the Company had operating lease liabilities for the New York and New Jersey leases of approximately $4.9 million and $5.2 million, respectively, and right of use assets of approximately $4.2 million and $4.6 million, respectively, which were included in the condensed consolidated balance sheets.

Finance Leases

On April 19, 2023, the Company entered into a master lease agreement for laboratory equipment (the "First Equipment Lease") with a vendor. The First Equipment Lease has a 5-year term and is recognized as a finance lease under ASC 842. The present value of the minimum future obligations of $1.5 million at inception was calculated based on an interest rate of 8.0%, which was recognized in finance lease liabilities in the condensed consolidated balance sheet.

On July 21, 2023, the Company entered into a master lease agreement for a laboratory equipment (the "Second Equipment Lease") with a vendor. The Second Equipment Lease has a 4-year term and is recognized as a finance lease under ASC 842. The present value of the minimum future obligations of $5.1 million at inception was calculated based on an interest rate of 7.4%, which was recognized in finance lease liabilities in the condensed consolidated balance sheet.

On September 26, 2023, the Company entered into a master lease agreement for a laboratory equipment (the "Third Equipment Lease") with a vendor. The Third Equipment Lease had a 3-year term starting on the commencement date. The commencement date is when the equipment is shipped and installed, then the Company will provide Final Acceptance Certificate to the vendor. On May 14, 2024, all three Final Acceptance Certificates in connection with certain Amended and Restated Lease Schedules to the Third Equipment Lease was delivered by the Company. The amended lease term for each lease schedule is 18-months with 6 quarterly payments. The aggregate present value of the minimum future obligations under these three lease schedules are approximately $3.0 million based on an interest rate of 12.3%, which was recognized in finance lease liabilities in the condensed consolidated balance sheet. The Company also recognized an additional $0.7 million in finance lease assets, which was reclassed from prepaid expenses as of the commencement date.

At September 30, 2024 and December 31, 2023, the Company had finance lease liabilities of approximately $7.6 million and $5.9 million, respectively, and finance lease assets within property and equipment, net of approximately $7.6 million and $5.8 million, respectively, which were included in the condensed consolidated balance sheets.

ProPhase Labs, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(unaudited)

The following summarizes quantitative information about our operating leases (amounts in thousands):


	For the three months ended				For the nine months ended
	September 30, 2024		September 30, 2023		September 30, 2024		September 30, 2023
Operating leases:
Operating lease cost	$	239	$	239	$	717	$	717
Total operating lease cost	$	239	$	239	$	717	$	717
Finance leases:
Interest lease cost	$	186	$	122	$	430	$	142
Depreciation expense	1,171		318		1,743		368
Total finance lease expense	$	1,357	$	440	$	2,173	$	510

Other information related to the Company’s leases is shown below (dollar amounts in thousands):


	For the nine months ended
	September 30, 2024			September 30, 2023
Operating cash flows used in operating leases	$	(714)		$	(606)

	September 30, 2024			December 31, 2023
Weighted-average remaining lease term – operating leases (in years)	6.7			7.4
Weighted-average remaining lease term – finance leases (in years)	2.4			3.8
Weighted-average discount rate – operating leases	10.00		%	10.00		%
Weighted-average discount rate – finance leases	9.26		%	7.56		%
Finance lease asset (1)	$	7,554		$	5,809

(1) As of September 30, 2024 and December 31, 2023, the Company had recorded accumulated depreciation of approximately $2.7 million and $0.8 million for the finance lease asset, respectively. Finance lease assets are recorded within property and equipment, net on the Company’s Condensed Consolidated Balance Sheets.

Maturities of the Company’s operating leases, excluding short-term leases, are as follows (in thousands):


	Operating Lease		Finance Lease		Total
Three Months Ended December 31, 2024	238		1,062		1,300
Year Ended December 31, 2025	977		4,175		5,152
Year Ended December 31, 2026	941		1,840		2,781
Year Ended December 31, 2027	955		1,188		2,143
Year Ended December 31, 2028	982		121		1,103
Thereafter	2,669		—		2,669
Total lease payments	6,762		8,386		15,148
Less present value discount	(1,906)		(826)		(2,732)
Total	$	4,856	$	7,560	$	12,416

ProPhase Labs, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(unaudited)

Note 10 - Segment Information

The Company has identified two operating segments, diagnostic services and consumer products, based on the manner in which the Company’s CEO, as Chief Operating Decision Maker, assesses performance and allocates resources across the organization. The operating segments are organized in a manner that depicts the difference in revenue generating synergies that include the separate processes, profit generation and growth of each segment. The diagnostic services segment provides COVID-19 diagnostic information services to a broad range of customers in the United States, including health plans, third party payers and government organizations. The consumer products segment is engaged in the research, development, manufacture, distribution, marketing and sale of OTC consumer healthcare products and dietary supplements in the United States and also provides personal genomics products and services. The unallocated corporate expenses mainly included professional fees associated with the public company.

ProPhase Labs, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(unaudited)

The following table is a summary of segment information for three and nine months ended September 30, 2024 and 2023 (amounts in thousands):


	For the three months ended				For the nine months ended
	September 30, 2024		September 30, 2023		September 30, 2024		September 30, 2023
Net revenues
Diagnostic services	$	—	$	2,491	$	—	$	24,849
Consumer products	3,146		5,874		9,254		16,036
Consolidated net revenue	3,146		8,365		9,254		40,885
Cost of revenue
Diagnostic services	501		1,798		1,930		10,812
Consumer products	2,810		4,240		8,398		10,778
Consolidated cost of revenue	3,311		6,038		10,328		21,590
Depreciation and amortization expense
Diagnostic services	719		1,916		2,247		3,059
Consumer products	803		655		2,412		1,266
Total Depreciation and amortization expense	1,522		2,571		4,659		4,325
Operating and other expenses	7,428		6,541		20,653		26,105
Income (loss) from operations, before income taxes
Diagnostic services	(1,520)		(2,512)		(7,639)		4,902
Consumer products	(4,364)		(1,384)		(7,738)		(874)
Unallocated corporate	(3,211)		(2,889)		(10,989)		(15,163)
Total loss from operations, before income taxes	(9,095)		(6,785)		(26,366)		(11,135)
Income tax benefit	2,508		1,644		7,361		3,104
Total loss from operations, after income taxes	(6,587)		(5,141)		(19,005)		(8,031)
Net loss	$	(6,587)	$	(5,141)	$	(19,005)	$	(8,031)

The following table is a summary of segment information as of September 30, 2024 and December 31, 2023 (amounts in thousands):


	September 30, 2024		December 31, 2023
ASSETS
Diagnostic services	$	37,816	$	44,221
Consumer products	33,443		38,358
Unallocated corporate	20,549		9,348
Total assets	$	91,808	$	91,927

Note 11 - Earnings Per Share

Basic earnings per share (“EPS”) excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or otherwise result in the issuance of common stock that shared in the earnings of the entity. Diluted EPS

ProPhase Labs, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(unaudited)

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, and the if-converted method for convertible debt.

The following table represents the number of securities excluded from the income per share computation as a result of their anti-dilutive effect (in thousands):


	For the three months ended		For the nine months ended
Anti-dilutive securities	September 30, 2024	September 30, 2023	September 30, 2024	September 30, 2023
Common stock purchase warrants	376	831	376	831
Stock options	3,919	3,289	3,919	3,289
Anti-dilutive securities	4,295	4,120	4,295	4,120

Note 12 - Subsequent Events

2025 Term Note

On October 22, 2024, the Company entered into a term note agreement with an individual investor for cash proceeds of $500,000 (the “2025 Term Note”). The Term Note has an implicit interest rate of 15%. The Term Note has a term of twelve (12) months and requires the Company to make interest only monthly payments in the amount of $6,250 with a $506,250 balloon payment at end of term.

Amended Second Future Receipts Financing Agreement

On November 5, 2024, the Company entered into an agreement of sale of future receipts (the “Amended Second Future Receipts Financing Agreement”) pursuant to which Slate restructured the existing Second Future Receipts Financing Agreement (see Note 5) by increasing the outstanding amount to $2.1 million for gross proceeds to the Company of $1.6 million, less origination fees of $35,000 and the outstanding balance under the Second Future Receipts Financing Agreement of $1.0 million, resulting in net proceeds to the Company of $527,000. The Amended Second Future Receipts Financing Agreement shall be repaid by the Company in 24 weekly installments of $89,000.

Public Offering

On November 12, 2024 ("Closing Date"), the Company closed on an underwritten firm commitment public offering whereby the Company sold 4,795,500 shares of common stock, including 625,000 shares of common stock sold upon full exercise of the underwriters' option to purchase additional shares (the "Offering"). Each share of common stock was sold at a public offering price of $0.72 per share for aggregate gross proceeds of $3.45 million. The Company also issued to the representative of the underwriters, or its designees, as partial compensation, warrants to purchase up to 208,500 shares of common stock, which is equal to 5% of the aggregate number of shares of common stock sold in the Offering.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis should be read in conjunction with our interim unaudited condensed consolidated financial statements and related notes included in this Quarterly Report on Form 10-Q (“Quarterly Report”) and the audited financial statements and notes thereto as of and for the year ended December 31, 2023 and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 29, 2024 (the “2023 Annual Report”). As used in this Quarterly Report, unless the context suggests otherwise, “we,” “us,” “our,” or “ProPhase” refer to ProPhase Labs, Inc. and its subsidiaries, unless the context otherwise requires.

Forward-Looking Statements

This Quarterly Report contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements relate to future events or our future financial performance. Forward-looking statements typically are identified by use of terms such as “anticipate”, “believe”, “plan”, “expect”, “intend”, “may”, “will”, “should”, “estimate”, “predict”, “potential”, “continue” and similar words although some forward-looking statements are expressed differently. This Quarterly Report may also contain forward-looking statements attributable to third parties relating to their estimates regarding the growth of our markets.

You are cautioned that forward-looking statements are not guarantees of performance and are subject to known and unknown risks, uncertainties and other factors that may cause our or our industry’s actual results, levels of activity, performance, achievements or prospects to be materially different from any future results, levels of activity, performance or achievements expressed or implied by the forward-looking statements. Many of these factors are beyond our ability to predict.

Such risks and uncertainties include, but are not limited to:

•our ability to generate net positive revenue;

•our ability to manage our growth successfully and to compete effectively;

•our ability to implement our growth strategies;

•potential disruptions to our supply chain, increases in the price of testing supplies, equipment and raw materials need for our businesses, or the adulteration of key testing materials and raw materials needed for our businesses;

•potential product liability claims;

•our ability to secure additional capital, when needed to support our businesses;

•our dependence on key personnel and our ability to attract, retain and motivate our key employees;

•our ability to substitute revenues from our lab diagnostic services or tests with new business segments;

•our ability to collect payment and reduce our accounts receivable for the diagnostic tests we delivered and to comply with complex billing requirements;

•our ability to successfully offer, perform and generate revenues from our personal genomics business;

•our ability to navigate privacy concerns and existing and new privacy regulations relating to our personal genomics business;

•potential disruptions in our ability to manufacture our products and those of others;

•our ability to meet the demands of our manufacturing business;

•seasonal fluctuations in demand for the products and services we provide;

•risks related to the initiation, cost, timing, progress and results of current and future research and development programs, preclinical studies and clinical trials and our ability to obtain and maintain regulatory approvals;

•our ability to successfully develop and commercialize our existing products and any new products;

•our ability to protect our proprietary rights;

•our ability to comply with complex regulatory requirements applicable to our businesses;

•our dependence on third parties to provide services critical to our businesses;

•our ability to remediate material weaknesses in our internal controls over financial reporting; and

•general and global economic conditions, including rising inflation, interest rates, and political conflicts.

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These factors should not be construed as exhaustive. Given the risks and uncertainties surrounding forward-looking statements, you should not place undue reliance on these statements. You should also consider carefully the statements we make under other sections of this Quarterly Report, such as Part II. Item 1A. “Risk Factors” of this Quarterly Report, and in our 2023 Annual Report, such as Part I. Item 1A. “Risk Factors” and Part II. Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2023 Annual Report, as well as in other documents we file from time to time with the SEC that address additional risks that could cause our actual results to differ from those set forth in any forward-looking statements. Our forward-looking statements speak only as the date of this Quarterly Report. We undertake no obligation to publicly update or review any forward-looking statements, whether as a result of new information, future developments or otherwise, except as required by law.

General

We are a diversified company that offers a range of services including genomics testing, diagnostic testing and contract manufacturing. We are also focused on licensing, developing and commercializing novel drugs, dietary supplements, compounds and diagnostics.

We conduct our operations through two operating segments: diagnostic services and consumer products.

Until late fiscal year 2020, we were engaged primarily in the research, development, manufacture, distribution, marketing and sale of over-the-counter ("OTC") consumer healthcare products and dietary supplements in the United States. This includes the development and marketing of dietary supplements under the TK Supplements® brand. However, commencing in December 2020, we also began offering COVID- 19 and were prepared to validate other RPP Molecular tests through our diagnostic service business. In August 2021, we began offering personal genomics products and services and in July 2022 we began focusing on the licensing, development and commercialization of novel drugs, dietary supplements, compounds and diagnostics.

Our wholly owned subsidiary, ProPhase Diagnostics, Inc. (“ProPhase Diagnostics”), which was formed on October 9, 2020, offers a broad array of clinical diagnostic and testing services at its CLIA certified laboratories including polymerase chain reaction testing for COVID-19. Critical to COVID-19 testing, we provide fast turnaround times for results. We also offer best-in-class rapid antigen testing for COVID-19. On October 23, 2020, we completed the acquisition of all of the issued and outstanding shares of capital stock of Confucius Plaza Medical Laboratory Corp., which owned a 4,000 square foot CLIA accredited laboratory located in Old Bridge, New Jersey for approximately $2.5 million. In December 2020, we expanded our diagnostic service business with the build-out of a second, larger CLIA accredited laboratory in Garden City, New York. Operations at this second facility commenced in January 2021. Due to the significant decrease in demand and reimbursement rate for our diagnostic testing service, we do not currently provide diagnostic testing services. Nonetheless we are prepared to provide an increased volume of our diagnostic testing service if diagnostic testing is required due to a new COVID-19 outbreak. In addition, in order to maintain licenses in certain states in which we operate, we currently perform several diagnostic tests each quarter to maintain our certified lab status, and we currently plan to do so for the foreseeable future.

On August 10, 2021, we acquired Nebula Genomics, Inc., a privately owned personal genomics company, through our new wholly owned subsidiary, ProPhase Precision Medicine Inc. (“ProPhase Precision”). Subsequently in 2022, ProPhase Precision legal name was changed to Nebula Genomics, Inc. ("Nebula"). Nebula focuses on genomics sequencing technologies, a comprehensive method for analyzing entire genomes, including the genes and chromosomes in DNA. The data obtained from genomic sequencing can be used to help identify inherited disorders and tendencies, help predict disease risk, help identify expected drug response, and characterize genetic mutations, including those that drive cancer progression.

Our wholly owned subsidiary, ProPhase BioPharma, Inc. (“PBIO”) was formed on June 28, 2022, for the licensing, development and commercialization of novel drugs, dietary supplements and compounds, beginning with Equivir and Equivir G. PBIO announced a second licensing agreement for two small molecule proviral integration site for moloney murine leukemia virus kinase inhibitors, Linebacker LB-1 and LB-2, in July 2022, with plans to pursue development and commercialization of LB-1 as a cancer co-therapy.

In January 2023, we acquired exclusive rights to the BE-Smart Esophageal Pre-Cancer Diagnostic Screening Test and related intellectual property assets.

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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.

Our wholly-owned subsidiary, DNA Complete, Inc. (“DNA Complete”), which was formed on September 24, 2024, for the offering of whole genome sequencing and related services. DNA Complete sequences specimens at Nebula as well as at other laboratories. DNA Complete focuses on genomics testing technologies, a comprehensive method for analyzing entire genomes, including the genes and chromosomes in deoxyribonucleic acid (“DNA”). The data obtained from genomic sequencing may help to identify inherited disorders and tendencies, predict disease risk, identify expected drug response, and characterize genetic mutations, including those that drive cancer progression. DNA Complete currently offers DNA Complete’s whole genome sequencing products direct-to-consumers online with plans to sell in food, drug and mass retail stores and to provide testing for universities conducting genomic research.Our personal genomics business is and will continue to be impacted by demand for our genetic sequencing products and services, our marketing and service capabilities, and our ability to comply with applicable regulatory requirements.

Our consumer sales are and will continue to be impacted by (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, which is largely 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 result of the change in weather and other factors. We generally experience in the first, third and fourth quarter higher levels of net revenues from our contract manufacturing business. Revenues are generally at their lowest levels in the second quarter when customer demand generally declines.

In addition, we continue to actively pursue acquisition opportunities for other companies, technologies and products within and outside the consumer products industry.

Results of Operations

Three Months Ended September 30, 2024 as Compared to the Three Months Ended September 30, 2023

For the three months ended September 30, 2024, net revenue was $3.1 million as compared to $8.4 million for the three months ended September 30, 2023. The decrease in net revenue was the result of a $2.5 million decrease in net revenue from diagnostic services, and a $2.7 million decrease in consumer products. The decrease in net revenue for diagnostic services was due to decreased COVID-19 testing volumes compared to the 2023 period. Overall diagnostic testing volume decreased from 13,000 tests in the three months ended September 30, 2023 to zero tests in the three months ended September 30, 2024. None of the tests during the three months ended September 30, 2023 were reimbursed by the HRSA uninsured program.

Cost of revenues for the three months ended September 30, 2024 were $3.3 million, comprised of $0.5 million for diagnostic services and $2.8 million for consumer products. Cost of revenues for the three months ended September 30, 2023 were $6.0 million, comprised of $1.8 million for diagnostic services and $4.2 million for consumer products.

We realized a gross margin loss of $0.2 million for the three months ended September 30, 2024 as compared to a gross margin profit of $2.3 million for the three months ended September 30, 2023. The decrease of $2.5 million was comprised of a decrease of $1.2 million in diagnostic services, and a decrease of $1.3 million in consumer products. For the three months ended September 30, 2024 and 2023, we realized an overall gross margin of (5.2)% and 27.8%, respectively. Gross margin for diagnostic services was zero or not applicable due to no revenue and 27.8% in the 2024 and 2023 comparable periods, respectively. Gross margin for consumer products was 10.7% and 27.8% in the 2024 and 2023 comparable periods, respectively. Gross margin for consumer products have historically been influenced by fluctuations in quarter-to-quarter production volume, fixed production costs and related overhead absorption, raw ingredient costs, inventory mark to market write-downs and timing of shipments to customers.

Diagnostic services costs for the three months ended September 30, 2024 were zero compared to $0.1 million for the three months ended September 30, 2023. The decrease in diagnostic service costs of $0.1 million for the three months ended September 30, 2024 as compared to the three months ended September 30, 2023 was due to decreased COVID-19 testing volumes in 2024 compared to the 2023 period.

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General and administration expenses for the three months ended September 30, 2024 were $7.7 million as compared to $8.2 million for the three months ended September 30, 2023. The decrease in general and administration expenses of $0.6 million for the three months ended September 30, 2024 as compared to the three months ended September 30, 2023 was principally related to a decrease in personnel expenses and professional fees associated with our diagnostic services business.

Research and development costs for the three months ended September 30, 2024 were $122,000 as compared to $428,000 for the three months ended September 30, 2023. The decrease in research and development costs of $306,000 for the three months ended September 30, 2024 as compared to the three months ended September 30, 2023 was principally due to decreased activities related to product research and field testing as a result of refined focus and efforts.

Interest and other income for the three months ended September 30, 2024 was zero as compared to $1,000 for the three months ended September 30, 2023. The decrease in interest income of $1,000 for the three months ended September 30, 2024 as compared to the three months ended September 30, 2023 was principally due to the lower account balance of our investment account that bears interest.

Interest expense for the three months ended September 30, 2024 was $1.2 million as compared to $275,000 for the three months ended September 30, 2023. The increase in interest expense of $883,000 for the three months ended September 30, 2024 as compared to the three months ended September 30, 2023 was principally due to the higher balance of our outstanding debt that bears interest and leased manufacturing equipment.

As a result of the effects described above, net loss for the three months ended September 30, 2024 was $6.6 million, or $(0.35) per share, as compared to net loss of $5.1 million, or $(0.30) per share, for the three months ended September 30, 2023. Diluted loss per share for the three months ended September 30, 2024 and 2023 were $(0.35) per share and $(0.30) per share, respectively.

Nine Months Ended September 30, 2024 as Compared to the Nine Months Ended September 30, 2023

For the nine months ended September 30, 2024, net revenue was $9.3 million as compared to $40.9 million for the nine months ended September 30, 2023. The decrease in net revenue was the result of a $24.8 million decrease in net revenue from diagnostic services, and a $6.8 million decrease in consumer products. The decrease in net revenue for diagnostic services was due to decreased COVID-19 testing volumes compared to the 2023 period. Overall diagnostic testing volume decreased from 259,000 tests in the the nine months ended September 30, 2023 to zero tests in the nine months ended September 30, 2024. None of the tests during the nine months ended September 30, 2023 were reimbursed by the HRSA uninsured program.

Cost of revenues for the nine months ended September 30, 2024 were $10.3 million, comprised of $1.9 million for diagnostic services and $8.4 million for consumer products. Cost of revenues for the nine months ended September 30, 2023 were $21.6 million, comprised of $10.8 million for diagnostic services and $10.8 million for consumer products.

We realized a gross margin loss of $1.1 million for the nine months ended September 30, 2024 as compared to a gross margin profit of $19.3 million for the nine months ended September 30, 2023. The decrease of $20.4 million was comprised of a decrease of $16.0 million in diagnostic services, and a decrease of $4.4 million in consumer products. For the nine months ended September 30, 2024 and 2023, we realized an overall gross margin of (11.6)% and 47.2%, respectively. Gross margin for diagnostic services was zero, or not applicable due to no revenue, and 56.5% in the nine months ended September 30, 2024 and 2023 comparable periods, respectively. Gross margin for consumer products was 9.3% and 32.8% in the nine months ended September 30, 2024 and 2023 comparable periods, respectively. Gross margin for consumer products have historically been influenced by fluctuations in quarter-to-quarter production volume, fixed production costs and related overhead absorption, raw ingredient costs, inventory mark to market write-downs and timing of shipments to customers.

Diagnostic services costs for the nine months ended September 30, 2024 were zero compared to $1.9 million for the nine months ended September 30, 2023. The decrease in diagnostic service costs of $1.9 million for the nine months ended September 30, 2024 as compared to the nine months ended September 30, 2023 was due to decreased COVID-19 testing volumes in 2024 compared to the 2023 period.

General and administration expenses for the nine months ended September 30, 2024 were $22.5 million as compared to $26.5 million for the nine months ended September 30, 2023. The decrease in general and administration

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expenses of $4.0 million for the nine months ended September 30, 2024 as compared to the nine months ended September 30, 2023 was principally related to a decrease in personnel expenses and professional fees associated with our diagnostic services business.

Research and development costs for the nine months ended September 30, 2024 were $533,000 as compared to $1,144,000 for the nine months ended September 30, 2023. The decrease in research and development costs of $611,000 for the nine months ended September 30, 2024 as compared to the nine months ended September 30, 2023 was principally due to decreased activities related to product research and field testing as a result of refined focus and efforts.

Interest and other income for the nine months ended September 30, 2024 was zero as compared to $39,000 for the nine months ended September 30, 2023. The decrease in interest income of $39,000 for the nine months ended September 30, 2024 as compared to the nine months ended September 30, 2023 was principally due to the lower account balance of our investment account that bears interest.

Interest expense for the nine months ended September 30, 2024 was $2.3 million as compared to $781,000 for the nine months ended September 30, 2023. The increase in interest expense of $1,535,000 for the nine months ended September 30, 2024 as compared to the nine months ended September 30, 2023 was principally due to the higher balance of our outstanding debt that bears interest and leased manufacturing equipment.

As a result of the effects described above, net loss for the nine months ended September 30, 2024 was $19.0 million, or $(1.02) per share, as compared to net loss of $8.0 million, or $(0.47) per share, for the nine months ended September 30, 2023. Diluted loss and earnings per share for the nine months ended September 30, 2024 and 2023 were $(1.02) per share and $(0.47) per share, respectively.

Non-GAAP Financial Measures and Reconciliation

In an effort to provide investors with additional information regarding our results of operations as determined by accounting principles generally accepted in the United States of America (“GAAP”), we disclose certain non-GAAP financial measures. The primary non-GAAP financial measures we disclose are EBITDA and Adjusted EBITDA.

We define "EBITDA" as net income (loss) before net interest expense, income taxes, depreciation and amortization. Adjusted EBITDA further adjusts EBITDA by excluding acquisition costs, other non-cash items, and other unusual or non-recurring charges (as described in the table below).

Non-GAAP financial measures should not be considered as a substitute for, or superior to, measures of financial performance prepared in accordance with GAAP. These non-GAAP financial measures do not reflect a comprehensive system of accounting, differ from GAAP measures with the same names and may differ from non-GAAP financial measures with the same or similar names that are used by other companies. We compute non-GAAP financial measures using the same consistent method from quarter to quarter and year to year. We may consider whether other significant items that arise in the future should be excluded from the non-GAAP financial measures.

We use EBITDA and Adjusted EBITDA internally to evaluate and manage the Company’s operations because we believe they provide useful supplemental information regarding the Company’s ongoing economic performance. We believe that these non-GAAP financial measures provide meaningful supplemental information regarding our operating results primarily because they exclude amounts that are not considered part of ongoing operating results when planning and forecasting and when assessing the performance of the organization. In addition, we believe that non-GAAP financial information is used by analysts and others in the investment community to analyze our historical results and in providing estimates of future performance and that failure to report these non-GAAP measures could result in confusion among analysts and others and create a misplaced perception that our results have underperformed or exceeded expectations.

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The following table sets forth the reconciliations of EBITDA and Adjusted EBITDA excluding other costs to the most comparable GAAP financial measures (in thousands):


	For the three months ended				For the nine months ended
	September 30, 2024		September 30, 2023		September 30, 2024		September 30, 2023
GAAP net income (1)	$	(6,587)	$	(5,141)	$	(19,005)	$	(5,141)
Interest, net	1,158		274		2,316		274
Income tax benefit	(2,508)		(1,644)		(7,361)		(1,644)
Depreciation and amortization	2,390		3,143		5,693		3,143
EBITDA	(5,547)		(3,368)		(18,357)		(3,368)
Share-based compensation expense	636		744		3,021		744

Non-cash rent expense (2)	471		99		236		99
Credit loss expense	—		—		—		—
Adjusted EBITDA	$	(4,440)	$	(2,525)	$	(15,100)	$	(2,525)

(1)We believe that net income (loss) is the financial measure calculated and presented in accordance with GAAP that is most directly comparable to EBITDA and Adjusted EBITDA. EBITDA and Adjusted EBITDA measure the Company’s operating performance without regard to certain expenses. EBITDA and Adjusted EBITDA are not presentations made in accordance with GAAP and the Company’s computation of EBITDA and Adjusted EBITDA may vary from others in the industry. EBITDA and Adjusted EBITDA have important limitations as analytical tools and should not be considered in isolation or as substitutes for analysis of the Company’s results as reported under GAAP.

(2)The non-cash portion of rent, which reflects the extent to which our GAAP rent expense recognized exceeds (or is less than) our cash rent payments. For newer leases, our rent expense recognized typically exceeds our cash rent payments, while for more mature leases, rent expense recognized is typically less than our cash rent payments.

Liquidity and Capital Resources

Our aggregate cash and cash equivalents as of September 30, 2024 were $1.1 million as compared to $2.1 million at December 31, 2023. Our working capital was $13.5 million and $26.7 million as of September 30, 2024 and December 31, 2023, respectively. The decrease of $1.1 million in our cash and cash equivalents for the nine months ended September 30, 2024 was principally due to $14.0 million cash used in operating activities, capital expenditures of $1.1 million, and repayment of notes payable for $2.5 million, offset by proceeds from the sale of marketable debt securities of $3.4 million, proceeds from issuance of common stock, notes payable and mortgage loan of $13.0 million.

To date the principal sources of capital to fund our operations have been from diagnostic services, genomics sequencing, product sales, net proceeds from the offering of equity securities, and issuances of promissory notes. Based on management’s current business plans, the Company estimates it will have enough cash and liquidity to finance its operating requirements for at least 12 months from the date of filing these unaudited condensed consolidated financial statements. However, due to the nature of early-stage ventures and accounts receivables collections, there are inherent uncertainties associated with managements’ business plan and cash flow projections, particularly if the Company is unable to grow its business lines, including replacing the revenues from our lab diagnostic services or tests with new business lines, or collect on its accounts receivables in a timely manner or at all. If we were to experience a cash shortfall, we believe our access to existing and other financing sources, including our at-the-market facility, and the established relationships with our investment banks will enable us to continue to meet our obligations and fund ongoing operations.

We may also use our cash to explore and/or acquire new product technologies, applications, product line extensions, new contract manufacturing applications and other new product opportunities. In the event that our available cash is insufficient to support such initiatives, we may need to incur indebtedness or issue common stock or other securities to finance our plans for growth. Volatility in the credit markets and the liquidity of major financial institutions, including as a result of inflation and/or the wars in Ukraine and the Gaza Strip and measures taken in response thereto, may have an adverse impact on our ability to fund our business strategy through future borrowings, under either existing or newly created instruments in the public or private markets on terms that we believe to be reasonable, if at all.

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We anticipate that we will continue to incur losses for foreseeable future. We expect to continue to incur research and development costs and general and administrative expenses, as well as expenses related to potential commercialization of our product candidates, consistent with costs associated with research and development at companies of our size and stage of development, and, as a result, we will need additional capital to fund our operations, which we may raise through public or private equity or debt financings, strategic collaborations, or other sources.

Contractual Obligation and Commitments

Manufacturing Agreement

Equivir License Agreement

Under the terms of our Equivir License Agreement with Global BioLife for the worldwide exclusive right and license to Equivir and Equivir G, we are required to pay to Global BioLife a royalty of 5.5% after the date of first commercial sale and during the royalty term. In the event that no valid claim of Equivir Licensed Patents cover a Equivir Licensed Product in a particular jurisdiction, the royalty rate for such Equivir Licensed Product will be reduced by 50%.

Linebacker License Agreement

Under the terms of our License Agreement entered into by and between PBIO and Global BioLife, Inc. (“Global BioLife”) on July 19, 2022 (the “Linebacker License Agreement”) for the worldwide exclusive right and license to Linebacker (LB-1 and LB-2), we must pay Global BioLife $900,000 following the achievement of a first Phase 3 study which may be required by the United States Food and Drug Administration for the first product comprising or containing any compound covered by certain patents identified in the Linebacker License Agreement (a “Linebacker Licensed Product”) and an additional $1 million upon the receipt of regulatory approval of a New Drug Application for the first Linebacker Licensed Product. During the term of the Linebacker License Agreement, we are also required to pay to Global BioLife 3% royalties on Net Revenue (as defined in the Linebacker License Agreement) of each Linebacker Licensed Product, but no less than the minimum royalty of $250,000 of Net Revenue per year minus any royalty payments for any required third party licenses.

Stella Asset Purchase Agreement

On December 15, 2022, we entered into an Asset Purchase Agreement (the “Stella Purchase Agreement”) with Stella Diagnostics Inc. (“Stella”) and Stella DX, LLC (“Stella DX” and, together with Stella, the “Stella Sellers”), pursuant to which, on January 3, 2023, we purchased all of the assets, rights and interests of the Stella Sellers and their affiliates pertaining to the Stella Sellers’ BE-Smart Esophageal Pre-Cancer diagnostic screening test and certain clinical assets, including all intellectual property rights (the “Stella Purchased Assets”). As consideration for the Stella Purchased Assets, we (i) paid to the Stella Sellers $3.5 million in cash, minus (a) the Secured Note Amount of $0.5 million, (b) the Liability

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Payoff Amount of $0.4 million and (c) the Promissory Note Payoff Amounts of $0.4 million (each as defined in the Stella Purchase Agreement) in 2022, and (ii) issued to Stella DX 100,000 shares of our common stock.

We are required to pay to the Stella Sellers for each of the seven calendar years (each, an “Annual Period”) during the seven year period commencing on the first day of the calendar year following the date of the Commercialization Event (as defined in the Stella Purchase Agreement), a non-refundable, non-creditable royalty of 5% of the Adjusted Gross Margin (as defined in the Stella Purchase Agreement) for such Annual Period.

JXVII Trust Promissory Note

On January 26, 2023, we issued an unsecured promissory note and guaranty for an aggregate principal amount of $7.6 million (the "JXVII Note") to JXVII Trust (“JXVII”). The JXVII Note is due and payable on January 27, 2026, the third anniversary of the date on which the JXVII Note was funded (the “Note Closing Date”), and accrues interest at a rate of 10% per year from the Note Closing Date, payable on a quarterly basis, until the JXVII Note is repaid in full. We have the right to prepay the JXVII Note at any time after the Note Closing Date and prior to the maturity date without premium or penalty upon providing seven days’ written notice to JXVII. Repayment of the JXVII Note has been guaranteed by the Company’s wholly-owned subsidiary, PMI.

The JXVII Note contains 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 JXVII Note may be accelerated. The JXVII Note also contains 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 JXVII Note) 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 JXVII.

Term Note Agreement

On October 22, 2024, we entered into a term note agreement with an individual investor for cash proceeds of $500,000 (the “Term Note”). The Term Note has an implicit interest rate of 15%. The Term Note has a term of 12 months and requires us to make interest only monthly payments in the amount of $6,250 with a $506,250 balloon payment at end of term.

HRSA Funding

In March 2020, the Coronavirus Aid, Relief, and Economic Security Act was enacted, providing for reimbursement to healthcare providers for COVID-19 tests provided to uninsured individuals, subject to continued available funding. There were no diagnostic services revenue for the three months ended September 30, 2024 and 2023, respectively, that was generated from this program for the uninsured. On March 22, 2022, the Health Resources & Services Administration's uninsured program stopped accepting claims for COVID-19 testing and treatment due to lack of sufficient funds. Despite requests from the Acting Director of the Office of Management and Budget and the White House Coordinator for COVID-19 Response for additional emergency funding for the uninsured program, additional emergency funding were not allocated to the Health Resources & Services Administration's uninsured program.

On January 30, 2023, the Administration announced that effective May 11, 2023, the federal Public Health Emergency would expire related to the COVID-19 pandemic. This expiration changes regulatory guidelines around COVID-19 testing including billing codes and reimbursement rates of in and out of network laboratories. As a result of the Public Health Emergency ending and the significant decrease in demand of COVID-19 testing, we have reduced the amount of diagnostic testing services that we provide since the second half of 2023.

At-the-Market Facility

On December 28, 2021, we entered into a Sales Agreement (the “Sales Agreement”) with ThinkEquity LLC (the “Sales Agent”), pursuant to which we may offer and sell, from time to time through the Sales Agent, shares of our common

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stock having an aggregate offering price of up to $100,000,000, subject to the terms and conditions of the Sales Agreement. We are not obligated to make any sales of shares under the Sales Agreement.

We will pay the Sales Agent a fixed commission rate of 2.0% of the aggregate gross proceeds from the sale of any shares pursuant to the Sales Agreement and have agreed to provide the Sales Agent with customary indemnification and contribution rights. We also agreed to reimburse the actual out-of-pocket accountable expenses of the Sales Agent up to $60,000 (of which a $25,000 advance was paid on December 7, 2021), which amount includes the fees and expenses of legal counsel to the Sales Agent up to $50,000, and to pay the costs associated with bound volumes of the public offering materials as well as commemorative mementos and lucite tombstones, in an amount not to exceed $3,000.

Impact of Inflation

We are subject to normal inflationary trends and anticipate that any increased costs for our contract manufacturing and retail operations would be passed on to our customers; however, any increased costs related to diagnostic services would be absorbed by the Company. Inflation could have a material effect on our business in the future.

Critical Accounting Policies and Estimates

Our significant accounting policies are described in Note 2 of the Notes to Condensed Consolidated Financial Statements included under Item 8 of this Part II. However, certain accounting policies are deemed “critical”, as they require management’s highest degree of judgment, estimates and assumptions. These accounting policies, estimates and disclosures have been discussed with the Audit Committee of our Board of Directors. A discussion of our critical accounting policies and estimates, the judgments and uncertainties affecting their application and the likelihood that materially different amounts would be reported under different conditions or using different assumptions are as follows:

Use of Estimates

The preparation of condensed consolidated 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 condensed consolidated financial statements and reported amounts of revenues and expenses during the respective reporting periods. Examples include revenue recognition and the estimation of the variable consideration associated with the diagnostic reimbursement rates, the allowance for credit losses and billing discrepancies, sales returns and allowances, 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. The estimates and assumptions are based on historical experience, current trends and other factors that management believes to be relevant at the time the condensed consolidated financial statements are prepared. Management reviews the accounting policies, assumptions, estimates and judgments on a quarterly basis. Actual results could differ from those estimates.

Revenue Recognition and Accounts Receivables

We generate revenue principally through four types of revenue streams: diagnostic services, contract manufacturing, genomic products and services, and retail and other. The process for estimating revenues and the ultimate collection of receivables involves assumptions and judgments.

Revenue from our diagnostic services is recognized when the lab test is complete, and the diagnostic test result is provided to the customer. Revenue from our genomics services is recognized when sequencing reports are provided to the customer. Revenue from our consumer products is recognized when the shipments to contract manufacturing and retailer customers are recognized at the time ownership is transferred to the customer. We bill the providers at standard price and take into consideration for negotiated discounts and an 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 may vary from the standard price.

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We carry our accounts receivable at cost less an allowance for credit losses. Allowances for credit losses are based upon our judgment regarding collectability. On a periodic basis, we evaluate our receivables and establish an allowance for credit losses, based on a history of past write-offs, collections, current credit conditions or generally accepted future trends in the industry and/or local economy. Accounts are written off as uncollectible at the time we determine that collections are unlikely. The reserve is not intended to address return activity or disputed balances with ongoing customers, as this should be addressed in a reserve for credit memos with a corresponding charge to revenue.

Goodwill 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 for impairment whenever events or changes in circumstances indicate that the carrying amount of these assets may not be fully recoverable. When it is determined that the carrying amount of long-lived assets or goodwill is impaired, impairment is measured by comparing an asset’s estimated fair 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, general economic and business conditions, among other factors.

Income Taxes

Accounting for income taxes requires recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities. These deferred taxes are measured by applying the provisions of tax laws in effect at the balance sheet date, including the impact of the Tax Cuts and Jobs Act (“TCJA”) enacted on December 22, 2017. The TCJA made broad and significant changes to the U.S. tax code that affects the year ended December 31, 2017, including, but not limited to, a change in the federal rate from 35% to 21% effective January 1, 2018.

We recognize in income the effect of a change in tax rates on deferred tax assets and liabilities in the period that includes the TCJA enactment date. 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 net current and non-current deferred tax asset is being provided.

Inventories

Inventory is valued at the lower of cost, determined on a first-in, first-out basis (“FIFO”), or net realizable value. We regularly review inventory quantities on hand and record a provision for excess and obsolete inventory based primarily on current and anticipated customer demand, production and laboratory requirements.

Recently Issued Accounting Standards, Adopted

In March 2024, the FASB issued ASU No. 2024-01, “Compensation-Stock Compensation (Topic 718): Scope Applications of Profits Interests and Similar Awards” ("ASU 2024-01"). ASU 2024-01 adds an example to Topic 718 which illustrates how to apply the scope guidance to determine whether profits interests and similar awards should be accounted for as share-based payment arrangements under Topic 718 or under other U.S. GAAP. ASU 2024-01 is effective for annual periods beginning after December 15, 2024, although early adoption is permitted. Upon adoption, ASU 2024-01 is not expected to have an impact on the Company’s condensed consolidated financial statements.

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Item 3. Quantitative and Qualitative Disclosures about Market Risk.

Like virtually all commercial enterprises, we can be exposed to the risk (“market risk”) that the cash flows to be received or paid relating to certain financial instruments could change as a result of changes in interest rate, exchange rates, commodity prices, equity prices and other market changes.

Our operations are not subject to risks of material foreign currency fluctuations, nor do we use derivative financial instruments in our investment practices. We place our marketable investments in instruments that meet high credit quality standards. We do not expect material losses with respect to our investment portfolio or excessive exposure to market risks associated with interest rates. The impact on our results of one percentage point change in short-term interest rates would not have a material impact on our future earnings, fair value, or cash flows related to investments in cash equivalents or interest-earning marketable securities.

Current economic conditions may cause a decline in business and consumer spending which could adversely affect our business and financial performance including the collection of accounts receivables, notes receivable, realization of inventory and recoverability of assets. In addition, our business and financial performance may be adversely affected by current and future economic conditions, including a reduction in the availability of credit, financial market volatility and recession.

There have been no material changes to our market risk exposures since December 31, 2023.

Item 4. Controls and Procedures.

Disclosure Controls and Procedures

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed with or submitted to the SEC under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to management, including our principal executive officer and principal financial and accounting officer, to allow timely decisions regarding required disclosure.

We carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of September 30, 2024. This evaluation was carried out under the supervision and with the participation of our principal executive officer and principal financial and accounting officer. Based on that review, our management, including our principal executive officer and principal financial and accounting officer, concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of September 30, 2024.

Material Weakness

A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our financial statements could occur but will not be prevented or detected on a timely basis. In connection with our 2023 Annual Report, our management conducted an evaluation of the effectiveness of our system of internal control over financial reporting based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework). Based upon that review, our management, including our principal executive officer and principal financial and accounting officer, concluded that the Company’s internal controls over financial reporting were not effective as of December 31, 2023 due to the material weaknesses described below.

•We did not adequately review certain account reconciliations or controls over the financial statement closing process, which resulted in misstatements in account reconciliations and resulted in several proposed unadjusted journal entries.

•Several errors were made related to recording revenue in the proper period, calculating current period revenue, and following Company policy regarding principal versus agent considerations, resulting in misstatements in accounts receivable, deferred revenue, and revenue for multiple subsidiaries. We relied heavily on the manual input process for these areas and it did not properly design and maintain controls to identify exceptions. In certain

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instances where revenue is recorded based on an estimation of rates, process were not in place to properly update the rates accordingly throughout the year.

•We did not design and maintain adequate controls over the identification of discrepancies relating to the calculated and recorded deferred costs and cost of sales, which such calculation and recording relied heavily on the manual input process and resulted in misstatements in deferred costs and cost of sales.

Remediation Plan

We are in the process of continuing to evaluate the material weaknesses and developing a detailed plan for remediation of the material weakness. The Company has hired a third-party accounting consultant and has recently added personnel to aid in implementing additional levels of review and approval. We will not consider the material weakness remediated until the remedial controls operate for a sufficient period of time and we have concluded, through testing, that these controls are effectively designed and operating effectively. We will continue to assess the effectiveness of our remediation efforts in connection with our future assessments of the effectiveness of internal control over financial reporting and disclosure controls and procedures throughout 2024. As we continue to evaluate and work to improve our internal control over financial reporting, we may execute additional measures to address potential control deficiencies or modify the remediation plan described above. We will continue to review and make necessary changes to the overall design of our internal control.

Changes in Internal Control Over Financial Reporting

Except as described above, no change in internal control over financial reporting occurred during the most recent quarter with respect to our operations, which materially affected, or is reasonable likely to materially affect, our internal controls over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

From time to time, we have been and may again become involved in legal proceedings arising in the ordinary course of business. We are not presently a party to any material litigation.

Item 1A. Risk Factors.

Factors that could cause our actual results to differ materially from those in this Quarterly Report are any of the risks described in our Annual Report on Form 10-K filed with the SEC on March 29, 2024. Any of these factors could result in a significant or material adverse effect on our results of operations or financial condition. Additional risk factors not presently known to us or that we currently deem immaterial may also impair our business or results of operations. 

As of the date of this Quarterly Report on Form 10-Q, there have been no material changes to the risk factors disclosed in our Annual Report on Form 10-K filed with the SEC on March 29, 2024, except as otherwise disclosed below. However, we may disclose changes to such factors or disclose additional factors from time to time in our future filings with the SEC. 

Servicing our debt will require a significant amount of cash, and we may not have sufficient cash flow from our business to pay our debt.

Our ability to make scheduled payments of the principal of, to pay interest on or to refinance our indebtedness depends on our future performance, which is subject to economic, financial, competitive and other factors beyond our control. We had, as of September 30, 2024, approximately $17.2 million of outstanding indebtedness, net of discounts and approximately $0.5 million in cash and cash equivalents. In addition, on August 15, 2024, we entered into the Amended JXVII Note that increased the principal amount from $7.6 million to $10.0 million; and on October 22, 2024, we entered into the Term Note for cash proceeds of $500,000. Our business may not generate cash flow from operations in the future sufficient to service our debt obligations and make necessary capital expenditures. If we are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as selling assets, restructuring debt or obtaining additional equity capital on terms that may be onerous or highly dilutive. Our ability to refinance our indebtedness will depend on the capital markets and our financial condition at such time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None

Item 3. Defaults Upon Senior Securities.

None

Item 4. Mine Safety Disclosures.

Not applicable

Item 5. Other Information.

None

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Item 6. Exhibits

Exhibit No.

Description

10.1

Amended and Restated Unsecured Promissory Note and Guaranty issued to JXVII Trust, dated August 15, 2024

31.1

Certification by the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2

Certification by the Principal Finance Officer and Principal Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1

Certification by the Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2

Certification by the Principal Finance Officer and Principal Accounting Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101. INS#

Inline XBRL Instance Document

101.SCH#

Inline XBRL Taxonomy Extension Schema Document

101.CAL#

Inline XBRL Taxonomy Extension Calculation Linkbase Document

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Inline XBRL Taxonomy Extension Definition Linkbase Document

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Inline XBRL Taxonomy Extension Presentation Linkbase Document

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Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	ProPhase Labs, Inc.

	By:	/s/ Ted Karkus
		Ted Karkus
		Chairman of the Board and Chief Executive Officer (Principal Executive Officer)
Date: November 13, 2024
	By:	/s/ Jed Latkin
		Jed Latkin
		Chief Operating Officer (Principal Financial Officer and Principal Accounting Officer)
Date: November 13, 2024

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Date	Price Target	Rating	Analyst
1/14/2022	$12.00 → $15.00	Buy	HC Wainwright & Co.
12/20/2021	$12.00	Buy	HC Wainwright & Co.
10/13/2021		Buy → Neutral	Dawson James

SEC Form 10-Q filed by ProPhase Labs Inc.

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SEC Form 4 filed by Karkus Ted William (Amendment)

SEC Form 4 filed by Latkin Jed

SEC Form 3 filed by new insider Latkin Jed

$PRPH SEC Filings

SEC Form 10-Q filed by ProPhase Labs Inc.

SEC Form NT 10-Q filed by ProPhase Labs Inc.

ProPhase Labs Inc. filed SEC Form 8-K: Results of Operations and Financial Condition, Regulation FD Disclosure, Financial Statements and Exhibits

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ProPhase Labs Announces Financial Results for the Three Months Ended September 30, 2024

ProPhase Labs Announces Closing of Public Offering of Common Stock

ProPhase Labs Inc. to Present Third Quarter 2024 Financial Results on November 13, 2024

ProPhase Labs Announces Financial Results for the Three Months Ended September 30, 2024

ProPhase Labs Inc. to Present Third Quarter 2024 Financial Results on November 13, 2024

ProPhase Labs Announces Financial Results for the Three Months Ended June 30, 2024

$PRPH Leadership Updates

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ProPhase Labs Unveils Project ZenQ-AI

Sidus Space Appoints Bill White as Chief Financial Officer

Nebula Genomics Strengthens Advisory Board with Appointment of Russ Altman, M.D., Ph.D.

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ProPhase Labs Announces Update On Pharmaloz Manufacturing Progress; Says PMI's 12-Month Forward Looking Revenue Run Rate With One Production Line Will Be ~$14M-16M And ~$5M In Pre-Tax Net Profits

ProPhase Labs Q1 2024 GAAP EPS $(0.07) Beats $(0.18) Estimate, Sales $3.634M Miss $9.860M Estimate

ProPhase Labs Unveils Project ZenQ-AI; Leveraging ProPhase Labs' AI Platform, Massive Genomics Database And Patented Esophageal Cancer Insights For Antibody Drug Conjugates Development

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HC Wainwright & Co. reiterated coverage on ProPhase Labs with a new price target

HC Wainwright & Co. initiated coverage on ProPhase Labs with a new price target

ProPhase downgraded by Dawson James

$PRPH Large Ownership Changes

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SEC Form SC 13D/A filed by ProPhase Labs Inc. (Amendment)

SEC Form SC 13D/A filed by ProPhase Labs Inc. (Amendment)

SEC Form SC 13D/A filed by ProPhase Labs Inc. (Amendment)

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