Financial Performance - For the three months ended September 30, 2022, net revenue was $24.2 million, a significant increase from $9.5 million for the same period in 2021, driven by a $13.4 million increase in diagnostic services revenue [225]. - For the nine months ended September 30, 2022, net revenue reached $100.8 million, up from $33.9 million in the same period in 2021, primarily due to a $64.2 million increase in diagnostic services revenue [235]. - Net income for the three months ended September 30, 2022, was $1.0 million, or $0.06 per share, compared to a net loss of $4.0 million, or ($0.26) per share, in Q3 2021 [234]. - Net income for the nine months ended September 30, 2022, was $20.9 million, or $1.33 per share, compared to a net loss of $4.3 million, or ($0.29) per share, in 2021 [243]. - Adjusted EBITDA for the nine months ended September 30, 2022, was $35.5 million, compared to $1.6 million in 2021 [248]. Revenue and Testing Volume - Overall diagnostic testing volume increased from 62,000 tests in Q3 2021 to 113,000 tests in Q3 2022, with 49.4% of tests reimbursed by the HRSA uninsured program [225]. - Approximately 31.5% of diagnostic services revenue for the nine months ended September 30, 2022, was generated from the HRSA program for uninsured individuals, down from 64.7% in 2021 [256]. Cost and Expenses - Cost of revenues for the nine months ended September 30, 2022, was $41.5 million, compared to $16.5 million for the same period in 2021, with diagnostic services accounting for $33.6 million of the total [236]. - General and administration expenses for Q3 2022 were $7.5 million, an increase from $5.9 million in Q3 2021, primarily due to higher personnel expenses and professional fees [230]. - General and administration expenses rose to $21.6 million in 2022 from $14.7 million in 2021, primarily due to higher personnel expenses and professional fees [239]. - Research and development costs decreased to $110,000 in Q3 2022 from $208,000 in Q3 2021, reflecting reduced personnel expenses [231]. - Research and development costs decreased to $0.2 million in 2022 from $0.4 million in 2021, mainly due to reduced personnel expenses [240]. - Interest expense decreased to $0.6 million in 2022 from $0.9 million in 2021, attributed to the repayment of convertible notes [242]. Profitability and Margins - Gross profit for the three months ended September 30, 2022, was $12.0 million, compared to $4.0 million in Q3 2021, resulting in a gross margin of 49.5% versus 42.0% in the prior year [228]. - Gross profit for the nine months ended September 30, 2022, was $59.4 million, up from $17.4 million in the same period of 2021, reflecting a gross margin increase from 51.2% to 58.9% [237]. - Diagnostic services gross margin improved to 63.4% in 2022 from 56.8% in 2021, driven by increased efficiencies and reduced costs [237]. Cash and Liquidity - Cash, cash equivalents, and restricted cash increased to $22.8 million as of September 30, 2022, from $8.7 million at December 31, 2021, with working capital rising to $53.6 million [251]. - The company estimates sufficient cash and liquidity to finance operations for at least 12 months, despite uncertainties in the diagnostic testing business beyond COVID-19 [252]. Accounting and Risk Management - The company evaluates accounts receivable and establishes an allowance for doubtful accounts based on past write-offs and current credit conditions [267]. - Goodwill and long-lived assets are reviewed annually for impairment, with fair value determined by market prices or projected future cash flows [269]. - The Tax Cuts and Jobs Act reduced the federal tax rate from 35% to 21%, effective January 1, 2018, impacting deferred tax assets and liabilities [270]. - Inventory is valued at the lower of cost or net realizable value, with provisions for excess and obsolete inventory based on customer demand [272]. - The adoption of ASU 2020-06 did not have a material impact on the company's financial statements or disclosures [273]. - The company is assessing the impact of ASU 2016-13, which introduces a current expected credit loss model effective for fiscal years beginning after December 15, 2022 [275]. - Current economic conditions may lead to a decline in business and consumer spending, adversely affecting accounts receivables and asset recoverability [279]. - There have been no material changes to market risk exposures since December 31, 2021, except for the effects of COVID-19 on the global economy [280]. Strategic Initiatives - The company continues to pursue acquisition opportunities for technologies and products within and outside the consumer products industry [223].

NOVEMBER 2022 A ProPhase | --- | --- | --- | --- | |-------|-------|-------|-------------------------| | | | | ProPhaseLabs.com | | | | | CORPORATE PRESENTATION | | | | | NASDAQ: PRPH | FORWARD LOOKING STATEMENTS This presentation contains forward‐looking statements relating to our strategy and business objectives. All statements other than statements of historical facts included in this presentation may be deemed to be forward‐looking statements including statements regarding our strategy, plans, objective ...

SEPTEMBER 2022 ▲ ProPhase | --- | --- | --- | --- | |-------|-------|-------|------------------------------------------| | | | | | | | | | ProPhaseLabs.com CORPORATE PRESENTATION | | | | | | | | | | NASDAQ: PRPH | FORWARD LOOKING STATEMENTS This presentation contains forward‐looking statements relating to our strategy and business objectives. All statements other than statements of historical facts included in this presentation may be deemed to be forward‐looking statements including statements regarding ou ...

[PART I. FINANCIAL INFORMATION](index=4&type=section&id=PART%20I.%20FINANCIAL%20INFORMATION) [Item 1. Financial Statements (Unaudited)](index=4&type=section&id=Item%201.%20Financial%20Statements) Unaudited condensed consolidated financial statements and accompanying notes detail the company's financial position and performance [Condensed Consolidated Balance Sheets](index=4&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) | Metric | June 30, 2022 (in thousands) | December 31, 2021 (in thousands) | | :-------------------------------- | :----------------------------- | :----------------------------- | | **ASSETS** | | | | Cash and cash equivalents | $23,959 | $8,408 | | Marketable debt securities | $3,539 | $8,779 | | Accounts receivable, net | $36,670 | $37,708 | | Total current assets | $70,275 | $61,317 | | TOTAL ASSETS | $97,947 | $89,295 | | **LIABILITIES AND STOCKHOLDERS' EQUITY** | | | | Accounts payable | $4,445 | $7,026 | | Income tax payable | $6,787 | $1,312 | | Total current liabilities | $16,722 | $15,524 | | Unsecured convertible promissory notes, net | $7,998 | $9,996 | | Total liabilities | $29,789 | $30,667 | | Total stockholders' equity | $68,158 | $58,628 | | TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $97,947 | $89,295 | [Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations%20and%20Comprehensive%20Income%20(Loss)) | Metric | Three Months Ended June 30, 2022 (in thousands) | Three Months Ended June 30, 2021 (in thousands) | Six Months Ended June 30, 2022 (in thousands) | Six Months Ended June 30, 2021 (in thousands) | | :------------------------------------ | :------------------------------------------ | :------------------------------------------ | :---------------------------------------- | :---------------------------------------- | | Revenues, net | $29,092 | $9,142 | $76,623 | $24,413 | | Cost of revenues | $10,372 | $4,676 | $29,226 | $11,020 | | Gross profit | $18,720 | $4,466 | $47,397 | $13,393 | | Income (loss) from operations | $10,587 | $(1,450) | $26,733 | $(229) | | Net income (loss) | $7,446 | $(1,395) | $19,940 | $(338) | | Basic EPS | $0.48 | $(0.09) | $1.28 | $(0.02) | | Diluted EPS | $0.40 | $(0.09) | $1.07 | $(0.02) | [Condensed Consolidated Statements of Stockholders' Equity](index=7&type=section&id=Condensed%20Consolidated%20Statements%20of%20Stockholders'%20Equity) | Metric | June 30, 2022 (in thousands) | December 31, 2021 (in thousands) | | :-------------------------- | :--------------------------- | :--------------------------- | | Common Stock Outstanding | 15,722,827 | 15,485,900 | | Additional Paid-in Capital | $106,162 | $104,552 | | Retained Earnings | $13,231 | $2,642 | | Treasury Stock | $(51,015) | $(48,407) | | Total Stockholders' Equity | $68,158 | $58,628 | - The company declared special cash dividends of **$0.30 per share** on February 14, 2022 (**$4.6 million**) and May 9, 2022 (**$4.7 million**)[125](index=125&type=chunk)[126](index=126&type=chunk) [Condensed Consolidated Statements of Cash Flows](index=9&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) | Cash Flow Activity | Six Months Ended June 30, 2022 (in thousands) | Six Months Ended June 30, 2021 (in thousands) | | :------------------------------------------ | :------------------------------------------ | :------------------------------------------ | | Net cash provided by (used in) operating activities | $25,108 | $(3,450) | | Net cash provided by (used in) investing activities | $3,596 | $(21,778) | | Net cash (used in) provided by financing activities | $(13,403) | $36,089 | | Increase in cash, cash equivalents and restricted cash | $15,301 | $10,861 | | Cash, cash equivalents and restricted cash, at end of period | $23,959 | $17,677 | [Notes to Condensed Consolidated Financial Statements](index=11&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements) [Note 1 - Organization and Business](index=11&type=section&id=Note%201%20-%20Organization%20and%20Business) - ProPhase Labs, Inc is a diversified company offering diagnostic testing (including COVID-19 and RPP molecular tests), genomics testing, and contract manufacturing of OTC consumer healthcare products and dietary supplements[21](index=21&type=chunk)[26](index=26&type=chunk) - The company operates through two segments: diagnostic services (ProPhase Diagnostics, ProPhase Precision Medicine) and consumer products (Pharmaloz Manufacturing, TK Supplements®)[21](index=21&type=chunk)[22](index=22&type=chunk)[23](index=23&type=chunk)[25](index=25&type=chunk)[26](index=26&type=chunk) - ProPhase BioPharma, Inc was formed on June 28, 2022, for the licensing, development, and commercialization of novel drugs and compounds, including Equivir, Equivir G, and PIM kinase inhibitors Linebacker LB-1 and LB-2[24](index=24&type=chunk) [Note 2 - Summary of Significant Accounting Policies](index=11&type=section&id=Note%202%20-%20Summary%20of%20Significant%20Accounting%20Policies) - The company's diagnostic service business is heavily influenced by demand for COVID-19 testing, pricing, reimbursement collection, and regulatory changes[32](index=32&type=chunk)[35](index=35&type=chunk) - The HRSA program, which covered COVID-19 testing for uninsured individuals, stopped accepting claims on March 22, 2022, due to insufficient funds, resulting in **$16.7 million in unrecognized revenue** for tests performed for uninsured individuals from March 23 to June 30, 2022[34](index=34&type=chunk) - The personal genomics business is influenced by demand, marketing capabilities, and regulatory compliance[37](index=37&type=chunk) - Consumer sales are seasonal, with **higher revenues in Q1, Q3, and Q4** due to cold season, and lowest in Q2[38](index=38&type=chunk) | Marketable Debt Securities (in thousands) | June 30, 2022 | December 31, 2021 | | :-------------------------------- | :------------ | :---------------- | | U.S. government obligations | $984 | $667 | | Corporate obligations | $2,555 | $8,112 | | Total Fair Value | $3,539 | $8,779 | | Accounts Receivable (in thousands) | June 30, 2022 | December 31, 2021 | | :------------------------- | :------------ | :---------------- | | Trade accounts receivable | $35,793 | $18,520 | | Unbilled accounts receivable | $6,766 | $23,089 | | Less allowances | $(5,889) | $(3,901) | | Total accounts receivable | $36,670 | $37,708 | | Inventory Components (in thousands) | June 30, 2022 | December 31, 2021 | | :-------------------------------- | :------------ | :---------------- | | Diagnostic services testing material | $2,122 | $2,989 | | Raw materials | $1,721 | $1,514 | | Work in process | $676 | $260 | | Finished goods | $421 | $272 | | Inventory valuation reserve | $(431) | $(435) | | Inventory, net | $4,509 | $4,600 | | Deferred Revenue by Recognition Period (in thousands) | June 30, 2022 | December 31, 2021 | | :------------------------------------ | :------------ | :---------------- | | 0-12 Months | $2,430 | $2,034 | | 13-24 Months | $699 | $530 | | Over 24 Months | $284 | $375 | | Total | $3,413 | $2,939 | | Revenue by Customer Type (in thousands) | Q2 2022 | Q2 2021 | H1 2022 | H1 2021 | | :------------------------------ | :------ | :------ | :------ | :------ | | Diagnostic services | $26,158 | $7,536 | $71,071 | $20,274 | | Contract manufacturing | $1,759 | $1,041 | $2,913 | $2,949 | | Retail and others | $465 | $565 | $1,011 | $1,190 | | Genomic products and services | $710 | $- | $1,628 | $- | | Total revenue, net | $29,092 | $9,142 | $76,623 | $24,413 | [Note 3 - Business Acquisition](index=22&type=section&id=Note%203%20-%20Business%20Acquisition) - On August 10, 2021, ProPhase Precision acquired Nebula Genomics, Inc for approximately **$14.3 million**, with a portion paid in common stock and **$1.08 million held in escrow**[105](index=105&type=chunk) | Nebula Acquisition - Assets Acquired & Liabilities Assumed (in thousands) | | :-------------------------------------- | :----- | | Short term investments | $1,800 | | Definite-lived intangible assets | $10,990 | | Total assets acquired | $13,473 | | Total liabilities assumed | $(5,245) | | Net identifiable assets acquired | $8,228 | | Goodwill | $4,446 | | Total consideration, net of cash acquired | $12,674 | | Intangible Assets from Nebula Acquisition (in thousands) | | :------------------------------ | :----- | | Trade names | $5,550 | | Proprietary intellectual property | $4,260 | | Customer relationships | $1,180 | | Total | $10,990 | [Note 4 - Goodwill and Acquired Intangible Assets](index=23&type=section&id=Note%204%20-%20Goodwill%20and%20Acquired%20Intangible%20Assets) - There were **no changes in goodwill** for the six months ended June 30, 2022[112](index=112&type=chunk) - Amortization expense for acquired intangible assets was **$1.4 million** for the six months ended June 30, 2022, up from **$207,000** in the prior year[115](index=115&type=chunk) | Intangible Assets, Net (in thousands) | June 30, 2022 | December 31, 2021 | | :-------------------------------- | :------------ | :---------------- | | Trade names | $5,550 | $5,550 | | Proprietary intellectual property | $4,260 | $4,260 | | Customer relationships | $1,180 | $1,180 | | CLIA license | $1,307 | $1,307 | | Less: accumulated amortization | $(2,863) | $(1,445) | | Total intangible assets, net | $9,434 | $10,852 | [Note 5 - Property, Plant and Equipment](index=24&type=section&id=Note%205%20-%20Property,%20Plant%20and%20Equipment) - Depreciation expense for the six months ended June 30, 2022, was **$1.098 million**, compared to **$900,000** for the same period in 2021[116](index=116&type=chunk) | Property, Plant and Equipment (in thousands) | June 30, 2022 | December 31, 2021 | | :----------------------------------- | :------------ | :---------------- | | Land | $352 | $352 | | Building improvements | $1,729 | $1,729 | | Machinery | $4,705 | $4,740 | | Lab equipment | $4,440 | $4,330 | | Computer equipment | $2,130 | $1,211 | | Furniture and fixtures | $468 | $468 | | Less: accumulated depreciation | $(7,572) | $(6,883) | | Total property, plant and equipment, net | $6,252 | $5,947 | [Note 6 - Unsecured Convertible Promissory Notes Payable](index=25&type=section&id=Note%206%20-%20Unsecured%20Convertible%20Promissory%20Notes%20Payable) - One of the two September 2020 unsecured convertible promissory notes, with a principal of **$2 million**, was paid off on February 28, 2022[118](index=118&type=chunk)[119](index=119&type=chunk) - The remaining outstanding note is due September 15, 2023, accrues **10% annual interest**, and allows the lender to convert up to **$3 million** into common stock at **$3.00 per share**[120](index=120&type=chunk) - Interest expense related to these notes decreased to **$433,000** for the six months ended June 30, 2022, from **$574,000** in the prior year, due to the repayment[122](index=122&type=chunk)[234](index=234&type=chunk) [Note 7 - Stockholders' Equity](index=25&type=section&id=Note%207%20-%20Stockholders'%20Equity) - The company declared special cash dividends of **$0.30 per share** on February 14, 2022 (**$4.6 million**) and May 9, 2022 (**$4.7 million**)[125](index=125&type=chunk)[126](index=126&type=chunk) - The **$6.0 million stock repurchase program** approved on September 8, 2021, expired on March 30, 2022, with **no repurchases made** during the six months ended June 30, 2022[128](index=128&type=chunk) - Stockholders approved the 2022 Directors' Equity Compensation Plan and the 2022 Equity Compensation Plan, increasing shares reserved for issuance by **300,000** and **1,000,000 shares**, respectively[129](index=129&type=chunk)[131](index=131&type=chunk) - The CEO Option exercise price under the 2018 Stock Plan was adjusted to **$0.60 per share** following the special cash dividend[134](index=134&type=chunk) - A non-qualified stock option (CFO Option) to purchase **400,000 shares** was issued to the CFO, Bill White, with an exercise price of **$6.74 per share**, adjusted to **$6.44** after the special dividend[138](index=138&type=chunk) - The company recognized **$0 share-based compensation expense** for stock warrants during the six months ended June 30, 2022, compared to **$193,000** in the prior year[144](index=144&type=chunk) | Stock Options Activity (in thousands, except per share) | Outstanding as of Jan 1, 2022 | Granted | Cashless exercised | Forfeited | Outstanding as of Jun 30, 2022 | | :-------------------------------------- | :---------------------------- | :------ | :----------------- | :-------- | :----------------------------- | | Number of Shares | 5,110 | 400 | (570) | (20) | 4,920 | | Weighted Average Exercise Price | $3.27 | $6.44 | $2.66 | $2.87 | $3.30 | [Note 8 - Defined Contribution Plans](index=28&type=section&id=Note%208%20-%20Defined%20Contribution%20Plans) - Company contributions to the 401(k) plan increased to **$99,000** for the six months ended June 30, 2022, from **$35,000** in the prior year[145](index=145&type=chunk) [Note 9 - Income Taxes](index=29&type=section&id=Note%209%20-%20Income%20Taxes) - As of June 30, 2022, the company has **net deferred tax liabilities**, a change from net deferred tax assets with a full valuation allowance at December 31, 2021, primarily due to the utilization of net operating losses[147](index=147&type=chunk) - The effective tax rate for the six months ended June 30, 2022, was **24.24%**, driven by federal and state taxes and a decrease in the valuation allowance[148](index=148&type=chunk) [Note 10 - Other Current Liabilities](index=29&type=section&id=Note%2010%20-%20Other%20Current%20Liabilities) | Other Current Liabilities (in thousands) | June 30, 2022 | December 31, 2021 | | :------------------------------- | :------------ | :---------------- | | Accrued commissions | $849 | $1,283 | | Accrued payroll | $81 | $514 | | Accrued expenses | $226 | $300 | | Accrued returns | $309 | $338 | | Accrued benefits and vacation | $52 | $60 | | Total other current liabilities | $1,517 | $2,495 | [Note 11 - Commitments and Contingencies](index=29&type=section&id=Note%2011%20-%20Commitments%20and%20Contingencies) - The manufacturing agreement with Nurya Brands, Inc (for Cold-EEZE® products) is in effect until March 29, 2023, with options for four successive one-year renewals[150](index=150&type=chunk) - The company is **not currently a party to any material litigation**[153](index=153&type=chunk) | Future Executive Employment Obligations (in thousands) | | :----------------------------------- | :----- | | Remaining periods in 2022 | $738 | | 2023 | $1,375 | | 2024 | $1,375 | | 2025 | $1,375 | | 2026 | $1,375 | | Total | $6,238 | [Note 12 - Leases](index=30&type=section&id=Note%2012%20-%20Leases) - The company leases a 4,000 sq ft CLIA lab in Old Bridge, New Jersey (24-month term) and a second-floor premises in Garden City, New York (10-year, 7-month term)[154](index=154&type=chunk)[156](index=156&type=chunk) - On June 10, 2022, the company entered into a new lease for approximately **4,516 sq ft** on the first floor of the Garden City building to expand lab capabilities[161](index=161&type=chunk) | Operating Lease Information (in thousands) | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :--------------------------------------- | :----------------------------- | :----------------------------- | | Operating lease cost | $408 | $408 | | Operating cash flows used in operating leases | $(387) | $(36) | | Weighted-average remaining lease term (years) | 9.0 | 9.9 | | Weighted-average discount rate | 10.00% | 10.00% | | Operating Lease Maturities (in thousands) | | :------------------------------------ | :----- | | Remaining periods in 2022 | $387 | | Year Ended December 31, 2023 | $738 | | Year Ended December 31, 2024 | $747 | | Year Ended December 31, 2025 | $768 | | Year Ended December 31, 2026 | $783 | | Thereafter | $3,876 | | Total | $7,299 | | Less present value discount | $(2,585) | | Operating lease liabilities | $4,714 | [Note 13 - Consulting Agreement and Secured Promissory Note Receivable](index=32&type=section&id=Note%2013%20-%20Consulting%20Agreement%20and%20Secured%20Promissory%20Note%20Receivable) - The company loaned **$3.0 million** to a consultant via a secured promissory note, later increased to **$3.75 million**[168](index=168&type=chunk)[172](index=172&type=chunk) - The consultant defaulted on the note, leading the company to file a complaint and reduce the carrying value of the note to **$0** as of December 31, 2021, with a **$3.75 million charge-off**[175](index=175&type=chunk)[176](index=176&type=chunk) [Note 14 - Significant Customer Concentrations](index=33&type=section&id=Note%2014%20-%20Significant%20Customer%20Concentrations) - One diagnostic services client accounted for **67.2% of revenue** for Q2 2022; for H1 2022, three clients accounted for **48.9%**, **15.7%**, and **10.0%** of revenue[177](index=177&type=chunk)[178](index=178&type=chunk) - Two diagnostic services payers comprised **51.1%** and **19.3%** of total reimbursement receivable balances at June 30, 2022[179](index=179&type=chunk) - The company relies on a **sole supplier** for saliva collection kits used in personal genomics services, posing a supply chain risk[180](index=180&type=chunk) [Note 15 - Segment Information](index=33&type=section&id=Note%2015%20-%20Segment%20Information) - The company operates in two segments: **diagnostic services** (COVID-19 and other diagnostic testing) and **consumer products** (contract manufacturing, retail, and personal genomics)[181](index=181&type=chunk) | Segment Net Revenues (in thousands) | Q2 2022 | Q2 2021 | H1 2022 | H1 2021 | | :-------------------------- | :------ | :------ | :------ | :------ | | Diagnostic services | $26,158 | $7,537 | $71,071 | $20,274 | | Consumer products | $2,934 | $1,605 | $5,552 | $4,139 | | Consolidated net revenue | $29,092 | $9,142 | $76,623 | $24,413 | | Segment Income (Loss) from Operations, before income taxes (in thousands) | Q2 2022 | Q2 2021 | H1 2022 | H1 2021 | | :-------------------------------------------------------- | :------ | :------ | :------ | :------ | | Diagnostic services | $12,872 | $1,164 | $32,898 | $4,004 | | Consumer products | $(313) | $540 | $(2,176) | $505 | | Unallocated corporate | $(2,148) | $(3,099) | $(4,401) | $(4,847) | | Total income from operations, before income taxes | $10,411 | $(1,395) | $26,321 | $(338) | | Segment Assets (in thousands) | June 30, 2022 | December 31, 2021 | | :---------------------- | :------------ | :---------------- | | Diagnostic services | $49,493 | $51,150 | | Consumer products | $23,027 | $24,139 | | Unallocated corporate | $25,427 | $14,006 | | Total assets | $97,947 | $89,295 | [Note 16 - Earnings Per Share](index=34&type=section&id=Note%2016%20-%20Earnings%20Per%20Share) | EPS Reconciliation (in thousands, except per share) | Q2 2022 | Q2 2021 | H1 2022 | H1 2021 | | :------------------------------------------ | :------ | :------ | :------ | :------ | | Net income - basic | $7,446 | $(1,395) | $19,940 | $(338) | | Interest on unsecured convertible promissory note | $200 | $- | $432 | $- | | Net income - diluted | $7,646 | $(1,395) | $20,372 | $(338) | | Weighted average shares outstanding - basic | 15,576 | 15,154 | 15,531 | 14,860 | | Diluted shares - Stock Options | 2,635 | $- | 2,389 | $- | | Diluted shares - Stock Warrants | 261 | $- | 244 | $- | | Unsecured convertible promissory note | 800 | $- | 800 | $- | | Weighted average shares outstanding - diluted | 19,272 | 15,154 | 18,964 | 14,860 | | Anti-dilutive Securities (in thousands) | Q2 2022 | Q2 2021 | H1 2022 | H1 2021 | | :------------------------------ | :------ | :------ | :------ | :------ | | Common stock purchase warrants | 455 | 4,378 | 455 | 4,378 | | Stock Options | 275 | 905 | 275 | 905 | | Unsecured convertible promissory note | - | 1,000 | - | 1,000 | | Total Anti-dilutive securities | 730 | 5,283 | 730 | 5,283 | [Note 17 - Related Parties](index=35&type=section&id=Note%2017%20-%20Related%20Parties) - Jason Karkus, son of CEO Ted Karkus, received **$110,000 in compensation** for the six months ended June 30, 2022, up from **$84,000** in the prior year[189](index=189&type=chunk) [Note 18 - Subsequent Event](index=35&type=section&id=Note%2018%20-%20Subsequent%20Event) - On July 19, 2022, ProPhase BioPharma entered into a license agreement with Global BioLife, Inc for exclusive worldwide rights to develop and commercialize Linebacker LB1 and LB2[190](index=190&type=chunk) - The license includes an upfront fee of **$50,000**, milestone payments of **$900,000** (Phase 3) and **$1 million** (NDA approval), and **3% royalties** on Net Revenue[193](index=193&type=chunk)[194](index=194&type=chunk) - On July 26, 2022, the Board authorized a new stock repurchase program of up to **$6 million** in common stock[198](index=198&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=37&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses financial condition, operational results, liquidity, and the significant impact of diagnostic services revenue [Forward-Looking Statements](index=37&type=section&id=Forward-Looking%20Statements) - The report contains forward-looking statements subject to known and unknown risks, including the ability to generate revenue, collect payments, and manage growth[202](index=202&type=chunk)[203](index=203&type=chunk)[204](index=204&type=chunk) [General Business Overview](index=38&type=section&id=General%20Business%20Overview) - ProPhase Labs is a diversified company with diagnostic services (COVID-19, RPP, genomics) and consumer products (OTC healthcare, dietary supplements, contract manufacturing)[206](index=206&type=chunk) - Diagnostic services revenue is highly dependent on COVID-19 testing demand, pricing, and reimbursement, while consumer sales are seasonal[211](index=211&type=chunk)[213](index=213&type=chunk)[215](index=215&type=chunk) - The company continues to pursue acquisition opportunities within and outside the consumer products industry[214](index=214&type=chunk) [Results of Operations](index=39&type=section&id=Results%20of%20Operations) Three Months Ended June 30, 2022 vs. 2021 | Metric | Q2 2022 (in millions) | Q2 2021 (in millions) | Change (in millions) | % Change | | :-------------------------- | :-------------------- | :-------------------- | :------------------- | :------- | | Net Revenue | $29.1 | $9.1 | $20.0 | 219.8% | | Diagnostic Services Revenue | $26.2 | $7.5 | $18.7 | 249.3% | | Consumer Products Revenue | $2.9 | $1.6 | $1.3 | 81.3% | | Gross Profit | $18.7 | $4.5 | $14.2 | 315.6% | | Gross Margin | 64.3% | 48.9% | 15.4 pp | - | | Net Income (Loss) | $7.4 | $(1.4) | $8.8 | - | | Basic EPS | $0.48 | $(0.09) | $0.57 | - | | Diluted EPS | $0.40 | $(0.09) | $0.49 | - | - Diagnostic services revenue increased due to higher COVID-19 testing volumes (**144,000 tests in Q2 2022** vs 56,000 in Q2 2021) and a higher average variable consideration per adjudicated test[216](index=216&type=chunk) - Diagnostic services gross margin improved to **67.9%** (from 53.8%) due to increased lab processing efficiencies and lower costs[219](index=219&type=chunk) Six Months Ended June 30, 2022 vs. 2021 | Metric | H1 2022 (in millions) | H1 2021 (in millions) | Change (in millions) | % Change | | :-------------------------- | :-------------------- | :-------------------- | :------------------- | :------- | | Net Revenue | $76.6 | $24.4 | $52.2 | 213.9% | | Diagnostic Services Revenue | $71.1 | $20.3 | $50.8 | 250.2% | | Consumer Products Revenue | $5.5 | $4.1 | $1.4 | 34.1% | | Gross Profit | $47.4 | $13.4 | $34.0 | 253.7% | | Gross Margin | 61.9% | 54.9% | 7.0 pp | - | | Net Income (Loss) | $19.9 | $(0.3) | $20.2 | - | | Basic EPS | $1.28 | $(0.02) | $1.30 | - | | Diluted EPS | $1.07 | $(0.02) | $1.09 | - | - Diagnostic services revenue increased due to higher COVID-19 testing volumes (**521,000 tests in H1 2022** vs 169,000 in H1 2021) and a higher average variable consideration per adjudicated test[226](index=226&type=chunk) - Diagnostic services gross margin improved to **64.7%** (from 61.4%) due to increased lab processing efficiencies and lower costs[229](index=229&type=chunk) [Non-GAAP Financial Measure and Reconciliation](index=41&type=section&id=Non-GAAP%20Financial%20Measure%20and%20Reconciliation) - The company uses non-GAAP measures EBITDA and Adjusted EBITDA to evaluate ongoing economic performance[237](index=237&type=chunk)[239](index=239&type=chunk) | Metric | Q2 2022 (in thousands) | Q2 2021 (in thousands) | H1 2022 (in thousands) | H1 2021 (in thousands) | | :-------------------------- | :--------------------- | :--------------------- | :--------------------- | :--------------------- | | GAAP net income | $7,446 | $(1,395) | $19,940 | $(338) | | EBITDA | $11,854 | $(783) | $29,174 | $895 | | Adjusted EBITDA | $12,393 | $479 | $30,455 | $2,771 | [Liquidity and Capital Resources](index=42&type=section&id=Liquidity%20and%20Capital%20Resources) - Cash, cash equivalents, and restricted cash increased to **$24.0 million** at June 30, 2022, from **$8.7 million** at December 31, 2021[243](index=243&type=chunk) - Net cash provided by operating activities was **$25.1 million** for the six months ended June 30, 2022[243](index=243&type=chunk) - The company estimates sufficient cash and liquidity for at least 12 months, but future needs depend on business diversification[244](index=244&type=chunk) - The HRSA uninsured program suspension resulted in **$16.7 million in unrecognized revenue** for COVID-19 testing from March 23 to June 30, 2022[248](index=248&type=chunk) - The company has an At-the-Market facility to sell up to **$100 million** in common stock, but no shares have been sold as of June 30, 2022[249](index=249&type=chunk)[252](index=252&type=chunk) [Impact of Inflation](index=44&type=section&id=Impact%20of%20Inflation) - Inflation has **not had a material effect** on the business; increased costs are expected to be passed on to customers or absorbed by the company[254](index=254&type=chunk) [Critical Accounting Policies and Estimates](index=44&type=section&id=Critical%20Accounting%20Policies%20and%20Estimates) - Critical accounting policies involve significant management judgment, including revenue recognition, allowances for receivables, and impairment of assets[256](index=256&type=chunk)[257](index=257&type=chunk)[259](index=259&type=chunk)[261](index=261&type=chunk)[262](index=262&type=chunk)[264](index=264&type=chunk) [Recently Adopted Accounting Standards](index=45&type=section&id=Recently%20Adopted%20Accounting%20Standards) - The company adopted ASU 2020-06 and ASU 2021-04 on January 1, 2022, neither of which had a material impact on the financial statements[265](index=265&type=chunk)[266](index=266&type=chunk) [Recently Issued Accounting Standards, Not Yet Adopted](index=46&type=section&id=Recently%20Issued%20Accounting%20Standards,%20Not%20Yet%20Adopted) - The company is assessing the impact of ASU 2016-13 (CECL model) and ASU 2022-03 (Fair Value Measurement) on its financial statements[267](index=267&type=chunk)[268](index=268&type=chunk) [Item 3. Quantitative and Qualitative Disclosures about Market Risk](index=46&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20about%20Market%20Risk) The company's market risk exposure is primarily related to interest rates and credit, with no material changes reported - The company is exposed to market risk from changes in interest rates but does not use derivative financial instruments[269](index=269&type=chunk)[270](index=270&type=chunk) - A **one percentage point change** in short-term interest rates is not expected to materially impact future earnings, fair value, or cash flows[270](index=270&type=chunk) - Current economic conditions, including the COVID-19 pandemic, could adversely affect business and financial performance[271](index=271&type=chunk)[272](index=272&type=chunk) [Item 4. Controls and Procedures](index=47&type=section&id=Item%204.%20Controls%20and%20Procedures) Disclosure controls are deemed ineffective due to a material weakness in diagnostic billing, with remediation efforts underway - As of June 30, 2022, the company's disclosure controls and procedures were **not effective** due to a material weakness in internal control over financial reporting[274](index=274&type=chunk) - The material weakness relates to a lack of appropriate procedures and controls for diagnostic billing and revenue[276](index=276&type=chunk) - Management is committed to remediating the material weakness through process improvements, system enhancements, and comprehensive reviews[277](index=277&type=chunk) [PART II. OTHER INFORMATION](index=48&type=section&id=PART%20II.%20OTHER%20INFORMATION) [Item 1. Legal Proceedings](index=48&type=section&id=Item%201.%20Legal%20Proceedings) The company is not currently involved in any material legal proceedings - The company is **not presently a party to any material litigation**[282](index=282&type=chunk) [Item 1A. Risk Factors](index=48&type=section&id=Item%201A.%20Risk%20Factors) Key risks include managing growth, diagnostic service payment collection, biopharmaceutical development, and IP protection [Our failure to manage our growth successfully could harm our growth and operating results.](index=48&type=section&id=Our%20failure%20to%20manage%20our%20growth%20successfully%20could%20harm%20our%20growth%20and%20operating%20results.) - The company has expanded into new businesses since 2020 and incurs significant expenses, with **no assurance that these new lines will achieve profitability**[286](index=286&type=chunk)[287](index=287&type=chunk) [Our ability to achieve or sustain profitability depends on our collection of payment for the tests we deliver, which we may not be able to do successfully.](index=48&type=section&id=Our%20ability%20to%20achieve%20or%20sustain%20profitability%20depends%20on%20our%20collection%20of%20payment%20for%20the%20tests%20we%20deliver,%20which%20we%20may%20not%20be%20able%20to%20do%20successfully.) - Approximately **48% of diagnostic services revenue** for H1 2022 was from the HRSA uninsured program, which stopped accepting claims on March 22, 2022, leading to **$16.7 million in unrecognized revenue**[288](index=288&type=chunk) - Inability to maintain past payment collection levels due to healthcare policy changes could adversely affect revenue and profitability[289](index=289&type=chunk) [Risks Related to Our Biopharmaceutical Development Operations](index=49&type=section&id=Risks%20Related%20to%20Our%20Biopharmaceutical%20Development%20Operations) - ProPhase BioPharma (PBIO) is in **early development stages**, with no commercialized products expected for several years, if ever[290](index=290&type=chunk) - Product candidates may have adverse side effects, fail to demonstrate safety/efficacy, or fail to receive regulatory approval[290](index=290&type=chunk) - Delays or difficulties in patient enrollment for clinical trials could hinder development and regulatory approval[295](index=295&type=chunk)[297](index=297&type=chunk) - Clinical trials are **expensive, time-consuming, and uncertain**, with potential for suspension or termination[298](index=298&type=chunk)[300](index=300&type=chunk)[302](index=302&type=chunk) - Failure to adequately demonstrate safety and efficacy in clinical trials could delay or prevent regulatory approval and commercialization[303](index=303&type=chunk) - Serious adverse events or undesirable side effects from product candidates could delay or prevent regulatory approval[306](index=306&type=chunk)[308](index=308&type=chunk) - The regulatory approval process is **expensive, lengthy, and uncertain**, with no guarantee of obtaining necessary approvals[313](index=313&type=chunk)[314](index=314&type=chunk)[315](index=315&type=chunk) - PBIO's ability to generate product revenue depends on establishing effective marketing and sales capabilities[316](index=316&type=chunk)[318](index=318&type=chunk) - Market acceptance of product candidates by physicians, patients, and the medical community is crucial for commercial success[319](index=319&type=chunk)[320](index=320&type=chunk)[322](index=322&type=chunk) - Market opportunities for product candidates may be smaller than anticipated, potentially limiting profitability[323](index=323&type=chunk) - Products may be subject to unfavorable pricing regulations, third-party reimbursement practices, or healthcare reform initiatives[324](index=324&type=chunk)[325](index=325&type=chunk)[327](index=327&type=chunk)[328](index=328&type=chunk) - Intense competition from other biotechnology and pharmaceutical companies with greater resources could render product candidates non-competitive[331](index=331&type=chunk) [Risks Related to Our Intellectual Property](index=60&type=section&id=Risks%20Related%20to%20Our%20Intellectual%20Property) - Failure to obtain and maintain effective patent or license rights could impair the company's ability to compete effectively[333](index=333&type=chunk)[336](index=336&type=chunk)[337](index=337&type=chunk) - The patent position in the biotechnology and pharmaceutical industries is **highly uncertain**[336](index=336&type=chunk) - Limited patent lifespans may reduce the period of market exclusivity and expose products to generic competition[338](index=338&type=chunk) - Third-party claims of intellectual property infringement could lead to substantial liability or prevent development[339](index=339&type=chunk)[340](index=340&type=chunk) - Reliance on third parties requires sharing trade secrets, increasing the risk of misappropriation or unauthorized disclosure[341](index=341&type=chunk) - Protecting intellectual property rights globally is expensive and challenging, as foreign laws may offer less protection[342](index=342&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=62&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) There were no unregistered sales of equity securities or use of proceeds to report for the period - **No unregistered sales** of equity securities or use of proceeds occurred during the period[345](index=345&type=chunk) [Item 3. Defaults Upon Senior Securities](index=63&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) There were no defaults upon senior securities during the period - **No defaults** upon senior securities occurred during the period[346](index=346&type=chunk) [Item 4. Mine Safety Disclosures](index=64&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) Mine safety disclosures are not applicable to the company - Mine safety disclosures are **not applicable** to the company[347](index=347&type=chunk) [Item 5. Other Information](index=64&type=section&id=Item%205.%20Other%20Information) There is no other information to report - **No other information** to report[347](index=347&type=chunk) [Item 6. Exhibits](index=64&type=section&id=Item%206.%20Exhibits) This section lists all exhibits filed as part of the Form 10-Q - Exhibits include equity compensation plans, lease agreements, a license agreement with Global BioLife, Inc, and certifications by the CEO and CFO[347](index=347&type=chunk) [SIGNATURES](index=65&type=section&id=SIGNATURES) [Signatures](index=65&type=section&id=Signatures) This section contains the duly authorized signatures certifying the report - The report is signed by Ted Karkus, Chairman of the Board and Chief Executive Officer, and Bill White, Chief Financial Officer, on **August 12, 2022**[351](index=351&type=chunk)

Financial Data and Key Metrics Changes - ProPhase Labs reported a revenue of over $90 million in the last three quarters, with earnings of $10.6 million in the fourth quarter of the previous year, $12.5 million in the first quarter, and $7.4 million in the second quarter [24][25]. - Adjusted EBITDA over the last three quarters reached $43 million, equating to nearly $3 per share [25]. Business Line Data and Key Metrics Changes - ProPhase Diagnostics faced a significant challenge in the second quarter due to the expiration of HRSA funding, which previously accounted for approximately 70% of its business [10][11]. - The company pivoted to a more insurance-oriented model, enhancing its IT platform to facilitate insurance verification and reimbursement [11][60]. Market Data and Key Metrics Changes - The company anticipates a strong fourth quarter driven by increased COVID testing in schools as they reopen, despite the historically weaker third quarter [50][54]. - The management expects year-over-year growth in the third quarter, although it may be lower than the second quarter due to seasonal trends [54]. Company Strategy and Development Direction - ProPhase Labs is diversifying its diagnostics business and plans to build a genomics lab, aiming to become a fully diversified diagnostic testing company [26][27]. - The company is also focusing on its personal genomics business, Nebula Genomics, which is positioned to offer low-cost whole genome sequencing and expand into retail [28][33]. Management's Comments on Operating Environment and Future Outlook - The management expressed confidence in the company's ability to adapt to changes in the funding landscape and emphasized the importance of a strong management team in navigating challenges [21][41]. - The CEO highlighted the ongoing demand for COVID testing and the potential for significant growth in the genomics sector, particularly as the market for whole genome sequencing evolves [22][33]. Other Important Information - ProPhase Labs has a strong cash position with over $50 million in net working capital, allowing for continued investment in growth initiatives [40]. - The company is cautious about establishing regular quarterly dividends, preferring to maintain flexibility in capital allocation [88][91]. Q&A Session Questions and Answers Question: What is the potential top line growth in the third quarter? - The CEO indicated that the third quarter is typically the weakest but expects it to be significantly greater year-over-year compared to the previous year, despite being lower than the second quarter [50][54]. Question: Will schools test all students regardless of symptoms? - The CEO confirmed that there will be robust COVID testing in schools, particularly as they reopen, with significant activity expected towards the end of the third quarter [57][58]. Question: How will the lack of HRSA funding impact revenue collection? - The CEO stated that while the lack of HRSA funding impacted the second quarter, the company has adapted and is still profitable without it [59][60]. Question: Are there significant marketing events expected for the personal genomics business? - The CEO mentioned ongoing negotiations for retail partnerships and expects to see significant developments in the personal genomics space before the end of the year [62][67]. Question: What are the plans to increase visibility in the investment community? - The CEO acknowledged the low P/E ratio and indicated plans for non-deal roadshows to increase visibility, while emphasizing the focus on building company value [78][82]. Question: Will there be a dividend soon? - The CEO explained that while the company has the capacity to pay dividends, it prefers not to establish a regular quarterly dividend to maintain flexibility [88][91]. Question: Will the results of the university study on linebacker products be publicized? - The CEO indicated that there are complexities regarding the publication of results from the university study but expressed excitement about the potential breakthroughs [95][96].

[PART I. FINANCIAL INFORMATION](index=4&type=section&id=PART%20I.%20FINANCIAL%20INFORMATION) This section details the company's financial statements, management's analysis, market risks, and internal controls [Financial Statements](index=4&type=section&id=Item%201.%20Financial%20Statements) The unaudited condensed consolidated financial statements for Q1 2022 reflect significant growth in assets, revenues, and net income, primarily driven by diagnostic services [Condensed Consolidated Balance Sheets](index=4&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) Total assets increased to **$99.7 million** by March 31, 2022, primarily due to a substantial rise in cash and cash equivalents Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | March 31, 2022 | December 31, 2021 | | :--- | :--- | :--- | | **Assets** | | | | Cash and cash equivalents | $25,807 | $8,408 | | Accounts receivable, net | $36,694 | $37,708 | | Total current assets | $72,555 | $61,317 | | TOTAL ASSETS | $99,665 | $89,295 | | **Liabilities & Equity** | | | | Total current liabilities | $19,770 | $15,524 | | Total liabilities | $33,220 | $30,667 | | Total stockholders' equity | $66,445 | $58,628 | | TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $99,665 | $89,295 | [Condensed Consolidated Statements of Operations and Other Comprehensive Loss](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations%20and%20Other%20Comprehensive%20Loss) Net revenues surged to **$47.5 million** in Q1 2022, leading to a net income of **$12.5 million**, a significant increase year-over-year Q1 2022 vs. Q1 2021 Statement of Operations (in thousands, except per share amounts) | Metric | Q1 2022 | Q1 2021 | | :--- | :--- | :--- | | Revenues, net | $47,531 | $15,271 | | Gross profit | $28,677 | $8,927 | | Income from operations | $16,146 | $1,221 | | Net income | $12,494 | $1,057 | | Basic EPS | $0.81 | $0.07 | | Diluted EPS | $0.68 | $0.06 | [Condensed Consolidated Statements of Stockholders' Equity](index=7&type=section&id=Condensed%20Consolidated%20Statements%20of%20Stockholders%27%20Equity) Stockholders' equity increased to **$66.4 million** by March 31, 2022, driven by net income, partially offset by dividends and share repurchases - Key activities affecting stockholders' equity in Q1 2022 included a net income of **$12.5 million**, payment of **$4.6 million** in cash dividends, and repurchases of common shares for **$1.15 million**[13](index=13&type=chunk) [Condensed Consolidated Statements of Cash Flows](index=8&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) Operating activities generated **$20.3 million** in cash in Q1 2022, contributing to a **$17.1 million** increase in cash and cash equivalents Q1 2022 vs. Q1 2021 Cash Flow Summary (in thousands) | Cash Flow Activity | Q1 2022 | Q1 2021 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $20,287 | $(7,892) | | Net cash provided by (used in) investing activities | $4,084 | $(6,832) | | Net cash (used in) provided by financing activities | $(7,222) | $40,635 | | **Increase in cash, cash equivalents and restricted cash** | **$17,149** | **$25,911** | [Notes to Condensed Consolidated Financial Statements](index=10&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements) Detailed notes disclose the company's operating segments, the significant impact of COVID-19 testing, risks from the HRSA program suspension, and segment-level financial performance - The company operates through two segments: diagnostic services (COVID-19 testing, genomics) and consumer products (OTC products, contract manufacturing)[18](index=18&type=chunk)[27](index=27&type=chunk) - A significant business risk is the suspension of the HRSA program for uninsured COVID-19 testing, which accounted for **69%** of diagnostic services revenue in Q1 2022. The program stopped accepting claims on March 22, 2022[30](index=30&type=chunk) - On August 10, 2021, the company acquired Nebula Genomics for approximately **$14.3 million** to expand into personal genomics testing[20](index=20&type=chunk)[106](index=106&type=chunk) Revenue by Source (in thousands) | Revenue by Customer Type | Q1 2022 | Q1 2021 | | :--- | :--- | :--- | | Diagnostic services | $44,913 | $12,738 | | Contract manufacturing | $1,154 | $1,908 | | Retail and others | $546 | $625 | | Genomic products and services | $918 | - | | **Total revenue, net** | **$47,531** | **$15,271** | Segment Income from Operations (before tax, in thousands) | Segment | Q1 2022 | Q1 2021 | | :--- | :--- | :--- | | Diagnostic services | $20,026 | $2,839 | | Consumer products | $(1,863) | $(35) | | Unallocated corporate | $(2,253) | $(1,747) | | **Total** | **$15,910** | **$1,057** | [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=38&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses the significant revenue and profit growth driven by COVID-19 testing, improved liquidity, and the critical impact of the HRSA uninsured program suspension - Net revenue for Q1 2022 was **$47.5 million**, a significant increase from **$15.3 million** in Q1 2021, primarily due to a **$32.2 million** increase in diagnostic services revenue[203](index=203&type=chunk) - Diagnostic testing volume increased from **113,000** tests in Q1 2021 to **377,000** tests in Q1 2022, driven by the Omicron variant[203](index=203&type=chunk) - The HRSA uninsured program, which accounted for **69%** of diagnostic services revenue in Q1 2022, stopped accepting claims on March 22, 2022, resulting in **$4.3 million** of unrecognized revenue for tests performed between March 23 and March 31, 2022[223](index=223&type=chunk) Adjusted EBITDA Reconciliation (in thousands) | Metric | Q1 2022 | Q1 2021 | | :--- | :--- | :--- | | GAAP net income | $12,494 | $1,057 | | Interest, net | $160 | $164 | | Depreciation and amortization | $1,250 | $457 | | **EBITDA** | **$13,904** | **$1,678** | | Share-based compensation expense | $482 | $428 | | Non-cash rent expense | $10 | $186 | | Bad debt expense | $250 | - | | **Adjusted EBITDA** | **$14,646** | **$2,292** | [Quantitative and Qualitative Disclosures about Market Risk](index=47&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20about%20Market%20Risk) The company faces no material foreign currency or interest rate risk, but general economic conditions could adversely affect its business operations - The company does not have material exposure to foreign currency fluctuations or interest rate risk[244](index=244&type=chunk) - General economic conditions pose a risk to the business, potentially affecting accounts receivable collections, inventory realization, and asset recoverability[245](index=245&type=chunk) [Controls and Procedures](index=47&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded that disclosure controls and procedures were ineffective due to a material weakness in diagnostic billing and revenue processes, with remediation efforts underway - Management concluded that disclosure controls and procedures were not effective as of March 31, 2022[248](index=248&type=chunk) - A material weakness was identified related to the diagnostic billing and revenue process, including a lack of appropriate standard operating procedures, billing system controls, and proper assessment of reimbursement receivables[251](index=251&type=chunk) - Management is committed to remediating the material weakness and has begun implementing changes to internal controls, with plans to continue assessment throughout 2022[252](index=252&type=chunk)[253](index=253&type=chunk) [PART II. OTHER INFORMATION](index=48&type=section&id=PART%20II.%20OTHER%20INFORMATION) This section covers legal proceedings, risk factors, equity sales, defaults, and other required disclosures [Legal Proceedings](index=48&type=section&id=Item%201.%20Legal%20Proceedings) The company is not currently a party to any material litigation, though ordinary course legal proceedings may arise - As of the report date, the company is not a party to any material litigation[256](index=256&type=chunk) [Risk Factors](index=49&type=section&id=Item%201A.%20Risk%20Factors) A key risk factor is the company's ability to collect payment for COVID-19 tests, especially after the suspension of the HRSA uninsured program - A primary risk is the company's ability to collect payment for tests, especially after the suspension of the HRSA uninsured program on March 22, 2022[260](index=260&type=chunk) - The HRSA program for the uninsured accounted for approximately **60%** of diagnostic services revenue for the three months ended March 31, 2022[260](index=260&type=chunk) - As a result of the HRSA program suspension, the company did not recognize **$4.3 million** of revenues for testing performed for uninsured individuals from March 23 to March 31, 2022[260](index=260&type=chunk) [Unregistered Sales of Equity Securities and Use of Proceeds](index=49&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The company reported no unregistered sales of equity securities during the period - None[262](index=262&type=chunk) [Defaults Upon Senior Securities](index=49&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) The company reported no defaults upon senior securities - None[263](index=263&type=chunk) [Other Information](index=49&type=section&id=Item%205.%20Other%20Information) The company reported no other information required to be disclosed - None[263](index=263&type=chunk) [Exhibits](index=49&type=section&id=Item%206.%20Exhibits) This section lists exhibits filed with the Form 10-Q, including CEO and CFO certifications and Inline XBRL documents - Exhibits filed include CEO and CFO certifications under Sarbanes-Oxley Sections 302 and 906[263](index=263&type=chunk)

Call Start: 11:00 January 1, 0000 11:57 AM ET ProPhase Labs, Inc. (NASDAQ:PRPH) Q1 2022 Earnings Conference Call May 13, 2022, 11:00 AM ET Company Participants Ted Karkus – Chairman & Chief Executive Officer Conference Call Participants Yi Chen – H.C. Wainwright & Co. Robert Titus – MRT Industries Dennis Waldman – Barrett Productions Kyle Krueger – Apollo Capital Fred McDonald – Private Investor Operator Good day and welcome to the ProPhase Labs First Quarter 2022. Financial Results and Corporate Update Con ...

PART I [Business](index=5&type=section&id=Item%201.%20Business) The company operates as a diversified entity in diagnostic services and consumer products, with a significant pivot to COVID-19 testing driving substantial revenue growth in FY2021 - The company is diversified across diagnostic testing, genomics testing, and contract manufacturing, operating through two segments: diagnostic services and consumer products[15](index=15&type=chunk) - In August 2021, ProPhase acquired personal genomics company Nebula Genomics, Inc to offer whole genome sequencing and expand into genomics testing technologies[18](index=18&type=chunk)[33](index=33&type=chunk) - The diagnostic services business, initiated in December 2020, includes two CLIA certified laboratories with a combined capacity to process up to **60,000 COVID-19 tests per day**[17](index=17&type=chunk)[25](index=25&type=chunk) Financial Performance Overview (FY2021 vs FY2020) | Metric | Fiscal 2021 | Fiscal 2020 | | :--- | :--- | :--- | | **Revenues** | $79.0 million | $14.5 million | | **Net Income (Loss)** | $6.3 million | ($2.1 million) | [Business Segments](index=7&type=section&id=Business%20Segments) The company's revenue is primarily driven by the Diagnostic Services segment, which exhibits significant customer concentration, followed by Contract Manufacturing and personal genomics - In Fiscal 2021, three diagnostic services customers accounted for **23.5%, 17.9%, and 11.9% of total revenues**, highlighting significant customer concentration in this new segment[26](index=26&type=chunk) - The payer mix for diagnostic services in FY2021 was dominated by **government agencies (primarily HRSA) at 60%**, followed by insurance providers (35%) and client payers (5%)[26](index=26&type=chunk) - In Fiscal 2020, the contract manufacturing business was the primary revenue source, with two customers accounting for **47.1% and 17.2% of revenues**[29](index=29&type=chunk) [Government Regulation](index=8&type=section&id=Government%20Regulation) Operations are subject to extensive and complex regulations from U.S agencies like the FDA, CLIA, and CMS, covering everything from testing and manufacturing to billing and data privacy - Diagnostic testing services are regulated by the FDA, which oversees instruments and test kits, and by CLIA, which requires federal certification for clinical laboratories[41](index=41&type=chunk)[58](index=58&type=chunk) - Manufacturing of OTC drugs and dietary supplements is subject to FDA's cGMP regulations, with dietary supplements also governed by the Dietary Supplement Health and Education Act (DSHEA)[44](index=44&type=chunk)[48](index=48&type=chunk)[49](index=49&type=chunk) - The company must comply with federal and state fraud and abuse laws, including the **Anti-Kickback Statute**, which prohibits offering value for referrals, and the **Stark Law**, which prohibits physician self-referrals[83](index=83&type=chunk)[88](index=88&type=chunk) - Billing for diagnostic services is complex and subject to rules from various payers; the Protecting Access to Medicare Act (PAMA) requires laboratories to report private payor rates to CMS to set Medicare payment rates[75](index=75&type=chunk)[76](index=76&type=chunk) [Human Capital Management](index=19&type=section&id=Human%20Capital%20Management) As of year-end 2021, the company employed 129 full-time staff, primarily in diagnostic services, with a focus on talent retention and employee safety - The company had **129 full-time employees** at year-end 2021, with 82 dedicated to diagnostic services and 47 to contract manufacturing operations[93](index=93&type=chunk) - Key human capital objectives include identifying, recruiting, and retaining employees through incentive plans designed to increase stockholder value[95](index=95&type=chunk) [Risk Factors](index=21&type=section&id=Item%201A.%20Risk%20Factors) The company faces significant risks from its heavy reliance on COVID-19 testing, the cessation of government funding for the uninsured, and a material weakness in internal financial controls - A critical risk is the company's ability to collect payment for tests, particularly from the HRSA program for uninsured individuals, which generated approximately **59.5% of Fiscal 2021 revenue** and was announced to stop accepting claims in March 2022 due to lack of funding[105](index=105&type=chunk) - The company's business could be materially affected if demand for COVID-19 testing decreases due to vaccination or containment efforts and it cannot generate sufficient profits from other molecular tests[103](index=103&type=chunk) - A **material weakness was identified in internal controls** over financial reporting concerning the diagnostic billing process, which could adversely affect the accuracy and timing of financial reports[191](index=191&type=chunk) - The company faces significant competition in all its business areas: lab diagnostics (from large players like Quest and LabCorp), contract manufacturing, OTC products, and the personal genomics market[114](index=114&type=chunk)[115](index=115&type=chunk)[117](index=117&type=chunk) [Unresolved Staff Comments](index=44&type=section&id=Item%201B.%20Unresolved%20Staff%20Comments) There are no unresolved staff comments - Not applicable[204](index=204&type=chunk) [Properties](index=44&type=section&id=Item%202.%20Properties) The company operates from key leased and owned facilities in New York, New Jersey, and Pennsylvania for its lab, manufacturing, and administrative functions - The company's main properties include a leased 25,000 sq ft headquarters and lab in Garden City, NY, and an owned 57,500 sq ft manufacturing facility in Lebanon, PA[205](index=205&type=chunk) [Legal Proceedings](index=44&type=section&id=Item%203.%20Legal%20Proceedings) The company is not currently a party to any material litigation - As of the report date, the company is not involved in any material legal proceedings[206](index=206&type=chunk) [Mine Safety Disclosures](index=45&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable to the company - Not applicable[207](index=207&type=chunk) PART II [Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=46&type=section&id=Item%205.%20Market%20for%20Registrant's%20Common%20Equity%2C%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) The company's common stock trades on Nasdaq, and a $6 million stock repurchase program was active in the fourth quarter of 2021 - The company's common stock is traded on The Nasdaq Capital Market under the symbol "PRPH"[209](index=209&type=chunk) - A stock repurchase program authorizing up to **$6 million** was announced on September 8, 2021, expiring March 30, 2022; as of November 30, 2021, approximately $5.06 million remained available for repurchases[213](index=213&type=chunk) Q4 2021 Stock Repurchases | Period | Shares Purchased | Average Price Paid | Total Value (approx) | | :--- | :--- | :--- | :--- | | Oct 2021 | 136,444 | $5.44 | $742,255 | | Nov 2021 | 30,380 | $5.73 | $174,077 | | **Total** | **166,824** | **$5.50** | **$916,332** | [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=46&type=section&id=Item%207.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Fiscal 2021 saw a dramatic 445% revenue increase to $79.0 million, driven by the new diagnostic services segment, though future revenue is uncertain due to the cessation of the HRSA program - The increase in net revenue was primarily due to a **$67.2 million contribution** from the new diagnostic services business, which had a full year of operations in 2021 compared to one month in 2020[224](index=224&type=chunk) - The HRSA program for uninsured COVID-19 testing, which generated **59.5% of FY2021 revenue**, stopped accepting claims on March 22, 2022, creating significant uncertainty for future revenue and collections[245](index=245&type=chunk) - Working capital increased to **$45.8 million** at year-end 2021 from $9.6 million in 2020, largely due to net proceeds of $40.6 million from stock offerings[238](index=238&type=chunk) Key Financial Results (FY2021 vs FY2020) | Metric | FY2021 | FY2020 | | :--- | :--- | :--- | | **Net Revenue** | $79.0M | $14.5M | | **Gross Profit** | $42.0M | $4.6M | | **Gross Margin** | 53.1% | 31.7% | | **Net Income (Loss)** | $6.3M | ($2.1M) | | **Adjusted EBITDA** | $18.1M | ($0.3M) | [Quantitative and Qualitative Disclosures About Market Risk](index=56&type=section&id=Item%207A.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company has minimal exposure to market risks such as foreign currency fluctuations and interest rate changes - The company has minimal exposure to market risks such as foreign currency fluctuations and interest rate changes[269](index=269&type=chunk) [Financial Statements and Supplementary Data](index=57&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data) The FY2021 financial statements reflect significant growth in assets and equity, driven by diagnostic services revenue, though auditors noted risks related to revenue estimation and HRSA funding cessation - The independent auditor's report identified a **Critical Audit Matter** concerning the estimation of variable consideration and allowances for diagnostic services revenue due to the high degree of judgment required[281](index=281&type=chunk) - The auditor's report also included an **Emphasis of Matter** paragraph highlighting the March 2022 cessation of the HRSA uninsured program, which accounted for 57.6% of the company's 2021 diagnostic service revenue[283](index=283&type=chunk)[488](index=488&type=chunk) Consolidated Balance Sheet Highlights (As of Dec 31) | Metric (in thousands) | 2021 | 2020 | | :--- | :--- | :--- | | **Total Current Assets** | $61,317 | $15,887 | | Accounts Receivable, net | $37,708 | $3,155 | | **Total Assets** | $89,295 | $31,405 | | **Total Liabilities** | $30,667 | $20,849 | | **Total Stockholders' Equity** | $58,628 | $10,556 | Consolidated Statement of Operations Highlights (Year Ended Dec 31) | Metric (in thousands) | 2021 | 2020 | | :--- | :--- | :--- | | **Revenues, net** | $79,042 | $14,514 | | **Gross Profit** | $41,988 | $4,606 | | **Income (Loss) from Operations** | $9,801 | ($2,081) | | **Net Income (Loss)** | $6,273 | ($2,125) | | **Diluted EPS** | $0.40 | ($0.18) | [Note 3 – Business Acquisitions](index=79&type=section&id=Note%203%20%E2%80%93%20Business%20Acquisitions) The company completed two key acquisitions in 2020 and 2021, purchasing Nebula Genomics for $14.6 million and CPM for $2.5 million to expand its genomics and lab capabilities - On August 10, 2021, the company acquired Nebula Genomics for **~$14.6 million**, allocating $11.0 million to definite-lived intangible assets (trade names, IP, customer relationships) and $4.4 million to goodwill[378](index=378&type=chunk)[384](index=384&type=chunk) - On October 23, 2020, the company acquired CPM for **~$2.5 million**, gaining a CLIA lab and recording $1.3 million for the CLIA license intangible asset and $1.3 million in goodwill[386](index=386&type=chunk)[387](index=387&type=chunk)[388](index=388&type=chunk) [Note 15 – Segment Information](index=99&type=section&id=Note%2015%20%E2%80%93%20Segment%20Information) In FY2021, the Diagnostic Services segment became the primary revenue and profit driver, generating $68.6 million in revenue, a major shift from the prior year Segment Performance (FY2021 vs FY2020, in thousands) | Segment | Net Revenues 2021 | Net Revenues 2020 | Income (Loss) from Cont Ops 2021 | Income (Loss) from Cont Ops 2020 | | :--- | :--- | :--- | :--- | :--- | | **Diagnostic Services** | $68,559 | $1,277 | $18,197 | ($270) | | **Consumer Products** | $10,483 | $13,237 | ($1,714) | $1,962 | [Note 18 – Subsequent Events](index=102&type=section&id=Note%2018%20%E2%80%93%20Subsequent%20Events) Subsequent to year-end, the company declared a special cash dividend, settled a promissory note, and faced the critical cessation of the HRSA program for uninsured COVID-19 testing - On March 15, 2022, HRSA announced its program for uninsured COVID-19 testing would stop accepting claims, impacting a revenue source that constituted **57.6% of the company's fiscal 2021 diagnostic service revenue**[488](index=488&type=chunk) - A special cash dividend of **$0.30 per share** was declared on February 14, 2022, and paid in March 2022[485](index=485&type=chunk) - In February 2022, the company paid off a **$2.0 million promissory note** through a cash payment of $1.44 million and a conversion/repurchase of $600,000 principal for a total cash outlay of $2.59 million[486](index=486&type=chunk)[487](index=487&type=chunk) [Controls and Procedures](index=102&type=section&id=Item%209A.%20Controls%20and%20Procedures) Management concluded that disclosure controls were not effective as of year-end 2021 due to a material weakness in internal control over the diagnostic billing and revenue process - Management identified a **material weakness** in internal controls over financial reporting as of December 31, 2021[495](index=495&type=chunk) - The weakness is related to the diagnostic billing and revenue process, specifically the lack of standard operating procedures, system controls, and proper documentation for reimbursement receivable allowances[496](index=496&type=chunk) - As a result of this material weakness, management concluded that the company's disclosure controls and procedures were **not effective**[490](index=490&type=chunk) PART III [Directors, Executive Officers and Corporate Governance](index=105&type=section&id=Item%2010.%20Directors%2C%20Executive%20Officers%20and%20Corporate%20Governance) Information regarding directors, executive officers, and corporate governance is incorporated by reference from the company's 2022 Proxy Statement - The required information is incorporated by reference from the Registrant's definitive proxy statement for its 2022 annual meeting of stockholders[505](index=505&type=chunk) [Executive Compensation](index=105&type=section&id=Item%2011.%20Executive%20Compensation) Information regarding executive compensation is incorporated by reference from the company's 2022 Proxy Statement - The required information is incorporated by reference from the Registrant's definitive proxy statement for its 2022 annual meeting of stockholders[506](index=506&type=chunk) [Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters](index=105&type=section&id=Item%2012.%20Security%20Ownership%20of%20Certain%20Beneficial%20Owners%20and%20Management%20and%20Related%20Stockholder%20Matters) Information regarding security ownership and equity compensation plans is incorporated by reference from the company's 2022 Proxy Statement - The required information is incorporated by reference from the Registrant's definitive proxy statement for its 2022 annual meeting of stockholders[506](index=506&type=chunk) [Certain Relationships and Related Transactions, and Director Independence](index=105&type=section&id=Item%2013.%20Certain%20Relationships%20and%20Related%20Transactions%2C%20and%20Director%20Independence) Information regarding related party transactions and director independence is incorporated by reference from the company's 2022 Proxy Statement - The required information is incorporated by reference from the Registrant's definitive proxy statement for its 2022 annual meeting of stockholders[507](index=507&type=chunk) [Principal Accountant Fees and Services](index=105&type=section&id=Item%2014.%20Principal%20Accountant%20Fees%20and%20Services) Information regarding principal accountant fees and services is incorporated by reference from the company's 2022 Proxy Statement - The required information is incorporated by reference from the Registrant's definitive proxy statement for its 2022 annual meeting of stockholders[507](index=507&type=chunk) PART IV [Exhibits and Financial Statement Schedules](index=106&type=section&id=Item%2015.%20Exhibits%20and%20Financial%20Statement%20Schedules) This section lists the financial statements and exhibits filed with the Form 10-K - This item lists the consolidated financial statements and various exhibits filed as part of the Annual Report on Form 10-K[509](index=509&type=chunk)[512](index=512&type=chunk) [Form 10-K Summary](index=107&type=section&id=Item%2016.%20Form%2010-K%20Summary) No Form 10-K summary was provided - None[514](index=514&type=chunk)

Financial Data and Key Metrics Changes - The company reported strong financial results for Q4 2021 and the full year, with significant growth in testing revenues driven by COVID-19 testing [4][11] - The company highlighted that despite an impairment charge of $3.75 million, the operational performance remained robust, with EBITDA being a key focus to correct for non-cash issues [32][11] Business Line Data and Key Metrics Changes - The diagnostics business saw a substantial increase in testing volume, performing 350,000 tests in Q4 2021 compared to 110,000 in the first quarter of the previous year, indicating a tripling of testing capacity [40] - The company plans to diversify its clinical lab services beyond COVID-19 testing, aiming to build a fully functional and diversified clinical lab [8][11] Market Data and Key Metrics Changes - The company has expanded its customer base significantly, growing from a few major customers to approximately a dozen, which has helped maintain testing volumes even as COVID-19 cases fluctuate [9][10] - The company is well-positioned to handle potential new COVID-19 variants, with ongoing testing services expected to remain robust [10][24] Company Strategy and Development Direction - The company aims to leverage its distribution network to expand direct-to-consumer genomic testing and retail distribution of Nebula's genomic sequencing products [3][12] - The strategic focus includes building partnerships and research collaborations to enhance precision medicine capabilities, with an emphasis on whole genome sequencing [12][16] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the continued demand for testing services, even as COVID-19 cases decline, citing the importance of testing in controlling the spread of the virus [10][24] - The company anticipates a strong first quarter of 2022, with expectations of record financial results compared to both the previous quarter and the same quarter last year [40] Other Important Information - The company has a strong cash position and working capital, allowing for potential stock buybacks and dividends in the future [6][19] - The acquisition of Nebula Genomics is seen as a significant growth opportunity, with expectations that it could become more valuable than the company's current market cap [18][19] Q&A Session Summary Question: Current trend of COVID-19 testing volume and potential for the current quarter - Management noted that while Omicron cases have dropped, a new sub-variant BA.2 is emerging, which could lead to increased testing demand [22][24] Question: Price reduction for Nebula Genomics test and retail availability - Management indicated that price reductions and retail distribution are expected in the second half of the year, with ongoing negotiations for strategic partnerships [25][27] Question: Impairment charge and its implications - Management confirmed that the impairment charge was non-cash and related to a loan, with hopes of recovering the amount in the future [32][34] Question: Stock buyback strategy - Management stated that stock buybacks and dividends are possibilities, with decisions made in the best interest of long-term shareholders [35][36] Question: Testing volume comparison for March - Management provided testing volume figures, indicating a strong performance in both February and March, with expectations for continued robust testing levels [40][41]

UNITED STATES SECURITIES AND EXCHANGE COMMISSION (Exact name of registrant as specified in its charter) WASHINGTON, D.C. 20549 FORM 10-Q ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2021 OR ☐ 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. Delaware 23-2577138 (State or other jurisdi ...