prph-20230331

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 March 31, 2023


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

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 registration 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 May 5, 2023
Common Stock, $0.0005 par value						17,182,841

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 March 31 , 2023 and December 31, 202 2	3

	Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three Months Ended March 31 , 202 3 and 2022	5

	Condensed Consolidated Statements of Stockholders’ Equity for the Three Months Ended March 31 , 202 3 and 2022	6

	Condensed Consolidated Statements of Cash Flows for the Three Months Ended Mar ch 31 , 202 3 and 2022	7

	Notes to Condensed Consolidated Financial Statements	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	30

Item 4.	Controls and Procedures	31

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	32

Item 1A.	Risk Factors	32

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	32

Item 3.	Defaults Upon Senior Securities	32

Item 4.	Mine Safety Disclosures	32

Item 5.	Other Information	32

Item 6.	Exhibits	33

Signatures		34

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)


	March 31, 2023		December 31, 2022
	(Unaudited)
ASSETS
Current assets
Cash and cash equivalents	$	9,613	$	9,109

Marketable debt securities, available for sale	5,946		8,328

Accounts receivable, net	37,836		37,054
Inventory, net	4,311		3,976
Prepaid expenses and other current assets	3,573		2,366
Total current assets	61,279		60,833

Property, plant and equipment, net	8,891		7,288
Prepaid expenses, net of current portion	121		121
Operating lease right-of-use asset, net	3,974		4,059
Intangible assets, net	14,524		8,475
Goodwill	5,231		5,709
Deferred tax asset	191		—
Other assets	1,163		1,163
TOTAL ASSETS	$	95,374	$	87,648

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	4,866	$	5,905
Accrued diagnostic services	353		1,009
Accrued advertising and other allowances	151		99
Operating lease liabilities	298		301
Deferred revenue	2,841		2,499
Income tax payable	3,849		4,190
Other current liabilities	6,109		2,072
Total current liabilities	18,467		16,075

Non-current liabilities:
Deferred revenue, net of current portion	1,160		1,059
Deferred tax liability, net	—		224
Unsecured promissory notes, net of discount of $376 and $0	7,224		—
Unsecured convertible promissory notes, net	2,400		2,400
Operating lease liabilities, net of current portion	4,182		4,259
Due to sellers (see Note 3)	2,000		—
Total non-current liabilities	16,966		7,942


Total liabilities	35,433		24,017

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, 16,851,041 and 16,210,776 shares outstanding, respectively	17		16
Additional paid-in capital	111,482		109,138
Retained earnings	12,303		11,753
Treasury stock, at cost, 18,934,955 and 18,126,970 shares, respectively	(63,953)		(58,033)
Accumulated other comprehensive loss	92		757
Total stockholders’ equity	59,941		63,631
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	95,374	$	87,648

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
	March 31, 2023		March 31, 2022
Revenues, net	$	19,303	$	47,531
Cost of revenues	8,783		18,854
Gross profit	10,520		28,677

Operating expenses:
Diagnostic expenses	1,203		4,672
General and administration	8,298		7,824
Research and development	144		35
Total operating expenses	9,645		12,531
Income from operations	875		16,146

Interest income, net	11		73
Interest expense	(215)		(233)
Other income (loss)	(107)		(76)
Income from operations before income taxes	564		15,910
Income tax expense	14		3,416
Income from operations after income taxes	550		12,494
Net income	$	550	$	12,494

Other comprehensive (loss) income:
Unrealized loss on marketable debt securities	(665)		37
Total comprehensive (loss) income	$	(115)	$	12,531

Earnings per share:
Basic	$	0.03	$	0.81
Diluted	$	0.03	$	0.68

Weighted average common shares outstanding:
Basic	16,748		15,486
Diluted	18,061		18,740

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 March 31, 2023
	Common Stock Shares Outstanding	Par Value		Additional Paid in Capital		Retained Earnings		Treasury Stock		Accumulated Other Comprehensive 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
Repurchase of common shares	(63,616)	—		—		—		(541)		—		(541)
Unrealized loss on marketable debt securities	—	—		—		—		—		(665)		(665)
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)
Stock-based compensation	—	—		947		—		—		—		947
Net income	—	—		—		550		—		—		550
Balance as of March 31, 2023	16,851,041	$	17	$	111,482	$	12,303	$	(63,953)	$	92	$	59,941


	For the Three Months Ended March 31, 2022
	Common Stock Shares Outstanding	Par Value		Additional Paid in Capital		Retained Earnings		Treasury Stock		Accumulated Other Comprehensive Loss		Total
Balance as of January 1, 2022	15,485,000	$	16	$	104,552	$	2,642	$	(48,407)	$	(175)	$	58,628
Issuance of common shares for debt conversion	200,000	—		600		—		—		—		600
Cash dividends	—	—		—		(4,646)		—		—		(4,646)
Repurchase of common shares	(200,000)	—		—		—		(1,150)		—		(1,150)
Unrealized loss on marketable debt securities	—	—		—		—		—		37		37
Stock-based compensation	—	—		482		—		—		—		482
Net loss	—	—		—		12,494		—		—		12,494
Balance as of March 31, 2022	15,485,000	$	16	$	105,634	$	10,490	$	(49,557)	$	(138)	$	66,445

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 three months ended
	March 31, 2023		March 31, 2022
Cash flows from operating activities
Net income	$	550	$	12,494
Adjustments to reconcile net income to net cash provided by operating activities:
Realized loss on marketable debt securities	107		179
Depreciation and amortization	1,292		1,249
Accretion of debt discount	20		1
Amortization on operating lease right-of-use assets	85		83
Gain on sale of assets	—		(23)
Stock-based compensation expense	947		482
Change in fair value of investment securities	—		76
Accounts receivable allowances	(147)		(924)
Inventory valuation reserve	—		25
Bad debt expenses	230		—
Changes in operating assets and liabilities:
Accounts receivable	(864)		1,938
Inventory	(335)		(105)
Prepaid expenses and other current assets	(2,107)		(126)
Deferred tax asset	(96)		—
Other assets	—		360
Accounts payable and accrued expenses	(2,661)		1,178
Accrued diagnostic services	(656)		(878)
Accrued advertising and other allowances	52		—
Deferred revenue	443		165
Deferred tax liability	—		443
Operating lease liabilities	(80)		(73)
Income tax payable	(341)		2,973
Other current liabilities	4,037		770
Net cash provided by operating activities	476		20,287

Cash flows from investing activities
Business acquisitions, escrow received	478		—
Asset acquisition, net of cash acquired	(2,904)		—

Purchase of marketable securities	—		(206)
Proceeds from sale of marketable debt securities	1,291		5,300
Proceeds from dispositions of property and other assets, net	—		85
Capital expenditures	(517)		(1,095)
Net cash (used in) provided by investing activities	(1,652)		4,084

Cash flows from financing activities

Proceeds from issuance of secured note payable	7,600		—


Repurchase of common stock for payment of statutory taxes due on cashless exercise of stock option	(5,379)		—
Repurchases of common shares	(541)		(1,150)
Repayment of note payable	—		(1,426)
Payment of dividends	—		(4,646)
Net cash provided by (used in) financing activities	1,680		(7,222)

Increase in cash, cash equivalents and restricted cash	504		17,149
Cash and cash equivalents, at the beginning of the period	9,109		8,658
Cash and cash equivalents, at the end of the period	$	9,613	$	25,807

Supplemental disclosures:
Cash paid for income taxes	$	1,500	$	—
Interest payment on the promissory notes	$	203	$	241

Supplemental disclosure of non-cash investing and financing activities:
Financed capital expenditures	$	1,623	$	—
Common stock issued in Asset Acquisition	$	1,000	$	—
Issuance of common shares for debt conversion	$	—	$	600
Net unrealized loss, investments in marketable debt securities	$	—	$	37

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. We currently 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 OTC consumer healthcare products and dietary supplements in the United States. However, commencing in December 2020, we also began offering COVID-19 and prepared to validate other Respiratory Pathogen Panel (RPP) molecular tests through our diagnostic services 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 (“PCR”) testing for COVID-19. Critical to COVID-19 testing, we provide fast turnaround times for results. We also offer rapid antigen testing for COVID-19. On October 23, 2020, we acquired Confucius Plaza Medical Laboratory Corp. (“CPM”), which included a non-operating but certified 4,000 square foot CLIA accredited laboratory located in Old Bridge, New Jersey. 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.

On August 10, 2021, we acquired Nebula Genomics, Inc. (“Nebula”), a privately owned personal genomics company, through our new wholly owned subsidiary, ProPhase Precision Medicine, Inc. (“ProPhase Precision”) (see Note 3, Business Acquisitions). ProPhase Precision 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 (dietary supplement) and Equivir G (Rx). In July 2022, PBIO announced a second licensing agreement for two small molecule PIM kinase inhibitors, Linebacker LB-1 and LB-2, with plans to pursue development and commercialization of LB-1 as a cancer co-therapy.

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

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.

We also develop and market dietary supplements under the TK Supplements® brand.

Note 2 -

SEC Form 10-Q filed by ProPhase Labs Inc.