UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

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 ~~June 30, 2021~~March 31, 2022

☐	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)~~

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)

	~~(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~~		PRPH		NasdaqCapital 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☒ No ☐

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☒ No ☐

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. ☐

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

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

Class		Outstanding ~~August~~May 13, ~~2021~~2022
Common Stock, $0.0005 par value		~~15,154,253~~15,485,900

ProPhase Labs, Inc. and Subsidiaries

TABLE OF CONTENTS

		PAGE
PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)

	~~Condensed Consolidated Balance Sheets as of June 30, 2021 and December 31, 2020~~	3

	Condensed Consolidated Balance Sheets as of March 31, 2022 and December 31, 2021	3

	Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three ~~and Six~~ Months Ended ~~June 30,~~March 31, 2022 and 2021 ~~and 2020~~	4

	Condensed Consolidated Statements of Stockholders’ Equity for the Three ~~and Six~~ Months Ended ~~June 30,~~March 31, 2022 and 2021 ~~and 2020~~	5

	Condensed Consolidated Statements of Cash Flows for the ~~Six~~Three Months Ended ~~June 30,~~March 31, 2022 and 2021 ~~and 2020~~	6

	Notes to Condensed Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2633

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	3041

Item 4.	Controls and Procedures	41
	30
PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	42
Item 1A.	Risk Factors	43
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	43
Item 3.	Defaults Upon Senior Securities	43
Item 4.	Mine Safety Disclosures	43
Item 5.	Other Information	43
Item 6.	Exhibits	43

~~PART II. OTHER INFORMATION~~Signatures
~~Item 1.~~	~~Legal Proceedings~~	31
~~Item 1A.~~	~~Risk Factors~~	31
~~Item 2.~~	~~Unregistered Sales of Equity Securities and Use of Proceeds~~	31
~~Item 3.~~	~~Defaults Upon Senior Securities~~	31
~~Item 4.~~	~~Mine Safety Disclosures~~	31
~~Item 5.~~	~~Other Information~~	31
~~Item 6.~~	~~Exhibits~~	31

~~Signatures~~		3244

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)

June 30, December 31,
2021 2020
(Unaudited)
ASSETS
Current assets
Cash and cash equivalents $ 17,677 $ 6,816
Marketable debt securities, available for sale 18,095 1,639
Marketable equity securities, available for sale 479 -
Accounts receivable, net 6,644 3,155
Inventory, net 15,169 3,039
Prepaid expenses and other current assets 428 1,238
Total current assets 58,492 15,887

Property, plant and equipment, net 6,914 3,578
Secured promissory note receivable 3,727 2,750
Prepaid expenses, net of current portion 460 2,084
Right-of-use asset, net 4,564 4,731
Intangible asset, net 1,017 1,234
Goodwill 901 901
Other assets 248 240
TOTAL ASSETS $ 76,323 $ 31,405

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable $ 7,114 $ 3,771
Accrued advertising and other allowances 214 463
Lease liabilities 635 329
Other current liabilities 6,211 1,731
Total current liabilities 14,174 6,294

Non-current liabilities:
Deferred revenue, net of current portion 121 162
Unsecured convertible promissory notes, net 9,994 9,991
Lease liabilities, net of current portion 4,301 4,402
Total non-current liabilities 14,416 14,555
Total liabilities 28,590 20,849

COMMITMENTS AND CONTINGENCIES - -

Stockholders’ equity
Preferred stock authorized 1,000,000, $.0005 par value, 0 shares issued and outstanding - -
Common stock authorized 50,000,000, $.0005 par value, issued 31,806,275 and 28,256,275 shares, respectively 16 14
Additional paid-in capital 99,265 61,674
Accumulated deficit (3,969 ) (3,631 )
Treasury stock, at cost, 16,652,022 and 16,652,022 shares, respectively (47,490 ) (47,490 )
Accumulated other comprehensive loss (89 ) (11 )
Total stockholders’ equity 47,733 10,556
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 76,323 $ 31,405
March 31, December 31,
March 31, December 31,
2022 2021
(Unaudited)
ASSETS
Current assets
Cash and cash equivalents $ 25,807 $ 8,408
Restricted cash - 250
Marketable debt securities, available for sale 3,543 8,779
Marketable equity securities, at fair value - 76
Accounts receivable, net 36,694 37,708
Inventory, net 4,680 4,600
Prepaid expenses and other current assets 1,831 1,496
Total current assets 72,555 61,317

Property, plant and equipment, net 6,440 5,947
Prepaid expenses, net of current portion 251 460
Right-of-use asset, net 4,319 4,402
Intangible assets, net 10,143 10,852
Goodwill 5,709 5,709
Other assets 248 608
TOTAL ASSETS $ 99,665 $ 89,295

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable $ 8,204 $ 7,026
Accrued diagnostic services 1,012 1,890
Accrued advertising and other allowances 95 104
Lease liabilities 654 663
Deferred revenue 2,246 2,034
Income tax payable
4,285

1,312

Other current liabilities 3,274 2,495
Total current liabilities 19,770 15,524

Non-current liabilities:
Deferred revenue, net of current portion 858 905
Deferred tax liability 443 -
Note payable 18 44
Unsecured convertible promissory notes, net 7,997 9,996
Lease liabilities, net of current portion 4,134 4,198
Total non-current liabilities 13,450 15,143
Total liabilities 33,220 30,667

COMMITMENTS AND CONTINGENCIES - -

Stockholders’ equity
Preferred stock authorized 1,000,000, $0.0005 par value, 0 shares issued and outstanding - -
Common stock authorized 50,000,000, $0.0005 par value, 15,485,900 and 15,485,900 shares outstanding, respectively 16 16
Additional paid-in capital 105,634 104,552
Retained earnings 10,490 2,642
Treasury stock, at cost, 17,018,846 and 16,818,846 shares, respectively (49,557 ) (48,407 )
Accumulated other comprehensive loss (138 ) (175 )
Total stockholders’ equity 66,445 58,628
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 99,665 $ 89,295
See accompanying notes to condensed consolidated financial statements
3
ProPhase Labs, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
and Other Comprehensive Loss
(in thousands, except per share amounts)
(unaudited)
June 30, 2021 June 30, 2020 June 30, 2021 June 30, 2020
For the three months ended For the six months ended
June 30, 2021 June 30, 2020 June 30, 2021 June 30, 2020
Revenues, net $ 9,142 $ 3,623 $ 24,413 $ 5,511
Cost of revenues 4,676 2,344 11,020 3,817
Gross profit 4,466 1,279 13,393 1,694

Operating expenses:
Diagnostic expenses 830 - 4,639 -
General and administration 4,993 1,155 8,775 2,323
Research and development 93 65 208 124
Total operating expenses 5,916 1,220 13,622 2,447
Income (loss) from operations (1,450 ) 59 (229 ) (753 )

Interest income, net 214 11 301 14
Interest expense (323 ) - (574 ) -
Change in fair value of investment securities 164 164
Net income (loss) $ (1,395 ) $ 70 $ (338 ) $ (739 )

Other comprehensive loss:
Unrealized gain (loss) on marketable debt securities (67 ) (5 ) (78 ) 6
Total comprehensive income (loss) $ (1,462 ) $ 65 $ (416 ) $ (733 )

Earnings (loss) per share:
Basic $ (0.09 ) $ 0.01 $ (0.02 ) $ (0.06 )
Diluted $ (0.09 ) $ 0.01 $ (0.02 ) $ (0.06 )

Weighted average common shares outstanding:
Basic 15,154 11,592 14,860 11,587
Diluted 15,154 11,618 14,860 11,587
March 31, 2022 March 31, 2021
For the three months ended
March 31, 2022 March 31, 2021
Revenues, net $ 47,531 $ 15,271
Cost of revenues 18,854 6,344
Gross profit 28,677 8,927

Operating expenses:
Diagnostic expenses 4,672 3,809
General and administration 7,824 3,782
Research and development 35 115
Total operating expenses 12,531 7,706
Income (loss) from operations 16,146 1,221

Interest income, net 73 87
Interest expense (233 ) (251 )
Change in fair value of investment securities (76 ) -
Income from operations before income taxes 15,910 1,057
Income tax expense (3,416 ) -
Income from operations after income taxes 12,494 1,057
Net income $ 12,494 $ 1,057

Other comprehensive loss:
Unrealized gain (loss) on marketable debt securities 37 (11 )
Total comprehensive income $ 12,531 $ 1,046

Earnings per share:
Basic $ 0.81 $ 0.07
Diluted $ 0.68 $ 0.06

Weighted average common shares outstanding:
Basic 15,486 14,563
Diluted 18,740 18,200
See accompanying notes to condensed consolidated financial statements
4
ProPhase Labs, Inc. and Subsidiaries
Condensed Consolidated Statements of Stockholders’ Equity
(in thousands, except share data)
(unaudited)
Common Stock Shares Outstanding, Net of Shares of Treasury Stock Par Value     Additional Paid in Capital Accumulated Deficit   Accumulated Comprehensive Income (Loss)     Treasury Stock       Total
For the Three Months Ended June 30, 2021
Common Stock Shares Outstanding, Net of Shares of Treasury Stock Par Value Additional Paid in Capital Accumulated Deficit Accumulated Comprehensive Income (Loss) Treasury Stock Total
Balance as of April 1, 2021 15,154,253 $ 16 $ 102,735 $ (2,574 ) $ (22 ) $ (47,490 ) $ 52,665

Issuance of common stock and warrants for cash from public offering, net of $2,365 offering cost
Issuance of common stock and warrants for cash from public offering, net of $2,365 offering cost, shares
Issuance of common stock and warrants for cash from private offering
Issuance of common stock and warrants for cash from private offering, shares
Cash dividends - - (4,546 ) - - - (4,546 )

Unrealized loss on marketable debt securities, net of realized gains of $2, net of taxes - - - - (67 ) - (67 )

Stock-based compensation - - 1,076 -                 - - 1,076

Net loss - - - (1,395 ) - - (1,395 )

Balance as of June 30, 2021 15,154,253 $ 16 $ 99,265 $ (3,969 ) $ (89 ) $ (47,490 ) $ 47,733
For the Three Months Ended June 30, 2020
Common Stock Shares Outstanding, Net of Shares of Treasury Stock Par Value Additional Paid in Capital Retained Earnings Accumulated Comprehensive Income (Loss) Treasury Stock Total
Balance as of April 1, 2020 11,581,939 $ 14 $ 60,413 $ (2,315 ) $              9 $ (47,490 ) $ 10,631

Unrealized loss on marketable debt securities, net of realized gains of $3, net of taxes - - - - (5 ) - (5 )

Stock-based compensation 9,709 - 198 - - - 198

Net income - - - 70 - - 70

Balance as of June 30, 2020 11,591,648 $ 14 $ 60,611 $ (2,245 ) $ 4 $ (47,490 ) $ 10,894
Common Stock Shares Outstanding Par Value Additional Paid in Capital Retained Earnings Comprehensive Loss Treasury Stock Total
Common Stock Shares Outstanding Par Value Additional Paid in Capital Retained Earnings Comprehensive Loss Treasury Stock Total
Balance as of January 1, 2022 15,485,900 $ 16 $ 104,552 $ 2,642 $ (175 ) $ (48,407 ) $ 58,628
Issuance of common shares for debt conversion 200,000 - 600 - - - 600
Cash dividends - - - (4,646 ) - - (4,646 )
Repurchases of common shares (200,000 ) - - - - (1,150 ) (1,150 )
Unrealized loss on marketable debt securities - - - - 37 - 37
Stock-based compensation - - 482 - - - 482
Net income - - - 12,494 - - 12,494
Balance as of March 31, 2022 15,485,900 $ 16 $ 105,634 $ 10,490 $ (138 ) $ (49,557 ) $ 66,445

For the Six Months Ended June 30, 2021
Common Stock Shares Outstanding, Net of Shares of Treasury Stock Par Value Additional Paid in Capital Accumulated Deficit Accumulated Comprehensive Income (loss) Treasury Stock Total
Balance as of January 1, 2021 11,604,253 $ 14 $ 61,674 $ (3,631 ) $             (11 ) $ (47,490 ) $ 10,556

Issuance of common stock and warrants for cash from public offering, net of $2,365 offering cost 3,000,000 2 35,133 - - - 35,135

Issuance of common stock and warrants for cash from private offering 550,000 - 5,500 - - - 5,500

Cash dividends - - (4,546 ) - - - (4,546 )

Unrealized loss on marketable debt securities, net of taxes - - - - (78 ) - (78 )

Stock-based compensation - - 1,504 - - - 1,504

Net loss - - - (338 ) - - (338 )

Balance as of June 30, 2021 15,154,253 $ 16 $ 99,265 $ (3,969 ) $ (89 ) $ (47,490 ) $ 47,733
Common Stock Shares Outstanding Par Value Additional Paid in Capital Retained Earnings Comprehensive Loss Treasury Stock Total

Common Stock
Shares Outstanding,
Par Value Additional Paid in Capital Accumulated Deficit
Accumulated
Comprehensive Income (loss)
Treasury Stock Total
Balance as of January 1, 2021 11,604,253 $ 14 $ 61,674 $ (3,631 ) $ (11 ) $ (47,490 ) $ 10,556
Issuance of common stock and warrants for cash from public offering, net of $2,365 offering cost 3,000,000 2 35,133 - - - 35,135
Issuance of common stock and warrants for cash from private offering 550,000 - 5,500 - - - 5,500
Unrealized loss on marketable debt securities - - - - (11 ) - (11 )
Stock-based compensation - - 428 - - - 428
Net income - - - 1,057 - - 1,057
Balance as of March 31, 2021 15,154,253 $ 16 $ 102,735 $ (2,574 ) $ (22 ) $ (47,490 ) $ 52,665

For the Six Months Ended June 30, 2020
Common Stock Shares Outstanding, Net of Shares of Treasury Stock Par Value Additional Paid in Capital Accumulated Deficit Accumulated Comprehensive Income (loss) Treasury Stock Total
Balance as of January 1, 2020 11,573,593 $ 14 $ 60,215 $ (1,506 ) $          (2 ) $ (47,490 ) $ 11,231

Unrealized loss on marketable debt securities, net of realized losses of $3, net of taxes - - - - 6 - 6
Unrealized (gain) loss on marketable debt securities, net of realized losses, net of taxes 6 6

Stock-based compensation 18,055 - 396 - - - 396

Net loss - - - (739 ) - - (739 )
Net income loss (739) (739)

Balance as of June 30, 2020 11,591,648 $ 14 $ 60,611 $ (2,245 ) $ 4 $ (47,490 ) $ 10,894
See accompanying notes to condensed consolidated financial statements

5

ProPhase Labs, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
June 30, 2021 June 30, 2020
For the six months ended
June 30, 2021 June 30, 2020
Cash flows from operating activities
Net loss $ (338 ) $ (739 )
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Realized loss on marketable debt securities 7 -
Depreciation and amortization 1,118 167
Amortization of debt discount 3 -
Amortization on right-of-use assets 167 -
Lower of cost or net realizable value inventory adjustment - 32
Stock-based compensation expense 1,504 396
Change in fair value of investment securities (164 ) -
Non-cash interest income on secured promissory note receivable (315 ) -
Changes in operating assets and liabilities:
Accounts receivable (3,466 ) 80
Escrow receivable - 4,812
Inventory (12,130 ) (620 )
Prepaid and other assets 2,434 91
Other assets (8 ) -
Accounts payable and accrued expenses 3,343 412
Lease liabilities 205 -
Other liabilities 4,190 26
Net cash (used in) provided by operating activities (3,450 ) 4,657

Cash flows from investing activities
Issuance of secured promissory note receivable (1,000 ) -
Purchase of marketable securities (16,841 ) (3,436 )
Proceeds from sale of marketable debt securities 300 1,029
Capital expenditures (4,237 ) (147 )
Net cash used in investing activities (21,778 ) (2,554 )

Cash flows from financing activities
Proceeds from issuance of common stock from public offering, net 35,135 -
Proceeds from issuance of common stock and warrants from private offering 5,500 -
Payment of dividends (4,546 )
Net cash provided by financing activities 36,089 -

Increase in cash and cash equivalents 10,861 2,103
Cash and cash equivalents, at the beginning of the period 6,816 434
Cash and cash equivalents, at the end of the period $ 17,677 $ 2,537

Supplemental disclosures:
Cash paid for income taxes $ - $ -
Interest payment on the promissory notes $ 500 $ -

Supplemental disclosure of non-cash investing and financing activities:
Net unrealized gain (loss), investments in marketable debt securities $ (78 ) $ 6
March 31, 2022 March 31, 2021
For the three months ended
March 31, 2022 March 31, 2021
Cash flows from operating activities
Net income $ 12,494 $ 1,057
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Realized loss on marketable debt securities 179 2
Depreciation and amortization 1,249 536
Amortization of debt discount 1 2
Amortization on right-of-use assets 83 85
Gain on sale of assets (23 ) -
Stock-based compensation expense 482 428
Change in fair value of investment securities 76 -
Accounts receivable allowances (924 ) -
Inventory valuation reserve 25 -
Changes in operating assets and liabilities:
Accounts receivable 1,938 (11,178 )
Inventory (105 ) (12,987 )
Prepaid and other assets (126 ) 2,243
Other assets 360 (8 )
Accounts payable and accrued expenses 1,178 4,009
Accrued diagnostic services (878 ) -
Deferred revenue 165 -
Deferred tax liability
443
-
Lease liabilities (73 ) 101
Income tax payable
2,973
-
Other liabilities 770 7,818
Net cash provided by (used in) operating activities 20,287 (7,892 )

Cash flows from investing activities
Issuance of secured promissory note receivable - (1,000 )
Purchase of marketable securities (206 ) (2,005 )
Proceeds from sale of marketable debt securities 5,300 100
Proceeds from dispositions of property and other assets 85 -
Capital expenditures (1,095 ) (3,927 )
Net cash provided by (used in) investing activities 4,084 (6,832 )

Cash flows from financing activities
Proceeds from issuance of common stock from public offering, net - 35,135
Proceeds from issuance of common stock and warrants from private offering - 5,500
Repayment of note payable (1,426 ) -
Repurchases of common shares (1,150 ) -
Payment of dividends (4,646 ) -
Net cash (used in) provided by financing activities (7,222 ) 40,635

Increase in cash, cash equivalents and restricted cash 17,149 25,911
Cash, cash equivalents and restricted cash, at the beginning of the period 8,658 6,816
Cash, cash equivalents and restricted cash, at the end of the period $ 25,807 $ 32,727

Supplemental disclosures:
Cash paid for income taxes $ - $ -
Interest payment on the promissory notes $ 241 $ 250

Supplemental disclosure of non-cash investing and financing activities:
Issuance of common shares for debt conversion $ 600 $ -
Net unrealized gain (loss), investments in marketable debt securities $ 37 $ (11 )
See accompanying notes to condensed consolidated financial statements

6

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 ~~biotech~~company that offers a range of services including diagnostic testing, genomics testing and contract manufacturing. We provide traditional CLIA molecular laboratory services, including SARS-CoV-2 (“COVID-19”) testing and seek to leverage our Clinical Laboratory Improvement Amendments (“CLIA”) accredited laboratory services to provide whole genome sequencing and research direct to consumers, while building a genomics ~~company with~~database to be used for further research. In addition, we have deep experience with ~~over-the- counter~~over-the-counter (“OTC”) consumer healthcare products and dietary supplements. We currently conduct our operations through two operating segments: diagnostic services and consumer products. Until late Fiscal 2020, we were engaged primarily in the research, development, manufacture, distribution, marketing and sale of OTC consumer healthcare products and dietary supplements in the United States. However, commencing in December 2020, we also began offering COVID-19 and other Respiratory Pathogen Panel (RPP) molecular tests through our ~~new~~ diagnostic services ~~business.~~business, and in August 2021 we began offering personal genomics products and services.

Our ~~wholly-owned~~wholly owned subsidiary, ProPhase Diagnostics, Inc. (“ProPhase Diagnostics”), which was formed on October 9, 2020, offers a ~~variety~~broad array of ~~medical tests,~~clinical diagnostic and testing services at its CLIA certified laboratories including state-of-the-art 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 and ~~Respiratory Pathogen Panel (RPP) molecular tests.~~antibody/immunity testing for COVID-19. On October 23, 2020, we ~~completed the acquisition of all of the issued and outstanding shares of~~acquired Confucius Plaza Medical Laboratory Corp. (“CPM”), which ~~operates~~included a non-operating but certified 4,000 square foot ~~Clinical Laboratory Improvement Amendments (“CLIA”)~~CLIA accredited laboratory located in Old Bridge, New ~~Jersey, for approximately $2.5~~ ~~million in cash (see Note 3, Business Acquisition). As a result of the acquisition of CPM in October 2020, we entered into a new business line, diagnostic services.~~Jersey. In December 2020, we expanded our diagnostic service business with the ~~signing of a lease and build out~~build-out of a second, larger CLIA accredited laboratory in Garden City, New York. Operations at this second facility commenced in ~~February~~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 testing technologies, a comprehensive method for analyzing entire genomes, including the genes and chromosomes in DNA. The data obtained from genomic testing can help to 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~~wholly owned subsidiary, Pharmaloz Manufacturing, Inc. (“PMI”), is a full-service contract manufacturer and private label developer of a broad range of ~~non- GMO,~~non-GMO, organic and natural-based cough drops and lozenges and OTC drug and dietary supplement products.

On August 10, 2021, we acquired Nebula Genomics, Inc., a privately owned personal genomics company, through our new wholly-owned subsidiary, ProPhase Precision Medicine, Inc. (see Note 15, Subsequent Events).We also develop and market dietary supplements under the TK Supplements® brand.
~~In addition, we continue to actively pursue acquisition opportunities for other companies, technologies and products within and outside the consumer products~~ ~~industry.~~
We use a December 31 year-end for financial reporting purposes. References herein to “Fiscal 2020” mean the fiscal year ended December 31, 2020 and references to other “Fiscal” years mean the year that ended on December 31 of the year indicated. The term “we”, “us” or the “Company” as used herein also refer, where appropriate, to the Company, together with its subsidiaries unless the context otherwise requires.

Note 2 –- Summary of Significant Accounting Policies
Basis of Presentation
The unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial statements and the rules of the Securities and Exchange Commission (“SEC”) applicable to interim financial statements, and therefore do not include all disclosures that might normally be required for financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The accompanying unaudited condensed consolidated financial statements have been prepared by management without audit and should be read in conjunction with our audited consolidated financial statements, including the notes thereto, appearing in our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2020.~~2021. In the opinion of management, all adjustments necessary for a fair presentation of the consolidated financial position, consolidated results of operations and other comprehensive loss and consolidated cash flows, for the periods indicated, have been made. The results of operations for the ~~six~~three months ended ~~June 30, 2021~~March 31, 2022 are not necessarily indicative of operating results that may be achieved over the course of the full year.

7

ProPhase Labs, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
Segments

In accordance with FASB ASC 280, “Segment Reporting” (“ASC 280”), the Company discloses financial and descriptive information about its reportable operating segments.
ASC 280 establishes standards for reporting information about operating segments in annual and interim financial statements and requires that companies report financial and descriptive information about their reportable segments based on a management approach. ASC 280 also establishes standards for related disclosures about products and services, geographic areas and major customers.
Operating segments are defined as components of an enterprise that engage in business activities for which separate financial information is available and is evaluated by the Chief Operating Decision Maker (“CODM”), which for the Company is its Chief Executive Officer, in deciding how to allocate resources and assess performance. ~~For the six months ended June 30, 2021, we~~We maintain two operating segments: diagnostic services (which includes our COVID-19 and other diagnostic testing services) and consumer ~~products. For the six months ended June 30, 2020, we only had the consumer~~ products ~~operating segment.~~(which includes our contract manufacturing, retail customers and personal genomics products and services) (see Note ~~14,~~15 Segment Information).
~~Business and Liquidity Uncertainties~~

~~For the six months ended June 30, 2021, our net revenues were derived from both our diagnostic services~~Business and ~~consumer products segments. For the six months ended June 30, 2020, our net revenues were derived solely from our consumer products segment.~~Liquidity Risks and Uncertainties

~~The~~We launched our diagnostic service business ~~commenced~~ in December 2020 and expanded in ~~February~~January 2021 with the opening of our ~~new~~ Garden City, New York CLIA accredited laboratory. Our diagnostic service business is and will continue to be influenced by the level of demand for COVID-19 and other diagnostic testing, how long this demand persists, the ~~price~~prices we are able to receive for performing our testing services, ~~and the length of time~~our ability to collect payment or reimbursement for ~~which that demand persists,~~our testing services, as well as the availability of COVID-19 testing from other laboratories and the period of time for which we are able to serve as an authorized laboratory offering COVID-19 testing under various Emergency Use Authorizations.

While our revenues increased significantly for the ~~six months~~year ended ~~June 30,~~December 31, 2021 and the first quarter of fiscal 2022 as a result of the launch of our ~~new~~ diagnostic services business, ~~line,~~ we ~~have made and~~ will continue to ~~make substantial investments~~be dependent on both government agency and insurance company reimbursement as well as the prevalence of COVID-19 associated strains.
In March 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), was enacted, providing for reimbursement to ~~secure~~healthcare providers for COVID-19 tests provided to uninsured individuals, subject to continued available funding. Approximately 69% and 57% of our diagnostic services revenue for the ~~necessary equipment, supplies~~three months ended March 31, 2022 and ~~personnel~~2021, respectively was generated from this program for the uninsured. On March 22, 2022, the Health Resources & Services Administration (HRSA) program stopped accepting claims for COVID-19 testing and treatment due to ~~provide these~~lack of sufficient funds. Despite requests from the Acting Director of the Office of Management and Budget and the White House Coordinator for COVID-19 Response for additional emergency funding for the uninsured program, emergency funding has not been allocated to the HRSA uninsured program as of the financial statement issuance date. We continue to perform testing ~~services.~~for uninsured persons and are incurring the accompanying costs. However, as a result of the suspension of the HRSA uninsured program, we did not recognize any revenue related to COVID-19 testing that we performed for uninsured individuals from March 23, 2022 through March 31, 2022. If funding for the HRSA program is reinstituted in the future, we will submit eligible claims for reimbursement to HRSA and record the associated revenues. If the HRSA program remains unfunded and we are unable to submit claims for reimbursement, there could be a material adverse effect on our business and financial condition.
8
ProPhase Labs, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
In addition, our diagnostic service business is subject to extensive federal, state, and local laws and regulations, all of which are subject to change, as well as laws and regulations governing the submission of claims for payment for our services, such as those relating to: coverage of our services under Medicare, Medicaid and other federal health care programs; the amounts that we may bill for our services; and the party to which we must submit claims. Also, reimbursement policies and requirements for some payers and procedures are ambiguous, which could lead to billing errors and related disputes. There can be no assurance that our efforts to offer and perform COVID-19 or other diagnostic testing will be successful in the future or that the revenue and operating profits from such business will increase or maintain their current level.

~~There are still numerous uncertainties associated with the COVID-19 pandemic, including the efficacy of the vaccines that have been developed~~We acquired and commenced our personal genomics business in August 2021. This business is and will continue to ~~treat the virus~~be influenced by demand for our genetic testing products and ~~their ability to protect against new strains of the virus, people’s willingness to receive a vaccine, possible resurgences of the coronavirus and/or new strains of the virus, the extent~~services, our marketing and ~~duration of protective~~service capabilities, and preventative measures that may be adopted by local, state and/or the federal government in the future as a result of future outbreaks, the duration of any future business closures, the ongoing impact of COVID-19 on the U.S. and world economy and consumer confidence, and various other uncertainties.
~~The COVID-19 pandemic has also had a negative impact on the global capital markets and economies worldwide and could ultimately have a material adverse impact on~~ our ability to ~~raise capital needed to operate our business.~~comply with applicable regulatory requirements.

Our consumer sales are and will continue to be influenced by ~~and subject to~~ (i) the timing of acceptance of our TK Supplements^® consumer products in the marketplace, and (ii) fluctuations in the timing of purchase and the ultimate level of demand for the OTC healthcare and cold remedy products that we manufacture, ~~for others,~~ which ~~are~~is largely a function of the timing, length and severity of each cold season. Generally, a cold season is defined as the period from September to March when the incidence of the common cold rises as a ~~consequence~~result of the change in weather and other factors. We generally experience in the first, third and fourth quarter higher levels of net ~~sales~~revenues from our contract manufacturing ~~of OTC healthcare and cold remedy products.~~business. Revenues are generally at their lowest levels in the second quarter when customer demand generally declines.

8
For the three months ended March 31, 2022, $20.3 million was provided by operating activities. The Company had cash, cash equivalents and marketable securities of $29.4 million as of March 31, 2022. Based on management’s current business plans, the Company estimates it will have enough cash and liquidity to finance its operating requirements for at least 12 months from the date of filing these unaudited condensed consolidated financial statements. However, due to the nature of the diagnostic business and the Company’s focus thus far on COVID-19 testing, there are inherent uncertainties associated with managements’ business plan and cash flow projections, particularly if the Company is unable to grow its diagnostic testing business beyond COVID-19 testing services.

~~Use~~The Company’s future capital needs and the adequacy of ~~Estimates~~its available funds will depend on the Company’s ability to achieve sustained profitability from its diagnostic services, the Company’s ability to successfully diversify its diagnostic services revenue streams and the Company’s ability to market and grow its personal genomics business. The Company may be required to raise additional funds through equity or debt securities offerings or strategic collaboration and/or licensing agreements in order to fund operations until it is able to generate enough revenues. Such financing may not be available on acceptable terms, or at all, and the Company’s failure to raise capital when needed could have a material adverse effect on its strategic objectives, results of operations and financial condition.
Use of Estimates
The preparation of condensed consolidated financial statements and the accompanying notes thereto, in conformity with GAAP, requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and reported amounts of revenues and expenses during the respective reporting periods. Examples include revenue recognition and the impact of the variable consideration of diagnostic test reimbursement rates, the provision for ~~bad debt, sales returns~~uncollectible receivables and billing errors, allowances, ~~diagnostic services reimbursements,~~slow moving and/or dated inventory ~~obsolescence, useful lives of property~~ and ~~equipment,~~associated provisions, the potential impairment of ~~goodwill, intangibles and property and equipment,~~long-lived assets, stock based compensation valuations, income tax asset valuations and assumptions related to accrued advertising. ~~These~~
Our estimates and assumptions are based on historical experience, current trends and other factors that management believes to be relevant at the time the condensed consolidated financial statements are prepared. Management reviews the accounting policies, assumptions, estimates and judgments on a quarterly basis. Actual results could differ from those estimates.

Cash and Cash Equivalents
We consider all highly liquid investments with a maturity of three months or less at the time of purchase to be cash equivalents. Cash equivalents include cash on hand and monies invested in money market funds. The carrying amount approximates the fair market value due to the short-term maturity of these securities.

~~Marketable Debt Securities~~Restricted Cash

Restricted cash as of December 31, 2021 includes approximately $250,000 held in escrow related to a potential purchase of an additional lab facility. The potential purchase was not consummated, and we are pursuing the return of the escrow, which is in dispute. As of March 31, 2022, we recognized an expense for this balance as the recovery of the funds was no longer considered probable.
9
ProPhase Labs, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
Marketable Debt Securities
We have classified our investments in marketable debt securities as available-for-sale and as a current asset. Our investments in marketable debt securities are carried at fair value, with unrealized gains anand as a separate component of stockholders’ equity. Realized gains and losses from our marketable debt securities are recorded as interest income (expense). These investments in marketable debt securities carry maturity dates between one and three years from date of ~~purchase and interest rates of~~ purchase.
~~0.94~~
~~% to~~ ~~3.35% during the first two quarters of Fiscal 2021. For the three and six months ended June 30, 2021, we reported unrealized losses of $67,000~~ ~~and $78,000, respectively. Unrealized gains and losses are classified as other comprehensive loss and the cost is determined on a specific identification basis.~~ The following is a summary of the components of our marketable debt securities and the underlying fair value input level tier hierarchy (in thousands) (see fair value of financial instruments) ~~(in thousands)~~:
Summary of Components of Marketable Securities
As of June 30, 2021 As of March 31, 2022
Amortized Unrealized Fair Amortized Unrealized Unrealized Fair
Cost Losses Value Cost Gains Losses Value
U.S. government obligations $ 2,556 $ (22 ) $ 2,534 $ 667 $ 123 $ (44 ) $ 746
Corporate obligations 15,628 (67 ) 15,561 2,839 - (42 ) 2,797
$ 18,184 $ (89 ) $ 18,095 $ 3,506 $ 123 $ (86 ) $ 3,543

As of December 31, 2020
Amortized Unrealized Fair
Cost Losses Value
U.S. government obligations $ 1,021 $ (7 ) $ 1,014
Corporate obligations 629 (4 ) 625
$ 1,650 $ (11 ) $ 1,639
9
We believe that the unrealized gains or losses generally are the result of a change in the risk premiums required by market participants rather than an adverse change in cash flows or a fundamental weakness in the credit quality of the issuer or underlying assets.
As of December 31, 2021
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
U.S. government obligations $ 650 $ 17 $ - $ 667
Corporate obligations 8,304 - (192 ) 8,112
$ 8,954 $ 17 $ (192 ) $ 8,779

Marketable Equity Securities

Marketable equity securities are recorded at fair value in the consolidated balance sheets. The change in fair value of marketable equity securities is recognized within other non-operating income, net in the consolidated statements of income.

On June 25, 2021, we were issued 1,260,619 common shares (the “Investment Shares”) ~~by the consultant~~ as an interest payment under ~~the~~our note receivable (see Note 13, Consulting Agreement and Secured Promissory Note ~~(see note 13)~~Receivable) with a fair value of $315,000~~. The~~at the time of issuance and a fair value of ~~the Investment Shares as of June 30, 2021 was based upon the closing stock price of~~ $~~0.38~~ 76,000 at December 31, 2021.~~per share.~~ The investment was classified as a Level 1 financial instrument. We recorded a $~~164,000~~76,000 ~~increase~~decrease in fair value of investment securities within the statement of operations for the ~~six~~three months ended ~~June 30, 2021.~~March 31, 2022.

~~Inventories,~~Accounts Receivable, net
Accounts receivable consists primarily of amounts due from government agencies and healthcare insurers. Unbilled accounts receivable relates to the delivery of our diagnostic testing services for which the related billings will occur in a future period, after a patient’s insurance information has been validated, and represent amounts for which we have a right to receive payment. Unbilled accounts receivable is classified as accounts receivable on the consolidated balance sheet. We carry our accounts receivable at the amount of consideration for which we expect to be entitled less allowances. When estimating the allowances for our diagnostics business, the Company pools its receivables based on the following payer types: healthcare insurers and government payers. The Company principally estimates the allowances by pool based on historical collection experience, current economic conditions, government and healthcare insurer payment trends, and the period of time that the receivables have been outstanding. Should a payer’s reimbursement policy change or their credit quality deteriorate, the Company removes the payer from their respective pools and establishes allowances based on the individual risk characteristics of such payer.
10
ProPhase Labs, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
Accounts are written off as uncollectible at the time we determine that collections are unlikely. Accounts receivable, net is comprised of the following (in thousands):
Schedule of Accounts Receivable Net
March 31, 2022 December 31, 2021
Trade accounts receivable $ 24,727 $ 18,520
Unbilled accounts receivable 14,944 23,089
Accounts receivable, gross 39,671 41,609
Less allowances (2,977 ) (3,901 )
Total accounts receivable $ 36,694 $ 37,708
Inventory, net
Inventory is valued at the lower of cost, determined on a first-in, first-out basis ~~(FIFO)~~(“FIFO”), or net realizable value. Inventory items are analyzed to determine cost and the net realizable value and appropriate valuation adjustments are ~~then~~ established.
At ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, the ~~financial statements include non-cash adjustments to adjust inventory for excess, obsolete or short-dated shelf-life inventory by $87,000and $167,000, respectively. The~~ components of inventory are as follows (in thousands):
Schedule of Components of Inventory
June 30, December 31, March 31, December 31,
2021 2020 2022 2021
Diagnostic services testing material $ 13,240 $ 1,028 $ 3,103 $ 2,989
Raw materials 1,249 1,404 1,238 1,514
Work in process 345 437 476 260
Finished goods 335 170 322 272
Inventory $ 5,139 $ 5,035
Inventory valuation reserve (459 ) (435 )
Inventory, net $ 15,169 $ 3,039 $ 4,680 $ 4,600

Property, Plant and Equipment
Property, plant and equipment are recorded at cost. We use the straight-line method in computing depreciation for financial reporting purposes. Depreciation expense is computed in accordance with the following ranges of estimated asset lives: building and improvements –- ten to thirty-nine years; machinery and equipment including lab equipment –- three to seven years; computer equipment and software –- three to five years; and furniture and fixtures –- five years.
~~We did not identify any indicators of our property, plant and equipment for the six months ended June 30, 2021 and 2020 and concluded there were no impairments or changes in useful lives.~~
~~Concentration of Risks~~

Future revenues, costs, margins and profits will continue to be influenced by our ability to maintain our manufacturing availability and capacity together with our marketing and distribution capabilities and the regulatory requirements associated with the developmentConcentration of OTC consumer healthcare products, dietary supplements and other remedies in order to compete on a national level and/or international level. Our diagnostic services business will be influenced by demand for our diagnostic testing services, particularly COVID-19, as well as our marketing and service capabilities and regulatory requirements associated with operating under and maintaining our CLIA license.
Our business is subject to federal and state laws and regulations adopted for the health and safety of users of our products. The manufacturing and distribution of OTC healthcare and dietary supplement products are subject to regulations by various federal, state and local agencies, including the Food and Drug Administration (“FDA”) and, as applicable, the Homeopathic Pharmacopoeia of the United States. The FDA is also responsible for the regulation of diagnostic testing instruments, test kits, reagents and other devices used by clinical laboratories.Financial Risks

Financial instruments that potentially subject us to significant concentrations of credit risk consist principally of cash investments, marketable debt securities, and ~~trade~~ accounts receivable. Our marketable securities are fixed income investments, which are highly liquid and can be readily purchased or sold through established markets.

We maintain cash and cash equivalents with certain major financial institutions. As of ~~June 30, 2021,~~March 31, 2022, our cash and cash equivalents ~~balance were $17.7million~~ and ~~our bank~~restricted cash balance was $~~17.9~~25.8 million. Of the total bank balance, $~~0.5~~0.9 million was covered by federal depository insurance and $~~17.4~~ 24.9million was uninsured at ~~June 30, 2021.~~March 31, 2022.

1011
ProPhase Labs, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)

Accounts receivable subject us to credit risk concentrations from time-to-time. We extend credit to our consumer healthcare product customers based upon an evaluation of the customer’s financial condition and credit history and generally do not require collateral. Our diagnostic services receivable credit risk is based on payer reimbursement experience, which includes government agencies and healthcare insurers, the period the receivables have been outstanding and the historical ~~collection.~~collection rates. The collectability of the diagnostic services receivables is also directly linked to the quality of our billing processes, which ~~depend~~depends on information provided to the payors and billing services of third parties. These credit concentrations impact our overall exposure to credit risk, which could be further affected by changes in economic, regulatory or other conditions that may impact the timing and collectability of trade receivables and diagnostic test receivables. Additionally, the reimbursement receivables from the diagnostic service business are subject to billing errors and related disputes.meeting their requirements for reimbursement.

We also assess the financial condition of the debtor under the Secured Note (see Note 13), balances due to us and other factors, and based on this assessment, we did not offset our note receivable with an allowance at June 30, 2021 and June 30, 2020.Leases

~~Leases~~
At the inception of an arrangement, we determine whether the arrangement is or contains a lease based on the unique facts and circumstances present in the arrangement. Most leases with a term greater than one year are recognized on the balance sheet as right-of-use assets and short-term and long-term lease liabilities, as applicable. We have elected not to recognize on the balance sheet leases with terms of 12 months or less. We typically only include an initial lease term in its assessment of a lease arrangement. Options to renew a lease are not included in our assessment unless there is reasonable certainty that we will renew.

Operating lease liabilities and their corresponding right-of-use assets are recorded based on the present value of lease payments over the expected remaining lease term. Certain adjustments to the right-of-use asset may be required for items such as incentives received. The interest rate implicit in our leases is typically not readily determinable. As a result, we utilize our incremental borrowing rate, which reflects the fixed rate at which we could borrow on a collateralized basis the amount of the lease payments in the same currency, for a similar term and in a similar economic environment (see Note ~~10, Lease)~~12, Leases).

The components of a lease should be allocated between lease components ~~(e.g.~~(e.g., land, building, etc.) and non-lease components ~~(e.g.~~(e.g., common area maintenance, consumables, etc.). The fixed and in-substance fixed contract consideration (including any consideration related to non-components) must be allocated based on the respective relative fair values to the lease components and non-lease components.

Goodwill and ~~Long-lived~~Intangible Assets

~~We review our~~Goodwill represents the excess of the fair value of the consideration transferred over the fair value of the underlying identifiable assets and liabilities acquired in a business combination. Goodwill and intangible assets deemed to have an indefinite life are not amortized, but instead are assessed for impairment annually. Additionally, if an event or change in circumstances occurs that would more likely than not reduce the fair value of the reporting unit below its carrying value, we would evaluate goodwill at ~~least annually for impairment as well as the carrying value of goodwill and our long-lived assets for impairment whenever events or changes in circumstances indicate~~ that the carrying amount of these assets may not be fully recoverable. When it is determined that the carrying amount of long-lived assets or goodwill is impaired, impairment is measured by comparing an asset’s estimated fair value to its carrying value. The determination of fair value is based on quoted market prices in active markets, if available, or independent appraisals; sales price negotiations; or projected future cash flows discounted at a rate determined by management to be commensurate with our business risk. The estimation of fair value utilizing discounted forecasted cash flows includes significant judgments regarding assumptions of revenue, operating and marketing costs; selling and administrative expenses; interest rates; property and equipment additions and retirements; and industry competition, general economic and business conditions, among other factors.time.

~~Management has determined~~In testing for goodwill impairment, we have the option to first assess qualitative factors to determine whether the existence of events or circumstances lead to a determination that ~~there was no impairment to our long-lived assets~~it is more likely than not that the fair value of the reporting unit is less than its carrying amount. If, after assessing the totality of events and ~~goodwill on~~circumstances, we conclude that it is not more likely than not that the ~~basis~~fair value of a ~~review of a discounted cash flow analysis, which for~~reporting unit is less than its carrying amount, then performing the two-step impairment test is not required. If we conclude otherwise, we are required to perform the two-step impairment test. The goodwill impairment test is performed at the reporting unit level ofby comparing the subsidiaries to which the goodwill relates. There were no events or circumstances that required an assessment to be performed on our long-lived assets with definite lives. If there is a material change in the assumptions used in the determination ofestimated fair value orof a ~~material change in~~reporting unit with its respective carrying value. If the ~~conditions or circumstances influencing~~estimated fair value ~~we could~~exceeds the carrying value, goodwill at the reporting unit level is not impaired. If the estimated fair value is less than the carrying value, an impairment charge will be ~~required~~recorded to ~~recognize a material impairment charge.~~reduce the reporting unit to fair value.

1112

ProPhase Labs, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
Intangible assets deemed to have finite lives are amortized on a straight-line basis over their estimated useful lives, where the useful life is the period over which the asset is expected to contribute directly, or indirectly, to our future cash flows.
Fair Value of Financial Instruments
We ~~measures~~measure assets and liabilities at fair value based on expected exit price as defined by the authoritative guidance on fair value measurements, which represents the amount that would be received on the sale date of an asset or paid to transfer a liability, as the case may be, in an orderly transaction between market participants. As such, fair value may be based on assumptions that market participants would use in pricing an asset or liability. The authoritative guidance on fair value measurements establishes a consistent framework for measuring fair value on either a recurring or nonrecurring basis whereby inputs, used in valuation techniques, are assigned a hierarchical level.

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

● Level 1: Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
● Level 2: Inputs reflect quoted prices for identical assets or liabilities in markets that are not active; quoted prices for similar assets or liabilities in active markets; inputs other than quoted prices that are observable for the assets or liabilities; or inputs that are derived principally from or corroborated by observable market data by correlation or other means.
● Level 3: Unobservable inputs reflecting the Company’s assumptions incorporated in valuation techniques used to determine fair value. These assumptions are required to be consistent with market participant assumptions that are reasonably available.

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

We account for our marketable securities at fair value, with the net unrealized gains or losses of marketable debt securities reported as a component of accumulated other comprehensive income or loss and marketable equity securities change in fair value reported on the condensed consolidated statement of ~~operations (see note 13, Secured Promissory Note Receivable and Consulting Agreement).~~operations. The components of marketable securities ~~and~~ are as follows (in thousands):

Schedule of Fair Value of Financial Instruments
As of June 30, 2021
Level 1 Level 2 Level 3 Total
Marketable debt securities
U.S. government obligations $ - $ 2,534 $ - $ 2,534
Corporate obligations - 15,561 - 15,561
Marketable equity securities 479 - - 479
$ 479 $ 18,095 $ - $ 18,574
As of March 31, 2022
Level 1 Level 2 Level 3 Total
U.S. government obligations $ - $ 746 $ - $ 746
Corporate obligations - 2,797 - 2,797
$ - $ 3,543 $ - $ 3,543

As of December 31, 2020
Level 1 Level 2 Level 3 Total
Marketable debt securities
U.S. government obligations $ - $ 1,014 $ - $ 1,014
Corporate obligations - 625 - 625
$ - $ 1,639 $ - $ 1,639
13

ProPhase Labs, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
As of December 31, 2021
Level 1 Level 2 Level 3 Total
U.S. government obligations $ - $ 667 $ - $ 667
Corporate obligations - 8,112 - 8,112
Marketable equity securities 76 - - 76
$ 76 $ 8,779 $ - $ 8,855
There were no transfers of marketable debt securities between Levels 1, 2 or 3 for the ~~six~~three months ended ~~June 30,~~March 31, 2022 and 2021.

Revenue Recognition
We recognize revenue that represents the transfer of promised goods or services to customers at an amount that reflects the consideration that is expected to be received in exchange for those goods or services. We recognize revenue when performance obligations with our customers have been satisfied. At contract inception, we evaluate the contract to determine if revenue should be recognized using the following five steps: (1) identify the contract with the customer; (2) identify the performance obligations; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations; and (5) recognize revenue when (or as) the entity satisfies a performance obligation.

Contract with Customers and Performance Obligations
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. ~~We had historically generated sales principally through two types of customers, contract manufacturing and retail customers for our consumer products.~~ Sales from product shipments to contract manufacturing and retailer customers are recognized at the time ownership is transferred to the customer. ~~As of December 2020, we also began generating revenues through diagnostic services.~~ Revenue from diagnostic services is recognized when the results are made available to the customer. ~~Net revenues~~Revenue from ~~consumer products were $1.6~~ ~~million and $4.1~~ ~~million for~~our personal genomics business is recognized when the ~~three and six months ended June 30, 2021, respectively. Net revenue from diagnostic services was $7.5~~ ~~million and $20.3~~ ~~million for the three and six months ended June 30, 2021, respectively. Net revenues for consumer products were $3.6~~ ~~million and $5.5~~ ~~million and zero sales from diagnostic services for the three and six months ended June 30, 2020, respectively.~~
~~The Company’s performance obligation for contract manufacturing and retail customers is~~genetic testing results are provided to ~~provide the goods ordered by~~ the customer. For ~~diagnostic~~subscription services associated with our genomic testing, we recognize revenue ratably over the ~~Company has one performance obligation, which is to provide the results~~term of the ~~laboratory test to the customer.~~subscription.
12

Transaction Price
For contract manufacturing and retail customers, the transaction price is fixed based upon either (i) the terms of a combined master agreement and each related purchase order, or (ii) if there is no master agreement, the price per individual purchase order received from each customer. The customers are invoiced at an agreed upon contractual price for each unit ordered and delivered by the Company.

Revenue from retail customers is reduced for trade promotions, estimated sales returns and other allowances in the same period as the related sales are recorded. No such allowance is applicable to our contract manufacturing customers. We estimate potential future product returns and other allowances related to current period revenue. We analyze historical returns, current trends, and changes in customer and consumer demand when evaluating the adequacy of the sales returns and other allowances.

14
ProPhase Labs, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
We do not accept returns ~~in the~~from our contract manufacturing ~~revenue stream.~~customers. Our return policy for retail customers accommodates returns for (i) discontinued products, (ii) store closings and (iii) products that have reached or exceeded their designated expiration date. We do not impose a period of time during which product may be returned. All requests for product returns must be submitted to us for pre-approval. We will not accept return requests pertaining to customer inventory “Overstocking” or “Resets”. We will accept return requests only for products in their intended package configuration. We reserve the right to terminate shipment of product to customers who have made unauthorized deductions contrary to our return policy or pursue other methods of reimbursement. We compensate the customer for authorized returns by means of a credit applied to ~~amounts.~~
~~Accrued advertising and other allowances operations as of June 30, 2021 included (i) $321,000~~ ~~for estimated returns and allowances, which is reported as a liability and (ii) $214,000~~ ~~for cooperative and incentive promotion costs, which is also reported as a liability. As of December 31, 2020, accrued advertising and other allowances included (i) $291,000~~ ~~for estimated returns, which is reported as a liability and (ii) $463,000~~ ~~for cooperative and incentive promotion costs, which was also reported as a liability.~~amounts owed.

For our diagnostic services business, a revenue transaction is initiated when we receive a requisition order to perform a diagnostic test. The information provided on the requisition form is used to determine the party that will be billed for the testing performed and the expected reimbursement. We provide diagnostic services to a range of ~~customers, including health plans, government agencies and consumers.~~customers. In many cases, the customer that orders our services is not responsible for paying for these services. Depending on the billing arrangement and applicable law, the payer may be the patient or a third party, such as a health plan, Medicare or Medicaid program and other government reimbursement programs. We bill the providers at standard price and take into consideration negotiated discounts and anticipated reimbursement remittance adjustments based on the payer portfolio, when revenue is recorded. We use the most expected value method to estimate the transaction price for reimbursements that vary from the listed contract price.

For our personal genomics business, a revenue transaction is initiated by a DNA test kit sale direct to the consumer sales via our website or through online retailers. The kit sales and subscriptions are billed at a standard price and take into consideration any discounts when revenue is recorded.
Recognize Revenue When the Company Satisfies a Performance Obligation
~~Performance obligations related to~~Recognition for contract manufacturing and retail customers ~~are~~is satisfied at a point in time when the goods are shipped to the customer as (i) we have transferred control of the assets to the customers upon shipping, and (ii) the customer obtains title and assumes the risks and rewards of ownership after the goods are shipped.
For diagnostic services, ~~the Company satisfies its performance obligation~~recognition occurs at the point in time that the results are made available to the customer, which is when the customer benefits from the information contained in the results and obtains control.

13
For genomic services, we satisfy our product performance obligation at a point in time when the genetic testing results are provided to the customer. For subscriptions services associated with its genomic testing, we satisfy our performance obligation ratably over the subscription period. If the customer does not return the test kit, services cannot be completed by us, potentially resulting in unexercised rights (“breakage”) revenue, including lifetime subscription services. We estimate breakage for the portion of test kits not expected to be returned using an analysis of historical data and consider other factors that could influence customer test kit return behavior. When breakage revenue is recognized on a kit, we recognize breakage on any associated subscription services ratably over the term of the subscription. The Company recognized breakage revenue from aggregate unreturned test kits and subscriptions of $0.4 million for the three months ended March 31, 2022.

Contract Balances
~~As of June 30, 2021 and December 31, 2020, we have deferred revenue of $233,000~~ ~~and $331,000, respectively, in relation to R&D stability and release testing programs recognized as contract manufacturing revenue.~~ Deferred revenues primarily consist of amounts that have been billed to or received from customers in advance of revenue recognition and prepayments received from customers in advance of services performed for the R&D work. ~~We recognize~~ As of March 31, 2022 and December 31, 2021, we have deferred ~~revenues~~revenue of $3.1 million and $2.9 million, respectively. Our new personal genomics business comprised $2.9million of the deferred revenue as ~~revenues when~~of March 31, 2022. The deferred revenue balance within the personal genomics business is comprised of kits to be sequenced and subscription services, ~~are performed~~ which have an average life between 12 and ~~the corresponding~~36 months. The remainder of deferred revenue ~~recognition criteria are met. Customer prepayments are generally applied against invoices issued~~relates to ~~customers when services are performed~~research and ~~billed.~~development (“R&D”) stability and release testing programs recognized as contract manufacturing revenue.
15
ProPhase Labs, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)

The following table disaggregates our deferred revenue by recognition period (in thousands):
Schedule of Deferred Revenue
As of
June 30, 2021 As of
December 31, 2020
Recognition Period
0-12 Months $ 112 $          169
13-24 Months 74 84
Over 24 Months 47 78
Total $ 233 $ 331
March 31, December 31,
2022 2021
Recognition Period
0-12 Months $ 2,246 $ 2,034
13-24 Months 598 530
Over 24 Months 260 375
Total $ 3,104 $ 2,939

Disaggregation of Revenue
We disaggregate revenue from contracts with customers into ~~three~~four categories: diagnostic services, contract manufacturing, retail ~~customers~~ and ~~diagnostic~~others, and genomic products and services. We determined that disaggregating revenue into these categories achieves the disclosure objective to depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.

The following table disaggregates ~~our~~the Company’s revenue by revenue source for the three ~~and six~~months ended ~~June 30,~~March 31, 2022 and 2021 ~~and 2020~~ (in thousands):
Schedule of Disaggregation by Revenue
For the three months ended For the six months ended For the three months ended
Revenue by Customer Type June 30, 2021 June 30, 2020 June 30, 2021 June 30, 2020 March 31, 2022 March 31, 2021
Diagnostic services $ 44,913 $ 12,738
Contract manufacturing $ 1,041 $ 3,472 $ 2,949 $ 5,195 1,154 1,908
Retail and others 565 151 1,190 316 546 625
Diagnostic services 7,536 - 20,274 -
Total revenue $ 9,142 $ 3,623 $ 24,413 $ 5,511
Genomic products and services 918 -
Total revenue, net $ 47,531 $ 15,271

Customer Consideration
The Company makes payments to certain diagnostic services customers for distinct services that approximate the fair value for those services. Such services include specimen collection, the collection and delivery of insurance and patient information necessary for billing and collection, and logistics ~~services, as well as other information requirements.~~services. Consideration associated with specimen collection services is classified in cost of revenues and the remaining costs are classified as diagnostic expenses within operating expenses in the accompanying statement of operations. ~~Diagnostic services cost~~
Sales Tax Exclusion from the Transaction Price
We exclude from the measurement of ~~revenue includes specimen collection payments to customers~~the transaction price all taxes assessed by a governmental authority that are both imposed on and ~~other costs incurred in connection~~concurrent with a specific revenue-producing transaction and collected by the ~~company operated laboratories, including reagent and other raw material costs, direct and indirect labor and other laboratory facility overhead (see Note 14, Segment Information).~~Company from the customer.

Shipping and Handling Activities
We account for shipping and handling activities that we perform as activities to fulfill the promise to transfer the ~~goods.~~good.

1416
ProPhase Labs, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)

Advertising and Incentive Promotions
Advertising and incentive promotion costs are expensed within the period in which they are utilized. Advertising and incentive promotion expense is comprised of (i) media advertising, presented as part of ~~sales~~general and ~~marketing~~administrative expense, (ii) cooperative incentive promotions and coupon program expenses, which are accounted for as part of net ~~sales,~~revenue, and (iii) free product, which is accounted for as part of cost of ~~sales.~~revenues. Advertising and incentive promotion expenses incurred for the three months ended ~~June 30,~~March 31, 2022 and 2021 ~~and 2020~~ were $~~111,000~~ 60,000and $~~49,000~~168,000~~, respectively. Advertising and incentive promotion expenses incurred for the six months ended June 30, 2021 and 2020 were $279,000~~ ~~and $96,000~~, respectively.

~~Share-Based~~Stock-Based Compensation

The Company accounts for stock-based compensation in accordance with FASB ASC 718, “Compensation - Stock Compensation.” Under the fair value recognition provision of the ASC, stock-based compensation cost is estimated at the grant date based on the fair value of the award. The Company estimates the fair value of stock options and warrants granted using the Black-Scholes-Merton option pricing model and stock grants at their closing reported market value. We recognize all ~~share-based~~stock-based payments to employees and directors, including grants of stock options, as compensation expense in the condensed consolidated financial statements based on their grant date fair values. ~~Fair~~The grant date fair values of stock options are determined through the use of the Black-Scholes option pricing model. The compensation cost is recognized as an expense over the requisite service period of the award, which usually coincides with the vesting period. We account for forfeitures as they occur.

Stock and stock options to purchase our common stock have been granted to employees pursuant to the terms of certain agreements and stock option ~~plans.~~plans (see Note 7, Stockholders’ Equity). Stock options are exercisable during a period determined by us, but in no event later than seven years from the date granted. ~~For the three months ended June 30, 2021 and 2020, we charged to operations $1,076,000~~ ~~and $198,000, respectively, for share-based compensation expense associated with vesting of outstanding equity awards.~~ ~~For the six months ended June 30, 2021 and 2020, we charged to operations $1,504,000~~ ~~and $396,000~~, ~~respectively, for share-based compensation expense associated with vesting of outstanding equity awards.~~
Research and Development (“R&D”)
R&D costs are charged to operations in the period incurred. R&D costs incurred for the three months ended ~~June 30,~~March 31, 2022 and 2021 ~~and 2020~~ were $~~93,000~~35,000 and $~~65,000~~115,000, respectively. R&D costs are principally related to personnel expenses and new product development initiatives and costs associated with our OTC health care products, dietary supplements and validation ~~fees~~costs in association with the diagnostic services ~~business including the validation work of the diagnostic services business~~business.

Income Taxes
We utilize the asset and liability approach, which requires the recognition of deferred tax assets and liabilities for the future tax consequences of events that have been recognized in our financial statements or tax returns. In estimating future tax consequences, we generally consider all expected future events other than enactments of changes in the tax law or rates. Until sufficient taxable income to offset the temporary timing differences attributable to operations and the tax deductions attributable to option, warrant and stock activities are assured, a valuation allowance equaling the total deferred tax asset is being provided.

~~We utilize a two-step approach to recognizing~~The Company recognizes deferred tax liabilities and ~~measuring uncertain tax positions. The first step is to evaluate~~assets based on the differences between the financial statement carrying amounts and the tax ~~position~~bases of assets and liabilities, using enacted tax rates in effect in the years the differences are expected to reverse.
The provision for, ~~recognition by determining if~~or benefit from, income taxes includes deferred taxes resulting from the ~~weight~~temporary differences in income for financial and tax purposes using the liability method. Future realization of deferred income tax assets requires sufficient taxable income within the carryback, carryforward period available under tax law. We evaluate, on a quarterly basis whether, based on all available evidence, ~~indicates~~it is probable that the deferred income tax assets are realizable. Valuation allowances are established when it is more likely than not that the ~~position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the~~ tax benefit of the deferred tax asset will not be realized. The evaluation, as prescribed by ASC 740- 10, “Income Taxes,” includes the ~~largest amount that is more than fifty percent likely~~consideration of ~~being realized upon ultimate settlement. Any interest~~all available evidence, both positive and negative, regarding historical operating results including recent years with reported losses, the estimated timing of future reversals of existing taxable temporary differences, estimated future taxable income exclusive of reversing temporary differences and carryforwards, and potential tax planning strategies which may be employed to prevent an operating loss or ~~penalties related to income taxes will be recorded as interest or administrative expense, respectively.~~tax credit carryforward from expiring unused.

AsThe Company accounts for uncertainties in income taxes under the provisions of FASB ASC 740-10-05 (the “Subtopic”). The Subtopic clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. The Subtopic prescribes a ~~result~~recognition threshold and measurement attribute for the financial statement recognition and measurement of ~~our historical losses from continuing operations, we have recorded~~ a ~~full valuation allowance against~~tax position taken or expected to be taken in a ~~net deferred~~ tax ~~asset. Additionally, we have not recorded a liability for unrecognized tax benefit.~~return. The Subtopic provides guidance on the de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.
17
ProPhase Labs, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)

Recently Issued Accounting Standards, ~~Not Yet~~ Adopted

~~In September 2016, the FASB issued ASU 2016-13,~~The Financial Instruments - Credit Losses (Topic 326). The ASU sets forth a “current expected credit loss” (CECL) model which requires the Company to measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions, and reasonable supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost and applies to some off-balance sheet credit exposures. In February 2020, the FASB issued ASU 2020-02, Financial Instruments - Credit Losses (Topic 326), which amends the effective date of the original pronouncement for smaller reporting companies. ASU 2016-13 and its amendments will be effective for the Company for interim and annual periods in fiscal years beginning after December 15, 2022. We are currently assessing the impact of the adoption of this ASU on our financial statements.
15
~~The FASB~~Accounting Standards Board (“FASB”) recently issued ~~ASU~~Accounting Standards Update (“ASU”) 2020-06, Debt –- Debt with Conversion and Other Options (Subtopic 470- 20) and Derivatives and Hedging –- Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, to reduce complexity in applying GAAP to certain financial instruments with characteristics of liabilities and equity. The guidance in ASU 2020-06 simplifies the accounting for convertible debt instruments and convertible preferred stock by removing the existing guidance that requires entities to account for beneficial conversion features and cash conversion features in equity, separately from the host convertible debt or preferred stock. The guidance in ASC 470-20 applies to convertible instruments for which the embedded conversion features are not required to be bifurcated from the host contract and accounted for as derivatives. In addition, the amendments revise the scope exception from derivative accounting in ASC 815-40 for freestanding financial instruments and embedded features that are both indexed to the issuer’s own stock and classified in stockholders’ equity, by removing certain criteria required for equity classification. These amendments are expected to result in more freestanding financial instruments qualifying for equity classification (and, therefore, not accounted for as derivatives), as well as fewer embedded features requiring separate accounting from the host contract. The amendments in ASU 2020-06 further revise the guidance in ASC 260, Earnings Per Share, to require entities to calculate diluted earnings per share (EPS) for convertible instruments by using the if-converted method. In addition, entities must presume share settlement for purposes of calculating diluted EPS when an instrument may be settled in cash or shares. The amendments in ASU 2020-06 are effective for public entities, excluding smaller reporting companies, for fiscal years beginning after December 15, 2021. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2023. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020. The adoption of ASU 2020-06 did not have a material impact on the Company’s condensed consolidated financial statements or disclosures.
In May 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt-Modifications and Extinguishments (Subtopic 470-50), Compensation-Stock Compensation (Topic 718), and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40). This ASU reduces diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options (for example, warrants) that remain equity classified after modification or exchange. This ASU provides guidance for a modification or an exchange of a freestanding equity-classified written call option that is not within the scope of another Topic. It specifically addresses: (1) how an entity should treat a modification of the terms or conditions or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange; (2) how an entity should measure the effect of a modification or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange; and (3) how an entity should recognize the effect of a modification or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange. This ASU will be effective for all entities for fiscal years beginning after December 15, 2021. An entity should apply the amendments prospectively to modifications or exchanges occurring on or after the effective date of the amendments. Early adoption is permitted, including adoption in an interim period. The adoption of ASU 2021-04 did not have a material impact on the Company’s condensed consolidated financial statements or disclosures.
Recently Issued Accounting Standards, Not Yet Adopted
In September 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326). The ASU sets forth a “current expected credit loss” (CECL) model which requires the Company to measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions, and reasonable supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost and applies to some off-balance sheet credit exposures. In February 2020, the FASB issued ASU 2020-02, Financial Instruments - Credit Losses (Topic 326), which amends the effective date of the original pronouncement for smaller reporting companies. ASU 2016-13 and its amendments will be effective for the Company for interim and annual periods in fiscal years beginning after December 15, 2022. We are currently assessing the impact of the adoption of this ASU on our financial ~~statements~~statements.
18
ProPhase Labs, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)

Note 3 –- Business Acquisition

Nebula Acquisition
On ~~October 23, 2020, we completed~~August 10, 2021 (the “Effective Date”), the ~~acquisition~~Company and its wholly owned subsidiary, ProPhase Precision, entered into and closed a Stock Purchase Agreement (the “Nebula Stock Purchase Agreement”) with Nebula, each of the stockholders of Nebula (the “Seller Parties”), and Kamal Obbad, as Seller Party Representative. Pursuant to the terms of the Nebula Stock Purchase Agreement, ProPhase Precision acquired all of the issued and outstanding shares of ~~capital~~common stock of ~~CPM~~Nebula from the Seller Parties, for an aggregate purchase price of approximately $~~2.5~~14.3 million, ~~in cash,~~ subject to post-closing adjustments (the “Nebula Acquisition”). A portion of the purchase price equal to $3.6 million was paid in shares of the Company’s common stock to certain ~~adjustments,~~Seller Parties and noteholders of Nebula, based on their election to receive shares of the Company’s common stock in lieu of cash, which shares were valued at a price per share of $7.46, which is equal to the average closing price of the Company’s common stock on Nasdaq for the five trading days preceding the signing of the Nebula Stock Purchase Agreement. A portion of the purchase price equal to $1,080,000 (the “Escrow Amount”) is being held in escrow by Citibank, N.A. (the “Escrow Agent”) until February 23, 2023(“Escrow Termination Date”), pursuant to the terms and conditions of ~~a Stock Purchase Agreement, by and among~~an escrow agreement entered into with the ~~Company, CPM, Pride Diagnostics LLC (“Pride Diagnostics”) and~~Escrow Agent, as security for the ~~members of Pride Diagnostics (together with Pride Diagnostics, the “Seller Parties”), and Arvind Gurnani, as representative~~indemnification obligations of the Seller Parties. ~~CPM (now known~~At the Escrow Termination Date, the remaining amount, if any, of the Escrow Amount, less any amount reasonably necessary to pay any claim with respect to which a notice of claim has been timely and properly given, will be delivered to the Seller Parties, as applicable.
In connection with the Nebula Acquisition, ProPhase ~~Diagnostics NJ, Inc.) owns a~~ ~~4,000~~ ~~square foot (CLIA) accredited laboratory located in Old Bridge, New Jersey. On October 23, 2020, we~~Precision entered into an employment agreement with Kamal Obbad, the Chief Executive Officer of Nebula, on the Effective Date, pursuant to which Mr. Obbad serves as Senior Vice President, Director of Sales and Marketing of ProPhase Precision. As a ~~Consulting Agreement with~~condition to the employment agreement, Mr. ~~Gurnani for~~Obbad was awarded a ~~six-month period for~~stock option to purchase 250,000 shares of Company common stock at an ~~aggregate total~~exercise price equal to $7.67 per share, the closing price of $~~300,000, which was subsequently terminated after two months of service.~~the Company common stock on the Effective Date (see Note 7, Stockholders’ Equity).

Based on the ~~preliminary~~ valuation, the total consideration of $~~2.5~~12.7 million, which is net of $1.6 million in cash acquired, has been allocated to assets acquired and liabilities assumed based on their respective fair values as follows ~~(amount in~~(in thousands):
Schedule of Assets Acquired and Liabilities Assumed

Clinical lab material $ 180
Lab equipment 112
Definite-lived intangible asset 1,307
Total assets acquired 1,599
Liabilities assumed -
Net identifiable assets acquired 1,599
Goodwill 901
Total consideration $ 2,500
Account Amount
Short term investments $ 1,800
Accounts receivable 171
Inventory 133
Prepaid and other current assets 379
Definite-lived intangible assets 10,990
Total assets acquired 13,473
Accounts payable (805 )
Accrued expenses and other current liabilities (43 )
Deferred revenue (2,391 )
Note payable (81 )
Deferred tax liability (1,925 )
Total liabilities assumed (5,245 )
Net identifiable assets acquired 8,228
Goodwill 4,446
Total consideration, net of cash acquired (1) $ 12,674
(1) Net of $1.6 million cash acquired.
19
ProPhase Labs, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)

Goodwill ~~has been measured as~~represents the excess of the ~~total consideration~~purchase price over the ~~amounts assigned to~~net identifiable tangible and intangible assets acquired. The Company believes the ~~identifiable assets acquired and liabilities assumed in the amount of $901,000, which was primarily~~goodwill related to the acquisition was a result of the ~~assembled workforce. Other definite-lived intangible asset of approximate $1.3~~ ~~million were related~~expected synergies to ~~the CLIA license, which was determined to have an estimated useful life of three years. The Company recognized $109,000~~ be realized from combining operations and $~~207,000~~ ~~amortization expense during the three and six months June 30, 2021, respectively.~~
is not deductible for income tax purposes. The preliminary purchase price allocation is adjusted, as necessary, up to one year after the acquisition closing date if management obtains more information regarding asset valuations and liabilities assumed.

The intangible assets identified in conjunction with the Nebula Acquisition are as follows (in thousands):
Schedule of Intangible Assets Acquisition
Gross Carrying Value Estimated Useful Life (in years)
Trade names $ 5,550 15
Proprietary intellectual property 4,260 5
Customer relationships 1,180 1
Total $ 10,990
Note 4 – Goodwill and Acquired Intangible Assets
Goodwill
There were no changes in goodwill for the three months ended March 31, 2022.
1620
ProPhase Labs, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
Intangible Assets, Net
Intangible assets as of March 31, 2022 and December 31, 2021 consisted of the following (in thousands):
Schedule of Intangible Assets

March 31,
2022

December 31,
2021

Estimated Useful
Life (in years)
Trade names $ 5,550 $ 5,550 15
Proprietary intellectual property 4,260 4,260 5
Customer relationships 1,180 1,180 1
CLIA license 1,307 1,307 3
Total intangible assets, gross 12,297 12,297
Less: accumulated amortization (2,154 ) (1,445 )
Total intangible assets, net $ 10,143 $ 10,852
Amortization expense for acquired intangible assets was $709,000 and $109,000 during the three months ended March 31, 2022 and 2021, respectively. The estimated future amortization expense of acquired intangible assets as of March 31, 2022 is as follows (in thousands):
Schedule of Estimated Future Amortization Expense of Acquired Intangible Assets

Remaining periods ended December 31, 2022 $ 1,669
Year ended December 31, 2023 1,585
Year ended December 31, 2024 1,222
Year ended December 31, 2025 1,222
Year ended December 31, 2026 890
Thereafter 3,555
Total intangible assets, net $ 10,143
Note ~~4 –~~5 - Property, Plant and Equipment
The components of property, plant and equipment are as follows (in thousands):
Schedule of Property, Plant and Equipment

June 30, 2021
December 31, 2020 Estimated Useful Life
Land $ 352 $ 352
Building improvements 1,859 1,729 10-39 years
Machinery 4,669 4,441 3-7 years
Lab equipment 4,316 1,002 3-7 years
Computer equipment 1,182 881 3-5 years
Furniture and fixtures 457 194 5 years
12,835 8,599
Less: accumulated depreciation (5,921 ) (5,021 )
Total property, plant and equipment, net $ 6,914 $ 3,578

March 31,
2022

December 31,
2021
Estimated Useful Life
Land $ 352 $ 352
Building improvements 1,729 1,729 10-39 years
Machinery 4,740 4,740 3-7 years
Lab equipment 4,936 4,330 3-7 years
Computer equipment 1,589 1,211 3-5 years
Furniture and fixtures 468 468 5 years
Property, Plant and Equipment, Gross 13,814 12,830
Less: accumulated depreciation (7,374 ) (6,883 )
Total property, plant and equipment, net $ 6,440 $ 5,947

Depreciation expense incurred for the ~~six months ended June, 2021 and 2020 was $900,000~~ ~~and $167,000, respectively. Depreciation expense for the~~ three months ended ~~June 30,~~March 31, 2022 and 2021 ~~and 2020~~ was $~~474,000~~ 491,000and $~~900,000~~428,000, respectively.
Note ~~5 –~~6 -Unsecured Convertible Promissory Notes Payable
On September 15, 2020, we issued two unsecured, partially convertible, promissory notes (the “September 2020 Notes”) for an aggregate principal amount of $10 million to two investors (collectively, the “Lenders”).

On February 28, 2022, we entered into a letter agreement (the “Letter Agreement”) with one of the Lenders providing for the payoff of its September 2020 Note in the principal amount of $2,000,000.
Pursuant to the terms of the Letter Agreement, (i) the Lender converted $600,000 of the principal amount due to him under his September 2020 Note into 200,000 shares of Company common stock (the “Conversion Shares”) at a price of $3.00 per share as provided for under the terms of the September 2020 Note (the “Conversion”), (ii) the Company paid to the Lender $1,440,548 in cash, representing $1,400,000 of the remaining principal under the September 2020 Note following the Conversion plus $40,548 in accrued and outstanding interest under the September 2020 Note, and (iii) the Company repurchased the Conversion Shares at a price of $5.75 per share for an aggregate amount of $1,150,000 (for a total aggregate payment to the Lender of $2,590,548).
21
ProPhase Labs, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
The September 2020 ~~Notes are~~Note that remains outstanding as of March 31, 2022 is due and payable on September 15, 2023 and ~~accrue~~accrues interest at a rate of 10% per year from the closing date, payable on a quarterly basis, until the September 2020 ~~Notes are~~Note is repaid in full. We have the right to prepay the outstanding September 2020 ~~Notes~~Note at any time after the ~~13 month~~13-month anniversary of the ~~closing~~initial issuance date after providing written notice to the ~~Lenders,~~Lender and may prepay the September 2020 ~~Notes~~Note prior to such time with the consent of the ~~Lenders.~~Lender. The ~~Lenders have~~Lender has the right, at any time, and from time to time, on and after the 13-month anniversary of the ~~closing~~initial issuance date to convert up to an aggregateof $3.0 million of the September 2020 ~~Notes~~Note into common stock of the Company at a conversion price of $3.00 per share. Repayment of the September 2020 ~~Notes~~Note has been guaranteed by our ~~wholly-owned~~wholly owned subsidiary, PMI.

The September 2020 ~~Notes contain~~Note contains customary events of default. If a default occurs and is not cured within the applicable cure period or is not waived, any outstanding obligations under the September 2020 ~~Notes~~Note may be accelerated. The September 2020 ~~Notes~~Note also contain certain restrictive covenants which, among other things, restrict our ability to create, incur, assume or permit to exist, directly or indirectly, any lien (other than certain permitted liens described in the September 2020 ~~Notes)~~Note) securing any indebtedness of the Company, and prohibits us from distributing or reinvesting the proceeds from any divestment of assets (other than in the ordinary course) without the prior approval of the ~~Lenders.~~Lender.

For the ~~six~~three months ended ~~June 30,~~March 31, 2022 and 2021, ~~and 2020,~~ we incurred $~~574,000~~233,000 and $0251,000, respectively, in interest expense ~~under~~related to the September 2020 ~~Notes and $323,000~~ ~~and $~~0 ~~for the three months ended June 30, 2021 and 2020.~~Notes.

Note ~~6 –~~7 - Stockholders’ Equity
Our authorized capital stock consists of 50million shares of common stock, $0.0005par value, and ~~one~~1000000 ~~million~~ shares of preferred stock, $0.0005par value.

Preferred Stock
The preferred stock authorized under our certificate of incorporation may be issued from time to time in one or more series. As of ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020,~~ 2021, 0 shares of preferred stock have been issued.

Common Stock Dividends

On ~~May 13, 2021,~~February 14, 2022, the ~~Board~~board of directors of the Company declared a special cash dividend of $0.30per share on the Company’s common stock, paid on March 10, 2022, in the amount of $4.6 million to holders of record of the Company’s common stock on ~~May 25, 2021, resulting in the payment of $~~March 1, 2022.
~~4.5~~
22
~~million~~ProPhase Labs, Inc. and Subsidiaries
Notes to ~~stockholders on June 3, 2021.~~Condensed Consolidated Financial Statements
(unaudited)

~~In Fiscal 2020,~~ 0~~cash dividends were declared.~~Common Stock

~~Common~~ Stock Repurchase Program
~~Registered Direct Offering~~On September 8, 2021, the board of directors (the “Board”) approved a stock repurchase program under which the Company was authorized to repurchase up to $6.0 million of its outstanding shares of common stock from time to time, over a six-month period.
During the three months ended March 31, 2022, the Company did not make any common shares repurchase under the stock repurchase program. The stock repurchase program expired on March 30, 2022.

On January 5, 2021, we entered into a securities purchase agreement with certain accredited investors and qualified institutional buyers, pursuant to which we issued and sold to the purchasers an aggregate of (i) ~~550,000~~ ~~shares of our common stock, and (ii) warrants to purchase up to~~ ~~275,000~~ ~~shares of common stock in a registered direct offering.~~
~~The shares and warrants were sold at a purchase price of $10.00~~ ~~per share for net proceeds of $5.5~~ ~~million. Each Warrant has an exercise price equal to $11.00~~ per share of common stock, will be exercisable at any time and from time to time, subject to certain conditions described in the Warrant, after the date of issuance, and will expire on the date that is three years from the date of issuance. The Shares and the Warrants are immediately separable and were issued separately.
~~Public Offering~~
~~On January 18, 2021, we entered into an underwriting agreement for the public offering of~~ 3 ~~million shares of common stock, at a price to the public of $12.50~~ ~~per share. We also issued to the Underwriters warrants to purchase up to an aggregate of~~ ~~180,000~~ ~~shares of common stock (6% of the shares of common stock sold in the offering) at an exercise price of $15.625~~ ~~per share (equal to 125% of the public offering price per share).On January 21, 2021, we completed the offering for net proceeds of $35.1~~ ~~million, after deducting the underwriting discounts and commissions and estimated offering expenses.~~
17
The 2010 Directors’ Equity Compensation Plan

On May 20, 2021, the stockholders of the Company approved the Amended and Restated 2010 Directors’ Equity Compensation Plan (the “Amended 2010 Directors’ Plan”) at the 2021 Annual Meeting of Stockholders of the Company (the “2021 Annual Meeting”). The Amended 2010 Directors’ Plan ~~had been previously approved by~~authorizes the ~~board~~issuance of ~~directors of the Company on April 7, 2021, subject to stockholder approval at the 2021 Annual Meeting.~~
~~The Amended 2010 Directors’ Plan provides for an increase in the number of shares reserved for issuance under the plan by~~ ~~100,000~~ ~~shares, from~~ ~~675,000~~ ~~shares~~up to 775,000~~shares.~~
~~During the three and six months ended June 30, 2021,~~ no shares of common ~~stock and options were granted to our directors under the 2010 Directors’ Plan.~~
~~During the three and six months ended June 30, 2020,~~ ~~9,709~~ ~~and~~ ~~18,055~~ ~~shares of common stock, respectively were granted to our directors under the 2010 Directors’ Plan. We recorded $35,000~~ of director fees during the six months ended June 30, 2020 in connection with these grants, which represented the fair value of the shares calculated based on the average closing price of our shares of common stock for the last five trading days of the quarter in which the Board fee was earned.stock.

At ~~June 30, 2021,~~March 31, 2022, there were ~~200,000~~ 425,126 stock options outstanding and there were ~~228,126~~ no shares of common stock available to be issued ~~pursuant to~~under the ~~terms of the~~Amended 2010 Directors’ Plan.No ~~stock options were exercised during the six months ended June 30, 2021.~~

The 2010 Equity Compensation Plan
On May 20, 2021, the stockholders of the Company approved the Amended and Restated 2010 Equity Compensation Plan (the “Amended 2010 Plan”) at the 2021 Annual ~~Meetings.~~Meeting. The Amended 2010 Plan ~~had been previously approved by~~authorizes the ~~board~~issuance of ~~directors of the Company on April 7, 2021, subject to stockholder approval at the 2021 Annual Meeting.~~
~~The Amended 2010 Plan provides for an increase in the number of shares reserved for issuance under the plan by~~ ~~1,000,000~~ ~~shares, from~~ ~~3,900,000~~ ~~shares~~up to 4,900,000~~shares.~~
~~There were~~ ~~675,000~~ ~~options granted under the 2010 Plan during the six months ended June 30, 2021 for a total fair value~~ shares of $~~1,973,000~~.common stock.

As of ~~June 30,~~December 31, 2021 and March 31, 2022, there were ~~1,890,250~~2,014,874 stock options outstanding and ~~340,659~~295,785 stock options available to be issued ~~pursuant to the terms of~~under the 2010 Plan. We will recognize an aggregate of approximately $~~1,583,000~~1,684,000 of remaining share-based compensation expense related to outstanding stock options over a weighted average period of ~~3.0~~2.8 years.No ~~stock options were exercised during the six months ended June 30, 2021.~~

The 2018 Stock Incentive Plan
On April 12, 2018, our stockholders approved the 2018 Stock Incentive Plan (the “2018 Stock Plan”). The 2018 Stock Plan provides for the grant of incentive stock options to eligible employees of the Company, and for the grant of non-statutory stock options to eligible employees, directors and consultants. The 2018 Stock Plan provides that the total number of shares that may be issued pursuant to the 2018 Stock Plan is 2,300,000 shares. At April 12, 2018, all ~~2.3~~2,300,000 ~~million~~ shares ~~available for issuance under the 2018 Stock Plan~~ have been granted in the form of a stock ~~option with an initial exercise price of $3.00~~ ~~per share, which are exercisable in 36 monthly installments,~~options to Ted Karkus (the “CEO Option”), our Chief Executive Officer. NoTo date, no stock options have been exercised ~~during~~under the ~~six months ended June 30, 2021 and 2020.~~2018 Stock Plan. No share based compensation expense will be recognized in forward periods related to the 2018 Stock Plan.

The 2018 Stock Plan requires certain proportionate adjustments to be made to the stock options granted under the 2018 Stock Plan upon the occurrence of certain events, including a special distribution (whether in the form of cash, shares, other securities, or other property) in order to maintain parity. Accordingly, the Compensation Committee of the board of directors, as required by the terms of the 2018 Stock Plan, adjusted the terms of the CEO Option, such that the exercise price of the CEO Option was reduced from ~~$3.00~~$3.00 per share to $2.00per share,, effective as of September 5, 2018, the date athe special $1.00special cash dividend was paid to ~~the Company’s~~ stockholders. The exercise price of the CEO Option was further reduced from $2.00to $1.75per share,effective as of January 24, 2019, the date athe $0.25special cash dividend was paid to ~~the Company’s~~ stockholders. The exercise price of the CEO Option was further reduced from $1.75to $1.50per share, effective as of December 12, 2019,the date another $~~0.25~~ 0.25 special cash dividend was paid to ~~Company’s~~ stockholders. The exercise price of the CEO Option was further reduced from $1.50to $1.20per share, effective as of June 3, 2021,, the date another $0.30 special cash dividend was paid to Company’s stockholders. The exercise price of the CEO Option was further reduced from $1.20 to $0.90 per share, effective as of March 10, 2022, the date another $0.30special cash dividend was paid to Company’s stockholders.

1823
ProPhase Labs, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
Inducement Option Award
As part of Nebula Acquisition, the Company issued a non-qualified stock option to Kamal Obbad, the Chief Executive Officer of Nebula, as an inducement to his employment with the Company (the “Inducement Award”). The Inducement Award entitles Mr. Obbad to purchase up to 250,000 shares of the Company’s common stock at an exercise price of $7.67 per share, the closing price of the Company’s common stock on the closing date of the Nebula Acquisition. The Inducement Award was granted to Mr. Obbad on the closing date of the Nebula Acquisition. The Inducement Award vested 25% on the grant date and will vest 25% per year for the next three years subject to Mr. Obbad’s continued employment with the Company. The Inducement Award expires on the seventh anniversary of the grant date. Any portion of the Inducement Award that does not vest and become exercisable will be forfeited for no consideration. The grant date fair value of the Inducement Award was approximately $1,128,000.
During the year ended December 31, 2021, we issued an inducement award to a non-employee to purchase up to 100,000 shares of the Company’s common stock at an exercise price of $5.76, the closing price of the common stock on the date of grant. The award vests in four equal installments from the date of grant. The award expires on the seventh anniversary of the grant date.
All inducement awards have been granted outside of the Company’s equity compensation plans.

The following table summarizes stock options activity during the ~~six~~three months ended ~~June 30, 2021~~March 31, 2022 for the Amended 2010 Plan, the Amended 2010 Directors’ Plan, ~~and~~ the 2018 Stock Plan and the Inducement Awards (in thousands, except per share data).
Schedule of Stock Options Activity
Number of Shares Weighted Average Exercise Price Weighted Average Remaining Contractual Life
(in years) Total Intrinsic Value
Outstanding as of January 1, 2022 5,110 $ 3.27 3.4 $ 20,820
Forfeited (20 ) 8.99 - -
Outstanding as of March 31, 2022 5,090 $ 3.11 3.2 $ 20,767
Options vested and exercisable 4,069 $ 2.41 2.4 $ 19,398
As of March 31, 2022, there were 5,090,000 stock options outstanding and 295,785 stock options available to be issued. We will recognize an aggregate of approximately $2,746,000 of remaining share-based compensation expense related to outstanding stock options over a weighted average period of 2.8 years.
Stock Warrants
The following table summarizes warrant activity during the three months ended March 31, 2022 (in thousands, except per share data):
~~Schedule of Stock Options Activity~~
Number of Shares Weighted Average Exercise Price Weighted Average Remaining Contractual Life
(in years) Total Intrinsic Value
Outstanding as of January 1, 2021 3,795 $ 2.21 3.4 $ 26,441
Granted 675 9.13 5.1 -
Forfeited (92 ) 5.31 - -
Outstanding as of June 30, 2021 4,378 $ 3.06 3.2 $ 16,182
Options vested and exercisable 3,573 $ 2.22 2.7 $ 15,183
~~The following table summarizes weighted average assumptions used in determining the fair value of the options at the date of grant during the six months ended June 30, 2021:~~
Summary of ~~Weighted Average Assumptions Used In Determining Fair Value of Options~~Warrant Activity
For the six months ended
June 30, 2021
Exercise price $ 9.13
Expected term (years) 3.5
Expected stock price volatility 83 %
Risk-free rate of interest 0.6 %
Expected dividend yield (per share) 0 %
Number of Shares Weighted Average Exercise Price Weighted Average Remaining Contractual Life
(in years)
Outstanding as of January 1, 2022 855 $ 8.23 1.9
Warrants granted - - -
Outstanding as of March 31, 2022 855 $ 8.23 1.6
Warrants vested and exercisable 855 $ 8.23 1.6

We ~~During the six months ended June 30, 2021, we issued warrants to purchase~~ recognized $~~275,000~~0 ~~shares of common stock in a registered direct offering~~ and ~~warrants to purchase~~ ~~180,000~~ ~~shares of common stock to the underwriters in a public offering. The following table summarizes warrant activities during the six months ended June 30, 2021 (in thousands, except per share data).~~
~~Schedule of Warrant Activity~~
Number of Shares Weighted Average Exercise Price Weighted Average Remaining Contractual Life
(in years)
Outstanding as of January 1, 2021 450 $ 3.22 2.7
Warrants granted 455 12.83 3.0
Outstanding as of June 30, 2021 905 $ 8.05 2.4
Warrants vested and exercisable 815 $ 8.61 2.4
~~The following table summarizes weighted average assumptions used in determining the fair value of the warrants at the date of grant during the six months ended June 30, 2021:~~
~~Summary of Weighted Average Assumptions Used in Determining Fair Value of Warrants~~
For the six months ended
June 30, 2021
Exercise price $ 12.83
Expected term (years) 3.0
Expected stock price volatility 81 %
Risk-free rate of interest 0.2 %
Expected dividend yield (per share) 0 %
~~As of June 30, 2021, there were~~ ~~905,000~~ ~~warrants outstanding and we recognized~~ $105,000~~and~~ $~~193,000~~ of share-based compensation expense during the three ~~and six~~ months ended ~~June 30, 2021. We had~~ no ~~compensation expense during the six months ended June 30, 2020.~~March 31, 2022 and 2021, respectively.
24
ProPhase Labs, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)

Note ~~7 –~~8 - Defined Contribution Plans
We maintain the ProPhase Labs, Inc. 401(k) Savings and Retirement Plan, a defined contribution plan for our employees. Our contributions to the plan are based on the amount of the employee plan contributions and compensation. Our contributions to the plan in the three ~~and six~~ months ended ~~June 30,~~March 31, 2022 and 2021 were $~~23,000~~ 52,000and $~~35,000~~13,000~~, respectively. Our contributions to the plan in the three and six months ended June 30, 2020 were $17,000~~ ~~and $33,000~~, respectively.

Note 9 – Income Taxes
We recognize tax assets and liabilities for the future tax consequences related to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and for net operating loss carryforwards. Management evaluated the deferred tax assets for recoverability using a consistent approach that considers the relative impact of negative and positive evidence, including historical profitability and projections of future reversals of temporary differences and future taxable income. We are required to establish a valuation allowance for deferred tax assets if management determines, based on available evidence at the time the determination is made, that it is not more likely than not that some portion or all of the deferred tax assets will be realized. As of March 31, 2022 the Company has net deferred tax liabilities for federal and combined states jurisdictions compared to net deferred tax assets with a full valuation allowance as of December 31, 2021. The decrease in deferred tax assets with a corresponding decrease in valuation allowance against those assets as of March 31, 2022 is primarily due to utilization of net operating losses. The Company has net deferred tax assets in other states jurisdictions where we maintain a full valuation allowance. Judgment is required to estimate forecasted future taxable income, which may be impacted by future business developments, actual results, tax initiatives, legislative, and other economic factors. The Company will continue to monitor income levels and potential changes to its operating and tax model, and other legislative or global developments in its determination.
The Company’s effective tax rate for the three months ended March 31, 2022 is 21.47% and it is primarily driven by federal tax at 21%, state taxes at 7.1%, and a decrease in the valuation allowance for federal and combined states jurisdictions. The total tax expense for the three months ended March 31, 2022 is $3.4 million and it mostly relates to current federal and combined state taxes.
1925
ProPhase Labs, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
Note ~~8 –~~10 - Other Current Liabilities
The following table sets forth the components of other current liabilities at ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, respectively (in thousands):
Schedule of Other Current Liabilities
June 30, 2021 December 31, 2020 March 31, December 31,
Accrued diagnostic services $ 4,353 $ -
2022 2021
Accrued commissions 639 461 $ 1,294 $ 1,283
Accrued payroll 240 464 50 514
Accrued expenses 467 304 356 300
Accrued returns 321 291 246 338
Accrued income tax payable 8 8
Accrued benefits and vacation 71 34 50 60
Deferred revenue 112 169
Accrued insurance reimbursement
1,278

-

Total other current liabilities $ 6,211 $ 1,731 $ 3,274 $ 2,495
Note 11 - Commitments and Contingencies

~~Note 9–~~ ~~Commitments and Contingencies~~
Manufacturing Agreement
~~Man~~uf~~acturin~~g Ag~~reement~~
~~In connection with the asset purchase agreement, the~~The Company and its ~~wholly-owned~~wholly owned subsidiary, PMI, entered into a manufacturing agreement (the “Manufacturing Agreement”) with Mylan ~~Consumer Healthcare Inc. (formerly known as Meda Consumer Healthcare Inc.) (“MCH”) and~~in connection with the asset purchase agreement we entered into with Mylan ~~Inc. (together with MCH, “Mylan”.~~in 2017. Pursuant to the terms of the Manufacturing Agreement, Mylan (or an affiliate or designee) purchased the inventory of the Company’s Cold-EEZE® brand and product line, and PMI agreed to manufacture certain products for Mylan, as described in the Manufacturing Agreement, at prices that reflect current market conditions for such products and include an agreed upon mark-up on our costs. On May 1, 2021, the Manufacturing Agreement was assigned by Mylan to Nurya Brands, Inc. (“Nurya”) in connection with Nurya’s acquisitions of certain assets from Mylan, including the Cold-EEZE® brand and product line. Unless terminated sooner by the parties, the Manufacturing Agreement will remain in effect until March 29, ~~2022~~.2023. Thereafter, the Manufacturing Agreement may be renewed by Nurya for up to ~~five~~four successive one-year periods by providing notice of its intent to renew not less than 90 days prior to the expiration of the then-current term.

20
Future Obligations
~~Emplo~~y~~ment A~~g~~reement Obl~~ig~~ations:~~
We have estimated future minimum obligations for an executive’s employment agreement over the next five years ~~including the remainder~~as of ~~Fiscal 2021,~~March 31, 2022, as follows (in thousands):
Schedule of Estimated Future Minimum Obligations

Employment
Contracts

2021 $ 338
2022 675
2023 675
2024 675
2025          675
Total $ 3,038
Employment Contracts
Remaining periods in 2022 $ 506
2023 675
2024 675
2025 675
2026 675
Total $ 3,206

~~Lit~~ig~~ation~~Litigation
In the normal course of our business, we may be named as a defendant in legal proceedings. It is our policy to vigorously defend litigation or to enter into a reasonable ~~settlements~~settlement where management deems it appropriate.

26
ProPhase Labs, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
Note ~~10 –~~12 - Leases

On October 23, 2020, we completed the acquisition of ~~CPM.~~ CPM, ~~(which is now known as ProPhase Diagnostics NJ, Inc.) is~~which included the ~~lessee~~acquisition of a 4,000square foot CLIA accredited laboratory located in Old Bridge, New Jersey, which was owned by CPM (which is now known as ProPhase Diagnostics ~~acquired as part of the transaction.~~NJ, Inc.). The lease ~~acquired~~ is for a term of 24 months with a monthly base lease payment of $5,950.

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

The ~~New York~~NY Lease was effective as of December 8, 2020, and commenced in ~~December 2020~~January 2021 (the “Commencement Date”) when the facility was made available to us by the Landlord. Payments on the lease begin upon the date of the Landlord’s substantial completion of certain improvements to the Leased Premises (the “Commencement Date”), as set forth in the New York Lease.landlord. The initial term of the ~~New York~~NY Lease is 10 yearsand seven months (the “Initial Term”), unless sooner terminated as provided in the ~~New York~~NY Lease. We may extend the term of the ~~New York~~NY Lease for one additional option period of five years. We have the option to terminate the ~~New York~~NY Lease on the sixth anniversary of the Commencement Date, provided that we give the ~~Landlord~~landlord written notice not less than nine months and not more than 12 months in advance and that we pay the ~~Landlord~~landlord a termination ~~fee as more particularly described in the New York Lease.~~fee.~~The Landlord provided a construction allowance to the Company in an aggregate amount not to exceed $250,795, to reimburse the Company for the cost of certain improvements to be made by the Company to the Leased Premises.~~

For the first year of the ~~New York~~NY Lease, we will pay a base rent of $56,963per month (subject to a ~~seven month~~seven-month abatement period), with a gradual rental rate increase of 2.75% for each ~~12 month~~12-month period thereafter in lieu of paying its proportionate share of common area operating expenses, culminating in a monthly base rent of $74,716during the final months of the Initial Term. In addition to the monthly base rent, we are responsible for ~~our~~its proportionate share of real estate tax escalations in accordance with the terms of the ~~New York~~NY Lease.

We also have a right of first refusal to lease certain additional space located on the ground floor of the Building containing 4,500 square feet and 4,600 square feet, as more particularly described in the ~~New York~~NY Lease. We also have a right of first offer to purchase the Building during the term of the ~~New York~~NY Lease.
21

At ~~June 30, 2021,~~March 31, 2022, we had operating lease liabilities for the New York and New Jersey leases of approximately $~~4.9~~ 4.8million and right of use assets of approximately $~~4.6~~ 4.3million, which were included in the condensed consolidated balance sheet.

The following summarizes quantitative information about our operating leases (amounts in thousands):
Summary of Quantitative Information About Operating Leases

For the Six Months Ended
June 30, 2021

Operating leases
Operating lease cost $ 408
Variable lease cost -
Operating lease expense 408
Short-term lease rent expense -
Total rent expense $ 408
March 31, 2022 March 31, 2021
For the three months ended
March 31, 2022 March 31, 2021
Operating leases
Operating lease cost $ 204 $ 204
Operating lease expense 204 204
Total rent expense $ 204 $ 204

For the Six Months Ended
June 30, 2021

Operating cash flows used in operating leases $ (36 )
Right-of-use assets obtained in exchange for operating lease liabilities $ -
Weighted-average remaining lease term – operating leases (in years)           9.9
Weighted-average discount rate – operating leases 10.00 %
27

ProPhase Labs, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
Maturities of the Company’s operating leases, excluding short-term leases, are as follows ~~(amounts in~~(in thousands):
Schedule of Maturity of Operating Leases

Remaing Months Ended December 31, 2021 $ 321
Year Ended December 31, 2022 774
Remaining Periods Ended December 31, 2022 $ 580
Year Ended December 31, 2023 738 738
Year Ended December 31, 2024 747 747
Year Ended December 31, 2025 768 768
Year Ended December 31, 2026 783
Thereafter 4,659 3,876
Total 8,007 7,492
Less present value discount (3,071 ) (2,704 )
Operating lease liabilities $ 4,936 $ 4,788

~~Note 11–~~ ~~Significant Customers~~
~~Revenue for the three months ended June 30, 2021 and 2020 was $9.1~~ ~~million and $3.6~~ ~~million, respectively. Two diagnostic services clients accounted for~~ ~~24.9% and~~ ~~16.8~~% of our revenue for the three months ended June 30, 2021. No contract manufacturing customer accounted for a significant portion of our revenue for the three months ended June 30, 2021. Three third-party contract manufacturing customers accounted for ~~58.7~~%, ~~16.6% and~~ ~~12.2~~%, respectively, of our revenue from continuing operations for the three months ended June 30, 2020. The loss of sales to any of these large customers could have a material adverse effect on our business operations and financial condition.
~~Revenue for the six months ended June 30, 2021 and 2020 was $24.4~~ ~~million and $5.5~~ ~~million, respectively. Two diagnostic services clients accounted for~~ ~~38.5% and~~ ~~24.0%, respectively, of our revenue for the six months ended June 30, 2021. Two third-party contract manufacturing customers accounted for~~ ~~55.2% and~~ ~~17.1~~%, respectively, of our revenue for the six months ended June 30, 2020. The loss of sales to any of these large customers could have a material adverse effect on our business operations and financial condition.
~~Three~~ ~~diagnostic services clients generated~~ ~~38.9~~%, ~~21.0% and~~ ~~10.2~~% ~~of our total reimbursement receivable balances from government agencies and healthcare issuers at June 30, 2021. Two consumer product customers represented~~ ~~72.4%, and~~ ~~12.8% of our total trade receivable balances at June 30, 2020.~~
22

Note ~~12 –~~13 - ~~Earnings (Loss) Per Share~~Consulting Agreement and Secured Promissory Note Receivable
Basic earnings per share (“EPS”) excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or otherwise result in the issuance of common stock that shared in the earnings of the entity. Diluted EPS also utilizes the treasury stock method which prescribes a theoretical buy back of shares from the theoretical proceeds of all options outstanding during the period, and the if-converted method for convertible debt. The potentially anti-dilutive effect of stock options, warrants, and convertible debt for the three and six months ended June 30, 2021 was ~~3,024,000~~ ~~and~~ ~~3,393,000~~ ~~shares, respectively.~~

For the three and six months ended June 30, 2021, dilutive loss per share were the same as basic earnings per share due to the exclusion of Common Stock in the form of stock options (“Common Stock Equivalents”), which in a net loss position would have an anti-dilutive effect on loss per share.
~~For the three months ended June 30, 2020, there were~~ ~~2,307,000~~ Common Stock Equivalents that were in the money that were included in the fully diluted earnings per share computation. For the six months ended June 30, 2020, dilutive loss per share were the same as basic earnings per share due to the exclusion of Common Stock Equivalents, which in a net loss position would have an anti-dilutive effect on loss per share.
~~Note 13 –~~ ~~Secured Promissory Note Receivable and Consulting Agreement~~
~~Consulting Agreement~~
On September 25, 2020 (the “Effective Date”), we entered into a consulting agreement with a consultant (the “Consulting Agreement”). The Consulting Agreement was to be effective through September 1, 2022; provided, however, that we could terminate this agreement at any time on five days’ prior written notice.
The consultant’s duties were to include, among other things, (i) identifying and introducing us to new opportunities in the medical technology and testing fields, (ii) assisting and advising us in acquiring one or more CLIA certified labs suitable for COVID-19 and other testing (“Test Labs”); (iii) assisting us in equipping and staffing any Test Labs acquired by us; (iv) advising and assisting in the operation of such Test Labs; (v) validating and obtaining certification of such Test Labs; and (vi) assisting us in obtaining a flow of business, orders and revenues from multiple sources in the industry, including but not limited to at least one significant, nation-wide manufacturer and distributor of COVID-19 saliva sample collection test kits (“COVID-19 Test Kits”).
All compensation earned by the consultant would first be applied to the acceleration and prepayment of all sums due to us, including but not limited to sums due pursuant to the Amended and Restated Promissory Note (“Secured Note”) described below. Under the terms of the Consulting Agreement, the consultant would not be entitled to receive any payments pursuant to the Consulting Agreement unless and until the Secured Note was paid in full. The total compensation that the consultant would be entitled to earn or to receive under the Consulting Agreement (inclusive of amounts credited against the Secured Note) would be capped at $~~4.0~~ ~~million.~~
23
Promissory Note and Security Agreement
On September 25, 2020 (the “Restatement Effective Date”), we entered into the Secured Note with a company consulting for us (“the ~~consultant,~~Consultant”), pursuant to which we loaned $3.0 million to the ~~consultant described above~~Consultant (inclusive of $1.0 million in the aggregate previously loaned to the ~~consultant,~~Consultant, as described below).

The Secured Note amended and restated in its entirety (i) that certain Promissory Note and Security Agreement, dated July 21, 2020 (the “Original July 21 Note”), pursuant to which we loaned $750,000to the ~~consultant~~Consultant and (ii) that certain Promissory Note and Security Agreement, dated July 29, 2020 (the “Original July 29 Note”, and, together with the Original July 21 Note, the “Original Notes”), pursuant to which we loaned $250,000to the ~~consultant.~~Consultant.

~~The Secured Note bears interest at a rate of~~ 15% per annum from and including the Restatement Effective Date until the principal amount is repaid in full plus any Principal Increases (as defined below) together with any accrued interest that has not been capitalized; ~~provided, however~~~~, that upon the occurrence and during an Event of Default (as defined in the Secured Note), the interest rate payable under the Secured Note will automatically increase to~~ 9~~% above the rate of interest then applicable to the Secured Note.~~
Interest under the Secured Note will be payable monthly in arrears on the first day of each month for the prior monthly period, as well as at maturity (whether upon demand, by acceleration or otherwise) (each such date, a “Payment Date”); provided, however, that prior to September 1, 2021, interest will be paid and capitalized in kind by increasing the principal amount of the Secured Note (any such increase, a “Principal Increase”) by an amount equal to the interest accrued on the principal amount (as increased by the Principal Increases) during the prior month. On each Payment Date commencingCommencing after September 1, 2021, in addition to payments of interest, ~~described in~~ the ~~preceding sentence, the consultant will~~Consultant is also required to make payments on the principal amount of the loan equal to 1/36 of the then outstanding principal amount. ~~The amount of the monthly payments will be equal~~
28
ProPhase Labs, Inc. and Subsidiaries
Notes to ~~the amount required to amortize fully the outstanding principal amount of the loan, together with interest, over a period of~~ Condensed Consolidated Financial Statements
~~36 months~~.(unaudited)

The entire remaining unpaid principal amount of the Secured Note, together with all accrued and unpaid interest thereon and all other amounts payable under the Secured Note, will be due and payable, if not sooner paid, on September 30, ~~2022 or an earlier date as a result of a maturity, whether by acceleration or otherwise. The Secured Note may be prepaid in full or in part at any time without penalty or premium.~~2022.

The Secured Note contains customary events of default. If a default occurs and is not cured within the applicable cure period or is not waived, any outstanding obligations under the Secured Note may be accelerated.
The Secured Note contains customary representation and warranties and certain restrictive covenants which, among other things, restrict the consultant’s ability to (i) sell, transfer, finance, lease, license, or dispose of all or substantially all of its property or assets, liquidate, windup, or dissolve, (ii) acquire all or substantially all of the property or assets of, or the equity interests in, any other person, (iii) participate in any merger, consolidation, share exchange, division, conversion, reclassification, or other absorption or reorganization, (iv) except for those existing as of the Restatement Effective Date, create, incur, assume, permit, or suffer to exist any pledges, liens, security interests, and other encumbrances of its property or assets, whether now owned or hereafter owned or acquired, and (v) create, incur or permit to exist any debt that is senior to, or ~~pari passu~~ ~~with the Secured Note.~~

~~In order to secure the consultant’s obligations under the Secured Note, the consultant granted to the Company a continuing security interest in certain property and assets.~~
~~Total interest income recorded in the three and six months ended June 30, 2021 was~~ 0~~and $233,000~~ ~~respectively.~~
Amendment and Termination Agreement
On January 14, 2021, we entered into an Amendment and Termination Agreement (the “Termination Agreement”) with the ~~consultant~~Consultant pursuant to which the parties amended the Secured Note and terminated the ~~Consulting Agreement.~~former consulting agreement with the Consultant (the “Consulting Agreement”). Pursuant to the terms of the Termination Agreement, the Company loaned an additional $1 $1 million to the ~~consultant~~Consultant in consideration for the termination of the Consulting Agreement and termination of the Company’s obligation to pay ~~the consultant~~any additional consulting ~~fees beyond the $250,000~~ ~~already earned by the consultant under the Consulting Agreement.~~fees. As a result, the initial principal amount due under the Secured Note was increased from $2.75 million to $3.75 million plus all accrued and unpaid interest arising under the Secured Note through and including January 14, 2021.

Under the terms of the Termination Agreement, the ~~consultant~~Consultant will continue to sell and process its viral test by RT-PCR (together with other viral and other types of tests). Until the Secured Note is paid in full, each COVID-19 Test Kit sold or processed from and after January 14, 2021, and for which payment of at least the specified amount as defined for the test, is received by the ~~consultant,~~Consultant, the ~~consultant~~Consultant will pay us a specified amount (the “Test Fee”). The total payments will not exceed the aggregate amounts due under the Secured Note and shall be applied first to interest and other amounts due under the Secured Note and then to the then-current outstanding principal. Test Fees will be due and payable on the 10th business day after the end of each month commencing in February, 2021, and until the Secured Note is paid in full. We received the first payment in the amount of $95,000with respect to the Test Fees from January 15 through February 2021. On June 25, 2021, we were issued 1,260,619~~common~~ shares of common stock of the ~~consultant~~Consultant with a fair value of $315,000as an interest payment ~~with respect to~~under the Secured Note in lieu of Test Fees from March through June 2021.

~~On each payment date commencing on or after~~Effective September 1, 2021, in addition to ~~payments~~the payment of the Test Fees described above, the ~~consultant will~~Consultant is also required to make payments to us in an amount equal to the greater of (x) the Test Fee, or (y) 1/36th of the then outstanding principal amount together with interest ~~thereon and interest accruing on~~thereon. The Company did not receive any payments from the Secured Note, in accordance with the Secured Note. Accordingly, commencing on September 1, 2021, the minimum number of monthly payments due and payable will be equal to the amount required to amortize fully the outstandingConsultant for either contractual principal ~~amount of the Secured Note, together with interest over a period of~~ ~~36 monthswith level monthly payments.~~or interest.

2429
ProPhase Labs, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
On October 11, 2021, the Company provided the Consultant with a Notice of Default and demanded the Secured Note be paid in full immediately. On January 25, 2022, the Company filed a complaint with the United States District Court for the District of Delaware for judgment against the Consultant for money damages consisting of principal, interest, default interest and other fees and costs. As a result, the Company considered that it is not probable that it will collect all amounts due under the Secured Note and reduced the carrying value of the Secured Note to $0 as of December 31, 2021 with a corresponding charge-off of $3.75 million during the year ended December 31, 2021.
Note 14 - Significant Customer Concentrations
Revenue for the three months ended March 31, 2022 and 2021 was $47.5 million and $15.3 million, respectively. Three diagnostic services clients accounted for 36.7%, 21.4%, and 11.0% of our revenue for the three months ended March 31, 2022. Two diagnostic services clients accounted for 46.1% and 31.6% of our revenue for the three months ended March 31, 2021. No contract manufacturing customer’s accounted for a significant portion of our revenue for the three month ended March 31, 2022 or 2021. The loss of sales to any of these large customers could have a material adverse effect on our business operations and financial condition.
Two diagnostic services payers comprised 33.6% and 26.5% of our total reimbursement receivable balances from government agencies and healthcare issuers at March 31, 2022. Four diagnostic services payers comprised 43.0%, 11.6%, 10.7% and 10.7% of our total reimbursement receivable balances from government agencies and healthcare issuers at December 31, 2021.
Currently, we rely on a sole supplier to manufacture our saliva collection kits used by customers who purchase our personal genomics services. Change in the supplier or design of certain of the materials that we rely on, in particular the saliva collection kit, could result in a requirement for additional premarket review from the FDA before making such a change.

Note ~~14 –~~15 - Segment Information

The Company has identified 2two operating segments, diagnostic services and consumer products, based on the manner in which the Company’s CEO as CODM assesses performance and allocates resources across the organization. The operating segments are organized in a manner that depicts the difference in revenue generating synergies that include the separate processes, profit generation and growth of each segment. The diagnostic services segment provides COVID-19 diagnostic information services to a broad range of customers in the United States, including health plans, third party payers and government organizations. The consumer products segment is engaged in the research, development, manufacture, distribution, marketing and sale of OTC consumer healthcare products and dietary supplements in the United ~~States.~~States and also provides personal genomics products and services. The unallocated corporate expenses mainly included professional fees associated with the public company.

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ProPhase Labs, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
The following table is a summary of segment information for three ~~and six~~ months ended ~~June 30,~~March 31, 2022 and 2021 ~~and 2020~~ (amounts in thousands):
Schedule of Segment Information
June 30, 2021 June 30, 2020 June 30, 2021 June 30, 2020
For the three months ended For the six months ended
June 30, 2021 June 30, 2020 June 30, 2021 June 30, 2020
Net revenues
Diagnostic services $ 7,537 $ - $ 20,274 $ -
Consumer products 1,605 3,623 4,139 5,511
Consolidated net revenue 9,142 3,623 24,413 5,511
Cost of revenue
Diagnostic services 3,479 - 7,824 -
Consumer products 1,197 2,344 3,196 3,817
Consolidated cost of revenue 4,676 2,344 11,020 3,817
Depreciation and amortization expense
Diagnostic services 392 - 737 -
Consumer products 3 5 6 10
Total Depreciation and amortization expense 395 5 743 10
Operating and other expenses 5,466 1,204 12,988 2,423
Income (loss) from continuing operations, before income taxes
Diagnostic services 1,164 - 4,004 -
Consumer products 540 1,274 505 1,684
Unallocated corporate (3,099 ) (1,204 ) (4,847 ) (2,423 )
Total income (loss) from continuing operations, before income taxes (1,395 ) 70 (338 ) (739 )
Net income (loss) $ (1,395 ) $ 70 $ (338 ) $ (739 )
March 31, 2022 March 31, 2021
For the three months ended
March 31, 2022 March 31, 2021
Net revenues
Diagnostic services $ 44,913 $ 12,737
Consumer products 2,618 2,534
Consolidated net revenue 47,531 15,271
Cost of revenue
Diagnostic services 16,702 4,345
Consumer products 2,152 1,999
Consolidated cost of revenue 18,854 6,344
Depreciation and amortization expense
Diagnostic services 576 345
Consumer products 600 3
Total Depreciation and amortization expense 1,176 348
Operating and other expenses 11,591 7,522
Income (loss) from operations, before income taxes
Diagnostic services 20,026 2,839
Consumer products (1,863 ) (35 )
Unallocated corporate (2,253 ) (1,747 )
Total income from operations, before income taxes 15,910 1,057
Income tax expense (3,416 ) -
Total income from operations, after income taxes 12,494 1,057
Net income $ 12,494 $ 1,057

The following table is a summary of segment ~~balance sheets~~ information as of ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020~~2021 (amounts in thousands):

March 31,
2022

December 31,
2021

ASSETS
Diagnostic services $ 51,823 $ 51,150
Consumer products 23,378 24,139
Unallocated corporate 24,464 14,006
Total assets $ 99,665 $ 89,295
Note 16 - Earnings Per Share
Basic earnings per share (“EPS”) excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or otherwise result in the issuance of common stock that shared in the earnings of the entity. Diluted EPS also utilizes the treasury stock method which prescribes a theoretical buy back of shares from the theoretical proceeds of all options outstanding during the period, and the if-converted method for convertible debt.
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ProPhase Labs, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
The following is a reconciliation of the weighted average number of common shares outstanding used in calculating basic and diluted net loss per share (in thousands):
Schedule of Basic and Diluted Net Loss Per Share
June 30, December 31,
2021 2020

ASSETS
Diagnostic services $ 32,222 $ 13,410
Consumer products 5,294 6,261
Unallocated corporate 38,807 11,734
Total assets $ 76,323 $ 31,405
March 31, 2022 March 31, 2021
For the three months ended
March 31, 2022 March 31, 2021
Net income - basic $ 12,494 $ 1,057
Interest on unsecured convertible promissory note 232 -
Net income - diluted $ 12,726 $ 1,057

Weighted average shares outstanding - basic 15,486 14,563
Diluted shares- Stock Options 2,232 2,895
Diluted shares- Stock Warrants 222 284
Unsecured convertible promissory note 800 458
Weighted average shares outstanding - diluted 18,740 18,200
The following table represents the number of securities excluded from the income per share computation as a result of their anti-dilutive effect (in thousands):
Schedule of Anti-dilutive Securities Excluded from the Income Per Share Computation
For the three months ended
Anti-dilutive securities March 31, 2022 March 31, 2021
Common stock purchase warrants 455 455
Stock Options 810 -
Anti-dilutive securities 1,265 455
Note 17 - Related Parties
Jason Karkus, Executive Vice President and Co-Chief Operations Officer of ProPhase Diagnostics, is the son of Ted Karkus, the Company’s Chairman and Chief Executive Officer. For the three months ended March 31, 2022 and 2021, Mr. Karkus received compensation of $55,000 and $30,000, respectively.

Note 1518 – Subsequent ~~Events~~Event
Appointment of Chief Financial Officer
On ~~August 10, 2021,~~May 9, 2022, the Company announced that has appointed Bill White as Chief Financial Officer of the Company, effective May 23, 2022 (the “Effective Date”), replacing Monica Brady, who is currently serving as Chief Financial Officer of the Company. Ms. Brady will remain with the Company and ~~its~~continue to serve as the Company’s Chief Accounting Officer, and Chief Financial Officer of the Company’s wholly-owned subsidiary, ProPhase Precision Medicine, Inc. (“ProPhase Precision”), entered into and closed a Stock Purchase Agreement (the “Nebula Stock Purchase Agreement”) with Nebula Genomics, Inc., a privately owned personal genomics company (“Nebula”), eachDiagnostics, as of the ~~stockholders of Nebula (the “Seller Parties”), and Kamal Obbad,~~Effective Date.
As an inducement to his employment as ~~Seller Party Representative. Pursuant to the terms~~Chief Financial Officer of the ~~Nebula Stock Purchase Agreement, ProPhase Precision acquired all~~Company, the Compensation Committee granted Mr. White a stock option (the “Option Award”) to purchase up to 400,000 shares of the ~~issued~~Company’s common stock. This award was made in accordance with the employment inducement award exemption provided by Nasdaq Rule 5635(c)(4) and ~~outstanding shares~~was therefore not awarded under the Company’s stockholder approved equity plan. The option award will vest over a four year period, with 12.5% vesting every six months following the Effective Date, and contingent upon the commencement of ~~common stock of Nebula (the “Nebula Shares”) from the Seller Parties, for~~his employment and continued service through each vesting date. The options have an ~~aggregate purchase~~exercise price of ~~approximately~~ $~~14.6~~6.74 million, subject to post-closing adjustments. A portion of the purchase price will be paid in shares to certain Seller Parties and noteholders of Nebula, based on their election to receive shares of Company common stock in lieu of cash, which shares have been valued at a price per share, ~~of $7.46, which is equal to~~ the ~~average~~ closing price of the Company’s common stock on ~~Nasdaq~~May 9, 2022, and will be exercisable for a period of seven years.
Announcement of Cash Dividend
On May 9, 2022, the ~~five trading days preceding the signing~~board of directors of the ~~Nebula Stock Purchase Agreement. A portion~~Company declared a special cash dividend of $0.30 per share for stockholders of record as of May 25, 2022, which will approximate $4.6 million. On the same date, the Compensation Committee of the ~~purchase~~board of directors approved an adjustment to the stock option granted to Mr. Karkus on February 23, 2018 (the “CEO Option”), as required under the Company’s 2018 Stock Plan, as a consequence of the special cash dividend. The board of directors has adjusted the terms of the CEO Option, such that the exercise price ~~equal~~of the CEO Option will be reduced from $0.90 per share to $~~1,080,000~~0.60 ~~(the “Escrow Amount”) will~~per share, effective as of June 3, 2022, the date the special cash dividend is to be ~~held in escrow by Citibank, N.A. (the “Escrow Agent”) until~~ ~~February 23, 2023~~paid. (“Escrow Termination Date”), pursuant to the terms and conditions of an escrow agreement entered into with the Escrow Agent, as security for the indemnification obligations of the Seller Parties. At the Escrow Termination Date, the remaining amount, if any, of the Escrow Amount, less any amount reasonably necessary to pay any claim with respect to which a notice of claim has been timely and properly given, will be delivered to the Seller Parties, as applicable.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis should be read in conjunction with our interim unaudited condensed consolidated financial statements and related notes included in this Quarterly Report on Form 10-Q (“Quarterly Report”) and the audited ~~condensed~~ financial statements and notes thereto as of and for the year ended December 31, ~~2020~~2021 and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 31, ~~2021~~2022 (the ~~“2020~~“2021 Annual Report”). As used in this Quarterly Report, unless the context suggests otherwise, “we,” “us,” “our,” or “ProPhase” refer to ProPhase Labs, Inc. and its subsidiaries, unless the context otherwise requires.

Forward-Looking Statements

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

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

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

● Our ability to generate revenue and sufficient profits from Respiratory Pathogen Panel (“RPP”) Molecular tests if and when demand for COVID-19 testing decreases or becomes no longer necessary;
● Our ability to collect payment for the tests we deliver;
● Our ability to manage our growth successfully;
● Our ability to compete effectively, including our ability to maintain and increase our markets and/or market share in the markets in which we do business;
● Our dependence on our largest ~~manufacturing~~diagnostic services customers;

● Our ability to successfully offer, perform and generate revenues from our ~~new diagnostic and~~personal genomics ~~sequencing services;~~
● ~~Our ability to generate sufficient profits from Respiratory Pathogen Panel (“ RPP”) Molecular tests if and when demand for COVID-19 testing decreases or becomes no longer necessary;~~businesses;

● Our ability to secure additional capital, when needed to support our diagnostic services business, personal genomics business, manufacturing business and product development and commercialization programs;

● Potential disruptions to our supply chain or increases to the price of or adulteration of key raw materials or supplies;

● Potential disruptions in our ability to manufacture our products and those of others;

● Seasonal fluctuations in demand for the products and services we ~~manufacture at our manufacturing facility;~~provide;

● Our ability to successfully develop and commercialize our existing products and any new products;
● ~~Our ability to compete effectively, including our ability to maintain and increase our markets and/or market share in the markets in which we do business;~~

● Our ability to attract, retain and motivate our key employees;

● Our ability to protect our proprietary rights;
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● Our ability to comply with regulatory requirements applicable to our businesses;
● The complexity of billing for, and collecting revenue for, testing services;

● Our dependence on third parties to provide services critical to our lab diagnostic services business;
26
● General economic conditions, including as a result of the ongoing COVID-19 pandemic and the war in Ukraine; and
● Our ability to remediate the material weakness in our internal controls over financial reporting and prevent other material weaknesses.

Given the risks and uncertainties surrounding forward-looking statements,, you should not place undue reliance on these statements. You should also consider carefully the statements we make under other sections of this Quarterly Report and in our ~~2020~~2021 Annual Report, as well as in other documents we file from time to time with the SEC that address additional risks that could cause our actual results to differ from those set forth in any forward-looking statements. Our forward-looking statements speak only as the date of this Quarterly Report. We undertake no obligation to publicly update or review any forward-looking statements, whether as a result of new information, future developments or otherwise, except as required by law.

General

We are a diversified ~~biotech~~company that offers a range of services including diagnostic testing, genomics testing and contract manufacturing. We provide traditional CLIA molecular laboratory services, including SARS-CoV-2 (“COVID-19”) testing and seek to leverage our Clinical Laboratory Improvement Amendments (“CLIA”) accredited laboratory services to provide whole genome sequencing and research direct to consumers, while building a genomics ~~company with~~ data base to be used for further research. In addition, we have deep experience with over-the-counter (“OTC”) consumer healthcare products and dietary supplements. We conduct our operations through two operating ~~segments;~~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. This includes the development and marketing of dietary supplements under the TK ~~Supplements®~~Supplements^® brand. However, commencing in December 2020, we also began offering COVID- 19 and other RPP Molecular tests through our ~~new~~ diagnostic service ~~business.~~business, and in August 2021 we began offering personal genomics products and services.

Our wholly-owned subsidiary, Pharmaloz Manufacturing, Inc. (“PMI”), is a full-service contract manufacturer and private label developer of a broad range of non- GMO, organic and natural-based cough drops and lozenges and OTC drug and dietary supplement products.
~~Our wholly-owned~~wholly owned subsidiary, ProPhase Diagnostics, Inc., (“ProPhase Diagnostics”), which was formed on October 9, 2020, offers a ~~variety~~broad array of ~~medical tests,~~clinical diagnostic and testing services at its CLIA certified laboratories including state-of-the-art polymerase chain reaction (“PCR”) testing for COVID-19. Critical to COVID-19 testing, we provide fast turnaround times for results. We also offer best-in-class rapid antigen and ~~RPG Molecular tests.~~antibody/immunity testing for COVID-19. On October 23, 2020, we completed the acquisition of all of the issued and outstanding shares of capital stock of Confucius Plaza Medical Laboratory Corp. (“CPM”), which ~~operates~~owned a 4,000 square foot ~~Clinical Laboratory Improvement Amendments (“CLIA”)~~CLIA accredited laboratory located in Old Bridge, New Jersey for approximately $2.5 million. ~~As a result of the acquisition of CPM in October 2020, we entered into a new business line, diagnostic services.~~ In December 2020, we expanded our diagnostic service business with the ~~signing of a lease and the recent build out~~build-out of a second, larger CLIA accredited laboratory in Garden City, New York. Operations at this second facility commenced in ~~February~~January 2021.

On August 10, 2021, we acquired Nebula Genomics, Inc. (“Nebula”), a privately owned personal genomics company, through our new ~~wholly-owned~~wholly owned subsidiary, ProPhase Precision ~~Medicine, Inc.~~Medicine. We ~~intend to~~ offer whole genome sequencing and related services through this new subsidiary.ProPhase Precision Medicine, Inc. focuses on genomics testing technologies, a comprehensive method for analyzing entire genomes, including the genes and chromosomes in DNA. The data obtained from genomic testing can help to 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, Pharmaloz Manufacturing, Inc. (“PMI”), is a full-service contract manufacturer and private label developer of a broad range of non-GMO, organic and natural-based cough drops and lozenges and OTC drug and dietary supplement products.

Our diagnostic service business is and will continue to be influenced by the level of demand for COVID-19 and other diagnostic testing, how long this demand persists, the price we are able to receive for performing our testing services, ~~and the length of time~~our ability to collect payment or reimbursement for ~~which that demand persists,~~our testing services, as well as the availability of COVID-19 testing from other laboratories and the period of time for which we are able to serve as an authorized laboratory offering COVID-19 testing under various Emergency Use Authorizations.

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Our personal genomics business is and will continue to be influenced by demand for our genetic testing products and services, our marketing and service capabilities, and our ability to comply with applicable regulatory requirements.
Our consumer sales are and will continue to be influenced by (i) the timing of acceptance of our TK Supplements^® consumer products in the marketplace, and (ii) fluctuations in the timing of purchase and the ultimate level of demand for the OTC healthcare and cold remedy products that we manufacture, which is largely a function of the timing, length and severity of each cold season. Generally, a cold season is defined as the period from September to March when the incidence of the common cold rises as a result of the change in weather and other factors. We generally experience in the first, third and fourth quarter higher levels of net revenues from our contract manufacturing business. Revenues are generally at their lowest levels in the second quarter when customer demand generally declines.
In addition, we continue to actively pursue acquisition opportunities for other companies, technologies and products within and outside the consumer products industry.
While our revenues have increased ~~for the six months ended June 30, 2021~~significantly as a result of our ~~new~~ diagnostic services business, ~~line,~~ we ~~have made and~~ will continue to ~~make substantial investments to secure~~be dependent on both government agency and insurance company reimbursement as well as the ~~necessary equipment, supplies and personnel to provide these testing services.~~prevalence of COVID-19 associated strains. There can be no assurance that our efforts to offer and perform COVID-19 or other diagnostic testing will continue to be successful and the revenue and operating profits from such business will increase from or maintain their current level.

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

27
~~Financial Condition and Results of Operations Results for the~~ Three Months Ended ~~June 30, 2021~~March 31, 2022 as Compared to the Three Months Ended ~~June 30, 2020~~March 31, 2021
For the three months ended ~~June 30, 2021,~~March 31, 2022, net revenue was ~~$9.1~~$47.5 million as compared to ~~$3.6~~$15.3 million for the three months ended ~~June 30, 2020. We experienced higher~~March 31, 2021. The increase in net revenue was the result of a $32.2 million increase in net revenue from diagnostic services and an immaterial increase in consumer products. The increase in net revenue for ~~the three months ended June 30, 2021, primarily as a result of an increase of $7.5 million related to our new~~ diagnostic services ~~business, which~~ was ~~offset by, a decrease of $2.0 million in customer orders from our consumer products business~~due to increased COVID-19 testing volumes performed as a result of the ~~timing~~Omicron variant, which emerged in early 2022. Overall diagnostic testing volume increased from 113,000 tests in the first quarter of 2021 to 377,000 tests in the first quarter of 2022, of which 60.3% and ~~demand~~69.0% were reimbursed by the HRSA uninsured program, respectively. The average variable consideration received was $120.14 per adjudicated test in the first quarter of ~~third party contract manufacturing customers.~~ 2022 versus $139.04 per adjudicated test in the first quarter of 2021. See “HRSA Funding” section in the Liquidity and Capital Resources management disclosures below for additional information.

Cost of revenues for the three months ended ~~June 30,~~March 31, 2022 were $18.9 million, comprised of $16.7 million for diagnostic services and $2.2 million for consumer products. Cost of revenues for the three months ended March 31, 2021 were ~~$4.7~~$6.3 million, ~~as compared to $2.3~~comprised of $4.3 million for diagnostic services and $2.0 million for consumer products.
We realized a gross profit of $28.7 million for the three months ended ~~June 30, 2020.~~ March 31, 2022 as compared to $8.9 million for the three months ended March 31, 2021. The increase of $19.8 million was comprised of an increase of $19.8 million from diagnostic services offset by an immaterial decrease in consumer products. For the three months ended ~~June 30,~~March 31, 2022 and 2021 ~~and 2020,~~ we realized aan overall gross margin of ~~48.9%~~60.3% and ~~35.3%~~58.5%, respectively. Gross margin for diagnostic services was 62.8% and 65.9% in the 2022 and 2021 comparable periods, respectively. The ~~increase~~decrease in gross margin ~~from the prior period is~~was principally due to increased ~~margins generally associated with our new diagnostic services business.~~sample collection costs and additional costs for HRSA-related testing for which revenue could not be recognized, partially offset by a decrease in cost of test materials. Gross ~~margins are generally~~margin for consumer products was 17.8% and 21.1% in the 2022 and 2021 comparable periods, respectively. Gross margin for consumer products have historically been influenced by fluctuations in quarter-to-quarter ~~diagnostic testing and OTC~~ production volume, fixed ~~operating~~production costs and related overhead absorption, raw ingredient costs, ~~testing supplies and labor costs and~~ inventory mark to market ~~write-downs.~~write-downs and timing of shipments to customers.

Diagnostic ~~expenses~~services costs for the three months ended ~~June 30, 2021~~March 31, 2022 were ~~$830,000~~$4.7 million compared to ~~no diagnostics expenses~~$3.8 million for the three months ended ~~June 30, 2020.~~March 31, 2021. The ~~$830,000~~increase of $0.9 million was due to increased COVID-19 testing volumes performed as a result of the Omicron variant, which emerged in ~~diagnostic expenses for~~early 2022, partially offset by a greater proportion of costs allocated to cost of revenues as a result of the ~~three months ended June 30, 2021 was comprised~~nature of agreements with network ~~providers expenses associated with our new diagnostic services business.~~providers.

~~Sales, general~~General and administration expenses for the three months ended ~~June 30, 2021~~March 31, 2022 were ~~$5.0~~$7.8 million as compared to ~~$1.2~~$3.8 million for the three months ended ~~June 30, 2020.~~March 31, 2021. The increase of ~~$3.8~~$4.0 million in general and administration expenses was principally related to ~~growth~~an increase in personnel expenses and professional fees associated with our ~~new~~ diagnostic services business.

Research and development costs for the three months ended ~~June 30, 2021~~March 31, 2022 were ~~$93,000~~$35,000 as compared to ~~$65,000~~$115,000 for the three months ended ~~June 30, 2020.~~March 31, 2021. The ~~increase~~decrease in research and development costs for the three months ended ~~June 30, 2021~~March 31, 2022 as compared to the three months ended ~~June 30, 2020 were~~March 31, 2021 was principally due to ~~additional professional fees~~a decrease in personnel expenses associated with our ~~new~~ diagnostics services business.

Interest and other income for the three months ended ~~June 30,~~March 31, 2022 and 2021 was $73,000 and ~~2020 was $214,000 and $11,000,~~$87,000, respectively. The ~~increase~~decrease in interest income for the three months ended ~~June 30, 2021~~March 31, 2022 as compared to the three months ended ~~June 30, 2020~~March 31, 2021 was principally due to the ~~issuance~~higher account balance of ~~the new Secured Note receivable~~our investment account that bears ~~interest at a rate of 15% per annum.~~interest.
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Interest expense for the three months ended ~~June 30, 2021~~March 31, 2022 was ~~$323,000~~$233,000 compared to ~~no interest expense~~$251,000 for the three months ended ~~June 30, 2020.~~March 31, 2021. The ~~increase~~decrease in interest expense for the three months ended ~~June 30, 2021~~March 31, 2022 as compared to the three months ended ~~June 30, 2020~~March 31, 2021 was principally due to the ~~new~~repayment during the three months ended March 31, 2022 of one of the two September 2020 unsecured convertible ~~September 2020 Notes~~notes payable that ~~accrues~~accrued interest at a rate of 10% per year.

Gain from change in fair value of investment securities for the three months ended June 30, 2021 was $164,000, which was due to the increase of stock price as of June 30, 2021 compared to stock price on the acquired date on June 25, 2021.
As a ~~consequence~~result of the effects ~~of the~~described above, net ~~loss~~income from operations for the three months ended ~~June 30, 2021~~March 31, 2022 was ~~$1.4~~$12.5 million, or ~~($0.09)~~$0.81 per share, as compared to ~~the net income~~$1.1 million, or $0.07 per share, for the three months ended ~~June 30, 2020 of $70,000, or $0.01~~March 31, 2021. Diluted earnings per ~~share.~~share for the three months ended March 31, 2022 and 2021 were $0.68 and $0.06, respectively.

Non-GAAP Financial ~~Condition~~Measure and ~~Results of Operations Results for the Six Months Ended June 30, 2021 as Compared to the Six Months Ended June 30, 2020~~
Reconciliation
For the six months ended June 30, 2021, net revenue was $24.4 million as compared to $5.5 million for the six months ended June 30, 2020. We experienced higher net revenue for the six months ended June 30, 2021, primarily as a result of our receipt of $20.3 million from our new diagnostic services business, which was offset by, a decrease of $1.4 million in customer orders from our consumer products business as a result of the timing and demand of third party contract manufacturing customers.

~~Cost~~In an effort to provide investors with additional information regarding our results of ~~revenues for~~operations as determined by accounting principles generally accepted in the ~~six months ended June 30, 2021 were $11.0 million as compared to $3.8 million for the six months ended June 30, 2020. For the six months ended June 30, 2021~~United States of America (“GAAP”), we disclose certain non-GAAP financial measures. The primary non-GAAP financial measure we disclose are EBITDA and 2020, we realized a gross margin of 54.9% and 30.7%, respectively. The increase in gross margin from the prior period is principally due to increased margins generally associated with our new diagnostic services business. Gross margins are generally influenced by fluctuations in quarter-to-quarter diagnostic testing and OTC production volume, fixed operating costs and related overhead absorption, raw ingredient costs, testing supplies and labor costs and inventory mark to market write-downs.Adjusted EBITDA.

~~Diagnostic expenses for~~We define EBITDA as net income (loss) before net interest expense, income taxes, depreciation and amortization. Adjusted EBITDA further adjusts EBITDA by excluding acquisition costs, other non-cash items, and other unusual or non-recurring charges (as described in the six months ended June 30, 2021 were $4.6 million compared to no diagnostics expenses for the six months ended June 30, 2020. The $4.6 million in diagnostic expenses for the six months ended June 30, 2021 was comprised of network providers expenses associated with our new diagnostic services business.table below).

~~Sales, general~~We use EBITDA and ~~administration expenses for~~Adjusted EBITDA internally to evaluate and manage the ~~six months ended June 30, 2021 were $8.8 million as compared~~Company’s operations because we believe they provide useful supplemental information regarding the Company’s ongoing economic performance. We have chosen to ~~$2.3 million for~~provide this information to investors to enable them to perform more meaningful comparisons of operating results. The following table sets forth the ~~six months ended June 30, 2020. The increase~~reconciliations of ~~$6.5 million in general~~EBITDA and ~~administration expenses was principally related~~Adjusted EBITDA excluding other costs to ~~growth in personnel expenses and professional fees associated with our new diagnostic services business.~~the most comparable GAAP financial measures (in thousands):

Research and development costs for the six months ended June 30, 2021 were $208,000 as compared to $124,000 for the six months ended June 30, 2020. The increase in research and development costs for the six months ended June 30, 2021 as compared to the six months ended June 30, 2020 were principally due to additional professional fees associated with our new diagnostics services business.
For the three months ended
March 31, 2022 March 31, 2021
GAAP net income ⁽¹⁾ $ 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 ⁽²⁾ 10 186
Bad debt expense ⁽³⁾ 250 -
Adjusted EBITDA $ 14,646 $ 2,292

~~Interest~~⁽¹⁾We believe that net income (loss) is the financial measure calculated and ~~other income~~presented in accordance with GAAP that is most directly comparable to EBITDA and Adjusted EBITDA. EBITDA and Adjusted EBITDA measure the Company’s operating performance without regard to certain expenses. EBITDA and Adjusted EBITDA are not presentations made in accordance with GAAP and the Company’s computation of EBITDA and Adjusted EBITDA may vary from others in the industry. EBITDA and Adjusted EBITDA have important limitations as analytical tools and should not be considered in isolation or as substitutes for the six months ended June 30, 2021 and 2020 was $301,000 and $14,000, respectively. The increase in interest income for the six months ended June 30, 2021 as compared to the six months ended June 30, 2020 was principally due to the issuanceanalysis of the ~~new Secured Note receivable that bears interest at a rate of 15% per annum.~~
Interest expense for the six months ended June 30, 2021 was $574,000 compared to no interest expense for the six months ended June 30, 2020. The increase in interest expense for the six months ended June 30, 2021Company’s results as ~~compared to the six months ended June 30, 2020 was principally due the new unsecured convertible September 2020 Notes payable that accrues interest at a rate of 10% per year.~~
Gain from change in fair value of investment securities for the six months ended June 30, 2021 was $164,000, which was due to the increase of stock price as of June 30, 2021 compared to stock price on the acquired date on June 25, 2021.
As a consequence of the effects of the above, net loss from operations for the six months ended June 30, 2021 was $338,000, or ($0.02) per share, as compared to the net loss for the six months ended June 30, 2020 of $739,000, or ($0.06) per share.reported under GAAP.

2836

⁽²⁾The non-cash portion of rent, which reflects the extent to which our GAAP rent expense recognized exceeds (or is less than) our cash rent payments. For newer leases, our rent expense recognized typically exceeds our cash rent payments, while for more mature leases, rent expense recognized is typically less than our cash rent payments.
⁽³⁾Full allowance reserved related to restricted cash.
Liquidity and Capital Resources

Our aggregate cash, ~~and~~ cash equivalents and ~~marketable debt securities~~restricted cash as of ~~June 30, 2021 was $35.8~~March 31, 2022 were $25.8 million as compared to ~~$8.5~~$8.7 million at December 31, ~~2020.~~2021. Our working capital was ~~$44.3~~$52.8 million and ~~$9.6~~$45.8 million as of ~~June 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, respectively. The increase of ~~$27.3~~$17.1 million in our cash, ~~and~~ cash equivalents and ~~marketable debt securities balance~~restricted cash for the ~~six~~three months ended ~~June 30, 2021~~March 31, 2022 was principally due to our ~~receipt of aggregate net~~ proceeds ~~of $40.6 million~~ from the ~~issuance~~sale of ~~common stock~~marketable debt securities of $5.3 million and ~~warrants in a registered direct offering and public offering~~$20.3 million cash provided by operating activities, offset by (i) ~~capital expenditures~~purchases of ~~$4.2~~marketable securities of $0.3 million, (ii) cash dividend payments of ~~$4.5~~$4.6 million, (iii) ~~issuance~~repayment of ~~a promissory~~ note payable of ~~$1.0~~$1.4 million, (iv) repurchase of common shares for $1.2 million, and ~~(iv) cash used in operations~~(v) capital expenditures of ~~$3.5~~$1.1 million.

To date the principal sources of capital to fund our operations have been from diagnostic services, product sales, net proceeds from the offering of equity securities, and issuances of promissory notes. Based on management’s current business plans, the Company estimates it will have enough cash and liquidity to finance its operating requirements for at least 12 months from the date of filing these unaudited condensed consolidated financial statements. However, due to the nature of the diagnostic business and the Company’s focus thus far on COVID-19 testing, there are inherent uncertainties associated with managements’ business plan and cash flow projections, particularly if the Company is unable to grow its diagnostic testing business beyond COVID-19 testing services. See “HRSA Funding” below.
COVID-19
The COVID-19 pandemic has not had a material adverse impact on our business to date. We experienced higher than normal net revenue for the ~~last six~~year ended December 31, 2021 and three months ended ~~June 30, 2020,~~March 31, 2022, primarily as a result of revenue from our ~~new~~ diagnostic services business, which offers COVID-19 testing. There can be no assurance that demand for our COVID-19 testing services will continue to exist in the future due to the widespread and effective vaccination of a majority of Americans against COVID-19 and successful containment efforts. If there is no demand for our COVID-19 testing services, and we are unable to generate sufficient profits from other RPP Molecular tests, our business could be materially adversely affected.

There are still numerous uncertainties associated with the COVID-19 pandemic, including the efficacy of the vaccines that have been developed to treat the virus and their ability to protect against new strains of the virus, people’s willingness to receive a vaccine, possible resurgences of the coronavirus and/or new strains of the virus, the extent and duration of protective and preventative measures that may be adopted by local, state and/or the federal government in the future as a result of future outbreaks, including business closures, the ongoing impact of COVID-19 on the U.S. and world economy and consumer confidence, and various other ~~uncertainties.~~uncertainties all of which could negatively impact our Company as a whole.

The COVID-19 pandemic has had a negative impact on the global capital markets and economies worldwide and could ultimately have a material adverse impact on our ability to raise capital needed to develop and commercialize products.

~~General~~HRSA Funding
In March 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted, providing for reimbursement to healthcare providers for COVID-19 tests provided to uninsured individuals, subject to continued available funding. Approximately 69% and 57% of our diagnostic services revenue for the three months ended March 31, 2022 and 2021, respectively was generated from this program for the uninsured. On March 22, 2022, the Health Resources & Services Administration (“HRSA”) uninsured program stopped accepting claims for COVID-19 testing and treatment due to lack of sufficient funds. Despite requests from the Acting Director of the Office of Management and Budget and the White House Coordinator for COVID-19 Response for additional emergency funding for the uninsured program, emergency funding has not been allocated to the HRSA uninsured program. We continue to perform testing for uninsured persons and are incurring the accompanying costs. However, as a result of the suspension of the HRSA uninsured program, we did not recognize $4.3 million in revenues related to COVID-19 testing that we performed for uninsured individuals from March 23, 2022 through March 31, 2022. If funding for the HRSA program is ~~not aware of any other trends, events or uncertainties that have had or~~reinstituted, we will submit eligible claims for reimbursement to HRSA and record the associated revenues. If the HRSA program remains unfunded and we are ~~reasonably likely~~unable to ~~have a material negative impact upon our (i) short-term or long-term liquidity, or (ii) net revenue or income from operations. Any challenge to our patent or trademark rights~~submit claims for reimbursement, there could ~~have~~be a material adverse effect on our ~~future; however, we are not aware of any condition that would make such an event probable. Our~~ business ~~is generally subject to seasonal variations thereby impacting our liquidity~~ and ~~working capital during the course of our fiscal year.~~financial condition.
37
At-the-Market Facility

~~During the six months ended June,~~On December 28, 2021, we ~~used $3.5 million in cash from operations. To the extent that we do not generate sufficient cash from operations, our cash balances will decline. We may also use our cash~~entered into a Sales Agreement (the “Sales Agreement”) with ThinkEquity LLC (the “Sales Agent”), pursuant to explore and/or acquire new product technologies, applications, product line extensions, new contract manufacturing applications and other new product opportunities. In the event that our available cash is insufficient to support such initiatives,which we may ~~need~~offer and sell, from time to ~~incur indebtedness or issue~~time through the Sales Agent, shares of our common stock having an aggregate offering price of up to ~~finance our plans for growth. Volatility in~~$100,000,000, subject to the ~~credit markets~~terms and ~~the liquidity of major financial institutions, including as a result~~conditions of the ~~COVID-19 pandemic, may have an adverse impact on our ability~~Sales Agreement. We are not obligated to ~~fund our business strategy through future borrowings,~~make any sales of shares under ~~either existing or newly created instruments in~~ the ~~public or private markets on terms that we believe to be reasonable, if at all.~~Sales Agreement.

~~Off-Balance Sheet Arrangements~~
~~It is not our usual business practice~~We will pay the Sales Agent a fixed commission rate of 2.0% of the aggregate gross proceeds from the sale of any shares pursuant to ~~enter into off-balance sheet arrangements such as guarantees~~the Sales Agreement and have agreed to provide the Sales Agent with customary indemnification and contribution rights. We also agreed to reimburse the actual out-of-pocket accountable expenses of the Sales Agent up to $60,000 (of which a $25,000 advance was paid on loans and financial commitments and retained interests in assets transferred to an unconsolidated entity for securitization purposes. We have no off-balance sheet arrangements that have, or are reasonably likely to have, a material current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.December 7, 2021).

Additionally, we will pay to H.C. Wainwright & Co. (“Wainwright”), a fee equal to 1.0% of the gross proceeds of the sales price of all the shares sold under the Sales Agreement, pursuant to a separate financial services agreement with Wainwright. Wainwright is not a sales agent under the Sales Agreement.
As of March 31, 2022, we have not sold any shares under the Sales Agreement.
Impact of Inflation
We are subject to normal inflationary trends and anticipate that any increased costs for our contract manufacturing and retail operations would be passed on to our ~~customers.~~customers; however, any increased costs related to diagnostic services would be absorbed by the Company. Inflation has not had a material effect on our business.
Critical Accounting Policies and Estimates
Our significant accounting policies are described in Note 2 of the Notes to Condensed Consolidated Financial Statements included under Item 8 of this Part II. However, certain accounting policies are deemed “critical”, as they require management’s highest degree of judgment, estimates and assumptions. These accounting policies, estimates and disclosures have been discussed with the Audit Committee of our Board of Directors. A discussion of our critical accounting policies and estimates, the judgments and uncertainties affecting their application and the likelihood that materially different amounts would be reported under different conditions or using different assumptions are as follows:
Use of Estimates
The preparation of condensed consolidated financial statements ~~are prepared~~and the accompanying notes thereto, in conformity with ~~accounting principles generally accepted in the United States of America (“GAAP”), which require the use of~~GAAP requires management to make estimates ~~judgments~~ and assumptions that affect ~~the~~ reported amounts of assets and liabilities ~~the~~and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and ~~the~~ reported amounts of revenues and expenses induring the ~~periods presented. We believe~~respective reporting periods. Examples include revenue recognition and the estimation of the variable consideration associated with the diagnostic reimbursement rates, the provision for bad debt and billing discrepancies, sales returns and allowances, inventory obsolescence, useful lives of property and equipment, impairment of goodwill, intangibles and property and equipment, income tax valuations and assumptions related to accrued advertising. The estimates and assumptions are based on historical experience, current trends and other factors that management believes to be relevant at the time the condensed consolidated financial statements are prepared. Management reviews the accounting policies, assumptions, estimates ~~employed are appropriate~~ and ~~resulting balances are reasonable; however, due to inherent uncertainties in making estimates, actual~~judgments on a quarterly basis. Actual results could differ from the original estimates, requiring adjustments to these balances in future periods. The critical accounting estimates that affect the consolidated financial statements and the judgments and assumptions used are consistent with those ~~described under Part II, Item 7 of the 2020 Annual Report.~~estimates.

2938
Revenue Recognition and Accounts Receivables
We generate revenue principally through four types of revenue streams: diagnostic services, contract manufacturing, genomic products and services, and retail and other. The process for estimating revenues and the ultimate collection of receivables involves assumptions and judgments.
Revenue from our diagnostic services is recognized when the lab test is complete, and the diagnostic test result is provided to the customer. Revenue from our genomics services is recognized when the sequencing report is provided to the customer. Revenue from our consumer products is recognized when the shipments to contract manufacturing and retailer customers are recognized at the time ownership is transferred to the customer. We bill the providers at standard price and take into consideration for negotiated discounts and an anticipated reimbursement remittance adjustments based on the payer portfolio, when revenue is recorded. We use the most expected value method to estimate the transaction price for reimbursements that may vary from the standard price.
We carry our accounts receivable at cost less an allowance for doubtful accounts. Allowances for doubtful accounts are based upon our judgment regarding collectability. On a periodic basis, we evaluate our receivables and establish an allowance for doubtful accounts, based on a history of past write-offs, collections, current credit conditions or generally accepted future trends in the industry and/or local economy. Accounts are written off as uncollectible at the time we determine that collections are unlikely. The reserve is not intended to address return activity or disputed balances with ongoing customers, as this should be addressed in a reserve for credit memos with a corresponding charge to revenue.
Goodwill and Long-lived Assets
We review our goodwill at least annually for impairment as well as the carrying value of goodwill and our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of these assets may not be fully recoverable. When it is determined that the carrying amount of long-lived assets or goodwill is impaired, impairment is measured by comparing an asset’s estimated fair value to its carrying value. The determination of fair value is based on quoted market prices in active markets, if available, or independent appraisals; sales price negotiations; or projected future cash flows discounted at a rate determined by management to be commensurate with our business risk. The estimation of fair value utilizing discounted forecasted cash flows includes significant judgments regarding assumptions of revenue, operating and marketing costs; selling and administrative expenses; interest rates; property and equipment additions and retirements; and industry competition, general economic and business conditions, among other factors.
Income Taxes
Accounting for income taxes requires recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities. These deferred taxes are measured by applying the provisions of tax laws in effect at the balance sheet date, including the impact of the Tax Cuts and Jobs Act (“TCJA”) enacted on December 22, 2017. The TCJA made broad and significant changes to the U.S. tax code that affects the year ended December 31, 2017, including, but not limited to, a change in the federal rate from 35% to 21% effective January 1, 2018.
We recognize in income the effect of a change in tax rates on deferred tax assets and liabilities in the period that includes the TCJA enactment date. We utilize the asset and liability approach which requires the recognition of deferred tax assets and liabilities for the future tax consequences of events that have been recognized in our financial statements or tax returns. In estimating future tax consequences, we generally consider all expected future events other than enactments of changes in the tax law or rates. Until sufficient taxable income to offset the temporary timing differences attributable to operations and the tax deductions attributable to option, warrant and stock activities are assured, a valuation allowance equaling the total net current and non-current deferred tax asset is being provided.
39
Inventories
Inventory is valued at the lower of cost, determined on a first-in, first-out basis (“FIFO”), or net realizable value. We regularly review inventory quantities on hand and record a provision for excess and obsolete inventory based primarily on current and anticipated customer demand, production and laboratory requirements.
Recently Adopted Accounting Standards
The Financial Accounting Standards Board (“FASB”) recently issued Accounting Standards Update (“ASU”) 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470- 20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, to reduce complexity in applying GAAP to certain financial instruments with characteristics of liabilities and equity. The guidance in ASU 2020-06 simplifies the accounting for convertible debt instruments and convertible preferred stock by removing the existing guidance that requires entities to account for beneficial conversion features and cash conversion features in equity, separately from the host convertible debt or preferred stock. The guidance in ASC 470-20 applies to convertible instruments for which the embedded conversion features are not required to be bifurcated from the host contract and accounted for as derivatives. In addition, the amendments revise the scope exception from derivative accounting in ASC 815-40 for freestanding financial instruments and embedded features that are both indexed to the issuer’s own stock and classified in stockholders’ equity, by removing certain criteria required for equity classification. These amendments are expected to result in more freestanding financial instruments qualifying for equity classification (and, therefore, not accounted for as derivatives), as well as fewer embedded features requiring separate accounting from the host contract. The amendments in ASU 2020-06 further revise the guidance in ASC 260, Earnings Per Share, to require entities to calculate diluted earnings per share (EPS) for convertible instruments by using the if-converted method. In addition, entities must presume share settlement for purposes of calculating diluted EPS when an instrument may be settled in cash or shares. The amendments in ASU 2020-06 are effective for public entities, excluding smaller reporting companies, for fiscal years beginning after December 15, 2021. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2023. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020. The adoption of ASU 2020-06 did not have a material impact on our condensed consolidated financial statements or disclosures.
In May 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt-Modifications and Extinguishments (Subtopic 470-50), Compensation-Stock Compensation (Topic 718), and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40). This ASU reduces diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options (for example, warrants) that remain equity classified after modification or exchange. This ASU provides guidance for a modification or an exchange of a freestanding equity-classified written call option that is not within the scope of another Topic. It specifically addresses: (1) how an entity should treat a modification of the terms or conditions or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange; (2) how an entity should measure the effect of a modification or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange; and (3) how an entity should recognize the effect of a modification or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange. This ASU will be effective for all entities for fiscal years beginning after December 15, 2021. An entity should apply the amendments prospectively to modifications or exchanges occurring on or after the effective date of the amendments. Early adoption is permitted, including adoption in an interim period. The adoption of ASU 2021-04 did not have a material impact on our condensed consolidated financial statements or disclosures.
Recently Issued Accounting Standards, Not Yet Adopted
In September 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326). The ASU sets forth a “current expected credit loss” (CECL) model which requires the Company to measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions, and reasonable supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost and applies to some off-balance sheet credit exposures. In February 2020, the FASB issued ASU 2020-02, Financial Instruments - Credit Losses (Topic 326), which amends the effective date of the original pronouncement for smaller reporting companies. ASU 2016-13 and its amendments will be effective for us for interim and annual periods in fiscal years beginning after December 15, 2022. We are currently assessing the impact of the adoption of this ASU on our financial statements.
40

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

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

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

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

Except for the broad effects of COVID-19 including its negative impact on the global economy and major financial markets, there have been no material changes to our market risk exposures since December 31, ~~2020.~~2021.

Item 4. Controls and Procedures.
Disclosure Controls and Procedures
We carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of June 30, 2021. This evaluation was carried out under the supervision and with the participation of our Principal Executive Officer and Principal Financial and Accounting Officer. Based upon that evaluation, our Principal Executive Officer and Principal Financial and Accounting Officer concluded that our disclosure controls and procedures were effective as of June 30, 2021.
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed with or submitted to the SEC under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to management, including our ~~Principal Executive Officer~~principal executive officer and ~~Principal Financial~~principal financial and ~~Accounting Officer,~~accounting officer, to allow timely decisions regarding required disclosure.

We carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of March 31, 2022. This evaluation was carried out under the supervision and with the participation of our principal executive officer and principal financial and accounting officer. Based on that review, our management, including our principal executive officer and principal financial and accounting officer, concluded that due to the material weakness described below, our disclosure controls and procedures were not effective at the reasonable assurance level as of March 31, 2022.
41
Material Weakness
In connection with our 2021 Annual Report, our management conducted an evaluation of the effectiveness of our system of internal control over financial reporting based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework). Based upon that review, our management, including our principal executive officer and principal financial and accounting officer, concluded that the Company’s internal controls over financial reporting were not effective as of March 31, 2022, as a material weakness exists. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our financial statements could occur but will not be prevented or detected on a timely basis.
The material weakness that was identified relates to the lack of appropriate standard operating procedures and billing system controls associated with the diagnostic billing and revenue process, as well as the lack of contemporaneous assessments and associated documentation of the reimbursement receivables leading to additional allowance requirements.
Management is committed to remediating the material weakness. We have begun the process of implementing changes to our internal control over financial reporting to remediate the control deficiencies that gave rise to the material weakness, including further improvements in our processes, the current billing system and analyses that support the estimates associated with the allowances. Further, we expect to perform a comprehensive review of our billing standard operating procedures, training and resources in our billing and accounting functions.
We will not consider the material weakness remediated until the remedial controls operate for a sufficient period of time and we have concluded, through testing, that these controls are effectively designed and operating effectively. We will continue to assess throughout 2022.
Changes in Internal Control Over Financial Reporting

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

30
Part II. Other Information

Item 1. Legal Proceedings.
From time to time, we have been and may again become involved in legal proceedings arising in the ordinary course of business. We are not presently a party to any material litigation.
42

Item 1A. Risk Factors.
~~There~~
Factors that could cause our actual results to differ materially from those in this Quarterly Report are any of the risks described in our Annual Report on Form 10-K filed with the SEC on March 31, 2022. Any of these factors could result in a significant or material adverse effect on our results of operations or financial condition. Additional risk factors not presently known to us or that we currently deem immaterial may also impair our business or results of operations. 
As of the date of this Quarterly Report on Form 10-Q, except as described below, there have been no material changes to the ~~risks described~~risk factors disclosed in ~~Item 1A. Risk Factors~~our Annual Report on Form 10-K filed with the SEC on March 31, 2022. However, we may disclose changes to such factors or disclose additional factors from time to time in our future filings with the SEC. 
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.
Our customer base for our COVID-19 tests is principally comprised of governmental bodies, municipalities, and large corporations who pay us directly or through third-party payors. In March 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted, providing for reimbursement to healthcare providers for COVID-19 tests provided to uninsured individuals, subject to continued available funding. Approximately 60 and 57% of our diagnostic services revenue for the three months ended March 31, 2022 and 2021, respectively was generated from this program for the uninsured. On March 22, 2022, the Health Resources & Services Administrations (“HRSA”) uninsured program stopped accepting claims for COVID-19 testing and treatment due to the lack of sufficient funds. Despite requests from the Acting Director of the ~~2020 Annual Report.~~Office of Management and Budget and the White House Coordinator for COVID-19 Response for additional emergency funding for the uninsured program, emergency funding has not been allocated to the HRSA uninsured program. We continue to perform testing for uninsured persons and are incurring the accompanying costs. However, as a result of the suspension of the HRSA uninsured program, we did not recognize $4.3 million of revenues related to COVID-19 testing which was performed for uninsured individuals from March 23, 2022 through March 31, 2022. If funding for the HRSA program is reinstituted, we will submit eligible claims for reimbursement to HRSA and record the associated revenues. If the HRSA program remains unfunded and we are unable to submit claims for reimbursement, there could be a material adverse effect on our business and financial condition.
Further, healthcare policy changes that influence the way healthcare is financed or other changes in the market that impact payment rates by institutional or non-institutional customers could also affect our collection rates. If we are unable to convince customers of the value and benefit provided by our tests, these customers may slow, or stop altogether, their purchases of these tests. Our collection risks also include the potential for default or bankruptcy by the party responsible for payment and other risks associated with payment collection generally. Any inability to maintain our past payment collection levels could cause our revenue and ability to achieve profitability to decline and adversely affect our business, prospects and financial condition.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3. Defaults Upon Senior Securities.
None

Item 4. Mine Safety Disclosures.

Not applicable

Item 5. Other Information.

None

Item 6. Exhibits
Exhibit No. Description
~~10.1~~ ~~Amended and Restated 2010 Equity Compensation Plan (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K (File No. 000-21617) filed on May 21, 2021)~~
~~10.2~~ ~~Amended and Restated 2010 Directors’ Equity Compensation Plan (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K (File No. 000-21617) filed on May 21, 2021)~~
31.1 Certification by the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2 Certification by the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

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

32.2 Certification by the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101. INS# Inline XBRL Instance Document

101.SCH# Inline XBRL Taxonomy Extension Schema Document

101.CAL# Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF# Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB# Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE# Inline XBRL Taxonomy Extension Presentation Linkbase Document
104 Cover Page Interactive Data File (embedded within the Inline XBRL document)
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SIGNATURES

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

ProPhase Labs, Inc.

By: /s/ Ted Karkus
Ted Karkus

Chairman of the Board and Chief Executive Officer (Principal Executive Officer)
~~Date: August 13, 2021~~
Date: May 13, 2022
By: /s/ Monica Brady
Monica Brady

Chief Financial Officer
(Principal Financial Officer)
Date: May 13, 2022
~~Date: August 13, 2021~~
3244

	June 30,			December 31,
	2021			2020
	(Unaudited)
ASSETS
Current assets
Cash and cash equivalents	$	17,677		$	6,816
Marketable debt securities, available for sale		18,095			1,639
Marketable equity securities, available for sale		479			-
Accounts receivable, net		6,644			3,155
Inventory, net		15,169			3,039
Prepaid expenses and other current assets		428			1,238
Total current assets		58,492			15,887

Property, plant and equipment, net		6,914			3,578
Secured promissory note receivable		3,727			2,750
Prepaid expenses, net of current portion		460			2,084
Right-of-use asset, net		4,564			4,731
Intangible asset, net		1,017			1,234
Goodwill		901			901
Other assets		248			240
TOTAL ASSETS	$	76,323		$	31,405

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	7,114		$	3,771
Accrued advertising and other allowances		214			463
Lease liabilities		635			329
Other current liabilities		6,211			1,731
Total current liabilities		14,174			6,294

Non-current liabilities:
Deferred revenue, net of current portion		121			162
Unsecured convertible promissory notes, net		9,994			9,991
Lease liabilities, net of current portion		4,301			4,402
Total non-current liabilities		14,416			14,555
Total liabilities		28,590			20,849

COMMITMENTS AND CONTINGENCIES		-			-

Stockholders’ equity
Preferred stock authorized 1,000,000, $.0005 par value, 0 shares issued and outstanding		-			-
Common stock authorized 50,000,000, $.0005 par value, issued 31,806,275 and 28,256,275 shares, respectively		16			14
Additional paid-in capital		99,265			61,674
Accumulated deficit		(3,969	)		(3,631	)
Treasury stock, at cost, 16,652,022 and 16,652,022 shares, respectively		(47,490	)		(47,490	)
Accumulated other comprehensive loss		(89	)		(11	)
Total stockholders’ equity		47,733			10,556
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	76,323		$	31,405

		March 31,			December 31,
	March 31,			December 31,
	2022			2021
	(Unaudited)
ASSETS
Current assets
Cash and cash equivalents	$	25,807		$	8,408
Restricted cash		-			250
Marketable debt securities, available for sale		3,543			8,779
Marketable equity securities, at fair value		-			76
Accounts receivable, net		36,694			37,708
Inventory, net		4,680			4,600
Prepaid expenses and other current assets		1,831			1,496
Total current assets		72,555			61,317

Property, plant and equipment, net		6,440			5,947
Prepaid expenses, net of current portion		251			460
Right-of-use asset, net		4,319			4,402
Intangible assets, net		10,143			10,852
Goodwill		5,709			5,709
Other assets		248			608
TOTAL ASSETS	$	99,665		$	89,295

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	8,204		$	7,026
Accrued diagnostic services		1,012			1,890
Accrued advertising and other allowances		95			104
Lease liabilities		654			663
Deferred revenue		2,246			2,034
Income tax payable		4,285			1,312
Other current liabilities		3,274			2,495
Total current liabilities		19,770			15,524

Non-current liabilities:
Deferred revenue, net of current portion		858			905
Deferred tax liability		443			-
Note payable		18			44
Unsecured convertible promissory notes, net		7,997			9,996
Lease liabilities, net of current portion		4,134			4,198
Total non-current liabilities		13,450			15,143
Total liabilities		33,220			30,667

COMMITMENTS AND CONTINGENCIES		-			-

Stockholders’ equity
Preferred stock authorized 1,000,000, $0.0005 par value, 0 shares issued and outstanding		-			-
Common stock authorized 50,000,000, $0.0005 par value, 15,485,900 and 15,485,900 shares outstanding, respectively		16			16
Additional paid-in capital		105,634			104,552
Retained earnings		10,490			2,642
Treasury stock, at cost, 17,018,846 and 16,818,846 shares, respectively		(49,557	)		(48,407	)
Accumulated other comprehensive loss		(138	)		(175	)
Total stockholders’ equity		66,445			58,628
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	99,665		$	89,295

	June 30, 2021			June 30, 2020			June 30, 2021			June 30, 2020
	For the three months ended						For the six months ended
	June 30, 2021			June 30, 2020			June 30, 2021			June 30, 2020
Revenues, net	$	9,142		$	3,623		$	24,413		$	5,511
Cost of revenues		4,676			2,344			11,020			3,817
Gross profit		4,466			1,279			13,393			1,694

Operating expenses:
Diagnostic expenses		830			-			4,639			-
General and administration		4,993			1,155			8,775			2,323
Research and development		93			65			208			124
Total operating expenses		5,916			1,220			13,622			2,447
Income (loss) from operations		(1,450	)		59			(229	)		(753	)

Interest income, net		214			11			301			14
Interest expense		(323	)		-			(574	)		-
Change in fair value of investment securities		164						164
Net income (loss)	$	(1,395	)	$	70		$	(338	)	$	(739	)

Other comprehensive loss:
Unrealized gain (loss) on marketable debt securities		(67	)		(5	)		(78	)		6
Total comprehensive income (loss)	$	(1,462	)	$	65		$	(416	)	$	(733	)

Earnings (loss) per share:
Basic	$	(0.09	)	$	0.01		$	(0.02	)	$	(0.06	)
Diluted	$	(0.09	)	$	0.01		$	(0.02	)	$	(0.06	)

Weighted average common shares outstanding:
Basic		15,154			11,592			14,860			11,587
Diluted		15,154			11,618			14,860			11,587

		March 31, 2022			March 31, 2021
	For the three months ended
	March 31, 2022			March 31, 2021
Revenues, net	$	47,531		$	15,271
Cost of revenues		18,854			6,344
Gross profit		28,677			8,927

Operating expenses:
Diagnostic expenses		4,672			3,809
General and administration		7,824			3,782
Research and development		35			115
Total operating expenses		12,531			7,706
Income (loss) from operations		16,146			1,221

Interest income, net		73			87
Interest expense		(233	)		(251	)
Change in fair value of investment securities		(76	)		-
Income from operations before income taxes		15,910			1,057
Income tax expense		(3,416	)		-
Income from operations after income taxes		12,494			1,057
Net income	$	12,494		$	1,057

Other comprehensive loss:
Unrealized gain (loss) on marketable debt securities		37			(11	)
Total comprehensive income	$	12,531		$	1,046

Earnings per share:
Basic	$	0.81		$	0.07
Diluted	$	0.68		$	0.06

Weighted average common shares outstanding:
Basic		15,486			14,563
Diluted		18,740			18,200

	Common Stock Shares Outstanding, Net of Shares of Treasury Stock		Par Value		Additional Paid in Capital			Accumulated Deficit			Accumulated Comprehensive Income (Loss)			Treasury Stock			Total
	For the Three Months Ended June 30, 2021
	Common Stock Shares Outstanding, Net of Shares of Treasury Stock		Par Value		Additional Paid in Capital			Accumulated Deficit			Accumulated Comprehensive Income (Loss)			Treasury Stock			Total
Balance as of April 1, 2021		15,154,253	$	16	$	102,735		$	(2,574	)	$	(22	)	$	(47,490	)	$	52,665

Issuance of common stock and warrants for cash from public offering, net of $2,365 offering cost
Issuance of common stock and warrants for cash from public offering, net of $2,365 offering cost, shares
Issuance of common stock and warrants for cash from private offering
Issuance of common stock and warrants for cash from private offering, shares
Cash dividends		-		-		(4,546	)		-			-			-			(4,546	)

Unrealized loss on marketable debt securities, net of realized gains of $2, net of taxes		-		-		-			-			(67	)		-			(67	)

Stock-based compensation		-		-		1,076			-			-			-			1,076

Net loss		-		-		-			(1,395	)		-			-			(1,395	)

Balance as of June 30, 2021		15,154,253	$	16	$	99,265		$	(3,969	)	$	(89	)	$	(47,490	)	$	47,733

	For the Three Months Ended June 30, 2020
	Common Stock Shares Outstanding, Net of Shares of Treasury Stock		Par Value		Additional Paid in Capital		Retained Earnings			Accumulated Comprehensive Income (Loss)			Treasury Stock			Total
Balance as of April 1, 2020		11,581,939	$	14	$	60,413	$	(2,315	)	$	9		$	(47,490	)	$	10,631

Unrealized loss on marketable debt securities, net of realized gains of $3, net of taxes		-		-		-		-			(5	)		-			(5	)

Stock-based compensation		9,709		-		198		-			-			-			198

Net income		-		-		-		70			-			-			70

Balance as of June 30, 2020		11,591,648	$	14	$	60,611	$	(2,245	)	$	4		$	(47,490	)	$	10,894

	Common Stock Shares Outstanding				Par Value		Additional Paid in Capital		Retained Earnings			Comprehensive Loss			Treasury Stock			Total
	Common Stock Shares Outstanding			Par Value		Additional Paid in Capital		Retained Earnings			Comprehensive Loss			Treasury Stock			Total
Balance as of January 1, 2022		15,485,900		$	16	$	104,552	$	2,642		$	(175	)	$	(48,407	)	$	58,628
Issuance of common shares for debt conversion		200,000			-		600		-			-			-			600
Cash dividends		-			-		-		(4,646	)		-			-			(4,646	)
Repurchases of common shares		(200,000	)		-		-		-			-			(1,150	)		(1,150	)
Unrealized loss on marketable debt securities		-			-		-		-			37			-			37
Stock-based compensation		-			-		482		-			-			-			482
Net income		-			-		-		12,494			-			-			12,494
Balance as of March 31, 2022		15,485,900		$	16	$	105,634	$	10,490		$	(138	)	$	(49,557	)	$	66,445

	For the Six Months Ended June 30, 2021
	Common Stock Shares Outstanding, Net of Shares of Treasury Stock		Par Value		Additional Paid in Capital			Accumulated Deficit			Accumulated Comprehensive Income (loss)			Treasury Stock			Total
Balance as of January 1, 2021		11,604,253	$	14	$	61,674		$	(3,631	)	$	(11	)	$	(47,490	)	$	10,556

Issuance of common stock and warrants for cash from public offering, net of $2,365 offering cost		3,000,000		2		35,133			-			-			-			35,135

Issuance of common stock and warrants for cash from private offering		550,000		-		5,500			-			-			-			5,500

Cash dividends		-		-		(4,546	)		-			-			-			(4,546	)

Unrealized loss on marketable debt securities, net of taxes		-		-		-			-			(78	)		-			(78	)

Stock-based compensation		-		-		1,504			-			-			-			1,504

Net loss		-		-		-			(338	)		-			-			(338	)

Balance as of June 30, 2021		15,154,253	$	16	$	99,265		$	(3,969	)	$	(89	)	$	(47,490	)	$	47,733

	For the Six Months Ended June 30, 2020
	Common Stock Shares Outstanding, Net of Shares of Treasury Stock		Par Value		Additional Paid in Capital		Accumulated Deficit			Accumulated Comprehensive Income (loss)			Treasury Stock			Total
Balance as of January 1, 2020		11,573,593	$	14	$	60,215	$	(1,506	)	$	(2	)	$	(47,490	)	$	11,231

Unrealized loss on marketable debt securities, net of realized losses of $3, net of taxes		-		-		-		-			6			-			6
Unrealized (gain) loss on marketable debt securities, net of realized losses, net of taxes											6						6

Stock-based compensation		18,055		-		396		-			-			-			396

Net loss		-		-		-		(739	)		-			-			(739	)
Net income loss								(739)									(739)

Balance as of June 30, 2020		11,591,648	$	14	$	60,611	$	(2,245	)	$	4		$	(47,490	)	$	10,894

	As of June 30, 2021							As of March 31, 2022
	Amortized		Unrealized			Fair		Amortized		Unrealized		Unrealized			Fair
	Cost		Losses			Value		Cost		Gains		Losses			Value
U.S. government obligations	$	2,556	$	(22	)	$	2,534	$	667	$	123	$	(44	)	$	746
Corporate obligations		15,628		(67	)		15,561		2,839		-		(42	)		2,797
	$	18,184	$	(89	)	$	18,095	$	3,506	$	123	$	(86	)	$	3,543

	As of December 31, 2020
	Amortized		Unrealized			Fair
	Cost		Losses			Value
U.S. government obligations	$	1,021	$	(7	)	$	1,014
Corporate obligations		629		(4	)		625
	$	1,650	$	(11	)	$	1,639

	As of December 31, 2021
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
U.S. government obligations	$	650	$	17	$	-		$	667
Corporate obligations		8,304		-		(192	)		8,112
	$	8,954	$	17	$	(192	)	$	8,779

	March 31, 2022			December 31, 2021
Trade accounts receivable	$	24,727		$	18,520
Unbilled accounts receivable		14,944			23,089
Accounts receivable, gross		39,671			41,609
Less allowances		(2,977	)		(3,901	)
Total accounts receivable	$	36,694		$	37,708

	June 30,		December 31,		March 31,			December 31,
	2021		2020		2022			2021
Diagnostic services testing material	$	13,240	$	1,028	$	3,103		$	2,989
Raw materials		1,249		1,404		1,238			1,514
Work in process		345		437		476			260
Finished goods		335		170		322			272
Inventory					$	5,139		$	5,035
Inventory valuation reserve						(459	)		(435	)
Inventory, net	$	15,169	$	3,039	$	4,680		$	4,600


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


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

	As of June 30, 2021
	Level 1		Level 2		Level 3		Total
Marketable debt securities
U.S. government obligations	$	-	$	2,534	$	-	$	2,534
Corporate obligations		-		15,561		-		15,561
Marketable equity securities		479		-		-		479
	$	479	$	18,095	$	-	$	18,574

	As of June 30, 2021		As of December 31, 2020
Recognition Period
0-12 Months	$	112	$	169
13-24 Months		74		84
Over 24 Months		47		78
Total	$	233	$	331


Clinical lab material	$	180
Lab equipment		112
Definite-lived intangible asset		1,307
Total assets acquired		1,599
Liabilities assumed		-
Net identifiable assets acquired		1,599
Goodwill		901
Total consideration	$	2,500

Account	Amount
Short term investments	$	1,800
Accounts receivable		171
Inventory		133
Prepaid and other current assets		379
Definite-lived intangible assets		10,990
Total assets acquired		13,473
Accounts payable		(805	)
Accrued expenses and other current liabilities		(43	)
Deferred revenue		(2,391	)
Note payable		(81	)
Deferred tax liability		(1,925	)
Total liabilities assumed		(5,245	)
Net identifiable assets acquired		8,228
Goodwill		4,446
Total consideration, net of cash acquired (1)	$	12,674

	Gross Carrying Value		Estimated Useful Life (in years)
Trade names	$	5,550		15
Proprietary intellectual property		4,260		5
Customer relationships		1,180		1
Total	$	10,990

	March 31, 2022			December 31, 2021			Estimated Useful Life (in years)
Trade names	$	5,550		$	5,550		15
Proprietary intellectual property		4,260			4,260		5
Customer relationships		1,180			1,180		1
CLIA license		1,307			1,307		3
Total intangible assets, gross		12,297			12,297
Less: accumulated amortization		(2,154	)		(1,445	)
Total intangible assets, net	$	10,143		$	10,852


Remaining periods ended December 31, 2022	$	1,669
Year ended December 31, 2023		1,585
Year ended December 31, 2024		1,222
Year ended December 31, 2025		1,222
Year ended December 31, 2026		890
Thereafter		3,555
Total intangible assets, net	$	10,143

	June 30, 2021			December 31, 2020			Estimated Useful Life
Land	$	352		$	352
Building improvements		1,859			1,729		10-39 years
Machinery		4,669			4,441		3-7 years
Lab equipment		4,316			1,002		3-7 years
Computer equipment		1,182			881		3-5 years
Furniture and fixtures		457			194		5 years
		12,835			8,599
Less: accumulated depreciation		(5,921	)		(5,021	)
Total property, plant and equipment, net	$	6,914		$	3,578

	March 31, 2022			December 31, 2021			Estimated Useful Life
Land	$	352		$	352
Building improvements		1,729			1,729		10-39 years
Machinery		4,740			4,740		3-7 years
Lab equipment		4,936			4,330		3-7 years
Computer equipment		1,589			1,211		3-5 years
Furniture and fixtures		468			468		5 years
Property, Plant and Equipment, Gross		13,814			12,830
Less: accumulated depreciation		(7,374	)		(6,883	)
Total property, plant and equipment, net	$	6,440		$	5,947

	Number of Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (in years)		Total Intrinsic Value
Outstanding as of January 1, 2022		5,110		$	3.27		3.4	$	20,820
Forfeited		(20	)		8.99		-		-
Outstanding as of March 31, 2022		5,090		$	3.11		3.2	$	20,767
Options vested and exercisable		4,069		$	2.41		2.4	$	19,398

	For the six months ended
	June 30, 2021
Exercise price	$	9.13
Expected term (years)		3.5
Expected stock price volatility		83	%
Risk-free rate of interest		0.6	%
Expected dividend yield (per share)		0	%

	Employment Contracts
2021	$	338
2022		675
2023		675
2024		675
2025		675
Total	$	3,038

	Employment Contracts
Remaining periods in 2022	$	506
2023		675
2024		675
2025		675
2026		675
Total	$	3,206

	For the Six Months Ended June 30, 2021
Operating leases
Operating lease cost	$	408
Variable lease cost		-
Operating lease expense		408
Short-term lease rent expense		-
Total rent expense	$	408