Diamond Equity Research Releases Update Note on ProPhase Labs Inc.

Diamond Equity Research, an equity research firm with a focus on small capitalization public companies has released an Update Note on ProPhase Labs Inc. (NASDAQ: PRPH). The update note includes information on the ProPhase's business model, services, industry, financial results, valuation, and risks.

The update note is available here . Highlights from the note include:

Operational Updates and Growth Catalysts for ProPhase Labs' Diverse Business Portfolio - ProPhase Labs is actively advancing its diverse business portfolio, addressing opportunities across its various divisions. Key updates from its manufacturing, genomics, and diagnostic businesses reflect the company's ongoing efforts to optimize operations and expand its market reach:
- Pharmaloz Manufacturing Expansion and Strategic Deals: Pharmaloz Manufacturing is poised for significant growth, engaging in late-stage negotiations to potentially sell its plant or pre-book future capacity of its second manufacturing line. The second line, expected to be operational by Q3, could, in combination with line one, generate $40-$45 million in revenue, with potential to reach $80-$100 million if two additional lines are added in 2025. The company has also secured two major deals worth over $5 million annually and is in talks with several more non-seasonal clients. Operating enhancements include the introduction of new liquid fill equipment and an average price increase of 15.2% for 2024 productions. Additionally, Pharmaloz has successfully passed a 3-year FDA audit and a 4-day UL Audit, reinforcing its regulatory compliance and market readiness.
- BE-Smart Esophageal Cancer Test Potentially Progress Toward Commercialization: The BE-Smart test for esophageal cancer is advancing towards commercialization, expected in the second half of 2024. Recent sample analyses by Stat King are validating the test's high sensitivity and specificity. ProPhase Labs is finalizing CPT codes and negotiating with a potential global partner. The innovative 'advanced traffic light' diagnostic approach could revolutionize treatment strategies for Barrett's Esophagus patients, potentially becoming a standard pre-endoscopy test. This market could be worth $7 - $14 billion if fully adopted. Collaborative efforts with Mayo Clinic are exploring additional biomarkers, enhancing the test's diagnostic capabilities.
- Nebula Genomics' Technological Advancements and Global Expansion: Nebula Genomics has expanded its business development team to boost global outreach and advanced genetic testing capabilities. Enhanced lab automation and staffing in New York have improved throughput and reduced processing times. The recent partnership with MenaDNA, Inc., along with other ongoing negotiations, potentially positions Nebula for significant global expansion, sustained by robust cybersecurity measures to protect sensitive genetic data.
- Project ZenQ-AI Pioneering Cancer Treatment Research: Project ZenQ-AI represents an innovative initiative in cancer treatment, leveraging the company's extensive genomics database and insights from the BE-Smart test. By applying advanced AI algorithms, the project aims to discover new therapies, focusing particularly on antibody drug conjugates ("ADCs"). This strategic move harnesses AI to accelerate oncological breakthroughs, showcasing ProPhase Labs' commitment to innovation in cancer research. A large investment bank just recently projected that ADC therapy could represent a meaningful portion of the $400 billion oncology market by 2028.
- Equivir Clinical Trials and Market Expansion: Equivir is nearing a significant milestone with nearly 300 patients completing the 180-day study period. With over 329 active participants, preliminary results from 152 patients at the 90-day mark have been promising. Full data from the study is expected by the end of the second quarter. Plans are underway to ramp up production and launch Equivir capsules in the second half of 2024. Additionally, ProPhase Labs is exploring expanded distribution through partnerships, potentially reaching over 40,000 retail outlets.
Valuation - Despite a significant decrease in net revenue in the first quarter of 2024, primarily due to a drop in COVID-19 diagnostic services, ProPhase Labs' current financial results do not fully reflect the company's growth potential. Several strategic initiatives across its subsidiaries, including the expansion of Pharmaloz Manufacturing, advancement in the BE-Smart Esophageal Cancer Diagnostic Test commercialization efforts, and anticipated Equivir launch indicate a strong foundation for future value generation. The initiation of project ZenQ-AI, leveraging a vast genomics database for potential cancer therapies while actively engaging in material agreements within its genomics business, points toward substantial revenue growth opportunities. These material developments strengthen confidence in the company's valuation and future performance despite the current dip in earnings linked to the transient nature of pandemic-related services. We have updated our valuation model to reflect the updated financial numbers and re-assessed our SOTP valuation approach reiterating our valuation of $21.00 per share, contingent on successful execution by the company.
ProPhase Labs Q1 FY2024 Financial Summary - For the first quarter of fiscal year 2024, ProPhase Labs reported net revenue of $3.6 million compared to $19.3 million in the same period last year, a decline primarily due to the cessation of COVID-19 diagnostic testing. Furthermore, the consumer products segment also experienced a revenue decrease of $1.1 million. Cost of revenues decreased to $4.1 million from $8.8 million, reflecting reduced operational scales, particularly in diagnostic services, where costs fell from $5.2 million to $0.7 million. The company experienced a gross margin loss of $0.4 million compared to a gross margin profit of $10.5 million in the same period of 2023. The diagnostic services contributed $10.0 million to the loss, and consumer products accounted for a $0.9 million decrease. Consequently, the overall gross margin plummeted from 54.5% in 2023 to (11.9%) in 2024. The fluctuation in the gross margin for consumer products has typically been influenced by changes in production volume, costs, and the timing of shipments. Operational costs were trimmed, with general and administrative expenses decreasing by $0.7 million to $7.6 million, while research and development costs rose by $128,000 to $272,000, indicating an increased focus on product innovation. As an overall result, the company reported a net loss of $6.3 million for the first quarter of fiscal year 2024. As of March 31, 2024, the company's cash and cash equivalents stood at $1.7 million, down from $2.1 million at the end of 2023. The reduction in cash was mainly due to $5.1 million used in operations, $0.9 million in capital expenditures, and $189,000 spent on repaying debts. These outflows were partly offset by $3.4 million from selling debt securities and $2.5 million raised through new loans. With over $4.6 million in cash as of April 30, 2024, and no immediate plans for raising additional equity, the company is focusing on three potential liquidity events. These include a strategic acquisition at Pharmaloz, securing capacity on line two, and capital inflows from enhanced accounts receivable initiatives. Each of these developments could significantly boost liquidity in the near term. Looking ahead, ProPhase Labs forecasts a marked improvement in revenues and EBITDA in the latter half of 2024, driven by strategic enhancements across its subsidiaries.
Near-Term Growth in Pharmaloz Manufacturing Poised to Strengthen ProPhase Labs' Market Position - ProPhase Labs is positioned for substantial growth as it capitalizes on the ongoing shortage of lozenge manufacturing capacity—a sector where it remains a crucial player. At the recent Expo West, the largest health and wellness event of the year, Pharmaloz stood out as the only participant offering future capacity for lozenge manufacturing. This positioning garnered significant interest from nearly a dozen companies, with negotiations currently underway with several prospects. These potential partnerships focus on functional lozenges that provide year-round benefits like vitamins and immunity boosters, promising to diversify and stabilize production beyond seasonal peaks. The anticipated completion of line two in the third quarter is expected to further expand revenue capabilities, particularly from the fourth quarter onwards.

About ProPhase Labs Inc.

ProPhase Labs, Inc. (Nasdaq: PRPH) is a diversified diagnostic, genomics, and biotech company seeking to leverage its CLIA lab services to provide whole genome sequencing and research directly to consumers and build a genomics database to be used for further research. The company also operates a contract manufacturing subsidiary and offers the TK Supplements line of dietary supplements, which are distributed in food, drug, and retailer stores. For more information, visit https://www.prophaselabs.com/ .

About Diamond Equity Research

Diamond Equity Research is a leading equity research and corporate access firm focused on small capitalization companies. Diamond Equity Research is an approved sell-side provider on major institutional investment platforms.

For more information, visit https://www.diamondequityresearch.com .

Disclosures:

Diamond Equity Research LLC is being compensated by ProPhase Labs Inc. for producing research materials regarding ProPhase Labs Inc. and its securities, which is meant to subsidize the high cost of creating the report and monitoring the security, however the views in the report reflect that of Diamond Equity Research. All payments are received upfront and are billed for research engagement. As of 05/16/24 the issuer had paid us $95,500 for our research services which commenced 03/21/23, and is billed annually upfront, consisting of $35,000 for the annual subscription in the first year and $35,000 in the second year (in two $17,500 installments for six month periods paid upfront) and $2,500 for additional one-time research work for the first year coverage and $20,000 for a research report on a subsidiary of ProPhase Labs Inc. and $20,000 for another research report on a subsidiary of ProPhase Labs Inc. The issuer has paid us for non-research-related services consisting of $2,500 for attending a virtual conference. Issuers are not required to engage us for these services. Although Diamond Equity Research company sponsored reports are based on publicly available information and although no investment recommendations are made within our company sponsored research reports, given the small capitalization nature of the companies we cover we have adopted an internal trading procedure around the public companies by whom we are engaged, with investors able to find such policy on our website public disclosures page . This report and press release do not consider individual circumstances and does not take into consideration individual investor preferences. Statements within this report may constitute forward-looking statements, these statements involve many risk factors and general uncertainties around the business, industry, and macroeconomic environment. Investors need to be aware of the high degree of risk in small capitalization equities including the complete loss of their investment. Investors can find various risk factors in the initiation report and in the respective financial filings for ProPhase Labs Inc.

Contact:
Diamond Equity Research
research@diamondequityresearch.com

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ProPhase Labs Inc.PRPH:US NASDAQ:PRPH:US

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	March 31, 2024			December 31, 2023
		(Unaudited)
ASSETS
Current assets
Cash and cash equivalents	$	1,175		$	1,609
Restricted cash		561			540
Marketable debt securities, available for sale		58			3,127
Accounts receivable, net		35,116			36,313
Inventory, net		3,758			3,841
Prepaid expenses and other current assets		4,377			2,155
Total current assets		45,045			47,585

Property, plant and equipment, net		12,797			12,898
Prepaid expenses, net of current portion		732			832
Operating lease right-of-use asset, net		4,462			4,572
Intangible assets, net		11,687			12,333
Goodwill		5,231			5,231
Deferred tax asset		9,762			7,313
Other assets		316			1,163
TOTAL ASSETS	$	90,032		$	91,927

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable	$	11,759		$	9,383
Accrued diagnostic services		268			314
Accrued advertising and other allowances		8			24
Finance lease liabilities		1,840			1,840
Operating lease liabilities		959			953
Short-term loan payable, net of discount of $396		2,381			—
Deferred revenue		1,630			2,382
Income tax payable		3,005			3,278
Other current liabilities		2,057			2,683
Total current liabilities		23,907			20,857

Non-current liabilities:
Secured long-term debt, net of discount of $334 and $340		2,926			2,924
Unsecured promissory notes, net of discount of $232 and $266		7,368			7,334
Due to sellers (see Note 3)		2,000			2,000
Deferred revenue, net of current portion		1,100			1,100
Operating lease liabilities, net of current portion		4,122			4,237
Finance lease liabilities, net of current portion		3,742			4,092
Total non-current liabilities		21,258			21,687
Total liabilities		45,165			42,544

COMMITMENTS AND CONTINGENCIES

Stockholders' equity
Preferred stock authorized 1,000,000, $0.0005 par value, no shares issued and outstanding		—			—
Common stock authorized 50,000,000, $0.0005 par value, 18,045,029 and 18,045,029 shares outstanding, respectively		18			18
Additional paid-in capital		120,283			118,694
Accumulated deficit		(11,294	)		(5,029	)
Treasury stock, at cost, 18,940,967 and 18,940,967 shares, respectively		(64,000	)		(64,000	)
Accumulated other comprehensive loss		(140	)		(300	)
Total stockholders' equity		44,867			49,383
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	90,032		$	91,927

	For the three months ended
	March 31, 2024			March 31, 2023
Revenues, net	$	3,634		$	19,303
Cost of revenues		4,067			8,783
Gross (loss) profit		(433	)		10,520

Operating expenses:
Diagnostic expenses		—			1,203
General and administration		7,593			8,298
Research and development		272			144
Total operating expenses		7,865			9,645
(Loss) Income from operations		(8,298	)		875

Interest income, net		—			11
Interest expense		(515	)		(215	)
Other expense		(18	)		(107	)
(Loss) Income from operations before income taxes		(8,831	)		564
Income tax benefit (expense)		2,566			(14	)
(Loss) income from operations after income taxes		(6,265	)		550
Net (loss) income	$	(6,265	)	$	550

Other comprehensive income (loss):
Unrealized gain (loss) on marketable debt securities		160			(665	)
Total comprehensive loss	$	(6,105	)	$	(115	)

Earnings (loss) per share:
Basic	$	(0.35	)	$	0.03
Diluted	$	(0.35	)	$	0.03

Weighted average common shares outstanding:
Basic		18,045			16,748
Diluted		18,045			18,061

	For the three months ended
	March 31, 2024			March 31, 2023
Cash flows from operating activities
Net (loss) income	$	(6,265	)	$	550
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
Realized loss on marketable debt securities		18			107
Depreciation and amortization		1,686			1,292
Amortization of debt discount		146			20
Amortization on operating lease right-of-use assets		110			85
Stock-based compensation expense		1,589			947
Accounts receivable allowances		—			(147	)
Credit loss expense, direct write-off		—			230
Inventory reserve		(69	)		1
Changes in operating assets and liabilities:
Accounts receivable		1,197			(864	)
Inventory		152			(336	)
Prepaid expenses and other current assets		(2,122	)		(2,107	)
Deferred tax asset		(2,612	)		(96	)
Other assets		847			—
Accounts payable and accrued expenses		2,376			(2,661	)
Accrued diagnostic services		(46	)		(656	)
Accrued advertising and other allowances		(16	)		52
Deferred revenue		(752	)		443
Operating lease liabilities		(459	)		(80	)
Income tax payable		(273	)		(341	)
Other liabilities		(626	)		4,037
Net cash (used in) provided by operating activities		(5,119	)		476

Cash flows from investing activities
Business acquisitions, escrow received		—			478
Asset acquisitions, net of cash acquired		—			(2,904	)
Proceeds from sales of marketable securities		3,374			1,291
Capital expenditures		(939	)		(517	)
Net cash provided by (used in) investing activities		2,435			(1,652	)

Cash flows from financing activities
Proceeds from issuance of note payable		2,460			7,600
Repurchases of common shares		—			(541	)
Repurchase of common stock for payment of statutory taxes due on cashless exercise of stock option		—			(5,379	)
Repayment of note payable		(189	)		—
Net cash provided by financing activities		2,271			1,680

(Decrease) increase in cash, cash equivalents and restricted cash		(413	)		504
Cash, cash equivalents and restricted cash at the beginning of the period		2,149			9,109
Cash, cash equivalents and restricted cash at the end of the period	$	1,736		$	9,613

Supplemental disclosures:
Cash paid for income taxes	$	318		$	1,500
Interest payment on the promissory notes	$	642		$	203

Supplemental disclosure of non-cash investing and financing activities:
Financed capital expenditures	$	—		$	1,623
Common stock issued in asset acquisition	$	—		$	1,000

	For the three months ended
	March 31, 2024			March 31, 2023
GAAP net income ⁽¹⁾	$	(6,265	)	$	550
Interest, net		515			204
Income tax (benefit) expense		(2,566	)		14
Depreciation and amortization		1,686			1,292
EBITDA		(6,630	)		2,060
Share-based compensation expense		1,589			947
Non-cash rent expense ⁽²⁾		169			6
Bad debt expense		—			74
Adjusted EBITDA	$	(4,872	)	$	3,087

	●	The Company is currently engaged in late-stage negotiations to potentially either sell the plant or pre-book some or all of the future capacity of its second manufacturing line.
	●	Anticipate $40 - $45 million of potential revenue capacity once line two is fully operational in Q3. $80 - $100 million of potential revenue capacity if an additional two lines are installed in 2025.
	●	There is a significant shortage of lozenge manufacturing capacity in both the U.S. and globally.
	●	The Company estimates that to build a new manufacturing facility from scratch with the capacity that Pharmaloz could have next year might cost approximately $100 million and take 5 years to complete with FDA approvals. And of course, any such new facility would not include the customers that the Company already has.
	●	Pharmaloz recently signed two significant deals representing over $5 million in additional revenues per year. Manufacturing has already begun for the first of these deals. Both deals could expand significantly in the future. Importantly, the second customer is not seasonal.
	●	The Company is working on several more non-seasonal customers that were sourced at the largest annual health and wellness expo.
	●	Engineering completed the design of phase 1 and phase 2 plans. This could potentially take the plant from 1 lozenge line to a potential of up to 7 operational lines within the next four years and a potential of over $250 million in annual revenue capacity.
	●	New liquid fill equipment is ahead of schedule and already enroute to the factory with manufacturing anticipated to begin by the end of May.
	●	Existing customers accepted an average price increase of 15.2% for production in 2024.
	●	Passed the 3-year FDA audit with no citations.
	●	Recently passed the 4-Day UL Audit.

	●	Expanded its business development team to increase global outreach and access to advanced genetic testing.
	●	Automated workflows and added key technicians in the New York lab have significantly improved throughput and reduced turnaround times.
	●	Nebula has built a massive database over the last six years, from whole genome sequencing tests across more than 130 countries, equivalent to roughly 150 million ancestry SNP-based tests.
	●	Data is safeguarded by world-class cyber security measures to protect sensitive genetic information.
	●	Nebula's whole genome sequencing technology analyzes greater than 99% of human DNA, providing a deeper insight compared to typical ancestry tests that analyze less than 1%.
	●	Nebula's proprietary bioinformatics platform delivers in-depth genetic health information, identifies rare genetic mutations, and traces ancestry at highly competitive prices.
	●	Signed key international business-to-business agreement with MenaDNA, Inc., a well-established global distribution company, enabling significant global growth opportunities.
	●	Additional significant agreements are currently under negotiation.

	●	Completed additional samples which are currently being analyzed by Stat King, a division of Genesis Drug Discovery and Development, to further validate the 90%+ sensitivity and specificity of the BE-Smart Esophageal Cancer test.
	●	Company on track to commercialize BE-Smart in the second half of 2024. Working with multiple consultants to secure CPT codes by the second half of 2024.
	●	Discussions for commercialization continue with a potential global partner.
	●	Working in conjunction with multiple groups to fully develop the ‘advanced traffic light' approach of green, yellow, orange, and red to assess distinct levels of cancer risk, leading to optimized treatment approaches. This approach could lead to insurance companies mandating the use of the BE-Smart test for endoscopies performed on Barrett's Esophagus patients.
	●	Working with Mayo Clinic to assess additional potential areas of interest within a panel of 55 additional markers. These patterns could help in conjunction with ZenQ-AI to develop potential targeted oncology therapies.

	●	The launch of Project ZenQ-AI marks a significant leap forward in cancer treatment research, utilizing the Company's massive global genomics database and analyzing patented discoveries from its BE-Smart Esophageal Cancer diagnostic test.
	●	This initiative deploys state-of-the-art AI algorithms to discover potential new cancer therapies, specifically focusing on antibody drug conjugates.

	●	Anticipate that by the end of May, the 300 ^th patient will have reached the 180-day mark thereby completing the original target of enrolling 300 or more patients and monitoring such patients over a 180-day period.
	●	Currently have over 329 active patients in the study.
	●	Released impressive interim preliminary results from 152 patients at the 90-day mark.
	●	Remain on target for full data unlocking by the end of the second quarter.
	●	The Company is planning to increase production of the Equivir capsules with a second half 2024 launch timeframe.
	●	Currently working with the Company's distribution partner to potentially leverage distribution longer term in over 40,000 food, drug and mass retail stores.

	●	Ended April with over $4.6 million in cash on the balance sheet.
	●	Realized over $3.6 million on the partial sale of an investment.
	●	Raised over $2.5 million by securitizing a small portion of outstanding receivables.
	●	Increased monthly accounts receivable collections with current collection partner.
	●	Started to receive payment from a key insurance company representing a receivable of close to $4.2 million.

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

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

Diamond Equity Research Releases Update Note on ProPhase Labs Inc.

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