PROPHASE LABS, INC. Management report and analysis of the financial situation and operating results. (Form 10-Q)

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The following discussion and analysis should be read in conjunction with our
interim unaudited condensed consolidated financial statements and related notes
included in this Quarterly Report on Form 10-Q ("Quarterly Report") and the
audited financial statements and notes thereto as of and for the year ended
December 31, 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, 2022 (the "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.

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

? Our ability to generate sufficient revenue and profit from Respiratory

Pathogen panel (“RPP”) Molecular Testing if and When Request for COVID-19 Testing

decreases or becomes useless;

? 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 our market share in the markets where we operate

Company;

? Our dependence on our largest diagnostic service customers;

? Our ability to successfully deliver, execute and generate revenue from our

personal genomics companies;

? Our ability to obtain additional capital, if needed, to support our diagnosis

service company, personal genomics company, manufacturing company and

product development, clinical research and development and commercialization

programs;

? Potential disruptions to our supply chain or increases in the price of or

tampering with raw materials or essential supplies;

? Potential disruptions to our ability to manufacture our products and those of

others;

? Seasonal fluctuations in demand for the products and services we provide;

? [Risks related to the initiation, cost, timing, progress and results of current

and future research and development programs, preclinical studies and clinical

trials and our ability to obtain and maintain regulatory approvals;]

? Our ability to successfully develop and market our existing products and

any new product;

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


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? Our ability to protect our property rights;

? Our ability to comply with regulatory requirements applicable to our

businesses;

? The complexity of billing and revenue collection for testing services;

? Our reliance on third parties to provide essential services to our laboratory

diagnostic services business;

? [Our reliance upon third parties, including contract research organizations,

collaborative partners, and independent investigators to analyze, collect,

monitor, and manage data for our ongoing nonclinical and clinical programs;]

? General economic conditions, including due to ongoing COVID-19

the pandemic and the war in Ukraine; and

? Our ability to address material weaknesses 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 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 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 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: 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® brand. However, commencing in December 2020, we also began offering
COVID- 19 and other RPP Molecular tests through our diagnostic service business,
and in August 2021 we began offering personal genomics products and services.

Our wholly owned subsidiary, ProPhase Diagnostics, Inc. ("ProPhase
Diagnostics"), which was formed on October 9, 2020, offers a broad array of
clinical diagnostic and testing services at its CLIA certified laboratories
including 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 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 owned a 4,000 square foot CLIA accredited
laboratory located in Old Bridge, New Jersey for approximately $2.5 million. In
December 2020, we expanded our diagnostic service business with the build-out of
a second, larger CLIA accredited laboratory in Garden City, New York. Operations
at this second facility commenced in January 2021.

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"). We 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, ProPhase BioPharma, Inc. ("PBIO"), which was formed
on June 28, 2022, for the licensing, development and commercialization of novel
drugs and compounds beginning with Equivir and Equivir G. PBIO announced a
second licensing agreement for two small molecule PIM kinase inhibitors,
Linebacker LB-1 and LB-2, in July 2022, with plans to pursue development and
commercialization of LB-1 as a cancer co-therapy.

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Our wholly owned subsidiary, Pharmaloz Manufacturing, Inc. ("PMI"), is a
full-service contract manufacturer and private label developer of a broad range
of non-GMO, organic and natural-based cough drops and lozenges and OTC drug and
dietary supplement products.

Our 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,
our ability to collect payment or reimbursement for 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.

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 significantly as a result of our diagnostic
services business, we will continue to be dependent on both government agency
and insurance company reimbursement as well as the 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.

Operating results

Three months completed June 30, 2022 compared to the three months ended June 30, 2021

For the three months ended June 30, 2022, net revenue was $29.1 million as
compared to $9.1 million for the three months ended June 30, 2021. The increase
in net revenue was the result of a $18.6 million increase in net revenue from
diagnostic services and $1.3 million increase in consumer products. The increase
in net revenue for diagnostic services was due to increased COVID-19 testing
volumes performed as a result of the spread of the Omicron variant, which
emerged in early 2022. Overall diagnostic testing volume increased from 56,000
tests in the second quarter of 2021 to 144,000 tests in the second quarter of
2022, of which 57.6% and 0.0% were reimbursed by the HRSA uninsured program,
respectively. The average variable consideration received was $152.08 per
adjudicated test in the second quarter of 2022 versus $115.51 per adjudicated
test in the second quarter of 2021.

Cost of revenues for the three months ended June 30, 2022 were $10.4 million,
comprised of $8.4 million for diagnostic services and $2.0 million for consumer
products. Cost of revenues for the three months ended June 30, 2021 were $4.7
million, comprised of $3.5 million for diagnostic services and $1.2 million
for
consumer products.

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We realized a gross profit of $18.7 million for the three months ended June 30,
2022 as compared to $4.5 million for the three months ended June 30, 2021. The
increase of $14.2 million was comprised of an increase of $13.7 million from
diagnostic services and an increase of $0.5 million in consumer products. For
the three months ended June 30, 2022 and 2021 we realized an overall gross
margin of 64.3% and 48.9%, respectively. Gross margin for diagnostic services
was 67.9% and 53.8% in the 2022 and 2021 comparable periods, respectively. The
increase in gross margin was principally due to (i) increased efficiencies in
our lab processing, (ii) a decreased sample collection costs and (iii) a
decrease in cost of test materials. Gross margin for consumer products was 32.9%
and 25.4% in the 2022 and 2021 comparable periods, respectively. Gross margin
for consumer products have historically been influenced by fluctuations in
quarter-to-quarter production volume, fixed production costs and related
overhead absorption, raw ingredient costs, inventory mark to market write-downs
and timing of shipments to customers.

Diagnostic services costs for the three months ended June 30, 2022 were $1.8
million compared to $830,000 for the three months ended June 30, 2021. The
increase of $1.0 million was due to increased COVID-19 testing volumes performed
as a result of the spread of the Omicron variant, which emerged in early 2022,
partially offset by a greater proportion of costs allocated to cost of revenues
as a result of the nature of agreements with network providers.

General and administration expenses for the three months ended June 30, 2022
were $6.3 million as compared to $5.0 million for the three months ended June
30, 2021. The increase of $1.3 million in general and administration expenses
was principally related to an increase in personnel expenses and professional
fees associated with our diagnostic services business.

Research and development costs for the three months ended June 30, 2022 were
$28,000 as compared to $93,000 for the three months ended June 30, 2021. The
decrease in research and development costs for the three months ended June 30,
2022 as compared to the three months ended June 30, 2021 was principally due to
a decrease in personnel expenses associated with our diagnostics services
business.

Interest and other income for the three months ended June 30, 2022 and 2021 was
$25,000 and $214,000, respectively. The decrease in interest income for the
three months ended June 30, 2022 as compared to the three months ended June 30,
2021 was principally due to the lower account balance of our investment account
that bears interest.

Interest expense for the three months ended June 30, 2022 was $201,000 compared
to $323,000 for the three months ended June 30, 2021. The decrease in interest
expense for the three months ended June 30, 2022 as compared to the three months
ended June 30, 2021 was principally due to the repayment during the three months
ended June 30, 2022 of one of the two September 2020 unsecured convertible notes
payable that accrued interest at a rate of 10% per year.

As a result of the effects described above, net income/(loss) from operations
for the three months ended June 30, 2022 was $7.4 million, or $0.48 per share,
as compared to ($1.4 million), or ($0.09) per share, for the three months ended
June 30, 2021. Diluted earnings per share for the three months ended June 30,
2022 and 2021 were $0.40 and ($0.09), respectively.

Semester completed June 30, 2022 compared to the half-year ended June 30, 2021

For the six months ended June 30, 2022, net revenue was $76.6 million as
compared to $24.4 million for the six months ended June 30, 2021. The increase
in net revenue was the result of a $50.8 million increase in net revenue from
diagnostic services and an immaterial increase in consumer products. The
increase in net revenue for diagnostic services was due to increased COVID-19
testing volumes performed as a result of the spread of the Omicron variant,
which emerged in early 2022. Overall diagnostic testing volume increased from
169,000 tests in the first half of 2021 to 521,000 tests in the first half of
2022, of which 79.1% and 48.0% were reimbursed by the HRSA uninsured program,
respectively. The average variable consideration received was $142.70 per
adjudicated test in the first half of 2022 versus $108.48 per adjudicated test
in the first half of 2021.

Cost of revenues for the six months ended June 30, 2022 were $29.2 million,
comprised of $25.1 million for diagnostic services and $4.1 million for consumer
products. Cost of revenues for the six months ended June 30, 2021 were $11.0
million, comprised of $7.8 million for diagnostic services and $3.2 million
for
consumer products.

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We realized a gross profit of $47.4 million for the six months ended June 30,
2022 as compared to $13.4 million for the six months ended June 30, 2021. The
increase of $34.0 million was comprised of an increase of $33.5 million from
diagnostic services and an increase of $0.5 million in consumer products. For
the six months ended June 30, 2022 and 2021 we realized an overall gross margin
of 61.9% and 54.9%, respectively. Gross margin for diagnostic services was 64.7%
and 61.4% in the 2022 and 2021 comparable periods, respectively. The increase in
gross margin was principally due (i) increased efficiencies in our lab
processing, (ii) a decreased sample collection costs and (iii) a decrease in
cost of test materials. Gross margin for consumer products was 25.8% and 22.8%
in the 2022 and 2021 comparable periods, respectively. Gross margin for consumer
products have historically been influenced by fluctuations in quarter-to-quarter
production volume, fixed production costs and related overhead absorption, raw
ingredient costs, inventory mark to market write-downs and timing of shipments
to customers.

Diagnostic services costs for the six months ended June 30, 2022 were $6.5
million compared to $4.6 million for the six months ended June 30, 2021. The
increase of $1.9 million was due to increased COVID-19 testing volumes performed
as a result of the spread of the Omicron variant, which emerged in early 2022,
partially offset by a greater proportion of costs allocated to cost of revenues
as a result of the nature of agreements with network providers.

General and administration expenses for the six months ended June 30, 2022 were
$14.1 million as compared to $8.8 million for the six months ended June 30,
2021. The increase of $5.3 million in general and administration expenses was
principally related to an increase in personnel expenses and professional fees
associated with our diagnostic services business.

Research and development costs for the six months ended June 30, 2022 were
$63,000 as compared to $208,000 for the six months ended June 30, 2021. The
decrease in research and development costs for the six months ended June 30,
2022 as compared to the six months ended June 30, 2021 was principally due to a
decrease in personnel expenses associated with our diagnostics services
business.

Interest and other income for the six months ended June 30, 2022 and 2021 was
$98,000 and $301,000, respectively. The decrease in interest income for the six
months ended June 30, 2022 as compared to the six months ended June 30, 2021 was
principally due to the lower account balance of our investment account that
bears interest.

Interest expense for the six months ended June 30, 2022 was $434,000 compared to
$574,000 for the six months ended June 30, 2021. The decrease in interest
expense for the six months ended June 30, 2022 as compared to the six months
ended June 30, 2021 was principally due to the repayment during the six months
ended June 30, 2022 of one of the two September 2020 unsecured convertible notes
payable that accrued interest at a rate of 10% per year.

As a result of the effects described above, net income/(loss) from operations
for the six months ended June 30, 2022 was $19.9 million, or $1.28 per share, as
compared to ($338,000), or ($0.02) per share, for the six months ended June 30,
2021. Diluted earnings per share for the six months ended June 30, 2022 and 2021
were $1.07 and ($0.02), respectively.

Non-GAAP Financial Measure and Reconciliation

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

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


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

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



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

                              For the three months ended                 

For the six months ended

                          June 30, 2022         June 30, 2021       June 30, 2022         June 30, 2021
GAAP net income (1)      $         7,446       $        (1,395 )   $        19,940       $          (338 )
Interest, net                        176                   109                 336                   273
Income tax expense                 2,965                     -             
 6,381                     -
Depreciation and
amortization                       1,267                   503               2,517                   960
EBITDA                            11,854                  (783 )            29,174                   895
Share-based
compensation expense                 528                 1,076               1,010                 1,504
Non-cash rent expense
(2)                                   11                   186                  21                   372
Bad debt expense (3)                   -                     -                 250                     -
Adjusted EBITDA          $        12,393       $           479     $        30,455       $         2,771



(1) We consider net income to be the calculated financial measure and

presented in accordance with GAAP that is most directly comparable to EBITDA

and Adjusted EBITDA. EBITDA and Adjusted EBITDA measure the

operating performance without considering certain expenses. EBITDA and Adjusted

EBITDA is not a presentation made in accordance with GAAP and

the calculation of EBITDA and Adjusted EBITDA may differ from others in the

industry. EBITDA and Adjusted EBITDA have important limitations as an analysis

tools and should not be considered in isolation or as substitutes

analysis of the Company’s results as presented under GAAP.

(2) The non-cash portion of rent, which reflects the extent to which our GAAP

the recognized rental expense exceeds (or is less than) our cash rental payments. For

newer leases, our recognized rent expense typically exceeds our cash rent

payments, while for older leases the rent expense recognized is generally

less than our cash rents.

(3) Full provision reserved related to restricted cash.

Cash and capital resources

Our aggregate cash, cash equivalents and restricted cash as of June 30, 2022
were $24.0 million as compared to $8.7 million at December 31, 2021. Our working
capital was $53.6 million and $45.8 million as of June 30, 2022 and December 31,
2021, respectively. The increase of $15.3 million in our cash, cash equivalents
and restricted cash for the six months ended June 30, 2022 was principally due
to our proceeds from the sale of marketable debt securities of $5.6 million,
proceeds from dispositions of property and other assets of $0.4 million, and
$25.1 million cash provided by operating activities, offset by (i) purchases of
marketable securities of $0.6 million, (ii) cash dividend payments of $9.4
million, (iii) repayment of note payable of $1.4 million, (iv) repurchase of
common shares for $1.2 million, and (v) capital expenditures of $1.8 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.

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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 year ended December
31, 2021 and six months ended June 30, 2022, primarily as a result of revenue
from our 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 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.

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 48% and 79% of our diagnostic services revenue
for the six months ended June 30, 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 $16.7 million in revenues related
to COVID-19 testing that we performed for uninsured individuals from March 23,
2022 through June 30, 2022. If funding for the HRSA program is reinstituted, we
will submit eligible claims for reimbursement to HRSA and record the associated
revenues.

At-the-Market Facility

On December 28, 2021, we entered into a Sales Agreement (the "Sales Agreement")
with ThinkEquity LLC (the "Sales Agent"), pursuant to which we may offer and
sell, from time to time through the Sales Agent, shares of our common stock
having an aggregate offering price of up to $100,000,000, subject to the terms
and conditions of the Sales Agreement. We are not obligated to make any sales of
shares under the Sales Agreement.

We will pay the Sales Agent a fixed commission rate of 2.0% of the aggregate
gross proceeds from the sale of any shares pursuant to the Sales Agreement and
have agreed to provide the Sales Agent with customary indemnification and
contribution rights. We also agreed to reimburse the actual out-of-pocket
accountable expenses of the Sales Agent up to $60,000 (of which a $25,000
advance was paid on December 7, 2021).

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 June 30, 2022, we have not sold any shares under the Sales Agreement.
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Impact of Inflation

We are subject to normal inflationary trends and anticipate that any increased
costs for our contract manufacturing and retail operations would be passed on to
our customers; however, any increased costs related to diagnostic services would
be absorbed by the Company. Inflation has not had a material effect on our
business.

Significant Accounting Policies and Estimates

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

Use of estimates

The preparation of condensed consolidated financial statements and the
accompanying notes thereto, in conformity with GAAP requires management to make
estimates and assumptions that affect reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the condensed
consolidated financial statements and reported amounts of revenues and expenses
during the respective reporting periods. Examples include revenue recognition
and the estimation of the variable consideration associated with the diagnostic
reimbursement rates, the 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 and judgments on a quarterly basis.
Actual results could differ from those estimates.

Revenue recognition and accounts receivable

We generate revenue primarily through four types of revenue streams: diagnostic services, contract manufacturing, genomics products and services, retail and other. The process of estimating revenue and ultimately collecting 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.

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Good will and long-term assets

We review our goodwill at least annually for impairment as well as the carrying
value of goodwill and our long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of these assets may
not be fully recoverable. When it is determined that the carrying amount of
long-lived assets or goodwill is impaired, impairment is measured by comparing
an asset's estimated fair value to its carrying value. The determination of fair
value is based on quoted market prices in active markets, if available, or
independent appraisals; sales price negotiations; or projected future cash flows
discounted at a rate determined by management to be commensurate with our
business risk. The estimation of fair value utilizing discounted forecasted cash
flows includes significant judgments regarding assumptions of revenue, operating
and marketing costs; selling and administrative expenses; interest rates;
property and equipment additions and retirements; and industry competition,
general economic and business conditions, among other factors.

Income taxes

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

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

Inventories

Inventories are valued at the lower of cost, determined on a first-in, first-out (“FIFO”) basis, 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 expected 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.

41






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 condensed consolidated
financial statements.

In June 2022, the FASB issued ASU 2022-03, ASC Subtopic 820 "Fair Value
Measurement of Equity Securities Subject to Contractual Sale Restrictions". The
FASB is issuing this Update (1) to clarify the guidance in Topic 820, Fair Value
Measurement, when measuring the fair value of an equity security subject to
contractual restrictions that prohibit the sale of an equity security, (2) to
amend a related illustrative example, and (3) to introduce new disclosure
requirements for equity securities subject to contractual sale restrictions that
are measured at fair value in accordance with Topic 820. For public business
entities, the amendments in this Update are effective for fiscal years beginning
after December 15, 2023, and interim periods within those fiscal years. Early
adoption is permitted for both interim and annual financial statements that have
not yet been issued or made available for issuance. We are currently assessing
the impact of the adoption of this ASU on our condensed consolidated financial
statements.

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