Outstanding Debt |
3 Months Ended |
|---|---|
Mar. 31, 2026 | |
| Debt Disclosure [Abstract] | |
| Outstanding Debt | Note 5 - Outstanding Debt
2026 Convertible Notes
On January 13, 2026, the Company entered into a securities purchase agreement (the “Agreement”) with an individual investor (the “Holder”) providing for the issuance of a 10% convertible promissory note (the “Note”) in the principal amount of $240,000. The Convertible Note permits the Holder to convert outstanding principal and accrued interest into shares of common stock at a conversion price that is 75% of the trailing five-day volume weighted average price (“VWAP”) immediately preceding the respective conversion date. The Company received cash proceeds of $190,000, which is net of original issue discount of $40,000 and issuance cost of $10,000. The Note has a maturity date on January 13, 2027. Total payments of $264,000 will be made in four monthly installment payments, which won’t be started until July 13, 2026 in accordance with the payment schedule pursuant to the note agreement. In consideration for entering into the Agreement, the Company also issued shares of common stock to the Investor in connection with the Note.
On January 27, 2026 (the “Issue Date”), the Company entered into a securities purchase agreement (the “January Labrys SPA”) with Labrys Fund II, LP (“Labrys”), pursuant to which the Company issued a 10% promissory note (the “January Labrys Note”) with a maturity date of January 27, 2027, in the principal sum of $180,000. The Company received cash proceeds of $140,000, which is net of original issue discount of $30,000 and issuance cost of $10,000. In addition, the Company issued shares of its common stock to Labrys as a commitment fee pursuant to the January Labrys SPA. The January Labrys Note is convertible into the Company’s common stock (subject to the beneficial ownership limitations of 4.99% in the January Labrys Note) after 180 days after the Issue Date at a conversion price at 80% of the lowest traded price over the ten prior trading days immediately preceding the respective conversion date.
On March 10, 2026 (the “Issue Date”), the Company entered into another securities purchase agreement (the “March Labrys SPA”) with Labrys, pursuant to which the Company issued a 10% promissory note (the “March Labrys Note”) with a maturity date of March 10, 2027, in the principal sum of $78,000. The Company received cash proceeds of $55,000, which is net of original issue discount of $13,000 and issuance cost of $10,000. The March Labrys Note is convertible into the Company’s common stock (subject to the beneficial ownership limitations of 4.99% in the March Labrys Note) after 180 days after the Issue Date at a conversion price at 80% of the lowest traded price over the ten prior trading days immediately preceding the respective conversion date.
The conversion option of the 2026 Convertible Notes contains variable conversion price, which fails the equity classification guidance in ASC 815 and is thus precluded from being classified in equity. Therefore, the embedded derivatives are required to be bifurcated from the 2026 Convertible Notes and accounted for at fair value at each reporting date. A fair value of $308,000 was determined for the embedded derivative liabilities on the issuance date. The embedded derivative liabilities will be re-measured to fair value each reporting period until settlement (see Note 15).
March 2026 Future Receipts Financing Agreements
On March 17, 2026, the Company entered into an agreement of sale of future receipts (“First 2026 Future Receipts Financing Agreement”) with Legendary Funding Group, LLC (“Legendary”) by which Legendary purchased from the Company, its future accounts and contract rights arising from the sale of goods or rendition of services to the Company’s customers. The purchase price was $80,000, which was paid to the Company on March 18, 2026, net of a $3,450 origination fee. The Company also incurred a $36,000 brokerage fee. The First 2026 Future Receipts Financing Agreement requires eighteen weekly payments of $6,444 for a total repayment of $116,000 over the term of the agreement. As of March 31, 2026, the outstanding balance under the First 2026 Future Financing Agreement was approximately $70,000, net of $33,000 unamortized debt discount.
On March 17, 2026, the Company entered into an agreement of sale of future receipts (“Second 2026 Future Receipts Financing Agreement”) with Immediate Capital Solutions LLC (“Immediate Advances”) by which Immediate Advances purchased from the Company, its future accounts and contract rights arising from the sale of goods or rendition of services to the Company’s customers. The purchase price was $220,000, which was paid to the Company on March 18, 2026, net of a $8,800 origination fee. The Company also incurred a $69,000 brokerage fee. The Second 2026 Future Receipts Financing Agreement requires twenty-five weekly payments of approximately $11,000 for a total repayment of $289,000 over the term of the agreement. As of March 31, 2026, the outstanding balance under the Second 2026 Future Financing Agreement was approximately $209,000, net of $68,000 unamortized debt discount.
2025 Loan Agreements with Warrants
On June 22, 2025, the Company entered into two identical loan agreements with Ted Karkus, the Company’s Chief Executive Officer and the Chairman of the Board of Directors (the “CEO Loan”), and an unaffiliated investor (the “Unaffiliated Investor Loan”), pursuant to which the Company issued two 12 twelve-month non- convertible promissory notes in the principal amount of $625,000 each. Both loans included an original issuance discount of $125,000 and bear an annual interest rate of 10%.
The Company received net cash proceeds of $500,000 from the CEO Loan. In connection with the issuance of the CEO Loan, the Company also issued 50,000 warrants (the “CEO Warrants”), which vested upon the approval by the Company’s stockholders of an amendment to the Company’s Amended and Restated Certificate of Incorporation to increase the number of authorized shares of common stock (the “Certificate of Amendment”) at the special meeting of stockholders held on September 9, 2025. The CEO Warrants have an exercise price of $6.00 for a term of 5.0 years. The grant date fair value of the CEO Warrants were valued at $115,000 using the Black-Scholes option pricing model with the following assumptions: dividend yield, expected volatility of %, risk free interest rate of % and expected warrant life of years. The fair value of the CEO Warrants was recorded as an additional debt discount to the note payable.
ProPhase Labs, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (unaudited)
The Unaffiliated Investor Loan was issued as an exchange to a term note issued in 2024. No additional cash proceeds were provided. The Company accounted for the issuance of the Unaffiliated Investor Loan as an extinguishment of the original debt of $500,000 and the recognition of new debt which is initially measured at its fair value of $433,000. In connection with the issuance of the Unaffiliated Investor Loan, the Company also issued 50,000 unvested warrants (the “Unaffiliated Investor Warrants”) to the Unaffiliated Investor. The Unaffiliated Investor Warrants contain the same terms as the CEO Warrants. Accordingly, the Unaffiliated Investor Warrants have a fair value of $115,000 on the issuance date.
2025 Short-term Loans
On August 1, 2025, the Company entered into a note agreement with an individual investor (the “Holder”) for cash proceeds of $100,000 (the “First August 2025 Note”), which is net of an original issue discount of $15,000. The First August 2025 Note is due on May 30, 2026. Total payments of $126,750 will be made in four monthly installment payments effective on January 30, 2026 in accordance with the payment schedule pursuant to the note agreement. During the three months ended March 31, 2026, the Company recognized $3,000 interest expense from the amortization of debt discount using the effective interest rate method on the condensed consolidated statement of operations. On January 23, 2026, the Company and the Holder entered into an amendment (the “Amended First August 2025 Note”), pursuant to which at the Holder’s option, the First August 2025 Note is convertible into the Company’s common stock at a conversion price at 65% of the lowest traded price over the ten prior trading days immediately preceding the respective conversion date. The amendment was accounted as a debt extinguishment. The optional redemption includes an exercise contingency, which fails the equity classification guidance in ASC 815 and is thus precluded from being classified in equity. Therefore, the embedded derivatives are required to be bifurcated from the Amended First August 2025 Note and accounted for at fair value at each reporting date. A fair value of $129,000 was determined for the embedded derivative liabilities. The embedded derivative liabilities will be re-measured to fair value each reporting period until settlement (see Note 15). The Company recognized approximately $126,000 debt extinguishment loss as of the amendment date. During the three months ended March 31, 2026, the Holder converted $62,000 of the Amended First August 2025 Note into shares of the Company’s common stock. The aggregate fair value of the common stock issued on the conversion date was approximately $113,000. The Company also extinguished approximately $51,000 embedded derivative liability upon the conversion.
On August 14, 2025, the Company entered into a note agreement with an individual investor for cash proceeds of $150,000 (the “Second August 2025 Note”). The Second August 2025 Note is due on August 14, 2026 and requires the Company to make interest only quarterly payments in the amount of $9,452 with a $159,452 balloon payment at the end of the term.
On August 1, 2025 and September 11, 2025, the Company entered into two note agreements (collectively the “Third August 2025 Notes”) with same individual investor (the “Lender”) for an aggregate cash proceeds of $400,000, which is net of original issue discount and issuance cost of $76,000. The Third August 2025 Notes has a 10 months term. Total payments of $528,000 will be made in four monthly installment payments, which won’t be started until 6 months from the issuance date in accordance with the payment schedule pursuant to the note agreements. During the three months ended March 31, 2026, the Company recognized $18,000 interest expense from the amortization of debt discount using the effective interest rate method on the condensed consolidated statement of operations. On January 23, 2026, the Company and the Lender entered into an amendment to amend the note that was issued on August 1, 2025 (the “Amended Note”) with principal amount of $238,000, pursuant to which at the Lender’s option, the Amended Note is convertible into the Company’s common stock at a conversion price at 65% of the lowest traded price over the ten prior trading days immediately preceding the respective conversion date. The amendment was accounted as a debt extinguishment. The optional redemption includes an exercise contingency, which fails the equity classification guidance in ASC 815 and is thus precluded from being classified in equity. Therefore, the embedded derivatives are required to be bifurcated from the Amended August Note and accounted for at fair value at each reporting date. A fair value of $289,000 was determined for the embedded derivative liabilities. The embedded derivative liabilities will be re-measured to fair value each reporting period until settlement (see Note 15). The Company recognized approximately $287,000 debt extinguishment loss as of the amendment date. During the three months ended March 31, 2026, the Lender converted $85,000 of the Amended August Note into shares of the Company’s common stock. The aggregate fair value of the common stock issued on the conversion date was approximately $144,000. The Company also extinguished approximately $59,000 embedded derivative liability upon the conversion.
On November 6, 2025, the Company entered into a note agreement ( the “November 2025 Note”) with an individual investor for an aggregate cash proceeds of $135,000, which is net of original issue discount and issuance cost of $28,000. The November 2025 Notes has a 10 months term. Total payments of $181,000 will be made in four monthly installment payments, which won’t be started until 6 months from the issuance date in accordance with the payment schedule pursuant to the note agreements. During the three months ended March 31, 2026, the Company recognized $12,000 interest expense from the amortization of debt discount using the effective interest rate method on the condensed consolidated statement of operations.
On December 22, 2025, the Company entered into a note agreement ( the “First December 2025 Note”) with an individual investor for an aggregate cash proceeds of $50,000, which is net of original issue discount and issuance cost of $8,000. The First December 2025 Notes has a 10 months term. Total payments of $64,000 will be made in four monthly installment payments, which won’t be started until 6 months from the issuance date in accordance with the payment schedule pursuant to the note agreements. During the three months ended March 31, 2026, the Company recognized $3,000 interest expense from the amortization of debt discount using the effective interest rate method on the condensed consolidated statement of operations.
On December 26, 2025, the Company entered into a note agreement ( the “Second December 2025 Note”) with an individual investor for an aggregate cash proceeds of $75,000, which is net of original issue discount and issuance cost of $19,000. The Second December 2025 Notes has a 10 months term. Total payments of $105,000 will be made in four monthly installment payments, which won’t be started until 6 months from the issuance date in accordance with the payment schedule pursuant to the note agreements. During the three months ended March 31, 2026, the Company recognized $7,000 interest expense from the amortization of debt discount using the effective interest rate method on the condensed consolidated statement of operations.
August 2025 Future Receipts Financing Agreements
On August 22, 2025, the Company entered into two agreements of sale of future receipts (“August Future Receipts Financing Agreements”) with Terrapin Business Funding, LLC (“Terrapin”) by which Terrapin purchased from the Company, its future accounts and contract rights arising from the sale of goods or rendition of services to the Company’s customers. The Company received net cash proceeds of $700,000 on August 25, 2025, which was net of $188,000 origination fee and $553,000 distribution from the flow of funds to pay off the remaining balance pursuant to the Libertas Financing Agreement.
ProPhase Labs, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (unaudited)
The August Future Receipts Financing Agreements require twelve monthly payments of $120,083 for a total repayment of $1.4 million over the term of the agreement. No payment has been made as of March 31, 2026.
In connection with the issuance of the August Future Receipts Financing Agreements, the Company also issued 50,000 warrants (the “August Warrants”) as an additional issuance cost. The Warrants have an exercise price of $5.00 per share for a term of 5.0 years. The grant date fair value of the August Warrants were valued at $120,000 using the Black-Scholes option pricing model with the following assumptions: dividend yield, expected volatility of %, risk free interest rate of % and expected warrant life of years. The fair value of the August Warrants was recorded as an additional debt discount to the notes payable.
During the three months ended March 31, 2026, the Company recognized an aggregate of $73,000 interest expense from the amortization of debt discount using the effective interest rate method. As of March 31, 2026, the outstanding balance under the August Future Financing Agreement was $1.2 million, net of debt discount of $104,000.
September 2025 Future Receipts Financing Agreements
On September 29, 2025, the Company entered into an agreement of sale of future receipts (“September Future Receipts Financing Agreement”) with Stage Advance, LLC (“Stage Advance”) by which Stage Advance purchased from the Company, its future accounts and contract rights arising from the sale of goods or rendition of services to the Company’s customers. The purchase price was $330,000, which was paid to the Company on September 29, 2025, net of a $6,600 origination fee. The Company also incurred a $77,000 brokerage fee. The September Future Receipts Financing Agreement requires twenty weekly payments of $19,800 for a total repayment of $396,000 over the term of the agreement.
During the three months ended March 31, 2026, the Company recognized an aggregate of $35,000 interest expense from the amortization of debt discount using the effective interest rate method. As of March 31, 2026, the outstanding balance under the September Future Financing Agreement was $158,000.
July 2025 Private Placement
On July 22, 2025, the Company entered into two security purchase agreements with two investors (the “Investors”) for the sale and issuance of two senior secured convertible notes (the “July 2025 Notes”) for an aggregate principal amount of $3.8 million, with cash investment amount of $3.0 million after 20% original issue discount of $750,000. The Company received net cash proceeds of $2.8 million after repayment of certain obligations from the flow of funds.
The July 2025 Notes mature on July 22, 2026, bear interest at 10% per annum on the original principal face amount and provide for other customary terms and covenants. The July 2025 Notes are not convertible for 4 months after execution and may be prepaid at any time without penalty. After the July 2025 Notes conversion waiting period of 4 months, the July 2025 Notes permit holders to convert outstanding principal and accrued interest into shares of common stock at a conversion price that is the lower of 80% of the trailing ten-day volume weighted average price (“VWAP”) or a fixed maximum price, but with a floor price and certain caps on conversion pursuant to and limited by the terms of the notes, to prevent excessive dilution. The optional redemption includes an exercise contingency, which fails the equity classification guidance in ASC 815 and is thus precluded from being classified in equity. Therefore, the embedded derivatives are required to be bifurcated from the July 2025 Notes and accounted for at fair value at each reporting date. A fair value of $2.1 million was determined for the embedded derivative liabilities. The embedded derivative liabilities will be re-measured to fair value each reporting period until settlement (see Note 15).
ProPhase Labs, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (unaudited)
The Company also issued common stock purchase warrants to acquire up to 525,000 shares of common stock (the “July Warrants”). The July Warrants are exercisable at an exercise price of $5.00 per share (subject to adjustment) and expire 5 years from their date of issuance. The Company assessed the classification of the Warrants and determined that the Warrants are equity classified. The relative fair value of the July Warrants on the issuance date was $1.3 million, which was recorded as an additional debt discount to the July 2025 Notes. The relative fair value was derived using the Black-Scholes option pricing model with the following assumptions: dividend yield, expected volatility of %, risk free interest rate of % and expected warrant life of years.
During the three months ended March 31, 2026, the Investors converted approximately $386,000 of the July 2025 Notes, including $7,000 accrued interest into shares of the Company’s common stock. The aggregate fair value of the common stock issued on the conversion date was approximately $511,000, which resulted a debt extinguishment loss of approximately $126,000. The Company also extinguished approximately $126,000 embedded derivative liability upon the conversion, which was recognized as debt extinguishment gain on the condensed consolidated statement of operations.
During the three months ended March 31, 2026, the Company recognized an aggregate of $141,000 interest expense from the amortization of debt discount using the effective interest rate method. As of March 31, 2026, the remaining outstanding balance for the July 2025 Notes were approximately $7,000 net of debt discount of $15,000.
ERC Claim and Risk Participation Agreement
In August 2023, the Company filed for the Employee Retention Credit (“ERC”) for $2.2 million. The ERC is a refundable tax credit for businesses that continued to pay employees while sustaining a full or partial suspension of operations limiting commerce, travel or group meetings due to COVID-19 pandemic and orders from an appropriate governmental authority or had significant declines in gross receipts from second quarter of 2020 to second quarter of 2021. The Company sustained a partial suspension of operations during this time due to governmental orders. Eligible employers can claim the ERC on an original or adjusted employment tax return for a period within those dates.
On September 16, 2024 (“Agreement Date”), the Company, as seller, received $1.9 million as a purchase price (the “Purchase Price”) for the sale of the Company’s rights, title and interest per a Risk Participation of ERC Claim Agreement, dated September 13, 2024 (“Agreement”) by and between the Company and 1861 Acquisition LLC (the “Buyer”). The Company also incurred an issuance cost of $154,000.
The Agreement transferred all of the Company’s rights to receive any and all payments, proceeds or distributions of any kind (without set-off, deduction or withholding of any kind), including interest, from the United States Internal Revenue Service (the “IRS”) in respect of the employee retention credits duly and timely claimed by Seller on account of qualified wages paid by Seller and identified as a “Claim for Refund” under Form 941-X Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund for the second (2nd), third (3rd) and fourth (4th) quarters of 2020, and the first (1st) and second (2nd) quarters of 2021 (the “Tax Refund Claim”) in the aggregate amount of $2.2 million (“Transferred Interests”).
The Company expects the IRS to approve or deny its claim within the 24 months from the Agreement Date. Upon approval and payment of the claim, the Company will settle the outstanding balance in cash to the Buyer. In the event that the IRS disallows all or a portion of the ERC, the Buyer has the demand right to put all or a part of the disallowed portion back to the Company at a price equal to 85% of the impaired amount, plus interest at 10% per annum, calculated from the date of September 13, 2024 until payment is made.
The Company elected to account for the ERC by analogy to IAS 20 when there was reasonable assurance of receipt, which was determined to be when the approval was received by the IRS. During the year ended December 31, 2025, the Company received approval for all refunds from the IRS in the amount of $2.2 million, of which $1.9 million was passed through to the Buyer and settled a portion of the ERC note and is included in other income on the condensed consolidated statements of operations, and the remaining of $272,000 was offset the Company’s outstanding tax liability by the IRS. The offset against the IRS liabilities triggered the Seller’s put back right, and therefore the Company is required to repurchase back this portion at 85% at $231,000. As of March 31, 2026, the remaining outstanding balance under the Agreement was approximately $231,000.
Collateralized Loan Agreement
On November 21, 2024 the Company entered into a financing agreement (the “2024 Collateralized Loan Agreement”) with CJEF Capital Partners PTE Ltd. (“CJEF”), to provide the Company with loan funding to be secured by shares of common stock (the “2024 Collateralized Loan”). Funding is to be provided in tranches and shall mature 2 years from date of funding. Collateral retained by CJEF will be pledged and utilized to secure each funding and to be retained until all principal and interest have been paid. Interest will accrue on the outstanding principal amount of the 2024 Collateralized Loan at 6% per annum (payable semi-annually in advance) and an arranger fee of 5% will be retained by CJEF from Loan proceeds. As of March 31, 2026, the Company has been provided funding of $500,000 against the 2024 Collateralized Loan agreement, with the entire balance remaining outstanding.
On October 14, 2025, the Company entered into a Share Financing Agreement (the “2025 Collateralized Loan Agreement”) with Oceanview Consultant Partners Ltd. (“Oceanview”), to provide the Company with loan financing funding to be secured by Company’s common shares (the “2025 Collateralized Loan”). Funding is to be provided in tranches and shall mature 1 year from date of funding. the Company has been provided funding of $900,000 against the 2025 Collateralized Loan, with the entire balance remaining outstanding. As of March 31, 2026, approximately common shares have been issued to secured the 2025 Collateralized Loan. Collateral retained by Oceanview will be pledged and utilized to secure each funding and is to be retained until all principal and interest have been paid. Interest will accrue on the outstanding principal amount of the Collateralized Loan at 6% per annum, with interest only payable monthly and an arranger fee of 6% will be retained by Oceanview from Loan proceeds.
ProPhase Labs, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (unaudited)
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