ProPhase Labs, Inc.

Ladies and gentlemen, thank you for standing by. Our presentation will begin momentarily. Thank you for your patience. Thank you for watching! so so Thank you, and good afternoon. I would like to thank you all for taking time to join us for ProPhase Labs' fourth quarter and full year 2020 financial results conference call. Your host today is ProPhase Labs' CEO and Chairman of the Board of Directors, Ted Karkas. A press release detailing these results crossed the wires today and is available on the company's website, ProPhaseLabs.com. Before we begin the formal presentation, I'd like to remind everyone that statements made on the call and webcast, including those regarding future financial results and future operational goals and industry prospects, are forward-looking and may be subject to a number of risks and uncertainties that could cause actual results to differ materially from those described in the call. Please refer to the company's SEC filings for a list of associated risks. Finally, this call This conference call is being webcast. The webcast link is available in the investor relations section of ProPhaseLabs.com. At this time, I would like to turn the call over to ProPhase Labs Chief Executive Officer, Ted Karkas. Ted, the floor is yours.

Thank you, Hector. And greetings, everybody, and thanks for joining me on the call today. It's kind of an interesting time for a call, given that we just reported the year-end numbers while we're at the end of the first quarter. I was actually thinking about waiting until we reported the first quarter where we had more to talk about about the first quarter in six weeks, but then I had a feeling a lot of investors would be upset with me. The stock is obviously volatile. When the stock's volatile, I get a bunch of comments, you know, where's the update? And so I would just like to start by reminding everyone, And those that have known me a long time know this to be true. For those that are newer investors, I'm sure many of you I've told this to before, but I'll repeat it. I have a history of building value for our companies and the companies that I get involved with over the long term. And I've been pretty consistent at doing that. I've certainly been pretty consistent at doing that as CEO of Prophe Labs over the last approximately 11 years. When I turned around the company, the stock bottomed out at $0.65. For those that stuck with me, I paid out, you know, I turned around and called these brands, sold them for $50 million, and then subsequently had the two stock buybacks, the three special dividends, a total of $1.50. So people that stuck with me have been handsomely rewarded. And since that time, I've always gone by the same theory every move I make, is in terms of what's best for long-term shareholders in terms of building value on a per-share basis. I consider that critical to what management should be paying attention to. Most managements don't. I don't want to go into more detail than that, but I just want to remind you all that that's my goal. That's my game plan. I am not responsible for NASDAQ selling off 1,000 points. All of the tech stocks and small, mid-cap stocks, I follow a lot of other stocks in the same industry that we're in, and they all got hammered. And so, frankly, I have no control over that. I also have no control over short-term swings in the incidence of COVID. Back in December and January, the numbers were going up dramatically every day in terms of the incidence of COVID and the amount of testing that was being done. All of a sudden, in middle of February, those numbers dropped dramatically. NASDAQ dropped dramatically, our stock dropped, and so forth. What I can control is making smart decisions to build our company longer term. That's what I'm doing. So just to talk a little bit, I know you all want to get into what's going on in Q1 and what's going on currently. Just to talk a little bit about last year, our revenues were up 45%, which quite frankly in and of itself I'm pretty proud of. That's both our base business, it's our manufacturing business, It's our dietary supplement business. And a little bit of testing, which we did at the end of December. I'm going to get into the COVID and the testing a little more in a moment. But we did not report a profit, but that's because we're rebuilding the company and taking it in new directions. And so that's all planned the same way I used to plan when I turned around and grew the Coldies brand, which we ultimately sold for $50 million. We lost money while we were developing the brand, but ultimately we sold it for $50 million. Whereas when I took over, maybe it was worth $5 or $10 million. So I'm doing the same thing now. I'm building value in the company long term. I really don't want to get too much into the stock price, even though that's what everybody seems to respond to. And I don't blame you. But by the same token, at some point it gets silly. As the stock goes down, it gets closer to actual liquidating value while we're actually growing a business here and growing revenues and now going forward, earning some cash flow. So I'm going to get into that a little bit more in a minute. I just wanted to give you that as a background for all on the same page. One more comment on our dietary supplement business, which I'm actually feeling really good about. We did get into a lead product. It was already in Rite Aid and Walgreens, and it's doing so well in those stores. We got into CVS and Walmart. These are considered the four largest retailers for dietary supplements. And, of course, you know, we have a laundry list of other retailers that we're in now as well. But we've got the biggest ones, Walmart and CVS, in the fourth quarter, which means just a pipeline, Phil. And the fact that our product sells off the shelf means that we're going to have significant, you know, a significant uptick in revenues and now earnings from the dietary supplement business. I actually feel really good about that. While it's a small business, it's going to grow very nicely this year. And all of a sudden, you'll see a small business that you're not paying attention to actually have real value in the company, especially with their stock price downwards. I don't really want to talk more about that because our testing business now going forward is going to dwarf our dietary supplement manufacturing business. But suffice it to say, our other core business is doing just fine. We ramped up in a very short order. We decided to pivot into COVID testing. And basically, it was late last year that we decided, rather than partner with another company, to actually do it ourselves. And in a matter of literally weeks, we went from not being in the business to buying a business without customers, to having to do a lot of validation work. And lo and behold, from late October to mid-December, a period of like six or seven weeks, we bought, closed on a lab, hired people, got validation work done, and actually started testing in late December. We quickly ramped up, which was honestly pretty incredible that we ramped up to 1,000 tests a day at the end of December and then actually had 1,500 tests a day in the end of December. Frankly, that was a hurricane task because there are, you know, other than the large labs, 95% of the labs across the country are smaller labs that are happy to do 200 or 500 tests a day. And we, within weeks, were already doing 1,500 tests a day, which is actually a pretty incredible number in and of itself. In January, we actually hit 2,500 tests a day. I was really excited about that. I expected that to continue with the time and to just keep growing. And just so you know, since that time, well, I'll go back a step. We had a fantastic January. I expected it to continue. In February, I alluded to this in our press release, I really want to stick to, what's out there that's public information. In the middle of February, we got hit with horrendous weather. We do a significant amount of business in the southwest, and frankly, in the areas where we do business, I guess I've never seen snow flurries before, but basically the whole state shut down. We had several testing centers shut down, and this was from our biggest customer, and so that hit Our overall business, I mean, it's from our largest customer. But at the same time, every month we've been adding customers. So the underlying business of adding customers and small business from one customer and a little business from another customer, that's all adding every week and every month. So we had a big knock from the largest customer, but the diversity in our business is growing on a weekly basis. So we have a really nice core business. So we ended, I also made sure to put this in the press release so I could talk about it a little bit. We finished, we averaged for the quarter based on a five-day testing week average. We averaged just under 2,000 tests a day, which, quite frankly, I am really pleased with from the point of view of not being in the business before. I'm not pleased with it relative to the incredible growth rates that we had in the last week of December and the first four weeks of January. So honestly, it was a little disappointing. But from the point of view of us growing our business, we continue to grow our business. I'm going to talk about the business a little bit more in a moment, but I'd like to just pause to also point the fact that we've built an incredible infrastructure over, you know, these past, you know, two or three months. We have a very, very strong management team. You know, besides our CFO, Monica Brady, who's been with me for many years, specific to the lab business, Steve Kamalek has been in the industry. I joke about how many decades he's been in it, but he built up another lab from a very small lab to a very large lab. And, you know, I couldn't be more grateful that he joined me in this new endeavor. We also attracted some fantastic IT people. I'm going to try not to go on too long with this because many of you have heard this before, and I really do want to get to a Q&A, but I just have to touch on a couple things. We hired two IT people led by Sergio Morales, who led an 18-person IT company on a consulting basis prior, and I can't tell you how blessed we are to have him and how important IT is in all of this. And we've hired two of the best molecular lab techs who are, you know, regularly working with the FDA. They have two EUAs filed with the FDA that we're waiting for approval on, Carlos Brewster and Amanda Vasquez. And so we really have a strong team, completely rounded out for every facet of the lab business. And so it makes it easier to grow when you have a good foundation and have a good team. We also, you know, when we built out our new lab, we built it out with state-of-the-art equipment. As I mentioned, we built it out with Thermo Fisher's latest equipment. They adjusted to COVID and responded and created new equipment and reagents with a multiplex platform so we can test for the new mutations of COVID. So we have the state-of-the-art equipment. We have a fantastic capacity, which I've talked about ad nauseum. We can turn around in 24 hours. I've talked about how important the IT is because once you have the key people and the equipment in place, the lab processing runs pretty smoothly as it does for us, but it's still the collection of the patient data and the technology to collect it and then also report out the results, and that's where IT is so important. And then, of course, we just announced last night about the acquisition of VACTrack, which is really cool. If we didn't have Sergio... First of all, I don't know if we would have made the acquisition. Number two, we wouldn't have been able to integrate it so quickly. It's already integrated into our system. You know, while and the seller of the technology who was quoted on a press release, we're actually working with him on a number of things right now. But he was nice enough while we were looking to and we literally just signed the deal. But we've already been integrating that track into our system even before we actually officially signed the deal. And so Sergio has already integrated in our system. We're already in beta testing, and we're about to roll this out any day now. In fact, I think we may have some customers that are willing to beta test it. We've done some internal beta testing. We're about to roll that out. And coincidentally, I was just talking to a partner of ours who thinks that he may have just landed an account And the deciding factor was actually Backtrack. And for those of you who don't know what Backtrack is, it is explained in the press release. It has a number of functions. Some of the key functions for us is it gives us the ability to report. If 1,000 people get tested, it gives us an ability to report directly to each of those 1,000 people, directly to their portal, directly to their smartphone on an app. They can then use that. It has an unalterable QR code and report on it where you can basically see your vaccinations. You can see if you're COVID positive or negative or any other test for that matter so that it could be used to enter events. This is a big deal now with events opening up. So I'm really excited about that track. It just builds out our technology. It builds out our company, and it just differentiates us one step further. I'd also like to point out that we have several partners out that we didn't have three months ago. These are partners that are bringing business to us that we're working extremely well with. We have a group that are experts in testing schools, and we have experts that are in testing towns and in testing states. And there's tremendous opportunities out there. So I just want to review the dynamics a little bit in terms of COVID incidents and COVID testing both dropped off. I mean, basically they dropped off a cliff in middle of February to March. But what's interesting is over in Europe, COVID is on the rise again. And I believe that there's just burnout in our country. People don't want to deal with masks anymore. Weather's getting warmer. They hear about vaccinations. And you're like, okay, screw COVID. But what people don't understand is just because you have a mentality of screw COVID, I don't need to get tested. I don't need to wear a mask. I can, you know, I don't have to social distance. All that's doing is it's starting the wave all over again. And I think I've said this before. I'll say it again. Every, virtually every expert I talk to says there is no cure for COVID. We've never been able to cure flu. Even with vaccines, vaccines are always nine months behind. It took nine, ten months to create a vaccine for COVID. Now it's mutating rapidly, faster than flu. Everyone's concerned with the current vaccines out there, how long they're going to be effective on the new strains. We are seeing more and more. We're now starting to see an uptick in the incidence of COVID. We're also seeing an uptick in the positivity rates, and we're seeing an uptick in the mutations. So all of this is going on while everybody psychologically feels like COVID is going away. I'd also point out that only about 15% of the population has been vaccinated with two vaccines. And maybe most importantly, when you get vaccinated, that does not protect you per se from getting COVID. It may protect you from getting symptoms, which actually makes you more dangerous because you're going to let your guard down when you're vaccinated. There's a higher probability that you're going to get COVID. And what that means is you're now more dangerous because you're asymptomatic, which means that you're not going to be as careful. And you may spread it to other people that haven't been vaccinated, which makes you, you know, deadly. So we have all these different factors going on. One thing that I pointed out is that even if COVID, and I pointed this out months ago, even if COVID testing dropped and it had, there's still going to be testing. And a perfect example of that are the school systems. where the current administration is funding in a significant way, they're funding schools to reopen. There is a ton of opportunity for testing with schools. We've actually developed, particularly with our partners, some expertise in testing at schools. We currently test in over 75 schools. These are high schools. And that number I expect to grow significantly in the coming months. The other thing I point out is that our three largest customers all told us, somewhat coincidentally, that within a couple of weeks, they expect that their testing with us, their business with us, to grow dramatically. And then in addition to all that, we have lots of other partners, though, that are working on weddings and events. We're starting to develop a network of independent pharmacies that are doing testing where they're sending their specimens to a lab. So there's just an enormous amount of opportunities, and while the overall level of testing has dropped significantly from mid-January to now, by the same token, we got into this business long before the numbers went up to where they got to in mid-January. And so, you know, they've come back down, but they're not going away, and now they're turning and going back up again. So the last thing I'd like to mention about this is that our goal was to build a strong infrastructure-invasive business with COVID testing. And now that we've pivoted, and now we're a substantial lab, and we're actually a force to be reckoned with with regard to RFPs, because quite frankly, nobody can beat our turnaround times. They might be able to match them, but they can't beat our turnaround time. Our customer service is first class. Our IT, our reporting systems now, you know, we're as good as it gets. And now it's just a matter of getting the word out. And as we do more and more business with more and more accounts, that's going to beget more business. And so I can't tell you how much our business is going to grow. As I said, I was a little disappointed that we had that dip. But by the same token, when you look at it, instead of looking at it every week, if you look at a quarter to quarter, I expect to grow every quarter. We grew, you know, last year we grew revenues 45%. Our fourth quarter grew really nicely. There was only a little bit of COVID testing at the very, very end of December, but, you know, our revenues are going to grow very strongly in the first quarter. I expect them to grow significantly more in the second quarter from the first quarter. The last point on this is we raised an awful lot of money, which significantly increased revenue our liquidating value on a per share basis. I always say that a pay tax is a terminal value on a per share basis, meaning look at the value of our company if we were to liquidate it, divided by the number of shares. My goal is to grow that every year. And I've been growing that every year, and I expect to continue to grow it every year. One of the reasons we raised that capital was because we were going through a period of significant negative cash flow, which I explained to everybody that was – One, for the building out of our Garden City lab, which I am so proud of. Anybody that's come to see it in person is really impressed with it. Number two, it's obviously providing the equipment for hiring people. But a large part of it is purchasing consumables. And at the time, back in January, there was big concern of shortages of consumables. I wanted to make sure we had more than enough consumables. So we bought an enormous amount of consumables to protect us for any large orders that might come our way. And so from the time you buy consumables, typically if you buy them about 30 days in advance of testing, you have to pay for them up front, 90% up front, 10% on delivery. So from the time we order 30 days in advance of the testing, we have to pay, and then once 30 days goes by, we do the testing, and then it could be up to two months before we actually get reimbursed. So we had a three-month period of tremendous negative cash flow, But I'm now looking forward to, and that basically was our first quarter. Our second quarter, we've got a lot of billing going out to insurance companies that were just now starting to get paid back from them. I expect our cash flow to rise dramatically in the second quarter. I expect to have really strong numbers going forward, and I'm excited for the future of our company. So I feel a little bit of pressure, quite frankly, from the stock price, and And there are people out there that made sure to let me know in an obnoxious way, which I don't, frankly, I don't respect. It sounds a little offensive. But for the most part, for the long-term shareholders that know me well, they know that I'm building value for them. And I am a very large shareholder of the company, so don't get me wrong. I'm building it for myself as well. But we're all on the same team here. I just want to make sure I look at my notes. And, again, the last part of this, is the next step is we're looking to diversify something like backtrack that rounds out our COVID testing really nicely. You know, obviously it can also be used for vaccinations, but I'm looking at diversification in many different ways. I'm looking at other tests besides just PCR tests. I'm looking at fast PCR tests. I'm looking at antigen tests. I'm looking at immunity tests with companies that we might partner with. I'm looking at labs. to acquire other than labs that do COVID testing, but labs that do other types of testing. I have groups of people who can bring business other than COVID testing. I'm talking about all the other types of testing that were being done before COVID that are gonna be done after COVID. And so I'm really looking to leverage our infrastructure to potentially buy a lab with licenses to do all the other types of testing besides COVID. So I'm looking at a lot of different directions. I'm looking at M&A activity. What's nice about our company is we have a very strong capital base. We have, you know, the company is up three levels from where it was last year in terms of our revenues, in terms of our business going forward, in terms of our cash flow going forward, but also in terms of our balance sheet. We have an incredibly strong balance sheet, and, you know, other than some M&A activity or acquisitions or things of that nature, I expect that, our balance sheet and our liquidating value to grow every quarter going forward. And now that I've said all that and that was a mouthful, I just want to highlight again the forward-looking statements. I'm not going to read them again. I believe everything that I just told you to be accurate. I can't guarantee what's going to happen with COVID or with NASDAQ or with the stock market or things of that nature. I can control what I can control. I can't control what I can't, but I can tell you I am Working my butt off harder than I ever worked before. This is reminiscent of when I turned this company around a decade ago and I was working around the clock. Well, I'm doing the same thing right now. I'm doing it on behalf of everyone on this call. And I'm very optimistic and confident that we are going to continue to grow our company from quarter to quarter. I can't tell you what's going to happen week to week, so please stop asking me. But quarter to quarter, I expect really nice growth in our company, and I'm looking forward to it. Let me just see if I have anything else before I open it up to a Q&A. My IR firm, who's on the call, told me keep this to 25 to 30 minutes. Well, it's 4.58 Eastern time. It's been 28 minutes. And I think I covered just about everything I wanted. I would like to open it up to questions now. Hector, I'll hand it off back to you. I think I'm right on time.

Thank you, sir. Thank you, sir. We'll now begin the question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Your first question comes from the line of David Deschler with Deschler and Associates. Please proceed with your question.