ProPhase Labs, Inc.

Welcome to the ProPhase Labs third quarter 2021 financial results and corporate update conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your touchtone phone. To withdraw your question, please press star, then two. Please note this event is being recorded. I would now like to turn the conference over to Jules Abraham with Core IR. Please go ahead.

Thank you, Eileen. Good morning, everyone. During this call, management will be making forward-looking statements, including statements that address ProPhase's expectations for future performance or operational results. These include statements regarding the company's expectations with respect to Q4 COVID-19 testing revenues, Its goal is to build a sizable customer base of independent pharmacies that will provide consistent and growing testing revenues for its diagnostics business, plans to provide genomics testing with faster turnaround times and lower price points, and ongoing efforts to evaluate and pursue additional strategic and synergistic acquisitions to build the company's precision medicine and genomics research capabilities. Forward-looking statements involve risks and other factors that may cause actual results to differ materially from those statements. For more information about these risks, please refer to the risk factors described in ProPhase's most recently filed annual reports on Form 10-K and quarterly report on Form 10-Q, the Form 8-K filed with the SEC today, and ProPhase Labs press release that accompanies this call, particularly the cautionary statements in it. The content of this call contains time-sensitive information that is accurate only as of today, November 12th, 2021. Except as required by law, ProPhase Labs disclaims any obligation to publicly update or revise any information to reflect events or circumstances that occur after this call. It's now my pleasure to introduce Ted Karkas, Chairman and CEO of ProPhase Labs. Ted.

Thank you, Jules, and thank you, Eileen, and thank you all for joining me today. I am in a particularly good mood. we've gone through a year and I'm just, I'm just thinking about this now spontaneously back when I first launched a proxy contest 12 years ago, it was a year of hell, uh, turning around the company, restructuring, firing versus everybody. And now this past year, I could probably say the same thing, getting into a new business. Um, I, I can't tell you what's involved in starting a new business from scratch. And, uh, I happen to think that we're situated in a really good place right now. And I'll get more into that. Let me start by giving you a quick background on me. I'll make it really brief for those of you that have heard this before. I'm the largest listed shareholder in the company. I have a history of executing on behalf of our shareholders. I've been investing in small cap development stage companies for 40 years. I turned around several companies. one of which was quite significant company that was ultimately sold for $1.4 billion. Uh, when I took over our company with the proxy contest, uh, a little more than a decade ago, our stock bottoms at 60 cents, 65 cents. I turned, I turned and we turned and our management team turned the company around, uh, ultimately selling the coldies brand for $50 million. Um, our stock now trades, you know, between five and $6 a share. We paid a dollar 80 in special stock dividends since then. We sold the Cold East Remedy brand for $50 million. So in my mind, you know, for those that have been long-term shareholders, they've been very, very well rewarded. But I think that the best is yet to come. And to be honest with you, I'm just getting started. That's the history. More recently, we pivoted into COVID testing. Within a short period of time, we built a substantial business with a state-of-the-art lab in Garden City, New York. We more recently have significantly diversified our customer base. We're growing revenues in Q4 with a more stabilized customer base. Our next step is going to be to diversify further with the Nebula Genomics, which leverages our lab testing facilities and our infrastructure selling into 40,000 food, drug, and mass retail stores. And then our ultimate goal is going to be diversify our genomics platform into precision personalized medicine, which is the future of healthcare. I will get into all of this. That's just the quick overview. I'm not going to read the numbers. You all have the ability to read the press release and the numbers for yourselves. And if you have questions at the end about the numbers, I'll do my best to answer them. I just want to point out a couple of things. We now are reporting adjusted EBITDA to give you a better sense of what the real earnings are. we have stock options in the company and ultimately they're always restructuring the management changes going on. There were consultants that I hired a year ago that I no longer work with and options that we gave to them ended up, we ended up actually canceling them. And it's really interesting. You issue stock options, you have an expense every quarter for them. When you cancel them, you don't reverse that expense. So we actually have these non-existent expenses. I don't want the SEC to get upset with me. They were, I guess theoretical expenses at the time that we issued the stock options, but then you cancel the stock options, you don't get to reverse that expense. So I thought it was important to start reporting adjusted EBITDA, which I believe gives you and everyone a better feel for what the numbers actually look like. And then the other perspective I want to give to you, we're a small cap growing company. We're looking to grow into a much, larger company. I don't know what our market cap is. It's under $100 million. My goal is to ultimately have a market cap of $1 billion or $2 billion. In order to do that, we are constantly looking at new opportunities the same way that we pivoted into the Clio lab testing last year, and we've acquired Nebula. Understand that Nebula was the culmination of a year's worth of work of reviewing at least 60 different acquisitions. It might have even been 100 different acquisitions. At least 20 of them we did very serious due diligence on. This includes investment bankers. It includes attorneys, legal fees, due diligence, consultants, accountants, you name it. There's a significant amount of expense in reviewing acquisitions and doing the due diligence and figuring out what's real and what has real potential versus what is just the story. And that culminated in the acquisition of Nebula, which I'm so excited about. It not only brings tremendous value to the company, it brings tremendous upside, but it also significantly leverages the infrastructure that we already have in place. I'll get more into that in a little while, but my point being is all of this work is expensive and I, Liking it to when we turned around the Cold East brand, we used to lose, I don't know, we'd go back and look at our numbers. We used to probably lose a million or $2 million a year building the Cold East brand. This is a brand that was potentially going out of business when I inherited it. And ultimately we sold that for $50 million. So losing a million or $2 million a year to rebuild the business, best investment I ever made. Similarly, the investment that we're making in lawyers and investment bankers, and accountants and consultants and reviewing acquisitions. In my mind, this is an investment towards building the value of the company longer term. And as I mentioned at the outset, I and we have a history of providing value to our shareholders, and it's been pretty significant what we've been able to accomplish, and we're going to continue along that route in the coming years. And therefore, to look on a quarter-to-quarter basis and see a loss, You know, the loss in the third quarter was primarily due to, you know, these lawyers and accountants fees and investment banking fees. And also by way of example, when we acquired Nebula, there was significant investment banking fees and legal fees associated with that. That's all expense. It's not capitalized. So that hits our bottom line in the third quarter. So when you account for all that, what's interesting is even without accounting for all that, we were actually profitable for the year on an adjusted EBITDA basis. When you account for these extra expenses, which in my mind are investments, you can see our numbers are a lot better than what it might look like at first glance. So I just wanted to review that to put that in a little bit of perspective. Getting into the specific subsidiaries, I'll start with the smallest ones first. First of all, our contract manufacturing. Someone actually asked me already this morning, why was there a dip this year? And so just to explain that, last year was an aberration. We had a spike in contract manufacturing sales because of COVID. As you recall, back when COVID first hit, everybody rushed out to buy toilet paper, paper towels, and guess what? They bought lozenges. And they bought a lot of them. And our contract manufacturing primarily manufactures lozenges for about eight companies. And so there was enormous demand out of the blue, just an enormous surge. We could not – I mean, we were running – our manufacturing lines around the clock. So we sold a ton. It was an aberration. It was a spike. But then in addition to that, we built up an enormous inventory, or I should say our customers built up an enormous inventory of lozenges going into this year. When this year hit, we didn't have that aberrational demand, you know, that spike in demand that we had last year. At the same time, we had all this inventory to burn up. So while we had an abnormally unusually high spike in sales last year, we had an abnormally low amount of sales, relatively speaking, in our contract manufacturing this year. Going into next year, inventory levels are more normalized. We're going to get back to growth. It's not a fast-growing business, but we are potentially adding more customers. We're certainly going to have a bounce back in sales in contract manufacturing. And I want to say certainly that, you know, keep in mind forward-looking statements. But my expectation is there's no reason why we're not going to have a nice bounce back in contract manufacturing sales next year, and that's without even adding any new customers. So we're going to have a bounce back in sales from contract manufacturers. If we add new customers, which I hope and expect to, then we'll grow even more. So our contract manufacturing is going to be just fine going into next year. With our dietary supplement business, that's a small business, but that's a little bit more visible. to understand the revenues and growth by the distribution. If you have more distribution, it's logical you're going to have more sales. As I mentioned, our dietary supplement businesses started off in Rite Aid, did so well. We got into Walgreens, and at the beginning of the year, we got into Walmart, CVS, and all the major food, drug, and mass retail stores. And so it's only natural just from distribution that our product, our dietary supplement business, is going to grow, albeit from a small base. But that business is doing very well. We find that our lead product, because we do actual clinical studies, that when we put it on the shelves, we can make claims that actually go on the package clinically shown. That is critically important to consumers. They love buying dietary supplements that have clinically shown on it. So our products honestly tend to sell themselves when they're on the shelves, even without advertising. So that business is doing just fine. What's also nice about our dietary supplement business, even though it's doing, let's say, a few million dollars a business this year, it solidifies and it keeps our infrastructure and our relationships with all of our major food, drug, and mass retailers strong. It keeps our relationship with our major national broker, who's the number one national broker to food, drug, and mass retail stores, keeps our relationship with them strong. And everybody's asking us what's next in terms of other products because their dietary supplements are doing so well and they can see, the retailers see that we're now diversifying. and we're in the CLIA lab business, and we're doing COVID testing, diagnostic testing, they want to know what else are we getting into, and they're interested in our next products. And I'm going to get into that. But the point of all this is that our infrastructure has never been stronger. So that covers our contract manufacturing and our dietary supplements. Moving on to our CLIA labs. We should have more consistency in testing going forward. While in the past we did a ton of school testing, Last, you know, cough, cold, flu season, you know, we started a business in December. January was the biggest month at the time that we ever had. That was a huge percentage of that was in schools. We are no longer as reliant on schools and no longer as reliant on mandates as we once were. We now have a significant amount of our CLIA lab diagnostic testing business, which comes from independent pharmacies and concierge services. These are places where people can just walk up and get a test for whatever reason without having to go to a doctor's office. It is incredibly convenient. People are always going to need to be COVID tested for a variety of reasons, no different than people going to get a flu test. But obviously, COVID is more dangerous than flu. So people are going to be more motivated to get a COVID test. I can't tell you. what testing levels are going to look like next year. But what I can tell you is our customer base is significantly more diverse than it was in January. And in January, that's when our sales peak. And I thought that they were going to continue to grow. And then we had a tremendous drop off in February and even bigger drop off in March. And I kept thinking it was going to bounce back. And then in the summer we had mandates that said you didn't have to wear masks and you didn't have to get tested. So all of the testing we thought we were going to do for graduation schools and prom all of a sudden disappeared. So we had a situation over the summer where we had enormous amounts of employees and all of a sudden very little testing. And I would simply point out that in that environment where we had very little testing and significant number of employees and significant overhead, our numbers really weren't that bad when you take into context the adjusted EBITDA and the expenses for acquisitions. And so that's our worst possible quarter. So we just got through our worst possible quarter. And yet for the year, we're still positive. on an adjusted EBITDA basis. And we're going into a fourth quarter that honestly is exciting. The month of October, we announced in the press release, we did more business than the entire third quarter. But also strikingly, and I may have neglected to put this in the press release, we did more business in the month of October than we did in the month of January, the biggest month in the history of the company. So we just have the biggest month in the history of the company. And What I'm particularly enthusiastic about is that there's no slowdown in sight. And I would also say that back in January, it was based on a panic when positivity rates were unusually high and everyone was in a panic to get tested. It's a very different environment now. Things have settled down. Positivity rates did spike a few months ago, but they settled down. And even though they've settled down, our business has never been stronger than it is right now. And so... You know, I'm a little gun-shy after what happened in January, but all I can tell you is we have a very well-diversified customer base. We're not reliant just on schools. We, you know, won two big awards in two big counties, and we have all these concierge services and independent pharmacies. The number of independent pharmacies is growing, and I really think that that's the wave of the future, at least a part of it, is going to be people, instead of going to the doctor's office to get tested, you walk down to the block to your local pharmacy or you walk down the block to a concierge service or a big pop-up tent you get tested our results we are one of the most efficient labs in the country we consistently turn around results in less than 24 hours i'm really proud of that fact our customer service is as good as or better than virtually any lab in the industry and quite frankly the big labs can't compete with us because they just can't provide and turn around results and with the reliability that we do um So I feel really good about our, obviously, about our testing service. You can expect, I certainly expect that we're going to have a strong fourth quarter. And so, you know, I'm looking forward to next steps. Let me just, I'm going to go through some notes. I don't want to mix too much here. Let's go on to Nebula. So Nebula sells whole genome sequencing direct to consumers. The beauty of this business, first of all, it's a fantastic business because over time people are going to be more and more interested in their health. Traditionally, they're interested in companies like Ancestry.com and 23andMe for ancestry information, where you might have come from, what country you might have come from generations ago, who your ancestors might have been. That's kind of interesting. You can actually get that information from studying a very small percentage of your genome. The future of medicine, however, is in studying your whole genetic makeup and understanding how your genetic makeup leads you to be predisposed to various diseases and illnesses. Over time, people are going to be more interested in your genetic makeup, not just for ancestry, but also for your health. And it doesn't mean one has to compete with the other. Whole genome sequencing, what Nebula does, does provide some basic information about your ancestry. It can't compete. right now with an ancestry or 23andMe just in terms of their database of people that they've tested where they can then link it in to figure out your ancestry and give you a little bit more detail. On the other hand, whole genome sequencing can provide as much as 1,000 to 5,000 times as much genetic information as many of these other tests out there. The reason why nobody is focused on whole genome sequencing historically is because it was so expensive. It was way too expensive. I think I put in one of our reports, we said the first whole genome was sequenced for $3 billion, and more recently it was thousands of dollars. And even now, the lowest provider in the U.S. is somewhere around $600, and Nebula provides it for $300. Moving forward, we can leverage nebula first of all as i mentioned with our food drug and mass retail distribution we plan on on and the way this works is you can't sell a 300 product to walmart or walgreens because they're going to market up retailers market up anywhere from 20 to 100 so no one's going into walmart to buy a four or five hundred dollar product however what we can do is something called low pass um which studies which doesn't give you as much information as whole genome sequencing, but we can do it for, and I don't know what the exact number is going to be. We're still working on it, but, you know, somewhere around $30 or $50, we can offer that to consumers. That's a product we can sell in food, drug, and mass retail stores. So we have a history of success in selling dietary supplements and other products and the Coldies brand and building that and marketing and distributing to retailers and doing the advertising, doing the execution, the fulfillment, and so forth. There's no reason why we can't do exactly the same thing with Nebula's products in food, drug, and mass retail stores. At the same time, Nebula only sells online. There's no reason why we can't use our expertise to also build sales online. In addition to that, we expect we're negotiating right now to get the price down significantly for $300. We think that the price elasticity of demand for this product suggests that if we can get the price down 50 or $100, that the demand is potentially going to double or triple. I don't know what the numbers are. I can only tell you that I am confident that we're going to be able to grow Nebula's current business significantly. As I mentioned when we first acquired them, that they were at a run rate of $9 million run rate over the next 12 months. So I don't know what the numbers are going to be for this calendar year. It's obviously going to be less than that because they're growing. But we think that that number, we can grow that significantly once we get the price down, once we fully integrate them, once we get more our company's infrastructure and people more involved. We think we're going to be able to grow the sales online. And then ultimately, we're working on a low-pass product. And what's nice about the low-pass product is we sell it at food, drug, and mask stores. And when consumers purchase that, and they're going to get some really, really good information you know, a significant, even low pass provides significantly more, you know, genetic information about your genetic makeup. But what's nice is that then piques your interest, and then we will upsell the whole genome sequencing to those same consumers. At the same time, Nebula's model has been a subscription model where they sell the sequencing at cost and then sell a subscription, and it's a monthly subscription, and all the profits really are generated from the monthly subscription. That monthly subscription costs virtually nothing. It's just a small team of scientists who have developed the library and then add to the library every month, and that information ties into your genetic makeup. It's really interesting to purchase the whole genome sequencing, see what your genetic makeup is, and then each month you get a report telling you that based on your genetic makeup, you might have eight genes that suggest that you're predisposed to breast cancer. And the average person, the average woman might have two or three, and you might have eight, and that might be on the high end. And what's interesting is it'll give you a polygenic risk score or assessment to tell you, based on our proprietary database, and this I'm going to get into also, Nebula has a proprietary database that they've been building. They've tested somewhere between 12 and 15,000 customers already. They have a database of all these people. And then they tie it into clinical studies that are regularly coming out every month that people with a high predisposition to breast cancer have this particular genetic makeup. So what happens when you get that report each month, it will tell you whether you're in the 90th percentile or the 10th percentile or the 50th percentile for breast cancer based on your genetic makeup. So it's really interesting information. And that's sort of at the heart of personalized medicine. Ultimately, personalized medicine has more to do with actual clinical studies and diagnostics where you go into the doctor's office, you get your genetic makeup, you specifically tie that into your healthcare records, and you come up with a diagnosis and a prognosis and so forth. It's much more sophisticated. But at the heart of it, it all starts with a genetic test. So we have sort of a hidden value in Nebula that I haven't really talked about before that we're exploring now with other companies and, in fact, other countries who are interested in our library and, in particular, our software platform for tying it all together. It's really unique, this monthly report that comes out. It's unique in the way that we do that. And so there's, I believe, a hidden significant value in Nebula that goes beyond simply selling products direct to consumers. So I'm really excited about the future of Nebula. I just want to go through a little bit more here. And I think that covers pretty much what I wanted to cover in the presentation that took just under 30 minutes or 25 minutes. I love to talk, but I also want to open it up to questions. The bottom line before I open it up to questions, just to be clear, I think you all know I'm pretty bullish on our company. I'm really excited. We announced a $6 million stock buyback. We announced that we purchased, I don't know what the number of shares is. It's in a press release. Our stock's down from $16 in January. We just had the biggest month in the history of the company, not only bigger than the whole third quarter, but in the history of the company, it was bigger than the month of January. And the difference between now and January is that our numbers are still growing and our customer base is more diverse. And now add to that the Nebula business, which we can leverage, has so many synergies to our company between leveraging our food, drug, and mass distribution. And then ultimately we're working on doing sequencing in our lab, which I'm really excited about. I'm actually looking to lease more office space to actually expand our lab capabilities. So I'm really excited about that. Initially, we may try and move low-pass sequencing into our lab. And ultimately, we may do all whole genome sequencing in our lab as well. A lot of that is based on price. But I can tell you I'm confident that we're going to be able to get the price down from $300. I'm also confident the other issue is turnaround times. Right now, turnaround times are the number one thing that customers complain about with whole genome sequencing. It's just a fact, and it's difficult to turn around quickly. But I do believe that with the partners we're working with, and the timeframes we're working on that our turnaround times are going to improve dramatically as well. So if we get the price down and improve the turnaround times, we think we're going to grow the whole genome sequencing business. If we introduce low pass, which is a much lower price product in food, drug, and mass stores, that's going to get more consumers interested in genetic makeup. And then we can upsell both the subscription, which is where all the profit is made anyway, as well as upselling whole genome sequencing to those same consumers. So there's tremendous potential with Nebula. And then the last thing I'll leave you with is that I'm not stopping there. We are working diligently on many other acquisitions. We're looking to diversify, leverage, continue to leverage our infrastructure, and continue to grow the company. We're just starting out. We're well capitalized. We're growing. We're going to have what I believe is going to be a very strong fourth quarter. Our outlook is bright. And I'm looking forward to the future, and I appreciate your support. And with that, Eileen, I would like to turn it over to questions.