ProPhase Labs, Inc.

Good morning everyone. Welcome to the ProPhase Labs conference call. The call will begin momentarily. We do thank you for joining today. If you do need assistance prior to the call start, you may do so by pressing star and zero. Once again, the call will begin momentarily. Thank you for holding. Thank you. Good morning, everyone, and welcome to the ProPhase Labs fourth quarter 2021 financial results and corporate update conference call. All participants are currently in a listen-only mode. Should you need assistance, please say no to 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 and then one on your telephone keypad. To withdraw your questions, you may press star and two. Please also note today's event is being recorded. And at this time, I'd like to turn the conference call over to Mr. Ted Karkas, CEO and Chairman of ProPhase Labs. Sir, please go ahead.

Great. Thank you, Jamie. And thank you all for joining me today. Before we get started, of course, I have to start with a forward-looking statement. I want to advise everyone everyone that today's conference call will contain forward-looking statements, including statements relating to our plans, expectations, future performance, and future events, including with respect to our expectations for Q1 2022 COVID-19 testing revenues and financial results, our ability to provide genomic testing with faster turnaround times and lower price points, our ability to expand direct-to-consumer and big box retail distribution of Nebula's genomic sequencing products by leveraging our distribution network, our goals related to the development of partnerships and research collaborations and our ongoing efforts to evaluate and pursue additional strategic and synergistic acquisitions to build our precision medicine and genomics research capabilities. These statements are subject to risks and uncertainties that could cause our actual results to differ material from those suggested by the forward-looking statements. Additional information concerning factors that could cause our results to differ material from these forward-looking statements are contained in the earnings release that we issued earlier today, as well as in our public filings with the FCC. The company undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events, or otherwise, except to the extent required by applicable law. Finally, the conference call is being webcast. The webcast link is available in the investor relations section of prophaselabs.com. That was a mouthful. I'm sorry, but... It's just one of the things you have to go through before we get to the actual conference call. Look, I have a lot to cover, and I want to leave plenty of time for the Q&A, so I'm not going to read the financial numbers. You're all capable of reading the press release and going through the financial numbers. Of course, I'm happy to answer questions in the Q&A about the numbers. Suffice it to say that the numbers were for our fourth quarter and, therefore, for the full year were awfully good. I want to start by thanking and acknowledging our entire management team. Honestly, the achievements and the success we had this year, this past year were pretty remarkable. I don't normally highlight some of our executives and employees, but I think it's important that I do so just because of the amount of success we've had and what we've been through this past year. I have to start with our CFO, Monica Brady. She literally works 24 seven. Um, she used to work, uh, in Doyle town, Pennsylvania. And out of the blue, I just decided to get into this crazy CLIA lab testing business. And before you know it, we blew up this enormous business in garden city, New York blew up, you know, blew up this tremendous lab here in this enormous new business. Um, Monica had to move. Uh, she had to, uh, literally work 24 7 this past year we have new auditors an entirely new business uh you know entirely new subsidiaries acquisitions you name it um so really my hats off to monica nobody is more loyal and nobody has worked harder than she has and i just want to say how much i appreciate her i also have to highlight three of our senior members of our lab diagnostics business Jason Carcass, yes, he not only has the same last name as me, he is my son. He is co-COO. He earned that, every bit of it. Look, at the end of the day, without sales, there would be no earnings. There would be no business, so to speak. He was personally responsible for the vast majority of the sales that were generated this past year, as well as in the first quarter that we're in right now. What he is accomplished is nothing short of remarkable. What he accomplished is the equivalent of what 20 senior salespeople would accomplish at another lab. I also have to acknowledge Alice Liyue. Jason is our co-COO. Alice is our other co-COO. She took on a Herculean task in organizing our lab. I understand it was the first year in the business. Throughout the year, We upgraded and improved our management team and the people that we hired and the people that we promoted. Alice was one of those key people who came in and completely reorganized our lab, made it significantly more efficient. When Omicron spiked late in the fourth quarter, she ramped up the number of employees from 50 to over 250 employees in our lab, really did an incredible job. Since then, I'm going to get more into this later. She's responsible for also significantly reducing the cost to process tests. I'll get into that when I talk more about the diagnostics business. But it was a godsend that Alice came to work for us this year. And finally, Sergio Marais, our chief information officer. Once the lab is operating properly, the most difficult component is actually IT. It's the collection of patient data and the reporting of results. I'm proud to say that we have one of the best, most automated technology platforms and portals in the laboratory industry. And that includes all the big guys. And a lot of these big labs, they're actually using old IT infrastructure. And I can tell you that we're just state-of-the-art in our equipment, in our IT infrastructure, in our security, et cetera. These people... that I just mentioned, um, as well as their teams and that are behind them. Um, I can't thank them enough for, for what they've accomplished and their loyalty to the company. Um, I typically stayed on these investor conference calls, um, that my number one goal is to execute on behalf of shareholders. That has always been my goal for 40 years. I started off as an, as an investor, as a trader on wall street, and then as an investor and then consulting the small cap companies. I've been doing this for 40 years, hundreds of companies. And the one thing I've learned that's most important is something called terminal value on a per share basis. Every decision I make is based on what's best for the shareholders in terms of the value of our company today divided by the number of shares outstanding and what the value of our company could be in two, three, five years divided by the number of shares outstanding then. So I pay attention to things like dilution. I pay attention to stock buybacks, to dividends, All of these types of decisions that I'm making and that our board of directors is making, it's all in terms of what's best for shareholders. It's the reason why we went through this tremendous bear market for 14 months and other stocks in the life science industry like ours are currently trading between 50 cents and $3. There's a reason why our stock is where it is. It's because I care deeply about the value of our company on a per share basis. I don't spend money frivolously. We have significantly more capital now than what we raised a year ago. And that's even after an acquisition of Nebula, which I'm going to get into, and two dividends. And even with those tens of millions of dollars that we spent between stock buyback, dividends, and the acquisition of Nebula, we have more working capital now than we did a year ago after capital we raised. I would find I'd be hard pressed. You'd be hard pressed to find another micro-cap company in the entire country who raised a block of money back in January a year ago when things were crazy and we were in a crazy bull market, that have more capital now, made acquisitions, did the things that we accomplished, and have more capital now than they did a year ago. And I will continue in the future. You have my word that in the future I'm going to continue to operate the company the same way. All right. Wow. Let's get into our company in a little bit more detail. I should point out, oh, by the way, I should also point out that we hired a company called Renmark. If you're new to ProPhase, I recommend getting in touch with Renmark to listen to presentations I do in the future. I do live presentations once or twice a month. And these are mostly for new retail investors. But if you call Renmark and they're actually on the press release, you can certainly sign up for that. I more go through all the divisions of the company from beginning to end. You, as shareholders, if you're new to the company, I suggest that you sign up with Renmark. In terms of getting into our particular divisions, let's talk about our lab business a little bit. As you all know, we acquired a small lab in October of 2020 with no customers. minimal operations and we then built out this fabulous lab in garden city new york uh 25 000 square feet state-of-the-art equipment um and we obviously we blew it up big with the covet testing we not only do pcr covet testing we do antigen and antibody testing as well the next step in our business is to build out a fully functional and diversified clinical lab we were able, um, I'm sorry. Um, you know, as I said, we started off with PCR testing with antigen and antibody testing. We are going to diversify. We have 25,000 square feet here in garden city, New York. We are going to diversify, um, by leveraging our customer base. We built out this incredible. Um, customer base, we went from approximately two or three major customers a year ago to, we probably have a dozen major customers now. Um, it's diverse and growing our base of customers. So, uh, we've gone through these waves of COVID, but, um, even as COVID drops now, we're still doing significant testing. Um, and the reason, which is why our testing year over year, It's so fantastic because we built out this tremendous customer base. So yes, of course, when the incidence of COVID goes up, there's more demand for testing. We are going to do more testing. However, you know, with the peaks and the valleys, unlike a year ago when we only had a couple of customers, we have so many customers now. We have testing from so many different places that even when the incidence of COVID is lower, we're still doing a significant amount of testing. Uh, which is why we had a fantastic, not only fourth quarter, but, uh, I already announced that we're gonna have a fantastic first quarter. Uh, because even though army crime has, has the incidence of it has dropped dramatically. We're still, we're still doing a significant amount of testing. Um, testing is not going away. It's the number one way, um, to cut, um, the spread of COVID at the end of the day, you can get vaccinated. But even if you get vaccinated, it doesn't stop you from getting COVID. Certainly, that's now been proven. No one was vaccinated a year ago when COVID peaked in approximately January of 2021. Now, a year later, you know, 70% of the population has been vaccinated, and yet we had this awful Omicron in December and January. Now, as we speak, there's a new subvariant, BA.2. Nobody's been paying attention to it in this country because Omicron is has been dropping, so the incidence of Omicron has been dropping so quickly. But we're getting into a situation now in the coming weeks where the incidence of BA.2 is starting to increase more rapidly than Omicron is dropping. So at some point, you're going to start to see the media turn, and they're going to start paying attention, and all of a sudden, you're going to see, and I can't tell you if it's going to be in two weeks, four weeks, six weeks, you're going to see the incidence of BA.2 likely increasing significantly. And you're going to see a lot of talk about COVID is back again. I don't want to give you depressing news, but that's just the reality. And we are incredibly well positioned for that testing. So that's our diagnostic testing business. It's doing awfully well. We are very well positioned. We have gone from all full-time employees to Half of them are what we call temporary employees that come from temp agencies. Actually about two thirds of our employees is from temp agencies. So we can fluctuate the number of employees. It's very easy to hire temps and let them go as our testing demands fluctuate, which means that our lab is going to be significantly more efficient when testing demand and volumes are lower. We'll be able to decrease our overhead quickly so we can still be profitable even at lower testing volumes, unlike a year ago. So I'm confident in our year-over-year numbers going forward throughout the year, the combination of our larger customer base with the fact that we have this variability and the flexibility with our employees. And then in addition to that, Alice Leoy, our co-COO, was able to significantly reduce the cost to process the test. So our gross margins Whatever gross margins were in the fourth quarter, you can expect them to increase further in the first quarter and into 2022. So that's our diagnostics business. Happy to talk more about it in the Q&A. Last year was a great year for COVID testing. We currently, as far as I'm concerned, this year, we've all but made our year already just with what we've accomplished in the first quarter. So I'm looking forward to our next earnings report in six weeks. The second half of this year and into next year, I expect Nebula to be huge and I expect our diversified clinical lab that we're going to build out, I expect that to start to take off as well. So we are not a one trick pony. We are heavy in assets, heavy in cash, heavy in working capital. Again, going back to the idea of the terminal value on a per share basis, Um, we have enormous working capital, enormous cash, minimal debt, uh, earning a ton of money. Uh, and I don't know if I'm allowed to say it's an inexpensive stock, but, uh, our stock price, uh, certainly is attractive relative to the amount of assets we have. And if we continue to earn, uh, you know, earn money the way we have been, um, at a minimum of our stock stays where it is, there's no reason why we can't continue to either do stock buybacks or dividends. I am not stating today that we're going to do either one. Again, I'll refer back to the forward-looking statements, but I have a history of taking such actions, putting it in perspective relative to the amount of money that we're earning. All right, let's talk about Nebula. Nebula is, I think of Nebula today similar to where Um, the internet was 20 years ago. Um, of course I'm talking about prophase, uh, precision medicine. That's our wholly owned subsidiary. Uh, we acquired nebula genomics within that subsidiary. I assume most of you know about nebula, uh, and whole genome sequencing. I'll, I'll touch on it. We can get more into it in the Q and a, if you're not familiar with it, anybody that's a long-term shareholder, um, certainly knows what we're doing there at the end of the day. Precision medicine is all about a couple of things. It's learning about your genetic makeup, and then based on your genetic makeup, changing your lifestyle based on diseases that you might be predisposed to. For example, if after being whole genome sequenced through our company, it turns out you're predisposed to lung cancer, well, guess what? I think you're going to think twice before picking up that first cigarette. That's a pretty easy example. Another example that I like to use, if you're predisposed to colon cancer, well, then instead of waiting until you're 50 years old, that's when the insurance companies say you should get a colonoscopy. Maybe you'll get one at 45 or 40 or 35 if you're predisposed to colon cancer. Ideas like that, things like that, that's the future of medicine in terms of changing your lifestyle based on your genetic makeup and diseases that you're potentially predisposed to. Then taking it a step further, let's suppose you get a disease, you get a cancer and you want to know how to treat it. Historically, you know, you'd rush two women get breast cancer and they rush to get chemotherapy. What if for the cancer that you have, what if for the first person based on their genetic makeup and based on research ongoing and into the future suggests that chemotherapy isn't the way to go that you're going to wait six months and there's an 80 or 90% probability it's not going to work for you. I would think you would want to know that. You would want to know what your genetic makeup is before making such a decision. And conversely, another woman could have breast cancer and it turns out there's 90% probability of success with chemotherapy. You'd want to, you know, you'd want to go into chemotherapy immediately. Decisions like this are what personalized precision medicine are all about. At the heart of it, it all starts with whole genome sequencing, genetic testing, learning about your genetic makeup. Right now, Nebula sells whole genome sequencing direct to consumer online. The business is just starting out. Our goal is to get the pricing down significantly. We found we did a test over Thanksgiving on Black Friday where we dropped the price arbitrarily from $300 to $200. And our sales went up 10 times. It was a fantastic test. It proved the point of the price elasticity of demand as it pertains to whole genome sequencing. We want to get this out to masses. There's only a very small percentage of the population that even knows what whole genome sequencing is. So this literally is in its infancy. So the first thing we want to do is educate consumers and get it out to the masses. How are we going to do that? We're going to drop the price significantly from $300. We're working with partners right now, strategic partners right now to drop the pricing. We sell whole genome sequencing at cost. It has zero growth profit margins for us. I'll explain a little more when I get into the library where we sell a subscription. But just understand our growth model here. One is to get the price down. As I said, we're working with partnerships right now to get the price down significantly. We think that that's going to significantly drive demand for whole genome sequencing to our online consumers. That's direct to consumer. We're also working on a lower price, what's called low pass whole genome sequencing that we're going to sell in stores. Historically, our business has been selling cold, these cold remedy into all the 40,000 food, drug, and mass retail stores, Walgreens, Walmart, CVS, and so forth. Um, we sold the cold, these grandpa, we kept the manufacturing facility, um, where we still sell lozenges and that business is doing very well. Uh, by the way, we developed another line of dietary supplements that we're selling into those stores. So we kept all that infrastructure in place. And now our goal is to sell a whole genome sequencing product in the same food, drug, and mass retail stores where we have all this distribution. So we have access to distribution not only in 40,000 food, drug, and mass retail stores, but also potentially 110,000 convenience stores. So there is enormous possibilities for our ability to distribute whole genome sequencing massively. educate the masses in the same way that we developed this fantastic and efficient marketing campaign for coldies and turned around the coldies brand. I want to do the same thing for whole genome sequencing for nebula. So gross grow, grow sales online by dropping price, grow sales by distributing to retail stores. That's the direct to consumer. And then the third part of this is nebula has a proprietary library. I'm not aware of anyone in the world that has a library like ours. In fact, we have large companies and countries that are very interested in licensing that library and partnering with us. I'm not going to get more into that on this call, but our library, basically, when you get whole genome sequence, you get what's called a polygenic risk score. It tells you about diseases that you're potentially predisposed to based on your genetic makeup. And then we have a library of all the clinical research from around the world that's being conducted, that has been conducted in the past and is being conducted currently that relates to the diseases that you're predisposed to. And it's really interesting that library gets updated regularly and you get, if you sign up for a subscription, you get regular updates on all the research out there and how it relates to the diseases that you're predisposed to. And that obviously is a hugely profitable business for us. You know, it's all on the internet. We have a handful of scientists who continue to build that library. So it has, you know, based on the size that we're doing, the gross margins, you know, are close to 100% on the library. So it's a subscription-based model. So the idea is to sell as many whole genome sequencing tests as possible, which right now, as far as I'm concerned, is in its infancy, the number of tests we're selling. compared to the potential. And then the idea is to sell the subscriptions. So the next part of this is to partner with other companies and countries with regards to our library. And then in addition to that, we're looking into doing other types of partnerships based on the other people that we hired. Again, George Church, who is world renowned in whole genome sequencing. He's a founder of Nebula along with the two gentlemen that, you know, run the business when we acquired Nebula. George Church took stock instead of cash, and he agreed, which he really does. He agreed to be on our advisory board. And so George is very into what we're doing with Nebula, and he's excited to help us. We're having regular calls with him. He potentially is going to bring other companies within Precision Medicine and that we can acquire. So understand, we're just getting started. Yes, whole genome sequencing in and of itself isn't saving the world. That's just a test. It's just a starting point. But we're building a foundation here. Give us a little time. The same way that it took us a year to build out the lab and make it one of the best labs in the country, we believe we're going to do the same thing with Nebula and with precision medicine. So when we call this precision medicine, Of course, it's just a whole genome sequencing test now, but the goal is to turn our company into a precision medicine company over time. All right. And again, in the Q&A, we can talk more about Nebula. I would just add, and I'm going to get to the Q&A very shortly, I would just like to add, so our lab diagnostics, obviously, we had a fantastic year, a fantastic fourth quarter. Our first quarter, we believe, is going to grow even more than the fourth quarter. So we're looking at a fantastic year for our lab diagnostics business. We're looking to in the second half of the year, we're going to be, our goal is to be building out into a more fully diversified clinical lab. Nebula is in its infancy. We have, you know, we think that's going to grow from a very small base of business into a very large base of business. How much of that is going to kick in when? I don't know. It's no different than we built out the lab business. You know, we started slow and then blew it up big. Well, I expect to do the same thing with Nebula. I think Nebula ultimately could, the value of Nebula alone, I believe could be worth multiples of the entire market cap of our company currently. That is what I believe in my heart. Again, forward-looking statement. It's not a guarantee. But I truly believe Nebula is going to be more valuable than our entire company. Meanwhile, we have an asset-rich company right now. So, you know, and earning a lot of money. So what's your downside? TK Supplements is growing. That's our dietary supplement business, albeit from a small base, just by the mere fact that we are fully distributed now into all of these, you know, 40,000 food, drug, and mass retail stores. Just because we added on distribution, of Walmart and CVS this past year. That business is going to grow going into 2022. And the same thing with our contract manufacturing business, just very, very briefly at the end of 2020, the first year of COVID in 2020, everybody raced out to buy paper towels and toilet paper. They also raced out to buy lozenges. It was incredible. Every lozenge and every story shelf was sold out in the middle of 2020. So come late 2020, all of our contract manufacturers all loaded up on inventory like an enormous amount of inventory and so in 2021 they had to work through all that inventory that we built out for them in 2020 and so 2021 we actually had a dip in sales and contract manufacturing we're now back to normalized levels we burned through all that inventory plus we're adding on new customers so we're going to have some nice growth in contract manufacturing so all four Subsidiaries of our company, operating subsidiaries, all look like we're going to have a great year in 2022. And finally, just to summarize, history of executing on behalf of shareholders. Since the time that the stock bottomed 10 years ago at $0.65, our stock is up 10 times. And I've paid out, and I want to say I, obviously, the company, Profase has paid out $2.10. in special dividends. $0.60 of those dividends were between last June and the $0.30 dividend that we just paid out a couple of weeks ago. There's no reason why the success should not continue. We turned around the Cold East brand when it was in a downward spiral and sold it for $50 million. We pivoted into CLIA lab testing, became one of the top performing labs in the country in the first year of operation. Next up, we're going to diversify the CLIA lab for traditional testing, though I still expect COVID testing to be around for the foreseeable future. And next up, Nebula. Literally, it's in the infancy of what we're going to do with Nebula. We're in the first inning. It has enormous potential over the next several years. And with that, Jamie, I kept it to about 30 minutes, which was my goal. I'd like you to open up to Q&A. I'm very happy to answer all your questions and get into whatever else. anybody else would like to ask. Jamie, I'll hand it over to you to start the Q&A.

Ladies and gentlemen, we will begin the question and answer session. To ask a question, you may press star and then one using a telephone keypad. If you are using a speakerphone, we do ask that you please pick up your handset prior to pressing the keys to ensure the best sound quality. To withdraw your questions, you may press star and two. Once again, to join the queue, that is star and then one. We'll pause momentarily to assemble the roster. And our first question today comes from Yi Chen from HC Wainwright. Please go ahead with your question.