ProPhase Labs, Inc.

Good morning and welcome to the ProPhase Labs second quarter 2022 financial results and corporate update. 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 a 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 Ted Karkas, CEO and Chairman of the Board of ProPhase Labs. Please go ahead.

Thanks so much. Thank you all for joining me today. Before we start, unfortunately, I have to read the forward-looking statement. I'll read it quickly. I think you all know what it is. Before we begin Today's call, I want to advise everyone that today's conference call will contain forward-looking statements, including statements relating to our plans, expectations, future performance, and future events, including statements regarding projected financial results for the third quarter of 2022, our expectations regarding the COVID-19 pandemic, future waves of the pandemic and continued demand for diagnostic testing, HRSA funding, that's HRSA funding, our plans to grow our diagnostic business and expand our lab services, our plans to grow our genomics businesses, our plans to develop Linebacker and Equivir, and our expectations regarding the sufficiency of our cash and working capital. 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 materially 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 SEC. The company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, except to the extent required by applicable law. Finally, a conference call is being webcast. The webcast link is available in the investor relations section of ProfaseLabs.com. Thank you, Wendy Grosso, our amazing securities attorney, for putting together my forward-looking statement. All right. Now that I have that away, welcome all. I really appreciate you joining. I really appreciate your support and interest in our company. It's always hard for me to gauge whether there are some new investors on the call and to what extent I should address them as opposed to our longer term investors and analysts and so forth. A couple of quick things just to point out for those that aren't aware. Um, first of all, I have these two great investment banks that we work with think equity and AT Wainwright. They both, uh, cover our company, uh, from an analyst point of view. Uh, but in addition to that, um, they're fantastic companies to work with. I have 40 years of experience working on wall street, working investment banking firms. And so I made sure, uh, I had a, I had a choice of a hundred. That might be an exaggeration, but a choice of dozens. of investment banks to work with. It's critically important when you're a development stage company to have the right relationships with the right investment bankers, and we certainly have those. I should also mention, and that's more on the institutional side, but I should also mention on the retail side, we work with Renmark, which is actually a Canadian company, but they do a fantastic job. They set up virtual non-deal roadshows for us. I've been doing those. roughly every week, two weeks, three weeks. You can contact Redmark if you're ever interested. I do presentations that review the latest. It's basically an overview of the company as well as, you know, any information that's public. I'm always doing a review and a recap. Some of our long-term shareholders love those calls, even though it is primarily the purpose of it is for new investors. I should also point out that on our website, we actually have two slide presentations now. One is for the overview of the company as a whole for prophase labs and its five subsidiaries, and then we have a separate approximate 30-page slide presentation just on prophase biopharma. I promise you, we would not have put all that work into that slide presentation and gone through all of this if I didn't think that it had significant potential. I will get to that momentarily. I do want to keep this call short. The second quarter earnings release does speak for itself. We are one of the few development stage companies out there that actually earns money. All right. And we earn it every year, you know, every quarter and our, and our numbers continue to grow year over year and our working capital grows quarter to quarter and we pay dividends and we make acquisitions. Please somebody on this call, Find me one company out of the 10,000 NASDAQ companies in the universe, you know, they're not all microcap, but find me any microcap company that can claim to have done all the things that we continue to accomplish. Because I can't find one that can grow, that can make smart new acquisitions so that we have a future while at the same time earning money in the present. It's a rare combination. I don't take all the credit for it. We have a team that's really fantastic. And, you know, let me get into a couple of things. I don't have a lot of prepared remarks. I do these presentations every few weeks or even more often with Renmark. And the numbers do speak for themselves. And I do want to get to the Q&A early. I don't want to have a long call just to listen to me talk. So a couple of things I do want to point out. First of all, prophase diagnostics. We got slammed with a curveball in the second quarter. Uh, when we found out at the end of the first quarter that HRSA, HRSA, uh, funding, they had run out of funding. This is the government funding that was paying for people without insurance to get tested. We kept hoping that it was going to come back. It didn't. Um, I give actually Jason Karkas, uh, not a coincidence. We have the same last name. He is my son. Um, he took the reins and pivoted our business. so that we could be more insurance-oriented. We were probably, this is a rough estimate, around 70% uninsured going into the second quarter. And he pivoted and worked very closely with our chief information officer, Sergio Morales, who does an absolute phenomenal job with our IT. And they developed together a better IT platform that could actually pick up insurance on the spot. And so we, in any event, we pivoted very quickly and understand, you know, a lot of our business comes from concierge services and from tents on the street. You know, these are people walking up to a tent. So for us to have a sophisticated IT platform at a tent that is being removed on a daily basis, I promise it's no easy feat. And so we actually brought a lot of sophistication, you know, to a business, to a tent that isn't in and of itself particularly sophisticated. So I give them an enormous amount of credit because basically 70% of our business went away overnight and it did so during our seasonally weaker quarter. And yet we still have these phenomenal results. So I give the two of them an enormous amount of credit. And so Jason has been promoted to president. It's well-deserved. He's responsible for building the revenue base of the company to just an extraordinary amount of revenues. So he has a very bright future at the company. He's doing a phenomenal job. And Sergio has built an absolute beautiful state-of-the-art IT platform. So we are in great shape. I would then also like to highlight that Alice Leoy was also promoted to, in addition to being COO of Prophase Diagnostics, she's also COO of our newly formed division, wholly owned subsidiary, Prophase Biopharma. She was instrumental, really integrally involved, led the charge in the compounds that we licensed and in developing the relationships with the teams that invented these compounds and that we licensed these compounds from. She's really taken the lead on all of this. It's really exciting. We think that Prophase Biopharma has enormous upside potential. And I'll get into that a little more, but I just wanted to highlight some of the people behind the scenes that really did a fantastic job for us. I should also mention that we hired Bill White. I believe we hired him during the second quarter. So it is the second quarter highlight. He is our new CFO. He's really integrated himself well into the company. He works incredibly well with Monica Brady, who continues as both chief accounting officer of the parent company as well as CFO of ProPhase Diagnostics. They're really working well together. We're building the team further. We've hired an additional controller. We have another controller coming on board. We're really building up the finance department, so I've never felt better. And Bill is gonna work with Monica in taking our company You know, Monica helped take our company from a $10 million company to a $100 million company to a $200 million company. Now we want to take it to a billion or multi-billion dollar company. And I believe Bill can help get us there. So that's just touching the surface on our team. We really have a fantastic team here. And at the end of the day, what I want to go back to, and this is going to be a little bit of a rant, at the end of the day, and I know I've told this story before, but in micro-cap companies, the most important thing is investing in the management team. It's what I learned 30 and 40 years ago. It's what Warren Buffett has said for 40 years. But the truth of the matter is so difficult because what happens is you get excited about the product or the service, not the management team. And every management team is optimistic about the product. And so it's critically important from an investor point of view to pay attention to, do you have a management team that executes? But it's often hard because with startup companies, you often have startup management teams. So this is just another situation where Um, if you're invested in a company, you're investing in a management team that has, uh, you know, proven track record of success year after year, after year, after year. Um, and look, we don't always know what the future is going to bring. We don't, we didn't know that all of a sudden HRSA wasn't going to be funded and we, you know, 70% of our business was going to disappear. All right. But we responded and other labs didn't. And so we, we run circles around other labs. We have more sophisticated. Technology, IT, we have more sophisticated equipment. We're much more efficient in processing. We don't lose, knock on wood, I don't think we've ever lost a customer. Our customer base continues to grow. And COVID isn't going anywhere. Next, I would just mention, we go through waves of COVID. Going back a year ago, everybody thought we would have COVID for a period of time. It would go away. And that we'd be a one trick wonder. Well, guess what? COVID is not going anywhere. It continues to mutate. I said three months ago, watch out for BA4, BA5. It's now accelerating in this country. And this is during what I consider to be our off season for COVID testing. And yet we're still earning an enormous amount of money. And by the way, we're earning money in the third quarter too. And again, last year at this time, you know, I think we lost money in the second and third quarter. Certainly on an earnings basis, on an adjusted EBITDA basis, between the two quarters, we were probably about break even. So it just gives you an idea of the execution of the company. And let's now, I just want to briefly, look, the quarter speaks for itself. I'll highlight maybe just a couple of things in the quarter in terms of the numbers. Just so you should be aware, first of all, between the fourth quarter of last year, fourth quarter last year, and first quarter this year, we did over 90 million in revenues. When you now include the first quarter, you know, almost 30 million revenues, we're talking about about $120 million in revenues just in the last three quarters. Earnings, fourth quarter, 10.6 million in earnings. First quarter, 12.5 million in earnings. And now, you know, This quarter, and I apologize, net income of another $7.4 million in earnings. And then a number I really like to focus on is adjusted EBITDA because adjusted EBITDA takes out all of the non-cash charges. A lot of these are expenses that later get reversed. But regardless, our EBITDA over the last three quarters is $43 million. It's almost $3 a share in EBITDA. It's undeniable. Um, so anyway, that's the execution of our company. Um, I'm looking for this, uh, in the fourth quarter of this year, we'll be testing not only for COVID, but also, uh, for flu and upper respiratory. We are looking, I know we always get questions about monkeypox. It's complicated. Uh, we are looking to validate for monkeypox, but you have to put this in perspective, you know, um, the number of people that are actually going to be tested for monkeypox pales in comparison to the number of people that are being tested for COVID. And especially once we get into flu season and people don't know if they have flu or COVID, guess what? They're going to rush to get COVID tested. And that's regardless of which variant happens to be, you know, around at that time. So that's a little bit about prophase diagnostics. Again, we are diversifying our prophase diagnostic business. We're going to get into full clinical. We're going to be a well-diversified diagnostic testing company in the future. In parallel, we are planning on the build-out of a genomics lab as well. So then we'll really be a fully diversified diagnostic company that's doing, you know, high-complexity molecular lab testing for upper respiratory, doing, you know, your full blood urinary toxicologies and so forth, and then also a full array of diagnostic genomics testing. So that's on the lab side. Let's talk about Nebula genomics just for a moment. I just want to put this into a little bit of perspective. Nebula is growing off of a small base, but it is growing. It takes time for us to negotiate major deals for lower-priced whole genome sequencing. We do believe we are the low-cost offeror of whole genome sequencing in the country. I'm not going to explain what whole genome sequencing is, but if anybody's confused, you can ask in the Q&A. But again, not only are we offering it at the lowest price, I believe that only a couple percent of the country even knows what whole genome sequencing is. We believe that there is a massive opportunity to educate consumers about whole genome sequencing, where you're getting whole genome sequence, not for ancestry information, but for health related information. And there's always a growing interest in our country for people who are interested in their health and becoming healthier. And it all starts with learning about your personal genetic makeup, which in turn can help you lead you into leading a healthier lifestyle based on diseases that you may be predisposed to. And then if you happen to get a disease in the future, analyzing your genetic makeup to help physicians determine what is the best course of treatment for your disease. That's basically what whole genome sequencing is all about. The first step in that is getting whole genome sequenced. We do provide whole genome sequencing direct to consumers online. We are working at a feverish pace. to offer whole genome sequencing in retail stores. All the major retailers are interested. We're fine-tuning that. It is not a short-term proposition, but that's all going extremely well. And so we have a business here in Nebula, which, and understand, whole genome sequencing is in the first inning, similar to where the Internet was 20 years ago. And we are so well positioned, we have one of the leading authorities in the world over the last 20 years in genomics and George Church, a PhD at Harvard University. And he's a founder and a shareholder of our company. He's on our advisory board. I'm telling you, we are so well positioned. And I only point this out relative to the fact that there's several other companies now in the same space. One raised $18 million. at, we believe, around a $50 million valuation. Another company, and it's not yet public yet, they've raised some money, but they're raising more. And it looks like they're going to be raising approximately $20 million at closer to $100 million valuation. And I believe that our company is significantly more developed than either of those companies. And yet, Nebulant Genomics is valued at so very little in regard to our market cap. So I just want to give you that perspective that Nebula has enormous potential. If this was a Silicon Valley startup where venture capital was just investing in a private round, I'm probably sure the valuations would be significantly greater than what anybody is valuing Nebula in our market cap. So that's a little bit on Nebula. And then I want to talk about ProPhase Biopharma. There was a lot of confusion in the last month when we announced the developments here. I cannot tell you how excited I am about prophase biopharma, uh, Alice Leeway, uh, and our legal team, uh, did an enormous amount of due diligence. Uh, we work with these companies with global research and development group. We've been working with them for two years. Um, and so this isn't something where I just quick came up with an idea overnight to announce, you know, a deal and this particular deal to license linebacker one and two. This was six months in the making. And what I can tell you is the major university did significant preclinical research on these compounds and came back with great results. We just had a conference call with them the other day. They went extremely well. They want to continue to work with us. They're really excited. And so we're just working out the details on that now. Linebacker in a nutshell. And so first of all, I just want to put this in perspective. This is something where we paid virtually nothing up front. I think we paid $50,000 in licensing fees. I paid more in legal fees than I did in licensing fees. These are compounds that I believe we can get through the animal studies and the first human clinical study within about 12 to 18 months at a cost under $5 million. We earn more than that in our seasonally weaker second quarter. So how, how anybody could come away with a conclusion that this is somehow going to impact the value of our company, or that all of a sudden out of the blue, after knowing me for 12 years of running our company, that all of a sudden I'm going to burn through our capital. It's just a ridiculous conclusion. Um, and so I've said publicly now, uh, we're going to, our budget is under $5 million. We have over $50 million in networking capital today. And that's after acquiring and developing Nebula. It's after licensing and building Prophase Biopharma. It's after building a state-of-the-art laboratory facility with I don't know how many millions of dollars of equipment and so on and so on and so on. And then, of course, all the dividends that we paid out. So I really believe that myself and our management team have executed in all facets, everything that you could ask of a management team, I believe that we have delivered and then some. And I'm simply pointing out the best is yet to come for long-term shareholders. You know, I'm sure it's going to be bumpy when you're a development stage company, but understand we're developing products and assets and subsidiaries with absolutely enormous potential. The last thing I want to mention is we've been at a bear market for a year and a half. Nobody realized we were in a bear market until the beginning of the year. But microcap and biotech and life science companies have been in a bear market since January or February of 2021, almost a year and a half. And so I've been pointing out to everybody who has been so bearish the last few months, I've been pointing out that because we've been in a bear market for a year and a half, the life science companies don't be so sure that they're going to continue to drop. And if you've noticed, actually, in the last one to two months, biotech and life science companies have actually led the charge on the upside that's no accident all right uh you know bear markets the stock market um you know discounts the future it doesn't you know discount the past it discounts the future and so it's interesting just in the last week there have been a number of deals in the biotech and life science space and i'd like to just bring your attention to a couple of them As I mentioned, there are at least two genomics companies, startup genomics companies with valuations, one around $50 million, one around $100 million that are raising capital. There have been two deals announced, at least two. One, Gilead is buying Microbio for $405 million. All of their assets are either preclinical or I believe they have one asset going and just starting to go into phase one. And they're being acquired for $405 million. And so that's why I tell you we have a potential major breakthrough in cancer research with the compounds that we are developing. And I believe that we could be at the same stage of development in 12 to 18 months from now. And then, of course, Amgen paying $3.7 billion for chemocentrics. There were major deals starting to happen, and the market's starting to wake up, and that's why you see biotech and life science companies are starting to wake up. So it's just an interesting trend. We're in the right place at the right time. And in the meantime, we have a diagnostic business where we're literally just killing it. So with that, I'd really like if people want to ask questions, I'd love to have a lively Q&A if the shareholders want. When we do the Renmark presentations, that is almost all new investors, so they always have a lot of questions. Hopefully we get some questions today, and I'm happy to talk more about any subject. I'm an open book. I am a hands-on CEO. I'm involved in every aspect of our company, so feel free to ask away. And so back to MJ. If you want to open it up to the Q&A, I would appreciate that.

Thanks so much, Ted. At this time, we'll begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. Our first question today comes from Yi Chen of HC Wainwright. Please go ahead.