ProPhase Labs, Inc.

Thank you for your patience. The call will start Thank you. Thank you. Good morning, afternoon, evening, and welcome to the ProPhase Labs third quarter 2022 financial results 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. You may ask a question by pressing the star key followed by one. To withdraw your question, please press the star key followed by two. Please note this event is being recorded. I would now like to turn the conference over to Marcus, Chairman and CEO of ProPhase Labs. Please go ahead.

Thanks very much, and thank you everyone for joining me today. I will start with the forward-looking statement. Then I'm not going to read our third quarter press release. You're all capable of doing that yourselves. I will go through some highlights for maybe, I don't know how long, 15 or 20 minutes. And then hopefully, please don't be shy, ask questions. I do these virtual non-deal roadshows every few weeks where I usually present the whole company for 25 minutes. And then we have a very lively 35-minute Q&A. So I hope People on the call will ask some questions so I can get into more details on various topics regarding our company. As always, I have to start with a forward-looking statement. This presentation contains forward-looking statements relating to our strategy and business objectives, all statements. Other than statements of historical facts included in this presentation may be deemed to be forward-looking statements, including statements regarding our strategy plans, objectives, and initiatives, including those related to our plans to expand our in-house clinical testing capabilities, and genomics testing offerings, and our plan to develop Equivir, Equivir-G, and Linebacker. You can identify forward-looking statements by words such as anticipate, believe, could, estimate, expect, intend, may, plan, potential, predict, project, should, will, would, or the negative of those terms and similar expressions that convey uncertainty or future events or outcomes. These forward-looking statements involve known and unknown risks, uncertainty, and other factors that may cause our actual results, performance, or achievements to be materially different from those contemplated, projected, forecasted, estimated, or budgeted, whether expressed or implied by these forward-looking statements, including risks related to consumer demand for our diagnostic and genomic services, the competitive environment, challenges related to entering into new business lines, the failure to obtain and maintain certain regulatory approvals, our ability to collect payments for the diagnostic tests we deliver, including our ability to collect payments from uninsured individuals if emergency funding is not allocated to our side-insured program in the future, and our ability to continue executing our business plan. Additional risks and uncertainties relating to our business can be found under the heading Risk Factors in our annual report on Form 10-K for the year of December 31, 2021, and our subsequent quarterly reports on Form 10-Q, as well as our other filings with the Securities and Exchange Commission. These forward-looking statements are based on current expectations, estimates, forecasts, and projections are not guarantees of future performance or development. The forward-looking statements contained on this conference call and in this presentation are made out of the data hereof. And we do not assume any obligation to update any forward-looking statements accepted as required by applicable law. Readers are questioned not to place undue reliance on any forward-looking statements contained in this presentation or on this conference call. All right. I am sorry that I have to read all that. That's a mouthful. But our attorneys love to give me a mouthful to start off the call. All right. In any event, now that we have the forward-looking statement out of the way, Welcome all. Just a couple of quick highlights and reminders. First of all, we do virtual non-deal roadshows. I do one every two or three or four weeks with Renmark. They've really done a great job with those. Feel free to join. Even as a shareholder, I run through the whole company, but there's always highlights. There's always new developments in our company every quarter. There's always more to talk about in the Q&A. It's always lively. So feel free to contact Renmark in the future if you'd like to join those calls. It really is a great way to communicate to our shareholders. Also, we have great relationships with both Think Equity and H.P. Wainwright. They both follow our stock, and I really appreciate the relationships that we have with both of our investment banks. I worked on Wall Street for a long time, and I know who the best investment banks are to work with for our microcap development space company, and these are two of the best. Okay, having said all that, look, our numbers speak for themselves. We are in a unique situation on Wall Street. Yes, we are in a bear market. In a bear market, that's where, you know, the pretenders show up as pretenders. At the end of the day, we are growing, we're earning capital while developing three subsidiaries at least two of which have multi-billion dollar potential. And I don't know another micro-cap company that can make that claim, you know, a micro-cap development stage company that's growing, that has earning, you know, that is earning money, real money, you know, growing their cash flow and working capital while at the same time develop assets which have such tremendous potential. Um, so with that, I always have to find a balance between how much I'm going to go over things that most of you should already know. Um, but you know, basically we're set up with five subsidiaries and I'm not gonna spend too much time on them. Our two historic businesses, manufacturing dietary supplement businesses are growing. Uh, they're doing just fine. Kim Bauer is doing a fantastic job in managing our plants in Lebanon, Pennsylvania. Those businesses, those two businesses combined. are growing this year and generating positive earnings. I could probably sell those two businesses. I don't know if I had to guess combined, I could probably sell them for $25 million. It's just sort of another hidden asset of the company. The reason why we don't do that is because all of our other subsidiaries are going to leverage the distribution and the shipping and the logistics that these two subsidiaries provide to us. So as I talk a little bit about the other three subsidiaries very briefly, you'll see the synergies. So first, prophase diagnostics, obviously that's generating the bulk of revenues and earnings at the moment. And the bulk of that testing is COVID testing. Everybody's been betting that COVID's going away and our testing's gonna go away for the last year and a half. And it's interesting, last summer, when the incidence of COVID dropped, We lost money, I think on a cashflow base, we might've been close to break even, you know, but we reported a loss last year. And whereas this year, you know, with the same level of incidence of COVID roughly, or maybe even less, we reported a significant growth in revenues and in earnings. I'm going to talk a little bit about the difference between our reported income and our adjusted EBITDA. I think it is critically important if you want to properly assess our company from a financial performance point of view to focus on our adjusted EBITDA. There are expenses that make up that difference. Most of those are depreciation. For example, we acquired Nebula Genomics. The value of Nebula Genomics, I believe, is growing dramatically, and I'll talk more about that in a moment. But at the same time, we're depreciating it because when we acquired Nebula, it was mostly goodwill. So you have examples like that, and then we have other examples where we issued stock options. Some stock options were to an executive that's actually not even with us anymore, or two executives that are not with us anymore. We are expensing and or expense those stock options, and they leave. We cancel the stock options, but we don't get to reverse the expense. So there are other issues like that, and that's why the adjusted EBITDA number is so important to me and what it should be to investors, because that's what demonstrates the real earnings power of our company and the real execution of our and your management team. So those are a couple of examples. We also, as we build out our lab and as we expand it, as we buy more equipment, we are depreciating um, that equipment. And so we have a lot of these, um, and, uh, anyway, that, that explains a little bit about the adjusted EBITDA versus the income. Um, again, we are earning money even during the seasonally and the, you know, the second and third quarter seasonally have been the weakest quarters in our company, uh, coincidentally for 25 years back when we had the Colby's brand, uh, you know, as a seasonal business. And then you get into the cold season, all of a sudden people are buying a lot more coldies. Well, guess what? In the cold season, that's also when people get cold symptoms and they get flu symptoms. And that's just about to hit us now. And people are not going to know whether, you know, yes, well, you have all of these mandates have been relaxed with wearing a mask. And nobody's really worried about COVID the way they were a year ago. But by the same token, a year ago at this time, people weren't that worried about COVID, and all of a sudden we got slammed with Omicron and the hospital filled up again. I am not suggesting that's going to happen again this year, but by the same token, when you get a cold or flu and when you get those first symptoms, the first thing you think is, do I have COVID? And so what do you do? What's the best way to deal with those symptoms? Go find out if you have COVID and get a PCR test. And we very conveniently provide both antigen tests and COVID tests, and if you walk out on the streets of New York, there's a very high probability when you walk up to one of those tents to get tested, it's coming to our lab. We are so efficient now that if you get to that tent, I can't remember what the cutoff is, but if you get to the tent by midday, you have your results by the end of the afternoon or early evening at the latest. All right, so our specimen collection partners love us. Our turnaround times are fantastic. Um, we also can afford to pay them more because we operate at such an efficient level. Um, I give a lot of credit to our management team at ProPhase Diagnostics, uh, both Jason Karkas and Alice Leway, uh, who just do a great job of managing the customers and managing the lab. Um, we are super efficient. Um, and it means that, you know, it's very difficult for other labs to compete with us, quite frankly. So even during the slowest part of the year, um, we were, Still very successful in the second and third quarters in generating significant year-over-year revenue growth and significant earnings and, you know, in particular, significant adjusted EBITDA. So that's just a little bit on the numbers. We can get more into it. More importantly, the numbers are great, but I'm not in this business just to generate some profits from diagnostic testing. I am in this business and I'm committed to our company because I truly want to build a multi-billion dollar company. And the way we're going to do that is by building out our three subsidiaries that have so much potential and so much going for them. And the beauty is we get to generate these earnings to support the management team, support our efforts, give us flexibility while building out these other subsidiaries. The other thing is we have such a great platform that we didn't have before. you know, we had a, we had a platform years ago, public company with no money. And then we had a little money and then we had a little capital and we had a little business and then we built it into a bigger business with more capital. We're now at a point where we have this great platform. Um, we have over 50 million of networking capital. A lot of that is in cash. Um, and we're earning money and, uh, we have a tightly held stock and not a lot of shares outstanding. And so you have all of these other, companies that have great potential, exciting assets, exciting science, but they don't have capital and their stock prices are struggling if they're public, some are private and they really have nowhere to turn right now. And they're turning to us looking to do deals with us. So there's a lot of opportunities, um, to very inexpensively acquire assets, um, and build out our businesses. That's what we did with Prophase Biopharma. We licensed, First, we licensed Equivir and Equivir G, broad-based antivirals, one as an over-the-counter dietary supplement, the other as a prescription. As the over-the-counter dietary supplement, we're looking to do some quick studies over the next few months and potentially introduce this to the marketplace early next year. Again, leveraging our food, drug, and mass retail, you know, store distribution. Okay, and then we were able to license Linebacker, which has enormous potential. And I've gone over this before. I can do it in the Q&A. But everyone should know by now, linebacker inhibits PIM. PIM is a growth factor in cancer. If you inhibit the growth of the cancer, when you have cancer, if you can inhibit the growth of that cancer while you're treating the cancer, whatever drug you're taking to treat that cancer has a better chance of working. It's that logically simple. We've gotten great preclinical results to date. Harvard and Dana-Farber Cancer Institute know our compounds well, and they're really excited to continue work on them. And so we just entered an agreement the other day. So really excited about the developments there. My point is, I believe that there could be some more opportunities within both prophase biopharma that we can pursue, particularly in this bear market. And then we get to Nebula. There's so much to talk about Nebula. Maybe we'll do that in the Q&A. I just returned from Abu Dhabi. Of course, you all saw the announcement with G42. G42 is a multibillion-dollar company that just formed a $10 billion tech fund. And everyone at G42, particularly G42 Healthcare, is very interested in working with us. G42 Healthcare, they are a leader, a global leader, in whole genome sequencing, particularly in the UAE. They're tasked with testing We're testing a million people in the UAE residents. That's their goal. They've done about 200,000 so far. So because they are doing such a high level of whole genome sequencing, they are able to get the best pricing on consumables, which means that they can more efficiently or at lower cost to them process these specimens. We are now, in effect, partnering with them and piggybacking on that pricing, and so we are going to have excellent pricing for whole genome sequencing. At the same time, I don't really want to go into it for competitive reasons, but we have relationships with all of the global, with basically the three global players in whole genome sequencing, and our goal and my hope and my true belief is that we will be the low-cost provider of whole genome sequencing in the entire United States of America going into next year. And I believe that this is a business that is going to explode because it is at the heart of precision medicine. And again, what's that all about? All the universities, they're all looking into understanding why two people get a certain form of cancer, the same two people with the same cancer, They take a drug. They take the same drug. On one person, it works great. On the other person, it doesn't work well. And the question is why? And it comes down to genetics. And how do you study someone's genetics? The best way to do it is with whole genome sequencing, which studies the entire genome. It's that simple. This business, this industry, it literally is the future of medicine. It's where all the research is going. And we expect to be at the heart of it. both in our collaborations with a global leader in whole genome sequencing, and we believe we have the best platform in the United States, particularly with our library, which you can subscribe to. So we are, right now we're selling online, growing significantly. I believe our sales at Nebula Genomics, even though it's off a small base, are growing, I want to say approximately 35%. However, if we get into retail stores, and we're doing a test right now with one of the largest retailers in the country, you know, one of the largest drug retailers in the country. And there's another one right behind it. And I believe the test is going well, the test goes well, and we go into these stores, our growth at nebula genomics could go from, you know, 35%, it could go into easily the triple digits, like a hockey stick, our sales could explode. Then in addition to that, We haven't even tapped the university research business yet. We are doing business with one university, and also globally. We actually, I believe we just signed a deal with another company globally, but we're not even touching the surface here, and we expect to be one of the global leaders in low-cost whole genome sequencing. And our next goal is also to build a lab in Garden City to do whole genome sequencing. So we're looking, I mean, just on selling whole genome sequencing direct to consumers online, we believe that business is going to grow significantly just by dropping the price further, which we're in the process of doing. We're also spending a lot of money on marketing to get our website to have the best website with the best conversion and the best ads. And we hired a great firm and we're in the process of working on all that right now. But then, as I mentioned, we get into the retail stores. If we do that, I'm talking realistically, we could be looking at triple digit growth year over year at Nebula. And then just think about the science. Think about how well we will be positioned. You know, this is like, I love to liken this to Silicon Valley with a startup tech company. There's no revenues or earnings. And before you know it, it has a billion dollar market valuation. So just imagine our company with a proprietary library that you sign up for that you pay a subscription to that has, you know, like 99% gross profit margins. We can sell our whole genome sequencing at cost, which we can do both direct to consumer online as well as in retail stores. How can anybody compete with us? First of all, I don't believe that another company can even match our pricing at their cost, and then if they want to make a profit, they would have to mark it up. We don't have to mark it up because we have the library to sell a subscription to. So I don't see how anybody can compete with us in an industry that's going to explode. Most consumers don't even know what whole genome sequencing is, but I promise you they will a year from now. So this business is going to explode. We're at the heart of it. We have the capital. We have the infrastructure. We have the relationships. We have George Church of Harvard. He's been a world-renowned leader in genomics for the last 20 years. We just added Russ Altman from Stanford University. These guys just don't go on any advisory board. We have this tremendous collaboration with G42, one of the leaders in the world. And then we have great relationships with the two largest companies in the world that manufacture the equipment and manufacture the consumables. And they want us to be their leading company in the United States for representing them. And so the deals that are being offered to us are really exciting. So there's just an enormous amount going on with Nebula. It literally is in its infancy. But you get to invest in our company. We're earning money while we're developing these businesses. So we have a lot going on at Prophase Biopharma. We have a lot going on at Nebula. And then I already touched upon it, our lab. And so to be clear, our diagnostic business, I think we're going to completely transform our diagnostic business over the next six months. And we're going to be going in so many different directions between a fully diversified clinical lab, genetic testing, but also not just genetic diagnostic tests, but also specifically the whole genome sequencing business. And then the potential collaborations we have with some of these global leaders could be enormous. As I mentioned, I just spent a week in Abu Dhabi with senior management at G42. And I can just tell you there's enormous potential there. So that's a little bit of a recap on our company and all the things that I'm excited about. I'm just going to very quickly, I also just want to point out trailing 12 months, it's not in the reported numbers, but our trailing 12 month revenues are over $140 million. Our adjusted EBITDA for the trailing 12 months is over $50 million. I mean, these are just huge numbers while we're developing these businesses, I think that both prophase biopharma as well as prophase precision medicine that has a nebula genomics, these are potential unicorns. There's always the possibility down the road that we could IPO them. And by the way, I should also mention Abu Dhabi and Dubai, hottest stock markets in the world. So here we're developing a collaboration with one of the leaders in whole genome sequencing. They happen to be based in Abu Dhabi. It happens to be the hottest stock market in the world. Just imagine the opportunities and strategic initiatives that our little prophase labs company could be working on. And just imagine the potential for our company while having this tremendous space of assets. As I mentioned, the manufacturing dietary supplement business has a value to it. Our networking capital is over. 50 million dollars you can place whatever value you want to on propane biopharma which probably has virtually no value in our stock price at current our diagnostic business you can you can say all you want to about covet going away people still want to know whether they have flu a cold or covet and they're still getting tested in the month of august and september we still did a lot of business we made a lot of money all right so just imagine i don't know what's going to happen in the month of december last year Things were quiet. They slowly ramped up in October, November, but it's really December where things exploded. I have no idea whether things are going to explode this year or not. They absolutely may not. But even if COVID remains at its lowest levels and people are uninterested, we're still, you know, in August, we're still generating lots of revenues and earnings as reported in our third quarter. And so, you know, there's certainly the potential for some nice upside there. But rest assured, we're earning lots of money. We're going to have positive earnings in the fourth quarter and for the foreseeable future. And then we're expanding with diversified. So that gives you some nice background about our businesses. I'll just mention again with Nebula, there are startup companies that pale in comparison to Nebula that are raising capital at $50 and $100 million valuations. And they don't have our business model. They don't have our relationships. They don't have They're like startups. There's just no comparison there. Just to give you some perspective there. And again, the last part of this also, the biotech and life science companies, while the major market averages have been at a bear market for all of this year, the biotech and life science company has been a bear market for two years. Bear markets, as much as it feels like they can go on forever, they never last forever, knock on wood. And the biotech industry uh, indexes, which I actually mentioned mid summer, I felt were bottoming. And, and I thought one indication of that was that transaction started to happen with the major pharma and larger companies were starting to swoop up to smaller companies that actually did bottom the biotech index back in June. It came back, may have tested those lows, but if you actually look at the biotech indexes, they've actually been outperforming the markets ever since June. Uh, and even now it looks like they're putting in the bottom. There's a ton of cash on the sidelines. I don't know when the bottom takes place, but we've outperformed. I actually looked as far as laboratory stocks are concerned. We outperformed every laboratory company in the United States in the last 12 months from a stock price perspective. But more importantly, at some point, the biotech index looks like it's bottoming. We're taking advantage of or we're going to be taking advantage of some tremendous opportunities where we can continue to add on and build our subsidiaries while we're earning money. And so I think we're really well positioned to fulfill my dream over the next couple of years. And that's to be managing and building and running a multi-billion dollar company. And I believe that we have the pieces, and I believe that there are opportunities out there that will continue to add. So with that, I could go on for another 30 minutes. But rather than do that, I want to get to questions. In a moment, I'm just going to look at my notes for a quick sec. I think I covered most of what I wanted to cover. The rest I'll cover in the Q&A. I hope there's a lively Q&A. I would love to hear if there are questions. Please start lining up for your questions. And, Jordan, I'm going to hand it back over to you.

Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question comes from Fred McDonald from Investor. Please go ahead.