ProPhase Labs, Inc.

Hello and welcome to the ProPhase Labs financial results for the year-ended December 31st, 2022 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 telephone keypad. To withdraw from the question queue, please press star, then two. Please note this event is being recorded. I would now like to turn the conference over to Chairman of the Board and CEO of ProPhase Labs, Ted Karkas. Please go ahead.

Thank you, MJ, and thank you all for joining me today. Before we get started, I have to read the forward-looking statement. Fortunately, our attorneys gave me a shorter version today. Thank God. I would like to remind you of the company's Safe Harbor language. During this presentation, we will make forward-looking statements, including statements regarding our strategy, plans, objectives, and initiatives, and the underlying assumptions. While we believe that these forward-looking statements are reasonable as and when made, forward-looking statements are based on expectations that involve risks and uncertainties that could cause actual results to differ materially. These risks and uncertainties include but are not limited to our ability to obtain and maintain necessary regulatory approval, general economic conditions, consumer demand for our products and services, challenges relating to entering into and growing new business lines, the competitive environment, and the risk factors listed from time to time in our filings with the SEC filing. This call will present non-GAAP financial measures such as adjusted EBITDA, reconciliation of these non-GAAP measures to the most comparable GAAP measures are included in the earnings release furnished to the SEC prior to this call and available on our website. All right, now that I got that out of the way, again, I want to thank everybody for joining me today. I don't want to reread the press release, and quite frankly, the press release is pretty self-explanatory. If you don't get what's going on from the press release, then you're wasting your time, and I don't know why you're on this call. First and foremost, And by the way, first of all, a couple of things just to mention. One, we have two fantastic investment bankers, investment banking firms that we work with. That's critically important. When you're a small cap development-based company, it is critically important to have good relationships with investment banking firms and particularly high-quality investment banking firms. And in our case, with small cap development-based companies, you want investment banking firms that focus on small cap development stage companies like ours. Small cap, I don't think of our company as small cap. In fact, I think our company is going to be larger than small cap soon. But in any event, I'm talking about Think Equity and A.T. Wainwright. They both cover our stock. They both do a great job, and I appreciate both firms. In addition to that, we work with Renmark Financial primarily for retail investors. If you've never seen a Renmark virtual non-deal roadshow call, I do these probably every two or three weeks. If you want to get updated, feel free to reach out to Renmark and sign up for the next one. Um, also on our website, we have two company presentations. One is on the whole company. One is just on the biopharma division. The main company presentation probably updated every couple of weeks. You can go there to learn more information. And so with that, um, The tone of this call is simple. I'm going to try and keep it brief and then go into a Q&A. Hopefully there are questions in the Q&A so I can go into more detail. First and foremost, and I said this in the press release, if you're investing in our company or you're investing in any small cap development-based company, you have to be investing in management. I learned that when I was on Wall Street 30 and 40 years ago. If your management doesn't execute, I don't care what your product or service is, It's probably going to turn out to be a bad investment. And so the one thing I can tell you is you can look at my track record, the track record of your management team, our company, over the past 10 years, and honestly, we've killed it. All right? We had a 65-cent stock 10 years ago since that time. We paid out $2.40 in special dividends, and our stock is up, you know, however many multiples, you know, from when it was 65 cents. and i'd say the majority of our shareholders in our company have probably been with me 10 years or longer and they've been well rewarded for their patience and i thank you for your patience having said that not just over the last 10 years but even over the last two years our our performance has been phenomenal so we turned around and sold the cold east brand for 50 million dollars and then i didn't squander a penny of that money i did everything i do is towards building value in the company long term. And I pay attention on a per share basis. And that's why we do stock. I think about terminal value on a per share basis. What's the value of our company divided by the number of shares outstanding? What's the value of our company going to be years from now, divided by the number of shares outstanding years from now. That's how I think that's from my Wall Street background. Every CEO of every company should think that way. Anybody that doesn't like stock buybacks and stock dividends should have their head examined. So in any event, I'm the largest shareholder in the company. Everything I do, I am therefore aligned with our shareholders. Everything I do is for the shareholders. And believe me, I put our shareholders above myself and before myself. So having said that, look, when we sold the Cold East brand, we did the stock buybacks, we paid the dividends, and we waited for the right opportunity to come along. And it came along with COVID. We quickly pivoted, built at a fantastic lab. And the last two years results speak for themselves. You know, frankly, they're pretty phenomenal. Tell me another company that raised, you know, and we raised $37.5 million in January, two years ago. And now we have over 40 million in networking capital. And that's after spending tens of millions of dollars in stock buybacks, tens of millions of dollars, you know, between stock buybacks, dividends, and acquiring several companies that we're now going to build out that hopefully my goal is it turns us into a multi-billion dollar company. That's the goal. So we pivoted, demonstrated that we executed, obviously, you know, look at the numbers. I'll just tell you very briefly, our revenues for 2022, 122.6 million of revenues. That's an all-time record in the 30-plus year history of the company, 18.5 million net income, all-time record, 38.6 million adjusted EBITDA, Well-time record. And we still have 44.6 million net working capital as of year end. And that's after all the acquisitions that are going to transform our company. So we were primarily a COVID testing company, you know, COVID and flu upper respiratory company for two years. We are now a well-diversified company. It has been transformed moving forward as COVID slows. And I know that's why the stock pulled back and blah, blah, blah. But I've explained this ad nauseum. over the last couple of months for anybody that watched the Redmark VNDR, we're now transforming our company where the underlying value from the other assets in our company are growing rapidly. And the growth in value of these other assets is going to more than make up for the decline in value of our COVID testing business. And the truth of the matter is we never got a multiple on our COVID testing business anyway. So quite frankly, it's apples and oranges. It almost doesn't matter. And so you have to look into some of the pieces and there's a lot of value in the piece of our company. I'll mention very briefly our manufacturing facility, and you can go back to our last roughly six press releases. I've given updates on most of our subsidiaries. Our manufacturing is growing like wildfire. The lozenge business is a growth industry right now, combined with the fact that our largest competitor was acquired by private equity a couple of years ago, and they really screwed up the business They're unreliable and several of the largest lozenge brands in the world are all coming to us. They all want us to be their primary manufacturer of their lozenges. They're willing to sign long-term contracts. They want us to build out the equipment and build out our capacity. Some of them are even willing to invest in the equipment necessary to build our capacity. That's how much they are impressed by how we do business. They're impressed with our customer service or impressed with our reliability. And frankly, it's almost like they're desperate. We have one company from another country, household name. I don't even want to mention the brand. All right. One of the biggest brands in this country, they're actually based in another country. They, they not only want us to do the manufacturing for them in this country, they potentially want us to do their lozenge manufacturing globally. So our lozenge manufacturing business is going to explode. I'm not guessing about that. Of course, there are no guarantees, but it's basically as fast as we can build the capacity, that business is going to grow. So just imagine a year from now, we're doing, you know, and I put this in a press release. I believe we are targeted to do about 25 million in revenues in 2024 in our manufacturing. So with the type of growth, think about what that business could be worth. I don't know. It could be worth 60, 75 million dollars. Just that alone, this one business that nobody pays attention to, plus our networking capital, could be worth the whole market cap of our company. How ridiculous is that? Okay, now we get into Nebula Genomics. There are startup companies with $50 and $100 million valuations that are probably three years behind us. They don't have the relationships that we have. They don't have the infrastructure that we have. They don't have the business or the business model. They're story stocks. And yet they have $50 and $100 million valuations. I'm not going to tell you what Nebula is worth, but Nebula is actually potentially growing even faster than our manufacturing facility. We are, our goal is to be the low cost provider in the country for whole genome sequencing. I am not going to explain what whole genome sequencing is, but I can tell you it is at the heart of the future of something called personalized precision medicine. Whole genome sequencing studies your whole genome. as opposed to competing companies whose products only study a very small percentage of your genome, which is great for ancestry information. It's awful for health-related information if you want high-level health information. And the whole country is going towards trying to be more healthy. And all of the research is all about starting with a whole genome sequencing test and figuring out how Your genetic makeup plays a role in your health. And so this is all in the first inning. This is like where the internet was 20 years ago. And we are so perfectly positioned. We have world-renowned George Church, who's a founder, who's on our advisory board, who's a shareholder in our company. We have Russ Altman, equally well-known out of Stanford University. They're on our advisory board. We're working with them regularly and building our company. They're introducing us to some of the largest companies in the world. I said before, we are working not only in this country, but we are in Abu Dhabi and in the UAE and working with some of the largest, our little company is working with some of the largest companies in the world on our nebula genomics initiatives. A lot more to come, enormous potential. And then our esophageal cancer test. I can't tell you how excited I am. We're going to help so many people save so many lives. and make our shareholders an enormous amount of money. That's the goal. And all I can tell you is since we took over, the number of scientists and people that I've got involved in with this have only further increased my enthusiasm and confidence in our ability to develop our esophageal cancer test. If people want to in the Q&A, I can go into more detail explaining it. The bottom line is we have ongoing studies. There's a real possibility. that we will commercialize this test towards the end of this year in this country as a research use only test for cash pay. Our goal ultimately is to get the insurance companies behind us and backing us with a CPT code. With that CPT code, we believe we would be reimbursed $1,000 to $2,000 per test, and our initial target is 2 million people who have Barrett's esophagus who get endoscopies once per year. Two million tests times $1,000 or $2,000 is a $2 to $4 billion market in this country. And we believe we could get the CPT codes as early as the beginning of next year. We're working with key opinion leaders, major cancer institutions who are all getting more and more involved in this. And this is going to, I believe, look more and more like a reality as the year goes on. And look at our market cap just Just how much of that is reflected in our market cap right now, given the potential and giving how real this is and giving the timeframe for commercialization. And then finally, we're working on, you know, linebacker, a cancer compound. We're not going to break the bank and spend a lot of money on it. It has enormous potential, but that's longer term. But our goal really is just to license that to major pharma. Sometime next year after we complete a phase one study, you know, sometime maybe late next year. Um, so we won't spend a lot of money on it, but, but it's possible we could do a licensing deal after the phase one study that's worth the entire market cap of our company. You know, right now that's something low risk to us because we're not going to spend a lot of money, enormous reward, and it's sort of icing on the cake to everything else we're working on. And then of course we have an Equivir blood based antiviral that we will be potentially introducing to the marketplace and commercializing later this year. Initially we would sell it online. Then ultimately the goal is to get into the retail stores. We are experts in selling antivirals OTC similar to what we did, you know, with coldies. And I personally was involved in the turnaround and sale of the coldies brand. And we still have some of the same, we still have the same senior salesman, Joe Brennan, who's been in this business for decades. He kills it. He has relationships with the number one national broker that we work with and with every major retailer. And so there's so much going on there, both with our current dietary supplements with Legends XL and Triple Edge, which is actually gaining momentum as we speak. And then once he has Equivir to introduce to the marketplace, and then in addition to that, Nebula Genomics, we can introduce a test, a whole genome sequencing test that we're working on introducing to stores. And that could build into a whole range of health tests. We could actually be the leaders in providing health tests in retail stores. So there's so much in so many directions. There's a lot of overlap. There are a lot of synergies between our various subsidiaries. And so I'm really excited about the future of the company. Anybody that's focused on us as a COVID testing company, you're completely missing the boat. That's going to be the least important part of our company down the road. And certainly in terms of the value, all right? COVID testing obviously has the revenues, but we never got a multiple of those revenues anyway. So now we have other businesses, esophageal cancer tests can have zero revenue this year. And yet by the end of this year, who knows what the value of that test could be. And then the kicker is we're working globally. We have global initiatives that we are working on to commercialize, to develop, and then commercialize our esophageal cancer tests in other parts of the world. Just think about it. Everybody that gets esophageal cancer in this country, guess what? They get in every other country too. It all starts with GERD, gastroesophageal reflex disease, that acid in your stomach that so many people get. A huge percentage of the population of every country gets GERD. And then sometimes it develops into Barrett's esophagus. And one out of 50 or one out of 100 people that get Barrett's esophagus, it turns into cancer. And right now, In fact, we just met with one of the scientists last night. He's a surgeon and he operates on people all the time with esophageal cancer. And he was telling me how excited he is for a test and how desperate the industry is for a test like this. And it's just sad right now when you get diagnosed with esophageal cancer. There's about a 73% to 80%. I've seen various numbers. I'm sorry, 79%, I've seen 80%. I've seen as high as 90% of people diagnosed with esophageal cancer die of esophageal cancer. That's because they're diagnosed too late. Our test lets you know well in advance so you have a chance to do an ablation procedure to kill the precancerous cells before they become cancerous and it's too late. We believe it's going to save a lot of lives. So with all these things going on with the company, I'm really excited about the future of the company. I want to cover a few, a couple of housekeeping items related to the numbers for those of you that are focused on the numbers. So Q4, reporting our Q4 was complicated because we had a $5.9 million accounts receivable write-off. The write-off was related to testing we did in the first half of the year. HRSA, which is the government funded entity that was actually paying for all the patients being tested that did not have insurance. And understand, people walking out on the streets of New York, most of them didn't have insurance with them. Whatever the case may be, the bottom line is, if we couldn't collect the insurance from insurance companies, we couldn't collect the insurance information. HRSA was paid. All of a sudden, that funding stopped. They gave us one week's notice, and then there was the promise that HRSA was going to be funded again. We continued the test. This went on for many months. And so there was the real possibility that we were going to collect on these patients. And then in addition to that, when HRSA finally became clear it wasn't going to be funded, we looked into potentially tracking down the information on these patients to see if they had insurance, even if we didn't collect it initially. The complicated matter, we're talking about tens of thousands of tests, and ultimately we have a new senior finance team. We hired three fantastic senior level executives and our finance team they all have you know decades of you know 10 years more of experience um probably any one of the three could be our cfo right now robert morris heads our department uh but heather and greg are equally fantastic so we have a very strong finance team and they recommended to be conservative and to be prudent that we take the 5.9 million dollar write-off what makes it complicated is that we're writing this off at year end and even though it's it's related through testing activity in the first half of the year when, you know, frankly, if we did 5.9 million less revenues the first half of the year, it wouldn't have even, it would have been negligible. It wouldn't have even been noticed because our revenues were so ridiculously large. But unfortunately, because it's at year end, if we report fourth quarter net income number, we would have to report it with a $5.9 million write-off, which frankly, I think would have been misleading. So rather than we doing that, we gave you the full year numbers, Just so you know, our numbers, you know, we still did 21.8 million of revenues. Not counting, of course, you got to count the 5.9 million, but I just want to give you a fair picture on what our fourth quarter looked like. Not counting the 5.9 million, we would have reported 1.8 million of net income. And furthermore, we had performance payments related to our testing activities throughout the year which actually probably should have been expense throughout the year as that hit the fourth quarter so because all that hit the quarter you know we would have had we had the 1.8 million in that income if that had been expense throughout the year our net income would have been you know significantly over two million dollars of net income but we do have we we did account for those performance payments um in the fourth quarter and so and then of course we have the 5.9 million dollar write-off which i've now explained Two other things to mention very quickly. Why is our SG&A so high? Actually, it's because of that $5.9 million. That's the jump in SG&A. And finally, our COUNTS receivable. While our COUNTS receivable looks like it hasn't changed, understand it's because we're still doing ongoing testing. First of all, part of the COUNTS receivable is trade receivables related to nebula genomics and farm-allowed manufacturing. But of course the bulk is from testing, but understand that as we get paid by insurance companies, we have new tests that creates new accounts receivable. And as I noted, there was a backlog because we had all of these patients that we tested. This is not like working, walking into a doctor's office where you stop at the front desk, you fill out all these forms, give your insurance card. It takes 15 minutes. It's all in the system. These are people, a lot of our testing were people walking up to a tent and getting a quick COVID test, you know, taking a quick specimen without the sophisticated equipment and without taking the time to properly collect the patient insurance information. So it's interesting now, we've now found we're working with a couple of different companies, one in particular in another country was like 50 people working on this, working through all of our accounts. We're talking about literally tens of thousands. of tests and patients and they're working through every single one of them and they're doing a fantastic job and i can tell you uh in fact my head of billy just walked into the office just before this call and she said she had great news for me and basically we're working through that accounts receivable very quickly we're always going to have some accounts receivable while we're doing testing because at the end of the day we have to organize the information get it to the insurance companies and the insurance companies take you know four six even eight weeks sometimes to pay it's it's high quality accounts receivable but nonetheless it still takes that 48 weeks. So it's always going to be rolling where we always have new accounts receivable replacing old accounts receivable. Having said that, I believe that our accounts receivable is going to be less when we report first quarter. Second quarter is going to be significantly less. So anybody who's concerned about accounts receivable, that was a long-winded way of saying don't be concerned about it at all. It's coming down to reasonable levels. In addition to that, we may be able to find insurance on patients that previously did not provide insurance that is not in our accounts receivable. It is not in our revenues. And so we may actually get some nice bonuses down the year from that. So not only do we have a squeaky clean financials with our new finance department team of experts, but in addition to that, we may actually have some upside in the coming quarters. And so I addressed a few quick questions. I've now, you know, I've now been speaking for about 25 minutes. I covered an awful lot. I just want to review before I open that up to a Q&A if I want to mention anything else. I think I've pretty much covered it. Look, at the end of the day, I personally have executed my entire career. The shareholders that know me for a long time know that. The people that I hire are people that execute. And I tell them that, and you know what, for every three senior level people that I hire, one works out, but the one that works out first of all, I go through an incredible screening process. So the three are all great. But having said that, you never know until you hire somebody. And so we've gone through a transformation in terms of our management team over the last couple of years, where it just gets better and better and better. We have a kick ass management team. Literally, not just our finance department, all the people in it. It starts with my son, Jason Karkas, our head of IT is amazing. Sergio Marais, Alice Lui, who does so much, not only in the lab, but also on the biopharma side. These are the most loyal people in the world that I've worked with for the last couple of years. Sam Beeler has been an unbelievable addition to our team. He's leading the way in Abu Dhabi. He has a multi-year relationship. with some very big players in Abu Dhabi and around the world and helping us become a global company. I don't want to leave anybody out. Those are some of the senior people. We hired a great guy, Jed Lapkin, who may become a senior executive right now. He's a senior advisor to our company, but he's working virtually full-time with us. He has decades of experience as an entrepreneur and as the CEO of other small cap development-based companies. I'm sure I'm leaving somebody out. I apologize if I am. But I'm really, really excited about the team that we have. And I'm really excited about the assets that we're now developing. It is my destiny to build a multi-billion dollar company. And I believe that we now have the assets to develop that can make that a reality. And again, I just want to highlight everything that I tell you, I believe in my heart, number one. And number two, if I tell you we're working on something, we're really working on it. If I tell you we're working on global initiatives, our little company is really working on global initiatives. So please stay tuned. I think that there's a lot more to come. And with that, MJ, I would like to open it up to questions. I hope that there are some questions lining up. I'll hand it back over to you.

Perfect. Thank you very much. We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw from the question queue, please press star, then two. And at this time, we will pause momentarily to assemble our roster. Today's first question comes from Yi Chen with HC Wainwright. Please go ahead.