ProPhase Labs, Inc.

Welcome to the ProFACE Labs Inc. First Quarter 2023 Financial Results and Corporate Update Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your telephone keypad. 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.

Thank you, Sarah. And thank you, everybody, for joining me today. Before we get started, 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 strategies, 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 approvals, 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 finance. 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 we got the forward-looking statement out of the way, I want to welcome you all and really appreciate you joining me and appreciate your interest in our company, ProPhase Labs. Just a couple of quick shout outs. First of all, we work with a company called Redmark that creates virtual non-deal roadshows. I do these approximately twice per month. If you're interested in hearing updates on our company, our company is constantly evolving. We are a dynamic company. We are growing in so many different areas. We're working on so many exciting things. There's so much going on. And so I like to keep our shareholders up to date. If you're interested in keeping up to date, please contact RunMark, find out, sign up with them, find out when we have another VNDR and feel free. Those are, video calls and I go through slide presentations and so forth. I should also remind everyone that we have presentations on our website. We have two presentations. One is just for our biotech division and the other is our company presentation. That was significantly updated recently. So if you haven't looked at it, you might want to go through our company presentation. It was updated, I think, just in the last couple of weeks. So go to our website. It is really a wealth of information. I also want to just highlight, we are now covered by four companies, Think Equity, A.C. Wainwright, Joshua Levine at Confluence, and Diamond in our most recent Diamond Equity Research. All four of these analysts that are following our company have us estimated to lose money this year while having stock price objectives of roughly 15 to $20 per share. The most recently updated research report from diamond equity has us with a $20 stock price objective. The reason I highlight this is because we are not an earning story this year. Anybody that's focused on us for earnings, you're invested or following the wrong company and let you know, unless I guess you're short and you think that you're gonna make money shortening our stock while we're developing underlying assets, which we believe have multi-billion dollar potential. That's up to you. But the point is we took advantage of an opportunity with COVID, which was a wonderful windfall for the company and for the shareholders. We got to help people while making an awful lot of money. We always knew that was not going to be the future of the company, but we took advantage of a two and a half year bear market or two year bear market in the micro cap biotech stocks. And so while we were making all of this money, we were planning for our future by building out the underlying value of our company with some fantastic acquisitions and developing some fantastic technologies. And so that's what we've been spending the last two and a half years doing not COVID testing, COVID testing generated revenues. I look long-term. I always tell people, I believe it is my destiny to build a multi-billion dollar company. I believe that we have the platform and the infrastructure now to do so. We didn't have that before. And so what the COVID testing did is it gave us that opportunity. The other thing I would point out to you is that when we raised capital with Think Equity two and a half years ago, We did not take that capital for granted. We used that capital to grow a substantial CLIA lab in New York and CLIA lab business with the COVID and the flu and the upper respiratory testing. We also use that capital to build out all these businesses that I'm going to talk about in the coming minutes. And all of these subsidiaries that we're developing now, And at the end of the day, we still have more working capital now than what they raised for us two and a half years ago. And so because we executed Think Equity and A.T. Wainwright and the other investment bankers that we work with, trust us and know that we are here to protect the shareholders and develop the underlying value of our company on behalf of the shareholders. I do not take a single dollar in our company for granted. And so we spent these last years developing these other assets, which now have not only enormous potential, but some of them are starting to generate significant underlying value to our company right now. So this year will not be an earning story. It's nice that we earned a little money in the first quarter, you know, and again, I focus on adjusted EBITDA because we have significant issues with uh our net income versus our adjusted ebitda i'm sure lots of public companies have this because of acquisitions we made between expensing stock options expensing acquisitions that we depreciate over time even while the value of these assets is growing there are you know some issues uh we have issues with nebula genomics in terms of deferred revenue and so there are all these complicated issues so i personally i like to focus on the adjusted ebitda We had a wonderful adjusted EBITDA number in the first quarter. I am not focused this year on earnings. I'm not even focused on adjusted EBITDA. You can bet that our testing, COVID testing and flu testing revenues, obviously that's going to slow as the public health emergency is over. Also, we're going into a seasonally weaker period of time, particularly in the second quarter. We historically have been seasonally weaker in virtually every every business that we're in. So you can expect that the numbers are going to weaken further, but again, we're not focused on earnings this year. We're focused on building the underlying value of our company. I'm sure most of the people on this call know our company relatively well, and I'm not going to read our press release earnings release this morning to you, but just a couple of items to highlight. I've certainly mentioned this on the Renmar calls. I will make sure we're all on the same page. We have a manufacturing facility that is at capacity for which we have enormous demand. We are extremely well thought of in the industry. And from a lozenge brand's point of view, reliability of supply is critically important. The retailers go ballistic. And I know this from turning around and selling the coldies bread. The number one most important factor to the retailers after having a, you know, they want to carry products on their shelves that consumers want to buy, obviously. But then the second most important factor is they want product on the shelves at all times. If there is a shelf that is empty, they lose out on profitability. And that's how these buyers at Walgreens, Walmart, CVS, and so forth, that's what the reviews are based on. It's making sure that they're generating profits on every square inch of shelf space. So when there's a shelf that does not have product on it, the retailers literally freak. And so there are supply chain issues in the lozenge business, which is a rather large business globally. And so we have... Some of the largest brands in the world are coming to us and want us to do their manufacturing. Some of them want us to do all of their manufacturing, not only in the United States but globally. So the potential for a manufacturing facility is extraordinary. I originally kept this business primarily just to keep our infrastructure and distribution in place so that we touch all 40,000 food, drug, and mask stores in the United States. but this is a business that's actually exploding. It's growing almost 100% per year. I've mentioned in the past that I think we have demand for at least $25 million of revenues next year in 2024. And we're just constrained by how quickly we can build out the additional capacity, which is going to take this year to do so. So right now our revenues are running up almost 100% year over year. And realistically, I'd say $25 million for next year. I don't give estimates, but I've already given this number out there, so I may as well continue to do so. $25 million is a reasonable target for next year for a manufacturing facility. It's the least interesting business we're developing, and even that business has enormous value relative to the market cap of our company. And that's going to be an ongoing theme during this call, is the market cap of our company relative to the various assets that we're developing that have nothing to do with earnings this year. All right. Think about what our manufacturing facility could be worth next year. I estimate in the back of my head, there's no guarantee certainly, but I think our manufacturing facility could be worth $70 million next year, whether that's 65 or 75 or, you know, some kind of number like that. And then of course we have 40 million in net working capital and we have tens of millions of dollars equipment. Forget that we even have a COVID testing or an upper respiratory business or any other business. In our lab, just the equipment itself that we've acquired is probably in the tens of millions of dollars. So we could almost get to our market cap without ever even thinking about our nebulous genomics business, our Lyme bagger cancer compound, our esophageal cancer test. So I just wanted to give you, or the full clinical lab business we're building. So let's talk about a few of those things. We have fully diversified our laboratory to have a full clinical lab, and then we've also fully diversified it to have a state-of-the-art genomic testing lab. We are waiting for the validations, which will take another couple of months, and then we will start to build out those businesses in the second half of this year. With our whole genome sequencing business, right now we process our specimens abroad. We cannot aggressively build a B2B business. until we are processing these specimens in-house. So we anticipate building a very nice Nebula Genomics business the second half of this year, particularly in the fourth quarter. In the meantime, our revenues are running up more than 100% year-over-year anyway. So Nebula Genomics understands there are similar businesses that are far behind us. We're probably three to five years ahead of some of these other businesses. And yet they have 50 and a hundred million dollar market caps for these startup genomics businesses. And we believe that we are situated well situated to be the low cost provider of whole genome sequencing in the United States and potentially globally. So our Nebula genomics business, again, right now we're only selling direct to consumers. We're looking to leverage this business in the second half of this year. I don't know when. But several of the major drug retailers are doing tests right now. The tests are going very well. And at some point, I believe that we will get our whole genome sequencing test on store shelves like Walgreens and CVS and so forth. And then we have this fantastic B2B business. I'm not going to explain, again, what personalized precision medicine is, but it is the future of medicine. It's the future of research. And at the heart of it is a whole genome sequencing test. And we expect to be the low cost provider of whole genome sequencing in this country. I believe that that business is going to grow rapidly. So we're already growing 100% year over year. Just imagine the hockey stick acceleration of that growth when our B2B business starts. And of course, that's in addition to retail stores. I'm happy in the Q&A if you have specific questions about Nebula Genomics. It is a very valuable business. And I'm looking forward to building it further. Again, we have world renowned experts, George Church and Russ Altman from Stanford University. George Church, of course, is world renowned in genomics. They're on our advisory board. We talk to them regularly. We just had a call with them a couple of days ago. And they are really involved in helping us build this business, introducing us to global players in the genomics field. There's just enormous potential. This is where the internet was 20, 25 years ago. We are so well situated. And so then everyone knows I'm very excited about our esophageal cancer test. In fact, it's really kind of mind blowing that we have the market cap we do, and we have a cancer test that literally could be commercialized early next year that has the potential of our esophageal cancer test. So I just, you know, it's interesting. I just happened to notice just the other day, There was a company called BioMia. Actually, I'm going to give you a different example first. Exact Sciences has a $12 billion market cap. They have a product called Cologuard, which is a test for colon cancer. We have a test for esophageal cancer. We believe that we are going to have CPT codes and be able to commercialize our tests early next year. So just to put that in perspective, if our test our esophageal cancer test, if we're 10% as successful as exact scientists, as exact science is, the value of our company would be almost 10 times what it is today. I just want to put it in that perspective for you. And when you look at our test versus theirs, and it's really apples and oranges because they're a, they're a colon cancer test and it's a test that consumers can take at home. Our test, has higher sensitivity and higher specificity. In the 200 specimens that we tested, our test was accurate on all 200 to tell you whether or not you were going to get esophageal cancer. It's really a remarkable test. We're just looking to do more studies similar to the ones that we've already done, and then we're looking to commercialize this next year. I don't know what the ramp-up looks like, but the potential for our esophageal cancer test is enormous and put it in the perspective of an exact science, it's really scary. And so again, that's why I go back to, it's silly to focus on revenues and earnings. I say that, I did a trip out into the Midwest a few weeks ago and I met with several institutional investors and they were focused on revenues and earnings. And if you're going to focus on that, again, you're invested in the wrong company. We're building enormous value What you should take away from the last two and a half years is that we have yet again executed on behalf of the shareholders. I've been investing in small cap development stage companies for 40 years. The one thing I have learned is that 95% of the time, the managements don't execute on behalf of shareholders. This is all we've done. This is all I've done my entire life. And this is what we're doing right now. And now, We have potential multibillion-dollar assets to develop and execute on. Before, they were smaller projects, turning around and selling the Colby's brand. We sold it for $50 million. That was a huge win for us, huge. But it doesn't have the potential of the types of activities that we're working on now. And then we can talk about Linebacker. And I'm not going to go into too much detail, and then I'll open it up for Q&A. And, again, you can go to our Redmark presentations if you want to hear the full presentation on each of our subsidiaries. But at Linebacker, we're continuing to get really exciting results. It's one thing when you acquire technologies and you do your due diligence. It's another thing when you're actually doing the studies yourself. And what I can tell you is that unanimously, every single scientist, medical doctor, professional in the biotech industry that we are working with on our esophageal cancer test and on our linebacker cancer compound are truly excited about what they're working on. Dr. Chris Hartley at Mayo Clinic is so excited. We talked to him on almost a daily basis. He's so excited about our esophageal cancer test. And, you know, Mayo Clinic is not just based in New York or, I'm sorry, in the United States. They're actually... But they also have offices in other places around the world, including in Abu Dhabi. And as you all know, we are developing ties into Abu Dhabi and I'll have more to talk about that in the future. So there's just so much. And if you think about it, what we're developing with esophageal cancer, with nebulogenomics and with linebacker, these are all initiatives that should be developed around the world. if we're going to save lives in the United States, why wouldn't we also save lives around the world? And so with our esophageal cancer in particular, it turns out there are other parts of the world, such as in the MENA region, where the incidence of GERD and Barrett's esophagus are actually higher than in the United States. So there's just tremendous potential. And so on the linebacker, as I was saying, we're getting fantastic results. We, recently announced very positive results in some initial studies and analysis that we did with Eurofins. And I'm looking forward to updating our shareholders further in the coming weeks with regard to the studies that we're doing at Dana-Farber Cancer Institute and the Harvard University site. So there's a lot to talk about there. And so while I gave the example of exact sciences, and how that potentially relates to our esophageal cancer test. By the same token, I just happened to notice this the other day. There's a company called Biomea Fusion, BMEA. The stock in the last year went from $3 to $30 on some positive phase two results. And in fact, in one day, the market value increased by over $500 million. Over that year, Their market cap went from a hundred million to over a billion dollars. I put that in perspective with us developing Linebacker because it's interesting. You always want to argue that the market is efficient, but was the market efficient if the stock was $3 a year ago, now it's $30. It had a hundred million market cap, now has a billion dollar market cap 10 times in one year. And we are developing assets with the same type of potential. So I, Don't really want to focus on stock price, but I do want to let our shareholders know we're developing assets that have the potential to dwarf the market cap of our company. And that's why my suggestion is focus less on revenues and earnings. This is a transition year. I use the word transition in our press release today. Focus on the underlying value of the assets that we're building because that underlying value, I believe, is enormous relative to our market cap. And I believe that long-term investors will be well rewarded if you continue to follow our stock. And so that just gives you a little bit perspective on how I'm thinking. I could obviously talk for another half an hour, another hour. I'm not going to. I'm sure there are going to be some questions in our Q&A. And again, I just want to thank you all for joining me today. And I hope that there are some good questions out there and we can get more into details on some of these various subsidiaries. So with that, Sarah, I would like to hand it over to you for questions.

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