ProPhase Labs, Inc.

Ladies and gentlemen, thank you for holding. We will be beginning shortly. Thank you. Good day and welcome to the ProFace Labs second quarter 2023 financial results and corporate update. All participants will be in a listen-only mode. Should you need assistance, please signal a content specialist by pressing star, then 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 touch-tone phone. To withdraw your question, please press star, then two. Please note, this event is being recorded. I would now like to turn the call over to Ted Karkis, CEO and Chairman of ProPhase Labs. Please go ahead, sir.

Thank you very much, and thank you all for joining today for our second quarter conference call. Look, I like to talk a lot, but I also explained an awful lot in our press release this morning. I really don't want to read the press release. I'm going to presume that you've all read it. Having said that before, let me start by reading the forward-looking statement. 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 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 will be SEC filings. 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 to the SEC prior to this call and available on our website. And with that, I always like to give a couple of shout outs at the beginning of the call. First of all, Renmark does a great job on the retail investor side. We do a virtual non-deal roadshow or presentation. We're currently doing them about once a month. So any shareholders on this call that ever want an update about what's going on with the company, I don't provide material non-public information. I have to be very careful about that. But I do give overviews about our company, what we're working on to give you better perspectives. and to understand how I'm thinking. I am an open book. I really am here for the shareholders. I'm the largest shareholder in the company, but I don't just do this for myself. I do this for all the shareholders. I really want to continue to build value in the company. I and our management team have had a history of success in doing so for more than a decade. Really, honestly, our management team has been incredibly successful over the last decade in building value in our company. Even now, you know, with their stock going back a little bit today, we're still up significant multiples over the last few years while paying out a significant amount of stock dividends. So anybody that's been with us, first of all, over the last three or four years, the returns have still been phenomenal. Anybody that's been with us over the last 10 years, the results and returns have been even more phenomenal. Interestingly, we're at a point in time right now where My expectations and what I really believe for the future is going to be significantly greater than anything we've accomplished in the past. We have support from not only Redmark, but also we have a number of analysts that follow us and investment bankers that we're working very closely with. Think Equity did a phenomenal job in raising capital for us a couple of years ago. They also have done a great job in showing us opportunities over the last couple of years, acquisitions, some of which we made. We probably reviewed a couple hundred acquisitions, targets, and we picked the absolute best. We cherry picked. And those are the assets that we're now developing that I'm going to be talking about shortly. A.T. Wainwright also does a great job of following us on the analyst side. And then also Joshua Levine at Third Screen Research and also Diamond Equity Research has done a phenomenal job recently of covering them. So if you want to follow our company, you can also follow the analysts and their updates as we move forward. So that's a little background. I really don't want to read the press release again, but I really want everybody to be on the same page so that you understand if you're going to be an investor in our company, what to expect. As I mentioned in the press release, you know, we turned around and sold the Colby's brand many years ago. From that, we then pivoted into COVID testing. We knew that when we pivoted into COVID testing, It was not going to be a long-term proposition. However, we decided to get into the business in late 2020. We bought a small lab for $2.5 million. It's probably only worth $400,000. That's sort of the running joke. And we built a $200 million business out of that. And we, quite frankly, in the first quarter, we were in the business. In the first quarter of 2021, we outperformed 95% of the labs in the country. The reason I bring that up It's not because of anything having to do with COVID, but it's incredibly similar to what we're working on right now with Nebula Genomics. Nebula Genomics, of course, was founded by George Church and his two PhD students five years ago. George had a vision 20 years ago. He's been a world renowned in genomics for literally the last 20 years. He had a vision that one day every single person in the country would be tested, potentially every baby. when they're born, would be genetically tested to know about genetic predispositions and all the research that's going into your genetic predispositions. And I'm going to get into that a little bit more. But what's eerily similar, and the reason I bring up the COVID testing, because we're no longer a COVID testing company, the reason I bring it up is because we got into the COVID testing business after not knowing anything about the lab business, but we saw an opportunity And yet we outperformed 95% of the labs the first quarter, the very first three months that we were in the business. And over that first year, I don't remember what we generated, but over those first two years, we generated over $200 million in revenues. So what's interesting is we're now in the exact same place with Nebula Genomics. We've just built up this state-of-the-art laboratory. So of course we have a state-of-the-art high complexity molecular laboratory that not only does COVID tests, it does all upper respiratory. We just built out a fantastic clinical lab. And now we have this literally world-class lab for doing genetic testing. And we provide whole genome sequencing at a lower cost than anybody in the country. So just imagine, we're in the same place now with Nebula Genomics that we were with COVID testing two and a half years ago. The difference is everybody thought that COVID was going to last, you know, for six months or a year. It ended up lasting for two years. Now, by the way, there's another round of COVID coming around, but people aren't taking it seriously. They're not testing like they were. And I'm not focusing on the company on it. If we get some COVID testing, great, but that's not the focus of the company. But my point is now we're getting into something where we're literally in the first inning with genetic testing, and we're the leading lab already. Now, instead of getting into a business where we have no experience, we have three years of experience in the lab business. And you've got to understand, when we first started that business, I hired a bunch of people with great resumes that were not great employees, but they helped build the lab initially. And then I worked on weeding out the weaker employees and hiring better employees. We have a team here that I would put up against any lab team in the country. And we just had an, uh, a inspection and I don't know that I'm really allowed to talk much about it, but it went fabulously well. And I can't tell you the compliments we got from our inspectors regarding our lab team. And so now this, what I think is a world-class lab team is focusing on building a world-class genomics lab where we're essentially a leader in the space. So we're a leader in the space of selling whole genome sequencing direct to consumers. And maybe more importantly, and that's really been sort of the focus, We're now also a leader in providing the sequencing to businesses. And so we just built a lab. We're literally just finishing the validations now. We're literally just starting to do testing in our lab. And the types of calls and inquiries we're getting, you know, it's really interesting. My son, Jason, who's the president of ProPhase Diagnostics, he started the lab business with me. And we decided together when we were exploring it back in 2020, and we were traveling the country and looking at opportunities. And, um, we literally were just talking in the last two days and like, oh my God, this is deja vu. The sense that we're getting from the interest levels of companies that want to do business with us is eerily similar to the sense that we got about the COVID business. The difference is. The genomic business, we're in the first thing. This is a business that's going to be a huge growth industry for, you know, years, if not decades to come. All the medical research is going in this direction towards personalized precision medicine. And, again, for those of you who don't know, and most of you probably do at this point if you've been on my other calls, personalized precision medicine. It's all about studying your genetic makeup and how that plays a role in diseases that you're predisposed to, the risks of the disease, The risk, what we call polygenic risk scores, which are the reports that we provide to you when you get tested, tells you about your gene mutations, tells you about diseases you're at high risk of. And then if you know you're at high risk of a dangerous disease, hopefully you'll do things preventative to prevent you from getting that disease. That all starts with knowing your genetic makeup. Maybe more importantly though, if you get a disease, how do you treat it? Turns out drugs work differently on different people, depending on your genetic makeup. The research is literally just starting in this field. And in order to do this research, you need data. That data comes in the form of whole genome sequencing tests. And that's what we do best. So what's interesting is not only do we see opportunities in the United States, we are also seeing opportunities in other countries. We just have to decide how much we want to focus on the other countries versus how much we want to just focus on our business in the United States. So we have a direct-to-consumer business. But what could be really explosive, and the direct-to-consumer business has obviously grown. We're growing over 100% year-over-year, and honestly, we're just getting started in the direct-to-consumer business, and we're growing 100% year-over-year. And as prices come down, that only helps us even more because as prices come down, we're making our money in the consumer business on selling subscriptions to our library where we provide the polygenic risks for it, and we provide updates twice a week on all of the clinical research going on around the world. some of which is related to the disease that you're at risk of, your gene mutation. It's really interesting stuff and our subscribers love it. And the profit margins are very, very high for the subscription. So that's a great business model in and of itself. But the B2B model, the volume that we see, the potential volume that we see is enormous. And so we built out the state-of-the-art lab, but what's interesting, I am spoiled, and we're spoiled by when we were doing COVID testing because the amount of tests you can do on one machine in COVID testing is quite large, whereas with whole genome sequencing, it's significantly less. So for us to get the kinds of volumes to do the kinds of revenues that we want to generate means buying more equipment and building out potentially a larger lab. The only reason we would do that is because the potential demand that we're seeing is awfully significant. So right now for the lab that we have in Garden City, I see that most of that capacity is going to be used up by our current customers and our B2C business that is growing. But if we want to do a substantial B2B business, we're going to want to continue to expand. which is a good thing because we can make an enormous amount of money and we won't have success just in the short term like COVID testing will have success in the long term. So I'm happy to talk more about Nebula Genomics in the Q&A if you want to ask about it. That's a little bit of background. I gave a lot more, I think, in the press release. I also just want to touch, people have asked me in recent quarters about our accounts receivable. So I just want to clarify that so there's no confusion. We're not the least bit concerned about our accounts receivable. So when somebody asks, you know, at year end, we had 37, approximately $37 million of accounts receivable. As of the end of June, we had 38. We'll overrate 38 million in accounts receivable. So everyone's like, oh, my God, what's wrong with your accounts receivable? What you don't understand is if that's 37 million in accounts receivable at year end, we already collected a 19 million of that. So it's not a substantial amount that's left. So, you know, we're, we're talking about from 2022, we're talking about, you know, about $18 million. That's not a $200 million code of roughly $200 million COVID business. We have 18 million left to collect. And so you understand why didn't we collect it? First of all, uh, accounts receivable it's with the highest quality payers. It's with insurance companies. So we're not really worried about collecting. The issue was with collecting the patient data. So understand we did, and I don't know what the exact number is, if we did 2 million COVID tests over two years, that means that's 2 million times we had to collect the specimen and we had to collect patient data. And unlike a patient that goes into a doctor's office that sits for 20 minutes with the receptionist and you get the driver's license and you get the insurance card information, and if everything doesn't check out, you don't even get to see the doctor until everything checks out. We couldn't do that with COVID testing when we were collecting specimens. Our specimen collection partners were basically setting up tents on streets in New York City. That was a big part of our business. And you just had people randomly walking up. You also had from HRSA at the time, HRSA was the government funded and anybody that didn't have insurance, HRSA would just reimburse. That all ended last year. And when that ended, you had people that still wanted to be tested. So sometimes they wouldn't give their correct information. They wouldn't have their insurance information with them. We would still test them. And now we're collecting on all that just takes time. But you have to understand we have to one by one go through every single one of those claims. So even on, you know, roughly $15 million, you know, we're talking about tens of thousands of tests and we have to go through each one individually. So we hired a company who were experts. I mentioned this a couple of months ago. They've made enormous progress. in collections and they had about 25 people in another country working on this going through literally every single claim so i just wanted to say um that our cash receivable is not an issue obviously as we're doing business and we were doing some covered business in the first quarter that created new accounts receivable and replaced the accounts receivable that we collected on last year so not an issue we're making a lot of progress in the accounts receivable and i'm i'm not really worried about it at all we did it right off the end of last year, a small write-off. I think it was $5 or $6 million. It's not a $200 million business. So we're pretty set there. Separately, before I get to questions, obviously I talked a lot without even covering a lot. Formalize. The potential at Formalize, our manufacturing facility, is enormous. What's interesting is when I first sold the Colby's brand, I didn't even care, I don't know, if they wanted to acquire or manufacturing facility, I wouldn't have put up a big fight. That is now becoming an enormously valuable business. I mentioned on a previous call that one or two of the largest lozenge brands in the world want to do business with us. Capacity is tight all over the place, and the most important thing for a lozenge brand when it comes to selling, if you're selling to a Walgreens, Walmart, CVS, and obviously we have a lot of experience there, critically important is that you don't have empty shelf space. When the buyer at Walgreens sits down with you and goes over the plan, they're responsible for every square inch of shelf space in their department. If a shelf is empty, if that space is empty, it's not generating a profit. They look really, really bad. So what happens is with lozenge brands, as with any consumer product, if you don't deliver the product on time, the retailers get really upset and they cut back your shelf space. And so we have major brands who need the reliability and we have the best reputation in the industry when it comes to lozenge manufacturing. And so we have large brands that want to do business with us, uh, that would be very profitable to our, to our manufacturing facility. And so we are now working on building out that capacity. Uh, one thing we're doing is purchasing. We already, ordered another lozenge line that's being manufactured. But in addition to that, there's other pieces of equipment that we can buy to increase our capacity, which we're doing now. And it's a wrapper and it's other types of machinery. And quite frankly, we never really upgraded to new equipment and never really built it out before. It wasn't a big focus of the company before, but now the potential is really enormous. We can go from a roughly you know, break even type of business to a business that literally we put in, um, or press release, you know, that could be earning $10 million. That's just on the new business plus the existing business. We're in the process of raising prices and also making our facility more efficient. So the opportunity at Formulaz is enormous over the next 12 months. And so anybody worried about us building value in the company, first of all, Nebula, to me, that's a layup. And we have this attitude with COVID, if you build it, they will come and they came. Well, if you build it in the genomics business, I can already see they're coming. And what's interesting is a lot of the companies you have, first of all, you have consumer product companies that are selling genetic testing. I'm not only talking about whole genome sequencing. I'm also... talking about the type of testing that ancestry companies provide. And they're only studying a very, very small percentage of your genome compared to all genome sequencing. But even those companies potentially could do testing at our lab. None of them want to be in the lab testing business. And what's interesting, particularly with academic institutions doing research, some of them have small labs. They don't want to invest in an expensive lab and have expensive equipment to do whole genome sequencing. They would rather outsource it. because they're only doing testing on whatever research they're doing. Nobody's doing enough testing individually to support building out the type of lab that we're building. And so that's why the opportunity is there for a company like ours. We now have a phenomenal reputation in the industry in the lab business. As I said, the inspections in New York, New York is one of the most stringent, difficult from a regulatory perspective, based in the entire country. And we are literally one of the top labs in the state of New York from a regulatory point of view. And I'll leave it at that. I won't talk more about the inspection, but it went incredibly well. And I'm really pleased with our lab. And so now we have this great reputation. We now have the best equipment. We're working with literally the leading global leaders in the equipment that is used They manufacture the equipment and they manufacture the consumables that are needed in order for us to process the whole genome sequencing test. And we have relationships with literally every major company in the world. George Church was a part of it. He made a lot of those introductions. A lot of it we inherited when we acquired Nebula Genomics. When we acquired Nebula, I don't know, two and a half years ago, they were already doing business with some of the largest. And we've now developed those relationships further. So I'm really excited about these two subsidiaries getting revenues now. And the revenue growth, I believe, is going to be dramatic over the next 6, 12, 18 months. And the earnings associated with it next year are going to be significant. And so we're using this year to invest, to build out the equipment, to build out the to purchase more manufacturing equipment, purchase more genetic testing equipment, hiring lab techs. I mean, we're hiring very sophisticated lab techs to build this business. And so you got to understand, yes, of course, we're going to lose money for a couple of quarters. We're hiring. We built out the state of the art lab. We have some of the best lab techs in the world now working at our company. And we weren't doing any genetic testing in our lab because it wasn't validated yet. So obviously, there are going to be losses short term. developing that's what it means to be a development stage company. But what's nice about us is the amount of money we're losing tells in comparison to the value of our company, our networking company, the value of the assets we have and the potential for growth. So those are two businesses that I mentioned, um, esophageal cancer. I could spend the whole call just talking about esophageal cancer. I'm not going to, uh, I'm happy to in the Q and a, everything is going really well there. We're working with an independent professional statistics company called StatKing that did a full analysis of all the testing we've done so far. And the idea is not to do more, not to run the clinical study any further than we have to. And how you determine the number of specimens we need in the clinical studies is based on the statistical analysis. So we have an independent company. right now calculating how many specimens we need to process in order to apply for CPT codes and in order for physicians and the various cancer organizations around the country and around the world to accept us for commercialization. And so we believe that with the number of specimens that have been coming in recently and that we're studying now, we should be in really good shape later this year. And so I'm just looking forward to completing current studies which have been done exactly the same as the studies that were done on the first specimens and so we are highly optimistic that we're going to get the same results and then we're going to be able to run with this and again i i think the topical cancer test by itself has multi-billion dollar potential happy to go into the numbers if anybody wants to i don't want to do it in my presentation but in the q a i'm happy to cover what anybody wants to cover so That gives me background. I want to stop. It's 1129. I probably spoke for a little over 20 minutes just to give you a little bit of background and update on our company. I'm happy to move this over to the Q&A. And I'll hand it back over to our conference call company to start the Q&A. And my, actually in my, there we go. My computer just froze. Okay. Okay. Vice Navi, if you want to start the Q&A, I'd appreciate it.

Sure. Sure. Thank you. We will now begin the question and answer session. To ask a question, you may press star, then one 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 two. Our first question comes from Adam Waldo with Lismore Partners. Please go ahead.