ProPhase Labs, Inc.

Good day and welcome to ProPhase Labs Incorporated third quarter 2023 financial results and corporate update. All participants will be in listening mode. If you need assistance, please signal conference specialists by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. Please note that this event is being recorded. I'd like to turn the conference over to Mr. Ted Harkis, CEO. Please go ahead.

Thank you, Nick, and thank you, everybody, for joining. I'm actually really excited to have this call today because we are at an inflection point in the company. In fact, we're going through an inflection point in our company over the last couple of quarters and over the next couple of quarters. But I am tickled pink with how well things are going in our development state subsidiaries. With that said, I want to start with the forward-looking statement. 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 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 filings. This call will present non-GAAP financial measures such as adjusted EBITDA, reconciliation of these non-GAAP Measures to the most comparable gap measures are included in the earnings release furnished to the SEC prior to this call and available on our website. All right. A couple of, I always like to start with a couple of shout outs. Number one, Think Equity done a phenomenal job working with our investment bankers over the last three years. Not only did they do a large raise for us, but they were instrumental in finding us some great assets that we acquired over the last three years. And some of those assets are the assets that are going to, uh, bear very significant fruit. I believe on behalf of our company going forward, we also have, um, excellent coverage by HC Wainwright, uh, by Joshua Levine, uh, third stream research, and of course, love diamond equity research, Hunter Diamond, uh, shout out to Hunter. Um, so thank you all so much. And finally, uh, Renmark, I do virtual non-deal road shows, presentations, Right now, about once a month. We actually have one coming up next Thursday the 16th. I like to keep our shareholders up to date on what's going on. So I like to do a VR, you know, it's a virtual presentation. We go through the company presentation, which is on our website. I update that presentation regularly. I believe we just updated it very, very recently. So feel free to go to our website if you want to get into more details about our company. Okay. So with that said, I don't like to prepare a lot of remarks for these calls. And everybody knows I love to talk, but I love to get into the Q&A. So I'm going to give everybody sort of stream of consciousness just off the top of my head, because I live and breathe our company every day. And I live and breathe everything that we're doing. And I just like to explain to everyone what we're doing, because I think that you will feel very good at the end of this call. If I speak that way, as opposed to reading two pages, you know, that I, so in any event, where do I start? Why don't I start with our accounts receivable, actually, because people ask questions about that every quarter. I'm sure I'm going to get some questions this quarter about it. People are going to ask about our finances. We're in a bear market for micro cap development stage companies. We came out of it for a little while. late last year and at some point this year with interest rates just really took off. It really just killed the ability to raise capital and that kills micro cap development space companies that are burning cash that need more cash. And I believe in the biotech industry, the valuations relative to liquidating value relative to cash on hand, the valuations have never been lower. So it's an incredibly difficult time for micro-cap development stage companies. So, and then people ask, well, what about our accounts receivable? Because then they worry, do we have the capital that we need to develop the assets? And I make it very clear in our press releases, I'm the largest shareholder in our company. I care about our shareholders more than anything. I even tell the employees that I'm very loyal to our employees. We have a great set of employees that have really evolved over the last year. But number one, shareholders come first. I don't dilute shareholders. If I don't absolutely have to, I never have. I'm not aware of ever diluting shareholders with any of the raises that we've ever done, and I have no current intentions, nor are there any prospects of having to dilute shareholders now or anytime soon, which also means for those that are still short out there, have no idea how you're going to cover because it's not because I'm we're going to do a raise at some point because there's absolutely nothing planned to do a raise for our parent company, ProPhase Labs. Specifically, as far as the accounts receivable is concerned, our accounts receivable, as I've explained in the past, is based on a combination of collecting on those receivables, but also operating a business that generates new accounts receivable. So at year end, for example, we had about $37 million at year end 2022, we had about 37 million in accounts receivable. We, in the first half of the year, I believe we collected on a little less than half of that amount. But we had new accounts receivable because we were still doing COVID testing business in the first half of the year. That's what we're collecting on now. Given that we're no longer, it's no longer a public health emergency and a significant percentage of our accounts receivable is from COVID testing, The insurance companies are now paying more slowly than they used to, but they are paying, but they're dragging it out and there's nothing that we can do about it. So we do have dollars coming in from accounts receivable. In fact, from, and I'd also point out that from the second quarter to the third quarter, our accounts receivable dropped from 39 million to 33.4 million. So they dropped more than $5 million while we were still doing business and understand we're also doing business now. uh with nebula genomics for which we have accounts receivable in fact we have some significant accounts receivable at nebula genomics um and and also with formalize so um the accounts receivable we are collecting and then it just becomes a question of tying in the accounts receivable with the dollars flowing in to the dollars flowing out and developing our company to build our nebula genomics lab required uh acquiring a lot of uh state-of-the-art equipment hiring a lot of people, building a lot of infrastructure. And we believe that's going to pay off in a huge way in the current year. And I'm going to get into next year, and I'm going to get into that in a moment. But I just want to give you sort of the big picture. And honestly, this is the one frustration I have is that the accounts receivable comes in slowly. I'll be honest with you, it puts pressure on me as the CEO. But we have plenty of avenues. So we're watching the accounts receivable flow in on a weekly basis. And if we need more capital, and I don't know that we do, we have access to a mortgage at Farm Alive. We own a substantial building. We own 12 acres across from a Walmart. It's valuable land and property. We have the significant accounts receivable that we could set up a credit line against. So to the extent that we need to raise additional capital, we can do so without doing an equity raise and without doing anything that would harm our shareholders. All right, so I just want to put that to rest because that seems to be a major concern at virtually every development stage company at the current time. All right, having said that, let's talk about some really positive things. And what I'm also going to say is the punchline to all this is I'm going to talk about farm allowance and I'm going to talk about, that's our allowance manufacturing facility, I'm going to talk about Nebula Genomics, both of these subsidiaries. are growing dramatically in value as we speak. And I believe that sometime early next year, it is possible that we could create liquidity events for some of these subsidiaries. And there's a number of different possibilities for what we could do, but it would represent values that collectively, I believe, would be significantly greater than the entire market cap of the company. So I only mention this now because my point is, why would we raise capital for ProPhase Labs, the public company, and dilute shareholders when we have underlying assets that are so valuable that we potentially could raise capital for without diluting our shareholders? And because I am shareholder friendly, this is the way I say, my background is on Wall Street. So rest assured, I believe, you know, if you're worried about the stock price, I believe that the future is very bright from the capital markets point of view. Let's get into the businesses a little bit, and then I'll go to the Q&A. Happy to start. You know, Pharmalize, we did a press release not that long ago. I reviewed everything. I don't want to go too much into it today. Read our last press release on Pharmalize and, of course, our press release today. The bottom line is, We're in a sweet spot in an industry where we've owned a state of the art manufacturing facility for 30 years. And it just so happens we're at a point in time where capacity has around the country and around, I believe globally has diminished significantly and demand has virtually never been greater. And so we have large, some of the largest lozenges brands in the world want to give us as much business as we can handle. I believe theoretically that if we had the capacity right now, we could be doing $100 million of revenues right now and earning pre-tax $20 to $25 million on that business. Now, we're not doing $100 million of revenues right now. We're operating at like $8 to $10 million. We have equipment coming in short term this month that's going to increase our capacity to $15 million in the month of December. So going into the first quarter, our revenues are going to be up dramatically because we already have demand for that $15 million of business. And we also instituted price increases. So on our base business, our margins are going to improve significantly. And on our new business, our margins are even better. So all of a sudden, formalized, is going to start generating nice profits that will contribute to the bottom line and then taking it one step further in the second quarter we have a new lozenge line and all the ancillary automated equipment that should take us to 30 or even 35 million dollars of capacity run rate by the end of the second quarter which means starting in the third quarter our goal is to be generating at least 30 million of revenues and generating pre-tax profits of at least six to seven or even $8 million of pre-tax profits. Those are serious numbers. So think about the swing in our earnings and in our cashflow and in our EBITDA just in the next quarter or two, just from formulas and understand when I talk about 30 to 35 million of capacity, We already have the demand for that as well right now. And that's without the two big lozenge brands that want to give us other business. So it gives you an idea of the dynamics of formulas and what's going on there. And I have been told, don't quote me on this, but the private equity will pay 10 to 15 times pre-tax. So you can start to see what the numbers could look like and feel like very quickly in the coming quarters. And, again, if you read the press releases, and we're doing this, we already have the plans for it. We have two more license lines already ordered that are coming in late next year that are going to take us up to, and depending on which press release and which presentation and, you know, the numbers, it's not an exact science. You know, we're talking $60 to $80 million of revenues. But understand, that's based on a three-and-a-half-day work week. Now, you have to have downtime. for maintenance and things like that. But you don't need three and a half days of downtime. It's a matter of making sure we have enough employees. And it's one of the reasons why we're bringing a lot more automated equipment. But in addition to that, we have to find a supply of employees to build it out. So we don't know, sitting here today, what the numbers are going to be. But there's a potential that our capacity could be $80 to $100 million by the end of next year. And could you imagine if we were generating 20, $25 million of pre-tax and multiply 10 to 15 times that, I mean, we're talking about a facility that could be worth $300 million. Now I don't want to get carried away. I'm not suggesting it's going to be worth that. I'm not saying that's even our objective, but the point is with that kind of potential and a market cap of our company that, you know, the trades around 70 to $80 million, um, we have a manufacturing facility. That could be worth significantly more than the whole market cap over company next year by itself. And again, my background is in investment banking on wall street. And so I'd be silly not to pursue all avenues in that regard. So I can talk more in the Q and a, but it just gives you a little bit of background and I'm not suggesting we're actually doing a raise on one of our subsidiaries or that we're, we're doing anything at present. I'm just explaining. that we do have options available to us so that our shareholders are rest assured that I'm not going to do what so many other microcap development stage companies do, and that's blindside you with an equity raise. It's simply not happening at ProPhase Labs, the parent company. All right. And, you know, I can't guarantee, you know, at some point in the future, something will change, but I can tell you for the foreseeable future, don't have the slightest interest in such an activity. Okay, nebula genomics. Now, formalized, to me, I don't want to insult anybody. To me, it's sort of a boring ho-hum business. One of our senior employees here who's working on this says, no, Ted, this is very exciting. And, yes, it is very exciting from a numbers point of view. It's not exciting from the point of view, it's not like biotech, all right? It's not like development stage cancer tests and cancer therapeutics and things of that nature. But Formulaz, obviously, it's exciting from a numbers point of view. The demand is there. It's just how quickly we can execute on building the capacity. And the one thing I can tell you, look at my history. For 40 years, I've done nothing but execute. And executing for Formulaz, to me, is a no-brainer. Probably one of the easiest things I've ever had to do. And I'm not hands-on personally, but it's the easiest thing as a company that I've ever seen. It's not a guarantee it's going to happen, but I can't see why we're not going to execute on a significant, truly in a significant way. Now, nebula genomics, what's interesting about that, completely different set of dynamics, and yet the future potential is even greater than formalized. So, what's interesting about nebula genomics is that whole genome sequencing, this was truly division of George Church 20 years ago, and it's just coming together now. And what's interesting is whole genome sequence testing didn't explode in a big way previously for no reason other than price. And now the price is coming down. Medical doctors, physicians, academic researchers, medical research is all starting to look much more seriously at whole genome sequencing. And that's not to say that the academicians and the researchers weren't already doing whole genome sequence research, but I'm talking about levels of research where this business is now literally exploding before our eyes because of price. And you got to understand, there was one company that had a monopoly on whole genome sequencing For a very long period of time, they kept their pricing very high. And because they kept their pricing so high, it demotivated consumers and demotivated medical researchers from doing more research. Now, a new company, not a new company, but new to this country, just settled litigation at the beginning of the year where they can bring in equipment into this country. We are the first laboratory in the country to have their high throughput, extremely efficient equipment for whole genome sequencing, where we can provide pricing at a lower price than any laboratory in the country. It is such an incredible statement. I can't believe our microcap company is making this statement, and yet it's an accurate statement. And so it was interesting, when we were just selling direct to consumer online, I didn't really feel the business taking off the way it should. It was growing very nicely, don't get me wrong, but from a small base. And so if we say it's growing 50% or 100% from a small base, like big deal, it's not meaningful to the numbers. And we had to advertise to generate that business. But now we have a business that doesn't require any advertising, no cost advertising. It's just getting the word out. that we're the low-cost provider of whole genome sequencing in the country. And the business is coming to us. We were just at a genomics conference, and the responses were tremendous. And I have a team here that is doing a phenomenal job now of building that business. So, yes, he is my son. He doesn't just have the same last name. Jason Karkas built the COVID testing business. which was doing $100 million a year revenues, he's now building our genomics business along with Jed Lapkin, who is becoming a senior employee of our company. And I believe that they're going to kill it the same way they did with the COVID testing. And so what's interesting about this, Jason and I had the approach three years ago with the COVID testing business where we took the approach of Kevin Costner and Field of Dreams. If you build it, they will come. And we built an enormous COVID testing lab, and then we did an enormous amount of business. The issue with that business was that COVID testing, you know, lasted two years. Originally, everybody thought it was going to be one year. It ended up being two years. Now, at this point, the only people getting COVID tested are they're going into a hospital and they get tested in the hospital. So we're actually not even in the COVID testing business. But now it's interesting, Jason and I had the same reaction, which is if you build it, they will come with the genomic, with the whole genome sequencing testing in our lab. And sure enough, we built a state of the art lab in garden city, New York, and they are starting to come. And the difference between the COVID business and the genomics business is the COVID testing business wasn't going to last long term. And it didn't. The genomics business is, and that's it's we're in its infancy. for what's going to happen to this business. It's going to explode going forward. And we are right now perfectly situated as the leaders in whole genome sequencing. And word is spreading quickly. We have major opportunities who did an enormous amount of research. These are companies that scoured the country looking for labs to do whole genome sequencing. And they said to us, there wasn't anybody that even came close to our pricing and our pricing still has healthy profit margins for us. And what's nice about the B2B business, it's repeatable business month after month, year after year. You can rely on it. We have very healthy profit margins. We don't have to spend on advertising. You can plan it out. And so we are going from a direct to consumer business where we have to spend money on advertising, still making nice money, nice profits, to a B2B business that can blow away the direct-to-consumer business. It's repeatable, has higher profit margins, and will be viewed as an incredibly valuable business to outsiders. What's also interesting is some of the largest labs in the country, they're dabbling. They're getting their feet wet in the business of whole genome sequencing, but they aren't doing it in a big way. And, you know, it's kind of humorous to see what one of the largest labs in the country offers for pricing for whole genome sequencing, and it's two and three times the price that we offer. And they have no ability to compete with us. In fact, they're not even really in the business. In fact, they're in the business on very expensive equipment with expensive consumables. Even if they wanted to compete with us, they couldn't. And so if somebody wants to build out a lab like ours, they first have to develop a relationship with the company that we have a relationship with. They would have to build out the lab, acquire the equipment, bring in the genomics professionals. They would have to negotiate for pricing. They would have to do all these things that's going to take time. And so I don't know what our lead time is, but our lead time might be a year, might be a year and a half. And if somebody else gets into the business, there's going to be so much business to go around that it's not like they will be taking business from us. They'll finally be in a year. or a year and a half, there might be another lab that can do what we do. But short term, there isn't a lab in the country that can do what we do. So that gives you a little bit about nebulous genomics. I can clarify further in our Q&A. I would just like to mention, I don't often spend a lot of time on the pure biotech plays. That's our esophageal cancer test, our linebacker. cancer therapeutic linebacker. I'm not going to mention on this call, the stock market doesn't care. I just want you to know that we have ongoing studies where we're getting really, really great results. I don't think the market's going to care anytime soon, so I don't even bother to mention it. We're not spending a lot of money on it, but it's a hidden asset that could be very valuable one day. And our esophageal cancer test, We have so many avenues of excitement with our esophageal cancer test. And again, I'm not going to explain too much of this call. I've explained what our esophageal cancer test on prior calls. But we have multiple avenues for this test, including testing not only for whether or not you have esophageal cancer today, but whether you're at high risk or low risk. And that's what the insurance companies tell us they're really interested in. That is a really big deal. We also have the ability with our technology to potentially provide this test without an endoscopy. If we do that, forget about it, it's game over. We're developing that now. And finally, we may, with our technology and our know-how, be able to develop a esophageal cancer therapeutic. So we're going in a lot of directions with it. We are absolutely, our timeframes are totally in line with what i've guided our shareholders all year we're looking to commercialize it early next year get cpt codes early next year and uh quite frankly we're continuing to get really great results and i'm really looking forward to developing our esophageal cancer test so and finally i mentioned in the press release equivir is getting close at hand we have this great clinical study going on um it was oversubscribed with patients And the results so far have been really, really good. And so I can't wait to get some of the preliminary results that we can use to finalize the claims that we'll put on the packaging so we can actually commercialize the product. And so with that, I just want to check a couple of quick notes if there's anything I want to mention. I will just mention one more thing on our Nebula genomics with our GAP versus non-GAP. We have subscriptions. where we have to recognize the revenue over three years, even though we get the revenue upfront and there's minimal costs to provide the services of the subscription. It's a little frustrating. We are correcting that now, but the beauty of the B2B is that's a different business model. There may not even be subscriptions involved, so we won't have these GAAP versus non-GAAP delays. You will see I believe very strong numbers from Nebula next year. And understand once that happens, we go from a company losing money quarterly to a company making money quarterly. I can't tell you which quarter we're going to have that change, but when we do, the numbers are going to start growing. I believe they're going to start growing dramatically every quarter sequentially thereafter. Both businesses are going to explode in revenues and profitability and therefore earnings. next year. I can't tell you which quarter exactly right now, and I don't want you to hold me to it, but the point is the amount of money we're losing when you look at our adjusted EBITDA, it's minimal compared to the opportunity and what we're building and managing the cash flow, so it's not an issue. So we have exciting times ahead, and it's just a matter of patience for when we get out of the bear market. But the last point, and I'll hand it over to the Q&A, It doesn't matter if we're in a bull market or a bear market, we're building the underlying value of the company. Bull markets and bear markets have no effect on our ability to build the capacity and generate revenues and earnings for formulas. And the same is true for Nebula Genomics. So if you look at it from that perspective, the underlying value of our company, I believe, is growing every single day. At some point, the stock market will recognize it next year, if not later this year. But whether it does or it doesn't, I will bring out the value in other ways, regardless of whether we're in a bull market or bear market. So I just want to give you all that perspective. And with that, Nick, I'd love to hand it over. I hit the 30-minute mark, and I'd love to hand it over for Q&A.

Thank you, sir. We'll now begin the question and answer session. To ask a question, may I press star then 1 on your touchstone phone? If you're using a speakerphone, please pick up your handset before pressing the keys. To tell your question, please press star then 2. This time we'll pause momentarily to assemble the roster. First question will be from Adam Waldo of Lismore Partners LLC. Please go ahead.