Transcript
Thank you, and good afternoon. I would like to thank you all for taking time to join us for ProPhase Labs Fourth Quarter and Full Year 2020 Financial Results Conference Call. Your host today is ProPhase Labs CEO and Chairman of the Board of Directors, Ted Karkus. A press release detailing these results crossed the wires today and is available on the Company's website, prophaselabs.com. Before we begin the formal presentation, I'd like to remind everyone that statements made on the call and webcast, including those regarding future financial results and future operational goals and industry prospects, are forward-looking and may be subject to a number of risks and uncertainties that could cause actual results to differ materially from those described in the call. Please refer to the Company's SEC filings for a list of associated risks. Finally, this conference call is being webcast. The webcast link is available in the Investor Relations section of prophaselabs.com. At this time, I would like to turn the call over to ProPhase Labs Chief Executive Officer, Ted Karkus. Ted, the floor is yours.
Thank you, Hector, and greetings, everybody, and thanks for joining me on the call today. It's kind of an interesting time for a call given that we just reported year-end numbers while we're at the end of the first quarter. I was actually thinking about waiting until we reported the first quarter where we had more to talk about, about the first quarter in six weeks, but then I was feeling a lot of investors would be upset with me. The stock is obviously volatile. When the stock is volatile, I get a bunch of comments. Where is the update? And so I would just like to start by reminding everyone. And those who have known me a long time know this to be true for those that are newer investors. I'm sure many of you have heard this before, but I'll repeat it. I have a history of building value for our companies and the companies that I get involved with over the long term, and I've been pretty consistent at doing that. I've certainly been quite consistent at doing that as CEO of ProPhase Labs over the last approximately 11 years. When I turned around the Company, the stock bottomed down at $0.65. For those that stuck with me, I turned around the Cold-EEZE brand and sold it for $50 million. Subsequently, after two stock buybacks, three special dividends totaled $1.50. So people who have stuck with me have been handsomely rewarded. Since that time, I've always operated with the same theory. Every move I make is in terms of what's best for long-term shareholders in building value on a per-share basis. I consider that critical to what management should be paying attention to, though most managements don't. I don't want to go into more detail on that, but I just want to remind you all that that's my goal. That's my game plan. I am not responsible for NASDAQ coming off 1,000 points, nor for the hammering that many tech stocks and small mid-cap stocks have taken. I follow many other stocks in the same industry, and they all got hammered too. Frankly, I have no control over that. I also have no control over short-term swings and the incidence of COVID. Back in December and January, the numbers were skyrocketing every day in terms of COVID incidence and testing. All of a sudden, in the middle of February, those numbers dropped dramatically. NASDAQ dropped dramatically. Our stock dropped, and so forth. What I can control is making smart decisions to build our company long term. That's what I'm focused on. Just to talk a little about last year, revenues were up 45%, which I am proud of. This includes our base business, our manufacturing business, our dietary supplement business, and a little bit from testing, which we did at the end of December. While we did not report a profit, that's because we're rebuilding the Company and taking it in new directions, and so that's all planned. This is similar to my previous experience when I turned around and grew the Cold-EEZE brand, which we ultimately sold for $50 million. We lost money while developing that brand, but ultimately, we sold it for $50 million, whereas when I took over, it was worth maybe $5 million or $10 million. I'm employing the same strategy now to build value in the Company. I really don't want to get too focused on the stock price, even though that's what seems to matter most to everyone. At some point, it gets a bit silly as the stock moves closer to its liquidating value while we're actually growing the business, increasing revenues and, moving forward, growing earnings and cash flow. One more comment on our dietary supplement business, which I feel very optimistic about; we entered into Rite-Aid and Walgreens, and it's performing exceptionally well in those stores. We are also in CVS and Walmart, which are among the largest retailers for dietary supplements. We have numerous other retailers we are also working with. Achieving shelf space in Walmart and CVS in the fourth quarter means that our product is selling off the shelf, and we're expecting a significant uptick in revenue and earnings from our dietary supplements this year. While it's a smaller business, it’s positioned for real growth. I don't want to dwell on that for now because our testing business going forward will dwarf our dietary supplement manufacturing business. But I want to highlight that our other core business segments are doing well. In a brief timeframe, we pivoted into COVID testing. Last year, we made the decision to do it ourselves rather than partner with another company. In just weeks, we transitioned from not being in the business to acquiring a lab, hiring employees, validating work, and commencing testing. By late December, we ramped up to conducting 1,000 tests a day, and then we reached 1,500 tests a day by the end of December. In January, we hit 2,500 tests a day, and I was very excited about that. I expected that to continue and just keep growing. However, in February, we faced significant weather disruptions, particularly in the Southwest, impacting our largest customer, resulting in numerous testing centers shutting down. This setback affected our overall business. Nevertheless, we've been consistently adding customers each month. While we encountered a major setback from our largest customer, our business diversity is growing weekly. So, we now have a robust core business. Looking at our averages for the quarter with a five-day testing week, we averaged just under 2,000 tests a day, which I am genuinely pleased with, especially considering we weren't in this business prior. However, I’m slightly disappointed relative to the exceptional growth we experienced in late December and early January. I want to emphasize that we've constructed an impressive infrastructure over these past few months, and we have a very strong management team. Alongside our CFO, Monica Brady, who has been with me for many years, we also brought in Steve Kamalic, who has decades of experience in the industry, and I am grateful he joined this new endeavor. Furthermore, we’ve attracted fantastic IT specialists, including Sergio Miralles, who previously led an 18-person IT consulting company, proving crucial to our operations. We've also hired top molecular lab technicians who regularly work with the FDA. They have two Emergency Use Authorizations filed with the FDA, which we are waiting for approval on, Carlos Brewster and Amanda Vasquez. We really have a well-rounded team to support every aspect of the lab business. We built our new lab with state-of-the-art equipment, including the latest from Thermo Fisher, which adapted to COVID by creating new equipment and reagents with a multiplex platform to test for new COVID mutations. We now have outstanding capacity and can turn around results in 24 hours. I've stressed the importance of IT, as the collection of patient data and reporting results is crucial. We officially announced the acquisition of VaccTrack last night, which is an exciting development. It was significant that we integrated it into our system smoothly prior to finalizing the deal, and we are currently beta testing it. I was just in touch with a partner who indicated that they just landed an account, and the deciding factor was actually our VaccTrack technology. For those who are unfamiliar, VaccTrack provides an unalterable QR code directly on users’ smartphones, serving as proof of vaccination and test results, which is essential for entering events. I am genuinely thrilled about VaccTrack; it strengthens our technology and enhances our company’s position. Additionally, we have several partnerships that we established recently. These partners, who are experts in testing schools and municipalities, are presenting tremendous opportunities for us. Overall, while COVID incidents and testing have decreased dramatically, Europe is experiencing a resurgence, which is noteworthy. I believe there's been a 'COVID burnout' mentality in our country as more people choose to ignore testing and preventive measures. However, it’s essential to recognize that this mentality can renew the spread of the virus. Experts consistently advise that there’s no definitive cure for COVID, and vaccines are typically developed to be nine months behind the most prevalent strains. The rapid mutations of COVID pose concerns regarding the vaccine's effectiveness. Despite the decline in testing, new opportunities remain, particularly in the education sector as funding from the current administration contributes significantly to the testing efforts for schools to reopen. We have built significant expertise in testing within schools, and we've tested over 75 schools, a number we expect to grow. Furthermore, we’re hearing from our largest customers that they anticipate dramatic growth in their testing business within the next couple of weeks. Additionally, we have numerous partners providing opportunities in independent pharmacies as they send specimens to our lab. While nationwide testing levels have decreased, we have successfully established our presence in this business long before the surge occurred in January. Although testing numbers have diminished, there’s still demand, and we are already beginning to see a rise again. I want to emphasize that our objective is to build a strong foundation and infrastructure with COVID testing. We have successfully pivoted into a substantial lab operation that is now a formidable competitor concerning requests for proposals, as our turnaround time remains unmatched. Our customer service remains first-rate, and our IT reporting systems are top-notch. As we expand business with more accounts, this momentum will only increase, leading to growth. I expect to see consistent growth quarter-to-quarter. Last year, we grew revenues by 45%, and I anticipate strong growth in the first quarter, which will continue to build as we go into the second quarter. Raising capital recently has significantly improved our liquidating value on a per-share basis, and I’m dedicated to increasing this value each year. I often receive pressure regarding stock prices, and while I appreciate constructive feedback, I acknowledge that it's my responsibility to build long-term value. I'm committed as both a shareholder and a CEO, and I want to assure you that our management is dedicated to growing this company. We are exploring opportunities for diversification, including fast PCR tests, antigen tests, immunity testing, and potential acquisitions of other labs focused on various types of testing beyond COVID. Our strong financial position allows us the flexibility to pursue these opportunities and further enhance our balance sheet. I want to reiterate that while I cannot guarantee how the market will behave, I am navigating our company with transparency and hard work. I’m very optimistic about our continuous growth quarter-to-quarter. I believe in our strategy and execution, and I'm ready to discuss any questions you may have.
Thank you, sir. We will now begin the question-and-answer session. Your first question comes from the line of David Deschler with Deschler & Associates. Please proceed with your question.
Ted, I've been a long time shareholder. And actually, I want to thank you for getting rid of Mr. Quigley. That's how long I've been. Yes.
Thank you, David. I have no comment about that. That was a long time ago.
Yes, I've been through fix and saves, but just a couple of questions. Number one, I can admire and comprehend completely your need to have a solid balance sheet because that is the most important thing. But in addition to the stock price, can you give us any time frame? Because I know cash just came right now. But as far as potential buybacks or dividends, how far out do you see where they may come into play?
Sure. That's a great question, and I only wish I could answer it directly. All right, here's what I can tell you. I have a history of doing what's best for shareholders, okay? We have a very strong balance sheet. But because we have a strong balance sheet, because cash is king, if I can find an acquisition of a lab for $5 million, which I think I can build to make it worth $25 million, or there's a lab that I can buy for $50 million that I think I can make worth $200 million in two to three years, I got to ask you, do I want to spend that cash or do I want to use it for buybacks? So yes, cash is king. It's also nice that I have a fantastic relationship with our two investment banks that did the underwriting for us back in January. For the right opportunity, I will always heed that advice. Because we already have a strong balance sheet and strong revenue growth, it’s easy for us to raise capital. But I'm very careful with those opportunities. Cash is king, and I won't do anything sloppy with the cash. The stock price is getting down to a point where they're undervaluing our new business, and I’m shaking my head. I'm not making stock price recommendations or advocating for any stock. But I also believe and weigh off factors. In the past, when we sold the Cold-EEZE brand and the stock was below liquidating value, I did two stock buybacks. After that, when we had cash left, we executed on three special dividends. I believe in stock buybacks and dividends at the right time, and it’s got to be what’s best for the shareholders relative to the opportunities available.
No, that's fine. Regarding your second point, I understand that you have two analysts offering projections. One is estimating $2 earnings per share, while the other suggests approximately $2.25 for the remainder of the year. Can you comment on that? It seems quite impressive to me.
Yes, of course. So if we were talking in January, I would tell you that I thought we would exceed those numbers. If you ask me right now, it depends on how we grow from here. I'll give you an example. We're working on opportunities that could be nationwide. But I don't know what the odds are, whether they are 1 in 5 or 1 in 10. But if I have a significant opportunity, we could be doing 40,000 tests a day. What would happen? I didn’t even calculate the numbers before, but we could end up doing considerably better than $2 a share this year. But if we don't hit those targets, and I don't expect to get there, our school business is growing. We are already handling 75 schools reported over the last couple of months. That's growing now, which translates to more revenue. I expect that number to grow significantly in the coming months. I'm sorry, I can't give you better answers on that.
We have good faith in you because of your track record.
Thank you, David. I really appreciate that.
Your next question comes from the line of Vincent Mara with Fordham Financial. Please proceed with your question.
Thanks for taking the question. Ted, I was just wondering, this news that came out yesterday about this COVID passport that you acquired. Is that the only one out there? Or is that just your version of it?
I appreciate your question and I understand that it’s not intended as a trick. To clarify, there are other options similar to ‘passports’ available. For example, IBM has developed one that was supported by New York state during their reopening process. We've been aware of this situation for weeks. We believe our pass is superior to others in the market, although we recognize that new technologies may emerge. Our pass serves as a secure report card on your smartphone for entering events. We are confident that VaccTrack will greatly enhance our offerings and help us close deals with new customers. I take pride in this and believe it will benefit our business.
Your next question comes from Robert Namaha, private investor. Please proceed with your question.
I just had a quick question. But first, I want to congratulate you on your hard work and your success. I'm a long-time investor. I met you on FOX News some time ago. And I bought the Cold-EEZE and sought it in the store, but over time it gradually earned more shelf space. I was just flabbergasted. So thank you for all your hard work. And now you're filling up Walmart your new products. That's awesome. You're doing great.
Thank you. I really appreciate that. Do you have a question as well?
Yes. I just wanted a question about Europe. Is there any way you think about breaking into Europe for testing? Or is that too far away?
That's interesting. There’s so much opportunity in the United States already that I don't know that we need to pursue Europe just yet. But yes, one of our intermediaries was dealing with the U.K. because they're seeking large labs for extensive testing. However, I won't stretch myself thin by building a lab across the pond just now. That said, with FedEx and our operations, testing across the country is done efficiently. Given that difference is just a few hours, we could potentially manage testing across the ocean if necessary. However, at the moment, we are focused on solidifying our U.S. operations. The new upticks in COVID suggest it's coming our way, and there will be opportunities for business here that we can capitalize on.
Your next question comes from the line of Dennis Waldman, private investor. Please proceed with your question.
Ted, congratulations on everything you've accomplished in the last six months. It's quite amazing. I know you're offering a great service with great capacity. We just need more customers. As a sales and marketing person, could you go into detail on your sales team?
Sure. I try and keep overhead at a reasonable level and operate efficiently. Therefore, I don't hire many internal employees, instead opting for a team of consultants finding new business opportunities for us. We have more than a dozen groups actively working on our behalf. For instance, our three largest accounts are actually intermediaries responsible for specimen collection and finding new business. They are signing up more customers daily. Additionally, we're continuously identifying new groups to assist in finding business. Some of those are individuals whose role is merely to direct business our way and then our partners handle specimen collection from there. We’re also utilizing different teams to seek opportunities in schools. We have numerous avenues of growth in place.
It does. May I ask another question about the VaccTrack?
Sure.
What is the revenue model for that? I'm not sure how exactly that works. I mean, I think it's fantastic. I think the acquisition is fantastic. I'm just trying to understand how to make money on it.
Yes. The first thing it does is enhance our offerings to customers significantly, giving us a better chance to close new business. Our sales force, primarily external, works with several in-house team members to secure new accounts. So let me explain in two ways. When bringing on a customer, the first question they ask is about our Lab Information System (LIS). This system will determine our ability to manage patient data and billing effectively. By explaining that we have a robust LIS and IT team, combined with our new VaccTrack technology, this gives us an advantage in winning more accounts. That’s one aspect of how we will generate revenue through VaccTrack. The second, we are exploring the potential to license the technology which would further generate revenue. I need to stress we just signed the deal, so we’re navigating this second opportunity closely.
Your next question comes from the line of Lee Alber with Hamic Investors. Please proceed with your question.
A couple of them. One, on VaccTrack, did you buy an app? Or did you buy a company, and you acquired the whole infrastructure?
That's a great question, but it's a legal matter, and I'm not sure I want to delve into it. However, we did acquire all the intellectual property rights. Does that address your inquiry?
Did you hire any?
No, no, no. It’s not a company and customers, although the founder is working closely with us. It’s almost as if we acquired his company, but we did not acquire like existing customer business, if that’s what you mean, although there are relationships that come with it. So in that sense, it's similar. We own the technology.
Can he sell it to anyone else? Does he have other clients?
No, no, no. You understand IP; the intellectual property. The patents are all ours. This is our technology, ours to use and potentially license. Our agreement allows us to develop it without restrictions.
And have you given us any indication of the cost?
No, I haven't provided those figures as it's not public information and not relevant to what's being discussed. However, I can say it was not an exorbitant amount.
If it's a material number, wouldn't you need to disclose it when you file?
I just follow our attorney's advice on that. We believe we secured a great deal, and it's a mutual benefit for everyone involved. We're working with the founder on various initiatives mutually beneficial, and again, I emphasize that the integration has gone smoothly and we already have the technology begun to implement.
Do you have any long-term arrangements with him? Or can you walk away from here tomorrow?
You can walk away if necessary. We have the technology, and we have integrated it successfully. We are not worried about functionality going forward.
Can you give us a little more color on what you're looking at doing testing the number of tests in April or May?
I wish I could be more specific; all indications suggest growth. Our three largest customers are anticipating growth in their business with us by mid-April. We also have a fourth customer expected to deliver substantial business in the next couple of weeks. Our schools continue to test and we are expanding that sector. Therefore, I expect April to be active. However, I cannot predict beyond that timeframe with certainty.
Can you give us an idea about how many customers you do have?
I don't have the exact number because the characterization can vary. Our relationship encompasses numerous patients being tested, intermediaries, and schools, hence it's complex to quantify.
In general terms, how much of the business is local? What actions are being taken? And how much comes from out of state? When I refer to out of state, I'm not including New York and Pennsylvania.
One of our largest customers operates across Texas, impacting our business considerably, although February's weather created challenges. It's challenging to discern the impact between weather disruptions and the general downturn in COVID incidents. However, several new accounts are growing, and we have several states under our operation including New York, Jersey, Pennsylvania, and Texas. We operate across the U.S. efficiently, and the logistics of our testing would allow us to deliver results rapidly, regardless of state.
Your next question comes from the line of Michael Wu, private investor. Please proceed with your question.
Ted, I have a question about the last Q4. There was $5.2 million in revenue. Do you know the numbers? How much of it is related to the testing?
I can't provide those numbers as they are not public information. They aren't broken down, and I'm not able to disclose them during this call. I can't give a specific figure right now. However, it's evident that we saw an increase from our testing due to the activity at the end of December, and our core business also performed well.
Could you provide a rough idea of the expenses you incurred in the last quarter? I don't need the exact number.
Yes. Yes, yes. I'm sorry, in the December quarter?
Yes, in the December quarter. Can you tell me what the total cost would be, around 5 million? How much is that related to?
That's the problem. I would love to provide expenses related to the testing specifically, but here's the contention. It's not public information. And I don’t want to give appears speculative. We incurred significant startup expenses for our business, primarily involving labor and technology. For our lab business, we hired a substantial number of employees, and we utilized recruiters, which led to significant expenses. We also had considerable technological expenses.
Okay, great. Yes. Any further information? I have a different question about the testing. You mentioned several times that you have a profit of 30, 40, is that gross profit? What is that?
Yes. So okay. So again, here's why that's a complicated question. And I’m not being evasive at all. But there's so many different variables. We have cash customers and we have insurance-based customers. Those paying insurance are collecting $100, but when we're contracting with partners for specimen collection, we might pay out $25. Conversely, we could have cash customers paying more based on their plan. Also, our startup expenses should be viewed in the context of ongoing operations, meaning the profit per test varies between how you quantify startup expenses versus standard operating expenses. The margin per test can be substantial, but we're still clarifying our cash flow as we just started receiving payments from insurance companies. Until we have enough testing experience to share solid empirical data, I can't provide numbers firmly.
Okay, great. So my understanding is that, that's just the profit. It's not the revenue, right? Like the money you get, right? It's including the cost of the.
No, no. The amount from revenue figures that vary is the aggregate cash we collect through tests, whether they come through insurance or cash remuneration. We have a lot of variation in the transactions when customers choose to pay cash, especially when there are large cash customers versus smaller ones keeping up with insurance reimbursements.
Okay, great. I have another question about your supply numbers.
Last question because yes. So this is the last question, because we're over an hour, and we still have somebody else who wants to ask a question, right?
Yes. Regarding your supply, could you tell me the shelf life of the reagent? Can it be used within one year or six months?
The shelf life of the consumables can range, but it generally lasts many months to a year. It varies based on the specific items and their applications.
Okay. I lost Michael. I’m not sure if there are any other questions. Hector, do you want to ask one last time, or should we conclude the call here at 5:32?
No further questions at this time. And this concludes our question-and-answer session. I'd like to turn the call back over to you, Ted, for any closing remarks.
Sure. I just want to thank you all for joining me today. I truly appreciate the support. Look, I'm looking to grow the Company, as I said, longer term. If you're a long-term shareholder, I believe that I and our whole management team will continue to grow the value per share for those that stick with it. For those of you that are traders, I wish you the best of luck. I'm focused on the long term and building the value of the Company. Historically, I've been able to do that, and I hope to do that in the months and quarters ahead. Thank you all for joining. Hector, thank you for setting this up. Have a great day.
Ladies and gentlemen, this does conclude today's conference call. Thank you all for your participation.