ProPhase Labs, Inc. Q1 FY2022 Earnings Call

Good day and welcome to the ProPhase Labs First Quarter 2022 Financial Results and Corporate Update Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal our conference specialists by pressing star then zero. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Ted Karkus, Chairman and CEO of ProPhase Labs. Please go ahead, sir.

Thanks so much, Matt. And thank you all for joining me this morning. Obviously, we had a great quarter, and I'll get into that in a moment, but of course I have to do the standard forward-looking statements, which is obviously important. So here goes. Before we begin today's call, I want to advise everyone that today's conference call will contain forward-looking statements, including statements relating to our plans, expectations, future performance, and future events, including statements regarding projected financial results for the second quarter of 2022, our expectations regarding the COVID-19 pandemic, future waves of the pandemic, continued demand for diagnostic testing, pursuit of funding, our plans to grow our diagnostic business, expand our lab services, and grow our genomics businesses, build a WGS library and attract academic institutions. We also plan to develop a broad-spectrum anti-viral OTC dietary supplement and build a pharmaceutical division. Our expectations regarding the sufficiency of our cash or working capital are subject to risks and uncertainties that could cause our actual results to differ materially from those suggested by the forward-looking statements. Additional information concerning factors that could cause our results to differ materially from these forward-looking statements is contained in the earnings release that we issued earlier today, as well as in our public filings with the SEC. The company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, except to the extent required by applicable law. Finally, the conference call is being webcast. The webcast link is available in the investor relations section of ProPhaseLabs.com. Thank you for bearing with me while I read all that. I take the forward-looking statement quite seriously. I like to talk a lot about our future plans, and of course, they are never guarantees, but I will tell you that everything I state today, I believe 100% as of today, there's no question in my mind regarding the things that I discussed. So, let's get into it. I have to start by saying we have built an amazing team since we started in the CLIA lab business in late 2020. It was new business for me and for our company. We built out very rapidly. You hire people, develop good management teams and continue to evolve. The people that I thought were strong before, I've come to realize I didn’t know the business well a year-and-a-half ago. I believed I was hiring fantastic people for the business. They were strong, and I appreciate all they did in the beginning to get us off the ground. But as the company evolved, we hired more people. I was able to learn the business and understand exactly what we needed. Quite frankly, we have substantially upgraded our management team throughout 2021. We have, excuse the expression, an exceptional management team. My virtual non-deal roadshows are supported by Renmark financial, whom I want to thank for setting these up. I do one or two of these a month. Each call begins with me stressing that if you're going to invest in micro-cap or startup or development-stage companies, it's vital to analyze the management team. I've learned from 40 years of investing to always invest in companies where I'm excited about the product or service; the management team must execute, and with over 95% of management teams not performing, that’s often why investors lose money. Given the current bear market that began over a year ago, we are at a stage where larger capital companies are just now feeling the crunch. Metrics like the Dow average and the Nasdaq indexes have dropped dramatically over the last three to six months. Yet, micro-cap stocks have been in a bear market for almost a year-and-a-half. This reminds me of 1998; if I may dare compare. Back then, micro-caps dropped first, and then major averages followed suit. Then came a boom for micro-caps and high-tech stocks until 2000. I insist that we are experiencing the same trends today. We've raised capital in January 2021, much like many other companies. However, many startup companies are burning through the majority of that cash, requiring additional fundraising, which in this bear market may not be feasible. Stocks are plummeting due to potential dilutive rounds of financing or going out of business. On the other hand, look at our capital. We just announced another dividend of $0.30, making it $0.60 paid out recently. We also distributed $0.30 last year. Overall, we’ve paid $0.90 in dividends, while our working capital has dramatically increased from the capital raised in January 2021. That’s a clear sign of a management team executing effectively. I'm genuinely excited about the management team we have in place now. We are incredibly strong in every department, and in our lab business, we've quickly become one of the strongest CLIA labs for COVID testing in New York and the country. We are highly valued by our customers. Thankfully, we haven’t lost a customer, due to faster turnaround times, efficient IT systems, and outstanding customer service. Now, having established ourselves in COVID testing, we want to expand further. I would like to discuss our numbers, but need to acknowledge the greatness of our whole management team, and we continue to build across every area, including our finance department by hiring Bill White as our new CFO. I extend my gratitude to Monica Brady for an outstanding job stepping in as CFO during the transition after our former COO/CFO left the company. Monica has helped us grow from a $10 million to a $100 million company. The goal ahead is to transition us to a billion-dollar company, actively working towards it. We are also enhancing our finance department in parallel with the growth of the company. Bill brings international experience and his expertise will enhance our capability significantly. I also have to highlight our IT system that we've built within this past year with state-of-the-art equipment, making it easy to use for our customers. This has created a competitive edge that’s hard for others to replicate. Even with a slowdown in COVID, our business remains robust, showcasing our diversifying customer base. I have so much more to discuss, but I'll leave it for the Q&A session. The numbers speak volumes. For Q1, our revenues reached $47.5 million, a remarkable 211% increase from a year ago. This growth reflects our lab’s efficiency and diversified customer base. The spike in COVID testing last year was significant, but we've become more efficient and expanded our services. However, there's a complexity regarding HRSA, which is a government-funded program that has financially supported a significant percentage of our testing. If HRSA isn’t funded, we expect our revenue numbers to drop. Currently, there’s ongoing discussion in Congress to get HRSA funded, which would greatly enhance our revenues. However, even without that, we anticipate substantial year-over-year growth. Historically, testing peaks in Q4 and Q1, so I don't expect our Q2 and Q3 numbers to see similar spikes, but still anticipate growth. Despite any uncertainties, we remain focused on diversifying our offerings beyond COVID testing, entering genomics, and expanding our clinical testing lab. We aim to lead in genetic testing, leveraging Nebula Genomics for whole genome sequencing both online and ultimately in retail spaces. I have strong confidence in our path ahead, and we are innovating to build future divisions, such as pharmaceuticals and product opportunities tied to antiviral dietary supplements.

Thank you. We will now begin the question-and-answer session. At this time, we will pause momentarily to assemble our roster.

Matt, we can get started with the questions. I see a number of people are already in the queue.

Thank you. Our first question will come from Yi Chen with H.C. Wainwright. Please go ahead.

Thank you for taking my questions. My first question is, could you please clarify what percentage of your testing volume in the first quarter was reimbursed by HRSA? And if HRSA is no longer funded, what would be the alternatives to get funding for the tests?

Sure. This is honestly a complicated question as I've never broken it out. The HRSA funding probably was north of 50%. We are instituting ways to adjust for that. Our customers, who are our collection partners, depend on this. For instance, some of our collection partners are located throughout New York City, and because of HRSA, if we don’t get reimbursed, they don’t either, which hurts them as much as it hurts us. They are diligent, and we are adapting by ensuring that they only accept cash from patients with insurance or establish good information on the patients to ensure we can collect on their insurance. While our overall numbers may drop a little, we expect our specimen percentage insured at the beginning to rise. Our year-over-year testing is up considerably even without HRSA funding. I wish I could provide a more specific answer, but I apologize that I can't. I've heard that the Biden Administration is still working to get that funding, and there's a strong probability that HRSA funding will return. Should that happen, we’d see extraordinary numbers this year. Without it, we still expect substantial year-over-year growth.

Thank you. And my second question relates to the genomic testing service available in retail stores; how are sales looking recently?

Got it. So, no, we're not in the big-box stores yet. We have major retailers interested, and we're very far along in the process. However, understand that to go into retail stores, we had to completely change the packaging. The Nebula package sold online is not shelf-friendly. The founders of Nebula did great work, but we have decades of experience in retail sales. We're optimizing the package design to attract consumers. We’re finalizing the packaging and preparing for presentations to retailers, but we expect this to roll out in months, not weeks. Our goal is to educate consumers about whole genome sequencing and its health implications. Most of the public is still unaware of whole genome sequencing; our mission is to inform them about its immense benefits. We haven't rolled out our product yet, but we're confident that we will do so successfully.

Thank you.

Thanks much for your support and those questions. Matt, we can go onto the next question, please.

Thank you. Our next question will come from Patrick E. Patterson with the Home. Please go ahead.

Good morning, Ted. Great job with the impressive numbers. I'm truly amazed, you're doing fantastic. Ted, I have two questions. The first one is regarding whole genome sequencing. I've noticed advertisements from ancestry.com promoting their products. Can you clarify the differences and advantages of your offerings compared to theirs?

It's a night and day difference, not in the same ballpark. If you want to learn about your health, you want detailed information. Their tests are inexpensive and focus on a very small percentage of your genome. They can offer broad ancestry info due to sending a higher number of tests worldwide, but it doesn't provide necessary detail relevant for health insights. If you want to understand health-related details, our whole genome sequencing is essential. If the reason behind ordering a test is ancestry, then consider those companies. But once individuals understand whole genome sequencing, I doubt they’d opt for limited ancestry tests. The market is primed for us to educate consumers on the comprehensive insights we can provide. We're just getting started in this vital genomic arena, and I have confidence in our future success.

Thank you. My other question relates to the potential new product—the over-the-counter antiviral dietary supplements. Are we talking about a preventative product, or one for treatment after COVID?

That’s a great question. I shouldn’t have mentioned it. But I wanted to convey to our shareholders that we are continuing to diversify and grow. Our platform is far superior to what it was two years ago. It positions us to explore numerous opportunities in genomic testing and pharmaceuticals. I’m excited about our plans, and I will keep our shareholders updated in the coming months, but it would be premature for me to disclose more today.

Okay. Thank you, Ted.

Thank you, Pat. Really appreciate your support. Matt, next question, please.

Our next question will come from Robert Titus with MRT. Please go ahead.

Hey, Ted. Stellar quarter. It's really nice to see so much free cash flow generated again. My question is about the ramp-up in hiring, especially Bill White. I notice he has some international experience, and I'm wondering if ProPhase has any plans to expand internationally?

That's a great question. In fact, we hired Sam Beeler as our Chief Operating Officer for the ProPhase precision management subsidiary due to the tremendous relationships he has abroad. G42, a $10 billion company in the UAE, is looking to partner with us. They aim to create a global initiative with whole genome sequencing that can significantly benefit our US presence. Bill's relationships complement what I’ve developed over years on Wall Street. We'll leverage their expertise across all our subsidiaries.

That really helps. I was reading the tea leaves there. So I appreciate you shedding some light on that. Thank you.

You're quite welcome. Thanks for the question, Matt, next one, please.

Our next question will come from Dennis Waldman with Barrett Productions, LLC. Please go ahead.

Hi, Ted. Congratulations on an awesome first quarter. Although Patrick asked my initial question, I'll inquire about diagnostic testing. I see that you indicated Q2 and Q3 wouldn't match the first quarter levels, but I'm located in New England, and I've been watching positivity rates jump from around 3% to areas well over 20%. The CDC anticipates another surge in New England. Therefore, why are you so certain that these numbers won't continue to rise as they did in the first quarter?

Dennis, that's an amazing question. Thank you for your support. First off, I want to be clear: I don't aim to place pressure on myself or the company to consistently announce record-breaking revenues. I prefer to underpromise and overdeliver, which has always been my philosophy. I appreciate the recognition for our dividends and recent increases in net worth. However, my focus is on building value for our long-term investors. While we acknowledge potential testing increases due to COVID surges, I can't guarantee what our numbers in the next quarters will look like; I genuinely care more about building this business for the long run. We continue to test, and it's essential. Although HRSA funding remains uncertain, our commitment to providing robust healthcare services persists. A high percentage of those benefited from HRSA are individuals who need it most. I remain optimistic that HRSA will be funded and believe a boost in capital could make this year extraordinary. Regardless, our long-term strategies extend beyond immediate testing; we're positioned to scale in genomics and pharmaceuticals as well, and the evolution of our company is what truly excites me.

Thank you for your answer.

Thank you so much, Dennis. I really appreciate it. Matt, next question?

Our next question will come from Kyle Krueger with Apollo Capital. Please go ahead.

Good morning, Ted. How many Nebula Genomics tests were sold during the quarter? What's the run rate on that since it's your incipient business?

That’s a great question. To be honest with you, I don’t know the exact numbers. We're still early in building out that part of the business. A rough estimate might be around 1,000 tests a month at this time. We haven't dropped our prices yet or finalized retail stores but anticipate that once we do, the numbers can increase significantly. The market is primed, and we have substantial advantages, so I believe we’ll significantly enhance our outreach and revenue in the near future.

Okay. My final question concerns the reported revenues for the quarter. Are all those revenues associated with reimbursement certainty or are you indicating that half are uncertain?

That's a brilliant question. We've reserved for all revenues that are questionable. Our earnings are strictly based on revenues we believe we will receive. Any tests conducted post-March 22 on uninsured people do not appear in our numbers. Although we could possibly collect on those. There are reserves ensuring our cited numbers are grounded in reality, so we didn't inflate them at all.

Thank you.

We truly appreciate that question, Matt. If there are no more inquiries, we can conclude the call now.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.