ProPhase Labs, Inc. Q2 FY2022 Earnings Call

Good morning, and welcome to the ProPhase Labs Second Quarter 2022 Financial Results and Corporate Update. Please note this event is being recorded. I would now like to conference over to Ted Karkus, CEO and Chairman of the Board of ProPhase Labs. Please go ahead.

Thanks so much. Thank you all for joining me today. Before we start, unfortunately, I have to read the forward-looking statement. I'll read it quickly. I think you all know what it is. Before we begin today's call, I want to advise everyone that today's call will contain forward-looking statements, including statements relating to our plans, expectations, future performance, and future events, including projected financial results for the third quarter of 2022, our expectations regarding the COVID-19 pandemic, future waves of the pandemic, and continued demand for diagnostic testing, and our plans to grow our diagnostic business and expand our lab services, among other things. These statements 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 and revise any forward-looking statements, except to the extent required by applicable law. Finally, the conference call is being webcast, and the link is available in the Investor Relations section of ProPhaseLabs.com. Thank you, Wendy, and Brussel, our amazing securities attorney for putting together my forward-looking statement. Now that I have that out of the way, welcome all. I really appreciate your joining, and I truly appreciate your support and interest in our company. It's always hard for me to gauge whether there are some new investors on the call and to what extent I should address them as opposed to our longer-term investors and analysts. A couple of quick things, just to point out for those that aren't aware. First of all, I have these two great investment banks that we work with: ThinkEquity and H.C. Wainwright. They both cover our company from an analyst point of view and are fantastic companies to work with. I have 40 years of experience working on Wall Street and in investment banking firms, and I made sure I had a choice of multiple investment banks to work with. It is critically important when you're a development stage company to have the right relationships, and we certainly have those. On the retail side, we work with Renmark, which is a Canadian company, and they do a fantastic job. They set up virtual non-deal roadshows for us. I've been doing those roughly every week, two weeks, or three weeks. You can contact Renmark if you're ever interested. I do presentations that review the latest information about the company. We have two slide presentations on our website: one is for the overview of ProPhase Labs and its five subsidiaries, and the other is a separate approximately 30-page presentation just on ProPhase Biopharma. We wouldn't have put all that work into the slide presentation if I didn't think it had significant potential. I promise to keep this call short. The second quarter earnings speak for themselves. We are one of the few development stage companies that actually earns money. We earn it every quarter, and our numbers continue to grow year-over-year. Our working capital grows quarter-to-quarter, and we pay dividends and make acquisitions. Please, find me one company out of the 10,000 Nasdaq companies that can claim to have done all the things we continue to accomplish. I can't find one that can grow, make smart new acquisitions, while at the same time earning money in the present. It's a rare combination, and I don't take all the credit for it; we have a fantastic team. Let me highlight a couple of things. We were hit with a curveball in the second quarter when we found out that HRSA funding had run out, the government funding that was paying for people without insurance to get tested. My son Jason Karkus took the reins and pivoted our business to be more insurance oriented. We were probably around 70% uninsured going into the second quarter, and he worked closely with our Chief Information Officer Sergio Miralles, who does an excellent job with IoT, to develop a better platform that could actually pick up insurance on the spot. We pivoted quickly. A lot of our business comes from street tents where people walk up for tests, so for us to have a sophisticated IT platform at a tent is no easy feat. We brought sophistication to a business that isn't inherently sophisticated. I give an enormous amount of credit to both of them. Jason has been promoted to President, which is well deserved, and Sergio has built a state-of-the-art IT platform, so we are in great shape. I also want to highlight that Alice Leroy has also been promoted. Besides being CEO of ProPhase Diagnostics, she is now CEO of our new division, wholly-owned subsidiary ProPhase Biopharma. She was instrumental in leading the charge in the compounds that we licensed and in developing relationships with the teams that invented these compounds. She’s taken a lead on wellness. We think ProPhase Biopharma has enormous upside potential. I should also mention that we hired Bill White, our new CFO, during the second quarter. He is already integrated well into the company and is working closely with Monica Brady, our Chief Accounting Officer and CFO of ProPhase Diagnostics. We are building the finance department further, and I have never felt better. Bill is going to work with Monica to take our company to the next level, and I believe in her capability. That’s just the surface on our team, which is fantastic. In microcap companies, the most important thing is investing in the management team. It's essential to pay attention to whether you have a management team that can execute. Every management team is optimistic about their product, but it is difficult because few have a proven track record. If you invest in a company with a management team that has a proven track record of success over the years, you are making a sound investment. I know I have told this story before, but not knowing when 70% of our business is disappearing is difficult, and we responded much better than other labs. Our technology, IT, and processing are sophisticated, and we have never lost a customer. Our customer base continues to grow, and COVID isn't going anywhere. Next, we go through waves of COVID. Last year, everyone thought it would go away; however, COVID continues to mutate. This is during the offseason for COVID testing, and we're still earning significant revenue. I believe we will earn money in the third quarter and continue to do so. The numbers from the second quarter alone were impressive; over the last three quarters, we have generated $120 million in revenue. Our adjusted EBITDA in the last three quarters is $43 million; it's undeniable. We will be testing for COVID in the fourth quarter as well as for flu and upper respiratory diseases. We are looking to validate for monkeypox but have to keep it in perspective. The number of people being tested for monkeypox is a fraction of COVID. We plan to fully diversify our diagnostics business, focusing on high complexity, molecular lab testing for upper respiratory, blood, urine, toxicology, and a full array of diagnostic genomics testing. Next, I want to talk about Nebula Genomics. Nebula is growing off a small base, but it is growing. It takes time to negotiate major deals for lower price whole genome sequencing, but I believe we offer the lowest price for whole genome sequencing in the country. There is a massive opportunity to educate consumers about whole genome sequencing for health-related information. The interest in knowing personal genetic makeup can help lead to healthier lifestyles and better treatment choices for diseases. We provide whole genome sequencing directly to consumers online, and we are working to offer it in retail stores, which has been received well. We're fine-tuning those efforts, but that is progressing. Whole genome sequencing is just in its infancy, similar to the Internet 20 years ago, and we are positioned well in this space. We have George Church, a leading authority in genomics from Harvard University on our advisory board. Our company is much more developed compared to other similar companies that are currently raising money at significantly higher valuations than ours. Nebula has tremendous potential that isn’t reflected in our market valuation. I want to discuss ProPhase Biopharma. There was some confusion in the past month regarding recent developments. I cannot express how excited I am about ProPhase Biopharma. Our legal team did extensive due diligence, and we have been working with our R&D groups for two years. This is not just a quick announcement; the deal for licensing Linebacker was six months in the making. Major universities conducted preclinical research on these compounds with great results, and we want to continue to develop that partnership. We only paid a nominal upfront license fee, and we believe we can get through animal studies and the first human clinical study within about 12 to 18 months at a cost under $5 million. We have ample net working capital to cover this and believe that we can develop a division that could be worth hundreds of millions of dollars. I believe our management team has executed in every aspect requested from them. The best is yet to come for our long-term shareholders, although it may be bumpy initially. We're developing products and subsidiaries with enormous potential. The last thing I want to mention is the market dynamics have changed, and biotech and life science companies have led the charge recently on the upside. Major deals have started happening, indicating significant value in the market. We are well-positioned with our diagnostic business while developing ProPhase biopharma. If people want to ask questions, I'd love to have a lively Q&A. I am a hands-on CEO, and I'm involved in every aspect of our company. Feel free to ask away.

Thank you for taking my question. Could you give us a little more color on the potential top-line growth in the third quarter? Is it going to be at a similar level as the revenue in the second quarter, or will it be trimmed down a bit but still show year-over-year growth compared to the third quarter of last year?

Historically, the third quarter is our weakest quarter. The summer months have less sales activity, especially for COVID testing, flu, and colds. However, there will be a substantial amount of school testing occurring toward the end of the summer as schools reopen. While I expect our third quarter to surpass last year's numbers, it will likely be less than our second quarter due to seasonal trends. Despite this, we will still be profitable and have a strong performance year-over-year.

So for the upcoming school year, do you expect the schools to test all students regardless of symptoms, or just those with symptoms?

I'm hearing that testing will be robust, but it will depend on the specific school policies. We have partnerships in place that facilitate school testing. Although I can’t give you specific numbers, I do expect a lively amount of testing in schools as we move from the third quarter into the fourth quarter.

Does the lack of HRSA funding going forward have a minimum impact on your revenue collection?

While HRSA funding affected our second quarter, we've pivoted our business and built a sophisticated IT platform to collect insurance information, making our operations more efficient. We are planning for HRSA not returning, but we remain profitable and optimistic about our revenue collection despite fewer uninsured tests.

Regarding the personal genomics business, can we expect some significant marketing events to occur before the end of this year?

We are negotiating with major retailers to provide whole genome sequencing, and we're also working on reducing prices to make it more accessible. We expect significant developments and strategic relationships to emerge that will enhance our market position.

Hi Ted. Congratulations on a fantastic quarter. For 2021, you made $0.41, and for the first six months of this year, you've already done $1.29. I see no less than $2 a share for 2022, yet our stock is selling at six times PE. What are your plans to bring more visibility to ProPhase in the investment community?

Thank you for your question. I appreciate your calculations. Besides having great investment banks that cover us, I am conducting virtual roadshows. Despite being in a bear market for over a year, our stock has outperformed many similar companies. I want to continue to build value on a per-share basis, and eventually, that will reflect positively on our stock price.

Besides the three analysts covering us now, do you see other analysts picking us up?

It’s entirely possible, but I want to focus on building value rather than just getting analyst coverage. Our performance speaks for itself, and I believe new analysts will naturally come on board as we grow.

You’ve spoiled us with dividends, yet no dividend was declared this quarter. Is there a chance we could see something sooner, or will we have to wait until the next quarter?

We want to avoid expectations around regular quarterly dividends. While we have a solid capital position, I also want to maintain flexibility for future opportunities. We are considering stock buybacks during this time and want to manage expectations carefully.

Hey, Ted, great job on the university study of the linebacker products. Will their results be publicized in a press release or medical journal? Can you provide an update?

The university is excited about the study's results, but there are complications regarding publishing due to existing agreements. They want to continue research, and I'll keep an eye on the situation as I believe the study was completed.

When do you anticipate the university study will be completed?

I believe it has been completed, but publishing rights may complicate announcing the results. We will continue our collaboration, and the progress is promising.

Regarding LabCorp, can you share how your customer acquisition strategy is developing in the clinical lab space?

We have established relationships with potential partners who can bring significant business to us. Our competitive advantage lies in our advanced IT infrastructure and our willingness to work closely with customers, unlike larger companies. We are focusing on building a solid customer base and will continue to execute successfully. Thank you to all shareholders, analysts, investment bankers, and potential investors for joining the call. I appreciate your time and support. The next 12 to 18 months have the potential for dramatic positive change, and I am excited about our company's future.

The conference is now concluded. Thank you for your participation. You may now disconnect.