ProPhase Labs, Inc. Q3 FY2022 Earnings Call

Good morning, afternoon, evening, and welcome to the ProPhase Labs Third Quarter 2022 Financial Results Conference Call. All participants will be in listen-only mode. 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 call over to Ted Karkus, Chairman and CEO of ProPhase Labs. Please go ahead.

Thanks very much, and thank you everyone for joining me today. I will start with the forward-looking statements. I'm not going to read our third quarter press release. You're all capable of doing that yourselves. I will go through some highlights for maybe 15 or 20 minutes. And then hopefully, please don't be shy, ask questions. I do these virtual non-deal roadshows every few weeks where I usually present the whole company for 25 minutes. Then we have a very lively 35-minute Q&A. So I hope people on the call will ask some questions so I can get into more details on various topics regarding our company. As always, I have to start with a forward-looking statement. This presentation contains forward-looking statements related to our strategy and business objectives. All statements other than statements of historical facts included in this presentation may be deemed to be forward-looking statements, including statements regarding our strategy, plans, objectives, and initiatives, including those related to our plans to expand our in-house clinical testing capabilities and genomics testing offerings, and our plan to develop Equivir and Linebacker. You can identify forward-looking statements by words such as anticipate, believe, could, estimate, expect, intent, may, plan, potential, predict, project, should, will, would, or the negative of those terms and similar expressions that convey uncertainty or future events or outcomes. These forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause our actual results, performance, or achievements to be materially different from those contemplated, projected, forecasted, estimated, or budgeted, whether expressed or implied by these forward-looking statements including risks related to consumer demands for diagnostic and genomic services, the competitive environment, challenges relating to entering into new business lines, the failure to obtain and maintain certain regulatory approvals, our ability to collect payments for the diagnostic tests we deliver, including our ability to collect payments from uninsured individuals if emergency funding is not allocated to the HRSA uninsured program in the future, and our ability to continue executing our business plan. Additional risks and uncertainties relating to our business can be found under the heading Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2021, and our subsequent quarterly reports on Form 10-Q, as well as our other filings with the Securities and Exchange Commission. These forward-looking statements are based on current expectations, estimates, forecasts, and projections and are not guarantees of future performance or development. The forward-looking statements contained on this conference call and in this presentation are made as of the date hereof, and we do not assume any obligation to update any forward-looking statements except as required by applicable law. Readers are cautioned not to place undue reliance on any forward-looking statements contained in this presentation or in this conference call. All right, I’m sorry that I have to read all that. That's a mouthful. But our attorney loves to give me a mouthful to start off the call. All right, at any event, now that we have the forward-looking statement out of the way. Welcome all, just a couple of quick highlights and reminders. First of all, we do virtual non-deal roadshows. I do one every two or three or four weeks with Renmark. They've really done a great job for those. Feel free to join, even as a shareholder, I run through the whole company, but there's always highlights. There's always new developments in our company every quarter. There's always more to talk about in the Q&A as well as lively, so feel free to contact Renmark in the future if you'd like to join those calls; really, it is a great way to communicate with our shareholders. Also, we have great relationships with both ThinkEquity and H.C. Wainwright. They both follow our stock, and I really appreciate the relationships that we have with both of our investment banks. I worked on Wall Street for a long time, and I know who the best investment banks are to work with for our microcap development stage company, and these are two of the best. Okay. Having said all that, look, our numbers speak for themselves. We are in a unique situation on Wall Street. Yes, we are in a bear market. In a bear market, that's where the pretenders show up as pretenders. At the end of the day, we are growing. We're earning capital while developing three subsidiaries, at least two of which have multi-billion dollar potential. And I don't know another microcap company that can make that claim. A microcap development stage company that's growing, that is earning money, real money, growing the cash flow, working capital, while at the same time developing assets with such tremendous potential. So with that, I always have to find a balance between how much I'm going to go over things that most of you should already know. But basically, we're set up with five subsidiaries, and I'm not going to spend too much time on them. Our two historic businesses, manufacturing dietary supplement businesses are growing. They're doing just fine. Kim Bauer is doing a fantastic job in managing our plant in Lebanon, Pennsylvania. Those businesses, those two businesses combined are growing this year and generating positive earnings. I could probably sell those two businesses. If I had to guess combined, I could probably sell them for $25 million. It's just sort of another hidden asset of the company. The reason why we don't do that is because all of our other subsidiaries are going to leverage the distribution and the shipping and the logistics that these two subsidiaries provide to us. So as I talk a little bit about the other three subsidiaries very briefly, you'll see the synergies. So first, ProPhase Diagnostics, obviously, that's generating the bulk of revenues and earnings at the moment, and the bulk of that testing is COVID testing. Everybody's been betting that COVID is going away, and our testing is going to go away for the last year and a half. It's interesting; last summer when the incidents of COVID dropped, we lost money. I think on a cash flow basis, we might have been close to breakeven, but we reported a loss last year. Whereas this year, with the same level of incidents of COVID, roughly, or maybe even less, we reported a significant growth in revenues and in earnings. I’m going to talk a little bit about the difference between our reported income and our adjusted EBITDA. I think it is critically important if you want to properly assess our company from a financial performance point of view to focus on our adjusted EBITDA. There are expenses that make up that difference. Most of those are depreciation. For example, we acquired Nebula Genomics. The value of Nebula Genomics, I believe, is growing dramatically, and I’ll talk more about that in a moment. But at the same time, we’re depreciating it because when we acquired Nebula, mostly goodwill, so you have examples like that. Then we have other examples where we issued stock options. Some stock options were to an executive that’s actually not even with us anymore, or two executives that are not with us anymore. We are expensing and/or expense those stock options, and they leave, we cancel the stock options, but we don’t get to reverse the expense. So there are other issues like that, and that’s why the adjusted EBITDA number is so important to me and what it should be to investors, because that demonstrates the real earnings power of our company and the real execution of our management team. So those are a couple of examples. We also – as we build out our lab and as we expand and as we buy more equipment, we are depreciating that equipment. We have a lot of these and anyway, that explains a little bit about the adjusted EBITDA versus the income. Again, we are earning money even during the seasonally, and the second or third quarter seasonally have been the weakest quarters in our company coincidentally for 25 years back when we had the Cold-EEZE brand as a seasonal business. Then you get into the cough cold season, and all of a sudden, people are buying a lot more Cold-EEZE. Well, guess what? In the cough cold season, that's also when people get cold symptoms, and they get flu symptoms. And that’s just about to hit us now. People are not going to know whether they have cold, flu, or COVID. What do you think? And so what do you do? What’s the best way to deal with those symptoms? Go find out if you have COVID and get a PCR test. We very conveniently provide both antigen tests and COVID tests. If you walk out on the streets of New York, there’s a very high probability that when you walk up to one of those tents to get tested, it’s coming to our lab. We are so efficient now that if you get to that tent, I can’t remember what the cutoff is, but if you get to the tent by midday, you have your results by the end of the afternoon or early evening at the latest. All right, so our specimen collection partners love us. Our turnaround times are fantastic. We also can afford to pay them more because we operate at such an efficient level. I give a lot of credit to our management team at ProPhase Diagnostics, both Jason Karkus and Alice Lioi, who just do a great job of managing the customers and managing the lab. We are super efficient, and it means that it’s very difficult for other labs to compete with us, quite frankly. Even during the slowest part of the year, we were still very successful in the second and third quarters in generating significant year-over-year revenue growth and significant earnings, and in particular, significant adjusted EBITDA. So that’s just a little bit on the numbers we can get into more, more importantly, the numbers are great, but I’m not in this business just to generate some profits from diagnostic testing. I am in this business, and I’m committed to our company because I truly want to build a multi-billion dollar company. And the way we’re going to do that is by building out our three subsidiaries that have so much potential and so much going for them. The beauty is we get to generate these earnings to support the management team, support our efforts, give us flexibility while building out these other subsidiaries. The other thing is we have such a great platform that we didn’t have before. So we had a platform years ago, a public company with no money, and then we had a little money, and then we had a little capital, and we had a little business, and then we built it into a bigger business with more capital. We’re now at a point where we have this great platform. We have over $50 million of networking capital; a lot of that is in cash, and we’re earning money, and we have tightly held stock and not a lot of shares outstanding. So you have all these other companies that have great potential, exciting assets, exciting science, but they don’t have capital, and their stock prices are struggling if they’re public. Some are private, and they really have nowhere to turn right now. They’re turning to us looking to do deals with us. So there are a lot of opportunities to very inexpensively acquire assets and build out our businesses. That’s what we did with ProPhase BioPharma. We licensed – first, we licensed Equivir and Equivir G broad-based antivirals. One is an over-the-counter dietary supplement; the other is a prescription. As the over-the-counter dietary supplement, we’re looking to do some quick studies over the next few months and potentially introduce it to the marketplace early next year. Again, leveraging our food, drug mass, retail, stored distribution. And then we were able to license Linebacker, which has enormous potential. I’ve gone over this before; I can do it in the Q&A, but everyone should know by now. Linebacker inhibits PIM. PIM is a growth factor in cancer. If you can inhibit the growth of cancer – when you have cancer, if you can inhibit the growth of that cancer while you’re treating the cancer, whatever drug you’re taking to treat that cancer has a better chance of working; that logically makes sense. We’ve gotten great preclinical results to date. Harvard and Dana-Farber Cancer Institute know our compounds well, and they’re really excited to continue work on them. We just entered an agreement the other day, so I’m really excited about the development there. My point is, I believe that there could be some more opportunities for ProPhase BioPharma that we can pursue, particularly in this bear market. We get to Nebula. There’s so much to talk about Nebula; maybe we’ll do that in the Q&A. I just returned from Abu Dhabi; of course, you all saw the announcement with G42. G42 is a multi-billion dollar company that just formed a $10 billion tech fund. Everyone at G42, particularly G42 Healthcare, is very interested in working with us. G42 Healthcare, they’re a global leader in whole genome sequencing, particularly in the UAE. They’re tasked with testing a million people in the UAE residents; that's their goal. They’ve done about 200,000 so far. Because they’re doing such a high level of whole genome sequencing, they can get the best pricing on consumables, which means that they can more efficiently or at lower cost to them process these specimens. We are now, in effect, partnering with them and piggybacking on that pricing. We are going to have excellent pricing for whole genome sequencing. At the same time, I don’t want to go into it for competitive reasons, but we have relationships with all of the global – basically the three global players in whole genome sequencing. Our goal and my hope, and my true belief is that we will be the low-cost provider of whole genome sequencing in the entire United States of America going into next year. I believe that this is a business that is going to explode because it is at the heart of precision medicine. Again, what is that all about? All the universities are looking into understanding why two people get a certain form of cancer. These same two people with the same cancer take the same drug; on one person it works great, and the other person, it doesn’t work well. The question is, why? It comes down to genetics. How do you study someone’s genetics? The best way to do it is with whole genome sequencing, which studies the entire genome. It’s that simple. This business, this industry, it literally is the future of medicine. It’s where all the research is going, and we expect to be at the heart of it, both in our collaborations with a global leader in whole genome sequencing. We believe we have the best platform in the United States, particularly with our library, which you can subscribe to. Right now, we’re selling online, growing significantly. I believe our sales at Nebula Genomics, even though it’s off a small base, are growing, I want to say approximately 35%. However, if we get into retail stores, we’re doing a test right now with one of the largest retailers in the country, one of the largest drug retailers in the country, and there’s another one right behind it. I believe the test is going well. If the test goes well and we go into these stores, our growth at Nebula Genomics could easily spike into triple digits, like a hockey stick. Our sales could explode. In addition to that, we haven’t even tapped the university research business yet. We are doing business with one university, and also globally, I believe we just signed a deal with another company globally, but we’re not even scratching the surface here. We expect to be one of the global leaders in low-cost whole genome sequencing. Our next goal is also to build a lab in Garden City to do whole genome sequencing. We’re looking – I mean, just selling whole genome sequencing direct to consumers online, we believe that business is going to grow significantly just by dropping the price further, which we’re in the process of doing. We’re also spending a lot of money on marketing to get our website to have the best conversion rates and the best ads. We hired a great firm, and we’re in the process of working on all that right now. But then, as I mentioned, we get into the retail stores. If we do that, I’m talking realistically, we could be looking at triple-digit growth year-over-year at Nebula, and then just think about the science and how well we will be positioned. This is like – I love to liken this to Silicon Valley with a startup tech company; there are no revenues or earnings, and before it has a $1 billion market valuation. Just imagine our company with a proprietary library that you sign up for, you pay a subscription to that has 99% gross profit margins. We can tell our whole genome sequencing at cost, which we can do both direct-to-consumer online and in retail stores. If we’re selling at cost, how can anybody compete with us? First of all, I don’t believe that another company could even match our pricing at their cost. If they want to make a profit, they would have to mark it up. We don’t have to mark it up because we have the library to sell a subscription to. I don’t see how anybody can compete with us in an industry that’s going to explode. Most consumers don’t even know what whole genome sequencing is, but I promise you they will acknowledge its significance a year from now. This business is going to explode. We’re at the heart of it. We have the capital, we have the infrastructure, we have the relationships. We have George Church of Harvard; he’s been a world-renowned leader in genomics for the last 20 years. We just added Russ Altman from Stanford University. These guys just don’t go on any advisory board. We have this tremendous collaboration with G42, one of the leaders in the world. Then we have great relationships with the two largest companies in the world that manufacture the equipment and consumables. They want us to be their leading company in the United States for representing them. The deals that are being offered to us are really exciting. There’s just an enormous amount going on with Nebula. It literally is in its infancy, but you get to invest in our company; we’re earning money while we’re developing these businesses. We have a lot going on at ProPhase BioPharma, and we have a lot going on at Nebula. Then as I already touched upon, our lab. To be clear, our diagnostic business, I think we’re going to completely transform our diagnostic business over the next six months. We’re going to be going in so many different directions between a fully diversified clinical lab, genetic testing, but also – not just genetic diagnostic tests but also specifically the whole genome sequencing business. The potential collaborations we have with some of these global leaders could be enormous. As I mentioned, I just spent a week in Abu Dhabi with senior management at G42. I can tell you there’s enormous potential there. That’s a little bit of a recap on our company and all the things that I’m excited about. I just want to very quickly – I also just want to point out, trailing 12 months, if not in the reported numbers, our trailing 12-month revenues are over $140 million; our adjusted EBITDA for the trailing 12 months is over $50 million. I think these are just huge numbers. While we’re developing these businesses, I think that both ProPhase BioPharma as well as ProPhase Precision Medicine, which has Nebula Genomics, these are potential unicorns. There's always the possibility down the road that we could IPO them. By the way, I should also mention Abu Dhabi and Dubai have the hottest stock markets in the world. We’re developing a collaboration with one of the leaders in whole genome sequencing; they happen to be based in Abu Dhabi, it happens to be the hottest stock market in the world. Just imagine the opportunities and strategic initiatives that our little ProPhase Labs company could be working on. Imagine the potential for our company while having this tremendous base of assets. As I mentioned, the manufacturing and dietary supplement business has value. Our networking capital is over $50 million. You can place whatever value you want on ProPhase BioPharma, which probably has virtually no value in our stock price at present. Our diagnostic business, you can say all you want to about COVID going away. People still want to know whether they have flu, a cold, or COVID, and they’re still getting tested. In the month of August and September, we still did a lot of business. We made a lot of money. Just imagine; I don’t know what’s going to happen in December. Last year, things were quiet. They slowly ramped up in October and November, but it was really December where things exploded. I have no idea whether things are going to explode this year or not. They absolutely may not. But even if COVID remains at its lowest levels and people are uninterested, we’re still – in August, we are still generating lots of revenues and earnings, as reported in our third quarter. There’s certainly the potential for some nice upside there. But rest assured, we’re earning lots of money. We’re going to have positive earnings in the fourth quarter and for the foreseeable future. We’re expanding; we’re diversified. So that gives us some nice background about our businesses. I’ll just mention again, with Nebula, there are startup companies that pale in comparison to Nebula that are raising capital at $50 million and $100 million valuations. They don’t have our business model, they don’t have our relationships. They don’t have those ingredients that are so critically important. The biotech and life science companies, while the major market averages have been in a bear market for all of this year, the biotech and life science companies have been in a bear market for two years. Bear markets, as much as it feels like they can go on forever, they never last forever, knock on wood. The biotech indexes, which I mentioned midsummer, I felt were bottoming. One indication of that was that transactions started to happen whereby the major pharma and larger companies were starting to swoop up the smaller companies; that actually bottomed the biotech index back in June. It came back and tested those lows. The biotech indexes have been outperforming the markets ever since June. It looks like they’re putting in a bottom. There’s a ton of cash on the sidelines. I don’t know when the bottom takes place, but we’ve outperformed. I actually looked; as far as laboratory stocks are concerned, we outperformed every laboratory company in the United States in the last 12 months from a stock price perspective. More importantly, at some point, the biotech index looks like it’s bottoming. We are poised to take advantage of some tremendous opportunities where we can continue to add and build our subsidiaries while we’re earning money. We’re really well positioned to fulfill my dream over the next couple of years to be managing and building and running a multi-billion dollar company. I believe we have the pieces, and I believe there are opportunities out there that will continue that. So with that – I could go on for another 30 minutes, but rather than do that, I want to get to questions in a moment. I’m just going to look at my notes for a quick sec. I think I covered most of what I wanted to cover. The rest I’ll cover in the Q&A. I hope there’s a lively Q&A. I would love to hear if there are questions. Please start lining up for your questions. Jordan, I’m going to hand it back over to you.

Thank you. Our first question comes from Fred McDonald, Private Investor. Please go ahead.

Ted, are you exploring other drugs that Linebacker can be used with other than the four cancer drugs?

Yes, that’s a great question. We’re going to be developing Linebacker. We’re not only going to be working with the Dana-Farber Cancer Institute; we will be working in parallel. Linebacker has some significant possibilities in more than just cancer. By the same token, we’re trying to be efficient and go after the first cell lines that have the greatest potential. You’ve got to understand, a tremendous amount of work has always been done over the last several years in developing Linebacker and preclinical studies. Dana-Farber/Harvard have already done a lot of work on the polyphenols that make up Linebacker. We’re going to hit the ground running knowing, with an optimistic – I don’t want to say a high probability; I have to be careful what I say. But everyone, including all the scientists and our company, is very optimistic about the direction we’re going with Linebacker at present. The most efficient and expedient thing to do is to initially go after cell lines where the most work has already been done, where we’ve already gotten great results. That’s why we’re optimistic that the studies we’re about to initiate with Dana-Farber will yield very positive results. Once we do, you’ve got to understand, you then go into Phase 1’s, where there’s typically very little risk in a Phase 1 human clinical study. Once we have Linebacker and finish most of our preclinical and our human Phase 1, I think at that point it will have significant value. Right now, it probably has no value on our stock price, but I think it will have very significant value, maybe as much value as their entire market cap right now. That is enormous potential, and that’s just a starting point. More is to come. We’re working with some great advisors in the ProPhase BioPharma division, including the CEO of another biotech company whose expertise is in cancer development. We’re going to do everything the right way; he’s bringing a number of different CROs to the table, clinical research organizations. More will come. It’s not just the Dana-Farber Cancer Institute. In the coming months, I expect we’ll have some really nice results to be reported by them since they’ve already done so much work. It’s not going to take us a year. I think within months we’ll have some really positive things to say from that initiative. You can bet that very cost-efficiently we are going to explore several different initiatives with Linebacker over the next six to 12 months. While staying well within our budget, I don’t want anybody to get scared. I’m the largest shareholder in the company. I have zero interest in burning through our capital and then come begging for more in the middle of a bear market, which is what 98% of the other microcap companies do. I do the exact opposite. I love the idea that we can develop Linebacker over the next 12 months for less than what we earned in the second quarter or less than what we earned in the third quarter on an adjusted EBITDA basis. That’s the way I run the company, and you can count on me to continue to run the company that way. I will not put us in a position where we ever have to do some big dilutive round of financing or hurt our shareholders. Hope that answers your question. If you’d like, you can ask one more.

Yes, that was a great answer. Thank you, Ted. Ted, one more question. You did an MOU with G42, and then you visited the United Arab Emirates. Can you give us some color on your visit? What happened there?

Yes. Here’s the most important takeaway. Two things. One is I met with senior management of G42 Healthcare, and they get it. What I found particularly interesting is they weren’t just interested in Nebula Genomics. They love our proprietary library. They love what we’re doing over here. They don’t have a presence in the United States and would love for us to be their U.S. partner and for both of us to grow together in the United States. Ultimately, the U.S. is one of the largest countries in the world for this potential business and whole genome sequencing. Think about it; we could be in whole genome sequencing bigger than G42 one day. Don’t think that they’re not aware of that. This would be a great entryway for them. The hottest stock markets in the world right now are in Abu Dhabi and Dubai. They have IPOs that are doubling and tripling in value. It’s really crazy what’s going on over there. There’s enormous opportunity both in terms of strategic initiatives of working with G42 as well as initiatives related to the capital markets, all of which I believe would be very bullish and positive for a company and build a lot of value. Just think about the startup genomics companies that pale in comparison to Nebula with $50 million and $100 million valuations. Imagine if we’re backed by G42 in Abu Dhabi and Dubai. Just imagine what we could do with Nebula. My background is in Wall Street, so I get it. We’re working on a number of different avenues here, but suffice it to say we’re earning money while building potentially very large subsidiaries that have enormous potential. Hope that answered your question, Fred. I really appreciate your support.

Thank you.

Jordan, next question, please.

Our next question comes from Yi Chen with H.C. Wainwright.

Hi. Thank you for taking my question. First, can you comment on the current trend of diagnostic services in the current quarter so far? And whether the non-COVID tests offered in your laboratory will start generating revenue in the current quarter?

Obviously I’ve mentioned before we do PCR testing, antigen testing, and immunity testing. PCR testing is far and away the bulk of our business. Antigen testing; we’ve really grown that business nicely. I give Jason Karkus a lot of credit for that. He's the one that figured out how to structure that with our customers. The latest is we're validated for flu, so we're adding that to our repertoire, and we’re just figuring out the best way to deal with it since insurance with flu reimburse very differently if you're in-network versus out-of-network. They reimburse better in-network, but for COVID testing, they reimburse better out-of-network. It's complicated, but we're figuring out the best way to integrate flu into the equation. As for diversifying, we're still under construction in our lab downstairs; that's virtually completed. Equipment is already ordered. So in the fourth quarter, other than diversifying into blood, urine, tox, and so forth, we’re really looking to start that up probably in the first quarter, not the fourth quarter this year. I’ll also tell you there are other opportunities and other ways we could expand more quickly, but that's for another time. We’re doing everything we can to expand and diversify our clinical labs sooner rather than later. In parallel, the genetics we actually can do a part of and/or are doing part of, regarding whole genome sequencing in our lab. Our goal is not only to do genetic diagnostic testing but also to do whole genome sequencing. We’re looking at purchasing the equipment. It’s complicated; the two global leaders had patent litigation against each other, which has all finally been settled. As of January, one of the largest competitors to Illumina will be allowed to sell equipment in the U.S. We have great relationships with Illumina and this other company. Our goal is to get the whole genome sequencing equipment in our lab to leverage the lab infrastructure we have. Early next year, as quickly as possible, I’ve told our team I want to move on this immediately to get the whole genome sequencing in our lab, because when that happens, then the universities blow up. But again, that’s more likely a first quarter phenomenon, not fourth quarter of this year.

Okay. And a question regarding the gross margin so in this quarter...

Excuse me. You had another question in there which I didn't answer, and that's just the current run rate of business. We are profitable in the second and third quarters; probably the slowest months of the year are in July and August. Now we're starting to pick up a little bit. It's hard to say what our numbers are going to be in the fourth quarter, but there's no question we're at a very profitable run rate. Our numbers are significant; we're generating lots of revenues and earnings. I fully expect that we're going to have positive earnings. I can’t say they’re going to be up year-over-year but by the same token, our run rate of business is solid and I feel good about it.

Got it. So regarding the gross margin in the third quarter, it appears to be much lower than the previous two quarters and has an impact on the bottom line profit. How should we look at the gross margin in the fourth quarter going forward?

That’s a good – I’ve got to be honest with you. That’s really a question from my finance department that I would rather take offline. I should mention, by the way, that in the past few months, we hired three senior executives in our finance department. Our finance department has never been stronger. Our recent meetings with our audit committee and auditors went extremely well. I’m very pleased with our new auditors, and I’m very pleased with our finance team. It’s a strong team. If you want to get into detailed questions, I’d really like you to put you directly in touch with them. I’d rather do that rather than guess. There are a number of factors with regards to the gross margins. But in general, our gross margins are pretty solid. I wouldn’t expect significant changes. I can look at what variations there were in the second and third quarters. I can't do that on this call, but I'm happy to get you the answers to your questions. There is certainly nothing to be concerned about; I can tell you that much. Thank you for continuing to follow our company.

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

Hi, Ted. First of all, congratulations on another profitable quarter. I was also going to ask about gross margins, so I'll table that. I was looking at the accounts receivables. I don't know if you could answer that $38 million seems to be steady. Does it take that long for the insurance companies to pay you?

It's the worst part of the business, and it's the reason I am so happy that we had more capital than we needed back in December and January. Other labs were inundated with orders like we were, but they literally couldn't handle them because they couldn't handle the cash flow. One reason our customers are so loyal is cash flow issues are not an issue for us because we have such a strong capital base. It’s one of the many reasons we run circles around the small and mid-size labs. I thought there was a lab significantly larger than us, that isn't nearly as intimidating as I thought. I mean, we're a real player in the industry now, and our capital helps us out. Yes, the issue – so first, one of the issues when we added HRSA, is that they ran out of funding in March and owed us a lot of money, and that's been trickling in ever since. Fortunately, we are getting paid by HRSA, and in fact, some of that we thought we weren't going to get, that we actually did get. A part of it is, yes, it's the insurance companies. Another part is, if you think about it, this really is a relatively new industry — COVID testing — and most of the specimen collection companies are relatively new to the industry, and they don't always do a great job when they collect patient data. They don’t collect the insurance information accurately, and then we have to follow up. It’s one of the many reasons our customers love us is we help them find the accurate insurance information. We have software providers that help us get that data. It’s a complicated process. I don’t want to blame it all on the insurance companies. A part of it is the collection of patient data. At the end of the day, it takes time, but it’s for all these reasons. One of the reasons is the cash flow issue is a little complicated, but our team does a great job. I also haven’t mentioned Sergio Miralles, our Head of IT, who is an integral part of all this. We really have a strong team across our subsidiaries. Yes, insurance is a complicated issue. It’s not all on the insurance companies; it’s also on collection. But at the end of the day, you get paid. We reserve, and we’re very conservative in how much we reserve for potentially not getting paid. We’ve been pretty good at that of how much we reserve.

Okay. I hesitate to ask this other question, but I’m going to throw it out there. I listened in on the Renmark presentation you did yesterday, and you insinuated that there might be an acquisition that is not another lab; is something in the works that you could talk about?

If I could talk about it, I would. Here’s how I’ll answer the question. I’m very aggressive in reviewing initiatives, strategic initiatives. Last year, I probably looked at 60 different labs to acquire but told you I’m spoiled by our own lab because we have such a nice lab and it's so efficiently run that I was turned off by almost all these other labs. They were overpriced. I don’t want to overpay for something. As I alluded to on this call, I may have mentioned yesterday, there are opportunities out there, for instance, Linebacker, which has multi-billion dollar potential. What we mainly paid were licensing fees; there are companies out there with assets – biotech assets, and tests that have enormous potential, but they can’t raise capital. They don’t have the infrastructure. They don’t have the NASDAQ platform; they don’t have any of the important ingredients. Nobody is giving capital to a startup company. I see opportunities coming across my desk, a couple of which I’m very excited about, but there’s no guarantee. I looked at 60 lab acquisitions last year; I didn’t acquire any of them. I’m looking at potential lab acquisitions and also other acquisitions that could build our divisions. I’m not going to acquire anything that requires a substantial amount of capital that will then kill our stock price and make us do dilutive rounds of financing. I’m not getting into any of that. If we can make a lab acquisition or a strategic acquisition that builds our other subsidiaries for $5 million or $10 million, and we’re making that in a quarter, nothing would make me happier—especially if I think there’s huge upside. I had an opportunity last year to buy a lab for $40 million that I could have built the value to $80 million or $100 million. I just don’t want to do that. I’d rather acquire something for $5 million that has multi-hundred million or billion potential. I’m looking at both types of acquisitions, but it gives you an idea of the way I’m thinking. I’m the largest shareholder in the company. Every decision I make is on behalf of the shareholders to protect the value we’ve built and continue to grow that value. That’s the way we operate the company. I’m glad to see you here.

I appreciate that answer. Good luck to Q4.

Appreciate it. We have one more question here. If anybody else has questions, please queue up. If not, we’ll finish with one final question. Sorry, Jordan.

Our next question comes from Patrick Patterson, Investor. Please go ahead.

Good morning, Ted.

Good morning.

Congratulations on a really great job. I mean, when I woke up this morning and waited for the earnings, as soon as it hit, I saw $6 million plus in EBITDA, and I figured the stock would be at $15 by the time I looked at it. I mean, really, because I knew what that meant was that you had figured out a way to get in a lot of testing in the worst quarter that you could ever have. I don’t know how you did it; but I didn’t understand why the market didn’t realize how positive it was. It has something to do with the non-cash expenses. I’m not an accountant, but I looked and saw almost $2 million worth of non-cash expenses for exercising stock options. Could you take a moment? I know you were talking about that earlier, but can you explain what all that is?

Sure. Yes, I don’t want to get into too many specifics, but as an example; when we acquired Nebula, we hired two key employees from Nebula that were two of the founders. We were going to hire them both for stock options. One, actually, we couldn’t hire until his paperwork was in place. We just issued those stock options more recently, and it’s a large block of stock options, and then you have to expense them. The interesting thing is we’re expecting them; they’re out of the money. We have non-cash expenses for stock options that are literally out of the money; yet it’s hitting our earnings and it is so frustrating. That’s an example. In the ordinary course of business, we hired several executives this year. We’re growing in multiple directions. Anyone that’s a seasoned executive is motivated by the stock option. We issue the stock option, but all those stock options are probably at the money or out of the money and we’re expensing those. That’s a big chunk of the expense that explains the stock option portion of what you’re asking. That’s a biggie. Then again, we’re depreciating Nebula, alright? Even though Nebula in my mind is growing dramatically in value, we’re depreciating it because when we acquired it, it was mostly goodwill. That’s just another example. Other assets we acquired are being depreciated. It’s unfortunate because, of course, analysts have to report earnings and multiples of earnings. It’s frustrating. But what’s important, Pat, is to pay attention to underlying value. That’s more important than following SEC GAAP accounting rules. What matters is are we building value? The beauty of the adjusted EBITDA number; that’s a real number. That’s why we’re building the underlying value of our subsidiaries. Again, all five of our subsidiaries are firing on all cylinders. Our manufacturing dietary supplement business is growing substantially this year and very profitable. That growth is just starting; it wasn’t in the first half of the year, but it is now. We’ve added new customers; we’re killing it in our manufacturing facility. That business is growing and profitable. Our other three subsidiaries have big potential. I wouldn’t worry about the stock price. Again, I shouldn’t be talking about stock price so much. I’m not worried about it. I’m building value. And with all the things I talked about in Abu Dhabi and G42 and all we’re working on, I wouldn’t worry about income versus EBITDA at this moment. The point is the EBITDA is significant; it’s real. Hope that answers your question, Pat.

Thank you very much. Yeah, it really does. And Ted, the only thing I worry about is you getting hit by a bus. I’d love to see you start.

Well, here’s what I can tell you. I work out every day, as passionate as I am about working at our company, I also work out; I care about my health. I can tell you I’m in the best shape of my life at age 63. You should see me; I’m at the gym, and people see me on the telephone three quarters of the time. I’m at the gym with my headphones on, and I’m living and breathing our company literally 24/7. I take a few hours on Saturday night to pay attention to my wife, and other than that, I’m 24/7 on our company. I’ve never been more excited because, building a $15 million company into a $150 million company is one thing; building it between a $150 million or $175 million company and seeing the very real possibilities of becoming a $1 billion and $2 billion valuation is another. I have great investment banks and amazing opportunities; I can’t tell you how well our situation is leading into next year. So forget stock price; forget earnings reports; just look at how we’re going to position whole genome sequencing. This is going to be a major industry, and we could literally be one of the leaders. Great global leaders are coming to us wanting to give us their best deal; that’s how well we’re situated. Normally microcap companies don’t establish these types of relationships and have this platform. I’m very excited going into next year for all the different things. I can’t tell you week to week what’s going to develop, but I can tell you we’re so well-positioned. I’m really excited for next year, and I appreciate all your support, Pat. Thank you for your questions. And Jordan, back to you. If there are any more questions.

This concludes the question-and-answer session. I would like to turn the conference back over to Ted Karkus for any closing remarks.

Thank you, Jordan. Again, thank you all for joining. You can hear my passion and enthusiasm; it’s all real. I hope I didn’t go on too much. We did this at the hour mark, and we started about five or six minutes after, so we haven’t even hit an hour. That’s good for me to be under an hour. If you ever want to hear more about the company, you can always go to the VNDRS that run more hosts. It’s a great way to get updates. With that said, I really think I recapped through the last two people that asked questions. I’m super excited for the future. I appreciate all your support. If you’re a long-term investor and you really have questions that must be answered, feel free to reach out to me. I don’t avoid investors or questions. The VNDRS typically answer most of your inquiries anyway; I wish you all the best of luck. Have a great day, and thank you, Jordan, for hosting the call.

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.