ProPhase Labs, Inc. Q4 FY2022 Earnings Call

Thank you, MJ, and thank you all for joining me today. Before we get started, I would like to read the forward-looking statement. Fortunately, our attorneys gave me a shorter version today, thank God. I would like to remind you of the company’s Safe Harbor language. During this presentation, we will make forward-looking statements, including statements regarding our strategies, plans, objectives, and initiatives and the underlying assumptions. While we believe that these forward-looking statements are reasonable, as and when made, forward-looking statements are based on expectations that involve risks and uncertainties that could cause actual results to differ materially. These risks and uncertainties include, but are not limited to our ability to obtain and maintain necessary regulatory approval, federal economic conditions, consumer demand for our products and services, challenges relating to entering into and growing new business lines, the competitive environment, and the risk factors listed from time-to-time and our filings with the SEC. This call will present non-GAAP financial measures such as adjusted EBITDA. Reconciliation of these non-GAAP measures to the most comparable GAAP measures are included in the earnings release furnished to the SEC prior to this call and available on our website. Alright, now that I got that out of the way. Again, I want to thank everybody for joining me today. I don’t want to reread the press release, and quite frankly, the press release is pretty self-explanatory. If you don’t get what’s going on from the press release, then you are wasting your time and I don’t know why you are on this call. First and foremost, I want to mention a couple of things: one, we have two fantastic investment banking firms that we work with, and that’s critically important when you are a small cap development stage company. It is crucial to have good relationships with investment banking firms, particularly high-quality firms that focus on small-cap development stage companies like ours. In our case, I am talking about ThinkEquity and H.C. Wainwright. They both cover our stock, and I appreciate both firms. In addition, we work with Renmark Financial primarily for retail investors. If you have never seen a Renmark virtual non-deal roadshow call, I do these probably every two or three weeks. If you want to get updated, feel free to reach out to Renmark and sign up for the next one. On our website, we have two company presentations: one is on the whole company, and one is just on the biopharma division. The main company presentation is probably updated every couple of weeks, and you can go there to learn more information. So with that, the tone of this call is simple. I am going to try and keep it brief and then go into a Q&A. Hopefully, there are questions in the Q&A too, so I can go into more details. First and foremost, and I said this in the press release, if you are investing in our company or you are investing in any small-cap development stage company, you have to be investing in management. I learned that when I was on Wall Street 30 and 40 years ago. If your management doesn’t execute, I don’t care what your products or services are; it’s probably going to turn out to be a bad investment. And the one thing I can tell you is you can look at my track record; it is the track record of your management team and our company over the past ten years, and honestly, we have killed it. Alright, we had a $0.65 stock ten years ago; since that time, we paid out $2.40 of special dividends, and our stock is up however many multiples from what it was at $0.65. I’d say the majority of our shareholders in our company have probably been with me for ten years or longer, and they have been well rewarded for their patience, and I thank you for your patience. Having said that, not just over the last ten years, but even over the last two years, our performance has been phenomenal. We turned and sold the Cold-EEZE brand for $50 million, and then I didn’t squander a penny of that money. Everything I do is towards building long-term value in the company. I pay attention to per-share basis; that’s why we do stock buybacks. I think about terminal value on a per-share basis. What’s the value of our company divided by the number of shares outstanding? What’s the value of our company going to be years from now, divided by the number of shares outstanding years from now? That’s how I think; that’s from my Wall Street background. Every CEO of every company should think that way. Anyone that doesn’t like stock buybacks and stock dividends should have their head examined. In any event, I am the largest shareholder in the company. Everything I do is aligned with our shareholders. Everything I do is for the shareholders. And believe me, I put our shareholders above and before myself. So having said that, after we sold the Cold-EEZE brand, we did the stock buybacks, we paid the dividends, and we waited for the right opportunity to come along. It came along with COVID; we quickly pivoted and built a fantastic lab, and the last two years’ results speak for themselves. Frankly, they are pretty phenomenal. Tell me another company that raised $37.5 million in January two years ago, and now we have over $40 million in net working capital. That’s after spending tens of millions of dollars in stock buybacks, tens of millions of dollars between stock buybacks, dividends, and acquiring several companies that we are now going to build out that, hopefully, my goal is to turn us into a multibillion-dollar company. That’s the goal. We pivoted and demonstrated that we executed; obviously, look at the numbers. I’ll just tell you very briefly, our revenues for 2022, $122.6 million, that’s an all-time record in the 30-plus year history of the company; $18.5 million net income, all-time record; $38.6 million adjusted EBITDA, all-time record; and we still have $44.6 million net working capital as of year-end, and that’s after all the acquisitions that are going to transform our company. So we were primarily a COVID testing company, COVID, and flu, and upper respiratory company for two years. We are now a well-diversified company. It has been transformed. Moving forward as COVID slows, and I know that’s why the stock pulled back, but I have explained this ad nauseam over the last couple of months for anybody that watched our Remark. We are now transforming our company in which the underlying value from the other assets in our company is growing rapidly, and the growth and value of these other assets are going to more than make up for the decline in value of our COVID testing business. And the truth of the matter is we never got a multiple on our COVID testing business anyway. So quite frankly, it’s apples and oranges; it almost doesn’t matter. You have to look at some of the pieces, and there is a lot of value in the pieces of our company. I’ll mention very briefly our manufacturing facility. You can go back to our last roughly six press releases. I have given updates on most of our subsidiaries. Our manufacturing is growing like wildfire. The lozenges business is a growth industry right now, combined with the fact that our largest competitor was acquired by private equity a couple of years ago, and they really screwed up the business. They are unreliable, and several of the largest lozenge brands in the world are all coming to us. They all want us to be their primary manufacturer of their lozenges. They are willing to sign long-term contracts; they want us to build out the equipment and build our capacity. Some of them are even willing to invest in the equipment necessary to build our capacity. That’s how much they are impressed by how we do business. They are impressed with our customer service and reliability, and frankly, it’s almost like they are desperate. We have one company from another country, a household name; I don’t even want to mention the brand, alright? One of the biggest brands in this country—though they are based in another country—they not only want us to do the manufacturing for them in this country, but they potentially want us to do their lozenge manufacturing globally. Our lozenges manufacturing business is going to explode. I am not guessing about that. Of course, there are no guarantees, but it’s basically as fast as we can build the capacity, that business is going to grow. Just imagine, a year from now, we are doing—and I put this in a press release, we are targeted to do about $25 million of revenues in 2024 in our manufacturing. With the type of growth, think about what that business could be worth; I don’t know, it could be worth $60 million, $75 million. Just that alone, this one business, and nobody pays attention to, plus our net working capital could be worth the whole market cap of our company. How ridiculous is that? Now we get into Nebula Genomics. There are startup companies with $50 million and $100 million valuations that are probably three years behind us. They don’t have the relationships that we have. They don’t have the infrastructure that we have. They don’t have the business model. They are story stocks, and yet they have $50 million and $100 million valuation. I am not going to tell you what Nebula is worth, but Nebula is actually potentially growing even faster than our manufacturing facility. Our goal is to be the low-cost provider in the country for whole genome sequencing. I am not going to explain what whole genome sequencing is, but I can tell you it is at the heart of something called personalized precision medicine. Whole genome sequencing studies your whole genome as opposed to competing companies whose products only study a very small percentage of your genome. It’s great for ancestry information, and it’s awful for health-related information; if you want high-level health information, the whole country is going towards trying to be more healthy. All of the research is all about starting with the whole genome sequencing test and figuring out how your genetic makeup plays a role in your health. This is all in the first inning. This is like where the Internet was 20 years ago. We are so perfectly positioned. We have world-renowned George Church, who is a founder, and he is on our Advisory Board; he is a shareholder of our company. We have Russ Altman, equally well-known out of Stanford University; they are on our Advisory Board. We are working with them regularly and building our company. They are introducing us to some of the largest companies in the world. I have said before, we are working not only in this country but in Abu Dhabi and the UAE and working with some of the largest companies in the world on our Nebula Genomics initiatives. A lot more to come, enormous potential. And then our esophageal cancer test, I can’t tell you how excited I am. We’re going to help many people save many lives and make our shareholders an enormous amount of money. That’s the goal. All I can tell you is since we took over, the number of scientists and people that I have got involved with this has only further increased my enthusiasm and confidence in our ability to develop our esophageal cancer test. If people want to in the Q&A, I can go into more detail explaining it. The bottom line is we have ongoing studies. There’s a real possibility that we will commercialize this test towards the end of this year in this country as a research use only test for cash pay. Our goal ultimately is to get the insurance companies behind us as backing us with a CPT code. We believe we would be reimbursed $1,000 to $2,000 per test, and our initial target is 2 million people who have Barrett’s esophagus who get endoscopies once per year. Two million tests times $1,000 or $2,000 is a $2 billion to $4 billion market in this country. We believe we could get the CPT codes as early as the beginning of next year. We are working with key opinion leaders and major cancer institutions who are all getting more and more involved in this, and this is going to, I believe, look more and more like a reality as the year goes on and look at our market cap, just how much of that is reflected in our market cap right now given the potential, time frame for commercialization. Finally, we are working on Linebacker, our cancer compound. We’re not going to break the bank and spend a lot of money on it. It has enormous potential, but that’s longer term. Our goal is just to license it to a major pharma sometime next year after we complete a Phase I study, possibly late next year. We won’t spend a lot of money on it, but it’s possible we could do a licensing deal after the Phase I study. It’s worth the entire market capital of our company right now; that’s low risk to us, and it’s enormous rewards, and it’s icing on the cake to everything else we’re working on. Of course, we have Equivir, broad-based antiviral that we will potentially introduce to the marketplace and commercialize later this year. Initially, we will sell it online, and ultimately the goal is to get into the retail stores. We are experts in selling antivirals, OTC, similar to what we did with Cold-EEZE, and I personally was involved in the turnaround and sale of the Cold-EEZE brand. We still have some of the same senior salesmen. Joe Brennan has been in this business for decades; he kills it. He has relationships, and we are the number one national broker that we work with and every major retailer. There’s so much going on there, both with our current dietary supplements with Legendz XL and Triple Edge, which is actually gaining momentum as we speak, and then once Equivir is introduced to the marketplace and in addition to that, Nebula Genomics, we can introduce a test, a whole genome sequencing test that we are working on introducing in the stores, and that could build into a whole range of health tests. We could actually be the leaders in providing health tests in retail stores. There’s so much in so many directions, there’s a lot of overlap, and there are a lot of synergies between our various subsidiaries. I’m really excited about the future of the company. Anyone that’s focused on us as a COVID testing company, you’re completely missing the boat. That’s going to be the least important part of our company down the road, certainly in terms of value. COVID testing obviously has the revenues, but we never got a multiple of those revenues anyway. Now we have other businesses; the esophageal cancer tests are going to have zero revenues this year. By the end of this year, who knows what the value of that test could be. The kicker is we are working globally. We have global initiatives that we are working on to commercialize and to develop and then commercialize our esophageal cancer tests in other parts of the world. Just think about it: everyone that gets esophageal cancer in this country, guess what, they get it in every other country too. It all starts with GERD, gastroesophageal reflux disease, that acid in your stomach. As many people get a huge percentage of the population as every country gets GERD, then sometimes it develops into Barrett’s esophagus. One out of 50 or one out of 100 people that get Barrett’s esophagus turns into cancer. Right now, in fact, we just met with one of the scientists last night. He is a surgeon, and he operates on people with esophageal cancer all the time, and he was telling me how excited he is for our test and how desperate the industry is for a test like this. It’s just sad right now. When you get diagnosed with esophageal cancer, there’s about a 73% to 80%—I’ve seen various numbers, I’m sorry—79%. I’ve seen 80%. I’ve seen as high as 90% of people diagnosed with esophageal cancer die of esophageal cancer. That’s because they’re diagnosed too late. Our test lets you know well in advance, so you have a chance to do an ablation procedure to kill the pre-cancer cells before they become cancerous and it’s too late. It’s going to save a lot of lives. With all these things going on with the company, I am really excited about the future. I want to cover a couple of housekeeping items related to the numbers for those of you that are focused on the numbers. Reporting our Q4 was complicated because we had a $5.9 million accounts receivable write-off. The write-off was related to testing we did in the first half of the year. HRSA, the government-funded entity that was actually paying for all the patients being tested that did not have insurance, and I understand people walking the streets in New York, most of them didn’t have insurance with them. Whatever the case may be, the bottom line is if we couldn’t collect the insurance from insurance companies or we could collect the insurance information, HRSA was paying. All of a sudden, that funding stopped; they gave us one week’s notice, and then there was the promise that HRSA was going to be funded again. We continued to test; this went on for many months. There was a real possibility that we were going to collect on these patients. When HRSA became clear they were going to be funded, we looked into potentially tracking down the information on these patients to see if they had insurance even if we didn’t collect it initially. This is a complicated matter; we are talking about tens of thousands of tests. Ultimately, we have a new senior finance team. We hired three fantastic senior-level executives in our finance team. They all have decades—ten years or more of experience; probably any one of the three could be our CFO. Robert Morse heads our department, but Heather and Greg are equally fantastic. We have a very strong finance team, and they recommended to be conservative and prudent that we take the $5.9 million write-off. What complicates it is that we’re writing this off at year-end. Even though it’s related to testing activity in the first half of the year, if we did $5.9 million less revenues in the first half of the year, it wouldn’t have even been noticeable. Our revenues are so ridiculously large. Unfortunately, because it’s at year-end, if we report the fourth-quarter net income number, we would have to report it with a $5.9 million write-off, which frankly, I think would be misleading. Rather than doing that, we gave you the full-year numbers. Just so you know our numbers, we still did $21.8 million in revenues. Not counting this, you must count the $5.9 million, but I want to give you a fair picture of what our fourth quarter looked like. Not counting the $5.9 million, we would have reported $1.8 million in net income. Furthermore, we had performance payments related to our testing activities throughout the year, which probably should have been expensed throughout the year, but hit the fourth quarter. Because all that hit the quarter, we had the $1.8 million in net income, but that had been expensed throughout the year. Our net income would have been significantly over $2 million, but we did account for those performance payments in the fourth quarter. And then, of course, we have the $5.9 million write-off, which I’ve now explained. Two other things to mention very quickly: why is our SG&A so high? Actually, it’s because of that $5.9 million; that’s the jump in SG&A. Finally, our accounts receivable, while it looks like it hasn’t changed, I understand it’s because we’re still doing ongoing testing. First of all, part of the accounts receivables is related to Nebula Genomics and Pharmaloz Manufacturing, but of course, the bulk is from testing. As we get paid by insurance companies, we have new tests; that creates no accounts receivable. As I noted, there was a backlog because we had all of these patients that we tested. This is not like walking into a doctor’s office where you stop at the front desk; you fill out all these forms, give your insurance card; it takes 15 minutes. These are people—many of our testing where people walk up to a tent and get a quick COVID test, taking a quick specimen without the sophisticated equipment and without taking the time to properly collect the patient’s insurance information. Now, we’ve found we’re working with a couple of different companies; one in particular, in another country, is like 50 people working on this, going through all of our accounts receivables. We’re talking about literally tens of thousands of tests and patients, and they’re working through every one of them; they’re doing a fantastic job. My Head of Billing just walked in just before this call; she said she has great news for me. We’re working through that accounts receivable very quickly. We’ve always got some accounts receivable while we’re doing testing. At the end of the day, we have to organize the information, get it to the insurance companies, and the insurance companies take four, six to eight weeks to pay. It’s high-quality accounts receivable, but nonetheless, it still takes four to eight weeks. So it’s always going to be rolling, where we always have new accounts receivable replacing old accounts receivable. I believe that our accounts receivable is going to be less when we report first-quarter. Second quarter is going to be significantly less. So, what everybody is concerned about accounts receivable, that was a long-winded way of saying don’t be concerned about it at all. It’s coming down to reasonable levels. In addition, we may be able to find insurance on patients that previously did not provide insurance that is not in our accounts receivable and not in our revenues. We may get some nice bonuses down the year from that. We have a squeaky clean financials team and in addition to that, we may have some upside in the coming quarters. I addressed a few quick questions. I’ve now been speaking for about 25 minutes; I covered an awful lot. I just want to review before I open it up to a Q&A if I want to mention anything else. I think I’ve pretty much covered it. Look, at the end of the day, I personally have executed my entire career. The shareholders who know me for a long time know that the people I hire are people that execute, and I tell them that. You know what, for every three senior-level people that I hire, one works out. First of all, I go through an incredible screening process. So, the three are all great, but having said that, you never know until you hire somebody. We’ve gone through a transformation in terms of our management team. Over the last couple of years, it just gets better and better. We have a fantastic management team, literally, not just our finance department, but all the people on it. It starts with my son, Jason Karkus, our Head of IT, is amazing; Sergio Miralles, Alice Lioi, who has done so much not only in the lab but also on the biopharma side. These are the most loyal people in the world that I’ve worked with for the last couple of years. Sam Beeler has been an unbelievable addition to our team; he’s leading the way in Abu Dhabi. He has a multiyear relationship with some very big players in Abu Dhabi and around the world and is helping us become a global company. I don’t want to leave anybody out; those are some of the senior people. We hired a great guy who may become a senior executive. Right now, he’s a senior adviser to our company, but he’s working virtually full-time with us; he has decades of experience as an entrepreneur and as the CEO of other small-cap development stage companies. I’m sure I’m leaving somebody out. I apologize if I am. I am really, really excited about the team that we have, and I’m really excited about the assets we’re now developing. It is my destiny to build a multibillion-dollar company. I believe that we now have the assets to develop that can make that a reality. Again, I just want to highlight everything that I tell you, I believe in my heart, number one. Number two, if I tell you we’re working on something, we’re really working on it. If I tell you we’re working on global initiatives, our little company is really working on global initiatives. Please stay tuned. There’s a lot more to come. With that, MJ, I would like to open it up to questions. I hope that there are some questions lining up. I’ll hand it back over to you.

Thank you very much. Today's first question comes from Yi Chen with H.C. Wainwright. Please go ahead.

Thank you for taking my questions. My first question is, could you comment on the current trend of COVID testing at your lab?

Sure. So, it’s obvious, it’s slowing. I think it was LabCorp, one of the largest labs in the country, said that they expect COVID testing to be down 90% this year. Now what’s interesting about our testing is that we blanket New York City with tests, and people are still spontaneously walking up to these tents to get tested. There are still people when it’s convenient for them; they want to get tested. So it’s not like the testing is going away. It’s no different than when I walk into the gym, and there are still people wearing masks, right? So, people are still being cautious. Still, if you get COVID, the best thing you can do is get tested or confirm having COVID; it’s to quarantine. People finally realized that vaccines don’t prevent you from getting COVID, and now it’s coming out that vaccines might actually be more dangerous than getting COVID. People are still getting tested; testing is clearly dropping, and it’s becoming a less significant part of our company. Certainly, from a value proposition point of view, I highlighted all the other divisions that are doing so much better. There’s no question that the trend in COVID testing is going to continue to drop. Having said that, I have to figure out what I can say right now; we’re still going to have a solid first quarter, and we’re still doing COVID testing. When we got into this business, we blew away 95% of labs, but we’re still outperforming 95% of labs. While our COVID testing is dropping, it’s not dropping as much as it is in the industry. I apologize that I can’t give future estimates and more detailed information. I hope that answers your question the best I can do on the call for now.

Thanks. You mentioned that you expect Nebula Genomics to grow more than 100% in 2023. Also, the manufacturing subsidiary could grow up to 100% year-over-year this year. Can you provide some general comments regarding the total revenue top-line growth in 2023 in terms of your expectations compared to 2022?

Sure. With our Pharmaloz Manufacturing, I don’t have the exact numbers; I don’t know that we reported them, so I don’t want to give numbers that were not reported. Maybe I’ll do an updated press release. I know with Pharmaloz, I believe off the top of my head, we did about $7 million or $8 million in revenues last year, and our goal is about $25 million in 2024. I think we will continue to grow up to 2024. Quite frankly, I think we could do $50 million in that. I think we have demand for $50 million of business annually. If we had the capacity, it’s just a matter of how quickly we build out the capacity. We’re starting by buying an individual piece of equipment right now that is ramping up as we speak. There are larger pieces of equipment and a whole new lozenges line that we’re building that is going to happen in the fourth quarter this year. Our fourth quarter is really going to jump once that’s operational. Our numbers are growing. We’re at capacity. It’s not clear exactly what our numbers will be this year. They’re going to grow significantly this year compared to 2022 where we did $7 million or $8 million and now we’re targeting approximately $25 million in 2024. As far as Nebula Genomics is concerned, that’s more complicated; people order tests, and then sometimes it takes them a while before they send in the test to be processed. In some cases, they aren’t billed for the subscription. We sell the test across; that’s how we continue to be the low-cost provider of whole genome sequencing in this country. Nobody can compete with us. This business is going to explode. There is no question about that. Right now, where our business model works is when you purchase the test; we are selling at approximately cost. The real money is made on the subscription. If you don’t send it in, we make the money on purchasing the test, and not the subscription, but we didn’t have the process to test, so we save a lot of money there. We still make a lot of money. But in any event, we don’t get to book the revenues for the subscription until they send the test in. So there’s a lot of deferred revenues. What happened was historically the lifetime subscriptions we had to book the revenues over three years. There’s a lot of deferred revenues. I think we fixed that issue now. We have changed the agreements that you sign when you purchase a test so that we will be able to book the revenues the same within twelve months of purchasing a lifetime subscription. It’s really kind of silly; it’s an accounting issue where we sell a subscription; we get the money upfront, but we can’t book it as revenues until we provide the service for that subscription. We’re working out a way to ensure that we’re actually getting paid for this setup as opposed to the ongoing subscription. In any event, I apologize for sharing a complicated GAAP accounting matter, and we’re working through that now. I’ll give more details maybe in a press release, but what I can tell you is Nebula Genomics numbers are growing dramatically. I want to say that we have a target, I guess, if I—I don’t know if I’m allowed to say this or not. Let’s move on to your next question. Suffice it to say, our Nebula Genomics is probably growing at an even faster rate than our manufacturing. I would say that our revenues in Nebula Genomics will be greater than our manufacturing revenues this year. How much greater, I just don’t want to get more specific. But Nebula Genomics is the type of business where we could be doing $100 million, $200 million in revenues or more; they could be valued at $1 billion in one day. I am not saying we will, but certainly, I think it’s worth a lot more than what’s represented in the stock price today.

Got it. My last question is the operating expenses in the fourth quarter, which appeared to be significantly higher. Do you expect to maintain this operating expenses level in 2023? Do you have sufficient capital to do that while continuing to buy back shares?

Great question. First of all, I will never buy back shares if it puts us in jeopardy. That’s number one. The buyback of shares is not significant relative to the amount of working capital and the cash that we have. We have a significant amount of cash on our books, and our net working capital is over $40 million. Buying back stock doesn’t really play a role; that’s number one. Number two, as I mentioned, with the fourth quarter, that one-time SG&A write-off is what hit the fourth quarter, which made our operating expenses look high. I make a point to be very, very efficient with our operating expenses. When we had performance payouts, we will try to spread them out over the year going forward instead of hitting the fourth quarter. Those performance payouts were paid out in the fourth quarter, which showed up in our fourth quarter, which really understates how strong our fourth quarter really was. The bigger expense was the SG&A; that was a one-time event. As I explained before, if anything, we’re now in the opposite position, where we have been testing that is not on our books, not in our accounts receivable. We believe that we are going to find insurance for some of these patients because there are ways for companies that can do research to find insurance on patients that have been tested; we’re now starting to uncover that information. If anything, our operating expenses should be less going forward at the same time that we could have some surprises in collection. When we say our operators expenses are going to be less, let me just pull back a second on that statement. We’re building four or five subsidiaries that have enormous potential; Pharmaloz, we’re building, although our revenues are growing at such a fast clip, it’s going to be profitable, no matter how much we spend. It’s just a question of how much of that we purchased equipment is going to be capitalized and how much will be expensed. We have an enormous amount of equipment that depreciates very, very quickly, even though that equipment could last 20 years; it depreciates very, very quickly. A lot of these are non-cash expenses, and that’s just a cost of building our businesses. We’re growing at a rapid rate. We’re building businesses that I think ultimately could make us a multibillion-dollar company, so you have to put it in that perspective. I can’t tell you exactly what the operating expenses are, but I can tell you the amount of management we have, overhead we have pales in comparison to the value of the businesses that we’re building. I really believe we’re one of the most efficiently run small-cap development stage companies you’ll ever come across. All these other companies that raised capital two years ago, burned through their capital, their stocks traded down 90%, aren’t coming back; they can’t raise capital. We did the opposite. Every dollar that we spent, we generated and created $2 or $3 or $5 in value. That’s why after we raised capital two years later, we still have more capital than what we raised two years ago, while building all these fantastic businesses and making all these fantastic acquisitions. Our operating expenses, yes, I know you’re an analyst, and you’re going to get into the numbers. Our operating expenses—you have to take out the SG&A, which is one-time. The performance payouts will be spread out over time instead of hitting the fourth quarter in the future. I would not take our fourth-quarter number and say those are our operating expenses at this point; they’re not.

Okay. Thank you.

Yi, thank you so much. Thanks for following our company; really appreciate your support. Thank you so much for the questions. MJ, can we go to the next caller, please?

Yes. The next question is from Hunter Diamond with Diamond Equity Research. Please go ahead.

Firstly, congratulations on the recent progress, can you provide more details on the esophageal diagnostic tests and potential economics?

Yes. Great. Thanks for the excellent question. Sure. First of all, we can commercialize this as a cash-only test. Until the key opinion leaders, cancer institutions, and insurance companies get behind you, the question is how effective will we be in distributing that test? Therefore, even if we commercialize it later this year, I have no idea what the numbers are. I’m certainly not going to project it or rely on revenues from this year from a cash-only test. It will be a good way to start. We might hire some salespeople to get the business off the ground. The real money is when we get the CPT codes. Again, the CPT codes, CPT codes, what you get reimbursed is based on the complexity of the test. We estimate that the CPT code will reimburse us for $1,000 to $2,000. Right now, I want to estimate that the test costs us under $500. That means the gross profit margins could be anywhere from, let’s say, 50% to 75%. Once we start doing those tests in volume, it’s possible that the test will cost us $300 or $250 or even less. At that point, the gross profit margins become ridiculously large. We are going after—first of all, there are over 70 million endoscopies performed per year. Specific to GI, it’s over 50 million. I only focused on the first 2 million, which are people with Barrett’s esophagus, but I understand this test could be performed by more than just people with Barrett’s esophagus. The starting point is to go after those 2 million people to get an endoscopy every year, and in an endoscopy, they are removing seven or eight biopsy tissue samples. We are simply taking a sliver of a tissue sample, running it through our test to predict whether or not you are going to get esophageal cancer. If you have Barrett’s esophagus and you have 1 out of 50 or 1 out of 100 people get esophageal cancer that have Barrett’s esophagus, that may not sound like a lot unless you are the person with Barrett’s esophagus. All of a sudden, you are saying, 'Oh, my God, I may die.' Just think about it, even if you had to pay cash, you wouldn’t pay $1,000 or $2,000 to know you are going to get esophageal cancer down the road and you can do an ablation to destroy the pre-cancer cells before you get esophageal cancer or when you want to know for peace of mind. Who wouldn’t pay that $1,000 or $2,000, especially since you are getting an endoscopy anyway? From an insurance company’s point of view, we believe they are going to be motivated because people right now that are diagnosed with Barrett’s esophagus are getting endoscopies every year, which cost the insurance company $2,000, $3,000, $4,000. They get them every year, year after year after year. Wouldn’t the insurance company rather pay $1,000 or $2,000 one-time? Also, for the people who actually get esophageal cancer, if we can prevent them from getting esophageal cancer, think of how much money that saves the insurance companies. We believe the insurance companies, from a monetary point of view, will be motivated to provide us the CPT codes. The way to get the CPT codes is to get the key opinion leaders and cancer institutions behind you, and that’s what we are doing right now a year in advance. When you read about how our scientists are presenting their findings on our esophageal cancer test at these major conferences, that’s all about building momentum and getting the key opinion leaders and cancer institutions behind you. We are involved with Mayo Clinic in the United States; I mentioned we are also working globally, which means we are working with major institutions and companies in other countries that are just as big as Mayo Clinic. That’s only the tip of the iceberg. I haven’t even gotten into this, but we may develop an even more effective and easier-to-use test that could be done on more than just people with endoscopes and potentially could be done in a doctor’s office. The potential of this test is enormous, and I can just tell you, we have a phenomenal relationship with Dr. Hartley at Mayo Clinic. My team speaks to him almost daily. We just met with a gastro-surgeon last night, who is hugely behind this test, and he is excited. We are now working with healthcare companies in other countries who are excited about the test. A lot behind this, the numbers have enormous potential, but understand it’s the development phase test. It’s no different than a cancer drug that’s been under development for ten years, and one day it’s commercialized, and all of a sudden it’s worth billions of dollars. I believe we are in the eighth inning of developing our esophageal cancer test. I hope that gave you some perspective. I appreciate the question. Hunter, do you have another question, please?

No, it definitely did. I agree. Endoscopies are sort of the standard of care, and it’s definitely a needed offering. Shifting over to Nebula, I know you recently announced the pricing that you are looking to differentiate on lower price. Can you comment on other aspects of how you are going to differentiate other than price? How much price do you view as a component of consumers purchasing genome sequencing?

Yes. There are really two components; there’s price and turnaround time and reliability and service. Our lab just happens to have better turnaround times, reliability, and service than virtually any lab in the country, which is why we went over all of these customers two years ago, why our business exploded, and we outperformed 95% of the labs. We have that down pat. We are building out our genomics lab as we speak. By the way, I didn’t mention this to everyone, I just walked into our lab downstairs for the first time in a few weeks. It blew me away; the carpeting is in, all the equipment is in. We have a fully built-out clinical lab that’s absolutely beautiful; it blew my mind. The same thing happened with our genetics lab, our genomics lab that’s going to do the whole genome sequencing. Again, these labs are really impressive. Anyone in the Garden City, New York area, ever wants to come visit, I promise you will be impressed. I looked at 60 labs to acquire in the last one to two years; all paled in comparison to our lab. So number one, from a lab point of view, hands down, people are going to come to our company to do whole genome sequencing and genomic testing. Number two, price, certainly for the universities, price is key, and also the direct-to-consumer price is key. The reason why major companies like 23andMe and ancestry.com never got into whole genome sequencing is because historically it was so expensive. You can’t sell a test to consumers at $1,000; they are just not going to pay for it. Whole genome sequencing was so expensive, so they instead built their whole model based on a technology that studies a very small percentage of your genome, which is all you need to get fantastic ancestry information. Especially when you test as many people as they have around the world, you tie it all together. You don’t have to study a big percentage of your genome to get very accurate ancestry information, but as they try to get into health-related information, the problem is they’re doing it with a test that studies a small percentage of your genome, which means that it’s not going to give you the type of results that you get with whole genome sequencing. It’s apples and oranges. Technically, our whole genome sequencing test provides more than 1,000x more data points than these other companies provide with their tests. That’s number one. For universities doing research, clearly, they are going to hold whole genome sequencing; that’s not even a question, but with the universities, they are on tight budgets. It’s critically important that when they have a certain budget, they want to test as many people as possible within that budget; price is critical. For consumers, they aren’t going to pay a fortune. If we can provide a whole genome sequencing test at that cost, how can anybody compete? Because of our relationships with global leaders, we literally are working with global leaders who want us to be their number one lab in the United States, representing them. We are getting the best deals of any company in the country for not only their equipment but their consumables. At the end of the day, the consumables are what drive price. We don’t believe anybody can process a whole genome sequencing test as inexpensively as we can. As far as the universities are concerned, I would say 80% of the decision is based on price. Clearly, we are going to mark up the price; if we are not selling them a description, we are going to mark up the price so that we make a profit. Even in marking up the price, we are still going to be able to offer it to them better than anyone else. Meanwhile, the universities doing research in personalized precision medicine is exploding. We are in the first inning. The amount of research that’s going to be ongoing in the coming years is going to be ridiculously large. It’s like the Internet 20 years ago. We are so well positioned; our company is so well positioned. It’s like if you found a leading Internet company 20 years ago, you didn’t know what was in advance, and you just wrote it for a few years. It’s amazing how much money we are going to make. Well, it’s the same thing with what we are doing now in the field of genomics with our whole genome sequencing. We are in the first inning; we are a leader in terms of a lab and our reputation, turnaround times, and customer service. In addition, we are working with the largest companies in the world, providing us with the least expensive consumables so that nobody can compete with us. We are working on potential strategic initiatives with some of the other largest companies in the world that want to partner with us, that are really impressed with our library and other strategic initiatives. These are global companies that want to partner with us, not only in Nebula Genomics but also with our esophageal cancer test and our Linebacker. They might want to even white label our whole genome sequencing test that we are going to be selling into retail stores; they may want to take our test, our packaging, let us do everything because we are experts at that, let them ship us and distribute it for them in other countries. It’s really far-ranging, and it leverages all the assets of our company. I hope that accurately answered your question.

No, it absolutely did. I think it’s a great growth area. Like you mentioned, the whole industry is in hyper growth, right? So, you are ideally positioning yourself at a very high-growth arena in the market. Again, thank you for taking my questions.

Of course, Hunter. Thanks so much. Thanks for your interest in our company as well. MJ, back to our next questioner, please.

Thank you. The next question comes from Patrick E. Patterson, Retail Investor. Please go ahead.

Good morning, Ted. Thanks very much for everything you are working on; it just sounds great.

Thank you. You are quite welcome, and thanks for your continued support, Pat.

Ted, I want to ask a question about Nebula Genomics also. I mean it’s pretty clear from just your discussion just now that Nebula Genomics is just a really important ingredient in the company’s future. And yet it doesn’t even seem to be included in our market cap to stock price. I just wonder if you have given thought to what we could do to literally unlock Nebula’s pent-up value. Could you talk about that some?

Sure. Great question. It’s interesting you should ask because I was just having a discussion about that this morning. Look, there are a lot of strategic initiatives that we are working on. There are a lot of things we are doing with our company. When you build a company that has assets with big potential, it gives you a lot of options on what to do with those assets. In my mind, if I think an asset is worth hundreds of millions of dollars, I am not going to sell it for $50 million or $100 million. If I think an asset is worth billions of dollars, I’m not going to sell it for $250 million. I think somebody asked me during a virtual non-deal roadshow call, and someone asked me, would you sell your esophageal cancer test; I can’t remember; he said $150 million or $250 million. I wouldn’t even consider selling it right now. Why? Could you imagine Amazon or Tesla; whatever the market cap is, 10 years ago somebody said, 'Oh, I will give you 50% more for it.' They would have been fools to take it. If I really believe in the assets that we are developing, why would I sell any of them now? With something like Nebula, honestly, I think that we could sell the business right now and create significant value for our shareholders today. I think a year from now, Nebula will be worth dramatically more. Quite frankly, I think I mentioned this once before; I was having a conversation with George Church, who is world-renowned in genomics. He could have retired on all the companies he has founded; he is a professor at Harvard, and he does that because of his love for genomics. He doesn’t do it for money. I don’t even know; I don’t want to speak out of turn, but he has made an enormous amount of money, probably more than the whole market cap of our company. One day, I was joking with him during one of our Advisory Board meetings, and I said, we might potentially have a buyer for Nebula Genomics of $100 million. He said, 'Don’t you dare sell Nebula Genomics for $100 million.' He was mad, he was like, 'Don’t even consider it.' I said, 'No, no, no, George. Don’t worry, we are not going to.' I hope that gives you some perspective; at the rate of growth, the market has not put a multiple on our revenues or earnings because they didn’t believe they would be long-term, and they were correct. Our COVID testing lasted longer than anybody expected; we did significantly more business than anyone expected in the last year longer than anyone expected. We never got a multiple on those earnings or revenues ever. On the other hand, I believe as Nebula grows this year, and the numbers really start to pop from a small base to a bigger base, we could get an enormous multiple of revenues. On a company like Nebula, especially when its peers have no revenues at all and they have a $150 million valuation. The type of valuation, look, hypothetically, we can IPO Nebula. I happen to be working on some other things that I want to do first. Hypothetically, there are companies; I think it was Alibaba just announced the stocks went up based on the fact that they want to split up into separate companies. You can unlock a lot of value with IPOs. It is possible down the road that I could IPO Nebula; I would rather do that and sell it if I think it’s going to be worth so much more in one, two, or three years. I wouldn’t want to sell it short because we can make a quick buck over the next three to six months. This gives you an idea of how I am thinking; I am thinking for long-term shareholders. Long-term doesn’t have to be five to ten years; it can be one to two years with what we are working on. We just have to wait and see how this plays out, but an IPO of Nebula is always a possibility. I would consider that before I consider a sale, just because it has so much potential, it’s growing quickly, and there’s demand.

Thank you, Ted. Appreciate it.

Yes. I really appreciate your continued support, Pat; I really do. Thanks for the call. MJ, on to the next one, please.

The next question is from Fred McDonald, Private Investor. Please go ahead.

Hi Ted. How are you doing?

Excellent, thank you. Thanks for calling in and for your support, Fred. How can I help you?

In your press release today, you mentioned the global opportunities for BE-Smart. Previously, you indicated that you are going to the United Arab Emirates in a couple of weeks. Is this to close a deal with BE-Smart and G42?

Actually, as I mentioned, Sam Beeler has been our Chief Strategy Officer at Nebula and has tremendous relationships with companies, including G42 Healthcare, which was acquired by Mubadala, which is a $43 billion company. They are very, very big in healthcare; it’s a primary focus of theirs, and they’re huge in genomics. They are responsible for the Emirati Genome Program, which tests 1 million residents in the UAE for whole genome sequencing. This is a prime focus of theirs. At the same time, they have a tremendous lab, which I toured; it might have been six weeks ago, I toured their lab. It’s interesting. We’re building our lab here almost in parallel. It’s interesting; the equipment is in both. What’s an interesting coincidence is we have very specialized equipment that we use to do esophageal cancer testing, and what a coincidence, G42 Healthcare happens to have that exact same equipment. G42 Healthcare is the only large company over there that we are talking to. A lot is happening both with Nebula Genomics and our BE-Smart esophageal cancer test. It’s just not appropriate for me to get more specific. When I have something to announce, I will announce it. I don’t want to mislead anybody. I am just working, developing the value of our assets. There are a lot of opportunities, we’re working on a lot of opportunities. What I can tell you is that what we’re working on, number one, is very real. Number two, everyone around us, key opinion leaders, cancer institutions, large healthcare companies, are all interested in what we are doing. They are all taking our calls and discussing strategies with all of them. I literally just spoke to—who was it? A GI surgeon who was super excited about this esophageal cancer test. At the same time, look, people get esophageal cancer around the world; everybody gets GERD—not just in this country. It’s growing at a rapid rate, especially with health, apparently, people that gain weight have more issues with GERD, and it’s taking off around the world. It’s a big problem over in the UAE and the MENA region, North Africa, that whole area. The numbers are taking off for GERD; Barrett’s esophagus; they’re taking off for esophageal cancer. Wouldn’t the leader in Abu Dhabi love to take credit for introducing an esophageal cancer test that saves thousands of lives? It would be great PR, great motivation, and he just happens to back the largest healthcare company, not to mention he backs the largest bank in Abu Dhabi. There is a lot going on over there; we have a lot of opportunities and are following up on all of them. When I have more to announce, I promise you, I will update our shareholders as quickly as I can. I hope that answers your question appropriately; I really don’t want to give people too excited, but at the same time, it’s awfully exciting.

Thanks, Ted. One more question; can the BE-Smart technology be used in other procedures?

BE-Smart technology is literally taking a sliver of a biopsy of the tissue biopsy. We are actually working on other technologies. The interesting thing is we are studying and this is proprietary unique proteins. What happens is everybody has a mix of proteins. People that develop esophageal cancer, the ratio of certain proteins changes. The key is to find the right protein markers. From what I understand, nobody else has uncovered the protein markers that we are currently working with. Those same protein markers could potentially be used for more than just esophageal cancer. First, it could be used for more than just testing to predict the esophageal cancer; ultimately, understanding more about those protein markers could help us develop a therapeutic to treat esophageal cancer. That is way out there—sort of Phase 2. At the same time, in parallel, I haven’t even gotten into this in detail yet; it’s possible we could develop the test to work in a different way where we don’t even need an endoscopy, where it’s a procedure that can be done in a doctor’s office. I don’t want to go into more detail than that now. Those are the first. There are two to three different ways the esophageal cancer test could play out; it will have enormous potential. It doesn’t exactly answer your question, but I can tell you that’s what we are focused on at the current time.

Great. Thank you, Ted.

Thank you. I think that concludes our call. MJ, is there anyone else?

No more questions in the queue at this time. I will turn it back to you for closing remarks.

Fantastic. Look, we ended up. This was an hour call, which is perfect; that’s what I would have targeted. I hope I didn’t talk too much. I hope everyone got an idea of what we are working on. Everything we are working on is real. There are no guarantees in life. If you invest in small-cap development-stage companies, at least you are investing in a management team that has historically executed. I am also the largest shareholder of the company, so you can bet I am going to continue to execute on behalf of the shareholders. We have a fantastic management team in place. We have a demonstrated history not only over the last ten years but over the last two years of executing. We have horses in the race that we never had before, and we have assets that we never had before that have enormous potential. We executed the other times we had assets with Cold-EEZE when we took it over; I don’t even know if that had any potential, we turned around and sold for $50 million. What we are working on now is 10x, 20x the potential of what we did with Cold-EEZE. Our lab, again, we got into the business; we executed literally from the first week we were in the business. It’s ridiculous how much business we did. Now we have all these different assets, and you can bet against us, but we are developing all these different assets. I would be surprised if at least one of these assets doesn’t turn into something really big, and the truth is I don’t see why all of the assets shouldn’t turn into something really big. With that, I really appreciate everybody joining the call today. I appreciate your time and your support or your potential support. I look forward to updating all of our shareholders probably in the not-too-distant future with a lot of good stuff to come. With that, everyone have a great day. Thank you so much. Thank you, MJ, for hosting the call today.

Thank you, Ted. The call has now concluded. Thank you for attending today’s presentation. You may now disconnect.