ProPhase Labs, Inc. Q2 FY2024 Earnings Call

Hello and good morning, everyone. Welcome to today's presentation. My name is Noella Alexander-Young, Virtual Event Moderator here at Renmark Financial Communications. On behalf of our team we want to thank everyone for joining us today for ProPhase Labs' Second Quarter 2024 Results. ProPhase is trading on the Nasdaq under the ticker symbol PRPH. Presenting today is Ted Karkus, Chairman and Chief Executive Officer. Following the presentation is a Q&A session for which you can participate using the chat box on the top right-hand corner of your screen. With that being said I will now hand over to Ted.

Thank you, Noella. I appreciate everyone joining us today for ProPhase Labs' presentation. This is our second quarter earnings release and review for our shareholders. I need to start with a forward-looking statement. Besides the historical information in this document, it includes forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. These statements pertain to our strategy, plans, objectives, and initiatives, including our plans to expand in our subsidiaries and build a multibillion-dollar business. We have an anticipated timeline for commercializing our BE-Smart test, as well as confidence in the potential of project ZenQ-AI to help identify new actionable targets for cancer therapies. Management believes these forward-looking statements are reasonable at the time they are made. However, these statements carry known and unknown risks, uncertainties, and other factors that may cause actual results to differ significantly from the projections. Risks include, but are not limited to, our ability to secure and maintain necessary regulatory approvals, economic conditions, consumer demand for our products, challenges in launching and expanding new business lines, the competitive landscape, and risks outlined in our annual reports on form 10-K, quarterly reports on form 10-Q, and other SEC filings. The company does not intend to update forward-looking statements unless required by securities laws. Readers should be aware that forward-looking statements are not guarantees of future performance and should exercise caution in relying on them. Noella, next quarter during our call, I might have you read that statement before introducing me, as I've seen done by other companies. I also want to mention that Renmark is hosting our monthly virtual non-deal roadshow calls and is doing so today. I'm committed to keeping our shareholders informed, so sign up with Renmark to join these updates. Now, let's dive into our current situation with Pharmaloz. The financial numbers are telling, but I prefer not to dwell on them since you can review the financial statements yourselves. The historical financials, even through the second quarter this year, feel less relevant compared to our company's current status and future trajectory. The second quarter's low revenue primarily resulted from Pharmaloz being a highly seasonal business. We manufacture lozenges, which are typically used during cold season. Lozenge brands prefer not to hold inventory all year, as it can become stale or expire, so we scale up production in the third and fourth quarters with minimal activity in the second quarter. Although we've increased prices, we didn't have the business in the second quarter, but the third quarter is where we expect to see the effects of our strategies. Interestingly, we're attracting lozenge brands suited for year-round use, which will help improve our seasonality. As we expand, our overall business is growing, even bringing in seasonal brands that will contribute to revenues in the second quarter of next year. When discussing our projections for the next year, I've emphasized that starting with the third quarter of this year is more relevant than last year's performance. The second half of last year is not indicative of our current capabilities as we have made significant changes like price increases and increased capacity. When we acquired two major customers, one has only recently begun ordering, and the other has been gradually ramping up. I’m excited to share more in our Q&A. Our business at Pharmaloz is on the verge of significant growth this quarter—there are no concerns on that front. Now let's turn to Nebula Genomics, which was founded by George Church and his team as a project to market DNA sequencing to a scientific audience, though we've identified opportunities to better leverage our 1x whole genome sequencing product which offers extensive data at a lower price. We've been revamping our strategy for eight months, focusing on improving our direct-to-consumer approach while enhancing our B2B efforts. We've enlisted top talent from the social media industry to amplify our reach effectively. While we're currently a developmental stage company, I view our expenses as an investment in future value. We're optimistic about the growth in Pharmaloz and Nebula, even looking at additional dietary supplements and leveraging existing brands in retail, such as LEGENDZ XL. Lastly, regarding our BE-Smart Esophageal Cancer test, we are collaborating with a top consulting firm to refine our strategies and are confident in our market potential, which is significant given the necessity of effective diagnostics for a serious health issue. We recognize the many steps needed in working with the FDA, insurance companies, and healthcare providers to deliver this product effectively. The Equivir study has entered its final stages, producing excellent results, which will capture the interest of retailers. Our initiatives with Nebula will also extend to this product, as we build a strong line of dietary supplements alongside our genetic testing services. Thank you for your attention, and I look forward to your questions.

Thank you very much, Ted, for the presentation. So now we will begin the Q&A. Your first question is, please provide some detail about Forward Healthcare and why you choose them. The website has a 2021 copyright, and it looks older than that and provides very little detail about what the company actually does and who its customers are. Thank you.

Thank you for the question. I believe I addressed much of this in my presentation, but let me reiterate. We are collaborating with three consultants, each possessing unique skills that collectively cover all aspects of commercializing our BE-Smart test and creating demand for it. Their expertise spans FDA regulations, CPT codes, insurance companies, and the physician network. They are very enthusiastic about working with us and are actively involved in our operations almost daily. I feel confident that we have the right partners in place. Additionally, they will be bringing in key opinion leaders. While I don't want to label the situation as political since we genuinely have an excellent test, the reality is that once your product is developed, the challenge becomes how to encourage gastroenterologists and other physicians to adopt it and how to secure insurance reimbursements. There’s another cancer test on the market with a market cap of around $30 to $40 million because they opted for a fast track, cash-based testing approach and are currently facing difficulties in getting insurance companies on board. With better timing and strategy, they could have achieved a significantly higher valuation, akin to companies like Guardant Health, with which we have established connections. My goal is to approach this appropriately. If I wanted to expedite the process, I could consider an IPO for our BE-Smart Esophageal Cancer test, possibly landing us a market cap similar to that $30 to $40 million figure within a year. However, I aim for a market cap of $1 billion. I truly believe in our test, and while there are challenges to navigate, we have the luxury of time to do this right. I understand the temptation for quick wins in the stock market, but as the CEO, my focus is on building this company’s long-term value. We have faced some obstacles, particularly with the stock price; however, the broader market for microcap stocks has also been struggling. Just a few weeks ago, the market experienced a significant drop. I’m optimistic about building the company's value moving forward, especially with BE-Smart. This initiative has the potential for monumental success. Thanks for the question, and I’ll hand it back to Noella for the next one.

Great. The next question for you is, my family has a history of esophageal cancer. When can I obtain the BE-Smart test?

Well, that makes me feel bad. I'm really sorry. Esophageal cancer. And this happens. I talk about this test. I don't know why, it makes me tear up. I talk about this test and sometimes I'll talk to an institutional investor. I can't tell you, it surprises me every time, but like one out of every several people has had to deal with esophageal cancer, and when I talk about it, I say, X percentage, once you're diagnosed, 80% to 90% of people diagnosed die. I say that, and then somebody says to me, their family member has esophageal cancer, and I'm like, I almost feel sorry that I said that statistic. It's really a terrible statistic, but it's more common than you realize. So as far as our test is concerned, it's a great question and it's complicated because the FDA is making it more complicated. It's possible we could provide this as a cash-based test, but apparently, I also don't want to set a precedent with doing it as a cash-based test, and then having issues with the insurance companies and I don't know all of the politics involved. So, honestly, if somebody actually wanted to get a test and reach out to our company, we can certainly do the test, but that's different from commercialization. So I'm working with the FHC consultants right now. I don't have all the answers today. I don't want to be rushed and put into a box as to exactly how we're gonna roll this out and again, there's a difference between CPT codes, which might give us the right to get reimbursed by insurance. It's very different from actually getting reimbursed by insurance and I said, as I said, there's another cancer testing company that's got a $30 million, $40 million market cap. I don't know if they're going anywhere. Again, their test is pre-endoscopy. So again, it would only help our cause if they vacate more successful, I don't know if they will. I hope that answered your question. I'm sorry I don't have a better answer today, but certainly, if somebody really wanted to be tested today, we certainly could. We're capable of doing the test.

Thank you for elaborating, Ted. The next question is, please elaborate on your recent SEC filing about the CrowdStrike incident preventing ProPhase from filing its Q2 results on time. Is this an ongoing issue for the company?

I don't even understand why somebody would ask a question. We just reported results because we reported them four days later, which we're allowed to do. Honestly, that question is just a waste of time. No, there's no ongoing issue. We just reported results. So you're asking about an issue that isn't an issue since we just reported results. So I don't even understand the question. I don't care about the CrowdStrike. That affected a lot of companies, but we reported our results today. So which we're allowed to do. So what's the next question, Noella? Thank you.

The next question is a two-part. The first part is, does ProPhase continue to have an investment in Lantern Pharma? And if so, what is the thinking about it? Long-term hold or potential source of cash in the short term? And if Pharmaloz is generating cash and growing, why look to sell this one profitable asset?

That's right. I don't wanna hear any more about Lantern. That's a question I don't really wanna touch on. It sounds like a Lantern shareholder or a lantern executive asking the question. So, thank you for trying to leverage our shareholder conference call to talk about Lantern. I'm not gonna comment further on in this call, but thank you.

Thank you Ted for the response. The next question is, what is happening at the diagnostics lab if there's no more COVID testing?

We have stopped doing COVID testing and transformed our COVID lab into a top-quality genomics lab. We're now focused on expanding our Nebula Genomics business, which we've rebranded as DNA Complete, and we aim to generate business for our lab through DNA Complete. This standalone business is very promising, and I'm excited about its potential. Operating the lab is costly, so we're working on scaling up the business to see where it leads us. While the lab has value due to its advanced equipment and high standards, we might consider selling it in the future. Our new strategy, which will be implemented soon, aims to fully utilize the lab, but it's important to clarify that we no longer conduct COVID testing, having moved on from that some time ago. Our company has a history of adapting as circumstances evolve; we're not static. Many COVID-related companies went under after the pandemic, but we sold our Cold-EEZE brand while retaining the manufacturing facility, which we might also sell. During the pandemic, we made significant profits from COVID testing, which allowed us to invest in new businesses and scientific assets. Currently, we're developing several promising products, including Equivir, which I believe could greatly enhance our company's value. We've also acquired Nebula Genomics and are working on the BE-Smart Esophageal Cancer test. The sale of Cold-EEZE provided us with the opportunity to enter the COVID testing market and raised vital capital for us. With that capital, we identified and are now developing valuable new assets. As an entrepreneur, I adapt to changing times, and while not every venture succeeds, my history of building successful companies is strong. Thank you. Next question, please.

Thank you, Ted. The next question is, it looks like there are now only two options for Nebula, Deep and Ultra Deep. Did you discontinue the standard option, and what was the rationale? Are you no longer offering lifetime memberships?

No. So we've done a complete overhaul. We're rolling that out, excuse me, very shortly. That'll all be clarified in about a week. Wait until you see the new websites, the new rebranding, all of that. We're having the quarterly call today. It would have been nice if we had the quarterly call after the rebranding launched. The timing didn't work out perfectly, but I'll provide updates in the coming weeks when this all launched, and I'll answer those questions. We have a variety of great products. We have a 100x. We have a 30x. We have a 1x, and we have a DNA Expand. The DNA Expand is taking the ancestry tests and giving you more information on the ancestry tests that you've already taken elsewhere and then the 1x, which we think is a phenomenal product, is incredibly low priced, and it's still a thousand to five thousand times more data than you get from an ancestry test and yet it's priced similar to an ancestry test. We think it's gonna be a huge product, but we'll see when we roll it out. So we'll see once we roll out with our new social media platform and all the people we're working with, and we're gonna be bringing in influencers. There's a lot of places we can go. This is gonna be very exciting. So you'll see, but the answer to your question is this will all be made clear very soon.

Thank you for that response, Ted. Next, when will the second line at the factory become operational, and is potential production spoken for?

We have some significant interest from several large customers, and we're currently in negotiations. The margin differences between one major lozenge brand and a number of smaller brands are notable. For our first production line, we're seeing exceptionally high margins, which makes it quite appealing to potential buyers. We're fully utilizing that capacity and even looking to hire more staff quickly. As for the second line, we're in discussions right now and it's encouraging. We reestablished contact with one of the world's largest lozenge brands, and they've shown interest in utilizing our entire capacity for that line, although it will require negotiation. Selling that capacity could provide a substantial down payment, but the margins would be notably lower compared to selling to multiple smaller customers. The challenge with smaller customers is their inconsistency; some succeed while others don’t. Producing for them can be quite labor-intensive, as we often have to stop production and clean the line frequently, which is tedious but comes at a premium price. We're planning to install the second line this year, although I can't specify a month yet. It's essential to note that the projections I've shared for Pharmaloz over the next year don’t factor in any contributions from the second line, which would be an additional benefit. Furthermore, we have space in our current facility for a potential third line, which is also an attractive point for any buyer. Our capacity for expansion is enticing, and we’ve developed a comprehensive plan with the help of top-notch consultants over the last several months. The second line, ordered a year and a half ago, is on its way, and we have plans for a third line in place. We are experiencing strong demand for our products due to several factors, including our reliability and excellent reputation as a manufacturer. We are FDA approved, which is rare among lozenge manufacturers, and we are located in the United States, making us an appealing option for businesses looking to operate domestically, especially with potential tariff issues looming. Depending on the outcome of the upcoming election, there could be a rush for us to gain more business if tariffs rise. Regardless of the political climate, demand remains strong. We're heading to a conference soon where we expect to engage with numerous new brands seeking collaboration. This business is thriving and currently represents a hidden asset for the company that will soon be more widely recognized.

Thank you for that response, Ted. Your next question is from Hunter Diamond from Diamond Equity.

Can you please discuss the marketing approach for BE-Smart if approved? Would you anticipate further partnerships to assist?

We have several options to consider. This is a great situation to be in, and I don't want to misstate anything, but I've been awaiting the final statistical results to present them to one of the largest cancer diagnostic companies globally. I'm confident we could form a partnership with them, but when you look three years ahead and reflect back, would you prefer a deal that provides some upfront cash and royalties? Or would you rather see our BE-Smart Esophageal Cancer test prove to be immensely valuable in three years? The microcap market won't be bearish forever, and I genuinely believe our BE-Smart cancer test targets a multibillion-dollar market with virtually no competition. I feel strongly that success is inevitable, though it's not something I can guarantee. I believe this test has the potential to be a major breakthrough, and shareholders should consider the possibility of Pharmaloz providing substantial funding to expand our other businesses while we wait. It could lead to surprising outcomes down the line. I also expect Nebula will be very valuable within a year. There are numerous paths we can take, and we'll have to wait and see. One option is to collaborate with a large existing cancer testing company that already has a complete sales and distribution framework. Conversely, with FHC's support, if we can establish essential networks among physicians and insurance companies, we could successfully launch our test. For example, if our Director at Optum signs on, that could secure the insurance companies' endorsement, making it a significant win. So, we're exploring various strategies. We're still in the early stages, but we aren't far from reaching a point where the market acknowledges the intrinsic value, which would open up future options. While I can't discuss IPOs or precondition the market, I believe we'll have chances for IPOs, spinouts, and dividends for shareholders next year, alongside the option of selling to a large company. However, I question whether selling for tens of millions with royalties is worth it if this really presents a billion-dollar opportunity. Thank you.

Thank you, Ted. The next question is, please address the adequacy of your liquidity until revenues ramp up.

That's a great question. We have money coming in regularly. Our net working capital is significant, along with a substantial accounts receivable. Pharmaloz is set to start contributing in the third quarter, and while the second quarter was disappointing, we expect a meaningful impact from Pharmaloz moving forward, which will reduce our monthly spending. We also have some major initiatives related to our accounts receivable that could yield unexpected results, although working with the government can be slow. We're optimistic but realistic about the timeline. Ultimately, we could receive a large influx of cash in the future. There are multiple strategies we could pursue, including potential investments or partnerships. Right now, as a development stage company, we understand that the market may not fully appreciate our value, but we anticipate that conditions will improve, especially with potential interest rate cuts. The micro-cap market has seen some activity, and we believe it will recover in due time. We just need to navigate the next six months, but we have a lot of underlying value. We’re currently receiving money daily and expect another influx tomorrow, so we’re in a good cash position. Once we sell Pharmaloz, everything will change, and our other ventures will also grow. Pharmaloz is now finally contributing positively, with real business operations at full capacity and a high profit margin. Last year, Pharmaloz generated around $9.3 million but wasn’t profitable. Now, we're expecting revenues between $14 million and $16 million over the next year, primarily in the first half. This will enhance our overall earnings. Additionally, with the rebranding of Nebula Genomics, we aim to improve our financials by reducing laboratory overhead. Next question, please. That was a good question.

Thank you, Ted. We're coming up on your last two questions. The first one is, how far are we from having the family doctor request a DNA genomics test along with regular blood tests on a patient to determine if there is a risk of disease?

It's a great question. That's where the world is headed—the future of medicine lies in personalized precision medicine. It's obvious that this is the direction medicine is moving towards. Just consider the implications of understanding your genetic makeup to identify diseases you might be at high risk for; this knowledge is crucial for prevention, and it can only be achieved through genetic testing. George Church has been ahead of his time, predicting that eventually everyone will undergo testing, including newborns. We are also exploring the idea of testing couples before they decide to marry and start a family. If both partners have the same genetic mutation that could result in severe issues for a child, they might reconsider marriage or parenthood altogether. It's not just about individual testing; couples are being considered for testing prior to having children. Interestingly, we're also looking into matchmaking services that are willing to invest in this notion. Some of these services are premium and could incorporate whole genome sequencing tests to ensure compatibility and avoid mismatches. This addition is quite feasible given the costs of these high-end services. There are numerous possibilities to explore in this area. I hope that answers your question. There's so much happening in our company, and I enjoy discussing these topics. Last question, please.

Excellent. So your final question for today is, looks like the second half of 2024 could bring several major milestone events. Will you be able to stay on top of all initiatives?

I am deeply committed to this company and work around the clock. This isn't just a job for me; it's part of my life. I walk between 13,000 and 13,500 steps daily, often while on business calls, and I encourage everyone to do the same for their health. I count calories as well. I share this to highlight my motivation for success. Our subsidiaries are at different developmental stages, and many don't require my direct involvement. We have excellent leadership at Nebula Genomics, and I’m enthusiastic about their progress. Our team, including Jed Latkin and Igor Ban for BE-Smart, is strong, and I am confident in their capabilities. Previously, we didn't have the right personnel in place, especially in selling Nebula’s offerings to the public, but I believe we now have a solid team ready to drive success. Our IT department is top-notch, which is crucial for our product development at Nebula, especially with our upcoming ancestry test. While I play a role in bringing the right people together, our team is what drives our businesses forward. Additionally, we now have a robust finance team led by Lance Bisesar. Running a public company requires immense effort, and I appreciate the strong team we have in every department. I was introduced to FHC by a successful investor, which adds confidence to our BE-Smart initiative. If there are any other questions, I’m happy to respond.

That's all the questions we have for today. So thank you very much, Ted, for your responses. That concludes the Q&A session, but before we go, I will turn back the floor to Ted for final remarks.

Sure. So look. Thank you again for everybody for joining today. Thank you for those of you that are shareholders, for being loyal shareholders. I know it's frustrating. Stock prices are frustrating. Believe me, it frustrates me more than anybody. I'm the largest shareholder in the company. I am super enthusiastic about what we're building. So I put stock prices aside for a moment. Noella, I always enjoy having you moderate. Renmark, again, I do the virtual non-deal roadshows at least once a month with Renmark, so sign up with them if you want our next update. Again, we have this phenomenal relationship with ThinkEquity. Thank you, Hunter Diamond, for calling in. He also covers us besides ThinkEquity. He also covers us on a research basis and does a phenomenal job, and with that, I say thank you. I'm looking forward to some really positive updates as we move forward throughout the year, and I think we're gonna be a very different company in the not too distant future, and I'm looking forward to it. Have a great day, everyone. Thank you again and thank you, Noella.

Thank you very much, Ted, for your presentation and Thank you everyone for joining us today for the ProPhase Labs Second Quarter 2024 results. ProPhase is trading on the Nasdaq under the ticker symbol PRPH. The playback will be available on our website 24 to 48 hours after this presentation under the VMDR tab. Please stay tuned for the next quarterly call and see you next time.