ProPhase Labs, Inc. Q1 FY2025 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 First Quarter 2025 Results. ProPhase is trading on the NASDAQ under the ticker symbol PRPH. Presenting today is Ted Karkus, Chairman and CEO. Following the presentation is a Q&A session for which you can participate using the chat box in the top-right-hand corner of your screen. With that being said, I will now hand the floor over to Ted.

Greetings everyone, and thank you for being here today. I'm Ted Karkus, the CEO of ProPhase Labs. I'm quite pleased with our current position compared to where we were six to nine months ago. It has been a challenging time, but I believe we are now at a turning point for the company. In the second quarter, we will begin to see the results of the moves, transformations, and changes we implemented in the first quarter. We are also anticipating significant liquidity events shortly. However, before we dive into those details, I want to address the forward-looking statement. This quarterly conference call includes forward-looking statements in line with the Private Securities Litigation Reform Act of 1995, which pertain to our strategy, plans, objectives, and initiatives, among other things. While we believe these statements are reasonable, they do involve known and unknown risks and uncertainties that could lead to results differing significantly from what we project. Challenges include our ability to secure necessary regulatory approvals, economic conditions, demand for our offerings, and competitive factors. We base these forward-looking statements on our current expectations and estimates, and they are not guarantees of future performance. We do not intend to update these statements unless required by applicable securities laws. Now, we have our company presentation and our earnings report to discuss. I'm curious how many of you on this call are long-term shareholders versus new investors. Given the increase in shares outstanding and the current low stock price, it seems we have many new shareholders. I want to provide insights for both groups about our status and plans. Currently, we have ProPhase Biopharma focusing on the BE-Smart Esophageal Cancer Test, DNA Complete through Nebula Genomics, and our range of ProPhase supplements. I have a strong history of success in this industry, including my turnaround of ID Biomedical, which was sold to GlaxoSmithKline for $1.4 billion after I got involved when it had a market cap between $15 million and $25 million. While I don’t take full credit for the sale, I am proud of turning around a company on the brink of bankruptcy. The same goes for ProPhase Labs. After taking over from previous management, I regained control through a proxy contest and managed to reverse the decline of the Cold-EEZE brand, ultimately selling it for $50 million, allowing us to enter COVID testing. Now, Jason Karkus deserves a lot of recognition for building our COVID testing business alongside the infrastructure I developed. Together, we expanded significantly. However, in the past year, we faced issues with reimbursement for our COVID testing services. Even as we branched out and prepared for the future, we expected considerable cash flow, which did not materialize as anticipated due to funding cuts from the government and policy changes from insurance companies. These developments put us in a tough spot. Despite these challenges, I have worked to keep the company solid over the last six months. Yes, we experienced dilution, but we possess substantial underlying assets. We've also restructured, closed down the costly genomics lab, and sold the manufacturing facility. This has greatly improved our balance sheet and increased our shareholders' equity. With Nebula Genomics up for sale, selling it could further enhance our net assets per share and overall financial position. Looking ahead, I want to discuss our esophageal cancer test, which we announced today. We sold Pharmaloz for $23 million in January, closed the costly lab in February, and reduced our IT expenses and workforce significantly. We employed 96 people in December and now have just 25, with potential further reductions following the sale of Nebula Genomics. Our overhead moving forward will be significantly less than last year, and coupled with anticipated liquidity events, we aim to align our operations with the profitable model I maintained for a decade, where our finances are tightly managed. As we navigate this path, I advise you selectively about your investment decisions based on what we’ve outlined. My focus is on managing debt rather than issuing shares at this stage, as I believe cash flow will soon be directed toward repaying debts instead of accumulating new ones. Regarding our compensation, I've chosen to defer two-thirds of my salary until we see a liquidity event, and other senior executives have similarly agreed to defer part of their compensation. We are all in this together to benefit shareholders. I have a significant personal investment in this company, and everything I do is aimed at generating value for our shareholders. I want to address concerns about our NASDAQ listing qualifications. We have met all requirements other than stock price, and I expect to receive a six-month extension once the current period concludes. The guidance received from NASDAQ indicates confidence in our meeting qualifications. They reflected positively on our increased net assets, which have tripled since December after the sale of the Pharmaloz facility, alleviating worries about delisting. I expect that our stock price will improve when significant cash flow arrives. We have passionate supporters of the company actively acquiring shares, which contributes to volume and optimism. I’m excited about our BE-Smart esophageal cancer test, which has significant market potential. Our goal is to integrate it with around 7 million endoscopies performed annually in the U.S. Our test enhances the accuracy of endoscopy results, which can often yield late diagnoses for esophageal cancer patients. Our method offers both higher reliability and the potential for preventive options for patients at risk. We see a valuable market size between $7 billion and $14 billion with virtually no competition. A paper is on the way from that Mayo Clinic, enhancing credibility and promoting uptake among practitioners. Moving on to Nebula Genomics, we initiated strategic alternatives and decided to sell. We aim to streamline our capital structure and remove pricing pressure. Recent acquisitions in the genomic sector, including Regeneron purchasing 23andMe for $256 million, highlight the value of genetic databases. Our own genomic dataset, the largest of its kind, boasts around 16 petabytes, collected through extensive testing over more than seven years. This puts us in a strong position to attract buyers, as our business is on the verge of being operationally break-even. With a subscription model that encourages renewal and a clean financial slate, I believe this makes us attractive to potential partners. We're already in discussions with interested parties and could see first letters of intent soon. Lastly, I mentioned Crown Medical, with potential litigation proceedings indicating possible settlements for underpaid insurance claims. We believe there could soon be funds flowing into the company as we settle ongoing issues in the coming months. I believe I covered everything essential and I look forward to addressing any questions you may have about our strategies and future plans. While I won’t provide projections, please refer to our financials in the press release for specifics regarding our earnings. Let’s focus instead on strategy moving forward.

Thank you, Ted for the presentation. As you said, we'll now take some questions. Your first question is, what's a realistic time line we should expect to see BE-Smart commercialized? Will it be this year?

That's a good question. It depends on how we define commercialization, and it will likely be a multi-year process. I do anticipate that the first patient will be tested on a commercial basis later this year. The exact number of patients is uncertain at this time, as it is too early to provide estimates. I prefer to under-promise and over-deliver, a strategy I have used throughout most of my career, and I aim to return to that approach. We're going to be very methodical in our process. It's important to note that we will not invest millions of dollars in drug development as some companies have done, which has led to bankruptcy for others. I have a friend whose company is struggling due to excessive spending on building a large sales force, which I will avoid. Instead, we believe we will have one of the best cancer tests globally and plan to partner with companies that already have established salespeople visiting GI offices and other medical facilities. Our strategy will allow these salespeople to sell our test and earn a commission, making it a profit center rather than a significant upfront expense. I want to ensure we do not repeat the challenges we've faced in the last six to nine months. I am looking forward to later this year and will keep you updated. We conduct Renmark presentations once a month, with this one focused on our first-quarter results. Now, let's move on to the next question.

Thank you, Ted. Your next question is, specifically, what vaccines or illnesses are we working on? And is anything past clinical studies? Thank you.

We are not currently working on any vaccines or spending substantial funds on FDA drug development for prescription drugs. At the moment, we are focusing on developing Equivir. Unfortunately, our contract research organization is located in another country, and they are collaborating with our local consultant, leading to delays in final results. This has been quite frustrating, but I anticipate reporting the final results soon. We aim to commercialize this for the next cough and cold season, which gives us a few months to prepare. In addition to that, we are working on the BE-Smart esophageal cancer test, developing additional dietary supplements, and Nebula Genomics, which is now operating at breakeven. We are looking to grow and sell that entity.

Thank you, Ted. Next, I believe you touched on this in the presentation, but if you were to ask, what steps are being taken to meet NASDAQ compliance? Will you need to file for an extension?

Yes. So I went through that in great detail already. And the bottom line is I already filed for the extension. They just don't answer the extension request until the end of the 6-month period at the end of next month. But of course, I already stated, I fully believe it was indicated to me that we will get the 6-month extension. There are no issues. So to be honest, there is nothing to talk about other than the fact that I'm not allowed to say we got the extension today, which is incredibly frustrating because we meet all the criteria. And she said to me yesterday, if you meet all the criteria, you automatically get the extension. So we're going to get the extension. But for some reason, I'm not allowed to say that today. So we are going to get the extension. But for those listening to this call, don't assume me if we don't get it. But as far as I'm aware, we're getting the extension. And that's it. And as I said, the only variable, I believe, would be that they would check our shareholders' equity, which actually increased since we went over yesterday. So with the 10-Q coming out today, our shareholders' equity virtually doubled. We went from like 7-point something million to over $15 million.

Thank you. The next question is, has the DNA Complete division started generating revenues?

Yes, I understand that there can be some confusion between Nebula Genomics and DNA Complete as they are part of the same company. DNA Complete has evolved into a more advanced direct-to-consumer product that is more user-friendly. Currently, the combined revenue is around $5 million a year, possibly a bit more. With sufficient marketing investment, we could quickly reach $10 million. Unfortunately, we've been constrained by our capital situation. If we were to achieve a liquidity event sooner rather than later and allocate some funds to marketing—considering we have an exceptional marketing team that has perfected our platform and website—the potential for growth is significant. We can also clearly communicate this potential to any prospective buyers, and as mentioned, the database holds substantial value in a potential sale.

Thank you, Ted. The next question is, are we still looking at June/July for COVID testing payments?

We are currently in mid-May, with June approaching. I based my comments on when Crown Medical was prepared to enter the court system, so I believe my statement is accurate. It's possible we might receive our first payments in June. The court timeline took longer than I anticipated, but there’s a chance we could see results sooner than expected. While I cannot say for certain, I am confident that a substantial amount of capital will come into our company in the latter half of this year. Timing its arrival is challenging. The Head of Crown Medical is very optimistic about not only the amount expected but also the significant flow of funds once it begins. This should occur within the next few months, although I can't specify if that’s one to three months; if you ask him, he likely has a more favorable estimate. I believe we are not far from that timeframe, which could be up to three months away. This development will be transformative for our company. I mentioned that you can purchase the stock now or wait until the funds begin to arrive. If we start receiving the funds, I would be surprised if the stock price remains the same. We'll see how the market reacts, as investors can behave unpredictably.

Thank you for the clarity on that, Ted. Next is you announced an agreement with a global private equity group for debt financing. Have you accessed the line of credit yet?

We did secure a small amount of capital and moved forward from that point. We used shares of stock as collateral, and we expect to receive those shares back when we repay the debt. Therefore, there may be a significant reduction in our share count in the future. I won't delve further into that right now, but I am currently exploring other debt financing options to help bridge the gap until we see liquidity events, such as collections from Crown Medical and the sale of Nebula Genomics. Either initiative could generate a significant cash flow for our company within the next few months, although I can't specify whether it will be in 2, 3, or 4 months.

Thank you for that Ted. Next is, what are the milestone items shareholders should be aware of for the balance of 2025?

So those are two big ones, and then following the development of our esophageal cancer test and then ultimately rolling out Equivir and building our dietary supplement business. I am not looking to diversify into more businesses, by the way. When we come into a lot of cash, I want to sit on that cash, figure out how to earn a decent interest rate. I mean it is amazing what we're paying in interest to borrow money right now. I know there are tremendous opportunities when that cash comes in to loan at a higher interest rate. And if you are sophisticated in how you do it, even though you get some defaults, the overall total return is tremendous. I'm not saying we are even going to do that. It's just amazing to me what we're paying in interest rates for debt financing right now. It's so frustrating. I can't wait for the cash to come in. I will never take that cash for granted.

Thanks Ted. The next question is, does the company still have a high degree of confidence in collecting the $25 million of uncollected AR?

We have approximately $20 million in uncollected accounts receivable, which we think is a conservative estimate. The auditors have noted that it's generally not appropriate to increase estimates for accounts receivable that have been outstanding for a while. However, we believe that the amount we actually collect could exceed $20 million. After discussing this in detail, I can confidently say that we expect to collect what's on our books, and we hope to collect significantly more. In fact, if we were to collect just what we have and proceed with the sale of Nebula, we would be in a strong position. Our esophageal cancer test alone is positioned well in a competitive market because current endoscopy practices are not always precise, and there is a clear need for better testing options. New tests are being adopted quickly by doctors. Our test specifically analyzes eight proteins that are commonly present when esophageal cancer is developing, in contrast to other tests that may check hundreds of proteins without focusing on these critical ones. Although I'm not a scientist, my experience over the last couple of years suggests to me that our esophageal cancer test is the best available, and I believe it will generate significant demand among gastroenterologists as awareness grows. If we find ourselves with a solid cash position later this year and can develop this test without resorting to dilutive financings, the market value could be substantial, potentially reaching ten times our current market cap. This does not even account for the anticipated incoming cash, which I expect to be well above our current market cap. I'm excited and optimistic about our future prospects.

Thanks for that, Ted. Next a viewer says, not a question, but a preference. If and when we receive payment for past due COVID testing, think smaller dividend and more cash in the bank. I hold a position of nearly 200,000 shares.

I have no idea when you purchased your 200,000 shares, but thank you for being a shareholder. If you bought those shares at $0.30 each, that would total a $60,000 investment. Those same 200,000 shares cost me around $8 each, totaling $1.6 million. You invested $60,000, and while I'm not trying to downplay your investment, I can't help but be amazed at what's transpired. I'm not upset, as I am looking forward to the future, though I find the situation somewhat frustrating. I completely agree with you that I will never allow our company to be in the same position it has been over the last six to nine months. To clarify, I still have to navigate the next three months and secure debt financing, so we are not completely out of the woods yet, but we are getting close. Once we are fully past this, I doubt the stock will be trading at its current level. That’s not for me to determine; it's up to the market. The market is tight on cash, which is obvious. However, I expect some new debt financing deals to come through soon, and then we'll be in a better situation as I am simply looking for a bridge to when the liquidity events start. Additionally, in the near future, there may be a possibility of debtor-in-possession financing where that money is returned to the creditors directly from the court, which would relieve some pressure from my need to pursue other debt financing. While it’s still a bit early to discuss, I want you to know we have potential options. I haven't gone into detail yet, but I will be focusing on this in the next two to three weeks as we move forward with the Crown Medical initiative in the court system.

Thank you for the insight on that, Ted. Next is, how do you plan to bring up the stock price?

Great question. I believe that I won't need to take any action because things should resolve on their own. However, depending on the timing and amount of cash flow we receive, I'm not able to disclose in advance what my plans might be. Looking at my history over the past decade, when we sold the Cold-EEZE brand for $50 million, I conducted two Dutch auctions. One of our shareholders was against the company, owning 14.9% of the shares. I executed a Dutch auction that effectively removed most of his holdings. The first auction was oversubscribed, prompting a second auction specifically to address that situation. By doing both auctions, I eliminated those wanting to sell, and the stock subsequently increased tenfold in a few years, becoming one of the most tightly held stocks on NASDAQ. I would love the chance to pursue a similar approach again, but I can't confirm any actions at this time, as it will depend on the stock price. I anticipate we will receive a six-month extension. It's important to note that in our upcoming Annual General Meeting, which we'll need to file within the next month, we do not plan to pursue a reverse stock split in our proxy. If our stock remains below $1 in the following six months, we may have no choice but to agree to a reverse split to avoid delisting, which I want to prevent. However, if we achieve even a portion of the liquidity events I expect, I don't foresee this being a problem. I'm not considering stock buybacks right now, and we're not issuing dividends either. Dividends are the last thing on my mind currently, and even when cash comes in, they will still be at the bottom of my priorities. My track record shows that I prioritize shareholder interests. I have been an investor for 40 years, and I want the loyal shareholders to benefit. We'll see what unfolds, but it’s still early as we await significant liquidity events. If my past is any indication, I will remain focused on being shareholder-friendly in the future. Thank you for your question. Noella, what's next?

Thanks, Ted. The next question is, can you tell us what you are going to do with the funds you get in from Crown Medical or possibly selling Nebula?

I believe I addressed those questions previously, so there's no need to go over them again. We'll see what unfolds. Of course, I care about our stock price and our NASDAQ listing, and we'll take it as it comes. Given my background on Wall Street, I'm committed to making decisions that benefit our shareholders moving forward. The last six to nine months have been challenging, and there are actions I took that I wish I hadn't had to. I can assure you that when this cash comes in, I will not repeat those actions. However, the initiatives I enjoy are all focused on benefiting shareholders, and we will assess the situation when the time is right. I'm particularly excited about commercializing our BE-Smart esophageal cancer test without incurring significant expenses. Additionally, as we gain traction later this year, there is a strong chance that someone will seek to acquire our esophageal cancer test for a substantial amount or propose a partnership. A partnership would be ideal, as it could lead to significant profits with a partner that has an established distribution network. It could turn into an overnight success with substantial milestones and royalties, which would be a great position for our company to be in. I would truly enjoy running a business like that and could envision retiring on the proceeds. Now, what's the next question?

So your next question is, what happened to Equivir?

I’m not discussing Equivir much because I share the frustration of everyone else. I'm waiting for our consultants and the CROs to align and finalize the results. Fortunately, we have some time since this product is intended for the cough/cold season, and we'll initially launch it online. However, the wait is a bit frustrating. We have strong preliminary results, and I'm eager for the final results that we can publish and use for packaging claims. As an over-the-counter dietary supplement, we're somewhat limited in the claims we can make compared to a drug. Nevertheless, it would be beneficial to highlight any statistical significance we achieve. To be honest, I feel the same frustration as everyone else. Yet, we have larger priorities and exciting opportunities right now, though Equivir has potential to be a major product. There are pressing matters currently that could be very impactful. Generating $25 million in revenue and a few million in profit is one thing, but generating $25 million in cash with no overhead is another. Regarding the $50 million from Crown Medical, that’s net income. We're not incurring any costs; they have a team of attorneys working on this without us paying anything. Their confidence suggests they anticipate substantial collections. They operate on contingency fees, taking a percentage of what they collect, and we get the rest. They believe we could net up to $50 million after fees, and it could even be more. Even if it ends up being $25 million, it would be transformative for the company. This isn’t just revenue; it’s revenue without associated costs since we expensed those during our COVID testing efforts a couple of years ago. Noella, do we have more questions? We have time for one or two more.

Yes. So we're coming to the end of the presentation, but I think we have time for one more question here. The question is, what is the forward-looking prospectus from here?

I would like to summarize our discussion since we are out of time. Thank you all for joining us. I believe I addressed most of the topics that you would be interested in during this call. I'm very optimistic about the company's future. We have a few months of debt financing to navigate, but based on recent discussions, I believe we will secure solid debt financing very soon. This could lead to an opportunity for debtor in possession financing, which would be beneficial for us since that amount wouldn't need to be repaid; it would come from collections. Once that's settled, we can start looking at liquidity events. For Crown Medical, the first liquidity event might be closer than we expect, possibly within the next couple of months, and it could happen even sooner. I don't want to make any promises, but I feel confident that we will have some positive developments regarding Crown Medical in the near future. Regarding Nebula, while Regeneron recently paid $256 million for 23andMe, it's important to note that our expected figures are not as high as that. We decided to observe market interest before revealing any specific numbers. However, being a breakeven business, we have significant advantages due to our large data set. We can grow rapidly, efficiently, and generate positive cash flow and earnings through subscription renewals, making us an attractive option for private equity acquisitions. Additionally, drug development companies may also be interested because of the data set we possess. We maintain strict privacy protocols and do not share our data unless the entire company is acquired. There are many factors at play, and we'll just have to see how things unfold. Confidentiality agreements are being sent out, and letters of intent may come back shortly. I hold these monthly calls, so stay tuned for updates. I hope to share some positive news at our next virtual roadshow. Thank you, Noella, and have a great day. I believe that wraps up our call.

Thank you, Ted. And that concludes our Q&A. Thank you to everyone for joining us today for ProPhase Labs first quarter 2025 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 VNDR Library tab. Please stay tuned for other presentations in your area and see you next time.