ProPhase Labs, Inc. (NASDAQ:PRPH) Q1 2024 Earnings Call Transcript

ProPhase Labs, Inc. (NASDAQ:PRPH) Q1 2024 Earnings Call Transcript May 9, 2024

ProPhase Labs, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Noella Alexander-Young: Welcome to today’s presentation. My name is Noella Alexander-Young, Virtual Event Moderator here at Renmark Financial Communications. On behalf of [Technical Difficulty] for joining us today for ProPhase Labs’ First 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. That being said I will now hand over to Ted.

Ted Karkus: Thank you, Noella. Really appreciate you moderating as always, big shout out to Renmark. We do virtual non-deal road shows with Renmark approximately once per month. So if you miss anything in any presentation or you want to get — be kept up regularly feel free to sign up with Renmark if you want to be up-to-date with what’s going on with our company. I think that these virtual presentations are a great way not only for when I do the VMDRs, but also we are now doing them for the earnings calls as well. Feel free to give me feedback if there’s a different approach you think we should take, but I love this approach. Before we get started, forward-looking statement, just very quickly. For the VMDRs, I don’t read them.

But for the earnings calls, I think I should. Before we get started, I’d 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 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, general 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 in our filings with the SEC filings.

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. So with that, first of all, I just have to give a shout out to ThinkEquity who we have close to a 4-year relationship with was instrumental in financing our initiatives when we built out the COVID business that went down to a couple of hundred million in revenues, they brought us some fantastic acquisitions that are now developing. So I always give a shout out to ThinkEquity, also to the other companies that follow us on an analytical — research analytical bases including H.C. Wainwright and Diamond Equity Research.

So with that, I don’t want to go through the presentation again, not that much has changed in the presentation itself from the last time I did an earnings call just six weeks ago. And so I was going to start the call by saying not that much changes in six weeks, but the fact is if you read the press release today, a lot has developed in the last six weeks. So before I get into it, I always like to put a little perspective. I really do believe that a history of execution in a microcap company is critically important. When a management executes historically, your probability of success goes up, on the next initiatives that management is focusing on as opposed to a management team that’s new, that’s starting up a company for the first time has quoted some breakthrough technology that they’re excited about.

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Q&A Session

The risks are much larger when you have a management team that you can’t assess. So I’m not going to go through all of this again. But again in 2012, when I restructured the company the stock was $0.65. Stock is around five and change right now, paid out $2.40 in special dividend. So we’re up 11 — 10, 11, 12, 13 times in total returns in the last 11 or 12 years. More recently, a few years ago, our stock was about $1.5. It’s more than tripled. We paid out another $0.90 in special dividend since that time. So we’ve been in the last few years, tremendous returns to the shareholders. We are now — we’ve transitioned multiple times now. Some years we’re a development stage company spending money to develop assets. Some years we’re generating revenues and earnings.

And it goes back and forth and that’s the life and cycle of a development stage company. So first we turned around the Cold-EEZE brand, lost money building the brand, sold there for $50 million. I did the same thing by the way with IT Biomedical. I was instrumental in the turnaround of the company that ultimately was sold for $1.4 billion. That was before I did the same thing with our company. All right. So I have a history of doing this. And it’s not just me. We have a great management team in place here, all right? So in any event after we sold the Cold-EEZE brand then we went back really to being a development stage company. Again, we did stock buybacks and dividends at the time. And then we got the COVID generated a lot of revenues, made a lot of money.

But now we’re back to a development stage company again. And so you can expect in a development stage company, developing assets, you’re going to lose money. I have no interest in focusing on the losses over the last couple of quarters. We’re going to lose money next quarter again. But at some point with the new assets that we’re developing, they’re going to take off in value. So the one that I really want to focus on today that’s the focus of the earnings report is formalized because there are some interesting new developments. So just very quickly, so we’re all on the same page here. Pharmaloz the business we’ve owned for decades. The supply/demand over the last several years for manufacturing of lozenges has shifted where there is less supply of manufacturing and there’s enormous demand both globally and domestically here in the United States.

And so for the last two years I understand this isn’t – there’s the line about the 20-year overnight success. And I actually looked up some quotes about 10-year overnight successes and it takes 10 years to be an overnight success. Well Pharmaloz is sudden going to sound like an overnight success but besides the fact we’ve been developing it for a long time, specifically over the last year or two, we’ve been specifically focusing on building the capacity, so that we could take advantage of the global demand so that we could have an asset where tremendously more over the next six months relative to what it was worth last year. So last year we did about $9.3 million and actually lost a little bit of money. We increased prices on all of our customers.

They all accepted the price increases. They’re kicking in now. We got two new orders in from two new brands that adds another $5 million of revenues. So between the price increases and the two new orders going into the second half of the year just on existing business on the first manufacturing line, we’re going from $9.3 million losing money to about $16 million in annualized run rate of revenues and making substantial money somewhere in the order of $3.5 million of profits. That will be our run rate as the current new customers ramp up their business. One, we started to ramp up already, the other one we’re going to be ramping up probably later in the second quarter or we’re very close in hand. So going into the third quarter, all of a sudden the numbers dramatically changed for Pharmaloz.

More importantly, we have a second line of manufacturing equipment. We have additional automation equipment coming in. It’s going to significantly increase our capacity, which now for the first time sets us up to be very attractive to very large brands who need capacity. And so as I announced today, we are exploring strategic alternatives with Pharmaloz. I don’t make that statement lightly. It’s not just an idea. This is something that’s been in the works literally for 1.5 years to two years in terms of the planning and then the execution of building out the capacity and then starting negotiations with large brands. I mentioned, probably I don’t know – I can’t remember. It was two earnings calls ago that we were in talks. So I understand even just the talks with the large lozenges brands have been in effect for many, many months.

This isn’t just some new idea “Oh we’re going to talk strategic alternatives. This is very far along in discussions. And it’s the only reason that I even mentioned it. It doesn’t mean there’s a guarantee it’s going to happen. So it’s not a guarantee that we will accept any offer that comes along if there is an offer and I don’t want to get into details because we have lots of options here. We could either sell the facility now potentially or we could negotiate for the second line, which is of course going to have tremendous capacity and will be very attractive to some very large lozenges brands, they may want to lock up the capacity. If they may want – if they lock up the capacity and going to want a down payment because it means cutting out all the other customers that we’re meeting that want the capacity as well.

We were recently at an expo, we have potentially a dozen new customers, smaller customers that could potentially fill up the second line as well. So we have different possibilities, couple of opportunities there, a couple of possibilities for significant liquidity events. So this is all very exciting. Happy to talk about it more in the Q&A. I’m going to try and get to the Q&A, a little earlier today. And not — I really don’t want to spend a lot of time on slides that I’ve reviewed in the past. This entire presentation by the way is available on our website. When there are updates, go to our website at least once a month. Any time we have a new press release, we usually update this presentation as well. So feel free to go to the website. So that’s really exciting for today.

Conceptually before, we get into the next slides, we’re going to get into Nebula Genomics very briefly. I just want to explain that when you’re developing assets, when you’re developing businesses there are always bumps in the road. There’s no such thing in just snapping your fingers, and taking the business and making it worth $5 million. And all of a sudden, it’s worth $50 million or $100 million. Every once in a great while, it happens with a technology company. You only hear about the one technology company that just takes off. You don’t hear about the other 99 that fail, unless you’re invested in them. And it’s not easy building a new business. And so with Nebula Genomics, we have a new go-to-market strategy. And I’m not going to go too much into what Nebula Genomics is, other than the fact that it was founded by George Church world renown in the field of genomics.

We have — we built a world-class lab. We converted — we were doing COVID testing. We converted to a world-class lab here in New York. That lab costs a lot of money to manage right now. We’re not generating the business currently to support the lab. However, I believe that six and 12 months from now, the Nebula business is going to take off and we’re going to be happy that we have the lab. We don’t need the lab. Historically, when we acquired Nebula Genomics, it didn’t have a lab except, all the specimens to a partner lab, but our thought is we could provide testing even less expensively, if we did it ourselves, but that’s in the long term. But the other part of having lab, it’s not just the P&L of sequencing a specimen in-house versus sending it to another lab.

There are some other factors that play here. One is in the long term, if somebody is interested in our business, it’s going to be a lot more attractive if we’re vertically integrated and horizontally integrated and we have a lab and we have all of these other pieces. The other part of it is, a lot of people are so worried about data privacy these days. They don’t want you sending your specimens abroad. The fact that — we can do the sequencing right here, in New York. And then ultimately, with four world-class latest greatest state-of-the-art platforms of equipment that allows us to be the most efficient, in terms of turnaround times pricing and so forth. So, it’s incredibly well situated. But the truth matter is the real value in Nebula, it’s in our bioinformatics platform, it’s in the reporting system.

And separate from that, it’s in our database. So I’m not going to — I can go more into it in the Q&A, but understand the real value of Nebula is our reporting system and our database that we’re going to leverage over time. We’re building a very exciting, new go-to-market strategy where we’re going to leverage some world-class social media and podcast experts. We’re potentially going to bring in some well-known celebrities to really get behind this. I just think of products and I’d love to think of Prime, because it’s just a hydration drink that came out and know where it got some celebrities and some social media behind it. And now, they’ve sold 1 billion bottles out of nowhere. Now I understand it’s a completely different business, but the concept is the same.

I believe, we have the right people in place. It took time to figure this out. And that’s why I say, this is a work in progress. Nebula is a work in progress. But to understand, it’s nice to have different assets in different stages of development so that we have Pharmaloz — is about to kick in with either liquidity events or profitability. And that was two years in the making to get it to the point, where it is now. Nebula, will be next. I can’t tell you which quarter it’s going to take off. It’s going to be probably the fourth quarter and first quarter of next year. But Nebula is a really exciting business with enormous potential and the different directions we can go in with it. And again I’ll talk more about it in the Q&A. I’m not going to talk more about it now.