ProPhase Labs, Inc.
Q1 2021 Earnings Call Transcript

Published: 13 May 2021

[Operator:]

Thank you, and good afternoon. I would like to thank you all for taking time to join us for ProPhase Labs First Quarter 2021 Financial Results Conference Call. Your host today is ProPhase Labs CEO and Chairman of the Board of Directors, Ted Karkus. A press release detailing these results crossed the wires today and is available on the company’s website, prophaselabs.com. Before we begin the formal presentation, I’d like to remind everyone that statements made on the call and webcast, including those regarding future financial results and future operational goals and industry prospects, are forward-looking and may be subject to a number of risks and uncertainties that could cause actual results to differ materially from those described in the call. Please refer to the company’s SEC filings for a list of associated risks.

[Ted Karkus:]

Awesome. Thank you, Jane. And thank you everyone for joining me and our company ProPhase Labs. This is the first quarter, full quarter that we’ve reported testing revenues and earnings and to put this in perspective, this was a – nothing more than an idea, six months ago, and at six months, we went from not even being in the CLIA laboratory testing business to having two significant labs and generating in the first quarter of this year a significant amount of revenues, and earnings. And I’ll get into the numbers a little bit now. And just to remind everybody, Jane did read the forward-looking statements. I’d like to be very careful in terms of projections this is a volatile business that we’re in. In general, we do not give earnings guidance, but to the extent that I say anything that sounds like guidance, understand the volatility and nature of the business and it’s a dynamic world that we live in this industry, and I’ll get more into that. But please be cognizant of that I am going to do the best I can to give everybody a full picture of what’s going on. But again, that’s as of today and things change better and worse, it doesn’t necessarily need to be worse, it could be a lot better, too. So with that said, I’m going to review a little bit of the numbers, and then I’m going to get more into the actual ongoings of our company and the strategy going forward. We reported revenues of $15.3 million versus $1.9 million a year ago, and net income of $1.1 million versus a loss. Just to break that out a little bit, our lab actually had a profit of $2.8 million. Typically, our manufacturing and dietary supplement business have a loss in the first quarter, this quarter was no different. So that might bring a drag down on the total company numbers. But to be clear, the vast majority of our revenues and earnings are currently in going forward are in our diagnostic testing business. So our lab, pretty nice, maybe not what I would have expected in January when things were really hot. But it’s still really pleased with the quarter to generate $2.8 million profit in lab. And wanted to be clear, we had significant startup expenses in the first quarter that hit our first quarter by the very nature of the word start-up means these will not be ongoing expenses. And so if we were to do hypothetically, even just the same numbers that we did in the second quarter with the first quarter without the start-up expenses, we would be well ahead of the game.

[.:]

And insurance really wasn’t even set up yet. And I think as I indicated, even when all the insurance was set up properly, and all the billing was set up properly, it can still take 60 days. And we were purchasing consumables, 30 days and 60 days before processing, and then getting paid 30 days to 60 days later, plus, in some cases – instances, it’s taken longer, to get the insurances set up to get the billing properly all that takes time, especially when you’re in a new business. And so we’re now in the last six weeks, and enormous amounts of cash is flowing into the company, from insurance companies. And quite frankly, that cash flowing in has more than covered just what’s coming in the last six weeks is more than covered the $0.30 dividend, which is ballpark about $4.5 million. We have more cash and that’s floated is in the company last six weeks. So, we are a very strong company financially at the moment. And as I told people in the past those that have been shareholders for a long period of time, I am extremely careful, and how our company manages its cash. Our CFO, Monica Brady is even more conservative than I am. At the end of the day, I’m the largest shareholder in the company. And frankly, I care about our long-term shareholders, even more than myself. I would never do anything to take advantage of them. And so you can be rest assured that we’re not going to all of a sudden burn through the cash. To the contrary, we have the strong cash flow flowing into the company from insurance payments. And I’m looking forward to all sorts of strategic initiatives, and given the platform that we have been a NASDAQ public company, having a very strong balance sheet. We have about $49 million of net working capital. We have just over $36 million of cash and cash equivalents, and I guess marketable securities.

[Operator:]

Thank you. Our first question comes from the line of Jason Kolbert with Dawson James. Please proceed with your question.

[Jason Kolbert:]

Great. Congratulations, you certainly beat my expectations on the quarter. The thing that strikes me the most about your comments is bidding on potential national contracts. And if you weren’t lucky enough to win something like that it actually could be transformative. Can you go into a little bit more detail about what those prospects might look like?

[Ted Karkus:]

Sure. First of all, Jason, I really appreciate your support. And I also appreciate your comments. The tricky part of this is when you go back to January, I was talking to companies, even some of the companies, some of our customers, and a couple of our customers were talking about doing three to five times the amount of business they were doing in January, only it didn’t come through and I regularly am talking to potential customers and potential initiatives that could be really, really large that don’t come to fruition. And what I don’t want to do is get shareholders excited about something and then it doesn’t come to fruition, I would really much rather just consistently build our company. And if we get surprised by a major win, that would be fantastic. What I can tell you, though, is that we have a lot of really positive initiatives we’re working on, the first of which is very real, and could get our business going again, more similar to what we were doing in January and grow beyond that. The second initiative, when we start talking about national initiatives, again, the Biden administration wants schools open, and they’re not just sending money to the state, but there’s actually a national initiative with RFPs that went out. And we partnered with a couple of major companies that submitted for the RFPs. And we are optimistic that one of those companies that we work with is going to win. And if they win a part of the country, they’re going to give us an enormous amount of business. What I can tell you is, we are perfectly situated for a major initiative, because we have state-of-the-art equipment, 24-hour turnaround times, state-of-the-art technology. So there would be no reason for anybody involved with a major winner of a national initiative, not to use us at least like in the Northeast. And with the national initiative, it’s broken up into four quarters of the country, but even having said that, as I said, one of our largest customers was testing throughout Texas. And, it was nothing for us to FedEx. They’d collect specimens till 6

[Jason Kolbert:]

I rarely – have I seen, dividend paid like that. I’d also like to focus a little bit on something you said, which is there were some big your expenses actually came in below my estimates. And so for me, that means that your COGS were below my estimates, which means your margins were higher than my estimates, wouldn’t it? And you also said that, expenses would kind of normalize some of the build out costs go away associated with a lab that occurred in the first quarter. So, I know, you don’t want to give guidance, but how should we be thinking about, those expenses for the rest of the year?

[Ted Karkus:]

Sure. So and I’ve discussed this on past calls, our margins are a tremendously complicated beast. And the reason is, because we have so many different types of customers that we pay different ways. You’re even issues within our numbers with whether or not a payment to a customer should go into COGS to go into the cost of goods sold, or whether it should go into a sales and marketing expense. And in some cases, it’s a combination of the two. It’s really complicated. And so all I can really do in guiding you is to talk about trends. And so far, out of network insurance, the numbers haven’t changed in terms of reimbursement rates and then for those without insurance, it’s an automatic $100, those numbers have not changed. I heard about one lab that was in network somewhere where they cut it below $100. But that hasn’t affected us at all. And in general, I just don’t. So far, I don’t see the revenue side of the picture, changing very much. At the same time, we’ve gotten more sophisticated in the business. And in many instances, our customers who are the companies that are going on and collecting specimens, in many instances, what we’re paying them is less than what we were paying the first customers that we do business with. So and then the last part of this is that there was, it was in tremendous backlog of back ordering of consumables. Back in December, and January, I was really concerned that we were going to have a major customer come in, and we were going to run out of consumables and I thought that would be the worst thing of all time. So, we loaded up on consumables. But what’s interesting is the cost of reagents is coming down. And so if anything, the trend in the cost of reagents is coming down. We’re getting more sophisticated in terms of how we pay our customers. And so far insurance rates have not been coming down. So it’s possible that you could see margin expansion going forward. All right. I don’t want to get into.

[Jason Kolbert:]

Yes, I mean, what’s really important, I know you reported $16 million in inventory. And so that’s a big number. And so I would assume that what you’re really saying is between accounts receivable and inventory as those numbers come down, we could even see better numbers on the top-line.

[Ted Karkus:]

Yes, absolutely.

[Jason Kolbert:]

Okay. Perfect. Thank you, Ted. Congratulations. Great quarter.

[Ted Karkus:]

Really appreciate the questions. And thanks for your participation and your support.

[Operator:]

Thank you. Ladies and gentlemen at this time, there are no further questions, and I would like to turn it back to Ted Karkus for closing comments.

[Ted Karkus:]

Great. Well, listen, I really want to, I actually see there’s one more question, if you want to take that Jane. Question just came in.

[Operator:]

Yes, we do have a question from the line of Robert Danaher, Private Investor. Please proceed with your question.

[Robert Danaher:]

Yes, Ted. Thanks for the good pick my call and great quarter; I just had a couple of questions regarding the date of ownership for the dividend. And whether there’s anything personnel changes, and since the beginning of the year, and the last one is like to make if you can make any comments regarding how you’re, how you feel about a consulting agreement? And how that’s working out for you.

[Ted Karkus:]

I’m sorry, what – in reverse order or what consulting agreement are you referring to?

[Robert Danaher:]

Ted, the one that’s in your 10-K report, the consulting agreement back in September 25 of 2020.

[Ted Karkus:]

Yes. I apologize. We have so many consulting agreements in – I think you’re talking about the one with the major laboratory.

[Robert Danaher:]

Yes.

[Ted Karkus:]

That when we actually that’s a complicated question. I would almost rather you contact me individually for that. But what I can tell you it’s actually it’s pretty straightforward. That’s what the laboratory that as they do testing, they pay back, they have debt to us. And as they do testing, they pay back to us. And so far, everything has been status quo. With regards to the timing of payment of the dividend, if you actually look in the, I believe it’s in the press release the actual date. I don’t want to misquote it. Let’s see, I’ll just tell you very quickly, I’m pretty sure it’s actually…

[Robert Danaher:]

Okay, listen – it’s in the report, I’ll catch you.

[Ted Karkus:]

Yes. It’s definitely in the press release. And then in fact, it says here, the dividend is payable on June 3, to stockholders of record as of May 25. So, you have time if you want to get your hands on the dividends. As far as employees, we ramped up employees in a dramatic way back in December, and January, as we’re building out our second lab. And what you got to understand what I don’t know, I think we might have hired 100 employees in the span of about eight weeks. Anytime you hire 100 employees over a short period of time, you’re always going to have some attrition. And so a number of people weeded themselves out. And of course, we also had a drop-off in revenues, and actually, more importantly, expected revenues, which therefore fit in well with the fact that we had a number of employees that didn’t work out. So, you put that those two together, we’re more efficient now. Our overhead is less now than it was three months ago. And that’s a smart business. If our numbers ramped up in the future for instances, as Jason Kolbert was asking about the national initiatives, if we hit on a national initiative, likely be hiring more people. Right now we’re happy with the headcount the way it is, I certainly wouldn’t comment on any employee in particular, whether they were let go for disciplinary reasons. But in general, there’s also natural, attrition, just from the fact that we hired so many people and some people just doesn’t work out for them.

[Robert Danaher:]

Okay, great. Thanks, Ted.

[Ted Karkus:]

You’re quite welcome. And looks like we have one more question, Jane, I’m happy to take we have little time.

[Operator:]

Our next question comes from Lee Alper with Hammock Investors. Please proceed with your question.

[Lee Alper:]

Hi, Ted, hope you can clear this up. There was some rumor on the – one of the internet boards that the whole bridge lab was closed for equipment problems and the people were laid off.

[Ted Karkus:]

Yes, okay. So that was all blown out of proportion. I assumed that it is somebody short the stock. Somebody actually brought that to my attention. And interestingly, the person was related to P2, people who were fired from the lab. So it doesn’t surprise me when rumors start related to disgruntled employees, and people related, and for the people listening, if you’re talking to former employees and trading in the stock, you probably want to think twice about doing that it’s not – it’s just not smart, especially when people know who you are and other people that were let go. But I can tell you is hypothetically their inspection to take place in lab, the same way that we’ve had a manufacturing facility and we do FDA inspections, I don’t report an FDA inspection, or lab inspections. But to blow it out of proportion, I can tell you that we have never had a hiccup in terms of accepting specimens. And you can see by the numbers, we just had a tremendous quarter. So I will be happy. I really don’t like to address rumors, especially when there’s faulty information in there. But I hope that clears up your question. And Jane, one more – I think, I see one more question.

[Operator:]

We do have a question for a line of Pat Patterson, Private Investor. Please proceed with your question.

[Pat Patterson:]

Okay, Ted, how are you?

[Ted Karkus:]

Awesome, Pat. It’s good to hear from you.

[Pat Patterson:]

Ted, you did an unbelievable job. I mean, I never thought I’d have a chance to even talk to Superman. But now I can say I’ve done it. So my question is – my question is about the antigen test. Because what you were talking about them being unreliable and whatnot, maybe they won’t be – maybe they won’t be really popular six months or a year from the day? I don’t know. But what I was curious about is since you’re going to get into the antigen testing business, how do you go about actually putting the antigen test in the hands of people? Can you address that? How the discretion for?

[Ted Karkus:]

Yes, yes, so there’s two ways, really three ways, for us to potentially distribute antigen test. Number one, when the FDA became overwhelmed last year, with various different types of tests coming to market, those that were developed by CLIA labs, which are called laboratory developed tests LDT. The process for approval for selling them is very different, you want to sell in a store. So as an LDT, you can sell to healthcare practitioners, medical doctors, offices, and so forth. We can also in our testing, since we actually have healthcare providers working for us and our customers are oftentimes healthcare providers that are doing a specimen collection, we can sell to them or partner with them. So for all the testing that we’re doing in schools, and potentially events, we can, if we introduced an LDT antigen test, we can roll that out very, very quickly. And that’s what we’re working on right now. In addition to that, we can also purchase with distribution companies, we can purchase antigen tests. And again, those we can distribute in our testing, obviously, the margins are going to be better and an antigen test that we develop ourselves also in the one that we’re working on ourselves. The reliability results, the sensitivity and specificity are fantastically better than most of the antigen tests out there, and a saliva-base. So, if we can introduce that, to complement our PCR testing, then the testing that we’re currently losing to antigen testing, we’ll be able to bring that back in house, because we’ll be able to provide the same customers with both PCR testing and antigen testing. And for instance, with schools, a lot of the schools now are really into doing the antigen testing. It’s just – it’s easier for them that the results are faster. A lot of this also has to do with politics and with psychology of doing an antigen tests because it’s easier, it’s quick, and all they care about is having a negative result reported, they don’t even care how accurate it is. So, because we’re dealing with that type of psychology, it’s important that we provide both PCR tests and antigen tests. But what’s nice is the one that we’re working on has excellent reliability resulted in. I really don’t want to go into too much detail, because we haven’t finalized any antigen test deals. But we are able to right now offer antigen testing, through a third-party who provides us with the antigen test that we then provide as a part of our testing right now. But the goal ultimately is to introduce our own. And then also not only as an LDT, but what you’re doing here apply to the FDA, for EUA for at home or point of care testing that’s a bigger hurdle. But that’s something that we would be working on as well. If we got the point of care, testing on our antigen test, forget about it the same way that Jason Kolbert asked, you know about something transformative. If we got point of care testing for antigen tests that would be transformative too. Again, I’m getting way ahead of the game and even talking about it. But those are the kinds of things that we’re working on for the future. I hope that answers.

[Pat Patterson:]

Yes, does. Thank you very much, Ted. Great job.

[Ted Karkus:]

Thank you really appreciated, Pat.

[Operator:]

And there are no further questions.

[Pat Patterson:]

All right, awesome. So listen, I just want to tell everyone how much I appreciate you joining the call today. And to tell you, I really am working on behalf of the shareholders. And it’s not just me, and something I didn’t mention on this call, but I have any other. We have a fantastic management team, led by our COO, Steve Kamalic, and our CFO, Monica Brady, and we have fantastic Head of IT and Sergio Miralles, and our two heads are high complexity Molecular Lab Techs, the Head of R&D, Carlos Brewster, and Amanda Vasquez. We just hired a fantastic person to Head of Lab Operations, who officially started working for us yesterday, her name Alex Levi , and then also Jason Karkus, who heads up our sales. I’m really, really pleased with our team, we just had a major potential customer sit in, we just saw sat in with them today. And they were so impressed. In fact, everybody that comes into our company is so impressed with our management team. It almost makes it easier for – easy for us to win awards, and bids, RFPs, when potential customers come and visit us in person. I couldn’t be more pleased when you have a strong management team, you have a strong financial base, fantastic equipment, the sky’s the limit on what we can do. I can’t guarantee success in advance. But we have all the right pieces in place, and all the right infrastructure in place. And the strategic initiatives that we’re working on, I’m so excited about. And I’m hoping to transform a company from we transformed it last year into a COVID lab testing business, I expect to quickly transform that into a COVID lab, not only PCR, but also antigen immunity testing company. And then I expect to transform it once again by diversifying it with other labs into other types of lab testing, and then be on the lookout down the road. Well, if and when we get into the field of genomics. So there’s some really exciting things ahead for our company. And for those of you that are patient, I’m going to do my best to provide returns for all of you. Have a great day. Thanks so much for your time. And thank you, Jane, this can end the call.

[Operator:]

Thank you ladies and gentlemen, this concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.