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Presentation

Operator: Hello and welcome to the ProPhase Labs Financial Results for the Year Ended December 31, 2022 Conference Call. Please note this event is being recorded. I would now like to turn the call over to Chairman of the Board and CEO of ProPhase Labs, Ted Karkus. Please go ahead.

Ted Karkus: Thank you, MJ and thank you all for joining me today. Before we get started, I would like to €“ I have 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 resists the €“ sorry, 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 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. Alright, now that I got 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 and you are wasting your time and I don’t know why you are on this call. First and foremost, and by the way, first of all, a couple of things just to mention one, we have two fantastic investment bankers, investment banking firms that we work with, that’s critically important when you are a small cap development stage company, it is critically important to have good relationships with investment banking firms and particularly high-quality investment banking firms.

And in our case, with small cap development stage companies you want investment banking firms that focus in small cap development stage companies like ours, small cap, I don’t think every company is small cap. In fact, I think our companies could be larger than small cap soon. But in any event, I am talking about ThinkEquity and H.C. Wainwright, they both cover our stock, they both do a great job and I appreciate both firms. In addition to that, we work with Renmark Financial for primarily for retail investors. If you have never seen a Renmark virtual non-deal roadshow call, I do these probably every 2 or 3 weeks. If you want to get updated, feel free to reach out to Renmark and sign-up for the next one. Also, on our website, we have two company presentations.

One is on the whole company one is just on the biopharma division. The main company presentation, probably updated every couple of weeks, you can go there to learn more information. And 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, it’s probably going to turn out to be a bad investment.

And so the one thing I can tell you is you can look at my track record is the track record of your management team, our company over the past 10 years and honestly we have killed it. Alright, we had a $0.65 stock 10 years ago since that time. We paid out $2.40 of special dividends and our stock is up however in many multiples, for what it was $0.65. And I’d say the majority of our shareholders in our company have probably been with me for 10 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 10 years, but even over the last 2 years, our performance has been phenomenal. So we turned and sold the Cold-EEZE brand for $50 million. And then I didn’t squander a penny of that money.

I did €“ everything I do is towards building value in the company long-term. And I pay attention on a per share basis and that’s why we do stock buyback. I think about terminal value on a per share basis. What’s the value of our company, divided by 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. Anybody that doesn’t like stock buybacks and stock dividends should have their head examined. So in any event, I am the largest shareholder in the company. Everything I do, I am therefore aligned with our shareholders. Everything I do is for the shareholders.

And believe me I put our shareholders above myself and before myself. So having said that, look, when we sold the Cold-EEZE brand, we did the stock buybacks, we paid the dividends and we waited for the right opportunity that came along €“ to come along. And it came along with COVID, we quickly pivoted, built at a fantastic lab, and the last 2 years’ results speak for themselves. Frankly, they are pretty phenomenal. Tell me another company that raised €“ and we raised $37.5 million in January 2 years ago and now we have over $40 million in net working capital and 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 it turns us into a multibillion dollar company.

That’s the goal. So we pivoted, demonstrated that we executed, obviously, look at the numbers. I’ll just tell you very briefly, our revenues for 2022, $122.6 million of revenues. 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, upper respiratory company for 2 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 and blah, blah, blah, but I have explained this ad-nauseam over the last couple of months for anybody that watched our Remark VNDR.

We are now transforming our company where the underlying value from the other assets in our company are growing rapidly and the growth and value of these other assets is 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. And so you have to look at some of the pieces and there is a lot of value in the piece of our company. I’ll mention very briefly our manufacturing facility. And 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 lozenges 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 out 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. They are impressed with the reliability. And frankly, it’s almost like they are desperate. We have one company from another country, household name, I don’t even want to mention the brand, alright. One of the biggest brands in this country, they are actually based in other country. They not only want us to do the manufacturing for them in this country, they potentially want us to do their lozenges manufacturing globally.

So 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. So just imagine, a year from now, we are doing €“ and I put this in a press release, I believe we are targeted to do about $25 million of revenues in 2024 in our manufacturing. So 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. That just not alone, this one business and nobody pays attention to plus our net working capital can be worth the whole market cap of our company, how ridiculous is that? Okay. Now we get into Nebula Genomics. There are startup companies with $50 million and $100 million valuations that are probably 3 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 for the business model. They are story stocks and yet they have $50 million and $100 million valuation. So I am not going to tell you what Nebula is worth, but Nebula is actually potentially growing even faster than our manufacturing facility. We are €“ 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 the future 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, which is a great for ancestry information.

It’s awful for health-related information, if you want high-level health information and the whole country is going towards trying to be more healthy. And 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. And so this is all in the first inning. This is like where the Internet was 20 years ago. And we are so perfectly positioned. We have world renowned George Church, who is a Founder, who is on our Advisory Board, who 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 we are in Abu Dhabi and in the UAE and working with some of the largest €“ our little company is 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 so many people save so many lives and make our shareholders an enormous amount of money. That’s the goal. And all I can tell you is since we took over the, number of scientists and people that I’ve got involved in with this have 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. With that 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. 2 million tests times $1,000 or $2,000 is a $2 billion to $4 billion market in this country. And we believe we could get the CPT codes as early as the beginning of next year. We are working with key opinion leaders, 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 and given how real this is and given the time frame for commercialization.

And then finally, we are working on Linebacker, our cancer compound. We’re not going to break the banks and spend a lot of money on it. It has enormous potential, but that’s longer term. But our goal really is just to license to a major pharma sometime next year after we complete a Phase I study, sometime maybe late next year. So 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 something low risk to us because we’re not going to spend a lot of money, enormous rewards, and it’s sort of icing on the cake to everything else we’re working on. And then, of course, we have an Equivir broad-based antiviral that we will be potentially introducing to the marketplace and commercializing later this year.

Initially, we would sell it online and ultimately, the goal is to get into the retail stores. We are experts in selling anti-virals, OTC, similar to what we did with Cold-EEZE and I personally was involved in the turnaround and sale of the Cold-EEZE brand. And we still have some of the same €“ we still have the same senior salesman. Joe Brennan, who has been in this business for decades, he kills it. He has relationships. We are the number one national broker that we work with and with every major retailer. And so 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 he has Equivir to introduce to the marketplace and in addition to that Nebula Genomics, we can introduce a test, a whole genome sequencing test that we’re 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. So there’s so much in so many directions, there’s a lot of overlap, there’s a lot of synergies between our various subsidiaries. And so I’m really excited about the future of the company. Anybody that’s focused on us as a COVID testing company, you’re completely missing the both. That’s going to be the least important part of our company down the road and certainly in terms of the value, all right? COVID testing obviously has the revenues, but we never got a multiple of those revenues anyway. So now we have other businesses esophageal cancer tests is going to have zero revenues this year. And by the end of this year, who knows what the value of that test could be. And then the kicker is, we are working globally.

We have global initiatives that we are working on to commercialize to develop and then commercialize our esophageal cancer tests in other parts of the world. Just think about it. Everybody that gets esophageal cancer in this country, guess what, they get in every other country, too. It all starts with GERD, gastroesophageal reflux disease that acid in your stomach. As so many people get a huge percentage of the population as every country gets GERD and then sometimes IT develops into Barrett’s esophagus. And one out of 50 or 1 out of 100 people that get Barrett’s esophagus turns into cancer. And right now, in fact, we just met with one of the scientists last night. He is a surgeon, and he operates on people all the time with esophageal cancer and he was telling me how excited he is for our test and how desperate the industry is for a test like this, and 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 €“ we believe it’s going to save a lot of lives. So, all these things going on with the company, I am really excited about the future of the company. I want to cover a few €“ a couple of housekeeping items related to the numbers for those of you that are focused on the numbers. So Q4 €“ 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, which is the government-funded entity that was actually paying for all the patients being tested that did not have insurance and I understand people walking out on 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 can 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 continue the test. This went on for many months. And so there was a real possibility that we were going to collect on these patients.

And then in addition to that, when HRSA when it finally became clear was 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. The complicated matter, we are talking about tens of thousands of tests. And ultimately, we have a new senior finance team. We hired three fantastic senior level executives in our finance team. They all have decades €“ 10 years or more of experience, probably any one of the three could be our CFO. Right now, Robert Morse heads our department, but Heather and Greg are equally fantastic. So we have a very strong finance team and they recommended to be conservative and to be prudent that we take the $5.9 million write-off.

What makes it complicated is that we’re writing this off at year-end and even though it’s related to testing activity in the first half of the year when, frankly, if we did $5.9 million less revenues in the first half of the year, it wouldn’t have been €“ it would have been negligible. It wouldn’t have even been noticed because our revenues are so ridiculously large. But unfortunately, because it’s at year-end, if we report fourth quarter net income number, we would have to report it with a $5.9 million write-off, which frankly, I think, would have been misleading. So, rather than doing that, we gave you the full year numbers, just so you know our numbers, we still did $21.8 million of revenues. Not counting, and of course, you got to count the $5.9 million, but I just want to give you a fair picture on what our fourth quarter looked like.

Not counting the $5.9 million, we would have reported $1.8 million of net income. And furthermore, we had performance payments related to our testing activities throughout the year, which actually probably should have been expensed throughout the year as that hit the fourth quarter. So because all that hit the quarter, we would have €“ 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 of net income. But we do have €“ we did account for those performance payments in the fourth quarter. And so €“ 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. And finally, our accounts receivable, while our accounts receivable 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, trade receivables related to Nebula Genomics and Pharmaloz Manufacturing, but of course, the bulk is from testing, but understand that as we get paid by insurance companies, we have new tests, that creates no accounts receivable. And 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.

It’s all in the system. These are people €“ a lot of our testing where people walking up to a tent and getting a quick COVID test, taking a quick specimen without the sophisticated equipment and without taking the time to properly collect the patient insurance information. So what’s interesting now, we’ve now found we’re working with a couple of different companies, one in particular in another country, it was like 50 people working on this, working through all of our accounts receivables, we’re talking about literally tens of thousands of tests and patients, and they’re working through every single one of them, and they’re doing a fantastic job. And I can tell you, in fact, my Head of Billing just walked in just before this call and she said, she has great news for me.

And basically, we’re working through that accounts receivable very quickly. We’ve always got some accounts receivable, while we’re doing testing. Because at the end of the day, we have to organize the information, get it to the insurance companies and the insurance companies take 4, 6 to 8 weeks on time to pay. It’s high-quality accounts receivable, but nonetheless, it still takes up 4 to 8 weeks. So it’s always going to be rolling where we always have new accounts receivable replacing old accounts receivable. Having said that, 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 longwinded way of saying don’t be concerned about it at all.

It’s coming down to reasonable levels. In addition to that, we may be able to find insurance on patients that previously did not provide insurance that is not in our accounts receivable. It is not in our revenues. And so we may actually get some nice bonuses down the year from that. So not only do we have a squeaky claim financials with our new finance department, team of experts. And in addition to that, we may actually have some upside in the coming quarters. And so I addressed a few quick questions. I’ve now €“ I’ve never 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 that I hire are people that execute and I tell them that. And you know what, for every three senior level people that I hire one works out at the €“ one that 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. And so we’ve gone through a transformation in terms of our management team. Over the last couple of years, where it just gets better and better and better. We have a kick ass management team, literally, not just our finance department, all the people in it. It starts with my son, Jason Karkus, our Head of IT, is amazing, Sergio Miralles. Alice Lioi, who’s 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 helping us become a global company. I don’t want to leave anybody out €“ those are the €“ 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 here, 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. But I’m really, really excited about the team that we have, and I’m really excited about the assets that we’re now developing.

It is my destiny to build a multibillion-dollar company. And I believe that we now have the assets to develop that can make that a reality. And again, I just want to highlight everything that I tell you, I believe in my heart, number one. And 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. So please stay tuned. I think that there’s a lot more to come. And 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.

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

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

Ted Karkus: 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 the 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’s still people when it’s convenience for them. They still 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 mask, right? So people are still being cautious. Still if you get COVID, the best thing you can do is get tested or to confirm you have COVID, if you do, it’s the quarantine, people finally realize 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.

And so people are still getting tested or testing is clearly dropping and it’s becoming a less and less significant or important piece of our company. Certainly, from a value proposition point of view, I highlighted all the other divisions that are doing so much better. So there’s no question that the trends in COVID testing is going to continue to drop. Having said that, I have to figure out what I can kind of say right now, we’re still going to have a solid first quarter, and we’re still doing COVID testing. And we’re €“ when we got into the business, we blew way 95% of labs but we’re still outperforming 95% of labs. So while our COVID testing is dropping, it’s not dropping as much as it is in the industry. I apologize you that I can’t €“ we don’t give future estimates and we don’t give more detailed information.

I hope that answers your question. The best I can do on the call for now.

Yi Chen: Thanks. You mentioned that you expect Nebula Genomics to grow more than 100% in 2023. And also the manufacturing subsidiary could grow up to 100% year-over-year this year. So I don’t know if you can provide some general comments regarding the total revenue top line growth in 2023 in terms of your expectations compared to 2022?

Ted Karkus: Sure. So with our Pharmaloz Manufacturing, and I don’t have the exact numbers, and 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. And I think that 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, and it’s just a matter of how quickly we build out the capacity. So we are starting with €“ we’re buying an individual piece of equipment right now that are ramping up as we speak.

There are larger pieces of equipment and a whole new lozenges line that we’re building that will happen in the fourth quarter this year. So our fourth quarter is really going to jump once that’s operational. So 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 of between 2022 where we did $7 million or $8 million. Right now, we’re targeting $25 million approximately in 2024 and will be somewhere in between. As far as Nebula Genomics is concerned, that’s a little more complicated because 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.

Where we really make the money is in the subscription. We will sell the test across. That’s how we will continue to be the low-cost provider of whole genome sequencing in this the country. Nobody can compete with us. And this business is as far as sitting, the business is going to explode. There is no question about that. But right now, where our business model works is when you purchase the test, which we are selling approximately at cost, the real money is made on the subscription, although if you don’t send it in, then we make the money on purchasing the test, not the subscription, but we didn’t have the process to test, so we save a lot of money there. So 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 with deferred revenues. The other thing is that happened was historically the lifetime subscriptions we had to book the revenues over 3 years. So there’s a lot of deferred revenues. I think we have fixed that issue now. We have changed the agreements that you signed when you purchase a test so that we will be able to book the revenues the same within 12 months of purchasing a lifetime subscription will be. 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 provided the service for that subscription. But now we’re working out in a way where we’re actually getting paid for this setup as opposed to the ongoing subscription. So in any event, I apologize.

I’m sharing a complicated GAAP accounting matter, and we’re working through that now. And 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. But suffice it to say, our Nebula Genomics is probably growing at an even faster rate than our manufacturing. And I would say that our revenues in Nebula Genomics will be €“ are going to 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.

And I’m not saying we will till own it then. But certainly, I think it’s worth a lot more than what’s represented in the stock price today.

Yi Chen: Got it. And my last question is the operating expenses in the fourth quarter appeared to be significantly higher. So do you expect to maintain this operating expenses level in 2023? And also, do you have sufficient capital to do that while continue to buy back shares.

Ted Karkus: Great question. So 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. So buying back stock doesn’t really play a role out, 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. So when we had performance payouts that we’re going to try to spread them out over the year going forward as opposed to them just hitting the fourth quarter because those performance payouts were paid out in the fourth quarter expense in the fourth quarter, that showed up in our fourth quarter, which really understates how strong our fourth quarter really was.

But having said that, the bigger expense was the SG&A, that was a one-time event. And as I explained before, if anything, we’re now in the opposite position, where we have been testing that is not on our books that is not in our accounts receivable that we believe that we’re not going to find insurance for some of these patients because there are ways for companies that can do research to actually find insurance on patients that have been tested even though they didn’t provide their insurance information, and we’re now starting to uncover that information. So if anything, our operating expenses should be less going forward at the same time that we could have some surprises in collection. So when we say our operators expense are going to be less, let me just be €“ let me just pull back a second on that statement.

We’re building four or five subsidiaries that have enormous potential, all right? 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. And then it’s just a question of how much of that with the equipment we purchased is going to be capitalized and how much of it is going to be expensed. We have an enormous amount of equipment that gets depreciated very, very quickly, even though that equipment could last as 20 years, it gets depreciated very, very quickly. So a lot of these €“ these are non-cash expenses. And that’s just a cost of building our businesses. So 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. So I can’t tell you exactly what the operating expense 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 that you’ll ever come across. And that’s why all these other companies that raised capital 2 years ago, burned with their capital, their stocks trade down 90%, aren’t coming back, can’t raise capital, we did the opposite. Every dollar that we spent, we generated and created $2 or $3 or $5 of value. And that’s why after we raised capital 2 years later, we still have more capital than what we raised 2 years ago, while building all these fantastic business, making all these fantastic acquisitions.

So 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. And the performance payouts will be spread out over time instead of hitting the fourth quarter in the future. So I would not take our fourth quarter number and say those are operating expenses at this point, they’re not.

Yi Chen: Okay. Thank you.

Ted Karkus: Yi, thank you so much. Thanks so much for following our company. Really appreciate your support, and thank you so much for the questions. MJ, can we go to the next caller, please?

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

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

Ted Karkus: Yes. Great. Thanks. Excellent question. Sure. So first of all, we can commercialize this as a cash-only test. But until the key opinion leaders and cancer institutions and the insurance companies get behind you the question is how effective will we be in distributing that test? And 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. But where the real money is when we get the CPT codes, all right? And again, the CPT codes, CPT codes, what you get reimbursed is based on the complexity of the test.

We believe, we estimate that the CPT code will potentially reimburse us for $1,000 to $2,000. Right now, I want to estimate that the test cost us under $500. So, that means the gross profit margins could be anywhere from, let’s say, 50% to 75%. However, once we start doing those tests and volume, it’s possible that test will cost us $300 or $250 or even less. And at that point, the gross profit margins become ridiculously large. And again, we are going after €“ first of all, there is 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 people than just people with Barrett’s esophagus.

So, the starting point is to go after those 2 million people to get an endoscopy every year and understand in an endoscopy, they are removing biopsy seven or eight 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, €œOh, my God, I may die.€ Alright. Just think about it. You are the person even if you had to pay cash, you wouldn’t pay $1,000 or $2,000, 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, no, you are not going to get esophageal cancer.

Either way, who wouldn’t pay that $1,000 or $2,000, especially since you are getting 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. And they get them every year, year-after-year-after-year and the insurance company €“ 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 this esophageal cancer, think of how much money that saves the insurance companies. So, we believe that the insurance companies, from a monetary point of view, are going to be motivated to provide us the CPT codes.

And 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. That’s what we are building right now. So, when you read about how our scientists are going as they did just a few weeks ago to present 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. And look, we are involved with Mayo Clinic in the United States. I mentioned that we are also working globally, which means that we are working with major institutions and companies in other countries that are just as big as Mayo Clinic. And so that’s only the tip of the iceberg.

I haven’t even gotten into this, but they may €“ we may be developing 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. It is 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 on almost a daily basis. We just met with a gastro surgeon last night, who is hugely behind this test, and he just as excited. And we are now working with healthcare companies in other countries who are excited about the test. So, there is 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 10 years and one day, it’s commercialized, it all of sudden worth billions of dollars.

We are, I believe in the eighth inning of developing esophageal cancer test. I hope that gave you some perspective. I appreciate the question. Hunter, do you have another question, please.

Hunter Diamond: No. It definitely did. Yes, one more. But no, I agree. Endoscopies are sort of the standard of care. So, I mean I think 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 how you are going to differentiate other than price? And how much price you view as a component of consumers purchasing genome sequencing?

Ted Karkus: Yes. So, there is really two components. There is price and there is 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 2 years ago why our business exploded and we outperformed 95% of the labs in the customer. So, we have that down path. Having said €“ and we are building out our genomics lab as we speak. And by the way, I didn’t mention to everybody, 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 full built-out clinical lab that’s absolutely beautiful, it blew my mind.

I can’t believe how nice it is. And then 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. Anybody in the Garden City in New York Area ever want to come visit, I promise you will be impressed. I looked at 60 labs to acquire in the last year or 2 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 the major company is like 23andMe and the 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. And so 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 and get into health-related information, the problem is they are doing it with a test or study of the 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 like apples-and-oranges. Technically, our whole genome sequencing test provides more than 1,000x more data points than what these other companies provide with their tests. So, that’s number one. Number two, universities doing research, clearly they are going to hold genome sequencing. That’s not even a question, but with the universities, they are on tight budgets. And so it’s critically important to them when they have a certain budget, they want to test as many people as they can within the budget, price is critical. So, first of all, the consumers, consumers aren’t going to pay a fortune. So, if we can provide a whole genome sequencing test at that cost, how can anybody compete. First of all, because of our relationships with the global leaders, we literally are working with the global leaders who in turn want us to be their number one lab in the United States, representing them.

And so we literally are getting the best deals of any company in the country for not only for their equipment, but for their consumables. And at the end of the day, the consumables is what drives price. So, we don’t believe that there is anybody that can actually process a whole genome sequencing test as inexpensively as we have had. And then in selling it to the consumers, we can sell it across because of our model or our subscription model, where we sell a subscription, we make all the money on the subscription. So, I don’t see how anybody can compete with us. And then as far as the universities are concerned, I would say 80% of the decision is actually based on price. So, 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.

But even in marking up the price, we are still going to be able to offer to them than anybody else. And then meanwhile, the universities doing research in personalized precision medicine, that business 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. Again, it’s like 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 in advance and you just wrote it for a few years, it’s amazing how much money we are going to pay. 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 and our turnaround times in our customer service. And then number two, we are working with the largest companies in the world who are providing us with the least expensive consumables so that nobody can compete with us. And then in addition to that, 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. And these are global companies that want to partner or potentially partner with us not only in Nebula Genomics, but also with our esophageal cancer test and also with our Linebacker. And they might even want to 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.

And they want us to ship it and distribute it for them in other countries. So, it’s really far ranging, and it really leverages all the assets of our company. I hope that accurately answered your question.

Hunter Diamond: No, it absolutely did. I think it’s a great growth area. And like you mentioned, it’s just 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.

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

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

Patrick Patterson: Good morning Ted. Thanks very much for everything you are working. It just sounds great.

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

Patrick Patterson: 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. And I just wonder if you have given thought to what we could do to try to literally un-cote Nebula’s pent-up value. Could you talk about that some?

Ted Karkus: Sure. Great question. And it’s interesting you should ask that because I was just having a discussion about that this morning. Look, there is a lot of strategic initiatives that we are working on. There is 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. Now 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 am not going to sell it for $250 million. I think somebody asked me, I was on a virtual non-deal roadshow call and somebody asked me, would you sell your esophageal cancer test, I can’t remember, he said $150 million or $250 million.

I am like 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, €œOh, I will give you 50% more for it.€ They would have been fools to take it. Well, if I really believe in the assets that we are developing, I really do, why would I sell any of them now. So, with something like Nebula, honestly, I think that we could sell the business right now and create significant value for our shareholders today. But I think that a year from now, Nebula is going to 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 up at Harvard and he does that because of his love of genomics. He doesn’t do it for money. And I don’t even know. I don’t want to speak out of term, but he has made an enormous amount of money, probably more than the whole market cap of our company. And one day, I was joking with him during one of our Advisory Board meeting. 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. Like he was mad, he was like, don’t you even consider it, I said, no, no, no, George. Don’t worry, we are not going to. So, I hope that gives you some perspective that at the rate of growth, and you got to understand, over the last 2 years, the market has not put a multiple on our revenues or earnings because they didn’t believe that they would be long-term.

And they were correct. It turned our COVID testing last year longer, than anybody expected, we did significantly more business than anybody expected in the last year longer than anybody expected. And at the same time, we never got a multiple of those earnings €“ of those revenues and earnings ever. On the other hand, I believe that 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 $1,500 million valuation. So, the type of valuation, so look, hypothetically, we can IPO Nebula. I happen to be working on some other things that I want to do first. But hypothetically, there are companies, I think it was Alibaba just announced the stocks up based on the fact that they want to split up into separate companies.

You can unlock a lot of value with IPOs. So, 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 1 year, 2 years and 3 years, I wouldn’t want to sell it because the company does need the money right now, all of our shareholders for the most are long-term shareholders. And I want to build value over the next 2 years, 3 years, 4 years, 5 years. I don’t want to sell it short because we can make a quick buck over the next three months to six months. So just, it gives you an idea of how I am thinking, I am thinking for long-term shareholders. But having said that, long-term, does it have to be 5 years to 10 years, it can be 1 year to 2 years with what we are working on.

So, 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 sale just because it has so much potential, and it’s growing so quickly and also some demand.

Patrick Patterson: Thank you, Ted. Appreciate it.

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

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

Fred McDonald: Hi Ted. How are you doing?

Ted Karkus: Excellent. Thank you. Thanks for calling in and for your support Fred, how can I help you?

Fred McDonald: Yes. In your press release today, you talk about the global opportunities for BE-Smart. And then previously, you indicated that you are going over to United Arab Republic in a couple of weeks. Is this to close a deal with BE-Smart and G42?

Ted Karkus: So, actually as I mentioned, Sam Beeler has been €“ he is Chief Strategy Officer of 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 this. They are huge in genomics. They are responsible for the Emirati Genome Program, which is to test 1 million residents in the UAE for €“ to do whole genome sequencing. And so this is a prime focus of theirs. And then at the same time, they have a tremendous lab, which I toured, I don’t remember, last time I was over in Abu Dhabi that might have been six weeks ago, I toured their lab. And it’s really interesting. We are building our lab here almost in parallel.

It’s really interesting. The equipment is in both. And then 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. And so understand G42 Healthcare is the only large company over there that we are talking to. And so there is a lot going on both with Nebula Genomics as well as with 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 don’t want to say we are best to announce a big deal or there is some big deal or anything like that. I am just working. I am just working, developing the value of our assets.

There is a lot of opportunities. We are working on a lot of opportunities. But what I can tell you is what we are working on, number one is very real. And number two, everyone around us from key opinion leaders to cancer institutions to large healthcare companies are all interested in what we are doing. They are all taking our calls. They are all talking to us and we are discussing strategies with all of them. As I mentioned, I just spoke to €“ literally just visited my office last night was a GI surgeon who is super excited about esophageal cancer test. And at the same time, look, people get esophageal cancer around the world. Everybody gets GERD. Not just in this country. And it’s growing at a rapid rate, especially with the health, apparently, people that gain weight have more of an issue with GERD.

And it’s taking off around the world. And it’s a big problem over in the UAE and in the MENA region, in Middle East, North Africa, that whole area. And so the numbers are taking off for GERD. The numbers are taking off for Barrett’s esophagus. And obviously, they are taking off for esophageal cancer. And so wouldn’t the leader in Abu Dhabi, wouldn’t he love to take credit for introducing an esophageal cancer test that saves thousands of lives. I mean it would be great PR. And it would be great motivation and he just happens to back the largest healthcare company, not to mention he backs the largest bank in Abu Dhabi. And so 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.

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

Ted Karkus: So, BE-Smart technology is literally taking a sliver of a biopsy €“ of the tissue biopsy. We are actually working on other technologies. And what’s interesting about it, what it’s actually doing, we are studying, and this is proprietary unique proteins. What happens is everybody has a mix of proteins. People with €“ that develop esophageal cancer, the ratio of certain proteins changes. And so the key is to find the right protein markers. And 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. Well, first of all, 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’s sort of way out there, that’s sort of Phase 2. And then also, at the same time, in parallel, I haven’t even, this is not something I have even gotten into detail on yet. It’s possible we can 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. And I don’t want to go into more detail than that now. So, those are the first. So, there is two to three different ways that this esophageal cancer test could play out, 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.

Fred McDonald: Great. Thank you, Ted.

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

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

Ted Karkus: Fantastic. So 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. But if you can 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 10 years, but over the last 2 years of executing. And now we have horses in the race that we never had before.

And we have assets that we never had before that of enormous potential. We executed the other times we had assets. 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 10x, 20x the potential of what we did with Cold-EEZE. And then with our lab, again, we got into the business, we executed literally from the first week we were in the business is ridiculous how much business we did. And now we have all these different assets. And you can bet with us that against us, but we are developing all these different assets, and I would be surprised if at least one of these assets doesn’t turn into something really big. And the truth of the matter is I don’t see why all of the assets aren’t going to turn into something really big.

And with that, I really appreciate everybody joining the call today. And I really appreciate your time and your support or your potential support. And 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, everybody, have a great day. Thank you so much. And thank you, MJ for hosting the call today.

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