Ted Karkus - CEO Monica Brady - Chief Accounting Officer.

Analysts:.

Good morning and welcome to the Year-End Financial Results Conference Call. My name is May and I will be facilitating the audio portion of today's interactive broadcast. All lines have been placed on mute to prevent any background noise. For those of you on this team, please take note of the options available in control.

[Operator Instructions] At this time, I would like to turn the show over to Mr. Ted Karkus the Chairman and CEO..

Thank you, May and thank you everyone for joining us on the call this morning. I'm really have been looking forward to having this call today and talking about our company and the employees. I really think we're doing a bang-up job. So, it's my pleasure to host this and again thank you all for joining.

The agenda for the call, I'm not going to read the earnings release you can all read that for yourselves. It always seems silly to me what other companies waste time reading the press release to you, I'd rather save my time for additional Q&A at the end to the extent that anyone has questions.

In a moment, I will introduce our Chief Accounting Officer to you, who'll read the Safe Harbor disclosure. I will then talk about our company for about 10 or 20 minutes at which point we will then open it up for questions. We do not screen callers or shareholders and interested investors are welcome to ask questions.

I feel that all questions, I did that for you to be respectful. Our team here has worked really hard to achieve the success that we've achieved to-date and so the fact that everyone be respectful. With that, I would like to introduce Monica Brady who was promoted late last year to become our Chief Accounting Officer and an executive of our company.

Monica has done a phenomenal job in taking over responsibility for our financials. This was an incredibly complicated year for reporting given the sale of our Cold-EEZE brand which is core asset of our company.

They're complicated tax situations involved including NOL's that we've been developing for the last 20 years, tax law changes that occurred at year-end. In addition, that Monica has been hard at work, new systems for working with the new subsidiaries that we are developing. So, Monica has regularly been working till 9, 10 O'clock most nights.

Last night I left Monica in the office at 11.30PM and then received an e-mail from her 2AM. So, I have no idea whether she left the office last night and I'm afraid to ask her. My point simply is that Monica is really dedicated to our company. She's done a phenomenal job during the transition from when she took over our financials six year ago.

So, I give Monica a major thank you. I told her that she must cut back her hours. She keeps promising me that she's going to do so hopefully now that this 10-K is out of the way or the 10-K will be out in a couple of days. Hopefully she is going to actually cut back. Anyway Monica, I would like you to introduce you to our shareholder.

Please read the Safe Harbor forward-looking statement..

Thank you, Ted. At this point, I'll read the forward-looking statement disclaimer that is contained in today's press release on Investor Relations section of our company's website and our 10-Q and 10-K filings with the Security and Exchange Commission.

Except for historical information contained herein, certain statements in our press release and on today's call contain forward-looking statements within the meaning of Private Securities Litigation Reform Act of 1995 including statements related to the launch of our new line of TK Supplements our new products Legendz XL and our new subsidiary ProPhase Digital Media.

Management believes that these forward-looking statements are reasonable and as when made, however such forward-looking statements involves known and unknown risks, uncertainties and other factors that may cause actual results to differ materially from those projected in the forward-looking statements.

These statements and uncertainties include but are not limited to the difficulty of predicting acceptance and demand of our products, the impact of competitive products and pricing, costs involved in manufacturing and marketing products.

The timely developments and launch of new products, the risk factors listed from time-to-time in our Annual Report on Form 10-K, quarterly reports on our Form 10-Q and subsequent SEC filings.

Additionally, we would like to advise you that statements made during this call are made as of this date and listeners to any replays should understand the passage of time by itself will diminish the quality of these statements..

Thank you, Monica that was [indiscernible] I appreciate you doing that. Alright, I would also like to knowledge our auditors EisnerAmper as well as your tax consultant Peter Baum at O'Connor Davy as they all worked late last night.

I want to thank them for their commitment to finalize the tax portion of our earnings statement without which we could not have released the earnings this morning. Really everybody chipped in to get to where we are today. As I mentioned, I'm not going to read you the numbers. You are capable of reading the press release.

However, I would just note that the roughly $9.9 million of reported sales for 2017 includes sales of our pre-existing inventory to Mylan when we sold the Cold-EEZE business to Mylan, we had a block of inventory which we sold to them. In addition, Mylan has a warehouse.

We've built up some inventory of Cold-EEZE products in that warehouse so consider that sort of an internal pipeline fill. So, do not expect these types of sales in 2018. I just don't want to mislead anybody, I'm not going to get too specific with the numbers.

On the positive side though, I would note that while manufacturing has operated a loss in the past. We are hoping to grow sales and improve profitability going forward. Dr. Rob Cuddihy who is sitting here by my side has done a phenomenal job, I always speak highly of him not only as our Head of R&D.

But additionally, he took over the responsibility of turning around our manufacturing facility and I'm quite confident based on the progress I've seen to-date that we're going to go from losses to profitability at our manufacturing facility and that we're growing sales.

So not only is he improving profit margins, he is also improving sales and in fact the very companies that are ordering product from us are ordering more even while it increased prices. So, I always say Rob is a better negotiator than me and he's proven that yet again by taking over our manufacturing, he did a phenomenal job. Thank you, Rob.

So, we do have some positives to look forward to with manufacturing. I just don't want anybody to take that $9.9 million number and assume that we're growing from there we're going to be growing from a smaller base. But we should be growing and we should be profitable.

Also, not to confuse anyone, the profitability is of our manufacturing facility that's not our company as a whole. Our manufacturing facility is in Lebanon, Pennsylvania about two hours from us. That is one piece of our business.

Our core business and our headquarters are in Doylestown where we are building a number of other businesses that are going to get into momentarily. With that said, our overall objective. First and foremost, every decision that I make is always guided by the mandate that we do what's best for the shareholders.

And in particular shareholders long-term interest which equates to maximize the terminal value of our company on a per share basis. Anytime, I have a conflict I have an issue I'm not sure which way to turn. All I think about is what's best for the shareholders and my decisions become clear.

All this basically means is we're growing the company while paying attention to the number of shares outstanding. This call serves us well as our stock price is now trading at its highest level since bottoming out at $0.65 per share in 2011 as we worked with a turnaround.

It's up more than four times since then, may not sound like a lot going from $0.65 to $3, but it's no different percentage terms for the stock that goes from $65 to $300.

Furthermore, for those who have stuck by me and believed in me and believed in me and believed in our team, they purchased more stocks at lower prices and have been doing very well ever since.

I would also note that following our Cold-EEZE sale and as requested by some shareholders, we provided two tender offers for more than 6 million shares of stock as liquidity events [indiscernible] shareholders who wanted to sell and needed the liquidity to do so.

Moving on to a couple of divisions that we've been developing, besides our manufacturing. We have our TK Supplements line of dietary supplements. Our lead product is Legendz XL. We achieved our first level of retail distribution in [indiscernible] stores and some grocery chains.

Our sales team has been hard at work to significantly increase retail distribution, initial signs are positive but the process for selling into retail chain is a long and sometimes frustrating process. You make presentations early in the year, you don't hear back until late in the year.

We're at a point now where we anticipate significantly greater retail distribution in the second half of 2018, but that is by no means a guarantee. I do not know any better than anybody on this call whether we're going to achieve that distribution, but I am hopeful that we are initial indications are positive.

Once we achieve the retail distribution, we have direct response TV ads which are ready to go. I don't want to air and I've said this before I don't want to air those ads on TV until we have national distribution of our product in a significant number of stores.

Direct response TV for our Legendz product I don't believe would be successful on its own, I'm not here to lose money. I'm not going to spend a lot of money just promoting our product on TV, if we don't have the distribution and stores. I don't believe that direct response on its own, as a standalone would be profitable.

And it's not worth it to spend millions and millions of dollars to build a brand when it's just to find that it's not going to be a successful product. So, I'm trying to keep risk to a minimum. The cash that we have on hand is substantial, I'm not looking for to burn a hole in my pocket or in our company's pocket. I treat that capital very carefully.

But the direct response TV ads are ready to go. We will also be marketing Legendz XL through our ProPhase Digital Media wholly owned subsidiary. And let me just talk about that for a minute. ProPhase Digital Media is a wholly owned subsidiary that we formed late last year.

It's a business that we're developing to product to market products online through targeted emails, native apd, native ads are digital ads which are embedded in online news stories. For instance, that you go to any website and you see a story that you like and you start reading it halfway through you see an embedded link or an embedded story.

Those are called native ads they are incredibly effective. Just give me a couple of examples of where the ProPhase Digital Media is going to be marketing products. We have been building the infrastructure very carefully and cautiously over this past, I don't know 6 to 12 months. We are very close at hand to our initial test to ProPhase Digital Media.

If and when that test is successful, we plan to ramp up pretty quickly. The first product that we will launch through ProPhase Digital Media is Legendz XL. If the results are successful, and improves the model that ProPhase Digital Media really can market products digitally for ProPhase.

We will then market the other TK Supplements products that we developed in-house, at which point we can then get aggressive in acquiring other company's products and or developing additional products internally.

I know I've mentioned this before and I don't want to keep praising him it's going to, I'm afraid it's going to go to his head, but Rob can formulate virtually anything and the only thing that's holding him back from formulating other products is that first we have to prove that we have a successful way to distribute those products.

It takes an enormous amount of time and effort and cost to formulate products, go through stability testing. There are minimum batches which mean that there are minimum quantities of products that has to be manufactured.

I don't want to spend $300000, $500000 to manufacture a minimum batch of product and then find out that we can't distribute it and then two years later we write it off. So those days are long gone and I don't want to revisit those days when in the early years we used to write-off inventory regularly.

So, the key is, we're ramping up Legendz XL to get more retail distribution. We're also not only looking at major food drug and mass retailers. We've also initiated distributing through convenience stores. Joe Brennan our head of sales done a great job to-date we've actually opened up the channel.

We just received our first orders from a major convenience store distributor. We're expecting that to build it's a slow build, but again second half of this year it has a lot of potential. So, we're working on our TK Supplements, along with dietary supplements led by Legendz XL. We're building ProPhase Digital Media.

Our goal is to do our best and not spending a lot of the dollars on our balance sheet to develop these two businesses. We will then, if we are successful we will then start acquiring other consumer products.

I regularly come across businesses, company's consumer products that are for sale, but I'm not interested in plowing a ton of money and taking a big risk to acquire these products until I am really confident that we have multiple ways of distributing those products both online and in the retail stores.

So, with that and just to review the past a little bit when we have to call these brands we're losing money we had a stock price that I thought was undervalued, we also didn't have much cash on the balance sheet.

We had an asset that most people told me was worth $15 million or $20 million maybe $25 million nobody thought it was worth the kind of value that I thought it was worth.

We overspent on advertising to build the value with the brand, but understand at that time big because I believe that our share price undervalued the value of the Cold-EEZE asset and the value of our company.

And because we didn't have a lot of cash on hand, our hands were tied from strategic point of view being able to acquire other companies or really enter any series M&A negotiations.

That also will change now, we're gone from a company that loses money, that has no cash, that has an undervalued asset so we've realized the value of that asset at [indiscernible]. We've paid our taxes, we're sitting on tens of millions of dollars of cash on the balance sheet. We have virtually no debt, I think we have about $1 million of liabilities.

I should also mention that we still have about $5 million in escrow.

I am hopeful and expect that $5 million to one day be released to us but there's no guarantee that that will happen $2.5 million is earmarked to be returned to us later this year, so that's a part of our current assets the other $2.5 million is going to is earmarked to be returned after this year.

So, because that's more than 12 months away, it's not listed as current assets that's a long term asset. So just that was just to help you, for those of you that are actually going to work with the numbers here. And so, with that we're now in a position where we can now look more aggressively at M&A activity.

As I mentioned, I think I've pretty much just explained the game plan with regards the dietary supplement business.

When we have the distribution, when I'm confident that we have the distribution the ability to sell, we will acquire products, we'll develop products, we'll build inventory, we have the potential to build our company into a serious dietary supplement business, but it is really premature to state that we are there now we're definitely going to get there.

But all of the elements that we need we have a great infrastructure, we have a great team in place. We're working with some great people who are building a ProPhase Digital Media business. I feel really good with where we are what we're developing with what our overhead is, understand also that our overhead as it pertains to Doylestown.

We had to keep for 2017, we had to keep that core infrastructure in place. We sold the Cold-EEZE brand for lot of money to Mylan. We owed it to them, we had a transition services agreement with them.

But even besides the transition service agreement, I felt a moral and ethical obligation to help them however they needed help in transitioning the brand over to them and keeping our core infrastructure in place it meant keeping significant overhead in place to support them and while we have that infrastructure supporting them at the same time the same core infrastructure is also building new businesses.

So, it's put us in a pretty good position, I expect to still be losing money for the time being certainly until ProPhase Digital Media ramps up you can expect losses, but hopefully those losses are manageable hopefully the manufacturing facility builds up and become profitable and cut back on some of the overhead and some of the losses and then looking forward I will tell you quite directly I am aggressively looking at other M&A activity outside of consumer products industry.

I've been looking, I won't say aggressively in the last couple of years, because as I mentioned our hands are really tied behind our back but our hands are no longer tied. If I see an acquisition that makes sense, something that we can build that I'm excited about we're going to go for it.

So, this company could look very different, we could go in other directions besides just a dietary supplement business in the future, I have a background on Wall Street I plan on using that background to do more with our company then what we've done in the past eight years since I joined, the past eight years have been an incredible experience for me in turning around the company and working with this great team and learning how to be a CEO and learning the dietary supplement business.

But I have higher aspirations and expectations from myself and for our company and for our team. And so, I expect and hope to take our company in new directions going forward potentially in technology areas which are not related to dietary supplements. And we'll just have to see what comes about and what opportunities become available.

We are in a sweet spot right now in terms of sitting with tens and millions of dollars in cash, virtually no debt, and stock price now trades at $3 or around $3 and not $1.50 much worse $0.65 and we have a great team in place and I really want to utilize all the talents of our great team.

So finally, I would also like to thank our great group of shareholders. I don't want to leave you out, many of you have stuck by me for a very long time, I hope that you're finally reaping some of those benefits and a higher stock price.

I hope that you feel good about the company and I sincerely appreciate all of the support that you've provided to us and been so patient with us during the years. So again, I just sincerely thank you for your patience and your support. With that May, I would like to hand it back over to you to set up the Q&A. I hope that some of you have questions.

I'm happy to answer them. May over to you..

Thank you. [Operator Instructions] Your first question comes from the line of Fred McDonald [ph]. Your line is open..

Hi Ted.

How are you doing?.

Great. Thanks for joining us Fred.

How are you?.

Pretty good.

Hey Ted, did the board force you to restructure your salary?.

No. I guess I can -- in that. No, actually to be clear. I have an iron clad contract in place. The board can't force me, I guess they can fire me. But if they fired me they'd have to pay me significant severance. This is truly voluntary, I did not have to do with, the board could not have made me do this.

For those of you on the call that don't know in the recent past I volunteered to forego I don't know about 80% of my salary in exchange for out of the money stock options. The stock options had a strike price of $3, I think at the time, the stock was around $2.30 or $2.40. I volunteered to do this for a couple of reasons.

Reason number one, where I feel like we're now back to be the development stage company and while I could have kept my salary I felt that it was only fair that I align my interest better with the interest of our shareholders because it would've been very easy for somebody not that I would have sat back and rested on my laurels and just collected a salary for next several years.

But I didn't want to give anybody that impression or anybody to come to that conclusion that I would even consider doing that.

I am highly motivated to build our company, I felt like before I took over control of the company eight years ago I felt like I was semi-retired consulting to and working with other companies and I was doing that on my own time. And this really was a major effort.

But I've done the semi-retirement route, that's out of my system for the rest of my life. I really want to do something bigger and I want to do that with ProPhase Labs.

Frankly, I could have cashed up my stock and could have left the company and built a company on my own and instead of owning I don't even know what percentage I own, because some is in stock and some is in options, but I am truly loyal to the shareholders and I could have left saying you all got to $3 a share or whatever liquidated the rest of the company, but I really want to build it and I'm happy to you know if I got off on my own I could raise the money, I could have controlled 80% and given 20% out to new shareholders plus I would have the capital to finance a new start-up venture myself.

But I decided rather own a little less of the company and keep the shareholders who have been so supportive with me and make this a win-win.

I'm not greedy from that point of view, I want to do much bigger things but it's not just about money and so I decided if I was going to continue to build this company that I wanted a bigger stake and frankly I wasn't going to do it for 15% or 20% stake. I don't think that that would been fair to me.

So, to figure out a way to make this a win-win for everybody, I traded a substantial portion of my cash salary which was guaranteed by contract for out of the money stock options where I only make money on those options if the stock goes up and it's very restrictive for CEO to ever sell stock. So, I can't just do a pump and dump and the stock.

I actually have to and when I say I, I mean with our ProPhase team build value in the company and only if we build value in the company will those $3 stock options ever have any real value. So, I thought it was a win-win that was my thinking behind it.

I didn't really discuss this with my wife and she was like she kind of shook her head and then she said, but she has confidence in me, it was kind of left at that. Fred, I hope that answers your question and if you have another one I'm happy to answer it..

Yes, Ted. Thank you for the answer. Very good. And one more question Ted. You talked about buying other companies and then doing the media branding.

Do you see us taking the media branding and doing other companies that we're not buying, set up arrangements with those companies?.

Right. So, we are in the with ProPhase Digital Media we're in, what I would consider the development stage but think of it like a hockey stick we could go from the development stage to kicking butt very very quickly.

It's tried our patience putting everything in place we had all these software vendors, the logistics getting a call center in placed, fulfillment center all of that requires enormous amount of work and logistical oversight.

Fiona Augar is actually sitting with us here, she is our Chief of Staff and she oversees a lot of that and my [indiscernible] off to her for everything because I don't have the, you know my ADHD would kick-in I actually couldn't do all that myself so thank you Fiona. But in any event almost all that have come together now.

We're at the point where we're actually ready to do our first test, the only thing we're waiting for in fact just setting up a merchant account and hopefully the merchant accounts gets set up in the coming weeks once we have the merchant account set up, we'll then do a test as the test is successful we'll ramp up sales of Legendz XL online.

If that's successful, we can then go after other companies. First of all, we can pitch other companies to market their products and that becomes a win-win with the other companies for which we'll be generating sales and brand awareness while we can get paid an awful lot of money for selling their products online.

In addition to that, it will then be more cost effective for us to acquire other company's products. Because when you look at the risk reward, the risk reward profile acquired somebody's product will change dramatically it we have PDM developed because the ability to ramp up sales will go up significantly.

It also means we then have less risk with regards to building inventory. So the risk reward ratio changes dramatically once we prove the PDM model successful. So whether we actually acquire the company's products or we market other company's products or we develop new products internally we'll be able to do all three.

I just don't want to do any of those three things until we prove the model successful, as I said I'm trying to be very careful with the capital. The capital in sitting on our balance sheet, I am not earmarking that for the dietary supplement business, I don't think we need a substantial portion of that for the dietary supplement business.

And I'm happy for just sit here with cash even if it's only earning 1% interest until we have something smart to do with it..

Thank you, Ted..

You are welcome..

Your next question comes from the line of Mr. David Reynolds [ph]. Your line is open..

Good morning, Mr. Karkus. Dave Reynolds from Connecticut and number one thank you very much for having this conference call today.

Do you hear me now?.

Yes, I do. Thank you, David I appreciate. You are quite welcome..

Thank you. I had a couple questions for you. You've already answered a couple of them, but just very quickly.

I noticed in the last month or so the volume in your stock has more than doubled is that -- have you spoken to any investment firm or any brokerage firm is there anyone in the loop who might at some point be close to maybe recommending it or just writing report on it is there any kind of a connection there going on?.

Alright. So that's an interesting question and bells are going off in my head from my Wall Street background, I have to be very careful from a [indiscernible] point of view, from a front running point of view.

In general, I don't like to talk about stock price I only talked about it earlier in this call from the point of view saying that in the past that I felt our stock was undervalued and it tied our hands relative to doing a deal with an undervalued stock which would not have made sense to me.

In terms of whether anybody is any brokerage firm is following the first block, I tell you that there's a brokerage firm about to recommend it that's going to be incredibly inappropriate.

I don't mind the question, but I hope you don't mind that it would be appropriate for me to answer if there was, but at the same time I can tell you I have not had any interest in the past in promoting the stock, I'm interested in building the value of the company.

But what I would also say is and whether this is coincidence or not that's for all of you to decide, it was after the announcement that I am forgoing a substantial amount of my cash salary for $3 stock options it all of sudden new buyers appeared to come into the stock and the stock interestingly went up to around $3 level.

I don't think that that's coincidence, I do not know who those buyers are. And if any of those buyers are on this line, I want to ask a question and introduce themselves, I'd be happy to talk to you.

You can either ask a question today or you can call me offline I'm also in charge of investor relations investor communications and I feel well from all shareholders. I hope that answers your question..

Yes, it does. And I have one more point I'd like to make please.

I'd like to talk about you major drug chain and XL Legendz was good that answered some questions I had there, but I'm an old timer and I'm used to Fortune 500 company came out with a new product there was certain firms that were known really throughout the country with brand and marketing companies which would help them introduce brand and market their new products, I'm speaking of a Fortune 500 company and do very very well they relied on.

Can we say now that if you are digital you're vertically integrated and this digital you can see it even in trouble with the words here this digital media a part of your company now is that big competition for these companies, it's something in a different area? I don't know if I'm making myself clear at all here.

I mean how do you now with your digital marketing hopefully expertise come in and compete with other old line firms who've done brand and marketing with big companies?.

All right. So let me answer your question this way. First of all, I am not intimidated by larger companies at all.

I actually through our experiences in the past, I believe that we know how to develop, market consumer products better than most large companies because we're entrepreneurial in nature, we understand the big picture, we don't just throw big block of money at something. And in fact, over the past eight years, we've hired people from large companies.

Typically, they are not as qualified and they're not capable of doing the job in an entrepreneurial environment. I don't think that really answers your question, but I'll go a step further and say the beauty of direct response sales is that you're selling products direct to consumers it's really irrelevant what other companies are doing.

I don't view any of them as competition, we're selling direct to consumers either a significant percentage of those consumers will respond to our outreach or they won't. If they respond and they purchase product either online whether it's Direct TV, whether through email, whether through the native ads or other digital ads.

However, we reach out to those consumers either they are going to respond or they are not and either our advertising will be cost effective and efficient and you'll get a significant enough number of consumers responding to pay for those ads or we won't. That's to be seen that's what we're looking to ramp up.

What other major companies are doing frankly is irrelevant to me. The other beauty of being an entrepreneurial and smaller company is that we have tremendous flexibility so we can go where the consumer demand is.

We can see what product and that has to change from year-to-year we can see which types of products which categories consumers are particularly responding to through online sales in a given year and we can either develop those products internally or we can approach other companies to market their products online at significant profit to us.

So we have all that open to us, I'm not in the least bit worried about competition honestly doesn't play a factor in my mind when it comes to direct response sales..

Well, I just want to say thank you very much and great job. Have a nice day..

Thank you for your questions. Please next if anyone..

There are no further questions at this time. Please continue..

Alright. Thank you, May. Again, I just want to thank everybody for joining us today. If you can hear in my voice I am optimistic regarding our future. I think we're in a great place we're a lean mean company with a lot of potential regarding our manufacturing business, our dietary supplement line of products and our ProPhase Digital Media business.

I'm looking forward to developing those. I'm looking forward to potential M&A activity and I'm looking forward to the future. If you are patient with us, I think it will be well rewarded and I look forward to our next call. May, thank you. I guess this ends the call today. Thank you all for joining us..

Thank you, Mr. Karkus. This concludes today's conference call. You may now disconnect..