ProPhase Labs, Inc. (PRPH) Q3 2022 Earnings Call Transcript

ProPhase Labs, Inc. (NASDAQ:PRPH) Q3 2022 Earnings Conference Call November 10, 2022 11:00 AM ET

Company Participants

Ted Karkus – Chairman and Chief Executive Officer

Conference Call Participants

Fred McDonald – Private Investor
Yi Chen – H.C. Wainwright
Dennis Waldman – Barrett Productions, LLC
Patrick Patterson – Investor

Operator

Good morning, afternoon, evening, and welcome to the ProPhase Labs Third Quarter 2022 Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded.

I would now like to turn the [Audio Dip] Karkus, Chairman and CEO of ProPhase Labs. Please go ahead.

Ted Karkus

Thanks very much, and thank you everyone for joining me today. I will start with the forward-looking statements. Then I'm not going to read our third quarter press release. You're all capable of doing that yourself. I will go through some highlights for maybe I don't know how long, 15 or 20 minutes. And then hopefully, please don't be shy, ask questions. I do these virtual non-deal roadshows every few weeks where I usually present the whole company for 25 minutes.

And then we have a very lively 35 minute Q&A. So I hope people on the call will ask some questions so I can get into more details on various topics regarding our company. As always, I have to start with a forward-looking statement. This presentation contains forward-looking statements related to our strategy and business objectives.

All statements other than statements of historical facts, included this presentation, may be deemed to be forward-looking statements, including statements regarding our strategy, plans, objectives and initiatives, including those related to our plans to expand our in-house clinical testing capabilities and genomics testing offering, and our plan to develop Equivir, Equivir and Linebacker.

You can identify forward-looking statements by words such as anticipate, believe, could estimate, expect, intent, may, plan, potential, predict, project, should, will, would, or the negative of those terms and similar expressions that convey uncertainty or future events or outcomes.

These forward-looking statements involved known and unknown risks, uncertainty, and other factors that may cause our actual results, performance, or achievements to be materially different from those contemplated, projected, forecasted, estimated or budgeted whether express or implied by these forward-looking statements including risks related to consumer demands for a diagnostic and genomic services. The competitive environment, challenges relating to entering into new business lines, the failure to obtain and maintain certain regulatory approvals, our ability to collect payments for the diagnostic tests we deliver, including our ability to collect payments from uninsured individuals of emergency funding is not allocated to HRSA uninsured program in the future and our ability to continue executing our business plan.

Additional risks and uncertainties relating to our business can be found under the heading Risk Factors and our Annual Report on Form 10-K for the year ended December 31, 2021, and our subsequent quarterly reports on Form 10-Q, as well as our other filings with the Securities and Exchange Commission. These forward-looking statements are based on current expectations, estimates, forecast and projections are not guarantees of future performance or development. The forward-looking statements contained on this conference call and in this presentation are made as of the date hereof, and we do not assume any obligation to update any forward-looking statements except as required by applicable law Readers are questioned not to place undue reliance on any forward-looking statements contained in this presentation or in this conference call.

All right, I’m sorry that I have to read all that. That's a mouthful. But our attorney love to give me a mouthful to start off the call. All right, at any event, now that we have the forward-looking statement out of the way. Welcome all, just a couple of quick highlights and reminders. First of all, we do virtual non-deal roadshows. I do one every two or three or four weeks with Renmark. They've really done a great job for those, feel free to join, even as a shareholder, I run through the whole company, but there's always highlights. There's always new developments in our company every quarter.

There's always more to talk about in the Q&A as well as lively, so feel free to contact Renmark in the future if you'd like to join those calls, really is a great way to communicate to our shareholders.

Also, we have great relationships with both ThinkEquity and H.C. Wainwright. They both follow our stock and I really appreciate the relationships that we have, with both of our investment banks. I worked on Wall Street for a long time, and I know who the best investment banks are to work with for our microcap development space company, and these are two of the best.

Okay. Having said all that, look, our numbers speak for themselves. We are in a unique situation on Wall Street. Yes, we are in a bear market. In a bear market, that's where the pretenders show up as pretenders. At the end of the day, we are growing. We're earning capital while developing three subsidiaries, at least two of which have multi-billion dollar potential. And I don't know another microcap company that can make that claim.

A microcap development stage company that's growing, that has earning, that is earning money, real money, growing the cash flow, working capital, while at the same time develop assets which have such tremendous potential. So with that, I always have to find a balance between how much, I'm going to go over things that most of you should already know. But basically we're set up with five subsidiaries, and I'm not going to spend too much time on them.

Our two historic businesses, manufacturing dietary supplement businesses are growing. They're doing just fine. Kim Bauer is doing a fantastic job in managing our plant in Lebanon, Pennsylvania. Those businesses, those two businesses combined are growing this year and generating positive earnings. I could probably sell those two businesses. I don't know if I had to guess combined, I could probably sell them for $25 million. It's just sort of another hidden asset of the company.

The reason why we don't do that is because all of our other subsidiaries are going to leverage the distribution and the shipping and the logistics that these two subsidiaries provide to us. So as I talk a little bit about the other three subsidiaries very briefly, you'll see the synergies. So first, ProPhase Diagnostics, obviously, that's generating the bulk of revenues and earnings at the moment, and the bulk of that testing is COVID testing.

Everybody's been betting that COVID is going away and our testing is going to go away for the last year and a half. And it's interesting, last summer when the incidents of COVID dropped, we lost money, I think on a cash flow basis, we might have been close to breakeven but we reported a loss last year.

And whereas this year, with the same level of incidents of COVID, roughly, or maybe even less we reported a significant growth in revenues and in earnings. I’m going to talk a little bit about the difference between our reported income and our adjusted EBITDA. I think it is critically important if you want to properly assess our company from a financial performance point of view to focus on our adjusted EBITDA.

There are expenses that make up that difference. Most of those are depreciation. For example, we acquired Nebula Genomics. The value of Nebula Genomics, I believe is growing dramatically, and I’ll talk more about that in a moment. But at the same time, we’re depreciating it because when we acquired Nebula, mostly goodwill, so you have examples like that. And then we have other examples where we issued stock options.

Some stock options were to an executive that’s actually not even with us anymore, or two executives that are not with us anymore. And we are expensing and/or expense those stock options, and they leave, we cancel the stock options, but we don’t get to reverse the expense. So there are other issues like that, and that’s why the adjusted EBITDA number is so important to me and what it should be to investors because that, that’s what demonstrates the real earnings power of our company and the real execution of our and your management team.

So those are a couple of examples. We also – as we build out our lab and as we expand and as we buy more equipment, we are depreciating that equipment. And so we have a lot of these and anyway, that, that explains a little bit about the adjusted EBITDA versus the income. Again, we are earning money even during the seasonally, and the second or third quarter seasonally have been the weakest quarters in our company coincidentally for 25 years back when we had the Cold-EEZE brand as a seasonal business.

And then you get into the cough cold season, all of a sudden people are buying a lot more Cold-EEZE. Well, guess what? In the cross cold season, that’s also when people get cold symptoms and they get flu symptoms. And that’s just about to hit us now. And people are not going to know whether yes, or you have all these mandates have been relaxed with wearing a mask, and no one has really worried about COVID the way they were a year ago. So by the same token, a year ago at this time, people weren’t that worried about COVID, and all of a sudden we got [indiscernible] and the hospital filled up again.

I am not suggesting that’s going to happen again this year, but by the same token, when you get a cold or flu, and when you get those first symptoms, the first thing you think is, do I have COVID? And so what do you do? What’s the best way to deal with those symptoms? Go find out, if you have COVID and get a PCR test. So we very conveniently provide both antigen tests and COVID tests. And if you walk out on the streets of New York, there’s a very high probability when you walk up to one of those tents to get tested, it’s coming to our lab.

We are so efficient now that if you get to that tent, I can’t remember what the cutoff is, but if you get to the tent by midday, you have your results by the end of the afternoon or early evening at the latest. All right, so our specimen collection partners love us. Our turnaround times are fantastic. We also can afford to pay them more because we operate at such an efficient level.

I give a lot of credit to our management team at ProPhase Diagnostics both Jason Karkus and Alice Lioi, who just do a great job of managing the customers and managing the lab. We are super efficient and it means that it’s very difficult for other labs to compete with us, quite frankly. So even during the slowest part of the year, we were still very successful in the second and third quarters in generating significant year-over-year revenue growth and significant earnings, and in particular, significant adjusted EBITDA.

So that’s just a little bit on the numbers we can get more into it more, more importantly, the numbers are great, but I’m not in this business just to generate some profits from diagnostic testing. I am in this business, and I’m committed to our company because I truly want to build a multi-billion dollar company. And the way we’re going to do that is by building out our three subsidiaries that have so much potential and so much going for them.

And the beauty is we get to generate these earnings to support the management team, support our efforts, give us flexibility while building out these other subsidiaries. The other thing is we have such a great platform that we didn’t have before. So we had a platform years ago, a public company with no money, and then we had a little money, and then we had a little capital, and we had a little business, and then we built it into a bigger business with more capital.

We’re now at a point where we have this great platform. We have over $50 million of networking capital a lot of that is in cash and we’re earning money and we have a tightly held stock and not a lot of shares outstanding. And so you have all of these other companies that have great potential exciting assets, exciting science, but they don’t have capital, and their stock prices are struggling if they’re public. Some are private, and they really have nowhere to turn right now. And they’re turning to us looking to do deals with us.

So there’s a lot of opportunities to very inexpensively acquire assets and build out our businesses. That’s what we did with ProPhase BioPharma. We licensed – first we licensed Equivir and Equivir G broad based antivirals one as an over the counter dietary supplement. The other is a prescription. The – as the over the counter dietary supplement, we’re looking to do some quick studies over the next few months and potentially introduce us to the marketplace early next year.

Again, leveraging our food, drug mass, retail, stored distribution. Okay. And then we were able to license Linebacker, which has enormous potential, and I’ve gone over this before. I can do it in the Q&A but everyone should know by now. Linebacker inhibits PIM. PIM is a growth factor in cancer. If you inhibit the growth of the cancer – when you have cancer, if you can inhibit the growth of that cancer while you’re treating the cancer, whatever drug you’re taking to treat that cancer has a better chance of working, that logically simple. We’ve gotten great preclinical results to-date. Harvard and Dana-Farber Cancer Institute know our compounds well and they’re really excited to continue work on them. And so we just entered an agreement the other day. So really excited about the development there.

My point is, I believe that there could be some more opportunities for them ProPhase BioPharma that we can pursue particularly in this bear market. And then we get to Nebula. There’s so much to talk about Nebula, maybe we’ll do that in the Q&A. I just returned from Abu Dhabi, of course, you all saw the announcement with G42. G42 is a multi-billion dollar company that just formed a $10 billion tech fund. And everyone at G42, particularly G42 Healthcare is very interested in working with us. G42 Healthcare, they’re a leader in a – global leader in whole genome sequencing particularly in the UAE. They’re tasked with testing a million people in the UAE residents that’s their goal.

They’ve done about 200,000 so far. So because they’re doing such a high level of whole genome sequencing, they are able to get the best pricing on consumables, which means that they can more efficiently or at lower cost to them process these specimens. We are now in effect partnering with them and piggybacking on that pricing. And so we are going to have excellent pricing for whole genome sequencing. At the same time, I don’t really want to go into it for competitive reasons, but we are – we have relationships with all of the global – with the – basically the three global players in whole genome sequencing. And our goal and my hope and my true belief is that we will be the low cost provider of whole genome sequencing in the entire United States of America going into next year. And I believe that this is a business that is going to explode because it is at the heart of precision medicine.

And again, what’s that all about? All the universities, they’re all looking into understanding why two people get a certain form of cancer. These same two people with the same cancer. They take a drug, they take the same drug on one person works great and the other person it doesn’t work well. And the question is why? And it comes down to genetics. And how do you study someone’s genetics? The best way to do it was with whole genome sequencing, which studies the entire genome. It’s that simple. This business – this industry, it literally is the future of medicine. It’s where all the research is going and we expect to be at the heart of it, both in our collaborations with a global leader in whole genome sequencing. And we believe we have the best platform in the United States, particularly with our library, which you can subscribe to.

So we are – right now we’re selling online growing significantly. I believe our sales at Nebula Genomics, even though it’s off a small base are growing, I want to say approximately 35%. However, if we get into retail stores and we’re doing a test right now with one of the largest retailers in the country, one of the largest drug retailers in the country, and there’s another one right behind it. And I believe the test is going well, the test goes well, and we go into these stores. Our growth at Nebula Genomics could go from 35%. It could go into easily as a triple digits, like a hockey stick. Our sales could explode. Then in addition to that, we haven’t even tapped the university research business yet. We are doing business with one university and also globally, there’s – we actually – I believe we just signed a deal with another company globally, but we’re not even touching the surface here.

And we expect to be one of the global leaders in low cost whole genome sequencing. And our next goal is also to build a lab in Garden City to do whole genome sequencing. So we’re looking, I mean, just on selling whole genome sequencing direct to consumers online, we believe that business is going to grow significantly just by dropping the price further, which we’re in the process of doing. We’re also spending a lot of money on marketing to get our website to have the best website with the best conversion and the best ads. And we hired a great firm, and we’re in the process of working on all that right now. But then as I mentioned, we get into the retail stores. If we do that, I’m talking realistically, we could be looking at triple digit growth year-over-year at Nebula, and then just think about the science, think about how well we will be positioned.

This is like – I love to liken this to Silicon Valley with a startup tech company, there’s no revenues or earnings, and before it has $1 billion market valuation. So just imagine our company with a proprietary library that you sign up for you pay a subscription to that has, like 99% gross profit margins. We can tell our whole genome sequencing at cost, which we can do both direct-to-consumer online, as well as in retail stores. If we’re telling, how can anybody compete with us? First of all, I don’t believe that another company could even match our pricing at their cost. And then if they want to make a profit, they would have to mark it up. We don’t have to mark it up, because we have the library to sell a subscription to.

So I don’t see how anybody can compete with us in an industry that’s going to explode. Most consumers don’t even know what whole genome sequencing, but I promise you they will a year from now. So this business is going to explode. We’re at the heart of it. We have the capital, we have the infrastructure, we have the relationships. We have George Church of Harvard. He’s been a world renowned leader, genomics the last 20 years. We just added Russ Altman from Stanford University. These guys just don’t go on any advisory board. We have this tremendous collaboration with G42, one of the leaders in the world.

And then we have great relationships with the two largest companies in the world that manufacture the equipment and manufacture the consumables. And they want us to be their leading company in the United States for representing them.

And so the deals that are being offered to us are really exciting. So there’s just an enormous amount going on with Nebula. It literally is in its infancy, but you get to invest in our company, we’re earning money while we’re developing these businesses. So we have a lot going on at ProPhase BioPharma. We have a lot going on at Nebula.

And then I already touched upon it our lab. And so to be clear, our Diagnostic business, I think we’re going to completely transform our Diagnostic business over the next six months. And we’re going to be going in so many different directions between a fully diversified clinical lab, genetic testing, but also – not just genetic diagnostic test but also specifically the whole genome sequencing business.

And then the potential collaborations we have with some of these global leaders could be enormous. As I mentioned, I just spent a week in Abu Dhabi with senior management at G42. And I can just tell you there’s enormous potential there. So that’s a little bit of a recap on our company and all the things that I’m excited about.

I’m just going to very quickly – I also just want to point out trailing 12 months if not in the reported numbers, our trailing 12 month revenues are over $140 million, our adjusted EBITDA for the trailing 12 months is over $50 million. I think these are just huge numbers. While we’re developing these businesses, I think that both ProPhase BioPharma as well as ProPhase Precision Medicine that has Nebula Genomics, these are potential unicorns. There’s always the possibility down the road that we could IPO them.

And by the way, I should also mention Abu Dhabi and Dubai hottest stock markets in the world. So here we’re developing a collaboration with one of the leaders in whole genome sequencing. They happen to be based in Abu Dhabi. It happened to be the hottest stock market in the world. Just imagine the opportunities and strategic initiatives that our little ProPhase Labs company could be working on. And just imagine the potential for our company, while having this tremendous base of assets. As I mentioned the Manufacturing and Dietary supplement business has a value to it. Our networking capital is over $50 million. You can place whatever value you want to on ProPhase BioPharma, which probably has virtually no value in our stock price at current.

Our Diagnostic business, you can say all you want to about COVID going away. People still want to know whether they have flu, a cold or COVID, and they’re still getting tested. In the month of August and September, we still did a lot of business. We made a lot of money. All right, so just imagine, I don’t know what’s going to happen in the month of December. Last year, things were quiet. They slowly ramped up in October, November, but it was really December where things exploded.

I have no idea whether things are going to explode this year or not. They absolutely may not. But even if COVID remains at its lowest levels and people are uninterested, we’re still – in August, we are still generating lots of revenues and earnings as reported in our third quarter. And so, there’s certainly the potential for some nice upside there. But rest assured, we’re earning lots of money. We’re going to have positive earnings in the fourth quarter and for the foreseeable future. And then we’re expanding, we’re diversified.

So that gives us some nice background about our businesses. I’ll just mention again, with Nebula, there are startup companies that pale in comparison to Nebula that are raising capital at $50 million and $100 million valuations. And they don’t have our business model, they don’t have our relationships. They don’t have any of what – they’re like startups. There’s just no comparison there. Just to give you some perspective though.

And again, the last part of this also the biotech and life science companies, while the major market averages have been at a bear market for all of this year, the biotech and life science companies has been a bear market for two years. Bear markets, as much as it feels like they can go on forever, they never last forever, knock on wood. And the biotech indexes, which I actually mentioned, midsummer, I felt were bottoming. And I thought one indication of that was that transactions started to happen where the major pharma and larger companies were starting to swoop up the smaller companies that actually did bottom the biotech index back in June.

It came back and they tested those lows. But if you actually look at the biotech indexes, they’ve actually been outperforming the markets ever since June. And even now it looks like they’re putting the bottom. There’s a ton of cash on the sidelines. I don’t know when the bottom takes place, but we’ve outperformed. I actually looked as far as laboratory stocks are concerned, we out outperformed every laboratory company in the United States in the last 12 months from a stock price perspective.

But more importantly, at some point, the biotech index looks like it’s bottoming. We are taking advantage of or we’re going to be taking advantage of some tremendous opportunities where we can continue to add on and build our subsidiaries while we’re earning money. And so I think we’re really well positioned to fulfill my dream over the next couple of years. And that’s to be managing and building and running a multi-billion dollar company. And I believe that we have the pieces, and I believe that there are opportunities out there that’ll continue that.

So with that – I could go on for another 30 minutes. But rather than do that I want to get to questions in a moment. I’m just going to look at my notes for a quick sec. I think I covered most of what I wanted to cover. The rest I’ll cover in the Q&A. I hope there’s a lively Q&A. I would love to hear if there are questions. Please start lining up for your questions.

And Jordan, I’m going to hand it back over to you.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question comes from Fred McDonald, Private Investor. Please go ahead.

Fred McDonald

Ted, are you exploring other drugs that linebacker can be used with other than the four cancer drugs?

Ted Karkus

Yes, that’s a great question. So we’re going to be developing linebacker. We’re not only going to be working with the Dana-Farber Cancer Institute, and so we will be working in parallel. Linebacker, it’s been touched on, but it really hasn’t been expanded on that linebacker has some significant possibilities in more than just cancer. And not just in the cancer line, but by the same token, we’re trying to be efficient and go after the first cell lines that have the greatest potential.

You got to understand, an enormous amount of work has always been done over the last several years in developing linebacker and preclinical studies. And as I mentioned, Dana-Farber/Harvard have already done a lot of work on the polyphenols that make up linebacker. And so we’re going to hit the ground running knowing with an optimistic – I don’t want to say a high probability, I have to be careful what I say. But we and all the scientists and our company, we’re all very optimistic in the direction that we’re going with linebacker at present.

And so the most efficient and expedient thing to do is to initially go after the cell lines where the most work has already been done, where we’ve already gotten great results. And that’s why we’re so optimistic that the studies that we’re now going to that we’re about to initiate with Dana-Farber we have a pretty high degree of confidence that we’re going to have very positive results.

And once we do, you got to understand, you then go into a Phase 1’s, there’s typically very little risk in a Phase 1 human clinical study. And once we have linebacker where we finish up most of our preclinical and our human Phase 1, I think at that point it will have significant. Right now it probably has no value on our stock price. I think it will have very significant value, maybe as much value as their entire market cap right now. So that is enormous potential, and that’s just a starting point.

So as we move forward we have some great advisors that we’re working with, in the ProPhase BioPharma division, including the CEO of another biotech company whose expertise is in cancer development that we’re working with. And so we’re going to do everything the right way, he’s bringing a number of different CROs to the table, clinical research organizations. And so there’s more to come. It’s not just Dana-Farber Cancer Institute. Which by the way, I would expect in the coming months we’ll have some really nice results being – preliminary results being reported by them since they’ve already done so much work. It’s not like it’s going to take us a year. I think within months we’ll have some really positive things to say from that initiative.

But then in addition to that, you can expect and I expect that we will have other initiatives that we’ll be talking about in the coming month with other companies. To be honest with you, we’re actually doing more with it, but we’re just not going to announce everything we’re doing with it. But as we come out with positive results, then we’ll have something to announce.

So you can bet that very cost efficiently we are going to explore several different initiatives with linebacker over the next six, 12 months. While staying well within our budget, I don’t want anybody to get scared. I’m the largest shareholder in the company. I have zero interest in burning through our capital and then come begging for more in the middle of a bear market, which is what 98% of the other microcap companies do. I do the exact opposite.

So I am very, very careful. I love the idea that we can develop linebacker over the next 12 months for less than what we earned in the second quarter or less than what we earned in the third quarter on an adjusted EBITDA basis. And that’s the way I run the company. And you can count on me to continue to run the company that way. I will not put us in a position where we ever have to do some big dilutive round of financing or hurt our shareholders. Hope that answers your question. If you like you can ask one more.

Fred McDonald

Yes, that was a great answer. Thank you, Ted. Ted, one more question. You did an MOU with G42, and then you visited the United Arab Emirate. Can you give us some color on your visit? What happened there?

Ted Karkus

Yes. So look, here’s the most important thing to walk away with. Two things. One is I met with the senior management of G42 Healthcare, and they get it. What I found particularly interesting is they weren’t just interested in Nebula Genomics, and they – obviously, they love our proprietary library. They love what we’re doing over here. They don’t have a presence in the United States, and they would love for us to be sort of their U.S. partner and for us to be a platform and for us to grow together in the United States.

And the concept also is that ultimately, the United States, one of the biggest countries in the world for this potential business and for whole genome sequencing. So think about it, we could be in whole genome sequencing bigger than G42 one day, and don’t think that they’re not aware of that, and this would be a great entree for them.

Then in addition to that, the hottest stock markets in the world, the only ones that aren’t in the bear market are in Abu Dhabi and Dubai. They have IPOs that are doubling and tripling in value. I mean, it’s really crazy what’s going on over there. So there’s enormous opportunity both in terms of strategic initiatives of working with G42 as well as initiatives related to the capital markets, all which I believe would be very bullish and very positive for a company and build a lot of additional value.

And again, all you got to do is think about the fact that you have startup genomics companies that pale in comparison to Nebula with $50 million and $100 million valuations. So just imagine if we’re backed by G42 in Abu Dhabi and Dubai, just imagine what we could do with Nebula. I mean, it’s – and just remember my background’s in Wall Street, right? So I get it. All right. So we’re working a number of different avenues here, but suffice it to say we’re earning money while building potentially very large subsidiaries that have enormous potential. Hope that answered your question, Fred I really appreciate your support.

Fred McDonald

Thank you.

Ted Karkus

Jordan, next question, please.

Operator

Our next question comes from Yi Chen with H.C. Wainwright.

Yi Chen

Hi. Thank you for taking my question. First, can you comment on the current trend of diagnostic services in the current quarter so far? And whether the non-COVID tests offered in your laboratory will start generating revenue in the current quarter?

Ted Karkus

Okay. So obviously I’ve mentioned before we do PCR testing, antigen testing, immunity testing. PCR testing is far and away the bulk of our business. Antigen testing, we’re doing a very – we’ve really grown that business nicely. I actually give Jason Karkus a lot of credit for that. He's the one that figured that out with our customers, how to structure that. And now the latest is we're validated for flu. So we're adding that to our repertoire, and we're just figuring out the best way full of complicated with insurance, because insurance with flu they reimburse very differently if you're in-network versus out of network, they reimburse better in-network, but for COVID testing, they reimburse better out of network.

So it's kind of complicated, but we're figuring out the best way to bring flu into the equation. And then as far as diversifying, we're still under construction in our lab downstairs that's virtually completed.

And equipment is already ordered, and so in the fourth quarter other than what I just mentioned in terms of diversifying into blood, urine, tox and so forth, we're really looking to start that up in the – probably in the first quarter, not the fourth quarter this year, but I will also tell you that there are other opportunities and other ways that we could expand more quickly. But that's for another time. But I will just tell you, we're doing everything that we can to expand and diversify our clinical labs sooner, rather later.

And then, of course, in parallel, the genetics we actually can do a part of and/or are doing a part of the whole genome sequencing in our lab. Now, I don't want to go too much into the specifics but ultimately our goal not only is to do genetic diagnostic testing, but also to do whole genome sequencing.

And we're actually looking right now into purchasing the equipment. It's a little complicated but the two global leaders had patent litigation against each other, which has all finally been settled. And as of January, one of the largest competitors to Illumina will be allowed to sell equipment into the United States. And so we have great relationships with Illumina and with this other company. And our goal actually is to get the whole genome sequencing equipment in our lab to leverage lab infrastructure we have. So early next year as quickly as possible, and actually told our team, I want to move on this immediately to get the whole genome sequencing in our lab, because when that happens, then the universities blow up. But again, that's a first quarter, first half of next year phenomenon. It's not fourth quarter of this year.

Yi Chen

Okay. And a question regarding the gross margin so in this quarter…

Ted Karkus

Excuse me. And you had another question in there which I didn't answer, and that's just sort of the current run rate of business. Look, we are profitable in the second and third quarters, probably the slowest months of the year are in July and August. And now we're starting to pick up a little bit. It's hard to say what our numbers are going to be in the fourth quarter, but there's no question we're at a very profitable run rate. Our numbers are significant, our profits are gross margin. We are such an efficiently run company and we're doing such a high level of testing.

And when I say high level of testing, obviously not compared to December, January of last year when things went haywire. And I don't know that they're going to again. But even with things come and nobody talking about COVID, we're generating a lot of revenues and earnings. I fully expect that we're going to have positive earnings. I can't say that they're going to be up year-over-year but by the same token, our run rate of business is solid and I feel good about it.

Yi Chen

Got it. So regarding the gross margin in the third quarter, it appears to be much lower than the previous two quarters and had an impact on the bottom line profit. So how should we look at the gross margin in the fourth quarter in going forward?

Ted Karkus

That's a good – I got to be honest with you, that's really a question from my finance department that I would rather take offline. I should mention by the way, that in the past few months, we hired three senior executives in our finance department. Our finance department has never been stronger. Our recent meetings with our audit committee and auditors went extremely well. And I'm very, very pleased with our new auditors, and I'm very, very pleased with our finance team. It's a really strong team, and if you want to get into detailed questions here, I'd really like you to put you directly in touch with them. And I'd rather do that rather than guess, there are a number of factors with regards to the gross margins.

But in general, our gross margins are pretty solid. I wouldn't expect significant changes. I can look what variations there were second quarter versus third quarter. I can't do that on this call, but I'm happy to get you the answers to your questions. There is certainly nothing to be concerned about, I can tell you that much. All right, thank you.

Thanks for continuing to follow our company. I really appreciate, you really do a great job, and thank you for your questions.

Operator

Our next question comes from Dennis Waldman with Barrett Productions, LLC. Please go ahead.

Dennis Waldman

Hi, Ted. First of all, congratulations on another profitable quarter. I was also going to ask about gross margins, so I'll table that. But I was looking at the accounts receivables. I don't know if you could answer that $38 million, and that seems to be steady. Does it take that long for the insurance companies to pay you?

Ted Karkus

It's the worst part of the business, and it's the reason I am so happy that we had more capital than we needed back in December and January. Other labs were inundated with orders like we were, but they literally couldn't handle them because they couldn't handle the cash flow. And one of the reasons why our customers are so loyal to us is that these types of cash flow issues are not an issue for us because we have such a strong capital base. And it's one reason, it's one of the many reasons we run circles around the small and mid-size labs.

In fact, there was a lab that I thought was significantly larger than us, that isn't nearly as intimidating as I thought. I mean, we're a real player in the industry now, and our capital really helps us out. And yes the issue, so first of all, one of the issues when we add HRSA is that, HRSA ran out of funding in March and they owed us a lot of money, and that's been trickling into us ever since. Fortunately, we actually are getting paid by HRSA, and in fact some of that we thought we weren't going to get, that we actually did get.

So a part of it is over this past year has been HRSA, and another part is, yes, it's the insurance companies. And another part of it is, if you think about it, this really, it's a relatively new industry COVID testing, and most of the specimen collection companies are relatively new to the industry, and they don't always do a great job when they collect the patient data. They don't often do a great job in collecting the insurance information, and then we have to go down.

It's one of the another reason why our customers love us so much is we help them find the accurate insurance information. We have software providers that we work with to help us get that information. So to be honest with you, it's really a complicated process. I don't want to blame it all on the insurance companies. A part of it is also collecting the patient data and in particular, the insurance information accurately. We also, one of the ways we grew the business is that we didn't put a lot of pressure on the patients to give us their insurance information back when there was HRSA. And because we could always track it down later, or if they didn’t have insurance, we get from HRSA, now that HRSA no longer exists, we have to be a little more careful with it. And so we continue to upgrade and be flexible with regards to our IT platform and how we work with our patients and with our customer service partners.

I’m sorry, our collection partners. But at the end of the day, yes, it takes time, but it’s for all of these different reasons. One of the reasons this business is a little complicated, but our team does a great job. And I also haven’t mentioned Sergio Miralles our Head of IT, who is an integral part of all this with the IT platform that he is built.

We really have a strong team across the Board in all of our subsidiaries. So yes, the insurance is a complicated issue. It’s not all on the insurance companies, it’s also in the collection. But when you put it all together, at the end of the day, we get paid. And if we get paid a month, a couple months later, so be it, as long as we get paid and we make the money, I’m the happiest guy in the world.

I think we are in a 1% on our cash balances anyway. So does it really matter? As long as we can handle the cash flow it doesn’t really matter. If it takes an extra 30 or 60 days to get paid, I’d rather get the extra business, because otherwise what happens is you lose the specimen collection partner will go to a different company, if we don’t pay them up front and/or if we’re not willing to take specimens where sometimes, we don’t get the insurance information until later.

So it’s a complicated business, but the idea is maximize the business and maximize profitability. But in the process, it me – the trade off is, it’s a little frustrating sometimes. We have to wait to get paid. But with insurance companies, at the end of the day, you get paid, which is nice. So in two years of doing this, at the end of the day, even when it took time, we still ended up getting paid. And by the way, we also reserve, and we’re very conservative in how much we reserve for potentially not getting paid. And we’ve been pretty good about that in terms of how much we reserve.

Dennis Waldman

Okay. I hesitate to ask this other question, but I’m going to throw it out there. I listened in on the Renmark presentation you did yesterday, and you insinuated that there might be an acquisition that is not another lab, is something in the works that you could talk about.

Ted Karkus

Well, if I – if it was – if I could talk about it, I would. But – so here’s how I’ll answer the question. I am very aggressive in reviewing initiatives, strategic initiatives. And as I said last year, I probably looked at 60 different labs last year to acquire but I told you I’m spoiled by our own lab because we have such a nice lab and so efficiently run that. I was really turned off by almost all these other labs.

They were all overpriced. I don’t want to overpay for something. As I alluded to on this call, I may have alluded to yesterday, I alluded to it on this call, there are opportunities out there, for instance, Linebacker, which has multi-billion dollar potential. What we primarily paid licensing fees for, there are companies out there with assets – biotech assets and other assets and diagnostic tests that have enormous potential, but they can’t raise the capital.

They don’t have the infrastructure. They don’t have the NASDAQ platform. They don’t have any of those other ingredients that are so critically important. And in this marketplace, nobody is giving capital to a startup company. They’re just not doing it. And so I see there are opportunities coming across my desk, a couple of which I’m very, very excited about, but there’s no guarantee.

As I said, I looked at 60 lab acquisitions last year, I didn’t acquire any of them. So I am looking both at potential lab acquisitions as opposed to other acquisitions that could build our divisions. But again, our subsidiaries, but again, I’m not going to acquire anything that requires a substantial amount of capital that’s going to then kill our stock price and make us do dilutive rounds of financing, all that kind of stuff.

I’m not getting into any of that. But if we can make a lab acquisition or a strategic acquisition that builds our other subsidiaries, it’s $5 million or $10 million and we’re making that in a quarter, nothing would make me happier, particularly if I think it as a huge upside. And so to give you one example, I had an opportunity last year to buy a lab for $40 million that I could have probably built the value of it to $80 million or $100 million.

I just don’t want to do that. I’d rather acquire something for $5 million that has multi $100 million potential or $1 billion potential and risk $5 million up front for it then to spend $40 million to build something to $60 million or $80 million. So I am looking at both types of acquisitions, but it at least gives you an idea of the way I’m thinking.

At the end of the day and I’ll say it again, I’m the large shareholder in the company. Every decision I make is on behalf of the shareholders to protect the value that we’ve built and then just continue to grow on that value. And that that’s the way we operate the company. And that’s the way I hope to always operate the company. I really appreciate the…

Dennis Waldman

I appreciate that answer. Good luck to Q4.

Ted Karkus

Appreciate it.

Dennis Waldman

Thank you.

Ted Karkus

And we have one more question here. If anybody else has questions please queue up. And if not, we’ll finish with one final question. Sorry, Jordan.

Operator

[Operator Instructions] Our next question comes from Patrick Patterson, Investor. Please go ahead.

Patrick Patterson

Good morning, Ted.

Ted Karkus

Good morning.

Patrick Patterson

Congratulations on a really great job. I mean when I woke up this morning and waited for the earnings as soon as it hit, I saw $6 million plus in EBITDA and I figured the stock would be at $15 by the time I looked at it. So I mean, really, because I knew what that meant was that you had figured out a way to get in a lot of testing in the worst quarter that you could ever have.

And so I don’t know how you did it. But I didn’t understand why the market didn’t realize how positive it was. And it’s got something to do with the non-cash expenses. And I’m not an accountant, but I did look and see on the cash flow chart that you posted up there. It said there was something almost like $2 million worth of non-cash expenses for exercising stock options. Could you take a moment? I know you were talking about that earlier, but can you just explain what all that is?

Ted Karkus

Sure. So I – yes, so I don’t want to get into too many of the specifics, but as an – I don’t just use this as one example off the top of my head. When we acquired Nebula, we hired the two key employees from Nebula that were two of the Founders. And we were going to hire them both for stock options. One, actually we couldn’t hire until he – his paperwork was in place. And so we just issued those stock options more recently, and it’s a large block of stock options, and then you have to expense them.

Now, the interesting thing about this is we’re expecting them and they’re out of the money. So we have non-cash expenses for stock options, just that as an example for stock options that literally are out of the money, and yet, it’s hitting our earnings and it is so frustrating. So that that’s just an example. And then the other thing, obviously in the ordinary course of business, just in building our business, we hired several executives this year. We’re growing in multiple directions. And anybody that’s a seasoned executive with serious experiences, it’s really going to help build their business.

They’re motivated by the stock option. So we issue the stock option, but all those stock options, probably are at the money, you are out of the money and we’re expensive, so that that’s a big chunk of the expense that at least explains the stock option portion of what you’re asking. And that’s a biggie. And then again, we’re depreciating Nebula, all right? Even though, Nebula in my mind is growing dramatically in value, we’re depreciating it, because when we acquired is mostly goodwill.

I mean, that’s just another example. And then other assets that we acquired that we’re depreciating. So – and it’s unfortunate because of course analysts have to report the earnings and multiples of earnings and all that kind of stuff. And so it’s a little frustrating. But what’s more important, Pat, and what everybody should be paying attention to is the fact that we’re building the value of the company. That’s more important than following SEC GAAP accounting rules. Okay. So obviously, we have to follow all of those rules and they – and we do. But in my mind, what’s important is, are we building the value of the company? And so the beauty of this is that adjusted EBITDA number, that’s a real number, all right. And that’s why we’re building the underlying value of our subsidiaries. And again, all five of our subsidies are clicking, are firing on all cylinders.

As I mentioned, both our manufacturing dietary supplement business, if you combine that into one that’s growing substantially this year and very profitable, and by the way, that growth is just starting, it wasn’t in the first half of the year. But it is now, we’ve added new customers, we’re killing it at our manufacturing facility. So that business is growing and profitable. And then our three other subsidiaries that have the big potential, it’s just – we’re hitting out all cylinders. Our diagnostics is generating the revenues and earnings and we’re going to diversify it. And the other two business just have enormous potential. So to me, that’s more important. At the end of the day, again, Pat, you can worry about how the stock trades hour to hour, but we’ve outperformed every lab stock in the country, and we’ve outperformed over the last year most microcap development stage companies.

And it’s because we execute. And so you can’t look at a data – and again, I always use the example, you look at any of the big internet companies from 20 years ago or the successful ones, you could have bought them at the high of the year and been sitting on a loss for a year when they sold to us. But two years later, you’re sitting on a huge profit, and you could have bought them at the high of any – virtually any year in the last 20 years and you held it to now you would’ve made a fortune. All right.

So we’re building the underlying value of our company, which will come out over time. So I wouldn’t worry about the stock price. I really shouldn’t be talking about stock price so much anyway. And again, I’m just not worried about at the moment. I’m building the value. And again, with all the things that I was talking about in Abu Dhabi and with G42 and with all the other things we’re working on, I wouldn’t worry about income versus EBITDA at the moment. But the point is, the EBITDA significant is real. Hope, that answers your question, Pat.

Patrick Patterson

Thank you very much. Yeah, it really does. And Ted, the only thing I worry about is you get, get by a bus. I love to start.

Ted Karkus

Well, here’s what I can tell you. I work out every day, as passionate as I am about working at our company, I also work out, I care about my health. So I’m honestly at the age of 63, I’m in the best shape of my life. You should see me, I’m at the gym, I’m on the people see me at the gym, and I’m on the telephone, three quarters of a time. I’m at the gym with my headphones on and I’m living and breathing our company, literally 24/7. I take a few hours on Saturday night to pay attention to my wife and go, and other than that, I’m 24/7 on our company literally. And I can tell you I’ve never been more excited, because one thing to build a $15 million company into a $150 million company, there’s nothing thing to build it from $150 million or $175 million company.

And see very real possibilities of $1 billion and $2 billion value company. And I got these great investment banks, and I got these great opportunities and Nebula so well situated. It is scary going into next year. So forget stock price, forget earnings reports, I’m telling you, just look at how we’re going to position whole genome sequencing. This is going to be a major industry, and we could literally be one of the leaders. We have global leaders coming to us wanting to give us their best deal. That’s how well we are situated right now, and that’s the type of relationships we’re developing.

It’s really exciting. Normally microcap companies don’t develop these kind of relationships and have this type of platform. So I’m really excited going into next year all the different things. I can’t tell you week to week, what’s going to develop one, what we’re going to actually acquire and what we’re not. I can just tell you, we’re so well positioned. I’m really excited to next you. And thank you for your support, always, Pat, I really appreciate your questions. It’s great to hear from you. Thank you.

Patrick Patterson

All the best to you.

Ted Karkus

And Jordan, back to you. If there are any more questions.

Operator

This concludes the question-and-answer session. I would like to turn the conference back over to Ted Karkus for any closing remarks.

Ted Karkus

Thank you, Jordan. Again, thank you all for joining. You can hear by my passion and my enthusiasm. It’s all real. I hope I didn’t go on too much. We did this at the hour marks, and we started about five or six minutes after, so we haven’t even hit an hour. So that’s good for me to be under an hour.

Again, if you ever want to hear more about the company, you can always go to the VNDRS that run more hosts. It’s a great way to get updates. And with that said, I really think I just recap through the last two people that asked questions. I think I already did a recap of our company. I’m super excited for the future. I appreciate all your support. If you’re a long-term investor and you really have questions that must be answered, feel free to reach out to me. I don’t avoid investors or questions. But the VNDRS typically will answer most of your questions anyway, I wish you all the best of luck and have a great day, and thank you Jordan for hosting the call.

Operator

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.