Q4 2015 ProPhase Labs Inc Earnings Call
Mar 29, 2016 AM EDT
Thomson Reuters StreetEvents Event Transcript
E D I T E D V E R S I O N
PRPH - ProPhase Labs Inc
Q4 2015 ProPhase Labs Inc Earnings Call
Mar 29, 2016 / 03:00PM GMT
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Corporate Participants
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* Ted Karkus
ProPhase Labs, Inc. - Chairman & CEO
* Bob Cuddihy
ProPhase Labs, Inc. - COO & CFO
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Conference Call Participants
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* Fred McDonald
- Private Investor
* William Lapp
- Private Investor
* Dino Romano
- Private Investor
* Charles Hooper
- Private Investor
* Pat Patterson
- Private Investor
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Presentation
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Operator [1]
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Good morning, my name is Janesha and I will be your conference operator today. At this time I would like to welcome everyone to the ProPhase Labs financial results for the fourth quarter and year ended December 31, 2015. (Operator Instructions). Thank you. Mr. Ted Karkus, CEO of ProPhase Labs, sir, you may begin.
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Ted Karkus, ProPhase Labs, Inc. - Chairman & CEO [2]
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Thank you very much and greetings all and thank you for joining us for the ProPhase Labs shareholders' update. We have not had one of these in quite some time, primarily because of various litigation issues in the past which are now behind us. So thank you for joining for the call and thanks for the opportunity to update everybody on what is going on with our Company.
As you know, I am Ted Karkus and I am joined by Bob Cuddihy and other members of our senior team. We will be available to answer any questions following a short presentation. Please don't hesitate to ask questions. I will not be available this afternoon to call and ask questions later, so don't cheat -- please ask them now. It's a great way to inform other shareholders who may be thinking about and wondering about the same types of questions.
I will try to be as open with everyone as possible. I really believe in all shareholders being as informed as possible about our Company. My only hesitation or limitation will be in the fact that we have competitors that may listen to our call from time to time.
We do find from time to time that they imitate us as it relates to our advertising and marketing initiatives and product development initiatives. So I have to be careful from that point of view. But otherwise I will be as open as possible, as transparent as possible to all of our shareholders.
Also we consider your time to be important, therefore it doesn't make sense for Bob and me to read the quotes and financials from our earnings press release. Those quotes and the financials, of course, are readily available online. If you haven't done so already I encourage you to review our press release which has all the numbers and some insights from us.
Bob is required to read the forward-looking statements disclaimer. I will then provide a review of our Company and then open it up to questions. So, Bob, why don't you take it away?
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Bob Cuddihy, ProPhase Labs, Inc. - COO & CFO [3]
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Thank you, Ted. At this point I will read the forward-looking statements that are contained in today's press release, on the Investor Relations section of our Company website, and on our 10-Q and 10-K filings with the Securities and Exchange Commission.
Except for the historical information contained herein, certain statements in our press release and on today's call contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements relating to the launch of our new line of products, TK Supplements, and our new product, Legendz XL.
Management believes that these forward-looking statements are reasonable as and when made. However, such forward-looking statements involve 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 risks and uncertainties include, but are not limited to: the difficulty of predicting the acceptance and demand of our products; the impact of competitive pricing and products; costs involved with the manufacturing and marketing of products; the timely development and launch of new products; and the risk factors listed from time to time in our annual report on Form 10-K, quarterly reports on Form 10-Q and any subsequent SEC filings.
Additionally, we would like to advise you that the statements made during this call are made as of this date and listeners to any replay should understand that the passage of time of itself and by itself will diminish the quality of these statements. Without any further ado, I will turn the floor back over to Mr. Karkus.
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Ted Karkus, ProPhase Labs, Inc. - Chairman & CEO [4]
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Thanks, Bob. So let me start with a brief review. We inherited a company that we believe five or six year ago was headed for bankruptcy. We restructured the Company, we bottomed out sales, turned around sales while turning around the Company, cut a couple million dollars of overhead out of the Company.
Since the bottoming of sales, even with this weak cold season, our sales were still up about 50% from the bottom. This has far outpaced the category and our competitors over this period of time. I believe that we've created a lot of value for the Company over these past years.
If you bought our stock at the bottom a few years ago you may be happy; but for the rest of us, including me, this certainly isn't very satisfying with our stock trading at a dollar and change.
This past season in particular, I've alluded to this in the past, the incidence of upper respiratory illness was down double-digits year over year for virtually the entire season. As I have always mentioned, Cold-EEZE sales and all cough/cold product sales are highly correlated to the incidence of upper respiratory illness.
It is pretty obvious when people are sick they buy cough/cold products, when they are not sick they don't. So with the incidence of upper respiratory illness down about -- down double-digits and in some weeks they were down as much as 25% year over year, the fact that our sales were down less than double-digits is actually a great feat on our part.
But unfortunately that doesn't mean that our sales were up and unfortunately it doesn't mean that we had the time for performance that we would like. So it is a moral victory, but by no means is it satisfactory in my mind and in our senior team's mind.
On the bright side, we recently visited with approximately 80 retailers at ECRM. This is something we do every year where we review the past, discuss the present and introduce new products for next season. I can report to you all that these meetings went extremely well.
We are in a tough category, we are in a contracting category, shelf space is at an all-time premium. Most of our competitors are getting facings or products kicked off the shelf. But I can report to you that I believe that for the coming cough/cold season we will be flat or, in all likelihood, actually gain shelf space in terms of facings.
We have a great R&D product innovation effort here at ProPhase Labs, it's headed by Dr. Raouf Ghaderi who has really done a great job in formulating virtually anything that we ask him to formulate. And he, I believe, really formulates the best products on the market for whatever new forms and active ingredients and whatever is we are looking for that we believe that consumers want, Dr. Ghaderi somehow seems to be able to formulate it.
So we have some great new products that we are introducing for the season. I don't want to go into too many details yet. Again, I am not interested in informing competitors about what we are doing, but I can tell you that the retailers responded incredibly well. And not only did they not cut back our shelf space, but in some cases they improved or increased our shelf space and will be giving us additional facings for new products.
So therefore I'm also pleased to announce that I expect that our revenues -- our Cold-EEZE-based revenue grow this year. We will also have some contract manufacturing revenues that will grow as well. So I am looking for a growth year in 2016 versus 2015.
I touched on our Cold-EEZE liquids previously or in prior press releases. One initiative we have is to develop a new line of Cold-EEZE products that are not homeopathic, that go after the more traditional brands like Robitussin and Tylenol and Alka-Seltzer and so forth. And our thought is if a brand name like Alka-Seltzer can get into the cough/cold business and do well, why can't Cold-EEZE.
I give prior management a lot of credit for creating the Cold-EEZE brand-name, I think it is a great name for our category. And I would like to see that expand. So we introduced Cold-EEZE liquids this past cold season in food stores.
As you know, we are in food, drug and mass. But the liquids -- we initially started introducing them just and food. They did very well there. We are looking to expand upon our distribution this season, the jury is still out. The biggest issue is that retailers, as I mentioned, they love new product innovation, they hate sort of copycat products.
In the case of our Cold-EEZE liquids, they are in line with the other liquids like Robitussin and Tylenol and Alka-Seltzer, as I mentioned. The difference is, number one, we have the Cold-EEZE brand; number two we manufacture them incredibly efficiently. Dr. Ghaderi actually developed a relationship with one of the low-cost manufacturers in the world of our liquids.
And we believe that we offer a value proposition to consumers for the liquids. We can actually offer these liquids -- the Cold-EEZE liquids to consumers at a lower price than any of our competitors while our retail partners can make better profit margins.
So, to me and to us it seems like a win-win and we are working on gathering momentum there. We had a good first season and we expect to build on that.
Separately, as I mentioned, we also have two new Cold-EEZE branded products that we are introducing, one is actually in a new form that I am really excited about. And again, the retailers were really impressed and virtually every one of them will be taking our Cold-EEZE product in our new form. And again, I apologize for not giving more details. So, for 2016 we are looking at some nice upside potential in growing the Cold-EEZE brand.
I'd like to touch on marketing just a little bit. As I have always said, we -- I am a big believer that when it comes to marketing there are two things that are incredibly important.
The first is developing an effective message. If you don't have an effective message it doesn't matter how many times the consumer sees it, they are not going to purchase the product. Once you develop an effective message it is then important to distribute it to consumers as efficiently as possible, you want to spend as little money as possible reaching as many people as possible.
I happen to believe that our Company, our messages are at least as effective as anyone else's and I believe that we distribute them more efficiently than anybody else in our industry. We make a small budget look like a very large budget competing against competitors that are 3, 5, 10 times our size.
Incidentally, we produced some great Cold-EEZE TV commercials this season. In fact, I just learned yesterday that our TV commercials won some big awards for best commercials in our cough/cold category. Actually I haven't even mentioned that to anybody in our Company yet. So I am really excited about that.
I talked to our director and producer and I said, when do I get to go up on stage? And they said unfortunately, nobody is going up on stage. I said, I want to be on stage next time. But, anyway, we did receive some awards for them.
All of our Cold-EEZE commercials have tested very high every year and these were no exception. So, I am really proud of the work that we've done on the marketing side to grow the Cold-EEZE brand.
Then, I've discussed this in the past -- the goal here is to not just grow the Cold-EEZE brand. We have a really efficient infrastructure in place. However, it costs a certain number of millions of dollars to support this infrastructure.
The Cold-EEZE brand supports the infrastructure but unfortunately it doesn't generate enough in revenues to both support the infrastructure and generate a profit. Our goal here is to figure out how to grow revenues at the Company, because if we grow revenues with high profit margin products then dollars will start to flow to the bottom line and we can become incredibly profitable very quickly just with a little bit of leverage.
And so, our goal is both to grow the Cold-EEZE brand as well as introduce new products. So, our first foray into going outside the cough/cold category, which, as I mentioned, is a very tough category, and that is to go into the dietary supplement category, which is a large and growing category.
We have developed, and when I say we, this has of course been led by Dr. Ghaderi, I keep mentioning his name because of all the great things he is doing with our product development. But he's develops some really great products under the banner brand TK Supplements.
This is a new line of dietary supplements. Our lead product is for men's libido sexual health. We have a lot of fun talking about these products in the Board room. And we have done a lot of work to research and come up with the best products. We've done clinical studies which are ongoing.
And unlike competitors, we conduct clinical studies on the whole product. We don't simply add ingredients that others have provided some clinical studies just on their one ingredient which are then put into the product. Our product works really well. We already have a clinically shown claim that we can make on our products. I can tell you that the products were great and I am looking forward to success with our libido product.
We decided to start the introduction process to consumers with direct response TV. The idea here is if we can optimize an infomercial that is successful enough to generate more revenues than what it costs to air on TV so that we can at least breakeven, then we can spend many millions of dollars on advertising breaking even which will create tremendous brand awareness.
We can then go to the next step which would be to leverage our infrastructure and our distribution platform for Cold-EEZE with all of our relationships, with all of our retailers around the country and introduce -- our product, by the way, is called Legendz XL, and it will be introduced Legendz XL to the retailers.
We are starting a process of introducing Legendz XL already in the convenience line of retailers that don't necessarily require national advertising. These are products that in this line of distribution is primarily a purchase based on impulse. When you are standing at the counter you will purchase the product.
But to go into the major retailers like a Walgreens or a Walmart or a CVS and so forth, if you don't have brand awareness the retailers will take our product on the shelf, but within six or nine months they will be kicking it right back off the shelf.
I am not interested in introducing a new product or brand just to have one year of success followed by millions of dollars of write offs. We really are trying to build this new line of products the right way. We are trying to do it by building brand awareness first. We are trying to build the brand awareness in a cost-effective manner and that cost effective manner initially is with direct response TV.
The frustrating part is the length of time it takes to optimize a TV spot. So we already did a test, but we will do a two-week test on TV, maybe we will spend $15,000 or $20,000 or $25,000 on that test. We will then spend a week to analyze the results. We will then discuss as a team how to improve upon the TV spot, that takes a week or two.
We then improve the spot, it goes into the editing process. We create new TV spots that have to be distributed back to the networks. The networks then have to approve them and then it has to go back on air.
So the whole turnaround time, from beginning to end between the two weeks of airing and then the six weeks of turnaround turns out to be an eight-week process just to do one round of edits. So we are into probably our third round of edits on TV, but again we're advertising in any minimal way; these are just tests.
So you probably haven't seen the TV spot yet. But if we're successful I promise you you will and you will see it a lot. So we are varying -- there are a number of things that we very vary. We don't want to change too many variables at one time or we won't know which changes are positive and which changes are negative.
So is important to only edit a couple of variables at a time, see how it performs and then move on from there. With this type of process, to be honest with you, I understand P90X, which most of you have probably seen, which turned out to be a $1 billion campaign, that took seven years to optimize.
Now I don't want to depress you, I don't expect this to take seven years, but I do expect that it could take the better part of this year for us to optimize our TV campaign. And again, once we optimize it, then we will go hog wild, we will spend a lot of money advertising, breaking even or better. And then as we generate that brand awareness we will get into retail stores.
So that is a little bit about our marketing, a little bit about our TK Supplements effort. I would like to now spend about 5 minutes talking about the value proposition of our Company. I don't do this often, but then again we have a done a conference call in quite some time.
So I just want to provide a little bit of perspective with regards to Cold-EEZE as an investment. In fact, I don't think I have done this in all the years that I've been here. But I think it is important that our shareholders have my perspective.
I think if you have read the filings you can see I have been a major supporter of our Company. I have purchased millions of shares of stock mostly in the open market over the last several years. I am a big believer in our Company, I'm a big believer in Cold-EEZE and I'm a big believer in the value of our Company.
So let's talk about the value proposition. I am just looking at a couple of notes here. The Cold-EEZE brand has value. And what are the things that go into having a valuable brand? First and foremost it is having high gross profit margins. Cold-EEZE has very high gross profit margins, it is in the 60%s.
Anytime I talk to anybody about the brand, it is the first thing they say is they are usually jealous about our high profit margins. To put this in perspective, a food product might have profit margins in the 20%s. I am actually an investor in another company that has profit margins at around 5%.
So for us to have gross profit margins in the 60%s makes the Cold-EEZE brand a very valuable brand. It may not look like it on the face of it when you analyze your financials because our earnings aren't there. But the brand by itself, for instance, to an acquirer would be a very valuable brand because of those high profit margins.
Other things that are important, our revenues in Cold-EEZE have achieved critical mass. What that means is we can conduct and afford national advertising. If you think about it, if a brand is doing $2 million, $3 million, $4 million, $5 million you can't spend the money to produce a quality TV spot much less advertise it nationally. You need a budget in order to do that.
So Cold-EEZE has that critical mass of revenues, it has high gross profit margins, it stood the test of time. We have been in business -- Cold-EEZE has been in business for over 20 years, so it is a solid brand, it is not going anywhere.
We also have not only the original clinical studies that were done in the 1990s in 1992 and 1996. But we've had additional studies conducted since then. We've gotten a lot of great press regarding zinc.
Back maybe 6 to 10 years ago there were a lot of question marks around zinc. But these days the amount of positive press regarding zinc has really bolstered the case for Cold-EEZE being a valuable brand and for consumers purchasing zinc products for their colds.
Of course, if you know anything about the Cold-EEZE brand, Cold-EEZE releases zinc ions in your mouth which are absorbed by the upper respiratory tract to literally block the cold virus from replicating.
That is the scientific theory, but it is a fact that it does release zinc ions in your mouth, which is very different from all the other zinc products out there that you swallow that get digested and may -- the zinc may provide some immune support going through your blood system that's very different from a product that goes to work directly fighting your cold.
Some other things I would mention about Cold-EEZE: people -- consumers who purchase Cold-EEZE tend to spend a lot more in what we call the shopper's basket. When they go into the store to purchase Cold-EEZE they are purchasing other products at checkout.
The consumer that has Cold-EEZE in their basket is spending probably twice what some of the other brands represent in shoppers' baskets. This is a nuance but it is very important to retailers and certainly important to an acquirer.
I talk about and acquirer only from the point of view of looking at the Cold-EEZE brand and its value. I am not interested in selling the brand right now. I know shareholders have asked me from time to time what my thoughts are and that is why I am addressing it.
Number one, our sales were down this year this year, it wouldn't be a good idea to sell a brand when our sales are down. Number two, I think that our sales are going to grow this year. And number three, I happen to think that we have a great infrastructure in place and we have a really valuable distribution platform.
As I said, we are in over 40,000 stores around the country. We have great relationships with all the major retailers. It would be a shame to sell the Cold-EEZE brand and allow our infrastructure and distribution platform essentially to just be written off because it does have so much value. And so, our goal this year really is to start to leverage that distribution platform and infrastructure.
Some other things I would mention, we inherited an enormous amount of legal fees and litigation in the first years of managing the Company. Some of those major litigation efforts wrapped up this past year.
We have one arbitration, which frankly I am responsible for. It is probably the one mistake I made back five, six years ago when I was starting here. But our arbitration is virtually wrapped up pending a decision. Most of that was expensed last year. There will be some legal expenses related to the arbitration in the first quarter this year.
Going beyond the first quarter, I anticipate that for this year our legal expenses will be down. I'm also paying very close attention to our marketing expenses. As I have mentioned now many times, we have turned around the Cold-EEZE brand, it is on solid footing.
I am looking to -- I will just say watch our marketing budget as it relates to Cold-EEZE very, very carefully so that our P&L can start to improve.
The one place where we are investing is in new products; it is in our TK Supplements, it is in our Legendz XL, it is in other products under development. I just want to put this into a little bit of perspective.
I actually, not that many months ago, was presented with an opportunity to acquire a brand that they probably spent $30 million developing and introducing over the last three years and they were looking to sell it for under $10 million. That is exactly what type of initiative we don't want to be responsible for here.
With the case of Legendz XL I think we have the best dietary supplement, sexual health product for men on the market. We are trying to figure out the most cost-effective way to introduce this to the market and it won't be for tens of millions of dollars.
We spent two years in development, we spent maybe in the low millions developing it. And at most we will spend in the low millions ramping it up and launching it. And with the low millions that will be spent in ramping up and launching it hopefully there will be some sales that will offset some of those expenses.
So, we are doing this as efficiently, as effectively as possible and I think that both Cold-EEZE and our TK Supplements, Legendz XL, products have really nice potential and upside for this year.
I am just going to review my notes and see if there is anything that I missed. I have been talking for quite a while now. I am about to open this up for a Q&A. I think I covered quite a bit of material. Again, I have not asked anyone to ask any questions or to call in with any softball questions.
I don't want to have a false conference call, that wasn't the purpose. The purpose really was to update shareholders, make sure we are all on the same page here. If you do have any questions I would love to hear them. Operator, I would like to turn it over -- back to you.
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Questions and Answers
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Operator [1]
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(Operator Instructions). [Fred McDonald].
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Fred McDonald, - Private Investor [2]
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Hey, Ted, can you project when Legendz will hit the store shelves?
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Ted Karkus, ProPhase Labs, Inc. - Chairman & CEO [3]
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I am sorry, Fred, thank you for asking your question, but you broke up a little bit. Could you repeat that, please?
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Fred McDonald, - Private Investor [4]
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Yes, (technical difficulty) projection on when Legendz might hit shelves?
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Ted Karkus, ProPhase Labs, Inc. - Chairman & CEO [5]
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Sure. So right now we are on TV, that is going to continue for the better part of this year. The goal ultimately, hopefully is that we actually have a profitable campaign on TV. If we do, that will be our primary focus will be to really ramp it up on TV.
There are plenty of companies, brands and products that only advertise through direct response TV and they do incredibly well. Of course the percentage of those that do well is small but the ones that achieve success make an awful lot of money. That certainly is one objective or possibility for Legendz.
However, since we have the infrastructure in place, while I don't want to go to our traditional food, drug and mass retailers, we are working with convenient stores now, there is the possibility that we are going to create -- well, we have already created a convenience size package for convenience stores.
It is a lengthy process of introducing the product to the convenience stores, to the convenience store channels, having them accept them and then they have to distribute them and then they have to show up on the shelves.
I would -- clearly there is no guarantee that they will even accept them. I never want to state that a retailer is going to accept a product until I actually see the order and they can --. But I can tell you that initial indications are that convenience stores are interested in the product.
One reason they're interested in the product is because we make a clinically shown claim. Most of the other products in the men's health, sexual health category, are fly-by-night companies with really questionable ingredients. We have a clinically shown product and even by saying clinically shown that is a conservative way of saying that we have some really great clinical studies that we have conducted and have more ongoing.
So we have some strong claims that we've already developed for the product, we have more that are coming. And so, the convenience stores are very interested. If it was to show up in convenience stores I would say before year end we would start accepting orders and shipping product.
Again, thinking about the forward-looking statements disclaimer, there are no guarantees. But I am hopeful that convenience stores will start to accept the product in their stores before year end.
As far as retailers are concerned, to put that in perspective with our traditional food, drug and mass, we just met at ECRM. These are retailers that are now planning for the cough/cold products that will show up on shelves in September.
So, if you think of that type of a timeframe, dietary supplements, because it doesn't have the seasonality that the cough/cold category has, we may not have as long a timeframe. But you have to assume from the time that we would first introduce the product to the major retailers, to the time that they would accept the product and then place an order and then it would have to go through the distribution centers.
And then after it actually gets distributed to the individual stores and put on the shelves you have to assume it is a 6 to 9 month process, we have not started that process yet. I don't want to start that process until we gain some momentum on TV. I hope that answers your question. But happy to answer another one.
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Fred McDonald, - Private Investor [6]
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Yes, thank you, Ted. Hey, Ted, my next question would be the clinical study that was done on Legendz (inaudible), can you talk about that a little bit? Was it a double-blind placebo study or just what was done?
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Ted Karkus, ProPhase Labs, Inc. - Chairman & CEO [7]
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Sure, great question. So, yes, virtually all of our studies are double-blind placebo-controlled studies. That is the gold standard as it relates to the FDA, FTC and to those class-action attorneys out there. The first claim that we are making is clinically shown to promote blood flow within 60 minutes.
We conducted a couple of initial studies that showed very positive results. We actually felt that the initial studies were strong enough to support that claim. We actually spoke to our regulatory experts and they said, well, they are strong enough for FDA and FTC, but you never know when a class action attorney is going to come along and make a claim anyway against us whether it is founded or unfounded.
And so, we went a step further by building an even larger clinical study, having even more patients in it so that we are on really solid footing on making that claim.
I like that claim for several reasons. Number one, the fact that it is double-blind placebo-controlled. The fact that we state clinically shown. The fact that we state promotes blood flow. People understand, men understand -- when you say promote blood flow they know what that means.
And when we say within 60 minutes that basically -- it implies two things. One that the product works. It implies that it works quickly. And relative to other products in the category, there are some products you have to take for 3 to 4 weeks particularly in the dietary supplement category.
There are some products that take 3 to 4 weeks before they start working. So, to avoid confusion we want to imply very clearly that our product works the first time that you take it. So we think that that is a very strong claim.
We have other claims coming, but we want to wait until all the T's are crossed, all the I's are dotted with regards to our clinical studies. The class-action lawsuits out there, even if you win it can cost $1 million to defend. And I would rather have such strong clinical studies that when the class-action attorneys knock on our doors we have so much data in our support that they realize they are just wasting their time and they leave.
That is basically what is happening with us with Cold-EEZE now. And, by the way, I should mention that we have conducted additional clinical studies on Cold-EEZE more recently. One of those studies we are looking to publish in the near future.
The bottom line is it is further support that our Cold-EEZE product really works great at reducing the severity and duration of the common cold. And it further increases the value of the brand while at the same time should scare away most class-action attorneys. Fred, anything else?
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Fred McDonald, - Private Investor [8]
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Well, I'm trying to think -- the only thing else I can think of is do you have an idea when your next TK Supplement will be released?
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Ted Karkus, ProPhase Labs, Inc. - Chairman & CEO [9]
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Yes. So, we actually have two more products that we have already developed. And by the way, a lot goes into not only formulating the products, testing the products but also developing the packaging, the graphics, the brand name.
We do a lot of market research, focus groups, online surveys, you name it. We literally spent two years creating our Legendz packaging graphics brand name, etc. I am really proud of the work that we've done there.
We have created two other products, I haven't really discuss them in detail. They happen to be really good products. One is for prostate health, the other is a product for men's energy that is -- I guess you can call it a natural testosterone booster that provides all day energy. Again the clinical studies have been great.
We're trying to figure out the best way to differentiate these two products relative to what is currently available. We think we have the best products on the market; they will be reasonably priced. Our hurdles are from the marketing point of view to create uniqueness in the minds of the consumers.
So, I am not in a hurry just to introduce products that aren't going to do well. And so, my thought is I really want to build the momentum with Legendz first and then allow the other two products to piggyback on the success of Legendz.
Separate from that we are now also looking at the women's category. We think it is underserved. We think that there is an even better opportunity on the women's side. And so, I say, Raouf -- Raouf is actually here for this call, but Raouf has to go back to his office pretty soon and get back to work formulating those products. But I'm actually looking for some women's products to leverage what we're doing as well next year.
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Fred McDonald, - Private Investor [10]
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Ted, thank you very much. I think the future looks very promising for Cold-EEZE. Thank you.
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Ted Karkus, ProPhase Labs, Inc. - Chairman & CEO [11]
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Thanks, Fred, I really appreciate it. Do we have other questions?
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Operator [12]
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[William Lapp].
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William Lapp, - Private Investor [13]
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Thank you. Hi, Ted, how are you?
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Ted Karkus, ProPhase Labs, Inc. - Chairman & CEO [14]
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Good evening, Bill, nice to hear your voice.
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William Lapp, - Private Investor [15]
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Yes, nice to talk to you. I want to first of all compliment you on the packaging. I have a Target store in Minneapolis and I thought I saw some of -- I mean I like the Cold-EEZE the way you have got it on the shelves.
But I also thought I saw some competitive Cold-EEZE on the liquid, it was right on the Target shelves. You mentioned that maybe they weren't there, but I thought I saw like for the liquid cold. But maybe I am wrong. But the packaging is very nice.
Let me ask you this, what is it your burn rate? I mean, you did $20 million, you have a 60% margin, so that left $12 million. But what do you project for your burn for cash flow for this 2016 year? Are you going to lose money on a cash --?
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Ted Karkus, ProPhase Labs, Inc. - Chairman & CEO [16]
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That is a great question. To some extent -- Bob wants to answer that question, but let me just say to some extent we have control over our cash flow because we can control the amount of dollars that we spend on marketing both for Cold-EEZE and the amount of dollars that we spend for Legendz.
So, I am trying to be conservative, I'm trying -- because I believe that we have been undervalued stock I'm trying really hard not to issue millions and millions of shares of stock and raise $10 million and then burn through it. I am really trying to do this as conservatively as possible.
At the same time, a couple million dollars of dilution to potentially build a new brand that could be worth $10 million or tens of millions of dollars, I think it is worth that endeavor to try and leverage our infrastructure and distribution platform.
So, as you can imagine, I can tell you I expect that our cash flow will probably be negative this year, but it is well controlled. Our legal expenses are going to be less than what they have been in the past, that is what we are projecting, that is the key figure.
Our marketing is under control because we have already turned around and grown the Cold-EEZE brand we can probably spend a little bit less on advertising this year and still have the same impact.
And so, between decreasing legal and marketing while -- that is not necessarily going to earn us money, it should take some of the pressure off while we invest in Legendz XL and our other dietary supplements, (multiple speakers).
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William Lapp, - Private Investor [17]
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So, basically you are not going to be profitable this year and you are going to have negative cash flow?
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Ted Karkus, ProPhase Labs, Inc. - Chairman & CEO [18]
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That is probably a fair statement. But in the process I expect that we will build significant value in the Company. I would be more than happy to lose a few million dollars and build a brand that is worth $10 million and then in a couple years it is worth $30 million or $50 million and lose a few million a year while doing so.
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William Lapp, - Private Investor [19]
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Okay. So, let me ask you about the Legend. Now the Legend, that competes with something like Cialis and all that, is that true, but it doesn't have to have FDA approval because it is a dietary supplement?
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Ted Karkus, ProPhase Labs, Inc. - Chairman & CEO [20]
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All right, so first of all it is not Legend, it is Legendz, I don't want you to (multiple speakers).
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William Lapp, - Private Investor [21]
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Legendz, pardon me.
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Ted Karkus, ProPhase Labs, Inc. - Chairman & CEO [22]
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Don't shortchange the Z, that is critical to the category. Not to (multiple speakers) a little fun with you. Second of all, I am not allowed to compare it to prescription products. But clearly you take Viagra or Cialis, it works the first time you take it. And with Legendz XL it works the first time that you take it. I can't make comparisons because we didn't go through 10 year FDA new drug application process.
This is a dietary supplement. We have to be very careful, FDA scrutinizes very closely what you say about dietary supplements. So I am not going to compare it to prescription products, I would rather compare to other dietary supplement products.
I can tell you that I believe we have the best product on the market in terms of how it works relative to other dietary supplement products. And we do have a very strong claim stating that within 60 minutes it promotes blood flow.
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William Lapp, - Private Investor [23]
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Yes, well, that is what you told me when you used it.
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Ted Karkus, ProPhase Labs, Inc. - Chairman & CEO [24]
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(Laughter) and Bill, how did that work out for you?
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William Lapp, - Private Investor [25]
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Huh? Anyway the question is, so you've had some info commercials, I think that is a great way to pull the brand through to marketing. But how have you done on them? You've had two or three tests. What kind of revenue have you generated, can you speak about that? I mean in other words, you have these commercials, they get a percentage. Can you talk about what kind of results you are seeing on the two or three commercials --?
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Ted Karkus, ProPhase Labs, Inc. - Chairman & CEO [26]
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Yes, okay. So I mean, listen, this is really preliminary. And the reason I don't want to talk numbers is because, number one, it is so preliminary. And, two, just to give you an example -- in our first test we might advertise on 20 different networks, 10 of them do relatively well, 10 of them don't do anything.
In the future we wouldn't do anything on the 10 obviously that aren't generating any revenues. So, to even talk about revenues relative to the spend -- honestly it is just not relevant right now.
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William Lapp, - Private Investor [27]
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Right.
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Ted Karkus, ProPhase Labs, Inc. - Chairman & CEO [28]
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It will be relevant six months from now, it is not relevant now.
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William Lapp, - Private Investor [29]
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Okay, but you are seeing positive -- you are seeing sales?
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Ted Karkus, ProPhase Labs, Inc. - Chairman & CEO [30]
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Of course, it is generating sales. We are generating -- the beauty is where actually built a really nice infrastructure for Legendz and for selling products online. You go to our website and purchase our products, a lot goes into that website, a lot goes into advertising on TV between developing all the infrastructure of the call center and the fulfillment center.
And all the nuances that go into the website. An enormous amount of work and research goes into that website just in terms of not only what you see but the order in which you see it. That all matters. Same thing with a TV spot. So I can tell you we're making nice progress, we're not there yet, we're not at breakeven yet, but I am hopeful later this year we will be.
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William Lapp, - Private Investor [31]
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Okay. So you know, Ted, I saw you bought a lot of stock. I saw that Leventhal bought a lot of stock. So, tell me what -- can you give me an offhand value what you think the Cold-EEZE brand is worth today?
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Ted Karkus, ProPhase Labs, Inc. - Chairman & CEO [32]
------------------------------
I actually thought that I answered that question pretty well. I am not going to get into specifics, but I have mentioned some of the factors that go into the value of the brand. One is whether -- the most important is probably gross profit margins, distribution, longevity and whether it is growing or shrinking.
You put that all together, it is a valuable brand. And by valuable what I mean is all those factors determine what the multiple of revenues or what the multiple (multiple speakers).
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William Lapp, - Private Investor [33]
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So what is the range? In other words, if you are doing $22 million and it meets those criteria, would you say it is 3 times?
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Ted Karkus, ProPhase Labs, Inc. - Chairman & CEO [34]
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I won't talk about Cold-EEZE. I will tell you based on my limited experience of other deals that I have looked at, if you have a small shrinking brand it is probably worth about -- and by the way, the acquirers typically look at contribution margin, they don't look at revenues. But contribution margin comes from revenues and we have high gross profit margins. So it is okay for me to speak in terms of revenues.
But if it is a small and shrinking brand maybe you get between a half and one times revenues. If it is a stable brand it depends on the size of the brand, it depends on the gross profit margins. You can -- it can go from anywhere from 1 to 4 times revenues.
The Cold-EEZE brand is certainly worth more than 1 times revenues. And to put that in perspective, our stock right now probably values our brand at about 1 times revenues, but we also own two properties, we own a state-of-the-art manufacturing facility, which I really didn't even touch on.
We have one of the best manufacturing facilities in the country for manufacturing lozenges and hard candy. So we have a valuable manufacturing facility, we own two properties. So there is a lot of value there and it is clear that our stock is undervalued.
What the brand would actually go for also depends on whether there is a major pharmaceutical company that is looking to put more of a emphasis on cough/cold and/or whether there is a company out there, maybe a foreign company that is looking for distribution in the US and wants to use Cold-EEZE as a platform for other products that they may have.
There is a lot of variables in there, but I can tell you that, at least in terms of the key factors that an acquirer would look for, they are all pretty positive for Cold-EEZE.
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William Lapp, - Private Investor [35]
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Well, didn't you have somebody try to take a run at this at one time?
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Ted Karkus, ProPhase Labs, Inc. - Chairman & CEO [36]
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Yes, that was a few years ago, but I am not interested in selling to a private equity firm at well below the (multiple speakers).
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William Lapp, - Private Investor [37]
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Well, they'll not want to pay you the right value.
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Fred McDonald, - Private Investor [38]
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Right.
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William Lapp, - Private Investor [39]
------------------------------
Well, keep up the good work, Ted.
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Ted Karkus, ProPhase Labs, Inc. - Chairman & CEO [40]
------------------------------
Thank you, Bill, I appreciate it, thank you.
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Operator [41]
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[Dino Romano].
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Ted Karkus, ProPhase Labs, Inc. - Chairman & CEO [42]
------------------------------
Greetings, Dino.
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Dino Romano, - Private Investor [43]
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Ted, hi. Question about synergy. Cold-EEZE has an incredible market presence. Are you going to be using that Cold-EEZE leverage to help sell the TK Supplement products or are they going to be totally separate entities or --?
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Ted Karkus, ProPhase Labs, Inc. - Chairman & CEO [44]
------------------------------
It is possible down the road. The real benefit of Cold-EEZE is that it provides us with the infrastructure and the relationships with the retailers as opposed to the Cold-EEZE name. It is a mixed bag, for every pro there is a con with regards to using the Cold-EEZE brand name and associating that with Legendz.
In research we have done in the past that was a mixed bag at best. I really don't want to mix the two together unless research clearly indicates that we should. But, because we are in the Cold-EEZE business, we have 40,000 stores around the country that will open up their doors to us and meet with us and be receptive to doing business with us.
So there is indirect, very positive leverage to the Cold-EEZE brand. We didn't have the Cold-EEZE brand and we were starting from scratch and just had a company that was looking to develop Legendz, we would have an incredibly difficult time getting into these same stores.
And entrepreneurs face this problem all the time, they create these products that they are passionate about and they just can't get distribution. And I see it happen all the time.
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Dino Romano, - Private Investor [45]
------------------------------
No doubt, no doubt about that. I am excited about your TK Supplement venture. What other -- you mentioned prostate health and testosterone booster as two potential new products. What about the general overall vitamin market itself? Do you have any intentions of entering into that at all with TK?
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Ted Karkus, ProPhase Labs, Inc. - Chairman & CEO [46]
------------------------------
Well, our next step actually -- we have gotten a lot of feedback that women want products similar to what is out there for men. And I will leave it to Dr. Ghaderi how soon he can develop those products for women. But I think we're on the right track there. And I actually think that is the next place to go.
But if we are successful with Legendz really the sky is the limit because we would then have a new platform in a multibillion-dollar category. And we could literally go wherever we see pockets of opportunity, which is one of the reasons why I wanted to try and extend beyond the cough/cold category.
Because again, that is a top seasonal category. For the work that we have done at our Company in restructuring and building it over the last several years, if we had put those efforts into a different category we would be multiples of the size that we are right now.
And frankly, I know that we -- while we may have made some mistakes along the way early on, we are doing all the right things now. And the problem is we are in a tough category with the cough/cold category.
And as I mentioned, when you have the incidence of upper respiratory illness down 20% and 25% some weeks year over year, very difficult to sell product no matter how good a job you do. So, I'm (multiple speakers).
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Dino Romano, - Private Investor [47]
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Why do you think that incident -- the incidence of upper respiratory infections was down so much this year. Was it whether or was there a --?
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Ted Karkus, ProPhase Labs, Inc. - Chairman & CEO [48]
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Well you can say it is global warming, you can say it is weather or is there a --?
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Ted Karkus, ProPhase Labs, Inc. - Chairman & CEO [49]
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Well, you can say it's global warming, you can say it's weather, you can say it is just cyclical where you have good seasons and bad seasons, it just wasn't a great season. Interestingly, right at the end of March and it started to pick up year over year relative to a year ago. So I happen to think more it's just one of those flukes or anomalies where we had a bad season.
I am confident that we are going to have a better season this coming year. There is no reason why we wouldn't at least be flat if not up in terms of the incidence of upper respiratory illness, which would be a great backdrop for us increasing shelf space and coming out with new products. So I expect Cold-EEZE to have a good year this year.
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Dino Romano, - Private Investor [50]
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Great. Hope so. Thank you.
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Ted Karkus, ProPhase Labs, Inc. - Chairman & CEO [51]
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All right, thank you very much. And we have another question?
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Operator [52]
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[Charles Hooper].
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Charles Hooper, - Private Investor [53]
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Ted.
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Ted Karkus, ProPhase Labs, Inc. - Chairman & CEO [54]
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Greetings, Mr. Hooper, and thank you for your patience.
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Charles Hooper, - Private Investor [55]
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Not at all, thank you for the call. Could you give us an idea of the market size for Robitussin and Mucinex brands as well as the libido product?
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Ted Karkus, ProPhase Labs, Inc. - Chairman & CEO [56]
------------------------------
Listen, I can tell you, yes, the liquids -- each of the liquids, and it depends on whether you include Mucinex in there, I mean we are talking about many, many hundreds of millions of dollars if not more. It is a big category. They make a lot of money.
And the thought there is if a brand name called Alka-Seltzer, which was for an upset stomach. If they can make a big splash into the cough/cold market why can't Cold-EEZE, it should be a no-brainer. So there is tremendous potential for our Cold-EEZE liquids, there are a lot of consumers out there.
Only approximately 6% or 7% of consumers purchase homeopathic products. But in the non-homeopathic liquids, those percentages, it is a multiple. A significant percentage of consumers purchase the liquids. So we are going after significantly dramatically more consumers and it is just a matter of getting the retailers to play ball with us.
Food typically has more shelf space for products like these because they love the profit margins because food has such low profit margins. So the cough/cold products, which have better profit margins for them, they are willing to give the space. So they opened up their doors to us first. We have to prove ourselves in food and then hopefully the others will open up their doors.
We have the possibility that at least one major retailer is seriously interested in our liquids for the upcoming season. If they take it on it will build momentum. Alka-Seltzer, I promise you, I don't know how many years it took, but it took years, not months, for them to get into cough/cold business.
And I can only tell you that everything is going in the right direction. If we get one of the major retailers in drug or mass to accept our product it will eventually motivate and pressure the other retailers to carry it as well.
So we are on the right track, it is a very big category. And if successful it could dramatically increase the amount of revenues for the Cold-EEZE brand and also dramatically increase the value of the Cold-EEZE brand. It's just one more reason why I would really like to see that play out as opposed to selling the brand for some impatient shareholders.
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Charles Hooper, - Private Investor [57]
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Okay, thank you very much.
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Ted Karkus, ProPhase Labs, Inc. - Chairman & CEO [58]
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Thank you, Chuck. I appreciate the questions. I see that there are no more questions out there. I really appreciate the questions and I appreciate everybody giving me an hour to talk about our Company. Operator, you want to ask one last time if anyone else has any other questions?
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Operator [59]
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(Operator Instructions).
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Ted Karkus, ProPhase Labs, Inc. - Chairman & CEO [60]
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Okay, great. I think we can end the call at this time -- oh, we have one -- it looks like we have one more question, go ahead.
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Operator [61]
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[Pat Patterson].
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Pat Patterson, - Private Investor [62]
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Oh, good morning, Ted.
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Ted Karkus, ProPhase Labs, Inc. - Chairman & CEO [63]
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Good morning, Pat, good to hear your voice.
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Pat Patterson, - Private Investor [64]
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Hey, sorry to be late on the questions. But I just wanted to ask to see if I did understand -- did you say that you were thinking about introducing additional dietary supplements, something in the vitamins and mineral lines later on?
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Ted Karkus, ProPhase Labs, Inc. - Chairman & CEO [65]
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I think the answer is that the dietary supplement category is a multibillion-dollar category, everybody that is not in it is jealous of the brands that are in it. This is our first entry into the category. If it is successful we can introduce virtually any product.
I am really proud of our R&D efforts. I don't think there is a better formulator on the planet than Raouf. And any product that we want to formulate there is no question in my mind he can formulate it. We have manufacturers around the country that are regularly dying to know how Raouf formulates what he formulates.
We keep our products' very closely guarded secrets. He'll manufacture part of the product at one location and one company, he'll manufacture another part at another manufacturer. So that manufacturers don't even know what he is doing.
So, I think to answer your question, if there is an opportunity, whether it is in vitamins or elsewhere in the category, there is no question that if Legendz is successful we will be able to leverage that and go wherever we like.
While our hands are somewhat tied and we are somewhat constrained with regards to the cough/cold category, there are no such constraints in the dietary supplement category.
So with TK Supplements, this could go from a little start up that we are financing from as Bill Lapp mentioned, our negative cash flow. Obviously we are being very, very careful in terms of spending money. We are doing this on a shoestring budget.
I could certainly ramp up Legendz more quickly if I was willing to spend $5 million or $10 million to do so. Anybody else would, we're trying to be more careful. But so this is a long-winded way of saying it is certainly possible but it is premature to give you any kind of definitive answer.
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Pat Patterson, - Private Investor [66]
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Well, Ted, it sounds like you are doing it exactly the right way. And I am really excited about the possibilities. Thanks for taking my question.
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Ted Karkus, ProPhase Labs, Inc. - Chairman & CEO [67]
------------------------------
Thanks, Pat, I am excited too. I think we are all excited at the Company. Thank you all for participating today, really appreciate it. It looks like Mr. Hooper has one more question. Go ahead, Chuck, please, feel free. Operator, we have one more question?
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Operator [68]
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Yes, Charles Hooper.
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Charles Hooper, - Private Investor [69]
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Yes, hello?
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Ted Karkus, ProPhase Labs, Inc. - Chairman & CEO [70]
------------------------------
Go ahead, Chuck.
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Charles Hooper, - Private Investor [71]
------------------------------
Ted, have you decided on a price for your libido product?
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Ted Karkus, ProPhase Labs, Inc. - Chairman & CEO [72]
------------------------------
Boy that is a great question. That is one of the key variables that we are testing. To give you an idea, one thing -- the way we tested introducing the product on TV is by providing a free sample and then signing up for a continuity program.
A continuity program means that when you get the free sample you have to provide your credit card and then you auto ship the product until you cancel it. We varied the price anywhere from $89.95 to $79.95, $69.95, we are testing $59.95 and that is for a 30 capsule package.
Separate from that we have also tested rather than doing a free sample with a continuity plan, because a lot of people don't want continuity programs. We have tested a bogo, that is a buy one get one free. We've tested that with a 10 count at $39.95 where you buy one for $39.95, you get a second package for free, it includes free shipping.
That is highly profitable to us. But if you don't generate enough orders it doesn't pay for the TV time. We may in the future test $29.95 instead of $39.95. So there are a number of variables, pricing isn't set.
The beauty of direct response TV is that the consumers tell you what is the most that they are willing to pay while still selling a lot of product. So there are some real advantages to going on direct response TV.
They tell you what they are looking for. They tell you what they respond to. They tell you the offers that they respond to. They tell you what calls to action they respond to. They tell you what claims they respond to. So, pricing is just one of probably 20 variables and we're just in the early stages of optimizing those variables.
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Charles Hooper, - Private Investor [73]
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Thanks, buddy, great job.
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Ted Karkus, ProPhase Labs, Inc. - Chairman & CEO [74]
------------------------------
You're welcome. Thank you so much. All right, thank you all. I think we are going to end the Q&A now, we are passed an hour and that was without us reading the press releases and the quotes.
I enjoyed the call. I hope that we have informed you and that this is somewhat of a level playing field. That you all realize that there is a lot of value in our Company, there is a lot of upside potential.
I can't guarantee the upside, but we're certainly going to give it our best shot as efficiently as possible. Enjoy the rest of your day and thanks again for joining us.
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Operator [75]
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This concludes today's call. You may now disconnect.
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