Nephros, Inc. (NEPH) Q3 2018 Earnings Report, Transcript and Summary

Good afternoon and welcome to the Nephros' Third Quarter 2018 Financial Results Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to Kirin Smith with PCG Advisory. Please go ahead, sir.

Good afternoon, everyone. This is Kirin Smith with PCG Advisory Group. Thank you all for participating In Nephros's third quarter conference call. Before we begin, I would like to caution that comments made during this conference call by management, will contain forward-looking statements regarding the operations and future results of Nephros. I encourage you to review Nephros's filings with the Securities and Exchange Commission, including without limitation the Company's forms 10-K and 10-Q, which identify specific factors and may cause actual results or events to differ materially from those described in the forward-looking statements. Factors that may affect the Company's results include but are not limited to its ability to successfully, timely, and cost effectively develop, seek, and obtain regulatory clearance for and commercialize its products and services offerings. The rate of adoption of its products and services by hospitals and other healthcare providers, success of its commercialization efforts, the effect on its business of existing and new regulatory requirements and other economic and competitive factors. The content of this conference call contains time sensitive information that is accurate only as of the date of the live call, today, November 8, 2018. The Company undertakes no obligation to revise or update any statements to reflect events or circumstances after the date of this conference call except as required by law. I would now like to turn the call over to Daron Evans, Nephros's CEO. Daron, please go ahead.

Thank you, Kirin, and good afternoon, everyone. Welcome to Nephros's third quarter earnings conference call. I'll begin the call with a brief overview of our third quarter results and then discuss developments that occurred during the quarter. I'll then turn the call over to Andy Astor, our Chief Financial Officer, and Andy will do a deeper dive into our third quarter operating results. I'm pleased to report that Nephros had another good quarter. Product revenue was up 96% over the last year's third quarter. Our growth primarily came from our Hospital Infection Control segment, which grew well over 100%. Based on a number of hospitals, the product evaluation kits we placed in new hospital customers in the second and third quarter this year and we do expect this growth for trajectory to continue. Our core sales strategy in the hospital segment, centers around consultation and service to be a valued expert partner in the hospital water management team as they develop and execute the water borne pathogens strategy. We focus primarily on two aspects of that relationship, the performance of our filters that can provide premium risk mitigation efforts and on the extremely responsive customer service. An example of our customer service is that we often will drive to the airport, we get a phone call at 10 o'clock in the morning, we'll be at the airport by noon, the product can get there that time. When a hospital is in the middle of an outbreak and patients' lives are at risk, every hour counts, and that's how we've built our business over the last few years and very pleased to see the results as it plays out. On our dialysis side, the ultrafilter business was not the core growth driver of the third quarter. However, we're seeing signs that a real sales growth curve is not far away. We expect to report more in future earnings calls. Outside of our core hospital business and infection control and dialysis ultrafilters, we have been surveying the marketplace for additional adjacent opportunities with organic and inorganic that have the potential to be significant growth drivers. We have built capabilities to design and launch new products internally as well as a solid infrastructure that will enable us to incorporate existing outside products into our portfolio and sales channels. Over time, we expect to add multiple new products per year to our portfolio either internally developed or acquired. We have made progress on both internal and external projects over the last year and expect to be able to share updates on those projects in coming months. I'll now turn the call over to Andy for financial review.

Thank you, Daron. I'll now provide a look at our consolidated financial results and after that I'll discuss our new business segment reporting and updates on our guidance for 2018 and our plans to uplift to a National Exchange. All numbers are rounded to the nearest thousand dollars unless otherwise specified. And I'll begin with the consolidated financial results. I'm very pleased to report that this quarter represents our 9th consecutive quarter of year-over-year revenue growth averaging 60%, over 60%. And as we said last quarter, we believe this consistent revenue growth is indicative of Nephros's strong product portfolio, and increasing market awareness of our brand, our deep relationships with partner companies in the field and the increasing regulations requiring water testing and remediation. Nephros reported total revenues of $1,724,000 for the third quarter compared to $916,000 in the same quarter last year, an increase of $808,000 or 88%. Quarter-over-quarter total revenue growth was also quite strong increasing by $358,000 or 26%. Product revenue for the quarter was $1,648,000 compared to $841,000 in the same quarter last year, an increase of $807,000, or 96%. Quarter-over-quarter product revenue growth was also strong increasing $432,000, or 36%. Cost of goods sold were $772,000 with gross margins of 55% compared to 58% in the last period - I'm sorry, in the same period last year. We consider gross margin fluctuation between 55% and 60% to be normal for a business in our size and our growth rate. Research and development or R&D expenses were approximately $352,000 in the third quarter compared with $237,000 in the same quarter last year, a 49% increase. Quarter-over-quarter R&D growth was zero. The R&D increase over the last year is due to increased investment in our second generation HDF machine, which is housed in our specialty renal products subsidiary or SRP, which Daron will discuss later in this call Selling, general and administrative expenses or SG&A were $1,069,000 in the second quarter compared with $753,000 in the same quarter last year, representing an increase of $316,000 or 42%. Quarter-over-quarter spend on SG&A actually decreased from $1,091,000 last quarter to the $1,069,000 this quarter, a reduction of $22,000 or 2%. Our cash balance at the end of the third quarter was $5,322,000, a significant increase from our second quarter cash balance of $3,484,000. This increase was largely driven by a $3 million private placement in our SRP subsidiary, which was previously reported on September 6. We believe our cash balance is sufficient to fund operations for at least another year and we have no specific plans to raise capital at this time I'll now discuss the topic of segment reporting. The financial results that I just reviewed are consolidated for all activities of Nephros, Inc. As many of you are aware though, Nephros is actually made up of two businesses that are quite different from each other. One is Water Filtration and the other Renal Products. Water Filtration is a growth stage commercial business, it is 100% of our current revenues and those revenues have approximately tripled over the last three years. Our Renal Products business on the other hand is a development stage business with revenues not expected to begin until 2020. This business is housed in the new SRP subsidiary and it's primarily concerned with developing our second generation HDF product. Beginning with today's 10-Q, which we just released, we report separately about these businesses as individual business segments and we encourage investors to read about these segments in the 10-Q management's discussion and analysis section. Turning to guidance, we continue to target for year 2018 revenue of $6 million, which would be an increase of 58% over 2017. We expect revenue to progressively accelerate through the year as it has as we continue to expand within existing accounts and to add new accounts as well. And finally, I will reiterate that we do intend to uplift our shares to a National Exchange in the near future. National Exchange Stocks have wider - have access to a wider set of investors and greater access to capital to fuel additional growth. Also as previously announced, we do plan to reverse split Nephros stock as soon as our uplift path is clear to achieve the minimum stock price required by the National Exchanges. I should note that this reverse split comes at a time of company strengths and is motivated solely to meet the National Exchange share price requirements. Of course, we will also continue to present at upcoming financial conferences and we look forward to meeting with many of you in the coming months. I will now turn the call back over to Daron, who will touch on our HDF business and then open the call for questions. Daron?

Thanks, Andy. Before we turn the call for questions, I'll provide a brief update on HDF business, the Specialty Renal Products or SRP. In early September, we announced $3 million funding ground to formally launch SRP. We believe this funding will support the HDF program through to early commercial launch of the next generation system. Since funding, we've been diligently working to finalize the design changes required to complete our early or alpha test system. We've been running these tests and obtaining user feedback on the alpha system for the past couple of months. We intend to complete the hardware and software design changes by the end of the year and to have pre-commercial testing in early 2019. The core change from our first generation HDF system to the new one is a shift from a reusable substitution fluid ultrafilter to a disposable substitution fluid. This relatively straightforward change drastically reduces the complexity of our system by limiting the need to incorporate internal disinfection equipment. This translates into dramatically reduce costs. We project a new HDF system less cost of goods more than 90% lower than our first generation system, we also believe that a single - small single-use filter to create substitution fluid better for patients and easier for the primary care technicians and nurses to use. By limiting the disinfection procedures between patient treatments, we should be able to reduce system set up time between patients by as much as 70% versus the first generation system. We have been and will be obtaining user feedback as often as possible in the clinic developing process to ensure that we fit very neatly into the current dialysis clinic procedures. Pending FDA clearance, we expect to provide patients in the fall just with a Hemodiafiltration treatment option near the end of '19 or latest early 2020. Before I conclude the presentation, I also want to provide a plug for the CamelBak Nephros military filtration system called M.A.P.S. CamelBak is completed in the full integration of Nephros filter in the military backpack; they provided Nephros with a limited quantity to sell to the stakeholders. If you'd like one, please e-mail info@ nephros.com to get in the waiting list and receive special Nephros stakeholder pricing. This concludes our formal presentation remarks. I'd like to iterate that we are extremely pleased with the direction where we're going and very excited about the future. I'd like to personally thank all of our stakeholders for their support. We'll take questions from the audience. I'll pass to the operator for managing the calls.

We will now begin the question-and-answer session. [Operator Instructions] At this time, we will pause momentarily to assemble our roster. And as we assemble our roster, I'll pass the call back to Andy to read questions from the web.

Thank you. I've got a couple of questions that have come in on e-mail. I'll address a pretty meaty one up front, which is a simple question. When might you now become cash flow positive? This is something that we've talked about many times in the past in our releases. And we've decided not to give guidance on our future cash flows. And I'd like to spend a couple of minutes on the reasons for this. As a fast growth company, our cash flow is naturally challenged especially in terms of increasing inventory purchases and higher accounts receivable balances. The truth is fast growth almost always means cash flow challenges. Also, our investments in the SRP renal products business segment will drag down cash flow in the near term since we're investing in R&D without any revenue to match it. Having said this, our water filtration business is really healthy from a cash perspective. I'm happy to report that expenses are increasing much more slowly than our revenue that our SG&A expenses have actually gone down this quarter and then our gross margins are consistently in the high 50s meaning the 55% to 60% range. So I'm super comfortable with where we are from a cash perspective in the water filtration business. And I also understand that our investors want a clearer picture of the relative cash flow health of our business segments and we are working diligently right now this quarter to develop metrics that will provide that information to you. So please stay tuned for these new measurements, which we will present during our next earnings call. Carl, I'll go back to you, do you have questions on the call.

We do. Our first question comes from Ray Swezey [ph] Private Investor. Please go ahead with your question.

Yeah, Ray Swezey. Can you talk about - I mean, when are you likely to file for an uplisting or have you already filed and you're just waiting?

It's a fair question, Ray, and I don't want to go into too much detail, but first of all, hi, Ray and -

Hello.

The truth is - the honest truth is we underestimated the time that the uplisting would take mostly because the application and the evaluation process are really more complex and more subjective than they appear to be on paper. So suffice it to say that we're working on it actively and what we will provide more information as soon as it's available. Along with that I'll comment on the reverse split, which is really simple, you know, it's been approved but will orchestrate the reverse split to happen as close to the uplist as possible, so we sort of consider that all one thing. Does that make sense?

Yes it does. Thank you very much and thank you for a great quarter.

Very welcome, Ray. Hope that helps.

[Operator Instructions] And our next question comes from Art Winston with Pilot Advisors. Please go ahead with your questions, please.

Daron, can you give us some estimation what the growth in locations or places in hospitals in total that use your water filtration systems and do you think you can pick up; you can sustain the pace of any locations at the same pace that you're going to tell me that you had?

Sure. Art, how are you? We added over 50 or 60; I haven't done the exact math. Hospitals over the last few months, we're growing at a pretty good cliff and it doesn't seem to be slowing down, if it's –we have an evaluation kit that we sell to a hospital to put our filters in first and then we let them run the course of life, we get them back, we spin a the report to show what we've captured and protecting them from - protect the patients from. If that it is an indication of how many is possible to get, we're still seeing between one and five a week. Our distributor is doing a great job of getting us into places and we then follow up where we can. So I think our sales folks are on the ground every day in a new town and visiting from three and five hospitals every day and regionally [ph] and water quality is top of mind. And we have a nice solution. So we're not seeing that pace slowdown yet -

How much of an impact is a major contributor to this or is that on the periphery?

It's - they're a major contributor but it's across the board. The customers have been - are asking for new solutions or exploring new performance from some filters and another filters too. But the - whereas three, four years ago, maybe 10% of hospitals had filtrations is kind of a regular purchase, I'd say by the end of next year all of them will. So if they're really - all the teams are really out looking for solutions that fit their model and will fit a lot of models and some models we won't, but we'll fit in a lot of models.

Thank you very much, Daron.

Welcome. Thanks for the question.

And at this time I'm seeing no further questions. We actually have a question from Ralph Well with Rwell [ph] Investment Management. Please go ahead with your question.

Yeah, hi. Hi, Daron and Andy. A question about EndoPur, can you comment on what - why is it been a bit slower and why you feel, I'm assuming you feel that it will catch on and et cetera going forward. And other areas besides hospitals are you making any progress in that ground?

So, we actually don't want to go too far into detail about the EndoPur, our competitors listen to our calls too. Let's just say that the sales cycle for dialysis it's much longer in the hospital and we've been in clinics for a long time, we're starting to see more this per week. So we think we're on the cusp of that inflection point where we started to see that in the period more is coming out. But we've been in clinics on both to be aside, putting aside and some of the major change and we're working through the use of it, but just to say we're ordering a lot of inventory to make sure we're ready for the wave. And from other places we are getting phone calls from schools and from fire stations and from other places. We are starting to think about how we would go into nursing homes, and for a nursing home the users of the filter would maybe need more brochures and things to help them understand what it's for and what it does and how to use it. We're still kind of at the B2 B space before we get too far into the realm outside of the medical arena, we do some more work on making sure that we are able to communicate well of how it's used, why it's used to more of a consumer level. But it is where we are getting orders from spaces outside of our core hospital and dialysis clinics space. Does that answer your question?

Yeah, what about the work that's been done with - I don't know the name of the company the one in Las Vegas, what kind of progress is being made of matter is that a very long term thing?

You know, that's Biocon out of Las Vegas, so there they are mostly in the hospitality, convenience store and restaurant space. And we have been working with them for years to talk to the bigger players in that space to understand how ultrafiltration can play a role. We are - we have for example our 20-inch flushable system that would be great for a point of entry for a restaurant. We're almost done with the testing of that. We should be able to start talking to the bigger players and placing that. The Biocon channel is our access to those - to those customers. Biocon make some of our components and they're also the manufacturer of our led filter system. So we have a nice and growing relationship with that company.

And at this time, there are no further audio questions. I would like to turn the call back to Andy Astor for any web questions.

We actually covered all of the questions that I had from the web. So Carl if there are no further questions, is that still the case?

That is still true sir.

Okay, great. Then I'd like to say thanks to all of you for participating and for your interest and for your patience. We are thrilled with the kind of numbers we've been able to throw up on the board. We hope to - and as we - with the percentage is still the same, the numbers will grow in a good way. We'll keep at it. Thanks everybody.

Thank you everyone.

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