Nephros, Inc. (NEPH) Q1 2019 Earnings Report, Transcript and Summary

Good afternoon, and welcome to the Nephros First Quarter 2019 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 this event is being recorded. I would now like to turn the conference over to Kirin Smith. Please go ahead.

Good afternoon, everyone. This is Kirin Smith with PCG Advisory. Thank you all for participating in Nephros’s first quarter 2019 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 that 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, the success of its commercialization efforts, the efforts on its business of existing and new regulatory requirements and other economic competitive factors. The content of this conference call contains time-sensitive information that is accurate only as of today – of the date of the live call today May 8, 2019. 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, everybody. Welcome to Nephros’s Q1, 2019 earnings conference call. I’ll begin the call with a brief overview of Q1 results and then talk more about the corporate update. I’ll turn the call over to Andy, our COO and CFO, and Andy will do a deeper dive into the operational earnings. I’m pleased to report that Q1, 2019 continued our upward path. Revenues were 80% over Q1, 2018 growth came primarily from our hospital and infection control segment, which grew approximately 78%. Andy will go into more detail on that. We do expect this growth rate to continue for the foreseeable future. In the first quarter, we focused on two primary things, one was to continue to expand our hospital footprint, and two was, to integrate the AETHER product portfolio into our company and start to pursue some of those opportunities in a different space. First quarter is a really good litmus test to see how our base hospital replacement business is growing. It’s – colder weather generally means limited number of outbreaks from bacteria. We responded to one size right at the end of the quarter, so, actually pretty clean quarter in that perspective. The 78% growth in hospital revenue reflects healthy expansion of our footprint through both the expansion in the number of filters at a given hospital as they add more ice machines, things for showers, their proactive protection strategy, as well as an expansion of the number of sites that use our products on a routine basis. We successfully migrated AETHER on to our infrastructure platform in the first part of the year. We added additional salesperson to better target the large convenience store chains and quick-service restaurants with AETHER’s carbon scale and [indiscernible] filters. We began to pursue 7 figure RFPs in the space and hope to be able to add step changes in our revenue growth in the near future. Over the next few years, we expect our commercial business will compete with our hospital business for being the largest segment of Nephros. The digital in the first quarter, we made great progress in solving the technical challenges provided – providing our water safety diagnostic product, we mentioned last earnings call. We also have been speaking with many of the experts in the infection control and remediation space to ensure that we understand how to best position this product into the current water safety management processes. Our diagnostic product integrates our expertise in filtration with latest real-time pathogen identification and quantification technology. Because we are often on the ground during emergency response situations, we believe we understand the needs of the infection control teams and how they operate in emergency situations. Our goal with the diagnostic tool is to provide water management teams with an appropriate level of information on multiple pathogens to make real-time choices that can impact how they ultimately care for patients, staff and building to try to treat. We see the building itself as a patient. Infection for professionals, employees, engineers need fast actionable data to help diagnose and treat their patients, the building. We intend to launch a product that we believe meets those needs and supplements the data they receive from the CDC Elite Labs are currently using, which provide the gold standard for pathogen identification and quantification, but they also take a long time to obtain results. So, shifting gears a little, the second-generation HDF product is progressing well under SRP. We expect to release our first batch of new machines this summer and begin the verification and validation testing. This is needed to put together – our 510(k), which we expect to submit by the end of the year. We do think that pending FDA review and guidance that we should be able to do a soft launch in early 2020 and get back to the market with HDF and help patients. With that, I’ll turn the call over to Andy for the financial overview.

Thanks, Daron. I will now provide a look at our consolidated financial results for the quarter ended March 31, 2019, as well as guidance about our expected revenues this year. I’ll also give an update on our plans to uplift to a national exchange, but I’ll begin with the consolidated financial results. I’m very pleased to report our 11th consecutive quarter of year-over-year revenue growth with an average growth rate of about 60% in those 11 quarters. As we’ve said consistently, we believe the steady revenue growth is indicative of Nephros’s strong product portfolio, increasing market awareness about brand, our deep relationships with partner companies in the field and the increasing number of regulations that require water testing and remediation. Nephros reported total revenues of $1.8 million for the quarter, this compares with $1.0 million in the same quarter last year, an increase of 80%. Product revenues represent about 98% of total revenues at this point, so, going forward, we just plan to report total revenues since the two are virtually identical. Cost of goods sold in the quarter was $0.8 million compared to $0.5 million in the same quarter last year, an increase of 49%. Our gross margins for the quarter were 56% compared to 47% in the same quarter last year. As previously reported, our gross margins in the first quarter last year were lower than usual due to a one-time inventory adjustment and a couple of other items. We expect future gross margins to continue in the range of 55% to 60%. Research and development or R&D expenses were approximately $0.8 million in the quarter compared to $0.3 million last year, a 162% increase. This R&D increase is due to investment in both our new water diagnostics products that we’ve discussed and Daron just updated us on, and on the second-generation HDF machine under development within our Specialty Renal Products or SRP subsidiary, which Daron also just talked about. Selling, general and administrative or SG&A expenses were $1.5 million this quarter compared with $1.3 million in 2018, a 19% increase largely due to headcount to support our increased revenues, which as I said earlier went up 80%. Our cash balance at the end of the first quarter was $3.6 million significantly higher than our cash balance of $1.8 million at this time last year. Based on our results in the first quarter and our strong sales pipeline, I’m pleased to reiterate guidance for 2019 revenues between $8.5 million and $9.5 million, which will be an increase of 50% to 65% over 2018. I’ll now discuss results from the Water Filtration business segment. As a reminder, we now recognize two distinct business segments within Nephros, Water Filtration and Renal Products. Water Filtration is 100% of our current revenues, which have approximately tripled over the last 3 years. Our Renal Products business on the other hand is a development stage business meaning no revenue. Net loss in the Water Filtration business segment was $0.9 million, an improvement of 31% compared with a net loss last year of $1.3 million. Adjusted EBITDA for the Water Filtration business was negative $0.5 million this quarter compared to negative $0.7 million in 2018, also a 31% improvement. As we discussed in our previous earnings call, the Water Filtration business segment showed positive adjusted EBITDA in the fourth quarter of 2018, and we do anticipate a return to positive adjusted EBITDA this year during 2019. Please refer to today’s press release for more details about the calculation of adjusted EBITDA and its reconciliation to GAAP net income or loss. I’ll now turn briefly to our uplift process. We are actively working on our previously announced plans to list Nephros on a national exchange, but I cannot give specifics. We are making good headway and we do expect to report progress in the near future. And it’s a brief update, but that’s about all I can say on this call. Lastly, we continue to present the Nephros story to the investment community and we plan to attend a number of upcoming events throughout the next month. I hope to see you all there. And this concludes our formal presentation remarks. I would like to personally thank all of our stakeholders for their continued support and look forward to chatting with you all again soon. We’ll take questions from the audience now and will also answer emailed questions as appropriate. Operator, please open the call for questions.

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Henry Link [ph] of Nephros.

Private investor. I must say, I think you’re doing a great job and you basically answered my questions, so I appreciate your work. Thank you.

Thanks, Henry.

Okay, thanks, Henry. Good to hear from you.

Yes.

Appreciate it.

The next question comes from Howard Halpern of Taglich Brothers. Please go ahead.

Congratulations guys on the great growth.

Thanks.

Thanks, Howard.

A modeling question, I guess, first, in terms of R&D and SG&A, is the first quarter the new baseline I should be working off of going forward with maybe an expected bump in during the summer months when you start putting the HDF machine out in the field a little bit?

So, in terms of R&D and SG&A expense, Q1 on SG&A, that’s the easy one, Q1 is always a little on the expensive side. So, I wouldn’t see it going up frankly, not sure it will go down a little bit or stay about the same, but it shouldn’t go up significantly. R&D – for this year give or take. For R&D, you’re seeing an increased spend on HDF and on the PCR, on the diagnostics product. So, I think as both of them new launch, you will – we’ll see a little bit of a bump there that, that could cross between R&D and SG&A. But I don’t think either of them are going to go up significantly anytime in the near future.

Okay.

I know it’s a little – little bit of a wishy-washy answer, Howard did that – did that answer your question, Howard?

Yes, no, I know, it’s going to migrate around this number give or take a little bit going forward.

That’s – okay, that’s a very concise summary.

Okay. In terms of, I guess, to educate me and maybe some others on getting into the, I guess, the convenience store side, you talked about RFPs. What is that sales cycle process and, how, I guess, did you just hire a dedicated person to seek out those RFPs? Could you maybe elaborate a little bit on the overall strategy and how that’s going to fit in going forward?

Yes. So, we bought a growing business and they’ve been chasing different RFPs, different companies for a long time. What we did was add a person to expand the bandwidth of that and do a lot more proactive work. There’s 500 different chains of quick-service restaurants and gas stations, large convenience stores that we’re going to address. We have no idea what each of their cycles are. So, we’re definitely in the early stage of learning. What we do know is, if they don’t know about us, they can call us or let us know that they’ve got one. So, we’re reaching out proactively to as many as we can, just let us know – let us know we are in that, we have replacement products for UltraPure and at some point in time and be able to meet their needs. We like to think that we’re a very customer service-oriented company that has good products and we’re used to going up against 900-pound gorillas. So, this seems like a space that we should know how to play, but ones we’ll learn a bit more about it.

Okay. And in terms of, I mean, you had one quarter, was there any progress made in actually selling into the hospital, selling the Nephros products?

Yes, actually it’s –

Yes.

Yes, it’s pretty – it’s actually a pretty easy sell, because there are many of them already have most of the UltraPure connection, whether it’s through a solid or through an UltraPure Filter. So, and it’s still like okay, great, just add it on to the bill, it’s pretty easy. So –

Okay. Well, keep up the great work, guys.

Thanks.

Thanks, Howard.

[Operator Instructions] The next question comes from Art Winston of Pilot Advisors. Please go ahead.

Thanks. Hi, Daron.

Hi, Art, how are you?

If the sales – good, if the sales going to be between $8.5 million and $9.5 million, how much of the sales would be a win fee, the traditional Water Filtration products that we’ve been selling to hospitals over the last year or 2, last couple of years?

I don’t think we break that out. I think in general we bought a business, it’s growing about the same pace we are. So, you kind of work the ratios back. We –

But we don’t know how much – what were the sales that we’re to start out with?

We’ve mentioned that they’re in that sort of less than $1 million, above $500,000, but that doesn’t mean it’s – it’s a wider range of potential because of the 7 figure RFPs, which we don’t see many of it in the hospital space. So, we can’t really tell you what we expect to end up, we know that there’s a range and we’ve got 10 fishing lines out and if we get 7 or 8 of them, it will be a really good year.

And in terms of the new thousand [ph] machines and products, any other new products that, that’s for 2020 as opposed to 2019, I would assume?

It’s really a 2020 launch path for that product, yes, and that would be a separate company effort. So –

Sure. Okay, thank you very much. Good work.

Thanks, Art.

Thanks, Art.

This concludes the question-and-answer session. I’d like to turn the conference back over to Daron for closing remarks.

Okay. As you can tell everybody that we’re – I think we’re in a really good spot. We’re well positioned for hyper growth. In those – 2015, 2016, it was hard time, but we’ve built a pretty good base on a pyramid and we’re going to the sky. So, I look forward to talking to all of you at some point in time if you have a chance to call and we’ll keep – try to keep the good work here. Thanks.

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