Nephros, Inc. (NEPH) Q4 2019 Earnings Report, Transcript and Summary

Good day, and welcome to the Nephros Incorporated Fourth Quarter 2019 Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Kirin Smith with PCG Advisory. Please go ahead.

Good afternoon, everyone. This is Kirin Smith with PCG Advisory. Thank you all for participating in Nephros’ full-year 2019 conference call. Before we begin, I would like to caution that comments made during the conference call by management will contain Forward-Looking Statements regarding the operations and future results of Nephros. I encourage you to review Nephros’ 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 the date of the live call today February 27, 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’ CEO. Daron, please go ahead.

Thank you, Kirin, and good afternoon, everyone. Welcome to Nephros’ 2019 full-year earnings conference call. I will begin the call with a brief overview of our year, provide a corporate update and then I will turn the call over to Andy, our COO and CFO who will give a deeper dive into the results. In 2019, the engine that we have building over the last couple years has started to run in all cylinders. Total revenues for 2019 were up approximate 82% for 2018. We saw nice growth in our base business and we are also fortunate to support a growing number of pathogen outbreaks in the back half of the year. We continue to work tirelessly to support our value added resellers and end customers in our hospital business segment. We are seeing hospitals make great strides in their development of water management plans, which establishes their routine pathogen testing protocols, their practice the use of chemistry infiltration, and there was positive planning events in pathogen outbreak. We are in the process of launching our pro pass pathogen detection system through in person demonstrations webinars and with our hospital customers. Our earlier discussions are very encouraging. We have already received multiple purchase orders for systems that will deliver before the end of the first quarter. We have opened a new office to focus on the development and high throughput manufacturing of a clear patch assays. We currently offer our multi patch strip with 15 different patch and test in a single assay delivered on-site in less than an hour. We also offer mono patch strips that enable users to run eight different water samples in one test, targeting a single pathogen of interest. We envision that users can use the multi patch test to provide a broad patent screening and once the pathogen of interest is identified. The mono patch test can helps to quickly isolate the source of pathogen contamination which often stems from biofilm build up in one or more segments we building’s water type system. We can support the development of pathogen, building heat map in real time saving valuable time in the process of isolating treating [indiscernible]. We expect the prototype system to be used both as a tool for the routine testing prescribed by the water management plan, as well as to the real time support in outbreak situations. Near the end of this year, we expect to launch our sequel patch service, which will have the ability to provide full bacterial bio mapping of a buildings water system and it is used four hours. To provide this data, we will utilize both our portable PCI technology and portable gene sequencing technology to compare amplified bacterial DNA plus a database of over 20,000 different bacterial families and species. To our knowledge, this will be the most extensive on-site real-time bacterial testing available anywhere in the world which will be truly cutting edge. The dialysis segment, we continue to see our EndoPur footprint growing slowly as the customers realize deployments of improvements possible for better flirtation. We expect this segment to grow - this segment to get into a slow and steady growth. In the second quarter this year, we expect to launch our DialyPath assay, which will focus on gram-negative bacteria, and providing thousand clinics with a real time estimation or endotoxin levels. The endotoxin task is a standard assay in the dialysis world to confirm the dialysis will offer the safety use of patients. When clinics have tests that show higher than certain levels of endotoxin, they may need to shut down until we disinfect the water system and prove their levels have returned to those required for patient safety. A real-time endotoxin assay has the potential to save days to week, depending on the level of contamination. Today, we are in the final stages of validating the correlations of the DialyPath assay the standard endotoxin assays performed inc centralized laboratories, we are excited about the potential to provide a real-time endotoxin measurements tool. We expect the DialyPath system to be used primarily in support of clinics that need to rapidly solve their contamination events. In our commercial segment, we continue to see steady demand for products in the quick service restaurant, convenient store and hotel markets. We will soon be launching additional products that can provide replacing filters for more [indiscernible] types, opening up additional segments to market for our filters. We continue to pursue large chain for long-term supply contracts to grow our base business. In regards to the second generation hemodiafiltration product being developed in our SRP subsidiary, we are completing formative testing of the systems and will hold formal design freeze meeting soon. We then will manufacturer first batch of final formula and initiate our verification validation testing. Currently, we are on past to [indiscernible]. I will now turn the call over to Andy for our financial review.

Thank you, Daron. I will now provide a look at our financial results for the fourth quarter and for the full-year ended December 31, 2019. First off, as is my habit, I’m very pleased to report our 14th consecutive quarter of year-over-year net revenue growth, with an average growth rate during those 14 quarters of 63%. Nephros reported net revenues in the fourth quarter of $3.2 million, compared to $1.6 million in the same period last year, an increase of 96%. For the full-year, net revenues were $10.3 million compared to $5.7 million in 2018, and 82% increase. All of these results exceeded our revenue guidance for the year. As a reminder, we recognize two different business segments water filtration and renal product. Revenues I just described were all generated by the Water Filtration business segment, which has also hit an important milestone here in the fourth quarter, and shooting positive net income for the first time, which was $135,000 compared with a net loss of $147,000 in 2018. For the four year Water Filtration showed a net loss of 1.6 million, down 32% from 2.4. million in 2018. Adjusted EBITDA for the Water Filtration business segment was 648,000 in the fourth quarter, compared with 136,000 in the same quarter 2018. Adjusted EBITDA in the Water Filtration segment for the full-year was positive 281,000, compared with negative 861,000 in 2018. Please refer to today’s press release for more details about the calculation of adjusted EBITDA and it is reconciliation to GAAP net income or loss. On a consolidated basis, net loss for the quarter was negative, I’m sorry, net loss for the quarter was 144,000 compared with 664,000 in 2018 of 78% improvement. And for the full-year net loss was 3.2 million a small improvement from the $3.3 million net loss in 2018. Consolidated adjusted EBITDA in the quarter was positive $376,000, compared to negative 256,000 in 2018. For the full-year, consolidated adjusted EBITDA was negative 1.2 million, a 30% improvement compared with negative 1.8 million in 2018. Cost of goods sold in the fourth quarter was 1.3 million, compared with 0.7 million in 2018 and increase of 92%. Cost of goods sold for the year was 4.3 million, compared with 2.5 million in 2018, a 71% increase. Gross margins in the fourth quarter were 60% compared with 59% in 2018. Gross margins for the year were 59%, compared with 56% in 2018. And we expect future gross margins to continue in the range of 55% to 60%. Research and Development or R&D expenses in the fourth quarter were 0.8 million, compared to 0.5 million in 2018 or 14% increase. And R&D expenses for the year were 3.1 million, compared with 1.5 million in 2018 an increase of 101%. Depreciation and amortization in the fourth quarter was $44,000, compared to 40,000 in 2018 a 10% increase and for the year, depreciation and amortization expenses were 186,000, compared with 163,000 in 2018, a 14% increase. Selling, general and administrative SG&A expenses for the fourth quarter were 1.4 million, compared with 1.1 million in 2018, an increases 30%. SG&A expenses for the year were 6.1 million, compared with 4.5 million in 2018, a 35% increase. Our cash balance at the end of 2019 was about $4.2 million. As you may be aware in late January we also completed a common stock offering which generated approximately $6.7 million of net cash proceeds. I will wrap up my introductory comments today or my comments today with the subject of revenue guidance. We are anticipating revenue growth in the 40% to 50% range in 2020. With additional growth possible depending on the timing and growth slope of our pathogen detection products, and on the potential for larger scale contracts in the commercial sector. For the full-year 2020 then we are setting guidance at $14.5 million to $15.5 million. In closing, we remain excited with the momentum we have been experiencing ended our future growth prospects. We look forward to seeing many of you the national conferences this spring and at our annual meeting, which is scheduled for May 21st, that is May 21, at our offices, more details will be released soon. In the meantime, please free to contact Daron or me directly at information@nephros.com. This concludes our formal presentation remarks. I would again like to personally thank all of our stakeholders for your continued support. And I look forward to speaking with you all again soon. We take questions now, and also answer email questions as appropriate. Operator, please open the call for questions. Thank you.

[Operator Instructions] The first question is from Anthony Vendetti from Maxim Group

Thanks a lot. Yes, just wanted to talk a little bit about the guidance. Andy you said the $14.5 million to $15.5 million doesn’t include potential commercial side of the business. So that would encompass correct QSRs, hotels. Stuff of that nature convenience stores, correct?

I’m not sure I had put it quite that black and white Anthony. I would say that we are anticipating total revenue growth of 40% to 50%. And we think that if we get some breaks it can be higher, particularly juiced up by success in the commercial sector and in potential growth in pathogen detection.

Okay. Maybe Daron more for you in terms of the color on the opportunity there. I know you mentioned on the last call. You have had some pretty extensive discussions. Is that still where is that or any comment that you can make on what that opportunity is or where it is at today versus the last conference call?

Yes sure. We are still in the process of working with these large companies that they are vogue and they move pretty slowly. The range of opportunities in sort of in the million range for year up to - multi million more than five million a year. Just you know the - of success with I have a long history of chasing these big contracts. So we just can’t really included in our risk away from, but if we get them at the step change. Multimillion step change from the commercial side. And it is just - if we get them then it is as we kind of see as upside bonus, and if we don’t, we actually have a relatively nice growth path they will be more conservative, but not the step change capability. So we don’t know more than the other, it is ARPs. But we think we have got a pretty good shot to learn through these things.

Okay great that is helpful. And then in terms of the dialysis business the Hemodiafiltration. I think you mentioned if you are on-track with this the 510(k) there. Can you can you just talk about what that opportunity could be assuming clearance there and whether it is this year or next year. What is the opportunity in that space?

We think about it, if you look at Europe as example being 10 to 15 years ahead HDF about a little more than 15% of the market is HDF. So for U.S., if it is apply our model which is we are incentivized for current footprint HDF machines that provides a dialyzer to set and machine. If we had 15% of the U.S. market, that would be sort of $60 million $75 million opportunity for us. I would doubt that we are going to get there tomorrow. So our path is to get approval, get back in the market. Go back to some of the clinics that we laid before, work on making sure we fit in the procedures that are different intravenous, and rest of the dialysis community. And then create a easy button which we didn’t give last time, it wasn’t easy to use our system. So we have created an easy button that we are going to try to then get back in the market and then has some larger proportion of patients who on whom this works better than normal analysis. So I can’t really give any guidance on what we are trying to achieve. Every machine we place, if it fully utilizes $17,000 to $20,000 in revenue. And right now the HDF market, there is over 200,000 machines in place in the U.S. So that is give you a scope of what is possible. And it is all good stand on be aware to the difference proceeding and others decided to use the system and always patients.

Okay that is helpful. Okay great, I will hop back in the queue. Thank you so much.

Thanks Anthony.

The next question comes from Howard Halpern of Taglich Brothers.

Congratulations on the quarter and the year guys.

Thanks.

Thanks Howard.

Talking about the commercial segment. How large now is your sales team as you head into 2020?

Just on the commercial side, it is really just a couple of people if it is a small operation.

And you would talk a little bit about I guess manufacturing of the strips and stuff. Is that in the U.S. or is that local?

It is in the U.S. it will be - yes go ahead Andy.

Go ahead Daron.

Okay. It is in the U.S., it will be in Nevada, which for a variety of reasons makes sense. And so we are building it there and yes, we will be doing it ourselves. It will be a local U.S. based operation.

And I may be jumping ahead. But is there a potential to consistently add to the number? I think now it is like 50. But could you add additional tests different packages?

So, if you think about what I talked about the sequel patch. I ultimately what we envision is going into a building and whether it is because some insurance company who is reentering the building who wants to see what is there, or if the building engineers want to see the full biome which also is kind of scary to think about. If you can see what exactly lives in that my price. But we can go and do that. And then each system might have its own biome might have its own problem about. And so easy to envision a fuse out. We come in, do a sequel path we have a heat map full biome testing the building, to figure out where the problems about that building and have a custom strip. And these riskier assets you to somewhere off the shelves somewhere stepping and read the papers. But it wouldn’t be hard to make any given essay once you have the bacteria verified because of this DNA and then all the sequence. And so we can have custom strips first site, so they can track their own progress on getting rid of the bad boy bugs.

Okay. And I’m pretty sure it is important. But how important is the data once you actually start building this out as to for instance you do buildings in certain areas. You go to other buildings in those areas. Does that typically have similar pipes I guess or stuff in the pipes?

You end up with the base water source that might be similar it might have similar people levels or contaminants. But once you get in the building, whether the backhoe from Fifth Avenue hit the hospital and Fourth Avenue would be different dirt than the backhoe from the 27th Avenue. And we had the chances for building its own basis. So it is very likely that a single water supply a budget hospitals might have a similar starting place. For once the source of contamination wouldn’t just be the water price, it could be some of the other more localized source. And so each building truly will have its own biome.

Okay. And we do think, Howard, that there is value to the data. It is early days and we don’t know exactly what that looks like. But if we have got data on 1000 or 2000, or whatever number of sites, is there is information to be attractive there.

Okay. In terms of outbreak business, was that in the fourth quarter, and so far this year is happening relative based on the temperatures that we didn’t see.

It is interesting in question. We can’t really talk about this quarter in terms of results. But last quarter was a strong quarter for outbreaks because it was warmer than usual. Without going into numbers, this quarter has not been as strong as outbreaks. And you wouldn’t expect it to be because while the overall temperatures are a little bit warmer, it is still pretty cold outside. So we don’t tend to get a lot of outbreaks.

Okay, and one final one. Based on the revenue guidance that you put out there. And, how you performed in the fourth quarter, is getting to or getting too close to a positive EBITDA probable in 2020?

You know I try really hard not to get ahead of our skis in terms of projections. But what I would pointed to is risk. We have the water filtration business is 100% of our revenue. So that is the business that is our growth engine that exists today. That is not only EBITDA positive, not only adjusted EBITDA positive, but it is actually net income positive. So that business is on a solid footing to be profitable and to continue to increase its profitability. The other business is the PluraPath pathogen detection and SRP’s HDF business our development stage services, and we are going to take investments. And depending on how those investments go. The overall consolidated report is going to have to be, is a little unpredictable, but we are only investing because we believe that those businesses will be profitable in the future. So with that, I’m not going to answer your question.

Okay. I will say one final question to with PluraPath and the other one that you are developing too, are we going to see a series of papers or consulting reports come out based on immediate results with some of the early customers that you would engage with?

We would there likely not be producing any papers based on a specific customers sight and PluraPath. You notice that we don’t publish who our customers are for this water filters because if we are their emergency reasons, and there is other stuff going on, they don’t really want to call potentially that. There is a couple of press releases where we didn’t mention that this, the filter the came in and made it all work. But what we will be doing is publishing our comparisons of our own test internally to centralize labs to other sort of standards so that we can sort of show it prove our customers that it works. So we have already got one white paper out there for legionella will be adding more to that overtime so for each different pathogen that we have in the script and you will see it our validation test. And then for things like an adoption levels. So that is one that is very easy to do where we just test water in the lab and then also send it off in a centralized lab and not call it question to any particular clinic. So we will be publishing papers and things to customers can see the assays and how they work, but probably not calling particular customer out.

Okay. Thanks and keep up the great work guys.

Thanks Howard.

The next question comes from Michael Brick from National Securities.

Actually most of my questions were answered. But I just wanted to go a little bit deeper on a couple of things. On the commercial side, you said you had a couple sales people. Is that the type of business that you are going to have to grow by growing sales people or as a more leverage in the sense that, this signing up distributors and then they end up distributing and increasing it is client base?

It is a combination, Michael, hi, it is good to hear your voice. It is a combination. The core strategy that we have is to go after large national contracts that then referred to earlier. And that is a very, aggressive, very senior low number of persons, like one to focus on the industry and get the big accounts. We also are more than dipping our toes and going after local operations and then sort of working up from there. And that is the second one of those, which is less developed than the first. Would overtime be one that you would drag more people at. That would be more regional. But, I don’t think that the investment, I don’t want to over invest too quickly there, because we don’t have the reputation yet. We are starting to bring in regional people on the hospital side because we are number two in the industry and we are pretty-well known at this point. I don’t want to throw good money after that that sounds good at this point, but I don’t want to - not that well known yet.

Right, right. Just aside, we are talking about manufacturing. My understanding was stuff was manufactured in Italy. Is that going to be moving to the States? Or we talking about two different things.

Two different things. The medical filters that we sell in Italy. The commercial filters that we sell, we actually manufacturer here in Nevada, in Las Vegas, and the clear path pathogens detection materials that we were talking about, the essays themselves will be manufactured in Reno. Yes.

Got it. And I assumed the guidance for the year is, all filtration right. You are not counting anything else.

Well, we are hoping to have some positive numbers from some pathogens detection, not counting on anything significant from, we are not really counting on a great deal of revenue from either one, but we’d like both of those numbers to be somewhat positive.

Right. You were talking about the tests and the outbreaks and it was warmer the quarter be full and now is there any kind of seasonality around that. But, obviously the change whereas going from warmer to cold or cold to warm, does that have any sort of effect on those outbreak?

Well, we don’t have scientific answers to that, but I can tell you that looking at the data for the last three years, Q1 is always a slower rise or even in some cases a slight fall from the previous quarter, even though it is a great deal higher than acute one before that. So it does appear that there is some seasonality to the cold winter months. It is not a great deal of seasonality like Christmas for retail. But, there does appear to be some low. Exactly.

Yes. Cool. Thank you very much. I appreciate it. Congratulations again.

Thanks, Michael.

The next question comes from Bob Wassermann from Benchmark Company. Please go ahead.

Hey. Thanks for taking the questions, and congratulations on Just real briefly, I know that you have got revenue growth guidance in 2020. Can you give us a little color on the core business, shelter business? Are you looking for new sites, new facilities? Are you looking to sell more filters for each facility? Maybe a little bit color on how that breaks down.

Yes. The short answer is, yes and yes. We monitor closely, although we don’t publish. But we monitor closely, our sales from existing customers or increases through our existing customers, and also the addition of new customer sites. We are adding new customer sites at more than one throughout 2019, we added more than one per day on average one for business day which is pretty great. And at the same time, our customer retention rate was 94% as measured quarterly, which tells you that we are keeping our customers and indeed over the course of the year they accounted existing customers accounted for 62% of our revenues, which I think is a really healthy number. It is not that 98% which would tell you that we are not getting any enough new customers, nor is it 10% which means that we are losing customers, it is a good healthy sort of two thirds of our revenues coming from existing customers. The other color, I would give you, which is a little bit different than what you are asked about, is that we postulate that the reason is that we are becoming more known in the industry. But our response to outbreak business risks are increased 142% over 2018. So, that is another area and by the way, some of those are existing customers, but more of them are new ones. So, that, that tells that the reputation is out there and bringing new customers into the floor as well through to the outside response. Is that helpful?

Yes that is great. And maybe just a little bit on the trends are you seeing in terms of new customers are you seeing kind of growth in certain geographical areas. Are you seeing growth in certain types of disabilities or is it is an all cross the board.

Well, it is all across the board, I would tell you that we are strong in the New York metropolitan area, was strong in California, was strong in the Midwest. I think we could and when I say strong, there is plenty of room for growth, but I think we have got a pretty good base in those three areas. I think the southeast have good trend and the South Texas area. That with the whole southern belt could be stronger and we are going to work on that this year. But we have sold products over the last three years to all 50 states plus Puerto Rico. So, we are everywhere at least to some degree.

Okay great. Thanks again and congrats on good quarter.

Thanks Rob.

The next question comes from [indiscernible] Investment Management. Please go ahead.

Could you elaborate a little possible on the competition for floor path, how it is been done in the past and the pathogen detection and what a little more light on what your advantages are in your mind in terms of your price, and the time it takes. That is basically the question.

Okay thanks So, five years ago most testing for hospital water was leading our focus most primarily and done in lab. There was from PCR done and mostly it was closer place. Over the last couple years, PCR has been starting to use more as adequate stream, so you can get data and 24 hours. What we are trying to do is give you that data plus a bunch of above on site. There are other machines out there, they are trying to sell kind of similar concepts or starting to a couple others that have the same real time capabilities. What differentiates our system is that we are able to help compensate the a sample in a way that makes the assay more effective. So by using our filter which is similar to our HDF filter. We can take a leader to the standard sample size. And we can translate that into sort of 10 to 15 mils, of water scene along to step up and concentration. And then you take that sample after utilized it and put it in the machine and PCR generally gives you about sensitivity on education of the DNA. So really have kind of a [indiscernible] two base pairs, that would be in a liter of water. So the PCR itself is very surface, but you will find on-site, and it is a compensation step that I think a lot of other folks won’t have in their systems. So that would be our advantage. We also have this has gotten, we saw many years to really to have a lot of our books, hardly reading the essays and the strips focused on trying to make it a very valuable system. You don’t need a biology degree and maybe dealt for using. The point of view, if you look at the centralize you look at the other contests. We are right there. We have done a lot of research on seeing was what’s his last costs. If you buy 100 tests a week, your lab, your costs are pretty low. If you buy one, and they are pretty high, and we were kind of in the middle. And the pricing hasn’t been something that we have been pushed back on yet. And we will keep looking at that. Once you get to high throughput, manufacturing and customer flexibility, especially in the marketplace, but right now, you think who’s riding there. If you were do the same test, even through a simple ad for all the team, your price point 20,000 bucks and well below that. So I think part price wise, we are really be evangelize. We have a filter staff that gives us better sample prep. And then you always have a system that we think is pretty user friendly. And cost of goods will be known as the most effective way which doesn’t use open source platform for this machine.

Thank you.

You are welcome.

The next question comes from [indiscernible] Private Investor. Please go ahead.

Hey Andy, Daron good to speak with you again and congratulations on 2019.

Well done thanks.

Thanks.

I have two quick questions. The first one is in the new army budget that came out for request, thought a few weeks ago there is a line item for roughly a couple million dollars for the Nephros Water Filtration device for the soldiers. And I was curious if you are ready to respond to that and ramp up that filtration product as well as the cartridge fab, if that is approved by Congress?

Yes. So we have out licensed that multiproduct CamelBak. So as we sometimes see some of those some of those government publications CamelBak handle that and they have they work directly with our manufacturers to ramp up, and they have got plenty of capabilities to do that. So if that contract comes to fruition and CamelBak sales $2 million worth of filters and we will get it over to check a few quarters later. So we are there to help wherever we can for this if they have any support needed for that to came in process. From the specified 10k, Pat, we are really basing our opinions on the guidance numbers that FDA provided a couple years ago, on what do you file special, whether you file a regular or whether you don’t follow it all. And the way our assessment is that every change we have made, it doesn’t actually trigger FR at all. So they are almost final changes. But we sort of been that the conservative path would be to roll them together and put it in their special and submit it. And obviously as we get closer to that time. Will forgive in the call and we talk about it. But right now that the change that we have made don’t - if you follow the to the 510K guidance that the FDA put out in 2017. Nothing triggers getting triggers the following. And we have seen lots of companies put forth no 510k filing for as many as 33,000 little changes in the machine does none of the -and also change made trigger the FDA filing. So it is about the assumption, but we are going to validate the assumption that the FDA conversations and get submitted as we planned.

Excellent. Thank you and are you still shooting for submitting by summer of this year?

Yes, yes that is the plan. Guide pretty shortly and then it just plug itself through the end process.

Excellent. Thanks again, guys. Appreciate it.

[Operator Instructions] The next question is from [Indiscernible], Private Investor. Please go ahead.

Good afternoon, guys. Thanks for taking my call. I was going to ask about first of all in HDF and the timeline, but that was mostly just answered. And then my other question was about the weather, weather revenue for the water is coming from where the growth is, and what our footprint is across the country. And I think that was pretty much largely answered too. If there is anything you would like to add anything - you would like to add, obviously would be nice in the summer for the HDF. I mean, that is what a three four month window. Would be nice to have some of - I don’t know you guys want to get this done, get it out and get up ball rolling. But obviously, it would be nice to have a former day. But do you anticipate between now and the submission? Any hurdles that could put it further? Or do we have a pretty set timeline at this point where you are pretty confident you would be ready to get this thing about June-July time.

Once you have the design freeze, then it really is kind of a prototype processes. There is a set number of steps and a set pattern you have to complete. And it is just a matter of execution. We recently brought another individual on board his path past life was execution. So hopefully, in between the three of us will be working on that project that and then design firm that is important as well, that we can, into the process sometime. So who knows, So far we do have a, one of the molds they we made in China. Will that be a problem so far there working, there in their working right now, I don’t think so. But it would be nice to say that June 30th, we are done. And that is a timeline. We are all being focused incentivized to get it done and before the end of second quarter, if we stood by few weeks, that is the way science works. But we are, we don’t see any big surprises from between now and the following.

Going back before you guys tenure, there was the, they came up and saying, and I think we saw over the years, but obviously a partnership there that doesn’t seem like it changed so much, I’m not sure the current status of that one is that the potential with that company was pretty huge with the previous management before you guys this time. Everyone about companies that are in the commercial space I think we mentioned like 3M companies like that. Due envision any kind of partnerships where the companies like that going forward?

So Care Mark where actually is one of our bigger distributors here right now. It like many others, just took a while for the hospitals to catch up on doing a water management plans the right way which means they made a plan in general and then have testing and then have proactive filtration and proactive Tennessee. So, we work with came up every day, they are great, great partners. We are there to help them anytime again. The 3M folks, we are going to go ahead and enter those guys pretty soon. They have got Cuno filter and Cuno is, I don’t know if it is 40% of market may be less or some large numbers between Pentair and 3M they kind of own the commercial takeover scale space. And that is our competitor in the commercial space. So much like for like, five years ago when we were looking at the pause as the [indiscernible] 3M and Pentair. They are much bigger [indiscernible]. And as far as the stage goes, and but it is also much more fragmented customer set. And we are going to get our wins. So, I think the U.S. filtration market is 500 million plus. And there is also the world market and we are selling some stuff overseas now to personally. So I think that is, that is just one way. It is just have so, it just have a big market. And our product works pretty well and our pricing pretty good. And we are small. But as soon as we get in some fashion, you can see the dollar sign falls, and that becomes a pretty big business pretty quick.

Well, I just want to say, I have said it before, but coming from where we come from, like three or four years ago, I think you guys are phenomenal job and looking forward and saying what can happen in the next couple years. But thanks for allowing us to pick your brains.

Thanks.

Thank you. Thanks for all the support over the years

The next question comes from [indiscernible]

Daron, good results. I wonder if, since R&D is the one up faster than your revenues. Is that something you anticipate going forward, sort of increase, even faster than revenues?

No. That really was a bullish that we did last year, because we went from finishing all of our filtration development and launching products. In 2019, we relaunched the HDF program and when we launched them, we did a bunch of work on the system. So, much of that was externally focused expense. So, that is not a going to be continuous. The HDF expenses from the development side at least will be kind of curtailing once we filed a special, while some expenses will not be at same levels, when you are doing active development. And staying to the clear path is that, once you sort of start build and develop, build and develop then most of those expenses might actually show a shift in the COGS because the growth that we are going to get to make this high throughput manufacturing is going to be part of this. The cost of goods is being amortized. So, I don’t see the R&D - it may come down as we shift out to these projects into that stage.

Okay. So, most of it will occur in the first half.

Yes. And we have grown our R&D staff a little bit, but not as much as revenues. So, the checks we are writing to other firms to at least one-time events slow down and that will not exceeding growth rate of revenue.

Okay. Okay. Got it. Thanks.

Thanks for the support.

The next question is from Art Winston from Pilot Advisors. Please go ahead.

Great quarter guys. Thank you very much.

Thanks.

Great quarter guys. Thank you very much. In terms of commercial opportunities, could you describe the characteristics of what dose that would be as we to replace somebody, is the contract written in the same was as it would be written with that hospital, with the margins be higher or lower than on the hospital business? And is it the same? Do we need outbreak to make the business grow faster? So, could you just give a little [meat on the bone] as far as the commercial opportunities?

Sure. So, in the hospital space, there is a lot of white space, and by white, we mean the hospital isn’t using microbiological filtration at all. So, we have to both convince the customer that, it is useful to use microbiological filtration, and to customers that are tested by us. In the commercial space, it is all replacement, every machine out there in the world has a recommended manufacturer, very coke machine has [indiscernible] and scale, coffee, tea machines. So, these are all replacements. And so, we are just going to, it is important to be able to plug and play the existing manifold that is there. You don’t have to have that extra transaction costs. But it is a just a convincing that that is your focused good enough to meet their needs and make the sale. So, this isn’t trying to convince that new technology is useful or that is going to be different. It is just like more procurement than less.

So, we would sacrifice a little bit of profit margin to get into the first couple of places to replace.

You know surprisingly, the big guys I think have really large profit margins because we don’t see it being that different than a hospital space. Once you have made the sale. So, I don’t think we will have to get that far into the gross margin to be able to get our feet wet and do a big sale. It is really just, just the mentioning that a small company can do it, and, we are now just not -. Before we purchased a third group, they were a very, very, very small company. And now its partner for those who can be looking at much bigger and are able to talk to your companies and say bigger things. So, we don’t think it is an effective margin. We think our pricing is good and using visual because we have less infrastructure and matter of proving that we can we can provide them 3000 units or 2000 stores and what have you.

Are we close to our first sale yet?

It is kind of a little bit. So, we have gotten to the hotel chains, we have gotten a little bit pieces here and there. We have to haven’t yet gotten that extra million dollar contract for the rest of $4 million contract. I think we are in there. We never really got it but we think we should inch in our way there and we respect the clothes we are going to this year.

Just very quickly do you see this really a major league opportunity is going to be a big deal for the company?

Yes, when we purchase acreage of the whole intent was to increase our pace of revenue growth and revenue overall. And right now, if you look out two to three years. I don’t know which one will have the most revenue in the hospital and the total pass, detection system or commercial. I think our main commercial and surpassing will catch up there to catch the hospitals.

Is that technology or the filters any different from triple MMM or the other competitors?

Now underscore the scale slightly different, but not the core of this space is carbon and whether you use granularity carbon or use carbon blocks is bit more efficient, easier to manage, but it is all carbon, as carbon is all the things in water to make [indiscernible].

Okay. Thank you very much guys. Good work.

Thanks Art.

The next question is from [Jamie DeYoung from Gurdee Capital] (Ph). Please go ahead.

Thanks for taking my call this afternoon. Congratulations on continued strong growth for the company. Just to make it quick here. Do you have any exposure at all to products being made in Italy for your products?

We are the vast majority of our medical products are made in [indiscernible] which is of course an island off the West Coast of Italy. And there has not been any outbreak of the Corona Virus there at this time. But if the Corona Virus goes there and if it impacts the business’s ability to stay open, then it could influence our supply chain significantly since they are our primary supplier and we don’t really have a significant backup. Having said that we have over the last several months long before there was a corona virus. We have been increasing our stock above normal levels in anticipation of the spring break business and increase business. And in the last week or two we have made clear that we want to continue to get as much inventory as we can as a backstop against that. The truth is Jamie and by the way, it is nice to hear your voice on the call. The truth is if industry gets shut down, will get shut down along with the rest of industry. We are not exposed differently than anybody else who is getting product from overseas, or frankly, who knows perhaps even here.

That is helpful. But the specific parts that you are referring to that are sourced from Italy. That is a key primary component of what you are saying?

Yes, it is the primary component of our hospital business. No question. We actually added that risk to the 10-K just last week.

Okay great. That is helpful, I appreciate the transparency, let us hope that we don’t have that situation upon us. My second question is, could you just update us for the deal. What is now the fully diluted share count?

Alright. Just over 10 million and if you give me a minute maybe ask you, if you have another question. I will pull up that that number, but its 10.2 million or 10.3 million, something like that.

Okay that is really helpful. And then with respect to options are there options that would - what would be the next amount of options that would come into the money that would increase that share count and at what price?

No. The options, well, the share count that I just gave you was fully diluted, which includes, which means that all the options that are currently on the books are exercised.

I didn’t know if there was another tranche that within the exercise here in short order as I said we are having price.

You mean as the price goes up?

Correct?

People would people would exercise options, which would bring the share count up about the fully diluted share count up, right?

Yes. I was just looking to see if there is more shares that could come into the -.

The option pool. Actually, Jamie, I answered you quickly, just give me one second. I want to check one number for you. Make sure that telling me give me the full story here. The number that I gave the 10.3 million is growing to be inclusive of, the number is going to be inclusive of all options that I said already in our sights right now. So that is a good number. It is not a bad thing.

Thank you so much. I appreciate the progress and look forward to speaking with you. thanks so much. Bye-bye.

Yes. Me too. Take care.

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