Nephros, Inc. (NEPH) Q4 2023 Earnings Report, Transcript and Summary

Good day, and welcome to the Nephros Inc. Fourth Quarter 2023 Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the 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' fourth quarter and fiscal year 2023 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' 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 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, the impact of the COVID-19 pandemic Nephros' ability to successfully, timely and cost effectively market and sell its products and service offerings, the rate of adoption of its products and services, by hospitals and other healthcare providers, success of its commercialization efforts, and the effect of existing and new regulatory requirements on Nephros' business 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, March 7, 2024. 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 Nephros' President and Chief Executive Officer, Robert Banks. Robert, please go ahead.

Thank you, Kirin, and good afternoon, everyone. I'm very pleased to welcome you to the call. Today, we reported the fourth quarter and full year results for 2023. It was an amazing year for Nephros, and we are all very proud of the results. We welcomed the new Executive Leadership at the CEO and CFO levels, we were cash flow positive for the full year 2023, and we finished with a very impressive revenue growth of 43% year-over-year. Nephros has always worked hard to consistently serve our customers with quality products, and to be on time, to meet emergency needs 24/7, any day of the week. Through a series of delivery, and transformative operational improvement with the supply chain, partnership development, and the expansion of our sales force, we are now realizing a new level of growth potential, but I'd like to thank the Nephros team, for their commitment and hard work to drive these great results. Let me share some of the highlights for market moments. First, we capitalized on the execution of new distributor agreements, to more strategically develop relationships with only our strongest partners. In turn, several of them saw record growth levels in 2023 as they utilize their respective infrastructures, to deliver our leading technology throughout a variety of customer markets. Of particular note, are the partners who water-related services provide an important gateway to filter sales. The strong relationships with key decision makers have offered us new opportunities to penetrate large segments of the market very quickly. Second, growth is good, but growing profitably is great. We looked at several areas within our operations then identified and resolved issues, which contributed to losses. One such area targeted for improvement was an inefficient off-site storage footprint. This challenge, was made more acute by our significant growth, which resulted in exceeding the limitations of our product inventory space. In response, we opened a new facility with a much larger warehouse in Q4. This new space allowed us to consolidate sites, while expanding our overall footage. I would like to commend the team in this huge step towards operational excellence, because we accomplished the move, while simultaneously achieving solid growth numbers. Although it wasn't easy, it demonstrated the commitment, and strength inherent in the DNA of our relatively small team. The third point I would like to highlight is the publication of the new ASHRAE 514 standard from August of last year. This new guidance addressed the microbial hazards of multiple pathogens, along with the physical and chemical hazards. The release of this information has already spurred greater demand for Nephros' solutions as these are more stringent guidelines regarding waterborne, pathogen, litigation, required technology that is not widely available. This is proving to be a great opportunity for Nephros, given the FDA 510(k) clearance of our infection control filters as Class II medical devices, which satisfies the exact recommendation detailed in the guidance. The growth in our infection control product line is truly a result of high performance throughout the year in our sales, engineering, quality, operations and marketing departments. We finished the fourth quarter with sales up 27% over the same period in the prior year with $3.3 million in revenue. This growth capped the year where Nephros reached an impressive $14.2 million in total revenue, 43% growth over 2022 revenue. As we accomplished this with an impressive improvement in EBITDA, which my CFO, Judy Krandel will cover next in financial section of this call. Judy, please go ahead.

Thanks, Robert. I'm very pleased to have joined Nephros and look forward to help build a terrific company, and fast-growing business. I will now provide a closer look at Nephros' financial performance in the fourth quarter. We reported fourth quarter net revenue of $3.3 million, a 27% increase over the corresponding period in 2022. And for the full year 2023, net revenue was up 43%, to $14.2 million. Active customer sites were 1,285 as of December 31, 2023, as compared to 1,234 as of September 30, 2023, and 1,172 as of December 31, 2022. Net loss from continuing operations for the quarter improved to $654,000, compared to $719,000 in the same period last year. For the full year 2023, net loss from continuing operations improved to $1.6 million, versus a loss of $4.3 million for 2022. Adjusted EBITDA from continuing operations in the quarter, was a loss of $51,000, compared to a loss of $460,000 during the same period in 2022. For the full year 2023, adjusted EBITDA from continuing operations marked a huge improvement, with a loss of $76,000, versus a loss of $2.4 million in 2022. Gross margins in the quarter also increased to 62%, compared with 59% in the fourth quarter of 2022, an improvement of three percentage points. For the full year 2023, gross margins increased significantly to 59%, versus 47% for 2022, a 12 percentage point improvement, from the prior year. Research and development expenses in the quarter were $208,000, compared to $359,000 for the same quarter in 2022. For the full year 2023, research and development expenses were $873,000, versus $1.3 million in the prior year. R&D expenses were lower, due to the wind down in 2023 of our SRP business and consequently, a reduction in SRP-related research and development expense. Sales, general and administrative expenses in the quarter were $2.4 million, compared to $1.8 million, for the corresponding period in 2022. For the full year 2023, sales, general and administrative expenses were $8.9 million, versus $7.6 million in the prior year. The increase were primarily, due to expenses from the ongoing expansion of our sales force and other revenue-generating activities. Net cash used in operating activities was $234,000 in the fourth quarter of 2023 and net cash provided by operations for the full year 2023 was $827,000. This is compared to net cash used in operating activities of $193,000 in the fourth quarter of 2022 and a $3.2 million used in the full year 2022, an increase of $41,000 for the quarter, an improvement of $4.1 million for the full year, respectively. Our cash balance on December 31, 2023, was $4.3 million, compared to $4.6 million as of September 30, 2023, and $3.6 million as of December 31, 2022. We continue to be debt-free. 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. Additional information about our results can be found in our filing on Form 10-K, which we will file in the coming days. I will now turn the call back to Robert for some closing remarks. Robert, please go ahead.

Thank you, Judy, and thanks, everyone, for joining and your continued support of Nephros. I'd like to specifically thank the Nephros employees, our partners and our customers who have remained with us on this journey, and contributed to these wonderful results. This concludes our formal presentation remarks. We will now take questions from the audience. Operator, please open the call for questions.

[Operator Instructions] The first question today comes from Nick Sherwood with Maxim Group. Please go ahead.

Yes. Good evening. My first question is, have you seen an increase in deal pipeline with ASHRAE? Can you quantify any changes in your deal pipeline with the new ASHRAE regulations?

Yes. Look, it's a great question, great comment, and I'd love to comment on that. So when we talk about the deal pipeline, and just a sheer number of opportunities coming in through to Nephros and the sales team, we definitely see a difference, especially around the mid-August time frame, when the ASHRAE 514 guidance was released. Mainly to this date, it's been a lot of education, people trying to understand what it means, how to comply and what will it take to, kind of give themselves the best chance of mitigating against the microbial packaging that, I discussed earlier. So in that regard, Nephros has been really stepping up, and being that educator and letting them know about various consultants, and how they can protect their facilities. As a result, usually when we can teach the customer how to do better, that often results in inquiries from the perspective of quotes. And I will also expect that to translate into visits. So, I've been quite pleased with the activity that's driven and what we expect it to continue to drive as the industry works to comply with this guidance. Does that answer the question?

Yes, that was a perfect answer. Thank you. And then one more question. Have you seen any significant trends in either order size, or customer penetration in the fourth quarter or in the first half, or I guess the first two-thirds of this first quarter of the year?

Can you give a little bit more flavor about what you're looking for from deal size or number of transactions or…

I guess, just specific would be average order size from your customers? Are you seeing any increases in that?

Haven't seen too much differences as far as the order size. This business does tend to be a little lumpy. So in periods when there's a lot of emergency responses, they tend to be larger immediate responses, things shipped right away. Other than that, there's been a fairly consistent pattern, peaks and troughs based on how long filters last, and when they need to be replaced. But have you seen a significant change in order size. So yes, I think that answers the question.

Awesome. Thank you. And then just my last question. Can you provide us any update on your agreement with Donastar and how that went over the fourth quarter?

So the agreement with Donastar was multiyear, wasn't - no changes expected, or made at this point in time. The commercial market and space in general, does take some time to penetrate. Many of the customers have existing inventory. So changing over to Nephros does take some time. We did just execute a new facility move, which we now have everything needed on the shelf ready to go. The Donastar is ramping up has a number of really great opportunities, and I look forward to them continuing to drive change. The impact I mentioned before, it does take a lot to move some of the big corporations, as they wait for filters to expire, before swapping out to a company. So good momentum there. I look forward to seeing that accelerate in the future. Nothing too exciting to report about that at this time, just chugging along as I would expect the commercial market to do so.

Awesome. Thank you so much for all that detail. I'll get back in the queue.

You're very welcome.

[Operator Instructions] As there are no further questions at this time, this concludes our question-and-answer session and concludes the conference call. Thank you for attending today's presentation. You may now disconnect.