Nephros, Inc.

Good afternoon and welcome to the NEPHRO's second quarter 2023 financial results conference call. All participants will be in listen-only mode. Should you need assistance, please signal your conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Kieran Smith. Please go ahead.

Thank you. Good afternoon, everyone. This is Kieran Smith with PCG Advisory. Thank you all for participating in NEPROS' second quarter 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 NEFROS. I encourage you to review NEFROS'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 future results include, but are not limited to, Nefros' 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, the success of its commercialization efforts, and the effect of existing and new regulatory requirements on Nefros' business and other economic and competitive factors. The contents of this conference call contains time-sensitive information that is accurate only as of the date of the live call, today, August 9, 2023. A 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 Nefros' Chief Executive Officer, Robert Banks. Robert, please go ahead.

Thank you, Kieran, and good afternoon, everyone. I'm very pleased to welcome you to my first earnings call as Nefros' CEO. I accepted this position based on my recognition of Nefros' potential to be a dynamic, profitable, fast-growing company, as well as my confidence in my abilities to help get it there. I'm pleased to report that in the three months I've been with Nefros, none of that has changed. I will begin with a couple of key financial highlights and follow with a few remarks about the present state of Nefros and our future direction. First, I'm happy to report that second quarter revenues were 3.5 million, a 24% increase over the same period in 2022. Looking at the year-to-date performance, the picture is even more compelling, with a 45% increase over 2022. I believe this significant growth demonstrates the positive momentum we have built and the value our solutions bring to the market. The growth is a healthy mix of both our core programmatic business as well as emergency response. I'm also quite pleased to report that we achieved positive cash flows in Q2 for the second consecutive quarter. We have diligently managed our resources and made strategic investments to support our growth initiatives while simultaneously ensuring financial stability. Another important metric that we monitor is the number of active customer sites, ACS, which increased to 1,427, a 6% year over year increase. It is important to note that although the number of sites has increased, our revenue grew four times faster over the same period last year. This indicates that we are expanding within our existing sales base. This land and expand strategy is a deliberate one. It is a very efficient way to grow by gaining a deeper penetration with the existing customer base, capturing more market share, and building stronger and longer-term relationships. Andy Astor will discuss other financial results in a few minutes. First, though, I would briefly describe my findings about the current state of Nefros. and highlight some of my early plans to drive the company forward. Over the past year, Nefros transformed itself from stagnant revenues, levels, and negative cash flows of over $1 million per quarter to strong revenue growth and positive cash flow. In the process, the company reduced its staff by 30%, doubled the size of its sales team, jettisoned two money-losing businesses, and retired all of its debt. We believe these steps have ready the company for fast and consistent profitability in the future. This progress was the result of the hard work and dedication of our talented employees and the mature, experienced leadership team. The company's unwavering commitment to excellence and its ability to adapt in the face of adversity have been instrumental in our journey towards recovery and growth. But we have much more work to do in our drive to build a high-growth, profitable enterprise. Looking forward, we plan to continue to invest in sales and marketing, both within the company and through our network of strategic partners who bring extensive relationships in our target markets. A great illustration of this concept is our partnership with Donestar that we announced in Q1, which is making excellent progress in building a sales funnel with national brands in the commercial markets. Another strategic focus for growth is converting customers experiencing emergency events, such as leachnella outbreaks, into long-term customers with a contractual relationship to provide ongoing revenue streams. These conversion programs have a great deal of focus within our sales efforts. In our core healthcare market, we have diligently evaluated our market position and identified specific segments where we believe Necros can truly differentiate itself. By targeting these segments, we can leverage our unique strength and deliver tailored solutions that meet the specific needs of our customers. This focused approach enables us to maximize our impact and drive sustainable growth. We acknowledge that our competitors have larger direct sales forces and greater market penetration, but we firmly believe that our superior products and our focused sales techniques will be catalysts for success. Our commitment to delivering high quality solutions with market-leading products is unwavering. We are confident that our differentiated offering will resonate with customers and allow us to continue to gain market share. I will now turn the call over to Andy Astor, our CFO. Andy, please go ahead.

Thanks, Robert. I will now provide a closer look at Nefros' financial performance in the second quarter. We reported second quarter net revenue of $3.5 million, a 24% increase over the corresponding period in 2022. Also, as Robert mentioned, revenues for the first six months of the year are up by 45%. Net loss from continuing operations for the quarter was 0.4 million compared to 0.7 million in the same period last year, Adjusted EBITDA in the quarter was negative 0.2 million compared with negative 0.4 million during the same period last year. Gross margins in the quarter were 59% compared with 49% in 2022, a 20% increase year-over-year. Research and development expenses in the quarter were 0.2 million compared with 0.3 million for the same quarter last year. and sales general and administrative expenses in the quarter were 2.2 million compared with 1.9 million for the corresponding period in 2022. Net cash provided by operating activities, that is positive cash flow, was 0.5 million for the six months ended June 30, 2023, compared to net cash used, that is negative, in operating activities of approximately 2.9 million for the six months ended June 30, 2022, an improvement of $3.4 million. Our cash balance on June 30, 2023 increased to 4.1 million from 3.8 million as of March 31, 2023. 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 will be found in our filing on Form 10Q, which has just been filed in the last few minutes. And I will now turn the call back to Robert for some closing remarks. Robert, please go ahead.

Thank you, Andy. In conclusion, The second quarter has been a period of significant growth and progress for NetGros. With a 24% increase in net revenue over the previous year, a 45% year-to-date revenue increase, and positive cash flow results, we believe we are well positioned for success. With a larger sales team, we will bolster our relationships. With our focus on our core strengths, we are winning in our targeted market segments. And with our renewed focus on distribution, we are able to increase the penetration of our superior products across larger market segments. These strategic moves and my drive towards accelerating growth give me a great confidence in our ability to sustain this momentum and drive the growth you expect from us. Thank you for your continued support and confidence in Nefros. We look forward to updating you on our future achievements and continuing to create long-term value for our investors and stakeholders. Operator, please open the call for questions now. Thank you.

We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. Once again, that was star then 1 to ask a question.

And at this time, we will pause momentarily to assemble our roster. And our first question comes from Thomas McGovern of Maxim Group.

Please go ahead.

hey guys thanks for taking my question and congrats on the quarter so just to get into it you know you guys mentioned that you know the revenue came from a combination of some of your core sales as well as emergency sales it's wondering if you'd be willing to give us a breakdown of you know what percent came from emergency and what percent came from those recurring core business and then kind of building off of that you guys mentioned that one of your focuses has been converting those emergency sales into recurring clients So I was just kind of wondering, you know, maybe high level, approximately how many of those have been converted and then kind of, you know, how you guys go about doing that. Thank you.

Sure. This is Andy. I'll answer your first part of your question, if that's okay, Robert, and then pass it over to you for the second half. Excellent. We don't describe the precise... percentages or proportions of emergency versus programmatic revenue, we never have. We do, I will tell you that over the long term, it averages about 15%. And when it's exceptionally large, we often will say we did have a big boost like we did that in Q1. But the fact that we're silent on it means that it's, you know, within some reasonable distance of normal.

and um so that's all we'll say on that i'll turn it over to robert for the second part of the question yes thank you andy and thank you for the question and and you said it exactly correctly by sharing best practices in ways that we have been successfully converting that emergency response to programmatic business we're getting the entire team up to speed on how to do that and typically when you have an emergency response you order a fair amount of supplies resources and items to mitigate the situation, and those last for some time. So when looking back just one quarter, we still are working off of that emergency response supply base, and then we are looking forward to converting those into long-term contractual businesses. It's a great way for us to grow. We have the established relationship, and it has been, in my eyes, fairly successful so far in the concentrated efforts in those regards. So I look forward to some more growth resulting from that part of our business. Thank you very much.

Great. I appreciate you guys taking my question. I'll hop back in the queue. Okay.

Thank you.

Once again, if you would like to ask a question, please press star, then 1. And our next question will come from Robert Smith of Center for Performing Investing.

Please go ahead.

Hi. Good afternoon, and thanks for taking my question. Robert, what is high growth in your terminology? And do you have some targets that you can share with us, any kind of three or five-year plan?

Yeah, thank you for the question. It's when I look at high growth, I can't project what that's going to mean or what that's going to equal in macro speak. I can look backwards to what I've done in the past in prior roles. And I do expect growth to continue along those lines. And where we are today, what you're seeing reported in the results released publicly just now, I would constitute that as high growth.

All right. That's reasonable. And so you're spending R&D at about a $800,000 annual rate. Where are those dollars going now? I mean, that's the lifeblood of the future, is it not?

When we have a company such as ours in this space with the clearances that we have required, there's a number of regulations that come up that we have to maintain a certain amount of effort to keep up with those and keep our products compliant. So a good portion of the spend goes along that as well. Andy, if you can speak historically on where some of those spends have gone, that may give some more color to the answer to that question.

Sure, I'll be happy to. Robert, nice to hear your voice. Thanks for the question. We are, you know, we're a relatively small company. We're about 30 people right now. And as you know, we've jettisoned a couple of areas of the company where the revenue growth just wasn't coming as quick as we wanted it to. So what's left is a company that's, you know, all I can use is last year's revenue. We're running at about a 10% R&D, somewhere between 8% and 12% of R&D expense. And I think that's appropriate. To say it's the lifeblood of the company is certainly true, but that doesn't mean that we should spend too quickly. And I think that we're in a phase right now where cash flow positivity is the most important thing and a march towards profitability supported by revenue growth and careful cost management. And so I, you know, what we're spending the R&D budget on is filters, filtration systems, which is what we do for a living. And I think that the number is right about where I'd like to see it. All right. Thanks.

How is the Chipotle relationship going?

Terrific.

Okay. Well, that's a great word. I'd love to hear it. All right. Thanks very much. Good luck. Okay. Take care. Thank you.

The next question is from Ralph Weil of R. Weil Investment Management. Please go ahead.

Good to talk to you, and good quarter. You have a long-term relationship with Medica, where there's some – end of it, I think, in a few years. Could you comment about the relationship and what your restrictions are or what your goals are and what you're doing to perhaps extend that so that we can just have an easier time going forward?

Yeah, great question, Ralph. If you'd like, I'm going to answer the first part of that, the qualitative part. And to whatever extent we are possible, I'm going to ask Andy to fill in the quantitative part. When I first started and I examined our supplier base and where we get our materials for critical and key components, this was one which got most of my attention. And I'm pleased to say after visiting with them and building a relationship with their current CEO and also their president, I feel more comfortable than ever that we have a very solid partnership And I have no doubt that we will continue that, and we both have mutual interests going forward. So all of my initial concerns are no longer there, and this is a very healthy and happy situation to be in. And Andy, if you may comment on any of the dates or the other parts of Ralph's question that you might be working on as well.

Sure, happy to. Ralph, hello. Yes. We are... You are correct. The Medica relationship, as it's currently written, the agreement expires on 12-31-2025. As Robert noted, he and I made a trip to Medica just a couple of weeks ago and had an excellent set of meetings with, frankly, the whole leadership team there. And we are quite confident that that will be extended. And while I can't say more than that, I'm not losing any sleep over it. And we'll have more to say on it probably next quarter or the quarter after that.

OK. Thanks for that answer. And can I just elaborate a little on my old friend Bob Smith's question regarding Chipotle? You say that it's been so long. Bob, good to hear you on the phone. You say that it's been terrific. And, yes, you've been into Chipotle now for quite a number of months, and I'm thrilled to hear it's terrific. And I hear what you're saying, that your relationship with Donna Star is great. And I also realize that in the past you said some things about expecting commercial business, and it didn't come, so you're gun-shy. But can you just elaborate a little bit on what we might expect from the commercial end?

Sure. I'd be happy to. So in my background, working with partners and developing that channel to market is somewhat of a specialty of mine. So I fully engaged with leadership within that company and developed a pipeline, which is very, very healthy. The pipeline is key because you expect a certain amount of wins from that pipeline based on your effectiveness of closing deals. And what started out as somewhat anemic of a pipeline is now extremely healthy and will support the growth targets that we have going forward. And we are starting to see some very good traction in that regard. When we are looking at the commercial space, it's somewhat of a growth issue where we started to expand very fast and had to wrap up our supply chain to keep up with the growth that we were seeing. So when Andy says terrific and good, he's kind of hinting at those words. We are seeing the growth that we desired, and it's on a track that is quite pleasing in my regards. But we will see what happens and report more on that in the future. But my expectations know that we are going to continue on a path that is good. Aside from giving you more specifics than that, I hope that gives a little bit of color and flavor to the relationship where it stands today.

Okay, thank you. This concludes our question and answer session.

Conference has now also concluded. Thank you for attending today's presentation and you may now disconnect.