Nephros, Inc.

Good afternoon and welcome to the Nefros, Inc. First Quarter 2024 Financial Results Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero on your touchtone telephone. 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, Investor Relations. Please go ahead.

Thank you. Good afternoon, everyone.

Thank you all for participating in NETROS' first quarter 2024 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 NETROS. I encourage you to review necrosis 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, the impact of the COVID-19 pandemic, NEPHRO's ability to successfully, timely, and cost-effectively market and scale its products and service offerings, the rate of adoption of its products and services, the success of its commercialization efforts, and the effect of existing and new regulatory requirements on NEPHRO's 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, May 9th, 2024. 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 NACROS's President and Chief Executive Officer, Robert Banks. Robert, please go ahead. Thank you, Kerry. And good afternoon, everyone. Thank you for joining us to discuss the 2024 first quarter results, which we reported today. It has been an exciting start to the year. I would like to start by thanking the Nefros team for a job well done as our programmatic business grew 12% over the same quarter last year, despite the 5% drop in top-line net revenues. This top line decrease is attributed to a record non-recurring emergency order that was reported in Q1 of last year and an unusually low amount of emergency business in this past quarter. The collective result of these factors was a modest 8% overall growth over the prior quarter. Given the unpredictable nature of ER orders, we remain focused on operational prudence and disciplined deployment of capital. These actions positively complement the growth of recurring sales and further support our steady advancement towards solid financial performance. With an established foundation of programmatic business and customer loyalty, we are investing in the development of new capabilities to extend our competitive advantages addressing water quality and safety challenges. One example is the creation of an online filter tracker, which enhances the customer's experience of managing their NETFLIX filters. This tool offers automated replacement reminders and documentation of installations and inventory. And these features are just the beginning as NETFLIX continues to explore ways of generating value in the digital space. NETFLIX is also exploring how to best support customers in need of nano and microplastics MMPs as we seek to expand our future capabilities within our medical filtration lines. Our ability to retain microorganisms with the smallest pore size on the market uniquely positions us to address MMPs, particularly nanoplastics. Looking ahead, the future growth of nephros will depend upon the continuous enhancement of sales strategies. the leverage of changing regulatory guidance, and the exploration of new products. Accordingly, our sales team is actively supporting our national partners and nurturing their success through increased training, expansion with existing accounts, and conversion of emergency response to programmatic business. We have been participating in a record number of trade shows and regional industry events, generating significant brand awareness and visibility to our product capabilities. Netverse's presence also affords countless opportunities to educate key influencers and decision makers on the most salient regulatory changes and recommended solutions. The stakeholder connections cultivated in these environments inform customer frameworks and often lead to future sales. The last area I'd like to highlight before turning the floor over to Judy is the need for solutions that mitigate human exposure to nano and microplastics, NMPs. I read a new article almost weekly regarding the multiple health concerns related to NMPs, which are significant. The ability of MMPs to penetrate biological barriers and reach toxic chemicals can lead to cellular toxicity, inflammation, and damaged DNA. Our hollow fiber technology, which offers the smallest pore size on the market, enables us to provide filtration that may effectively retain MMPs. I will now pass the mic to our CFO, Judy Crandall.

Thanks, Robert. I will now provide a closer look at NetBros' financial performance in the first quarter. We reported first quarter net revenue of $3.5 million, a 5% decrease over the corresponding period in 2023. This decrease was primarily driven by decreased revenue from emergency response orders, which were unusually large in the first quarter of 2023 and not repeated in the comparable 2024 period. However, The decrease in emergency response orders was partially offset by increased revenue from programmatic or recurring sales, which were 12% more than the same period in 2023. Growth margins in the quarter were 62% compared with 57% in 2023, an increase of five percentage points year over year. The increase in growth margins was driven by reductions in shipping expenses and more favorable terms with our largest supplier. Research and development expenses were $200,000 for the first quarter of 2024 and 2023 respectively. Sales, general, and administrative expenses were $2.1 million for both the first quarters of 2024 and 2023 respectively. Net loss for the quarter was $169,000 compared to $306,000 in the same period last year. adjusted EBITDA in the quarter with negative $95,000 compared with positive $147,000 during the same period in 2023. Net cash used in operating activities was $672,000 in the quarter compared to net cash provided by operating activities of $276,000 in the same quarter last year. The use of cash primarily reflects the operating loss payment of 2023 annual bonuses, which always hit in the first quarter, and an investment in inventory to support future growth. Our cash balance on March 31st, 2024 was $3.6 million compared to $4.3 million as of December 31st, 2023. We continue to remain 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 will be found in our file in Form 10-K, which should be filed later today. I will now turn the call back to Robert for some closing remarks. Robert, please go ahead.

Thank you again for joining me and for your investment in this great organization that is so uniquely positioned to solve the toughest problems associated with water consumption. Additional thanks to each of our Nefros employees, our partners, and our customers, without which we would not be where we are today. I'd like to close by reiterating our enthusiasm for our future growth prospects as we continue to build on the momentum we have been experiencing. This concludes our formal presentation remarks. We will now take questions from the audience. Operator, please open the call for questions.

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're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then 2. Again, it is star than one to ask a question. At this time, we will pause momentarily to assemble our roster. The first question comes from Tomas McGovern with Maxim Group. Please go ahead.

Hey, guys. Congrats on the quarter. So, yes, let's start off with looking at the growth in recurring revenue. I'm just curious, how much of this growth in the programmatic sales is reflective of expansion within those key partners that you've discussed in the last couple calls versus acquiring new clients? Thanks. Thank you for that question, Thomas. It's about a good mix of new customers and growth in existing customers. We've been adding a record number of new sites this past quarter, and that's felt really good. So the programmatic business continues to expand. The strategy we've been quite effectiveness has been this land and expand approach. We would go in and we would acquire business in one part of the facility, and then as we get comfortable and know who all the players are, we expand to other parts. So that strategy has been pretty effective in two of the regions, whereas regions where we haven't typically had a lot of sales exposure, are enjoying a lot of growth and new customers. We're just getting to build those relationships and trust as we work with local partners and direct. What we have noticed is the existing business has not always been maintained and growing at the rate we expect. However, the new digital tool that I just mentioned will take a look and track if they've got 10 units that we're treating, did we change that filter 10 times in the prescribed period? And what we're finding probably 40%, 25% of the time, depending on what region we're in, they're not changing the loan required or requested. And that's not because it's done on purpose, but often they forget that the filter's installed, there's been no problems, and just missing their PMs, their preventive maintenance activities. So our goal, our task, is to make sure that we're not leaving anything on the business we've already done, so that we keep that recurring programmatic business going. while also adding new customers and expanding into places where we haven't been able to add our filters in the past. So the exact split between growth and new business versus new customers, difficult to track that based on some of the deficiencies in maintaining the programmatic business, as we mentioned, but we're going to get a lot easier in doing that when we add new digital tools. I just discussed a moment ago. Hope that answers that question and look for more to come on that business in the future. Absolutely. That's very helpful. So just kind of on the online filter tracker, just curious, you know, when you guys exactly launched that and have you guys already started to see that reflect in people kind of ordering these filters on time versus, you know, you've mentioned several times since we've been covering, but yeah, you know, a lot of times, whether it's because they're, Again, it doesn't sound like it's intentional. It's just they have a lot on their plate. They're focusing on their business and might not be ordering these as promptly as they should be. So have you already started to see a kind of shift? Have you seen that start to pay off, or is it too early to tell? Too early to tell. We are just in the beta phase. We are signing up with new customers, making sure we work out the kinks. And what we're finding is, oh, there's another feature we'd like to add. Oh, it would be good if we could do this. So we'll probably need to say it's done and move on at one point, but it's It's proven so exciting in different capabilities and things that we'd like to do to enhance its functionality. So it's really early in those phases. We've been talking about it internally for a few months, and we're just happy that it's finally ready to start launching and running that to customers. And we're starting to get those results now, but it's still in early phases. Gotcha. I appreciate that. And then my final question is on the NMP that you discussed in your prepared remarks. So are you guys currently servicing any customers for this express purpose of filtering some microplastics or is it something you guys have seen maybe, you know, industry demand for and you guys are kind of responding to and looking to kind of enter that space more aggressively as it seems to be a pressing issue? Yeah, this has been something that's come up fairly recently. And I read an article that said the average person consumed more than a credit card in plastics every week. And I just started to think about what can you do about that being a filtration company? There aren't regulations stating what the acceptable limits are in certain areas, and there's not really a driver other than people wanting to do the right thing when it comes to the damage that it can potentially do to humans. All this is still being evaluated and still under research. There's just a lot of gaps in understanding what it does long-term, the effects of human health, how it disrupts development and people and adults. So we are trying to get ahead of that. By taking a look at our technology, because it just uses size exclusion, we have a hole of a certain size, anything bigger than that hole doesn't pass through. So without any scientific thought there, we can easily remove NMPs because they are a larger particle size. But they are smaller than the average filter on the market, so they do pass right through. So because we have that smallest core size in the market, we're with that filter company to address these NMPs. And that got me really excited as a new opportunity that we need to explore. So we first have to figure out what are the holding capacities, how long would it last, where we recommend it. So we're building that information up. We'll get to the point where we can launch this as a solution that people can consider in lots of different markets. But if you think about the healthcare and hospitality market, There is the Joint Commission. There's CMS. There's ASHRAE. There's all these regulating bodies that tell them what's good, what's bad, and give suggestions. There is not that same guidance when we talk about schools, government facilities. So it's a different sell. It's a different, it's a push versus a pull. So, and we're ready to provide the products once we get all that with details worked out. So it's very exciting for us. You're going to hear more and more about it as things go along. I'm hoping that it represents a significant opportunity for Nefros.

Awesome. I appreciate you guys taking the time to answer my questions. I'll hop back in the queue. Thank you. The next question comes from Mike with a private investor. Please go ahead.

Good afternoon and congratulations on the quarter, guys. Great job. My question is Netflix has been selling to hospitals and health centers, of course, and you also just mentioned schools and municipalities, but there's also senior living centers and more that you started selling to even even before the nanoplastics possibility. Do you see this trend of increasing your TAM continuing? Well, Mike, it's a great question. I'm glad to hear from you. So, microcaps have been falling through those ventricles, and part of it comes from where we were born, getting our beginnings in the dialysis space and taking that technology and expanding it into patient care facilities. What you'll see when we start looking at the TAM of other places, schools, municipalities, senior centers, correctional facilities, government buildings, is they don't always have the same drivers that you're going to find in those healthcare facilities. I just mentioned a few of the regulating bodies, like the Joint Commission, the National, that follow and become greatly adhered to when we deal with those patient care facilities. There's not the same driver for a school, believe it or not, saying that you must provide this type or quality of water. But we do see that there are articles and documentation of where patients or students or inmates or whomever have been injured and lawsuits happen. So we do get caught in and can solve some of these problems. So I do see this continuing. I look forward to it being less of a push and more of a pull, as I was answering Thomas' question. But in the meantime, it's all about my team and the NEPRA team educating those who are dealing with ramifications when they do have those different contaminants and microorganisms impacting. Because our infection control products really are providing a great solution for those places that otherwise would have significant problems. Expanding that timeline fast is really good, and we see this continuing. It will be a source of driving new business in the future. Thank you for that question. Sounds great. Thank you. And one more question, if I could. Could you elaborate at all on the OEM agreements that you have that include metro filters, dialysis, or otherwise? Sure, sure. I can speak to that. I will have to be a little bit general and not mention names. Just out of respect, a lot of the OEMs are competitors with others, but when you're dealing with dialysis and people are using our devices, their FDA-cleared Class 2, they become something that is working to the clearance that device will obtain. So often we have to work in parallel for months, if not years, ahead of the launch of a particular product so that the solution, when introduced or released, it becomes something that is that you have to use a specific configuration in order to maintain the use case and the clearances that that device has achieved. So we have a fair amount of OEM agreements that are a pretty significant part of our business, and we're always looking for ways to improve how we're performing and delivering value so that those OEMs choose us for the next product revisions and also for the new product launches. They may have requirements that our filters cannot perform today. Maybe it's a size restraint or capacity constraint. So we're able to take and redesign, especially based on our smaller size, accommodate some of those needs. So we become a really favorable partner from the OEM's perspective. So those agreements are nurtured and treated extremely with high regard and importance and priority in our organization. And we have some great people on the team who are experts in what they do, whether it be dialysis or working in hospitals, and able to meet the needs of some of those OEMs. So thank you for that, and I'll give you the question. Thank you. I was going to ask a third question on the exciting nanoplastics opportunity, but you actually covered that already. So thank you very much, and again, congratulations.

Thank you. Again, if you have a question, Please press star, then 1. The next question comes from Ankur Sagar, a private investor. Please go ahead. Mr. Sagar, your line is open. Did you have a question? Or perhaps your phone is muted.

Hey, good afternoon. Yeah, sorry about that. Hey, good afternoon, Robert and Judy. Thank you for taking my questions. A good quarter. with growth on the programmatic revenue. Robert, you laid out a couple of, I think, good initiatives on the recurring revenue part, the filter. I think you renegotiated the contracts with the distributors to know where the filters are placed. And now this online tracker filter, where the customers would know when the filter needs to be replaced. If you can share any insights, any early insights that you have seen on how this can even help to accelerate the programmatic revenue further than what we have seen now, that would be great. Sure, sure. It's great insight. And we started looking at this a couple of months ago. And what we were noticing is the team is working really hard and it's closing a lot of new business And we're not losing customers, active customer sites stay pretty high, but yet we weren't seeing that recurring revenue. Our baseline was where we were starting from quarter after quarter, seeing lower and lower. So the numbers didn't add up. We started digging into accounts and figuring out where we sold filters and they've got a certain number of machines and they're expecting a certain amount of turnover. It just wasn't achieving that turnover. Well, as it turns out, nursing homes, for example, don't have big budgets and they could choose to leave them on for years before they change it out instead of three months or six months. And that's not good. Sometimes it's just neglecting and not having the staff to go find it and change it. More often than not, it's just forgotten about and not the priority when you've got short staffs and budgets going other places. So by having a reminder to be able to tell them that, hey, this was installed a certain time period ago, it is driving that change or should drive that change. That's the theory. And we have an offline tool where you can look at a spreadsheet and say, okay, we sold the filter six months ago, but often the response was, well, we didn't install it yet, or we installed it the month after we bought it. So it wasn't real clear. But being able to scan that QR code on that filter once it's put in place gives us the exact time it's installed so that we cut that gap and can more accurately and automatically tell what and when and where things are supposed to be installed so that we don't get the 75% or so that we're not replacing when they're supposed to be. And that's on the optimistic side. I'm very optimistic that we will get the growth and programmatic business that's reflective of the new sales that we're achieving on a daily basis. I'm not sure if that's exactly your question, but that's That's great. I agree. I think it's easier to sell through the five filters in the existing installations that you have than to just sell five brand new devices from scratch. So that's great. Good to see that. I think in the presentation that you had at the conference, the plant microcap conference, I think you laid out a few initiatives for growth. And I think there's a bunch of them, microplastics you mentioned, new devices. And then there was commercial, there could be even some foreign distributors. If I could have you probably summarize and go through at least the three top initiatives you think that you're working on currently, and that could help for this year's top line, that would be great. Okay, no problem. That last phrase that you put in there, for this year's top line, I was going to say, for the growth of this year's change, whether you're talking short-term or long-term, However, the short term, or this year and past, I expect this digital tool to really be a driver. And it's not because it's going to bring in new customers, but for the reasons we talked about earlier of it not letting us forget about filters that we've already won. We did the hard work. We delighted the customer. We got the units installed. Why not get the filter changed out every six months? And by the way, if only FDA cleared for six months beyond that, we're not guaranteeing performance, although it doesn't just turn off at six months to one day. So I do think that this digital tool getting that in the hands of people that, like hospital officials, those who have a skin in the game when something doesn't go as planned or expected to drive that programmatic change out on a recurring basis. Next, I think that this cross-selling where we are, maybe we're in there taking care of the ice machine. Well, we also have sterile processing products, and that's a big part of the hospital's standard filters as well, or bubblers, water fountains, showers, sinks, inland filters. There's just so many different applications, and typically you just bought into a facility for one application. So that cross-selling or land and expand strategy is going to be probably the second bigger driver And then nurturing our partners and distributors. So it's getting out to these events, speaking at conferences. I will be at APEC in a month or two. We've got the ASHE conference coming up in California in July. These are big national events. We get all the infection control people. We get the members of the conferences and the responsible parties at these facilities for maintaining infection control protocol water management programs. Those are the people we're going to have to educate on the new guidelines that come out, the new technologies available, and mitigation strategies against pathogens and other things that impact the infection control states. So, if you ask what the top three are that will have an impact this year, I would take those three. But as you noted, there are others, too, that were discussed during the climate microcap adjustment conference as well. Yeah, that's great. One last one regarding the gross margin. There was a nice gross margin improvement. Do you expect that to continue from that, you know, shipping, you know, gross margin side that you captured? Do you expect that to continue for the rest of the year? Yeah, I'm going to let Judy handle that question. I have my own thoughts, but she's been digging into it pretty deep. Judy, do you want to?

Yes, I'm sorry. Could you repeat the question again? For some reason, it didn't come clear.

From a gross margin standpoint, Judy, I think the gross margin was higher. I think about 62% compared to last year's quarter. So do you expect that to continue throughout? Do you expect to keep that gross margin or the shipping will fluctuate?

Yes. Okay. And thank you for repeating that. It just didn't come clear. So we were very pleased with margins. Our shipping expenses we've been managing very carefully. They were unusually high during the COVID period, but we've been working very hard managing air versus sea shipments and working through that. So we feel right now, without sort of an economic increase overall in shipping expenses, we feel pretty good about that. The negotiations and the better terms with our supplier, that's something that continues. So ultimately, our growth margin is affected by our mix of business slightly. Certain larger customers may have a different discount here, but we feel pretty good about maintaining relatively strong margins like this. We'll see quarter-to-quarter of the decent fluctuations, but I don't think this is just such an anomaly.

Okay. The next question comes from Nick Farwell with Arbor Group. Please go ahead. Judy, may I follow up on the last gentleman's question?

You indicated that gross margins might be sustainable for a couple of factors. One of them is better terms from your supplier. Is that in part or reflected in any way? Did currency have an impact either to your income statement or balance sheet?

Thank you for the question. No, currency has just a modest negligible effect. When we renewed our contract with our largest supplier, we did do a good job of negotiating terms that were more favorable. We have a longer-term supply. They know our volumes are growing. So that really relates to the actual pricing of the finished goods products that we buy.

And I'm curious, given the base business grew 12%, to what degree does that, in your mind, reflect a softer economy or perhaps just a short-term perturbation? That seemed to, versus past history, seemed a little more modest than the normal year-to-year growth or sequential growth, seasonality, in the base business, not including the emergency response. Yeah. Hi, Judy. I'll take that question, if you don't mind. Hi, Nick. How are things going? Fine. Thank you for answering it, Robert. I appreciate it. No worries. It's a really good question and something I've been keenly aware and focused on over the past few weeks, if not months, coming up to the close of the quarter. And I've got probably three different attributions to guide that. My first response is, if you look at the number of hospital beds as indication of the performance of the healthcare or patient care market, that number's not growing. It's pretty stagnant, it's not lower. Which, in that case, the number of port services, whether it be ice machines, shower heads, and faucets isn't growing accordingly. So from that aspect, the market's flat. If you look at healthcare industry overall, it's only growing at 2%, 3% tops. So again, another indicator, and if you look at gross domestic product and other things. So when we hit a number like 12%, modest, yes, still far outpacing the growth of the industry itself. So I think we're kind of a victim of our own success because we've set up expectations of huge growth numbers, which we do expect to continue to grow in double digits. Just personal expectations, not anything we're committing to or guiding. But the growth, 12%, although modest, not something to be ashamed of. Another thing I would add is the winter months, the colder months, tend to be seasonally lower in sales. There had not been a lot of seasonality quite evident before, somewhat masked by that emergency response. But when I strip away the numbers and look just at that programmatic and core business, I do see a seasonality kick in quite clearly, and we're in the top of that. So those are the couple, three things I would say in response to the 12 percent number. It's nothing to be disappointed about from my perspective as far as the reflection of how low we're closing business. We are taking market share from our competitors, and we're not losing or bleeding customers on the back end. So I'm pretty happy from that perspective, and I look forward to still delivering at some numbers going forward. I'm curious, Robert, what is the mix between direct and your distribution, your various distributors? And does that shift have any impact on the higher end of the range of gross profit margins? When we look at our partners, distributors, we have far fewer than we did this time one year ago. And that's very, very intentional and deliberate. Those who are still with us are much more aligned with how we do business, the value story that we sell, the relationships in places we would not otherwise have a chance of touching. When you look at the small number of sales people that we have and the thousands and thousands of targets out there, there's no chance of us touching them all. So the distribution partners are essential. The trick is making sure they understand the value that Necros provides when it goes to solving problems for our different customer bases and facilities. So they're able to go in and sell the products and it's not a discussion about price. It's how fast can you get it when you've secured everything from the employee's shimmy and perspective. So they're commanding premiums over the alternatives. When we talk direct, often we are offering some type of discount. From a customer perspective, there isn't a lot of difference. From a margin perspective, it's slight. The volume of sales far outweighs the gross margin dollar, positively outweighs what we get up in having a partner there delivering the goods as well. So it's a good question. We always keep an eye on that mix. There's been no significant change one way or the other. To say that that's what's impacting that gross margin, it's more than items that Judy mentioned earlier. Yeah, so really I think I hear you saying that At the operating line, the sale through direct quote unquote versus direct is roughly the same. The gross margin may be different, but the allocation of SG&A is perhaps if you did it in some fashion or could do it would be somewhat lower given the volume of a direct order. I'm not sure I would say the same. but it's not significantly different. How's that for us? That's good enough. And the last question I'm curious, has headcount changed dramatically over the last year? Good question. Dramatically, no. However, we have been adding resources as the sales grow to support the additional resources. We've noticed that there's a certain capacity that a person in the region can handle. And once they reach that saturation point, we've got to add more heads to be able to cover more and still provide that personal touch with direct and guidance training for the partners. So we've added in the area of sales and continue to selectively add. But we're being extremely prudent about where we deploy heads and what costs we incur because we think one of the bigger strengths that we have, and we remember the history quite well of where we came from, that we have to maintain a certain level of performance that we are deploying capital in the most efficient use so that we return that value for our shareholders. And then my last question briefly, you've moved into a new facility and consolidated. To what degree has that been reflected in the better gross margins in particular, but perhaps the ability to generate a positive, sustainable positive cash flow? That's a very good point, Dave. The new facility expansion to where we work, our main headquarters, allowed us to cease use of a couple of other sites, some off-site storage, another facility in a farther away location. So it's a bigger place and it's much closer so that the amount of effort transiting back and forth when it does occur is much, much less and easier cost. So that does result in some savings. I don't know if I've quantified that. We're just getting everything settled and getting that operation up and running, getting the inventories at the right levels. So I think that may be reflected in Q1, maybe more so in the future quarters. I don't know, Judy, if you had anything to add to that or might be able to quantify any of it. I don't know that we've done that exercise to show what that impact has been.

No, I think you handled it well. I don't think you're going to see a dramatic change in our costs, but it will help long-term.

Thank you.

I appreciate it, Judy, Robert. Thank you.

Thank you.

The next question is a follow-up from Thomas McGovern with Maxson Group.

Please go ahead. Hey, guys. Yeah, so I thought I'd follow up. And actually, those last two questions are well-suited for my outstanding question. So firstly, on the headcount increases that you guys did over the past year, you know, you guys kind of answered half my questions, and you guys are going to continue to selectively add heads where it is needed But, you know, given what you discussed in terms of short-term catalysts, you know, between the digital tracking tool, the cross-selling opportunity, and the event, you know, each of these seems to me as though you'll need boots on the ground to do this. And from where I stand, it looks like they could be, you know, fairly segmented in terms of, you know, skills or expertise. Do you guys anticipate any need – well, first of all, do you expect a similar – based on the demand you're seeing in the market, are you expecting to add pretty similar in terms of headcount, total number of headcount, similar to 2023, more or less? And then second question is, have you guys looked at or considered adding maybe specialized salespeople, whether it's to target these NMPs or to really get to know the digital tool and bring people on, bring your sites on board with that? Or is it more just, you know, based on territory with general salespeople that go out and kind of wear multiple hats to get you guys to where you need to be? Thanks for that follow-up question. I do have to wonder, are you sitting in my staff meetings? There's very, very good thoughts, insights, and all things that we're thinking about. I love the thought that you just said. When it comes to the app, I'll start there first. That does require some specialized expertise. We don't have that in-house. So we're working with a partner that actually already has this software and technology developed, launched, and has been running it in other spaces, and we're just adopting it and changing it to fit ours. That's how we were able to go to a minimal viable product in such a short period of time and now enhancing it to match what we want. We literally only spent a few months on this, and if you've ever been in the software development world, starting from scratch can take a year or so. So we took advantage of an existing tool and just repurposed it for our needs. That saved time, cost, and also we didn't have to bring expertise in-house. When it comes to NMPs and other future-looking technologies, we did just add an engineer. We're looking to add another one. And we are selectively looking for people with certain skill sets to help handle some of these future growth areas. and all of what we're doing is is kind of put into our budget baked into our profitability goals making sure that the sales support some of that growth and um you know deploying capital like i mentioned uh where it makes sense and i'm using an rli type decision for everything that we're doing if i add this head spend this money will i get that return over what period of time and does it make more sense to spend here than it does on this other project So that's been very helpful as far as making sure that we feel comfortable about where we are standing and where it makes sense to lean forward and take a risk for bringing on an asset so that you might return greater growth faster. We're going ahead and doing that. I hope that answers your question. Thanks for that. That's a good insightful question. I appreciate it. It does answer my question. And then the final question I have for you guys is on that warehouse, right? Maybe it doesn't make a huge impact on any one particular quarter. You're hoping to see some margin appreciation over the long run as a result. Two questions on that. Are you guys still using any third-party warehouses across the country, maybe just to make sure that your distribution points are near several sites, particularly as you guys continue to expand? And the second question is, with your in-house warehouse or the newly developed warehouse, How long do you expect, you know, the capacity of the warehouse? Do you think we'll be able to service, you know, your inventory storage requirements for at least the foreseeable future, or do you anticipate a need to bring on, you know, third-party warehouses or possibly expand the existing warehouse? Appreciate it. Sure, I can address that. So the first question, as far as I know, we don't have additional storage sites or other of errant facilities throughout the country. Really, that was the goal, to get rid of all of those extra expenses. To address the point you mentioned where being closer to a customer or a key supplier, we do have partners now that are in the stocking mentality or stocking position. So that we've been able to lean on them, even if it's not a counter bank giving service, to be able to get something out the door. But we still maintain 24-hour less type response with emergency orders, shipping out same day. The team won't hesitate to drive in at 8 o'clock at night on the weekend and get something shipped out, driving it personally to a shipping carrier. the having a closer facility to service the West Coast or something to that effect, there may be some benefit there, but it's gonna be hard to beat the speed if we turn around things today. So that's the first part of your question. The second part about needing to expand again, we have certain milestones built into, once we get to this point, we're gonna need to add that facility. And the particular space where we are now, I'm only utilizing about 50% of what I'm going to have available in the short term. So at that point, when that space becomes available, our sales should require us to need that additional space, and we will take advantage of it. So it's a very deliberate plan, very convenient, and we have an excellent real estate agent that we've been working with and making sure that we've got our needs met and we're planning out for three to five years. Everything meshes up very well. Great. I appreciate you guys taking the time to answer all my questions. Congrats again on the quarter.

Thank you.

The next question comes from Ralph Weil with R. Weil Investment Management. Please go ahead.

Hi, Robert. Nice presentation today. I was wondering, in the past, they talked about customer retention, and I was wondering, what's the percentage of the customers have been retained versus new customers? And have you seen any price pressures in what you're selling? And are there any major new accounts that you've taken on or that you are close to taking on? Okay. And then I have another question.

Okay. Oh, okay. So I'll start with the retention question. So the retention rates, let me go back a little bit. Let's start with the active customer sites. We take the number of active customer sites and we come up with a net sales, net new customers, and that's a function of what we've lost versus what we've gained. and we have sort of rolling retention rate. And quarter over quarter, we hover right around the same rate. Our quarterly retention rates are right around the mid-90s to 92, 94%. So that's been very, very good, very high. It tells us that our customers are satisfying them, and despite our higher than the competitive price, we're still retaining them because, frankly, it's just a different product with the way that we perform. Now, the... From a price perspective, we do get pressure. We do have a product that is a premium product. There is a significant amount of quality assurances and checks and just a lot that goes into a medical device versus a standard off-the-shelf filter. But once customers realized that what they were spending on, how frequently they were changing the previous filter, how to recover from a leach and l outbreak that they no longer have to, the price of our filter just becomes a mute point. So from that perspective, pressure, yes. However, in our premium product position, I think it's well justified and our customers seem to agree. So we'll continue to leverage the performance in making sure that we're providing more value than we're charging and we're not leaving too much value on the table when it comes to how we price as far as getting customers and keeping customers. I'm not sure, did I cover your question there? I kind of missed one or two points, but let me know if I didn't.

Okay. You've been there, I'm not sure, but it's probably closer to a year now, and you saw a significant opportunity at NetFrost, and you know the water business quite well from your past, and you've done well at other companies in the past. What would you say, now that you've been there for a while, what has come faster and better than what you might have expected? And what do you feel are your major challenges going ahead that you may not have thought were as major when you joined?

Okay. Let's see. I'll start with what's gone better. The fact that this team will jump through hoops, run through a wall to get a filter out the door to a customer and meet a demand is just incredible. I've never experienced that in a company where the people that work here, they take it personal. Every customer need, every desire to have something installed, it means the world to them. And it shows. And when we have the sales team out, willing to sacrifice on birthdays and weekends and kids' events to go make sure they take care of their customer. That's how we win new customers that stay with us for life. And I didn't see that in previous places and positions where I worked, and we've got to that extent. And I also know that this team will pivot and change when something isn't working or when there's a certain need that does not stand it off the shelf. We're jumping through hoops to try to figure it out. and we'll put our heads together, and there's such smart people that have way more talent and experience in this industry than I do working here. It's just a matter of giving everybody that chance to help solve the problem, and it works really well. So those have been my really pleasant surprises, takeaways, speed of responses I've experienced in the first year. Sean, what was the second part? How did you phrase it? It was, I think that you would go differently.

Yeah, what has been more challenging to you and challenging How are you working those things?

Got it, got it. So the more challenging thing has been if you have a customer who has a problem and they don't have a regulatory body telling them to fix that problem, their sheer complacency sometimes to not want to address the problem and only do what they're required has been somewhat startling. Frankly, I've had customers say, I'm not going to. spend any money on what's been told to. I just don't have the budget, don't have the people. I've got other problems in the facility. These are typically life or death situations, when people are getting sick and . So that's just . Sorry, I got some feedback on the line. We've been addressing that through education, just making sure we're sharing exactly how, yes, it may be more upfront cost, but it's giving you more maintenance, less filter changes, less response, cost dollars. So it's been working, it's just a slow grind and in combat when it comes to sharing that message with the parties that are making these decisions. So good, yeah, good questions, insightful questions. And it's been a nice day so far. Thank you.

Robert, I suspect that besides, I mean, your major areas about the hospital business, nursing homes, and dialysis area and I would assume that there are other areas that could use in an important way perhaps very pure water and I'm just wondering you know whether you have the capability at this point to go after some of those areas and if you do how you would go about that and how How do you see the revenue mix perhaps changing over the next two to three years from the major reliance on hospitals and nursing homes and dialysis? Are there any significant thoughts that you might have in that area?

And, of course, you mentioned nanoplastics before. Yeah, that's what I was going to revert back to. That's the example of an area where we have pivoted into or starting to look at different areas. Hospital or patient care in the lines of infection control. I want to make sure I use that word patient care and infection control as opposed to hospital because there's clinics, there's senior facilities, there's correctional facilities, lots of places that house people and take care of people. Those are all our target markets and it makes sense because there's regulation driving it. Now, if we can get that same regulation guidelines from school boards or from government agencies recommending certain water quality standards in government buildings, those are going to be the areas that we pivoted to fastest. Other than that, it's us creating the market or a push versus a pull and that hence the nanoplastics it's something that we through size exclusion can already solve and resolve so it's not inventing a new wheel it's not creating some new muscle it's deploying what we already have in a different application so those are the areas that we're going to see impacting and growing fastest other places that I am getting inquiries here and there for applications I won't mention too many of them here but um When it comes to sterile processing, that's an area that also is already suited for our technology. So we're going to dive into sterile processing, how we meet the needs of places that have instruments that need to be cleaned after coming in contact with patients of whatever nature. So all good growth areas, I do see those becoming significant parts in the future. And parties that come in to you for this capability? I've had two of those types of requests in the past month. I won't say who or which ones, but it's areas that we haven't typically dealt with in the past outside that patient care realm. So that's exciting.

Yeah, that does sound good, especially if they're coming to you. Okay. I thank you. I thank you.

Okay. This concludes our question and answer session and the Nefros, Inc.

First Quarter 2024 Financial Results Conference Call. Thank you for attending today's presentation. You may now disconnect.