Nephros, Inc.

Good day and welcome to the NEFROS, Inc. Third 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 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 with PCG Advisory. Please go ahead.

Thank you, Debbie. Good afternoon, everyone, and welcome to NEFROS' Q3 2024 earnings conference call. Thank you all for participating in NEFROS' third quarter 2024 conference call. Before we begin, I'd like to remind you that this call will include forward-looking statements regarding the operations and future results of Nefros. For a discussion of these forward-looking statements, please review Nefros' SEC filings, including 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, Nefros' ability to successfully, timely, and cost-effectively market and sell 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, and the effect of existing and new regulatory requirements on Nefros' 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, November 7th, 2024. The company undertakes no obligation to revise or update any statements to reflect events or circumstances as to the date of this conference call, except as required by law. Now, I would like to turn the call over to NEPHRO's President and Chief Operating Officer, Chief Executive Officer, excuse me, Robert Banks.

Robert, please go ahead. Thank you, Karen. And good afternoon, everyone. I appreciate you joining us today for Nefros' Q3 2024 earnings call. This quarter represents a significant milestone for our company as we achieved our first profitable quarter since inception. I want to begin by acknowledging the hard work and dedication of the entire Nefros team who have made this achievement possible. For the third quarter, which ended September 30th, 2024, we reported a net revenue of $3.5 million an increase of 8% over Q2 2024, but a 6% decline compared to Q3 2023. Despite this decline, I'm pleased to report a net income of $.2 million compared to a net loss of $.2 million in Q3 of last year. This positive shift is driven by cost management efforts and operational improvements that have helped us to reach this milestone. Gross margin for the quarter was 61% compared to 59% in Q3 2023, reflecting improved terms with our largest supplier. Adjusted EBITDA for Q3 was $295,000, a significant improvement over 11,000 in the same quarter last year. SG&A expenses were reduced to $1.7 million from 2.1 million in Q3 2023 due to lower stock compensation and bonus accruals. And quarterly revenue increased 8% over Q2 following a rebound in emergency response ER orders. Although we continue to see some challenges in specific regions, we remain focused on mitigating reductions in programmatic reorders by strengthening customer engagement and service capabilities. We are making strategic advancements to ensure long-term growth. In Q3, we began ramping up our digital support tools for filter installation, which will improve customer compliance with filter change-out schedules and drive recurring revenues. This initiative, coupled with our increased service capabilities, positions us well for future growth. Looking ahead, we are focused on expanding into new markets, such as scale processing, laboratories, and dental practices where we see clear opportunities for our products. Additionally, we are actively exploring partnerships that will allow us to offer solutions for emerging issues like nano and microplastic contaminations. As of September 30th, 2024, our cash and cash equivalents stood at $2.5 million. This is down from $4.3 million at the end of 2023. This reduction is primarily due to operating losses in the first half of 2024, payments of annual employee bonuses, and an inventory investment in Q1. Despite this decrease, we remain committed to maintaining financial discipline while pursuing strategic growth opportunities at the same time. In conclusion, Q3 marks a pivotal point for Nevros as we enter a new phase of profitability and operational excellence. We are excited about the future, and we remain focused on delivering strong results for our stakeholders. I want to thank our investors, partners, and employees for their continued support. We look forward to building on this momentum in the coming quarters. I will now turn the call over to our CFO, Judy Crandall, for a detailed discussion on our financial performance. Judy?

Thank you, Robert. Please provide an overview of our financial performance for the third quarter of 2024. Our third quarter net revenue was $3.5 million, down 6% compared to the third quarter of 2023. As Robert alluded, this decrease reflects a decline in programmatic revenue, partially offset by an increase in emergency response revenue. The decline in programmatic revenue reflects underperformance in one region and a few of our larger accounts showing slower order patterns. Our gross margin for the third quarter of 2024 increased to 61% versus 59% in the prior year period, reflecting improved terms with our largest supplier. As Robert mentioned, we achieved positive net income of approximately $200,000 in the third quarter of 2024 versus a net loss of $180,000 in the prior year period, reflecting the improved gross margins this year and a tight control of expenses This is primarily due to reduced SG&A expenses, which declined by 19%, which was driven by lower stock compensation, lower bonus accruals, and lower sales commissions. Adjusted EBITDA improved to $295,000 in the third quarter of 2024 from 11,000 in the prior year period. Now, looking at the nine months ending September 30th, 2024, Sales declined by 6% to $10.3 million from $11 million in the prior year period, but excluding emergency response revenue, sales increased by 3%. Gross margins improved to 61% in the first nine months of 2024 from 58% in the prior year period, reflecting improved pricing from our largest supplier, as well as reduced shipping expenses. SD&A expenses decreased by 11% in the nine months of 2024 versus the prior year period due to a decrease in bonus accrual, sales commission expense, stock compensation expense, and travel expenses. And this was offset in part by an increase in salary expense. Net loss decreased 70% to a loss of $275,000 in the first nine months of 2024. from a loss of $921,000 in the prior year period. Adjusted EBITDA for the nine month period improved to $67,000 from a loss of $25,000 in the prior year period. Our balance sheet remains strong with a cash balance of approximately $2.5 million as of September 30th, 2024. This is a decrease from 4.3 million at the end of 23 mainly due to increased inventory and accounts receivable, and the payments of annual bonuses, as well as the decline in accounts payable simply due to timing of payments. Despite these changes, we continue to operate debt-free, providing us with flexibility to invest in growth initiatives. As we look to the future, we are focused on maintaining financial discipline while investing strategically in areas that will drive long-term value. This includes optimizing our product pricing, improving operational efficiencies, and exploring strategic opportunities for expansion. I will now turn the call to Robert for some concluding remarks. Robert?

Thank you, Judy. As we move forward, Nefros is well positioned to continue its growth trajectory by focusing on innovation, customer engagement, and strategic expansion. We remain We remain committed to providing high-quality water filtration solutions that meet the evolving needs of our customers. I want to extend my gratitude to our investors, partners, and the entire Nefros team for their continued support and dedication. We look forward to sharing more updates on our progress in the coming quarters. This concludes our formal presentation. We will now open the floor for questions. Operator, please open the call for Q&A.

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. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. The first question comes from Jeremy Perlman with Maxim Group. Please go ahead.

Hi, good afternoon. Thank you for taking my question. I'm on the line for Anthony Vendetti. You mentioned on the call that you are planning to strengthen your customer engagement to try and, I guess, get back some of those reordering from the larger customers. Maybe you could talk a little bit about how you plan on doing that. What are some of your strategies for that?

Sure.

Thank you for that call.

Very, very good question. The reorder, or we do call programmatic business, the filters that we sell often have a three-month or a six-month replacement cycle, and customers are prompted to replace them, and usually that happens at a regular pace. What we've noticed through analysis is that customers are letting those six-month filters last longer. By emphasizing to the customer that using the product off-label and beyond its FDA-cleared amount of time They are then basically off-label. We can kind of talk to their infection control departments and get them to comply. Often it's not intentional. They just forget that it's happening. So we're employing online tools to have the automated reminders set out so that they can be warned, hey, it's time to change your filters. It's time to update things. In addition, we're now offering a lot of services to be able to do that for them if they don't have the manpower. So by coupling that with the cell bar filter and getting them on a contractual or longer-term basis, we'll be able to help recover and prevent that filter from being used longer than it's supposed to be. So it took us longer than we should have to come up with some of those, but it takes a while to put these technologies in place and get the company orientated to be able to support those service type requests.

I think that's sort of. Yeah, so I think that also might have answered another one, my next question, just to confirm. So you mentioned, is that that online filter tracker that you think did a beta testing in the first quarter, that ties into this? That's going to be something that automatically will send alerts to customers that their filter is expiring in a month or has expired and they should reorder it? That goes hand in hand?

Correct, correct. Yeah, we were pretty far down the path of a solution, had some hiccups from a technology perspective, getting things to work offline, Had to pivot midway through and we've been testing a new version of it 2.0 and we're very happy with how that's working out. So that's going to be what we're moving forward and pushing out to the field. But it does take some time to make sure that it works before we get it fully rolled out and have a product that we have to recall. So, so far, we're very, very pleased.

Do you have a rough estimate of time on when you think that would be rolled out to all your customers? Is that at the end of the year or something in 2021, maybe first half 2025?

Yeah, I think we're still aiming for Q1 next year. Like we mentioned nothing previously, we've already started rolling it out to customers, beta testing it, making sure everyone's happy with it. So it's right on schedule.

Okay, great. And then just my last question is related to that new HydroGuard Ultra filter you put out a press release recently. What's the target market for that, and how do you think that fits in with the rest of your portfolio? Is that complementary, or is that a totally new addressable market?

Well, it's complementary. It's somewhat of a new also. We've had opportunities for still processing and basically higher flow situations where we couldn't reach it with the existing product portfolio. So this opens up a bigger market and some of the newer markets covered under ST-108, which are becoming more and more prevalent today. So we're very excited about what that can do for us. We've been able to satisfy that need in the past, getting creative, getting things together, but it put us at somewhat of a deficiency by the time you come up with a custom solution. So this does allow us to compete more competitively and readily with a product that's designed and made for that particular application. So that's what that brings us.

Okay, great. That's great. I'm going to have to take you and thank you again for taking my questions. Thank you.

Again, if you have a question, please press star then one. The next question is from Ankur Sagar. He's a private investor. Please go ahead.

Hey, good afternoon, Robert and Judy. Thank you for taking my questions. Nice job on the profitability. I think that just shows the strength of the operating model and what's visible with higher revenue numbers. So that's great. Um, on the, on the revenue side, um, can you, um, you know, separate out, you know, in terms of, you know, if the programmatic business also declined and what the decline was, uh, and also I think you called out a couple of reasons, um, that the South central region not performing and, uh, and the reorders, um, And if you could just, you know, list out the things that you're doing to stop that decline. Sure.

I'll go into some detail. Hopefully it will answer that question. Programmatic sales, which listed, I mentioned previously, they've declined over same quarter last year. Well, same quarter, third quarter last year was one of the highest quarters on record. I think it was the third. I'll have to go back and check the numbers. So coming close to that isn't too shabby of an achievement. However, it's lower than what we would expect at that same quarter in 2024. It is a cyclical product, so every six months. And so based on ordering patterns, you typically have a slower month followed by a bigger month. So 3Q in 2023, I believe, was $3.7 million. So that was a really, really high quarter. So coming close is not too bad. Now, we did increase, I believe, 6% over prior quarter. So if you take programmatic versus Q2, we are increasing there. So not too unhappy with that result. So as long as the trajectory continues, I'm quite pleased. So I think that's the answer to how the programmatic business has performed. I did see declines in some of the regions and some customers. It's really limited to a few customers. And what I've noticed, and when we talked to a few of those individually, a couple of them are burning down inventory. They were carrying high inventories and they wanted to get that down. So you'll see ordering patterns kick back in and that should reverse itself. So not too worried about that. I don't see losses across the system to competitors. I don't see people just abandoning the nephros answer and solution. So not too concerned overall. Just maybe ordering patterns, timing, inventory reduction. Now, the performance of one of the regions I mentioned, it was performance against expectations, not against, say, prior year or other things. So those aren't losses. Those are just places where, given the number of opportunities patients care facilities, other opportunities that I would have expected larger revenue, and we just weren't quite seeing that. So, yeah, we've taken and realigned some of the support and gotten different resources capable with different technologies to be able to grow that region, and hopefully we'll be able to report on some results on that in the coming quarter.

I see. Okay. That's great. You know, it's not calling out names, Robert, but I see it in the news. Recently, there was a facility, you know, here on the East Coast, you know, which had, I think, a legionella outbreak. A few people died, and then, you know, there was a lawsuit against that. So it's strange to see, you know, where these facilities could be just, you know, staying compliant with this filtration and save lives, but they're not. I think that goes to your response regarding the programmatic business. I think you mentioned about launching this digital filter, but in the press release, I think you mentioned also as you launch this digital filter, you are also channeling this by service, I think you have some full service customers as well where you basically change the filters yourself or some of your partners do it. I think if you could elaborate on that because that seems like something maybe can tackle this programmatic side of business quickly.

Speaking directly, I think there's two questions kind of embedded in there. The one I think you're really getting at is the service arm. that capability is one that we haven't fully executed in the recent past anyway. So having a team that can go out and not only sell the filter but exchange the filter, track it, a lot of the entities that we're talking to, they don't have full staff of people ready to change the filter. And when they do, it's teams thinking of maybe they're filtering your refrigerator or you go in and plug a new one in. Our filters are basically medical devices in most cases, and you have to do a certain amount of sanitization or you're putting a clean filter in a dirty line and you're not doing yourself any favors. So having our team service it and follow our instructions for use is really a way to make sure that they're not only compliant with how the filters are supposed to be used and getting the results they want and need to get, but also that we're tracking that when that filter gets installed and it gets changed on a regular basis. So that's very important for us. It's important for us to figure out how to do that regularly and build the muscle internally to be able to do that and with our partners who also have those capabilities. So we'll be looking for continuing to strengthen either our third-party network, but more importantly, our internal network as well to be able to support those opportunities.

Okay. Just one last one. I think, Robert, coming into 2024, I think you had some higher expectations for growth. Obviously, that didn't pan out. If you could probably comment, talk about the top three initiatives that you're looking forward and focused on from the growth side, You know, that would be great. And just one last part on this question for Judy. You know, any revenue growth that happens, should we expect that it drops to the bottom line and increases the profitability? Okay. So I'll try to type that.

Do you want to go first, Robert?

Okay.

No, go ahead, Judy. I'm sorry to interrupt you. Please go.

I'm sorry. Sorry. Yeah, I appreciate the question. So certainly, we have nice gross margins. And we really think we can grow sales faster than expenses. So obviously, we do expect every incremental dollar of sales to add more to the bottom line. I do want to caution you, though. We did have lower, because sales did not meet expectations, we did have lower sales commissions and bonus accruals this year than expected, which was the savings on the expense line. We certainly don't plan for that next year, so we hope to have full commissions and full bonuses, which again are variable, and we still expect to become more profitable as we grow sales on the operating line.

I can tackle the first part of the question. When you say not meeting expectations, what I've learned early part in this year was there are two sources of revenue, which we've often talked about, the programmatic and also the emergency response. The part that we can control with our efforts, our day-to-day, our core is that programmatic business. And those sales have been increasing at a steady trajectory as intended, maybe slightly lower than we expected, especially this past quarter. But overall, I'm not disappointed with that result. The emergency response, which I talked to Nazia in the previous conversation, call about as disappointed, but that's not something that we can control. So we've been looking at the top line revenue and as an aggregate of the two components of revenue and thinking about it classifying the revenue stream overall. And I think, and I suggested before that it's probably a much better measure of how well the company is doing against competition to look at the core and programmatic business. So from that perspective, I'm looking at three growth initiatives to keep that number going and rising into the next year. We talked about one just now with service, going in and keeping track of same-site sales, filters that are installed, and changing those out on a regular basis. That's one. Two, the digitization effort by tracking and knowing where the filters will land, where they're installed, how they're performing, what's there, all of that being recorded and online will give us analytics and be able to tell a lot more information how to serve the market and meet our customers' needs. A third one I would point at is going beyond patient care. Patient care, hospitals, burn centers, recovery emergency units, those are our typical places where you'll find our filters, which are considered medical devices. But there's a world of other opportunities out there, whether it be airports, cruise ships, large office buildings, correctional facilities. All the places where you can think that we care about microplastics, nanoplastics, and other contaminants beyond just the pathogens all represent opportunities. So as we get better at how to serve these other markets and brand and our materials to be able to meet the needs and communicate that, we hope to show growth in those areas as well.

Okay. Great. Thank you for taking my question. No problem.

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

Good afternoon to both of you. You've talked in the past about ASHRAE and that it is suggested in the regulations. Then we're talking about having more teeth in the regulations. Where do you stand and what do you see regarding the ASHRAE regulations as it affects nephros. And a second question, you've talked a lot about the numbers, and I know you've touched upon the newer areas that you're working on. Could you possibly just be a little more specific as to what you might be doing and where you stand with the newer areas at this point in time?

Okay. I'll try to answer that first. I can answer the first one. The second one on how specific on the newer areas I might struggle with, but let's see where the answer takes us. So as far as ASHRAE, ASHRAE 514, ST-108, these regulations, guidelines, they're calling for people who conform with them to form water management committees, to have emergency response plans, to have basically had some idea for how they will handle pathogens when problems arise. This has caused people in the, say, Ohio area, where it had become not as important, to look at that again and to adhere to a certain amount of testing if they want to keep their hospital accreditation status. So what we saw in Q3 with a little bit of rebound there towards the end with ER is was partially a result of that. As you see different patient care entities in that area start to now pay more attention to it and look for those programs, we're getting those calls and we're having people that are testing and we're able to respond and provide solutions for them. So the regulations that we've mentioned and had been talking about for months ahead of this are starting to show and realize some increased opportunities for nephros. So that's good and that's exciting. I'm seeing something similar in New Jersey with regulations that are being passed there. So it's in the beginning stages, and a lot of these entities do have a pretty significant grace period of time to comply. So, I mean, sometimes a year plus. As they start to do and create their own plans, we're getting calls being asked to, hey, how do we meet these standards? What can you do to help us? So that's exciting. Now, the second part of your question, I hope again you said new, please repeat that second part for me. I was having a little trouble understanding what you were trying to ask.

Yeah, could you just, I mean, you've talked a lot about the numbers, the SG&A, the inventories, et cetera, and you both talked about that. But I guess investors would like to hear more about the newer initiatives and newer programs whether it be, and you did mention dental and you mentioned instruments and nanomicroplastics. Could you elaborate a little more on what you've been doing and how long that might take and what it may mean to the company? I mean, I guess... That's the future. I and I guess others are looking forward to where the new growth is going to come from besides your problematic business and your emergency business.

I think you meant programmatic business, but I get it. One of the things I have gotten from investors is that they do want to know what's coming, what's new, what's exciting, how is Nefra going to take into the next quarter, into the next year. And that's one of the reasons you've seen and will continue to see more of these press releases. We did one on the new product, the HydroGuard. And in the press release, it talks about markets that we're going to be targeting with that product, which happens to line up very nicely with some of the regulations that are coming out. You've seen another press release on disaster recovery. So being able to respond when there is emergencies like the hurricanes. We're getting calls from customers that didn't know who Nefros was before. and trying to look at how we not only take their emergency response, but let them know that this is also a solution that can be used in line and ongoing. So, again, those are going to be some of the growth areas, converting the new customers' emergency response into programmatic. You're going to see more activity like that. Press releases are just letting the investors know what's coming and where we're seeing significant growth and opportunities. in the coming weeks and months. So stay tuned for that. We hear you. We know that it's important to let our investors know where we're going, and we're excited to start sharing some of those things. We've got a pretty robust pipeline of items in our R&D pipeline that we're going to be just accelerating just as quick as possible. So stay tuned is what I would say to that.

Could you comment – about the commercial beverage business and what the status is of that and whether any changes being made there to accelerate that or do anything different?

So the commercial business, as was highlighted early Q1 last year, had big plans and robust goals that did not meet expectations. We are still well into that space. We are still rolling out through our partner's tractor by way of Donostar to reach all the Chipotles. So those change-outs are happening. Not seeing the accelerated growth as I would have liked to, but it was never supposed to be a huge chunk of our existence anyway. So it's piping along. Donostar is still a great partner of ours, and we're always looking for additional ways to expand that.

Okay, thank you. Thank you.

This concludes our question and answer session. This also concludes our conference. Thank you for attending today's presentation. You may now disconnect.