Nephros, Inc. (NEPH) Earnings Call Transcript & Summary

Greetings, and welcome to the Nephros Spring Investor Summit Webcast. It's now my pleasure to introduce your host, Andy Astor, COO and CFO. Thank you, Mr. Astor, you may begin.

Good morning, everybody. Good to be with you, and -- albeit virtually. So we'll go through the slide deck quickly. I hope to make this as interactive as possible. Please feel free to submit your questions using the technology. My able assistant, Kirin Smith, who is President of PCG Advisory and runs our Investor Relations function, will be monitoring your questions and will interrupt as appropriate to take your calls. So having just gone through the safe harbor statement, fundamentally, Nephros is a water -- sorry, a water solutions company. We provide innovative and superior technologies that provide safe water solutions, that's really the keyword there, delivered to our customers with extraordinary quality and reliability and customer service. That's who we are. As you think about the business, think about us in 3 segments. Our business to -- that you'll -- you might be familiar with is our water filtration business. It's 100% of our revenue through our Q -- our 10-K of last year. It is a recurring razor-razor blade model. And with strong gross margins that are consistently right up around 60%. We just crossed through to cash flow breakeven and indeed profitability in this segment. And over the past 14 quarters have had revenue growth year-on-year every single quarter, averaging 65%. There are 3 parts of the water filtration business. The vast majority of it is hospitals or infection control, and we'll talk about how that worked in a little bit. We also purify water going into dialysis clinic. And we also have a young but growing commercial business that is focused on hospitality and food service. We'll talk again about that briefly in a little bit. We have a new product line that launched in January, before being a little bit interrupted by the coronavirus, but we've gotten some great feedback and some early small amounts of revenue on it. This is our PluraPath pathogen detection system focused on the $8 billion highly fragmented global testing market. Fundamentally, the value proposition of PluraPath is that, currently, if you want to test your water in a hospital, and by the way you have to, you wait 2 to 14 days to get your results and they tell you whether or not you have 1 single pathogen, which is Legionella. Our test will give you, in an hour, the results on 15 different assays simultaneously. So that's our new business. And then our legacy business that this company was in originally, the HDF Dialysis. We are targeting a relaunch this year. HDF is a very significant market opportunity. But we'll get to that, time permitting, as we go. I think that the water filtration and PluraPath are where we're going to spend most of our time today. A quick view of the management team. Daron, who is our President and CEO, formerly CFO at Nile. A lot of time at Booz Allen, Arthur D. Little, Johnson & Johnson. Strong scientist as well as General Manager, really is the water -- is our strategist in charge and very much focuses on what are we doing a year or more from now, whereas I focus more on the operations. My background is I've been mostly in the software technology space, also an MBA, as Daron has, mine is from Wharton. And I founded a couple of companies, sold most recently one to Amazon, and have spent time both in large and small technology companies for quite a long time. Mike Milman and Vashone Thomas, both are central casting kinds of VPs for their respective roles, research and development. Mike was -- cut his teeth at Stryker. He's got 10 years at Nephros. He is an engineer's engineer. Vashone is a very, very strong quality person. These 4 people on the right side of this page are the folks that spend their lives focused on the market-facing activities. So you've got Shane, who is Vice President of Sales, has been with us for 7 years. Really is the engineer and the driver of the 65% year-on-year growth that we've had for 3.5 years. Greg Lucas, which was the owner and founder of Biocon and Aether, which is the company that we bought 1 year ago, previously an executive at Gallo. Kimothy Smith, a molecular biologist, geneticist, Doctor of Veterinary Medicine and an epidemiologist, of a PhD in epidemiology, is on our pathogen detection. Monet Carnahan, dialysis product, and we've just added to that -- to her side of the equation is Tony Robinson, that announcement was made this morning, who came in as Vice President of Operations of Specialty Renal Products, which houses the HDF Dialysis business. Any questions before I jump into water filtration? Great.

No, not yet, Andy.

Thanks, Kirin. Okay. All right. So -- sorry. So this is what we do. You should see on your screen, the water looks like that's been retained in our filter versus the water that our product delivers. This is an actual 6-month backflush or backwash of a filter that has been in place at a hospital. And what our filter does and what it does so extraordinarily well is that it pore sizes our 5 nanometers in diameter, whereas conventional or competitive filters that we work against are 200 nanometers or 0.2 microns. And so while bacteria is mostly retained by conventional filters, but not all, viruses and endotoxins and fractional DNA components, all get through conventional filters, but we stop all of that. So -- and before you ask the question, because somebody will, on COVID-19, that's really an airborne bacteria. And so we don't -- I'm sorry, an airborne virus, and we're really focused on waterborne pathogens here. But we are much smaller than conventional filters. And as such, we pulled back a whole lot more. When you think about the sort of the key features, we just talked about the filtration, the pore size. But the other -- there are a couple of other features that really matter. One is how long does the filter last? And we last 2 to 3x longer than our competitors. And then what is the flow rate of the water going through our filter. And again, our flow rate per service area is faster so that the end result basically is that the water comes out just as quickly with ours as it does with our competitive filters. And they wind up costing about the same on a cost per month basis, which is kind of hospitals think about it. And by the way, these filters are placed where the patient touches the water. They're focused on immunocompromised patients. So their showers, their sinks, their ice machines, their water fountains. And that means that even if the water comes into the hospital clean, but then go through the miles of pipes and gets exposed to bacteria and biofilms and various things that can cause a problem, when the water comes out of the sink and touches the patient, it's perfectly clean. That's what we do for a living. And this just shows you, compared to Pall, which is our primary competitor, how we compare. And by the way, this deck is, of course, available on our website. Overall, our addressable market is about -- is well over $1 billion. Just in the hospital and dialysis water purification space, it's around $400 million to $500 million. And that's based on only a penetration of 20% of hospital beds because that's really where the high-risk patients are. So the business, the TAM could be larger than the $400 million to $500 million that we quote on the medical side. But just conservatively, it's up there. Our sales, as you may know, are just over $10 million in 2019. And so we've got a really -- we've got a great growth opportunity in disrupting this market. On the commercial side, frankly, it's a market that's so big we don't know how to measure it, because we're targeting the hospitality and the food and beverage space, particularly quick-service restaurants. And there's just -- there are so many Coke machines and Pepsi machines and coffee machines and juice machines and ice machines in that market. Our strategy there, by the way, is a little bit different than it is on the hospital and dialysis side. We're really going in -- there are 2 very large competitors there, 3M and Pentair, which own the CUNO and Everpure brands, respectively. And we're really just nibbling at what is essentially an oligopoly there. And we're nibbling at it by going after large national contract of 7 figures, of $1 million or a $2 million contract or more. And we've got -- we're making strong progress on that front. And we believe that we will close one or more of those deals this year. And that will be a step change in that business. Because right now, it's only about $1 million business. And so we think we can take that business and double or triple it this year and continue to grow it like that in the coming year. On the sales and distribution strategy, and I'm now going backwards to the hospital and dialysis side, we really sell through distributors, particularly in the hospital infection control. We sell to the water service professionals -- the water safety professionals, who have the contracts with the hospitals today. So basically, every hospital, except the very, very largest who have their own staff, hire companies like Garratt-Callahan, like NCH Chem-Aqua, like HOH or Earth Wise Technologies, to check their water, to test it, to change the filter, to scrub their pipes and their cooling towers and so forth. And we sell -- we wholesale to them uniquely in this market. Our main competitor, Pall, only does direct sales. Direct sales is a small part of what we do. So that's how we focus. I'm going to try to accelerate things just a little bit. Any questions on the filtration side, Kirin?

No, nothing yet, Andy.

Okay, great. I'll just keep going. You can interrupt if something comes up. So on the pathogen detection side, I want to give you a little bit of context. Hospitals today, according to regulations that came out in 2017, must have a water management plan, all health care facilities. And that plan must include testing. And if they have -- if there is a positive test for bacteria or viruses, they have to remediate either with filters or chlorine or other chemical cleansing. We have, to date, only handled the filtration side. We're now moving up the food chain into the water testing area. And it's all done, as I said earlier, on-site and in an hour. And it's basically the same kind of DNA or, I should say, quantitative DNA -- sorry, quantitative PCR, polymerase chain reaction, testing that is being used today in the COVID-19 pandemic that we're seeing is basically the same technology that we're all becoming very unfortunately familiar with. But this is -- what you're looking at here is a portable pelican case that we've customized, which has, in it, a PCR machine and a concentration kit and a peristaltic pump and the aliquot, the pipettor that brings the samples into them and allows you on-site to get 15 pathogens identified in an hour, which is unlike anything else that's on the market today. Coming up, later in this first half of the year, we'll release DialyPath, which will basically allow dialysis clinics, which are much more sensitive than overall hospital water systems, to not only test for 15 different pathogens like we just described, but to actually say what's in my water. And we will actually sequence the DNAs of all of the pathogens that they care about, all of the gram-negative bacteria that they worry about and be able to give them that information. And then our vision around the end of this year is to get to SequaPath where we're able to really look at a building almost as a patient and do biome mapping services for the building to recognize over 20,000 different bacteria references in a single day. We'll offer that as a service, expect it to happen at late this year. Specialty Renal Products is a subsidiary of ours. It was the original, as I said earlier, legacy business of Nephros. And I'll only spend a minute on it because we're almost out of time. But traditional dialysis in the United States is done with hemo -- with a technology or modality called hemodialysis, HD. By adding a pressure gradient to the blood dialysate semipermeable membrane, we're able to push larger molecules across with a technology called HDF. This is used in Europe and Asia extensively. It represents about 15% of the existing dialysis that happens overseas. And we believe that this -- we and, by the way, other large dialysis companies believe that this technology is coming to the U.S. And we have, today, the only HDF cleared -- machine that is cleared by the FDA. And we are creating a second generation of that machine today and expect to release it to the FDA for clearance this summer and into clinics before the end of this year. Quickly on the financials. As I said earlier, our gross margin is running pretty consistently in the high 50s to 60%. You can see that our revenue has been growing very, very quickly, almost doubling every year and very close to doubling last year. If you take a look at our highlights, just that first -- or the second column, the Q -- 2019 Q4, you can see that we turned profitable in the water filtration segment. All of our numbers are up hundreds and sometimes thousands of percent. Balance sheet. This is post the capital raise that netted us $6.7 million at the end of January. And we are -- while this is a little out of date because the market's done -- has had a little movement in the last couple of weeks, our market cap right now is around $57 million or so last time I checked. And our price -- our share price was trading yesterday around in the low 6s. I'll drop it there. I think we are just about out of time, but I will open it up for questions if you have any.

Great. Yes, Andy, we've received a question about the current mindset of the water treatment professionals as they interact with the hospitals during this environment. And any effects they may be experiencing or you may be experiencing due to the COVID-19?

Yes. We're in an enviable position, frankly, in this very unfortunate time. We are focused on infection control and all of the world now knows what the word pathogen means and what the word -- what infection control is all about. We are focused on the water side, not on the air side. But nevertheless, we see no significant reduction in the need for our products, both on a preventive basis and on a reactive basis. We are in Q1. I want to caution all investors that Q1 is traditionally our quarter that often does not sequentially increase over Q4, but does sequentially increase year-on-year for the prior Q1. That's the way we measure our business. I would encourage you to do the same. Why is Q1 traditionally a slower growth quarter? It's cold. And water-borne pathogens don't grow as much in the cold weather. It's really that simple. But I guess I got a little bit off topic there, and I'll answer the question a little more directly. What's the mindset? Well, the mindset is we better -- everything takes a back seat to COVID right now. But at the same time, hospitals that have a program of replacing their filters every 6 months are replacing their filters every 6 months. And I think most -- I think that Nephros, like most businesses, will see a slowing in their acquisition of new customers because customers simply don't have the time for new sales and buying activities as much, whereas existing relationships that Nephros has with its customers are pretty unaffected. What does Q2 look like? We'll have to see in Q2 because it seems withheld now.

Great. Thanks, Andy. That's all the questions for today.

Okay. Thanks, everybody. Appreciate your attention and you coming to the conference. My contact information is actually on the last page of the deck. You're always welcome to get in contact with us. And stay safe out there. Take care.

This concludes today's webcast. You may disconnect your lines at this time. Thank you for your participation.