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

Our next presenter is a commercial stage company that develops and markets high-performance water purification products and pathogen detection systems for medical and commercial markets whose filters are used in hospitals, medical clinics and commercial facilities to retain bacteria and viruses from water, providing barriers that aid an infection [Audio Gap]

Good morning, everybody. This is Andy Astor. I am the CEO of Nephros. Here is our safe harbor statement, and we'll move right into the preview of the company. For those of you who don't know us, we are Nephros on NASDAQ NEPH, $60 million, $65 million company right now in terms of market cap covered by Benchmark, Maxim and Taglich. Large institutional holders are listed here on the slide. Revenues are just over $10 million last year with 15 consecutive quarters of growth, over 50% year-on-year. And while the pandemic has interrupted our story a little bit, we believe that we will return to those levels of growth in the near term. Management team has been together for some time. And we're -- this is not our first rodeo. Strong market opportunity in multiple growth engines with $7 million in cash and an extremely clean balance sheet. Simply put Nephros' mission is to provide innovative and superior technologies in the area of water safety delivered with unparalleled quality, reliability and service. We worked hard on that mission at every word of it. And we implement that mission through 3 main business segments. The only -- 100% of our revenue today is coming out of the Water Filtration segment which targets 3 markets. Those markets are hospitals for infection control, dialysis in clinics for water purification before the water touches the patient's blood, and thirdly is the commercial business, which I'll talk about briefly. All of these are razor, razor-blade models with 55% to 60% gross margins. We were at cash flow breakeven and even profitability in this business in Q4 before the disruption of the pandemic. And as I've said, 15 consecutive quarters of growth -- year-on-year growth, averaging well over 50%. Our second business segment is the Pathogen Detection segment. It's our newest area. We launched it early this year with 3 products in it. And in a nutshell, while Water Filtration focuses on fixing problems that are in the water, Pathogen Detection is around identifying whether or not you have a problem to begin with. And so it's a water testing system with several product applications that all produce results in real time. The third area of our business, the third segment is HDF dialysis. We will talk briefly about that towards the end. It's actually a business that Nephros was founded in 23 years ago and has a long history that we won't have time to get into too much detail on this call. As I mentioned a moment ago, we have 15 quarters of consecutive growth. You can see here both the rolling average net revenue in the black line and the active customers in the orange line. Constantly accelerating, although, again, with the -- with pandemic interruption in Q2, which I'll talk about. If you take a look at Nephros over the last 4 years, starting at the end of 2015 and going into 2016 through '19, the share price and the revenue and the active customers are all growing at a compounded annual growth rate of around 50%, and with the revenue and share price following along together as, frankly, you would expect with a company of this size. I've mentioned a couple of times the pandemic interruption. I thought I would overlay the numbers of the first half of this year to let you understand in what ways the pandemic is impacting us. Our share price, which is now in the -- actually, last night, it was in the high 6s has suffered somewhat. So this number is out of date, but it's as of June 30. Net revenue is basically flat against last year and active customer sites are growing, but slower than we would normally expect them to. Probably the most interesting statistic here on this page is this 85% number in the lower right. Normally -- we are in a recurring revenue business, and normally, you would expect to see about 1/3 of our business come from new customers and 2/3 from our installed base. That number is now 85% installed base and only 15% new customers. Again, largely the temporary interruption of the pandemic. In other words, you can't go and meet new customers and make new relationships in this environment. A quick view of the team. I have just recently, just a little over a week ago, took over as CEO. I have been with the firm for 3.5 years previously as COO and CFO. My background is largely in small entrepreneurial firms, mostly on the private side after coming out of Wharton 100 years ago with my MBA. Darren Evans, who was our CEO, has now moved to a part-time role by his own preference. And as our Science Adviser and CEO of the Specialty Renal Product subsidiary, which is the home of the dialysis system that I mentioned, the HDF dialysis system, which we'll talk about. I won't go over the background it's just in the interest of time of everyone else, but I will let you know that the average longevity of this team is 4 or 5 years with the company, and all mature operators who know what we're doing. Quick introduction to the water filtration system that we produce. Fundamentally, we -- these are hospital infection control filters. This is about 70% or 75% of our revenue right now. These are point-of-use disposable filters that go into existing plumbing and hospitals and this is an actual picture of the degree that's been retained by our filters over a 6-month period in a hospital next to the clear water, which is what comes out of our filters. So fundamentally, this is what we do. We take bad stuff out of the water. We do so by having the smallest pore sizes in the industry. Our pore size is about 5 nanometers or 0.005 microns compared to 200 nanometers or 0.2 microns for conventional filters. Sorry, I just got a little bit lost in the pushing of slides. Here we go. There are 3 sort of key features of our filters. One is the pore size that I just mentioned. The other 2 are very important, and they are -- the filter life. We last 2 to 3x the filter life of our competitors. And our flow rate is completely equivalent to our competition, even though the holes or the pores in our filters are dramatically smaller. So we, in a nutshell, dramatically improve the performance of a filter at a smaller cost per day versus conventional filters. And the fact that we last longer means that change outs which cost money, are also minimized. We use these filters in hospitals for infection control. As I said, we use the exact same filters to purify water in dialysis clinics. But then there's another technology that we have in a company and a subsidiary that we have called Aether Water Systems that focuses on the commercial market, where rather than bacteria and virus removal, our filters are really focused on the improvement of taste and the reduction of odor in water through carbon-based technologies. And here, we're going up against major 800-pound gorillas in this market such as 3M through their Keno brand and Pentair through their Everpure brand. Here, our fundamental value proposition is that we have competitive filters that are somewhat better at a lower price with dramatically better service. And the target of this market has really been to take this small company that we acquired last year and to invest in its infrastructure and its research and target large national accounts. And for those of you who have heard this presentation before, you know that I've said for months that we're getting closer. We are continuing to get closer. We are very close on, we believe, closing a large national account in the near future. And Aether is less than $1 million in revenue today. So we have the ability to really make step changes in that in that revenue stream likely to double or perhaps even triple in the next 12 months. On the pathogen detection side that I mentioned briefly, this is our newest area and the way that hospitals and other facilities test their water today is they take a leader of water and they send it out through the mail and they wait days and sometimes weeks and they get back to the results of whether or not typically they have 1 pathogen in their water. The main focus these days is legionella, which is the pathogen that causes disease. And what we've done by bringing a completely portable system to the floor is allowing a hospital to test their water on-site, in about an hour and not just find out whether or not they have legionella, but actually to look at 15 different pathogens simultaneously all for about the same cost as a legionella test. So it's a disruptive addition to the marketplace, and we're pretty excited about it. And by the way, we also are bringing 2 other products, one of which we just launched, which is called SequaPath, and another which will launch late this quarter or perhaps early next quarter called DialyPath. SequaPath is a very different product, even though it uses some of the same PCR technologies. SequaPath answers the question what's in my water? Not the question of are any of these 15 pathogens there, but rather what is in the water. And it's intent is really to find out what is the biome of my building? What of the 20,000 bacteria in our database is in the water? Which of them are dangerous? And it answers that question. While our next product, DialyPath, is focused on the dialysis market where basically to identify what are called gram-negative bacteria which cause inflammation in patients to substitute for the limuses immunocyte lysate test or the LAL test, which usually takes 2 to 3 days to get results and which, by the way, has to use the cells of a horseshoe crab, and we are decimating their population. And so this is intended to substitute for that. Finally, in the third area of the company that I mentioned, we have specialty renal products where we have a product that bolts on essentially to a traditional dialysis machine to deliver a modality called HDF, which patients, frankly, just feel better when they've had HDF, and we just don't have time to go through the science of it. But again, this is a business that we've been in for 23 years. We have the only FDA-cleared product for this, which was cleared back in 2012. Frankly, the machine was overly complicated and hard to use. And we have created a second-generation version of that machine, which is very close to being submitted to the FDA. We had said that we would have that done by end of summer. We are late on that by a little bit. We are expecting that to get submitted to the FDA in about mid- Q4, but we're very close. We're in production now. I do see that there are some questions. So let me stop talking for just a second and see what the questions are. So the first question is, is the sales team beginning to make contact with new customers again? And how receptive are they to deploying filters? And Howard, I see this is from you. This is a fair question. We're finding that the hospitals are still more or less 90%, 95% closed to on-site visits for nonurgent, nonmedical reasons. And so I would say that new customers are still hard to come by, not impossible. We're adding many per quarter, but not at the rate of 1 per day, which is what our rate is under more normal circumstances. You also asked, Howard, have you seen a pickup in the outbreak business in the past month or so? And the answer is yes, we have. For those of you who don't know our business, there are sort of 2 sides to the infection control business that we're in, in hospitals. One is proactive, where we place filters into hospitals to protect patients proactively against disease that might be there. And the other is reactive. If a patient gets sick or if testing has identified the presence of a pathogen, and in the outbreak business, really crashed, frankly, in Q2 because, frankly, there was just no fire hotter in the world than COVID-19. We have seen some movement there. It's not at the level that it was pre-pandemic, but it is resuming already. Another question is, over the next few years, which segment could be the largest revenue contributor? And frankly, it could be any of the three. It could easily be the water testing because it's such a big market but given that the filters have a 3-year head start on that business. It's got some growth to do to catch up. Our fundamental thesis in building this company was to put together a small handful of opportunities, each of which could be a $50 million business. So that we know not all of them are going to hit in exactly the way that we think they will, but that we've got bets that we believe in, all of which could be significant. And the last question I see is to provide some perspective of the landing of the commercial market customer to the Aether brand. I did mention that briefly and we do think that it is imminent in the coming weeks or perhaps a month or 2, but we will have to see. We just can't predict that yet. And with a minute left, I'll just put back the Nephros at a glance slide. We are a fast growth company that has been interrupted, like many have during the pandemic, and frankly, everyone's been interrupted in some way, some positive, some negative. It's a weird world out there, but we're all making through as best we can. The last question is, can your competitors such as Paul, create a hospital filter that has higher filtration capabilities comparable to your own? And the answer to that is they could try to catch up. But we're already about as small a filter as there is on the market. We came out of the dialysis space and actually used the dialysis filtration technology to build our filters and 5 nanometers is 5 or 50 daltons is just about as small as the filtration is going to get. So with that, I'm 30 seconds away from the end, and I'll say thank you very much, and I appreciate your attention. Take care, everybody, and stay safe.

Thank you for a great presentation today. We appreciate you taking the time to present with us. This concludes today's event.