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

Good day, and welcome to your Nephros, Inc. Conference Call. I would now like to turn the floor over to Andy Astor, Chief Executive Officer. Sir, the floor is yours.

Thank you very much, and good morning or yes, good morning for everybody. So good morning, everybody. I'm very happy to be here at the Best Ideas Conference. This is my first time, and here's our safe harbor statement, and we'll jump right in. So Nephros is fundamentally a -- well, let me give you a quick overview of it. Nephros is [ $60 million - $65 million ] market cap company, currently covered by benchmark by Maxim and by Taglich Brothers. Increasingly, a significant number of strong institutional holders including those that you see here, Wexford has been with us for a long time. They're a large private equity firm. The Pessin Family office, another family office called the Farwell Family. Parkman Health care, Bard Associates and the list goes on. We did $10 million last year. And over the 4 years prior to that, we grew every single quarter for -- at an average of 50% year-on-year, and that stopped with COVID, and we'll talk about that in just a second. But the we've done a fair amount of analysis. The underlying business is strong. The recurring revenue is happening, and we do expect to get back to very fast growth in the near future as COVID eases. The management team is a mature and long-tenured group. That means that we have -- none of this is not any of our first rodeo, so to speak. We have a team performance record that is years long, and we're, frankly, a mature and fairly prudent operation. We -- the structure of Nephros, which I'll be talking about in just a second, is to have multiple growth engines, including new product lines at all times so that as -- so that we make multiple bets. It's not a single-product company by any stretch of imagination. Cap structure is very clean. The 7 -- well, actually, I'm sorry, this was we just announced a couple of days ago that we have $5 million in the bank, $5.2 million as of 9/30, and about 9 million shares outstanding and about 10 million fully diluted, very clean structure. So I do want to spend just a second reading this to you. We provide innovative and superior technologies. That's an important part of our -- of who we are. That focus on water safety solutions, that's our market target, delivered to customers with unparalleled quality, reliability and service. And what that tells you, I hope, is that we -- we're a company that tries to punch above our weight. We're obviously a small company, but we're growing rapidly. And I think we act like a much larger company than we are. I mentioned before that we have several product areas, and there are 3, what we call business segments, and you'll see that we break them out in our 10-K and 10-Q. Water Filtration, Pathogen Detection and HDF Dialysis. I'll talk first about Water Filtration, which -- and this is important, is 100% of our revenue today. And there are 3 areas within Water Filtration. There's hospital infection control, there's purifying water for dialysis clinics. And then there is a commercial division that focuses on point of use, well, on basically the dispensers that consumers use. So coke machines and pepsi machines and ice machines and coffee and juice and things like that. So in all 3 of these businesses that I just mentioned, hospital infection control dialysis, water purification and commercial, we are a point-of-use company. We're a company that focuses on where patients and consumers to water, making it safer, making it -- the water taste better and just generally servicing the water. The products are relatively small. They're typically 1 to 2 -- a foot to 1.5 foot long. It's very much a razor, razor-blade model with a recurring revenue model and high gross margins. We -- our cash flow breakeven under pre-pandemic, we were cash flow breakeven in the water filtration market that has dipped. But as I said earlier, that's coming back. As I said, also, we've got 15 consecutive quarters of growth, averaging 50%, 60%. And as I said also, these are the markets that we're focused on, hospitals, hospitality, food service and dialysis. The second area of the company is Pathogen Detection. These are -- this is essentially water testing. And there are 3 product areas that map really to the 3 market areas of the Water Filtration business that I just talked about, hospitals, dialysis clinics and consumers, or I should say, non medical. The PluraPath answers the question for hospitals, what dangerous pathogens do I have in my water? The SequaPath answers the commercial question, what is in our -- the water in our office building. The DialyPath product, which was released just this morning, answers the question do I have any gram-negative bacteria, which are dangerous bacteria in our dialysis water so that we can remediate that before patients get sick from it. This is a new product line. The whole pathogen detection area is new in 2020. We expect to see -- we don't expect significant revenue here for this year, but we do think that this is a high-growth market area for us in 2021. I want to go back for just a second to the Water Filtration business and mentioned something that isn't written on the slide, and that is that the commercial business, the area where we are shooting at soda machines and ice machines and juice and coffee and so forth. Is a new business from about 1.5 years old that we acquired, and we've been investing in significantly, and we are expecting to bring to market a -- or I should say, we're expecting to close a pretty large significant deal in the near future in that market, which, for a company that's only a $10 million company, a 7-figure deal could have a real impact on the company's future. The third business segment is the HDF Dialysis we -- actually, this has been a business that Nephros has been in for 23 years. It, frankly, didn't succeed in its first 20 years. And what we've done is spun it off into a separate subsidiary that is called Specialty Renal Products, and we have a second-generation machine here that we are expecting to submit to the FDA for clearance by the end of this year. This is to just sum this up in a nutshell, this is a product that bolts on to existing dialysis machines that allows them to do a modality of dialysis called HDF, which is a superior form. It gets a -- the blood is more completely cleaned by forcing bigger molecules out of the blood, which I'm happy to go into in detail, but this is just a quick overview of the 3 business segments of the company. As I mentioned, we've got pre-COVID 15 consecutive quarters of growth, averaging 60% year-on-year. The blue bars are the actual individual quarters of revenue, the black line is the rolling average of revenue. And then the orange is our number of active customers that we've got. So you can see strong growth again, pre-pandemic, but the customer line continues to grow, which is important. Probably worthwhile for you to to quickly take a look at if you bought the company stock in -- or if you're looking back, I should say, at the company's performance since 2015, our revenue has grown in an average of 52%, compounded annual growth rate and our active customer sites has also grown at about that same level. Our installed base revenue in any given quarter is about 2/3. And in other words, we're selling about 1/3 of our revenue in any given quarter or year to new customers but about 2/3 is recurring revenue from our installed base. If you take a look at what's happened in the pandemic, you can see that our revenue growth from 2019 to 2020 in the first half of the year, was not strong, it was -- we basically just kept pace. And while active customers grew, they grew by a smaller number. And that's pretty common in this pandemic environment. It's just harder to make new customer relationships. The good news is that we have a recurring revenue base of about 70%. And so we're down in terms of new customer acquisition, our existing customers are continuing to buy the product as expected. This is the leadership team. I'll give you just a quick glimpse of each of us and then I'll be opening it up for questions before I do go any deeper into the product. So if you do have questions, please go ahead and enter them on your slide. And Keith will well manage the Q&A. So I came out of the software industry about 3.5 years ago. I came in here as CFO, became COO about 1.5 years ago and took the CEO slot just a couple of months ago. My background is from an MBA from Wharton and then just a whole lot of enterprise software companies, including a couple that I co-founded or helped to build, one of which sold to Amazon recently and another one has just acquired the #2 company in its business. So a fair amount of good success there. Daron Evans, who was previously the CEO of the company and has stepped down just for personal reasons, is still deeply involved in Nephros. He is a science adviser, and he is also functioning as CEO of Specialty Renal Products, which is that subsidiary. I was just talking about, Daron came out of [ Duke and Rice]. And has been -- is just an extraordinary entrepreneurial executive, came out of Arthur D. Little and Booz, J&J, and was the CFO of a company that is now part of Capricor. I won't go in detail in everybody else's resume, but what's important here is the structure. On the left side of the page, you've got the staff. And so Mike Milman and Vashone Thomas are just central casting leaders of R&D and quality for medical device companies. And then we have 4 leaders on the right side of the page, who are each facing a specific market. So you've got Shane Sullivan in VP of Sales, but focuses mostly on Hospital Infection Control; Greg Lucas, who focuses on Commercial Water Systems; Kimothy, who is the head of the new business, Pathogen Detection Products; and our -- and Tony Robinson, who runs dialysis operations for the SRP subsidiary. So it's a strong team. Frankly, there's a lot of leaders for a small company of our size, but we've done that on purpose so that we've got clear, high energy people in all of the key slots in the company. So I'll pause for a moment and just ask Keith if there are questions before we go dig deeper into the technology because I'm happy to adjust the presentation according to the questions that you have.

Yes. Great. Thank you, and as you do a few questions already. So I will pose a few of those to you. To begin, what do you anticipate the sales cycle to be for your newly launched DialyPath assay?

It's a great question. And the short answer is we don't know because it's a brand-new product. And frankly, the whole Pathogen Detection Systems group is new and is operating in unprecedented circumstances, of course, as we all are. Having said that, we do think that PDS is poised to to accelerate from basically 0 right now to significant revenue in 2021. And that's where I would keep my eyes on it. And I think that we should have some significant revenue in probably in the 6 figures in 2021 and then perhaps more, but then that should really start to take off in the 2021, '22 time frame.

Yes. Great. And following up on that. Do you see DialyPath as a stepping stone for the HDF Dialysis? Or do you view both products as different verticals?

They're really different verticals. HDF is really a dialysis machine sale, whereas DialyPath is really a water sale. So the HDF is going to be bought by the medical staff, the clinical staff. The -- it's going to be driven by patient preferences for what treatment they get, whereas the water is really just table stakes. And making sure that your water is clean and contains no gram-negative bacteria. That's more of an on an operations requirement.

And then we do have a couple of COVID-related questions, given the quotes -- words specifically mentioned in the question, and I'll pose both because they are related. In the last month or so, have you seen any changes in acquiring new customers, and have there been any significant sales due to [ hot-spots ] outbreaks over the summer?

So somebody knows Nephros who ask those questions. So great questions. Thank you. We have seen a bit of an uptick from -- in the last month or 2. And what's been promising about that uptick is that it was an uptick at the beginning of Q3, it lasted through Q3, and it seems to be lasting as we enter Q4. So we did $1.6 million in Q2. We did in $2.1 million in Q3. And at least so far, things are looking reasonably progressive in Q4. In terms of the outbreak business, we actually have had a couple of outbreaks as the questioner probably knows that business, the bottom kind of fell out of it at the beginning of the year. And to which we attribute that to the fact that COVID was the only issue that hospitals were dealing with for several months. Now that it has somewhat normalized into it's just the way things are. I think more testing is going on and identifying outbreaks. I think patients who are getting sick are being -- are not just automatically being diagnosed as COVID. So we have seen a little bit more on the outbreak side. In Q3, I think it was about 4% of our business, where it was closer to 0 in Q1 and Q2. And it's normally ranges from sort of 10% to 20%. So it is beginning to normalize.

Great. Thank you, Andy. And actually, those are all the questions we have for now. So if you'd like to continue with your presentation. Perhaps we'll have a few more questions at the end.

Sure. Sure. We've got 6 or 7 minutes. So I'll just -- this is a picture of what Nephros does. In the background, you see there are water -- I'm sorry, our hospital infection control water filters. And these are actual filters that we're in a hospital, and the bottles on the right side are the water that, that filter was delivering on the day that it was removed from service. And then the filter was back flushed, and you see what is inside the filter after 6 months even in a hospital. So it's just -- it's a very necessary product. And hospitals know it. And a lot of people may ask, well, what is the -- what is Nephros' advantage. And the primary thing that you should remember is that Nephros has a much, much smaller pore size than conventional filters. So conventional filters are 0.2 microns. That's pretty much the state of the standard that's out there. And we're 0.005 microns or 5 nanometers. It's 40x smaller. So while some bacteria and many viruses and endotoxins will get through a conventional filter, a Nephros filter will block all of that. And so if you take that and you add to it, the fact that our filters last longer and that our flow rate is the same basically because we provide a larger surface area to the customer. What you have is a filter that dramatically improves performance at a smaller cost per day than conventional filters. And that sort of explains the reason that Nephros has started to disrupt the marketplace. And speaking of the marketplace, our competition is primarily Pall Medical, which is many, many times larger than we are probably 10 to 30x larger than we are. And we have -- we're making some noise in their market in a significant way. We are taking business more. We're certainly winning more than our fair share of the deals. And that's how we got from pretty close to 0 revenue 4 years ago to a $10 million rate, which is what we did last year. Let me stop there. We've only got another couple of minutes. I'll see if there are any further questions. And I will also pop back up the Nephros-at-a-glance slide, so people can take a look at that while we're talking. Keith?

No further questions at this time, Andy.

Okay. Great. What I will do is offer, we love talking to investors. So my e-mail address is [email protected]. If anything that I said today wasn't clear or too high level, I would welcome you to send an e-mail to me at [email protected]. And I'm more than happy to set up a call or to answer your questions on e-mail as necessary. And I thank you for your attention very much.

Thanks for your time, Andy, really appreciate it for all participants. Thank you. This concludes the event. You may now disconnect at this time. Thank you.

Thank you.