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

Good afternoon, and welcome to the Nephros Third Quarter 2020 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over Kirin Smith, Investor Relations Officer. Please sir, please go ahead.

Good afternoon, everyone. This is Kirin Smith with PCG Advisory. Thank you all for participating in Nephros' Third Quarter 2020 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 Nephros. I encourage you to review Nephros' filings with the Securities and Exchange Commission, including without limitation, 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, its ability to successfully, timely and cost effectively develop, seek and obtain regulatory clearance for and commercialize its products and service offerings; the rate of adoption of its products and services by hospitals and other health care providers; the success of its commercialization efforts; the effect on its business of existing and new regulatory requirements to 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 5, 2020. 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 Andy Astor, Nephros' CEO. Andy, please go ahead.

Thank you, Kirin, and good afternoon, everyone. Welcome to Nephros' Third Quarter 2020 Earnings Conference Call. This is my first earnings call as CEO, and I'd like to start by thanking Daron Evans, who developed and led our turnaround strategy over the past 5.5 years, increasing revenues from about $1 million to more than $10 million annually during that time. As most of you know, Daron is continuing to help drive our progress on a part-time basis, focused on building the pathogen detection business and also filling the CEO role at our specialty renal product subsidiary, where he is laser-focused on submitting the second-generation FDA product -- I'm sorry, HDF product for FDA clearance. And of course, I want to thank once again all the people providing essential services that keep our country moving and our fellow citizens safe while putting themselves in harms way. I will now provide a few highlights of our Q3 business performance, and I will also review our financial results for the quarter. I'm pleased to report that net revenues increased 34% over the prior quarter. While they remain about 30% lower than a year ago, the quarter-over-quarter increase does seem to indicate some level of market stabilization after a challenging second quarter when the pandemic took hold. Also, while net revenues were down year-over-year, I am pleased to note that recurring installed base revenues in Q3 returned to their 2019 levels after these revenues had contracted somewhat in Q2. We believe this strong demand from our existing customers is an important sign of strength, further bolstered by our customer retention rate remain over 90%. Our medical water filter business did continue to experience declines in new customer acquisitions and in emergency response business as we had reported last quarter. Our observation is that for the time being, customers and potential customers are primarily focused on pandemic-related issues and simply don't have time for proactive water testing and remediation nor for new vendor relationships. Anecdotal evidence from our network seems to confirm that this is a trend throughout the industry. I'm also pleased to report that Q4 has kicked off relatively strongly, including both our recurring and our emergency response medical filtration businesses. Our commercial water business declined versus last year as our hospitality and food service customers continue to be deeply impacted by the pandemic. Notably, we continue to believe that we are on track to secure at least one large national contract in the near future, hopefully within this calendar year. In our pathogen detection business, we recently released DialyPath, our qPCR-based endotoxin testing system, which will be marketed to dialysis clinics. As with our filtration business, we are beginning to see increased interest in our pathogen detection products, including PluraPath, SequaPath and now DialyPath. But the commercial environment is still challenging, and we have somewhat slowed our marketing plans for the moment. We are using this time to build product and marketing infrastructure to support the growth that we expect in 2021 and beyond. In our subsidiary, specialty renal products, we are getting closer to FDA submission of the next-generation HDF product, as I mentioned briefly at the beginning of this call. As reported last quarter, we did experience a few delays in the manufacturing process for HDF, but we are indeed getting close and hope to submit before the end of this year. I will now provide a look at our financial results for the third quarter ended September 30, 2020. As many of you know, up until the COVID-19 pandemic, Nephros delivered consistent year-over-year revenue growth for 15 consecutive quarters, averaging over 50% through the first quarter of 2020. The second and now the third quarter of 2020 were challenging for the company, although the fourth quarter has started strongly, and we are optimistic that quarter-over-quarter growth will continue. Nephros reported net revenues in the third quarter of $2.1 million, a 31% decrease compared to $3.1 million in the same period last year. The decrease of $1 million was driven by changes due to COVID-19, including a downturn in the emergency response business as well as fewer new customer acquisitions. Net loss in the water filtration business segment was $0.4 million compared to $0.2 million in 2019. This increased loss was primarily due to the reduced revenue that I just mentioned. Adjusted EBITDA in the segment was negative $0.3 million compared to a negative $0.4 million in 2019. 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 water filtration, pathogen detection and renal products business segments and their operating results can be found in today's filing on Form 10-Q. On a consolidated basis, net loss for the quarter was $1 million, $1.0 million compared with $0.7 million in 2019, a 36% increase. Consolidated adjusted EBITDA in the quarter was negative $1 million compared with negative $0.2 million in 2019. Cost of goods sold in the third quarter was $0.9 million compared to $1.3 million in 2019, a decrease of 30%. Gross margins in the third quarter were 58% compared to 59% in 2019. The 1% margin reduction compared to a year ago was primarily due to unfavorable inventory expiration and adjustments of $0.1 million during the 3 months ended September 30. As we have said before, margin fluctuations are normal for a company of our size, and we expect future gross margins to remain in the range of 55% to 60%. Research and development expenses in the third quarter were $0.75 million compared with $0.78 million in 2019, a 3% decrease. Depreciation and amortization expenses in the third quarter were $49,000 compared with $44,000 in 2019, an 11% increase. Selling, general and administrative expenses for the third quarter were $1.5 million compared with $1.8 million in 2019, a decrease of approximately 14%, primarily driven by a decrease in travel-related and marketing expenses due to the COVID-19 pandemic. Our cash balance at the end of the third quarter was about $5.2 million and also as announced on October 16, Nephros did raise an additional $5 million through a registered direct offering of 833,333 shares of common stock at a price to the public of $6 per share. In closing, I would like to introduce you all to Dan D'Agostino, who is on the call with us today. Dan joined the team a few weeks ago and will be officially assuming the role of Chief Financial Officer beginning tomorrow morning. He will be leading our next discussion on financial results in our year-end earnings call, which we expect will take place in late February 2021. We will be participating in several financial conferences in the coming weeks. Details of which will be announced this Monday, November 9, and we look forward to seeing many of you virtually at these shows. In the meantime, of course, please always feel free to contact me directly at info@nephros.com. And Dan, and -- will be on that e-mail address as well. This concludes our formal presentation remarks. I would like to personally thank all of our investors and other stakeholders for their support through the years as well as during our recent CEO transition. I look forward to speaking with you all again soon, and we will take questions from the audience now and also answer e-mailed questions as appropriate. Operator, please open the call for questions.

[Operator Instructions] Our first question comes from Howard Halpern from Taglich Brothers.

Congratulations on navigating a tough environment out there.

Thank you, Howard.

Did I hear correctly, so far at the start of the fourth quarter that you've gotten some emergency response business compared to the prior quarters, which there really wasn't any?

Yes. It gives, you are correctly. October is one month out of a quarter. So I don't want to set expectations. I don't know what the quarter will look like. But the first month was a very reasonable emergency response. For a normal October, it felt pretty normal. So we'll see if it keeps up. This is an area of our business that we have almost no control -- well, we have 0 control over it because it's all inbound, and so we'll see how it goes.

And any indication for new customers so far in the beginning of the quarter? Or is that still going to be a very single-digit percentage of the business?

It's not a single-digit percentage. It's normally 30-ish percent per quarter. And in the last couple of quarters, it's been between 10 and 20. We -- it's down, but it's not down terribly. It's not down as much as the emergency response businesses. That's for sure or has not or has been.

And started looking forward with the Pathogen Detection division. If you could describe what you're anticipating going forward, in terms of what -- which one of those 3 products that you have, do you think will be the gain the easiest traction, I guess, in terms of revenue? And then which one over time should be the biggest driver of revenue as the world eases in pandemic conditions?

I wish I knew, Howard. But one of the reasons we have 3 products is because we can't know for sure which one will catch on first. PluraPath is the very straightest line between infection control and infection control prevention. So it may be PluraPath but dialysis clinics tend to make their decisions more centrally. So there may be some traction there. And then SequaPath, an answer to another part of your question, that could be the biggest of them all by far because it's not -- it's applicability is not limited to a medical facility. It can be used in any kind of a building, commercial, residential, et cetera. So we will have to see.

And lastly, I know you've been consistent on moving closer towards getting that commercial contract. Is it just -- is it with the same or do you have a group of them that might come together? Or has it been the same potential customer or just moving -- as you're just moving forward?

It's not just one opportunity, and it has a couple of different forms, but it is the main opportunity that we have been talking about for a couple of quarters is the same main opportunity that we are still talking about.

Okay. And that -- if and when that happens, that will move the needle?

We expect it to, yes.

Okay. Okay. Well, keep up the good work, and I would -- well, I guess one more question. Dan, what -- if you can answer it, what drew you to Nephros and what do you -- basically, what drew you to Nephros?

Well, thanks for the question. I would say that knowing the company for, geez, probably 5 years now. Andy mentioned briefly there really has been just an incredible sort of resurgence. Daron coming in I think, and doing some of the heavy lifting. And then Andy, the way that I perceived it from an outsiders perspective, putting a lot of the processes in place to take now some interesting products and a real strategy into kind of institutionalizing that. I just see tremendous value in the products that are really just starting to get traction.