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

Good day, ladies and gentlemen, and welcome to your Nephros webcast. At this time, it is my pleasure to turn the floor over to your host, Andy Astor. Sir, the floor is yours.

Thank you, Tara. Good morning, everybody. It's good to be here on this Monday morning. I hope you are all safe and being -- just being as safe as possible in this crazy time. So I'm going to bring up our safe harbor statement and then move straight into the preview. [Operator Instructions] So Nephros, a NASDAQ company, $60 million, $65 million market cap right now covered by Benchmark, Maxim and Taglich from an analyst standpoint. Strong institutional holders, including the Wexford Family Office and Parkman and the Pessin -- I'm sorry, the Pessin Family Office as well as Wexford Capital, which is the largest shareholder, Bard and several others, increasingly institutionally held company. We did $10 million of revenue in 2019 with 15 consecutive quarters of growth averaging over 50% until COVID hit. So through Q1, that was true. But the post pandemic expectations were very strong, which I will explain and show you the data on when we get there. The management team is not a 20-something-year-old team. We are fairly mature, fairly long tenured. Strong performance record as a team. And the thesis of the way we design Nephros is really to have multiple growth engines, including new product lines at all times so that we've developed a company that, while it is tightly focused on a small number of opportunities, does have multiple opportunities so that they can be pursued simultaneously so that we're not -- we don't have all of our bets on one horse. Cap structure is extremely clean. We have the $5 million in the bank as of 9/30, and we've just raised another $5 million a couple of weeks ago. There are 10 million shares, roughly, outstanding and about 11 million fully diluted. It's a thinly traded stock, around 10,000 or 12,000 average shares per day. So it's a stock for the patient and, frankly, very well pressed right now compared to historical numbers due, again, to the pandemic. What Nephros is all about is providing superior and innovative technologies around water safety. We're a water solutions company. And as a small company, challenging the large incumbents, it is really all about quality and reliability and customer -- and extraordinary customer service. And that's the way that upstarts such as Nephros can deal with the -- with challenging the well-entrenched 800-pound gorillas. And fundamentally, what we do is really 3 business lines, one of which is 100% of our revenue, and that is Water Filtration. So in Water Filtration, there are 3 primary markets: hospitals, dialysis clinics and hospitality and food service on the commercial side. It's a razor/razor blade model. All of our filters last 3 to 6 months on an average and must be replaced. They are disposable. High gross margins in 55% to 60% range, which has been true for well over 4 years running. We were cash flow breakeven pre-pandemic. We are not right now, but again, 62% average year-on-year revenue growth for 15 consecutive quarters pre-pandemic. I will talk about each of business lines in a few minutes -- I'm sorry, the markets that we address in the filters. On the pathogen detection side, this is a new product line with 3 products that is all about real-time pathogen detection systems for hospitals, for dialysis clinics, for commercial organizations, really paralleling the lines that we have for our filters on the left side of the page. And then we also have a subsidiary called Specialty Renal Products, which is in the HDF Dialysis business. And again, we'll talk about that towards the end of the deck. This is the growth that I talked about. The black line shows you the rolling average of the last 4 quarters, and you can see that very strong revenue growth curve until we hit the pandemic. The orange line, by the way, is the total number of active customers, well over 1,000 at this point. This gives you an idea of what Nephros has done over the last 5 years. At the end of 2015, we did net revenue of $1.9 million. We are at $10.3 million. So our compounded annual revenue growth rate is over 50%, as is our compounded annual growth rate in number of customers. You'll notice the line on the bottom, which shows the installed base revenue. This is a very strong recurring revenue company, where, in any given quarter, about 2/3 of our revenue comes in from existing customers. What I want to do now is to show you what happened in the pandemic. While we're doing fine and we have plenty of cash in the bank, our sales are down 30% year-on-year in both Q2 and Q3. So in the first half of the year, we were actually -- we actually grew that but only by a point. And our active sites grew, but they didn't grow nearly at the rate we normally would expect. The installed base revenue climbed from the -- about 2/3 to about 85% of existing customers, which means that we were not able to sell as many to new customers because, frankly, in the pandemic, new customer relationships are difficult to make. Quick look at the team. I took over as CEO about 3 months ago now. I have a background of growing small entrepreneurial organizations into sizable companies, some of which have been acquired, such as most recently OpenSCG, which was acquired by Amazon, formerly at Asurion and at Dun & Bradstreet as well as entrepreneurial companies. MBA from Wharton. Dan D'Agostino just joined us a couple of weeks ago as CFO. I had held the CFO and COO title until that time. Dan is known to some of you, I'm sure, as an expert in the investment banking for health care companies. Mike Milman and Vashone Thomas are our VPs of R&D and of quality, respectively, both really central casting players in the medical device R&D and quality business. Daron Evans is the former CEO. He was CEO for the last 5 years. And he stepped down to focus on a couple of our scientific endeavors, namely pathogen detection and SRP. Daron is -- and also, frankly, to attend to some family matters that he's got that are pandemic related. So he's down to about half time. Shane Sullivan came out of Thermo Scientific and several other significant companies as VP of sales. Greg Lucas, whose company Aether Water Systems we acquired in 2018. He is a former Gallo executive and then for 10 years, ran Aether Water Systems before our acquisition. And Kimothy Smith, who joined us just last year, who heads our Pathogen Detection products business, is a well-known microbiology and epidemiology, academic, and who has not only an entrepreneurial streak with him but is, again, widely known in the fields of -- frankly, when the anthrax scares happened a few years ago, it was actually his labs that the anthrax samples were sent to. So very briefly, a little bit about Water Filtration. This is what we do for a living right here. This is an actual slide from a -- I'm sorry, this is an actual filter that was removed from a hospital a year or 2 ago after 6 months. And on the right, you see the water that we deliver to the patients just before we took this filter off the site. And then when we back flushed the filter, you can see on the left, the debris that the filter retained. And what Nephros does that is unusual is that its pore sizes are about 40x smaller than the conventional microfilters that are on the market for the purpose of infection control in hospitals. So ours are 5 nanometers compared to 200 nanometers on a conventional filter. And in addition to the pore size, our filters last 2 to 3x longer than our competitors. And our flow rate is the same as our competitors, even though the pore size is much smaller. And that's an important thing to understand because as you make your holes, if you will, in the filter, in the straining that the filter does to keep pathogens away from patients, as you make those holes smaller to less -- not only does -- do less pathogens get through but also lets water get through. But by having enormously larger surface area than our competitors, we're able to keep the flow rate the same. Our competitor, main competitor in this field is Pall Medical, part of -- which is a $3 billion subsidiary of Danaher, which is a $20 billion company. And again, as I mentioned earlier, we compete effectively against Pall, primarily by just having superior products at competitive prices with extraordinary customer support. That's really our fundamental strategy in presenting to market. These filters, by the way, are used in both the infection control space and also in the purification of dialysis clinic water before that water is used in the dialysis machine that touches the patient. Aether Water Systems is our commercial product. This is a different technology. These are primarily carbon-based products that focus on removing bacteria, like our medical filters, but also very focused on odor and taste of water as well as elimination of scale buildup. Second area that I mentioned to you earlier is Pathogen Detection. And fundamentally, today, when a hospital wants to test its water, it has to send -- it takes, let's say, 10 individual liters of water as samples, and it sends it out to a lab, and they wait somewhere between 3 days and 2 weeks to get their results. And then they find out, typically, if they have Legionella. One pathogen is all that's typically measured for. With our product, it's an on-site, real-time detection system. It's PCR-based, which is the same as we're all familiar with now. That's how COVID tests are done or the better COVID tests at any rate. And you -- we wheel in the suitcase that I'm showing in the bottom right picture into a hospital. You set it up, which takes about 5 minutes, and you can run a test in about an hour that doesn't just test for 1 pathogen Legionella, but actually tests for 15 separate DNA and RNA assays or tests for DNA and RNA pathogens. We also -- in addition to the PluraPath, the 15 pathogen infection control test, we also have SequaPath and DialyPath, which I won't go into just in the interest of time today, but fundamentally, DialyPath on the right, answers the question, do I have any inflammation-producing pathogens in my water, which is very important when you are -- when you're taking care of immune-compromised dialysis patients. And SequaPath actually answers a much bigger question, which is, what's in my water? It allows you to recognize over 20,000 different bacteria references in just -- in literally a couple of hours. I also mentioned that we have a small subsidiary, Specialty Renal Products. Specialty Renal Products is actually the business that Nephros was formed to perform 23 years ago as a spin-off of Columbia University. And unfortunately, Nephros, in its prior form, didn't really succeed. But the technology -- at least not commercially, but the technology that it created is pretty extraordinary. And HDF is, in a nutshell, a better form of dialysis. And we have created a Generation 2 of this machine, which we intend to submit for FDA clearance by the end of this year, so just a few weeks away. So again, in a nutshell, Nephros is -- I'm just bringing back the chart that I showed you earlier. We only have a few minutes today, so I want to give you a quick overview. But fundamentally, Nephros is a company with 5, sort of, bets, right? It has 3 in the water filtration business, hospital infection control, dialysis, water purification and commercial filters in the food and beverage and hospitality space. And then we have new entries in pathogen detection with real-time qPCR-based testing. And we have our subsidiary Specialty Renal Products that we hope to have a new FDA-cleared product from in the coming couple of months after we submit for clearance next month. I don't see any questions right now. I will leave the floor open for another 30 or 60 seconds. So if you'd like to ask a question, please do enter it into the system. As of this time, however, I don't see any. So again, we'll wait another 30 seconds just to see if any questions pop up. And if not, I'll give you back 5 minutes into your calendar. All right. Well, thank you, everybody, for coming. Operator, I will turn it back to you, and we will end the call. Thank you.

Thank you. Ladies and gentlemen, this concludes the webcast. You may now disconnect. Have a great day.