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

Good afternoon, and welcome to the Nephros Inc. Second Quarter 2022 Financial Results Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Stephanie Prince from PCG Advisory. Please go ahead.

Thank you, Gary, and thank you all for participating in Nephros' Second Quarter 2022 Conference Call. Before we begin, I would like to caution you 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, the company's Forms 10-K and 10-Q which identifies 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, the impact of the COVID-19 pandemic, Nephros' ability to successfully, timely and cost effectively market 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 and the effect of existing and new regulatory requirements on nephrosis business and other 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, August 10, 2022. 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 Nephros' President and Chief Executive Officer, Andy Astor. Andy?

Thank you, Stephanie, and good afternoon, everyone, and welcome to the call. I am pleased to report our second quarter results, which were strong at the top line. Net revenue was $2.9 million, an increase of 27% year-over-year and 32% over the previous quarter. Also, active customer sites increased 21% year-over-year to a record 1,349, which were also 6% higher than the previous quarter. Customer retention rates remain comfortably over 90%. While top line growth remains our top priority, we also recognize that Nephros needs to become profitable. As we announced last month, Nephros expects to be cash flow positive by midyear 2023. Of course, we remain focused and optimistic about revenue growth, but we are also taking steps to tighten our belts. In the quarter ended June 30, these steps included a 15% headcount reduction, reduced use of professional services and initial work towards production and inventory efficiencies. As of July 1, operating expenses have been reduced by more than $300,000 per quarter, and we expect our ongoing actions to reduce expenses further in the coming quarters. I'll now give a brief overview of some sales and marketing highlights. Wes Lobo, our Chief Commercial Officer, would normally give this update, but he is on vacation this week. As we announced on the previous earnings call, Nephros launched its new web presence at the beginning of Q2. In his remarks at that time, Wes said, the launch of that quote, the launch of our new website provides the digital architecture to articulate our value proposition, provide easier discovery of product solutions and produce timely, relevant materials for our customers. I am pleased to report that just 4 months later, the website is delivering benefits, including lead generation that has led to new revenue in the tens of thousands of dollars so far. In addition, we can continue to build our regional sales teams to provide dedicated support to our distributors and our end customers. We have coverage in most of our important markets and are actively recruiting for the rest. Our medical water filtration businesses, primarily hospital infection control and dialysis water purification were both strong this quarter, also ending with record numbers of active customer sites. In the commercial filtration business, I am pleased to report that we shipped over 3,000 filters this quarter for installation in Chipotle restaurants nationwide. The replacement cycle for these products is every 6 months. We expect the brand equity from this relationship to unlock additional opportunities in the food service and beverage space going forward. And in the pathogen detection business, we have completed agreements with 2 strategic testing partners and anticipate a steady build of sales over time. And finally, with the previously announced FDA 510(k) clearance of the HDF assist product from our subsidiary, Specialty Rental Products, we are now in discussions with dialysis clinics for a rollout to patients around the end of this year. I'll now turn to a few details of our financial results. We reported second quarter net revenue of $2.9 million, a 27% increase over prior year. Factors impacting this growth included organic growth the Chipotle shipment I discussed earlier and also some pull-ahead sales due to a price increase implemented in June 1. Net consolidated loss for the quarter was $1.1 million, approximately the same amount as the second quarter or Q2 of 2021. Consolidated adjusted EBITDA in the quarter was negative $0.7 million compared with negative $0.8 million in Q2 of 2021. Consolidated gross margins in the quarter were 47% compared with 57% in Q2 2021. This decrease is primarily due to global inflationary and supply chain trends in addition to some inventory expiration. We expect the June 1 price increase to improve our margins and continue to target future gross margins of 55% to 60%. Consolidated research and development expenses in the quarter were $0.4 million compared with $0.5 million in Q2 2021. Consolidated sales, general and admin, or SG&A expenses in the quarter were $2.0 million compared with $1.9 million in Q2 of 2021. And our cash balance on June 30, 2022, was $4.2 million. We reassert that our current cash balances are expected to suffice for the foreseeable future. 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 results including our water filtration, pathogen detection and renal products businesses -- business segments will be found in our filing on Form 10-Q, which we plan to file on Monday, August 15. That concludes the financial discussion, and we'll open the call to questions in just a minute. But first, I would like to thank each of our Nephros' employees and our strategic partners we're providing unsurpassed products and services to our customers, especially this year during some difficult times. And thanks also to our devoted investors for your continued confidence and your patience. We know, but these are challenging times for our investors. And yet we believe that our ability to navigate the short-term results will be to our ultimate benefit as we maintain our commitment to investments in scalable commercial and operational infrastructures as a path towards long-term sustainable growth. This concludes our formal presentation remarks. We will now take questions from the audience. Gary, please open the call for questions.

[Operator Instructions] Our first question is from Marc Wiesenberger with B. Riley FBR.

Andy, it's nice to hear a more upbeat tone from you relative to the last quarter. So congrats on the efforts.

Thank you, Marc. Nice to hear your voice.

We'd like to start maybe with the gross margins. We did see some nice stabilization and sequential increase. How should we think about that ramping into the second half of the year? And do you anticipate getting back into the target range by the end of this year?

In this economy, it's hard for me to say a simple yes or no. I'm glad they have stabilized. There will be some more pressure from product expiration. But I don't think -- I have what we have not seen is continued increases in shipping indeed, I just heard yesterday that our air shipments, which we don't do very much of, but air shipping costs have actually gone down. So the fact that prices are not going up and the fact that we have a price increase that for most of our customers went into effect on June 1 should give us upwards should be -- should positively impact our gross margin. And so I do think we will see modest increases in it over the course of the next couple of quarters. We probably won't be back at target range of 55% to 60% overall. I don't know if it will be this year or if they're or if it will be early next, but we'll be moving -- we intend to move in that direction in the next few quarters. That will be part of our plan, of course, of getting to cash flow, positive cash flow.

Got it. Okay. Well, we'll be looking for that continued progress moving down the P&L, how should we think about OpEx building off the 2Q levels? And I guess as growth ramps, is the current infrastructure sufficient for that expansion? And then I did hear you mention expanding the sales team a little bit in certain regions. Is this kind of a shift in emphasis from distribution partners to maybe more of a direct sales force? Or how do I interpret that comment there?

I think you -- I think the answer to your first question is, yes, we are -- our current level will support the growth that we are looking for. So we don't need to significantly increase OpEx in order to grow when I say modestly, I mean, make up a number, 20%, 30%. The second question you asked, sorry, just remind me. I've lost my train of thought.

Sure. No problem. You talked about expanding, I think, the certain geographies. Is that kind of an emphasis away from distribution partners to more direct sales force?

Thank you. No, not at all. In fact, we have always had direct salespeople to support our partners. So there's absolutely no change to that whatsoever. But what we -- what there is not a change to, but a continuation of is our intent to have geographical regional sales managers within a long driver or a short flight to everywhere in the Continental U.S. and we're making good progress on that. And that's, again, not a change from plan.

Perfect. In terms of the medical filtration market, if you could kind of provide some more insights in terms of what you're seeing there and kind of the different kind of submarkets within there, that would be really helpful.

Sure. What -- what I would tell you about Q2 is for all 3 of the filtration markets, which are the 2 medical and the commercial, the -- they were normally distributed. They grew -- all 3 grew nicely and commercial grew a little extra nicely because of the Chipotle shipment. So what I would tell you is that there is nothing -- I wouldn't say that solid healthy growth is not noteworthy, but it is what we expected, and it was what we were surprised -- we had a negative surprise in Q1, but we're right back where we thought we would be in all 3 markets in Q2. Does that answer your question?

It does. I think this quarter, though, does kind of have some lag are delayed from the first quarter. Is that right? Can you remind us kind of how much that was pushed in from the first quarter into this quarter?

Yes, not a lot. One of the 2 that we mentioned in that last call did close and that the other one got down the road. So I wouldn't spend a lot of time trying to analyze that. I think Q2 was Q2 is Q2. And what I do -- what I did say in the -- in my opening remarks and would remind you of is that there probably was some pull-ahead sales, not probably, there was some pull ahead sales on our June 1 price increase probably to the tune of the low hundreds of thousands of dollars, like let's call it, about 250 would likely have come into the second quarter sales that might have not come in until Q3, if not for the price increase.

Understood. Very helpful. And then just one more, and I'll get back in the queue. Looking at the at-home dialysis market, I believe a leading player previously had an FDA hold from shipping some units, which has now been lifted. Were you at all impacted by that in the first half of the year? And now that, that has been lifted, do you anticipate that accelerating some of your growth into the second half of the year?

Yes. And yes. We were impacted by that FDA hold, and there were some holes put on future orders that were planned by both parties. And the lifting of the hold, we do anticipate, although I can't tell you that we have it in hand yet, but we do anticipate that, that will bring -- that will contribute to growth in Q3, Q4.

Great. Let me just sneak in follow up to that to those pretty helpful. I guess, could you quantify potentially what that drag was, number one? And then number two, do you also supply that customers in clinic or do you supply filters for that customer in clinic as well as their at home?

No and no. No, I won't quantify the impact and no the customer relationship there is for the home and portable dialysis product.

[Operator Instructions]

I'll offer if there are no further questions, Marc, if you have other follow-ups, you are more than welcome to ask.

Our next question is from Ralph Weil with R. Weil Investment Management.

Could you comment a little more about the expense cuts or the headcount cuts, where they may have taken place and what parts of the business? And I assume you feel that these were done without hurting your business going forward? And a second question would be, do you vision in view of the fact that you've had this problem that -- and then, even though you say you don't need money that you get by and I hope you will, sincerely hope you will. Do you see any parts of the business being monetized so that you can concentrate more on any of the ones that are left?