Nephros Q4 2023 Earnings Call Transcript

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March 7, 2024

There are 3 speakers on the call.

Operator

Good day, and welcome to the Nessus Inc. 4th Quarter 2023 Financial Results Conference Call. All participants will be in a listen only mode. Please note this event is being recorded. I would now like to turn the conference over to Kieran Smith.

Operator

Please go ahead.

Speaker 1

Good afternoon, everyone. This is Kieran Smith with PCG Advisory. Thank you all for participating in Nephros' Q4 fiscal year 2023 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 the company's forms 10 ks and 10 Q, which identify specific factors that may cause actual results to differ materially from those described in the forward looking statements.

Speaker 1

Factors that may affect the company's results include, but are not limited to, the impact of the COVID-nineteen pandemic, Nephros' ability to successfully, timely and cost effectively market and sell its products and service offerings, the rate of adoption of its products and services by hospitals and other health care providers, success of its commercialization efforts and the effect of existing and regulatory requirements on Nephros' business and other economic and competitive factors. The contents of this conference call contains timely, time sensitive information that is accurate only as of the date of the live call today, March 7, 2024. 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, Robert Banks. Robert, please go ahead.

Speaker 1

Thank you, Karen, and good afternoon, everyone. I'm very pleased to welcome you to the call. Today, we reported the Q4 and full year results for 2023. It was an amazing year for Nephros, and we are all very proud of the results. We welcome the new executive leadership at the CEO and CFO levels.

Speaker 1

We were cash flow positive for the full year 2023 and we finished with very impressive revenue growth of 43% year over year. Netflix has always worked hard to consistently serve our customers with quality products and deliver on time to meet emergency needs 20 fourseven any day of the week. Through a series of deliberate and transformative operational improvements with supply chain, partnership development and the expansion of our sales force, we are now realizing a new level of growth potential. I would like to thank the Nephros team for their commitment and hard work to drive these great results. Let me share some of the highlights from our performance.

Speaker 1

1st, we capitalized on the execution of new distributor agreements to more strategically develop relationships with only our strongest partners. In turn, several of them saw record growth levels in 2023 as they utilized their respective infrastructures to deliver our leading technology throughout a variety of customer markets. Of particular note are the partners who water related services provide an important gateway to virtual sales. Their strong relationships with key decision makers have offered us new opportunities to penetrate large segments of the market very quickly. 2nd, growth is good, but growing profitably is great.

Speaker 1

We looked at several areas within our operations, then identified the resolved issues which contributed to losses. One such area targeted for improvement was an inefficient off-site storage footprint. This challenge was made more acute by our significant growth, which resulted in exceeding the limitations of our product inventory space. In response, we opened a new facility with a much larger warehouse in Q4. This new space allowed us to consolidate sites while expanding our overall footage.

Speaker 1

I would like to commend the team in this huge step towards operational excellence because we accomplished the move while simultaneously achieving solid growth numbers. Although it wasn't easy, it demonstrated the commitment and strength inherent in the DNA of our relatively small team. The third point I would like to highlight is the publication of the new ASHRAE Nodlan-four standard in August of last year. This new guidance addressed the microbial hazards of multiple pathogens along with the physical and chemical hazards. The release of this information has already spurred greater demand for nephrases solutions as these more stringent guidelines regarding waterborne, packaging, mitigation require technology that is not widely available.

Speaker 1

This is perceived to be a great opportunity for Nephros given the FDA 510 clearance of our infection control filters as Class II medical devices, which satisfies the exact recommendation detailed in the guidance. The growth in our infection control product line is truly a result of high performance throughout the year in our sales, engineering, quality, operations and marketing departments. We finished the 4th quarter with sales up 27% over the same period from the prior year with $3,300,000 in revenue. This growth capped a year where Netflix reached an impressive $14,200,000 in total revenue, 43% growth over 2022 revenue. As we accomplished this with an impressive improvement in EBITDA, which my CFO, Judy Kreindel, will cover next in the financial section of this call.

Speaker 1

Judy, please go ahead.

Operator

Thanks, Robert. I'm very pleased to have joined Nephros and look forward to help build a terrific company and fast growing business. I will now provide a closer look at NetRose's financial performance in the 4th quarter. We reported 4th quarter net revenue of $3,300,000 a 27% increase over the corresponding period in 2022. And for the full year 2023, net revenue was up 43% to $14,200,000 Active customer sites were 1285 as of December 31, 2023, as compared to 1234 as of September 30, 2023 and 11.72 as of December 31, 2022.

Operator

Net loss from continuing operations for the quarter improved to $654,000 compared to $719,000 in the same period last year. For the full year 2023, net loss from continuing operations improved to $1,600,000 versus a loss of $4,300,000 for 2020 2. Adjusted EBITDA from continuing operations in the quarter was a loss of $51,000 compared to a loss of $460,000 during the same period in 2022. For the full year 2023, adjusted EBITDA from continuing operations marked a huge improvement with a loss of $76,000 versus a loss of $2,400,000 in 2022. Gross margins in the quarter also increased to 62% compared with 59% in the Q4 of 2022, an improvement of 3 percentage points.

Operator

For the full year 2023, gross margins increased significantly to 59 percent versus 47% for 2022, a 12 percentage point improvement from the prior year. Research and development expenses in the quarter were $208,000 compared to $359,000 for the same quarter in 2022. For the full year 2023, research and development expenses were $873,000 versus $1,300,000 in the prior year. R and D expenses were lower due to the wind down in 2023 of our SRP business and consequently a reduction in SRP related research and development expense. Sales, general and administrative expenses in the quarter were $2,400,000 compared to $1,800,000 for the corresponding period in 2022.

Operator

For the full year 2023, sales, general and administrative expenses were $8,900,000 versus $7,600,000 in the prior year. The increase were primarily due to expenses from the ongoing expansion of our sales force and other revenue generating activities. Net cash used in operating activities was $234,000 in the 4th quarter of 2023 and net cash provided by operations for the full year 2023 was $827,000 This is compared to net cash used in operating activities of $193,000 in the Q4 of 2022 and a $3,200,000 used in the full year 2022, an increase of $41,000 for the quarter, an improvement of $4,100,000 for the full year respectively. Our cash balance on December 31, 2023 was $4,300,000 compared to $4,600,000 as of September 30, 2023 $3,600,000 as of December 31, 2022. We continue to be debt free.

Operator

Please refer to today's press release for more details about the calculation of adjusted EBITDA and its reconciliation to which we will file in the coming days. I will now turn the call back to Robert for some closing remarks. Robert, please go ahead.

Speaker 1

Thank you, Judy, and thanks, everyone, for joining and your continued support of Nephros. I'd like to specifically thank the Nephros employees, our partners and our customers who have remained with us on this journey and contributed to these wonderful results. This concludes our formal presentation remarks. We will now take questions from the audience. Operator, please open the call for questions.

Operator

The first question today comes from Nick Sherwood with Maxim Group. Please go ahead.

Speaker 2

Hi, good evening. My first question is, have you seen an increase in deal pipeline with ASHRAE? So can you quantify any changes in your deal pipeline with the new Assurant regulations?

Speaker 1

Yes. Look, it's a great question, great comment, and I'd love to comment on that. So when we talk about the deal pipeline and just pure number of opportunities coming in through to Nephros and the sales team, we definitely see a difference, especially around the mid August timeframe when the ASHRAE five fourteen guidance was released. Mainly to this date, it's been a lot of education, people trying to understand what it means, how to comply and what will it take to kind of give themselves the best chance of mitigating against the microbial pathogens that I discussed earlier. So in that regard, Nephros has been really stepping up and being that educator and letting them know various consultants in helping to protect their facilities.

Speaker 1

As a result, usually then we can teach the customer how to do better. That often results in some inquiries from the perspective of quotes. And I will also expect that to translate into results. So I've been quite pleased with the activity that's driven and what we expect it to continue to drive as the industry was to comply with the guidance. Does that answer the question?

Speaker 2

Yes, that was a perfect answer. Thank you. And then one more question. Have you seen any significant trends in either order size or customer penetration in the Q4 or in the first half or I guess the first two thirds of this Q1 of the year?

Speaker 1

Do you have a bit more looking for from deal size or number of transactions or I guess,

Speaker 2

specific would be average order size from your customers, are you seeing any increases in that?

Speaker 1

I haven't seen too much differences as far as the order size. This business does tend to be a little lumpy. So I'm curious when there's a lot of emergency responses, they tend to be larger immediate responses, things shift right away. Other than that, there's been a fairly consistent pattern, peaks and troughs, based on how long the filters last and when they need to be replaced. But I haven't seen a significant change in order size.

Speaker 1

So yes, I think that answers the question.

Speaker 2

Awesome. Thank you. And then just my last question. Can you provide us any update on your agreement with DynaStar and how that went over the 4th quarter?

Speaker 1

So the agreement with DynaStar with Multiyear wasn't no changes expected or made at this point in time. The commercial market and space in general does take some time to penetrate. Many of the customers have existing inventory, so changing over to net first does take some time. We did just execute a new facility move, which we now have everything needed on the shelf ready to go. Dynastar is ramping up, has a number of really great opportunities, and I look forward to them continuing to drive change.

Speaker 1

In fact, I mentioned before, it does take a lot to move some of the big corporations as they wait for filters to expire before swapping out to a new company. So, good momentum there. I look forward to seeing that accelerate in the future. Nothing too exciting to report about that at this time, just chugging along as I would expect the commercial market to do so.

Operator

As there are no further questions at this time, this concludes our question and answer session and concludes the conference call. Thank you for attending today's presentation. You may now disconnect.

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