Nephros Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 9, 2024

There are 5 speakers on the call.

Operator

Good afternoon, and welcome to the Nephros Inc. 1st Quarter 2024 Financial Results Conference Call. All participants will be in listen only mode. Please note this event is being recorded. I would now like to turn the conference over to Kieran Smith, Investor Relations.

Operator

Please go ahead.

Speaker 1

Thank you. Good afternoon, everyone. Thank you all for participating in Nephros' Q1 2024 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 or events 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 scale its products and service offerings, the rate of adoption of its products and services, the success of its commercialization efforts and the effect of existing and new regulatory requirements on Nephros' 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, May 9, 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, Carrie, and good afternoon, everyone. Thank you for joining us to discuss the 2024 Q1 results, which we reported today. It has been an exciting start to the year. I would say start by thanking the Nephros team for a job well done as our programmatic business grew 12% over the same quarter last year despite the 5% drop in top line net revenue. This top line decrease is attributed to a record non recurring emergency order that was reported in Q1 of last year and an unusually low amount of emergency business in this past quarter.

Speaker 1

The collective result of these factors was a modest 8% overall growth over the prior quarter. Given the unpredictable nature of ER orders, we remain focused on operational prudence and disciplined deployment of capital. These actions positively complement the growth of recurring sales and further support our steady advancement towards solid financial performance. With an established foundation of programmatic business and customer loyalty, we are investing in the development of new capabilities to extend our competitive advantages addressing water quality and safety challenges. One example is the creation of an online filter tracker, which enhances the customers' experience of managing their net gross filters.

Speaker 1

This tool offers automated replacement reminders and documentation of installations and inventory. And these features are just the beginning as Netflix continues to explore ways of generating value in the digital space. Netflix is also exploring how to best support customers in need of nano and microplastics, NMPs, as we seek to expand our future capabilities within our medical filtration lines. Our ability to retain microorganisms with the smallest pore size on the market uniquely positions us to address NMPs, particularly nanoplastics. Looking ahead, the future growth of Nephros will depend upon the continuous enhancement of sales strategies, the leverage of changing regulatory guidance and the exploration of new products.

Speaker 1

Accordingly, our sales team is actively supporting our national partners and nurturing their success through increased training, expansion with existing accounts and conversion of emergency response to programmatic business. Additionally, we have been participating in a record number of trade shows and regional industry events, generating significant brand awareness and visibility to our product capabilities. Netflix's presence also affords countless opportunities to educate key influencers and decision makers on most salient regulatory changes and recommended solutions. The stakeholder connections cultivated in these environments, informed customer frameworks and often lead to future sales. The last area I'd like to highlight before turning the floor over to Judy is the need for solutions that mitigate human exposure to nano and microplastics, NMPs.

Speaker 1

I read a new article almost weekly regarding the multiple health concerns related to NMPs, which are significant. The ability of MMPs to penetrate biological barriers and reach toxic chemicals can lead to cellular toxicity, inflammation and damaged DNA. Our hollow fiber technology, which offers the smallest pore size on the market, enables us to provide filtration that may effectively retain NIMPs. I will now pass the mic to our CFO, Judy Kranda.

Speaker 2

Thanks, Robert. I will now provide a closer look at Nephros' financial performance in the Q1. We reported 1st quarter net revenue of $3,500,000 a 5% decrease over the corresponding period in 2023. This decrease was primarily driven by decreased revenue from emergency response orders, which were unusually large in Q1 of 2023 and not repeated in the comparable 2024 period. However, the decrease in emergency response orders was partially offset by increased revenue from programmatic or recurring sales, which were 12% more than the same period in 2023.

Speaker 2

Gross margins in the quarter were 62% compared with 57% in 2023, an increase of 5 percentage points year over year. The increase in gross margins was driven by reductions in shipping expenses and more favorable terms with our largest supplier. Research and development expenses were $200,000 for the Q1 of 20242023, respectively. Sales, general and administrative expenses were $2,100,000 for both the 1st quarters of 20242023, respectively. Net loss for the quarter was $169,000 compared to $306,000 in the same period last year.

Speaker 2

Adjusted EBITDA in the quarter was negative $95,000 compared with positive $147,000 during the same period in 2023. Net cash used in operating activities was $672,000 in the quarter compared to net cash provided by operating activities of $276,000 in the same quarter last year. The use of cash primarily reflects the operating loss, payment of 2023 annual bonuses, which always hit in the Q1, and an investment in inventory to support future growth. Our cash balance on March 31, 2024 was $3,600,000 compared to $4,300,000 as of December 31, 2023. We continue to remain debt free.

Speaker 2

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 will be found in our filing in Form 10 ks, which should be filed later today. I will now turn the call back to Robert for some closing remarks. Robert, please go ahead.

Speaker 1

Thank you again for joining me and for your investment in this great organization that is so uniquely positioned to solve the toughest problems associated with water consumption. Additional thanks to each of our Nephros employees, our partners and our customers, without which we would not be where we are today. I'd like to close by reiterating our enthusiasm for our future growth prospects as we continue to build on the momentum we have been experiencing. This concludes our formal presentation remarks. We will now take questions from the audience.

Speaker 1

Operator, please open the call for questions.

Operator

We will now begin the question and answer The first question comes from Thomas McGovern with Maxim Group. Please go ahead.

Speaker 3

Hey, guys. Congrats on the quarter. So, yes, let's start off with looking at the growth in recurring revenue. I'm just curious how much of this growth in the programmatic sales is reflective of expansion within those key partners that you've discussed in the last couple of calls versus acquiring new clients? Thanks.

Speaker 1

Thank you for that question, Alex. It's about a good mix of new customers and growth in existing customers. We've been adding a record number of new sites this past quarter, and that's felt really good. So the programmatic business continues to expand. The strategy we've been quite effectiveness has been this land and expand approach.

Speaker 1

We would go in and we would acquire business in one part of the facility. And then as we get comfortable and know who all the players are, we expand to other parts. So that strategy has been pretty effective in 2 of the regions, whereas regions where we haven't typically had a lot of sales exposure are enjoying a lot of growth in new customers where we're just getting to build those relationships and trust as we work with local partners and direct. What we have noticed is the existing business has not always been maintained and growing at the rate we expect. However, the new digital tool that I just mentioned will take a look and track if they've got 10 units that we're treating, did we change that filter 10 times in the prescribed period?

Speaker 1

And what we're finding, probably 40%, 25% of the time, depending on what region we're in, they're not changing the name we've acquired or requested. And that's not because it's done on purpose, but often they project that the filter is installed, there's been no problems and just missing their PMs that they're providing maintenance activities. So our goal, our task is to make sure that we're not bleeding anything on the business we've already done so that we keep that recurring Birdamatic business going while also adding new customers and expanding into places where we haven't been able to add our filters in the past. So the exact split between growth and new business versus new customers, difficult to track that based on some of the deficiencies in maintaining the programmatic business as we mentioned. But we're going to get a lot easier in doing that when we add these digital tools that I just discussed a moment to the hope that answers that question and look for more to come on that business in the future.

Speaker 3

Yes, absolutely. No, that's very helpful. So just kind of on the online filter tracker, just curious when you guys exactly launched that? And have you guys already started to see that reflect in people kind of ordering these filters on time versus as you've mentioned several times since we've been covering that, yes, a lot of times whether it's because they're and this again, like it doesn't sound like it's intentional. It's just they had a lot on their plate.

Speaker 3

They're focusing on their business and might not be ordering these as promptly as they should be. So have you already started to see a kind of shift? Have you seen that start to pay off? Or is it too early to tell?

Speaker 1

Too early to tell. We are just in the beta phase. We are signing up with new customers, making sure we work out the kinks. And what we're finding is, oh, there's another feature we'd like add. Oh, it'd be good if you could do this.

Speaker 1

So we'll probably need to say it's done and move on at one point, but it's proven so exciting in different capabilities and things that we'd like to do to enhance its functionality. So it's really early in those phases. We've been talking about it internally for a few months and we're just happy that it's finally ready to start launching running that to customers, and we're starting to get those results now, but that's still an early basis.

Speaker 3

Got you. I appreciate that. And then my final question is on the NMPs that you discussed in your prepared remarks. So are you guys currently servicing any customers for this press purpose of filtering some microplastics? Or is it something you guys had seen maybe industry demand for and you guys are kind of responding to looking to kind of enter that space more aggressively as

Operator

that seems to be a pressing issue?

Speaker 1

Yes. This has been something that's come up fairly recently. And I read an article that said the average person consumes more than other credit card plastics every week. And I just started to think about what can you do about that being a filtration company. There aren't regulations stating what the acceptable limits are in certain areas and there's not really a driver other than people wanting to do the right thing when it comes to the damage that it can potentially do to humans.

Speaker 1

All this is still being evaluated and still under research. There's just a lot of gaps in understanding what it does long term, the effects of human health, how it disrupts development and people and adults. So we are trying to get ahead of that. And by taking a look at our technology, because it just uses size exclusion, we have a hole of a certain size, anything bigger than that hole doesn't pass through. So without any scientific thought there, we can easily remove NMPs because they are a larger particle size.

Speaker 1

But they are smaller than the average filter on the market, and yes, they do pass right through. So because we have that smallest port size in the market, we're the best filter company to address these NMPs. And that got me really excited as a new opportunity that we need to explore. So we first have to figure out where are the holding capacities, how long would it last, where we recommend it. So we're building that information up.

Speaker 1

We'll get to the point where we can launch this as a solution that people can consider in lots of different markets. But if you think about the healthcare and hospitality market, there is the Joint Commission, there is CMS, there is ASHRAE, there is regulating bodies that tell them what's good, what's bad and give suggestions. There is not that same guidance when you talk about schools, government facilities. So it's a different sell and it's a different it's a push versus a pull. So we're ready to provide the products once we get all that pull details worked out.

Speaker 1

So it's very exciting for us. You're going to hear more and more about it as things go along, and hoping that it represents a significant opportunity for Net Risk.

Speaker 3

Awesome. I appreciate you guys taking the time to answer my questions. I'll hop back in the queue.

Speaker 1

Thank you.

Operator

The next question comes from Mike Gustaitis with a private investor. Please go ahead.

Speaker 1

Good afternoon and congratulations on the quarter guys. Great job. My question is Netflix has been selling the hospitals and college centers, of course. And you also just mentioned, schools and municipalities, but there's also senior living centers and more that you started selling to even before the nano plastics possibility. Do you see this trend of increasing your TAM continuing?

Speaker 1

Mike, it's a great question and good to hear from you. The network has been falling to those entities and part of it comes from where we were born, getting our beginnings in the dialysis space and taking that technology and expanding it into patient care facilities. What you'll see when we start looking at the TAM of other places, schools and alleys, senior centers, correctional facilities, government buildings, is they don't always have the same drivers that you're going to find in those healthcare facilities. I just mentioned a few of the regulating bodies like the Joint Commission, the National that follow and become greatly adhered to when we deal with those patient care facilities. There's not the same driver for a school, believe it or not, saying that you must provide this type of quality of water.

Speaker 1

But we do see that there are articles and documentation of where patients or students or inmates or whomever have been injured and lawsuits happen. So we do get called in and can solve some of these problems. So I do see this continuing. I look forward to it being less of a push and more of a pull because I was answering our comments discussion. But in the meantime, it's all about my team and the nephrostene educating those who are dealing with ramifications when they do have those different contaminants and microorganisms impacting because our infection control products are really are providing a great solution for those places that otherwise would have significant problems.

Speaker 1

So expanding that TAM and SaaS is really good and we see it continuing. It will be a source of driving new business in the future. Thank you for that question. Sounds great. Thank you.

Speaker 1

And one more question, if I could. Could you elaborate on the OEM agreements that you have that

Speaker 3

include Methros filters, dialers or otherwise?

Speaker 1

Sure, sure. I can speak to that. I will have to be a little bit general and not mention names, just out of respect to a lot of the OEMs or competitors with others. But when you're dealing with dialysis and people are using our devices, they're FDA cleared Class II, they become bumping that is worked into the clearance that device will obtain. So often, we have to work in parallel for months, if not years ahead of the launch of a particular product so that the solution, when introduced or released, it becomes something that is that you have to use a specific configuration in order to maintain the use cases and the currencies that, that device has achieved.

Speaker 1

So we have a fair amount of OEM agreements. That's a pretty significant part of our business. And we're always looking for ways to improve how we're performing and delivering value so that those OEMs choose us for the next product revisions and also for the new product launches. They may have requirements that our filters cannot perform today. Maybe it's a size restraint or a capacity constraint.

Speaker 1

So we're able to take and redesign, especially based on our smaller size, accommodate some of those needs. So we become a really favorable partner from the OEMs perspective. So those agreements are nurtured and treated extremely with high regard and importance and priority in our organization. And we have some great people on the team who are experts in what they do, whether it be dialysis or working in hospitals and able to meet the needs of some of those OEMs. So thank you for that and have a great and good question.

Speaker 1

Thank you. And I was going to ask the third question on exciting nanoplastics opportunity, but you actually covered that already. So thank you very much and again congratulations.

Operator

The next question comes from Ankur Sagar, a Private Investor. Please go ahead. Mr. Sagar, your line is open. Did you have a question or perhaps your phone is muted?

Speaker 1

Hey, good afternoon. Sorry about that. Hey, good afternoon, Robert and Judy. Thank you for taking my questions. A good quarter with growth on the programmatic revenue.

Speaker 1

Robert, you laid out a couple of, I think, good initiatives on the recurring revenue part, the filter. I think you renegotiated the contracts with distributors to know where the filters are placed. And now this online tracker filter, where the customers will know when the filter needs to be replaced. If you can share any insights, any early insights that you have seen on how this can even help to accelerate the programmatic revenue further than what we have seen now, that would be great. Sure, sure.

Speaker 1

It's great insight. And we started looking at this a couple of months ago. And what we were noticing is the team is working really hard and it's closing a lot of new business. And we're not losing customers, active customer sites stay pretty high, but yet we weren't seeing that recurring revenue. Our baseline is where we were starting from quarter after quarter, we're seeing lower and lower.

Speaker 1

So the numbers didn't add up. We tried digging into accounts and figuring out where we sold filters and it got a certain number of machines and respecting a certain amount of turnover, it just wasn't achieving that turnover. Well, as it turns out, nursing homes, for example, don't have big budgets and they could choose to leave them on for years before they change it out instead of 3 months or 6 months. And that's not good. Sometimes it's just neglecting and not having staff to go find it and change it.

Speaker 1

More often than not, it's just forgotten about and not the priority and you've got short staffs and budgets going in other places. So by having a reminder, to be able to tell them that, hey, this was installed a certain time period ago, It is driving that change or should drive that change. That's the theory. And we have an offline tool where you can look at a spreadsheet and say, okay, we sold these 6 filters 6 months ago, but often the response was, well, we didn't install it yet or we installed it a month after we bought it. So it wasn't real clear.

Speaker 1

But being able to scan that QR code on that filter once it's put in place gives us the exact time it's installed, So that we cut that gap and get more accurately and automatically tell what and when and where things are supposed to be installed. So that we don't get the 75% or so that we're not replacing when they're supposed to be. And that's on the optimistic side. So the yes, I'm very optimistic that we will get the growth in programmatic business that's reflective of the new sales that we're achieving on a daily basis. I'm not sure if that's exactly your question, but that's the That's great.

Speaker 1

I agree. I think it's easier to sell through the 5 filters in the existing installations that you have than to just sell new 5 brand new devices from scratch. So that's great. Good to see that. And I think in the presentation that you had at the conference, the plant Microcap Conference, I think you laid out a few initiatives for growth.

Speaker 1

And I think there's a bunch of them, microplastics you mentioned with new devices. And then there was commercial, there could be even some foreign distributors. If I could have you probably summarize and go through at least the 3 top initiatives you think that you're working on currently and that could help for this year's top line, that would be great. Okay. No problem.

Speaker 1

That last phrase that you put in there for this year's top line may be different. So I was going to say, will the growth initiatives change, will it be up in short term or long term? However, the short term or this year impact, I expect this digital tool to really be a driver. And it's not because it's going to bring in new customers, but for the reasons we talked about earlier of it not letting us forget about filters that we've already won. We did the hard work.

Speaker 1

We delighted the customer. We got the units installed. Why not get the filter changed out every 6 months? And by the way, it's only FDA cleared for 6 months. Beyond that, we're not guaranteeing its performance, although it doesn't just turn off at 6 months to one day.

Speaker 1

So I do think that this digital tool getting that in the hands of people who have, like hospital officials, those who have a skin in the game when something doesn't go as planned or expected to drive that programmatic change out on a return basis. Next, I think that this cross selling where we are maybe we're in there taking care of the ice machine, but we also have sterile processing products, and that's a big part of hospitals, stand in bedgers as well, or bubblers, water fountains, showers, sinks, in line bedgers. There's just so many different applications, and typically you just bought into a facility for 1 application. So that's that cross selling or land and expand strategy is going to be probably the 2nd bigger driver. And then nurturing our partners and distributors.

Speaker 1

So it's getting out to these events, speaking at conferences. I will be at APEC in a month to, we've got the ASHU conference coming up in California in July. These are big national events where you get all the infection control people, you get the members of the conferences that are responsible parties at these facilities for maintaining infection control, protocol, water management programs. Those are the people where we're going to have to educate on the new guidelines that come out, the new technologies available and mitigation strategies against pathogens and other things that impact the infection control space. So if you ask what the top 3 are that will have an impact this year, I would take those 3.

Speaker 1

But as you noted, there are others too that were discussed during the point of microcap investment problems as well. Yes. That's great. One last one regarding the gross margin. There was a nice gross margin improvement.

Speaker 1

Do you expect that to continue from that shipping gross margin side that you captured? Do you expect that to continue for the rest of the year? Yes. I'm going to let Judy handle that question. I have my own thoughts, but she's been digging into it pretty deep.

Speaker 1

Judy, do you have?

Speaker 2

Yes. I'm sorry. Could you repeat the question again? For some reason, it didn't come clearly.

Speaker 1

From a gross margin standpoint, Judy, I think the gross margin was higher, I think, about 62% compared to last year's quarter. 62% compared to last year's quarter. So do you expect that to continue for the throughout? You expect to keep that gross margin or the shipping will fluctuate and

Speaker 2

Yes. Okay. And thank you for repeating that. It just didn't come clear. So we were very pleased with margins.

Speaker 2

Our shipping expenses, we've been managing very carefully. They were unusually high during COVID period, but we've been working very hard managing air versus sea shipments and working through that. So we feel right now without sort of an economic increase overall in shipping expenses, we feel pretty good about that. The negotiations and the better terms with our supplier, that's something that continues. So ultimately, our gross margin is affected by our mix of business slightly.

Speaker 2

Certain larger customers may have a different discount here, but we feel pretty good about maintaining relatively strong margins like this. We'll see quarter to quarter the decent fluctuations, but I don't think this is just such an anomaly.

Operator

Okay. The next question comes from Nick Barwell with Arbor Group. Please go ahead.

Speaker 3

Judy, may I follow-up on the last gentleman's question? You indicated that gross margins might be sustainable for a couple of factors. One of them is better terms from your supplier. Is that in part or reflected in any way? Did currency have an impact either to your income statement or balance sheet?

Speaker 2

Thank you for the question. No, currency has just a modest negligible effect. When we renewed our contract with our largest supplier, we did do a good job of negotiating terms that were more favorable. We have a longer term supply. They know our volumes are growing.

Speaker 2

So that really relates to the actual pricing of the finished goods products that we buy.

Speaker 3

And I'm curious, given the base business grew 12%, to what degree does that in your mind reflect a softer economy or perhaps just a short term perturbation? That seemed versus past history seemed a little more modest than normal year to year growth or sequential growth ex seasonality in the base business, not including the emergency response?

Speaker 1

Yes. Hi, Judy. I'll take that question, if you don't mind. Hi, Nick. How are you talking going?

Speaker 3

Fine. Thank you for answering it, Robert. I appreciate it.

Speaker 1

No worries. It's a really good question and something I've been keenly aware and focused on over the past few weeks, if not months, coming up to the close of the quarter. And I've got probably 3 different attributions to guide that. My first response is, if you look at the number of hospital beds as an indication of the performance of the healthcare or patient care market, that number is not growing. It's pretty stagnant, it's not lower, which in that case, the number of port services, whether it be ice machines, shower heads, sinks, faucets, it's growing accordingly.

Speaker 1

So from that aspect, the market is flat. If you look at health care industry overall, it's only growing at 2%, 3% tops. So again, another indicator and if you look at this growth domestic product and other things. So when we hit a number like 12%, modest, yes, still far outpacing the growth of the industry itself. So I think we're kind of a victim of our own success as we set up expectations of huge growth numbers, which we do expect to continue to grow in double digits, just personal expectations, not anything we're committing to or guiding.

Speaker 1

But the growth of 12%, although modest, not something to be ashamed of. Another thing I would add is the winter months, the quarter months tend to be seasonally lower in sales. There had not been a lot of seasonality quite evident before, somewhat masked by that emergency response. But when I strip away the numbers and look just at that programmatic and core business, I do see a seasonality kick in quite clearly and we're in the trough of that. So those are the couple of 3 things I would say in response to the 12% number.

Speaker 1

It's nothing to be disappointed about from my perspective as far as the reflection of how we're closing business. We are taking market share from our competitors and we're not losing with leading customers on the back end. So I'm pretty happy from that perspective, and I look forward to still delivering good types of numbers going forward.

Speaker 3

Yes. I'm curious, Robert, what is the mix between direct and your distribution, your various distributors? And does that shift have any impact on the higher end of the range of gross profit margins?

Speaker 1

When we look at our partners, distributors, we have far fewer than we did this time 1 year ago. And that's very, very intentional and deliberate. Those who are still with us are much more aligned with how we do business, the value story that we sell. We've got the relationships in places we would not otherwise have a chance of touching. When you look at the small number of salespeople that we have and the thousands and thousands of targets out there, there's no chance of us touching them all.

Speaker 1

So the distribution partners are essential. The trick is making sure they understand the value that Netlist provides when it goes to solving problems for our different customer basins and facilities. So they're able to go in and sell the products and it's not a discussion about price. It's how fast can you get it when you take care of everything from an installation perspective. So they're commanding premiums over the alternatives.

Speaker 1

When you talk direct, often we are offering some type of discount. From a customer perspective, there isn't a lot of difference. From a margin perspective, it's slight. But it's far the volume of sales far outweighs the gross margin dollar, positively outweighs the what we did up in having a partner there delivering the goods as well. So it's a good question.

Speaker 1

We always keep an eye on that mix. There's been no significant change one way or the other to say that that's what's impacting that gross margin. It's more the items that Judy mentioned earlier.

Speaker 3

Yes. So really, I think I hear you saying that at the operating line, the sale through direct versus direct is roughly the same. The gross margin may be different, but the allocation of SG and A is perhaps if you did it in some fashion or could do it would be somewhat lower given the volume of a direct order.

Speaker 1

I'm not sure I would say the same, but it's not significantly different.

Speaker 3

That's good enough. And then last question, I'm curious, has headcount changed dramatically over the last year?

Speaker 1

Good question. Dramatically, no. However, we have been adding resources as the sales grow to support the additional resources. We've noticed that there's a certain capacity that a person in the region can handle. And once they reach that saturation point, we've got to add more heads to be able to cover more and still provide that personal touch with direct and guidance training for the partners.

Speaker 1

So we've added an area of sales and continue to selectively add, but we're being extremely prudent about where we deploy heads and what costs we incur because we think one of the bigger strengths that we have, and we remember the history quite well where we came from, that we have to maintain a certain level of performance that we are deploying capital in the most efficient use so that we return that value for our shareholders.

Speaker 3

And then my last question briefly, you've moved into a new facility and consolidated. To what degree is that been reflected in the better gross margins in particular, but perhaps the ability to generate a positive sustainable positive cash flow?

Speaker 1

That's a very good point. The new facility expansion to where we were at our main headquarters allowed us to cease use of a couple of other sites, some off-site storage and other facility in a farther away location. So it's a bigger place and it's much closer so that the amount of effort transiting back and forth when it does occur is much, much less and easier cost. So that does result in some savings. I don't know if I've quantified that.

Speaker 1

If you were just getting everything settled and getting that operation up and running and getting the inventories at the right levels. So I think that may be reflected in Q1, maybe more so in the future quarters. I don't know, Jeet, if you had anything to add to that or might be able to quantify any of this. I don't know that we've done that exercise to show what that impact has been.

Speaker 2

No, I think you handled it well. I don't think you're going to see a dramatic change in our costs, but it will help long term.

Speaker 3

Okay. Thank you. I appreciate it, Judy, Robert. Thank you.

Speaker 1

Thank you.

Operator

The next question is a follow-up from Thomas McGovern with Maxim Group. Please go ahead.

Speaker 3

Hey, guys. Yes, so I thought I'd follow-up and actually those last two questions are well suited for my outstanding question. So firstly on the headcount increases that you guys did over

Speaker 1

the past year, you guys kind

Speaker 3

of answered half my question saying you guys are going to continue to selectively add heads where it is needed. But given what you discussed in terms of short term catalysts between the digital tracking tool, the cross selling opportunity in the event, Each of these seems to me as though you'll need boots on the ground to do this. And from where I stand, it looks like they could be fairly segmented in terms of skills or expertise. Do you guys anticipate any need well, first of all, do you expect similar based on the demand you're seeing in the market, are you expecting to add pretty similar in terms of headcount, total number of headcount similar to 20 23 more or less? And then second question is, have you guys looked at or considered adding maybe specialized sales people, whether it's to target these NNPs or to really get to know the digital tool and bring people on, bring your sites on board with that?

Speaker 3

Or is it more just based on territory with general salespeople that go out and kind of wear multiple hats to get you guys

Speaker 1

to where you need to be? So Thomas, thanks for that follow-up question. I do have to wonder, are you sitting in my staff meetings? It has very, very good thoughts, insights and all things that we're thinking about. I love the thought that you just said, maybe it's really just took a word in my mouth.

Speaker 1

When it comes to the asset, I'll start there first. That does require some specialized expertise. We don't have that in house. So we're working with a partner that actually already has this software and technology developed, launched and has been running it in other spaces and we're just adopting it and changing it to fit hours. That's how we were able to go to minimal viable product in such a short period of time and now enhancing it to match what we want.

Speaker 1

We literally only spend a few months on this. And if you've ever been in the software development world, starting from scratch can take a year or so. So that's we took advantage of an existing tool and just repurposed it for our needs. That saved time, cost and also we didn't have to bring expertise in house. When it comes to NMPs and other future looking technologies, We did just add an engineer.

Speaker 1

We're looking to add another one. And we are selectively looking for people with certain skill sets to help handle some of these future growth areas. And all of what we're doing is going to put into our budget baked into our profitability goals, making sure that the sales support some of that growth and deploying capital, like I mentioned, where it makes sense. And I'm using an ROI type decision for everything that we're doing. If I add this head, spend this money, will I get that return over what period of time?

Speaker 1

And does it make more sense to spend here than it does on this other project. So that's been very helpful as far as making sure that we feel comfortable about where we are spending and where it makes sense to lean forward and take a risk for bringing on an asset so that we might return greater growth faster. We're going ahead and doing that. I hope that answers your question, but thanks for that. And that's a good insightful question.

Speaker 3

I appreciate it. It does answer my question. And then the final question I have for you guys is on that warehouse, right? So maybe it doesn't make a huge impact on any one particular quarter. You're hoping to see some margin accretion over the long run as a result.

Speaker 3

Two questions on that. Are you guys still using any 3rd party warehouses across the country maybe just to make sure that your distribution points are near several sites, particularly as you guys continue to expand? And the second question is with your in house warehouse or the newly developed warehouse, how long do you expect the capacity of the warehouse? Do you think we'll be able to service your inventory storage requirements for at least the foreseeable future? Or do you anticipate needs to bring on 3rd party warehouses or possibly expand the existing warehouse?

Speaker 3

Appreciate it.

Speaker 1

Yes. Sure, I can address that. So the first question, as far as I know, we don't have additional storage sites or other kind of errant facilities throughout the country. Really, that was the goal, to get rid of all of those extra expenses. To address the point you mentioned where being closer to a customer or a key supplier, we do have partners now that are in the stocking mentality or stocking position.

Speaker 1

So that we've been able to lean on them even if it's not a count that they aren't giving service to be able to get something out the door. But we still maintain 24 hour less type response with emergency orders, shipping out same day. The team won't hesitate to drive in 7:8 o'clock at night on the weekend and get something shipped out, driving it personally to a shipping carrier. So having a closer facility to service the West Coast or something to that effect, maybe there may be some benefit there, but it's going to be hard to beat the speed if we turn around things today. So that's the first part of your question.

Speaker 1

The second part about needing to expand again. We have certain milestones built into once you get to this point, we're going to need to add that facility. And the particular space where we are now, I'm only utilizing about 50% of what I'm going to have available in the short term. So at that point, when that space becomes available, our sales should require us to get additional space and we will take advantage of it. So it's a very deliberately planned, very convenient and we have an excellent real estate agent that we've been working with and making sure that we've got our needs met and we're planning out for 3 to 5 years and make sure that everything matches up very well.

Speaker 3

Great. I appreciate you guys taking the time to answer all my questions. Congrats again on the quarter.

Speaker 1

Thank you.

Operator

The next question comes from Ralph Weil with R. Weil Investment Management. Please go ahead.

Speaker 1

Hi, Robert.

Speaker 4

Nice presentation today. I was wondering, in the past, they talked about customer retention. And I was wondering what the percentage of the customers have been retained versus new customers? And have you seen any price pressures in the in what you're selling? And are there any major new accounts that you've taken on or that you are close to taking on.

Speaker 4

And then I have another question.

Speaker 1

Okay. So I'll start with the retention question. So the retention rates I'm sorry, let me move it back a little bit. Let's start with the active customer sites. We take the number of active customer sites and we come up with a net sales net new customers and that's a function of what we've lost versus what we've gained, and we have sort of rolling retention rate.

Speaker 1

And quarter over quarter, we hover right around the same rate. Our quarterly retention rates are right around the mid-90s to 92%, 94%. So that's been very, very good, very high. It tells us that our customers are we're satisfying them. And despite our higher than the competitive price, we're still retaining them because we're frankly a super different product with the way that we perform.

Speaker 1

Now the from a price perspective, we do get pressure. We do have a product that is a premium product. There is a significant amount of quality assurances and checks and just a lot that goes into a medical device versus a standard off the shelf filter. But when customers realized that what they were spending on how frequently they were changing the previous filter, how to recover from a Legionella outbreak, they no longer have to, the price of our filter just becomes a midpoint. So from that perspective, pressure, yes.

Speaker 1

However, in our premium product position, I think it's well justified and our customers seem to agree. So, we'll continue to leverage the performance and making sure that we're providing more value than they're charging and we're not leaving too much value on the table when it comes to how we price and as far as getting customers and keeping customers. Not let's cover your questions there. I might have missed 1 or 2 points, but let me know if I didn't.

Speaker 4

Okay. You've been there I'm not sure, but it's probably closer to a year now. And you saw a significant opportunity at Nephros and you know the water business quite well from your past and you've done well, other companies in the past. So what would you say now that you've been there for a while, what has come faster and better than what you might have expected? And what do you feel are your major challenges going ahead that you may not have thought were as major when you joined?

Speaker 1

Okay. Let's see. I'll start with what's gone better. The fact that this team will jump through hoops, run through a wall to get a filter out the door to a customer and meet a demand is just incredible. I've never experienced that in a company where the people that work here, they take it personal.

Speaker 1

Every customer need, every desire to have something installed, it means the world to them. And it shows. And when we have the sales team out willing to sacrifice on birthdays and weekends and kids events to go make sure they take care of the customer. That's how we then need customers that stay with us for life. And that's I didn't see that in previous places and positions where I worked, any thought to that extent.

Speaker 1

And I also know that this team will pivot and change when something isn't working or when there's a certain need that is not a standard off the shelf. We're jumping through hoops to try to figure it out. And we'll put our heads together and there's such smart people that have way more talent and experience in this industry than I do working here. It's just a matter of giving everybody a chance to help solve the problem and it works really well. So those have been my really pleasant surprises, takeaways, speed of responses, I think, reflect on the 1st year.

Speaker 1

From a what was the second part, how did you phrase it? It was things that we will bump differently?

Speaker 4

What has been more challenging to you and how you're working those things?

Speaker 1

Got it. Got it. So the more challenging, Kuehne, has been, if you have a customer who has a problem and they don't have a regulatory body telling them to fix that problem, the sheer complacency sometimes to not want to address the problem and only do what they're required has been somewhat startling. Frankly, it's I've had customers say, I'm not going to spend any money that's been told to. I just don't have the budget, don't have the people.

Speaker 1

I've got other problems in the facility. These are typically life or death situation when people getting sick and coughing. So that just sorry, I can keep back online. We've been addressing that through education, just making sure we're sharing exactly how that's maybe more upfront cost, but it's saving you more maintenance, less filter changes, less response, cost dollars. So it's been working.

Speaker 1

It's just a slow grind and then combat when it comes to sharing that message with the parties that are making these decisions. So good. Yes, good questions, insightful questions. And it's been a nice thank you so far.

Speaker 4

Thank you. Robert, I suspect that beside I mean, your major areas of the hospital business, nursing homes and dialysis area. And I would assume that there are other areas that could use in an important way perhaps very pure water. And I'm just wondering whether you have the capability at this point to go after some of those areas? And if you do, how you would go about that?

Speaker 4

And how do you see the revenue mix perhaps changing over the next 2 to 3 years from the major reliance on hospitals and nursing homes and dialysis? Are there any significant thoughts that you might have in that area? And of course, you mentioned nanoplastics before.

Speaker 1

Yes. I'd also go into reverse. That's the example of an area where we have pivoted into or starting to look at different areas. Hospital or patient care in the lines of infection control, I want to make sure I use that word patient care and infection control as opposed to hospital because there's clinics, there's senior housing facilities, there's correctional facilities, lots of places that house people and take care of people. Those are all our target markets and it makes sense because there's regulation driving it.

Speaker 1

Now if we can get that same regulation guidelines from school boards or from government agencies recommending certain water quality standards in government billings, those are going to be the areas that we pivoted to fastest. Other than that, it's us creating a market or a push versus a pull. And that tends to nanoplastics. It's something that we through seismic collusion can already solve and resolve. So it's not inventing a new wheel.

Speaker 1

It's not creating some new muscle. It's deploying what we already have in a different application. So those are the areas that we're going to see impacting and growing fastest. Other places, I am getting inquiries here and there for applications. I won't mention too many of them here, but when it comes to sterile processing, that's an area that also is already suited for our technology.

Speaker 1

So we're going to dive into sterile processing, how we meet the needs of places that have instruments that need to be cleaned after coming in contact with patients of whatever nature. So all good growth areas. I do see those becoming significant parts in the future.

Speaker 4

And parties that are coming to you for this capability?

Speaker 1

I've had 2 type of those 2 of those types of requests in the past month. I won't say who or which one, but it's areas that we haven't typically dealt with in the past outside that patient care realm. So that's exciting.

Speaker 4

Yes, that does sound good, especially if they're coming to you. Okay. So I thank you. I thank you.

Operator

Okay. This concludes our question and answer session and the Nephros Inc. Q1 2024 Financial Results Conference Call. Thank you for attending today's presentation. You may now disconnect.

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Key Takeaways

  • Recurring revenue growth: Programmatic sales climbed 12% year-over-year, partially offsetting a 5% decline in overall net revenue driven by lumpy emergency orders, resulting in an 8% sequential increase.
  • Digital filter tracker: Launched a beta online tool with QR code scanning to automate replacement reminders and installation tracking, aimed at boosting filter change compliance and recurring revenue.
  • Micro- & nanoplastics initiative: Leveraging its hollow-fiber filtration with the smallest pores on the market, Nephros is developing solutions to remove harmful nano/microplastics and expand medical filtration capabilities.
  • Improved gross margins: Q1 gross margin rose to 62% from 57% a year ago, driven by lower shipping costs and better supplier terms, supporting operational prudence amid volatile emergency order demand.
  • Strategic market expansion: Sales efforts include deeper collaboration with national partners, record attendance at industry events, cross-selling across healthcare applications and conversion of emergency response into programmatic contracts.
AI Generated. May Contain Errors.
Earnings Conference Call
Nephros Q1 2024
00:00 / 00:00