Nephros Q2 2024 Earnings Report

Nephros EPS Results

• Actual EPS: -$0.03
• Consensus EPS: -$0.01
• Beat/Miss: Missed by -$0.02
• One Year Ago EPS: N/A

Nephros Revenue Results

• Actual Revenue: $3.25 million
• Expected Revenue: N/A
• Beat/Miss: N/A
• YoY Revenue Growth: N/A

Nephros Announcement Details

• Quarter: Q2 2024
• Date: 8/8/2024
• Time: After Market Closes
• Conference Call Date: Thursday, August 8, 2024
• Conference Call Time: 4:30PM ET

Nephros (NASDAQ:NEPH), Inc. is a development-stage company specializing in advanced water filtration and purification technologies for medical, laboratory, industrial and defense applications. The company’s core offering centers on proprietary hollow fiber ultrafilters designed to remove bacteria, viruses, endotoxins and particulates from water streams. These ultrafilters are used in hemodialysis systems to protect patient treatment, in pharmaceutical and laboratory environments to ensure water quality and in critical field-deployable units for military and emergency response.

The company’s product portfolio includes standalone filtration cartridges for point-of-use and point-of-entry installations in dialysis clinics and hospitals, as well as bench-top and portable water purification systems. Nephros’ Water Purification System (WPS) is engineered to meet stringent U.S. Army and World Health Organization guidelines for field use, delivering potable water from untreated sources. In parallel, the MembraPure™ brand serves pharmaceutical and biotech customers requiring laboratory-grade water for research and manufacturing.

Nephros holds FDA 510(k) clearance for its medical-grade hollow fiber filters, underpinning its role in critical patient care applications. The company distributes products directly to healthcare providers and partners with OEMs and authorized distributors to serve markets across North America and select international territories. Its technology has been adopted by hospitals seeking to safeguard dialysis water and by research institutions requiring ultrapure water for sensitive assays.

Founded in 2005 and headquartered in Kinnelon, New Jersey, Nephros operates under the leadership of President and Chief Executive Officer Hal S. Zarem. The company maintains a focus on product innovation through ongoing research and development efforts, pursuing commercial partnerships and clinical collaborations to expand its footprint in water purification and filtration solutions.

Nephros Q2 2024 Earnings Call Transcript

Key Takeaways

• Achieved highest number of active customer sites ever with a 15% year-over-year increase, adding over 300 customers and recording the best retention rate in six quarters.
• Programmatic sales rose 8% year-over-year, but a 92% decline in emergency response business led to an 8% drop in total Q2 revenue.
• Improved profitability with a 28% reduction in net loss and a narrower Adjusted EBITDA loss, driven by disciplined SG&A management.
• Filter tracking app rollout encountered initial offline scanning issues that are now resolved, but full implementation across accounts remains in progress.
• Leveraging the market’s smallest pore size filter to address nano- and microplastics and targeting growth in dental, sterile processing, and endoscopy through OEM partnerships.

Presentation

[Operator]

Good day, and welcome to the Nephros Inc.'s second quarter 2024 financial results conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad, and to withdraw your question, please press star then two. Please note today's event is being recorded. I'd now like to turn the conference over to Kirin Smith with Investor Relations. Please go ahead.

[Kirin Smith, President at PCG Advisory]

Good afternoon, everyone, and welcome to Nephros' Q2 2024 earnings conference call. This is Kirin Smith with PCG Advisory. Thank you all for participating in Nephros' second quarter 2024 conference call. Before we begin, I would like to remind you that this call will include forward-looking statements regarding the operations and future results of Nephros. For a discussion of these forward-looking statements, please review Nephros' SEC filings, including 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.

[Kirin Smith, President at PCG Advisory]

Factors that may affect the company's results include, but are not limited to, 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 healthcare providers, 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, August 8, 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. Now I would like to turn the call over to Nephros' President and Chief Executive Officer, Robert Banks. Robert, please go ahead.

[Robert Banks, President and CEO at Nephros]

Thank you, Kirin, and good afternoon, everyone. We appreciate you joining us for our Q2 2024 earnings call. I want to start by expressing my gratitude to the entire Nephros team for their continued hard work and dedication. Today, we reported our 2024 second quarter results. As in the previous quarter, we began to break out the programmatic business and emergency response business in order to provide greater clarity of the health of the core business. Programmatic describes the sales of filters as part of an ongoing, long-term water management solution for the control of pathogens in water, while the emergency response business can fluctuate with large one-time orders, and that's just due to the nature of that business.

[Robert Banks, President and CEO at Nephros]

I'm proud to report that in the first half of 2024, we have achieved the highest number of active customer sites ever, with a 15% increase over last year, adding over 300 customers in the past 12 months. In Q2, we have managed the highest retention rate in the past 6 quarters. These reasons why I am very proud of all the Nephros team for executing on such a high and consistent level. In the second quarter of 2024, we experienced a very positive increase in non-emergency response business of 8% compared to Q2 of last year. This solid growth was offset by a 92% year-over-year decline in our smaller emergency response business, resulting in an 8% decline overall in Q2 total revenue.

[Robert Banks, President and CEO at Nephros]

We also just reported a 28% year-over-year improvement in our net loss as we continue to focus on cash flow generation and overall profitability. We believe that one contributor to the decline in the emergency response business is the reduced stringency of waterborne risk response in territories previously committed to both proactive filtration measures and robust corrective actions. We continue to focus on key initiatives that drive long-term growth. One significant achievement is the expansion of our digital tools, including the filter tracking app, which is designed to enhance customer engagement and ensure consistent filter replacements. The speed of implementation has not yet met our expectations as we continue to fine-tune the platform and online operability.

[Robert Banks, President and CEO at Nephros]

Additionally, we are advancing our capabilities to address the growing concern around nano and microplastics NMPs, leveraging our unique position with the smallest pore size in the market, which is a key competitive strength and allows us to offer an excellent solution to this dire problem. We are seeking relationships with other entities and OEMs that may purchase and integrate our solution to their offerings, enabling them to make the claim of remediating NMPs. Looking ahead, we are also strategically positioning ourselves to capitalize on growth opportunities in various sectors beyond hospitals to areas like dental practices, sterile processing, and endoscopy processing, where we are seeing there is clear growth opportunity. I remain excited about our overall value proposition and long-term growth prospects while focusing on profitability and return on investment for our stakeholders. As we help the world meet its critical water filtration demands.

[Robert Banks, President and CEO at Nephros]

I will now turn the call over to our CFO, Judy Krandel, to discuss our financial performance in detail. Judy?

[Judy Krandel, CFO at Nephros]

Thank you, Robert. I'm pleased to provide an overview of our financial performance for the second quarter of 2024. Our Q2 2024 net revenue was $3.25 million, down 8% compared to Q2 2023. As Robert alluded to, this decrease reflects the continued low contribution from emergency revenue. Excluding the emergency response revenue, sales increased 8%, due in part to the increasing success from our longer-term and newer sales personnel hired in 2023. Our gross margin remains strong at 59%, flat year-over-year, and a slight decrease from 62% in the first quarter of 2024. The sequential decrease was due to increased shipping expenses and additional reserves, primarily for slow-moving commercial products. Despite these challenges, our product gross margins before shipping and non-cash reserves stayed very healthy, indicating strong underlying product performance.

[Judy Krandel, CFO at Nephros]

We achieved a 33% improvement in our net loss of $289,000, down from the $433,000 loss in the second quarter of 2023. This is primarily due to reduced SG&A expenses, which declined by 13%, driven by lower stock compensation, bonus accruals, commissions, and professional fees. Adjusted EBITDA improved to a loss of $133,000 in the second quarter of 2024, from a loss of $183,000 in the prior year period. Moving on to the six-month period. Sales for the six months ending June 30, 2024, declined by 6% from the prior year period, but again, excluding the emergency response revenue, sales increased by 10%.

[Judy Krandel, CFO at Nephros]

Gross margins improved to 61% in the first half of 2024, from 58% in the prior year period. SG&A expenses decreased by 6% in the first half of 2024 versus the prior year period, due to a decrease in bonus accrual, sales commission expense, stock compensation expense, and professional fees, offset in part by an increase in salary expense. Our net loss decreased 38% to $458,000 in the first half of 2024, from $739,000 loss in the prior year period. Our balance sheet remains strong, with a cash balance of approximately $3.1 million as of June 30, 2024.

[Judy Krandel, CFO at Nephros]

This is a decrease from $4.3 million at the end of the first, the end of, the last year, 2023, mainly due to increased inventory and accounts receivable and the payments of annual bonuses. Despite these changes, we continue to operate debt-free, providing us with flexibility to invest in growth initiatives. As we look to the future, we are focused on maintaining financial discipline while investing strategically in areas that will drive long-term value. This includes optimizing our product pricing, improving operational efficiencies, and exploring strategic opportunities for expansion. I will now turn the call back to Robert for some concluding remarks. Robert?

[Robert Banks, President and CEO at Nephros]

Thank you, Judy. As we move forward, Nephros is well positioned to continue to grow its trajectory by focusing on innovation, customer engagement, and strategic expansion. We remain committed to providing high-quality water filtration solutions that meet the needs of our evolving customers. I want to extend my gratitude to our investors, partners, and the entire Nephros team for their continued support and dedication. We look forward to sharing more updates on our progress in the coming quarters. This concludes our formal presentation. We will now open the floor for questions. Operator, please open the call for Q&A.

[Operator]

Thank you. We will now begin the question and answer session. To ask a question, please press star then one on your telephone keypad. If you are using a speakerphone, we ask that you please pick up your handset before pressing the keys. If at any point your question has been addressed and you'd like to remove yourself from queue, please press star then two. Once again, ladies and gentlemen, that's star then one if you have a question. Today's first question comes from Tom McGovern with Maxim Group. Please go ahead.

[Tom McGovern, Equity Research Associate at Maxim Group]

Hey, guys. How's it going? So yeah, so first question, I just wanted to see if you guys could elaborate a little bit more on the reduced stringency for the waterborne risk response in certain territories. Just wondering, you know, if there was a specific reason you guys can identify for that reduced stringency? And then maybe kind of a follow-up question on that is, you know, with the ASHRAE 514, I believe it is, the standard that came out, I think it was at the end of last year, just kind of curious if you could give an update on that. I know you guys are doing a good job of trying to inform clients of that, but have you guys seen, you know, maybe a shift in clients that guideline applies to in terms of reorder rate?

[Tom McGovern, Equity Research Associate at Maxim Group]

Any color on that would be very helpful. Thanks.

[Robert Banks, President and CEO at Nephros]

Yeah, thanks for the question, and good to talk to you again, Tom. So on the first question, identifying any specific actions or things that may have happened, if I look specifically at Ohio and the Department of Health, their system was basically overwhelmed with number of cases and urgencies and positive test responses. So the mentality changed that in order not to overwhelm the system, they changed that stance. They stopped testing so excessively and reverted back to a method of just letting each individual entity handle the situation.

[Robert Banks, President and CEO at Nephros]

Now, not to say that there is a lax in care of the importance of patients, but coming out in the future, in that same region, an Ohio Administrative Code, rule number 3701-22-07, it's a memorandum requiring testing, and in order for you to obtain a hospital license, you'll have to show that you've tested over some period. So that starts on October 1 of this year. So we could see a return to some a higher level of those emergency responses and then other states and areas in the region following suit. I'm seeing similar legislation in New Jersey as well. So that, I think, is a big influence based on the second part of your question of the ASHRAE guidelines, and that's now requiring testing as well.

[Robert Banks, President and CEO at Nephros]

So I think that those two influences coming down the pipe could change that, but going forward, I cannot rely on emergency response as part of the forecast since it is something in a more non-controllable state of business and so on. I hope that answers your question. Despite that emergency response, you'll see that that core is still strong, maintaining kind of an average around that double-digit growth trajectory, which is impressive in the time that we have today. So thanks for that question.

[Tom McGovern, Equity Research Associate at Maxim Group]

Gotcha. Appreciate it. And then I have one more, and I can jump back in the queue. So this is just on the filter tracker. So obviously, rollout seems to be, you know, maybe not quite as rapid as you would expect it, as you guys are kind of working through some kinks or maybe adding improvements to the platform. So I was just wondering if you'd give an update on kind of how you're seeing this rollout. Last time we spoke, you said it was kind of like a 12-month implementation timeline, which would kind of have it fully rolled out and integrated, by the end of the first quarter in 2025. Is that still the case? Do you guys kind of

[Tom McGovern, Equity Research Associate at Maxim Group]

Is that kind of possible delays cooked into that timeline or now do you expect it to maybe be pushed to the end of second quarter? And then just kind of a follow-up on that would just be: have you seen you know changes in reorder rates from the clients that kind of have the prototype of this? Have you seen that it's been working? Any commentary you can have on kind of just initial success of the platform would be helpful as well. Thank you.

[Robert Banks, President and CEO at Nephros]

No, great question. And the filter tracking app we were talking about, and we do have to come up with a better name than that boring name, but the app was having some issues, but we knew that it would have issues. The offline version of it, many of these filters are located in parts of hospitals or patient care facilities that don't have good reception. So the scanning and that part of the tool had to be updated and revamped, and then so that it works on most phones or all phones. It was working fine on some. So that, those kinks and problems seem to have been worked out as of very recently. Places where we are using it are full service accounts that were already kind of changing their filters on a regular basis.

[Robert Banks, President and CEO at Nephros]

But kind of alluded to, or the underlying problem your question is addressing, is the reorder rate. These are people who have programmatic long-term water treatment plans using our filters, but then, for whatever reason, are not changing them on a regular basis. They may not have the staff. They forget about them. The nurses doesn't, won't complain, so they leave it alone. A whole number of reasons why the filters aren't getting changed out on a regular basis, but I do believe that's a low-hanging fruit, easy problem that we'll be able to rectify once we get this filter tracker and other of these digital online tools in place to better monitor and keep up with that business. Thanks for asking. That's a good question.

[Tom McGovern, Equity Research Associate at Maxim Group]

Gotcha. Appreciate that. Just one last thing. I know you guys commented on you added 300 accounts, active accounts recently over the past 12 months, was it? Or possibly six months. I have to go back and check. But did you guys give us the total number of active accounts as of the end of the second quarter? I know that's a figure you used to give. I'm not sure if you're still planning on doing that.

[Tom McGovern, Equity Research Associate at Maxim Group]

Yes. Let me one second. Unless you have it there, Judy, I'll find it in about three seconds.

[Judy Krandel, CFO at Nephros]

Yes.

[Robert Banks, President and CEO at Nephros]

It is-

[Judy Krandel, CFO at Nephros]

Yeah, we will look up that number for you.

[Robert Banks, President and CEO at Nephros]

Total active sites at the end of Q2, 1,384.

[Tom McGovern, Equity Research Associate at Maxim Group]

All right, guys. Great. I appreciate you taking the time to answer my questions, and I'll hop back in the queue. Appreciate it.

[Robert Banks, President and CEO at Nephros]

No problem. Thank you.

[Operator]

Thank you. As a reminder, if you'd like to ask a question, please press star then one at this time. We'll pause for just a moment to assemble our roster. This concludes our question and answer session. I'd like to turn the conference back over to the company for any closing remarks.

[Robert Banks, President and CEO at Nephros]

Thank you, and I do appreciate everyone joining the call today, and we look forward to talking again in the future. Please have a great rest of your day and week.

[Operator]

Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.

Participants

Executives

• Judy Krandel, CFO
• Robert Banks, President and CEO

Analysts

• Kirin Smith, President at PCG Advisory
• Tom McGovern, Equity Research Associate at Maxim Group