Nephros - Q1 2023

Transcript

Operator (participant)

Good afternoon, everyone, and welcome to the Nephros, Inc. First Quarter 2023 financial results conference call. All participants will be in a 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 and then 1 on your touchtone telephones. To withdraw your question, you may press star and two. Please also note that today's event is being recorded. At this time, I'd like to turn the floor over to Kirin Smith, Investor Relations. Please go ahead.

Kirin Smith (President)

Good afternoon, everyone. This is Kirin Smith with PCG Advisory. Thank you all for participating in Nephros' 1st quarter 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 Form 8-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.

Factors that may affect the company's future results include, but are not limited to, Nephros' ability to successfully, timely and cost-effectively market and sell its products and services 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, May 10, 2023. 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, please go ahead.

Andy Astor (President and CEO)

Thank you, Kirin, Good afternoon, everyone, Welcome to the call. I am pleased to report and comment on our first quarter 2023 results, which reflect significant improvements in our operating performance. I am particularly pleased to report that net revenue for the quarter was $3.7 million, a 71% increase over last year. Some of the growth was a result of an unusually large emergency response order. Even without that order, revenue would have been 3.1 million, a 40% increase over last year. Second highlight is that we achieved positive cash flow this quarter, several months earlier than our target of midyear 2023.

While future net cash flows may fluctuate somewhat, our first quarter results confirm our belief that we are well on the path to financial self-sustainability, coupled with higher revenue growth rates and profitability in the near future thereafter. As I have commented in prior calls, Nephros took multiple actions over the past year in the pursuit of these results, including broad headcount and other expense reductions, the disposition of our Pathogen Detection Systems business segment, and the recent cessation of operations by our subsidiary, Specialty Renal Products. We also implemented two price increases during 2022, doubled the size of our sales team, and relaunched our commercial filtration business. With Nephros now in a stronger position, the timing is excellent for us to put in place a succession plan and for me to retire in the coming months.

As we announced on Monday, Robert Banks has joined us and tomorrow will assume the title of President and CEO. I will remain with the company as an advisor and interim CFO until we recruit and train a permanent CFO. I'm very pleased now to invite Robert to say a few words to you, after which I will return with a financial summary. Robert, please go ahead.

Kirin Smith (President)

Good afternoon, everyone. I am very excited to be here today. I'm still new, so I will spend just a few minutes introducing myself with more substantive presentation in the near future. I've spent most of my career at GE and bring 20-plus years of experience in the water industry, along with a consistent record of growing sales in a wide variety of commercial and industrial markets. After obtaining my mechanical engineering degree from the University of Delaware, I began my career as an applications engineer. Soon thereafter, I moved into field solutions, where I worked closely with customers to solve water problems such as microbiological proliferation, surface scale, and corrosion propagation using chemical means. When the options for administering such chemicals were suboptimal, I branched into product management, where I led efforts to develop technologies for remote control, monitoring, and dosing.

I also augmented my wet chemistry expertise by taking on mechanical water filtration with reverse osmosis and ultrafiltration product lines. My last water-specific role, just before crossing into the industrial space, took me through deionization and ultrapure water in semiconductors and commercial applications. My broad water-centered experience, along with the rigor of Six Sigma training, an MBA from the University of Maryland, and participation in world-class leadership training programs have all prepared me for this leadership role at Nephros. It is a pleasure and honor to be part of the journey, especially at this juncture when we have achieved cash flow positive performance and returning to higher growth rates. Nephros is building a reputation for best-in-class technologies and extraordinary relationships with its partners and customers. This is an exciting time in the company's life cycle, and I look forward to taking it to the next level. Back to you, Andy.

Andy Astor (President and CEO)

Thank you, Robert. Once again, welcome aboard. I will now turn to our financial results for the quarter ended March 31, 2023. We reported first quarter net revenue, as I said, of 3.1 million, a 71% increase over the corresponding period in 2022. Net loss for continuing operations for the quarter was $0.3 million, compared with a $1.6 million loss during the same period in 2022. Adjusted EBITDA from continuing operations in the quarter was positive 0.1 million, compared with negative 1.2 million during the same period in 2022. Gross margins in the quarter were 57%, compared with 49% in 2022, an 8% increase and a return to our targeted range of 55%-60%.

Research and development expenses in the quarter were 0.2 million, compared to 0.4 million for the same quarter in 2022. Sales general and administrative expenses in the quarter were 2.1 million, a decrease from 2.2 million for the corresponding period in 2022. Net cash provided from operating activities was 0.3 million or 0.3 million for Q1 2023, compared with negative 1.8 million in 2022. Our cash balance on March 31, 2023 increased to 3.8 million from 3.6 million as of December 31, 2022. 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 on Form 10-Q, which actually we filed about 15 minutes ago. That concludes the financial discussion, as always, and in this case in particular, I would like to thank each of our Nephros employees and our strategic partners. Fiscal 2022 was not an easy one, it has been an extremely rewarding year for the company, positioning us for success, frankly, more strongly than at any time in the past. Going forward, we will continue to provide unsurpassed products and services to our customers and partners. This time, however, under new leadership, which I'm very excited about. Of course, thanks also to our devoted investors for your continued confidence. This concludes our formal presentation remarks, we will now take questions from the audience. Operator, please open the call for questions.

Thank you.

Operator (participant)

Ladies and gentlemen, at this time, we'll begin the question and answer session. To ask a question, you may press star and then one on your touch-tone telephone. If you are using a speakerphone, we do ask that you please pick up your handset prior to pressing the keys to ensure the best sound quality. To withdraw your questions, you may press star and two. Again, that is star and then one to join the question queue. We'll pause momentarily to assemble the roster. Our first question today comes from Nick Sherwood from Maxim Group. Please go ahead with your question.

Nick Sherwood (Analyst)

Hey, how's everyone doing? Congrats on the great quarter.

Andy Astor (President and CEO)

Thanks, Nick. Good to hear from you.

Nick Sherwood (Analyst)

Can you tell us, a little bit about the number of active customer sites you had at the end of the first quarter, please?

Andy Astor (President and CEO)

That is a great question, and I apologize, but we didn't publish that. I can do so. I will do that for you tomorrow.

Nick Sherwood (Analyst)

Okay, thank you. I noticed that, you know, there's a large drop in inventory due to the large one-time order. Do you plan on slowly rebuilding inventory to those, back to that level in order to be able to meet some of these large purchases? What sort of is your plan going forward about managing that inventory, knowing that you might receive these large orders?

Andy Astor (President and CEO)

Sure. We have a pretty generous policy about our inventory. We try to keep several months of inventory on certainly our most popular products at all times, just for the event, just in case there is an event of an outbreak or some such. Yes, we will absolutely build our inventory back and have already placed orders to do so. It's also true, Nick, that we had too much inventory. We had bulked up early in the pandemic, as some of you will remember, to, you know, to ensure our supply chain. We allowed that to bleed out quite intentionally to levels that are more appropriate for us. We've certainly accomplished that. We will be building it back up to appropriate levels.

Nick Sherwood (Analyst)

Awesome. Thanks for that detail. My last question will be, how has the new agreement with DaVita been progressing, and sort of any details that you might have that from the last couple of months?

Andy Astor (President and CEO)

Thank you. Thank you. It's a great question. DaVita is a strong partner, and they're doing quite well. We don't break out our sales or, you know, we don't publish publicly our individual market sales between commercial and dialysis and infection control. Suffice it to say that we're really happy to be working with DaVita, and we see great things in the future with them.

Nick Sherwood (Analyst)

Perfect. Well, thank you. Thank you again for answering all my questions, and I'll return to the queue.

Andy Astor (President and CEO)

You're very welcome. Thank you, Nick.

Operator (participant)

Once again, if you would like to ask a question, please press star and then one. To remove yourself from the queue, you may press star and two. At this time, showing no additional questions, I'd like to turn the floor back over to management for any closing remarks.

Andy Astor (President and CEO)

Thank you, Jamie. I guess all I will say is that it has been a great pleasure over the last six and a half years or so in helping to build Nephros to where it is today. I'm very excited to be turning the reins over to Robert officially tomorrow. Again, I will stay on as interim CFO for some period of time, so I'm sure I'll see you all again next quarter. Have a great spring and early summer, and we'll talk to you soon. Take care, everybody.

Operator (participant)

Ladies and gentlemen, with that, we'll conclude today's conference call and presentation. We thank you for joining. You may now disconnect your lines.