Nephros - Q1 2024
May 9, 2024
Transcript
Operator (participant)
Good afternoon and welcome to the Nephros, Inc. First 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 star then zero on your touch tone telephone. 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. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Kirin Smith, Investor Relations. Please go ahead.
Kirin Smith (President)
Thank you. Good afternoon, everyone. Thank you all for participating in Nephros's First Quarter 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's filings with the Securities and Exchange Commission, including without limitation the company's 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.
Factors that may affect the company's results include but are not limited to the impact of the COVID-19 pandemic, Nephros's ability to successfully, timely, and cost-effectively market, sell 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's 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 9th, 2024. The company undertakes no obligation to revise or update bank 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.
Robert Banks (President and CEO)
Thank you, Kirin. Good afternoon, everyone. Thank you for joining us to discuss the 2024 first quarter 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. 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 customer's experience of managing their Nephros filters. This tool offers automated replacement reminders and documentation of installations and inventory. These features are just the beginning as Nephros continues to explore ways of generating value in the digital space. Nephros is also exploring how to best support customers in need of nano and microplastics NMPs as we seek to expand our featured 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. 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. Nephros' presence also affords countless opportunities to educate key influencers and decision-makers on the most salient regulatory changes and recommended solutions. The stakeholder connections cultivated in these environments inform 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.
I read a new article almost weekly regarding the multiple health concerns related to NMPs, which are significant. The ability of NMPs to penetrate biological barriers and leach 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 NMPs. I will now pass the mic to our CFO, Judy Krandel.
Judy Krandel (CFO)
Thanks, Robert. I will now provide a closer look at Nephros' financial performance in the first quarter. We reported first quarter net revenue of $3.5 million, 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 the first quarter 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. Gross margins in the quarter were 62% compared with 57% in 2023, an increase of five 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 first quarter of 2024 and 2023, respectively.
Sales, general, and administrative expenses were $2.1 million for both the first quarters of 2024 and 2023, respectively. Net loss for the quarter was $169,000 compared to $306,000 in the same period last year. Adjusted EBITDA in the quarter was -$95,000 compared with +$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 first quarter, and an investment in inventory to support future growth. Our cash balance on March 31st, 2024, was $3.6 million compared to $4.3 million as of December 31st, 2023. We continue to remain debt-free.
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 Form 10-K filing, which should be filed later today. I will now turn the call back to Robert for some closing remarks. Robert, please go ahead.
Robert Banks (President and CEO)
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. Operator, please open the call for questions.
Operator (participant)
We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. Again, it is star then one to ask a question. At this time, we will pause momentarily to assemble our roster. The first question comes from Thomas McGovern with Maxim Group. Please go ahead.
Thomas McGovern (Equity Research Associate)
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.
Robert Banks (President and CEO)
Thank you for that question, Thomas. 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 effective with has been this land and expand approach. 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 two of the regions, whereas regions where we haven't typically had a lot of sales exposure are enjoying a lot of growth and 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? And what we're finding, probably 40%, 25% of the time, depending on what region we're in, they're not changing them when we've acquired or requested. And that's not because it's done on purpose, but often they forget that the filter is installed, there's been no problems, and just missing their PMs that go for vendor maintenance activities.
So our goal, our task is to make sure that we're not leaving anything on the business we've already won so that we keep that recurring programmatic 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 it's the exact flip 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 put that answer to that question and look for more to come on that business in the future.
Thomas McGovern (Equity Research Associate)
Yeah, absolutely. No, that's very helpful. So yes, 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? Yeah, a lot of times, whether it's because they're again, it doesn't sound like it's intentional. It's just they have a lot on their plate. 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?
Robert Banks (President and CEO)
Too early to tell. We are just in the beta phase. We are signing up a few customers, making sure we work out the kinks. And what we're finding is, "Oh, there's another feature we'd like to add. Oh, it'd be good if we could do this." 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 and rolling out to customers. And we're starting to get those results now, but that's still in early phases.
Thomas McGovern (Equity Research Associate)
Gotcha. 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 express purpose of filtering some microplastics? Or is it something that you guys have seen maybe industry demand for and you guys are kind of responding to and looking to kind of enter that space more aggressively as it seems to be a pressing issue?
Robert Banks (President and CEO)
Yeah, this has been something that's come up fairly recently. I read an article that said the average person consumes a credit card's worth of plastics every week. I just started to think about what can we 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. 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. We are trying to get ahead of that.
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. But they are smaller than the average filter on the market, and yes, they do pass right through. So because we have that smallest pore size in the market, we're with that 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. 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's all these 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 push versus a pull. So we're ready to provide the products once we get all that details worked out. So it's very exciting for us. You're going to hear more and more about it as things go along, and I'm hoping that it represents a significant opportunity for Nephros.
Thomas McGovern (Equity Research Associate)
Awesome. I appreciate you guys taking the time to answer my questions. I'll hop back in the queue.
Robert Banks (President and CEO)
Good. Thank you.
Operator (participant)
The next question comes from Mike Gustitis with a private investor. Please go ahead.
Mike Gustitis (Private Investor)
Good afternoon, and congratulations on the quarter, guys. Great job. My question is, Nephros has been selling to hospitals and health centers, of course. You also just mentioned schools and municipalities, but there's also senior living centers and more that you started selling to even before the nanoplastics possibility. Do you see this trend of increasing your TAM continuing?
Robert Banks (President and CEO)
Oh, Mike, it's a great question. Good to hear from you. Yeah, Nephros has been selling 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, municipalities, 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 and ASHRAE 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.
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 those problems. So I do see this continuing. I look forward to it being less of a push and more of a pull as I was answering Thomas's question. But in the meantime, it's all about my team and the Nephros team educating those who are dealing with ramifications when they do have those different contaminants and microorganisms impacting because our infection control products really are providing a great solution for those places that otherwise would have significant problems. So expanding that TAM and [SASis really good, and we see this continuing. It will be a source of driving new business in the future. Thank you for that question.
Mike Gustitis (Private Investor)
Sounds great. Thank you. One more question, if I could. Could you elaborate at all on the OEM agreements that you have that include Nephros filters, dialysis, or otherwise?
Robert Banks (President and CEO)
Sure. Sure. I can speak to that. I will have to be a little bit general and not mention names just out of respect. A lot of the OEMs are competitors with others. But when you're dealing with dialysis and people are using our devices, the FDA-cleared Class II, they become something that is worked into the clearance that 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 you have to use a specific configuration in order to maintain the use case and the clearances that that device has achieved. 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. 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 OEM's 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 enjoy the question.
Mike Gustitis (Private Investor)
Thank you. And I was going to ask a third question on the exciting nanoplastics opportunity, but you actually covered that already. So thank you very much. And again, congratulations.
Robert Banks (President and CEO)
Thanks, Mike.
Operator (participant)
Again, if you have a question, please press star, then one. 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 at this point?
Ankur Sagar (Private Investor)
Hey, good afternoon. Yeah, sorry about that. Hey, good afternoon, Robert and Judy. Thank you for taking my questions. A good quarter with growth on the programmatic revenue. 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 the distributors to know where the filters are placed. And now this online tracker filter where the customers would 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'd be great.
Robert Banks (President and CEO)
Sure. Sure. It's great insight. We started looking at this a couple of months ago. What we were noticing is the team's working really hard, and it's closing a lot of new business. We're not losing customers. Active customer sites stay pretty high. But yet, we weren't seeing that recurring revenue. Our baseline was where we were starting from quarter after quarter is seeing lower and lower. So the numbers didn't add up. So we started digging into accounts and figuring out where we sold filters, and they've got a certain number of machines, and they're expecting 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 three months or six months. And that's not good.
Sometimes it's just neglecting and not having the staff to go find it and change it. More often than not, it's just forgotten about and not the priority when they've got short staffs and budgets going other places. 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. We have an offline tool where you can look at a spreadsheet and say, "Okay, we sold this filter six 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.
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 can 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 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. Hold on. Okay. Not sure if that's exactly your question, but that's the.
That's great. I agree. I think it's easier to sell through the five filters and the existing installations that you have than to just sell new five brand-new devices from scratch. So that's great. Good to see that. I think in the presentation that you had at the conference, the Planet MicroCap Conference, you laid out a few initiatives for growth. 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 three 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. That last phrase that you put in there for this year's top line made the difference because I was going to say, "Well, the growth initiatives change, but you're talking short-term or long-term." However, the short-term or this year impacts, 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. We delighted the customer. We got the units installed. Why not get the filter changed out every six months? And by the way, it's only FDA-cleared for six months. Beyond that, we're not guaranteeing its performance, although it doesn't just turn off at six months in one day.
So I do think that this digital tool getting that in the hands of people 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 recurring basis. Next, I think that this cross-selling where maybe we're in there taking care of the ice machine; well, we also have sterile processing products. And that's a big part of the hospitals' standard inline filters as well or bubblers, water fountains, showers, sinks, inline filters. There's just so many different applications. And typically, you're just brought into a facility for one application. So that cross-selling or land-and-expand strategy is going to be probably the second bigger driver. And then nurturing our partners and distributors. So it's getting out to these events, speaking at conferences. I will be at APIC in a month or two.
We've got the ASHE conference coming up in California in July. These are big national events. We 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 three are that will have an impact this year, I would take those through. But as you noted, there are others too that were discussed during the Planet MicroCap Conference as well.
Ankur Sagar (Private Investor)
Yeah. Yeah. That's great. One last one regarding the gross margin. There was a nice gross margin improvement. 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?
Robert Banks (President and CEO)
Yeah. I'm going to let Judy handle that question. I have my own thoughts, but she's been digging into it pretty deep. Judy, do you want to?
Judy Krandel (CFO)
Yes. I'm sorry. Could you repeat the question again? For some reason, it didn't come clear.
Ankur Sagar (Private Investor)
From a gross margin standpoint, Judy, I think the gross margin was higher, I think, about 62% compared to last year's quarter. So do you expect that to continue throughout? You expect to keep that gross margin, or the shipping will fluctuate and?
Judy Krandel (CFO)
Yep. Okay. And thank you for repeating that. It just didn't come clear. So we were very pleased with margins. Our shipping expenses, we've been managing very carefully. They were unusually high during the COVID period, but we've been working very hard managing air versus sea shipment 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's affected by our mix of business slightly. 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 there'll be some fluctuations, but I don't think this is just such an anomaly.
Operator (participant)
Okay. The next question comes from Nick Farwell with Arbor Group. Please go ahead.
Nick Farwell (Analyst)
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?
Judy Krandel (CFO)
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. So that really relates to the actual pricing of the finished goods products that we buy.
Nick Farwell (Analyst)
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? Versus past history seemed a little more modest than the normal year-to-year growth or sequential growth, seasonality in the base business, not including the emergency response.
Robert Banks (President and CEO)
Yeah. I'd love to take that question if you don't mind. Hi, Nick. How are things going? That's a really good question.
Nick Farwell (Analyst)
Fine. Thank you for answering it, Robert. I appreciate it.
Robert Banks (President and CEO)
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 closure of the quarter. I've got probably three 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 support services, whether it be ice machines, showerheads, sinks, faucets, isn't growing accordingly. From that aspect, the market's flat. If you look at healthcare industry overall, it's only growing at 2%-3% tops. Again, another indicator. If you look at just gross domestic product, there are 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 because we've 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. 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.
Those are the couple three things I would say in response to the 12% number. It's nothing to be disappointed about from my perspective as far as the reflection of how low we're closing business. We are taking market share from our competitors, and we're not losing of leading customers on the back end. I'm pretty happy from that perspective, and I look forward to still delivering those types of numbers going forward.
Nick Farwell (Analyst)
Yeah. 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?
Robert Banks (President and CEO)
When we look at our partners, distributors, we have far fewer than we did this time one 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. They'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. So the distribution partners are essential. The trick is making sure they understand the value that Nephros provides when it goes to solving problems for our different customer bases 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 and perspective? So they're commanding premiums over the alternatives. When we sell direct, often, we are offering some type of discount. And from a customer perspective, there isn't a lot of difference. From a margin perspective, it's slight, but the volume of sales far outweighs the gross margin dollar, positively outweighs what we get up in having a partner there delivering the goods as well. So it's a good question. 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.
Nick Farwell (Analyst)
Yeah. 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&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.
Robert Banks (President and CEO)
I'm not sure I would say the same, but it's not significantly different. How's that for answering your question?
Nick Farwell (Analyst)
That's good enough. The last question I'm curious is, has headcount changed dramatically over the last year?
Robert Banks (President and CEO)
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. 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. We've added in the area of sales and continue to selectively add. 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.
Nick Farwell (Analyst)
My last question, briefly, you've moved into a new facility and consolidated. To what degree has that been reflected in the better gross margins in particular, but perhaps the ability to generate a sustainable positive cash flow?
Robert Banks (President and CEO)
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 offsite storage, another 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. We're 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, Judy, if you had anything to add to that or might be able to quantify any of it.
I don't know that we've done that exercise to show what that impact has been.
Judy Krandel (CFO)
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.
Nick Farwell (Analyst)
Okay. Thank you. I appreciate it, Judy. Robert, thank you.
Robert Banks (President and CEO)
Thank you.
Operator (participant)
The next question is a follow-up from Thomas McGovern with Maxim Group. Please go ahead.
Thomas McGovern (Equity Research Associate)
Hey, guys. Yeah, I thought I'd follow up. Actually, those last two questions are well-suited for my outstanding question. Firstly, on the headcount increases that you guys did over the past year, you guys kind of answered half of my question saying that 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, and the events, each of these seems to me as though you'll need boots on the ground to do this. From where I stand, they look 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 a 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 2023, more or less? And then second question is, have you guys looked at or considered adding maybe specialized salespeople, whether it's to target these NMPs or to really get to know the digital tool and bring people on, bring your sites on board with that? Or is it more just based on territory with general salespeople that go out and kind of wear multiple hats to get you guys to where you need to be?
Robert Banks (President and CEO)
Well, Thomas, thanks for that follow-up question. I do have to wonder, are you sitting in my staff meetings? It's very, very good thoughts, insights, and all things that we're thinking about. I love the thought that you just said. I think it really took the words out of my mouth. When it comes to the apps, and 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 ours. That's how we were able to go to a minimally viable product in such a short period of time and now enhancing it to match what we want. And we literally only spend a few months on this.
If you've ever been in the software development world, starting from scratch can take a year or so. 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. We're looking to add another one. We are selectively looking for people with certain skill sets to help handle some of these future growth areas. All of what we're doing is kind of 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. 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? 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. So I hope that answers your question. But yeah, thanks for that. And that's a good insightful question.
Thomas McGovern (Equity Research Associate)
Good. I appreciate it. Yeah. 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 in any one particular quarter. You're hoping to see some margin accretion over the long run as a result. Two questions on that. Are you guys still using any third-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 it'll be able to service your inventory storage requirements for at least the foreseeable future? Or do you anticipate need to bring on third-party warehouses or possibly expand the existing warehouse? Appreciate it.
Robert Banks (President and CEO)
Yeah. 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 rented 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. So we've been able to lean on them, even if it's not a count day at give-way service, to be able to get something out the door. But we still maintain 24-hour lead-time response with emergency orders, shipping out same day. The team won't hesitate to drive in seven, eight 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, there may be some benefit there, but it's going to be hard to beat the speed with which we turn around things today. So that's the first part of your question. The second part about needing to expand again, we have certain milestones built into once we 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 need that additional space, and we will take advantage of it. So it was very deliberately planned, very convenient.
We have an excellent real estate agent that we've been working with and making sure that we got our needs met when we're planning out for three to five years and make sure that everything meshes up very well.
Thomas McGovern (Equity Research Associate)
Great. I appreciate you guys taking the time to answer all of my questions. Congrats again on the quarter.
Robert Banks (President and CEO)
Thank you.
Operator (participant)
The next question comes from Ralph Weil with R Weil Investment Management. Please go ahead.
Ralph Weil (President)
Hi, Robert. Nice presentation today. I was wondering, in the past, they talked about customer retention. I was wondering what the percentage of the customers have been retained versus new customers. Have you seen any price pressures in what you're selling? Are there any major new accounts that you've taken on or that you are close to taking on? Then I have another question.
Robert Banks (President and CEO)
Okay. Oh, okay. So I'll start with the retention question. The retention rates, gosh, let me go 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 new customers. And that's a function of what we've lost versus what we've gained. And we have kind of a rolling retention rate. And quarter-over-quarter, we hover right around the same rate. Our quarterly retention rates are right around the mid-90% 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, frankly, it's just a different product with the way that we perform. Now, 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 once customers realize what they were spending on, how frequently they were changing the previous filter, how to recover from a Legionella outbreak that they no longer have to, the price of our filter just becomes a moot point. So from that perspective, pressure, yes. However, in our premium product position, I think it's well justified, and our customers seem to agree. So yeah, we'll continue to leverage the performance in making sure that we're providing more value than we're charging, and we're not leaving too much value on the table when it comes to how we price and as far as gaining customers and keeping customers. Did I cover your questions there?
I might have missed one or two points, but let me know if I didn't.
Ralph Weil (President)
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 at 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?
Robert Banks (President and CEO)
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. Every customer need, every desire to have something installed. It means the world to them. It shows. 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 a customer, that's how we win these customers that stay with us for life. I didn't see that in previous places and positions where I worked, at least not to that extent.
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 that chance to help solve the problem. And it works really well. So those have been my really pleasant surprises, takeaways, speed of responses that we can reflect on in the first year. What was the second part? How did you phrase it? It was things that you would want differently?
Ralph Weil (President)
Yeah. What has been more challenging to you and how you're working those things?
Robert Banks (President and CEO)
Got it. Got it. So the more challenging thing 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, I've had customers say, "I'm not going to spend any money unless I'm told to. I just don't have the budget. I don't have the people. I've got other problems in the facility." And these are typically life-or-death situations when people are getting sick, and so that addressing that. Sorry, I got some feedback on the line. We've been addressing that through education, just making sure we're sharing exactly how, yes, it may be more upfront costs, but it's saving you more in maintenance, less filter changes, less response cost dollars. So it's been working.
It's just a slow grind, hand-to-hand combat when it comes to sharing that message with the parties that are making these decisions. Good. Yeah. Good questions, insightful questions. Yeah. It's been a nice thank you so far. Thank you.
Ralph Weil (President)
Robert, I suspect that I mean, your major areas are 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. And how do you see the revenue mix perhaps changing over the next two to three 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.
Robert Banks (President and CEO)
Yeah. I was going to revert back to that. 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 living 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. Now, if we can get that same regulation guidelines from school boards or from government agencies recommending certain water quality standards in government buildings, those are going to be the areas that we pivot into fastest. Other than that, it's us creating the market or a push versus a pull. And that tends to nanoplastics.
It's something that we, through size exclusion, can already solve and resolve. So it's not inventing a new wheel. 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. So we're going to dive into sterile processing and 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.
Ralph Weil (President)
Parties are coming to you for this capability?
Robert Banks (President and CEO)
I've had two types of those two 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. That's exciting.
Ralph Weil (President)
Yeah. That does sound good, especially if they're coming to you. Okay. I thank you. I thank you.
Robert Banks (President and CEO)
Okay.
Operator (participant)
This concludes our question and answer session and the Nephros, Inc., First Quarter 2024 Financial Results Conference Call. Thank you for attending today's presentation. You may now disconnect.