Nephros - Q4 2023

Transcript

Operator (participant)

Good day, and welcome to the Nephros Inc. fourth 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, then one on a touch-tone phone. 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. Please go ahead.

Kirin Smith (President)

Good afternoon, everyone. This is Kirin Smith with PCG Advisory. Thank you all for participating in Nephros's fourth quarter and fiscal year 2023 conference call. Before we begin, I would like to caution that comments made during this conference call by management will contain forward-looking statements regarding the operations and future results of Nephros. I encourage you to review Nephros's filings with the Securities and Exchange Commission, including, without limitation, the company's Form 10-K and 10-Q, which identify specific factors that may cause actual results 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 and sell its products and service offerings, the rate of adoption of its products and services by hospitals and other healthcare providers, 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 contents of this conference call contains timely, time-sensitive information that is accurate only as of the date of the live call today, March seventh, 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's President and Chief Executive Officer, Robert Banks. Robert, please go ahead.

Robert Banks (President and CEO)

Thank you, Kirin, and good afternoon, everyone. I'm very pleased to welcome you to the call. Today, we reported the fourth quarter and full year results for 2023. It was an amazing year for Nephros, and we're all very proud of the results. We welcomed the new executive leadership at the CEO and CFO levels. We were cash flow positive for the full year 2023, and we finished with very impressive revenue growth of 43% year over year. Nephros has always worked hard to consistently serve our customers with quality products and deliver on time to meet emergency needs 24/7, any day of the week. Through a series of deliberate and transformative operational improvements with supply chain, partnership development, and the expansion of our sales force, we are now realizing a new level of growth potential.

I'd like to thank the Nephros team for their commitment and hard work to drive these great results. Let me share some of the highlights from our performance. First, we capitalized on the execution of new distributor agreements to more strategically develop relationships with only our strongest partners. In turn, several of them saw record growth levels in 2023 as they utilized their respective infrastructures to deliver our leading technology throughout a variety of customer markets. Of particular note are the partners whose water-related services provide an important gateway to potential sales. Their strong relationships with key decision-makers have offered us new opportunities to penetrate large segments of the market very quickly. Second, growth is good, but growing profitably is great. We looked at several areas within our operations, then identified and resolved issues which contributed to losses.

One such area targeted for improvement was an inefficient off-site storage footprint. This challenge was made more acute by our significant growth, which resulted in exceeding the limitations of our product inventory space. In response, we opened a new facility with a much larger warehouse in Q4. This new space allowed us to consolidate sites while expanding our overall footage. I would like to commend the team in this huge step towards operational excellence, because we accomplished the move while simultaneously achieving solid growth numbers. Although it wasn't easy, it demonstrated the commitment and strength inherent in the DNA of our relatively small team. The third point I'd like to highlight is the publication of the new ASHRAE Standard 514 in August of last year. This new guidance addressed the microbial hazards of multiple pathogens, along with the physical and chemical hazards.

The release of this information has already spurred greater demand for Nephros's solutions, as these more stringent guidelines regarding waterborne pathogen mitigation require technology that is not widely available. This is perceived to be a great opportunity for Nephros, given the FDA 510(k) clearance of our Infection Control Filters as Class II medical devices, which satisfies the exact recommendation detailed in the guidance. The growth in our infection control product line is truly the result of high performance throughout the year in our sales, engineering, quality, operations, and marketing departments. We finished the fourth quarter with sales up 27% over the same period in the prior year, with $3.3 million in revenue. This growth capped a year where Nephros reached an impressive $14.2 million in total revenue, 43% growth over 2022 revenue.

As we accomplished this with an impressive improvement in EBITDA, which my CFO, Judy Krandel, will cover next in our financial section of this call. Judy, please go ahead.

Judy Krandel (CFO)

Thanks, Robert. I'm very pleased to have joined Nephros and look forward to help build a terrific company and fast-growing business. I will now provide a closer look at Nephros's financial performance in the fourth quarter. We reported fourth quarter net revenue of $3.3 million, a 27% increase over the corresponding period in 2022. For the full year 2023, net revenue was up 43% to $14.2 million. Active customer sites were 1,285 as of December 31, 2023, as compared to 1,234 as of September 30, 2023, and 1,172 as of December 31, 2022. Net loss from continuing operations for the quarter improved to $654 thousand, compared to $719 thousand in the same period last year.

For the full year 2023, net loss from continuing operations improved to $1.6 million, versus a loss of $4.3 million for 2022. Adjusted EBITDA from continuing operations in the quarter was a loss of $51,000, compared to a loss of $460,000 during the same period in 2022. For the full year 2023, adjusted EBITDA from continuing operations marked a huge improvement, with a loss of $76,000 versus a loss of $2.4 million in 2022. Gross margins in the quarter also increased to 62%, compared with 59% in the fourth quarter of 2022, an improvement of three percentage points. For the full year 2023, gross margins increased significantly to 59% versus 47% for 2022, a 12 percentage point improvement from the prior year.

Research and development expenses in the quarter were $208,000, compared to $359,000 for the same quarter in 2022. For the full year 2023, research and development expenses were $873,000 versus $1.3 million in the prior year. R&D expenses were lower due to the wind down in 2023 of our SRP business and consequently, a reduction in SRP-related research and development expenses. Sales, general, and administrative expenses in the quarter were $2.4 million, compared to $1.8 million for the corresponding period in 2022. For the full year 2023, sales, general, and administrative expenses were $8.9 million, versus $7.6 million in the prior year.

The increase were primarily due to expenses from the ongoing expansion of our sales force and other revenue-generating activities. Net cash used in operating activities was $234,000 in the fourth quarter of 2023, and net cash provided by operations for the full year 2023 was $827,000. This is compared to net cash used in operating activities of $193,000 in the fourth quarter of 2022, and $3.2 million used in the full year 2022, an increase of $41,000 for the quarter, an improvement of $4.1 million for the full year, respectively.

Our cash balance on December 31, 2023, was $4.3 million, compared to $4.6 million as of September 30, 2023, and $3.6 million as of December 31, 2022. We continue to be 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 can be found in our filing in Form 10-K, which we will file in the coming days. I will now turn the call back to Robert for some closing remarks. Robert, please go ahead.

Robert Banks (President and CEO)

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

Operator (participant)

We will now begin the question-and-answer session. To ask a question, you may press star, then one on your touchtone phone. If you are using a speakerphone, please pick up the handset to ask your question. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question today comes from Nick Sherwood with Maxim Group. Please go ahead.

Nick Sherwood (Analyst)

Good evening. My first question is, have you seen an increase in deal pipeline with the ASHRAE? Or can you qualify any changes in your deal pipeline with the new ASHRAE regulations?

Robert Banks (President and CEO)

Yeah, look, it's a great, great question, great comment, and I'd love to comment on that. So when we talk about the deal pipeline and just pure number of opportunities coming in through to Nephros and the sales team, we definitely see a difference, especially around the mid-August timeframe, when the ASHRAE 514 guidance was released. Mainly to this date, it's been a lot of education, people trying to understand what it means, how to comply, and what will it take to kind of give themselves the best chance of mitigating against the microbial pathogens that I discussed earlier. So in that regard, Nephros has been really stepping up and being that educator and letting them know about various consultants and how they can protect their facilities.

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

Nick Sherwood (Analyst)

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

Robert Banks (President and CEO)

Be a little bit more clear about what you're looking for, from deal size or number of transactions, or?

Nick Sherwood (Analyst)

Oh, I guess specific would be average order size from your customers. Are you seeing any increases in that?

Robert Banks (President and CEO)

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

Nick Sherwood (Analyst)

Awesome. Thank you. And then just my last question, can you provide us any update on your agreement with Donastar and how that went over the fourth quarter?

Robert Banks (President and CEO)

So the agreement with Donastar was multiyear, wasn't. No changes expected or made at this point in time. The commercial market and space in general does take some time to penetrate. Many of the customers have existing inventory, so changing over to Nephros does take some time. We did just execute a new facility move, which we now have everything needed on the shelf ready to go. Donastar is ramping up, has a number of really great opportunities, and I look forward to them continuing to drive change. Like I mentioned before, it does take a lot to move some of the big corporations as they wait for filters to expire before swapping out to a new company. So, good momentum there. I look forward to seeing that accelerate in the future.

Nothing too exciting to report about that at this time. Just chugging along as I would expect the commercial market to do so.

Nick Sherwood (Analyst)

Awesome. Thank you so much for all that detail. I'll get back in the queue.

Robert Banks (President and CEO)

You're welcome.

Operator (participant)

As a reminder, if you have a question, please press star then one to enter the question queue. That's star then one. As there are no further questions at this time, this concludes our question and answer session and concludes the conference call. Thank you for attending today's presentation. You may now disconnect.