Nephros - Earnings Call - Q4 2024

Executive Summary

• Q4 2024 net revenue was $3.870M (+19% year over year) with gross margin of 64% (+200 bps YoY); net income was $0.349M and adjusted EBITDA was $0.466M, marking a strong finish to the year and sustained operational discipline.
• FY 2024 net revenue was flat at $14.162M, but Nephros delivered its first annual net income of $0.074M as supplier term improvements and SG&A reductions lifted profitability; management indicated gross margins in the low-60s should be sustainable.
• Strategic catalysts: launch of the 20" HydraGuard UltraFilter targeted at sterile processing under ANSI/AAMI ST108, plus expansion into non-healthcare verticals (office, airports, transportation) to diversify demand and drive programmatic growth.
• Liquidity improved sequentially: Q4 operating cash flow was +$1.3M; year-end cash was $3.760M and the company remains debt-free, supporting selective investment in R&D and marketing.
• Estimates context: Wall Street consensus via S&P Global was not retrievable for Q4 2024 in this session; as such, no beat/miss vs estimates is shown, and any future comparison will anchor to S&P Global data.

What Went Well and What Went Wrong

What Went Well

• Record profitability milestones: first profitable quarter in Q3 and first annual net income driven by cost control and better supplier terms; Q4 adjusted EBITDA of $0.466M and net income of $0.349M continued momentum.
• Product innovation and regulatory alignment: launch of the 20" HydraGuard UltraFilter, positioned to meet sterile processing needs under ST108; “tightest control of bacteria and endotoxins on the market” per management.
• Commercial traction: ~600 new customer sites added (~$2M sales; >13% of FY revenue) and active sites grew to >1,500, bolstering recurring programmatic revenue base.

What Went Wrong

• Emergency response exposure: significant decline in emergency response revenue in H1 (historically double-digit % of total) to single digits; recovery came only in H2, leaving FY revenue flat.
• Reorder cadence and regional softness: slower-than-usual reorders at larger accounts and underperformance in the South Central region weighed on programmatic sales in Q3 before initiatives began to mitigate reorders and bolster service.
• Q2 headwinds: total revenue declined 8% YoY in Q2 due to a 92% YoY drop in emergency response; adjusted EBITDA loss of $0.133M and net loss of $0.289M signaled transitional dynamics before improvements took hold.

Transcript

Speaker 2

Good day, and welcome to the Nephros Fourth 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 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 Kieran Smith with PCG Advisory. Please go ahead.

Speaker 1

Good afternoon, everyone. Thank you all for participating in Nephros' Fourth Quarter and Fiscal Year 2024 Conference Call. Before we begin, I would like to caution that comments made during this conference call by management will contain forward-looking statements regarding the operations and future results of Nephros. I encourage you to review Nephros' filings with the Securities and Exchange Commission, including without limitation the company's Forms 10-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, Nephros' ability to successfully, timely, and cost-effectively market and sell its products/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 call today, March 6, 2025. The company undertakes no obligation to revise or update any statements to reflect events or circumstances after the date of this conference call, except as required by law. I would now like to turn the call over to Nephros' President and Chief Executive Officer, Robert Banks. Robert, please go ahead.

Speaker 0

Thank you, Kieran, and good afternoon, everyone. I am very pleased to welcome you to the call. Today, we reported the fourth quarter and full-year results for 2024. Nephros finished Q4 2024 on a high note, demonstrating solid growth in our core business and achieving key strategic milestones. While our annual revenue results were approximately flat compared to 2023, we showed consistent growth throughout the year, especially as our core programmatic revenue steadily increased. Nephros demonstrated the ability to adapt, innovate, and expand, putting it on a trajectory toward even greater success. One of the biggest challenges we faced in 2024 was a significant decline in our emergency response business in the first half of the year. Historically, emergency response sales have comprised a notable portion of our total revenue. In Q1 and Q2, those contributions dropped to single digits.

However, we successfully navigated this headwind in the second half of 2024, culminating in a 19% year-over-year growth in total sales during the fourth quarter. Beyond stabilizing our revenue streams, Nephros has taken important steps in expanding our product lineup and diversifying our market reach. One of our most notable developments has been the launch of our 20-inch HydraGuard UltraFilter, designed to support higher volume water applications. This product opens new opportunities for us in sterile processing, laboratories, and manufacturing, areas where stringent water quality regulations demand the highest level of filtration. The release of ANSI AAMI ST 108 standard in late 2023 has further reinforced our competitive advantage. This standard outlines strict guidance for water quality in sterile processing, and we believe the HydraGuard UltraFilter is uniquely positioned to meet and exceed those requirements.

Its instrumenting ability to remove bacteria and endotoxins makes it essential as a solution for hospitals and healthcare facilities that prioritize compliance and patient safety. Even with the revenue hurdles we faced early in the year, we achieved profitability for the first time in Q3, a major milestone that underscores our commitment to operational excellence and financial discipline. Additionally, we added nearly 600 new customer sites, which contributed almost $2 million in sales and accounted for more than 13% of our annual revenue. These accounts provide a solid foundation for growth in 2025 and beyond. Looking ahead, we remain committed to expanding into new markets, leveraging regulatory challenges, and strengthening our financial performance. The foundation we built in 2024 has set us up for a transformational 2025 and beyond. I'm incredibly proud of our team's dedication and resilience. I thank the entire Nephros team for their hard work and commitment.

Now, let me turn it over to our CFO, Judy Krandel, to go over the financials. Judy?

Speaker 3

Thanks, Robert. I will now provide a closer look at Nephros' financial performance in the fourth quarter and full year of 2024. We reported fourth quarter net revenue of $3.9 million, a 19% increase over the corresponding period in 2023, reflecting strong growth in our programmatic business, offset by a decline in our emergency response business. For the full year 2024, net revenue remained steady at $14.2 million, reflecting 9% growth in our programmatic business, offset by a decline in our emergency response business. Active customer sites continue to grow, and we're just over 1,500 as of December 31, 2024, as compared to just under 1,300 as of December 31, 2023. Gross margins in the quarter also increased to 64% compared to 62% in the fourth quarter of 2023, an improvement of 2 percentage points.

For the full year 2024, gross margins increased to 62% versus 59% for 2023, a 3 percentage point improvement from the prior year. The improvement in gross margins in 2024 relates primarily to more favorable terms with our largest supplier. Research and development expenses in the quarter were $252,000, compared to $208,000 for the same quarter in 2023. For the full year 2024, research and development expenses were $906,000 versus $873,000 in the prior year. R&D expenses were higher in 2024 due to an increase in headcount. Sales, general and administrative expenses in the quarter were $1.9 million, compared to $2.4 million for the corresponding period in 2023, a decrease of 22% due to a decline in bonuses, commissions, and stock compensation expense. For the full year of 2024, SG&A expenses were $7.7 million versus $8.9 million in the prior year.

The decrease was primarily due to a decrease in bonuses, commissions, and professional fees. We are pleased to report positive net income for the quarter of $349,000, compared to a net loss of $654,000 in the same period last year. For the full year 2024, we had net income of $74,000 versus a net loss of $1.6 million for 2023. Adjusted EBITDA in the quarter was positive $466,000, compared to a loss of $51,000 during the same period in the prior year. For the full year 2024, adjusted EBITDA was positive $533,000 versus a loss of $76,000 in 2023. Net cash provided by operating activities was $1.3 million in the fourth quarter of 2024 versus net cash used of $200,000 in the prior year period, an improvement of $1.5 million.

Net cash provided in the fourth quarter of 2024 reflects primarily a positive net income, a decrease in inventory, an increase in accounts payable, and accrued expenses. Net cash used in the fourth quarter of 2023 reflects primarily an increase in inventory. Net cash used in operations for the full year 2024 was $492,000 versus net cash provided by operations of $827,000 for the full year 2023, a decrease of $1.3 million. Net cash used in 2024 reflects primarily an increase in inventory and accounts receivable, and a decrease in accounts payable and accrued expenses. Net cash provided by operations in 2023 was primarily due to a decline in inventory and an increase in accrued expenses. Our cash balance on December 31, 2024, was $3.8 million, compared to $2.5 million as of September 30, 2024, and $4.3 million as of December 31, 2023. Nephros continues 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 on Form 10-K, which we will file soon. I will now turn the call back to Robert for some closing remarks. Robert, please go ahead.

Speaker 0

Thank you, Judy. I want to close by reiterating my confidence in Nephros' growth strategy. Our team's resilience and adaptability have helped us navigate challenging market conditions, and we are well-positioned for sustained growth in 2025 and beyond. As we look ahead, we will focus on expanding our presence in new markets, leveraging regulatory challenges to drive demand, and enhancing operational efficiencies to sustain profitability. I want to personally thank our employees, customers, and investors for their continued support. We are excited about the future, and we appreciate your trust in Nephros. This concludes our formal presentation remarks. I'll take questions from the audience. Operator, can you please open the call for questions?

Speaker 2

Thank you. We will now begin the question-and-answer session. To ask a question, you may press Star, then 1 on your touch-tone phone. If you're 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 2. At this time, we will pause momentarily to assemble our roster. The first question will come from Jeremy Promen with Maxim Group. Please go ahead.

Speaker 4

Hi, good afternoon. Thank you for taking the question, and congrats on a great quarter and a strong finish to 2024. Just the first question, the new 20-inch Ultra Filter, what do you estimate that opportunity is for the company, and I guess in terms of revenue and the top line, and how are you positioning yourself in that market?

Speaker 0

That's a good question. The 20-inch HydraGuard opens up a new market for us. We are first attempting to figure out what that market opportunity is, but based on the new requirements for regulations in the sterile processing space, it now allows us to address those higher flow rates. Exactly what that means from a dollar conversion perspective, we have a very healthy pipeline of opportunities, and once they get realized and we have some great clarity on our closing rates, we'll share that in the upcoming quarters. I do expect it to be a pretty good part of our programmatic growth business going forward as we work towards patient safety.

Speaker 4

Okay, understood. Thank you. You mentioned on the last call you had that beta launch of the digital tracking tool. I think we had expected that to launch fully in the first quarter of this year. Maybe you could just give us, if you have any update on that, how's that helping the reorders, and has it launched into a full launch, or are you still working out the kinks in the beta?

Speaker 0

Sure, no, good question. That application has really been a good way for us to have visibility to the same site sales. That programmatic loss of business I was referring to way back in Q1 and Q2 last year was largely due to customers that were with us but not reordering at the rate that they should be ordering. By applying this tracking app, we're able to now have a digital representation of the life of that filter when it was actually installed, and we've actually added some more components to it, including pictures of the install, the conditions with which it was installed, and all that's being tracked digitally. The anticipated launch date was Q1. We actually launched that earlier than anticipated, so we implemented it about midway through last quarter. We have about 300-plus sites on our applications where that's being tracked currently.

Services performed, we add those to the site as well. It is largely an internal tool. We are getting the most benefit from it, but with the help of our distribution partners and end users, we are getting that continuously launched. Very pleased with its progress, and it is doing what we expected it to do as we have greater line of sight to those same site sales, and that is probably one of the big contributors for our programmatic business being growing as fast as it has been on a steady basis.

Speaker 4

Okay, great. Just the final question. You mentioned operationally you still have, I mean, you still have room to make some cuts or some streamline processes. Is that correct? I mean, what else do you see that could be done from an operational perspective to help keep costs low and keep profits up?

Speaker 0

We have done most of the closing report. That is what it was about. Judy and team have really spent a lot of time on that. I have got some pieces to add, but Judy, I will let you, since you guys have done most of the work there, talk about that and then turn it back over to me for my notice to wrap up soon.

Speaker 3

Sure, thank you. Thank you for the question. We have really tried to manage costs relative to revenue. There are certainly investments that we'd like to make in the business. As opposed to looking for ways to streamline costs, which we've done, we are about as lean, frankly, as we possibly could go. We are looking to make select investments in the business in areas of R&D, a little bit more financial support, and marketing, but we're going to have to do that carefully along with revenue growth. We want to maintain cash positive as much as we can.

I think we have streamlined what we could, and at this point, it's more incremental investments that will be covered by incremental sales, and we have a select hires focused for this year, a little bit more marketing money, and then we'll see as the year progresses what it allows us to do.

Speaker 0

The other part of your question referring to the sustained growth, there's been a lot of analysis done in 2024 on which products are generating the most product revenue, and no surprise, they're also the products that have the greatest differentiation. By focusing more efforts on growing those infection control products, which are also well aligned with some of the regulations that are coming and have been launched, we've been able to continue to sustain that growth and get market share in that patient infection control space. That's been the growth driver, and I expect that to continue going forward.

Speaker 4

Okay, great. Thank you for taking my question. I'll hop back in the queue.

Speaker 0

Thank you.

Speaker 2

Again, if you have a question, please press Star, then 1, while we pause momentarily for any more questions. It looks like our next question will come from Nick Farewell with Harbor Group. Please go ahead.

Speaker 5

I'm very curious whether the 20-inch HydraGuard is focused initially and entirely on healthcare, or is it broadening your customer verticals over time or starting at this particular point in time?

Speaker 0

The 20-inch HydraGuard was developed for a specific targeted market in the sterile processing. This is either instrument rinsing or after you do have scopes and probes that need to be cleaned. You need a higher fluid of water, and specifically, the regulations talk about endotoxins in that space. That's not a microbiological filter, so the HydraGuard does satisfy that need and meet those requirements, which positioned us pretty uniquely on satisfying that. This was not a focus before for hospitals, not really anything on the radar. Generally, it's a new market that by getting this product developed and meeting those flow rates, we've been able to satisfy that need. I'm pretty excited about what it's going to do for us. I don't think that there's a lot of competition that can meet the needs there.

It's a great question, Nick, and I don't want to put too much emphasis on the 20-inch HydraGuard, but it's something that Nephros has done over the years and continues to do. When we see a need and there's a gap based on products not out there currently that can fit it, we pivot pretty quickly, and it can provide a solution. That's what we've been doing, and we look to do more of that in the future.

Speaker 5

Yeah. To what degree have you broadened your customer verticals this last year or so, Robert? Or are you still primarily healthcare?

Speaker 0

We are primarily healthcare, and that's mainly because the regulation has driven and asked different facilities to create water management teams, to have a water management plan, to test, and that regulation does drive them towards coming up with some solution for what happens when those tests don't turn out so good. That being said, we're not stopping there. We're looking at other verticals where people are interested in not having bacteria and toxins in those waters. Think about places like airports, correctional facilities, schools, large office buildings, outside of the patient care space. That really was evident in 2024, the back half, as we looked at some of those new customer sites, started to create that market for having safe water.

Everyone talks about water quality, making sure it smells good, it's clear, the quality of the water, and only now is the conversation pivoting more towards the safety of the water, so that it's not just good-looking, but also safe to drink. That's really where we shot and come in and take care of problems that they didn't know there were solutions out there for. I'm really excited about going into other verticals and looking at other spaces to go beyond patient care.

Speaker 5

Okay, on a financial question, Judy, to what degree were fourth-quarter gross margins influenced by the stronger dollar, mix, or other factors? Year-end adjustments turned positive for perhaps some of your reserve accruals. Is it sustained? Do you feel something in that 63% or 64% range is sustainable for the current year?

Speaker 3

The improvement in gross margin really reflects a continued strong product margin and very reasonable shipping expenses. Sometimes we have more shipments in one quarter than another. Sometimes we need to do more air versus sea. Our shipping expenses are reasonable, but year over year, the entire year in 2024, we benefited from our new agreement with our largest supplier, and we had improved terms. We will not see that year-over-year improvement automatically because we had that this entire year, but we do feel good about our product. Yes, mix affects it. Certain customers, based on their volume, get certain discounts, some direct versus indirect, but we do not have a reason to believe that there is a big hit coming to margins. Within that kind of low 60s, we are hoping that it is very sustainable.

Speaker 5

Were there any factors that influenced the fourth quarter, like the spike in the dollar, or is that so lagged that you captured in the use in the burn of inventory?

Speaker 3

Yeah, it really isn't a dramatic effect on the results.

Speaker 5

Okay. The last question, I'll let someone else ask some questions. Given all the uncertainty that the U.S. economy and the world economy is facing right now, especially with the new administration, have you seen that yet or either heard about it manifesting itself in your bookings or your business or your expectations of the business, or is it too early to make any comments in that regard?

Speaker 0

When I look at the macro environment in the market and the patient care space, it isn't necessarily driven by how much money is in one's pocket or entity. It's usually driven by having an issue with people getting sick or avoiding lawsuits where they need some solution, and that has less of an impact based on the stock market prices in general. Even when it comes to tariffs, most of our components coming from Europe, that's not in the crosshairs right now. Not to say that it won't be in the future, as I know that there was legislation proposed in February regarding medical devices or, sorry, regarding tariffs from Europe, but medical devices weren't specifically called out as far as I could see anywhere. We've got to get ready for that as well.

Worst case, myself and competitors are impacted by some of those situations, but I think that we are much better positioned with our long-term agreements and location of our suppliers that not shield us, but make the impact more bearable. It is a great question, and we look at that very often and try to see what is coming and how we might mitigate against any of those impacts. As you know, the world's extremely volatile today, and so far we've been doing a decent job and continue to keep an eye on that.

Speaker 5

Thank you.

Speaker 2

With no further questions, this will conclude our question-and-answer session, and thus concludes today's conference call. Thank you for attending today's presentation. You may now.