NEPHROS INC (NEPH)·Q3 2024 Earnings Summary

Executive Summary

• First profitable quarter: Net revenue $3.52M (-6% YoY; +8% QoQ) and net income $0.18M (vs. $(0.18)M LY), driven by 61% gross margin (↑200 bps YoY) and lower SG&A; Adjusted EBITDA $0.30M .
• Sequential rebound was aided by emergency response orders and cost controls; management highlighted underperformance in the South Central region and slower reorders at several large accounts as headwinds .
• Strategy pivot gaining traction: digital filter-tracker (beta; target full roll-out Q1 2025) and scaling services to perform customer filter changes aim to restore programmatic reorder cadence and compliance .
• Regulatory tailwinds emerging (Ohio hospital testing and NJ activity; ASHRAE 514/ST108) with potential to lift emergency response and drive solutions demand; new HydroGuard product expands into higher-flow/sterile processing use cases .
• No numerical guidance was issued; focus remains on profitability and operating discipline while investing selectively in growth initiatives .

What Went Well and What Went Wrong

• What Went Well
  • Achieved first quarterly profit; net income $0.18M vs. $(0.18)M) and Adjusted EBITDA $0.30M vs. $0.01M LY; gross margin improved to 61% on better supplier terms .
  • Sequential revenue growth (+8%) on ER rebound; management cited strong performance across most regions and operational improvements .
  • Strategic initiatives progressing: digital filter-tracking and service capability expansion to drive recurring replacements; CEO: “launch digital support for filter installation…ramping up our service capabilities” .
• What Went Wrong
  • YoY revenue declined 6% as Q3’23 was unusually strong with large initial orders; 2024 replacement orders smaller by comparison .
  • South Central region underperformed vs. expectations; some large accounts exhibited slower-than-usual ordering patterns and inventory burn-down, dampening programmatic sales .
  • No explicit guidance issued; continued variability in emergency response demand and programmatic compliance creates forecasting uncertainty .

Financial Results

Revenue mix and operating detail (Q3 2024):

KPIs and liquidity trend:

Context and drivers:

• YoY revenue decline reflects tough comp from Q3’23 large initial orders; sequential +8% aided by ER recovery .
• Margin expansion tied to supplier renegotiation and shipping expense management; SG&A fell on lower stock comp and bonuses .
• Programmatic reorders slowed at several large accounts and one region underperformed; initiatives target compliance and service-led installs .

Guidance Changes

No numerical guidance was provided this quarter.

Earnings Call Themes & Trends

Management Commentary

• “I am very excited to report our first profitable quarter… positive-adjusted EBITDA for both the third quarter and first nine months of 2024.” — Robert Banks, CEO .
• “Gross margins…61%…reflecting improved terms with our largest supplier… SG&A…$1.7 million…due to a decline in stock compensation and bonus accruals.” — 8-K narrative .
• “Quarterly revenue increased 8% over Q2 following a rebound in emergency response ER orders.” — Robert Banks .
• “We are ramping up our service capabilities to foster installation commissions and complement filter sales… [to] offset customer non-compliance with filter changeout schedules.” — Robert Banks .

Q&A Highlights

• Programmatic reorder strategy: Management deploying automated reminders and offering service installs; focus on compliance with FDA-cleared changeout intervals to restore recurring revenue .
• Filter tracker timeline: Beta underway; target broad rollout in Q1 2025 after v2.0 improvements addressing offline functionality .
• HydroGuard target market: Complementary, opens higher-flow/sterile processing applications aligned with ST108; enhances competitiveness where prior custom solutions were needed .
• Profit flow-through: CFO expects incremental revenue to improve profitability but cautions 2025 may see normalized commissions/bonuses vs. 2024 savings .
• Regulatory catalysts: Ohio hospital testing and NJ activity are spurring ER and programmatic opportunities; ASHRAE 514 guidance contributing to demand .
• Commercial beverage channel: Continues via partners; not expected to be a major growth driver near term .

Estimates Context

• S&P Global Wall Street consensus data for Q3 2024 could not be retrieved due to a request limit, so we cannot provide a comparison to consensus EPS and revenue this quarter. Values retrieved from S&P Global could not be obtained due to daily request limit; consensus comparison is therefore unavailable.*

Key Takeaways for Investors

• Profitability inflection achieved via margin gains and expense discipline; sustaining 60%+ gross margins and normalizing variable comp will be key to maintaining positive earnings .
• Recurring programmatic revenue is the core KPI; digital tracking and service-led installs are the primary levers to restore reorder cadence at large accounts .
• ER-driven volatility remains but regulatory developments (Ohio/NJ, ASHRAE 514/ST108) create medium-term tailwinds for both ER and programmatic solutions .
• Product portfolio broadened with HydroGuard for higher-flow/sterile processing; adjacent end-markets (labs, dental) expand addressable opportunities .
• Liquidity trending lower as operations normalize (cash $2.46M at Q3-end); operating discipline and working capital management remain focal points .
• Near-term trading implication: stock likely sensitive to evidence of programmatic reorder recovery and proof points from digital/service rollout; announcements on regulatory wins or large service contracts could be catalysts .
• Medium-term thesis: a shift from episodic ER reliance toward a higher-quality recurring model with margin durability, supported by regulation and expanded applications .