Q3 2024 Nephros Inc Earnings Call
Speaker Change: Good day and welcome to the Nefros, Inc. 3rd Quarter 2024 Financial Results Conference Call.
Speaker Change: 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.
Speaker Change: After today's presentation, there will be an opportunity to ask questions.
Speaker Change: To ask a question, you may press star then 1 on your telephone keypad. To withdraw your question, please press star then 2. Please note this event is being recorded.
Speaker Change: I would now like to turn the conference over to Kirin Smith with PCG Advisory. Please go ahead.
Kirin Smith: Thank you, Debbie. Good afternoon, everyone, and welcome to Nefros' Q3 2024 Earnings Conference Call.
Kirin Smith: Thank you all for participating in NEFROS's third quarter 2024 conference call. Before we begin, I'd like to remind you that this call will include forward-looking statements regarding the operations and future results of NEFROS.
Kirin Smith: For a discussion of these forward-looking statements, please review NEPHROS' SEC filings, including 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.
Kirin Smith: Factors that may affect the company's results include, but are not limited to, Nevros' ability to successfully, timely, and cost-effectively market and sell its products and services offerings.
Kirin Smith: the rate of adoption of its products and services by hospitals and other health care providers, the success of its commercialization efforts, and the effect of existing and new regulatory requirements on Nefros' business and other economic and competitive factors.
Kirin Smith: Content of this conference call contains time-sensitive information that is accurate only as of the date of the live call today, November 7th, 2024.
Speaker Change: The company undertakes no obligation to revise or update any statements to reflect events or circumstances as to the date of this conference call, except as required by law. Now I would like to turn the call over to Nefros's President and Chief Operating Officer, Chief Executive Officer, excuse me, Robert Banks. Robert, please go ahead.
Robert Banks: Thank you, Karin. And good afternoon, everyone. I appreciate you joining us today for Nefris' Q3 2024 earnings call.
Robert Banks: This quarter represents a significant milestone for our company as we achieved our first profitable quarter since inception.
Robert Banks: I want to begin by acknowledging the hard work and dedication of the entire Nefros team who have made this achievement possible.
Robert Banks: For the third quarter, which ended September 30, 2024, we reported a net revenue of $3.5 million, an increase of 8% over Q2 2024, but a 6% decline compared to Q3 2023.
Robert Banks: Despite this decline, I am pleased to report a net income of $0.2 million compared to a net loss of $0.2 million in Q3 of last year.
Robert Banks: This positive shift is driven by cost management efforts and operational improvements that have helped us to reach this milestone.
Robert Banks: Gross margin for the quarter was 61% compared to 59% in Q3 2023, reflecting improved terms with our largest supplier.
Robert Banks: Adjusted EBITDA for Q3 was $295,000, a significant improvement over $11,000 in the same quarter last year.
Robert Banks: SG&A expenses were reduced to $1.7 million from $2.1 million in Q3 2023 due to lower stock compensation and bonus accruals.
Robert Banks: and quarterly revenue increased 8% over Q2 following a rebound in emergency response ER orders.
Robert Banks: Although we continue to see some challenges in specific regions, we remain focused on mitigating reductions in programmatic reorders by strengthening customer engagement and service capabilities.
Robert Banks: We are making strategic advancements to ensure long-term growth. In Q3, we began ramping up our digital support tools for filter installation, which will improve customer compliance with filter change-out schedules and drive recurring revenues.
Robert Banks: This initiative, coupled with our increased service capabilities, positions us well for future growth.
Robert Banks: Looking ahead, we are focused on expanding into new markets such as Dell Processing, Laboratories, and Dental Practices where we see clear opportunities for our products.
Robert Banks: Additionally, we are actively exploring partnerships that will allow us to offer solutions for emerging issues like nano and microplastic contaminations.
Robert Banks: As of September 30, 2024, our cash and cash equivalents stood at $2.5 million. This is down from $4.3 million at the end of 2023.
Robert Banks: This reduction is primarily due to operating losses in the first half of 2024, payments of annual employee bonuses, and an inventory investment in Q1.
Robert Banks: Despite this decrease, we remain committed to maintaining financial discipline while pursuing strategic growth opportunities at the same time.
Robert Banks: In conclusion, Q3 marks a pivotal point for NetBros as we enter a new phase of profitability and operational excellence.
Robert Banks: We are excited about the future, and we remain focused on delivering strong results for our stakeholders. I want to thank our investors, partners, and employees for their continued support.
Robert Banks: We look forward to building on this momentum in the coming quarters.
Speaker Change: I will now turn the call over to our CFO, Judy Krandel, for a detailed discussion on our financial performance. Judy?
Judy Krandel: Thank you Robert. Please provide an overview of our financial performance for the third quarter of 2024.
Judy Krandel: Our third quarter net revenue was $3.5 million, down 6% compared to the third quarter of 2023.
Speaker Change: As Robert alluded, this decrease reflects a decline in programmatic revenue partially offset by an increase in emergency response revenue. The decline in programmatic revenue reflects underperformance in one region and a few of our larger accounts showing slower order patterns.
Speaker Change: Our gross margin for the third quarter of 2024 increased to 61% versus 59% in the prior year period, reflecting improved terms with our largest supplier.
Speaker Change: As Robert mentioned, we achieved positive net income of approximately $200,000 in the third quarter of 2024 versus a net loss of $180,000 in the prior year period, reflecting the improved gross margins this year and a tight control of expenses.
Speaker Change: This is primarily due to reduced SG&A expenses, which declined by 19%, which was driven by lower stock compensation, lower bonus accruals, and lower sales commissions.
Speaker Change: Adjusted EBITDA improved to $295,000 in the third quarter of 2024 from $11,000 in the prior year period.
Speaker Change: Now looking at the nine months ending September 30th, 2024, sales declined by 6% to $10.3 million from $11 million in the prior year period, but excluding emergency response revenue, sales increased by 3%.
Speaker Change: Growth margins improved to 61% in the first nine months of 2024, from 58% in the prior year period, reflecting improved pricing from our largest supplier, as well as reduced shipping expenses.
Speaker Change: SD&A expenses decreased by 11% in the nine months of 2024 versus the prior year period due to a decrease in bonus accrual, sales commission expense,
Speaker Change: stock compensation expense and travel expenses. This was offset in part by an increase in salary expense.
Speaker Change: Net loss decreased 70% to a loss of $275,000 in the first nine months of 2024 from a loss of $921,000 in the prior year period.
Speaker Change: Adjusted EBITDA for the 9-month period improved to $67,000 from a loss of $25,000 in the prior year period.
Speaker Change: Our balance sheet remains strong, with a cash balance of approximately $2.5 million as of September 30, 2024.
Speaker Change: This is a decrease from $4.3 million at the end of 2023, mainly due to increased inventory and accounts receivable, and the payments of annual bonuses, as well as a decline in accounts payable, simply due to timing of payments.
Speaker Change: Despite these changes, we continue to operate debt-free, providing us with flexibility to invest in growth initiatives.
Speaker Change: I will now turn the call to Robert for some concluding remarks. Robert?
Robert Banks: Thank you, Judy. As we move forward, Nefros is well positioned to continue its growth trajectory by focusing on innovation, customer engagement, and strategic expansion.
Thank you. Thank you.
Robert Banks: We remain committed to providing high-quality water filtration solutions that meet the evolving needs of our customers. I want to extend my gratitude to our investors, partners, and the entire Nefros team for their continued support and dedication.
Robert Banks: We look forward to sharing more updates on our progress in the coming quarters.
Robert Banks: This concludes our formal presentation. We will now open the floor for questions. Operator, please open the call for Q&A.
Speaker Change: We will now begin the question and answer session. To ask a question you may press star then 1 on your telephone keypad. If you are using a speakerphone please pick up your handset before pressing the keys.
Speaker Change: 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.
Speaker Change: The first question comes from Jeremy Perlman with Maxim Group. Please go ahead.
Speaker Change: Hi, good afternoon. Thank you for taking my question. I'm on the line for Ante Venditti. You mentioned on the call that you are planning to strengthen your customer engagement to try and I guess get back some of those reordering from the larger customers. Maybe you could talk a little bit to how you plan on doing that. What are some of your strategies for that?
Speaker Change: Sure. Thank you for that call. Very, very good question. The reorder, or we do call it programmatic business,
Speaker Change: The filters that we sell often have a three-month or a six-month replacement cycle, and customers are prompted to replace them, and usually that happens at a regular pace. What we've noticed through analysis is that customers are letting those six-month filters last longer.
Speaker Change: By emphasizing to the customer that using the product off-label and beyond its FDA cleared amount of time They are then out of basically off-label. We can kind of talk to their infection control departments and get them to comply
Often it's not intentional, they just forget that it's happening.
Speaker Change: So we're employing online tools to have the automated reminders set out so that they can be warned, hey, it's time to change your filters. It's time to update things. In addition, we're now offering a lot of services to be able to do that for them if they don't have the manpower.
Speaker Change: So by coupling that with the cell of our filter and getting them on a contractual or longer-term basis, we'll be able to help recover and prevent that filter from being used longer than it's supposed to be.
Speaker Change: It took us longer than we should have to come up with some of those, but it takes a while to put these technologies in place and get the company orientated to be able to support those service type requests.
Yep.
I think that's sort of...
Speaker Change: Yeah, so I think I might have answered another one of my next questions just to confirm. So you mentioned, you know, is that online filter tracker that you think in a beta testing in the first quarter that ties into this, that's going to be something that automatically will send, you know, alerts to customers that their filter is expiring in a month and then or has expired and they should reorder it, that goes hand in hand?
Speaker Change: Correct, correct. Yeah, we were pretty far down the path of a solution, had some hiccups from a technology perspective, getting things to work offline, had to pivot midway through, and we've been testing a new version of it, 2.0, and we're very happy with how that's working out. So that's going to be what we're moving forward and pushing out to the field.
Speaker Change: But it does take some time to make sure that it works before we get it fully rolled out and have a product that we have to recall. So, so far, we're very, very pleased.
Speaker Change: Do you have a rough estimate of time on when you think that would be rolled out to all your customers? Is that at the end of the year or something in the first half of 2025?
Speaker Change: Yeah, I think we're still aiming for Q1 next year, like we mentioned, I think, previously. We will start, we've already started rolling it out to customers, beta testing it, making sure everyone's happy with it.
So it's right on schedule.
Speaker Change: Okay great and then just my last question is related to that new HydroGuard ultra filter you know you put out a press release recently. What's the target market for that and how do you think that fits in with the rest of your portfolio? Is that a that complimentary or is that a totally new addressable market?
Well, it's complimentary. It's somewhat of a new also.
Speaker Change: opportunities for stale processing and basically higher flow situations where we couldn't reach it with the existing product portfolio.
Speaker Change: So, this opens up a bigger market and some of the newer markets covered under ST-108, which are becoming more and more prevalent today. So, we're very excited about what that can do for us.
Speaker Change: We've been able to satisfy that need in the past, getting creative, getting things together, but it put us at somewhat of a deficiency by the time you come up with a custom solution.
Speaker Change: So, this does allow us to compete more competitively and readily with a product that's designed and made for that particular application. So, yep, that's what that brings us. Okay, great. That's great. I'm going to head back and take you, and thank you again for taking my questions.
Thank you.
Speaker Change: Again, if you have a question, please press star, then 1. The next question is from Ankur Sagar, he's a private investor. Please go ahead.
Thank you. Bye. Bye.
Speaker Change: Hey, good afternoon, Robert and Judy. Thank you for taking my questions. Nice job on the profitability. I think that just shows the strength of the operating model and what's visible with higher revenue numbers.
Speaker Change: So that's great. On the revenue side, can you separate out in terms of if the programmatic business also declined and what that decline was?
Speaker Change: and also I think you called out a couple of reasons that the South Central region not performing and and the reorders and if you could just you know list out the things that you're doing to to stop that decline
Speaker Change: Sure, I'll go into some detail. Hopefully it will answer that question. Programmatic sales, which I mentioned previously, they've declined over same quarter last year.
Speaker Change: Well, same quarter, third quarter last year was one of the highest quarters on record. I think it was any third I'll have to go back and check the numbers
Speaker Change: So coming close to that isn't too shabby of an achievement. However, it's lower than what we would expect at that same quarter in 2024.
Speaker Change: It is a cyclical product, so every six months, and so based on ordering patterns, you typically have a slower month followed by a bigger month.
Speaker Change: So, 3Q in 2023, I believe, was $3.7 million, so that was a really, really high quarter. So, coming close is not too bad. Now, we did increase, I believe, 6% over prior quarter. So, if you take programmatic...
Speaker Change: versus Q2, we are increasing there, so not too unhappy with that result. So as long as the trajectory continues, I'm quite pleased.
Speaker Change: So I think that's the answer to how the programmatic business has performed.
Speaker Change: I did see declines in some of the regions and some customers. It's really limited to a few customers.
Speaker Change: And what I've noticed, and when we talked to a few of those individually, a couple of them are burning down inventory. They were carrying high inventories and they wanted to get that down. So you'll see ordering patterns kick back in, and that should reverse itself. So not too worried about that. I don't see losses across the system to competitors.
I don't see people just abandoning the nephros.
Speaker Change: answer and solution. So, so not too, not too concerned overall. Just maybe ordering patterns, timing, inventory reduction. Now,
Speaker Change: The performance of one of the regions I mentioned, it was performance against expectations, not against a prior year or other things, so those aren't losses, those are just places where given the number of opportunities, patient care facilities, other opportunities, I would have expected larger revenue and we just weren't quite seeing that.
Speaker Change: So, yeah, we've taken and realigned some of the support and gotten different resources capable with different technologies to be able to grow that region and hopefully we'll be able to report on some results on that in the coming quarter.
Speaker Change: I see, okay, that's great. You know, it's not calling out names, Robert, but I saw, I see it in the news recently there was a facility
you know, share on the East Coast.
Speaker Change: You know, which had, I think, a legionnaire outbreak, a few people died, and then, you know, there was a lawsuit against that.
It's strange to see.
Speaker Change: You know, where these facilities could be just, you know, staying compliant with this filtration and save lives, but they're not. I think that goes to, you know, your response regarding the programmatic business.
Speaker Change: channeling this by, you know, service. I think you have some full-service customers as well where you basically change the filters yourself or some of your partners do it. I think if you could elaborate on that because that seems like
Speaker Change: something maybe can can tackle this this programmatic side of business you know quickly.
Yes, so...
fully executed in the recent past anyway.
Speaker Change: So having a team that can go out and not only sell the filter but exchange the filter, track it. A lot of the entities that we're talking to, they don't have full staff of people ready to change the filter. And when they do, it's teams thinking of maybe they're filtering your refrigerator or you go in and unplug it and plug a new one in.
Speaker Change: Our filters are basically medical devices in most cases, and you have to do a certain amount of sanitization, or you're putting a clean filter in a dirty line, and you're not doing yourself any favors.
Speaker Change: So, having our team service it and follow our instructions for use.
Speaker Change: is really a way to make sure that they're not only compliant with how the filters are supposed to be used in getting the results they want and need to get.
Speaker Change: but also that we're tracking that when that filter gets installed and it gets changed on a regular basis.
Speaker Change: So that's very important for us. It's important for us to figure out how to do that regularly and build the muscle internally to be able to do that and with our partners who also have those capabilities.
Speaker Change: So, we'll be looking for continuing to strengthen either our third-party network, but more importantly, our internal network as well, to be able to support those opportunities.
Speaker Change: Okay, okay. Just one last one. I think, Robert, coming into 2024, I think you had some higher expectations for growth.
Speaker Change: If you could probably comment, talk about the top three initiatives that you're looking forward.
and focused on
Speaker Change: from the growth side, you know, that would be great. And just one last part on this question for Judy, you know, any revenue growth that happens, should we expect that it drops to the bottom line and increases the profitability?
Okay, so I'll try to type that in.
Speaker Change: No, go ahead, Judy. I'm sorry to interrupt you. Please go.
Judy Krandel: I don't know, sorry, sorry if I get this. Yeah, I appreciate the question. So certainly we have nice growth margins and
Speaker Change: We really think we can grow sales faster than expenses. So obviously...
Speaker Change: We do expect every incremental dollar of sales to add more to the bottom line. I do want to caution you though, we did have...
Speaker Change: Lower because sales did not meet expectations. We did have lower sales commissions and bonus accruals this year than expected.
Speaker Change: which was a savings on the expense line. We certainly don't plan for that next year, so we hope to have full commissions and full bonuses, which again are variable. We still expect to become more profitable as we grow sales on the operating line.
Speaker Change: I can tackle the first part of the question. When you say not meeting expectations, what I've learned early part in this year was there are two sources of revenue, which we've often talked about, the programmatic and also the emergency response.
Speaker Change: The part that we can control with our efforts, our day-to-day, our core, is that programmatic business.
Speaker Change: And those sales have been increasing at a steady trajectory as...
Speaker Change: as intended. Maybe slightly lower than we expected, especially this past quarter.
Speaker Change: But overall, I'm not disappointed with that result. The emergency response, which I talked to Nadia in the previous call about, has disappointed. But that's not something that we can control. So we've been...
Speaker Change: Looking at the top-line revenue as an aggregate of the two components of revenue and thinking about it classifying the revenue stream overall.
Speaker Change: And I think, and I suggested before that it's probably a much better measure of how well the company is doing against competition to look at the core and programmatic business.
Speaker Change: So from that perspective, I'm looking at three growth initiatives to keep that number going and rising into the next year. We talked about one just now with service.
Speaker Change: going in and keeping track of same-site sales filters that are installed and changing those out on a regular basis.
Speaker Change: That's one. Two, the digitization effort by tracking and knowing where the filters will land, where they're installed, how they're performing, what's there, all of that being recorded and online will give us analytics and be able to tell a lot more information how to
serve the market and meet our customers needs.
Speaker Change: A third one I would point at is going beyond patient care.
Speaker Change: Patient care, hospitals, burn centers, recovery, emergency units, those are our typical places where you'll find our filters, which are considered medical devices, but there's a world of other opportunities out there, whether it be airports, cruise ships,
Speaker Change: large office buildings, correctional facilities, all the places where you can think that would care about microplastics, nanoplastics and other contaminants beyond just the pathogens, all represent opportunities.
Speaker Change: So as we get better at how to serve these other markets and brand and our materials to be able to meet the needs and communicate that, we hope to show growth in those areas as well.
Okay, great. Thank you for taking my question.
No problem.
Speaker Change: The next question is from Ralph Weil with R. Weil Investment Management. Please go ahead.
Please.
Speaker Change: Good afternoon to both of you. You've talked in the past about ASHRAE and that it is suggested and the regulations then we're talking about having more teeth in the regulations.
Speaker Change: you're working on. Could you possibly just be a little more specific as to what you might be doing and where you stand with the newer areas at this point in time?
Speaker Change: Okay, I'll try to answer that first. I can answer the first one, the second one on how specific on the newer areas I might struggle with, but let's see where the answer takes us.
Speaker Change: So as far as ASHRAE, ASHRAE 514, ST-108, these regulations, guidelines, they're calling for people who conform with them to form water management committees, to have emergency response plans.
to have basically some idea for how they will handle
Speaker Change: pathogens when problems arise. This has caused people in the, say, Ohio area where it had become not as important to look at that again and to adhere to a certain amount of testing if they want to keep their hospital accreditation status.
Speaker Change: So, what we saw in Q3 with a little bit of rebound there towards the end of ER was partially result of that. As you see, different patient care entities in that area start to now pay more attention to it and look for those programs, we're getting those calls and we're having people that are testing and we're able to respond and provide solutions for them.
Speaker Change: So the regulations that we've mentioned and had been talking about for, you know, months ahead of this are starting to show and realize some increased opportunities for nephros. So that's good and that's exciting. I'm seeing something similar in New Jersey with regulations that are being passed there.
Speaker Change: So, it's in the beginning stages, and a lot of these entities do have a pretty significant grace period of time to comply.
Speaker Change: So, I mean, sometimes a year plus, so as they start to do and create their own plans, we're getting calls being asked to, hey, how do we meet these standards? What can you do to help us? So that's exciting.
Speaker Change: Now, the second part of your question, I hope, again, you said new, or, yep, please repeat that second part for me. I was having a little trouble understanding what you were trying to highlight.
Speaker Change: Douglas Goldstein, CFP®, is the director of Profile Investment Services and the host
Speaker Change: investors would like to hear more about the newer initiatives and newer programs that you have, whether it be, and you did mention dental and you mentioned instruments and nano microplastics.
Speaker Change: Could you elaborate a little more on, you know, what you've been doing and how long that might take and, you know, what it may mean to the company? I mean, I guess...
Speaker Change: That's the future and people, you know, I and I guess others are looking forward to where the...
Speaker Change: New growth is going to come from besides your problematic business and your emergency business. I think you meant programmatic business, but I get it.
Speaker Change: The new products One of the things I have gotten from investors that they do want to know what's coming. What's new? What's exciting? How is Nefers going to take the?
Speaker Change: into the next quarter, into the next year. And that's one of the reasons you've seen and will continue to see more of these press releases.
Speaker Change: We did one on the new product, the HydroCard, and in the press release it talks about markets that we're going to be targeting with that product, which happens to line up very nicely with some of the regulations that are coming out.
Speaker Change: You've seen another press release on disaster recovery. So being able to respond when there is emergencies like the hurricanes. We're getting calls from customers that didn't know who Nefros was before and trying to look at...
Speaker Change: how we not only take their emergency response, but let them know that this is also a solution that can be used in line and ongoing.
Speaker Change: So, again, those are going to be some of the growth areas converting the new customers into emergency response into programmatic.
Speaker Change: You're going to see more activity like that, press releases or just letting the investors know what's coming and where we're seeing significant growth and opportunities.
Thank you.
Speaker Change: in the coming weeks and months. So, stay tuned for that. We hear you. We know that it's important to let our investors know where we're going, and we're excited to start sharing some of those things. We've got a pretty robust pipeline of items in our R&D pipeline that we're going to be
Speaker Change: just accelerating just as quick as possible, so stay tuned is what I would say to that.
Could you comment?
Speaker Change: about the commercial beverage business and what the status is of that and
whether you, you know.
Speaker Change: Were there any changes being made there to accelerate that or do anything different?
Speaker Change: So, the commercial business, as was highlighted early Q1 last year, had big plans and robust goals that did not meet expectations. We are still well into that space. We are still rolling out
Speaker Change: through our partner's tractor by way of Donistar to reach all the Chipotles. So those change outs are happening. Not seeing the accelerated growth as I would have liked to, but it was never supposed to be a huge chunk of our existence anyway.
Speaker Change: So, it's piping along. Dynastar is still a great partner of ours and we're always looking for additional ways to expand that.
Okay, thank you.
Thank you.
This concludes our question and answer session.
Speaker Change: This also concludes our conference. Thank you for attending today's presentation. You may now disconnect.