Nephros Inc

NASDAQ:NEPH

Earnings Call Transcript 2024-Q2

[Operator]

Good day, and welcome to the Nephros Inc. Second Quarter 2024 Financial Results Conference Call. [Operator Instructions] Please note, today's event is being recorded. I'd now like to turn the conference over to Kirin Smith with Investor Relations. Please go ahead.

[Kirin Smith, executive]

Good afternoon, everyone, and welcome to Nephros's Q2 2024 Earnings Conference Call. This is Kirin Smith with PCG Advisory. Thank you, all, for participating in Nephros's Second Quarter 2024 Conference Call. Before we begin, I would like to remind you that this call will include forward-looking statements regarding the operations and future results of Nephros. For a discussion of these forward-looking statements, please review Nephros's 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. Factors that may affect the company's results include, but are not limited to, 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 health care providers, 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, August 8, 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. Now I would like to turn the call over to Nephros's President and Chief Executive Officer, Robert Banks. Robert, please go ahead.

[Robert Banks, executive]

Thank you, Kirin, and good afternoon, everyone. We appreciate you joining us on our Q2 2024 earnings call. I want to start by expressing my gratitude to the entire Nephros team for their continued hard work and dedication. Today, we reported our 2024 second quarter results. As in the previous quarter, we began to break out the programmatic business and emergency response business in order to provide greater clarity of the health of the core business. Programmatic describes the sales of filters as part of an ongoing, long-term water management solution for the control of pathogens in water, while the emergency response business can fluctuate with large onetime orders and that's just due to the nature of that business. I'm proud to report that in the first half of 2024, we have achieved the highest number of active customer sites ever with a 15% increase over last year, adding over 300 customers in the past 12 months. In Q2, we have managed the highest retention rate in the past 6 quarters. These reasons why I am very proud of all the Nephros team for executing on such a high and consistent level. In the second quarter of 2024, we experienced a very positive increase in nonemergency response business, up 8% compared to Q2 of last year. This solid growth was offset by a 92% year-over-year decline in our smaller emergency response business, resulting in an 8% decline overall in Q2 total revenue. We also just reported a 28% year-over-year improvement in our net loss as we continue to focus on cash flow generation and overall profitability. We believe that one contributor to the decline in the emergency response business is the reduced stringency of waterborne risk response and territories previously committed to both proactive filtration measures and robust corrective actions. We continue to focus on key initiatives that drive long-term growth. One significant achievement is the expansion of our digital tools, including the filter tracking app, which is designed to enhance customer engagement and ensure consistent filter replacements. The speed of implementation has not yet met our expectations as we continue to fine-tune the platform and online operability. Additionally, we are advancing our capabilities to address the growing concern around nano and micro plastics, NMPs, leveraging our unique position with the smallest pore size in the market, which is a key competitive strength and allows us to offer an excellent solution to this [ dire ] problem. We are seeking relationships with other entities and OEMs that may purchase and integrate our solution to their offerings, enabling them to make the claim of the mediating NMPs. Looking ahead, we are also strategically positioning ourselves to capitalize on growth opportunities in various sectors beyond hospitals to areas like dental practices, scale processing and endoscopy processing where we are seeing there is clear growth opportunity. I remain excited about our overall value proposition and long-term growth prospects, while focusing on profitability and return on investment for our stakeholders, as we help the world meet its critical water filtration demands. I will now turn the call over to our CFO, Judy Krandel, to discuss our financial performance in detail. Judy?

[Judy Krandel, executive]

Thank you, Robert. I'm pleased to provide an overview of our financial performance for the second quarter of 2024. Our Q2 2024 net revenue was $3.25 million, down 8% compared to Q2 2023. As Robert alluded to, this decrease reflects the continued low contribution from emergency revenue. Excluding the emergency response revenue, sales increased 8% due in part to the increasing success from our longer-term and newer sales personnel hired in 2023. Our gross margin remained strong at 59%, flat year-over-year and a slight decrease from 62% in the first quarter of 2024. The sequential decrease was due to increased shipping expenses and additional reserves primarily for slow-moving commercial products. Despite these challenges, our product gross margins before shipping and noncash reserves stayed very healthy, indicating strong underlying product performance. We achieved a 33% improvement in our net loss of $289,000, down from the $433,000 loss in the second quarter of 2023. This was primarily due to reduced SG&A expenses, which declined by 13%, driven by lower stock compensation, bonus accruals, commissions and professional fees. Adjusted EBITDA improved to a loss of $133,000 in the second quarter of 2024 from a loss of $183,000 in the prior year period. Moving on to the 6-month period. Sales for the 6 months ending June 30, 2024 declined by 6% from the prior year period. But again, excluding the emergency response revenue, sales increased by 10%. Gross margins improved to 61% in the first half of 2024 from 58% in the prior year period. SG&A expenses decreased by 6% in the first half of 2024 versus the prior year period due to a decrease in bonus accrual, sales commission expense, stock compensation expense and professional fees, offset in part by an increase in salary expense. Our net loss decreased 38% to $458,000 in the first half of 2024 from $739,000 loss in the prior year period. Our balance sheet remains strong with a cash balance of approximately $3.1 million as of June 30, 2024. This is a decrease from $4.3 million at the end of the first -- the end of the last year, 2023, mainly due to increased inventory and accounts receivable and the payment of annual bonuses. Despite these changes, we continue to operate debt-free, providing us with flexibility to invest in growth initiatives. As we look to the future, we are focused on maintaining financial discipline, while investing strategically in areas that will drive long-term value. This includes optimizing our product pricing, improving operational efficiencies and exploring strategic opportunities for expansion. I will now turn the call back to Robert for some concluding remarks. Robert?

[Robert Banks, executive]

Thank you, Judy. As we move forward, Nephros is well positioned to continue to grow its trajectory by focusing on innovation, customer engagement and strategic expansion. We remain committed to providing high-quality water filtration solutions that meet the needs of our evolving customers. I want to extend my gratitude to our investors, partners and the entire Nephros team for their continued support and dedication. We look forward to sharing more updates on our progress in the coming quarters. This concludes our formal presentation. We will now open the floor for questions. Operator, please open the call for Q&A.

[Operator]

[Operator Instructions] And today's first question comes from Tom McGovern with Maxim Group.

[Thomas McGovern, analyst]

So yes, so first question, I just wanted to see if you guys could elaborate a little bit more on the reduced stringency for the waterborne risk response in certain territories? Just wondering if there was a specific reason you guys could identify for that reduced stringency? And then maybe kind of a follow-up question on that is, with the ASHRAE 514, I believe it is the standard that came out. I think it was at the end of last year. Just kind of curious if you could give an update on that? I know you guys are doing a good job of trying to inform clients of that, but have you guys seen maybe a shift in clients that guideline applies to in terms of reorder rate? Any color on that would be very helpful.

[Robert Banks, executive]

Yes. Thanks for the question. So on the first question, identifying any specific actions or things that may have happened, if I look specifically at Ohio in the Department of Health, their system was basically overwhelmed with a number of cases and urgencies and positive test responses. So the mentality change that in order not to overwhelm the system, they changed that stance. They stopped testing so excessively and reverted back to a method of letting each individual entity handle the situation. Now, not to say that there is a [ lax ] in care of the importance of patients. But coming out in the future in that same region, Ohio Administrative Code Rule #3701-[ 20-07 ], it's a [ membrane ] requiring testing. And in order for you to obtain a hospital license, you'll have to show that you've tested over some period. So that starts on October 1 of this year. So we could see a return to some higher level of those emergency responses and in other states and areas in the region following suit. I'm seeing similar legislation in New Jersey as well. So that, I think, is a big influence based on the second part of your question of the ASHRAE guidelines, and that's now requiring testing as well. So I think that those 2 influences coming on the pipe will -- could change that. But going forward, I cannot rely on emergency response as part of the forecast since it is something in the more noncontrollable state of business. So I hope that answers your question. Despite that emergency response, you'll see that, that core is still strong, maintaining kind of an average around that double-digit growth trajectory, which is impressive in the time that we have today. So thanks for that question.

[Thomas McGovern, analyst]

Got you. Appreciate it. And then I have one more, and I can jump back in the queue. So this is just on the filter trackers. So obviously, rollout seems to be maybe not quite as rapid as you had expected as you guys are kind of working through some [ kinks ] for maybe adding improvements to the platform. So I was just wondering if you could give an update on kind of how you're seeing this rollout? Last time we spoke, you said it was kind of the 12-month implementation time line, which we kind of have it fully rolled out and integrated by the end of the first quarter in '25. Is that still the case you guys got -- was that kind of possible delays [ cooked ] into that time line? Or now do you expect it to maybe be pushed to the end of second quarter? And then just kind of a follow-up on that would just be, have you seen changes in reorder rates from the clients that kind of have the prototype of this? Have you seen that it's been working? Any commentary you can have on kind of just initial success of the platform would be helpful as well.

[Robert Banks, executive]

Great question. And the filter tracker app we were talking about, and we didn't have to come up with a better name than that, boring name. But the app was having some issues, but we knew they would have issues, the offline version of it. Many of these filters are located in parts of hospitals or patient care facilities that don't have good reception. So the scanning and not part of the tool had to be updated and revamped and then -- so that it works on most [ phones ] or all [ phones ]. It was working fine on some. So that -- those kinks and problems seem to have been worked out as of very recently. Places where we are using it are full-service accounts that were already kind of changing their filters on a regular basis. But kind of alluded to -- or the underlying problem your question is addressing is the reorder rate. These are people who have programmatic long-term water treatment plans using our filters, but then for whatever reason are not changing them on a regular basis. They may not have the staff, they forget about -- The nurses [ as in ] don't complain, so they [indiscernible]. A whole number of reasons why the filters aren't getting changed out on a regular basis, but I do believe that's a low-hanging fruit, easy problem that we'll be able to rectify once we get this filter tracker and other digital online tools in place to better monitor and keep up with that business. Thanks for asking. That's a good question.

[Thomas McGovern, analyst]

Got you. I appreciate that. And just one last thing. I know you guys commented on -- you added 300 accounts -- active accounts recently over the past 12 months, was it possibly 6 months I've to go back and check. But did you guys give us the total number of active accounts as of the end of the second quarter? I know that's a figure you used to give. I'm not sure if you're still planning on doing that?

[Robert Banks, executive]

Yes, let me -- one second, unless you have it, Judy, I'll find it in about [ 3 seconds ].

[Judy Krandel, executive]

Yes, we will look at that number for you.

[Robert Banks, executive]

[ Pull it ] back to [ sites ] at the end of Q2, 1,384.

[Operator]

[Operator Instructions] And this concludes our question-and-answer session. I'd like to turn the conference back over to the company for any closing remarks.

[Robert Banks, executive]

Thank you, and I appreciate everyone joining the call today, and we look forward to talking again in the future. Please have a great rest of your day and week.

[Operator]

Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.