Nephros, Inc. Q1 FY2024 earnings call

• Programmatic business grew 12% year-over-year despite a 5% drop in top-line net revenue, attributed to a record nonrecurring emergency order in Q1 2023 not repeating in 2024.
• Investing in new capabilities like an online filter tracker to enhance customer experience with automated replacement reminders and installation documentation.
• Exploring ways to support customers with nano and microplastics (NMPs) using hollow-fiber technology with the smallest pore size on the market.
• Participating in trade shows and industry events to increase brand awareness and educate key influencers on regulatory changes and solutions.
• Sales team actively supporting national partners, expanding with existing accounts, and converting emergency response to programmatic business.

Nephros reported first quarter net revenue of $3.5 million, a 5% decrease from the corresponding period in 2023. This decrease was primarily due to lower emergency response orders, but programmatic or recurring sales grew 12% year-over-year. Gross margins in the quarter were 62% compared to 57% in 2023, an increase of 5 percentage points driven by reduced shipping expenses and more favorable terms with the largest supplier. Research and development expenses were $200,000 for both first quarters of 2024 and 2023, while sales, general and administrative expenses were $2.1 million for both periods. Net loss was $169,000 compared to $306,000 in the prior year, and adjusted EBITDA was negative $95,000 vs positive $147,000 in 2023.

• Future growth depends on continuous enhancement of sales strategies, leveraging changing regulatory guidance, and exploring new products.
• Focus on operational prudence and disciplined capital deployment to support recurring sales growth.
• Expect to continue advancing towards solid financial performance by building on momentum from programmatic business and customer loyalty.

• Impact of COVID-19 pandemic on operations and results.
• Nephros' ability to timely and cost-effectively market, sell products and services.
• Rate of adoption of products and services.
• Success of commercialization efforts.
• Effect of existing and new regulatory requirements on business.
• Other economic and competitive factors that may affect results.

Q: Congrats on the quarter. How much of the growth in programmatic sales is from new customers vs existing?

A: It's a good mix of new customers and growth in existing customers, with a land and expand strategy being effective. The new digital tool will help track and maintain recurring programmatic business.

Q: When was the online filter tracker launched? Any early results?

A: Too early to tell, still in beta phase. Just starting to launch and roll out to customers, working out kinks.

Q: Are you servicing customers for filtering microplastics currently?

A: Not yet, but exploring the opportunity. Building up information on holding capacity, longevity, and recommendations to launch as a solution.

Q: Do you see TAM increasing?

A: Yes, expanding into schools, municipalities, senior living centers, etc., but noting different drivers compared to healthcare facilities. Infection control regulations in healthcare drive adoption more than in other sectors.

Q: Elaborate on OEM agreements?

A: Have fair amount of OEM agreements, working in parallel with device launches to meet clearance requirements. Designing filters to meet OEM needs, including size and capacity constraints.

Q: Insights on online filter tracker accelerating programmatic revenue?

A: The tracker helps remind customers to replace filters, driving turnover as previously filters were sometimes neglected. Expected to drive programmatic change and revenue.

Q: Top initiatives for this year's top line?

A: Digital tool to drive programmatic change, cross-selling within facilities, and nurturing partners/distributors through events and conferences.

Q: Expectations on gross margin sustainability?

A: Shipping expenses managed carefully, better terms with supplier, and mix of business influencing margins. Expect to maintain relatively strong margins though quarter-to-quarter fluctuations may occur.

Q: Headcount changes and expertise for new technologies?

A: Added an engineer and looking to add more, using ROI to decide on headcount. Using existing software tools for the online filter tracker and selectively hiring for future growth areas.

Q: Warehouse and distribution?

A: No third-party warehouses currently, but partners in stocking positions. In-house warehouse capacity expected to service foreseeable future, with plans to expand if needed.

Q: Customer retention and price pressures?

A: Retention rates around mid-90s, customers stay due to product performance despite price pressure. Price justified by performance and value provided.

Q: What's gone better and challenges?

A: Faster response times and team's willingness to go the extra mile are positives. Challenges include customer complacency in addressing non-regulatory-driven problems, addressed through education and value sharing.

Q: Future areas of growth?

A: Expanding into areas like sterile processing, schools, government buildings, leveraging NMPs opportunity with existing technology.