Earnings Call Transcript - NEPH Q2 2021

Operator, Operator

Good day, and welcome to the Nephros, Inc. Second Quarter 2021 Financial Results Conference Call. Please note, today's event is being recorded. I would now like to turn the conference over to Kirin Smith, Investor Relations. Please go ahead.

Kirin Smith, Investor Relations

Good afternoon, everyone. This is Kirin Smith with PCG Advisory. Thank you all for participating in Nephros' Second Quarter 2021 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, its ability to successfully, timely, and cost-effectively develop, seek and obtain regulatory clearance for its products and services offerings; the rate of adoption of its products and services by hospitals and other healthcare providers; the success of its commercialization efforts and its effect on the business of existing and new regulatory requirements 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 5, 2021. 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' Chief Executive Officer, Andy Astor. Andy, please go ahead.

Andrew Astor, CEO

Thank you, Kirin. Good afternoon, everyone. I am very pleased to report that Nephros had a solid second quarter, continuing our trend of year-over-year growth. Indeed, our total second quarter net revenue was 44% higher than last year and perhaps more important, total first half revenue was 20% higher than in any previous first half in the company's history. In other highlights, our Pathogen Detection business demonstrated some early success in the field, delivering products and services to end customers. We also acquired GenArraytion, Inc. in an all-stock deal, and we submitted a traditional application for the 510(k) clearance of our HDF product to the FDA. I will be expanding on each of these points shortly, but suffice it to say that it's been a busy quarter for Nephros. Looking forward, our outlook for the second half of the year continues to be optimistic, although with some caution; while we're seeing positive momentum in all of our core markets, it is uncertain whether the COVID-19 Delta variant or future variants may exert downward market pressure in the coming weeks and months. We can only hope that more people will get vaccinated so that we can all put this pandemic behind us. In the meantime, we remain focused on the long term, serving as a resource to our partners and our customers in support of their water management program needs. Now let's look more closely at each of our business segments. Our core Water Filtration business continued to grow in the second quarter. Net filtration revenue was up 40% over the same period of the prior year. Installed base sites, the source of our recurring revenue, were stable. New site sales were within normal limits, and our retention rates were at or above 90%. Our emergency response business was somewhat lower than average, although large swings in this aspect of the business are to be expected. Also of note, to offset increasing supply chain costs, we implemented a price increase across our filtration products, averaging 6%. During the second quarter, we saw a marked uptick in the face-to-face customer sales meetings and service engagements, which fortifies our new business pipeline and increased interest in our products and services. As stated last quarter, we expect a key driver of increased customer interest to be the new standards document called new requirements for water management and healthcare facilities by the joint commission, which was approved earlier this year by the Centers for Medicare & Medicaid Services, or CMS. The requirements in this document apply to all healthcare facilities receiving funding from CMS and stipulate increased scope and documentation for water management programs beginning January 1, 2022. As healthcare facilities develop, implement and update their water management programs to meet the deadline of upcoming requirements, we are well positioned to work with our strategic partners and their customers to support healthcare facilities' needs for filtration and pathogen detection. And so now let's move on to our Pathogen Detection Systems, or PDS business segment. It was a solid quarter for PDS as we demonstrated early commercial success and completed our strategic acquisition of GenArraytion. We deployed our on-site PDS technology at multiple customer locations to identify waterborne pathogens within premise plumbing systems. In one specific example, a hospitality customer required urgent testing to validate that its facility was safe to reopen to the public. This is an excellent demonstration of our ability to provide on-site near real-time results with limited notice. Building on that success, Nephros acquired the assets of GenArraytion, Inc. located in Rockville, Maryland in an all-stock transaction as reported in our July 12 press release. GenArraytion is a recognized market leader in infection disease monitoring and measurement, and the acquisition gave us access to a wide variety of proprietary assays, multiplexing technology and selection methods using PCR technology. With our leading-edge products and the tightened regulations of both the CMS and the joint commission, we remain confident in the future growth of our Pathogen Detection business. And for a brief update on our Renal Products business segment and our second-generation HDF product. As we announced last month, we submitted a traditional 510(k) clearance application to the FDA in late June. The FDA recently responded with a set of questions, a normal part of the clearance process, and we expect to file our responses to these questions in the next few days. Timing for the clearance process is wholly determined by the FDA's execution schedule. We will continue to be prompt in our responses to their questions, and we anticipate clearance in the coming months and then to pursue a limited commercial launch in the dialysis clinic market. I'll now present a few highlights of our second quarter 2021 financial performance. Nephros reported consolidated net revenues in the second quarter of $2.3 million, a 44% increase versus the same period in 2020. Net consolidated loss for the quarter was $1.1 million compared with $1.7 million in 2020, a 35% improvement. Consolidated adjusted EBITDA in the quarter was negative $0.8 million compared with negative $1.4 million in 2020, a 46% improvement. Consolidated gross margins in the second quarter were 56% compared with 57% in 2020. We expect future gross margins to continue in the range of 55% to 60% as we have for the last several years. Consolidated research and development expenses in the second quarter were $0.5 million compared with $0.8 million in 2020. Consolidated sales, general and administrative expenses in the second quarter were $1.9 million compared with $1.6 million in 2020, and our cash balance at the end of the second quarter was $8.2 million. 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, including our Water Filtration, Pathogen Detection and Renal Products business segments, can be found in today's filing on Form 10-Q. In closing, as always, I would like to thank each of our Nephros employees and our strategic partners for their unwavering focus on being a resource to customers and patients and helping us achieve strong first half results. Please be on the lookout for our participation in upcoming industry trade shows and financial conferences. I look forward to seeing many of you there, either virtually or in person. And if you're not already subscribed to our occasional email alerts, you may do so at the bottom of our website home page. And of course, please always feel free to contact me directly at andy@nephros.com. This concludes our formal presentation remarks. I'd like to personally thank all our investors and our other stakeholders for your support through the years. I look forward to speaking with you all again soon, and we will take questions from the audience now. Rocco, please open the call for questions.

Operator, Operator

Today's first question comes from Marc Wiesenberger with B. Riley.

Marc Wiesenberger, Analyst

Andy, can you explain more about the dynamics of the emergency response business? From your perspective, why has that segment been slower to recover? Is it simply that Legionella outbreaks are not occurring? If that's not the case, what do you think is driving the need for a return to normal?

Andrew Astor, CEO

Well, Marc, it's great to hear from you. The dynamics of the emergency response business are quite variable. In fact, we have seen a rebound since 2020, with more activity in the first quarter than we did in all of 2020. This rebound is due to increased testing and focus on diseases beyond COVID, especially as we hope to see a decline in COVID cases. However, with the Delta variant and rising COVID trends, it's not surprising that the emergency response business has seen a slight downturn. If you were to graph this business, it would look like a folded piece of paper, with upward and downward fluctuations. It heavily relies on the magnitude of outbreaks and the capacities of the hospitals affected, resulting in a naturally irregular pattern. To sum up, the business is recovering and I believe its recovery will inversely correlate with the decline of COVID. We will likely continue to experience this irregular business pattern.

Marc Wiesenberger, Analyst

Got it. Okay. Moving on, I know you guys provide filters for use in dialysis clinics, but there's a big push to move towards in-home dialysis. And I'm wondering if you could talk about your involvement in that market and maybe expectations for growth opportunities going forward.

Andrew Astor, CEO

Sure. Thanks, Marc. There are several in-home and portable dialysis manufacturers. We are actually the original equipment manufacturer of filters for some of them. That business is strong. It has grown well. We don't disclose the individual numbers, but the dialysis business has been an important part of our continued growth, and we think it will continue to be so. It at least keeps up with our growth in our hospital business and frankly has exceeded that growth in several of the last few quarters.

Marc Wiesenberger, Analyst

Got it. Okay. And then last one for me. Could you just kind of talk about the impetus behind the GenArraytion deal and the potential impacts on the gross margin for the PDS segment going forward?

Andrew Astor, CEO

Sure, sure. Thank you, Marc. The impetus for the deal was pretty much a vertical integration play. We have been buying from GenArraytion for a couple of years several of our assays. At the beginning, it was quite a few. And then as we've developed our own, it was less. But GenArraytion has literally hundreds of assays that they've developed as well as proprietary processes and purchasing them reduces the cost of our development and reduces our time to market. I think that it will have a good impact on our abilities and gross margins because we're manufacturing now all of our own assays rather than paying wholesale for some of them.

Operator, Operator

And ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the conference back over to Andy Astor for any closing remarks.

Andrew Astor, CEO

All right. Well, it was good to see several dozen of you that are on the call, and I look forward to seeing you all in the future. I hope you have a great rest of your summer, and we'll talk to you in November.

Operator, Operator

Thank you, sir. 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.