Nephros, Inc.
Q4 2020 Earnings Call Transcript

Published: 1 Mar 2021

[Operator:]

Good afternoon. And welcome to the Nephros Incorporated Fourth Quarter 2020 Financial Results Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Kirin Smith, Investor Relations. Please go ahead.

[Kirin Smith:]

Good afternoon, everyone. This is Kirin Smith with PCG Advisory. Thank you all for participating in Nephros’ full year 2020 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.

[Andy Astor:]

Thank you, Kirin. Good afternoon everyone. I'll spend a few minutes reviewing our business operations and then turn my attention to the company's financial performance. But first, as with all of our earnings calls in these pandemic times, I'd like to express my gratitude to all of the essential workers who continue to keep our country moving at our fellow citizens safe. As you are aware, our business takes us into these health care facilities, where we provide products and services to keep healthcare workers and patients safe. And to that point, I would also like to extend a sincere thank you to all of our Nephros’ employees and our partners and distributors for continuing to provide excellent service and support through an incredibly difficult 2020 and into 2021. Now, onto our results. I will begin with our water filtration core business segment, and candidly, the water the Nephros water filtration business had a challenging year in 2020. After 15 consecutive quarters of revenue growth, averaging 60%, sales in 2020 were down 17% compared to 2019, while cash burn and net losses increased. The 2020 revenue downturn was driven by the COVID-19 pandemic and it manifested itself primarily in three ways. First was a reduction in our emergency response business. This was the business, in which we respond with filtration solutions to outbreaks of water pathogens and associated disease. The reduction of this business appears to have been an industry-wide pattern, driven by healthcare institutions being focused primarily on COVID-19 during the year.

[Wes Lobo:]

Thank you, Andy. It is a pleasure to be here and thank you for allowing me a moment to introduce myself to the investor community.

[Andy Astor:]

Thank you, Wes. We're excited to have you. One more thing regarding the Water Filtration Business segment, I mentioned the medical side. On the commercial side, we continue to pursue large contracts with major brand names in the food service space. And while this process has taken frankly much longer than expected, due to previously mentioned slowness in the space, we remain optimistic about these opportunities within our Commercial Filtration segment. I'll turn my attention to Pathogen Detection Systems, or PDS our second business segment. 2020 was our first year recognizing the segment and first year revenues were quite small. Fundamentally, as was also true in the filtration business, development of new business relationships and sales of new products proved very challenging in 2020, due to the single-minded market focus on COVID-19 related topics within the healthcare community.

[Q - Marc Wiesenberger:]

Yeah. Thank you. Good afternoon. Can you talk about what you're hearing from your distribution partners on the ground, and what's their ability to get access to hospitals and healthcare facilities and how is that evolved from the end of last year into 2021 so far?

[Andy Astor:]

Marc, first of all, thanks for the question. It's good to hear from you. I would say that the comparison between Q1 of 2021 and Q4 of 2020 is analogous to the comparison of 20 -- Q4 2020 to Q3 2020. In other words, it's a steady slow reopening. If I had to project, I think you're going to see a pretty steady slope of that line. And this is also what I'm hearing from our partners that we're going to see a pretty steady slope of that line Q4, Q1, Q2. And then we would expect the slope of the line to increase in the second half of the year when most of the population -- when the vaccine is more widely distributed. But I would call…

[Marc Wiesenberger:]

Understood.

[Andy Astor:]

If I were to put a final point on it, a quarter ago if you had asked me, I would say the market was about 90% closed and I would say, it's still about 80% closed.

[Marc Wiesenberger:]

Understood. Thank you. I know that the outbreak response business has some seasonality with usually higher activity in the warmer months, but are you at least seeing customers and facility managers starting to at least refocus their priorities and undertake maybe more normalized levels of testing and monitoring, which could bode well for kind of bounce back in that business?

[Andy Astor:]

A little. We are definitely seeing some emergency response events and servicing them, of course. But I would say that that bounce back is slow, but it does appear to be beginning.

[Marc Wiesenberger:]

Okay, understood. Also, as schools are starting to return to more in-person learning, you've had districts in Michigan, Ohio, Pennsylvania, New York report elevated levels of Legionella in their drinking water following the closures. And then even recently the Governor of Wisconsin in her budget proposal, put $55 million in there to install water filters in schools statewide across Wisconsin. How should we think about Nephros potentially expanding its opportunities into schools, and maybe other markets that it has not traditionally served?

[Andy Astor:]

Great question. Thank you. What I would say is Nephros is 90% an indirect selling company that sells through the water service treatment professionals that are our strategic partners. And so, it is really a matter of making sure that we partner with as many of the best of those that we can. Now, we've already serviced multiple school systems including some locally in New Jersey. But it really is a matter of working through our partners, our distributors who have those relationships. The Nephros sales model is not to hire up sales force of 100 people, but rather to go to support with expert sales and product capabilities the distributors that we are partnered with, and so I would expect that not to change fundamentally.

[Marc Wiesenberger:]

Understood, and last one for me. Where do we stand on some of the commercial RFPs that have been in the pipeline? And maybe if you could just give an update on some of the give and takes on what's going on with the negotiations, and maybe even we could expect to hear some good news there? Thank you very much.

[Andy Astor:]

Thank you, Marc. I'd be happy to tell you all about the give and take except that it's mostly give. And what I mean by that is that we are dealing with extremely large organizations, and they move at their own pace. And while, as I said in my prepared remarks, we remain optimistic on those opportunities. We were premature, obviously, to talk about them, probably at this point, nine months ago. They are still developing. They are still developing in a helpful way. And, I cannot give you more specific guidance as to when they will close. But they're larger opportunities and will make a difference when they do.

[Marc Wiesenberger:]

Great. Thank you very much.

[Andy Astor:]

My pleasure. Thank you, Marc.

[Operator:]

Excuse me. The next question is from Anthony Vendetti with Maxim Group. Please go ahead.

[Anthony Vendetti:]

Thanks. Thanks Andy, and welcome aboard Wes. Andy just a quick follow-up on that, and I know that QSR has been discussed for a while, and I'm sure COVID had a lot to do with it. But would you say that pipeline though, is it the same or even though it hasn't one hasn't closed, it has the pipeline started to increase, in other words the opportunities have they expanded or is it about the same-store?

[Andy Astor:]

Good to hear from you, Anthony. And what I would say is they have increased. These are large opportunities, having a conversation with one organization within a large company often brings additional conversations and we are seeing that. So I think it's fair to say that the opportunities are increasing. And it's just a matter of when they fall.

[Anthony Vendetti:]

Sure, sure. Understood. And then just on. I know the pathogen detection is new and this was obviously a difficult year ago to launch it. How do you – how should we look at that in 2021 with as you mentioned, 80% of hospitals still difficult to access, is that you think pushed out more towards the second half of this year? How should we look at it?

[Andy Astor:]

Well, the way I look at – the way I think about the year is that the first half of the year is likely to look a lot more like 2020 than 2019. And what I mean by that is that 2020 was the peak of the pandemic and even though the vaccines came out in November, December, distribution on the time associated with it I think gets us to at least July 1 until the system fundamentally changes. And so, I'm hopeful that Q3, Q4 look more like 2019 than 2020, when we were growing 60 – 60% on average, but some quarters we're closer to 100% year-on-year. And I'm hopeful that to see the growth curves coming back then, and when they do, I would think that pathogen detection will be part of that growth curve. So long – slightly long answer to say that I do think that you'll start to see acceleration in the second half of the year. Although, there could be some blue birds in the first half as well.

[Anthony Vendetti:]

Okay. No, that color is helpful. Just lastly, then you mentioned that you completed the second generation, Hemodialtration system, HDF device. In terms of actual submission of that 510(k), is that on target for end of 2021 or is could that be sooner?

[Andy Astor:]

I'm sorry, when you say this on target for 2021, do you mean the approval?

[Anthony Vendetti:]

Yes. What do you think, what's the timeframe, is your best guess?

[Andy Astor:]

Well, we said – as we've talked about before, we have filed the package under the special 510(k) pathway. And if assuming that the FDA accepts it, it's 30 – it's – the official timeline is 30 days once they accept it for that review. So even if they -- even if it takes time, a little extra time for whatever reason, I think that, unless there's a surprise and they don't accept it on the special 510(k) pathway. I would think it would be approved by the middle of the year. Now, if the FDA turns around themselves. No, we think this is more of a traditional 510(k) pathway then it'll take longer. But end of year would be a surprise for me. I think it'll be long before that.

[Anthony Vendetti:]

Right. Okay. Make sense. So special 510(k), if it's accepted, you'll find out soon, I guess. And, if not, then it would go this normal 510(k) route, which would give them 90 days to respond --

[Andy Astor:]

Correct.

[Anthony Vendetti:]

…once you -- you'd have to resubmit right, for regular 510(k)?

[Andy Astor:]

We would. But we've completed all the testing and documentation required for that. So it's a large paperwork exercise, but it's only a paperwork exercise. So it would be -- if we had to go the traditional route, it would be measured in weeks, not months or years.

[Anthony Vendetti:]

Okay, great. Thanks very much. I'll hop back in the queue.

[Andy Astor:]

Okay. Thanks, Anthony.

[Operator:]

The next question is from Henry Linc , a private investor. Please go ahead.

[Unidentified Analyst:]

Hi Andy. How are you?

[Andy Astor:]

I'm good Henry. Nice to hear from you.

[Unidentified Analyst:]

Good. Good to hear from you. And Wes, welcome on board. I'm glad to hear you’re there.

[Wes Lobo:]

Thank you.

[Unidentified Analyst:]

Anyway, I just was wondering, do you have projections for the pathogen detection and testing portion to go out or, how are they, going relative to projections?

[Andy Astor:]

Well, we were not public with guidance on any of our businesses right now, Henry. But I would say that the work that's going on is going great. And by that, I mean the development of the technology and the validation of it, and the products that we've published -- that we that we released, I’m sorry, as well as the construction of a, -- as I said a level two biosafety lab and an automated production facility. These are all things that we've built at relatively low capital costs by the way, and are getting ready for that business to really grow. But until the healthcare markets, open up again, it's just hard to project specific revenue levels. But I'm anxious to do so as soon as we see the markets open up.

[Unidentified Analyst:]

And you released the testing analysis, is it white papers or anything like that?

[Andy Astor:]

We have, we have. We actually produced a prepublication white paper. Actually it was an academic paper, I guess, probably four or five months ago, talking about our SequaPath product. And we've got other papers in the works as well, so yes.

[Unidentified Analyst:]

Right. Thank you.

[Andy Astor:]

My pleasure, Henry.

[Operator:]

The next question is from Joseph Schuler with JAS Investors. Please go ahead.

[Unidentified Analyst:]

Hi, Andy.

[Andy Astor:]

Hey, Joe.

[Unidentified Analyst:]

Yeah. Hi. HDF, maybe you could give us, maybe kind of elaborate a little more. You did mention that you've completed a second generation product. You also mentioned, if I heard correctly, that you're proceeding with FDA paperwork, and I think you hoping to pre-test or early markets the product possibly in the second half of 2021. I don't know, if I got that all right, but maybe you could elaborate a little bit.

[Andy Astor:]

Well, the short answer Joe is you got it exactly right. The product is done. The paperwork for submission is done. The FDA has received it. We have a case number. We are in discussions with them over whether it's a special 510 (k) or traditional. And over the course of the next one to few months, we expect to get that product approved, that is, that's our goal. That -- and we'll have more to say as – more specifics about the submission pathway as soon as we have it from the FDA.

[Unidentified Analyst:]

Let me just proceed with that, if assuming your best hope and it may not happens and you get the FDA approval in three months, when after that do you think you'd have a marketable product or -- mark a product on the market, let's say?

[Andy Astor:]

Well, we'd go immediately to dialysis clinics and roll it out in a controlled number of them. So, that we could get real-world experience, but it would be -- officially, it's on the market as soon as the FDA clears it.

[Unidentified Analyst:]

Got you. Good. Thank you very much.

[Andy Astor:]

My pleasure. Good to hear from you, Joe.

[Operator:]

This concludes our question and answer session, and the conference is also now concluded. Thank you for attending today's presentation. You may now disconnect.