Good day and welcome to the Nephros First Quarter Financial Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Kirin Smith. Please go ahead..

Good afternoon everyone. This is Kirin Smith with PCG Advisory Group. Thank you all for participating in Nephros's first quarter 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.

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 and commercialize its products and services offerings; the rate of adoption of its products and services by hospitals and other health care providers; the success of its commercialization efforts; the effect on its 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, May 6, 2020. 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 Daron Evans, Nephros' CEO. Daron Please go ahead..

Thank you, Kirin, and good afternoon everyone. Welcome to Nephros' first quarter 2020 earnings conference call. This is a very unusual time for everyone. I want to thank all the front line healthcare workers, and all those who are providing the essential services that are keeping us fed and safe, while putting themselves at potential risk.

Today, we are going to run the call a little differently. I will not spend much time talking about the first quarter. Instead, I will talk about our view of what might be the new normal. I'll then turn the call over to Dr.

Kimothy Smith, vice president of our pathogen detection systems group, who will spend a little time talking about his team's work, and some of the main issues buildings will face as we try to get America back to work. Dr.

Smith will then turn the call over to Andy Astor, our Chief Operating and Financial Officer, who will do a deeper dive into our Q1 2020 operating results. Overall Q1 2020 revenues were up 43%.

Q1 generally provides a clear view into our base business, as the first quarter of the year is generally not a time where many outbreaks occur, due to the colder weather and this was no different.

We were pleased with our 43% revenue growth, but did take note that only 8% of our Q1 revenue was from new customer sites, compared with prior averages of 30% to 40%. We took this as a leading indicator of a coming change in customer and prospect priorities due to the COVID-19, and began to realign some of our activities.

As we moved into the second quarter, we identified a few key risks that needed to be addressed, to ensure our ability to maintain our high growth momentum. First, because we manufacture our medical device ultrafilters in Italy, the location of the first non-Chinese hot zone, we were concerned about potential supply disruptions.

To mitigate that risk, we increased our order sizes and added about a million dollars of additional inventory to manage through what could have been up to a six month shut down. Thankfully, to date, our Italian partner has been able to manage through the crisis. We have had no significant shipment disruptions.

Second, we recognized, as did others in our industry, the risks associated with stagnant water in the pipes of office buildings, hotels, dormatories, and other buildings that have had less than usual occupancy over the last few months. Stagnant, warm environments are natural breeding grounds for waterborne pathogens.

To that ends, we accelerated some of our pathogen detection research and expect to release a white paper in the coming weeks, comparing the building bacterial biome from an unoccupied building to that of an occupied building. This risk is real and we are working to understand more.

Third, we recognized that our customers would need to be singularly focused on their Covid-19 response programs, and that Nephros products, while still critical to their infection control programs, would probably take a back seat for a period of time. Accordingly, we shifted our focus towards the next steps in the life cycle of this crisis.

Among other focus areas, we are using our time to run more experiments to bolster our pathogen detection program. We have made great progress on our DialyPath system, which is designed to provide real-time endotoxin level estimates for dialysis clinics.

We have also made significant progress on our SequaPath system, which is designed to provide a bacterial census of a building's water system, an estimation of a building's bacterial biome, from a database of over 20,000 difference bacterial families. We will soon be releasing white papers on our most recent results from these two systems.

Before turning the call over the Dr. Smith, let me just provide a quick update on our hemodiafiltration system program. We are still on target to file the Special 510(k) this summer.

We are currently in the process of manufacturing the systems and disposables that will be used for the last steps before completing the regulatory package, the verification and validation testing. Thus far, we have not had any COVID related delays on this project.

We will hopefully, continue to avoid delays in the process, but will be using contract research firms to perform some of the testing, and therefore could be subject to their timelines. Now, I will turn the call over to Dr.

Smith, who will talk in more detail about the most recent analyses we are performing to better understand the microorganisms around us..

PluraPath, DialyPath, and SequaPath. First let's talk about PluraPath is a mobile, quantitative polymerase chain reaction qPCR-based water-borne pathogen detection system that can provide on-site, actionable data to infection control teams on up to 15 different pathogens in under one hour.

PluraPath allows our customers to understand the breadth of waterborne pathogens in their premise plumbing systems, not just Legionella, but Pseudomonas, Non-tuberculosis causing Mycobacterium, and Burholderia, and many others.

These pathogens are major concerns for certain segments of the population and are associated with HAI's, hospital acquired infections. PluraPath is also appropriate for identifying pathogens in cooling towers, which are external to building plumbing systems.

Cooling towers have been a difficult case for PCR based methods in the past because of heavy metals and other substances causing inhibition of the test. We have developed a rapid, enhanced sample preparation kit which removes the inhibiting compounds but retains the DNA needed for the PluraPath testing protocol.

Our second pathogen detection product, DialyPath, will be released later this quarter. DialyPath is designed to provide real-time endotoxin level estimates for dialysis clinics by detecting and quantifying endotoxin-producing Gram-negative bacteria.

In simpler terms, this means that DialyPath can identify bacteria, which can cause inflammatory reactions, before they impact patient health. The DialyPath system is extremely sensitive and specific.

It can detect levels of Gram-negative bacteria as low one bacterium per 100 mLs of dialysis water, or about one-trillionth of a gram of endotoxin per milliliter of water, and it can provide the specific identity of the predominate bacteria in a water sample. The third product in our pathogen detection roster is SequaPath.

This will be released later this year. SequaPath will provide a window into the true microbial diversity in a building's plumbing system. SequaPath extends the technologies of PluraPath and DialyPath with the power of rapid, targeted DNA sequencing. It will provide an opportunity to understand the microbial community dynamics of building biomes.

As Daron mentioned earlier, there are risks associated with stagnant water in unoccupied office buildings, hotels, dormatories, and other buildings that have had little or no occupancy over the last few months.

We are collecting water samples now and expect to write a white paper in the coming weeks on this topic, comparing the building bacterial signatures in unoccupied and occupied buildings. We are working to understand the potential risks of stagnant building water from a holistic perspective, rather than through the lens of a single pathogen.

I will now turn the call over to Andy for a financial overview..

Thank you, Kimothy. I will now provide a look at our financial results for the first quarter ended March 31, 2020. And I am very pleased to kick that off by reporting our 15th consecutive quarter of year-over-year net revenue growth, with an average growth rate 62%.

Nevertheless, as Daron outlined, we have seen significant changes in customer priorities, and early Q2 has seen slower than planned start, particularly with respect to new customer acquisition.

As Daron pointed out, about 8% of our revenue in Q1 was from new customers, rather than the normal 30% to 40% that we've seen in a quarter, which of course we attribute to the COVID-19 outbreak. Nephros reported net revenues in the first quarter of $2.5 million, compared to $1.8 million in the same period last year, an increase of 43%.

Over 99% of these revenues were generated by our Water Filtration business segment and net loss in that segment was 0.6 million compared to 0.8 million in 2019. Adjusted EBITDA in the segment was negative $0.4 million compared to negative $0.3 million in 2019.

Please refer to today's press release for more details about the calculation of adjusted EBITDA and it's reconciliation to GAAP, net income and loss. Additional information about our Water Filtration and Renal Products business segments and their operating results can be found in today's filing on Form 10-Q.

Also, beginning with today's report, we are recognizing our Pathogen Detection business which can now be run as a third business segment within Nephros. On a consolidated basis, net loss for the quarter was $1.1 million compared with $1.3 million in 2019, a 19% improvement.

While, consolidated adjusted EBITDA in the quarter was negative $0.8 million compared with negative $0.9 million in 2019, a 7% improvement. Cost of goods sold in the first quarter was $1.0 million compared with $0.8 million in 2019, an increase of 35%.

Gross margins in the first quarter were 59%, compared with 56% in 2019 and we expect future gross margins to continue in the range of 55% to 60%. Research and development or R&D expenses in the first quarter were $0.6 million compared with $0.8 million in 2019, a 26% decrease.

Depreciation and amortization expenses in the first quarter were $46,000, compared with $50,000 in 2019, an 8% decrease. Selling, general and administrative or SG&A expenses for the first quarter were $1.9 million, compared with $1.5 million in 2019, an increase of 30%. And our cash balance at the end of the quarter was just about $9.0 million.

I'd like to stop for a second and take this opportunity to briefly highlight the charitable efforts of our own staff, led by Michael Milman, our Vice President of R&D and working with personal funds from the Nephros team, Mike and his team, his staff worked tirelessly to import thousands of NIOSH-certified N95 masks, which they donated to more than 20 healthcare teams in the New York/New Jersey metropolitan area as well as other geographies throughout the U.S.

In closing, we remain resolute about staying strong during this extraordinary time and remain very excited about our future growth prospects. We look forward to seeing many of you virtually at financial conferences this spring, and at our annual meeting, which will be held virtually on May 21st. More details will be released soon.

In the meantime, please always feel free to contact Daron or I directly at info@nephros.com. And this concludes our formal presentation remarks. I would like to personally thank all of our stakeholders for you continued support and look forward to speaking with you again soon.

We will take questions from the audience now, and also answer e-mailed questions as we can. Operator, please open the call for questions..

Thank you. [Operator Instructions] And we'll take our first question from Howard Halpern with Taglich Brothers..

First question, I guess is in regards to, I know, you talked about mix with new customer, but what do you see, or what do you anticipate seeing in terms of lead time as you distribution network gets back to, I don't want to say more normal, but I think you understand what I mean.

Are you going to have a good lead time as to when they're going to start shifting around and the environments are shifting?.

When you say, lead time, are you talking about the time to close a sale?.

No, in terms of them making a shift to where they might go circle after going at the new customers again, expanding their….

Oh, I am sorry, yes, I think that the reduction of new customers is just the direct result the fact that everybody's got their heads down on the big problem, the 800-pound gorilla.

And as soon as things returned to, as we said, somewhat normal within our customers, infection control and waterborne pathogens, and the identification of waterborne pathogens through our testing systems remain a super important priority.

And so I think that, I don't know exactly how long it takes for us to get back to normal, but we're certainly seeing some activity, some early signs of new activity, and we think it's coming and how to quantify that, frankly, we're all -- none of us have done this before, we don't really have a radar to project..

Okay.

And in terms of, as you start ramping up the testing, the pathogen detection side of the business, you have adequate ability to produce in this environment I'll say it, but test kits, the kits they go into your devise, you have enough capacity for what you believe could be a potential ramp in sales of that of the testing?.

It's a very good question, Howard. Yes, we have significant capacity. We're building bigger capacity right now in an internal manufacturing facility that we are putting up. And we think we are good for strong demand. So, we're planning on the strong first year capacity detection, let's put it that way..

Okay..

And how they're scaling that, we're making robotic capacity, which means, we can almost improve the scale and we look around doing that. And we can see it in a very precise way.

And long-term, I've talked about this where we want to use our SequaPath and understand the buildings biome and understand where their problem mechanisms, the problem bacteria and then create [indiscernible]. And we will be able to press print whenever they need a press print, so we're going after that..

Okay.

So the SequaPath, is that going to -- is it the same distribution network you're going to use? Or are you going to expand on that? And so many things have closed down, is there, I know if it's like I said, is it same? Or are you going to have to expand your distribution network, distributor network?.

It really is the same -- the beauty of this pathogen interaction world is the same people that put our focus into the one that organizing manage testing on site. And so, it's the same pipeline of people.

So, really, it's about educating our current water treatment and consulting network on how to use it and how to integrate it with their water management plan and then be able to just deliver it. And there'll be different levels of expertise in the field and we've designed PluraPath to be able to be done by integrally.

We're trying to make it make PCR level technology come to the masses..

Okay, and for the dialysis part of the testing, is that the same distribution? Or what I would think if people get back to the centers in the hospital, they might be comforted to know that they're doing that type of test.

So I don't know, is it easy to get that test into the dialysis center or dialysis part of hospitals?.

So, most of them -- most of dialysis is run by two companies. And we have big conversations with both those companies and they really run their own shop. And so, it's not the same fragmented federalist type system the hospitals have. When you saw on [indiscernible] you saw that people that have been touching on 2,000 or 3,000, whatever you have sites.

So, it's a very different type of cell and then quite same with it, but here is the same pipeline..

And one last one from me on, it's more like a commercial side, I don't know if you are tweaking the commercial side a little bit given the environment.

But are you able to go into like assisted living facilities and nursing homes now, with, I guess both the hospital quality and your commercial type of filters with their protection I guess?.

We actually sell to a lot of nursing homes now and generally during outbreaks because most of them are one story, two stories with mostly residential plumbing, which is pretty good about not going down. But we're going to do this, it's going to be cleaned out and it's going to have time to get there.

So, our current networks of water treatment professionals those who are responded to those emergencies and what the facility they bring. They don't use that many commercials side filters, the paper to [indiscernible] for coffee and tea and pickles.

As you expect, one of our markets is Las Vegas and that's [indiscernible] where we have our team going through [indiscernible], already do some favors are going to now and relatively I change out the bar expectations is that for longer deposit doing off a little bit, but when they turn back on..

We can now take our next question from Anthony Vendetti of Maxim Group..

I want to talk a little bit about with your current clients and whether you've seen an increase in order of your products for the current hospital clients that already have your product.

Are they ordering more for four different units like ICU critical care emergency rooms? And then as it plays out as a pandemic continues to play out, how do you see the need for your business? We just finished up a big infectious disease conference yesterday, and we certainly believe that there's going to be a heightened awareness on all types of pathogens to be used up the adoption rate, either dramatically increasing, incrementally increasing in the long-term?.

I take the first part of that, and then maybe Daron want to add. We are seeing ongoing purchases from our hospitals, our customers and for few of our distributors.

This is not a time where the last eight weeks or so, have not sometimes where we're seeing big increases because a big increase means a decision making and decision making right now is all around COVID, which is an airborne pathogen, not a waterborne pathogens.

So, what you're seeing now is a lot of keeping the wheels turning, but not changing the wheels a lot. So, in the second half in terms of what we see going forward, I think, as you've pointed out to me, I like to say, there's a billion people who know the word pathogen today that didn't know that word six weeks ago.

I don't know if my numbers are accurate, I think either for points. So, we do think that in the long-term, this awareness of pathogens and their effect on the community is good for us, and exactly what that schedule looks like, we're just starting now..

And that same new awareness is about PCR, and one of our challenges going into this, we saw and educated most of them on PCR being a standard of care as possible. There's maybe half a billion who know PCR means now, especially the ones that have gotten the test.

So, that's now becoming -- it's off to the acceptance of PCR technology was going to take a couple years set that path forward. So, the word PCR native exclusion is something that we're not going to have to repeat and define which is fantastic for our business as well as people know the viruses, and they know it's the big deal.

From the total world, there's not a lot of viruses they float around the water, but the ones they do they migrate, and we're going as we got it. So, that was a checkbox positive in the past and that could become a leverage point in the future. So, this at the end of the day, the world will be more knowledgeable about small things that hurt you.

And we make things that help you see the small things and help up with small things. So, it's probably been a positive but we can't characterize that how much now..

Sure, make sense. And just the last follow-up question, Daron, you've spoken about the opportunity, I'd assume based on this pandemic that most of the decision making around that has slowed and put on hold, but I'd also think that, at some point, it's not now in the near future, the pipeline for that business should also increase.

Is that accurate on both sides? Or would you comment on that? That would be helpful. Thanks.

Yes, no, there's -- we believe there's been fraud and delays in that sector and this whole group just kind of turned off. But I'd say that we're pretty comfortable that we talked about the real and fact, there's going to be just had some success and update this year. So, we see that as a growth area that hasn't changed at all.

There might be monthly delays and things, but it's still a good place and efforts to have having and it's a good continuity product related products.

And there may actually be the last questions, a lot more discussions that we could have with the QRS about their pathogen infection filters, so there is a -- that's one of those discussions we probably could have a couple of years from once we're providing the service for a while, but it's those where we could sell as well.

So, there's a lot of more opportunities for people who now might be more ones successfully, what's smallpox will do in a lot of different prices, but they didn't use to think about it..

We can now take our next question from Bob Wassermann, Benchmark..

Real quick, can you just give me a little color on the new again 20% growth for new customers this year? Can you give me a little color on where what sectors that came from and maybe what the groups did not, you know, you didn't not close new accounts and might do later this year?.

I'm not sure.

Did you say a 20% number during the introduction?.

Yes. I didn't understand.

You say that you usually have quite a bit of growth from new account and you didn't that this year?.

Yes. And that, we attribute, I mean, in the first half of the first quarter, we saw normal growth of new accounts. And in the second half of the first quarter, we saw new accounts deeply depressed, and we took that as a leading indicator or but an indicator, let's just put it that way.

Our company, our hospitals and medical centers and care facilities that are somewhere in the middle of a sales process with us that simply had to turn off their attention. So we are instead of having our normal 30% to 40% of our revenues come from new customers. We have 8% come from new customers as a result of that..

So you're saying that the 8% was from earlier in the quarter and trying that maybe step back on that your typical past later in the year.

On the commercial side, are you see these same type of numbers? Your commercial customer open at this point or now they didn't open?.

Our commercial customers for the most part are hotels and restaurants and chain stores. So, I think you know the answer to that. So, they're mostly close. And that was definitely took a heap on it, in April, it just because they're just not open. But that's not, that hasn't been the case on the medical side, which is 90% of our total..

We can now take our next question from [indiscernible]. Please go ahead..

Yes, I'm assuming kind of late. Just interested knowing since the cruise liners are extremely depressed and minimal reservations.

Is there any area within the cruise ship lines that we could see some entree with filters?.

We've actually talked to some cruise companies in the past and they've been scared about water for a long time because a lot of weather in real virus outbreaks.

And what they generally have is a 6, 7 or 8 or 9 of RO systems provide water, and they do a lot of chlorine to go on a cruise and haven't been a long time, they intend to have a chlorine test. So, they take a lot of precautions and try not to have filtration.

Where there might be opportunity is in the testing side, they want to do more thorough testing of their types just not as they're building with and not just with the cruise ship they have been sitting around for a while, but every time a cruise ship comes in and between now, they want to have a check.

So, that's a place where we can go look, maybe at least it's a bandwidth thing in some point in time what we'll see what we'll do to get, get some interest there..

[Operator Instructions] We can take our next question from Scott [indiscernible] Capital..

I have a couple of questions. First off, I want to go back to the existing customers and new customers and just have a quick question. Over the last several quarters, you guys have grown revenues between roughly 60% and 90%.

Can you break out the historical growth from existing customers versus new customers?.

I don't have that handy Scott. We could do that. But clearly, if you just look at the last -- if you look at the fourth quarters of 2019m our average sale was 63% existing customers and 37% new.

So if that number goes from 37% to 8%, in this in this prior quarter, and yet our growth is 43% for the quarter, you can pretty much say that the growth for the existing customers is there and the growth for the new customers is not, that's sort of how I read the numbers..

Okay.

And conversations with distributors, customers, sales, do you have, I think getting any visibility on when hospitals are likely to step back into the market and start purchasing and then referring new customers?.

Everybody's trying to open as fast as they can, and hospitals are going are probably going to be a little conservative about it. So, I don't think they're going to open tomorrow or they open on June 1st or July 1st or August 1st. I just don't know..

Shifting gears to costs. Given the fewer flights by airliners and if I'm not mistaken, you've historically gotten your product using airlines.

Have you changed how you get your products? And how is that -- and with fewer flights, how is the cost affected your SG&A line?.

That's a great question and it's a thoughtful. Thanks for asking it. In the early days of the pandemic, in the March timeframe, you're correct. we have traditionally -- because our growth rate, we had to bring in our filters mostly by air, which is sensors. And in the month of March, those costs went up just because there were fewer flights.

But happily because we spent the last previous 3, 4, 5 months building inventory pretty, pretty strongly, it's up from 2.5 million to 3.5 million this last quarter. And being most of our products over by ocean, so our costs are actually going down right now our initial thing where we can.

And where we have an occasion on strong need for a product, we'll ship it by air. But I don't think, there is going to -- there's been a significant impact on the SG&A on there, except for maybe a small blip in late Q1..

Do you think this is going to be a permanent shift either to maintain higher levels of inventory going forward? And therefore continue to use the cheaper route with transport ocean liners versus airlines?.

We'll do that analysis, but certainly, we were looking for a way to transition to ocean before there was a global pandemic. That's one of the reasons we were building our inventories early. So, I do think that we will continue to try to optimize across our shipping wherever we can..

And then last question on the testing side of the business.

I don't think you've given guidance on revenue ramp for the testing, but can you just have visibility on when we can expect to hear more about commercial placements and that ramping?.

The ramping of the testing products?.

Yes..

That's actually why we broke it out as a business segment in Q1. So, unfortunately, only a few weeks after we launched, the launch basically got canceled by the pandemic, but the $18,000 worth of revenue in this quarter in the pathogen detection business. So you’ll see that broken out going forward from now on..

And can quantify what kind of feedback you got from customers that were using?.

Yes, qualitatively just superb feedback. We really excited by what we've got intrigued, they like the depth and breadth, in other words, the specificity of the products as well as the ability to look for multiple pathogens simultaneously in one test.

And the pricing let assume rational to them and in a couple of weeks, we have $18,000 to $20,000 worth of sale, so very promising for a couple of week..

[indiscernible] high level when you left meeting [indiscernible] what questions were asked and were meeting we need, do you think we're going to fit in the market?.

I do. Yes, and one of their things that you said earlier Daron, that your daughter can run the PluraPath system.

People who were aware of qPCR, who are aware of PCR testing that happens in a centralized laboratory, and never possibly would be able to run it themselves on site at a facility and then they're thrilled by having that power in their hands and being able a really huge breath of information, actionable information to a client, at least you have to wait minimum 24 but usually 72 or more hours to get that can now get within an hour.

And the segment that that generates the ability to look at bacterial in residents in premise, performing in localized lab as do something about it in a matter of hours. That can mean on a huge difference in terms of life, so, a lot of positive feedback from the field at this point..

If you look forward say, three, four or five years or even beyond, which has bigger potentials, the testing business or the water filtration business?.

Testing, if you look at the markets in general, if you look at Legionella testing in the global market, it's over $8 billion. If you look at the water filters, it's -- on commercial side, it's only $2 billion to $3 billion [indiscernible] and the medical supply business smaller.

To be able to do this to do what people were saying by the 190 there on site, it was get faster and faster and more specifics. So, we talked about our ability to make a custom test for a building. If you've got a problem but you got to watch for then you want to watch that for and maybe keeping more.

So we can increase the number of samples you can run at once, we can do things throughout your multi factors in order to customize.

So our ability to today understand the buildings, the full biome, it was as possible without your thought process and be able to provide custom rapid test, we think we changed the game and these are companies out there that are certain based on site Legionella test, but really as you told the biome and it's obviously a lot more Legionella in New Mexico.

So, and this is a way to address it fast. So, we think and this is probably our major prospects of the role. So, [indiscernible] it's Pseudomonas this can include a global this will probably have most opportunities do quickly and meet the need a lot places.

We get in better inbound calls from other countries already people are doing water treatment because which is typically they need tool..

[Operator Instructions] We have no further questions over the phone at this time..

Great. Thank you everybody for joining us. Save time, stay safe from the victims which you can. And as we get back to work, there'll be a new normal, but it'll be a much more informal. And we'll do we can make to make every water safe. Thanks a lot..

This concludes today's calls. Thank you for your participation. You may now disconnect..