Nephros Presents at MicroCap Leadership Summit 2021

[Music] nephros is a water technology company that sells water purification filters mainly to medical centers dialysis clinics and healthcare facilities the filters normally need to be replaced every six months so it's a recurring revenue stream prior to covid the company was growing this recurring revenue stream at greater than 50 per year for the preceding three years they hope to get back to those types of growth rates shortly in addition the water to water filtration the company recently launched the first of its kind portable water pathogen detection system that allows on-site water pathogen testing and rapid results we're honored to have ceo andy ester with us today as a reminder if you have any questions during andy's presentation click the q a button at the bottom of the zoom screen and we'll get to your questions after his formal presentation thank you andy thank you ian i am just going to get to my presentation here and i believe please tell me that you can see this now i can see it excellent great well thanks everybody for coming um once again nephros any ph on nasdaq market caps running around 85 95 million these days um up about fourfold over the last three and a half years or so covered by b riley fbr benchmark and maxim um in terms of our research and very some very strong institutional holders where we're pretty illiquid stock uh just so that you know we've got we only trade about 10 000 shares a day um uh ian tells me that that's uh that's a good thing um i think it's it's not a terrible thing it's um uh you know we are we we only we have a we have a pretty low float um but patient investors can come in and um uh you know the the returns have have uh spoken for themselves over the last couple of years and i think we're just we're we're just getting started revenue wise um [Music] the first half of this year is 20 greater than last year but more importantly it's 20 greater than the year before as well um 2020 was a it was a cliff for us in q2 um during when cobit hit in 2020 um but we did 5 million in 2021 and only four in the first half of the preceding two years um which i take is a very good sign pre-covet as ian said uh 15 consecutive quarters of growth over 60 averaging over 60 percent and what i am calling postcoded although we're not really out of the woods yet we've got two consecutive growth quarters meaning q1 and q2 of 2021 uh averaging 25 between the two of them um strong management team that i'll briefly touch on uh during the presentation and we've been together for the most part for a fairly long time it's none of our first rodeos this is a uh not a not a junior management team uh in any sense of the word and i feel um quite strong as you'll see the company in terms of the market opportunity is designed to have multiple growth engines and to be constantly innovating new product lines and i'll explain how we think about that in just a minute cap structure wise very very simple we've got as of the end of june we had eight almost eight and a half million in cash um that hadn't changed much over the last uh few quarters partially because we watch our pennies carefully and partially because some warrants expired uh at the uh in the in q2 and so we got a little bit of extra cash from that uh as they were exercised uh got about 10 million shares outstanding 12 million fully diluted and that's kind of a very high level view of the company there's three business segments that we report on in our 10 qs and 10ks water filtration pathogen detection and hdf dialysis and i apologize for the very busy slide um you're very welcome to read it but what i'll do is really talk about what this slide represents and also let you know that we are we will be releasing an entirely new uh corporate deck starting in the early q4 in water filtration we really target three markets um all of them are what i what i call point of use filters um these are water filters ultra filters that protect patients these are about 90 of what we sell our medical products we protect patients from infections where they touch their water so at sinks at showers and ice machines we are protecting patients from getting sick and and in in some cases from dying from uh water particularly focused on immunocompromised patients so in water filtration the first target market is hospital infection control where we have these point of use filters that i've described that's about 70 of our business about 20 of our business meaning our revenue is in dialysis clinics and in that portable and home dialysis products the ultra filtration that takes place inside the machine i'm sorry in the water that's feeding to the machine to ensure that the dialysis machine is delivering ultra pure water to the patient again the same medical filter technology that is in the infection control but uh these filters are targeted at dialysis clinics and that's about 20 and then about 10 of our business comes from commercial water filtration where we're not using the same medical technology we're using more traditional more cost efficient frankly more commoditized carbon filters and some pretty innovative methods to prevent and remove scale and bacteria in certain circumstances from water so 70 20 10 um for those three areas all in water filtration in the pathogen detection the second column it's a brand new area the uh revenue is just beginning it's um i think we've done a little under a hundred thousand dollars this year as opposed to uh five million in the first half of the year for water filtration the pathogen detection area is is pretty exciting for us with filters you know the the customers you're serving are know they have a problem or know they could have a problem so they put filters on to avoid the problem with pathogen detection we're doing the water testing before they know they have a problem so we're moving up in the thought process up in the food chain of waterborne pathogens and what we provide is something that as ian mentioned is a unique offering it is a portable real-time qpcr based uh mechanism that not only tells you whether you have a particular bug such as legionella but actually 15 different bugs meaning bacteria or viruses all simultaneously in a product that we call pleuropath um there's a third business segment which is a relaunch of as you can see it's called hdf dialysis and it's a relaunch of a technology that nefros was founded to develop 25 years ago um which was commercially unsuccessful when it came out a number of years ago and we are trying to relaunch that with a new next generation product going back over this very busy slide water filtration close to 100 of our revenue pathogen detection new business we expect it to grow quickly and it's beginning to show signs of life right now and hdf dialysis a new business that we will be uh launching late 2021 early 2022 as soon as soon as we get um 510k clearance from the fda just a quick look at our revenues for the last four years as you can see we've we have year on year growth as we've talked about already this is the second time of about of a little over 60 percent for 15 consecutive quarters ending here in 2012 uh q1 of 2020 then there's the cliff that we saw from coded sorry the cliff that we saw from cobit and and really the cliff from covid was was two things it was the ability to get new customers which are an important part of our growth and it was also the elimination frankly of [Music] of a whole category of our business in hospitals which is called emergency response i want to talk about that for just a second to make sure it's clear to everybody 70 or so of our filter of our medical filter business is what i call proactive which is as ian talked about a recurring revenue model every three or six or sometimes 12 months hospitals and dialysis clinics have to reorder these filters they behave kind of like a subscription but about 15 or 20 percent of our business is there's an outbreak of legionella or there's an outbreak of pseudomonas so there's an outbreak of some other bacteria and on an emergency response basis we get called then to close those uh to to fix the water uh in a particular wing of a hospital or something like that um that business kind of went away last year and it's it was interesting because we didn't understand why at first but it turns out that the testing of water for legionella and for other bacteria simply went away during the covid world even though it's required even though that testing is required um there was only one fire burning and it was coded and so that is the the the the reason for the uh revenue downturn in uh q2 of last year you can see that we've steadily built back up and even in q2 of 2021 the last line here the last bar here uh which is quarter of a quarter shrink it is actually a growth year on year which is how we measure our growth and and have consistently for a long time even with that reduction our compounded annual growth rate in revenue is 35 and um we're very very bullish on on where we go from here as i mentioned i'm uh andy astor the president and ceo i come out of mostly the software technology background i've been in uh founder and ceo and president of several companies one of them is the largest uh open source database company specializing in postgres today the other one was the second largest of that category and was acquired a couple of years ago by amazon but i bring with me to this uh to the fourth three uh frankly world-class scientists slash engineers darren evans who's the former ceo of nephros um uh is now our science advisor and the ceo of that hdf dialysis component that i talked about earlier we have mike millman the vp of research and development trained at striker and is the longest tenured member of our leadership team and dr kimothy smith our newest member of the leadership team runs our pathogen detection group on the commercial side we also are similarly quite strong with wes lobo recently announced chief commercial officer very strong in the water business from both watts water and xylem water where he spent 20 years shane sullivan who is our second longest tenured he's been with us for about 10 years that that number is outdated in the box and greg lucas who is the president of our commercial water systems he was the founder and owner of aether water systems which we acquired at the end of 2018 and then vashawn thomas who runs our quality and regulatory organization has also been around the block quite a bit on the um medical product side and is driving our quality and regulatory so excuse me i'll move pretty quickly through the details of the excuse me through the details of the um [Music] each of these three areas but i do want to give you just a picture particularly in the medical uh water filtration what that looks like the filters are in the back in the center in the back there and these are actual filters that we removed were removed from a hospital after six months the water that was coming out of those filters is shown on the right the water that is retained in the filters with a simple back flush is shown on the left so this is actually what tap water concentrated over a few months looks like and it's what we do for a living how we do it is with the smallest pore size uh in the uh in the world today for for this purpose we conventional filters from our competitors are typically a 0.2 micron or 200 nanometers pore size which takes out most bacteria and lets but does let some through and does it and for the most part let's viruses and endotoxins which can cause illness uh get through without stopping nephro's filters have a 5 nanometer as opposed to 200 nanometer pore size they stop all bacteria viruses endotoxins we're you know it's very simple our pore size is 40 times smaller than conventional filters now what you'd expect with a pore size that small is that the flow rate of the filter would be worse uh than the flow rate through a larger pore size you know if you've got a colander the water flows through faster than it does if you've got a tea strainer for example but because of the design of our filters we actually present much more surface area to the water and therefore have the same or even better flow rates and because of the design as well of the hollow fibers in our filters our filter life is two to three times better than other products on the market and hospitals measure the cost of their filters and dialysis clinics measure the cost of their filters in terms of cost per month and our cost per month is the same as um as the products that i would argue are less uh are less strong competitors on the market today so that's a story the story of the medical filters in the commercial filters you know we have um here the carbon block filter which reduces chlorine and improves taste and odor but we also have more sophisticated filters such as the scale control filter which uses a proprietary technology to drastically reduce and sometimes eliminate the scale and that we've all seen particularly in coffee machines these are filters that are focused on the food and beverage and hospitality industries and take uh take improve the taste and odor and and improve the scale control and the bacteria control of water in these settings on the pathogen detection front i mentioned that we have a portable system this what you're looking at is a pelican case a rollerboard pelican case that can be checked on an airplane and everything that you need to do the testing is in that pelican case and that is something that we sell but the money the the recurring revenue in this business is really in the sample strips which perform 15 separate uh qpcr uh assays looking at the dna and the rna in the in a water sample in about an hour and um the um sorry the gross margin of this area was about the same as the water filter area which is about 55 to 60 but in july just a couple of months ago we announced the acquisition of a very small company uh called generation and generation is a um is a as i said a very small company that we acquired for 1.2 million dollars that makes the that that has the formulas for the assays that we were um using in other words they were our supplier and while we were also developing our own assays we've now bought the supply the supply chain of these assays we have vertically integrated them and driven our gross margin significantly higher i.e our cost of goods sold significantly lower so pluralpath is our primary product here it is as i said the it gives the ability to do many assays uh as opposed to just one assay for legionella in real time less than an hour on site using a rollerboard suitcase and it's getting a lot of interest in the marketplace we also have two additional products one of which is now available as a service called sql path which answers a different question the question that pluropath answers the one that you saw just a moment ago is do i have any of these bacteria in the water what cyclopath does is processes 96 samples at once and answers the question what's in the water it is able to recognize over 20 000 different bacteria and um very useful not just in medical facilities but in commercial facilities of you know how's the water quality to an office park for example this is a newer product than pluropath um it is uh you know emergent at best but it is something that we think has some uh some real potential for legs and then um our newest product the dialopath product is for dialysis clinics to test for what's called gram-negative bacteria in water which can make particularly dialysis patients sick and it is uh we think it will have the ability to replace the limitless aminoside lysate test which a is more expensive but also requires the destruction of the horseshoe crab population of the planet and we're hoping that we are able to replace that test with the dialopath test over time and remove that uh that serious threat by the way to the to the horseshoe crab species i mentioned that we also have a um uh sort of a legacy business uh we call it specialty renal products i listed it earlier as hdf dialysis and in a in a in a nutshell nephros was originally founded 25 years ago to build this product um it took um frankly over 100 million dollars and it took was lost and it took about 15 years to get it approved by the fda and even though it was approved it um the the way that the company at that time built it uh was was not a strong six it was not a successful uh uh implementation we put it on the back burner we pivoted the company to the uh water filtration and pathogen detection businesses that i've talked about and are now relaunching um specialty renal products uh with the same technology but a dramatically simplified version of it that we think will be an interesting strategic asset for us we didn't want to just let it let it die frankly we we have put it into a private entity called specialty renal products inside the public entity and raise money for it uh separately and it will have to stand on its own two feet it's not you know it's considered to be a standalone uh uh offshoot of nefers so once again um that that's pretty much our our story we've uh um this is this slide is nothing more than a copy of the of the one at the beginning so i won't reread it to you but again the symbol is any ph and i will open it up for questions from the audience thank you thanks andy um i want to remind the participants if you have any questions to please uh click on the q a button and and let us know questions um first question is what's the market opportunity by segment well the water filtration segment is one that we understand pretty well and i'll tell you that they [Music] i mentioned that there are three markets there there's the hospital infection control dialysis and commercial the infection control is somewhere around a half a billion dollars and um the the uh the town the uh the total addressable market today the market is probably only half of that or maybe even smaller um and there is a leader in that area which is paul medical uh some city area of danaher we are the number two there but the market itself is growing very quickly so that's a half a billion the dialysis clinic and portable market is somewhere between 50 and 100 million dollars it's smaller but we think we have a stronger ability to dominate overall uh that market since no one else is really addressing it head-on the way we are and then the commercial market frankly is billions of dollars but that's i don't like it when other companies tell me that their market is unlimited it's billions of dollars we have to find a very narrow area um there's probably a four or five billion dollar market just in hospitality um uh and um quick service rest for water filtration i wanna as we mature that business i want to understand it more deeply and shrink the addressable market so that we can actually have um a meaningful part of it it's uh philosophically i it's it doesn't make sense for a micro cap company to go over and go after a five or ten billion dollar market um because you've got you've got no chance on the um pathogen detection in a similar situation there's an eight billion dollar water testing global market but once again if that's too big for us to say we're gonna go after an eight billion dollar market um we don't know yet how big the on-site um pcr based market is but it's a significant size it's certainly in the hundreds of millions of dollars and it is potentially in the low billions and then finally on the hdf um another another multi-hundred million dollar business um what what the hdf product does that is interesting and different than anyone else is it converts existing dialysis machines hd machines to do hdf dialysis which is a some would argue a better modality of dialysis where patients feel better and for a very small investment and um and just recurring disposables you can convert an hd machine which costs tens of thousands of dollars to be an hdf machine without replacing the whole machine so um uh you know half a billion to a billion dollars on that one so who are your customers for the pathogen detection system there's there's a couple of categories first of all and these are uh the ones that we've been talking about for a couple of years now um there are hospitals there are um uh senior living facilities there are rehab centers all the places where patients live need to have their water tested and that uh you know they need to have water management plans that is driven by met by cms and implemented by the joint commission and we're a very important part i think of that world in addition we think we can go after the centralized laboratories which are currently where where water samples from hospitals are sent to for spread culture plate analysis you know basically a petri dish analysis because increasingly pcr technology is used um as you know it used to be that culture plates where the gold standard that is no longer true it is now culture plates and pcr as well um so that is uh that's an additional market that we haven't talked about much but uh that i'm we're feeling uh pretty strongly about so when you sell your medical filtering systems i assume that they're basically installed at the point of delivery so like a sink or something like that yes that's correct the um the the [Music] the infection control filters are pretty much 100 of them are either at sinks showers or ice machines and um how many points of delivery or how many systems could you potentially sell into like a hospital do they like does the hospital try to like put one on every uh delivery point or do they focus on certain areas of the hospital yeah some do but most don't most these filters are expensive you know it's 50 bucks a month to to have these filters on for each filter or two bucks a day um and so it's and religionella is not dangerous uh pseudomonas is not dangerous for most of us but it is very uh dangerous for immune compromised patients so figure that's 25 30 percent of the days in a hospital and that's really if you if you want to um quantify the number of beds that we can service think of it as about 25 of the beds in a hospital but there we have hospitals you know i i live in chicago um we have hospitals here that uh where we've got hundreds of filters in and thousands in an emergency basis when there's outbreaks and that's we have that all over the country we we're in uh uh in some of the it happens that the the best hospitals also are the biggest users of our filters because they are very proactive in all in every aspect of healthcare delivered um and so we're uh we're in many hospitals that are in uh that have hundreds of filters how are the healthcare filters currently being sold is it direct or through distributors partners thanks for asking um it's about 85 90 through partners we partner with water treatment companies that that take care of the water quality in hospitals and we have we wholesale through them and they've got a new revenue stream by partnering with us which by the way is not available from um uh from paul they they pretty much only sell direct and uh and and keep all keep all that orange so does that mean you're pretty much the only solution that those companies can sell or are there other competitors or there's competitors but uh we're by far the largest of the of the competitors out there okay and we're we don't have any competitors with the technology with the tech sorry with the technology with the specifications that i talked about earlier okay so it sounds like your your solution is technically better in terms of filtering than than your competition correct i i if i if i owned a hospital i would buy nephrons just looking through our questions um so one of the questioners their listeners asked uh it's kind of surprised to see the low head count in the company um and was wondering if you know nephros is trying to do too much um uh you know it would be possible to grow faster if you're targeting fewer markets and maybe talk about why you know you're targeting all the markets you are yeah it's it's a fair question um [Music] our uh thesis if you will is to build a company that can have a few not many but a few 50 million dollar bets minimum 50 million dollar revenue bets and i've told you today about the five that we've chosen um i don't plan on adding a sixth or an eighth or a twelfth um i think we've got we've been pursuing these five since we started the company not all of them are going to pan out the way we expect them to some of them are going to overachieve some of them maybe will under achieve um some of them will grow faster some will grow slower and um then the structure of this company has is from from the uh the turnaround uh that we put in place four or five years ago it has always been to have a small handful of markets that we can pursue so that we don't have all our eggs in one basket but don't aren't trying to do too much too many things either is there any potential legislation requiring water testing that could positively impact your business yeah it doesn't require water testing i want to be clear i don't want to mislead anybody but um there is a guideline that first came out in 2015 and then was adapt adopted into um hospital into hospital requirements from cms in 2017 that is being updated right now and will go into effect with an updated version in 2022 and what this requirement it's all based on ashrae 188 if you want to look it up and what this requires is that every hospital every healthcare facility that services patients in the united states which is about 20 000 must have a water management plan the water management plan must ex must un uh must have a logical um a logical design for protecting patients and for keeping the bacterial count of uh of pathogens low low you know acceptably low and may be validated with testing so that's the language of of the uh of the the [Music] regulation in practice that means everybody tests um so it's not a requirement but testing is part of the validation um and and um and so the the short answer is we think those requirements from the uh from from the cms guidelines uh are very much driving uh the need for testing and will increase the size of the market how do you think about the rate of revenue growth versus getting to profitability i'm glad you asked the question thank you for asking it i think that it differs depending on which of the three business segments you're talking about i think the water filtration business which is close to 100 of our revenue we now owe the uh the shareholders profitability there and we need to work on that um is that next quarter next year and we're not talking about that but it's soon we recognize our responsibility to get that profitable we have by the way had one profitable quarter fully loaded every all the the the costs uh included we did have a profitable quarter in q4 of 2019 and then of course the pandemic hit in q1 of 2020. um so we're shooting at that we're not shooting for profitability right now for pathogen detection and we're not shooting for profitability right now for hdf and what will that mean to the consolidated profitability i don't know but for a sophisticated investor looking at nefros i think the way to think about profitability is by business segment and the first place you should be looking is water filtration um a lot of companies are having issues with supply chain can you talk about your supply chain and how it might be challenging right now i i can and i'm very pleased to say that we have no challenges when the pandemic hit we we saw the potential for supply chain constriction and in um february of 2020 we we said pedal to the metal make as much as you can and let's just put a lot of stock on our um on our shelves and our think our inventory went up 30 uh while our sales went down um and that was just fine because it made sure that we had plenty um it turns out that we don't have any supply chain challenges at all um and um our our you know our back orders are well under one percent probably under half a percent okay thank you andy i appreciate the time you're welcome thank you ian great uh great questions thank you everybody and have a good day thank you

Channel: MicroCapClub

Views: 216

Rating: 5 out of 5

Keywords: microcap, microcaps, microcapclub, stocks, investing, microcap leadership summit, mls2021

Id: a1JQzM69U7s

Length: 39min 24sec (2364 seconds)

Published: Wed Sep 29 2021