Nephros, Inc.

Good day and welcome to the Nefrosync second quarter 2021 financial results conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touch-tone phone. To withdraw your question, please press star then two. Please note today's event is being recorded. I would now like to turn the conference over to Kieran Smith, Investor Relations. Please go ahead.

Good afternoon, everyone. This is Kieran Smith with PCG Advisory. Thank you all for participating in NEFROS' 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 NEFROS. I encourage you to review NEFROS' 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 5th, 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 Nefros' Chief Executive Officer, Andy Astor. Andy, please go ahead.

Thank you, Kieran. Good afternoon, everyone. I am very pleased to report that Nefros had a solid second quarter, continuing our trend of year-over-year growth. Indeed, our second quarter. excuse me, 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 Generation Incorporated in an all stock deal, and we submitted a traditional application for the 510 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 Nefros. 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 service 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. Install-based 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 in Healthcare Facilities by the Joint Commission, which was approved earlier this year by the Center for Medicare and 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 Generation. 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 was an excellent demonstration of our ability to provide on-site, near real-time results with limited notice. Building on that success, Nefros acquired the assets of Generation Incorporated, located in Rockville, Maryland, in an all-stock transaction as reported in our July 12 press release. Generation 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 510K 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 NEFRS 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 homepage. And of course, Please always feel free to contact me directly at andy.nefros.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.

Yes, sir. If you would like to ask a question, please press star then 1 on your touch-tone phone. If you're using a speakerphone, we ask that you please pick up your handset before pressing the keys. To withdraw your question, please press star then two. Today's first question comes from Mark Weissenberger with B Reilly.

Please go ahead. Thanks. Good afternoon. Appreciate you taking my questions. Andy, can you explain a little bit more about the dynamics of the emergency response business? And from your perspective, Why has that part of the business been slower to rebound? Is it just that Legionella outbreaks aren't happening? And if that's not the case, why do you think, what do you think the impetus is for kind of more normalization?

Well, hi, Mark. Nice to hear your voice. And the emergency response business dynamics are very dynamic. And actually they have rebounded from 2020. We did more in the first quarter, and I'm not sure if that's true in Q2, than we did in all of 2020. So they have rebounded because we believe that testing and frankly the attention is being paid to diseases other than COVID now that COVID is hopefully on the wane. So it has rebounded, and I think that as long as COVID, and particularly now in the second and third quarter as the Delta variant is expanding and the trends of COVID are rising again, it doesn't surprise me at all that the emergency response business is down a bit. But the truth is, if you graph it, If you graph the business, it just looks like a folded piece of paper. It goes up and then down and then up and then down. It depends enormously on the size of outbreaks and the size of the hospitals in which the outbreaks occur, and it's just a naturally irregular flow. That was a long-winded answer, but in summary, it is coming back. I think it will come back inversely in somewhat inverse relationship with COVID's reduction. And I think you will continue, we will all continue to see it be an irregularly irregular business pattern.

Got it. Okay. Moving on. I know you guys provide filters for use in dialysis. clinics, but there's a big push to move toward 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.

Sure. Thanks, Mark. There are several in-home and portable dialysis manufacturers, and we are actually the of the filter, the original equipment manufacturer of filters in 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. frankly, has exceeded that growth in several of the last few quarters.

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

Sure. Sure. Thank you, Mark. The impetus for the deal was pretty much a vertical integration play. We have been buying from Generation 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 Generation 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. And so I think that it will have a, I was going to say positive, but I'll just say good impact on our gross margin, on our abilities and gross margins, because we're manufacturing now all of our own assets rather than paying wholesale for some of them.

Great. Thank you very much. Okay. Thanks for your questions.

And ladies and gentlemen, as a reminder, if you'd like to ask a question, please press star the one at this time. We will pause momentarily to assemble our roster. 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.

All right. Well, I see all the names up on the screen. It was good to see the 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.

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.