Nephros, Inc.

Good day and welcome to the NEFROS Incorporated third 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 telephone keypad. To withdraw your question, please press star then two. Please note, this event is generally recorded. I now like to turn the conference over to Mr. Kieran Smith. Please proceed.

Thank you, Ian. Good afternoon, everyone. This is Kieran Smith with PCG Advisory. Thank you all for participating in NEPHROs' third 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 nephrosis 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 service offerings, The rate of adoption of its products and services by hospitals and other healthcare providers, 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, November 4th, 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. Please go ahead, Andy.

Thank you, Kieran, and good afternoon, everyone. I'll start with a brief overview of our consolidated results, followed by a brief discussion of each of our business segments. We were pleased with our third quarter results, which were 24% ahead of last year. This was our third consecutive quarter of year-over-year growth, averaging about 25%, and demonstrating our gradual emergence from the effect of the pandemic. Furthermore, and perhaps most importantly, year-to-date revenue in 2021 was $7.6 million, the highest nine-month total in the company's history. Looking ahead, our outlook is strongly positive. And with that, let's take a closer look at each of our business segments. Our core water filtration business continued its growth in the third quarter. Net filtration revenue was up 22% over the same period last year. Our active customer count is near its all-time high, and customer retention rates were strong, comfortably exceeding 90%. Our emergency response business, which had been significantly impacted by the pandemic, was at normal levels during this quarter. As stated in our prior call, we expect an important driver of increased customer interest to be the new standards document, 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 these 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. Indeed, some of our most recent Customer engagements and orders are a direct result of healthcare facilities and water management consultants implementing water screening and infection control filtration due to the upcoming Joint Commission standard. Moving on to pathogen detection systems, or PDS, business segment, we delivered about $60,000 in revenue this quarter. While still an emerging business, we are pleased with recent revenue consistency and excited by several recent developments. For example, we recently completed the integration of Generation, our previously announced acquisition, into the PDS organization. Generation was a recognized market leader in infectious 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. These intellectual property assets are expected to accelerate new product development and time to market and to add new revenue streams to this business. We also recently signed partnership agreements with consulting organizations to promote PDS products into their customer bases. We are building a significant pipeline of opportunities within these new relationships and we expect These will generate significant revenue growth in the coming months. For a brief update on our renal products business segment and our second-generation HDF product, we received promising news from the FDA recently that they have completed their acceptance review of our HDF application. This means that the FDA has all the information necessary to evaluate our second-generation HDF product and will now move into their substantive review phase. This is expected to take approximately 60 to 90 days, assuming they have no further questions. We expect FDA clearance around the end of the year or early 2022, after which we will pursue a limited commercial launch in the dialysis clinic market. I'll now present a few highlights of our third quarter 2021 financial performance. We reported consolidated net revenues in the quarter of $2.6 million, a 24% increase versus the same period of 2020. We also had a net consolidated loss for the quarter of $1.2 million compared with $1.0 million in 2020. Consolidated adjusted EBITDA in the quarter was negative 0.7 million compared with negative 1.0 million in 2020. Consolidated gross margins in the quarter were 54% compared with 58% in 2020. We continue to expect future gross margins to continue in the range of 55% to 60% despite this quarter's fall to slightly under that range. Consolidated research and development expenses in the third quarter was $0.6 million compared with $0.8 million in 2020. Consolidated sales, general, and administrative expenses in the third quarter were 1.9 million compared to 1.5 million in 2020. And our cash balance at the end of the third quarter was $7.4 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. I'll now make a couple of closing comments. First, as I said earlier, we are pleased with our year-to-date revenue results in that we have stabilized the business to more consistent quarter-to-over-quarter performance after a tough 2020. To be clear, we are pleased, but we are not satisfied. We intend to accelerate our growth trajectory by investing in scalable commercial and operational infrastructures and balancing short-term results with long-term sustainable high rates of growth. Second, I'd like to speak briefly about the topic of revenue guidance. We believe it was prudent at the start of the pandemic to suspend our practice of giving annual guidance since so many of our business assumptions were upended. However, as vaccinations become ubiquitous and the pandemic begins to recede, we believe we can return to giving guidance and we expect to do so shortly after the turn of the new year. And with that, I would like to thank each of our Nefros employees and our strategic partners for your unwavering focus on providing unsurpassed products and services to our customers, as well as for achieving record year-to-date revenues thus far in 2021. I would also like to thank our investors for your continued confidence and patience as we exit the pandemic and get back to higher growth rates. We look forward to seeing many of you at upcoming trade shows and financial conferences. And if you're not already subscribed to our occasional email alerts, once again, I'll remind you that you can do so at the bottom of our website homepage. And of course, always please feel free to contact me directly at andy.nefros.com This concludes our formal presentation remarks, and we will now take questions from the audience. Ian, please open the call for questions.