Nephros, Inc.

Good afternoon and welcome to the NEFROS Incorporated Second Quarter 2022 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 being recorded. I would now like to turn the conference over to Stephanie Prince from PCG Advisory. Please go ahead.

Thank you, Gary, and thank you all for participating in NEFROS' second quarter 2022 conference call. Before we begin, I would like to caution you 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's 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, the impact of the COVID-19 pandemic, Nefros' ability to successfully, timely, and cost-effectively market its products and service offerings, the rate of adoption of its products and services by hospitals and other health care providers, the success of its commercialization efforts, and the effect of existing and new regulatory requirements on NEFROS' business 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 10, 2022. 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's President and Chief Executive Officer, Andy Astor. Andy?

Thank you, Stephanie, and good afternoon, everyone, and welcome to the call. I am pleased to report our second quarter results, which were strong at the top line. Net revenue was $2.9 million, an increase of 27% year-over-year and 32% over the previous quarter. Also, active customer sites increased 21% year-over-year to a record 1,349, which were also 6% higher than the previous quarter. Customer retention rates remain comfortably over 90%. While top-line growth remains our top priority, we also recognize that Nefros needs to become profitable. As we announced last month, Nefros expects to be cash flow positive by mid-year 2023. Of course, we remain focused and optimistic about revenue growth, but we are also taking steps to tighten our belts. In the quarter ended June 30, these steps included a 15% headcount reduction, reduced use of professional services, and initial work towards production and inventory efficiencies. As of July 1, operating expenses have been reduced by more than $300,000 per quarter, and we expect our ongoing actions to reduce expenses further in the coming quarters. I'll now give a brief overview of some sales and marketing highlights. Wes Lobo, our Chief Commercial Officer, would normally give this update, but he is on vacation this week. As we announced on the previous earnings call, Nefros launched its new web presence at the beginning of Q2. In his remarks at that time, Wes said, the launch of that quote, the launch of our new website provides the digital architecture to articulate our value proposition, provide easier discovery of product solutions, and produce timely, relevant materials for our customers. I am pleased to report that just four months later, the website is delivering benefits, including lead generation, that has led to new revenue in the tens of thousands of dollars so far. In addition, we continue to build our regional sales teams to provide dedicated support to our distributors and our end customers. We have coverage in most of our important markets and are actively recruiting for the rest. Our medical water filtration businesses, primarily hospital infection control and dialysis water purification, were both strong this quarter also ending with record numbers of active customer sites. In the commercial filtration business, I am pleased to report that we shipped over 3,000 filters this quarter for installation in Chipotle restaurants nationwide. The replacement cycle for these products is every six months. We expect the brand equity from this relationship to unlock additional opportunities in the food service and beverage space going forward. And in the pathogen detection business, we have completed agreements with two strategic testing partners and anticipate a steady build of sales over time. And finally, with the previously announced FDA 510K clearance of the HDF assist product from our subsidiary specialty renal products, we are now in discussions with dialysis clinics for a rollout to patients around the end of this year. I'll now turn to a few details of our financial results. We reported second quarter net revenue of $2.9 million, a 27% increase over prior year. Factors impacting this growth included organic growth, the Chipotle shipment I discussed earlier, and also some pull ahead sales due to a price increase implemented June 1. Net consolidated loss for the quarter was $1.1 million, approximately the same amount as the second quarter or Q2 of 2021. Consolidated adjusted EBITDA in the quarter was negative 0.7 million compared with negative 0.8 million in Q2 of 2021. Consolidated gross margins in the quarter were 47% compared with 57% in Q2 2021. This decrease is primarily due to global inflationary and supply chain trends in addition to some inventory expiration. We expect the June 1 price increase to improve our margins and continue to target future gross margins of 55 to 60 percent. Consolidated research and development expenses in the quarter were $0.4 million compared with $0.5 million in Q2 2021. Consolidated sales general and admin or SG&A expenses in the quarter were $2.0 million compared with $1.9 million in Q2 of 2021. And our cash balance on June 30, 2022 was $4.2 million. We reassert that our current cash balances are expected to suffice for the foreseeable future. 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, will be found in our filing on Form 10-Q, which we plan to file on Monday, August 15. That concludes the financials discussion. and we'll open the call to questions in just a minute. But first, I would like to thank each of our Nefros employees and our strategic partners for providing unsurpassed products and services to our customers, especially this year during some difficult times. And thanks also to our devoted investors for your continued confidence and your patience. We know that these are challenging times for our investors, and yet we believe that our ability to navigate the short-term results will be to our ultimate benefit as we maintain our commitment to investments in scalable commercial and operational infrastructures as a path towards long-term sustainable growth. This concludes our formal presentation remarks. We will now take questions from the audience. Gary, please open the call for questions.