Good day and welcome to the Nephros, Inc. Fourth Quarter 2021 Financial Results Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Kirin Smith with PCG Advisory. Please go ahead.

Good afternoon, everyone. This is Kirin Smith with PCG Advisory. Thank you all for participating in Nephros's Fourth 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 Nephros's filings with the Securities and Exchange Commission, including, without limitation, the company's Forms 10-K and 10-Q to 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, Nephros's 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 health care providers, success of its commercialization efforts and its effect on 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, February 23rd, 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 Nephros's President and Chief Executive Officer, Andy Astor. Andy, please go ahead.

Thank you, Kirin. And good afternoon, everyone. With me on the call today is Wes Lobo, our Chief Commercial Officer. So as you might recall that Wes joined Nephros a little over a year ago, and happy anniversary, Wes. And I thought it would be beneficial for you all to hear what he and his team have been working on. I will begin the call with a summary of Nephros ' recent progress toward its revenue guidance of 25% to 30% growth, or $13 million to $13.5 million. I am pleased to report that we've had a strong start to the first few weeks of 2022 -- 2022. And to name a few examples: 1. we are now shipping filters on a nationally recognized quick-service restaurant deal, which will add about $250,000 in revenues in 2022. We also continue to pursue several other large opportunities in the food service and beverage industries. Two, we have become a strategic supplier of for two major dialysis companies. We expect these deals to add at least $0.5 million or $500,000 in revenue over the next 12 months. Other significant dialysis customers are also in the pipeline. Three, we are making excellent progress in our Pathogen Detection Systems group, including significant commercial discussions with at least three leading firms in the microbiological testing space. Also, as noted in our recent shareholder letter, PDS, our Pathogen Detection group has achieved CDC's elite certification for our laboratories, which has helped establish Nephros as a leading developer and manufacturer of qPCR assays for both environmental and RUO or Research Use Only testing. Four, with respect to Specialty Renal Products or SRP and the HDF Assist Module, we have completed our responses on ten of the 14 topics raised by the FDA and are on schedule to resubmit…

Thank you, Andy. Good afternoon everyone. The pleasure to be joining you on today's earnings call. Over the past year, have had the opportunity to meet our healthcare and commercial customers and partners, both virtually and in-person. I've been in hospitals that their sales and service teams to see firsthand what we do and how we do it. By main learning is that we are niche market player and infection control for healthcare and what we do, we do extremely well. When we can in front of a potential customer, we have a very high rate of success. Our challenge has been the ability to broaden the reach of our value proposition to a wider audience. Choose a sports analogy, we have a high batting average. We need more of that. We're addressing this opportunity through three lenses, brand and marketing, business development, and customer service. First, our brand and marketing team has been working diligently over the past few months to overhaul and launch a new Nephros's brand that better articulates who we are and how we help our customers. In scope to name a few elements is a new website to update a product and company collateral, lead generation initiatives, and more channels through which to connect with our customers. We'll be publicly launching our new brand and messaging at the Grainger show next week in Orlando. And we expect to launch the new website, in the next 45 to 60 days. Our goal is to make Nephros easier to find, easier to contact, and to clearly communicate our value proposition in an easy to understand and measurable way. On the business development front, we've organized around our three primary filtration segments of healthcare, dialysis water, and commercial, as well as pathogen detection. While the pandemic has caused…

Thank you, Wes. That was great. I will now review our financial results. We reported fourth quarter net revenue of $2.8 million, an 18% increase over prior year and full-year revenue of $10.4 million, a 22% increase over prior year. The $10.4 million represents a revenue record -- I'm sorry, a record revenue year for Nephros albeit by a small margin. And furthermore, we have now delivered four consecutive quarters of year-over-year growth, averaging 19%. Net consolidated loss for the quarter was a million -- $1 million, compared with $0.8 million in 2020,and net consolidated loss for the year was $3.9 million compared with $4.5 million in 2020. Consolidated adjusted EBITDA in the quarter was negative $0.4 million compared with negative $0.5 million in 2020, and consolidated adjusted EBITDA for the year was negative $2.6 million compared with negative $3.6 million in 2020. Consolidated gross margins in the quarter were 53% compared with 56% in 2020. Consolidated gross margins to be year were 55% compared with 57% in 2020. We do continue to expect future gross margins to be in the range of 55% to 60% despite this quarter's fall to slightly under that range. Consolidated R&D expenses in the quarter were $0.5 million compared to $0.6 million in 2020, and consolidated R&D expenses for the year were $2.2 million compared with $2.8 million in 2020. Consolidated SG&A, or sales, general and admin expenses, in the quarter were $2 million compared to $1.4 million in 2020, and consolidated sales, general and administrative expenses for the year were $7.7 million compared with $6.5 million in 2020. Our cash balance on December 31, 2021 was $7 million, $7.0 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…

We will now begin our question-and-answer session. [Operator Instructions] If you were using your speakerphone, please pick up your handset before pressing the keys. [Operator Instructions] At this time, we will pause momentarily to assemble our roster. Thank you. And our first question will come from Marc Wiesenberger with B. Riley Securities. Please go ahead.

Yes. Thank you. Good afternoon. I appreciate the insight into the commercial. I'm wondering if you could rehash those details again and additionally, what percent of the overall footprint does -- what you're currently servicing represent for this customer in aggregate? Is this an initial pilot that maybe as we move through the year, should expand from the stats that you talked about earlier?

Sure. Hi, Mark. What I said was -- and Marc, I'm sorry. Go ahead. We will add about a quarter of a million dollars in revenue in 2022. We don't have the exact numbers yet, and it is not a pilot. The testing is over and this is a nationwide rollout. But as we've -- as I've said before, both in private conversations and I think also on these calls, the market of food service and hospitality has a unit and value that is much lower, or I should say, a site value that's much lower than at health care. It's usually in the hundreds of dollars if that. This is a large contract with multiple thousand locations and that is the expected annual revenue, roughly a quarter of $1 million, give or take.

Great. Appreciate that additional insight. You talked about scalability is setting up for a bigger second half of the year. The last few years in the second half represented about 52% of overall sales. Should we expect a deviation for that this year, based on your scalability comments?

It is -- it's hard to set specific numbers for what the second half of the year looks like. I don't think that what you just said was the -- if I look back at 2019, for example, I think it was more like 60% in the back half of the year. So first of all, I'm not sure if it's evenly spread as your observation. But more importantly, Marc, the difference this year is not that we're saying the second half of the year will be big -- will be larger because of market trends, but rather because of the scalable infrastructure and the work that we're building in are expected to build over time. I think it is our expectation that we'll see increased acceleration through the year and also into next year.

With regards to your calendar 2022 guide, I'm wondering if you could talk about the level of emergency response to that. You're baking in, and how does that compared relative to calendar 2019? I believe the emergency response has been below trend in both calendar '20 and maybe '21. I don't think leading our outbreaks to time offs as a result of COVID. Where is the primary delta relative to normalize trends, their weakness maybe in larger hospitals, or long-term care facilities? I want to hear your thoughts and also, where -- when do you think maybe you get back to normalized levels in the emergency response segment of business?

Well, emergency response was deeply, deeply depressed, close to zero in 2020, but that was not the case last year. Emergency response last year was in the normal range. We usually say that if you zoom out, it's about 15%, although it varies tremendously because it is by definition unpredictable, it is emergency. And we're expecting similar levels of 15 - ish% as we continue to grow. And we will learn, frankly, whether or not emergency response will scale up the same rate or faster or slower as we grow because we've never been there before, so we'll have to see. But as a starting point, 15% or so is about right.

Great. Appreciate it. And then just a final one for me. If you could talk about the demand resulting from recent CMS and Joint Commission guidelines, how that progresses at the end of the year, how it's progressing thus far in 2022. And -- and how close of an analog is the 2017 time period turning out to be thus far and going forward? Thank you.

Thank you, Marc. It's a hard thing to measure. When we were in the 2017, 2018, and even 2019, in the field, there was a lot of talk about the new CMS guidelines. And for those on the call who may not be familiar with this, these are guidelines on water management plan that healthcare -- every health care institution in the country is required to follow. They've started in June of 2017 with a set of guidelines, and those guidelines are being or have been tightened starting in -- on January 1, 2022.

I would say that we're seeing the same thing. It's -- it is a big issue. Hospitals or health care institutions are dealing with it differently. It's more of a rising tide. You don't really notice the impact on a day-by-day basis even though it's a hot topic, but it very much influenced our growth in the 2017 to 2019 and frankly, I expect it to continue to do the same thing in 2022 to '24. Thanks, Marc. I appreciate it.

Great. Thank you.

And the next question will come from Anthony Vendetti with Maxim Group. Please go ahead.

Yes, thanks. There was some static there so I don't know if you answered this, Andy, but the new water management standard went into effect 1-1 - 2022. Did that new standard increase interest in your products and services? And if so, is there a way to quantify to what level, in terms of either the pipeline or the growth that you can attribute to that new standard?

I don't have -- I'm sorry that the noisy line. I don't have a quantification of that. My experience in the 2017 to '19 time frame was better. It was more like a rising tide that more healthcare institutions were interested in water management plans, which we do not per se do, but we do the remediation that comes from water management planning. And it obviously had a very helpful impact. I don't know how to quantify the specific impact of the guidelines on what we're seeing in the market. Wes, would you differ from my perspective? You're in the field a little more?

Yeah, it's a good question. I think from what I've seen so far, is it's too early. I know that it's going to affect on 1122. And what I've seen and what I've heard is there is a mix of health care facilities. That prior to this going into effect, we're already stressed in terms of manpower and coverage with the roads maintenance, facility upkeep, etc. So there's a combination of still education that's going on. You see a lot of whether it's through different consulting agencies and organizations who are still out there doing a lot of education as they go through what their healthcare community, and again, working with maintenance, engineering, and operations staff, well, we have seen, I think, Andy, you mentioned in the last earnings call, we have seen facilities that were contracting with now new health care facilities that were contracting with them are seeking out our product or asking about it as a result of implementing the water management plans. So we are seeing an ask as a result of it. We're also seeing that there's still a lot of questions about exactly what it means, there's still a lot of education going on. And so my view is that it's going to be a slow walk up in the first few months and we're -- that we're doing -- that we're going through right now. And the role that we play in it in this part of what I mentioned before but just getting more facts. The role we play in it is to just try to cast a wider net on helping the healthcare community with -- through education and what it means, how it impacts them, and how we can help.

Okay. That's helpful. And then to -- that was good color on the restaurant contract, Andy, but on the Specialty Renal Products. You've completed 10 of the 14 questions. You expect to resubmit to the FDA for the five 10-K by the end of 1Q 2022. Does that -- is that a 90-day clock that starts once you resubmit? That's one part of the question and then the second part is you mentioned that in the beginning of the call in your prepared remarks, you have in your orders or your backlog voters, you have 500 thousand from two HDF customers. Is that contingent upon this product being approved or is that a different contract?

I wish that was the case, Anthony, but that's not. First of all, it is a 90-day clock that restarts when we resubmit. We're planning on resubmitting at the end of March and we are -- what we have found is that the FDA is unpredictable and can be quite slow in its responses but we are making headway with them. I do believe that we will resubmit at the end of March and I do believe that roughly 90 days later, we should be getting a response from them. You -- what you heard in terms of the $0.5 million was for a couple of dialysis water purification contract. In other words, we have three filtration businesses as you'll recall. We have hospitals, infection control. We have dialysis water purification and we have our hospitality and food service business. The $0.5 million that I mentioned was in the dialysis water purification that completely different than the HDF business, which I talked about a little bit later.

Okay. Now that clarifies it. That's -- that's -- that was very helpful. Okay. Good. Okay. Those are -- those are my questions. Thanks very much. I'll hop back in the queue.

My pleasure, Anthony. Good to hear from you.

Thank you. And the next question will come from Neil Cataldi with Blueprint Capital. Please go ahead.

Hi, guys. Thanks for the color tonight. A few of mine were already asked but I'll just -- I'll follow-up on two. Regarding the QSR opportunity, could you tell how long you were working on this? And has anything changed that might mean more of these start to hit, or does this win effectively open the door, validate your ability to capture others?

It's a great question, Neil. And good to -- it's good to hear your voice. If I said forever, we've been working on it, would you believe me? It is -- we've been working on it for quite some time, probably over -- certainly over a year and maybe a little longer than that. And I don't think that it represents a change for -- I don't think there's an industry change that caused it to happen. I do think that our persistence and our integrity and our relationship building has paid off. And I -- we're not starting from zero in the other opportunities that we are pursuing. As the word gets around, which it will, of our filters in several thousand locations, and our ability to deliver and perform, and our reputation grows. I do think that it will help us win additional business.

Okay. I remember two years ago, you were talking about a big opportunity and it sounds like this is a different one and maybe that one is still out there. Could you help us understand why they chose to switch? Was it a cost comparison or was it some other feature?

Why they chose to switch at all or why they choose --

Or were you designed into a new machine or -- I don't know.

Yeah.

Is there any background on why they chose you versus other competitors that have filters?

They had reasons, which I won't discuss, that they wanted to get away from their provider and vice versa. It was -- there was -- they wanted to change their filtration solution and they went looking for products through a -- they were serviced by another buyer company and that company came looking -- went looking for providers, found us, selected us, tested us, partnered with us and so we were selected. Frankly it was not a -- it was a cold selection process.

Got it. So there's a middleman partner that you've relationship with?

There was barely a relationship there. The middleman partner knew of us, but they also knew of everybody else, and we were evaluated along with others.

Got it. Great. One other question I have on the pathogen side, I think you mentioned some partners that you're working on there. Anything you can elaborate with? I imagine they're distributors of some sort. And if so, what type of hospital reach might they have?

Well, what I said was three leading firms in the microbiological testing space. I'm not going to comment further on what or who they are, but they're not the traditional hospital distributors that we've been working with on the Filtration side even though there is also opportunities growing in that -- on that front.

Okay. All right. Great. Thanks, guys. Great call tonight. Look forward to talking to you.

You too.

Thanks, Neil.

[ Operator Instructions] The next question will come from Jason Hirschman with Hudson 2-15 Capital. Please go ahead.

Hi, Andy. Hi, Wes. How you guys doing today?

Doing great, Jason. Nice to hear your voice.

Nice to hear your voice too. You've talked about the batting averages. You talked about getting more at-bats. So I'm just going to continue the baseball talk, and bring up slightly percentage, and ask if there's a way to maybe perhaps -- I mean, you mentioned the bundling maybe just -- like for one hospital, but going forward, bundle some hospital -- on hospital side, for the commercial side of the hospital and also -- or even packaging say detection solutions to a single customer. Is that something that you could see may grow to be a bigger part of your business or a bigger opportunity going forward?

It's a great question, Jason. The answer is yes. Wes, would you like to talk about the cross-selling opportunities?

Sure. Yes. Yes, thanks for the question, Jason. This natural adjacency between our Pathogen Detection business and our healthcare business, and as I said earlier, our -- the assortment of assays that we have really can go into many different vertical markets, specifically the healthcare business where we play most. There's that adjacency and we've already seen success in joint calls, where we're going into speak about one and the other comes up and vice versa. That's part of our business development is to see how much of a run we have there. Coming back to slugging percentage is about extra base hits. In terms of dollar value, our deals vary for the most part, save a large international QSR accounted in the multi, under the thousands of it, save that type of opportunity. Most for deals I mainly said before are a low dollar volume per transaction or per site. When I say get more pads, singles are great because we wanted -- the more we have them then the more predictable and the more you set your clock to it versus hoping for the home run. I'll keep with that analogy. So that's general from the line. But even with Pathogen Detection and coupling it with pull-through and filtration solutions in healthcare, the actual dollar value of the transaction wouldn't necessarily be higher, but certainly something that we are -- not only could do, but are already doing when we're going in to speak with -- and that also depends on who you're speaking with as a customer target audience. And so it is something that's in the works that is absolutely in the scope of the business development work we're doing. It's a great point you're bringing up. But I also wanted to level set that doing that joint sale doesn't necessarily take it from our item using hypotheticals, a $100 sale to a $500 sale.

Sure. And I understand that, and I appreciate the color. I'd just -- also, I think perhaps it would aid some of the customer retention, the more things you get into a particular customer, of course. But we'll see. Great quarter, and looking forward to you hitting your guidance this year. And we'll keep our fingers crossed that we're done with the pandemic's part of the pandemic at least.

Marc, go ahead.

And thank you. Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Andy Astor for any closing remarks.

Thanks very much Chad, and thanks Kirin and Wes for being on the call with me today and sharing the mic. And thanks to everybody for dialing in, we had a really good showing today. It's been a tough few months. We've -- 2019 -- sorry, 2020 and 2021, while we grew out of the pandemic impacts of 2020, we -- it took us a whole year to do that and then the stock price took a tanking and along with many others over the last couple of months and it's been a challenging time. I'm here to tell you that we've never stopped believing. We have never stopped working and we think we re beginning to see the benefits of not panicking, of not changing our business model of not trying to fix it. With one blow, we're putting one foot in front of the other. We are putting -- we put a strategy in place. We're executing on that strategy. We've got a great team and I hope you all stick with it because I think there's great times ahead. Thanks again for coming everybody. Take care and I look forward to seeing you all soon. Bye.

And thank you sir. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.