Good day, and welcome to the Nephros Inc. Third Quarter 2024 Financial Results Conference Call. All participants will be in listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note, today’s event is being recorded. I would now like to turn the conference over to Kirin Smith with PCG Advisory. Please go ahead.

Thank you, Debbie. Good afternoon everyone and welcome to Nephros' Q3 2024 earnings conference call. Thank you all for participating in Nephros' third quarter 2024 conference call. Before we begin, I would like to remind you that this call will include forward-looking statements regarding the operations and future results of Nephros. For a discussion of these forward-looking statements, please review Nephros’ SEC filings including 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, Nephros’ ability to successfully, timely and cost-effectively market and sell 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 Nephros’ 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, November 7, 2024. 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. Now, I would like to turn the call over to Nephros' President and Chief Executive Officer Robert Banks. Robert, please go ahead.

Thank you, Kirin, and good afternoon everyone. I appreciate you joining us today for Nephros' Q3 2024 earnings call. This quarter represents a significant milestone for our company as we achieved our first profitable quarter since inception. I want to begin by acknowledging the hard work and dedication of the entire Nephros team who have made this achievement possible. For the third quarter, which ended September 30, 2024, we reported a net revenue of $3.5 million, an increase of 8% over Q2 2024 but a 6% decline compared to Q3 2023. Despite this decline, I'm pleased to report a net income of $0.2 million compared to a net loss of $0.2 million in Q3 of last year. This positive shift is driven by cost management efforts and operational improvements that have helped us to reach this milestone. Gross margin for the quarter was 61%, compared to 59% in Q3 2023, reflecting improved terms with our largest supplier. Adjusted EBITDA for Q3 was $295,000, a significant improvement over $11,000 in the same quarter last year. SG&A expenses were reduced to $1.7 million from $2.1 million in Q3 2023 due to lower stock compensation and bonus accruals. Quarterly revenue increased 8% over Q2, following a rebound in emergency response orders. Although we continue to see some challenges in specific regions, we remain focused on mitigating reductions in programmatic reorders by strengthening customer engagement and service capabilities. We are making strategic advancements to ensure long-term growth. In Q3, we began ramping up our digital support tools for filter installation, which will improve customer compliance with filter changeout schedules and drive recurring revenues. This initiative, coupled with our increased service capabilities, positions us well for future growth. Looking ahead, we are focused on expanding into new markets such as sterile processing, laboratories, and dental practices where we see clear opportunities for our products. Additionally, we are actively exploring partnerships that will allow us to offer solutions for emerging issues like nano and microplastic contaminations. As of September 30, 2024, our cash and cash equivalents stood at $2.5 million. This is down from $4.3 million at the end of 2023. This reduction is primarily due to operating losses in the first half of 2024, payments of annual employee bonuses, and an inventory investment in Q1. Despite this decrease, we remain committed to maintaining financial discipline while pursuing strategic growth opportunities at the same time. In conclusion, Q3 marks a pivotal point for Nephros as we enter a new phase of profitability and operational excellence. We are excited about the future and we remain focused on delivering strong results for our stakeholders. I want to thank our investors, partners, and employees for their continued support. We look forward to building on this momentum in the coming quarters. I will now turn the call over to our CFO, Judy Krandel for a detailed discussion on our financial performance. Judy?

Thank you, Robert. I'm pleased to provide an overview of our financial performance for the third quarter of 2024. Our third quarter net revenue was $3.5 million, down 6% compared to the third quarter of 2023. As Robert alluded, this decrease reflects the decline in programmatic revenue, partially offset by an increase in emergency response revenue. The decline in programmatic revenue reflects underperformance in one region and a few of our larger accounts showing slower order patterns. Our gross margin for the third quarter of 2024 increased to 61% versus 59% in the prior year period, reflecting improved terms with our largest supplier. As Robert mentioned, we achieved positive net income of approximately $200,000 in the third quarter of 2024 versus a net loss of $180,000 in the prior year period, reflecting the improved gross margins this year and a tight control of expenses. This is primarily due to reduced SG&A expenses which declined by 19%, driven by lower stock compensation, lower bonus accruals, and lower sales commissions. Adjusted EBITDA improved to $295,000 in the third quarter of 2024, from $11,000 in the prior year period. Looking at the nine months ending September 30, 2024, sales declined by 6% to $10.3 million from $11 million in the prior year period, but excluding emergency response revenue, sales increased by 3%. Gross margins improved to 61% in the first nine months of 2024 from 58% in the prior year period, reflecting improved pricing from our largest supplier as well as reduced shipping expenses. SG&A expenses decreased by 11% in the nine months of 2024 versus the prior year period due to a decrease in bonus accruals, sales commission expense, stock compensation expense, and travel expenses; this was offset in part by an increase in salary expense. Net loss decreased 70% to a loss of $275,000 in the first nine months of 2024 from a loss of $921,000 in the prior year period. Adjusted EBITDA for the nine-month period improved to $67,000 from a loss of $25,000 in the prior year period. Our balance sheet remains strong with a cash balance of approximately $2.5 million as of September 30, 2024. This is a decrease from $4.3 million at the end of 2023, mainly due to increased inventory and accounts receivable and the payments of annual bonuses as well as a decline in accounts payable simply due to timing of payments. Despite these changes, we continue to operate debt-free, providing us with flexibility to invest in growth initiatives. Looking to the future, we are focused on maintaining financial discipline while strategically investing in areas that will drive long-term value. This includes optimizing our product pricing, improving operational efficiencies, and exploring strategic opportunities for expansion. I will now turn the call to Robert for some concluding remarks. Robert?

Thank you, Judy. As we move forward, Nephros is well positioned to continue its growth trajectory by focusing on innovation, customer engagement, and strategic expansion. We remain committed to providing high-quality water filtration solutions that meet the evolving needs of our customers. I want to extend my gratitude to our investors, partners, and the entire Nephros team for their continued support and dedication. We look forward to sharing more updates on our progress in the coming quarters. This concludes our formal presentation. We will now open the floor for questions. Operator, please open the call for Q&A.

We will now begin the question-and-answer session. The first question comes from Jeremy Pearlman with Maxim Group. Please go ahead.

Hi. Good afternoon. Thank you for taking my question. I'm on the line for Anthony Vendetti. Just you mentioned on the call that you are planning to strengthen your customer engagement to try and get back some of those reordering from the larger customers. Maybe you could talk a little bit to how you plan on doing that? What are some of your strategies for that?

Sure. Thank you for that question. The reorder, or what we call programmatic business, the filters that we sell often have a three-month or a six-month replacement cycle, and customers are prompted to replace them. Usually, that happens at a regular pace. What we've noticed through analysis is that customers are letting those six-month filters last longer. By emphasizing to the customer that using the product off-label and beyond its FDA-cleared amount of time makes them non-compliant, we can engage with their infection control departments to encourage compliance. Often, this is not intentional; they just forget. So, we're employing online tools to send automated reminders to customers, notifying them when it's time to change their filters and update their orders. Additionally, we're now offering more services to handle this for them if they lack manpower. By coupling this service with the sale of our filters on a contractual or long-term basis, we'll be able to help recover and prevent filters from being used longer than they should be used. It took us longer than expected to implement these technologies and prepare the company to support these service-type requests.

Yes. So I think that also might have answered my next question, just to confirm. So you mentioned is that online filter tracker that you think that a beta testing in the first quarter that ties into this. That's going to be something that automatically will send alerts to customers that their filter is expiring in a month and then has expired and they should reorder, that goes hand in hand?

Correct. Correct. We were pretty far down the path of a solution and had some hiccups from a technology perspective, so we pivoted midway through and we're testing a new version of it—2.0—and we're very happy with how that's working out. This will be the solution we'll focus on rolling out to the field. But it does take some time to ensure that it works before we get it fully deployed to avoid any recalls. So far, we're very pleased.

Do you have a rough estimate of when you think that would be rolled out to all your customers? Is that at the end of the year or sometime in maybe the first half of 2025?

Yeah, I think we're still aiming for Q1 next year, as mentioned previously. We've already started rolling it out to customers, beta testing it, and ensuring everyone is happy with it. So it's right on schedule.

Okay. Great. And then just my last question is related to that new HydroGuard UltraFilter. You put out a press release recently. What's the target market for that, and how do you think that fits in with the rest of your portfolio? Is that complementary? Or is that a totally new addressable market?

Well, it's complementary. It's somewhat new too. We've had opportunities for sterile processing and basically higher flow situations where we couldn't reach with the existing product portfolio. This opens up a bigger market and some of the newer markets covered under ST108, which are becoming more prevalent today. We're very excited about what that can do for us. We've been able to satisfy that need in the past creatively, but it put us at somewhat of a deficiency by the time we came up with a custom solution. This product allows us to compete more effectively and readily with a product that's designed for that particular application, which is quite advantageous for us.

Okay. Great. That's great. I'm going to hop back into the queue, and thank you again for taking my questions.

Thanks.

The next question is from Ankur Sagar, he is a private investor. Please go ahead.

Hey, good afternoon, Robert and Judy. Thank you for taking my questions. Nice job on the profitability. I think that just shows the strength of the operating model and what's visible with higher revenue numbers. So that's great. On the revenue side, can you separate out in terms of if the programmatic business also declined and what that decline was? And also, I think you called out a couple of reasons, the South Central region not performing in the reorders. If you could just list out the things that you're doing to stop that decline?

Sure. I'll go into detail and hopefully answer the question. Programmatic sales, which I mentioned previously, have declined compared to the same quarter last year. The third quarter last year was one of the highest quarters on record. Coming close to that isn't too shabby of an achievement. However, it is lower than what we would expect at the same quarter in 2024. It is a cyclical product with a six-month replacement cycle. Based on ordering patterns, you often have a slower month followed by a bigger month. The third quarter of 2023 was $3.7 million, which was a very high quarter. We did increase, I believe, 6% over the prior quarter. So, while the results may not be as high as expected, I'm quite pleased with the trajectory. Regarding declines in some regions and customers, it’s limited to a few customers. We’ve noticed that a couple of them are burning down excess inventories and looking to reduce that; thus, you will see a potential increase in ordering patterns soon. I don’t anticipate losses to competitors or people abandoning the Nephros solution entirely. Overall, there are no significant concerns; it seems to be a matter of timing and inventory reduction.

I see. Okay. That's great. It's not calling out names, Robert, but I saw—it's in the news. Recently, there was a facility here on the East Coast, which had a regional outbreak; a few people died, and then there was a lawsuit against that. So, it's strange to see, where these facilities could be just staying compliant with this filtration and save lives, but they're not. I think that goes to your response regarding the programmatic business. I think you mentioned launching this digital filter. In the press release, I think you also mentioned you're handling this service model where you have some full-service customers as well, where your team or partners change the filters. If you could elaborate on that, it seems like something that might tackle the programmatic side quickly.

Yes. Speaking directly, I think there are two questions embedded here. The first is about the service arm, which is one capability we haven’t fully executed in the recent past. Having a team that can not only sell the filter but also track and exchange it is crucial. Many entities we talk to do not have staffs ready to change the filters, and when they do, they may not follow the correct sanitization procedures, effectively undermining the utility of the new filter. Having our team perform the service and ensure compliance is vital, as this aids in regular maintenance and performance verification. Thus, we aim to develop and build the internal capacity as well as our third-party network to support those service opportunities effectively.

Okay. Just one last one. I think Robert, coming into 2024, you had some higher expectations for growth. Obviously, that didn't pan out. If you could probably comment on the top three initiatives that you're focusing on from a growth perspective, that would be great. And just one last part on this question for Judy. Any revenue growth that happens, should we expect that it drops to the bottom line and increases profitability?

I'll try to address that. When you say we did not meet expectations, I've learned that there are two sources of revenue we often discuss: programmatic and emergency response. The part we can control daily—our core efforts—are in programmatic business, and those sales have been steadily increasing, although at a slightly lower trajectory this past quarter than expected. However, I’m not disappointed overall. In contrast, the emergency response part has been less favorable; however, this is outside of our control. Therefore, it would be more beneficial to evaluate our core programmatic business as a measure of how well we are performing. I will point out three growth initiatives aimed at enhancing numbers for the upcoming year. The first is improving service levels to monitor same-site filter changes regularly. Secondly, our digitization efforts for tracking filter status, performance, and needs will generate valuable analytics. Thirdly, we want to explore beyond patient care. Areas such as airports, cruise ships, large office buildings, and correctional facilities that require attention to contaminants also pose opportunities. We aim to enhance our services in these other markets steadily.

Okay. Thank you for that. Yes, I appreciate your question. We, of course, have strong gross margins and we believe we can grow sales faster than expenses. Every incremental dollar of sales is expected to impact the bottom line positively. However, it's important to note we did have lower sales commissions and bonus accruals this year than planned due to unmet sales expectations. We do not foresee this trend continuing into next year. We expect to return to full commissions and bonuses, which are variable, and still anticipate increased profitability as sales grow.

I can add to that. As mentioned, when discussing growth expectations, I want to clarify that programmatic sales have increased steadily. Our emergency response sales are less predictable and sometimes disappointing, but the programmatic business remains a solid foundation. I see three initiatives driving growth: enhancing service capabilities for timely filter replacements; advancing our digital tracking efforts; and pursuing opportunities beyond traditional markets such as hospitals. We're also focusing on branding and communication to effectively reach these sectors and generate new sales opportunities.

Okay, great. Thank you for taking my question.

The next question is from Ralph Weil with R. Weil Investment Management. Please go ahead.

Good afternoon to both of you. You've talked in the past about ASHRAE and that it has suggested regulations. Then you mentioned having more enforcement of the regulations. Where do you stand, and what do you see regarding ASHRAE regulations as they affect Nephros? A second question: you've talked a lot about the numbers, and I know you've touched upon the newer areas you're exploring. Could you possibly be more specific about what you're doing and where you stand with those initiatives?

Okay. I'll try to answer the first one. As for ASHRAE 514 and ST108, these regulations are encouraging clients to form water management committees and emergency response plans to effectively manage pathogens during problematic situations. This has caused organizations in areas like Ohio to revisit compliance to maintain hospital accreditation. We noticed a rebound towards the end of Q3 when entities began to pay more attention to these regulations and actively sought solutions. We are receiving inquiries and fulfilling these needs in response to the heightened awareness, which is exciting. Furthermore, I see similar trends in New Jersey with newly implemented regulations. The pace of compliance may vary, with many facilities having extensive grace periods of time to adhere to these standards, but we anticipate more interest in our solutions as these deadlines approach.

Yes. Could you elaborate on the newer initiatives you have, whether it be in dental, instruments, or nano and microplastics? What progress are you making, and how significant might it be for the company?

Investors are curious about our future and growth prospects. That’s why you're seeing an uptick in our press releases, including the recent one about HydroGuard. The product is geared toward markets that align with upcoming regulations. We've also shared information on our disaster recovery solutions. We are engaging with potential customers who, until recently, may have been unaware of Nephros and looking for robust emergency responses. Our goal is to convert these new emergency response clients into programmatic customers. Expect more informative press releases outlining our growth areas to emerge as we approach the coming weeks and months. We're ramping up our R&D pipeline to accelerate the development of new products that meet market needs.

Could you comment about the commercial beverage business? What's the status and any planned changes to accelerate growth?

The commercial beverage business, as highlighted in early Q1 last year, had significant plans and ambitious goals, but those did not materialize. We are still actively engaged in that space, rolling out through partners to reach various clients. Although we're not witnessing the desired acceleration in growth, it was never intended to constitute a major chunk of our operations. The partnership remains strong, and we're continuously seeking additional opportunities for expansion.

Okay. Thank you.

Thank you.

This concludes our question-and-answer session. This also concludes our conference. Thank you for attending today's presentation. You may now disconnect.