NEPH - NASDAQ

Good afternoon, and welcome to the Nephros Inc. Fourth Quarter 2022 Financial Results Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Kirin Smith, Investor Relations. Please go ahead.

Thank you. Good afternoon, everyone. This is Kirin Smith with PCG Advisory. Thank you all for participating in Nephros' fourth quarter and fiscal year 2022 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' 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, 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 contents of this conference call contain time-sensitive information that is accurate only as of the date of the live call today, March 8, 2023. 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' President and Chief Executive Officer, Andy Astor. Andy, please go ahead.

Thank you, Kirin, and good afternoon, everyone, and welcome to the call. I'm very pleased to report and to comment on our fourth quarter and year-end results, which reflects continuing positive trends, both in leading growth indicators and in cash usage. 2022 was a year of refocusing and rebuilding for Nephros. After a very challenging first half of the year, we established a target of cash flow breakeven by mid-year 2023, coupled with significant revenue growth by that same time. As we noted in our press release today, I am pleased to say that we are making good progress on both fronts. I'll talk about each one. In our efforts to achieve cash flow breakeven, we took multiple actions. These included broad headcount and other expense reductions, the disposition of our pathogen detection systems or PDS business segment and two price increases during the year, which were intended to return us to target gross margins of 55% to 60%. I am pleased to report that our fourth quarter gross margins were 59%. Additionally, we reduced our net cash usage from $2.8 million in the first half of 2022 to $0.5 million in the second half of the year, an 80% improvement. Turning our attention to revenue growth. We took several actions, including a restructuring of our sales organization, the doubling in size of our sales team and the relaunch of our commercial filtration business, which included a rebrand of our commercial filter products from Aether to Nephros. Of further note, as we reported last week, we established a strategic partnership with Donastar Enterprises, as the exclusive master distributor of our commercial filters in the food & beverage and hospitality markets. We anticipate realizing further cost savings in the second quarter of this year due to the planned cessation of operations by our majority-owned subsidiary, Specialty Renal Products or SRP. In February 2023, SRP management unsuccessfully concluded its efforts to identify a strategic partner to support a commercial launch of SRP's second-generation HDF product and/or to identify potential additional investment that would allow SRP to fund the launch itself. SRP's capital resources are now nearly exhausted. Accordingly, the SRP board of directors recently determined, subject to the approval of SRP’s stockholders, to wind down SRP’s operations and liquidate its remaining assets. Nephros expects to re-evaluate opportunities for HDF in the future but has no immediate plans to do so. I'll now turn to our financial results for the quarter and year ended December 31, 2022. We reported fourth quarter net revenue of $2.6 million, a 6% decrease over prior year and full year revenue of $10 million or $10.0 million, a 2% decrease over the prior year. Net consolidated loss for the quarter was $0.7 million, equivalent to that of the fourth quarter or Q4 of 2021. Net consolidated loss for the year was $4.3 million compared with $2.8 million in 2021. Consolidated adjusted EBITDA in the quarter was negative $0.5 million compared with $0.1 million negative in 2021. Consolidated adjusted EBITDA for the year was negative $2.4 million compared with negative $1.6 million in 2021. Consolidated gross margins in the quarter were 59% compared with 54% in 2021. Consolidated gross margins for the year were 47% compared with 55% in 2021. And as I said earlier, we do expect future gross margins to continue in the range of 55% to 60%. Consolidated research and development expenses in the quarter were $0.4 million compared to $0.3 million in 2021. Consolidated research and development expenses for the year were $1.3 million compared with $1.5 million in 2021. Consolidated sales, general and administrative expenses in the quarter were $1.8 million, no change from Q4 2021. Consolidated sales, general and administrative expenses for the year were $7.6 million compared with $7.2 million in 2021. Cash used in operating activities was $202,000 compared with $336,000 in Q4 of 2021. Our cash balance on December 31, 2022, was $3.6 million, and we reassert our belief that current cash balances will 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 will be found in our filing on Form 10-K, which we plan to file later this month. This concludes the financial discussion. As always, I would like to thank each of our Nephros 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 believe our continued dedication to growth and expense management have well positioned the company for future long-term success. This concludes our formal presentation remarks. We will now take questions from the audience. Gary, will you please open the call for questions. Thank you.

Thanks, Andy. So on the Donastar Enterprises agreement as your exclusive distributor outside of health care. Were there any companies or clients you were speaking with that you now are handing over to them? Or is there a pipeline that they have or funnel that they're already looking at? And then just how does that agreement work and how do they get paid going forward? And then any update on Chipotle? And does this have any impact on that? Or is that - it's just the go-forward business?

Okay. Thanks, Anthony. Good to hear your voice, and congratulations on your news at Maxim. Let's see. First of all, it is not exclusive outside of health care. I just want to make sure that we're clear. It's exclusive within the food and beverage and hospitality space. There are other nonmedical spaces that they do not have an exclusive with, although we will be partnering very, very closely together as close partners. In terms of the pipeline, the answer to your question is both. They both are bringing their own pipeline and their own network and their own relationships into the partnership, and they are also taking over all of the management from a sales and service perspective of our existing customers as well. So it's really both. Chipotle, as you said, is one of our customers, and Donastar is deeply involved with them, and that will continue, and that's going very well. But I expect that we'll be adding other companies, customers to the roster in the near future. We've got a lot of energy going into the Donastar relationship, as well as the relaunch that I mentioned because we really did not just change our marketing and distribution strategy. We really relaunched the whole offering filtration to - of commercial filtration to focus in on a tighter set of products that are - that use our highest quality products that are - that are all certified that have a clear and standardized way of communicating their benefit and so forth. So it's been quite an effort. We've been quiet about it, but that effort is now rolling out in states. Did that answer your question, Anthony?

Yes. Thank you. And even with this agreement, you - it sounds like you're still targeting 55% to 60% gross margin. So it seems like a win-win for you in terms of the relationship with Donastar?

Yes, I think so. Thankfully, they will be - when you asked how they get compensated, they are - they really get compensated in two ways. One, they get a discount just like any other distributor on our filters, although they have the exclusive in these markets. And then the second way, of course, is that they are a company with tremendous reach, over 1,000 service people in the field around the country. And so they get - by adding the exclusive filter relationship with Nephros, they have a product that helps them sell not only filters, but the services that go with them. And so it's a win-win for everybody.

Okay. Great. Great. And then just switching gears. How many - at the end of the fourth quarter, how many active customer sites do you have now?

1394.

Excellent. Okay. Good. Let me hop back in the queue. Thanks so much, Andy. Appreciate it.

Okay, you bet. Thanks, Anthony.

Thank you, Robert.

The next question is from Joseph Schuler with JAS Investors. Please go ahead.

Hello. Question – two questions, but one is on SRP. Just thinking on a cash flow basis, was there expense to metros [ph] in the last couple of years, obviously, the initial investment, but was there an expense in addition to that, where that might be eliminated going forward?

Absolutely. SRP exhausted - its exhausted its funds. Nephros agreed to lend it up to $1.3 million that loan balance is now close to 1.5. And we've been funding SRP at a rate of about $150,000 a quarter, $150,000 to $200,000 a quarter. And so that will now come right out of our expenses, and I expect that Q2, just like with PDS, we were able to remove 300,000 or so of cost, I expect to remove about 150,000 or so - of cost in Q2 and forward.

Thank you. Just since you mentioned that the $1.5 million or whatever that number is, what is the -- what is Nephros standing and list of creditors to the degree there is anything left? Or do you feel there's nothing left on that? In other words, where is it a loss? Or is it - do you think the funds can come back in?

No. It's on there...

Okay...

Yes, there is no - there are virtually no assets except, of course, the technology, the IP, the machines, which - and so all of that and Nephros is the sole creditor of SRP. And so what is almost certainly going to happen is that SRP will wind down and lease to exist as a separate company and all of its assets, including those I just mentioned, will roll into Nephros.

Okay. One other question...

But there won't be any cash, sorry.

I understand. Revenues have been around $10 million a year for a few years. Where do we get out of that, is it - do you see that as wherever it might come from? Do you see that as a possibility in the coming year?

Do I see growth from that $10 million of possibility? Yes. Absolutely, absolutely. I - we are focused on only two things. One is watching our cash burn and two is growing that number. And so the only place that we're investing right now is in our sales team and our sales capability. And as I said, we're not discussing our results in Q1 yet, but the first few weeks of the year are - have been promising to me. And so I do expect to see that number growing this year.

Good luck going forward. We're rooting for you.

Thank you, Joe. All right. Take care.

Thanks, Robert. You bet.