Nephros, Inc.

Good afternoon and welcome to the NEFROS Incorporated fourth 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 Kieran Smith, Investor Relations. Please go ahead.

Thank you. Good afternoon, everyone. This is Kieran Smith with TCG Advisory. Thank you all for participating in NEPHRO's 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 Nefros. I encourage you to review Nefros' 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 statement. 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 and sell its products and service offerings, the rate of adoption of its products and services by hospitals and other healthcare providers, the success of its commercialization efforts, and the effect of existing new regulatory requirements on Nefros' 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 NEFROS's President and Chief Executive Officer, Andy Oster. Andy, please go ahead.

Thank you, Kieran, 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 Nefros. 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 percent. I am pleased to report that our fourth quarter gross margins were 59 percent. 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 percent 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 Ather to Nefros. Of further note, as we reported last week, we established a strategic partnership with Donestar Enterprises as the exclusive master distributor of our commercial filters in the food and 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 stockholders, to wind down SRP's operations and liquidate its remaining assets. NEFROS expects to reevaluate opportunities for HDF in the future but has no immediate plans to do so. On that 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 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 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 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.