Nephros, Inc. (NEPH) Earnings Call Transcript & Summary

Good afternoon, and welcome to the Nephros Inc. Fourth Quarter 2022 Financial Results Conference Call. [Operator Instructions] 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 CCG 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 metals. I encourage you to review FS' 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 anemic, Nephros' ability to successfully timely and cost effectively market and sell its products and service offerings; the rate of adoption of these products and services by hospitals and other health care providers; the success of its commercialization efforts and the effect of existing 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 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 from Nephros. After a very challenging first half of the year, we established a target of cash flow breakeven by midyear 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 head count and other expense reductions, the disposition of our pathogen detection systems or PDS business segment and 2 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 [ Ather ] 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 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 adopted. Accordingly, the SRP Board of Directors recently determined subject to the approval of SLP stockholders to wind down SRP's operations and liquidate its remaining assets. Nephros expect to reevaluate 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 prior year. Net consolidated loss for the quarter was $0.7 million, equivalent to that of the fourth quarter of Q4 of 2021. Net consolidated loss for the year was $4.3 million compared with $2.8 million in 2021. I 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%. We Consolidated research and development expenses in the quarter was $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. We -- our cash balance on December 31, 2020, 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 through 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.

[Operator Instructions] Our first question is from Anthony Vendetti with Maxim Group.

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 role? And how 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 of filtration to commercial filtration to focus in on a tighter set of products that are -- that use our highest quality products that are all certified that have a clear and standardized way of communicating their benefit and so forth. So it's -- it's been quite an effort. We've been quiet about it, but that effort is now rolling out in the States. Did that answer your question, Anthony?

Yes. And even with this agreement, your -- 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 2 ways. One, they get a discount just like any other distributor on our filth, 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 -- they -- by adding the exclusive filter relationship with Nephros, they have 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?

1,394.

The next question is from [ Robert Smith from the Center of Performance Investing ].

Could you kind of discuss the growth drivers as you see it going forward?

I can. Thanks for asking. -- there really are a few. There's really just a very concentrated number of them. Number one, the growth driver is we have had too few people in the field to respond properly to all of the opportunity that's in front of us. We have now doubled the size of our sales force. We're still a small company, a small sales force, but we have additional feet on the street and the ability to the pavement and to not only respond to new -- to incoming requests, but also to develop more on our own. We have the relationship with Donastar, which will bring us into the food and beverage space and the hospitality space, which is what they do, and I think that will drive. I think we will also have drivers environmentally in the increasingly stringent and strict regulations that are prevalent in the medical field, which we've talked about before, and we are seeing we are seeing some lift there. And while I'm not -- we're not releasing numbers for the first 2 months of the year, I am very optimistic that we are on the right track based on what I'm seeing internally. Is that helpful?

Yes. Andy, was it a surprise you the ability to get funding for that operation and shutting down? Okay, give me some more color -- give us more color on that...

Yes. It was certainly a disappointment. I'm not sure that it was surprised based on what I've seen over the last year or so. It's a tough time to be, A, a micro-cap B in the dialysis field and well, I don't have a fee right now, but it's a tough time to be looking for investment. And frankly, there is just a structural problem with the way that we reimbursed for dialysis treatment in this country where all dialysis treatments are treated equally, even if some of them are, A, more expensive and have different or perhaps better outcomes. And so while HDS is only increasing in popularity in Europe, it's going nowhere right now in the U.S., and we just hit a wall in this environment of being able to find either funding or a partner for the rollout. And so while I'm -- as I say, very disappointed, I've been with the company now for 6 years. And I came because of this of the HDF opportunity, I think that at some point, you got to say, okay, we're succeeding in the filter business -- and we're just spending money again and again and again in the -- on SRP through a loan, and I think it's just time to take a pause. So I do hope that Nephros will rekindle that technology in the future. But for right now, when we've promised all of you that we will get the cash flow breakeven around the middle of the year, I just don't think it's a time to be spending $150,000 or more a quarter. And if we want to do the rollout without funding it from the outside, it would be double or triple that. We just don't have the resources.

So what do you have to see any to regulatory to get this back?

Well... I don't think -- well, we would have to see a better opportunity to properly reimburse a higher-cost dialysis modality. Right now, it doesn't exist then since the treatment costs more, nobody is doing it. So we have no market to go into. That's the problem. We think that will change, but I said that to you all 3, 4 years ago, and I have -- we haven't seen it change yet, and we'd rather not spend money while we wait to -- for the market to change.

Yes. I guess on the run-up to this, I mean, looking back a year or so, then I didn't hold anything but this was -- was going to unfold. I mean it's just surprised...

Well, in all Canada, the -- well, I hear what you're saying. I'm sorry, that you say it's a surprise that it is a company that the SRP effort has been -- while we've been growing our best efforts after it, it has also been true that we have seen many delays and had to report significant disappointments until last May when we got the clearance, and now we're -- since that time or right about that time, we've seen the market in the medical microcap space really tank and most -- and the availability of capital, all but dry up. So -- as I said disappointed, but I'm not terribly surprised that we are to go right now.

Is there any way to capitalize upon this in the European market?

Perhaps. But we're a small company, and I think that the most important thing that we can do is focus on what we know and get ourselves to profitability and to cash flow breakeven or positive cash flow and then make decisions based on what we can afford because right now, we don't -- we're in a situation where we need to get ourselves to profitability and meet the commitment that we've made. So that's what we're working on.

The next question is from [ Joseph Schuler with JAS Investors ].

Question -- 2 questions, but one is on SRP. Just thinking on a cash flow basis, was there expense to net flows 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 adjusted 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 costs in Q2 and forward.

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 Nephros is the sole creditor of SRP. And so, what is almost certain we're going to happen is that SRP will wind down and cease to exist as a set the company and all of its assets, including those I just mentioned, will roll into Nephros. Okay.

One other…

But there won't be any cash sorry.

I understand. Revenues have been around $10 million a year for a few years. When do we get out of that -- 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. Yes. Absolutely... Absolutely. I -- we are focused on only 2 things. One is watching our cash burn and 2 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, and 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.

The next question is a follow-up from [ Robert Smith with Center for Performance Investing ].

Yes, Andy. So can you share with us the R&D budget, which is around, what, $1.5 million or so -- how is that being spent?

I don't think -- well, it's $1.5 million, including SRP and that part will go away. It's probably -- and I don't have it in front of me, but I think it's under $1 million right now on the filtration side. And the -- it's being spent on product development and making sure that we're staying current with technology and offering the best current products to our customers. So it's a -- I think it's a pretty modest budget. And it's pretty much cut as much as we can or it certainly will be at the end of this quarter when SRP goes away.

All right. And do you -- when you say it's basically refinements and are you working on anything that might be interesting not speaking about near term, but for the future?

Yes, I think we are. I do. And I can't really say very much more about it than that.

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