Good afternoon, welcome to the Nephros, Inc. 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 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'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 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, 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's 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 Nephros's 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 eighth, two thousand twenty-three. 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. 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, 2 price increases during the year, which were intended to return us to target gross margins of 55%-60%. I'm 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 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.
Nephros expects 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 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 -$2.4 million, compared with -$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. As I said earlier, we do expect future gross margins to continue in the range of 55%-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. 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.
We will now begin the question-and-answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. Our first question is from Anthony Vendetti with Maxim Group. Please go ahead.
Thanks, Andy. On the Donastar Enterprises agreement as your exclusive distributor outside of healthcare, were there any companies or clients you were speaking with that you now are handing over to them? Is there a pipeline that they have or funnel that they're already looking at? Just how does that agreement work and how do they get paid, you know, going forward? Any update on Chipotle and how if 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.
Thanks.
Let's see. First of all, it is not exclusive outside of healthcare. I just wanna make sure that we're clear. It's exclusive within the food and beverage and hospitality space. There are other non-medical spaces that they don't, 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 to of our existing customers as well. 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 it's going very well. 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. We really did not just change our marketing and distribution strategy. We really relaunched the whole offering of filtration or 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.
It's been quite an effort. We've been quiet about it, but that effort is now rolling out in spades. Did that answer your question, Anthony?
Yes. Thank you. Even with this agreement, you're, it sounds like, you're still targeting 55%-60% gross margin. It seems like a win-win for you in terms of the relationship with Donastar.
Yeah, I think so. You know, thankfully, they will be... You asked how they get compensated. They really get compensated in 2 ways. One, they get a discount, just like any other distributor on our filters, although they have the exclusive in these markets. 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. They, 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. It's a win-win for everybody.
Okay, great. Great. Then just switching gears, At the end of the fourth quarter, how many active customer sites do you have now?
Um, thirteen hundred and ninety-four.
Excellent. Okay, good. Let me hop back in the queue. Thanks so much, Andy. Appreciate it.
Okay, you bet. Thanks, Anthony.
If you have a question, please press star then one. Please stand by as we poll for questions. The next question is from Robert Smith from the Center of Performance Investing. Please go ahead.
Hi, Andy.
Hey, Robert.
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 pound 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. 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 some lift there. While 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?
Yeah. Andy, was it a surprise to you the inability to get funding for that operation and it's shutting down?
Um.
Okay. Give it some more color on that.
It was certainly a disappointment. I'm not sure that it was a surprise based on what I've seen over the last year or so. It's a tough time to be, A, a microcap, B, in the dialysis field. Well, I don't have a C right now, but it's a tough time to be looking for investment. Frankly, there is, you know, just a structural problem with the way that we reimburse for dialysis treatment in this country, where all dialysis treatments are treated equally, even if some of them are, A, more expensive and B, have different or perhaps better outcomes. While HDF is only increasing in popularity in Europe, it's going nowhere right now in the US.
We just, you know, we just hit a wall in this environment of being able to find either funding or a partner for the rollout. While I'm, as I say, very disappointed, I've been with the company now for six 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 are, we're just spending money again and again and again in the SRP, on SRP through a loan, and I think it's just time to take a pause." I do hope that Nephros will rekindle that technology in the future.
For right now, when we've promised, all of you that we will get to cash flow breakeven around the middle of the year, I just don't think it's the time to be spending $150,000 or more a quarter. If we wanna do the rollout without funding it from the outside, it would be, you know, double or triple that. We just don't have the other resources.
What do you have to see, I mean, regulatory to get this back?
Well, we would have to see a better opportunity to properly reimburse a higher cost dialysis modality. Right now it doesn't exist, and since the treatment costs more, nobody's doing it, so we have no market to go into. That's the problem. We think that will change, but, you know, I said that to you all 3, 4 years ago, and we haven't seen it change yet, and we'd rather not spend money while we wait for the market to change.
Yeah. I guess on the run up to this, I mean, looking back, a year or so, I mean, I didn't have an inkling that this was, what was gonna, you know, unfold. I mean, it's a surprise to me.
Well, it all came. Well, I hear what you're saying. I'm sorry it's, you know, that you say it's a surprise. It is a company that it, you know, the SRP effort has been while we've been, you know, throwing our best efforts after it has also been true that we have seen many delays and, you know, had to report significant disappointments until last May when we got the clearance. Now we're, you know, 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.
You know, as I said, I'm disappointed, but I'm not terribly surprised that we are where we are right now.
Is there any way to capitalize upon this in the European market?
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. Right now we don't... You know, we're in a situation where we need to get ourselves to profitability, and meet the commitment that we've made. That's what we're working on.
Yeah, I hear you. All right. Thanks. Wish you good luck.
Thank you, Robert.
The next question is from Joseph Schuler with JAS Investors. Please go ahead.
Hello there. Question, 2 questions, but one is on SRP. Just thinking on a cash flow basis, was there expense to Nephros in the last couple of years? Obviously the initial investment, but, was there an expense in addition to that where, you know, that might be eliminated going forward?
Absolutely. SRP exhausted its funds. Nephros agreed to lend it up to $1.3 million. That loan balance is now close to $1.5 million. We've been, you know, funding SRP at a rate of about $150,000 a quarter, $150,000-$200,000 a quarter. That will now come right out of our expenses. I expect that Q2, just like with PDS, we were able to remove $300,000 or so of costs. I expect to remove about $150,000 or so of costs in Q2 and forward.
Thank you. Well, just since you mentioned that, the one and a half million or whatever that number is, what is Nephros standing in list of creditors to the degree there is anything left? Do you feel there's nothing left on that? In other words, where is.
Yeah.
Is it a loss or do you think funds can come back in?
No, it's a loss.
Okay.
There are. Yeah, there are virtually no assets except of course, the technology, the IP, the machines, which, you know. All of that at Nephros is the sole creditor of SRP.
Mm-hmm.
What is almost certainly going to happen is that SRP will wind down and cease to exist as a separate company and all of its assets, including those I just mentioned, will roll into Nephros.
Okay, one other question.
There won't be.
Yeah.
There won't be any cash. Sorry.
I understand. Revenues have been around $10 million a year for a few years. You know, where do we get out of that, you know, 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 a possibility?
Yes. Yes.
Absolutely. Absolutely. I, we are, you know, we are focused on only two things. One is watching our cash burn, and two is growing that number. The only place that we're investing right now is in our sales team and our sales capability. As I said, we're not discussing our results in Q1 yet, the first few weeks of the year are, you know, have been promising to me. I do expect to see that number growing this year.
Good luck going forward. We're rooting for you.
Thank you, Joseph.
Okay. Later.
All right. Take care.
The next question is a follow-up from Robert Smith with the Center for Performance Investing. Please go ahead.
Andy, 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 a million and a half 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. The it's being spent on product development and, you know, making sure that we're staying current with technology and offering the best, you know, current products to our customers. You know, 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 by at the end of this quarter when SRP goes away.
All right. Do you, would you say it's basically refinements and, are you working on anything that might be interesting? Not speaking about-
We're working-
Maybe in the near term, but for the future?
Yeah, I think we are. I do. I can't really say very much more about it than that.
All right. I'll be on the lookout.
Okay.
Thanks.
Thanks, Robert. Yep, you bet.
This concludes our question and answer session. The conference is also now concluded. Thank you for attending today's presentation. You may now disconnect.