Business Context and Reporting Period
Company: Nephros, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2008
Business Overview: Nephros develops hemodiafiltration (HDF) products for End Stage Renal Disease (ESRD) and water filtration systems. Key products include the OLpūr MDHDF Filter Series and the Dual Stage Ultrafilter (DSU). The company is a smaller reporting company and has incurred significant losses since inception.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2008 | Nine Months Ended Sep 30, 2008 | Balance Sheet (Sep 30, 2008) |
|---|---|---|---|
| Net Product Revenues | $393,000 | $1,033,000 | - |
| Gross Margin | $139,000 (35.4%) | $379,000 (36.7%) | - |
| Net Loss | ($1,346,000) | ($5,430,000) | - |
| Net Loss Per Share (Basic/Diluted) | ($0.04) | ($0.14) | - |
| Cash and Cash Equivalents | - | - | $3,745,000 |
| Total Assets | - | - | $5,328,000 |
| Total Liabilities | - | - | $1,922,000 |
| Stockholders' Equity | - | - | $3,406,000 |
| Accumulated Deficit | - | - | ($87,042,000) |
Cash Flow (Nine Months Ended Sep 30, 2008):
- Net cash used in operating activities: ($4,329,000)
- Net cash provided by investing activities: $4,630,000 (primarily from sale of auction rate securities)
- Net cash provided by financing activities: $11,685,000 (proceeds from private placement of convertible securities)
Material Changes vs. Prior Period
- Revenue Growth: Net product revenues increased 251% for the quarter and 37% for the nine-month period compared to 2007. Growth was driven by increased sales of OLpūr dialyzers in Europe and new revenue from a U.S. Defense Department project.
- Operating Expenses: Research and development (R&D) expenses increased 88% year-over-year for the nine-month period, primarily due to the cost of a clinical trial completed in Q2 2008. Selling, general, and administrative (SG&A) expenses decreased 12% for the quarter due to reduced legal fees but increased 4% for the nine-month period due to marketing investments.
- Debt Status: The company incurred no interest expense in 2008 as all debt securities were converted to equity in the fourth quarter of 2007. In 2007, interest expense was approximately $149,000 for the quarter and $317,000 for the nine months.
- Investment Activity: The company sold its auction rate securities (ARS) in July 2008 for $4.1 million, resulting in a realized gain of $114,000. This contrasts with 2007, where the company purchased ARS.
Guidance, Outlook, Risks, and Unusual Items
Management Commentary and Outlook:
Management expects to continue incurring losses in the short term. Profitability depends on substantially increasing revenue and maintaining positive gross and operating margins. The company has submitted a 510(k) application to the FDA for its OLpūr H2H module and MD 220 filter (November 2008) and is actively qualifying distributors for its DSU water filtration system.
Unusual Items:
- Executive Transition: On September 15, 2008, Norman J. Barta resigned as CEO and Chairman. Ernest A. Elgin III was appointed CEO and President. A separation agreement with Mr. Barta includes a six-month salary continuation and a $18,000 bonus.
Risks and Contingencies:
- Listing Compliance: The company received notice from the NYSE Amerinext U.S. (AMEX) on September 12, 2008, of non-compliance with continued listing standards due to stockholders' equity falling below $6,000,000 (equity was $3,406,000 at period end). A compliance plan was submitted in October 2008, but delisting remains a risk if compliance is not regained.
Investor Verification Checklist
- AMEX Compliance Status: Verify the outcome of the compliance plan submitted to the NYSE Amerinext U.S. to assess delisting risk.
- Regulatory Approvals: Monitor the status of the FDA 510(k) application submitted in November 2008 for the OLpūr H2H and MD 220 products.
- Cash Burn Rate: Review the sustainability of the $3.7 million cash balance given the $4.3 million operating cash burn over the last nine months.
- Internal Control Remediation: Assess progress on remediation plans for the material weakness in internal controls over financial reporting.
- Revenue Concentration: Note that Customer A accounted for 84% of sales and 77% of accounts receivable for the nine months ended September 30, 2008.