Nephros, Inc. — FY 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020; comparisons are with FY 2019. This filing reports annual results, not separate fourth-quarter figures. Nephros develops and sells water-filtration products and pathogen-detection systems and is developing a second-generation hemodiafiltration system through its majority-owned Specialty Renal Products subsidiary.
Financial performance
| Metric | FY 2020 | FY 2019 |
|---|---|---|
| Revenue | $8.561 million | $10.334 million |
| Gross profit / margin | $4.913 million / 57% | $6.084 million / 59% |
| Operating loss | $4.275 million | $3.155 million |
| Net loss | $4.526 million | $3.179 million |
| Net loss attributable to Nephros shareholders | $4.766 million | $3.420 million |
| Net loss per share, basic and diluted | $0.52 | $0.45 |
| Cash used in operating activities | $6.903 million | $2.276 million |
Water Filtration generated $8.532 million of 2020 revenue; Pathogen Detection contributed $29,000 after products launched during the year. Renal Products reported no revenue. Management said recurring revenue from existing customers rose 24%, while quarterly customer retention averaged 89%.
Financial position and liquidity
- At December 31, 2020, cash and cash equivalents were $8.249 million, working capital was $13.829 million, total assets were $18.510 million, and stockholders’ equity was $15.573 million.
- Inventory increased to $5.304 million from $2.562 million, partly reflecting purchases made to reduce potential pandemic-related supply interruptions.
- The secured note payable had $593,000 of principal outstanding, bears 8% interest, and matures April 1, 2023. The revolving credit facility was terminated in May 2020. A $482,000 PPP loan was outstanding at year-end and was fully forgiven on January 14, 2021. Equipment financing was $7,000; lease liabilities were $1.091 million.
- Financing activities provided $11.216 million, including $11.452 million in net common-stock proceeds and $479,000 in PPP proceeds. The company issued shares in February and October 2020; year-end shares outstanding were 9,873,006.
- Minimum purchase commitments, principally under the Medica supply agreement, totaled $21.7 million, including $3.9 million due within one year. Lease commitments totaled $1.231 million.
Changes, outlook, and key risks
- Revenue fell 17%, primarily attributed to COVID-19 disruptions in new-account sales, hospitality and food service, and emergency-response business. Gross margin declined by approximately two percentage points, partly due to inventory reserves. Operating and net losses widened despite lower research and development expense.
- Operating cash use rose substantially, driven mainly by inventory investment and lower revenue. Management stated that available cash was expected to fund its current operating plan for at least 12 months from the March 1, 2021 financial-statement issuance date, while cautioning that weaker demand or failure to meet plans could require spending cuts and impair growth.
- Management believes demand may benefit over the medium to long term from increased attention to waterborne pathogens, but provided no quantified revenue, earnings, or cash-flow guidance. Pandemic-related uncertainty remained, despite normal production and shipping reported at year-end.
- Growth plans include commercializing the new pathogen-detection products and advancing SRP’s second-generation HDF system. SRP’s FDA 510(k) submission was expected initially in early 2021; timing, clearance, adoption, and funding remain uncertain. Nephros had loaned SRP $1.0 million in 2020 under an agreement permitting loans up to $1.3 million.
- Material risks include a history of losses and a $132.0 million accumulated deficit; market acceptance and regulatory risks; dependence on third-party manufacturing and a key supplier; customer concentration (four customers represented 43% of revenue); and sizable purchase commitments. The company reported no pending legal proceedings and no off-balance-sheet arrangements.
- The independent auditor issued an unqualified opinion on the financial statements and reported no critical audit matters. Management concluded disclosure controls and internal control over financial reporting were effective; the auditor did not audit internal control effectiveness.
Important facts for investors to verify
- Whether revenue and recurring-customer growth recovered after pandemic-related disruption, and whether the new detection products gained commercial traction.
- Cash burn, inventory conversion, and the assumptions supporting management’s stated 12-month liquidity outlook.
- Expected purchases, demand coverage, and payment terms under the $21.7 million Medica commitment, including supplier concentration and the agreement’s remaining term.
- SRP’s FDA submission and clearance progress, remaining development costs, and repayment or other treatment of Nephros’s intercompany loan.
- The effects of 2020 equity offerings and outstanding options and warrants on future dilution; also consider Wexford’s reported approximately 38% ownership as of March 1, 2021.