Nephros, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Unaudited results; financial amounts below are in millions unless otherwise noted. Nephros develops water filtration and pathogen-detection products and, through Specialty Renal Products (SRP), a hemodiafiltration system.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $2.121 | $3.095 | $6.227 | $7.173 |
| Gross margin | $1.225; 58% | $1.819; 59% | $3.611; 58% | $4.184; 58% |
| Operating loss | $(0.932) | $(0.695) | $(3.556) | $(2.864) |
| Net loss | $(1.012) | $(0.744) | $(3.767) | $(3.035) |
| Net loss attributable to Nephros shareholders | $(1.072) | $(0.804) | $(3.946) | $(3.215) |
| Loss per share, basic and diluted | $(0.12) | $(0.10) | $(0.44) | $(0.43) |
Q3 revenue was entirely in Water Filtration; Pathogen Detection had no Q3 revenue. For the nine-month period, Water Filtration generated $6.199 million and Pathogen Detection $28,000; Renal Products had no revenue.
Liquidity, cash flow and debt
- At September 30, cash was $5.155 million, working capital $9.376 million, total assets $15.242 million and total liabilities $3.802 million. Inventory was $5.385 million, up from $2.562 million at year-end 2019.
- Nine-month operating cash use was $5.377 million, versus $2.640 million a year earlier. Investing cash use was $239,000; financing provided $6.601 million. Cash increased $989,000 to $5.155 million.
- Debt included $652,000 of secured note principal and a $481,000 PPP loan; the revolving facility was terminated in May with no balance outstanding. Equipment financing was $8,000. Lease liabilities totaled $1.172 million and are separate from these borrowings.
- Financing included $6.8 million net proceeds from a February stock offering and $479,000 of PPP proceeds. On October 20, after quarter-end, a registered direct offering generated $4.7 million net proceeds from 833,333 shares.
Material changes and management commentary
- Q3 revenue fell 31% year over year, which management attributed primarily to pandemic-related customer deprioritization of waterborne-pathogen prevention and lower hospitality and food-service demand. Nine-month revenue declined 13%; management cited weaker demand in Q2 and Q3, partly offset by stronger Q1.
- Gross margin declined one percentage point in Q3, principally from $100,000 of inventory expiration and adjustments; nine-month margin was unchanged year over year. Q3 operating loss widened despite lower selling, general and administrative expenses. For the nine months, SG&A rose 9%, while R&D fell 8% as HDF development neared regulatory submission and pathogen detection moved toward commercialization.
- Management said operations and supply shipments continued, but it increased inventory purchases to hedge against possible Italy-based supply interruptions. The inventory build was the principal driver of higher operating cash use.
- Management believes available cash, including the subsequent October offering, will fund the current operating plan for at least 12 months from the financial statements’ issuance date. This outlook is subject to uncertainty: prolonged weak demand could require cost cuts, accelerate cash depletion or make additional financing difficult or dilutive. The company has incurred recurring losses and expects further losses.
- SRP had used its original $3.0 million outside investment. Nephros agreed in October to provide up to $1.3 million of operating funding, including $0.8 million already advanced, to support the planned FDA 510(k) submission of its second-generation HDF system near year-end 2020. Submission and clearance are prospective, not assured.
- Other notable items: a $229,000 noncash gain from the fair-value change in Aether acquisition contingent consideration; an October amendment provided for a $100,000 lump-sum settlement, with approximately $94,000 expected from escrow. Medica purchase commitments totaled about €4.5 million (approximately $5.0 million) at quarter-end. Three customers represented 41% of Q3 revenue.
No specific revenue or earnings guidance was provided. The company accelerated the SequaPath launch and launched DialyPath in October 2020; neither had established material revenue in the reported period. Disclosure controls were concluded effective, and management reported no material quarterly change in internal control over financial reporting.
Most important facts for investors to verify
- Whether water-filtration demand recovers from COVID-19-related weakness and whether customer concentration remains significant.
- Cash burn, inventory conversion and product expiration risk, especially given the large inventory increase and substantial Medica purchase commitments.
- Whether the stated 12-month liquidity outlook remains supportable, including the impact of the October offering, ongoing losses and SRP funding.
- Timing and outcome of the HDF FDA submission and clearance, and commercial adoption and revenue generation for pathogen-detection products.
- Final treatment of the PPP loan, including eligibility for forgiveness, and completion of the Aether contingent-consideration settlement.