Nephros, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; unaudited. Comparisons are with Q1 2016 unless otherwise stated. Nephros sells hemodiafiltration systems and ultrafiltration products for healthcare, dialysis, and other markets. Amounts below are in U.S. dollars; financial statement figures are in thousands except per-share data.
Financial results
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Product revenue | $690 | $545 | Up $145, about 27% |
| License and royalty revenue | $44 | $45 | Down $1 |
| Total revenue | $734 | $590 | Up $144, about 24% |
| Gross profit / gross margin | $455 / about 62% | $295 / 50% | Margin up about 12 percentage points |
| Operating expenses | $1,060 | $1,101 | Down $41 |
| Operating loss | $(605) | $(806) | Improved $201 |
| Interest expense | $66 | $14 | Up $52 |
| Net loss | $(680) | $(836) | Improved $156 |
| Basic and diluted loss per share | $(0.01) | $(0.02) | |
| Operating cash flow | $(659) | $(522) | Use increased $137 |
Management attributed revenue growth primarily to higher filter unit sales. Lower cost of goods sold reflected an inventory-reserve adjustment in the 2016 period with no comparable adjustment in 2017. R&D expense fell mainly due to fewer full-time R&D employees; SG&A was broadly flat. Q1 2017 interest expense included $33 thousand of interest on the 2016 notes, $26 thousand of debt-discount amortization, and $7 thousand of interest on vendor payables.
Cash, liquidity, and debt
- Cash was $803 thousand at March 31, 2017, versus $275 thousand at December 31, 2016. Current assets were $1.928 million and current liabilities $780 thousand, implying working capital of $1.148 million based on the balance sheet.
- Cash used in operations was $659 thousand; there was no investing cash outflow. Financing provided $1.187 million, principally from equity issuance. The March private placement raised approximately $1.218 million gross and $1.074 million net of issuance costs; the company also received $113 thousand from Lincoln Park share sales.
- The balance sheet reports an unsecured long-term note payable of $864 thousand, net of discounts and issuance costs. The notes bear 11% interest, with principal due June 7, 2019. Cash paid for interest was $5 thousand.
- Management stated that cash, together with expected sales growth and the March financing, was projected to fund operations at least into 2018, conditional on product-launch timing and market acceptance. The filing nevertheless states that recurring losses and negative operating cash flow raise substantial doubt about the company’s ability to continue as a going concern.
Developments, outlook, and risks
- Product launches: FDA clearance for the EndoPur 10-inch filter was received in March 2017, with shipments expected late in Q2; 20- and 30-inch versions were expected in early August. HydraGuard shipments were expected in May, with production ramping in Q3. A flushable HydraGuard and a lead-filtration system were also planned for Q3.
- Nephros reported that Vanderbilt University began treating patients with its HDF system in early 2017. It planned to assess clinical, workflow, and economic fit over the following 12–18 months and was developing a version 2.0 intended to support manufacturing at scale and potentially lower per-treatment costs.
- Subsequent event: On May 5, 2017, Nephros amended its Medica license and supply agreement to add products using Medica’s Versatile technology, revise the licensed territory, and establish minimum annual purchases. Required purchases rise from €1.6 million in 2017 to €3.475 million in 2022. These are substantial commitments relative to the company’s reported quarterly revenue.
- Risks include continued losses and financing needs, uncertain product acceptance and launch execution, dependence on suppliers and distributors, customer concentration, regulatory and product-liability exposure, and the ability to achieve profitable sales. Four customers represented 57% of Q1 2017 sales in aggregate; one customer accounted for 25%.
- The company reported effective disclosure controls and procedures at quarter-end. Interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Reconcile the MD&A liquidity table with the balance sheet: MD&A shows working capital as “(369)” at December 31, 2016, while balance-sheet current assets of $1.264 million less current liabilities of $895 thousand imply positive working capital of $369 thousand. The MD&A table also presents stockholders’ equity as “(667)” for that date, whereas the balance sheet reports positive equity of $667 thousand.
- Assess the cash runway against ongoing operating cash use, the going-concern warning, and the timing and market acceptance assumptions underlying management’s projection into 2018.
- Evaluate the Medica minimum-purchase commitments, related financing and inventory requirements, and the company’s ability to meet those commitments while growing sales.
- Track actual shipment and sales progress for EndoPur, HydraGuard, and other announced product launches, and the HDF system’s adoption and economics.
- Review dilution and potential overhang: shares outstanding increased to 54,160,547 by March 31; the filing also lists 7.43 million warrant shares, 5.04 million option shares, and 584,467 unvested restricted shares excluded from diluted EPS as anti-dilutive.