Nephros, Inc. — Q2 2013 Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2013. Financial statements are unaudited; amounts below are in thousands of dollars unless stated otherwise. Nephros develops and sells high-performance liquid-purification filters for healthcare, dialysis, and military markets.
Financial performance and liquidity
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net revenue | $575 | $302 | $1,096 | $835 |
| Gross profit | $349 | $267 | $675 | $578 |
| Gross margin | 60.7% | 88.4% | 61.6% | 69.2% |
| Operating loss | $(628) | $(812) | $(1,840) | $(1,368) |
| Net loss | $(671) | $(754) | $(1,912) | $(1,311) |
| Net loss per share | $(0.05) | $(0.07) | $(0.14) | $(0.12) |
Q2 revenue growth was 90%, largely from product revenue, which increased to $391 from $132; license revenue was $184 versus $170. For the six-month period, product revenue was $737 versus $492 and license revenue was $359 versus $343. The six-month net loss increased despite higher sales, reflecting higher operating expenses and interest/other costs. SG&A declined in Q2 to $660 from $838, but rose for the six months to $1,918 from $1,558.
At June 30, cash and cash equivalents were $298, down from $987 at June 30, 2012 but up from $47 at December 31, 2012. Current assets were $870 and current liabilities $1,689; total liabilities were $2,041 and stockholders’ equity was $841. The company reported no outstanding senior secured note at quarter-end: its $1,300 note, bearing 12% interest, was repaid in May using rights-offering proceeds. Six-month operating cash use was $2,762; investing activities provided $2 and financing activities provided $3,010.
Material changes and notable items
- Nephros completed a rights offering on May 22, 2013, raising $3,000 gross. After note repayment, interest, fees, legal costs, and issuance costs, management reported approximately $1,400 of net proceeds. The offering and warrant exercises increased shares outstanding to 17,984,170 at June 30 from 11,949,824 at year-end.
- Cost of goods sold rose faster than revenue, contributing to lower gross-margin percentages. Six-month R&D increased 40% to $483, including higher machine-development and personnel costs. Depreciation and amortization increased to $114, principally due to the Medica agreement asset.
- The Bellco license generated $359 of revenue in the first half. Approximately $1,055 of Bellco-related deferred revenue remained at June 30, expected to be recognized through December 2014.
- The Medica license and supply agreement asset was approximately $2,000 net of accumulated amortization. Nephros had 2013 minimum aggregate purchases of €500,000 and reported approximately €417,000 of purchases for the first half; it also owes a 3% royalty on covered product sales beginning April 23, 2014, subject to agreement terms.
Outlook, risks, and contingencies
- Management stated that recurring losses and inadequate operating cash flow raise substantial doubt about the company’s ability to continue as a going concern. Nephros expects additional losses and says further financing may be required; no assurance is given that financing will be available on acceptable terms or at all.
- No quantified financial guidance was provided. Management expected to place a mid-HDF system in a U.S. dialysis clinic in Q3 2013 and was preparing for market release; it had not broadly marketed the system and planned to seek a U.S. commercialization partner.
- Nephros reported GSA Schedule additions and July 2013 Veterans Affairs medical-center bid awards after quarter-end. Its U.S. Army proposal remained under evaluation; the filing notes that the Army could award several, one, or no contracts.
- Sales are concentrated: four customers accounted for 88% of first-half sales (33%, 29%, 24%, and 2%). Two customers represented 86% of receivables at June 30.
- Other stated risks include the need to grow sales and margins, reliance on suppliers and manufacturers, product adoption and regulatory risks, competition, intellectual-property protection, and access to capital. The filing reported no pending legal proceedings and no off-balance-sheet arrangements.
- Nephros’ CFO resigned effective June 15, 2013; the CEO was appointed Acting CFO and Principal Financial and Accounting Officer on August 9, after quarter-end.
Important facts for investors to verify
- Cash-flow inconsistency: The cash-flow statement reports first-half 2012 operating cash use of $372, while MD&A states $143. The filing text does not reconcile these values.
- Revenue detail: The statements report first-half 2013 product revenue of $737 and 2012 product revenue of $492; MD&A separately cites water-filter sales of $735 and $375. Confirm the scope and reconciliation of these figures.
- Confirm the company’s cash runway, financing needs, and progress toward addressing the disclosed going-concern uncertainty.
- Monitor whether product-sales growth can support improving gross margins and whether customer concentration and receivable balances change.
- Track execution and economics of the Army opportunity, VA awards, mid-HDF commercialization, and the purchase and royalty obligations under the Medica agreement.