Nephros, Inc. — FY 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012; comparisons are with FY 2011. The filing does not provide standalone fourth-quarter results. Nephros develops and sells high-performance liquid purification filters for dialysis, healthcare, and other markets, and is developing a hemodiafiltration (HDF) system.
Financial results and liquidity
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Total revenue | $1.807 million | $2.214 million |
| Product revenue | $1.127 million | $1.849 million |
| Licensing revenue | $680,000 | $365,000 |
| Gross profit / margin | $1.070 million / 59.2% | $868,000 / 39.2% |
| Operating expenses | $4.403 million | $3.178 million |
| Operating loss | $(3.333) million | $(2.310) million |
| Net loss | $(3.262) million | $(2.360) million |
| Net loss per share | $(0.29) | $(0.27) |
| Cash used in operations | $1.547 million | $1.296 million |
At year-end, cash was $47,000, current assets were $1.403 million, and current liabilities were $3.416 million, implying a working-capital deficit of approximately $2.013 million and a current ratio of about 0.41. Total liabilities were $4.123 million versus assets of $3.528 million; stockholders’ equity was negative $595,000. The company reported no debt outstanding at December 31, 2012, but subsequently issued a secured note described below. Accumulated deficit was $97.530 million.
Material changes versus FY 2011
- Revenue fell 18% to $1.807 million. European MD-filter revenue declined about $733,000 and Office of Naval Research revenue declined about $346,000 as that contract ended in March 2012. Water-filter sales rose 63%, from $620,000 to $1.010 million; Bellco licensing revenue also increased.
- Cost of goods sold fell 45% to $737,000, contributing to higher gross profit and gross margin despite lower total revenue.
- Research and development expense increased 40% to $632,000; selling, general and administrative expense increased 37% to $3.620 million. Higher salary, legal, stock-compensation, and travel costs contributed to the SG&A increase.
- Net loss widened by $902,000. Cash used in operations increased by $251,000. Investing used $612,000, principally for Medica-related intangible assets; financing provided $503,000, primarily from warrant exercises.
Business developments, outlook, and risks
- The FDA cleared the OLpūr H2H Module and OLpūr MD 220 Hemodiafilter for U.S. marketing in April 2012. Nephros had not broadly marketed the mid-HDF system and planned to seek a U.S. commercialization partner.
- In April 2012, Nephros entered an exclusive license and supply arrangement with Medica. It paid €500,000 in 2012 and €600,000 in February 2013; a further €400,000 was due by June 30, 2013. The agreement also requires minimum product purchases, including €500,000 for 2013 and €750,000 for 2014, and provides for a 3% royalty on relevant net sales from April 2014 through 2022.
- Bellco’s final fixed license installment of approximately €600,000 was received in January 2013. Nephros expected to recognize approximately $707,000 of Bellco licensing revenue in each of 2013 and 2014; unit-based royalties are scheduled for 2015–2016, subject to sales.
- On February 4, 2013, Nephros issued Lambda Investors a $1.3 million senior secured note bearing 12% interest and maturing August 4, 2013. The note is secured by a first-priority lien on substantially all assets, including intellectual property; default interest rises to 16%, and covenants restrict certain transactions. Management expected proceeds to fund operations through May 2013.
- Nephros undertook a proposed $3 million rights offering, expected at $0.60 per share, and contemplated a one-time $0.30 exercise price for certain public warrants. Completion, proceeds, and sufficiency of capital were not assured. The filing states that failure to obtain additional funding could require curtailing operations or ceasing operations.
- The auditor issued an unmodified opinion on the financial statements but included a going-concern explanatory paragraph, citing recurring losses and negative operating cash flow. Management also concluded disclosure controls and internal control over financial reporting were effective; the auditor did not attest to internal-control effectiveness.
- Four customers represented 79% of FY 2012 sales. The filing gives inconsistent figures for their share of year-end receivables: 88% in some sections and 98% in Note 11. Other key risks include limited cash, dependence on external manufacturers and distributors, uncertain product adoption and regulatory requirements, competitive markets, and potential dilution and control concentration.
- No numerical operating or revenue guidance is provided. Management’s stated priorities were marketing water-filtration products, pursuing business development for the renal-treatment system, and working capital.
Most important facts for investors to verify
- Whether the proposed rights offering or another financing closed, on what terms, and whether proceeds covered operating needs and repayment obligations under the Lambda note.
- The current cash runway, payment status of the remaining €400,000 Medica license fee, and ability to meet Medica purchase commitments.
- The discrepancy in the filing concerning the four customers’ share of year-end accounts receivable (88% versus 98%), as well as actual collections, including the approximately $791,000 Bellco receivable reported at year-end.
- Commercial progress, sales, margins, and partnership plans for the FDA-cleared mid-HDF system and water-filter products.
- The effects of the secured note’s collateral and covenants, the rights offering and warrant terms, and resulting dilution or changes in Lambda’s ownership and control.