Nephros, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Financial amounts below are in U.S. dollars; figures are unaudited. Nephros sells water filtration and pathogen-detection products and develops renal-treatment technology through Specialty Renal Products, Inc. (SRP).
Financial results and liquidity
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net revenue | $2.884 million | $2.266 million | $5.071 million | $5.002 million |
| Gross margin | $1.361 million (47%) | $1.275 million (56%) | $2.386 million (47%) | $2.862 million (57%) |
| Operating loss | $1.204 million | $1.117 million | $3.157 million | $2.135 million |
| Net loss | $1.137 million | $1.126 million | $3.104 million | $1.663 million |
| Net loss attributable to Nephros shareholders | $1.203 million | $1.186 million | $3.233 million | $1.782 million |
| Loss per share, basic and diluted | $0.12 | $0.12 | $0.31 | $0.18 |
- Revenue mix and segments: Product revenue was $2.839 million in Q2 and $5.016 million in the first half; royalty and other revenue was $45,000 and $55,000, respectively. Water Filtration generated $2.849 million in Q2 and $5.008 million in the first half. Pathogen Detection generated $35,000 and $63,000; Renal Products recorded no revenue.
- Cash flow: Operating activities used $2.869 million in the first half, compared with $172,000 in the prior-year period. Investing activities used $137,000; financing activities provided $214,000. Cash decreased $2.794 million to $4.179 million.
- Liquidity and balance sheet: At June 30, cash was $4.179 million, working capital was $9.011 million, and total assets were $14.953 million. Total liabilities were $2.472 million. Secured-note principal was $210,000, due by April 2023; equipment financing was $3,000. Lease liabilities totaled $663,000.
- Profitability: The company reported an accumulated deficit of $138.8 million and said it expects operating losses to continue over the next several quarters.
Changes versus comparable periods
- Q2 revenue rose 27%, led by a 30% increase in Water Filtration sales; Pathogen Detection revenue declined 54% due to lower-than-expected service and testing revenue. First-half revenue increased 1% overall, with Water Filtration up 2% and Pathogen Detection down 17%.
- Gross margin fell to 47% from 56% in Q2 and to 47% from 57% for the first half. Management cited higher shipping costs, lower product margins, inventory expirations and obsolescence, and inventory-count adjustments. Expired GenArraytion-acquired inventory weighed on Pathogen Detection margins, which were negative.
- First-half operating loss widened by $1.022 million. SG&A increased 15% to $4.418 million, primarily due to employee-related, travel, and marketing costs. R&D decreased 3% to $1.009 million.
- First-half net loss increased versus 2021 in part because the prior-year period included $482,000 of income from PPP loan forgiveness; the loan was forgiven in January 2021. The 2022 period also included $63,000 of other income, primarily from releasing a cumulative foreign-currency translation adjustment when a foreign subsidiary was liquidated.
Outlook, commentary and risks
- Management believes available cash and anticipated revenue will fund its current operating plan for at least 12 months from issuance of the financial statements. It cautioned that weaker-than-expected results could require further cuts to headcount, R&D, and other discretionary costs.
- SRP received FDA 510(k) clearance for its second-generation hemodiafiltration system on May 13, 2022. Management planned a measured launch at 1–3 clinics in late 2022 and expansion to additional clinics in 2023; commercial adoption and timing remain uncertain.
- Nephros implemented broad product price increases beginning June 1, 2022 in response to supply-chain cost increases. The filing does not quantify the expected revenue or margin benefit.
- Management reported a workforce reduction of approximately 15% during Q2, including severance costs, as part of efforts to align expenses with revenue.
- COVID-19-related demand and operating disruption remain uncertain, as do inflation, supply-chain costs, customer acceptance, and the company’s ability to raise capital if needed. The filing notes that further demand declines could lead to additional spending reductions and slow growth plans.
- Four Water Filtration customers accounted for 47% of Q2 revenue; two customers accounted for 32% of first-half revenue. The company also had a €2.1 million (approximately $2.3 million) remaining purchase commitment with Medica at June 30, against a €3.5 million (approximately $3.8 million) minimum for 2022.
- Nephros owns 62.5% of SRP. SRP sold additional preferred shares in February 2022 for gross proceeds of approximately $500,000, and Nephros’s outstanding loan to SRP, including accrued interest, was $1.4 million at June 30.
Important facts for investors to verify
- Whether Water Filtration growth, the June price increases, and cost controls improve gross margins and operating cash flow.
- Cash runway assumptions and the pace of cash use, given first-half operating cash outflow of $2.869 million and management’s expectation of continuing losses.
- Pathogen Detection revenue recovery and the impact of inventory expiration and obsolescence on future segment margins.
- Timing, launch costs, clinical uptake, and financing needs for SRP’s newly cleared HDF system; also review SRP preferred-stock rights and the related-party loan balance.
- Customer concentration, Medica supply and purchase commitments, and exposure to inflation, supply interruptions, and renewed COVID-19 disruption.