Nephros, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Unaudited consolidated results. Nephros sells water-purification filters and hemodiafiltration (HDF) products and systems.
Financial performance
Amounts below are in millions of dollars except per-share data and percentages.
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net revenue | $1.366 | $0.859 | $2.351 | $1.593 |
| Gross margin | 61% | 60% | 55% | 61% |
| Operating loss | $0.653 | $0.700 | $1.776 | $1.305 |
| Net loss | $0.682 | $0.786 | $2.111 | $1.466 |
| Net loss per share | $0.01 | $0.01 | $0.04 | $0.03 |
| Operating cash used | Not provided for quarter | Not provided for quarter | $2.012 | $1.158 |
Financial position and material changes
- Cash was $3.484 million at June 30, 2018, up from $2.194 million at year-end 2017. Working capital was $4.375 million, versus $1.938 million.
- Total assets were $6.845 million and stockholders’ equity was $4.498 million. Current liabilities were $1.396 million.
- Debt at June 30 comprised a $1.138 million secured note and $0.153 million drawn on a secured revolving facility. The note replaced the 11% unsecured notes, which were repaid; the new note bears 8% interest and matures in 2023. The refinancing resulted in a $0.199 million extinguishment loss. The revolving facility rate was 8.50% at quarter-end.
- In April, the company sold 6,540,669 shares in a private placement at $0.45 per share. The notes report $2.943 million gross proceeds and $2.924 million net proceeds; elsewhere, the filing describes approximately $2.943 million as net proceeds. This difference merits verification. Total shares outstanding were 64,166,988 at June 30.
- Six-month revenues rose 48%, primarily from water-filter product sales. Six-month gross margin fell to 55% from 61%, reflecting higher costs in Q1, including a $0.050 million inventory reserve and $0.030 million of inventory count adjustments. Q2 gross margin improved to 61% from 60%.
- Six-month operating expenses increased to $3.073 million from $2.277 million, mainly from higher SG&A and R&D. SG&A rose 42% to $2.351 million, reflecting increased headcount, stock compensation, marketing, rent and other costs; R&D rose 26% to $0.641 million, including second-generation HDF development.
Outlook, risks and unusual items
- Management expects further operating losses over the next several quarters, but believes cash will fund the current operating plan for at least 12 months from issuance of the financial statements. No revenue or earnings guidance is provided.
- Nephros says water filtration is its primary near-term growth opportunity. It completed a second-generation HDF prototype and formed Specialty Renal Products, Inc. on July 2, 2018 to develop the system. The company expects a possible return to market in approximately 18 months, conditional on full funding; it intends primarily to raise funds directly into the subsidiary.
- Six-month operating cash use increased to $2.012 million, with inventory growth of $0.728 million a principal working-capital use. Financing cash inflows included equity proceeds and secured borrowing. No investing cash flow was reported.
- Customer concentration remains material: four customers accounted for 42% of 2018 revenue for both the quarter and half-year; three customers represented 39% of receivables at June 30. The company also depends on third-party suppliers and manufacturers.
- The Medica supply agreement requires approximately €2.5 million (about $3.0 million) of minimum purchases for 2018; remaining aggregate purchase commitments were approximately €0.949 million (about $1.139 million) at June 30. The company also has office lease commitments through 2022.
- Adoption of ASC 606 accelerated recognition of approximately $0.278 million of Bellco deferred license revenue through an opening accumulated-deficit adjustment. Reported 2018 revenue was lower than under prior guidance by $0.018 million for Q2 and $0.035 million for the half-year.
- Management identified market acceptance, financing, product safety and liability, regulatory approvals, supplier performance, intellectual property and competitive pricing among the risks. The filing reports no off-balance-sheet arrangements. Disclosure controls were concluded effective, with no material quarterly change in internal control reported.
Key investor verification points
- Reconcile the private-placement proceeds descriptions: $2.943 million is stated as both gross and, in one passage, net proceeds; the detailed note gives $2.924 million net.
- Assess cash runway against the $2.012 million first-half operating cash burn, continued expected losses, inventory needs and the Medica purchase commitment.
- Track whether water-filter sales growth and gross margins persist, and monitor customer concentration and receivable collections.
- Verify funding progress, development milestones and timing assumptions for the second-generation HDF system.
- Review secured-debt terms, collateral and covenants, along with dilution from equity issuance and outstanding warrants and options.