Nephros, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. Nephros develops water filtration and pathogen detection products and, through its majority-owned subsidiary SRP, a second-generation hemodiafiltration system. The financial statements are unaudited; amounts below are in U.S. dollars and rounded, generally to millions.
Financial results and liquidity
| Metric | Q1 2021 | Q1 2020 / comparison |
|---|---|---|
| Total revenue | $2.736 million | $2.529 million; up 8% |
| Gross profit and margin | $1.587 million; 58% | $1.491 million; 59% |
| Operating loss | $1.018 million | $1.026 million |
| Net loss | $537,000 | $1.098 million |
| Net loss attributable to Nephros shareholders | $596,000; $0.06 per share | $1.157 million; $0.13 per share |
| Cash used in operating activities | $55,000 | $1.840 million |
| Cash and cash equivalents at period end | $8.163 million | $8.249 million at December 31, 2020 |
| Working capital at period end | $13.259 million | $13.829 million at December 31, 2020 |
Product revenue was $2.712 million, compared with $2.475 million; royalty and other revenue declined to $24,000 from $54,000. Q1 net loss included a $482,000 gain from forgiveness of the Paycheck Protection Program loan, making the reported improvement in net loss partly attributable to a nonrecurring item. The company reported an accumulated deficit of $132.4 million and expects further operating losses.
At March 31, 2021, total liabilities were $2.399 million, including a secured note with $532,000 principal outstanding and lease liabilities of approximately $1.032 million. The PPP loan had been forgiven in full. Nephros reported no outstanding balance on its terminated revolving credit facility. Management believes available cash can fund its current operating plan for at least 12 months from the financial statements’ issuance date, while noting uncertainty in its projections.
Material changes and segment performance
- Water Filtration generated all $2.736 million of Q1 2021 revenue, up 9% from $2.511 million. Segment operating loss widened to $633,000 from $549,000; higher direct product costs reduced gross margin by about one percentage point.
- Pathogen Detection had no revenue, versus $18,000 a year earlier. Its operating loss increased to $220,000 from $166,000, mainly reflecting increased research and development spending.
- Renal Products had no reported revenue. Its operating loss narrowed to $165,000 from $311,000 as development and administrative spending declined while the second-generation HDF system neared FDA review.
- Operating cash use improved substantially year over year, primarily because inventory declined by $616,000, whereas it had increased by $1.088 million in Q1 2020. The company said the earlier inventory build was precautionary and is now being sold through.
- Cash decreased by $86,000 in Q1 2021. In Q1 2020, cash increased by $4.796 million, principally due to a public stock offering that generated $6.8 million in net proceeds.
Outlook, risks and unusual items
- Management said Q1 2021 revenue was the company’s highest first-quarter revenue to date and expected COVID-19-related business impacts to continue subsiding during 2021. It cited potential demand recovery as facilities reopen, deferred infection-control purchases resume, and customer meetings become easier. These are expectations, not guarantees.
- COVID-19 had reduced demand in some hospital and commercial markets and restricted access to prospective customers. If demand or revenue falls short of plan, the company may need to reduce spending, potentially slowing growth plans.
- Management planned a Q2 2021 launch of the DialyPath pathogen detection system. SRP submitted its second-generation HDF system for FDA 510(k) clearance on February 24, 2021; timing and outcome of clearance remain uncertain.
- The Medica supply agreement requires minimum 2021 purchases of €3.3 million (approximately $4.0 million); remaining purchase commitments at March 31 were €1.4 million (approximately $1.7 million). The agreement also includes a 3% royalty on covered product sales.
- Customer concentration is material: six customers accounted for 64% of Q1 revenue, and three customers individually represented 10% or more. Accounts receivable was also concentrated, with three customers representing 42% at quarter end.
- Other risks identified include product acceptance and liability, regulatory approvals, supplier and distributor issues, competition, access to capital, and the effects of COVID-19. The filing reports no off-balance-sheet arrangements and no material change in internal control over financial reporting; management concluded disclosure controls were effective.
Important facts for investors to verify
- Whether revenue growth can continue and gross margin recover despite higher direct product costs and reliance on a concentrated customer base.
- Cash burn, liquidity assumptions, and whether management’s stated 12-month funding horizon remains valid if sales weaken or costs rise.
- The timing, regulatory outcome, and funding needs for SRP’s HDF clearance process and the commercial rollout of DialyPath and other detection products.
- Execution of the Medica minimum-purchase commitment and the potential impact of customer concentration, supply obligations, and related royalties.
- Share-count figures: the balance sheet reports 9,887,891 shares outstanding at March 31, while the cover page reports 9,962,229 shares outstanding as of May 4, 2021; verify the subsequent share changes and dilution.