Nephros, Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; filed February 27, 2020. This is an annual report, not a standalone fourth-quarter results report. Nephros develops and sells medical and commercial water-filtration products, and is developing pathogen-detection products and a second-generation hemodiafiltration (HDF) system. The AETHER commercial filtration business was acquired on December 31, 2018. Unless noted otherwise, financial amounts below are in U.S. dollars.
Financial performance and liquidity
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Total revenue | $10.334 million | $5.687 million | +82% |
| Gross profit / margin | $6.084 million / 59% | $3.203 million / 56% | Margin +3 percentage points |
| Research and development | $3.090 million | $1.539 million | +101% |
| Selling, general and administrative | $6.119 million | $4.517 million | +35% |
| Operating loss | $(3.155) million | $(3.016) million | Loss widened $139,000 |
| Net loss | $(3.179) million | $(3.325) million | Improved $146,000 |
| Net loss attributable to Nephros shareholders | $(3.420) million | $(3.402) million | Loss widened $18,000 |
| Net loss per share, basic and diluted | $(0.45) | $(0.50) | — |
- Product revenue was $10.182 million; royalty and other revenue was $152,000. Management attributed growth to recurring sales, new customer sites, increased outbreak-response revenue and approximately $738,000 of incremental AETHER revenue. Quarterly customer retention was reported at 94%, and new-site acquisition averaged more than one per day.
- Gross margin improved primarily due to manufacturing discounts and lower inventory reserves. Higher R&D reflected investment in pathogen detection and HDF; SG&A rose with headcount, stock compensation, professional and marketing expenses, and facility costs.
- Net cash used in operating activities was $2.276 million, versus $3.662 million in 2018. Investing activities used $151,000; financing activities provided $2.017 million. Cash declined to $4.166 million from $4.581 million.
- At year-end, working capital was $5.871 million, current assets $8.299 million and current liabilities $2.428 million. Total liabilities were $3.940 million. Borrowings included $560,000 under the revolving credit facility, $824,000 under the secured note and $10,000 of equipment financing; operating lease liabilities were $1.151 million.
- In February 2020, the company completed a public offering that generated approximately $6.765 million in net proceeds. Management said available cash, including the offering, was expected to fund its current operating plan for at least 12 months from issuance of the financial statements.
Material changes and business developments
- Revenue grew 82%, while gross margin increased from 56% to 59%; operating loss nevertheless widened as operating expenses rose.
- Revenue concentration increased: five customers represented 60% of 2019 revenue, compared with 38% in 2018. Two customers individually contributed 19% and 17% of revenue. Two customers accounted for 37% of year-end receivables.
- The July 2019 1-for-9 reverse stock split reduced shares outstanding. The company raised approximately $1.992 million net in a May 2019 private placement and received $731,000 from warrant exercises.
- The revolving credit facility’s borrowing capacity was increased from $1.0 million to $2.5 million in December 2019. The secured note carries 8% interest and matures in 2023; the revolving facility’s stated year-end rate was 8.25%.
- Medica supply-agreement minimum purchase commitments total approximately $24 million over the disclosed commitment period, including $3.5 million due within one year. The agreement also requires a 3% royalty on covered product net sales and runs through 2025.
Outlook, risks and unusual items
- No formal revenue or earnings guidance is provided. Management expects continued operating losses until sales and/or licensing revenue are sufficient to achieve profitability. It intends to invest in filtration and diagnostics sales and development, second-generation HDF, and working capital.
- Management planned DialyPath launch in the second quarter of 2020 and expected to launch SequaPath and a building-biome mapping service before year-end 2020. These are forward-looking plans, not reported achievements. HDF commercialization depends on FDA clearance for the second-generation device.
- The company relies substantially on Medica in Italy for product supply. The filing warned that the coronavirus outbreak could disrupt supplier operations, exports or shipments and adversely affect inventory availability, sales and results.
- Other key risks include a long history of losses and a $127.332 million accumulated deficit; product and regulatory risks; dependence on a limited supplier base; market-acceptance and execution uncertainty; customer concentration; and potential dilution from future equity issuance. Product-liability insurance was $2 million; claims exceeding coverage could materially affect the company.
- The AETHER acquisition contributed approximately $738,000 of incremental commercial revenue, but contingent consideration was reduced by $156,000 in 2019 because performance was below expectations. The CamelBak sublicense’s minimum-fee obligations were eliminated; related royalty revenue fell to $16,000 from $100,000.
- The independent auditor issued an unqualified opinion on the financial statements. Management stated that disclosure controls and internal control over financial reporting were effective; the company was not required to obtain an auditor opinion on internal-control effectiveness. No legal proceedings were reported.
Important facts for investors to verify
- Whether the public-offering proceeds and management’s cash forecast provide adequate runway given continuing losses and execution needs.
- Medica’s ability to supply products reliably, and how actual purchases compare with the substantial minimum commitments and demand outlook.
- Whether revenue growth and gross-margin gains continue, particularly given customer concentration and the contribution from outbreak-response sales.
- Regulatory, development and commercialization progress for DialyPath, SequaPath and the second-generation HDF system, including any FDA clearance requirements.
- Potential share dilution and the share-count figures: the filing reports different year-end share figures in different statements, and reports 9,006,550 shares outstanding as of February 20, 2020.