Nephros, Inc. — FY2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013; comparisons are with FY2012. This filing does not provide standalone fourth-quarter results. Nephros develops and sells ultrafiltration products for dialysis, water treatment, and military use.
Financial results
| Metric | FY2013 | FY2012 |
|---|---|---|
| Revenue | $1.740 million | $1.807 million |
| Product revenue | $1.029 million | $1.127 million |
| License revenue | $711,000 | $680,000 |
| Gross profit / margin | $842,000 / 48.4% | $1.070 million / 59.2% |
| Operating expenses | $4.159 million | $4.403 million |
| Operating loss | $3.317 million | $3.333 million |
| Net loss | $3.698 million | $3.262 million |
| Net loss per share | $0.24 | $0.29 |
| Cash used in operations | $3.583 million | $1.547 million |
At year-end, cash was $579,000 (versus $47,000), current assets were $988,000, and current liabilities were $3.499 million. The balance sheet showed a $1.5 million senior secured note, reported net of discount at $1.358 million, and a stockholders’ deficit of $610,000. The $1.5 million note was repaid in March 2014. The filing does not provide a clear cash runway balance after that repayment.
Changes and operating developments
- Revenue declined 4% year over year. Management attributed the decrease mainly to the end of an Office of Naval Research contract and recall-related sales credits, partly offset by Bellco license revenue and growth in water-filter sales.
- Management reported water-filter sales of $1.240 million, up 23%; dialysis-water and hospital-water sales increased, while military-water sales declined approximately 83%.
- Gross profit fell $228,000 as cost of goods sold rose 22%, including higher inventory reserves. R&D expense increased 31% to $826,000, while SG&A fell 14% to $3.110 million, primarily reflecting lower legal and professional costs.
- Net loss widened by $436,000, including $94,000 of interest expense and $257,000 of debt-discount amortization in 2013.
- Three customers represented 86% of sales and 97% of accounts receivable in 2013, versus 68% and 88%, respectively, in 2012.
Outlook, risks, and unusual items
- Going concern: The auditor’s report includes a substantial-doubt paragraph. The company reported recurring losses and negative operating cash flow and said it would need additional financing, licensing, or asset transactions to sustain operations. Management stated that March 2014 rights-offering proceeds and the Bellco amendment were expected to fund operations into Q3 2014, excluding future operating cash receipts.
- Financing and dilution: A March 2014 rights offering raised gross proceeds of $2.1 million and issued 7,140,822 shares; part of the proceeds repaid the $1.5 million Lambda note plus accrued interest. The company also had substantial outstanding warrants and options.
- Hospital-water product recall: In October 2013, Nephros voluntarily recalled all production lots of POU filters and requested removal of promotional materials for POU and DSU products after FDA concerns about marketing claims. The company also received reports of high bacterial counts possibly associated with fiber breakage. Reports stated that one death and one infection may have been associated with the issue; investigation was ongoing. The company said 29 earlier complaints had not involved reported adverse events. Dialysis products were not affected. The recall product was fully reserved, with destruction planned by April 20, 2014; the company requested recall closeout in March 2014. Further FDA or consumer actions and financial effects remained uncertain.
- Bellco agreement: A February 2014 amendment extended the license through 2021, expanded its territory, and provided €450,000 in upfront fees. Future royalties were revised, including €1.75 per unit for the first 125,000 units and €1.25 thereafter for 2015–2016. Sales targets can trigger conversion to non-exclusive status at Nephros’s discretion.
- Commercial prospects: The HDF system had FDA clearance, but Nephros had not broadly marketed it and was seeking a U.S. commercialization partner. A U.S. clinic placement was expected in Q2 2014. The Army solicitation could result in several, one, or no contracts; maximum combined awards were capped at 450,000 units or $45 million over three years, and the evaluation was still ongoing as of March 2014.
- Other commitments: The Medica supply agreement included minimum purchase commitments, including €750,000 for 2014, and a 12% interest arrangement on overdue invoices. The company identified no pending legal proceedings. Management reported effective disclosure controls and internal control over financial reporting.
Key facts for investors to verify
- Current cash, obligations, and actual runway after the rights offering and repayment of the Lambda note; the stated Q3 2014 runway is a management estimate.
- Final FDA disposition of the hospital-water recall, investigation findings, any claims or proceedings, and the ultimate recall costs.
- Bellco sales performance against minimum targets, royalty receipts, and collection of the full €450,000 amendment fee.
- Whether HDF clinic placement and Army testing lead to commercial orders or contracts, and whether Nephros secures a commercialization partner.
- Customer concentration and the effect of financing-related dilution, including outstanding warrants and options.