Nephros, Inc. — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012. Unaudited results are for Nephros and its wholly owned subsidiary. The company develops and commercializes blood- and water-filtration products.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $302,000 | $637,000 | $835,000 | $1,318,000 |
| Gross profit | $267,000 | $203,000 | $578,000 | $402,000 |
| Gross margin | 88.4% | 31.9% | 69.2% | 30.5% |
| Operating expenses | $1,079,000 | $801,000 | $1,946,000 | $1,646,000 |
| Net loss | $754,000 | $602,000 | $1,311,000 | $1,309,000 |
| Net loss per share | $0.07 | $0.06 | $0.12 | $0.19 |
Q2 and six-month revenue fell 53% and 37%, respectively. Lower MD-filter sales in Europe and reduced U.S. Naval Research contract revenue were major factors; Bellco license revenue partly offset the decline. Six-month product revenue was $492,000 versus $1.318 million, while license revenue was $343,000 versus none. Gross profit improved despite lower revenue, principally because cost of goods sold fell substantially. Operating losses widened to $812,000 for Q2 and $1.368 million for the six-month period.
Cash, liquidity and capital
- Cash was $987,000 at June 30, 2012, down from $1.669 million at December 31, 2011. Current assets were $2.235 million and current liabilities $2.442 million.
- Six-month operating cash use was $372,000, versus $1.088 million in 2011. The improvement mainly reflected a $1.014 million reduction in accounts receivable; it does not eliminate the underlying funding risk.
- Investing cash use was $666,000, including $659,000 for Medica-related intangible assets. Financing provided $356,000 from warrant exercises. Cash declined by $682,000 during the period.
- Total liabilities were $3.452 million. The balance sheet reported no debt at June 30, 2012; the prior-year-period debt and related interest had been repaid in March 2011. The company had $1.238 million payable under the Medica agreement.
- Stockholders’ equity was $897,000, versus $1.421 million at year-end 2011. Accumulated deficit was $95.579 million. Common shares outstanding were 11,383,727 at June 30; 11,608,345 were outstanding at August 9, 2012.
Business developments, outlook and risks
- FDA clearance was received in April 2012 for the OLpūr H2H Module and OLpūr MD 220 for specified use with a UF-controlled hemodialysis machine in the United States.
- The April 2012 Medica license and supply agreement grants Nephros exclusive worldwide marketing rights, except Italy for the first three years, for certain filtration products. Nephros agreed to minimum purchases of €300,000, €500,000 and €750,000 for 2012–2014, made installment payments totaling €500,000 at signing, and owes a further €1 million in January 2013. A 3% net-sales royalty applies from April 2014 through 2022. The company capitalized approximately $2.093 million, net, of agreement-related assets and granted Medica options for 300,000 shares.
- The Bellco agreement provides fixed installments, with the first two received and a final approximately €600,000 payment due in January 2013. Nephros recognized $343,000 of Bellco license revenue in the first half; approximately $1.684 million remained deferred at June 30. The filing also reports the final payment as an approximately $755,000 receivable.
- Management expects continuing losses and says revenue must increase substantially, with positive gross and operating margins, for the company to become profitable. It states that operating cash flow has not been sufficient to meet obligations and that additional financing is required; failure to obtain capital could force curtailment or cessation of operations. The filing expressly says recurring losses and cash-generation difficulty raise substantial doubt about the company’s ability to continue as a going concern.
- Management anticipated accelerating U.S. dialysis-market sales and initial sales to dialysis markets outside the U.S. in 2012; these are forward-looking expectations, not reported results. No quantified earnings or revenue guidance is provided.
- Customer concentration is significant: three customers accounted for 71% of first-half sales, and one customer represented 85% of accounts receivable at June 30. Key risks include financing availability, product adoption and profitability, regulatory approvals, supplier/manufacturer dependence, and patent protection. No pending legal proceedings or material changes to the prior annual report’s risk factors were reported.
Important facts for investors to verify
- Cash runway, financing needs, and progress toward resolving the disclosed going-concern uncertainty.
- Collection and timing of the Bellco receivable, and the January 2013 payment obligation to Medica.
- Whether product sales recover, particularly European MD filters and newly cleared U.S. products, and whether gross-margin improvement is sustainable.
- Medica purchase commitments, product launch and supply execution, and the commercial terms and potential dilution from its 300,000 options.
- Customer concentration, accounts-receivable collectability, and the expected cash impact of deferred Bellco revenue.