Nephros, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparison is with Q1 2018 unless otherwise noted. Unaudited consolidated statements. Figures below are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise.
Business context
Nephros develops and sells water-filtration products for medical and commercial markets. Its Specialty Renal Products subsidiary is developing a second-generation hemodiafiltration (HDF) system. The December 31, 2018 acquisition of Biocon and Aether expanded the company’s commercial water-filtration products. Q1 revenue was reported entirely in Water Filtration; Renal Products generated no revenue.
Key financial metrics
| Metric | Q1 2019 | Q1 2018 / comparison |
|---|---|---|
| Total revenue | $1.769 | $0.985; up 80% |
| Gross profit / margin | $0.998 / 56% | $0.467 / 47% |
| Operating expenses | $2.299 | $1.590 |
| Operating loss | $(1.301) | $(1.123) |
| Net loss | $(1.349) | $(1.429) |
| Net loss attributable to Nephros shareholders | $(1.408) | $(1.429) |
| Basic and diluted loss per share | $(0.02) | $(0.03) |
| Cash used in operating activities | $(0.697) | $(0.669) |
| Cash at period end | $3.608 | $4.581 at Dec. 31, 2018 |
- Product revenue was $1.729 million; royalty and other revenue was $0.040 million. Management attributed revenue growth to higher medical-device sales to new and existing accounts and expansion into commercial markets.
- Gross margin improved by 9 percentage points, primarily due to lower inventory-reserve adjustments and improved foreign-exchange rates.
- Research and development expense rose 162% to $0.756 million, including increased spending on the water-safety testing system and second-generation HDF development. Selling, general and administrative expense rose 19% to $1.503 million.
- Net loss improved year over year, in part because Q1 2018 included a $0.199 million loss on extinguishment of debt. Operating loss widened as operating expenses grew faster than gross profit.
Balance sheet, debt and liquidity
- At March 31, 2019, total assets were $10.138 million, total liabilities $4.534 million, stockholders’ equity $5.604 million, and working capital $4.062 million. Accumulated deficit was $125.502 million.
- Cash declined $0.973 million during the quarter. Investing cash outflow was $0.137 million, related to a Biocon acquisition working-capital adjustment; financing cash outflow was $0.137 million, including secured-note and revolving-credit repayments.
- Debt included $0.906 million outstanding on a secured revolving facility with a $1.0 million limit and a $0.986 million secured note bearing 8% interest, due April 2023. The revolver’s stated rate was 9% at quarter-end. The company said the facility would automatically renew on August 17, 2019, though renewal was not guaranteed.
- Operating lease liabilities totaled $0.597 million following adoption of the new lease standard. Contingent consideration related to the Biocon acquisition was $0.503 million.
- Approximately $1.9 million of remaining SRP financing proceeds was restricted to SRP expenses and generally unavailable for other company operations.
- Management expected available operating cash to fund its current plan for at least 12 months from the filing date. It also reported sustained operating losses and negative operating cash flow since inception, and said that if operations underperformed it could cut discretionary spending or seek additional capital; success or availability of those actions was not assured.
Material changes, outlook and risks
- The Biocon/Aether acquisition expanded the commercial product portfolio; Q1 included $0.137 million of acquisition-related working-capital payments. Goodwill was $0.759 million and allocated to Water Filtration.
- Management expected to launch a water-safety diagnostic product in late 2019 and, subject to FDA clearance, believed it could return its HDF system to market by early 2020. These are expectations, not guarantees; the filing provides no numerical revenue or earnings guidance.
- Nephros had a 2019 minimum-purchase commitment to Medica of €3.0 million; remaining aggregate purchase commitments at March 31 were approximately €1.789 million. Dependence on suppliers, product acceptance, regulatory approvals, product liability, financing, and patent protection were identified as risks.
- Five customers accounted for 55% of Q1 revenue, compared with 39% a year earlier, creating customer-concentration exposure. The filing also describes contingent consideration whose valuation depends on estimates of future acquired-business performance.
- Subsequent matters disclosed included a May 2019 amendment to the CEO’s employment agreement, providing 12 months of base-salary continuation in specified termination circumstances, and board approval to reserve an additional 2 million shares for the equity plan.
Investor facts to verify
- Whether revenue growth and improved gross margin persist, and how much reflects the acquired Aether business versus existing products.
- Cash availability for parent-company operations, given SRP’s restricted funds, recurring cash burn, and the company’s stated financing and cost-reduction contingencies.
- Renewal and borrowing availability under the secured revolving facility, as well as compliance with secured debt obligations.
- Progress, funding, regulatory requirements and actual launch timing for the diagnostic product and second-generation HDF system.
- Customer concentration, Medica purchase commitments, and assumptions underlying the Biocon contingent-consideration valuation.