Nephros, Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. Financial amounts below are in thousands of dollars unless otherwise noted. Nephros develops and sells hemodiafiltration (HDF) systems and liquid-purification filters for healthcare, dialysis, military, and commercial markets.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Total revenue | $509 | $567 | $1,099 | $1,112 |
| Gross profit | $297 | $358 | $592 | $641 |
| Gross margin | 58.3% | 63.1% | 53.9% | 57.6% |
| Operating expenses | $1,114 | $952 | $2,216 | $2,039 |
| Operating loss | $(817) | $(594) | $(1,624) | $(1,398) |
| Net loss | $(835) | $(1,815) | $(1,671) | $(1,572) |
| Basic and diluted loss per share | $(0.02) | $(0.06) | $(0.03) | $(0.05) |
Q2 revenue fell 10%, mainly on lower hospital-filter sales, partly offset by higher dialysis-filter revenue. Six-month revenue declined 1%, with decreases in both hospital and dialysis filters. The company said S100 orders received by June 30 but shipped in Q3 were not included. Q2 operating loss widened as R&D and SG&A costs increased. The lower Q2 net loss versus 2015 primarily reflects the absence of the prior-year $1,196 warrant-liability fair-value expense; that liability-classified warrant issue was fully exercised in September 2015. For the six-month comparison, 2016 net loss was higher; excluding the 2015 warrant fair-value expense, management reported a $287 increase in loss.
Cash, liquidity, and debt
- Cash was $1,602 at June 30, 2016, up from $1,248 at December 31, 2015. Working capital was $1,236, down from $1,505; current assets were $2,454 and current liabilities $1,218.
- Six-month operating cash use was $794, versus $1,451 in 2015. Investing cash use was $40. Financing provided $1,188, including approximately $1,187 gross proceeds from new notes and warrants. Ending cash was $1,602.
- In June, Nephros issued unsecured notes with $1,187 gross proceeds. Notes bear 11% annual interest, require semiannual interest payments, and mature June 7, 2019. The balance sheet reports $791 of long-term notes, net of debt discount and issuance costs. Warrants to buy approximately 2.4 million shares at $0.30 per share were also issued, exercisable for five years.
- Total liabilities were $2,322, including $1,218 current liabilities and $313 long-term deferred revenue. Stockholders’ equity was $1,673. The company had an accumulated deficit of $118,924.
Material developments, outlook, and risks
- Going concern: Recurring losses and a history of negative operating cash flow raise substantial doubt about the company’s ability to continue as a going concern. Management projected available cash and anticipated new-product sales would fund operations at least into Q1 2017, depending on launch timing and market uptake; this projection excludes future cash receipts from recurring operations. The company said additional financing is necessary and may not be available on acceptable terms or at all; alternatives could include curtailing activities or ceasing operations.
- Commercial and product plans: Nephros completed the RRI HDF evaluation in June after more than 1,200 patient treatments. It expected to deploy HDF systems at an academic institution in Q4 2016, subject to final contracting and planning, and was developing HDF version 2.0. The SSUmini launched in March. Management anticipated commercial cartridge products and limited releases of flushable systems later in 2016; these were plans, not assured results.
- Regulatory: FDA cleared the S100 point-of-use filter in April 2016. The FDA requested additional information on the PathoGuard submission and on EndoPur; the company reported an August 15, 2016 FDA meeting was scheduled to discuss submissions. The FDA’s April letter said it appeared the company had addressed deficiencies in its May 2015 warning letter; a February 2016 inspection had no observations.
- Supplier and customer exposure: The Medica agreement requires minimum 2016 purchases of €1.2 million, and the company described a 12% annual interest arrangement on certain overdue supplier invoices. Three customers accounted for 31% of Q2 revenue in 2016; the largest accounted for 35% of receivables at June 30.
- Management noted that operating results may fluctuate significantly, including due to R&D spending and marketing costs for launches. Key risks include market adoption, product and regulatory issues, supplier and distributor execution, and the ability to obtain capital. No legal proceedings were reported as pending.
Most important facts for investors to verify
- Whether cash runway, subsequent financing, and the going-concern assessment remain consistent with the stated Q1 2017 projection.
- Actual sales, margins, and cash conversion from new products, including the S100 orders shipped after quarter-end.
- Progress and commercial implications of the planned HDF deployment, RRI evaluation, and HDF version 2.0.
- FDA outcomes and timing for PathoGuard and EndoPur, and any effects on product launches or sales.
- Terms, interest burden, repayment obligations, and potential dilution from the June notes and warrants, together with the company’s ability to meet Medica purchase commitments.
- Customer concentration, receivable collection, and inventory-reserve adequacy.