Nephros, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; comparisons are with Q1 2012 unless noted. The unaudited statements cover Nephros, Inc. and its wholly owned subsidiary. Nephros develops and sells liquid-purification filters for healthcare, military and dialysis markets.
Key financial results
Amounts below are in thousands of U.S. dollars, except per-share data and percentages.
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Product revenue | $346 | $360 |
| License revenue | $175 | $173 |
| Total revenue | $521 | $533 |
| Gross profit / gross margin | $325 / 62.4% | $311 / 58.3% |
| Operating expenses | $1,537 | $867 |
| Operating loss | $(1,212) | $(556) |
| Net loss | $(1,242) | $(557) |
| Net loss per share, basic and diluted | $(0.10) | $(0.05) |
| Cash from (used in) operations | $(1,133) | $425 |
At March 31, 2013, cash was $243, current assets were $667, and total assets were $2,737. Current liabilities were $3,902, including a $1,300 senior secured note; total liabilities were $4,433 and stockholders’ deficit was $1,696. The company reported an accumulated deficit of $98,772. It had 12,025,309 common shares outstanding at quarter-end and 12,149,249 as of May 3, 2013.
Changes and operating developments
- Revenue declined 2% year over year. Management attributed the decrease mainly to approximately $117 of lower ONR contract revenue after that contract ended in March 2012; water-filter sales rose 42%, from approximately $243 to $345.
- Gross profit increased to $325 from $311 as cost of goods sold fell 12%, partly reflecting the end of ONR-related costs.
- Operating expenses rose 77%. SG&A increased $539, principally from personnel costs, approximately $204 of fees associated with the Lambda note, legal fees and travel. R&D increased $78; amortization related to the Medica agreement added $53 of depreciation and amortization expense.
- Cash used in operations worsened substantially, to $1,133 from $425 provided. The 2013 period included an $815 reduction in license and supply fees payable; the prior-year period benefited from a $778 decrease in other assets. Receivables and inventory reductions provided cash in Q1 2013.
- Cash increased from $47 at December 31, 2012 to $243, supported primarily by $1,300 of note proceeds and $30 from warrant exercises. Operating cash burn more than offset those financing proceeds.
Liquidity, outlook and risks
- Going concern: Management stated recurring losses and inadequate operating cash flow raise substantial doubt about the company’s ability to continue as a going concern. Nephros expects further losses and says it needs additional financing; it warns it may have to curtail operations or cease operations if it cannot raise capital.
- Secured debt: The February 2013 Lambda note is $1.3 million, bears 12% annual interest and matures August 4, 2013. It is secured by a first-priority lien on company property, including intellectual property. The rate rises to 16% upon nonpayment when due. The note contains restrictive covenants and requires prepayment from specified financing and asset-sale proceeds. Accrued transaction and legal fees were recorded in SG&A.
- Rights offering: A $3.0 million rights offering was underway after its registration statement became effective April 17, 2013; it was scheduled to expire May 17, subject to extension. Full subscription was estimated to yield $3.0 million gross, before expenses. Lambda indicated an intention to exercise its basic rights and purchase unsubscribed shares, subject to conditions; completion and proceeds were not established in this filing. Warrants issued in 2011 temporarily had a reduced exercise price during the offering period.
- Commercial and product outlook: The company said it was preparing its FDA-cleared mid-HDF system for market and expected to place one in a U.S. dialysis clinic in Q2 2013, while seeking a U.S. commercialization partner. Nephros was in the competitive range for a U.S. Army IWPD solicitation and received a request for 180 test units; the filing cautions that the Army may award several, one or no contracts. The solicitation’s combined maximum was 450,000 units or $45 million over three years, not a forecast or awarded contract.
- Other commitments: The Medica agreement includes minimum purchases of €500,000 in 2013 and €750,000 in 2014, plus a €400,000 deferred installment due June 2013. A 3% royalty on specified product net sales applies from April 2014 through 2022. Bellco license royalties are scheduled for 2015–2016, subject to unit sales and agreement terms.
- Concentration and execution risks: Three customers represented 34%, 34% and 18% of Q1 sales. One customer accounted for 91% of accounts receivable at March 31. The filing also identifies financing, product adoption, supplier, regulatory, intellectual-property and competitive risks. No pending legal proceedings were reported; management concluded disclosure controls were effective.
The filing provides no quantified earnings or revenue guidance. Management cautions that quarterly results may fluctuate and are not necessarily indicative of full-year performance.
Important facts for investors to verify
- Whether the rights offering closed, how much net cash it raised, and whether proceeds repaid the Lambda note.
- Cash runway, near-term obligations and any subsequent financing or going-concern developments.
- Whether the Army evaluation resulted in a contract, and whether the expected Q2 mid-HDF clinic placement and U.S. commercialization plans proceeded.
- Customer concentration, collections from the customer representing 91% of receivables, and the company’s ability to grow product sales and margins.
- Compliance with the Lambda note’s maturity, covenants and collateral provisions, and funding of Medica purchase and deferred-payment commitments.