Nephros, Inc. — Q1 2012 Form 10-Q
Business context and period. Unaudited results for the three months ended March 31, 2012, compared with Q1 2011. Nephros develops and sells hemodiafiltration and water-filtration products. The company reported FDA clearance for its OLpūr H2H Module and MD 220 Hemodiafilter on April 30, after quarter-end.
Key financial results
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Net revenue | $533,000 | $681,000 |
| Gross profit / margin | $311,000 / 58.3% | $199,000 / 29.2% |
| Operating expenses | $867,000 | $845,000 |
| Operating loss | ($556,000) | ($646,000) |
| Net loss | ($557,000) | ($707,000) |
| Operating cash flow | $425,000 provided | $548,000 used |
| Cash and equivalents at period end | $2.174 million | $2.247 million |
Balance sheet and liquidity. At March 31, cash was $2.174 million, current assets $3.584 million, current liabilities $1.343 million, and total liabilities $2.565 million. Stockholders’ equity was $1.034 million. The filing reports no interest-bearing debt at quarter-end; liabilities include deferred revenue of about $1.921 million related to the Bellco license. Accumulated deficit was $94.825 million. Management stated that recurring losses and difficulty generating sufficient cash flow raise substantial doubt about the company’s ability to continue as a going concern.
Changes and drivers versus Q1 2011
- Revenue declined 22%: product revenue fell to $360,000 from $681,000, while $173,000 of Bellco license revenue was recognized. Management attributed the decline chiefly to a $402,000 reduction in MD-filter sales in its target European market; higher DSU sales and Bellco license revenue partly offset the decline.
- Gross profit rose despite lower revenue, as cost of goods sold declined 54% to $222,000. The gross margin increased to 58.3% from 29.2%.
- Research and development expense increased 51% to $139,000. Selling, general and administrative expense was nearly unchanged at $726,000; depreciation and amortization fell to $2,000 from $24,000.
- Net loss narrowed by $150,000. Q1 2011 included interest expense and amortization of debt issuance costs associated with a senior secured note that was repaid in March 2011; neither was reported in Q1 2012.
- Operating cash flow turned positive, but included a $778,000 decrease in other assets, along with a $162,000 decrease in accounts receivable and a $162,000 increase in accounts payable and accrued expenses. These items, together with working-capital movements, should not be assumed to recur.
Outlook, risks, and notable items
- Management expects additional losses unless product sales or license revenue increase, and says additional financing may be needed. It warns that failure to obtain adequate capital could require curtailing operations or ceasing them; there is no assurance financing will be available on acceptable terms.
- The company depends on scheduled Bellco payments, product-market acceptance, effective manufacturing and marketing, and regulatory and development progress. Sales and receivables are concentrated: three customers accounted for 79% of Q1 2012 sales, and one customer represented 77% of quarter-end accounts receivable.
- Bellco’s final fixed installment of approximately €600,000 was due in January 2013. The filing says the first two installments had been received; the final installment was also included in current trade receivables at an approximate value of $800,280.
- After quarter-end, Nephros entered a Medica license and supply agreement requiring installment payments of €500,000 and €1 million, with the first payment made April 23, 2012, plus minimum annual purchases of €300,000 in 2012, €500,000 in 2013, and €750,000 in 2014. The agreement also provides Medica options to purchase 300,000 common shares.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. No legal proceedings were reported.
Important facts for investors to verify
- Whether the final Bellco installment was collected and the extent to which its receivable supports near-term liquidity.
- Available financing and the company’s cash runway, considering its going-concern warning and Medica payment and purchase commitments.
- Whether FDA clearance leads to commercial adoption and revenue growth, and whether the company can improve operating economics.
- Whether customer concentration and the timing of receivable collections or other working-capital changes affect reported cash generation.