Nephros, Inc. — Q3 2012 Form 10-Q
Reporting period: Three and nine months ended September 30, 2012; filed November 9, 2012. Financial statements are unaudited. Dollar amounts below are in millions unless stated otherwise.
Business context
Nephros is a commercial-stage medical-device company selling high-performance liquid-purification filters, primarily for dialysis and healthcare facilities, with additional military and other applications. It also develops a mid-dilution hemodiafiltration system. The company received FDA clearance for its OLpūr H2H Module and MD 220 Hemodiafilter in April 2012, but had not begun U.S. marketing and planned to seek a commercialization partner.
Key financial results and liquidity
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Total net revenue | $0.604 | $0.407 | $1.439 | $1.725 |
| Gross margin | $0.413 (68%) | $0.309 (76%) | $0.991 (69%) | $0.711 (41%) |
| Operating expenses | $1.266 | $0.734 | $3.212 | $2.380 |
| Net loss | $(0.853) | $(0.413) | $(2.164) | $(1.722) |
| Cash used in operations | Not provided for quarter | Not provided for quarter | $(1.089) | $(0.679) |
- At September 30, cash was $0.366, down from $1.669 at December 31, 2011. Current assets were $1.777 and current liabilities $2.752, including a $1.285 payable under the Medica license and supply agreement.
- Total liabilities were $3.633; the filing reports no debt outstanding. Deferred revenue was $1.585, of which $0.704 was current and $0.881 long-term. Stockholders’ equity was $0.323.
- Investing activities used $0.666, including $0.659 for Medica-related intangible assets. Financing activities provided $0.451 from warrant exercises. Cash decreased $1.303 over the nine-month period.
- Basic and diluted net loss per share was $(0.07) for Q3 and $(0.20) for the nine-month period. The company excluded 17.6 million options and warrants from diluted EPS as anti-dilutive.
Material changes versus comparable periods
- Q3 revenue increased 48%, driven by higher U.S. dialysis and hospital filter sales, initial military water-filter sales, and European sales; lower STERIS and U.S. Naval Research project revenue partly offset growth. Q3 net loss more than doubled, primarily as operating expenses rose 72%, including higher personnel, stock compensation, legal and marketing costs.
- Nine-month revenue declined 17%. Lower European MD-filter sales following the Bellco licensing arrangement and reduced STERIS and Naval Research revenue outweighed higher Bellco license revenue and growth in U.S. and military sales.
- Nine-month gross margin improved to 69% from 41%, largely as cost of goods sold fell 56%, including lower costs associated with European MD-filter sales and the completed Naval Research project. Despite the improved gross margin, operating expenses rose 35% and the net loss widened.
- Shares outstanding increased to 11.63 million from 10.50 million at year-end, primarily following warrant exercises that generated $0.451 million. The filing also reports additional exercises after quarter-end that issued 80,854 shares.
Outlook, commitments and risks
- Going concern: Management states recurring losses and insufficient cash flow raise substantial doubt about the company’s ability to continue as a going concern. Additional financing is needed; if unavailable, Nephros may curtail planned activities or cease operations. No specific financing plan or financial guidance is provided.
- Bellco: A final fixed payment of approximately $0.771 million was due in January 2013 and recorded as a receivable. Bellco’s future royalties are contingent on unit sales and begin in 2015 under the disclosed agreement.
- Medica: The company’s $1.285 million installment payment was due January 25, 2013. It also committed to minimum purchases of €0.3 million, €0.5 million and €0.75 million for 2012, 2013 and 2014, respectively; purchases through September 2012 totaled approximately €0.438 million. A 3% royalty on product net sales is specified for 2014–2022, subject to agreement terms.
- Principal risks include continued losses and financing needs; customer concentration (one customer represented 36% of nine-month sales and 72% of receivables); reliance on third-party manufacturing; uncertain product adoption and regulatory requirements; and potential dilution, limited trading liquidity and stock-price volatility.
- The company reported no pending legal proceedings and said disclosure controls were effective, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Available cash, expected operating cash burn, and the timing, amount and terms of any required financing.
- Collection of the Bellco receivable and payment of the Medica obligation due in January 2013, along with future purchase commitments.
- Whether U.S. commercialization or a partner for the FDA-cleared mid-HDF system is secured, and whether military and healthcare filter sales can grow profitably.
- Customer concentration, warrant and option dilution, and the discrepancy in the filing’s accumulated-deficit figures: the balance sheet reports $96.432 million, while a risk-factor passage reports approximately $96.458 million.