Nephros, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; unaudited. Nephros is a commercial-stage medical-device and filtration company, selling water ultrafiltration products and hemodiafiltration (HDF) systems. Water filtration is management’s primary near-term growth opportunity; HDF is a longer-term development focus.
Financial performance
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Net revenue | $985,000 | $734,000 |
| Gross profit / margin | $467,000 / 47% | $455,000 / 62% |
| Operating expenses | $1.590 million | $1.060 million |
| Operating loss | $(1.123) million | $(605,000) |
| Net loss | $(1.429) million | $(680,000) |
| Operating cash used | $(669,000) | $(659,000) |
| Cash at period end | $1.819 million | $803,000 |
Revenue grew 34%, driven primarily by water-filter product sales, which rose to $958,000 from $690,000. License and royalty revenue was $27,000 versus $44,000. The reported gross margin fell to approximately 47% from 62%; cost of goods sold increased 86% to $518,000, including higher product costs, foreign-exchange effects, a $50,000 inventory reserve for expiring items, and $30,000 of physical-count adjustments. SG&A increased 64% to $1.260 million, reflecting higher personnel, stock-based compensation, and professional-services costs. R&D increased 25% to $289,000, partly for second-generation HDF development.
Liquidity, debt, and balance sheet
At March 31, 2018, current assets were $3.514 million and current liabilities $1.731 million, for working capital of $1.766 million. Total assets were $4.632 million, total liabilities $2.734 million, and stockholders’ equity $1.898 million. Accumulated deficit was $122.257 million. Inventory, net of reserves, was $928,000, up from $674,000 at year-end.
Nephros refinanced its $1.187 million 11% unsecured notes in March with a $1.187 million secured note bearing 8% interest and maturing April 2023; the refinancing generated a $199,000 debt-extinguishment loss from writing off the remaining discount. The secured revolving facility balance was $150,000, at an 8.25% rate at quarter-end, with a stated maximum of $1 million. The company also paid $561,000 net on that facility during the quarter.
Financing activities provided $293,000, including $854,000 net from common-stock issuance and $1.187 million of secured-note proceeds, offset by note repayments and revolving-credit payments. Operating cash use was nearly unchanged year over year despite the higher net loss, helped by receivable collections and higher accounts payable; inventory growth absorbed cash.
Developments, outlook, and risks
- After quarter-end, Nephros completed a private placement on April 11, 2018, selling approximately 6.54 million shares at $0.45 each for approximately $2.9 million net proceeds. Management said cash plus these proceeds should fund its current operating plan for at least 12 months. The company nevertheless expects further operating losses; no quantified revenue or earnings guidance is provided.
- Nephros adopted ASC 606 on January 1, 2018. The adoption accelerated approximately $278,000 of Bellco deferred revenue into opening accumulated deficit; Q1 reported revenue was $17,000 lower than it would have been under the previous guidance. Product revenue recognition was unaffected.
- Management attributed revenue growth to early progress in hospital water-infection-control filtration. It said the final post-market HDF evaluation concluded at Vanderbilt in Q1 2018 and it may work with Vanderbilt to publish observational findings. Development of a second-generation HDF system is being funded as cash permits.
- Supplier and concentration exposures warrant attention: three customers generated 37% of Q1 revenue, and three customers represented 36% of receivables at quarter-end. The Medica agreement requires minimum 2018 aggregate purchases of €2.5 million; reported purchase commitments outstanding at March 31 were approximately €471,000 ($565,000). The company relies on third-party manufacturing and suppliers.
- Other stated risks include product acceptance and liability, regulatory compliance and approvals, financing needs, supplier or distributor problems, intellectual-property protection, and the uncertain economics and timing of HDF development. Management reported disclosure controls were effective and no material change in internal control during the quarter.
Investor facts to verify
- Whether post-quarter financing and cash generation support the stated 12-month operating runway as losses continue.
- Whether water-filter sales growth can be sustained while gross margin recovers from the Q1 decline and inventory reserves are managed.
- The terms, collateral, repayment schedule, and covenant implications of the secured note and revolving facility.
- Progress against Medica purchase commitments, customer concentration, and commercialization milestones for new filters and the second-generation HDF system.
- Share dilution from the April placement and the company’s other potentially dilutive securities; 63,710,322 common shares were outstanding as of May 9, 2018.