Nephros, Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017; filed August 8, 2017. Financial amounts below are in thousands of dollars unless stated otherwise. Nephros develops and sells hemodiafiltration systems and liquid-purification filters, including products for dialysis and waterborne infection control.
Financial performance
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Net revenue | $859 | $509 | $1,593 | $1,099 |
| Gross profit (gross margin) | $517 (60.2%) | $297 (58.3%) | $972 (61.0%) | $592 (53.9%) |
| Operating expenses | $1,217 | $1,114 | $2,277 | $2,216 |
| Operating loss | $(700) | $(817) | $(1,305) | $(1,624) |
| Net loss | $(786) | $(835) | $(1,466) | $(1,671) |
| Net loss per share, basic and diluted | $(0.01) | $(0.02) | $(0.03) | $(0.03) |
Revenue growth was primarily attributed to increased filter sales. Management said this may reflect early success in hospital waterborne-infection-control markets. Product revenue was $785 in Q2 and $1,475 in the first half; license, royalty and other revenue was $74 and $118, respectively. Selling, general and administrative expense rose 9% in Q2 and 4% in the first half year over year. First-half interest expense increased to $130 from $44, principally reflecting note interest and debt-discount amortization. Foreign-currency losses contributed $23 in Q2 and $33 in the first half.
Cash, liquidity and debt
- Cash was $301 at June 30, 2017, versus $275 at year-end 2016. Working capital surplus was $630, compared with $369; total assets were $2,841 and total liabilities $2,058.
- Operating cash use was $1,158 for the first half, up from $794 in 2016. Cash provided by financing was $1,179, principally from the March 2017 private placement; investing cash flow was zero. Ending cash was $301, versus $1,602 at June 30, 2016.
- The unsecured notes carry 11% annual interest and are due in cash in June 2019. Their balance-sheet carrying value, net of debt discount and issuance costs, was $892; the filing describes approximately $1.187 million of original gross proceeds.
- In March, the company issued 4,059,994 shares and warrants at $0.30 per unit, receiving approximately $1.218 million gross and $1.066 million net of equity issuance costs. It also sold 300,000 shares to Lincoln Park in January for $113,000. Shares outstanding were 54,160,547 at June 30.
Changes, outlook and material risks
- Year-over-year first-half revenue rose 45%, while gross margin increased to 61.0% from 53.9%; operating and net losses narrowed. However, operating cash use increased, and cash remained limited.
- Management disclosed recurring losses and insufficient operating cash generation that raise substantial doubt about the company’s ability to continue as a going concern. Management expected existing resources, projected sales growth and proposed financing to fund operations at least into 2018, but those expectations were conditional.
- The company was pursuing a short-term asset-based credit facility and had approval to sell New Jersey tax credits, which management expected to produce approximately $1.5 million. Neither transaction had closed by the filing date; anticipated proceeds were not assured.
- Management expected to begin shipping the EndoPur 10-inch filter in August 2017, with larger sizes later that month; HydraGuard began shipping in July, with production ramp and a longer-life version expected in Q3. A lead-filtration system was also expected to launch in Q3. Timing and market acceptance are uncertain.
- A May 2017 amendment to the Medica supply agreement expanded covered products and territories and set minimum annual purchases of €1.6 million in 2017, rising to €3.475 million in 2022. These commitments create significant supply and liquidity exposure if sales do not develop as planned.
- Revenue and receivables are concentrated among a small number of customers: four customers represented 54% of Q2 revenue; three customers represented 48% of accounts receivable at June 30. Other risks cited include product acceptance, regulatory and product-liability exposure, supplier and manufacturer dependence, financing availability, and competition.
- Vanderbilt began treating patients with the HDF system in early 2017. The company is developing a second-generation system but said investment would follow achievement of positive cash flow. No quantified revenue or earnings guidance was provided.
Important facts for investors to verify
- Whether the proposed credit facility and approximately $1.5 million NJEDA tax-credit sale closed, and their final terms and timing.
- Whether new filter launches achieve the anticipated shipment ramp, customer adoption and cash collections.
- How the company will fund operating cash needs and meet Medica minimum purchase commitments, note interest and the June 2019 note maturity.
- Customer concentration, receivable collection, and any subsequent changes to liquidity or the going-concern assessment.
Management reported that disclosure controls and procedures were effective at period-end and that no material change in internal control over financial reporting occurred during the quarter.