Nephros, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; comparisons are with Q1 2015 unless stated otherwise. Financial statement amounts below are in thousands of dollars except per-share data. Nephros develops and sells hemodiafiltration systems and liquid-purification filters, including products for dialysis, hospitals, and commercial water filtration.
Financial performance and position
| Metric | Q1 2016 | Q1 2015 / prior date |
|---|---|---|
| Net revenue | $590 | $544 |
| Gross profit; gross margin | $295; 50.0% | $282; 51.8% |
| Operating expenses | $1,101 | $1,088 |
| Operating loss | $(806) | $(806) |
| Net income (loss) | $(836) | $243 |
| Basic earnings (loss) per share | $(0.02) | $0.01 |
| Cash used in operating activities | $(522) | $(917) |
| Cash and working capital | $701 cash; $769 working capital | Cash at March 31, 2015: $367; working-capital deficit: $265 |
| Total assets; total liabilities; equity (March 31, 2016) | $3,427; $1,434; $1,993 | December 31, 2015: $3,970; $1,306; $2,664 |
Revenue comprised $545 of product sales and $45 of license and royalty revenue. The filing reports no conventional interest-bearing debt balance; liabilities principally include accounts payable, accrued expenses, and deferred revenue. Interest expense was $14, primarily related to overdue vendor invoices. Cash declined by $547 during the quarter; investing activities used $26 and financing activities provided $1.
Material changes and notable items
- Revenue increased $46, or 8%, mainly from hospital and commercial filter sales and Bellco royalties; lower dialysis-filter sales partly offset the increase.
- Cost of goods sold rose 13% to $295, faster than revenue, reducing gross margin to 50.0% from 51.8%.
- R&D expense increased 40% to $269, primarily due to higher headcount. SG&A decreased 8% to $777, reflecting the absence of a prior-year CEO severance charge and lower professional-services costs, partly offset by increased stock compensation.
- Q1 2015 net income included a $1,009 noncash gain from a decrease in the fair value of warrant liabilities. Those warrants were fully exercised in September 2015; excluding that prior-period item, management compared the 2016 net loss of $836 with a 2015 loss of approximately $766.
- Q1 2016 included a $17 foreign-currency loss, compared with a $51 gain in Q1 2015. Accounts receivable increased to $569 from $397 at year-end; inventory declined to $476 from $591, including a higher inventory reserve.
- Customer concentration is significant: four customers represented 72% of Q1 2016 sales, and one customer accounted for 51% of quarter-end receivables.
Outlook, risks, and contingencies
- Going concern: Recurring losses and insufficient operating cash flow raise substantial doubt about the company’s ability to continue as a going concern. Management expected cash, warrant proceeds, and projected product-sales growth to fund operations at least into Q3 2016, depending on sales timing and uptake; this projection excluded future operating cash receipts. Additional financing, spending reductions, or cessation of operations may be necessary, and financing is not assured.
- Products and regulatory timing: Nephros launched the SSUmini in March 2016 and reported FDA clearance for the S100 Point of Use filter in April. FDA converted the EndoPur 20-, 30-, and 40-inch submissions to Traditional 510(k) review; management targeted an early-Q4 2016 launch for those sizes, subject to clearance. A separate Special 510(k) was filed for the 10-inch size, with an early-Q3 target, also subject to clearance.
- Commercial execution: Management described continued work on HDF evaluations and development of a next-generation system, while noting that customer adoption, product sales, and market uptake remain uncertain. The DaVita evaluation was not expected to restart in the near term.
- Commitments and operational exposure: The Medica supply agreement sets 2016 minimum purchases of approximately €1.2 million and a 3% royalty on relevant product sales. The company relies on third-party manufacturers and suppliers. Other identified risks include regulatory compliance, product liability, competition, financing needs, and foreign-exchange movements.
- FDA quality-system matter: After a 2015 warning letter, the company reported a February 2016 FDA inspection with no observations and an April 2016 FDA letter indicating its corrective actions appeared to address the cited deficiencies.
- The filing reported no pending legal proceedings and no off-balance-sheet arrangements. Management stated that disclosure controls were effective and that no material quarterly change in internal control over financial reporting occurred.
Important facts for investors to verify
- Whether cash runway, financing access, and sales growth are sufficient to address the disclosed going-concern uncertainty.
- Actual revenue growth, gross-margin trend, customer concentration, receivable collection, and inventory-reserve adequacy.
- FDA clearance and launch timing for each EndoPur size, and commercial adoption of the S100 and SSUmini products.
- Performance of the HDF evaluations and progress toward scalable, lower-cost HDF equipment.
- Ability to meet Medica purchase commitments and maintain supplier and distributor relationships.