Nephros, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Nephros develops and sells water filtration and pathogen-detection products and is developing a hemodiafiltration system through its majority-owned subsidiary, Specialty Renal Products (SRP). Financial figures below are in millions of dollars unless otherwise noted.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net revenue | $2.637 | $2.121 | $7.639 | $6.227 |
| Gross margin | $1.412 | $1.225 | $4.274 | $3.611 |
| Gross margin percentage | 54% | 58% | 56% | 58% |
| Operating loss | $(1.162) | $(0.932) | $(3.297) | $(3.556) |
| Net loss | $(1.162) | $(1.012) | $(2.825) | $(3.767) |
| Net loss attributable to Nephros shareholders | $(1.222) | $(1.072) | $(3.004) | $(3.946) |
| Basic and diluted loss per share | $(0.12) | $(0.12) | $(0.30) | $(0.44) |
- Q3 revenue rose 24%, led by Water Filtration, up 22% to $2.578 million; Pathogen Detection generated $59,000, versus no segment revenue in Q3 2020. Nine-month revenue grew 23%; Water Filtration revenue increased 21% to $7.504 million and Pathogen Detection revenue was $135,000.
- Gross margin percentage declined 4 percentage points in Q3 and 2 points for the nine-month period. Management attributed the decreases primarily to higher shipping costs and inventory adjustments in Q3, and inventory adjustments over nine months.
- Q3 operating expenses were $2.574 million, including $1.892 million of selling, general and administrative expense (SG&A) and $632,000 of research and development (R&D). Q3 SG&A increased 23%, primarily due to Water Filtration headcount; R&D declined 16% as lower HDF spending outweighed increased pathogen-detection investment.
- Nine-month operating loss improved by $259,000 year over year. The net loss improvement also included $482,000 of income from PPP loan forgiveness; the loan was forgiven in January 2021.
Cash flow, balance sheet and liquidity
- Cash and cash equivalents were $7.350 million at September 30, 2021, down from $8.249 million at December 31, 2020. Working capital was $11.798 million, compared with $13.829 million at year-end.
- For the first nine months, operating cash use was $1.082 million, versus $5.377 million in 2020; investing cash use was $85,000; and financing provided $274,000. Cash decreased by $899,000 to $7.350 million.
- Total assets were $17.820 million, total liabilities $2.490 million, and stockholders’ equity $15.330 million. Secured note principal was approximately $407,000, with a stated 8% rate and April 2023 maturity. The PPP loan balance was zero after forgiveness. Lease liabilities totaled approximately $864,000.
- The company reported an accumulated deficit of $134.7 million and said it expects operating losses to continue for several quarters. Management believed available cash would fund its current operating plan for at least 12 months from issuance of the statements, while noting that weaker demand or failure to meet its revenue plan could require spending reductions.
Material changes, outlook and risks
- On July 9, 2021, Nephros acquired GenArraytion in an asset acquisition for 123,981 common shares valued at approximately $1.2 million, plus about $49,000 of direct transaction costs. The acquired intellectual property and equipment support pathogen-detection products. Nephros also agreed to pay royalties of 5% of certain product net sales for five years.
- SRP’s second-generation hemodiafiltration system was resubmitted to the FDA for Traditional 510(k) clearance in June 2021 after an earlier Special 510(k) submission. No approval date or financial guidance was provided. Nephros said it planned a measured launch after clearance.
- Management described pandemic-related demand and sales-access disruption, particularly in hospital emergency-response filtration and hospitality/food-service products. It reported that operations continued without significant supply-chain or service interruptions, but warned that renewed COVID-19 disruption could weigh on demand and liquidity.
- Customer concentration is notable: three customers represented 46% of Q3 revenue; four represented 45% of nine-month revenue. Five customers accounted for 54% of accounts receivable at quarter-end.
- Nephros had approximately €3.3 million (about $4.0 million) of minimum 2021 purchase commitments to Medica; €2.8 million (about $3.3 million) remained at September 30. The Medica agreement also includes a 3% royalty on covered product net sales.
- Other risks include product acceptance, regulatory clearance, supplier and manufacturing dependencies, product liability, competition, intellectual-property protection, and access to future capital. The company reported no off-balance-sheet arrangements and said disclosure controls were effective.
- After quarter-end, on October 29, SRP’s president and CEO resigned; Nephros CEO Andrew Astor assumed those SRP roles. The filing provides no separate financial forecast.
Key facts for investors to verify
- Whether revenue growth and gross-margin performance continue, especially given shipping costs, inventory adjustments, and reliance on a small number of customers.
- Cash use versus management’s 12-month liquidity assessment, and whether operating plans or demand change enough to require additional capital or cost reductions.
- FDA review progress and the commercial and funding implications of SRP’s second-generation HDF system.
- Execution and potential returns from GenArraytion, including the effect of its stock consideration and royalty obligations.
- Medica purchase commitments, related royalties, and the company’s ability to manage supplier and inventory needs.
- Share-count and dilution disclosures: the filing reports 10,192,526 shares issued and outstanding at September 30 in the equity statement, while the cover reports 10,233,083 shares outstanding as of November 1.