Nephros, Inc. — FY2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021. This is an annual filing; the supplied text does not provide separate fourth-quarter results. Nephros develops and sells water filtration products and pathogen-detection systems, and its majority-owned subsidiary SRP is developing a hemodiafiltration device.
Financial performance and liquidity
| Metric | FY2021 | FY2020 |
|---|---|---|
| Net revenue | $10.404 million | $8.561 million |
| Gross profit / margin | $5.743 million / 55% | $4.913 million / 57% |
| Operating loss | $4.335 million | $4.275 million |
| Net loss | $3.867 million | $4.526 million |
| Net loss attributable to Nephros shareholders | $4.107 million; $0.41 per share | $4.766 million; $0.52 per share |
| Net cash used in operating activities | $1.417 million | $6.903 million |
- Water Filtration revenue rose 20% to $10.217 million. Pathogen Detection revenue increased to $187,000 from $29,000; Renal Products had no revenue.
- Gross margin declined by 2 percentage points, mainly due to higher inventory obsolescence in Water Filtration. Operating loss widened slightly as higher SG&A offset revenue growth and lower R&D expense.
- SG&A increased 19% to $7.710 million, principally from headcount, travel and marketing costs. R&D fell 21% to $2.166 million, mainly because of lower second-generation HDF spending, partly offset by higher pathogen-detection investment.
- Cash and cash equivalents were $6.973 million at year-end, down from $8.249 million; working capital was $11.244 million, down from $13.829 million. Management said cash was expected to fund its operating plan for at least 12 months from issuance of the financial statements.
- Total liabilities were $2.901 million. Secured note principal was approximately $343,000, bearing 8% interest and due April 2023; the revolving credit facility had been terminated in 2020. Lease liabilities were also reported. The 2020 PPP loan was forgiven in January 2021, generating $482,000 of income.
- Accumulated deficit was $135.7 million. The company reported no income-tax benefit or expense and maintained a full valuation allowance against net deferred tax assets.
Material changes and notable items
- Revenue grew 22%, with management citing new customer-site additions averaging more than one per day, 90% customer retention, and a 29% increase in sales to installed-base hospitals. Three customers represented 35% of revenue, versus 41% in 2020.
- Operating cash use improved substantially year over year, primarily because 2020 included inventory purchases made as a COVID-era supply-chain precaution and 2021 revenue increased.
- Nephros acquired GenArraytion in July 2021 for consideration of approximately $1.2 million, primarily to obtain pathogen-detection intellectual property and equipment. The agreement also provides for 5% royalties on certain product net sales for five years.
- The FDA had moved SRP’s second-generation HDF Assist Device 510(k) submission into substantive review, then requested additional testing, documentation and user-performance information in late December. The company expected to address the requests in March or April 2022 and anticipated clearance in the first half of 2022, followed by a measured launch in the second half, subject to clearance.
- In February 2022, SRP raised approximately $500,000 through a preferred-stock sale. Nephros participated to maintain its 62.5% ownership interest.
Outlook, risks and contingencies
- Management expected pandemic-related disruption to ease and believed increased awareness of waterborne pathogens could support demand. It also cautioned that new COVID-19 waves could again affect sales and supply chains. The company reported no significant supply or service interruptions during the pandemic.
- Management saw potential growth in commercial filtration and pathogen detection, and said it expected to pursue large commercial contracts. These are expectations, not assured outcomes; PluraPath and DialyPath are early-stage opportunities, and SequaPath was available as a service offering.
- Nephros remains loss-making and dependent on market acceptance, execution, and available capital. Risks include reliance on third-party manufacturers and distributors, regulatory delays, product liability, competition, customer concentration, and possible dilution from equity awards or future financing.
- Medica is a key supplier under an agreement running through 2025 that includes minimum purchase requirements. For 2021, the filing reports approximately €3.9 million of minimum purchases and €4.2 million of aggregate purchase commitments. Late invoices may incur interest at 12% annually under the company’s understanding with Medica.
- The filing reports no material pending legal proceedings. The independent auditor issued an unqualified opinion on the financial statements and identified the excess and obsolete inventory reserve as a critical audit matter. Management concluded disclosure controls and internal control over financial reporting were effective; the auditor did not provide an internal-control audit opinion.
Important facts for investors to verify
- Whether revenue growth can continue while gross margin recovers from the inventory-obsolescence pressure.
- Cash burn and liquidity relative to management’s stated 12-month funding horizon, including the timing and funding needs of SRP and any future capital raises.
- FDA progress and any changes to the timing, cost, or commercial prospects for the second-generation HDF device.
- Customer concentration, the Medica supply and minimum-purchase terms, and the effect of GenArraytion’s royalty obligations.
- The filing gives differing share-count reference dates: 10,198,712 shares at December 31, 2021 in the financial statements, and 10,258,444 shares outstanding as of March 1, 2022 on the cover. Verify current shares outstanding and potential dilution from options and warrants.