Nephros, Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017; filed November 9, 2017. The unaudited results are for a commercial-stage medical device and filtration products company, with products in hemodiafiltration and water ultrafiltration.
Financial performance and liquidity
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net revenue | $916,000 | $475,000 | $2.509 million | $1.575 million |
| Gross profit / margin | $532,000 / 58.1% | $316,000 / 66.5% | $1.504 million / 60.0% | $908,000 / 57.7% |
| Operating loss | $518,000 | $637,000 | $1.823 million | $2.260 million |
| Net loss | $632,000 | $706,000 | $2.098 million | $2.377 million |
| Operating cash used | Not separately presented for the quarter | $1.871 million | $1.584 million |
- Q3 revenue increased 93% year over year; product revenue rose 107%. Nine-month revenue increased 59%. Management attributed growth mainly to higher filter sales and described the hospital infection-control filtration strategy as showing early success.
- Gross margin was lower in Q3 year over year, which management attributed to foreign exchange, purchase timing, and product mix. Nine-month gross margin improved compared with 2016.
- Cash was $150,000 at September 30, versus $275,000 at December 31, 2016. Current assets were $1.609 million and current liabilities $1.412 million, leaving working capital of $197,000. Total stockholders’ equity fell to $265,000 from $667,000.
- Net cash used in operations was $1.871 million for the first nine months. Financing provided $1.742 million, including $1.179 million net proceeds from common-stock issuances and $563,000 from a new revolving facility; investing used no cash. Ending cash was $150,000.
- At September 30, the secured revolving facility had $563,000 outstanding, within a $1 million limit, at a stated rate of 7.75%. The unsecured notes carried an 11% rate and are due in June 2019. The balance sheet reported $922,000 for the long-term note, net of discount and issuance costs; total reported debt carrying amounts were approximately $1.485 million.
Material changes and business developments
- Revenue growth was driven principally by filter sales. Nephros began shipping HydraGuard hospital filters and EndoPur dialysis filters in July 2017, and began shipping EndoPur 20- and 30-inch versions in September. A lead-filtration product launch was expected in Q4 2017.
- In March, the company issued 4.06 million shares and warrants in a private placement at $0.30 per unit; in January, it also sold 300,000 shares under its Lincoln Park agreement. Shares outstanding rose from 49.8 million at year-end 2016 to 54.2 million at September 30, 2017.
- A secured, asset-based revolving credit facility was entered into in August. It is secured by company assets, including accounts receivable and inventory, and is guaranteed by the company’s subsidiary.
- The Medica license and supply agreement was expanded in May and extended in September through December 2025. The agreement includes annual minimum purchase commitments, including €1.6 million for 2017 and higher minimums in later years, plus a 3% royalty on applicable product sales.
Outlook, risks, and contingencies
- Going concern: The filing states that recurring losses and insufficient operating cash flow raise substantial doubt about the company’s ability to continue as a going concern. Management expected cash resources to fund operations through at least the first half of 2018, based on cash, projected sales growth, and anticipated NJEDA proceeds.
- Nephros reported approval to sell New Jersey net operating losses and research and development tax credits and anticipated proceeds of more than $1.75 million in Q4 2017. Receipt and timing were uncertain; management warned that failure to obtain proceeds or achieve projected sales could require additional financing, curtailing activities, or ceasing operations.
- Management cited product acceptance, new-product timing, financing availability, supplier and distributor performance, regulatory approvals, product liability, intellectual-property protection, and currency movements as risks. Foreign-currency losses were $27,000 in Q3 and $60,000 for the first nine months of 2017.
- Customer concentration is material: three customers represented 43% of nine-month revenue (18%, 13%, and 12%, respectively). The company also depends on third-party manufacturers and suppliers.
- Management said disclosure controls and procedures were effective at period-end and reported no material change in internal control over financial reporting during the quarter. No off-balance-sheet arrangements were reported.
Important facts for investors to verify
- Whether the anticipated NJEDA proceeds of more than $1.75 million were received, and whether subsequent cash resources supported the stated operating runway.
- Whether new product launches translated into sustained sales growth and improved gross margins, rather than only higher shipment volumes.
- Current cash burn, borrowing availability and terms, and the repayment or refinancing plan for the 11% notes due in June 2019.
- Progress against Medica’s minimum purchase commitments and the effect of those commitments on cash, inventory, and margins.
- Customer concentration, receivable collections, and dilution from warrants, options, and future equity financing.