Nephros
volatility or risk?
By Manuel Maurício
May 09, 2022
Nephros is down 68% since I bought it for the Portfolio. To break even, the stock must go up 213%.
The question now becomes “should we be selling or buying?”
Let’s look at the recent developments before I answer that question.
Financials
Revenue went down -20% from last year. The management attributed this to an unusually high emergency response component last year and also to the fact that 2 larger customer orders were delayed in this uarter.
Costs went up by +10% due to inflation and to increased spending in anticipation of future growth.
The result is a loss of -$2 million compared to -$0.5 million in the first quarter of last year.
Water Filtration
On the Conference Call, instead of focusing on the declining numbers, Andy chose to focus on “leading indicators” such as customer count, which went up by 17% to an all-time high of 1,276 customers, and customer satisfaction rate well over 90%.
He also mentioned that some of the competitors are struggling with supply chain constraints leading to the delay of several weeks or even months of the infection control filters.
Commercial Segment
There’s big news here as the company disclosed that the big fast food chain with which it had signed a distribution deal is the giant Chipotle.
Nephros will be providing beverage filters to over 2,500 restaurants starting in the second quarter and is counting on replacing the filters every 6 months. Andy had previously disclosed that this represented $250.000 annually, or $100 per restaurant.
This is good news because Chipotle is a well-known brand and will serve as proof of Nephros’ ability to execute large sales contracts.
Water Pathogen Testing
Andy mentioned that they’re looking to sign deals with 2 strategic testing partners and that this should be materializing in the second quarter. It’s worth mentioning that in the past quarter there were 3 strategic partners and now there’s only 2. I’ve sent Andy an email asking about this.
HDF machine
They are waiting for the FDA’s response to the request for clearance of the HDF machine. They hope to have it by the middle of the year.
The plan is to roll it out to just a couple of clinics in the second half of the year to demonstrate its efficacy. I could almost bet that they’ll be trying to license the machine to Fresenius. Maybe they’ll sell the whole company. The HDF subsidiary just raised $500K and both Nephros and its largest shareholder, Wexford Capital, bought enough stock to maintain their holdings. This shows confidence in the business.
Inflation
They’ve raised prices twice in the last 10 months and Andy is considering further increases in the second half of the year to throw the gross margin back to the 55%-60% range.
Balance Sheet
The company had $5.4 million in cash, and it burns $6.4 million per year. Not only that, but they have a $1.2 million loan that will mature in April 2023.
We should be seeing the company raising cash soon. Maybe after the FDA clearance so they can issue shares at better valuations.
Conclusion
Now to the question of if we should be buying or selling Nephros. It all comes down to whether you believe the story or not and how much you believe in it. I believe in the story, or else I wouldn’t own it.
Nothing has changed, all the shots on goal are even closer to the goal, but as a pre-profitability microcap, market sentiment creates increased volatility.
On my last update I mentioned that I was considering buying more stock. Well, I’m still considering.
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