UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: June 30,March 31, 20222023
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from: _______ to _______
Commission File Number: 001-32288
NEPHROS, INC.
(Exact name of registrant as specified in its charter)
delaware | 13-3971809 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
380 Lackawanna Place South Orange, NJ | 07079 | |
(Address of principal executive offices) | (Zip Code) |
(201) 343-5202
Registrant’s telephone number, including area code
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading symbol | Name of exchange on which registered | ||
Common stock, par value $0.001 per share | NEPH | The Nasdaq Stock Market LLC |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ YES ☐ NO
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ YES ☐ NO
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.:
Large accelerated filer ☐ | Accelerated filer ☐ |
Non-accelerated filer ☒ | Smaller reporting company ☒ |
Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ YES ☒ NO
As of August 10, 2022,May 3, 2023, shares of the registrant’s common stock, $0.001 par value per share, were outstanding.
NEPHROS, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
2 |
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
NEPHROS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
(Unaudited)
June 30, 2022 | December 31, 2021 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 4,179 | $ | 6,973 | ||||
Accounts receivable, net | 2,128 | 1,641 | ||||||
Inventory | 4,664 | 4,795 | ||||||
Prepaid expenses and other current assets | 151 | 225 | ||||||
Total current assets | 11,122 | 13,634 | ||||||
Property and equipment, net | 450 | 366 | ||||||
Lease right-of-use assets | 626 | 730 | ||||||
Intangible assets, net | 1,460 | 1,536 | ||||||
Goodwill | 759 | 759 | ||||||
License and supply agreement, net | 469 | 536 | ||||||
Other assets | 67 | 89 | ||||||
TOTAL ASSETS | $ | 14,953 | $ | 17,650 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Current portion of secured note payable | $ | 210 | $ | 248 | ||||
Accounts payable | 1,411 | 1,334 | ||||||
Accrued expenses | 185 | 444 | ||||||
Current portion of lease liabilities | 305 | 364 | ||||||
Total current liabilities | 2,111 | 2,390 | ||||||
Secured note payable, net of current portion | - | 95 | ||||||
Equipment financing, net of current portion | 3 | 4 | ||||||
Lease liabilities, net of current portion | 358 | 412 | ||||||
TOTAL LIABILITIES | 2,472 | 2,901 | ||||||
COMMITMENTS AND CONTINGENCIES (Note 13) | - | - | ||||||
STOCKHOLDERS’ EQUITY | ||||||||
Preferred stock, $ | par value; shares authorized at June 30, 2022 and December 31, 2021; shares issued and outstanding at June 30, 2022 and December 31, 2021.- | - | ||||||
Common stock, $ | par value; shares authorized at June 30, 2022 and December 31, 2021; and shares issued and outstanding at June 30, 2022 and December 31, 2021, respectively.10 | 10 | ||||||
Additional paid-in capital | 148,040 | 147,346 | ||||||
Accumulated other comprehensive income | - | 64 | ||||||
Accumulated deficit | (138,829 | ) | (135,725 | ) | ||||
Subtotal | 9,221 | 11,695 | ||||||
Noncontrolling interest | 3,260 | 3,054 | ||||||
TOTAL STOCKHOLDERS’ EQUITY | 12,481 | 14,749 | ||||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 14,953 | $ | 17,650 |
The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements.
NEPHROS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In thousands, except share and per share amounts)
(Unaudited)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||||||
Net revenue: | ||||||||||||||||
Product revenues | $ | 2,839 | $ | 2,196 | $ | 5,016 | $ | 4,908 | ||||||||
Royalty and other revenues | 45 | 70 | 55 | 94 | ||||||||||||
Total net revenues | 2,884 | 2,266 | 5,071 | 5,002 | ||||||||||||
Cost of goods sold | 1,523 | 991 | 2,685 | 2,140 | ||||||||||||
Gross margin | 1,361 | 1,275 | 2,386 | 2,862 | ||||||||||||
Operating expenses: | ||||||||||||||||
Research and development | 431 | 487 | 1,009 | 1,043 | ||||||||||||
Depreciation and amortization | 64 | 51 | 116 | 101 | ||||||||||||
Selling, general and administrative | 2,070 | 1,854 | 4,418 | 3,853 | ||||||||||||
Total operating expenses | 2,565 | 2,392 | 5,543 | 4,997 | ||||||||||||
Loss from operations | (1,204 | ) | (1,117 | ) | (3,157 | ) | (2,135 | ) | ||||||||
Other income (expense): | ||||||||||||||||
Interest expense | (6 | ) | (11 | ) | (13 | ) | (24 | ) | ||||||||
Interest income | 1 | 3 | 3 | 6 | ||||||||||||
Extinguishment of PPP loan | - | - | - | 482 | ||||||||||||
Other income (expense), net | 72 | (1 | ) | 63 | 8 | |||||||||||
Total other income (expense): | 67 | (9 | ) | 53 | 472 | |||||||||||
Net loss | (1,137 | ) | (1,126 | ) | (3,104 | ) | (1,663 | ) | ||||||||
Less: Undeclared deemed dividend attributable to noncontrolling interest | (66 | ) | (60 | ) | (129 | ) | (119 | ) | ||||||||
Net loss attributable to Nephros, Inc. shareholders | (1,203 | ) | (1,186 | ) | (3,233 | ) | (1,782 | ) | ||||||||
Net loss per common share, basic and diluted | $ | (0.12 | ) | $ | (0.12 | ) | $ | (0.31 | ) | $ | (0.18 | ) | ||||
Weighted average common shares outstanding, basic and diluted | 10,299,148 | 9,943,026 | 10,265,267 | 9,913,196 | ||||||||||||
Comprehensive loss: | ||||||||||||||||
Net loss | $ | (1,137 | ) | $ | (1,126 | ) | $ | (3,104 | ) | $ | (1,663 | ) | ||||
Other comprehensive income (loss), foreign currency translation adjustments, net of tax | - | 2 | (3 | ) | (4 | ) | ||||||||||
Comprehensive loss | (1,137 | ) | (1,124 | ) | (3,107 | ) | (1,667 | ) | ||||||||
Comprehensive loss attributable to noncontrolling interest | (66 | ) | (60 | ) | (129 | ) | (119 | ) | ||||||||
Comprehensive loss attributable to Nephros, Inc. shareholders | $ | (1,203 | ) | $ | (1,184 | ) | $ | (3,236 | ) | $ | (1,786 | ) |
March 31, 2023 | December 31, 2022 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 3,836 | $ | 3,634 | ||||
Accounts receivable, net | 1,963 | 1,286 | ||||||
Inventory | 2,348 | 3,153 | ||||||
Prepaid expenses and other current assets | 177 | 188 | ||||||
Total current assets | 8,324 | 8,261 | ||||||
Property and equipment, net | 107 | 116 | ||||||
Lease right-of-use assets | 897 | 984 | ||||||
Intangible assets, net | 412 | 423 | ||||||
Goodwill | 759 | 759 | ||||||
License and supply agreement, net | 368 | 402 | ||||||
Other assets | 60 | 54 | ||||||
TOTAL ASSETS | $ | 10,927 | $ | 10,999 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Current portion of secured note payable | $ | - | $ | 71 | ||||
Accounts payable | 719 | 740 | ||||||
Accrued expenses | 383 | 285 | ||||||
Current portion of lease liabilities | 313 | 316 | ||||||
Total current liabilities | 1,415 | 1,412 | ||||||
Equipment financing, net of current portion | - | 1 | ||||||
Lease liabilities, net of current portion | 618 | 705 | ||||||
TOTAL LIABILITIES | 2,033 | 2,118 | ||||||
COMMITMENTS AND CONTINGENCIES (Note 14) | - | - | ||||||
STOCKHOLDERS’ EQUITY: | ||||||||
Preferred stock, $ par value; shares authorized at March 31, 2023 and December 31, 2022; shares issued and outstanding at March 31, 2023 and December 31, 2022 | - | - | ||||||
Common stock, $ par value; shares authorized at March 31, 2023 and December 31, 2022; and shares issued and outstanding at March 31, 2023 and December 31, 2022, respectively | 10 | 10 | ||||||
Additional paid-in capital | 152,021 | 148,413 | ||||||
Accumulated deficit | (143,137 | ) | (142,831 | ) | ||||
Subtotal | 8,894 | 5,592 | ||||||
Noncontrolling interest | - | 3,289 | ||||||
TOTAL STOCKHOLDERS’ EQUITY | 8,894 | 8,881 | ||||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 10,927 | $ | 10,999 |
The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements.
NEPHROS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In thousands, except share and per share amounts)
(Unaudited)
Three Months Ended March 31, | ||||||||
2023 | 2022 | |||||||
Net revenue: | ||||||||
Product revenues | $ | 3,662 | $ | 2,151 | ||||
Royalty and other revenues | 35 | 8 | ||||||
Total net revenues | 3,697 | 2,159 | ||||||
Cost of goods sold | 1,586 | 1,106 | ||||||
Gross margin | 2,111 | 1,053 | ||||||
Operating expenses: | ||||||||
Selling, general and administrative | 2,124 | 2,177 | ||||||
Research and development | 239 | 372 | ||||||
Depreciation and amortization | 54 | 51 | ||||||
Total operating expenses | 2,417 | 2,600 | ||||||
Operating loss from continuing operations | (306 | ) | (1,547 | ) | ||||
Other (expense) income: | ||||||||
Interest expense | (1 | ) | (7 | ) | ||||
Interest income | 12 | 2 | ||||||
Other expense, net | (11 | ) | (9 | ) | ||||
Total other expense: | - | (14 | ) | |||||
Loss from continuing operations | (306 | ) | (1,561 | ) | ||||
Net loss from discontinued operations | - | (406 | ) | |||||
Net loss | (306 | ) | (1,967 | ) | ||||
Less: Undeclared deemed dividend attributable to noncontrolling interest | - | (63 | ) | |||||
Net loss attributable to Nephros, Inc. shareholders | $ | (306 | ) | $ | (2,030 | ) | ||
Net loss per common share, basic and diluted from continuing operations | $ | (0.03 | ) | $ | (0.15 | ) | ||
Net loss per common share, basic and diluted from discontinued operations | - | (0.04 | ) | |||||
Net loss per common share, basic and diluted | (0.03 | ) | (0.19 | ) | ||||
Net loss per common share, basic and diluted, attributable to continuing noncontrolling interest | - | (0.01 | ) | |||||
Net loss per common share, basic and diluted, attributable to Nephros, Inc, shareholders | $ | (0.03 | ) | $ | (0.20 | ) | ||
Weighted average common shares outstanding, basic and diluted | 10,297,429 | 10,213,898 | ||||||
Comprehensive loss: | ||||||||
Net loss | $ | (306 | ) | $ | (1,967 | ) | ||
Other comprehensive loss, foreign currency translation adjustments, net of tax | - | (3 | ) | |||||
Comprehensive loss | (306 | ) | (1,970 | ) | ||||
Comprehensive loss attributable to continuing noncontrolling interest | - | (63 | ) | |||||
Comprehensive loss attributable to Nephros, Inc. shareholders | $ | (306 | ) | $ | (2,033 | ) |
The accompanying notes are an integral part of these unaudited consolidated interim financial statements.
4 |
NEPHROS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
(In thousands, except share amounts)
(Unaudited)
Three and six months ended June 30, 2022 | ||||||||||||||||||||||||||||||||
Common Stock | Additional Paid-in | Accumulated Other Comprehensive | Accumulated | Noncontrolling | Total Stockholders’ | |||||||||||||||||||||||||||
Shares | Amount | Capital | Income | Deficit | Subtotal | Interest | Equity | |||||||||||||||||||||||||
Balance, December 31, 2021 | 10,198,712 | $ | 10 | $ | 147,346 | $ | 64 | $ | (135,725 | ) | $ | 11,695 | $ | 3,054 | $ | 14,749 | ||||||||||||||||
Net loss | - | - | - | - | (1,967 | ) | (1,967 | ) | - | (1,967 | ) | |||||||||||||||||||||
Change in non-controlling interest | - | - | - | - | - | - | 188 | 188 | ||||||||||||||||||||||||
Net unrealized losses on foreign currency translation, net of tax | - | - | - | (3 | ) | - | (3 | ) | - | (3 | ) | |||||||||||||||||||||
Exercise of warrants | 60,374 | - | 163 | - | - | 163 | - | 163 | ||||||||||||||||||||||||
Stock-based compensation | - | - | 272 | - | - | 272 | - | 272 | ||||||||||||||||||||||||
Balance, March 31, 2022 | 10,259,086 | $ | 10 | $ | 147,781 | $ | 61 | $ | (137,692 | ) | $ | 10,160 | $ | 3,242 | $ | 13,402 | ||||||||||||||||
Net loss | - | $ | - | $ | - | $ | - | $ | (1,137 | ) | $ | (1,137 | ) | $ | - | $ | (1,137 | ) | ||||||||||||||
Restricted stock vesting | 44,732 | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Elimination of cumulative translation adjustment, upon closing of wholly owned foreign subsidiary | - | - | - | (61 | ) | - | (61 | ) | - | (61 | ) | |||||||||||||||||||||
Stock-based compensation | - | - | 259 | - | - | 259 | 18 | 277 | ||||||||||||||||||||||||
Balance, June 30, 2022 | 10,303,818 | $ | 10 | $ | 148,040 | $ | - | $ | (138,829 | ) | $ | 9,221 | $ | 3,260 | $ | 12,481 |
Three months ended March 31, 2023 | ||||||||||||||||||||||||||||||||
Common Stock | Additional Paid-in | Accumulated Other Comprehensive | Accumulated | Noncontrolling | Total Stockholders’ | |||||||||||||||||||||||||||
Shares | Amount | Capital | Income | Deficit | Subtotal | Interest | Equity | |||||||||||||||||||||||||
Balance, December 31, 2022 | 10,297,429 | $ | 10 | $ | 148,413 | $ | - | $ | (142,831 | ) | $ | 5,592 | $ | 3,289 | $ | 8,881 | ||||||||||||||||
Net loss | - | - | - | - | (306 | ) | (306 | ) | - | (306 | ) | |||||||||||||||||||||
Change in non-controlling interest | - | - | 3,262 | - | - | 3,262 | (3,262 | ) | - | |||||||||||||||||||||||
Stock-based compensation | - | - | 346 | - | - | 346 | (27 | ) | 319 | |||||||||||||||||||||||
Balance, March 31, 2023 | 10,297,429 | $ | 10 | $ | 152,021 | $ | - | $ | (143,137 | ) | $ | 8,894 | $ | - | $ | 8,894 |
Three and six months ended June 30, 2021 | ||||||||||||||||||||||||||||||||
Common Stock | Additional Paid-in | Accumulated Other Comprehensive | Accumulated | Noncontrolling | Total Stockholders’ | |||||||||||||||||||||||||||
Shares | Amount | Capital | Income | Deficit | Subtotal | Interest | Equity | |||||||||||||||||||||||||
Balance, December 31, 2020 | 9,873,006 | $ | 10 | $ | 144,296 | $ | 74 | $ | (131,858 | ) | $ | 12,522 | $ | 3,051 | $ | 15,573 | ||||||||||||||||
Net loss | - | - | - | - | (537 | ) | (537 | ) | - | (537 | ) | |||||||||||||||||||||
Net unrealized losses on foreign currency translation, net of tax | - | - | - | (6 | ) | - | (6 | ) | - | (6 | ) | |||||||||||||||||||||
Exercise of options | 14,754 | - | 62 | - | - | 62 | - | 62 | ||||||||||||||||||||||||
Cashless exercise of options | 131 | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Stock-based compensation | - | - | 443 | - | - | 443 | 2 | 445 | ||||||||||||||||||||||||
Balance, March 31, 2021 | 9,887,891 | $ | 10 | $ | 144,801 | $ | 68 | $ | (132,395 | ) | $ | 12,484 | $ | 3,053 | $ | 15,537 | ||||||||||||||||
Net loss | - | $ | - | $ | - | $ | - | $ | (1,126 | ) | $ | (1,126 | ) | $ | - | $ | (1,126 | ) | ||||||||||||||
Net unrealized gains on foreign currency translation, net of tax | - | - | - | 2 | - | 2 | - | 2 | ||||||||||||||||||||||||
Cashless exercise of options | 14,616 | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Exercise of warrants | 110,003 | - | 297 | - | - | 297 | - | 297 | ||||||||||||||||||||||||
Cashless exercise of warrants | 10,963 | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Stock-based compensation | - | - | 280 | - | - | 280 | 1 | 281 | ||||||||||||||||||||||||
Balance, June 30, 2021 | 10,023,473 | $ | 10 | $ | 145,378 | $ | 70 | $ | (133,521 | ) | $ | 11,937 | $ | 3,054 | $ | 14,991 |
Three months ended March 31, 2022 | ||||||||||||||||||||||||||||||||
Common Stock | Additional Paid-in | Accumulated Other Comprehensive | Accumulated | Noncontrolling | Total Stockholders’ | |||||||||||||||||||||||||||
Shares | Amount | Capital | Income | Deficit | Subtotal | Interest | Equity | |||||||||||||||||||||||||
Balance, December 31, 2021 | 10,198,712 | $ | 10 | $ | 147,346 | $ | 64 | $ | (135,725 | ) | $ | 11,695 | $ | 3,054 | $ | 14,749 | ||||||||||||||||
Net loss | - | - | - | (1,967 | ) | (1,967 | ) | - | (1,967 | ) | ||||||||||||||||||||||
Change in non-controlling interest | - | - | - | - | - | 188 | 188 | |||||||||||||||||||||||||
Net unrealized losses on foreign currency translation, net of tax | - | - | (3 | ) | - | (3 | ) | - | (3 | ) | ||||||||||||||||||||||
Exercise of warrants | 60,374 | - | 163 | - | - | 163 | - | 163 | ||||||||||||||||||||||||
Stock-based compensation | - | 272 | - | - | 272 | - | 272 | |||||||||||||||||||||||||
Balance, March 31, 2022 | 10,259,086 | $ | 10 | $ | 147,781 | $ | 61 | $ | (137,692 | ) | $ | 10,160 | $ | 3,242 | $ | 13,402 |
The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements.
5 |
NEPHROS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended June 30, | Three Months Ended March 31, | |||||||||||||||
2022 | 2021 | 2023 | 2022 | |||||||||||||
OPERATING ACTIVITIES: | ||||||||||||||||
Net loss | $ | (3,104 | ) | $ | (1,663 | ) | $ | (306 | ) | $ | (1,967 | ) | ||||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||||||||||
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | ||||||||||||||||
Depreciation of property and equipment | 53 | 15 | 9 | 17 | ||||||||||||
Amortization of intangible assets, license and supply agreement and finance lease right-of-use asset | 143 | 94 | 44 | 75 | ||||||||||||
Stock-based compensation, including stock options and restricted stock | 549 | 557 | 319 | 272 | ||||||||||||
Inventory obsolescence charge | 108 | 37 | 91 | 49 | ||||||||||||
Extinguishment of PPP loan | - | (482 | ) | |||||||||||||
Gain on foreign currency transactions | (60 | ) | (8 | ) | ||||||||||||
Change in right-of-use assets | 174 | 158 | ||||||||||||||
Change in right of use asset | 87 | 86 | ||||||||||||||
Decrease (increase) in operating assets: | ||||||||||||||||
Accounts receivable | (487 | ) | (19 | ) | (677 | ) | 348 | |||||||||
Inventory | 23 | 180 | 714 | 67 | ||||||||||||
Prepaid expenses and other current assets | 74 | 144 | 10 | (39 | ) | |||||||||||
Other assets | 22 | (15 | ) | (5 | ) | 4 | ||||||||||
(Decrease) increase in operating liabilities: | ||||||||||||||||
Accounts payable | 77 | 685 | (21 | ) | (437 | ) | ||||||||||
Accrued expenses | (262 | ) | 300 | 98 | (183 | ) | ||||||||||
Lease liabilities | (179 | ) | (155 | ) | (87 | ) | (89 | ) | ||||||||
Net cash used in operating activities | (2,869 | ) | (172 | ) | ||||||||||||
Net cash provided by (used in) operating activities | 276 | (1,797 | ) | |||||||||||||
INVESTING ACTIVITIES: | ||||||||||||||||
Purchase of property and equipment | (137 | ) | (23 | ) | - | (34 | ) | |||||||||
Net cash used in investing activities | (137 | ) | (23 | ) | - | (34 | ) | |||||||||
FINANCING ACTIVITIES: | ||||||||||||||||
Proceeds from sale of subsidiary preferred shares to noncontrolling interest | 188 | - | - | 188 | ||||||||||||
Payments on secured note payable | (133 | ) | (123 | ) | ||||||||||||
Principal payments on finance lease liability | (3 | ) | (7 | ) | (2 | ) | (3 | ) | ||||||||
Principal payments on equipment financing | (1 | ) | (1 | ) | (1 | ) | (1 | ) | ||||||||
Payments on secured note payable | (71 | ) | (66 | ) | ||||||||||||
Proceeds from exercise of warrants | 163 | 297 | - | 163 | ||||||||||||
Proceeds from exercise of options | - | 62 | ||||||||||||||
Net cash provided by financing activities | 214 | 228 | ||||||||||||||
Net cash provided by (used in) financing activities | (74 | ) | 281 | |||||||||||||
Effect of exchange rates on cash and cash equivalents | (2 | ) | (4 | ) | - | (2 | ) | |||||||||
Net (decrease) increase in cash and cash equivalents | (2,794 | ) | 29 | |||||||||||||
Net increase (decrease) in cash and cash equivalents | 202 | (1,552 | ) | |||||||||||||
Cash and cash equivalents, beginning of period | 6,973 | 8,249 | 3,634 | 6,973 | ||||||||||||
Cash and cash equivalents, end of period | $ | 4,179 | $ | 8,278 | $ | 3,836 | $ | 5,421 | ||||||||
Supplemental disclosure of cash flow information | ||||||||||||||||
Cash paid for interest expense | $ | 13 | $ | 23 | $ | 1 | $ | 7 | ||||||||
Cash paid for income taxes | $ | - | $ | 35 | ||||||||||||
Supplemental disclosure of noncash investing and financing activities | ||||||||||||||||
Right-of-use asset obtained in exchange for operating lease liability | $ | 69 | $ | 21 |
The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements.
6 |
NEPHROS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (unaudited)
Note 1 – Organization and Nature of Operations
Nephros, Inc. (“Nephros” or the “Company”) was incorporated under the laws of the State of Delaware on April 3, 1997. The Company was founded by health professionals, scientists and engineers affiliated with Columbia University to develop advanced end stage renal disease (“ESRD”) therapy technology and products.
Beginning in 2009, Nephros introduced high performance liquid purification filters to meet the demand for water purification in certain medical markets. The Company’s filters, generally classified as ultrafilters, are primarily used in hospitals for the prevention of infection from waterborne pathogens, such as legionella and pseudomonas, and in dialysis centers for the removal of biological contaminants from water and bicarbonate concentrate. The Company also develops and sells water filtration products for commercial applications, focusing on the hospitality and food service markets. The water filtration business is a reportable segment, referred to as the Water Filtration segment.
TheOn October 4, 2022, the Company entered into a definitive asset purchase agreement with a third party for the sale of substantially all of the Company’s pathogen detection systems are portable, near real-time systems designed to provide actionable dataPathogen Detection Systems (“PDS”) business, which had been previously reported as a separate reportable operating segment. As a result of the sale of the PDS business, we completely exited the PDS business. As a result, we determined that our PDS business had met the criteria for infection control teams and other organizations. The pathogen detection systemsdiscontinued operations as of September 30, 2022. We no longer separately report the PDS business isas a separate reportable segment referred to asin our financial statements including in this Quarterly Report for any of the Pathogen Detection segment.periods presented.
In July 2018, the Company formed a new subsidiary, Specialty Renal Products, Inc. (“SRP”), to drive the development of its second-generation hemodiafiltration system and other products focused on improving therapies for patients with renal disease. After SRP’s formation, the Company assigned to SRP all of the Company’s rights to three patents relating to the Company’s hemodiafiltration technology, which were carried at zero book value. On March 9, 2023, the SRP isStockholders approved a reportable segment, referredplan of dissolution to wind down SRP’s operations, liquidate SRP’s remaining assets and dissolve SRP, and SRP filed a certificate of dissolution with the State of Delaware on April 13, 2023. As a result of the SRP Stockholders’ approval of the plan of dissolution and provisions therein, there were no assets remaining to be paid to the Series A Preferred Stockholders. As such, the value of the Series A Preferred Stock was written to zero and the impact recorded to the Company's additional paid in capital as the Renal Products segment.Company retained control of SRP.
The Company’s primary U.S. facilities are located at 380 Lackawanna Place, South Orange, New Jersey 07079 and 3221 Polaris Avenue, Las Vegas, Nevada 89102 and 1015 Telegraph Street, Unit B, Reno, Nevada 89502.89102. These locations house the Company’s corporate headquarters, research, manufacturing, and distribution facilities. In addition, the Company maintains small administrative offices in various locations in the United States.
Note 2 – Basis of Presentation and Liquidity
Interim Financial Information
The accompanying unaudited condensed consolidated interim financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 8 and Article 10 of Regulation S-X. The condensed consolidated balance sheet as of December 31, 20212022 was derived from the Company’s audited financial statements. Accordingly, they do not include all of the information and footnotes required by GAAP for annual financial statements. Results as of and for the sixthree months ended June 30, 2022March 31, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022.2023.
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The condensed consolidated interim financial statements and notes thereto should be read in conjunction with the consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.2022.
Segment Reporting
The Company operates in only one business segment from which the Company’s chief operating decision maker evaluates the financial performance of the Company.
Consolidation
The accompanying condensed consolidated financial statements include the accounts of Nephros, Inc. and its subsidiaries, including the Company’s wholly owned subsidiary Nephros International, which was dissolved during the quarter ended June 30, 2022, and SRP, infor which the Company maintains a controlling interest. Outside stockholders’ interest in SRPplan of 37.5% is showndissolution was approved by its stockholders on the condensed consolidated balance sheet as noncontrolling interest.March 9, 2023. All intercompany accounts and transactions were eliminated in the preparation of the accompanying condensed consolidated financial statements.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAPaccounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities, at the date of the financial statements, and the reported amount of revenues and expenses, during the reporting period. Actual results could differ materially from those estimates. Included in these estimates are assumptions about the collection of accounts receivable, net realizable value of inventories, useful life of fixed assets and intangible assets, the assessment of expected cash flows used in evaluating goodwill and other long-lived assets, and assumptions used in determining stock compensation such as expected volatility and risk-free interest rate.
Liquidity
The Company has sustained operating losses and expects such losses to continue over the next several quarters. In addition, net cash from operations has been negative since inception, generating an accumulated deficit of $138.8 million as of June 30, 2022.
In February 2022, pursuant to a First Amendment to Series A Preferred Stock Purchase Agreement (the “Amendment”) among SRP and the holders of SRP’s outstanding shares of Series A Preferred Stock, SRP issued and sold an additional 500,015. See “Note 1112 – Stockholders’ Equity – Noncontrolling Interest,” below. In addition to the funds provided by the sale of these additional shares of Series A Preferred Stock, the Company and SRP continue to maintain a loan agreement under which the Company agreed to lend up to $1.3 million to SRP, including the $1.0 million borrowed during the year ended December 31, 2020. These loaned funds were used to fund SRP’s operating activities through the recent FDA 510(k) clearance process of SRP’s second-generation hemodiafiltration system, which was initially submitted to the FDA on February 24, 2021 and which received 510(k) clearance on May 13, 2022. As of June 30, 2022,March 31, 2023, the outstanding balance of this loan, including accrued interest, was approximately $1.41.5 million. It is not expected that this $1.5 million will be repaid, given SRP’s March 2023 plan to dissolve and wind down its business. In lieu of repayment of the loan, the Company expects to take assignment of all of SRP’s remaining assets following the satisfaction of SRP’s other indebtedness. shares of its Series A Preferred Stock at a price of $ per share, resulting in total gross proceeds of $
BasedThe Company has sustained operating losses and expects such losses to continue over the next several quarters. In addition, net cash from operations has been mostly negative since inception, generating an accumulated deficit of $143.1 million as of March 31, 2023. These operating losses and negative cash flows raise substantial doubt of the company’s ability to continue as a going concern. However, during the second half of 2022, the Company took certain actions to mitigate these conditions, including headcount and other expense reductions, the sale of PDS assets and discontinuance of PDS operations, the wind down of SRP, customer price increases, and the recruiting and acquisition of additional sales staff to grow revenues. The Company believes these actions, when fully implemented, will alleviate the substantial doubt as to the Company’s ability to continue as a going concern. Furthermore, based on these actions, as well as the cash that is available for the Company’s operations and projections of future Company operations, and recent expense reduction measures taken by management, the Company believes that its cash balances will be sufficient to fund its current operating plan through at least the next 12 months from the date of issuance of the accompanying condensed consolidated financial statements. In the event that operations do not meet expectations, the Company may need to further reduce discretionary expenditures such as additional headcount, new R&D projects, and other variable costs, to alleviate any remaining substantial doubt as to the Company’s ability to continue as a going concern.
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While significant progress has been made against the COVID-19 pandemic, some uncertainty remains with respect to the Company’s projections regarding the availability of sufficient cash resources, due to the possibility that COVID-19 infections could increase again and cause further disruption to economic conditions. During the pandemic, particularly during calendar year 2020, the Company saw decreased demand for its hospital filtration products, particularly in emergency pathogen outbreak response. In addition, sales to new customers during 2020 – including water filtration and pathogen detection products – were hindered by pandemic-related travel restrictions. Also in 2020, the Company’s commercial filtration products, which are primarily targeted at the hospitality and food service markets, saw a decrease in demand, due to the closure of many hotels and restaurants. The Company believes that broad vaccine distribution and increased population immunity has reduced the probability of further significant negative COVID-19 impacts, but if these decreases in demand return and the Company is unable to achieve its revenue plan, the Company may need to reduce budgeted expenditures as appropriate to preserve its available capital resources, which could slow its revenue growth plans.
Recently Adopted Accounting Pronouncements
In May 2021, the FASB issued ASU 2021-04, “Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options,” which clarifies and reduces diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options that remain equity classified after modification or exchange. The Company adopted this guidance as of January 1, 2022, and the guidance did not have an impact on its condensed consolidated financial statements.
Recent Accounting Pronouncements, Not Yet Effective
In October 2021, the FASB issued ASU 2021-08, “Accounting for Contract Assets and Contract Liabilities from Contracts with Customers,” which requires that an entity recognize contract assets and contract liabilities acquired in a business combination in accordance with Accounting Standards Codification (“ASC”) 606. The guidance is effective for the Company beginning in the first quarter of fiscal year 2023 and should be applied prospectively. Early adoption is permitted. The Company will assessadopted this guidance as of January 1, 2023 and the guidance did not have an impact if any, of adopting this guidance on its consolidated financial statements.
Concentration of Credit Risk
The Company deposits its cash in financial institutions. At times, such deposits may be in excess of insured limits. To date, the Company has not experienced any impairment losses on its cash. The Company also limits its credit risk with respect to accounts receivable by performing credit evaluations when deemed necessary.
Major Customers
For the three months ended June 30,March 31, 2023 and 2022, and 2021, the following customers all of which are in the Water Filtration segment, accounted for the following percentages of the Company’s revenues, respectively:
Schedule of Revenues and Accounts Receivable Percentage of Major Customers
Customer | 2022 | 2021 | ||||||
A | 17 | % | 14 | % | ||||
B | 12 | % | 9 | % | ||||
C | 12 | % | 10 | % | ||||
D | 6 | % | 11 | % | ||||
Total | 47 | % | 44 | % |
For the six months ended June 30, 2022 and 2021, the following customers, all of which are in the Water Filtration segment, accounted for the following percentages of the Company’s revenues, respectively:
Customer | 2022 | 2021 | ||||||
A | 20 | % | 16 | % | ||||
B | 12 | % | 13 | % | ||||
Total | 32 | % | 29 | % |
Schedule of Revenues and Accounts Receivable Percentage of Major Customers
No other customer accounted for 10% or more of the Company’s revenue during the periods presented above.
Customer | 2023 | 2022 | ||||||
A | 20 | % | 24 | % | ||||
B | 19 | % | 2 | % | ||||
C | 10 | % | 12 | % | ||||
Total | 49 | % | 38 | % |
As of June 30, 2022March 31, 2023 and December 31, 2021,2022, the following customers accounted for the following percentages of the Company’s accounts receivable, respectively:
Customer | 2022 | 2021 | 2023 | 2022 | ||||||||||||
B | 33 | % | 2 | % | ||||||||||||
A | 14 | % | 21 | % | ||||||||||||
C | 13 | % | 19 | % | 10 | % | 10 | % | ||||||||
A | 11 | % | 8 | % | ||||||||||||
B | 10 | % | 11 | % | ||||||||||||
E | 10 | % | 0 | % | ||||||||||||
D | - | 10 | % | |||||||||||||
Total | 44 | % | 38 | % | 57 | % | 43 | % |
Accounts Receivable
The Company recognizes an allowance that reflects a current estimate of credit losses expected to be incurred over the life of a financial asset, including trade receivables. The Company continuously monitors collections and payments from its customers and maintains a provision for estimated credit losses. The Company determines its allowance for doubtful accounts by considering a number of factors, including the length of time balances are past due, the Company’s previous loss history, the customer’s current ability to pay its obligations to the Company and the expected condition of the general economy and the industry as a whole. The Company writes off accounts receivable when they are determined to be uncollectible. There was noThe allowance for doubtful accounts was approximately $1,000as of June 30, 2022,March 31, 2023, and December 31, 2021,2022, respectively.
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Depreciation Expense
Depreciation related to equipment utilized in the manufacturing process is recognized in cost of goods sold on the condensed consolidated statements of operations and comprehensive loss. For the three and six months ended June 30,March 31, 2023, and 2022, depreciation expense was approximately $22,0001,000 and $28,000, respectively. For the three and six months ended June 30, 2021, depreciation expense was approximately $8,000 and $15,0004,000, respectively.
Note 3 – Revenue Recognition
The Company recognizes revenue related to product sales when product is shipped via external logistics providers and the other criteria of ASC 606 are met. Product revenue is recorded net of returns and allowances. There was no allowance for sales returns for the three and six months ended June 30, 2022March 31, 2023, or 2021.2022. In addition to product revenue, the Company recognizes revenue related to royalty and other agreements in accordance with the five-step model in ASC 606. Royalty and otherOther revenues recognized for the three and six months ended June 30,March 31, 2023, and 2022 was approximately $35,000and 2021 is comprised of:$8,000
Schedule of Royalty and Other Revenues
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||||||
(in thousands) | (in thousands) | |||||||||||||||
Royalty revenue under the Bellco License Agreement | $ | - | $ | 15 | $ | - | $ | 29 | ||||||||
Royalty revenue under the Sublicense Agreement with Camelbak (1) | - | 20 | - | 20 | ||||||||||||
Other revenue | 45 | 35 | 55 | 45 | ||||||||||||
Total royalty and other revenue | $ | 45 | $ | 70 | $ | 55 | $ | 94 |
Bellco License Agreement
On June 27, 2011, the Company entered into a License Agreement (as thereafter amended, the “License Agreement”), effective July 1, 2011, with Bellco S.r.l. (“Bellco”), an Italy-based supplier of hemodialysis and intensive care products, for the manufacturing, marketing and sale of the Company’s patented mid-dilution dialysis filters (the “Products”). Under the License Agreement, the Company granted Bellco a license to manufacture, market and sell the Products under its own name, label, and CE mark in certain countries on an exclusive basis, and to do the same on a non-exclusive basis in certain other countries. Under the License Agreement with Bellco, the Company received upfront payments which were previously deferred and subsequently recognized as license revenue over the term of the License Agreement. respectively.In addition, the License Agreement also provided for the payment of certain royalties to the Company based on the number of units of Products sold per year in the covered territory. The License Agreement expired in accordance with its terms on December 31, 2021.
Other Revenue – Other revenues are derived from sales of services to customers, which primarily include installation, training and testing on products and equipment sold to certain customers.
Note 4 – Discontinued Operations
In accordance with ASC 205-20, Presentation of Financial Statements: Discontinued Operations, a disposal of a component of an entity or a group of components of an entity (disposal group) is required to be reported as discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results when the disposal group meets the criteria to be classified as held-for-sale. The consolidated statements of operations reported for current and prior periods report the results of operations of the discontinued operations, including the impairment loss recognized as a component of net income (loss) separate from the net income (loss) from continuing operations.
All discontinued operations relate to the Company’s previously reported PDS segment, for the three months ended March 31, 2022.
Schedule of Assets and Liabilities of Discontinued Operations
Three Months Ended | ||||
March 31, 2022 | ||||
Total net revenues | $ | 28 | ||
Gross loss | (28 | ) | ||
Research and development expenses | 206 | |||
Depreciation and amortization expense | 1 | |||
Selling, general and administrative expenses | 171 | |||
Total operating expenses | 378 | |||
Operating loss from discontinued operations | (406 | ) | ||
Impairment of assets held for sale | - | |||
Loss from discontinued operations | $ | (406 | ) |
Note 45 – Fair Value Measurements
The Company measures certain financial instruments and other items at fair value.
To determine the fair value, the Company uses the fair value hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs market participants would use to value an asset or liability and are developed based on market data obtained from independent sources. Unobservable inputs are inputs based on assumptions about the factors market participants would use to value an asset or liability.
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To measure fair value, the Company uses the following fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable:
Level 1 – Quoted prices in active markets for identical assets or liabilities.
Level 2 – Inputs other than Level 1 that are observable for the asset or liability, either directly or indirectly, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data by correlation or other means.
Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Value is determined using pricing models, discounted cash flow methodologies, or similar techniques and also includes instruments for which the determination of fair value requires significant judgment or estimation.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The Company evaluates its financial assets and liabilities subject to fair value measurements on a recurring basis to determine the appropriate level of classification for each reporting period.
At June 30, 2022March 31, 2023 and December 31, 2021,2022, the Company’s cash equivalents consisted of money market funds. The Company values its cash equivalents using observable inputs that reflect quoted prices for securities with identical characteristics and classify the valuation techniques that use these inputs as Level 1.
At June 30, 2022March 31, 2023 and December 31, 2021,2022, the fair value measurements of the Company’s assets and liabilities measured on a recurring basis were as follows:
Schedule of Assets and Liabilities Measured at Fair Value on Recurring Basis
Fair Value Measurements at Reporting Date Using | Fair Value Measurements at Reporting Date Using | |||||||||||||||||||||||
Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||||||
June 30, 2022 | ||||||||||||||||||||||||
March 31, 2023 | ||||||||||||||||||||||||
Cash | $ | 2,155 | $ | $ | $ | 230 | $ | $ | ||||||||||||||||
Money market funds | 2,024 | 3,606 | ||||||||||||||||||||||
Cash and cash equivalents | $ | 4,179 | $ | - | $ | - | $ | 3,836 | $ | - | $ | - | ||||||||||||
December 31, 2021 | ||||||||||||||||||||||||
December 31, 2022 | ||||||||||||||||||||||||
Cash | $ | 2,952 | $ | $ | $ | 1,598 | $ | $ | ||||||||||||||||
Money market funds | 4,021 | 2,036 | ||||||||||||||||||||||
Cash and cash equivalents | $ | 6,973 | $ | - | $ | - | $ | 3,634 | $ | - | $ | - |
Assets and Liabilities Not Measured at Fair Value on a Recurring Basis
The carrying amounts of accounts receivable, accounts payable and accrued expenses approximate fair value due to the short-term maturity of these instruments.
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The carrying amounts of the secured long-term note payable, lease liabilities and equipment financing approximate fair value as of June 30, 2022March 31, 2023 and December 31, 20212022 because those financial instruments bear interest at rates that approximate current market rates for similar agreements with similar maturities and credit.
Note 56 – Inventory
Inventory is stated at the lower of cost or net realizable value using the first-in, first-out method and consists of raw materials and finished goods. The Company’s inventory components as of June 30, 2022March 31, 2023 and December 31, 2021,2022, were as follows:
Schedule of Inventory, Net
June 30, 2022 | December 31, 2021 | March 31, 2023 | December 31, 2022 | |||||||||||||
(in thousands) | (in thousands) | |||||||||||||||
Finished goods | $ | 3,639 | $ | 3,760 | $ | 1,901 | $ | 2,709 | ||||||||
Raw materials | 1,025 | 1,035 | 447 | 422 | ||||||||||||
Work in process | - | 22 | ||||||||||||||
Total inventory | $ | 4,664 | $ | 4,795 | $ | 2,348 | $ | 3,153 |
Note 67 – Intangible Assets and Goodwill
Intangible Assets net
Intangible assets at June 30, 2022as of March 31, 2023 and December 31, 20212022 are set forth in the table below. Gross carrying values and accumulated amortization of the Company’s intangible assets by type are as follows:
Schedule of Intangible Assets
June 30, 2022 | December 31, 2021 | |||||||||||||||||||||||
Cost | Accumulated Amortization | Net | Cost | Accumulated Amortization | Net | |||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
Tradenames, service marks and domain names | $ | 50 | $ | (35 | ) | $ | 15 | $ | 50 | $ | (30 | ) | $ | 20 | ||||||||||
Intellectual property | 1,098 | (82 | ) | 1,016 | 1,098 | (26 | ) | 1,072 | ||||||||||||||||
Customer relationships | 540 | (111 | ) | 429 | 540 | (96 | ) | 444 | ||||||||||||||||
Total intangible assets | $ | 1,688 | $ | (228 | ) | $ | 1,460 | $ | 1,688 | $ | (152 | ) | $ | 1,536 |
March 31, 2023 | December 31, 2022 | |||||||||||||||||||||||
Cost | Accumulated Amortization | Net | Cost | Accumulated Amortization | Net | |||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
Tradenames, service marks and domain names | $ | 50 | $ | (43 | ) | $ | 7 | $ | 50 | $ | (40 | ) | $ | 10 | ||||||||||
Customer relationships | 540 | (135 | ) | 405 | 540 | (127 | ) | 413 | ||||||||||||||||
Total intangible assets | $ | 590 | $ | (178 | ) | $ | 412 | $ | 590 | $ | (167 | ) | $ | 423 |
The Company recognized amortization expense of approximately $38,00011,000 for each of the three months ended June 30, 2022March 31, 2023 and $11,000 for the three months ended June 30, 2021. Of the approximately $38,000, approximately $11,000 wasMarch 31, 2022. All were recognized in selling, general and administrative expenses and approximately $27,000 was recognized in cost of goods sold on the accompanying condensed consolidated statement of operations and comprehensive loss.
The Company recognized amortization expense of approximately $76,000 for the six months ended June 30, 2022 and $21,000 for the six months ended June 30, 2021. Of the approximately $76,000, approximately $21,000 was recognized in selling, general and administrative expenses and approximately $55,000 was recognized in cost of goods sold on the accompanying condensed statement of operations and comprehensive loss.
As of June 30, 2022,March 31, 2023, future amortization expense for each of the next five years is (in thousands):
Schedule of Future Amortization Expense
Fiscal Years | ||||||||
2022 (excluding the six months ended June 30, 2022) | $ | 76 | ||||||
2023 | 152 | |||||||
2023 (excluding the three months ended March 31, 2023) | 31 | |||||||
2024 | 142 | 32 | ||||||
2025 | 142 | 32 | ||||||
2026 | 142 | 32 | ||||||
2027 | 32 | |||||||
2028 | 32 |
The Company did 0t recognize any intangible asset impairment charges during the three and six months ended June 30, 2022 or 2021.
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Goodwill
Goodwill has a carrying value on the Company’s condensed consolidated balance sheets of approximately $0.8 million at June 30, 2022March 31, 2023 and December 31, 2021. Goodwill has been allocated to the Water Filtration segment.2022.
Note 78 – License and Supply Agreement, net
On April 23, 2012, the Company entered into a License and Supply Agreement (as thereafter amended, the “License and Supply Agreement”) with Medica S.p.A. (“Medica”), an Italy-based medical product manufacturing company, for the marketing and sale of certain filtration products based upon Medica’s proprietary Medisulfone ultrafiltration technology in conjunction with the Company’s filtration products, and for an exclusive supply arrangement for the filtration products. Under the License and Supply Agreement, Medica granted to the Company an exclusive license, with right of sublicense, to market, promote, distribute, offer for sale and sell the filtration products worldwide, with certain limitations on territory, during the term of the License and Supply Agreement. In addition, the Company granted to Medica an exclusive license under the Company’s intellectual property to make the filtration products during the term of the License and Supply Agreement. The filtration products covered under the License and Supply Agreement includes both certain products based on Medica’s proprietary Versatile microfiber technology and certain filtration products based on Medica’s proprietary Medisulfone ultrafiltration technology. The term of the License Agreement with Medica expires on December 31, 2025, unless earlier terminated by either party in accordance with the terms of the License and Supply Agreement.
In exchange for the license, the gross value of the intangible asset capitalized was $2.3 million. License and supply agreement, net, on the condensed consolidated balance sheet is $0.50.4 million as of June 30, 2022March 31, 2023 and December 31, 2021,2022, respectively. Accumulated amortization is $1.9 million and $1.8 million as of June 30, 2022March 31, 2023 and December 31, 2021,2022, respectively. The intangible asset is being amortized as an expense over the life of the License and Supply Agreement. Amortization expense of approximately $33,000 was recognized in each of the three months ended June 30,March 31, 2023 and 2022 and 2021 on the condensed consolidated statement of operations and comprehensive loss.
As of September 2013, the Company has an understanding with Medica whereby the Company has agreed to pay interest to Medica at a 12% annual rate calculated on the principal amount of any outstanding invoices that are not paid pursuant to the original payment terms. There was 0no interest recognized for the sixthree months ended June 30, 2022March 31, 2023 or June 30, 2021.March 31, 2022.
In addition, for the period beginning April 23, 2014 through December 31, 2025,, the Company will pay Medica a royalty rate of 3% of net sales of the filtration products sold, subject to reduction as a result of a supply interruption pursuant to the terms of the License and Supply Agreement. Approximately $73,00096,000 and $56,00059,000 for the three months ended June 30,March 31, 2023 and 2022, and 2021, respectively, was recognized as royalty expense and is included in cost of goods sold on the condensed consolidated statement of operations and comprehensive loss. Approximately $132,00096,000 and $128,000 for the six months ended June 30, 2022 and 2021, respectively, was recognized as royalty expense and is included in cost of goods sold on the condensed consolidated statement of operations and comprehensive loss. Approximately $73,000 and $70,00071,000 of this royalty expense was included in accounts payable as of June 30, 2022March 31, 2023 and December 31, 2021,2022, respectively.
Note 89 – Secured Note Payable
On March 27, 2018, the Company entered into a Secured Promissory Note Agreement (the “Secured Note”) with Tech Capital LLC (“Tech Capital”) for a principal amount of $1.2 million. The Secured Note was amended and restated on May 26, 2020 to reflect the then-current balance on the Secured Note. There were no other changes to the terms and conditions of the Secured Note. As of June 30, 2022,March 31, 2023, the principal balance of the Secured Note was $0.2 million.paid off.
The Secured Note has a maturity date of April 1, 2023. The unpaid principal balance accruesaccrued interest at a rate of 8% per annum. Principal and interest payments arewere due on the first day of each month commencing on May 1, 2018. The Secured Note iswas subject to terms and conditions of and iswas secured by security interests granted by the Company in favor of Tech Capital under the Loan and Security Agreement entered into on August 17, 2017 and subsequently amended on December 20, 2019 (the “Loan Agreement”). An event of default under such Loan Agreement iswas an event of default under the Secured Note and vice versa.
During each of the three months ended June 30,March 31, 2023 and 2022, and 2021, the Company made payments under the Secured Note of approximately $72,00071,000. Included in the total payments made, approximately $5,0001,000 and $10,0006,000, respectively, was recognized as interest expense on the condensed consolidated statement of operations and comprehensive loss for the sixthree months ended June 30,March 31, 2023 and 2022 and 2021. During each of the six months ended June 30, 2022 and 2021, the Company made payments under the Secured Note of approximately $144,000. Included in the total payments made, approximately $11,000 and $22,000 was recognized as interest expense on the condensed consolidated statements of operations and comprehensive loss for the six months ended June 30, 2022 and 2021, respectively.
As of June 30, 2022, future principal maturities are as follows (in thousands):
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Schedule of Future Debt Principal Maturities
Fiscal Years | ||||
2022 (excluding the six months ended June 30, 2022) | $ | 115 | ||
2023 | 95 | |||
Total | $ | 210 |
Note 910 – Leases
The Company has operating leases for corporate offices, an automobile and office equipment. The leases have remaining lease terms of 1 year to 35 years.
Lease cost, as presented below, includes costs associated with leases for which right-of-use (“ROU”) assets have been recognized as well as short-term leases.
The components of total lease costs were as follows:
Schedule of Components of Lease Cost
Three months ended June 30, 2022 | Three months ended June 30, 2021 | |||||||
(in thousands) | ||||||||
Operating lease cost | $ | 102 | $ | 99 | ||||
Finance lease cost: | ||||||||
Amortization of right-of-use assets | 1 | 2 | ||||||
Interest on lease liabilities | 1 | 1 | ||||||
Total finance lease cost | 2 | 3 | ||||||
Variable lease cost | 10 | 10 | ||||||
Total lease cost | $ | 114 | $ | 112 |
Six months ended June 30, 2022 | Six months ended June 30, 2021 | Three months ended March 31, 2023 | Three months ended March 31, 2022 | |||||||||||||
(in thousands) | (in thousands) | |||||||||||||||
Operating lease cost | $ | 213 | $ | 200 | $ | 92 | $ | 111 | ||||||||
Finance lease cost: | ||||||||||||||||
Amortization of right-of-use assets | 5 | 5 | 2 | 4 | ||||||||||||
Interest on lease liabilities | 3 | 2 | 1 | 2 | ||||||||||||
Total finance lease cost | 8 | 7 | 3 | 6 | ||||||||||||
Variable lease cost | 19 | 19 | 4 | 9 | ||||||||||||
Total lease cost | $ | 240 | $ | 226 | $ | 99 | $ | 126 |
Supplemental cash flow information related to leases was as follows:
Schedule of Supplemental Cash Flow Information Related to Leases
Six months ended June 30, 2022 | Six months ended June 30, 2021 | Three months ended March 31, 2023 | Three months ended March 31, 2022 | |||||||||||||
(in thousands) | (in thousands) | |||||||||||||||
Cash paid for amounts included in the measurement of lease liabilities: | ||||||||||||||||
Operating cash flows from operating leases | $ | 211 | $ | 208 | $ | 87 | $ | 111 | ||||||||
Financing cash flows from finance leases | $ | 3 | $ | 7 | 2 | 3 |
Supplemental balance sheet information related to leases was as follows:
Schedule of Supplemental Balance Sheet Information Related to Leases
March 31, 2023 | December 31, 2022 | |||||||
(in thousands) | ||||||||
Operating lease right-of-use assets | $ | 888 | $ | 972 | ||||
Finance lease right-of-use assets | $ | 9 | $ | 12 | ||||
Current portion of operating lease liabilities | $ | 306 | $ | 308 | ||||
Operating lease liabilities, net of current portion | 616 | 701 | ||||||
Total operating lease liabilities | $ | 922 | $ | 1,009 | ||||
Current portion of finance lease liabilities | $ | 7 | $ | 8 | ||||
Finance lease liabilities, net of current portion | 2 | 4 | ||||||
Total finance lease liabilities | $ | 9 | $ | 12 | ||||
Weighted average remaining lease term | ||||||||
Operating leases | 3.7 years | |||||||
Finance leases | 1.4 years | |||||||
Weighted average discount rate | ||||||||
Operating leases | 8.0 | % | ||||||
Finance leases | 8.0 | % |
June 30, 2022 | December 31, 2021 | |||||||
(in thousands) | ||||||||
Operating lease right-of-use assets | $ | 608 | $ | 867 | ||||
Finance lease right-of-use assets | $ | 18 | $ | 30 | ||||
Current portion of operating lease liabilities | $ | 295 | $ | 344 | ||||
Operating lease liabilities, net of current portion | 350 | 575 | ||||||
Total operating lease liabilities | $ | 645 | $ | 919 | ||||
Current portion of finance lease liabilities | $ | 10 | $ | 12 | ||||
Finance lease liabilities, net of current portion | 8 | 18 | ||||||
Total finance lease liabilities | $ | 18 | $ | 30 | ||||
Weighted average remaining lease term | ||||||||
Operating leases | 2.1 years | 2.7 years | ||||||
Finance leases | 1.8 years | 2.7 years | ||||||
Weighted average discount rate | ||||||||
Operating leases | 8.0 | % | 8.0 | % | ||||
Finance leases | 8.0 | % | 8.0 | % |
14 |
As of June 30, 2022,March 31, 2023, maturities of lease liabilities were as follows:
Schedule of Maturities of Lease Liabilities
Operating Leases | Finance Leases | |||||||
(in thousands) | ||||||||
2022 (excluding the six months ended June 30, 2022) | $ | 196 | $ | 7 | ||||
2023 | 276 | 8 | ||||||
2024 | 204 | 7 | ||||||
2025 | 25 | 4 | ||||||
2026 | - | - | ||||||
Total future minimum lease payments | 701 | 26 | ||||||
Less imputed interest | (56 | ) | (8 | ) | ||||
Total | $ | 645 | $ | 18 |
Operating Leases | Finance Leases | |||||||
(in thousands) | ||||||||
2023 (excluding the three months ended March 31, 2023) | $ | 281 | $ | 6 | ||||
2024 | 303 | 4 | ||||||
2025 | 163 | - | ||||||
2026 | 168 | - | ||||||
2027 | 158 | - | ||||||
Total future minimum lease payments | 1,073 | 10 | ||||||
Less imputed interest | (151 | ) | (1 | ) | ||||
Total | $ | 922 | $ | 9 |
The fair value of stock options and restricted stock is recognized as stock-based compensation expense in the Company’s condensed consolidated statement of operations and comprehensive loss. The Company calculates stock-based compensation expense in accordance with ASC 718. The fair value of stock-based awards is amortized over the vesting period of the award.
Stock Options
TheDuring the three months ended March 31, 2023, the Company granted stock options to purchase and shares of common stock respectively, to employees during the three and six months ended June 30, 2022.employees. These stock options are being expensed over the respective vesting period, which is based on a service condition. The fair value of the stock options granted during the three and six months ended June 30, 2022,March 31, 2023 was approximately $ million..
Schedule of Fair Value Assumptions
Assumptions for Option Grants | ||||||
Stock Price Volatility | % | |||||
Risk-Free Interest Rate | % | |||||
Expected Life (in years) | ||||||
Expected Dividend Yield | % |
Stock-based compensation expense related to stock options was approximately $ and $ for the three months ended June 30,March 31, 2023 and 2022, and 2021, respectively. For the three months ended June 30, 2022,March 31, 2023, approximately $ and $ are included in selling, general and administrative expenses and research and development expenses, respectively, on the accompanying condensed consolidated statement of operations and comprehensive loss. For the three months ended June 30, 2021,March 31, 2022, approximately $ and $ are included in selling, general and administrative expenses and research and development expenses, respectively, on the accompanying condensed consolidated statement of operations and comprehensive loss.
Stock-based compensation expense related to stock options was $ and $ for the six months ended June 30, 2022 and 2021, respectively. For the six months ended June 30, 2022, approximately $ and $ are included in selling, general and administrative expenses and research and development expenses, respectively, on the accompanying condensed consolidated statement of operations and comprehensive loss. For the six months ended June 30, 2021, approximately $ and $ are included in selling, general and administrative expenses and research and development expenses, respectively, on the accompanying condensed consolidated statement of operations and comprehensive loss.
There was 0no tax benefit related to expense recognized in the three or six months ended June 30,March 31, 2023 and 2022, and 2021, as the Company is in a net operating loss position. As of June 30, 2022,March 31, 2023, there was approximately $ million of total unrecognized compensation expense related to unvested stock-based awards granted under the equity compensation plans, which will be amortized over the weighted average remaining requisite service period of years.
15 |
Restricted Stock
Total stock-based compensation expense for restricted stock on the Company’s condensed consolidated statement of operations was approximately $ and $ for the three months ended June 30,March 31, 2023 and 2022, and 2021, respectively. For the three months ended June 30,March 31, 2023 and 2022, approximately $ isand $ are included in selling, general and administrative expenses on the accompanying condensed consolidated statement of operations and comprehensive loss. Forloss, respectively. During the three months ended June 30, 2021, approximately $March 31, 2023, is included in selling, general and administrative expenses and research and development expenses, respectively, on the accompanying condensed consolidated statementshares of operations and comprehensive loss.
Total stock-based compensation expense for restricted stock was approximately $were issued to employees, and $shares of restricted stock were issued to board members all related to services rendered during the year ended December 31, 2022. In addition, forshares of restricted stock were issued to contractors during the sixperiod ended March 31, 2023. All restricted shares issued during the three months ended June 30, 2022 and 2021, respectively. ForMarch 31, 2023, have a vesting period of six months. There was no restricted stock issued in the six monthsperiod ended June 30, 2022, approximately $ is included in selling, general and administrative expenses and research and development expenses on the accompanying condensed consolidated statement of operations and comprehensive loss. For the six months ended June 30, 2021, approximately $ is included in selling, general and administrative expenses and research and development expenses, on the accompanying condensed consolidation statement of operations and comprehensive loss.March 31, 2022.
As of June 30, 2022,March 31, 2023, there was approximately $ of unrecognized compensation expense related to unvested stock-based awards granted under the equity compensation plans, which will be amortized over the weighted average remaining requisite service period of approximately years.
The aggregate shares of common stock legally issued and outstanding as of June 30, 2022March 31, 2023 is greater than the aggregate shares of common stock outstanding for accounting purposes by the amount of unvested restricted shares.
SRP Equity Incentive Plan
SRP’s 2019 Equity Incentive Plan (the “SRP Plan”) was approved on May 7, 2019 under which shares of SRP’s common stock are reserved for the issuance of options restricted stock and other stock awards. This plan is no longer operational, due to the March 9, 2023 wind down of SRP operations.
Due to the Company’s acquisition of the non-controlling interest in SRP issued sharesduring the three months ended March 31, 2023, all remaining equity-based awards have been forfeited and no further expense will be incurred related to these awards. There were no SRP stock options or other equity awards granted during the three months ended March 31, 2023. For the three months ended March 31, 2023, a credit of restricted stock pursuantapproximately ($ ) was recognized for expense related to the SRP Plan duringequity based awards. There was no stock-based compensation expense recognized related to the SRP equity based awards for the three and six months ended June 30,March 31, 2022. Stock-based compensation expense related to the SRP stock grants was approximately $, for the three and six months ended June 30, 2022 and wasequity based awards is included in selling, general and administrative expenses on the accompanying condensed consolidated statement of operations and comprehensive loss.
Stock-based compensation expense related to the SRP stock grants was approximately $ and $, respectively, for the three and six months ended June 30, 2021 and are included in selling, general and administrative expenses and research and development expenses, respectively, on the accompanying condensed consolidated statement of operations and comprehensive loss.
SRP stock grants are expensed over the respective vesting period, which was based on a service condition. Stock-based compensation expense related to the SRP stock grantsoptions is presented by the Company as noncontrolling interest on the consolidated balance sheetssheet as of June 30, 2022 and December 31, 2021.2022.
Note 1112 – Stockholders’ Equity
Noncontrolling Interest
On February 1, 2022, SRP entered into a First AmendmentPursuant to Series A Preferred Stock Purchase Agreement (the “SRP Amendment”) with the holders of SRP’s outstanding shares of Series A Preferred Stock. The SRP Amendment amended the terms and conditions of thea Series A Preferred Stock Purchase Agreement, dated September 9, 2018, among SRP and the purchasers identified therein (the “SRP Purchase Agreement”), pursuant to which SRP had sold to such purchasers an aggregate of shares of its Series A Preferred Stock (the “Series A Preferred”) at a price of $ per share resulting in total gross proceeds of $3.0 million. The purpose ofOn February 1, 2022, SRP and such purchasers amended the SRP Amendment wasPurchase Agreement to permit SRP to sell up toallow for the sale of an additional shares of its Series A Preferred, Stock at one or more closings to occur byall of which were sold on February 28,4, 2022, for aggregate gross proceeds of $500,015and otherwise on the same terms and conditions as otherwise set forth in the SRP Purchase Agreement. PursuantApproximately $188,000 of the proceeds from the February 2022 sale were recorded as an increase to the SRP Amendment, on February 4, 2022, SRP conducted a closing in which it sold sharesequity of Series A Preferred Stock, resulting in gross proceeds of $500,015.the non-controlling interests. The Company purchased shares of SRP’s Series A Preferred at such closing and, as a result, maintained its 62.5% stock ownership position in SRP. The other purchasers at the February 4, 2022 closing included the Company’s Chief Executive Officer, who purchased shares, and Lambda Investors LLC (“Lambda”), an affiliate of Wexford Capital, which beneficiallytogether with its affiliates owns approximately 36% of the Company’s common stock, which purchased shares of SRPthe Series A Preferred Stock.in February 2022. Such purchases were made on the same terms as all other purchasers. In addition to the funds provided by the Series ASRP Purchase Agreement, Nephros andthe Company loaned to SRP continue to maintain a loan agreement under which Nephros agreed to lend up tothe principal amount of $1.3 million, to SRP, including the $1.0 million borrowedof which was advanced during the year ended December 31, 2020. These loaned funds were used to fund SRP’s operating activities through the recent FDA 510(k) clearance process of SRP’s second-generation hemodiafiltration system, which was initially submitted to the FDA on February 24, 2021 and which received 510(k) clearance on May 13, 2022. As of June 30, 2022,March 31, 2023, the outstanding balance, of this loan, including accrued interest, was $1.41.5 million.
Each share of Series A Preferred is initially convertible into one share of SRP common stock, subject to adjustment for stock splits and recapitalization events. Subject to customary exempt issuances, in the event SRP issues additional shares of its common stock or securities convertible into common stock at a per share price that is less than the original Series A Preferred price, the conversion price of the Series A Preferred will automatically be reduced to such lower price.
In the event of any voluntary or involuntary liquidation, dissolution or winding up of SRP, the holders of the Series A Preferred are entitled to be paid out of the assets of SRP available for distribution to its stockholders or, in the case of a deemed liquidation event, out of the consideration payable to stockholders in such deemed liquidation event or the available proceeds, before any payment shall be made to the holders of SRP common stock by reason of their ownership thereof, an amount per share equal to one times (1x) the Series A Preferred original issue price, plus any accruing dividends accrued but unpaid thereon, whether or not declared, together with any other dividends declared but unpaid thereon (the “Series A Liquidation Preference”). If upon any such liquidation, dissolution or winding up of SRP or deemed liquidation event, the assets of SRP available for distribution to its stockholders shall be insufficient to pay the Series A Liquidation Preference in full, the holders of Series A Preferred shall share ratably in any distribution of the assets available for distribution in proportion to the respective amounts which would otherwise be payable in respect of the shares held by them upon such distribution if all amounts payable on or with respect to such shares were paid in full. After the full payment of the Series A Liquidation Preference, the holders of the Series A Preferred and the holders of common stock will share ratably in any remaining proceeds available for distribution on an as-converted to common stock basis.
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Each shareAs of Series A Preferred accrues dividends atDecember 31, 2022, the rate per annum of $ per share. The accruing dividends shall accrue from day to day, whether or not declared, and shall be cumulative and shall be payable only when, as, and if declared by the Board.
Holders of Series A Preferred shall be entitled to cast the number of votes equal to the number of whole shares of common stock into which the shares of Series A Preferred held by such holder are convertible as of the record date for determining stockholders entitled to vote. Except as provided by law or by the other provisions, the holders of Series A Preferred vote together with the holders of common stock as a single class. Notwithstanding the foregoing, for as long as at least shares of Series A Preferred are outstanding, SRP is required to obtain the affirmative vote or written consent of a majority of the Series A Preferred in order to effect certain corporate transactions, including without limitation, the issuance of any securities senior to or on parity with the Series A Preferred, a liquidation or deemed liquidation of SRP, amendments to SRP’s charter documents, the issuance of indebtedness in excess of $250,000, any annual budget for the Company’s operations, and the hiring or firing of any executive officers of SRP. In addition, the holders of the Series A Preferred are entitled to elect two members of SRP’s board of directors.
The noncontrollingnon-controlling interest in SRP held by holders of the Series A Preferred has been classified as equity on the accompanying consolidated interim balance sheet, as the noncontrollingnon-controlling interest is redeemable only upon the occurrence of events that are within the control of the Company. As a result of the SRP Stockholders’ approval of the plan of dissolution and provisions therein, the redemption feature related to the Series A Preferred Stock expired. As such, the value of the Series A Preferred Stock previously presented in non-controlling interest was reclassified to additional paid in capital as the Company retained control of SRP.
In March 2023, the board of directors of SRP adopted, and the stockholders of SRP approved, a plan to wind down SRP’s operations and dissolve, and in April 2023, SRP filed a certificate of dissolution with the State of Delaware. In accordance with its plan of dissolution, after SRP has satisfied its other outstanding liabilities, the Company expects that SRP will assign to the Company all of its remaining assets, including its intellectual property rights, in partial satisfaction of outstanding indebtedness owed to the Company in the approximate amount of $1.5 million. The Company does not expect that there will be any proceeds from SRP’s liquidation available for distribution to any of SRP’s stockholders, including the Company, in respect of their shares of SRP capital stock, including the Series A Preferred. As a result of the dissolution described above, it was determined approximately $24,000 of inventory likely had no value, and was written off in the period ended March 31, 2023.
Warrants
During the three months ended June 30, 2022, March 31, 2023, no warrants were exercised. Warrants to purchase63,102 shares of the Company’s common stock expired unexercised.were exercised and no warrants were outstanding.
During the sixthree months ended June 30,March 31, 2022, warrants to purchase 60,374 shares of the Company’s common stock were exercised, resulting in proceeds of $0.2 million and the issuance of shares of the Company’s common stock. Of the warrants exercised during the sixthree months ended June 30,March 31, 2022, warrants to purchase 14,815 shares of the Company’s common stock were exercised by members of management, resulting in proceeds of approximately $40,000.
Basic loss per common share is calculated by dividing net loss available to common shareholders by the number of weighted average common shares issued and outstanding. Diluted loss per common share is calculated by dividing net loss available to common shareholders by the weighted average number of common shares issued and outstanding for the period, plus amounts representing the dilutive effect from the exercise of stock options and warrants and unvested restricted stock, as applicable. The Company calculates dilutive potential common shares using the treasury stock method, which assumes the Company will use the proceeds from the exercise of stock options and warrants to repurchase shares of common stock to hold in its treasury stock reserves.
Schedule of Antidilutive Securities Excluded from Computation of Earnings Per Share
June 30, | ||||||||
2022 | 2021 | |||||||
Shares underlying warrants outstanding | - | 123,476 | ||||||
Shares underlying options outstanding | 1,603,835 | 1,262,263 | ||||||
Unvested restricted stock | 15,000 | 64,338 |
March 31, | ||||||||
2023 | 2022 | |||||||
Shares underlying options outstanding | 1,420,564 | 1,442,010 | ||||||
Unvested restricted stock | 187,503 | 59,732 |
Note 1314 – Commitments and Contingencies
Purchase Commitments
In exchange for the rights granted under the License and Supply Agreement with Medica (see Note 78 – License and Supply Agreement, net), the Company agreed to make certain minimum annual aggregate purchases from Medica over the term of the License and Supply Agreement. For the year ended December 31, 2022,2023, the Company has agreed to make minimum annual aggregate purchases from Medica of €3.53.8 million (approximately $3.84.1 million). As of June 30, 2022,March 31, 2023, the Company’s aggregate purchase commitments totaled €2.12 million (approximately $2.32.2 million).
Contractual Obligations
See Note 910 – Leases for a discussion of the Company’s contractual obligations.
Note 14 – Segment Reporting
The Company has defined three reportable segments: Water Filtration, Pathogen Detection and Renal Products. The Water Filtration segment primarily develops and sells high performance water purification filters. The Pathogen Detection segment develops and sells portable, real-time water testing systems designed to provide actionable data on waterborne pathogens in approximately one hour. The Renal Products segment is focused on the development of medical device products for patients with renal disease, including a 2nd generation hemodiafiltration system for the treatment of patients with ESRD.
The Company’s chief operating decision maker evaluates the financial performance of the Company’s segments based upon segment revenues, gross margin and operating expenses which include research and development and selling, general and administrative expenses. Items below loss from operations are not reported by segment, since they are excluded from the measure of segment profitability reviewed by the Company’s chief operating decision maker. The Company does not report balance sheet information by segment since such information is not reviewed by the Company’s chief operating decision maker.
The accounting policies for the Company’s segments are the same as those described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
The tables below present segment information reconciled to total Company loss from operations, with segment operating loss including gross profit less direct research and development expenses and direct selling, general and administrative expenses to the extent specifically identified by segment:
Schedule of Segment Information
Three Months Ended June 30, 2022 | ||||||||||||||||
(in thousands) | ||||||||||||||||
Water Filtration | Pathogen Detection | Renal Products | Nephros, Inc. Consolidated | |||||||||||||
Total net revenues | $ | 2,849 | $ | 35 | $ | - | $ | 2,884 | ||||||||
Gross margin (loss) | 1,407 | (46 | ) | - | 1,361 | |||||||||||
Research and development expenses | 205 | 159 | 67 | 431 | ||||||||||||
Depreciation and amortization expense | 63 | 1 | - | 64 | ||||||||||||
Selling, general and administrative expenses | 1,804 | 184 | 82 | 2,070 | ||||||||||||
Total operating expenses | 2,072 | 344 | 149 | 2,565 | ||||||||||||
Loss from operations | $ | (665 | ) | $ | (390 | ) | $ | (149 | ) | $ | (1,204 | ) |
Six Months Ended June 30, 2022 | ||||||||||||||||
(in thousands) | ||||||||||||||||
Water Filtration | Pathogen Detection | Renal Products | Nephros, Inc. Consolidated | |||||||||||||
Total net revenues | $ | 5,008 | $ | 63 | $ | - | $ | 5,071 | ||||||||
Gross margin (loss) | 2,460 | (74 | ) | - | 2,386 | |||||||||||
Research and development expenses | 460 | 365 | 184 | 1,009 | ||||||||||||
Depreciation and amortization expense | 114 | 2 | - | 116 | ||||||||||||
Selling, general and administrative expenses | 3,953 | 356 | 109 | 4,418 | ||||||||||||
Total operating expenses | 4,528 | 722 | 293 | 5,543 | ||||||||||||
Loss from operations | $ | (2,068 | ) | $ | (796 | ) | $ | (293 | ) | $ | (3,157) |
Three Months Ended June 30, 2021 | ||||||||||||||||
(in thousands) | ||||||||||||||||
Water Filtration | Pathogen Detection | Renal Products | Nephros, Inc. Consolidated | |||||||||||||
Total net revenues | $ | 2,190 | $ | 76 | $ | - | $ | 2,266 | ||||||||
Gross margin | 1,215 | 60 | - | 1,275 | ||||||||||||
Research and development expenses | 305 | 149 | 33 | 487 | ||||||||||||
Depreciation and amortization expense | 51 | - | - | 51 | ||||||||||||
Selling, general and administrative expenses | 1,735 | 96 | 23 | 1,854 | ||||||||||||
Total operating expenses | 2,091 | 245 | 56 | 2,392 | ||||||||||||
Loss from operations | $ | (876 | ) | $ | (185 | ) | $ | (56 | ) | $ | (1,117 | ) |
Six Months Ended June 30, 2021 | ||||||||||||||||
(in thousands) | ||||||||||||||||
Water Filtration | Pathogen Detection | Renal Products | Nephros, Inc. Consolidated | |||||||||||||
Total net revenues | $ | 4,926 | $ | 76 | $ | - | $ | 5,002 | ||||||||
Gross margin | 2,802 | 60 | - | 2,862 | ||||||||||||
Research and development expenses | 598 | 268 | 177 | 1,043 | ||||||||||||
Depreciation and amortization expense | 101 | - | - | 101 | ||||||||||||
Selling, general and administrative expenses | 3,612 | 196 | 45 | 3,853 | ||||||||||||
Total operating expenses | 4,311 | 464 | 222 | 4,997 | ||||||||||||
Loss from operations | $ | (1,509 | ) | $ | (404 | ) | $ | (222 | ) | $ | (2,135 | ) |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion should be read in conjunction with our condensed consolidated financial statements and notes thereto included in Item 1 of Part I of this Quarterly Report on Form 10-Q. This discussion includes forward-looking statements about our business, financial condition and results of operations including discussions about management’s expectations for our business. These statements represent projections, beliefs and expectations based on current circumstances and conditions and in light of recent events and trends, and these statements should not be construed either as assurances of performances or as promises of a given course of action. Instead, various known and unknown factors are likely to cause our actual performance and management’s actions to vary, and the results of these variances may be both material and adverse.
Business Overview
We are a commercial-stage company that develops and sells high performance water solutions to the medical and commercial markets.
In medical markets, we sell water filtration products and waterborne pathogen detection products. Our medical water filters, mostly classified as ultrafilters, are used primarily by hospitals for the prevention of infection from waterborne pathogens, such as legionella and pseudomonas, and in dialysis centers for the removal of biological contaminants from water and bicarbonate concentrate. Because our ultrafilters capture contaminants as small as 0.005 microns in size, they minimize exposure to a wide variety of bacteria, viruses, fungi, parasites, and endotoxins.
InOur commercial markets, we manufacture and sell water filters that improve the taste and odor of water and reduce biofilm, bacteria,cysts, particulates, and scale build-up in downstream equipment. Marketed under both the Nephros and AETHER brands, ourOur products are marketed primarily to the food service, hospitality, convenience store, and health care markets.
Our pathogen detection systems are portable, near real-time systems designedmarkets, and also sold into medical institutions to provide actionable data for testing laboratories, infection control teams, biomedical engineers in dialysis clinics, and water quality teams in building management organizations.supplement.
We also haveown a subsidiary,majority stake in Specialty Renal Products, Inc. (“SRP”), a development-stage medical device company that is focused primarily on developing hemodiafiltration (“HDF”) technology. On May 13, 2022, the FDA gave 510(k) clearance to SRP’s second-generation model of the OLpūr H2HrH2H Hemodiafiltration System, which enables nephrologists to provide HDF treatment to patients with end stage renal disease (“ESRD”).
disease. In January 2023, SRP management began exploring strategic partnerships to support a commercial launch of the HDF product but was unsuccessful in identifying a partner. By late February 2023, SRP had nearly exhausted its capital resources. Due to its limited capital and lack of prospects for securing a strategic partnership or additional financing, the board of directors of SRP adopted a plan on March 6, 2023 to wind down SRP operations, liquidate its remaining assets and dissolve the company. That plan was approved by SRP’s stockholders on March 9, 2023, and on April 11, 2023, SRP filed a certificate of dissolution with the State of Delaware. We were founded in 1997 by healthcare professionals affiliatedanticipate that SRP’s cash resources will be sufficient to satisfy all of its outstanding liabilities other than its obligations to us under a loan with Columbia University Medical Center/New York-Presbyterian Hospital to develop and commercialize an alternative method to hemodialysis. We have extended our filtration technologies to meet the demand for liquid purification in other areas, in particular, water purification.
COVID-19 Pandemic
Most customers and prospects –outstanding balance of approximately $1.5 million. Accordingly, we expect that SRP will assign all of its remaining assets, including healthcare, hospitality, and food and beverage – have re-opened to our sales activity as the country has progressed through the COVID-19 pandemic. In addition, our filter emergency response business has normalized. We expect the pandemic to continue its overall trend toward abatementintellectual property rights in the coming months, but recent infection increases from new viral variants may interrupt that abatement from timeHDF2 device, to time, as has occurred with the Delta and Omicron variants.
During the pandemic,us in partial satisfaction of its outstanding loan balance. Although we maintained full operations, supporting our customers and strategic partners, withhave no significant interruptions in supply chain or service capabilities.
We believe that, as the COVID-19 pandemic subsides,current plans to do so, we may experience a net positive impact on demandre-evaluate opportunities for our products, due especially to increased global awareness of infectious pathogens andHDF in the serious problems they cause. Specifically, we expect that:future.
Our Products
Water Filtration Products
We develop and sell water filtration products used in both medical and commercial applications. Our water filtration products employ multiple filtration technologies, as described below.
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In medical markets, our primary filtration mechanism is to pass liquids through the pores of polysulfone hollow fiber. Our filters’ pores are significantly smaller than those of competing products, resulting in highly effective elimination of waterborne pathogens, including legionella bacteria (the cause of Legionnaires disease) and viruses, which are not eliminated by most other microbiological filters on the market. Additionally, the fiber structure and pore density in our hollow fiber enables significantly higher flow rates than in other polysulfone hollow fiber.
Our primary sales strategy in medical markets is to sell through value-added resellers (“VARs”). Leveraging VARs has enabled us to expand rapidly our access to target customers without significantwith limited sales staff expansion. In addition, while we are currently focused on medical markets, the VARs that support these customers also support a wide variety of commercial and industrial customers. We believe that our VAR relationships have and will continue to facilitate growth in filter sales outside of the medical industry.
In commercial markets, we develop and sell our Nephros- and AETHER-branded filters, for which carbon-based absorption is the primary filtration mechanism. AetherThese products allow us to improve water’s odor and taste, to reduce scale and heavy metals, and to reduce other water contaminants for customers who are primarily in the food service, convenience store, and hospitality industries.
Our Aether filter offerings have the potential to generate accretive revenue growth in at least three ways. First, we expect the business to continue its organic growth. Second, cross-selling opportunities These commercial products are generated by offering taste/odor-focused products to thealso sold into medical markets, as well as pathogen-focusedsupplemental filtration to the commercial markets. Finally, as part of the more substantial Nephros organization, Aether may be able to compete for larger filtration contracts than may have been available to it as a smaller, independent firm.our medical filters.
In commercial markets, our model combines both direct and indirect sales. Our sales staff have sold products directly to a number of convenience stores, hotels, casinos, and restaurants. We are also pursuing large corporate contracts through partnerships.
Target Markets
Our ultrafiltration products currently target the following markets:
● | Hospitals and Other Healthcare Facilities: Filtration of water for washing and drinking as an aid in infection control. The filters produce water that is suitable for wound cleansing, cleaning of equipment used in medical procedures, and washing of surgeons’ hands. | |
● | Dialysis Centers and Home/Portable Dialysis Machines: Filtration of water or bicarbonate concentrate used in hemodialysis. | |
● | Commercial Facilities: Filtration and purification of water for consumption, including for use in ice machines and soft drink dispensers. | |
● | Military and Outdoor Recreation: Individual water purification devices used by soldiers and backpackers to produce drinking water in the field, as well as filters customized to remote water processing systems. |
Hospitals and Other Healthcare Facilities. Nephros filters are a leading tool used to provide proactive protection to patients in high-risk areas (e.g., ice machines, surgical rooms, NICUs) and reactive protection to patients in broader areas during periods of water pathogen outbreaks. Our products are used in hundreds of medical facilities to aid in infection control, both proactively and reactively.
As of 2019,2022, according to the American Hospital Association, there are approximately 6,100 hospitals in the U.S., with approximately 921,000 beds. In 2019, over 36Over 33 million patients were admitted to these hospitals. The U.S. Centers for Disease Control and Prevention (“CDC”) estimates that healthcare associated infections (“HAI”) occur in approximately 1 out of every 31 hospital patients, which calculates to over 1one million patients in 2019.2022. HAIs affect patients in hospitals or other healthcare facilities and are not present or incubating at the time of admission. They also include infections acquired by patients in the hospital or facility, but appearing after discharge, and occupational infections among staff. Many HAIs are caused by waterborne bacteria and viruses that can thrive in aging or complex plumbing systems often found in healthcare facilities.
In January 2022, the Center for Clinical Standards and Quality at the Centers for Medicare and Medicaid Services (“CMS”) expanded its requirements – originally implemented in 2017 – for facilities to develop policies and procedures that inhibit the growth and spread of legionella and other opportunistic pathogens in building water systems. In this 2022 update, CMS requires teams to be assigned to the development of formal water management plans (“WMPs”), as well as detailed documentation regarding the development of the WMPs and their execution. CMS surveyors regularly review policies, procedures, and reports documenting water management implementation results to verify that facilities are compliant with these requirements. We believe that these CMS regulations may have a positive impact on the sale of our HAI-inhibiting ultrafilters.
We currently have FDA 510(k) clearance on the following portfolio of medical device products for use in the hospital setting to aid in infection control:
● | The DSU-H and SSU-H are in-line, 0.005-micron ultrafilters that provide dual- and single-stage protection, respectively, from waterborne pathogens. They are primarily used to filter potable water feeding ice machines, sinks, and medical equipment, such as endoscope washers and surgical room humidifiers. The DSU-H has an up to 6-month product life in a typical hospital setting, while the SSU-H has an up to 3-month product life. | |
● | The S100 is a point-of-use, 0.01-micron microfilter that provides protection from waterborne pathogens. The S100 is primarily used to filter potable water feeding sinks and showers. The S100 has an up to 3-month product life when used in a hospital setting. | |
● | The HydraGuardTM and HydraGuardTM - Flush are 0.005-micron cartridge ultrafilters that provide single-stage protection from waterborne pathogens. The HydraGuard ultrafilters are primarily used to filter potable water feeding ice machines and medical equipment, such as endoscope washers and surgical room humidifiers. The HydraGuard has an up to 6-month product life and the HydraGuard - Flush has an up to 12-month product life when used in a hospital setting. |
Our complete hospital infection control product line, including in-line, point-of-use, and cartridge filters,point-of-use can be viewed on our website at http:https://www.nephros.com/infection-control/. We are not including the information on our website as a part of, nor incorporating it by reference into, this Quarterly Report on Form 10-Q.
Dialysis Centers - Water/Bicarbonate. In the dialysis water market, Nephros ultrafiltration products are among the highest performing products on the market. The DSU-D, SSU-D and the SSUmini have become the standard endotoxin filter in many portable reverse osmosis systems. The EndoPur®, our large-format ultrafilter targeted at dialysis clinic water systems, provides the smallest pore size available. Following a long pilot project at a major dialysis provider, we are now seeing growth in the use of this product. In addition, we aim to expand EndoPur’s usage into heat-disinfected water systems, which we anticipate will further open the market for this product.
To perform hemodialysis, all dialysis clinics have dedicated water purification systems to produce water and bicarbonate concentrate, two essential ingredients for making dialysate, the liquid that removes waste material from the blood. According to the American Journal of Kidney Diseases, there are approximately 6,500 dialysis clinics in the United States servicing approximately 468,000 patients annually. We estimate that there are over 100,000 hemodialysis machines in operation in the United States.
Medicare is the main payer for dialysis treatment in the United States. To be eligible for Medicare reimbursement, dialysis centers must meet the minimum standards for water and bicarbonate concentrate quality set by the Association for the Advancement of Medical Instrumentation (“AAMI”), the American National Standards Institute (“ANSI”) and the International Standards Organization (“ISO”). We anticipate that the stricter standards approved by these organizations in 2009 will be adopted by Medicare in the future.
We currently have FDA 510(k) clearance on the following portfolio of medical device products for use in the dialysis setting to aid in bacteria, virus, and endotoxin retention:
● | The DSU-D, SSU-D and SSUmini are in-line, 0.005-micron ultrafilters that provide protection from bacteria, viruses, and endotoxins. All of these products have an up to 12-month product life in the dialysis setting and are used to filter water following treatment with a reverse osmosis (“RO”) system, and to filter bicarbonate concentrate. These ultrafilters are primarily used in the water lines and bicarbonate concentrate lines leading into dialysis machines, and as a polish filter for portable RO machines. | |
● | The EndoPur is a 0.005-micron cartridge ultrafilter that provides single-stage protection from bacteria, viruses, and endotoxins. The EndoPur has an up to 12-month product life in the dialysis setting and is used to filter water following treatment with an RO system. More specifically, the EndoPur is used primarily to filter water in large RO systems designed to provide ultrapure water to an entire dialysis clinic. The EndoPur is a cartridge-based, “plug and play” market entry that requires no plumbing at installation or replacement. The EndoPur is available in 10”, 20”, and 30” configuration. |
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Commercial and Industrial Facilities. Our commercial NanoGuard® product line accomplishes ultrafiltration via small pore size (0.005 micron) technology, filtering bacteria and viruses from water. In addition, the AETHER brand expanded our product line tocommercial filtration offerings include water filtration and purification technologies that are primarily focused on improving odor and taste and on reducing scale and heavy metals from filtered water.
We purchased the AETHER brand to expedite our access to commercial markets and to expand our filtration expertise and capabilities. Our commercial market focus is onincludes the hotel, restaurant,hospitality and convenience store markets. In the first-year post-acquisition,food and beverage markets, in which we upgraded Aetherpartner with Donastar Enterprises LLC as our master distributor. We also sell commercial filters into medical and non-medical facilities to increase production and logistics capacity, integrated Aether products into the Nephros infection control product portfolio, and initiated sales efforts with several large commercial customers. In March 2022, we closed a contract to provide water filtration systems to an organization of approximately 3,000 Quick Service Restaurants (“QSR”). We continue to pursuethrough our other national accounts, which may result in step-change increases in commercial market revenue.distribution partners.
Over time, we believe that the same water safety management programs currently underway at medical facilities may migrate to commercial markets. As the epidemiology of waterborne pathogens expands, links to contamination sources will become more efficient and the data more readily available. In cases where those sources are linked to restaurants, hotels, office buildings and residential complexes, the corporate owners of those facilities will likely face increasing liability exposure. We expect that building owners will come to understand ASHRAE-188, which outlines risk factors for buildings and their occupants, and provides water safety management guidelines. We believe, in time, most commercial buildings will need to follow the basic requirements of ASHRAE-188: create a water management plan, perform routine testing, and establish a plan to treat the building in the event of a positive test.
As demand for water testing and microbiological filtration grows, we will be ready to deploy our expertise and solutions based on years of experience servicing the medical market. We believe that we have an opportunity to offer unique expertise and products to the commercial market, and that our future revenue from the commercial market could even surpass our infection control revenue.
We currently market the following portfolio of proprietary products for use in the commercial, industrial, and food service settings:
● | The NanoGuard set of products are in-line, 0.005-micron ultrafilter that provides dual-stage retention of any organic or inorganic particle larger than 15,000 Daltons. NanoGuard products are designed to fit a variety of existing plumbing configurations, including 10” and 20” standard housings, and | |
● | The |
AETHERNephros commercial products combine effectively with NanoGuard ultrafiltration technologies to offer full-featured solutions to the commercial water market, including to existing users of Everpure filter manifolds.
Military and Outdoor RecreationPathogen Detection Systems. We developed our individual water treatment device (“IWTD”) in both in-line and point-of-use configurations. Our IWTD allows a soldier in the field to derive drinking water from any freshwater source. This enables the soldier to remain hydrated, to help maintain mission effectiveness and unit readiness, and to extend mission reach. Our IWTD has been validated by the military to meet the NSF Protocol P248 standard. It has also been approved by the U.S. Army Public Health Command and the U.S. Army Test and Evaluation Command for deployment.
In May 2015,2019, we entered into a Sublicense Agreement (the “Sublicense Agreement”) with CamelBak Products, LLC (“CamelBak”). Under this Sublicense Agreement, we granted CamelBak an exclusive, non-transferable, worldwide (with the exception of Italy) sublicense and license, in each case solely to market, sell, distribute, import and export the IWTD. In exchange for the rights granted to CamelBak, CamelBak agreed, through December 31, 2022, to pay us a percentage of the gross profit on any sales made to a branch of the U.S. military, subject to certain exceptions, and to pay us a fixed per-unit fee for any other sales made. CamelBak was also required to meet or exceed certain minimum annual fees payable to us, and, if such fees are not met or exceeded, we were able to convert the exclusive sublicense to a non-exclusive sublicense with respect to non-U.S. military sales. In the first quarter of 2019, the Sublicense Agreement was amended to eliminate the minimum fee obligations starting May 6, 2018, and, as such, CamelBak has no further minimum fee obligations. Related to this Sublicense Agreement, there was no royalty revenue recognized during the three and six months ended June 30, 2022, and approximately $20,000 of revenue was recognized in the three and six months ended June 30, 2021.
Pathogen Detection Systems (“PDS”)
Pathogen Detection in Infection Control. We recently expanded our portfolio of water solutions with the introduction of pathogen detection system (“PDS”) products and services, including our PluraPath™PluraPath pathogen detection system, which we believe represents a significant growth opportunity for Nephros.
We developed the PluraPath pathogen detection system to provide real-time data to infection control teams executing their water management plans. We integrated our ultrafilter technology with emerging, quantitative polymerase chain reaction (qPCR) technology and real-time analytics. We chose a portable, open-source qPCR platform that allows us to parallel-process up to 15 different bacteria and virus assays. We worked with industry experts to select and develop DNA- and RNA-based assays that could meet our goals of providing quantitative precision within one hour. We also developed a mobile application to extract and processregarding the data real-time. Furthermore, we designed the system so that anyone can perform qPCR testing, not just someone with training in microbiological laboratory techniques.
With the PluraPath system, it will be possible to map and track the changes to levels of multiple bacterial and viral pathogens in a building’s water system on a real-time basis, at cost levels equivalent to assays that currently take 24-72 hours or more and typically provide data on only a single pathogen. Using PluraPath, we expect that infection control teams will be able to quickly assess approximate levelsexistence of a broad array of waterborne pathogens in their water systems, and optimally focus their secondary disinfection efforts and point-of-use filtration; services and products offered by our strategic partners.
The PluraPath system does not replace culture-based assays, which areto the current regulatory requirements for confirmation in testing for waterborne pathogens. Rather, we believe PluraPath will become a valuable tool in the arsenal of defense, permitting faster decision making about a larger target population of pathogens. Our objective is to provide our customers and strategic partners with a user-friendly system that delivers dependable, actionable data to infection control teams in less than an hour.
Pathogen Detection in Centralized Testing Laboratories. Due to qPCR testing’s accuracy, ability to automate, and its cost efficiencies, we expect that centralized testing laboratories will increasingly migrate their standard testing to qPCR technologies inresponsible executing a building or other facility’s water management plans. In the coming years. Nephros PDS is well positioned to assist in this strategic transformation. We are pursuing relationships with multiple centralized laboratories and testing service providers.
Pathogen Detection in Dialysis Facilities. We have also been investigating pathogen detection efforts in the dialysis space. The LAL (limulus amebocyte lysate) test is a dialysis industry standard assay that identifies the presencethird quarter of potential endotoxins, agnostic to the source species. The source of endotoxins are gram-negative bacteria. LAL testing routinely takes 48-72 hours to provide results from the time of shipping the sample to a central laboratory. When dialysis clinics have urgent contamination or severely elevated endotoxin issues, they may have to shut down for extended periods of time creating enormous logistical issues for patients and increasing the cost of care.
To provide a real-time solution for this testing paradigm, we developed the DialyPath™ pathogen detection and endotoxin estimation system. The DialyPath system mirrors our PluraPath but includes a gram-negative DNA marker test and test for six different gram-negative bacteria. The DialyPath system is designed to provide data on two test samples in one run in less than one hour. The system will provide an estimate of the overall endotoxin in the sample, as well as estimated levels of six specific endotoxin-generating bacteria known to be frequent invaders of dialysis clinic water systems.
Facility-Wide Pathogen Detection. Bacterial contaminants in water systems can originate from thousands of different bacterial families. The technology now exists to map the water system biome in real-time, on-site, using an enhanced form of the portable PluraPath system and a bioinformatics database. The SequaPath system provides the capability to screen water for over 20,000 different bacterial genera (families), including genera of the 40+ pathogenic bacteria listed by the Centers for Disease Control & Prevention (“CDC”) in their “Opportunistic Pathogens of Premise Plumbing.” The system incorporates our proprietary filtration technology and a DNA sequencing step that makes it possible to screen rapidly for genera of waterborne pathogens. Like PluraPath, the SequaPath platform is portable, allowing for same-day on-site analysis.
The SequaPath technology was used in 2020 to perform an academic study that found far more bacteria in buildings unoccupied during the COVID-19 pandemic than in occupied buildings. The potential for building biome mapping is enormous. We are developing the technology, processes, and procedures to perform as many as 96 tests in a single run. SequaPath is currently available as a service offering.
While this service could be of value to the management of any water system in any building in any part of the world, we will first focus on the hospital customers of our strategic partners. Once proven in the hospital space, we believe that SequaPath has the potential to shift the building water testing paradigm across multiple markets and geographies.
Our Pathogen Detection Systems laboratories facility in Reno, Nevada, has matured into a first-class, environmental test development and manufacturing organization. The lab was recently enrolled in the CDC’s ELITE Program, which recognizes approximately 150 U.S. laboratories capable of advanced isolation techniques with respect to Legionella identification. Our focus extends well beyond Legionella. Indeed, we believe our laboratories now offer the most extensive list of CDC-noted, opportunistic waterborne pathogens in a single test on the market today.
Additional Pathogen Detection Markets. On July 9, 2021, we acquired substantially all the assetsbusiness of GenArraytion, Inc. (“GenArraytion”). This acquisition gave us access to ), including GenArraytion’s many proprietary assays, multiplexing technology, and selection methods for detecting waterborne pathogens and other microorganisms using Polymerase Chain Reaction technology. GenArraytion’s assets and business have beenwas integrated into our Pathogen Detection SystemsPDS segment.
Due primarily In November 2022, we sold substantially all of our assets used in our PDS business to BWSI, LLC pursuant to the intellectual property acquired interms of an Agreement for Purchase and Sale of Assets with BWSI (the “PDS Purchase Agreement”). Under the GenArraytion acquisition, including proprietary techniquesterms of rapid assay development, we are exploring additional pathogen detection market opportunities, including additional waterborne pathogen detection markets as well as non-waterborne areas, such as mosquito-the PDS Purchase Agreement, BWSI made a nominal cash payment at the closing of the transaction and tick-borne illnessassumed certain continuing liabilities of the PDS business. Additionally, for a period of seven years commencing January 1, 2023, and women’s health panels.ending December 31, 2029, BWSI will pay us an annual royalty equal to a specified percentage of gross margin received by BWSI from each of the sale and licensing of products developed by the PDS Business.
Hemodiafiltration (HDF) Systems and Specialty Renal Products, Inc.
Introduction to HDF
The current standard of care in the United States for patients with chronic renal failure is hemodialysis (“HD”), a process in which toxins are cleared via diffusion. Patients typically receive HD treatments at least 3 times weekly for 3-4 hours per treatment. HD is most effective in removing smaller, easily diffusible toxins. For patients with acute renal failure, the current standard of care in the United States is hemofiltration (“HF”), a process where toxins are cleared via convection. HF offers a much better removal of larger sized toxins when compared to HD; however, HF treatment is more challenging for patients, as it is performed daily, and typically takes 12-24 hours per treatment.
Hemodiafiltration
Our company was originally founded to develop and commercialize a hemodiafiltration (“HDF”) medical device. HDF is an alternative dialysis modality that combines the benefits of HD and HF into a single therapy by clearing toxins using both diffusion and convection. Though not widely used in the United States, HDF is prevalent in Europe and is performed for a growing number of patients. Clinical experience and literature show the following clinicaldemonstrate that HDF’s benefits, among other factors, include enhanced clearance of middle and large molecular weight toxins, improved patient benefitssurvival, reduced incidence of HDF:
However, like HD, HDF can be resource-intensive and can require a significant amountreduced hospitalizations and overall length of time to deliver one course of treatment.stays.
Nephros and First-GenerationOur original HDF
In the early 2000’s, Nephros developed a medical device that enabled a standard HD machine to perform HDF. This first-generation device (“HDF1”) was cleared by the U.S. Food and Drug Administration (“FDA”) for the treatment of patients with chronic renal failure in 2012.
We refer2012, but did not gain market acceptance due to, our approach as an on-line mid-dilution hemodiafiltration (“mid-dilution HDF”) system. Our HDF1 solution included an OLpūr H2H Hemodiafiltration Module (“H2H Module”), an OLpūr MD 220 Hemodiafilter (“HDF Filter”) and an H2H Substitution Filter (“Dialysate Filter”).
Our H2H Module attachesamong other reasons, the feeling that it was too difficult to a standard HD machine to perform on-line HDF therapy. The HD machine controls and monitors the basic treatment functions, as it would normally when providing HD therapy. The H2H Module is a free-standing, movable device that is placed next to either side of an HD machine. The H2H Module connects to the clinic’s water supply, drain, and electricity.
The H2H Module utilizes the HDF Filter, which is similar to a typical hollow fiber dialyzer assembled with a single hollow fiber bundle made with a high-flux (or high-permeability) membrane. With the HDF Filter, however, the fiber bundle is separated into two discrete, but serially connected, blood paths. Dialysate flows in one direction that is counter-current to blood flow in Stage 1 and co-current to blood flow in Stage 2.
In addition to the HDF Filter, the H2H Module also utilizes a Dialysate Filter during patient treatment. The Dialysate Filter is a hollow fiber, ultrafilter device that consists of two sequential (redundant) ultrafiltration stages in a single housing. During on-line HDF with the H2H Module, fresh dialysate is redirected by the H2H Module’s hydraulic (substitution) pump and passed through this dual-stage ultrafilter before being infused as substitution fluid into the extracorporeal circuit. Providing ultrapure dialysate is crucial for the success of on-line HDF treatment.
In the years following the HDF1 product’s FDA clearance, DaVita Healthcare Partners, the Renal Research Institute (a research division of Fresenius Medical Care), and Vanderbilt University conducted post-market evaluations of HDF1 in their clinics. We gathered feedback from these evaluations to develop a better understanding of how our system best fits into the clinical ESRD treatment paradigm. The purpose of this feedback was to better understand the potential for HDF in U.S. clinical settings, to (a) improve the quality of life for the patient, (b) reduce overall expenditure compared to other dialysis modalities, (c) minimize the impact on nurse workflow at the clinic, and (d) demonstrate the pharmacoeconomic benefit of the HDF technology to the U.S. healthcare system, as has been done in Europe with other HDF systems. The last evaluation was concluded at Vanderbilt in the first quarter of 2018.
Specialty Renal Products and Second-Generation HDF
In 2017 anduse. Accordingly, since 2018, we have undertaken to redesign and dramatically simplified and redesignedsimplify our HDF1 device into a second-generation device (HDF2). OurHDF device. We believe our updates have made the system significantly easier to use. By shifting from a reusable substitution ultrafilter to a disposable substitution ultrafilter, we simplified the set-up process and substantially reduced the time required between patient treatments – two of the key complaints from users of our first-generation system. We used real-time user feedback to aid in the fine-tuning of our changes to the system that impacted usability. We believe our second-generation HDF system will meet the needs of both clinicians and patients.
In July 2018, we spun-off the development of the second-generation HDF device (“HDF2”) into SRP, a new private entity, Specialty Renal Products, Inc. (“SRP.”) Wenewly-formed subsidiary, and shortly thereafter SRP raised $3 million of newoutside equity capital directly into SRP to fund the second-generation development described above. Nephros maintains aAfter such financing, our ownership stake was reduced to 62.5%. In February 2022, SRP raised an additional $0.5 million of equity capital, including an investment by the Company of $0.3 million, which was sufficient to maintain our 62.5% ownership stake in SRP. In addition to the equity capital raised by SRP, in December 2020, we entered into a loan agreement with SRP under which we loaned $1.3 million to SRP. As of December 31, 2022, the outstanding balance of this loan, including accrued interest, was approximately $1.4 million.
OnIn May 13, 2022, the FDA cleared HDF2 for patient use, which enables nephrologists to provide HDF treatment to patients with end stage renal disease (“ESRD”).disease. To date, Nephros’sour and SRP’s HDF1 and HDF2 systems are the only HDF systems cleared by the FDA. Following FDA clearance of HDF2, SRP’s management began exploring strategic partnerships and/or potential additional sources of financing to support a commercial launch of the HDF2 device but has been unsuccessful in identifying any interested strategic partner or investor. By late February 2023, SRP had nearly exhausted its capital resources.
In late 2022,March 2023, SRP’s board of directors and stockholders determined to wind down SRP operations and liquidate its remaining assets, due to capital constraints. We believe SRP’s remaining cash resources are sufficient to satisfy all of its outstanding liabilities other than its outstanding loan to us. Accordingly, we plan to launchexpect that SRP will assign all of its remaining assets, including its intellectual property rights in the HDF2 system at 1-3 clinicsdevice, to establish clinical experience. SRP is currently manufacturing devices and suppliesus in partial satisfaction of its outstanding loan balance of approximately $1.5 million. Although we have no current plans to do so, we may re-evaluate opportunities for its commercial launch. We have also hired a Director of Operations to lead the commercial launch and select initial clinics.HDF2 device in the future
In 2023, we plan to expand our efforts on a measured basis, to clinics that wish to provide HDF therapy to their patients. We believe this measured launch approach is more likely to be successful than a broader push into the market. Nephrologists in the United States are not trained on HDF therapy; however, we believe many nephrologists are interested in exploring the option. We also believe that early adopters will want to perform studies to better understand the technology. We intend to support these investigator-initiated studies.
While several studies have been performed in Europe, the body of evidence for optimal use of HDF needs to be built in the U.S. treatment setting. According to European data from Fresenius, over 15% of dialysis treatments are HDF. That could translate to over 10 million individual treatments if HDF achieved that level of penetration in the United States. We do not believe that the United States will instantaneously mirror Europe. However, we do believe that HDF therapy has a place in the treatment landscape for patients with ESRD in the United States, and we look forward to enabling this pathway.
Critical Accounting Policies
For the six-monththree-month period ended June 30, 2022,March 31, 2023, there were no significant changes to our critical accounting policies as identified in our Annual Report on Form 10-K for the year ended December 31, 2021.2022.
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Recent Accounting Pronouncements
We are subject to recently issued accounting standards, accounting guidance and disclosure requirements. For a description of these new accounting standards, see Note 2, “Basis of Presentation and Liquidity,” of the Notes to our Unaudited Condensed Consolidated Interim Financial Statements contained in Item 1 of Part I of this Quarterly Report on Form 10-Q, which is incorporated herein by reference.
Results of Operations
Fluctuations in Operating Results
Our results of operations have fluctuated significantly from period to period in the past, including recently, and are likely to continue to do so in the future. We anticipate that our annual results of operations will be impacted for the foreseeable future by several factors, including market acceptance of our products,revenue growth rates, expense management, and progress in achievingmaintaining positive operating cash flow. Due to these fluctuations, we believe that the period-to-period comparisons of our operating results are not a good indication of our future performance.
Three Months Ended June 30, 2022March 31, 2023 Compared to the Three Months Ended June 30, 2021March 31, 2022
The following table sets forth our summarized, consolidated results of operations for the three months ended June 30,March 31, 2023 and 2022 and 2021 (in thousands, except percentages):
2022 | 2021 | $ Increase (Decrease) | % Increase (Decrease) | |||||||||||||
Total net revenues | $ | 2,884 | $ | 2,266 | $ | 618 | 27 | % | ||||||||
Cost of goods sold | 1,523 | 991 | 532 | 54 | % | |||||||||||
Gross margin | 1,361 | 1,275 | 86 | 7 | % | |||||||||||
Gross margin % | 47 | % | 56 | % | - | (9 | )% | |||||||||
Research and development expenses | 431 | 487 | (56 | ) | (11 | )% | ||||||||||
Depreciation and amortization expense | 64 | 51 | 13 | 25 | % | |||||||||||
Selling, general and administrative expenses | 2,070 | 1,854 | 216 | 12 | % | |||||||||||
Loss from operations | (1,204 | ) | (1,117 | ) | (87 | ) | (8 | )% | ||||||||
Interest expense | (6 | ) | (11 | ) | 5 | 45 | % | |||||||||
Interest income | 1 | 3 | (2 | ) | (67 | )% | ||||||||||
Other income (expense), net | 72 | (1 | ) | 73 | 7300 | % | ||||||||||
Net loss | (1,137 | ) | (1,126 | ) | (11 | ) | (1 | )% | ||||||||
Less: Undeclared deemed dividend attributable to noncontrolling interest | (66 | ) | (60 | ) | (6 | ) | (10 | )% | ||||||||
Net loss attributable to Nephros, Inc. | $ | (1,203 | ) | $ | (1,186 | ) | $ | (17 | ) | (1 | )% |
Net Revenues. Our business is reported in three reportable segments: Water Filtration, Pathogen Detection and Renal Products. Our net revenues in each of these segments for the three months ended June 30, 2022 and 2021 (in thousands, except percentages) were as follows:
2022 | 2021 | $ Increase (Decrease) | % Increase (Decrease) | |||||||||||||
Water Filtration | $ | 2,849 | $ | 2,190 | $ | 659 | 30 | % | ||||||||
Pathogen Detection | 35 | 76 | (41 | ) | (54 | )% | ||||||||||
Renal Products | - | - | - | - | % | |||||||||||
Total | $ | 2,884 | $ | 2,266 | $ | 618 | 27 | % |
2023 | 2022 | $ Increase (Decrease) | % Increase (Decrease) | |||||||||||||
Total net revenues | $ | 3,697 | $ | 2,159 | $ | 1,538 | 71 | % | ||||||||
Cost of goods sold | 1,586 | 1,106 | 480 | 43 | % | |||||||||||
Gross margin | 2,111 | 1,053 | 1,058 | 101 | % | |||||||||||
Gross margin % | 57 | % | 49 | % | - | 8 | % | |||||||||
Research and development expenses | 239 | 372 | (133 | ) | (36 | )% | ||||||||||
Depreciation and amortization expense | 54 | 51 | 3 | 6 | % | |||||||||||
Selling, general and administrative expenses | 2,124 | 2,177 | (53 | ) | (2 | )% | ||||||||||
Operating loss from continuing operations | (306 | ) | (1,547 | ) | 1,241 | (80) | % | |||||||||
Interest expense | (1 | ) | (7 | ) | (6 | ) | (86 | )% | ||||||||
Interest income | 12 | 2 | 10 | 500 | % | |||||||||||
Other expense, net | (11 | ) | (9 | ) | (2 | ) | 22 | % | ||||||||
Net loss from continuing operations | (306 | ) | (1,561 | ) | 1,255 | (80 | )% | |||||||||
Net loss from discontinued operations | - | (406 | ) | (406 | ) | 100 | % | |||||||||
Net loss | (306 | ) | (1,967 | ) | 1,661 | (84 | )% | |||||||||
Less: Undeclared deemed dividend attributable to noncontrolling interest | - | (63 | ) | (63 | ) | 100 | % | |||||||||
Net loss attributable to Nephros, Inc. shareholders | $ | (306 | ) | $ | (2,030 | ) | $ | (1,724 | ) | 85 | % |
TotalThe increase in net revenues of $1.5 million, or 71%, was driven by two factors. First, we invested in the Water Filtration segment increased 30% due to increasedour sales in all 3organization, increasing medical sales headcount significantly and partnering with a master distributor for much of our filtration target markets: Hospitals, Dialysis, and Commercial. We believe these sales increases reflect growing market acceptancecommercial business. These investments generated approximately 40% growth in our core, programmatic business. Second, we received an unusually large emergency response order, which generated approximately $600,000 of our products.
Total net revenues in the Pathogen Detection segment decreased 54% due to lower-than-expected service and testing revenues.additional, unexpected revenue.
Gross Profit Margin
2022 | 2021 | % Increase (Decrease) | ||||||||||
Water Filtration | 49 | % | 55 | % | (6 | )% | ||||||
Pathogen Detection | (131 | )% | 79 | % | (210 | )% | ||||||
Renal Products | - | % | - | % | - | % | ||||||
Total | 47 | % | 56 | % | (9 | )% |
Consolidated gross profit margin was approximately 47%57% for the three months ended June 30, 2022March 31, 2023 compared to approximately 56%49% for the three months ended June 30, 2021.March 31, 2022. The decreaseincrease of approximately 9%8%, reflecting a return to target gross margins of 55-60%, was driven by increased shipping costs as well as inventory expirations, certain product obsolescence, and adjustments to inventory counts. The negative gross profit marginprice increases implemented in the Pathogen Detection segment was primarily caused by the expirationsecond and third quarters of product2022, reductions in shipping expenses, and improved inventory that we acquired in connection with our 2021 acquisition of GenArraytion, Inc. Responding to supply chain cost increases, we implemented a broad price increase beginning on June 1, 2022.management.
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Research and Development Expenses
Research and development expenses by segment for the three months ended June 30, 2022 and 2021 (in thousands, except percentages) were as follows:
2022 | 2021 | $ Increase (Decrease) | % Increase (Decrease) | |||||||||||||
Water Filtration | $ | 205 | $ | 305 | $ | (100 | ) | (33 | )% | |||||||
Pathogen Detection | 159 | 149 | 10 | 7 | % | |||||||||||
Renal Products | 67 | 33 | 34 | 103 | % | |||||||||||
Total | $ | 431 | $ | 487 | $ | (56 | ) | (11 | )% |
Consolidated research and development expenses decreased $56,000 primarilyapproximately $133,000 due to the wind down of SRP and slightly decreased investment across product lines as products matured.in water filter research and development.
Depreciation and Amortization Expense
Depreciation and amortization expenses were approximately $54,000 and $51,000, respectively, for the three months ended March 31, 2023 and 2022.
Selling, General and Administrative Expenses
Selling, general and administrative expenses by segment for the three months ended June 30, 2022 and 2021 (in thousands, except percentages) were as follows:
2022 | 2021 | $ Increase (Decrease) | % Increase (Decrease) | |||||||||||||
Water Filtration | $ | 1,804 | $ | 1,735 | $ | 69 | 4 | % | ||||||||
Pathogen Detection | 184 | 96 | 88 | 92 | % | |||||||||||
Renal Products | 82 | 23 | 59 | 257 | % | |||||||||||
Total | $ | 2,070 | $ | 1,854 | $ | 216 | 12 | % |
Consolidated selling, general and administrative expenses increased $0.2 milliondecreased $53,000, or 2%, primarily due initially to increased headcount expenditures, followed by severance expenses resulting from a reduction-in-force of approximately 15% of company staff in an effort to reduce operating expenses to align with current and projected revenue.broad-based expense management efforts.
Interest Expense
Interest expense was approximately $6,000$1,000 for the three months ended June 30, 2022.March 31, 2023. It is comprised primarily of interest on our secured note payable. Interest expense was approximately $11,000$7,000 for the three months ended June 30, 2021,March 31, 2022, comprised primarily of interest on our secured note payable.
Interest Income
Interest income was approximately $12,000 for the three months ended March 31, 2023 compared to approximately $2,000 for the three months ended March 31, 2022.
Other Income (Expense), net
Other income ofexpense was approximately $72,000$11,000 and $9,000 for the three months ended June 30,March 31, 2023 and March 31, 2022 is primarily related to the release of the cumulative translation adjustment, from accumulated other comprehensive income (loss) on the liquidation of a foreign entity. Other expense of approximately $1,000 for the three months ended June 30, 2021 is related to foreign currency exchange losses.
Six Months Ended June 30, 2022 Compared to the Six Months Ended June 30, 2021
The following table sets forth our summarized, consolidated results of operations for the six months ended June 30, 2022 and 2021 (in thousands, except percentages):
2022 | 2021 | $ Increase (Decrease) | % Increase (Decrease) | |||||||||||||
Total net revenues | $ | 5,071 | $ | 5,002 | $ | 69 | 1 | % | ||||||||
Cost of goods sold | 2,685 | 2,140 | 545 | 25 | % | |||||||||||
Gross margin | 2,386 | 2,862 | (476 | ) | (17 | )% | ||||||||||
Gross margin % | 47 | % | 57 | % | - | (10 | )% | |||||||||
Research and development expenses | 1,009 | 1,043 | (34 | ) | (3 | )% | ||||||||||
Depreciation and amortization expense | 116 | 101 | 15 | 15 | % | |||||||||||
Selling, general and administrative expenses | 4,418 | 3,853 | 565 | 15 | % | |||||||||||
Loss from operations | (3,157 | ) | (2,135 | ) | (1,022 | ) | (48 | )% | ||||||||
Interest expense | (13 | ) | (24 | ) | 11 | (46 | )% | |||||||||
Interest income | 3 | 6 | (3 | ) | (50 | )% | ||||||||||
Forgiveness of PPP Loan | - | 482 | (482 | ) | (100 | )% | ||||||||||
Other income (expense), net | 63 | 8 | 55 | 688 | % | |||||||||||
Net loss | (3,104 | ) | (1,663 | ) | (1,441 | ) | (87 | )% | ||||||||
Less: Undeclared deemed dividend attributable to noncontrolling interest | (129 | ) | (119 | ) | (10 | ) | (8 | )% | ||||||||
Net loss attributable to Nephros, Inc. | $ | (3,233 | ) | $ | (1,782 | ) | $ | (1,451 | ) | (81 | )% |
Net Revenues. Our business is reported in three reportable segments: Water Filtration, Pathogen Detection and Renal Products. Our net revenues in each of these segments for the six months ended June 30, 2022 and 2021 (in thousands, except percentages) were as follows:
2022 | 2021 | $ Increase (Decrease) | % Increase (Decrease) | |||||||||||||
Water Filtration | $ | 5,008 | $ | 4,926 | $ | 82 | 2 | % | ||||||||
Pathogen Detection | 63 | 76 | (13 | ) | (17 | )% | ||||||||||
Renal Products | - | - | - | - | % | |||||||||||
Total | $ | 5,071 | $ | 5,002 | $ | 69 | 1 | % |
Total net revenues in the Water Filtration segment increased 2%.
Total net revenues in the Pathogen Detection segment decreased 17% in the six months ended June 30, 2022, due to lower-than-expected service and testing revenues. By comparison, net revenues increased 100% in the first three months of the year. Pathogen Detection is still an early-stage business, and significant revenue fluctuations are expected.
Gross Profit Margin
2022 | 2021 | % Increase (Decrease) | ||||||||||
Water Filtration | 49 | % | 57 | % | (8 | )% | ||||||
Pathogen Detection | (118 | )% | 79 | % | (197 | )% | ||||||
Renal Products | - | % | - | % | - | % | ||||||
Total | 47 | % | 57 | % | (10 | )% |
Consolidated gross margin was approximately 47% for the six months ended June 30, 2022, compared to approximately 57% for the six months ended June 30, 2021. The decrease of approximately 10% was driven by increased shipping costs, 4.2%, lower product margins, 2.9%, as well as inventory reserve increases for, expirations, certain product obsolescence, and adjustments to inventory counts, 2.6%. The negative gross profit margin in the Pathogen Detection segment was primarily caused by the expiration of product inventory that was purchased in the 2021 acquisition of GenArraytion, Inc. Responding to supply chain cost increases, we implemented a broad price increase beginning on June 1, 2022.
Research and Development Expenses
Research and development expenses by segment for the six months ended June 30, 2022 and 2021 (in thousands, except percentages) were as follows:
2022 | 2021 | $ Increase (Decrease) | % Increase (Decrease) | |||||||||||||
Water Filtration | $ | 460 | $ | 598 | $ | (138 | ) | (23 | )% | |||||||
Pathogen Detection | 365 | 268 | 97 | 36 | % | |||||||||||
Renal Products | 184 | 177 | 7 | 4 | % | |||||||||||
Total | $ | 1,009 | $ | 1,043 | $ | (34 | ) | (3 | )% |
Consolidated research and development expenses decreased $34,000 primarily due to decreased investment in the Water Filtration segment, offset by increased investment in Pathogen Detection products.
Selling, General and Administrative Expenses
Selling, general and administrative expenses by segment for the six months ended June 30, 2022 and 2021 (in thousands, except percentages) were as follows:
2022 | 2021 | $ Increase (Decrease) | % Increase (Decrease) | |||||||||||||
Water Filtration | $ | 3,953 | $ | 3,612 | $ | 341 | 9 | % | ||||||||
Pathogen Detection | 356 | 196 | 160 | 82 | % | |||||||||||
Renal Products | 109 | 45 | 64 | 142 | % | |||||||||||
Total | $ | 4,418 | $ | 3,853 | $ | 565 | 15 | % |
Consolidated selling, general and administrative expenses increased $0.6 million or 15% primarily due to increased employee related costs, $0.3 million, increased travel costs, $0.1 million and increased costs for marketing, $0.1 million.
Interest Expense
Interest expense was approximately $13,000 for the six months ended June 30, 2022 compared to $24,000 for the six months ended June 30, 2021. This reduction is primarily related to a lower principal balance of the company’s secured note payable.
Extinguishment of PPP loan
Our outstanding PPP loan was forgiven in January of 2021 resulting in an extinguishment of approximately $482,000.
Other Income (Expense), net
Other income was approximately $63,000 for the six months ended June 30, 2022, and is primarily related to the release of the cumulative translation adjustment from accumulated other comprehensive income (loss) on the liquidation of a foreign entity. Other income was approximately $8,000 for the six months ended June 30, 2021 as a result of gainslosses on foreign currency transactions.
Liquidity and Capital Resources
The following table summarizes our liquidity and capital resources as of June 30, 2022March 31, 2023 and December 31, 20212022 and is intended to supplement the more detailed discussion that follows. The amounts stated are expressed in thousands.
June 30, | December 31, | |||||||||||||||
Liquidity and Capital Resources | 2022 | 2021 | March 31, 2023 | December 31, 2022 | ||||||||||||
Cash and cash equivalents | $ | 4,179 | $ | 6,973 | $ | 3,836 | $ | 3,634 | ||||||||
Other current assets | 6,943 | 6,661 | 4,488 | 4,627 | ||||||||||||
Working capital | 9,011 | 11,244 | 6,909 | 6,849 | ||||||||||||
Stockholders’ equity | 12,481 | 14,749 | 8,894 | 8,881 |
At June 30, 2022,As of March 31, 2023, we had an accumulated deficit of $138.8$143.1 million and we expect to incur additional operating losses from operations until such time, if ever, that we are able to increase product sales and/or licensing revenue to achieve profitability.
Based on cash that is available for our operations and projections of our future operations, as well as our significantly reduced cash burn rates over the past nine months, we believe that our existing cash resources together with our anticipated revenue,balances will be sufficient to fund our current operating plan through at least the next 12 months from the date of issuance of the condensed consolidated financial statements in this Quarterly Report on Form 10-Q. Additionally, our operating plans are designed to help control operating costs, to increase revenue, and to raise additional capital until such time as we generate sufficient cash flows to fund operations. If there were a decrease in the demand for our products due to either economic or competitive conditions, or if we are otherwise unable to achieve our plan or achieve our anticipated operating results, there could be a significant reduction in liquidity due to our possible inability to cut costs sufficiently. In such event, the Company may need to take further actions to reduce its discretionary expenditures, including further reducing headcount, reducing spending on R&D projects, and reducing other variable costs.
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Our future liquidity sources and requirements will depend on many other factors, including:
● | ||
● | the costs involved in filing and enforcing patent claims and the status of competitive products; and | |
● | the cost of litigation, including potential patent litigation and any other actual or threatened litigation. |
We expect to put our current capital resources totoward the following uses:development, marketing, and sales of our water filtration products and working capital purposes.
Net cash provided by operating activities was approximately $0.3 million for the three months ended March 31, 2023 compared to net cash used in operating activities was $2.9of approximately $1.8 million for the sixthree months ended June 30,March 31, 2022, compared to $0.2 for the six months ended June 30, 2021. Thisan increase of $2.7$2.1 million is due primarily to an increasea decrease of $1.7 million in the net loss incurredas a result of $1.4increased revenue for the three months ended March 31, 2023 compared to 2022, increased gross margins, and decreased research and development costs. In addition, a reduction in inventory provided approximately $0.8 million in cash, which was partially offset by an increase in accounts receivable used approximately $0.7 million in cash, both as a result of $0.5 million offset by a decreasethe large increase in accounts payable of $0.6 million.sales for the period.
The company had no investing activities for the three months ended March 31, 2023. Net cash used in investing activities was approximately $137,000 in$34,000, for the sixthree months ended June 30,March 31, 2022, compared to approximately $23,000 for the six months ended June 30, 2021. The change is due to increased purchases of property and equipment.
Net cash used in financing activities was approximately $0.1 million for the three months ended March 31, 2023, primarily due to principal payments on debt. Net cash provided by financing activities was approximately $0.2$0.3 million for the sixthree months ended June 30, 2022. This wasMarch 31, 2022, primarily due to proceeds from the sale of subsidiary preferred shares to a noncontrolling interest of $0.2 million and proceeds from the exercise of warrants of $0.2 million and from the sale to Nephros of SRP preferred shares of $0.2 million,partially offset partially by payments of $0.1 million on our secured note, principal payments of approximately $3,000 on our finance lease obligation and principal payments of approximately $1,000 on our equipment financing debt.
Net cash provided by financing activities of $0.2 million for the six months ended June 30, 2021 resulted from proceeds from the exercise of warrants and options of $0.4 million offset partially by payments of $0.1 million on our secured note, principal payments of approximately $7,000 on our finance lease obligation and principal payments of approximately $1,000 on our equipment financing debt.note.
Off-Balance Sheet Arrangements
We did not have any off-balance sheet arrangements as of March 31, 2023.
Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements. ThisCertain statements in this Quarterly Report on Form 10-Q containsconstitute “forward-looking statements”. Such statements include statements regarding the efficacy and intended use of our technologies under development, the timelines and strategy for bringing such “forward-looking” information, which includes allproducts to market, the timeline for regulatory review and approval of our products, the availability of funding sources for continued development of such products, and other statements herein that are based on future expectations. In some cases, you can identify forward-lookingnot historical facts, including statements which may be preceded by the following words: “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,words “intends,” “may,” “ongoing,” “plan,” “potential,” “predict,” “project,” “should,” “will,” “would,“plans,” “expects,” “anticipates,” “projects,” “predicts,” “estimates,” “aims,” “believes,” “hopes,” “potential” or the negative of these terms or other comparable terminology, although not all forward-looking statements contain thesesimilar words. Forward-looking statements are only predictions and are not guaranteesguaranties of performance. These statementsfuture performance, are based on our management’s beliefscertain assumptions and assumptions, which in turn are based on their interpretation of currently available information. The forward-looking statements contained in this report include, but are not limitedsubject to statements regarding the following:
These statements involvevarious known and unknown risks and uncertainties, and other factors thatmany of which are beyond our control. Actual results may cause our results, levels of activity, performance or achievements to bediffer materially different from the information expressed or implied by theseexpectations contained in the forward-looking statements. Factors that may cause such differences include, but are not limited to, the risks that:
● | ||
● |
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● | we face potential liability associated with the production, marketing and sale of our products, and the expense of defending against claims of product liability could materially deplete our assets and generate negative publicity, which could impair our reputation; | |
● | to the extent our products or marketing materials are found to violate any provisions of the U.S. Food, Drug and Cosmetic Act (the “FDC Act”) or any other statutes or regulations, we could be subject to enforcement actions by the U.S. Food and Drug Administration (the “FDA”) or other governmental agencies; | |
● | we may not be able to obtain funding when needed or on terms favorable to us in order to continue | |
● | we may not have sufficient capital to successfully implement our business | |
● | we may not be able to effectively market our | |
● | we may not be able to sell our water filtration | |
● | we may encounter problems with our suppliers, manufacturers, and | |
● | we may encounter unanticipated internal control deficiencies or weaknesses or ineffective disclosure controls and |
● | we may not be able to obtain appropriate or necessary regulatory approvals to achieve our business | |
● | we may not be able to secure or enforce adequate legal protection, including patent protection, for our products; | |
● | we may not be able to achieve sales growth in key geographic | |
TheseMore detailed information about us and additional risksthe risk factors that may affect the realization of forward-looking statements, including the forward-looking statements in this Quarterly Report on Form 10-Q, is set forth in our filings with the U.S. Securities and uncertainties are described more fully inExchange Commission (the “SEC”), including our Annual Report on Form 10-K for the fiscal year ended December 31, 2021,2022 and in our Quarterly Report on Form 10-Q for the period ended March 31, 2022, which we haveother reports filed with the SECSEC. We urge investors and which are available throughsecurity holders to read those documents free of charge at the SEC’s EDGAR systemweb site at www.sec.gov. You should read these risk factors and the other cautionary statements made in this report as being applicablewww.sec.gov. We do not undertake to all related forward-looking statements wherever they appear in this report. We cannot assure you that the forward-looking statements in this report will prove to be accurate. Furthermore, ifpublicly update or revise our forward-looking statements prove to be inaccurate, the inaccuracy may be material. You should read this report completely. Other thanas a result of new information, future events or otherwise, except as required by law, we undertake no obligation to update these forward-looking statements, even though our situation may change in the future.law.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not required for smaller reporting companies.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
We maintain a system of disclosure controls and procedures, as defined in Rule 13a-15(e) or Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which is designed to provide reasonable assurance that information required to be disclosed in our reports filed pursuant to the Exchange Act is accumulated and communicated to management in a timely manner. Management recognizes that any disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives. Because there are inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud have been or will be detected.
At the end of the period covered by this Quarterly Report on Form 10-Q, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, regarding the effectiveness of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this report were effective.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during our most recent fiscal quarter that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1A. Risk Factors
As a smaller reporting company, we are not required to provide disclosure pursuant to this item. However, in addition to other information set forth in this Quarterly Report on Form 10-Q, including the important information in the section entitled “Forward Looking Statements,” you should carefully consider the “Risk Factors” in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2021 and in Item 1A of our Quarterly Report on Form 10-Q for the period ended March 31, 2022 for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in this Quarterly Report on Form 10-Q. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial might materially adversely affect our actual business, financial condition and/or operating results.results
Item 6. Exhibits
EXHIBIT INDEX
Exhibit No. | Description of Exhibit | |
31.1 | ||
32.1 | ||
Inline XBRL Instance Document* | ||
101.SCH | Inline XBRL Taxonomy Extension Schema Document | |
Inline XBRL Taxonomy Extension | ||
Inline XBRL Taxonomy Extension | ||
Inline XBRL Taxonomy Extension | ||
Inline XBRL Taxonomy Extension Presentation Linkbase | ||
104 | Cover Page Interactive Data File (embedded within the Inline XBRL document) | |
* | Filed herewith | |
** | Furnished herewith. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
NEPHROS, INC. | |||
Date: | By: | /s/ Andrew Astor | |
Name: | Andrew Astor | ||
Title: | President, Chief Executive Officer and Chief Financial Officer (Principal Executive and Financial Officer) |