As filed with the Securities and Exchange
Commission on June 23, 2015
Registration No. 333-
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
NEPHROS, INC.
(Exact Name of Registrant as Specified
in Its Charter)
| Delaware |
3841 |
13-3971809 |
| (State or Other Jurisdiction of |
(Primary Standard Industrial |
(I.R.S. Employer |
| Incorporation or Organization) |
Classification Code Number) |
Identification No.) |
41 Grand Avenue
River Edge, New Jersey 07661
(201) 343-5202
(Address, Including Zip Code, and Telephone
Number,
Including Area Code, of Registrant’s
Principal Executive Offices)
|
Daron Evans
President, Chief Executive Officer
and Acting Chief Financial Officer
Nephros, Inc.
41 Grand Avenue
River Edge, New Jersey 07661
(201) 343-5202
(Name, Address, Including Zip Code, and
Telephone Number,
Including Area Code, of Agent for Service) |
|
Copies to:
Christopher J. Melsha, Esq.
Fredrikson & Byron P.A.
200 South Sixth Street
Suite 4000
Minneapolis, Minnesota 55402
Telephone: (612) 492-7369
Facsimile: (612) 492-7077 |
Approximate date of commencement of proposed sale to the
public: From time to time after the effective date of this registration statement, as shall be determined by the selling shareholder
identified herein.
If any of the securities being registered on this Form are to
be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box. x
If this Form is filed to register additional securities for
an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same offering. ¨
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. ¨
If this Form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. ¨
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated
filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer |
¨ |
|
Accelerated filer |
¨ |
| Non-accelerated filer |
¨ (Do not check if smaller reporting company) |
|
Smaller reporting company |
x |
CALCULATION OF REGISTRATION FEE (1)
Title of Each Class of Securities to be Registered | |
Amount to
be Registered(1) | | |
Proposed Maximum
Offering Price Per Share
(2) | | |
Proposed
Maximum
Aggregate Offering Price | | |
Amount of Registration Fee | |
| Common stock, $0.001 par value per share | |
| 2,751,448 | | |
$ | 0.70 | | |
$ | 1,926,014 | | |
$ | 223.80 | |
| Total | |
| | | |
| | | |
$ | 1,926,014 | | |
$ | 223.80 | |
| (1) | Pursuant to Rule 416 under the Securities Act, the shares being registered hereunder include such indeterminate number of shares
as may be issuable with respect to the shares being registered hereunder as a result of stock splits, stock dividends or similar
transactions. |
| (2) | Estimated solely for purposes of calculating the amount of the registration fee pursuant to Rule 457(c). The offering price
per share and the aggregate offering price are based upon the average of the high and low prices of the registrant’s common
stock as reported on the OTCQB on June 18, 2015. |
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT
ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH
SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT
TO SUCH SECTION 8(A), MAY DETERMINE.
| The information in this prospectus is not complete and may be changed. We may not sell these securities until the Registration Statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities or the solicitation of an offer to buy these securities in any state in which such offer, solicitation or sale is not permitted. |
| PRELIMINARY PROSPECTUS |
SUBJECT TO COMPLETION — DATED JUNE 23,
2015 |
NEPHROS, INC.
2,751,448 Shares of Common Stock
The selling stockholders identified beginning
on page 18 of this prospectus are offering on a resale basis a total of 2,751,448 shares of our common stock, of which 917,149
are issuable upon the exercise of outstanding warrants. We will not receive any proceeds from the sale of these shares by the selling
stockholders.
Shares of our common stock are quoted on
the OTCQB Marketplace operated by the OTC Markets Group, Inc., or OTCQB, under the ticker symbol “NEPH.” On ,
2015, the closing sales price for our common stock was $ per share. The shares of common
stock issued upon the exercise of warrants will also be quoted on the OTCQB under the same ticker symbol. The warrants are not
listed for trading on any stock exchange or market or quoted on the OTCQB.
Investing in our common stock involves
substantial risks. See “Risk Factors” beginning on page 6 of this prospectus to read about important
factors you should consider before purchasing our common stock.
Neither the Securities and Exchange Commission
nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of
this prospectus. Any representation to the contrary is a criminal offense.
The date of this prospectus is ,
2015.
NEPHROS, INC.
TABLE OF CONTENTS
ABOUT THIS PROSPECTUS
We refer to Nephros, Inc. and its consolidated
subsidiary as “Nephros”, the “Company”, “we”, “our”, and “us”. This
prospectus is part of a registration statement that we have filed with the Securities and Exchange Commission, which we refer to
as the SEC or the Commission, utilizing a registration process. It is important for you to read and consider all of the information
contained in this prospectus and any applicable prospectus before making a decision whether to invest in the common stock. You
should also read and consider the information contained in the exhibits filed with our registration statement, of which this prospectus
is a part, as described in “Where You Can Find More Information” in this prospectus.
You should rely only on the information
contained in this prospectus and any applicable prospectus supplement, including the information incorporated by reference. We
have not authorized anyone to provide you with different information. We are not offering to sell or soliciting offers to buy,
and will not sell, any securities in any jurisdiction where it is unlawful. You should assume that the information contained in
this prospectus or any prospectus supplement, as well as information contained in a document that we have previously filed or in
the future will file with the SEC is accurate only as of the date of this prospectus, the applicable prospectus supplement or the
document containing that information, as the case may be.
PROSPECTUS SUMMARY
This summary highlights information contained
in other parts of this prospectus. Because it is a summary, it does not contain all of the information that is important to you.
For a more complete understanding of our business, you should read this summary together with the more detailed information and
financial statements for the three months ended March 31, 2015 and March 31, 2014 and for the years ended December 31, 2014 and
2013, and related notes appearing elsewhere in this prospectus. You should read this entire prospectus carefully, including the
“Risk Factors” section beginning on page 6 and the “Special Note Regarding Forward-Looking Statements”
section beginning on page 16. This prospectus contains important information that you should consider when making your investment
decision.
About the Company
Nephros is a commercial stage medical device
company that develops and sells high performance liquid purification filters. Our filters, which we call ultrafilters, are primarily
used in dialysis centers for the removal of biological contaminants from water, bicarbonate concentrate and/or blood. 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.
Our ultrafilters use proprietary hollow
fiber technology. We believe the hollow fiber design allows our ultrafilters to optimize the three elements critical to filter
performance:
| · | Filtration - as low as 0.005 microns |
| · | Flow rate - minimal disruption |
| · | Filter life - up to 12 months |
We were founded in 1997 by healthcare professionals
affiliated with Columbia University Medical Center/New York-Presbyterian Hospital to develop and commercialize an alternative method
to hemodialysis, or HD. We have extended our filtration technologies to meet the demand for liquid purification in other areas,
in particular water purification.
Our Products
Presently, we offer
ultrafilters for sale to customers in five markets:
| · | Hospitals and Other Healthcare Facilities: Filtration of water to be used for patient washing and drinking as an aid
in infection control. The filters also produce water that is suitable for wound cleansing, cleaning of equipment used in medical
procedures and washing of surgeons’ hands. |
| · | Dialysis Centers - Water/Bicarbonate: Filtration of water or bicarbonate concentrate used in hemodialysis devices. |
| · | Dialysis Centers - Blood: Treatment of patients with chronic renal failure using the OLpūr H2H Hemodiafiltration,
or HDF, Module in conjunction with a UF controlled hemodialysis machine and its accessories, the H2H Module accessories, appropriately
prepared water and ultrapure dialysate for hemodialysis and the OLpūr MD 220 Hemodiafilter. |
| · | Military and Outdoor Recreation: Highly compact, individual water purification devices used by soldiers and backpackers
to produce drinking water in the field. |
| · | Commercial Facilities: Filtration of water for washing and drinking including use in ice machines and soda fountains. |
Our Target Markets
Hospitals and Other Healthcare Facilities.
According to the American Hospital Association there are approximately 5,700 hospitals and 920,000 beds in the U.S. and the United
States Centers for Disease Control and Prevention estimates that healthcare associated infections, or HAIs, annually account for
1.7 million infections and 99,000 deaths. HAIs affect patients in a hospital or other healthcare facility, 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 waterborne bacteria and viruses that can thrive in aging
or complex plumbing systems often found in healthcare facilities. The Affordable Care Act, which was passed in March 2010, puts
in place comprehensive health insurance reforms that aim to lower costs and enhance quality of care. With its implementation, healthcare
providers have substantial incentives to deliver better care or be forced to absorb the expenses associated with repeat medical
procedures or complications like HAIs. As a consequence, hospitals and other healthcare facilities are proactively implementing
strategies to reduce the potential for HAIs. Our ultrafilters are designed to aid in infection control in the hospital and healthcare
setting by treating facility water at the point of delivery, for example, from sinks and showers.
On June 30, 2014, we submitted to the FDA,
for 510(k) clearance, the DSU-H and SSU-H Ultrafilters to filter EPA quality drinking water to remove microbiological contaminants
and waterborne pathogens. On October 28, 2014, we announced that we received 510(k) clearance from the FDA to market our DSU-H
and SSU-H Ultrafilters as medical devices for use in the hospital setting. The DSU-H and SSU-H Ultrafilters are intended to be
used to filter EPA quality drinking water. The filters retain bacteria, viruses and endotoxin. By providing ultrapure water for
patient washing and drinking, the filters aid in infection control. The filters also produce water that is suitable for wound cleansing,
cleaning of equipment used in medical procedures and washing of a surgeon’s hands. The filters are not intended to provide
water that can be used as a substitute for United States Pharmacopeia sterile water.
We anticipate that the impact of the American
Society of Heating, Refrigerating, and Air-Conditioning Engineers, Inc. proposed Standard 188, “Prevention of Legionellosis
Associated with Building Water Systems”, when adopted, will be positive for the point of delivery filtration market. We will
be enhancing our efforts to support our distributors by developing and delivering focused sales training to their sales forces
on the use of our filters to support an overall program of infection risk prevention, as well as by offering the services of our
sales representatives to jointly call on potential hospital customers to serve as a product expert when needed.
Dialysis Centers - Water/Bicarbonate.
To perform hemodialysis, all dialysis clinics have dedicated water purification systems to produce water and bicarbonate concentrate.
Water and bicarbonate concentrate are essential ingredients for making dialysate, the liquid that removes waste material from the
blood. Within the U.S., there are approximately 6,000 clinics with 100,000 dialysis machines providing over 50 million dialysis
treatments to 400,000 patients annually.
Medicare is the main payer for dialysis
treatment in the U.S. 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, or AAMI, the American National
Standards Institute, or ANSI and the International Standards Organization, or ISO. We anticipate that the stricter standards approved
by these organizations in 2009 will be adopted by Medicare in the near future.
Published studies have shown that the use
of ultrapure dialysate can reduce the overall need for erythropoietin stimulating agents, or ESAs, expensive drugs used in conjunction
with HD. By reducing the level of dialysate contaminants, specifically cytokine-inducing substances that can pass into a patient’s
blood stream, the stimulation of inflammation-inducing cytokines is reduced, thus reducing systemic inflammation. When inflammation
is low, inflammatory morbidities are reduced and a patient’s responsiveness to erythropoietin is enhanced, consequently the
overall need for ESAs is reduced.
We believe that our ultrafilters are attractive
to dialysis centers because they exceed currently approved and newly proposed standards for water and bicarbonate concentrate purity,
assist in achieving those standards and may help dialysis centers reduce costs associated with the amount of ESA required to treat
a patient. Our in-line filters are easily installed into the fluid circuits supplying water and bicarbonate concentrate just prior
to entering each dialysis machine.
During March 2014 we signed a non-exclusive
distributor agreement with Mar Cor Purification, a wholly-owned subsidiary of Cantel Medical Corp., to distribute our dialysis
ultrafilters to U.S. and Canadian dialysis clinics. In July 2014, we received notification from Health Canada Therapeutic Products
Directorate Medical Devices Bureau that we were successfully issued a license for our Single Stage Ultrafilter.
Dialysis Centers - Blood. The current
standard of care in the U.S. for patients with chronic renal failure is HD, a process in which toxins are cleared via diffusion.
Patients typically receive HD treatment 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 U.S. is hemofiltration, or
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 performed on a daily basis, and typically takes 12-24 hours.
Hemodiafiltration, or 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 U.S., HDF is much more prevalent in Europe and is performed in approximately 16% of patients. Clinical
experience and literature show the following clinical and patient benefits of HDF:
| · | Enhanced clearance of middle and large molecular weight toxins |
| · | Improved survival - up to a 35% reduction in mortality risk |
| · | Reduction in the occurrence of dialysis-related amyloidosis |
| · | Reduction in inflammation |
| · | Reduction in medication such as EPO and phosphate binders |
| · | Improved patient quality of life |
| · | Reduction in number of hospitalizations and overall length of stay |
However, like HF, HDF can be resource intensive and can require
a significant amount of time to deliver one course of treatment.
We have developed a modified approach to
HDF that we believe is more patient-friendly, less resource-intensive, and can be used in conjunction with current HD machines.
We refer to our approach as an online mid-dilution hemodiafiltration (mid-dilution HDF) system and it consists of our OLpūr
H2H Module and OLpūr MD 220 Hemodiafilter. The OLpūr H2H HDF Module and OLpūr MD 220 Hemodiafilter are cleared by
the FDA to market for use with a ultrafiltration controlled hemodialysis machine that provides ultrapure dialysate in accordance
with current ANSI/AAMI/ISO standards, for the treatment of patients with chronic renal failure in the United States. Our on-line
mid-dilution HDF system is the only on-line mid-dilution HDF system of its kind to be cleared by the FDA to date.
We completed preparation of our OLpūr
H2H HDF Modules and have manufactured lots of our OLpūr MD220 Hemodiafilters, H2H Substitution filters and H2H water filters.
We also finalized our service contract to support the commercialization of our system in the field. In May 2014, DaVita Healthcare
Partners announced that it had commenced delivering and evaluating on-line mid-dilution hemodiafiltration treatments to select
patients at DaVita’s North Colorado Springs Clinic. In February 2015, we announced that, in the course of the evaluation,
DaVita informed Nephros that they would require additional validation of the system. Nephros and DaVita agreed upon a protocol
for the additional validation work which was completed in March. We have submitted the data report to DaVita, and have been informed
that it is still under review. Upon confirmatory review of the additional validation work, it is anticipated that DaVita will continue
its evaluation. In March 2015, we announced that the Renal Research Institute, a research division of Fresenius Medical Care, was
conducting an ongoing evaluation of our hemodiafiltration system in its clinic. We also anticipate evaluating our on-line mid-dilution
HDF system at other clinics throughout the U.S. with the intent of developing a better understanding of how our system best fits
into the current clinical and economic ESRD treatment paradigm with the ultimate goals of improving the quality of life for the
patient, reducing overall expenditure compared to other dialysis modalities, minimizing the impact on nurse work flow at the clinic,
and demonstrating the phamacoeconomic benefit of the HDF technology to the U.S. healthcare system, as has been done in Europe with
other HDF systems.
Military and Outdoor Recreation.
Water is a key requirement for the soldier to be fully mission-capable. The need for water supplies and immediate on-site water
purification is critical to enhance the ability to operate in any environment. Currently, the military is heavily reliant on the
use of bottled water to support its soldiers in the field. Bottled water is not always available, is very costly to move, resource
intensive, and prone to constant supply disruptions. Soldiers conducting operations in isolated and rugged terrain must be able
to use available local water sources when unable to resupply from bulk drinking water sources or bottled water. Therefore, the
soldier needs the capability to purify water from indigenous water sources in the absence of available potable water. Soldiers
must have the ability to remove microbiological contaminants in the water to levels specified by the Environmental Protection Agency,
or EPA.
We developed our individual water treatment
device, or IWTD, in both in-line (HydraGuard in-line) and point-of-use (HydraGuard Universal) configurations. Our IWTD allows a
soldier in the field to derive drinking water from any fresh water source. This enables the soldier to remain hydrated which will
maintain mission effectiveness and unit readiness, and extend mission reach. Our IWTD is one of the few portable filters that has
been validated by the military to meet the NSF Protocol P248 standard. It has also been approved by U.S. Army Public Health Command
and U.S. Army Test and Evaluation Command for deployment.
In May 2015, we entered into a Sublicense
Agreement with CamelBak Products, LLC, or 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 HydraGuard individual water treatment devices. In exchange for the rights granted to CamelBak, CamelBak agreed 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 is also required to meet or exceed certain minimum annual fees payable
to us, and if such fees are not met or exceeded, we may convert the exclusive sublicense to a non-exclusive sublicense with respect
to non-U.S. military sales. Additionally, we have the right to terminate the sublicense with respect to a specific geographic area
if CamelBak enters into an agreement or otherwise obtains or develops the rights to market or sell a product that competes with
the HydraGuard individual water treatment devices in such geographic area. If we do not terminate the sublicense in such situation,
and the sales of the competing product in such geographic area exceed the sales of the HydraGuard individual water treatment devices
in the same area during any full calendar year, we may convert the exclusive sublicense to a non-exclusive sublicense solely with
respect to such geographic area.
Commercial Facilities. In October
2013, we announced the voluntary recalls of our point of use, or POU, and DSU in-line ultrafilters used in hospital water treatment
applications. As a result, we recalled all production lots of our POU filters, and also requested that customers remove and discard
certain labeling/promotional materials for the products. In addition, for the DSU in-line ultrafilter, we also requested that customers
remove and discard certain labeling/promotional materials for the product. These voluntary recalls did not affect our dialysis
products. In March, 2014, we requested termination of our product recall from the FDA. As of the date of this report, there has
been no additional communication from the FDA regarding our request.
We have launched our new NanoGuard-D and
NanoGuard-S in-line ultrafilters for the filtration of water which is to be used for non-medical drinking and washing in non-transient
non-community water systems, or commercial facilities. The NanoGuard-D and NanoGuard-S trap particulates greater than 5nm in size
and the water permeability (the ease at which water can pass through a membrane at a given pressure) of the membrane is higher
than membranes with a similar pore size. This provides improved flow performance relative to the physical size of the filter. We
anticipate that the filters will be used as a component of a facility water treatment system and also for filtering water to be
used in ice machines and soda fountains.
With respect to public drinking water systems,
EPA regulations make a distinction between community and non-community systems. A community water system supplies water to the
same population year-round. It serves at least 25 people at their primary residences or at least 15 residences that are primary
residences. Community water systems include those that supply municipalities, mobile home parks, and residential sub-divisions.
Non-community water systems are composed
of transient and non-transient water systems:
| · | Transient non-community water systems provide water to 25 or more people for at least 60 days/year; however, not to the same
people and not on a regular basis, e.g. gas stations, campgrounds. |
| · | Non-transient non-community water systems regularly supply water to at least 25 of the same people at least six months per
year, but not year-round, e.g. office buildings, schools, hotels and factories which have their own water systems. |
Corporate Information
We were incorporated under the laws of the
State of Delaware in April 1997. Our principal executive offices are located at 41 Grand Avenue, River Edge, New Jersey, 07661,
and our telephone number is (201) 343-5202. We also have an office in Dublin, Ireland. For more information about Nephros, please
visit our website at www.nephros.com.
Where You Can Find More Information
We make available free of charge on our
website (http://www.nephros.com) our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form
8-K, and all amendments to those reports, as soon as reasonably practicable after such material is electronically filed with or
furnished to the SEC. We provide electronic or paper copies of filings free of charge upon request. The public may read and copy
any materials filed with the SEC at the SEC’s Public Reference Room at 100 F Street N.E. Washington, D.C. 20549. The public
may obtain information on the operation of the Public Reference Room by calling the SEC at 1800-SEC-0330. The SEC maintains an
Internet site that contains reports, proxy and information statements and other information regarding issuers that file with the
SEC at http://www.sec.gov.
The Offering
The following summary describes the principal
terms of the rights offering, but is not intended to be complete.
| Securities Offered |
2,751,448 shares of common stock, including 917,149 shares of common stock issuable upon exercise of certain outstanding warrants. |
| |
|
| Exercise Price and Term of Warrants |
The warrants have an exercise price of $0.85 per share and are exercisable at any time prior to May 19, 2020. For a more complete description of the terms of the warrants, see “Description of 2015 Private Placement – The 2015 Warrants.” |
| |
|
| Use of Proceeds |
We will receive none of the proceeds from the sale of the shares by the selling stockholders, except for the warrant exercise price upon exercise of the warrants, which we expect to use to further develop our products and for general for working capital purposes. |
| |
|
| Risk Factors |
The acquisition of our common stock involves substantial risks. See “Risk Factors” beginning on page 6 of this prospectus. |
| |
|
| OTCQB Symbol |
NEPH |
Recent Developments
On May 12, 2015, we entered into a securities
purchase agreement with various accredited investors pursuant to which we agreed to sell in a private placement a total of 1,834,299
units of our securities, each unit consisting of one share of our common stock and a five-year warrant to purchase one-half of
one share of our common stock. The closing of the private placement occurred on May 19, 2015. We refer to the offer and sale of
our securities pursuant to the purchase agreement as our “2015 Private Placement.” The purchase price for each unit
was $0.67. The warrants are exercisable at a price of $0.85 per warrant share. The sale of the shares and warrants resulted
in aggregate gross proceeds of approximately $1.23 million, before deducting expenses.
RISK FACTORS
An investment in our securities involves
a high degree of risk. You should consider carefully the following information about these risks, together with the other information
contained in this prospectus, before you decide whether to buy our securities. The occurrence of any of the following risks could
have a material adverse effect on our business, financial condition and results of operations.
Risks Related to Our Company
If we are unable to maintain effective internal control
over financial reporting, our ability to produce accurate financial statements on a timely basis could be impaired and the market
price of our securities may be negatively affected.
Section 404 of the Sarbanes-Oxley Act of
2002 requires us to maintain internal control over financial reporting and to report any material weaknesses in such internal control.
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there
is a reasonable possibility that a material misstatement of annual or interim financial statements will not be prevented or detected
and corrected on a timely basis. We also are required to furnish a report by management on the effectiveness of our internal control
over financial reporting. We perform system and process evaluation and testing of our internal controls over financial reporting
to allow management to prepare and furnish such a report.
In connection with the preparation of our
consolidated financial statements for the year ended December 31, 2014, we discovered that we had improperly accounted for our
warrants as components of equity instead of as derivative liabilities, and our management and auditors determined that this resulted
from a material weakness in internal control over financial reporting. This material weakness led to the need for the restatement
of (i) our audited consolidated financial statements as of and for the years ended December 31, 2013, 2012, 2011, 2010 and 2009,
including the cumulative effect as of January 1, 2009, and (ii) our unaudited condensed consolidated interim financial statements
as of, and for each of the quarterly periods ended, March 31, June 30, and September 30, in the years 2014 and 2013.
If we are unable to maintain proper and
effective internal control over financial reporting, we may not be able to produce timely and accurate financial statements. If
that were to happen, investors may lose confidence in the accuracy and completeness of our financial reports, the market price
of our securities could decline and we could be subject to sanctions or investigations by the SEC or other regulatory authorities.
Our independent registered public accounting firm, in
its audit report related to our financial statements for the fiscal year ended December 31, 2014, expressed substantial doubt about
our ability to continue as a going concern.
Our independent registered public accounting
firm has included an explanatory paragraph in its report on our consolidated financial statements included in this prospectus expressing
doubt as to our ability to continue as a going concern. The accompanying consolidated financial statements have been prepared assuming
that we will continue as a going concern. However, there can be no assurance that we will be able to do so. Our recurring losses
and difficulty in generating sufficient cash flow to meet our obligations and sustain our operations raise substantial doubt about
our ability to continue as a going concern, and our consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty. Based on our current cash flow projections, we will need to raise additional funds
through either the licensing or sale of our technologies or the additional public or private offerings of our securities. However,
there is no guarantee that we will be able to obtain further financing, or do so on reasonable terms. If we are unable to raise
additional funds on a timely basis, or at all, we would be materially adversely affected.
We have a history of operating losses and a significant
accumulated deficit, and we may not achieve or maintain profitability in the future.
As of March 31, 2015, we had an accumulated
deficit of approximately $113,922,000, as a result of historical operating losses. We expect to continue to incur additional losses
for the foreseeable future as a result of a high level of operating expenses, significant up-front expenditures, including the
cost of clinical trials, production and marketing activities and very limited revenue from the sale of our products. We began sales
of our first product in March 2004, and we may never realize sufficient revenues from the sale of our products or be profitable.
Each of the following factors, among others, may influence the timing and extent of our profitability, if any:
| · | the market acceptance of our technologies and products in each of our target markets; |
| · | our ability to effectively and efficiently manufacture, market and distribute our products; |
| · | our ability to sell our products at competitive prices which exceed our per unit costs; and |
| · | our ability to continue to develop products and maintain a competitive advantage in our industry. |
If we violate any provisions of the FDC Act or any other
statutes or regulations, then we could be subject to enforcement actions by the FDA or other governmental agencies.
We face a significant compliance burden
under the FDC Act and other applicable statutes and regulations which govern the testing, labeling, storage, record keeping, distribution,
sale, marketing, advertising and promotion of our medically approved products.
On October 30, 2013, we initiated a voluntary
recall of our point of use (POU) and DSU in-line ultrafilters used in hospital water treatment applications. We initiated the voluntary
recall of these POU filters because the FDA informed us that promotional materials for these non-medical water filtration products
were determined to promote claims which constitute marketing the product as a medical device. In addition, we received reports
from one customer of high bacterial counts that may be associated with the breakage of fiber in four filters. According to the
reports received, one death and one infection may have occurred due to the failure mode associated with this voluntary recall.
Investigation into these reports is ongoing. Prior to receiving the complaints mentioned previously, since we began marketing the
products, we received 29 additional complaints of high bacterial counts that may be associated with the breakage of filter fiber.
We have had no reports of adverse events associated with these 29 complaints. We have recalled all production lots of these POU
filters, and are also requesting that customers remove and discard certain labeling/promotional materials for the products. We
initiated the voluntary recall of the DSU in-line ultrafilter because the FDA informed us that promotional materials for these
non-medical water filtration products were determined to promote claims which constitute marketing the product as a medical device.
We are requesting that customers remove and discard certain labeling/promotional materials for the product.
On May 28, 2015, we received a warning
letter from the FDA resulting from an October 2014 inspection of our facility in River Edge, New Jersey. The warning letter
alleges deficiencies relating to our compliance with the Quality System regulation and the Medical Device Reporting
regulation. We take the matters identified in the warning letter seriously and are in the process of evaluating the
corrective actions required to address the matters raised in the warning letter. We responded to the warning letter within 15
business days as requested by the FDA, and intend to work diligently and expeditiously to resolve the issues raised by the
FDA. The warning letter does not restrict the manufacture, production or shipment of any of our products, nor require the
withdrawal of any product from the marketplace.
If we violate the FDC Act or other regulatory
requirements (either with respect to our POU or DSU ultrafilters or otherwise) at any time during or after the product development
and/or approval process or we fail to promptly address the issues raised in the warning letter discussed above, we could be subject
to enforcement actions by the FDA or other agencies, including:
| · | recalls or seizures of products; |
| · | total or partial suspension of the production of our products; |
| · | withdrawal of any existing approvals or pre-market clearances of our products; |
| · | refusal to approve or clear new applications or notices relating to our products; |
| · | recommendations that we not be allowed to enter into government contracts; and |
Any of the above could have a material adverse
effect on our business, financial condition and results of operations.
We cannot assure you that our products will be safe or
that there will not be product-related deaths, serious injuries or product malfunctions. Further, we are required under applicable
law to report any circumstances relating to our medically approved products that could result in deaths or serious injuries. These
circumstances could trigger recalls, class action lawsuits and other events that could cause us to incur expenses and may also
limit our ability to generate revenues from such products.
We cannot assure you that our products will
prove to be safe or that there will not be product-related deaths or serious injuries or product malfunctions, which could trigger
recalls, class action lawsuits and other events that could cause us to incur significant expenses, limit our ability to market
our products and generate revenues from such products or cause us reputational harm.
In particular, the voluntary recalls of
the POU and DSU in-line ultrafilters used in hospital water treatment applications announced on October 30, 2013 and the related
circumstances could subject us to claims or proceedings by consumers, the FDA or other regulatory authorities which may adversely
impact our sales and revenues.
Under the FDC Act, we are required to submit
medical device reports, or MDRs, to the FDA to report device-related deaths, serious injuries and malfunctions of medically approved
products that could result in death or serious injury if they were to recur. Depending on their significance, MDRs could trigger
events that could cause us to incur expenses and may also limit our ability to generate revenues from such products, such as the
following:
| · | information contained in the MDRs could trigger FDA regulatory actions such as inspections, recalls and patient/physician notifications; |
| · | because the reports are publicly available, MDRs could become the basis for private lawsuits, including class actions; and |
| · | if we fail to submit a required MDR to the FDA, the FDA could take enforcement action against us. |
If any of these events occur, then we could
incur significant expenses and it could become more difficult for us to market and sell our products and to generate revenues from
sales. Other countries may impose analogous reporting requirements that could cause us to incur expenses and may also limit our
ability to generate revenues from sales of our products.
Product liability associated with the production, marketing
and sale of our products, and/or the expense of defending against claims of product liability, could materially deplete our assets
and generate negative publicity which could impair our reputation.
The production, marketing and sale of kidney
dialysis and water-filtration products have inherent risks of liability in the event of product failure or claim of harm caused
by product operation. In particular, the voluntary recalls of the POU and DSU in-line ultrafilters used in hospital water treatment
applications announced on October 30, 2013 and the related circumstances could subject us to claims or proceedings by consumers,
the FDA or other regulatory authorities which may adversely impact our sales and revenues. Furthermore, even meritless claims of
product liability may be costly to defend against. Although we have acquired product liability insurance for our products, we may
not be able to maintain or obtain this insurance on acceptable terms or at all. Because we may not be able to obtain insurance
that provides us with adequate protection against all potential product liability claims, a successful claim in excess of our insurance
coverage could materially deplete our assets. Moreover, even if we are able to obtain adequate insurance, any claim against us
could generate negative publicity, which could impair our reputation and adversely affect the demand for our products, our ability
to generate sales and our profitability.
Some of the agreements that we may enter
into with manufacturers of our products and components of our products may require us:
| · | to obtain product liability insurance; or |
| · | to indemnify manufacturers against liabilities resulting from the sale of our products. |
For example, the agreement with our contract
manufacturer, or CM, requires that we obtain and maintain certain minimum product liability insurance coverage and that we indemnify
our CM against certain liabilities arising out of our products that they manufacture, provided they do not arise out of our CM’s
breach of the agreement, negligence or willful misconduct. If we are not able to obtain and maintain adequate product liability
insurance, then we could be in breach of these agreements, which could materially adversely affect our ability to produce our products
and generate revenues. Even if we are able to obtain and maintain product liability insurance, if a successful claim in excess
of our insurance coverage is made, then we may have to indemnify some or all of our manufacturers for their losses, which could
materially deplete our assets.
We face significant challenges in obtaining market acceptance
of our products, which could adversely affect our potential sales and revenues.
We do not yet have an established market
or customer base for our products. Acceptance of our products in the marketplace by both potential users, including chronic renal
failure patients, and potential purchasers, including nephrologists, dialysis clinics and other health care providers, is uncertain,
and our failure to achieve sufficient market acceptance will significantly limit our ability to generate revenue and be profitable.
Market acceptance will require substantial marketing efforts and the expenditure of significant funds by us to inform dialysis
patients and nephrologists, dialysis clinics and other health care providers of the benefits of using our products. We may encounter
significant clinical and market resistance to our products and our products may never achieve market acceptance. We may not be
able to build key relationships with physicians, clinical groups and government agencies, pursue or increase sales opportunities
in Europe or elsewhere, or be the first to introduce hemodiafiltration therapy in the United States. Product orders may be cancelled,
patients or customers currently using our products may cease to do so and patients or customers expected to begin using our products
may not. Factors that may affect our ability to achieve acceptance of our chronic renal failure therapy products in the marketplace
include whether:
| · | such products will be safe for use; |
| · | such products will be effective; |
| · | such products will be cost-effective; |
| · | we will be able to demonstrate product safety, efficacy and cost-effectiveness; |
| · | there are unexpected side effects, complications or other safety issues associated with such products; and |
| · | government or third party reimbursement for the cost of such products is available at reasonable rates, if at all. |
Acceptance of our water filtration products
in the marketplace is also uncertain, and our failure to achieve sufficient market acceptance and sell such products at competitive
prices will limit our ability to generate revenue and be profitable. Our water filtration products and technologies may not achieve
expected reliability, performance and endurance standards. Our water filtration products and technology may not achieve market
acceptance, including among hospitals, or may not be deemed suitable for other commercial, military, industrial or retail applications.
Many of the same factors that may affect
our ability to achieve acceptance of our chronic renal failure therapy products in the marketplace will also apply to our water
filtration products, except for those related to side effects, clinical trials and third party reimbursement.
If we are not able to successfully scale-up production
of our products, then our sales and revenues will suffer.
In order to commercialize our products,
we need to be able to produce them in a cost-effective way on a large scale to meet commercial demand, while maintaining extremely
high standards for quality and reliability. The extent to which we fail to successfully commercialize our products will limit our
ability to be profitable.
We expect to rely on a limited number of
independent manufacturers to produce our products. Our manufacturers’ systems and procedures may not be adequate to support
our operations and may not be able to achieve the rapid execution necessary to exploit the market for our products. Our manufacturers
could experience manufacturing and control problems as they begin to scale-up our future manufacturing operations, if any, and
we may not be able to scale-up manufacturing in a timely manner or at a commercially reasonable cost to enable production in sufficient
quantities. If we experience any of these problems with respect to our manufacturers’ initial or future scale-ups of manufacturing
operations, then we may not be able to have our products manufactured and delivered in a timely manner. Our products are new and
evolving, and our manufacturers may encounter unforeseen difficulties in manufacturing them in commercial quantities or at all.
If we cannot develop adequate distribution, customer service
and technical support networks, then we may not be able to market and distribute our products effectively and/or customers may
decide not to order our products. In either case, our sales and revenues will suffer.
Our strategy requires us to distribute our
products and provide a significant amount of customer service and maintenance and other technical service. To provide these services,
we have begun, and will need to continue, to develop a network of distribution and a staff of employees and independent contractors
in each of the areas in which we intend to operate. We cannot assure that we will be able to organize and manage this network on
a cost-effective basis. If we cannot effectively organize and manage this network, then it may be difficult for us to distribute
our products and to provide competitive service and support to our customers, in which case customers may be unable, or decide
not, to order our products and our sales and revenues will suffer.
We have limited experience selling our products to healthcare
facilities, and we might be unsuccessful in increasing our sales.
Our business strategy depends in part on
our ability to sell our products to hospitals and other healthcare facilities that include dialysis clinics. We have limited experience
with respect to sales and marketing. If we are unsuccessful at manufacturing, marketing and selling our products, our operations
and potential revenues will be materially adversely affected.
We cannot sell our products, including certain modifications
thereto, until we obtain the requisite regulatory approvals and clearances in the countries in which we intend to sell our products.
If we fail to receive, or experience a significant delay in receiving, such approvals and clearances, then we may not be able to
get our products to market and enhance our revenues.
Our business strategy depends in part on
our ability to get our products into the market as quickly as possible. We have obtained a Conformité Européene,
or CE, mark, which demonstrates compliance with the relevant European Union requirements and is a regulatory prerequisite for selling
our products in the European Union and certain other countries that recognize CE marking (collectively, “European Community”),
for our OLpūr mid dilution hemodiafilter series product and our Dual Stage Ultrafilter. We have not yet obtained the CE mark
for any of our other products. On April 30, 2012, we announced that we received clearance from the FDA to market our OLpūr
MD220 Hemodiafilter and OLpūr H2H Module for use with a hemodialysis machine that provides ultrapure dialysate in accordance
with current ANSI/AAMI/ISO standards, for the treatment of chronic renal failure patients. We have not begun to broadly market
these products and are actively seeking a commercialization partner in the U.S.
There is no assurance that any existing
products that have not yet been approved, or any new products developed by us in the future, will be approved for marketing. The
clearance and/or approval processes can be lengthy and uncertain and each requires substantial commitments of our financial resources
and our management’s time and effort. We may not be able to obtain further CE marking or regulatory approval for any of our
existing or new products in a timely manner or at all. Even if we do obtain regulatory approval, approval may be only for limited
uses with specific classes of patients, processes or other devices. Our failure to obtain, or delays in obtaining, the necessary
regulatory clearance and/or approvals would prevent us from selling our affected products in the applicable regions. If we cannot
sell some of our products in such regions, or if we are delayed in selling while waiting for the necessary clearance and/or approvals,
our ability to generate revenues from these products will be limited.
We intend to market our products globally.
Requirements pertaining to the sale of our products vary widely from country to country. It may be very expensive and difficult
for us to meet the requirements for the sale of our products in many countries. As a result, we may not be able to obtain the required
approvals in a timely manner, if at all. If we cannot sell our products in a particular region, then the size of our potential
market could be reduced, which would limit our potential sales and revenues.
Clinical studies that may be required for our products
are costly and time-consuming, and their outcome is uncertain.
Before obtaining regulatory approvals for
the commercial sale of any of our products, other than those for which we have already received marketing approval in the United
States and elsewhere, we must demonstrate through clinical studies that our products are safe and effective.
For products other than those for which
we have already received marketing approval, if we do not prove in clinical trials that our products are safe and effective, we
will not obtain marketing approvals from the applicable regulatory authorities. In particular, one or more of our products may
not exhibit the expected medical benefits, may cause harmful side effects, may not be effective in treating dialysis patients or
may have other unexpected characteristics that preclude regulatory approval for any or all indications of use or limit commercial
use if approved. The length of time necessary to complete clinical trials varies significantly and is difficult to predict. Factors
that can cause delay or termination of our clinical trials include:
| · | slower than expected patient enrollment due to the nature of the protocol, the proximity of subjects to clinical sites, the
eligibility criteria for the study, competition with clinical trials for similar devices or other factors; |
| · | lower than expected retention rates of subjects in a clinical trial; |
| · | inadequately trained or insufficient personnel at the study site to assist in overseeing and monitoring clinical trials; |
| · | delays in approvals from a study site’s review board, or other required approvals; |
| · | longer treatment time required to demonstrate effectiveness; |
| · | lack of sufficient supplies of the product; |
| · | adverse medical events or side effects in treated subjects; and |
| · | lack of effectiveness of the product being tested. |
Even if we obtain positive results from
clinical studies for our products, we may not achieve the same success in future studies of such products. Data obtained from clinical
studies are susceptible to varying interpretations that could delay, limit or prevent regulatory approval. In addition, we may
encounter delays or rejections based upon changes in regulatory policy for device approval during the period of product development
and regulatory review of each submitted new device application. Moreover, regulatory approval may entail limitations on the indicated
uses of the device. Failure to obtain requisite governmental approvals or failure to obtain approvals of the scope requested will
delay or preclude our licensees or marketing partners from marketing our products or limit the commercial use of such products
and will have a material adverse effect on our business, financial condition and results of operations.
In addition, some or all of the clinical
trials we undertake may not demonstrate sufficient safety and efficacy to obtain the requisite regulatory approvals, which could
prevent or delay the creation of marketable products. Our product development costs will increase if we have delays in testing
or approvals, if we need to perform more, larger or different clinical trials than planned or if our trials are not successful.
Delays in our clinical trials may harm our financial results and the commercial prospects for our products. Additionally, we may
be unable to complete our clinical trials if we are unable to obtain additional capital.
We may be required to design and conduct additional clinical
trials.
We may be required to design and conduct
additional clinical trials to further demonstrate the safety and efficacy of our products, which may result in significant expense
and delay. Regulatory agencies may require new or additional clinical trials because of inconclusive results from current or earlier
clinical trials, a possible failure to conduct clinical trials in complete adherence to certain regulatory standards, the identification
of new clinical trial endpoints, or the need for additional data regarding the safety or efficacy of our products. It is possible
that regulatory authorities may not ultimately approve our products for commercial sale in any jurisdiction, even if we believe
future clinical results are positive.
Significant additional governmental regulation could subject
us to unanticipated delays which would adversely affect our sales and revenues.
Our business strategy depends in part on
our ability to get our products into the market as quickly as possible. Additional laws and regulations, or changes to existing
laws and regulations that are applicable to our business may be enacted or promulgated, and the interpretation, application or
enforcement of the existing laws and regulations may change. We cannot predict the nature of any future laws, regulations, interpretations,
applications or enforcements or the specific effects any of these might have on our business. Any future laws, regulations, interpretations,
applications or enforcements could delay or prevent regulatory approval or clearance of our products and our ability to market
our products. Moreover, changes that result in our failure to comply with the requirements of applicable laws and regulations could
result in the types of enforcement actions by the FDA and/or other agencies as described above, all of which could impair our ability
to have manufactured and to sell the affected products.
Protecting our intellectual property in our technology
through patents may be costly and ineffective. If we are not able to adequately secure or enforce protection of our intellectual
property, then we may not be able to compete effectively and we may not be profitable.
Our future success depends in part on our
ability to protect the intellectual property for our technology through patents. We will only be able to protect our products and
methods from unauthorized use by third parties to the extent that our products and methods are covered by valid and enforceable
patents or are effectively maintained as trade secrets. Our 18 granted U.S. patents will expire at various times from 2018 to 2027,
assuming they are properly maintained.
The protection provided by our patents,
and patent applications if issued, may not be broad enough to prevent competitors from introducing similar products into the market.
Our patents, if challenged or if we attempt to enforce them, may not necessarily be upheld by the courts of any jurisdiction. Numerous
publications may have been disclosed by, and numerous patents may have been issued to, our competitors and others relating to methods
and devices for dialysis of which we are not aware and additional patents relating to methods and devices for dialysis may be issued
to our competitors and others in the future. If any of those publications or patents conflict with our patent rights, or cover
our products, then any or all of our patent applications could be rejected and any or all of our granted patents could be invalidated,
either of which could materially adversely affect our competitive position.
Litigation and other proceedings relating
to patent matters, whether initiated by us or a third party, can be expensive and time-consuming, regardless of whether the outcome
is favorable to us, and may require the diversion of substantial financial, managerial and other resources. An adverse outcome
could subject us to significant liabilities to third parties or require us to cease any related development, product sales or commercialization
activities. In addition, if patents that contain dominating or conflicting claims have been or are subsequently issued to others
and the claims of these patents are ultimately determined to be valid, then we may be required to obtain licenses under patents
of others in order to develop, manufacture, use, import and/or sell our products. We may not be able to obtain licenses under any
of these patents on terms acceptable to us, if at all. If we do not obtain these licenses, we could encounter delays in, or be
prevented entirely from using, importing, developing, manufacturing, offering or selling any products or practicing any methods,
or delivering any services requiring such licenses.
If we file patent applications or obtain
patents in foreign countries, we will be subject to laws and procedures that differ from those in the United States. Such differences
could create additional uncertainty about the level and extent of our patent protection. Moreover, patent protection in foreign
countries may be different from patent protection under U.S. laws and may not be as favorable to us. Many non-U.S. jurisdictions,
for example, prohibit patent claims covering methods of medical treatment of humans, although this prohibition may not include
devices used for such treatment.
If we are not able to secure and enforce protection of
our trade secrets through enforcement of our confidentiality and non-competition agreements, then our competitors may gain access
to our trade secrets, we may not be able to compete effectively and we may not be profitable. Such protection may be costly and
ineffective.
We attempt to protect our trade secrets,
including the processes, concepts, ideas and documentation associated with our technologies, through the use of confidentiality
agreements and non-competition agreements with our current employees and with other parties to whom we have divulged such trade
secrets. If these employees or other parties breach our confidentiality agreements and non-competition agreements, or if these
agreements are not sufficient to protect our technology or are found to be unenforceable, then our competitors could acquire and
use information that we consider to be our trade secrets and we may not be able to compete effectively. Policing unauthorized use
of our trade secrets is difficult and expensive, particularly because of the global nature of our operations. The laws of other
countries may not adequately protect our trade secrets.
If we are not able to maintain sufficient quality controls,
then the approval or clearance of our products by the European Union, the FDA or other relevant authorities could be withdrawn,
delayed or denied and our sales and revenues will suffer.
Approval or clearance of our products could
be withdrawn, delayed or denied by the European Union, the FDA and the relevant authorities of other countries if our manufacturing
facilities do not comply with their respective manufacturing requirements. The European Union imposes requirements on quality control
systems of manufacturers, which are inspected and certified on a periodic basis and may be subject to additional unannounced inspections.
Failure by our manufacturers to comply with these requirements could prevent us from marketing our products in the European Community.
The FDA also imposes requirements through quality system requirements, or QSR, regulations, which include requirements for good
manufacturing practices, or GMP. Failure by our manufacturers to comply with these requirements could prevent us from obtaining
FDA approval of our products and from marketing such products in the United States. Although the manufacturing facilities and processes
that we use to manufacture our OLpur MDHDF filter series have been inspected and certified by a worldwide testing and certification
agency (also referred to as a notified body) that performs conformity assessments to European Union requirements for medical devices,
they have not been inspected by the FDA. A “notified body” is a group accredited and monitored by governmental agencies
that inspects manufacturing facilities and quality control systems at regular intervals and is authorized to carry out unannounced
inspections. We cannot be sure that any of the facilities or processes we use will comply or continue to comply with their respective
requirements on a timely basis or at all, which could delay or prevent our obtaining the approvals we need to market our products
in the European Community and the United States.
To market our products in the European Community,
the United States and other countries, where approved, manufacturers of such products must continue to comply or ensure compliance
with the relevant manufacturing requirements. Although we cannot control the manufacturers of our products, we may need to expend
time, resources and effort in product manufacturing and quality control to assist with their continued compliance with these requirements.
In particular, we are in the process of addressing certain issues raised by the FDA in the warning letter received in May 2015
and failure to promptly address these issues could result in regulatory action. If violations of applicable requirements are noted
during periodic inspections of the manufacturing facilities of our manufacturers or we fail to address issues raised by the FDA
in these inspections, then we may not be able to continue to market the products manufactured in such facilities and our revenues
may be materially adversely affected.
We may face significant risks associated with international
operations, which could have a material adverse effect on our business, financial condition and results of operations.
We expect to manufacture and to market our
products globally. Our international operations are subject to a number of risks, including the following:
| · | fluctuations in exchange rates of the United States dollar could adversely affect our results of operations; |
| · | we may face difficulties in enforcing and collecting accounts receivable under some countries’ legal systems; |
| · | local regulations may restrict our ability to sell our products, have our products manufactured or conduct other operations; |
| · | political instability could disrupt our operations; |
| · | some governments and customers may have longer payment cycles, with resulting adverse effects on our cash flow; and |
| · | some countries could impose additional taxes or restrict the import of our products. |
Any one or more of these factors could increase
our costs, reduce our revenues, or disrupt our operations, which could have a material adverse effect on our business, financial
condition and results of operations.
Risks Related to Our Common Stock and
Warrants
There currently is a limited trading market for our Common
Stock.
We do not currently meet all of the requirements
for initial listing of our Common Stock on a registered stock exchange. Our Common Stock is quoted on the OTCQB. Trading in our
Common Stock on the OTCQB has been very limited. As a result, an investor may find it difficult to dispose of or to obtain accurate
quotations as to the market value of our Common Stock, and our Common Stock may be less attractive for margin loans, for investment
by financial institutions, as consideration in future capital raising transactions or other purposes. There is no guarantee that
we will ever become listed on the Nasdaq Capital Market, or any other exchange, or that a liquid trading market for our Common
Stock will develop.
Our Common Stock could be further diluted as a result
of the issuance of additional shares of Common Stock, warrants or options.
In the past we have issued Common Stock
and warrants in order to raise money. We have also issued stock options and restricted stock as compensation for services and incentive
compensation for our employees, directors and consultants. We have shares of Common Stock reserved for issuance upon the exercise
of certain of these securities and may increase the shares reserved for these purposes in the future. Our issuance of additional
Common Stock, convertible securities, options and warrants could affect the rights of our stockholders, could reduce the market
price of our Common Stock or could result in adjustments to exercise prices of outstanding warrants (resulting in these securities
becoming exercisable for, as the case may be, a greater number of shares of our Common Stock), or could obligate us to issue additional
shares of Common Stock.
Market sales of large amounts of our Common
Stock, or the potential for those sales even if they do not actually occur, may have the effect of depressing the market price
of our Common Stock, the supply of Common Stock available for resale could be increased which could stimulate trading activity
and cause the market price of our Common Stock to drop, even if our business is doing well. Furthermore, the issuance of any additional
shares of our Common Stock or securities convertible into our Common Stock could be substantially dilutive to holders of our Common
Stock if they do not invest in future offerings.
The prices at which shares of the Common Stock trade have
been and will likely continue to be volatile.
In the two years ended March 31, 2015, our
Common Stock has traded at prices ranging from a high of $1.71 to a low of $0.30 per share. Due to the lack of an active trading
market for our Common Stock, you should expect the prices at which our Common Stock might trade to continue to be highly volatile.
The expected volatile price of our stock will make it difficult to predict the value of your investment, to sell your shares at
a profit at any given time, or to plan purchases and sales in advance. A variety of other factors might also affect the market
price of our Common Stock. These include, but are not limited to:
| · | achievement or rejection of regulatory approvals by our competitors or us; |
| · | publicity regarding actual or potential clinical or regulatory results relating to products under development by our competitors
or us; |
| · | delays or failures in initiating, completing or analyzing clinical trials or the unsatisfactory design or results of these
trials; |
| · | announcements of technological innovations or new commercial products by our competitors or us; |
| · | developments concerning proprietary rights, including patents; |
| · | regulatory developments in the United States and foreign countries; |
| · | economic or other crises and other external factors; |
| · | period-to-period fluctuations in our results of operations; |
| · | threatened or actual litigation; |
| · | changes in financial estimates by securities analysts; and |
| · | sales of our Common Stock. |
We are not able to control many of these
factors, and we believe that period-to-period comparisons of our financial results will not necessarily be indicative of our future
performance.
In addition, the stock market in general,
and the market for medical technology companies in particular, has experienced extreme price and volume fluctuations in recent
years that might have been unrelated or disproportionate to the operating performance of individual companies. These broad market
and industry factors might seriously harm the market price of our Common Stock, regardless of our operating performance. Securities
class action litigation has often been instituted against companies following periods of volatility in the overall market and in
the market price of a company’s securities. This litigation, if instituted against us, could result in very substantial costs,
divert our management’s attention and resources and harm our business, operating results and financial condition.
We have never paid dividends and do not intend to pay
cash dividends.
We have never paid dividends on our Common
Stock and currently do not anticipate paying cash dividends on our Common Stock for the foreseeable future. Consequently, any returns
on an investment in our Common Stock in the foreseeable future will have to come from an increase in the value of the stock itself.
As noted above, the lack of an active trading market for our Common Stock will make it difficult to value and sell our Common Stock.
While our dividend policy will be based on the operating results and capital needs of our business, it is anticipated that all
earnings, if any, will be retained to finance our future operations.
Because we are subject to the “penny stock”
rules, you may have difficulty in selling our Common Stock.
Our Common Stock is subject to regulations
of the SEC relating to the market for penny stocks. Penny stock, as defined by the Penny Stock Reform Act, is any equity security
not traded on a national securities exchange that has a market price of less than $5.00 per share. The penny stock regulations
generally require that a disclosure schedule explaining the penny stock market and the risks associated therewith be delivered
to purchasers of penny stocks and impose various sales practice requirements on broker-dealers who sell penny stocks to persons
other than established customers and accredited investors. The broker-dealer must make a suitability determination for each purchaser
and receive the purchaser’s written agreement prior to the sale. In addition, the broker-dealer must make certain mandated
disclosures, including the actual sale or purchase price and actual bid offer quotations, as well as the compensation to be received
by the broker-dealer and certain associated persons. The regulations applicable to penny stocks may severely affect the market
liquidity for your Common Stock and could limit your ability to sell your securities in the secondary market.
Several provisions of the Delaware General Corporation
Law, our fourth amended and restated certificate of incorporation, as amended, and our second amended and restated bylaws could
discourage, delay or prevent a merger or acquisition, which could adversely affect the market price of our Common Stock.
Several provisions of the Delaware General
Corporation Law, our fourth amended and restated certificate of incorporation, as amended, and our second amended and restated
bylaws could discourage, delay or prevent a merger or acquisition that stockholders may consider favorable, and the market price
of our Common Stock could be reduced as a result. These provisions include:
| · | authorizing our board of directors to issue “blank check” preferred stock without stockholder approval; |
| · | providing for a classified board of directors with staggered, three-year terms; |
| · | prohibiting us from engaging in a “business combination” with an “interested stockholder” for a period
of three years after the date of the transaction in which the person became an interested stockholder unless certain provisions
are met; |
| · | prohibiting cumulative voting in the election of directors; |
| · | limiting the persons who may call special meetings of stockholders; and |
| · | establishing advance notice requirements for nominations for election to our board of directors or for proposing matters that
can be acted on by stockholders at stockholder meetings. |
As a smaller reporting company with little or no name
recognition and with several risks and uncertainties that could impair our business operations, we are not likely to generate widespread
interest in our Common Stock. Without widespread interest in our Common Stock, our Common Stock price may be highly volatile and
an investment in our Common Stock could decline in value.
Unlike many companies with publicly traded
securities, we have little or no name recognition in the investment community. We are a relatively new company and very few investors
are familiar with either our company or our products. We do not have an active trading market in our Common Stock, and one might
never develop, or if it does develop, might not continue.
Additionally, the market price of our Common
Stock may fluctuate significantly in response to many factors, many of which are beyond our control. Risks and uncertainties, including
those described elsewhere in this “Risk Factors” section could impair our business operations or otherwise cause our
operating results or prospects to be below expectations of investors and market analysts, which could adversely affect the market
price of our Common Stock. As a result, investors in our Common Stock may not be able to resell their shares at or above their
purchase price and could lose all of their investment.
Securities class action litigation is often
brought against public companies following periods of volatility in the market price of such company’s securities. We may
become subject to this type of litigation in the future. Litigation of this type could be extremely expensive and divert management’s
attention and resources from running our company.
Our directors, executive officers and Lambda control a
significant portion of our stock and, if they choose to vote together, could have sufficient voting power to control the vote on
substantially all corporate matters.
As of May 31, 2015, our directors, executive
officers and Lambda, our largest stockholder, beneficially owned approximately 48% of our outstanding Common Stock, representing
approximately 56% on a fully-diluted basis. As a result of this ownership, Lambda has the ability to exert significant influence
over our policies and affairs, including the election of directors. Lambda, whether acting alone or acting with other stockholders,
could have the power to elect all of our directors and to control the vote on substantially all other corporate matters without
the approval of other stockholders. Furthermore, such concentration of voting power could enable Lambda, whether acting alone or
acting with other stockholders, to delay or prevent another party from taking control of our company even where such change of
control transaction might be desirable to other stockholders. The interests of Lambda in any matter put before the stockholders
may differ from those of any other stockholder.
Future sales of our Common Stock could cause the market
price of our Common Stock to decline.
The market price of our Common Stock could
decline due to sales of a large number of shares in the market, including sales of shares by Lambda or any other large stockholder,
or the perception that such sales could occur. These sales could also make it more difficult or impossible for us to sell equity
securities in the future at a time and price that we deem appropriate to raise funds through future offerings of Common Stock.
Future sales of our Common Stock by stockholders could depress the market price of our Common Stock.
Shares eligible for future sale may adversely affect the
market.
From time to time, certain of our stockholders
may be eligible to sell all or some of their shares of Common Stock by means of ordinary brokerage transactions in the open market
pursuant to Rule 144 promulgated under the Securities Act, subject to certain limitations. In general, pursuant to Rule 144, non-affiliate
stockholders may sell freely after holding their shares for six months and affiliates may sell freely after holding their shares
for one year, in each case, subject to current public information, notice and other requirements. Any substantial sales of our
Common Stock pursuant to Rule 144 may have a material adverse effect on the market price of our Common Stock.
The market price of our common stock may fall below the
exercise price of the warrants issued in connection with the 2015 Private Placement.
The 2015 Warrants are currently exercisable
and will expire on May 19, 2020. The market price of our common stock may fall below the exercise price for the 2015 Warrants prior
to their expiration. Any 2015 Warrants not exercised by their date of expiration will expire worthless and we will be under no
further obligation to the holders of the 2015 Warrants.
SPECIAL NOTE REGARDING FORWARD-LOOKING
STATEMENTS
Certain statements in this prospectus
constitute “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 products to market, the availability of funding
sources for continued development of such products, and our ability to continue as a going concern and other statements that are
not historical facts, including statements which may be preceded by the words “intends,” “may,” “will,”
“plans,” “expects,” “anticipates,” “projects,” “predicts,” “estimates,”
“aims,” “believes,” “hopes,” “potential” or similar words. Forward-looking statements
are not guarantees of future performance, are based on certain assumptions and are subject to various known and unknown risks and
uncertainties, many of which are beyond our control. Actual results may differ materially from the expectations contained in the
forward-looking statements. Factors that may cause such differences include, but are not limited to, the risks that:
| · | we may not be able to continue as a going concern; |
| · | the voluntary recalls of point of use and DSU in-line ultrafilters used in hospital water treatment applications announced
on October 30, 2013 and the related circumstances could subject us to claims or proceedings by consumers, the FDA or other regulatory
authorities which may adversely impact our sales and revenues; |
| · | we face significant challenges in obtaining market acceptance of our products, which could adversely affect our potential sales
and revenues; |
| · | there are product-related deaths or serious injuries or product malfunctions, which could trigger recalls, class action lawsuits
and other events that could cause us to incur expenses and may also limit our ability to generate revenues from such products; |
| · | 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 FDC Act or any other statutes
or regulations then we could be subject to enforcement actions by the FDA or other governmental agencies; |
| · | we may not be able to obtain funding if and when needed or on terms favorable to us in order to continue operations; |
| · | we may not have sufficient capital to successfully implement our business plan; |
| · | we may not be able to effectively market our products; |
| · | we may not be able to sell our water filtration products or chronic renal failure therapy products at competitive prices or
profitably; |
| · | we may encounter problems with our suppliers, manufacturers and distributors; |
| · | we may encounter unanticipated internal control deficiencies or weaknesses or ineffective disclosure controls and procedures; |
| · | we may not obtain appropriate or necessary regulatory approvals to achieve our business plan; |
| · | products that appeared promising to us in research or clinical trials may not demonstrate anticipated efficacy, safety or cost
savings in subsequent pre-clinical or clinical trials; |
| · | we may not be able to secure or enforce adequate legal protection, including patent protection, for our products; and |
| · | we may not be able to achieve sales growth in key geographic markets. |
More detailed information about the Company
and the risk factors that may affect the realization of forward-looking statements, including the forward-looking statements in
this prospectus and in our Annual Report on Form 10-K for the year ended December 31, 2014, is set forth in our filings with the
SEC, including our other periodic reports filed with the SEC. We urge investors and security holders to read those documents free
of charge at the SEC’s web site at www.sec.gov. We do not undertake to publicly update or revise our forward-looking
statements as a result of new information, future events or otherwise, except as required by law.
DESCRIPTION OF 2015 PRIVATE PLACEMENT
The following description is qualified
in its entirety by the terms and conditions of the Securities Purchase Agreement, which is incorporated by reference into the registration
statement of which this prospectus forms a part, and the 2015 Warrants, the form of which is incorporated by reference into the
registration statement of which this prospectus forms a part. The following description may not contain all the information with
respect to the Securities Purchase Agreement and the 2015 Warrants that is important to you. We encourage you to read each of the
Securities Purchase Agreement and the form of 2015 Warrant in its entirety.
On May 12, 2015, we entered into a securities
purchase agreement, referred to as the Securities Purchase Agreement, with various accredited investors pursuant to which we agreed
to sell in a private placement, referred to as the 2015 Private Placement, a total of 1,834,299 units of our securities, each unit
consisting of one share of our common stock and a five-year warrant to purchase one-half of one share of our common stock, referred
to as the 2015 Warrants. The closing of the 2015 Private Placement occurred on May 19, 2015. The purchase price for each unit was
$0.67. The 2015 Warrants are exercisable at a price of $0.85 per warrant share. The sale of the shares and 2015 Warrants resulted
in aggregate gross proceeds of approximately $1.23 million, before deducting expenses.
The 2015 Warrants
The 2015 Warrants have a five-year term
and are exercisable at a price of $0.85 per share, subject to adjustment for stock splits, combinations and recapitalization events.
The 2015 Warrants are required to be exercised for cash, provided that if during the term of the 2015 Warrants there is not an
effective registration statement under the Securities Act covering the resale of the shares issuable upon exercise of the 2015
Warrants, then the 2015 Warrants may be exercised on a cashless (net exercise) basis.
We will not issue fractional shares of common
stock or cash in lieu of fractional shares of common stock upon the exercise of the 2015 warrants. Warrant holders do not have
any voting or other rights as a stockholder of our company. No market exists for the 2015 Warrants. We do not intend to list the
2015 Warrants offered hereby on any securities exchange or automated quotation system.
If we (i) pay a dividend or make a distribution
on our common stock in shares of common stock, (ii) subdivide our outstanding shares of common stock into a greater number of shares,
or (iii) combine our outstanding shares of common stock into a smaller number of shares, then the per share exercise price and
the number of warrant shares will be proportionately adjusted so that the aggregate warrant price payable for the then total number
of warrant shares available for exercise under the 2015 Warrant will remain consistent.
If we effect any merger or consolidation,
or a sale any of all or substantially all of our assets or the majority of our shares are acquired by a third party, or any tender
offer or exchange offer is completed, or we effect any reclassification or compulsory share exchange, the holder of the 2015 Warrant
will have the right to receive on the exercise of the 2015 Warrant the kind and amount of securities, cash or other property which
the holder would have owned or have been entitled to receive immediately after such reorganization, reclassification, consolidation,
merger or reorganization had the 2015 Warrant been exercised immediately prior to the effective date of such transaction. Our consummation
of any such transaction in which we are not the surviving entity will be contingent upon the assumption of the 2015 Warrants by
the surviving party to such transaction.
Registration Rights
Pursuant to the terms of the Securities
Purchase Agreement, we agreed to file a registration statement with the SEC in order to register the resale of the shares of common
stock issued in the 2015 Private Placement and the shares of common stock issuable upon exercise of the 2015 Warrants. In the event
we did not file the registration statement by July 18, 2015, we agreed to pay liquidated damages to the investors in the amount
of 1% of such investor’s aggregate investment amount each month until the registration statement is filed. The registration
statement of which this prospectus forms a part covers the resale of the shares of common stock issued in the 2015 Private Placement,
including the shares issued upon the exercise of the 2015 Warrants. We are required to maintain the effectiveness of the registration
statement until all of the shares covered thereby are sold or may be sold pursuant to Rule 144 under the Securities Act without
volume restrictions.
USE OF PROCEEDS
We will receive none of the proceeds from the sale of the
shares by the selling stockholders, except for the warrant exercise price upon exercise of the 2015 Warrants, which would be used
to further develop our products and for general working capital purposes.
SELLING STOCKHOLDERS
This prospectus covers the resale by the
selling stockholders identified below of 2,751,448 shares of our common stock, of which 917,149 shares are issuable upon the exercise
of certain outstanding warrants.
The following table sets forth the number
of shares of our common stock beneficially owned by the selling stockholders as of May 31, 2015, and after giving effect to this
offering, except as otherwise referenced below.
| | |
| | |
| | |
Number of | | |
| |
| | |
| | |
| | |
shares | | |
| |
| | |
| | |
Number of | | |
offered by | | |
Beneficial | |
| | |
Shares | | |
outstanding | | |
selling | | |
ownership | |
| | |
beneficially | | |
shares | | |
stockholder | | |
after | |
| | |
owned | | |
offered by | | |
upon | | |
offering (1) | |
| | |
before | | |
selling | | |
exercise of | | |
Number | | |
| |
| Selling Stockholder | |
offering (1) | | |
stockholder | | |
warrants | | |
of shares | | |
Percent | |
| | |
| | |
| | |
| | |
| | |
| |
| Best Six, LLC (2) | |
| 223,881 | | |
| 149,254 | | |
| 74,627 | | |
| - | | |
| * | |
| Bumack LLC (3) | |
| 55,971 | | |
| 37,314 | | |
| 18,657 | | |
| - | | |
| * | |
| Crockett-Boragno Trust (4) | |
| 55,971 | | |
| 37,314 | | |
| 18,657 | | |
| - | | |
| * | |
| Patricia M. and Preston W. Evans, JTWROS | |
| 22,500 | | |
| 15,000 | | |
| 7,500 | | |
| - | | |
| * | |
| Franklin Associates, LLC (5) | |
| 111,945 | | |
| 74,630 | | |
| 37,315 | | |
| - | | |
| * | |
| Allan Gordon | |
| 22,500 | | |
| 15,000 | | |
| 7,500 | | |
| - | | |
| * | |
| Arlene R. and David Henick (6) | |
| 30,889 | | |
| 14,926 | | |
| 7,463 | | |
| 8,500 | | |
| * | |
| Karen Weil Revocable Trust u/a dtd 7/2/10 (7) | |
| 150,000 | | |
| 100,000 | | |
| 50,000 | | |
| - | | |
| * | |
| Leon J. Laviolette (8) | |
| 91,850 | | |
| 40,000 | | |
| 20,000 | | |
| 31,850 | | |
| * | |
| Stephen Todd Leis | |
| 55,969 | | |
| 37,313 | | |
| 18,656 | | |
| - | | |
| * | |
| Hsiao Dee Lieu | |
| 22,500 | | |
| 15,000 | | |
| 7,500 | | |
| - | | |
| * | |
| Lincoln Park Capital Fund, LLC (9) | |
| 225,000 | | |
| 150,000 | | |
| 75,000 | | |
| - | | |
| * | |
| Theodore James Mallinson (10) | |
| 142,403 | | |
| 94,030 | | |
| 47,015 | | |
| 1,358 | | |
| * | |
| Richard Molinsky | |
| 55,971 | | |
| 37,314 | | |
| 18,657 | | |
| - | | |
| * | |
| Janet C. Persen (11) | |
| 65,734 | | |
| 31,160 | | |
| 15,580 | | |
| 18,994 | | |
| * | |
| Fredric R. Rosenberg | |
| 330,000 | | |
| 220,000 | | |
| 110,000 | | |
| - | | |
| * | |
| Matthew Rosenberg (12) | |
| 922,271 | | |
| 200,000 | | |
| 100,000 | | |
| 622,271 | | |
| 1.9 | % |
| Michael Rosenberg | |
| 55,971 | | |
| 37,314 | | |
| 18,657 | | |
| - | | |
| * | |
| Seligman Rosenberg (13) | |
| 132,939 | | |
| 74,626 | | |
| 37,313 | | |
| 21,000 | | |
| * | |
| Lewis Schneider (14) | |
| 1,062,000 | | |
| 100,000 | | |
| 50,000 | | |
| 912,000 | | |
| 2.8 | % |
| Robert W. Schubert (15) | |
| 55,875 | | |
| 29,850 | | |
| 14,925 | | |
| 11,100 | | |
| * | |
| Joseph Schueller | |
| 404,893 | | |
| 100,000 | | |
| 50,000 | | |
| 254,893 | | |
| * | |
| Peter Vasconcelos | |
| 55,971 | | |
| 37,314 | | |
| 18,657 | | |
| - | | |
| * | |
| James Waldron | |
| 112,500 | | |
| 75,000 | | |
| 37,500 | | |
| - | | |
| * | |
| Norman M. Whitton | |
| 67,164 | | |
| 44,776 | | |
| 22,388 | | |
| - | | |
| * | |
| L.E. Luke Wilson (16) | |
| 101,306 | | |
| 67,164 | | |
| 33,582 | | |
| 560 | | |
| * | |
| TOTALS | |
| | | |
| 1,834,299 | | |
| 917,149 | | |
| | | |
| | |
* denotes less
than 1%
| |
(1) |
Beneficial ownership is determined in accordance with Rule 13d-3 under the Exchange Act, and includes any shares as to which the security or stockholder has sole or shared voting power or investment power, and also any shares which the security or stockholder has the right to acquire within 60 days of the date hereof, whether through the exercise or conversion of any stock option, convertible security, warrant or other right. The indication herein that shares are beneficially owned is not an admission on the part of the security or stockholder that he, she or it is a direct or indirect beneficial owner of those shares. Percentage of shares beneficially owned after the resale of all the shares offered by this prospectus assumes there are outstanding 33,145,088 shares of common stock, including all shares offered hereby that are issuable upon exercise of warrants. |
| |
(2) |
Phyllis Rosenberg holds voting and/or dispositive power over the shares held by the selling stockholder. |
| |
(3) |
Josh Lebewohl and Jeremy Lebewohl hold voting and/or dispositive power over the shares held by the selling stockholder. |
| |
(4) |
Michael Crockett, trustee, holds voting and/or dispositive power over the shares held by the selling stockholder. |
| |
(5) |
Harrison Rosenberg holds voting and/or dispositive power over the shares held by the selling stockholder. |
| |
(6) |
In addition to the shares offered hereby, beneficial ownership also includes 3,800 shares of our common stock held by Arlene Henick and 4,700 shares of our common stock held by David Henick. |
| |
(7) |
Karen Weil, trustee, holds voting and/or dispositive power over the shares held by the selling stockholder. |
| |
(8) |
In addition to the shares offered hereby, beneficial ownership also includes 31,850 shares of our common stock. |
| |
(9) |
Joshua Scheinfeld and Jonathan Cope, the principals of Lincoln Park are deemed to be beneficial owners of all of shares of common stock owned by Lincoln Park. Messrs. Scheinfeld and Cope have shared voting and dispositive power over the shares being offered under this prospectus. |
| |
(10) |
In addition to the shares offered hereby, beneficial ownership also includes 1,358 shares of our common stock. |
| |
(11) |
Ms. Persen is the spouse of Malcolm Persen, a director of the Company. In addition to the shares offered hereby, beneficial ownership also includes 18,994 shares issuable upon the exercise of options to purchase common stock held by Malcolm Persen. |
| |
(12) |
Mr. Rosenberg is a director of the Company. In addition to the shares offered hereby, beneficial ownership also includes 589,695 shares of our common stock and 32,576 shares issuable upon the exercise of options to purchase common stock. |
| |
(13) |
In addition to the shares offered hereby, beneficial ownership also includes 21,000 shares of our common stock. |
| |
(14) |
In addition to the shares offered hereby, beneficial ownership also includes 912,000 shares of our common stock. |
| |
(15) |
In addition to the shares offered hereby, beneficial ownership also includes 11,100 shares of our common stock. |
| |
(16) |
In addition to the shares offered hereby, beneficial ownership also includes 560 shares of our common stock. |
DIVIDEND POLICY
We have neither paid nor declared dividends
on our common stock since our inception. We do not anticipate paying any dividends on our common stock in the foreseeable future.
We expect to retain future earnings, if any, for use in our development activities and the operation of our business. The payment
of any future dividends will be subject to the discretion of our board of directors and will depend, among other things, upon our
results of operations, financial condition, cash requirements, prospects and other factors that our board of directors may deem
relevant. Additionally, our ability to pay future dividends may be restricted by the terms of any debt financing, tax considerations
and applicable law.
MARKET FOR OUR COMMON STOCK
Our common stock is quoted on the OTCQB
Marketplace operated by the OTC Markets Group, Inc., or OTCQB, under the symbol “NEPH.” The following table sets forth
the high and low bid and ask prices for our common stock as reported on the OTCQB for each quarter listed. Such over the counter
market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent
actual transactions.
| Quarter Ended | |
High | | |
Low | |
| March 31, 2013 | |
$ | 1.49 | | |
$ | 0.73 | |
| June 30, 2013 | |
$ | 1.25 | | |
$ | 0.63 | |
| September 30, 2013 | |
$ | 1.71 | | |
$ | 0.85 | |
| December 31, 2013 | |
$ | 1.25 | | |
$ | 0.31 | |
| March 31, 2014 | |
$ | 0.75 | | |
$ | 0.30 | |
| June 30, 2014 | |
$ | 1.29 | | |
$ | 0.35 | |
| September 30, 2014 | |
$ | 1.19 | | |
$ | 0.76 | |
| December 31, 2014 | |
$ | 1.00 | | |
$ | 0.61 | |
| March 31, 2015 | |
$ | 0.96 | | |
$ | 0.50 | |
| April 1, 2015 through June 18, 2015 | |
$ | 0.80 | | |
$ | 0.49 | |
As of May 31, 2015, there were
approximately 61 holders of record and approximately 1,000 beneficial holders of our common stock.
On , 2015, the last reported sale
price of our common stock on the OTCQB was $ per share.
PLAN OF DISTRIBUTION
We are registering the shares offered by
this prospectus on behalf of the selling stockholders. The selling stockholders, which as used herein includes donees, pledgees,
transferees or other successors-in-interest selling shares of common stock or interests in shares of common stock received after
the date of this prospectus from a selling stockholder as a gift, pledge, partnership distribution or other transfer, may, from
time to time, sell, transfer or otherwise dispose of any or all of their shares of common stock or interests in shares of common
stock on any stock exchange, market or trading facility on which the shares are traded or in private transactions. These dispositions
may be at fixed prices, at prevailing market prices at the time of sale, at prices related to the prevailing market price, at varying
prices determined at the time of sale, or at negotiated prices. To the extent any of the selling stockholders gift, pledge or otherwise
transfer the shares offered hereby, such transferees may offer and sell the shares from time to time under this prospectus, provided
that this prospectus has been amended under Rule 424(b)(3) or other applicable provision of the Securities Act to include the name
of such transferee in the list of selling stockholders under this prospectus.
The selling stockholders may use any one
or more of the following methods when disposing of shares or interests therein:
| · | ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers; |
| · | block trades in which the broker-dealer will attempt to sell the shares as agent, but may position
and resell a portion of the block as principal to facilitate the transaction; |
| · | purchases by a broker-dealer as principal and resale by the broker-dealer for its account; |
| · | an exchange distribution in accordance with the rules of the applicable exchange; |
| · | privately negotiated transactions; |
| · | through the writing or settlement of options or other hedging transactions, whether through an
options exchange or otherwise; |
| · | broker-dealers may agree with the selling stockholders to sell a specified number of such shares
at a stipulated price per share; |
| · | a combination of any such methods of sale; and |
| · | any other method permitted pursuant to applicable law. |
The selling stockholders may, from time
to time, pledge or grant a security interest in some or all of the shares of common stock owned by them and, if they default in
the performance of their secured obligations, the pledgees or secured parties may offer and sell the shares of common stock, from
time to time, under this prospectus, or under an amendment to this prospectus under Rule 424(b)(3) or other applicable provision
of the Securities Act amending the list of selling stockholders to include the pledgee, transferee or other successors in interest
as selling stockholders under this prospectus.
In connection with the sale of our common
stock or interests therein, the selling stockholders may enter into hedging transactions with broker-dealers or other financial
institutions, which may in turn engage in short sales of the common stock in the course of hedging the positions they assume. The
selling stockholders may also sell shares of our common stock short and deliver these securities to close out their short positions,
or loan or pledge the common stock to broker-dealers that in turn may sell these securities. The selling stockholders may also
enter into option or other transactions with broker-dealers or other financial institutions or the creation of one or more derivative
securities which require the delivery to such broker-dealer or other financial institution of shares offered by this prospectus,
which shares such broker-dealer or other financial institution may resell pursuant to this prospectus (as supplemented or amended
to reflect such transaction).
The aggregate proceeds to the selling stockholders
from the sale of the common stock offered by them will be the purchase price of the common stock less discounts or commissions,
if any. Each of the selling stockholders reserves the right to accept and, together with their agents from time to time, to reject,
in whole or in part, any proposed purchase of common stock to be made directly or through agents. We will not receive any of the
proceeds from this offering. Upon any exercise of the warrants by payment of cash, however, we will receive the exercise price
of the warrants.
The selling stockholders also may resell
all or a portion of the shares in open market transactions in reliance upon Rule 144 under the Securities Act of 1933, provided
that they meet the criteria and conform to the requirements of that rule.
The selling stockholders might be,
and any broker-dealers that act in connection with the sale of securities will be, deemed to be “underwriters” within
the meaning of Section 2(11) of the Securities Act, and any commissions received by such broker-dealers and any profit on the resale
of the securities sold by them while acting as principals will be deemed to be underwriting discounts or commissions under the
Securities Act.
To the extent required, the shares of our
common stock to be sold, the names of the selling stockholders, the respective purchase prices and public offering prices, the
names of any agents, dealer or underwriter, any applicable commissions or discounts with respect to a particular offer will be
set forth in an accompanying prospectus supplement or, if appropriate, a post-effective amendment to the registration statement
that includes this prospectus.
In order to comply with the securities laws
of some states, if applicable, the common stock may be sold in these jurisdictions only through registered or licensed brokers
or dealers. In addition, in some states the common stock may not be sold unless it has been registered or qualified for sale or
an exemption from registration or qualification requirements is available and is complied with.
We have advised the selling stockholders
that the anti-manipulation rules of Regulation M under the Exchange Act may apply to sales of shares in the market and to the activities
of the selling stockholders and their affiliates. In addition, we will make copies of this prospectus (as it may be supplemented
or amended from time to time) available to the selling stockholders for the purpose of satisfying the prospectus delivery requirements
of the Securities Act. The selling stockholders may indemnify any broker-dealer that participates in transactions involving the
sale of the shares against certain liabilities, including liabilities arising under the Securities Act.
We have agreed to indemnify the selling
stockholders against liabilities, including liabilities under the Securities Act and state securities laws, relating to the registration
of the shares offered by this prospectus.
We have agreed with the selling stockholders
to keep the registration statement that includes this prospectus effective until the earlier of (1) such time as all of the shares
covered by this prospectus have been disposed of pursuant to and in accordance with the registration statement that contains this
prospectus or (2) the date on which the shares may be sold without registration or restriction pursuant to Rule 144 of the Securities
Act.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following 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 you should not construe these statements 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. A list of the known
material factors that may cause our results to vary, or may cause management to deviate from its current plans and expectations,
is included herein under “Risk Factors” and Item 1A “Risk Factors” of our Annual Report on Form 10-K for
the year ended December 31, 2014. The following discussion should also be read in conjunction with the consolidated financial statements
and notes included herein.
Restatement
In connection with the audit of our consolidated
financial statements for the year ended December 31, 2014, our management further evaluated the warrants under Accounting Standards
Codification (“ASC”) Subtopic 815-40, “Contracts in Entity’s Own Equity.” ASC Subtopic 815-40-15
addresses equity versus liability treatment and classification of equity-linked financial instruments, including common stock purchase
warrants, and states that a warrant may be classified as a component of equity only if, among other things, the warrant is indexed
to the issuer’s common stock. Under ASC Subtopic 815-40-15, a warrant is not indexed to the issuer’s common stock if
the terms of the warrant require an adjustment to the exercise price upon a specified event and that event is not an input to the
fair value of the warrant. Based on management’s evaluation, our audit committee, in consultation with management and after
discussion with WithumSmith+Brown PC, our independent registered public accounting firm, concluded that our warrants are not indexed
to our common stock in the manner contemplated by ASC Section 815-40-15 because the transactions that would trigger the Anti-Dilution
Adjustment Provision are not inputs to the fair value of the warrants. As a result, we should have classified the warrants as derivative
liabilities as of January 1, 2009, the date which ASC Section 815-40-15 was effective. Under this accounting treatment, we are
required to measure the fair value of the warrants at the end of each reporting period beginning with the year ended December 31,
2009, with a cumulative effect presented as of January 1, 2009, and recognize changes in the fair value for all periods beginning
with January 1, 2009 in our operating results for the current period.
The Company’s financial statements
as of January 1, 2009 and for the years ended December 31, 2009 to 2013 (the “Prior Financial Statements”), were audited
by Rothstein Kass, an independent registered public accounting firm. Though it still exists, Rothstein Kass has ceased practicing
public accounting and is therefore no longer able to re-audit the Prior Financial Statements. The report of WithumSmith+Brown PC
regarding the audit of our financial statements as of and for the year ended December 31, 2014, included in this prospectus includes
a statement that such firm has only been engaged to audit the adjustments required by the restatement of the Prior Financial Statements,
and not the Prior Financial Statements taken as a whole, as to which it expresses no opinion.
Our accounting for the warrants as components
of equity instead of as derivative liabilities did not have any effect on our previously reported revenue, operating expenses,
operating income, cash flows or cash.
We have not amended our previously filed
Annual Reports on Form 10-K or Quarterly Reports on Form 10-Q for the periods affected by the restatement. The financial information
that has been previously filed or otherwise reported for these periods is superseded by the information in our Annual Report on
Form 10-K for the year ended December 31, 2014, and the financial statements and related financial information contained in such
previously filed reports should no longer be relied upon.
The restatement is more fully described
in Note 2 of the notes to the financial statements for the year ended December 31, 2014 included herein.
Business Overview
Nephros is a commercial stage medical
device company that develops and sells high performance liquid purification filters. Our filters, which we call ultrafilters, are
primarily used in dialysis centers for the removal of biological contaminants from water, bicarbonate concentrate and/or blood.
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.
Our ultrafilters use proprietary hollow fiber technology. We
believe the hollow fiber design allows our ultrafilters to optimize the three elements critical to filter performance:
| • | Filtration - as low as 0.005 microns |
| • | Flow rate - minimal disruption |
| • | Filter life - up to 12 months |
We were founded in 1997 by healthcare professionals
affiliated with Columbia University Medical Center/New York-Presbyterian Hospital to develop and commercialize an alternative method
to hemodialysis, or HD. We have extended our filtration technologies to meet the demand for liquid purification in other areas,
in particular water purification.
The following trends, events and uncertainties may have a material
impact on our potential sales, revenue and income from operations:
| • | the market acceptance of our products in the United States and of our technologies and products in each of our target markets; |
| • | our ability to effectively and efficiently manufacture, market and distribute our products; |
| • | our ability to sell our products at competitive prices which exceed our per unit costs; |
| • | the consolidation of dialysis clinics into larger clinical groups; and |
| • | the current U.S. healthcare plan is to bundle reimbursement for dialysis treatment which may force dialysis clinics to change
therapies due to financial reasons. |
To the extent we are unable to succeed in
accomplishing the foregoing, our sales could be lower than expected and dramatically impair our ability to generate income from
operations.
Recently Adopted Accounting Pronouncements
In May 2014, the Financial Accounting Standards
Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, "Revenue from Contracts with Customers,"
related to revenue recognition. The underlying principle of the new standard is that a business or other organization will recognize
revenue to depict the transfer of promised goods or services to customers in an amount that reflects what it expects in exchange
for the goods or services. The standard also requires more detailed disclosures and provides additional guidance for transactions
that were not addressed completely in prior accounting guidance. ASU 2014-09 provides alternative methods of initial adoption,
and it is effective for annual reporting periods beginning after December 15, 2016, and interim periods within those annual periods.
Early adoption is not permitted. We are currently reviewing the revised guidance and assessing the potential impact on our consolidated
financial statements.
In August 2014, the FASB issued ASU No.
2014-15, “Presentation of Financial Statements - Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity's
Ability to Continue as a Going Concern.” ASU 2014-15 provides guidance about management's responsibility to evaluate whether
there is substantial doubt about an entity's ability to continue as a going concern and sets rules for how this information should
be disclosed in the financial statements. ASU 2014-15 is effective for annual periods ending after December 15, 2016 and interim
periods thereafter. Early adoption is permitted. We are currently evaluating any impact the adoption of ASU 2014-15 might have
on our consolidated financial statements.
In April 2015, the FASB issued ASU No. 2015-03,
“Interest – Imputation of Interest (Subtopic 2015-03): Simplifying the Presentation of Debt Issuance Costs” related
to the presentation requirements for debt issuance costs and debt discount and premium. ASU 2015-03 requires that debt issuance
costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of
that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected
by ASU 2015-03. ASU 2015-03 is effective for annual and interim periods beginning after December 15, 2015. Early adoption of the
amendments in ASU 2015-03 is permitted for financial statements that have not been previously issued. We do not believe that the
adoption of ASU 2015-03 will have a significant impact on our consolidated financial statements.
Going Concern
Our independent registered public accounting
firm has included an explanatory paragraph in their report on our consolidated financial statements included in this prospectus
which expressed doubt as to our ability to continue as a going concern. The accompanying consolidated financial statements have
been prepared assuming that we will continue as a going concern. However, there can be no assurance that we will be able to do
so. Our recurring operating losses and difficulty in generating sufficient cash flow to meet our obligations and sustain our operations
raise substantial doubt about our ability to continue as a going concern, and our consolidated financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial
condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance
with accounting principles generally accepted in the United States. The preparation of financial statements in accordance with
generally accepted accounting principles in the United States requires application of management’s subjective judgments,
often requiring the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent
periods. Our actual results may differ substantially from these estimates under different assumptions or conditions. While our
significant accounting policies are described in more detail in the notes to consolidated financial statements included in this
prospectus, we believe that the following accounting policies require the application of significant judgments and estimates.
Revenue Recognition
Revenue is recognized in accordance with
Accounting Standards Codification (“ASC”) Topic 605. Four basic criteria must be met before revenue can be recognized:
(i) persuasive evidence that an arrangement exists; (ii) delivery has occurred or services have been rendered; (iii) the fee is
fixed or determinable; and (iv) collectability is reasonably assured.
We recognize revenue related to product
sales when delivery is confirmed by our external logistics provider and the other criteria of ASC Topic 605 are met. Product revenue
is recorded net of returns and allowances. All costs and duties relating to delivery are absorbed by us. Shipments for all products
are currently received directly by our customers.
We are recognizing the remaining deferred
revenue under the Bellco license agreement on a straight line basis over the remaining eighty-four month expected obligation period
which ends on December 31, 2021. Any difference between payments received and recognized revenue is reported as deferred revenue.
Deferred revenue on the accompanying December
31, 2014 consolidated balance sheet is approximately $487,000 and is related to the Bellco license agreement. We have recognized
approximately $2,589,000 of revenue related to this license agreement to date and approximately $834,000 for the year ended December
31, 2014, resulting in $487,000 being deferred over the remainder of the expected obligation period. We amortize the deferred revenue
monthly over the expected obligation period which ends on December 31, 2021. As a result, expected revenue to be recognized will
be approximately $70,000 in each of the next seven years.
Stock-Based Compensation
We account for stock-based compensation
in accordance with ASC 718 by recognizing the fair value of stock-based compensation in net income. The fair value of our stock
option awards are estimated using a Black-Scholes option valuation model. This model requires the input of highly subjective assumptions
and elections including expected stock price volatility and the estimated life of each award. In addition, the calculation of compensation
costs requires that we estimate the number of awards that will be forfeited during the vesting period. The fair value of stock-based
awards is amortized over the vesting period of the award. For stock awards that vest based on performance conditions (e.g. achievement
of certain milestones), expense is recognized when it is probable that the condition will be met.
Warrants
We account for stock warrants as either
equity instruments or derivative liabilities depending on the specific terms of the warrant agreement. Stock warrants that allow
for cash settlement or provide for modification of the warrant exercise price under certain conditions are accounted for as derivative
liabilities. We classify derivative warrant liabilities on the balance sheet as a liability, which is revalued using a binomial
options pricing model at each balance sheet date subsequent to the initial issuance. A binomial options pricing model requires
the input of highly subjective assumptions and elections including expected stock price volatility and the estimated life of each
award. The changes in fair value of the derivative warrant liabilities resulting from their remeasurement at each balance sheet
date are recorded in current period earnings.
Accounts Receivable
We provide credit terms to our customers
in connection with purchases of our products. We periodically review customer account activity in order to assess the adequacy
of the allowances provided for potential collection issues and returns. Factors considered include economic conditions, each customer’s
payment and return history and credit worthiness. Adjustments, if any, are made to reserve balances following the completion of
these reviews to reflect our best estimate of potential losses.
Inventory Reserves
Our inventory reserve requirements are based
on factors including the products’ expiration date and estimates for the future sales of the product. If estimated sales
levels do not materialize, we will make adjustments to our assumptions for inventory reserve requirements.
Accrued Expenses
We are required to estimate accrued expenses
as part of our process of preparing financial statements. This process involves identifying services which have been performed
on our behalf, and the level of service performed and the associated cost incurred for such service as of each balance sheet date
in our consolidated financial statements. Examples of areas in which subjective judgments may be required include costs associated
with services provided by contract organizations for the preclinical development of our products, the manufacturing of clinical
materials, and clinical trials, as well as legal and accounting services provided by professional organizations. In connection
with such service fees, our estimates are most affected by our understanding of the status and timing of services provided relative
to the actual levels of services incurred by such service providers. The majority of our service providers invoice us monthly in
arrears for services performed. In the event that we do not identify certain costs, which have begun to be incurred, or we under-
or over-estimate the level of services performed or the costs of such services, our reported expenses for such period would be
too low or too high. The date on which certain services commence, the level of services performed on or before a given date and
the cost of such services are often determined based on subjective judgments. We make these judgments based upon the facts and
circumstances known to us in accordance with U.S. generally accepted accounting principles.
Results of Operations
Fluctuations in Operating Results
Our results of operations have fluctuated
significantly from period to period in the past 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 the progress and timing of expenditures
related to our research and development efforts, marketing expenses related to product launches, timing of regulatory approval
of our various products and market acceptance of our products. 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 March 31, 2015 Compared to the Three Months
Ended March 31, 2014
Revenues
Total net revenues for the three months
ended March 31, 2015 were approximately $544,000 compared to approximately $473,000 for the three months ended March 31, 2014.
Total net revenues increased approximately $71,000 or 15%, arising from a 140% increase, or approximately $308,000, in higher water
filter sales on dialysis and commercial water partially offset by a 93% decrease, or approximately $237,000, in licensing revenue
related to the Bellco license agreement. The increase in water filter sales was primarily driven by an increase in sales in the
hospital market resulting from the DSU-H and SSU-H product launch following the FDA 510k clearance in October 2014. Revenue recognized
related to the Bellco license agreement in the three months ended March 31, 2015 relates only to the upfront payment received in
February 2014. All previously received payments related to the Bellco license agreement were fully recognized as revenue as of
December 31, 2014.
Cost of Goods Sold
Cost of goods sold was approximately $262,000
for the three months ended March 31, 2015 compared to approximately $106,000 for the three months ended March 31, 2014. The increase
of approximately $156,000, or 147%, during the three months ended March 31, 2015 compared to the same period in 2014 is primarily
due to increase in sales volume and any cost of sales gains arising from favorable exchange rate impacts, offset by product mix
changes in the three months ended March 31, 2015 compared to the three months ended March 31, 2014.
Research and Development
Research and development expenses were approximately $192,000
and $163,000 respectively, for the three months ended March 31, 2015 and March 31, 2014. This increase of approximately $29,000,
or 18%, is primarily due to an increase in research and development costs and other project costs primarily related to our OLpūr
H2H Module.
Depreciation and Amortization Expense
Depreciation and amortization expense was
approximately $53,000 for the three months ended March 31, 2015 compared to approximately $55,000 for the three months ended March
31, 2014. Amortization expense related to the asset recognized in conjunction with the License and Supply Agreement with Medica
S.p.A (“License and Supply Agreement”) was $52,000 for the three months ended March 31, 2015 and 2014. The remaining
$1,000 and $3,000, respectively, recognized in the three months ended March 31, 2015 and 2014 was depreciation on equipment and
tools.
Selling, General and Administrative Expenses
Selling, general and administrative expenses
were approximately $843,000 for the three months ended March 31, 2015 compared to approximately $711,000 for the three months ended
March 31, 2014, an increase of approximately $132,000 or 19%. The increase is primarily due to an increase in personnel costs of
approximately $89,000 as a result of the former CEO severance, an increase in sales commission expense of approximately $49,000
as a result of increased sales and an increase in professional services costs of approximately $102,000 primarily related to timing
of when services were rendered. In addition, other increases in selling, general and administrative expenses were related to an
increase in directors’ compensation expense of approximately $19,000 due to an increase in the number of Board members and
an increase in investor relations of approximately $33,000. These expenses were partially offset by a decrease in stock based compensation
expense of approximately $94,000 primarily related to the forfeiture of the former CEO’s unvested stock options and a decrease
in legal expenses of approximately $44,000. Legal expenses were higher for the three months ended March 31, 2014 as a result of
fees incurred in relation to the October 2013 product recall.
Interest Expense
The table below summarizes interest expense
for the three months ended March 31, 2015 and 2014:
| | |
2015 | | |
2014 | |
| Interest related to November 2013 senior secured note | |
| - | | |
| 37,000 | |
| Amortization of debt discount – November 2013 senior secured note | |
| - | | |
| 142,000 | |
| Interest – outstanding payables due to a vendor | |
| 11,000 | | |
| 15,000 | |
| Other | |
| - | | |
| 1,000 | |
| Total interest expense | |
$ | 11,000 | | |
$ | 195,000 | |
Change in Fair Value of Warrant Liability
Certain warrants are classified as liabilities
at their fair value and adjusted to their fair value at each reporting period. The fair value of such warrants issued have been
estimated using a binomial options pricing model. For the three months ended March 31, 2015 and 2014, the change in fair value
of the warrant liability was a decrease of approximately $1,009,000 and an increase of approximately $2,751,000, respectively.
Other Income (Expense)
Other income (expense) relates to foreign
currency gains and losses on invoices paid to an international supplier. A foreign currency gain was recognized for the three months
ended March 31, 2015 of approximately $51,000 compared to a foreign currency loss of approximately $3,000 for the three months
ended March 31, 2014.
The Fiscal Year Ended December 31, 2014 Compared to the
Fiscal Year Ended December 31, 2013
Revenues
Total revenues for the year ended December
31, 2014 were approximately $1,748,000 compared to approximately $1,740,000 for the year ended December 31, 2013. Total revenues
increased approximately $8,000, or 0.5%. An increase of approximately $123,000 related to the Bellco license agreement was offset
by a decrease in water filter sales of $115,000. The decrease in water filter sales is primarily related to a decrease in water
filter units sold partially offset by an increase in average selling price.
Cost of Goods Sold
Cost of goods sold was approximately $549,000
for the year ended December 31, 2014 compared to approximately $898,000 for the year ended December 31, 2013. The decrease of approximately
$349,000, or 39%, in cost of goods sold was primarily related to an increase in inventory reserves related to the recall of our
point of use and DSU ultrafilters that we announced in October 2013. Inventory reserves increased approximately $210,000 during
the year ended December 31, 2013, $203,000 of which was a result of the October 2013 voluntary product recall. For the year ended
December 31, 2014, inventory reserves increased approximately $59,000, a decrease compared to 2013 of $151,000. The cost of goods
sold related to water filter sales decreased by approximately $64,000 due to lower water filter sales. In addition, included in
cost of goods sold for the year ended December 31, 2013 was approximately $151,000 related to additional costs as a result of the
product recall. Partially offsetting these decreases was an additional $17,000 in costs of goods sold for the year ended December
31, 2014 related to the Medica royalty payments which began in the second quarter of fiscal year 2014.
Research and Development
Research and development expenses were approximately
$781,000 and $867,000, respectively, for the years ended December 31, 2014 and December 31, 2013. This decrease of approximately
$86,000, or 10%, is primarily due to lower stock compensation expense of approximately $48,000. The decrease in stock compensation
expense is related to restricted stock awards granted to employees during the year ended December 31, 2013. The remainder of the
decrease in research and development expenses is due to a decrease of approximately $38,000 in project costs primarily related
to our OLpūr H2H Module.
Depreciation and Amortization Expense
Depreciation and amortization expense was
approximately $217,000 for the year ended December 31, 2014 compared to approximately $223,000 for the year ended December 31,
2013, representing a decrease of 3%.
Selling, General and Administrative Expenses
Selling, general and administrative, or
SG&A, expenses were approximately $2,870,000 for the year ended December 31, 2014 compared to approximately $3,069,000 for
the year ended December 31, 2013, representing a decrease of $199,000 or 7%. The decrease is primarily due to a decrease in personnel
costs of approximately $205,000 related to the absence of a chief financial officer in the year ended December 31, 2014 , a decrease
of approximately $156,000 in legal and professional services and a decrease in stock compensation of approximately $36,000, partly
offset by an increase in SG&A expenses of approximately $129,000 as a result of increased regulatory and quality system management
resource costs due to the product recall and an increase in board of directors’ fees of approximately $89,000.
Interest Expense
The table below summarizes interest expense
for the years ended December 31, 2014 and 2013:
| | |
2014 | | |
2013 | |
| Interest related to August 2014 senior secured note | |
$ | 63,000 | | |
$ | - | |
| Interest related to November 2013 senior secured note | |
| 37,000 | | |
| 24,000 | |
| Interest related to February 2013 senior secured note | |
| - | | |
| 47,000 | |
| Amortization of debt discount – August 2014 senior secured note | |
| 178,000 | | |
| | |
| Amortization of debt discount – November 2013 senior secured note | |
| 142,000 | | |
| 53,000 | |
| Amortization of debt discount – February 2013 senior secured note | |
| - | | |
| 204,000 | |
| Interest – outstanding payables due to a vendor | |
| 61,000 | | |
| 21,000 | |
| Other | |
| 2,000 | | |
| 2,000 | |
| Total interest expense | |
$ | 483,000 | | |
$ | 351,000 | |
Change in Fair Value of Warrant Liability
As a result of the restatement described
in Note 2 of the notes to the financial statements included herein, we classify certain warrants as liabilities at their fair value
and adjust the warrant liability to fair value at each reporting period. This liability is subject to re-measurement at each balance
sheet date until exercised, and any change in fair value is recognized in our consolidated statement of operations and comprehensive
income (loss). The fair value of such warrants issued have been estimated using a binomial options pricing model. For the years
ended December 31, 2014 and 2013, the change in fair value of the warrant liability was an increase of approximately $4,277,000
and a decrease of approximately $5,020,000, respectively.
Other Income/Expense
Other income of approximately $58,000 for
the year ended December 31, 2014 is due to foreign currency gains.
Other expense, net, of approximately $33,000
for the year ended December 31, 2013 is primarily due to other expenses of approximately $36,000 related to foreign currency transaction
losses and approximately $14,000 of expenses related to the May 2013 rights offering warrant modification. These expenses were
partially offset by other income of approximately $17,000, which consisted primarily of a refund of $15,000 received as a result
of the Steris agreement termination.
Off-Balance Sheet Arrangements
We did not have any off-balance sheet arrangements
as of March 31, 2015 or December 31, 2014.
Liquidity and Capital Resources
The following table summarizes our
liquidity and capital resources as of March 31, 2015 and December 31, 2014 and is intended to supplement the more detailed discussion
that follows. The amounts stated are expressed in thousands.
| Liquidity and capital resources | |
March 31, 2015 | | |
December 31, 2014 | |
| Cash | |
$ | 367 | | |
$ | 1,284 | |
| Other current assets | |
| 624 | | |
| 400 | |
| Working capital (deficit) | |
| (265 | ) | |
| 437 | |
| Stockholders’ deficit | |
| (5,411 | ) | |
| (5,681 | ) |
At March 31, 2015, we had an accumulated
deficit of approximately $113,922,000 and we expect to incur additional operating losses in the foreseeable future at least until
such time, if ever, that we are able to increase product sales or license revenue. We have financed our operations since inception
primarily through the private placements of equity and debt securities, our initial public offering, license revenue, and rights
offerings.
Our future liquidity sources and requirements
will depend on many factors, including:
| · | the availability of additional financing, through the sale of equity securities or otherwise, on commercially reasonable terms
or at all; |
| · | the market acceptance of our products, and our ability to effectively and efficiently produce and market our products; |
| · | the continued progress in, and the costs of, clinical studies and other research and development programs; |
| · | 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
to the following uses:
| · | for the marketing and sales of our water-filtration products; |
| · | to pursue business development opportunities with respect to our chronic renal treatment system; and |
| · | for working capital purposes. |
We operate under an Investment, Risk Management
and Accounting Policy adopted by our board of directors. Such policy limits the types of instruments or securities in which we
may invest our excess funds: U.S. Treasury Securities; Certificates of Deposit issued by money center banks; Money Funds by money
center banks; Repurchase Agreements; and Eurodollar Certificates of Deposit issued by money center banks. This policy provides
that our primary objectives for investments shall be the preservation of principal and achieving sufficient liquidity to meet our
forecasted cash requirements. In addition, provided that such primary objectives are met, we may seek to achieve the maximum yield
available under such constraints.
On May 12, 2015, the Company entered into
a Securities Purchase Agreement (the “Purchase Agreement”) with certain purchasers identified therein. Pursuant to
the Purchase Agreement, the Company agreed to issue and sell, and the purchasers agreed to purchase, an aggregate of approximately
1.8 million shares at a price of $0.67 per share for total gross proceeds of approximately $1.2 million (such transaction, the
“2015 Private Placement”). In addition, the Company issued to the purchasers warrants to purchase approximately 0.9
million shares of common stock. The warrants have an exercise price of $0.85 per share and are exercisable for 5 years from the
closing date. The purchase and sale of the shares and warrants closed on May 19, 2015.
On February 19, 2014, we entered into the
First Amendment to License Agreement (the “First Amendment”), with Bellco, which amends the License Agreement, entered
into as of July 1, 2011. Pursuant to the First Amendment, both parties agreed to extend the term of the License Agreement through
December 31, 2021. The First Amendment also expands the Territory covered by the License Agreement to include Sweden, Denmark,
Norway, Finland, Korea, Mexico, Brazil, China and the Netherlands. The First Amendment further provides new minimum sales targets
which, if not satisfied, will, at our discretion, result in conversion of the license to non-exclusive status. We have agreed to
reduce the fixed royalty payment payable to us for the period beginning on January 1, 2015 through and including December 31, 2021.
Beginning on January 1, 2015 through and including December 31, 2021, Bellco will pay us a royalty based on the number of units
of Products sold per year in the Territory as follows: for the first 125,000 units sold in total, €1.75 (approximately $2.40)
per unit; thereafter, €1.25 (approximately $1.71) per unit. In addition, we received a total of €450,000 (approximately
$612,000) in upfront fees in connection with the First Amendment, half of which was received on February 19, 2014 and the remaining
half was received on April 4, 2014. In addition, the First Amendment provides that, in the event that we pursue a transaction to
sell, assign or transfer all right, title and interest to the licensed patents to a third party, we will provide Bellco with written
notice thereof and a right of first offer with respect to the contemplated transaction for a period of thirty (30) days.
We expect that the approximately $1.2 million
of gross proceeds that we received upon the closing of the 2015 Private Placement, and the projected increase in product sales
from the hospital market, will allow us to fund our operations into the fourth quarter of fiscal year 2015. Our cash flow currently
is not, and historically has not been, sufficient to meet our obligations and commitments. We must seek and obtain additional financing
to fund our operations. If we cannot raise sufficient capital, in connection with offerings of our common stock or through other
means, we will be forced to curtail our planned activities and operations or cease operations entirely. There can be no assurance
that we could raise sufficient capital on a timely basis or on satisfactory terms or at all.
Cash Flows for the Three Months Ended March 31, 2015 Compared
to the Three Months Ended March 31, 2014
Net cash used in operating activities was
approximately $917,000 for the three months ended March 31, 2015 compared to approximately $622,000 for the three months ended
March 31, 2014. Although our net income increased by approximately $3,754,000 during the three months ended March 31, 2015 compared
to the three months ended March 31, 2014, the primary reason for the increase was due to the noncash impact of the change in fair
value of the warrant liability. The warrant liability decreased by approximately $1,009,000 in the three months ended March 31,
2015 compared to an increase of approximately $2,751,000 in the three months ended March 31, 2014.
The most significant items contributing
to the net increase of approximately $295,000 in cash used in operating activities during the three months ended March 31, 2015
compared to the three months ended March 31, 2014 are highlighted below:
| · | our deferred revenue decreased by approximately $17,000 in the 2015 period compared to an increase of approximately $363,000
in the 2014 period; and |
| · | during the 2015 period, there was no amortization of debt discount compared to approximately $142,000 in the 2014 period |
Offsetting the above changes are the following
items:
| · | our stock based compensation was approximately $26,000 during the 2015 period compared to approximately $120,000 during the
2014 period; |
| · | our accounts receivable decreased by approximately $224,000 during the 2015 period compared to approximately $355,000 during
the 2014 period; and |
| · | our accrued expenses increased by approximately $90,000 in the 2015 period compared to a decrease of approximately $172,000
in the 2014 period. |
Net cash provided by financing activities
for the three months ended March 31, 2015 of $1,000 resulted from proceeds from the exercise of warrants.
Net cash provided by financing activities
for the three months ended March 31, 2014 of $517,000 resulted from proceeds of approximately $2,016,000 resulting from the issuance
of common stock in the 2014 rights offering and approximately $1,000 of proceeds resulting from the exercise of warrants. These
proceeds were offset by the payment of the November 2013 senior secured note of $1,500,000.
Cash Flows for the Year Ended December 31, 2014 Compared
to the Year Ended December 31, 2013
Net cash used in operating activities was
approximately $2,495,000 for the year ended December 31, 2014 compared to approximately $3,583,000 for the year ended December
31, 2013. Although our net loss increased by approximately $8,693,000 during the year ended December 31, 2014 compared to the year
ended December 31, 2013, the primary reason for the decrease was due to the noncash impact of the change in fair value of the warrant
liability. The warrant liability increase by approximately $4,277,000 in the year ended December 31, 2014 compared to a decrease
of approximately $5,020,000 in the year ended December 31, 2013.
Excluding the impact of the change in the
fair value of the warrant liability, the net decrease of approximately $1,088,000 in cash used in operating activities during the
year ended December 31, 2014 compared to the year ended December 31, 2013 are highlighted below:
| · | during 2014, our deferred revenue decreased by approximately $216,000 compared to a decrease of approximately $711,000 during
2013 as a result of timing in recognition of revenue under the Bellco agreement; and |
| · | during 2013, license and supply fee payable decreased by $1,318,000; and |
| · | during 2014, we recorded amortization of debt issuance costs of $320,000, whereas amortization of debt issuance costs in 2013
was $257,000. |
Offsetting the above changes are the following
items:
| · | during 2014, our stock-based compensation expense, a non-cash expense, decreased by approximately $146,000 compared to 2013; |
| · | during 2014, we recorded an inventory reserve of approximately $59,000 compared to approximately $210,000, primarily a result
of the product recall, in 2013; |
| · | during 2014, our accounts receivable decreased by approximately $11,000 compared to a decrease of approximately $820,000, primarily
reflecting the collection of amounts related to the Bellco agreement., during 2013; |
| · | during 2014, our accounts payable and accrued expenses decreased by approximately $112,000 in the aggregate compared to an
increase of approximately $98,000 during 2013; and |
| · | as a result of changes in foreign currency rates, during 2014, we recognized a gain on foreign currency transactions of approximately
$48,000 compared to a loss of approximately $26,000 during 2013. |
Net cash provided by investing activities
for the year ended December 31, 2013 was approximately $3,000 related to the sale of fully depreciated manufacturing equipment.
There were no investing transactions in 2014.
Net cash provided by financing activities
for the year ended December 31, 2014 of $3,203,000, net of equity issuance costs of approximately $276,000, resulted primarily
from gross proceeds of $5.1 million related to the issuance of common stock related to the March 2014 rights offering and December
2014 rights offering, gross proceeds from the issuance of the August 2014 senior secured note of $1.75 million and approximately
$15,000 of proceeds resulting from the exercise of warrants. Net cash provided by financing activities was partially offset by
the repayment of the $1.75 million August 2014 senior secured note, repayment of the $1.5 million November 2013 senior secured
note and payment of financing costs of approximately $178,000.
Net cash provided by financing activities
for the year ended December 31, 2013 of $4,120,000, net of equity issuance costs of approximately $229,000, resulted primarily
from gross proceeds of $3.0 million related to the issuance of common stock related to the May 2013 rights offering, gross proceeds
from the issuance of the February 2013 senior secured note and the November 2013 senior secured note of $2.8 million and approximately
$248,000 of proceeds resulting from the exercise of warrants. Net cash provided by financing activities was partially offset by
the repayment of the $1.3 million February 2013 senior secured note and the payment of financing costs of $399,000.
Contractual Obligations and Commercial Commitments
The following table summarizes our approximate
minimum contractual obligations and commercial commitments as of December 31, 2014:
| | |
Payments Due in Period | |
| | |
Total | | |
Within
1 Year | | |
Years
1-3 | | |
Years
4-5 | | |
More than 5
Years | |
| Leases | |
$ | 106,000 | | |
$ | 104,000 | | |
$ | 2,000 | | |
$ | - | | |
$ | - | |
| Employment Contracts (1) | |
| 175,000 | | |
| 175,000 | | |
| - | | |
| - | | |
| - | |
| Total | |
$ | 281,000 | | |
$ | 279,000 | | |
$ | 2,000 | | |
$ | - | | |
$ | - | |
| (1) | Represents amount payable under severance agreement for John C. Houghton, effective January 4, 2015. See Note 15, Subsequent
Events, to the consolidated financial statements for the year ended December 31, 2014 for further discussion. |
No material changes occurred in the
above table during the three months ended March 31, 2015. On April 15, 2015, the Company entered into a four-year employment
agreement with Daron Evans, the President, CEO and Acting CFO, pursuant to which Mr. Evans will receive an annual base salary
of $240,000 per year. See Note 12 ,Subsequent Events, to the consolidated financial statements for the quarter ended March
31, 2015 for further discussion.
BUSINESS
Nephros is a commercial stage medical device
company that develops and sells high performance liquid purification filters. Our filters, which we call ultrafilters, are primarily
used in dialysis centers for the removal of biological contaminants from water, bicarbonate concentrate and/or blood. 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.
Our ultrafilters use proprietary hollow
fiber technology. We believe the hollow fiber design allows our ultrafilters to optimize the three elements critical to filter
performance:
| · | Filtration -
as low as 0.005 microns |
| · | Flow rate - minimal
disruption |
| · | Filter life -
up to 12 months |
We were founded in 1997 by healthcare professionals
affiliated with Columbia University Medical Center/New York-Presbyterian Hospital to develop and commercialize an alternative
method to hemodialysis, or HD. We have extended our filtration technologies to meet the demand for liquid purification in other
areas, in particular water purification..
Our Products
Presently, we offer ultrafilters for sale
to customers in five markets:
| · | Hospitals
and Other Healthcare Facilities: Filtration of water to be used for patient washing
and drinking as an aid in infection control. The filters also produce water that is suitable
for wound cleansing, cleaning of equipment used in medical procedures and washing of
surgeons’ hands. |
| · | Dialysis Centers
- Water/Bicarbonate: Filtration of water or bicarbonate concentrate used in hemodialysis
devices. |
| · | Dialysis Centers
- Blood: Treatment of patients with chronic renal failure using the OLpūr H2H
Hemodiafiltration, or HDF, Module in conjunction with a UF controlled hemodialysis machine
and its accessories, the H2H Module accessories, appropriately prepared water and ultrapure
dialysate for hemodialysis and the OLpūr MD 220 Hemodiafilter. |
| · | Military and
Outdoor Recreation: Highly compact, individual water purification devices used by
soldiers and backpackers to produce drinking water in the field. |
| · | Commercial
Facilities: Filtration of water for washing and drinking including use in ice machines
and soda fountains. |
Our Target Markets
Hospitals and Other Healthcare Facilities.
According to the American Hospital Association there are approximately 5,700 hospitals and 920,000 beds in the U.S. and the
United States Centers for Disease Control and Prevention estimates that healthcare associated infections, or HAIs, annually account
for 1.7 million infections and 99,000 deaths. HAIs affect patients in a hospital or other healthcare facility, 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 waterborne bacteria and viruses that can thrive in aging
or complex plumbing systems often found in healthcare facilities. The Affordable Care Act, which was passed in March 2010, puts
in place comprehensive health insurance reforms that aim to lower costs and enhance quality of care. With its implementation,
healthcare providers have substantial incentives to deliver better care or be forced to absorb the expenses associated with repeat
medical procedures or complications like HAIs. As a consequence, hospitals and other healthcare facilities are proactively implementing
strategies to reduce the potential for HAIs. Our ultrafilters are designed to aid in infection control in the hospital and healthcare
setting by treating facility water at the point of delivery, for example, from sinks and showers.
On June 30, 2014, we submitted to the FDA,
for 510(k) clearance, the DSU-H and SSU-H Ultrafilters to filter EPA quality drinking water to remove microbiological contaminants
and waterborne pathogens. On October 28, 2014, we announced that we received 510(k) clearance from the FDA to market our DSU-H
and SSU-H Ultrafilters as medical devices for use in the hospital setting. The DSU-H and SSU-H Ultrafilters are intended to be
used to filter EPA quality drinking water. The filters retain bacteria, viruses and endotoxin. By providing ultrapure water for
patient washing and drinking, the filters aid in infection control. The filters also produce water that is suitable for wound
cleansing, cleaning of equipment used in medical procedures and washing of a surgeon’s hands. The filters are not intended
to provide water that can be used as a substitute for United States Pharmacopeia sterile water.
We anticipate that the impact of the American
Society of Heating, Refrigerating, and Air-Conditioning Engineers, Inc. proposed Standard 188, “Prevention of Legionellosis
Associated with Building Water Systems”, when adopted, will be positive for the point of delivery filtration market. We
will be enhancing our efforts to support our distributors by developing and delivering focused sales training to their sales forces
on the use of our filters to support an overall program of infection risk prevention, as well as by offering the services of our
sales representatives to jointly call on potential hospital customers to serve as a product expert when needed.
Dialysis Centers - Water/Bicarbonate.
To perform hemodialysis, all dialysis clinics have dedicated water purification systems to produce water and bicarbonate concentrate.
Water and bicarbonate concentrate are essential ingredients for making dialysate, the liquid that removes waste material from
the blood. Within the U.S., there are approximately 6,000 clinics with 100,000 dialysis machines providing over 50 million dialysis
treatments to 400,000 patients annually.
Medicare is the main payer for dialysis
treatment in the U.S. 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, or AAMI, the American National
Standards Institute, or ANSI and the International Standards Organization, or ISO. We anticipate that the stricter standards approved
by these organizations in 2009 will be adopted by Medicare in the near future.
Published studies have shown that the use
of ultrapure dialysate can reduce the overall need for erythropoietin stimulating agents, or ESAs, expensive drugs used in conjunction
with HD. By reducing the level of dialysate contaminants, specifically cytokine-inducing substances that can pass into a patient’s
blood stream, the stimulation of inflammation-inducing cytokines is reduced, thus reducing systemic inflammation. When inflammation
is low, inflammatory morbidities are reduced and a patient’s responsiveness to erythropoietin is enhanced, consequently
the overall need for ESAs is reduced.
We believe that our ultrafilters are attractive
to dialysis centers because they exceed currently approved and newly proposed standards for water and bicarbonate concentrate
purity, assist in achieving those standards and may help dialysis centers reduce costs associated with the amount of ESA required
to treat a patient. Our in-line filters are easily installed into the fluid circuits supplying water and bicarbonate concentrate
just prior to entering each dialysis machine.
During March 2014 we signed a non-exclusive
distributor agreement with Mar Cor Purification, a wholly-owned subsidiary of Cantel Medical Corp., to distribute our dialysis
ultrafilters to U.S. and Canadian dialysis clinics. In July 2014, we received notification from Health Canada Therapeutic Products
Directorate Medical Devices Bureau that we were successfully issued a license for our Single Stage Ultrafilter.
Dialysis Centers - Blood. The current
standard of care in the U.S. for patients with chronic renal failure is HD, a process in which toxins are cleared via diffusion.
Patients typically receive HD treatment 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 U.S. is hemofiltration,
or 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 performed on a daily basis, and typically takes 12-24 hours.
Hemodiafiltration, or 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 U.S., HDF is much more prevalent in Europe and is performed in approximately 16% of patients. Clinical
experience and literature show the following clinical and patient benefits of HDF:
| · | Enhanced clearance
of middle and large molecular weight toxins |
| · | Improved survival
- up to a 35% reduction in mortality risk |
| · | Reduction in
the occurrence of dialysis-related amyloidosis |
| · | Reduction in
inflammation |
| · | Reduction in
medication such as EPO and phosphate binders |
| · | Improved patient
quality of life |
| · | Reduction in
number of hospitalizations and overall length of stay |
However, like HF, HDF can be resource intensive and can require
a significant amount of time to deliver one course of treatment.
We have developed a modified approach to
HDF that we believe is more patient-friendly, less resource-intensive, and can be used in conjunction with current HD machines.
We refer to our approach as an online mid-dilution hemodiafiltration (mid-dilution HDF) system and it consists of our OLpūr
H2H Module and OLpūr MD 220 Hemodiafilter. The OLpūr H2H HDF Module and OLpūr MD 220 Hemodiafilter are cleared
by the FDA to market for use with a ultrafiltration controlled hemodialysis machine that provides ultrapure dialysate in accordance
with current ANSI/AAMI/ISO standards, for the treatment of patients with chronic renal failure in the United States. Our on-line
mid-dilution HDF system is the only on-line mid-dilution HDF system of its kind to be cleared by the FDA to date.
We completed preparation of our OLpūr
H2H HDF Modules and have manufactured lots of our OLpūr MD220 Hemodiafilters, H2H Substitution filters and H2H water filters.
We also finalized our service contract to support the commercialization of our system in the field. In May 2014, DaVita Healthcare
Partners announced that it had commenced delivering and evaluating on-line mid-dilution hemodiafiltration treatments to select
patients at DaVita’s North Colorado Springs Clinic. In February 2015, we announced that, in the course of the evaluation,
DaVita informed Nephros that they would require additional validation of the system. Nephros and DaVita agreed upon a protocol
for the additional validation work which was completed in March. We have submitted the data report to DaVita, and have been informed
that it is still under review. Upon confirmatory review of the additional validation work, it is anticipated that DaVita will
continue its evaluation. In March 2015, we announced that the Renal Research Institute, a research division of Fresenius Medical
Care, was conducting an ongoing evaluation of our hemodiafiltration system in its clinic. We also anticipate evaluating our on-line
mid-dilution HDF system at other clinics throughout the U.S. with the intent of developing a better understanding of how our system
best fits into the current clinical and economic ESRD treatment paradigm with the ultimate goals of improving the quality of life
for the patient, reducing overall expenditure compared to other dialysis modalities, minimizing the impact on nurse work flow
at the clinic, and demonstrating the phamacoeconomic benefit of the HDF technology to the U.S. healthcare system, as has been
done in Europe with other HDF systems.
Military and Outdoor Recreation.
Water is a key requirement for the soldier to be fully mission-capable. The need for water supplies and immediate on-site water
purification is critical to enhance the ability to operate in any environment. Currently, the military is heavily reliant on the
use of bottled water to support its soldiers in the field. Bottled water is not always available, is very costly to move, resource
intensive, and prone to constant supply disruptions. Soldiers conducting operations in isolated and rugged terrain must be able
to use available local water sources when unable to resupply from bulk drinking water sources or bottled water. Therefore, the
soldier needs the capability to purify water from indigenous water sources in the absence of available potable water. Soldiers
must have the ability to remove microbiological contaminants in the water to levels specified by the Environmental Protection
Agency, or EPA.
We developed our individual water treatment
device, or IWTD, in both in-line (HydraGuard in-line) and point-of-use (HydraGuard Universal) configurations. Our IWTD allows
a soldier in the field to derive drinking water from any fresh water source. This enables the soldier to remain hydrated which
will maintain mission effectiveness and unit readiness, and extend mission reach. Our IWTD is one of the few portable filters
that has been validated by the military to meet the NSF Protocol P248 standard. It has also been approved by U.S. Army Public
Health Command and U.S. Army Test and Evaluation Command for deployment.
In May 2015, we entered into a Sublicense
Agreement with CamelBak Products, LLC, or 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 HydraGuard individual water treatment devices. In exchange for the rights granted to CamelBak, CamelBak agreed to pay us a
percentage of the gross profit on any sales made to a branch of the military, subject to certain exceptions, and to pay us a fixed
per-unit fee for any other sales made. CamelBak is also required to meet or exceed certain minimum annual fees payable to us,
and if such fees are not met or exceeded, we may convert the exclusive sublicense to a non-exclusive sublicense with respect to
non-U.S. military sales. Additionally, we have the right to terminate the sublicense with respect to a specific geographic area
if CamelBak enters into an agreement or otherwise obtains or develops the rights to market or sell a product that competes with
the HydraGuard individual water treatment devices in such geographic area. If we do not terminate the sublicense in such situation,
and the sales of the competing product in such geographic area exceed the sales of the HydraGuard individual water treatment devices
in the same area during any full calendar year, we may convert the exclusive sublicense to a non-exclusive sublicense solely with
respect to such geographic area.
Commercial Facilities. In October
2013, we announced the voluntary recalls of our point of use, or POU, and DSU in-line ultrafilters used in hospital water treatment
applications. As a result, we recalled all production lots of our POU filters, and also requested that customers remove and discard
certain labeling/promotional materials for the products. In addition, for the DSU in-line ultrafilter, we also requested that
customers remove and discard certain labeling/promotional materials for the product. These voluntary recalls did not affect our
dialysis products. In March 2014, we requested termination of our product recall from the FDA. As of the date of this report,
there has been no additional communication from the FDA regarding our request.
We have launched our new NanoGuard-D and
NanoGuard-S in-line ultrafilters for the filtration of water which is to be used for non-medical drinking and washing in non-transient
non-community water systems, or commercial facilities. The NanoGuard-D and NanoGuard-S trap particulates greater than 5nm in size
and the water permeability (the ease at which water can pass through a membrane at a given pressure) of the membrane is higher
than membranes with a similar pore size. This provides improved flow performance relative to the physical size of the filter.
We anticipate that the filters will be used as a component of a facility water treatment system and also for filtering water to
be used in ice machines and soda fountains.
With respect to public drinking water systems,
EPA regulations make a distinction between community and non-community systems. A community water system supplies water to the
same population year-round. It serves at least 25 people at their primary residences or at least 15 residences that are primary
residences. Community water systems include those that supply municipalities, mobile home parks, and residential sub-divisions.
Non-community water systems are composed
of transient and non-transient water systems:
| · | Transient non-community
water systems provide water to 25 or more people for at least 60 days/year; however,
not to the same people and not on a regular basis, e.g. gas stations, campgrounds. |
| · | Non-transient
non-community water systems regularly supply water to at least 25 of the same people
at least six months per year, but not year-round, e.g. office buildings, schools, hotels
and factories which have their own water systems. |
Corporate Information
We were incorporated under the laws of
the State of Delaware in April 1997. Our principal executive offices are located at 41 Grand Avenue, River Edge, New Jersey, 07661,
and our telephone number is (201) 343-5202. We also have an office in Dublin, Ireland. For more information about Nephros, please
visit our website at www.nephros.com.
Going Concern
The accompanying consolidated financial
statements have been prepared assuming that we will continue as a going concern. Our recurring losses and difficulty in generating
sufficient cash flow to meet our obligations and sustain our operations raise substantial doubt about our ability to continue
as a going concern. Our consolidated financial statements do not include any adjustments that might result from the outcome of
this uncertainty.
We have incurred significant losses in
operations in each quarter since inception. In addition, we have not generated positive cash flow from operations for the three
months ended March 31, 2015 or the year ended December 31, 2014. To become profitable, we must increase revenue substantially
and achieve and maintain positive gross and operating margins. If we are not able to increase revenue and gross and operating
margins sufficiently to achieve profitability, our results of operations and financial condition will be materially and adversely
affected.
There can be no assurance that our future
cash flow will be sufficient to meet our obligations and commitments. If we are unable to generate sufficient cash flow from operations
in the future to service our commitments, we will be required to adopt alternatives, such as seeking to raise debt or equity capital,
curtailing our planned activities or ceasing our operations. There can be no assurance that any such actions could be effected
on a timely basis or on satisfactory terms or at all, or that these actions would enable us to continue to satisfy our capital
requirements.
Recent Developments
On May 12, 2015, we entered into a securities
purchase agreement with various accredited investors pursuant to which we agreed to sell in a private placement a total of 1,834,299
units of our securities, each unit consisting of one share of our common stock and a five-year warrant to purchase one-half of
one share of our common stock. The closing of the private placement occurred on May 19, 2015. The purchase price for each unit
was $0.67. The warrants are exercisable at a price of $0.85 per warrant share. The sale of the shares and warrants resulted in
aggregate gross proceeds of approximately $1.23 million, before deducting expenses.
On May 25, 2015, we received a Notice of
Allowance for U.S. Patent Application No. 13/888,645, “Method and Apparatus of Flush Pump Feature for Portable Liquid Purifying
Filter.” The Notice of Allowance covers claims relating to certain accessories used with our HydraGurad individual water
purifier devices. The HydraGuard ultrafilter membrane provides a barrier to block sediment, bacteria, parasites, viruses &
cysts from water filtered by the membrane. The flush pump apparatus, as described in the patent claims, provides a mechanism to
provide real-time verification of filter integrity, to enable the user to clean the filter membrane while inside the filter casing,
and to purge the filter for lighter storage or for protection against freeze-related damage in cold environments. The combination
of our ultrafilter membrane and our flush pump apparatus enabled the HydraGuard to pass the NSF Protocol P248 for Military Operations
Microbiological Water Purifiers.
Barring any unforeseen circumstances, we
believe this patent should be valid until May 2033 given the patent filing occurred in May 2013. We licensed all intellectual
property relating to the HydraGuard individual water purifier devices, including this patent, to Camelbak Products, LLC as part
of a Sublicense Agreement on May 6, 2015. The Sublicense Agreement expires on December 31, 2022, unless terminated sooner in accordance
with the terms of the agreement.
On May 28, 2015, we received a warning letter from the FDA resulting
from an October 2014 inspection of our facility in River Edge, New Jersey. The warning letter alleges deficiencies relating to
our compliance with the Quality System regulation and the Medical Device Reporting regulation. We take the matters identified in
the warning letter seriously and are in the process of evaluating the corrective actions required to address the matters raised
in the warning letter. We responded to the warning letter within 15 business days as requested by the FDA, and intend to work diligently
and expeditiously to resolve the issues raised by the FDA. The warning letter does not restrict the manufacture, production or
shipment of any of our products, nor require the withdrawal of any product from the marketplace.
Manufacturing and Suppliers
We do not, and do not intend to in the
near future, manufacture any of our products and components. With regard to the OLpūr MD190 and MD220, on June 27, 2011,
we entered into a license agreement, effective July 1, 2011, as amended by the first amendment dated February 19, 2014, with Bellco
S.r.l., or Bellco, an Italy-based supplier of hemodialysis and intensive care products, for the manufacturing, marketing and sale
of our patented mid-dilution dialysis filters (MD190, MD220), referred to herein as the Products. Under the agreement, as amended
by the first amendment, we granted Bellco a license to manufacture, market and sell the Products under its own name, label and
CE mark in Italy, France, Belgium, Spain, Canada, Denmark, Finland, Norway and Sweden on an exclusive basis, and to do the same
on a non-exclusive basis in the United Kingdom, Greece, Brazil, China, Korea, Mexico and the Netherlands and, upon our written
approval, other European countries where we do not sell the Products as well as non-European countries, all such countries herein
referred to as the Territory.
In April 2012, we entered into a license
and supply agreement with Medica S.p.A., 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 our filtration
products, and to engage in an exclusive supply arrangement for the filtration products. Under the license and supply Agreement,
Medica granted to us an exclusive license, with right of sublicense, to market, promote, distribute, offer for sale and sell the
filtration products worldwide, excluding Italy, during the term of the agreement.
Sales and Marketing
Under the Bellco license agreement, as
discussed above, we granted Bellco a license to manufacture, market and sell the Products under its own name, label and CE mark
in the Territory. In addition, if requested by us, Bellco will be required to sell the Products to our distributors in the Territory.
Our New Jersey office oversees global sales
and marketing activity of our ultrafilter products. We are in discussions with several medical products and filtration products
suppliers to act as non-exclusive distributors of our ultrafilter products to medical and non-medical institutions. In May 2012,
we signed a non-exclusive U.S. distributor agreement with Vantage. In July 2012, we signed non-exclusive U.S. distributor agreements
with TQM and Ameriwater. During 2013 we signed a non-exclusive North American distributor agreement with Chem-aqua and Garratt-Callahan.
In February 2014 we signed a non-exclusive North American distributor agreement with Mar Cor Purification. For each prospective
market for our ultrafilter products, we are pursuing alliance opportunities for joint product development and distribution. Our
ultrafilter manufacturer in Europe shares certain intellectual property rights with us for one of our Dual Stage Ultrafilter (DSU)
designs.
Research and Development
Our research and development efforts continue
on several fronts directly related to our current product lines. We are also working on additional machine devices, next-generation
user interface enhancements and other product enhancements.
We were awarded research contracts from
the Office of Naval Research, or ONR, for development of a potable dual-stage military water purifying filter. The initial research
contract was awarded in 2006 for approximately $1 million and work was completed in August 2009. The second research contract
was awarded in August 2009 and was an expansion of the 2006 ONR contract which is being performed as part of the Marine Corps
Advanced Technology Demonstration project. The primary objective of this expanded research program is to select concepts and functional
prototype filter/pump units which were developed during the first phase of the project, and further develop them into smaller
field-testable devices that can be used for military evaluation purposes. An advantage of our ultrafilter is the removal of viruses
which are not removed with commercially available off-the-shelf microfilter devices. Such devices generally rely on a secondary
chemical disinfection step to make the water safe to drink. The expanded contract also includes research geared toward improving
membrane performance, improving device durability, developing larger squad-level water purifier devices, and investigating desalination
filter/pump devices for emergency-use purposes.
Major Customers
For the years ended December 31, 2014 and
2013, three customers accounted for 78% and 86%, respectively, of our revenues.
As of December 31, 2014 three customers
accounted for 83% of our accounts receivable. As of December 31, 2013, two customers accounted for 97% of our accounts receivable.
Competition
With respect to the water filtration market,
we expect to compete with companies that are well entrenched in the water filtration domain. These companies include Pall Corporation,
which manufactures end-point water filtration systems, as well as 3M and Siemens. Our methods of competition in the water filtration
domain include:
| · | developing and
marketing products that are designed to meet critical and specific customer needs more
effectively than competitive devices; |
| · | offering unique
attributes that illustrate our product reliability, “user-friendliness,”
and performance capabilities; |
| · | selling products
to specific customer groups where our unique product attributes are mission-critical;
and |
| · | pursuing alliance
opportunities for joint product development and distribution. |
The dialyzer and renal replacement therapy
market is subject to intense competition. Accordingly, our future success will depend on our ability to meet the clinical needs
of physicians and nephrologists, improve patient outcomes and remain cost-effective for payers.
We compete with other suppliers of End
Stage Renal Disease, or ESRD, therapies, supplies and services. These suppliers include Fresenius Medical Care AG, and Baxter,
currently two of the primary machine manufacturers in hemodialysis. At present, Fresenius Medical Care AG and Baxter also manufacture
HDF machines.
The markets in which we sell our dialysis
products are highly competitive. Our competitors in the sale of hemodialysis products include Baxter International Inc., Fresenius
Medical Care AG, Asahi Kasei Medical Co. Ltd., B. Braun Melsungen AG, Nipro Medical Corporation Ltd., Nikkiso Co., Ltd., Terumo
Medical Corporation and Toray Medical Co., Ltd.
Other competitive considerations include
pharmacological and technological advances in preventing the progression of ESRD in high-risk patients such as those with diabetes
and hypertension, technological developments by others in the area of dialysis, the development of new medications designed to
reduce the incidence of kidney transplant rejection and progress in using kidneys harvested from genetically-engineered animals
as a source of transplants.
We are not aware of any other companies
using technology similar to ours in the treatment of ESRD. Our competition would increase, however, if companies that currently
sell ESRD products, or new companies that enter the market, develop technology that is more efficient than ours. We believe that
in order to become competitive in this market, we will need to develop and maintain competitive products and take and hold sufficient
market share from our competitors. Therefore, we expect our methods of competing in the ESRD marketplace to include:
| · | continuing our
efforts to develop, have manufactured and sell products which, when compared to existing
products, perform more efficiently and are available at prices that are acceptable to
the market; |
| · | displaying our
products and providing associated literature at major industry trade shows in the United
States; |
| · | initiating discussions
with dialysis clinic medical directors, as well as representatives of dialysis clinical
chains, to develop interest in our products; |
| · | pursuing alliance
opportunities in certain territories for distribution of our products and possible alternative
manufacturing facilities; and |
| · | entering into
license agreements similar to the Bellco S.r.l. agreement to expand market share. |
Intellectual Property
Patents
We protect our technology and products
through patents and patent applications. In addition to the United States, we also applied for patents in other jurisdictions,
such as the European Patent Office, Canada and Japan, to the extent we deem appropriate. We have built a portfolio of patents
and applications covering our products, including their hardware design and methods of hemodiafiltration.
We believe that our patent strategy will
provide a competitive advantage in our target markets, but our patents may not be broad enough to cover our competitors’
products and may be subject to invalidation claims. Our U.S. patents for the “Method and Apparatus for Efficient Hemodiafiltration”
and for the “Dual-Stage Filtration Cartridge,” have claims that cover the OLpur MDHDF filter series and the method
of hemodiafiltration employed in the operation of the products. Technological developments in ESRD therapy could reduce the value
of our intellectual property. Any such reduction could be rapid and unanticipated. We have issued patents on our water filtration
products and applications in process to cover various applications in residential, commercial, and remote environments.
As of December 31, 2014, we have eighteen
issued U.S. patents, one issued Eurasian patent, seven Mexican patents, four South Korean patents, three Russian patents, six
Chinese patents, nine French patents, nine German patents, five Israeli patents, seven Italian patents, three Spanish patents,
nine United Kingdom patents, fourteen Japanese patents, three Hong Kong patents, nine Canadian patents, one Australian patent,
two patents in Brazil, one patent in Sweden and one patent in the Netherlands. Our issued U.S. patents expire between 2018 and
2027. In addition, we have three pending U.S. patent applications, four pending patent applications in Canada, five pending patent
applications in the European Patent Office, two pending patent applications in Brazil, one pending patent application in China,
four pending patent applications in Israel, two pending patent applications in India and one pending patent application in South
Korea. Our pending patent applications relate to a range of dialysis technologies, including cartridge configurations, cartridge
assembly, substitution fluid systems, and methods to enhance toxin removal.
Trademarks
As of December 31, 2014, we secured registrations
of the trademarks CENTRAPUR, H2H,OLpūr and the Arrows Logo in the European Union. Applications for these trademarks are pending
registration in the United States. We also have applications for registration of a number of other marks pending in the United
States Patent and Trademark Office.
Governmental Regulation
The research and development, manufacturing,
promotion, marketing and distribution of our ESRD therapy products in the United States, Europe and other regions of the world
are subject to regulation by numerous governmental authorities, including the FDA, the European Union and analogous agencies.
United States
The FDA regulates the manufacture and distribution
of medical devices in the United States pursuant to the FDC Act. All of our ESRD therapy products are regulated in the United
States as medical devices by the FDA under the FDC Act. Under the FDC Act, medical devices are classified in one of three classes,
namely Class I, II or III, on the basis of the controls deemed necessary by the FDA to reasonably ensure their safety and effectiveness.
| · | Class I devices
are medical devices for which general controls are deemed sufficient to ensure their
safety and effectiveness. General controls include provisions related to (1) labeling,
(2) producer registration, (3) defect notification, (4) records and reports and (5) quality
service requirements, or QSR. |
| · | Class II devices
are medical devices for which the general controls for the Class I devices are deemed
not sufficient to ensure their safety and effectiveness and require special controls
in addition to the general controls. Special controls include provisions related to (1)
performance and design standards, (2) post-market surveillance, (3) patient registries
and (4) the use of FDA guidelines. |
| · | Class III devices
are the most regulated medical devices and are generally limited to devices that support
or sustain human life or are of substantial importance in preventing impairment of human
health or present a potential, unreasonable risk of illness or injury. Pre-market approval
by the FDA is the required process of scientific review to ensure the safety and effectiveness
of Class III devices. |
Before a new medical device can be introduced
to the market, FDA clearance of a pre-market notification under Section 510(k) of the FDC Act or FDA clearance of a pre-market
approval, or PMA, application under Section 515 of the FDC Act must be obtained. A Section 510(k) clearance will be granted if
the submitted information establishes that the proposed device is “substantially equivalent” to a legally marketed
Class I or Class II medical device or to a Class III medical device for which the FDA has not called for pre-market approval under
Section 515. The Section 510(k) pre-market clearance process is generally faster and simpler than the Section 515 pre-market approval
process.
For any devices cleared through the Section
510(k) process, modifications or enhancements that could significantly affect the safety or effectiveness of the device or that
constitute a major change to the intended use of the device will require a new Section 510(k) pre-market notification submission.
Accordingly, if we do obtain Section 510(k) pre-market clearance for any of our ESRD therapy and DSU products, we will need to
submit another Section 510(k) pre-market notification if we significantly affect that product’s safety or effectiveness
through subsequent modifications or enhancements.
On July 1, 2009, we received FDA clearance
of the DSU to be used to filter biological contaminants from water and bicarbonate concentrate used in hemodialysis procedures.
On August 11, 2011, we filed a 510(k) application
with the FDA for clearance of our hemodiafiltration system for end-stage renal disease. On April 30, 2012, we announced that 510(k)
clearance was received from the FDA to market the OLpūr H2H Module and OLpūr MD 220 Hemodiafilter for use with a UF
controlled hemodialysis machine that provides ultrapure dialysate in accordance with current ANSI/AAMI/ISO standards, for the
treatment of patients with chronic renal failure in the United States.
On October 28, 2014, we announced that
we received 510(k) clearance from the FDA to market our DSU-H and SSU-H Ultrafilters as medical devices for use in the hospital
setting. The DSU-H and SSU-H Ultrafilters are intended to be used to filter EPA quality drinking water. The filters retain bacteria,
viruses and endotoxin. By providing ultrapure water for patient washing and drinking, the filters aid in infection control. The
filters also produce water that is suitable for wound cleansing, cleaning of equipment used in medical procedures and washing
of a surgeon’s hands. The filters are not intended to provide water that can be used as a substitute for USP sterile water.
The FDC Act requires that medical devices
be manufactured in accordance with the FDA’s current QSR regulations which require, among other things, that:
| · | the design and
manufacturing processes be regulated and controlled by the use of written procedures; |
| · | the ability to
produce medical devices which meet the manufacturer’s specifications be validated
by extensive and detailed testing of every aspect of the process; |
| · | any deficiencies
in the manufacturing process or in the products produced be investigated; |
| · | detailed records
be kept and a corrective and preventative action plan be in place; and |
| · | manufacturing
facilities be subject to FDA inspection on a periodic basis to monitor compliance with
QSR regulations. |
If violations of the applicable QSR regulations
are noted during FDA inspections of our manufacturing facilities or the manufacturing facilities of our contract manufacturers,
there may be a material adverse effect on our ability to produce and sell our products.
On May 28, 2015, we received a
warning letter from the FDA resulting from an October 2014 inspection of our facility in River Edge, New Jersey. The warning
letter alleges deficiencies relating to our compliance with the Quality System regulation and the Medical Device Reporting
regulation. We take the matters identified in the warning letter seriously and are in the process of evaluating the
corrective actions required to address the matters raised in the warning letter. We responded to the warning letter within 15
business days as requested by the FDA, and intend to work diligently and expeditiously to resolve the issues raised by the
FDA. The warning letter does not restrict the manufacture, production or shipment of any of our products, nor require the
withdrawal of any product from the marketplace. However, failure to promptly address the issues raised in the warning letter
to the FDA’s satisfaction or to comply with U.S. medical device regulatory requirements in general could result in
regulatory action being initiated by the FDA. These actions could include, among other things, delays in approval of any FDA
applications, product seizures, injunctions and civil monetary penalties. Any such actions could disrupt our ongoing business
and operations and potentially have a material adverse impact on our financial condition and operating results
In addition to the requirements described
above, the FDC Act requires that:
| · | all medical device
manufacturers and distributors register with the FDA annually and provide the FDA with
a list of those medical devices which they distribute commercially; |
| · | information be
provided to the FDA on death or serious injuries alleged to have been associated with
the use of the products, as well as product malfunctions that would likely cause or contribute
to death or serious injury if the malfunction were to recur; and |
| · | certain medical
devices not cleared with the FDA for marketing in the United States meet specific requirements
before they are exported. |
European Union
The European Union began to harmonize national
regulations comprehensively for the control of medical devices in member nations in 1993, when it adopted its Medical Devices
Directive 93/42/EEC. The European Union directive applies to both the manufacturer’s quality assurance system and the product’s
technical design and discusses the various ways to obtain approval of a device (dependent on device classification), how to properly
CE Mark a device and how to place a device on the market.
The regulatory approach necessary to demonstrate
to the European Union that the organization has the ability to provide medical devices and related services that consistently
meet customer requirements and regulatory requirements applicable to medical devices requires the certification of a full quality
management system by a notified body. Initially, we engaged TÜV Rheinland of North America, Inc., or TÜV Rheinland,
as the notified body to assist us in obtaining certification to the International Organization for Standardization, or ISO, 13485/2003
standard, which demonstrates the presence of a quality management system that can be used by an organization for design and development,
production, installation and servicing of medical devices and the design, development and provision of related services.
European Union requirements for products
are set forth in harmonized European Union standards and include conformity to safety requirements, physical and biological properties,
construction and environmental properties, and information supplied by the manufacturer. A company demonstrates conformity to
these requirements, with respect to a product, by pre-clinical tests, biocompatibility tests, qualification of products and packaging,
risk analysis and well-conducted clinical investigations approved by ethics committees.
Once a manufacturer’s full quality
management system is determined to be in compliance with ISO 13485/2003 and other statutory requirements, and the manufacturer’s
products conform to harmonized European standards, the notified body will recommend and document such conformity. The manufacturer
will receive a CE marking and ISO certifications, and then may place a CE mark on the relevant products. The CE mark, which stands
for Conformité Européenne, demonstrates compliance with the relevant European Union requirements. Products subject
to these provisions that do not bear the CE mark cannot be imported to, or sold or distributed within, the European Union.
In July 2003, we received a certification
from TÜV Rheinland that our quality management system conforms to the requirements of the European Community. At the same
time, TÜV Rheinland approved our use of the CE marking with respect to the design and production of high permeability hemodialyzer
products for ESRD therapy. In April 2010, we changed our notified body from TÜV Rheinland to BSI America, Inc. and expanded
our scope to include design and development and production of water filters.
Under the Bellco license agreement, as
discussed above, we granted Bellco a license to manufacture, market and sell the Products under its own name, label and CE mark
in the Territory. In addition, if requested by us, Bellco will be required to sell the Products to our distributors in the Territory.
Regulatory Authorities in Regions Outside of the United
States and the European Union
We also plan to sell our ESRD therapy products
in foreign markets outside the United States which are not part of the European Union. Requirements pertaining to medical devices
vary widely from country to country, ranging from no health regulations to detailed submissions such as those required by the
FDA. We believe the extent and complexity of regulations for medical devices such as those produced by us are increasing worldwide.
We anticipate that this trend will continue and that the cost and time required to obtain approval to market in any given country
will increase, with no assurance that such approval will be obtained. Our ability to export into other countries may require compliance
with ISO 13485, which is analogous to compliance with the FDA’s QSR requirements. In November 2007 and May 2011, the Therapeutic
Products Directorate of Health Canada, the Canadian health regulatory agency, approved our OLpūr MD220 Hemodiafilter and
our DSU, respectively, for marketing in Canada. Other than the CE marking and Canadian approval of our OLpūr MD220 Hemodiafilter
and DSU products, we have not obtained any regulatory approvals to sell any of our products and there is no assurance that any
such clearance or certification will be issued.
Reimbursement
In both domestic markets and markets outside
of the United States, sales of our ESRD therapy products will depend in part, on the availability of reimbursement from third-party
payers. In the United States, ESRD providers are reimbursed through Medicare, Medicaid and private insurers. In countries other
than the United States, ESRD providers are also reimbursed through governmental and private insurers. In countries other than
the United States, the pricing and profitability of our products generally will be subject to government controls. Despite the
continually expanding influence of the European Union, national healthcare systems in its member nations, including reimbursement
decision-making, are neither regulated nor integrated at the European Union level. Each country has its own system, often closely
protected by its corresponding national government.
Product Liability and Insurance
The production, marketing and sale of our
products have an inherent risk of liability in the event of product failure or claim of harm caused by product operation. We have
acquired product liability insurance for our products in the amount of $2 million. A successful claim in excess of our insurance
coverage could materially deplete our assets. Moreover, any claim against us could generate negative publicity, which could decrease
the demand for our products, our ability to generate revenues and our profitability.
Some of our existing and potential agreements
with manufacturers of our products and components of our products do or may require us (1) to obtain product liability insurance
or (2) to indemnify manufacturers against liabilities resulting from the sale of our products. If we are not able to maintain
adequate product liability insurance, we will be in breach of these agreements, which could materially adversely affect our ability
to produce our products. Even if we are able to obtain and maintain product liability insurance, if a successful claim in excess
of our insurance coverage is made, then we may have to indemnify some or all of our manufacturers for their losses, which could
materially deplete our assets.
Employees
As of December 31, 2014, we employed a
total of 8 employees, 7 of whom were full time and 1 who is employed on a part-time basis. We also have engaged 2 consultants
on an ongoing basis. Of the 10 total employees and consultants, 3 are employed in a sales/marketing/customer support capacity,
3 in general and administrative and 4 in research and development.
Properties
Our U.S. facilities are located at 41 Grand
Avenue, River Edge, New Jersey, 07661 and consist of approximately 4,688 square feet of space. The term of the rental agreement
is for one year commencing December 1, 2014 with a monthly cost of approximately $8,800. We use these facilities to house our
corporate headquarters and research facilities.
Our facilities in Europe are currently
located at A5 Clonlara Avenue, Baldonnell Business Park, Dublin, Ireland, and consist of approximately 500 square feet of space.
The lease agreement was entered into on July 1, 2010. The lease term is renewable for 6 month terms with a 2 month notice to discontinue,
on a rolling basis. Our monthly cost is 500 Euro (approximately $700).
We use these facilities to house our accounting,
operations and customer service departments.
We believe our current facilities will
be adequate to meet our needs. We do not own any real property for use in our operations or otherwise.
Legal Proceedings
There are no currently pending legal proceedings
and, as far as we are aware, no governmental authority is contemplating any proceeding to which we are a party or to which any
of our properties is subject.
Available Information
We make available free of charge on our
website (http://www.nephros.com) our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K,
and all amendments to those reports, as soon as reasonably practicable after such material is electronically filed with or furnished
to the SEC. We provide electronic or paper copies of filings free of charge upon request. The public may read and copy any materials
filed with the SEC at the SEC’s Public Reference Room at 100 F Street N.E. Washington, D.C. 20549. The public may obtain
information on the operation of the Public Reference Room by calling the SEC at 1800-SEC-0330. The SEC maintains an Internet site
that contains reports, proxy and information statements and other information regarding issuers that file with the SEC at http://www.sec.gov.
MANAGEMENT
Director Classes
Our Board of Directors is currently composed
of six directors. Our Board of Directors is divided into three classes. Each year, one class is elected to serve for three years.
The business address for each director for matters regarding our company is 41 Grand Avenue, River Edge, New Jersey 07661.
In connection with our September 2007 financing,
we entered into an investor rights agreement with the 2007 investors pursuant to which we agreed to take such corporate actions
as may be required, among other things, to entitle Lambda Investors (i) to nominate two individuals having reasonably appropriate
experience and background to our Board to serve as directors until their respective successor(s) are elected and qualified, (ii)
to nominate each successor to the Lambda Investors nominees, provided that any successor shall have reasonably appropriate experience
and background, and (iii) to direct the removal from the Board of any director nominated under the foregoing clauses (i) or (ii).
Under the investor rights agreement, we are required to convene meetings of the Board of Directors at least once every three months.
If we fail to do so, a Lambda Investors director will be empowered to convene such meeting.
Class I Director — Term Expiring
2015
| Name |
|
Age
(as of
5/31/15) |
|
Director
Since |
|
Business
Experience For Last Five Years |
| Arthur H. Amron |
|
58 |
|
2007 |
|
Mr. Amron has served as a director of our company since September 2007. Mr. Amron is a Partner
of Wexford Capital LP, an SEC-registered investment advisor and serves as its General Counsel. Mr. Amron also actively participates
in various private equity transactions, particularly in the bankruptcy and restructuring areas, and has served on the boards
and creditors’ committees of a number of public and private companies in which Wexford has held investments. Mr. Amron
has also served as a director of Rhino GP LLC, which is the general partner of Rhino Resource Partners LP, a publicly traded
master limited partnership (NYSE - RNO), since October 2010. From 1991 to 1994, Mr. Amron was an Associate at Schulte Roth
& Zabel LLP, specializing in corporate and bankruptcy law, and from 1984 to 1991, Mr. Amron was an Associate at Debevoise
& Plimpton LLP specializing in corporate litigation and bankruptcy law. Mr. Amron holds a J.D. from Harvard University,
a B.A. in Political Theory from Colgate University and is a member of the New York Bar. Among other experience, qualifications,
attributes and skills, Mr. Amron’s legal training and experience in the capital markets, as well as his experience serving
on boards of directors of other public companies, led to the conclusion of our Board that he should serve as a director of
our company in light of our business and structure. |
| |
|
|
|
|
|
|
| Name |
|
Age
(as of
5/31/15) |
|
Director
Since |
|
Business Experience For Last
Five Years |
| Matthew Rosenberg |
|
34 |
|
2014 |
|
Dr. Rosenberg has served as a director of our company since May 2014. Dr. Rosenberg is an
accomplished professional with extensive healthcare public policy experience. He is the Founder and President of Opake as
well as an active angel investor. Dr. Rosenberg was formerly at McKinsey & Company, a global management consulting
firm, where he focused on the Healthcare Systems and Services Practice. Dr. Rosenberg specializes in driving impact for payors
and providers through strategic, organizational and operational improvements, including managed care contracting, alternative
reimbursement designs, and clinical operations improvement. Dr. Rosenberg received his A.B. in Economics from Harvard University
and his M.D. from Yale University School of Medicine. Among other experience, qualifications, attributes and skills, Dr. Rosenberg’s
medical background and healthcare policy experience led to the conclusion of our Board that he should serve as a director
of our company in light of our business and structure. |
Class II Directors — Term Expiring
2016
| Name |
|
Age
(as of
5/31/15) |
|
Director
Since |
|
Business Experience
For Last Five Years |
| Paul A. Mieyal |
|
44 |
|
2007 |
|
Dr. Mieyal has served as a director of our company since September 2007 and served as our
Acting President, Acting Chief Executive Officer, Acting Chief Financial Officer and Acting Secretary from January 4, 2015
until April 15, 2015. Dr. Mieyal also previously served as our Acting Chief Executive Officer from April 6, 2010 until April
20, 2012.Dr. Mieyal has been a Vice President of Wexford Capital LP since October 2006. From January 2000 through September
2006, he was Vice President in charge of healthcare investments for Wechsler & Co., Inc., a private investment firm and
registered broker-dealer. Dr. Mieyal was a director of Nile Therapeutics, Inc., a publicly traded company, from September
2007 through November 2013. Dr. Mieyal received his Ph.D. in Pharmacology from New York Medical College, a B.A. in Chemistry
and Psychology from Case Western Reserve University, and is a Chartered Financial Analyst. Among other experience, qualifications,
attributes and skills, Dr. Mieyal’s pharmacology and chemistry education, his experience in investment banking in the
healthcare industry, as well as his experience serving on boards of directors of other public companies, led to the conclusion
of our Board that he should serve as a director of our company in light of our business and structure. |
| Name |
|
Age
(as of
5/31/15) |
|
Director
Since |
|
Business Experience
For Last Five Years |
| Malcolm Persen |
|
61 |
|
2015 |
|
Mr. Persen has served as a director of our Company since May 2015 and is currently the President
of Resolute Performance Contracting, a solar construction firm that he founded in 2011. Previously, from 2009 through 2011,
he was the Executive Vice President at Ironco Enterprises, a renewable energy contracting organization. From 2004 through
2008, Mr. Persen served as the Chief Financial Officer for Radyne Corporation, a NASDAQ-traded manufacturer and distributor
of satellite and telecommunications equipment. While at Radyne, he was part of the management team that tripled revenues and
sold the firm, resulting in a 100% return for shareholders. Earlier, Mr. Persen was employed as Group Financial Officer for
Avnet, Inc., a global distributor of electronic components and computer systems. Other experience included assignments with
consultancies Arthur D. Little and Mercer Management Consulting. In addition, Mr. Persen lectured in finance at the University
of Arizona from 2010 to 2013 and at Boston College from 1988 to 1999. Mr. Persen currently serves on the Board of Valutek,
a supplier of cleanroom supplies through direct and distribution channels. Mr. Persen holds a BA in Political Economics from
The Colorado College, and an MBA from The Amos Tuck School of Business at Dartmouth College. Among other experience, qualifications,
attributes and skills, Mr. Persen’s extensive financial background led to the conclusion of our Board that he should
serve as a director of our company in light of our business and structure. |
Class III Directors — Term Expiring
2017
| Name |
|
Age
(as of
5/31/15) |
|
Director
Since |
|
Business Experience
For Last Five Years |
| Daron Evans |
|
41 |
|
2013 |
|
Mr. Evans is currently our President, Chief Executive Officer and Acting Chief Financial
Officer. He previously served as the Chairman of our Board of Directors from January 4, 2015 through April 15, 2015. Mr. Evans
is a life sciences executive with over 20 years of financial leadership and operational experience. Mr. Evans is currently
Managing Director of PoC Capital, LLC, and a Director of Zumbro Discovery, an early stage company developing a novel therapy
for resistant hypertension. Mr. Evans was most recently Chief Financial Officer of Nile Therapeutics, Inc., from 2007 until
its merger with Capricor, Inc. in November 2013. From 2006 to 2007, he was Director of Business Assessment for Vistakon, a
division of Johnson & Johnson Corp. From 2004 to 2006, he was Associate Director of Portfolio Management & Business
Analytics at Scios, Inc. after its acquisition by Johnson & Johnson Corp. Mr. Evans was a co-founder of Applied Neuronal
Network Dynamics, Inc. and served as its President from 2002 to 2004. From 1995 to 2002, Mr. Evans served in various roles
at consulting firms Arthur D. Little and Booz Allen & Hamilton. Mr. Evans is the author of four U.S. patents. Mr. Evans
received his Bachelor of Science in Chemical Engineering from Rice University, his Master of Science in Biomedical Engineering
from a joint program at the University of Texas at Arlington and Southwestern Medical School and his MBA from the Fuqua School
of Business at Duke University. Among other experience, qualifications, attributes and skills, Mr. Evans’s extensive
operational and business development experience led to the conclusion of our Board that he should serve as a director of our
company in light of our business and structure. |
| Name |
|
Age
(as of
5/31/15) |
|
Director
Since |
|
Business Experience
For Last Five Years |
| Lawrence J. Centella |
|
74 |
|
2001 |
|
Mr. Centella has served as a director of our company since January 2001 and currently
serves as the Chairman of our Board of Directors. Mr. Centella serves as President of Renal Patient Services, LLC, a company
that owns and operates dialysis centers, and has served in such capacity since June 1998. From 1997 to 1998, Mr. Centella
served as Executive Vice President and Chief Operating Officer of Gambro Healthcare, Inc., an integrated dialysis company
that manufactured dialysis equipment, supplied dialysis equipment and operated dialysis clinics. From 1993 to 1997, Mr. Centella
served as President and Chief Executive Officer of Gambro Healthcare Patient Services, Inc. (formerly REN Corporation). Prior
to that, Mr. Centella served as President of COBE Renal Care, Inc., Gambro Hospal, Inc., LADA International, Inc. and Gambro,
Inc. Mr. Centella is also the founder of LADA International, Inc. Mr. Centella received a B.S. from DePaul University. Among
other experience, qualifications, attributes and skills, Mr. Centella’s extensive experience in managing companies engaged
in the business of dialysis centers and equipment, led to the conclusion of our Board that he should serve as a director of
our company in light of our business and structure. |
Director Independence
Our Board of Directors has determined that
all of the current directors are “independent” within the meaning of the Nasdaq independence standard, other than
Mr. Evans, who currently serves as the Company’s President, CEO and Acting CFO, and Mr. Mieyal, who served as the Company’s
Acting President, Acting Chief Executive Officer, Acting Chief Financial Officer and Acting Secretary from January 4, 2015 until
April 15, 2015.
Executive Officer
We currently have no executive officers
other than Daron Evans, who serves as our President, Chief Executive Officer and Acting Chief Financial Officer.
On January 4, 2015, John C. Houghton separated
from service with the Company as President, Chief Executive Officer and Acting Chief Financial Officer of the Company. Mr. Houghton
also resigned as a member of the Board effective January 4, 2015. From January 4, 2015 through April 15, 2015, Paul A. Mieyal,
a member of the Board of Directors, served as the Acting President, Chief Executive Officer and Chief Financial Officer.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange
Act requires our officers and directors, and persons who own more than 10% of a registered class of our equity securities, to
file reports of ownership on Form 3 and changes in ownership on Form 4 or Form 5 with the SEC. Officers, directors and 10% stockholders
are also required by SEC rules to furnish us with copies of all such forms that they file. Based solely on a review of the copies
of such forms received by us, or written representations from reporting persons, we believe that during fiscal year 2014, all
of our officers, directors and 10% stockholders complied with applicable Section 16(a) filing requirements except as follows:
(i) each of Messrs. Amron, Mieyal, and Centella did not timely file one Form 4 reporting a grant of stock options and restricted
stock by the Board and (ii) Mr. Evans did not timely file one Form 4 related to shares issued to Mr. Evans upon exercise of nontransferable
subscription rights in the March 2014 rights offering.
Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
There have been no disagreements with our
accountants during 2014 or 2013 reportable pursuant to this requirement.
EXECUTIVE COMPENSATION
The following table sets forth all compensation
earned in the fiscal years ended December 31, 2014 and 2013 by our Named Executive Officers.
Summary Compensation Table
Name and Principal
Position | |
Year | |
Salary
($) | | |
Bonus
($)(1) | | |
Stock
Awards
($)(2) | | |
Option
Awards
($)(2) | | |
All Other
Compensation
($)(3) | | |
Total | |
| John C. Houghton(4) | |
2014 | |
$ | 350,000 | | |
| - | | |
| - | | |
$ | 10,500 | | |
$ | 37,784 | | |
$ | 398,284 | |
| President, Chief Executive Officer and Acting Chief Financial Officer | |
2013 | |
$ | 350,000 | | |
| - | | |
$ | 47,040 | | |
$ | 23,625 | | |
$ | 31,652 | | |
$ | 452,317 | |
| (1) | The amounts in this column reflect decisions approved by our Compensation
Committee and are based on an analysis of the executive’s contribution to our company
during fiscal years 2014 and 2013. |
| (2) | The amount reported is the aggregate grant date fair value of the
options granted, computed in accordance with FASB ASC Topic 718. The assumptions used
in determining the grant date fair values of the option awards are set forth in Note
2 of the consolidated financial statements set forth elsewhere in this Annual Report. |
| (3) | See table below for details on “All Other Compensation.” |
| (4) | Mr. Houghton was appointed President and Chief Executive Officer
effective April 20, 2012. On August 9, 2013, the Board of Directors of the Company appointed
Mr. Houghton to also serve as the Company’s Acting Chief Financial Officer and
Principal Financial and Accounting Officer. Mr. Houghton separated from service with
the Company effective January 4, 2015. |
All Other Compensation
| Name | |
Year | |
Matching
401K Plan
Contribution | | |
Health
Insurance
Paid by
Company | | |
Life
Insurance
Paid by the
Company | | |
Total Other
Compensation | |
| John C. Houghton | |
2014 | |
$ | 14,000 | | |
$ | 20,520 | | |
$ | 3,264 | | |
$ | 37,784 | |
| | |
2013 | |
$ | 14,000 | | |
$ | 15,732 | | |
$ | 1,920 | | |
$ | 31,652 | |
Option and Restricted Stock Holdings
and Fiscal Year-End Option and Restricted Stock Values
The following table shows information concerning
unexercised options and unvested restricted stock awards outstanding as of December 31, 2014 for our named executive officers.
Outstanding Equity Awards at Fiscal
Year-End 2014
| | |
| |
Option Awards(2) |
| Name | |
Grant Date(1) | |
Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable(2) | | |
Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable(2) | | |
Option
Exercise
Price ($) | | |
Option
Expiration
Date(3) |
| John C. Houghton | |
April 20, 2012 | |
| 464,063 | | |
| 210,938 | | |
$ | 0.95 | | |
4/20/22 |
| John C. Houghton | |
July 3, 2012 | |
| 227,941 | | |
| 331,550 | | |
$ | 1.89 | | |
7/3/22 |
| John C. Houghton | |
May 23, 2013 | |
| 9,375 | | |
| 28,125 | | |
$ | 0.71 | | |
5/23/23 |
| John C. Houghton | |
February 5, 2014 | |
| - | | |
| 35,000 | | |
$ | 0.71 | | |
5/23/23 |
| (1) | For better understanding
of this table, we have included an additional column showing the grant date of stock
options. |
| (2) | As of December 31,
2014, stock options became exercisable in accordance with the vesting schedule below: |
| Grantee |
|
Grant Date |
|
Vesting |
| John C. Houghton |
|
April 20, 2012 |
|
14,063 vest monthly until March 20, 2016 |
| John C. Houghton |
|
July 3, 2012 |
|
6,907 vest monthly until March 20, 2016 |
| John C. Houghton |
|
May 23, 2013 |
|
9,375 vest annually until May 23, 2017 |
| John C. Houghton |
|
February 5, 2014 |
|
8,750 vest annually until February 5, 2018 |
Effective January 4, 2015, in connection with the separation
from service of John C. Houghton from all of his positions with the Company, all unvested options were forfeited. The total unvested
and forfeited options equaled 605,613.
| (3) | Effective January 4, 2015, in connection with the separation from
service of John C. Houghton from all of his positions with the Company, the expiration
date for all options was accelerated to April 4, 2015. |
Advisory Vote on Executive Compensation
Our Board of Directors recognizes the fundamental
interest our stockholders have in the compensation of our executive officers. At the Company’s 2014 Annual Meeting, our
stockholders approved with approximately 98% of the votes cast, on an advisory basis, in favor of the compensation of the Company’s
named executive officers as disclosed in the compensation tables and related narrative disclosure in the proxy statement for the
2014 Annual Meeting. Based on the results of such advisory vote and our review of our compensation policies and decisions, we
believe that our existing compensation policies and decisions are consistent with our compensation philosophy and objectives disclosed
in the compensation tables and related narrative disclosure and adequately align the interests of our named executive officers
with the long term goals of the Company. In addition, based on a separate advisory vote of our stockholders at the Company’s
2014 Annual Meeting relating to the frequency of the advisory vote on the compensation of the Company’s NEOs, the Company’s
stockholders indicated their approval of the Board’s recommendation to hold a non-binding advisory vote on the Company’s
executive compensation once every two years.
Employment and Change in Control Agreements
We have used employment agreements as a
means to attract and retain executive officers. These are more fully discussed below. We believe that these agreements provide
our executive officers with the assurance that their employment is a long-term arrangement and provide us with the assurance that
the officers’ services will be available to us for the foreseeable future.
Agreement with Mr. Daron Evans
The terms of Mr. Evans’ employment
with the Company are set forth in an Employment Agreement dated as of April 15, 2015, or the Evans Employment Agreement. The Evans
Employment Agreement provides for a four-year term expiring on April 14, 2019, unless sooner terminated by either party. Pursuant
to the Evans Employment Agreement, Mr. Evans will receive an initial annualized base salary of $240,000 and will be eligible to
receive an annual performance bonus of up to 30% of his annualized base salary. At such time that the Company’s common stock
is approved for listing on the NASDAQ Stock Market, New York Stock Exchange or such other national securities exchange approved
by the Board and begins trading on such exchange, the Board may review and adjust Executive’s base salary to a market competitive
level. In addition, Mr. Evans was granted a 10-year stock option to purchase an aggregate of 2,184,193 shares of the Company’s
common stock pursuant to the Company’s 2015 Equity Incentive Plan. The option is exercisable at a price of $0.60 per share,
which represents the closing sale price of the Company’s common stock on the Effective Date. Mr. Evans right to purchase
the shares vests, subject to his continued employment, as follows:
| · | 35% of the shares
subject to the option vest in 16 equal quarterly installments over 4 years, commencing
June 30, 2015; |
| · | 15% of the shares
subject to the option will vest upon approval of listing of the Company’s common
stock on the NASDAQ Stock Market, New York Stock Exchange or such other national securities
exchange approved by the Board; |
| · | 10% of the shares
subject to the option will vest, if ever, on the February 1st following the Company’s
first completed fiscal year in which annual revenue exceeds $3,000,000; |
| · | 20% of the shares
subject to the option will vest, if ever, on the February 1st following the Company’s
first completed fiscal year in which annual revenue exceeds $6,000,000; and |
| · | 20% of the shares
subject to the option will vest, if ever, on the February 1st following the Company’s
first completed fiscal year in which annual revenue exceeds $10,000,000. |
The Evans Employment Agreement provides
that if the Company terminates Mr. Evans without “Cause,” or if he resigns for “Good Reason” (each as
defined in the Evans Employment Agreement), then he shall be entitled to: (i) continuation of his base salary for a period of
three months if such termination occurs prior to the first anniversary of April 15, 2015, or if such termination occurs following
the first anniversary of April 15, 2015, continuation of his base salary for a period of six months (or the expiration of the
term of the Evans Employment Agreement, if sooner).
Agreement with Mr. John C. Houghton
Mr. Houghton’s employment with the
Company ended January 4, 2015. In connection with his separation from employment with the Company, Mr. Houghton entered into a
Separation Agreement and General Release. Pursuant to this agreement, Mr. Houghton is entitled to six months severance (equal
to six months of his then-current base salary, or a total of $175,000 and is permitted to exercise his vested unexpired stock
options for ninety days following January 4, 2015. During the severance term, Mr. Houghton will be subject to customary non-competition,
non-solicitation and confidentiality restrictions.
On April 20, 2012, we entered into an Employment
Agreement, or the Houghton Employment Agreement, effective as of April 20, 2012, with Mr. Houghton. The Houghton Employment Agreement
had a term of four years, ending on April 20, 2016. The Employment Agreement provided that Mr. Houghton’s annual base salary
would be $350,000. Mr. Houghton was eligible to receive a target discretionary bonus of 30% of annual base salary, as determined
by us. The targets with respect to the bonus for the year ending December 31, 2012 were mutually agreed upon between Mr. Houghton
and the Compensation Committee of the Board within 60 days following April 20, 2012 and such bonus was appropriately prorated
for such annual period. The targets for each subsequent annual period were to be mutually agreed upon at the beginning of each
calendar year between Mr. Houghton and the Compensation Committee.
Upon execution of the Houghton Employment
Agreement, we granted Mr. Houghton options to purchase 675,000 shares of our common stock pursuant to our 2004 Stock Incentive
Plan. In addition, we were required to grant Mr. Houghton options to purchase an additional 331,550 shares of our common stock.
The Employment Agreement further provided that, subject to Mr. Houghton meeting and maintaining the director eligibility requirements
of the Board, Mr. Houghton would be nominated for election as a director at each stockholders meeting during his employment at
which his term as a director would otherwise expire.
The Houghton Employment Agreement provides
that upon the occurrence of a change in control (as defined in the Houghton Employment Agreement), all of Mr. Houghton’s
unvested stock options would vest and become exercisable immediately and, unless all such options were cashed-out in the change
in control transaction, would remain exercisable for a period of not less than 360 days (or the expiration of the stock option
term, if sooner), regardless of whether Mr. Houghton’s employment was terminated in connection with such change in control
transaction.
In the event that Mr. Houghton’s
employment was terminated by us for “cause” (as defined in the Houghton Employment Agreement), then we would pay the
earned but unpaid base salary for services rendered through the date of termination and any and all unvested stock options would
automatically be cancelled and forfeited by Mr. Houghton as of the date of termination.
In the event that Mr. Houghton’s
employment was terminated by reason of Mr. Houghton’s death, or by reason of Mr. Houghton’s resignation or retirement
(as to which at least two weeks notice is required), then we would pay to Mr. Houghton only the earned but unpaid base salary
for services rendered through the date of termination. Any and all unvested stock options will automatically be cancelled and
forfeited as of the date of Mr. Houghton’s death, resignation or retirement.
If, as a result of Mr. Houghton’s
incapacity due to physical or mental illness, we determined that Mr. Houghton had failed to perform his duties on a full time
basis for either ninety (90) days within any three hundred sixty-five (365) day period or sixty (60) consecutive days, we could
terminate his employment hereunder for “disability”. In that event, we would pay the earned but unpaid base salary
for services rendered through such date of termination. Any and all unvested stock options would be cancelled as of the date of
termination. During any period that Mr. Houghton failed to perform his duties as a result of incapacity due to physical or mental
illness, he would continue to receive compensation and benefits provided by the Employment Agreement until his employment was
terminated; provided, however, that the amount of compensation and benefits received during such period would be reduced by the
aggregate amounts, if any, payable under our disability benefit plans and programs or under the Social Security disability insurance
program. Additionally, the vesting of stock options would be tolled during such period and in the event of a termination of the
Employment Agreement as a result of disability, any and all unvested stock options would automatically be cancelled and forfeited
as of the date of termination.
In the event that Mr. Houghton’s
employment was terminated by us prior to the expiration of the term of the Employment Agreement for any reason other than as described
above or by Mr. Houghton for “good reason” (as defined in the Employment Agreement) any and all unvested stock options
would automatically be cancelled and forfeited by Mr. Houghton as of the date of such termination (except as provided in a change
in control), vested stock options would remain exercisable for ninety (90) days after the date of such termination or the expiration
of the stock option term, if sooner (except as otherwise provided in the event of a change in control), and we would pay to Mr.
Houghton any earned but unpaid base salary for services rendered through the date of termination and continuing payments of severance
pay (less applicable withholding taxes) at a rate equal to his base salary rate, as then in effect, for a period equal to three
(3) months (or, when Mr. Houghton has been employed for at least one (1) year, a period equal to six (6) months), to be paid periodically
in accordance with our normal payroll policies; provided that if Mr. Houghton continued to be employed in any capacity by a successor
entity following a change in control, the severance pay that would otherwise be payable would be reduced by the amount of base
compensation and guaranteed bonus (if any) Mr. Houghton received in such capacity during or attributable to the severance term.
Payment of any severance benefits would be subject to the execution by Mr. Houghton of a general release and an agreement to continue
to be bound by certain provisions of the Employment Agreement relating to, among others, non-competition, non-solicitation and
confidentiality.
Mr. Houghton was also subject to non-competition,
non-solicitation and confidentiality covenants during the term of his employment.
2004 Stock Incentive Plan
The 2004 Stock Incentive Plan provides
that if there is a change in control, unless the agreement granting an award provides otherwise, all awards under the 2004 Stock
Incentive Plan will become vested and exercisable as of the effective date of the change in control. As defined in the 2004 Plan,
a change in control means the occurrence of any of the following events: (i) any “person,” including a “group,”
as such terms are defined in sections 13(d) and 14(d) of the Exchange Act and the rules promulgated thereunder, becomes the beneficial
owner, directly or indirectly, whether by purchase or acquisition or agreement to act in concert or otherwise, of more than 50%
of the outstanding shares of our common stock; (ii) our complete liquidation; (iii) the sale of all or substantially all of our
assets; or (iv) a majority of the members of our Board of Directors are elected to the Board without having previously been nominated
and approved by a majority of the members of the Board incumbent on the day immediately preceding such election.
401(k) Plan
We have established a 401(k) deferred contribution
retirement plan, which covers all employees. This 401(k) plan provides for voluntary employee contributions of up to 15% of annual
earnings, as defined. As of January 1, 2004, we began matching 100% of the first 3% and 50% of the next 2% of employee earnings
to the 401(k) Plan. We contributed and expensed $43,000 and $46,000 in 2014 and 2013, respectively.
Director Compensation
For fiscal year 2014, our directors received
a $20,000 annual retainer, $1,500 per meeting for each quarterly Board meeting attended and reimbursement for expenses incurred
in connection with serving on our Board of Directors. The Chairman of the Board received an annual retainer of $30,000 and $1,800
per meeting for each quarterly Board meeting attended. The chairperson of our Audit Committee was paid a $10,000 annual retainer
and $1,000 per meeting for meetings of the Audit Committee, with a maximum of eight meetings per year.
We grant each non-employee director who
first joins our Board, immediately upon such director joining our Board, the number of options equal to the product of 0.0011
multiplied by the total number of outstanding shares of our common stock on a fully-diluted basis. The exercise price per share
will be equal to the fair market value price per share of our common stock on the date of grant. We will also grant annually to
each non-employee director the number of options equal to the product of 0.0006 multiplied by the total number of outstanding
shares of common stock of the company on a fully-diluted basis. The exercise price per share will be equal to the fair market
value price per share of our common stock on the date of grant. These non-employee director options vest in three equal installments
on each of the date of grant and the first and second anniversaries thereof.
Our executive officers
do not receive additional compensation for service as directors if any of them so serve.
The following table shows the compensation
earned by each of our non-employee directors for the year ended December 31, 2014. Mr. Persen was not a director during fiscal
year 2014 and is not included in the table below.
Non-Employee Director Compensation in
Fiscal Year 2014
| Name | |
Fees Earned or
Paid
in Cash | | |
Restricted
Stock
Awards(1) | | |
Option
Awards(2) | | |
Total | |
| Arthur H. Amron(8) | |
$ | -0- | | |
$ | 21,840 | | |
$ | 10,905 | (3) | |
$ | 32,745 | |
| Paul A. Mieyal(8) | |
$ | -0- | | |
$ | 21,840 | | |
$ | 10,905 | (4) | |
$ | 32,745 | |
| Lawrence J. Centella | |
$ | -0- | | |
$ | 21,840 | | |
$ | 10,905 | 5) | |
$ | 32,745 | |
| Daron Evans | |
$ | -0- | | |
$ | 37,147 | | |
$ | 30,898 | (6) | |
$ | 68,045 | |
| Matthew Rosenberg | |
$ | -0- | | |
$ | 10,920 | | |
$ | 34,151 | (7) | |
$ | 45,071 | |
| (1) | Director fees owed as of September 30, 2014 were paid in restricted
stock awards in lieu of a cash payment. |
| (2) | The amount reported is the aggregate grant date fair value of the
options granted, computed in accordance with FASB ASC Topic 718. The assumptions used
in determining the grant date fair values of these awards are set forth in Note 2 of
the consolidated financial statements set forth elsewhere in this Annual Report. |
| (3) | Options granted for services rendered by Mr. Amron totaled 80,348
options at December 31, 2014. |
| (4) | Options granted for services rendered by Dr. Mieyal totaled 80,348
options at December 31, 2014. |
| (5) | Options granted for services rendered by Mr. Centella totaled 109,098
options at December 31, 2014. |
| (6) | Options granted for services rendered by Mr. Evans totaled 75,361
options at December 31, 2014. |
| (7) | Options granted for services rendered by Mr. Rosenberg totaled
48,864 options at December 31, 2014. |
| (8) | At the request of Messrs. Amron and Mieyal, their respective options
and director fees were directed to Wexford Capital LP. |
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On February 4, 2013, the Company issued
a senior secured note to Lambda Investors LLC in the principal amount of $1.3 million. The note bore interest at the rate of 12%
per annum and was scheduled to mature on August 4, 2013, at which time all principal and accrued interest was due. However, the
Company paid amounts due under the note, including all accrued interest thereon of $46,800, on May 22, 2013 with the cash proceeds
from the May 2013 rights offering. In connection with the note, the Company paid Lambda Investors an 8%, or $104,000, sourcing/transaction
fee. In addition, the Company paid Lambda Investors’ legal fees and other expenses incurred in connection with the note
in the amount of $50,000 as well as Lambda Investors’ legal fees and other expenses incurred in connection with the May
2013 rights offering in the amount of $50,000. Those payments totaling $204,000 are reflected as amortization of debt discount.
On November 12, 2013, the Company issued
a senior secured note to Lambda Investors LLC in the principal amount of $1.5 million. The note bore interest at the rate of 12%
per annum and was scheduled to mature on May 12, 2014, at which time all principal and accrued interest was due. However, the
Company paid amounts due under the note, including all accrued interest thereon of $61,000, on March 18, 2014 with the cash proceeds
from the March 2014 rights offering. In connection with the note, the Company paid Lambda Investors an 8%, or $120,000, sourcing/transaction
fee. In addition, the Company paid Lambda Investors’ legal fees and other expenses incurred in connection with the note
in the amount of $75,000. Those payments totaling $195,000 were made on November 12, 2013 and are reflected as a debt discount
which is being amortized over the term of the senior secured note. Approximately $142,000 and $53,000, respectively, are included
in interest expense on the consolidated statements of operations and comprehensive loss for the years ended December 31, 2014
and 2013.
On August 29, 2014, the Company issued
a senior secured note to Lambda, in the principal amount of $1.75 million. The note bore interest at the rate of 12% per annum
and was scheduled to mature on February 28, 2015, at which time all principal and accrued interest was due. However, the Company
paid all amounts due under the note on December 18, 2014 with the cash proceeds from the rights offering that closed in December
2014. In connection with the note, the Company incurred an 8%, or $140,000, sourcing/transaction fee with Lambda. In addition,
the Company incurred additional legal fees and other expenses in connection with the note in the amount of $38,000 with Lambda.
Those payments totaling $178,000 were initially reflected as a debt discount and amortized over the term of the note. For the
year ended December 31, 2014, $178,000 is included in interest expense on the consolidated statements of operations and comprehensive
loss.
As of May 31, 2015, Lambda Investors is
our largest stockholder and beneficially owns approximately 48% of our outstanding common stock and, on a fully-diluted basis,
owns approximately 56% of our outstanding common stock. The warrants held by Lambda Investors have an exercise price of $0.30
or $0.40 per share and certain warrants have full ratchet anti-dilution protection. In connection with the August 2014 senior
note, we agreed to extend the expiration date of the existing warrants held by Lambda Investors to March 21, 2019.
In connection with the February 2013 loan,
the November 2013 loan and the August 2014 loan from Lambda Investors, we entered into registration rights agreements with Lambda
Investors pursuant to which we will file a registration statement on Form S-1 covering the resale by Lambda Investors of the common
stock underlying shares sold to Lambda Investors. Under these registration rights agreements, we will pay all of the expenses,
including reasonable legal fees, of Lambda Investors in connection with such registration statement and resale of shares by Lambda
Investors under such registration statement, which may be in an underwritten public offering. We will be obligated to use our
reasonable best efforts to keep such registration statement continuously effective until such time as all the securities registered
on such registration statement have been sold or are eligible for sale without restriction under the applicable securities laws.
The shares beneficially owned by Lambda
Investors may be deemed beneficially owned by Wexford Capital LP, which is the managing member of Lambda Investors. Arthur H.
Amron, a director of Nephros, is a partner and general counsel of Wexford Capital. Paul A. Mieyal, a director of Nephros and the
former Acting President, Acting Chief Executive Officer and Acting Chief Financial Officer until April 15, 2015, is a vice president
of Wexford Capital. During 2014 and 2013, at the request of Messrs. Amron and Mieyal, fees and options in the aggregate amount
of approximately $65,490 and $45,752, respectively, earned in respect of services they rendered to the company were directed to
Wexford Capital LP.
In connection with the 2015 Private Placement,
Matthew Rosenberg and Janet Persen, the spouse of Malcolm Persen, purchased shares of common stock and warrants from us for an
aggregate purchase price of $134,000 and $20,877, respectively. These purchase prices are the equivalent of 200,000 shares and
warrants to purchase 100,000 shares for Mr. Rosenberg and 31,160 shares and warrants to purchase 15,580 shares for Ms. Persen.
Additionally, the following immediate family members, or entities controlled by immediate family members, of Mr. Rosenberg purchased
shares of common stock and warrants from us in the 2015 Private Placement: Best Six, LLC purchased 149,254 shares and warrants
to purchase 74,627 shares for an aggregate purchase price of $100,000; Franklin Associates, LLC purchased 74,630 shares and warrants
to purchase 37,315 shares for an aggregate purchase price of $50,002; Fredric R. Rosenberg purchased 220,000 shares and warrants
to purchase 110,000 shares for an aggregate purchase price of $147,400; and Seligman Rosenberg purchased 74,626 shares and warrants
to purchase 37,313 shares for an aggregate purchase price of $50,000. The exercise price for the warrants is $0.85 per share and
the warrants are exercisable for five-years from the date of issuance.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
Securities Authorized for Issuance
under Equity Compensation Plans
The following table provides information
as of December 31, 2014 about compensation plans under which shares of our common stock may be issued to employees, consultants
or members of our Board of Directors upon exercise of options or warrants. Our equity compensation plans as of December 31, 2014
consisted of our Amended and Restated Nephros 2000 Equity Incentive Plan and our Nephros, Inc. 2004 Stock Incentive Plan (the
“Prior Plans”). All of our employees and directors were eligible to participate in the Prior Plans. The Prior Plans
are both expired and no further equity is granted under the Prior Plans. Our Prior Plans were approved by our stockholders.
On March 26, 2015, our Board approved the
2015 Equity Incentive Plan (the “2015 Plan”). The 2015 Plan is not reflected in the table below.
| Plan Category | |
(a)
Number of securities to be
issued upon exercise of
outstanding options,
warrants
and rights | | |
(b)
Weighted-average
exercise
price of outstanding
options, warrants and
rights | | |
(c)
Number of securities remaining
available
for issuance under equity
compensation
plans (excluding securities reflected
in
column (a)) | |
| Equity compensation plans approved by our stockholders | |
| 2,140,684 | | |
$ | 0.91 | | |
| 2,054,799 | |
| Equity compensation plans not approved by
our stockholders(1) | |
| 331,550 | | |
$ | 1.69 | | |
| - | |
| Total | |
| 2,472,184 | | |
| | | |
| 2,054,799 | |
| (1) | On July 3, 2012, the Company granted Mr. Houghton an option to
purchase 331,550 shares of common stock of the company, under a Non-qualified Stock Option
Agreement, dated July 3, 2012, between Mr. Houghton and the Company, in connection with
his appointment as the President and Chief Executive Officer. The terms of this Non-qualified
Stock Option Agreement are substantially similar to the terms of the 2004 Stock Incentive
Plan. The options granted to Mr. Houghton pursuant to this agreement vest in equal monthly
installments over four years commencing on April 20, 2012, the date Mr. Houghton was
appointed; provided that Mr. Houghton remains employed by the company at such time. In
connection with the separation from service of John C. Houghton from all of his positions
with the Company, all unvested options were forfeited on January 4, 2015. |
Security Ownership of Certain Beneficial
Owners
The following table sets forth the beneficial ownership of
our common stock as of May 31, 2015, by (i) each person known to us to own beneficially more than five percent (5%) of our common
stock, based on such persons’ or entities’ filings with the SEC as of that date; (ii) each director and named executive
officer; and (iii) all directors and executive officers as a group:
| Name and Address of
Beneficial Owner |
|
Amount
and Nature of Beneficial
Ownership |
|
|
Percentage of Class
(1) |
|
| Lambda Investors LLC(2) |
|
|
29,990,870 |
|
|
|
64.1 |
% |
| Arthur H. Amron(3) |
|
|
145,373 |
|
|
|
* |
|
| Lawrence J. Centella(4) |
|
|
221,564 |
|
|
|
* |
|
| John C. Houghton(5) |
|
|
74,139 |
|
|
|
* |
|
| Daron Evans(6) |
|
|
172,104 |
|
|
|
* |
|
| Paul A. Mieyal(7) |
|
|
145,373 |
|
|
|
* |
|
| Matthew Rosenberg(8) |
|
|
922,271 |
|
|
|
2.8 |
% |
| Malcolm Persen(9) |
|
|
65,734 |
|
|
|
* |
|
| All executive officers and directors as a group(3) – (8) |
|
|
1,672,419 |
|
|
|
5.1 |
% |
| * | Represents less than
1% of the outstanding shares of our common stock. |
| (1) | Applicable percentage ownership is based on 32,227,939 shares of
common stock outstanding as of May 31, 2015, together with applicable options and warrants
for each stockholder. Beneficial ownership is determined in accordance with the rules
of the SEC, based on factors including voting and investment power with respect to shares.
Common stock subject to options and warrants exercisable on or within 60 days after May
31, 2015 are deemed outstanding for the purpose of computing the percentage ownership
of the person holding those options or warrants, but not for computing the percentage
ownership of any other person. |
| (2) | Based in part on information provided in a Form 4 filed on December
22, 2014. The shares beneficially owned by Lambda Investors may be deemed beneficially
owned by Wexford Capital LP, which is the managing member of Lambda Investors, Wexford
GP LLC, which is the General Partner of Wexford Capital LP, by Charles E. Davidson in
his capacity as Chairman and managing member of Wexford Capital LP and by Joseph M. Jacobs
in his capacity as President and managing member of Wexford Capital LP. The address of
each of Lambda Investors LLC, Wexford Capital LP, Mr. Davidson and Mr. Jacobs is c/o
Wexford Capital LP, 411 West Putnam Avenue, Greenwich, CT 06830. Each of Wexford Capital
LP, Wexford GP LLC, Mr. Davidson and Mr. Jacobs disclaims beneficial ownership of the
shares of Common Stock owned by Lambda Investors except, in the case of Mr. Davidson
and Mr. Jacobs, to the extent of their respective interests in each member of Lambda
Investors. Includes 11,742,100 shares issuable upon exercise of warrants held by Lambda
Investors having an exercise price of $0.30 per share and 2,782,576 shares issuable upon
exercise of warrants held by Lambda Investors having an exercise price of $0.40 per share.
Lambda Investors is controlled by Wexford Capital LP. Arthur H. Amron, one of our directors,
is a Partner and General Counsel of Wexford Capital LP. Paul A. Mieyal, one of our directors
and former Acting President, Acting Chief Executive Officer, and Acting Chief Financial
Officer until April 15, 2015, is a Vice President of Wexford Capital LP. |
| (3) | Mr. Amron’s address is c/o Wexford Capital LP, 411 West Putnam
Avenue, Greenwich, CT 06830. The shares identified as being beneficially owned by Mr.
Amron consist of: (i) 73,891 shares of restricted stock granted under the 2004 Stock
Incentive Plan; and (ii) 71,482 shares issuable upon exercise of options granted under
the 2004 Stock Incentive Plan. Does not include 8,866 shares issuable upon the exercise
of options which have been granted under our Stock Incentive Plans but will not vest
within 60 days of May 31, 2015. |
| (4) | Mr. Centella’s address is the company address: 41 Grand Avenue,
River Edge, New Jersey 07661. The shares identified as being beneficially owned by Mr.
Centella consist of: (i) 47,441 shares of common stock; (ii) 73,891 shares of restricted
stock granted under the 2004 Stock Incentive Plan; and (iii) 100,232 shares issuable
upon exercise of options granted under the 2004 Stock Incentive Plan. Does not include
8,866 shares issuable upon the exercise of options which have been granted under our
Stock Incentive Plans but will not vest within 60 days of May 31, 2015. |
| (5) | Mr. Houghton’s address is the company address: 41 Grand Avenue,
River Edge, New Jersey 07661. The shares identified as being beneficially owned by Mr.
Houghton consist of: (i) 66,254 shares of restricted stock granted under the 2004 Stock
Incentive Plan; and (i) 7,885 shares purchased in a rights offering in December 2014.
|
| (6) | Mr. Evans’ address is the company address: 41 Grand Avenue,
River Edge, New Jersey 07661. The shares identified as being beneficially owned by Mr.
Evans consist of: (i) 74,084 shares of common stock; and (ii) 98,020 shares issuable
upon exercise of options granted under the 2004 Stock Incentive Plan. Does not include
2,161,534 shares issuable upon the exercise of options which have been granted under
our Stock Incentive Plans but will not vest within 60 days of May 31, 2015. |
| (7) | Dr. Mieyal’s address is c/o Wexford Capital LP, 411 West
Putnam Avenue, Greenwich, CT 06830. The shares identified as being beneficially owned
by Dr. Mieyal consist of: (i) 73,891 shares of restricted stock granted under the 2004
Stock Incentive Plan; and (ii) 71,482 shares issuable upon exercise of options granted
under the 2004 Stock Incentive Plan. Does not include 8,866 shares issuable upon the
exercise of options which have been granted under our Stock Incentive Plans but will
not vest within 60 days of May 31, 2015. |
| (8) | Mr. Rosenberg’s
address is the company address: 41 Grand Avenue, River Edge, New Jersey 07661. The shares
identified as being beneficially owned by Mr. Rosenberg consist of: (i) 776,997 shares
of common stock; (ii) 12,698 shares of restricted stock granted under the 2004 Stock
Incentive Plan; (iii) 32,576 shares issuable upon exercise of options granted under the
2004 Stock Incentive Plan; and (iv) 100,000 shares issuable upon the exercise of warrants
having an exercise price of $0.85 per share. Does not include 16,288 shares issuable
upon the exercise of options which have been granted under our Stock Incentive Plans
but will not vest within 60 days of May 31, 2015. |
| (9) | Mr. Persen’s
address is the company address: 41 Grand Avenue, River Edge, New Jersey 07661. The shares
identified as being beneficially owned by Mr. Person consist of: 31,160 shares of common
stock held by Mr. Persen’s spouse; 18,993 shares of common stock issuance upon
exercise of options granted under the 2015 Equity Incentive Plan; and (iii) 15,580 shares
of common stock issuable upon the exercise of warrants having an exercise price of $0.85
per share. Does not include 37,988 shares issuable upon the exercise of options which
have been granted under our Stock Incentive Plans but will not vest within 60 days of
May 31, 2015. |
DESCRIPTION
OF CAPITAL STOCK
This prospectus relates to the shares
of our common stock issued to the investors in the 2015 Private Placement and to the shares of our common stock issuable upon
the exercise of the 2015 Warrants. For a further description of the 2015 Warrants, see “Description of 2015 Private Placement
– The 2015 Warrants.”
Our authorized capital stock consists of
90,000,000 shares of common stock, par value $0.001 per share, and 5,000,000 shares of preferred stock, par value $0.001 per share.
As of May 31, 2015, we had issued and outstanding
approximately:
| · | 32,227,939 shares
of common stock; |
| · | Options to purchase
3,634,877 shares of our common stock at exercise prices ranging from $0.33 to $51.40,
with a weighted average price of $0.70; and |
| · | Warrants to purchase
17,667,938 shares of our common stock, including the 2015 Warrants to purchase 917,149
shares of our common stock at $0.85 per share with expiration dates in 2020, warrants
to purchase 2,226,112 shares at an exercise price of $0.40 per share with expiration
dates in 2016, warrants to purchase 2,782,577 at an exercise price of $0.40 per share
with expiration dates in 2019, and warrants to purchase 11,742,100 shares at an exercise
price of $0.30 per share with expiration dates in 2019. |
Holders of our common stock are entitled
to one vote for each share held of record on all matters submitted to a vote of the stockholders and do not have cumulative voting
rights. Accordingly, holders of a majority of the shares of our common stock entitled to vote in any election of directors may
elect all of the directors standing for election. Apart from preferences that may be applicable to any holders of preferred stock
outstanding at the time, holders of our common stock are entitled to receive dividends, if any, ratably as may be declared from
time to time by the Board out of funds legally available therefor. Upon our liquidation, dissolution or winding up, the holders
of our common stock are entitled to receive ratably our net assets available after the payment of all liabilities and liquidation
preferences on any outstanding preferred stock. Holders of our common stock have no preemptive, subscription, redemption or conversion
rights, and there are no redemption or sinking fund provisions applicable to our common stock. The rights, preferences and privileges
of holders of our common stock are subject to, and may be adversely affected by, the rights of the holders of shares of any series
of preferred stock which we may designate and issue in the future.
LEGAL MATTERS
The legality of the securities offered
hereby have been passed upon for us by Fredrikson & Byron P.A., Minneapolis, Minnesota.
EXPERTS
Our financial statements as of and
for the year ended December 31, 2014 included in this prospectus have been audited by WithumSmith+Brown, PC, an
independent registered public accounting firm, as stated in their report, which report includes an explanatory paragraph
related to the Company’s ability to continue as a going concern. Our financial statements at and for the year ended
December 31, 2013 included in this prospectus have been audited by Rothstein Kass, an independent registered public
accounting firm, as stated in their report, which report includes an explanatory paragraph related to the Company’s
ability to continue as a going concern.
Such financial statements have been so
included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and current reports,
proxy statements and other information with the SEC. You may read and copy any document we file at the SEC’s public reference
room located at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the
public reference room. Our SEC filings are also available to the public free of charge at the SEC’s website at www.sec.gov
and on our website at www.nephros.com.
DISCLOSURE OF SEC POSITION ON INDEMNIFICATION
FOR SECURITIES LAW VIOLATIONS
Our Fourth Amended and Restated Certificate
of Incorporation, as amended, provides for indemnification of directors and officers of the Registrant to the fullest extent permitted
by the Delaware General Corporation Law, or DGCL. We have obtained liability insurance for each director and officer for certain
losses arising from claims or charges made against them while acting in their capacities as directors or officers of the registrant.
Our Second Amended and Restated By-Laws provide for indemnification of our officers, directors and others who become a party to
an action on our behalf by us to the fullest extent not prohibited under the DGCL. However, insofar as indemnification for liabilities
arising under the Securities Act may be permitted to our directors, officers, and controlling persons pursuant to the foregoing
provisions or otherwise, we have been advised that in the opinion of the SEC such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities
(other than the payment of expenses incurred or paid by a director, officer or controlling person in a successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being
registered, we will, unless in the opinion of our counsel the matter has been settled by controlling precedent, submit to the
court of appropriate jurisdiction the question whether such indemnification by us is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
FINANCIAL STATEMENTS
| |
Page |
| |
|
| Annual Financial Statements |
|
| |
|
| Reports of Independent Registered Public Accounting Firms |
F-1 |
| |
|
| Consolidated Balance Sheets — December 31, 2014 and 2013 |
F-3 |
| |
|
| Consolidated Statements of Operations — Years ended December 31, 2014 and 2013 |
F-4 |
| |
|
| Consolidated Statements of Changes in Stockholders’ Equity — Years ended December 31, 2014 and 2013 |
F-5 |
| |
|
| Consolidated Statements of Cash Flows — Years ended December 31, 2014 and 2013 |
F-6 |
| |
|
| Notes to Consolidated Financial Statements |
F-7 |
| |
|
| Interim Financial Statements |
|
| |
|
| Condensed Consolidated Balance Sheets — March 31, 2015 and December 31, 2014 |
F-29 |
| |
|
| Consolidated Statements of Operations — Three months ended March 31, 2015 and March 31, 2014 |
F-30 |
| |
|
| Consolidated Statements of Changes in Stockholders’ Equity — Three months ended March 31, 2015 and March 31, 2014 |
F-31 |
| |
|
| Consolidated Statements of Cash Flows — Three months ended March 31, 2015 and March 31, 2014 |
F-32 |
| |
|
| Notes to Consolidated Financial Statements |
F-33 |
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Nephros, Inc.
We have audited the accompanying consolidated
balance sheet of Nephros, Inc. and Subsidiary (collectively, the “Company”), as of December 31, 2014, and the related
consolidated statements of operations and comprehensive loss, changes in stockholders’ deficit and cash flows for the year
then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility
is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with
the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement.
The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.
Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial
statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial
statements referred to above present fairly, in all material respects, the financial position of Nephros, Inc. and Subsidiary as
of December 31, 2014, and the results of their operations and their cash flows for the year then ended in accordance with accounting
principles generally accepted in the United States of America.
The accompanying consolidated financial
statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the consolidated
financial statements, the Company has incurred negative cash flow from operations and recurring net losses since inception. These
conditions, among others, raise substantial doubt about its ability to continue as a going concern. Management’s plans in
regard to these matters are also described in Note 3. The accompanying consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
We also have audited the adjustments described
in Note 2 that were applied to restate the consolidated financial statements as of and for the year ended December 31, 2013, and
the adjustments described in Note 2 that were applied to restate selected amounts as of January 1, 2009, and as of and for each
of the years ended December 31, 2009 to 2012 as indicated in Note 2 (collectively, the “Restatement Adjustments”),
to correct an error. In our opinion, the Restatement Adjustments are appropriate and have been properly applied. We were not engaged
to audit, review, or apply any procedures to the consolidated financial statements as of January 1, 2009, or the consolidated financial
statements as of and for each of the years ended December 31, 2009 to 2013, of the Company other than with respect to the Restatement
Adjustments and, accordingly, we do not express an opinion or any other form of assurance on the 2009 through 2013 consolidated
financial statements, taken as a whole. Those consolidated financial statements were audited by other auditors, Rothstein Kass.
/s/ WithumSmith+Brown, PC
Morristown, New Jersey
April 15, 2015
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Nephros, Inc.
We have audited, before the effects of
the adjustments for the correction of the error described in Note 2, the accompanying consolidated balance sheet of Nephros, Inc.
and Subsidiary (collectively, “the Company”) as of December 31, 2013, and the related consolidated statements of operations
and comprehensive loss, changes in stockholders’ deficit and cash flows for the year ended December 31, 2013 (the 2013 financial
statements before the effects of the adjustments discussed in Note 2 are not presented herein). These consolidated financial statements
are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with
the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included
consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over
financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting
the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that
our audit provide a reasonable basis for our opinion.
In our opinion, except for the error in
Note 2, the consolidated financial statements referred to above present fairly, in all material respects, the financial position
of Nephros, Inc. and Subsidiary as of December 31, 2013, and the results of their operations and their cash flows for the year
ended December 31, 2013, in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial
statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the consolidated
financial statements, the Company has incurred negative cash flow from operations and net losses since inception. These conditions,
among others, raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these
matters are also described in Note 3. The accompanying consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
We were not engaged to audit, review, or
apply any procedures to the adjustments for the correction of an error described in Note 2 and, accordingly, we do not express
an opinion or any other form of assurance about whether such adjustments are appropriate and have been properly applied. Those
adjustments were audited by WithumSmith+Brown, PC.
/s/ Rothstein Kass
Roseland, New Jersey
March 27, 2014
NEPHROS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share and Per Share
Amounts)
| | |
December 31, 2014 | | |
December 31, 2013
(restated) | |
| ASSETS | |
| | | |
| | |
| Current assets: | |
| | | |
| | |
| Cash | |
$ | 1,284 | | |
$ | 579 | |
| Accounts receivable, net | |
| 110 | | |
| 122 | |
| Inventory, net | |
| 186 | | |
| 162 | |
| Prepaid expenses and other current assets | |
| 104 | | |
| 125 | |
| Total current assets | |
| 1,684 | | |
| 988 | |
| Property and equipment, net | |
| 1 | | |
| 7 | |
| Other assets, net of accumulated amortization | |
| 1,684 | | |
| 1,894 | |
| Total assets | |
$ | 3,369 | | |
$ | 2,889 | |
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | |
| | | |
| | |
| Current liabilities: | |
| | | |
| | |
| Senior secured note payable, net of debt discount of $142 at December 31, 2013 | |
$ | - | | |
$ | 1,358 | |
| Accounts payable | |
| 835 | | |
| 1,073 | |
| Accrued expenses | |
| 342 | | |
| 365 | |
| Deferred revenue, current portion | |
| 70 | | |
| 703 | |
| Total current liabilities | |
| 1,247 | | |
| 3,499 | |
| Warrant liability | |
| 7,386 | | |
| 3,109 | |
| Long-term portion of deferred revenue | |
| 417 | | |
| - | |
| Total liabilities | |
| 9,050 | | |
| 6,608 | |
| | |
| | | |
| | |
| Commitments and Contingencies | |
| | | |
| | |
| | |
| | | |
| | |
| Stockholders’ deficit: | |
| | | |
| | |
| | |
| | | |
| | |
| Preferred stock, $.001 par value; 5,000,000 shares authorized at December 31, 2014 and 2013; no shares issued and outstanding at December 31, 2014 and 2013. | |
| - | | |
| - | |
| Common stock, $.001 par value; 90,000,000 shares authorized at December 31, 2014 and 2013; 30,391,513 and 18,082,043 shares issued and outstanding at December 31, 2014 and December 31, 2013, respectively. | |
| 30 | | |
| 18 | |
| Additional paid-in capital | |
| 108,382 | | |
| 102,983 | |
| Accumulated other comprehensive income | |
| 72 | | |
| 74 | |
| Accumulated deficit | |
| (114,165 | ) | |
| (106,794 | ) |
| Total stockholders’ deficit | |
| (5,681 | ) | |
| (3,719 | ) |
| Total liabilities and stockholders’ deficit | |
$ | 3,369 | | |
$ | 2,889 | |
The accompanying notes are an integral
part of these consolidated financial statements.
NEPHROS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
(In Thousands, Except Share and Per Share
Amounts)
| | |
Years Ended December 31, | |
| | |
2014 | | |
2013
(restated) | |
| Net revenue: | |
| | | |
| | |
| Product revenues | |
$ | 914 | | |
$ | 1,029 | |
| Licensing revenues | |
| 834 | | |
| 711 | |
| Total net revenues | |
| 1,748 | | |
| 1,740 | |
| | |
| | | |
| | |
| Cost of goods sold | |
| 549 | | |
| 898 | |
| Gross margin | |
| 1,199 | | |
| 842 | |
| Operating expenses: | |
| | | |
| | |
| Research and development | |
| 781 | | |
| 867 | |
| Depreciation and amortization | |
| 217 | | |
| 223 | |
| Selling, general and administrative | |
| 2,870 | | |
| 3,069 | |
| Total operating expenses | |
| 3,868 | | |
| 4,159 | |
| Loss from operations | |
| (2,669 | ) | |
| (3,317 | ) |
| Change in fair value of warrant liability | |
| (4,277 | ) | |
| 5,020 | |
| Interest expense | |
| (483 | ) | |
| (351 | ) |
| Gain on sale of equipment | |
| - | | |
| 3 | |
| Other income (expense), net | |
| 58 | | |
| (33 | ) |
| Net income (loss) | |
| (7,371 | ) | |
| 1,322 | |
| Other comprehensive loss, foreign currency translation adjustments | |
| (2 | ) | |
| (2 | ) |
| Total comprehensive income (loss) | |
$ | (7,373 | ) | |
$ | 1,320 | |
| Net income (loss) per common share, basic | |
$ | (0.31 | ) | |
$ | 0.08 | |
| Weighted average common shares outstanding, basic | |
| 23,817,184 | | |
| 15,624,999 | |
| Net loss per common share, diluted | |
$ | (0.31 | ) | |
| (0.18 | ) |
| Weighted average common shares outstanding, diluted | |
| 23,817,184 | | |
| 20,760,410 | |
The accompanying notes are an integral
part of these consolidated financial statements.
NEPHROS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS’ DEFICIT
(In Thousands, Except Share Amounts)
| | |
| | |
| | |
| | |
Accumulated | | |
| | |
| |
| | |
| | |
| | |
Additional | | |
Other | | |
| | |
Equity | |
| | |
Common Stock | | |
Paid-in | | |
Comprehensive | | |
Accumulated | | |
(Deficit) | |
| | |
Shares | | |
Amount | | |
Capital | | |
Income | | |
Deficit | | |
Total | |
| Balance, December 31, 2012 (restated) | |
| 11,949,824 | | |
$ | 12 | | |
$ | 99,304 | | |
$ | 76 | | |
$ | (108,116 | ) | |
$ | (8,724 | ) |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Net income, as restated | |
| | | |
| | | |
| | | |
| | | |
| 1,322 | | |
| 1,322 | |
| Net unrealized losses on foreign currency translation, net of tax | |
| | | |
| | | |
| | | |
| (2 | ) | |
| | | |
| (2 | ) |
| Shareholder rights offering, net | |
| 5,000,000 | | |
| 5 | | |
| 2,766 | | |
| | | |
| | | |
| 2,771 | |
| Issuance of restricted stock | |
| 340,220 | | |
| | | |
| | | |
| | | |
| | | |
| - | |
| Exercise of warrants | |
| 791,999 | | |
| 1 | | |
| 247 | | |
| | | |
| | | |
| 248 | |
| Noncash stock-based compensation | |
| | | |
| | | |
| 652 | | |
| | | |
| | | |
| 652 | |
| Warrant modification | |
| | | |
| | | |
| 14 | | |
| | | |
| | | |
| 14 | |
| Balance, December 31, 2013 (restated) | |
| 18,082,043 | | |
$ | 18 | | |
$ | 102,983 | | |
$ | 74 | | |
$ | (106,794 | ) | |
$ | (3,719 | ) |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Net loss | |
| | | |
| | | |
| | | |
| | | |
| (7,371 | ) | |
| (7,371 | ) |
| Net unrealized losses on foreign currency translation, net of tax | |
| | | |
| | | |
| | | |
| (2 | ) | |
| | | |
| (2 | ) |
| Shareholder rights offerings, net | |
| 12,140,823 | | |
| 12 | | |
| 4,854 | | |
| | | |
| | | |
| 4,866 | |
| Issuance of restricted stock | |
| 132,077 | | |
| | | |
| | | |
| | | |
| | | |
| - | |
| Exercise of warrants | |
| 36,570 | | |
| | | |
| 15 | | |
| | | |
| | | |
| 15 | |
| Noncash stock-based compensation | |
| | | |
| | | |
| 530 | | |
| | | |
| | | |
| 530 | |
| Balance, December 31, 2014 | |
| 30,391,513 | | |
$ | 30 | | |
$ | 108,382 | | |
$ | 72 | | |
$ | (114,165 | ) | |
$ | (5,681 | ) |
The accompanying notes are an integral
part of these consolidated financial statements.
NEPHROS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
| | |
Years Ended December 31, | |
| | |
2014 | | |
2013
(restated) | |
| | |
| | |
| |
| Operating activities | |
| | | |
| | |
| Net income (loss) | |
$ | (7,371 | ) | |
$ | 1,322 | |
| Adjustments to reconcile net income (loss) to net cash used in operating activities: | |
| | | |
| | |
| Depreciation of property and equipment | |
| 6 | | |
| 9 | |
| Amortization of other assets | |
| 210 | | |
| 214 | |
| Non-cash stock-based compensation, including stock options and restricted stock | |
| 429 | | |
| 575 | |
| Change in fair value of warrant liability | |
| 4,277 | | |
| (5,020 | ) |
| Warrant inducement | |
| - | | |
| 14 | |
| Inventory reserve | |
| 59 | | |
| 210 | |
| Amortization of debt discount | |
| 320 | | |
| 257 | |
| Gain on disposal of property and equipment | |
| - | | |
| (3 | ) |
| (Gain)/loss on foreign currency transactions | |
| (48 | ) | |
| 26 | |
| (Increase) decrease in operating assets: | |
| | | |
| | |
| Accounts receivable | |
| 12 | | |
| 820 | |
| Inventory | |
| (82 | ) | |
| (60 | ) |
| Prepaid expenses and other current assets | |
| 21 | | |
| (16 | ) |
| Increase (decrease) in operating liabilities: | |
| | | |
| | |
| Accounts payable | |
| (190 | ) | |
| (23 | ) |
| Accrued expenses | |
| 78 | | |
| 121 | |
| License and supply agreement fee payable | |
| - | | |
| (1,318 | ) |
| Deferred revenue | |
| (216 | ) | |
| (711 | ) |
| Net cash used in operating activities | |
| (2,495 | ) | |
| (3,583 | ) |
| | |
| | | |
| | |
| Investing activities | |
| | | |
| | |
| Proceeds from sales of property and equipment | |
| - | | |
| 3 | |
| Net cash provided by investing activities | |
| - | | |
| 3 | |
| | |
| | | |
| | |
| Financing activities | |
| | | |
| | |
| Proceeds from issuance of common stock, net of equity issuance costs of $276 and $229, respectively | |
| 4,866 | | |
| 2,771 | |
| Proceeds from issuance of senior secured notes | |
| 1,572 | | |
| 2,800 | |
| Payment of financing costs | |
| - | | |
| (399 | ) |
| Proceeds from exercise of warrants | |
| 15 | | |
| 248 | |
| Payment of senior secured notes | |
| (3,250 | ) | |
| (1,300 | ) |
| Net cash provided by financing activities | |
| 3,203 | | |
| 4,120 | |
| Effect of exchange rates on cash | |
| (3 | ) | |
| (8 | ) |
| Net increase in cash | |
| 705 | | |
| 532 | |
| Cash, beginning of year | |
| 579 | | |
| 47 | |
| Cash, end of year | |
$ | 1,284 | | |
$ | 579 | |
| | |
| | | |
| | |
| Supplemental disclosure of cash flow information | |
| | | |
| | |
| Cash paid for interest | |
$ | 188 | | |
$ | 54 | |
| Cash paid for taxes | |
$ | 6 | | |
$ | 2 | |
| Restricted stock issued to settle liability | |
$ | 101 | | |
$ | 77 | |
The accompanying notes are an integral
part of these consolidated financial statements.
NEPHROS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. Nephros was founded by health
professionals, scientists and engineers affiliated with Columbia University to develop advanced End Stage Renal Disease (“ESRD”)
therapy technology and products. The Company has two products in the hemodiafiltration, or HDF, modality to deliver therapy for
ESRD patients. These are the OLpūr mid-dilution HDF filter or “dialyzer,” designed expressly for HDF therapy,
and the OLpūr H2H HDF module, an add-on module designed to allow the most common types of hemodialysis machines to be used
for HDF therapy. In 2009, the Company introduced its Dual Stage Ultrafilter (“DSU”) water filter, which represented
a new and complementary product line to the Company’s ESRD therapy business. The DSU incorporates the Company’s unique
and proprietary dual stage filter architecture.
On June 4, 2003, Nephros International
Limited was incorporated under the laws of Ireland as a wholly-owned subsidiary of the Company. In August 2003, the Company
established a European Customer Service and financial operations center in Dublin, Ireland.
The U.S. facilities, located at 41 Grand
Avenue, River Edge, New Jersey, 07661, are used to house the Company’s corporate headquarters and research facilities.
Note 2 – Restatement of Previously Issued
Financial Statements
In preparation of the Annual Report, the
Company concluded it should correct its accounting related to the Company’s outstanding warrants that were originally issued
in 2007 (the “2007 Warrants”). The Company had initially accounted for the warrants as a component of equity but upon
further evaluation of the terms of these warrants, concluded that the 2007 Warrants should be accounted for as a derivative liability.
The Company’s 2007 Warrants are not indexed to the Company’s common stock because the transactions that would trigger
the Anti-Dilution Adjustment Provision are not inputs to the fair value of the warrants. As a result, we should have classified
the 2007 Warrants as derivative liabilities as of January 1, 2009, the date which ASC Section 815-40-15 was effective. Under this
accounting treatment, we are required to measure the fair value of the 2007 Warrants at the end of each reporting period beginning
in the year ended December 31, 2009, with a cumulative effect presented as of January 1, 2009, and recognize changes in the fair
value for all periods beginning with January 1, 2009 in our operating results for the current period.
The following table summarizes the effect
of the restatement to the Company’s financial statements for (i) its audited consolidated financial statements as of and
for the years ended December 31, 2013, 2012, 2011, 2010 and 2009, including the cumulative effect as of January 1, 2009, and (ii)
its unaudited condensed consolidated interim financial statements as of, and for each of the quarterly periods ended, March 31,
June 30, and September 30, in the years 2014 and 2013:
| | |
(Amounts in 000s, except share and per share data) | |
| | |
As | | |
| | |
| |
| | |
Previously | | |
| | |
As | |
| | |
Reported | | |
Adjustments | | |
Restated | |
| | |
| | |
| | |
| |
| Balance sheet as of September 30, 2014 (unaudited) | |
| | | |
| | | |
| | |
| Warrant Liability | |
$ | - | | |
$ | 7,116 | | |
$ | 7,116 | |
| Additional Paid-in Capital | |
| 102,864 | | |
| 2,458 | | |
| 105,322 | |
| Accumulated Deficit | |
| (103,348 | ) | |
| (9,573 | ) | |
| (112,921 | ) |
| | |
| | | |
| | | |
| | |
| Three months ended September 30, 2014 (unaudited) | |
| | | |
| | | |
| | |
| Change in fair value of warrant liability | |
| - | | |
| 3,428 | | |
| 3,428 | |
| Net income (loss) | |
| (706 | ) | |
| 3,428 | | |
| 2,723 | |
| Net income (loss) per share, basic | |
| (0.03 | ) | |
| 0.14 | | |
| 0.11 | |
| Net income (loss) per share, diluted | |
| (0.03 | ) | |
| 0.01 | | |
| (0.02 | ) |
| Weighted average common shares outstanding, diluted | |
| 25,238,412 | | |
| 8,252,777 | | |
| 33,491,189 | |
| Comprehensive income (loss) | |
| (705 | ) | |
| 3,429 | | |
| 2,724 | |
NEPHROS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 – Restatement of Previously Issued
Financial Statements (continued)
| | |
(Amounts in 000s, except share and per share data) | |
| | |
As | | |
| | |
| |
| | |
Previously | | |
| | |
As | |
| | |
Reported | | |
Adjustments | | |
Restated | |
| | |
| | |
| | |
| |
| Nine months ended September 30, 2014 (unaudited) | |
| | | |
| | | |
| | |
| Change in fair value of warrant liability | |
| - | | |
| (4,007 | ) | |
| (4,007 | ) |
| Net loss | |
| (2,120 | ) | |
| (4,007 | ) | |
| (6,127 | ) |
| Net income (loss) per share, basic and diluted | |
| (0.09 | ) | |
| (0.18 | ) | |
| (0.27 | ) |
| Comprehensive loss | |
| (2,121 | ) | |
| (4,007 | ) | |
| (6,128 | ) |
| | |
| | | |
| | | |
| | |
| Balance sheet as of June 30, 2014 (unaudited) | |
| | | |
| | | |
| | |
| Warrant Liability | |
| - | | |
| 10,544 | | |
| 10,544 | |
| Additional Paid-in Capital | |
| 102,761 | | |
| 2,458 | | |
| 105,219 | |
| Accumulated Deficit | |
| (102,642 | ) | |
| (13,002 | ) | |
| (115,644 | ) |
| | |
| | | |
| | | |
| | |
| Three months ended June 30, 2014 (unaudited) | |
| | | |
| | | |
| | |
| Change in fair value of warrant liability | |
| - | | |
| (4,685 | ) | |
| (4,685 | ) |
| Net loss | |
| (654 | ) | |
| (4,685 | ) | |
| (5,339 | ) |
| Net loss per share, basic and diluted | |
| (0.03 | ) | |
| (0.18 | ) | |
| (0.21 | ) |
| Comprehensive loss | |
| (655 | ) | |
| (4,685 | ) | |
| (5,340 | ) |
| | |
| | | |
| | | |
| | |
| Six months ended June 30, 2014 (unaudited) | |
| | | |
| | | |
| | |
| Change in fair value of warrant liability | |
| - | | |
| (7,436 | ) | |
| (7,436 | ) |
| Net loss | |
| (1,414 | ) | |
| (7,436 | ) | |
| (8,850 | ) |
| Net loss per share, basic and diluted | |
| (0.06 | ) | |
| (0.34 | ) | |
| (0.40 | ) |
| Comprehensive loss | |
| (1,416 | ) | |
| (7,436 | ) | |
| (8,852 | ) |
| | |
| | | |
| | | |
| | |
| Balance sheet as of March 31, 2014 (unaudited) | |
| | | |
| | | |
| | |
| Warrant Liability | |
| - | | |
| 5,859 | | |
| 5,859 | |
| Additional Paid-in Capital | |
| 102,656 | | |
| 2,458 | | |
| 105,114 | |
| Accumulated Deficit | |
| (101,988 | ) | |
| (8,317 | ) | |
| (110,305 | ) |
| | |
| | | |
| | | |
| | |
| Three months ended March 31, 2014 (unaudited) | |
| | | |
| | | |
| | |
| Change in fair value of warrant liability | |
| - | | |
| (2,751 | ) | |
| (2,751 | ) |
| Net loss | |
| (760 | ) | |
| (2,751 | ) | |
| (3,511 | ) |
| Net loss per share, basic and diluted | |
| (0.04 | ) | |
| (0.15 | ) | |
| (0.19 | ) |
| Comprehensive loss | |
| (761 | ) | |
| (2,751 | ) | |
| (3,512 | ) |
| | |
| | | |
| | | |
| | |
| Balance sheet as of December 31, 2013 (audited) | |
| | | |
| | | |
| | |
| Warrant Liability | |
| - | | |
| 3,109 | | |
| 3,109 | |
| Additional Paid-in Capital | |
| 100,526 | | |
| 2,457 | | |
| 102,983 | |
| Accumulated Deficit | |
| (101,228 | ) | |
| (5,566 | ) | |
| (106,794 | ) |
NEPHROS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 – Restatement of Previously Issued
Financial Statements (continued)
| | |
(Amounts in 000s, except share and per share data) | |
| | |
As | | |
| | |
| |
| | |
Previously | | |
| | |
As | |
| | |
Reported | | |
Adjustments | | |
Restated | |
| | |
| | |
| | |
| |
| Year ended December 31, 2013 (audited) | |
| | | |
| | | |
| | |
| Change in fair value of warrant liability | |
| - | | |
| 5,020 | | |
| 5,020 | |
| Net income (loss) | |
| (3,698 | ) | |
| 5,020 | | |
| 1,322 | |
| Net income (loss) per share, basic | |
| (0.24 | ) | |
| 0.32 | | |
| 0.08 | |
| Net income (loss) per share, diluted | |
| (0.24 | ) | |
| 0.06 | | |
| (0.18 | ) |
| Weighted average common shares outstanding, diluted | |
| 15,624,999 | | |
| 5,135,411 | | |
| 20,760,410 | |
| Comprehensive income (loss) | |
| (3,700 | ) | |
| 5,020 | | |
| 1,320 | |
| | |
| | | |
| | | |
| | |
| Balance sheet as of September 30, 2013 (unaudited) | |
| | | |
| | | |
| | |
| Warrant Liability | |
| - | | |
| 7,776 | | |
| 7,776 | |
| Additional Paid-in Capital | |
| 100,391 | | |
| 2,457 | | |
| 102,848 | |
| Accumulated Deficit | |
| (100,053 | ) | |
| (10,234 | ) | |
| (110,287 | ) |
| | |
| | | |
| | | |
| | |
| Three months ended September 30, 2013 (unaudited) | |
| | | |
| | | |
| | |
| Change in fair value of warrant liability | |
| - | | |
| (1,797 | ) | |
| (1,797 | ) |
| Net loss | |
| (611 | ) | |
| (1,797 | ) | |
| (2,408 | ) |
| Net loss per share, basic and diluted | |
| (0.03 | ) | |
| (0.11 | ) | |
| (0.14 | ) |
| Comprehensive loss | |
| (611 | ) | |
| (1,797 | ) | |
| (2,408 | ) |
| | |
| | | |
| | | |
| | |
| Nine months ended September 30, 2013 (unaudited) | |
| | | |
| | | |
| | |
| Change in fair value of warrant liability | |
| - | | |
| 352 | | |
| 352 | |
| Net income (loss) | |
| (2,523 | ) | |
| 352 | | |
| (2,171 | ) |
| Net income (loss) per share, basic and diluted | |
| (0.17 | ) | |
| 0.02 | | |
| (0.15 | ) |
| Comprehensive loss | |
| (2,525 | ) | |
| 352 | | |
| (2,173 | ) |
| | |
| | | |
| | | |
| | |
| Balance sheet as of June 30, 2013 (unaudited) | |
| | | |
| | | |
| | |
| Warrant Liability | |
| - | | |
| 5,980 | | |
| 5,980 | |
| Additional Paid-in Capital | |
| 100,191 | | |
| 2,457 | | |
| 102,648 | |
| Accumulated Deficit | |
| (99,442 | ) | |
| (8,437 | ) | |
| (107,879 | ) |
| | |
| | | |
| | | |
| | |
| Three months ended June 30, 2013 (unaudited) | |
| | | |
| | | |
| | |
| Change in fair value of warrant liability | |
| - | | |
| (608 | ) | |
| (608 | ) |
| Net loss | |
| (671 | ) | |
| (608 | ) | |
| (1,279 | ) |
| Net loss per share, basic and diluted | |
| (0.05 | ) | |
| (0.05 | ) | |
| (0.10 | ) |
| Comprehensive loss | |
| (673 | ) | |
| (608 | ) | |
| (1,281 | ) |
| | |
| | | |
| | | |
| | |
| Six months ended June 30, 2013 (unaudited) | |
| | | |
| | | |
| | |
| Change in fair value of warrant liability | |
| - | | |
| 2,149 | | |
| 2,149 | |
| Net income (loss) | |
| (1,912 | ) | |
| 2,149 | | |
| 237 | |
| Net income (loss) per share, basic | |
| (0.14 | ) | |
| 0.16 | | |
| 0.02 | |
| Net income (loss) per share, diluted | |
| (0.14 | ) | |
| 0.04 | | |
| (0.10 | ) |
| Weighted average common shares outstanding, diluted | |
| 14,556,050 | | |
| 5,150,160 | | |
| 19,706,210 | |
| Comprehensive income (loss) | |
| (1,914 | ) | |
| 2,149 | | |
| 235 | |
NEPHROS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 – Restatement of Previously Issued
Financial Statements (continued)
| | |
(Amounts in 000s, except share and per share data) | |
| | |
As | | |
| | |
| |
| | |
Previously | | |
| | |
As | |
| | |
Reported | | |
Adjustments | | |
Restated | |
| | |
| | |
| | |
| |
| Balance sheet as of March 31, 2013 (unaudited) | |
| | | |
| | | |
| | |
| Warrant Liability | |
| - | | |
| 5,372 | | |
| 5,372 | |
| Additional Paid-in Capital | |
| 96,988 | | |
| 2,457 | | |
| 99,445 | |
| Accumulated Deficit | |
| (98,772 | ) | |
| (7,830 | ) | |
| (106,602 | ) |
| | |
| | | |
| | | |
| | |
| Three months ended March 31, 2013 (unaudited) | |
| | | |
| | | |
| | |
| Change in fair value of warrant liability | |
| - | | |
| 2,756 | | |
| 2,756 | |
| Net income (loss) | |
| (1,242 | ) | |
| 2,756 | | |
| 1,514 | |
| Net income (loss) per share, basic | |
| (0.10 | ) | |
| 0.23 | | |
| 0.13 | |
| Net income (loss) per share, diluted | |
| (0.10 | ) | |
| 0.03 | | |
| (0.07 | ) |
| Weighted average common shares outstanding, diluted | |
| 12,009,285 | | |
| 5,624,075 | | |
| 17,633,360 | |
| Comprehensive income (loss) | |
| (1,242 | ) | |
| 2,756 | | |
| 1,514 | |
| | |
| | | |
| | | |
| | |
| Balance sheet as of December 31, 2012 (audited) | |
| | | |
| | | |
| | |
| Warrant Liability | |
| - | | |
| 8,129 | | |
| 8,129 | |
| Additional Paid-in Capital | |
| 96,847 | | |
| 2,457 | | |
| 99,304 | |
| Accumulated Deficit | |
| (97,530 | ) | |
| (10,586 | ) | |
| (108,116 | ) |
| | |
| | | |
| | | |
| | |
| Year ended December 31, 2012 (audited) | |
| | | |
| | | |
| | |
| Change in fair value of warrant liability | |
| - | | |
| (3,361 | ) | |
| (3,361 | ) |
| Net loss | |
| (3,262 | ) | |
| (3,361 | ) | |
| (6,623 | ) |
| Net loss per share, basic and diluted | |
| (0.29 | ) | |
| (0.30 | ) | |
| (0.59 | ) |
| Comprehensive loss | |
| (3,262 | ) | |
| (3,361 | ) | |
| (6,596 | ) |
| | |
| | | |
| | | |
| | |
| Balance sheet as of December 31, 2011 (audited) | |
| | | |
| | | |
| | |
| Warrant Liability | |
| - | | |
| 5,096 | | |
| 5,096 | |
| Additional Paid-in Capital | |
| 95,630 | | |
| 2,129 | | |
| 97,759 | |
| Accumulated Deficit | |
| (94,268 | ) | |
| (7,225 | ) | |
| (101,493 | ) |
| | |
| | | |
| | | |
| | |
| Year ended December 31, 2011 (audited) | |
| | | |
| | | |
| | |
| Change in fair value of warrant liability | |
| - | | |
| (4,638 | ) | |
| (4,638 | ) |
| Net loss | |
| (2,360 | ) | |
| (4,638 | ) | |
| (6,998 | ) |
| Net loss per share, basic and diluted | |
| (0.27 | ) | |
| (0.54 | ) | |
| (0.81 | ) |
| Comprehensive loss | |
| (2,333 | ) | |
| (4,638 | ) | |
| (6,971 | ) |
| | |
| | | |
| | | |
| | |
| Balance sheet as of December 31, 2010 (audited) | |
| | | |
| | | |
| | |
| Warrant Liability | |
| - | | |
| 458 | | |
| 458 | |
| Additional Paid-in Capital | |
| 91,979 | | |
| 2,129 | | |
| 94,108 | |
| Accumulated Deficit | |
| (91,908 | ) | |
| (2,587 | ) | |
| (94,495 | ) |
NEPHROS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 – Restatement of Previously Issued
Financial Statements (continued)
| | |
(Amounts in 000s, except share and per share data) | |
| | |
As | | |
| | |
| |
| | |
Previously | | |
| | |
As | |
| | |
Reported | | |
Adjustments | | |
Restated | |
| | |
| | |
| | |
| |
| Year ended December 31, 2010 (audited) | |
| | | |
| | | |
| | |
| Change in fair value of warrant liability | |
| - | | |
| 5,813 | | |
| 5,813 | |
| Net income (loss) | |
| (1,933 | ) | |
| 5,813 | | |
| 3,880 | |
| Net income (loss) per share, basic and diluted | |
| (0.93 | ) | |
| 2.79 | | |
| 1.86 | |
| | |
| | | |
| | | |
| | |
| Balance sheet as of December 31, 2009 (audited) | |
| | | |
| | | |
| | |
| Warrant Liability | |
| - | | |
| 6,272 | | |
| 6,272 | |
| Additional Paid-in Capital | |
| 91,815 | | |
| 2,129 | | |
| 93,944 | |
| Accumulated Deficit | |
| (89,975 | ) | |
| (8,400 | ) | |
| (98,375 | ) |
| | |
| | | |
| | | |
| | |
| Year ended December 31, 2009 (audited) | |
| | | |
| | | |
| | |
| Change in fair value of warrant liability | |
| - | | |
| (10,056 | ) | |
| (10,056 | ) |
| Net loss | |
| (2,026 | ) | |
| (10,056 | ) | |
| (12,082 | ) |
| Net loss per share, basic and diluted | |
| (1.06 | ) | |
| (5.26 | ) | |
| (6.32 | ) |
| | |
| | | |
| | | |
| | |
| Balance sheet as of January 1, 2009 (audited) | |
| | | |
| | | |
| | |
| Warrant Liability | |
| - | | |
| 2,107 | | |
| 2,107 | |
| Additional Paid-in Capital | |
| 90,375 | | |
| (3,763 | ) | |
| 86,612 | |
| Accumulated Deficit | |
| (87,949 | ) | |
| 1,656 | | |
| (86,293 | ) |
Historically, the Company had generated
net losses thus its basic and diluted earnings per share calculations were based upon the same weighted average shares due to the
anti-dilution effect. Certain periods above were restated to reflect net income. As such, the diluted earnings per share calculation
for those periods are calculated based upon the treasury stock method as follows:
| | |
(restated) | | |
(restated) | | |
(restated) | |
| | |
For the three months | | |
For the year | | |
For the six months | |
| | |
ended September 30, | | |
ended December 31, | | |
ended June 30, | |
| (amounts in 000s, except share and per share data) | |
2014 | | |
2013 | | |
2013 | |
| | |
| | |
| | |
| |
| Loss per share – Basic: | |
| | | |
| | | |
| | |
| Numerator for basic income (loss) per share | |
$ | 2,723 | | |
$ | 1,322 | | |
$ | 237 | |
| Denominator for basic income (loss) per share | |
| 25,238,412 | | |
| 15,624,999 | | |
| 14,556,050 | |
| Basic income (loss) per common share | |
$ | 0.11 | | |
$ | 0.08 | | |
$ | 0.02 | |
| | |
| | | |
| | | |
| | |
| Loss per share – Diluted: | |
| | | |
| | | |
| | |
| Numerator for diluted income (loss) per share | |
$ | 2,723 | | |
$ | 1,322 | | |
| 237 | |
| Adjust: Fair value of dilutive warrants outstanding | |
| (3,429 | ) | |
| (5,020 | ) | |
| (2,149 | ) |
| Numerator for diluted income (loss) per share | |
$ | (706 | ) | |
| (3,698 | ) | |
| (1,912 | ) |
| | |
| | | |
| | | |
| | |
| Denominator for basic income (loss) per share | |
| 25,238,412 | | |
| 15,624,999 | | |
| 14,556,050 | |
| Plus: Incremental shares underlying warrants outstanding | |
| 8,252,777 | | |
| 5,135,411 | | |
| 5,150,160 | |
| Denominator for diluted income (loss) per share | |
| 33,491,189 | | |
| 20,760,410 | | |
| 19,706,210 | |
| Diluted income (loss) per common share | |
$ | (0.02 | ) | |
$ | (0.18 | ) | |
$ | (0.10 | ) |
NEPHROS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 – Restatement of Previously Issued
Financial Statements (continued)
| | |
(restated) | | |
(restated) | |
| | |
For the three months | | |
For the year | |
| | |
ended March 31, | | |
ended December 31, | |
| (amounts in 000s, except share and per share data) | |
2013 | | |
2010 | |
| | |
| | |
| |
| Loss per share – Basic: | |
| | | |
| | |
| Numerator for basic income (loss) per share | |
$ | 1,514 | | |
$ | 3,880 | |
| Denominator for basic income (loss) per share | |
| 12,009,285 | | |
| 2,087,068 | |
| Basic income (loss) per common share | |
$ | 0.13 | | |
$ | 1.86 | |
| | |
| | | |
| | |
| Loss per share – Diluted: | |
| | | |
| | |
| Numerator for diluted income (loss) per share | |
$ | 1,514 | | |
$ | 3,880 | |
| Adjust: Fair value of dilutive warrants outstanding | |
| (2,756 | ) | |
| - | |
| Numerator for diluted income (loss) per share | |
$ | (1,242 | ) | |
$ | 3,880 | |
| | |
| | | |
| | |
| Denominator for basic income (loss) per share | |
| 12,009,285 | | |
| 2,087,068 | |
| Plus: Incremental shares underlying warrants outstanding | |
| 5,624,075 | | |
| - | |
| Denominator for diluted income (loss) per share | |
| 17,633,360 | | |
| 2,087,068 | |
| Diluted income (loss) per common share | |
$ | (0.07 | ) | |
$ | 1.86 | (1) |
(1)The
impact of assumed exercise of warrants is not included because all of the warrants outstanding were “out of the money”
during this period.
Note 3 - Summary of Significant Accounting Policies
Principles of Consolidation and Basis of Presentation
The accompanying consolidated financial
statements include the accounts of the Company and its wholly owned subsidiary, Nephros International Limited. All intercompany
accounts and transactions have been eliminated in consolidation.
Use of Estimates in the Preparation of Financial Statements
The preparation of consolidated financial
statements in conformity with accounting principles generally accepted in the United States of America 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 valuation of
the warrant liability, the collection of accounts receivable, value of inventories, useful life of fixed assets and intangible
assets, and assumptions used in determining stock compensation such as expected volatility and risk-free interest rate. Certain
prior year amounts have been reclassified to conform to the current year presentation.
Going Concern and Management’s Response
The accompanying consolidated financial
statements have been prepared assuming that the Company will continue as a going concern. The Company’s recurring losses
and difficulty in generating sufficient cash flow to meet its obligations and sustain its operations raise substantial doubt about
its ability to continue as a going concern. The Company’s consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
The Company has incurred significant losses
from operations in each quarter since inception. In addition, the Company has not generated positive cash flow from operations
for the years ended December 31, 2014 and 2013. To become profitable, the
NEPHROS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3 - Summary of Significant
Accounting Policies (continued)
Company must increase revenue substantially
and achieve and maintain positive gross and operating margins. If the Company is not able to increase revenue and gross and operating
margins sufficiently to achieve profitability, its results of operations and financial condition will be materially and adversely
affected.
On December 18, 2014, the Company completed
a rights offering which resulted in gross proceeds of $3.0 million. See Note 12, Stockholders’ Deficit, for a more detailed
discussion of the rights offering. The Company repaid the August 29, 2014 senior secured note issued to Lambda Investors LLC (“Lambda”)
in the principal amount of $1.75 million with a portion of the proceeds from the rights offering. For a more detailed discussion
of the terms of the August 2014 senior secured note, see Note 8, Senior Secured Notes.
There can be no assurance that the Company’s
future cash flow will be sufficient to meet its obligations and commitments. If the Company is unable to generate sufficient cash
flow from operations in the future to service its commitments, the Company will be required to adopt alternatives, such as seeking
to raise debt or equity capital, curtailing its planned activities or ceasing its operations. There can be no assurance that any
such actions could be effected on a timely basis or on satisfactory terms or at all, or that these actions would enable the Company
to continue to satisfy its capital requirements.
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.
Major Customers
For the years ended December 31, 2014 and
2013, three customers accounted for 78% and 86%, respectively, of the Company’s revenues. As of December 31, 2014 three customers
accounted for 83% of the Company’s accounts receivable. As of December 31, 2013, two customers accounted for 97% of the Company’s
accounts receivable
Accounts Receivable
The Company provides credit terms to customers
in connection with purchases of the Company’s products. Management periodically reviews customer account activity in order
to assess the adequacy of the allowances provided for potential collection issues and returns. Factors considered include economic
conditions, each customer’s payment and return history and credit worthiness. Adjustments, if any, are made to reserve balances
following the completion of these reviews to reflect management’s best estimate of potential losses. There was
an allowance for doubtful accounts of approximately $1,000 at December 31, 2014. There was no allowance for doubtful accounts at
December 31, 2013. There was no allowance for sales returns at December 31, 2014 or 2013. There were no write offs
of accounts receivable to bad debt expense during 2014 or 2013.
Inventory
The Company engages third parties to manufacture
and package inventory held for sale, takes title to certain inventory once manufactured, and warehouses such goods until packaged
for final distribution and sale. Inventory consists of finished goods held at the manufacturers’ facilities, and are valued
at the lower of cost or market using the first-in, first-out method.
The Company’s inventory reserve requirements
are based on factors including the products’ expiration date and estimates for the future sales of the product. If estimated
sales levels do not materialize, the Company will make adjustments to its assumptions for inventory reserve requirements.
In March 2014, the Company requested the
closeout of its October 2013 voluntary product recall. The Company destroyed the respective product in April 2014.
NEPHROS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3 - Summary of Significant
Accounting Policies (continued)
Patents
The Company has filed numerous patent applications
with the United States Patent and Trademark Office and in foreign countries. All costs and direct expenses incurred in connection
with patent applications have been expensed as incurred and are included in Selling, General and Administrative expenses on the
accompanying consolidated statement of operations and comprehensive loss.
Property and Equipment, net
Property and equipment, net is stated at
cost less accumulated depreciation. These assets are depreciated over their estimated useful lives of three to seven years using
the straight line method.
Impairment for Long-Lived Assets
The Company adheres to Accounting Standards
Codification (“ASC”) Topic 360 and periodically evaluates whether current facts or circumstances indicate that the
carrying value of its depreciable assets to be held and used may not be recoverable. If such circumstances are determined to exist,
an estimate of undiscounted future cash flows produced by the long-lived assets, or the appropriate grouping of assets, is compared
to the carrying value to determine whether impairment exists. If an asset is determined to be impaired, the loss is measured based
on the difference between the asset’s fair value and its carrying value. An estimate of the asset’s fair value is based
on quoted market prices in active markets, if available. If quoted market prices are not available, the estimate of fair value
is based on various valuation techniques, including a discounted value of estimated future cash flows. The Company reports an asset
to be disposed of at the lower of its carrying value or its estimated net realizable market value. There were no impairment losses
for long-lived assets recorded for the years ended December 31, 2014 and December 31, 2013.
Fair Value of Financial Instruments
The carrying amounts of cash, accounts
receivable, accounts payable and accrued expenses approximate fair value due to the short-term maturity of these instruments. See
Note 4 for information on the fair value of derivative liabilities.
Revenue Recognition
Revenue is recognized in accordance with
ASC Topic 605. Four basic criteria must be met before revenue can be recognized: (i) persuasive evidence of an arrangement
exists; (ii) delivery has occurred or services have been rendered; (iii) the fee is fixed or determinable; and (iv) collectability
is reasonably assured.
The Company recognizes revenue related
to product sales when delivery is confirmed by its external logistics provider and the other criteria of ASC Topic 605 are met.
Product revenue is recorded net of returns and allowances. All costs and duties relating to delivery are absorbed by Nephros.
All shipments are currently received directly by the Company’s customers.
Deferred revenue was approximately
$487,000 and $703,000 on the accompanying consolidated balance sheets as of December 31, 2014 and 2013, respectively, and is related
to the License Agreement with Bellco. The Company has recognized approximately $2,589,000 of revenue related to this license agreement
to date, including approximately $834,000 for the year ended December 31, 2014, resulting in $487,000 being deferred over the remainder
of the expected obligation period (see Note 14). The Company recognized approximately $711,000 of revenue related to this license
agreement for the year ended December 31, 2013.
Shipping and Handling Costs
Shipping and handling costs charged to
customers are recorded as cost of goods sold and were approximately $4,000 and $5,000 for the years ended December 31, 2014 and
2013, respectively.
Research and Development Costs
Research and development costs are expensed
as incurred.
NEPHROS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3 - Summary of Significant
Accounting Policies (continued)
Stock-Based Compensation
The Company accounts for stock-based compensation
in accordance with ASC Topic 718 by recognizing the fair value of stock-based compensation in the consolidated statement of operations
and comprehensive loss. The fair value of the Company’s stock option awards are estimated using a Black-Scholes option
valuation model. This model requires the input of highly subjective assumptions and elections including expected stock price volatility
and the estimated life of each award. In addition, the calculation of compensation costs requires that the Company estimate the
number of awards that will be forfeited during the vesting period. The fair value of stock-based awards is amortized over the vesting
period of the award.
Warrants
The Company accounts for stock warrants
as either equity instruments or derivative liabilities depending on the specific terms of the warrant agreement. Stock warrants
that allow for cash settlement or provide for anti-dilution of the warrant exercise price under certain conditions are accounted
for as derivative liabilities. The Company classifies derivative warrant liabilities on the balance sheet as a liability, which
is revalued using a binomial options pricing model at each balance sheet date subsequent to the initial issuance. A binomial options
pricing model requires the input of highly subjective assumptions and elections including expected stock price volatility and the
estimated life of each award. The changes in fair value of the derivative warrant liabilities are remeasured at each balance sheet
date and the resulting changes in fair value are recorded in current period earnings.
Amortization of Debt Issuance Costs
The Company accounts for debt issuance
costs in accordance with ASC 835, which allows that costs paid directly to the issuer of the notes be reported in the balance
sheet as a debt discount and amortized over the term of the associated debt. Debt issuance costs associated with the senior
secured note issued to Lambda on August 29, 2014 were $178,000. All of these costs, in addition to the remaining unamortized debt
issuance costs related to the senior secured note issued to Lambda on November 12, 2013 of $142,000, were amortized as of December
31, 2014 and are included in interest expense on the consolidated statements of operations and comprehensive loss for the year
ended December 31, 2014.
Total debt issuance costs recorded during
the year ended December 31, 2013 were approximately $399,000. Approximately $195,000 and $204,000, respectively, were associated
with the senior secured notes issued to Lambda on February 4, 2013 and November 12, 2013. Of the total debt issuance costs
amortized as of December 31, 2013, approximately $53,000 and $204,000, respectively, were related to the senior secured notes issued
to Lambda on February 4, 2013 and November 12, 2013 and are included in interest expense on the consolidated statements of operations
and comprehensive loss.
Other Income (Expense), net
Other income of approximately $58,000 for
the year ended December 31, 2014 is due to foreign currency transaction gains.
Other expense, net, of approximately $33,000
for the year ended December 31, 2013 is primarily due to other expenses of approximately $36,000 related to foreign currency transaction
losses and approximately $14,000 related to the May 2013 rights offering warrant modification. These expenses were partially
offset by other income of approximately $17,000, which consisted primarily of a refund of $15,000 received as a result of the Steris
agreement termination.
Income Taxes
The Company accounts for income taxes in
accordance with ASC Topic 740, which requires accounting for deferred income taxes under the asset and liability method. Deferred
income taxes are recognized for the tax consequences of temporary differences by applying enacted statutory tax rates applicable
in future years to differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities.
For financial reporting purposes, the Company
has incurred a loss in each period since its inception. Based on available objective evidence, including the Company’s history
of losses, management believes it is more likely than not that the net deferred tax assets will not be fully realizable. Accordingly,
the Company provided for a full valuation allowance against its net deferred tax assets at December 31, 2014 and 2013.
NEPHROS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3 - Summary of Significant
Accounting Policies (continued)
ASC Topic 740 prescribes, among other things,
a recognition threshold and measurement attributes for the financial statement recognition and measurement of uncertain tax positions
taken or expected to be taken in a company’s income tax return. ASC 740 utilizes a two-step approach for evaluating
uncertain tax positions. Step one, or recognition, requires a company to determine if the weight of available evidence indicates
a tax position is more likely than not to be sustained upon audit, including resolution of related appeals or litigation processes,
if any. Step two, or measurement, is based on the largest amount of benefit, which is more likely than not to be realized
on settlement with the taxing authority. The Company is subject to income tax examinations by major taxing authorities for
all tax years subsequent to 2011. During the years ended December 31, 2014 and 2013, the Company recognized no adjustments
for uncertain tax positions. However, management’s conclusions regarding this policy may be subject to review and adjustment
at a later date based on factors including, but not limited to, on-going analyses of and changes to tax laws, regulation and interpretations,
thereof.
Net Income (loss) per Common Share
Basic income (loss) per common share is
calculated by dividing net income (loss) available to common shareholders by the number of weighted average common shares issued
and outstanding. Diluted earnings (loss) per common share is calculated by dividing net income (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, 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.
The following securities have been excluded
from the dilutive per share computation as they are antidilutive:
| | |
December 31, | |
| | |
2014 | | |
2013 | |
| Shares underlying options outstanding | |
| 2,472,234 | | |
| 2,410,134 | |
| Shares underlying warrants outstanding | |
| 16,752,915 | | |
| 5,081,023 | |
| Unvested restricted stock | |
| 132,077 | | |
| 75,450 | |
Foreign Currency Translation
Foreign currency translation is recognized
in accordance with ASC Topic 830. The functional currency of Nephros International Limited is the Euro and its translation
gains and losses are included in accumulated other comprehensive income. The balance sheet is translated at the year-end rate.
The statement of operations is translated at the weighted average rate for the year.
Comprehensive Income (Loss)
Comprehensive income (loss), as defined
in ASC 220, is the total of net income (loss) and all other non-owner changes in equity (or other comprehensive income (loss)).
The Company’s other comprehensive income (loss) consists only of foreign currency translation adjustments.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards
Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, "Revenue from Contracts with Customers,"
related to revenue recognition. The underlying principle of the new standard is that a business or other organization will recognize
revenue to depict the transfer of promised goods or services to customers in an amount that reflects what it expects in exchange
for the goods or services. The standard also requires more detailed disclosures and provides additional guidance for transactions
that were not addressed completely in prior accounting guidance. ASU 2014-09 provides alternative methods of initial adoption,
and it is effective for annual reporting periods beginning after December 15, 2016, and interim periods within those annual periods.
Early adoption is not permitted. The Company is currently reviewing the revised guidance and assessing the potential impact on
its consolidated financial statements.
NEPHROS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3 - Summary of Significant
Accounting Policies (continued)
In August 2014, the FASB issued ASU No.
2014-15, “Presentation of Financial Statements - Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity's
Ability to Continue as a Going Concern.” ASU 2014-15 provides guidance about management's responsibility to evaluate whether
there is substantial doubt about an entity's ability to continue as a going concern and sets rules for how this information should
be disclosed in the financial statements. ASU 2014-15 is effective for annual periods ending after December 15, 2016 and interim
periods thereafter. Early adoption is permitted. The Company is currently evaluating any impact the adoption of ASU 2014-15 might
have on its consolidated financial statements.
In April 2015, the FASB issued ASU No.
2015-03, “Interest – Imputation of Interest (Subtopic 2015-03): Simplifying the Presentation of Debt Issuance Costs”
related to the presentation requirements for debt issuance costs and debt discount and premium. ASU 2015-03 requires that debt
issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying
amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs
are not affected by ASU 2015-03. ASU 2015-03 is effective for fiscal years beginning after December 15, 2015 and interim periods
within those fiscal years. Early adoption of the amendments in ASU 2015-03 is permitted for financial statements that have not
been previously issued. The Company does not believe that the adoption of ASU 2015-03 will have a significant impact on its consolidated
financial statements.
Note 4 – Financial Instruments
The Company’s 2007 Warrants are recorded
as liabilities at their estimated fair value at the date of issuance, with the subsequent changes in estimated fair value recorded
in changes in fair value of warrant liability in the Company’s consolidated statement of operations and comprehensive income
(loss) in each subsequent period. The Company utilizes a binomial options pricing model to value the 2007 Warrants.
The fair value guidance requires fair value
measurements be classified and disclosed in one of the following three categories:
| · | Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted
assets or liabilities; |
| · | Level 2: Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially
the full term of the asset or liability; |
| · | Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable
(i.e., supported by little or no market activity). |
The estimated fair value of the 2007 Warrants is determined
using Level 3 inputs. Inherent in a binomial options pricing model are assumptions related to expected stock-price volatility,
expected life, risk-free interest rate and dividend yield. The Company estimates the volatility of its common stock based on historical
volatility that matches the expected remaining life of the warrants. The risk-free interest rate is based on the U.S. Treasury
zero-coupon yield curve on the grant date for a maturity similar to the expected remaining life of the warrants. The expected life
of the warrants is assumed to be equivalent to their remaining contractual term. The dividend rate is based on the historical rate,
which the Company anticipates to remain at zero.
NEPHROS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4 – Financial Instruments (continued)
The following fair value hierarchy table
presents information about each major category of the Company’s financial assets and liability measured at fair value on
a recurring basis as of December 31, 2014 and 2013 (in thousands).
| | |
Fair value measurement 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) | | |
Total | |
| At December 31, 2014: | |
| | | |
| | | |
| | | |
| | |
| Warrant liability | |
$ | - | | |
$ | - | | |
$ | 7,386 | | |
$ | 7,386 | |
| | |
Fair value measurement 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) | | |
Total | |
| At December 31, 2013: | |
| | | |
| | | |
| | | |
| | |
| Warrant liability | |
$ | - | | |
$ | - | | |
$ | 3,109 | | |
$ | 3,109 | |
The Company has issued warrants to purchase
common stock that are measured at fair value on a recurring basis using unobservable inputs or available market data in a binomial
options pricing model to support the fair value (Level 3). A reconciliation of the warrant liability is as follows (in thousands):
| | |
2007 Warrants | |
| Balance at January 1, 2013 | |
$ | 8,129 | |
| Decrease in fair value of warrant liability | |
| (5,020 | ) |
| Balance at December 31, 2013 | |
$ | 3,109 | |
| Increase in fair value of warrant liability | |
| 4,277 | |
| Balance at December 31, 2014 | |
$ | 7,386 | |
The following table summarizes the calculated aggregate fair
values of the warrants, along with the assumptions utilized in each calculation:
| | |
2014 | | |
2013 | |
| Calculated aggregate value | |
$ | 7,386 | | |
$ | 3,109 | |
| Weighted average exercise price | |
$ | 0.30 | | |
$ | 0.40 | |
| Closing price per share of common stock | |
$ | 0.79 | | |
$ | 0.42 | |
| Volatility | |
| 165.6 | % | |
| 103.5 | % |
| Weighted average remaining expected life (years) | |
| 5.2 | | |
| 5.0 | |
| Risk-free interest rate | |
| 1.8 | % | |
| 1.6 | % |
| Dividend yield | |
| - | | |
| - | |
NEPHROS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5 - Inventory
The Company’s inventory components as of December 31,
2014 and 2013 were as follows:
| | |
December 31, | |
| | |
2014 | | |
2013 | |
| Total gross inventory, finished goods | |
$ | 297,000 | | |
$ | 527,000 | |
| Less: inventory reserve | |
| (111,000 | ) | |
| (365,000 | ) |
| Total inventory | |
$ | 186,000 | | |
$ | 162,000 | |
Note 6 - Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets as of December 31,
2014 and 2013 were as follows:
| | |
December 31, | |
| | |
2014 | | |
2013 | |
| Prepaid insurance premiums | |
$ | 70,000 | | |
$ | 70,000 | |
| Security deposit | |
| 21,000 | | |
| 21,000 | |
| Other | |
| 13,000 | | |
| 34,000 | |
| Prepaid expenses and other current assets | |
$ | 104,000 | | |
$ | 125,000 | |
Note 7 - Property and Equipment, Net
Property and equipment as of December 31, 2014 and 2013 was
as follows:
| | |
| |
December 31, | |
| | |
Life | |
2014 | | |
2013 | |
| Manufacturing equipment | |
3-5 years | |
$ | 599,000 | | |
$ | 599,000 | |
| Research equipment | |
5 years | |
| 37,000 | | |
| 37,000 | |
| Computer equipment | |
3-4 years | |
| 59,000 | | |
| 59,000 | |
| Furniture and fixtures | |
7 years | |
| 39,000 | | |
| 39,000 | |
| Property and equipment, gross | |
| |
| 734,000 | | |
| 734,000 | |
| Less: accumulated depreciation | |
| |
| 733,000 | | |
| 727,000 | |
| Property and equipment, net | |
| |
$ | 1,000 | | |
$ | 7,000 | |
Depreciation expense for each of the
years ended December 31, 2014 and 2013 was approximately $6,000 and $9,000, respectively.
During 2013, the Company sold fully depreciated equipment totaling
approximately $3,000 which is reflected as gain on sale of equipment on the consolidated statements of operations and comprehensive
loss.
Note 8 – Senior Secured Notes
On August 29, 2014, the Company issued
a senior secured note to Lambda, in the principal amount of $1.75 million. The note bore interest at the rate of 12% per annum
and was scheduled to mature on February 28, 2015, at which time all principal and accrued interest was due. However, the Company
paid all amounts due under the note on December 18, 2014 with the cash proceeds from the rights offering that closed in December
2014. In connection with the note, the Company incurred an 8%, or $140,000, sourcing/transaction fee with Lambda. In addition,
the Company incurred additional legal fees and other expenses in connection with the note in the amount of $38,000 with Lambda.
Those payments totaling $178,000 were initially reflected as a debt discount and amortized over the term of the note. For the year
ended December 31, 2014, $178,000 is included in interest expense on the consolidated statements of operations and comprehensive
loss.
On November 12, 2013, the Company issued
a senior secured note to Lambda in the principal amount of $1.5 million. The note bore interest at the rate of 12% per annum and
was scheduled to mature on May 12, 2014, at which time all principal and accrued interest was due. However, the Company paid amounts
due under the note on March 18, 2014 with the cash proceeds from the rights offering that closed in March 2014. In connection with
the note, the Company incurred an 8%, or $120,000, sourcing/transaction fee with Lambda. In addition, the Company incurred
additional legal fees and other expenses in connection with the note in the amount of $75,000 with Lambda. Those payments totaling
$195,000 were made on November 12, 2013 and are reflected as a debt discount which was amortized over the term of the senior secured
note. Approximately $142,000 and $53,000, respectively, are included in interest expense on the consolidated statements of operations
and comprehensive loss for the years ended December 31, 2014 and 2013.
NEPHROS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Lambda is an affiliate of Wexford Capital
LP, which is the managing member of Lambda. Arthur H. Amron, a director of the Company, is a partner and general counsel of Wexford
Capital LP. Paul A. Mieyal, a director of the Company and currently its acting President, CEO and CFO, is also a Vice President
of Wexford Capital LP.
Note 9 - Accrued Expenses
Accrued expenses as of December 31, 2014
and 2013 were as follows:
| | |
December 31, | |
| | |
2014 | | |
2013 | |
| Accrued legal | |
$ | 145,000 | | |
$ | 149,000 | |
| Accrued management bonus | |
| 50,000 | | |
| 81,000 | |
| Accrued directors’ compensation | |
| 36,000 | | |
| - | |
| Accrued stock transfer agent fees | |
| 27,000 | | |
| - | |
| Accrued accounting | |
| 23,000 | | |
| - | |
| Accrued interest | |
| 14,000 | | |
| 39,000 | |
| Accrued product recall | |
| - | | |
| 60,000 | |
| Accrued other | |
| 47,000 | | |
| 36,000 | |
| | |
$ | 342,000 | | |
$ | 365,000 | |
Note 10 - Income Taxes
A reconciliation of the income tax provision
computed at the statutory tax rate to the Company’s effective tax rate is as follows:
| | |
2014 | | |
2013 | |
| U.S. federal statutory rate | |
| 35.00 | % | |
| 35.00 | % |
| Warrant liability | |
| (23.70 | )% | |
| (155.10 | )% |
| State & local taxes | |
| 5.02 | % | |
| 6.40 | % |
| Tax on foreign operations | |
| 0.20 | % | |
| 2.00 | % |
| State research and development credits | |
| 0.55 | % | |
| (3.10 | )% |
| Other | |
| (3.10 | )% | |
| 6.50 | % |
| Valuation allowance | |
| (13.97 | )% | |
| 108.30 | % |
| Effective tax rate | |
| - | | |
| - | |
Significant components of the Company’s
deferred tax assets as of December 31, 2014 and 2013 are as follows:
| | |
2014 | | |
2013 | |
| Deferred tax assets: | |
| | | |
| | |
| Net operating loss carry forwards | |
$ | 27,935,165 | | |
$ | 27,029,000 | |
| Research and development credits | |
| 1,118,389 | | |
| 1,096,000 | |
| Nonqualified stock option compensation expense | |
| 1,913,673 | | |
| 1,801,000 | |
| Other temporary book - tax differences | |
| 436,178 | | |
| 408,000 | |
| Total deferred tax assets | |
| 31,403,405 | | |
| 30,334,000 | |
| Valuation allowance for deferred tax assets | |
| (31,403,405 | ) | |
| (30,334,000 | ) |
| Net deferred tax assets | |
$ | - | | |
$ | - | |
NEPHROS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10 - Income Taxes (continued)
A valuation allowance has been recognized
to offset the Company’s net deferred tax asset as it is more likely than not that such net asset will not be realized. The
Company primarily considered its historical loss and potential Internal Revenue Code Section 382 limitations to arrive at its conclusion
that a valuation allowance was required.
At December 31, 2014, the Company had Federal
and New Jersey income tax net operating loss carryforwards of $92,928,000 and foreign income tax net operating loss carryforwards
of $8,070,000. The Company also had Federal research tax credit carryforwards of $1,118,389 at December 31, 2014 and $1,096,000
at December 31, 2013. The Federal and New Jersey net operating loss carryforwards and Federal tax credit carryforwards will expire
at various times between 2014 and 2026 unless utilized.
It is the Company’s policy to report interest and penalties,
if any, related to unrecognized tax benefits in income tax expense.
Note 11 - Stock Plans, Share-Based Payments and Warrants
Stock Plans
In 2000, the Company adopted the Nephros
2000 Equity Incentive Plan. In January 2003, the Board of Directors adopted an amendment and restatement of the plan and renamed
it the Amended and Restated Nephros 2000 Equity Incentive Plan (the “2000 Plan”), under which 106,538 shares of common
stock had been authorized for issuance upon exercise of options granted.
As of December 31, 2014 there were no outstanding
options under the 2000 Plan. On March 15, 2014, the 2,834 options outstanding as of December 31, 2013 expired.
The Board retired the 2000 Plan in June
2004, and thereafter no additional awards may be granted under the 2000 Plan.
In 2004, the Board of Directors adopted
and the Company’s stockholders approved the Nephros, Inc. 2004 Stock Incentive Plan. During the year ended December 31, 2013,
the Company’s stockholders approved an amendment to such plan (as amended, the “2004 Plan”), that increased the
number of shares of the Company’s common stock that are authorized for issuance by the Company pursuant to grants of awards
under the 2004 Plan to 4,500,000.
As of December 31, 2014, 1,236,975 options
had been issued to employees under the 2004 Plan and were outstanding. The options expire on various dates between April 27, 2015
and February 5, 2024, and have vested or will vest upon a combination of the following: immediate vesting or straight line vesting
of two or four years. At December 31, 2014, there were 2,054,799 shares available for future grants under the 2004 Plan. As of
December 31, 2014, 903,709 options had been issued to non-employees under the 2004 Plan and were outstanding. Such options expire
at various dates between April 26, 2015 and November 17, 2024, and vest upon a combination of the following: immediate vesting
or straight line vesting of two or four years.
As of December 31, 2013, 1,028,509 options
had been issued to employees under the 2004 Plan and were outstanding. The options expire on various dates between April 27, 2015
and March 24, 2021, and vest upon a combination of the following: immediate vesting or straight line vesting of two or four years.
At December 31, 2013, there were 2,407,318 shares available for future grants under the 2004 Plan. As of December 31, 2013, 715,692
options had been issued to non-employees under the 2004 Plan and were outstanding. Such options expire at various dates between
November 11, 2014 and November 18, 2021, and vest upon a combination of the following: immediate vesting or straight line vesting
of two or four years.
In addition, 331,550 options were issued
in 2012 to the Company’s CEO per terms of his employment agreement and were outstanding as of December 31, 2014 and 2013.
Share-Based Payment
Expense is recognized, net of expected
forfeitures, over the vesting period of the options. Stock based compensation expense recognized for the years ended December 31,
2014 and 2013 was approximately $421,000 and approximately $418,000, respectively.
Gerald J. Kochanski, Chief Financial Officer,
Treasurer and Corporate Secretary of Nephros, Inc., resigned effective June 15, 2013. The Company agreed, in consideration of Mr.
Kochanski providing certain consulting services to the Company, to extend the exercise period of his outstanding vested stock options
from September 15, 2013 to March 14, 2014. The change in the terms under this modification did not result in any additional compensation
expense. All of Mr. Kochanski’s vested stock options expired on March 14, 2014.
NEPHROS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11 - Stock Plans, Share-Based Payments and Warrants
(continued)
The following table summarizes the option
activity for the years ended December 31, 2014 and 2013:
| | |
Shares | | |
Weighted
Average
Exercise
Price | |
| Outstanding at December 31, 2012 | |
| 2,294,714 | | |
$ | 2.14 | |
| Options granted | |
| 237,315 | | |
| 0.64 | |
| Options forfeited or expired | |
| (121,895 | ) | |
| 3.27 | |
| Outstanding at December 31, 2013 | |
| 2,410,134 | | |
| 1.28 | |
| Options granted | |
| 352,519 | | |
| 0.50 | |
| Options forfeited or expired | |
| (290,419 | ) | |
| 2.45 | |
| Outstanding at December 31, 2014 | |
| 2,472,234 | | |
$ | 0.96 | |
The following table summarizes the options
exercisable and vested and expected to vest as of December 31, 2014 and 2013:
| | |
Shares | | |
Weighted
Average
Exercise
Price | |
| Exercisable at December 31, 2013 | |
| 1,385,199 | | |
$ | 1.46 | |
| Vested and expected to vest at December 31, 2013 | |
| 2,350,688 | | |
$ | 1.29 | |
| Exercisable at December 31, 2014 | |
| 1,679,392 | | |
$ | 1.11 | |
| Vested and expected to vest at December 31, 2014 | |
| 2,426,249 | | |
$ | 1.04 | |
The following table summarizes information
about stock options outstanding and exercisable at December 31, 2014:
| | |
Options Outstanding | | |
Options Exercisable | |
Range of Exercise
Price | |
Number
Outstanding as
of December
31, 2014 | | |
Weighted
Average
Remaining
Contractual
Life in
Years | | |
Weighted
Average
Exercise
Price | | |
Number
Exercisable as
of
December 31,
2014 | | |
Weighted
Average
Exercise Price | |
| | |
| | |
| | |
| | |
| | |
| |
| $0.33 - $2.60 | |
| 2,460,284 | | |
| 8.57 | | |
$ | 0.91 | | |
| 1,667,441 | | |
$ | 0.92 | |
| $15.40 - $29.80 | |
| 10,450 | | |
| 4.51 | | |
$ | 21.89 | | |
| 10,450 | | |
$ | 21.89 | |
| $51.40-$96.00 | |
| 1,500 | | |
| 1.58 | | |
$ | 64.47 | | |
| 1,500 | | |
$ | 64.47 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
| Total Outstanding | |
| 2,472,234 | | |
| | | |
$ | 0.96 | | |
| 1,679,392 | | |
$ | 1.11 | |
NEPHROS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11 - Stock Plans, Share-Based Payments and Warrants
(continued)
The fair value of each option grant is
estimated on the date of grant using the Black-Scholes option pricing model with the below assumptions for the risk-free interest
rates, expected dividend yield, expected lives and expected stock price volatility.
| | |
Option Pricing Assumptions | |
| Grant Year | |
2014 | | |
2013 | |
| Stock Price Volatility | |
| 129.8 | % | |
| 129.8 | % |
| Risk-Free Interest Rates | |
| 1.86 | % | |
| 1.36 | % |
| Expected Life (in years) | |
| 5.84 | | |
| 5.91 | |
| Expected Dividend Yield | |
| 0 | % | |
| 0 | % |
Expected volatility is based on historical
volatility of the Company’s common stock at the time of grant. The risk-free interest rate is based on the U.S. Treasury
yields in effect at the time of grant for periods corresponding with the expected life of the options. For the expected life, the
Company is using the simplified method as described in the SEC Staff Accounting Bulletin 107. This method assumes that stock option
grants will be exercised based on the average of the vesting periods and the option’s life.
The total fair value of options vested
during the fiscal year ended December 31, 2014 was approximately $507,000. The total fair value of options vested during the
fiscal year ended December 31, 2013 was approximately $519,000.
The weighted-average fair value of options
granted in 2014 and 2013 is $0.45 and $0.56, respectively. The aggregate intrinsic value of stock options outstanding at December
31, 2014 is $241,000 and of stock options vested or expected to vest is approximately $235,000. A stock option has intrinsic value,
at any given time, if and to the extent that the exercise price of such stock option is less than the market price of the underlying
common stock at such time. The weighted-average remaining contractual life of options vested or expected to vest is 7.5 years.
The aggregate intrinsic value of stock
options outstanding at December 31, 2013 is $0 and of stock options vested or expected to vest is approximately $0. A stock option
has intrinsic value, at any given time, if and to the extent that the exercise price of such stock option is less than the market
price of the underlying common stock at such time. The weighted-average remaining contractual life of options vested or expected
to vest is 8.1 years.
As of December 31, 2014, the total remaining
unrecognized compensation cost related to non-vested stock options amounted to $504,000 and will be amortized over the weighted-average
remaining requisite service period of 1.9 years.
Restricted Stock
The Company has issued restricted stock
as compensation for the services of certain employees and non-employee directors. The grant date fair value of restricted
stock was based on the fair value of the common stock on the date of grant, and compensation expense is recognized based on the
period in which the restrictions lapse.
The following table summarizes restricted stock activity for
the year end December 31, 2014 and 2013:
| | |
Shares | | |
Weighted
Average
Grant Date
Fair Value | |
| Nonvested at December 31, 2012 | |
| - | | |
$ | - | |
| Granted | |
| 398,227 | | |
| 0.73 | |
| Vested | |
| (264,770 | ) | |
| 0.71 | |
| Forfeited | |
| (58,007 | ) | |
| 0.88 | |
| Nonvested at December 31, 2013 | |
| 75,450 | | |
| 0.66 | |
| Granted | |
| 132,077 | | |
| 0.86 | |
| Vested | |
| (75,450 | ) | |
| 0.66 | |
| Nonvested at December 31, 2014 | |
| 132,077 | | |
$ | 0.86 | |
NEPHROS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11 - Stock Plans, Share-Based Payments and Warrants
(continued)
Total stock-based compensation expense
for the restricted stock was approximately $109,000 for the year ended December 31, 2014 and is included in Selling, General and
Administrative expenses on the accompanying consolidated statement of operations and comprehensive loss. Any additional stock-based
compensation related to non-employee directors will be recorded to stock-based compensation expense. As of December 31, 2014, there
was approximately $8,000 of unrecognized compensation expense related to the restricted stock awards, which is expected to be recognized
over the next four months.
Warrants
The Company accounts for stock warrants as either equity
instruments or derivative liabilities depending on the specific terms of the warrant agreement. Stock warrants are accounted
for as derivative liabilities if the stock warrants allow for cash settlement or provide for modification of the warrant
exercise price in the event that subsequent sales of common stock are at a lower price per share than the then-current
warrant exercise price. The Company classifies derivative warrant liabilities on the balance sheet as a long-term liability,
which is measured to fair value at each balance sheet date subsequent to the initial issuance of the stock
warrant.
The following table summarizes certain
terms of all of the Company’s outstanding warrants at December 31, 2014 and 2013:
Total Outstanding Warrants
| Title of Warrant | |
Date Issued | |
Expiry Date | |
Exercise Price | | |
Total Common
Shares Issuable as December 31, | |
| | |
| |
| |
| | |
2014 | | |
2013 | |
| Liability-classified warrants | |
| |
| |
| | | |
| | | |
| | |
| 2007 Warrants - Lambda | |
11/14/2007 | |
3/21/2019 | |
$ | 0.30 | | |
| 11,742,100 | | |
| 8,806,575 | |
| | |
| |
| |
| | | |
| 11,742,100 | | |
| 8,806,575 | |
| | |
| |
| |
| | | |
| | | |
| | |
| Equity-classified warrants | |
| |
| |
| | | |
| | | |
| | |
| July 2009 Warrants | |
7/24/2009 | |
7/24/2014 | |
$ | 22.40 | | |
| - | | |
| 33,629 | |
| Shareholder Rights Offering Warrants | |
3/10/2011 | |
3/10/2016 | |
$ | 0.40 | | |
| 2,228,238 | | |
| 2,264,817 | |
| March 2011 Lambda Warrants | |
3/10/2011 | |
3/21/2019 | |
$ | 0.40 | | |
| 2,782,577 | | |
| 2,782,577 | |
| | |
| |
| |
| | | |
| 5,010,815 | | |
| 5,081,023 | |
| Total | |
| |
| |
| | | |
| 16,752,915 | | |
| 13,887,598 | |
The weighted average exercise price of
the outstanding warrants was $0.33 for December 31, 2014 and $0.45 for December 2013.
Following the issuance of the August 2014
senior secured note, Lambda’s existing warrants to purchase 11,742,100 shares that remain outstanding were amended to expire on
March 21, 2019.
As a result of the March 2014 rights offering, the full ratchet
anti-dilution protection for Class D warrants held by Lambda was triggered. The respective warrants are now exercisable for 11,742,100
shares of common stock at an exercise price of $0.30 per share compared to the 8,806,575 shares of common stock and $0.40 exercise
price prior to the rights offering.
Warrants exercised during 2014 and 2013
During the twelve months ended December
31, 2014, 791,278 warrants were exercised, resulting in proceeds of approximately $15,000 and the issuance of 36,570 shares of
the Company’s common stock.
In connection with the May 2013 rights
offering, the Company temporarily reduced the exercise price for its warrants issued in March 2011 from $0.40 per share to $0.30
per share. The Company determined that this inducement was a modification of equity instruments and, therefore, an incremental
fair value of the inducement was determined using the Black-Scholes option pricing model.
NEPHROS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11 - Stock Plans, Share-Based Payments and Warrants
(continued)
During the period that the May 2013 rights
offering was open, warrant holders exercised 14,879,708 warrants, issued in March 2011, for 687,793 shares of common stock, resulting
in gross proceeds of approximately $206,000 to the Company. The incremental fair value of the inducement recorded in the year
ended December 31, 2013 was approximately $14,000.
Additionally, during the twelve months
ended December 31, 2013, 2,254,500 warrants were exercised outside the period that the May 2013 rights offering was open, resulting
in proceeds of approximately $42,000 and the issuance of 104,206 shares of the Company’s common stock.
In addition, 9 and 374 common shares, respectively,
were not issued as a result of warrant exercises for the years ended December 31, 2014 and 2013 due to rounding.
Note 12 – Stockholders’
Deficit
December 2014 Rights Offering
On October 20, 2014, the Company filed
a Registration Statement on Form S-1 in connection with a $3 million rights offering. On November 4, 2014, the Company’s
Registration Statement on Form S-1 related to the Rights Offering was declared effective by the SEC.
The December 2014 rights offering commenced
on November 10, 2014 and expired on December 15, 2014. All of the Company’s stockholders and warrant holders were eligible
to participate in the rights offering on a pro rata basis based upon their proportionate ownership of the Company’s common
stock on a fully-diluted basis. Pursuant to the rights offering, the Company distributed to holders of its common stock and/or
warrants one non-transferable subscription right for each share of common stock, and each share of common stock underlying a warrant,
held as of November 5, 2014. Each right entitled the holder to purchase 0.11901 of a share of the Company’s common
stock at a subscription price of $0.60 per share. The Company rounded up any fractional shares to the nearest whole share.
On December 18, 2014, the Company completed
a rights offering which resulted in the issuance of 5,000,000 shares for gross proceeds of $3.0 million. The aggregate net proceeds
were approximately $1.1 million, after deducting the repayment of the $1.75 million August 2014 senior secured note, plus $64,000
of accrued interest thereon, issued to Lambda, and an aggregate of $75,000 for reimbursement of Lambda’s legal fees incurred
in connection with the August 2014 senior secured note and the rights offering.
March 2014 Rights Offering
On January 7, 2014, the Company filed a
Registration Statement on Form S-1 in connection with a $2.8 million rights offering. On February 12, 2014, the Company’s
Registration Statement on Form S-1 related to the March 2014 rights offering was declared effective by the SEC. The March 2014
rights offering commenced on February 14, 2014 and expired on March 14, 2014. All of the Company’s stockholders and warrant
holders were eligible to participate in the March 2014 rights offering on a pro rata basis based upon their proportionate ownership
of the Company’s common stock on a fully-diluted basis. Pursuant to the March 2014 rights offering, the Company distributed
to holders of its common stock and/or warrants one non-transferable subscription right for each share of common stock, and each
share of common stock underlying a warrant, held as of January 30, 2014. Each right entitled the holder to purchase 0.28673 of
a share of the Company’s common stock at a subscription price of $0.30 per share. The Company rounded up any fractional shares
to the nearest whole share.
On March 21, 2014, the Company completed
the March 2014 rights offering that resulted in gross proceeds of $2.1 million. The aggregate net proceeds were approximately $581,000,
after deducting the repayment of the November 2013 $1.5 million senior secured note and the $61,000 of accrued interest thereon.
The Company issued a total of 7,140,823
shares of common stock to the holders of subscription rights who validly exercised their subscription rights, which represents
77% of the total shares offered in the March 2014 rights offering. Fees of approximately $128,000 were also incurred related to
the March 2014 rights offering and were recorded as reduction to equity.
NEPHROS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 12 – Stockholders’
Deficit (continued)
May 2013 Rights Offering
On March 4, 2013, the Company filed a Registration
Statement on Form S-1 in connection with a $3 million rights offering. On April 17, 2013, the Company’s Registration
Statement on Form S-1 related to the May 2013 rights offering was declared effective by the SEC.
The May 2013 rights offering commenced
on April 17, 2013 and expired on May 17, 2013. All of the Company’s stockholders and warrant holders were eligible
to participate in the Rights Offering on a pro rata basis based upon their proportionate ownership of the Company’s common
stock on a fully-diluted basis. Pursuant to the May 2013 rights offering, the Company distributed to holders of its common
stock and/or warrants one non-transferable subscription right for each share of common stock, and each share of common stock underlying
a warrant, held as of April 4, 2013. Each right entitled the holder to purchase 0.18776 of a share of the Company’s
common stock at a subscription price of $0.60 per share. The Company rounded up any fractional shares to the nearest whole
share.
On May 22, 2013, the Company completed
its May 2013 rights offering which resulted in the issuance of 5,000,000 shares for gross proceeds of $3.0 million. The aggregate
net proceeds were approximately $1.4 million, after deducting the repayment of the $1.3 million February 2013 senior secured note,
plus $46,800 of accrued interest thereon, issued to Lambda, the payment of an 8% sourcing transaction fee of $104,000 with respect
to the February 2013 senior secured note and an aggregate of $100,000 for reimbursement of Lambda’s legal fees incurred in
connection with the February 2013 senior secured note and the May 2013 rights offering. Those payments totaling $204,000 are reflected
as amortization of debt discount.
Note 13 - 401(k) Plan
The Company has established a 401(k) deferred
contribution retirement plan (the “401(k) Plan”) which covers all employees. The 401(k) Plan provides for voluntary
employee contributions of up to 15% of annual earnings, as defined. As of January 1, 2004, the Company matches 100% of the first
3% and 50% of the next 2% of employee contributions to the 401(k) Plan. The Company contributed and expensed $43,000 and $46,000
in 2014 and 2013, respectively.
Note 14 - Commitments
and Contingencies
Manufacturing and Suppliers
The Company has not and does not intend
in the near future, to manufacture any of its products and components. With regard to the OLpur MD190 and MD220, on June 27, 2011,
the Company entered into a license agreement, effective July 1, 2011, with Bellco S.r.l., an Italy-based supplier of hemodialysis
and intensive care products, for the manufacturing, marketing and sale of our patented mid-dilution dialysis filters (MD 190, MD
220), referred to herein as the Products. Under the agreement, Nephros granted Bellco a license to manufacture, market and sell
the Products under its own name, label and CE mark in Italy, France, Belgium, Spain and Canada on an exclusive basis, and to do
the same on a non-exclusive basis in the United Kingdom and Greece and, upon our written approval, other European countries where
the Company does not sell the Products as well as non-European countries (referred to as the “Territory”).
On February 19, 2014, the Company entered
into the First Amendment to License Agreement (the “First Amendment”), by and between the Company and Bellco, which
amends the License Agreement, entered into as of July 1, 2011 by and between the Company and Bellco. Pursuant to the First
Amendment, the Company and Bellco agreed to extend the term of the License Agreement from December 31, 2016 to December 31, 2021.
The First Amendment also expands the Territory covered by the License Agreement to include Sweden, Denmark, Norway, Finland, Korea,
Mexico, Brazil, China and the Netherlands. The First Amendment further provides new minimum sales targets which, if not satisfied,
will, at the discretion of the Company, result in conversion of the license to non-exclusive status. The Company has agreed to
reduce the fixed royalty payment payable to the Company for the period beginning on January 1, 2015 through and including December
31, 2021. Beginning on January 1, 2015 through and including December 31, 2021, Bellco will pay the Company a royalty based on
the number of units of Products sold per year in the Territory as follows: for the first 125,000 units sold in total, €1.75
(approximately $2.40) per unit; thereafter, €1.25 (approximately $1.71) per unit. In addition, the Company received
a total of €450,000 (approximately $612,000) in upfront fees in connection with the First Amendment, half of which was received
on February 19, 2014 and the remaining half was received on April 4, 2014. In addition, the First Amendment provides that, in the
event that the Company pursues a transaction to sell, assign or transfer all right, title and interest to the licensed patents
to a third party, the Company will provide Bellco with written notice thereof and a right of first offer with respect to the contemplated
transaction for a period of thirty (30) days.
NEPHROS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 14 - Commitments and
Contingencies (continued)
License and Supply Agreement
On April 23, 2012, the Company
entered into a License and Supply Agreement (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 (collectively, the “Filtration Products”), and to engage in 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, excluding Italy for the first three years, 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. In exchange for the rights granted, the Company agreed to make
minimum annual aggregate purchases from Medica of €300,000 (approximately $400,000), €500,000 (approximately
$700,000) and €750,000 (approximately $880,000) for the years 2012, 2013 and 2014, respectively. In the year ended
December 31, 2014, the Company’s aggregate purchase commitments totaled approximately €766,000
(approximately $900,000). For calendar years 2015 through 2022, annual minimum amounts will be mutually agreed upon between
Medica and the Company. The annual minimum amount for calendar 2015 has not been finalized. In exchange for the license, the
Company paid Medica a total of €1,500,000 (approximately $2,000,000) in three installments: €500,000 (approximately
$700,000) on April 23, 2012, €600,000 (approximately $800,000) on February 4, 2013, and €400,000 (approximately
$500,000) on May 23, 2013.
As further consideration for the license
and other rights granted to the Company, the Company granted Medica options to purchase 300,000 shares of the Company’s common
stock. The fair market value of these stock options was approximately $273,000 at the time of their issuance, calculated as described
in Note 2 under Stock-Based Compensation. The fair market value of the options has been capitalized as a long-term intangible asset
along with the total installment payments described. Other long-term assets on the consolidated balance sheet is approximately
$1,684,000, net of $566,000 accumulated amortization, and is related to the License and Supply Agreement. The asset is being amortized
as an expense over the life of the agreement. Approximately $210,000 and $214,000 have been charged to amortization expense
for the years ended December 31, 2014 and 2013, respectively, on the consolidated statement of operations and comprehensive
loss. Approximately $210,000 of amortization expense will be recognized in each of the years ended December 31, 2015 through 2022.
In addition, for the period beginning April 23, 2014 through December 31, 2022, 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. The term of the License and Supply Agreement commenced on April 23, 2012 and continues in effect
through December 31, 2022, unless earlier terminated by either party in accordance with the terms of the License and Supply Agreement.
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.
Contractual Obligations
The Company had an operating lease that
expired on November 30, 2014 for the rental of its U.S. office and research and development facilities with a monthly cost of approximately
$8,000. On August 27, 2014, the Company signed a one year lease extension for the same office space which will expire on November
30, 2015 with a monthly cost of approximately $8,800 beginning December 1, 2014.
The lease agreement for the facilities
in Europe was entered into on July 1, 2010. The lease term is renewable for 6 month terms with a 2 month notice to discontinue,
on a rolling basis. The monthly cost is 500 Euro (approximately $600).
Rent expense
for the years ended December 31, 2014 and 2013 totaled $117,000 and $116,000, respectively.
NEPHROS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 14 - Commitments and
Contingencies (continued)
Contractual Obligations and Commercial
Commitments
The following tables summarize our approximate
minimum contractual obligations and commercial commitments as of December 31, 2014:
| | |
Payments Due in Period | |
| | |
Total | | |
Within
1 Year | | |
Years
1 - 3 | | |
Years
4 - 5 | | |
More than
5 Years | |
| | |
| | |
| | |
| | |
| | |
| |
| Leases | |
$ | 106,000 | | |
$ | 104,000 | | |
$ | 2,000 | | |
$ | - | | |
$ | - | |
| Employment Contracts (1) | |
| 175,000 | | |
| 175,000 | | |
| - | | |
| - | | |
| - | |
| Total | |
$ | 281,000 | | |
$ | 279,000 | | |
$ | 2,000 | | |
$ | - | | |
$ | - | |
(1) Represents amount payable under severance agreement
for John C. Houghton, effective January 4, 2015. See Note 15, Subsequent Events, for further discussion.
Product Recall
On October 30, 2013, the Company filed
a Current Report on Form 8-K announcing the voluntary recalls of its point of use (POU) and DSU in-line ultrafilters used in hospital
water treatment applications. As a result, the Company recalled all production lots of its POU filters, and also requested
that customers remove and discard certain labeling/promotional materials for the products. In addition, the Company also
requested, for the DSU in-line ultrafilter, that customers remove and discard certain labeling/promotional materials for the product.
These voluntary recalls did not affect the Company’s dialysis products. The consolidated financial statements for the
year ended December 31, 2013 included product revenues and cost of goods sold adjustments of approximately $216,000 and $110,000,
respectively, reflecting estimates of the financial impact of product recalled to the Company. The recall and the related
circumstances could subject the Company to claims or proceedings by consumers, the FDA or other regulatory authorities which may
adversely impact the Company’s sales and revenues. The Company destroyed the respective product in April 2014.
Note 15 - Subsequent Events
On January 4, 2015, the Board of Directors
appointed Daron Evans, a member of the Board, to serve as Chairman of the Board. Also on January 4, 2015, the Board of Directors
appointed Paul A. Mieyal, a member of the Board, to serve as the Acting President, Acting Chief Executive Officer, Acting Chief
Financial Officer and Acting Secretary of the Company. Dr. Mieyal succeeded John C. Houghton, whose separation of employment as
President, Chief Executive Officer and Acting Chief Financial Officer of the Company was effective on January 4, 2015. In addition,
Mr. Houghton resigned as a member of the Board, effective on January 4, 2015. The resignation as a member of the Board was not
due to any disagreement by or with Mr. Houghton on any matter relating to the Company’s operations, policies or practices.
In connection with his separation from employment with the Company, Mr. Houghton entered into a Separation Agreement and General
Release (the “Agreement”). Pursuant to the Agreement, Mr. Houghton is entitled to six months severance and is permitted
to exercise his vested unexpired stock options for ninety days following January 4, 2015. During the severance term, Mr. Houghton
will be subject to customary non-competition, non-solicitation and confidentiality restrictions.
NEPHROS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
| | |
(Unaudited) | | |
(Audited) | |
| | |
March 31, 2015 | | |
December 31, 2014 | |
| ASSETS | |
| | | |
| | |
| Current assets: | |
| | | |
| | |
| Cash | |
$ | 367 | | |
$ | 1,284 | |
| Accounts receivable, net | |
| 334 | | |
| 110 | |
| Inventory, net | |
| 208 | | |
| 186 | |
| Prepaid expenses and other current assets | |
| 82 | | |
| 104 | |
| Total current assets | |
| 991 | | |
| 1,684 | |
| Property and equipment, net | |
| - | | |
| 1 | |
| Other assets, net of accumulated amortization | |
| 1,631 | | |
| 1,684 | |
| Total assets | |
$ | 2,622 | | |
$ | 3,369 | |
| | |
| | | |
| | |
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | |
| | | |
| | |
| Current liabilities: | |
| | | |
| | |
| Accounts payable | |
$ | 754 | | |
$ | 835 | |
| Accrued expenses | |
| 432 | | |
| 342 | |
| Deferred revenue, current portion | |
| 70 | | |
| 70 | |
| Total current liabilities | |
| 1,256 | | |
| 1,247 | |
| Warrant liability | |
| 6,377 | | |
| 7,386 | |
| Long-term portion of deferred revenue | |
| 400 | | |
| 417 | |
| Total liabilities | |
| 8,033 | | |
| 9,050 | |
| | |
| | | |
| | |
| Commitments and Contingencies | |
| | | |
| | |
| | |
| | | |
| | |
| Stockholders’ deficit: | |
| | | |
| | |
| Preferred stock, $.001 par value; 5,000,000 shares authorized at March 31, 2015 and December 31, 2014; no shares issued and outstanding at March 31, 2015 and December 31, 2014 | |
| - | | |
| - | |
| Common stock, $.001 par value; 90,000,000 shares authorized at March 31, 2015 and December 31, 2014; 30,392,480 and 30,391,513 shares issued and outstanding at March 31, 2015 and December 31, 2014, respectively. | |
| 30 | | |
| 30 | |
| Additional paid-in capital | |
| 108,409 | | |
| 108,382 | |
| Accumulated other comprehensive income | |
| 72 | | |
| 72 | |
| Accumulated deficit | |
| (113,922 | ) | |
| (114,165 | ) |
| Total stockholders’ deficit | |
| (5,411 | ) | |
| (5,681 | ) |
| Total liabilities and stockholders’ deficit | |
$ | 2,622 | | |
$ | 3,369 | |
The accompanying notes are an integral
part of these unaudited condensed consolidated interim financial statements.
NEPHROS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS AND COMPREHENSIVE LOSS
(In thousands, except share and per share
amounts)
(Unaudited)
| | |
Three Months Ended March 31, | |
| | |
2015 | | |
2014 | |
| Net revenues: | |
| | | |
| | |
| Product revenues | |
$ | 527 | | |
$ | 219 | |
| License revenues | |
| 17 | | |
| 254 | |
| Total net revenues | |
| 544 | | |
| 473 | |
| Cost of goods sold | |
| 262 | | |
| 106 | |
| Gross margin | |
| 282 | | |
| 367 | |
| Operating expenses: | |
| | | |
| | |
| Research and development | |
| 192 | | |
| 163 | |
| Depreciation and amortization | |
| 53 | | |
| 55 | |
| Selling, general and administrative | |
| 843 | | |
| 711 | |
| Total operating expenses | |
| 1,088 | | |
| 929 | |
| Loss from operations | |
| (806 | ) | |
| (562 | ) |
| Change in fair value of warrant liability | |
| 1,009 | | |
| (2,751 | ) |
| Interest expense | |
| (11 | ) | |
| (195 | ) |
| Other income (expense) | |
| 51 | | |
| (3 | ) |
| Net income (loss) | |
| 243 | | |
| (3,511 | ) |
| Other comprehensive loss, foreign currency translation adjustments | |
| - | | |
| (1 | ) |
| Total comprehensive income (loss) | |
$ | 243 | | |
$ | (3,512 | ) |
| Net income (loss) per common share, basic | |
$ | 0.01 | | |
$ | (0.19 | ) |
| Weighted average common shares outstanding, basic | |
| 30,259,823 | | |
| 18,816,746 | |
| Net loss per common share, diluted | |
$ | (0.02 | ) | |
$ | (0.19 | ) |
| Weighted average common shares outstanding, diluted | |
| 37,082,499 | | |
| 18,816,746 | |
The accompanying notes are an integral
part of these unaudited condensed consolidated interim financial statements.
NEPHROS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN
STOCKHOLDERS’ DEFICIT
(In Thousands,
Except Share Amounts)
(Unaudited)
| | |
Common Stock | | |
Additional Paid-in | | |
Accumulated Other Comprehensive | | |
Accumulated | | |
| |
| | |
Shares | | |
Amount | | |
Capital | | |
Income | | |
Deficit | | |
Total | |
| Balance, December 31, 2014 (audited) | |
| 30,391,513 | | |
$ | 30 | | |
$ | 108,382 | | |
$ | 72 | | |
$ | (114,165 | ) | |
$ | (5,681 | ) |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Net income | |
| | | |
| | | |
| | | |
| | | |
| 243 | | |
| 243 | |
| Exercise of warrants | |
| 967 | | |
| | | |
| 1 | | |
| | | |
| | | |
| 1 | |
| Noncash stock-based compensation | |
| | | |
| | | |
| 26 | | |
| | | |
| | | |
| 26 | |
| Balance, March 31, 2015 | |
| 30,392,480 | | |
$ | 30 | | |
$ | 108,409 | | |
$ | 72 | | |
$ | (113,922 | ) | |
$ | (5,411 | ) |
The accompanying notes are an integral
part of these unaudited condensed consolidated interim financial statements.
NEPHROS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS
(In thousands)
(Unaudited)
| | |
Three Months Ended March 31, | |
| | |
2015 | | |
2014 | |
| Operating activities: | |
| | | |
| | |
| Net income (loss) | |
$ | 243 | | |
$ | (3,511 | ) |
| Adjustments to reconcile net income (loss) to net cash used in operating activities: | |
| | | |
| | |
| Depreciation of property and equipment | |
| 1 | | |
| 2 | |
| Amortization of other assets | |
| 52 | | |
| 53 | |
| Noncash stock-based compensation, including stock options and restricted stock | |
| 26 | | |
| 120 | |
| Change in fair value of warrant liability | |
| (1,009 | ) | |
| 2,751 | |
| Amortization of debt discount | |
| - | | |
| 142 | |
| Inventory reserve | |
| (2 | ) | |
| 17 | |
| (Gain)/loss on foreign currency transactions | |
| (40 | ) | |
| 1 | |
| (Increase) decrease in operating assets: | |
| | | |
| | |
| Accounts receivable | |
| (224 | ) | |
| (355 | ) |
| Inventory | |
| (20 | ) | |
| (46 | ) |
| Prepaid expenses and other current assets | |
| 22 | | |
| 53 | |
| Increase (decrease) in operating liabilities: | |
| | | |
| | |
| Accounts payable | |
| (39 | ) | |
| (40 | ) |
| Accrued expenses | |
| 90 | | |
| (172 | ) |
| Deferred revenue | |
| (17 | ) | |
| 363 | |
| Net cash used in operating activities | |
| (917 | ) | |
| (622 | ) |
| Financing activities: | |
| | | |
| | |
| Proceeds from issuance of common stock, net of equity issuance costs of $125 | |
| - | | |
| 2,016 | |
| Proceeds from exercise of warrants | |
| 1 | | |
| 1 | |
| Payment of senior secured note | |
| - | | |
| (1,500 | ) |
| Net cash provided by financing activities | |
| 1 | | |
| 517 | |
| Effect of exchange rates on cash | |
| (1 | ) | |
| (1 | ) |
| Net decrease in cash | |
| (917 | ) | |
| (106 | ) |
| Cash, beginning of period | |
| 1,284 | | |
| 579 | |
| Cash, end of period | |
$ | 367 | | |
$ | 473 | |
| Supplemental disclosure of cash flow information | |
| | | |
| | |
| Cash paid for interest | |
$ | 14 | | |
$ | 77 | |
The accompanying notes are an integral
part of these unaudited condensed consolidated interim financial statements.
NEPHROS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
INTERIM FINANCIAL STATEMENTS
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. Nephros was founded by health
professionals, scientists and engineers affiliated with Columbia University to develop advanced End Stage Renal Disease (“ESRD”)
therapy technology and products. The Company has two products in the hemodiafiltration, or HDF, modality to deliver therapy for
ESRD patients. These are the OLpūr mid-dilution HDF filter or “dialyzer,” designed expressly for HDF therapy,
and the OLpūr H2H HDF module, an add-on module designed to allow the most common types of hemodialysis machines to be used
for HDF therapy. In 2009, the Company introduced its Dual Stage Ultrafilter (“DSU”) water filter, which represented
a new and complementary product line to the Company’s ESRD therapy business. The DSU incorporates the Company’s unique
and proprietary dual stage filter architecture.
On June 4, 2003, Nephros International
Limited was incorporated under the laws of Ireland as a wholly-owned subsidiary of the Company. In August 2003, the Company
established a European Customer Service and financial operations center in Dublin, Ireland.
Note 2 – Basis of Presentation and Going Concern
Interim Financial Information
The accompanying unaudited condensed
consolidated interim financial statements of Nephros, Inc. and its wholly owned subsidiary, Nephros International Limited
(collectively, the “Company” or “Nephros”) should be read in conjunction with the audited
consolidated financial statements and notes thereto included in the Company’s 2014 Annual Report on Form 10-K filed
with the Securities and Exchange Commission (the “SEC”) on April 15, 2015. In the Company’s Annual Report
on Form 10-K for the year ended December 31, 2014, the Company restated (i) its audited consolidated financial statements as
of and for the years ended December 31, 2013, 2012, 2011, 2010 and 2009, including the cumulative effect as of January 1,
2009, and (ii) its unaudited condensed consolidated interim financial statements as of, and for each of the quarterly periods
ended, March 31, June 30, and September 30, in the years 2014 and 2013. The restatement results from the Company's prior
accounting for certain outstanding common stock purchase warrants originally issued in November 2007 as components of equity
instead of as derivative liabilities. Accordingly, certain amounts as of and for the quarter ended March 31, 2014 presented
herein reflect these previously restated amounts. The accompanying consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim
financial information and in accordance with the instructions to Form 10-Q and Article 8 and Article 10 of Regulation S-X.
Accordingly, since they are interim statements, the accompanying condensed consolidated interim financial statements do not
include all of the information and notes required by GAAP for a complete financial statement presentation. The condensed
consolidated balance sheet as of December 31, 2014 was derived from the Company’s audited consolidated financial
statements but does not include all disclosures required by GAAP. In the opinion of management, the condensed consolidated
interim financial statements reflect all adjustments consisting of normal, recurring adjustments that are necessary for a
fair presentation of the financial position, results of operations and cash flows for the condensed consolidated interim
periods presented. Interim results are not necessarily indicative of results for a full year. Certain reclassifications were
made to the prior year’s amounts to conform to the 2015 presentation. All intercompany transactions and balances have
been eliminated in consolidation.
Use of Estimates
The preparation of financial statements
in conformity with 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 valuation of the warrant liability, the collection of accounts receivable, value of inventories, useful
life of fixed assets and intangible assets, and assumptions used in determining stock compensation such as expected volatility
and risk-free interest rate.
Going Concern and Management’s Response
The accompanying financial statements have
been prepared assuming that the Company will continue as a going concern. The Company’s recurring operating losses and difficulty
in generating sufficient cash flow to meet its obligations and sustain its operations raise substantial doubt about its ability
to continue as a going concern. The Company’s condensed consolidated interim financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
The Company has incurred significant losses in operations in
each quarter since inception. To become profitable, the Company must increase revenue substantially and achieve and maintain positive
gross and operating margins. If the Company is not able to increase revenue and gross and operating margins sufficiently to achieve
profitability, its results of operations and financial condition will be materially and adversely affected.
NEPHROS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
INTERIM FINANCIAL STATEMENTS
There can be no assurance that the Company’s
future cash flow will be sufficient to meet its obligations and commitments. If the Company is unable to generate sufficient cash
flow from operations in the future to service its commitments, the Company will be required to adopt alternatives, such as seeking
to raise debt or equity capital, curtailing its planned activities or ceasing its operations. There can be no assurance that any
such actions could be effected on a timely basis or on satisfactory terms or at all, or that these actions would enable the Company
to continue to satisfy its capital requirements.
Note 3 – Concentration of Credit Risk
For the three months ended March 31, 2015
and 2014, the following customers accounted for the following percentages of the Company’s sales, respectively.
| Customer | |
2015 | | |
2014 | |
| A | |
| 30 | % | |
| 9 | % |
| B | |
| 28 | % | |
| 25 | % |
| C | |
| 18 | % | |
| - | % |
| D | |
| 3 | % | |
| 54 | % |
As of March 31, 2015 and December 31, 2014,
the following customers accounted for the following percentages of the Company’s accounts receivable, respectively.
| Customer | |
2015 | | |
2014 | |
| A | |
| 35 | % | |
| 22 | % |
| B | |
| 17 | % | |
| - | % |
| C | |
| 16 | % | |
| - | % |
| D | |
| 12 | % | |
| 25 | % |
| E | |
| - | % | |
| 35 | % |
Note 4 – Revenue Recognition
Revenue is recognized in accordance with
Accounting Standards Codification ("ASC") Topic 605. Four basic criteria must be met before revenue can be recognized:
(i) persuasive evidence that an arrangement exists; (ii) delivery has occurred or services have been rendered; (iii) the fee is
fixed or determinable; and (iv) collectability is reasonably assured.
The Company recognizes revenue related
to product sales when delivery is confirmed by its external logistics provider and the other criteria of ASC Topic 605 are met.
Product revenue is recorded net of returns and allowances. All costs and duties relating to delivery are absorbed by the Company.
Shipments for all products are currently received directly by the Company’s customers.
Deferred revenue on the accompanying March
31, 2015 condensed consolidated balance sheet is approximately $470,000 and is related to the License Agreement with Bellco, which
is being deferred over the remainder of the expected obligation period. The Company has recognized approximately $2,606,000 of
revenue related to the License Agreement to date and approximately $17,000 for the three months ended March 31, 2015. The Company
recognized approximately $254,000 of revenue related to this License Agreement for the three months ended March 31, 2014. Revenue
recognized in the three months ended March 31, 2015 relates only to the upfront payment received in February 2014. All previously
received payments related to the License Agreement were fully recognized as revenue as of December 31, 2014. Approximately $52,000
of revenue will be recognized in the remaining nine months of fiscal year 2015 and approximately $69,000 of revenue will be recognized
in each of the years ended December 31, 2016 through 2021. See Note 11, Commitments and Contingencies, for further discussion
of the Bellco License Agreement.
NEPHROS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
INTERIM FINANCIAL STATEMENTS
Note 5 – Fair Value of Financial Instruments
The carrying amounts of cash, accounts
receivable, accounts payable and accrued expenses approximate fair value due to the short-term maturity of these instruments.
The Company’s outstanding warrants
that were originally issued in 2007 (the “2007 Warrants”) are accounted for as a derivative liability because the transactions
that would trigger the anti-dilution adjustment provision in the 2007 Warrants are not inputs to the fair value of the warrants.
The 2007 Warrants are recorded as liabilities at their estimated fair value at the date of issuance, with the subsequent changes
in estimated fair value recorded in changes in fair value of warrant liability in the Company’s consolidated statement of
operations and comprehensive income (loss) in each subsequent period. The Company utilizes a binomial options pricing model to
value the 2007 Warrants at each reporting period.
The fair value guidance requires fair value
measurements be classified and disclosed in one of the following three categories:
| |
· |
Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities; |
| |
· |
Level 2: Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability; |
| |
· |
Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity). |
The estimated fair value of the 2007 Warrants
is determined using Level 3 inputs. Inherent in a binomial options pricing model are assumptions related to expected stock-price
volatility, expected life, risk-free interest rate and dividend yield. The Company estimates the volatility of its common stock
based on historical volatility that matches the expected remaining life of the warrants. The risk-free interest rate is based on
the U.S. Treasury zero-coupon yield curve on the grant date for a maturity similar to the expected remaining life of the warrants.
The expected life of the warrants is assumed to be equivalent to their remaining contractual term. The dividend rate is based on
the historical rate, which the Company anticipates to remain at zero.
The following fair value hierarchy table
presents information about each major category of the Company’s financial assets and liabilities measured at fair value on
a recurring basis as of March 31, 2015 and December 31, 2014 (in thousands):
| | |
Fair value measurement 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) | | |
Total | |
| At March 31, 2015: | |
| | | |
| | | |
| | | |
| | |
| Warrant liability | |
$ | - | | |
$ | - | | |
$ | 6,377 | | |
$ | 6,377 | |
| | |
Fair value measurement 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) | | |
Total | |
| At December 31, 2014: | |
| | | |
| | | |
| | | |
| | |
| Warrant liability | |
$ | - | | |
$ | - | | |
$ | 7,386 | | |
$ | 7,386 | |
NEPHROS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
INTERIM FINANCIAL STATEMENTS
Note 5 – Fair Value of Financial Instruments (continued)
On the condensed consolidated statement of operations for the
three month periods ended March 31, 2015 and 2014, the Company recorded income of $1,009,000 and expense of $2,751,000, respectively,
as a result of the change in fair value of the warrant liability.
The following table summarizes the calculated aggregate fair
values of the warrants, along with the assumptions utilized in each calculation:
| | |
March 31, | | |
December 31, | |
| | |
2015 | | |
2014 | |
| Calculated aggregate value | |
$ | 6,377 | | |
$ | 7,386 | |
| Weighted average exercise price | |
$ | 0.30 | | |
$ | 0.30 | |
| Closing price per share of common stock | |
$ | 0.60 | | |
$ | 0.79 | |
| Volatility | |
| 138 | % | |
| 165.6 | % |
| Weighted average remaining expected life (years) | |
| 4.7 | | |
| 5.0 | |
| Risk-free interest rate | |
| 1.4 | % | |
| 1.8 | % |
| Dividend yield | |
| - | | |
| - | |
Note 6 – Stock-Based Compensation
Stock Options
The Company accounts for stock option grants
to employees and non-employee directors under the provisions of ASC 718, Stock Compensation. ASC 718 requires the recognition
of the fair value of stock-based compensation in the statement of operations. In addition, the Company accounts for
stock option grants to consultants under the provisions of ASC 505-50, Equity-Based Payments to Non-Employees, and as such, these
stock options are revalued at each reporting period through the vesting period.
The fair value of stock option awards is
estimated using a Black-Scholes option pricing model. The fair value of stock-based awards is amortized over the vesting
period of the award using the straight-line method.
The Company calculates expected volatility
for a stock-based grant based on historic monthly common stock price observations during the period immediately preceding the grant
that is equal in length to the expected term of the grant. The Company also estimates future forfeitures, using historical employee
behaviors related to forfeitures, as a part of the estimate of expense as of the grant date. With respect to grants of options,
the risk free rate of interest is based on the U.S. Treasury rates appropriate for the expected term of the grant.
Stock-based compensation expense was approximately
$20,000 and $118,000 for the three months ended March 31, 2015 and 2014, respectively. For the three months ended March
31, 2015, approximately $16,000 and approximately $4,000 are included in Selling, General and Administrative expenses and Research
and Development expenses, respectively, on the accompanying condensed consolidated statement of operations. For the three months
ended March 31, 2014, approximately $110,000 and approximately $8,000 are included in Selling, General and Administrative expenses
and Research and Development expenses, respectively, on the accompanying condensed consolidated statement of operations.
There was no tax benefit related to expense
recognized in the three months ended March 31, 2015 and 2014, as the Company is in a net operating loss position. As of March 31,
2015, there was approximately $111,000 of total unrecognized compensation cost related to unvested share-based compensation awards
granted under the equity compensation plans, which will be amortized over the weighted average remaining requisite service period
of 3.1 years. Such amount does not include the effect of future grants of equity compensation, if any. Of
the approximately $111,000 of total unrecognized compensation cost, the Company expects to recognize approximately 65% in the remaining
interim periods of 2015, approximately 27% in 2016 and approximately 8% in 2017.
NEPHROS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
INTERIM FINANCIAL STATEMENTS
Note 6 – Stock-Based Compensation (continued)
Restricted Stock
Total stock-based compensation expense
for the restricted stock grants was approximately $6,000 for the three months ended March 31, 2015 and is included in Selling,
General and Administrative expenses on the accompanying condensed consolidated statement of operations. As of March 31, 2015, there
was approximately $2,000 of unrecognized compensation expense related to the restricted stock awards, which is expected to be recognized
over the next three months.
Note 7 – Warrants
For the three months ended March 31, 2015,
20,927 warrants were exercised, resulting in proceeds of approximately $1,000 and the issuance of 967 shares of the Company’s
common stock.
Note 8 – Net Income (Loss) per Common Share
Basic income (loss) per common share is
calculated by dividing net income (loss) available to common shareholders by the number of weighted average common shares issued
and outstanding. Diluted earnings (loss) per common share is calculated by dividing net income (loss) available to common
shareholders, adjusted for the change in the fair value of the warrant liability 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,
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.
| | |
For the three months | |
| | |
March 31, | | |
March 31, | |
| | |
2015 | | |
2014 | |
| | |
| | |
| |
| Loss per share – Basic: | |
| | | |
| | |
| Numerator for basic income (loss) per share | |
$ | 243,000 | | |
$ | (3,511,000 | ) |
| Denominator for basic income (loss) per share | |
| 30,259,823 | | |
| 18,816,746 | |
| Basic income (loss) per common share | |
$ | 0.01 | | |
$ | (0.19 | ) |
| | |
| | | |
| | |
| Loss per share – Diluted: | |
| | | |
| | |
| Numerator for diluted income (loss) per share | |
$ | 243,000 | | |
$ | (3,511,000 | ) |
| Adjust: Change in fair value of dilutive warrants outstanding | |
| (1,009,000 | ) | |
| 2,751,000 | |
| Numerator for diluted income (loss) per share | |
$ | (766,000 | ) | |
$ | (760,000 | ) |
| | |
| | | |
| | |
| Denominator for basic income (loss) per share | |
| 30,259,823 | | |
| 18,816,746 | |
| Plus: Incremental shares underlying warrants outstanding | |
| 6,822,676 | | |
| - | |
| Denominator for diluted income (loss) per share | |
| 37,082,499 | | |
| 18,816,746 | |
| Diluted income (loss) per common share | |
$ | (0.02 | ) | |
$ | (0.19 | ) |
The following potentially dilutive securities
have been excluded from the computations of diluted weighted-average shares outstanding as they would be anti-dilutive:
| | |
March 31, | |
| | |
2015 | | |
2014 | |
| Shares underlying warrants outstanding | |
| 5,009,848 | | |
| 16,820,281 | |
| Shares underlying options outstanding | |
| 2,094,562 | | |
| 2,375,748 | |
| Unvested restricted stock | |
| 132,077 | | |
| 59,199 | |
NEPHROS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
INTERIM FINANCIAL STATEMENTS
Note 9 – Recent Accounting
Pronouncements
In May 2014, the Financial
Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, "Revenue from
Contracts with Customers," related to revenue recognition. The underlying principle of the new standard is that a business
or other organization will recognize revenue to depict the transfer of promised goods or services to customers in an amount that
reflects what it expects in exchange for the goods or services. The standard also requires more detailed disclosures and provides
additional guidance for transactions that were not addressed completely in prior accounting guidance. ASU 2014-09 provides alternative
methods of initial adoption, and it is effective for annual reporting periods beginning after December 15, 2016, and interim periods
within those annual periods. Early adoption is not permitted. The Company is currently reviewing the revised guidance and assessing
the potential impact on its consolidated financial statements.
In August 2014, the
FASB issued ASU No. 2014-15, “Presentation of Financial Statements - Going Concern (Subtopic 205-40): Disclosure of Uncertainties
about an Entity's Ability to Continue as a Going Concern.” ASU 2014-15 provides guidance about management's responsibility
to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern and sets rules for how
this information should be disclosed in the financial statements. ASU 2014-15 is effective for annual periods ending after December
15, 2016 and interim periods thereafter. Early adoption is permitted. The Company is currently evaluating any impact the adoption
of ASU 2014-15 might have on its consolidated financial statements.
In April 2015, the FASB
issued ASU No. 2015-03, “Interest – Imputation of Interest (Subtopic 2015-03): Simplifying the Presentation of Debt
Issuance Costs” related to the presentation requirements for debt issuance costs and debt discount and premium. ASU 2015-03
requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction
from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt
issuance costs are not affected by ASU 2015-03. ASU 2015-03 is effective for fiscal years beginning after December 15, 2015 and
interim periods within those fiscal years. Early adoption of the amendments in ASU 2015-03 is permitted for financial statements
that have not been previously issued. The Company does not believe that the adoption of ASU 2015-03 will have a significant impact
on its consolidated financial statements.
Note 10 – Inventory, net
Inventory is stated at the lower of cost
or market using the first-in first-out method and consists entirely of finished goods. The Company’s inventory as of March
31, 2015 and December 31, 2014 was as follows:
| | |
March 31, 2015 | | |
December 31, 2014 | |
| | |
(Unaudited) | | |
(Audited) | |
| Total Gross Inventory, Finished Goods | |
$ | 308,000 | | |
$ | 297,000 | |
| Less: Inventory reserve | |
| (100,000 | ) | |
| (111,000 | ) |
| Total Inventory | |
$ | 208,000 | | |
$ | 186,000 | |
Note 11 – Commitments
and Contingencies
Manufacturing and Suppliers
The Company has not, and does not intend
in the near future, to manufacture any of its products and components. With regard to the OLpur MD190 and MD220, on June 27, 2011,
the Company entered into a License Agreement, effective July 1, 2011, with Bellco S.r.l., an Italy-based supplier of hemodialysis
and intensive care products, for the manufacturing, marketing and sale of our patented mid-dilution dialysis filters (MD 190, MD
220), referred to herein as the Products. Under the agreement, Nephros granted Bellco a license to manufacture, market and sell
the Products under its own name, label and CE mark in Italy, France, Belgium, Spain and Canada on an exclusive basis, and to do
the same on a non-exclusive basis in the United Kingdom and Greece and, upon our written approval, other European countries where
the Company does not sell the Products as well as non-European countries (referred to as the “Territory”).
On February 19, 2014, the Company entered
into the First Amendment to License Agreement (the “First Amendment”), by and between the Company and Bellco, which
amends the License Agreement. Pursuant to the First Amendment, the Company and Bellco agreed to extend the term of the License
Agreement from December 31, 2016 to December 31, 2021. The First Amendment also expands the Territory covered by the License Agreement
to include Sweden, Denmark, Norway, Finland, Korea, Mexico, Brazil, China and the Netherlands. The First Amendment further provides
new minimum sales targets which, if not satisfied,
will, at the discretion of the Company, result in conversion of the license to non-exclusive status. The Company has agreed to
reduce the fixed royalty payment payable to the Company for the period beginning on January 1, 2015 through and including December
31, 2021. Beginning on January 1, 2015 through and including December 31, 2021, Bellco will pay the Company a royalty based on
the number of units of Products sold per year in the Territory as follows: for the first 125,000 units sold in total, €1.75
(approximately $1.90) per unit; thereafter, €1.25 (approximately $1.36) per unit. In addition, the Company received
a total of €450,000 (approximately $612,000) in upfront fees in connection with the First Amendment, half of which was received
on February 19, 2014 and the remaining half was received on April 4, 2014. In addition, the First Amendment provides that, in the
event that the Company pursues a transaction to sell, assign or transfer all right, title and interest to the licensed patents
to a third party, the Company will provide Bellco with written notice thereof and a right of first offer with respect to the contemplated
transaction for a period of thirty (30) days.
NEPHROS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
INTERIM FINANCIAL STATEMENTS
Note 11 – Commitments and Contingencies (continued)
License and Supply Agreement
On April 23, 2012, the Company entered
into a License and Supply Agreement (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 (collectively, the
“Filtration Products”), and to engage in 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, excluding Italy for the first three years, 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. In exchange for the rights granted, the Company
agreed to make minimum annual aggregate purchases from Medica of €300,000 (approximately $400,000), €500,000 (approximately
$700,000) and €750,000 (approximately $880,000) for the years 2012, 2013 and 2014, respectively. In the three months
ended March 31, 2015, the Company’s aggregate purchase commitments totaled approximately €243,000 (approximately $265,000).
For calendar years 2015 through 2022, annual minimum amounts will be mutually agreed upon between Medica and the Company. The annual
minimum amount for calendar 2015 is €1,000,000 (approximately $1,085,000). In exchange for the license, the Company paid Medica
a total of €1,500,000 (approximately $2,000,000) in three installments: €500,000 (approximately $700,000) on April 23,
2012, €600,000 (approximately $800,000) on February 4, 2013, and €400,000 (approximately $500,000) on May 23, 2013.
As further consideration for the license
and other rights granted to the Company, the Company granted Medica options to purchase 300,000 shares of the Company’s common
stock. The fair market value of these stock options was approximately $273,000 at the time of their issuance, calculated as described
in Note 6 under Stock-Based Compensation. The fair market value of the options has been capitalized as a long-term intangible asset
along with the total installment payments described. Other long-term assets on the consolidated balance sheet is approximately
$1,631,000, net of $619,000 accumulated amortization, and is related to the License and Supply Agreement. The asset is being amortized
as an expense over the life of the agreement. Approximately $52,000 has been charged to amortization expense in each of the three
month periods ended March 31, 2015 and 2014 on the consolidated statement of operations and comprehensive loss. Approximately
$158,000 of amortization expense will be recognized in the remaining nine months of fiscal year 2015 and approximately $210,000
of amortization expense will be recognized in each of the years ended December 31, 2016 through 2022. In addition, for the period
beginning April 23, 2014 through December 31, 2022, 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.
The term of the License and Supply Agreement commenced on April 23, 2012 and continues in effect through December 31, 2022, unless
earlier terminated by either party in accordance with the terms of the License and Supply Agreement.
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.
NEPHROS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
INTERIM FINANCIAL STATEMENTS
Note 12 – Subsequent Events
The Board appointed Daron Evans as the
Company’s President and Chief Executive Officer, as well as its Acting Chief Financial Officer, effective April 15, 2015.
Upon his appointment as President and Chief Executive Officer, Mr. Evans resigned as Chairman of the Board. Lawrence J. Centella,
a member of the Board since 2001, was appointed Chairman of the Board. Mr. Evans succeeds Paul A. Mieyal, who had been serving
as the Company’s Acting President, Chief Executive Officer and Chief Financial Officer since January 2015. Dr. Mieyal resigned
from such offices as of the Effective Date, but continues to serve as a member of the Board.
The terms of Mr. Evans’ employment
with the Company are set forth in an Employment Agreement dated as of April 15, 2015 (the “Employment Agreement”).
The Employment Agreement provides for a four-year term expiring on April 14, 2019 (the “Term”), unless sooner terminated
by either party. Pursuant to the Employment Agreement, Mr. Evans will receive an initial annualized base salary of $240,000 and
will be eligible to receive an annual performance bonus of up to 30% of his annualized base salary. At such time that the Company
begins trading its shares on a national securities exchange, the Board may review and adjust Mr. Evans’ base salary to a
market competitive level. In addition, Mr. Evans was granted a 10-year stock option to purchase an aggregate of 2,184,193 shares
of the Company’s common stock pursuant to the Company’s 2015 Equity Incentive Plan. 50% of the options will vest upon
the achievement of annual revenue targets of $3,000,000, $6,000,000 and $10,000,000; 15% of the options will vest upon the Company
listing on a national securities exchange; and 35% of the options will vest over four years in 16 equal, quarterly installments.
The option is exercisable at a price of $0.60 per share, which represents the closing sale price of the Company’s common
stock on April 15, 2015.
On May 4, 2015, the Company entered into
a Second Amendment to License and Supply Agreement (the “Second Amendment”) with Medica S.p.A. (“Medica”).
Pursuant to the Second Amendment, the Company and Medica agreed that the total minimum amount of purchases by the Company from
Medica for calendar year 2015 will be €1,000,000 (approximately $1,085,000). Additionally, the Company and Medica agreed that
Italy will continue to be excluded from the worldwide license, and that, until December 31, 2022, the Company will pay Medica a
royalty of 3% of net sales, in addition to any other payments required, except that if the Company sublicenses to a third party
the right to market and sell its HydraGuard products, the Company will pay Medica a fee of €2.00 (approximately $2.17) per
HydraGuard unit in lieu of the 3% royalty.
On May 6, 2015, the Company entered into
a Sublicense Agreement with CamelBak Products, LLC (“CamelBak”). Under this Sublicense Agreement, the Company granted
to 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 Company’s HydraGuard individual water treatment devices. The sublicensed
intellectual property is licensed to the Company by Medica pursuant to the License and Supply Agreement, as amended, between the
Company and Medica, which granted the Company an exclusive license, with right of sublicense, to market, promote, distribute, offer
for sale and sell certain filtration products based upon Medica’s proprietary Medisulfone ultrafiltration technology in combination
with the Company’s filtration products, which includes the HydraGuard individual water treatment devices.
In exchange for the rights granted to CamelBak,
CamelBak agreed to pay the Company 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 the Company a fixed per-unit fee for any other sales made. CamelBak is also required to meet
or exceed certain minimum annual fees payable to the Company, and if such fees are not met or exceeded, the Company may convert
the exclusive sublicense to a non-exclusive sublicense with respect to non-U.S. military sales. Additionally, the Company has the
right to terminate the sublicense with respect to a specific geographic area if CamelBak enters into an agreement or otherwise
obtains or develops the rights to market or sell a product that competes with the HydraGuard individual water treatment devices
in such geographic area. If the Company does not terminate the sublicense in such situation, and the sales of the competing product
in such geographic area exceed the sales of the HydraGuard individual water treatment devices in the same area during any full
calendar year, the Company may convert the exclusive sublicense to a non-exclusive sublicense solely with respect to such geographic
area. The Sublicense Agreement will expire on December 31, 2022, unless earlier terminated in accordance with the terms of the
Sublicense Agreement.
On May 7, 2015, the Board appointed Malcolm
Persen as a director of the Company. Mr. Persen was also appointed to serve as the Chair of the Audit Committee of the Board. The
Company will provide Mr. Persen with the standard compensation and indemnification approved for non-employee directors.
On May 12, 2015, the Company entered into
a Securities Purchase Agreement (the “Purchase Agreement”) with certain purchasers identified therein. Pursuant to
the Purchase Agreement, the Company agreed to issue and sell, and the purchasers agreed to purchase, an aggregate of approximately
1.8 million shares at a price of $0.67 per share for total gross proceeds of approximately $1.2 million. In addition, the Company
will issue to the purchasers warrants to purchase approximately 0.9 million shares of common stock. The warrants will have an exercise
price of $0.85 per share and will be exercisable for 5 years from the closing date. The purchase and sale of the shares and warrants
is expected to close on or about May 15, 2015, subject to satisfying customary closing conditions.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance
and Distribution.
The following table
sets forth the estimated costs and expenses payable by the registrant in connection with the sale of the securities being registered.
All amounts are estimates.
| SEC filing fee | |
$ | 224 | |
| Legal fees and expenses | |
$ | 20,000 | |
| Accounting fees and expenses | |
$ | 10,000 | |
| Miscellaneous | |
$ | 5,000 | |
| Total | |
$ | 35,224 | |
Item 14. Indemnification of Directors
and Officers.
Section 145 of the Delaware General Corporation
Law, or DGCL, permits a corporation, under specified circumstances, to indemnify its directors, officers, employees or agents
against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlements actually and reasonably incurred
by them in connection with any action, suit or proceeding brought by third parties by reason of the fact that they were or are
directors, officers, employees or agents of the corporation, if such directors, officers, employees or agents acted in good faith
and in a manner they reasonably believed to be in or not opposed to the best interests of the corporation and, with respect to
any criminal action or proceeding, had no reason to believe their conduct was unlawful. In a derivative action, that is one by
or in the right of the corporation, indemnification may be made only for expenses actually and reasonably incurred by directors,
officers, employees or agents in connection with the defense or settlement of an action or suit, and only with respect to a matter
as to which they will have acted in good faith and in a manner they reasonably believed to be in or not opposed to the best interests
of the corporation, except that no indemnification will be made if such person will have been adjudged liable to the corporation,
unless and only to the extent that the court in which the action or suit was brought will determine upon application that the
defendant directors, officers, employees or agents are fairly and reasonably entitled to indemnity for such expenses despite such
adjudication of liability.
Our Fourth Amended and Restated Certificate
of Incorporation, as amended, provides for indemnification of our directors and officers of the registrant to the fullest extent
permitted by the DGCL. Our Second Amended and Restated By-Laws provides that the we will generally indemnify our directors, officers,
employees or agents to the fullest extent permitted by the law against all losses, claims, damages or similar events. We have
obtained liability insurance for each director and officer for certain losses arising from claims or charges made against them
while acting in their capacities as directors or officers of our company.
Item 15. Recent Sales of Unregistered
Securities.
On July 24, 2009, we raised gross proceeds
of $1,251,000 through the private placement to eight accredited investors of an aggregate of 67,258 shares of our common stock
and warrants to purchase an aggregate of 33,629 shares of our common stock, representing 50% of the shares of common stock purchased
by each investor. We sold the shares to investors at a price per share equal to $18.60. The warrants had an exercise price of
$22.40, were exercisable immediately and terminated on July 24, 2014.
On March 10, 2011, we completed a rights
offering and private placement that together resulted in gross proceeds of approximately $3.2 million and estimated net proceeds
of approximately $2.3 million to the Company after deducting the payments to Lambda Investors and after estimated expenses of
the rights offering. In the rights offering, we sold 4,964,854 units at $0.40 per unit for gross proceeds of approximately $2.0
million, resulting in the issuance of 4,964,854 shares of common stock and warrants to purchase an aggregate of 4,590,171 shares
of common stock. The warrants expire on March 10, 2016 and have an exercise price of $0.40 per share. All amounts are reported
on a post-reverse stock split basis.
Based upon the completion of the rights
offering Lambda Investors purchased in a private placement 3,009,711 units at a per unit purchase price of $0.40 for aggregate
gross proceeds of approximately $1.2 million, pursuant to a purchase agreement between Nephros and Lambda Investors. Each unit
consisted of one share of common stock and a warrant to purchase 0.924532845 shares of common stock at an exercise price of $0.40
per share for a period of five years following the issue date of the warrant, resulting in Lambda Investors acquiring 3,009,711
shares of common stock and a warrant to purchase 2,782,577 shares of common stock. All amounts are reported on a post-reverse
stock split basis. Net proceeds, after deducting the aggregate of $666,650 in payments due Lambda Investors were approximately
$537,000.
Concurrently with its 2011 Offering, Nephros
entered into an Exchange Agreement with each of Southpaw Credit Opportunity Master Fund LP, 3V Capital Master Fund Ltd, Distressed/High
Yield Trading Opportunities, Ltd., Kudu Partners, L.P. and LJHS Company (collectively, the “Exchange Investors” and
together with the New Investors, the “Investors”), pursuant to which the Exchange Investors agreed to exchange the
principal and accrued but unpaid interest in an aggregate amount of approximately $5.6 million under the 6% Secured Convertible
Notes due 2012 (“Old Notes”) of Nephros, for new Series B 10% Secured Convertible Notes due 2008 in an aggregate principal
amount of $5.3 million (the “Exchange Notes”). All principal and accrued but unpaid interest under the New Notes automatically
converted into (i) an aggregate of 912,756 shares of our common stock, par value $0.001 per share at a conversion price per share
equal to $14.12 and (ii) in the case of Purchased Notes, but not Exchange Notes, Class D Warrants to purchase an aggregate of
455,628 shares of common stock with an exercise price per share equal to $14.12.
In 2011, Lambda Investors LLC committed
to purchase, through a private placement evidenced by a purchase agreement, 3,009,711 Units, which amount equals the number of
Units that would otherwise be available for purchase by Lambda Investors pursuant to the exercise of its basic subscription privilege,
at the rights offering subscription price of $0.40 per Unit, so long as certain conditions were met, including that stockholders
not affiliated with Lambda Investors subscribe for at least 4,375,000 of the Units offered in the rights offering. In addition,
under the purchase agreement, Lambda Investors had the right to purchase, at the rights offering subscription price, that number
of Units that would otherwise be available for purchase by Lambda Investors pursuant to its over-subscription privilege in the
event our other stockholders did not exercise their basic subscription privileges in full and Lambda Investors purchases 3,009,711
Units under the purchase agreement. Lambda Investors did not receive any compensation for its purchase commitment.
On May 12, 2015, the Company entered into
a securities purchase agreement with various accredited investors pursuant to which the Company agreed to sell in a private placement
a total of 1,834,299 units of its securities, each unit consisting of one share of its common stock and a five-year warrant to
purchase one-half of one share of the Company’s common stock. Pursuant to the purchase agreement, the closing of the purchase
and sale of the shares and warrants occurred on May 19, 2015. The purchase price for each unit was $0.67. The warrants are exercisable
at a price of $0.85 per warrant share. The sale of the shares and warrants resulted in aggregate gross proceeds of approximately
$1.23 million, before deducting expenses.
The sales of the securities described above
were not registered under the Securities Act because they were made in transactions exempt from registration under Section 4(2)
of the Securities Act and/or Rule 506 promulgated thereunder.
Item 16. Exhibits.
| (a) | Exhibits. The following exhibits are filed as
part of this registration statement: |
EXHIBIT INDEX
| Exhibit
No. |
|
Description |
| 3.1 |
|
Fourth Amended and Restated Certificate of Incorporation of the Registrant, incorporated
by reference to Nephros, Inc.’s Registration Statement on Form S-8 (Reg. No. 333-127264), filed with the Securities
and Exchange Commission on August 5, 2005. |
| |
|
|
| 3.2 |
|
Certificate of Amendment to the Fourth Amended and Restated Certificate of Incorporation
of the Registrant, incorporated by reference to Nephros, Inc.’s Quarterly Report on Form 10-QSB for the quarter ended
June 30, 2007, filed with the Securities and Exchange Commission on August 13, 2007 (SEC File No. 001-32288). |
| |
|
|
| 3.3 |
|
Certificate of Amendment to the Fourth Amended and Restated Certificate of Incorporation
of the Registrant, incorporated by reference to Nephros, Inc.’s Quarterly Report on Form 10-QSB for the quarter ended
June 30, 2007, filed with the Securities and Exchange Commission on August 13, 2007 (SEC File No. 001-32288). |
| |
|
|
| 3.4 |
|
Certificate of Amendment to the Fourth Amended and Restated Certificate of Incorporation
of the Registrant as filed with the Delaware Secretary of State on November 13, 2007, incorporated by reference to Nephros,
Inc.’s Quarterly Report on Form 10-QSB for the quarter ended September 30, 2007, filed with the Securities and Exchange
Commission on November 13, 2007 (SEC File No. 001-32288). |
| 3.5 |
|
Certificate of Amendment to the Fourth Amended and Restated Certificate
of Incorporation of the Registrant as filed with the Delaware Secretary of State on October 26, 2009, incorporated by reference
to Nephros, Inc.’s Registration Statement on Form S-1 (Reg. No. 333-162781), filed with the Securities and Exchange
Commission on October 30, 2009. |
| |
|
|
| 3.6 |
|
Certificate of Amendment to the Fourth Amended and Restated Certificate of Incorporation
of the Registrant as filed with the Delaware Secretary of State on March 10, 2011, incorporated by reference to Nephros, Inc.’s
Current Report on Form 8-K, filed with the Securities and Exchange Commission on March 16, 2011. |
| |
|
|
| 3.7 |
|
Certificate of Amendment to the Fourth Amended and Restated Certificate of Incorporation
of the Registrant as filed with the Delaware Secretary of State on March 11, 2011, incorporated by reference to Nephros, Inc.’s
Current Report on Form 8-K, filed with the Securities and Exchange Commission on March 16, 2011. |
| |
|
|
| 3.8 |
|
Second Amended and Restated By-Laws of the Registrant, incorporated by reference to Nephros,
Inc.’s Current Report on Form 8 K, filed with the Securities and Exchange Commission on December 3, 2007 (SEC File No.
001-32288). |
| |
|
|
| 4.1 |
|
Specimen of Common Stock Certificate of the Registrant, incorporated by reference to Nephros,
Inc.’s Amendment No. 1 to Registration Statement on Form S-1/A (Reg. No. 333-116162), filed with the Securities and
Exchange Commission on July 20, 2004. |
| |
|
|
| 4.4 |
|
Form of Class D Warrant, incorporated by reference to Nephros, Inc.’s Current Report
on Form 8-K, filed with the Securities and Exchange Commission on September 25, 2007 (SEC File No. 001-32288). |
| |
|
|
| 4.6 |
|
Form of Investor Warrant issued on July 24, 2009, incorporated by reference to Nephros,
Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2009, filed with the Securities and Exchange Commission
on August 14, 2009. |
| |
|
|
| 4.7 |
|
Form of Warrant Certificate, incorporated by reference to Nephros, Inc.’s Registration
Statement on Form S-1 (Reg. No. 333 169728), filed with the Securities and Exchange Commission on October 1, 2010. |
| |
|
|
| 4.8 |
|
Form of Warrant Agreement between Nephros, Inc. and Continental Stock Transfer & Trust
Company, incorporated by reference to Nephros, Inc.’s Amendment No. 1 to Registration Statement on Form S-1/A (Reg.
No. 333-169728), filed with the Securities and Exchange Commission on November 8, 2010. |
| |
|
|
| 4.9 |
|
Form of Subscription Rights Certificate, incorporated by reference to Nephros, Inc.’s
Registration Statement on Form S-1 (Reg. No. 333-169728), filed with the Securities and Exchange Commission on October 1,
2010. |
| |
|
|
| 4.10 |
|
Form of Subscription Rights Certificate, incorporated by reference to Nephros, Inc.’s
Amendment No. 1 to Registration Statement on Form S-1/A (Reg. No. 333-199483 ), filed with the Securities and Exchange Commission
on October 31, 2014. |
| |
|
|
| 4.11 |
|
Form of Subscription Agent Agreement, incorporated by reference to Nephros, Inc.’s
Amendment No. 1 to Registration Statement on Form S-1/A (Reg. No. 333-199483 ), filed with the Securities and Exchange Commission
on October 31, 2014. |
| |
|
|
| 4.12 |
|
Form of Common Stock Purchase Warrant to be issued to various investors, incorporated by
reference to Nephros, Inc.’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on May 18,
2015. |
| |
|
|
| 5.1 |
|
Opinion of Fredrikson & Byron P.A. as to the legality of the securities being registered.
* |
| |
|
|
| 10.2 |
|
2004 Nephros Stock Incentive Plan, incorporated by reference to Nephros, Inc.’s Amendment
No. 1 to Registration Statement on Form S-1/A (Reg. No. 333-116162), filed with the Securities and Exchange Commission on
July 20, 2004. † |
| |
|
|
| 10.3 |
|
Amendment No. 1 to 2004 Nephros Stock Incentive Plan, incorporated by reference to Nephros,
Inc.’s Registration Statement on Form S-8 (Reg. No. 333-127264), filed with the Securities and Exchange Commission on
August 5, 2005. † |
| |
|
|
| 10.4 |
|
Amendment No. 2 to the Nephros, Inc. 2004 Stock Incentive Plan, incorporated by reference
to Nephros, Inc.’s Quarterly Report on Form 10-QSB for the quarter ended September 30, 2007, filed with the Securities
and Exchange Commission on November 13, 2007 (SEC File No. 001-32288). |
| 10.12 |
|
Registration Rights Agreement, dated as of September 19, 2007, among
Nephros and the Holders, incorporated by reference to Nephros, Inc.’s Current Report on Form 8-K, filed with the Securities
and Exchange Commission on September 25, 2007 (SEC File No. 001-32288). |
| |
|
|
| 10.13 |
|
License Agreement, dated October 1, 2007, between the Trustees of Columbia University in
the City of New York, and Nephros, incorporated by reference to Nephros, Inc.’s Annual Report on Form 10-KSB for the
year ended December 31, 2007, filed with the Securities and Exchange Commission on March 31, 2008 (SEC File No. 001-32288). |
| |
|
|
| 10.14 |
|
Lease Agreement between Nephros, Inc. and 41 Grand Avenue, LLC dated as of November 20,
2008, incorporated by reference to Nephros, Inc.’s Current Report on Form 8-K, filed with the Securities and Exchange
Commission on November 20, 2008 (SEC File No. 001-32288). |
| |
|
|
| 10.16 |
|
Amendment No. 3 to the Nephros, Inc. 2004 Stock Incentive Plan, incorporated by reference
to Nephros, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2008, filed with the Securities and Exchange
Commission on March 31, 2009 (SEC File No. 001-32288). † |
| |
|
|
| 10.18 |
|
Form of Registration Rights Agreement, dated as of September 30, 2010, by and between the
Registrant and Lambda Investors LLC, incorporated by reference to Nephros, Inc.’s Registration Statement on Form S-1
(Reg. No. 333-169728), filed with the Securities and Exchange Commission on October 1, 2010. |
| |
|
|
| 10.19 |
|
Amendment No. 4 to the Nephros, Inc. 2004 Stock Incentive Plan, incorporated by reference
to Nephros, Inc.’s 2011 Proxy Statement (Exhibit A), filed with the Securities and Exchange Commission on December 2,
2010. † |
| |
|
|
| 10.21 |
|
License Agreement, entered into as of July 1, 2011 by and between Nephros, Inc. and Bellco
S.r.l., incorporated by reference to Nephros, Inc.’s Current Report on Form 8-K, filed with the Securities and Exchange
Commission on June 27, 2011. |
| |
|
|
| 10.22 |
|
License and Supply Agreement dated as of April 23, 2012 between Nephros, Inc. and Medica
S.p.A., incorporated by reference to Nephros, Inc.’s Current Report on Form 8-K, filed with the Securities and Exchange
Commission on April 26, 2012. |
| |
|
|
| 10.23 |
|
Employment Agreement dated as of April 20, 2012 between Nephros, Inc. and John C. Houghton,
incorporated by reference to Nephros, Inc.’s Current Report on Form 8-K, filed with the Securities and Exchange Commission
on April 26, 2012. † |
| |
|
|
| 10.24 |
|
Non-qualified Stock Option Agreement made as of July 3, 2012 by Nephros, Inc. and John C.
Houghton, incorporated by reference to Nephros, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September
30, 2012, filed with the Securities and Exchange Commission on November 9, 2012. † |
| |
|
|
| 10.25 |
|
Senior Secured Note, dated February 4, 2013, issued to Lambda Investors LLC, incorporated
by reference to Nephros, Inc.’s Registration Statement on Form S-1 (Reg. No. 333-187036), filed with the Securities
and Exchange Commission on March 4, 2013. |
| |
|
|
| 10.26 |
|
Registration Rights Agreement, dated February 4, 2013, by and between Nephros, Inc. and
Lambda Investors LLC, incorporated by reference to Nephros, Inc.’s Registration Statement on Form S-1 (Reg. No. 333-187036),
filed with the Securities and Exchange Commission on March 4, 2013. |
| |
|
|
| 10.27 |
|
Security Agreement, dated as of February 4, 2013, by and between Nephros, Inc. and Lambda
Investors LLC, incorporated by reference to Nephros, Inc.’s Registration Statement on Form S-1 (Reg. No. 333-187036),
filed with the Securities and Exchange Commission on March 4, 2013. |
| |
|
|
| 10.28 |
|
Intellectual Property Security Agreement, dated as of February 4, 2013, made by Nephros,
Inc. and Lambda Investors LLC, incorporated by reference to Nephros, Inc.’s Registration Statement on Form S-1 (Reg.
No. 333-187036), filed with the Securities and Exchange Commission on March 4, 2013. |
| |
|
|
| 10.29 |
|
First Amendment to Registration Rights Agreement, dated as of May 23, 2013, by and between
Nephros, Inc. and Lambda Investors LLC, incorporated by reference to Nephros, Inc.’s Quarterly Report on Form 10-Q,
filed with the Securities and Exchange Commission on August 13, 2013. |
| |
|
|
| 10.30 |
|
Amendment No. 6 to Nephros, Inc. 2004 Stock Incentive Plan dated June 14, 2013, incorporated
by reference to Nephros, Inc.’s Quarterly Report on Form 10-Q, filed with the Securities and Exchange Commission
on August 13, 2013. |
| 10.31 |
|
Senior Secured Note, dated November 12, 2013, issued to Lambda Investors
LLC, incorporated by reference to Nephros, Inc.’s Current Report on Form 8-K, filed with the Securities and Exchange
Commission on November 14, 2013. |
| |
|
|
| 10.32 |
|
Registration Rights Agreement, dated November 12, 2013, by and between Nephros, Inc. and
Lambda Investors LLC, incorporated by reference to Nephros, Inc.’s Current Report on Form 8-K, filed with the Securities
and Exchange Commission on November 14, 2013. |
| |
|
|
| 10.33 |
|
Security Agreement, dated as of November 12, 2013, by and between Nephros, Inc. and Lambda
Investors LLC, incorporated by reference to Nephros, Inc.’s Current Report on Form 8-K, filed with the Securities and
Exchange Commission on November 14, 2013. |
| |
|
|
| 10.34 |
|
Intellectual Property Security Agreement, dated as of November 12, 2013, made by Nephros,
Inc. and Lambda Investors LLC, incorporated by reference to Nephros, Inc.’s Current Report on Form 8-K, filed with the
Securities and Exchange Commission on November 14, 2013. |
| |
|
|
| 10.35 |
|
First Amendment to License Agreement, dated as of February 19, 2014, by and between Nephros,
Inc. and Bellco S.r.l., incorporated by reference to Nephros, Inc.’s Current Report on Form 8-K, filed with the Securities
and Exchange Commission on February 25, 2014. |
| |
|
|
| 10.36 |
|
First Amendment to Registration Rights Agreement, dated as of April 14, 2014, by and between
Nephros, Inc. and Lambda Investors LLC, incorporated by reference to Nephros, Inc.’s Quarterly Report on Form 10-Q for
the quarter ended March 31, 2014, filed with the Securities and Exchange Commission on May 14, 2014. |
| |
|
|
| 10.37 |
|
Senior Secured Note, dated August 29, 2014, issued to Lambda Investors LLC, incorporated
by reference to Nephros, Inc.’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on September
3, 2014. |
| |
|
|
| 10.38 |
|
Registration Rights Agreement, dated August 29, 2014, by and between Nephros, Inc. and Lambda
Investors LLC, incorporated by reference to Nephros, Inc.’s Current Report on Form 8-K, filed with the Securities and
Exchange Commission on September 3, 2014. |
| |
|
|
| 10.39 |
|
Security Agreement, dated as of August 29, 2014, by and between Nephros, Inc. and Lambda
Investors LLC, incorporated by reference to Nephros, Inc.’s Current Report on Form 8-K, filed with the Securities and
Exchange Commission on September 3, 2014. |
| |
|
|
| 10.40 |
|
Intellectual Property Security Agreement, dated as of August 29, 2014, made by Nephros,
Inc. and Lambda Investors LLC, incorporated by reference to Nephros, Inc.’s Current Report on Form 8-K, filed with the
Securities and Exchange Commission on September 3, 2014. |
| |
|
|
| 10.41 |
|
First Amendment to Registration Rights Agreement, dated as of September 23, 2014, by and
between Nephros, Inc. and Lambda Investors LLC, incorporated by reference to Nephros, Inc.’s Quarterly Report on Form
10-Q for the quarter ended September 30, 2014, filed with the Securities and Exchange Commission on November 13, 2014. |
| |
|
|
| 10.42 |
|
Employment Agreement dated April 15, 2015, between Daron Evans and Nephros, Inc., incorporated
by reference to Nephros, Inc.’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on April
21, 2015.† |
| |
|
|
| 10.43 |
|
Separation Agreement and General Release between the Company and John C. Houghton, dated
January 4, 2015, incorporated by reference to Nephros, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March
31, 2015, filed with the Securities and Exchange Commission on May 15, 2015. † |
| |
|
|
| 10.44 |
|
Nephros, Inc. 2015 Equity Incentive Plan, incorporated by reference to Nephros, Inc.’s
Quarterly Report on Form 10-Q for the quarter ended March 31, 2015, filed with the Securities and Exchange Commission on May
15, 2015. † |
| |
|
|
| 10.45 |
|
Form of Incentive Stock Option Agreement under the 2015 Equity Incentive Plan, incorporated
by reference to Nephros, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2015, filed with the Securities
and Exchange Commission on May 15, 2015. † |
| |
|
|
| 10.46 |
|
Form of Non-Qualified Stock Option Agreement under the 2015 Equity Incentive Plan, incorporated
by reference to Nephros, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2015, filed with the Securities
and Exchange Commission on May 15, 2015. † |
| 10.47 |
|
Form of Restricted Stock Agreement under the 2015 Equity Incentive Plan,
incorporated by reference to Nephros, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2015, filed
with the Securities and Exchange Commission on May 15, 2015. † |
| |
|
|
| 10.48 |
|
Form of Restricted Stock Unit Agreement under the 2015 Equity Incentive Plan, incorporated
by reference to Nephros, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2015, filed with the Securities
and Exchange Commission on May 15, 2015. † |
| |
|
|
| 10.49 |
|
Form of Securities Purchase Agreement entered into among the Company and various accredited
investors on May 12, 2015, incorporated by reference to Nephros, Inc.’s Current Report on Form 8-K, filed with the Securities
and Exchange Commission on May 18, 2015. |
| |
|
|
| 14.1 |
|
Code of Ethics and Business Conduct, as amended on April 2, 2007, incorporated by reference
to Nephros, Inc.’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on April 6, 2007 (SEC
File No. 001-32288). |
| |
|
|
| 21.1 |
|
Subsidiaries of Registrant, incorporated by reference to Nephros, Inc.’s Annual Report
on Form 10-KSB for the year ended December 31, 2006, filed with the Securities and Exchange Commission on April 10, 2007 (SEC
File No. 001-32288). |
| |
|
|
| 23.1 |
|
Consent of WithumSmith + Brown, PC Independent Registered Public Accounting Firm. * |
| |
|
|
| 23.2 |
|
Consent of Rothstein Kass, Independent Registered Public Accounting Firm. * |
| |
|
|
| 23.3 |
|
Consent of Fredrikson & Byron P.A. (contained in Exhibit 5.1). * |
| |
|
|
| 24.1 |
|
Power of Attorney (included on signature page hereto). * |
| |
|
|
| 101 |
|
Interactive Data File. * |
| † | Management contract or compensatory plan arrangement. |
Item 17. Undertakings.
| (a) | The undersigned
registrant hereby undertakes: |
| (1) | To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement: |
| (i) | To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933 (the “Act”); |
| (ii) | To reflect in the prospectus any facts or events arising after
the effective date of this registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a fundamental change
in the information in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total dollar value of securities
offered would not exceed that which was registered) and any deviation from the low or
high end of the estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than a 20% change in the maximum aggregate offering
price set forth in the “Calculation of Registration Fee” table in the effective
registration statement; and |
| (iii) | To include any material information with respect to the plan
of distribution not previously disclosed in this registration statement or any material
change to such information in this registration statement. |
| (2) | That, for the purpose of determining any liability under the
Act, each such post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof. |
| (3) | To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of the
offering. |
| (4) | That, for the purpose of determining liability under the Act
to any purchaser, each prospectus filed pursuant to Rule 424(b) as part of a registration
statement relating to an offering, other than registration statements relying on Rule
430B or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be
part of and included in the registration statement as of the date it is first used after
effectiveness. Provided, however, that no statement made in a registration statement
or prospectus that is part of the registration statement or made in a document incorporated
or deemed incorporated by reference into the registration statement or prospectus that
is a part of the registration statement will, as to a purchaser with a time of contract
of sale prior to such first use, superseded or modify any statement that was made in
the registration statement or prospectus that was part of the registration statement
or made in any such document immediately prior to such date of first use. |
| (h) | Insofar as indemnification for liabilities arising under the Act
may be permitted to directors, officers and controlling persons of the registrant pursuant
to the foregoing provisions, or otherwise, the registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by the registrant
of expenses incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue. |
SIGNATURES
Pursuant to the requirements
of the Securities Act of 1933, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned,
thereunto duly authorized in the City of River Edge, State of New Jersey, on June 23, 2015.
| |
NEPHROS, INC. |
| |
|
| Date: June 23, 2015 |
By: /s/ Daron Evans |
| |
Name: Daron Evans |
| |
Title: President, Chief Executive Officer |
| |
and Acting Chief Financial Officer |
POWER OF ATTORNEY
Each of the undersigned constitutes and
appoints Daron Evans his true and lawful attorney-in-fact and agent, with full powers of substitution and resubstitution, for
him and in his name, place and stead, in any and all capacities, to sign this Registration Statement on Form S-1 of Nephros, Inc.,
any or all amendments or post-effective amendments to the Registration Statement on Form S-1, and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact
and agents, each acting alone, full power and authority to do and perform each and every act and thing requisite and necessary
to be done in and about the premises, as fully to all intents and purposes as the undersigned might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, each acting alone, or their substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements
of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the
dates indicated.
| Signature |
Title |
Date |
| |
|
|
/s/ Daron Evans
Daron Evans |
President, Chief Executive Officer and Acting Chief Financial Officer, and Director (Principal
Executive Officer and Principal Financial and Accounting Officer) |
June 23, 2015 |
| |
|
|
/s/ Arthur H. Amron
Arthur H. Amron |
Director |
June 23, 2015 |
| |
|
|
/s/ Lawrence J. Centella
Lawrence J. Centella |
Chairman, Director |
June 23, 2015 |
| |
|
|
/s/ Paul A. Mieyal
Paul A. Mieyal |
Director |
June 23, 2015 |
| |
|
|
/s/ Matthew S. Rosenberg
Matthew S. Rosenberg |
Director |
June 23, 2015 |
| |
|
|
/s/ Malcolm Persen
Malcolm Persen |
Director |
June 23, 2015 |
