10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: September 30, 2015

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from: _______ to _______

Commission File Number: 001-32288

NEPHROS, INC.

(Exact name of Registrant as Specified in Its Charter)

DELAWARE	13-3971809
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)
41 Grand Avenue  River Edge, NJ	07661
(Address of Principal Executive Offices)	(Zip code)

(201) 343-5202

Registrant’s Telephone Number, Including Area Code

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days

x YES         ¨ NO

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     

x YES         ¨ NO

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. (Check one):

Large accelerated filer     ¨	Accelerated filer    ¨
Non-accelerated filer      ¨ (Do not check if a smaller reporting company)	Smaller reporting company  x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

¨ YES        x NO

 As of November 4, 2015, 45,025,803 shares of the registrant’s common stock, $0.001 par value per share, were outstanding.

Table of Contents 

		Page No.
PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets – September 30, 2015 (unaudited) and December 31, 2014 (audited)	2
	Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) - Three and nine months ended September 30, 2015 and 2014 (unaudited)	3
	Consolidated Statement of Changes in Stockholders’ Equity (Deficit) – Nine months ended September 30, 2015 (unaudited)	4
	Condensed Consolidated Statements of Cash Flows - Nine months ended September 30, 2015 and 2014 (unaudited)	5
	Notes to Unaudited Condensed Consolidated Interim Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	26
Item 4.	Controls and Procedures	26
PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	27
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	27
Item 5.	Other Information	27
Item 6.	Exhibits	27
SIGNATURES		28

NEPHROS, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)

	(Unaudited)			(Audited)
	September 30, 2015			December 31, 2014
ASSETS
Current assets:
Cash	$	1,813		$	1,284
Accounts receivable, net		216			110
Inventory, net		665			186
Prepaid expenses and other current assets		85			104
Total current assets		2,779			1,684
Property and equipment, net		-			1
Other assets, net of accumulated amortization		1,526			1,684
Total assets	$	4,305		$	3,369
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
Accounts payable	$	924		$	835
Accrued expenses		154			342
Deferred revenue, current portion		70			70
Total current liabilities		1,148			1,247
Warrant liability		-			7,386
Long-term portion of deferred revenue		365			417
Total liabilities		1,513			9,050
Commitments and Contingencies
Stockholders’ equity (deficit):
Preferred stock, $.001 par value; 5,000,000 shares authorized at September 30, 2015 and December 31, 2014; no shares issued and outstanding at September 30, 2015 and December 31, 2014		-			-
Common stock, $.001 par value; 90,000,000 shares authorized at September 30, 2015 and December 31, 2014; 45,025,803 and 30,391,513 shares issued and outstanding at September 30, 2015 and December 31, 2014, respectively		45			30
Additional paid-in capital		118,993			108,382
Accumulated other comprehensive income		72			72
Accumulated deficit		(116,318	)		(114,165	)
Total stockholders’ equity (deficit)		2,792			(5,681	)
Total liabilities and stockholders’ equity (deficit)	$	4,305		$	3,369

The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements.

2 

NEPHROS, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(In thousands, except share and per share amounts)

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
Net revenues:
Product revenues	$	274		$	298		$	1,323		$	765
License and royalty revenues		46			193			110			641
Total net revenues		320			491			1,433			1,406
Cost of goods sold		154			175			626			423
Gross margin		166			316			807			983
Operating expenses:
Research and development		226			178			582			521
Depreciation and amortization		53			54			159			164
Selling, general and administrative		974			765			2,551			2,177
Total operating expenses		1,253			997			3,292			2,862
Loss from operations		(1,087	)		(681	)		(2,485	)		(1,879	)
Change in fair value of warrant liability		2,287			3,428			2,099			(4,007	)
Warrant modification expense		(1,761	)		-			(1,761	)		-
Interest expense		(9	)		(65	)		(30	)		(277	)
Other income (expense)		(11	)		41			24			36
Net income (loss)		(581	)		2,723			(2,153	)		(6,127	)
Other comprehensive income (loss), foreign currency translation adjustments		1			1			-			(1	)
Total comprehensive income (loss)		(580	)		2,724			(2,153	)		(6,128	)
Net income (loss) per common share, basic	$	(0.02	)	$	0.11		$	(0.07	)	$	(0.27	)
Net loss per common share, diluted	$	(0.02	)	$	(0.02	)	$	(0.07	)	$	(0.27	)
Weighted average common shares outstanding, basic		32,622,377			25,238,412			31,366,292			23,094,457
Weighted average common shares outstanding, diluted		32,622,377			33,491,189			31,366,292			23,094,457

The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements.

3 

NEPHROS, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (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 loss										(2,153	)		(2,153	)
Issuance of common stock, net of equity issuance costs of $24		1,834,299		2		1,203							1,205
Issuance of common stock, net of commitment fee of $135		550,000		1		162							163
Issuance of restricted stock		389,151				174							174
Issuance of restricted stock to vendor		116,613				57							57
Exercise of warrants		11,744,227		12		8,799							8,811
Noncash stock-based compensation						216							216
Balance, September 30, 2015		45,025,803	$	45	$	118,993	$	72	$	(116,318	)	$	2,792

The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements.

4 

NEPHROS, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Nine Months Ended September 30,
	2015			2014
Operating activities:
Net loss	$	(2,153	)	$	(6,127	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation of property and equipment		1			6
Amortization of other assets		158			158
Noncash stock-based compensation, including stock options and restricted stock		216			321
Shares issued for services rendered to vendors		47			-
Change in fair value of warrant liability		(2,099	)		4,007
Warrant modification		1,761			-
Amortization of debt discount		-			173
Allowance for doubtful accounts		13
Inventory reserve		-			31
(Gain)/loss on foreign currency transactions		3			(40	)
(Increase) decrease in operating assets:
Accounts receivable		(119	)		(57	)
Inventory		(479	)		24
Prepaid expenses and other current assets		56			92
Increase (decrease) in operating liabilities:
Accounts payable		86			(125	)
Accrued expenses		(14	)		(104	)
Deferred revenue		(52	)		(23	)
Net cash used in operating activities		(2,575	)		(1,664	)
Financing activities:
Proceeds from issuance of common stock		1,340			2,013
Proceeds from senior secured note		-			1,610
Proceeds from exercise of warrants		1,762			11
Payment of senior secured note		-			(1,500	)
Net cash provided by financing activities		3,102			2,134
Effect of exchange rates on cash and cash equivalents		2			(2	)
Net increase in cash		529			468
Cash, beginning of period		1,284			579
Cash, end of period	$	1,813		$	1,047
Supplemental disclosure of cash flow information
Cash paid for income taxes	$	3		$	6
Cash paid for interest	$	34		$	70
Supplemental disclosure of noncash financing activity
Issuance of common stock as commitment fee, net of amortization	$	27		$	-
Issuance of restricted stock for future services to be provided	$	10		$	-
Restricted stock issued to settle liability	$	174		$	-

The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements.

5 

NEPHROS, INC. AND SUBSIDIARY

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 Annual Report on Form 10-K for the year ended December 31, 2014 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 three and nine months ended September 30, 2014 presented herein reflect these previously restated amounts. The accompanying condensed 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 lives 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.

6 

NEPHROS, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

Note 2 - Basis of Presentation and Going Concern (continued)

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.

On September 29, 2015, the Company issued 11,742,100 shares of common stock to Lambda Investors, LLC for warrants exercised and received approximately $1.76 million in cash proceeds. The exercise price for each warrant was $0.15. See Note 5 for further discussion.

On July 24, 2015, the Company entered into a purchase agreement (the “Purchase Agreement”), together with a registration rights agreement (the “Registration Rights Agreement”), with Lincoln Park Capital Fund, LLC (“Lincoln Park”), pursuant to which the Company has the right to sell to Lincoln Park up to $5 million of the Company’s common stock. In connection with the Purchase Agreement, the Company issued to Lincoln Park 250,000 shares of common stock for no proceeds. Pursuant to the Purchase Agreement, in September 2015, the Company issued and sold 300,000 shares of common stock to Lincoln Park at a per share purchase price of $0.45, resulting in gross proceeds of $135,000. See Note 12 – Stockholders’ Equity (Deficit).

On May 18, 2015, the Company raised gross proceeds of $1.23 million through the private placement of 1,834,299 units of its securities. Each unit consisted 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. The purchase price for each unit was $0.67. The warrants are exercisable at a price of $0.85 per share.

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 nine months ended September 30, 2015 and 2014, the following customers accounted for the following percentages of the Company’s revenues, respectively.

Customer	2015			2014
A		25	%		25	%
B		21	%		-	%
C		13	%		9	%
D		4	%		46	%

As of September 30, 2015 and December 31, 2014, the following customers accounted for the following percentages of the Company’s accounts receivable, respectively. 

Customer	2015			2014
A		44	%		22	%
B		13	%		25	%
C		1	%		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.

7 

NEPHROS, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

Note 4 - Revenue Recognition (continued)

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 September 30, 2015 condensed consolidated balance sheet is approximately $435,000 and is related to the Company’s License Agreement with Bellco (see Note 11), which is being deferred over the remainder of the expected obligation period. The Company has recognized approximately $2,641,000 of revenue related to the License Agreement to date and approximately $52,000 for the nine months ended September 30, 2015. The Company recognized approximately $641,000 of revenue related to this License Agreement for the nine months ended September 30, 2014. Revenue recognized in the nine months ended September 30, 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 $17,000 of revenue will be recognized in the remaining three months of fiscal year 2015 and approximately $70,000 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 License Agreement with Bellco.

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 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 Company had outstanding warrants originally issued in 2007 (the “2007 Warrants”) that were accounted for as a derivative liability until September 29, 2015 as they were fully exercised on this date. The 2007 warrants were classified as a liability because the transactions that would trigger the anti-dilution adjustment provision in the 2007 Warrants were not inputs to the fair value of the warrants. The 2007 Warrants were 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 utilized a binomial options pricing model to value the 2007 Warrants at each reporting period.

The estimated fair value of the 2007 Warrants as of September 29, 2015 and December 31, 2014 was 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.

At September 29, 2015 and December 31, 2014, the warrant liability was approximately $5,287,000 and $7,386,000, respectively and was categorized as a Level 3 financial instrument.

On the condensed consolidated statement of operations for the three month periods ended September 30, 2015 and 2014, the Company recorded income of approximately $2,287,000 and approximately $3,428,000, respectively, as a result of the change in fair value of the warrant liability. On the condensed consolidated statement of operations for the nine month periods ended September 30, 2015 and 2014, the Company recorded income of approximately $2,099,000 and expense of approximately $4,007,000, respectively, as a result of the change in fair value of the warrant liability.

8 

NEPHROS, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

Note 5 - Fair Value of Financial Instruments (continued)

The following table summarizes the calculated aggregate fair values of the warrants, along with the assumptions utilized in each calculation:

	September 29,			December 31,
	2015			2014
Calculated aggregate value	$	5,287		$	7,386
Weighted average exercise price	$	0.30		$	0.30
Closing price per share of common stock	$	0.40		$	0.79
Volatility		137	%		136.9	%
Weighted average remaining expected life (years)		4.2			5.0
Risk-free interest rate		1.4	%		1.6	%
Dividend yield		-			-

On September 29, 2015, the Company entered into a Warrant Amendment and Exercise Agreement (the “Amendment”) with Lambda Investors, LLC (“Lambda”). Pursuant to the Amendment, the Company agreed to reduce the current exercise price of the 2007 Warrants by 50%, to $0.15 per share, in exchange for Lambda’s agreement to exercise the 2007 Warrants in their entirety immediately following the modification. Upon exercise of the 2007 Warrants, the Company issued 11,742,100 shares of common stock to Lambda and received approximately $1.76 million in cash proceeds from Lambda. Following such exercise, no 2007 Warrants remain outstanding. The value of the 2007 Warrants as of September 29, 2015, after the modification, was approximately $7,048,000, calculated as intrinsic value with an expected term of zero. As a result, approximately $1,761,000 was recorded as warrant modification expense for the three and nine months ended September 30, 2015.

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 that vest upon service conditions is amortized over the vesting period of the award using the straight-line method. 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.

The Company granted stock options to purchase 2,496,848 shares of common stock during the nine months ended September 30, 2015 to employees. These stock options will be expensed over their respective applicable vesting periods, which are based on service and performance conditions. The fair value of all stock-based awards granted during the nine months ended September 30, 2015 was approximately $1,310,000.

The following assumptions were used for options granted for the nine months ended September 30, 2015:

Assumptions for Option Grants	Nine Months Ended September 30, 2015
Stock Price Volatility		122.8	%
Risk-Free Interest Rates		1.55	%
Expected Life (in years)		6.15
Expected Dividend Yield		-	%

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.

9 

NEPHROS, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

Note 6 - Stock-Based Compensation (continued)

Stock-based compensation expense was approximately $205,000 and $318,000 for the nine months ended September 30, 2015 and 2014, respectively.  For the nine months ended September 30, 2015, approximately $189,000 and approximately $15,000 are included in Selling, General and Administrative expenses and Research and Development expenses, respectively, on the accompanying condensed consolidated statement of operations. For the nine months ended September 30, 2014, approximately $302,000 and approximately $16,000 are included in Selling, General and Administrative expenses and Research and Development expenses, respectively, on the accompanying condensed consolidated statements of operations.

There was no tax benefit related to expense recognized in the nine months ended September 30, 2015 and 2014, as the Company is in a net operating loss position. As of September 30, 2015, there was approximately $1,166,000 of total unrecognized compensation cost related to unvested share-based compensation awards granted under the equity compensation plans. Approximately $158,000 of the $1,166,000 of total unrecognized compensation will be recognized at the time that certain performance conditions are met. The remaining approximately $1,008,000 will be amortized over the weighted average remaining requisite service period of 3.7 years.  Such amount does not include the effect of future grants of equity compensation, if any.  Of the remaining approximately $1,008,000 of unrecognized compensation cost, the Company expects to recognize approximately 9% in the remaining interim period of 2015, approximately 32% in 2016, approximately 24% in 2017, approximately 23% in 2018, approximately 8% in 2019 and approximately 4% in 2020.

Restricted Stock

On September 9, 2015, the Company issued 389,151 shares of restricted stock as compensation for the services of non-employee directors. The grant date fair value of the outstanding restricted stock awards was approximately $195,000 and was based on the fair value of the common stock on the date of grant. Of the total grant date fair value of approximately $195,000, approximately $174,000 was related to services previously rendered. The remaining approximately $21,000 will be recognized ratably over the vesting period as the restrictions lapse six months from the date of grant.

On September 25, 2015, the Company issued 47,382 shares of restricted stock, with a grant date fair value of approximately $22,000, to Scratched Anchor, LLC for services rendered and to be rendered by Scratched Anchor, LLC through December 31, 2016. Expense related to services rendered as of September 30, 2015 was approximately $12,000 and is included in Selling, General and Administrative expenses for the nine months ended September 30, 2015. The restricted stock will vest on November 25, 2015. The remaining expense will be recognized in the three months ended December 31, 2015.

On July 9, 2015, the Company issued 69,231 shares of restricted stock, with a grant date fair value of approximately $45,000, to Proactive Capital Resources Group (“Proactive”) for services rendered and to be rendered by Proactive through November 17, 2015. Expense related to services rendered as of September 30, 2015 was included in Selling, General and Administrative expenses for the nine months ended September 30, 2015, with the remaining approximately $10,000 recorded as prepaid expense as of September 30, 2015. This restricted stock vested on August 7, 2015.

Total stock-based compensation expense for the restricted stock grants was approximately $11,000 and $3,000 for the nine months ended September 30, 2015 and 2014, respectively, and is included in Selling, General and Administrative expenses on the accompanying condensed consolidated statements of operations. For the nine months ended September 30, 2015, approximately $9,000 was related to restricted stock awards granted prior to 2015. The remaining approximately $2,000 is related to the September 9, 2015 restricted stock grant, with the remaining approximately $19,000 to be recognized in the period October 1, 2015 through March 9, 2015.

Note 7 - Warrants 

In addition to the Lambda warrants exercised and discussed in Note 5, for the nine months ended September 30, 2015, 2,127 shares of common stock were issued as a result of additional warrants exercised, resulting in proceeds of $851.

Note 8 - Net Income (Loss) per Common Share

Basic income (loss) per common share is calculated by dividing net income (loss) available to common stockholders 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 stockholders, 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

10 

NEPHROS, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

Note 8 - Net Income (Loss) per Common Share (continued)

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						For the nine months
	September 30,			September 30,			September 30,			September 30,
	2015			2014			2015			2014
Income (Loss) per share - Basic:
Numerator for basic income (loss) per share	$	(581,000	)	$	2,723,000		$	(2,153,000	)	$	(6,127,000	)
Denominator for basic income (loss) per share		32,622,377			25,238,412			31,366,292			23,094,457
Basic income (loss) per common share	$	(0.02	)	$	0.11		$	(0.07	)	$	(0.27	)
Income (Loss) per share - Diluted:
Numerator for diluted income (loss) per share	$	(581,000	)	$	2,723,000		$	(2,153,000	)	$	(6,127,000	)
Adjust: Change in fair value of dilutive warrants outstanding		-			(3,428,000	)		-			-
Numerator for diluted income (loss) per share	$	(581,000	)	$	(705,000	)	$	(2,153,000	)	$	(6,127,000	)
Denominator for basic income (loss) per share		32,622,377			25,238,412			31,366,292			23,094,457
Plus: Incremental shares underlying warrants outstanding		-			8,252,777			-			-
Denominator for diluted income (loss) per share		32,622,377			33,491,189			31,366,292			23,094,457
Diluted income (loss) per common share	$	(0.02	)	$	(0.02	)	$	(0.07	)	$	(0.27	)

The following potentially dilutive securities have been excluded from the computations of diluted weighted-average shares outstanding as they would be anti-dilutive:

	September 30,
	2015		2014
Shares underlying warrants outstanding		5,925,836		16,793,301
Shares underlying options outstanding		3,888,657		2,424,612
Unvested restricted stock		436,333		-

In addition, pursuant to the Amendment with Lambda (see Note 5), the Company committed to initiating tender offers to the holders of all of its remaining outstanding warrants pursuant to which it would offer such holders the right to exercise their respective warrants at a 50% discount to their current exercise prices, which range from $0.40 to $0.85 per share. Based on the recent market price for the Company’s common stock, the Company intends to first commence a tender offer for the outstanding warrants originally issued in 2011. The Company intends to commence a tender offer for the outstanding warrants issued in 2015 at a later date. If all remaining warrants are exercised at the discounted prices, the Company would receive maximum additional proceeds of approximately $1.39 million.

11 

NEPHROS, INC. AND SUBSIDIARY

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. In July 2015, the FASB approved a one-year deferral of the effective date of the new standard, making it effective for annual and interim reporting periods beginning January 1, 2018. Early adoption is permitted, but not before the original effective date for public companies (annual reporting periods beginning after December 15, 2016). The Company has not yet determined 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 has not yet determined the impact, if any, of the adoption of ASU 2014-15 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.

In July 2015, the FASB issued ASU No. 2015-11, “Simplifying the Measurement of Inventory (Subtopic 2015-11).” ASU 2015-11 requires inventory be measured at the lower of cost and net realizable value, and methods for valuing inventory that consider market value will be eliminated. ASU 2015-11 defines net realizable value as estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The guidance is effective for reporting periods beginning after December 15, 2016 and interim periods within those fiscal years with early adoption permitted. ASU 2015-11 should be applied prospectively. The Company has not yet determined the impact, if any, the adoption of ASU 2015-11 might have 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 September 30, 2015 and December 31, 2014 was as follows:

	September 30, 2015			December 31, 2014
	(Unaudited)			(Audited)
Total Gross Inventory, Finished Goods	$	717,000		$	297,000
Less: Inventory reserve		(52,000	)		(111,000	)
Total Inventory	$	665,000		$	186,000

Note 11 - Commitments and Contingencies

Manufacturing and Suppliers

The Company does not 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. (“Bellco”), 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”).

12 

NEPHROS, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

Note 11 - Commitments and Contingencies (continued)

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 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 pays 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 (estimated at approximately $1.95 using current exchange rates) per unit; thereafter, €1.25 (estimated at approximately $1.40 using current exchange rates) per unit.  For the nine months ended September 30, 2015, the Company recognized royalty income of approximately $58,000. As of September 30, 2015, $29,000 was received with the remaining $29,000 recorded as a receivable. 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 days.

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, 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 nine months ended September 30, 2015, the Company’s aggregate purchase commitments totaled approximately €973,000 (approximately $1,089,000). 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 (estimated at approximately $1,120,000 using current exchange rates). 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 as of September 30, 2015 is approximately $1,526,000, net of $724,000 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 $158,000 has been charged to amortization expense in each of the nine month periods ended September 30, 2015 and 2014 on the consolidated statements of operations and comprehensive loss. Approximately $53,000 of amortization expense will be recognized in the remaining three 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 pays 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.

13 

NEPHROS, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

Note 12 - Stockholders’ Equity (Deficit)

July 2015 Purchase Agreement and Registration Rights Agreement

On July 24, 2015, the Company entered into a Purchase Agreement, together with a Registration Rights Agreement, with Lincoln Park, an Illinois limited liability company.

Under the terms and subject to the conditions of the Purchase Agreement, the Company has the right to sell to and Lincoln Park is obligated to purchase up to $10.0 million in shares of the Company’s common stock, subject to certain limitations, from time to time, over the 36-month period commencing on September 4, 2015. The Company may direct Lincoln Park, at its sole discretion and subject to certain conditions, to purchase up to 100,000 shares of common stock on any business day, provided that at least one business day has passed since the most recent purchase, increasing to up to 200,000 shares depending upon the closing sale price of the common stock (such purchases, “Regular Purchases”). However, in no event shall a Regular Purchase be more than $500,000. The purchase price of shares of common stock related to the future funding will be based on the prevailing market prices of such shares at the time of sales, but in no event will shares be sold to Lincoln Park on a day the common stock closing price is less than the floor price as set forth in the Purchase Agreement. In addition, the Company may direct Lincoln Park to purchase additional amounts as accelerated purchases if on the date of a Regular Purchase the closing sale price of the common stock is not below the threshold price as set forth in the Purchase Agreement. The Company’s sales of shares of common stock to Lincoln Park under the Purchase Agreement are limited to no more than the number of shares that would result in the beneficial ownership by Lincoln Park and its affiliates, at any single point in time, of more than 9.99% of the then-outstanding shares of the common stock.

In connection with the Purchase Agreement, the Company issued to Lincoln Park 250,000 shares of common stock for no proceeds. The fair value of the 250,000 shares of common stock issued was approximately $163,000 and was recorded as a commitment fee. Pursuant to the Purchase Agreement, in September 2015, the Company issued and sold an additional 300,000 shares of common stock to Lincoln Park at a per share price of $0.45, resulting in gross proceeds of $135,000. As a result of the issuance of the 300,000 shares of common stock, approximately $135,000 of the $163,000 commitment fee was amortized and recorded in additional paid in capital as of September 30, 2015.

The Purchase Agreement and the Registration Rights Agreement contain customary representations, warranties, agreements and conditions to completing future sale transactions, indemnification rights and obligations of the parties. The Company has the right to terminate the Purchase Agreement at any time, at no cost or penalty. Actual sales of shares of common stock to Lincoln Park under the Purchase Agreement will depend on a variety of factors to be determined by the Company from time to time, including, among others, market conditions, the trading price of the common stock and determinations by the Company as to the appropriate sources of funding for the Company and its operations. There are no trading volume requirements or restrictions under the Purchase Agreement. Lincoln Park has no right to require any sales by the Company, but is obligated to make purchases from the Company as it directs in accordance with the Purchase Agreement. Lincoln Park has covenanted not to cause or engage in any manner whatsoever, any direct or indirect short selling or hedging of Company shares.

Proactive Capital Resources Group

In July 2015, 69,231 shares of restricted stock, with a fair value of approximately $45,000, were issued as payment for services to be provided through November 2015 under the Company’s agreement with Proactive Capital Resources Group (see Note 6). The Company recorded approximately $35,000 of expense and approximately $10,000 of prepaid expenses during the three months ended September 30, 2015. The restricted stock vested on August 7, 2015.

May 2015 Private Placement

On May 18, 2015, the Company raised gross proceeds of $1.23 million through the private placement of 1,834,299 units of its securities. Each unit consisted 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. The purchase price for each unit was $0.67. The warrants are exercisable at a price of $0.85 per share. Net proceeds recorded as a result of the private placement was approximately $1,205,000.

14 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

This discussion should be read in conjunction with our consolidated financial statements included in this Quarterly Report on Form 10-Q and the notes thereto, as well as the other sections of this Quarterly Report on Form 10-Q, including the “Forward-Looking Statements” section hereof, and our Annual Report on Form 10-K for the year ended December 31, 2014, including the “Risk Factors” and “Business” sections thereof.  This discussion contains a number of forward-looking statements, all of which are based on our current expectations and could be affected by the uncertainties and risk factors described in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2014. Our actual results may differ materially.

Financial Operations Overview

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 that an arrangement exists; (ii) delivery has occurred or services have been rendered; (iii) the fee is fixed and determinable; and (iv) collectability is reasonably assured.

Cost of Goods Sold: Cost of goods sold represents the acquisition cost for the products we purchase and sell from our third party manufacturers as well as damaged and obsolete inventory written off.

Research and Development: Research and development expenses consist of costs incurred in identifying, developing and testing product candidates. These expenses consist primarily of salaries and related expenses for personnel, fees of our scientific and engineering consultants and subcontractors and related costs, clinical studies, machine and product parts and software and product testing. We expense research and development expenses as incurred.

Selling, General and Administrative: Selling, general and administrative expenses consist primarily of sales and marketing expenses as well as personnel and related costs for general corporate functions, including finance, accounting, legal, human resources, facilities and information systems expense.

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 a hemodiafiltration (HDF) device as an alternative method to hemodialysis (HD). We have extended our filtration technologies to address multiple markets where ultrapure filtration is of potential value.

Our Products

Presently, we have two core product lines: HDF Systems and Ultrafiltration Products

HDF Systems

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 (“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 (“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:

15 

• 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 Hemodiafiltration Module (“H2H Module”), our OLpūr MD 220 Hemodiafilter (“HDF Filter”) and our H2H Substitution Filter (“Dialysate Filter”).

The H2H Module utilizes a standard HD machine to perform on-line hemodiafiltration therapy. The HD machine controls and monitors the basic treatment functions, as it would normally when providing HD therapy. The H2H Module is a free-standing, movable device that is placed next to either side of an HD machine. The H2H Module is connected to the clinic's water supply, drain, and electricity.

The H2H Module utilizes the HDF Filter and is very similar to a typical hollow fiber dialyzer assembled with a single hollow fiber bundle made with a high-flux (or high-permeability) membrane. The fiber bundle is separated into two discrete, but serially connected blood paths. Dialysate flows in one direction that is counter-current to blood flow in Stage 1 and co-current to blood flow of Stage 2.

In addition to the HDF Filter, the H2H Module also utilizes a Dialysate Filter during patient treatment. The Dialysate Filter is a hollow fiber, ultrafilter device that consists of two sequential (redundant) ultrafiltration stages in a single housing. During on-line HDF with the H2H Module, fresh dialysate is redirected by the H2H Module’s hydraulic (substitution) pump and passed through this dual-stage ultrafilter before being infused as substitution fluid into the extracorporeal circuit. Providing ultrapure dialysate is crucial for the success of on-line HDF treatment.

Our HDF System is cleared by the FDA to market for use with an 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.

In May 2014, DaVita Healthcare Partners initiated an evaluation of our HDF System to treat 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 2015. We do not believe that DaVita will re-start the evaluation of the system in the near term.

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. As of November 2015, our HDF Systems had performed over 1,000 patient treatments. Over the last 16 months of commercial use, we have gathered direct feedback from users of our HDF System to help improve our system and our training methodology. By the end of 2015, we expect to have completed a software update that we believe will improve the system’s alignment with nurse work flow, and to have updated our user training.

We are in discussions to evaluate our 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 pharmacoeconomic benefit of the HDF technology to the U.S. healthcare system, as has been done in Europe with other HDF systems.

16 

Ultrafiltration Products

Our ultrafiltration products target a number of 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.

·  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 approximately 5,700 hospitals, with approximately 915,000 beds, treated over 35 million patients in the U.S. in 2013. The United States Centers for Disease Control and Prevention estimates that healthcare associated infections, or HAIs, occurred in approximately 1 out of every 25 hospital patients. 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 forUnited States Pharmacopeia (“USP”) sterile water.

In June 2015, the American Society of Heating, Refrigerating, and Air-Conditioning Engineers, Inc. (“ASHRAE”) approved Standard 188-2015, “Legionellosis: Risk Management for Building Water Systems”. We believe the approval of ASHRAE 188-2015 (“S188”) as a national standard will have a positive impact on point of delivery filtration market. The S188 applies to any human occupied building that is not a single family residence; requires the building to have a plan to control for waterborne infection; requires heat, chemical or both cleaning in the event of a suspected or confirmed presence of legionella; and recommends point-of-use filters in areas of high risk. We are 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; and by, whenever possible, doing joint sales calls with our distributors on potential hospital customers to both serve as a product expert and to field train their sales representatives.

In October 2015, we submitted the S100 Point of Use filter to the FDA for 510(k) clearance. Subject to FDA clearance, these products will compete directly with other end-of-faucet filters for short term use following a positive test in a medical facility for a water borne pathogen, such as Legionella.

In the first part of 2016, we plan to launch new products to expand on our hospital product line. The DSU-H and the SSU-H are both in-line filters designed to be installed between the wall water outlet and the point of delivery fixture, be it sink faucet, shower head or ice machine. The new products are designed to be attached to the end of a faucet or shower line. 

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. According to the American Journal of Kidney Diseases, there are approximately 6,300 dialysis clinics in the United States servicing approximately 430,000 patients annually. We estimate that there are over 100,000 hemodialysis machines in operation in the United States.

Medicare is the main payer for dialysis treatment in the 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 (“AAMI”), the American National Standards Institute (“ANSI”) and the International Standards Organization (“ISO”). We anticipate that the stricter standards approved by these organizations in 2009 will be adopted by Medicare in the near future.

Published studies have shown that the use of ultrapure dialysate can reduce the overall need for erythropoietin stimulating agents (“ESA”), 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 (“EPO”) is enhanced, consequently the overall need for ESAs is reduced.

17 

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 (“SSU”).

In September 2015, we launched a new marketing campaign focused on further expanding our products into dialysis clinics, the Nephros Challenge. The Nephros Challenge is a money-back guarantee if a dialysis clinic does not see any measurable self-defined benefit from using Nephros Ultrafilters at the HD station to provide ultrapure water and bicarbonate. We will be working with our distributors to roll out the Nephros Challenge and to leverage recent data that was presented at the America Society of Nephrology in November 2015.

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 Environmental Protection Agency (“EPA”) specified levels.

We developed our individual water treatment device (“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.

On May 6, 2015, we entered into a Sublicense Agreement with CamelBak Products, LLC (“CamelBak”). Under this Sublicense Agreement, we granted CamelBak an exclusive, non-transferable, worldwide (with the exception of Italy) sublicense and license, in each case solely to market, sell, distribute, import and export the HydraGuard individual water treatment devices. In exchange for the rights granted to CamelBak, CamelBak agreed, through December 31, 2022, to pay us a percentage of the gross profit on any sales made to a branch of the U.S. military, subject to certain exceptions, and to pay us a fixed per-unit fee for any other sales made. CamelBak 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 (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 May 2015, we received a warning letter from the FDA resulting from an October 2014 inspection.  In the letter, the FDA alleges deficiencies relating to our compliance with the quality system regulation and the medical device reporting regulation. The warning letter did not restrict our ability to manufacture, produce or ship any of our products, nor does it require the withdrawal of any product from the marketplace.  In August 2015, we received a subsequent letter from the FDA noting that it has received our response correspondence detailing our completed corrective actions. The corrective actions included revisions to our standard operating procedures relating to purchasing and supplier controls, adverse event reporting, and complaint handling and monitoring.

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.

18 

We have been working with customers to test prototype filters in commercial settings, such as data centers, and other high-flow-rate applications where particle reduction can provide an advantage. In the first part of 2016, we intend to launch new products into the commercial market. Specifically, we will launch a 10” and 20” filter cartridges that insert into standard filter housings, such as Pentek, Cuno, Shelco and Graver. We also intend to launch an additional form factor filter cartridge that targets restaurants, convenience stores and other hospitality markets. We will be working with existing distributors and their existing customers, and seeking new distributors to address customers not currently targeted by our existing distributors.

Critical Accounting Policies

The discussion and analysis of our consolidated financial condition and results of operations are based upon our condensed consolidated interim financial statements. These condensed consolidated financial statements have been prepared following the requirements of accounting principles generally accepted in the United States (“GAAP”) and Rule 8-03 of Regulation S-X for interim periods and require us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to potential impairment of investments and share-based compensation expense. As these are condensed consolidated financial statements, you should also read expanded information about our critical accounting policies and estimates provided in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included in our Form 10-K for the year ended December 31, 2014. There have been no material changes to our critical accounting policies and estimates from the information provided in our Form 10-K for the year ended December 31, 2014.

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. In July 2015, the FASB approved a one-year deferral of the effective date of the new standard, making it effective for annual and interim reporting periods beginning January 1, 2018. Early adoption is permitted, but not before the original effective date for public companies (annual reporting periods beginning after December 15, 2016). We have not determined 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 have not yet determined the impact, if any, of the adoption of ASU 2014-15 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.

In July 2015, the FASB issued ASU No. 2015-11, “Simplifying the Measurement of Inventory (Subtopic 2015-11).” ASU 2015-11 requires inventory be measured at the lower of cost and net realizable value and options that currently exist for market value be eliminated. ASU 2015-11 defines net realizable value as estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The guidance is effective for reporting periods beginning after December 15, 2016 and interim periods within those fiscal years with early adoption permitted. ASU 2015-11 should be applied prospectively. We have not yet determined the impact, if any, the adoption of ASU 2015-11 might have on our consolidated financial statements.

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 quarterly results of operations will be impacted for the foreseeable future by several factors including the level and timing of revenue, the progress and timing of expenditures related to our research and development efforts, and marketing expenses related to product launches.  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.

19 

Three Months Ended September 30, 2015 Compared to the Three Months Ended September 30, 2014

Revenues

Total net revenues for the three months ended September 30, 2015 were approximately $320,000 compared to approximately $491,000 for the three months ended September 30, 2014.  Total product revenues decreased approximately $24,000 or 8%, stemming from decreases in dialysis ultrafilter sales that were partially offset by increases in hospital ultrafilter sales. License and royalty revenue decreased by approximately $147,000, or 76%, primarily related to a decrease in revenue recognized from the Bellco license agreement in 2015 versus the revenue recognized in 2014. Of the approximately $46,000 of license and royalty revenue recognized for the three months ended September 30, 2015, approximately $29,000 related to royalties on products sold and approximately $17,000 related to amortization of a February 2014 up-front payment. We expect that our revenue from the Bellco license agreement to remain at similar levels for the near-term.

Cost of Goods Sold

Cost of goods sold was approximately $154,000 for the three months ended September 30, 2015 compared to approximately $175,000 for the three months ended September 30, 2014. The decrease of approximately $21,000, or 12%, during the three months ended September 30, 2015 compared to the same period in 2014 is primarily due to a decrease in sales volume.

Gross Margin

Gross margin and gross margin as a percentage of product revenues was approximately $120,000 or 44%, for the three months ended September 30, 2015 compared to approximately $123,000, or 41%, for the three months ended September 30, 2014. The increase of approximately 3% was related to a combination of decreased product costs from a favorable exchange rate shift and distributor contract modifications.

Research and Development

Research and development expenses were approximately $226,000 and $178,000 respectively, for the three months ended September 30, 2015 and 2014. This increase of approximately $48,000, or 27%, is primarily due to an increase in development expenses relating to new filter product development, H2H module upgrade expenses and additional personnel.

Depreciation and Amortization Expense

Depreciation and amortization expense was approximately $53,000 for the three months ended September 30, 2015 compared to approximately $54,000 for the three months ended September 30, 2014. Amortization expense related to the asset recognized in conjunction with the License and Supply Agreement with Medica S.p.A was $53,000 for both the three months ended September 30, 2015 and the three months ended September 30, 2014. The remaining $1,000 recognized in the three months ended September 30, 2014 was depreciation on equipment and tools.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were approximately $974,000 for the three months ended September 30, 2015 compared to approximately $765,000 for the three months ended September 30, 2014, an increase of approximately $209,000 or 27%. An increase of approximately $62,000 in legal expenses resulted primarily from efforts relating to improving company standard operating procedures, which was offset by a significant decrease in corporate legal expenses. An increase of approximately $70,000 in personnel costs resulted from additional personnel and one-time expenses relating to the departure of the previous CEO. An increase in travel, marketing expenses and other expenses of approximately $77,000 resulted from increased sales and marketing efforts.

Interest Expense

The table below summarizes interest expense for the three months ended September 30, 2015 and 2014:

	2015		2014
Interest - outstanding payables due to a vendor	$	9,000	$	31,000
Other		-		34,000
Total interest expense	$	9,000	$	65,000

Change in Fair Value of Warrant Liability

Certain warrants were classified as liabilities at their fair value and adjusted to their fair value at each reporting period. The fair value of such warrants issued had been estimated using a binomial options pricing model. For the three months ended September 30, 2015 and 2014, the change in fair value of the warrant liability resulted in income of approximately $2,287,000 and approximately $3,428,000, respectively.

20 

Warrant Modification Expense

During the three months ended September 30, 2015, the warrant modification resulted in an increase in the warrant liability, immediately before exercise, of approximately $1,761,000.

Other Income (Expense)

Other income (expense) relates to foreign currency gains and losses on invoices paid to an international supplier. A foreign currency loss of approximately $11,000 was recognized for the three months ended September 30, 2015 compared to a foreign currency gain of approximately $41,000 for the three months ended September 30, 2014.

Nine Months Ended September 30, 2015 Compared to the Nine Months Ended September 30, 2014

Revenues

Total net revenues for the nine months ended September 30, 2015 were approximately $1,433,000 compared to approximately $1,406,000 for the nine months ended September 30, 2014.  Total product revenues increased by approximately $558,000, or approximately 73%, driven by a small increase in dialysis ultrafilter sales and over 100% increase in hospital ultrafilter sales. The increase in product sales was partially offset by a decrease in licensing and royalty revenue of approximately $531,000, or approximately 83%, primarily related to revenue from the Bellco license agreement. Of the approximately $110,000 in licensing and royalty revenue recognized for the nine months ended September 30, 2015, approximately $58,000 related to royalties on products sold and approximately $52,000 related to amortization of a February 2014 up-front payment. We expect that our revenue from the Bellco license agreement to remain at similar levels for the near-term.

Cost of Goods Sold

Cost of goods sold was approximately $626,000 for the nine months ended September 30, 2015 compared to approximately $423,000 for the nine months ended September 30, 2014. The increase of approximately $203,000, or 48%, during the nine months ended September 30, 2015 compared to the same period in 2014 is primarily due to increase in sales volume.

Gross Margin

Gross margin and gross margin as a percentage of product revenues was approximately $697,000, or 53%, for the nine months ended September 30, 2015 compared to approximately $342,000, or 45%, for the nine months ended September 30, 2014. The increase of approximately 8% was related to a combination of decreased product cost from a favorable exchange rate fluctuation and distributor contract modifications.

Research and Development

Research and development expenses were approximately $582,000 and $521,000 for the nine months ended September 30, 2015 and September 30, 2014, respectively. This increase of approximately $61,000, or 12%, is primarily due to an increase in development expenses relating to new filter product development, H2H module upgrade expenses and additional personnel.

Depreciation and Amortization Expense

Depreciation and amortization expense was approximately $159,000 for the nine months ended September 30, 2015 compared to approximately $164,000 for the nine months ended September 30, 2014. Amortization expense related to the asset recognized in conjunction with the License and Supply Agreement with Medica S.p.A was $158,000 for the nine months ended September 30, 2015 compared to approximately $159,000 for the nine months ended September 30, 2014. The remaining $1,000 and $5,000 recognized in the nine months ended September 30, 2015 and 2014, respectively, was depreciation on equipment and tools.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were approximately $2,551,000 for the nine months ended September 30, 2015 compared to approximately $2,177,000 for the nine months ended September 30, 2014, an increase of approximately $374,000, or 17%. An increase of approximately $202,000 in personnel costs is primarily related to severance expenses for a previous CEO and an increased number of personnel. Partially offsetting the increase in personnel costs was a decrease of approximately $113,000 primarily related to the forfeiture of the former CEO’s unvested stock options. An increase in professional services expenses of approximately $200,000 is primarily related to costs associated with the accounting restatement and efforts relating to improving company standard operating procedures, which were offset by reduced patent-related legal expenses. An increase in travel and marketing related expense of approximately $38,000 resulted from increased sales and marketing efforts. An increase in directors’ compensation expense of approximately $47,000 was due to an increase in the number of Board members.

21 

Interest Expense

The table below summarizes interest expense for the nine months ended September 30, 2015 and 2014:

	2015		2014
Interest related to November 2013 and August 2014 senior secured note	$	-	$	56,000
Amortization of debt discount - November 2013 and August 2014 senior secured note		-		173,000
Interest - outstanding payables due to a vendor		29,000		48,000
Other		1,000		-
Total interest expense	$	30,000	$	277,000

Change in Fair Value of Warrant Liability

Certain warrants were classified as liabilities at their fair value and adjusted to their fair value at each reporting period. The fair value of such warrants issued had been estimated using a binomial options pricing model. The change in fair value of the warrant liability resulted in income of approximately $2,099,000 for the nine months ended September 30, 2015 and expense of approximately $4,007,000 for the nine months ended September 30, 2014.

Warrant Modification Expense

During the nine months ended September 30, 2015, the warrant modification resulted in an increase in the warrant liability, immediately before exercise, of approximately $1,761,000.

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 nine months ended September 30, 2015 of approximately $24,000 compared to a foreign currency gain of approximately $36,000 for the nine months ended September 30, 2014.

Liquidity and Capital Resources

The following table summarizes our liquidity and capital resources as of September 30, 2015 and 2014 and is intended to supplement the more detailed discussion that follows. The amounts stated are expressed in thousands.

	September 30,
Liquidity and capital resources	2015		2014
Cash	$	1,813	$	1,047
Other current assets		966		320
Working capital (deficit)		1,631		(1,690	)
Stockholders’ equity (deficit)		2,792		(7,501	)

At September 30, 2015, we had an accumulated deficit of approximately $116,318 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.

On September 29, 2015, we entered into a Warrant Amendment and Exercise Agreement (the “Amendment”) with Lambda Investors, LLC (“Lambda”). Pursuant to the Amendment, the Company agreed to reduce the current exercise price of the Class D Warrant issued to Lambda on November 14, 2007 (together with all amendments thereto entered into prior to the Amendment, the “Warrant”) representing the right to purchase 11,742,100 shares of the Company’s common stock by 50%, to $0.15 per share, in exchange for Lambda’s agreement to exercise such Warrant in its entirety. Upon exercise of the Warrant, the Company issued 11,742,100 shares of common stock to Lambda and received approximately $1.76 million in cash proceeds from Lambda. Following such exercise, no Class D Warrants remain outstanding.

In addition, pursuant to the Amendment, the Company committed to initiating tender offers to the holders of all of its remaining outstanding warrants pursuant to which it would offer such holders the right to exercise their respective warrants at a 50% discount to their current exercise prices, which range from $0.40 to $0.85 per share. Based on the recent market price for the Company’s common stock, the Company intends to first commence a tender offer for the outstanding warrants originally issued in 2011. The Company intends to commence a tender offer for the outstanding warrants issued in 2015 at a later date. If all remaining warrants are exercised at the discounted prices, the Company would receive maximum additional proceeds of approximately $1.39 million.

22 

On July 24, 2015, we entered into a purchase agreement, together with a registration rights agreement, with Lincoln Park Capital Fund, LLC (“Lincoln Park”), an Illinois limited liability company. Under the terms and subject to the conditions of the purchase agreement, we have the right to sell to and Lincoln Park is obligated to purchase up to $10.0 million in shares of our common stock, subject to certain limitations, from time to time, over the 36-month period commencing on September 4, 2015. We may direct Lincoln Park, at our sole discretion and subject to certain conditions, to purchase up to 100,000 shares of common stock on any business day, provided that at least one business day has passed since the most recent purchase, increasing to up to 200,000 shares depending upon the closing sale price of the common stock. However, in no event shall these purchases be more than $500,000. The purchase price of shares of common stock related to the future funding will be based on the prevailing market prices of such shares at the time of sales, but in no event will shares be sold to Lincoln Park on a day the common stock closing price is less than the floor price as set forth in the purchase agreement. In addition, we may direct Lincoln Park to purchase additional amounts as accelerated purchases if on the date of a purchase the closing sale price of the common stock is not below the threshold price as set forth in the purchase agreement. Our sales of shares of common stock to Lincoln Park under the purchase agreement are limited to no more than the number of shares that would result in the beneficial ownership by Lincoln Park and its affiliates, at any single point in time, of more than 9.99% of the then-outstanding shares of the common stock.

On May 18, 2015, we raised gross proceeds of $1.23 million through the private placement of 1,834,299 units of our securities. Each unit consisted of one share of our common stock and a five-year warrant to purchase one-half of one share of our common stock. The purchase price for each unit was $0.67. The warrants are exercisable at a price of $0.85 per share.

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 pays 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 (estimated at approximately $1.95 using current exchange rates) per unit; thereafter, €1.25 (estimated at approximately $1.40 using current exchange rates) per unit.  As of September 30, 2015, the Company recorded a receivable of approximately $28,000 related to the royalty payable by Bellco. 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 days.

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.

At September 30, 2015, we had cash totaling approximately $1,813,000 and total assets of approximately $2,779,000, excluding other intangible assets (related to the Medica License and Supply Agreement) of approximately $1,526,000.

We expect that the proceeds from the prior Lambda Class D warrant exercise, the additional warrant exercises that may result from the upcoming tender offers and the projected increase in product sales, will allow us to fund our operations through at least the third quarter of 2016.  However, our cash flow currently is not, and historically has not been, sufficient to meet our obligations and commitments. Additionally, there is no guarantee as to the amount of additional warrant exercises that will occur nor that we will see the projected increase in sales we expect. We may need to raise additional financing in the future, and if we cannot raise sufficient capital, in connection with offerings of our common stock or through other means, or our future sales levels do not meet our projections, we may 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.

23 

Net cash used in operating activities was approximately $2,601,000 for the nine months ended September 30, 2015 compared to approximately $1,664,000 for the nine months ended September 30, 2014. Excluding the noncash impacts of the change in fair value of the warrant liability and the warrant modification, our net loss was approximately $2,491,000 for the nine months ended September 30, 2015 compared to approximately $2,120,000 for the nine months ended September 30, 2014, an increase of approximately $371,000.

In addition to the increase in the net loss, the most significant items contributing to the net increase of approximately $937,000 in cash used in operating activities during the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014 are highlighted below:

· our inventory increased by approximately $479,000 during the 2015 period compared to a decrease of approximately $24,000 during the 2014 period as a result of increased sales volume and projected sales volume;

· during the 2015 period, our amortization of debt discount decreased by approximately $173,000 compared to the 2014 period. There was no outstanding debt during the 2015 period; and

· our stock based compensation was approximately $216,000 during the 2015 period compared to approximately $321,000 during the 2014 period. The decrease was due to the forfeiture of unvested options as a result of the departure of the former CEO.

Offsetting the above changes:

·   our accounts payable increased by approximately $86,000 in the 2015 period compared to a decrease of approximately $125,000 in the 2014 period as a result of an increase in inventory.

Net cash provided by financing activities for the nine months ended September 30, 2015 of approximately $3,102,000 resulted from net proceeds of approximately $1,340,000 resulting from the issuance of common stock and approximately $1,762,000 of proceeds resulting from the exercise of warrants.

Net cash provided by financing activities for the nine months ended September 30, 2014 of $2,134,000 resulted from proceeds of approximately $2,013,000 resulting from the issuance of common stock in the 2014 rights offering , proceeds from the issuance of the August 2014 senior secured note of $1,610,000, net of financing costs and approximately $11,000 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.

Off-Balance Sheet Arrangements

We did not have any off-balance sheet arrangements as of September 30, 2015 or 2014.

24 

Forward-Looking Statements

Certain statements in this Quarterly Report on Form 10-Q constitute “forward-looking statements.” Such statements include statements regarding the efficacy and intended use of our technologies under development, the timelines for bringing such products to market and the availability of funding sources for continued development of such products, our plans for initiating tender offers to the holders of all of our remaining outstanding warrants 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 (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 U.S. Food and Drug Administration, or 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;

· product-related deaths or serious injuries or product malfunctions 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 U.S. Food, Drug and Cosmetic Act, or 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;

· we may not be able to achieve sales growth in key geographic markets; and

· we may encounter delays in initiating, or be unable to initiate, tender offers to the holders of all of our outstanding warrants, or fewer holders may tender outstanding warrants than we anticipate or expect.

More detailed information about us and the risk factors that may affect the realization of forward-looking statements, including the forward-looking statements in this Quarterly Report on Form 10-Q, is set forth in our filings with the SEC, including our Annual Report on Form 10-K for the fiscal year ended December 31, 2014 and 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.

25 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Not required for smaller reporting companies.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

We maintain a system of disclosure controls and procedures, as defined in Rule 13a-15(e) or Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which is designed to provide reasonable assurance that information required to be disclosed in our reports filed pursuant to the Exchange Act is accumulated and communicated to management in a timely manner. Management recognizes that any disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives. Because there are inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud have been or will be detected.

As disclosed in our Annual Report on Form 10-K for the year ended December 31, 2014, the Acting Chief Executive Officer and Acting Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of December 31, 2014, as a result of a material weakness in controls related to the accounting for warrants as described in Note 2 of the Annual Report on Form 10-K for the year ended December 31, 2014, including an insufficient number of resources in the accounting and finance department. In light of this material weakness, we performed additional analysis as deemed necessary to ensure that our financial statements were prepared in accordance with U.S. generally accepted accounting principles.

At the end of the period covered by this Quarterly Report on Form 10-Q, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Acting Chief Financial Officer, regarding the effectiveness of  our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b). Based upon that evaluation, our Chief Executive Officer and Acting Chief Financial Officer concluded that, due to the material weakness in our internal control over financial reporting described below, our disclosure controls and procedures as of the end of the period covered by this report were not effective.

Changes in Internal Control Over Financial Reporting

Other than as described herein, there were no changes in our internal control over financial reporting that occurred during our most recent fiscal quarter that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

In connection with the preparation of our financial statements for the year ended December 31, 2014, our management 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. During the quarter ended September 30, 2015, we expanded and improved our review process for complex securities and related accounting standards to remediate this material weakness; however, as of September 30, 2015, this material weakness continues to exist. We plan to further improve our review process by enhancing access to accounting literature, identification of third party professionals with whom to consult regarding complex accounting applications and consideration of additional staff with the requisite experience and training to supplement existing accounting professionals.

26 

PART II -   OTHER INFORMATION

Item 1.  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.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

On July 9, 2015, the Company issued 69,231 shares of restricted stock, with a grant date fair value of approximately $45,000, to Proactive Capital Resources Group ("Proactive") for services rendered and to be rendered by Proactive through November 17, 2015. The Company issued the shares in reliance upon an exemption from registration contained in Section 4(a)(2) under the Securities Act as the shares were not issued in a public offering.

On September 25, 2015, the Company issued 47,382 shares of restricted stock, with a grant date fair value of approximately $22,000, to Scratched Anchor, LLC for services rendered and to be rendered by Scratched Anchor, LLC through December 31, 2016. The Company issued the shares in reliance upon an exemption from registration contained in Section 4(a)(2) under the Securities Act as the shares were not issued in a public offering. 

Item 5. Other Information

As discussed above in Part I, Item 2 under "Liquidity and Capital Resources", the Company has committed to initiating tender offers to the holders of all of its remaining outstanding warrants pursuant to which it will offer such holders the right to exercise their respective warrants at a 50% discount to their current exercise prices, which range from $0.40 to $0.85 per share. If all remaining warrants are exercised at the discounted prices, the Company would receive maximum additional proceeds of approximately $1.39 million.

IMPORTANT NOTICE:

The discussion of the tender offers contained in this Quarterly Report is for informational purposes only and is neither an offer to buy nor a solicitation of an offer to sell securities. The offers to exercise the Company's outstanding warrants have not yet commenced. The offers to exercise will be made only pursuant to written offers to exercise and other related materials that are expected to be mailed to all holders of the Company's outstanding warrants shortly after commencement of the tender offers, at no expense to the holders. Holders of the warrants should read those materials and the documents incorporated therein by reference carefully when they become available because they will contain important information, including the various terms and conditions of the tender offers. The Company will file Tender Offer Statements on Schedule TO-I (the "Tender Offer Statements") with the Securities and Exchange Commission (the "SEC"). The Tender Offer Statements, including the offers to exercise and other related materials, will also be available to stockholders at no charge on the SEC's website at www.sec.gov or from the Company. Holders of the Company's warrants are urged to read those materials carefully prior to making any decisions with respect to the tender offers.

27 

Item 6. Exhibits

EXHIBIT INDEX

4.1	Warrant Amendment and Exercise Agreement, dated September 29, 2015, between Nephros, Inc. and Lambda Investors, LLC (incorporated by reference to Exhibit 4.1 to Nephros, Inc.’s Current Report on Form 8-K, filed with the SEC on September 30, 2015).
10.1	Purchase Agreement, dated July 24, 2015, between the Registrant and Lincoln Park Capital Fund, LLC (incorporated by reference to Exhibit 10.1 to Nephros, Inc.’s Current Report on Form 8-K, filed with the SEC on July 27, 2015).
10.2	Registration Rights Agreement, dated July 24, 2015, between the Registrant and Lincoln Park Capital Fund, LLC (incorporated by reference to Exhibit 10.2 to Nephros, Inc.’s Current Report on Form 8-K, filed with the SEC on July 27, 2015).
31.1	Certification by the Chief Executive Officer and Acting Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *
32.1	Certifications by the Chief Executive Officer and Acting Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *
101	Interactive Data File. *

* Filed herewith.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	NEPHROS, INC.
Date:  November 10, 2015	By:	/s/  Daron Evans
	Name:	Daron Evans
	Title:	President, Chief Executive Officer and Acting Chief
		Financial Officer (Principal Executive Officer and
		Principal Financial and Accounting Officer)

28 

EX-31.1

Exhibit 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND ACTING CHIEF FINANCIAL OFFICER

UNDER SECTION 302 OF THE SARBANES-OXLEY ACT

I, Daron Evans, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Nephros, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to me by others within those entities, particularly during the period in which this report is being prepared;

b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under my supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report my conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:  November 10, 2015	By:	/s/  Daron Evans
	Name: Daron Evans
	Title: President, Chief Executive Officer and Acting Chief Financial Officer (Principal Executive Officer and Principal Financial and Accounting Officer)

EX-32.1

Exhibit 32.1

Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the Quarterly Report on Form 10-Q of Nephros, Inc. (the “Company”) for the period ended September 30, 2015 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, Daron Evans, the President, Chief Executive Officer and Acting Chief Financial Officer of the Company certifies that:

1. the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

By:	/s/ Daron Evans
Name: Daron Evans
Title: President, Chief Executive Officer and Acting
Chief Financial Officer (Principal Executive Officer
and Principal Financial and Accounting Officer)
Dated:  November 10, 2015

XML

Stockholders' Equity (Deficit) (Details Textual) - USD ($)		1 Months Ended			9 Months Ended
	Jul. 09, 2015	Sep. 30, 2015	Jul. 24, 2015	May. 18, 2015	Sep. 30, 2015	Sep. 30, 2014	Dec. 31, 2014
Class of Stock [Line Items]
Proceeds from Issuance of Common Stock				$ 1,230,000	$ 1,340,000	$ 2,013,000
Class of Warrant or Right, Exercise Price of Warrants or Rights				$ 0.85
Stock Issued During Period, Value, New Issues					1,205,000
Additional Paid in Capital, Total		$ 118,993,000			118,993,000		$ 108,382,000
Stock Issued During Period, Value, Acquisitions	$ 45,000				$ 45,000
Stock Issued During Period, Shares, Acquisitions	69,231				69,231
Payments of Stock Issuance Costs					$ 24,000
Restricted Stock Fair Value	$ 45,000
Private Placement [Member]
Class of Stock [Line Items]
Stock Issued During Period, Shares, New Issues				1,834,299
Proceeds from Issuance of Common Stock				$ 1,230,000
Class of Warrant or Right, Exercise Price of Warrants or Rights				$ 0.85
Net Proceeds from Issuance Of Common Stock				$ 1,205,000
Shares Issued, Price Per Share				$ 0.67
Lincoln Park Capital Fund Llc [Member]
Class of Stock [Line Items]
Stock Issued During Period, Shares, New Issues		300,000
Proceeds from Issuance of Common Stock		$ 135,000
Limited Liability Company (LLC) or Limited Partnership (LP), Members or Limited Partners, Ownership Interest			9.99%
Limited Liability Company Description For Purchase Shares Level			direct Lincoln Park, at its sole discretion and subject to certain conditions, to purchase up to 100,000 shares of common stock on any business day, provided that at least one business day has passed since the most recent purchase, increasing to up to 200,000 shares depending upon the closing sale price of the common stock
Limited Liability Company Description For Regular Purchase			Regular Purchase be more than $500,000.
Stock Issued During Period, Shares, Other	250,000		250,000
Stock Issued During Period, Value, New Issues			$ 10,000,000
Fair Value of Stock Issued as Commitment Fee			$ 163,000
Amortized Commitment Fee		163,000
Additional Paid in Capital, Total		$ 135,000			$ 135,000
Share Price		$ 0.45			$ 0.45
Payments of Stock Issuance Costs					$ 35,000
Prepaid Expense, Current, Total		$ 10,000			$ 10,000
Restricted Stock Fair Value	$ 45,000

XML

Warrants (Details Textual) - USD ($)	9 Months Ended
	Sep. 30, 2015	Sep. 30, 2014
Warrants [Line Items]
Proceeds from Warrant Exercises	$ 1,762,000	$ 11,000
Lambda Investors LLC [Member]
Warrants [Line Items]
Stock Issued During Period, Shares, Conversion of Convertible Securities	2,127
Proceeds from Warrant Exercises	$ 851

XML

Inventory, net (Tables)

9 Months Ended

Sep. 30, 2015

Inventory Disclosure [Abstract]

Schedule of Inventory, Current

The Company’s inventory as of September 30, 2015 and December 31, 2014 was as follows:

	September 30, 2015		December 31, 2014
	(Unaudited)		(Audited)
Total Gross Inventory, Finished Goods	$	717,000	$	297,000
Less: Inventory reserve		(52,000)		(111,000)
Total Inventory	$	665,000	$	186,000

XML

Inventory, net (Details) - USD ($)	Sep. 30, 2015	Dec. 31, 2014
Inventory [Line Items]
Total Gross Inventory, Finished Goods	$ 717,000	$ 297,000
Less: Inventory reserve	(52,000)	(111,000)
Total Inventory	$ 665,000	$ 186,000

XML

Basis of Presentation and Going Concern

9 Months Ended

Sep. 30, 2015

Organization, Consolidation and Presentation of Financial Statements [Abstract]

Basis of Presentation and Going Concern

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 Annual Report on Form 10-K for the year ended December 31, 2014 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 three and nine months ended September 30, 2014 presented herein reflect these previously restated amounts. The accompanying condensed 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 lives 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.

On September 29, 2015, the Company issued 11,742,100 shares of common stock to Lambda Investors, LLC for warrants exercised and received approximately $1.76 million in cash proceeds. The exercise price for each warrant was $0.15. See Note 5 for further discussion.

On July 24, 2015, the Company entered into a purchase agreement (the “Purchase Agreement”), together with a registration rights agreement (the “Registration Rights Agreement”), with Lincoln Park Capital Fund, LLC (“Lincoln Park”), pursuant to which the Company has the right to sell to Lincoln Park up to $5 million of the Company’s common stock. In connection with the Purchase Agreement, the Company issued to Lincoln Park 250,000 shares of common stock for no proceeds. Pursuant to the Purchase Agreement, in September 2015, the Company issued and sold 300,000 shares of common stock to Lincoln Park at a per share purchase price of $0.45, resulting in gross proceeds of $135,000. See Note 12 – Stockholders’ Equity (Deficit). 

On May 18, 2015, the Company raised gross proceeds of $1.23 million through the private placement of 1,834,299 units of its securities. Each unit consisted 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. The purchase price for each unit was $0.67. The warrants are exercisable at a price of $0.85 per share.

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.

XML

Fair Value of Financial Instruments (Details) - USD ($)	9 Months Ended	12 Months Ended
	Sep. 29, 2015	Dec. 31, 2014
Fair Value Inputs, Liabilities, Quantitative Information [Line Items]
Calculated aggregate value	$ 5,287	$ 7,386
Weighted average exercise price	$ 0.30	$ 0.3
Closing price per share of common stock	$ 0.40	$ 0.79
Volatility	137.00%	136.90%
Weighted average remaining expected life (years)	4 years 2 months 12 days	5 years
Risk-free interest rate	1.40%	1.60%
Dividend yield	0.00%	0.00%

XML

Revenue Recognition (Details Textual) - USD ($)	9 Months Ended
	Sep. 30, 2015	Sep. 30, 2014
Bellco [Member]
Deferred Revenue Arrangement [Line Items]
Revenue recognized	$ 2,641,000
License Agreement [Member]
Deferred Revenue Arrangement [Line Items]
Deferred Revenue	$ 435,000
Deferred Revenue, Description	Approximately $17,000 of revenue will be recognized in the remaining three months of fiscal year 2015 and approximately $70,000 of revenue will be recognized in each of the years ended December 31, 2016 through 2021.
License Agreement [Member] | Bellco [Member]
Deferred Revenue Arrangement [Line Items]
Revenue recognized		$ 641,000
Deferred Revenue	$ 52,000

XML

Fair Value of Financial Instruments (Details Textual) - USD ($)	1 Months Ended	3 Months Ended		9 Months Ended
	Sep. 29, 2015	Sep. 30, 2015	Sep. 30, 2014	Sep. 30, 2015	Sep. 30, 2014	May. 18, 2015	Dec. 31, 2014
Fair Value Disclosures [Line Items]
Amount of dilutive securities effect on earnings per share warrants		$ 2,287,000	$ 3,428,000	$ (2,099,000)	$ 4,007,000
Warrant Liability	$ 5,287,000	0		0			$ 7,386,000
Class of Warrant or Right, Exercise Price of Warrants or Rights						$ 0.85
Proceeds from Warrant Exercises				1,762,000	$ 11,000
2007 Warrant [Member]
Fair Value Disclosures [Line Items]
Reduced Percentage of Warrant Excersize Price	50.00%
Warrant Inducement		$ 1,761,000		$ 1,761,000
Class of Warrant or Right, Exercise Price of Warrants or Rights	$ 0.15
Stock Issued During Period, Shares, Other	11,742,100
Proceeds from Warrant Exercises	$ 1,760,000
Warrants and Rights Outstanding	$ 7,048,000

XML

Stock-Based Compensation (Details)	9 Months Ended
	Sep. 30, 2015
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Stock Price Volatility	122.80%
Risk-Free Interest Rates	1.55%
Expected Life (in years)	6 years 1 month 24 days
Expected Dividend Yield	0.00%

XML

Organization and Nature of Operations

9 Months Ended

Sep. 30, 2015

Organization, Consolidation and Presentation of Financial Statements [Abstract]

Organization and Nature of Operations

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.

XML

Stock-Based Compensation (Details Textual) - USD ($)			1 Months Ended	9 Months Ended
	Sep. 09, 2015	Jul. 09, 2015	Sep. 30, 2015	Sep. 30, 2015	Sep. 30, 2014
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Share-based compensation expense				$ 205,000	$ 318,000
Shares, Options granted	195,000			2,496,848
Stock Granted, Value, Share-based Compensation, Gross				$ 1,310,000
Unrecognized compensation cost related to non-vested options			$ 1,166,000	$ 1,166,000
Weighted average remaining requisite service period for unrecognized compensation cost				3 years 8 months 12 days
Noncash stock-based compensation, including stock options and restricted stock				$ 216,000	321,000
Share-based Compensation, Total				$ 11,000	3,000
Expected recognition of unrecognized compensation costs due in current year				9.00%
Expected recognition of unrecognized compensation costs due in one year				32.00%
Expected recognition of unrecognized compensation costs due in two years				24.00%
Expected recognition of unrecognized compensation costs due in three years				23.00%
Expected recognition of unrecognized compensation costs due in fourth years				8.00%
Expected recognition of unrecognized compensation costs due in fifth years				4.00%
Employee Service Share-based Compensation, Tax Benefit from Compensation Expense				$ 158,000
Stock Based Compensation Recognized Amortization Cost				$ 1,008,000
Stock Issued During Period, Shares, Acquisitions		69,231		69,231
Stock Issued During Period, Value, Acquisitions		$ 45,000		$ 45,000
Restricted Stock Fair Value		45,000
Stock Issued During Period, Shares, Restricted Stock Award, Gross	389,151
Stock Issued During Period, Value, Restricted Stock Award, Gross	$ 2,000			$ 174,000
Stock Issued During Period Share Restricted Stock To Vendor				47,382
Scenario, Forecast [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Stock Issued During Period, Value, Restricted Stock Award, Gross	$ 21,000
Lincoln Park Capital Fund Llc [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Restricted Stock Fair Value		$ 45,000
Prepaid Expense, Current, Total			10,000	$ 10,000
Employee Stock Option [Member] | Selling, General and Administrative Expenses [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Noncash stock-based compensation, including stock options and restricted stock				189,000	302,000
Employee Stock Option [Member] | Research and Development Expense [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Noncash stock-based compensation, including stock options and restricted stock				15,000	$ 16,000
Restricted Stock [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Share-based compensation expense				$ 0
Shares, Options granted				9,000
Stock Issued During Period, Value, Restricted Stock Award, Gross				$ 19,000
Restricted Stock Grand Date Fair Value			22,000
Restricted Stock [Member] | Selling, General and Administrative Expenses [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Share-based compensation expense			$ 12,000

XML

CONDENSED CONSOLIDATED BALANCE SHEETS - USD ($) $ in Thousands	Sep. 30, 2015	Dec. 31, 2014
Current assets:
Cash	$ 1,813	$ 1,284
Accounts receivable, net	216	110
Inventory, net	665	186
Prepaid expenses and other current assets	85	104
Total current assets	2,779	1,684
Property and equipment, net	0	1
Other assets, net of accumulated amortization	1,526	1,684
Total assets	4,305	3,369
Current liabilities:
Accounts payable	924	835
Accrued expenses	154	342
Deferred revenue, current portion	70	70
Total current liabilities	1,148	1,247
Warrant liability	0	7,386
Long-term portion of deferred revenue	365	417
Total liabilities	$ 1,513	$ 9,050
Commitments and Contingencies
Stockholders’ equity (deficit):
Preferred stock, $.001 par value; 5,000,000 shares authorized at September 30, 2015 and December 31, 2014; no shares issued and outstanding at September 30, 2015 and December 31, 2014	$ 0	$ 0
Common stock, $.001 par value; 90,000,000 shares authorized at September 30, 2015 and December 31, 2014; 45,025,803 and 30,391,513 shares issued and outstanding at September 30, 2015 and December 31, 2014, respectively	45	30
Additional paid-in capital	118,993	108,382
Accumulated other comprehensive income	72	72
Accumulated deficit	(116,318)	(114,165)
Total stockholders’ equity (deficit)	2,792	(5,681)
Total liabilities and stockholders’ equity (deficit)	$ 4,305	$ 3,369

XML

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) (Parenthetical) $ in Thousands	9 Months Ended
	Sep. 30, 2015 USD ($)
Payments of Stock Issuance Costs	$ 24
Commitment Fee	$ 135

XML

Net Income (Loss) per Common Share (Details 1) - shares	9 Months Ended
	Sep. 30, 2015	Sep. 30, 2014
Warrant [Member]
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Excluded anti-dilutive stock options and warrants	5,925,836	16,793,301
Unvested restricted stock [Member]
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Excluded anti-dilutive stock options and warrants	436,333	0
Stock options [Member]
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Excluded anti-dilutive stock options and warrants	3,888,657	2,424,612

XML

Fair Value of Financial Instruments (Tables)

9 Months Ended

Sep. 30, 2015

Fair Value Disclosures [Abstract]

Fair Value Inputs, Liabilities, Quantitative Information

 The following table summarizes the calculated aggregate fair values of the warrants, along with the assumptions utilized in each calculation:

	September 29,			December 31,
	2015			2014
Calculated aggregate value	$	5,287		$	7,386
Weighted average exercise price	$	0.30		$	0.30
Closing price per share of common stock	$	0.40		$	0.79
Volatility		137	%		136.9	%
Weighted average remaining expected life (years)		4.2			5.0
Risk-free interest rate		1.4	%		1.6	%
Dividend yield		-			-

XML

Net Income (Loss) per Common Share (Details Textual) - USD ($) $ / shares in Units, $ in Thousands	9 Months Ended
	Sep. 30, 2015	Sep. 29, 2015	May. 18, 2015
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Class of Warrant or Right, Exercise Price of Warrants or Rights			$ 0.85
Proceeds from Issuance of Warrants	$ 1,390
Maximum [Member]
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Class of Warrant or Right, Exercise Price of Warrants or Rights	$ 0.85
Minimum [Member]
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Class of Warrant or Right, Exercise Price of Warrants or Rights	$ 0.40
Warrant [Member]
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Common Stock, Voting Rights	50%
Class of Warrant or Right, Exercise Price of Warrants or Rights		$ 0.15

XML

Net Income (Loss) per Common Share (Tables)

9 Months Ended

Sep. 30, 2015

Earnings Per Share [Abstract]

Schedule of Earnings Per Share, Basic and Diluted

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				For the nine months
	September 30,		September 30,		September 30,		September 30,
	2015		2014		2015		2014
Income (Loss) per share - Basic:
Numerator for basic income (loss) per share	$	(581,000)	$	2,723,000	$	(2,153,000)	$	(6,127,000)
Denominator for basic income (loss) per share		32,622,377		25,238,412		31,366,292		23,094,457
Basic income (loss) per common share	$	(0.02)	$	0.11	$	(0.07)	$	(0.27)
Income (Loss) per share - Diluted:
Numerator for diluted income (loss) per share	$	(581,000)	$	2,723,000	$	(2,153,000)	$	(6,127,000)
Adjust: Change in fair value of dilutive warrants outstanding		-		(3,428,000)		-		-
Numerator for diluted income (loss) per share	$	(581,000)	$	(705,000)	$	(2,153,000)	$	(6,127,000)
Denominator for basic income (loss) per share		32,622,377		25,238,412		31,366,292		23,094,457
Plus: Incremental shares underlying warrants outstanding		-		8,252,777		-		-
Denominator for diluted income (loss) per share		32,622,377		33,491,189		31,366,292		23,094,457
Diluted income (loss) per common share	$	(0.02)	$	(0.02)	$	(0.07)	$	(0.27)

Schedule of Antidilutive Securities Excluded from Computation of Earnings Per Share

The following potentially dilutive securities have been excluded from the computations of diluted weighted-average shares outstanding as they would be anti-dilutive:

	September 30,
	2015		2014
Shares underlying warrants outstanding		5,925,836		16,793,301
Shares underlying options outstanding		3,888,657		2,424,612
Unvested restricted stock		436,333		-

XML

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2015	Sep. 30, 2014
Operating activities:
Net loss	$ (2,153)	$ (6,127)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation of property and equipment	1	6
Amortization of other assets	158	158
Noncash stock-based compensation, including stock options and restricted stock	216	321
Shares issued for services rendered to vendors	47	0
Change in fair value of warrant liability	(2,099)	4,007
Warrant Modification	1,761	0
Amortization of debt discount	0	173
Allowance for doubtful accounts	13
Inventory reserve	0	31
(Gain)/loss on foreign currency transactions	3	(40)
(Increase) decrease in operating assets:
Accounts receivable	(119)	(57)
Inventory	(479)	24
Prepaid expenses and other current assets	56	92
Increase (decrease) in operating liabilities:
Accounts payable	86	(125)
Accrued expenses	(14)	(104)
Deferred revenue	(52)	(23)
Net cash used in operating activities	(2,575)	(1,664)
Financing activities:
Proceeds from issuance of common stock	1,340	2,013
Proceeds from senior secured note	0	1,610
Proceeds from exercise of warrants	1,762	11
Payment of senior secured note	0	(1,500)
Net cash provided by financing activities	3,102	2,134
Effect of exchange rates on cash and cash equivalents	2	(2)
Net increase in cash	529	468
Cash, beginning of period	1,284	579
Cash, end of period	1,813	1,047
Supplemental disclosure of cash flow information
Cash paid for income taxes	3	6
Cash paid for interest	34	70
Supplemental disclosure of noncash financing activity
Issuance of common stock as commitment fee, net of amortization	27	0
Issuance of restricted stock for future services to be provided	10	0
Restricted stock issued to settle liability	$ 174	$ 0

XML

CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) - $ / shares	Sep. 30, 2015	Dec. 31, 2014
Preferred stock, par value	$ 0.001	$ 0.001
Preferred stock, shares authorized	5,000,000	5,000,000
Preferred stock, shares issued	0	0
Preferred stock, shares outstanding	0	0
Common stock, par value	$ 0.001	$ 0.001
Common stock, shares authorized	90,000,000	90,000,000
Common stock, shares issued	45,025,803	30,391,513
Common stock, shares outstanding	45,025,803	30,391,513

XML

Inventory, net

9 Months Ended

Sep. 30, 2015

Inventory Disclosure [Abstract]

Inventory, net

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 September 30, 2015 and December 31, 2014 was as follows:

	September 30, 2015		December 31, 2014
	(Unaudited)		(Audited)
Total Gross Inventory, Finished Goods	$	717,000	$	297,000
Less: Inventory reserve		(52,000)		(111,000)
Total Inventory	$	665,000	$	186,000

XML

Document And Entity Information - shares	9 Months Ended
	Sep. 30, 2015	Nov. 04, 2015
Document Information [Line Items]
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Sep. 30, 2015
Document Fiscal Year Focus	2015
Document Fiscal Period Focus	Q3
Entity Registrant Name	NEPHROS INC
Entity Central Index Key	0001196298
Current Fiscal Year End Date	--12-31
Entity Filer Category	Smaller Reporting Company
Trading Symbol	NEPH
Entity Common Stock, Shares Outstanding		45,025,803

XML

Commitments and Contingencies

9 Months Ended

Sep. 30, 2015

Commitments and Contingencies Disclosure [Abstract]

Commitments and Contingencies

Note 11 - Commitments and Contingencies

Manufacturing and Suppliers

The Company does not 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. (“Bellco”), 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 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 pays 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 (estimated at approximately $1.95 using current exchange rates) per unit; thereafter, €1.25 (estimated at approximately $1.40 using current exchange rates) per unit.  For the nine months ended September 30, 2015, the Company recognized royalty income of approximately $58,000. As of September 30, 2015, $29,000 was received with the remaining $29,000 recorded as a receivable. 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 days.

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, 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 nine months ended September 30, 2015, the Company’s aggregate purchase commitments totaled approximately €973,000 (approximately $1,089,000). 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 (estimated at approximately $1,120,000 using current exchange rates). 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 as of September 30, 2015 is approximately $1,526,000, net of $724,000 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 $158,000 has been charged to amortization expense in each of the nine month periods ended September 30, 2015 and 2014 on the consolidated statements of operations and comprehensive loss. Approximately $53,000 of amortization expense will be recognized in the remaining three 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 pays 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.

XML

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2015	Sep. 30, 2014	Sep. 30, 2015	Sep. 30, 2014
Net revenues:
Product revenues	$ 274	$ 298	$ 1,323	$ 765
License and royalty revenues	46	193	110	641
Total net revenues	320	491	1,433	1,406
Cost of goods sold	154	175	626	423
Gross margin	166	316	807	983
Operating expenses:
Research and development	226	178	582	521
Depreciation and amortization	53	54	159	164
Selling, general and administrative	974	765	2,551	2,177
Total operating expenses	1,253	997	3,292	2,862
Loss from operations	(1,087)	(681)	(2,485)	(1,879)
Change in fair value of warrant liability	2,287	3,428	2,099	(4,007)
Warrant modification expense	(1,761)	0	(1,761)	0
Interest expense	(9)	(65)	(30)	(277)
Other income (expense)	(11)	41	24	36
Net income (loss)	(581)	2,723	(2,153)	(6,127)
Other comprehensive income (loss), foreign currency translation adjustments	1	1	0	(1)
Total comprehensive income (loss)	$ (580)	$ 2,724	$ (2,153)	$ (6,128)
Net income (loss) per common share, basic	$ (0.02)	$ 0.11	$ (0.07)	$ (0.27)
Net loss per common share, diluted	$ (0.02)	$ (0.02)	$ (0.07)	$ (0.27)
Weighted average common shares outstanding, basic	32,622,377	25,238,412	31,366,292	23,094,457
Weighted average common shares outstanding, diluted	32,622,377	33,491,189	31,366,292	23,094,457

XML

Fair Value of Financial Instruments

9 Months Ended

Sep. 30, 2015

Fair Value Disclosures [Abstract]

Fair Value of Financial Instruments

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 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 Company had outstanding warrants originally issued in 2007 (the “2007 Warrants”) that were accounted for as a derivative liability until September 29, 2015 as they were fully exercised on this date. The 2007 warrants were classified as a liability because the transactions that would trigger the anti-dilution adjustment provision in the 2007 Warrants were not inputs to the fair value of the warrants. The 2007 Warrants were 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 utilized a binomial options pricing model to value the 2007 Warrants at each reporting period.

The estimated fair value of the 2007 Warrants as of September 29, 2015 and December 31, 2014 was 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.

At September 29, 2015 and December 31, 2014, the warrant liability was approximately $5,287,000 and $7,386,000, respectively and was categorized as a Level 3 financial instrument.

On the condensed consolidated statement of operations for the three month periods ended September 30, 2015 and 2014, the Company recorded income of approximately $2,287,000 and approximately $3,428,000, respectively, as a result of the change in fair value of the warrant liability. On the condensed consolidated statement of operations for the nine month periods ended September 30, 2015 and 2014, the Company recorded income of approximately $2,099,000 and expense of approximately $4,007,000, 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:

	September 29,			December 31,
	2015			2014
Calculated aggregate value	$	5,287		$	7,386
Weighted average exercise price	$	0.30		$	0.30
Closing price per share of common stock	$	0.40		$	0.79
Volatility		137	%		136.9	%
Weighted average remaining expected life (years)		4.2			5.0
Risk-free interest rate		1.4	%		1.6	%
Dividend yield		-			-

On September 29, 2015, the Company entered into a Warrant Amendment and Exercise Agreement (the “Amendment”) with Lambda Investors, LLC (“Lambda”). Pursuant to the Amendment, the Company agreed to reduce the current exercise price of the 2007 Warrants by 50%, to $0.15 per share, in exchange for Lambda’s agreement to exercise the 2007 Warrants in their entirety immediately following the modification. Upon exercise of the 2007 Warrants, the Company issued 11,742,100 shares of common stock to Lambda and received approximately $1.76 million in cash proceeds from Lambda. Following such exercise, no 2007 Warrants remain outstanding. The value of the 2007 Warrants as of September 29, 2015, after the modification, was approximately $7,048,000, calculated as intrinsic value with an expected term of zero. As a result, approximately $1,761,000 was recorded as warrant modification expense for the three and nine months ended September 30, 2015.

XML

Revenue Recognition

9 Months Ended

Sep. 30, 2015

Revenue Recognition [Abstract]

Revenue Recognition

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 September 30, 2015 condensed consolidated balance sheet is approximately $435,000 and is related to the Company’s License Agreement with Bellco (see Note 11), which is being deferred over the remainder of the expected obligation period. The Company has recognized approximately $2,641,000 of revenue related to the License Agreement to date and approximately $52,000 for the nine months ended September 30, 2015. The Company recognized approximately $641,000 of revenue related to this License Agreement for the nine months ended September 30, 2014. Revenue recognized in the nine months ended September 30, 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 $17,000 of revenue will be recognized in the remaining three months of fiscal year 2015 and approximately $70,000 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 License Agreement with Bellco.

XML

Stock-Based Compensation (Tables)

9 Months Ended

Sep. 30, 2015

Share-based Compensation [Abstract]

Schedule Of Share-Based Payment Award, Employee Stock Purchase Plan, Valuation Assumptions

The following assumptions were used for options granted for the nine months ended September 30, 2015:

Assumptions for Option Grants	Nine Months Ended September 30, 2015
Stock Price Volatility		122.8	%
Risk-Free Interest Rates		1.55	%
Expected Life (in years)		6.15
Expected Dividend Yield		-	%

XML

Stockholders' Equity (Deficit)

9 Months Ended

Sep. 30, 2015

Equity [Abstract]

Stockholders' Equity Note Disclosure [Text Block]

Note 12 - Stockholders’ Equity (Deficit)

July 2015 Purchase Agreement and Registration Rights Agreement

 

On July 24, 2015, the Company entered into a Purchase Agreement, together with a Registration Rights Agreement, with Lincoln Park, an Illinois limited liability company.

 

Under the terms and subject to the conditions of the Purchase Agreement, the Company has the right to sell to and Lincoln Park is obligated to purchase up to $10.0 million in shares of the Company’s common stock, subject to certain limitations, from time to time, over the 36-month period commencing on September 4, 2015. The Company may direct Lincoln Park, at its sole discretion and subject to certain conditions, to purchase up to 100,000 shares of common stock on any business day, provided that at least one business day has passed since the most recent purchase, increasing to up to 200,000 shares depending upon the closing sale price of the common stock (such purchases, “Regular Purchases”). However, in no event shall a Regular Purchase be more than $500,000. The purchase price of shares of common stock related to the future funding will be based on the prevailing market prices of such shares at the time of sales, but in no event will shares be sold to Lincoln Park on a day the common stock closing price is less than the floor price as set forth in the Purchase Agreement. In addition, the Company may direct Lincoln Park to purchase additional amounts as accelerated purchases if on the date of a Regular Purchase the closing sale price of the common stock is not below the threshold price as set forth in the Purchase Agreement. The Company’s sales of shares of common stock to Lincoln Park under the Purchase Agreement are limited to no more than the number of shares that would result in the beneficial ownership by Lincoln Park and its affiliates, at any single point in time, of more than 9.99% of the then-outstanding shares of the common stock.

In connection with the Purchase Agreement, the Company issued to Lincoln Park 250,000 shares of common stock for no proceeds. The fair value of the 250,000 shares of common stock issued was approximately $163,000 and was recorded as a commitment fee. Pursuant to the Purchase Agreement, in September 2015, the Company issued and sold an additional  300,000 shares of common stock to Lincoln Park at a per share price of $0.45, resulting in gross proceeds of $135,000. As a result of the issuance of the 300,000 shares of common stock, approximately $135,000 of the $163,000 commitment fee was amortized and recorded in additional paid in capital as of September 30, 2015.

The Purchase Agreement and the Registration Rights Agreement contain customary representations, warranties, agreements and conditions to completing future sale transactions, indemnification rights and obligations of the parties. The Company has the right to terminate the Purchase Agreement at any time, at no cost or penalty. Actual sales of shares of common stock to Lincoln Park under the Purchase Agreement will depend on a variety of factors to be determined by the Company from time to time, including, among others, market conditions, the trading price of the common stock and determinations by the Company as to the appropriate sources of funding for the Company and its operations. There are no trading volume requirements or restrictions under the Purchase Agreement. Lincoln Park has no right to require any sales by the Company, but is obligated to make purchases from the Company as it directs in accordance with the Purchase Agreement. Lincoln Park has covenanted not to cause or engage in any manner whatsoever, any direct or indirect short selling or hedging of Company shares.

Proactive Capital Resources Group

In July 2015, 69,231 shares of restricted stock, with a fair value of approximately $45,000, were issued as payment for services to be provided through November 2015 under the Company’s agreement with Proactive Capital Resources Group (see Note 6). The Company recorded approximately $35,000 of expense and approximately $10,000 of prepaid expenses during the three months ended September 30, 2015. The restricted stock vested on August 7, 2015.

May 2015 Private Placement

On May 18, 2015, the Company raised gross proceeds of $1.23 million through the private placement of 1,834,299 units of its securities. Each unit consisted 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. The purchase price for each unit was $0.67. The warrants are exercisable at a price of $0.85 per share. Net proceeds recorded as a result of the private placement was approximately $1,205,000.

XML

Net Income (Loss) per Common Share

9 Months Ended

Sep. 30, 2015

Earnings Per Share [Abstract]

Net Income (Loss) per Common Share

Note 8 - Net Income (Loss) per Common Share

Basic income (loss) per common share is calculated by dividing net income (loss) available to common stockholders 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 stockholders, 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				For the nine months
	September 30,		September 30,		September 30,		September 30,
	2015		2014		2015		2014
Income (Loss) per share - Basic:
Numerator for basic income (loss) per share	$	(581,000)	$	2,723,000	$	(2,153,000)	$	(6,127,000)
Denominator for basic income (loss) per share		32,622,377		25,238,412		31,366,292		23,094,457
Basic income (loss) per common share	$	(0.02)	$	0.11	$	(0.07)	$	(0.27)
Income (Loss) per share - Diluted:
Numerator for diluted income (loss) per share	$	(581,000)	$	2,723,000	$	(2,153,000)	$	(6,127,000)
Adjust: Change in fair value of dilutive warrants outstanding		-		(3,428,000)		-		-
Numerator for diluted income (loss) per share	$	(581,000)	$	(705,000)	$	(2,153,000)	$	(6,127,000)
Denominator for basic income (loss) per share		32,622,377		25,238,412		31,366,292		23,094,457
Plus: Incremental shares underlying warrants outstanding		-		8,252,777		-		-
Denominator for diluted income (loss) per share		32,622,377		33,491,189		31,366,292		23,094,457
Diluted income (loss) per common share	$	(0.02)	$	(0.02)	$	(0.07)	$	(0.27)

The following potentially dilutive securities have been excluded from the computations of diluted weighted-average shares outstanding as they would be anti-dilutive:

	September 30,
	2015		2014
Shares underlying warrants outstanding		5,925,836		16,793,301
Shares underlying options outstanding		3,888,657		2,424,612
Unvested restricted stock		436,333		-

In addition, pursuant to the Amendment with Lambda (see Note 5), the Company committed to initiating tender offers to the holders of all of its remaining outstanding warrants pursuant to which it would offer such holders the right to exercise their respective warrants at a 50% discount to their current exercise prices, which range from $0.40 to $0.85 per share. Based on the recent market price for the Company’s common stock, the Company intends to first commence a tender offer for the outstanding warrants originally issued in 2011. The Company intends to commence a tender offer for the outstanding warrants issued in 2015 at a later date. If all remaining warrants are exercised at the discounted prices, the Company would receive maximum additional proceeds of approximately $1.39 million.

XML

Stock-Based Compensation

9 Months Ended

Sep. 30, 2015

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

Stock-Based Compensation

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 that vest upon service conditions is amortized over the vesting period of the award using the straight-line method. 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.

The Company granted stock options to purchase 2,496,848 shares of common stock during the nine months ended September 30, 2015 to employees. These stock options will be expensed over their respective applicable vesting periods, which are based on service and performance conditions. The fair value of all stock-based awards granted during the nine months ended September 30, 2015 was approximately $1,310,000.

The following assumptions were used for options granted for the nine months ended September 30, 2015:

Assumptions for Option Grants	Nine Months Ended September 30, 2015
Stock Price Volatility		122.8	%
Risk-Free Interest Rates		1.55	%
Expected Life (in years)		6.15
Expected Dividend Yield		-	%

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 $205,000 and $318,000 for the nine months ended September 30, 2015 and 2014, respectively.  For the nine months ended September 30, 2015, approximately $189,000 and approximately $15,000 are included in Selling, General and Administrative expenses and Research and Development expenses, respectively, on the accompanying condensed consolidated statement of operations. For the nine months ended September 30, 2014, approximately $302,000 and approximately $16,000 are included in Selling, General and Administrative expenses and Research and Development expenses, respectively, on the accompanying condensed consolidated statements of operations.

There was no tax benefit related to expense recognized in the nine months ended September 30, 2015 and 2014, as the Company is in a net operating loss position. As of September 30, 2015, there was approximately $1,166,000 of total unrecognized compensation cost related to unvested share-based compensation awards granted under the equity compensation plans. Approximately $158,000 of the $1,166,000 of total unrecognized compensation will be recognized at the time that certain performance conditions are met. The remaining approximately $1,008,000 will be amortized over the weighted average remaining requisite service period of 3.7 years.  Such amount does not include the effect of future grants of equity compensation, if any.  Of the remaining approximately $1,008,000 of unrecognized compensation cost, the Company expects to recognize approximately 9% in the remaining interim period of 2015, approximately 32% in 2016, approximately 24% in 2017, approximately 23% in 2018, approximately 8% in 2019 and approximately 4% in 2020.

Restricted Stock

On September 9, 2015, the Company issued 389,151 shares of restricted stock as compensation for the services of non-employee directors. The grant date fair value of the outstanding restricted stock awards was approximately $195,000 and was based on the fair value of the common stock on the date of grant. Of the total grant date fair value of approximately $195,000, approximately $174,000 was related to services previously rendered. The remaining approximately $21,000 will be recognized ratably over the vesting period as the restrictions lapse six months from the date of grant.

On September 25, 2015, the Company issued 47,382 shares of restricted stock, with a grant date fair value of approximately $22,000, to Scratched Anchor, LLC for services rendered and to be rendered by Scratched Anchor, LLC through December 31, 2016. Expense related to services rendered as of September 30, 2015 was approximately $12,000 and is included in Selling, General and Administrative expenses for the nine months ended September 30, 2015. The restricted stock will vest on November 25, 2015. The remaining expense will be recognized in the three months ended December 31, 2015.

On July 9, 2015, the Company issued 69,231 shares of restricted stock, with a grant date fair value of approximately $45,000, to Proactive Capital Resources Group (“Proactive”) for services rendered and to be rendered by Proactive through November 17, 2015. Expense related to services rendered as of September 30, 2015 was included in Selling, General and Administrative expenses for the nine months ended September 30, 2015, with the remaining approximately $10,000 recorded as prepaid expense as of September 30, 2015. This restricted stock vested on August 7, 2015.

Total stock-based compensation expense for the restricted stock grants was approximately $11,000 and $3,000 for the nine months ended September 30, 2015 and 2014, respectively, and is included in Selling, General and Administrative expenses on the accompanying condensed consolidated statements of operations. For the nine months ended September 30, 2015, approximately $9,000 was related to restricted stock awards granted prior to 2015. The remaining approximately $2,000 is related to the September 9, 2015 restricted stock grant, with the remaining approximately $19,000 to be recognized in the period October 1, 2015 through March 9, 2015.

XML

Warrants

9 Months Ended

Sep. 30, 2015

Warrants and Rights Note Disclosure [Abstract]

Warrants

Note 7 - Warrants 

In addition to the Lambda warrants exercised and discussed in Note 5, for the nine months ended September 30, 2015, 2,127 shares of common stock were issued as a result of additional warrants exercised, resulting in proceeds of $851.

XML

Recent Accounting Pronouncements

9 Months Ended

Sep. 30, 2015

New Accounting Pronouncements and Changes in Accounting Principles [Abstract]

Recent Accounting Pronouncements

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. In July 2015, the FASB approved a one-year deferral of the effective date of the new standard, making it effective for annual and interim reporting periods beginning January 1, 2018. Early adoption is permitted, but not before the original effective date for public companies (annual reporting periods beginning after December 15, 2016). The Company has not yet determined 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 has not yet determined the impact, if any, of the adoption of ASU 2014-15 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.

In July 2015, the FASB issued ASU No. 2015-11, “Simplifying the Measurement of Inventory (Subtopic 2015-11).” ASU 2015-11 requires inventory be measured at the lower of cost and net realizable value, and methods for valuing inventory that consider market value will be eliminated. ASU 2015-11 defines net realizable value as estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The guidance is effective for reporting periods beginning after December 15, 2016 and interim periods within those fiscal years with early adoption permitted. ASU 2015-11 should be applied prospectively. The Company has not yet determined the impact, if any, the adoption of ASU 2015-11 might have on its consolidated financial statements.

XML

Net Income (Loss) per Common Share (Details) - USD ($)	3 Months Ended		9 Months Ended
	Sep. 30, 2015	Sep. 30, 2014	Sep. 30, 2015	Sep. 30, 2014
Income (Loss) per share - Basic:
Numerator for basic income (loss) per share	$ (581,000)	$ 2,723,000	$ (2,153,000)	$ (6,127,000)
Denominator for basic income (loss) per share	32,622,377	25,238,412	31,366,292	23,094,457
Basic income (loss) per common share	$ (0.02)	$ 0.11	$ (0.07)	$ (0.27)
Income (Loss) per share - Diluted:
Numerator for diluted income (loss) per share	$ (581,000)	$ 2,723,000	$ (2,153,000)	$ (6,127,000)
Adjust: Change in fair value of dilutive warrants outstanding	0	(3,428,000)	0	0
Numerator for diluted income (loss) per share	$ (581,000)	$ (705,000)	$ (2,153,000)	$ (6,127,000)
Denominator for basic income (loss) per share	32,622,377	25,238,412	31,366,292	23,094,457
Plus: Incremental shares underlying warrants outstanding	0	8,252,777	0	0
Denominator for diluted income (loss) per share	32,622,377	33,491,189	31,366,292	23,094,457
Diluted income (loss) per common share	$ (0.02)	$ (0.02)	$ (0.07)	$ (0.27)

XML

Concentration of Credit Risk (Tables)

9 Months Ended

Sep. 30, 2015

Sales Revenue [Member]

Concentration Risk [Line Items]

Schedules Of Concentration Of Risk, By Risk Factor

For the nine months ended September 30, 2015 and 2014, the following customers accounted for the following percentages of the Company’s revenues, respectively.

Customer	2015			2014
A		25	%		25	%
B		21	%		-	%
C		13	%		9	%
D		4	%		46	%

Accounts Receivable [Member]

Concentration Risk [Line Items]

Schedules Of Concentration Of Risk, By Risk Factor

As of September 30, 2015 and December 31, 2014, the following customers accounted for the following percentages of the Company’s accounts receivable, respectively. 

Customer	2015			2014
A		44	%		22	%
B		13	%		25	%
C		1	%		35	%

XML

Basis of Presentation and Going Concern (Details Textual) - USD ($)		1 Months Ended				9 Months Ended
	Jul. 09, 2015	Sep. 30, 2015	Sep. 29, 2015	Jul. 24, 2015	May. 18, 2015	Sep. 30, 2015	Sep. 30, 2014
Basis Of Presentation And Going Concern [Line Items]
Proceeds from Issuance of Common Stock					$ 1,230,000	$ 1,340,000	$ 2,013,000
Sale of Stock, Description of Transaction					0.67
Class of Warrant or Right, Exercise Price of Warrants or Rights					$ 0.85
Proceeds from Warrant Exercises						$ 1,762,000	$ 11,000
Lincoln Park Capital Fund Llc [Member]
Basis Of Presentation And Going Concern [Line Items]
Proceeds from Issuance of Common Stock		$ 135,000
Stock Issued During Period, Shares, New Issues		300,000
Stock Issued During Period, Shares, Other	250,000			250,000
Registration Rights Agreement Maximum SharesAvailable For Grant Value				$ 5,000,000
Share Price		$ 0.45				$ 0.45
Warrant [Member]
Basis Of Presentation And Going Concern [Line Items]
Class of Warrant or Right, Exercise Price of Warrants or Rights			$ 0.15
Stock Issued During Period, Shares, Other			11,742,100
Proceeds from Warrant Exercises			$ 1,760,000
Private Placement [Member]
Basis Of Presentation And Going Concern [Line Items]
Proceeds from Issuance of Common Stock					$ 1,230,000
Stock Issued During Period, Shares, New Issues					1,834,299
Class of Warrant or Right, Exercise Price of Warrants or Rights					$ 0.85

XML

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) - 9 months ended Sep. 30, 2015 - USD ($) $ in Thousands	Total	Common Stock [Member]	Additional Paid-in Capital [Member]	Accumulated Other Comprehensive Income [Member]	Accumulated Deficit [Member]
Balance at Dec. 31, 2014	$ (5,681)	$ 30	$ 108,382	$ 72	$ (114,165)
Balance, shares at Dec. 31, 2014		30,391,513
Net loss	(2,153)				(2,153)
Issuance of common stock, net of equity issuance costs of $24	1,205	$ 2	1,203
Issuance of common stock, net of equity issuance costs of $24 (in Shares)		1,834,299
Issuance of common stock, net of commitment fee of $135	163	$ 1	162
Issuance of common stock, net of commitment fee of $135 (in shares)		550,000
Issuance of restricted stock	174		174
Issuance of restricted stock (in shares)		389,151
Issuance of restricted stock to vendor	$ 57		57
Issuance of restricted stock to vendor (in shares)	47,382	116,613
Exercise of warrants	$ 8,811	$ 12	8,799
Exercise of warrants, shares		11,744,227
Noncash stock-based compensation	216		216
Balance at Sep. 30, 2015	$ 2,792	$ 45	$ 118,993	$ 72	$ (116,318)
Balance, shares at Sep. 30, 2015		45,025,803

XML

Concentration of Credit Risk

9 Months Ended

Sep. 30, 2015

Concentration Of Credit Risk [Abstract]

Concentration of Credit Risk

Note 3 - Concentration of Credit Risk

For the nine months ended September 30, 2015 and 2014, the following customers accounted for the following percentages of the Company’s revenues, respectively.

Customer	2015			2014
A		25	%		25	%
B		21	%		-	%
C		13	%		9	%
D		4	%		46	%

As of September 30, 2015 and December 31, 2014, the following customers accounted for the following percentages of the Company’s accounts receivable, respectively. 

Customer	2015			2014
A		44	%		22	%
B		13	%		25	%
C		1	%		35	%

XML

Concentration of Credit Risk (Details)	9 Months Ended		12 Months Ended
	Sep. 30, 2015	Sep. 30, 2014	Dec. 31, 2014
Sales Revenue [Member] | Customer A [Member]
Concentration Risk [Line Items]
Concentration Risk, Percentage	25.00%	25.00%
Sales Revenue [Member] | Customer B [Member]
Concentration Risk [Line Items]
Concentration Risk, Percentage	21.00%	0.00%
Sales Revenue [Member] | Customer C [Member]
Concentration Risk [Line Items]
Concentration Risk, Percentage	13.00%	9.00%
Sales Revenue [Member] | Customer D [Member]
Concentration Risk [Line Items]
Concentration Risk, Percentage	4.00%	46.00%
Accounts Receivable [Member] | Customer A [Member]
Concentration Risk [Line Items]
Concentration Risk, Percentage	44.00%		22.00%
Accounts Receivable [Member] | Customer B [Member]
Concentration Risk [Line Items]
Concentration Risk, Percentage	13.00%		25.00%
Accounts Receivable [Member] | Customer C [Member]
Concentration Risk [Line Items]
Concentration Risk, Percentage	1.00%		35.00%

XML

Commitments and Contingencies (Details Textual)				1 Months Ended				3 Months Ended	9 Months Ended
	Sep. 09, 2015 shares	Feb. 04, 2013 USD ($)	Feb. 04, 2013 EUR (€)	May. 23, 2013 USD ($)	May. 23, 2013 EUR (€)	Apr. 23, 2012 USD ($)	Apr. 23, 2012 EUR (€)	Sep. 30, 2015 USD ($)	Sep. 30, 2015 USD ($) shares	Sep. 30, 2015 EUR (€) shares	Sep. 30, 2014 USD ($)	Sep. 30, 2015 EUR (€)	Sep. 30, 2015 € / Product	Sep. 30, 2015 $ / Product	Sep. 30, 2015	Dec. 31, 2014 USD ($)	Dec. 31, 2014 EUR (€)	Dec. 31, 2013 USD ($)	Dec. 31, 2013 EUR (€)	Dec. 31, 2012 USD ($)	Dec. 31, 2012 EUR (€)
Commitments And Contingencies [Line Items]
Finite Lived Intangible Assets Amortization Expense Years Two And Three								$ 210,000	$ 210,000
Other Assets, Noncurrent								1,526,000	1,526,000							$ 1,684,000
Accumulated Amortization of Other Deferred Costs								724,000	$ 724,000
Amortization of Other Deferred Charges								53,000			$ 158,000
Royalty rate									3.00%	3.00%
Debt Instrument, Interest Rate, Stated Percentage															12.00%
Share-based Compensation Arrangement by Share-based Payment Award, Options, Grants in Period, Gross | shares	195,000								2,496,848	2,496,848
Annual Minimum Amount								1,120,000	$ 1,120,000			€ 1,000,000
Royalty Receivable								$ 29,000	29,000
Cash Received Fom Royalty									29,000
Royalty Revenue, Total									$ 58,000
Bellco [Member]
Commitments And Contingencies [Line Items]
Number of units under first tier royalty receivable								125,000	125,000
First tier royalty per unit													1.75	1.95
Second tier royalty per unit													1.25	1.40
Upfront Fees And Connection Of First Amendment									$ 612,000	€ 450,000
Medica Spa [Member]
Commitments And Contingencies [Line Items]
License Agreement Payment									2,000,000	1,500,000
Long-term Purchase Commitment, Amount									1,089,000	€ 973,000
Payments for Royalties		$ 800,000	€ 600,000	$ 500,000	€ 400,000	$ 700,000	€ 500,000
Share Based Goods And Nonemployee Services Transaction Fair Market Value Of Options Granted									$ 273,000
Share-based Compensation Arrangement by Share-based Payment Award, Options, Grants in Period, Gross | shares									300,000	300,000
Purchase Obligation, Total																$ 880,000	€ 750,000	$ 700,000	€ 500,000	$ 400,000	€ 300,000

XML

Basis of Presentation and Going Concern (Policies)

9 Months Ended

Sep. 30, 2015

Accounting Policies [Abstract]

Interim Financial Information

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 Annual Report on Form 10-K for the year ended December 31, 2014 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 three and nine months ended September 30, 2014 presented herein reflect these previously restated amounts. The accompanying condensed 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

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 lives 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

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.

On September 29, 2015, the Company issued 11,742,100 shares of common stock to Lambda Investors, LLC for warrants exercised and received approximately $1.76 million in cash proceeds. The exercise price for each warrant was $0.15. See Note 5 for further discussion.

On July 24, 2015, the Company entered into a purchase agreement (the “Purchase Agreement”), together with a registration rights agreement (the “Registration Rights Agreement”), with Lincoln Park Capital Fund, LLC (“Lincoln Park”), pursuant to which the Company has the right to sell to Lincoln Park up to $5 million of the Company’s common stock. In connection with the Purchase Agreement, the Company issued to Lincoln Park 250,000 shares of common stock for no proceeds. Pursuant to the Purchase Agreement, in September 2015, the Company issued and sold 300,000 shares of common stock to Lincoln Park at a per share purchase price of $0.45, resulting in gross proceeds of $135,000. See Note 12 – Stockholders’ Equity (Deficit). 

On May 18, 2015, the Company raised gross proceeds of $1.23 million through the private placement of 1,834,299 units of its securities. Each unit consisted 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. The purchase price for each unit was $0.67. The warrants are exercisable at a price of $0.85 per share.

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.