Basis of Presentation and Liquidity

6 Months Ended

Jun. 30, 2020

Accounting Policies [Abstract]

Basis of Presentation and Liquidity

Note 2 – Basis of Presentation and Liquidity

Interim Financial Information

The accompanying unaudited condensed consolidated interim financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 8 and Article 10 of Regulation S-X. The condensed consolidated balance sheet as of December 31, 2019 was derived from the Company’s audited financial statements. Accordingly, these interim financial statements do not include all of the information and footnotes required by GAAP for annual financial statements. Results as of and for the three and six months ended June 30, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020.

The condensed consolidated interim financial statements and notes thereto should be read in conjunction with the consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

Reverse Stock Split

On May 22, 2019, the Company’s Board of Directors authorized a 1-for-9 reverse stock split and approved an amendment to the Company’s Certificate of Incorporation to affect the 1-for-9 reverse split of the Company’s common stock, which was effected at 5:30 p.m. ET on July 9, 2019. Fractional shares were not issued and stockholders who otherwise would have been entitled to receive a fractional share as a result of the reverse stock split received an amount in cash equal to $5.58 per share for such fractional interests. All of the share and per share amounts discussed in the accompanying condensed consolidated financial statements have been adjusted to reflect the effect of this reverse split.

Consolidation

The accompanying condensed consolidated financial statements include the accounts of Nephros, Inc. and its subsidiaries, including SRP, in which a controlling interest is maintained by the Company. Outside shareholders’ interest in SRP of 37.5% is shown on the condensed consolidated balance sheet as noncontrolling interest. All intercompany accounts and transactions were eliminated in the preparation of the accompanying condensed consolidated financial statements.

Use of Estimates

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities, at the date of the financial statements, and the reported amount of revenues and expenses, during the reporting period. Actual results could differ materially from those estimates. Included in these estimates are assumptions about the collection of accounts receivable, value of inventories, useful life of fixed assets and intangible assets, the assessment of expected cash flows used in evaluating goodwill and other long-lived assets, value of contingent consideration, the assessment of the ability to continue as a going concern and assumptions used in determining stock compensation such as expected volatility and risk-free interest rate.

Liquidity

The Company has sustained operating losses and expects such losses to continue over the next several quarters. In addition, net cash from operations has been negative since inception, generating an accumulated deficit of $130.1 million as of June 30, 2020.

On February 4, 2020, the Company completed a confidentially marketed underwritten public offering whereby the Company sold 937,500 shares of its common stock for aggregate net proceeds of $6.8 million. Additionally, the Company received $0.5 million from the U.S. Small Business Administration’s Paycheck Protection Program (“PPP”) on April 24, 2020. The PPP was established by the Coronavirus Aid, Relief and Economic Security Act (CARES Act), enacted on March 27, 2020, in response to the Coronavirus Disease 2019 (COVID-19) pandemic. Under the terms of the PPP, certain amounts of the loan may be forgiven if they are used for qualifying expenses during the first 24 weeks of the loan. The Company intends to use the entire amount for such qualifying expenses.

On May 26, 2020, the Company terminated its loan agreement with a lender, which had provided a secured asset-based revolving credit facility of up to $2.5 million. As of June 30, 2020, there was no outstanding amount due under the secured asset-based revolving facility.

On September 5, 2018, SRP completed a private placement transaction whereby SRP sold preferred shares equivalent to 37.5% of its outstanding equity interests for aggregate proceeds of $3.0 million. As of the date of issuance of the accompanying condensed consolidated financial statements, SRP had utilized the proceeds from this private placement. Nephros intends to loan operating funds to SRP at least through the planned FDA 510(k) clearance process of SRP’s second-generation hemodiafiltration system, which is expected to be complete before the end of 2020.

Based on cash that is available for the Company’s operations and projections of future Company operations, the Company believes that its cash balances will be sufficient to fund its current operating plan – including the potential negative impact of the COVID-19 pandemic – through at least the next 12 months from the date of issuance of the accompanying condensed consolidated financial statements. Additionally, the Company’s operating plans are designed to help control operating costs and to increase revenue until such time as the Company generates sufficient cash flows from operations. However, there is uncertainty with respect to the Company’s projections regarding the availability of sufficient cash resources as a result of the COVID-19 crisis and the economic conditions it has caused. In recent months, the Company has seen decreased demand for its products both with respect to new hospital customers and its existing hospital, restaurant and hospitality customers, which have been significantly impacted by the COVID-19 crisis. If this decrease in demand continues beyond the third quarter of 2020 and the Company is unable to achieve its revenue plan, the Company may be forced to cut costs as appropriate to preserve its available capital resources. If the Company is unable to sufficiently decrease its spending to match any future decreased demands for its products, the Company may exhaust its capital resources sooner than it currently anticipates. Further, as a result of the recent volatility of the capital markets and economic conditions generally, it may be difficult for the Company to raise additional capital at times when it may need it, and even if the Company were able to raise additional capital, it may be on terms than are detrimental to the Company. Accordingly, the current economic conditions caused by the COVID-19 crisis place uncertainty on the Company’s ability to maintain adequate levels of liquidity.

Recently Adopted Accounting Pronouncements

In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-04, “Simplifying the Test for Goodwill Impairment,” which simplifies the test for goodwill impairment. The guidance is effective for the Company beginning in the first quarter of fiscal year 2020. Early adoption is permitted for interim or annual goodwill impairments tests after January 1, 2017. The Company adopted this guidance as of January 1, 2020 and the guidance did not have an impact on its consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, “Disclosure Framework-Changes to the Disclosure Requirements for the Fair Value Measurement,” which modifies the disclosure requirements on fair value measurements. The guidance is effective for the Company beginning in the first quarter of fiscal year 2020. The Company adopted this guidance as of January 1, 2020 and the guidance did not have an impact on its consolidated financial statements.

In August 2018, the FASB issued ASU 2018-15, “Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract,” which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The guidance is effective for the Company beginning in the first quarter of fiscal year 2020. The Company adopted this guidance as of January 1, 2020 and the guidance did not have an impact on its consolidated financial statements.

In November 2018, the FASB issued ASU 2018-18, “Collaborative Arrangements: Clarifying the Interaction Between Topic 808 and Topic 606.” This guidance clarifies that, when the collaborative arrangement participant is a customer in the context of a unit-of-account, revenue from contracts with customers guidance should be applied, adds unit-of-account guidance to collaborative arrangements guidance, and requires, that in a transaction with a collaborative arrangement participant who is not a customer, presenting the transaction together with revenue recognized under contracts with customers is precluded. The guidance is effective for the Company beginning in the first quarter of fiscal year 2020. The Company adopted this guidance as of January 1, 2020 and the guidance did not have an impact on its consolidated financial statements.

In November 2019, the FASB issued ASU 2019-08, “Codification Improvements – Share-Based Consideration Payable to a Customer,” which requires that an entity measure and classify share-based payment awards granted to a customer by applying the guidance in Topic 718. The guidance is effective for the Company beginning in the first quarter of fiscal year 2020. The Company adopted this guidance as of January 1, 2020 and the guidance did not have an impact on its consolidated financial statements.

Recent Accounting Pronouncements, Not Yet Effective

In December 2019, the FASB issued ASU 2019-12, “Simplifying the Accounting for Income Taxes,” which removes certain exceptions to the general principles of the accounting for income taxes and also improves consistent application of and simplification of other areas when accounting for income taxes. The guidance is effective for the Company beginning in the first quarter of fiscal year 2021. Early adoption is permitted. The Company is assessing the impact of adopting this guidance on its consolidated financial statements.

Concentration of Credit Risk

The Company deposits its cash in financial institutions. At times, such deposits may be in excess of insured limits. To date, the Company has not experienced any impairment losses on its cash. The Company also limits its credit risk with respect to accounts receivable by performing credit evaluations when deemed necessary.

Major Customers

For the three months ended June 30, 2020 and 2019, the following customers, all of which are in the Water Filtration segment, accounted for the following percentages of the Company’s revenues, respectively:

Customer	2020			2019
A		21	%		7	%
B		11	%		12	%
C		10	%		6	%
D		5	%		12	%
E		-	%		10	%
Total		47	%		47	%

For the six months ended June 30, 2020 and 2019, the following customers, all of which are in the Water Filtration segment, accounted for the following percentages of the Company’s revenues, respectively:

Customer	2020			2019
A		22	%		7	%
B		14	%		14	%
D		9	%		12	%
Total		45	%		33	%

As of June 30, 2020 and December 31, 2019, the following customers, all of which are in the Water Filtration segment, accounted for the following percentages of the Company’s accounts receivable, respectively:

Customer	2020			2019
C		15	%		6	%
B		7	%		26	%
A		7	%		11	%
Total		29	%		43	%

Cash and Cash Equivalents

The Company considers all highly liquid money market instruments with an original maturity of three months or less when purchased to be cash equivalents. At June 30, 2020 and December 31, 2019, cash and cash equivalents were deposited in financial institutions and consisted entirely of immediately available fund balances. The Company maintains its cash deposits and cash equivalents with financial institutions it believes to be well-known and stable.

Accounts Receivable

The Company provides credit terms to customers in connection with purchases of the Company’s products. Management periodically reviews customer account activity in order to assess the adequacy of the allowances provided for potential collection issues and returns. Factors considered include economic conditions, each customer’s payment and return history and credit worthiness. Adjustments, if any, are made to reserve balances following the completion of these reviews to reflect management’s best estimate of potential losses. There was no allowance for doubtful accounts as of June 30, 2020. The allowance for doubtful accounts was approximately $25,000 as of December 31, 2019. For the three and six months ended June 30, 2020 and 2019, there was no provision for bad debt expense. Write-offs of accounts receivable were approximately $25,000 for the three and six months ended June 30, 2020 which were reserved for in a prior period. Write-offs of accounts receivable were approximately $1,000 and $5,000, respectively, for the three and six months ended June 30, 2019 which were reserved for in a prior period. There was no allowance for sales returns at June 30, 2020 or December 31, 2019.

Depreciation Expense

Depreciation related to equipment utilized in the manufacturing process is recognized in cost of goods sold on the consolidated statements of operations and comprehensive loss. For the three and six months ended June 30, 2020, depreciation expense was approximately $6,000 and $11,000, respectively. Approximately $4,000 of the approximately $6,000 and approximately $8,000 of the approximately $11,000 of depreciation expense for the three and six months ended June 30, 2020, respectively, has been recognized in the cost of goods sold. For the three and six months ended June 30, 2019, depreciation expense was approximately $8,000 and $16,000, respectively. Approximately $4,000 of the approximately $8,000 and approximately $6,000 of the approximately $16,000 of depreciation expense for the three and six months ended June 30, 2019, respectively, has been recognized in the cost of goods sold.