UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM
(Mark One)
For
the quarterly period ended:
OR
For the transition period from: _______ to _______
Commission
File Number:
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) | |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading symbol | Name of exchange on which registered | ||
| The
|
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. ☒ ☐ NO
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ ☐ NO
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.:
| Large accelerated filer ☐ | Accelerated filer ☐ |
| Smaller
reporting company | |
| Emerging
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ YES ☒
As of November 8, 2022, shares of the registrant’s common stock, $0.001 par value per share, were outstanding.
NEPHROS, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
| 2 |
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
NEPHROS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
(Unaudited)
| September 30, 2022 | December 31, 2021 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Inventory | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Current assets held-for-sale | ||||||||
| Total current assets | ||||||||
| Property and equipment, net | ||||||||
| Lease right-of-use assets | ||||||||
| Intangible assets, net | ||||||||
| Goodwill | ||||||||
| License and supply agreement, net | ||||||||
| Other assets | ||||||||
| Non-current assets held-for-sale | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Current portion of secured note payable | $ | $ | ||||||
| Accounts payable | ||||||||
| Accrued expenses | ||||||||
| Current portion of lease liabilities | ||||||||
| Current liabilities associated with assets held-for-sale | ||||||||
| Total current liabilities | ||||||||
| Secured note payable, net of current portion | ||||||||
| Equipment financing, net of current portion | ||||||||
| Lease liabilities, net of current portion | ||||||||
| Non-current liabilities associated with assets held-for-sale | ||||||||
| TOTAL LIABILITIES | ||||||||
| COMMITMENTS AND CONTINGENCIES (Note 15) | ||||||||
| STOCKHOLDERS’ EQUITY | ||||||||
| Preferred stock, $ par value; shares authorized at September 30, 2022 and December 31, 2021; shares issued and outstanding at September 30, 2022 and December 31, 2021. | ||||||||
| Common stock, $ par value; shares authorized at September 30, 2022 and December 31, 2021; and shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively. | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated other comprehensive income | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Subtotal | ||||||||
| Noncontrolling interest | ||||||||
| TOTAL STOCKHOLDERS’ EQUITY | ||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements.
| 3 |
NEPHROS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In thousands, except share and per share amounts)
(Unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Net revenue: | ||||||||||||||||
| Product revenues | $ | $ | $ | $ | ||||||||||||
| Royalty and other revenues | ||||||||||||||||
| Total net revenues | ||||||||||||||||
| Cost of goods sold | ||||||||||||||||
| Gross margin | ||||||||||||||||
| Operating expenses: | ||||||||||||||||
| Research and development | ||||||||||||||||
| Depreciation and amortization | ||||||||||||||||
| Selling, general and administrative | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Loss from continuing operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other (expense) income: | ||||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Interest income | ||||||||||||||||
| Extinguishment of PPP loan | ||||||||||||||||
| Other income (expense), net | ||||||||||||||||
| Total other (expense) income: | ||||||||||||||||
| Loss from continuing operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net loss from discontinued operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Less: net loss due to undeclared deemed dividends attributable to continuing noncontrolling interest | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net loss attributable to Nephros Inc. shareholders | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net loss per common share , basic and diluted from continuing operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net loss per common share, basic and diluted, from discontinued operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net loss per common share, basic and diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Net loss per common share, basic and diluted, attributable to continuing noncontrolling interest | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net loss per common share, basic and diluted attributable to Nephros Inc. shareholders | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Weighted average common shares outstanding, basic and diluted | ||||||||||||||||
| Comprehensive loss: | ||||||||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Other comprehensive income (loss), foreign currency translation adjustments, net of tax | ( | ) | ( | ) | ( | ) | ||||||||||
| Comprehensive loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Comprehensive loss attributable to continuing noncontrolling interest | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Comprehensive loss attributable to Nephros, Inc. shareholders | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements.
| 4 |
NEPHROS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
(In thousands, except share amounts)
(Unaudited)
| Three and nine months ended September 30, 2022 | ||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-in | Accumulated Other Comprehensive | Accumulated | Noncontrolling | Total Stockholders’ | |||||||||||||||||||||||||||
| Shares | Amount | Capital | Income | Deficit | Subtotal | Interest | Equity | |||||||||||||||||||||||||
| Balance, December 31, 2021 | $ | $ | $ | $ | ( |
) | $ | $ | $ | |||||||||||||||||||||||
| Net loss | - | ( |
) | ( |
) | ( |
) | |||||||||||||||||||||||||
| Change in non-controlling interest | - | |||||||||||||||||||||||||||||||
| Net unrealized losses on foreign currency translation, net of tax | - | ( |
) | ( |
) | ( |
) | |||||||||||||||||||||||||
| Exercise of warrants | ||||||||||||||||||||||||||||||||
| Stock-based compensation | - | |||||||||||||||||||||||||||||||
| Balance, March 31, 2022 | $ | $ | $ | $ | ( |
) | $ | $ | $ | |||||||||||||||||||||||
| Net loss | - | ( |
) | ( |
) | ( |
) | |||||||||||||||||||||||||
| Restricted stock vesting | ||||||||||||||||||||||||||||||||
| Elimination of cumulative translation adjustment, upon closing of wholly owned foreign subsidiary | - | ( |
) | ( |
) | ( |
) | |||||||||||||||||||||||||
| Stock-based compensation | - | |||||||||||||||||||||||||||||||
| Balance, June 30, 2022 | $ | $ | $ | $ | ( |
) | $ | $ | $ | |||||||||||||||||||||||
| Net loss | - | ( |
) | ( |
) | ( |
) | |||||||||||||||||||||||||
| Stock-based compensation | - | |||||||||||||||||||||||||||||||
| Balance, September 30, 2022 |
|
$ | $ | $ | $ | ( |
) | $ | $ | $ | ||||||||||||||||||||||
| 5 |
| Three and nine months ended September 30, 2021 | ||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-in | Accumulated Other Comprehensive |
Accumulated |
Noncontrolling |
Total Stockholders’ |
|||||||||||||||||||||||||||
| Shares | Amount | Capital | Income | Deficit | Subtotal | Interest | Equity | |||||||||||||||||||||||||
| Balance, December 31, 2020 | $ | $ | $ | $ | ( |
) | $ | $ | $ | |||||||||||||||||||||||
| Net loss | - | ( |
) | ( |
) | ( |
) | |||||||||||||||||||||||||
| Net unrealized losses on foreign currency translation, net of tax | - | ( |
) | ( |
) | ( |
) | |||||||||||||||||||||||||
| Exercise of options | ||||||||||||||||||||||||||||||||
| Cashless exercise of options | ||||||||||||||||||||||||||||||||
| Stock-based compensation | - | |||||||||||||||||||||||||||||||
| Balance, March 31, 2021 | $ | |
$ | $ | |
$ | ( |
) | $ | $ | |
$ | ||||||||||||||||||||
| Net loss | - | ( |
) | ( |
) | ( |
) | |||||||||||||||||||||||||
| Net unrealized gains on foreign currency translation, net of tax | - | |||||||||||||||||||||||||||||||
| Cashless exercise of options | ||||||||||||||||||||||||||||||||
| Exercise of warrants | ||||||||||||||||||||||||||||||||
| Cashless exercise of warrants | ||||||||||||||||||||||||||||||||
| Stock-based compensation | - | |||||||||||||||||||||||||||||||
| Balance, June 30, 2021 | $ | $ | $ | $ | ( |
) | $ | $ | $ | |||||||||||||||||||||||
| Net loss | - | ( |
) | ( |
) | ( |
) | |||||||||||||||||||||||||
| Net unrealized losses on foreign currency translation, net of tax | - | ( |
) | ( |
) | ( |
) | |||||||||||||||||||||||||
| Issuance of common stock for asset acquisition (see Note 3) | ||||||||||||||||||||||||||||||||
| Exercise of options | ||||||||||||||||||||||||||||||||
| Issuance of vested restricted stock | ||||||||||||||||||||||||||||||||
| Stock-based compensation | - | |||||||||||||||||||||||||||||||
| Balance, September 30, 2021 | $ | $ | $ | $ | ( |
) | $ | $ | $ | |||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements.
| 6 |
NEPHROS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
| Nine Months Ended September 30, | ||||||||
| 2022 | 2021 | |||||||
| OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation of property and equipment | ||||||||
| Amortization of intangible assets, license and supply agreement and finance lease right-of-use asset | ||||||||
| Stock-based compensation, including stock options and restricted stock | ||||||||
| Inventory obsolescence charge | ||||||||
| Extinguishment of PPP loan | ( | ) | ||||||
| Provision for bad debt expense | ( | ) | ||||||
| Impairment of assets held for sale | ||||||||
| Gain on foreign currency transactions | ( | ) | ( | ) | ||||
| Change in lease right-of-use assets | ||||||||
| Decrease (increase) in operating assets: | ||||||||
| Accounts receivable | ( | ) | ||||||
| Inventory | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Other assets | ( | ) | ||||||
| (Decrease) increase in operating liabilities: | ||||||||
| Accounts payable | ( | ) | ||||||
| Accrued expenses | ( | ) | ||||||
| Lease liabilities | ( | ) | ( | ) | ||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| INVESTING ACTIVITIES: | ||||||||
| Purchase of property and equipment | ( | ) | ( | ) | ||||
| Payment of direct transaction costs for asset acquisition | ( | ) | ||||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| FINANCING ACTIVITES: | ||||||||
| Proceeds from sale of subsidiary preferred shares to noncontrolling interest | ||||||||
| Payments on secured note payable | ( | ) | ( | ) | ||||
| Principal payments on finance lease liability | ( | ) | ( | ) | ||||
| Principal payments on equipment financing | ( | ) | ( | ) | ||||
| Proceeds from exercise of warrants | ||||||||
| Proceeds from exercise of options | ||||||||
| Net cash provided by financing activities | ||||||||
| Effect of exchange rates on cash and cash equivalents | ( | ) | ( | ) | ||||
| Net decrease in cash and cash equivalents | ( | ) | ( | ) | ||||
| Cash and cash equivalents, beginning of period | ||||||||
| Cash and cash equivalents, end of period | $ | $ | ||||||
| Supplemental disclosure of cash flow information | ||||||||
| Cash paid for interest expense | $ | $ | ||||||
| Cash paid for income taxes | $ | $ | ||||||
| Supplemental disclosure of noncash investing and financing activities | ||||||||
| Right-of-use asset obtained in exchange for operating lease liability | $ | $ | ||||||
| Issuance of common shares for asset acquisition | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements.
| 7 |
NEPHROS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (unaudited)
Note 1 – Organization and Nature of Operations
Nephros, Inc. (“Nephros” or the “Company”) was incorporated under the laws of the State of Delaware on April 3, 1997. The Company was founded by health professionals, scientists and engineers affiliated with Columbia University to develop advanced end stage renal disease (“ESRD”) therapy technology and products.
Beginning in 2009, Nephros introduced high performance liquid purification filters to meet the demand for water purification in certain medical markets. The Company’s filters, generally classified as ultrafilters, are primarily used in hospitals for the prevention of infection from waterborne pathogens, such as legionella and pseudomonas, and in dialysis centers for the removal of biological contaminants from water and bicarbonate concentrate. The Company also develops and sells water filtration products for commercial applications, focusing on the hospitality and food service markets. The water filtration business is a reportable segment, referred to as the Water Filtration segment.
On October 4, 2022, the Company entered into a definitive asset purchase agreement with a third party for the sale of substantially all of the Company’s Pathogen Detection Systems (“PDS”) business (disposal group), which had been previously reported as a separate reportable operating segment. As a result, the disposal group was determined to meet the accounting criteria for discontinued operations as well as an asset held for sale as of September 30, 2022. PDS is no longer separately reported in the Company’s reportable segment footnote for any of the periods presented. (See Note 4 - Assets Held-for-Sale and Discontinued Operations).
In July 2018, the Company formed a new subsidiary, Specialty Renal Products, Inc. (“SRP”), to drive the development of its second-generation hemodiafiltration system and other products focused on improving therapies for patients with renal disease. After SRP’s formation, the Company assigned to SRP all of the Company’s rights to three patents relating to the Company’s hemodiafiltration technology, which were carried at zero book value. SRP is a reportable segment, referred to as the Renal Products segment.
The Company’s primary U.S. facilities are located at 380 Lackawanna Place, South Orange, New Jersey 07079, 3221 Polaris Avenue, Las Vegas, Nevada 89102 and 1015 Telegraph Street, Unit B, Reno, Nevada 89502. These locations house the Company’s corporate headquarters, research, manufacturing, and distribution facilities. In addition, the Company maintains small administrative offices in various locations in the United States.
Note 2 – Basis of Presentation and Liquidity
Interim Financial Information
The accompanying unaudited condensed consolidated interim financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 8 and Article 10 of Regulation S-X. The condensed consolidated balance sheet as of December 31, 2021 was derived from the Company’s audited financial statements. Accordingly, they do not include all of the information and footnotes required by GAAP for annual financial statements. Results as of and for the nine months ended September 30, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022.
The condensed consolidated interim financial statements and notes thereto should be read in conjunction with the consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
Consolidation
The
accompanying condensed consolidated financial statements include the accounts of Nephros, Inc. and its subsidiaries, including the Company’s
wholly owned subsidiary Nephros International which was dissolved during the quarter ended June 30, 2022, and SRP, in which the Company
maintains a controlling interest. Outside stockholders’ interest in SRP of
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, net realizable value of inventories, useful life of fixed assets and intangible assets, the assessment of expected cash flows used in evaluating goodwill and other long-lived assets, and assumptions used in determining stock compensation such as expected volatility and risk-free interest rate.
| 8 |
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 $
In
February 2022, pursuant to a First Amendment to Series A Preferred Stock Purchase Agreement (the “Amendment”) among SRP and
the holders of SRP’s outstanding shares of Series A Preferred Stock, SRP issued and sold an additional shares of its Series
A Preferred Stock at a price of $ per share, resulting in total gross proceeds of $
Based on cash that is available for the Company’s operations, projections of future Company operations, and recent expense reduction measures taken by management, including the sale of the PDS assets and discontinuance of its operations, the Company believes that its cash balances will be sufficient to fund its current operating plan through at least the next 12 months from the date of issuance of the accompanying condensed consolidated financial statements. In the event that operations do not meet expectations, the Company may need to further reduce discretionary expenditures such as additional headcount, new R&D projects, and other variable costs to alleviate any substantial doubt as to the Company’s ability to continue as a going concern.
While significant progress has been made against the COVID-19 pandemic, some uncertainty remains with respect to the Company’s projections regarding the availability of sufficient cash resources, due to the possibility that COVID-19 infections could increase again and cause further disruption to economic conditions. During the pandemic, particularly during calendar year 2020, the Company saw decreased demand for its hospital filtration products, particularly in emergency pathogen outbreak response. In addition, sales to new customers during 2020 – including water filtration and pathogen detection products – were hindered by pandemic-related travel restrictions. Also in 2020, the Company’s commercial filtration products, which are primarily targeted at the hospitality and food service markets, saw a decrease in demand, due to the closure of many hotels and restaurants. The Company believes that broad vaccine distribution and increased population immunity has reduced the probability of further significant negative COVID-19 impacts, but if these decreases in demand return and the Company is unable to achieve its revenue plan, the Company may need to reduce budgeted expenditures as appropriate to preserve its available capital resources, which could slow its revenue growth plans.
Recently Adopted Accounting Pronouncements
In May 2021, the FASB issued ASU 2021-04, “Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options,” which clarifies and reduces diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options that remain equity classified after modification or exchange. The Company adopted this guidance as of January 1, 2022, and the guidance did not have an impact on its condensed consolidated financial statements.
Recent Accounting Pronouncements, Not Yet Effective
In October 2021, the FASB issued ASU 2021-08, “Accounting for Contract Assets and Contract Liabilities from Contracts with Customers,” which requires that an entity recognize contract assets and contract liabilities acquired in a business combination in accordance with Accounting Standards Codification (“ASC”) 606. The guidance is effective for the Company beginning in the first quarter of fiscal year 2023 and should be applied prospectively. Early adoption is permitted. The Company will assess the impact, if any, of adopting this guidance on its consolidated financial statements.
Concentration of Credit Risk
The Company deposits its cash in financial institutions. At times, such deposits may be in excess of insured limits. To date, the Company has not experienced any impairment losses on its cash. The Company also limits its credit risk with respect to accounts receivable by performing credit evaluations when deemed necessary.
| 9 |
Major Customers
For the three months ended September 30, 2022 and 2021, the following customers, all of which are in the Water Filtration segment, accounted for the following percentages of the Company’s revenues, respectively:
| Three Months Ended September 30 | ||||||||
| Customer | 2022 | 2021 | ||||||
| A | % | % | ||||||
| D | % | % | ||||||
| Total | % | % | ||||||
For the nine months ended September 30, 2022 and 2021, the following customers, all of which are in the Water Filtration segment, accounted for the following percentages of the Company’s revenues, respectively:
| Nine Months Ended September 30 | ||||||||
| Customer | 2022 | 2021 | ||||||
| A | % | % | ||||||
| B | % | % | ||||||
| Total | % | % | ||||||
No
other customer accounted for
As of September 30, 2022 and December 31, 2021, the following customers accounted for the following percentages of the Company’s accounts receivable, respectively:
| Customer | September 30, 2022 | December 31, 2021 | ||||||
| A | % | % | ||||||
| C | % | % | ||||||
| B | % | % | ||||||
| Total | % | % | ||||||
Accounts Receivable
The
Company recognizes an allowance that reflects a current estimate of credit losses expected to be incurred over the life of a financial
asset, including trade receivables. The Company continuously monitors collections and payments from its customers and maintains a provision
for estimated credit losses. The Company determines its allowance for doubtful accounts by considering a number of factors, including
the length of time balances are past due, the Company’s previous loss history, the customer’s current ability to pay its
obligations to the Company and the expected condition of the general economy and the industry as a whole. The Company writes off accounts
receivable when they are determined to be uncollectible. There was
Depreciation Expense
Depreciation
related to equipment utilized in the manufacturing process is recognized in cost of goods sold on the condensed consolidated statements
of operations and comprehensive loss. For the three and nine months ended September 30, 2022, depreciation expense was approximately
$
Assets Held-For-Sale and Discontinued Operations
See Note 4, Assets Held-for-Sale and Discontinued Operations, for a discussion of the Company’s significant accounting policy surrounding the sale of substantially all of the Company’s PDS business.
| 10 |
Note 3 – Asset Acquisition
On
July 9, 2021, the Company acquired substantially all of the assets of GenArraytion, Inc. (“GenArraytion”). The acquisition
did not qualify as a business combination and, as a result, was accounted for as an asset acquisition as the fair value of the gross
assets acquired was primarily related to a single asset. In consideration for the acquisition of these assets, the Company issued
shares of the Company’s common stock to GenArraytion, reflecting an aggregate purchase price of $
Fifty percent of the 123,981 common shares issued were subject
to a risk of forfeiture which lapsed during the three months ended September 30, 2021. Pursuant to the purchase agreement with GenArraytion,
the Company also agreed to make royalty payments to GenArraytion equal to
The
total consideration of $
| Total Consideration | ||||
| (in thousands) | ||||
| Intellectual property | $ | |||
| Equipment | ||||
| Total consideration | $ | |||
The
acquired intellectual property was being amortized over its estimated useful life of
Note 4 – Assets Held-for-Sale and Discontinued Operations
In accordance with ASC 360-10-45-9, a long-lived asset (disposal group) to be sold shall be classified as held for sale in the period in which all of the following criteria are met: management has committed to a plan to sell the asset; the asset is available for immediate sale in its present condition; an active program to locate a buyer and other actions required to complete the plan to sell the asset have been initiated; the sale of the asset is probable and is expected to qualify for recognition as a completed sale within one year; the asset is being actively marketed for sale at a price that is reasonable in relation to its current fair value; and actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.
Long-lived assets that are classified as held-for-sale are recorded at the lower of carrying value or fair value less costs to sell and are considered to be Level 3 measurements as defined in Note 6.
On October 4, 2022, the Company entered into a
definitive asset purchase agreement with a third party pursuant to which the Company agreed to sell substantially all of the assets
used in the Company’s PDS business.
| 11 |
The following table presents the components in assets held-for-sale and liabilities associated with assets held-for-sale:
| (in thousands) | September 30, 2022 | December 31, 2021 | ||||||
| Inventory | ||||||||
| Prepaid expenses | ||||||||
| Operating lease right of use assets | ||||||||
| Total current assets held-for-sale | $ | $ | ||||||
| Property and equipment | ||||||||
| Operating lease right of use assets | ||||||||
| Intangible assets, net | ||||||||
| Other assets | ||||||||
| Total non-current assets held-for-sale | $ | $ | ||||||
| Current portion of operating lease liabilities | ||||||||
| Total current liabilities associated with assets held-for-sale | $ | $ | ||||||
| Lease liabilities, net of current portion | ||||||||
| Total non-current liabilities associated with assets held-for-sale | $ | $ | ||||||
Discontinued Operations
In accordance with ASC 205-20, Presentation of Financial Statements: Discontinued Operations, a disposal of a component of an entity or a group of components of an entity (disposal group) is required to be reported as discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results when the disposal group meets the criteria to be classified as held-for-sale. The condensed consolidated statements of operations reported for current and prior periods report the results of operations of the discontinued operations, including the impairment loss recognized as a component of net income (loss) separate from the net income (loss) from continuing operations.
All discontinued operations relate to the Company’s previously reported PDS segment, for the three months ended September 30, 2022 and 2021.
| Three months ended September 30, | Three Months Ended September 30, | |||||||
| 2022 | 2021 | |||||||
| Total net revenues | $ | $ | ||||||
| Gross margin | ( | ) | ||||||
| Research and development expenses | ||||||||
| Depreciation and amortization expense | ||||||||
| Selling, general and administrative expenses | ||||||||
| Total operating expenses | ||||||||
| Operating loss from discontinued operations | ( | ) | ( | ) | ||||
| Impairment of assets held for sale | ( | ) | ||||||
| Loss from discontinued operations | $ | ( | ) | $ | ( | ) | ||
| 12 |
All discontinued operations relate to the Company’s previously reported PDS segment, for the nine months ended September 30, 2022 and 2021.
| Nine Months Ended September 30, | Nine Months Ended September 30, | |||||||
| 2022 | 2021 | |||||||
| Total net revenues | $ | $ | ||||||
| Gross margin | ( | ) | ||||||
| Research and development expenses | ||||||||
| Depreciation and amortization expense | ||||||||
| Selling, general and administrative expenses | ||||||||
| Total operating expenses | ||||||||
| Operating loss from discontinued operations | ( | ) | ( | ) | ||||
| Impairment of assets held for sale | ( | ) | ||||||
| Loss from discontinued operations | $ | ( | ) | $ | ( | ) | ||
The following items related to discontinued operations were included in the condensed consolidated statement of cash flows:
| For the nine months ended, | ||||||||
| (in millions) | September 30, 2022 | September 30, 2021 | ||||||
| Depreciation | $ | $ | ||||||
| Amortization | ||||||||
| Stock compensation | ||||||||
| Impairment of assets held-for-sale | ||||||||
| Operating lease right-of-use assets | ||||||||
| Purchases of property and equipment | ( | ) | ( | ) | ||||
During
the nine months ended September 30, 2022, $
Note 5 – Revenue Recognition
The Company recognizes revenue related to product sales when product is shipped via external logistics providers and the other criteria of ASC 606 are met. Product revenue is recorded net of returns and allowances. There was no allowance for sales returns for the three and nine months ended September 30, 2022 or 2021. In addition to product revenue, the Company recognizes revenue related to royalty and other agreements in accordance with the five-step model in ASC 606. Royalty and other revenues recognized for the three and nine months ended September 30, 2022 and 2021 is comprised of:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| (in thousands) | (in thousands) | |||||||||||||||
| Royalty revenue under the Bellco License Agreement | $ | $ | $ | $ | ||||||||||||
| Royalty revenue under the Sublicense Agreement with Camelbak (1) | ||||||||||||||||
| Other revenue | ||||||||||||||||
| Total royalty and other revenues | $ | $ | $ | $ | ||||||||||||
| (1) |
| 13 |
Bellco License Agreement
On June 27, 2011, the Company entered into a License Agreement (as thereafter amended, the “License Agreement”), effective July 1, 2011, with Bellco S.r.l. (“Bellco”), an Italy-based supplier of hemodialysis and intensive care products, for the manufacturing, marketing and sale of the Company’s patented mid-dilution dialysis filters (the “Products”). Under the License Agreement, the Company granted Bellco a license to manufacture, market and sell the Products under its own name, label, and CE mark in certain countries on an exclusive basis, and to do the same on a non-exclusive basis in certain other countries. Under the License Agreement with Bellco, the Company received upfront payments which were previously deferred and subsequently recognized as license revenue over the term of the License Agreement. In addition, the License Agreement also provided for the payment of certain royalties to the Company based on the number of units of Products sold per year in the covered territory. The License Agreement expired in accordance with its terms on December 31, 2021.
Other Revenue – Other revenues are derived from sales of services to customers, which primarily include installation, training and testing on product and equipment sold to certain customers.
Note 6 – Fair Value Measurements
The Company measures certain financial instruments and other items at fair value.
To determine the fair value, the Company uses the fair value hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs market participants would use to value an asset or liability and are developed based on market data obtained from independent sources. Unobservable inputs are inputs based on assumptions about the factors market participants would use to value an asset or liability.
To measure fair value, the Company uses the following fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable:
Level 1 – Quoted prices in active markets for identical assets or liabilities.
Level 2 – Inputs other than Level 1 that are observable for the asset or liability, either directly or indirectly, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data by correlation or other means.
Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Value is determined using pricing models, discounted cash flow methodologies, or similar techniques and also includes instruments for which the determination of fair value requires significant judgment or estimation.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The Company evaluates its financial assets and liabilities subject to fair value measurements on a recurring basis to determine the appropriate level of classification for each reporting period.
At September 30, 2022 and December 31, 2021, the Company’s cash equivalents consisted of money market funds. The Company values its cash equivalents using observable inputs that reflect quoted prices for securities with identical characteristics and classify the valuation techniques that use these inputs as Level 1.
At September 30, 2022 and December 31, 2021, the fair value measurements of the Company’s assets and liabilities measured on a recurring basis were as follows:
| Fair Value Measurements at Reporting Date Using | ||||||||||||
| Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||
| (in thousands) | ||||||||||||
| September 30, 2022 | ||||||||||||
| Cash | $ | $ | - | $ | - | |||||||
| Money market funds | - | - | ||||||||||
| Cash and cash equivalents | $ | $ | $ | |||||||||
| December 31, 2021 | ||||||||||||
| Cash | $ | - | - | |||||||||
| Money market funds | - | - | ||||||||||
| Cash and cash equivalents | $ | $ | $ | |||||||||
| 14 |
Assets and Liabilities Not Measured at Fair Value on a Recurring Basis
The carrying amounts of accounts receivable, accounts payable and accrued expenses approximate fair value due to the short-term maturity of these instruments.
The carrying amounts of the secured long-term note payable, lease liabilities and equipment financing approximate fair value as of September 30, 2022 and December 31, 2021 because those financial instruments bear interest at rates that approximate current market rates for similar agreements with similar maturities and credit.
Note 7 – Inventory
Inventory is stated at the lower of cost or net realizable value using the first-in, first-out method and consists of raw materials and finished goods. The Company’s inventory components as of September 30, 2022 and December 31, 2021, were as follows:
| September 30, 2022 | December 31, 2021 | |||||||
| (in thousands) | ||||||||
| Finished goods | $ | $ | ||||||
| Raw materials | ||||||||
| Total inventory | $ | $ | ||||||
Note 8 – Intangible Assets and Goodwill
Intangible Assets, net
Intangible assets at September 30, 2022 and December 31, 2021 are set forth in the table below. Gross carrying values and accumulated amortization of the Company’s intangible assets by type are as follows:
| September 30, 2022 | December 31, 2021 | |||||||||||||||||||||||
| Cost | Accumulated Amortization | Net | Cost | Accumulated Amortization |
Net | |||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||
| Tradenames, service marks and domain names | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Customer relationships | ( | ) | ( | ) | ||||||||||||||||||||
| Total intangible assets | $ | ( | ) | $ | $ | ( | ) | |||||||||||||||||
| 15 |
The
Company recognized amortization expense of approximately $
The
Company recognized amortization expense of approximately $
As of September 30, 2022, future amortization expense for each of the next five years is (in thousands):
| Fiscal Years | ||||
| 2022 (excluding the nine months ended September 30, 2022) | $ | |||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
The
Company recognized approximately $
Goodwill
Goodwill
has a carrying value on the Company’s condensed consolidated balance sheets of approximately $
Note 9 – License and Supply Agreement, net
On April 23, 2012, the Company entered into a License and Supply Agreement (as thereafter amended, the “License and Supply Agreement”) with Medica S.p.A. (“Medica”), an Italy-based medical product manufacturing company, for the marketing and sale of certain filtration products based upon Medica’s proprietary Medisulfone ultrafiltration technology in conjunction with the Company’s filtration products, and for an exclusive supply arrangement for the filtration products. Under the License and Supply Agreement, Medica granted to the Company an exclusive license, with right of sublicense, to market, promote, distribute, offer for sale and sell the filtration products worldwide, with certain limitations on territory, during the term of the License and Supply Agreement. In addition, the Company granted to Medica an exclusive license under the Company’s intellectual property to make the filtration products during the term of the License and Supply Agreement. The filtration products covered under the License and Supply Agreement includes both certain products based on Medica’s proprietary Versatile microfiber technology and certain filtration products based on Medica’s proprietary Medisulfone ultrafiltration technology. The term of the License Agreement with Medica expires on December 31, 2025, unless earlier terminated by either party in accordance with the terms of the License and Supply Agreement.
In
exchange for the license, the gross value of the intangible asset capitalized was $
As
of September 2013, the Company has an understanding with Medica whereby the Company has agreed to pay interest to Medica at a
In
addition, for the period beginning April 23, 2014 through December 31, 2025, the Company will pay Medica a royalty rate of
| 16 |
Note 10 – Secured Note Payable
On March 27, 2018, the Company entered into a Secured Promissory Note Agreement (the “Secured Note”) with Tech Capital for a principal amount of $1.2 million. As of September 30, 2022, the principal balance of the Secured Note was approximately $0.1 million.
The
Secured Note has a maturity date of
During
each of the three months ended September 30, 2022 and 2021, the Company made payments under the Secured Note of approximately $
As of September 30, 2022, future principal maturities are as follows (in thousands):
| Fiscal Years | ||||
| 2022 (excluding the nine months ended September 30, 2022) | $ | |||
| 2023 | ||||
| Total | $ | |||
Note 11 – Leases
The
Company has operating leases for corporate offices, an automobile and office equipment. The leases have remaining lease terms of
Lease cost, as presented below, includes costs associated with leases for which right-of-use (“ROU”) assets have been recognized as well as short-term leases.
The components of total lease costs were as follows:
Three months ended September 30, 2022 | Three months ended September 30, 2021 | |||||||
| (in thousands) | ||||||||
| Operating lease cost | $ | $ | ||||||
| Finance lease cost: | ||||||||
| Amortization of right-of-use assets | ||||||||
| Interest on lease liabilities | ||||||||
| Total finance lease cost | ||||||||
| Variable lease cost | ||||||||
| Total lease cost | $ | $ | ||||||
Nine months ended September 30, 2022 | Nine months ended September 30, 2021 | |||||||
| (in thousands) | ||||||||
| Operating lease cost | $ | $ | | |||||
| Finance lease cost: | ||||||||
| Amortization of right-of-use assets | ||||||||
| Interest on lease liabilities | ||||||||
| Total finance lease cost | ||||||||
| Variable lease cost | ||||||||
| Total lease cost | $ | $ | ||||||
| 17 |
Supplemental cash flow information related to leases was as follows:
Nine months ended September 30, 2022 | Nine months ended September 30, 2021 | |||||||
| (in thousands) | ||||||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||||||
| Operating cash flows from operating leases | $ | $ | ||||||
| Financing cash flows from finance leases | $ | $ | ||||||
Supplemental balance sheet information related to leases was as follows:
| September 30, 2022 | December 31, 2021 | |||||||
| (in thousands) | ||||||||
| Operating lease right-of-use assets | $ | $ | ||||||
| Finance lease right-of-use assets | $ | $ | ||||||
| Current portion of operating lease liabilities | $ | $ | ||||||
| Operating lease liabilities, net of current portion | ||||||||
| Total operating lease liabilities | $ | $ | ||||||
| Current portion of finance lease liabilities | $ | $ | ||||||
| Finance lease liabilities, net of current portion | ||||||||
| Total finance lease liabilities | $ | $ | ||||||
| Weighted average remaining lease term | ||||||||
| Operating leases | ||||||||
| Finance leases | ||||||||
| Weighted average discount rate | ||||||||
| Operating leases | % | % | ||||||
| Finance leases | % | % | ||||||
As of September 30, 2022, maturities of lease liabilities were as follows:
| Operating Leases | Finance Leases | |||||||
| (in thousands) | ||||||||
| 2022 (excluding the nine months ended September 30, 2022) | $ | $ | ||||||
| 2023 | ||||||||
| 2024 | ||||||||
| 2025 | ||||||||
| Total future minimum lease payments | ||||||||
| Less imputed interest | ( | ) | ||||||
| Total | $ | $ | ||||||
The fair value of stock options and restricted stock is recognized as stock-based compensation expense in the Company’s condensed consolidated statement of operations and comprehensive loss. The Company calculates stock-based compensation expense in accordance with ASC 718. The fair value of stock-based awards is amortized over the vesting period of the award.
| 18 |
Stock Options
The Company granted stock options to purchase and shares of common stock, respectively, to employees during the three and nine months ended September 30, 2022. These stock options are being expensed over the respective vesting periods of each option, which are conditioned upon the continued services of the option recipient. The fair value of the stock options granted during the three and nine months ended September 30, 2022, respectively, was $ and $ million.
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model. The below assumptions for the risk-free interest rates, expected dividend yield, expected lives and expected stock price volatility were utilized for the stock options granted during the nine months ended September 30, 2022.
| Assumptions for Option Grants | ||||
| Stock Price Volatility | % | |||
| Risk-Free Interest Rate | % | |||
| Expected Life (in years) | ||||
| Expected Dividend Yield | % | |||
Stock-based compensation expense related to stock options was $ and $ for the three months ended September 30, 2022 and 2021, respectively. For the three months ended September 30, 2022, approximately $ and $ are included in selling, general and administrative expenses and research and development expenses, respectively, on the accompanying condensed consolidated statement of operations and comprehensive loss. For the three months ended September 30, 2021, approximately $ and $ are included in selling, general and administrative expenses and research and development expenses, respectively, on the accompanying condensed consolidated statement of operations and comprehensive loss.
Stock-based compensation expense related to stock options was $ and $ for the nine months ended September 30, 2022 and 2021, respectively. For the nine months ended September 30, 2022, approximately $ and $ are included in selling, general and administrative expenses and research and development expenses, respectively, on the accompanying condensed consolidated statement of operations and comprehensive loss. For the nine months ended September 30, 2021, approximately $ and $ are included in selling, general and administrative expenses and research and development expenses, respectively, on the accompanying condensed consolidated statement of operations and comprehensive loss.
There
was
Restricted Stock
Total stock-based compensation expense for restricted stock on the Company’s condensed consolidated statement of operations was a credit to expense of ($), due to the forfeiture of unvested restricted shares, and $ for the three months ended September 30, 2022 and 2021, respectively. For the three months ended September 30, 2022, approximately ($) is included in selling, general and administrative expenses on the accompanying condensed consolidated statement of operations and comprehensive loss. For the three months ended September 30, 2021, approximately $is included in selling, general and administrative expenses, on the accompanying condensed consolidated statement of operations and comprehensive loss.
Total stock-based compensation expense for restricted stock was approximately $ and $ for the nine months ended September 30, 2022 and 2021, respectively. For the nine months ended September 30, 2022, approximately $ is included in selling, general and administrative expenses on the accompanying condensed consolidated statement of operations and comprehensive loss. For the nine months ended September 30, 2021, approximately $ is included in selling, general and administrative expenses on the accompanying condensed consolidation statement of operations and comprehensive loss.
Approximately $ of restricted stock was granted to employees during the three and nine months ended September 30, 2021 for services rendered during the year ended December 31, 2020.
As of September 30, 2022, there was unrecognized compensation expense related to restricted stock-based awards granted under the equity compensation plans, and during the three and nine months ended September 30, 2022, shares of restricted stock were forfeited as the conditions on the vesting of the restricted stock could not be met.
| 19 |
SRP Equity Incentive Plan
SRP’s 2019 Equity Incentive Plan (the “SRP Plan”) was approved on May 7, 2019 under which shares of SRP’s common stock are reserved for the issuance of options, restricted stock and other stock awards.
There were SRP stock options granted during the three months ended September 30, 2022. SRP issued shares of restricted stock pursuant to the SRP Plan during the nine months ended September 30, 2022. Stock-based compensation expense related to the SRP stock grants was approximately $ and $ for the three and nine months ended September 30, 2022 and was included in selling, general and administrative expenses on the accompanying condensed consolidated statement of operations and comprehensive loss.
There was stock-based compensation expense related to the SRP stock options for the three months ended September 30, 2021. There was approximately $ recognized for stock-based compensation expense for the nine months ended September 30, 2021 which was included in selling, general and administrative expenses on the accompanying condensed consolidated statement of operations and comprehensive loss.
SRP stock grants are expensed over the respective vesting period, which was based on a service condition. Stock-based compensation expense related to the SRP stock grants is presented by the Company as noncontrolling interest on the consolidated balance sheets as of September 30, 2022 and December 31, 2021.
Note 13 – Stockholders’ Equity
July 2021 Common Stock Issuance
On July 9, 2021, the Company issued shares
of common stock to acquire
Noncontrolling Interest
Pursuant to the terms and conditions of a Series A
Preferred Stock Purchase Agreement, dated September 9, 2018, among SRP and the purchasers identified therein (the “SRP Purchase
Agreement”), SRP sold to such purchasers an aggregate of shares of its Series A Preferred Stock (the “Series A Preferred”)
at a price of $ per share resulting in total gross proceeds of $
Each share of SRP Series A Preferred is initially convertible into one share of SRP common stock, subject to adjustment for stock splits and recapitalization events. Subject to customary exempt issuances, in the event SRP issues additional shares of its common stock or securities convertible into common stock at a per share price that is less than the original purchase price of the Series A Preferred , the conversion price of the Series A Preferred will automatically be reduced to such lower price.
| 20 |
In the event of any voluntary or involuntary liquidation, dissolution or winding up of SRP, the holders of the Series A Preferred are entitled to be paid out of the assets of SRP available for distribution to its stockholders or, in the case of a deemed liquidation event, out of the consideration payable to stockholders in such deemed liquidation event or the available proceeds, before any payment shall be made to the holders of SRP common stock by reason of their ownership thereof, an amount per share equal to one times (1x) the Series A Preferred original issue price, plus any accruing dividends accrued but unpaid thereon, whether or not declared, together with any other dividends declared but unpaid thereon (the “Series A Liquidation Preference”). If upon any such liquidation, dissolution or winding up of SRP or deemed liquidation event, the assets of SRP available for distribution to its stockholders shall be insufficient to pay the Series A Liquidation Preference in full, the holders of Series A Preferred shall share ratably in any distribution of the assets available for distribution in proportion to the respective amounts which would otherwise be payable in respect of the shares held by them upon such distribution if all amounts payable on or with respect to such shares were paid in full. After the full payment of the Series A Liquidation Preference, the holders of the Series A Preferred and the holders of common stock will share ratably in any remaining proceeds available for distribution on an as-converted to common stock basis
Each share of Series A Preferred accrues dividends at the rate per annum of $ per share. The accruing dividends shall accrue from day to day, whether or not declared, and shall be cumulative and shall be payable only when, as, and if declared by the Board.
Holders of Series A Preferred
shall be entitled to cast the number of votes equal to the number of whole shares of common stock into which the shares of Series A Preferred
held by such holder are convertible as of the record date for determining stockholders entitled to vote. Except as provided by law or
by the other provisions, the holders of Series A Preferred vote together with the holders of common stock as a single class. Notwithstanding
the foregoing, for as long as at least shares of Series A Preferred are outstanding, SRP is required to obtain the affirmative
vote or written consent of a majority of the Series A Preferred in order to effect certain corporate transactions, including without limitation,
the issuance of any securities senior to or on parity with the Series A Preferred, a liquidation or deemed liquidation of SRP, amendments
to SRP’s charter documents, the issuance of indebtedness in excess of $
The noncontrolling interest in SRP held by holders of the Series A Preferred has been classified as equity on the accompanying consolidated interim balance sheet, as the noncontrolling interest is redeemable only upon the occurrence of events that are within the control of the Company.
Warrants
During the nine
months ended September 30, 2022, warrants to purchase
Basic loss per common share is calculated by dividing net loss available to common shareholders by the number of weighted average common shares issued and outstanding. Diluted loss per common share is calculated by dividing net loss available to common shareholders by the weighted average number of common shares issued and outstanding for the period, plus amounts representing the dilutive effect from the exercise of stock options and warrants and unvested restricted stock, as applicable. The Company calculates dilutive potential common shares using the treasury stock method, which assumes the Company will use the proceeds from the exercise of stock options and warrants to repurchase shares of common stock to hold in its treasury stock reserves.
| September 30, | ||||||||
| 2022 | 2021 | |||||||
| Shares underlying warrants outstanding | ||||||||
| Shares underlying options outstanding | ||||||||
| Unvested restricted stock | ||||||||
| 21 |
Note 15 – Commitments and Contingencies
Purchase Commitments
In exchange for the rights granted under the License
and Supply Agreement with Medica (see Note 9 – License and Supply Agreement, net), the Company agreed to make certain minimum annual
aggregate purchases from Medica over the term of the License and Supply Agreement. For the year ended December 31, 2022, the Company has
agreed to make minimum annual aggregate purchases from Medica of €
Contractual Obligations
See Note 11 – Leases for a discussion of the Company’s contractual obligations.
Note 16 – Segment Reporting
The Company has defined three reportable segments : Water Filtration, Pathogen Detection and Renal Products. During the period ended September 30, 2022, it was determined the Pathogen Detection segment was to be treated as a discontinued operation (See Note 4 – Assets Held-for-Sale and Discontinued Operations). For purposes of this segment reporting, the Company is reporting only on the remaining two segments that are considered part of continuing operations.
The Water Filtration segment primarily develops and sells high performance water purification filters. The Renal Products segment is focused on the development of medical device products for patients with renal disease, including a second generation hemodiafiltration system for the treatment of patients with ESRD.
The Company’s chief operating decision maker evaluates the financial performance of the Company’s segments based upon segment revenues, gross margin and operating expenses which include research and development and selling, general and administrative expenses. Items below loss from operations are not reported by segment, since they are excluded from the measure of segment profitability reviewed by the Company’s chief operating decision maker. The Company does not report balance sheet information by segment since such information is not reviewed by the Company’s chief operating decision maker.
The accounting policies for the Company’s segments are the same as those described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
The tables below present segment information reconciled to total Company loss from operations, with segment operating loss including gross profit less direct research and development expenses and direct selling, general and administrative expenses to the extent specifically identified by segment:
Three months ended September 30, 2022 |
||||||||||||
| Water Filtration | Renal Products |
Nephros, Inc. Consolidated |
||||||||||
| Total net revenues | $ | $ | $ | |||||||||
| Gross margin | ||||||||||||
| Research and development expenses | ||||||||||||
| Depreciation and amortization expense | ||||||||||||
| Selling, general and administrative expenses | ||||||||||||
| Total operating expenses | ||||||||||||
| Loss from continuing operations | $ | ( |
) | $ | ( |
) | $ | ( |
) | |||
Nine months ended September 30,2022 |
||||||||||||
| Water Filtration | Renal Products |
Nephros, Inc. Consolidated |
||||||||||
| Total net revenues | $ | $ | $ | |||||||||
| Gross margin | ||||||||||||
| Research and development expenses | ||||||||||||
| Depreciation and amortization expense | ||||||||||||
| Selling, general and administrative expenses | ||||||||||||
| Total operating expenses | ||||||||||||
| Loss from continuing operations | $ | ( |
) | $ | ( |
) | $ | ( |
) | |||
| 22 |
| Three months ended September 30, 2021 | ||||||||||||
| Water Filtration | Renal Products | Nephros, Inc. Consolidated | ||||||||||
| Total net revenues | $ | $ | $ | |||||||||
| Gross margin | ||||||||||||
| Research and development expenses | ||||||||||||
| Depreciation and amortization expense | ||||||||||||
| Selling, general and administrative expenses | ||||||||||||
| Total operating expenses | ||||||||||||
| Loss from continuing operations | $ | ( |
) | $ | ( |
) | $ | ( |
) | |||
| Nine months ended September 30, 2021 | ||||||||||||
| Water Filtration |
Renal Products |
Nephros, Inc. Consolidated |
||||||||||
| Total net revenues | $ | $ | $ | |
||||||||
| Gross margin | ||||||||||||
| Research and development expenses | ||||||||||||
| Depreciation and amortization expense | ||||||||||||
| Selling, general and administrative expenses | ||||||||||||
| Total operating expenses | ||||||||||||
| Loss from continuing operations | $ | ( |
) | $ | ( |
) | $ | ( |
) | |||
| 23 |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion should be read in conjunction with our condensed consolidated financial statements and notes thereto included in Item 1 of Part I of this Quarterly Report on Form 10-Q. This discussion includes forward-looking statements about our business, financial condition and results of operations including discussions about management’s expectations for our business. These statements represent projections, beliefs and expectations based on current circumstances and conditions and in light of recent events and trends, and these statements should not be construed either as assurances of performances or as promises of a given course of action. Instead, various known and unknown factors are likely to cause our actual performance and management’s actions to vary, and the results of these variances may be both material and adverse.
Business Overview
We are a commercial-stage company that develops and sells high performance water solutions to the medical and commercial markets.
In medical markets, we sell water filtration products and waterborne pathogen detection products. Our medical water filters, mostly classified as ultrafilters, are used primarily by hospitals for the prevention of infection from waterborne pathogens, such as legionella and pseudomonas, and in dialysis centers for the removal of biological contaminants from water and bicarbonate concentrate. Because our ultrafilters capture contaminants as small as 0.005 microns in size, they minimize exposure to a wide variety of bacteria, viruses, fungi, parasites, and endotoxins.
In commercial markets, we manufacture and sell water filters that improve the taste and odor of water and reduce biofilm, bacteria, and scale build-up in downstream equipment. Marketed under both the Nephros and AETHER brands, our products are marketed primarily to the food service, hospitality, convenience store, and health care markets.
We also have a subsidiary, Specialty Renal Products, Inc. (“SRP”), a development-stage medical device company that is focused primarily on developing hemodiafiltration (“HDF”) technology. On May 13, 2022, the FDA gave 510(k) clearance to SRP’s second-generation model of the OLpūr H2H Hemodiafiltration System, which enables nephrologists to provide HDF treatment to patients with end stage renal disease (“ESRD”).
We were founded in 1997 by healthcare professionals affiliated with Columbia University Medical Center/New York-Presbyterian Hospital to develop and commercialize an alternative method to hemodialysis. We have extended our filtration technologies to meet the demand for liquid purification in other areas, in particular, water purification.
COVID-19 Pandemic
Most customers and prospects – including healthcare, hospitality, and food and beverage – have re-opened to our sales activity as the country has progressed through the COVID-19 pandemic. In addition, our filter emergency response business has normalized. We expect the pandemic to continue its overall trend toward abatement in the coming months, but recent infection increases from new viral variants may interrupt that abatement from time to time, as has occurred with the Delta and Omicron variants.
During the pandemic, we maintained full operations, supporting our customers and strategic partners, with no significant interruptions in supply chain or service capabilities.
We believe that, as the COVID-19 pandemic subsides, we may experience a net positive impact on demand for our products, due especially to increased global awareness of infectious pathogens and the serious problems they cause. Specifically, we expect that:
| ● | Purchase decisions for infection control filtration that had been deferred, both in new and existing customer organizations, may be re-prioritized. | |
| ● | Demand for our pathogen detection products may increase as unoccupied buildings, including office buildings and hotels, are readied for re-occupation. Extended periods of low, or no, water flow through building piping creates opportunities for biofilm propagation – a problem our strategic partners are trained to eradicate. | |
| ● | Demand for our commercial filtration products may increase as business returns to hotels, casinos, and restaurants. |
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Our Products
Water Filtration Products
We develop and sell water filtration products used in both medical and commercial applications. Our water filtration products employ multiple filtration technologies, as described below.
In medical markets, our primary filtration mechanism is to pass liquids through the pores of polysulfone hollow fiber. Our filters’ pores are significantly smaller than those of competing products, resulting in highly effective elimination of waterborne pathogens, including legionella bacteria (the cause of Legionnaires disease) and viruses, which are not eliminated by most other microbiological filters on the market. Additionally, the fiber structure and pore density in our hollow fiber enables significantly higher flow rates than in other polysulfone hollow fiber.
Our primary sales strategy in medical markets is to sell through value-added resellers (“VARs”). Leveraging VARs has enabled us to expand rapidly our access to target customers without significant sales staff expansion. In addition, while we are currently focused on medical markets, the VARs that support these customers also support a wide variety of commercial and industrial customers. We believe that our VAR relationships will facilitate growth in filter sales outside of the medical industry.
In commercial markets, we develop and sell our Nephros- and AETHER-branded filters, for which carbon-based absorption is the primary filtration mechanism. Aether products allow us to improve water’s odor and taste, to reduce scale and heavy metals, and to reduce other water contaminants for customers who are primarily in the food service, convenience store, and hospitality industries.
Our Aether filter offerings have the potential to generate accretive revenue growth in at least three ways. First, we expect the business to continue its organic growth. Second, cross-selling opportunities are generated by offering taste/odor-focused products to the medical markets, as well as pathogen-focused filtration to the commercial markets. Finally, as part of the more substantial Nephros organization, Aether may be able to compete for larger filtration contracts than may have been available to it as a smaller, independent firm.
In commercial markets, our model combines both direct and indirect sales. Our sales staff have sold products directly to a number of convenience stores, hotels, casinos, and restaurants. We are also pursuing large corporate contracts through partnerships.
Target Markets
Our ultrafiltration products currently target the following markets:
| ● | Hospitals and Other Healthcare Facilities: Filtration of water for washing and drinking as an aid in infection control. The filters produce water that is suitable for wound cleansing, cleaning of equipment used in medical procedures, and washing of surgeons’ hands. | |
| ● | Dialysis Centers and Home/Portable Dialysis Machines: Filtration of water or bicarbonate concentrate used in hemodialysis. | |
| ● | Commercial Facilities: Filtration and purification of water for consumption, including for use in ice machines and soft drink dispensers. | |
| ● | Military and Outdoor Recreation: Individual water purification devices used by soldiers and backpackers to produce drinking water in the field, as well as filters customized to remote water processing systems. |
Hospitals and Other Healthcare Facilities. Nephros filters are a leading tool used to provide proactive protection to patients in high-risk areas (e.g., ice machines, surgical rooms, NICUs) and reactive protection to patients in broader areas during periods of water pathogen outbreaks. Our products are used in hundreds of medical facilities to aid in infection control, both proactively and reactively.
As of 2019, according to the American Hospital Association, there are approximately 6,100 hospitals in the U.S., with approximately 921,000 beds. In 2019, over 36 million patients were admitted to these hospitals. The U.S. Centers for Disease Control and Prevention (“CDC”) estimates that healthcare associated infections (“HAI”) occur in approximately 1 out of every 31 hospital patients, which calculates to over 1 million patients in 2019. HAIs affect patients in hospitals or other healthcare facilities and are not present or incubating at the time of admission. They also include infections acquired by patients in the hospital or facility, but appearing after discharge, and occupational infections among staff. Many HAIs are caused by waterborne bacteria and viruses that can thrive in aging or complex plumbing systems often found in healthcare facilities.
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In January 2022, the Center for Clinical Standards and Quality at the Centers for Medicare and Medicaid Services (“CMS”) expanded its requirements – originally implemented in 2017 – for facilities to develop policies and procedures that inhibit the growth and spread of legionella and other opportunistic pathogens in building water systems. In this 2022 update, CMS requires teams to be assigned to the development of formal water management plans (“WMPs”), as well as detailed documentation regarding the development of the WMPs and their execution. CMS surveyors regularly review policies, procedures, and reports documenting water management implementation results to verify that facilities are compliant with these requirements. We believe that these CMS regulations may have a positive impact on the sale of our HAI-inhibiting ultrafilters.
We currently have FDA 510(k) clearance on the following portfolio of medical device products for use in the hospital setting to aid in infection control:
| ● | The DSU-H and SSU-H are in-line, 0.005-micron ultrafilters that provide dual- and single-stage protection, respectively, from waterborne pathogens. They are primarily used to filter potable water feeding ice machines, sinks, and medical equipment, such as endoscope washers and surgical room humidifiers. The DSU-H has an up to 6-month product life in a typical hospital setting, while the SSU-H has an up to 3-month product life. | |
| ● | The S100 is a point-of-use, 0.01-micron microfilter that provides protection from waterborne pathogens. The S100 is primarily used to filter potable water feeding sinks and showers. The S100 has an up to 3-month product life when used in a hospital setting. | |
| ● | The HydraGuardTM and HydraGuardTM - Flush are 0.005-micron cartridge ultrafilters that provide single-stage protection from waterborne pathogens. The HydraGuard ultrafilters are primarily used to filter potable water feeding ice machines and medical equipment, such as endoscope washers and surgical room humidifiers. The HydraGuard has an up to 6-month product life and the HydraGuard - Flush has an up to 12-month product life when used in a hospital setting. |
Our complete hospital infection control product line, including in-line, point-of-use, and cartridge filters, can be viewed on our website at http://www.nephros.com/infection-control/. We are not including the information on our website as a part of, nor incorporating it by reference into, this Quarterly Report on Form 10-Q.
Dialysis Centers - Water/Bicarbonate. In the dialysis water market, Nephros ultrafiltration products are among the highest performing products on the market. The DSU-D, SSU-D and the SSUmini have become the standard endotoxin filter in many portable reverse osmosis systems. The EndoPur®, our large-format ultrafilter targeted at dialysis clinic water systems, provides the smallest pore size available. Following a long pilot project at a major dialysis provider, we are now seeing growth in the use of this product. In addition, we aim to expand EndoPur’s usage into heat-disinfected water systems, which we anticipate will further open the market for this product.
To perform hemodialysis, all dialysis clinics have dedicated water purification systems to produce water and bicarbonate concentrate, two essential ingredients for making dialysate, the liquid that removes waste material from the blood. According to the American Journal of Kidney Diseases, there are approximately 6,500 dialysis clinics in the United States servicing approximately 468,000 patients annually. We estimate that there are over 100,000 hemodialysis machines in operation in the United States.
Medicare is the main payer for dialysis treatment in the United States. To be eligible for Medicare reimbursement, dialysis centers must meet the minimum standards for water and bicarbonate concentrate quality set by the Association for the Advancement of Medical Instrumentation (“AAMI”), the American National Standards Institute (“ANSI”) and the International Standards Organization (“ISO”). We anticipate that the stricter standards approved by these organizations in 2009 will be adopted by Medicare in the future.
We currently have FDA 510(k) clearance on the following portfolio of medical device products for use in the dialysis setting to aid in bacteria, virus, and endotoxin retention:
| ● | The DSU-D, SSU-D and SSUmini are in-line, 0.005-micron ultrafilters that provide protection from bacteria, viruses, and endotoxins. All of these products have an up to 12-month product life in the dialysis setting and are used to filter water following treatment with a reverse osmosis (“RO”) system, and to filter bicarbonate concentrate. These ultrafilters are primarily used in the water lines and bicarbonate concentrate lines leading into dialysis machines, and as a polish filter for portable RO machines. | |
| ● | The EndoPur is a 0.005-micron cartridge ultrafilter that provides single-stage protection from bacteria, viruses, and endotoxins. The EndoPur has an up to 12-month product life in the dialysis setting and is used to filter water following treatment with an RO system. More specifically, the EndoPur is used primarily to filter water in large RO systems designed to provide ultrapure water to an entire dialysis clinic. The EndoPur is a cartridge-based, “plug and play” market entry that requires no plumbing at installation or replacement. The EndoPur is available in 10”, 20”, and 30” configuration. |
Commercial and Industrial Facilities. Our commercial NanoGuard® product line accomplishes ultrafiltration via small pore size (0.005 micron) technology, filtering bacteria and viruses from water. In addition, the AETHER brand expanded our product line to include water filtration and purification technologies that are primarily focused on improving odor and taste and on reducing scale and heavy metals from filtered water.
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We purchased the AETHER brand to expedite our access to commercial markets and to expand our filtration expertise and capabilities. Our commercial market focus is on the hotel, restaurant, and convenience store markets. In the first-year post-acquisition, we upgraded Aether facilities to increase production and logistics capacity, integrated Aether products into the Nephros infection control product portfolio, and initiated sales efforts with several large commercial customers. In March 2022, we closed a contract to provide water filtration systems to an organization of approximately 3,000 Quick Service Restaurants (“QSR”). We continue to pursue other national accounts, which may result in step-change increases in commercial market revenue.
Over time, we believe that the same water safety management programs currently underway at medical facilities may migrate to commercial markets. As the epidemiology of waterborne pathogens expands, links to contamination sources will become more efficient and the data more readily available. In cases where those sources are linked to restaurants, hotels, office buildings and residential complexes, the corporate owners of those facilities will likely face increasing liability exposure. We expect that building owners will come to understand ASHRAE-188, which outlines risk factors for buildings and their occupants, and provides water safety management guidelines. We believe, in time, most commercial buildings will need to follow the basic requirements of ASHRAE-188: create a water management plan, perform routine testing, and establish a plan to treat the building in the event of a positive test.
As demand for water testing and microbiological filtration grows, we will be ready to deploy our expertise and solutions based on years of experience servicing the medical market. We believe that we have an opportunity to offer unique expertise and products to the commercial market, and that our future revenue from the commercial market could even surpass our infection control revenue.
We currently market the following portfolio of proprietary products for use in the commercial, industrial, and food service settings:
| ● | The NanoGuard set of products are in-line, 0.005-micron ultrafilter that provides dual-stage retention of any organic or inorganic particle larger than 15,000 Daltons. NanoGuard products are designed to fit a variety of existing plumbing configurations, including 10” and 20” standard housings, and AETHER and Everpure® manifolds. Included in the NanoGuard product line are both conventional and flushable filters. | |
| ● | The AETHER line of commercial filters, which are also sold under the Nephros brand, provide a variety of technology solutions that improve water quality in food service, convenience store, hospitality, and industrial applications. AETHER filters improve water taste and odor, and reduce sediment, dirt, rust particles and other solids, chlorine and heavy minerals, lime scale build-up, and both particulate lead and soluble lead. |
AETHER products combine effectively with NanoGuard ultrafiltration technologies to offer full-featured solutions to the commercial water market, including to existing users of Everpure filter manifolds.
Military and Outdoor Recreation. We developed our individual water treatment device (“IWTD”) in both in-line and point-of-use configurations. Our IWTD allows a soldier in the field to derive drinking water from any freshwater source. This enables the soldier to remain hydrated, to help maintain mission effectiveness and unit readiness, and to extend mission reach. Our IWTD has been validated by the military to meet the NSF Protocol P248 standard. It has also been approved by the U.S. Army Public Health Command and the U.S. Army Test and Evaluation Command for deployment.
In May 2015, we entered into a Sublicense Agreement (the “Sublicense Agreement”) with CamelBak Products, LLC (“CamelBak”). Under this Sublicense Agreement, we granted CamelBak an exclusive, non-transferable, worldwide (with the exception of Italy) sublicense and license, in each case solely to market, sell, distribute, import and export the IWTD. In exchange for the rights granted to CamelBak, CamelBak agreed, through December 31, 2022, to pay us a percentage of the gross profit on any sales made to a branch of the U.S. military, subject to certain exceptions, and to pay us a fixed per-unit fee for any other sales made. CamelBak was also required to meet or exceed certain minimum annual fees payable to us, and, if such fees are not met or exceeded, we were able to convert the exclusive sublicense to a non-exclusive sublicense with respect to non-U.S. military sales. In the first quarter of 2019, the Sublicense Agreement was amended to eliminate the minimum fee obligations starting May 6, 2018, and, as such, CamelBak has no further minimum fee obligations. Related to this Sublicense Agreement, there was no royalty revenue recognized during the three and nine months ended September 30, 2022, and approximately $20,000 of revenue was recognized in the nine months ended September 30, 2021.
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Hemodiafiltration (HDF) Systems and Specialty Renal Products, Inc.
Introduction to HDF
The current standard of care in the United States for patients with chronic renal failure is hemodialysis (“HD”), a process in which toxins are cleared via diffusion. Patients typically receive HD treatments at least 3 times weekly for 3-4 hours per treatment. HD is most effective in removing smaller, easily diffusible toxins. For patients with acute renal failure, the current standard of care in the United States is hemofiltration (“HF”), a process where toxins are cleared via convection. HF offers a much better removal of larger sized toxins when compared to HD; however, HF treatment is more challenging for patients, as it is performed daily, and typically takes 12-24 hours per treatment.
Hemodiafiltration (“HDF”) is an alternative dialysis modality that combines the benefits of HD and HF into a single therapy by clearing toxins using both diffusion and convection. Though not widely used in the United States, HDF is prevalent in Europe and is performed for a growing number of patients. Clinical experience and literature show the following clinical and patient benefits of HDF:
| ● | Enhanced clearance of middle and large molecular weight toxins | |
| ● | Improved survival - up to a 35% reduction in mortality risk | |
| ● | Reduction in the occurrence of dialysis-related amyloidosis | |
| ● | Reduction in inflammation | |
| ● | Reduction in medication such as EPO and phosphate binders | |
| ● | Improved patient quality of life | |
| ● | Reduction in number of hospitalizations and overall length of stay |
However, like HD, HDF can be resource-intensive and can require a significant amount of time to deliver one course of treatment.
Nephros and First-Generation HDF
In the early 2000’s, Nephros developed a medical device that enabled a standard HD machine to perform HDF. This first-generation device (“HDF1”) was cleared by the U.S. Food and Drug Administration (“FDA”) for the treatment of patients with chronic renal failure in 2012.
We refer to our approach as an on-line mid-dilution hemodiafiltration (“mid-dilution HDF”) system. Our HDF1 solution included an OLpūr H2H Hemodiafiltration Module (“H2H Module”), an OLpūr MD 220 Hemodiafilter (“HDF Filter”) and an H2H Substitution Filter (“Dialysate Filter”).
Our H2H Module attaches to a standard HD machine to perform on-line HDF therapy. The HD machine controls and monitors the basic treatment functions, as it would normally when providing HD therapy. The H2H Module is a free-standing, movable device that is placed next to either side of an HD machine. The H2H Module connects to the clinic’s water supply, drain, and electricity.
The H2H Module utilizes the HDF Filter, which is similar to a typical hollow fiber dialyzer assembled with a single hollow fiber bundle made with a high-flux (or high-permeability) membrane. With the HDF Filter, however, the fiber bundle is separated into two discrete, but serially connected, blood paths. Dialysate flows in one direction that is counter-current to blood flow in Stage 1 and co-current to blood flow in Stage 2.
In addition to the HDF Filter, the H2H Module also utilizes a Dialysate Filter during patient treatment. The Dialysate Filter is a hollow fiber, ultrafilter device that consists of two sequential (redundant) ultrafiltration stages in a single housing. During on-line HDF with the H2H Module, fresh dialysate is redirected by the H2H Module’s hydraulic (substitution) pump and passed through this dual-stage ultrafilter before being infused as substitution fluid into the extracorporeal circuit. Providing ultrapure dialysate is crucial for the success of on-line HDF treatment.
In the years following the HDF1 product’s FDA clearance, DaVita Healthcare Partners, the Renal Research Institute (a research division of Fresenius Medical Care), and Vanderbilt University conducted post-market evaluations of HDF1 in their clinics. We gathered feedback from these evaluations to develop a better understanding of how our system best fits into the clinical ESRD treatment paradigm. The purpose of this feedback was to better understand the potential for HDF in U.S. clinical settings, to (a) improve the quality of life for the patient, (b) reduce overall expenditure compared to other dialysis modalities, (c) minimize the impact on nurse workflow at the clinic, and (d) demonstrate the pharmacoeconomic benefit of the HDF technology to the U.S. healthcare system, as has been done in Europe with other HDF systems. The last evaluation was concluded at Vanderbilt in the first quarter of 2018.
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Specialty Renal Products and Second-Generation HDF
In 2017 and 2018, we dramatically simplified and redesigned our HDF1 device into a second-generation device (HDF2). Our updates made the system significantly easier to use. By shifting from a reusable substitution ultrafilter to a disposable substitution ultrafilter, we simplified the set-up process and substantially reduced the time required between patient treatments – two of the key complaints from users of our first-generation system. We used real-time user feedback to aid in the fine-tuning of our changes to the system that impacted usability. We believe our second-generation HDF system will meet the needs of both clinicians and patients.
In July 2018, we spun-off the HDF device into a new private entity, Specialty Renal Products, Inc. (“SRP.”) We raised $3 million of new capital directly into SRP to fund the second-generation development described above. Nephros maintains a 62.5% ownership stake in SRP.
On May 13, 2022, the FDA cleared HDF2 for patient use, which enables nephrologists to provide HDF treatment to patients with end stage renal disease (“ESRD”). To date, Nephros’s HDF1 and HDF2 systems are the only HDF systems cleared by the FDA.
In late 2022, we plan to launch the HDF2 system at 1-3 clinics to establish clinical experience. SRP is currently manufacturing devices and supplies for its commercial launch. We have also hired a Director of Operations to lead the commercial launch and select initial clinics.
In 2023, we plan to expand our efforts on a measured basis, to clinics that wish to provide HDF therapy to their patients. We believe this measured launch approach is more likely to be successful than a broader push into the market. Nephrologists in the United States are not trained on HDF therapy; however, we believe many nephrologists are interested in exploring the option. We also believe that early adopters will want to perform studies to better understand the technology. We intend to support these investigator-initiated studies.
While several studies have been performed in Europe, the body of evidence for optimal use of HDF needs to be built in the U.S. treatment setting. According to European data from Fresenius, over 15% of dialysis treatments are HDF. That could translate to over 10 million individual treatments if HDF achieved that level of penetration in the United States. We do not believe that the United States will instantaneously mirror Europe. However, we do believe that HDF therapy has a place in the treatment landscape for patients with ESRD in the United States, and we look forward to enabling this pathway.
Critical Accounting Policies
For the three and nine month period ended September 30, 2022, there were no significant changes to our critical accounting policies as identified in our Annual Report on Form 10-K for the year ended December 31, 2021.
Recent Accounting Pronouncements
We are subject to recently issued accounting standards, accounting guidance and disclosure requirements. For a description of these new accounting standards, see Note 2, “Basis of Presentation and Liquidity,” of the Notes to our Unaudited Condensed Consolidated Interim Financial Statements contained in Item 1 of Part I of this Quarterly Report on Form 10-Q, which is incorporated herein by reference.
Results of Operations
Fluctuations in Operating Results
Our results of operations have fluctuated significantly from period to period in the past, including recently, and are likely to continue to do so in the future. We anticipate that our annual results of operations will be impacted for the foreseeable future by several factors, including market acceptance of our products, expense management, and progress in achieving positive operating cash flow. Due to these fluctuations, we believe that the period-to-period comparisons of our operating results are not a good indication of our future performance.
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Three Months Ended September 30, 2022 Compared to the Three Months Ended September 30, 2021
The following table sets forth our summarized, consolidated results of operations for the three months ended September 30, 2022 and 2021 (in thousands, except percentages):
| 2022 | 2021 |
$ Increase (Decrease) |
% Increase (Decrease) |
|||||||||||||
| Total net revenues | $ | 2,409 | $ | 2,578 | $ | (169 | ) | (7 | )% | |||||||
| Cost of goods sold | 1,647 | 1,218 | 429 | 35 | % | |||||||||||
| Gross margin | 762 | 1,360 | (598 | ) | (44 | )% | ||||||||||
| Gross margin % | 32 | % | 53 | % | - | (21 | )% | |||||||||
| Research and development expenses | 252 | 395 | (143 | ) | (36 | )% | ||||||||||
| Depreciation and amortization expense | 48 | 49 | (1 | ) | (2 | )% | ||||||||||
| Selling, general and administrative expenses | 1,743 | 1,718 | 25 | 1 | % | |||||||||||
| Loss from continuing operations | (1,281 | ) | (802 | ) | (479 | ) | (60 | )% | ||||||||
| Interest expense | (4 | ) | (10 | ) | 6 | 60 | % | |||||||||
| Interest income | 4 | 2 | 2 | 100 | % | |||||||||||
| Other income (expense), net | 31 | 8 | 23 | 288 | % | |||||||||||
| Net loss from continuing operations | (1,250 | ) | (802 | ) | (448 | ) | (56 | )% | ||||||||
| Net loss from discontinued operations | (1,904 | ) | (360 | ) | (1,544 | ) | (429 | )% | ||||||||
| Net loss | (3,154 | ) | (1,162 | ) | (1,992 | ) | (171 | )% | ||||||||
| Less: net loss due to undeclared deemed dividends attributable to continuing noncontrolling interest | (77 | ) | (60 | ) | (17 | ) | (28 | )% | ||||||||
| Net loss attributable to Nephros, Inc. shareholders | $ | (3,231 | ) | $ | (1,222 | ) | $ | (2,009 | ) | (164 | )% | |||||
Net Revenues. Our business is reported in two reportable segments: Water Filtration and Renal Products. Our net revenues in each of these segments for the three months ended September 30, 2022 and 2021 (in thousands, except percentages) were as follows:
| 2022 | 2021 |
$ Increase (Decrease) |
% Increase (Decrease) |
|||||||||||||
| Water Filtration | $ | 2,409 | $ | 2,578 | $ | (169 | ) | (7 | )% | |||||||
| Renal Products | - | - | - | - | ||||||||||||
| Total | $ | 2,409 | $ | 2,578 | $ | (169 | ) | (7 | )% | |||||||
Total net revenues in the Water Filtration segment decreased 7%, primarily because certain customers pulled-ahead their planned third-quarter purchases into the second quarter, to avoid a price increase that took effect on June 1, 2022. This had the impact of increasing second quarter revenue by approximately $300,000 and decreasing third quarter revenue by a similar amount.
Gross Profit Margin
| 2022 | 2021 |
% Increase (Decrease) |
||||||||||
| Water Filtration | 32 | % | 53 | % | (21 | )% | ||||||
| Renal Products | - | % | - | % | -% | |||||||
| Total | 32 | % | 53 | % | (21 | )% | ||||||
Consolidated gross margin was approximately 32% for the three months ended September 30, 2022, compared to approximately 53% for the three months ended September 30, 2021.
The decrease of approximately 21% was driven by inventory reserve increases charged to expense, for expirations, certain product obsolescence and adjustments to inventory counts, amounting to 26%. This decrease in margin was partially offset by a 5% increase in product cost margins primarily as a result of implementing a broad price increase beginning on June 1, 2022.
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Research and Development Expenses
Research and development expenses by segment for the three months ended September 30, 2022 and 2021 (in thousands, except percentages) were as follows:
| 2022 | 2021 |
$ Increase (Decrease) |
% Increase (Decrease) |
|||||||||||||
| Water Filtration | $ | 184 | $ | 363 | $ | (179 | ) | (49 | )% | |||||||
| Renal Products | 68 | 32 | 36 | 113 | % | |||||||||||
| Total | $ | 252 | $ | 395 | $ | (143 | ) | (36 | )% | |||||||
Consolidated research and development expenses decreased $143,000 primarily due to decreased investment across product lines as products matured.
Selling, General and Administrative Expenses
Selling, general and administrative expenses by segment for the three months ended September 30, 2022 and 2021 (in thousands, except percentages) were as follows:
| 2022 | 2021 |
$ Increase (Decrease) |
% Increase (Decrease) |
|||||||||||||
| Water Filtration | $ | 1,663 | $ | 1,704 | $ | (41 | ) | (2 | )% | |||||||
| Renal Products | 80 | 14 | 66 | 471 | % | |||||||||||
| Total | $ | 1,743 | $ | 1,718 | $ | 25 | 1 | % | ||||||||
Consolidated selling, general and administrative expenses increased $25,000, primarily due to miscellaneous cost avoidance in the Water Filtration segment, offset by expense increases in Renal Products as we prepare for commercial roll-out of the second-generation HDF product.
Interest Expense
Interest expense was approximately $4,000 for the three months ended September 30, 2022. It is comprised primarily of interest on our secured note payable. Interest expense was approximately $10,000 for the three months ended September 30, 2021, comprised primarily of interest on our secured note payable.
Other Income (Expense), net
Other income of approximately $31,000 for the three months ended September 30, 2022 is related to foreign currency exchange gains. Other income of approximately $8,000 for the three months ended September 30, 2021 is related to foreign currency exchange gains.
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Nine Months Ended September 30, 2022 Compared to the Nine Months Ended September 30, 2021
The following table sets forth our summarized, consolidated results of operations for the nine months ended September 30, 2022 and 2021 (in thousands, except percentages):
| 2022 | 2021 |
$ Increase (Decrease) |
% Increase (Decrease) |
|||||||||||||
| Total net revenues | $ | 7,417 | $ | 7,504 | $ | (87 | ) | (1 | )% | |||||||
| Cost of goods sold | 4,195 | 3,342 | 853 | 26 | % | |||||||||||
| Gross margin | 3,222 | 4,162 | (940 | ) | (23 | )% | ||||||||||
| Gross margin % | 43 | % | 55 | % | - | (12 | )% | |||||||||
| Research and development expenses | 896 | 1,170 | (274 | ) | (23 | )% | ||||||||||
| Depreciation and amortization expense | 162 | 150 | 12 | 8 | % | |||||||||||
| Selling, general and administrative expenses | 5,806 | 5,373 | 433 | 8 | % | |||||||||||
| Loss from continuing operations | (3,642 | ) | (2,531 | ) | (1,111 | ) | (44 | )% | ||||||||
| Interest expense | (17 | ) | (34 | ) | 17 | 50 | % | |||||||||
| Interest income | 7 | 8 | (1 | ) | (13 | )% | ||||||||||
| Forgiveness of PPP Loan | - | 482 | (482 | ) | (100 | )% | ||||||||||
| Other income (expense), net | 94 | 16 | 78 | 83 | % | |||||||||||
| Net loss from continuing operations | (3,558 | ) | (2,059 | ) | (1,499 | ) | (73 | )% | ||||||||
| Net loss from discontinued operations | (2,700 | ) | (766 | ) | (1,934 | ) | (252 | )% | ||||||||
| Net loss | (6,258 | ) | (2,825 | ) | (3,433 | ) | (122 | )% | ||||||||
| Less: net loss due to undeclared deemed dividends attributable to continuing noncontrolling interest | (206 | ) | (179 | ) | (27 | ) | (15 | )% | ||||||||
| Net loss attributable to Nephros, Inc. shareholders | $ | (6,464 | ) | $ | (3,004 | ) | $ | (3,460 | ) | (115 | )% | |||||
Net Revenues. Our business is reported in two reportable segments: Water Filtration and Renal Products. Our net revenues in each of these segments for the nine months ended September 30, 2022 and 2021 (in thousands, except percentages) were as follows:
| 2022 | 2021 |
$ Increase (Decrease) |
% Increase (Decrease) |
|||||||||||||
| Water Filtration | $ | 7,417 | $ | 7,504 | $ | (87 | ) | (1 | )% | |||||||
| Renal Products | - | - | - | - | ||||||||||||
| Total | $ | 7,417 | $ | 7,504 | $ | (87 | ) | (1 | )% | |||||||
Total net revenues in the Water Filtration segment decreased 1% in the nine months ended September 30, 2022.
Gross Profit Margin
| 2022 | 2021 |
% Increase (Decrease) |
||||||||||
| Water Filtration | 43 | % | 55 | % | (12 | )% | ||||||
| Renal Products | - | % | - | % | % | |||||||
| Total | 43 | % | 55 | % | (12 | )% | ||||||
Consolidated gross margin was approximately 43% for the nine months ended September 30, 2022, compared to approximately 55% for the nine months ended September 30, 2021.
The decrease of approximately 12% was driven by increased shipping costs, 2.4%, as well as inventory reserve increases charged to expense, for expirations, certain product obsolescence and adjustments to inventory counts, 9.5%. Responding to supply chain cost increases, we implemented a broad price increase beginning on June 1, 2022, which helped to partially offset the increases noted above.
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Research and Development Expenses
Research and development expenses by segment for the nine months ended September 30, 2022 and 2021 (in thousands, except percentages) were as follows:
| 2022 | 2021 |
$ Increase (Decrease) |
% Increase (Decrease) |
|||||||||||||
| Water Filtration | $ | 644 | $ | 961 | $ | (317 | ) | (33 | )% | |||||||
| Renal Products | 252 | 209 | 43 | 21 | % | |||||||||||
| Total | $ | 896 | $ | 1,170 | $ | (274 | ) | (23 | )% | |||||||
Consolidated research and development expenses decreased 23% primarily due to decreased R&D investment in the Water Filtration segment, partially offset by increased investment in Renal products.
Selling, General and Administrative Expenses
Selling, general and administrative expenses by segment for the nine months ended September 30, 2022 and 2021 (in thousands, except percentages) were as follows:
| 2022 | 2021 |
$ Increase (Decrease) |
% Increase (Decrease) |
|||||||||||||
| Water Filtration | $ | 5,618 | $ | 5,314 | $ | 304 | 6 | % | ||||||||
| Renal Products | 188 | 59 | 129 | 219 | % | |||||||||||
| Total | $ | 5,806 | $ | 5,373 | $ | 433 | 8 | % | ||||||||
Consolidated selling, general and administrative expenses increased $0.4 million or 8%, primarily due to increased sales headcount and associated travel and recruiting costs.
Interest Expense
Interest expense was approximately $17,000 for the nine months ended September 30, 2022 compared to $34,000 for the nine months ended September 30, 2021. This reduction is primarily related to a lower principal balance of the company’s secured note payable.
Extinguishment of PPP loan
Our outstanding PPP loan was forgiven in January 2021 resulting in an extinguishment gain of approximately $482,000.
Other Income (Expense), net
Other income was approximately $94,000 for the nine months ended September 30, 2022 and is primarily related to the release of the cumulative translation adjustment from accumulated other comprehensive income (loss) on the liquidation of a foreign entity and of gains on foreign currency transactions related to the closure in the second quarter of 2022, of Nephros International, a wholly owned subsidiary of Nephros, Inc. Other income was approximately $16,000 for the nine months ended September 30, 2021 as a result of gains on foreign currency transactions.
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Liquidity and Capital Resources
The following table summarizes our liquidity and capital resources as of September 30, 2022 and December 31, 2021 and is intended to supplement the more detailed discussion that follows. The amounts stated are expressed in thousands.
| September 30, | December 31, | |||||||
| Liquidity and Capital Resources | 2022 | 2021 | ||||||
| Cash and cash equivalents | $ | 3,940 | $ | 6,973 | ||||
| Other current assets | 5,048 | 6,130 | ||||||
| Working capital (excluding current assets and current liabilities held for sale) | 7,567 | 10,944 | ||||||
| Stockholders’ equity | 9,581 | 14,749 | ||||||
At September 30, 2022, we had an accumulated deficit of $142.0 million and we expect to incur additional operating losses from operations until such time, if ever, that we are able to increase product sales and/or licensing revenue to achieve profitability.
Based on cash that is available for our operations and projections of our future operations, we believe that our existing cash resources together with our anticipated revenue, will be sufficient to fund our current operating plan through at least the next 12 months from the date of issuance of the condensed consolidated financial statements in this Quarterly Report on Form 10-Q. Additionally, our operating plans are designed to help control operating costs, to increase revenue and to raise additional capital until such time as we generate sufficient cash flows to fund operations. If there were a decrease in the demand for our products due to either economic or competitive conditions, or if we are otherwise unable to achieve our plan or achieve our anticipated operating results, there could be a significant reduction in liquidity due to our possible inability to cut costs sufficiently. In such event, the Company may need to take further actions to reduce its discretionary expenditures, including further reducing headcount, reducing spending on R&D projects and reducing other variable costs.
Our future liquidity sources and requirements will depend on many other factors, including:
| ● | the market acceptance of our products, and our ability to effectively and efficiently produce, market and sell our products; | |
| ● | 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:
| ● | the development, marketing, and sales of our water filtration products; | |
| ● | the commercial roll-out of our second-generation HDF product; and | |
| ● | working capital purposes. |
Net cash used in operating activities was $3.0 million for the nine months ended September 30, 2022, compared to $1.1 million for the nine months ended September 30, 2021. This increase of $1.9 million is due primarily to an increase in the net loss incurred of $3.4 million, partially offset by approximately $1.4 million in non-cash charges for impairment of assets held for sale.
Net cash used in investing activities was approximately $137,000 in the nine months ended September 30, 2022 compared to approximately $85,000 for the nine months ended September 30, 2021. The change is due to increased purchases of property and equipment.
Net cash provided by financing activities was approximately $0.1 million for the nine months ended September 30, 2022. This was primarily from proceeds from the exercise of warrants of $0.2 million and from the sale to Nephros of SRP preferred shares of $0.2 million, offset partially by payments of $0.2 million on our secured note, principal payments of approximately $3,000 on our finance lease obligation and principal payments of approximately $2,000 on our equipment financing debt.
Net cash provided by financing activities of $0.3 million for the nine months ended September 30, 2021 resulted primarily from proceeds from the exercise of warrants and options of $0.5 million offset partially by payments of $0.2 million on our secured note.
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 and strategy for bringing such products to market, the timeline for regulatory review and approval of our products, the availability of funding sources for continued development of such products, and other statements 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:
| ● | our expectations regarding the impact of the COVID-19 pandemic on our results of operations and financial condition; |
| ● | our expectation that demand for our water filtration products will increase as business returns to the hospitality industry and commercial buildings return to full occupancy; |
| ● | the adoption of our second generation HDF system by physicians and clinics; |
| ● | anticipated future revenues from the sale of our products; |
| ● | our expectations regarding the use of our current capital resources; |
| ● | the expected future volatility of our results of operations; |
| ● | the progress and timing of our research and development efforts; |
| ● | our expectation that we will reduce our selling, general and administrative expenses in future periods; |
| ● | our belief that our existing cash resources will be sufficient to fund our current operating plan through at least the next 12 months; |
| ● | our plans to further reduce cash expenditures in the event we do not achieve our anticipated results from operations; and |
| ● | the anticipated impact of adoption of recent accounting pronouncements on our financial statements. |
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These statements involve known and unknown risks, uncertainties and other factors that may cause our results, levels of activity, performance or achievements to be materially different from the information expressed or implied by these forward-looking statements. Factor that may cause such differences include, but are not limited to, the risks that:
| ● | we face significant challenges in obtaining market acceptance of our products, which, if not obtained, could adversely affect our potential sales and revenues; | |
| ● | inflationary pressures and supply chain challenges across most industries could negatively impact our revenues, margins, and customer satisfaction; | |
| ● | we face potential liability associated with the production, marketing and sale of our products, and the expense of defending against claims of product liability could materially deplete our assets and generate negative publicity, which could impair our reputation; | |
| ● | to the extent our products or marketing materials are found to violate any provisions of the U.S. Food, Drug and Cosmetic Act (the “FDC Act”) or any other statutes or regulations, we could be subject to enforcement actions by the U.S. Food and Drug Administration (the “FDA”) or other governmental agencies; | |
| ● | we may not be able to obtain funding when needed or on terms favorable to us in order to continue operation; | |
| ● | 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, pathogen detection system 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 be able to 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 | |
| ● | future waves of COVID-19 infections may cause disruptions to our business, including reduced product sales and supply chain disruptions. |
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, 2021 and our other 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not required for smaller reporting companies.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
We maintain a system of disclosure controls and procedures, as defined in Rule 13a-15(e) or Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which is designed to provide reasonable assurance that information required to be disclosed in our reports filed pursuant to the Exchange Act is accumulated and communicated to management in a timely manner. Management recognizes that any disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives. Because there are inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud have been or will be detected.
At the end of the period covered by this Quarterly Report on Form 10-Q, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, regarding the effectiveness of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this report were effective.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during our most recent fiscal quarter that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II - OTHER INFORMATION
Item 1A. Risk Factors
As a smaller reporting company, we are not required to provide disclosure pursuant to this item. However, in addition to other information set forth in this Quarterly Report on Form 10-Q, including the important information in the section entitled “Forward Looking Statements,” you should carefully consider the “Risk Factors” in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2021 and in Item 1A of our Quarterly Report on Form 10-Q for the period ended March 31, 2022 for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in this Quarterly Report on Form 10-Q. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial might materially adversely affect our actual business, financial condition and/or operating results
Item 5. Other Information
On November 4, 2022, the Company issued a press release in which it disclosed its financial results for the quarter ended September 30, 2022, including its condensed consolidated balance sheets as of December 31, 2021, and September 30, 2022 (the “Earnings Release”). The Company’s Condensed Consolidated Balance Sheet as of September 30, 2022, and December 31, 2021, included in this Quarterly Report on Form 10-Q correct items reflected on the balance sheet included in the Earnings Release relating to current assets held for sale, total current assets, total assets, current liabilities associated with assets held for sale and total liabilities.
Item 6. Exhibits
| Exhibit No. | Description of Exhibit | |
| 31.1 | ||
| 32.1 | ||
| 101 | Interactive Data File. * | |
| 101.INS* | Inline XBRL Instance Document | |
| 101.SCH* | Inline XBRL Taxonomy Extension Schema | |
| 101.CAL* | Inline XBRL Taxonomy Extension Calculation Linkbase | |
| 101.LAB* | Inline XBRL Taxonomy Extension Labels Linkbase | |
| 101.PRE* | Inline XBRL Taxonomy Extension Presentation Linkbase | |
| 101.DEF* | Inline XBRL Taxonomy Extension Definition Linkbase | |
| 104 | Cover Page Interactive Data File (embedded within the Inline XBRL document) |
| * | Filed herewith | |
| ** | Furnished herewith. |
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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 15, 2022 | By: | /s/ Andrew Astor |
| Name: | Andrew Astor | |
| Title: | President, Chief Executive Officer and Chief Financial Officer (Principal Executive and Financial Officer) | |
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