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 | ||
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
growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ YES
As of November 4, 2024, shares of the registrant’s common stock, $ 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, 2024 | December 31, 2023 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Inventory | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| Property and equipment, net | ||||||||
| Lease right-of-use assets | ||||||||
| Intangible assets, net | ||||||||
| Goodwill | ||||||||
| License and supply agreement, net | ||||||||
| Other assets | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses | ||||||||
| Current portion of lease liabilities | ||||||||
| Total current liabilities | ||||||||
| Lease liabilities, net of current portion | ||||||||
| TOTAL LIABILITIES | ||||||||
| STOCKHOLDERS’ EQUITY | ||||||||
| Preferred stock, $ par value; shares authorized at September 30, 2024 and December 31, 2023; shares issued and outstanding at September 30, 2024 and December 31, 2023. | ||||||||
| Common stock, $ par value; shares authorized at September 30, 2024 and December 31, 2023; and shares issued and outstanding at September 30, 2024 and December 31, 2023, respectively. | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| 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
(In thousands, except share and per share amounts)
(Unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Net revenue: | ||||||||||||||||
| Product revenues | $ | $ | $ | $ | ||||||||||||
| Royalty and other revenues | ||||||||||||||||
| Total net revenues | ||||||||||||||||
| Cost of goods sold | ||||||||||||||||
| Gross margin | ||||||||||||||||
| Operating expenses: | ||||||||||||||||
| Selling, general and administrative | ||||||||||||||||
| Research and development | ||||||||||||||||
| Depreciation and amortization | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Operating income (loss) | ( | ) | ( | ) | ( | ) | ||||||||||
| Other (expense) income: | ||||||||||||||||
| Interest expense | ( | ) | ( | ) | ||||||||||||
| Interest income | ||||||||||||||||
| Other income (expense), net | ( | ) | ( | ) | ( | ) | ||||||||||
| Total other expense (income), net: | ( | ) | ||||||||||||||
| Net income (loss) | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
| Net income (loss) per common share, basic | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
| Net income (loss) per common share, diluted | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
| Weighted average common shares outstanding, basic | ||||||||||||||||
| Weighted average common shares outstanding, diluted | ||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements.
| 4 |
NEPHROS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(In thousands, except share amounts)
(Unaudited)
| Three and nine months ended September 30, 2024 | ||||||||||||||||||||||||||||
| Common Stock | Additional Paid-in | Accumulated | Noncontrolling | Total Stockholders’ | ||||||||||||||||||||||||
| Shares | Amount | Capital | Deficit | Subtotal | Interest | Equity | ||||||||||||||||||||||
| Balance, December 31, 2023 | $ | | $ | | $ | ( | ) | $ | | $ | $ | | ||||||||||||||||
| Net loss | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||
| Stock option exercises | ||||||||||||||||||||||||||||
| Stock-based compensation | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||
| Balance, March 31, 2024 | $ | $ | $ | ( | ) | $ | $ | $ | ||||||||||||||||||||
| Net loss | - | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | |||||||||||||||
| Stock-based compensation | - | |||||||||||||||||||||||||||
| Restricted stock vesting | ( | ) | ||||||||||||||||||||||||||
| Balance, June 30, 2024 | $ | $ | $ | ( | ) | $ | $ | $ | ||||||||||||||||||||
| Net income | - | $ | $ | $ | ||||||||||||||||||||||||
| Stock-based compensation | - | |||||||||||||||||||||||||||
| Balance, September 30, 2024 | $ | $ | $ | ( | ) | $ | $ | $ | ||||||||||||||||||||
| Three and nine months ended September 30, 2023 | ||||||||||||||||||||||||||||
| Common Stock | Additional Paid-in | Accumulated | Non controlling | Total Stockholders’ | ||||||||||||||||||||||||
| Shares | Amount | Capital | Deficit | Subtotal | Interest | Equity | ||||||||||||||||||||||
| Balance, December 31, 2022 | $ | $ | $ | ( | ) | $ | $ | $ | ||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||
| Change in non-controlling interest | - | ( | ) | |||||||||||||||||||||||||
| Stock-based compensation | - | ( | ) | |||||||||||||||||||||||||
| Balance, March 31, 2023 | $ | $ | $ | ( | ) | $ | $ | $ | ||||||||||||||||||||
| Net loss | - | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | |||||||||||||||
| Stock-based compensation | - | |||||||||||||||||||||||||||
| Balance, June 30, 2023 | $ | $ | $ | ( | ) | $ | $ | $ | ||||||||||||||||||||
| Net loss | - | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||||||||||||||
| Restricted stock vesting | ||||||||||||||||||||||||||||
| Stock-based compensation | - | |||||||||||||||||||||||||||
| Balance, September 30, 2023 | $ | $ | $ | ( | ) | $ | $ | $ | ||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements.
| 5 |
NEPHROS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
| Nine Months Ended September 30, | ||||||||
| 2024 | 2023 | |||||||
| OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash provided by (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 | ||||||||
| Inventory impairments and write offs | ||||||||
| Provision for bad debt expense | ||||||||
| Loss on foreign currency transactions | ||||||||
| Gain on disposal of equipment | ( | ) | ||||||
| Decrease (increase) in operating assets: | ||||||||
| Accounts receivable | ( | ) | ( | ) | ||||
| Inventory | ( | ) | ||||||
| Prepaid expenses and other current assets | ||||||||
| Right-of-use assets | ||||||||
| Other assets | ( | ) | ||||||
| (Decrease) increase in operating liabilities: | ||||||||
| Accounts payable | ( | ) | ||||||
| Accrued expenses | ( | ) | ||||||
| Lease liabilities | ( | ) | ( | ) | ||||
| Net cash provided by (used in) operating activities | ( | ) | ||||||
| INVESTING ACTIVITIES: | ||||||||
| Proceeds from sale of equipment | ||||||||
| Purchase of property and equipment | ( | ) | ||||||
| Net cash used in investing activities | ( | ) | ||||||
| FINANCING ACTIVITIES: | ||||||||
| Principal payments on finance lease liability | ( | ) | ( | ) | ||||
| Principal payments on equipment financing | ( | ) | ||||||
| Payments on secured note payable | ( | ) | ||||||
| Net cash used in financing activities | ( | ) | ( | ) | ||||
| Net increase (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 | $ | $ | ||||||
| Supplemental disclosure of noncash investing and financing activities | ||||||||
| Right-of-use asset obtained in exchange for finance lease liability | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements.
| 6 |
NEPHROS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (unaudited)
Note 1 – Organization and Nature of Operations
Nephros, Inc. (“Nephros” or the “Company”) was incorporated under the laws of the State of Delaware on April 3, 1997. The Company was founded by health professionals, scientists and engineers affiliated with Columbia University to develop advanced end stage renal disease (“ESRD”) therapy technology and products.
Beginning in 2009, Nephros introduced high performance liquid purification filters to meet the demand for water purification in certain medical markets. The Company’s filters, generally classified as ultrafilters, are primarily used in hospitals for the prevention of infection from waterborne pathogens, such as legionella and pseudomonas, and in dialysis centers for the removal of biological contaminants from water and bicarbonate concentrate. The Company also develops and sells water filtration products for commercial applications, focusing on the hospitality and food service markets.
In July 2018, the Company formed a subsidiary, Specialty Renal Products, Inc. (“SRP”), to drive the development of its second-generation hemodiafiltration system and other products focused on improving therapies for patients with renal disease. After SRP’s formation, the Company assigned to SRP all of the Company’s rights to three patents relating to the Company’s hemodiafiltration technology, which were carried at zero book value. On March 9, 2023, the SRP Stockholders approved a plan of dissolution to wind down SRP’s operations, liquidate SRP’s remaining assets and dissolve SRP, and SRP filed a certificate of dissolution with the State of Delaware on April 13, 2023. As a result of the SRP Stockholders’ approval of the plan of dissolution and provisions therein and after satisfying all of SRP’s liabilities, there are no assets available for distribution to the holders of any of SRP’s capital stock, including its Series A Preferred Stock. As such, the value recorded to non-controlling interest was written to zero and the impact reclassified to the Company’s additional paid-in capital as the Company retained control of SRP.
The Company’s primary U.S. facility is located at 380 Lackawanna Place, South Orange, New Jersey 07079. This location along with our Whippany, NJ facility, houses the Company’s corporate headquarters, research, manufacturing, and distribution facilities.
| 7 |
Note 2 – Basis of Presentation and Liquidity and Significant Accounting Policies
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, 2023 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, 2024 are not necessarily indicative of the results that may be expected for the year ending December 31, 2024.
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, 2023.
Segment Reporting
The Company operates in only one business segment from which the Company’s chief operating decision maker evaluates the financial performance of the Company.
Consolidation
The accompanying condensed consolidated financial statements include the accounts of Nephros, Inc. and its subsidiary, SRP, which was dissolved pursuant to a plan of dissolution adopted by its stockholders on March 9, 2023 and the subsequent filing of a certificate of dissolution with the State of Delaware on April 13, 2023. All intercompany accounts and transactions were eliminated in the preparation of the accompanying condensed consolidated financial statements.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities, at the date of the financial statements, and the reported amount of revenues and expenses, during the reporting period. Actual results could differ materially from those estimates. Included in these estimates are assumptions about the collection of accounts receivable, value of inventories, useful life of fixed assets and intangible assets, the assessment of expected cash flows used in evaluating goodwill and other long-lived assets, the assessment of the ability to continue as a going concern and assumptions used in determining stock compensation such as expected volatility and risk-free interest rate.
Liquidity
In connection with SRP’s plan of dissolution and pursuant to an agreement between the Company and SRP entered into on May 24, 2023, SRP assigned substantially all of its remaining assets to the Company in satisfaction of the entire loan balance. See “Note 11 – Stockholders’ Equity – Noncontrolling Interest”. Accordingly, as of September 30, 2024, there was no outstanding balance of this loan.
Although
we generated positive cash flow from operations of $
While we achieved net income for the three months ended September 30, 2024, at present we cannot be certain that we will be able to generate a sufficient amount of product revenue to achieve profitability on an ongoing basis.
The Company continues to focus on growth in sales and managing tight expenses with the goal of returning to cash flow positive from operations. The investment in inventory in 2024 is preparing for higher sales volumes of key products in the future. The Company believes that the tight focus on operations and its current cash balances are 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. However, if the Company’s operating results do not meet its expectations, the Company may need to further reduce discretionary expenditures such as headcount, R&D projects, and other variable costs.
| 8 |
Recent Accounting Pronouncements, Not Yet Effective
In March 2024, the FASB issued ASU 2024-01, “ASC 718-Scope Application of Profits Interest and Similar Awards,” which provides guidance to assist entities in determining whether profits interest and similar awards should be accounted for in accordance with Topic 718, Compensation—Stock Compensation. The guidance is effective for the Company’s annual reporting period ending December 31, 2025, including interim periods. Early adoption is permitted. The Company is assessing the impact of adopting this guidance on its condensed consolidated financial statements.
In December 2023, the FASB issued ASU 2023-09, “Improvements to Income Tax Disclosures,” which enhances the transparency and decision usefulness of income tax disclosures. The guidance is effective for the Company’s annual reporting period ending December 31, 2025. Early adoption is permitted. The Company is assessing the impact of adopting this guidance on its condensed consolidated financial statements.
In November 2023, the FASB issued ASU 2023-07, “Improvements to Reportable Segment Disclosures,” which improves reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. The guidance is effective for the Company beginning in the annual reporting period ending December 31, 2024 and interim periods beginning in fiscal year 2025. Early adoption is permitted. The Company is assessing the impact of adopting this guidance on its consolidated financial statements.
Concentration of Credit Risk
The Company deposits its cash in financial institutions. At times, such deposits may be in excess of insured limits. To date, the Company has not experienced any impairment losses on its cash. The Company also limits its credit risk with respect to accounts receivable by performing credit evaluations when deemed necessary.
Major Customers
For the three months ended September 30, 2024, and 2023, the following customers accounted for the following percentages of the Company’s revenues, respectively:
| Customer | 2024 | 2023 | ||||||
| A | % | % | ||||||
| B | % | % | ||||||
| Total | % | % | ||||||
For the nine months ended September 30, 2024, and 2023, the following customers accounted for the following percentages of the Company’s revenues, respectively:
| Customer | 2024 | 2023 | ||||||
| A | % | % | ||||||
| B | % | % | ||||||
| Total | % | % | ||||||
As of September 30, 2024, and December 31, 2023, the following customers accounted for the following percentages of the Company’s accounts receivable, respectively:
| Customer | 2024 | 2023 | ||||||
| B | % | % | ||||||
| C | % | |||||||
| A | % | % | ||||||
| Total | % | % | ||||||
| 9 |
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. The allowance for credit losses was approximately $
Goodwill
Goodwill represents the excess of
the purchase price over the fair value of the net tangible and intangible assets acquired in a business combination. In accordance
with ASC Topic 350, Intangibles-Goodwill and Other, the Company does not amortize goodwill, but tests it for impairment
annually on October 1st of each fiscal year or more frequently if events or changes in circumstances indicate that the
asset may be impaired. The Company operates as one reporting
segment. When testing goodwill for impairment, the Company may first perform an optional qualitative assessment. The qualitative
factors evaluated by the Company include macro-economic conditions of the business environment, overall financial performance, and
other entity specific factors as deemed appropriate. If under such qualitative analysis the Company determines that it is not more
likely than not that the reporting segment’s fair value is less than its carrying amount, then no further analysis is
necessary. If the Company determines that it is more likely than not that the fair value of its reporting unit is less than its
carrying amount, then the quantitative impairment test will be performed. Under the quantitative impairment test, if the carrying
amount of the Company’s reporting segment exceeds its fair value, the Company will recognize an impairment loss in an amount
equal to that excess but limited to the total amount of goodwill.
Note 3 – Revenue Recognition
The
Company recognizes revenue related to product sales when product is shipped via external logistics providers and the other criteria of
ASC 606 are met. Product revenue is recorded net of returns and allowances. There was no allowance for sales returns for the three and
nine months ended September 30, 2024, or 2023. In addition to product revenue, the Company recognizes revenue related to services to
customers, royalties and other agreements in accordance with the five-step model in ASC 606. Other revenues recognized for the three
and nine months ended September 30, 2024 were approximately $
Note 4 – 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, 2024 the Company’s cash equivalents consisted of money market funds. At December 31, 2023, the Company’s cash equivalents consisted of money market funds and certificates of deposit. 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.
| 10 |
At September 30, 2024 and December 31, 2023, 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, 2024 | ||||||||||||
| Cash | $ | $ | - | $ | - | |||||||
| Money market funds | ||||||||||||
| Cash and cash equivalents | $ | $ | $ | |||||||||
| December 31, 2023 | ||||||||||||
| Cash | $ | $ | - | $ | - | |||||||
| Money market funds | - | - | ||||||||||
| Certificate of deposit | - | - | ||||||||||
| Cash and cash equivalents | $ | $ | $ | |||||||||
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 their short-term nature.
The carrying amounts of the lease liabilities and equipment financing approximate fair value as of September 30, 2024 and December 31, 2023 because those financial instruments bear interest at rates that approximate current market rates for similar agreements with similar maturities and quality.
Note 5 – 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, 2024 and December 31, 2023, were as follows:
September 30, 2024 | December 31, 2023 | |||||||
| (in thousands) | ||||||||
| Finished goods | $ | $ | ||||||
| Raw materials | ||||||||
| Total inventory | $ | $ | ||||||
| 11 |
Note 6 – Intangible Assets and Goodwill
Intangible Assets
Intangible assets as of September 30, 2024 and December 31, 2023 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, 2024 | December 31, 2023 | |||||||||||||||||||||||
| Cost | Accumulated Amortization | Net | Cost | Accumulated Amortization | Net | |||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||
| Customer relationships | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Total intangible assets | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | ||||||||||||||
The
Company recognized amortization expense of approximately $
The
Company recognized amortization expense of approximately $
As of September 30, 2024, future amortization expense for each of the next five years is (in thousands):
| Fiscal Years | ||||
| 2024 (excluding the nine months ended September 30, 2024) | $ | |||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| 2028 | ||||
| 2029 | ||||
Goodwill
Goodwill
has a carrying value on the Company’s condensed consolidated balance sheets of approximately $
Note 7 – 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. In December 2023, the Company signed a new agreement with Medica which extends the term until December 31, 2028, 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 December 11, 2023, the Company has agreed with Medica to pay interest per month at the
| 12 |
In
addition, for the period beginning April 23, 2014 through December 31, 2023, the Company paid Medica a royalty rate of
Note 8 – 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 $
The
Secured Note had a maturity date of
During the three months ended September 30, 2023, no payments were made under the Secured Note, as the Note was repaid in full at March 31, 2023.
During
the nine months ended September 30, 2023, the Company made payments under the Secured Note of approximately $
Note 9 – Leases
The
Company has operating leases for corporate offices 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, 2024 | Three months ended September 30, 2023 | |||||||
| (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, 2024 | Nine months ended September 30, 2023 | |||||||
| (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 | $ | $ | ||||||
| 13 |
Supplemental cash flow information related to leases was as follows:
Nine months ended September 30, 2024 | Nine months ended September 30, 2023 | |||||||
| (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, 2024 | December 31, 2023 | |||||||
| (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, 2024, maturities of lease liabilities were as follows:
| Operating Leases | Finance Leases | |||||||
| (in thousands) | ||||||||
| 2024 (excluding the nine months ended September 30, 2024) | $ | $ | ||||||
| 2025 | ||||||||
| 2026 | ||||||||
| 2027 | ||||||||
| 2028 | ||||||||
| Total future minimum lease payments | ||||||||
| Less imputed interest | ( | ) | ( | ) | ||||
| Total | $ | $ | ||||||
| 14 |
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. The Company calculates stock-based compensation expense in accordance with ASC 718. The fair value of stock-based awards is amortized over the vesting period of the award.
Stock Options
The Company granted stock options to purchase shares of common stock to employees during the nine months ended September 30, 2024. These stock options are being expensed over the respective vesting period, which is based on a service condition. The fair value of the stock options granted during the nine months ended September 30, 2024, was approximately $ million.
| Assumptions for Option Grants | ||||
| Stock Price Volatility | % | |||
| Risk-Free Interest Rate | % | |||
| Expected Life (in years) | ||||
| Expected Dividend Yield | % | |||
Stock-based compensation expense related to stock options was approximately $ and $ for the three months ended September 30, 2024 and 2023, respectively. For the three months ended September 30, 2024, approximately $ and $ are included in selling, general and administrative expenses and research and development expenses, respectively, on the accompanying condensed consolidated statement of operations. For the three months ended September 30, 2023, approximately $ and $ are included in selling, general and administrative expenses and research and development expenses, respectively, on the accompanying condensed consolidated statement of operations.
Stock-based compensation expense related to stock options was $ and $ for the nine months ended September 30, 2024 and 2023, respectively. For the nine months ended September 30, 2024, approximately $ and $ are included in selling, general and administrative expenses and research and development expenses, respectively, on the accompanying condensed consolidated statement of operations. Stock-based compensation expense for the nine months ended September 30, 2024 consisted of $ expense for shares vested, partially offset by a credit of $ due to the reversal of expense related to an immaterial error associated with the forfeiture of unvested options for employee terminations that occurred in prior fiscal periods. For the nine months ended September 30, 2023, approximately $ and $ are included in selling, general and administrative expenses and research and development expenses, respectively, on the accompanying condensed consolidated statement of operations.
There
was
| 15 |
Restricted Stock
There was stock-based compensation expense for restricted stock on the Company’s condensed consolidated statement of operations for the three months ended September 30, 2024. Total stock-based compensation expense for restricted stock was approximately $ for the three months ended September 30, 2023 which is included in selling, general and administrative expenses on the accompanying condensed consolidated statement of operations.
Total stock-based compensation expense for restricted stock was approximately $ and $ for the nine months ended September 30, 2024 and 2023, respectively. During the nine months ended September 30, 2023, shares of restricted stock were issued to employees and shares of restricted stock were issued to board members related to services rendered during the year ended December 31, 2022. In addition, shares of restricted stock were issued to contractors during the nine months ended September 30, 2023. All restricted shares issued during the nine months ended September 30, 2023, have a vesting period of six months.
As of September 30, 2024, there was unrecognized compensation expense related to unvested stock-based awards granted under the equity compensation plans.
SRP Equity Incentive Plan
SRP’s 2019 Equity Incentive Plan was approved on May 7, 2019 under which shares of SRP’s common stock are reserved for the issuance of options and other awards. This plan is no longer operational, due to the wind down of SRP’s operations and its April 2023 dissolution.
Due to the Company’s acquisition of the non-controlling interest in SRP during the nine months ended September 30, 2023, all remaining equity-based awards have been forfeited and no further expense will be incurred related to these awards. There were no SRP stock options or other equity awards granted during the nine months ended September 30, 2023. For the nine months ended September 30, 2023, a credit of approximately ($) was recognized for expense related to the SRP equity-based awards. Stock-based compensation expense related to the SRP equity-based awards is included in selling, general and administrative expenses on the accompanying condensed consolidated statement of operations.
Note 11 – Stockholders’ Equity
Noncontrolling Interest
In
separate transactions in September 2018 and February 2022, SRP issued and sold an aggregate of shares of its Series A Preferred
Stock for aggregate gross proceeds of approximately $
In
March 2023, the board of directors of SRP adopted, and the stockholders of SRP approved, a plan to wind down SRP’s operations and
dissolve, and in April 2023, SRP filed a certificate of dissolution with the State of Delaware. In accordance with its plan of dissolution,
after SRP satisfied its other outstanding liabilities, SRP assigned to the Company all of its remaining assets, including its intellectual
property rights, in satisfaction of outstanding indebtedness owed to the Company in the approximate amount of $
Basic income (loss) per common share is calculated by dividing net income (loss) available to common shareholders by the number of weighted average common shares issued and outstanding. Diluted income (loss) per common share is calculated by dividing net income (loss) available to common shareholders by the weighted average number of common shares issued and outstanding for the period, plus amounts representing the dilutive effect from the exercise of stock options and warrants 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.
| 16 |
| Three Months Ended | ||||||||
| September 30, | ||||||||
| (In thousands, except share and per share data) | 2024 | 2023 | ||||||
| Numerator: | ||||||||
| Net income (loss) | $ | $ | ( | ) | ||||
| Denominator: | ||||||||
| Basic weighted average common shares outstanding | ||||||||
| Effect of potentially dilutive options | ||||||||
| Diluted weighted average common shares outstanding | ||||||||
| Income (loss) per common share: | ||||||||
| Basic | $ | $ | ( | ) | ||||
| Diluted | $ | $ | ( | ) | ||||
| Nine Months Ended | ||||||||
| September 30, | ||||||||
| (In thousands, except share and per share data) | 2024 | 2023 | ||||||
| Numerator: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Denominator: | ||||||||
| Basic weighted average common shares outstanding | ||||||||
| Effect of potentially dilutive options | ||||||||
| Diluted weighted average common shares outstanding | ||||||||
| Loss per common share: | ||||||||
| Basic | $ | ( | ) | $ | ( | ) | ||
| Diluted | $ | ( | ) | $ | ( | ) | ||
| September 30, | ||||||||
| 2024 | 2023 | |||||||
| Shares underlying options outstanding | ||||||||
Contractual Obligations
See Note 9 – Leases for a discussion of the Company’s contractual obligations.
| 17 |
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.
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.
Our commercial water filters improve the taste and odor of water and reduce biofilm, cysts, particulates, and scale build-up in downstream equipment. Our products are marketed primarily to the food service, hospitality, convenience store, and health care markets, and also sold into medical institutions to supplement our medical filters.
We previously held a majority stake in Specialty Renal Products, Inc. (“SRP”), a development-stage medical device company that was focused primarily on developing hemodiafiltration (“HDF”) technology. In May 2022, SRP received 510(k) clearance from the FDA for SRP’s second-generation model of the OLpūrH2H Hemodiafiltration System, which enables nephrologists to provide HDF treatment to patients with end stage renal disease. In January 2023, SRP management began exploring strategic partnerships to support a commercial launch of the HDF product but was unsuccessful in identifying a partner. By late February 2023, SRP had nearly exhausted its capital resources and, due to its limited capital and lack of prospects for securing a strategic partnership or additional financing, the board of directors of SRP adopted a plan on March 6, 2023 to wind down SRP operations, liquidate its remaining assets and dissolve the company. That plan was approved by SRP’s stockholders on March 9, 2023, and on April 13, 2023, SRP filed a certificate of dissolution with the State of Delaware. SRP’s cash resources were sufficient to satisfy all of its outstanding liabilities other than its obligations to us under a loan with an outstanding balance of approximately $1.5 million. Accordingly, SRP assigned to Nephros all of its remaining assets, including its intellectual property rights in the HDF2 device, in satisfaction of its outstanding loan balance. Although we have no current plans to do so, we may re-evaluate opportunities for HDF in the future.
Our Products
Water Filtration Products
We develop and sell water filtration products used in both medical and commercial applications. Our water filtration products employ multiple filtration technologies, as described below.
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.
| 18 |
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 with limited sales staff expansion. In addition, while we are currently focused on medical markets, the VARs that support these customers also support a wide variety of commercial and industrial customers. We believe that our VAR relationships have and will continue to facilitate growth in filter sales outside of the medical industry.
In commercial markets, we develop and sell our filters, for which carbon-based absorption is the primary filtration mechanism. These 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. These commercial products are also sold into medical markets, as supplemental filtration to our medical filters.
In commercial markets, our model combines both direct and indirect sales. Through our employee sales staff, we have sold products directly to a number of convenience stores, hotels, casinos, and restaurants. We have also signed an agreement with a partner to be the exclusive distributor to resell select water filters and related products to customers in the commercial food and beverage markets subject to meeting certain minimum thresholds.
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 2023, according to the American Hospital Association, there are approximately 6,129 hospitals in the U.S., with approximately 920,000 beds. Over 34 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 one million patients in 2023. HAIs affect patients in hospitals or other healthcare facilities and are not present or incubating at the time of admission. They also include infections acquired by patients in the hospital or facility, but appearing after discharge, and occupational infections among staff. Many HAIs are caused by waterborne bacteria and viruses that can thrive in aging or complex plumbing systems often found in healthcare facilities.
In January 2022, the Center for Clinical Standards and Quality at the Centers for Medicare and Medicaid Services (“CMS”) expanded its requirements – originally implemented in 2017 – for facilities to develop policies and procedures that inhibit the growth and spread of legionella and other opportunistic pathogens in building water systems. In this 2022 update, CMS requires teams to be assigned to the development of formal water management plans (“WMPs”), as well as detailed documentation regarding the development of the WMPs and their execution. CMS surveyors regularly review policies, procedures, and reports documenting water management implementation results to verify that facilities are compliant with these requirements. We believe that these CMS regulations may have a positive impact on the sale of our HAI-inhibiting ultrafilters.
| 19 |
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, and point-of-use can be viewed on our website at https://www.nephros.com/infection-control/. We are not including the information on our website as a part of, nor incorporating it by reference into, this Quarterly Report on Form 10-Q.
Dialysis Centers - Water/Bicarbonate. In the dialysis water market, Nephros ultrafiltration products are among the highest performing products on the market. The DSU-D, SSU-D and the SSUmini have become the standard endotoxin filter in many portable reverse osmosis systems. The EndoPur®, our large-format ultrafilter targeted at dialysis clinic water systems, provides the smallest pore size available.
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 7,100 dialysis clinics in the United States servicing approximately 500,000 patients annually. We estimate that there are over 100,000 hemodialysis machines in operation in the United States.
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” configurations. |
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, our commercial filtration offerings include technologies that are primarily focused on improving odor and taste and on reducing scale and heavy metals from filtered water.
| 20 |
Our commercial market focus is on the hotel, restaurant, and convenience store markets. In March 2022, we entered into an agreement to provide water filtration systems to an organization that services approximately 3,000 Quick Service Restaurants (“QSR”). Effective January 1, 2023, we entered into a new supply agreement with this commercial partner, which superseded the March 2022 agreement. Under the January 2023 agreement, we engaged this commercial partner to be our exclusive distributor to the food, beverage and hospitality industries. We continue to pursue other national accounts, which, over time, 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 Nephros and Everpure® manifolds. Included in the NanoGuard product line are both conventional and flushable filters. | |
| ● | The Nephros line of commercial filters provide a variety of technology solutions that improve water quality in food service, convenience store, hospitality, and industrial applications. Nephros 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. |
Nephros commercial products combine effectively with NanoGuard ultrafiltration technologies to offer full-featured solutions to the commercial water market, including to existing users of Everpure filter manifolds.
Critical Accounting Policies
For the nine-month period ended September 30, 2024, 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, 2023.
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 to achieve 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.
| 21 |
Three Months Ended September 30, 2024 Compared to the Three Months Ended September 30, 2023
The following table sets forth our summarized, consolidated results of operations for the three months ended September 30, 2024 and 2023 (in thousands, except percentages):
| $ | % | |||||||||||||||
| Increase | Increase | |||||||||||||||
| 2024 | 2023 | (Decrease) | (Decrease) | |||||||||||||
| Total net revenues | $ | 3,518 | $ | 3,742 | $ | (224 | ) | (6 | )% | |||||||
| Cost of goods sold | 1,369 | 1,548 | (179 | ) | (12 | )% | ||||||||||
| Gross margin | 2,149 | 2,194 | (45 | ) | (2 | )% | ||||||||||
| Gross margin % | 61 | % | 59 | % | - | 2 | % | |||||||||
| Selling, general and administrative expense | 1,721 | 2,137 | (416 | ) | (19 | )% | ||||||||||
| Research and development expense | 188 | 205 | (17 | ) | (8 | )% | ||||||||||
| Depreciation and amortization expense | 34 | 55 | (21 | ) | (38 | )% | ||||||||||
| Operating income (loss) | 206 | (203 | ) | 409 | (201 | )% | ||||||||||
| Interest income | 20 | 11 | 9 | 82 | % | |||||||||||
| Other income (expense), net | (43 | ) | 10 | (53 | ) | (530 | )% | |||||||||
| Net income (loss) | $ | 183 | $ | (182 | ) | $ | 365 | (201 | )% | |||||||
Revenue
Overall, net revenues decreased by $0.2 million, or 6%, for the three months ended September 30, 2024, compared to the same period in 2023. This decrease was primarily driven by a decline in programmatic business reflecting underperformance in one region and a few of our larger accounts showing slower order patterns. This decline was partially offset by an increase in emergency response business.
Gross Profit Margin
Consolidated gross margin was approximately 61% for the three months ended September 30, 2024, compared to approximately 59% for the three months ended September 30, 2023. The increase of approximately 2 percentage points, was driven by favorable pricing terms with our largest supplier.
Selling, General and Administrative Expenses
Consolidated selling, general and administrative expenses decreased $416,000, or 19%, primarily due to a decrease in bonus accrual, sales commission expense, and stock compensation expense. In addition, we had expenses in the third quarter of 2023 related to our facilities consolidation which were not repeated in the third quarter of 2024.
Research and Development Expenses
Consolidated research and development expenses decreased approximately $17,000 due to a reduction in bonus accrual.
Depreciation and Amortization Expense
Depreciation and amortization expenses were approximately $34,000 and $55,000, respectively, for the three months ended September 30, 2024, and 2023.
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Interest Income
Interest income was approximately $20,000 for the three months ended September 30, 2024 compared to approximately $11,000 for the three months ended September 30, 2023.
Other Income (Expense), net
Other expense of approximately $43,000 for the three months ended September 30, 2024 is primarily a result of losses on foreign currency transactions. Other income of approximately $10,000 for the three months ended September 30, 2023 is primarily a result of gains on foreign currency transactions.
Nine Months Ended September 30, 2024 Compared to the Nine Months Ended September 30, 2023
The following table sets forth our summarized, consolidated results of operations for the nine months ended September 30, 2024 and 2023 (in thousands, except percentages):
| $ | % | |||||||||||||||
| Increase | Increase | |||||||||||||||
| 2024 | 2023 | (Decrease) | (Decrease) | |||||||||||||
| Total net revenues | $ | 10,292 | $ | 10,984 | $ | (692 | ) | (6 | )% | |||||||
| Cost of goods sold | 4,044 | 4,600 | (556 | ) | (12 | )% | ||||||||||
| Gross margin | 6,248 | 6,384 | (136 | ) | (2 | )% | ||||||||||
| Gross margin % | 61 | % | 58 | % | - | 3 | % | |||||||||
| Selling, general and administrative expense | 5,804 | 6,500 | (696 | ) | (11 | )% | ||||||||||
| Research and development expense | 654 | 665 | (11 | ) | (2 | )% | ||||||||||
| Depreciation and amortization expense | 101 | 163 | (62 | ) | (38 | )% | ||||||||||
| Operating loss | (311 | ) | (944 | ) | 633 | (67 | )% | |||||||||
| Interest expense | (1 | ) | (1 | ) | - | - | % | |||||||||
| Interest income | 66 | 36 | 30 | 83 | % | |||||||||||
| Other income (expense), net | (29 | ) | (12 | ) | (17 | ) | 142 | % | ||||||||
| Net loss | $ | (275 | ) | $ | (921 | ) | $ | 646 | (70 | )% | ||||||
Revenue
Overall, net revenues decreased by $0.7 million, or 6% for the nine months ended September 30, 2024, compared to the same period in 2023. This decrease was primarily driven by decreased revenue from emergency response orders, which were unusually large in the first nine months of 2023 but not repeated to the same degree in the comparable 2024 period. We believe that one contributor to this decline is the reduced stringency of waterborne risk response in territories previously committed to both proactive filtration measures and robust corrective actions. Consequently, we experienced the effects of a relaxation of requirements for emergency relief and remediation. However, the decrease in emergency response orders was partially offset by increased revenue from programmatic or recurring sales, which were 3% more than the same period in 2023. This increase in programmatic sales was due to the development of our newer sales personnel hired in 2023.
Gross Profit Margin
Consolidated gross margin was approximately 61% for the nine months ended September 30, 2024, compared to approximately 58% for the nine months ended September 30, 2023. The increase of approximately 3 percentage points was driven by more favorable pricing terms with our largest supplier and reduced shipping expenses in the first quarter of 2024.
Selling, General and Administrative Expenses
Consolidated selling, general and administrative expenses decreased $696,000 or 11% primarily due to a decrease in bonus accrual, sales commission expense, stock compensation expense, and travel expenses offset in part by an increase in salary expense.
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Research and Development Expenses
Consolidated research and development expenses decreased $11,000 primarily due to the wind down of our SRP division offset by an increase in headcount.
Depreciation and Amortization Expense
Depreciation and amortization expenses were approximately $101,000 and $163,000, respectively, for the nine months ended September 30, 2024 and 2023.
Interest Expense
Interest expense was approximately $1,000 for the nine months ended September 30, 2024 and September 30, 2023.
Interest Income
Interest income was approximately $66,000 for the nine months ended September 30, 2024, compared to approximately $36,000 for the nine months ended September 30, 2023.
Other Income (Expense), net
Other expense was approximately $29,000 and $12,000 respectively for the nine months ended September 30, 2024 and September 30, 2023 and is primarily a result of losses on foreign currency transactions.
Liquidity and Capital Resources
The following table summarizes our liquidity and capital resources as of September 30, 2024 and December 31, 2023 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 | 2024 | 2023 | ||||||
| Cash and cash equivalents | $ | 2,457 | $ | 4,307 | ||||
| Other current assets | 4,899 | 4,098 | ||||||
| Working capital | 6,298 | 6,292 | ||||||
| Stockholders’ equity | 8,174 | 8,358 | ||||||
At September 30, 2024, we had an accumulated deficit of $144.7 million and we may 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 cash balances will be sufficient to fund our current operating plan through at least the next 12 months from the date of issuance of the condensed consolidated financial statements in this Quarterly Report on Form 10-Q. Additionally, our operating plans are designed to help control operating costs, to increase revenue, and to raise additional capital until such time as we generate sufficient cash flows to fund operations. If there were a decrease in the demand for our products due to either economic or competitive conditions, or if we are otherwise unable to achieve our plan or achieve our anticipated operating results, there could be a significant reduction in liquidity due to our possible inability to cut costs sufficiently. In such event, the Company may need to take further actions to reduce its discretionary expenditures, including further reducing headcount, reducing spending on R&D projects, and reducing other variable costs.
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Our future liquidity sources and requirements will depend on many other factors, including:
| ● | the 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 toward the development, marketing, and sales of our water filtration products and working capital purposes.
Net cash used in operating activities was $1.8 million for the nine months ended September 30, 2024, compared to net cash provided by operating activities of approximately $1.1 million for the nine months ended September 30, 2023. Net cash used in operating activities in 2024 was primarily due to an increase in inventory of approximately $0.8 million, a decrease in accounts payable and accrued expenses of approximately $0.5 million each, and a net loss of approximately $0.3 million, offset by an increase in inventory impairments and write-offs of approximately $0.2 million. Net cash provided by operating activities in 2023 was primarily due to a decline in inventory of approximately $0.8 million, an increase in accrued expenses of approximately $0.4 million, partially offset by an increase in accounts receivable of approximately $0.2 million.
Net cash used in investing activities was approximately $50,000 in the nine months ended September 30, 2024, due primarily to purchases of property and equipment. We had no investing activities for the nine months ended September 30, 2023.
Net cash used in financing activities was approximately $4,000 for the nine months ended September 30, 2024, primarily due to payments on finance leases. Net cash used in financing activities was approximately $0.1 million for the nine months ended September 30, 2023, primarily due to final principal payments on since-retired debt.
Off-Balance Sheet Arrangements
We did not have any off-balance sheet arrangements as of September 30, 2024.
Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for 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 guaranties of future performance, are based on certain assumptions and are subject to various known and unknown risks and uncertainties, many of which are beyond our control. Actual results may differ materially from the expectations contained in the forward-looking statements. Factors that may cause such differences include, but are not limited to, the risks that:
| ● | we face significant challenges in obtaining market acceptance of our products, which, if not obtained, could adversely affect our potential sales and revenues; | |
| ● | product-related deaths or serious injuries or product malfunctions could trigger recalls, class action lawsuits and other events that could cause us to incur expenses and may also limit our ability to generate revenues from such products; | |
| ● | we face potential liability associated with the production, marketing and sale of our products, and the expense of defending against claims of product liability could materially deplete our assets and generate negative publicity, which could impair our reputation; | |
| ● | to the extent our products or marketing materials are found to violate any provisions of the U.S. Food, Drug and Cosmetic Act (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; |
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| ● | we may not be able to effectively market our products; | |
| ● | we may not be able to sell our water filtration 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; | |
| ● | we may not be able to secure or enforce adequate legal protection, including patent protection, for our products; and | |
| ● | we may not be able to achieve sales growth in key geographic markets. |
More detailed information about 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 U.S. Securities and Exchange Commission (the “SEC”), including our Annual Report on Form 10-K for the fiscal year ended December 31, 2023, 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.
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, 2023 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. You should also consider the following risk factor:
We are subject to minimum purchase obligations under our License and Supply Agreement with Medica and failure to meet these minimum purchase requirements may result in termination of the agreement, which could materially impact our ability to obtain our filtration products.
On December 11, 2023, we entered into a license and supply agreement (the “License and Supply Agreement”) with Medica S.p.A. (“Medica”), an Italy-based medical product manufacturing company, for the marketing and sale of certain filtration products based upon Medica’s proprietary ultrafiltration technology in conjunction with our filtration products (collectively, the “Products”), and to engage in an exclusive supply arrangement for the Products. Under the License and Supply Agreement, Medica granted us an exclusive license, with right of sublicense, to market, promote, distribute, offer for sale and sell the Products in the Territory (as defined in the License and Supply Agreement). In addition, we granted to Medica an exclusive license under our intellectual property to make the Products during the term of the License and Supply Agreement.
In exchange for the rights granted, we have agreed to make minimum annual aggregate purchases from Medica of €4,208,000, €4,629,000, €4,976,000, €5,349,000 and €5,750,000 for the years 2024, 2025, 2026, 2027 and 2028, respectively. If we are unable to satisfy our remaining minimum purchase commitment for 2024, we will be in breach of the License and Supply Agreement, giving Medica a right of termination. If the License and Supply Agreement is terminated, we may be unable to obtain our filtration products from an alternative supplier on commercially favorable terms, if at all. If we are unable to obtain our filtration products from an alternative supplier, we may be unable to supply our products to our customers, which could have a material adverse effect on our results of operations and damage our reputation.
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Item 5. Other Information.
During
the three months ended September 30, 2024, none of our directors or officers
Item 6. Exhibits
EXHIBIT INDEX
| Exhibit No. | Description of Exhibit | |
| 31.1 | Certification by the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. * | |
| 31.2 | Certification by the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. * | |
| 32.1 | Certification by the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. ** | |
| 32.2 | Certification by the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. ** | |
| 101 | Interactive Data File. * | |
| 101.INS | Inline XBRL Instance Document* | |
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document | |
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | |
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | |
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
| 104 | Cover Page Interactive Data File (embedded within the Inline XBRL document) | |
| * | Filed herewith | |
| ** | Furnished herewith | |
| † | Management contract or compensatory plan arrangement |
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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 14, 2024 | By: | /s/ Robert Banks |
| Name: | Robert Banks | |
| Title: | President, Chief Executive Officer (Principal Executive Officer) | |
| Date: November 14, 2024 | By: | /s/ Judy Krandel |
| Name: | Judy Krandel | |
| Title: | Chief Financial Officer (Principal Financial and Accounting Officer) | |
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