Nephros(US:NEPH)2025-05-15 20:00PART I - FINANCIAL INFORMATION This section presents the unaudited condensed interim financial statements and management's analysis Item 1. Financial Statements (Unaudited) This section presents Nephros, Inc.'s unaudited condensed interim financial statements and related notes for Q1 2025 and 2024 Condensed Balance Sheets This section provides a snapshot of the company's financial position at March 31, 2025, and December 31, 2024 Condensed Balance Sheet Highlights (in thousands): | Metric | March 31, 2025 | December 31, 2024 | Change | % Change | | :-------------------------------- | :------------- | :---------------- | :----- | :------- | | Total Assets | $11,778 | $11,210 | $568 | 5.07% | | Total Liabilities | $2,487 | $2,625 | $(138) | -5.26% | | Total Stockholders' Equity | $9,291 | $8,585 | $706 | 8.22% | | Cash and cash equivalents | $4,081 | $3,760 | $321 | 8.54% | | Accounts receivable, net | $2,677 | $1,781 | $896 | 50.31% | | Inventory | $1,954 | $2,615 | $(661) | -25.28% | Condensed Statements of Operations This section details the company's financial performance for the three months ended March 31, 2025 and 2024 Condensed Statements of Operations Highlights (in thousands, except per share): | Metric | Three Months Ended March 31, 2025 | Three Months Ended March 31, 2024 | Change | % Change | | :-------------------------------- | :-------------------------------- | :-------------------------------- | :----- | :------- | | Total net revenues | $4,877 | $3,522 | $1,355 | 38.47% | | Gross margin | $3,154 | $2,187 | $967 | 44.22% | | Operating income (loss) | $566 | $(200) | $766 | 383.00% | | Net income (loss) | $558 | $(169) | $727 | -430.18% | | Net income (loss) per common share, basic | $0.05 | $(0.02) | $0.07 | -350.00% | | Net income (loss) per common share, diluted | $0.05 | $(0.02) | $0.07 | -350.00% | Condensed Statements of Changes in Stockholders' Equity This section outlines changes in stockholders' equity for the three months ended March 31, 2025 and 2024 Changes in Stockholders' Equity (in thousands): | Item | Three Months Ended March 31, 2025 | | :------------------------ | :-------------------------------- | | Balance, December 31, 2024 | $8,585 | | Net Income | $558 | | Issuance of vested restricted stock | $82 | | Stock-based compensation | $66 | | Balance, March 31, 2025 | $9,291 | Condensed Statements of Cash Flows This section presents the cash inflows and outflows for the three months ended March 31, 2025 and 2024 Condensed Statements of Cash Flows Highlights (in thousands): | Metric | Three Months Ended March 31, 2025 | Three Months Ended March 31, 2024 | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Net income (loss) | $558 | $(169) | | Net cash provided by (used in) operating activities | $322 | $(672) | | Net cash used in financing activities | $(1) | $(2) | | Net increase (decrease) in cash and cash equivalents | $321 | $(674) | | Cash and cash equivalents, end of period | $4,081 | $3,633 | Notes to Condensed Interim Financial Statements This section provides detailed explanations of the company's accounting policies and financial statement items Note 1 – Organization and Nature of Operations This note describes Nephros, Inc.'s incorporation and its core business in liquid purification filters - Nephros, Inc. was incorporated on April 3, 1997, and specializes in high-performance liquid purification filters for medical markets (hospitals, dialysis centers) to prevent waterborne pathogens, as well as water filtration products for commercial applications (hospitality, food service)1920 Note 2 – Basis of Presentation and Liquidity This note explains the basis of financial statement preparation and assesses the company's liquidity position - The interim financial statements are unaudited and prepared in accordance with GAAP for interim financial information. The company generated net income and positive cash from operations in Q1 2025, and believes its current cash balances are sufficient to fund operations for at least the next 12 months, despite an accumulated deficit of $143.8 million as of March 31, 20252226 Major Customers' Contribution to Revenue and Accounts Receivable: | Customer | 2025 Revenue % | 2024 Revenue % | 2025 A/R % | 2024 A/R % | | :------- | :------------- | :------------- | :--------- | :--------- | | A | 19% | 31% | 8% | 13% | | B | 11% | 7% | 12% | 4% | | Total | 30% | 38% | 20% | 17% | Note 3 – Revenue Recognition This note details the company's policies for recognizing revenue from product sales, royalties, and services - Product revenue is recognized at a point-in-time upon shipment, net of variable consideration. Royalty and service revenues are recognized in accordance with the five-step model in ASC 606, with royalty revenue increasing significantly from $16k in Q1 2024 to $171k in Q1 2025333436 Note 4 – Fair Value Measurements This note outlines the company's fair value hierarchy and valuation methods for financial instruments - The company uses a three-level fair value hierarchy. Cash equivalents, primarily money market funds, are classified as Level 1, valued at $2,779k as of March 31, 2025, and $1,866k as of December 31, 20243943 Note 5 – Inventory This note provides a breakdown of the company's inventory components and their valuation Inventory Components (in thousands): | Item | March 31, 2025 | December 31, 2024 | | :------------- | :------------- | :---------------- | | Finished goods | $1,626 | $2,261 | | Raw materials | $328 | $354 | | Total inventory | $1,954 | $2,615 | Note 6 – Intangible Assets and Goodwill This note details the company's intangible assets and goodwill, including amortization and impairment Intangible Assets (in thousands): | Item | March 31, 2025 (Net) | December 31, 2024 (Net) | | :-------------------- | :------------------- | :---------------------- | | Customer relationships | $341 | $349 | | Total intangible assets | $341 | $349 | Goodwill (in thousands): | Item | March 31, 2025 | December 31, 2024 | | :------- | :------------- | :---------------- | | Goodwill | $759 | $759 | - Amortization expense for intangible assets was approximately $8k for both Q1 2025 and Q1 2024. No goodwill impairment was recorded for the three months ended March 31, 2025 and 20244732 Note 7 – License and Supply Agreement, net This note describes the exclusive license and supply agreement with Medica S.p.A. and related commitments - Nephros has an exclusive License and Supply Agreement with Medica S.p.A., its sole supplier for certain filter materials, extended until December 31, 2028. The agreement includes minimum annual aggregate purchase commitments, with failure to meet them potentially leading to termination5051 Minimum Annual Purchase Commitments (in thousands of Euros): | Year | Amount | | :--- | :----- | | 2025 | €4,629 | | 2026 | €4,976 | | 2027 | €5,349 | | 2028 | €5,750 | - The capitalized intangible asset for the license has a gross value of $2.3 million, with a net value of $0.2 million as of March 31, 2025. Amortization expense was approximately $14k for both Q1 2025 and Q1 202452 Note 8 – Leases This note provides information on the company's operating leases, including right-of-use assets and liabilities - The company holds operating leases for corporate offices and office equipment, with remaining terms of 3 to 4 years. Total lease cost decreased to $119k in Q1 2025 from $139k in Q1 20245455 Lease Liabilities and ROU Assets (in thousands): | Item | March 31, 2025 | December 31, 2024 | | :-------------------------------- | :------------- | :---------------- | | Operating lease right-of-use assets | $1,269 | $1,355 | | Total operating lease liabilities | $1,306 | $1,389 | | Weighted average remaining lease term (Operating) | 3.3 years | 3.6 years | | Weighted average discount rate (Operating) | 8.0% | 8.0% | Note 9 – Stock Plans and Share-Based Payments This note details the company's stock option and restricted stock plans and related compensation expenses - Nephros granted 204,575 stock options in Q1 2025 with a fair value of approximately $0.2 million. Stock-based compensation expense for stock options was $66k in Q1 2025 (vs. $(17)k in Q1 2024) and for restricted stock was $10k in Q1 2025 (vs. $8k in Q1 2024)586264 - As of March 31, 2025, there was $564k of unrecognized compensation expense related to unvested stock-based awards, to be amortized over a weighted average remaining service period of 2.5 years63 Note 10 – Segment Information This note clarifies that the company operates as a single reportable segment focused on water solutions - The company operates as a single operating and reportable segment, focusing on high-performance water solutions for medical and commercial markets. The CEO, as the Chief Operating Decision Maker, evaluates performance based on net income (loss)6768 Note 11 – Net Income (Loss) per Common Share This note presents the calculation of basic and diluted net income (loss) per common share Net Income (Loss) per Common Share (in thousands, except per share data): | Metric | Three Months Ended March 31, 2025 | Three Months Ended March 31, 2024 | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Net income (loss) | $558 | $(169) | | Basic weighted average common shares outstanding | 10,600,350 | 10,501,771 | | Diluted weighted average common shares outstanding | 10,615,766 | 10,501,771 | | Basic EPS | $0.05 | $(0.02) | | Diluted EPS | $0.05 | $(0.02) | - Potentially dilutive securities, including 1,438,706 shares underlying options outstanding as of March 31, 2025, were excluded from diluted EPS computation as they were antidilutive72 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial condition and operational results for Q1 2025 Business Overview This section provides an overview of Nephros's business, products, and target markets - Nephros is a commercial-stage company specializing in FDA 510(k)-cleared medical-grade water filtration solutions for infection control and dialysis, and also offers commercial water filters for taste, odor, and contaminant reduction across various industries7475 Our Products This section describes the company's medical and commercial water filtration products and their technologies - Medical products utilize polysulfone hollow fiber technology for effective pathogen elimination and high flow rates, primarily sold through distributors (VARs) and a direct salesforce. Commercial products use carbon-based absorption to improve water quality, sold through both direct and indirect channels78798081 Target Markets This section identifies the key markets for Nephros's products, including healthcare and commercial facilities - Nephros targets hospitals and healthcare facilities for infection control, dialysis centers for water/bicarbonate filtration, and commercial/industrial facilities (hotels, restaurants, convenience stores) for general water purification82848791 - CMS regulations requiring formal water management plans (WMPs) in healthcare facilities are expected to positively impact sales of HAI-inhibiting ultrafilters. The company anticipates significant future revenue growth in commercial markets, potentially surpassing infection control revenue, driven by increasing water safety awareness and ASHRAE-188 guidelines859394 - The company ended its exclusive distribution relationship with Donastar in September 2024 to expand commercial market distribution and pursue other national accounts92 Critical Accounting Policies This section discusses the significant accounting policies, particularly revenue recognition, used in financial reporting - No significant changes to critical accounting policies were noted for Q1 2025, other than details on revenue recognition. Product revenue is recognized upon shipment, while royalty and service revenues follow the ASC 606 five-step model, with transaction prices allocated based on standalone selling prices96979899100102 Results of Operations This section analyzes the company's financial performance, including revenue, gross margin, and net income Results of Operations Highlights (in thousands, except percentages): | Metric | 2025 | 2024 | $ Increase (Decrease) | % Increase (Decrease) | | :-------------------------------- | :----- | :----- | :-------------------- | :-------------------- | | Total net revenue | $4,877 | $3,522 | $1,355 | 38% | | Cost of goods sold | $1,723 | $1,335 | $388 | 29% | | Gross margin | $3,154 | $2,187 | $967 | 44% | | Gross margin % | 65% | 62% | - | 3% | | Selling, general and administrative expense | $2,254 | $2,142 | $112 | 5% | | Research and development expense | $295 | $212 | $83 | 39% | | Depreciation and amortization expense | $39 | $33 | $6 | 18% | | Operating Income (loss) | $566 | $(200) | $766 | 383% | | Interest expense | $- | $(1) | $1 | 100% | | Interest income | $13 | $25 | $(12) | (48)% | | Other (expense) income, net | $(21) | $7 | $(28) | (400)% | | Net Income (loss) | $558 | $(169) | $727 | (430)% | - Net revenue increased by 38% due to strong reorders, new active sites, pre-ordering ahead of a price increase, and stronger emergency response sales. Gross profit margin improved by 3 percentage points to 65% due to a favorable product mix, price increase, and lower inventory reserves/write-offs106107 Liquidity and Capital Resources This section assesses the company's ability to meet its short-term and long-term financial obligations Liquidity and Capital Resources (in thousands): | Metric | March 31, 2025 | December 31, 2024 | | :------------------------ | :------------- | :---------------- | | Cash and cash equivalents | $4,081 | $3,760 | | Other current assets | $4,911 | $4,538 | | Working capital | $7,474 | $6,736 | | Stockholders' equity | $9,291 | $8,585 | - Net cash provided by operating activities was approximately $0.3 million for Q1 2025, a significant improvement from $0.7 million used in Q1 2024, primarily due to net income and a decrease in inventory, offset by an increase in accounts receivable118 - The company believes its current cash balances are sufficient to fund its operating plan through at least the next 12 months, but acknowledges potential future operating losses and the need for cost control if revenue expectations are not met115 Off-Balance Sheet Arrangements This section confirms the absence of any off-balance sheet arrangements as of March 31, 2025 - The company did not have any off-balance sheet arrangements as of March 31, 2025120 Forward-Looking Statements This section highlights the inherent risks and uncertainties associated with forward-looking statements - This section contains forward-looking statements subject to various known and unknown risks and uncertainties, including market acceptance, product liability, regulatory compliance, funding, marketing effectiveness, supplier issues, tariffs, and internal control deficiencies, which could cause actual results to differ materially from expectations121 Item 3. Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, Nephros, Inc. is exempt from providing detailed market risk disclosures - The company is exempt from providing disclosures on market risk as it qualifies as a smaller reporting company123 Item 4. Controls and Procedures Management concluded that disclosure controls were ineffective due to a material weakness in revenue recognition controls - Disclosure controls and procedures were deemed not effective as of March 31, 2025125 - A material weakness was identified in internal controls over financial reporting concerning revenue recognition from contracts with multiple performance obligations and the application of ASC 606, specifically regarding the allocation of transaction price based on standalone selling price125126 - This material weakness did not result in any material misstatements in the financial statements for the period presented, but management is working with consultants to establish remediation controls125126 PART II - OTHER INFORMATION This section includes additional information such as risk factors, exhibits, and official signatures Item 1A. Risk Factors This section refers to the Annual Report for risk factors and highlights new risks related to tariffs and internal control weaknesses - The company refers to its Annual Report on Form 10-K for a discussion of important risk factors129 - New risks include potential material adverse effects from changes in U.S. tariff policies, particularly due to reliance on EU suppliers, which could increase costs and impact revenues and profitability130 - The identified material weakness in internal control over financial reporting poses a risk that could adversely affect investor confidence and the value of common stock if not remediated131132 Item 5. Exhibits This section lists all supplementary documents and certifications filed with the Form 10-Q - Exhibits include certifications by the CEO and CFO (pursuant to Sections 302 and 906 of Sarbanes-Oxley Act), Inline XBRL documents, and an Amendment to Letter Agreement with Judy Krandel135136 SIGNATURES This section contains the official signatures of the company's principal executive and financial officers - The report was signed on May 15, 2025, by Robert Banks (President, Chief Executive Officer) and Judy Krandel (Chief Financial Officer)139