Nephros(NEPH) - 2021 Q2 - Quarterly Report

PART I - FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) This section presents the unaudited condensed consolidated financial statements, including balance sheets, statements of operations and comprehensive loss, statements of changes in stockholders' equity, and statements of cash flows, along with detailed notes explaining the company's accounting policies, financial instruments, and segment performance for the periods ended June 30, 2021 and 2020 Condensed Consolidated Balance Sheets Condensed Consolidated Balance Sheets (in thousands) | Metric (in thousands) | June 30, 2021 | December 31, 2020 | | :-------------------- | :------------ | :---------------- | | Total Assets | $17,991 | $18,510 | | Total Liabilities | $3,000 | $2,937 | | Total Stockholders' Equity | $14,991 | $15,573 | | Cash and Cash Equivalents | $8,278 | $8,249 | | Total Current Assets | $14,840 | $15,154 | | Total Current Liabilities | $2,170 | $1,325 | Condensed Consolidated Statements of Operations and Comprehensive Loss Condensed Consolidated Statements of Operations and Comprehensive Loss (in thousands) | Metric (in thousands) | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :-------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Total Net Revenues | $2,266 | $1,577 | $5,002 | $4,106 | | Gross Margin | $1,275 | $895 | $2,862 | $2,386 | | Loss from Operations | $(1,117) | $(1,598) | $(2,135) | $(2,624) | | Net Loss | $(1,126) | $(1,657) | $(1,663) | $(2,755) | | Net Loss per Common Share, Basic and Diluted | $(0.12) | $(0.19) | $(0.18) | $(0.33) | Condensed Consolidated Statements of Changes in Stockholders' Equity Condensed Consolidated Statements of Changes in Stockholders' Equity (in thousands) | Metric (in thousands) | Balance, Dec 31, 2020 | Net Loss (Q2 2021) | Stock-based Compensation (Q2 2021) | Balance, June 30, 2021 | | :-------------------- | :-------------------- | :----------------- | :--------------------------------- | :--------------------- | | Total Stockholders' Equity | $15,573 | $(1,126) | $281 | $14,991 | - For the six months ended June 30, 2021, the company reported a net loss of $1.663 million, contributing to an accumulated deficit of $133.521 million[12][14] - Stock-based compensation for the six months ended June 30, 2021, was $0.557 million, contributing to an increase in additional paid-in capital[14][18] Condensed Consolidated Statements of Cash Flows Condensed Consolidated Statements of Cash Flows (in thousands) | Cash Flow Activity (in thousands) | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :-------------------------------- | :----------------------------- | :----------------------------- | | Net Cash Used in Operating Activities | $(172) | $(3,560) | | Net Cash Used in Investing Activities | $(23) | $(226) | | Net Cash Provided by Financing Activities | $228 | $6,666 | | Net Increase in Cash and Cash Equivalents | $29 | $2,880 | | Cash and Cash Equivalents, End of Period | $8,278 | $7,046 | - Net cash used in operating activities significantly decreased by $3.388 million (from $(3.560) million to $(0.172) million) for the six months ended June 30, 2021, primarily due to a decrease in inventory levels[18][188] - The company received $0.482 million from the extinguishment of a PPP loan in 2021, which positively impacted cash flow from operations[18][33][182] Notes to Condensed Consolidated Interim Financial Statements Note 1 – Organization and Nature of Operations - Nephros, Inc. was founded in 1997 to develop advanced end-stage renal disease (ESRD) therapy technology[20] - The company operates in three reportable segments: Water Filtration (medical and commercial water purification), Pathogen Detection (portable, near real-time systems), and Renal Products (development of second-generation hemodiafiltration systems)[21][22][23] Note 2 – Basis of Presentation and Liquidity - The company has sustained operating losses and expects them to continue, with an accumulated deficit of $133.5 million as of June 30, 2021[29] - Management believes current cash balances are sufficient to fund operations for at least the next 12 months, with operating plans focused on cost control and revenue increase[31] - A $0.5 million Paycheck Protection Program (PPP) loan was fully forgiven on January 14, 2021, recognized as an extinguishment of debt[33] Key Customer Revenue Concentration | Customer | % of Revenues (3 months ended June 30, 2021) | % of Revenues (3 months ended June 30, 2020) | | :--------- | :------------------------------------------- | :------------------------------------------- | | A | 14% | 11% | | D | 11% | 5% | | C | 10% | 21% | | E | 5% | 10% | | Total | 40% | 47% | Key Customer Accounts Receivable Concentration | Customer | % of Accounts Receivable (June 30, 2021) | % of Accounts Receivable (December 31, 2020) | | :--------- | :--------------------------------------- | :------------------------------------------- | | D | 17% | 6% | | A | 12% | 18% | | F | 9% | 12% | | Total | 38% | 36% | Note 3 – Revenue Recognition - Product revenue is recognized upon shipment, net of returns and allowances, with no allowance for sales returns in the reported periods[40] Royalty and Other Revenue (in thousands) | Royalty and Other Revenue (in thousands) | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :--------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Royalty revenue (Bellco) | $15 | $13 | $29 | $29 | | Royalty revenue (CamelBak) | $20 | $- | $20 | $- | | Other revenue | $35 | $- | $45 | $38 | | Total | $70 | $13 | $94 | $67 | Note 4 – Fair Value Measurements - The company uses a fair value hierarchy (Level 1, 2, 3) to measure financial instruments, prioritizing observable inputs[45][46][48][49] - Cash equivalents, primarily money market funds, are valued using Level 1 inputs (quoted prices in active markets)[51] - There were no outstanding amounts related to contingent consideration as of June 30, 2021, or December 31, 2020, following a lump sum payment in October 2020[51] Note 5 – Inventory - Inventory is valued at the lower of cost or net realizable value using the first-in, first-out (FIFO) method[54] Inventory Components (in thousands) | Inventory Component (in thousands) | June 30, 2021 | December 31, 2020 | | :--------------------------------- | :------------ | :---------------- | | Finished goods | $4,167 | $4,340 | | Raw materials | $920 | $964 | | Total inventory | $5,087 | $5,304 | Note 6 – Intangible Assets and Goodwill Intangible Assets (in thousands) | Intangible Asset (in thousands) | June 30, 2021 Net | December 31, 2020 Net | | :------------------------------ | :---------------- | :-------------------- | | Tradenames, service marks and domain names | $25 | $30 | | Customer relationships | $460 | $476 | | Total intangible assets | $485 | $506 | - Goodwill had a carrying value of $0.8 million at both June 30, 2021, and December 31, 2020, allocated to the Water Filtration segment, and was not impaired[57] - Amortization expense for intangible assets was approximately $11 thousand for each of the three months ended June 30, 2021 and 2020, and $21 thousand for each of the six months ended June 30, 2021 and 2020[55] Note 7 – License and Supply Agreement, net - The company has an exclusive license and supply agreement with Medica S.p.A. for certain filtration products, expiring December 31, 2025[58] - The net carrying value of the license and supply agreement was $0.6 million at June 30, 2021, and $0.7 million at December 31, 2020, with accumulated amortization of $1.6 million[59] - Royalty expense to Medica was approximately $56 thousand for the three months ended June 30, 2021 (up from $44 thousand in 2020) and $128 thousand for the six months ended June 30, 2021 (up from $113 thousand in 2020)[61] Note 8 – Secured Revolving Credit Facility - The secured asset-based revolving credit facility with Tech Capital, LLC was terminated on May 26, 2020[63] - Interest expense related to the Revolver termination was approximately $7 thousand for the year ended December 31, 2020[63] Note 9 – Secured Note Payable - The principal balance of the Secured Promissory Note with Tech Capital was $0.5 million as of June 30, 2021, accruing interest at 8% per annum and maturing April 1, 2023[65][66] Future Principal Maturities of Secured Note (in thousands) | Fiscal Year | Future Principal Maturities (in thousands) | | :---------- | :--------------------------------------- | | 2021 (excluding six months ended June 30, 2021) | $106 | | 2022 | $269 | | 2023 | $95 | | Total | $470 | Note 10 – Leases - The company has operating leases for corporate offices, an automobile, and office equipment, with remaining terms of 1 to 4 years[70] Lease Costs (in thousands) | Lease Cost (in thousands) | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Operating lease cost | $99 | $101 | $200 | $192 | | Total finance lease cost | $3 | $2 | $7 | $3 | | Variable lease cost | $10 | $10 | $19 | $23 | | Total lease cost | $112 | $113 | $226 | $218 | Lease Liabilities and Right-of-Use Assets (in thousands) | Lease Liabilities (in thousands) | June 30, 2021 | December 31, 2020 | | :------------------------------- | :------------ | :---------------- | | Operating lease right-of-use assets | $867 | $1,002 | | Finance lease right-of-use assets | $30 | $35 | | Total operating lease liabilities | $919 | $1,056 | | Total finance lease liabilities | $30 | $35 | | Weighted average remaining operating lease term | 2.7 years | 3.1 years | | Weighted average remaining finance lease term | 2.7 years | 3.3 years | | Weighted average discount rate (Operating & Finance) | 8.0% | 8.0% | Note 11 – Stock Plans and Share-Based Payments - Stock-based compensation expense for stock options was $215 thousand for Q2 2021 (vs. $149 thousand in Q2 2020) and $448 thousand for H1 2021 (vs. $317 thousand in H1 2020)[77][78] - Total unrecognized compensation expense related to unvested stock-based awards was $1.9 million as of June 30, 2021, to be amortized over a weighted average remaining service period of 4.6 years[79] - Stock-based compensation expense for restricted stock was $65 thousand for Q2 2021 (vs. $24 thousand in Q2 2020) and $106 thousand for H1 2021 (vs. $52 thousand in H1 2020)[80][81] Note 12 – Stockholders' Equity - In February 2020, the company issued 937,500 shares of common stock through a public offering, generating $6.8 million in net proceeds[88] - SRP's Series A Preferred Stockholders hold a 37.5% noncontrolling interest, with specific voting rights and liquidation preferences[89][91][93] - During the six months ended June 30, 2021, 120,966 shares of common stock were issued from warrant exercises, generating $0.3 million in gross proceeds from cash exercises[95] Note 13 – Net Loss per Common Share - Basic and diluted net loss per common share are calculated by dividing net loss attributable to common shareholders by weighted average common shares outstanding[97] Potentially Dilutive Securities | Potentially Dilutive Securities | June 30, 2021 | June 30, 2020 | | :------------------------------ | :------------ | :------------ | | Shares underlying warrants outstanding | 123,476 | 348,912 | | Shares underlying options outstanding | 1,262,263 | 1,003,669 | | Unvested restricted stock | 64,338 | - | Note 14 – Commitments and Contingencies - The company has minimum annual aggregate purchase commitments with Medica S.p.A. of €3.3 million (approximately $4.0 million) for the year ended December 31, 2021[99] - As of June 30, 2021, aggregate purchase commitments totaled €2.2 million (approximately $2.6 million)[99] Note 15 – Segment Reporting - The company operates in three reportable segments: Water Filtration, Pathogen Detection, and Renal Products[101] Segment Performance for Three Months Ended June 30, 2021 (in thousands) | Segment (in thousands) | Total Net Revenues (Q2 2021) | Gross Margin (Q2 2021) | R&D Expenses (Q2 2021) | SG&A Expenses (Q2 2021) | Loss from Operations (Q2 2021) | | :--------------------- | :--------------------------- | :--------------------- | :--------------------- | :---------------------- | :----------------------------- | | Water Filtration | $2,190 | $1,215 | $305 | $1,735 | $(876) | | Pathogen Detection | $76 | $60 | $149 | $96 | $(185) | | Renal Products | $- | $- | $33 | $23 | $(56) | | Consolidated | $2,266 | $1,275 | $487 | $1,854 | $(1,117) | Segment Performance for Six Months Ended June 30, 2021 (in thousands) | Segment (in thousands) | Total Net Revenues (H1 2021) | Gross Margin (H1 2021) | R&D Expenses (H1 2021) | SG&A Expenses (H1 2021) | Loss from Operations (H1 2021) | | :--------------------- | :--------------------------- | :--------------------- | :--------------------- | :---------------------- | :----------------------------- | | Water Filtration | $4,926 | $2,802 | $598 | $3,612 | $(1,509) | | Pathogen Detection | $76 | $60 | $268 | $196 | $(404) | | Renal Products | $- | $- | $177 | $45 | $(222) | | Consolidated | $5,002 | $2,862 | $1,043 | $3,853 | $(2,135) | Note 16 – Subsequent Event - On July 9, 2021, the company acquired substantially all assets of GenArraytion, Inc. for an aggregate purchase price of $1.2 million, paid in 123,981 shares of common stock[105] - Fifty percent of the issued shares are subject to forfeiture, lapsing upon satisfactory completion of intellectual property transition services, and the company will make royalty payments based on net sales over five years[105] 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 results of operations, including a business overview, the impact of the COVID-19 pandemic, detailed product descriptions, critical accounting policies, and a comparative analysis of financial performance for the three and six months ended June 30, 2021 and 2020, alongside discussions on liquidity and capital resources, and forward-looking statements Business Overview - Nephros, Inc. is a commercial-stage company specializing in high-performance water solutions for medical and commercial markets[108] - The company's offerings include medical water filtration products (e.g., ultrafilters for infection prevention in hospitals and dialysis centers), commercial water filters (improving taste/odor, reducing biofilm), and portable pathogen detection systems[109][110][111] - Specialty Renal Products, Inc. (SRP), a subsidiary, is developing a second-generation hemodiafiltration (HDF) system for end-stage renal disease (ESRD) patients[112] COVID-19 Pandemic - The company experienced decreased demand for hospital filtration products and commercial filtration products in 2020 due to the COVID-19 pandemic, particularly in emergency pathogen outbreak response and sales to new customers[32] - As the pandemic subsides, Nephros anticipates a net positive impact on demand, driven by increased awareness of infectious pathogens, deferred purchase decisions, and reopening of commercial facilities[115] Our Products Water Filtration Products - Medical water filtration products utilize polysulfone hollow fiber ultrafilters to eliminate waterborne pathogens (e.g., legionella, viruses) in hospitals and dialysis centers[117][122][126] - Commercial water filtration products, marketed under Nephros and AETHER brands, focus on improving water taste/odor and reducing scale/heavy metals for food service, hospitality, and convenience store markets[119][131][139] - The company's individual water treatment device (IWTD) for military and outdoor recreation is sublicensed to CamelBak, with $20 thousand in revenue recognized in H1 2021[135][136] Pathogen Detection Systems - The PluraPath™ system provides portable, near real-time (within one hour) quantitative PCR (qPCR) pathogen detection for infection control teams, capable of parallel-processing up to 15 different bacteria and virus assays[137][138][141] - The DialyPath™ system, introduced in October 2020, offers real-time pathogen detection and endotoxin estimation for dialysis facilities, providing data on two test samples in less than one hour[143][144] - The SequaPath™ system, available as a service, provides facility-wide pathogen detection by screening water for over 20,000 different bacterial genera using proprietary filtration and DNA sequencing[145][146] Specialty Renal Products: HDF System - Specialty Renal Products, Inc. (SRP) is developing a second-generation hemodiafiltration (HDF) system, which combines diffusion and convection for enhanced toxin clearance, improved survival, and better patient quality of life compared to traditional hemodialysis[148][149] - The second-generation HDF system has been dramatically simplified and redesigned for ease of use, including a shift to a disposable substitution ultrafilter, and was submitted for FDA 510(k) clearance in June 2021[157][159] - Nephros maintains a 62.5% ownership stake in SRP, which raised $3 million in outside capital to fund the HDF system's development[158] Critical Accounting Policies - There were no significant changes to the company's critical accounting policies for the six-month period ended June 30, 2021, as identified in its Annual Report on Form 10-K for the year ended December 31, 2020[161] Recent Accounting Pronouncements - The company adopted ASU 2019-12, 'Simplifying the Accounting for Income Taxes,' effective January 1, 2021, with no impact on its condensed consolidated financial statements[34][162] - ASU 2021-04, 'Issuer's Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options,' is effective for the company in Q1 2022, and its impact is currently being assessed[35][162] Results of Operations - Operating results are expected to fluctuate due to R&D expenditures, marketing expenses, regulatory approvals, and market acceptance[163] Three Months Ended June 30, 2021 Compared to the Three Months Ended June 30, 2020 Financial Performance for Three Months Ended June 30 (in thousands) | Metric (in thousands) | 2021 | 2020 | Change ($) | Change (%) | | :-------------------- | :------- | :------- | :--------- | :--------- | | Total Net Revenues | $2,266 | $1,577 | $689 | 44% | | Cost of Goods Sold | $991 | $682 | $309 | 45% | | Gross Margin | $1,275 | $895 | $380 | 42% | | Gross Margin % | 56% | 57% | - | (1)% | | R&D Expenses | $487 | $836 | $(349) | (42)% | | SG&A Expenses | $1,854 | $1,610 | $244 | 15% | | Loss from Operations | $(1,117) | $(1,598) | $(481) | (30)% | | Net Loss | $(1,126) | $(1,657) | $(531) | (32)% | Segment Revenues for Three Months Ended June 30 (in thousands) | Segment Revenues (in thousands) | 2021 | 2020 | Change ($) | Change (%) | | :------------------------------ | :----- | :----- | :--------- | :--------- | | Water Filtration | $2,190 | $1,567 | $623 | 40% | | Pathogen Detection | $76 | $10 | $66 | 660% | | Renal Products | $- | $- | $- | -% | | Total | $2,266 | $1,577 | $689 | 44% | - Consolidated R&D expenses decreased by $0.3 million, primarily due to reduced investment in the second-generation HDF product in the Renal Products segment, which was submitted for FDA clearance[168] - Consolidated SG&A expenses increased by $0.2 million, mainly due to increased headcount-related expenditures in the Water Filtration segment, partially offset by decreases in the Renal Products segment[170] Six Months Ended June 30, 2021 Compared to the Six Months Ended June 30, 2020 Financial Performance for Six Months Ended June 30 (in thousands) | Metric (in thousands) | 2021 | 2020 | Change ($) | Change (%) | | :-------------------- | :------- | :------- | :--------- | :--------- | | Total Net Revenues | $5,002 | $4,106 | $896 | 22% | | Cost of Goods Sold | $2,140 | $1,720 | $420 | 24% | | Gross Margin | $2,862 | $2,386 | $476 | 20% | | Gross Margin % | 57% | 58% | - | (1)% | | R&D Expenses | $1,043 | $1,399 | $(356) | (25)% | | SG&A Expenses | $3,853 | $3,560 | $293 | 8% | | Loss from Operations | $(2,135) | $(2,624) | $(489) | (19)% | | Net Loss | $(1,663) | $(2,755) | $(1,092) | (40)% | Segment Revenues for Six Months Ended June 30 (in thousands) | Segment Revenues (in thousands) | 2021 | 2020 | Change ($) | Change (%) | | :------------------------------ | :----- | :----- | :--------- | :--------- | | Water Filtration | $4,926 | $4,078 | $848 | 21% | | Pathogen Detection | $76 | $28 | $48 | 171% | | Renal Products | $- | $- | $- | -% | | Total | $5,002 | $4,106 | $896 | 22% | - Consolidated R&D expenses decreased by $0.4 million, primarily due to reduced investment in the Renal Products segment, partially offset by increased expenditures in the Pathogen Detection segment[177] - The extinguishment of the PPP loan in January 2021 resulted in approximately $0.482 million in other income[182] Liquidity and Capital Resources Key Liquidity Metrics (in thousands) | Metric (in thousands) | June 30, 2021 | December 31, 2020 | | :-------------------- | :------------ | :---------------- | | Cash and cash equivalents | $8,278 | $8,249 | | Other current assets | $6,562 | $6,905 | | Working capital | $12,705 | $13,829 | | Stockholders' equity | $15,026 | $15,573 | - The company had an accumulated deficit of $133.5 million as of June 30, 2021, and expects to incur additional operating losses[185] - Management believes current cash balances are sufficient to fund operations for at least the next 12 months, with operating plans focused on cost control, revenue increase, and raising additional capital[186] - Net cash used in operating activities decreased by $3.4 million for the six months ended June 30, 2021, primarily due to a $0.2 million decrease in inventory, compared to a $2.2 million increase in the prior year[188] Off-Balance Sheet Arrangements - The company did not have any off-balance sheet arrangements as of June 30, 2021[192] Forward-Looking Statements - The report contains forward-looking statements regarding product efficacy, market timelines, regulatory approvals, funding, and other non-historical facts[193] - Key risks include challenges in market acceptance, product-related liabilities, funding availability, marketing effectiveness, competitive pricing, supplier issues, internal control deficiencies, regulatory approvals, and the ongoing impact of the COVID-19 pandemic[194] Item 3. Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, Nephros, Inc. is not required to provide quantitative and qualitative disclosures about market risk in this report - The company is exempt from providing disclosures about market risk as it qualifies as a smaller reporting company[196] Item 4. Controls and Procedures This section details the evaluation of the company's disclosure controls and procedures, confirming their effectiveness, and states that there were no material changes in internal control over financial reporting during the most recent fiscal quarter - The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of June 30, 2021[199] - There were no changes in internal control over financial reporting during the most recent fiscal quarter that materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[200] PART II - OTHER INFORMATION Item 1A. Risk Factors As a smaller reporting company, Nephros, Inc. is not required to provide detailed risk factor disclosures in this quarterly report but refers readers to the comprehensive 'Risk Factors' section in its Annual Report on Form 10-K for the year ended December 31, 2020 - The company, as a smaller reporting company, is not required to provide specific risk factor disclosures in this 10-Q[203] - Readers are directed to the 'Risk Factors' section in the Annual Report on Form 10-K for the year ended December 31, 2020, for a discussion of factors that could materially affect actual results[203] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section details the issuance of common stock resulting from the exercise of outstanding warrants during the three and six months ended June 30, 2021, including both cash and cashless exercises, and the proceeds generated - During the three and six months ended June 30, 2021, the company issued 120,966 shares of common stock from warrant exercises[204] - Cash exercises of 110,003 shares at $2.70 per share generated gross proceeds of $0.3 million[204] - 66,667 shares were issued to entities affiliated with Wexford Capital LP, the largest stockholder, generating $0.2 million in proceeds[204] Item 6. Exhibits This section provides a list of exhibits filed with the Quarterly Report on Form 10-Q, including certifications by the Chief Executive Officer and Chief Financial Officer and the Interactive Data File List of Exhibits | Exhibit No. | Description of Exhibit | | :---------- | :----------------------------------------------------------------------------------------------------------------- | | 31.1 | Certification by the Chief Executive Officer and Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. * | | 32.1 | Certification by the Chief Executive Officer and 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. * | SIGNATURES This section contains the official signatures, confirming the due authorization and filing of the Quarterly Report on Form 10-Q by Nephros, Inc. - The report was signed by Andrew Astor, President, Chief Executive Officer, and Chief Financial Officer, on August 5, 2021[210]