UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON D.C. 20549

FORM 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: June 30, 2023

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from: _______ to _______

Commission File Number: 001-32288

NEPHROS, INC.

(Exact name of registrant as specified in its charter)

delaware		13-3971809
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

380 Lackawanna Place South Orange, NJ		07079
(Address of principal executive offices)		(Zip Code)

(201) 343-5202

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
Common stock, par value $0.001 per share		NEPH		The Nasdaq Stock Market LLC

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. ☒ YES ☐ 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). ☒ YES ☐ 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 ☐
Non-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 ☒ NO

As of August 7, 2023, 10,484,932 shares of the registrant’s common stock, $0.001 par value per share, were outstanding.

NEPHROS, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION	3

Item 1. Financial Statements (unaudited).	3

CONSOLIDATED BALANCE SHEETS – June 30, 2023 and December 31, 2022	3

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS – Three and six months ended June 30, 2023 and 2022	4

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY – Three and six months ended June 30, 2023 and 2022	5

CONSOLIDATED STATEMENTS OF CASH FLOWS – Six months ended June 30, 2023 and 2022	6

NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS	7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.	18

Item 3. Quantitative and Qualitative Disclosures About Market Risk.	26

Item 4. Controls and Procedures.	26

PART II - OTHER INFORMATION	27

Item 1A. Risk Factors	27

Item 5. Other Information	27

Item 6. Exhibits	27

SIGNATURES	28

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

NEPHROS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

(Unaudited)

	June 30, 2023			December 31, 2022
ASSETS
Current assets:
Cash and cash equivalents	$	4,060		$	3,634
Accounts receivable, net		1,576			1,286
Inventory		2,126			3,153
Prepaid expenses and other current assets		152			188
Total current assets		7,914			8,261
Property and equipment, net		98			116
Lease right-of-use assets		824			984
Intangible assets, net		402			423
Goodwill		759			759
License and supply agreement, net		335			402
Other assets		54			54
TOTAL ASSETS	$	10,386		$	10,999

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of secured note payable	$	-		$	71
Accounts payable		302			740
Accrued expenses		572			285
Current portion of lease liabilities		323			316
Total current liabilities		1,197			1,412
Equipment financing, net of current portion		-			1
Lease liabilities, net of current portion		534			705
TOTAL LIABILITIES		1,731			2,118

COMMITMENTS AND CONTINGENCIES (Note 14)		-			-

STOCKHOLDERS’ EQUITY

Preferred stock, $.001 par value; 5,000,000 shares authorized at June 30, 2023 and December 31, 2022; no shares issued and outstanding at June 30, 2023 and December 31, 2022.		-			-
Common stock, $.001 par value; 40,000,000 shares authorized at June 30, 2023 and December 31, 2022; 10,484,932 and 10,297,429 shares issued and outstanding at June 30, 2023 and December 31, 2022, respectively.		10			10
Additional paid-in capital		152,215			148,413
Accumulated deficit		(143,570	)		(142,831	)
Subtotal		8,655			5,592
Noncontrolling interest		-			3,289
TOTAL STOCKHOLDERS’ EQUITY		8,655			8,881
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	10,386		$	10,999

The accompanying notes are an integral part of these unaudited consolidated interim financial statements.

NEPHROS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(In thousands, except share and per share amounts)

(Unaudited)

	2023			2022			2023			2022
	Three Months Ended June 30,						Six Months Ended June 30,
	2023			2022			2023			2022
Net revenue:
Product revenues	$	3,537		$	2,837		$	7,199		$	4,988
Royalty and other revenues		8			13			43			21
Total net revenues		3,545			2,850			7,242			5,009
Cost of goods sold		1,466			1,455			3,052			2,561
Gross margin		2,079			1,395			4,190			2,448
Operating expenses:
Selling, general and administrative		2,239			1,885			4,363			4,062
Research and development		221			273			460			645
Depreciation and amortization		54			51			108			102
Total operating expenses		2,514			2,209			4,931			4,809
Operating loss from continuing operations		(435	)		(814	)		(741	)		(2,361	)
Other (expense) income:
Interest expense		-			(6	)		(1	)		(13	)
Interest income		13			1			25			3
Other income (expense), net		(11	)		72			(22	)		63
Total other expense:		2			67			2			53
Loss from continuing operations		(433	)		(747	)		(739	)		(2,308	)
Net loss from discontinued operations		-			(390	)		-			(796	)
Net loss		(433	)		(1,137	)		(739	)		(3,104	)
Less: Undeclared deemed dividend attributable to noncontrolling interest		-			(66	)		-			(129	)
Net loss attributable to Nephros, Inc. shareholders	$	(433	)	$	(1,203	)		$ (739	)	$	(3,233	)
Net loss per common share, basic and diluted from continuing operations		(0.04	)		(0.07	)		(0.07	)		(0.22	)
Net loss per common share, basic and diluted from discontinued operations		-			(0.04	)		-			(0.08	)
Net loss per common share, basic and diluted		(0.04	)		(0.11	)		(0.07	)		(0.30	)
Net loss per common share, basic and diluted, attributable to continuing noncontrolling interest		-			(0.01	)		-			(0.01	)
Net loss per common share, basic and diluted, attributable to Nephros, Inc, shareholders	$	(0.04	)	$	(0.12	)		(0.07	)	$	(0.31	)
Weighted average common shares outstanding, basic and diluted		10,297,429			10,299,148			10,297,429			10,265,267

Comprehensive loss:
Net loss	$	(433	)	$	(1,137	)	$	(739	)	$	(3,104	)
Other comprehensive loss, foreign currency translation adjustments, net of tax		-			-			-			(3	)
Comprehensive loss		(433	)		(1,137	)		(739	)		(3,107	)
Comprehensive loss attributable to noncontrolling interest		-			(66	)		-			(129	)
Comprehensive loss attributable to Nephros, Inc. shareholders	$	(433	)	$	(1,203	)	$	(739	)	$	(3,236	)

The accompanying notes are an integral part of these unaudited consolidated interim financial statements.

NEPHROS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(In thousands, except share amounts)

(Unaudited)

	Shares		Amount		Capital		Income		Deficit			Subtotal			Interest			Equity
	Three and six months ended June 30, 2023

	Common Stock				Additional Paid-in		Accumulated Other Comprehensive		Accumulated						Noncontrolling			Total Stockholders’
	Shares		Amount		Capital		Income		Deficit			Subtotal			Interest			Equity
Balance, December 31, 2022		10,297,429	$	10	$	148,413	$	-	$	(142,831	)	$	5,592		$	3,289		$	8,881
Net loss		-		-		-		-		(306	)		(306	)		-			(306	)
Change in non-controlling interest		-		-		3,262		-		-			3,262			(3,262	)		-
Stock-based compensation		-		-		346		-		-			346			(27	)		319
Balance, March 31, 2023		10,297,429	$	10	$	152,021	$	-	$	(143,137	)	$	8,894		$	-		$	8,894

Net loss		-	$	-	$	-	$	-	$	(433	)	$	(433	)	$	-		$	(433	)
Stock-based compensation		-		-		194		-		-			194			-			194
Balance, June 30, 2023		10,297,429	$	10	$	152,215	$	-	$	(143,570	)	$	8,655		$	-		$	8,655

	Three and six months ended June 30, 2022

	Common Stock				Additional Paid-in		Accumulated Other Comprehensive			Accumulated						Noncontrolling		Total Stockholders’
	Shares		Amount		Capital		Income			Deficit			Subtotal			Interest		Equity
Balance, December 31, 2021		10,198,712	$	10	$	147,346	$	64		$	(135,725	)	$	11,695		$	3,054	$	14,749
Net loss		-		-		-		-			(1,967	)		(1,967	)		-		(1,967	)
Change in non-controlling interest		-		-		-		-			-			-			188		188
Net unrealized losses on foreign currency translation, net of tax		-		-		-		(3	)		-			(3	)		-		(3	)
Exercise of warrants		60,374		-		163		-			-			163			-		163
Stock-based compensation		-		-		272		-			-			272			-		272
Balance, March 31, 2022		10,259,086	$	10	$	147,781	$	61		$	(137,692	)	$	10,160		$	3,242	$	13,402

Net loss		-	$	-	$	-	$	-		$	(1,137	)	$	(1,137	)	$	-	$	(1,137	)
Restricted stock vesting		44,732		-		-		-			-			-			-		-
Elimination of cumulative translation adjustment, upon closing of wholly owned foreign subsidiary		-		-		-		(61	)		-			(61	)		-		(61	)
Stock-based compensation		-		-		259		-			-			259			18		277
Balance, June 30, 2022		10,303,818	$	10	$	148,040	$	-		$	(138,829	)	$	9,221		$	3,260	$	12,481

The accompanying notes are an integral part of these unaudited consolidated interim financial statements.

NEPHROS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	2023			2022
	Six Months Ended June 30,
	2023			2022
OPERATING ACTIVITIES:
Net loss	$	(739	)	$	(3,104	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation of property and equipment		19			53
Amortization of intangible assets, license and supply agreement and finance lease right-of-use asset		88			143
Stock-based compensation, including stock options and restricted stock		513			549
Inventory obsolescence charge		106			108
Gain on foreign currency transactions		-			(60	)
Decrease (increase) in operating assets:
Accounts receivable		(290	)		(487	)
Inventory		920			23
Prepaid expenses and other current assets		35			74
Right-of-use assets		160			174
Other assets		2			22
(Decrease) increase in operating liabilities:
Accounts payable		(437	)		77
Accrued expenses		285			(262	)
Lease liabilities		(160	)		(179	)
Net cash provided by (used in) operating activities		502			(2,869	)
INVESTING ACTIVITIES:
Purchase of property and equipment		-			(137	)
Net cash used in investing activities		-			(137	)
FINANCING ACTIVITIES:
Proceeds from sale of subsidiary preferred shares to noncontrolling interest		-			188
Principal payments on finance lease liability		(4	)		(3	)
Principal payments on equipment financing		(1	)		(1	)
Payments on secured note payable		(71	)		(133	)
Proceeds from exercise of warrants		-			163
Net cash provided by (used in) financing activities		(76	)		214
Effect of exchange rates on cash and cash equivalents		-			(2	)
Net increase (decrease) in cash and cash equivalents		426			(2,794	)
Cash and cash equivalents, beginning of period		3,634			6,973
Cash and cash equivalents, end of period	$	4,060		$	4,179
Supplemental disclosure of cash flow information
Cash paid for interest	$	2		$	13
Supplemental disclosure of noncash investing and financing activities
Right-of-use asset obtained in exchange for operating lease liability	$	-		$	69

The accompanying notes are an integral part of these unaudited consolidated interim financial statement

NEPHROS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (unaudited)

Note 1 – Organization and Nature of Operations

Nephros, Inc. (“Nephros” or the “Company”) was incorporated under the laws of the State of Delaware on April 3, 1997. The Company was founded by health professionals, scientists and engineers affiliated with Columbia University to develop advanced end stage renal disease (“ESRD”) therapy technology and products.

Beginning in 2009, Nephros introduced high performance liquid purification filters to meet the demand for water purification in certain medical markets. The Company’s filters, generally classified as ultrafilters, are primarily used in hospitals for the prevention of infection from waterborne pathogens, such as legionella and pseudomonas, and in dialysis centers for the removal of biological contaminants from water and bicarbonate concentrate. The Company also develops and sells water filtration products for commercial applications, focusing on the hospitality and food service markets. The water filtration business is a reportable segment, referred to as the Water Filtration segment.

On October 4, 2022, the Company entered into a definitive asset purchase agreement with a third party for the sale of substantially all of the Company’s Pathogen Detection Systems (“PDS”) business, which had been previously reported as a separate reportable operating segment. As a result of the sale of the PDS business, we completely exited the PDS business. As a result, we determined that our PDS business had met the criteria for discontinued operations as of September 30, 2022. We no longer separately report the PDS business as a separate reportable segment in our financial statements including in this Quarterly Report for any of the periods presented.

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. Pursuant to such plan, 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 the extent 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 of the SRP Series A Preferred Stock was written to zero and the impact recorded to the Company’s additional paid in capital as the Company retained control of SRP.

The Company’s primary U.S. facilities are located at 380 Lackawanna Place, South Orange, New Jersey 07079 and 3221 Polaris Avenue, Las Vegas, Nevada 89102. These locations house the Company’s corporate headquarters, research, manufacturing, and distribution facilities.

Note 2 – Basis of Presentation and Liquidity

Interim Financial Information

The accompanying unaudited 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 consolidated balance sheet as of December 31, 2022 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 six months ended June 30, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023.

The 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, 2022.

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 consolidated financial statements include the accounts of Nephros, Inc. and its subsidiaries, including the Company’s wholly owned subsidiary Nephros International, which was dissolved during the quarter ended June 30, 2022, and SRP, 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 consolidated financial statements.

Use of Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“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, and assumptions used in determining stock compensation such as expected volatility and risk-free interest rate.

Liquidity

In February 2022, pursuant to a First Amendment to Series A Preferred Stock Purchase Agreement (the “Amendment”) among SRP and the holders of SRP’s outstanding shares of Series A Preferred Stock, SRP issued and sold an additional 100,003 shares of its Series A Preferred Stock at a price of $5.00 per share, resulting in total gross proceeds of $500,015. See “Note 12 – Stockholders’ Equity – Noncontrolling Interest,” below. In addition to the funds provided by the sale of these additional shares of Series A Preferred Stock, the Company and SRP also maintained a loan agreement under which the Company loaned $1.3 million to SRP, of which $1.0 million had been loaned during the year ended December 31, 2020. These loaned funds were used to fund SRP’s operating activities through the FDA 510(k) clearance process of SRP’s second-generation hemodiafiltration system, which was initially submitted to the FDA on February 24, 2021, and which received 510(k) clearance on May 13, 2022. 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. Accordingly, as of June 30, 2023, there was no outstanding balance of this loan.

The Company sustained operating losses every quarter through December 31, 2022. Although the Company has recently realized modest positive operating cash flows, net cash from operations has been mostly negative since the Company’s inception, generating an accumulated deficit of $143.6 million as of June 30, 2023. These operating losses and negative cash flows raise substantial doubt of the Company’s ability to continue as a going concern. The Company has realized positive cash flows during the first two quarters of 2023, partly due to revenue growth and partly due to certain actions the Company took during the second half of 2022. These actions included headcount and other expense reductions, the sale of PDS assets and discontinuance of PDS operations, the wind down and dissolution of SRP, customer price increases, and the recruiting and acquisition of additional sales staff to grow revenues. The Company believes these actions and the recent positive cash flows alleviate the substantial doubt as to the Company’s ability to continue as a going concern. Furthermore, based on these actions, as well as the cash that is available for the Company’s operations and projections of future Company operations, the Company believes that its 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 consolidated financial statements. However, in the event that 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.

Recently Adopted Accounting Pronouncements

In October 2021, the FASB issued ASU 2021-08, “Accounting for Contract Assets and Contract Liabilities from Contracts with Customers,” which requires that an entity recognize contract assets and contract liabilities acquired in a business combination in accordance with Accounting Standards Codification (“ASC”) 606. The guidance is effective for the Company beginning in the first quarter of fiscal year 2023 and should be applied prospectively. The Company adopted this guidance as of January 1, 2023 and the guidance did not have an impact on its consolidated financial statements.

Concentration of Credit Risk

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

Major Customers

For the three months ended June 30, 2023, and 2022, the following customers accounted for the following percentages of the Company’s revenues, respectively:

Customer	2023			2022
A		18	%		17	%
C		11	%		12	%
D		11	%		1	%
E		5	%		12	%
Total		45	%		42	%

For the six months ended June 30, 2023, and 2022, the following customers accounted for the following percentages of the Company’s revenues, respectively:

Customer	2023			2022
A		19	%		20	%
B		13	%		2	%
C		10	%		12	%
Total		42	%		34	%

As of June 30, 2023, and December 31, 2022, the following customers accounted for the following percentages of the Company’s accounts receivable, respectively:

Customer

2023

SEC Form 10-Q filed by Nephros Inc.