NEPHROS INC - Quarter Report: 2013 September (Form 10-Q)

(Mark One)

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

 

For the quarterly period ended: September 30, 2013

 

¨ 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

 

 

 

 

 

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

x YES   ¨ NO

 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   ¨	Accelerated filer   ¨
Non-accelerated filer   ¨ (Do not check if a smaller reporting company)	Smaller reporting company   x

 

As of November 7,  2013, 18,034,632 shares of issuer’s common stock, with $0.001 par value per share, were outstanding. 

 

 

 

 

		(Unaudited)			(Audited)
		September 30, 2013			December 31, 2012
ASSETS
Current assets:
Cash and cash equivalents		$	168		$	47
Accounts receivable			104			935
Inventory, less allowances of $274 at September 30, 2013 and $269 at December 31, 2012			291			312
Prepaid expenses and other current assets			37			109
Total current assets			600			1,403
Property and equipment, net			9			16
Other assets, net of accumulated amortization			1,947			2,109
Total assets		$	2,556		$	3,528
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
Accounts payable		$	1,065		$	1,070
License and supply agreement fee payable			-			1,318
Accrued expenses			183			321
Deferred revenue, current portion			702			707
Total current liabilities			1,950			3,416
Long-term portion of deferred revenue			176			707
Total liabilities			2,126			4,123
Commitments and Contingencies (Note 10)
Stockholders’ equity (deficit):
Preferred stock, $.001 par value; 5,000,000 shares authorized at September 30, 2013 and December 31, 2012; no shares issued and outstanding at September 30, 2013 and December 31, 2012			-			-
Common stock, $.001 par value; 90,000,000 shares authorized at September 30, 2013 and December 31, 2012; 18,034,632 and 11,949,824 shares issued and outstanding at September 30, 2013 and December 31, 2012, respectively.			18			12
Additional paid-in capital			100,391			96,847
Accumulated other comprehensive income			74			76
Accumulated deficit			(100,053)			(97,530)
Total stockholders’ equity (deficit)			430			(595)
Total liabilities and stockholders’ equity (deficit)		$	2,556		$	3,528

		Three Months Ended September 30,						Nine Months Ended September 30,
		2013			2012			2013			2012
Net revenues:
Product revenues		$	242		$	438		$	979		$	930
License revenues			176			166			535			509
Total net revenues			418			604			1,514			1,439
Cost of goods sold			189			191			610			448
Gross margin			229			413			904			991
Operating expenses:
Research and development			204			208			687			552
Depreciation and amortization			55			52			169			96
Selling, general and administrative			578			1,006			2,497			2,564
Total operating expenses			837			1,266			3,353			3,212
Loss from operations			(608)			(853)			(2,449)			(2,221)
Interest income			-			-			-			2
Interest expense			(5)			-			(52)			-
Gain on sale of equipment			1			-			3			-
Other income (expense)			1			-			(25)			55
Net loss			(611)			(853)			(2,523)			(2,164)
Other comprehensive income (loss), foreign currency translation adjustments			-			17			(2)			7
Total comprehensive loss			(611)			(836)			(2,525)			(2,157)
Net loss per common share, basic and diluted		$	(0.03)		$	(0.07)		$	(0.17)		$	(0.20)
Weighted average common shares outstanding, basic and diluted			17,787,356			11,560,329			14,805,395			11,032,743

											Accumulated
								Additional			Other
		Common Stock						Paid-in			Comprehensive			Accumulated
		Shares			Amount			Capital			Income			Deficit			Total
Balance, December 31, 2012			11,949,824		$	12		$	96,847		$	76		$	(97,530)		$	(595)
Net loss															(2,523)			(2,523)
Net unrealized losses on foreign currency translation												(2)						(2)
Shareholder rights offering, net			5,000,000			5			2,766									2,771
Issuance of restricted stock			293,099
Exercise of warrants			791,709			1			247									248
Noncash stock-based compensation									517									517
Warrant modification									14									14
Balance, September 30, 2013			18,034,632		$	18		$	100,391		$	74		$	(100,053)		$	430

		Nine Months Ended September 30,
		2013			2012
Operating activities:
Net loss		$	(2,523)		$	(2,164)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation of property and equipment			7			6
Amortization of other assets			162			90
Noncash stock-based compensation, including stock options and restricted stock			401			335
Noncash warrant inducement			14			-
Inventory reserve			5			-
Gain/(loss) on foreign currency transactions			17			(3)
Gain on sale of equipment			(3)			-
(Increase) decrease in operating assets:
Accounts receivable			831			852
Inventory			16			(47)
Prepaid expenses and other current assets			71			65
Increase (decrease) in operating liabilities:
Accounts payable and accrued expenses			(45)			286
License and supply agreement fee payable			(1,318)			-
Deferred revenue			(535)			(509)
Net cash used in operating activities			(2,900)			(1,089)
Investing activities:
Purchase of property and equipment						(7)
Proceeds from sale of equipment			3			-
Purchase of intangible assets			-			(659)
Net cash provided by (used in) investing activities			3			(666)
Financing activities:
Proceeds from exercise of warrants			248			451
Proceeds from issuance of Senior Secured Note			1,300			-
Proceeds from issuance of common stock, net of equity issuance costs of $229			2,771			-
Payment of Senior Secured Note			(1,300)			-
Net cash provided by financing activities			3,019			451
Effect of exchange rates on cash and cash equivalents			(1)			1
Net increase (decrease) in cash			121			(1,303)
Cash, beginning of period			47			1,669
Cash, end of period		$	168		$	366
Supplemental disclosure of cash flow information
Cash paid for taxes		$	2		$	18
Restricted stock issued to settle liability		$	116		$	-
Payable related to license and supply agreement		$	-		$	1,266
Receivable related to license agreement		$	-		$	771
Fair value of stock options granted to Medica		$	-		$	273

 

 

On October 30, 2013, the Company filed a Current Report on Form 8-K announcing the voluntary recalls of its point of use (POU) and DSU in-line ultrafilters used in hospital water treatment applications. As a result, the Company has recalled all production lots of its POU filters, and also requested that customers remove and discard certain labeling/promotional materials for the products. In addition, the Company also requested, for the DSU in-line ultrafilter, that customers remove and discard certain labeling/promotional materials for the product.  These voluntary recalls do not affect the Company’s dialysis products.  The condensed consolidated interim financial statements for the period ended September 30, 2013 include product revenues and cost of goods sold adjustments of approximately $127,000 and $27,000, respectively, reflecting estimates of the financial impact of product recalled notified to the Company. The Company is unable to predict at this time what additional effect this recall might have on its business, financial condition, future prospects or reputation or whether the Company may be subject to future actions from the U.S. Food and Drug Administration. 

 

On November 12, 2013, we issued a senior secured note to Lambda Investors LLC in the principal amount of $1.5 million. The note bears interest at the rate of 12% per annum and matures on May 12, 2014, at which time all principal and accrued interest will be due. We have agreed to prepay amounts due under the note with the cash proceeds from (a) a rights offering, (b) any other equity or debt financing, or (c) the issuance or incurrence of any other indebtedness or the sale of any assets outside the ordinary course of business, in each case prior to the maturity date. If we do not pay principal and interest under the note when due, the interest rate increases to 16% per annum. In addition, we have undertaken to conduct a $2.75 million rights offering of common stock. We expect the offering price will be $0.30 per share. All of our stockholders and warrantholders will be eligible to participate in the offering on a pro rata basis based upon their proportionate ownership of our common stock, calculated on an as converted to common stock, fully-diluted basis. In connection with the note and the rights offering, we have agreed to pay Lambda Investors an 8%, or $120,000, sourcing/transaction fee. In addition, we will pay Lambda Investors’ legal fees and other expenses incurred in connection with the note and rights offering in the amount of $75,000. The warrants held by Lambda Investors have an exercise price of $0.40 per share and certain warrants have full ratchet anti-dilution protection.  The full ratchet anti-dilution protection for certain warrants will be triggered in connection with the rights offering as the $0.30 per share price is less than the $0.40 exercise price for these warrants.  In connection with the proposed rights offering, the Company agreed to amend the expiration date of the existing warrants held by Lambda Investors from March 10, 2017 to the date which is the five year anniversary of the closing of the rights offering.  Subject to the satisfaction of certain conditions, Lambda Investors has advised us that it intends to exercise its basic subscription privilege in full.  To the extent that after the closing of the rights offering there still remain unsubscribed shares, Lambda Investors will have the right, at its option, to purchase any or all such remaining unsubscribed shares within ten days of the closing of the rights offering.  In connection with the rights offering, we will file a registration statement on Form S-1, as may be amended, with the Securities and Exchange Commission.

 

Customer		2013				2012
A			31	%			18	%
B			36	%			36	%
C			16	%			15	%

Customer		2013				2012
A			57	%			4	%
B			31	%			2	%
C			-	%			85	%

		Nine Months Ended September 30, 2013
Risk-free interest rate			1.09-1.22	%
Volatility			127.46 - 131.79	%
Expected dividend yield			0	%
Expected term			5.75 - 6.25 yrs

		Nine Months Ended September 30,
		2013			2012
Shares underlying warrants outstanding			13,888,262			15,325,943
Shares underlying options outstanding			2,380,644			2,294,714
Unvested restricted stock			150,423			-

		Unaudited			Audited
		September 30, 2013			December 31, 2012
Total Gross Inventory, Finished Goods		$	565,000		$	581,000
Less: Inventory reserve			(274,000)			(269,000)
Total Inventory		$	291,000		$	312,000

Hospitals and Other Healthcare Facilities.  Our ultrafilters are designed to be a component of a proactive water treatment system, to assist in minimizing exposure to waterborne contaminants.  Our products can also be used for reactive contaminant control.  For example, during acute contaminant outbreaks, our ultrafilters have been used at hospitals and other healthcare facilities to provide an immediate barrier to waterborne contaminants.

We submitted information in response to a request for information (RFI) from the U.S. Marines Corps Warfighting Laboratory (MCWL).  The MCWL was seeking to obtain market research information from sources capable of fully satisfying the requirement for a commercial-off-the-shelf individual water purifier device capable of meeting the requirements of NSF Protocol P248. On September 19, 2013 we were awarded the contract for 30 (thirty) UF-40L units.  In October 2013, Marines at the Mountain Warfare Training Center in Bridgeport, California, tested the Marine Austere Patrolling System, a prototype including, among other things, the Nephros filters, a high-efficiency solar panel utilizing space technology, and coordinating rechargeable batteries.  Ongoing testing of the water and power systems is expected to conclude next spring.

 

	16

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	·	the availability of additional financing, through the sale of equity securities or otherwise, on commercially reasonable terms or at all;
	·	the costs involved in connection with the voluntary recalls of our point of use and DSU in-line ultrafilters used in hospital water treatment applications announced on October 30, 2013 and the related circumstances;
	·	the market acceptance of our products, and our ability to effectively and efficiently produce and market our products;

·

the continued progress in and the costs of clinical studies and other research and development programs;

·

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.

·

for the marketing and sales of our water-filtration products;

·

to pursue business development opportunities with respect to our chronic renal treatment system; and

·

for working capital purposes.

	18

·

during the 2013 period, our net loss increased by approximately $359,000;

·

during the 2013 period, our license and supply agreement fee payable decreased by approximately $1,318,000;

·

our accounts receivable decreased by approximately $831,000 during the 2013 period compared to a decrease  of approximately $852,000 during the 2012 period;

·

our accounts payable and accrued expenses decreased by approximately $45,000 in aggregate in the 2013 period compared to an increase of approximately $286,000 in the aggregate in the 2012 period;

·

our inventory decreased by approximately $16,000 during the 2013 period compared to an increase of approximately $47,000 during the 2012 period;

·

amortization expense related to assets associated with the License and Supply Agreement was approximately $162,000 for the 2013 period, an increase of $90,000 compared to the 2012 period;

·

during the 2013 period, our stock-based compensation expense increased by approximately $66,000;

·

our prepaid expenses and other current assets decreased  by approximately $71,000 in the 2013 period compared to a decrease of approximately $65,000 in the 2012 period.

	19

·

we may not be able to obtain funding if and when needed or on terms favorable to us in order to continue operations;

·

we may not have sufficient capital to successfully implement our business plan;

·

we may not be able to effectively market our products;

·

we may not be able to sell our water filtration products or chronic renal failure therapy products at competitive prices or profitably;

·

we may encounter problems with our suppliers, manufacturers and distributors;

·

we may encounter unanticipated internal control deficiencies or weaknesses or ineffective disclosure controls and procedures;

·

we may not obtain appropriate or necessary regulatory approvals to achieve our business plan;

·

products that appeared promising to us in research or clinical trials may not demonstrate anticipated efficacy, safety or cost savings in subsequent pre-clinical or clinical trials;

·

we may not be able to secure or enforce adequate legal protection, including patent protection, for our products; and

·

we may not be able to achieve sales growth in key geographic markets.

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31.1	Certification by the Chief Executive Officer and Acting Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification by the Chief Executive Officer and Acting 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

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	NEPHROS, INC.
Date: November 14, 2013	By:	/s/ John C. Houghton
	Name:	John C. Houghton
	Title:	President, Chief Executive Officer and Acting Chief Financial Officer (Principal Executive Officer and Principal Financial and Accounting Officer)