Depreciation and Amortization Expense Depreciation and amortization expense was approximately $58,000$55,000 for the three months ended JuneSeptember 30, 2013 compared to approximately $42,000$52,000 for the three months ended JuneSeptember 30, 2012. The increase of approximately $16,000Total depreciation and amortization expense is primarily due to amortization related to the asset recognized in conjunction with the License and Supply Agreement with Medica S.p.A (“License and Supply Agreement”) which began on April 23, 2012. Selling, General and Administrative Expenses Selling, general and administrative expenses were approximately $660,000$578,000 for the three months ended JuneSeptember 30, 2013 compared to approximately $838,000$1,006,000 for the three months ended JuneSeptember 30, 2012, a decrease of approximately $178,000$428,000 or 21%43%. The decrease is primarily due to decreases in legal, accounting and professional services fees of approximately $229,000 incurred during$188,000, decreases of approximately $174,000 related to personnel costs and decreases of approximately $66,000 related to travel and other costs. The decreases in personnel and travel costs are primarily related to the open CFO position as well as the reduction of the sales force from four individuals to one for the three months ended JuneSeptember 30, 2013 which related primarilycompared to the Rights Offering and therefore, are recorded in equity during the three months ended JuneSeptember 30, 2013. The decrease is partially offset by an increase in personnel costs and other costs of approximately $51,000.2012.
There was no interest income for the three months ended JuneSeptember 30, 2013 compared with $1,000or September 30, 2012.
Interest Expense
Interest expense was approximately $5,000 for the three months ended
June 30, 2012.Interest Expense
Interest expense was approximately $24,000 for the three months ended JuneSeptember 30, 2013 and related primarily to accrued interest recognized ason outstanding payables due to a result of the Senior Secured Note.vendor. We had no interest expense for the three months ended JuneSeptember 30, 2012.
Gain on Sale of Equipment
A gain of approximately $1,000 was recognized for the three months ended September 30, 2013 related to the sale of fully depreciated equipment.
Other expenseincome in the amount of approximately $19,000$1,000 for the three months ended JuneSeptember 30, 2013 was due to $15,000 received as a result of the STERIS agreement termination which was partially offset by approximately $14,000 related to warrant inducement expense and approximately $6,000 of foreign currency losses on invoices paid to an international suppler. These expenses were partially offset by approximately $1,000 of other income.Other income in the amount of approximately $57,000 for the threesupplier.
Nine months ended June 30, 2012 was comprised of approximately $18,000 of write-offs of old vendor invoices which are no longer due and approximately $39,000 of foreign currency gain on invoices paid to and due to an international supplier.Six Months Ended JuneSeptember 30, 2013 Compared to the Six MonthsNine months Ended JuneSeptember 30, 2012
Total net revenues for the sixnine months ended JuneSeptember 30, 2013 were approximately $1,096,000$1,514,000 compared to approximately $835,000$1,439,000 for the sixnine months ended JuneSeptember 30, 2012. Total net revenues increased approximately $261,000,$75,000, or 31%5%, mainly as a result of an increase of approximately $360,000$166,000 in water filter sales which increased from approximately $375,000$813,000 in 2012 to $735,000$979,000 in 2013, an increase of 96%20%. The underlying increase in water filter sales reflects the growth in key business segments of dialysis water and hospital water and is partially offset by a reduction in revenue of approximately $117,000 as a result of the ONR contract ending in March 2012.2012 in addition to which approximately $127,000 of anticipated sales credits are recorded to reflect the impact of a voluntary product recall of point of use filters (POU) announced on October 30, 2013. In addition, licensing revenues related to the Bellco license agreement were approximately $359,000$535,000 for the sixnine months ended JuneSeptember 30, 2013, an increase of $16,000,$26,000, compared to $343,000$509,000 for the sixnine months ended JuneSeptember 30, 2012. Cost of goods sold was approximately $421,000$610,000 for the sixnine months ended JuneSeptember 30, 2013 compared to approximately $257,000$448,000 for the sixnine months ended JuneSeptember 30, 2012. The increase of approximately $164,000$162,000 or 64%36% during the sixnine months ended JuneSeptember 30, 2013 compared to the same period in 2012 is primarily due to the increase of $216,000$241,000 in cost of water filter sales for the sixnine months ended JuneSeptember 30, 2013 compared to the same period in 2012. This increase was partially offsetby a reduction in cost of sales related to the ONR contract of approximately
$52,000.$52,000 in addition to which approximately $27,000 relating to the estimated impact of a voluntary product recall of point of use filters (POU) announced on October 30, 2013. The ONR contract ended as of March 31, 2012.
Research and development expenses were approximately
$483,000$687,000 and
$344,000$552,000 for the
sixnine months ended
JuneSeptember 30, 2013 and
JuneSeptember 30, 2012, respectively. This increase of approximately
$139,000,$135,000, or
40%24%, is primarily due to an increase in machine research and development costs of approximately
$106,000,$127,000 and an increase in research and development personnel related costs of approximately
$52,000$85,000. These increases are partially offset by a reduction in research and development materials and other project costs of approximately
$19,000$77,000 during the
sixnine months ended
JuneSeptember 30, 2013 compared to the same period in 2012. The increase in personnel costs is not due to an increase in headcount but rather due to the ONR contract having ended as of March 31, 2012. Time spent on the ONR contract in 2012 was reclassified to Cost of Goods Sold from Research and Development expenses. Since the contract ceased as of March 31, 2012, all of the personnel costs are included in Research and Development expenses in 2013.
Depreciation and Amortization Expense Depreciation and amortization expense was approximately
$114,000$169,000 for the
sixnine months ended
JuneSeptember 30, 2013 compared to approximately
$44,000$96,000 for the
sixnine months ended
JuneSeptember 30, 2012. The increase of approximately
$70,000$73,000 is due to amortization related to the asset recognized in conjunction with the License and Supply Agreement with Medica S.p.A (“License and Supply Agreement”) which began on April 23, 2012.
Selling, General and Administrative Expenses Selling, general and administrative expenses were approximately
$1,918,000$2,497,000 for the
sixnine months ended
JuneSeptember 30, 2013 compared to approximately
$1,558,000$2,564,000 for the
sixnine months ended
JuneSeptember 30, 2012,
an increasea decrease of approximately
$360,000$67,000 or
23%3%. The
increasedecrease is primarily due to
increases in personnel costs of approximately $276,000, approximately $204,000 related to fees incurred as a result of the issuance of a $1.3 million senior secured note (“Senior Secured Note”) to Lambda Investors LLC and increases in travel and other related expenses of approximately $109,000. These increases were partially offset by a decrease in legal, accounting and professional services fees of approximately $229,000 incurred during the
sixnine months ended
JuneSeptember 30, 2013 which related primarily to the Rights Offering and therefore, are recorded in equity during the
sixnine months ended
JuneSeptember 30,
2013.2013 and a decrease in other costs of approximately $36,000. These decreases were partially offset by increases in personnel related costs of $129,000 and increases in legal, accounting and professional services fees, other than those related to the equity offering, of approximately $69,000.
There was no interest income for the
sixnine months ended
JuneSeptember 30, 2013 compared with $2,000 for the
sixnine months ended
JuneSeptember 30, 2012.
Interest expense was approximately $47,000$52,000 for the sixnine months ended JuneSeptember 30, 2013 and2013. During such period, interest expense of approximately $47,000 related primarily to interest recognized as a result of the Senior Secured Note.Note and interest expense of approximately $5,000 related to accrued interest recognized on outstanding payable due to a vendor. We had no interest expense for the sixnine months ended JuneSeptember 30, 2012. Gain on Sale of Equipment A gain of approximately
$2,000$3,000 was recognized for the
sixnine months ended
JuneSeptember 30, 2013 related to the sale of fully depreciated equipment.
Other expense in the amount of approximately
$27,000$25,000 for the
sixnine months ended
JuneSeptember 30, 2013 was due to approximately $14,000 related to warrant inducement expense and approximately
$14,000$27,000 of foreign currency losses on invoices paid to an international suppler. These expenses were partially offset by approximately
$15,000 received as a result of the STERIS agreement termination and approximately $1,000 of other income.Other income in the amount of approximately $55,000 for the
sixnine months ended
JuneSeptember 30, 2012 was comprised of approximately $18,000 of write-offs of old vendor invoices which are no longer due and approximately $37,000 of
net foreign currency gain
on the adjustment of the license and supply fee payable at the September 30, 2012 exchange rate and net foreign currency loss on invoices paid to and due to an international supplier.
Liquidity and Capital Resources At
JuneSeptember 30, 2013, we had an accumulated deficit of approximately
$99,442,000$100,053,000 and we expect to incur additional losses in the foreseeable future at least until such time, if ever, that we are able to increase product sales or license revenue. We have financed our operations since inception primarily through the private placements of equity and debt securities, our initial public offering, license revenue, the March 2011 rights offering and concurrent private placement, and the April 2013 rights offering.
Our future liquidity sources and requirements will depend on many factors, including:
| · | 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. |
We expect to put our current capital resources to the following uses:
| · | 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. |
At
JuneSeptember 30, 2013, we had cash and cash equivalents totaling approximately
$298,000$168,000 and tangible assets of approximately
$882,000.$609,000. Tangible assets consist of total assets of approximately
$2,882,000,$2,556,000, reduced by other intangible assets (related to the Medica License and Supply Agreement) of approximately
$2,000,000.$1,947,000.
On June 27, 2011, we entered into a License Agreement with Bellco S.r.l., as licensee (“Bellco”), an Italy-based supplier of hemodialysis and intensive care products, for the manufacturing, marketing and sale of Nephros’ patented mid-dilution dialysis filters. This Agreement provides us with payments of €500,000, €750,000, and €600,000 on July 1, 2011, January 15, 2012 and January 15, 2013, respectively. All payments have been received. Beginning on January 1, 2015 through and including December 31, 2016, Bellco will pay to Nephros a royalty based on the number of units of Products sold in the Territory as follows: for the first 103,000 units sold, €4.50 per unit; thereafter, €4.00 per unit. Anticipated payments from this License Agreement will be a positive source of cash flow to our Company.
Our cash flow currently is not, and historically has not been, sufficient to meet our obligations and commitments. We must seek and obtain additional financing to fund our operations. If we cannot raise sufficient capital, we will be forced to curtail our planned activities and operations or cease operations entirely. There can be no assurance that we will be able to raise sufficient capital on a timely basis or on satisfactory terms or at all.
Net cash used in operating activities was approximately
$2,762,000$2,900,000 for the
sixnine months ended
JuneSeptember 30, 2013 (“2013 period”) compared to net cash used in operating activities of approximately
$143,000$1,089,000 for the
sixnine months ended
JuneSeptember 30, 2012 (“2012 period”). The most significant items contributing to this increase of approximately
$2,619,000$1,811,000 in cash used in operating activities during the
sixnine months ended
JuneSeptember 30, 2013 compared to the
sixnine months ended
JuneSeptember 30, 2012 are highlighted below:
| · | during the 2013 period, our net loss increased by approximately $601,000;$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 $577,000$831,000 during the 2013 period compared to a decrease of approximately $1,014,000$852,000 during the 2012 period; |
| · | our accounts payable and accrued expenses decreased by approximately $330,000$45,000 in aggregate in the 2013 period compared to an increase of approximately $58,000$286,000 in the aggregate in the 2012 period; |
Partially offsetting the above changes are the following items:
| · | our inventory decreased by approximately $166,000$16,000 during the 2013 period compared to an increase of approximately $21,000$47,000 during the 2012 period; |
| · | amortization expense related to assets associated with the License and Supply Agreement was approximately $109,000$162,000 for the 2013 period, an increase of $70,000$90,000 compared to the 2012 period; |
| · | during the 2013 period, our stock-based compensation expense increased by approximately $80,000;$66,000; |
| · | our prepaid expenses and other current assets decreased by approximately $37,000$71,000 in the 2013 period compared to a decrease of approximately $23,000$65,000 in the 2012 period. |
Net cash provided by investing activities of approximately
$2,000$3,000 for the
sixnine months ended
JuneSeptember 30, 2013 resulted from proceeds from the sale of fully depreciated equipment.Net cash used in investing activities for the
sixnine months ended
JuneSeptember 30, 2012 was approximately $666,000 due to $7,000 used for the purchase of equipment and $659,000 for the purchase of intangible assets associated with the Medica License and Supply Agreement.
Net cash provided by financing activities for the
sixnine months ended
JuneSeptember 30, 2013 of
$3,010,000,$3,019,000, net of equity issuance costs of approximately $229,000, resulted primarily from gross proceeds of $3.0 million related to the issuance of common stock related to the Rights Offering, proceeds from the issuance of the Senior Secured Note of $1.3 million and approximately
$239,000$248,000 of proceeds resulting from the exercise of warrants. Net cash provided by financing activities was partially offset bythe repayment of the $1.3 million Senior Secured Note. Net cash provided by financing activities for the
sixnine months ended
JuneSeptember 30, 2012 was approximately
$356,000$451,000 resulting from the exercise of warrants.
Forward-Looking Statements This report contains certain “forward-looking statements.” Such statements include statements regarding the efficacy and intended use of our technologies under development, the timelines for bringing such products to market and 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 guarantees 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 may not be able to continue as a going concern; |
| |
· | the voluntary recalls of point of use (POU) and DSU in-line ultrafilters used in hospital water treatment applications announced on October 30, 2013 and the related circumstances could subject us to claims or proceedings which may adversely impact our sales and revenues; |
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· | we face significant challenges in obtaining market acceptance of our products, which could adversely affect our potential sales and revenues; |
| |
· | there are product-related deaths or serious injuries or product malfunctions, which 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/or 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 FDC Act or any other statutes or regulations then we could be subject to enforcement actions by the FDA or other governmental agencies; |
| · | 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 manufacturers;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. |
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 SEC, including our Annual Report on Form 10-K for the fiscal year ended December 31, 2012 and our other periodic 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.
Off-Balance Sheet Arrangements We did not engage in any off-balance sheet arrangements during the sixnine month periods ended JuneSeptember 30, 2013 and 2012.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
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 Acting Chief Financial Officer, regarding the effectiveness of our disclosure controls and procedures pursuant to Securities and Exchange Act Rule 13a-15(b). Based upon that evaluation, our Chief Executive Officer and Acting 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 Our management, with the participation of the Chief Executive Officer and Acting Chief Financial Officer, has concluded that there were no changes in our internal control over financial reporting, that occurred during the quarter ended
JuneSeptember 30, 2013, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Through the evaluation of the Sarbanes-Oxley internal control assessment, a more structured approach, including checklists, reconciliations and analytical reviews, has been implemented to reduce risk in the financial reporting process.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings There are no currently pending legal proceedings and, as far as we are aware, no governmental authority is contemplating any proceeding to which we are a party or to which any of our properties is subject.
Item 5. Other InformationIn connection with the resignation of Gerald J. Kochanski as the Company’s Chief Financial Officer, on August 9, 2013, the Board of Directors of the Company appointed John C. Houghton, President and Chief Executive Officer, to also serve as the Company’s Acting Chief Financial Officer and Principal Financial and Accounting Officer.
Item
6. Exhibits 10.1 | First Amendment to Registration Rights Agreement dated as of May 23, 2013 by and between Nephros, Inc. and Lambda Investors LLC. |
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10.2 | Amendment No. 6 to Nephros, Inc. 2004 Stock Incentive Plan dated June 14, 2013. |
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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. |
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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. |
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101 | Interactive Data File |
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: August 13,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) |