Unassociated Document
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
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: June
30, 2010
OR
o |
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.)
|
|
|
41
Grand Avenue
River
Edge, NJ
|
07661
|
(Address
of Principal Executive Offices)
|
(Zip
code)
|
(201)
343-5202
Registrant’s
Telephone Number, Including Area Code
_____________________________________________________________________
(Former
Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)
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 has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted 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 and post such files).
¨ 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
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
¨ YES
x NO
As of
August 13, 2010,
41,811,048 shares of issuer’s common stock, with $0.001 par value per share,
were outstanding.
Table
of Contents
|
|
Page No.
|
PART I –
FINANCIAL INFORMATION
|
|
|
|
|
Item
1.
|
Financial
Statements
|
|
|
|
|
|
Condensed
Consolidated Balance Sheets – June 30, 2010 (unaudited) and December 31,
2009 (audited)
|
1
|
|
|
|
|
Condensed
Consolidated Statements of Operations - Three and six months ended June
30, 2010 and 2009 (unaudited)
|
2
|
|
|
|
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Condensed
Consolidated Statements of Cash Flows – Six months ended June 30, 2010 and
2009 (unaudited)
|
3
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|
|
|
|
Notes
to Unaudited Condensed Consolidated Interim Financial
Statements
|
4
|
|
|
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
8
|
|
|
|
Item
4.
|
Controls
and Procedures
|
14
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|
|
PART
II – OTHER INFORMATION
|
|
|
|
|
Item
1.
|
Legal
Proceedings
|
14
|
|
|
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
14
|
|
|
|
Item
6.
|
Exhibits
|
15
|
|
|
|
SIGNATURES
|
|
16
|
PART
I – FINANCIAL INFORMATION
NEPHROS,
INC. AND SUBSIDIARY
CONDENSED
CONSOLIDATED BALANCE SHEETS
(In
thousands, except share amounts)
|
|
(Unaudited)
|
|
|
(Audited)
|
|
|
|
June
30,
2010
|
|
|
December
31,
2009
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
344 |
|
|
$ |
1,004 |
|
Accounts
receivable
|
|
|
652 |
|
|
|
629 |
|
Inventory,
less allowances of $18
|
|
|
697 |
|
|
|
653 |
|
Prepaid
expenses and other current assets
|
|
|
90 |
|
|
|
135 |
|
Total
current assets
|
|
|
1,783 |
|
|
|
2,421 |
|
Property
and equipment, net
|
|
|
138 |
|
|
|
210 |
|
Other
assets
|
|
|
21 |
|
|
|
21 |
|
Total
assets
|
|
$ |
1,942 |
|
|
$ |
2,652 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
585 |
|
|
$ |
455 |
|
Accrued
expenses
|
|
|
182 |
|
|
|
239 |
|
Deferred
revenue
|
|
|
100 |
|
|
|
- |
|
Total
current liabilities
|
|
|
867 |
|
|
|
694 |
|
Total
liabilities
|
|
|
867 |
|
|
|
694 |
|
|
|
|
|
|
|
|
|
|
Commitments
and Contingencies (Note 11)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
|
Preferred
stock, $.001 par value; 5,000,000 shares authorized at June 30, 2010 and
December 31, 2009; no shares issued and outstanding at June 30, 2010 and
December 31, 2009.
|
|
|
- |
|
|
|
- |
|
Common
stock, $.001 par value; 90,000,000 authorized at June 30, 2010 and
December 31, 2009; 41,811,048 and 41,604,798 shares issued and outstanding
at June 30, 2010 and December 31, 2009, respectively.
|
|
|
42 |
|
|
|
42 |
|
Additional
paid-in capital
|
|
|
91,936 |
|
|
|
91,815 |
|
Accumulated
other comprehensive income (loss)
|
|
|
(34 |
) |
|
|
76 |
|
Accumulated
deficit
|
|
|
(90,869 |
) |
|
|
(89,975 |
) |
Total
stockholders’ equity
|
|
|
1,075 |
|
|
|
1,958 |
|
Total
liabilities and stockholders’ equity
|
|
$ |
1,942 |
|
|
$ |
2,652 |
|
The
accompanying notes are an integral part of these unaudited condensed
consolidated interim financial statements
NEPHROS,
INC. AND SUBSIDIARY
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(In
thousands, except share and per share amounts)
(Unaudited)
|
|
Three
Months Ended
June
30
|
|
|
Six
Months Ended
June
30
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Product
revenue
|
|
$ |
809 |
|
|
$ |
527 |
|
|
$ |
1,799 |
|
|
$ |
1,158 |
|
Cost
of goods sold
|
|
|
527 |
|
|
|
336 |
|
|
|
1,127 |
|
|
|
788 |
|
Gross
margin
|
|
|
282 |
|
|
|
191 |
|
|
|
672 |
|
|
|
370 |
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
|
71 |
|
|
|
92 |
|
|
|
143 |
|
|
|
150 |
|
Depreciation
and amortization
|
|
|
32 |
|
|
|
65 |
|
|
|
68 |
|
|
|
137 |
|
Selling,
general and administrative
|
|
|
545 |
|
|
|
628 |
|
|
|
1,353 |
|
|
|
1,417 |
|
Total
operating expenses
|
|
|
648 |
|
|
|
785 |
|
|
|
1,564 |
|
|
|
1,704 |
|
Loss
from operations
|
|
|
(366 |
) |
|
|
(594 |
) |
|
|
(892 |
) |
|
|
(1,334 |
) |
Interest
income
|
|
|
1 |
|
|
|
1 |
|
|
|
1 |
|
|
|
6 |
|
Interest
expense
|
|
|
- |
|
|
|
(2 |
) |
|
|
- |
|
|
|
(2 |
) |
Other
income (expense)
|
|
|
- |
|
|
|
182 |
|
|
|
(2 |
) |
|
|
182 |
|
Net
loss
|
|
$ |
(365 |
) |
|
$ |
(413 |
) |
|
$ |
(893 |
) |
|
$ |
(1,148 |
) |
Net
loss per common share, basic and diluted
|
|
$ |
(0.01 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.02 |
) |
|
$ |
(0.03 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding, basic and diluted
|
|
|
41,735,423 |
|
|
|
38,264,462 |
|
|
|
41,670,111 |
|
|
|
38,214,921 |
|
The
accompanying notes are an integral part of these unaudited condensed
consolidated interim financial statements
NEPHROS,
INC. AND SUBSIDIARY
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In
thousands)
(Unaudited)
|
|
Six
Months Ended
June
30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
Operating
activities
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(893 |
) |
|
$ |
(1,148 |
) |
|
|
|
|
|
|
|
|
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
of property and equipment
|
|
|
68 |
|
|
|
137 |
|
Noncash
stock-based compensation
|
|
|
49 |
|
|
|
35 |
|
|
|
|
|
|
|
|
|
|
(Increase)
decrease in operating assets:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(78 |
) |
|
|
77 |
|
Inventory
|
|
|
(101 |
) |
|
|
(48 |
) |
Prepaid
expenses and other current assets
|
|
|
44 |
|
|
|
87 |
|
|
|
|
|
|
|
|
|
|
Increase
(decrease) in operating liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
|
92 |
|
|
|
(570 |
) |
Deferred
revenue
|
|
|
100 |
|
|
|
- |
|
Net
cash used in operating activities
|
|
|
(719 |
) |
|
|
(1,430 |
) |
|
|
|
|
|
|
|
|
|
Investing
activities
|
|
|
|
|
|
|
|
|
Maturities
of short-term investments
|
|
|
- |
|
|
|
7 |
|
Net
cash provided by investing activities
|
|
|
- |
|
|
|
7 |
|
|
|
|
|
|
|
|
|
|
Financing
activities
|
|
|
|
|
|
|
|
|
Proceeds
from stock options exercised
|
|
|
72 |
|
|
|
- |
|
Net
cash provided by financing activities
|
|
|
72 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rates on cash
|
|
|
(13 |
) |
|
|
7 |
|
Net
decrease in cash
|
|
|
(660 |
) |
|
|
(1,416 |
) |
Cash,
beginning of year
|
|
|
1,004 |
|
|
|
2,306 |
|
Cash,
end of year
|
|
$ |
344 |
|
|
$ |
890 |
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$ |
- |
|
|
$ |
2 |
|
Cash
paid for taxes
|
|
|
2 |
|
|
|
3 |
|
The
accompanying notes are an integral part of these unaudited condensed
consolidated interim financial statements
NEPHROS,
INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
1.
Basis
of Presentation and Going Concern |
Interim
Financial Information
The
accompanying unaudited condensed consolidated interim financial statements of
Nephros, Inc. and its wholly owned subsidiary, Nephros International, Limited,
(collectively, the “Company”) should be read in conjunction with the audited
consolidated financial statements and notes thereto included in the Company’s
2009 Annual Report on Form 10-K filed with the Securities and Exchange
Commission (the “SEC”) on April 2, 2010. The accompanying consolidated financial
statements have been prepared in accordance with accounting principles generally
accepted in the United States of America (“GAAP”) for interim financial
information and in accordance with the instructions to Form 10-Q and Article 8
and Article 10 of Regulation S-X. Accordingly, since they are interim
statements, the accompanying consolidated financial statements do not include
all of the information and notes required by GAAP for a complete financial
statement presentation. The condensed consolidated balance sheet as of December
31, 2009 was derived from the Company’s audited consolidated financial
statements but does not include all disclosures required by GAAP. In the opinion
of management, the interim consolidated financial statements reflect all
adjustments consisting of normal, recurring adjustments that are necessary for a
fair presentation of the financial position, results of operations and cash
flows for the condensed consolidated interim periods presented. Interim results
are not necessarily indicative of results for a full year. All significant
intercompany transactions and balances have been eliminated in
consolidation.
Use
of Estimates
The
preparation of financial statements in conformity with U.S. generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the Company’s condensed consolidated financial
statements and accompanying notes. Actual results could differ materially from
those estimates.
Going
Concern and Management’s Response
The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. The Company’s recurring losses and difficulty
in generating sufficient cash flow to meet its obligations and sustain its
operations raise substantial doubt about its ability to continue as a going
concern. The condensed consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty. Based on the
Company’s current cash flow projections, it will need to raise additional funds
through either the licensing or sale of its technologies or additional public or
private offerings of its securities. The Company continues to investigate
strategic funding opportunities as they are identified. However, there is no
guarantee that the Company will be able to obtain further financing. If it is
unable to raise additional funds on a timely basis or at all, the Company would
not be able to continue its operations.
On May
21, 2010, the Company filed a Form S-1 in which the Company offered up to
500,000 units, each unit consisting of 25 shares of our common stock and
warrants to purchase an additional 25 shares of our common stock. The warrants
are exercisable at any time after the closing date of the offering and on or
before the five year anniversary of their initial exercise date. Units will not
be issued or certificated. The units will separate immediately and the common
stock and warrants will be issued separately and the common stock and warrants
will trade separately. As of the date of this Form 10-Q, the SEC has
not declared the Form S-1 effective and, as a result, the Company has not sold
any units.
The
Company has incurred significant losses in its operations in each quarter since
inception. For the six months ended June 30, 2010 and 2009, the Company has
incurred net losses of approximately $893,000 and $1,148,000, respectively. In
addition, the Company has not generated positive cash flow from operations for
the three and six months ended June 30, 2010 and 2009. To become profitable, the
Company must increase revenue substantially and achieve and maintain positive
gross and operating margins. If the Company is not able to increase revenue and
gross and operating margins sufficiently to achieve profitability, the Company’s
results of operations and financial condition will be materially and adversely
affected.
The
Company’s current operating plans primarily include the continued development
and support of the Company’s business in the European and Canadian markets,
organizational changes necessary to expand the commercialization of the
Company’s water filtration business and the completion of current year
milestones that are included in the Office of Naval Research
appropriation.
There can
be no assurance that the Company’s future cash flow will be sufficient to meet
its obligations and commitments. If the Company is unable to generate sufficient
cash flow from operations in the future to service its commitments the Company
will be required to adopt alternatives, such as seeking to raise debt or equity
capital, curtailing its planned activities or ceasing its operations. There can
be no assurance that any such actions could be effected on a timely basis or on
satisfactory terms or at all, or that these actions
would enable the Company to continue to satisfy its capital
requirements.
NEPHROS,
INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
1.
Basis
of Presentation and Going Concern
(continued) |
The
Company continues to investigate additional funding opportunities. However,
there can be no assurance that the Company will be able to obtain further
financing, do so on reasonable terms or do so on terms that would not
substantially dilute the equity interests in the Company. If the Company is
unable to raise additional funds on a timely basis, or at all, the Company will
not be able to continue its operations.
2.
Concentration
of Credit Risk |
For the
six months ended June 30, 2010 and 2009, the following customers accounted for
the following percentages of the Company’s sales, respectively.
Customer
|
|
2010
|
|
|
2009
|
|
A
|
|
|
49
|
%
|
|
|
41
|
%
|
B
|
|
|
37
|
%
|
|
|
49
|
%
|
As of
June 30, 2010 and December 31, 2009, the following customers accounted for
the following percentages of the Company’s accounts receivable,
respectively.
Customer
|
|
2010
|
|
|
2009
|
|
A
|
|
|
61
|
%
|
|
|
44
|
%
|
B
|
|
|
19
|
%
|
|
|
34
|
%
|
The
Company’s OLpur MDHDF filter series and Dual Stage Ultrafilter water
filtration system products are manufactured by the same
vendor.
Revenue
is recognized in accordance with Accounting Standards Codification (ASC) Topic
605. Four basic criteria must be met before revenue can be recognized: (i)
persuasive evidence of an arrangement exists; (ii) delivery has occurred or
services have been rendered; (iii) the fee is fixed or determinable; and (iv)
collectability is reasonably assured.
The
Company recognizes revenue related to product sales when delivery is confirmed
by its external logistics provider and the other criteria of ASC Topic 605 are
met. Product revenue is recorded net of returns and allowances. All costs and
duties relating to delivery are absorbed by the Company. All shipments are
currently received directly by the Company’s customers.
4.
Stock-Based Compensation
The
Company accounts for stock-based compensation in accordance with ASC Topic 718
by recognizing the fair value of stock-based compensation in the statement of
operations. The fair value of the Company’s stock option awards are estimated
using a Black-Scholes option valuation model. This model requires the input of
highly subjective assumptions and elections including expected stock price
volatility and the estimated life of each award. In addition, the calculation of
compensation costs requires that the Company estimate the number of awards that
will be forfeited during the vesting period. The fair value of stock-based
awards is amortized over the vesting period of the award. For stock-based awards
that vest based on performance conditions (e.g. achievement of certain
milestones), expense is recognized when it is probable that the condition will
be met.
For the
three months ended June 30, 2010 and 2009, stock-based compensation expense was
approximately $22,000 and $24,000, respectively. For the six months
ended June 30, 2010 and 2009, stock-based compensation expense was approximately
$49,000 and $35,000, respectively.
There was
no tax benefit related to expense recognized in the three and six months ended
June 30, 2010 and 2009, as the Company is in a net operating loss
position. As of June 30, 2010, there was approximately $170,000 of
total unrecognized compensation cost related to unvested share-based
compensation awards granted under the equity compensation plans which will be
amortized over the weighted average remaining requisite service period of 2.4
years. Such amount does not include the effect of future grants of equity
compensation, if any. Of the total $170,000, the Company expects to recognize
approximately 24% in the remaining interim periods of 2010, approximately 46% in
2011, approximately 18% in 2012 and approximately 12% in 2013.
NEPHROS,
INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
5.
Comprehensive Income (Loss)
Comprehensive
income (loss), as defined in ASC Topic 220, is the total of net income (loss)
and all other non-owner changes in equity (or other comprehensive income (loss))
such as unrealized gains or losses on securities classified as
available-for-sale and foreign currency translation adjustments. As of June 30,
2010, accumulated other comprehensive loss was approximately
$34,000. As of December 31, 2009, accumulated other comprehensive
income was approximately $76,000.
6.
Loss per Common Share
In
accordance with ASC Topic 260-10, net loss per common share amounts (“basic
EPS”) are computed by dividing net loss attributable to common stockholders by
the weighted-average number of common shares outstanding and excluding any
potential dilution. Net loss per common share amounts assuming dilution
(“diluted EPS”) is generally computed by reflecting potential dilution from
conversion of convertible securities and the exercise of stock options and
warrants. However, because their effect is antidilutive, the Company has
excluded stock options and warrants aggregating 9,335,109 and 12,399,475 shares,
respectively, from the computation of diluted EPS for the six month periods
ended June 30, 2010 and 2009, respectively.
7.
Recently Adopted Accounting Pronouncements
In
December 2009, the Financial Accounting Standards Board (“FASB”) issued an
amendment to ASC Topic 810-Improvements to Financial Reporting By Enterprises
Involved with Variable Interest Entities. This amendment to ASC Topic 810
requires a qualitative approach for determining the primary beneficiary of a
variable interest entity and replaces the quantitative evaluation previously set
forth under FASB Interpretation No. 46 (revised December 2003), Consolidation of
Variable Interest Entities. This approach is focused on identifying the
reporting entity that has the ability to direct the activities of a variable
interest entity that most significantly affects the entity's economic
performance and has the obligation to absorb the entity's losses or has the
right to receive benefits from the entity. The amendment, among other things,
will require enhanced disclosures about a reporting entity's involvement in
variable interest entities. The guidance under the amendment to ASC Topic 810
will be effective for the first annual period beginning after November 15, 2009,
and interim periods within that first annual period. The Company adopted the
pronouncement on January 1, 2010 resulting in no impact to the Company’s
consolidated balance sheets, statements of income and cash flows. .
In
February 2010, the FASB issued an amendment which requires that an SEC filer, as
defined, evaluate subsequent events through the date that the financial
statements are issued. The update also removed the requirement for an SEC filer
to disclose the date through which subsequent events have been evaluated. The
adoption of this guidance on January 1, 2010 did not have a material effect on
the Company’s consolidated financial statements.
In
January 2010, the FASB issued an amendment to ASC Topic 820- Improving
Disclosures about Fair Value Measurements, which amends the existing fair value
measurement and disclosure guidance currently included in ASC Topic 820, Fair
Value Measurements and Disclosures, to require additional disclosures regarding
fair value measurements. Specifically, the amendment to ASC Topic 820 requires
entities to disclose the amounts of significant transfers between Level 1 and
Level 2 of the fair value hierarchy and the reasons for these transfers, the
reasons for any transfer in or out of Level 3 and information in the
reconciliation of recurring Level 3 measurements about purchases, sales,
issuances and settlements on a gross basis. In addition, this amendment also
clarifies the requirement for entities to disclose information about both the
valuation techniques and inputs used in estimating Level 2 and Level 3 fair
value measurements. This amendment is effective for interim and annual reporting
periods beginning after December 15, 2009, except for additional disclosures
related to Level 3 fair value measurements, which are effective for fiscal years
beginning after December 15, 2010. The adoption of this amendment did not impact
the Company’s consolidated financial statements or results of
operations.
8.
New Accounting Pronouncements
In April
2010, the FASB issued an Accounting Standards Update which provides guidance on
defining a milestone and determining when it may be appropriate to apply the
milestone method of revenue recognition for research or development
transactions. Research or development arrangements frequently include payment
provisions whereby a portion or all of the consideration is contingent upon
milestone events such as successful completion of phases in a study or achieving
a specific result from the research or development efforts. The amendments in
this standard provide guidance on the criteria that should be met for
determining whether the milestone method of revenue recognition is appropriate.
This standard is effective for fiscal years and interim periods within those
years beginning on or after June 15, 2010, with early adoption permitted. This
standard is effective for the Company on January 1, 2011. The Company is
currently evaluating the impact that the adoption of this standard will have on
the Company’s consolidated financial condition, results of operations, and
disclosures.
NEPHROS,
INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
9.
Fair Value of Financial Instruments
The
carrying amounts of cash and cash equivalents, short-term investments, accounts
receivable, accounts payable and accrued expenses approximate fair value due to
the short-term maturity of these instruments.
The
Company had no financial assets held at fair value at June 30, 2010 or December
31, 2009.
10. Inventory,
net
Inventory
is stated at the lower of cost or market using the first-in first-out method.
The Company’s inventory as of June 30, 2010 and December 31, 2009 was
approximately as follows:
|
|
Unaudited
|
|
|
Audited
|
|
|
|
June
30,
2010
|
|
|
December 31,
2009
|
|
Raw
Materials
|
|
$
|
254,000
|
|
|
$
|
257,000
|
|
Finished
Goods
|
|
|
461,000
|
|
|
|
414,000
|
|
Total
Gross Inventory
|
|
$
|
715,000
|
|
|
$
|
671,000
|
|
Less:
Inventory reserve
|
|
|
(18,000
|
)
|
|
|
(18,000
|
)
|
Total
Inventory
|
|
$
|
697,000
|
|
|
$
|
653,000
|
|
11. Commitments
and Contingencies
On March
30, 2010, Ernest Elgin, III resigned as the Company’s President and Chief
Executive Officer and also resigned from the Board of Directors. In
connection with Mr. Elgin’s resignation, the Company entered into a separation,
release and consulting agreement with Mr. Elgin, pursuant to which the Company
paid Mr. Elgin his current salary through April 16, 2010, paid his applicable
COBRA premiums through April 30, 2010 and, during any time that his COBRA
coverage is in effect in 2010, will reimburse him for out-of-pocket payments
made in 2010 under his healthcare coverage up to $5,000, which is the deductible
under the healthcare coverage. Mr. Elgin was available to consult
with the Company for up to 15 hours a week until May 31, 2010, for which the
Company paid Mr. Elgin at the rate of 50% of his current salary from April 16 to
May 31, 2010. The Company has extended the consulting period for four
months during which Mr. Elgin has and will be available to consult with the
Company for up to 7.5 hours a week and during which the Company paid and will
pay Mr. Elgin 25% of his current salary. The agreement contains customary
release and confidentiality terms. The maximum value of the severance pay was
approximately $55,000. As of June 30, 2010, the remaining unpaid
but accrued balance is approximately $22,000.
Gerald
Kochanski, our Chief Financial Officer, served as the acting Chief Executive
Officer from March 30, 2010 until April 5, 2010. As of April 6, 2010, Paul
Mieyal, a member of the Board of Directors, has served as the acting Chief
Executive Officer. Dr. Mieyal is a Vice President of Wexford Capital LP, the
managing member of Lambda Investors LLC, which is the beneficial owner of
approximately 44.2% of the Company’s outstanding stock based on common stock and
warrants held at June 30, 2010.
Suppliers
The
Company entered into an agreement in December 2003, as amended in June 2005,
with a fiber supplier (“FS”), a manufacturer of medical and technical membranes
for applications such as dialysis, to continue to produce the fiber for the
OLpur MDHDF filter series. Pursuant to the agreement, the FS is the Company’s
exclusive provider of the fiber for the OLpur MDHDF filter series in the
European Union as well as certain other territories. On January 18, 2010 the FS
notified the Company that it is exercising its right to terminate the supply
agreement. Termination of the supply agreement was effective on July 18, 2010.
The Company has an adequate supply of fiber inventory on hand. The FS noted its
desire to negotiate and execute a new supply agreement with the Company.
Negotiations on terms of a new supply agreement are ongoing.
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations.
This
discussion should be read in conjunction with our consolidated financial
statements included in this Quarterly Report on Form 10-Q and the notes thereto,
as well as the other sections of this Quarterly Report on Form 10-Q, including
the “Certain Risks and Uncertainties” section hereof, and our Annual Report on
Form 10-K for the year ended December 31, 2009, including the “Certain Risks and
Uncertainties” and “Description of Business” sections thereof. This discussion
contains a number of forward-looking statements, all of which are based on our
current expectations and could be affected by the uncertainties and risk factors
described in this Quarterly Report and our Annual Report on Form 10-K for the
year ended December 31, 2009. Our actual results may differ
materially.
Immediate
Need for Capital
We have
incurred significant losses in our operations in each quarter since
inception. In addition, we have not generated positive cash flow from
operations for the year ended December 31, 2008 or 2009 or for the three or six
months ended June 30, 2010. Our recurring losses and difficulty in
generating sufficient cash flow to meet our obligations and sustain our
operations raise substantial doubt about our ability to continue as a going
concern. We need to raise operating funds through either the
licensing or sale of our technologies or public or private offerings of our
securities. While we are investigating strategic funding
opportunities, we might not be able to raise funds on a timely basis or on
acceptable terms or at all. If we fail to raise capital, we expect our funds will be
depleted in the fourth quarter of 2010, and we might not be able to continue our
operations.
Financial
Operations Overview
Revenue Recognition: Revenue
is recognized in accordance with ASC Topic 605. Four basic criteria must be met
before revenue can be recognized: (i) persuasive evidence of an arrangement
exists; (ii) delivery has occurred or services have been rendered; (iii) the fee
is fixed and determinable; and (iv) collectability is reasonably
assured.
Cost of Goods Sold: Cost of
goods sold represents the acquisition cost for the products we purchase from our
third party manufacturers as well as damaged and obsolete inventory written
off.
Research and Development:
Research and development expenses consist of costs incurred in identifying,
developing and testing product candidates. These expenses consist primarily of
salaries and related expenses for personnel, fees of our scientific and
engineering consultants and subcontractors and related costs, clinical studies,
machine and product parts and software and product testing. We expense research
and development costs as incurred.
Selling, General and
Administrative: Selling, general and administrative expenses consist
primarily of sales and marketing expenses as well as personnel and related costs
for general corporate functions, including finance, accounting, legal, human
resources, facilities and information systems expense.
Business
Overview
Founded
in 1997, we are a Delaware corporation that has been engaged primarily in the
development of hemodiafiltration, or HDF, products and technologies for treating
patients with End Stage Renal Disease, or ESRD. In January 2006, we introduced
our new Dual Stage Ultrafilter (the “DSU”) water filtration system, which
represents a new and complementary product line to our existing ESRD therapy
business.
We
currently have three products in various stages of development in the HDF
modality to deliver improved therapy to ESRD patients:
|
·
|
OLpur
MDHDF filter series (which we sell in various countries in Europe and
currently consists of our MD190 and MD220 diafilters); to our knowledge,
it is the only filter designed expressly for HDF therapy and employs our
proprietary Mid-Dilution Diafiltration
technology;
|
|
·
|
OLpur
H2H, our add-on module designed to allow the most common types of
hemodialysis machines to be used for HDF therapy;
and
|
|
·
|
OLpur
NS2000 system, our stand-alone HDF machine and associated filter
technology.
|
We have
also developed our OLpur HD 190 high-flux dialyzer cartridge, which incorporates
the same materials as our OLpur MD series but does not employ our proprietary
Mid-Dilution Diafiltration technology. Our OLpur HD190 was designed for use with
either hemodialysis or hemodiafiltration machines, and received its approval
from the U.S. Food and Drug Administration, or FDA , under Section 510(k) of the
Food, Drug and Cosmetic Act, or the FDC Act, in June 2005.
OLpur and
H2H are among our trademarks for which U.S. registrations are pending. H2H is a
registered European Union trademark. We have assumed that the reader understands
that these terms are source-indicating. Accordingly, such terms appear
throughout the remainder of this Annual Report without trademark notices for
convenience only and should not be construed as being used in a descriptive or
generic sense.
We
believe that products in our OLpur MDHDF filter series are more effective than
any products currently available for ESRD therapy because they are better at
removing certain larger toxins (known in the industry as “middle molecules”
because of their heavier molecular weight) from blood. The accumulation of
middle molecules in the blood has been related to such conditions as
malnutrition, impaired cardiac function, carpal tunnel syndrome, and
degenerative bone disease in the ESRD patient. We also believe that OLpur H2H
will, upon introduction, expand the use of HDF as a cost-effective and
attractive alternative for ESRD therapy.
We
believe that our products will reduce hospitalization, medication and care costs
as well as improve patient health (including reduced drug requirements and
improved blood pressure profiles), and therefore, quality of life, by removing a
broad range of toxins through a more patient-friendly, better-tolerated process.
In addition, independent studies in Europe have indicated that, when compared
with dialysis as it is currently offered in the United States, HDF can reduce
the patient’s mortality risk by up to 35%. We believe that the OLpur MDHDF
filter series and the OLpur H2H will provide these benefits to ESRD patients at
competitive costs and without the need for ESRD treatment providers to make
significant capital expenditures in order to use our products. We also believe
that the OLpur NS2000 system, if successfully developed, will be the most
cost-effective stand-alone hemodiafiltration system available.
In the
first quarter of 2007, we received approval from the FDA for our Investigational Device
Exemption (“IDE”) application for the clinical evaluation of our OLpūr H2H
module and OLpūr MD 220 filter. We completed the patient treatment phase of our
clinical trial during the second quarter of 2008. We submitted our data to
the FDA with our 510(k) application on these products in November 2008.
Following its review of the application, the FDA requested additional
information from us. We replied to the FDA inquiries on March 13,
2009.
On June
30, 2010, we received a final decision letter from the FDA for our 510(k)
submission which stated that the FDA could not reach a substantial equivalence
determination for our hemodiafiltration (HDF) system. An in-person meeting with
the FDA has been scheduled for September 10, 2010, to discuss the issues raised
in the current FDA letter as well as the process for moving
forward. Based upon the meeting with the FDA reviewers, we will
determine the appropriate course of action, which could include filing
a new 510(k) application or filing an appeal related to the
current application. We have engaged King & Spalding LLP as regulatory
counsel to advise us in our interactions with the FDA. We also intend
to utilize the FDA’s Ombudsman process, as applicable. The current decision by
the U.S. FDA with regard to our HDF system does not impact our ability to market
and sell our mid-dilution (MD) filters for hemodiafiltration procedures outside
of the U.S.
In
January 2006, we introduced our new Dual Stage Ultrafilter (the “DSU”) water
filtration system. Our DSU represents a new and complementary product line to
our existing ESRD therapy business. The DSU incorporates our unique and
proprietary dual stage filter architecture and is, to our knowledge, the only
water filter that allows the user to sight-verify that the filter is properly
performing its cleansing function. Our research and development work on the
OLpur H2H and MD Mid-Dilution filter technologies for ESRD therapy provided the
foundations for a proprietary multi-stage water filter that we believe is cost
effective, extremely reliable, and long-lasting. We believe our DSU can offer a
robust solution to a broad range of contaminated water and disease prevention
issues. Hospitals are particularly stringent in their water quality
requirements; transplant patients and other individuals whose immune systems are
compromised can face a substantial infection risk in drinking or bathing with
standard tap water that would generally not present a danger to individuals with
normal immune function. The DSU is designed to remove a broad range of bacteria,
viral agents and toxic substances, including salmonella, hepatitis, cholera,
HIV, Ebola virus, ricin toxin, legionella, fungi and e-coli. With over 5,800
registered hospitals in the United States alone (as reported by the American
Hospital Association in Fast Facts of November 11, 2009), we believe the
hospital shower and faucet market can offer us a valuable opportunity as a first
step in water filtration.
Due to
the ongoing concerns of maintaining water quality, on October 7, 2008, we filed
a 510(k) application for approval to market our DSU to dialysis clinics for
in-line purification of dialysate water. On July 1, 2009, we received FDA
approval of the DSU to be used to filter biological contaminants from water and
bicarbonate concentrate used in hemodialysis procedures.
In 2006,
the U.S. Defense Department budget included an appropriation for the U.S. Marine
Corps for development of a dual stage water ultra filter. In connection with
this Federal appropriation of approximately $1 million, we worked on the
development of a personal potable water purification system for use by
warfighters. Work on this project was completed in August 2009 and we billed
approximately $900,000 during the twenty months ended August 2009. In August
2009, we were awarded a new $1.8 million research contract from the Office of
Naval Research (ONR) for continued development of a potable dual-stage military
water purifying filter. The research contract is an expansion of our former ONR
contract and is being performed as part of the Marine Corps Advanced Technology
Demonstration (ATD) project. The primary objective of this expanded research
program is to select concepts and functional prototype filter/pump units that
were developed during the first phase of the project, and further develop them
into smaller field-testable devices that can be used for military evaluation
purposes. An advantage of our ultrafilter is the removal of viruses, which are
not removed with commercially available off-the-shelf microfilter devices. Such
devices generally rely on a secondary chemical disinfection step to make the
water safe to drink. The expanded contract also includes research geared toward
improving membrane performance, improving device durability, developing larger
squad-level water purifier devices, and investigating desalination filter/pump
devices for emergency-use purposes. Approximately $1,093,000 of revenue has been
recognized on this new project since September 2009 of
which approximately $670,000 was recognized on this project during the
six months ended June 30, 2010.
We have
also introduced the DSU to various government agencies as a solution to
providing potable water in emergency response situations. We have also begun
investigating a range of commercial, industrial and retail opportunities for our
DSU technology.
On March
23, 2010, we announced that Nephros signed a development agreement with STERIS
Corporation to jointly develop filtration-based products for medical device
applications. Under the terms of the contract Nephros received a
$100,000 payment from STERIS Corporation during the second quarter of
2010. This $100,000 is accounted for as Deferred Revenue on the
Balance Sheet at June 30, 2010 since the work performed in Q2 was preparatory in
nature. The contract has several milestones identified that, if reached, will
result in additional cumulative $100,000 in payments to Nephros. We
expect we will achieve the milestones during the remainder of 2010 and in early
2011.
Critical
Accounting Policies
The
discussion and analysis of our consolidated financial condition and results of
operations are based upon our condensed financial statements. These condensed
financial statements have been prepared following the requirements of accounting
principles generally accepted in the United States (“GAAP”) and Rule 8-03 of
Regulation S-X for interim periods and require us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and liabilities. On an
ongoing basis, we evaluate our estimates, including those related to potential
impairment of investments and share-based compensation expense. As these are
condensed consolidated financial statements, you should also read expanded
information about our critical accounting policies and estimates provided in
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations,” included in our Form 10-K for the year ended December 31, 2009.
There have been no material changes to our critical accounting policies and
estimates from the information provided in our Form 10-K for the year ended
December 31, 2009.
New
Accounting Pronouncements
See Note
8 to our condensed consolidated financial statements set forth in Item 1 of this
quarterly report for information regarding new accounting
pronouncements.
Results
of Operations
Fluctuations
in Operating Results
Our
results of operations have fluctuated significantly from period to period in the
past and are likely to continue to do so in the future. We anticipate that our
quarterly results of operations will be impacted for the foreseeable future by
several factors including the progress and timing of expenditures related to our
research and development efforts, as well as marketing expenses related to
product launches. Due to these fluctuations, we believe that the period to
period comparisons of our operating results are not a good indication of our
future performance.
Three
Months Ended June 30, 2010 Compared to the Three Months Ended June 30,
2009
Revenues
Total
revenues for the three months ended June 30, 2010 were approximately $809,000
compared to approximately $527,000 for the three months ended June 30, 2009.
Total revenues increased approximately $282,000. The increase of approximately
54% is due to increased revenue of approximately $62,000 in sales of our DSU in
the United States for the three months ended June 30, 2010 over the same period
in 2009. Sales of our MD filters in our Target European Market were
approximately $237,000 higher in the three months ended June 30, 2010 compared
to the same period in 2009. Approximately $268,000 of the European revenue
increase was due to more units sold offset partially by a decrease of
approximately $31,000 due to foreign currency exchange rate fluctuation. Unit
sales in Europe increased approximately 120% for the three months ended June 30,
2010 compared to the same period in 2009. The increases were
partially offset by a decrease of approximately $17,000 during the three months
ended June 30, 2010 over the same period in 2009, related to our contract with
the Office of U.S. Naval Research.
Cost
of Goods Sold
Cost of
goods sold was approximately $527,000 for the three months ended June 30, 2010
compared to approximately $336,000 for the three months ended June 30, 2009. The
increase of approximately $191,000, or 57%, in cost of goods sold is primarily
due to increased costs related to higher sales of our MD filters in our Target
European Market of approximately $164,000 and an increase of approximately
$58,000 in costs related to higher sales of our DSU in the United States for the
three months ended June 30, 2010 over the same period in 2009. Approximately
$186,000 of the European cost of goods sold increase was due to more units sold
offset partially by a decrease of approximately $23,000 was due to foreign
currency exchange rate fluctuation. Costs related to the contract
with the Office of U.S. Naval Research were approximately $31,000 lower for the
three months ended June 30, 2010 compared to the same period in
2009. The reduced costs were related to use of a subcontractor on the
contract and not internal personnel.
Research
and Development
Research
and development expenses were approximately $71,000 and $92,000 respectively,
for the three months ended June 30, 2010 and June 30, 2009. This decrease of
approximately $21,000 or 23% is primarily due to a decrease in research and
development personnel related costs of approximately $17,000. Although the
number of personnel dedicated to research and development did not change, their
percentage of time spent on the contract with the Office of U.S. Naval Research
increased during the three months ended June 30, 2010 compared to the same
period in 2009. Travel expenses of research and development personnel
decreased by approximately $4,000 during the three months ended June 30,
2010 compared to the same period in 2009.
Depreciation
Expense
Depreciation
expense was approximately $32,000 for the three months ended June 30, 2010
compared to approximately $65,000 for the three months ended June 30, 2009, a
decrease of 51%. The decrease of approximately $33,000 is primarily due to
several assets having been fully depreciated as of year end 2009 resulting in no
depreciation expense for those assets during the three months ended June 30,
2010. There were no disposals of assets during the three months ended June 30,
2010.
Selling,
General and Administrative Expenses
Selling,
general and administrative expenses were approximately $545,000 for the three
months ended June 30, 2010 compared to approximately $628,000 for the three
months ended June 30, 2009, a decrease of $83,000 or 13%. The decrease is
primarily due to a decrease in personnel related expenses of approximately
$101,000, a decrease in marketing expenses of approximately $27,000 and a
decrease in travel expenses of approximately $10,000. These decreases
were partially offset by increases of approximately $36,000 in professional
services expenses, including legal and accounting fees, and other business
expenses of approximately $19,000.
Interest
Income
Interest
income was approximately $1,000 for the three months ended June 30, 2010 and
2009, respectively.
Interest
Expense
There was
no interest expense for the three months ended June 30,
2010. We incurred approximately $2,000 of interest expense for
the three months ended June 30, 2009. This interest relates primarily
to financing of premiums for product liability
insurance.
Other
income (expense)
There was
no other income (expense) incurred for the three months ended June 30,
2010. Other income in the amount of approximately $182,000 for the
three months ended June 30, 2009 resulted primarily from receipt of 2007
New York State Qualified Emerging Technology Company tax refunds.
Six
Months Ended June 30, 2010 Compared to the Six Months Ended June 30,
2009
Revenues
Total
revenues for the six months ended June 30, 2010 were approximately $1,799,000
compared to approximately $1,158,000 for the six months ended June 30, 2009.
Total revenues increased approximately $641,000. The increase of approximately
55% is due to increased revenue of approximately $105,000 during the six months
ended June 30, 2010 over the same period in 2009, related to our contract with
the Office of U.S. Naval Research and an increase of approximately $160,000 in
sales of our DSU in the United States for the six months ended June 30, 2010
over the same period in 2009. Sales of our MD filters in our Target European
Market were approximately $376,000 higher in the six months ended June 30, 2010
compared to the same period in 2009. Approximately $379,000 of the European
revenue increase was due to more units sold offset partially by $3,000 due to
foreign currency exchange rate fluctuation. Unit sales in Europe increased
approximately 77% for the six months ended June 30, 2010 compared to the
same period in 2009.
Cost
of Goods Sold
Cost of
goods sold was approximately $1,127,000 for the six months ended June 30, 2010
compared to approximately $788,000 for the six months ended June 30, 2009. The
increase of approximately $339,000, or 43%, in cost of goods sold is primarily
due to increased costs related to higher sales of our MD filters in our Target
European Market of approximately $265,000 and an increase of approximately
$109,000 in costs related to higher sales of our DSU in the United States for
the six months ended June 30, 2010 over the same period in 2009. Approximately
$267,000 of the European cost of goods sold increase was due to more units sold
offset partially by $2,000 due to foreign currency exchange rate fluctuation.
Costs related to the contract with the Office of U.S. Naval Research were
approximately $35,000 lower for the six months ended June 30, 2010 compared to
the same period in 2009.
Research
and Development
Research
and development expenses were approximately $143,000 and $150,000 respectively,
for the six months ended June 30, 2010 and June 30, 2009. This decrease of
approximately $7,000 or 5% is primarily due to decreased water development
expenses of approximately $21,000 and decreased travel expenses of approximately
$5,000, offset partially by increases in other expenses of approximately
$19,000.
Depreciation
Expense
Depreciation
expense was approximately $68,000 for the six months ended June 30, 2010
compared to approximately $137,000 for the six months ended June 30, 2009, a
decrease of 50%. The decrease of approximately $69,000 is primarily due to
several assets having been fully depreciated as of year end 2009 resulting in no
depreciation expense for those assets during the six months ended June 30, 2010.
There were no disposals of assets during the six months ended June 30,
2010.
Selling,
General and Administrative Expenses
Selling,
general and administrative expenses were approximately $1,353,000 for the six
months ended June 30, 2010 compared to approximately $1,417,000 for the six
months ended June 30, 2009, a decrease of $64,000 or 5%. The decrease is due
primarily to a decrease in personnel costs of approximately $56,000, decreases
in marketing related expenses of approximately $112,000, decreases in business
travel expenses of approximately $12,000 and a decrease in investor relations
expense of approximately $9,000. These decreases were partially
offset by increases in professional services fees, including legal expenses, of
approximately $115,000 and other expenses of approximately $10,000.
Interest
Income
Interest
income was approximately $1,000 for the six months ended June 30, 2010 compared
to approximately $6,000 for the six months ended June 30, 2009. The decrease of
approximately $5,000 is due to the decreased investments held during the six
months ended June 30, 2010 compared to the six months ended June 30,
2009.
Interest
Expense
There was
no interest expense for the six months ended June 30, 2010. We
incurred approximately $2,000 of interest expense for the six months ended June
30, 2009. This interest relates primarily to financing of premiums
for product liability insurance.
Other income
(expense)
Other
expense in the amount of approximately $2,000 for the six months ended June 30,
2010 was a currency loss related to an international funds transfer. Other
income in the amount of approximately $182,000 for the six months ended June 30,
2009 resulted primarily from receipt of 2007 New York State Qualified
Emerging Technology Company tax refunds.
Liquidity
and Capital Resources
Net cash
used in operating activities was approximately $719,000 for the six months ended
June 30, 2010 compared to approximately $1,430,000 for the six months ended June
30, 2009. The most significant items contributing to this decrease of
approximately $711,000 cash used in operating activities during the six months
ended June 30, 2010 compared to the six months ended June 30, 2009 are
highlighted below:
|
·
|
during
the 2010 period, our net loss decreased by approximately
$255,000;
|
|
|
|
|
·
|
during
the 2010 period, we recorded deferred revenue of $100,000, whereas there
was no deferred revenue in the 2009 period;
|
|
|
|
|
·
|
during
the 2010 period, our stock-based compensation expense increased by
approximately $14,000;
|
|
·
|
our
accounts payable and accrued expenses increased by approximately $37,000
in the aggregate in the 2010 period compared to a decrease of
approximately $660,000 in the 2009 period;
and
|
|
·
|
our
accrued severance expense was approximately $55,000 in the aggregate in
the 2010 period compared to a reversal of expense of approximately $90,000
in the 2009 period.
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Offsetting
the above changes are the following items:
|
·
|
during
the 2010 period, depreciation expense decreased by approximately
$69,000;
|
|
|
|
|
·
|
our
accounts receivable increased by approximately $78,000 during the 2010
period compared to a decrease of approximately $77,000 during the 2009
period;
|
|
|
|
|
·
|
our
inventory increased by approximately $101,000 during the 2010 period
compared to an increase of approximately $48,000 during the 2009
period;
|
|
·
|
our
prepaid expenses and other assets decreased by approximately $44,000 in
the 2010 period compared to a decrease of approximately $87,000 in the
2009 period.
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There
were no investing activities for the six months ended June 30, 2010. Net cash
provided by investing activities was approximately $7,000 for the six months
ended June 30, 2009 and resulted from the maturities of short-term
investments.
Financing
activities provided net cash of approximately $72,000 for the six months ended
June 30, 2010 resulting from the issuance of common stock due to the exercise of
stock options. There were no financing activities for the six months ended June
30, 2009.
Certain
Risks and Uncertainties
Our
Annual Report on Form 10-K for the year ended December 31, 2009 includes a
detailed discussion of our risk factors under the heading “Certain Risks and
Uncertainties.” The information presented below should be read in conjunction
with the risk factors and information disclosed in such Form 10-K.
Safe Harbor
for Forward-Looking Statements
This
report contains certain “forward-looking statements” within the meaning of the
Private Securities Litigation Reform Act of 1995, as amended. 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. For such statements, we claim the protection of
the Private Securities Litigation Reform Act of 1995. 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 the risks that:
|
·
|
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 be able to continue as a going concern;
|
|
|
|
|
·
|
we
may not obtain appropriate or necessary regulatory approvals to achieve
our business plan or effectively market our products;
|
|
|
|
|
·
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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;
|
|
|
|
|
·
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we
may encounter unanticipated internal control deficiencies or weaknesses or
ineffective disclosure controls and
procedures;
|
|
·
|
HDF
therapy may not be accepted in the United States and/or our technology and
products may not be accepted in current or future target markets, which
could lead to failure to achieve market penetration of our
products;
|
|
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|
|
·
|
we
may not be able to sell our ESRD therapy or water filtration products at
competitive prices or profitably;
|
|
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|
·
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we
may not be able to secure or enforce adequate legal protection, including
patent protection, for our products; and
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|
|
|
|
·
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we
may not be able to achieve sales growth in Europe and Canada or expand
into other key geographic
markets.
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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, is set forth in our filings with the SEC,
including our Annual Report on Form 10-K for the fiscal year ended December 31,
2009 and in this Quarterly Report on Form 10-Q. 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.
Off-Balance
Sheet Arrangements
We did
not engage in any off-balance sheet arrangements during the six month periods
ended June 30, 2010 and 2009.
Item
4. Controls and Procedures.
Evaluation
of Disclosure Controls and Procedures
We
maintain a system of disclosure controls and procedures, as defined in
Securities and Exchange Act Rule 13a-15(e),which is designed to provide
reasonable assurance that information, which is required to be disclosed in our
reports filed pursuant to the Securities and Exchange Act of 1934, as amended ,
is accumulated and communicated to management in a timely manner. 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 acting Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Securities and Exchange Act Rule 13a-15(b). Based upon
that evaluation, our acting Chief Executive Officer and 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
There
were no changes in our internal control over financial reporting or in other
factors 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
4. Submission of Matters to a Vote of Security Holders
There
were no matters submitted to a vote of security holders during the three months
ended June 30, 2010.
Item
6. Exhibits
EXHIBIT
INDEX
31.1
|
Certification
by the Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
31.2
|
Certification
by the Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
32.1
|
Certifications
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.
|
SIGNATURES
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 16, 2010
|
By:
|
/s/
Paul A. Mieyal
|
|
Name:
|
Paul
A. Mieyal
|
|
Title:
|
Acting
Chief Executive Officer
(Principal
Executive Officer)
|
|
|
|
|
|
|
Date:
August 16, 2010
|
By:
|
/s/
Gerald J. Kochanski
|
|
Name:
|
Gerald
J. Kochanski
|
|
|
Chief
Financial Officer
(Principal
Financial and
Accounting
Officer)
|
Exhibit
Index
31.1
|
Certification
by the Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
31.2
|
Certification
by the Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
32.1
|
Certifications
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.
|