NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
1 - Organization and Nature of Operations
Nephros,
Inc. (“Nephros” or the “Company”) was incorporated under the laws of the State of Delaware on April 3, 1997.
The Company was founded by health professionals, scientists and engineers affiliated with Columbia University to develop advanced end
stage renal disease (“ESRD”) therapy technology and products.
Beginning
in 2009, Nephros introduced high performance liquid purification filters to meet the demand for water purification in certain medical
markets. The Company’s filters, generally classified as ultrafilters, are primarily used in hospitals for the prevention of infection
from waterborne pathogens, such as legionella and pseudomonas, and in dialysis centers for the removal of biological contaminants from
water and bicarbonate concentrate. The Company also develops and sells water filtration products for commercial applications, focusing
on the hospitality and food service markets. The water filtration business is a reportable segment, referred to as the Water Filtration
segment.
On
October 4, 2022, the Company entered into a definitive asset purchase agreement with a third party for the sale of substantially all
of the Company’s Pathogen Detection Systems (“PDS”) business, which had been previously reported as a separate reportable
operating segment. As a result of the sale of the PDS business, we completely exited the PDS business. As a result, we determined that
our PDS business had met the criteria for discontinued operations as of September 30, 2022. We no longer separately report the PDS business
as a separate reportable segment in our financial statements including in this Annual Report for any of the periods presented.
In
July 2018, the Company formed a new subsidiary, Specialty Renal Products, Inc. (“SRP”), to drive the development of its second-generation
hemodiafiltration system and other products focused on improving therapies for patients with renal disease. After SRP’s formation,
the Company assigned to SRP all of the Company’s rights to three patents relating to the Company’s hemodiafiltration technology,
which were carried at zero book value. SRP is a reportable segment, referred to as the Renal Products segment.
The
Company’s primary U.S. facilities are located at 380 Lackawanna Place, South Orange, New Jersey 07079 and 3221 Polaris Avenue,
Las Vegas, Nevada 89102. These locations house the Company’s corporate headquarters, research, manufacturing, and distribution
facilities. In addition, the Company maintains small administrative offices in various locations in the United States.
Note
2 - Summary of Significant Accounting Policies
Principles
of Consolidation and Basis of Presentation
The
accompanying consolidated financial statements include the accounts of Nephros, Inc. and its subsidiaries, including the Company’s
wholly owned subsidiary Nephros International which was dissolved during the quarter ended June 30, 2022, and SRP, in which the Company
maintains a controlling interest. Outside stockholders’ interest in SRP of 37.5% is shown on the consolidated balance sheet as
noncontrolling interest. All intercompany accounts and transactions were eliminated in the preparation of the accompanying consolidated
financial statements.
Discontinued
Operations
See
Note 4, Discontinued Operations, for a discussion of the Company’s significant accounting policy surrounding the sale of substantially
all of the Company’s PDS business.
Use
of Estimates
The
preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of
America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities, at the date of the financial statements, and the reported amount of revenues and
expenses, during the reporting period. Actual results could differ materially from those estimates. Included in these estimates are assumptions
about the collection of accounts receivable, value of inventories, useful life of fixed assets and intangible assets, the assessment
of expected cash flows used in evaluating goodwill and other long-lived assets, the assessment of the ability to continue as a going
concern and assumptions used in determining stock compensation such as expected volatility and risk-free interest rate.
Liquidity
In
February 2022, pursuant to a First Amendment to Series A Preferred Stock Purchase Agreement (the “Amendment”) among SRP
and the holders of SRP’s outstanding shares of Series A Preferred Stock, SRP issued and sold an additional 100,003
shares of its Series A Preferred Stock at a price of $5.00
per share, resulting in total gross proceeds of $500,015.
See “Note 17 – Stockholders’ Equity – Noncontrolling Interest,” below. In addition to the funds
provided by the sale of these additional shares of Series A Preferred Stock, the Company and SRP continue to maintain a loan
agreement under which the Company agreed to lend up to $1.3
million to SRP, including the $1.0
million borrowed during the year ended December 31, 2020. These loaned funds were used to fund SRP’s operating activities
through the recent FDA 510(k) clearance process of SRP’s second-generation hemodiafiltration system, which was initially
submitted to the FDA on February 24, 2021 and which received 510(k) clearance on May 13, 2022. As of December 31, 2022, the
outstanding balance of this loan, including accrued interest, was approximately $1.4
million. It is not expected that this $1.4 million will be repaid, given the recent decision to wind down SRP’s business.
The
Company has sustained operating losses and expects such losses to continue over the next several quarters. In addition, net cash from
operations has been negative since inception, generating an accumulated deficit of $142.8
million as of December 31, 2022. These operating
losses and negative cash flows raise substantial doubt of the company’s ability to continue as a going concern. However, during
the second half of 2022, the Company took certain actions to mitigate these conditions, including headcount and other expense reductions,
the sale of PDS assets and discontinuance of PDS operations, customer price increases, and the recruiting and acquisition of additional
sales staff to grow revenues. The Company believes these actions, when fully implemented, will alleviate the substantial doubt as to
the Company’s ability to continue as a going concern. Furthermore, based on these actions, as well as the cash that is available
for the Company’s operations and projections of future Company operations, the Company believes that its cash balances will be
sufficient to fund its current operating plan through at least the next 12 months from the date of issuance of the accompanying consolidated
financial statements. In the event that operations do not meet expectations, the Company may need to further reduce discretionary expenditures
such as headcount, R&D projects, and other variable costs, to alleviate any remaining substantial doubt as to the Company’s
ability to continue as a going concern.
While
significant progress has been made against the COVID-19 pandemic, some uncertainty remains with respect to the Company’s projections
regarding the availability of sufficient cash resources, due to the possibility that COVID-19 infections could increase again and cause
further disruption to economic conditions. During the pandemic, particularly during calendar year 2020, the Company saw decreased demand
for its hospital filtration products, both in programmatic business and emergency pathogen outbreak response. In addition, sales to new
customers during 2020 – including water filtration and pathogen detection products – were hindered by pandemic-related travel
restrictions. Also in 2020, the Company’s commercial filtration products, which are primarily targeted at the hospitality and food
service markets, saw a decrease in demand, due to the closure of many hotels and restaurants. The Company believes that broad vaccine
distribution and increased population immunity has reduced the probability of further significant negative COVID-19 impacts, but if these
decreases in demand return and the Company is unable to achieve its revenue plan, the Company may need to reduce budgeted expenditures
as appropriate to preserve its available capital resources, which could slow its revenue growth plans.
Recently
Adopted Accounting Pronouncements
In
May 2021, the FASB issued ASU 2021-04, “Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified
Written Call Options,” which clarifies and reduces diversity in an issuer’s accounting for modifications or exchanges of
freestanding equity-classified written call options that remain equity classified after modification or exchange. The Company adopted
this guidance as of January 1, 2022, and the guidance did not have an impact on its consolidated financial statements.
Concentration
of Credit Risk
The
Company deposits its cash in financial institutions. At times, such deposits may be in excess of insured limits. To date, the Company
has not experienced any impairment losses on its cash. The Company also limits its credit risk with respect to accounts receivable by
performing credit evaluations when deemed necessary.
Major
Customers
For
the years ended December 31, 2022 and 2021, the following customers accounted for the following percentages of the Company’s revenues,
respectively:
Schedule
of Revenues and Accounts Receivable Percentage of Major Customers
Customer | |
2022 | | |
2021 | |
A | |
| 25 | % | |
| 17 | % |
B | |
| 10 | % | |
| 9 | % |
C | |
| 7 | % | |
| 11 | % |
Total | |
| 42 | % | |
| 37 | % |
As
of December 31, 2022 and 2021, the following customers accounted for the following percentages of the Company’s accounts receivable,
respectively:
Customer | |
2022 | | |
2021 | |
A | |
| 21 | % | |
| 8 | % |
B | |
| 10 | % | |
| 11 | % |
D | |
| 10 | % | |
| 7 | % |
C | |
| 0 | % | |
| 19 | % |
Total | |
| 41 | % | |
| 45 | % |
Cash
and Cash Equivalents
The
Company considers all highly liquid money market instruments with an original maturity of three months or less when purchased to be cash
equivalents. At December 31, 2022 and 2021, cash and cash equivalents were deposited in financial institutions and consisted entirely
of immediately available fund balances. The Company maintains its cash deposits and cash equivalents with financial institutions it believes
to be well-known and stable.
Accounts
Receivable
The
Company recognizes an allowance that reflects a current estimate of credit losses expected to be incurred over the life of a financial
asset, including trade receivables. The Company continuously monitors collections and payments from its customers and maintains a provision
for estimated credit losses. The Company determines its allowance for doubtful accounts by considering a number of factors, including
the length of time balances are past due, the Company’s previous loss history, the customer’s current ability to pay its
obligations to the Company and the expected condition of the general economy and the industry as a whole. The Company writes off accounts
receivable when they are determined to be uncollectible. The
allowance for doubtful accounts was approximately $0 and $1,000 as of December 31, 2022 and 2021, respectively.
Inventory
For
all medical device products and some commercial products, the Company engages third parties to manufacture and package its finished goods,
which are shipped to the Company for warehousing, until sold to distributors or end customers. Some commercial products are manufactured
at Company facilities. Inventory consists of finished goods and raw materials and is valued at the lower of cost or net realizable value
using the first-in, first-out method.
Our
inventory reserve requirements are based on various factors including product expiration date and estimates for the future sales of the
product. Reserve assessments include inventory obsolescence based upon expiration date, damaged, or rejected product, slow-moving products,
and other considerations.
License
and Supply Rights
The
Company’s rights under the License and Supply Agreement with Medica are capitalized and stated at cost, less accumulated amortization,
and are amortized using the straight-line method over the term of the License and Supply Agreement, which is from April 23, 2012 through
December 31, 2025. The Company determines amortization periods for licenses based on its assessment of various factors impacting estimated
useful lives and cash flows of the acquired rights. Such factors include the expected launch date of the product, the strength of the
intellectual property protection of the product and various other competitive, developmental, and regulatory issues, and contractual
terms. See Note 10 – License and Supply Agreement, net for further discussion.
Leases
The
Company determines if an arrangement contains a lease at inception. Leases are included in lease right-of-use (“ROU”) assets
and lease liabilities on the consolidated balance sheet.
Lease
ROU assets and lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at
commencement date. As most of the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing
rate based on the information available at commencement date in determining the present value of future payments. The operating lease
ROU asset includes any lease payments made and initial direct costs incurred and excludes lease incentives. The Company’s lease
terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option.
Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.
The
Company has elected as an accounting policy not to apply the recognition requirements in ASC 842 to short-term leases. Short-term leases
are leases that have a term of 12 months or less and do not include an option to purchase the underlying asset that the Company is reasonably
certain to exercise. The Company recognizes the lease payments for short-term leases on a straight-line basis over the lease term.
The
Company has also elected, as a practical expedient, by underlying class of asset, not to separate lease components from non-lease components
and, instead, account for them as a single component.
Property
and Equipment, net
Property
and equipment, net is stated at cost less accumulated depreciation. These assets are depreciated over their estimated useful lives of
three to seven years using the straight-line method.
The
Company adheres to ASC 360 and periodically evaluates whether current facts or circumstances indicate that the carrying value of its
depreciable assets to be held and used may not be recoverable. If such circumstances are determined to exist, an estimate of undiscounted
future cash flows produced by the long-lived assets, or the appropriate grouping of assets, is compared to the carrying value to determine
whether impairment exists. If an asset is determined to be impaired, the loss is measured based on the difference between the asset’s
fair value and its carrying value. For long-lived assets, the estimate of fair value is based on various valuation techniques, including
a discounted value of estimated future cash flows. The Company reports an asset to be disposed of at the lower of its carrying value
or its fair value less costs to sell. For the year ended December 31, 2022, See Note 4 Discontinued Operations, for a discussion of the
Company’s significant accounting policy surrounding the sale of substantially all of the Company’s PDS business and related
impairment charge. There were no impairment losses for long-lived assets recorded for the year ended December 31, 2021.
Intangible
Assets
The
Company’s intangible assets include finite lived assets. Finite lived intangible assets, consisting of customer relationships,
tradenames, service marks and domain names are amortized on a straight-line basis over the estimated useful lives of the assets.
Finite
lived intangible assets are tested for impairment when events or changes in circumstances indicate that the carrying value of the asset
may not be recoverable. Impairment testing requires management to estimate the future undiscounted cash flows of an intangible asset
using assumptions believed to be reasonable, but which are unpredictable and inherently uncertain. Actual future cash flows may differ
from the estimates used in the impairment testing.
Goodwill
Goodwill
represents the excess of purchase price over the fair value of net assets acquired. In accordance with ASC 350, “Goodwill and Other
Intangibles,” rather than recording periodic amortization, goodwill is subject to an annual assessment for impairment by applying
a fair value-based test. If the fair value of the reporting unit exceeds the reporting unit’s carrying value, including goodwill,
then goodwill is considered not impaired, making further analysis not required. The Company reviews goodwill for possible impairment
annually during the fourth quarter, or whenever events or circumstances indicate that the carrying amount may not be recoverable.
Fair
Value Measurements
The
Company measures certain financial instruments and other items at fair value.
To
determine the fair value, the Company uses the fair value hierarchy for inputs used in measuring fair value that maximizes the use of
observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable
inputs are inputs market participants would use to value an asset or liability and are developed based on market data obtained from independent
sources. Unobservable inputs are inputs based on assumptions about the factors market participants would use to value an asset or liability.
To
measure fair value, the Company uses the following fair value hierarchy based on three levels of inputs, of which the first two are considered
observable and the last unobservable:
Level
1 - Quoted prices in active markets for identical assets or liabilities.
Level
2 - Inputs other than Level 1 that are observable for the asset or liability, either directly or indirectly, such as quoted prices
for similar assets and liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are
not active; or other inputs that are observable or can be corroborated by observable market data by correlation or other means.
Level
3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets
or liabilities. Value is determined using pricing models, discounted cash flow methodologies, or similar techniques and also includes
instruments for which the determination of fair value requires significant judgment or estimation.
Revenue
Recognition
The
Company recognizes revenue under ASC 606, “Revenue from Contracts with Customers.” ASC 606 prescribes a five-step model for
recognizing revenue, which includes (i) identifying contracts with customers; (ii) identifying performance obligations; (iii) determining
the transaction price; (iv) allocating the transaction price; and (v) recognizing revenue. See Note 5 – Revenue Recognition for
further discussion.
Shipping
and Handling Costs
Shipping
and handling costs charged to customers are recorded as revenue and as cost of goods sold and were approximately $98,000 and $71,000
for the years ended December 31, 2022 and 2021, respectively.
Research
and Development Costs
Research
and development costs represent a significant part of our business. Costs included in research and development are expensed as incurred
and relate to the processes of discovering, testing and developing new products, improving existing products and regulatory compliance
prior to FDA approval. Research and development costs include, but are not limited to, personnel expenses, consulting costs and equipment
depreciation.
Stock-Based
Compensation
The
fair value of stock options is recognized as stock-based compensation expense in the Company’s consolidated statement of operations
and comprehensive loss. The Company calculates stock-based compensation expense in accordance with ASC 718. The fair value of the Company’s
stock option awards is 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. The fair value of stock-based awards is
amortized over the vesting period of the award. For stock 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.
Warrants
The
Company accounts for stock warrants as either equity instruments or derivative liabilities depending on the specific terms of the warrant
agreement.
Other
Income and Expense, net
Other
income of approximately $64,000 for the year ended December 31, 2022, is primarily related to the
release of the cumulative translation adjustment from accumulated other comprehensive income (loss) on the liquidation of a foreign entity
and of gains on foreign currency transactions related to the closure in the second quarter of 2022 of Nephros International, a
wholly owned subsidiary of Nephros, Inc. Other income of $0.5 million for the year ended December 31, 2021, is primarily due to the extinguishment
of the U.S. Small Business Administration’s Paycheck Protection Plan (“PPP”) loan.
Income
Taxes
The
Company accounts for income taxes in accordance with ASC 740, which requires accounting for deferred income taxes under the asset and
liability method. Deferred income taxes are recognized for the tax consequences of temporary differences by applying enacted statutory
tax rates applicable in future years to differences between the financial statement carrying amounts and the tax basis of existing assets
and liabilities.
For
financial reporting purposes, the Company has incurred a loss in each period since its inception. Based on available objective evidence,
including the Company’s history of losses, management believes it is more likely than not that the net deferred tax assets will
not be fully realizable. Accordingly, the Company provided for a full valuation allowance against its net deferred tax assets at December
31, 2022 and 2021.
ASC
740 prescribes, among other things, a recognition threshold and measurement attributes for the financial statement recognition and measurement
of uncertain tax positions taken or expected to be taken in a company’s income tax return. ASC 740 utilizes a two-step approach
for evaluating uncertain tax positions. Step one, or recognition, requires a company to determine if the weight of available evidence
indicates a tax position is more likely than not to be sustained upon audit, including resolution of related appeals or litigation processes,
if any. Step two, or measurement, is based on the largest amount of benefit that is more likely than not to be realized on settlement
with the taxing authority. The Company is subject to income tax examinations by major taxing authorities for all tax years subsequent
to 2016. During the years ended December 31, 2022 and 2021, the Company recognized no adjustments for uncertain tax positions. However,
management’s conclusions regarding this policy may be subject to review and adjustment at a later date based on factors including,
but not limited to, on-going analyses of and changes to tax laws, regulation and interpretations, thereof.
The
Coronavirus Aid, Relief, and Economic Security Act (the CARES Act) was enacted into law on March 27, 2020. The act contains several tax
relief and economic stimulus provisions. The enactment of the CARES Act did not have a material impact on the Company’s financial
statements.
See
Note 15 – Income Taxes for further discussion.
Net
Loss per Common Share
Basic
loss per common share is calculated by dividing net loss available to common shareholders by the number of weighted average common shares
issued and outstanding. Diluted loss per common share is calculated by dividing net loss available to common shareholders by the weighted
average number of common shares issued and outstanding for the period, plus amounts representing the dilutive effect from the exercise
of stock options and warrants and unvested restricted stock, as applicable. The Company calculates dilutive potential common shares using
the treasury stock method, which assumes the Company will use the proceeds from the exercise of stock options and warrants to repurchase
shares of common stock to hold in its treasury stock reserves.
The
following potentially dilutive securities have been excluded from the computations of diluted weighted average shares outstanding as
they would be antidilutive:
Schedule
of Antidilutive Securities Excluded from Computation of Earnings Per Share
| |
December 31, | |
| |
2022 | | |
2021 | |
Shares underlying options outstanding | |
| 1,365,365 | | |
| 1,426,510 | |
Shares underlying warrants outstanding | |
| - | | |
| 123,476 | |
Unvested restricted stock | |
| - | | |
| 59,732 | |
Foreign
Currency Translation
Foreign
currency translation is recognized in accordance with ASC 830. The functional currency of Nephros International Limited, the Company’s
Irish subsidiary is the Euro, and its translation gains and losses are included in accumulated other comprehensive income. The balance
sheet is translated at the year-end rate. The consolidated statements of operations and comprehensive loss are translated at the weighted
average rate for the year.
Comprehensive
Loss
Comprehensive
loss, as defined in ASC 220, is the total of net loss and all other non-owner changes in equity (or other comprehensive loss). The Company’s
other comprehensive loss consists only of foreign currency translation adjustments.
Recent
Accounting Pronouncements, Not Yet Effective
In
October 2021, the FASB issued ASU 2021-08, “Accounting for Contract Assets and Contract Liabilities from Contracts with Customers,”
which requires that an entity recognize contract assets and contract liabilities acquired in a business combination in accordance with
Accounting Standards Codification (“ASC”) 606. The guidance is effective for the Company beginning in the first quarter of
fiscal year 2023 and should be applied prospectively. Early adoption is permitted. The Company will assess the impact, if any, of adopting
this guidance on its consolidated financial statements.
Note
3 – Asset Acquisition
On
July 9, 2021, the Company acquired substantially all of the assets of GenArraytion, Inc. (“GenArraytion”). The acquisition
did not qualify as a business combination and, as a result, was accounted for as an asset acquisition as the fair value of the gross
assets acquired was primarily related to a single asset. In consideration for the acquisition of these assets, the Company issued 123,981
shares of the Company’s common stock to GenArraytion, reflecting an aggregate purchase price of $1.2 million. The purchase price,
including direct acquisition costs of approximately $49,000, was allocated among the acquired assets which include intellectual property
and equipment, based upon their relative fair values at the date of acquisition.
Fifty
percent of the 123,981 common shares issued were subject to a risk of forfeiture which lapsed during the three months ended September
30, 2021. Pursuant to the purchase agreement with GenArraytion, the Company also agreed to make royalty payments to GenArraytion equal
to 5% of net sales of certain products by the Company over the next five years. However, as a result of the Company’s sale of its
PDS business to a third party, the Company will no longer make any net sales of GenArraytion products during such royalty period. (See
Note 4 - Discontinued Operations).
The
total consideration of $1.2 million was allocated as follows to the acquired assets:
Schedule
of Assets Acquired
| |
Total Consideration | |
| |
(in thousands) | |
Intellectual property | |
$ | 1,098 | |
Equipment | |
| 75 | |
Total consideration | |
$ | 1,173 | |
The
acquired intellectual property was being amortized over its estimated useful life of 10 years. With the sale of the PDS assets announced
on October 11, 2022, this asset was classified as held-for-sale at the period ended September 30, 2022, and then tested for impairment
and subsequently written down to $0. (See Note 4 –Discontinued Operations).
Note
4 – Discontinued Operations
In
accordance with ASC 205-20, Presentation of Financial Statements: Discontinued Operations, a disposal of a component of an entity or
a group of components of an entity (disposal group) is required to be reported as discontinued operations if the disposal represents
a strategic shift that has (or will have) a major effect on an entity’s operations and financial results when the disposal group
meets the criteria to be classified as held-for-sale. The consolidated statements of operations reported for current and prior periods
report the results of operations of the discontinued operations, including the impairment loss recognized as a component of net income
(loss) separate from the net income (loss) from continuing operations.
All
discontinued operations relate to the Company’s previously reported PDS segment, for the year ended December 31, 2022 and 2021.
Schedule
of Assets and Liabilities of Discontinued Operations
| |
Year Ended December 31, | | |
Year Ended December 31, | |
| |
2022 | | |
2021 | |
Total net revenues | |
$ | 110 | | |
$ | 187 | |
Gross margin | |
| (259 | ) | |
| 110 | |
Research and development expenses | |
| 637 | | |
| 668 | |
Depreciation and amortization expense | |
| - | | |
| 10 | |
Selling, general and administrative expenses | |
| 535 | | |
| 515 | |
Total operating expenses | |
| 1,175 | | |
| 1,193 | |
Operating loss from discontinued operations | |
| (1,434 | ) | |
| (1,083 | ) |
| |
| | | |
| | |
Impairment of assets held for sale | |
| (1,395 | ) | |
| - | |
Loss from discontinued operations | |
$ | (2,829 | ) | |
$ | (1,083 | ) |
On
October 4, 2022, the Company entered into a definitive asset purchase agreement with a third party pursuant to which the Company agreed
to sell substantially all of the assets used in the Company’s PDS business. In consideration for the sale of these assets, the
Company received $1,000 in cash at the closing, and will receive potential royalties payable to Nephros for a seven-year period commencing
on January 1, 2023 subject to a minimum gross margin threshold. As such, the potential royalties payable to the Company are a gain contingency
as they pertain to an uncertain event that will be resolved in future reporting periods. As a result, the Company will recognize the
gain contingency when it is probable the contingency will be resolved, which is ultimately when settled. The Company determined all of
the required criteria for held-for-sale and discontinued operations classification were met as of September 30, 2022. During the third
quarter as part of presenting these assets and liabilities as held-for-sale in the Condensed Consolidated Balance Sheets, the Company
evaluated the disposal group including the relevant intangible assets for impairment. Based upon the selling price less the costs of
sale, the Company determined the net carrying value of the assets held for sale were impaired, and the value of the asset group to be
sold was $0.
During
year ended December 31, 2022, $49,000 of right-of-use assets related to discontinuing operations were obtained in exchange for operating
lease liabilities.
Note
5 – Revenue Recognition
The
Company recognizes revenue related to product sales when product is shipped via external logistics providers and the other criteria of
ASC 606 are met. Product revenue is recorded net of returns and allowances. There was no allowance for sales returns at December 31,
2022 or 2021. In addition to product revenue, the Company recognizes revenue related to royalty and other agreements in accordance with
the five-step model in ASC 606. Royalty and other revenues recognized for the years ended December 31, 2022 and 2021 (in thousands) is
comprised of:
Schedule
of Royalty and Other Revenues
| |
2022 | | |
2021 | |
| |
Years
Ended December 31, | |
| |
2022 | | |
2021 | |
Other revenue | |
$ | 46 | | |
$ | 73 | |
Royalty revenue under the License Agreement with Bellco | |
| - | | |
| 59 | |
Royalty revenue under the Sublicense Agreement with CamelBak (1) | |
| - | | |
| 20 | |
Total royalty and other revenues | |
$ | 46 | | |
$ | 152 | |
| (1) | In May 2015, the Company entered into a Sublicense Agreement (the “Sublicense Agreement”) with CamelBak Products, LLC (“CamelBak”). Under this Sublicense Agreement, the Company granted CamelBak an exclusive, non-transferable, worldwide (with the exception of Italy) sublicense and license, in each case solely to market, sell, distribute, import and export the IWTD. In exchange for the rights granted to CamelBak, CamelBak agreed, through December 31, 2022, to pay the Company a percentage of the gross profit on any sales made to a branch of the U.S. military, subject to certain exceptions, and to pay a fixed per-unit fee for any other sales made. CamelBak was also required to meet or exceed certain minimum annual fees payable to the Company, and, if such fees are not met or exceeded, the Company was able to convert the exclusive sublicense to a non-exclusive sublicense with respect to non-U.S. military sales. In the first quarter of 2019, the Sublicense Agreement was amended to eliminate the minimum fee obligations starting May 6, 2018 and, as such, CamelBak has no further minimum fee obligations. The Sublicense Agreement terminated on December 31, 2022. |
Bellco
License Agreement
On
June 27, 2011, the Company entered into a License Agreement (as thereafter amended, the “License Agreement”), effective July
1, 2011, with Bellco S.r.l. (“Bellco”), an Italy-based supplier of hemodialysis and intensive care products, for the manufacturing,
marketing and sale of the Company’s patented mid-dilution dialysis filters (the “Products”). Under the License Agreement,
the Company granted Bellco a license to manufacture, market and sell the Products under its own name, label, and CE mark in certain countries
on an exclusive basis, and to do the same on a non-exclusive basis in certain other countries. Under the License Agreement with Bellco,
the Company received upfront payments which were previously deferred and subsequently recognized as license revenue over the term of
the License Agreement. In addition, the License Agreement also provided for the payment of certain royalties to the Company based on
the number of units of Products sold per year in the covered territory. The License Agreement expired in accordance with its terms on
December 31, 2021.
Other
Revenue – Other revenues are derived from sales of services to customers, which primarily include installation, training and testing
on product and equipment sold to certain customers.
Note
6 – Fair Value Measurements
Assets
and Liabilities Measured at Fair Value on a Recurring Basis
The
Company evaluates its financial assets and liabilities subject to fair value measurements on a recurring basis to determine the appropriate
level of classification for each reporting period.
At
December 31, 2022 and December 31, 2021, the Company’s cash equivalents consisted of money market funds. The Company values its
cash equivalents using observable inputs that reflect quoted prices for securities with identical characteristics and classify the valuation
techniques that use these inputs as Level 1.
At
December 31, 2022 and December 31, 2021, the fair value measurements of the Company’s assets and liabilities measured on a recurring
basis were as follows:
Schedule
of Assets and Liabilities Measured at Fair Value on Recurring Basis
| |
Fair
Value Measurements at Reporting Date Using | |
| |
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1) | | |
Significant
Other
Observable
Inputs
(Level 2) | | |
Significant
Unobservable
Inputs
(Level 3) | |
| |
| | |
(in thousands) | | |
| |
December 31, 2022 | |
| | | |
| | | |
| | |
Cash | |
$ | 1,598 | | |
$ | - | | |
$ | - | |
Money market funds | |
| 2,036 | | |
| - | | |
| - | |
Cash and cash equivalents | |
$ | 3,634 | | |
$ | - | | |
$ | - | |
| |
| | | |
| | | |
| | |
December 31, 2021 | |
| | | |
| | | |
| | |
Cash | |
$ | 2,952 | | |
| - | | |
| - | |
Money market funds | |
| 4,021 | | |
| - | | |
| - | |
Cash and cash equivalents | |
$ | 6,973 | | |
$ | - | | |
$ | - | |
Assets
and Liabilities Not Measured at Fair Value on a Recurring Basis
The
carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximate fair value as of
December 31, 2022 and 2021 due to the short-term maturity of these instruments.
The
carrying amounts of the secured long-term note payable, lease liabilities and equipment financing approximate fair value as of December
31, 2022 and 2021 because those financial instruments bear interest at rates that approximate current market rates for similar agreements
with similar maturities and credit.
Note
7 - Inventory
Inventory
is stated at the lower of cost or net realizable value using the first-in, first-out method and consists of raw materials and finished
goods. The Company’s inventory components as of December 31, 2022 and December 31, 2021, were as follows:
Schedule
of Inventory, Net
| |
2022 | | |
2021 | |
| |
December 31, | |
| |
2022 | | |
2021 | |
Finished goods | |
$ | 2,709 | | |
$ | 3,655 | |
Raw material | |
| 422 | | |
| 807 | |
Work in process | |
| 22 | | |
| - | |
Total inventory | |
$ | 3,153 | | |
$ | 4,462 | |
Note
8 - Property and Equipment, Net
Property
and equipment as of December 31, 2022 and 2021 was as follows (in thousands):
Schedule of Property and Equipment, Net
| |
| |
| | | |
| | |
| |
Estimated Useful | |
December 31, | |
| |
Life | |
2022 | | |
2021 | |
Manufacturing and research equipment | |
3-7 years | |
$ | 843 | | |
$ | 808 | |
Capitalized internal use software and website development | |
5 years | |
| 103 | | |
| - | |
Computer equipment | |
3-4 years | |
| 43 | | |
| 43 | |
Furniture and fixtures | |
7 years | |
| 37 | | |
| 25 | |
Leasehold improvements | |
4 years | |
| 13 | | |
| 25 | |
Property and equipment, gross | |
| |
| 1,039 | | |
| 901 | |
Less: accumulated depreciation | |
| |
| (923 | ) | |
| (829 | ) |
Property and equipment, net | |
| |
$ | 116 | | |
$ | 72 | |
Depreciation
related to equipment utilized in the manufacturing process is recognized in cost of goods sold on the consolidated statements of operations
and comprehensive loss. Depreciation related to equipment utilized in research and development is recognized in research and development
on the consolidated statements of operations and comprehensive loss. Equipment is capitalized due to various uses inclusive of R&D.
Depreciation expense for the years ended December 31, 2022 and 2021 was approximately $93,000 and $38,000, respectively. Approximately
$45,000 of depreciation expense has been recognized in cost of goods sold for the year ended December 31, 2022. Approximately $17,000
of depreciation expense has been recognized in cost of goods sold for the year ended December 31, 2021. Approximately $18,000 and $7,000
of depreciation expense was recognized in research and development expense for the periods ended December 31, 2022 and December 31, 2021
respectively.
Note
9 – Intangible Assets and Goodwill
Intangible
Assets
Intangible
assets at December 31, 2022 and December 31, 2021 are set forth in the table below. Gross carrying values and accumulated amortization
of the Company’s intangible assets by type are as follows:
Schedule
of Intangible Assets
| |
December 31, 2022 | | |
December 31, 2021 | |
| |
Cost | | |
Accumulated Amortization | | |
Net | | |
Cost | | |
Accumulated Amortization | | |
Net | |
| |
(in thousands) | |
Tradenames, service marks and domain names | |
$ | 50 | | |
$ | (40 | ) | |
$ | 10 | | |
$ | 50 | | |
$ | (30 | ) | |
$ | 20 | |
Customer relationships | |
| 540 | | |
| (127 | ) | |
| 413 | | |
| 540 | | |
| (95 | ) | |
| 445 | |
Total intangible assets | |
$ | 590 | | |
$ | (167 | ) | |
$ | 423 | | |
$ | 590 | | |
$ | (125 | ) | |
$ | 465 | |
The
Company recognized amortization expense of approximately $42,000 for the years ended December 31, 2022 and December 31, 2021 in selling,
general and administrative expenses on the accompanying consolidated statement of operations and comprehensive loss.
As
of December 31, 2022, future amortization expense for each of the next five years is (in thousands):
Schedule
of Future Amortization Expense
| |
| | |
Fiscal Years | |
| |
2023 | |
$ | 42 | |
2024 | |
| 32 | |
2025 | |
| 32 | |
2026 | |
| 32 | |
2027 | |
| 32 | |
The
Company recognized approximately $1.0 million in intangible asset impairment charges during the year ended December 31, 2022, related
to the fair value of assets held for sale. (See Note 4 –Discontinued Operations).
Goodwill
Goodwill
had a carrying value on the Company’s consolidated balance sheets of $0.8 million at December 31, 2022 and 2021, respectively.
Goodwill has been allocated to the Water Filtration segment. The Company concluded the carrying value of goodwill was not impaired as
of December 31, 2022, or 2021 as the Company determined that it was not more likely than not that the fair value of goodwill was less
than its carrying value.
Note
10 – License and Supply Agreement, net
On
April 23, 2012, the Company entered into a License and Supply Agreement (as thereafter amended, the “License and Supply Agreement”)
with Medica S.p.A. (“Medica”), an Italy-based medical product manufacturing company, for the marketing and sale of certain
filtration products based upon Medica’s proprietary Medisulfone ultrafiltration technology in conjunction with the Company’s
filtration products, and for an exclusive supply arrangement for the filtration products. Under the License and Supply Agreement, Medica
granted to the Company an exclusive license, with right of sublicense, to market, promote, distribute, offer for sale and sell the filtration
products worldwide, with certain limitations on territory, during the term of the License and Supply Agreement. In addition, the Company
granted to Medica an exclusive license under the Company’s intellectual property to make the filtration products during the term
of the License and Supply Agreement. The filtration products covered under the License and Supply Agreement includes both certain products
based on Medica’s proprietary Versatile microfiber technology and certain filtration products based on Medica’s proprietary
Medisulfone ultrafiltration technology. The term of the License Agreement with Medica expires on December 31, 2025, unless earlier terminated
by either party in accordance with the terms of the License and Supply Agreement.
In
exchange for the license, the gross value of the intangible asset capitalized was $2.3 million. License and supply agreement, net, on
the consolidated balance sheet is $0.4 million and $0.5 million as of December 31, 2022 and 2021, respectively. Accumulated amortization
is $1.8 million and $1.8 million as of December 31, 2022 and 2021, respectively. The intangible asset is being amortized as an expense
over the life of the License and Supply Agreement. Amortization expense of $0.1 million was recognized in each of the years ended December
31, 2022 and 2021 on the consolidated statement of operations and comprehensive loss.
As
of September 2013, the Company has an understanding with Medica whereby the Company has agreed to pay interest to Medica at a 12% annual
rate calculated on the principal amount of any outstanding invoices that are not paid pursuant to the original payment terms. There was
no interest recognized for the years ended December 31, 2022 or 2021.
In
addition, for the period beginning April 23, 2014 through December 31, 2025, the Company will pay Medica a royalty rate of 3% of net
sales of the filtration products sold, subject to reduction as a result of a supply interruption pursuant to the terms of the License
and Supply Agreement. Royalty expense of $0.3 million for the years ended December 31, 2022 and 2021, respectively, was recognized and
is included in cost of goods sold on the consolidated statement of operations and comprehensive loss. Approximately $71,000 and $70,000
of this royalty expense was included in accounts payable as of December 31, 2022 and 2021, respectively.
Note
11 – Secured Note Payable
On
March 27, 2018, the Company entered into a Secured Promissory Note Agreement (the “Secured Note”) with Tech Capital for a
principal amount of $1.2 million. As of December 31, 2022 and 2021, the principal balance of the Secured Note was $0.1 million and $0.3
million, respectively.
The
Secured Note has a maturity date of April 1, 2023. The unpaid principal balance accrues interest at a rate of 8% per annum. Principal
and interest payments are due on the first day of each month commencing on May 1, 2018. The Secured Note is subject to terms and conditions
of and is secured by security interests granted by the Company in favor of Tech Capital under the Loan and Security Agreement entered
into on August 17, 2017 and subsequently amended on December 20, 2019 (the “Loan Agreement”). An event of default under such
Loan Agreement is an event of default under the Secured Note and vice versa.
During
each of the years ended December 31, 2022 and 2021, the Company made payments under the Secured Note of approximately $0.3 million. Included
in the total payments made, approximately $18,000 and $38,000 was recognized as interest expense on the consolidated statement of operations
and comprehensive loss for the year ended December 31, 2022 and 2021, respectively.
As
of December 31, 2022, future principal maturities are as follows (in thousands):
Schedule
of Future Debt Principal Maturities
Note
12 – Paycheck Protection Program Loan
On
April 24, 2020, the Company obtained a loan from the U.S. Small Business Administration’s Paycheck Protection Program (“PPP”)
in the amount of $0.5 million (“PPP loan”). Under the terms of the PPP, certain amounts of the loan may be forgiven if they
are used for qualifying expenses during the first 24 weeks of the loan. On January 14, 2021, the U.S Small Business Administration notified
the Company that, in accordance with the PPP terms, the PPP loan was forgiven in full, including all principal and interest outstanding
as of the date of forgiveness. As such, $0.5 million has been recognized as an extinguishment of debt on the Company’s consolidated
statement of operations and comprehensive loss. The SBA reserves the right to audit any PPP loan, regardless of size. These audits may
occur after forgiveness has been granted. In accordance with the Cares Act. All borrowers are required to maintain the PPP loan documentation
for six years after the PPP loan was forgiven or repaid in full and to provide that documentation to the SBA upon request.
Note
13 – Leases
The
Company has operating leases for corporate offices, warehouse space, an automobile and office equipment. The leases have remaining lease
terms of 1 year to 5 years.
Lease
cost, as presented below, includes costs associated with leases for which right-of-use (“ROU”) assets have been recognized
as well as short-term leases.
The
components of total lease costs were as follows (in thousands):
Schedule of Components of Lease Cost
| |
| | | |
| | |
| |
Year ended December 31, 2022 | | |
Year ended December 31, 2021 | |
Operating lease cost | |
$ | 351 | | |
$ | 369 | |
Finance lease cost: | |
| | | |
| | |
Amortization of right-of-use assets | |
| 12 | | |
| 12 | |
Interest on lease liabilities | |
| 2 | | |
| 2 | |
Total finance lease cost | |
| 14 | | |
| 14 | |
Variable lease cost | |
| 53 | | |
| 42 | |
Total lease cost | |
$ | 418 | | |
$ | 425 | |
Supplemental
cash flow information related to leases was as follows (in thousands):
Schedule of Supplemental Cash Flow Information Related to Leases
| |
| | | |
| | |
| |
Year ended
December 31, 2022 | | |
Year ended
December 31, 2021 | |
Cash paid for amounts included in the measurement of lease liabilities: | |
| | | |
| | |
Operating cash flows from operating leases | |
$ | 365 | | |
$ | 383 | |
Financing cash flows from finance leases | |
$ | 12 | | |
$ | 11 | |
Supplemental
balance sheet information related to leases was as follows (in thousands except years):
Schedule of Supplemental Balance Sheet Information Related to Leases
| |
| | | |
| | |
| |
December 31, 2022 | | |
December 31, 2021 | |
Operating lease right-of-use assets | |
$ | 972 | | |
$ | 590 | |
Finance lease right-of-use assets | |
$ | 12 | | |
$ | 24 | |
| |
| | | |
| | |
Current portion of operating lease liabilities | |
$ | 309 | | |
$ | 313 | |
Operating lease liabilities, net of current portion | |
| 700 | | |
| 340 | |
Total operating lease liabilities | |
$ | 1,009 | | |
$ | 653 | |
| |
| | | |
| | |
Current portion of finance lease liabilities | |
$ | 8 | | |
$ | 12 | |
Finance lease liabilities, net of current portion | |
| 4 | | |
| 12 | |
Total finance lease liabilities | |
$ | 12 | | |
$ | 24 | |
| |
| | | |
| | |
Weighted average remaining lease term | |
| | | |
| | |
Operating leases | |
| 3.9 years | | |
| 2.3 years | |
Finance leases | |
| 1.54 years | | |
| 2.2 years | |
| |
| | | |
| | |
Weighted average discount rate | |
| | | |
| | |
Operating leases | |
| 8.0 | % | |
| 8.0 | % |
Finance leases | |
| 8.0 | % | |
| 8.0 | % |
As
of December 31, 2022, maturities of lease liabilities were as follows (in thousands):
Schedule of Maturities of Lease Liabilities
| |
Operating Leases | | |
Finance Leases | |
2023 | |
$ | 374 | | |
$ | 8 | |
2024 | |
| 303 | | |
| 4 | |
2025 | |
| 163 | | |
| - | |
2026 | |
| 168 | | |
| - | |
2027 | |
| 158 | | |
| - | |
Total future minimum lease payments | |
| 1,166 | | |
| 12 | |
Less imputed interest | |
| (157 | ) | |
| - | |
Total | |
$ | 1,009 | | |
$ | 12 | |
Note
14 - Accrued Expenses
Accrued
expenses as of December 31, 2022 and 2021 were as follows (in thousands):
Schedule of Accrued Expenses
| |
| | | |
| | |
| |
December 31, | |
| |
2022 | | |
2021 | |
Accrued bonus | |
$ | 76 | | |
$ | 232 | |
Accrued directors’ fees | |
| 126 | | |
| - | |
Accrued legal | |
| 4 | | |
| 37 | |
Accrued sales commission | |
| 36 | | |
| 34 | |
Accrued sales tax payable | |
| 7 | | |
| 26 | |
Accrued franchise tax | |
| 10 | | |
| 21 | |
Accrued other | |
| 26 | | |
| 94 | |
Accrued expenses | |
$ | 285 | | |
$ | 444 | |
Note
15 - Income Taxes
There
was no income tax current or deferred tax benefit or expense recognized during the years ended December 31, 2022 and 2021.
A
reconciliation of the income tax benefit computed at the statutory tax rate to the Company’s effective tax rate for the years ended
December 31, 2022 and 2021 is as follows:
Schedule of Effective Income Tax Rate Reconciliation
| |
Years Ended December 31, | |
| |
2022 | | |
2021 | |
U.S. federal statutory rate | |
| 21.00 | % | |
| 21.00 | % |
State taxes | |
| 4.79 | % | |
| 1.82 | % |
Expired NOLs and credits | |
| (12.78 | )% | |
| (6.60 | )% |
Stock-based compensation | |
| (2.43 | )% | |
| (2.17 | )% |
Federal research and development credits | |
| 0.62 | % | |
| 2.59 | % |
Foreign Rate Differential | |
| 9.15 | % | |
| - | |
Other | |
| 3.44 | % | |
| (1.27 | )% |
Paycheck protection loan forgiveness | |
| - | % | |
| 2.62 | % |
Valuation allowance | |
| (23.78 | )% | |
| (17.99 | )% |
Effective tax rate | |
| - | % | |
| - | % |
Significant
components of the Company’s deferred tax assets (liabilities) as of December 31, 2022 and 2021 are as follows (in thousands):
Schedule of Deferred Tax Assets
| |
| | | |
| | |
| |
December 31, | |
| |
2022 | | |
2021 | |
Deferred tax assets: | |
| | | |
| | |
Net operating loss carry forwards | |
$ | 17,672 | | |
$ | 18,473 | |
Research and development credits | |
| 1,401 | | |
| 1,413 | |
Nonqualified stock option compensation expense | |
| 543 | | |
| 601 | |
Lease liabilities | |
| 243 | | |
| 179 | |
Capital loss carryforwards | |
| 1,946 | | |
| - | |
Fixed and intangible basis difference | |
| 328 | | |
| - | |
Other temporary book - tax differences | |
| 243 | | |
| 75 | |
Total deferred tax assets | |
| 22,376 | | |
| 20,741 | |
| |
| | | |
| | |
Deferred tax liabilities: | |
| | | |
| | |
Lease right-of-use assets | |
| (234 | ) | |
| (169 | ) |
Fixed and intangible asset basis difference | |
| - | | |
| (119 | ) |
Total deferred tax liabilities | |
| (234 | ) | |
| (288 | ) |
| |
| | | |
| | |
Deferred tax assets, net | |
| 22,142 | | |
| 20,453 | |
Valuation allowance for deferred tax assets | |
| (22,142 | ) | |
| (20,453 | ) |
Net deferred tax assets after valuation allowance | |
$ | - | | |
$ | - | |
A
valuation allowance has been recognized to offset the Company’s net deferred tax asset as it is more likely than not that such
net asset will not be realized. The Company primarily considered its historical loss and potential Internal Revenue Code Section 382
limitations to arrive at its conclusion that a valuation allowance was required. The Company’s valuation allowance increased
approximately $1.7 million
from December 31, 2021 to December 31, 2022.
At
December 31, 2022, the Company had Federal income tax net operating loss carryforwards of $82.3 million and State income tax net operating
loss carryforwards of $5.6 million. The Company had Federal research and development tax credit carryforwards of $1.4 million at December
31, 2022. The Company’s net operating losses and research and development tax credits may ultimately be limited by Section 382
of the Internal Revenue Code and, as a result, the Company may be unable to offset future taxable income (if any) with losses, or its
tax liability with credits, before such losses and credits expire. Included in the Federal net operating loss carryforwards are $16.6
million of losses generated from 2018 onward that have an indefinite carryover period. The remaining Federal and New Jersey net operating
loss carryforwards and Federal and New Jersey tax credit carryforwards will expire at various times between 2022 and 2038 unless utilized.
The
Company has analyzed the tax positions taken or expected to be taken in its tax returns and concluded it has no liability related to
uncertain tax positions. The Company is subject to income tax examinations by major taxing authorities for all tax years subsequent to
2017 and does not anticipate a change in its uncertain tax positions within the next twelve months. The Company’s policy is to
report interest and penalties, if any, related to unrecognized tax benefits in income tax expense.
Note
16 - Stock Plans and Share-Based Payments
The
fair value of stock options and restricted stock is recognized as stock-based compensation expense in the Company’s consolidated
statement of operations and comprehensive loss. The Company calculates stock-based compensation expense in accordance with ASC 718. The
fair value of stock-based awards is amortized over the vesting period of the award.
Stock
Plans
In
2015, the Board of Directors adopted the Nephros, Inc. 2015 Equity Incentive Plan (“2015 Plan”). As of December 31, 2022
including amendments approved by the Board of Directors, 2,547,400 shares of common stock were approved for issuance pursuant to stock
options, restricted stock and other equity incentive awards to the Company’s employees, directors and consultants. The maximum
contractual term for stock options granted under the 2015 Plan is 10 years.
As
of December 31, 2022, options to purchase 1,339,328 shares of common stock had been issued to employees under the 2015 Plan and were
outstanding. The options issued to employees expire on various dates between April 15, 2025 and November 1, 2032. Taking into account
all options and restricted stock granted under the 2015 Plan, there are 664,741 shares available for future grant under the 2015 Plan.
Generally, grants vest based on a service condition only and vest between two to four years.
The
Company’s previously adopted and approved plan, the 2004 Stock Incentive Plan (“2004 Plan”), expired in the year ended
December 31, 2014. As of December 31, 2022, options to purchase 26,037 shares of common stock had been issued to employees under the
2004 Plan and were outstanding. The options expire on various dates between May 23, 2023 and March 26, 2024. No shares are available
for future grants under the 2004 Plan. Options currently outstanding are fully vested.
Stock
Options
The
Company has elected to recognize forfeitures as they occur. Stock-based compensation expense recognized for the years ended December
31, 2022 and 2021 was $0.9 million and $0.9 million, respectively.
For
the year ended December 31, 2022, $0.8 million and approximately $63,000 are included in selling, general and administrative expenses
and research and development expenses, respectively, on the accompanying consolidated statement of operations and comprehensive loss.
For the year ended December 31, 2021, $0.9 million and approximately $48,000 are included in selling, general and administrative expenses
and research and development expenses, respectively, on the accompanying consolidated statement of operations and comprehensive loss.
The
following table summarizes the option activity for the years ended December 31, 2022 and 2021:
Summary of Option Activity
| |
Shares | | |
Weighted Average Exercise Price | |
Outstanding at December 31, 2020 | |
| 1,265,660 | | |
$ | 5.78 | |
Options granted | |
| 391,156 | | |
| 7.81 | |
Options forfeited or expired | |
| (152,051 | ) | |
| 6.71 | |
Options exercised | |
| (78,255 | ) | |
| 4.79 | |
Outstanding at December 31, 2021 | |
| 1,426,510 | | |
$ | 6.29 | |
Options granted | |
| 279,115 | | |
| 1.91 | |
Options forfeited or expired | |
| (340,260 | ) | |
| 6.88 | |
Options exercised | |
| - | | |
| - | |
Outstanding at December 31, 2022 | |
| 1,365,365 | | |
$ | 5.25 | |
The
following table summarizes the options exercisable and vested and expected to vest as of December 31, 2022 and 2021 (in thousands except
per share prices):
Summary of Options Exercisable Vested and Expected to Vest
| |
Shares | | |
Weighted Average Exercise Price | |
Exercisable at December 31, 2021 | |
| 877,633 | | |
$ | 5.46 | |
Vested and expected to vest at December 31, 2021 | |
| 1,395,932 | | |
$ | 6.26 | |
Exercisable at December 31, 2022 | |
| 968,441 | | |
$ | 5.55 | |
Vested and expected to vest at December 31, 2022 | |
| 1,342,342 | | |
$ | 5.26 | |
The
fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model. The below assumptions
for the risk-free interest rates, expected dividend yield, expected lives and expected stock price volatility were utilized for the stock
options granted during the year ended December 31, 2022.
Schedule of Fair Value Assumptions
Assumption for Option Grants | |
2022 | | |
2021 | |
Stock Price Volatility | |
| 75.44 | % | |
| 70.62 | % |
Risk-Free Interest Rates | |
| 2.74 | % | |
| 1.02 | % |
Expected Life (in years) | |
| 5.64 | | |
| 6.17 | |
Expected Dividend Yield | |
| 0 | % | |
| 0 | % |
Expected
volatility is based on historical volatility of the Company’s common stock at the time of grant. The risk-free interest rate is
based on the U.S. Treasury yields in effect at the time of grant for periods corresponding with the expected life of the options. For
the expected life, the Company is using the simplified method as described in the SEC Staff Accounting Bulletin 107. This method assumes
that stock option grants will be exercised based on the average of the vesting periods and the option’s life.
The
weighted-average fair value of options granted in 2022 and 2021 is $1.25 and $4.94, respectively. The aggregate intrinsic values of stock
options outstanding and stock options vested or expected to vest as of December 31, 2022 was approximately $0 for each. A stock option
has intrinsic value, at any given time, if and to the extent that the exercise price of such stock option is less than the market price
of the underlying common stock at such time. The weighted-average remaining contractual life of options vested or expected to vest as
of December 31, 2022 was 6.0 years.
The
intrinsic values of stock options exercised was approximately $265,000 for the year ended December 31, 2021. No stock options were exercised
for the year ended December 31, 2022.
As
of December 31, 2022, there was $0.9 million 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 1.93
years.
There
was no tax benefit related to expense recognized in the twelve months ended December 31, 2022 and 2021, as the Company is in a net operating
loss position.
Restricted
Stock
The
Company has issued restricted stock as compensation for the services of certain employees and non-employee directors. The grant date
fair value of restricted stock is based on the fair value of the common stock on the date of grant, and compensation expense is recognized
based on the period in which the restrictions lapse.
The
following table summarizes restricted stock activity for the years ended December 31, 2022 and 2021:
Summary of Restricted Stock Activity
| |
Shares | | |
Weighted Average Grant Date Fair Value | |
Nonvested at December 31, 2020 | |
| - | | |
$ | - | |
Granted | |
| 83,513 | | |
| 8.07 | |
Vested | |
| (23,781 | ) | |
| 8.06 | |
Nonvested at December 31, 2021 | |
| 59,732 | | |
| 8.07 | |
Granted | |
| - | | |
| - | |
Vested | |
| (44,732 | ) | |
| 7.87 | |
Forfeited | |
| (15,000 | ) | |
| 8.66 | |
Nonvested at December 31, 2022 | |
| - | | |
$ | - | |
The
total fair value of restricted stock that vested during the years ended December 31, 2022 and 2021 was $0.4 million and $0.2 million,
respectively.
Total
stock-based compensation expense for restricted stock was approximately $42,000 and $333,000 for the year ended December 31, 2022 and
2021, respectively and is recognized in selling, general and administrative expenses on the accompanying consolidate statement of operations
and comprehensive loss.
Approximately
$169,000 of restricted stock was granted to employees during the year ended December 31, 2021 for services rendered during the year ended
December 31, 2020.
As
of December 31, 2022, there was no unrecognized compensation expense related to restricted stock-based awards granted under the equity
compensation plans, and during the year ended December 31, 2022, 15,000 shares of restricted stock were forfeited as the conditions on
the vesting of the restricted stock could not be met.
As
of December 31, 2021, there was approximately $172,000 of unrecognized compensation expense related to the restricted stock awards which
will be amortized over the weighted average remaining requisite service period of 2.5 years.
The
aggregate shares of common stock legally issued and outstanding as of December 31, 2021 is greater than the aggregate shares of common
stock outstanding for accounting purposes by the amount of unvested restricted shares.
SRP
Equity Incentive Plan
SRP’s
2019 Equity Incentive Plan (the “SRP Plan”) was approved on May 7, 2019 under which 150,000 shares of SRP’s common
stock are reserved for the issuance of options, restricted stock and other stock awards.
There
were no SRP stock options granted during the year ended December 31, 2022. SRP issued 29,880 shares of restricted stock pursuant to the
SRP Plan during year ended December 31, 2022. Stock-based compensation expense related to the SRP stock grants was approximately $47,000
for the year ended December 31, 2022 and was included in selling, general and administrative expenses on the accompanying consolidated
statement of operations and comprehensive loss.
SRP
restricted shares are being expensed over the respective vesting period, which is based on a service condition.
Summary of Restricted Stock Activity
| |
Shares | | |
Weighted Average Exercise Price | |
Nonvested at December 31, 2021 | |
| - | | |
$ | 0.00 | |
Granted | |
| 29,880 | | |
| 5.00 | |
Vested | |
| 3,960 | | |
| 5.00 | |
Nonvested at December 31, 2022 | |
| 25,920 | | |
$ | 5.00 | |
SRP
stock grants are expensed over the respective vesting period, which was based on a service condition. Stock-based compensation expense
related to the SRP stock grants is presented by the Company as noncontrolling interest on the consolidated balance sheets as of December
31, 2022.
Note
17 - Stockholders’ Equity
July
2021 Common Stock Issuance
On
July 9, 2021, the Company issued 123,981 shares of common stock to acquire 100% of GenArraytion. The purchase price was $1.2 million,
including transaction costs of approximately $49,000, and was allocated among the acquired assets based upon their relative fair values
at the date of acquisition. Fifty percent of the 123,981 common shares issued were subject to a risk of forfeiture which lapsed during
the three months ended September 30, 2021.
Noncontrolling
Interest
Pursuant
to the terms and conditions of a Series A Preferred Stock Purchase Agreement, dated September 9, 2018, among SRP and the purchasers identified
therein (the “SRP Purchase Agreement”), SRP sold to such purchasers an aggregate of 600,000 shares of its Series A Preferred
Stock (the “Series A Preferred”) at a price of $5.00 per share resulting in total gross proceeds of $3.0 million. On February
1, 2022, SRP entered into a First Amendment to the SRP Purchase Agreement (the “SRP Amendment”) with the holders of its outstanding
shares of Series A Preferred. The purpose of the SRP Amendment was to permit SRP to sell up to an additional 100,003 shares of Series
A Preferred at one or more closings to occur by February 28, 2022, and on the same terms and conditions as otherwise set forth in the
SRP Purchase Agreement. Pursuant to the SRP Amendment, on February 4, 2022, SRP conducted a closing in which it sold 100,003 shares of
Series A Preferred, resulting in gross proceeds of $500,015. Approximately $188,000 of the proceeds were recorded as an increase to the
equity of the non-controlling interests. The Company purchased 62,500 shares of SRP’s Series A Preferred at such closing and, as
a result, maintained its 62.5% stock ownership position in SRP. The other purchasers at the February 4, 2022 closing included the Company’s
Chief Executive Officer, who purchased 313 shares, and Lambda Investors LLC (“Lambda”), an affiliate of Wexford Capital,
which beneficially owns approximately 36% of the Company’s common stock, which purchased 25,938 shares of SRP’s Series A
Preferred. Such purchases were made on the same terms as all other purchasers. In addition to the funds provided by the SRP Purchase
Agreement, Nephros and SRP continue to maintain a loan agreement under which Nephros agreed to lend up to $1.3 million to SRP, including
the $1.0 million borrowed during the year ended December 31, 2020. These loaned funds were used to fund SRP’s operating activities
through the recent FDA 510(k) clearance process of SRP’s second-generation hemodiafiltration system, which was initially submitted
to the FDA on February 24, 2021 and which received 510(k) clearance on May 13, 2022. As of December 31, 2022, the outstanding balance
of this loan, including accrued interest, was $1.4 million.
Each
share of SRP Series A Preferred is initially convertible into one share of SRP common stock, subject to adjustment for stock splits and
recapitalization events. Subject to customary exempt issuances, in the event SRP issues additional shares of its common stock or securities
convertible into common stock at a per share price that is less than the original purchase price of the Series A Preferred, the conversion
price of the Series A Preferred will automatically be reduced to such lower price.
In
the event of any voluntary or involuntary liquidation, dissolution or winding up of SRP, the holders of the Series A Preferred are entitled
to be paid out of the assets of SRP available for distribution to its stockholders or, in the case of a deemed liquidation event, out
of the consideration payable to stockholders in such deemed liquidation event or the available proceeds, before any payment shall be
made to the holders of SRP common stock by reason of their ownership thereof, an amount per share equal to one times (1x) the Series
A Preferred original issue price, plus any accruing dividends accrued but unpaid thereon, whether or not declared, together with any
other dividends declared but unpaid thereon (the “Series A Liquidation Preference”). If upon any such liquidation, dissolution
or winding up of SRP or deemed liquidation event, the assets of SRP available for distribution to its stockholders shall be insufficient
to pay the Series A Liquidation Preference in full, the holders of Series A Preferred shall share ratably in any distribution of the
assets available for distribution in proportion to the respective amounts which would otherwise be payable in respect of the shares held
by them upon such distribution if all amounts payable on or with respect to such shares were paid in full. After the full payment of
the Series A Liquidation Preference, the holders of the Series A Preferred and the holders of common stock will share ratably in any
remaining proceeds available for distribution on an as-converted to common stock basis.
Each
share of Series A Preferred accrues dividends at the rate per annum of $0.40 per share. The accruing dividends shall accrue from day
to day, whether or not declared, and shall be cumulative and shall be payable only when, as, and if declared by the Board.
Holders
of Series A Preferred shall be entitled to cast the number of votes equal to the number of whole shares of common stock into which the
shares of Series A Preferred held by such holder are convertible as of the record date for determining stockholders entitled to vote.
Except as provided by law or by the other provisions, the holders of Series A Preferred vote together with the holders of common stock
as a single class. Notwithstanding the foregoing, for as long as at least 150,000 shares of Series A Preferred are outstanding, SRP is
required to obtain the affirmative vote or written consent of a majority of the Series A Preferred in order to effect certain corporate
transactions, including without limitation, the issuance of any securities senior to or on parity with the Series A Preferred, a liquidation
or deemed liquidation of SRP, amendments to SRP’s charter documents, the issuance of indebtedness in excess of $250,000, any annual
budget for the Company’s operations, and the hiring or firing of any executive officers of SRP. In addition, the holders of the
Series A Preferred are entitled to elect two members of SRP’s board of directors.
The
noncontrolling interest in SRP held by holders of the Series A Preferred has been classified as equity on the accompanying consolidated
interim balance sheet, as the noncontrolling interest is redeemable only upon the occurrence of events that are within the control of
the Company.
In
March 2023, the board of directors of SRP adopted, and the stockholders of SRP approved, a plan to wind up SRP’s operations and
dissolve. See Note 21 – Subsequent Event, below.
Warrants
The
Company accounts for stock warrants as either equity instruments or derivative liabilities depending on the specific terms of the warrant
agreement. As of December 31, 2021 all of the Company’s outstanding warrants were classified as equity. There are no outstanding
warrants at December 31, 2022.
The
following table summarizes certain terms of all of the Company’s outstanding warrants at December 31, 2022 and 2021:
Schedule of Warrant Outstanding
| |
| |
| |
Exercise | | |
Total Common Shares Issuable as of December 31, | |
Title of Warrant | |
Date Issued | |
Expiry Date | |
Price | | |
2022 | | |
2021 | |
Equity-classified warrants | |
| |
| |
| | | |
| | | |
| | |
| |
| |
| |
| | | |
| | | |
| | |
March 2017 – private placement warrants | |
3/22/2017 | |
3/22/2022 | |
$ | 2.70 | | |
| - | | |
| 123,476 | |
March 2017 – private placement warrants | |
3/22/2017 | |
3/22/2022 | |
$ | 2.70 | | |
| - | | |
| 123,476 | |
Warrants
Exercised During 2022 and 2021
During
the year ended December 31, 2022, warrants to purchase 60,374 shares of the Company’s common stock were exercised, resulting in
proceeds of $0.2 million and the issuance of 60,374 shares of the Company’s common stock. Of the warrants exercised during the
year ended December 31, 2022, warrants to purchase 14,815 shares of the Company’s common stock were exercised by members of management,
resulting in proceeds of approximately $40,000. Warrants to purchase 63,102 shares of the Company’s common stock expired unexercised,
during the year ended December 31, 2022.
During
the year ended December 31, 2021, the Company issued an aggregate of 120,966 shares of its common stock upon the exercise of outstanding
warrants relating to an aggregate of 126,008 shares of common stock. Of such 120,966 shares issued, 110,003 were issued in cash exercises
resulting in gross proceeds to the Company of $0.3 million (the “Cash Exercises”) and 10,963 shares were issued in connection
with cashless (net) exercises of outstanding warrant relating to 16,005 shares of common stock (the “Cashless Exercises”).
Among the shares issued in connection with the Cash Exercises, 66,667 shares were issued to the Company’s largest stockholder,
which resulted in proceeds to the Company of $0.2 million. Among the Cashless Exercises, 4,570 shares of common stock were issued to
persons affiliated with members of the Company’s management upon the exercise of warrants relating to 6,669 shares.
Note
18 – Savings Incentive Match Plan
On
January 1, 2017, the Company established a Savings Incentive Match Plan for Employees Individual Retirement Account (SIMPLE IRA), which
covers all employees. The SIMPLE IRA Plan provides for voluntary employee contributions up to statutory IRA limitations. The Company
matches 100% of employee contributions to the SIMPLE IRA Plan, up to 3% of each employee’s salary. The Company contributed and
expensed approximately $104,000 and $92,000 to the SIMPLE IRA in 2022 and 2021, respectively.
Note
19 - Commitments and Contingencies
Purchase
Commitments
In
exchange for the rights granted under the License and Supply Agreement with Medica (see Note 10 – License and Supply
Agreement, net), the Company agreed to make certain minimum annual aggregate purchases from Medica over the term of the License and
Supply Agreement. For the year ended December 31, 2022, the Company has agreed to make minimum annual aggregate purchases from
Medica of €3.5
million (approximately $3.7
million). For the year ended December 31, 2022, the Company’s aggregate purchase commitments totaled €3.2
million (approximately $3.4
million). The company has agreed with Medica that it will make-up the €0.3 purchase shortfall based on anticipated future
revenues.
Future
purchase commitments to under the License and Supply Agreement with Medica are as follows:
| ● | 2023:
€3,625,000 |
| ● | 2024:
€3,825,000 |
| ● | 2025:
€4,000,000 |
Note
20 – Segment Reporting
The
Company has defined three reportable segments: Water Filtration, Pathogen Detection and Renal Products. During the period ended December
31, 2022, it was determined the Pathogen Detection segment was to be treated as a discontinued operation (See Note 4 –Discontinued
Operations). For purposes of this segment reporting, the Company is reporting only on the remaining two segments that are considered
part of continuing operations.
The
Water Filtration segment primarily develops and sells high performance water purification filters. The Renal Products segment is focused
on the development of medical device products for patients with renal disease, including a second generation hemodiafiltration system
for the treatment of patients with ESRD.
The
Company’s chief operating decision maker evaluates the financial performance of the Company’s segments based upon segment
revenues, gross margin and operating expenses which include research and development and selling, general and administrative expenses.
Items below loss from operations are not reported by segment, since they are excluded from the measure of segment profitability reviewed
by the Company’s chief operating decision maker. The Company does not report balance sheet information by segment since such information
is not reviewed by the Company’s chief operating decision maker.
The
accounting policies for the Company’s segments are the same as those described in Item 7, “Management’s Discussion
and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates” of this Annual
Report on Form 10-K and Note 2 – Summary of Significant Accounting Policies.
The
tables below present segment information reconciled to total Company loss from operations, with segment operating loss including gross
profit less direct research and development expenses and direct selling, general and administrative expenses to the extent specifically
identified by segment:
Schedule of Segment Information
| |
| | | |
| | | |
| | |
| |
Year Ended December 31, 2022 | |
| |
Water
Filtration | | |
Renal
Products | | |
Nephros, Inc.
Consolidated | |
Total net revenues | |
$ | 9,975 | | |
$ | - | | |
$ | 9,975 | |
Gross margin | |
| 4,731 | | |
| - | | |
| 4,731 | |
Research and development expenses | |
| 879 | | |
| 376 | | |
| 1,255 | |
Depreciation and amortization expense | |
| 218 | | |
| - | | |
| 218 | |
Selling, general and administrative expenses | |
| 7,328 | | |
| 265 | | |
| 7,593 | |
Total operating expenses | |
| 8,425 | | |
| 641 | | |
| 9,066 | |
Loss from continuing operations | |
$ | (3,694 | ) | |
$ | (641 | ) | |
$ | (4,335 | ) |
| |
| | | |
| | | |
| | |
| |
Year
Ended December 31, 2021 | |
| |
Water
Filtration | | |
Renal
Products | | |
Nephros, Inc.
Consolidated | |
Total net revenues | |
$ | 10,217 | | |
$ | - | | |
$ | 10,217 | |
Gross margin | |
| 5,633 | | |
| - | | |
| 5,633 | |
Research and development expenses | |
| 1,251 | | |
| 247 | | |
| 1,498 | |
Depreciation and amortization
expense | |
| 192 | | |
| - | | |
| 192 | |
Selling, general and administrative
expenses | |
| 7,124 | | |
| 71 | | |
| 7,195 | |
Total operating expenses | |
| 8,567 | | |
| 318 | | |
| 8,885 | |
Loss from continuing operations | |
$ | (2,934 | ) | |
$ | (318 | ) | |
$ | (3,252 | ) |
As
of December 31, 2022, $0.1 million of total assets in the Renal Products segment consisted of cash received from the loan agreement between
Nephros and SRP.
Note
21 – Subsequent Event
On March 6 2023, the Board of Directors of
Specialty Renal Products, Inc. (“SRP”), the Company’s subsidiary, approved a plan to wind down SRP’s
operations, liquidate SRP’s remaining assets and dissolve the company, which plan was approved by SRP’s stockholders on
March 9, 2023. As of such date, the SRP Board of Directors believes that SRP’s cash resources are sufficient to satisfy the
company’s outstanding liabilities, other than its obligations under the loan agreement between SRP and the Company pursuant to
which SRP has an existing balance of outstanding principal and accrued interest of approximately $1.4 million.
As a result, the Company does not expect to receive cash repayment of such indebtedness, but anticipates that all of SRP’s
remaining assets, including all of its rights and interests in and to the technology and assets related to its second generation HDF
product, will be assigned to the Company in partial satisfaction of such indebtedness. The holders of SRP’s outstanding common
stock and preferred stock are not expected to receive any return of capital from the liquidation of SRP.