10-Q

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: March 31, 2019

OR

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

For the transition period from: _______ to _______

Commission File Number: 001-32288

NEPHROS, INC.

(Exact name of registrant as specified in its charter)

DELAWARE	13-3971809
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
380 Lackawanna Place South Orange, NJ	07079
(Address of principal executive offices)	(Zip Code)

(201) 343-5202

Registrant’s telephone number, including area code

N/A

(Former name, former address and former fiscal year, if changed since last report)

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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). [X] YES [  ] NO

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

Large accelerated filer [  ]	Accelerated filer [  ]
Non-accelerated filer [X]	Smaller reporting company [X]
	Emerging growth company [  ]

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). [  ] YES [X] NO

Securities registered pursuant to Section 12(b) of the Act: None.

As of May 3, 2019, 64,611,300 shares of the registrant’s common stock, $0.001 par value per share, were outstanding.

NEPHROS, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION	3
Item 1. Financial Statements (unaudited).	3
CONDENSED CONSOLIDATED BALANCE SHEETS – March 31, 2019 and December 31, 2018	3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS – Three months ended March 31, 2019 and 2018	4
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY – Three months ended March 31, 2019 and 2018	5
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS – Three months ended March 31, 2019 and 2018	6
NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (unaudited)	7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.	22
Item 3. Quantitative and Qualitative Disclosures About Market Risk.	31
Item 4. Controls and Procedures.	31
PART II - OTHER INFORMATION	32
Item 5. Other Information	32
Item 6. Exhibits	32
SIGNATURES	33

2

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

NEPHROS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)

(Unaudited)

	March 31, 2019			December 31, 2018
ASSETS
Current assets:
Cash	$	3,608		$	4,581
Accounts receivable, net		1,249			1,452
Inventory, net		2,040			1,864
Prepaid expenses and other current assets		275			276
Total current assets		7,172			8,173
Property and equipment, net		97			91
Operating lease right-of-use assets		587			-
Intangible assets, net		580			590
Goodwill		759			748
License and supply agreement, net		904			938
Other assets		39			18
TOTAL ASSETS	$	10,138		$	10,558
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Secured revolving credit facility	$	906		$	991
Current portion of secured note payable		199			195
Accounts payable		1,030			836
Accrued expenses		512			396
Current portion of contingent consideration		272			236
Current portion of operating lease liabilities		191			-
Total current liabilities		3,110			2,654
Secured note payable, net of current portion		787			843
Contingent consideration, net of current portion		231			263
Operating lease liabilities, net of current portion		406			-
TOTAL LIABILITIES		4,534			3,760
COMMITMENTS AND CONTINGENCIES (Note 16)
STOCKHOLDERS’ EQUITY
Preferred stock, $.001 par value; 5,000,000 shares authorized at March 31, 2019 and December 31, 2018; no shares issued and outstanding at March 31, 2019 and December 31, 2018.		-			-
Common stock, $.001 par value; 90,000,000 shares authorized at March 31, 2019 and December 31, 2018; 64,611,300 and 64,616,031 shares issued and outstanding at March 31, 2019 and December 31, 2018, respectively.		64			64
Additional paid-in capital		127,974			127,816
Accumulated other comprehensive income		68			71
Accumulated deficit		(125,502	)		(124,153	)
Subtotal		2,604			3,798
Noncontrolling interest		3,000			3,000
TOTAL STOCKHOLDERS’ EQUITY		5,604			6,798
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	10,138		$	10,558

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

3

NEPHROS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(In thousands, except share and per share amounts)

(Unaudited)

	Three Months Ended March 31,
	2019			2018
Net revenue:
Product revenues	$	1,729		$	958
Royalty and other revenues		40			27
Total net revenues		1,769			985
Cost of goods sold		771			518
Gross margin		998			467
Operating expenses:
Research and development		756			289
Depreciation and amortization		50			41
Selling, general and administrative		1,503			1,260
Change in fair value of contingent consideration		(10	)		-
Total operating expenses		2,299			1,590
Loss from operations		(1,301	)		(1,123	)
Other income (expense):
Loss on extinguishment of debt		-			(199	)
Interest expense		(46	)		(86	)
Interest income		-			1
Other expense, net		(2	)		(22	)
Total other expense		(48	)		(306	)
Net loss		(1,349	)		(1,429	)
Less: Undeclared deemed dividend attributable to noncontrolling interest		(59	)		-
Net loss attributable to Nephros, Inc. shareholders		(1,408	)		(1,429	)
Net loss per common share, basic and diluted	$	(0.02	)	$	(0.03	)
Weighted average common shares outstanding, basic and diluted		64,166,988			55,568,575
Comprehensive loss:
Net loss		(1,349	)		(1,429	)
Other comprehensive income (loss), foreign currency translation adjustments, net of tax		(3	)		3
Comprehensive loss		(1,352	)		(1,426	)
Comprehensive loss attributable to noncontrolling interest		(59	)		-
Comprehensive loss attributable to Nephros, Inc. shareholders	$	(1,411	)	$	(1,426	)

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

4

NEPHROS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(In Thousands, Except Share Amounts)

(Unaudited)

	Three months ended March 31, 2019
	Common Stock				Additional Paid-in		Accumulated Other Comprehensive			Accumulated						Noncontrolling		Total Stockholders’
	Shares		Amount		Capital		Income			Deficit			Subtotal			Interest		Equity
Balance, December 31, 2018		64,212,847	$	64	$	127,816	$	71		$	(124,153	)	$	3,798			3,000	$	6,798
Net loss											(1,349	)		(1,349	)				(1,349	)
Net unrealized losses on foreign currency translation, net of tax								(3	)					(3	)				(3	)
Noncash stock-based compensation						158								158					158
Balance, March 31, 2019		64,212,847	$	64	$	127,974	$	68		$	(125,502	)	$	2,604		$	3,000	$	5,604

	Three months ended March 31, 2018
	Common Stock					Additional Paid-in		Accumulated Other Comprehensive		Accumulated						Noncontrolling		Total Stockholders’
	Shares			Amount		Capital		Income		Deficit			Subtotal			Interest		Equity
Balance, December 31, 2017		55,293,267		$	55	$	122,924	$	77	$	(121,106	)	$	1,950			-	$	1,950
Net loss											(1,429	)		(1,429	)				(1,429	)
Cumulative effect of adoption of ASC 606											278			278					278
Net unrealized gains on foreign currency translation, net of tax									3					3					3
Issuance of common stock		1,900,000			2		852							854					854
Cashless exercise of stock options		22,245			-									-					-
Cancelled restricted stock shares		(45,859	)		-									-					-
Noncash stock-based compensation							242							242					242
Balance, March 31, 2018		57,169,653		$	57	$	124,018	$	80	$	(122,257	)	$	1,898		$	-	$	1,898

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

5

NEPHROS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Three Months Ended March 31,
	2019			2018
OPERATING ACTIVITIES:
Net loss	$	(1,349	)	$	(1.429	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation of property and equipment		8			7
Amortization of intangible assets and license and supply agreement		44			34
Non-cash stock-based compensation, including stock options and restricted stock		158			242
Loss on extinguishment of debt		-			199
Inventory reserve		26			50
Change in fair value of contingent consideration		(10	)		-
Accretion of contingent consideration		14			-
Amortization of debt discount		-			34
Loss on disposal of equipment		-			10
(Gain) loss on foreign currency transactions		(5	)		7
(Increase) decrease in operating assets:
Accounts receivable		203			158
Inventory		(202	)		(304	)
Prepaid expenses and other current assets		1			22
Other asset		(21	)		-
Increase in operating liabilities:
Accounts payable		199			190
Accrued expenses		237			111
Net cash used in operating activities		(697	)		(669	)
INVESTING ACTIVITIES:
Acquisition of Biocon		(137	)		-
Net cash used in investing activities		(137	)		-
FINANCING ACTIVITES:
Proceeds from issuance of common stock		-			854
Net payments from secured revolving credit facility		(85	)		(561	)
Payments on secured note payable		(52	)		-
Proceeds from issuance of secured note		-			1,187
Repayment of unsecured long term note payable		-			(1,187	)
Net cash (used in) provided by financing activities		(137	)		293
Effect of foreign exchange rates on cash		(2	)		1
NET DECREASE IN CASH		(973	)		(375	)
CASH, BEGINNING OF PERIOD		4,581			2,194
CASH, END OF PERIOD	$	3,608		$	1,819
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest expense	$	31		$	64
Cash paid for income taxes	$	-		$	3
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING INFORMATION
Right-of-use asset obtained in exchange for lease liability	$	20		$	-
Purchase of equipment included in accrued expenses	$	14		$	-

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

6

NEPHROS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS  (unaudited)

Note 1 – Organization and Nature of Operations

Nephros, Inc. (“Nephros” or the “Company”) was incorporated under the laws of the State of Delaware on April 3, 1997. The Company was founded by health professionals, scientists and engineers affiliated with Columbia University to develop advanced end stage renal disease (“ESRD”) therapy technology and products. Today, the Company has two U.S. Food and Drug Administration 510(k)-cleared products in the hemodiafiltration (“HDF”) market that deliver therapy to ESRD patients: the OLpūr mid-dilution HDF filter or “dialyzer,” designed expressly for HDF therapy, and the OLpūr H2H HDF module, an add-on module designed to allow the most common types of hemodialysis machines to be used for HDF therapy.

Beginning in 2009, Nephros introduced an additional, complementary business developing and marketing 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 water-borne 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 Company is also exploring water purification applications in other markets, including diagnostics, military field applications, and data center cooling.

In July 2018, the Company formed a new, wholly-owned subsidiary, Specialty Renal Products, Inc. (“SRP”), to drive the development of its second-generation HDF system and other products focused on improving therapies for patients with renal disease. The Company transferred three patents to SRP, which were carried at zero book value. SRP is a reportable segment, referred to as the Renal Products segment.

On December 31, 2018, the Company entered into a Membership Interest Purchase Agreement (the “Agreement”) with Biocon 1, LLC, a Nevada limited liability company (“Biocon”), Aether Water Systems, LLC, a Nevada limited liability company (“Aether”), and Gregory Lucas, the sole member of each of Biocon and Aether (“Lucas”). Pursuant to the terms of the Agreement, the Company acquired 100% of the outstanding membership interests of each of Aether and Biocon (the “Biocon Acquisition”).

The U.S. facilities, located at 380 Lackawanna Place, South Orange, New Jersey, 07079, and at 591 East Sunset Road, Henderson, Nevada 89011, are used to house the Company’s corporate headquarters, research, manufacturing, and distribution facilities.

Note 2 – Basis of Presentation and Liquidity

Interim Financial Information

The accompanying unaudited condensed interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 8 and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for annual financial statements. Results as of and for the three months ended March 31, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019.

The condensed consolidated interim financial statements and notes thereto should be read in conjunction with the consolidated financial statements and notes for the year ended December 31, 2018 included in the Company’s Annual Report on Form 10-K.

Consolidation

The accompanying consolidated financial statements include the accounts of Nephros, Inc. and its subsidiaries, including SRP, in which a controlling interest is maintained by the Company. Outside shareholders’ 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.

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, value of contingent consideration, 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.

7

Liquidity

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 approximately $125,502,000 as of March 31, 2019. Also, the Company has a loan agreement with a lender, which provides a secured asset-based revolving credit facility of up to $1,000,000. This loan agreement will automatically renew on August 17, 2019, although this renewal is not guaranteed.

In July 2018, the Company formed a new, wholly-owned subsidiary, SRP, to drive the development of its second-generation HDF system and other products focused on improving therapies for patients with renal disease. On September 5, 2018, SRP completed a private placement transaction whereby SRP sold preferred shares equivalent to 37.5% of its outstanding equity interests for aggregate proceeds of $3,000,000. The proceeds of this private placement are restricted to SRP expenses and may not be used for the benefit of the Company or other affiliated entities, except to reimburse for expenses directly attributable to SRP.

Based on cash that is available for Company operations and projections of future Company operations, the Company believes that its cash will be sufficient to fund the Company’s 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 will reduce discretionary expenditures such as additional headcount, new R&D projects, and other variable costs to alleviate the substantial doubt as to the Company’s ability to continue as a going concern. The Company may also seek to raise additional capital, however, 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.

Recently Adopted Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, “Leases,” (“ASC 842”) which discusses how an entity should account for lease assets and lease liabilities. The guidance specifies that an entity who is a lessee under lease agreements should recognize lease assets and lease liabilities for those leases classified as operating leases under previous FASB guidance. The Company adopted the guidance on January 1, 2019 using the transition method provided by ASU 2018-11, “Leases (Topic 842): Targeted Improvements”. Under this transition method, the Company applied the new requirements to only those leases that existed as of January 1, 2019, rather than at the earliest comparative period presented in the financial statements. Prior periods will be presented under existing lease guidance. Upon transition, the Company applied the package of practical expedients permitted under the ASC 842 transition guidance. As a result, the Company did not reassess (1) whether expired or existing contracts contain leases under the new definition of a lease, including whether an existing or expired contract contains an embedded lease, (2) lease classification for expired or existing leases and (3) any initial direct costs of existing leases. As a result of the adoption of this guidance on January 1, 2019, the Company recorded right-of-use assets of approximately $613,000, net of approximately $8,000 of deferred rent liability as of January 1, 2019, and lease liabilities of approximately $621,000. Adoption of the guidance did not have any impact on the Company’s consolidated statements of operations and comprehensive loss or cash provided by or used in operating, investing or financing activities on its consolidated statements of cash flows.

In June 2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses on Financial Instruments,” which replaces the current incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The guidance is effective for the Company beginning in the first quarter of fiscal year 2020. Early adoption is permitted beginning in the first quarter of fiscal year 2019. The Company early adopted this guidance as of January 1, 2019 and the guidance did not have an impact on its consolidated financial statements.

In May 2018, the FASB issued ASU 2018-07, “Improvements to Nonemployee Share-Based Payment Accounting,” which expands the scope of Accounting Standards Codification (“ASC”) 718 to include share-based payment transactions for acquiring goods and services from nonemployees. The Company adopted this guidance as of January 1, 2019 and the guidance did not have an impact on its consolidated financial statements.

Recent Accounting Pronouncements, Not Yet Effective

In January 2017, the FASB issued ASU 2017-04, “Simplifying the Test for Goodwill Impairment,” which simplifies the test for goodwill impairment. The guidance is effective for the Company beginning in the first quarter of fiscal year 2020. Early adoption is permitted for interim or annual goodwill impairments tests after January 1, 2017. The Company is assessing the impact of adopting this guidance on its consolidated financial statements.

8

In August 2018, the FASB issued ASU 2018-13, “Disclosure Framework-Changes to the Disclosure Requirements for the Fair Value Measurement,” which modifies the disclosure requirements on fair value measurements. The guidance is effective for the Company beginning in the first quarter of fiscal year 2020. Early adoption is permitted. The Company is assessing the impact of adopting this guidance on its consolidated financial statements.

In August 2018, the FASB issued ASU 2018-15, “Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract,” which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The guidance is effective for the Company beginning in the first quarter of fiscal year 2020. Early adoption is permitted. The Company is assessing the impact of adopting this guidance on its consolidated financial statements.

In November 2018, the FASB issued ASU 2018-18, “Collaborative Arrangements: Clarifying the Interaction Between Topic 808 and Topic 606.” The new guidance clarifies that, when the collaborative arrangement participant is a customer in the context of a unit-of-account, revenue from contracts with customers guidance should be applied, adds unit-of-account guidance to collaborative arrangements guidance, and requires, that in a transaction with a collaborative arrangement participant who is not a customer, presenting the transaction together with revenue recognized under contracts with customers is precluded. The guidance is effective for the Company beginning in the first quarter of fiscal year 2020. Early adoption is permitted. The Company is assessing the impact of adopting this guidance on its consolidated financial statements.

Concentration of Credit Risk

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

Major Customers

For the three months ended March 31, 2019 and 2018, the following customers accounted for the following percentages of the Company’s revenues, respectively:

Customer	2019			2018
A		17	%		1	%
B		12	%		5	%
C		12	%		5	%
D		7	%		13	%
E		7	%		15	%
Total		55	%		39	%

As of March 31, 2019 and December 31, 2018, the following customers accounted for the following percentages of the Company’s accounts receivable, respectively:

Customer	2019			2018
A		13	%		5	%
B		11	%		-	%
F		-	%		15	%
D		4	%		11	%
C		8	%		11	%
Total		36	%		42	%

Accounts Receivable

The Company provides credit terms to customers in connection with purchases of the Company’s products. Management periodically reviews customer account activity in order to assess the adequacy of the allowances provided for potential collection issues and returns. Factors considered include economic conditions, each customer’s payment and return history and credit worthiness. Adjustments, if any, are made to reserve balances following the completion of these reviews to reflect management’s best estimate of potential losses. The allowance for doubtful accounts was approximately $11,000 and $15,000 as of March 31, 2019 and December 31, 2018, respectively. For the three months ended March 31, 2019, there was no provision for bad debt expense. Write-offs of accounts receivable were approximately $4,000 for the three months ended March 31, 2019 which were reserved for in a prior period. There was no allowance for sales returns at March 31, 2019 or December 31, 2018. During the three months ended March 31, 2018, there was no provision for bad debt expense and there were no write-offs of accounts receivable.

9

Depreciation Expense

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. For the three months ended March 31, 2019 and 2018, depreciation expense was approximately $8,000 and $7,000, respectively. Approximately $2,000 of the approximately $8,000 of depreciation expense for the three months ended March 31, 2019 has been recognized in the cost of goods sold. There was no depreciation recognized in cost of goods sold for the three months ended March 31, 2018.

Leases

The Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets and operating lease liabilities on the consolidated balance sheet.

Operating lease ROU assets and operating 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 also includes any lease payments made and excludes lease incentives and initial direct costs incurred. 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 nonlease components and, instead, account for them as a single component.

Note 3 – Biocon Acquisition

On December 31, 2018, the Company completed the Biocon Acquisition, which included the acquisition of 100% of the outstanding membership interests of each of Aether and Biocon. The purpose of the Biocon Acquisition was to accelerate growth and to expedite entry into additional markets.

Transaction costs associated with the Biocon Acquisition of approximately $33,000 were recorded in selling, general and administrative costs in the fourth quarter of 2018.

The Company has accounted for the Biocon Acquisition as a business combination under the acquisition method of accounting.

The following is a summary of total consideration for the Biocon Acquisition, including a final working capital adjustment in the three months ended March 31, 2019 of approximately $11,000:

	Total Consideration
Fixed purchase price	$	1,070,000
Acquisition date fair value of contingent consideration		562,000
Total consideration1	$	1,632,000

¹Total consideration consists of an upfront payment of $991,000, which includes $250,000 held in escrow, $137,000 in working capital payments, $5,000 in accrued expenses and $499,000 of acquisition date fair value contingent consideration liabilities.

The Company has allocated the total consideration for the transaction based upon the fair value of net assets acquired and liabilities assumed at the date of acquisition.

10

The following is a summary of the final purchase price allocation for the Biocon Acquisition. Changes to the purchase price allocation from amounts reported on the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 were due to the final working capital adjustment of approximately $11,000.

	Fair Values
Trade accounts receivable	$	164,000
Inventories		179,000
Equipment		39,000
Security deposit		7,000
Goodwill		759,000
Intangible assets		590,000
Total assets acquired, net of cash acquired		1,738,000
Accounts payable		91,000
Accrued expenses		15,000
Total liabilities assumed		106,000
Net assets acquired, net of cash acquired	$	1,632,000

Intangible Assets

The acquired intangible assets are being amortized over their estimated useful lives as follows:

	Preliminary Fair Values		Weighted Average Useful Life (Years)
Tradenames, service marks and domain names		50,000		5
Customer relationships		540,000		17
Total intangible assets	$	590,000

The estimated fair value of the identifiable intangible assets was determined using the “income approach,” which is a valuation technique that provides an estimate of the fair value of an asset based on market participant expectations of the cash flows an asset would generate over its remaining useful life. The assumptions, including the expected projected cash flows, utilized in the preliminary purchase price allocation and in determining the purchase price were based on the Company’s best estimates as of December 31, 2018, the closing date of the Biocon Acquisition.

Some of the more significant assumptions inherent in the development of those asset valuations include the estimated net cash flows for each year for each asset or product (including net revenues, cost of goods sold, research and development costs, selling and marketing costs and working capital / contributory asset charges), the appropriate discount rate to select in order to measure the risk inherent in each future cash flow stream, the assessment of each asset’s life cycle, the potential regulatory and commercial success risks, competitive trends impacting the asset and each cash flow stream, as well as other factors. No assurances can be given that the underlying assumptions used to prepare the discounted cash flow analysis will not change. For these and other reasons, actual results may vary significantly from estimated results.

Goodwill

Goodwill is calculated as the excess of the consideration transferred over the net assets recognized. Factors that contributed to the Company’s recognition of goodwill include the Company’s intent to expand its product portfolio. Goodwill has been allocated to the Water Filtration segment.

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Unaudited Pro Forma Results of Operations

The following table reflects the unaudited pro forma combined results of operations for the three months ended March 31, 2018 (assuming the closing of the Biocon Acquisition occurred on January 1, 2017):

	Three Months Ended
	March 31, 2018
Total revenues	$	1,170,000
Net loss attributable to Nephros, Inc	$	(1,389,000	)

The pro forma results have been prepared for comparative purposes only and are not necessarily indicative of the actual results of operations had the closing of the Biocon Acquisition taken place on January 1, 2017. Furthermore, the pro forma results do not purport to project the future results of operations of the Company.

The unaudited pro forma information reflects the following adjustments:

● Adjustments to amortization expense for the three months ended March 31, 2018 of approximately $10,000 related to identifiable intangible assets acquired;

● Eliminate interest expense in the historical Biocon results of operations and eliminate interest income in the Company’s historical results of operations, each of which was approximately $1,000 for the three months ended March 31, 2018, which interest was related to a lease that was terminated as of the closing of the Biocon Acquisition; and

● Eliminate sales, and related cost of goods sold, for products sold by Biocon to the Company, with a gross margin impact of approximately $1,000 for the three months ended March 31, 2018.

Note 4 – Revenue Recognition

The Company recognizes revenue related to product sales when product is shipped via external logistics provider and the other criteria of ASC 606, “Revenue from Contracts with Customers” (“ASC 606”) are met. Product revenue is recorded net of returns and allowances. In addition to product revenue, the Company recognizes revenue related to license, royalty and other agreements in accordance with the five-step model in ASC 606. License, royalty and other revenue recognized for the three months ended March 31, 2019 and 2018 is comprised of:

	Three Months Ended March 31,
	2019		2018
Royalty revenue under the License Agreement with Bellco	$	26,000	$	27,000
Other revenue		14,000		-
Total royalty and other revenue	$	40,000	$	27,000

Bellco License Agreement

With regard to the OLpūr MD190 and MD220, on June 27, 2011, the Company entered into a License Agreement (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, as amended, 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 recognized as license revenue over the term of the License Agreement. As of the adoption of ASC 606, the remaining deferred revenue of approximately $278,000 was recognized as a cumulative effect adjusted to accumulated deficit as of January 1, 2018 in accordance with ASC 606.

The License Agreement, as amended, also provides minimum sales targets which, if not satisfied, will, at the discretion of the Company, result in conversion of the license to non-exclusive status. Beginning on January 1, 2015 through and including December 31, 2021, Bellco will pay the Company a royalty based on the number of units of Products sold per year in the covered territory as follows: for the first 125,000 units sold in total, €1.75 (approximately $2.10) per unit; thereafter, €1.25 (approximately $1.50) per unit. The License Agreement also provides for a fixed royalty payment payable to the Company for the period beginning on January 1, 2015 through and including December 31, 2021 if the minimum sales targets are not met.

The Company recognized royalty income from Bellco pursuant to the License Agreement for the three months ended March 31, 2019 and 2018 of approximately $26,000 and $27,000, respectively.

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Note 5 – 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.

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.

The following table sets forth the Company’s financial assets and liabilities that were measured at fair value on a recurring basis as of March 31, 2019:

	Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Total
At March 31, 2019:
Total contingent consideration liability	$	-	$	-	$	503,000	$	503,000

The following table sets forth the Company’s financial assets and liabilities that were measured at fair value on a recurring basis as of December 31, 2018:

	Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Total
At December 31, 2018:
Total contingent consideration liability	$	-	$	-	$	499,000	$	499,000

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The following table summarizes the change in fair value, as determined by Level 3 inputs, for the contingent consideration liability using unobservable Level 3 inputs for the three months ended March 31, 2019:

	Contingent Consideration
	(Unaudited)
Balance as of December 31, 2018	$	499,000
Payments against contingent consideration		-
Change in fair value of contingent consideration liability		(10,000	)
Accretion of contingent consideration liability		14,000
Balance as of March 31, 2019	$	503,000

During the three months ended March 31, 2019, a change in fair value of contingent consideration of approximately $10,000 was recorded due to lower than planned performance.

Consideration paid in a business combination may include potential future payments that are contingent upon the acquired business achieving certain levels of earnings in the future (“contingent consideration”). Contingent consideration liabilities are measured at their estimated fair value as of the date of acquisition, with subsequent changes in fair value recorded in the consolidated statements of operations. Fair value as of the date of acquisition is estimated based on projections of expected future cash flows of the acquired business. The Company estimated the contingent consideration liability using the income approach (discounted cash flow method), which requires the Company to make estimates and assumptions regarding the future cash flows and profits. Changes in these estimates and assumptions could have a significant impact on the amounts recognized.

There were no transfers between levels in the fair value hierarchy during the three months ended March 31, 2019.

Assets and Liabilities Not Measured at Fair Value on a Recurring Basis

The carrying amounts of cash, accounts receivable, secured revolving credit facility, accounts payable and accrued expenses approximate fair value due to the short-term maturity of these instruments.

The carrying amounts of the secured long-term note payable and operating lease liabilities approximate fair value as of March 31, 2019 and December 31, 2018 because those financial instruments bear interest at rates that approximate current market rates for similar agreements with similar maturities and credit.

Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis

See Note 3 – Biocon Acquisition for the allocation of the total consideration for the Biocon Acquisition based upon the fair value of net assets acquired and liabilities assumed at the date of acquisition.

Note 6 – Inventory, net

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 March 31, 2019 and December 31, 2018 were as follows:

	March 31, 2019			December 31, 2018
	(Unaudited)			(Audited)
Finished goods	$	1,842,000		$	1,633,000
Raw materials		273,000			280,000
Less: inventory reserve		(75,000	)		(49,000	)
Total inventory, net	$	2,040,000		$	1,864,000

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Note 7 – Intangible Assets and Goodwill

Intangible Assets, net

Intangible assets for the three months ended March 31, 2019 are set forth in the table below. The table shows the gross carrying values and accumulated amortization of the Company’s intangible assets by type as of March 31, 2019:

	March 31, 2019
	Cost		Accumulated Amortization		Net
Tradenames, service marks and domain names	$	50,000	$	2,000	$	48,000
Customer relationships		540,000		8,000		532,000
Total intangible assets	$	590,000		10,000		580,000

The Company recognized amortization expense of approximately $10,000 for the three months ended March 31, 2019 in selling, general and administrative expenses on the accompanying condensed consolidated statement of operations and comprehensive loss.

Amortization expense for the reminder of the fiscal year 2019 is estimated to be approximately $32,000. Aggregate amortization expense for each of the next five years is estimated to be approximately $42,000.

The Company did not recognize any intangible asset impairment charges during the three months ended March 31, 2019.

Goodwill

Goodwill had a carrying value on the Company’s condensed consolidated balance sheets of approximately $759,000 and $748,000 at March 31, 2019 and December 31, 2018, respectively. As a result of a final working capital adjustment, goodwill increased approximately $11,000 during the three months ended March 31, 2019. Goodwill has been allocated to the Water Filtration segment.

Note 8 – License and Supply Agreement, net

On April 23, 2012, the Company entered into a License and Supply Agreement (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, as amended, 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 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 approximately $2,250,000. License and supply agreement, net, on the condensed consolidated balance sheet is approximately $904,000 and $938,000 as of March 31, 2019 and December 31, 2018, respectively. Accumulated amortization is approximately $1,346,000 and $1,312,000 as of March 31, 2019 and December 31, 2018, respectively. The intangible asset is being amortized as an expense over the life of the License and Supply Agreement. Approximately $34,000 in each of the three months ended March 31, 2019 and 2018 on the condensed 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 three months ended March 31, 2019. For the three months ended March 31, 2018, approximately $10,000 of interest expenses was recognized on the condensed consolidated statement of operations and comprehensive loss.

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. Approximately $47,000 and $29,000 for the three months ended March 31, 2019 and 2018, respectively, was recognized as royalty expense and is included in cost of goods sold on the condensed consolidated statement of operations and comprehensive loss. Approximately $47,000 in royalties are included in accrued expenses as of March 31, 2019. Approximately $50,000 in royalties are included in accounts payable as of December 31, 2018.

Note 9 – Secured Note Payable

On March 27, 2018, the Company entered into a Secured Promissory Note Agreement (the “Secured Note”) with Tech Capital, LLC (“Tech Capital”) for a principal amount of $1,187,000. As of March 31, 2019, the principal balance of the Secured Note was approximately $986,000. The Company used the proceeds from the Secured Note to repay the Company’s 11% unsecured promissory notes issued in June 2016 pursuant to the Note and Warrant Agreement (see Note 11 – Unsecured Promissory Notes and Warrants).

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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 the 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 between the Company and Tech Capital, dated August 16, 2017 and all of the riders and amendments thereto (the “Loan Agreement”) (see Note 10 – Secured Revolving Credit Facility). An event of default under such Loan Agreement shall be an event of default under the Secured Note and vice versa. In the event the principal balance under the Loan Agreement is due, all amounts due under the Secured Note shall also be due.

During the three months ended March 31, 2019, the Company made payments under the Secured Note of approximately $72,000. Included in the total payments made, approximately $20,000 was recognized as interest expense on the condensed consolidated statement of operations and comprehensive loss for the three months ended March 31, 2019.

Debt issuance costs of approximately $6,000 were recognized as interest expense on the condensed consolidated statement of operations and comprehensive loss for the three months ended March 31, 2018.

As of March 31, 2019, future principal maturities are as follows:

2019 (excluding the three months ended March 31, 2019)	$	162,000
2020		231,000
2021		251,000
2022		271,000
2023		71,000
Total	$	986,000

Note 10 – Secured Revolving Credit Facility

On August 17, 2017, the Company entered into the Loan Agreement with Tech Capital. The Loan Agreement provides for a secured asset-based revolving credit facility of up to $1,000,000, which the Company may draw upon and repay from time to time during the term of the Loan Agreement. The outstanding principal balance of the Loan Agreement was approximately $906,000 and $991,000 as of March 31, 2019 and December 31, 2018, respectively. The Company is using these proceeds for working capital and general corporate purposes.

The Loan Agreement has a term of 12 months, which was automatically renewed on August 17, 2018 and will automatically renew for successive 12-month periods unless cancelled. Availability under the Loan Agreement will be based upon periodic borrowing base certifications valuing certain of the Company’s accounts receivable and inventory. Outstanding borrowings under the Loan Agreement accrue interest, which are payable monthly based on the average daily outstanding balance, at a rate equal to 3.5% plus the prime rate per annum, provided that such prime rate will not be less than 4.25% per annum. As of March 31, 2019, the current interest rate was 9.00% per annum.

The Company also granted to Tech Capital a first priority security interest in its assets, including its accounts receivable and inventory, to secure all of its obligations under the Loan Agreement. In addition, Nephros International Limited, a wholly-owned subsidiary of the Company, unconditionally guaranteed the Company’s obligations under the Loan Agreement.

For the three months ended March 31, 2019 and 2018, approximately $11,000 and $6,000, respectively, was recognized as interest expense on the condensed consolidated statement of operations and comprehensive loss. As of March 31, 2019, approximately $3,000 of the $11,000 of interest expense incurred for the three months ended March 31, 2019 is included in accrued expenses on the condensed consolidated balance sheet.

Note 11 - Unsecured Promissory Notes and Warrants

In June 2016, the Company entered into a Note and Warrant Agreement (the “Note and Warrant Agreement”) with new creditors as well as existing stockholders under which the Company issued unsecured promissory notes and warrants resulting in total gross proceeds to the Company of approximately $1,187,000. The outstanding principal under the notes accrued interest at a rate of 11% per annum. The notes required the Company to make interest only payments on a semi-annual basis, with all outstanding principal under the notes being repayable in cash on the third anniversary of the date of issuance. In addition to the notes, the Company issued warrants to purchase approximately 2.4 million shares of the Company’s common stock. The portion of the gross proceeds allocated to the warrants, approximately $393,000, was accounted for as additional paid-in capital resulting in a debt discount. The debt discount, which included approximately $9,000 of debt issuance costs in addition to the fair value of the warrants, was being amortized to interest expense using the effective interest method in accordance with ASC 835 over the term of the Note and Warrant Agreement.

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On March 30, 2018, the principal balance of the notes, along with the remaining accrued interest of approximately $43,000, was repaid in full. The remaining debt discount of approximately $199,000 was recorded as loss on extinguishment of debt in the Company’s consolidated statements of operations and comprehensive loss for the three months ended March 31, 2018.

For the three months ended March 31, 2018, approximately $34,000 was recognized as amortization of debt discount and is included in interest expense on the consolidated statement of operations and comprehensive loss. For the three months ended March 31, 2018, approximately $30,000 of interest expense was incurred.

For the three months ended March 31, 2018, the amount of interest expense recognized related to related parties comprised of entities controlled by a member of management and by Lambda Investors, LLC (“Lambda”), the Company’s largest shareholder, was approximately $1,000.

Note 12 – Leases

The Company has operating leases for corporate offices, an automobile and office equipment. The leases have remaining lease terms of 1 year to 4 years.

The Company entered into an operating lease that began in December 2017 for 380 Lackawanna Place, South Orange, New Jersey 07079, which consists of approximately 7,700 square feet of space. The rental agreement expires in November 2022 with a monthly cost of approximately $11,000. Approximately $11,000 related to a security deposit for this U.S. office facility is classified as other assets on the condensed consolidated balance sheet as of March 31, 2019 and December 31, 2018. The Company uses this facility to house its corporate headquarters and research facilities.

The Company also has a rental agreement for 591 East Sunset Road, Henderson, Nevada 89011, which consists of approximately 16,000 total square feet of space. The Nevada lease expires in November 2020 with a monthly cost of approximately $6,000. Approximately $7,000 related to a security deposit for this U.S. office facility is classified as other assets on the condensed consolidated balance sheet as of March 31, 2019 and December 31, 2018.

The Company entered into an operating lease that began in February 2019 for 211 Donelson Pike, Nashville, Tennessee 37214, for office space. The rental agreement expires in January 2021 with a monthly cost of approximately $850. Approximately $1,000 related to a security deposit for this office facility is classified as other assets on the condensed consolidated balance sheet as of March 31, 2019.

The Company entered into an operating lease in March 2019 for 3221 Polaris Avenue, Las Vegas, Nevada 89118. The rental agreement will commence in June 2019 with a monthly cost of approximately $15,000. Approximately $20,000 related to a security deposit for this office facility is classified as other assets on the condensed consolidated balance sheet as of March 31, 2019.

The lease agreement for the office space in Ireland was entered into on August 1, 2018 and includes a twelve month term.

The Company also has lease agreements for an automobile and office equipment.

Prior to the adoption of ASC 842, operating lease expense of approximately $51,000 was recognized in the Company’s consolidated statements of operations and comprehensive loss for the three months ended March 31, 2018.

Operating lease expense for the three months ended March 31, 2019 was approximately $58,000 in the Company’s consolidated statements of operations and comprehensive loss and includes costs associated with leases for which ROU assets have been recognized as well as short-term leases.

Supplemental cash flow information related to leases was as follows:

	Three months ended March 31, 2019
		(Unaudited)
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	57,000
ROU assets obtained in exchange for lease obligations
Operating leases	$	20,000

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Supplemental balance sheet information related to leases was as follows:

	March 31, 2019
		(Unaudited)
Operating lease right-of-use assets	$	587,000
Current portion of operating lease liabilities	$	191,000
Operating lease liabilities, net of current portion		406,000
Total operating lease liabilities	$	597,000
Weighted average remaining lease term, operating leases		3.2 years
Weighted average discount rate, operating leases		8.0	%

As of March 31, 2019, maturities of lease liabilities were as follows:

2019 (excluding the three months ended March 31, 2019)	$	171,000
2020		218,000
2021		147,000
2022		136,000
Total future minimum lease payments		672,000
Less imputed interest		(75,000	)
Total	$	597,000

Note 13 – 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 condensed 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 Options

During the three months ended March 31, 2019, the Company granted stock options to purchase 86,546 shares of common stock to a director. These stock options are being expensed over the respective vesting period, which is based on a service condition. The fair value of the stock options granted during the three months ended March 31, 2019 was approximately $31,000.

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 three months ended March 31, 2019.

Assumptions for Option Grants
Stock Price Volatility	92.1	%
Risk-Free Interest Rates	2.47	%
Expected Life (in years)	5.75
Expected Dividend Yield	-	%

Stock-based compensation expense related to stock options was approximately $143,000 and $130,000 for the three months ended March 31, 2019 and 2018, respectively. For the three months ended March 31, 2019, approximately $124,000 and $19,000 are included in selling, general and administrative expenses and research and development expenses, respectively, on the accompanying condensed consolidated statement of operations and comprehensive loss. For the three months ended March 31, 2018, approximately $120,000 and $10,000 are included in selling, general and administrative expenses and research and development expenses, respectively, on the accompanying condensed consolidated statement of operations and comprehensive loss. During the three months ended March 31, 2018, previously issued stock options were modified for an employee who is no longer employed with the Company. As a result of this modification, approximately $12,000 was recognized as stock option modification expense and included in research and development expenses on the accompanying condensed consolidated statement of operations and comprehensive loss. The remaining income recorded as stock based compensation included in research and development expenses of approximately $2,000 for the three months ended March 31, 2018 is primarily due to the reversal of expense due to the forfeiture of unvested stock options.

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There was no tax benefit related to expense recognized in the three months ended March 31, 2019 and 2018, as the Company is in a net operating loss position. As of March 31, 2019, there was approximately $1,193,000 of total unrecognized compensation expense related to unvested stock-based awards granted under the equity compensation plans. Approximately $230,000 of the $1,193,000 total unrecognized compensation expense will be recognized at the time that certain performance conditions are met. The remaining unrecognized compensation expense of approximately $963,000 will be amortized over the weighted average remaining requisite service period of 2.0 years. Such amount does not include the effect of future grants of equity compensation, if any.

Restricted Stock

Total stock-based compensation expense for restricted stock was approximately $15,000 and $112,000 for the three months ended March 31, 2019 and 2018, respectively. For the three months ended March 31, 2019, approximately $14,000 and $1,000 are included in selling, general and administrative expenses and research and development expenses, respectively, on the accompanying condensed consolidated statement of operations and comprehensive loss. For the three months ended March 31, 2018, approximately $100,000 and $12,000 are included in selling, general and administrative expenses and research and development expenses, respectively, on the accompanying condensed consolidated statement of operations and comprehensive loss.

As of March 31, 2019, there was approximately $15,000 of unrecognized compensation expense related to restricted stock awards, which is expected to be recognized over the next three months.

The aggregate shares of common stock legally issued and outstanding as of December 31, 2018 is greater than the aggregate shares of common stock outstanding for accounting purposes by the amount of unvested restricted shares.

Note 14 – Stockholders’ Equity

July 2015 Purchase Agreement and Registration Rights Agreement

On July 24, 2015, the Company entered into both a securities purchase agreement and registration rights agreement with Lincoln Park Capital Fund, LLC (“Lincoln Park”). Under the terms and subject to the conditions of the securities purchase agreement, the Company had the right to sell to Lincoln Park, and Lincoln Park was obligated to purchase, up to $10.0 million in shares of the Company’s common stock, subject to certain limitations, from time to time, over the 36-month period commencing on September 4, 2015. Pursuant to the securities purchase agreement, during the three months ended March 31, 2018, the Company issued and sold 1,900,000 shares of its common stock to Lincoln Park. The issuance of the common shares to Lincoln Park resulted in gross proceeds of $854,000 for the three months ended March 31, 2018. The securities purchase agreement expired on September 4, 2018.

Noncontrolling Interest

In July 2018, the Company formed a new, wholly-owned subsidiary, SRP, to drive the development of its second-generation HDF system and other products focused on improving therapies for patients with renal disease.

On September 5, 2018, SRP entered into a Series A Preferred Stock Purchase Agreement with certain purchasers pursuant to which SRP sold 600,000 shares of its Series A Preferred Stock (“Series A Preferred”) for $5.00 per share. The aggregate purchase price was $3,000,000. SRP incurred transaction-related expenses of approximately $30,000, which were included in selling, general and administrative expenses on the accompanying consolidated statement of operations and comprehensive loss for the three and nine months ended September 30, 2018. The net proceeds from the issuance of the Series A Preferred are restricted to SRP expenses, and may not be used for the benefit of the Company or other affiliated entities, except to reimburse for expenses directly attributable to SRP. Following the Series A Preferred transaction, the Company retained a 62.5% ownership interest in SRP, holding 100% of the outstanding common shares, and holders of Series A Preferred retained a 37.5% interest in SRP on a fully diluted basis, holding 100% of the outstanding preferred shares. Of the 600,000 shares of Series A Preferred issued, the shares purchased by related parties comprised of persons controlled by members of management and by Lambda amounted to 18,000 and 400,000 shares, respectively.

Each share of 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 Series A Preferred price, the conversion price of the Series A Preferred will automatically be reduced to such lower price.

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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.

Warrants

There were no warrants exercised during the three months ended March 31, 2019 or 2018.

Note 15 – 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, 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 anti-dilutive:

	March 31,
	2019		2018
Shares underlying warrants outstanding		6,642,344		7,099,010
Shares underlying options outstanding		7,495,128		6,474,527
Unvested restricted stock		444,313		753,528

Note 16 – Commitments and Contingencies

Purchase Commitments

In exchange for the rights granted under the License and Supply Agreement with Medica (see Note 8 – 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, 2019, the Company has agreed to make minimum annual aggregate purchases from Medica of €3,000,000 (approximately $3,400,000). As of March 31, 2019, the Company’s aggregate purchase commitments totaled approximately €1,789,000 (approximately $2,032,000).

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Contractual Obligations

See Note 12 – Leases for a discussion of the Company’s contractual obligations.

Note 17 – Segment Reporting

During the three months ended September 30, 2018, the Company began reporting the results of SRP as a new segment as a result of the July 2018 formation of the Company’s new subsidiary, SRP. Prior to the formation of SRP, the Company had only a single operating segment. The Company has reflected these new segment measures beginning in the quarter ended September 30, 2018 and prior periods have been restated for comparability.

The Company has defined its two reportable segments as Water Filtration and Renal Products. The Water Filtration segment develops and sells high performance liquid purification filters, known as ultrafilters. The Renal Products segment is focused on the development of medical device products for patients with renal disease, including a 2^nd 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.

The accounting policies for the Company’s segments are the same as those described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

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:

	Three Months Ended March 31, 2019
	Water Filtration			Renal Products			Nephros, Inc. Consolidated
Total net revenues	$	1,769,000		$	-		$	1,769,000
Gross margin		998,000			-			998,000
Research and development expenses		345,000			411,000			756,000
Depreciation and amortization expense		50,000			-			50,000
Selling, general and administrative expenses		1,469,000			34,000			1,503,000
Change in fair value of contingent consideration		(10,000	)		-			(10,000	)
Total operating expenses		(1,854,000	)		(445,000	)		(2,299,000	)
Loss from operations	$	(856,000	)	$	(445,000	)	$	(1,301,000	)

	Three Months Ended March 31, 2018
	Water Filtration			Renal Products			Nephros, Inc. Consolidated
Total net revenues	$	985,000		$	-		$	985,000
Gross margin		467,000			-			467,000
Research and development expenses		189,000			100,000			289,000
Depreciation and amortization expense		41,000			-			41,000
Selling, general and administrative expenses		1,250,000			10,000			1,260,000
Total operating expenses		(1,480,000	)		(110,000	)		(1,590,000	)
Loss from operations	$	(1,013,000	)	$	(110,000	)	$	(1,123,000	)

As of March 31, 2019, approximately $2,100,000 of total assets are in the Renal Products segment. The $2,100,000 consisted of the remaining cash received of approximately $1,900,000 from the sale of Series A Preferred during the year ended December 31, 2018 and prepaid expenses and other current assets of approximately $200,000.

As of December 31, 2018, approximately $2,500,000 of total assets are in the Renal Products segment. The $2,500,000 consisted of the remaining cash received of approximately $2,300,000 from the sale of Series A Preferred during the year ended December 31, 2018 and prepaid expenses and other current assets of approximately $200,000.

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

The following discussion should be read in conjunction with our condensed consolidated financial statements and notes thereto included in Item 1 of Part I of this Quarterly Report on Form 10-Q. This discussion includes forward-looking statements about our business, financial condition and results of operations including discussions about management’s expectations for our business. These statements represent projections, beliefs and expectations based on current circumstances and conditions and in light of recent events and trends, and these statements should not be construed either as assurances of performances or as promises of a given course of action. Instead, various known and unknown factors are likely to cause our actual performance and management’s actions to vary, and the results of these variances may be both material and adverse.

Business Overview

We are a commercial stage medical device and commercial products company that develops and sells high performance liquid purification filters. Our filters, which are generally classified as ultrafilters, are primarily used in hospitals for the prevention of infection from water-borne pathogens, such as legionella and pseudomonas, and in dialysis centers for the removal of biological contaminants from water and bicarbonate concentrate. Because our ultrafilters capture contaminants as small as 0.005 microns in size, they minimize exposure to a wide variety of bacteria, viruses, fungi, parasites, and endotoxins.

Our subsidiary, Specialty Renal Products, Inc. (“SRP”), is a development-stage medical device company focused primarily on developing hemodiafiltration (“HDF”) technology. SRP is developing a second generation of the OLpūr H2H Hemodiafiltration System, the only U.S. Food and Drug Administration (“FDA”) 510(k)-cleared medical device that enables nephrologists to provide HDF treatment to patients with end stage renal disease (“ESRD”).

On December 31, 2018, we entered into a Membership Interest Purchase Agreement (the “Agreement”) with Biocon1, LLC, a Nevada limited liability company (“Biocon”), Aether Water Systems, LLC, a Nevada limited liability company (“Aether”), and Gregory Lucas, the sole member of each of Biocon and Aether (“Lucas”). Pursuant to the terms of the Agreement, we acquired 100% of the outstanding membership interests of each of Biocon and Aether (the “Biocon Acquisition”).

We were founded in 1997 by healthcare professionals affiliated with Columbia University Medical Center/New York-Presbyterian Hospital to develop and commercialize an alternative method to hemodialysis. We have extended our filtration technologies to meet the demand for liquid purification in other areas, in particular water purification.

Our Products

Water Filtration Products

We develop and sell liquid filtration products used in both medical and commercial applications, employing multiple filtration technologies.

In medical markets, our primary filtration mechanism is to pass liquids through the pores of polysulfone hollow fiber. Our filters’ pores are significantly smaller than those of competing products, resulting in highly effective elimination of water-borne pathogens, including legionella bacteria (the cause of Legionnaires disease) and viruses, which are not eliminated by most other microbiological filters on the market. Additionally, the fiber structure and pore density in our hollow fiber enables significantly higher flow rates than in other polysulfone hollow fiber.

In commercial markets, with our recent addition of the Aether product line, carbon-based absorption is the primary filtration mechanism. Aether products allow us to improve water’s odor and taste, to reduce scale and heavy metals, and to reduce other water contaminants for customers who are primarily in the food service, convenience store, and hospitality industries.

Our sales strategy is a combination of direct selling to end customers and indirect selling through value-added resellers (“VARs”). Leveraging VARs has enabled us to expand rapidly our access to target customers in the medical market without significant sales staff expansion. In addition, while we are currently focused in medical markets, the VARs that support these customers also support a wide variety of commercial and industrial customers. We believe that our VAR relationships will facilitate growth in filter sales outside of the medical industry.

Target Markets

Our ultrafiltration products currently target the following markets:

● Hospitals and Other Healthcare Facilities: Filtration of water for washing and drinking as an aid in infection control. The filters produce water that is suitable for wound cleansing, cleaning of equipment used in medical procedures, and washing of surgeons’ hands. In addition, we have recently begun development of a broad-spectrum diagnostic tool for our hospital and other health care customers, to provide them with the ability to assess water safety risks on a real-time basis.

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● Dialysis Centers: Filtration of water or bicarbonate concentrate used in hemodialysis.

● Commercial Facilities: Filtration and purification of water for consumption, including for use in ice machines and soft drink dispensers.

● Military and Outdoor Recreation: Individual water purification devices used by soldiers and backpackers to produce drinking water in the field, as well as filters customized to remote water processing systems.

Hospitals and Other Healthcare Facilities. According to the American Hospital Association, approximately 5,700 hospitals, with approximately 915,000 beds, treated over 35 million patients in the United States in 2013. The U.S. Centers for Disease Control and Prevention estimates that healthcare associated infections (“HAI”) occurred in approximately 1 out of every 31 hospital patients, or about 687,000 patients in 2015. HAIs affect patients in hospitals or other healthcare facilities and are not present or incubating at the time of admission. They also include infections acquired by patients in the hospital or facility, but appearing after discharge, and occupational infections among staff. Many HAIs are caused by waterborne bacteria and viruses that can thrive in aging or complex plumbing systems often found in healthcare facilities.

The Affordable Care Act, passed in March 2010, puts in place comprehensive health insurance reforms that aim to lower costs and enhance quality of care. With its implementation, healthcare providers have substantial incentives to deliver better care or be forced to absorb the expenses associated with repeat medical procedures or complications like HAIs. As a consequence, hospitals and other healthcare facilities are proactively implementing strategies to reduce HAI potential. Our ultrafilters are designed to aid in infection control in the hospital and healthcare setting by treating facility water at the points of delivery, such as ice machines, sinks and showers.

In June 2017, the Center for Clinical Standards and Quality at the Centers for Medicare and Medicaid Services (“CMS”) announced the addition of requirements for facilities to develop policies and procedures that inhibit the growth and spread of legionella and other opportunistic pathogens in building water systems. Going forward, CMS surveyors will review policies, procedures, and reports documenting water management implementation results to verify that facilities are compliant with these requirements. We believe that these CMS regulations may have a positive impact on the sale of our HAI-inhibiting ultrafilters.

We currently have FDA 510(k) clearance on the following portfolio of medical device products for use in the hospital setting to aid in infection control:

● The DSU H is an in-line, 0.005-micron ultrafilter that provides dual-stage protection from water borne pathogens. The DSU H is primarily used to filter potable water feeding ice machines, sinks, and medical equipment, such as endoscope washers and surgical room humidifiers. The DSU H has an up to 6-month product life when used in a hospital setting.

● The SSU H is an in-line, 0.005-micron ultrafilter that provides single-stage protection from water borne pathogens. The SSU H is primarily used to filter potable water feeding sinks, showers and medical equipment. The SSU H has an up to 3-month product life when used in a hospital setting.

● The S100 is a point-of-use, 0.01-micron microfilter that provides protection from water borne pathogens. The S100 is primarily used to filter potable water feeding sinks and showers. The S100 has an up to 3-month product life when used in a hospital setting.

● The HydraGuard^TM and HydraGuard^TM - Flush are 0.005-micron cartridge ultrafilters that provide single-stage protection from water borne pathogens. The HydraGuard^TM ultrafilters are primarily used to filter potable water feeding ice machines and medical equipment, such as endoscope washers and surgical room humidifiers. The HydraGuard^TM has an up-to 6-month product life and the HydraGuard^TM - Flush has an up to 12-month product life when used in a hospital setting.

We received FDA 510(k) clearance to market the HydraGuard^TM in December 2016 and began shipping it in July 2017. We began shipping the HydraGuard^TM - Flush in September 2017. The DSU H, SSU H, and S100 products received FDA 510(k) clearance in prior years.

The complete hospital infection control product line, including in-line, point-of-use, and cartridge filters, can be viewed on our website at http://www.nephros.com/infection-control/. We are not including the information on our website as a part of, nor incorporating it by reference into, this Annual Report on Form 10-K.

We are currently developing a product for real-time diagnosis of water borne pathogens, which we expect will complement our medical water filtration products. We plan to offer the product initially to customers and prospective customers that focus on infection control, including hospitals, dialysis centers, and other health care facilities. Following initial launch, we plan to market the product to other markets as well, including those addressed by our AETHER product lines. We expect to launch this product line in late 2019 and expect to provide additional product details in the coming quarters.

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Dialysis Centers - Water/Bicarbonate. To perform hemodialysis, all dialysis clinics have dedicated water purification systems to produce water and bicarbonate concentrate, two essential ingredients for making dialysate, the liquid that removes waste material from the blood. According to the American Journal of Kidney Diseases, there are approximately 6,300 dialysis clinics in the United States servicing approximately 430,000 patients annually. We estimate that there are over 100,000 hemodialysis machines in operation in the United States.

Medicare is the main payer for dialysis treatment in the United States. To be eligible for Medicare reimbursement, dialysis centers must meet the minimum standards for water and bicarbonate concentrate quality set by the Association for the Advancement of Medical Instrumentation (“AAMI”), the American National Standards Institute (“ANSI”) and the International Standards Organization (“ISO”). We anticipate that the stricter standards approved by these organizations in 2009 will be adopted by Medicare in the near future.

We currently have FDA 510(k) clearance on the following portfolio of medical device products for use in the dialysis setting to aid in bacteria, virus, and endotoxin retention:

● The DSU D, SSU D and SSUmini are in-line, 0.005-micron ultrafilters that provide protection from bacteria, viruses, and endotoxins. All of these products have an up to 12-month product life in the dialysis setting and are used to filter water following treatment with a reverse osmosis (“RO”) system, and to filter bicarbonate concentrate. These ultrafilters are primarily used in the water lines and bicarbonate concentrate lines leading into dialysis machines, and as a polish filter for portable RO machines.

● The EndoPur is a 0.005-micron cartridge ultrafilter that provides single-stage protection from bacteria, viruses, and endotoxins. The EndoPur has an up to 12-month product life in the dialysis setting, and is used to filter water following treatment with an RO system. More specifically, the EndoPur is used primarily to filter water in large RO systems designed to provide ultrapure water to an entire dialysis clinic. The EndoPur is available in 10”, 20”, and 30” configurations.

The EndoPur is a cartridge-based, “plug and play” market entry that requires no plumbing at installation or replacement. In March 2017, we received FDA 510(k) clearance to market the EndoPur filter. We began shipping the EndoPur 10” filter in July 2017 and the 20” and 30” versions in September 2017.

Commercial and Industrial Facilities. Our commercial NanoGuard® product line accomplishes ultrafiltration via small pore size (0.005-micron) technology, filtering bacteria and viruses from water. Our recent acquisition of Biocon and Aether – marketed under the AETHER® brand – expands our product line to include additional water filtration and purification technologies, primarily focused on improving odor and taste and on reducing scale and heavy metals from filtered water.

We currently market the following portfolio of proprietary products for use in the commercial, industrial, and food service settings:

● The NanoGuard®-D is an in-line, 0.005-micron ultrafilter that provides dual-stage retention of any organic or inorganic particle larger than 15,000 Daltons.

● The NanoGuard®-S is an in-line, 0.005-micron ultrafilter that provides single-stage retention of any organic or inorganic particle larger than 15,000 Daltons.

● The NanoGuard®-E is a 0.005-micron ultrafilter cartridge that plugs into an Everpure® filter manifold and provides single-stage retention of any organic or inorganic particle larger than 15,000 Daltons.

● The NanoGuard®-C is a 0.005-micron cartridge ultrafilter that fits with most 10”, 20”, 30” and 40” cartridge housings and provides single-stage retention of any organic or inorganic particle larger than 15,000 Daltons.

● The NanoGuard®-F is a 0.005-micron flushable cartridge ultrafilter, available in 10” or 20” sizes and provides single-stage retention of any organic or inorganic particle larger than 15,000 Daltons.

● The AETHER® Sediment filter provides a 1-micron barrier to retain sediment, dirt, rust particles and other solids in potable water.

● The AETHER® Carbon Block filter is a carbon-based filter to improve and taste and odor and reduce levels of chlorine and heavy minerals.

● The AETHER® Scale filter uses proprietary technology to reduce the development of lime scale build-up in downstream equipment and surfaces.

● The AETHER® Carbon + Scale filter combines a carbon-based filter with the AETHER® Scale technology in a single filter.

● The Nephros Lead Filter System filters both particulate lead and soluble lead, tested to reduce 99% of 150ppb soluble lead in potable water.

AETHER® products combine effectively with NanoGuard® ultrafiltration technologies to offer full-featured solutions to the commercial water market, including to existing users of Everpure® filter manifolds. AETHER® and NanoGuard® products are targeted primarily at the food service, hospitality, convenience store and industrial markets.

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Military and Outdoor Recreation. We developed our individual water treatment device (“IWTD”) in both in-line and point-of-use configurations. Our IWTD allows a soldier in the field to derive drinking water from any freshwater source. This enables the soldier to remain hydrated, to help maintain mission effectiveness and unit readiness, and to extend mission reach. Our IWTD has been validated by the military to meet the NSF Protocol P248 standard. It has also been approved by the U.S. Army Public Health Command and the U.S. Army Test and Evaluation Command for deployment.

In May 2015, we entered into a Sublicense Agreement (the “Sublicense Agreement”) with CamelBak Products, LLC (“CamelBak”). Under this Sublicense Agreement, we 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 us 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 us a fixed per-unit fee for any other sales made. CamelBak was also required to meet or exceed certain minimum annual fees payable to us, and, if such fees are not met or exceeded, we may 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.

Specialty Renal Products: HDF System

Introduction to HDF

The current standard of care in the United States for patients with chronic renal failure is hemodialysis (“HD”), a process in which toxins are cleared via diffusion. Patients typically receive HD treatments at least 3 times weekly for 3-4 hours per treatment. HD is most effective in removing smaller, easily diffusible toxins. For patients with acute renal failure, the current standard of care in the United States is hemofiltration (“HF”), a process where toxins are cleared via convection. HF offers a much better removal of larger sized toxins when compared to HD; however, HF treatment is more challenging for patients, as it is performed on a daily basis, and typically takes 12-24 hours per treatment.

Hemodiafiltration (“HDF”) is an alternative dialysis modality that combines the benefits of HD and HF into a single therapy by clearing toxins using both diffusion and convection. Though not widely used in the United States, HDF is prevalent in Europe and is performed for a growing number of patients. Clinical experience and literature show the following clinical and patient benefits of HDF:

● Enhanced clearance of middle and large molecular weight toxins

● Improved survival - up to a 35% reduction in mortality risk

● Reduction in the occurrence of dialysis-related amyloidosis

● Reduction in inflammation

● Reduction in medication such as EPO and phosphate binders

● Improved patient quality of life

● Reduction in number of hospitalizations and overall length of stay

However, like HD, HDF can be resource-intensive and can require a significant amount of time to deliver one course of treatment.

Nephros HDF Background

Over the course of our history, we originally developed a medical device that enabled a standard HD machine to perform HDF. We refer to our approach as an on-line mid-dilution hemodiafiltration (“mid-dilution HDF”) system. Our original solution included an OLpūr H2H Hemodiafiltration Module (“H2H Module”), an OLpūr MD 220 Hemodiafilter (“HDF Filter”) and an H2H Substitution Filter (“Dialysate Filter”).

Our H2H Module attaches to a standard HD machine to perform on-line HDF therapy. The HD machine controls and monitors the basic treatment functions, as it would normally when providing HD therapy. The H2H Module is a free-standing, movable device that is placed next to either side of an HD machine. The H2H Module connects to the clinic’s water supply, drain, and electricity.

The H2H Module utilizes the HDF Filter, and is very similar to a typical hollow fiber dialyzer assembled with a single hollow fiber bundle made with a high-flux (or high-permeability) membrane. The fiber bundle is separated into two discrete, but serially connected, blood paths. Dialysate flows in one direction that is counter-current to blood flow in Stage 1 and co-current to blood flow in Stage 2.

In addition to the HDF Filter, the H2H Module also utilizes a Dialysate Filter during patient treatment. The Dialysate Filter is a hollow fiber, ultrafilter device that consists of two sequential (redundant) ultrafiltration stages in a single housing. During on-line HDF with the H2H Module, fresh dialysate is redirected by the H2H Module’s hydraulic (substitution) pump and passed through this dual-stage ultrafilter before being infused as substitution fluid into the extracorporeal circuit. Providing ultrapure dialysate is crucial for the success of on-line HDF treatment.

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Our original HDF system conformed with current ANSI/AAMI/ISO standards and was cleared by the FDA for the treatment of patients with chronic renal failure in 2012. To date, our HDF System is the only HDF system cleared by the FDA.

Over the last four years, DaVita Healthcare Partners, the Renal Research Institute (a research division of Fresenius Medical Care), and Vanderbilt University conducted post-market evaluations of our hemodiafiltration system in their clinics. We gathered direct feedback from these evaluations to develop a better understanding of how our system best fits into the current clinical and economic ESRD treatment paradigm. The ultimate goal of the evaluations was to better understand the potential for HDF, in the U.S. clinical setting, to (a) improve the quality of life for the patient, (b) reduce overall expenditure compared to other dialysis modalities, (c) minimize the impact on nurse work flow at the clinic, and (d) demonstrate the pharmacoeconomic benefit of the HDF technology to the U.S. healthcare system, as has been done in Europe with other HDF systems. The last evaluation was concluded at Vanderbilt in the first quarter of 2018.

Specialty Renal Products, Inc.

Leveraging the results of our evaluations, we recently completed development of a second-generation HDF machine prototype. We believe that the design changes will enable our HDF machine to better align with clinical work-flow practices, to be highly reliable, to simplify the training required for proficiency, and to have a dramatically lower cost of goods. We have filed for patent protection on key features of our updated design.

During 2018, we formed a new subsidiary, Specialty Renal Products, Inc. (“SRP”), to drive the development of this second-generation HDF system. A prototype of the new second-generation HDF system has been constructed. We intend to fund the HDF program primarily with funds directly raised into SRP, including a $3 million Series A financing round completed in September 2018. Pending FDA clearance, we believe we can return to the market with our HDF system in by early 2020.

Critical Accounting Policies

For the three month period ended March 31, 2019, other than the adoption of Accounting Standards Codification 842, “Leases” (see Note 2, “Basis of Presentation and Liquidity,” of the Notes to our Unaudited Condensed Consolidated Interim Financial Statements contained in Item 1 of Part I of this Quarterly Report on Form 10-Q), there were no significant changes to our critical accounting policies as identified in our Annual Report on Form 10-K for the year ended December 31, 2018.

Recent Accounting Pronouncements

We are subject to recently issued accounting standards, accounting guidance and disclosure requirements. For a description of these new accounting standards, Note 2, “Basis of Presentation and Liquidity,” of the Notes to our Unaudited Condensed Consolidated Interim Financial Statements contained in Item 1 of Part I of this Quarterly Report on Form 10-Q, which is incorporated herein by reference.

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 annual 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, marketing expenses related to product launches, timing of regulatory approval of our various products and market acceptance of our products. 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.

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Three Months Ended March 31, 2019 Compared to the Three Months Ended March 31, 2018

The following table sets forth our summarized, consolidated results of operations for the three months ended March 31, 2019 and 2018:

	Three Months Ended March 31,
	2019			2018			$ Increase (Decrease)			% Increase (Decrease)
Total net revenues	$	1,769,000		$	985,000		$	784,000			80	%
Cost of goods sold		771,000			518,000			253,000			49	%
Gross margin		998,000			467,000			531,000			114	%
Gross margin		56	%		47	%		-			9	%
Research and development expenses		756,000			289,000			467,000			162	%
Depreciation and amortization expense		50,000			41,000			9,000			22	%
Selling, general and administrative expenses		1,503,000			1,260,000			243,000			19	%
Change in fair value of contingent consideration		(10,000	)		-			10,000			100	%
Loss from operations		(1,301,000	)		(1,123,000	)		178,000			16	%
Loss on extinguishment of debt		-			(199,000	)		(199,000	)		(100	)%
Interest expense		(46,000	)		(86,000	)		(40,000	)		(47	)%
Interest income		-			1,000			(1,000	)		(100	)%
Other expense		(2,000	)		(22,000	)		(20,000	)		(91	)%
Net loss		(1,349,000	)		(1,429,000	)		(80,000	)		(6	)%
Less: Undeclared deemed dividend attributable to noncontrolling interest		(59,000	)		-			59,000			100	%
Net loss attributable to Nephros, Inc.	$	(1,408,000	)	$	(1,429,000	)	$	(21,000	)		(1	)%

Water Filtration

The following table sets forth results of operations for the Water Filtration segment for the three months ended March 31, 2019 and 2018:

	Three Months Ended March 31,
	2019			2018			$ Increase (Decrease)			% Increase (Decrease)
Total net revenues	$	1,769,000		$	985,000		$	784,000			80	%
Cost of goods sold		771,000			518,000			253,000			49	%
Gross margin		998,000			467,000			531,000			114	%
Gross margin		56	%		47	%		-			9	%
Research and development expenses		345,000			189,000			156,000			83	%
Depreciation and amortization expense		50,000			41,000			9,000			22	%
Selling, general and administrative expenses		1,469,000			1,250,000			219,000			18	%
Change in fair value of contingent consideration		(10,000	)		-			10,000			100	%
Loss from operations	$	(856,000	)	$	(1,013,000	)	$	(157,000	)		(15	)%

Net Revenues

Total net revenues for the three months ended March 31, 2019 were approximately $1,769,000 compared to approximately $985,000 for the three months ended March 31, 2018. The increase of approximately $784,000, or 80%, was driven by significant increased medical device sales, to both new and existing customer accounts, as well as our expansion into commercial markets.

Cost of Goods Sold

Cost of goods sold was approximately $771,000 for the three months ended March 31, 2019 compared to approximately $518,000 for the three months ended March 31, 2018. The increase of approximately $253,000, or 49%, was due to approximately $320,000 in increased direct product costs in support of increased revenue, offset by a decrease of approximately $17,000 in expenses related to adjustments for inventory reserves for expiring items and physical count inventory adjustments and a decrease of approximately $40,000 related to the improvement of foreign exchange rates.

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Gross Margin

Gross margin was approximately 56% for the three months ended March 31, 2019 compared to approximately 47% for the three months ended March 31, 2018. The increase of approximately 9% is primarily due to a decrease in expense related to inventory reserves for expiring items and physical count inventory adjustments as well as improvements in foreign exchange rates during the three months ended March 31, 2019 compared to March 31, 2018.

Research and Development Expenses

Research and development expenses were approximately $345,000 and $189,000 for the three months ended March 31, 2019 and 2018, respectively. This increase of approximately $156,000, or 83%, reflects expenditures on product development for our water safety testing system.

Depreciation and Amortization Expense

Depreciation and amortization expense was approximately $50,000 for the three months ended March 31, 2019 compared to approximately $41,000 for the three months ended March 31, 2018. The increase of approximately $9,000, or 22%, is due to amortization of intangible assets recognized in the Biocon Acquisition.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were approximately $1,469,000 for the three months ended March 31, 2019 compared to approximately $1,250,000 for the three months ended March 31, 2018, representing an increase of $219,000, or 18%. The increase was primarily due to increased headcount-related expenses of approximately $136,000, increased accounting and tax expenses of approximately $28,000, increased accounting expenses of approximately $15,000 as a result of timing of invoices and increased professional services expenses of approximately $37,000 related to the Biocon Acquisition.

Change in Fair Value of Contingent Consideration

Change in fair value of contingent consideration of approximately $10,000 was related to lower than planned performance during the three months ended March 31, 2019.

Interest Expense

Interest expense decreased approximately $40,000 primarily due to interest and related debt discount on the unsecured long-term note payable of approximately $64,000 that was paid off during the three months ended March 31, 2018 offset partially by an increase in interest expense on the secured note payable and secured revolving credit facility of approximately $19,000 during the three months ended March 31, 2019.

Interest Income

There was no interest income for the three months ended March 31, 2019. Interest income of approximately $1,000 for the three months ended March 31, 2018 was a result of interest income recognized on an equipment lease. As a result of the Biocon Acquisition on December 31, 2018, the equipment lease was terminated.

Other Expense

Other expense was approximately $2,000 and $22,000 for the three months ended March 31, 2019 and 2018, respectively. Other expense for the three months ended March 31, 2019 includes approximately $7,000 related foreign currency exchange losses partially offset by other income of approximately $5,000. Other expense for the three months ended March 31, 2018 is a result of losses on foreign currency transactions. The decrease of 68% in foreign currency exchange losses is due to improvements in foreign currency exchange rates.

28

Renal Products

The following table sets forth results of operations for the Renal Products segment for the three months ended March 31, 2019 and 2018:

	Three Months Ended March 31,
	2019			2018			$ Increase (Decrease)		% Increase (Decrease)
Research and development expenses	$	411,000			100,000		$	311,000		311	%
Selling, general and administrative expenses		34,000			10,000			24,000		240	%
Loss from operations	$	(445,000	)	$	(110,000	)	$	335,000		305	%

Research and Development Expenses

Research and development expenses were approximately $411,000 and $100,000 for the three months ended March 31, 2019 and 2018, respectively, an increase of approximately $311,000 due to an increased investment in the second-generation HDF product.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were approximately $34,000 and $10,000 for the three months ended March 31, 2019 and 2018, respectively, an increase of approximately $24,000 due to an increased investment in the second-generation HDF product.

Liquidity and Capital Resources

The following table summarizes our liquidity and capital resources as of March 31, 2019 and December 31, 2018 and is intended to supplement the more detailed discussion that follows. The amounts stated are expressed in thousands.

Liquidity and Capital Resources	March 31, 2019		December 31, 2018
Cash	$	3,608	$	4,581
Other current assets		3,564		3,592
Working capital		4,062		5,519
Stockholders’ equity		5,604		6,798

At March 31, 2019, we had an accumulated deficit of approximately $125,502,000, and we expect to incur additional operating losses from operations until such time, if ever, that we are able to increase product sales and/or licensing revenue to achieve profitability.

Our cash flow from operations currently is not, and historically has not been, sufficient to meet our obligations and commitments. Based on cash that is available for our operations and projections of our future operations, we believe that our cash will be sufficient to fund our current operating plan through at least the next 12 months from the date of filing of this Quarterly Report on Form 10-Q. In the event that operations do not meet expectations, we will reduce discretionary expenditures such as additional headcount, new R&D projects, and other variable costs to alleviate the substantial doubt as to our ability to continue as a going concern. We may also seek to raise additional capital, however, 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 us to continue to satisfy our capital requirements.

Our future liquidity sources and requirements will depend on many factors, including:

● the market acceptance of our products and our ability to effectively and efficiently produce and market our products;

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

● the costs involved in filing and enforcing patent claims and the status of competitive products; and

● the cost of litigation, including potential patent litigation and any other actual or threatened litigation.

29

We expect to put our current capital resources to the following uses:

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

● for the development of our second-generation HDF product; and

● for working capital purposes.

At March 31, 2019, we had cash totaling approximately $3,608,000 and total assets of approximately $9,234,000, excluding the asset related to the License and Supply Agreement with Medica of approximately $904,000.

Net cash used in operating activities was approximately $697,000 for the three months ended March 31, 2019 compared to approximately $669,000 for the three months ended March 31, 2018, an increase of approximately $28,000 which is due to a combination of factors, including increased research and development expenses offset by improvements in gross margins, lower stock-based compensation expense and a loss on extinguishment of debt recorded in the three months ended March 31, 2018 related to the unsecured long-term note payable.

Net cash used in investing activities was approximately $137,000 for the three months ended March 31, 2019 due to a working capital adjustment related to the Biocon Acquisition. There was no cash used in investing activities for the three months ended March 31, 2018.

Net cash used in financing activities of approximately $137,000 for the three months ended March 31, 2019 resulted from payments on our secured note payable of approximately $52,000 and net payments on our secured revolving credit facility of approximately $85,000.

Net cash provided by financing activities of approximately $293,000 for the three months ended March 31, 2018 resulted from proceeds from the issuance of common stock of approximately $854,000 and proceeds from the issuance of secured note payable of approximately $1,187,000, offset partially by net payments on our secured revolving credit facility of approximately $561,000 and payments of approximately $1,187,000 on our unsecured long-term note payable.

Off-Balance Sheet Arrangements

We did not have any off-balance sheet arrangements as of March 31, 2019 or December 31, 2018.

Forward-Looking Statements

Certain statements in this Quarterly Report on Form 10-Q constitute “forward-looking statements”. Such statements include statements regarding the efficacy and intended use of our technologies under development, the timelines and strategy for bringing such products to market, the timeline for regulatory review and approval of our products, the availability of funding sources for continued development of such products, and other statements that are not historical facts, including statements which may be preceded by the words “intends,” “may,” “will,” “plans,” “expects,” “anticipates,” “projects,” “predicts,” “estimates,” “aims,” “believes,” “hopes,” “potential” or similar words. Forward-looking statements are not guarantees of future performance, are based on certain assumptions and are subject to various known and unknown risks and uncertainties, many of which are beyond our control. Actual results may differ materially from the expectations contained in the forward-looking statements. Factors that may cause such differences include, but are not limited to, the risks that:

● we face significant challenges in obtaining market acceptance of our products, which could adversely affect our potential sales and revenues;

● product-related deaths or serious injuries or product malfunctions could trigger recalls, class action lawsuits and other events that could cause us to incur expenses and may also limit our ability to generate revenues from such products;

● we face potential liability associated with the production, marketing and sale of our products, and the expense of defending against claims of product liability could materially deplete our assets and generate negative publicity, which could impair our reputation;

● to the extent our products or marketing materials are found to violate any provisions of the U.S. Food, Drug and Cosmetic Act or any other statutes or regulations, we could be subject to enforcement actions by the FDA or other governmental agencies;

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

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

● we may not be able to effectively market our products;

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

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

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

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

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

30

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

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

More detailed information about us and the risk factors that may affect the realization of forward-looking statements, including the forward-looking statements in this Quarterly Report on Form 10-Q, is set forth in our filings with the SEC, including our Annual Report on Form 10-K for the fiscal year ended December 31, 2018 and our other reports filed with the SEC. We urge investors and security holders to read those documents free of charge at the SEC’s web site at www.sec.gov. We do not undertake to publicly update or revise our forward-looking statements as a result of new information, future events or otherwise, except as required by law.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Not required for smaller reporting companies.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

We maintain a system of disclosure controls and procedures, as defined in Rule 13a-15(e) or Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which is designed to provide reasonable assurance that information required to be disclosed in our reports filed pursuant to the Exchange Act is accumulated and communicated to management in a timely manner. Management recognizes that any disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives. Because there are inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud have been or will be detected.

At the end of the period covered by this Quarterly Report on Form 10-Q, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, regarding the effectiveness of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b). Based upon that evaluation, our 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 that occurred during our most recent fiscal quarter that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

31

PART II - OTHER INFORMATION

Item 5. Other Information

On May 7, 2019, we entered into a First Amendment to Employment Agreement with Daron Evans, the Company’s Chief Executive Officer, effective April 15, 2019 (the “Amendment”). Pursuant to the Amendment, the term of Mr. Evans’s employment with the Company will continue indefinitely until terminated in accordance with the Employment Agreement. Additionally, if Mr. Evans is terminated without “cause” or he resigns for “good reason” (each as defined in the Employment Agreement), Mr. Evans will be entitled to continuation of his base salary for a period of twelve months. The foregoing summary of the Amendment is qualified in its entirety by reference to the complete form of Amendment, a copy of which is attached hereto as Exhibit 10.1.

On May 7, 2019, the Board approved reserving an additional 2,000,000 shares of our common stock for issuance pursuant to our 2015 Equity Incentive Plan (the “Plan”). An aggregate of 12,000,000 shares of our common stock have now been reserved for issuance pursuant to the Plan. A summary of the material terms of the Plan is included in our Current Report on Form 8-K, filed with the SEC on May 24, 2018, and is incorporated herein by reference.

Item 6. Exhibits

EXHIBIT INDEX

Exhibit No.	Description of Exhibit
10.1	First Amendment to Employment Agreement between Nephros, Inc. and Daron Evans, effective April 15, 2019. *
10.2	Second Amendment to Sublicense Agreement, dated January 30, 2019, between Nephros, Inc. and CamelBak Products, LLC, incorporated by reference to Exhibit 10.24 to the Nephros, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2018, as filed with the SEC on March 12, 2019.
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	Certification by the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. **
32.2	Certification by the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. **
101	Interactive Data File. *
*	Filed herewith
**	Furnished herewith.

32

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: May 8, 2019	By:	/s/ Daron Evans
	Name:	Daron Evans
	Title:	President, Chief Executive Officer (Principal Executive
		Officer)
Date: May 8, 2019	By:	/s/ Andrew Astor
	Name:	Andrew Astor
	Title:	Chief Financial Officer (Principal Financial and Accounting Officer)

33

EX-10.1

FIRST AMENDMENT TO

EMPLOYMENT AGREEMENT

This First Amendment to Employment Agreement (this “Amendment”) is entered into effective as of April 15, 2019, by and between Nephros, Inc., a Delaware corporation (the “Company”), and Daron Evans, an individual residing in the State of California (“Executive”).

RECITALS

A. Executive has been employed by the Company as its President and Chief Executive Officer pursuant to the terms and conditions set forth in that certain Employment Agreement dated April 15, 2015 (the “Agreement”).

B. The Company and Executive desire to amend the Agreement in order to extend the term of the Agreement and to provide for other modifications described more fully below.

AGREEMENT

NOW, THEREFORE, in consideration of the foregoing and the mutual covenants set forth in this Agreement, the Company and Executive, intending to be legally bound, hereby agree as follows:

1. Extended Term. Section 1 of the Agreement shall be amended and restated in its entirety as follows:

“1. Term. The term of Executive’s employment pursuant to this Agreement shall commence on the Effective Date and continue until terminated in accordance with Section 2.3 and Section 4 of this Agreement (the “Term”).”

2. Maximum Severance Period. The definition of “Maximum Severance Period,” as set forth in Section 4.5 of the Agreement, shall be amended and restated as follows:

“As used herein, the “Maximum Severance Period” shall mean twelve months.”

3. Miscellaneous. All capitalized terms used but not defined in this Amendment shall have the meanings given to such terms in the Agreement. Except as modified by this Amendment, all other terms and conditions of the Agreement are hereby confirmed and shall continue in full force and effect. This Agreement may be executed in two (2) or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. Counterparts may be delivered via facsimile, electronic mail (including pdf or any electronic signature complying with the U.S. federal ESIGN Act of 2000, e.g., www.docusign.com) or other transmission method and any counterpart so delivered shall be deemed to have been duly and validly delivered and be valid and effective for all purposes.

[The signature page follows]

IN WITNESS WHEREOF, each of the parties hereto has duly executed this Agreement as of May 7, 2019, to be deemed effective as of the date first written above.

NEPHROS, INC.
By:	/s/ Oliver Spandow
	Oliver Spandow
	Member, Compensation Committee
	/s/ Daron Evans
	Daron Evans

[Signature Page to First Amendment to Employment Agreement]

EX-31.1

Exhibit 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

UNDER SECTION 302 OF THE SARBANES-OXLEY ACT

I, Daron Evans, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Nephros, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to me by others within those entities, particularly during the period in which this report is being prepared;

b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under my supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report my conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 8, 2019	By:	/s/ Daron Evans
	Name:	Daron Evans
	Title:	President, Chief Executive Officer (Principal Executive Officer)

EX-31.2

Exhibit 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

UNDER SECTION 302 OF THE SARBANES-OXLEY ACT

I, Andrew Astor, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Nephros, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to me by others within those entities, particularly during the period in which this report is being prepared;

b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under my supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report my conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 8, 2019	By:	/s/ Andrew Astor
	Name:	Andrew Astor
	Title:	Chief Financial Officer (Principal Financial and Accounting Officer)

EX-32.1

Exhibit 32.1

Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the Quarterly Report on Form 10-Q of Nephros, Inc. (the “Company”) for the period ended March 31, 2019 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, Daron Evans, President, Chief Executive Officer of the Company, certifies that:

1.	the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2.	the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

By:	/s/ Daron Evans
Name:	Daron Evans
Title:	President, Chief Executive Officer (Principal Executive Officer)
Dated: May 8, 2019

EX-32.2

Exhibit 32.2

Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the Quarterly Report on Form 10-Q of Nephros, Inc. (the “Company”) for the period ended March 31, 2019 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, Andrew Astor, Chief Financial Officer of the Company, certifies that:

1.	the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2.	the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

By:	/s/ Andrew Astor
Name:	Andrew Astor
Title:	Chief Financial Officer (Principal Financial and Accounting Officer)
Dated: May 8, 2019

XML

Document And Entity Information - shares	3 Months Ended
	Mar. 31, 2019	May 03, 2019
Document And Entity Information [Abstract]
Entity Registrant Name	NEPHROS INC
Entity Central Index Key	0001196298
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Mar. 31, 2019
Current Fiscal Year End Date	--12-31
Entity Filer Category	Non-accelerated Filer
Entity Small Business Flag	true
Entity Emerging Growth Company	false
Entity Ex Transition Period	false
Entity Common Stock, Shares Outstanding		64,611,300
Trading Symbol	NEPH
Document Fiscal Period Focus	Q1
Document Fiscal Year Focus	2019

XML

Condensed Consolidated Balance Sheets (Unaudited) - USD ($) $ in Thousands	Mar. 31, 2019	Dec. 31, 2018
Current assets:
Cash	$ 3,608	$ 4,581
Accounts receivable, net	1,249	1,452
Inventory, net	2,040	1,864
Prepaid expenses and other current assets	275	276
Total current assets	7,172	8,173
Property and equipment, net	97	91
Operating lease right-of-use assets	587
Intangible assets, net	580	590
Goodwill	759	748
License and supply agreement, net	904	938
Other assets	39	18
TOTAL ASSETS	10,138	10,558
Current liabilities:
Secured revolving credit facility	906	991
Current portion of secured note payable	199	195
Accounts payable	1,030	836
Accrued expenses	512	396
Current portion of contingent consideration	272	236
Current portion of operating lease liabilities	191
Total current liabilities	3,110	2,654
Secured note payable, net of current portion	787	843
Contingent consideration, net of current portion	231	263
Operating lease liabilities, net of current portion	406
TOTAL LIABILITIES	4,534	3,760
COMMITMENTS AND CONTINGENCIES (Note 16)
STOCKHOLDERS' EQUITY
Preferred stock, $.001 par value; 5,000,000 shares authorized at March 31, 2019 and December 31, 2018; no shares issued and outstanding at March 31, 2019 and December 31, 2018.
Common stock, $.001 par value; 90,000,000 shares authorized at March 31, 2019 and December 31, 2018; 64,611,300 and 64,616,031 shares issued and outstanding at March 31, 2019 and December 31, 2018, respectively.	64	64
Additional paid-in capital	127,974	127,816
Accumulated other comprehensive income	68	71
Accumulated deficit	(125,502)	(124,153)
Subtotal	2,604	3,798
Noncontrolling interest	3,000	3,000
TOTAL STOCKHOLDERS' EQUITY	5,604	6,798
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$ 10,138	$ 10,558

XML

Condensed Consolidated Balance Sheets (Unaudited) (Parenthetical) - $ / shares	Mar. 31, 2019	Dec. 31, 2018
Statement of Financial Position [Abstract]
Preferred stock, par value	$ .001	$ .001
Preferred stock, shares authorized	5,000,000	5,000,000
Preferred stock, shares issued
Preferred stock, shares outstanding
Common stock, par value	$ .001	$ .001
Common stock, shares authorized	90,000,000	90,000,000
Common stock, shares issued	64,611,300	64,616,031
Common stock, shares outstanding	64,611,300	64,616,031

XML

Condensed Consolidated Statements of Operations and Comprehensive Loss (Unaudited) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2019	Mar. 31, 2018
Net revenue:
Total net revenues	$ 1,769	$ 985
Cost of goods sold	771	518
Gross margin	998	467
Operating expenses:
Research and development	756	289
Depreciation and amortization	50	41
Selling, general and administrative	1,503	1,260
Change in fair value of contingent consideration	(10)
Total operating expenses	2,299	1,590
Loss from operations	(1,301)	(1,123)
Other income (expense):
Loss on extinguishment of debt		(199)
Interest expense	(46)	(86)
Interest income		1
Other expense, net	(2)	(22)
Total other expense	(48)	(306)
Net loss	(1,349)	(1,429)
Less: Undeclared deemed dividend attributable to noncontrolling interest	(59)
Net loss attributable to Nephros, Inc. shareholders	$ (1,408)	$ (1,429)
Net loss per common share, basic and diluted	$ (0.02)	$ (0.03)
Weighted average common shares outstanding, basic and diluted	64,166,988	55,568,575
Comprehensive loss:
Net loss	$ (1,349)	$ (1,429)
Other comprehensive income (loss), foreign currency translation adjustments, net of tax	(3)	3
Comprehensive loss	(1,352)	(1,426)
Comprehensive loss attributable to noncontrolling interest	(59)
Comprehensive loss attributable to Nephros, Inc. shareholders	(1,411)	(1,426)
Product Revenues [Member]
Net revenue:
Total net revenues	1,729	958
Royalty and Other Revenues [Member]
Net revenue:
Total net revenues	$ 40	$ 27

XML

Condensed Consolidated Statement of Changes in Stockholders' Equity (Unaudited) - USD ($) $ in Thousands	Common Stock [Member]	Additional Paid-in Capital [Member]	Accumulated Other Comprehensive Income [Member]	Accumulated Deficit [Member]	Subtotal [Member]	Noncontrolling Interest [Member]	Total
Balance at Dec. 31, 2017	$ 55	$ 122,924	$ 77	$ (121,106)	$ 1,950		$ 1,950
Balance, shares at Dec. 31, 2017	55,293,267
Net loss				(1,429)	(1,429)		(1,429)
Cumulative effect of adoption of ASC 606				278	278		278
Net unrealized gains (losses) on foreign currency translation, net of tax			3		3		3
Issuance of common stock	$ 2	852			854		854
Issuance of common stock, shares	1,900,000
Cashless exercise of stock options
Cashless exercise of stock options, shares	22,245
Cancelled restricted stock shares
Cancelled restricted stock shares, shares	(45,859)
Noncash stock-based compensation		242			242		242
Balance at Mar. 31, 2018	$ 57	124,018	80	(122,257)	1,898		1,898
Balance, shares at Mar. 31, 2018	57,169,653
Balance at Dec. 31, 2018	$ 64	127,816	71	(124,153)	3,798	3,000	6,798
Balance, shares at Dec. 31, 2018	64,212,847
Net loss				(1,349)	(1,349)		(1,349)
Net unrealized gains (losses) on foreign currency translation, net of tax			(3)		(3)		(3)
Noncash stock-based compensation		158			158		158
Balance at Mar. 31, 2019	$ 64	$ 127,974	$ 68	$ (125,502)	$ 2,604	$ 3,000	$ 5,604
Balance, shares at Mar. 31, 2019	64,212,847

XML

Condensed Consolidated Statements of Cash Flows (Unaudited) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2019	Mar. 31, 2018
OPERATING ACTIVITIES:
Net loss	$ (1,349)	$ (1,429)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation of property and equipment	8	7
Amortization of intangible assets and license and supply agreement	44	34
Non-cash stock-based compensation, including stock options and restricted stock	158	242
Loss on extinguishment of debt		199
Inventory reserve	26	50
Change in fair value of contingent consideration	(10)
Accretion of contingent consideration	14
Amortization of debt discount		34
Loss on disposal of equipment		10
(Gain) loss on foreign currency transactions	(5)	7
(Increase) decrease in operating assets:
Accounts receivable	203	158
Inventory	(202)	(304)
Prepaid expenses and other current assets	1	22
Other asset	(21)
Increase in operating liabilities:
Accounts payable	199	190
Accrued expenses	237	111
Net cash used in operating activities	(697)	(669)
INVESTING ACTIVITIES:
Acquisition of Biocon	(137)
Net cash used in investing activities	(137)
FINANCING ACTIVITES:
Proceeds from issuance of common stock		854
Net payments from secured revolving credit facility	(85)	(561)
Payments on secured note payable	(52)
Proceeds from issuance of secured note		1,187
Repayment of unsecured long term note payable		(1,187)
Net cash (used in) provided by financing activities	(137)	293
Effect of foreign exchange rates on cash	(2)	1
NET DECREASE IN CASH	(973)	(375)
CASH, BEGINNING OF PERIOD	4,581	2,194
CASH, END OF PERIOD	3,608	1,819
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest expense	31	64
Cash paid for income taxes		3
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING INFORMATION
Right-of-use asset obtained in exchange for lease liability	20
Purchase of equipment included in accrued expenses	$ 14

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Organization and Nature of Operations

3 Months Ended

Mar. 31, 2019

Organization, Consolidation and Presentation of Financial Statements [Abstract]

Organization and Nature of Operations

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. Today, the Company has two U.S. Food and Drug Administration 510(k)-cleared products in the hemodiafiltration (“HDF”) market that deliver therapy to ESRD patients: the OLpūr mid-dilution HDF filter or “dialyzer,” designed expressly for HDF therapy, and the OLpūr H2H HDF module, an add-on module designed to allow the most common types of hemodialysis machines to be used for HDF therapy.

Beginning in 2009, Nephros introduced an additional, complementary business developing and marketing 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 water-borne 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 Company is also exploring water purification applications in other markets, including diagnostics, military field applications, and data center cooling.

In July 2018, the Company formed a new, wholly-owned subsidiary, Specialty Renal Products, Inc. (“SRP”), to drive the development of its second-generation HDF system and other products focused on improving therapies for patients with renal disease. The Company transferred three patents to SRP, which were carried at zero book value. SRP is a reportable segment, referred to as the Renal Products segment.

On December 31, 2018, the Company entered into a Membership Interest Purchase Agreement (the “Agreement”) with Biocon 1, LLC, a Nevada limited liability company (“Biocon”), Aether Water Systems, LLC, a Nevada limited liability company (“Aether”), and Gregory Lucas, the sole member of each of Biocon and Aether (“Lucas”). Pursuant to the terms of the Agreement, the Company acquired 100% of the outstanding membership interests of each of Aether and Biocon (the “Biocon Acquisition”).

The U.S. facilities, located at 380 Lackawanna Place, South Orange, New Jersey, 07079, and at 591 East Sunset Road, Henderson, Nevada 89011, are used to house the Company’s corporate headquarters, research, manufacturing, and distribution facilities.

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Basis of Presentation and Liquidity

3 Months Ended

Mar. 31, 2019

Organization, Consolidation and Presentation of Financial Statements [Abstract]

Basis of Presentation and Liquidity

Note 2 – Basis of Presentation and Liquidity

Interim Financial Information

The accompanying unaudited condensed interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 8 and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for annual financial statements. Results as of and for the three months ended March 31, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019.

The condensed consolidated interim financial statements and notes thereto should be read in conjunction with the consolidated financial statements and notes for the year ended December 31, 2018 included in the Company’s Annual Report on Form 10-K.

Consolidation

The accompanying consolidated financial statements include the accounts of Nephros, Inc. and its subsidiaries, including SRP, in which a controlling interest is maintained by the Company. Outside shareholders’ 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.

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, value of contingent consideration, 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

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 approximately $125,502,000 as of March 31, 2019. Also, the Company has a loan agreement with a lender, which provides a secured asset-based revolving credit facility of up to $1,000,000. This loan agreement will automatically renew on August 17, 2019, although this renewal is not guaranteed.

In July 2018, the Company formed a new, wholly-owned subsidiary, SRP, to drive the development of its second-generation HDF system and other products focused on improving therapies for patients with renal disease. On September 5, 2018, SRP completed a private placement transaction whereby SRP sold preferred shares equivalent to 37.5% of its outstanding equity interests for aggregate proceeds of $3,000,000. The proceeds of this private placement are restricted to SRP expenses and may not be used for the benefit of the Company or other affiliated entities, except to reimburse for expenses directly attributable to SRP.

Based on cash that is available for Company operations and projections of future Company operations, the Company believes that its cash will be sufficient to fund the Company’s 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 will reduce discretionary expenditures such as additional headcount, new R&D projects, and other variable costs to alleviate the substantial doubt as to the Company’s ability to continue as a going concern. The Company may also seek to raise additional capital, however, 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.

Recently Adopted Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, “Leases,” (“ASC 842”) which discusses how an entity should account for lease assets and lease liabilities. The guidance specifies that an entity who is a lessee under lease agreements should recognize lease assets and lease liabilities for those leases classified as operating leases under previous FASB guidance. The Company adopted the guidance on January 1, 2019 using the transition method provided by ASU 2018-11, “Leases (Topic 842): Targeted Improvements”. Under this transition method, the Company applied the new requirements to only those leases that existed as of January 1, 2019, rather than at the earliest comparative period presented in the financial statements. Prior periods will be presented under existing lease guidance. Upon transition, the Company applied the package of practical expedients permitted under the ASC 842 transition guidance. As a result, the Company did not reassess (1) whether expired or existing contracts contain leases under the new definition of a lease, including whether an existing or expired contract contains an embedded lease, (2) lease classification for expired or existing leases and (3) any initial direct costs of existing leases. As a result of the adoption of this guidance on January 1, 2019, the Company recorded right-of-use assets of approximately $613,000, net of approximately $8,000 of deferred rent liability as of January 1, 2019, and lease liabilities of approximately $621,000. Adoption of the guidance did not have any impact on the Company’s consolidated statements of operations and comprehensive loss or cash provided by or used in operating, investing or financing activities on its consolidated statements of cash flows.

In June 2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses on Financial Instruments,” which replaces the current incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The guidance is effective for the Company beginning in the first quarter of fiscal year 2020. Early adoption is permitted beginning in the first quarter of fiscal year 2019. The Company early adopted this guidance as of January 1, 2019 and the guidance did not have an impact on its consolidated financial statements.

In May 2018, the FASB issued ASU 2018-07, “Improvements to Nonemployee Share-Based Payment Accounting,” which expands the scope of Accounting Standards Codification (“ASC”) 718 to include share-based payment transactions for acquiring goods and services from nonemployees. The Company adopted this guidance as of January 1, 2019 and the guidance did not have an impact on its consolidated financial statements.

Recent Accounting Pronouncements, Not Yet Effective

In January 2017, the FASB issued ASU 2017-04, “Simplifying the Test for Goodwill Impairment,” which simplifies the test for goodwill impairment. The guidance is effective for the Company beginning in the first quarter of fiscal year 2020. Early adoption is permitted for interim or annual goodwill impairments tests after January 1, 2017. The Company is assessing the impact of adopting this guidance on its consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, “Disclosure Framework-Changes to the Disclosure Requirements for the Fair Value Measurement,” which modifies the disclosure requirements on fair value measurements. The guidance is effective for the Company beginning in the first quarter of fiscal year 2020. Early adoption is permitted. The Company is assessing the impact of adopting this guidance on its consolidated financial statements.

In August 2018, the FASB issued ASU 2018-15, “Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract,” which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The guidance is effective for the Company beginning in the first quarter of fiscal year 2020. Early adoption is permitted. The Company is assessing the impact of adopting this guidance on its consolidated financial statements.

In November 2018, the FASB issued ASU 2018-18, “Collaborative Arrangements: Clarifying the Interaction Between Topic 808 and Topic 606.” The new guidance clarifies that, when the collaborative arrangement participant is a customer in the context of a unit-of-account, revenue from contracts with customers guidance should be applied, adds unit-of-account guidance to collaborative arrangements guidance, and requires, that in a transaction with a collaborative arrangement participant who is not a customer, presenting the transaction together with revenue recognized under contracts with customers is precluded. The guidance is effective for the Company beginning in the first quarter of fiscal year 2020. Early adoption is permitted. The Company is assessing the impact of adopting this guidance on its consolidated financial statements.

Concentration of Credit Risk

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

Major Customers

For the three months ended March 31, 2019 and 2018, the following customers accounted for the following percentages of the Company’s revenues, respectively:

Customer	2019			2018
A		17	%		1	%
B		12	%		5	%
C		12	%		5	%
D		7	%		13	%
E		7	%		15	%
Total		55	%		39	%

As of March 31, 2019 and December 31, 2018, the following customers accounted for the following percentages of the Company’s accounts receivable, respectively:

Customer	2019			2018
A		13	%		5	%
B		11	%		-	%
F		-	%		15	%
D		4	%		11	%
C		8	%		11	%
Total		36	%		42	%

Accounts Receivable

The Company provides credit terms to customers in connection with purchases of the Company’s products. Management periodically reviews customer account activity in order to assess the adequacy of the allowances provided for potential collection issues and returns. Factors considered include economic conditions, each customer’s payment and return history and credit worthiness. Adjustments, if any, are made to reserve balances following the completion of these reviews to reflect management’s best estimate of potential losses. The allowance for doubtful accounts was approximately $11,000 and $15,000 as of March 31, 2019 and December 31, 2018, respectively. For the three months ended March 31, 2019, there was no provision for bad debt expense. Write-offs of accounts receivable were approximately $4,000 for the three months ended March 31, 2019 which were reserved for in a prior period. There was no allowance for sales returns at March 31, 2019 or December 31, 2018. During the three months ended March 31, 2018, there was no provision for bad debt expense and there were no write-offs of accounts receivable.

Depreciation Expense

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. For the three months ended March 31, 2019 and 2018, depreciation expense was approximately $8,000 and $7,000, respectively. Approximately $2,000 of the approximately $8,000 of depreciation expense for the three months ended March 31, 2019 has been recognized in the cost of goods sold. There was no depreciation recognized in cost of goods sold for the three months ended March 31, 2018.

Leases

The Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets and operating lease liabilities on the consolidated balance sheet.

Operating lease ROU assets and operating 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 also includes any lease payments made and excludes lease incentives and initial direct costs incurred. 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 nonlease components and, instead, account for them as a single component.

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Biocon Acquisition

3 Months Ended

Mar. 31, 2019

Business Combinations [Abstract]

Biocon Acquisition

Note 3 – Biocon Acquisition

On December 31, 2018, the Company completed the Biocon Acquisition, which included the acquisition of 100% of the outstanding membership interests of each of Aether and Biocon. The purpose of the Biocon Acquisition was to accelerate growth and to expedite entry into additional markets.

Transaction costs associated with the Biocon Acquisition of approximately $33,000 were recorded in selling, general and administrative costs in the fourth quarter of 2018.

The Company has accounted for the Biocon Acquisition as a business combination under the acquisition method of accounting.

The following is a summary of total consideration for the Biocon Acquisition, including a final working capital adjustment in the three months ended March 31, 2019 of approximately $11,000:

	Total  Consideration
Fixed purchase price	$	1,070,000
Acquisition date fair value of contingent consideration		562,000
Total consideration1	$	1,632,000

¹Total consideration consists of an upfront payment of $991,000, which includes $250,000 held in escrow, $137,000 in working capital payments, $5,000 in accrued expenses and $499,000 of acquisition date fair value contingent consideration liabilities.

The Company has allocated the total consideration for the transaction based upon the fair value of net assets acquired and liabilities assumed at the date of acquisition.

The following is a summary of the final purchase price allocation for the Biocon Acquisition. Changes to the purchase price allocation from amounts reported on the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 were due to the final working capital adjustment of approximately $11,000.

	Fair Values
Trade accounts receivable	$	164,000
Inventories		179,000
Equipment		39,000
Security deposit		7,000
Goodwill		759,000
Intangible assets		590,000
Total assets acquired, net of cash acquired		1,738,000
Accounts payable		91,000
Accrued expenses		15,000
Total liabilities assumed		106,000
Net assets acquired, net of cash acquired	$	1,632,000

Intangible Assets

The acquired intangible assets are being amortized over their estimated useful lives as follows:

	Preliminary Fair Values		Weighted Average Useful Life (Years)
Tradenames, service marks and domain names		50,000		5
Customer relationships		540,000		17
Total intangible assets	$	590,000

The estimated fair value of the identifiable intangible assets was determined using the “income approach,” which is a valuation technique that provides an estimate of the fair value of an asset based on market participant expectations of the cash flows an asset would generate over its remaining useful life. The assumptions, including the expected projected cash flows, utilized in the preliminary purchase price allocation and in determining the purchase price were based on the Company’s best estimates as of December 31, 2018, the closing date of the Biocon Acquisition.

Some of the more significant assumptions inherent in the development of those asset valuations include the estimated net cash flows for each year for each asset or product (including net revenues, cost of goods sold, research and development costs, selling and marketing costs and working capital / contributory asset charges), the appropriate discount rate to select in order to measure the risk inherent in each future cash flow stream, the assessment of each asset’s life cycle, the potential regulatory and commercial success risks, competitive trends impacting the asset and each cash flow stream, as well as other factors. No assurances can be given that the underlying assumptions used to prepare the discounted cash flow analysis will not change. For these and other reasons, actual results may vary significantly from estimated results.

Goodwill

Goodwill is calculated as the excess of the consideration transferred over the net assets recognized. Factors that contributed to the Company’s recognition of goodwill include the Company’s intent to expand its product portfolio. Goodwill has been allocated to the Water Filtration segment.

Unaudited Pro Forma Results of Operations

The following table reflects the unaudited pro forma combined results of operations for the three months ended March 31, 2018 (assuming the closing of the Biocon Acquisition occurred on January 1, 2017):

	Three Months Ended
	March 31, 2018
Total revenues	$	1,170,000
Net loss attributable to Nephros, Inc	$	(1,389,000	)

The pro forma results have been prepared for comparative purposes only and are not necessarily indicative of the actual results of operations had the closing of the Biocon Acquisition taken place on January 1, 2017. Furthermore, the pro forma results do not purport to project the future results of operations of the Company.

The unaudited pro forma information reflects the following adjustments:

● Adjustments to amortization expense for the three months ended March 31, 2018 of approximately $10,000 related to identifiable intangible assets acquired;

● Eliminate interest expense in the historical Biocon results of operations and eliminate interest income in the Company’s historical results of operations, each of which was approximately $1,000 for the three months ended March 31, 2018, which interest was related to a lease that was terminated as of the closing of the Biocon Acquisition; and

● Eliminate sales, and related cost of goods sold, for products sold by Biocon to the Company, with a gross margin impact of approximately $1,000 for the three months ended March 31, 2018.

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Revenue Recognition

3 Months Ended

Mar. 31, 2019

Revenue from Contract with Customer [Abstract]

Revenue Recognition

Note 4 – Revenue Recognition

The Company recognizes revenue related to product sales when product is shipped via external logistics provider and the other criteria of ASC 606, “Revenue from Contracts with Customers” (“ASC 606”) are met. Product revenue is recorded net of returns and allowances. In addition to product revenue, the Company recognizes revenue related to license, royalty and other agreements in accordance with the five-step model in ASC 606. License, royalty and other revenue recognized for the three months ended March 31, 2019 and 2018 is comprised of:

	Three Months Ended March 31,
	2019		2018
Royalty revenue under the License Agreement with Bellco	$	26,000	$	27,000
Other revenue		14,000		-
Total royalty and other revenue	$	40,000	$	27,000

Bellco License Agreement

With regard to the OLpūr MD190 and MD220, on June 27, 2011, the Company entered into a License Agreement (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, as amended, 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 recognized as license revenue over the term of the License Agreement. As of the adoption of ASC 606, the remaining deferred revenue of approximately $278,000 was recognized as a cumulative effect adjusted to accumulated deficit as of January 1, 2018 in accordance with ASC 606.

The License Agreement, as amended, also provides minimum sales targets which, if not satisfied, will, at the discretion of the Company, result in conversion of the license to non-exclusive status. Beginning on January 1, 2015 through and including December 31, 2021, Bellco will pay the Company a royalty based on the number of units of Products sold per year in the covered territory as follows: for the first 125,000 units sold in total, €1.75 (approximately $2.10) per unit; thereafter, €1.25 (approximately $1.50) per unit. The License Agreement also provides for a fixed royalty payment payable to the Company for the period beginning on January 1, 2015 through and including December 31, 2021 if the minimum sales targets are not met.

The Company recognized royalty income from Bellco pursuant to the License Agreement for the three months ended March 31, 2019 and 2018 of approximately $26,000 and $27,000, respectively.

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Fair Value Measurements

3 Months Ended

Mar. 31, 2019

Fair Value Disclosures [Abstract]

Fair Value Measurements

Note 5 – 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.

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.

The following table sets forth the Company’s financial assets and liabilities that were measured at fair value on a recurring basis as of March 31, 2019:

	Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Total
At March 31, 2019:
Total contingent consideration liability	$	-	$	-	$	503,000	$	503,000

The following table sets forth the Company’s financial assets and liabilities that were measured at fair value on a recurring basis as of December 31, 2018:

	Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Total
At December 31, 2018:
Total contingent consideration liability	$	-	$	-	$	499,000	$	499,000

The following table summarizes the change in fair value, as determined by Level 3 inputs, for the contingent consideration liability using unobservable Level 3 inputs for the three months ended March 31, 2019:

	Contingent Consideration
	(Unaudited)
Balance as of December 31, 2018	$	499,000
Payments against contingent consideration		-
Change in fair value of contingent consideration liability		(10,000	)
Accretion of contingent consideration liability		14,000
Balance as of March 31, 2019	$	503,000

During the three months ended March 31, 2019, a change in fair value of contingent consideration of approximately $10,000 was recorded due to lower than planned performance.

Consideration paid in a business combination may include potential future payments that are contingent upon the acquired business achieving certain levels of earnings in the future (“contingent consideration”). Contingent consideration liabilities are measured at their estimated fair value as of the date of acquisition, with subsequent changes in fair value recorded in the consolidated statements of operations. Fair value as of the date of acquisition is estimated based on projections of expected future cash flows of the acquired business. The Company estimated the contingent consideration liability using the income approach (discounted cash flow method), which requires the Company to make estimates and assumptions regarding the future cash flows and profits. Changes in these estimates and assumptions could have a significant impact on the amounts recognized.

There were no transfers between levels in the fair value hierarchy during the three months ended March 31, 2019.

Assets and Liabilities Not Measured at Fair Value on a Recurring Basis

The carrying amounts of cash, accounts receivable, secured revolving credit facility, accounts payable and accrued expenses approximate fair value due to the short-term maturity of these instruments.

The carrying amounts of the secured long-term note payable and operating lease liabilities approximate fair value as of March 31, 2019 and December 31, 2018 because those financial instruments bear interest at rates that approximate current market rates for similar agreements with similar maturities and credit.

Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis

See Note 3 – Biocon Acquisition for the allocation of the total consideration for the Biocon Acquisition based upon the fair value of net assets acquired and liabilities assumed at the date of acquisition.

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Inventory, Net

3 Months Ended

Mar. 31, 2019

Inventory Disclosure [Abstract]

Inventory, Net

Note 6 – Inventory, net

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 March 31, 2019 and December 31, 2018 were as follows:

	March 31, 2019			December 31, 2018
	(Unaudited)			(Audited)
Finished goods	$	1,842,000		$	1,633,000
Raw materials		273,000			280,000
Less: inventory reserve		(75,000	)		(49,000	)
Total inventory, net	$	2,040,000		$	1,864,000

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Intangible Assets and Goodwill

3 Months Ended

Mar. 31, 2019

Goodwill and Intangible Assets Disclosure [Abstract]

Intangible Assets and Goodwill

Note 7 – Intangible Assets and Goodwill

Intangible Assets, net

Intangible assets for the three months ended March 31, 2019 are set forth in the table below. The table shows the gross carrying values and accumulated amortization of the Company’s intangible assets by type as of March 31, 2019:

	March 31, 2019
	Cost		Accumulated Amortization		Net
Tradenames, service marks and domain names	$	50,000	$	2,000	$	48,000
Customer relationships		540,000		8,000		532,000
Total intangible assets	$	590,000		10,000		580,000

The Company recognized amortization expense of approximately $10,000 for the three months ended March 31, 2019 in selling, general and administrative expenses on the accompanying condensed consolidated statement of operations and comprehensive loss.

Amortization expense for the reminder of the fiscal year 2019 is estimated to be approximately $32,000. Aggregate amortization expense for each of the next five years is estimated to be approximately $42,000.

The Company did not recognize any intangible asset impairment charges during the three months ended March 31, 2019.

Goodwill

Goodwill had a carrying value on the Company’s condensed consolidated balance sheets of approximately $759,000 and $748,000 at March 31, 2019 and December 31, 2018, respectively. As a result of a final working capital adjustment, goodwill increased approximately $11,000 during the three months ended March 31, 2019. Goodwill has been allocated to the Water Filtration segment.

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License and Supply Agreement, Net

3 Months Ended

Mar. 31, 2019

License And Supply Agreement Net

License and Supply Agreement, Net

Note 8 – License and Supply Agreement, net

On April 23, 2012, the Company entered into a License and Supply Agreement (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, as amended, 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 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 approximately $2,250,000. License and supply agreement, net, on the condensed consolidated balance sheet is approximately $904,000 and $938,000 as of March 31, 2019 and December 31, 2018, respectively. Accumulated amortization is approximately $1,346,000 and $1,312,000 as of March 31, 2019 and December 31, 2018, respectively. The intangible asset is being amortized as an expense over the life of the License and Supply Agreement. Approximately $34,000 in each of the three months ended March 31, 2019 and 2018 on the condensed 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 three months ended March 31, 2019. For the three months ended March 31, 2018, approximately $10,000 of interest expenses was recognized on the condensed consolidated statement of operations and comprehensive loss.

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. Approximately $47,000 and $29,000 for the three months ended March 31, 2019 and 2018, respectively, was recognized as royalty expense and is included in cost of goods sold on the condensed consolidated statement of operations and comprehensive loss. Approximately $47,000 in royalties are included in accrued expenses as of March 31, 2019. Approximately $50,000 in royalties are included in accounts payable as of December 31, 2018.

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Secured Note Payable

3 Months Ended

Mar. 31, 2019

Debt Disclosure [Abstract]

Secured Note Payable

Note 9 – Secured Note Payable

On March 27, 2018, the Company entered into a Secured Promissory Note Agreement (the “Secured Note”) with Tech Capital, LLC (“Tech Capital”) for a principal amount of $1,187,000. As of March 31, 2019, the principal balance of the Secured Note was approximately $986,000. The Company used the proceeds from the Secured Note to repay the Company’s 11% unsecured promissory notes issued in June 2016 pursuant to the Note and Warrant Agreement (see Note 11 – Unsecured Promissory Notes and Warrants).

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 the 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 between the Company and Tech Capital, dated August 16, 2017 and all of the riders and amendments thereto (the “Loan Agreement”) (see Note 10 – Secured Revolving Credit Facility). An event of default under such Loan Agreement shall be an event of default under the Secured Note and vice versa. In the event the principal balance under the Loan Agreement is due, all amounts due under the Secured Note shall also be due.

During the three months ended March 31, 2019, the Company made payments under the Secured Note of approximately $72,000. Included in the total payments made, approximately $20,000 was recognized as interest expense on the condensed consolidated statement of operations and comprehensive loss for the three months ended March 31, 2019.

Debt issuance costs of approximately $6,000 were recognized as interest expense on the condensed consolidated statement of operations and comprehensive loss for the three months ended March 31, 2018.

As of March 31, 2019, future principal maturities are as follows:

2019 (excluding the three months ended March 31, 2019)	$	162,000
2020		231,000
2021		251,000
2022		271,000
2023		71,000
Total	$	986,000

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Secured Revolving Credit Facility

3 Months Ended

Mar. 31, 2019

Debt Disclosure [Abstract]

Secured Revolving Credit Facility

Note 10 – Secured Revolving Credit Facility

On August 17, 2017, the Company entered into the Loan Agreement with Tech Capital. The Loan Agreement provides for a secured asset-based revolving credit facility of up to $1,000,000, which the Company may draw upon and repay from time to time during the term of the Loan Agreement. The outstanding principal balance of the Loan Agreement was approximately $906,000 and $991,000 as of March 31, 2019 and December 31, 2018, respectively. The Company is using these proceeds for working capital and general corporate purposes.

The Loan Agreement has a term of 12 months, which was automatically renewed on August 17, 2018 and will automatically renew for successive 12-month periods unless cancelled. Availability under the Loan Agreement will be based upon periodic borrowing base certifications valuing certain of the Company’s accounts receivable and inventory. Outstanding borrowings under the Loan Agreement accrue interest, which are payable monthly based on the average daily outstanding balance, at a rate equal to 3.5% plus the prime rate per annum, provided that such prime rate will not be less than 4.25% per annum. As of March 31, 2019, the current interest rate was 9.00% per annum.

The Company also granted to Tech Capital a first priority security interest in its assets, including its accounts receivable and inventory, to secure all of its obligations under the Loan Agreement. In addition, Nephros International Limited, a wholly-owned subsidiary of the Company, unconditionally guaranteed the Company’s obligations under the Loan Agreement.

For the three months ended March 31, 2019 and 2018, approximately $11,000 and $6,000, respectively, was recognized as interest expense on the condensed consolidated statement of operations and comprehensive loss. As of March 31, 2019, approximately $3,000 of the $11,000 of interest expense incurred for the three months ended March 31, 2019 is included in accrued expenses on the condensed consolidated balance sheet.

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Unsecured Promissory Notes and Warrants

3 Months Ended

Mar. 31, 2019

Debt Disclosure [Abstract]

Unsecured Promissory Notes and Warrants

Note 11 - Unsecured Promissory Notes and Warrants

In June 2016, the Company entered into a Note and Warrant Agreement (the “Note and Warrant Agreement”) with new creditors as well as existing stockholders under which the Company issued unsecured promissory notes and warrants resulting in total gross proceeds to the Company of approximately $1,187,000. The outstanding principal under the notes accrued interest at a rate of 11% per annum. The notes required the Company to make interest only payments on a semi-annual basis, with all outstanding principal under the notes being repayable in cash on the third anniversary of the date of issuance. In addition to the notes, the Company issued warrants to purchase approximately 2.4 million shares of the Company’s common stock. The portion of the gross proceeds allocated to the warrants, approximately $393,000, was accounted for as additional paid-in capital resulting in a debt discount. The debt discount, which included approximately $9,000 of debt issuance costs in addition to the fair value of the warrants, was being amortized to interest expense using the effective interest method in accordance with ASC 835 over the term of the Note and Warrant Agreement.

On March 30, 2018, the principal balance of the notes, along with the remaining accrued interest of approximately $43,000, was repaid in full. The remaining debt discount of approximately $199,000 was recorded as loss on extinguishment of debt in the Company’s consolidated statements of operations and comprehensive loss for the three months ended March 31, 2018.

For the three months ended March 31, 2018, approximately $34,000 was recognized as amortization of debt discount and is included in interest expense on the consolidated statement of operations and comprehensive loss. For the three months ended March 31, 2018, approximately $30,000 of interest expense was incurred.

For the three months ended March 31, 2018, the amount of interest expense recognized related to related parties comprised of entities controlled by a member of management and by Lambda Investors, LLC (“Lambda”), the Company’s largest shareholder, was approximately $1,000.

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Leases

3 Months Ended

Mar. 31, 2019

Leases [Abstract]

Leases

Note 12 – Leases

The Company has operating leases for corporate offices, an automobile and office equipment. The leases have remaining lease terms of 1 year to 4 years.

The Company entered into an operating lease that began in December 2017 for 380 Lackawanna Place, South Orange, New Jersey 07079, which consists of approximately 7,700 square feet of space. The rental agreement expires in November 2022 with a monthly cost of approximately $11,000. Approximately $11,000 related to a security deposit for this U.S. office facility is classified as other assets on the condensed consolidated balance sheet as of March 31, 2019 and December 31, 2018. The Company uses this facility to house its corporate headquarters and research facilities.

The Company also has a rental agreement for 591 East Sunset Road, Henderson, Nevada 89011, which consists of approximately 16,000 total square feet of space. The Nevada lease expires in November 2020 with a monthly cost of approximately $6,000. Approximately $7,000 related to a security deposit for this U.S. office facility is classified as other assets on the condensed consolidated balance sheet as of March 31, 2019 and December 31, 2018.

The Company entered into an operating lease that began in February 2019 for 211 Donelson Pike, Nashville, Tennessee 37214, for office space. The rental agreement expires in January 2021 with a monthly cost of approximately $850. Approximately $1,000 related to a security deposit for this office facility is classified as other assets on the condensed consolidated balance sheet as of March 31, 2019.

The Company entered into an operating lease in March 2019 for 3221 Polaris Avenue, Las Vegas, Nevada 89118. The rental agreement will commence in June 2019 with a monthly cost of approximately $15,000. Approximately $20,000 related to a security deposit for this office facility is classified as other assets on the condensed consolidated balance sheet as of March 31, 2019.

The lease agreement for the office space in Ireland was entered into on August 1, 2018 and includes a twelve month term.

The Company also has lease agreements for an automobile and office equipment.

Prior to the adoption of ASC 842, operating lease expense of approximately $51,000 was recognized in the Company’s consolidated statements of operations and comprehensive loss for the three months ended March 31, 2018.

Operating lease expense for the three months ended March 31, 2019 was approximately $58,000 in the Company’s consolidated statements of operations and comprehensive loss and includes costs associated with leases for which ROU assets have been recognized as well as short-term leases.

Supplemental cash flow information related to leases was as follows:

	Three months ended March 31, 2019
		(Unaudited)
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	57,000
ROU assets obtained in exchange for lease obligations
Operating leases	$	20,000

Supplemental balance sheet information related to leases was as follows:

	March 31, 2019
		(Unaudited)
Operating lease right-of-use assets	$	587,000
Current portion of operating lease liabilities	$	191,000
Operating lease liabilities, net of current portion		406,000
Total operating lease liabilities	$	597,000
Weighted average remaining lease term, operating leases		3.2 years
Weighted average discount rate, operating leases		8.0	%

As of March 31, 2019, maturities of lease liabilities were as follows:

2019 (excluding the three months ended March 31, 2019)	$	171,000
2020		218,000
2021		147,000
2022		136,000
Total future minimum lease payments		672,000
Less imputed interest		(75,000	)
Total	$	597,000

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Stock Plans and Share-Based Payments

3 Months Ended

Mar. 31, 2019

Share-based Payment Arrangement [Abstract]

Stock Plans and Share-Based Payments

Note 13 – 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 condensed 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 Options

During the three months ended March 31, 2019, the Company granted stock options to purchase 86,546 shares of common stock to a director. These stock options are being expensed over the respective vesting period, which is based on a service condition. The fair value of the stock options granted during the three months ended March 31, 2019 was approximately $31,000.

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 three months ended March 31, 2019.

Assumptions for Option Grants
Stock Price Volatility	92.1	%
Risk-Free Interest Rates	2.47	%
Expected Life (in years)	5.75
Expected Dividend Yield	-	%

Stock-based compensation expense related to stock options was approximately $143,000 and $130,000 for the three months ended March 31, 2019 and 2018, respectively. For the three months ended March 31, 2019, approximately $124,000 and $19,000 are included in selling, general and administrative expenses and research and development expenses, respectively, on the accompanying condensed consolidated statement of operations and comprehensive loss. For the three months ended March 31, 2018, approximately $120,000 and $10,000 are included in selling, general and administrative expenses and research and development expenses, respectively, on the accompanying condensed consolidated statement of operations and comprehensive loss. During the three months ended March 31, 2018, previously issued stock options were modified for an employee who is no longer employed with the Company. As a result of this modification, approximately $12,000 was recognized as stock option modification expense and included in research and development expenses on the accompanying condensed consolidated statement of operations and comprehensive loss. The remaining income recorded as stock based compensation included in research and development expenses of approximately $2,000 for the three months ended March 31, 2018 is primarily due to the reversal of expense due to the forfeiture of unvested stock options.

There was no tax benefit related to expense recognized in the three months ended March 31, 2019 and 2018, as the Company is in a net operating loss position. As of March 31, 2019, there was approximately $1,193,000 of total unrecognized compensation expense related to unvested stock-based awards granted under the equity compensation plans. Approximately $230,000 of the $1,193,000 total unrecognized compensation expense will be recognized at the time that certain performance conditions are met. The remaining unrecognized compensation expense of approximately $963,000 will be amortized over the weighted average remaining requisite service period of 2.0 years. Such amount does not include the effect of future grants of equity compensation, if any.

Restricted Stock

Total stock-based compensation expense for restricted stock was approximately $15,000 and $112,000 for the three months ended March 31, 2019 and 2018, respectively. For the three months ended March 31, 2019, approximately $14,000 and $1,000 are included in selling, general and administrative expenses and research and development expenses, respectively, on the accompanying condensed consolidated statement of operations and comprehensive loss. For the three months ended March 31, 2018, approximately $100,000 and $12,000 are included in selling, general and administrative expenses and research and development expenses, respectively, on the accompanying condensed consolidated statement of operations and comprehensive loss.

As of March 31, 2019, there was approximately $15,000 of unrecognized compensation expense related to restricted stock awards, which is expected to be recognized over the next three months.

The aggregate shares of common stock legally issued and outstanding as of December 31, 2018 is greater than the aggregate shares of common stock outstanding for accounting purposes by the amount of unvested restricted shares.

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Stockholders' Equity

3 Months Ended

Mar. 31, 2019

Equity [Abstract]

Stockholders' Equity

Note 14 – Stockholders’ Equity

July 2015 Purchase Agreement and Registration Rights Agreement

On July 24, 2015, the Company entered into both a securities purchase agreement and registration rights agreement with Lincoln Park Capital Fund, LLC (“Lincoln Park”). Under the terms and subject to the conditions of the securities purchase agreement, the Company had the right to sell to Lincoln Park, and Lincoln Park was obligated to purchase, up to $10.0 million in shares of the Company’s common stock, subject to certain limitations, from time to time, over the 36-month period commencing on September 4, 2015. Pursuant to the securities purchase agreement, during the three months ended March 31, 2018, the Company issued and sold 1,900,000 shares of its common stock to Lincoln Park. The issuance of the common shares to Lincoln Park resulted in gross proceeds of $854,000 for the three months ended March 31, 2018. The securities purchase agreement expired on September 4, 2018.

Noncontrolling Interest

In July 2018, the Company formed a new, wholly-owned subsidiary, SRP, to drive the development of its second-generation HDF system and other products focused on improving therapies for patients with renal disease.

On September 5, 2018, SRP entered into a Series A Preferred Stock Purchase Agreement with certain purchasers pursuant to which SRP sold 600,000 shares of its Series A Preferred Stock (“Series A Preferred”) for $5.00 per share. The aggregate purchase price was $3,000,000. SRP incurred transaction-related expenses of approximately $30,000, which were included in selling, general and administrative expenses on the accompanying consolidated statement of operations and comprehensive loss for the three and nine months ended September 30, 2018. The net proceeds from the issuance of the Series A Preferred are restricted to SRP expenses, and may not be used for the benefit of the Company or other affiliated entities, except to reimburse for expenses directly attributable to SRP. Following the Series A Preferred transaction, the Company retained a 62.5% ownership interest in SRP, holding 100% of the outstanding common shares, and holders of Series A Preferred retained a 37.5% interest in SRP on a fully diluted basis, holding 100% of the outstanding preferred shares. Of the 600,000 shares of Series A Preferred issued, the shares purchased by related parties comprised of persons controlled by members of management and by Lambda amounted to 18,000 and 400,000 shares, respectively.

Each share of 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 Series A Preferred price, 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.

Warrants

There were no warrants exercised during the three months ended March 31, 2019 or 2018.

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Net Loss Per Common Share

3 Months Ended

Mar. 31, 2019

Earnings Per Share [Abstract]

Net Loss Per Common Share

Note 15 – 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, 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 anti-dilutive:

	March 31,
	2019		2018
Shares underlying warrants outstanding		6,642,344		7,099,010
Shares underlying options outstanding		7,495,128		6,474,527
Unvested restricted stock		444,313		753,528

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Commitments and Contingencies

3 Months Ended

Mar. 31, 2019

Commitments and Contingencies Disclosure [Abstract]

Commitments and Contingencies

Note 16 – Commitments and Contingencies

Purchase Commitments

In exchange for the rights granted under the License and Supply Agreement with Medica (see Note 8 – 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, 2019, the Company has agreed to make minimum annual aggregate purchases from Medica of €3,000,000 (approximately $3,400,000). As of March 31, 2019, the Company’s aggregate purchase commitments totaled approximately €1,789,000 (approximately $2,032,000).

Contractual Obligations

See Note 12 – Leases for a discussion of the Company’s contractual obligations.

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Segment Reporting

3 Months Ended

Mar. 31, 2019

Segment Reporting [Abstract]

Segment Reporting

Note 17 – Segment Reporting

During the three months ended September 30, 2018, the Company began reporting the results of SRP as a new segment as a result of the July 2018 formation of the Company’s new subsidiary, SRP. Prior to the formation of SRP, the Company had only a single operating segment. The Company has reflected these new segment measures beginning in the quarter ended September 30, 2018 and prior periods have been restated for comparability.

The Company has defined its two reportable segments as Water Filtration and Renal Products. The Water Filtration segment develops and sells high performance liquid purification filters, known as ultrafilters. The Renal Products segment is focused on the development of medical device products for patients with renal disease, including a 2^nd 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.

The accounting policies for the Company’s segments are the same as those described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

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:

	Three Months Ended March 31, 2019
	Water Filtration			Renal Products			Nephros, Inc. Consolidated
Total net revenues	$	1,769,000		$	-		$	1,769,000
Gross margin		998,000			-			998,000
Research and development expenses		345,000			411,000			756,000
Depreciation and amortization expense		50,000			-			50,000
Selling, general and administrative expenses		1,469,000			34,000			1,503,000
Change in fair value of contingent consideration		(10,000	)		-			(10,000	)
Total operating expenses		(1,854,000	)		(445,000	)		(2,299,000	)
Loss from operations	$	(856,000	)	$	(445,000	)	$	(1,301,000	)

	Three Months Ended March 31, 2018
	Water Filtration			Renal Products			Nephros, Inc. Consolidated
Total net revenues	$	985,000		$	-		$	985,000
Gross margin		467,000			-			467,000
Research and development expenses		189,000			100,000			289,000
Depreciation and amortization expense		41,000			-			41,000
Selling, general and administrative expenses		1,250,000			10,000			1,260,000
Total operating expenses		(1,480,000	)		(110,000	)		(1,590,000	)
Loss from operations	$	(1,013,000	)	$	(110,000	)	$	(1,123,000	)

As of March 31, 2019, approximately $2,100,000 of total assets are in the Renal Products segment. The $2,100,000 consisted of the remaining cash received of approximately $1,900,000 from the sale of Series A Preferred during the year ended December 31, 2018 and prepaid expenses and other current assets of approximately $200,000.

As of December 31, 2018, approximately $2,500,000 of total assets are in the Renal Products segment. The $2,500,000 consisted of the remaining cash received of approximately $2,300,000 from the sale of Series A Preferred during the year ended December 31, 2018 and prepaid expenses and other current assets of approximately $200,000.

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Basis of Presentation and Liquidity (Policies)

3 Months Ended

Mar. 31, 2019

Organization, Consolidation and Presentation of Financial Statements [Abstract]

Interim Financial Information

Interim Financial Information

The accompanying unaudited condensed interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 8 and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for annual financial statements. Results as of and for the three months ended March 31, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019.

The condensed consolidated interim financial statements and notes thereto should be read in conjunction with the consolidated financial statements and notes for the year ended December 31, 2018 included in the Company’s Annual Report on Form 10-K.

Consolidation

Consolidation

The accompanying consolidated financial statements include the accounts of Nephros, Inc. and its subsidiaries, including SRP, in which a controlling interest is maintained by the Company. Outside shareholders’ 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.

Use of Estimates

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, value of contingent consideration, 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

Liquidity

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 approximately $125,502,000 as of March 31, 2019. Also, the Company has a loan agreement with a lender, which provides a secured asset-based revolving credit facility of up to $1,000,000. This loan agreement will automatically renew on August 17, 2019, although this renewal is not guaranteed.

In July 2018, the Company formed a new, wholly-owned subsidiary, SRP, to drive the development of its second-generation HDF system and other products focused on improving therapies for patients with renal disease. On September 5, 2018, SRP completed a private placement transaction whereby SRP sold preferred shares equivalent to 37.5% of its outstanding equity interests for aggregate proceeds of $3,000,000. The proceeds of this private placement are restricted to SRP expenses and may not be used for the benefit of the Company or other affiliated entities, except to reimburse for expenses directly attributable to SRP.

Based on cash that is available for Company operations and projections of future Company operations, the Company believes that its cash will be sufficient to fund the Company’s 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 will reduce discretionary expenditures such as additional headcount, new R&D projects, and other variable costs to alleviate the substantial doubt as to the Company’s ability to continue as a going concern. The Company may also seek to raise additional capital, however, 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.

Recently Adopted Accounting Pronouncements

Recently Adopted Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, “Leases,” (“ASC 842”) which discusses how an entity should account for lease assets and lease liabilities. The guidance specifies that an entity who is a lessee under lease agreements should recognize lease assets and lease liabilities for those leases classified as operating leases under previous FASB guidance. The Company adopted the guidance on January 1, 2019 using the transition method provided by ASU 2018-11, “Leases (Topic 842): Targeted Improvements”. Under this transition method, the Company applied the new requirements to only those leases that existed as of January 1, 2019, rather than at the earliest comparative period presented in the financial statements. Prior periods will be presented under existing lease guidance. Upon transition, the Company applied the package of practical expedients permitted under the ASC 842 transition guidance. As a result, the Company did not reassess (1) whether expired or existing contracts contain leases under the new definition of a lease, including whether an existing or expired contract contains an embedded lease, (2) lease classification for expired or existing leases and (3) any initial direct costs of existing leases. As a result of the adoption of this guidance on January 1, 2019, the Company recorded right-of-use assets of approximately $613,000, net of approximately $8,000 of deferred rent liability as of January 1, 2019, and lease liabilities of approximately $621,000. Adoption of the guidance did not have any impact on the Company’s consolidated statements of operations and comprehensive loss or cash provided by or used in operating, investing or financing activities on its consolidated statements of cash flows.

In June 2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses on Financial Instruments,” which replaces the current incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The guidance is effective for the Company beginning in the first quarter of fiscal year 2020. Early adoption is permitted beginning in the first quarter of fiscal year 2019. The Company early adopted this guidance as of January 1, 2019 and the guidance did not have an impact on its consolidated financial statements.

In May 2018, the FASB issued ASU 2018-07, “Improvements to Nonemployee Share-Based Payment Accounting,” which expands the scope of Accounting Standards Codification (“ASC”) 718 to include share-based payment transactions for acquiring goods and services from nonemployees. The Company adopted this guidance as of January 1, 2019 and the guidance did not have an impact on its consolidated financial statements.

Recent Accounting Pronouncements, Not Yet Effective

Recent Accounting Pronouncements, Not Yet Effective

In January 2017, the FASB issued ASU 2017-04, “Simplifying the Test for Goodwill Impairment,” which simplifies the test for goodwill impairment. The guidance is effective for the Company beginning in the first quarter of fiscal year 2020. Early adoption is permitted for interim or annual goodwill impairments tests after January 1, 2017. The Company is assessing the impact of adopting this guidance on its consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, “Disclosure Framework-Changes to the Disclosure Requirements for the Fair Value Measurement,” which modifies the disclosure requirements on fair value measurements. The guidance is effective for the Company beginning in the first quarter of fiscal year 2020. Early adoption is permitted. The Company is assessing the impact of adopting this guidance on its consolidated financial statements.

In August 2018, the FASB issued ASU 2018-15, “Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract,” which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The guidance is effective for the Company beginning in the first quarter of fiscal year 2020. Early adoption is permitted. The Company is assessing the impact of adopting this guidance on its consolidated financial statements.

In November 2018, the FASB issued ASU 2018-18, “Collaborative Arrangements: Clarifying the Interaction Between Topic 808 and Topic 606.” The new guidance clarifies that, when the collaborative arrangement participant is a customer in the context of a unit-of-account, revenue from contracts with customers guidance should be applied, adds unit-of-account guidance to collaborative arrangements guidance, and requires, that in a transaction with a collaborative arrangement participant who is not a customer, presenting the transaction together with revenue recognized under contracts with customers is precluded. The guidance is effective for the Company beginning in the first quarter of fiscal year 2020. Early adoption is permitted. The Company is assessing the impact of adopting this guidance on its consolidated financial statements.

Concentration of Credit Risk

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

Major Customers

For the three months ended March 31, 2019 and 2018, the following customers accounted for the following percentages of the Company’s revenues, respectively:

Customer	2019			2018
A		17	%		1	%
B		12	%		5	%
C		12	%		5	%
D		7	%		13	%
E		7	%		15	%
Total		55	%		39	%

As of March 31, 2019 and December 31, 2018, the following customers accounted for the following percentages of the Company’s accounts receivable, respectively:

Customer	2019			2018
A		13	%		5	%
B		11	%		-	%
F		-	%		15	%
D		4	%		11	%
C		8	%		11	%
Total		36	%		42	%

Accounts Receivable

Accounts Receivable

The Company provides credit terms to customers in connection with purchases of the Company’s products. Management periodically reviews customer account activity in order to assess the adequacy of the allowances provided for potential collection issues and returns. Factors considered include economic conditions, each customer’s payment and return history and credit worthiness. Adjustments, if any, are made to reserve balances following the completion of these reviews to reflect management’s best estimate of potential losses. The allowance for doubtful accounts was approximately $11,000 and $15,000 as of March 31, 2019 and December 31, 2018, respectively. For the three months ended March 31, 2019, there was no provision for bad debt expense. Write-offs of accounts receivable were approximately $4,000 for the three months ended March 31, 2019 which were reserved for in a prior period. There was no allowance for sales returns at March 31, 2019 or December 31, 2018. During the three months ended March 31, 2018, there was no provision for bad debt expense and there were no write-offs of accounts receivable.

Depreciation Expense

Depreciation Expense

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. For the three months ended March 31, 2019 and 2018, depreciation expense was approximately $8,000 and $7,000, respectively. Approximately $2,000 of the approximately $8,000 of depreciation expense for the three months ended March 31, 2019 has been recognized in the cost of goods sold. There was no depreciation recognized in cost of goods sold for the three months ended March 31, 2018.

Leases

Leases

The Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets and operating lease liabilities on the consolidated balance sheet.

Operating lease ROU assets and operating 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 also includes any lease payments made and excludes lease incentives and initial direct costs incurred. 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 nonlease components and, instead, account for them as a single component.

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Basis of Presentation and Liquidity (Tables)

3 Months Ended

Mar. 31, 2019

Organization, Consolidation and Presentation of Financial Statements [Abstract]

Schedule of Revenues and Receivable Major Customers

For the three months ended March 31, 2019 and 2018, the following customers accounted for the following percentages of the Company’s revenues, respectively:

Customer	2019			2018
A		17	%		1	%
B		12	%		5	%
C		12	%		5	%
D		7	%		13	%
E		7	%		15	%
Total		55	%		39	%

As of March 31, 2019 and December 31, 2018, the following customers accounted for the following percentages of the Company’s accounts receivable, respectively:

Customer	2019			2018
A		13	%		5	%
B		11	%		-	%
F		-	%		15	%
D		4	%		11	%
C		8	%		11	%
Total		36	%		42	%

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Biocon Acquisition (Tables)

3 Months Ended

Mar. 31, 2019

Business Combinations [Abstract]

Summary of Total Consideration

The following is a summary of total consideration for the Biocon Acquisition, including a final working capital adjustment in the three months ended March 31, 2019 of approximately $11,000:

	Total Consideration
Fixed purchase price	$	1,070,000
Acquisition date fair value of contingent consideration		562,000
Total consideration1	$	1,632,000

¹Total consideration consists of an upfront payment of $991,000, which includes $250,000 held in escrow, $137,000 in working capital payments, $5,000 in accrued expenses and $499,000 of acquisition date fair value contingent consideration liabilities.

Summary of Preliminary Purchase Price Allocation

The following is a summary of the final purchase price allocation for the Biocon Acquisition.

	Fair Values
Trade accounts receivable	$	164,000
Inventories		179,000
Equipment		39,000
Security deposit		7,000
Goodwill		759,000
Intangible assets		590,000
Total assets acquired, net of cash acquired		1,738,000
Accounts payable		91,000
Accrued expenses		15,000
Total liabilities assumed		106,000
Net assets acquired, net of cash acquired	$	1,632,000

Schedule of Acquired Intangible Assets Amortized Over Estimated Useful Lives

The acquired intangible assets are being amortized over their estimated useful lives as follows:

	Preliminary Fair Values		Weighted Average Useful Life (Years)
Tradenames, service marks and domain names		50,000		5
Customer relationships		540,000		17
Total intangible assets	$	590,000

Schedule of Business Acquisition, Pro Forma Information

The following table reflects the unaudited pro forma combined results of operations for the three months ended March 31, 2018 (assuming the closing of the Biocon Acquisition occurred on January 1, 2017):

	Three Months Ended
	March 31, 2018
Total revenues	$	1,170,000
Net loss attributable to Nephros, Inc	$	(1,389,000	)

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Revenue Recognition (Tables)

3 Months Ended

Mar. 31, 2019

Revenue from Contract with Customer [Abstract]

Schedule of License, Royal and Other Revenue

License, royalty and other revenue recognized for the three months ended March 31, 2019 and 2018 is comprised of:

	Three Months Ended March 31,
	2019		2018
Royalty revenue under the License Agreement with Bellco	$	26,000	$	27,000
Other revenue		14,000		-
Total royalty and other revenue	$	40,000	$	27,000

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Fair Value Measurements (Tables)

3 Months Ended

Mar. 31, 2019

Fair Value Disclosures [Abstract]

Schedule of Fair value on Recurring Basic

The following table sets forth the Company’s financial assets and liabilities that were measured at fair value on a recurring basis as of March 31, 2019:

	Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Total
At March 31, 2019:
Total contingent consideration liability	$	-	$	-	$	503,000	$	503,000

The following table sets forth the Company’s financial assets and liabilities that were measured at fair value on a recurring basis as of December 31, 2018:

	Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Total
At December 31, 2018:
Total contingent consideration liability	$	-	$	-	$	499,000	$	499,000

Schedule of Change in Fair Value of Contingent Consideration Liability Using Unobservable Level 3 Inputs

The following table summarizes the change in fair value, as determined by Level 3 inputs, for the contingent consideration liability using unobservable Level 3 inputs for the three months ended March 31, 2019:

	Contingent Consideration
	(Unaudited)
Balance as of December 31, 2018	$	499,000
Payments against contingent consideration		-
Change in fair value of contingent consideration liability		(10,000	)
Accretion of contingent consideration liability		14,000
Balance as of March 31, 2019	$	503,000

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Inventory, Net (Tables)

3 Months Ended

Mar. 31, 2019

Inventory Disclosure [Abstract]

Schedule of Inventory, Net

The Company’s inventory components as of March 31, 2019 and December 31, 2018 were as follows:

	March 31, 2019			December 31, 2018
	(Unaudited)			(Audited)
Finished goods	$	1,842,000		$	1,633,000
Raw materials		273,000			280,000
Less: inventory reserve		(75,000	)		(49,000	)
Total inventory, net	$	2,040,000		$	1,864,000

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Intangible Assets and Goodwill (Tables)

3 Months Ended

Mar. 31, 2019

Goodwill and Intangible Assets Disclosure [Abstract]

Schedule of Intangible Assets

The table shows the gross carrying values and accumulated amortization of the Company’s intangible assets by type as of March 31, 2019:

	March 31, 2019
	Cost		Accumulated Amortization		Net
Tradenames, service marks and domain names	$	50,000	$	2,000	$	48,000
Customer relationships		540,000		8,000		532,000
Total intangible assets	$	590,000		10,000		580,000

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Secured Note Payable (Tables)

3 Months Ended

Mar. 31, 2019

Debt Disclosure [Abstract]

Schedule of Future Debt Principal Maturities

As of March 31, 2019, future principal maturities are as follows:

2019 (excluding the three months ended March 31, 2019)	$	162,000
2020		231,000
2021		251,000
2022		271,000
2023		71,000
Total	$	986,000

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Leases (Tables)

3 Months Ended

Mar. 31, 2019

Leases [Abstract]

Schedule of Supplemental Cash Flow Information Related to Leases

Supplemental cash flow information related to leases was as follows:

	Three months ended March 31, 2019
		(Unaudited)
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	57,000
ROU assets obtained in exchange for lease obligations
Operating leases	$	20,000

Schedule of Supplemental Balance Sheet Information Related to Leases

Supplemental balance sheet information related to leases was as follows:

	March 31, 2019
		(Unaudited)
Operating lease right-of-use assets	$	587,000
Current portion of operating lease liabilities	$	191,000
Operating lease liabilities, net of current portion		406,000
Total operating lease liabilities	$	597,000
Weighted average remaining lease term, operating leases		3.2 years
Weighted average discount rate, operating leases		8.0	%

Schedule of Maturities of Lease Liabilities

As of March 31, 2019, maturities of lease liabilities were as follows:

2019 (excluding the three months ended March 31, 2019)	$	171,000
2020		218,000
2021		147,000
2022		136,000
Total future minimum lease payments		672,000
Less imputed interest		(75,000	)
Total	$	597,000

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Stock Plans and Share-Based Payments (Tables)

3 Months Ended

Mar. 31, 2019

Share-based Payment Arrangement [Abstract]

Schedule of Fair Value Assumptions

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 three months ended March 31, 2019.

Assumptions for Option Grants
Stock Price Volatility	92.1	%
Risk-Free Interest Rates	2.47	%
Expected Life (in years)	5.75
Expected Dividend Yield	-	%

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Net Loss Per Common Share (Tables)

3 Months Ended

Mar. 31, 2019

Earnings Per Share [Abstract]

Schedule of Antidilutive Securities Excluded from Computation of Earnings Per Share

The following potentially dilutive securities have been excluded from the computations of diluted weighted average shares outstanding as they would be anti-dilutive:

	March 31,
	2019		2018
Shares underlying warrants outstanding		6,642,344		7,099,010
Shares underlying options outstanding		7,495,128		6,474,527
Unvested restricted stock		444,313		753,528

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Segment Reporting (Tables)

3 Months Ended

Mar. 31, 2019

Segment Reporting [Abstract]

Schedule of Segment Information

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:

	Three Months Ended March 31, 2019
	Water Filtration			Renal Products			Nephros, Inc. Consolidated
Total net revenues	$	1,769,000		$	-		$	1,769,000
Gross margin		998,000			-			998,000
Research and development expenses		345,000			411,000			756,000
Depreciation and amortization expense		50,000			-			50,000
Selling, general and administrative expenses		1,469,000			34,000			1,503,000
Change in fair value of contingent consideration		(10,000	)		-			(10,000	)
Total operating expenses		(1,854,000	)		(445,000	)		(2,299,000	)
Loss from operations	$	(856,000	)	$	(445,000	)	$	(1,301,000	)

	Three Months Ended March 31, 2018
	Water Filtration			Renal Products			Nephros, Inc. Consolidated
Total net revenues	$	985,000		$	-		$	985,000
Gross margin		467,000			-			467,000
Research and development expenses		189,000			100,000			289,000
Depreciation and amortization expense		41,000			-			41,000
Selling, general and administrative expenses		1,250,000			10,000			1,260,000
Total operating expenses		(1,480,000	)		(110,000	)		(1,590,000	)
Loss from operations	$	(1,013,000	)	$	(110,000	)	$	(1,123,000	)

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Organization and Nature of Operations (Details Narrative) - Membership Interest Purchase Agreement [Member]	Dec. 31, 2018
Aether Water Systems, LLC [Member]
Noncontrolling interest, percentage	100.00%
Biocon Acquisition [Member]
Noncontrolling interest, percentage	100.00%

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Basis of Presentation and Liquidity (Details Narrative) - USD ($) $ in Thousands		3 Months Ended		12 Months Ended
	Sep. 05, 2018	Mar. 31, 2019	Mar. 31, 2018	Dec. 31, 2018	Jan. 02, 2019
Noncontrolling interest, description		Outside shareholders' interest in SRP of 37.5% is shown on the consolidated balance sheet as noncontrolling interest.
Accumulated deficit		$ (125,502)		$ (124,153)
Available for secured revolving credit facility		1,000		1,000
Right-of-use assets		587			$ 613
Deferred rent liability					8
Lease liabilities		597			$ 621
Allowance for doubtful accounts receivable		11		15
Provision for bad debt expense
Write-offs of accounts receivable		4
Sales returns and allowances
Depreciation expense		8	7
Cost of goods sold, depreciation		$ 2
Specialty Renal Products, Inc. [Member] | Private Placement [Member]
Number of common stock shares sold, value	$ 3,000
Specialty Renal Products, Inc. [Member] | Private Placement [Member] | Minority Interest Ownership [Member]
Noncontrolling interest, percentage	37.50%

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Basis of Presentation and Liquidity - Schedule of Revenues and Receivable Major Customers (Details)	3 Months Ended
	Mar. 31, 2019	Mar. 31, 2018
Sales Revenue Goods Net [Member]
Concentration risk percentage	55.00%	39.00%
Accounts Receivable [Member]
Concentration risk percentage	36.00%	42.00%
Customer A [Member] | Sales Revenue Goods Net [Member]
Concentration risk percentage	17.00%	1.00%
Customer A [Member] | Accounts Receivable [Member]
Concentration risk percentage	13.00%	5.00%
Customer B [Member] | Sales Revenue Goods Net [Member]
Concentration risk percentage	12.00%	5.00%
Customer B [Member] | Accounts Receivable [Member]
Concentration risk percentage	11.00%	0.00%
Customer C [Member] | Sales Revenue Goods Net [Member]
Concentration risk percentage	12.00%	5.00%
Customer C [Member] | Accounts Receivable [Member]
Concentration risk percentage	8.00%	11.00%
Customer D [Member] | Sales Revenue Goods Net [Member]
Concentration risk percentage	7.00%	13.00%
Customer D [Member] | Accounts Receivable [Member]
Concentration risk percentage	4.00%	11.00%
Customer E [Member] | Sales Revenue Goods Net [Member]
Concentration risk percentage	7.00%	15.00%
Customer F [Member] | Accounts Receivable [Member]
Concentration risk percentage	0.00%	15.00%

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Biocon Acquisition (Details Narrative) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2019	Mar. 31, 2018	Dec. 31, 2018
Interest income		$ 1
Gross margin	998	467
Biocon Acquisition [Member]
Percentage on membership interests			100.00%
Working capital adjustment	$ 11
Adjustments to amortization expense related to identifiable intangible assets acquired		10
Interest income		1
Gross margin		$ 1
Biocon Acquisition [Member] | Selling, General and Administrative Cost [Member]
Transaction costs			$ 33

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Biocon Acquisition - Summary of Total Consideration (Details) - Biocon Acquisition [Member] $ in Thousands	3 Months Ended
	Mar. 31, 2019 USD ($)
Fixed purchase price	$ 1,070
Acquisition date fair value of contingent consideration	562
Total consideration	$ 1,632	[1]

[1] Total consideration consists of an upfront payment of $991,000, which includes $250,000 held in escrow, $137,000 in working capital payments, $5,000 in accrued expenses and $499,000 of acquisition date fair value contingent consideration liabilities.

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Biocon Acquisition - Summary of Total Consideration (Details) (Parenthetical) - Biocon Acquisition [Member] $ in Thousands	3 Months Ended
	Mar. 31, 2019 USD ($)
Upfront payment	$ 991
Held in escrow	250
Working capital payments	137
Accrued expenses	5
Fair value of contingent consideration liabilities	$ 499

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Biocon Acquisition - Summary of Preliminary Purchase Price Allocation (Details) - USD ($) $ in Thousands	Mar. 31, 2019	Dec. 31, 2018
Goodwill	$ 759	$ 748
Biocon Acquisition [Member]
Trade accounts receivable		164
Inventories		179
Equipment		39
Security deposit		7
Goodwill		759
Intangible assets		590
Total assets acquired, net of cash acquired		1,738
Accounts payable		91
Accrued expenses		15
Total liabilities assumed		106
Net assets acquired, net of cash acquired		$ 1,632

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Biocon Acquisition - Schedule of Acquired Intangible Assets Amortized Over Estimated Useful Lives (Details) $ in Thousands	3 Months Ended
	Mar. 31, 2019 USD ($)
Preliminary Fair Values: Total intangible assets	$ 590
Tradenames, Service Marks and Domain Names [Member]
Preliminary Fair Values: Total intangible assets	$ 50
Weighted Average Useful Life (Years)	5 years
Customer Relationships [Member]
Preliminary Fair Values: Total intangible assets	$ 540
Weighted Average Useful Life (Years)	17 years

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Biocon Acquisition - Schedule of Business Acquisition, Pro Forma Information (Details) - Biocon Acquisition [Member] $ in Thousands	3 Months Ended
	Mar. 31, 2018 USD ($)
Total revenues	$ 1,170
Net loss attributable to Nephros, Inc	$ (1,389)

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Revenue Recognition (Details Narrative) - Bellco [Member] $ / shares in Units, $ in Thousands	3 Months Ended
	Mar. 31, 2019 USD ($) Products $ / shares	Mar. 31, 2018 USD ($)	Dec. 31, 2018 € / shares	Jan. 02, 2018 USD ($)
Number of units under first tier royalty receivable | Products	125,000
First tier royalty per unit | $ / shares	$ 2.10
Second tier royalty per unit | $ / shares	$ 1.50
License Agreement [Member]
Cumulative effect adjusted to accumulated deficit | $				$ 278
Royalty income | $	$ 26	$ 27
EURO Currency [Member]
First tier royalty per unit | € / shares			€ 1.75
Second tier royalty per unit | € / shares			€ 1.25

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Revenue Recognition - Schedule of License, Royal and Other Revenue (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2019	Mar. 31, 2018
License Revenue [Member] | License Agreement [Member] | Bellco [Member]
Revenue	$ 26	$ 27
Other Revenue [Member]
Revenue	14
Royalty and Other Revenues [Member]
Revenue	$ 40	$ 27

XML

Fair Value Measurements (Details Narrative) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2019	Mar. 31, 2018
Fair Value Disclosures [Abstract]
Change in fair value of contingent consideration	$ 10

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Fair Value Measurements - Schedule of Fair value on Recurring Basic (Details) - USD ($) $ in Thousands	Mar. 31, 2019	Dec. 31, 2018
Significant Unobservable Inputs (Level 3) [Member]
Total contingent consideration liability	$ 503	$ 499
Fair Value, Measurements, Recurring [Member]
Total contingent consideration liability	503	499
Fair Value, Measurements, Recurring [Member] | Quoted Prices in Active Markets for Identical Assets (Level 1) [Member]
Total contingent consideration liability
Fair Value, Measurements, Recurring [Member] | Significant Other Observable Inputs (Level 2) [Member]
Total contingent consideration liability
Fair Value, Measurements, Recurring [Member] | Significant Unobservable Inputs (Level 3) [Member]
Total contingent consideration liability	$ 503	$ 499

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Fair Value Measurements - Schedule of Change in Fair Value of Contingent Consideration Liability Using Unobservable Level 3 Inputs (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2019	Mar. 31, 2018
Change in fair value of contingent consideration liability	$ (10)
Significant Unobservable Inputs (Level 3) [Member]
Balance as of December 31, 2018	499
Payments against contingent consideration
Change in fair value of contingent consideration liability	(10)
Accretion of contingent consideration liability	14
Balance as of March 31, 2019	$ 503

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Inventory, Net - Schedule of Inventory, Net (Details) - USD ($) $ in Thousands	Mar. 31, 2019	Dec. 31, 2018
Inventory Disclosure [Abstract]
Finished goods	$ 1,842	$ 1,633
Raw materials	273	280
Less: inventory reserve	(75)	(49)
Total inventory, net	$ 2,040	$ 1,864

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Intangible Assets and Goodwill (Details Narrative) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2019	Dec. 31, 2018
Goodwill and Intangible Assets Disclosure [Abstract]
Amortization of intangible assets	$ 10
Amortization expense intangible assets reminder fiscal year	32
Amortization expense intangible assets next twelve months	42
Amortization expense intangible assets year two	42
Amortization expense intangible assets year three	42
Amortization expense intangible assets year four	42
Amortization expense intangible assets five years	42
Goodwill	759	$ 748
Increase decrease in goodwill	$ 11

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Intangible Assets and Goodwill - Schedule of Intangible Assets (Details) $ in Thousands	Mar. 31, 2019 USD ($)
Cost	$ 590
Accumulated Amortization	10
Total intangible assets, Net	580
Tradenames, Service Marks and Domain Names [Member]
Cost	50
Accumulated Amortization	2
Total intangible assets, Net	48
Customer Relationships [Member]
Cost	540
Accumulated Amortization	8
Total intangible assets, Net	$ 532

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License and Supply Agreement, Net (Details Narrative) - USD ($) $ in Thousands		3 Months Ended		12 Months Ended
	Apr. 23, 2012	Mar. 31, 2019	Mar. 31, 2018	Dec. 31, 2018	Sep. 30, 2013
Long-term intangible asset		$ 2,250
Other long-term assets		904		$ 938
Accumulated amortization		1,346		1,312
Amortization of other deferred charges		34	$ 34
Interest expense			10
Royalty expense		47	$ 29
Accrued Expenses [Member]
Royalty expense		$ 47
Accounts Payable [Member]
Royalty expense				$ 50
Medica S.p.A. [Member]
Expiration term of license agreement	Dec. 31, 2025
Debt instrument, interest rate, stated percentage					12.00%
Medica [Member] | April 23, 2014 through December 31, 2025 [Member]
Royalty rate		3.00%

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Secured Note Payable (Details Narrative) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2019	Mar. 31, 2018	Mar. 27, 2018
Interest expense	$ 46	$ 86
Unsecured Promissory Note [Member]
Debt interest rate	11.00%
Secured Note [Member]
Repayments of notes payable	$ 72
Interest expense	20
Secured Promissory Note Agreement [Member] | Tech Capital, LLC [Member]
Principal amount of secured note payable			$ 1,187
Principal balance of line of credit	$ 986
Debt interest rate	8.00%
Maturity date	Apr. 01, 2023
Debt instrument, maturity date, description	Principal and interest payments are due on the first day of each month commencing on May 1, 2018.
Debt issuance costs	$ 6

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Secured Notes Payable - Schedule of Future Debt Principal Maturities (Details) $ in Thousands	Mar. 31, 2019 USD ($)
Debt Disclosure [Abstract]
2019 (excluding the three months ended March 31, 2019)	$ 162
2020	231
2021	251
2022	271
2023	71
Total	$ 986

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Secured Revolving Credit Facility (Details Narrative) - USD ($) $ in Thousands	3 Months Ended		12 Months Ended
	Mar. 31, 2019	Mar. 31, 2018	Dec. 31, 2018	Aug. 17, 2017
Interest expense	$ 46	$ 86
Interest expense included in accrued expenses	512		$ 396
Loan Agreement [Member] | Tech Capital, LLC [Member]
Maximum secured revolving credit facility				$ 1,000
Principal balance of line of credit	$ 906		$ 991
Loan agreement, term	12 months
Line of credit interest rate	9.00%
Interest expense	$ 11	$ 6
Loan Agreement [Member] | Tech Capital, LLC [Member] | Revolving Credit Facility [Member]
Interest expense included in accrued expenses	$ 3
Loan Agreement [Member] | Tech Capital, LLC [Member] | Prime Rate [Member]
Line of credit interest rate	3.50%
Loan Agreement [Member] | Tech Capital, LLC [Member] | Prime Rate [Member] | Maximum [Member]
Line of credit interest rate	4.25%

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Unsecured Promissory Notes and Warrants (Details Narrative) - USD ($) $ in Thousands	1 Months Ended	3 Months Ended
	Jun. 30, 2016	Mar. 31, 2019	Mar. 31, 2018	Mar. 30, 2018
Loss on extinguishment of debt			$ (199)
Amortization of debt discount			34
Interest expense		$ 46	86
Entities Controlled by Member of Management and by Lambda Investors, LLC [Member]
Interest expense related party			1
Note and Warrant Agreement [Member]
Gross proceeds from unsecured promissory notes and warrants	$ 1,187
Percentage of accrued interest rate per annum	11.00%
Proceeds from warrants	$ 393
Debt issuance costs	$ 9
Amortization of debt discount			34
Interest expense			30
Note and Warrant Agreement [Member] | Investors [Member]
Number of warrants issued to purchase of shares of common stock	2,400,000
Secured Note Agreement [Member]
Accrued interest				$ 43
Loss on extinguishment of debt			$ 199

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Leases (Details Narrative)	1 Months Ended		3 Months Ended		12 Months Ended
	Mar. 31, 2019 USD ($) ft²	Feb. 28, 2019 USD ($)	Mar. 31, 2019 USD ($) ft²	Mar. 31, 2018 USD ($)	Dec. 31, 2017 USD ($) ft²	Dec. 31, 2018 USD ($)	Aug. 01, 2018
Rental Agreement [Member]
Area of a land | ft²	16,000		16,000
Lease expiration date			Expires in November 2020
Monthly rent expense			$ 6,000
Security deposit	$ 7,000		7,000			$ 7,000
Operating Lease [Member]
Area of a land | ft²					7,700
Lease expiration date		Expires in January 2021			Expires in November 2022
Monthly rent expense	15,000	$ 850			$ 11,000
Security deposit	11,000		11,000			$ 11,000
Operating lease expense			58,000	$ 51,000
Operating Lease One [Member]
Security deposit	1,000		1,000
Operating Lease Two [Member]
Security deposit	$ 20,000		$ 20,000
License Agreement [Member] | Ireland [Member]
Operating lease terms							12 months
Minimum [Member]
Operating lease terms	1 year		1 year
Maximum [Member]
Operating lease terms	4 years		4 years

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Leases - Schedule of Supplemental Cash Flow Information Related to Leases (Details) $ in Thousands	3 Months Ended
	Mar. 31, 2019 USD ($)
Leases [Abstract]
Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases	$ 57
ROU assets obtained in exchange for lease liabilities: Operating leases	$ 20

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Leases - Schedule of Supplemental Balance Sheet Information Related to Leases (Details) - USD ($) $ in Thousands	Mar. 31, 2019	Jan. 02, 2019	Dec. 31, 2018
Leases [Abstract]
Operating lease right-of-use assets	$ 587	$ 613
Current portion of operating lease liabilities	191
Operating lease liabilities, net of current portion	406
Total operating lease liabilities	$ 597	$ 621
Weighted average remaining operating lease term	3 years 2 months 12 days
Operating leases weighted average discount rate	8.00%

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Leases - Schedule of Maturities of Lease Liabilities (Details) $ in Thousands	Mar. 31, 2019 USD ($)
Leases - Schedule Of Maturities Of Lease Liabilities
2019 (excluding the three months ended March 31, 2019)	$ 171
2020	218
2021	147
2022	136
Total future minimum lease payments	672
Less: imputed interest	(75)
Total	$ 597

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Stock Plans Share-Based Payments (Details Narrative) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2019	Mar. 31, 2018
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Selling, general and administrative expense	$ 1,503	$ 1,260
Income tax expenses benefit
Employee service share-based compensation, nonvested awards, compensation not yet recognized, stock options	1,193
Employee service share-based compensation, nonvested awards, compensation recognized at the time of certain performance conditions met	230
Stock based compensation recognized amortization cost	$ 963
Employee service share-based compensation, nonvested awards, compensation cost not yet recognized, period for recognition	2 years
Restricted Stock [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Share-based compensation expense	$ 15	112
Selling, general and administrative expense	14	100
Research and development expense	$ 1	12
Share based compensation unrecognized restricted stock award	15
Unvested Stock Options [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Research and development expense		2
Stock Option [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Share-based compensation expense	$ 143	130
Selling, general and administrative expense	124	120
Research and development expense	$ 19	10
Stock option modification expense		$ 12
Director [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Stock options granted	86,546
Fair value of stock option granted	$ 31

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Stock Plans, Share-Based Payments - Schedule of Fair Value Assumptions (Details)	3 Months Ended
	Mar. 31, 2019
Share-based Payment Arrangement [Abstract]
Stock Price Volatility	92.10%
Risk-Free Interest Rates	2.47%
Expected Life (in years)	5 years 9 months
Expected Dividend Yield	0.00%

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Stockholders' Equity (Details Narrative) - USD ($) $ / shares in Units, $ in Thousands			3 Months Ended			9 Months Ended	12 Months Ended
	Sep. 05, 2018	Jul. 24, 2015	Mar. 31, 2019	Sep. 30, 2018	Mar. 31, 2018	Sep. 30, 2018	Dec. 31, 2018
Class of Stock [Line Items]
Proceeds from issuance of common stock					$ 854
Preferred stock, shares outstanding
Proceeds from warrants exercised
Series A Preferred Stock [Member]
Class of Stock [Line Items]
Number of shares issued in transaction, value			$ 1,900				$ 2,300
Preferred stock, shares outstanding	150,000
Proceeds from indebtedness	$ 250
Securities Purchase Agreement [Member] | Lincoln Park Capital Fund LLC [Member]
Class of Stock [Line Items]
Stock issued during period, value, new issues		$ 10,000
Limited liability company description for purchase shares level		The Company had the right to sell to Lincoln Park, and Lincoln Park was obligated to purchase, up to $10.0 million in shares of the Company's common stock, subject to certain limitations, from time to time, over the 36-month period commencing on September 4, 2015.
Number of shares issued during period					1,900,000
Proceeds from issuance of common stock					$ 854
Series A Preferred Stock Purchase Agreement [Member] | Specialty Renal Products, Inc. [Member]
Class of Stock [Line Items]
Sale of stock, price per share	$ 5.00
Equity interest	62.50%
Ownership percentage	100.00%
Dividends per share rate	$ 0.40
Series A Preferred Stock Purchase Agreement [Member] | Specialty Renal Products, Inc. [Member] | Holders of Series A Preferred [Member]
Class of Stock [Line Items]
Equity interest	37.50%
Ownership percentage	100.00%
Series A Preferred Stock Purchase Agreement [Member] | Specialty Renal Products, Inc. [Member] | Entities Controlled by Member of Management [Member]
Class of Stock [Line Items]
Number of shares issued during period	18,000
Series A Preferred Stock Purchase Agreement [Member] | Specialty Renal Products, Inc. [Member]
Class of Stock [Line Items]
Number of shares sold during the period	600,000
Number of shares issued in transaction, value	$ 3,000
Transaction-related expenses				$ 30		$ 30
Series A Preferred Stock Purchase Agreement [Member] | Specialty Renal Products, Inc. [Member] | Lambda, Majority Shareholder [Member]
Class of Stock [Line Items]
Number of shares issued during period	400,000

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Net Loss Per Common Share - Schedule of Antidilutive Securities Excluded from Computation of Earnings Per Share (Details) - shares	3 Months Ended
	Mar. 31, 2019	Mar. 31, 2018
Shares Underlying Warrants Outstanding [Member]
Antidilutive Securities Excluded from Computation of Earnings Per Share	6,642,344	7,099,010
Shares Underlying Options Outstanding [Member]
Antidilutive Securities Excluded from Computation of Earnings Per Share	7,495,128	6,474,527
Unvested Restricted Stock [Member]
Antidilutive Securities Excluded from Computation of Earnings Per Share	444,313	753,528

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Commitments and Contingencies (Details Narrative) - 3 months ended Mar. 31, 2019 - License and Supply Agreement [Member] - Medica S.p.A. [Member] € in Thousands, $ in Thousands	USD ($)	EUR (€)
Purchase commitment | $	$ 2,032
December 31, 2019 [Member]
Purchase commitment | $	$ 3,400
EURO Currency [Member]
Purchase commitment | €		€ 1,789
EURO Currency [Member] | December 31, 2019 [Member]
Purchase commitment | €		€ 3,000

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Segment Reporting (Details Narrative) $ in Thousands	3 Months Ended	12 Months Ended
	Mar. 31, 2019 USD ($) Products	Dec. 31, 2018 USD ($)
Number of operating segments | Products	1
Number of reportable segments | Products	2
Total assets	$ 10,138	$ 10,558
Prepaid Expenses and Other Current Assets [Member]
Total assets		200
Series A Preferred Stock [Member]
Sale of preferred stock, cash value	1,900	2,300
Renal Products Segment [Member]
Total assets	$ 2,100	$ 2,500

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Segment Reporting - Schedule of Segment Information (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2019	Mar. 31, 2018
Total net revenues	$ 1,769	$ 985
Gross margin	998	467
Research and development expenses	756	289
Depreciation and amortization expense	50	41
Selling, general and administrative expenses	1,503	1,260
Change in fair value of contingent consideration	(10)
Total operating expenses	(2,299)	(1,590)
Loss from operations	(1,301)	(1,123)
Water Filtration [Member]
Total net revenues	1,769	985
Gross margin	998	467
Research and development expenses	345	189
Depreciation and amortization expense	50	41
Selling, general and administrative expenses	1,469	1,250
Change in fair value of contingent consideration	(10)
Total operating expenses	(1,854)	(1,480)
Loss from operations	(856)	(1,013)
Renal Products [Member]
Total net revenues
Gross margin
Research and development expenses	411	100
Depreciation and amortization expense
Selling, general and administrative expenses	34	10
Change in fair value of contingent consideration
Total operating expenses	(445)	(110)
Loss from operations	$ (445)	$ (110)