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Equibles

10-Q

Nephros Inc (NEPH)

10-Q 2020-11-05 For: 2020-09-30
View Original
Added on April 10, 2026

UNITEDSTATES

SECURITIESAND EXCHANGE COMMISSION

WASHINGTOND.C. 20549

FORM10-Q

(Mark One)

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

For the quarterly period ended: September 30, 2020

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<br> or other jurisdiction of<br><br> <br>incorporation<br> or organization) (I.R.S.<br> Employer<br><br> <br>Identification<br> No.)
380 Lackawanna Place<br><br> <br>South Orange, NJ 07079
(Address<br> of principal executive offices) (Zip<br> 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)

Securities registered pursuant to Section 12(b) of the Act:

Title<br> of each class Trading<br> symbol Name<br> of exchange on which registered
Common<br> stock, par value $0.001 per share NEPH The<br> Nasdaq Stock Market LLC

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<br> accelerated filer [  ] Accelerated<br> filer [  ]
Non-accelerated<br> filer [X] Smaller<br> reporting company [X]
Emerging<br> 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

As of November 3, 2020, 9,864,673 shares of the registrant’s common stock, $0.001 par value per share, were outstanding.

NEPHROS,INC. AND SUBSIDIARIES

TABLEOF CONTENTS

PART I - FINANCIAL INFORMATION 3
Item 1. Financial Statements (unaudited). 3
CONDENSED CONSOLIDATED BALANCE SHEETS – September 30, 2020 and December 31, 2019 3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS – Three and nine months ended September 30, 2020 and 2019 4
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY – Three and nine months ended September 30, 2020 and 2019 5
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS – Nine months ended September 30, 2020 and 2019 7
NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS 8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. 23
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 38
Item 4. Controls and Procedures. 38
PART II - OTHER INFORMATION 39
Item 1A. Risk Factors 39
Item 6. Exhibits 40
SIGNATURES 41

PART I - FINANCIAL INFORMATION

Item

  1. Financial Statements.

NEPHROS,INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Inthousands, except share and per share amounts)

(Unaudited)

December 31, 2019
ASSETS
Current assets:
Cash and cash equivalents 5,155 $ 4,166
Accounts receivable, net 901 1,045
Inventory, net 5,385 2,562
Prepaid expenses and other current assets 314 526
Total current assets 11,755 8,299
Property and equipment, net 302 81
Lease right-of-use assets 1,117 1,106
Intangible assets, net 517 548
Goodwill 759 759
License and supply agreement, net 703 804
Other assets 89 32
TOTAL ASSETS 15,242 $ 11,629
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Secured revolving credit facility - $ 560
Current portion of secured note payable 224 211
Current portion of paycheck protection program loan 340 -
Accounts payable 887 959
Accrued expenses 596 136
Contingent consideration 6 300
Current portion of lease liabilities 326 262
Total current liabilities 2,379 2,428
Secured note payable, net of current portion 428 613
Paycheck protection program loan, net of current portion 141 -
Equipment financing, net of current portion 8 10
Lease liabilities, net of current portion 846 889
TOTAL LIABILITIES 3,802 3,940
COMMITMENTS AND CONTINGENCIES (Note 15)
STOCKHOLDERS’ EQUITY
Preferred stock, .001 par value; 5,000,000 shares authorized at September 30, 2020 and December 31, 2019; no shares issued and outstanding at September 30, 2020 and December 31, 2019. - -
Common stock, .001 par value; 40,000,000 shares authorized at September 30, 2020 and December 31, 2019; 9,039,673 and 8,058,850 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively. 9 8
Additional paid-in capital 139,410 131,934
Accumulated other comprehensive income 69 65
Accumulated deficit (131,100 ) (127,332 )
Subtotal 8,388 4,675
Noncontrolling interest 3,052 3,014
TOTAL STOCKHOLDERS’ EQUITY 11,440 7,689
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY 15,242 $ 11,629

All values are in US Dollars.

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

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NEPHROS,INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(Inthousands, except share and per share amounts)

(Unaudited)

Three Months Ended <br>September 30, Nine Months Ended <br>September 30,
2020 2019 2020 2019
Net revenues:
Product revenues $ 2,094 $ 3,054 $ 6,133 $ 7,067
Royalty and other revenues 27 41 94 106
Total net revenues 2,121 3,095 6,227 7,173
Cost of goods sold 896 1,276 2,616 2,989
Gross margin 1,225 1,819 3,611 4,184
Operating expenses:
Research and development 751 777 2,150 2,326
Depreciation and amortization 49 44 142 142
Selling, general and administrative 1,544 1,787 5,104 4,693
Change in fair value of contingent consideration (187 ) (94 ) (229 ) (113 )
Total operating expenses 2,157 2,514 7,167 7,048
Loss from operations (932 ) (695 ) (3,556 ) (2,864 )
Other (expense) income:
Interest expense (22 ) (48 ) (95 ) (140 )
Interest income 3 - 8 -
Other expense, net (61 ) (1 ) (124 ) (31 )
Net loss (1,012 ) (744 ) (3,767 ) (3,035 )
Less: Undeclared deemed dividend attributable to <br>noncontrolling interest (60 ) (60 ) (179 ) (180 )
Net loss attributable to Nephros, Inc. shareholders $ (1,072 ) $ (804 ) $ (3,946 ) $ (3,215 )
Net loss per common share, basic and diluted $ (0.12 ) $ (0.10 ) $ (0.44 ) $ (0.43 )
Weighted average common shares outstanding, basic and diluted 9,039,673 7,703,033 8,872,624 7,408,569
Comprehensive loss:
Net loss $ (1,012 ) $ (744 ) $ (3,767 ) $ (3,035 )
Other comprehensive income (loss), foreign currency translation adjustments, net of tax 4 (7 ) 4 (8 )
Comprehensive loss (1,008 ) (751 ) (3,763 ) (3,043 )
Comprehensive loss attributable to noncontrolling <br>interest (60 ) (60 ) (179 ) (180 )
Comprehensive loss attributable to Nephros, Inc. <br>shareholders $ (1,068 ) $ (811 ) $ (3,942 ) $ (3,223 )

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

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NEPHROS,INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(Inthousands, except share amounts)

(Unaudited)
Additional<br> Paid-in Accumulated<br> Other Comprehensive Accumulated Noncontrolling Total<br> Stockholders’
Amount Capital Income Deficit Subtotal Interest Equity
Balance, December 31, 2019 8,003,739 $ 8 $ 131,934 $ 65 $ (127,332 ) $ 4,675 $ 3,014 $ 7,689
Net loss (1,098 ) (1,098 ) (1,098 )
Net unrealized losses<br> on foreign currency translation, net of tax (1 ) (1 ) (1 )
Issuance of common stock,<br> net of equity issuance costs of 729 937,500 1 6,770 6,771 6,771
Exercise of warrants 18,889 51 51 51
Exercise of options 556 2 2 2
Cashless exercise of options 755
Noncash<br> stock-based compensation 196 196 26 222
Balance, March 31,<br> 2020 8,961,439 $ 9 $ 138,953 $ 64 $ (128,430 ) $ 10,596 $ 3,040 $ 13,636
Net loss (1,657 ) (1,657 ) (1,657 )
Net unrealized gains on<br> foreign currency translation, net of tax 1 1 1
Exercise of warrants 21,123 112 112 112
Exercise of options 2,000 5 5 5
Issuance of vested restricted<br> stock 55,111
Noncash<br> stock-based compensation 173 173 6 179
Balance, June 30,<br> 2020 9,039,673 $ 9 $ 139,243 $ 65 $ (130,087 ) $ 9,230 $ 3,046 $ 12,276
Net loss (1,012 ) (1,012 ) (1,012 )
Net unrealized gains on<br> foreign currency translation, net of tax 4 4 4
Noncash<br> stock-based compensation 166 166 6 172
Balance, September<br> 30, 2020 9,039,673 $ 9 $ 139,409 $ 69 $ (131,099 ) $ 8,388 $ 3,052 $ 11,440

All values are in US Dollars.

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

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| --- | | | | | | | | | | | | | | | | | | | | | | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | | | | | | Additional<br> Paid-in | | Accumulated Other<br> <br>Comprehensive | | | Accumulated | | | | | | Noncontrolling | | Total<br> Stockholders’ | | | | | | | Amount | | Capital | | Income | | | Deficit | | | Subtotal | | | Interest | | Equity | | | | Balance, December 31, 2018 | 7,134,719 | | $ | 7 | $ | 127,873 | $ | 71 | | $ | (124,153 | ) | $ | 3,798 | | $ | 3,000 | $ | 6,798 | | | Net loss | | | | | | | | | | | (1,349 | ) | | (1,349 | ) | | | | (1,349 | ) | | Net unrealized losses<br> on foreign currency translation, net of tax | | | | | | | | (3 | ) | | | | | (3 | ) | | | | (3 | ) | | Noncash<br> stock-based compensation | | | | | | 158 | | | | | | | | 158 | | | | | 158 | | | Balance, March 31,<br> 2019 | 7,134,719 | | $ | 7 | $ | 128,031 | $ | 68 | | $ | (125,502 | ) | $ | 2,604 | | $ | 3,000 | $ | 5,604 | | | Net loss | | | | | | | | | | | (942 | ) | | (942 | ) | | | | (942 | ) | | Net unrealized gains on<br> foreign currency translation, net of tax | | | | | | | | 2 | | | | | | 2 | | | | | 2 | | | Issuance of common stock,<br> net of equity issuance costs of 8 | 493,827 | | | 1 | | 1,991 | | | | | | | | 1,992 | | | | | 1,992 | | | Issuance of vested restricted<br> stock | 44,270 | | | | | | | | | | | | | | | | | | | | | Noncash<br> stock-based compensation | | | | | | 147 | | | | | | | | 147 | | | 3 | | 150 | | | Balance, June 30,<br> 2019 | 7,672,816 | | $ | 8 | $ | 130,169 | $ | 70 | | $ | (126,444 | ) | $ | 3,803 | | $ | 3,003 | $ | 6,806 | | | Net loss | | | | | | | | | | | (744 | ) | | (744 | ) | | | | (744 | ) | | Net unrealized losses<br> on foreign currency translation, net of tax | | | | | | | | (7 | ) | | | | | (7 | ) | | | | (7 | ) | | Exercise of warrants | 108,147 | | | | | 292 | | | | | | | | 292 | | | | | 292 | | | Exercise of stock options | 4,166 | | | | | 21 | | | | | | | | 21 | | | | | 21 | | | Aggregate fractional shares<br> cancelled due to reverse stock split | (594 | ) | | | | | | | | | | | | | | | | | | | | Noncash<br> stock-based compensation | | | | | | 348 | | | | | | | | 348 | | | 6 | | 354 | | | Balance, September<br> 30, 2019 | 7,784,535 | | $ | 8 | $ | 130,830 | $ | 63 | | $ | (127,188 | ) | $ | 3,713 | | $ | 3,009 | $ | 6,722 | |

All values are in US Dollars.

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

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NEPHROS,INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Inthousands)

(Unaudited)

Nine months ended September 30,
2020 2019
OPERATING ACTIVITIES:
Net loss $ (3,767 ) $ (3,035 )
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation of property and equipment 18 20
Amortization of intangible assets, license and supply agreement and finance lease right-of-use asset 136 132
Non-cash stock-based compensation, including stock options and restricted stock 573 662
Inventory reserve 4 37
Change in fair value of contingent consideration (229 ) (113 )
Accretion of contingent consideration 14 41
Loss (gain) on foreign currency transactions 7 (2 )
(Increase) decrease in operating assets:
Accounts receivable 144 (461 )
Inventory (2,827 ) (301 )
Allowance for doubtful accounts reserve - 19
Prepaid expenses and other current assets 207 21
Operating right-of-use assets and operating lease liabilities 15 49
Other assets (57 ) (21 )
Increase (decrease) in operating liabilities:
Accounts payable (79 ) (144 )
Accrued expenses 464 456
Net cash used in operating activities (5,377 ) (2,640 )
INVESTING ACTIVITIES:
Purchase of equipment (239 ) (14 )
Acquisition of the Aether business - (137 )
Net cash used in investing activities (239 ) (151 )
FINANCING ACTIVITES:
Proceeds from issuance of common stock 6,771 1,992
Proceeds from Paycheck Protection Program Loan 479 -
Net payments on secured revolving credit facility (560 ) (9 )
Payments on secured note payable (172 ) (159 )
Principal payments on finance lease liability (6 ) -
Principal payments on equipment financing (2 ) (1 )
Proceeds from equipment financing - 14
Proceeds from exercise of warrants 163 292
Proceeds from exercise of options 7 21
Payment of contingent consideration (79 ) (78 )
Net cash provided by financing activities 6,601 2,072
Effect of foreign exchange rates on cash 4 (7 )
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 989 (726 )
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 4,166 4,581
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 5,155 $ 3,855
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest expense $ 80 $ 98
Cash paid for income taxes $ 21 $ 4
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING INFORMATION
Right-of-use asset obtained in exchange for operating lease liability $ 201 $ 800
Right-of-use asset obtained in exchange for finance lease liability $ 17 $ -

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

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NEPHROS,INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (unaudited)

Note1 – Organization and Nature of Operations

Nephros, Inc. (“Nephros” or the “Company”) was incorporated under the laws of the State of Delaware on April 3, 1997. The Company was founded by health professionals, scientists and engineers affiliated with Columbia University to develop advanced end stage renal disease (“ESRD”) therapy technology and products.

Beginning in 2009, Nephros introduced high performance liquid purification filters to meet the demand for water purification in certain medical markets. The Company’s filters, generally classified as ultrafilters, are primarily used in hospitals for the prevention of infection from waterborne pathogens, such as legionella and pseudomonas, and in dialysis centers for the removal of biological contaminants from water and bicarbonate concentrate. The Company also develops and sells water filtration products for commercial applications, focusing on the hospitality and food service markets. The water filtration business is a reportable segment, referred to as the Water Filtration segment.

The Company’s pathogen detection systems are portable, near real-time systems designed to provide actionable data for infection control teams and other organizations. The pathogen detection systems business is a reportable segment, referred to as the Pathogen Detection segment.

In July 2018, the Company formed a new subsidiary, Specialty Renal Products, Inc. (“SRP”), to drive the development of its second-generation hemodiafiltration system and other products focused on improving therapies for patients with renal disease. 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.

The Company’s primary U.S. facilities are located at 380 Lackawanna Place, South Orange, New Jersey 07079, 3221 Polaris Avenue, Las Vegas, Nevada 89102 and 1015 Telegraph Street, Unit B, Reno, Nevada 89502. These locations house the Company’s corporate headquarters, research, manufacturing, and distribution facilities. In addition, the Company maintains small administrative offices in various locations in the United States and Ireland.

Note2 – Basis of Presentation and Liquidity

InterimFinancial Information

The accompanying unaudited condensed consolidated interim financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 8 and Article 10 of Regulation S-X. The condensed consolidated balance sheet as of December 31, 2019 was derived from the Company’s audited financial statements. Accordingly, these interim financial statements do not include all of the information and footnotes required by GAAP for annual financial statements. Results as of and for the three and nine months ended September 30, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020.

The condensed consolidated interim financial statements and notes thereto should be read in conjunction with the consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

Consolidation

The accompanying condensed 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 condensed consolidated balance sheet as noncontrolling interest. All intercompany accounts and transactions were eliminated in the preparation of the accompanying condensed consolidated financial statements.

Useof Estimates

The preparation of consolidated financial statements in conformity with 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.

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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 $131.1 million as of September 30, 2020.

On February 4, 2020, the Company completed a confidentially marketed underwritten public offering whereby the Company sold 937,500 shares of its common stock for aggregate net proceeds of $6.8 million. Additionally, the Company received $0.5 million from the U.S. Small Business Administration’s Paycheck Protection Program (“PPP”) on April 24, 2020. The PPP was established by the Coronavirus Aid, Relief and Economic Security Act (CARES Act), enacted on March 27, 2020, in response to the Coronavirus Disease 2019 (COVID-19) pandemic. Under the terms of the PPP, certain amounts of the loan may be forgiven if they are used for qualifying expenses during the first 24 weeks of the loan. The Company intends to use the entire loan amount for such qualifying expenses.

On May 26, 2020, the Company terminated its secured asset-based revolving credit facility, which had allowed the Company to borrow up to $2.5 million. As of September 30, 2020, there was no outstanding amount due under the secured asset-based revolving credit facility.

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 $3.0 million. As of approximately July 1, 2020, SRP had fully spent the proceeds from this private placement. During the three months ended September 30, 2020, SRP borrowed $0.8 million in operating funds from Nephros. On October 9, 2020, Nephros and SRP entered into a formal loan agreement, in which Nephros agreed to lend up to $1.3 million of operating funds to SRP, including the $0.8 million borrowed during the three months ended September 30, 2020. These funds are expected to be sufficient to fund SRP through the planned FDA 510(k) clearance process of SRP’s second-generation hemodiafiltration system, which is expected to be initially submitted to the FDA near the end of 2020.

On October 20, 2020, the Company completed a registered direct offering of 833,333 shares of its common stock at a price of $6.00 per share with net proceeds of $4.7 million.

Based on cash that is available for the Company’s operations and projections of future Company operations, the Company believes that its cash balances will be sufficient to fund its current operating plan – including the potential negative impact of the COVID-19 pandemic – through at least the next 12 months from the date of issuance of the accompanying condensed consolidated financial statements. Additionally, the Company’s operating plans are designed to help control operating costs and to increase revenue until such time as the Company generates sufficient cash flows from operations. However, there is uncertainty with respect to the Company’s projections regarding the availability of sufficient cash resources as a result of the COVID-19 pandemic and the economic conditions it has caused. In recent months, the Company has seen decreased demand for its products both with respect to new hospital customers and its existing hospital, restaurant and hospitality customers, which have been significantly impacted by the COVID-19 pandemic.

If this decrease in demand continues beyond the third quarter of fiscal year 2021 and the Company is unable to achieve its revenue plan, the Company may be forced to cut costs as appropriate to preserve its available capital resources. If the Company is unable to sufficiently decrease its spending to match any future decreased demands for its products, the Company may exhaust its capital resources sooner than it currently anticipates. Further, as a result of the recent volatility of the capital markets and economic conditions generally, it may be difficult for the Company to raise additional capital at times when it may need it, and even if the Company were able to raise additional capital, it may be on terms than are detrimental to the Company. Accordingly, the current economic conditions caused by the COVID-19 pandemic place uncertainty on the Company’s ability to maintain adequate levels of liquidity.

RecentlyAdopted Accounting Pronouncements

In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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 adopted this guidance as of January 1, 2020 and the guidance did not have an impact 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. The Company adopted this guidance as of January 1, 2020 and the guidance did not have an impact 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. The Company adopted this guidance as of January 1, 2020 and the guidance did not have an impact on its consolidated financial statements.

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In November 2018, the FASB issued ASU 2018-18, “Collaborative Arrangements: Clarifying the Interaction Between Topic 808 and Topic 606.” This 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 precludes, in a transaction with a collaborative arrangement participant who is not a customer, presenting the transaction together with revenue recognized under contracts with customers. The guidance is effective for the Company beginning in the first quarter of fiscal year 2020. The Company adopted this guidance as of January 1, 2020 and the guidance did not have an impact on its consolidated financial statements.

In November 2019, the FASB issued ASU 2019-08, “Codification Improvements – Share-Based Consideration Payable to a Customer,” which requires that an entity measure and classify share-based payment awards granted to a customer by applying the guidance in Topic 718. The guidance is effective for the Company beginning in the first quarter of fiscal year 2020. The Company adopted this guidance as of January 1, 2020 and the guidance did not have an impact on its consolidated financial statements.

RecentAccounting Pronouncements, Not Yet Effective

In December 2019, the FASB issued ASU 2019-12, “Simplifying the Accounting for Income Taxes,” which removes certain exceptions to the general principles of the accounting for income taxes and also improves consistent application of and simplification of other areas when accounting for income taxes. The guidance is effective for the Company beginning in the first quarter of fiscal year 2021. Early adoption is permitted. The Company is assessing the impact of adopting this guidance on its consolidated financial statements.

Concentrationof 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.

MajorCustomers

For the three months ended September 30, 2020 and 2019, the following customers, all of which are in the Water Filtration segment, accounted for the following percentages of the Company’s revenues, respectively:

Customer 2020 2019
A 17 % 19 %
B 16 % 7 %
C 8 % 31 %
Total 41 % 57 %

For the nine months ended September 30, 2020 and 2019, the following customers, all of which are in the Water Filtration segment, accounted for the following percentages of the Company’s revenues, respectively:

Customer 2020 2019
C 18 % 18 %
A 15 % 16 %
B 11 % 10 %
Total 44 % 44 %

As of September 30, 2020 and December 31, 2019, the following customers, all of which are in the Water Filtration segment, accounted for the following percentages of the Company’s accounts receivable, respectively:

Customer 2020 2019
D 14 % 2 %
B 10 % -%
A 5 % 26 %
C 9 % 11 %
Total 38 % 39 % 
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Cashand Cash Equivalents

The Company considers all highly liquid money market instruments with an original maturity of three months or less when purchased to be cash equivalents. At September 30, 2020 and December 31, 2019, cash and cash equivalents were deposited in financial institutions and consisted entirely of immediately available fund balances. The Company maintains its cash deposits and cash equivalents with financial institutions it believes to be well-known and stable.

AccountsReceivable

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. There was no allowance for doubtful accounts as of September 30, 2020. The allowance for doubtful accounts was approximately $25,000 as of December 31, 2019. For the three and nine months ended September 30, 2020, there was no provision for bad debt expense. For the three and nine months ended September 30, 2019, the provision for bad debt expense was approximately $19,000. Write-offs of accounts receivable were approximately $25,000 for the three and nine months ended September 30, 2020 which were reserved for in a prior period. Write-offs of accounts receivable were approximately $5,000 for the nine months ended September 30, 2019 which were reserved for in a prior period. There were no write-offs of accounts receivable for the three months ended September 30, 2019. There was no allowance for sales returns at September 30, 2020 or December 31, 2019.

DepreciationExpense

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 and nine months ended September 30, 2020, depreciation expense was approximately $8,000 and $18,000, respectively. Approximately $4,000 of the approximately $8,000 and approximately $12,000 of the approximately $18,000 of depreciation expense for the three and nine months ended September 30, 2020, respectively, has been recognized in cost of goods sold. For the three months ended September 30, 2019, depreciation expense was approximately $4,000 and was recognized in cost of goods sold. Approximately $10,000 of the approximately $20,000 of depreciation expense recognized for the nine months ended September 30, 2019 has been recognized in cost of goods sold.

Note3 – 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 royalty and other agreements in accordance with the five-step model in ASC 606. Royalty and other revenue recognized for the three and nine months ended September 30, 2020 and 2019 is comprised of:

Three Months Ended<br> <br>September 30, Nine Months Ended<br> <br>September 30,
2020 2019 2020 2019
Royalty revenue under the License Agreement with Bellco $ 20 $ 10 $ 49 $ 50
Other revenue 7 31 45 56
Total license, royalty and other revenue $ 27 $ 41 $ 94 $ 106

BellcoLicense 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 subsequently recognized as license revenue over the term of the License Agreement.

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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 $1.90) per unit; thereafter, €1.25 (approximately $1.40) 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 of approximately $20,000 and $10,000 for the three months ended September 30, 2020 and 2019, respectively. The Company recognized royalty income from Bellco pursuant to the License Agreement of approximately $49,000 and $50,000 for the nine months ended September 30, 2020 and 2019, respectively.

Note4 – 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:

Level1 – Quoted prices in active markets for identical assets or liabilities.

Level2 – 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.

Level3 – 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.

Assetsand 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 September 30, 2020:

Quoted prices in<br> <br>active markets for<br> <br>identical assets<br> <br>(Level 1) Significant other<br> <br>observable<br> <br>inputs<br> <br>(Level 2) Significant<br> <br>unobservable<br> <br>inputs<br> <br>(Level 3) Total
(in thousands)
At September 30, 2020:
Total contingent consideration liability $ - $ - $ 6 $ 6 
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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, 2019:

Quoted prices in active markets for identical assets<br><br> <br>(Level 1) Significant other observable<br><br>inputs<br><br> <br>(Level 2) Significant unobservable<br><br>inputs<br><br> <br>(Level 3) Total
(in thousands)
At December 31, 2019:
Total contingent consideration liability $ - $ - $ 300 $ 300

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 nine months ended September 30, 2020:

Contingent Consideration
(in thousands)
Balance as of December 31, 2019 $ 300
Payments against contingent consideration (79 )
Change in fair value of contingent consideration liability (229 )
Accretion of contingent consideration liability 14
Balance as of September 30, 2020 $ 6

During the three and nine months ended September 30, 2020, the change in fair value of contingent consideration of $0.2 million was due to the settlement of the contingent consideration liability. In October 2020, the Company entered into a Second Amendment to the Membership Interest Purchase Agreement dated December 31, 2018 (the “Amended Agreement”) related to the acquisition of the Aether business, in which the Company agreed to pay a lump sum of $0.1 million in full consideration for the Company’s obligation to make payments of contingent consideration under the Membership Interest Purchase Agreement (see Note 17 – Subsequent Events). Approximately $94,000 of the remaining obligation will be paid out of amounts remaining in escrow as of September 30, 2020.

During each of the three and nine months ended September 30, 2019, a change in fair value of contingent consideration of $0.1 million 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 and nine months ended September 30, 2020.

Assetsand Liabilities Not Measured at Fair Value on a Recurring Basis

The carrying amounts of cash and cash equivalents, 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, lease liabilities and equipment financing approximate fair value as of September 30, 2020 and December 31, 2019 because those financial instruments bear interest at rates that approximate current market rates for similar agreements with similar maturities and credit.

The carrying amount of the PPP loan does not include interest imputed at a market rate as the PPP loan is a transaction whereby the interest rate is prescribed by a government agency**.**

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Note5 – 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 September 30, 2020 and December 31, 2019 were as follows:

September 30, 2020 December<br>31, 2019
(in thousands)
Finished goods $ 4,645 $ 2,248
Raw materials 781 359
Less: inventory reserve (41 ) (45 )
Total inventory, net $ 5,385 $ 2,562

Note6 – Intangible Assets and Goodwill

IntangibleAssets, net

Intangible assets as of September 30, 2020 and December 31, 2019 are set forth in the table below. Gross carrying values and accumulated amortization of the Company’s intangible assets by type are as follows:

September 30, 2020 December 31, 2019
Cost Accumulated Amortization Net Cost Accumulated Amortization Net
(in thousands)
Tradenames, service marks and domain names $ 50 $ (17 ) $ 33 $ 50 $ (10 ) $ 40
Customer relationships 540 (56 ) 484 540 (32 ) 508
Total intangible assets $ 590 $ (73 ) $ 517 $ 590 $ (42 ) $ 548

The Company recognized amortization expense of approximately $10,000 for each of the three months ended September 30, 2020 and 2019 and such amounts are included in selling, general and administrative expenses on the accompanying condensed consolidated statement of operations and comprehensive loss. The Company recognized amortization expense of approximately $31,000 for each of the nine months ended September 30, 2020 and 2019 and such amounts are included in selling, general and administrative expenses on the accompanying condensed consolidated statement of operations and comprehensive loss.

As of September 30, 2020, future amortization expense for each of the next five years is (in thousands):

Fiscal Years
2020 (excluding the nine months ended September 30, 2020) $ 11
2021 42
2022 42
2023 42
2024 32

The Company did not recognize any intangible asset impairment charges during the three and nine months ended September 30, 2020 or 2019.

Goodwill

Goodwill had a carrying value on the Company’s condensed consolidated balance sheets of $0.8 million at each of September 30, 2020 and December 31, 2019. Goodwill has been allocated to the Water Filtration segment.

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Note7 – 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 products covered under the License and Supply Agreement includes both certain products based on Medica’s proprietary Versatile microfiber technology and certain filtration products based on Medica’s proprietary Medisulfone ultrafiltration technology. The term of the License Agreement with Medica expires on December 31, 2025, unless earlier terminated by either party in accordance with the terms of the License and Supply Agreement.

In exchange for the license, the gross value of the intangible asset capitalized was $2.3 million. License and supply agreement, net on the condensed consolidated balance sheet is $0.7 million and $0.8 million as of September 30, 2020 and December 31, 2019, respectively. Accumulated amortization is $1.6 million and $1.5 million as of September 30, 2020 and December 31, 2019, respectively. The intangible asset is being amortized as an expense over the life of the License and Supply Agreement. Amortization expense of approximately $34,000 was recognized in each of the three months ended September 30, 2020 and 2019 on the condensed consolidated statement of operations and comprehensive loss. Amortization expense of $0.1 million was recognized in each of the nine months ended September 30, 2020 and 2019 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 or nine months ended September 30, 2020 or 2019.

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 $60,000 and $82,000 for the three months ended September 30, 2020 and 2019, 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 $173,000 and $190,000 for the nine months ended September 30, 2020 and 2019, 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 $60,000 in royalties are included in accrued expenses as of September 30, 2020. Approximately $83,000 in royalties are included in accounts payable as of December 31, 2019.

Note8 – Secured Revolving Credit Facility

On August 17, 2017, the Company entered into the Loan Agreement and Security Agreement (the “Loan Agreement”) with Tech Capital, LLC (“Tech Capital”). The Loan Agreement initially provided for a secured asset-based revolving credit facility (the “Revolver”) of up to $1.0 million, which the Company drew upon and repaid from time to time during the term of the Loan Agreement. On December 20, 2019, the Company and Tech Capital entered into a First Modification to the Loan Agreement (“the Amendment”). The Amendment increased the Revolver from $1.0 million to $2.5 million. The outstanding principal balance of the Loan Agreement was $0.6 million as of December 31, 2019. The Company used these proceeds for working capital and general corporate purposes.

On May 26, 2020, the Company terminated the Revolver and, as a result, recognized fees of approximately $7,000, which are included in interest expense on the condensed consolidated statement of operations and comprehensive loss for the nine months ended September 30, 2020. Although the Revolver was terminated, the Loan Agreement, as amended on May 26, 2020 to reflect this termination, remains in place for purposes of specifying obligations related to the Secured Note Payable (see Note 9 – Secured Note Payable).

For the nine months ended September 30, 2020, excluding approximately $7,000 related to the termination of the Revolver, approximately $25,000 was recognized as interest expense on the condensed consolidated statement of operations and comprehensive loss. For the three and nine months ended September 30, 2019, approximately $17,000 and $40,000, respectively, was recognized as interest expense on the condensed consolidated statement of operations and comprehensive loss.

Note9 – Secured Note Payable

On March 27, 2018, the Company entered into a Secured Promissory Note Agreement (the “Secured Note”) with Tech Capital for a principal amount of $1.2 million. The Secured Note was amended and restated on May 26, 2020 to reflect the then-current balance on the Secured Note. There were no other changes to the terms and conditions of the Secured Note. As of September 30, 2020, the principal balance of the Secured Note was $0.7 million.

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 commenced on May 1, 2018 and are due on the first day of each month.

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 Agreement and all of the riders and amendments thereto (see Note 8 – Secured Revolving Credit Facility). An event of default under such Loan Agreement is 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 also become due.

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In addition, Nephros International Limited, a wholly-owned subsidiary of the Company, unconditionally guaranteed the Company’s obligations under the Loan Agreement.

During the three months ended September 30, 2020 and 2019, the Company made payments under the Secured Note of approximately $73,000. Included in the total payments made, approximately $14,000 and $18,000 was recognized as interest expense on the condensed consolidated statement of operations and comprehensive loss for the three months ended September 30, 2020 and 2019, respectively. During the nine months ended September 30, 2020 and 2019, the Company made payments under the Secured Note of approximately $217,000. Included in the total payments made, approximately $45,000 and $58,000 was recognized as interest expense on the condensed consolidated statement of operations and comprehensive loss for the nine months ended September 30, 2020 and 2019, respectively.

As of September 30, 2020, future principal maturities are as follows (in thousands):

Fiscal Years
2020 (excluding the nine months ended September 30, 2020) $ 39
2021 249
2022 269
2023 95
Total $ 652

Note10 – Paycheck Protection Program Loan

On April 24, 2020, the Company was granted a PPP loan in the amount of $0.5 million. The PPP, established as part of the CARES Act, provides for loans to qualifying businesses for amounts up to 2.5 times of the average monthly payroll expenses of the qualifying business. In connection with the PPP loan, the Company issued a promissory note dated April 24, 2020, in the principal amount of $0.5 million. The loan matures on April 24, 2022 and bears interest at a rate of 1.0% per annum, payable monthly commencing November 24, 2020. The note may be prepaid at any time prior to maturity with no prepayment penalties. Funds from the loan may only be used for payroll costs, benefits, rent, utilities and interest on other debt obligations incurred prior to February 15, 2020. The Company intends to use the entire amount for such qualifying expenses. Under the terms of the PPP, certain amounts of the loan may be forgiven if they are used for qualifying expenses during the first 24 weeks of the loan. For the three and nine months ended September 30, 2020, approximately $1,000 and $2,000, respectively, was recognized as interest expense on the condensed consolidated statement of operations and comprehensive loss.

Note11 – 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 in March 2020 for 1015 Telegraph Street, Unit B, Reno, Nevada 89502. The rental agreement commenced in March 2020 and expires in February 2022 with an option to extend for two additional years that the Company is reasonably certain to exercise. The monthly cost is approximately $5,000. Approximately $5,000 related to a security deposit for this office facility is classified as other assets on the condensed consolidated balance sheet as of September 30, 2020.

The Company entered into a finance lease in February 2020 for office equipment. The rental agreement commenced in February 2020 and expires in January 2023 with a monthly cost of approximately $1,000.

The Company entered into an operating lease in June 2020 for 923 Incline Way, #37, Incline Village, Nevada 89451. The rental agreement commenced in March 2020 and expires in January 2021. The monthly cost is approximately $2,000. The Company adopted the short-term lease practical expedient and, as such, will recognize the lease payments on a straight-lease basis over the lease term.

Operating lease cost, as presented below, includes costs associated with leases for which right of use (“ROU”) assets have been recognized as well as short-term leases.

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The components of total lease costs were as follows:

Three months ended<br> <br>September 30, 2020 Three months ended<br> <br>September 30, 2019
(in thousands)
Operating lease cost $ 105 $ 98
Finance lease cost:
Amortization of right-of-use assets 3 -
Interest on lease liabilities - -
Total finance lease cost 3 -
Variable lease cost 7 -
Total lease cost $ 115 $ 98
Nine months ended<br> <br>September 30, 2020 Nine months ended<br> <br>September 30, 2019
--- --- --- --- ---
(in thousands)
Operating lease cost $ 300 $ 214
Finance lease cost:
Amortization of right-of-use assets 4 -
Interest on lease liabilities 1 -
Total finance lease cost 5 -
Variable lease cost 30 -
Total lease cost $ 335 $ 214

Supplemental cash flow information related to leases was as follows:

Nine months ended<br> <br>September 30, 2020 Nine months ended<br> <br>September 30, 2019
(in thousands)
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases $ 293 $ 165
Financing cash flows from finance leases 5 -
ROU assets obtained in exchange for lease obligations:
Operating leases $ 201 $ 800
Finance leases $ 17 -

Supplemental balance sheet information related to leases was as follows:

September 30, 2020 December 31, 2019
(in thousands)
Operating lease right-of-use assets $ 1,079 $ 1,106
Finance lease right-of-use assets $ 38 $ -
Current portion of operating lease liabilities $ 315 $ 262
Operating lease liabilities, net of current portion 819 889
Total operating lease liabilities $ 1,134 $ 1,151
Current portion of finance lease liabilities $ 11 $ -
Finance lease liabilities, net of current portion 27 -
Total finance lease liabilities $ 38 $ -
Weighted average remaining lease term
Operating leases 3.4 years 4 years
Finance leases 3.3 years -
Weighted average discount rate
Operating leases 8.0 % 8.0 %
Finance leases 8.0 % - 
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As of September 30, 2020, maturities of lease liabilities were as follows:

Operating Leases Finance Leases
(in thousands)
2020 (excluding the nine months ended September 30, 2020) $ 98 $ 3
2021 389 14
2022 388 14
2023 261 8
2024 153 4
Total future minimum lease payments 1,289 43
Less imputed interest (155 ) (5 )
Total $ 1,134 $ 38

Note12 – 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.

StockOptions

During the three and nine months ended September 30, 2020, the Company granted stock options to purchase 157,064 and 170,675 shares, respectively, of common stock to employees. 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 and nine months ended September 30, 2020 was approximately $704,000 and $783,000, respectively.

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 and nine months ended September 30, 2020.

Assumptions for Option Grants
Stock Price Volatility 71.96 %
Risk-Free Interest Rates 0.37 %
Expected Life (in years) 6.25
Expected Dividend Yield - %

Stock-based compensation expense related to stock options was $166,000 and $348,000 for the three months ended September 30, 2020 and 2019, respectively. For the three months ended September 30, 2020, approximately $150,000 and approximately $16,000 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 September 30, 2019, approximately $335,000 and approximately $13,000 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.

Stock-based compensation expense related to stock options was $483,000 and $623,000 for the nine months ended September 30, 2020 and 2019, respectively. For the nine months ended September 30, 2020, approximately $435,000 and approximately $48,000 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 nine months ended September 30, 2019, approximately $577,000 and approximately $46,000 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.

There were no stock options exercised during the three months ended September 30, 2020. During the nine months ended September 30, 2020, stock options to purchase 2,556 shares of the Company’s common stock were exercised in a cash exercise for proceeds of approximately $7,000, resulting in the issuance of 2,556 shares of the Company’s common stock. During the nine months ended September 30, 2020, stock options to purchase 1,112 shares of the Company’s common stock were exercised in a cashless exercise, resulting in the issuance of 755 shares of the Company’s common stock. There were no stock options exercised during the three or nine months ended September 30, 2019.

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There was no tax benefit related to expense recognized in the three or nine months ended September 30, 2020 and 2019, as the Company is in a net operating loss position. As of September 30, 2020, there was $1.1 million of total unrecognized compensation expense related to unvested stock-based awards granted under the equity compensation plans, which will be amortized over the weighted average remaining requisite service period of 2.5 years. Such amount does not include the effect of future grants of equity compensation, if any.

RestrictedStock

There was no stock-based compensation expense for restricted stock recognized during the three months ended September 30, 2020 or 2019.

Total stock-based compensation expense for restricted stock was approximately $52,000 and $30,000 for the nine months ended September 30, 2020 and 2019, respectively. For the nine months ended September 30, 2020, approximately $42,000 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. For the nine months ended September 30, 2019, approximately $28,000 and $2,000 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.

There were no unvested shares of restricted stock as of September 30, 2020.

SRPEquity Incentive Plan

SRP’s 2019 Equity Incentive Plan was approved on May 7, 2019 under which 150,000 shares of SRP’s common stock are reserved for the issuance of options and other awards.

There were no SRP stock options granted during the three or nine months ended September 30, 2020. Stock-based compensation expense related to the SRP stock options was approximately $6,000 and $38,000 for the three and nine months ended September 30, 2020, respectively. For the three months ended September 30, 2020, approximately $2,000 and $4,000 are included in selling, general and administrative expenses and research and development expenses, respectively, on the accompanying consolidated statement of operations and comprehensive loss. For the nine months ended September 30, 2020, approximately $16,000 and $22,000 are included in selling, general and administrative expenses and research and development expenses, respectively, on the accompanying consolidated statement of operations and comprehensive loss.

Stock-based compensation expense related to the SRP stock options was approximately $6,000 and $9,000 for the three and nine months ended September 30, 2019. For the three months ended September 30, 2019, approximately $2,000 and $4,000 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 nine months ended September 30, 2019, approximately $3,000 and $6,000 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.

Stock-based compensation expense related to the SRP stock options is presented by the Company as noncontrolling interest on the consolidated balance sheet as of September 30, 2020.

Note13 – Stockholders’ Equity

February2020 Common Stock Issuance

On February 4, 2020, the Company issued 937,500 shares of common stock through a confidentially marketed underwritten public offering resulting in gross proceeds to the Company of $7.5 million. The purchase price for each share was $8.00. Proceeds, net of equity issuance costs of $0.7 million, recorded as a result of the offering were $6.8 million.

NoncontrollingInterest

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 $3.0 million. 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 the Company’s largest shareholder amounted to 18,000 and 400,000 shares, respectively.

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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 September 30, 2020. During the nine months ended September 30, 2020, warrants to purchase 40,012 shares of the Company’s common stock were exercised, resulting in proceeds of $0.2 million and the issuance of 40,012 shares of the Company’s common stock.

During the three and nine months ended September 30, 2019, warrants to purchase 108,149 shares of the Company’s common stock were exercised, resulting in proceeds of $0.3 million and the issuance of 108,147 shares of the Company’s common stock. Of the warrants exercised during the three and nine months ended September 30, 2019, warrants to purchase 4,444 shares of the Company’s common stock were exercised by members of management, resulting in proceeds of approximately $12,000.

There were no warrants issued during the three or nine months ended September 30, 2020 or 2019.

Note14 – 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.

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

September 30,
2020 2019
Shares underlying warrants outstanding 270,597 629,921
Shares underlying options outstanding 1,159,655 887,782

Note15 – Commitments and Contingencies

PurchaseCommitments

In exchange for the rights granted under the License and Supply Agreement with Medica (see Note 7 – 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, 2020, the Company agreed to make minimum annual aggregate purchases from Medica of €3.2 million (approximately $3.5 million). As of September 30, 2020, the Company’s aggregate purchase commitments totaled €4.5 million (approximately $5.0 million).

ContractualObligations

See Note 11 – Leases for a discussion of the Company’s contractual obligations.

Note16 – Segment Reporting

On January 1, 2020, the Company began reporting the results of its Pathogen Detection Systems business as a new segment, known as the Pathogen Detection segment. Prior to the additional reporting of Pathogen Detection as a reporting segment, the Company had two operating segments, Water Filtration and Renal Products. The Company reflected the new segment measures beginning in the three months ended March 31, 2020, and prior periods have been restated for comparability.

The Company has defined three reportable segments: Water Filtration, Pathogen Detection and Renal Products. The Water Filtration segment primarily develops and sells high performance water purification filters. The Pathogen Detection segment develops and sells portable, real-time water testing systems designed to provide actionable data on waterborne pathogens in approximately one hour. 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. Items below loss from operations are not reported by segment, since they are excluded from the measure of segment profitability reviewed by the Company’s chief operating decision maker. The Company does not report balance sheet information by segment since it is not reviewed by the Company’s chief operating decision maker.

The accounting policies for the Company’s segments are the same as those described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

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 September 30, 2020
(in thousands)
Water Filtration Pathogen Detection Renal<br><br> <br>Products Nephros, Inc. Consolidated
Total net revenues $ 2,121 $ - $ - $ 2,121
Gross margin 1,227 (2 ) - 1,225
Research and development expenses 359 49 343 751
Depreciation and amortization expense 49 - - 49
Selling, general and administrative expenses 1,317 116 111 1,544
Change in fair value of contingent consideration (187 ) - - (187 )
Total operating expenses 1,538 165 454 2,157
Loss from operations $ (311 ) $ (167 ) $ (454 ) $ (932 ) 
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Nine Months Ended September 30, 2020
(in thousands)
Water Filtration Pathogen Detection Renal Products Nephros, Inc. Consolidated
Total net revenues $ 6.199 $ 28 $ - $ 6,227
Gross margin 3,597 14 - 3,611
Research and development expenses 1,014 206 930 2,150
Depreciation and amortization expense 142 - - 142
Selling, general and administrative expenses 4,381 377 346 5,104
Change in fair value of contingent consideration (229 ) - - (229 )
Total operating expenses 5,308 583 1,276 7,167
Loss from operations $ (1,711 ) $ (569 ) $ (1,276 ) $ (3,556 )
Three Months Ended September 30, 2019
(in thousands)
Water Filtration Pathogen Detection Renal<br><br> <br>Products Nephros, Inc. Consolidated
Total net revenues $ 3,095 $ - $ - $ 3,095
Gross margin 1,819 - - 1,819
Research and development expenses 231 180 366 777
Depreciation and amortization expense 44 - - 44
Selling, general and administrative expenses 1,756 - 31 1,787
Change in fair value of contingent consideration (94 ) - - (94 )
Total operating expenses 1.937 180 397 2,514
Loss from operations $ (118 ) $ (180 ) $ (397 ) $ (695 )
Nine Months Ended September 30, 2019
(in thousands)
Water Filtration Pathogen Detection Renal Products Nephros, Inc. Consolidated
Total net revenues $ 7,173 $ - $ - $ 7,173
Gross margin 4,184 - - 4,184
Research and development expenses 698 492 1,136 2,326
Depreciation and amortization expense 142 - - 142
Selling, general and administrative expenses 4,577 - 116 4,693
Change in fair value of contingent consideration (113 ) - - (113 )
Total operating expenses 5,304 492 1,252 7,048
Loss from operations $ (1,120 ) $ (492 ) $ (1,252 ) $ (2,864 )

Note17 – Subsequent Events

On October 9, 2020, Nephros and SRP entered into a formal loan agreement, in which Nephros agreed to lend up to $1.3 million of operating funds to SRP, including the $0.8 million borrowed during the three months ended September 30, 2020. These funds are expected to be sufficient to fund SRP through the planned FDA 510(k) clearance process of SRP’s second-generation hemodiafiltration system, which is expected to be initially submitted to the FDA near the end of 2020.

On October 20, 2020, the Company issued 833,333 shares of the Company’s common stock in a registered direct offering, resulting in net proceeds to the Company of $4.7 million. The purchase price for each share was $6.00.

On October 15, 2020, the Company entered into the Amended Agreement related to the acquisition of the Aether business in which the Company agreed to pay a lump sum of $0.1 million in full consideration for the Company’s obligation to make payments of contingent consideration under the Membership Interest Purchase Agreement.

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

Thefollowing discussion should be read in conjunction with our condensed consolidated financial statements and notes thereto includedin 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. Thesestatements represent projections, beliefs and expectations based on current circumstances and conditions and in light of recentevents and trends, and these statements should not be construed either as assurances of performances or as promises of a givencourse of action. Instead, various known and unknown factors are likely to cause our actual performance and management’sactions to vary, and the results of these variances may be both material and adverse.

BusinessOverview

We are a commercial-stage company that develops and sells high performance water solutions to the medical and commercial markets.

In medical markets, we sell water filtration products and waterborne pathogen detection products. Our medical water filters, mostly classified as ultrafilters, are used primarily by hospitals for the prevention of infection from waterborne pathogens, such as legionella and pseudomonas, and in dialysis centers for the removal of biological contaminants from water and bicarbonate concentrate. 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.

In commercial markets, we manufacture and sell water filters that improve the taste and odor of water and reduce biofilm, bacteria, and scale build-up in downstream equipment. Marketed under both the Nephros and AETHER brands, our products are marketed primarily to the food service, hospitality, convenience store, and health care markets.

Our pathogen detection systems are portable, near real-time systems designed to provide actionable data for infection control teams, biomedical engineers in dialysis clinics, and water quality teams in building management organizations.

We also have a subsidiary, Specialty Renal Products, Inc. (“SRP”), a development-stage medical device company, focused primarily on developing hemodiafiltration (“HDF”) technology. SRP is developing a second-generation of the Nephros OLpūr H2H Hemodia-filtration System, the FDA 510(k)-cleared medical device that enables nephrologists to provide HDF treatment to patients with end stage renal disease (“ESRD”).

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.

COVID-19Pandemic

The COVID-19 pandemic has impacted nearly every business in the United States and around the world. To date, we have fully maintained operations through the crisis, supporting our customers and strategic partners. Our warehouse and laboratory teams have integrated disinfection procedures into their activities, while our office teams have worked primarily from home. Our manufacturing and sterilization facilities have been operational, our supply chain has not been materially impacted, and our warehouses are shipping product on normal schedules.

In recent months, the COVID-19 pandemic has negatively impacted our business in several ways, including:

● We<br> have seen decreased demand for our hospital filtration products, particularly in emergency pathogen outbreak response. We<br> believe this decreased demand is due primarily to our customers temporarily shifting their focus to matters related to the<br> COVID-19 pandemic and de-prioritizing unrelated matters, including both proactive and reactive efforts to detect and reduce<br> waterborne pathogens.
● Early<br> in the COVID-19 pandemic, we experienced some delays in expected orders from existing customers. However, customer re-orders<br> seem to have returned to prior levels.
● The<br> inability of our sales personnel to meet with new potential customers due to policies implemented to address the spread of<br> COVID-19 has also hindered demand for our products, especially our new PluraPath™ pathogen detection system, which launched<br> less than two months before the onset of the COVID-19 pandemic in the United States.
● Our<br> commercial filtration products, which are primarily targeted at the hospitality and food service markets, have seen a decrease<br> in demand, due to the closure of many hotels and restaurants.
● We<br> increased our cash and accounts payable usage in the first nine months of the year to purchase extra inventory from our Italian<br> manufacturer as a hedge against the risk of COVID-19-related supply chain interruptions. 
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As we are unable to determine the duration of the COVID-19 pandemic, we are not able to predict when we will see an increase in demand for our products and a corresponding increase to our revenue. Due to this uncertainty, we applied for and received $0.5 million from the U.S. Small Business Administration’s Paycheck Protection Program (“PPP”) on April 24, 2020, which we believe will help us offset the adverse effect on our results of operations and financial condition that could result from a prolonged decrease in demand for our products.

We believe that, as the COVID-19 pandemic subsides, we may experience over the medium-to-long-term a net positive impact on demand for all of our products, due especially to increased global awareness of infectious pathogens and the serious problems they cause. Specifically, we expect that:

● Purchase<br> decisions for infection control filtration that had been deferred, both in new and existing customer organizations, may be<br> re-prioritized.
● Demand<br> for our pathogen detection products may increase as unoccupied buildings, including office buildings and hotels, are readied<br> for re-occupation. Extended periods of low, or no, water flow through building piping creates opportunities for biofilm propagation<br> – a problem our strategic partners are trained to eradicate.
● Demand<br> for our commercial filtration products may increase as and to the extent that hotels, casinos, and restaurants re-open.
● Sales<br> meetings at new potential customers may resume.

In summary, the COVID-19 pandemic adds uncertainty to our business plans in the short term, while we believe that our medium-to-long-term prospects remain strong. At this time, we cannot predict the specific extent or duration of the impact of the COVID-19 pandemic on our condition, resources and results.

OurProducts

WaterFiltration Products

We develop and sell water filtration products used in both medical and commercial applications. Our water filtration products employ multiple filtration technologies, as described below.

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 waterborne 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.

Our primary sales strategy in medical markets is to sell through value-added resellers (“VARs”). Leveraging VARs has enabled us to expand rapidly our access to target customers 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.

In commercial markets, we develop and sell our Nephros- and AETHER-branded filters, for which 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 Aether filter offerings have the potential to generate accretive revenue growth in at least three ways. First, we expect the business to continue its organic growth. Second, cross-selling opportunities are generated by offering taste/odor-focused products to the medical markets, as well as pathogen-focused filtration to the commercial markets. Finally, as part of the more substantial Nephros organization, Aether may be able to compete for larger filtration contracts than may have been available to it as a smaller, independent firm. Since we acquired the AETHER brand, we have seen some promising results in each of these strategies, but it is still too early to judge the likelihood or magnitude of their long-term success.

In commercial markets, our model combines both direct and indirect sales. Our sales staff have sold products directly to a number of convenience stores, hotels, casinos, and restaurants. We are also pursuing large corporate contracts through partnerships.

TargetMarkets

Our ultrafiltration products currently target the following markets:

● Hospitals<br> and Other Healthcare Facilities: Filtration of water for washing and drinking as an aid in infection control. The filters<br> produce water that is suitable for wound cleansing, cleaning of equipment used in medical procedures, and washing of surgeons’<br> hands. 
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| --- | | ● | Dialysis<br> Centers: Filtration of water or bicarbonate concentrate used in hemodialysis. | | --- | --- | | ● | Commercial<br> Facilities: Filtration and purification of water for consumption, including for use in ice machines and soft drink dispensers. | | ● | Military<br> and Outdoor Recreation: Individual water purification devices used by soldiers and backpackers to produce drinking water in<br> the field, as well as filters customized to remote water processing systems. |

Hospitalsand Other Healthcare Facilities. Nephros filters are a leading tool used to provide proactive protection to patients in high-risk areas (e.g., ice machines, surgical rooms, NICUs) and reactive protection to patients in broader areas during periods of water pathogen outbreaks. Our products are used in hundreds of medical facilities to aid in infection control, both proactively and reactively.

According to the American Hospital Association, approximately 6,200 hospitals, with approximately 931,000 beds, treated over 36 million patients in the United States in 2017. 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.

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<br> DSU-H and SSU-H are in-line, 0.005-micron ultrafilters that provide dual- and single-stage protection, respectively, from<br> waterborne pathogens. They are primarily used to filter potable water feeding ice machines, sinks, and medical equipment,<br> such as endoscope washers and surgical room humidifiers. The DSU-H has an up to 6-month product life in a typical hospital<br> setting, while the SSU-H has an up to 3-month life.
● The<br> S100 is a point-of-use, 0.01-micron microfilter that provides protection from waterborne pathogens. The S100 is primarily<br> used to filter potable water feeding sinks and showers. The S100 has an up to 3-month product life when used in a hospital<br> setting.
● The<br> HydraGuard^TM^ and HydraGuard^TM^ - Flush are 0.005-micron cartridge ultrafilters that provide single-stage<br> protection from waterborne pathogens. The HydraGuard ultrafilters are primarily used to filter potable water feeding ice machines<br> and medical equipment, such as endoscope washers and surgical room humidifiers. The HydraGuard has an up to 6-month product<br> life and the HydraGuard - Flush has an up to 12-month product life when used in a hospital setting.

Our 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 Quarterly Report on Form 10-Q.

DialysisCenters - Water/Bicarbonate. In the dialysis water market, Nephros ultrafiltration products are among the highest performing products on the market. The DSU-D, SSU-D and the SSUmini have become the standard endotoxin filter in many portable reverse osmosis systems. The EndoPur^®^, our large-format ultrafilter targeted at dialysis clinic water systems, provides the smallest pore size available. Following a long pilot project at a major dialysis provider, we are now seeing growth in the use of this product. In addition, we aim to expand EndoPur’s usage into heat-disinfected water systems, which will further open the market for this product.

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 6,500 dialysis clinics in the United States servicing approximately 468,000 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.

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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<br> DSU-D, SSU-D and SSUmini are in-line, 0.005-micron ultrafilters that provide protection from bacteria, viruses, and endotoxins.<br> All of these products have an up to 12-month product life in the dialysis setting and are used to filter water following treatment<br> with a reverse osmosis (“RO”) system, and to filter bicarbonate concentrate. These ultrafilters are primarily<br> used in the water lines and bicarbonate concentrate lines leading into dialysis machines, and as a polish filter for portable<br> RO machines.
● The<br> EndoPur is a 0.005-micron cartridge ultrafilter that provides single-stage protection from bacteria, viruses, and endotoxins.<br> The EndoPur has an up to 12-month product life in the dialysis setting, and is used to filter water following treatment with<br> an RO system. More specifically, the EndoPur is used primarily to filter water in large RO systems designed to provide ultrapure<br> water to an entire dialysis clinic. The EndoPur is a cartridge-based, “plug and play” market entry that requires<br> no plumbing at installation or replacement. The EndoPur is available in 10”, 20”, and 30” configurations.<br> We expect that the EndoPur will be validated for heat disinfection by the end of the third quarter of fiscal year 2020.

Commercialand Industrial Facilities. Our commercial NanoGuard^®^ product line accomplishes ultrafiltration via small pore size (0.005 micron) technology, filtering bacteria and viruses from water. In addition, the AETHER brand expands our product line to include water filtration and purification technologies that are primarily focused on improving odor and taste and on reducing scale and heavy metals from filtered water.

We purchased the AETHER brand to expedite our access to commercial markets and to expand our filtration expertise and capabilities. Our commercial market focus is in the hotel, restaurant, and convenience store markets. In the first year post-acquisition, we upgraded Aether facilities to increase production and logistics capacity, integrated Aether products into the Nephros infection control product portfolio, and initiated sales efforts with a number of large commercial customers. We have recently added to our commercial sales team and, going forward, hope to close on one or more large contracts that may result in step-change increases in commercial market revenue.

Over time, we believe that the same water safety management programs currently underway at medical facilities may migrate to commercial markets. As the epidemiology of waterborne pathogens expands, links to contamination sources will become more efficient and the data more readily available. In cases where those sources are linked to restaurants, hotels, office buildings and residential complexes, the corporate owners of those facilities will likely face increasing liability exposure. We expect that building owners will come to understand ASHRAE-188, which outlines risk factors for buildings and their occupants, and provides water safety management guidelines. We believe, in time, most commercial buildings will need to follow the basic requirements of ASHRAE-188: create a water management plan, perform routine testing, and establish a plan to treat the building in the event of a positive test.

As demand for water testing and microbiological filtration grows, we will be ready to deploy our expertise and solutions based on years of experience servicing the medical market. We believe that we have an opportunity to offer unique expertise and products to the commercial market, and that our future revenue from the commercial market could even surpass our infection control revenue.

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

● The<br> NanoGuard set of products are in-line, 0.005-micron ultrafilters that provide dual-stage retention of any organic or inorganic<br> particle larger than 15,000 Daltons. NanoGuard products are designed to fit a variety of existing plumbing configurations,<br> including 10” and 20” standard housings, and AETHER and Everpure® manifolds. Included in the NanoGuard product<br> line are both conventional and flushable filters.
● The<br> AETHER line of commercial filters, which are also sold under the Nephros brand, provide a variety of technology solutions<br> that improve water quality in food service, convenience store, hospitality, and industrial applications. AETHER filters improve<br> water taste and odor, and reduce sediment, dirt, rust particles and other solids, chlorine and heavy minerals, lime scale<br> build-up, and both particulate lead and soluble lead.

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.

Militaryand 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.

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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 were able to convert the exclusive sublicense to a non-exclusive sublicense with respect to non-U.S. military sales. In the first quarter of 2019, the Sublicense Agreement was amended to eliminate the minimum fee obligations starting May 6, 2018 and, as such, CamelBak has no further minimum fee obligations. There was no royalty revenue recognized during the three and nine months ended September 30, 2020 or 2019 related to this Sublicense Agreement. CamelBak product sales have been slower than originally hoped. However, military contracts often take years to close, and we remain optimistic about these products and markets.

PathogenDetection Systems

We recently expanded our portfolio of solutions with the introduction of our PluraPath™, SequaPath™, and DialyPath™ pathogen detection systems, which we believe represent significant growth opportunities for Nephros.

PluraPath:Pathogen Detection in Infection Control. We developed the PluraPath pathogen detection system to provide real-time data to infection control teams executing their water management plans. We integrated our ultrafilter technology with emerging, quantitative polymerase chain reaction (qPCR) technology and real-time analytics. We chose a portable, open-source qPCR platform that allows us to parallel-processes up to 15 different bacteria and virus assays. We worked with industry experts to select and develop DNA- and RNA-based assays that could meet our goals of providing quantitative precision within one hour. We also developed a mobile application to extract and process the data real-time. Furthermore, we designed the system so that anyone can perform qPCR testing, not just someone with training in microbiological laboratory techniques.

With the PluraPath system, it is possible to map and track the changes to levels of multiple bacterial and viral pathogens in a building’s water system on a real-time basis, at cost levels equivalent to assays that currently take 24-72 hours or more and typically provide data on only a single pathogen. Using PluraPath, we expect that infection control teams will be able to quickly assess approximate levels of a broad array of pathogens in their water systems, and optimally focus their secondary disinfection efforts and point-of-use filtration; services and products offered by our strategic partners.

The PluraPath system does not replace culture-based assays, which are the current regulatory requirements for confirmation in testing for waterborne pathogens. Rather, we believe PluraPath will become a valuable tool in the arsenal of defense, permitting faster decision making about a larger target population of pathogens. Our objective is to provide our customers and strategic partners with a user-friendly system that delivers dependable, actionable data to infection control teams in less than an hour.

SequaPath:Facility-Wide Pathogen Detection. Bacterial contaminants in water systems can originate from thousands of different bacterial families. The technology now exists to map the water system biome in real-time, on-site, using an enhanced form of the portable PluraPath system and a bioinformatics database. The SequaPath system provides the capability to screen water for over 20,000 different bacterial genera (families), including genera of the 40+ pathogenic bacteria listed by the Centers for Disease Control & Prevention (CDC) in their “Opportunistic Pathogens of Premise Plumbing.” The system incorporates our proprietary filtration technology and a DNA sequencing step that makes it possible to screen rapidly for genera of waterborne pathogens. Like PluraPath, the SequaPath platform is portable, allowing for same-day on-site analysis.

Due to re-opening concerns associated with buildings in the COVID-19 environment, we have accelerated the market launch of SequaPath™ from late 2020 to the current quarter. The technology was also used to perform a recent academic study that found far more bacteria in buildings unoccupied during the COVID-19 pandemic than in occupied buildings.

The potential for building biome mapping is enormous. We are developing the technology, processes, and procedures to perform as many as 96 tests in a single run. Our plan is to first provide SequaPath as a service, and then as a product that we can support with partners who have the in-house technical capabilities to manage this system.

While this service could be of value to the management of any water system in any building in any part of the world, we will first focus on the hospital customers of our strategic partners. Once proven in the hospital space, we believe that SequaPath has the potential to shift the building water testing paradigm across multiple markets and geographies.

DialyPath:Endotoxin Detection in Dialysis Facilities. We have also been investigating pathogen detection efforts in the dialysis space. The LAL (limulus amebocyte lysate) test is a dialysis industry standard assay that identifies the presence of potential endotoxins, agnostic to the source species. The source of endotoxins are gram-negative bacteria. LAL testing routinely takes 48-72 hours to provide results from the time of shipping the sample to a central laboratory. When dialysis clinics have urgent contamination or severely elevated endotoxin issues, they may have to shut down for extended periods of time creating enormous logistical issues for patients and increasing the cost of care.

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To provide a real-time solution for this testing paradigm, we launched the DialyPath pathogen detection and endotoxin estimation system on October 13, 2020. The DialyPath system mirrors PluraPath, but includes a gram-negative DNA marker test and tests for six different gram-negative bacteria. The DialyPath system is designed to provide data on two test samples in one run in about an hour. The system provides an estimate of the overall endotoxin in the sample, as well as estimated levels of six specific endotoxin-generating bacteria known to be frequent invaders of dialysis clinic water systems, and to cause inflammation in dialysis patients.

SpecialtyRenal 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<br> clearance of middle and large molecular weight toxins
● Improved<br> survival - up to a 35% reduction in mortality risk
● Reduction<br> in the occurrence of dialysis-related amyloidosis
● Reduction<br> in inflammation
● Reduction<br> in medication such as EPO and phosphate binders
● Improved<br> patient quality of life
● Reduction<br> 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.

Our original HDF system conformed with current ANSI/AAMI/ISO standards and was cleared by the U.S. Food and Drug Administration (“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.

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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 in order 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.

Over the past two years, we have dramatically simplified and redesigned our HDF device. Our updates have made the system significantly easier to use. By shifting from a reusable substitution ultrafilter to a disposable substitution ultrafilter, we were able to simplify the set-up process and substantially reduce the time required between patient treatments – two of the key complaints from our first-generation system. We used real-time user feedback to aid in the fine-tuning of our changes to the system that impacted usability. We believe our second generation HDF system will meet the needs of both clinicians and patients.

In 2018, we spun-off the development of the HDF device into SRP. We raised $3 million of outside capital directly into SRP to fund the second-generation development described above. These funds were exhausted in early July 2020. Nephros, which maintains a 62.5% ownership stake in SRP, loaned $0.8 million in operating funds to SRP during the three months ended September 30, 2020.

On October 9, 2020, Nephros and SRP entered into a formal loan agreement, in which Nephros agreed to lend up to $1.3 million of operating funds to SRP, including the $0.8 million borrowed by SRP during the three months ended September 30, 2020. These funds are expected to be sufficient to fund SRP through the planned FDA 510(k) clearance process of SRP’s second-generation hemodiafiltration system, which is expected to be initially submitted to the FDA near the end of 2020.

Once we have obtained FDA clearance for our second-generation device, we intend to launch it at clinics with previous experience with our device. We plan to then expand our efforts, on a measured basis, to clinics that wish to provide HDF therapy to their patients. At this time, we do not believe making a rapid and broad push into the market would be optimal. Nephrologists in the United States are not trained on HDF therapy; however, many nephrologists want to explore the option and we believe that early adopters will want to perform studies to better understand the technology. We intend to support these investigator-initiated studies.

While a number of studies have been performed in Europe, the body of evidence for optimal use of HDF needs to be built in the U.S. treatment setting. According to European data from Fresenius, over 15% of dialysis treatments are HDF. That could translate to over 10 million individual treatments if HDF achieved that level of penetration in the United States. We do not believe that the United States will instantaneously mirror Europe. However, we do believe that HDF therapy has a place in the treatment landscape for patients with ESRD in the United States, and we look forward to enabling this pathway.

CriticalAccounting Policies

For the nine months ended September 30, 2020, other than our cash and cash equivalents policy (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, 2019.

RecentAccounting Pronouncements

We are subject to recently issued accounting standards, accounting guidance and disclosure requirements. For a description of these new accounting standards, 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, which is incorporated herein by reference.

Resultsof Operations

Fluctuationsin 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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ThreeMonths Ended September 30, 2020 Compared to the Three Months Ended September 30, 2019

The following table sets forth our summarized, consolidated results of operations for the three months ended September 30, 2020 and 2019 (in thousands, except percentages):

2020 2019 Increase (Decrease) %<br> <br>Increase<br> <br>(Decrease)
Total net revenues $ 2,121 $ 3,095 ) (31 )%
Cost of goods sold 896 1,276 ) (30 )%
Gross margin 1,225 1,819 ) (33 )%
Gross margin % 58 % 59 % (1 )%
Research and development expenses 751 777 ) (3 )%
Depreciation and amortization expense 49 44 11 %
Selling, general and administrative expenses 1,544 1,787 ) (14 )%
Change in fair value of contingent consideration (187 ) (94 ) 99 %
Loss from operations (932 ) (695 ) 34 %
Interest expense (22 ) (48 ) ) (54 )%
Interest income 3 - 100 %
Other expense (61 ) (1 ) 6000 %
Net loss (1,012 ) (744 ) 36 %
Less: Undeclared deemed dividend attributable to noncontrolling interest (60 ) (60 ) -
Net loss attributable to Nephros, Inc. $ (1,072 ) $ (804 ) 33 %

All values are in US Dollars.

NetRevenues

Total net revenues for the three months ended September 30, 2020 were $2.1 million compared to $3.1 million for the three months ended September 30, 2019. The decrease of $1.0 million, or 31%, was driven by reduced customer demand that appears to be related to decreased customer focus on waterborne pathogens during the COVID-19 pandemic.

Costof Goods Sold

Cost of goods sold was $0.9 million for the three months ended September 30, 2020 compared to $1.3 million for the three months ended September 30, 2019. This decrease of $0.4 million, or 30%, was primarily due to $0.3 million in decreased direct product costs consistent with the decrease in revenue and lower product costs due to volume discounts, partially offset by an increase in expense related to inventory expiration and adjustments of $0.1 million during the three months ended September 30, 2020 compared to the three months ended September 30, 2019.

GrossMargin

Gross margin was approximately 58% for the three months ended September 30, 2020 compared to approximately 59% for the three months ended September 30, 2019. The decrease of approximately 1 percentage point is primarily due to unfavorable inventory expiration and adjustments of $0.1 million during the three months ended September 30, 2020.

Researchand Development Expenses

Research and development expenses were $0.8 million for each of the three months ended September 30, 2020 and 2019.

Depreciationand Amortization Expense

Depreciation and amortization expenses were approximately $49,000 and $44,000 for the three months ended September 30, 2020 and 2019, respectively.

Selling,General and Administrative Expenses

Selling, general and administrative expenses were $1.5 million for the three months ended September 30, 2020 compared to $1.8 million for the three months ended September 30, 2019, representing a decrease of $0.2 million, or 14%. The decrease was primarily due to a decrease in travel-related and marketing expenses of approximately $0.2 million as a result of the COVID-19 pandemic.

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Changein Fair Value of Contingent Consideration

Change in fair value of contingent consideration of approximately $0.2 million for the three months ended September 30, 2020 was due to settlement of the contingent consideration liability. Change in fair value of contingent consideration of approximately $0.1 million for the three months ended September 30, 2019 was due to lower-than-planned revenue performance of commercial filtration products.

InterestExpense

Interest expense was approximately $22,000 for the three months ended September 30, 2020 and is primarily related to interest on our secured note payable. Interest expense was approximately $48,000 for the three months ended September 30, 2019, which was comprised primarily of interest on our secured note payable and interest on our secured revolving credit facility, which was terminated on May 26, 2020.

InterestIncome

Interest income was approximately $3,000 for the three months ended September 30, 2020. There was no interest income for the three months ended September 30, 2019.

OtherExpense

Other expense was approximately $61,000 and $1,000 for the three months ended September 30, 2020 and 2019, respectively, and is a result of losses on foreign currency transactions.

WaterFiltration

The following table sets forth results of operations for the Water Filtration segment for the three months ended September 30, 2020 and 2019 (in thousands, except percentages):

2020 2019 Increase (Decrease) %<br> <br>Increase<br> <br>(Decrease)
Total net revenues $ 2,121 $ 3,095 ) (31 )%
Cost of goods sold 894 1,276 ) (30 )%
Gross margin 1,227 1,819 ) (33 )%
Gross margin % 58 % 59 % (1 )%
Research and development expenses 359 231 55 %
Depreciation and amortization expense 49 44 11 %
Selling, general and administrative expenses 1,317 1,756 ) (25 )%
Change in fair value of contingent consideration (187 ) (94 ) 99 %
Loss from operations $ (311 ) $ (118 ) 164 %

All values are in US Dollars.

NetRevenues

Total net revenues for the three months ended September 30, 2020 were $2.1 million compared to $3.1 million for the three months ended September 30, 2019. The decrease of $1.0 million, or 31%, was driven by reduced customer demand that appears to be related to decreased customer focus on waterborne pathogens during the COVID-19 pandemic.

Costof Goods Sold

Cost of goods sold was $0.9 million for the three months ended September 30, 2020 compared to $1.3 million for the three months ended September 30, 2019. This decrease of $0.4 million, or 30%, was primarily due to $0.3 million in decreased direct product costs consistent with the decrease in revenue and lower product costs due to volume discounts, partially offset by an increase in expense related to inventory expiration and adjustments of $0.1 million during the three months ended September 30, 2020 compared to the three months ended September 30, 2019.

GrossMargin

Gross margin was approximately 58% for the three months ended September 30, 2020 compared to approximately 59% for the three months ended September 30, 2019. The decrease of approximately 1 percentage point is primarily due to unfavorable inventory expiration and adjustments of $0.1 million during the three months ended September 30, 2020.

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Researchand Development Expenses

Research and development expenses were $0.3 million and $0.2 million for the three months ended September 30, 2020 and 2019, respectively. This increase of $0.1 million, or 55%, reflects increased headcount expenditures on product research and development.

Depreciationand Amortization Expense

Depreciation and amortization expenses were approximately $49,000 and $44,000 for the three months ended September 30, 2020 and 2019, respectively.

Selling,General and Administrative Expenses

Selling, general and administrative expenses were $1.3 million and $1.8 million for the three months ended September 30, 2020 and 2019, respectively, representing a decrease of $0.4 million, or 25%. The decrease was primarily due to a decrease in stock based compensation expense of $0.2 million, primarily related to the vesting of options as a result of the performance condition met upon our Nasdaq listing during the three months ended September 30, 2019 and a decrease in travel-related and marketing expenses of $0.2 million as a result of the COVID-19 pandemic.

Changein Fair Value of Contingent Consideration

Change in fair value of contingent consideration of $0.2 million for the three months ended September 30, 2020 was due to settlement of the contingent consideration liability. Change in fair value of contingent consideration of $0.1 million for the three months ended September 30, 2019 was due to lower-than-planned revenue performance of commercial filtration products.

PathogenDetection

The following table sets forth results of operations for the Pathogen Detection segment for the three months ended September 30, 2020 and 2019 (in thousands, except percentages):

2020 2019 Increase (Decrease) %<br> <br>Increase<br> <br>(Decrease)
Total net revenues $ - $ - -
Cost of goods sold 2 - 100 %
Gross margin (2 ) - ) (100 )%
Gross margin % 0 % 0 % -
Research and development expenses 49 180 ) (73 )%
Selling, general and administrative expenses 116 - 100 %
Loss from operations $ (167 ) $ (180 ) ) (7 )%

All values are in US Dollars.

Costof Goods Sold

Cost of goods sold was approximately $2,000 for the three months ended September 30, 2020.

Researchand Development Expenses

Research and development expenses were $49,000 and $0.2 million, respectively for each of the three months ended September 30, 2020 and 2019. This decrease of $0.1 million, or 73%, reflects this business segment’s transition from a purely research focus to a commercial phase.

Selling,General and Administrative Expenses

Selling, general and administrative expenses were $0.1 million for the three months ended September 30, 2020 and were due to the sales efforts that began during the nine months ended September 30, 2020.

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RenalProducts

The following table sets forth results of operations for the Renal Products segment for the three months ended September 30, 2020 and 2019 (in thousands, except percentages):

2020 2019 Increase (Decrease) %<br> <br>Increase<br> <br>(Decrease)
Research and development expenses $ 343 366 ) (6 )%
Selling, general and administrative expenses 111 31 258 %
Loss from operations $ (454 ) $ (397 ) 14 %

All values are in US Dollars.

Researchand Development Expenses

Research and development expenses were $0.4 million for each of the three months ended September 30, 2020 and 2019.

Selling,General and Administrative Expenses

Selling, general and administrative expenses were $0.1 million and $31,000 for the three months ended September 30, 2020 and 2019, respectively, an increase of approximately $80,000 due to an increased investment in operational management.

NineMonths Ended September 30, 2020 Compared to the Nine Months Ended September 30, 2019

The following table sets forth our summarized, consolidated results of operations for the nine months ended September 30, 2020 and 2019 (in thousands, except percentages):

2020 2019 Increase (Decrease) % Increase (Decrease)
Total net revenues $ 6,227 $ 7,173 ) (13 )%
Cost of goods sold 2,616 2,989 ) (12 )%
Gross margin 3,611 4,184 ) (14 )%
Gross margin % 58 % 58 % -
Research and development expenses 2,150 2,326 ) (8 )%
Depreciation and amortization expense 142 142 -
Selling, general and administrative expenses 5,104 4,693 9 %
Change in fair value of contingent consideration (229 ) (113 ) 103 %
Loss from operations (3,556 ) (2,864 ) 24 %
Interest expense (95 ) (140 ) ) (32 )%
Interest income 8 - 100 %
Other expense (124 ) (31 ) 300 %
Net loss (3,767 ) (3,035 ) 24 %
Less: Undeclared deemed dividend attributable to noncontrolling interest (179 ) (180 ) ) (1 )%
Net loss attributable to Nephros, Inc. $ (3,946 ) $ (3,215 ) 23 %

All values are in US Dollars.

NetRevenues

Total net revenues for the nine months ended September 30, 2020 were $6.2 million compared to $7.2 million for the nine months ended September 30, 2019. The decrease of $0.9 million was driven by reduced customer demand of $1.7 million during the three months ended September 30, 2020 and June 30, 2020 – which appears to be related to decreased customer focus on waterborne pathogens during the COVID-19 pandemic – offset by increased customer demand of $0.8 million during the three months ended March 31, 2020.

Costof Goods Sold

Cost of goods sold was $2.6 million for the nine months ended September 30, 2020 compared to $3.0 million for the nine months ended September 30, 2019, consistent with the decrease in net revenues.

GrossMargin

Gross margin was approximately 58% for each of the nine months ended September 30, 2020 and 2019.

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Researchand Development Expenses

Research and development expenses were $2.1 million and $2.3 million for the nine months ended September 30, 2020 and 2019, respectively. This decrease of $0.2 million, or 8%, is primarily due to decreasing investment in the second-generation HDF product as it nears submission for FDA clearance, and the Pathogen Detection Systems business segment’s transition from a purely research focus to a commercial phase.

Depreciationand Amortization Expense

Depreciation and amortization expenses were approximately $142,000 for each of the nine months ended September 30, 2020 and 2019.

Selling,General and Administrative Expenses

Selling, general and administrative expenses were $5.1 million for the nine months ended September 30, 2020 compared to $4.7 million for the nine months ended September 30, 2019, representing an increase of $0.4 million, or 9%. The increase was due to several factors, including increased headcount-related expenses of $0.7 million, driven by investments in pathogen detection, renal products, and logistics, and partially offset by a decrease in travel and marketing related expenses of $0.2 million as a result of the COVID-19 pandemic.

Changein Fair Value of Contingent Consideration

Change in fair value of contingent consideration of $0.2 million for the nine months ended September 30, 2020 was due to settlement of the contingent consideration liability. Change in fair value of contingent consideration of $0.1 million for the nine months ended September 30, 2019 was due to lower-than-planned revenue performance of commercial filtration products.

InterestExpense

Interest expense was approximately $95,000 and $140,000 for the nine months ended September 30, 2020 and 2019, respectively, and is primarily related to interest on our secured note payable, interest on our secured revolving credit facility that was terminated on May 26, 2020 and accretion of contingent consideration.

InterestIncome

Interest income was approximately $8,000 for the nine months ended September 30, 2020. There was no interest income for the nine months ended September 30, 2019.

OtherExpense

Other expense was approximately $124,000 and $31,000 for the nine months ended September 30, 2020 and 2019, respectively. Other expense for the nine months ended September 30, 2020 and 2019 is primarily related to foreign currency exchange losses.

WaterFiltration

The following table sets forth results of operations for the Water Filtration segment for the nine months ended September 30, 2020 and 2019 (in thousands, except percentages):

2020 2019 Increase (Decrease) %<br> <br>Increase<br> <br>(Decrease)
Total net revenues $ 6,199 $ 7,173 ) (14 )%
Cost of goods sold 2,602 2,989 ) (13 )%
Gross margin 3,597 4,184 ) (14 )%
Gross margin % 58 % 58 % -
Research and development expenses 1,014 698 45 %
Depreciation and amortization expense 142 142 -
Selling, general and administrative expenses 4,381 4,577 ) (4 )%
Change in fair value of contingent consideration (229 ) (113 ) 103 %
Loss from operations $ (1,711 ) $ (1,120 ) 53 %

All values are in US Dollars.

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NetRevenues

Total net revenues for the nine months ended September 30, 2020 were $6.2 million compared to $7.2 million for the nine months ended September 30, 2019. The decrease of $0.9 million was driven by reduced customer demand of $1.7 million during the three months ended September 30, 2020 and June 30, 2020 – which appears to be related to decreased customer focus on waterborne pathogens during the COVID-19 pandemic –offset by increased customer demand of $0.8 million during the three months ended March 31, 2020.

Costof Goods Sold

Cost of goods sold was $2.6 million for the nine months ended September 30, 2020 compared to $3.0 million for the nine months ended September 30, 2019, consistent with the decrease in net revenues.

GrossMargin

Gross margin was approximately 58% for each of the nine months ended September 30, 2020 and 2019.

Researchand Development Expenses

Research and development expenses were $1.0 million and $0.7 million for the nine months ended September 30, 2020 and 2019, respectively. This increase of $0.3 million, or 31%, reflects increased headcount expenditures on product research and development.

Depreciationand Amortization Expense

Depreciation and amortization expenses were approximately $142,000 for each of the nine months ended September 30, 2020 and 2019.

Selling,General and Administrative Expenses

Selling, general and administrative expenses were $4.4 million for the nine months ended September 30, 2020 compared to $4.6 million for the nine months ended September 30, 2019, representing a decrease of $0.2 million, or 4%. The decrease was primarily due to a decrease in travel and marketing related expenses of $0.2 million as a result of the COVID-19 pandemic.

Changein Fair Value of Contingent Consideration

Change in fair value of contingent consideration of $0.2 million for the nine months ended September 30, 2020 was due to settlement of the contingent consideration liability. Change in fair value of contingent consideration of $0.1 million for the nine months ended September 30, 2019 was due to lower-than-planned revenue performance of commercial filtration products.

PathogenDetection

The following table sets forth results of operations for the Pathogen Detection segment for the nine months ended September 30, 2020 and 2019 (in thousands, except percentages):

2020 2019 Increase (Decrease) %<br> <br>Increase<br> <br>(Decrease)
Total net revenues $ 28 $ - 100 %
Cost of goods sold 14 - 100 %
Gross margin 14 - 100 %
Gross margin % 51 % - % 51 %
Research and development expenses 206 492 ) (58 )%
Selling, general and administrative expenses 377 - 100 %
Loss from operations $ (569 ) $ (492 ) 16 %

All values are in US Dollars.

NetRevenues

Total net revenues for the nine months ended September 30, 2020 were approximately $28,000. Our sales of the pathogen detection system began during the nine months ended September 30, 2020.

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Costof Goods Sold

Cost of goods sold was approximately $14,000 for the nine months ended September 30, 2020.

GrossMargin

Gross margin was approximately 51% for the nine months ended September 30, 2020.

Researchand Development Expenses

Research and development expenses were $0.2 million and $0.5 million for the nine months ended September 30, 2020 and 2019, respectively. This decrease of $0.3 million, or 58%, reflects this business segment’s transition from a purely research focus to a commercial phase.

Selling,General and Administrative Expenses

Selling, general and administrative expenses were $0.4 million for the nine months ended September 30, 2020 and were due to the sales effort which began during the nine months ended September 30, 2020.

RenalProducts

The following table sets forth results of operations for the Renal Products segment for the nine months ended September 30, 2020 and 2019 (in thousands, except percentages):

2020 2019 Increase (Decrease) %<br> <br>Increase<br> <br>(Decrease)
Research and development expenses $ 930 1,136 ) (18 )%
Selling, general and administrative expenses 346 116 198 %
Loss from operations $ (1,276 ) $ (1,252 ) 2 %

All values are in US Dollars.

Researchand Development Expenses

Research and development expenses were $1.0 and $1.2 million for the nine months ended September 30, 2020 and 2019, respectively, a decrease of $0.2 million due to decreasing investment in the second-generation HDF product as it nears submission for FDA clearance.

Selling,General and Administrative Expenses

Selling, general and administrative expenses were $0.3 and $0.1 million for the nine months ended September 30, 2020 and 2019, respectively, an increase of $0.2 million due to an increased investment in operational management.

Liquidityand Capital Resources

The following table summarizes our liquidity and capital resources as of September 30, 2020 and December 31, 2019 and is intended to supplement the more detailed discussion that follows. The amounts stated are expressed in thousands.

September 30, December 31,
Liquidity and Capital Resources 2020 2019
Cash and cash equivalents $ 5,155 $ 4,166
Other current assets 6,600 4,133
Working capital 9,376 5,871
Stockholders’ equity 11,440 7,689

At September 30, 2020, we had an accumulated deficit of $131.1 million 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.

The CARES Act established the PPP, which authorizes the issuance of loans to small businesses. Loan amounts are forgivable to the extent that proceeds are used to cover certain costs, including payroll, over a 24-week period following loan funding. Loans have a maturity of 2 years with an interest rate of 1.0% and may be prepaid without penalty. We applied for and received a PPP loan in the amount of $0.5 million on April 24, 2020.

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On October 20, 2020, we completed a registered direct offering of 833,333 shares of common stock at a price of $6.00 per share with net proceeds of $4.7 million. Based on cash that is available for our operations and projections of our future operations, we believe that our cash balances will be sufficient to fund our current operating plan – including the potential negative impact of the COVID-19 pandemic – through at least the next 12 months from the date of issuance of the accompanying condensed consolidated financial statements. Additionally, our operating plans are designed to help control operating costs and to increase revenue until such time as we generate sufficient cash flows from operations. However, there is uncertainty with respect to our projections regarding the availability of sufficient cash resources as a result of the COVID-19 pandemic and the economic conditions it has caused. In recent months, we have seen decreased demand for our products both with respect to new hospital customers and our existing hospital, restaurant and hospitality customers, which have been significantly impacted by the COVID-19 pandemic.

If this decrease in demand continues beyond the third quarter of fiscal year 2021 and we are unable to achieve our revenue plan, we may be forced to cut costs as appropriate to preserve our available capital resources. If we are unable to sufficiently decrease our spending to match any future decreased demands for our products, we may exhaust our capital resources sooner than we currently anticipate. Further, as a result of the recent volatility of the capital markets and economic conditions generally, it may be difficult for us to raise additional capital at times when we need it, and even if we were able to raise additional capital, it may be on terms than are detrimental to us. Accordingly, the current economic conditions caused by the COVID-19 pandemic place uncertainty on our ability to maintain adequate levels of liquidity.

In addition to the factors caused by the COVID-19 pandemic and the current economic conditions, our future liquidity sources and requirements will depend on many other factors, including:

● the<br> market acceptance of our products, and our ability to effectively and efficiently produce and market our products;
● the<br> continued progress in, and the costs of, clinical studies and other research and development programs;
● the<br> costs involved in filing and enforcing patent claims and the status of competitive products; and
● the<br> cost of litigation, including potential patent litigation and any other actual or threatened litigation.

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

● the<br> development, marketing, and sales of our water-filtration and water diagnostics product;
● the<br> development of our second-generation HDF product; and
● working<br> capital purposes.

At September 30, 2020, we had cash and cash equivalents totaling $5.2 million and total assets of $14.5 million excluding the asset related to the License and Supply Agreement with Medica of $0.7 million.

Net cash used in operating activities was $5.4 million for the nine months ended September 30, 2020 compared to $2.6 million for the nine months ended September 30, 2019, an increase of $2.7 million, due primarily to an increase of $2.8 million in inventory during the nine months ended September 30, 2020, which we executed to reduce the risk of a disruption of our Italy-based supply chain during the COVID-19 pandemic. In addition, reduced revenues increased our use of cash, since less gross margin was available to cover expenses.

Net cash used in investing activities was $0.2 million for the nine months ended September 30, 2020 due to purchases of equipment. Net cash used in investing activities was $0.1 million for the nine months ended September 30, 2019 due to a working capital adjustment related to the acquisition of the Aether business.

Net cash provided by financing activities of $6.6 million for the nine months ended September 30, 2020 resulted primarily from proceeds from the issuance of common stock of $6.8 million, proceeds from the PPP loan of $0.5 million and proceeds from the exercise of warrants and options of $0.2 million, offset partially by net payments on our secured revolving credit facility of $0.6 million, payments of $0.2 million on our secured note and payment of approximately $79,000 for contingent consideration.

Net cash provided by financing activities of $2.1 million for the nine months ended September 30, 2019 resulted primarily from net proceeds from the issuance of common stock of $2.0 million and proceeds from the exercise of warrants and options of $0.3 million partially offset by payments on our secured note payable of $0.2 million and payment of contingent consideration of approximately $78,000.

Off-BalanceSheet Arrangements

We did not have any off-balance sheet arrangements as of September 30, 2020.

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Forward-LookingStatements

The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for 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 guaranties 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<br> face significant challenges in obtaining market acceptance of our products, which could adversely affect our potential sales<br> and revenues;
● product-related<br> deaths or serious injuries or product malfunctions could trigger recalls, class action lawsuits and other events that could<br> cause us to incur expenses and may also limit our ability to generate revenues from such products;
● we<br> face potential liability associated with the production, marketing and sale of our products, and the expense of defending<br> against claims of product liability could materially deplete our assets and generate negative publicity, which could impair<br> our reputation;
● to<br> the extent our products or marketing materials are found to violate any provisions of the U.S. Food, Drug and Cosmetic Act<br> or any other statutes or regulations, we could be subject to enforcement actions by the FDA or other governmental agencies;
● we<br> may not be able to obtain funding if and when needed or on terms favorable to us in order to continue operations;
● we<br> may not have sufficient capital to successfully implement our business plan;
● we<br> may not be able to effectively market our products;
● we<br> may not be able to sell our water filtration products, pathogen detection systems or chronic renal failure therapy products<br> at competitive prices or profitably;
● we<br> may encounter problems with our suppliers, manufacturers and distributors;
● we<br> may encounter unanticipated internal control deficiencies or weaknesses or ineffective disclosure controls and procedures;
● we<br> may not obtain appropriate or necessary regulatory approvals to achieve our business plan;
● products<br> that appeared promising to us in research or clinical trials may not demonstrate anticipated efficacy, safety or cost savings<br> in subsequent pre-clinical or clinical trials;
● we<br> may not be able to secure or enforce adequate legal protection, including patent protection, for our products;
● we<br> may not be able to achieve sales growth in key geographic markets; and
● the<br> effects of the COVID-19 pandemic may be more severe than we currently anticipate.

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, 2019 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.

Evaluationof 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.

Changesin 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.

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PART II - OTHER INFORMATION

Item 1A. Risk Factors

As a smaller reporting company, we are not required to provide disclosure pursuant to this item. However, in addition to other information set forth in this Quarterly Report on Form 10-Q, including the important information in the section entitled “Forward Looking Statements,” you should carefully consider the “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019 for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in this Quarterly Report on Form 10-Q. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial might materially adversely affect our actual business, financial condition and/or operating results. You should also consider the following risk factor:

Theeffects of the COVID-19 pandemic, including measures taken to contain the pandemic, are highly uncertain and cannot be predicted.

Our operations expose us to risks associated with public health crises and pandemics, such as the outbreak of COVID-19. The COVID-19 pandemic has caused a general reduction in economic activity as businesses and consumers reduce activity to slow the spread of COVID-19 on a voluntary basis and in response to government orders. These reductions in activity have impacted and will continue to impact our workforce and operations, the operations of our customers, and the operations of our vendors and suppliers.

We have operations, supply chain, and customers in North America and Europe, and each of these regions has been affected by the outbreak and taken measures in an attempt to contain it. If the COVID-19 pandemic continues and conditions worsen, we may experience a decline in sales activities or greater effects on our supply chain, and it remains uncertain what impact these changes will have on future sales and production once conditions begin to improve.

COVID-19 mitigation efforts have had broad effects on the economy and financial markets. The extent of the scope and duration of these economic effects cannot currently be predicted, although they are likely to be significant for the near future. We expect that the economic impact of COVID-19 will affect us in a variety of ways, including without limitation, reducing demand for our products, making our stock price more volatile, making it more difficult to raise additional capital through offerings of equity or debt securities, whether due to the overall availability of capital or restrictions on terms that may be available to us, and reducing the availability of bank loans.

The extent to which the COVID-19 pandemic impacts our business, results of operations and financial condition will depend on future developments, which are highly uncertain and cannot be predicted, including, but not limited to, the duration and spread of the outbreak, the severity of the outbreak, the actions of governments and private actors to slow the spread of the outbreak, the effect of fiscal stimulus measures, and how quickly and to what extent normal economic and operating conditions can resume. We do not yet know the full extent of the impact on our business, our operations or the global economy as a whole. However, the effects could have a material impact on our results of operations, and we will continue to monitor the COVID-19 pandemic closely.

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Item 6. Exhibits

EXHIBITINDEX

Exhibit No. Description of Exhibit
10.1 Employment Agreement between the Registrant and Andrew Astor, dated August 23, 2020. *
10.2 Consulting Agreement between the Registrant and Daron Evans, dated August 23, 2020. *
10.3 Consulting Agreement between Specialty Renal Products, Inc. and Daron Evans, dated August 26, 2020. *
10.4 Loan Agreement between the Registrant and Specialty Renal Products, dated October 7, 2020, incorporated by reference to Exhibit 10.1 to Nephros, Inc.’s Current Report on Form 8-K filed with the SEC on October 13, 2020.
10.5 8% Convertible Promissory Note, from Specialty Renal Products, Inc. to the Registrant, dated October 7, 2020, incorporated by reference to Exhibit 10.2 to Nephros, Inc.’s Current Report on Form 8-K, filed with the SEC on October 13, 2020.
10.6 Form of Securities Purchase Agreement dated October 15, 2020, between the Registrant and the Purchasers, incorporated by reference to Exhibit 10.1 to Nephros, Inc.’s Current Report on Form 8-K filed with the SEC on October 16, 2020.
10.7 Second Amendment to Membership Interest Purchase Agreement, between the Registrant and Gregory Lucas, dated October 15, 2020, incorporated by reference to Exhibit 10.1 to Nephros, Inc.’s Current Report on Form 8-K filed with the SEC on October 20, 2020.
31.1 Certification by the Chief Executive Officer and Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *
32.1 Certification by the Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. **
101 Interactive<br> Data File. *
* Filed<br>herewith
** Furnished<br>herewith. 
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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:<br> November 5, 2020 By: /s/ Andrew Astor
Name: Andrew<br> Astor
Title: Chief<br> Executive Officer and Chief Financial Officer (Principal Financial and Accounting Officer) 
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Exhibit10.1

EMPLOYMENTAGREEMENT

This EMPLOYMENT AGREEMENT (this “Agreement”), is entered into as of August 23, 2020, and effective as of August 24, 2020 (the “Effective Date”), by and between Nephros, Inc., a Delaware corporation having its executive offices and principal place of business at 380 Lackawanna Place, South Orange, New Jersey 07079 (the “Company”), and Andrew Astor (“Executive”).

RECITALS

WHEREAS, the Company currently employs Executive as its Chief Financial Officer and Chief Operating Officer;

WHEREAS, the Company desires to continue to employ Executive and to appoint him to serve as President and Chief Executive Officer of the Company, and Executive desires to accept such employment on the terms and conditions hereinafter set forth:

NOW, THEREFORE, in consideration of the mutual covenants and agreements hereinafter set forth, the Company and Executive agree 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. Employment.

2.1 Employment by the Company; Duties. Executive agrees to be employed by the Company during the Term upon the terms and subject to the conditions set forth in this Agreement. Executive shall serve as President and Chief Executive Officer (“CEO”), reporting to the Board of Directors of the Company (the “Board”). As President and CEO, Executive will serve as the principal executive officer of the Company, and will be responsible for the general active management of the business of the Company, and shall have such duties as may be prescribed by the Board from time to time and which are commonly performed by presidents and chief executive officers of similar sized companies conducting similar business. Without limiting the foregoing, Executive shall also be responsible for monitoring and managing the Company’s interest in its Specialty Renal Products, Inc. (“SRP”) subsidiary and such other responsibilities related to SRP as prescribed by the Board from time to time. In addition, the parties acknowledge and agree that Executive will continue to serve as Chief Financial Officer of the Company and its principal financial officer, and shall have such additional duties and responsibilities as may be prescribed by the Board from time to time in that role and which are commonly performed by principal financial officers of similar sized public reporting companies conducting similar business.

2.2 Performance of Duties. Throughout the Term, Executive shall faithfully and diligently perform Executive’s duties in conformity with the directions of the Board and serve the Company to the best of Executive’s ability. The Company and Executive agree that Executive may partially perform his duties remotely from his residence, provided that Executive shall be physically present at the Company’s corporate offices performing his duties as necessary to diligently perform his duties.

2.3 At-Will Employment. The parties agree that Executive’s employment shall be on an “at-will” basis, subject to the terms of this Agreement, and may be terminated at any time, for any or no cause, at the option of either the Company or Executive. Executive understands and agrees that neither his job performance nor promotions, commendations, bonuses or the like from the Company give rise to or in any way serve as the basis for modification, amendment, or extension, by implication or otherwise, of his employment with the Company.

2.4 Directorship. Executive shall also serve as a director of the Company. The Company agrees to include Executive in the management slate for election as a director at each stockholders meeting during the Term at which his term as a director would otherwise expire. The Executive agrees to accept election, and to serve during the Term, as director of the Company, without any compensation therefore other than as specified in this Agreement. Upon termination of Executive’s employment hereunder for any reason, Executive shall be deemed to have resigned as director of the Company and as an officer or director of any entity affiliated with the Company, effective as of the date of such termination.

3. Compensation and Benefits.

3.1 Base Salary. The Company agrees to pay to Executive an initial base salary (“Base Salary”) at the annual rate of $325,000, payable in equal installments consistent with the Company’s payroll practices. The Board may review and adjust Executive’s Base Salary on an annual basis, as it deems appropriate, provided that the Board may not, without Executive’s consent, reduce the Base Salary to an amount less than the initial Base Salary set forth in the preceding sentence.

3.2 Performance Bonus. The Company agrees to pay to Executive a target discretionary performance bonus of 30% of annual Base Salary, as determined by the Company in its sole discretion. The bonus, if any, is subject to: (a) such objectives as may be mutually determined by the Board and Executive from time to time; (b) the Company’s achievement of overall corporate targets approved by the Board; and (c) the terms and conditions of any applicable incentive compensation plan then in effect for senior executives of the Company. The targets with respect to the bonus for the period ending December 31, 2020 (the “Initial Bonus Period”) shall be mutually agreed upon between the Executive and the Compensation Committee of the Board, within thirty (30) days following the Effective Date and such bonus shall be prorated to reflect the Initial Bonus Period. The targets with respect to the bonus for each annual period following the Initial Bonus Period shall be mutually agreed upon at the beginning of each calendar year by the Executive and the Compensation Committee of the Board of Directors. Each bonus, if any, shall be paid to the Executive not later than thirty (30) days after the issuance of the Company’s respective operating financial results and in no event later than March 15 of the calendar year following the calendar year to which the bonus relates.

3.3 Grant of Options and Terms Thereof. Upon the Effective Date, the Company shall grant to Executive a 10-year stock option to purchase 152,064 shares of the Company’s Common Stock (the “Option”), which number of shares Executive and the Company acknowledge represents approximately 3% of the fully-diluted outstanding shares of Common Stock when aggregated with the shares of Common Stock underlying all other equity incentive grants previously awarded to Executive. The exercise price applicable to the Option will be equal to the closing sale price of the Common Stock on the Effective Date. The right to purchase 25% of the shares subject to the Option shall vest and become exercisable on the first anniversary of the Effective Date, and thereafter the remaining shares will vest and become exercisable in 12 approximately equal quarterly installments, subject to Executive’s continued employment with the Company. The Option will be granted pursuant to the Company’s 2015 Stock Incentive Plan (the “2015 Plan”) and shall be evidenced by a separate agreement between the Company and Executive in the Company’s standard form for use under the 2015 Plan.

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3.4 Change of Control. In the event of a Change of Control (as such term is defined in the 2015 Plan), notwithstanding anything to the contrary contained herein, all shares subject to the Option that have not then vested shall vest and become exercisable immediately and, unless all such options are cashed-out in the Change of Control transaction, shall remain exercisable for a period of not less than 360 days (or the expiration of the Option term, if sooner), regardless of whether Executive’s employment is terminated in connection with such Change of Control transaction. Notwithstanding the foregoing, unless otherwise determined by the Board, no change in ownership of the Company’s outstanding securities shall be deemed a Change of Control for purposes of this Agreement if such change in ownership is caused by or relates solely to any disposition or acquisition of any Company securities by Wexford Capital, LP (and/or its affiliates).

3.5 Benefits and Perquisites. Executive shall be entitled to participate in, to the extent Executive is otherwise eligible under the terms thereof, the benefit plans and programs, and receive the benefits and perquisites, generally provided to the Company’s eligible employees, to the extent his age, health and other qualifications make him eligible to participate. Executive shall be entitled to receive four weeks of annual paid vacation in accordance with the Company’s vacation policy, with the timing and duration of specific vacations mutually and reasonably agreed to by the parties hereto.

3.6 Travel and Business Expenses. Upon submission of itemized expense statements in the manner specified by the Company, Executive shall be entitled to reimbursement for reasonable travel and other reasonable business expenses duly incurred by Executive in the performance of Executive’s duties under this Agreement in accordance with the policies and procedures established by the Company from time to time for executives of the same level and responsibility as Executive.

3.7 No Other Compensation or Benefits; Payment. The compensation and benefits specified in this Section 3 and in Section 4 of this Agreement shall be in lieu of any and all other compensation and benefits. Payment of all compensation and benefits to Executive hereunder shall be made in accordance with the relevant Company policies in effect from time to time to the extent the same are consistently applied, including normal payroll practices, and shall be subject to all applicable employment and withholding taxes and other withholdings.

3.8 Cessation of Employment. In the event Executive shall cease to be employed by the Company for any reason, then Executive’s compensation and benefits shall cease on the date of such event, except as otherwise provided herein or in any applicable employee benefit plan or program.

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4. Termination of Employment.

4.1 Termination. The Company may terminate Executive’s employment for Cause (as defined below), in which case the provisions of Section 4.2 of this Agreement shall apply. The Company may also terminate Executive’s employment in the event of Executive’s Disability (as defined below), in which case the provisions of Section 4.4 of this Agreement shall apply. The Company may also terminate Executive’s employment for any other reason or no reason by written notice to Executive, in which case the provisions of Section 4.5 of this Agreement shall apply. If Executive’s employment is terminated by reason of Executive’s death, retirement or resignation, the provisions of Section 4.3 of this Agreement shall apply. If Executive’s employment terminates for Good Reason (defined below), the provisions of Section 4.5 shall apply.

4.2 Termination for Cause. In the event that Executive’s employment hereunder is terminated during the Term by the Company for Cause (as defined below), then (a) the Company shall pay to Executive only the earned but unpaid Base Salary for services rendered through the date of termination, and (b) any and all unvested Options shall automatically be cancelled and forfeited by Executive as of the date of termination. Executive shall have the right to exercise any and all vested Options within the period commencing on the date of termination and ending ninety days after the date of such termination (or the expiration of the Option term, if sooner), except as otherwise provided in Section 3.4 hereof in the event of a Change of Control (the “Options Exercise Period”). Any Options not exercised by Executive within the Options Exercise Period shall be cancelled. In all other respects, all such Options shall be governed by the plans, programs, agreements, and other documents pursuant to which such Options were granted.

For purposes of this Agreement, “Cause” means (i) Executive’s failure or refusal to follow a reasonable and lawful direction of the Company’s Board, provided that, if such failure or refusal is capable of being remedied, the Company will provide written notice to Executive specifying the nature of such failure or refusal and demanding that such failure or refusal be remedied within 10 business days (and if so remedied within such period, no “cause” shall be deemed to exist); (ii) the conviction of (including any plea of no lo contendere to) any felony or any crime involving fraud, dishonesty or moral turpitude (whether or not involving the Company); (iii) Executive’s material breach of any fiduciary obligation to the Company, provided that if such breach is capable of being remedied, the Company will provide Executive with written notice specifying the nature of such breach and demanding that such breach be remedied within 10 business days (and if so remedied with in such period, no “cause” shall be deemed to exist); (iv) any intentional wrongdoing or fraudulent conduct committed by Executive in the scope of his employment with the Company; and (v) the intentional material breach by Executive of the Company’s policies and procedures in effect from time to time.

4.3 Termination by Reason of Death or Retirement or Resignation. In the event that Executive’s employment hereunder is terminated during the Term (a) by reason of Executive’s death, or (b) by reason of Executive’s resignation or retirement (as to which Executive shall give Company at least four (4) weeks’ notice), then the Company shall pay to Executive only the earned but unpaid Base Salary for services rendered through the date of termination. Any and all unvested Options shall automatically be cancelled and forfeited by Executive as of the date Executive’s resignation or retirement. In the event of Executive’s death, any and all unvested Options shall automatically be cancelled and forfeited. Executive or Executive’s estate, as applicable, shall have the right to exercise any and all vested Options within the appropriate options exercise period, which shall be one (1) year after the date of termination in the event of Executive’s death or ninety (90) days after the date of termination in the event of Executive’s resignation or retirement (or, in each case, the expiration of the Option term, if sooner), except as otherwise provided in Section 3.4 hereof in the event of a Change of Control. Any Options not exercised by Executive within the Options Exercise Period shall be cancelled. In all other respects, all such Options shall be governed by the plans, programs, agreements, and other documents pursuant to which such Options were granted.

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4.4 Disability. If, as a result of Executive’s incapacity due to physical or mental illness, the Company determines that Executive has failed to perform Executive’s duties hereunder on a full time basis for either: (a) 90 days within any 365-day period; or (b) 60 consecutive days, the Company may terminate Executive’s employment hereunder for “Disability.” In that event, the Company shall pay to Executive the earned but unpaid, Base Salary for services rendered through such date of termination. Any and all unvested Options shall be cancelled as of the date of termination. During any period that Executive fails to perform Executive’s duties hereunder as a result of incapacity due to physical or mental illness (a “Disability Period”), Executive shall continue to receive the compensation and benefits set forth in Section 3 of this Agreement until Executive’s employment hereunder is terminated; provided, however, that the amount of compensation and benefits received by Executive during the Disability Period shall be reduced by the aggregate amounts, if any, payable to Executive under disability benefit plans and programs of the Company or under the Social Security disability insurance program. Additionally, the vesting of Executive’s Options shall be tolled during the Disability Period and in the event of a termination of this Agreement as a result of Executive’s Disability, any and all unvested Options shall automatically be cancelled and forfeited by Executive as of the date of such termination. Executive (or as applicable, his personal representative or estate) shall have the right to exercise any and all vested Options within one year after the date of termination (or the expiration of the Option term, if sooner). Any Options not exercised by Executive within such period shall be cancelled. In all other respects, all such Options shall be governed by the plans, programs, agreements, and other documents pursuant to which such Options were granted.

4.5 Termination by Company for Any Other Reason, including a Change of Control or by Executive for Good Reason. In the event that Executive’s employment hereunder is terminated by the Company for any reason other than as provided in Sections 4.2, 4.3 or 4.4 of this Agreement or by Executive for Good Reason, then any and all unvested Options shall automatically be cancelled and forfeited by Executive as of the date of such termination (except as provided by Section 3.4 with respect to a Change of Control), vested Options shall remain exercisable for the Options Exercise Period and the Company shall:

(a) pay<br> to Executive any earned but unpaid Base Salary for services rendered through such date of termination; and
(b) pay<br> to Executive severance payments (less applicable withholding taxes) at a rate equal to his Base Salary rate then in effect<br> for a period of twelve months (the “Severance Term”), which amounts shall be paid periodically in accordance<br> with the Company’s normal payroll policies; provided that if Executive continues to be employed in any capacity<br> by a successor entity following a Change of Control, the severance pay that would otherwise be payable under this Section<br> 4.5 shall be reduced by the amount of base compensation and guaranteed bonus (if any) Executive receives in such capacity<br> during or attributable to the Severance Term; and 
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| --- | | (c) | to<br> the extent permitted by applicable healthcare laws and provided that Executive makes a timely election to continue coverage,<br> the Company shall pay directly to the insurance provider the premium for COBRA continuation coverage for Executive and his<br> dependents, less the amount payable by an active employee for such coverage, for a period of one year or until Executive obtains<br> new employment, whichever comes first (the benefits provided in this Section 4.5(c)) shall be referred to as the “Continued<br> Benefits”). Notwithstanding the foregoing, in the event that applicable healthcare laws do not permit continuation<br> of coverage, then the Company shall reimburse Executive for the costs of obtaining coverage in an amount not to exceed the<br> coverage amounts paid or payable by the Company on behalf of Executive immediately prior to the date of termination. | | --- | --- |

Due to the release requirements set forth in Section 4.6 below, any payment under this Section 4.5(b) scheduled to occur during the first 60 days following the date of termination of employment shall not be paid until the Company’s next regular payroll date on or immediately following expiration of the seven day release revocation period required by Section 4.6, and shall include payment of any amount that was otherwise scheduled to be paid prior to the 60th day after such termination.

“Good Reason” means the occurrence of any of the following events without Executive’s consent, subject to notice and an opportunity to cure: (i) a material reduction in Executive’s Base Salary, unless Executive consents to such reduction; (ii) material diminution in Executive’s title, duties, authorities or responsibilities (other than temporarily during a Disability Period or as required by applicable law), but excluding the removal of Executive as Chief Financial Officer and the duties, authorities and responsibilities related to such position; (iii) a material adverse change in Executive’s ability to perform his duties remotely, as described in Section 2.2, with periodic travel to Company headquarters from his residence at Company expense; or (iv) the Company’s material breach of this Agreement with respect to the making of any compensation payments to Executive. Executive must provide written notice to the Company of the occurrence of any of the foregoing events or conditions without Executive’s consent within 60 days of the occurrence of such event. The Company or any successor or Affiliate will have a period of 20 business days to cure such event or condition after receipt of written notice of such event from Executive. If the Company fails to cure such event or condition within such 20 business day period, then any voluntary termination of employment by Executive for “Good Reason” must occur, if at all, within ten business days following the expiration of such 20 business day cure.

Notwithstanding anything to the contrary contained herein, in the event that Executive shall breach Sections 5, 6 or 7 of this Agreement at any time, then in addition to any other remedies the Company may have, the Company’s obligations under paragraphs (b) and (c) of this Section 4.5 shall cease and Executive’s rights thereto shall terminate and shall be forfeited.

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4.6 Release. Except for any accrued obligations, the severance payments and Continued Benefits described in Section 4.5 will be provided to Executive only if the following conditions are satisfied: (a) Executive agrees to continue to be bound by and complies with all surviving provisions of Sections 5, 6 and 7 of this Agreement; and (b) Executive has entered into, within 60 days following the termination date, a full, irrevocable general release, in a form reasonably acceptable to both the Company and Executive (which form shall be provided by Company to Executive no later than seven days following the termination date), releasing all claims, known or unknown, that Executive may have against the Company, and any subsidiary or related entity, their officers, directors, employees and agents, arising out of or any way related to Executive’s employment or termination of employment with the Company.

4.7 Section 409A. Notwithstanding the foregoing, if necessary to comply with the restriction in Section 409A(a)(2)(B) of the Internal Revenue Code of 1986, as amended (the “Code”) concerning payments to “specified employees,” any payment on account of Executive’s separation from service that would otherwise be due hereunder within six months after such separation shall nonetheless be delayed until the first business day of the seventh month following Executive’s date of termination and the first such payment shall include the cumulative amount of any payments that would have been paid prior to such date if not for such restriction, together with interest on such cumulative amount during the period of such restriction at a rate, per annum, equal to the applicable federal short-term rate (compounded monthly) in effect under Section 1274(d) of the Code on the date of termination. For purposes of this Agreement, Executive shall be a “specified employee” for the 12-month period beginning on the first day of the fourth month following each “Identification Date” if he is a “key employee” (as defined in Section 416(i) of the Code without regard to Section 416(i)(5) thereof) of the Company at any time during the 12-month period ending on the “Identification Date.” For purposes of the foregoing, the Identification Date shall be December 31.

This Agreement is intended to comply with the requirements of Section 409A of the Code and regulations promulgated thereunder (“Section 409A”), but the Company does not guarantee such compliance. To the extent that any provision in this Agreement is ambiguous as to its compliance with Section 409A, to the extent possible the provision shall be read in such a manner so that no payments due under this Agreement shall be subject to an “additional tax” as defined in Section 409A(a)(1)(B) of the Code. For purposes of Section 409A, each payment made under this Agreement shall be treated as a separate payment. In no event may Executive, directly or indirectly, designate the calendar year of payment. Notwithstanding anything contained herein to the contrary, in the event any payment on account of Executive’s separation from service constitutes nonqualified deferred compensation subject to (and not exempt from Section 409A), Executive shall not be considered to have terminated employment with the Company for purposes of the right to receive such payment hereof unless he would be considered to have incurred a “termination of employment” from Employer within the meaning of Treasury Regulation §1.409A-1(h)(1)(ii). All reimbursements provided under this Agreement shall be made or provided in accordance with the requirements of Section 409A, including, where applicable, the requirement that (i) any reimbursement is for expenses incurred during Executive’s lifetime (or during a shorter period of time specified in this Agreement), (ii) the amount of expenses eligible for reimbursement during a calendar year may not affect the expenses eligible for reimbursement in any other calendar year, (iii) the reimbursement of an eligible expense will be made on or before the last day of the calendar year following the year in which the expense is incurred, and (iv) the right to reimbursement is not subject to liquidation or exchange for another benefit.

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5. Exclusive Employment; Noncompetition.

5.1 No Conflicting Activities. During the period of Executive’s employment with the Company, Executive shall not: (a) engage in any activity which conflicts or interferes with or derogates from the performance of Executive’s duties hereunder, nor shall Executive engage in any other business activity except as approved in advance in writing by the Board, which approval may be revoked by the Board upon 60 days’ written notice to Executive; or (b) accept any other employment or service engagement, and whether or not compensated therefor, unless Executive receives the prior written approval of the Board which approval may be revoked by the Board upon 60 days’ written notice to Executive. Notwithstanding the foregoing, prior approval of the Board shall not be required for Executive to serve on the boards of directors (or comparable governing bodies) of charitable organizations, so long as (i) Executive provides notice to the Board of any such position, (ii) such organization would not, in the judgment of the Board, reasonably be expected to lead to unwanted or unfavorable publicity to the Company or any of its officers, directors or affiliated entities, and (iii) such service by Executive, either alone or in combination with all other non-Company engagements, will not interfere with the performance of Executive’s duties and responsibilities to the Company.

5.2 No Competition.

(a) Executive acknowledges and recognizes the highly competitive nature of the Company’s business and that access to the Company’s customer relationships, confidential records, and proprietary information renders him special and unique within the Company’s industry. In consideration of the payment by the Company to Executive of amounts that may hereafter be paid to Executive pursuant to this Agreement (including, without limitation, pursuant to Sections 3 and 4 hereof) and other obligations undertaken by the Company hereunder, Executive agrees that during (a) his employment with the Company and (b) for the period commencing upon the termination of his employment and continuing until the longer of (x) the first anniversary of such employment termination if such employment was terminated by the Company pursuant to Sections 4.2 or 4.4 or by Executive pursuant to Section 4.3, or (y) the last day of the Severance Term if his employment is terminated by the Company or by Executive pursuant to Section 4.5 (the “Post-Employment Period”), Executive shall not, directly or indirectly, for himself or any third party, engage without the prior consent of the Company as owner, investor, financier, partner, stockholder, employer, employee, consultant, advisor, director, officer or otherwise in any firm, partnership, corporation, entity, or business that engages or participates in a business that offers any product or service that competes in any material respect with a product or service (i) sold or provided by the Company to customers, including licensees, distributors and other persons that purchase Company products or services, or (ii) that the Company is developing, during the period of Executive’s employment with the Company (a “Competing Business”) anywhere in the world where the Company conducts its business. Without limiting the foregoing, Competing Business includes, but is not limited to, the development, marketing, distribution or sale of (A) medical equipment in the hemodiafiltration realm for use in end-stage renal disease therapy, (B) water filtration purification products or systems, or (C) waterborne pathogen detection products and systems.

(b) The provisions of Section 5.2(a) will not be deemed breached merely because Executive owns less than 1% of the outstanding common stock of a publicly-traded company.

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(c) In the event of a termination pursuant to Section 4.5 hereof, the Company shall have the option in its sole and absolute discretion, to extend the restrictions set forth in Section 5.2(a) for an additional six months in return for a six-month extension of the Severance Term and any such extension shall extend the Post-Employment Period accordingly.

(d) The covenants contained in Section 5.2(a) shall be construed as a series of separate covenants, one for each county, city, state, or any similar subdivision in any geographic area. Except for geographic coverage, each such separate covenant shall be deemed identical in terms to the covenant contained in Section 5.2(a). If, in any judicial proceeding, a court refuses to enforce any of such separate covenants (or any part thereof), then such unenforceable covenant (or such part) shall be eliminated from this Agreement to the extent permitted by law and necessary to permit the remaining separate covenants (or portions thereof) to be enforced. In the event that the provisions of this section are deemed to exceed the time, geographic or scope limitations permitted by applicable law, then such provisions shall be, to the extent permitted by law, reformed to the maximum time, geographic or scope limitations, as the case may be, permitted by applicable laws.

(e) Executive acknowledges that the limitations of time, geography and scope of activity agreed to in this no competition provision are reasonable because, among other things, (i) the Company is engaged in a highly competitive industry, (ii) he will have access to trade secrets and know-how of the Company, (iii) he will be able to obtain suitable and satisfactory employment without violation of this agreement, and (iv) these limitations are necessary to protect the trade secrets, confidential information and goodwill of the Company.

5.3 Non-Solicitation. In further consideration of the payment by the Company to Executive of amounts that may hereafter be paid to Executive pursuant to this Agreement (including, without limitation, pursuant to Sections 3 and 4 of this Agreement) and other obligations undertaken by the Company hereunder, Executive agrees that during his employment and the Post-Employment Period, he shall not, directly or indirectly: (a) solicit, encourage or attempt to solicit or encourage any of the employees, agents, consultants or representatives of the Company or any of its affiliates to terminate his, her, or its relationship with the Company or such affiliate; (b) solicit, encourage or attempt to solicit or encourage any of the employees of the Company or any of its affiliates to become employees or consultants of any other person or entity; (c) solicit, encourage or attempt to solicit or encourage any of the consultants of the Company or any of its affiliates to become employees or consultants of any other person or entity, provided that the restriction in this clause (c) shall not apply if (i) such solicitation, encouragement or attempt to solicit or encourage is in connection with a business which is not a Competing Business and (ii) the consultant’s rendering of services for the other person or entity will not interfere with the consultant’s rendering of services to the Company; (d) solicit or attempt to solicit any customer, vendor or distributor of the Company or any of its affiliates with respect to any product or service being furnished, made, sold or leased by the Company or such affiliate, provided that the restriction in this clause (d) shall not apply if such solicitation or attempt to solicit is (i) in connection with a business which is not a Competing Business and (ii) does not interfere with, or conflict with, the interests of the Company or any of its affiliates; or (e) persuade or seek to persuade any customer of the Company or any affiliate to cease to do business or to reduce the amount of business which any customer has customarily done or contemplates doing with the Company or such affiliate, whether or not the relationship between the Company or its affiliate and such customer was originally established in whole or in part through Executive’s efforts. For purposes of this Section 5.3 only, the terms “customer,” “vendor” and “distributor” shall mean a customer, vendor or distributor who has done business with the Company or any of its affiliates within twelve months preceding the termination of Executive’s employment.

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5.4 Notifications. During Executive’s employment with the Company and during the Post-Employment Period, Executive agrees that upon the earlier of Executive’s: (a) negotiating with any Competitor (as defined below) concerning the possible employment of Executive by the Competitor; (b) receiving an offer of employment from a Competitor; or (c) becoming employed by a Competitor, Executive will (i) immediately provide written notice to the Company of such circumstances and (ii) provide copies of Section 5 of this Agreement to the Competitor. Executive further agrees that the Company may provide notice to a Competitor of Executive’s obligations under this Agreement, including without limitation Executive’s obligations pursuant to Section 5 of this Agreement. For purposes of this Agreement, “Competitor” shall mean any entity (other than the Company or any of its affiliates) that engages, directly or indirectly, in any Competing Business.

5.5 Sufficient Consideration. Executive understands that the provisions of this Section 5 may limit his ability to earn a livelihood in a business similar to the business of the Company or its affiliates but nevertheless agrees and hereby acknowledges that the consideration provided under this Agreement, including any amounts or benefits provided under Sections 3 and 4 of this Agreement and other obligations undertaken by the Company hereunder, is sufficient to justify the restrictions contained in such provisions. In consideration thereof and in light of Executive’s education, skills and abilities, Executive agrees that he will not assert in any forum that such provisions prevent him from earning a living or otherwise are void or unenforceable or should be held void or unenforceable.

6. Inventions and Proprietary Property.

6.1 Definition of Proprietary Property. For purposes of this Agreement, “Proprietary Property” shall mean non-public information that relates to the actual or anticipated business or research and development of the Company, designs, specifications, ideas, formulas, discoveries, inventions, improvements, innovations, concepts and other developments, trade secrets, techniques, methods, know-how, technical and non-technical data, works of authorship, computer programs, computer algorithms, computer architecture, mathematical models, drawings, trademarks, copyrights, customer lists and customers (including, but not limited to, customers of the Company on whom Executive called or with whom Executive became acquainted during the term of his employment), marketing plans, and all other matters which are legally protectable or recognized as forms of property, whether or not patentable or reduced to practice or to a writing.

6.2 Assignment of Proprietary Property to the Company or its Subsidiaries.

(a) Executive hereby agrees to assign, transfer and set over, and Executive does hereby assign, transfer and set over, to the Company (or, as applicable, a subsidiary or designee of the Company), without further compensation, all of Executive’s rights, title and interest in and to any and all Proprietary Property which Executive, either solely or jointly with others, has conceived, made or suggested or may hereafter conceive, make or suggest, in the course of Executive’s employment with the Company, whether or not patentable or registrable under copyright or similar laws, which Executive may solely or jointly conceive or develop or reduce to practice, or cause to be conceived or developed or reduced to practice, during the period of time Executive is in the employ of the Company.

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(b) The assignment of Proprietary Property hereunder includes without limitation all rights of paternity, integrity, disclosure and withdrawal and any other rights that may be known as or referred to as moral rights (“Moral Rights”). To the extent that such Moral Rights cannot be assigned under applicable law and to the extent the following is allowed by the laws in the various countries where Moral Rights exist, Executive hereby waives such Moral Rights and consents to any action of the Company or any subsidiary of the Company that would violate such Moral Rights in the absence of such consent. Executive also will endeavor to facilitate such use of any such Moral Rights as the Company, or, as applicable, a subsidiary of the Company, shall reasonably instruct, including confirming any such waivers and consents from time to time as requested by the Company (or, as applicable, a subsidiary of the Company).

6.3 Works for Hire. Executive acknowledges that all original works of authorship or other creative works which are made by Executive (solely or jointly with others) within the scope of the employment of Executive by the Company and which are protectable by copyright are “works made for hire,” pursuant to United States Copyright Act (17 U.S.C., Section 101). To the extent such original work of authorship or other creative works are not works made for hire, Executive hereby assigns to the Company (or, as directed by the Company, to a subsidiary of the Company) all of the rights comprised in the copyright of such works.

6.4 Disclosure of Proprietary Property and Execution of Documents. Executive further agrees to promptly disclose to the Company any and all Proprietary Property which Executive has assigned, transferred and set over or will assign, transfer and set over as provided in Section 6.2 above, and Executive agrees to execute, acknowledge and deliver to the Company (or, as applicable, to a subsidiary of the Company), without additional compensation and without expense to Executive, any and all instruments reasonably requested, and to do any and all lawful acts which, in the reasonable judgment of the Company or its attorneys (or, as applicable, a subsidiary of the Company or its attorneys) may be required or desirable in order to vest in the Company or such subsidiary all property rights with respect to such Proprietary Property.

6.5 Enforcement of Proprietary Rights.

(a) Executive will assist the Company (or, as applicable, a subsidiary of the Company) in every proper way to obtain, assign to the Company (or, as directed by the Company, to a subsidiary), confirm and from time to time enforce, United States and foreign patent trade secret, trademark, copyright, mask work, and other intellectual property rights relating to Proprietary Property in any and all countries. To that end Executive will execute, verify and deliver such documents and perform such other acts (including appearances as a witness) as the Company, or, as applicable, a subsidiary of the Company, may reasonably request for use in applying for, obtaining, perfecting, evidencing, sustaining and enforcing such proprietary rights and the assignment of such Proprietary Property. In addition, Executive will execute, verify and deliver assignments of such Proprietary Property and all rights therein to the Company, its subsidiary or its or their designee. The obligation of Executive to assist the Company, or, as applicable, a subsidiary of the Company, with respect to proprietary rights relating to such Proprietary Property in any and all countries shall continue beyond the termination of employment, but the Company, or as applicable, a subsidiary of the Company, shall compensate Executive at a mutually agreed upon fee, in addition to any expenses, after such termination.

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(b) In the event the Company, or, as applicable, a subsidiary of the Company, is unable for any reason, after reasonable effort, to secure the signature of Executive on any document needed in connection with the actions specified in the preceding paragraph, Executive hereby irrevocably designates and appoints the Company and its duly authorized officers and agents as agent and attorney in fact, which appointment is coupled with an interest, to act for and on behalf of Executive, to execute, verify and file any such documents and to do all other lawfully permitted acts to further the purposes of the preceding paragraph with the same legal force and effect as if executed by Executive. Executive hereby waives and quitclaims to the Company or, as applicable, a subsidiary of the Company, any and all claims, of any nature whatsoever, which Executive now or may hereafter have for infringement of any proprietary rights assigned hereunder to the Company or such subsidiary.

6.6 Third Party Information. To the extent Executive has or possesses any Confidential Information (as hereinafter defined) belonging to Executive or to others, Executive shall not use or disclose to the Company or its subsidiaries or induce the Company or its subsidiaries to use any such Confidential Information unless the Company or its subsidiaries have a legal rights to use such Confidential Information. Executive will promptly advise the Company in writing if any of Executive’s involvement with the Company or any subsidiary of the Company might result in the possible violation of Executive’s undertakings to others or the use of any Confidential Information of Executive or of others.

7. Confidential Information.

7.1 Existence of Confidential Information. The Company owns and has developed and compiled, and the Company and its subsidiaries will develop and compile, certain proprietary techniques and confidential information, which have and will have great value to their businesses (referred to in this Agreement, collectively, as “Confidential Information”). Confidential Information includes not only information disclosed by the Company (or, as applicable, a subsidiary of the Company) to Executive, but also information developed or learned by Executive during the course or as a result of employment with the Company, which information shall be the property of the Company or, as applicable, such subsidiary. Confidential Information includes all information that has or could have commercial value or other utility in the business in which the Company or any of its subsidiaries is engaged or contemplates engaging, and all information of which the unauthorized disclosure could be detrimental to the interests of the Company or its subsidiary, whether or not such information is specifically labeled as Confidential Information by the Company or such subsidiary. By way of example and without limitation, Confidential Information includes any and all information developed, obtained, licensed by or to or owned by the Company or any of its subsidiaries concerning trade secrets, techniques, know-how (including designs, plans, procedures, merchandising, marketing, distribution and warehousing know-how, processes, and research records), software, computer programs and designs, development tools, all Proprietary Property, and any other intellectual property created, used or sold (through a license or otherwise) by the Company or any of its subsidiaries, electronic data information know-how and processes, innovations, discoveries, improvements, research, development, test results, reports, specifications, data, formats, marketing data and plans, business plans, strategies, forecasts, unpublished financial information, orders, agreements and other forms of documents, price and cost information, merchandising opportunities, expansion plans, budgets, projections, customer, supplier, licensee, licensor and subcontractor identities, characteristics, agreements and operating procedures, and salary, staffing and employment information.

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7.2 Protection of Confidential Information. Executive acknowledges and agrees that in the performance of Executive’s duties hereunder, the Company or a subsidiary of the Company may disclose to and entrust Executive with Confidential Information which is the exclusive property of the Company or such subsidiary and which Executive may possess or use only in the performance of Executive’s duties to the Company. Executive also acknowledges that Executive is aware that the unauthorized disclosure of Confidential Information, among other things, may be prejudicial to the Company’s or its subsidiaries’ interests, an invasion of privacy and an improper disclosure of trade secrets. Executive shall not, directly or indirectly, use, make available, sell, disclose or otherwise communicate to any corporation, partnership or other entity, individual or other third party, other than in the course of Executive’s assigned duties and for the benefit of the Company, any Confidential Information, either during the Term or thereafter. In the event Executive desires to publish the results of Executive’s work for or experiences with the Company or its subsidiaries through literature, interviews or speeches, Executive will submit requests for such interviews or such literature or speeches to the Board at least fourteen (14) days before any anticipated dissemination of such information for a determination of whether such disclosure is in the best interests of the Company and its subsidiaries, including whether such disclosure may impair trade secret status or constitute an invasion of privacy. Executive agrees not to publish, disclose or otherwise disseminate such information without the prior written approval of the Board.

7.3 Delivery of Company Records and Property. In the event Executive’s employment with the Company ceases for any reason, Executive will not remove from the Company’s premises without its prior written consent any records (written or electronic), files, drawings, documents, equipment, materials and writings received from, created for or belonging to the Company or its subsidiaries, including those which relate to or contain Confidential Information, or any copies thereof. Executive agrees, as requested by the Company, to search for, copy and/or delete any electronic records belonging to the Company or its subsidiaries or containing Confidential Information and stored on any personal computer or other device used or maintained by Executive. Upon the termination of his employment, Executive agrees to provide a computer-useable copy of all such electronic records and then, to the extent reasonably practicable, permanently delete and expunge such records from his personal computers and other devices. Executive shall also return to the Company all Company property in his possession or control, including without limitation, all computer hardware and other devices purchased by the Company (or for which Executive was reimbursed) upon his termination of employment with the Company, unless the Company otherwise consents in writing.

8. Assignment and Transfer.

8.1 Company. This Agreement shall inure to the benefit of and be enforceable by, and may be assigned by the Company to, any purchaser of all or substantially all of the Company’s business or assets, any successor to the Company or any assignee thereof (whether direct or indirect, by purchase, merger, consolidation or otherwise).

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8.2 Executive. Executive’s rights and obligations under this Agreement shall not be transferable by Executive by assignment or otherwise, and any purported assignment, transfer or delegation thereof shall be void; provided, however, that if Executive shall die, all amounts then payable to Executive hereunder shall be paid in accordance with the terms of this Agreement to Executive’s devisee, legatee or other designee or, if there be no such designee, to Executive’s estate.

9. Miscellaneous.

9.1 Other Obligations. Executive represents and warrants that neither Executive’s employment with the Company or Executive’s performance of Executive’s obligations hereunder will conflict with or violate or otherwise are inconsistent with any other obligations, legal or otherwise, which Executive may have. Executive covenants that he shall perform his duties hereunder in a professional manner and not in conflict or violation, or otherwise inconsistent with other obligations legal or otherwise, which Executive may have.

9.2 Nondisclosure; Other Employers. Executive represents and warrants that he has not taken or otherwise misappropriated and does not have in his possession or control any confidential and proprietary information belonging to any of his prior employers or connected with or derived from his service to prior employers. Executive represents and warrants that he has returned to all prior employers any and all such confidential and proprietary information. Executive further acknowledges, represents and warrants that the Company has informed Executive that Executive is not to use or cause the use of such confidential or proprietary information in any manner whatsoever in connection with your employment by the Company. Executive agrees, represents and warrants that he will not use such information in connection with his employment by the Company. Executive shall indemnify and hold harmless the Company from any and all claims arising from any breach of the representations and warranties in this Section.

9.3 Cooperation. Following termination of employment with the Company for any reason, Executive shall cooperate with the Company, as requested by the Company, to effect a transition of Executive’s responsibilities and to ensure that the Company is aware of all matters being handled by Executive.

9.4 Indemnification. The Company shall defend and indemnify the Executive in his capacity as President and CEO of the Company to the fullest extent permitted by applicable law. The Company shall also establish a policy for indemnifying its officers and directors, including but not limited to the Executive, for all actions or omissions permitted under applicable law taken in good faith pursuant of their duties for the Company, including but not limited to the obtaining of an appropriate level of Directors and Officers Liability coverage and including such provisions in the Company’s by-laws or certificate of incorporation, as applicable and customary. The rights to indemnification shall survive any termination of this Agreement.

9.5 Protection of Reputation. During the Term and thereafter, Executive agrees that he will take no action which is intended, or would reasonably be expected, to disparage or harm the Company or any of its officers, directors or affiliated entities or its or their reputations or which would reasonably be expected to lead to unwanted or unfavorable publicity to the Company or any of its officers, directors or affiliated entities, other than those required in order to permit Executive to comply with applicable law or those made in connection with legal or arbitral process. During the Term and thereafter, the Company agrees that it will take no actions which are intended, or would reasonably be expected, to disparage or harm Executive or his reputation or which would reasonably be expected to lead to unwanted or unfavorable publicity to Executive, other than those required in order to permit the Company to comply with applicable law or those made in connection with legal or arbitral process. Notwithstanding the foregoing, this paragraph shall not prevent the Company or Executive from exercising any of their respective rights under this Agreement.

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9.6 Governing Law. This Agreement shall be governed by and construed (both as to validity and performance) and enforced in accordance with the internal laws of the State of New Jersey applicable to agreements made and to be performed wholly with such jurisdiction, without regard to principles of the conflict of laws thereof or where the parties are located at the time a dispute arises.

9.7 Arbitration.

(a) If any dispute arises between Executive and the Company that the parties cannot resolve themselves, including any dispute over the application, validity, construction, or interpretation of this Agreement, arbitration in accordance with the then-applicable employment law rules of the American Arbitration Association shall provide the exclusive remedy for resolving any such dispute, regardless of its nature; provided, however, that the Company may enforce may enforce Executive’s obligation to provide services under this Agreement and Executive’s obligations under Sections 5 through 7 of this Agreement by an action for injunctive relief and damages in a court of competent jurisdiction at any time prior or subsequent to the commencement of an arbitration proceeding as herein provided. This Section 9.6 shall apply to any and all claims arising out of Executive’s employment and its termination, under state and federal statutes, local ordinances, and the common law including, without limitation Title VII of the Civil Rights Act of 1964, as amended, the Civil Rights Act of 1991, the Equal Pay Act, the Employee Retirement Income Security Act, as amended, the Age Discrimination in Employment Act of 1967, the Americans with Disabilities Act of 1990, the Family and Medical Leave Act of 1993, the Fair Labor Standards Act, the New Jersey Family Leave Act, the New Jersey Conscientious Employee Protection Act, the New Jersey Civil Rights Act and the New Jersey Law Against Discrimination.

(b) Executive has read and understand this Section 9.7 which discusses arbitration. Executive understands that by signing thisAgreement, Executive agrees to submit any claims arising out of, relating to, or in connection with this Agreement, or the interpretation,validity, construction, performance, breach or termination thereof, or Executive’s employment or the termination thereof,to binding arbitration, and that this arbitration provision constitutes a waiver of Executive’s right to a jury trial andrelates to the resolution of all disputes relating to all aspects of the employer/employee relationship. Executive further understandsthat other options such as federal and state administrative remedies and judicial remedies exist and know that by signing thisAgreement those remedies are forever precluded and that regardless of the nature of Executive’s complaint, Executive knowsthat it can only be resolved by arbitration.

(c) Unless the parties agree otherwise, any arbitration shall be administered by and take place in the offices of the American Arbitration Association in Essex County, New Jersey. If that office is not available, then the arbitrator shall determine the location of the arbitration within New Jersey.

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9.8 Entire Agreement. This Agreement (including all exhibits hereto) contains the entire agreement and understanding between the parties hereto in respect of Executive’s employment and supersedes, cancels and annuls any prior or contemporaneous written or oral agreements, understandings, commitments and practices between them respecting Executive’s employment, including all prior employment agreements, if any, between the Company and Executive, which agreement(s) hereby are terminated and shall be of no further force or effect. With respect to that certain Confidentiality, Assignment of Inventions and Non-Competition Agreement dated on or about February 13, 2017, between the Company and Executive (the “Prior Inventions Agreement”), the Company and Executive agree that such Prior Inventions Agreement shall be deemed superseded in its entirety by the terms and conditions of this Agreement, including Sections 5, 6 and 7 hereof.

9.9 No Amendment/Waiver. This Agreement may not be amended or modified in any manner nor may any of its provisions be waived except by written amendment executed by the parties. A waiver, modification or amendment by a party shall only be effective if (a) it is in writing and signed by the parties, (b) it specifically refers to this Agreement and (c) it specifically states that the party, as the case may be, is waiving, modifying or amending its rights hereunder. Any such amendment, modification or waiver shall be effective only in the specific instance and for the specific purpose for which it was given.

9.10 Severability. If any term, provision, covenant or condition of this Agreement or part thereof, or the application thereof to any person, place or circumstance, shall be held to be invalid, unenforceable or void by a court of competent jurisdiction, the remainder of this Agreement and such term, provision, covenant or condition shall remain in full force and effect, and any such invalid, unenforceable or void term, provision, covenant or condition shall be deemed, without further action on the part of the parties hereto, modified, amended and limited, and the court shall have the power to modify, to the extent necessary to render the same and the remainder of this Agreement valid, enforceable and lawful. In this regard, Executive acknowledges that the provisions of Sections 5, 6 and 7 of this Agreement are reasonable and necessary for the protection of the Company.

9.11 Construction. The headings and captions of this Agreement are provided for convenience only and are intended to have no effect in construing or interpreting this Agreement. The language in all parts of this Agreement shall be in all cases construed according to its fair meaning and not strictly for or against the Company or Executive. The use herein of the word “including,” when following any general provision, sentence, clause, statement, term or matter, shall be deemed to mean “including, without limitation.” As used herein, “Company” shall mean the Company and its subsidiaries and any purchaser of, successor to or assignee (whether direct or indirect, by purchase, merger, consolidation or otherwise) of all or substantially all of the Company’s business or assets which is obligated to perform this Agreement by operation of law, agreement or otherwise. As used herein, the words “day” or “days” shall mean a calendar day or days. As used herein, “Compensation Committee” means the Compensation Committee of the Board or, if no such committee is then serving, at least two members of the Board as selected by the Board.

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9.12 Remedies for Breach. The parties hereto agree that Executive is obligated under this Agreement to render personal services during the Term of a special, unique, unusual, extraordinary and intellectual character, thereby giving this Agreement special value, and, in the event of a breach or threatened breach of any covenant of Executive herein, the injury or imminent injury to the value and the goodwill of the Company’s and its subsidiaries’ businesses could not be reasonably or adequately compensated in damages in an action at law. Accordingly, Executive acknowledges that the Company (and as applicable, one or more of its subsidiaries) shall be entitled to seek injunctive relief or any other equitable remedy against Executive in the event of a breach or threatened breach of Sections 5, 6 or 7 of this Agreement. The rights and remedies of Executive and Company are cumulative and shall not be exclusive, and Executive and Company shall be entitled to pursue all legal and equitable rights and remedies and to secure performance of the obligations and duties of the other under this Agreement, and the enforcement of one or more of such rights and remedies by Executive or Company shall in no way preclude Executive or Company from pursuing, at the same time or subsequently, any and all other rights and remedies available to Executive or Company.

9.13 Notices. Any notice, request, consent or approval required or permitted to be given under this Agreement or pursuant to law shall be sufficient if in writing, and if and when sent by certified or registered mail, return receipt requested, with postage prepaid, or by overnight courier, to Executive’s residence, or to the Company’s principal executive office, attention: Chairman of the Compensation Committee of the Board of Directors with a copy (which shall not constitute notice) to: Fredrikson & Byron, P.A., 200 South Sixth Street, Suite 4000, Minneapolis, MN 55402, Attention: Christopher J. Melsha, as the case may be. All such notices, requests, consents and approvals shall be effective upon being deposited in the United States mail. However, the time period in which a response thereto must be given shall commence to run from the date of receipt on the return receipt of the notice, request, consent or approval by the addressee thereof. Rejection or other refusal to accept, or the inability to deliver because of changed address of which no notice was given as provided herein, shall be deemed to be receipt of the notice, request, consent or approval sent.

9.14 Assistance in Proceedings, Etc. Executive shall, without additional compensation during the Term and with complete reimbursement of expenses after the expiration of the Term, upon reasonable notice, furnish such information and proper assistance to the Company as may reasonably be required by the Company in connection with any legal or quasi-legal proceeding, including any external or internal investigation, involving the Company or any of its subsidiaries or in which any of them is, or may become, a party.

9.15 Survival. Cessation or termination of Executive’s employment with the Company shall not result in termination of this Agreement. To the extent that any of the obligations of this Agreement constitute continuing obligations, they shall survive any termination or expiration of this Agreement or of Executive’s employment hereunder.

[Signaturepage follows]

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IN WITNESS WHEREOF, each of the parties hereto has duly executed this Agreement as of August 23, 2020, to be deemed effective as of the date first written above.

EMPLOYER
NEPHROS, INC.
By: /s/ Oliver Spandow
Name: Oliver<br> Spandow
Title: Chairman<br> of the Compensation Committee of the Board of Directors
EXECUTIVE
---
/s/ Andrew Astor
Andrew<br> Astor

SignaturePage to Employment Agreement

Exhibit 10.2

CONSULTING AGREEMENT

This Consulting Agreement (this “Agreement”), entered into as of August 24, 2020 and effective as of August 24, 2020 (the “Effective Date”) is by and between Nephros, Inc., a Delaware Corporation (“Nephros”) and Daron G. Evans (“Consultant”).

WHEREAS, Nephros desires to engage Consultant as a consultant under the terms and conditions of this Agreement, and Consultant desires to be engaged by Nephros in such capacity:

NOW THEREFORE, in consideration of the mutual covenants and promises contained herein and other good and valuable consideration, the receipt and adequacy of which is hereby acknowledged, and intending to be legally bound hereby, the parties hereto agree as follows:

  1. Services. The nature of the services to be performed by Consultant and the deliverables to be provided (collectively, the “Services”), as well as the timing, cost, and payment schedule, shall be as specifically set forth in Schedule A.

  2. Term. The initial term of this Agreement shall commence on the Effective Date and continue in full force and effect through August 31, 2021 (as may be renewed, the “Term”) unless earlier terminated pursuant to Section 3. Prior to the expiration of the Term, this Agreement may be renewed under the same terms and conditions only by the mutual written agreement of Nephros and Consultant.

  3. Termination. Nephros may terminate this Agreement at any time upon written notice to Consultant. Consultant may terminate this Agreement at any time upon ten (10) days’ written notice to Nephros. Upon the effective date of the termination or expiration of this Agreement, Consultant shall immediately cease all Services, deliver to Nephros all work in progress and return all Confidential Information (as defined below). Nephros’s sole obligation to Consultant upon termination of this Agreement shall be to pay Consultant, subject to Section 4, any monies due for satisfactory work actually performed and reasonable expenses actually incurred (with the prior written authorization of Nephros) prior to the effective date of such termination. Any excess amounts previously paid shall be promptly refunded to Nephros.

  4. Fees. Nephros shall pay Consultant the fees and other amounts for the Services actually performed by Consultant, and related expenses, in each case as set forth on Schedule A. Payments by Nephros shall exclude all sales, use, value added or other similar taxes or duties payable in connection with the Services, any and all of which shall be the sole responsibility of Consultant.

  5. Conflicts. If any potential conflicts arise with any of Consultant’s other current or future clients, Consultant will promptly disclose this to Nephros in writing, and the parties will address how to proceed.

  6. Representations, Warranties and Covenants.

(a) Each of Nephros and Consultant represents and warrants that: (i) such party has full power and authority to enter into this Agreement; and (ii) the execution, delivery and performance of this Agreement do not and will not (A) require the consent, license, permit, waiver, approval, authorization or other action of, by or with respect to, or registration, declaration or filing with, any court or governmental authority, department, commission, board, bureau, agency or instrumentality, domestic or foreign, or any other person or entity, which has not yet been obtained or (B) violate or conflict with any law or any agreement entered into by it.

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(b) Consultant shall comply with all applicable state, federal and local laws and executive orders and regulations in the performance of this Agreement. Consultant shall notify Nephros immediately if the Consultant’s work becomes the subject of a government audit or investigation. Consultant represents that the Consultant has not been indicted or convicted of fraud or any other felony arising out of a contract with the federal government.

(c) Consultant will not engage in any activity, which represents a conflict of interest, or the appearance of a conflict of interest, in the performance of this Agreement. Consultant represents and warrants that it has read, understands and will comply with FAR 9.5 “Organizational and Consultant Conflicts of Interest.” Consultant will immediately advise Nephros in writing prior to divulging any information that may violate this regulation.

  1. Indemnification. Consultant shall indemnify and hold harmless Nephros and its affiliates, and its and their respective directors, officers, managers, agents and employees against any and all losses, claims, damages, liabilities, obligations, penalties, judgments, awards; costs; expenses and disbursements (and any and all actions, suits, proceedings and investigations in respect thereof and any and all legal and other costs, expenses or disbursement in giving testimony or furnishing documents in response to a subpoena or otherwise), including; without limitation, the costs, expenses and disbursements, as and when incurred, of investigating, preparing or defending any such action, suit, proceeding or investigation (whether or not in connection with litigation in which Nephros is a party), directly or indirectly, caused by, relating to, based upon or arising out of or in connection with: (i) any material breach of this Agreement by Consultant; (ii) any willful misconduct or gross negligence by Consultant under this Agreement; or (iii) any act by Consultant in connection with Consultant’s engagement with Nephros that is outside the scope of Consultant’s authority hereunder.

  2. Confidentiality.

(a) Consultant acknowledges and agrees that Consultant has or will have access to information concerning the technical, business and financial activities of Nephros and to information provided by Nephros regarding third parties. Such information, together with all information relating to the Services, whether documentary, oral, written, graphic or electronic form, or by way of demonstrations or models, whether acquired by Consultant before or after the Effective Date, shall be deemed to be and referred to as “Confidential Information”. Consultant agrees that as between Consultant and Nephros, all Confidential Information, patents and other rights in connection therewith shall be the sole property of Nephros. Consultant agrees to: (i) to hold in strict confidence and not disclose Confidential Information or any information derived therefrom to any third party, except as approved in writing by Nephros; (ii) to use the Confidential Information for no purpose other than for performing Consultant’s duties hereunder and in the best interests of Nephros; and (iii) not to copy, reverse engineer, reverse compile or attempt to derive the composition or underlying information, structure or underlying information, structure, or ideas of any Confidential Information. Upon the expiration or termination of this Agreement, Consultant will promptly deliver to Nephros all documents, notes and materials of any nature pertaining to Consultant’s work with Nephros, and Consultant will not keep any documents or materials or copies thereof containing any Confidential Information. Consultant shall immediately notify Nephros upon discovery of any loss or unauthorized disclosure of the Confidential Information.

(b) Consultant acknowledges that any violation of this Section 8 will cause Nephros immediate and irreparable harm which monetary damages cannot adequately remedy. Therefore, upon any actual or impending violation of the provisions contained in this Section, Consultant consents to the issuance by any court of competent jurisdiction of a restraining order or other injunction, without bond, restraining or enjoining such violation by Consultant. Consultant understands and acknowledges that such relief is additional to and does not limit the availability to the other party of any other remedy.

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  1. Assignment of Rights. Consultant hereby assigns and agrees to assign to Nephros all of Consultant’s rights to any work papers, reports, documentation, drawings, photographs, negatives, tapes and masters therefore, prototypes and other materials (hereinafter, “Items”), including without limitation any and all such Items generated and maintained on any form of electronic media, generated by Consultant while engaged by Nephros, whether in the course of Consultant’s engagement, with the use of Nephros’s time, material or facilities, or in any way within or related to the existing or contemplated scope of Nephros’s business. Consultant also assigns and agrees to assign to Nephros all of Consultant’s rights to any discoveries, inventions and improvements (hereinafter “Inventions”), whether patentable or not, made, conceived or suggested, either alone or jointly with others, by Consultant while engaged by Nephros, whether in the course of Consultant’s engagement, with the use of Nephros’s time, material or facilities, or in any way within or related to the existing or contemplated scope of Nephros’s business. Any Item or Invention directly derivative of Nephros’s planned or existing products or services, developed or under development during Consultant’s engagement and made, conceived or suggested by Consultant, either alone or jointly with others, within one (1) year following termination of Consultant’s engagement under this Agreement or any successor agreements shall be irrebuttably presumed to have been made, conceived or suggested in the course of Consultant’s engagement and with the use of Nephros’s time, materials or facilities.

  2. Insider Trading, Etc. Consultant recognizes that in the course of Consultant’s duties hereunder, Consultant may receive from Nephros or others information which may be considered “material, non-public information” concerning a public company that is subject to the reporting requirements of the Securities and Exchange Act of 1934, as amended. Consultant agrees that Consultant will not, without prior written consent of Nephros, perform any of the following:

(a) purchase, trade, offer, pledge, sell, contract to sell or to purchase or “short” or “short against the box” (as such terms are generally understood in the securities markets), or otherwise dispose of or acquire any securities of the Company or options or other derivative securities in respect of such securities while in possession of relevant material, non-public information received from the Company or others in connection herewith;

(b) provide Nephros with information with respect to any public company that may be considered material, non-public information; and

(c) provide any person with material, non-public information, received from Nephros, including any relative, associate, or other individual who intends to, or may: (i) trade securities with respect to Nephros which is the subject of such information; or (ii) otherwise directly or indirectly benefit from such information.

  1. Disclosure. Neither Consultant nor any person or entity acting on behalf of the Consultant shall issue any press releases or any other public statements with respect to this Agreement, the terms hereof or any of the transactions contemplated hereby.

  2. Governing Law; Venue. This Agreement shall be governed by the laws of the State of New Jersey applicable to contracts entered into and to be performed within New Jersey. The parties hereto hereby irrevocably and unconditionally consent to the exclusive jurisdiction of the federal and state Courts located in State of New Jersey for any action, suit or proceeding arising out of or related hereto. Each of the parties agrees not to commence any legal proceeding related hereto except in such Courts. Each of the parties irrevocably waives any objection which it may now or hereafter have to the laying of the venue of any such proceeding in any such Courts and hereby further irrevocably and unconditionally waives and agrees not to plead or claim in any such Courts that any such action, suit or proceeding brought in any such Court has been brought in an inconvenient forum. Each of the parties irrevocably waives any right it may have to a trial by jury in any such action, suit or proceeding.

    3

  3. Independent Contractor. Consultant is acting solely and an independent contractor hereunder and has no authority to bind, represent, obligate or act on behalf of Nephros. Consultant shall not be entitled to any benefits afforded by Nephros to its employees or to workers’ compensation or similar benefits or insurance protection. Consultant, as an independent contractor, shall determine the method, details, and means of performing any services furnished pursuant to this Agreement, but the Services contemplated herein shall meet the approval of Nephros, and be subject to the right of inspection for Nephros to secure satisfactory completion thereof.

  4. Taxes, Etc. Consultant agrees that Consultant is solely responsible for paying when due all income taxes, including estimated taxes, payroll taxes, insurance and other taxes incurred as a result of or in connection with the compensation paid by Nephros to Consultant for services rendered under this Agreement and no income or employment tax withholdings will be deducted from such payments. Consultant hereby indemnifies, and undertakes to defend and hold Nephros free and harmless from and against any demands or claims for any taxes, interest or penalties assessed by any taxing authority with respect to sums paid to Consultant pursuant to this Agreement.

  5. No Assignment. Consultant shall not subcontract, delegate or assign this Agreement or any portion thereof. This Agreement shall inure to the benefit of and be binding on Nephros, Consultant and their respective permitted successors and assigns.

  6. Notices. All notices required or permitted to be given under this letter will be deemed sufficiently and validly made if given by certified mail, postage prepaid, return receipt requested, or by international overnight carrier or by fax or email, and addressed to the following individuals:

As to Nephros: Nephros, Inc.
380 Lackawanna Place
South Orange, NJ 07079
Attention: Andy Astor, CEO
(201) 345-0824
andy@nephros.com
As to Consultant: Daron G. Evans
[Omitted]

  1. Severability. If any provision of this Agreement is held to be invalid or unenforceable in any respect, the validity and enforceability of the remaining terms and provisions of this Agreement shall not in any way be affected or impaired thereby and the parties will attempt to agree upon a valid and enforceable provision that is a reasonable substitute therefor, and upon so agreeing, shall incorporate such substitute provision in this Agreement.

  2. Entire Agreement. This Agreement sets forth all the terms and conditions of the agreement between the parties with respect to its subject matter, and supersedes any and all prior oral or written understandings, arrangements and agreements with respect thereto, all of which are merged herein. Consultant’s services are personal in nature, and Consultant may not assign its rights or delegate its obligations hereunder, in whole or in part, without the prior written consent of Nephros in each instance, which consent may be withheld in Nephros’s sole and absolute discretion. Consultant’s obligations under this provision shall survive the expiration or termination of this Agreement.

    4

  3. Amendments. No amendments to or modifications of or waivers under this Agreement shall be valid or binding unless made in a writing signed by both parties and expressly stating that it, he/she or they, as the case may be, intend to amend or modify, or waive a right under, this Agreement.

  4. Counterparts. This Agreement may be signed in one or more counterparts (whether original, facsimile or electronic copies), each of which when executed and delivered will constitute an original, but all of which will constitute one and the same agreement.

  5. Survival. Sections 7 through 20 inclusive, as well as any other terms of this Agreement that expressly extend or by their nature should extend beyond termination or expiration of this Agreement, shall survive and continue in full force and effect after any expiration or earlier termination of this Agreement.

IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed and delivered as of the date first written above.

Nephros, Inc.
By: /s/ Andrew Astor By: /s/ Daron Evans
Andy<br> Astor, CEO Daron<br> Evans, Consultant
Nephros,<br> Inc. 
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Schedule A

Statement of Services

Fees and Expenses

  1. Services. Consultant’s services shall include, without limitation, the following activities:
a. Expert consulting on both the science and commercialization of Nephros’s pathogen detection systems products, including but not limited to PluraPath, SequaPath, and DialyPath;
b. Expert consulting on both the science and commercialization of other Nephros businesses, including but not limited to its water filtration business; and
c. Other expert consulting as requested.
  1. Fees and Expenses. Nephros shall compensate Consultant for services rendered pursuant to this Agreement as follows:

2.1 Fees. Nephros shall pay Consultant a retainer for work performed at the rate of $8,333.33 per month. Consultant agrees to be available to provide services under this Agreement as needed. Nephros will pay fees to consultant on a monthly basis.

2.2 Expense Reimbursements. Nephros agrees to reimburse Consultant for pre-approved reasonable business expenses incurred by Consultant in performing the Services as approved by Nephros in writing. No expenses shall be reimbursed without proper documentation.

Exhibit10.3

CONSULTINGAGREEMENT

This Consulting Agreement (this “Agreement”), entered into as of August 26, 2020 and effective as of August 24, 2020 (the “Effective Date”) is by and between Specialty Renal Products, Inc., a Delaware Corporation (“SRP”) and Daron G. Evans (“Consultant”).

WHEREAS, SRP desires to engage Consultant as a consultant under the terms and conditions of this Agreement, and Consultant desires to be engaged by SRP in such capacity:

NOW THEREFORE, in consideration of the mutual covenants and promises contained herein and other good and valuable consideration, the receipt and adequacy of which is hereby acknowledged, and intending to be legally bound hereby, the parties hereto agree as follows:

1. Services. The nature of the services to be performed by Consultant and the deliverables to be provided (collectively, the “Services”), as well as the timing, cost, and payment schedule, shall be as specifically set forth in Schedule A.

2. Term. The initial term of this Agreement shall commence on the Effective Date and continue in full force and effect through August 31, 2021 (as may be renewed, the “Term”) unless earlier terminated pursuant to Section 3. Prior to the expiration of the Term, this Agreement may be renewed under the same terms and conditions only by the mutual written agreement of SRP and Consultant.

3. Termination. SRP may terminate this Agreement at any time upon written notice to Consultant. Consultant may terminate this Agreement at any time upon ten (10) days’ written notice to SRP. Upon the effective date of the termination or expiration of this Agreement, Consultant shall immediately cease all Services, deliver to SRP all work in progress and return all Confidential Information (as defined below). SRP’s sole obligation to Consultant upon termination of this Agreement shall be to pay Consultant, subject to Section 4, any monies due for satisfactory work actually performed and reasonable expenses actually incurred (with the prior written authorization of SRP) prior to the effective date of such termination. Any excess amounts previously paid shall be promptly refunded to SRP.

4. Fees. SRP shall pay Consultant the fees and other amounts for the Services actually performed by Consultant, and related expenses, in each case as set forth on Schedule A. Payments by SRP shall exclude all sales, use, value added or other similar taxes or duties payable in connection with the Services, any and all of which shall be the sole responsibility of Consultant.

5. Conflicts. If any potential conflicts arise with any of Consultant’s other current or future clients, Consultant will promptly disclose this to SRP in writing, and the parties will address how to proceed.

6. Representations, Warranties and Covenants.

(a) Each of SRP and Consultant represents and warrants that: (i) such party has full power and authority to enter into this Agreement; and (ii) the execution, delivery and performance of this Agreement do not and will not (A) require the consent, license, permit, waiver, approval, authorization or other action of, by or with respect to, or registration, declaration or filing with, any court or governmental authority, department, commission, board, bureau, agency or instrumentality, domestic or foreign, or any other person or entity, which has not yet been obtained or (B) violate or conflict with any law or any agreement entered into by it.

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(b) Consultant shall comply with all applicable state, federal and local laws and executive orders and regulations in the performance of this Agreement. Consultant shall notify SRP immediately if the Consultant’s work becomes the subject of a government audit or investigation. Consultant represents that the Consultant has not been indicted or convicted of fraud or any other felony arising out of a contract with the federal government.

(c) Consultant will not engage in any activity, which represents a conflict of interest, or the appearance of a conflict of interest, in the performance of this Agreement. Consultant represents and warrants that it has read, understands and will comply with FAR 9.5 “Organizational and Consultant Conflicts of Interest.” Consultant will immediately advise SRP in writing prior to divulging any information that may violate this regulation.

7. Indemnification. Consultant shall indemnify and hold harmless SRP and its affiliates, and its and their respective directors, officers, managers, agents and employees against any and all losses, claims, damages, liabilities, obligations, penalties, judgments, awards; costs; expenses and disbursements (and any and all actions, suits, proceedings and investigations in respect thereof and any and all legal and other costs, expenses or disbursement in giving testimony or furnishing documents in response to a subpoena or otherwise), including; without limitation, the costs, expenses and disbursements, as and when incurred, of investigating, preparing or defending any such action, suit, proceeding or investigation (whether or not in connection with litigation in which SRP is a party), directly or indirectly, caused by, relating to, based upon or arising out of or in connection with: (i) any material breach of this Agreement by Consultant; (ii) any willful misconduct or gross negligence by Consultant under this Agreement; or (iii) any act by Consultant in connection with Consultant’s engagement with SRP that is outside the scope of Consultant’s authority hereunder.

8. Confidentiality.

(a) Consultant acknowledges and agrees that Consultant has or will have access to information concerning the technical, business and financial activities of SRP and to information provided by SRP regarding third parties. Such information, together with all information relating to the Services, whether documentary, oral, written, graphic or electronic form, or by way of demonstrations or models, whether acquired by Consultant before or after the Effective Date, shall be deemed to be and referred to as “Confidential Information”. Consultant agrees that as between Consultant and SRP, all Confidential Information, patents and other rights in connection therewith shall be the sole property of SRP. Consultant agrees to: (i) to hold in strict confidence and not disclose Confidential Information or any information derived therefrom to any third party, except as approved in writing by SRP; (ii) to use the Confidential Information for no purpose other than for performing Consultant’s duties hereunder and in the best interests of SRP; and (iii) not to copy, reverse engineer, reverse compile or attempt to derive the composition or underlying information, structure or underlying information, structure, or ideas of any Confidential Information. Upon the expiration or termination of this Agreement, Consultant will promptly deliver to SRP all documents, notes and materials of any nature pertaining to Consultant’s work with SRP, and Consultant will not keep any documents or materials or copies thereof containing any Confidential Information. Consultant shall immediately notify SRP upon discovery of any loss or unauthorized disclosure of the Confidential Information.

(b) Consultant acknowledges that any violation of this Section 8 will cause SRP immediate and irreparable harm which monetary damages cannot adequately remedy. Therefore, upon any actual or impending violation of the provisions contained in this Section, Consultant consents to the issuance by any court of competent jurisdiction of a restraining order or other injunction, without bond, restraining or enjoining such violation by Consultant. Consultant understands and acknowledges that such relief is additional to and does not limit the availability to the other party of any other remedy.

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9. Assignment of Rights. Consultant hereby assigns and agrees to assign to SRP all of Consultant’s rights to any work papers, reports, documentation, drawings, photographs, negatives, tapes and masters therefore, prototypes and other materials (hereinafter, “Items”), including without limitation any and all such Items generated and maintained on any form of electronic media, generated by Consultant while engaged by SRP, whether in the course of Consultant’s engagement, with the use of SRP’s time, material or facilities, or in any way within or related to the existing or contemplated scope of SRP’s business. Consultant also assigns and agrees to assign to SRP all of Consultant’s rights to any discoveries, inventions and improvements (hereinafter “Inventions”), whether patentable or not, made, conceived or suggested, either alone or jointly with others, by Consultant while engaged by SRP, whether in the course of Consultant’s engagement, with the use of SRP’s time, material or facilities, or in any way within or related to the existing or contemplated scope of SRP’s business. Any Item or Invention directly derivative of SRP’s planned or existing products or services, developed or under development during Consultant’s engagement and made, conceived or suggested by Consultant, either alone or jointly with others, within one (1) year following termination of Consultant’s engagement under this Agreement or any successor agreements shall be irrebuttably presumed to have been made, conceived or suggested in the course of Consultant’s engagement and with the use of SRP’s time, materials or facilities.

10. Insider Trading, Etc. Consultant recognizes that in the course of Consultant’s duties hereunder, Consultant may receive from SRP or others information which may be considered “material, non-public information” concerning a public company that is subject to the reporting requirements of the Securities and Exchange Act of 1934, as amended. Consultant agrees that Consultant will not, without prior written consent of SRP, perform any of the following:

(a) purchase, trade, offer, pledge, sell, contract to sell or to purchase or “short” or “short against the box” (as such terms are generally understood in the securities markets), or otherwise dispose of or acquire any securities of the Company or options or other derivative securities in respect of such securities while in possession of relevant material, non-public information received from the Company or others in connection herewith;

(b) provide SRP with information with respect to any public company that may be considered material, non-public information; and

(c) provide any person with material, non-public information, received from SRP, including any relative, associate, or other individual who intends to, or may: (i) trade securities with respect to SRP which is the subject of such information; or (ii) otherwise directly or indirectly benefit from such information.

11. Disclosure. Neither Consultant nor any person or entity acting on behalf of the Consultant shall issue any press releases or any other public statements with respect to this Agreement, the terms hereof or any of the transactions contemplated hereby.

12. Governing Law; Venue. This Agreement shall be governed by the laws of the State of New Jersey applicable to contracts entered into and to be performed within New Jersey. The parties hereto hereby irrevocably and unconditionally consent to the exclusive jurisdiction of the federal and state Courts located in State of New Jersey for any action, suit or proceeding arising out of or related hereto. Each of the parties agrees not to commence any legal proceeding related hereto except in such Courts. Each of the parties irrevocably waives any objection which it may now or hereafter have to the laying of the venue of any such proceeding in any such Courts and hereby further irrevocably and unconditionally waives and agrees not to plead or claim in any such Courts that any such action, suit or proceeding brought in any such Court has been brought in an inconvenient forum. Each of the parties irrevocably waives any right it may have to a trial by jury in any such action, suit or proceeding.

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13. Independent Contractor. Consultant is acting solely and an independent contractor hereunder and has no authority to bind, represent, obligate or act on behalf of SRP. Consultant shall not be entitled to any benefits afforded by SRP to its employees or to workers’ compensation or similar benefits or insurance protection. Consultant, as an independent contractor, shall determine the method, details, and means of performing any services furnished pursuant to this Agreement, but the Services contemplated herein shall meet the approval of SRP, and be subject to the right of inspection for SRP to secure satisfactory completion thereof.

14. Taxes, Etc. Consultant agrees that Consultant is solely responsible for paying when due all income taxes, including estimated taxes, payroll taxes, insurance and other taxes incurred as a result of or in connection with the compensation paid by SRP to Consultant for services rendered under this Agreement and no income or employment tax withholdings will be deducted from such payments. Consultant hereby indemnifies, and undertakes to defend and hold SRP free and harmless from and against any demands or claims for any taxes, interest or penalties assessed by any taxing authority with respect to sums paid to Consultant pursuant to this Agreement.

15. No Assignment. Consultant shall not subcontract, delegate or assign this Agreement or any portion thereof. This Agreement shall inure to the benefit of and be binding on SRP, Consultant and their respective permitted successors and assigns.

16. Notices. All notices required or permitted to be given under this letter will be deemed sufficiently and validly made if given by certified mail, postage prepaid, return receipt requested, or by international overnight carrier or by fax or email, and addressed to the following individuals:

As<br> to SRP: Specialty<br> Renal Products, Inc.
c/o<br> Wexford Capital LP
677<br> Washington Boulevard
Stamford,<br> CT 06901
Attention:<br> Paul A. Mieyal, Director
(203)<br> 862-7051
pmieyal@wexford.com
As<br> to Consultant: Daron<br> G. Evans
[Omitted]

17. Severability. If any provision of this Agreement is held to be invalid or unenforceable in any respect, the validity and enforceability of the remaining terms and provisions of this Agreement shall not in any way be affected or impaired thereby and the parties will attempt to agree upon a valid and enforceable provision that is a reasonable substitute therefor, and upon so agreeing, shall incorporate such substitute provision in this Agreement.

18. Entire Agreement. This Agreement sets forth all the terms and conditions of the agreement between the parties with respect to its subject matter, and supersedes any and all prior oral or written understandings, arrangements and agreements with respect thereto, all of which are merged herein. Consultant’s services are personal in nature, and Consultant may not assign its rights or delegate its obligations hereunder, in whole or in part, without the prior written consent of SRP in each instance, which consent may be withheld in SRP’s sole and absolute discretion. Consultant’s obligations under this provision shall survive the expiration or termination of this Agreement.

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19. Amendments. No amendments to or modifications of or waivers under this Agreement shall be valid or binding unless made in a writing signed by both parties and expressly stating that it, he/she or they, as the case may be, intend to amend or modify, or waive a right under, this Agreement.

20. Counterparts. This Agreement may be signed in one or more counterparts (whether original, facsimile or electronic copies), each of which when executed and delivered will constitute an original, but all of which will constitute one and the same agreement.

21. Survival. Sections 7 through 20 inclusive, as well as any other terms of this Agreement that expressly extend or by their nature should extend beyond termination or expiration of this Agreement, shall survive and continue in full force and effect after any expiration or earlier termination of this Agreement.

INWITNESS WHEREOF, the parties have caused this Agreement to be duly executed and delivered as of the date first written above.

Specialty Renal Products, Inc.
By: /s/ Paul A. Mieyal By: /s/ Daron Evans
Paul<br>A. Mieyal, Director Daron<br>Evans, Consultant
Specialty<br>Renal Products, Inc. 
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ScheduleA

Statementof Services

Feesand Expenses

Services. Consultant’s services shall include, without limitation, the following activities:

a. Expert<br> consulting on both the science and commercialization of SRP’s hemodiafiltration (HDF) products, and;
b. Other<br> expert consulting as requested.

Fees and Expenses. SRP shall compensate Consultant for services rendered pursuant to this Agreement as follows:

2.1 Fees. SRP shall pay Consultant a retainer for work performed at the rate of $8,333.33 per month. Consultant agrees to be available to provide services under this Agreement as needed. SRP will pay fees to consultant on a monthly basis.

2.2 Expense Reimbursements. SRP agrees to reimburse Consultant for pre-approved reasonable business expenses incurred by Consultant in performing the Services as approved by SRP in writing. No expenses shall be reimbursed without proper documentation.

Exhibit31.1

CERTIFICATIONOF CHIEF FINANCIAL OFFICER

UNDERSECTION 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:<br> November 5, 2020 By: /s/ Andrew Astor
Name: Andrew<br> Astor
Title: Chief<br> Executive Officer and Chief Financial Officer (Principal Financial and Accounting Officer)

Exhibit32.1

CertificationPursuant 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 September 30, 2020 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<br> Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. the<br> information contained in the Report fairly presents, in all material respects, the financial condition and results of operations<br> of the Company.
By: /s/ Andrew Astor
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Name: Andrew<br> Astor
Title: Chief<br> Executive Officer and Chief Financial Officer<br><br> <br>(Principal<br> Financial and Accounting Officer)
Dated:<br> November 5, 2020

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