# Nephros Inc: Form 10-Q for the period ended Mar 31, 2023

- Company: [Nephros Inc](/companies/neph.md) (CIK 1196298)
- Form: 10-Q
- Filed: 2023-05-10
- Accepted by EDGAR: May 10, 2023, 16:07 ET
- Period: 2023-03-31
- Accession: 0001493152-23-016161
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1196298/000149315223016161/form10-q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1196298/000149315223016161/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2023-01-01 to 2023-03-31 | $3.7m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2023-01-01 to 2023-03-31 | $1.6m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2023-01-01 to 2023-03-31 | $2.1m | us-gaap:GrossProfit |
| Research and development | 3 months, 2023-01-01 to 2023-03-31 | $239.0k | us-gaap:ResearchAndDevelopmentExpense |
| Selling, general and administrative | 3 months, 2023-01-01 to 2023-03-31 | $2.1m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2023-01-01 to 2023-03-31 | −$306.0k | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2023-01-01 to 2023-03-31 | $1.0k | us-gaap:InterestExpense |
| Income tax | 3 months, 2023-01-01 to 2023-03-31 | $0 | us-gaap:IncomeTaxExpenseBenefit |
| Basic EPS | 3 months, 2023-01-01 to 2023-03-31 | −$0.03 | us-gaap:EarningsPerShareBasic |
| Operating cash flow | 3 months, 2023-01-01 to 2023-03-31 | $276.0k | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Cash and equivalents | at 2023-03-31 | $3.8m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2023-03-31 | $8.3m | us-gaap:AssetsCurrent |
| Total assets | at 2023-03-31 | $10.9m | us-gaap:Assets |
| Current liabilities | at 2023-03-31 | $1.4m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2023-03-31 | $2.0m | us-gaap:Liabilities |
| Shareholders' equity | at 2023-03-31 | $8.9m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 33,845 characters.

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

### Business Overview

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

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.

Our commercial water filters improve the taste and odor of water and reduce biofilm, cysts, particulates, and scale build-up in downstream equipment. Our products are marketed primarily to the food service, hospitality, convenience store, and health care markets, and also sold into medical institutions to supplement.

We also own a majority stake in Specialty Renal Products, Inc. (“SRP”), a development-stage medical device company that is focused primarily on developing hemodiafiltration (“HDF”) technology. On May 13, 2022, the FDA gave 510(k) clearance to SRP’s second-generation model of the OLpūrH2H Hemodiafiltration System, which enables nephrologists to provide HDF treatment to patients with end stage renal disease. In January 2023, SRP management began exploring strategic partnerships to support a commercial launch of the HDF product but was unsuccessful in identifying a partner. By late February 2023, SRP had nearly exhausted its capital resources. Due to its limited capital and lack of prospects for securing a strategic partnership or additional financing, the board of directors of SRP adopted a plan on March 6, 2023 to wind down SRP operations, liquidate its remaining assets and dissolve the company. That plan was approved by SRP’s stockholders on March 9, 2023, and on April 11, 2023, SRP filed a certificate of dissolution with the State of Delaware. We anticipate that SRP’s cash resources will be sufficient to satisfy all of its outstanding liabilities other than its obligations to us under a loan with an outstanding balance of approximately $1.5 million. Accordingly, we expect that SRP will assign all of its remaining assets, including its intellectual property rights in the HDF2 device, to us in partial satisfaction of its outstanding loan balance. Although we have no current plans to do so, we may re-evaluate opportunities for HDF in the future.

### Our Products

### Water Filtration 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 with limited sales staff expansion. In addition, while we are currently focused on medical markets, the VARs that support these customers also support a wide variety of commercial and industrial customers. We believe that our VAR relationships have and will continue to facilitate growth in filter sales outside of the medical industry.

In commercial markets, we develop and sell our filters, for which carbon-based absorption is the primary filtration mechanism. These 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. These commercial products are also sold into medical markets, as supplemental filtration to our medical filters.

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.

#### Target Markets

Our ultrafiltration products currently target the following markets:

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

*Hospitals and Other Healthcare Facilities.* 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.

As of 2022, according to the American Hospital Association, there are approximately 6,100 hospitals in the U.S., with approximately 921,000 beds. Over 33 million patients were admitted to these hospitals. The U.S. Centers for Disease Control and Prevention (“CDC”) estimates that healthcare associated infections (“HAI”) occur in approximately 1 out of every 31 hospital patients, which calculates to over one million patients in 2022. 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 January 2022, the Center for Clinical Standards and Quality at the Centers for Medicare and Medicaid Services (“CMS”) expanded its requirements – originally implemented in 2017 – for facilities to develop policies and procedures that inhibit the growth and spread of legionella and other opportunistic pathogens in building water systems. In this 2022 update, CMS requires teams to be assigned to the development of formal water management plans (“WMPs”), as well as detailed documentation regarding the development of the WMPs and their execution. CMS surveyors regularly review policies, procedures, and reports documenting water management implementation results to verify that facilities are compliant with these requirements. We believe that these CMS regulations may have a positive impact on the sale of our HAI-inhibiting ultrafilters.

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

- The DSU-H and SSU-H are in-line, 0.005-micron ultrafilters that provide dual- and single-stage protection, respectively, from waterborne pathogens. They are primarily used to filter potable water feeding ice machines, sinks, and medical equipment, such as endoscope washers and surgical room humidifiers. The DSU-H has an up to 6-month product life in a typical hospital setting, while the SSU-H has an up to 3-month product life.
- The S100 is a point-of-use, 0.01-micron microfilter that provides protection from waterborne pathogens. The S100 is primarily used to filter potable water feeding sinks and showers. The S100 has an up to 3-month product life when used in a hospital setting.
- The HydraGuardTM and HydraGuardTM - Flush are 0.005-micron cartridge ultrafilters that provide single-stage protection from waterborne pathogens. The HydraGuard ultrafilters are primarily used to filter potable water feeding ice machines and medical equipment, such as endoscope washers and surgical room humidifiers. The HydraGuard has an up to 6-month product 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, and point-of-use can be viewed on our website at https://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.

*Dialysis Centers - 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.

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 future.

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

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

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*Commercial and Industrial Facilities.* Our commercial NanoGuard® product line accomplishes ultrafiltration via small pore size (0.005 micron) technology, filtering bacteria and viruses from water. In addition, our commercial filtration offerings include technologies that are primarily focused on improving odor and taste and on reducing scale from filtered water. Our commercial market focus includes the hospitality and food and beverage markets, in which we partner with Donastar Enterprises LLC as our master distributor. We also sell commercial filters into medical and non-medical facilities through our other distribution partners.

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

Nephros commercial 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.

### Pathogen Detection Systems

In 2019, we expanded our portfolio of water solutions with the introduction of pathogen detection system (“PDS”) products and services, including our PluraPath pathogen detection system, which we developed to provide real-time data regarding the existence of a broad array of waterborne pathogens to the infection control teams responsible executing a building or other facility’s water management plans. In the third quarter of 2021, we acquired the business of GenArraytion, Inc. (“GenArraytion” ), including GenArraytion’s many proprietary assays, multiplexing technology, and selection methods for detecting waterborne pathogens and other microorganisms using Polymerase Chain Reaction technology. GenArraytion’s assets was integrated into our PDS segment. In November 2022, we sold substantially all of our assets used in our PDS business to BWSI, LLC pursuant to the terms of an Agreement for Purchase and Sale of Assets with BWSI (the “PDS Purchase Agreement”). Under the terms of the PDS Purchase Agreement, BWSI made a nominal cash payment at the closing of the transaction and assumed certain continuing liabilities of the PDS business. Additionally, for a period of seven years commencing January 1, 2023, and ending December 31, 2029, BWSI will pay us an annual royalty equal to a specified percentage of gross margin received by BWSI from each of the sale and licensing of products developed by the PDS Business.

### Hemodiafiltration (HDF) Systems and Specialty Renal Products, Inc.

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 daily, and typically takes 12-24 hours per treatment.

Our company was originally founded to develop and commercialize a hemodiafiltration (“HDF”) medical device. 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 demonstrate that HDF’s benefits, among other factors, include enhanced clearance of middle and large molecular weight toxins, improved patient survival, reduced incidence of dialysis-related amyloidosis, improved patient quality of life and reduced hospitalizations and overall length of stays.

Our original HDF device (“HDF1”) was cleared by the U.S. Food and Drug Administration (“FDA”) for the treatment of patients with chronic renal failure in 2012, but did not gain market acceptance due to, among other reasons, the feeling that it was too difficult to use. Accordingly, since 2018, we have undertaken to redesign and dramatically simplify our HDF device. We believe our updates have made the system significantly easier to use.

In 2018, we spun-off the development of the second-generation HDF device (“HDF2”) into SRP, a newly-formed subsidiary, and shortly thereafter SRP raised $3 million of outside equity capital directly to fund the second-generation development described above. After such financing, our ownership stake was reduced to 62.5%. In February 2022, SRP raised an additional $0.5 million of equity capital, including an investment by the Company of $0.3 million, which was sufficient to maintain our 62.5% ownership stake in SRP. In addition to the equity capital raised by SRP, in December 2020, we entered into a loan agreement with SRP under which we loaned $1.3 million to SRP. As of December 31, 2022, the outstanding balance of this loan, including accrued interest, was approximately $1.4 million.

In May 2022, the FDA cleared HDF2 for patient use, which enables nephrologists to provide HDF treatment to patients with end stage renal disease. To date, our and SRP’s HDF1 and HDF2 systems are the only HDF systems cleared by the FDA. Following FDA clearance of HDF2, SRP’s management began exploring strategic partnerships and/or potential additional sources of financing to support a commercial launch of the HDF2 device but has been unsuccessful in identifying any interested strategic partner or investor. By late February 2023, SRP had nearly exhausted its capital resources.

In March 2023, SRP’s board of directors and stockholders determined to wind down SRP operations and liquidate its remaining assets, due to capital constraints. We believe SRP’s remaining cash resources are sufficient to satisfy all of its outstanding liabilities other than its outstanding loan to us. Accordingly, we expect that SRP will assign all of its remaining assets, including its intellectual property rights in the HDF2 device, to us in partial satisfaction of its outstanding loan balance of approximately $1.5 million. Although we have no current plans to do so, we may re-evaluate opportunities for the HDF2 device in the future

### Critical Accounting Policies

For the three-month period ended March 31, 2023, 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, 2022.

### Recent Accounting 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 Consolidated Interim Financial Statements contained in Item 1 of Part I of this Quarterly Report on Form 10-Q, which is incorporated herein by reference.

### Results of Operations

#### Fluctuations in Operating Results

Our results of operations have fluctuated significantly from period to period in the past, including recently, 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 revenue growth rates, expense management, and maintaining positive operating cash flow. Due to these fluctuations, we believe that the period-to-period comparisons of our operating results are not a good indication of our future performance.

### Three Months Ended March 31, 2023 Compared to the Three Months Ended March 31, 2022

The following table sets forth our summarized, consolidated results of operations for the three months ended March 31, 2023 and 2022 (in thousands, except percentages):

|  | 2023 | 2022 | $ Increase (Decrease) | % Increase (Decrease) |
| --- | ---: | ---: | ---: | ---: |
| Total net revenues | $3,697 | $2,159 | $1,538 | 71% |
| Cost of goods sold | 1,586 | 1,106 | 480 | 43% |
| Gross margin | 2,111 | 1,053 | 1,058 | 101% |
| Gross margin % | 57% | 49% | - | 8% |
| Research and development expenses | 239 | 372 | (133) | (36)% |
| Depreciation and amortization expense | 54 | 51 | 3 | 6% |
| Selling, general and administrative expenses | 2,124 | 2,177 | (53) | (2)% |
| Operating loss from continuing operations | (306) | (1,547) | 1,241 | (80)% |
| Interest expense | (1) | (7) | (6) | (86)% |
| Interest income | 12 | 2 | 10 | 500% |
| Other expense, net | (11) | (9) | (2) | 22% |
| Net loss from continuing operations | (306) | (1,561) | 1,255 | (80)% |
| Net loss from discontinued operations | - | (406) | (406) | 100% |
| Net loss | (306) | (1,967) | 1,661 | (84)% |
| Less: Undeclared deemed dividend attributable to noncontrolling interest | - | (63) | (63) | 100% |
| Net loss attributable to Nephros, Inc. shareholders | $(306) | $(2,030) | $(1,724) | 85% |

The increase in net revenues of $1.5 million, or 71%, was driven by two factors. First, we invested in our sales organization, increasing medical sales headcount significantly and partnering with a master distributor for much of our commercial business. These investments generated approximately 40% growth in our core, programmatic business. Second, we received an unusually large emergency response order, which generated approximately $600,000 of additional, unexpected revenue.

#### Gross Profit Margin

Consolidated gross profit margin was approximately 57% for the three months ended March 31, 2023 compared to approximately 49% for the three months ended March 31, 2022. The increase of approximately 8%, reflecting a return to target gross margins of 55-60%, was driven by price increases implemented in the second and third quarters of 2022, reductions in shipping expenses, and improved inventory management.

#### Research and Development Expenses

Consolidated research and development expenses decreased approximately $133,000 due to the wind down of SRP and slightly decreased investment in water filter research and development.

#### Depreciation and Amortization Expense

Depreciation and amortization expenses were approximately $54,000 and $51,000, respectively, for the three months ended March 31, 2023 and 2022.

#### Selling, General and Administrative Expenses

Consolidated selling, general and administrative expenses decreased $53,000, or 2%, primarily due to broad-based expense management efforts.

#### Interest Expense

Interest expense was approximately $1,000 for the three months ended March 31, 2023. It is comprised primarily of interest on our secured note payable. Interest expense was approximately $7,000 for the three months ended March 31, 2022, comprised primarily of interest on our secured note payable.

#### Interest Income

Interest income was approximately $12,000 for the three months ended March 31, 2023 compared to approximately $2,000 for the three months ended March 31, 2022.

#### Other Income (Expense), net

Other expense was approximately $11,000 and $9,000 for the three months ended March 31, 2023 and March 31, 2022 primarily as a result of losses on foreign currency transactions.

### Liquidity and Capital Resources

The following table summarizes our liquidity and capital resources as of March 31, 2023 and December 31, 2022 and is intended to supplement the more detailed discussion that follows. The amounts stated are expressed in thousands.

| Liquidity and Capital Resources | March 31, 2023 | December 31, 2022 |
| --- | ---: | ---: |
| Cash and cash equivalents | $3,836 | $3,634 |
| Other current assets | 4,488 | 4,627 |
| Working capital | 6,909 | 6,849 |
| Stockholders’ equity | 8,894 | 8,881 |

As of March 31, 2023, we had an accumulated deficit of $143.1 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.

Based on cash that is available for our operations and projections of our future operations, as well as our significantly reduced cash burn rates over the past nine months, we believe that our cash balances will be sufficient to fund our current operating plan through at least the next 12 months from the date of issuance of the consolidated financial statements in this Quarterly Report on Form 10-Q. Additionally, our operating plans are designed to help control operating costs, to increase revenue, and to raise additional capital until such time as we generate sufficient cash flows to fund operations. If there were a decrease in the demand for our products due to either economic or competitive conditions, or if we are otherwise unable to achieve our plan or achieve our anticipated operating results, there could be a significant reduction in liquidity due to our possible inability to cut costs sufficiently. In such event, the Company may need to take further actions to reduce its discretionary expenditures, including further reducing headcount, reducing spending on R&D projects, and reducing other variable costs.

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

- revenue growth rates, and our ability to produce, market and sell our products effectively and efficiently.
- the costs involved in filing and enforcing patent claims and the status of competitive products; and
- the cost of litigation, including potential patent litigation and any other actual or threatened litigation.

We expect to put our current capital resources toward the development, marketing, and sales of our water filtration products and working capital purposes.

Net cash provided by operating activities was approximately $0.3 million for the three months ended March 31, 2023 compared to net cash used in operating activities of approximately $1.8 million for the three months ended March 31, 2022, an increase of $2.1 million due primarily to a decrease of $1.7 million in net loss as a result of increased revenue for the three months ended March 31, 2023 compared to 2022, increased gross margins, and decreased research and development costs. In addition, a reduction in inventory provided approximately $0.8 million in cash, which was partially offset by an increase in accounts receivable used approximately $0.7 million in cash, both as a result of the large increase in sales for the period.

The company had no investing activities for the three months ended March 31, 2023. Net cash used in investing activities was approximately $34,000, for the three months ended March 31, 2022, due to purchases of property and equipment.

Net cash used in financing activities was approximately $0.1 million for the three months ended March 31, 2023, primarily due to principal payments on debt. Net cash provided by financing activities was approximately $0.3 million for the three months ended March 31, 2022, primarily due to proceeds from the sale of subsidiary preferred shares to a noncontrolling interest of $0.2 million and proceeds from the exercise of warrants of $0.2 million partially offset by payments of $0.1 million on our secured note.

### Off-Balance Sheet Arrangements

We did not have any off-balance sheet arrangements as of March 31, 2023.

### Forward-Looking Statements

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

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- we face potential liability associated with the production, marketing and sale of our products, and the expense of defending against claims of product liability could materially deplete our assets and generate negative publicity, which could impair our reputation;
- to the extent our products or marketing materials are found to violate any provisions of the U.S. Food, Drug and Cosmetic Act (the “FDC Act”) or any other statutes or regulations, we could be subject to enforcement actions by the U.S. Food and Drug Administration (the “FDA”) or other governmental agencies;
- we may not be able to obtain funding when needed or on terms favorable to us in order to continue operation;
- we may not have sufficient capital to successfully implement our business plan;
- we may not be able to effectively market our products;
- we may not be able to sell our water filtration products at competitive prices or profitably;
- we may encounter problems with our suppliers, manufacturers, and distributors;
- we may encounter unanticipated internal control deficiencies or weaknesses or ineffective disclosure controls and procedures;
- we may not be able to obtain appropriate or necessary regulatory approvals to achieve our business plan;
- we may not be able to secure or enforce adequate legal protection, including patent protection, for our products;
- we may not be able to achieve sales growth in key geographic markets; and

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 U.S. Securities and Exchange Commission (the “SEC”), including our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 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.

## Controls and procedures

As filed, 1,672 characters.

### Evaluation of Disclosure Controls and Procedures

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

At the end of the period covered by this Quarterly Report on Form 10-Q, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, regarding the effectiveness of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this report were effective.

### Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during our most recent fiscal quarter that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 827 characters.

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 Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2022 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

Filed May 10, 2023.
Source: SEC EDGAR, the filing index for accession 0001493152-23-016161. Last ingested by Listed: Nov 5, 2026, 16:46 ET. No prices; not investment advice.