Delaware
(State
or Other Jurisdiction of
Incorporation
or Organization)
|
13-3971809
(I.R.S.
Employer Identification No.)
|
Title
Of Each Class
|
Name
Of Each Exchange On Which Registered
|
|
Common
Stock, $.001 par value per share
|
American
Stock Exchange
|
Class
|
Outstanding
at April 10, 2007
|
Common
Stock, $.001 par value
|
12,317,992
|
Item
1.
|
Description
of Business.
4
|
Item
2.
|
Description
of Property
20
|
Item
3.
|
Legal
Proceedings
20
|
Item
4.
|
Submission
of Matters to a Vote of Security
Holders.
20
|
Item
5.
|
Market
for Common Equity, Related Stockholder Matters and Small Business
Issuer
Purchases of Equity
Securities.
21
|
Item
6.
|
Management’s
Discussion and Analysis or Plan of
Operation
21
|
Item
7.
|
Financial
Statements.
F-1
|
|
Item
8.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial
Disclosure.
50
|
Item
8A.
|
Controls
and
Procedures.
50
|
Item
8B.
|
Other
Information.
50
|
Item
9.
|
Directors,
Executive Officers, Promoters, Control Persons and Corporate Governance;
Compliance with Section 16(a) of the Exchange
Act. 50
|
Item
10.
|
Executive
Compensation.
51
|
Item
11.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder
Matters.
51
|
Item
12.
|
Certain
Relationships and Related Transactions, and Director
Independence.
51
|
Item
13.
|
Exhibits.
51
|
Item
14.
|
Principal
Accountant Fees and
Services. 55
|
SIGNATURES
|
56
|
-
|
OLpūr
MDHDF
filter series (which we sell in various countries in Europe and currently
consists of our MD190 and MD220 diafilters) designed expressly for
HDF
therapy and employing our proprietary Mid-Dilution Diafiltration
technology;
|
-
|
OLpūr
H
2
H,
our add-on module designed to allow the most common types of hemodialysis
machines to be used for HDF therapy;
and
|
-
|
OLpūr
NS2000
system, our stand-alone HDF machine and associated filter
technology.
|
-
|
Peritoneal
Dialysis
,
or PD, uses the patient’s peritoneum, the membrane lining covering the
internal abdominal organs, as a filter by introducing injectable-grade
dialysate solution into the peritoneal cavity through a surgically
implanted catheter. After some period of time, the fluid is drained
and
replaced. PD is limited in use because the peritoneal cavity is subject
to
scarring with repeated episodes of inflammation of the peritoneal
membrane, reducing the effectiveness of this treatment approach.
With
time, a PD patient’s kidney function continues to deteriorate and
peritoneal toxin removal alone may become insufficient to provide
adequate
treatment. In such case the patient may switch to an extracorporeal
renal
replacement therapy such as hemodialysis or
hemodiafiltration.
|
-
|
Hemodialysis
uses
an artificial kidney machine to remove certain toxins and fluid
from the
patient’s blood while controlling external blood flow and monitoring
patient vital signs. Hemodialysis patients are connected to a dialysis
machine via a vascular access device. The hemodialysis process
occurs in a
dialyzer cartridge with a semi-permeable membrane which divides
the
dialyzer into two chambers: while the blood is circulated through
one
chamber, a premixed solution known as dialysate circulates through
the
other chamber. Toxins and excess fluid from the blood cross the
membrane
into the dialysate solution through a process known as
“diffusion.”
|
-
|
Hemodiafiltration,
or
HDF, in its basic form combines the principles of hemodialysis with
hemofiltration. Hemofiltration is a cleansing process without dialysate
solution where blood is passed through a semi-permeable membrane,
which
filters out solute particles. HDF uses dialysate solution with a
negative
pressure (similar to a vacuum effect) applied to the dialysate solution
to
draw additional toxins from the blood and across the membrane. This
process is known as “convection.” HDF thus combines diffusion with
convection, offering efficient removal of small solutes by diffusion,
with
improved removal of larger substances (i.e., middle molecules) by
convection.
|
-
|
With
pre-dilution, substitution fluid is added to the blood before the
blood
enters the dialyzer cartridge. In this process, the blood can be
over-diluted, and therefore more fluid can be drawn across the membrane.
This enhances removal of toxins by convection. However, because the
blood
is diluted before entering the device, it actually reduces the rate
of
removal by diffusion; the overall rate of removal, therefore, is
reduced
for small molecular weight toxins (such as urea) that rely primarily
on
diffusive transport.
|
-
|
With
post-dilution, substitution fluid is added to blood after the blood
has
exited the dialyzer cartridge. This is the currently preferred method
because the concentration gradient is maintained at a higher level,
thus
not impairing the rate of removal of small toxins by diffusion. The
disadvantage of this method, however, is that there is a limit in
the
amount of plasma water that can be filtered from the blood before
the
blood becomes too viscous, or thick. This limit is approximately
20% to
25% of the blood flow rate. This limit restricts the amount of convection,
and therefore limits the removal of middle and larger
molecules.
|
(1) |
the
DSU is, to our knowledge, the only water filter that provides the
user
with a simple sight verification that the filter is properly performing
its cleansing function due to our unique dual-stage architecture;
|
(2)
|
the
DSU filters finer contaminants than other filters of which we are
aware in
the water filtration marketplace;
|
(3)
|
the
DSU filters relatively large volumes of water before requiring
replacement; and
|
(4)
|
the
DSU continues to protect the user even if the flow is reduced by
contaminant volumes, because contaminants do not cross the filtration
medium.
|
Ÿ
|
continuing
our efforts to develop, have manufactured and sell products which,
when
compared to existing products, perform more efficiently and are available
at prices that are acceptable to the
market;
|
Ÿ
|
displaying
our products and providing associated literature at major industry
trade
shows in the United States, our Target European Market and
Asia;
|
Ÿ
|
initiating
discussions with dialysis clinic medical directors, as well as
representatives of dialysis clinical chains, to develop interest
in our
products;
|
Ÿ
|
offering
the OLpūr H
2
H
at a price that does not provide us with significant positive margins
in
order to encourage adoption of this product and associated demand
for our
dialyzers; and
|
Ÿ
|
pursuing
alliance opportunities in certain territories for distribution of
our
products and possible alternative manufacturing
facilities.
|
Ÿ
|
developing
and marketing products that are designed to meet critical and specific
customer needs more effectively than competitive
devices;
|
Ÿ
|
offering
unique attributes that illustrate our product reliability,
“user-friendliness,” and performance
capabilities;
|
Ÿ |
selling
products to specific customer groups where our unique product
attributes
are mission-critical;
and
|
Ÿ
|
pursuing
alliance opportunities for joint product development and
distribution.
|
Ÿ
|
Class
I devices are medical devices for which general controls are deemed
sufficient to ensure their safety and effectiveness. General controls
include provisions related to (1) labeling, (2) producer
registration, (3) defect notification, (4) records and reports and
(5)
quality service requirements, or
QSR.
|
Ÿ
|
Class
II devices are medical devices for which the general controls for
the
Class I devices are deemed not sufficient to ensure their safety
and
effectiveness and require special controls in addition to the general
controls. Special controls include provisions related to (1) performance
and design standards, (2) post-market surveillance, (3) patient registries
and (4) the use of FDA guidelines.
|
Ÿ
|
Class
III devices are the most regulated medical devices and are generally
limited to devices that support or sustain human life or are of
substantial importance in preventing impairment of human health or
present
a potential, unreasonable risk of illness or injury.
Pre-market
|
Ÿ
|
approval by the FDA is the required process of scientific review to ensure the safety and effectiveness of Class III devices. |
Ÿ
|
that
we will not need to reevaluate the applicability of the Section 510(k)
pre-market notification process to our ESRD therapy products in the
future;
|
Ÿ
|
that
the FDA will agree with our determination that we are eligible to
use the
Section 510(k) pre-market notification process;
or
|
Ÿ
|
that
the FDA will not in the future require us to submit a Section 515
pre-market approval application, which would be a more costly, lengthy
and
uncertain approval process.
|
Ÿ
|
our
inability to timely raise sufficient
funds;
|
Ÿ
|
the
FDA’s failure to schedule advisory review
panels;
|
Ÿ
|
changes
in established review guidelines;
|
Ÿ
|
changes
in regulations or administrative interpretations;
or
|
Ÿ
|
determinations
by the FDA that clinical data collected is insufficient to support
the
safety and effectiveness of one or more of our products for their
intended
uses or that the data warrants the continuation of clinical
studies.
|
Ÿ
|
the
design and manufacturing processes be regulated and controlled by
the use
of written procedures;
|
Ÿ
|
the
ability to produce medical devices which meet the manufacturer’s
specifications be validated by extensive and detailed testing of
every
aspect of the process;
|
Ÿ
|
any
deficiencies in the manufacturing process or in the products produced
be
investigated;
|
Ÿ
|
detailed
records be kept and a corrective and preventative action plan be
in place;
and
|
Ÿ |
manufacturing
facilities be subject to FDA inspection on a periodic basis to
monitor
compliance with QSR
regulations.
|
Ÿ
|
all
medical device manufacturers and distributors register with the FDA
annually and provide the FDA with a list of those medical devices
which
they distribute commercially;
|
Ÿ
|
information
be provided to the FDA on death or serious injuries alleged to have
been
associated with the use of the products, as well as product malfunctions
that would likely cause or contribute to death or serious injury
if the
malfunction were to recur; and
|
Ÿ
|
certain
medical devices not cleared with the FDA for marketing in the United
States meet specific requirements before they are
exported.
|
Quarter
Ended
|
High
|
Low
|
||
March
31, 2005
|
$5.90
|
$3.34
|
||
June
30, 2005
|
$4.15
|
$2.06
|
||
September
30, 2005
|
$3.75
|
$2.68
|
||
December
31, 2005
|
$3.13
|
$1.05
|
||
March
31, 2006
|
$3.15
|
$1.20
|
||
June
30, 2006
|
$2.45
|
$1.20
|
||
September
30, 2006
|
$1.86
|
$0.94
|
||
December
31, 2006
|
$1.50
|
$0.95
|
(1)
|
the
completion and success of additional clinical trials and of our regulatory
approval processes for each of our ESRD therapy products in our target
territories;
|
(2)
|
the
market acceptance of HDF therapy in the United States and of our
technologies and products in each of our target
markets;
|
(3)
|
our
ability to effectively and efficiently manufacture, market and distribute
our products;
|
(4)
|
our
ability to sell our products at competitive prices which exceed our
per
unit costs; and
|
(5)
|
the
consolidation of dialysis clinics into larger clinical
groups.
|
• |
the
market acceptance of our products, and our ability to effectively
and
efficiently produce and market our
products;
|
• |
the
availability of additional financing, through the sale of equity
securities or otherwise, on commercially reasonable terms or at
all;
|
• |
the
timing and costs associated with obtaining the Conformité Européene, or
CE, mark, which demonstrates compliance with the relevant European
Union
requirements and is a regulatory pre
requisite
for selling our ESRD therapy products in the European Union and
certain
other countries that recognize CE marking (for products other than
our
OLpūr MDHDF filter series, for which the CE mark was obtained in July
2003), or United States regulator
y
approval;
|
•
|
the
ability to maintain the listing of our common stock on the
AMEX;
|
• |
the
continued progress in and the costs of clinical studies and other
research
and development programs;
|
• |
the
costs involved in filing and enforcing patent claims and the status
of
competitive products; and
|
• |
the
cost of litigation, including potential patent litigation and any
other
actual or threatened litigation.
|
• |
for
the marketing and sales of our
products;
|
• |
to
complete certain clinical studies, obtain appropriate regulatory
approvals
and expand our research and development with respect to our ESRD
therapy
products;
|
• |
to
continue our ESRD therapy product
engineering;
|
• |
to
pursue business opportunities with respect to our DSU water-filtration
product;
|
• |
to
pay the Receiver of Lancer Offshore, Inc. amounts due under the settlement
with respect to the Ancillary Proceeding between us and the Receiver
(See
“Note 9—Commitments and Contingencies—Settlement Agreements” to the
Condensed Consolidated Financial Statements for a description of
the
settlement);
|
• |
to
pay a former supplier, Plexus Services Corp., amounts due under our
settlement agreement; and
|
• |
for
working capital purposes and for additional professional fees and
expenses
and other operating costs.
|
Payments
Due in Period
|
|||||||||||||||||||
Contractual
Obligations
|
Within
|
Years
|
Years
|
More
than
|
|||||||||||||||
Total
|
1
Year
|
1-3
|
3-5
|
5
Years
|
|||||||||||||||
Convertible
Notes (1)
|
|
|
$
|
7,290,229
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
7,290,229
|
|||||||
Leases
|
133,612
|
133,612
|
-
|
-
|
-
|
||||||||||||||
Employment
Contracts
|
567,075
|
424,163
|
142,912
|
-
|
|||||||||||||||
Total
|
$
|
7,990,916
|
$
|
557,775
|
$
|
142,912
|
$
|
-
|
$
|
7,290,229
|
|||||||||
(1)
Includes interest of $2,090,229.
|
Ÿ
|
the
market acceptance of our products, and our ability to effectively
and
efficiently produce and market our
products;
|
Ÿ
|
the
availability of additional financing, through the sale of equity
securities or otherwise, on commercially reasonable terms or at
all;
|
Ÿ
|
the
timing and costs associated with obtaining the Conformité Européene, or
CE, mark, which demonstrates compliance with the relevant
Europe
an
Union requirements and is a regulatory prerequisite for selling our
ESRD
therapy products in the European Union and certain other countries
that
recognize CE marking (for products other than our OLpūr MDHDF filter
series, for which the CE mark was obtai
ned
in July 2003 and our DSU for which the CE mark was obtained in November
2006), or United States regulatory approval;
|
Ÿ
|
the
continued progress in and the costs of clinical studies and other
research
and development programs;
|
Ÿ
|
the
costs associated with manufacturing
scale-up;
|
Ÿ
|
the
costs involved in filing and enforcing patent claims and the status
of
competitive products; and
|
Ÿ
|
the
cost of litigation, including potential patent litigation and actual,
current and threatened litigation
|
Ÿ
|
the
completion and success of additional clinical trials and of our regulatory
approval processes for each of our ESRD therapy products in our target
territories;
|
Ÿ
|
the
market acceptance of HDF therapy in the United States and of our
technologies and products in each of our target
markets;
|
Ÿ
|
our
ability to effectively and efficiently manufacture, market and distribute
our products;
|
Ÿ
|
our
ability to sell our products at competitive prices which exceed our
per
unit costs; and
|
Ÿ
|
the consolidation of dialysis clinics into larger clinical groups. |
Ÿ
|
make
it more difficult for us to satisfy our other
obligations;
|
Ÿ
|
require
us to dedicate a substantial portion of any cash flow we may generate
to
payments on our debt obligations, which would reduce the availability
of
our cash flow to fund working capital, capital expenditures and other
corporate requirements;
|
Ÿ
|
impede
us from obtaining additional financing in the future for working
capital,
capital expenditures and general corporate purposes;
and
|
Ÿ
|
make
us more vulnerable in the event of a downturn in our business prospects
and limit our flexibility to plan for, or react to, changes in our
industry.
|
Ÿ
|
slower than expected patient enrollment due to the nature of the protocol, the proximity of subjects to clinical sites, the eligibility criteria for the study, competition with clinical trials for similar devices or other factors; |
Ÿ
|
lower
than expected retention rates of subjects in a clinical
trial;
|
Ÿ
|
inadequately
trained or insufficient personnel at the study site to assist in
overseeing and monitoring clinical
trials;
|
Ÿ
|
delays
in approvals from a study site’s review board, or other required
approvals;
|
Ÿ
|
longer
treatment time required to demonstrate
effectiveness;
|
Ÿ
|
lack
of sufficient supplies of the ESRD therapy
product;
|
Ÿ
|
adverse
medical events or side effects in treated
subjects;
|
Ÿ
|
lack
of effectiveness of the ESRD therapy product being tested;
and
|
Ÿ
|
regulatory
changes.
|
Ÿ
|
information
contained in the MDRs could trigger FDA regulatory actions such as
inspections, recalls and patient/physician
notifications;
|
Ÿ
|
because
the reports are publicly available, MDRs could become the basis for
private lawsuits, including class actions;
and
|
Ÿ
|
if
we fail to submit a required MDR to the FDA, the FDA could take
enforcement action against us.
|
Ÿ
|
to
obtain product liability insurance;
or
|
Ÿ
|
to
indemnify manufacturers against liabilities resulting from the sale
of our
products.
|
Ÿ
|
fines;
|
Ÿ
|
injunctions;
|
Ÿ
|
civil
penalties;
|
Ÿ
|
recalls
or seizures of our products;
|
Ÿ
|
total
or partial suspension of the production of our
products;
|
Ÿ
|
withdrawal
of any existing approvals or pre-market clearances of our
products;
|
Ÿ
|
refusal
to approve or clear new applications or notices relating to our
products;
|
Ÿ
|
recommendations
by the FDA that we not be allowed to enter into government contracts;
and
|
Ÿ
|
criminal
prosecution.
|
Ÿ
|
such
products will be safe for use;
|
Ÿ
|
such
products will be effective;
|
Ÿ
|
such
products will be cost-effective;
|
Ÿ
|
we
will be able to demonstrate product safety, efficacy and
cost-effectiveness;
|
Ÿ
|
there
are unexpected side effects, complications or other safety issues
associated with such products; and
|
Ÿ
|
government
or third party reimbursement for the cost of such products is available
at
reasonable rates, if at all.
|
Ÿ
|
fluctuations
in exchange rates of the United States dollar could adversely affect
our
results of operations;
|
Ÿ
|
we
may face difficulties in enforcing and collecting accounts receivable
under some countries’ legal
systems;
|
Ÿ
|
local
regulations may restrict our ability to sell our products, have our
products manufactured or conduct other
operations;
|
Ÿ
|
political
instability could disrupt our
operations;
|
Ÿ
|
some
governments and customers may have longer payment cycles, with resulting
adverse effects on our cash flow;
and
|
Ÿ
|
some
countries could impose additional taxes or restrict the import of
our
products.
|
Ÿ
|
authorizing
our board of directors to issue “blank check” preferred stock without
stockholder approval;
|
Ÿ
|
providing
for a classified board of directors with staggered, three-year
terms;
|
Ÿ
|
prohibiting
us from engaging in a “business combination” with an “interested
stockholder” for a period of three years after the date of the transaction
in which the person became an interested stockholder unless certain
provisions are met;
|
Ÿ
|
prohibiting
cumulative voting in the election of
directors;
|
Ÿ
|
prohibiting
stockholder action by written consent unless the written consent
is signed
by all stockholders entitled to vote on the
action;
|
Ÿ
|
limiting
the persons who may call special meetings of stockholders;
and
|
Ÿ
|
establishing
advance notice requirements for nominations for election to our board
of
directors or for proposing matters that can be acted on by stockholders
at
stockholder meetings.
|
Ÿ
|
Develop
procedures to implement a formal monthly closing calendar and process
and
hold monthly meetings to address the monthly closing
process;
|
Ÿ
|
Establish
a detailed timeline for review and completion of financial reports
to be
included in our Forms 10-QSB and
10-KSB;
|
Ÿ |
Enhance
the level of service provided by outside accounting service providers
to
further support and supplement our internal staff in accounting
and
related areas;
|
Ÿ
|
Seek
additional staffing to provide additional resources for internal
preparation and review of financial reports;
and
|
Ÿ
|
Employ
the use of appropriate supplemental SEC and U.S. GAAP checklists
in
connection with our closing process and the preparation of our Forms
10-QSB and 10-KSB.
|
Ÿ
|
the
development of new medications, or improvements to existing medications,
which help to delay the onset or prevent the progression of ESRD
in
high-risk patients (such as those with diabetes and
hypertension);
|
Ÿ
|
the
development of new medications, or improvements in existing medications,
which reduce the incidence of kidney transplant rejection;
and
|
Ÿ
|
developments
in the use of kidneys harvested from genetically-engineered animals
as a
source of transplants.
|
Page
|
|
Report
of Independent Registered Public Accounting Firm
|
F-2
|
Consolidated
Financial Statements
|
|
Consolidated
Balance Sheets
|
F-3
|
Consolidated
Statements of Operations
|
F-4
|
Statement
of Changes in Stockholders’ (Deficit) Equity
|
F-5
|
Consolidated
Statements of Cash Flows
|
F-6
|
Notes
to Consolidated Financial Statements
|
F-7
|
December
31,
|
December
31,
|
|||||||||||||||||||||||||||
|
2006
|
2005
|
||||||||||||||||||||||||||
ASSETS
|
|
|
||||||||||||||||||||||||||
Current
assets:
|
|
|
||||||||||||||||||||||||||
Cash
and cash equivalents
|
$
|
253,043
|
$
|
746,581
|
||||||||||||||||||||||||
Short-term
investments
|
2,800,000
|
4,500,000
|
||||||||||||||||||||||||||
Accounts
receivable, less allowances of $48,368 and $34,687,
respectively
|
227,889
|
244,100
|
||||||||||||||||||||||||||
Inventory,
net
|
511,714
|
814,548
|
||||||||||||||||||||||||||
Prepaid
expenses and other current assets
|
440,294 |
358,306
|
||||||||||||||||||||||||||
Total
current assets
|
4,232,940
|
6,663,535
|
||||||||||||||||||||||||||
|
|
|
||||||||||||||||||||||||||
Property
and equipment, net
|
910,525
|
1,143,309
|
||||||||||||||||||||||||||
Other
assets
|
23,233
|
17,731
|
||||||||||||||||||||||||||
Total
assets
|
$
|
5,166,698
|
$
|
7,824,575
|
||||||||||||||||||||||||
|
|
|
||||||||||||||||||||||||||
LIABILITIES
AND STOCKHOLDERS' (DEFICIT) EQUITY
|
||||||||||||||||||||||||||||
Current
liabilities:
|
|
|
||||||||||||||||||||||||||
Accounts
payable
|
$
|
567,566
|
$
|
766,158
|
||||||||||||||||||||||||
Accrued
expenses
|
649,074
|
451,109
|
||||||||||||||||||||||||||
Accrued
severance expense
|
94,270
|
318,250
|
||||||||||||||||||||||||||
Note
payable - short-term portion
|
379,701
|
295,838
|
||||||||||||||||||||||||||
Total
current liabilities
|
1,690,611
|
1,831,355
|
||||||||||||||||||||||||||
|
|
|
||||||||||||||||||||||||||
Convertible
notes payable
|
5,204,938
|
-
|
||||||||||||||||||||||||||
Accrued
interest-convertible notes
|
183,321
|
-
|
||||||||||||||||||||||||||
Note
payable - long-term portion
|
184,025
|
613,727
|
||||||||||||||||||||||||||
Total
liabilities
|
7,262,895
|
2,445,082
|
||||||||||||||||||||||||||
|
|
|
||||||||||||||||||||||||||
Stockholders'
(deficit) equity:
|
|
|
||||||||||||||||||||||||||
|
|
|||||||||||||||||||||||||||
Common
stock, $.001 par value; 25,000,000 shares authorized at
December
31, 2006 and December 31, 2005; 12,317,992 and 12,313,494
shares
issued and outstanding at December 31, 2006 and 2005, respectively.
|
12,318 |
12,313
|
||||||||||||||||||||||||||
Additional
paid-in capital
|
53,135,371
|
54,848,711
|
||||||||||||||||||||||||||
Deferred
compensation
|
-
|
(2,189,511
|
)
|
|||||||||||||||||||||||||
Accumulated
other comprehensive income (loss)
|
11,908 | (49,137 | ) | |||||||||||||||||||||||||
Accumulated
deficit
|
(55,255,794
|
)
|
(47,242,883
|
)
|
||||||||||||||||||||||||
Total stockholders' (deficit) equity | (2,096,197 | ) | 5,379,493 | |||||||||||||||||||||||||
Total
liabilities and stockholders' (deficit) equity
|
$
|
5,166,698
|
$
|
7,824,575
|
|
Twelve
Months Ended
|
||||||
|
December
31
|
||||||
|
2006
|
2005
|
|||||
|
|
|
|||||
Contract
revenues
|
$
|
-
|
$
|
1,750,000
|
|||
Net
product revenues
|
793,489
|
674,483
|
|||||
Net revenues
|
793,489
|
2,424,483
|
|||||
|
|
|
|||||
Cost
of goods sold
|
943,726
|
379,462
|
|||||
|
|
|
|||||
Gross
(loss) profit
|
(150,237
|
)
|
2,045,021
|
||||
|
|
|
|||||
Operating
expenses:
|
|
|
|||||
Research and development
|
1,844,220
|
1,756,492
|
|||||
Depreciation expense
|
319,164
|
305,601
|
|||||
Selling, general and administrative
|
5,718,037
|
6,307,399
|
|||||
Total
operating expenses
|
7,881,421
|
8,369,492
|
|||||
Loss
from operations
|
(8,031,658
|
)
|
(6,324,471
|
)
|
|||
|
|
|
|||||
Interest
income
|
211,881
|
233,207
|
|||||
Interest
expense
|
195,089
|
-
|
|||||
Other
income
|
1,955
|
623,087
|
|||||
|
|
|
|||||
Net
loss
|
$
|
(8,012,911
|
)
|
$
|
(5,468,177
|
)
|
|
Basic
and diluted net loss per common share
|
$
|
(0.65
|
)
|
$
|
(0.45
|
)
|
|
Shares
used in computing basic and
|
|
|
|||||
diluted
net loss per common share
|
12,317,080
|
12,269,054
|
|||||
|
|
|
|
|
|
|
Accumulated
|
|
|
||||||||||||||||
|
|
|
Additional
|
|
Other
|
|
|
|||||||||||||||
|
Common
Stock
|
Paid-in
|
Deferred
|
Comprehensive
|
Accumulated
|
|
||||||||||||||||
|
Shares
|
Amount
|
Capital
|
Compensation
|
Loss
|
Deficit
|
Total
|
|||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||
Balance,
December 31, 2004
|
12,120,248
|
$
|
12,120
|
$
|
53,740,171
|
$
|
(2,479,317
|
)
|
$
|
152,373
|
$
|
(41,774,706
|
)
|
$
|
9,650,641
|
|||||||
|
||||||||||||||||||||||
Comprehensive
loss:
|
||||||||||||||||||||||
Net loss
|
-
|
-
|
-
|
-
|
-
|
(5,468,177
|
)
|
(5,468,177
|
)
|
|||||||||||||
Net unrealized losses on foreign currency translation
|
-
|
-
|
-
|
-
|
(205,570
|
)
|
-
|
(205,570
|
)
|
|||||||||||||
Net unrealized gains on available-for-sale
|
||||||||||||||||||||||
securities
|
-
|
-
|
-
|
-
|
4,060
|
-
|
4,060
|
|||||||||||||||
Comprehensive loss
|
(5,669,687
|
)
|
||||||||||||||||||||
Amortization
of deferred compensation
|
-
|
-
|
378,430
|
-
|
-
|
378,430
|
||||||||||||||||
Issuance
of Noncash stock-based compensation
|
173,347
|
(173,347
|
)
|
|||||||||||||||||||
Cancelled
stock options due to terminations
|
-
|
-
|
(84,723
|
)
|
84,723
|
-
|
-
|
-
|
||||||||||||||
Exercise
of stock options
|
8,996
|
9
|
2,870
|
-
|
-
|
-
|
2,879
|
|||||||||||||||
Adjustment
to issuance of common stock in
|
||||||||||||||||||||||
connection with initial public offering
|
-
|
-
|
44,361
|
-
|
-
|
-
|
44,361
|
|||||||||||||||
Issuance
of common stock in connection with
|
||||||||||||||||||||||
private placement
|
184,250
|
184
|
955,337
|
-
|
-
|
-
|
955,521
|
|||||||||||||||
Issuance
of warrants in connection with
|
||||||||||||||||||||||
settelement of legal proceedings
|
-
|
-
|
17,348
|
-
|
-
|
-
|
17,348
|
|||||||||||||||
Balance,
December 31, 2005
|
12,313,494
|
$
|
12,313
|
$
|
54,848,711
|
$
|
(2,189,511
|
)
|
$
|
(49,137
|
)
|
$
|
(47,242,883
|
)
|
$
|
5,379,493
|
||||||
Comprehensive
loss:
|
||||||||||||||||||||||
Net loss
|
-
|
-
|
-
|
-
|
-
|
(8,012,911
|
)
|
(8,012,911
|
)
|
|||||||||||||
Net unrealized gains on foreign currency translation
|
-
|
-
|
-
|
-
|
61,045
|
-
|
61,045
|
|||||||||||||||
Comprehensive loss
|
-
|
-
|
-
|
-
|
-
|
-
|
(7,951,866
|
)
|
||||||||||||||
Reclassification
of deferred compensation
|
-
|
-
|
(2,189,511
|
)
|
2,189,511
|
-
|
-
|
-
|
||||||||||||||
Noncash
stock-based compensation
|
-
|
-
|
474,735
|
-
|
-
|
-
|
474,735
|
|||||||||||||||
Exercise
of stock options
|
4,498
|
5
|
1,436
|
-
|
-
|
-
|
1,441
|
|||||||||||||||
Balance,
December 31, 2006
|
12,317,992
|
$
|
12,318
|
$
|
53,135,371
|
$
|
-
|
$
|
11,908
|
$
|
(55,255,794
|
)
|
$
|
(2,096,197
|
)
|
|||||||
|
Year
ended December 31,
|
|||||||
2006
|
2005
|
||||||
Operating
activities:
|
|||||||
Net
loss
|
$
|
(8,012,911
|
)
|
$
|
(5,468,177
|
)
|
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|||||||
Depreciation
|
319,164
|
305,601
|
|||||
Amortization
of research & development assets
|
30,318
|
-
|
|||||
Loss
on disposal of equipment
|
37,881
|
-
|
|||||
Amortization
of debt discount
|
4,938
|
-
|
|||||
Noncash
stock-based compensation
|
474,735
|
374,529
|
|||||
Gain
on settlement agreement
|
-
|
(623,087
|
)
|
||||
Provision
for returns
|
9,417
|
18,697
|
|||||
(Increase)
decrease in operating assets:
|
|||||||
Accounts
receivable
|
59,418
|
(133,066
|
)
|
||||
Inventory
|
361,624
|
(280,613
|
)
|
||||
Prepaid
expenses and other current assets
|
(53,296
|
)
|
87,360
|
||||
Other
assets
|
(5,501
|
)
|
(13,909
|
)
|
|||
Increase
(decrease) in operating liabilities:
|
|||||||
Accounts
payable and accrued expenses
|
(113,807
|
)
|
660,123
|
||||
Accrued
severance expense
|
(249,059
|
)
|
-
|
||||
Accrued
interest-convertible notes
|
183,321
|
-
|
|||||
Deferred
revenue
|
-
|
(64,058
|
)
|
||||
Other
liabilities
|
(345,839
|
)
|
32,652
|
||||
Net
cash used in operating activities
|
(7,299,597
|
)
|
(5,103,948
|
)
|
|||
Investing
activities
|
|||||||
Purchase
of property and equipment
|
(110,163
|
)
|
(397,290
|
)
|
|||
Purchase
of short-term investments
|
(3,000,000
|
)
|
-
|
||||
Maturities
of short-term investments
|
4,700,000
|
1,500,000
|
|||||
Net
cash provided by investing activities
|
1,589,837
|
1,102,710
|
|||||
Financing
activities
|
|||||||
Proceeds
from private placement of common stock
|
-
|
955,521
|
|||||
Proceeds
from private placement of convertible notes
|
5,200,000
|
-
|
|||||
Adjustment
to proceeds from IPO of common stock
|
-
|
44,361
|
|||||
Proceeds
from exercise of stock options
|
1,441
|
2,879
|
|||||
Net
cash provided by financing activities
|
5,201,441
|
1,002,761
|
|||||
Effect
of exchange rates on cash
|
14,781
|
25,877
|
|||||
Net
decrease in cash and cash equivalents
|
(493,538
|
)
|
(2,972,600
|
)
|
|||
Cash
and cash equivalents, beginning of period
|
746,581
|
3,719,181
|
|||||
Cash
and cash equivalents, end of period
|
$
|
253,043
|
$
|
746,581
|
|||
Supplemental
disclosure of cash flow information
|
|||||||
Cash
paid for taxes
|
$
|
32,283
|
$
|
14,240
|
|||
|
|
||||||
Customer
|
2006
|
2005
|
||
A
|
|
69%
|
|
41%
|
B
|
|
17%
|
|
14%
|
C
|
6%
|
11%
|
Customer
|
2006
|
2005
|
||
A
|
|
71%
|
|
63%
|
C
|
|
14%
|
|
8%
|
December
31,
|
|||||||
2006
|
2005
|
||||||
Raw
Materials
|
$
|
53,358
|
$
|
153,299
|
|||
Finished
Goods
|
458,356
|
661,249
|
|||||
Total
Inventory
|
$
|
511,714
|
$
|
814,548
|
Option
Pricing Assumptions
|
||||
Grant
Year
|
2006
|
2005
|
||
Stock
Price Volatility
|
65%
to 92%
|
80%
|
||
Risk-Free
Interest Rates
|
4.34%
to 4.97%
|
3.33%
|
||
Expected
Life (in years)
|
5.8
to 6.0
|
7.0
|
||
2005
|
||||
Net
loss as reported
|
$
|
(5,468,177
|
)
|
|
Add
back: compensation expense recorded under the intrinsic
method
|
374,529
|
|||
Deduct:
compensation expense under the fair value method
|
(730,143
|
)
|
||
Pro
forma net loss using the fair value method
|
$
|
(5,819,890
|
)
|
|
Net
loss per share:
|
||||
As reported
|
$
|
(0.45
|
)
|
|
Pro forma
|
$
|
(0.47
|
)
|
Options
Outstanding
|
Options
Exerciseable
|
|||||||||
Range
of exercise price
|
Number
outstanding as of December 31, 2006
|
Weighted
average remaining contractual life in years
|
Weighted
average exercise price
|
Number
exercisable as of December 31, 2006
|
Weighted
average exercise price
|
|||||
$0.32
|
520,471
|
3.1
|
$0.32
|
520,471
|
$0.32
|
|||||
$1.36
- $1.49
|
548,500
|
9.5
|
$1.38
|
145,333
|
$1.38
|
|||||
$1.76
|
496,890
|
6.4
|
$1.76
|
397,512
|
$1.76
|
|||||
$2.32
- $2.64
|
241,380
|
7.8
|
$2.47
|
100,975
|
$2.45
|
|||||
$2.77
- $2.78
|
363,306
|
6.4
|
$2.78
|
173,358
|
$2.78
|
|||||
$3.40
- $5.45
|
144,000
|
8.1
|
$4.30
|
105,667
|
$4.35
|
|||||
2,314,547
|
1,443,316
|
|||||||||
Shares
|
Weighted
average exercise price
|
||||||
Outstanding
at January 1, 2005
|
1,852,540
|
$
|
1.85
|
||||
Options
granted
|
65,000
|
$
|
3.49
|
||||
Options
exercised
|
(8,997
|
)
|
$
|
0.32
|
|||
Options
canceled
|
(24,006
|
)
|
$
|
2.60
|
|||
Outstanding
at December 31, 2005
|
1,884,537
|
$
|
1.91
|
||||
Options
granted
|
665,500
|
$
|
1.59
|
||||
Options
exercised
|
(4,499
|
)
|
$
|
0.32
|
|||
Options
canceled
|
(230,991
|
)
|
$
|
2.61
|
|||
Outstanding
at December 31, 2006
|
2,314,547
|
$
|
1.74
|
||||
Vested or expected to vest at December 31, 2006 | 1,982,486 |
$
|
2.52
|
||||
Exerciseable
at December 31, 2006
|
1,443,316
|
$
|
1.56
|
|
Number
of
options
|
Weighted-average
fair value
|
|||||
Nonvested
at January 1, 2006
|
608,938
|
$
|
3.87
|
||||
Options
granted
|
423,015
|
$
|
2.60
|
||||
Options
vested
|
(141,250
|
)
|
$
|
4.70
|
|||
Options
forfeited
|
(145,161
|
)
|
$
|
1.72
|
|||
Nonvested
at December 31, 2006
|
745,542
|
$
|
3.41
|
December
31,
|
|||||||
2006
|
2005
|
||||||
Prepaid
insurance premiums
|
$
|
177,336
|
$
|
94,556
|
|||
Advances
on product development services
|
102,500
|
96,565
|
|||||
Other
|
160,458
|
167,185
|
|||||
Prepaid
Expenses and Other Current Assets
|
$
|
440,294
|
$
|
358,306
|
December
31,
|
||||||||||
Life
|
2006
|
2005
|
||||||||
Manufacturing
equipment
|
5
years
|
$
|
1,808,701
|
$
|
1,742,358
|
|||||
Research
equipment
|
5
years
|
91,275
|
34,500
|
|||||||
Computer
equipment
|
4
years
|
122,015
|
158,169
|
|||||||
Furniture
and fixtures
|
7
years
|
54,123
|
83,066
|
|||||||
Leasehold
improvement
|
1
year
|
15,000
|
-
|
|||||||
2,091,114
|
2,018,093
|
|||||||||
Less:
accumulated depreciation
|
1,180,589
|
874,784
|
||||||||
Property
and Equipment, net
|
$
|
910,525
|
$
|
1,143,309
|
Total
Outstanding Warrants
|
||||||||
Title
of Warrant
|
Date
Issued
|
Expiry
Date
|
Exercise
Price
|
Total
Common Shares Issuable
|
||||
Lancer
Warrants
|
1/18/2006
|
1/18/2009
|
$
1.50
|
21,308
|
||||
Underwriter
Warrants
|
3/24/2005
|
9/20/2009
|
$
7.50
|
200,000
|
||||
Plexus
Warrants
|
6/19/2002
|
6/19/2007
|
$
10.56
|
170,460
|
|
December
31, 2006
|
|||||||||
|
|
Gross
|
|
|||||||
|
Unrealized
|
Gross
Fair
|
||||||||
Cost
|
Losses
|
Value
|
||||||||
Auction
rate securities
|
$
|
2,800,000
|
$
|
-
|
$
|
2,800,000
|
||||
Total
securities
|
$
|
2,800,000
|
$
|
-
|
$
|
2,800,000
|
||||
|
|
|
|
|||||||
|
December
31, 2005
|
|||||||||
|
|
Gross
|
|
|||||||
|
Unrealized
|
Gross
Fair
|
||||||||
Cost
|
Losses
|
Value
|
||||||||
Auction
rate securities
|
$
|
4,500,000
|
$
|
-
|
$
|
4,500,000
|
||||
Total
securities
|
$
|
4,500,000
|
$
|
-
|
$
|
4,500,000
|
||||
|
|
|
|
2006
|
2005
|
||||||
U.S.
federal statutory rate
|
35.00
|
%
|
35.00
|
%
|
|||
State
& local taxes
|
8.67
|
%
|
6.13
|
%
|
|||
Tax
on foreign operations
|
(
5
.68
)
|
%
|
(
10.68
)
|
%
|
|||
Other
|
0.01
|
%
|
0.10
|
%
|
|||
Valuation
Allowance
|
(
38.00)
|
%
|
(
30.55)
|
%
|
|||
Effective
tax rate
|
0.00
|
%
|
0.00
|
%
|
|||
2006
|
2005
|
||||||
Deferred
tax assets:
|
|||||||
Net
operating loss carryforwards
|
$
|
14,926,870
|
$
|
12,077,036
|
|||
Research
and development credits
|
825,079
|
745,141
|
|||||
Nonqualified
stock option compensation expense
|
1,367,354
|
1,130,179
|
|||||
Other
Temporary Book - Tax differences
|
11,562
|
52,968
|
|||||
Total
deferred tax assets
|
17,130,865
|
14,005,324
|
|||||
Valuation
allowance for deferred tax assets
|
(17,130,865
|
)
|
(14,005,324
|
)
|
|||
Net
deferred tax assets
|
$
|
—
|
$
|
—
|
US
|
IRELAND
|
Total
|
|||||||||||||||||
2006
|
2005
|
2006
|
2005
|
2006
|
2005
|
||||||||||||||
Net
Operating Loss Carryforward
|
$
|
30,017,322
|
$
|
24,579,888
|
$
|
7,510,384
|
$
|
4,836,445
|
$
|
37,527,706
|
$
|
29,416,333
|
|||||||
Net
Loss
|
$
|
5,998,491
|
$
|
2,872,981
|
$
|
2,014,420
|
$
|
2,595,196
|
$
|
8,012,911
|
$
|
5,468,177
|
Ÿ
|
Develop
procedures to implement a formal monthly closing calendar and process
and
hold monthly meetings to address the monthly closing
process;
|
Ÿ
|
Establish
a detailed timeline for review and completion of financial reports
to be
included in our Forms 10-QSB and 10-KSB;
|
Ÿ
|
Enhance
the level of service provided by outside accounting service providers
to
further support and supplement our internal staff in accounting and
related areas;
|
Ÿ
|
Seek
additional staffing to provide additional resources for internal
preparation and review of financial reports;
and
|
Ÿ
|
Employ
the use of appropriate supplemental SEC and U.S. GAAP checklists
in
connection with our closing process and the preparation of our Forms
10-QSB and 10-KSB.
|
Plan
Category
|
|
(a)
Number
of Securities to be Issued Upon Exercise of Outstanding Options,
Warrants
and Rights
|
(b)
Weighted-Average
Exercise Price of Outstanding Options, Warrants and Rights
|
|
(c)
Number
of Securities Remaining Available for Future Issuance Under Equity
Compensation Plans (Excluding Securities Reflected in Column
(a))
|
|
||||
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
||||
Equity
compensation plans approved by stockholders
|
|
|
2,314,548
|
$
|
1.74
|
|
84,384
|
|
||
Equity
compensation plans not approved by stockholders
|
|
|
-
|
-
|
|
|
-
|
|
||
All
plans
|
|
|
2,314,548
|
$
|
1.74
|
|
84,384
|
|
3.1
|
Fourth
Amended and Restated Certificate of Incorporation of the Registrant.
(5)
|
|
3.2
|
Amended
and Restated By-laws of the Registrant. (1)
|
|
4.1
|
Specimen
of Common Stock Certificate of the Registrant. (1)
|
|
4.2
|
Form
of Underwriter’s Warrant. (1)
|
|
4.3
|
Form
of Convertible Promissory Note due August 7, 2002. (1)
|
4.4
|
Form
of Senior Convertible Bridge Notes due 2004. (1)
|
|
4.5
|
Class
C Warrant for the Purchase of Shares of Common Stock, dated September
22,
2003, issued to Joseph Giamanco by the Registrant. (1)
|
|
4.6
|
Class
C Warrant for the Purchase of Shares of Common Stock, dated September
22,
2003, issued to George Hatsopoulous by the Registrant. (1)
|
|
4.7
|
Stock
Purchase Warrant, dated June 19, 2002, issued to Plexus Services
Corp. by
the Registrant. (1)
|
|
4.8
|
Class
A Warrant for the Purchase of Shares of Common Stock, dated August
5,
2002, issued to Lancer Offshore, Inc. (1)
|
|
4.9
|
Warrant
for the purchase of shares of common stock dated January 18, 2006,
issued
to Marty Steinberg, Esq., as Court-appointed Receiver for Lancer
Offshore,
Inc.
|
|
10.1
|
Amended
and Restated 2000 Nephros Equity Incentive Plan. (1) (2)
|
|
10.2
|
2004
Nephros Stock Incentive Plan. (1) (2)
|
|
10.3
|
Form
of Subscription Agreement dated as of June 1997 between the Registrant
and
each Purchaser of Series A Convertible Preferred Stock. (1)
|
|
10.4
|
Amendment
and Restatement to Registration Rights Agreement, dated as of May
17, 2000
and amended and restated as of June 26, 2003, between the Registrant
and
the holders of a majority of Registrable Shares (as defined therein).
(1)
|
|
10.5
|
Employment
Agreement dated as of November 21, 2002 between Norman J. Barta and
the
Registrant. (1) (2)
|
|
10.6
|
Amendment
to Employment Agreement dated as of March 17, 2003 between Norman
J. Barta
and the Registrant. (1) (2)
|
|
10.7
|
Amendment
to Employment Agreement dated as of May 31, 2004 between Norman J.
Barta
and the Registrant. (1) (2)
|
|
10.8
|
Form
of Employee Patent and Confidential Information Agreement. (1)
|
|
10.9
|
Form
of Employee Confidentiality Agreement. (1)
|
|
10.10
|
Settlement
Agreement dated June 19, 2002 between Plexus Services Corp. and the
Registrant. (1)
|
|
10.11
|
Settlement
Agreement dated as of January 31, 2003 between Lancer Offshore, Inc.
and
the Registrant. (1)
|
|
10.12
|
Settlement
Agreement dated as of February 13, 2003 between Hermitage Capital
Corporation and the Registrant. (1)
|
|
10.13
|
License
Agreement dated as of July 1, 2003 between the Trustees of Columbia
University in the City of New York and the Registrant. (1)
|
|
10.14
|
Form
of Transmittal Letter Agreement, dated as of April 28, 2004, between
each
holder of convertible promissory notes due August 7, 2002 and the
Registrant. (1)
|
10.15
|
Commitment
Agreement between Ronald Perelman and the Registrant, dated as of
May 30,
2003. (1)
|
|
10.16
|
Form
of Subscription Agreement between the Registrant and each purchaser
of
Senior Convertible Bridge Notes due 2004. (1)
|
|
10.17
|
Supply
Agreement between Nephros, Inc. and Membrana GmbH, dated as of December
17, 2003. (1) (3)
|
|
10.18
|
Employment
Agreement dated as of June 16, 2004 between Marc L. Panoff and the
Registrant. (1) (2)
|
|
10.19
|
Manufacturing
and Supply Agreement between Nephros, Inc. and Medica s.r.l., dated
as of
May 12, 2003. (1) (3)
|
|
10.20
|
License
Agreement dated as of July 1, 2005 between the Trustees of Columbia
University in the City of New York and the Registrant. (1)
|
|
10.21
|
HDF-Cartridge
License Agreement dated as of March 2, 2005 between Nephros, Inc.
and
Asahi Kasei Medical Co., Ltd. (4)
|
|
10.22
|
Subscription
Agreement dated as of March 2, 2005 between Nephros, Inc. and Asahi
Kasei
Medical Co., Ltd. (4)
|
|
10.23
|
Amendment
No. 1 to 2004 Nephros Stock Incentive Plan. (2) (5)
|
|
10.24
|
Non-employee
Director Compensation Summary. (2) (6)
|
|
10.25
|
Named
Executive Officer Summary of Changes to Compensation. (2) (6)
|
|
10.26
|
Stipulation
of Settlement Agreement between Lancer Offshore, Inc. and Nephros,
Inc.
approved on December 19, 2005. (8)
|
|
10.27
|
Consulting
Agreement, dated as of January 11, 2006, between the Company and
Bruce
Prashker. (2) (8)
|
|
10.28
|
Summary
of Changes to Chief Executive Officer’s Compensation. (2) (8)
|
|
10.29
|
Employment
Agreement, dated as of February 28, 2006, between the Company and
Mark W.
Lerner. (2) (8)
|
|
10.30
|
Amended
Supply Agreement between Nephros, Inc. and Membrana GmbH dated as
of June
16, 2005. (3) (7)
|
|
10.31
|
Amended
Manufacturing and Supply Agreement between Nephros, Inc. and Medica
s.r.l., dated as of March 22, 2005. (3) (8)
|
|
10.32
|
Form
of 6% Secured Convertible Note due 2012 for June 1, 2006 Investors.
(9)
|
|
10.33
|
Form
of Prepayment Warrant. (9)
|
|
10.34
|
Form
of Subscription Agreement, dated as of June 1, 2006. (9)
|
|
10 . 35 | Form of Registration Rights Agreement, dated as of June 1, 2006. (9) |
(11)
|
Incorporated
by reference to Nephros, Inc.’s Current Report on Form 8-K filed with the
Securities and Exchange Commission on August 4, 2006.
|
Signature
|
Title
|
Date
|
|
/s/
Norman J Barta
Norman
J. Barta
|
President,
Chief Executive Officer and Director
(Principal
Executive Officer)
|
April
10, 2007
|
|
/s/
Mark W. Lerner
Mark
W. Lerner
|
Chief
Financial Officer (Principal Financial
Officer
and Principal Accounting Officer)
|
April
10, 2007
|
|
/s/
William J. Fox
William
J. Fox
|
Executive
Chairman and Director
|
April
10, 2007
|
|
/s/
Eric A. Rose, M.D.
Eric
A. Rose, M.D.
|
Lead
Director of the Board of Directors
|
April
10, 2007
|
|
/s/
Lawrence J. Centella
Lawrence
J. Centella
|
Director
|
April
10, 2007
|
|
/s/
Donald G. Drapkin
Donald
G. Drapkin
|
Director
|
April
10, 2007
|
|
/s/
Howard Davis
Howard
Davis
|
Director
|
April
10, 2007
|
|
/s/
Bernard Salick, M.D.
Bernard
Salick, M.D.
|
Director
|
April
10, 2007
|
|
/s/
Judy S. Slotkin
Judy
S. Slotkin
|
Director
|
April
10, 2007
|
|
/s/
W. Townsend Ziebold, Jr
.
W.
Townsend Ziebold, Jr.
|
Director
|
April
10, 2007
|
1. |
Contract
conditions
|
a) |
The
current Bellco-Nephros commercial contract will be amended to reflect
a
term ending * * *. The parties agree to negotiate in good faith by
* * *
for a contract extension.
|
2. |
MD
Mid-Dilution Dialyzer
|
a) |
Bellco
will commit to purchasing a minimum
of
|
a. |
*
*
* MD dialyzers from January 1 to December 31,
2007;
|
b. |
*
*
* MD dialyzers or from January 1 to December 31,
2008;
|
c. |
Minimum
increase of * * * filters per year over prior year actual thereafter.
The
parties agree to negotiate in good faith to revise this number upward
upon
introduction of the new Bellco/Nephros HDF
machine.
|
d. |
The
* * * MD dialyzers scheduled from January 1 to April 30, 2007 are
included
in the total amount of * * * mentioned in the point
2.a)a.
|
b) |
Rolling
purchase order forecasts will be provided by Bellco, in multiples
of full
pallet quantities, within the first 5 business days of each month
for the
succeeding 6 month period (e.g., Bellco will provide a rolling forecast
by
December 7 for succeeding months January through June), for which
months 1
and 2 (e.g. January and February) will be firm commitments. Nephros
shall
plan to ship on or before the 20
th
day of the month preceding the month of the forecast. In no event
shall a
monthly order be less than * * * of the annual minimum commitment
for the
year in which the order takes
place.
|
c) |
Any
changes in membrane, dialyzer characteristics or manufacturer must
be
agreed on in writing between Bellco and Nephros, subject to Nephros’s
ability to obtain a given membrane, the continuing availability or
viability of a given manufacturer,
and
events of force majeur.
|
d) |
Bellco
shall provide a report of estimated MD Filter sales to Nephros on
a
quarterly basis, including:
|
a. |
Number
of MD Filters sold in the quarter;
|
b. |
Number
of (and names of) clinics using the MD
Filters;
|
c. |
Number
of patients on on-going MD Filter therapy at each
clinic.
|
e) |
Nephros
shall have the right to audit these sales figures on an annual basis.
Bellco shall cooperate in such audit; and Nephros shall have the
right to
have third party auditors conduct such
audit.
|
3. |
Sales
Territory
|
a) |
Bellco
will be the exclusive distributor for * *
*.
|
b) |
Bellco
will be the exclusive distributor for these other countries out of
the EU:
* * *.
|
c) |
Bellco
will be the exclusive distributor for * * *.
|
d) |
Nephros
and Bellco will negotiate in good faith on a timely basis for
non-exclusive distribution rights in * * *, and will negotiate separate
order quantities for these countries
accordingly.
|
e) |
Bellco
will not market the filter in any other territories without the express
written permission of Nephros.
|
4. |
Transfer
Price
|
a) |
Different
country markets require different pricing; non-EU countries may have
product prices lower than EU
countries.
|
b) |
The
transfer price for the filter scheduled from January 1, 2007 to March
31,
2007 will be * * * in accordance with the previous
agreement.
|
c) |
The
transfer price for the filter scheduled after March 31, 2007 will
be * *
*.
|
d) |
Payment
terms on filters are net 60 days, (by wire transfer to Nephros designated
account) prorated interest accruing thereafter at 1.5% per
month.
|
5. |
Product
and Patent Registrations
|
a) |
To
enter some new markets out of the EU, a product registration is
required.
|
b) |
All
the documents and the technical dossiers required for the registration
will be provided by Nephros.
|
c) |
The
registration cost for each country where it is incrementally required
will
be paid by Bellco.
|
d) |
Patent
costs to maintain required patents as determined by Nephros will
be paid
by Nephros.
|
6. |
Clinical
Trials and Support
|
a) |
Bellco
and Nephros recognize that it is mutually beneficial to have clinical
trials, scientific presentations and articles to support the mid-dilution
therapy.
|
b) |
Bellco
will conduct clinical trials only in the territories and centers
that are
covered under the commercial agreement. Nephros will conduct
clinical trials in the territories or centers that Bellco operates
exclusively only by mutual agreement with
Bellco.
|
c) |
Bellco
and Nephros will share all data from their clinical trials related
to
mid-dilution therapy.
|
d) |
Any
serious adverse events or technical problems involving the MD190
and MD
220 filters will be communicated to the other party as soon as possible
(regardless of territory or who sold the
dialyzer).
|
7. |
Manufacturing
|
a) |
Nephros
will deliver product in minimum batches of * * * to any Bellco facility
within
*
*
*
(FOB
point of shipment). Other terms apply as specified in the
Agreement.
|
8. |
Assignment
|
a) |
The
Agreement shall be binding upon and inure to the benefit of the parties
hereto and their respective successors and assignees; provided that
the
parties may assign this Agreement to an affiliate but shall remain
fully
responsible for the performance of this
Agreement.
|
b) |
In
the event an eventual Bellco successor or assignee changes the commercial
strategy for sale of the MD filters, Nephros shall have the option
to void
the exclusivity provisions of this Agreement.
|
c) |
In
the event of a change of control at Nephros, the successor or assignee
shall have the right to renegotiate this contract after a one year
waiting
period following succession or
assignment.
|
a) |
In
the event of any inconsistency between this Agreement and the original
January 7, 2004 agreement between Nephros and Bellco, this Agreement
shall
govern. All other provisions of the original January 7, 2004
agreement not otherwise amended or superseded herein shall remain
in full
force and effect.
|
a) |
In
the event of any dispute between the parties concerning the
interpretation, performance of obligations, breaches, termination
or
enforcement of this contract, the Parties will make a best effort
to
settle the dispute by means of a discussion between senior managers
of
Nephros and Bellco, in light of the premises underlying this Agreement,
the purpose of the Agreement, and the provisions set forth in this
Agreement.
|
a) |
The
individuals executing this agreement have full power and authority
to bind
their respective companies hereunder and no further consent or approval
is
required of either party prior to this Agreement taking effect as
of the
effective date first above written.
|
Name
|
Jurisdiction
|
Percentage
Equity
|
|
|
|
Nephros
International Limited
|
Ireland
|
100%
|
(1)
|
The
Report fully complies with the requirements of section 13(a) or 15(d)
of
the Securities Exchange Act of 1934;
and
|
(2)
|
The
information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the
Company.
|
/s/
Norman J.
Barta
Norman
J. Barta
Chief
Executive Officer
Date:
April 10,
2007
|
|
|
(1)
|
The
Report fully complies with the requirements of section 13(a) or 15(d)
of
the Securities Exchange Act of 1934;
and
|
(2)
|
The
information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the
Company.
|
/s/
Mark W.
Lerner
Mark
W. Lerner
Chief
Financial Officer
Date:
April 10,
2007
|