S-3/A
As filed with the Securities and Exchange Commission on
April 16, 2008
Registration
No. 333-148200
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Amendment No. 1
to
Form S-3
REGISTRATION
STATEMENT
UNDER
THE SECURITIES ACT OF
1933
NEPHROS, INC.
(Exact name of Registrant as
specified in its charter)
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Delaware
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13-3971809
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(State or other jurisdiction
of
incorporation or organization)
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(IRS employer
identification number)
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3960 Broadway
New York, New York
10032
(212) 781-5113
(Address, including zip code,
and telephone number,
including area code, of
registrant’s principal executive offices)
Norman J. Barta
President and Chief Executive
Officer
Nephros, Inc.
3960 Broadway
New York, New York
10032
(212) 781-5113
(Name, address, including zip
code, and telephone number,
including area code, of agent
for service)
Copy to:
David M.
Zlotchew, Esq.
Haynes and Boone, LLP
153 East
53rd
Street
New York, NY 10022
Telephone:
(212) 659-4986
Facsimile:
(212) 884-9540
Approximate date of commencement of proposed sale to the
public: At such time or other times as may be determined by
the selling stockholders following the effectiveness of this
Registration Statement.
If the only securities being registered on this Form are being
offered pursuant to dividend or interest reinvestment plans,
please check the following
box. o
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act of 1933, other than
securities offered only in connection with dividend or interest
reinvestment plans, check the following
box. þ
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
please check the following box and list the Securities Act
registration statement number of the earlier effective
registration statement for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
If this Form is a registration statement pursuant to General
Instruction I.D. or a post-effective amendment thereto that
shall become effective upon filing with the Commission pursuant
to Rule 462(e) under the Securities Act, check the
following
box. o
If this Form is a post-effective amendment to a registration
statement filed pursuant to General Instruction I.D. filed
to register additional securities or additional classes of
securities pursuant to Rule 413(b) under the Securities
Act, check the following
box. o
Indicate by checkmark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
“large accelerated filer,” “accelerated
filer” and “smaller reporting company” in
Rule 12b-2
of the Exchange Act. (Check one):
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Large accelerated
filer o
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Accelerated
filer o
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Non-accelerated
filer o
(Do not check if a smaller reporting company)
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Smaller reporting
company þ
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The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act of 1933 or until this Registration
Statement shall become effective on such date as the Commission,
acting pursuant to said Section 8(a), may determine.
The information in
this prospectus is not complete and may be changed. The selling
stockholders may not sell these securities until the
registration statement filed with the Securities and Exchange
Commission is effective. This prospectus is not an offer to sell
these securities or the solicitation of an offer to buy these
securities in any state in which such offer, solicitation or
sale is not permitted.
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SUBJECT TO
COMPLETION — DATED APRIL 16, 2008
PRELIMINARY PROSPECTUS
36,916,328 Shares of
Common Stock
This prospectus relates to the resale or other disposition of up
to 36,916,328 shares of our common stock, which shares
consist of (i) 25,847,388 presently outstanding shares of
our common stock, (ii) 9,112,566 shares of our common
stock issuable upon the exercise of our Class D warrants,
(iii) 1,756,374 shares of our common stock issuable
upon the exercise of our placement agent warrants, and
(iv) 200,000 shares of our common stock issuable upon
the exercise of our underwriter warrants, that are beneficially
owned by the selling stockholders listed on page 21 of this
prospectus or their transferees. The selling stockholders may
sell any, all or none of the shares of our common stock offered
under this prospectus and any supplements to this prospectus
from time to time, in one or more transactions.
We are registering the shares of common stock offered under this
prospectus as required by the terms of certain registration
rights agreements between the selling stockholders and us, as
described in the section entitled the “Selling
Stockholders.” We will not receive any proceeds from the
sale of shares of our common stock sold by the selling
stockholders. However, we may receive up to $10,950,309 of
proceeds in connection with the exercise for cash by the selling
stockholders of warrants to purchase certain of the shares of
our common stock that may be offered and sold under this
prospectus.
Our shares of common stock are listed for trading on the
American Stock Exchange under the symbol “NEP.” On
March 28, 2008, the last reported sale price of our common
stock on the American Stock Exchange was $0.74 per share.
INVESTING IN OUR COMMON STOCK INVOLVES CERTAIN RISKS. AS YOU
REVIEW THIS PROSPECTUS, YOU SHOULD CAREFULLY CONSIDER THE
MATTERS DESCRIBED IN THE SECTION OF THIS PROSPECTUS TITLED
“RISK FACTORS” BEGINNING ON PAGE 3.
None of the Securities and Exchange Commission, any state
securities commission or any other regulatory body has approved
or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the
contrary is a criminal offense.
The date of this prospectus is April 16, 2008
Prospectus
Summary
This summary highlights information contained in other parts
of this prospectus. Because it is a summary, it does not contain
all of the information that is important to you. You should
carefully read the more detailed information contained or
incorporated by reference in this prospectus, including the
section entitled “Risk Factors” on page 3 and our
financial statements and related notes, which are incorporated
by reference. We refer to Nephros, Inc. and its consolidated
subsidiary as “Nephros”, the “Company”,
“we”, “our”, and “us”.
About the
Company
Nephros, Inc., headquartered in New York, is a medical device
company developing and marketing products designed to improve
the quality of life for the End-Stage Renal Disease (ESRD)
patient, while addressing the critical financial and clinical
needs of the care provider. ESRD is a disease state
characterized by the irreversible loss of kidney function.
Nephros believes that its products, particularly its
Mid-Dilution Hemodiafiltration therapy, are designed to remove a
range of harmful substances more effectively, and more
cost-effectively, than existing ESRD treatment methods;
particularly with respect to substances known collectively as
“middle molecules,” due to their molecular weight,
that have been found to contribute to such conditions as
dialysis-related amyloidosis, carpal tunnel syndrome,
degenerative bone disease and, ultimately, mortality in the ESRD
patient. Nephros products are currently being used in over fifty
clinics in Europe, and are currently sold and distributed
throughout Europe.
In the course of our extensive development, we have diversified
into infection control in the form of our Dual Stage Ultrafilter
water filtration products (the “DSU”). The
Company’s patented dual stage cold sterilization
Ultrafilter has the capability to filter out bacteria and, due
to its exceptional filtration levels, filter out many viruses
and parasites. The DSU proprietary design provides dual-stage
filtration which reduces the risk of filtration failure. With
initial focus on health care, the DSU is in a pilot-use program
at a major medical center and has been selected for further
development by the U.S. Marine Corps. The Company considers
the DSU a significant breakthrough in providing affordable and
reliable water filtration. The DSU is based on Nephros’
proprietary water filtration technology originally designed for
medical use in its H2H machine, and is a complementary product
line to the Company’s main focus, the ESRD therapy business.
The
Offering
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Securities offered by the selling stockholders |
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36,916,328 shares of common stock of Nephros, par value
$0.001 per share, held by the selling stockholders, are being
offered by this prospectus.(1)(2) |
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Shares outstanding before the Offering |
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38,165,380 shares of common stock(3) |
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Use of Proceeds |
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The shares being offered pursuant to this prospectus are being
sold by the selling stockholders, and we will not receive any
proceeds from the sale of the shares by the selling
stockholders. We may receive proceeds in connection with the
exercise of the Warrants for cash, the underlying shares of
which may be sold by the selling stockholders under this
prospectus. |
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(1) |
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Includes (i) 9,122,566 shares of our common stock
issuable upon conversion of our Class D warrants with an
exercise price per share equal to $0.90 per share (the
“Class D Warrants”) issued by us to certain
selling stockholders in connection with our September 2007
financing, (ii) 1,756,374 shares of our common stock
issuable upon conversion of our placement agent warrants with an
exercise price per share equal to $0.706 per share (the
“Placement Agent Warrants”) issued by us to certain
selling stockholders in connection with our September 2007
financing and (iii) 200,000 shares of our common stock
issuable upon conversion of our underwriter warrants with an
exercise price per share equal to $7.50 per share (the
“Underwriter Warrants”, and together with the
Class D Warrants and the Placement Agent Warrants, the
“Warrants”) issued by us to certain selling
stockholders in connection with our initial public offering. |
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(i) The following selling stockholders received our common
stock and Class D Warrants, as further described under the
section entitled “Selling Stockholders”, in connection
with our September 2007 financing: Lambda Investors LLC, Enso
Global Equities Master Partnership LP, GPC 76, LLC, Lewis P.
Schneider, Southpaw Credit Opportunity Master Fund LP, 3V
Capital Master Fund Ltd., Distressed/High Yield Trading
Opportunities Ltd., Kudu Partners, LP and LJHS Company (the
“2007 Investors”); (ii) the following selling
stockholders received Placement Agent Warrants in connection
with our September 2007 financing: National Securities
Corporation, Mark Goldwasser, Brian Friedman, Christopher Dewey,
Malcolm Plett, Ryan Rauch, Matt Portes, Peter Menachem, Michael
Compton, Eric Lyon, Tom Holly, Dinosaur Securities LLC, Andrew
J. Deniken and David Garrity; and (iii) the following
selling stockholders received Underwriter Warrants in connection
with our initial public offering: Gary Shemano, William Corbett,
Howard Davis, David Weinstein, Doug Kaiser, Frank Salvatore,
Michael Bresner, Mark Goldwasser, Brian Friedman, Robert Daskal
and National Securities Corporation. |
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(3) |
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This amount does not include the 11,078,940 shares of
common stock issuable upon conversion of the Warrants. |
Corporate
Information
We are incorporated in Delaware and our principal executive
offices are located at 3960 Broadway, New York, New York 10032.
Our telephone number is
(212) 781-5113
and our website address is www.nephros.com. Information
contained in, or accessible through, our website does not
constitute part of this prospectus.
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Risk
Factors
An investment in shares of our common stock involves a high
degree of risk. You should consider carefully the following
information about these risks, together with the other
information contained or incorporated by reference in this
prospectus, before you decide whether to buy our common stock.
The occurrence of any of the following risks could have a
material adverse effect on our business, financial condition and
results of operations.
Risks
Related to Our Company
We
have a history of operating losses and a significant accumulated
deficit, and we may not achieve or maintain profitability in the
future.
We have not been profitable since our inception in 1997. As of
December 31, 2007, we had an accumulated deficit of
approximately $81,612,000 primarily as a result of our research
and development expenses and selling, general and administrative
expenses. We expect to continue to incur additional losses for
the foreseeable future as a result of a high level of operating
expenses, significant up-front expenditures including the cost
of clinical trials, production and marketing activities and very
limited revenue from the sale of our products. We began sales of
our first product in March 2004, and we may never realize
sufficient revenues from the sale of our products or be
profitable. Each of the following factors, among others, may
influence the timing and extent of our profitability, if any:
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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;
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the market acceptance of HDF therapy in the United States and of
our technologies and products in each of our target markets;
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our ability to effectively and efficiently manufacture, market
and distribute our products;
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our ability to sell our products at competitive prices which
exceed our per unit costs; and
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the consolidation of dialysis clinics into larger clinical
groups.
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Our
independent registered public accountants, in their audit report
related to our financial statements for the year ended
December 31, 2007, expressed substantial doubt about our
ability to continue as a going concern.
Our independent registered public accounting firm has included
an explanatory paragraph in their report on our financial
statements included in our Annual Report on
Form 10-KSB
expressing doubt as to our ability to continue as a going
concern. Our financial statements accompanying the
Form 10-KSB
have been prepared assuming that we will continue as a going
concern, however, there can be no assurance that we will be able
to do so. Our recurring losses and difficulty in generating
sufficient cash flow to meet our obligations and sustain our
operations, raises substantial doubt about our ability to
continue as a going concern, and our consolidated financial
statements do not include any adjustments that might result from
the outcome of this uncertainty. Based on our current cash flow
projections, we will need to raise additional funds through
either the licensing or sale of our technologies or the
additional public or private offerings of our securities.
However, there is no guarantee that we will be able to obtain
further financing, or to do so on reasonable terms. If we are
unable to raise additional funds on a timely basis, or at all,
we would be materially adversely affected.
Our
short-term investments may not provide us with the liquidity
that we intended them to provide. If we are unable to liquidate
our short-term investments in a timely manner and on reasonable
terms, then we may run out of funds with which to operate our
business.
As of December 31, 2007, we held $4.7 million in
auction rate securities (“ARS”) which are classified
as short-term investments on our balance sheet. ARS are
long-term debt instruments with interest rates reset through
periodic short-term auctions. If there are insufficient buyers
when such a periodic auction is held, then the auction
“fails” and the holders of the ARS are unable to
liquidate their investment through such auction. Starting in
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February 2008, the auctions for our ARS have
“failed.” Accordingly, and for so long as such
auctions continue to “fail,” these ARS are no longer
functionally short-term.
To the extent that the auctions for our ARS continue to
“fail” and no other markets develop for our ARS, we
may be unable to liquidate these assets in a timely manner, on
reasonable terms or at all. If we are unable to liquidate our
short-term investments in a timely manner and on reasonable
terms, then we may run out of funds with which to operate our
business. If the current lack of liquidity relating to our ARS
investments continues, it may have a material adverse effect on
our ability to fund our ongoing operations and growth
initiatives.
We may
not be able to meet the American Stock Exchange’s continued
listing standards and as a result, we may be delisted from the
American Stock Exchange.
During 2006, we received notices from AMEX that we were not in
compliance with certain conditions of the continued listing
standards of Section 1003 of the AMEX Company Guide.
Specifically, AMEX noted our failure to comply with
Section 1003(a)(i) of the AMEX Company Guide relating to
shareholders’ equity of less than $2,000,000 and losses
from continuing operations
and/or net
losses in two out of our three most recent fiscal years;
Section 1003(a)(ii) of the AMEX Company Guide relating to
shareholders’ equity of less than $4,000,000 and losses
from continuing operations
and/or net
losses in three out of our four most recent fiscal years; and
Section 1003(a)(iii) of the AMEX Company Guide relating to
shareholders’ equity of less than $6,000,000 and losses
from continuing operations
and/or net
losses in our five most recent fiscal years. We submitted a plan
in August 2006 to advise AMEX of the steps we had taken, and
proposed to take, to regain compliance with the applicable
listing standards.
On November 14, 2006, we received notice that the AMEX
staff had reviewed our plan of compliance to meet the
AMEX’s continued listing standards and that AMEX would
continue our listing while we sought to regain compliance with
the continued listing standards during the period ending
January 17, 2008. During the plan period, we were required
to provide the AMEX staff with updates regarding initiatives set
forth in our plan of compliance. On November 14, 2007, all
of our Series A 10% Secured Convertible Notes Due 2008 and
our Series B 10% Secured Convertible Notes due 2008
(collectively, the “Notes”), representing an
aggregate principal amount of $18 million, were converted
into shares of our common stock and warrants, resulting in an
increase in our stockholders’ equity. As a result, and
notwithstanding our loss during the fourth quarter of 2007, our
stockholders’ equity, at December 31, 2007, was
approximately $8,756,000 and in excess of the $6,000,000
required by the AMEX rules.
On March 5, 2008, we received a letter from the AMEX
acknowledging that we had resolved the continued listing
deficiencies referenced in the AMEX’s letters dated
July 17, 2006 and November 14, 2006. However, if we
are not able to generate revenues from operations or timely
raise equity capital, we are likely to again fail to comply with
the AMEX rules regarding minimum shareholders’ equity.
Should this occur within 12 months of January 17,
2009, then, in accordance with Section 1009(h) of the AMEX
Company Guide, the AMEX may evaluate the relationship between
the two incidents and apply more truncated procedures for
compliance or immediately initiate delisting proceedings.
Furthermore, there can be no assurance that we will not run
afoul of the AMEX’s other continued listing standards. If
we fail to meet such standards, then our common stock may be
delisted from the AMEX.
On September 27, 2007, we received a warning letter from
the AMEX stating that the staff of the AMEX Listing
Qualifications Department had determined that we were not in
compliance with Section 121B(2)(c) of the AMEX Company
Guide requiring that at least 50% of the directors of our board
of directors are independent directors. This non-compliance was
due to the fact that William J. Fox, Judy Slotkin, W. Townsend
Ziebold and Howard Davis resigned from our board of directors on
September 19, 2007, concurrently with the appointment of
Paul Mieyal and Arthur Amron to our board of directors, in
accordance with our September 2007 financing. Consequently, our
board of directors consisted of five directors, two of whom were
independent. The AMEX had given us until December 26, 2007
to regain compliance with the independence requirements. On
November 16, 2007, James S. Scibetta was appointed to serve
as an independent director on our board of directors. On
December 5, 2007 we received a letter from the AMEX
acknowledging that we had resolved the continued listing
deficiency identified in their September 27, 2007 letter.
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If our common stock is delisted by the AMEX, trading of our
common stock would thereafter likely be conducted on the OTC
Bulletin Board. In such case, the market liquidity for our
common stock would likely be negatively affected, which may make
it more difficult for holders of our common stock to sell their
securities in the open market and we could face difficulty
raising capital necessary for our continued operation. Investors
may find it more difficult to dispose of or obtain accurate
quotations as to the market value of our securities. In
addition, our common stock, if delisted by the AMEX, may
constitute “penny stock” (as defined in
Rule 3a51-1
promulgated under the Securities Exchange Act of 1934, as
amended) if we fail to meet certain criteria set forth in such
Rule. Various practice requirements are imposed on
broker-dealers who sell “penny stocks” to persons
other than established customers and accredited investors. For
these types of transactions, the broker-dealer must make a
special suitability determination for the purchaser and have
received the purchaser’s written consent to the
transactions prior to sale. Consequently, if our common stock
were to become “penny stock,” then the Rule may deter
broker-dealers from recommending or selling our common stock,
which could further negatively affect the liquidity of our
common stock.
Pursuant
to the terms of our recently completed financing, if we fail to
have the registration statement of which this prospectus is a
part declared effective by the SEC in a timely manner as
provided in the Registration Rights Agreement, then we may be
required to pay liquidated damages to the 2007
Investors.
In connection with our September 2007 financing of an aggregate
of approximately $18 million principal amount of
Series A and Series B 10% Secured Convertible Notes
due 2008 (the “New Notes”), we entered into a
Registration Rights Agreement (the “Registration Rights
Agreement”) with the investors in the Financing (the
“2007 Investors”) pursuant to which we agreed to file
an initial resale registration statement with the SEC no later
than 60 days after the filing of a definitive version of an
Information Statement on Schedule 14C (the
“Information Statement”). The Information Statement
was filed with the SEC on October 24, 2007, and initial
resale registration statement was filed on December 20,
2007.
We have agreed to use our commercially reasonable best efforts
to have the registration statement of which this prospectus is a
part declared effective within 240 days after filing of the
Information Statement. In the event such registration statement
has not been declared effective within such time period, for
each 30-day
period thereafter or portion thereof, we will pay each 2007
Investor, as liquidated damages, an amount equal to 1% of the
principal and interest amount of such 2007 Investor’s New
Notes that were automatically converted into shares of our
common stock (the “Conversion Amount”) in respect of
the first ten
30-day
periods, and 2% of such 2007 Investor’s Conversion Amount
thereafter. If we fail to pay the liquidated damages when due,
then we shall pay interest thereon at a rate of 15% per annum.
Certain
customers individually account for a large portion of our
product sales, and the loss of any of these customers could have
a material adverse effect on our sales.
For the year ended December 31, 2007, one of our customers
accounted for 91% of our product sales. Also, this customer
represented 98% of our accounts receivable as of
December 31, 2007. We believe that the loss of this
customer would have a material adverse effect on our product
sales, at least temporarily, while we seek to replace such
customer
and/or
self-distribute in the territories currently served by such
customer.
We
cannot sell our ESRD therapy products, including certain
modifications thereto, until we obtain the requisite regulatory
approvals and clearances in the countries in which we intend to
sell our products. We have not obtained FDA approval for any of
our ESRD therapy products, except for our HD190 filter, and
cannot sell any of our other ESRD therapy products in the United
States unless and until we obtain such approval. If we fail to
receive, or experience a significant delay in receiving, such
approvals and clearances then we may not be able to get our
products to market and enhance our revenues.
Our business strategy depends in part on our ability to get our
products into the market as quickly as possible. We obtained the
Conformité Européene, or CE, mark, which demonstrates
compliance with the relevant European Union requirements and is
a regulatory prerequisite for selling our products in the
European Union and certain other countries that recognize CE
marking (collectively, “European Community”), for our
OLpūr MDHDF filter series product in 2003 and received CE
marking in November 2006 for our water filtration product, the
Dual Stage
5
Ultrafilter (“DSU”). We have not yet obtained the CE
mark for any of our other products. Similarly, we cannot sell
our ESRD therapy products in the United States until we receive
FDA clearance. Although we received approval of our IDE in March
2007 to begin clinical trials in the United States, until we
complete the requisite U.S. human clinical trials and
submit pre-market notification to the FDA pursuant to
Section 510(k) of the FDC Act or otherwise comply with FDA
requirements for a 510(k) approval, we will not be eligible for
FDA approval for any of our products, except for our HD190
filter.
In addition to the pre-market notification required pursuant to
Section 510(k) of the FDC Act, the FDA could require us to
obtain pre-market approval of our ESRD therapy products under
Section 515 of the FDC Act, either because of legislative
or regulatory changes or because the FDA does not agree with our
determination that we are eligible to use the
Section 510(k) pre-market notification process. The
Section 515 pre-market approval process is a significantly
more costly, lengthy and uncertain approval process and could
materially delay our products coming to market. If we do obtain
clearance for marketing of any of our devices under
Section 510(k) of the FDC Act, then any changes we wish to
make to such device that could significantly affect safety and
effectiveness will require clearance of a notification pursuant
to Section 510(k), and we may need to submit clinical and
manufacturing comparability data to obtain such approval or
clearance. We could not market any such modified device until we
received FDA clearance or approval. We cannot guarantee that the
FDA would timely, if at all, clear or approve any modified
product for which Section 510(k) is applicable. Failure to
obtain timely clearance or approval for changes to marketed
products would impair our ability to sell such products and
generate revenues in the United States.
The clearance
and/or
approval processes in the European Community and in the United
States can be lengthy and uncertain and each requires
substantial commitments of our financial resources and our
management’s time and effort. We may not be able to obtain
further CE marking or any FDA approval for any of our ESRD
therapy products in a timely manner or at all. Even if we do
obtain regulatory approval, approval may be only for limited
uses with specific classes of patients, processes or other
devices. Our failure to obtain, or delays in obtaining, the
necessary regulatory clearance
and/or
approvals with respect to the European Community or the United
States would prevent us from selling our affected products in
these regions. If we cannot sell some of our products in these
regions, or if we are delayed in selling while awaiting the
necessary clearance
and/or
approvals, our ability to generate revenues from these products
will be limited.
If we are successful in our initial marketing efforts in some or
all of Cyprus, Denmark, France, Germany, Greece, Ireland, Italy,
the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland
and the United Kingdom (referred to hereinafter collectively as
the “Target European Market”) and the United States,
then we plan to market our ESRD therapy products in several
countries outside of our Target European Market and the United
States, including Korea and China, Canada and Mexico.
Requirements pertaining to the sale of medical devices vary
widely from country to country. It may be very expensive and
difficult for us to meet the requirements for the sale of our
ESRD therapy products in many of these countries. As a result,
we may not be able to obtain the required approvals in a timely
manner, if at all. If we cannot sell our ESRD therapy products
outside of our Target European Market and the United States,
then the size of our potential market could be reduced, which
would limit our potential sales and revenues.
We have entered into an agreement with Asahi Kasei Medical Co.,
Ltd. (“Asahi”) granting Asahi exclusive rights to
manufacture and distribute filter products based on our
OLpūr MD190 hemodiafilter in Japan for 10 years
commencing when the first such product receives Japanese
regulatory approval. If the requisite Japanese regulatory
approvals are not timely obtained, our potential license
revenues will be limited.
Clinical
studies required for our ESRD therapy products are costly and
time-consuming, and their outcome is uncertain.
Before obtaining regulatory approvals for the commercial sale of
any of our ESRD therapy products in the United States and
elsewhere, we must demonstrate through clinical studies that our
products are safe and effective. We received conditional
approval for our IDE application from the FDA to begin human
clinical trials of our OLpūr
H2H
hemodiafiltration module and OLpūr MD220 hemodiafilter. We
were granted this approval on the condition that, by
March 5, 2007, we submit a response to two informational
questions from the FDA. We have responded to
6
these questions. We have obtained approval from Western IRB,
Inc., which enables us to proceed with our clinical trial. We
began our clinical trials in the United States in the fourth
quarter of 2007.
For products other than those for which we have already received
marketing approval, if we do not prove in clinical trials that
our ESRD therapy products are safe and effective, we will not
obtain marketing approvals from the FDA and other applicable
regulatory authorities. In particular, one or more of our ESRD
therapy products may not exhibit the expected medical benefits,
may cause harmful side effects, may not be effective in treating
dialysis patients or may have other unexpected characteristics
that preclude regulatory approval for any or all indications of
use or limit commercial use if approved. The length of time
necessary to complete clinical trials varies significantly and
is difficult to predict. Factors that can cause delay or
termination of our clinical trials include:
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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;
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lower than expected retention rates of subjects in a clinical
trial;
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inadequately trained or insufficient personnel at the study site
to assist in overseeing and monitoring clinical trials;
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delays in approvals from a study site’s review board, or
other required approvals;
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longer treatment time required to demonstrate effectiveness;
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lack of sufficient supplies of the ESRD therapy product;
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adverse medical events or side effects in treated subjects;
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lack of effectiveness of the ESRD therapy product being
tested; and
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regulatory changes.
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Even if we obtain positive results from clinical studies for our
products, we may not achieve the same success in future studies
of such products. Data obtained from clinical studies are
susceptible to varying interpretations that could delay, limit
or prevent regulatory approval. In addition, we may encounter
delays or rejections based upon changes in FDA policy for device
approval during the period of product development and FDA
regulatory review of each submitted new device application. We
may encounter similar delays in foreign countries. Moreover,
regulatory approval may entail limitations on the indicated uses
of the device. Failure to obtain requisite governmental
approvals or failure to obtain approvals of the scope requested
will delay or preclude our licensees or marketing partners from
marketing our products or limit the commercial use of such
products and will have a material adverse effect on our
business, financial condition and results of operations.
In addition, some or all of the clinical trials we undertake may
not demonstrate sufficient safety and efficacy to obtain the
requisite regulatory approvals, which could prevent or delay the
creation of marketable products. Our product development costs
will increase if we have delays in testing or approvals, if we
need to perform more, larger or different clinical trials than
planned or if our trials are not successful. Delays in our
clinical trials may harm our financial results and the
commercial prospects for our products. Additionally, we may be
unable to complete our clinical trials if we are unable to
obtain additional capital.
We may
be required to design and conduct additional clinical
trials.
We may be required to design and conduct additional clinical
trials to further demonstrate the safety and efficacy of our
ESRD therapy product, which may result in significant expense
and delay. The FDA and foreign regulatory authorities may
require new or additional clinical trials because of
inconclusive results from current or earlier clinical trials, a
possible failure to conduct clinical trials in complete
adherence to FDA good clinical practice standards and similar
standards of foreign regulatory authorities, the identification
of new clinical trial endpoints, or the need for additional data
regarding the safety or efficacy of our ESRD therapy products.
It is possible that the FDA or foreign regulatory authorities
may not ultimately approve our products for commercial sale in
any jurisdiction, even if we believe future clinical results are
positive.
7
We
cannot assure you that our ESRD therapy products will be safe
and we are required under applicable law to report any
product-related deaths or serious injuries or product
malfunctions that could result in deaths or serious injuries,
and such reports could trigger recalls, class action lawsuits
and other events that could cause us to incur expenses and may
also limit our ability to generate revenues from such
products.
We cannot assure you that our ESRD therapy products will be
safe. Under the FDC Act, we are required to submit medical
device reports, or MDRs, to the FDA to report device-related
deaths, serious injuries and product malfunctions that could
result in death or serious injury if they were to recur.
Depending on their significance, MDRs could trigger events that
could cause us to incur expenses and may also limit our ability
to generate revenues from such products, such as the following:
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information contained in the MDRs could trigger FDA regulatory
actions such as inspections, recalls and patient/physician
notifications;
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because the reports are publicly available, MDRs could become
the basis for private lawsuits, including class actions; and
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if we fail to submit a required MDR to the FDA, the FDA could
take enforcement action against us.
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If any of these events occur, then we could incur significant
expenses and it could become more difficult for us to gain
market acceptance of our ESRD therapy products and to generate
revenues from sales. Other countries may impose analogous
reporting requirements that could cause us to incur expenses and
may also limit our ability to generate revenues from sales of
our ESRD therapy products.
Product
liability associated with the production, marketing and sale of
our products, and/or the expense of defending against claims of
product liability, could materially deplete our assets and
generate negative publicity which could impair our
reputation.
The production, marketing and sale of kidney dialysis and
water-filtration products have inherent risks of liability in
the event of product failure or claim of harm caused by product
operation. Furthermore, even meritless claims of product
liability may be costly to defend against. Although we have
acquired product liability insurance in the amount of $5,000,000
for our dialysis filters outside of the United States and intend
to acquire additional product liability insurance upon
commercialization of any of our additional products or upon
introduction of any products in the United States, we may not be
able to maintain or obtain this insurance on acceptable terms or
at all. Because we may not be able to obtain insurance that
provides us with adequate protection against all potential
product liability claims, a successful claim in excess of our
insurance coverage could materially deplete our assets.
Moreover, even if we are able to obtain adequate insurance, any
claim against us could generate negative publicity, which could
impair our reputation and adversely affect the demand for our
products, our ability to generate sales and our profitability.
Some of the agreements that we may enter into with manufacturers
of our products and components of our products may require us:
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To obtain product liability insurance; or
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To indemnify manufacturers against liabilities resulting from
the sale of our products.
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For example, our agreement with Medica s.r.l. requires that we
obtain and maintain certain minimum product liability insurance
coverage and that we indemnify Medica against certain
liabilities arising out of our products that they manufacture,
provided they do not arise out of Medica’s breach of the
agreement, negligence or willful misconduct. If we are not able
to obtain and maintain adequate product liability insurance,
then we could be in breach of these agreements, which could
materially adversely affect our ability to produce our products
and generate revenues. Even if we are able to obtain and
maintain product liability insurance, if a successful claim in
excess of our insurance coverage is made, then we may have to
indemnify some or all of our manufacturers for their losses,
which could materially deplete our assets.
8
If we
violate any provisions of the Food, Drug and Cosmetic Act (the
“FDC Act”) or any other statutes or regulations, then
we could be subject to enforcement actions by the FDA or other
governmental agencies.
We face a significant compliance burden under the FDC Act and
other applicable statutes and regulations which govern the
testing, labeling, storage, record keeping, distribution, sale,
marketing, advertising and promotion of our ESRD therapy
products. If we violate the FDC Act or other regulatory
requirements at any time during or after the product development
and/or
approval process, we could be subject to enforcement actions by
the FDA or other agencies, including:
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fines;
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injunctions;
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civil penalties;
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recalls or seizures of our products;
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total or partial suspension of the production of our products;
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withdrawal of any existing approvals or pre-market clearances of
our products;
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refusal to approve or clear new applications or notices relating
to our products;
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recommendations by the FDA that we not be allowed to enter into
government contracts; and
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criminal prosecution.
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Any of the above could have a material adverse effect on our
business, financial condition and results of operations.
Significant
additional governmental regulation could subject us to
unanticipated delays which would adversely affect our sales and
revenues.
Our business strategy depends in part on our ability to get our
products into the market as quickly as possible. Additional laws
and regulations, or changes to existing laws and regulations
that are applicable to our business may be enacted or
promulgated, and the interpretation, application or enforcement
of the existing laws and regulations may change. We cannot
predict the nature of any future laws, regulations,
interpretations, applications or enforcements or the specific
effects any of these might have on our business. Any future
laws, regulations, interpretations, applications or enforcements
could delay or prevent regulatory approval or clearance of our
products and our ability to market our products. Moreover,
changes that result in our failure to comply with the
requirements of applicable laws and regulations could result in
the types of enforcement actions by the FDA
and/or other
agencies as described above, all of which could impair our
ability to have manufactured and to sell the affected products.
Access
to the appropriations from the U.S. Department of Defense
regarding the development of a dual-stage water ultrafilter
could be subject to unanticipated delays which could adversely
affect our potential revenues.
Our business strategy with respect to our DSU products depends
in part on the successful development of DSU products for use by
the military. We have contracted with the U.S. Office of
Naval Research to develop a personal potable water purification
system for warfighters, and Federal appropriations from the
U.S. Department of Defense in an aggregate amount of
$3 million have been approved for this purpose. If there
are unanticipated delays in receiving the appropriations from
the U.S. Department of Defense, our operations and
potential revenues may be adversely affected.
9
Protecting
our intellectual property in our technology through patents may
be costly and ineffective. If we are not able to adequately
secure or enforce protection of our intellectual property, then
we may not be able to compete effectively and we may not be
profitable.
Our future success depends in part on our ability to protect the
intellectual property for our technology through patents. We
will only be able to protect our products and methods from
unauthorized use by third parties to the extent that our
products and methods are covered by valid and enforceable
patents or are effectively maintained as trade secrets. Our 13
granted U.S. patents will expire at various times from 2018
to 2022, assuming they are properly maintained.
The protection provided by our patents, and patent applications
if issued, may not be broad enough to prevent competitors from
introducing similar products into the market. Our patents, if
challenged or if we attempt to enforce them, may not necessarily
be upheld by the courts of any jurisdiction. Numerous
publications may have been disclosed by, and numerous patents
may have been issued to, our competitors and others relating to
methods and devices for dialysis of which we are not aware and
additional patents relating to methods and devices for dialysis
may be issued to our competitors and others in the future. If
any of those publications or patents conflict with our patent
rights, or cover our products, then any or all of our patent
applications could be rejected and any or all of our granted
patents could be invalidated, either of which could materially
adversely affect our competitive position.
Litigation and other proceedings relating to patent matters,
whether initiated by us or a third party, can be expensive and
time-consuming, regardless of whether the outcome is favorable
to us, and may require the diversion of substantial financial,
managerial and other resources. An adverse outcome could subject
us to significant liabilities to third parties or require us to
cease any related development, product sales or
commercialization activities. In addition, if patents that
contain dominating or conflicting claims have been or are
subsequently issued to others and the claims of these patents
are ultimately determined to be valid, then we may be required
to obtain licenses under patents of others in order to develop,
manufacture, use, import
and/or sell
our products. We may not be able to obtain licenses under any of
these patents on terms acceptable to us, if at all. If we do not
obtain these licenses, we could encounter delays in, or be
prevented entirely from using, importing, developing,
manufacturing, offering or selling any products or practicing
any methods, or delivering any services requiring such licenses.
If we file patent applications or obtain patents in foreign
countries, we will be subject to laws and procedures that differ
from those in the United States. Such differences could create
additional uncertainty about the level and extent of our patent
protection. Moreover, patent protection in foreign countries may
be different from patent protection under U.S. laws and may
not be as favorable to us. Many
non-U.S. jurisdictions,
for example, prohibit patent claims covering methods of medical
treatment of humans, although this prohibition may not include
devices used for such treatment.
If we
are not able to secure and enforce protection of our trade
secrets through enforcement of our confidentiality and
non-competition agreements, then our competitors may gain access
to our trade secrets, we may not be able to compete effectively
and we may not be profitable. Such protection may be costly and
ineffective.
We attempt to protect our trade secrets, including the
processes, concepts, ideas and documentation associated with our
technologies, through the use of confidentiality agreements and
non-competition agreements with our current employees and with
other parties to whom we have divulged such trade secrets. If
these employees or other parties breach our confidentiality
agreements and non-competition agreements or if these agreements
are not sufficient to protect our technology or are found to be
unenforceable, then our competitors could acquire and use
information that we consider to be our trade secrets and we may
not be able to compete effectively. Policing unauthorized use of
our trade secrets is difficult and expensive, particularly
because of the global nature of our operations. The laws of
other countries may not adequately protect our trade secrets.
If our
trademarks and trade names are not adequately protected, then we
may not be able to build brand loyalty and our sales and
revenues may suffer.
Our registered or unregistered trademarks or trade names may be
challenged, cancelled, infringed, circumvented or declared
generic or determined to be infringing on other marks. We may
not be able to protect our rights to
10
these trademarks and trade names, which we need to build brand
loyalty. Over the long term, if we are unable to establish a
brand based on our trademarks and trade names, then we may not
be able to compete effectively and our sales and revenues may
suffer.
If we
are not able to successfully
scale-up
production of our products, then our sales and revenues will
suffer.
In order to commercialize our products, we need to be able to
produce them in a cost-effective way on a large scale to meet
commercial demand, while maintaining extremely high standards
for quality and reliability. If we fail to successfully
commercialize our products, then we will not be profitable.
We expect to rely on a limited number of independent
manufacturers to produce our OLpūr MDHDF filter series and
our other products, including the DSU. Our manufacturers’
systems and procedures may not be adequate to support our
operations and may not be able to achieve the rapid execution
necessary to exploit the market for our products. Our
manufacturers could experience manufacturing and control
problems as they begin to
scale-up our
future manufacturing operations, and we may not be able to
scale-up
manufacturing in a timely manner or at a commercially reasonable
cost to enable production in sufficient quantities. If we
experience any of these problems with respect to our
manufacturers’ initial or future
scale-ups of
manufacturing operations, then we may not be able to have our
products manufactured and delivered in a timely manner. Our
products are new and evolving, and our manufacturers may
encounter unforeseen difficulties in manufacturing them in
commercial quantities or at all.
We
will not control the independent manufacturers of our products,
which may affect our ability to deliver our products in a timely
manner. If we are not able to ensure the timely delivery of our
products, then potential customers may not order our products,
and our sales and revenues would be adversely
affected.
Independent manufacturers of medical devices will manufacture
all of our products and components. We have contracted Medica
s.r.l., a developer and manufacturer of medical products with
corporate headquarters located in Italy, to assemble and produce
our OLpūr MD190, MD220 and possibly other filters,
including our DSU, and have an agreement with Membrana GmbH, a
manufacturer of medical and technical membranes for applications
like dialysis with corporate headquarters located in Germany, to
produce the fiber for the OLpūr MDHDF filter series. As
with any independent contractor, these manufacturers will not be
employed or otherwise controlled by us and will be generally
free to conduct their business at their own discretion. For us
to compete successfully, among other things, our products must
be manufactured on a timely basis in commercial quantities at
costs acceptable to us. If one or more of our independent
manufacturers fails to deliver our products in a timely manner,
then we may not be able to find a substitute manufacturer. If we
are not or if potential customers believe that we are not able
to ensure timely delivery of our products, then potential
customers may not order our products, and our sales and revenues
would be adversely affected.
The
loss or interruption of services of any of our manufacturers
could slow or stop production of our products, which would limit
our ability to generate sales and revenues.
Because we are likely to rely on no more than two contract
manufacturers to manufacture each of our products and major
components of our products, a stop or significant interruption
in the supply of our products or major components by a single
manufacturer, for any reason, could have a material adverse
effect on us. We expect most of our contract manufacturers will
enter into contracts with us to manufacture our products and
major components and that these contracts will be terminable by
the contractors or us at any time under certain circumstances.
We have not made alternative arrangements for the manufacture of
our products or major components and we cannot be sure that
acceptable alternative arrangements could be made on a timely
basis, or at all, if one or more of our manufacturers failed to
manufacture our products or major components in accordance with
the terms of our arrangements. If any such failure occurs and we
are unable to obtain acceptable alternative arrangements for the
manufacture of our products or major components of our products,
then the production and sale of our products could slow down or
stop and our cash flow would suffer.
11
If we
are not able to maintain sufficient quality controls, then the
approval or clearance of our ESRD therapy products by the
European Union, the FDA or other relevant authorities could be
delayed or denied and our sales and revenues will
suffer.
Approval or clearance of our ESRD therapy products could be
delayed by the European Union, the FDA and the relevant
authorities of other countries if our manufacturing facilities
do not comply with their respective manufacturing requirements.
The European Union imposes requirements on quality control
systems of manufacturers, which are inspected and certified on a
periodic basis and may be subject to additional unannounced
inspections. Failure by our manufacturers to comply with these
requirements could prevent us from marketing our ESRD therapy
products in the European Community. The FDA also imposes
requirements through quality system requirements, or QSR,
regulations, which include requirements for good manufacturing
practices, or GMP. Failure by our manufacturers to comply with
these requirements could prevent us from obtaining FDA approval
of our ESRD therapy products and from marketing such products in
the United States. Although the manufacturing facilities and
processes that we use to manufacture our OLpūr MDHDF filter
series have been inspected and certified by a worldwide testing
and certification agency (also referred to as a notified body)
that performs conformity assessments to European Union
requirements for medical devices, they have not been inspected
by the FDA. Similarly, although some of the facilities and
processes that we expect to use to manufacture our OLpūr
H2H
and OLpūr NS2000 have been inspected by the FDA, they have
not been inspected by any notified body. A “notified
body” is a group accredited and monitored by governmental
agencies that inspects manufacturing facilities and quality
control systems at regular intervals and is authorized to carry
out unannounced inspections. We cannot be sure that any of the
facilities or processes we use will comply or continue to comply
with their respective requirements on a timely basis or at all,
which could delay or prevent our obtaining the approvals we need
to market our products in the European Community and the United
States.
Even with approval to market our ESRD therapy products in the
European Community, the United States and other countries,
manufacturers of such products must continue to comply or ensure
compliance with the relevant manufacturing requirements.
Although we cannot control the manufacturers of our ESRD therapy
products, we may need to expend time, resources and effort in
product manufacturing and quality control to assist with their
continued compliance with these requirements. If violations of
applicable requirements are noted during periodic inspections of
the manufacturing facilities of our manufacturers, then we may
not be able to continue to market the ESRD therapy products
manufactured in such facilities and our revenues may be
materially adversely affected.
If our
products are commercialized, we may face significant challenges
in obtaining market acceptance of such products, which could
adversely affect our potential sales and revenues.
Our products are new to the market, and we do not yet have an
established market or customer base for our products. Acceptance
of our ESRD therapy products in the marketplace by both
potential users, including ESRD patients, and potential
purchasers, including nephrologists, dialysis clinics and other
health care providers, is uncertain, and our failure to achieve
sufficient market acceptance will significantly limit our
ability to generate revenue and be profitable. Market acceptance
will require substantial marketing efforts and the expenditure
of significant funds by us to inform dialysis patients and
nephrologists, dialysis clinics and other health care providers
of the benefits of using our ESRD therapy products. We may
encounter significant clinical and market resistance to our
products and our products may never achieve market acceptance.
We may not be able to build key relationships with physicians,
clinical groups and government agencies, pursue or increase
sales opportunities in Europe or elsewhere, or be the first to
introduce hemodiafiltration therapy in the United States.
Product orders may be cancelled, patients or customers currently
using our products may cease to do so and patients or customers
expected to begin using our products may not. Factors that may
affect our ability to achieve acceptance of our ESRD therapy
products in the marketplace include whether:
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such products will be safe for use;
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such products will be effective;
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such products will be cost-effective;
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12
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we will be able to demonstrate product safety, efficacy and
cost-effectiveness;
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there are unexpected side effects, complications or other safety
issues associated with such products; and
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government or third party reimbursement for the cost of such
products is available at reasonable rates, if at all.
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Acceptance of our water filtration products in the marketplace
is also uncertain, and our failure to achieve sufficient market
acceptance and sell such products at competitive prices will
limit our ability to generate revenue and be profitable. Our
water filtration products and technologies may not achieve
expected reliability, performance and endurance standards. Our
water filtration products and technology may not achieve market
acceptance, including among hospitals, or may not be deemed
suitable for other commercial, military, industrial or retail
applications.
Many of the same factors that may affect our ability to achieve
acceptance of our ESRD therapy products in the marketplace will
also apply to our water filtration products, except for those
related to side effects, clinical trials and third party
reimbursement.
If we
cannot develop adequate distribution, customer service and
technical support networks, then we may not be able to market
and distribute our products effectively and/or customers may
decide not to order our products, and, in either case, our sales
and revenues will suffer.
Our strategy requires us to distribute our products and provide
a significant amount of customer service and maintenance and
other technical service. To provide these services, we have
begun, and will need to continue, to develop a network of
distribution and a staff of employees and independent
contractors in each of the areas in which we intend to operate.
We cannot assure you we will be able to organize and manage this
network on a cost-effective basis. If we cannot effectively
organize and manage this network, then it may be difficult for
us to distribute our products and to provide competitive service
and support to our customers, in which case customers may be
unable, or decide not, to order our products and our sales and
revenues will suffer.
We may
face significant risks associated with international operations,
which could have a material adverse effect on our business,
financial condition and results of operations.
We expect to manufacture and to market our products in our
Target European Market and elsewhere outside of the United
States. We expect that our revenues from our Target European
Market will initially account for a significant portion of our
revenues. Our international operations are subject to a number
of risks, including the following:
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fluctuations in exchange rates of the United States dollar could
adversely affect our results of operations;
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we may face difficulties in enforcing and collecting accounts
receivable under some countries’ legal systems;
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local regulations may restrict our ability to sell our products,
have our products manufactured or conduct other operations;
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political instability could disrupt our operations;
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some governments and customers may have longer payment cycles,
with resulting adverse effects on our cash flow; and
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some countries could impose additional taxes or restrict the
import of our products.
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Any one or more of these factors could increase our costs,
reduce our revenues, or disrupt our operations, which could have
a material adverse effect on our business, financial condition
and results of operations.
13
If we
are unable to keep our key management and scientific personnel,
then we are likely to face significant delays at a critical time
in our corporate development and our business is likely to be
damaged.
Our success depends upon the skills, experience and efforts of
our management and other key personnel, including our chief
executive officer, certain members of our scientific and
engineering staff and our marketing executives. As a relatively
new company, much of our corporate, scientific and technical
knowledge is concentrated in the hands of these few individuals.
We do not maintain key-man life insurance on any of our
management or other key personnel other than Norman Barta, on
whom we obtained a $1 million key-man life insurance
policy. The loss of the services of one or more of our present
management or other key personnel could significantly delay the
development
and/or
launch of our products as there could be a learning curve of
several months or more for any replacement personnel.
Furthermore, competition for the type of highly skilled
individuals we require is intense and we may not be able to
attract and retain new employees of the caliber needed to
achieve our objectives. Failure to replace key personnel could
have a material adverse effect on our business, financial
condition and operations.
Our
fourth amended and restated certificate of incorporation, as
amended, limits liability of our directors and officers, which
could discourage you or other stockholders from bringing suits
against our directors or officers in circumstances where you
think they might otherwise be warranted.
Our fourth amended and restated certificate of incorporation, as
amended, provides, with specific exceptions required by Delaware
law, that our directors are not personally liable to us or our
stockholders for monetary damages for any action or failure to
take any action. In addition, we have agreed to, and our fourth
amended and restated certificate of incorporation, as amended,
and our second amended and restated bylaws provide for,
mandatory indemnification of directors and officers to the
fullest extent permitted by Delaware law. These provisions may
discourage stockholders from bringing suit against a director or
officer for breach of duty and may reduce the likelihood of
derivative litigation brought by stockholders on our behalf
against any of our directors or officers.
If and
to the extent we are found liable in certain proceedings or our
expenses related to those or other legal proceedings become
significant, then our liquidity could be materially adversely
affected and the value of our stockholders’ interests in us
could be impaired.
In April 2002, we entered into a letter agreement with Hermitage
Capital Corporation (“Hermitage”), as placement agent,
the stated term of which was from April 30, 2002 through
September 30, 2004. As of February 2003, we entered into a
settlement agreement with Hermitage pursuant to which, among
other things: the letter agreement was terminated; the parties
gave mutual releases relating to the letter agreement; and we
agreed to issue Hermitage or its designees, upon the closing of
certain transactions contemplated by a separate settlement
agreement between us and Lancer Offshore, Inc., warrants
exercisable until February 2006 to purchase an aggregate of
60,000 shares of common stock for $2.50 per share (or
17,046 shares of our common stock for $8.80 per share, if
adjusted for the reverse stock split pursuant to the
antidilution provisions of such warrant, as amended). Because
Lancer Offshore, Inc. never satisfied the closing conditions
and, consequently, a closing has not been held, we have not
issued any warrants to Hermitage in connection with our
settlement with them. In June 2004, Hermitage threatened to sue
us for warrants it claims are due to it under its settlement
agreement with us as well as a placement fee and additional
warrants it claims are, or will be, owed in connection with our
initial public offering completed on September 24, 2004, as
compensation for allegedly introducing us to one of the
underwriters. We had some discussions with Hermitage in the
hopes of reaching an amicable resolution of any potential
claims, most recently in January 2005. We have not heard from
Hermitage since then.
If and to the extent we are found to have significant liability
to Hermitage in any lawsuit Hermitage may bring against us, then
our liquidity could be materially adversely affected
and/or our
stockholders could experience dilution in their investment in us
and the value of our stockholders’ interests in us could be
impaired.
14
We may
use our financial resources in ways with which you do not agree
and in ways that may not yield a favorable return.
Our management has broad discretion over the use of our
financial resources, including the net proceeds from our initial
public offering and our subsequent financings. Stockholders may
not deem such uses desirable. Our use of our financial resources
may vary substantially from our currently planned uses. We
cannot assure you that we will apply such proceeds effectively
or that we will invest such proceeds in a manner that will yield
a favorable return or any return at all.
Several
provisions of the Delaware General Corporation Law, our fourth
amended and restated certificate of incorporation, as amended,
and our second amended and restated bylaws could discourage,
delay or prevent a merger or acquisition, which could adversely
affect the market price of our common stock.
Several provisions of the Delaware General Corporation Law, our
fourth amended and restated certificate of incorporation, as
amended, and our second amended and restated bylaws could
discourage, delay or prevent a merger or acquisition that
stockholders may consider favorable, and the market price of our
common stock could be reduced as a result. These provisions
include:
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•
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authorizing our board of directors to issue “blank
check” preferred stock without stockholder approval;
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•
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providing for a classified board of directors with staggered,
three-year terms;
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•
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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;
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•
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prohibiting cumulative voting in the election of directors;
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•
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limiting the persons who may call special meetings of
stockholders; and
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•
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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.
|
As a
relatively new company with little or no name recognition and
with several risks and uncertainties that could impair our
business operations, we are not likely to generate widespread
interest in our common stock. Without widespread interest in our
common stock, our common stock price may be highly volatile and
an investment in our common stock could decline in
value.
Unlike many companies with publicly traded securities, we have
little or no name recognition in the investment community. We
are a relatively new company and very few investors are familiar
with either our company or our products. We do not have an
active trading market in our common stock, and one might never
develop, or if it does develop, might not continue.
Additionally, the market price of our common stock may fluctuate
significantly in response to many factors, many of which are
beyond our control. Risks and uncertainties, including those
described elsewhere in this “Risk Factors” section
could impair our business operations or otherwise cause our
operating results or prospects to be below expectations of
investors and market analysts, which could adversely affect the
market price of our common stock. As a result, investors in our
common stock may not be able to resell their shares at or above
their purchase price and could lose all of their investment.
Securities class action litigation is often brought against
public companies following periods of volatility in the market
price of such company’s securities. As a result, we may
become subject to this type of litigation in the future.
Litigation of this type could be extremely expensive and divert
management’s attention and resources from running our
company.
15
If we
fail to maintain an effective system of internal controls over
financial reporting, we may not be able to accurately report our
financial results, which could have a material adverse effect on
our business, financial condition and the market value of our
securities.
Effective internal controls over financial reporting are
necessary for us to provide reliable financial reports. If we
cannot provide reliable financial reports, our reputation and
operating results may be harmed. Management identified a
material weakness in internal control over financial reporting,
due to an insufficient number of resources in the accounting and
finance department, resulting in (i) an ineffective review,
monitoring and analysis of schedules, reconciliations and
financial statement disclosures and (ii) the misapplication
of generally accepted accounting principles
(“U.S. GAAP”) and SEC reporting requirements. Due
to the pervasive effect of the lack of resources, including a
lack of resources that are appropriately qualified in the areas
of U.S. GAAP and SEC reporting, and the potential impact on
the financial statements and disclosures and the importance of
the annual and interim financial closing and reporting process,
in the aggregate, there is more than a remote likelihood that a
material misstatement of the annual financial statements would
not have been prevented or detected .
Management is in the process of remediating the above-mentioned
weakness in our internal control over financial reporting and
has designed the following steps to be implemented:
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•
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Develop procedures to implement a formal monthly closing
calendar and process and hold monthly meetings to address the
monthly closing process;
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•
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Establish a detailed timeline for review and completion of
financial reports to be included in our
Forms 10-QSB
and 10-KSB;
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•
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Enhance the level of service provided by outside accounting
service providers to further support and supplement our internal
staff in accounting and related areas;
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•
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Seek additional staffing to provide additional resources for
internal preparation and review of financial reports; and
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•
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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.
|
The implementation of these remediation plans has been initiated
and will continue during fiscal 2008. The material weakness will
not be considered remediated until the applicable remedial
procedures are tested and management has concluded that the
procedures are operating effectively.
The use of our financial resources will be required not only for
implementation of these measures, but also for testing their
effectiveness. Based on our existing funds, there can be no
assurance that such procedures will be implemented on a timely
basis, or at all. If we are not able to implement controls to
avoid the occurrence of these kinds of problems in the future,
we might report results that are not consistent with our actual
results and we may need to restate results that will have been
previously reported.
Our
directors, executive officers and principal stockholders control
a significant portion of our stock and, if they choose to vote
together, could have sufficient voting power to control the vote
on substantially all corporate matters.
As of December 31, 2007, our directors, executive officers
and principal stockholders beneficially owned approximately
82.7% of our outstanding common stock. As of December 31,
2007, Lambda Investors LLC beneficially owned 37.7% of our
outstanding common stock. As of December 31, 2007, Ronald
O. Perelman beneficially owned 9.3% of our outstanding common
stock. As of December 31, 2007, Enso Global Equities Master
Partnership LP beneficially owned 9.0% of our outstanding common
stock. As of December 31, 2007, Southpaw Credit Opportunity
Master Fund LP beneficially owned 7.7% of our outstanding
common stock. As of December 31, 2007, each of 3V Capital
Master Fund Ltd. and Distressed/High Yield Trading
Opportunities Ltd. beneficially owned 5.8% of our outstanding
common stock. As of December 31, 2007, WPPN, LP,
Wasserstein SBIC Ventures II L.P., WV II Employee Partners,
LLC and BW Employee Holdings, LLC, entities that may be deemed
to be controlled by Bruce Wasserstein, beneficially owned an
aggregate of 5.1% of our outstanding common stock.
16
Our principal stockholders may have significant influence over
our policies and affairs, including the election of directors.
Should they act as a group, they will have the power to elect
all of our directors and to control the vote on substantially
all other corporate matters without the approval of other
stockholders. Furthermore, such concentration of voting power
could enable those stockholders to delay or prevent another
party from taking control of our company even where such change
of control transaction might be desirable to other stockholders.
Future
sales of our common stock could cause the market price of our
common stock to decline.
The market price of our common stock could decline due to sales
of a large number of shares in the market, including sales of
shares by our large stockholders or the perception that such
sales could occur. These sales could also make it more difficult
or impossible for us to sell equity securities in the future at
a time and price that we deem appropriate to raise funds through
future offerings of common stock.
Prior to our initial public offering we entered into
registration rights agreements with many of our existing
security holders that entitled them to have an aggregate of
10,020,248 shares registered for sale in the public market.
Moreover, many of those shares, as well as the
184,250 shares we sold to Asahi, could be sold in the
public market without registration once they have been held for
one year, subject to the limitations of Rule 144 under the
Securities Act. In addition, in connection with the September
2007 financing, we entered into the Registration Rights
Agreement with the 2007 Investors pursuant to which we granted
the 2007 Investors certain registration rights with respect to
their shares of common stock.
Risks
Related to the ESRD Therapy Industry
We
expect to face significant competition from existing suppliers
of renal replacement therapy devices, supplies and services. If
we are not able to compete with them effectively, then we may
not be profitable.
We expect to compete in the ESRD therapy market with existing
suppliers of hemodialysis and peritoneal dialysis devices,
supplies and services. Our competitors include Fresenius Medical
Care AG and Gambro AB, currently two of the primary machine
manufacturers in hemodialysis, as well as B. Braun Biotech
International GmbH, and Nikkiso Corporation and other smaller
machine manufacturers in hemodialysis. B. Braun, Fresenius,
Gambro and Nikkiso also manufacture HDF machines. These
companies and most of our other competitors have longer
operating histories and substantially greater financial,
marketing, technical, manufacturing and research and development
resources and experience than we have. Our competitors could use
these resources and experiences to develop products that are
more effective or less costly than any or all of our products or
that could render any or all of our products obsolete. Our
competitors could also use their economic strength to influence
the market to continue to buy their existing products.
We do not have a significant established customer base and may
encounter a high degree of competition in further developing
one. Our potential customers are a limited number of
nephrologists, national, regional and local dialysis clinics and
other healthcare providers. The number of our potential
customers may be further limited to the extent any exclusive
relationships exist or are entered into between our potential
customers and our competitors. We cannot assure you that we will
be successful in marketing our products to these potential
customers. If we are not able to develop competitive products
and take and hold sufficient market share from our competitors,
we will not be profitable.
Some
of our competitors own or could acquire dialysis clinics
throughout the United States, our Target European Market and
other regions of the world. We may not be able to successfully
market our products to the dialysis clinics under their
ownership. If our potential market is materially reduced in this
manner, then our potential sales and revenues could be
materially reduced.
Some of our competitors, including Fresenius and Gambro,
manufacture their own products and own dialysis clinics in the
United States, our Target European Market
and/or other
regions of the world. In 2005, Gambro divested its
U.S. dialysis clinics to DaVita, Inc. and entered a
preferred, but not exclusive, ten-year supplier arrangement with
DaVita, whereby DaVita will purchase a significant amount of
renal products and supplies from Gambro Renal Products. Because
these competitors have historically tended to use their own
products in their clinics, we may not be able to successfully
market our products to the dialysis clinics under their
ownership.
17
According to the Fresenius 2007
Form 20-F
annual report, Fresenius provides treatment in its own dialysis
clinics to approximately 173,863 patients in approximately
2,238 facilities around the world of which approximately 1,602
facilities are located in the North America. According to
DaVita’s press release dated February 13, 2008, DaVita
provides treatment in 1,359 outpatient dialysis centers serving
approximately 107,000 patients in the United States, and,
according to DaVita’s 2006 Annual Report, DaVita and
Fresenius combined treated approximately 65% of the United
States outpatient dialysis patients in 2007.
We believe that there is currently a trend among ESRD therapy
providers towards greater consolidation. If such consolidation
takes the form of our competitors acquiring independent dialysis
clinics, rather than such dialysis clinics banding together in
independent chains, then more of our potential customers would
also be our competitors. If our competitors continue to grow
their networks of dialysis clinics, whether organically or
through consolidation, and if we cannot successfully market our
products to dialysis clinics owned by these competitors or any
other competitors and do not acquire clinics ourselves, then our
revenues could be adversely affected.
If the
size of the potential market for our products is significantly
reduced due to pharmacological or technological advances in
preventative and alternative treatments for ESRD, then our
potential sales and revenues will suffer.
Pharmacological or technological advances in preventative or
alternative treatments for ESRD could significantly reduce the
number of ESRD patients needing our products. These
pharmacological or technological advances may include:
|
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•
|
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);
|
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|
•
|
the development of new medications, or improvements in existing
medications, which reduce the incidence of kidney transplant
rejection; and
|
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|
•
|
developments in the use of kidneys harvested from
genetically-engineered animals as a source of transplants.
|
If these or any other pharmacological or technological advances
reduce the number of patients needing treatment for ESRD, then
the size of the market for our products may be reduced and our
potential sales and revenues will suffer.
If
government and other third party reimbursement programs
discontinue their coverage of ESRD treatment or reduce
reimbursement rates for ESRD products, then we may not be able
to sell as many units of our ESRD therapy products as otherwise
expected, or we may need to reduce the anticipated prices of
such products and, in either case, our potential revenues may be
reduced.
Providers of renal replacement therapy are often reimbursed by
government programs, such as Medicare or Medicaid in the United
States, or other third-party reimbursement programs, such as
private medical care plans and insurers. We believe that the
amount of reimbursement for renal replacement therapy under
these programs has a significant impact on the decisions of
nephrologists, dialysis clinics and other health care providers
regarding treatment methods and products. Accordingly, changes
in the extent of coverage for renal replacement therapy or a
reduction in the reimbursement rates under any or all of these
programs may cause a decline in recommendations or purchases of
our products, which would materially adversely affect the market
for our products and reduce our potential sales. Alternatively,
we might respond to reduced reimbursement rates by reducing the
prices of our products, which could also reduce our potential
revenues.
As the
number of managed health care plans increases in the United
States, amounts paid for our ESRD therapy products by
non-governmental programs may decrease and we may not generate
sufficient revenues to be profitable.
We expect to obtain a portion of our revenues from reimbursement
provided by non-governmental programs in the United States.
Although non-governmental programs generally pay higher
reimbursement rates than governmental programs, of the
non-governmental programs, managed care plans generally pay
lower reimbursement rates
18
than insurance plans. Reliance on managed care plans for
dialysis treatment may increase if future changes to the
Medicare program require non-governmental programs to assume a
greater percentage of the total cost of care given to dialysis
patients over the term of their illness, or if managed care
plans otherwise significantly increase their enrollment of these
patients. If the reliance on managed care plans for dialysis
treatment increases, more patients join managed care plans or
managed care plans reduce reimbursement rates, we may need to
reduce anticipated prices of our ESRD therapy products or sell
fewer units, and, in either case, our potential revenues would
suffer.
If HDF
does not become a preferred therapy for ESRD, then the market
for our ESRD therapy products may be limited and we may not be
profitable.
A significant portion of our success is dependent on the
acceptance and implementation of HDF as a preferred therapy for
ESRD. There are several treatment options currently available
and others may be developed. HDF may not increase in acceptance
as a preferred therapy for ESRD. If it does not, then the market
for our ESRD therapy products may be limited and we may not be
able to sell a sufficient quantity of our products to be
profitable.
If the
per-treatment costs for dialysis clinics using our ESRD therapy
products are higher than the costs of clinics providing
hemodialysis treatment, then we may not achieve market
acceptance of our ESRD therapy products in the United States and
our potential sales and revenues will suffer.
If the cost of our ESRD therapy products results in an increased
cost to the dialysis clinic over hemodialysis therapies and such
cost is not separately reimbursable by governmental programs or
private medical care plans and insurers outside of the
per-treatment fee, then we may not gain market acceptance for
such products in the United States unless HDF therapy becomes
the standard treatment method for ESRD. If we do not gain market
acceptance for our ESRD therapy products in the United States,
then the size of our market and our anticipated sales and
revenues will be reduced.
Proposals
to modify the health care system in the United States or other
countries could affect the pricing of our products. If we cannot
sell our products at the prices we plan to, then our margins and
our profitability will be adversely affected.
A substantial portion of the cost of treatment for ESRD in the
United States is currently reimbursed by the Medicare program at
prescribed rates. Proposals to modify the current health care
system in the United States to improve access to health care and
control its costs are continually being considered by the
federal and state governments. We anticipate that the
U.S. Congress and state legislatures will continue to
review and assess alternative health care reform proposals. We
cannot predict whether these reform proposals will be adopted,
when they may be adopted or what impact they may have on us if
they are adopted. Any spending decreases or other significant
changes in the Medicare program could affect the pricing of our
ESRD therapy products. As we are not yet established in our
business and it will take some time for us to begin to recoup
our research and development costs, our profit margins are
likely initially to be lower than those of our competitors and
we may be more vulnerable to small decreases in price than many
of our competitors.
Health administration authorities in countries other than the
United States may not provide reimbursement for our products at
rates sufficient for us to achieve profitability, or at all.
Like the United States, these countries have considered health
care reform proposals and could materially alter their
government-sponsored health care programs by reducing
reimbursement rates for dialysis products.
Any reduction in reimbursement rates under Medicare or foreign
health care programs could negatively affect the pricing of our
ESRD therapy products. If we are not able to charge a sufficient
amount for our products, then our margins and our profitability
will be adversely affected.
If
patients in our Target European Market were to reuse dialyzers,
then our potential product sales could be materially adversely
affected.
In the United States, a majority of dialysis clinics reuse
dialyzers - that is, a single dialyzer is disinfected and reused
by the same patient. However, the trend in our Target European
Market is towards not reusing dialyzers, and some countries
(such as France, Germany, Italy and the Netherlands) actually
forbid the reuse of dialyzers. As a
19
result, each patient in our Target European Market can generally
be expected to purchase more dialyzers than each United States
patient. The laws forbidding reuse could be repealed and it may
become generally accepted to reuse dialyzers in our Target
European Market, just as it currently is in the United States.
If reuse of dialyzers were to become more common among patients
in our Target European Market, then there would be demand for
fewer dialyzer units and our potential product sales could be
materially adversely affected.
Special
Note Regarding Forward-Looking Statements
Certain statements in this prospectus constitute
“forward-looking statements” within the meaning of the
United States Private Securities Litigation Reform Act of 1995.
The words or phrases “can be,” “may,”
“could,” “would,” “expects,”
“believes,” “seeks,” “estimates,”
“projects” and similar words and phrases are intended
to identify such forward-looking statements. These
forward-looking statements may include, among other things,
statements concerning the expectations of Nephros regarding its
business, growth prospects, revenue trends, operating costs,
working capital requirements, competition, results of
operations, and other statements of expectations, beliefs,
future plans and strategies, anticipated events or trends, and
similar expressions concerning matters that are not historical
facts. Such forward-looking statements are subject to various
known and unknown risks and uncertainties, including those
described on the preceding pages, and we caution you that any
forward-looking information provided by or on behalf of us is
not a guarantee of future performance. Our actual results could
differ materially from those anticipated by such forward-looking
statements due to a number of factors, some of which are beyond
our control. All such forward-looking statements are current
only as of the date on which such statements were made. We do
not undertake any obligation to publicly update any
forward-looking statement to reflect events or circumstances
after the date on which any such statement is made or to reflect
the occurrence of unanticipated events.
Use of
Proceeds
The selling stockholders will receive all of the net proceeds
from the sales of shares of our common stock offered under this
prospectus. The Company may receive up to $10,950,309 of
proceeds in connection with the exercise of the Warrants for
cash, the underlying shares of which may be sold by the selling
stockholders. Although the timing and amount of any such
proceeds are uncertain, such proceeds, if received, will be used
for working capital.
Determination
of Offering Price
The selling stockholders may sell shares from time to time in
negotiated transactions, brokers’ transactions or a
combination of such methods at market prices prevailing at the
time of the sale or at negotiated prices.
20
Selling
Stockholders
The following table sets forth the shares beneficially owned, as
of March 28, 2008, by the selling stockholders (as
represented to us by the selling stockholders) prior to the
offering contemplated by this prospectus, the number of shares
each selling stockholder is offering by this prospectus and the
number of shares which each would own beneficially if all such
offered shares are sold.
Beneficial ownership is determined in accordance with the rules
of the SEC and includes generally voting
and/or
investment power with respect to securities. Shares of common
stock subject to warrants, options or convertible stock
currently exercisable or convertible, or exercisable or
convertible within 60 days of March 28, 2008, are
deemed outstanding for the purpose of computing the percentage
beneficially owned by the person holding such warrants, options
or convertible stock but are not deemed outstanding for the
purpose of computing the percentage beneficially owned by any
other person.
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|
Number of Shares of
|
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|
|
|
|
|
|
|
|
Common Stock
|
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|
|
Number of Shares of
|
|
|
Number of Shares of
|
|
|
Beneficially Owned
|
|
|
|
Common Stock
|
|
|
Common Stock
|
|
|
After Sale of All
|
|
|
|
Beneficially Owned
|
|
|
Subject to the Sale
|
|
|
Sale Pursuant to
|
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Selling Stockholder
|
|
Before Any Sale
|
|
|
of this Prospectus
|
|
|
this Prospectus(1)
|
|
Lambda Investors LLC
|
|
|
21,572,432
|
(2)
|
|
|
21,572,432
|
|
|
|
0
|
|
Enso Global Equities Master Partnership LP
|
|
|
5,169,002
|
(3)
|
|
|
5,169,002
|
|
|
|
0
|
|
Southpaw Credit Opportunity Master Fund LP
|
|
|
2,931,638
|
(4)
|
|
|
2,931,638
|
|
|
|
0
|
|
3V Capital Master Fund Ltd.
|
|
|
2,198,729
|
(5)
|
|
|
2,198,729
|
|
|
|
0
|
|
Distressed/High Yield Trading Opportunities Ltd.
|
|
|
2,198,729
|
(6)
|
|
|
2,198,729
|
|
|
|
0
|
|
National Securities Corporation
|
|
|
634,462
|
(7)
|
|
|
634,462
|
|
|
|
0
|
|
GPC 76, LLC
|
|
|
380,651
|
(8)
|
|
|
380,651
|
|
|
|
0
|
|
Andrew J. Deniken
|
|
|
342,493
|
(9)(34)
|
|
|
342,493
|
|
|
|
0
|
|
Lewis P. Schneider
|
|
|
215,609
|
(10)
|
|
|
215,609
|
|
|
|
0
|
|
Malcolm Plett
|
|
|
150,000
|
(11)(33)
|
|
|
150,000
|
|
|
|
0
|
|
Ryan Rauch
|
|
|
150,000
|
(12)(33)
|
|
|
150,000
|
|
|
|
0
|
|
Kudu Partners, LP
|
|
|
146,582
|
(13)
|
|
|
146,582
|
|
|
|
0
|
|
LJHS Company
|
|
|
146,582
|
(14)
|
|
|
146,582
|
|
|
|
0
|
|
Dinosaur Securities LLC
|
|
|
131,728
|
(15)
|
|
|
131,728
|
|
|
|
0
|
|
Mark Goldwasser
|
|
|
105,876
|
(16)(33)
|
|
|
105,876
|
|
|
|
0
|
|
Brian Friedman
|
|
|
79,000
|
(17)(33)
|
|
|
79,000
|
|
|
|
0
|
|
Christopher Dewey
|
|
|
75,000
|
(18)(33)
|
|
|
75,000
|
|
|
|
0
|
|
Gary Shemano
|
|
|
71,015
|
(19)
|
|
|
71,015
|
|
|
|
0
|
|
David Garrity
|
|
|
52,691
|
(20)(34)
|
|
|
52,691
|
|
|
|
0
|
|
Howard Davis
|
|
|
35,508
|
(21)
|
|
|
35,508
|
|
|
|
0
|
|
William Corbett
|
|
|
35,507
|
(22)
|
|
|
35,507
|
|
|
|
0
|
|
Peter Menachem
|
|
|
25,000
|
(23)(33)
|
|
|
25,000
|
|
|
|
0
|
|
Eric Lyon
|
|
|
15,000
|
(24)(33)
|
|
|
15,000
|
|
|
|
0
|
|
Tom Holly
|
|
|
15,000
|
(25)(33)
|
|
|
15,000
|
|
|
|
0
|
|
David Weinstein
|
|
|
11,614
|
(26)
|
|
|
11,614
|
|
|
|
0
|
|
Matt Portes
|
|
|
10,000
|
(27)(33)
|
|
|
10,000
|
|
|
|
0
|
|
Michael Bresner
|
|
|
5,000
|
(28)
|
|
|
5,000
|
|
|
|
0
|
|
Michael Compton
|
|
|
5,000
|
(29)(33)
|
|
|
5,000
|
|
|
|
0
|
|
Robert Daskal
|
|
|
3,000
|
(30)(33)
|
|
|
3,000
|
|
|
|
0
|
|
Doug Kaiser
|
|
|
1,740
|
(31)
|
|
|
1,740
|
|
|
|
0
|
|
Frank Salvatore
|
|
|
1,740
|
(32)
|
|
|
1,740
|
|
|
|
0
|
|
21
|
|
|
(1) |
|
Assumes that the selling stockholders will sell all of their
shares of common stock subject to sale pursuant to this
prospectus. There is no assurance that the selling stockholders
will sell all or any of their shares of common stock. |
|
(2) |
|
Represents (i) 14,381,621 shares of our common stock;
and (ii) 7,190,811 shares of our common stock issuable
upon conversion of our Class D Warrants. Lambda Investors
LLC (“Lambda”) is a private investment fund formed for
the purpose of making various investments. Wexford Capital LLC
(“Wexford”) is the managing member of Lambda.
Mr. Charles E. Davidson and Mr. Joseph M. Jacobs serve
as the managing members of Wexford. Wexford may, by reason of
its status as managing member of Lambda, be deemed to
beneficially own the shares of our common stock beneficially
owned by Lambda. Each of Charles E. Davidson and Joseph M.
Jacobs may, by reason of his status as a controlling person of
Wexford, be deemed to beneficially own the shares of our common
stock beneficially owned by Lambda. Each of Charles E. Davidson,
Joseph M. Jacobs and Wexford shares the power to vote and to
dispose of the shares of our common stock beneficially owned by
Lambda. Each of Wexford and Messrs. Davidson and Jacobs
disclaims beneficial ownership of the shares of our common stock
owned by Lambda. Further information is set forth in the
Schedule 13D filed with the SEC by Lambda, Wexford,
Mr. Davidson and Mr. Jacobs on October 1, 2007. |
|
|
|
(3) |
|
The amount shown as beneficially owned represents
(i) 3,446,001 shares of our common stock; and
(ii) 1,723,001 shares of our common stock issuable
upon conversion of our Class D Warrants. Enso Global
Equities Master Partnership, LP (“Enso”) is a private
investment fund formed for the purpose of making various
investments. Enso Capital Management, Ltd. is the general
partner of Enso. Enso Capital Management LLC is the investment
manager of Enso. Mr. Joshua Fink serves as Director of Enso
Capital Management, Ltd. (general partner of Enso), and as Chief
Executive Officer and Chief Investment Officer of Enso Capital
Management LLC. Enso Capital Management, Ltd. may, by reason of
its status as general partner of Enso, be deemed to beneficially
own the shares of our common stock beneficially owned by Enso.
Enso Capital Management LLC may, by reason of its status as
investment manager of Enso, be deemed to beneficially own the
shares of our common stock beneficially owned by Enso. Joshua A.
Fink may, by reason of his status as controlling person of Enso
Capital Management LLC, be deemed to beneficially own the shares
of our common stock beneficially owned by Enso. Each of Enso
Capital Management, Ltd., Enso Capital Management LLC and Joshua
A. Fink shares the power to vote and to dispose of the shares of
our common stock beneficially owned by Enso. Each of Enso
Capital Management, Ltd., Enso Capital Management LLC and
Mr. Fink disclaims beneficial ownership of the shares of
our common stock owned by Enso except, with respect to
Mr. Fink, to the extent of his interests in each partner of
Enso. Further information is set forth in the Schedule 13D
filed with the SEC by Enso, Enso Capital Management, Ltd., Enso
Capital Management LLC and Mr. Fink on October 4, 2007. |
|
|
|
(4) |
|
The amount shown as beneficially owned represents
2,931,638 shares of our common stock. Southpaw Credit
Opportunity Master Fund LP (“Master Fund”) serves
as a master fund investment vehicle for investments by Southpaw
Credit Opportunity Fund (FTE) Ltd. and Southpaw Credit
Opportunity Partners LP. Southpaw Asset Management LP
(“Southpaw Management”) provides investment management
services to private individuals and institutions, including
Master Fund. Southpaw Holdings LLC (“Southpaw
Holdings”) serves as the general partner of Southpaw
Management. Mr. Kevin Wyman and Mr. Howard Golden are
principals of Southpaw Holdings. Southpaw Management, Southpaw
Holdings, Mr. Wyman and Mr. Golden share the power to
vote and dispose of our common stock. Pursuant to
Rule 13d-4,
Southpaw Management, Southpaw Holdings, Mr. Wyman and
Mr. Golden disclaim all such beneficial ownership. Further
information is set forth in the Schedule 13D filed with the
SEC by Master Fund, Southpaw Management, Southpaw Holdings,
Mr. Wyman and Mr. Golden on October 17, 2007. |
|
(5) |
|
The amount shown as beneficially owned represents
2,198,729 shares of our common stock. 3V Capital Management
LLC (“Management”) serves as investment manager or
advisor to, and controls the investing and trading in securities
of, 3V Capital Master Fund, Ltd. Mr. Scott A. Stagg serves
as the principal control person (directly or indirectly) of
Management and 3V Capital Master Fund, Ltd. Mr. Stagg and
Management share the power to vote and dispose of our common
stock. Further information is set forth in the Schedule 13D
filed with the SEC by 3V Capital Management LLC and
Mr. Stagg on October 23, 2007. |
22
|
|
|
(6) |
|
The amount shown as beneficially owned represents
2,198,729 shares of our common stock. 3V Capital Management
LLC (“Management”) serves as investment manager or
advisor to, and controls the investing and trading in securities
of, Distressed/High Yield Trading Opportunities, Ltd.
Mr. Scott A. Stagg serves as the principal control person
(directly or indirectly) of Management and Distressed/High Yield
Trading Opportunities, Ltd. Mr. Stagg and Management share
the power to vote and dispose of our common stock. Further
information is set forth in the Schedule 13D filed with the
SEC by 3V Capital Management LLC and Mr. Stagg on
October 23, 2007. |
|
|
|
(7) |
|
The amount shown as beneficially owned represents
(i) 609,462 shares of our common stock issuable upon
conversion of our Placement Agent Warrants and
(ii) 25,000 shares of our common stock issuable upon
conversion of our Underwriter Warrants. National Securities
Corporation, a FINRA member, was entitled to receive these
securities as partial compensation for its services as placement
agent/underwriter in the ordinary course of business and at the
time of receiving the securities had no agreements or
understandings, directly or indirectly, with any person to
distribute them. The securities underlying the Placement Agent
Warrants are subject to a
180-day
lock-up in
accordance with the requirements of NASD Rule 2710(g)(1). |
|
|
|
(8) |
|
The amount shown as beneficially owned represents
(i) 253,767 shares of our common stock; and
(ii) 126,884 shares of our common stock issuable upon
conversion of our Class D Warrants. Southpaw Asset
Management LP (“Southpaw Management”) provides
investment management services to private individuals and
institutions, including GPC 76 LLC. Southpaw Holdings LLC
(“Southpaw Holdings”) serves as the general partner of
Southpaw Management. Mr. Kevin Wyman and Mr. Howard
Golden are principals of Southpaw Holdings. Southpaw Management,
Southpaw Holdings, Mr. Wyman and Mr. Golden share the
power to vote and dispose of our common stock. Pursuant to
Rule 13d-4,
Southpaw Management, Southpaw Holdings, Mr. Wyman and
Mr. Golden disclaim all such beneficial ownership. Further
information is set forth in the Schedule 13D filed with the
SEC by Master Fund, Southpaw Management, Southpaw Holdings,
Mr. Wyman and Mr. Golden on October 17, 2007. |
|
(9) |
|
The amount shown as beneficially owned represents
342,493 shares of our common stock issuable upon conversion
of our Placement Agent Warrants. |
|
(10) |
|
The amount shown as beneficially owned represents
(i) 143,739 shares of our common stock; and
(ii) 71,870 shares of our common stock issuable upon
conversion of our Class D Warrants. |
|
(11) |
|
The amount shown as beneficially owned represents
150,000 shares of our common stock issuable upon conversion
of our Placement Agent Warrants. |
|
(12) |
|
The amount shown as beneficially owned represents
150,000 shares of our common stock issuable upon conversion
of our Placement Agent Warrants. |
|
(13) |
|
The amount shown as beneficially owned represents
146,582 shares of our common stock. La Plata River
Partners, LLC is the general partner of Kudu Partners, L.P.
William Lupien is the sole member of La Plata River
Partners, LLC. Mr. Lupien has dispositive power and voting
control over the shares of our common stock. |
|
(14) |
|
The amount shown as beneficially owned represents
146,582 shares of our common stock. LJHS Company is a
family investment partnership. Each of James McLeod, Heather
McLeod Yowel, Lisa McLeod Stephenson and Scott McLeod are the
owners of LJHS Company. Scott McLeod and Jack McLeod each have
dispositive power and voting control over the shares of our
common stock. |
|
|
|
(15) |
|
The amount shown as beneficially owned represents
131,728 shares of our common stock issuable upon conversion
of our Placement Agent Warrants. Dinosaur Securities LLC, a
FINRA member, was entitled to receive these securities as
partial compensation for its services as placement agent in the
ordinary course of business and at the time of receiving the
securities had no agreements or understandings, directly or
indirectly, with any person to distribute them. The securities
underlying the Placement Agent Warrants are subject to a
180-day
lock-up in
accordance with the requirements of NASD Rule 2710(g)(1). |
|
|
|
(16) |
|
The amount shown as beneficially owned represents
(i) 100,000 shares of our common stock issuable upon
conversion of our Placement Agent Warrants and
(ii) 5,876 shares of our common stock issuable upon
conversion of our Underwriter Warrants. |
23
|
|
|
(17) |
|
The amount shown as beneficially owned represents
(i) 75,000 shares of our common stock issuable upon
conversion of our Placement Agent Warrants and
(ii) 4,000 shares of our common stock issuable upon
conversion of our Underwriter Warrants. |
|
(18) |
|
The amount shown as beneficially owned represents
75,000 shares of our common stock issuable upon conversion
of our Placement Agent Warrants. |
|
(19) |
|
The amount shown as beneficially owned represents
71,015 shares of our common stock issuable upon conversion
of our Underwriter Warrants. |
|
(20) |
|
The amount shown as beneficially owned represents
52,691 shares of our common stock issuable upon conversion
of our Placement Agent Warrants. |
|
(21) |
|
The amount shown as beneficially owned represents
35,508 shares of our common stock issuable upon conversion
of our Underwriter Warrants. |
|
(22) |
|
The amount shown as beneficially owned represents
35,507 shares of our common stock issuable upon conversion
of our Underwriter Warrants. |
|
(23) |
|
The amount shown as beneficially owned represents
25,000 shares of our common stock issuable upon conversion
of our Placement Agent Warrants. |
|
(24) |
|
The amount shown as beneficially owned represents
15,000 shares of our common stock issuable upon conversion
of our Placement Agent Warrants. |
|
(25) |
|
The amount shown as beneficially owned represents
15,000 shares of our common stock issuable upon conversion
of our Placement Agent Warrants. |
|
(26) |
|
The amount shown as beneficially owned represents
11,614 shares of our common stock issuable upon conversion
of our Underwriter Warrants. |
|
(27) |
|
The amount shown as beneficially owned represents
10,000 shares of our common stock issuable upon conversion
of our Placement Agent Warrants. |
|
(28) |
|
The amount shown as beneficially owned represents
5,000 shares of our common stock issuable upon conversion
of our Underwriter Warrants. |
|
(29) |
|
The amount shown as beneficially owned represents
5,000 shares of our common stock issuable upon conversion
of our Placement Agent Warrants. |
|
(30) |
|
The amount shown as beneficially owned represents
3,000 shares of our common stock issuable upon conversion
of our Underwriter Warrants. |
|
(31) |
|
The amount shown as beneficially owned represents
1,740 shares of our common stock issuable upon conversion
of our Underwriter Warrants. |
|
(32) |
|
The amount shown as beneficially owned represents
1,740 shares of our common stock issuable upon conversion
of our Underwriter Warrants. |
|
|
|
(33) |
|
National Securities Corporation, or NSC, has advised us that the
listed selling stockholder is an associated person of NSC,
received these warrants as a designee of NSC in the ordinary
course of business and at the time of receiving the securities
had no agreements or understandings, directly or indirectly,
with any person to distribute them. NSC was entitled to receive
these securities as partial compensation for its services as
placement agent or underwriter in the ordinary course of
business and at the time of receiving the securities had no
agreements or understandings, directly or indirectly, with any
person to distribute them. The securities underlying the
Placement Agent Warrants are subject to a
180-day
lock-up in
accordance with the requirements of NASD Rule 2710(g)(1). |
|
|
|
(34) |
|
Dinosaur Securities LLC, or Dinosaur, has advised us that the
listed selling stockholder is an associated person of Dinosaur,
received these warrants as a designee of Dinosaur in the
ordinary course of business and at the time of receiving the
securities had no agreements or understandings, directly or
indirectly, with any person to distribute them. Dinosaur was
entitled to receive these securities as partial compensation for
its services as placement agent in the ordinary course of
business and at the time of receiving the securities had no
agreements or understandings, directly or indirectly, with any
person to distribute them. The securities underlying the
Placement Agent Warrants are subject to a
180-day
lock-up in
accordance with the requirements of NASD Rule 2710(g)(1). |
24
Material
Relationships
On September 19, 2007, Paul A. Mieyal and Arthur H. Amron
were appointed as members of our board of directors.
Dr. Mieyal and Mr. Amron are employed by Wexford, a
registered investment advisory firm that manages Lambda, a
selling stockholder.
Agreements
with the Selling Stockholders
September
2007 Financing
In connection with our September 2007 financing, we entered into
the Registration Rights Agreement with the 2007 Investors
pursuant to which we agreed to file an initial resale
registration statement no later than 60 days after we filed
the Information Statement with the SEC. The Information
Statement was filed on October 24, 2007, and we filed the
initial resale registration statement of which this prospectus
is a part on December 20, 2007. We agreed to use our
commercially reasonable best efforts to have such registration
statement declared effective within 240 days after filing
the definitive version of the Information Statement. In the
event such registration statement has not been declared
effective within such time period, for each
30-day
period thereafter or a portion thereof, we will pay each 2007
Investor liquidated damages as set forth in the Registration
Rights Agreement. If we fail to pay the liquidated damages, we
will pay interest thereon at a rate of 15% per annum.
In connection with our September 2007 financing, we issued the
Placement Agent Warrants to National Securities Corporation
(“NSC”), Dinosaur Securities LLC
(“Dinosaur”) and their designees. Pursuant to such
Placement Agent Warrants, we agreed to register the shares
issuable under the Placement Agent Warrants on one or more
resale registration statements, treating the shares issuable
upon conversion of the Placement Agent Warrants as Registrable
Securities (as defined in the Registration Rights Agreement) and
as shares of common stock issuable upon exercise of the
Class D Warrants and treating the holders of the Placement
Agent Warrants as holders of the Class D Warrants. We also
granted NSC and Dinosaur a right of first refusal to act as
co-lead placement agents for any future private offering of our
securities or as co-lead managing underwriters for any future
public offering of our securities. Such right of first refusal
will terminate on March 19, 2009, and we have no repurchase
right with respect to such right.
In connection with our September 2007 financing, we entered into
an Investor Rights Agreement (the “Investor Rights
Agreement”) with the 2007 Investors pursuant to which we
agreed to take such corporate actions as may be required, among
other things, to entitle Lambda, one of the selling
stockholders, (i) to nominate two individuals having
reasonably appropriate experience and background (the
“Lambda Nominees”) to our board to serve as directors
until their respective successor(s) are elected and qualified,
(ii) to nominate each successor to the Lambda Nominees,
provided that any successor shall have reasonably appropriate
experience and background, and (iii) to direct the removal
from the Board of any director nominated under the foregoing
clauses (i) or (ii). Under the Investor Rights Agreement,
we are required to convene meetings of the Board at least once
every three months. If we fail to do so, a Lambda director will
be empowered to convene such meeting.
The Investor Rights Agreement also provides that, except as
Lambda may otherwise agree in writing, Lambda will have the
right (i) to engage, directly or indirectly, in the same or
similar business activities or lines of business as us and
(ii) to do business with any of our clients, competitors or
customers, with the result that we shall have no right in or to
such activities or any proceeds or benefits therefrom, and
neither Lambda nor any officer, director, partner, manager,
employee or affiliate of Lambda (“Lambda Person”) will
be liable to us or our stockholders for breach of any fiduciary
duty by reason of any such activities of Lambda or of such
Lambda Person’s participation therein. A Lambda Person who
is serving as one of our officers or directors may not, at the
same time, serve as an officer or director of any entity whose
principal business activity is (i) the development or sale
of medical devices for the treatment of end stage renal disease
or (ii) water filtration. In the event that Lambda or any
Lambda Person acquires knowledge of a potential transaction or
matter that may be a corporate opportunity for both Lambda and
us other than in the case of a “director-related
opportunity” (as defined below), Lambda and such Lambda
Person will have no duty to communicate or present such
corporate opportunity to us. In addition, in the event that a
Lambda director acquires knowledge of a potential transaction or
matter that may be a corporate opportunity for both us and
Lambda, such corporate opportunity will belong to Lambda, unless
such corporate opportunity is a director-related opportunity, in
which case such corporate opportunity will belong to us. A
“director-related opportunity”, under the
25
Investor Rights Agreement, means a potential transaction or
matter that may be a corporate opportunity for both us and
Lambda where knowledge of such corporate opportunity is made
known to a Lambda Person who is serving as our director as a
result of his serving as our director prior to (x) Lambda
or any other Lambda Person acquiring knowledge of such corporate
opportunity, or (y) such Lambda Person acquiring knowledge
of such corporate opportunity other than as a result of such
Lambda Person’s serving as a director.
2004
Initial Public Offering
In connection with our initial public offering, we entered into
a Warrant Agreement (the “Warrant Agreement”), dated
as of September 24, 2004, with The Shemano Group, Inc.
(“Shemano”), whereby we issued the Underwriter
Warrants to Shemano and its designees. Pursuant to the Warrant
Agreement, we agreed that, if at any time during the five years
following the initial public offering, we proposed to register
any shares of our common stock, we must include the shares of
our common stock issuable upon conversion of the Underwriter
Warrants in such registration statement on the same terms and
conditions as the securities otherwise being sold in such
registration. Therefore, this prospectus relates to the
200,000 shares of our common stock issuable upon conversion
of the Underwriter Warrants.
Copies of the Registration Rights Agreement, the Placement Agent
Warrant and the Investor Rights Agreement as described above
have been filed as exhibits to our Current Report on
Form 8-K
filed with the SEC on September 25, 2007. A copy of the
Warrant Agreement as described above has been filed as an
exhibit to our Registration Statement on
Form S-1
(No. 333-116162),
as amended, filed with the SEC on August 26, 2004. This
summary is qualified in its entirety by reference to each of
these documents, which are incorporated herein by reference. We
urge you to read these documents carefully for more details
regarding the provisions we describe in this prospectus and for
other provisions that may be important to you.
Plan of
Distribution
We anticipate that the selling stockholders and their pledgees,
donees, transferees and other
successors-in-interest
may sell all or a portion of the shares offered by this
prospectus from time to time on securities exchanges or in
private transactions, at fixed prices, at market prices
prevailing at the time of sale, at prices reasonably related to
the market price or at negotiated prices. Sale of the shares
offered by this prospectus may be effected by one or more of the
following methods:
|
|
|
|
•
|
ordinary brokerage transactions and transactions in which the
broker solicits purchases;
|
|
|
•
|
sales to one or more brokers or dealers as principal, and resale
by those brokers or dealers for their account, including resales
to other brokers and dealers;
|
|
|
•
|
block trades in which a broker or dealer attempts to sell the
shares as agent but may position and resell a portion of the
block as principal to facilitate the transaction;
|
|
|
•
|
privately negotiated transactions with purchasers;
|
|
|
|
|
•
|
an exchange distribution in accordance with the rules of the
applicable exchange;
|
|
|
|
|
•
|
settlement of short sales entered into after the date of this
prospectus;
|
|
|
|
|
•
|
a combination of any such methods of sale; or
|
|
|
|
|
•
|
any other method permitted pursuant to applicable law.
|
Broker-dealers engaged by the selling stockholders may arrange
for other brokers-dealers to participate in sales.
Broker-dealers may receive commissions or discounts from the
selling stockholders (or, if any broker-dealer acts as agent for
the purchaser of shares, from the purchaser) in amounts to be
negotiated. The selling stockholders do not expect these
commissions and discounts to exceed what is customary in the
types of transactions involved. No such broker-dealer will
receive compensation in excess of that permitted by NASD
Rule 2440 and IM-2440. In no event will any broker-dealer
receive total compensation in excess of 8%. Any profits on the
resale of shares of common stock by a broker-dealer acting as
principal might be deemed to be underwriting discounts or
commissions
26
under the Securities Act. Discounts, concessions, commissions
and similar selling expenses, if any, attributable to the sale
of shares will be borne by a selling stockholder. The selling
stockholders may agree to indemnify any agent, dealer or
broker-dealer that participates in transactions involving sales
of the shares if liabilities are imposed on that person under
the Securities Act.
The selling stockholders may from time to time pledge or grant a
security interest in some or all of the shares of common stock
owned by them and, if they default in the performance of their
secured obligations, the pledgees or secured parties may offer
and sell the shares of common stock from time to time under this
prospectus after we have filed a supplement to this prospectus
under Rule 424(b)(3) or other applicable provision of the
Securities Act supplementing or amending the list of selling
stockholders to include the pledgee, transferee or other
successors in interest as selling stockholders under this
prospectus.
The selling stockholders also may transfer the shares of common
stock in other circumstances, in which case the transferees,
pledgees or other successors in interest will be the selling
beneficial owners for purposes of this prospectus and may sell
the shares of common stock from time to time under this
prospectus after we have filed a supplement to this prospectus
under Rule 424(b)(3) or other applicable provision of the
Securities Act supplementing or amending the list of selling
stockholders to include the pledgee, transferee or other
successors in interest as selling stockholders under this
prospectus.
We are not aware as of the date of this prospectus of any
agreements between any selling stockholder and any
broker-dealers regarding the sale of the shares offered by this
prospectus, although we have made no inquiry in that regard. If
we are notified by any selling stockholder that any material
arrangement has been entered into with a broker-dealer for the
sale of shares of common stock, if required, we will file a
supplement to this prospectus. If the selling stockholders use
this prospectus for any sale of the shares of common stock, they
will be subject to the prospectus delivery requirements of the
Securities Act.
We will file, during any period during which we are required to
do so under our registration rights agreement with the selling
stockholders, one or more post-effective amendments to the
registration statement of which this prospectus is a part to
describe any material information with respect to the plan of
distribution not previously disclosed in this prospectus or any
material change to such information in this prospectus.
An aggregate of 1,756,374 shares of common stock issuable
upon exercise of warrants held by National Securities
Corporation , Dinosaur Securities LLC
and/or
“related persons” of National Securities Corporation
and Dinosaur Securities LLC are subject to a 180 day
lock-up in
accordance with the requirements of NASD Rule 2710(g)(1)
and will not be sold, pledged, assigned, transferred or
hypothecated for a period of 180 days from the effective
date of the registration statement of which this prospectus is a
part, except in accordance with the requirements of NASD
Rule 2710(g)(2).
Each selling stockholder may be deemed to be an
“underwriter” within the meaning of the Securities Act
of 1933, as amended (the “Securities Act”). Any
broker, dealer or other agent executing a sell order on behalf
of the selling stockholders may be considered to be an
underwriter within the meaning of the Securities Act, in which
case commissions received by any of these brokers, dealers or
agents and profit on any resale of the shares may be considered
to be underwriting commissions under the Securities Act.
The selling stockholders may also sell shares under
Rule 144 of the Securities Act, if available, rather than
under this prospectus.
All costs, fees and expenses of registration incurred in
connection with the offering will be borne by us. All selling
and other expenses incurred will be borne by each selling
stockholder. We have agreed to indemnify the selling
stockholders against certain losses, claims, damages and
liabilities, including liabilities under the Securities Act.
The anti-manipulation rules of Regulation M under the
Securities Exchange Act of 1934 may apply to sales of our
common stock and activities of the selling stockholders.
27
Description
of Common Stock
Holders of our common stock are entitled to one vote for each
share held of record on all matters submitted to a vote of the
stockholders and do not have cumulative voting rights.
Accordingly, holders of a majority of the shares of our common
stock entitled to vote in any election of directors may elect
all of the directors standing for election. Apart from
preferences that may be applicable to any holders of preferred
stock outstanding at the time, holders of our common stock are
entitled to receive dividends, if any, ratably as may be
declared from time to time by the Board out of funds legally
available therefor. Upon our liquidation, dissolution or winding
up, the holders of our common stock are entitled to receive
ratably our net assets available after the payment of all
liabilities and liquidation preferences on any outstanding
preferred stock. Holders of our common stock have no preemptive,
subscription, redemption or conversion rights, and there are no
redemption or sinking fund provisions applicable to our common
stock. The rights, preferences and privileges of holders of our
common stock are subject to, and may be adversely affected by,
the rights of the holders of shares of any series of preferred
stock which we may designate and issue in the future.
Legal
Matters
The legality of the common stock offered hereby will be passed
upon for us by Haynes and Boone, LLP, New York, New York.
Experts
Our financial statements at and for the year ended
December 31, 2007, incorporated in this prospectus by
reference from our Annual Report on
Form 10-KSB
for the year ended December 31, 2007, have been audited by
Rothstein Kass & Company P.C., an independent
registered public accounting firm, as stated in their report,
which is incorporated herein by reference, which report includes
an explanatory paragraph related to the Company’s ability
to continue as a going concern. Such financial statements have
been so incorporated in reliance upon the report of such firm
given upon their authority as experts in accounting and auditing.
The 2006 consolidated financial statements incorporated by
reference in this prospectus have been audited by
Deloitte & Touche LLP, an independent registered
public accounting firm, as stated in their report, which report
expresses an unqualified opinion on the consolidated financial
statements and includes an explanatory paragraph related to the
Company’s ability to continue as a going concern and an
explanatory paragraph related to the Company’s adoption of
Statement of Financial Accounting Standards No. 123(R),
Share-Based Payment. Such consolidated financial
statements have been so incorporated in reliance upon the report
of such firm given upon their authority as experts in accounting
and auditing.
As disclosed in our Current Report on
Form 8-K
filed with the SEC on July 20, 2007, we replaced
Deloitte & Touche LLP with Rothstein Kass &
Company P.C. on July 16, 2007.
Where You
Can Find More Information
We file annual, quarterly and current reports, proxy statements
and other information with the SEC. You may read and copy any
document we file at the SEC’s public reference room located
at 100 F Street, N.E., Washington, D.C. 20549.
Please call the SEC at
1-800-SEC-0330
for further information on the public reference room. Our SEC
filings are also available to the public free of charge at the
SEC’s website at
http://www.sec.gov.
Incorporation
of Certain Information by Reference
The information incorporated by reference is an important part
of this prospectus, and information we later file with the SEC
will automatically update and supersede earlier information. We
incorporate by reference the following documents filed with the
SEC by us and any future filings we make with the SEC under
Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act
after the date of this prospectus and prior to the termination
of the offering of
28
our common stock covered by this prospectus (except for
information furnished to the SEC that is not deemed to be
“filed” for purposes of the Exchange Act):
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|
|
|
•
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Our Annual Report on
Form 10-KSB
for the fiscal year ended December 31, 2007, filed
March 31, 2008;
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|
|
|
•
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Our Current Report on
Form 8-K
filed on January 16, 2008; and
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|
|
|
|
•
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The description of our common stock set forth in our
Registration Statement on
Form 8-A
filed on August 5, 2005, including any amendment or report
filed for the purpose of updating such description.
|
We will, at no cost, furnish each person, including any
beneficial owner, to whom this prospectus is delivered, a copy
of the information we incorporate by reference in this
prospectus at no cost by writing or telephoning us at Nephros,
Inc. at 3960 Broadway, New York, New York 10032, telephone
(212) 781-5113.
We maintain a website at www.nephros.com. Information contained
on our website is not incorporated by reference into this
prospectus and you should not consider information contained on
our website to be a part of this prospectus.
Disclosure
of SEC Position on Indemnification
for Securities Law Violations
Our Fourth Amended and Restated Certificate of Incorporation, as
amended, provides for indemnification of directors and officers
of the Registrant to the fullest extent permitted by the
Delaware General Corporation Law (the “DGCL”). We have
obtained liability insurance for each director and officer for
certain losses arising from claims or charges made against them
while acting in their capacities as directors or officers of the
registrant. Our Second Amended and Restated By-Laws provide for
indemnification of our officers, directors and others who become
a party to an action on our behalf by us to the fullest extent
not prohibited under the DGCL. However, insofar as
indemnification for liabilities arising under the Securities Act
may be permitted to our directors, officers, and controlling
persons pursuant to the foregoing provisions or otherwise, we
have been advised that in the opinion of the SEC such
indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other
than the payment of expenses incurred or paid by a director,
officer or controlling person in a successful defense of any
action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities
being registered, we will, unless in the opinion of our counsel
the matter has been settled by controlling precedent, submit to
the court of appropriate jurisdiction the question whether such
indemnification by us is against public policy as expressed in
the Securities Act and will be governed by the final
adjudication of such issue.
29
PART II
INFORMATION
NOT REQUIRED IN PROSPECTUS
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Item 14.
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Other
Expenses of Issuance and Distribution.
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The following table sets forth the costs and expenses payable by
the registrant in connection with the sale of the securities
being registered. All amounts (except the Commission
registration fee) are estimates.
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|
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SEC registration fee
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$
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669.38
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Printing expenses
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$
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30,000.00
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Legal fees and expenses
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$
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100,000.00
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Accounting fees and expenses
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$
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40,000.00
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Miscellaneous
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$
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19,330.62
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|
|
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Total
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$
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190,000.00
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Item 15.
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Indemnification
of Directors and Officers.
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Section 145 of the Delaware General Corporation Law (the
“DGCL”) permits a corporation, under specified
circumstances, to indemnify its directors, officers, employees
or agents against expenses (including attorneys’ fees),
judgments, fines and amounts paid in settlements actually and
reasonably incurred by them in connection with any action, suit
or proceeding brought by third parties by reason of the fact
that they were or are directors, officers, employees or agents
of the corporation, if such directors, officers, employees or
agents acted in good faith and in a manner they reasonably
believed to be in or not opposed to the best interests of the
corporation and, with respect to any criminal action or
proceeding, had no reason to believe their conduct was unlawful.
In a derivative action, that is one by or in the right of the
corporation, indemnification may be made only for expenses
actually and reasonably incurred by directors, officers,
employees or agents in connection with the defense or settlement
of an action or suit, and only with respect to a matter as to
which they will have acted in good faith and in a manner they
reasonably believed to be in or not opposed to the best
interests of the corporation, except that no indemnification
will be made if such person will have been adjudged liable to
the corporation, unless and only to the extent that the court in
which the action or suit was brought will determine upon
application that the defendant directors, officers, employees or
agents are fairly and reasonably entitled to indemnity for such
expenses despite such adjudication of liability.
The registrant’s Fourth Amended and Restated Certificate of
Incorporation, as amended, provides for indemnification of
directors and officers of the registrant to the fullest extent
permitted by the DGCL. The registrant’s Second Amended and
Restated By-Laws provides that the registrant will generally
indemnify its directors, officers, employees or agents to the
fullest extent permitted by the law against all losses, claims,
damages or similar events. The registrant has obtained liability
insurance for each director and officer for certain losses
arising from claims or charges made against them while acting in
their capacities as directors or officers of the Registrant.
(a) Exhibits. The following exhibits are
filed as part of this registration statement:
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Exhibit No.
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Description
|
|
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4
|
.1
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Fourth Amended and Restated Certificate of Incorporation of the
Registrant. (Incorporated by reference to Nephros, Inc.’s
Registration Statement on
Form S-8
(No. 333-127264),
as filed with the SEC on August 5, 2005).
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4
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.2
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|
Certificate of Amendment to the Fourth Amended and Restated
Certificate of Incorporation of the Registrant. (Incorporated by
reference to Exhibit 3.2 of Nephros, Inc.’s Quarterly
Report on
Form 10-QSB
for the quarter ended June 30, 2007, filed with the SEC on
August 13, 2007).
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|
4
|
.3
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|
Certificate of Amendment to the Fourth Amended and Restated
Certificate of Incorporation of the Registrant. (Incorporated by
reference to Exhibit 3.3 of Nephros, Inc.’s Quarterly
Report on
Form 10-QSB
for the quarter ended June 30, 2007 filed with the SEC on
August 13, 2007).
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II-1
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Exhibit No.
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Description
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4
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.4
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Certificate of Amendment to the Fourth Amended and Restated
Certificate of Incorporation of the Registrant. (Incorporated by
reference to Exhibit 3.4 of Nephros, Inc.’s Quarterly
Report on
Form 10-QSB
for the quarter ended September 30, 2007 filed with the SEC
on November 13, 2007).
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4
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.5
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Second Amended and Restated By-Laws of the Registrant.
(Incorporated by reference to Exhibit 3.1 of Nephros,
Inc.’s Current on
Form 8-K
filed with the SEC on December 3, 2007).
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4
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.6
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Specimen Common Stock Certificate of Nephros, Inc. (Incorporated
by reference to Exhibit 4.1 to the Registration Statement
on
Form S-1/A
(File
No. 333-116162)
filed with the SEC on July 20, 2004).
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4
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.7
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Registration Rights Agreement, dated as of September 19,
2007, among Nephros and the Investors (as defined therein).
(Incorporated by reference to Exhibit 10.3 to the Current
Report on
Form 8-K
filed with the SEC on September 25, 2007).
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4
|
.8
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Form of Placement Agent Warrant. (Incorporated by reference to
Exhibit 4.4 to the Current Report on
Form 8-K
filed with the SEC on September 25, 2007).
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4
|
.9
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|
Investor Rights Agreement, dated as of September 19, 2007,
among Nephros and the Investors. (as defined therein)
(Incorporated by reference to Exhibit 10.4 to the Current
Report on
Form 8-K
filed with the SEC on September 25, 2007).
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4
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.10
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Form of Warrant Agreement. (Incorporated by reference to
Exhibit 4.2 to the Registration Statement on
Form S-1/A
(File
No. 333-116162)
filed with the SEC on August 26, 2004).
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4
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.11
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Form of Series A 10% Secured Convertible Note due 2008
convertible into Common Stock and Warrants. (Incorporated by
reference to Exhibit 4.1 to the Current Report on
Form 8-K
filed with the SEC on September 25, 2007).
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4
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.12
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Form of Series B 10% Secured Convertible Note due 2008
convertible into Common Stock. (Incorporated by reference to
Exhibit 4.2 to the Current Report on
Form 8-K
filed with the SEC on September 25, 2007).
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4
|
.13
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Form of Class D Warrant. (Incorporated by reference to
Exhibit 4.3 to the Current Report on
Form 8-K
filed with the SEC on September 25, 2007).
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4
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.14
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Form of 6% Secured Convertible Note due 2012 for June 1,
2006 Investors. (Incorporated by reference to Exhibit 4.1
to the Current Report on
Form 8-K
filed with the SEC on June 2, 2006).
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4
|
.15
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Form of 6% Secured Convertible Note due 2012 for June 30,
2006 Investors. (Incorporated by reference to Exhibit 4.1
to the Current Report on
Form 8-K
filed with the Securities and Exchange Commission on
July 7, 2006).
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5
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.1
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Opinion of Haynes and Boone, LLP as to the legality of the
securities being registered.*
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23
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.1
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Consent of Deloitte & Touche LLP.*
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23
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.2
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Consent of Rothstein Kass & Company, P.C.*
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23
|
.3
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Consent of Haynes and Boone, LLP. (Included in
Exhibit 5.1).*
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24
|
.1
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Power of Attorney. (Incorporated by reference to
page II-4
of this Registration Statement, as filed on December 20,
2007).
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(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration
statement:
(i) To include any prospectus required by
Section 10(a)(3) of the Securities Act of 1933 (the
“Act”);
(ii) To reflect in the prospectus any facts or events
arising after the effective date of this registration statement
(or the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental change
in the information in this registration statement.
Notwithstanding the foregoing, any increase or decrease in
volume of securities offered (if the total dollar value of
securities
II-2
offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no more
than a 20 percent change in the maximum aggregate offering
price set forth in the “Calculation of Registration
Fee” table in the effective registration statement;
(iii) To include any material information with respect to
the plan of distribution not previously disclosed in this
registration statement or any material change to such
information in this registration statement;
Provided, however, that paragraphs (a)(1)(i), (a)(1)(ii)
and (a)(1)(iii) do not apply if the registration statement is on
Form S-3
and the information required in a post-effective amendment by
those paragraphs is incorporated by reference from periodic
reports filed by the small business issuer under the Securities
Exchange Act of 1934, or is contained in a form of prospectus
filed pursuant to Rule 424(b) that is deemed part of and
included in the registration statement.
(2) That, for the purpose of determining any liability
under the Act, each such post-effective amendment shall be
deemed to be a new registration statement relating to the
securities offered herein, and the offering of such securities
at that time shall be deemed to be the initial bona fide
offering thereof.
(3) To remove from registration by means of a
post-effective amendment any of the securities being registered
which remain unsold at the termination of the offering.
(4) That, for the purpose of determining liability of the
undersigned sunder the Act in the initial distribution of the
securities, in a primary offering of securities of the
undersigned pursuant to this registration statement, regardless
of the underwriting method used to sell the securities to the
purchaser, if the securities are offered or sold to such
purchased by means of any of the following communications, the
undersigned will be a seller to the purchaser and will be
considered to offer or sell such securities to such purchaser :
(i) any preliminary prospectus or prospectus of the
undersigned relating to the offering required to be filed
pursuant to Rule 424;
(ii) any free writing prospectus relating to the offering
prepared by or on behalf of the undersigned or used or referred
to by the undersigned;
(iii) the portion of any other free writing prospectus
relating to the offering containing material information about
the undersigned or its securities provided by or on behalf of
the undersigned; and
(iv) any other communication that is an offer in the
offering made by the undersigned to the purchaser.
(b) Insofar as indemnification for liabilities arising
under the Act may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing
provisions, or otherwise, the registrant has been advised that
in the opinion of the Securities and Exchange Commission
(“SEC”) such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable.
(c) The undersigned registrant hereby undertakes that:
(i) For purposes of determining any liability under the
Act, the information omitted from the form of prospectus filed
as part of this registration statement in reliance upon
Rule 430A and contained in a form of prospectus filed by
the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Act shall be deemed to be part of this
registration statement as of the time it was declared effective
by the SEC.
(ii) For the purpose of determining any liability under the
Act, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and that offering of
such securities at that time shall be deemed to be the initial
bona fide offering thereof.
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, the registrant certifies that it has reasonable grounds
to believe that it meets all of the requirements for filing on
Form S-3
and has duly caused this registration statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the
City of New York, State of New York, on the
16th
of April, 2008.
NEPHROS, INC.
Norman J. Barta
Chairman of the Board, President and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as
amended, this registration statement has been signed by the
following persons in the capacities and on the dates indicated.
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Signature
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Title
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Date
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/s/ Norman
J. Barta
Norman
J. Barta
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Chairman of the Board, President and Chief Executive Officer
(Principal Executive Officer)
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April 16, 2008
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/s/ Mark
W. Lerner
Mark
W. Lerner
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Chief Financial Officer (Principal Executive Officer and
Principal Accounting Officer)
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April 16, 2008
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/s/ Arthur
H. Amron*
Arthur
H. Amron
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Director
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|
April 16, 2008
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/s/ Paul
A. Mieyal*
Paul
A. Mieyal
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Director
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April 16, 2008
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/s/ Lawrence
J. Centella*
Lawrence
J. Centella
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Director
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April 16, 2008
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/s/ Eric
A. Rose, M.D.*
Eric
A. Rose, M.D.
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Director
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April 16, 2008
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/s/ James
S. Scibetta*
James
S. Scibetta
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Director
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April 16, 2008
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*By:
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/s/ Norman
J. Barta
Norman
J. Barta
Attorney-in-Fact
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April 16, 2008
|
II-4
Exhibit Index
|
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Exhibit No.
|
|
Description
|
|
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4
|
.1
|
|
Fourth Amended and Restated Certificate of Incorporation of the
Registrant. (Incorporated by reference to Nephros, Inc.’s
Registration Statement on
Form S-8
(No.
333-127264),
as filed with the SEC on August 5, 2005).
|
|
4
|
.2
|
|
Certificate of Amendment to the Fourth Amended and Restated
Certificate of Incorporation of the Registrant. (Incorporated by
reference to Exhibit 3.2 of Nephros, Inc.’s Quarterly
Report on
Form 10-QSB
for the quarter ended June 30, 2007, filed with the SEC on
August 13, 2007).
|
|
4
|
.3
|
|
Certificate of Amendment to the Fourth Amended and Restated
Certificate of Incorporation of the Registrant. (Incorporated by
reference to Exhibit 3.3 of Nephros, Inc.’s Quarterly
Report on
Form 10-QSB
for the quarter ended June 30, 2007 filed with the SEC on
August 13, 2007).
|
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4
|
.4
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|
Certificate of Amendment to the Fourth Amended and Restated
Certificate of Incorporation of the Registrant. (Incorporated by
reference to Exhibit 3.4 of Nephros, Inc.’s Quarterly
Report on
Form 10-QSB
for the quarter ended September 30, 2007 filed with the SEC
on November 13, 2007).
|
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4
|
.5
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|
Second Amended and Restated By-Laws of the Registrant.
(Incorporated by reference to Exhibit 3.1 of Nephros,
Inc.’s Current on
Form 8-K
filed with the SEC on December 3, 2007).
|
|
4
|
.6
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|
Specimen Common Stock Certificate of Nephros, Inc. (Incorporated
by reference to Exhibit 4.1 to the Registration Statement
on
Form S-1/A
(File
No. 333-116162)
filed with the SEC on July 20, 2004).
|
|
4
|
.7
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|
Registration Rights Agreement, dated as of September 19,
2007, among Nephros and the Investors (as defined therein).
(Incorporated by reference to Exhibit 10.3 to the Current
Report on Form 8-K filed with the SEC on September 25,
2007).
|
|
4
|
.8
|
|
Form of Placement Agent Warrant. (Incorporated by reference to
Exhibit 4.4 to the Current Report on
Form 8-K
filed with the SEC on September 25, 2007).
|
|
4
|
.9
|
|
Investor Rights Agreement, dated as of September 19, 2007,
among Nephros and the Investors. (as defined therein).
(Incorporated by reference to Exhibit 10.4 to the Current
Report on Form 8-K filed with the SEC on September 25,
2007).
|
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4
|
.10
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|
Form of Warrant Agreement. (Incorporated by reference to
Exhibit 4.2 to the Registration Statement on
Form S-1/A
(File
No. 333-116162)
filed with the SEC on August 26, 2004).
|
|
4
|
.11
|
|
Form of Series A 10% Secured Convertible Note due 2008
convertible into Common Stock and Warrants. (Incorporated by
reference to Exhibit 4.1 to the Current Report on
Form 8-K
filed with the SEC on September 25, 2007).
|
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4
|
.12
|
|
Form of Series B 10% Secured Convertible Note due 2008
convertible into Common Stock. (Incorporated by reference to
Exhibit 4.2 to the Current Report on
Form 8-K
filed with the SEC on September 25, 2007).
|
|
4
|
.13
|
|
Form of Class D Warrant. (Incorporated by reference to
Exhibit 4.3 to the Current Report on
Form 8-K
filed with the SEC on September 25, 2007).
|
|
4
|
.14
|
|
Form of 6% Secured Convertible Note due 2012 for June 1,
2006 Investors. (Incorporated by reference to Exhibit 4.1
to the Current Report on
Form 8-K
filed with the SEC on June 2, 2006).
|
|
4
|
.15
|
|
Form of 6% Secured Convertible Note due 2012 for June 30,
2006 Investors. (Incorporated by reference to Exhibit 4.1
to the Current Report on Form 8-K filed with the Securities
and Exchange Commission on July 7, 2006).
|
|
5
|
.1
|
|
Opinion of Haynes and Boone, LLP as to the legality of the
securities being registered.*
|
|
23
|
.1
|
|
Consent of Deloitte & Touche LLP.*
|
|
23
|
.2
|
|
Consent of Rothstein Kass & Company, P.C.*
|
|
23
|
.3
|
|
Consent of Haynes and Boone, LLP. (Included in Exhibit 5.1).*
|
|
24
|
.1
|
|
Power of Attorney. (Incorporated by reference to
page II-4
of this Registration Statement, as filed on December 20,
2007).
|
II-5