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Nephros Reports 2012 Fourth Quarter And Full Year Financial Results

RIVER EDGE, N.J., March 4, 2013 /PRNewswire/ -- Nephros, Inc. (OTC Bulletin Board: NEPH), a commercial stage medical device company that develops and sells high performance liquid purification ultrafilters, announced today financial results for the three months and full year ended December 31, 2012.

2012 Highlights
  • Increased ultrafiltration product revenues to approximately $1,010,000, an increase of 63% from prior year period
  • Received €750,000 license payment from Bellco S.r.l.
  • Received FDA clearance for on-line mid-dilution Hemodiafiltration (mid HDF)
  • Executed License and Supply Agreement with Medica S.p.A.
  • Director of U.S. Sales engaged
  • Permanent CEO engaged
  • Introduced full range of hospital filters
  • First Military orders shipped

"2012 was a productive year for Nephros.  With the FDA clearance of our on-line mid-dilution HDF system, the execution of our license and supply agreement with Medica, significant growth in our dialysis and hospital water filtration businesses, and our first military orders we believe we are establishing a solid foundation in our core markets in the U.S.," said John C. Houghton, President and Chief Executive Officer of Nephros.  "We will continue to build upon this foundation in the U.S. and look to expand our presence in Europe as we progress through 2013."

Financial Performance for the Year Ended December 31, 2012

Total revenues for the year ended December 31, 2012 were approximately $1,807,000 compared to approximately $2,214,000 for the year ended December 31, 2011.  Total revenues decreased approximately $407,000, or 18% as a result of decreases of approximately $733,000 related to our MD filters in Europe, $346,000 related to the Office of Naval Research and approximately $33,000 related to the STERIS project.  These decreases were partially offset by an increase of approximately $315,000 related to the Bellco license agreement as well as a 63% increase in water filter sales, which increased from $620,000 in 2011 to $1,010,000 in 2012.

Cost of goods sold was approximately $737,000 for the year ended December 31, 2012 compared to approximately $1,346,000 for the year ended December 31, 2011. The decrease of approximately $609,000 or 45%, in cost of goods sold is primarily related to a $583,000 reduction in cost of goods sold of our MD filters in Europe.  Additional decreases include approximately $208,000 related to the Office of Naval Research, approximately $15,000 related to DSU sales for the year ended December 31, 2012 compared to the same period in 2011 and a decrease of approximately $29,000 related to the STERIS project.  These decreases were partially offset by an increase in cost of goods sold of approximately $226,000 related to filters sold to the military during the year ended December 31, 2012, a 100% increase compared to the same period in 2011.  Cost of goods sold includes increases in inventory reserves of approximately $82,000 and $218,000 for the years ended December 31, 2012 and 2011, respectively.

Research and development expenses were approximately $632,000 and $451,000 respectively, for the years ended December 31, 2012 and December 31, 2011. This increase of approximately $181,000 or 40% is primarily due to an increase in research and development personnel related costs of approximately $136,000 during the year ended December 31, 2012 compared to the year ended December 31, 2011.

Depreciation and amortization expense was approximately $151,000 for the year ended December 31, 2012 compared to approximately $91,000 for the year ended December 31, 2011, an increase of 66%. The increase of approximately $60,000 is primarily due to amortization of approximately $142,000 related to the asset recognized in conjunction with the License and Supply Agreement offset partially by several assets having been fully depreciated as of year-end 2011 resulting in no depreciation expense for those assets during the year ended December 31, 2012.

Selling, general and administrative expenses were approximately $3,620,000 for the year ended December 31, 2012 compared to approximately $2,636,000 for the year ended December 31, 2011, an increase of $984,000 or 37%. The increase is primarily due to $489,000 of salary expense, an increase in legal expenses of approximately $330,000, an increase in stock compensation expense of $159,000, and $171,000 of travel related expenses during the year ended December 31, 2012 compared to the year ended December 30, 2011. These increases were partially offset by a reduction in bonus expense of approximately $165,000 for the year ended December 31, 2012 compared to the year ended December 31, 2011.

Other income in the amount of approximately $69,000 for the year ended December 31, 2012 was primarily due to approximately $55,000 arising from the sale of fully depreciated manufacturing equipment sold to Medica in October 2012.  In addition, approximately $18,000 was related to the write-offs of vendor invoices which are no longer due.  Other income was partially offset by $4,000 related to foreign currency losses on invoices paid to an international supplier.

Other expense in the amount of approximately $2,000 for the year ended December 31, 2011 was due to foreign currency loss on invoices paid to an international supplier.

As of December 31, 2012, Nephros had cash and cash equivalents of approximately $47,000.  As previously announced, Nephros received a cash payment of €600,000 from Bellco S.r.l. on January 15, 2013 under the licensing agreement which became effective July 1, 2011 and $1,300,000 on February 4, 2013 under a bridge loan and security agreement with Lambda Investors LLC.

Dialysis and Hospital Applications – Ultrafilters

For 2012, Nephros recorded approximately $1,010,000 of sales related to its water and bicarbonate ultrafiltration products, a 63% increase over the prior year.  We believe that more stringent standards for dialysis water purity from the Association for the Advancement of Medical Instruments (AAMI), bundling of dialysis reimbursement payments, and the Affordable Care Act initiatives which relate hospital reimbursement rates to infection control compliance can provide positive momentum for increased adoption of Nephros ultrafiltration products.  Following the execution of the Medica license and supply agreement, we are now offering a full range of point-of-use filters for hospital infection control, including SafeSpout and SafeShower filters, worldwide.  In February 2013, Nephros and Chem-Aqua, Inc. announced that the companies signed a non-exclusive distributor agreement for Chem-Aqua to distribute Nephros's innovative ultrafilters in North America.

Military Applications – Ultrafilters

In response to a Special Notice Announcement from the U.S. Army, Nephros submitted its Individual Water Treatment Device (IWTD) device containing the Nephros proprietary ultrafilter technology for consideration as part of a standard issue personal hydration pack for soldiers in the field.  Nephros has been informed by the Military Government Review Agency that its IWTD has been validated to meet the military's NSF P248 standard as a microbiological water treatment device for military operations.  In April 2012, Nephros presented its IWTD as part of the Experimental Forward Operating Base demonstration and assessment event at Camp Lejeune in North Carolina.  The IWTD was evaluated by approximately 100 U.S. Marines and a Military Assessment Team.  To date, Nephros has shipped approximately 2,000 IWTD's to the U.S. armed forces, equating to approximately $200,000 of sales. In January 2013, the U.S. Army issued a request for proposal (RFP) relating to IWTD's, Nephros submitted its response to this RFP on February 25th.  The U.S. Army may award several, one or no contracts as a result of this solicitation.  The maximum quantity of all contracts combined is not to exceed 450,000 units or $45,000,000 over a 3 year period.  The RFP evaluation period may take up to 6 months before an award is made, if at all.

European Hemodiafiltration

Under the licensing agreement with Bellco, S.r.l., Nephros received the second installment payment of €750,000 in January 2012.  The third and final installment payment of €600,000 was received by Nephros on January 15, 2013.  Beginning on January 1, 2015 until December 31, 2016, Nephros expects to receive royalty payments from Bellco as part of the license agreement.  During the license period, Nephros no longer recognizes sales from the licensed territory, but rather licensing revenue and royalty payments.  For 2012, amortized license revenue from the Bellco agreement was $680,000.

U.S. On-line Mid-dilution Hemodiafiltration

In April 2012, Nephros received FDA 510(k) clearance to market the Company's on-line mid-dilution hemodiafiltration (mid HDF) system in the U.S. for the treatment of patients with chronic renal failure when used with a UF controlled hemodialysis machine that provides ultrapure dialysate in accordance with current AAMI/ANSI/ISO standards. Nephros intends to pursue a limited launch of its HDF system prior to expanding into the broader market. We are currently preparing our HDF system for a scaled market release and expect to have units placed in a select number of dialysis clinics in the second quarter of 2013. In parallel, Nephros continues to explore opportunities to leverage the resources of a strategic partner to most effectively address the market. There are more than half a million patients in the U.S. whose kidneys have failed requiring them to seek treatment. Of these, approximately 370,000 are receiving hemodialysis. In 2009 the total medical care costs for Chronic Renal Failure reached $42.5 billion. The Nephros HDF system is the only FDA-cleared on-line mid-dilution HDF therapy available in the U.S.

Nephros is evaluating a range of additional commercial, industrial, and military opportunities for its ultrafiltration technology.

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