Nephros Inc. Reports First Quarter 2012 Financial Results

RIVER EDGE, N.J., May 15, 2012 /PRNewswire/ -- Nephros, Inc. (OTC Bulletin Board: NEPH), a global medical device company developing and marketing filtration products for therapeutic applications, infection control, and water purification, announced today financial results for the three months ended March 31, 2012.

Recent Highlights

• Received FDA 510(k) clearance to market hemodiafiltration system in U.S.
• Executed strategic license and supply agreement with Medica S.p.A.
• Received scheduled euro 750,000 payment from Bellco S.r.l. under licensing agreement for mid-dilution dialysis product, contributing to a positive cash flow quarter
• Decreased mid-dilution ("MD") product revenue from $402,000 to $0 as a result of Licensing Agreement with Bellco S.r.l.
• Increased gross margin in the first quarter to 58% from 29% in the prior year period as a result of licensing revenue from Bellco Agreement
• Increased ultrafiltration product revenues to approximately $243,000, an increase of 69% from prior year period
• Presented Individual Water Treatment/Purification Device (UF-40 ultrafilter) at Camp Lejeune as part of the Military's Experimental Forward Operating Base (ExFOB) demonstration and assessment event
• Hired John C. Houghton as President & CEO
• Hired Shane Sullivan as Director of U.S. Sales

"The first quarter of 2012 was highly productive for Nephros, and the company has continued its momentum into the second quarter," said John C. Houghton, President and CEO of Nephros. "The licensing and supply agreement with Medica has secured our ultrafiltration product line, and the recent FDA clearance to market our hemodiafiltration system in the U.S. provides Nephros with another significant asset. Excellent groundwork has been laid to position Nephros for long-term growth and value creation, and my immediate objective is to now focus on cost-effective execution as we seek to increase revenue through direct sales, through distributors, and through strategic partnerships in both the U.S. and global markets. Going forward, I intend to present at investor conferences and other appropriate venues to increase the profile of the company while pursuing the company's goal of regaining a listing on a national exchange."

Financial Performance for the First Quarter Ended March 31, 2012

As a result of the license agreement with Bellco which began in July 2011 and which provides for a fixed amount of license revenue through December 2014, Nephros does not record product revenue or cost of goods sold from sales of MD filters in the licensed territory during this period. On a quarter on quarter basis, Nephros recorded MD product sales in the first quarter of 2011 which preceded the licensing agreement whereas no MD product sales were recorded in the first quarter of 2012 during the license payment period.

For the quarter ended March 31, 2012, Nephros recognized net revenues of approximately $533,000 compared with approximately $681,000 in the corresponding period of 2011, a decrease of $148,000 or 22%. Net product revenues decreased due primarily to a decrease in sales of our Mid-Dilution filters in Europe of approximately $402,000 in the three months ended March 31, 2012 compared to the same period in 2011. The reduction in MD product sales was partially offset by increased revenue of approximately $98,000 in sales of our Dual Stage Ultrafilter (DSU) products for the three months ended March 31, 2012 compared to the same period in 2011. In addition, approximately $173,000 of licensing revenue was recognized in the three months ended March 31, 2012. No licensing revenue was recognized during the first quarter of 2011 which preceded the license agreement with Bellco.

Operating expenses for the three months ended March 31, 2012 were approximately $867,000 compared with approximately $845,000 in the corresponding period of 2011. The increase was primary due to an increase in research and development expenses of approximately $47,000 or 51% in the first quarter of 2012 compared to the same period in 2011. Selling, general and administrative expenses in the first quarter of 2012 were materially unchanged.

Nephros' net loss was approximately $557,000 or $0.05 per basic and diluted common share for the first quarter of 2012 versus a net loss of approximately $707,000 or $0.18 per basic and diluted common share in the first quarter of 2011. At March 31, 2012, Nephros had approximately $2.2 million of cash and cash equivalents.

Europe MD Revenue

Under the licensing agreement with Bellco, S.r.l., Nephros began 2012 with receipt of the second installment payment of EUR 750,000 in January. The third and final installment payment of euro 600,000 is payable to Nephros on January 15, 2013. Beginning on January 1, 2015, Nephros will receive royalty payments from Bellco as part of the license agreement. During the license period, Nephros no longer recognizes MD product sales from the licensed territory, but rather licensing revenue and royalty payments.

U.S. Hemodiafiltration

In April 2012, Nephros received FDA 510(k) clearance to market the Company's hemodiafiltration (HDF) system 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 in the United States. The Nephros HDF system is the only on-line HDF therapy available in the U.S. Nephros intends to pursue a limited launch of its HDF system before expanding into the broader market. In parallel, Nephros intends to explore opportunities to leverage the resources of a strategic partner to most effectively address the market. 26 million American adults have Chronic Kidney Disease (CKD) and millions of others are at increased risk. CKD is a progressive disease which ultimately leads to kidney failure. There are more than half a million patients whose kidneys have failed requiring them to seek treatment. Of these, approximately 370,000 are receiving hemodialysis and this number is growing yearly. In 2009 the total medical care costs for Chronic Renal Failure reached $42.5 billion.

Ultrafiltration

For the first quarter of 2012, Nephros recorded approximately $243,000 of sales related to its water ultrafiltration products, a 69% increase over the prior year. With the recent additions of Shane Sullivan as Director of U.S. Sales and Dr. Joseph Cervia as a strategic consultant, Nephros is focused on the waterborne hospital infection control market and other addressable markets for the water ultrafiltration product line. Observational studies have shown a significant reduction in required erythropoietin dosing when the Nephros DSU is utilized during hemodialysis therapy. In a separate study involving two major U.S. hospitals, the Nephros DSU system was shown to be effective in reducing waterborne Legionella bacteria to undetectable levels, an effect which was sustained for the 3-month study period. We believe that market forces including more stringent standards for dialysis water purity from the Association for the Advancement of Medical Instruments (AAMI), bundling of dialysis reimbursement payments, and CMS initiatives which relate hospital reimbursement rates to infection control compliance can provide positive momentum for increased adoption of the Nephros ultrafiltration products.

Collaborative Agreements

During 2011, Nephros completed the initial milestones under the joint collaboration agreement with STERIS Corp. (NYSE: STE) and anticipates completion of the final milestones under the agreement during 2012. The remaining milestones, if met, would result in aggregate payments to Nephros of $60,000.

Military Applications

In response to a Special Notice Announcement from the U.S. Army, Nephros submitted its Individual Water Treatment/Purification Device (IWTD) 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 for emergency military operations as a microbiological water purifier. During the week of April 30, 2012, Nephros presented its IWTD as part of the Experimental Forward Operating Base (ExFOB 2012-1) demonstration and assessment event at Camp Lejeune in North Carolina. The IWTD was evaluated by approximately 100 U.S. Marines who then provided feedback about the product via questionnaires. At the same event the IWTD was also evaluated for performance by a Military Assessment Team. Following the evaluation it is expected that the Military will make recommendations for future potential use. The Special Notice Announcement indicated that an official Sources Sought solicitation would be released; however, this has not been published at this time. In the interim; however, Nephros has received a purchase order for 1,000 IWTD's from the U.S. Army, Natick Contracting Division.

About Nephros, Inc.

Nephros, Inc., headquartered in River Edge, New Jersey, is a global medical device company developing and marketing liquid filtration products for therapeutic applications and water purification. The Nephros Hemodiafiltration (HDF) system is intended to address the critical financial and clinical needs of the care provider. The Nephros Dual Stage Ultrafilter (DSU) is the basis for the Nephros line of water filtration products, which includes the MSU and SSU ultrafilters. The patented dual stage cold sterilization ultrafilter has the capability to filter out bacteria, viruses, parasites and biotoxins. The Nephros DSU, MSU, and SSU are intended for the filtration of biological contaminants from water and bicarbonate concentrate used in hemodialysis procedures and for the filtration of water in the hospital/healthcare environment.

For more information about Nephros, please visit the company's website at www.nephros.com.