Nephros’ total revenues decrease $67,000 to 4% in the year ended December 31, 2012

Nephros, Inc. (OTCQB:NEPH), a commercial stage medical device company that develops and sells high performance liquid purification ultrafilters and an on-line mid-dilution hemodiafiltration system for the treatment of chronic renal failure patients, announced today financial results for the three months and full year ended December 31, 2013.

2013 Highlights

• Total water filter sales increased by 23% from $1,005,000 in 2012 to $1,240,000 in 2013
• Key business segments of dialysis water and hospital water sales increased by approximately 66% and 25%, respectively
• Launched new SSU for Dialysis Water/Bicarbonate filtration
• Signed Distributor agreements with Chem-Aqua and Garrett Callahan
• Submitted U.S. Army RFP
• Achieved GSA listing
• Completed May 2013 rights offering
• Daron Evans appointed to Board of Directors

"We have continued to show growth with our water filtration business; however, this was offset by the unanticipated voluntary product recall in the fourth quarter of 2013," said John C. Houghton, Chief Executive Officer of Nephros. "In 2014 we intend to continue to focus our efforts on expanding the availability of our water filtration products by enhancing our relationships with key distributors.  In addition we also expect to commence commercialization of our on-line mid-dilution hemodiafiltration system in the second quarter of 2014."

Financial Performance for the Year Ended December 31, 2013
Total revenues for the year ended December 31, 2013 were approximately $1,740,000 compared to approximately $1,807,000 for the year ended December 31, 2012.  Total revenues decreased approximately $67,000, or 4%, as a result of decreases of approximately $117,000 related to the Office of Naval Research, whose contract ended as of March 2012, and approximately $216,000 related to the sales credits recorded to reflect the impact of a voluntary product recall of point of use filters (POU) announced on October 30, 2013. These decreases were partially offset by an increase of approximately $31,000 related to the Bellco license agreement as well as underlying increases in total water filter sales.  Total water filter sales increased by 23% from $1,005,000 in 2012 to $1,240,000 in 2013 reflecting growth in key business segments of dialysis water and hospital water.  Dialysis water and hospital water sales increased by approximately 66% and 25%, respectively.  These increases were partially offset by decreases in military water sales of approximately 83%.

Cost of goods sold was approximately $898,000 for the year ended December 31, 2013 compared to approximately $737,000 for the year ended December 31, 2012. The increase of approximately $161,000 or 22%, in cost of goods sold is related to the increase in inventory reserves of approximately $210,000, $203,000 of which is a result of the October 2013 voluntary product recall and an increase in cost of goods sold of approximately $119,000 related to increased sales of water filters in key business segments during the year ended December 31, 2013. The increases are partially offset by a decrease in sales related to the Office of Naval Research combined with the impact of a voluntary product recall of point of use filters (POU) of approximately $168,000.

Research and development expenses were approximately $826,000 and $632,000, respectively, for the years ended December 31, 2013 and December 31, 2012. This increase of approximately $194,000, or 31%, is primarily due to an increase in research and development material and other project costs primarily related to our OLpur H2H Module of approximately $104,000 and an increase in personnel related costs of approximately $88,000 during the year ended December 31, 2013 compared to the year ended December 31, 2012.

Selling, general and administrative expenses were approximately $3,110,000 for the year ended December 31, 2013 compared to approximately $3,620,000 for the year ended December 31, 2012, representing a decrease of $510,000, or 14%. The decrease is primarily due to a decrease in legal and professional services expenses.  In the twelve months ended December 31, 2013, approximately $229,000 of legal and professional services expenses were recorded in equity as a result of the May 2013 rights offering and approximately $204,000 were recorded as amortization of debt discount as they were fees paid in relation to the February 2013 Senior Secured Note.  In addition, travel and other expenses decreased approximately $130,000 during the year ended December 31, 2013 compared to the year ended December 30, 2012.  These decreases were partially offset by an increase in personnel related expenses of approximately $53,000, primarily a result of increased expenses related to bonus and stock-based compensation expense.

As of December 31, 2013, Nephros had cash and cash equivalents of approximately $579,000. As previously announced, Nephros received gross proceeds of $2.14 million from the March 2014 rights offering. A portion of the proceeds was used for the repayment of the $1.5 million note issued to Lambda Investors LLC, Nephros' largest shareholder, in November 2013, plus $61,000 of accrued interest thereon. Nephros issued a total of 7,140,822 shares of common stock to the holders of subscription rights who validly exercised their subscription rights, which represents 77% of the total shares offered in the rights offering.  Pursuant to the previously announced amendment to our license agreement with Bellco S.r.l., Nephros will receive a total of €450,000; €225,000 of which was paid in February 2014 and the remaining €225,000 is payable on March 31, 2014.