Nephros Inc. 2026 Q2 Earnings Call

Please go ahead. Thank you, operator, and good afternoon, everyone.

This is Kirin Smith with PCG Advisory. Thank you all for participating in Nephros' second quarter 2026 conference call. Before we begin, I would like to caution that comments made during this conference call by management will contain forward-looking statements regarding the operations and future results of Nephros. I encourage you to review Nephros' filings with the Securities and Exchange Commission, including, without limitation, the company's Forms 10-K and 10-Q, which identify specific factors that may cause actual results or events to differ materially from those described in the forward-looking statements.

Factors that may affect the company's results include, but are not limited to, Nephros' ability to successfully, timely, and cost-effectively market and sell its products and service offerings, the rate of adoption of its products and services by hospitals and other healthcare providers, the success of its commercialization efforts, and the effects of existing and new regulatory requirements on Nephros' business and other economic and competitive factors. The content of this conference call contains time-sensitive information that is accurate only as of the date of the live call today, August sixth, 2026. The company undertakes no obligation to revise or update any statements to reflect events or circumstances after the date of this conference call, except as required by law. I would now like to turn the call over to Nephros' President and Chief Executive Officer, Robert Banks.

Robert, please go ahead. Thank you, Kirin, and good afternoon, everyone.

I'm very pleased to welcome you to the call. The second quarter of 2026 was an exceptional quarter for Nephros and represents another major step forward in the company's development. We generated $6 million in revenue, the highest quarterly revenue in our history, and a 36% increase over the second quarter. Revenue also increased approximately 15% sequentially from our record first quarter. More important than the headline number is the quality and breadth of the growth. Our core programmatic product revenue increased by double digits year-over-year. This is the recurring foundation of our business. Customers install our products, incorporate them into their water management programs, and continue purchasing replacement filters over time. Our service-only revenue nearly tripled as customers increasingly rely on Nephros for installation, replacement, and ongoing support, not simply for the initial product purchase.

Emergency response revenue also increased meaningfully during the quarter. That business can naturally fluctuate depending on outbreaks, infrastructure issues, and urgent customer requirements, so we do not build our long-term strategy around it. However, our ability to respond quickly remains an important differentiator and complements the steady growth of our core programmatic business. Taken together, these results demonstrate that our broad strategy is working. Nephros is increasingly becoming more than a filter product company. We are building an integrated water safety platform around three mutually reinforcing pillars: products, services, and education. Our differentiated products open the door. Our installation and replacement services make adoption easier and deepen the customer relationship. Our education efforts, including the Nephros Water Institute, help customers understand their risks and make more informed water safety decisions. A major topic Judy and I addressed in the last call was our gross margin.

The reported result requires some context. Reported gross margin was 67%, compared with 63% in second quarter of 2025. This was largely due to the tariff refund. I will let Judy go into more details during the financial portion of the call because it's not as straightforward as it seems. She will talk about the adjusted margin if we place refund in the periods in which the affected inventory was sold. The remaining year-over-year pressure reflects the continuing 10% tariff. The strengthening of the euro relative to the U.S. dollar increased shipping costs and the growing contributions from commercial and service revenue, which currently carry lower margins than our core infection control products. We are pleased to have recovered a meaningful amount of previously paid tariffs, but we recognize that margin improvement remains an important area of focus.

We continue to evaluate pricing, sourcing, freight, product mix, and operational efficiencies as we work to offset the remaining external cost pressures. We also are continuing to invest in the areas that we believe can support the next stage of growth. Number 1, expanding our presence in important markets, including Greater New York and Puerto Rico. Number 2, increasing adoption of installation and scheduled replacement services. Three, growing education-led demand through the Nephros Water Institute. Four, introducing products addressing PFAS, microplastics, nanoplastics, sterile processing, and broader commercial applications. Number 5, strengthening investor awareness and market visibility. During the quarter, we hosted our virtual investor event, participated in the Health, Wellness & Longevity Virtual Conference, announced our inclusion in the Russell Microcap Index, and increased communication around emerging water quality concerns such as microplastics and nanoplastics.

Our investor event attracted attendees from several regions and a range of investment and financial data organizations. These initiatives help broaden awareness of both the company and increasingly important water quality problems that we address. As we enter the second half, I believe Nephros is in the strongest position in its history. For the first six months of the year, revenue increased 21% to approximately $11.2 million. We are growing across multiple channels rather than depending on a single product, geography, or revenue source. That diversification makes the business larger, more durable, more capable of producing sustained long-term growth. I want to thank our employees for their tremendous execution, our customers and partners for their continued trust, and our investors for their support. With that, I will turn the call over to our CFO, Judy Krandel, for a closer look at our financial results.

Judy? Thank you, Robert. I will now provide a closer look at Nephros' financial performance in the second quarter and first half of 2026.

We reported second quarter net revenue of $6 million compared to $4.4 million in the second quarter of 2025, an increase of 36%. Product revenue related to our programmatic business grew approximately 27%. We also had strong revenue growth in both our emergency response and service revenue. Gross profit margin was approximately 67% for the three months ended June 30th, 2026, compared to approximately 63% for the corresponding 2025 period. The increase of approximately four percentage points was primarily attributable to our recognition during the period of a tariff refund of about $600,000, which primarily was recognized as a reduction of cost of goods sold during the three months ended June 30th, 2026.

The benefit resulting from this tariff refund was offset in part by increased costs due to the weakening of the U.S. dollar compared to the euro, an increase in shipping expense, and rapid growth in our service revenue, which yields lower gross margins than we realize from product sales. With respect to the tariff refund, the refund represents duties paid by us between the period from April 2025 to February 2026 that were imposed by executive order in April 2025 under the U.S. International Emergency Economic Powers Act, also known as IEEPA.

U.S. Supreme Court subsequently ruled in February of 2026 that those tariffs were invalid, approximately half a million of the entire $600,000 tariff refunds that we received this past quarter relates to purchase inventory that we converted to revenue beginning with the second quarter of 2025 through the first quarter of 2026, and which therefore would have reduced cost of goods sold in such periods. Only approximately $100,000 of the $600,000 tariff refund related to purchase inventory that was converted to revenue during the three-month period ended June 30th, 2026. The half a million of tariff refunds corresponding to product sales made in prior periods increased our gross profit margin this past quarter by approximately nine percentage points. Approximately $30,000 of the total tariff refund related to purchase inventory that was converted to revenue during the three-month period ended June 30th, 2025.