Good day, and welcome to the Nephros, Inc. Third Quarter 2025 Financial Results Conference Call. Please note this event is being recorded. I would now like to turn the conference over to Kirin Smith with Investor Relations. Please go ahead.

Good afternoon, everyone. This is Kirin Smith with PCG Advisory. Thank you all for participating in Nephros' Third Quarter 2025 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 health care providers; the success of its commercialization efforts and the effect 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, November 6, 2025. 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 excited to share the results from our third quarter 2025, a period that marks another step forward in Nephros' transformation and growth story. We delivered $4.8 million in revenue, our second highest quarter ever, and we did it with strong contributions across our business. This past quarter also marks our fifth consecutive quarter of profitability, and I'm so excited to report that we reached the highest level of programmatic business in our company's history, a milestone that reflects the consistency, resilience, and increasing value of our recurring revenue streams. What's driving that? Well, our filtration installation program continues to be a powerful growth lever. We've seen that when we support our customers with the full installation experience, not just the product, reorder rates go up, engagement deepens, and customer loyalty strengthens. That's not just good for the quarter; that's good for long-term business. Another exciting development, our PFAS removal solution is now in the field. This breakthrough opens the door to new verticals beyond our traditional patient care markets, including municipalities, dialysis centers, and labs as much more attention is being paid to this alarming issue. While early, the response has been encouraging, and we believe that this will be a growth engine for years to come. We've also deepened our commercial traction in cross-functional coordination. Our teams are firing on all cylinders, and our sales force continues to bring in high-quality opportunities, not just more business, but the right kind of business. As we expand into dental, municipal, and government facilities, we're doing so with operational discipline and strategic focus. As I look ahead, I'm incredibly optimistic with strong customer retention, a record number of active sites, and new innovations already in the market. We're executing extremely well today and building momentum for tomorrow. Our intense focus and financial discipline is clearly driving our revenue growth and profitability. With our strong balance sheet, zero debt, and a robust innovation pipeline, we remain confident that Nephros is well positioned to sustain growth, broaden our market reach, and deliver strong value in the quarters ahead. Thank you to our employees, our partners, and investors for your continued belief in Nephros. With that, I'll turn it over to Judy for a more detailed look at our financials. Judy?

Thanks, Robert. I will now provide a closer look at Nephros' financial performance in the third quarter and year-to-date of 2025. We reported third quarter net revenue of $4.8 million, a 35% increase over the corresponding period in 2024, reflecting strong growth in our programmatic business and significant growth in our service revenue. Our active customer sites continued to grow sequentially and were over 1,650 as of September 30, 2025. Gross margins in the quarter came in at 61%, which is consistent with 61% in the third quarter of 2024, reflecting an increase in inventory handling expenses, including tariffs that were mostly offset by a reduction in inventory reserve adjustments. Research and development expenses in the quarter were $338,000 compared to $188,000 for the same quarter in 2024. Expenses were higher in 2025 due to higher accrual for employee bonuses and an increase in headcount. Sales, general and administrative expenses in the quarter were $2.2 million compared to $1.7 million for the corresponding period in 2024, an increase of 30% due to higher sales commissions resulting from increased revenue and higher accrual of employee bonuses. We are pleased to report a significant increase in net income for the quarter. We ended up with $337,000 compared to $183,000 in the same period last year. This marks our fifth consecutive quarter of profitability. Adjusted EBITDA in the quarter was positive $418,000 compared to $295,000 during the same period in 2024. Net cash provided by operating activities was $99,000 in the third quarter of 2025 versus net cash used of $623,000 in the prior year period, an improvement of $722,000. Net cash provided in the third quarter of 2025 reflects primarily our positive net income, offset by an increase in accounts receivable. Net cash used in the third quarter of 2024 reflects our positive net income, offset by an increase in inventory. Now let me turn to our 9-month results. Sales for the 9 months ending September 30, 2025, increased by 37% to $14.1 million from $10.3 million in the prior year period, reflecting strong growth in our programmatic business and emergency response business with service revenue also showing significant growth. Gross margins improved to 63% in the 9 months ended September 30, 2025, from 61% in the prior year period. The increase in gross margin was primarily driven by lower product costs resulting from a more favorable product mix and a reduction in inventory reserve adjustments. SG&A expenses were $6.7 million, an increase of 15% in the 9 months ended September 30, 2025, versus the prior year period due to higher sales commission expenses, increased employee bonus accruals, and higher stock-based compensation expenses. Net income increased to $1.1 million in the 9 months ended September 30, 2025, from a net loss of $0.3 million in the prior year period. Adjusted EBITDA in the 9 months ended September 30, 2025, was positive $1.4 million compared to $67,000 during the same period in 2024. I am also pleased to report that our cash balance on September 30, 2025, increased to $5.2 million compared to $3.8 million as of December 31, 2024, and we continue to be debt-free. So please refer to today's press release for more details about the calculation of adjusted EBITDA and its reconciliation to GAAP net income or loss. And as always, additional information about our results can be found in our filing on Form 10-Q, which we filed this afternoon as well. I would now like to hand the call back to Robert for concluding comments. Robert?

Thank you, Judy. As we look to the future, our focus remains clear: scale what's working, pursue what's next, and stay grounded in our mission. The progress we've made across operations, our commercial strategy, and financial performance has laid a strong foundation for sustainable growth. In a world where water quality and infection control are increasingly vital, Nephros is well positioned to lead. This quarter has shown what's possible when innovation meets execution and purpose drives performance. We are energized by this momentum, and we're not only at the beginning of what we believe is a long runway. It's a point where the future is up for us. At this point, we'd like to open this up for questions. Operator?

The first question comes from Thomas McGovern with Maxim Group.

Congrats on another strong quarter here. I just wanted to see if we could dive in a little bit more into the new PFAS filtration solution that you guys launched back in October. So it sounds like it kind of broadens your potential market into those municipalities and some, I guess, more rigorous regulatory environments like dialysis and other labs. But maybe just kind of unpack for me just what the significance really is as we look at how it could impact revenues in '26 and in the fourth quarter.

Great question, and great to hear from you again. Thank you for your support and continuing to dial in. So PFAS, what that does is gives us another opportunity to meet the needs of our customer. Often, we get hit with the most challenging situations. Typically, it's pathogen-based. And more frequently now, we're being asked about what do you have to remediate against PFAS? And in addition, we're also being asked about microplastics and nanoplastics. So in an effort to meet the needs of our customers instead of turning them away to a potentially competitor, we introduced this PFAS as an option. And what I've also noticed is it's not typically the same customer that you find in a patient care or hospital setting that is concerned about PFAS. PFAS tends to be a more longer-term impact and has implications over some broader period of time. So we're getting closer to more commercial and sometimes even high-end residential people that are asking us these questions. So what we have to do at Nephros is figure out how do we turn that opportunity into something that we can make commercial and not do what we're doing with the infection control part of our business. So I love how this is giving us this ability to look into other areas, other markets, and have an opportunity to educate those who are reaching out to us about all the different hazards that they will find in water. So we see this more as a conjunction or even a door opener for lead-in to some of our other technology that we've been growing our core with. So in those regards, PFAS is a door opener. It's also branching out into new markets and giving us a chance to have a new conversation with somebody who wasn't always curious about viruses, endotoxins, and bacteria in the past. So that's pretty exciting for us. And what that means as far as growth is still to be seen as we're just now getting started and launching and exploring how we treat new customers with that technology. Hopefully, that answers the question.

Yes, absolutely. I really appreciate that insight. So when we kind of take a step back and look at the PFAS versus some of the other innovations you've launched recently, whether it's the S100 or the UltraFilter, all of those are pretty early stage in terms of how long they've been commercially available. But could you give us somewhat of an idea as to what you see as the largest driver of growth at least in the near term in 2026, then maybe taking a step further back and looking at this as what's the largest opportunity for you guys on the whole as you look at your business long term?

That's a good question. Our strategy has always been to grow our core business, particularly focusing on our infection control product line. The new products we've launched, like HydraGuard and others addressing ST108, are helping us meet the requirements set forth by ST108 and other regulations that hospitals are currently navigating. These regulations are quite strict, pushing our customers to conduct more tests and manage endotoxins—some of the toughest pathogens to eliminate. This demand is a significant factor driving our growth. Our customers are trying to understand how to create water management safety programs that comply with these regulations and which products they need to ensure compliance. The positive aspect is that we are well-equipped to guide them through this process. We have experts available for consultations, and while this guidance doesn't always translate to an increased purchase of Nephros filters, it may lead customers to implement more testing protocols or adjust their equipment setups and maintenance routines. Educating customers on how to navigate these guidelines often makes them turn to us for additional solutions and filtration products. I believe that an informed customer is a loyal Nephros customer. The more we can educate them about their water needs and tackling challenging conditions, the more inclined they are to choose our products over competitors who may not meet their requirements as effectively.

Understood. You also mentioned in your prepared remarks that you guys have a robust innovation pipeline. Just curious if there's anything we should be keeping our eye out as we kind of enter the end of the year and enter '26 as well.

Our innovation pipeline is pretty robust. We always have more that we want to do than we have time or bodies to be able to do. So we typically will pivot to try to meet whatever newest challenges are out today and what we see coming in the future. And today, the challenges such as forever chemicals, PFAS, and more towards the future a bit, the microplastics, nanoplastics, I think those are going to be products that we see our pipeline meeting and satisfying that will drive more growth in the future. And why do I think that? It's because those situations, especially nanoplastics, are very difficult. The size of those particulates and the harms they can do by penetrating the blood-brain barrier and causing cellular disruption and endocrine disruptions, it's a really challenging situation. And as that becomes more and more known and more prevalent, there are not solutions out there today that can easily handle it. I think we're well positioned to deploy our technology to be able to remove those nanoplastics. So you'll see innovation and products released and announcements around meeting some of those really tough challenging questions that are coming in the future.

I was muted there. Understood. I appreciate that. I'll ask one more question and then I'll return to the queue. You mentioned that the filter and installation program continues to support growth in the programmatic business, which is encouraging. However, I didn't hear any comments on the tracking app during the call. I would like to get an update on that. Also, if possible, could you provide insights on the record programmatic sales? Specifically, at a high level, how much of the growth in the programmatic business do you attribute to the filter installation program compared to the tracking app?

Yes. No, great question. Tracking app is doing well and continues to grow. We've expanded not as much in the amount of sites that we're tracking, but more in the geographies that we're tracking. Now we've got key installations in Texas and California, Florida, New York. So the biggest markets, and we're still looking to penetrate the Midwest a bit more. But this tracking app is doing a couple of things for us. Number one, it's allowing us a tool to give the customer more value. They can see the installation, have a picture of what was installed, how it was installed, when it was installed, who did the installation. They can also get the messages and reminders that it's time to change it. And I think that's the most important powerful part on our side as far as getting those repeat customers. But in addition, it's allowing us to create more touch points. And now the touch point is that we are out there doing the install in sight. And while the technician might be walking to install something at a sink, he sees a water fountain that might be offline since COVID, like, oh, by the way, we have a solution that can get that fountain back online. Have you guys heard about the new install processing guidelines? Do you have any instrument washing on site? So those discussions that don't necessarily show up in the service revenue do show up in core programmatic growth and allow us to expand within those existing sites. And that's what's got me most excited about the installation program. It's that dialogue and those touch points and yet another opportunity to educate the customer about how they can meet those water needs and satisfy the challenging environments that they face, especially with some of the new regulatory guidelines out today.

Our next question comes from Ralph Weil with R. Weil Investment Management.

You mentioned PFASs and microplastics, and I hope you will have solutions for both. I'm curious if you plan to tackle these issues independently, through your distributors, or by forming joint ventures or partnerships with companies already active in this space to help penetrate the market with your new products. Additionally, I've noticed significant publicity regarding Legionella disease, and I'm wondering if it has impacted your quarter. Furthermore, with the government's recognition of the problems posed by old water pipes and related issues, do you anticipate that regulations, including ASHRAE or others, will be enforced more stringently and become more meaningful for you moving forward?

Rob, thank you for your questions. I'll start by discussing market penetration and then move on to Legionella. To penetrate the market, we explore new technologies like PFAS. The customers we engage with may differ from those we currently serve, making market penetration a crucial aspect for us. We distribute our products both directly and through partners, and we're constantly evaluating whether we have the right collaborators for PFAS discussions. We're adjusting our model accordingly. Ultimately, our sales team plays a key role in explaining our remediation processes, whether through distributor introductions, direct communications, marketing leads, or trade shows. We are enthusiastic about the new opportunities and audiences this brings. Our distributors, some of whom are deeply rooted in healthcare while others are not, have both identified opportunities, particularly non-healthcare partners. While we don’t yet have the same reach and relationships as our partners, their contributions have been vital for our growth. We strive to support their efforts. Regarding microplastics, we believe we are not as advanced in that area compared to PFAS. This stems from the difficulties in measuring and identifying microplastics, requiring sophisticated equipment and techniques. Additionally, the lack of regulatory frameworks makes it challenging to define standards for what constitutes acceptable levels. However, we are well-positioned to tackle these challenges when the time comes and want to drive conversations around this emerging market. In summary, we often deal with different customers than we typically encounter, which presents exciting new segments to explore. We remain committed to addressing the water quality needs of our customers, regardless of the challenges involved. On the subject of Legionella, it has certainly garnered a lot of attention lately. Despite the publicity, it's important to note that Legionella is not the most significant concern for healthcare networks; more challenging pathogens exist. However, we're noticing increased inquiries, particularly related to air systems like cooling towers in cities such as New York, where pathogens can be inhaled. While our focus is not solely on water situations, we're eager to have these discussions and provide educational support. Awareness is growing, which helps us better understand where these issues arise and enables proactive conversations with facility managers. Ultimately, we appreciate educated customers who ask the right questions, allowing us to discuss water safety management programs. We hope this momentum continues, and while we don't wish for anyone to suffer from Legionella, we have the solutions ready when necessary.

Can I ask one other thing?

Absolutely.

In the 10-Q, you talked about besides the hospital business, you talk about other newer areas where the filters are being deployed, such as laboratories, manufacturing facilities, aviation environments, and government buildings. Can you elaborate a little more where you have made inroads and which of these you see could be a bigger market for the company? Obviously, not as big as hospitals, but where you can really grow them in a nice way.

I would like to provide specific names and locations, but our customers typically prefer to keep that information confidential. However, I've noticed that facilities focused on patient care, especially those serving similar populations, often qualify as strong candidates for our solutions. They may cater to at-risk groups, the elderly, younger immunocompromised individuals, or high-end clientele concerned about health risks. Spaces where individuals share close quarters or communal facilities, like bathrooms and showers, present substantial opportunities. Examples include correctional facilities, schools, municipal buildings, and similar environments. We've observed deployments in these areas not only this quarter but as a part of a trend over the past three quarters, particularly as our team expands its outreach beyond the 8,000 to 9,000 hospitals available. Hospitals remain a key market for us due to their adherence to various guidelines, regulations, and accreditation requirements. Their motivations extend beyond tackling issues; they also strive to retain customers and patients. While I'm unsure if I fully addressed the question, these are additional sectors we're pursuing, which have proven to be successful and instrumental for our growth, particularly over the last few quarters.

We have a follow-up question from Tom McGovern with Maxim Group.

I wanted to jump back in to ask about the margins. You've explained some of it already. I understand that you source some components from Italy, and it seems tariffs have had an impact. As we look toward the fourth quarter and 2026, should we anticipate gross margins around 61%, more in line with historical averages, instead of the 63% you've been operating at? Is this a more realistic run rate moving forward, or do you expect some factors to help alleviate the current margin pressures?

Thanks for the question. Good question. So the impact of tariffs, tariff is an expense as we get inventory in stock, it's capitalized as we sell through the inventory; it affects the cost of goods sold. So as tariff impact has started to increase, obviously, we do source a lot of our filters from Italy. It has an impact as we sell through that inventory. So you certainly started to see some of that. Do we see a full quarter of it that quarter? Will we see a full quarter of it this quarter? It's too close to tell, but I don't think it will have too much more of an impact, but it's a part of our life. So what else affects our gross margin? Certainly, is price increases, and we put through a price increase earlier this year. If we do put through another price increase next year, that's something that can offset it. We're managing our inventory very carefully and cleanly. Our reserves are very clean. It's also the mix of business. Certain customers get volume discounts and depending each quarter on how the mix of business comes in, that affects the margins. So we don't expect a dramatic decrease in margins from the tariffs, but it's a reality. It did have a small impact. We still hope to maintain 60-plus gross margins that will just move around a bit to bit. We're not going to make any projections, but I think it's mostly manageable.

Understood. And last, just a clarifying question real quick. So when you talk about service revenue, that's just really pertaining to this the installation program that you guys have when you go and actually outfit the facility in exchange or replace filters, that type of thing? Or is there anything else that's falling into that bucket?

Service revenue refers to two types for us. There's the initial installation where the customer may be either using a competitor's filter or no filter at all. In those cases, we often install quick connect fittings to ensure proper setup, and sometimes we include manifolds as well. This initial installation tends to take a bit longer. There's also the regular replacement business where after a certain period, such as three or six months, we go in and change out the filter. So, service revenue covers the activities charged and billed under either contract or one-time services for performing these tasks.

Understood. I appreciate you guys taking the time. Congrats again on the quarter and looking forward to seeing what you guys can do moving forward.

Our next question comes from Nick Farwell with Arbor Group.

Robert, Judy, thank you very much for a very strong quarter. I'm curious on 2 questions. One is, can you talk a little bit about the trade-off between trying to maximize margins and capture higher incremental margins by managing SG&A? Or are you still in a mode where you feel incremental dollars spent in SG&A are more valuable than incremental profitability?

I'll jump in there first and let Robert add anything additional. We very much have enjoyed this year profitability, EBITDA positive. It feels good. It's a good place to be. We certainly know that we are under-resourced in many areas. There's always room to add more resources in a small growing company, and we have departments that would like more resources. So we do want to manage it carefully. Obviously, we are continuing to add valuable sales resources. In fact, we'll have another one coming on sort of an inside salesperson supporting further our Western region. It's been a great fit, and we think the return is significantly there. But we do want to manage for profitability. We do think it's important. So we weigh opportunities carefully, and we want to be able to support the growth, too, from the warehouse perspective, from the quality perspective. So we're very carefully adding resources as we need them. But I do think it's important to try and maintain fiscal discipline as we continue to grow the company. And again, Robert, if you have more that you'd like to add, please jump in.

Yes. Absolutely, absolutely. When I think about SG&A and adding costs, whether it be headcount, vehicles, anything, it's still guided by the same principle I always have. If it makes sense and I can show a return for that investment that's reasonable and favorable, then I'll do it. If it means adding more people where necessary. But basically, we tested a model a couple of years ago with these associates working under the regional sales managers. They were able to free up our experts to give them time to go out and talk and educate and cultivate and grow these new sales while the associates were cultivating the existing accounts. I'm super happy with the way that turned out, and we're double, tripling, and quadrupling down on that model which will add cost, but it is more than offsetting those costs with the amount of revenue and profits being generated.

And a little add-on question to that is, how have you changed your go-to-market strategy as you address new market verticals? Are there different ways you can go to market that you can leverage your SG&A organization, sales organization?

Yes, absolutely. The one we just described is the most different, where we are no longer focused on head down in hospitals, but gotten out to even well beyond patient care areas into other different verticals by doing that. It's using both direct and indirect channels. But in addition, it's trying to meet those decision-makers where they are. By understanding who is making the buying decision, learn why they're making that decision and then focusing on potential objections to them choosing Nephros as their solution. That's really put us and led us to different types of solutions. That's why you'll see us taking a number of different paths and ways to make touch points with the customers. We've been attending more trade shows and more speaking engagements this year, and that's paid off as well by getting the Nephros name and solutions out there and matching up those solutions with our technology has been a winning formula for us.

There are no more questions. I would like to turn the conference back over to Robert Banks for any closing remarks.

Thank you. Thank you. Great, great robust question-and-answer session today. I really enjoyed the questions where you're asking about how we're growing. Really when we're scaling and getting more speaking engagements, going to more of these conferences, hosting webinars, here's a plug for our LinkedIn page. You can go there and check out some of those speaking opportunities. It's really helping us to go beyond even individual hospitals and get more to the networks, get more to people to help them build their safety management plans. I wanted to thank our exceptional team, our dedicated customers, and our shareholders. You guys have been very supportive. And as always, if you have any questions, please feel free to reach out to us directly. With that, I'd like to wish you all a great day, great evening.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.