Nephros Inc Q1 FY2026 Earnings Call

Good day, and welcome to the Nephros, Inc. First Quarter 2026 Financial Results Conference Call. Please note this event is being recorded. I would now like to turn the conference over to Kirin Smith, Investor Relations. Please go ahead.

Good afternoon, everyone. This is Kirin Smith with PCG Advisory. Thank you all for participating in Nephros' First 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 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, May 7, 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. Q1 2026 was a milestone quarter for Nephros. We delivered $5.2 million in revenue, representing a new all-time high for the company and marking the first time we've crossed the $5 million threshold in a single quarter. This performance reflects continued execution across our core business, expanding adoption of our products in new applications and increasing contribution from our service and installation capabilities. Importantly, this growth was driven by strong programmatic performance, which increased approximately 23% year-over-year. That is the clearest signal that our model is working. Customers are installing, reordering and expanding usage over time. At the same time, we saw a decline in emergency response revenue compared to last year's first quarter, which included an unusually high exit opportunity that did not repeat. Despite the normal fluctuation, we still achieved record revenue, which speaks to the strength and durability of the underlying business. Now let me address margins directly. Gross margin for the first quarter came in at 57% compared to 65% in the prior year, and that decline was driven by 3 very clear factors. First, tariffs created a meaningful headwind, contributing over $200,000 in incremental costs during the quarter. Without the tariffs, our gross margins would have been in the low 60s. We are actively pursuing refund opportunities with respect to tariffs that we paid prior to the February 2026 U.S. Supreme Court decision and implementing mitigation strategies to reduce exposure going forward. Just a reminder, our tariff rate declined from 15% to 10% as of the end of February. That improvement will start to help us later this year as our newer inventory gets sold. Second, currency pressure, specifically the strengthening euro, increased our product costs year-over-year. And third, product mix. We are intentionally expanding into commercial applications, which carry lower margins than our core infection control business. Let me be very clear. None of these factors reflect deterioration in the business. They reflect external cost pressures and deliberate strategic expansion into larger markets. The shift towards commercial applications is intentional and important. We are expanding into areas such as ice machines, drinking fountains, bottle fillers and other high-use water applications. These represent a much larger addressable market than our traditional segments. While this impacts margin in the near term, it positions us for scale, diversification and long-term growth. Beyond products, we are seeing strong traction across our broader strategy. Number one, our installation and replacement programs are driving recurring revenue and strengthening customer relationships. Two, our service capabilities are expanding our role from product provider to full solution partner. Third, our education initiatives, including the Nephros Water Institute, are positioning us earlier in the customers' decision cycle. These are not short-term drivers. They are structural advantages that will continue to build over time. Looking forward, we remain highly confident in the trajectory of the business. We expect continued growth driven by expansion in key markets such as New York and Puerto Rico, increasing contribution from programmatic installations and replacements and continued adoption of our broader products, services and education platform. We are building a larger, more durable and scalable business. Near-term margin variability driven by tariffs, currency, product mix does not change that trajectory. I want to thank our employees for their clear execution, our customers for their continued trust and our investors for their ongoing support. With that, I'll turn the call over to our CFO, Judy Krandel, for a closer look at the financials.

Thank you, Robert. I will now provide a closer look at Nephros' financial performance in the first quarter of 2026. We reported first quarter net revenue of $5.2 million compared to $4.9 million in the first quarter of 2025, an increase of 7%. Product revenue related to our programmatic business grew strongly, while emergency response revenue declined compared to an elevated prior year quarter. Cost of goods sold increased to approximately $2.2 million, reflecting growth in sales as well as higher product costs driven by tariffs, currency impacts and product mix. Consequently, gross margin for the quarter was 57% compared to 65% in the prior year period. As Robert mentioned, we expect to see some improvement with our new tariff rate that started at the end of February. Research and development expenses increased to approximately $346,000 or 17%, primarily due to higher headcount. Selling, general and administrative expenses were approximately $2.5 million, an increase of 12%, reflecting increased headcount and professional fees. As a result of the above changes, net income declined 75% for the quarter to approximately $140,000 compared to $558,000 in the prior year period. And adjusted EBITDA declined 69% to approximately $206,000 compared to $667,000 in the prior year. As of March 31, 2026, we had approximately $4 million in cash and remained debt-free. Our cash balance has declined from December 31, 2025, due to the timing of receiving inventory as well as collections on accounts receivable. Since then, we have received customer payments, which translate right to cash. I will now turn the call back to Robert for closing remarks. Robert?

Thank you, Judy. This quarter demonstrates the strength of what we are building at Nephros. We are growing revenue, expanding into larger markets and strengthening our recurring revenue model, all while navigating external pressures that we believe are temporary and manageable. The fundamentals of the business remain strong, and our strategy is working. We are confident in our ability to continue driving both growth and long-term value. Thank you again for your time and support. Operator, please open the line for questions.

The first question comes from Nick Sherwood with Maxim Group. This demonstrates the strength of what we are building at Nephros. We are growing revenue, expanding into larger markets and strengthening our recurring revenue model, all while navigating external pressures that we believe are temporary and manageable. The fundamentals of the business remain strong, and our strategy is working. We are confident in our ability to continue driving both growth and long-term value. Thank you again for your time and support. Operator, please open the line for questions.

My first question is about the certification for the water management program development as a service. How are you charging: by the hour, by the person who holds the certification, or based on the whole team? And are you expecting more employees to receive that certification or to hire people who already have it?

So the certification falls under the Nephros Education arm of our pillar. We're not currently charging for services yet. It's something that we're training and getting our partners up to speed on, and we do have an employee or two that are capable of creating these water safety management plans. This is new service that we offer, but by and large, our partners offer this service as well. It's in instances where we don't have the coverage from our partner that we can come in and help create those plans. We do see this evolving as we move forward into a service that we're offering more to smaller entities or hospital groups, those who just don't understand the new regulations as they come out. And that's been an area for us to at least have that conversation where we can start the decision-making process and engage those who are deciding to use Nephros earlier in that process. So the capability of the certifications is just getting started. We are still rolling that out and formalizing the offering as a product that we offer going forward, and we're pretty excited about it and there is lots of interest so far. We hope to report more wins in the future as we get that further developed.

Understood. And then my next question is about hiring of the sales leader and focus in the New York market. Part of that increased focus was due to sort of increased regulatory focus from New York itself. Can you kind of explain what that opportunity is in the New York City area or New York region?

Yes. Absolutely. If you look at New York City, the greater region, the five boroughs, there are a very high density of hospitals and others with infection control needs in that area. In the past, we've broken out our sales force into kind of these four or five large regions. And the person covering all of New York, the previous representative, was not able to really focus on the New York City region when it's a completely different sales cycle, sales process and value proposition. In addition, there's been a number of outbreaks from Legionella and other organisms in that region that have generated a lot of questions coming to us. So we took the step to look for someone who knows the five boroughs extremely well and has been doing business in the healthcare space for quite some time and decided to augment their capabilities by bringing that person on board to be able to focus on that unique and specific direct need in the area. And so far, we're quite pleased. It does take some time to seed, educate, build and sell. So we're still early in the game, early innings. And I look forward to showing that revenue growth. There's no reason that New York City, by itself, can't be as large as any of our other regions combined. So that's the reason we've decided to really put a focused effort in that area.

Understood. And my last question is, what was the number of active customer sites at the end of the quarter?

Active customer sites is 1,676. It's been growing very steadily, very healthy, not as fast as our revenue, which, in my mind, tells me that we're earning more per customer, which makes sense considering that we're offering services and even expanding commercial filter sales into some of those customers as well. So continued steady active customer site growth, and there's no reason that shouldn't continue past 1,700. So lots of adoption, and we're quite pleased with the results there.

The next question is from Ankur Sagar, who is a private investor. Active customer sites are 1,676. They've been growing very steadily and healthily, although not as fast as our revenue, which suggests we're earning more per customer. That makes sense since we're offering services and expanding commercial filter sales to some of those customers. We expect continued steady active customer site growth and see no reason it shouldn't surpass 1,700. There's lots of adoption, and we're quite pleased with the results.

Congratulations to you on this milestone for the company achieving north of $5 million revenue in one quarter for the first time.

Thank you.

That was great — we're quite proud of that. It's been very exciting for us.

Yes, it is indeed. Robert, 23% programmatic growth is great. I know you don't break it out, but could you provide some number on what portion of the revenue came from programmatic and what was emergency response? Because 23% is really great year-over-year.

Yes. And you're right, we don't typically break that out. In the past, we've been seeing emergency response can average anywhere between 10% and 15% of our sales. In Q1, it was significantly less than that. So it's really a good thing to see. The team really stepped up. But the big difference is, from prior year, emergency response was a big part of that. Now although we don't go out and create the emergency response, we don't create the outbreak, it does take a presence. You have to have your name known, that Nephros is someone that you can call in these situations. That comes from our presence in trade shows and networking and word of mouth, with many of our new customers coming from referrals and even our partners who run into problems, and they call Nephros, 'They can solve this.' So what we're seeing is that recognition bringing us these emergency response opportunities more and more frequently when it's a really tough situation. So although there's not as many of these opportunities, when they do come, they tend to be a bit larger. And that's — this particular quarter, there was none of that happening. So it doesn't mean that it's something that we can count on and repeat. But really, if I'm trying to measure how healthy the business is, I really want to know what the core is doing, the things that we are actively going out and selling and closing, and that's when I look to that programmatic number. So that's a long-winded answer, not exactly giving you the answer, but at least giving you a flavor that we were one of the few that are able to get that.

No, I appreciate that. Just to clarify, normally the emergency response is up to 10% to 15%, but you're saying this over $5 million quarterly number is entirely or mostly programmatic revenue?

I can't characterize exactly how much of it, just that it was significantly less than what we've been seeing in the past.

Okay. One part of your strategy has been to really grow beyond the healthcare vertical since you joined as CEO. Anything you could share in terms of what subverticals you've been able to penetrate and get some early success within that commercial segment?

Sure. I can characterize that a little bit. Nephros being originally in dialysis, healthcare is our sweet spot. That's really where we shine, mainly because that's a regulated environment. FDA regulated, in many cases, our medical devices, being Class II, give us an edge. When you've got competitors who can come in and make claims, they don't have the clearances and FDA certifications to back it up. When I go into other spaces, such as aviation, hospitality, government, municipal buildings, retail, real estate management, large properties, schools and universities, they're not regulated in many cases by the FDA. So the competition is a lot more, and there's not any watchdog saying that they can or can't do what they say. So you tend to also see a little lower margins in some of these other spaces as the competitive landscape is basically based on results, and people do give a shot before they fail, then they call us. We're seeing traction in these other areas that I mentioned and that is important and growing. What we're finding, similar to healthcare, is that most of our new sales come from referrals — someone who used us somewhere, had great success and then told a colleague, or they went and worked somewhere else. Similar occurrences are starting to take place in some of the other commercial applications. One place might use us and then the management team leaves or goes somewhere else, and sometimes new management are used to other vendors, so it becomes stiffer competition for holding on to some of those spaces. Some of the business is a little less sticky. There's a much larger TAM if we're looking at TAMs and SAMs. But it is more competitive and a lot more churn. So we have to balance what our core sweet spot is, and that still remains where the lion's share of our margins are coming from, the healthcare space, and we'll likely always be strong there. But I do like the large scale, because a margin dollar versus a percent is also very important, especially as we scale to larger numbers. So when we figure out how to conquer those spaces and get similar competitive advantages and our name out there, you'll start to see those grow at some of the same paces that we do in the healthcare space. It's exciting. I wouldn't look for Q2 or Q3 for it to be something significantly moving the needle, but it is part of the long-term strategy, especially if there are any ups or downs in the healthcare space that we want to be somewhat insulated from. We want other ways to make money and grow, not just the place where we're the best at.

A couple of examples you mentioned like large buildings or airports or airlines — I assume these would be larger in size compared to what the company has done typically in healthcare?

I would say larger in points of application, but not necessarily larger flow rates at one time. I mean we're not doing the entire building; it would be fixture by fixture. They do seem attractive, but even though it makes sense, they don't always make a decision that would be aligned with us. For example, cruise ships — when we reach out and try to get them to adopt some of the filters, it still comes down to price. More often than not, our competition is against doing nothing, not a direct competitor. So it still takes a lot of education, and that's why the education pillar that we're really focusing on now is so important, because it's really going to be creating the market as we're building and growing it. That blank white space of sales is super exciting. It does take some time and development, but I see it as another frontier that we can start to open up.

Okay. One last one — I'll make it a two-part. The EPA has a new push on with new regulations for PFAS and microplastics. I think you have talked about those two in the past where you have some products in the area. Do you expect those regulations, when they come into play, to help? Are you already hearing from customers or new customers about that? And second, Judy, the gross margin was light due to the external factors, but how do you expect that to trend further out in the year in Q2, Q3, Q4?

I'll answer the first part, and then turn it over to Judy after that. Short answer, yes. As there are drivers such as regulations or guidelines, even if it's not a rule but a suggestion, we do see activity and churn. The issue right now is there is not enough of a driver to overcome the cost. Adding a filter of any kind is a cost. When we're talking to the average homeowner, they weigh that against other expenses. But we do get a ton of questions about nanoplastics and microplastics. Every time an article comes out, we see that as an opportunity to market our product as a solution for that. Right now, it tends to be limited to bigger spenders or people with other needs because plastics and forever chemicals are a longer-term issue. It has to be an education so people see the long-term benefit of spending the extra money to have safer water. We get a lot of inquiries and have people on our team who are sharing that message. Brianne McGuire's work with the Water Institute and our sales team — Shane Sullivan and the team — are great at going in and solving problems for customers. A lot of times curiosity plants the seed, and when they decide to make a move, they come to us. So that's a fun part of our job, and I'm fortunate to participate in many of those conversations as well. I'll turn the second part over to Judy.

Great. Thank you for the question. First, we do want to point out that last year's first quarter had an unusually high gross margin. The euro was weaker against the dollar and tariffs weren't there. If you look at gross margin from Q4 of last year to Q1, it was only slightly lower. As Robert mentioned, our tariff cost was over $200,000 this quarter. When tariffs moved from 15% to 10%, one-third of that incremental tariff cost would not have been incurred going forward, which will improve our margins. As most of you know, we buy inventory ahead of time to be prepared, and we have been growing inventory to support higher sales. So as inventory with the 15% tariff flows through and we start seeing the new inventory come through, we will see an improvement in margins, with all other things being equal. As Robert mentioned, we're considering other mitigation factors. Can we pass on some of this tariff to our customers as we watch what customers or our competitors are doing? We're looking for ways to mitigate this as well. Of course, we'll see how successful commercial is as a percent of business, but every incremental dollar of commercial business drives incremental gross profit dollars. So we are hopeful that we'll see some improvement in margins as we go through the year and these things take effect, but we feel very good about the health of our core product margins. These are just some external factors.

Got it. Got it. I know it takes a lot to produce this number. So great job on the programmatic revenue numbers and turnaround.

At this time, there are no further questions. So this concludes our... We have a question from Ralph Weil with R. Weil Investment Management.

Nice quarter in the programmatic business. Have there been any pricing pressures from your competitors in the business that may have been more so than normal? And maybe I missed it, but I heard about the nano, microplastic comments. But what about the PFAS area? Are we able to make any headway in that area? Or is that something that's become too difficult? And can you comment about the potential in the home market? I see a lot of ads about filters for the homes, etc. Is that something that we might be looking at? And I'm sure that if we would be doing that, it wouldn't be on our own, maybe with a partner, for all I know. Can you just comment on any of that at this point in time?

I can talk to all three of those points. First, price pressures. At Nephros, we've never been seeking the lowest cost per filter. The price pressures we've always faced have been purchasing agents who look at a SKU and compare our filter to the next. That's fine, but if our filter costs 20% more but lasts 100% longer — 60 days instead of 30 or six months instead of three months — then that price-per-SKU comparison is misleading. What we have been seeing is that the low end is getting more competition with some entrants. On the field, we've been getting reports, for example from the West Coast and from the South, that some filters start to crack and leak and cause problems, and that's a great opportunity for us to step in with our products. So price pressures exist, but we've been able to incrementally raise prices year-over-year, and we try to talk about value: how much water we filter, the contaminants we remove, and the overall performance. There isn't really a filter doing the same thing, so the price comparison is often inadequate when the filters accomplish different tasks. We're always looking at the market situation and trying to capture price where necessary. We aim to create customers that stay with us for a long time. We have a very high retention rate, and we focus on solving problems and providing more value than what they pay. Regarding PFAS, forever chemicals, we hear a lot about that. PFAS removal is actually fairly straightforward in many cases, though there are many species and specific types to address. Our filters and solutions for PFAS are somewhat different and also remove other contaminants like iron. There are a number of solutions out there, so it can be harder to command the price we want or to prove superiority when others make claims that may lack the same level of rigor. We continue to be opportunistic about PFAS. I don't know that it will eclipse sales in our infection control product line. So it's more of a commercial product line, but it starts conversations that lead to infection control sales. On the home market, the space is huge — millions of people filter water in their homes for well water or municipal concerns. There are many commodity filter providers. What we're starting to see more is people concerned about biological contaminants. Once the conversation turns toward infection control, that's where we shine, and we have great point-of-use fixture solutions. We don't yet have a full whole-home solution, but that's something we're exploring. For homeowners, the decision often comes down to price, and we work through partners who service homeowners in different markets, typically higher-end homes or homebuilders. We're forming more arrangements with those partners. I hope that in the coming quarters we have meaningful movement to report in these areas. It's an exciting market to penetrate without sacrificing our infection control product lines in healthcare.

This concludes our question-and-answer session. I would like to turn the conference back over to Robert Banks for any closing remarks.

Thanks, Debbie. It's been a really great quarter, and the team is working really hard. We've got our rockstars across the board. Stacy with dialysis is just phenomenal. Kelly, Nick, shout out to those folks who are rock solid. I mentioned Shane in the West. With Dana's expertise in New York City and Jim with his years of sales experience, I feel really comfortable with this team. By adding our service pillar and what Alfred is doing to help the team install and ensure safety, it's been a big boost. And now augmenting it with education to grow the market upstream, I have full confidence that Brianne, our webinars and the full team support behind us will do phenomenal things going forward. So I look forward to future growth and more great results. Thank you for joining and for all the continued support. Bye, everybody.

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