Nephros, Inc. (NEPH) Earnings Call Transcript

Good afternoon, and welcome to the Nephros, Inc. Second Quarter 2026 Financial Results Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mr. Kirin Smith, Investor Relations. 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 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, August 5, 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 that -- 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 3 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 the 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 one, expanding our presence in important markets, including Greater New York and Puerto Rico; number two, 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; and number five, strengthening investor awareness and market visibility. During the quarter, we hosted our virtual investor event, participated in the Maxim Health, Wellness, and Longevity 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 6 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 and 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 3 months ended June 30, 2026, compared to approximately 63% for the corresponding 2025 period. The increase of approximately 4 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 3 months ended June 30, 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 that we realized from product sales. Now 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. The U.S. Supreme Court subsequently ruled in February of 2026 that those tariffs were invalid and approximately $0.5 million of the entire $600,000 tariff refund 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 3-month period ended June 30, 2026. The $0.5 million of tariff refund corresponding to product sales made in prior periods increased our gross profit margin this past quarter by approximately 9 percentage points and approximately $30,000 of the total tariff refund related to purchase inventory that was converted to revenue during the 3-month period ended June 30, 2025. For that period last year, including the $30,000, the gross profit margin for that second quarter of 2025 would have increased by approximately 1 percentage point. Although the IEEPA tariffs were declared invalid, the current administration has imposed tariffs using other statutory basis, which do remain in effect. Accordingly, we expect that our gross profit margin will continue to be impaired as a result of U.S. tariff policy. And again, just to reiterate, as service revenue continues to grow, it helps drive our product sales and adds to our gross profit dollars but does have a lower gross margin than our product revenue. Now moving on to research and development expenses. They increased approximately $366,000 or 18%, primarily due to higher salary expense. Selling, general and administrative expenses were approximately $2.4 million, an increase of 10%, reflecting increased headcount and an increase in sales commissions. As a result of the above changes, net income increased over 400% for the quarter to approximately $1.2 million compared to $237,000 in the prior year period. And adjusted EBITDA for the second quarter of 2026 increased 260% to approximately $1.3 million compared to $355,000 in the prior year. Net cash provided by operating activities was $681,000 in the second quarter of 2026 versus net cash provided of $994,000 in the prior year period. This showed a decline of $313,000. Net cash provided in the second quarter of 2026 reflects primarily our positive net income and a decrease in accounts payable and accrued expenses. Those were partially offset by an increase in accounts receivable and inventory. Net cash provided by operating activities in the second quarter of 2025 reflects primarily positive net income and a decrease in accounts receivable. Moving on to our 6-month results. Sales for the 6 months ending June 30, 2026, increased by 21% to $11.2 million from $9.3 million in the prior year period, reflecting strong growth in our programmatic and our service revenue. This was slightly offset by a decline in our emergency response revenue. Gross profit margin was approximately 63% for the 6 months ended June 30, 2026, compared to approximately 64% for the corresponding 2025 period. The decrease of approximately 1 percentage point was primarily attributable to increased product costs due to the weakening of the U.S. dollar compared to the euro, increased shipping expense and rapid revenue growth from our commercial product offerings and service revenue, both of which yield lower gross margins than our infection control business. However, -- our gross margin significantly benefited from our recognition during the 2026 period of the tariff refund of approximately $600,000, which I just mentioned previously. Of the $600,000, approximately $300,000 of this tariff refund corresponds to purchase inventory that we converted to revenue in the first half of 2026, which accounts for approximately 3 percentage point improvement in our gross profit margin for the 6 months ended June 30, 2026. The remaining approximately $300,000 of the refunded tariff correspond to purchase inventory that we converted to revenue in 2025, of which $30,000 corresponds to the 6 months ended June 30, 2025. Research and development expenses increased to $712,000 or 17% in the first half of 2026, driven by higher salary expense from increased headcount. SG&A expenses increased to $4.9 million or 11% in the first half of 2026 versus the prior year period, primarily due to higher headcount and higher professional fees. As a result of the above changes, net income increased 68% to $1.3 million from $800,000 in the prior year period, and adjusted EBITDA increased 46% to $1.5 million from $1 million in the prior year period. Net cash used in operations for the first 6 months ending June 30, 2026, was $990,000. Our positive net income was more than offset by an increase in accounts receivable and inventory. Net cash provided by operations in the first 6 months ended June 30, 2025, was $1.3 million. That was driven primarily by our positive net income as well as a decline in inventory and an increase in accrued expenses. As of June 30, 2026, we had approximately $4.7 million in cash and remain debt-free. Our cash balance increased from $4 million as of March 31, 2026. I will now turn the call back to Robert for closing remarks. Robert?

Thank you, Judy. This quarter provides strong evidence of the progress we are making. We delivered record revenue, record programmatic revenue, substantial growth in service and the highest quarterly net income and adjusted EBITDA in our history. At the same time, we continued investing in new products, expanded our customer support capabilities, broader market awareness and future growth. We recognize that a portion of this quarter's reported profitability benefited from the onetime tariff refund. But the larger takeaway is the underlying growth of the business, programmatic revenue increased. Infection control filter sales increased. Service revenue nearly tripled. Those results weren't created by accounting and timing, they were created by execution. Our priorities for the second half remain clear: serve our existing customers exceptionally well, expand our installed base, increase service and replacement activity, improve underlying margins and continue building awareness of Nephros and the markets we address. We believe the opportunity ahead of us is significant, and we remain confident in our ability to create lasting value for our customers and shareholders. Thank you for your time and continued support. Operator, please open the line for questions.

The first question comes from Bobby Brooks with Northland Capital Markets.

This is Ketith [indiscernible] on for Bobby. Congratulations on a great quarter. And I just wanted to -- I was curious if any of the new product launches addressing microplastics and PFAS and drinking founds were reflected in the robust 2Q results? Or is it all just the core legacy products accelerating?

That's a great question, and thank you for asking it. The microplastics or more importantly, nanoplastics as well as PFAS and some of the other newer products have recently been released. It's with the exception of sterile processing and maybe the HydraGuard, which were earlier prior year, the new products haven't quite gained traction yet, and it does take some time for adoption to occur. We have to first educate the market and then run trials often and then usually that results in increased sales. So we look for those to be drivers in future quarters, maybe 2, 3 out. And further, as regulation also regarding microplastics and nanoplastics increases, they will become a bigger driver as well. More often than not, we get questions and we'll provide our newer products to fill that gap. We haven't quite educated the market yet for them to be drivers, and that's even more exciting. personally, I'd like to see more and more of the growth that's coming in our core business come from newer products. That shows that we're continuously evolving and putting some of those hard R&D dollars to work. Thanks for the question.

Yes. And then maybe a follow-up. Can we go into some of those products that are gaining traction and maybe the target customers in the PFAS sales or nanoplastics?

Well, that was one of the really good things about this quarter. It was not a single product or family that was gaining traction. It was pretty uniform across the board. We have introduced some new flow sync adapters and some other convenience kits. But by and large, the service enabled more filter purchases as customers that are limited in support and internal abilities to install found no more excuses not to take care of those problems. We're also finding growth in bottle fillers and drinking fountains where many of these fountains had remained closed for quite some time following COVID and entities are faced with the option of either paying a lot of money to tear them out or contacting us to clean them up and put a filter in place. So often, our solution is cheaper and easier and faster. So are gaining some traction in those areas. So it was really broad across the board in our portfolio, which is a really, really healthy and broad-based growth. And I believe there's another part of your question, if you could repeat that?

Yes. Just kind of the targeted service audience for your nanoplastic filters.

So again, yes, nanoplastic hasn't gotten the traction yet. Just recently launched some of those capabilities. The flagship product that we sell, the DSU has always had those capabilities through size exclusion. And now we've got those documented, and that's really what that latest press release was about. The target audience for the most part, will likely be more commercial residential type users. When you think about patients in a hospital or patient care, they come in, they are present for a few days, maybe a week or 2 and then they leave, whereas someone living in a home might be raising children who have to drink that water for quite some time. So if I just -- and this is just thinking off the top of my head, the typical use case is going to be those who are exposed or have the opportunity to consume water from the same source over long periods of time. Anyone in that scenario would be concerned with the impact of microplastics and nanoplastics when held over some period.

[Operator Instructions] The next question comes from Anthony Vendetti with Maxim Group.

Maybe just higher level on the revenues. Obviously, a record revenue quarter, significantly ahead of our expectations. Some of that is the tariff revenue. But even without that, it still would have been a significantly higher quarter than expected. So I know there were some emergency services revenue in there. Can you quantify that -- and then whatever else you could break out in terms of revenue, was it more by -- driven more by new sites that you signed up or a combination of that and a little bit of higher revenue per site?

Robert, if I could just jump in for one second. I'm going to let you answer, but I do want to make a clarification. No, tariff -- we didn't have any tariff revenue. The refund all was a reduction of cost of goods sold. So that was real product revenue that came through. I just want to make sure that's clear.

Yes, no problem. Great question. And as I go back and analyze the orders and where they're coming from, I look for trends. I'm not seeing a trend based on a specific region. I'm not seeing a trend based on a specific customer type. It really was broad-based. And some of the characteristics of that broad-based growth are primarily growth within existing sites. The number of new customers is not impressive. 1,724 was the count, just a few more than last quarter. So it really is sales within existing customers, especially as we offer every existing customer more products and more services. And that's quite impressive that we can do that with customers that we've had for quite some time. Some of the other maybe macro factors impacting some of the growth, there's been a lot of questions and activity around Legionnaires' disease, especially in the New York City area even though that is not related to the potable water, that's an HVAC industrial portion of the system, it still is sparking interest. And I'm thrilled that people call me a couple of times a week, if not almost every day, asking about that situation because they think about Nephros. They think about I've got a Legionnaires' problem or scare or worry. This is a company that can call to get information and support. So that's been fantastic. So a lot of this has been just recognition and education as we've done more and more outreach. We do quite a few webinars, seminars, speaking at trade shows and conferences and getting that name just recognized out there. Our partners are continuously bringing us opportunities, and they're getting smarter. They're starting to recognize different opportunities and how it helps them please their customers more and keep their business. So I want to continue to make sure we nurture that partner network. We don't have as many as we did 3 years ago, but the few that we have are much stronger than ever. So that's also quite nice as well. So I'm not sure if I directly answered your question. Emergency response is nothing exceptional. It's been pretty steady and steady at a low number. So there's been nothing that stands out from that regards. When there are -- when there is something to that nature, I do call it out because I'll have to cite it again the following year about why something didn't repeat. But there's been nothing extremely noteworthy from that front as well.