Nephros Inc Stock

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.

So it seems like -- yes. No, it seems like, Robert, what you're saying is it's just very high customer retention rate and more services and revenues in each site. You did mention or you mentioned that revenue in the services side tripled. Is that sort of like now the new run rate you've added these services on and they're expected to continue at that new rate?

When we mentioned services, so there's 2 types, the initial installation when the filter gets placed and then maintenance of the filter or changing out of the filter at some point in the future, 3 months, 6 months, as an example. And that is usually the case. Not always, but that is certainly what we're pushing for. The filter tracker app that we implemented some time ago has reached a more mature state.

And what that does is it allows us to scan the QR code on the filter once it's installed which then logs the location, the customer, what was installed, when it was installed, who installed it and also creates a database that allows us to more -- to automate the renewal or the reminders that a new filter needs to be in place. So that is really a very nice way to take some of the manual part out of it instead of completely relying on spreadsheets in memory, we're able to kind of automate some of that.

So bottom line, I think it's -- I would classify the growth as execution. The sales team has been really honing in their skills, really serving as more of an educational resource. They're the water expert, and they're getting that first call even if it's a product that we don't offer or an area that we don't service. So that execution is really what's driving it, and I think that's going to continue. But we will see.

Okay. Okay. Great. So it sounds like these new services you've added on have resonated with the customers and there is an expectation that these kind of services are services that the clients either need or want and an expectation for them to continue at a similar level.

And just one final thought on your questions. As customers do come to us with questions and have problems and different challenges, that also prompts us to look at designing and creating new products. So that feeds our pipeline. And when we do solve that problem for one , it often translates in scales to others. So thanks for the questions.

[Operator Instructions] The next question comes from John Dunn with Trinity Health.

Robert, I just wanted to introduce myself. My name is John Dunn. I am your Water Quality Manager for Trinity Health. I cover approximately 30 million square feet of 34 facilities in the greater Northeast. And to support what Robert is driving for us has been we've collaborated and become partners and basically, everything that Robert is driving home here is work for our facilities tremendously. Their knowledge, as he said, the filter tracker and some of the implementation of some of the new devices that he had, we're utilizing them all.

And basically, I just wanted to reach out and thank Robert and his team everybody involved. It's been a good year. It's been a good partnership. So that's basically all I had to say.

Thank you, John, and I greatly appreciate that reflection. And I would say that the experience you have is one that we try to mimic and duplicate with all of our customers. We work hard to create that personal touch and responsiveness.

And in each of the regions, there's going to be a similar story when someone with a delighted experience. I appreciate you.

Especially Robert on the education. Especially on the education, we've taken quite advantage of the education today where staffing is so difficult to drive -- not even keep on hand, but keep educated.

Some of the recent -- we've partnered with them in videos. We've partnered in them with education. We've partnered with different processes with our ice machines and not just -- even just in the proactive directive of mitigation of potential water pathogens. You guys have been on top of it, and I appreciate once again you guys' efforts.

Thank you. Thank you. Thank you so much. I can't thank you enough. We really struggle with getting customers to share. And a lot of times, it's not because they don't like what we do, but they don't want their name necessarily associated with a company that is really an expert at remediating the region. So thank you so much for that information.

[Operator Instructions] And we have a follow-up from Anthony Vendetti with Maxim Group.

Just a real quick follow-up on the education side. Is that something that is also a new service that's resonating with customers? And is that a service that you charge for embed in your overall cost for the filters? How should we look at that from a financial perspective?

Yes, that's a great question, and it's an evolving question. The way I think about Nephros and my vision for quite some time now is to create these 3 pillars. It all starts with products and the filters, which are great, unique, differentiated and awesome and have been for quite some time. The service has been a way to remove barriers and get more of those filters adopted and also make sure that they get changed on a regular basis.

The education, the newest piece or newest pillar really was the final cog in now that we've got the product, now that we can help remove barriers, how do I get the notice out that we are solving these problems and can meet the very stringent guidelines and demands out there. We have not decided to monetize that product yet in the way that we have webinars with hundreds of attendees all the time.

Often, they come back and result in quote requests and subsequently orders. We offer lots of different ways. We'll come to your site and train you, all for the purpose of trying to get more filter products installed. There might be a point in the future where we do try to monetize that. But at this stage, I think it's really not the point of what Nephros is. We're not a school. We are a company that is creating solutions for water management, water problems. So still determining how that plays out in the future, but I don't immediately see that hitting a revenue stream.

Seeing no further questions at this time, this concludes our question-and-answer session. I would like to turn the conference back over to Robert Banks for any closing remarks.

Thank you, Drew. And it has truly been a great quarter, and the team has worked extremely hard, and they continue to work hard every single day. I just want to thank all the shareholders and people for sticking with us throughout the time as we execute our plan, and I look forward to hearing from you and having you join our next call. Thank you so much, and have a great rest of your day.

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

I'm really super excited about this. I got a few more people still logging in, so I'm going to pause just a little bit while we get those last few [indiscernible] logged in. So good stuff, good stuff.

So welcome to the Nephros investor event. Thank you for taking the time to join us today and for your interest in Nephros. Whether you've been a shareholder for years or just beginning to learn about the company, I hope you leave today's event with a much deeper understanding of who we are, why we exist and perhaps most importantly, where we're headed.

Because today's event isn't really about filters, it's about water. Water is necessary for life. Clean, safe water is fundamental to health. And yet most people don't think about it until something goes wrong. When water quality fails, the consequences can be significant. Patients become ill, buildings can shut down, equipment can fail, businesses lose confidence, trust is lost.

At Nephros, our purpose is simple. We purify water where it matters most. That includes hospitals, dialysis clinics, commercial buildings, laboratories, food service and many other environments where water quality has real consequences for patients, customers, caregivers, equipment, operations ultimately, trust.

The interesting thing that the market around us is changing so rapidly. Just a few years ago, most conversations centered around Legionella. Today, the discussion is much broader. Customers are thinking about opportunistic premise plumbing pathogens, biofilm, antibiotic-resistant organisms, PFOS, lead, aging infrastructure and increasingly micro and nano plastics.

The expectation is no longer simply to react when the problems occur. The expectation is to prevent them. That shift plays directly into Nephros's strengths. Our membrane technology provides a physical barrier through size exclusion filtration rather than relying solely on chemistry or perfect water conditions throughout an entire building technology provides targeted purification exactly where water is used.

But today, I'd like to show you and like you to see that the filter is just -- it's not the only part of the story. Over the past several years, we've intentionally involved Nephros into a company built around 3 complementary pillars. The first is products. Everything begins with differentiated technology. Our hollow fiber ultrafiltration membrane has been proven in some of the most demanding environments. The technology is incredible. It gives us credibility, the opportunity to expand into new markets, new applications, all while continuing to strengthen our leadership in health care.

The second pillar is service. We learned that even the best product creates less value if it isn't installed properly or maintained correctly. Customers increasingly need a partner, not simply a supplier. Today, Nephros supports site assessments, installations, emergency response, filter replacement and ongoing consultation. Service doesn't just improve customer satisfaction, it helps ensure that our technology performs exactly as intended.

And the third, most recent pillar is education. One of the most exciting initiatives we've launched in Nephros is the Nephros Water Institute. Why? Because water quality is becoming more complex every year. Standards continue to evolve, regulations continue to change. Customers are looking for trusted guidance, not just products. Through webinars, industry presentations, consulting and educational programming, we're helping customers better understand water safety before they ever purchase a filter. Education creates trust.

Trust creates relationships. These relationships create long-term customers. And that's an important point I'd like everyone to remember today. At Nephros, we are not trying to build a transactional business. We're building an enduring customer relationship. When you combine differentiated products, responsive service, and meaningful education something powerful happens. Customers don't simply buy a filter. They increasingly look at trusted water quality partner. That creates recurring demand, stronger customer retention and opportunities to expand into additional applications over time.

Today's event was designed to show you exactly what that looks like in practice. You'll hear directly from members of our team who work with customers every day. You'll hear from a partner who has experienced firsthand what it looks like to work with Nephros. And you'll see how our approach translates into measurable value in the field. Following this next video, Judy and I will discuss our recent progress, our outlook for the business and opportunities we believe are in front of us.

We're excited about Nephros, where we are today, but we're even more excited about where we're going. We believe water quality will continue to become more important across health care, commercial, institutional and new adjacent markets. We believe our technology is uniquely positioned to address many of those challenges. And we believe that the combination of products, services and education creates a differentiated platform, which is capable of generating sustainable long-term growth.

Thank you again for spending part of your day with us. I hope you enjoyed today's program, and I look forward to speaking with many of you during our live question-and-answer session. So that being said, let's get started, and I'll share the first video with you.

[Presentation]

What a great testimony from one of our key partners. Now we're going to go a little bit deeper into the expertise and value of the platform that [ Mike ] spoke about with our colleague [ Brian ].

Most people think about Nephros, they think about filters. They think about products. But we're not just a manufacturer. When I joined the company a little over 5 years ago, we endeavored on a huge rebrand. One of the outcomes of that rebrand was determining what was our why? Our why was because water matters.

And really, this is so key to how we do what we do and why we do what we do. We're making products that help make water safer or better, but we're also helping people understand why that's important. The way that we do that is through education.

When it comes to water, knowledge is more important than ever. As technology advances, so too does our understanding about different things that impact our water quality and safety. We are understanding of more risks, understanding of more challenges, all things being discovered every day, new regulations being introduced. This creates some operational and compliance challenges for different industries, particularly for customers like our own who are often in health care or other regulated industries where water safety and water quality concerns are not should they become a must.

So referencing back to our why because water matters. It was key to our rebrand and defining that why that it was also key to help people understand why it matters. And then knowing why it matters, one must also understand what can challenge it. And having that understanding is often a factor of education.

So very early in our rebrand, education became a cornerstone of the work that we do. When it comes to supporting our customers who are navigating these technology advancements is changing regulatory expectations and the landscape of different standards being released the compliance and operational burden that they face is something that we are more than happy to help with that we feel it is very closely tied to our mission.

And so with that, we make a point of doing the work ourselves to understand what is going on in the industry? What are the challenges facing water quality and water safety, not just from an industry perspective, but from a human perspective. With that work in that research, we have to be well versed in what are the expectations for compliance. We do that work of learning and understanding so that we can do the translation, turn it into actionable items, tactical guidance that we can then in turn share with our customers and our partners.

Beyond how we help our customers and partners better understand more quality and water safety challenges and how best to respond to them. We're also looking to advance the public understanding of water challenges and how to respond, calling attention to different blind spots, if you will, and something that we have found that is true both from an industry perspective, but also from a public perspective, is the idea that water is safe because it is a utility that we rely upon, right?

There are different government standards dictating what makes EPA quality water, what makes water safe, right? And water is also something where if there are problems they're invisible. One can't look at a glass of water and know immediately what might be wrong with it, if it's not something that's affecting the color or the smell. So with this invisibility, comes another opportunity for education.

A lot of focus with water treatment comes from the -- before it gets to the building part when you were talking about water treatment plans, right? Something when we're thinking about municipal supply, we're thinking about large-scale purification, large-scale treatment and assuming when water gets to us, all the work has been done, and it is now safe to consume.

But the reality is when water enters a building, all bets are off. Things change. You have another water journey that starts from the point of entry into a building to the point of use. Where you're going to interact with that water, maybe at a faucet, maybe taking a shower, maybe in a facility, maybe as part of your commercial or professional process.

And that's another area where there are plenty of things that we can call attention to that are not just useful for industries, as I said, but for the average person to have a better understanding of something that we rely upon for life, water. Earlier this year, we took another step in our efforts with education. We decided to form what is now known as the Nephros Water Institute, which is essentially a more formalized version of what we have been doing already for some time, engaging with our public, staying abreast of industry developments, being mindful of what are the contaminants of most concern, but also what are the regulatory changes? And how can we translate this to our partners?

We are holding webinars, we are creating tailored resources. We are really focused on using evidence-based education as a support for our public, for our customers in particular. Education also creates value for our business. Yes, we're helping the public and our customers and partners better understand the situations that they're navigating when it comes to water or bringing attention to things that they may not have been aware of.

But an informed customer is a better customer, right? They're having a better experience with our products. That our understanding leads to better implementation and better implementation leads to better outcomes. It helps establish grow that trust that is so key ending customer relationship that will also hopefully expand and grow over time.

Another way that education supports our business is helping us to reach customers beyond our traditional markets, beyond our traditional customer base. As you well know, health care is a big customers. But there are other industries that we are engaging in, different types of manufacturing different aspects of water treatment beyond just health care. So with these industries, it's very important to be in touch with what are the topics and contaminants that are of particular concern to them.

This comes from industry engagement often with conferences, but also different professional organizations. And we have had the privilege of also being asked to speak at a lot of these. So it's great to be able to identify these new areas to identify topics that are relevant, be able to tie that back to how Nephros can support them, how Nephros can provide value for these areas. And it also creates an opportunity for different industries and different populations and audiences to have a better understanding Nephros if they have little understanding. And if they've never heard of us before know that we are a resource that's out there. I know that we are a solution that is available. Education is not separate from our business strategy our purpose of our customer relationships and the value that we bring beyond the products themselves.

So now that you've heard from [ Brian ] in the Water Institute, I want to take a little bit deeper dive and look what's under the hood to understand really where the magic happens. For that, I pulled Mike in and had a little roundtable. So take a look at this recording on that.

As a filtration manufacturer, Nephros has developed a lot of different filtration technology. We have been able to support a wide range of industries, different applications and water quality challenges. And having started in dialysis where the scrutiny, the quality needs, the rigor of purification is so high, it has really helped inform our expertise and the breadth of our product solutions, if you will.

So since our start in dialysis, we have expanded quite a bit. We are in infection control, physical and chemical contaminant control as well a number of different custom, commercial, partner-driven applications. So on that note, I did want to take this opportunity to open up the conversation with our Vice President of R&D, Michael Milman, who's here with me today.

And we want to peel back the curtain, so to speak, on our OEM partnerships and a lot of the custom product development that is not really publicly spoken about, but is a big part of the Nephros business. So Mike, I know one reason Nephros is able to support the range of applications capabilities that we've developed has to do with the technical demands of the work that we've done, thinking historically about different industries and applications we've supported dialysis or even pathogen detection, things of that nature. Can you walk us through how our early technical foundation has shaped what we are able to offer today?

Sure. Sure, of course. So many not know about this, but we were the customer, right? We -- Nephros started out developing a novel dialysis, both the system and treatment and big part of that treatment was the requirement to have really high end, really pure purification process. We tried to find something that was available and it wasn't. So we actually had to develop our own technology for that high-end purification process. And that technology still serve us today as a core to a lot of our products.

So as a result, we were sitting in our customers' shoes. We know what problems they were dealing with. We know what support they really needed. So through that experience, we really got this deep understanding of our customer pain points, their needs. And often, we can help direct them or identify the problems or the solutions on the questions they may not be familiar with because we've sort of been in their shoes. So because of that history and the development, we really deeply understand our customer pain points and their needs. So we're able to help them and guide them through the process, having that experience.

I imagine the nature of that sort of problem-solving position, acting as a bit of a consultant to partners there probably been some unusual requests. Is that true? Has there been anything that's stumped your team?

I don't think we're often stumped these days because there is such a broad range of applications that we get involved from chicken coops to forward military deployment filtration to medical device manufacturing and I mean some people trying to filter new or [ quarters ] so they can make better pizza outside the state. So we -- I'd like to say we've seen it all, but we're a team that's always wants to learn more and curious about that applications. We get really interested and seeing something new. So being involved in so many different sort of the breadth and depth of the applications give us the ability to really find the right solutions for our customers.

Yes. And we're going to dive a little bit more closely into the specifics of the applications in the industries. But it's just interesting and the few examples that you mentioned. It really runs the gamut from different water quality issues to water safety very similar to our product catalog, but different in the sense that we're really thinking about, as you said, what the customer needs, there are pain points, et cetera.

So Mike, when we talk about OEM capabilities, product customization and even product development, can you run through how you would characterize our capability set when it comes to the support we can offer?

Sure. Sure. Thank you, [indiscernible]. So thinking about Nephros capabilities, we're not just a filter supplier. Nephros collaborates very closely with our partners, especially in those OE implications. We get involved very early in the development cycle so we can really ask the right questions, help our customers develop the problem, really focus on the core problem they're trying to solve.

And then we stay very close working with them through the development, through launch, to make sure we can help them every step of the way. We're also not only focused on our filtration side to how we can best use our products for their technologies, right? How do we integrate better, what are the right solutions, what's the best pathway even regulatory-wise if it's a medical device. And we continue to support them through the launch with post launch to make sure we continue to help them with whether it's improvements, our sustaining engineering and really develop that strong partnership that they can rely on us as not just a supplier or a product company, but really a partner in helping them address their core problems and really focus on the ultimate solution their business organization needs.

I think another key point for investors is that we're not from a single technology. We've touched on this a little bit. But speaking specifically about the filtration nature, can you walk us through the different types of filtration and how they can support different problems that we're solving?

Sure. Sure. I can talk about kind of the broad range of technologies available today. Nephros started with hollow fiber. So hollow fiber technology, whether it's [ titration ] or microfiltration and other size in between is really where we started and is the key technology and a lot of infection control applications, where it's the [ altritration ] membrane that helps us trap, whether it's viruses, bacteria endotoxins to microfiltration where customers focus in bacteria and maybe need really high flow rates or low pressure drops to other technologies such as media that we use today to help our customers with contaminants such as maybe it's the forever chemicals or PFAS or lab or [ in chlorine and chlorine ] which is very important, a lot of dialysis applications to emerging technologies and problems such as nano plastics, and microplastics removal, all the way down to something like scale reduction for equipment maintenance.

And then also, we worked with a lot of partners over the years that have other technologies that may be useful on specific projects. So it's not just our own technologies that we can utilize, but we can also work together, integrate technologies from other partners, if they're appropriate for the problem the customer is trying to solve.

So tell me at the start of a project with a customer, how do you determine whether the solution is an existing product, something to be developed and further, is it a media-based filtration? Is it membrane based? How do you make those decisions?

Sure, sure. That's a great question. I think this is where we start and go back to experience is knowing the right questions to ask. The customers may come to us with something they researched with the solution they found readily available, which is they think is something they can use. So it's our job to really understand what problem they're trying to solve and not so much what filter they may think they need.

So this is where we work closely with customers to understand what is the core problem, what does success look like for them. And then we start looking into what technologies we have available off the shelf, what can be either tweaked or modified to where a completely custom solution is developed -- our job isn't to go into a lab and overengineer something just to create something cool.

It's really to make sure that we balance what the customer problem needs to what we have available versus what we can develop or even work with our partners to help that integration. So we want to make sure that we're challenging the assumptions, right, that come with whether the original specs requirements or people in the industry have about the solution that they're looking for and really focus on what's going to really solve the problem for the customer.

With similar technologies, we often start with a little bit of skepticism, right, because when you tell somebody we can throw an ultrafilter on their tap water line and it's going to last 15,000 gallons -- that's not something other technologies can do. But what we find is after working with us over the years, the customers are now coming to us instead of saying, "Hey, here's the filter I need. Now they understand as us, here's the problem we have. Help us how do we solve that problem."

And that's really what turns the sort of customers into long-term partners because they trust us with finding the right solution and even the one that's not readily available or somebody has thought of before.

And you're describing a bit of a classic product design challenge where especially if somebody comes and they think they already know what the solution is, and they're looking for somebody to help them execute it. You kind have to backtrack and trying to assume what the solution is. And again, like you said, dive more into defining what the problem is in turn what the goal the solution you're working towards?

Absolutely. And this is where we balance -- we try not to be too annoying because we don't want to throw 1,000 questions to them, but we really try to stress the value and explain that this is how we bring value, right? We're not -- we're not a distributor that takes a product and that just provides to them. We really want to solve their core problem. And for them to walk away with at least solving that problem, but probably even in having an improvement than what they thought was possible before.

Another important part of the Nephros value proposition is not just our access and history with filtration technology, but also the path to regulatory clearance. So thinking about successful development and commercialization of products of getting things through the FDA 510(k) clearance process specifically.

Because as a reminder, we are a manufacturer of Class II medical devices. So we have that experience when it comes to filters, but I know it's not limited to filters. Can you talk us through how experience navigating that particular landscape, how you carry that experience over when it comes to supporting customers?

Sure, sure. So having the history or the background of several FDA clear products and like you said, not just filters, but also the entire dialysis system or dialysis [indiscernible] module from where the company started is a lot more complex, but also -- over the years, we've developed a lot of whether it's validations and third-party testing and documentation and just arsenal information and data around our core products.

So when customers come to us and they're looking to whether they're looking for to submit their overall system with a device for 510(k) clearance or it's a customer product we're developing for them. We have all that experience and history to an arsenal of information to use. Sometimes it could literally speed up the development cycle for a customer by 6 to 12 months because we already have the biocompatibility testing.

We already have those third-party validations. And at the same time, when the FDA reviewers looking at their submission, and they see that the most important, let's say, polishing step for some kind of a pathogen retention is a Nephros filter that's already been cleared in several other devices and it's the same technology, it makes that part a lot easier, right? They're not looking at a new device. They're already familiar with the Nephros product.

So when we get into whether it's a regulatory pathway, just working with our customers, we know what questions to ask, we know how to avoid certain issues. We know all the different pathways that they can take whether they want to have some [indiscernible] meetings with the FDA or what the FDA is looking for when it comes to purification as part of their system, we're already very familiar with.

So we can both advise our customers, we can use our own experience and the several products have been already cleared to really help them both accelerate the process, but also say the significant amount of cost as they do to that as well.

Got you. I know we don't want to get into any specifics with customers or functionality, but are there any notable examples of how that expertise like you mentioned, could speed up the process of approval or clearance from 6 to 12 months. Are there any examples of that, that you can share any details?

Sure. I think it's something that I touched on a little bit. It's, for example, one of the most maybe costly and long process and being something like by compatibility testing. As a medical device manufacturer as dealing something, for example, a dialysis where your device comes in direct blood contact through a [ dialyzer ] or through your device, you have to show that the water, the dialysis solution or whatever is coming in contact with the patient is extremely pure.

So you have to be able to prove that not only your devices function is attended, but also you're not leaching something, right, and that kind of very small scale into the solution or into the person's bloodstream. So having the data that we have for our devices that we had to essentially conduct [indiscernible] purposes, can really save you easily 6 months in testing and also tremendous cost because we already have that we can supply and we can show an equivalency that the product that we've cleared or the product we conducted by compatibility testing is substantially equivalent to the product that our customer is trying to put into market.

So I think another one of our clear indicators of value is not just the range of industries that we are able to support, but the range of products and solutions that we've developed as well. I'd love to dive a bit more deeply into the applications and industries outside of health care specifically. I know we talked a bit about dialysis, but I also know there's a whole range of nonhealthcare-related industries that we've had the opportunity to touch. Can you tell us about those.

Sure. Sure. Let's dive in. So over the years, we've been involved from anything to pathogen detection or filtering a small volume of solution of about 20 mills through one of the filters, so we can do the proper tractions for the PCR reaction, upwards to a system that's flowing 30 gallons a minute for whether it's manufacturing and processing of something specific like cleaning solution.

We've been in military application of manufacturing both medical device and now medical device manufacturing, we have food processing like where, for example, in chicken coops, where they need to make sure that the process water used for washing down that equipment and processes clean to, as I mentioned, to people trying to make novel food applications. All kind of equipment, whether it's reprocessing.

We talked about infection control and hospitals, but also just even in situations where in the East Coast, after Sandy, we had a lot of silicon in the water. And a lot of technologies we're struggling with trapping at silica, so the other technologies can work properly. [indiscernible] have been used to trap silicon those technologies because of just small or we can go down to without clogging. So we've really kind of seen it many different areas.

We have some new novel technologies being developed for -- also for military and nonmilitary use in terms of different health care solutions, which again, can't speak to in detail, but they also need to really purify the water use for that process. So it's really been sort of a really broad range of solutions we've seen over the years.

Speaking of Sandy, and I know the point about the silica, the [indiscernible] water. I know the reason why we were able to tackle challenges like that -- the fact that we have a range of technologies that use the hollow fiber that are operating through size exclusion.

Can you talk to us a bit about how that means of a barrier how that can apply to a broad range of different types of contaminants because I know like where we're talking about medical grade filtration. That's the same type of technology that we can rely on to take care of things like bacteria even down to endotoxins. But when we're talking about the nonmedical application size exclusion if we're talking about solid suspended in the water, right, that can apply to a whole bunch of different particulate, right? So can you take an opportunity to just walk us through that?

Sure. I mean a great example is you hear a lot about microplastics nowadays. And when we talk about microplastics, it's really the nano side of that, right, nanoplastics. You hear microplastics people really mean both, but it's a nanoplastics that most published studies are concerned about because their particles are really small.

And now those are the ones that can, let's say, believe can make it across blood barriers and so on and people are finding them when they do post type of looking at people's brain tissue and other tissues. So because we're able to go down to such a small pore size, we're actually now helping people that are looking to remove nano plastics from their water supply, not just again bacteria viruses, right?

There's also other contaminants where really small porous can play a role and having that ability. But it's also not just our technology in terms of the hollow fiber also our media filters, right, whether we're removing PFAS, which are the long and short chain forever chemicals that are much concerned or it's chloramine which, again, can be very dangerous in certain application or just really will make your food and beverage taste terrible if you're trying to have a business that you're dealing with [ Clarins], the water like on the West Coast. So it's really a lot of different application and it depends what the customer is trying to do. But we've been able to apply our solutions to a broad range of applications as we discussed.

One thing you mentioned was reprocessing, which I wanted to expand on a little bit. So I know with our customer base, we do focus on that a lot in a health care setting, thinking about sterile processing and cleaning of medical instruments and such. But that kind of work with water in a cleaning setting, we see extend into other industries.

So dental, for instance, they use sterilizers. And I know they're getting a lot more scrutiny when it comes to water. I know the CDC has called some attention to things that they should be concerned about because they're in a very similar setting as you would find in a hospital, but they don't yet have like the regulatory oversight telling them they must do something. But that being said, I know we do have customers and there are folks in the dental space that are being proactive about it. So are there any customers or any details about the dental space you can kind of elaborate on and shed some light?

Sure. Sure. I won't go into specific customer applications, but we definitely have applications within both the dental industry also extends into the just lab water as well, where water quality is extremely important. So we are helping some customers to create solutions around purifying water and making sure that they're addressing microorganisms. I think can be dangerous for the application, especially if you're getting some kind of oral surgery or in that space at the same time for, as I mentioned, in labwater, you have to have very high purity water to start with.

If you're doing experiments, if you're -- so you want to make sure that what are you using for your experiments is actually interfering with your experiment. So that's another area that we're starting to see a lot of demand and interest as a concurrent industry to what we're already doing. So we have customers coming with the request for solutions from both of those spaces.

Yes. I mentioned Dental too, just the nature of it lends itself perhaps more to custom product development given that there's such a range in different equipment types and so many instrumentation and where water is flowing and tiny tubes and things like that, it's like all of the conditions that we talk about in other settings that kind of create a great environment for bacteria to thrive. So yes, I imagine there are kind of some unique challenges when it comes to space limitations, probably when you're trying to identify a solution for a customer in that space.

Yes, that's very true. I don't think Dental is the only, I think, a lot of applications. They want to see the most efficient contact product -- but yes, yes, if you're trying to put something into an already designed dental chair or some kind of dental application, being able to provide the right flow rate at the right pressure and a very small footprint matters a lot, which is another area where we excel compared to what's available in the industry.

Yes. Put a really good way to highlight what we were able to accomplish and how we can generate value well beyond the filter. So next, I'm going to have Judy share a financial update with you before we go to the Q&A section. Judy?

Thanks, Robert, and thanks, everyone, for joining us today. I'd like to just give a short recap of our first quarter earnings. And of course, I'm happy to answer any questions during our Q&A session when this is over. We reported our first quarter revenue of $5.2 million, which was a 7% increase over last year. This was really driven by strong growth in our programmatic revenue of over 20%, which did offset a year-over-year decline in our Emergency Response business.

As we know, our emergency response business is lumpy and opportunistic of the growth in the programmatic business. We also showed significant growth in our service business, albeit from a small base. If you look at the fourth quarter relative to the first quarter, we had a 10% sequential growth in revenue, again, driven by programmatic and service revenue.

I'd like to touch upon our gross margins a bit and go into those in a little bit more detail. So our gross margins in the first quarter of this year declined to 57% on from 65% in the first quarter of 2025. There were a number of things that affect gross margins quarter-to-quarter. And I'd like to walk through each of those now and share how they affected our margins in the first quarter.

First and foremost, of course, are product costs. [indiscernible] have been relatively stable, there's been some minor inflationary increases in some noncore products, but we've managed through those fairly well. And we did put a small [indiscernible] through at the beginning of March, which did offset some of these inflationary price increases.

The second point I'd like to talk about is tariffs. Since the tariffs were initiated originally, we were subject to a 15% tariff through February of this year. Our come from Italy, and Italy has a 15% tariff. In fact, tariffs cost us over $200,000 in the first quarter of 2026. Without that tariff, our gross margins would have been comfortably in the low 60s percentages.

Now we have applied for a tariff refund at all tariffs paid through February of this year, and we do expect to receive that refund in the very near future. Our tariff rate was reduced to 10% from 15% at the end of February. This new round of tariffs were designed to last 150 days and at this point are scheduled to expire at the end of July. We certainly are hopeful that, that will be the case and potentially no new tariffs initiated after that.

But certainly, we will see how that plays out and a 10% tariff certainly is easier to manage than 15% tariff. Point that can affect our gross margin quarter-to-quarter is the euro-dollar exchange rate. As we import much of our products from Italy, as I mentioned, changes in the euro dollar exchange rate affect our gross margins.

Since the end of last year, the euro has strengthened against the dollar, which affected our gross margins negatively. Although since the end of March, the euro has actually weakened just slightly against the dollar. The next point that does affect our gross margins is our customer mix. We offer volume discounts to our larger customers that are tiered based on the business levels that they do each year. If we happen to have a quarter where much of our business came from those larger customers, it certainly would affect our realized margin that quarter. And that just moves around quarter-to-quarter.

Finally, I'd like to discuss the mix of business, which also can affect our gross margins. Our infection control business has the highest gross margins. After that, our commercial and service businesses albeit incremental revenue that is very important to us, they have lower gross margins.

Now in the first quarter of this year, we had faster growth year-over-year in those 2 businesses. So commercial and service grew even faster than our infection control business despite the strong growth in programmatic. And that mix would negatively affect the reported gross margin. So hopefully, those issues explain some things that we manage through every quarter and some movement, but we feel extremely healthy with our overall product margins, product costs and manufacturing ability to provide a great product at a continued high gross margin that we always have done.

Our research and development expense in the first quarter increased 17% year-over-year. That was really due to increased head count in that department and our SG&A expense increased 12% year-over-year due to increased compensation expense as well as higher professional fees like accounting, audit, legal, et cetera. And so due to the items that I've just discussed throughout my portion here, this really affected our net income, which declined in the first quarter to $140,000 from $558,000 per year. Now at the end of March, our cash stood at $4.1 million, and that's down from $5.4 million at the end of last year. The decline in cash reflects both an increase in our accounts receivable due to growing sales and the timing of collections.

We feel very good about the credit risk of our customers. We've worked hard in collections, and that's just a timing issue. We also had an increase in inventory of $400,000 as we support the growth in revenue that you're seeing and also working hard to improve in-stock positions in key items. We look forward to sharing our second quarter results with everybody in August. And again, any follow-up questions, I'm always available. Robert I think that's a good recap.

Thank you so much for sharing. There is so much that goes on behind the scenes, and your team works really hard to make sure all that does happen. So thank you for that great work there and reporting. So this brings me to the final segment that we have, the Q&A. Arguably my most aren't I like the most. I love answering live questions. I love hearing from you, the investor.

I want to remind you that there's a couple of ways to ask questions. You can raise your hand. So if you go to the Teams window and there's a button where you can hit raise, and that allow you to speak live. I've got the Board helping me monitor that, and we can kind of bring people on to speak and interact real time, which is my favorite way. You can also type your question in the chat. I've tied a couple of questions or some comments. The board had to comment please don't be shy ask the question. This is your time. We've got plenty of time.

But I've also, another way has received questions ahead of this meeting. So I've got a bunch of questions that I'm just going to answer, but I'm going to get priority to the live questions. So if you do have a hand raised or something you typed in a chat, that's going to get priority over the list of questions that I'm going to go through here in this portion.

So with that being said, we'll go ahead and turn it over to question and answer. The first one I have from previous was a comment, and I think this may have already been answered, but I'll turn it over to you, Judy. Gross margins declined significantly. Should investors expect 57% going forward. So that's a great question, and I think you touched on it a little bit. I'll give you a chance to kind of reanswer that here and address that.

Yes, excellent question. We certainly don't expect it to permanently have a lower gross margin. Again, a lot of this will depend on tariffs and how they change when this round of tariffs expire. But again, we feel very good about the health of our product. and what we're producing and shipping. And so we certainly don't -- we look forward to working hard to get those margins back into the 60s.

Thanks. Great answer. I do have a question that came to the chat. What do you see as the key to a successful innovation strategy at Nephros? How do you balance innovation between the medical business and more commercial business? Great question. Thank you, [ Nicolas], for asking.

So what's interesting about innovation, when I think about it, and Mike and [ Brian ] touched on this quite a bit in the roundtable, key to that successful innovation strategy is execution. We really have to take what we get, listen to our customers and create value. Us being who we are, we're a smaller, nimbler with res and knowledge in certain areas, we often can provide and solve solutions for our customers and partners that they didn't even know were options.

So they'll come to us with, hey, we want to buy a filter that can do this. And then we right away start asking questions, what problem are you trying to solve? What is the ultimate goal for what you're asking us for? Because it may or may not be our filter, it may or may not be the flow rate or the size that you're looking for. And that really is the key for how we are able to delight our customers and the value that we bring in providing those innovative solutions.

And to the second part, balancing between medical and more commercial, that's always a challenge. Fortunately, they're not always the same resources. We do have people that are good at commercial and they're able to grow and focus. We've got partners that that's what they do all the time, only what they do, whereas we have another core team that is really good at infection control which mean by a medical business listed here. And so it's not always a trade-off of one or the other.

So that's a good thing. I've got a lot of, I guess, bandwidth or a desire to have the right products on the shelf. So we don't struggle with trading up inventory. Meeting the customer when they meet us, where they need us, as Mike [indiscernible] talked about in testimonial initially, is really how we delay customers as well. So great question. It's not necessarily a balancing act, fortunately. It's how we can delight them wherever they need to be and where we're going to grow the business most. But it all comes down to execution. Great question.

Next question, I see infection control. Any cells given the recent Ebola outbreak. Please provide an update on your initiatives in Mexico? Okay, 2 questions. Thanks, William, for the questions. I'll take them one at a time.

When it comes to infection control and especially Ebola and things like that, there are an infection on a macro level, COVID, things like that, those are not always water-borne pathogens, really, what we focus on is water. Now that becomes dangerous or harmful when that water aerosolizes. When someone needs this call, it's flash [indiscernible] sink or shower and things get in the air, then they breathe in and they get into your lungs where they can mix with your lung tissue, and that's how they enter your bloodstream and thus prevent an infection.

In hospitals when you're washing your hands out of the [indiscernible] come from that hand washing exercise. Again, things become aerosolized and they become inhaled or ingested. So when it comes to things like Ebola, method of transmission, whether it's human to animal or animal to animal or animal to human, the mechanism is a little different than premise water source being the cause of the infection. We're really addressing that water supply, that thing that becomes ingested. And those outbreaks and things that you're talking about won't necessarily generate business for us because that's not the source of the infection.

So hope that answers it and happy to go into it more and maybe even pull some of my engineers and if I didn't answer that accurately or adequately enough? Second part of your question, love these questions guys. Come and keep teeing them up.

Please provide an update to your strategy on Mexico. Mexico was a pretty important -- is a pretty important initiative for us. And the way that -- just an update on where that's going is Mexico is growing. It's just under $10 million as far as where I think the market is going to be. And it's important because it provides us a bulkhead for the Caribbean and other places in the region. With these types of sales, we have to do a number of things.

We have to educate the market so they understand that there's even a need for water filtration. We have to have the proper support and I just realized I'm using Puerto Rico and Mexico, but the strategies aren't too different. The -- so actually back up a second before I continue answering. The initiative we announced was for Puerto Rico, and I'm not sure if you meant Puerto Rico or Mexico, but we haven't announced any strategic initiatives for Mexico.

But I'll continue answering as if it were Puerto Rico because I think that's probably like you meant. So in addition, we have to have materials like support materials in Spanish that can accommodate the local languages. We have to have support that in service and install and also train the people that are installing and local inventory. So all those things we have in place, it does take time to build it.

This is a rather new initiative that we announced in Puerto Rico within the last few months, but stay tuned, I'll continue to update us on future investor calls on how that's going or if we do decide to launch something for Mexico specifically. Is that right?

Keep those live questions coming, as I mentioned before, I'll go to one of the ones that we've received previously. And it is how much of your growth came from core business versus onetime events? Is this growth sustainable?

Okay. Good question. We do get questions often about the sustainability of this growth? And is it a one-off? I'm not going to speak to what's going to happen in the future. I will always talk about how well we're executing and how well we're operating the business. But recurring growth or programmatic sales revenue, really, that's this core that we talk about so often. And I shifted maybe 2 years ago to focus and kind of highlight the core as opposed to the emergency business, which is more of a onetime event, which often leads to programmatic business.

But that is not the reorder that we're looking for or that we can predict always when we're looking at core growth. So much of our business I would say -- or we didn't give percentages to be [indiscernible] to you on how much, but I would say an increasingly large number amount of our business that is growing is coming from this core repeatable business. Just by the nature of there's not more emergencies just because Nephros is a bigger company. There's kind of a steady amount of emergencies. It's just becoming a smaller portion as we grow our top line revenue more and more.

Robert, we have shared in the past that historically, emergency response ran about 15% of our business. But in the last few years, it definitely ran substantially less than that simply because we're growing the rest of our business so significantly.

Great portion. Great addition to that, especially when you think about the service program and the water stuff that's coming in.

Both in commercial that's been picking up.

Commercial growth. So yes, as a result, that onetime sale becomes less and less impactful, which is ultimately a good thing as we have a business that's more sustainable and predictable over time. So good stuff.

Next question that I've received previously why are you investing in services instead of just selling builders?

This is a question I actually have gotten from some of my partners who, in the past, have traditionally bought up Nephros as a distributor, meaning that we just provide you a filter, you take the filter and then go install at a customer site. As you heard in the segments that were previously discussed, even from our partner who gave the testimonial, it is so important that we can just not just sell a product, but build a relationship with the customer.

And the way I have really tried to focusing the growth is, first, educate the customer, then service, install the customer and then replace the filter when it breaks. And then through the tools like the tracking, all this is providing recurring revenue. And we're investing in services because a lot of the barrier for installing this medical device, which does require some sanitization.

It requires every 6 months or 3 months, changing it. It's been -- it's a little bit more than just changing a roll of toilet paper. So a lot of people just don't have the staff or the dedication to treat the filter in the way that it's going to perform as designed and sold. So by taking that illness off the customer, where they may want to put their staff on working on why the AC failed, we can do that for them.

And as we start to build these contracts, maybe it's multiyear, it's a type of business that is more predictable, sustainable, and we can grow it. So we're really excited about those services and investing in service, not just for the service revenue, but what it enables when selling the filter itself.

Okay. We got another live question here. I'd like to go just go ahead. Impressive pressor presentation shows the passion of Nephros team. Question, please talk about the efforts to grow in verticals beyond health care and what traction has been achieved so far. Can you share examples of recent wins outside of health care? Will these verticals also help in improving overall growth rates?

Great question, [ Ankur ]. When I talk about the efforts to grow verticals beyond health care, okay, so you saw the start of our business, it was articulated quite nicely with Mike [ Kennedy ] as far as how we started in dialysis. That in itself going outside to health care was a or into a different vertical. And then now beyond health care into what I'd like to sometimes refer to as patient care a couple of years ago has now gone even broader, whether it be places like government buildings, correctional facilities, universities, schools, airports, we're going into a lot more places that we hadn't had before.

Even Mike Milman, our VP of Engineering Technology, talked about chicken coops and water filtration for pizza makers to have a consistent product. Unfortunately, I can't give a lot of names, but those are just examples of places where we're providing value, whether it be dental just a lot of customers are coming to us and are realizing the value of having water that is safe and clean and that having a filter like what we sell, how it can help them achieve their goals.

It does involve often asking what problem they're trying to solve and then how do we get to a product that fits that problem. If we've got the broad product. If not, we can [indiscernible] dissolve and solve the problem other ways. But PFOS, microfiltration, nanofiltration, all those are beyond health care specifically, and they're showing ways that we get traction and wins outside of that space. And we're continually having to evolve and adapt our business to be able to accommodate those types of customers.

So very exciting stuff and all going to contribute to growth rate. It doesn't happen instantly. You have to build the market, educate the market and make sure that we're aligned with delivering a service in value because we're not going to do anything halfway. We're really going to do it in a way that keeps and provides the net first quality, which this is the reputation that's too important for us to damage. So a great question. Continue to look forward for me to sharing more as we do more work with different verticals, all exciting stuff to come.

Okay. Next, how do you see hiring a external talent in your efforts to build Nephros's capabilities? What does competition for [indiscernible] look like? Great question, [ Nicolas]. When I think about talent and Judy, you can comment on this as well, this company is nothing without the people. It's our most expensive part of what we spend money on. And it is Nephros, it's the passion. It's the intelligence what expertise that this staff is bringing to this company and this product.

That's really what's coming through. I'm just here to remove a lot of the barriers that help keep our products from getting out and growing more. But when I see what this team does, we've got low attrition rates. We -- all gauges, I guess, to come in that people are pretty happy. So it's very important to me that this is a place that -- and I've said this before that I would feel proud that my daughter could come in to work.

And I think that when I think about hiring talent internally, my first goal is to have the talent in-house and to develop and grow because we really want the people owning what happens. But we do have a number of very good third-party partners that help us and we have no problems with finding the right person, hiring the right talent and the competition for people that are in the space.

I mean, it's really weird, but there's not a whole lot of people that are experts in water. So it becomes a pretty small community, and we all get to know each other pretty well. We see each other at trade shows year after year, competition. We even have sales with some of our competitors. So it's all in the name of kind of solving some of the problems that our customers see, but I think that the talent and capabilities is so important that we make sure that we nurture that. So great question, Nicolas, and I don't know if you have anything to add on that, but ...

No. And I say we have added some key people in the last year or 2, we've been very pleased. We run lean head count well under 40 people. So to add 1 or 2 new people a year or whatever we need, we can be very selective and very careful. And we get a lot of interest, people excited about coming to work for a public company. coming to work in sort of a leader in a public company in an industry, it then ship by getting stock options. They're intrigued by how family-oriented we are. So we've been very pleased with the talent we've been able to find.

Great. Next question I see from Jaime Santiago. Greetings and [ Salud]. I live in Puerto Rico, private industry experience and for the last decade or so [indiscernible] professor at the graduate level. Congratulations very important work there. The vast majority of technical documentation is dealt with in English, not Spanish. This includes marketing material, not granted. You may need some documentation in Spanish for an individual customer, but it shouldn't be a big deal.

Good comment. I will say that the first couple of times I've been in the Puerto Rico under the Metro umbrella. And I'm working with people at the executive level, the problem even management level, the problem, but the ones who actually have to work with deal, install, stock, purchase our filters they want the information in Spanish. They kind of look at pictures and try to work through it. But yes, they can translate there's even some local apps where you can take a picture and translate it.

But it's also important for them to understand every line of our instruction manual for installation. If they forget to sanitize that last line from the filter to the outlet of the spot, you've really negated the whole purpose of having a sterile system and process. So the importance of having our filter it being the medical device FDA Class II cleared with all the different caveats that come with that is critical.

The training part is so important, following the instructions. So we have felt that it is important to have the language locally. That's why we hired somebody who is native to Puerto Rico as well to help service. So it's something I'm thinking seriously. Prior to Nephros, I've worked and lived in different countries. I was in quite a bit of time in Europe. I was in charge of all the subs here in Africa in 42 countries. I was in India for a year or so with my family.

Having the local language has always meant so much more adoption adherence to the way the things are cleaned and kept and maintained. And I'm taking this my lessons learned from the past and that we also assuming that we need that type of support in local language as well in Puerto Rico. So if it proves it it's not important or that we can branch out into other places, no harm. We still have it locally. We still have the only versions as well. So -- but thanks for reaching out. I appreciate your background. Give me a call. I'd love to kind of meet you down there some day and find out what he needs you might have and help me grow the Puerto Rico story.

See [indiscernible], good question here. In recent weeks, there's been an leaders, disease outbreak apartments in New York City. Is there a potential market for Nephros? I'm glad you brought that up, Joe. And again, let me tell you, I'm thrilled that so many of the investment community has been reaching out to me directly via e-mail and also my team. sending me articles, letting them know that, hey, there's this problem here. These 3 blocks were shut down. The lead ones outbreak in New York City is one [indiscernible] national attention, and it's also thrills me even more that people think about Nephros when you hear led generics disease.

That's the right answer. Yes, think about Nephros whenever you have waterborne type pathogens. The problem in New York City is a specific unique and regulated primarily around cooling towers. So these are large flow rates. I don't know if you're familiar with the type of cooling tower there, where you've got water spread over lubes, which comes down and creates an error rated situation were. So what you see coming from cooling towers, not smoke. It's actually water vapor water droplets. And then that water drop lit on the roof of many of these apartment buildings is also right next to the air intake for much of the HVAC systems.

So you've got the water droplets. You've got the water circulating right around and now it's being pumped into the buildings. Lesion [indiscernible] disease or the lesion the mold, the bacteria that causes it is very prevalent. It's in most cooling towers, actually. Unless you've got a pristine coin tower with no sentiment, those things act like giant air scrubbers.

So I get less excited about the fact that there's a [indiscernible] disease and more excited that they don't have the [indiscernible] properly angle that it's set right next to an air intake that doesn't have the proper filtration on it. And I don't think that there is a water Nephros and the fact that the cooling tower is going to spell out contaminated water vapor. But I do know that when you are drinking water, when you are taking a shower or when you're using potable water that [indiscernible] rates it, and it's a situation where you can breathe it in, that we can help. So it's dealing more with the premise plumbing, which [ Brian ] talked about earlier, that is where we had that initial play.

We can come in and evaluate and check it out, what other sources of [indiscernible] might there be in the building? What are you not doing or doing from a hygiene perspective. We have a bunch of partners who focus on this as well. and we call those partners in to help us address those needs, too. But yes, so if you guys do hear about things like that, please keep those leads coming in. We do follow up on every single one of them. We might not always get back and close the loop but they're always of interest. And my regional managers who live and breathe in those areas where these things are happening are on top of it. They see the new stories and they really want to make sure that they solve and are being a good steward of their community as well. So thanks for pointing that out and keep those leads coming in.

Okay. All right. So I'll go to one of my other pre questions. This one was interesting, what makes Nephros different from much larger filtration companies? And I think what this was about was we've got some competitors who have been doing this from a while and then you lost some other things as well. But what I found is they often have a lot of problems like maybe they round of inventory or here's what we're selling, and that's it. Really what's different about Nephros is our technology, which we did highlight a bit today, our medical device quality. I mean, this hollow-fiber unit here this is an FDA Class I medical device.

It's tested by a third party, that this is very different than other filters you're going to see out in the world. the education. We're going to come in and help and train your staff, teach you how to work with the filter, clean it service. We can come in and sell it for you, change it out.

And once it's expired, we can provide technical support if you got a problem in that you can't solve, all those different things build this relationship that makes Nephros very different than some of these larger companies that won't take that time and go through all these different problems that you might have. I'm very proud of that and proud of what this team offers in those regards, and we look forward to continuing to do neckline board.

What does success look like 5 years from now? That's a good one. I believe Nephros has become or can become one of the most trusted water partners out there and not just health care but [indiscernible] facilities, which we talk about in most market segments where water matters. Not just the scale, but I think industrial application, which I often get asked questions about, that's not on our short-term radar or long-term radar. But did addressable market segments where we do have patient care and all these other different places that I talked about, they're huge. We have a lot of room to grow, and we're trying to make sure we solve those needs and those needs as best we can, and the team is really well positioned to do that.

Just to add to sort of translate to sort of financial results, that we'd like to look like in 5 years from now, certainly continue to grow our active customer sites and continue to work on sort of revenue per customer site. So we hope to have significantly larger number of both Obviously, that would translate to a lot of gross margin dollars that could come and we'd like to truly grow our cash flow and profitability.

If we continue on this front alone, we could be sort of self-sustainable cash flow from a cash flow perspective. And potentially, success would be finding strategic opportunities that we could add to the mix and there could be acquisitions that help broaden our product line to our existing customer base, we're potentially broad in the markets that we are serving. So I think success also brings stern strategic opportunities based on our positioning and knowledge of butter that make us address a much larger market 5 years from now.

That point, Judy, it's a great addition. I think that's your spot on. Oh, I do have a hand raised. So I would like to give Ralph a chance to ask his question. Mark, you can assist with that.

Ralph, I think you should be able to ask a question.

Okay. You might -- okay. You talked about -- or mine talked about different areas where companies come in or -- and they work with you on finding a use helping you coming to you to help them with something that they want. Are any of these -- the potential areas where you feel that there's a much greater need than just for one company. And have any of these really materialized in any significant way where you feel you can branch it out to other companies?

Yes. Great question. And -- just question properly. When Mike especially was talking about some of his OEM and other development for product, does that have room to grow? Can it branch out into other areas, other companies? Is it something that can scale into something larger?

I'll say that just from a historical perspective, that's what we've done. We've had a number of these relationships, these OEM relationships that become something greater. And if I think about it loosely, metros kind of formed that way. We were solving a problem. The problem didn't -- the solution didn't exist in that form the basis for how the core technology was created, which something branch out to many others.

I know specifically, there is an OEM we're working with right now that doesn't mind us once the solution is developed sharing with others because when it helps them spread development costs out over a larger amount of products. So to answer your question, yes and yes, we'd love to do that. And whenever those opportunities will arise and we're allowed to, we will take advantage of that every single time.

I personally love the OEM development route. We can't usually talk about it much because it is very specific to customers and what they need and the problems they're solving for them. That's why we kind of spent so much time on it today just because as an investor, I think it's important that you realize that that's a way that we're generating a tremendous amount of value for customers, and that does scale up, just not something that I can share specifics. And it's a super exciting area.

I see another question here from Nick. With rising consumer concerns around PFOS and nanoplastics, do you see a significant DTC opportunity for Nephros filters? Example, Amazon, leveraging our superior removal capabilities. several similar products already show strong review traffic suggesting an enormous TAM. What are your thoughts on testing this channel?

Good question, Nick. When I think about microplastics, nano plastics, PFOS, it's different than our typical clientele. Patient care and hospitals, they're dealing usually with more acute situations, someone gets sick and they can die within a week or microplastics, nano plastics, their industry disruptors, for example, that take a long time to impact. And in fact, children are growing up and your ability to reproduce and things like that, that you don't always see in a short time period.

So it's a different tends to be more residential or high-end commercial areas. And that is interesting. And the channel to market or direct-to-consumer, as you say here, is something that -- it's not a muscle that Nephros has developed today. We're constantly evaluating, is this something that we want to develop? Is there a [indiscernible] we can talk to? Is there a way to make that channel viable for us as far as distribution and getting our product out in the world.

Those are all interesting. I won't comment further about it, but we are constantly exploring ways that we can take these products and solutions and open up our [indiscernible] and as even larger. I will say I'll always make sure that we do have a focus and continue to support our core technology. That is something that is very different and unique for us, and it is very sustainable and hard to replicate.

So while doing both at the same time because I think it's a different set of expertise at different clientele, very, very interesting and exciting area for us just for future costs as we develop more into those areas. I love the participation in questions that I get, very good feedback from the group. All of these are also making my head think about different ways that I can take Nephros in the future.

Another question that came in from previous was, how are you thinking about capital allocation? I'll turn to Judy about that because this one is interesting for me, not just capital, but just how the companies run in general and how I choose to -- how we choose to run the company and keep it in a very healthy financial state. So maybe touch on that, maybe what our priorities are and how we're thinking about company allocation.

Yes, I'd love to. That's a great question. One of the things we're very proud of is that we have a solid balance sheet. You saw about a little over $4 million in cash at the end of March, no debt. Obviously, leverage plays a point in growing companies when you think about your cost of capital. Right now, debt is not inexpensive, as everyone knows, interest rates are fairly high. And to bring on debt or line of credit, you do need to support it.

On their opportunities to fund some type of lending credit against the inventory that we have. But frankly, what we're looking for our rock solid balance sheet to do right now: a, is to give customers total confidence that they can do business with us, and we will be there for years to come; B, opportunistically, of course, we could do stock buybacks if we felt there was a time that our stock was really undervalued.

But to me, the greater opportunity is it to use it for strategic growth initiatives. We've discussed publicly looking for acquisitions, merger partners, investing in business development opportunities, something with a significantly higher return on investment. We have been using it to invest in our people which, as you've seen, we've added select talent. But I think we will look forward to using our balance sheet to strengthen our position in the strategic realm as we find opportunities.

Another question. I haven't gotten more questions about this. I was a little surprised, but a question I did get was how is Nephros using AI today?

When I think about artificial intelligence and all the hype around it and fast growing, it seems like any company that can attach AI to their name or something seems to be growing an incredible amounts at least getting the investment I do view AIS is as important, but I view it more as a productivity tool rather than a product strategy. Today, we use AI to accelerate content development or support engineering research, also for maybe customer communications even some software type development when we're looking at filter tracker type stuff, but it does increase our internal efficiency.

As we continue to develop our digital platforms with the filter tracker app, we do see opportunities to incorporate it more into how we support our customers, maybe even predictive maintenance or data analytics. But today, it's not a product per se, but it's quite exciting, quite interesting. There's new development, it seems like every single day.

The second part to that same question was could AI become part of your products? That I say potentially yes, but not necessarily inside the filter itself. It's more around that data generated by water management. I do think there's an opportunity to help customers maybe predict filter life or maybe even identify water quality trends help facilities improve what they're doing and how they're managing things in those areas. But interesting and stay tuned if I find some ways to really make AI a larger portion, I would totally explore that and figure out how to use it to generate more value for our customers.

Okay. Right. So we're coming towards the end. I still do have a few more minutes left for questions that might come in live. Remember feel free to raise your hand and ask it live or type it in the chat. Otherwise I'm going to get to on with a few more of these questions.

Judy did talk about tariffs earlier. So this question maybe it's answered mostly, but I'll give you another shot. How should investors think about tariffs going forward?

Right. I think the critical event is, I think we want to see if these tariffs, which are due to expire in a few months, will expire, will they be renewed? If they expire, we've managed through this part of the process, potentially, we'll be able to get a refund in the second round of tariffs. And if they continue, then we have discussed internally mitigations. We do have price increases every year, but we could have specific tariff surcharges. Certainly, it's affected us as we've all seen in our gross margins. we're looking at different sourcing alternatives. Are there countries where we could do some sourcing with lower tariffs for part of our products? Always looking for -- we don't want to change the quality of our product or a long-term strategy. But certainly, if it's going to be a part of our life [indiscernible] we believe we do deserve to have some ability to recoup some of that, and some customers seem open to talking about that. And so we'll have those discussions as we see how the spring unfolds.

Yes. And from a business and a management perspective, I don't manage the business, assuming that today's environment is permanent. We know things change all the time. We adapt whether there's supplier diversification, pricing, operational efficiencies or product mix, I just continue to adjust while protecting the long-term shareholder value as best we run the business as best we can.

All right. A couple of other questions here about -- about a recession or Medicare changes is probably when it might be more interesting. Are changes in Washington affecting your business, regulatory -- maybe you can talk a little bit about this, but the regulatory environment. I don't know. It's hard to say.

We wish we had the ability to have a stronger lobbying effect. The things that we do are so important. We wish frankly, that they were required and regulated. These needs to protect the water, particularly the patient population in hospitals. So we do what we can to support any efforts along those lines that would help drive demand for our products, and we monitor what's happening in Washington. Right now, we don't see anything to affect us in a negative way. And we certainly hope that more concern about these issues will come out of Washington to help us in a more positive way.

Yes. I totally agree. It's just -- if I focus just on trying to follow that and create policy and how we run the business and change it all the time, it's impossible. The changes happened so fast, really head down and it actually plays well to this last question that was asked here is what keeps you awake at night.

It's not government policy. It's not tariffs, but it's execution. It's taking that Nephros ability to just make it better and larger than it's ever been. My focus is really just making sure we execute that we continue to innovate that we hire great people that we serve our customers exceptionally well that we just stayed disciplined in how we grow. So those are the things that we can control. And ultimately, it's what's going to determine our success.

So that being said, I think -- that's good for questions for now that I have pre. Last call for anything that people might have online that they want to share with us. So in the meantime, I'd want to direct your attention to our website. This is something that I've been proud of the team's worked really hard on it. where you can find Nephros and our team, and including myself, if you clear our homepage, www.nephros.com, just go to about section quick events.

This is where you'll see us. We're speaking engagements, what's happening. I'm going to be at the Minneapolis [ ASH ] Conference. I also WT at the convention center here at the Omni Hotel. But you can go and find one we're close to where you are, reach out, go at 10, you can kick on any of these links. It takes you into a little bit more detail about where how did attend the show and things like that. But lots of great stuff on here on our resources on our page. Team spends are really a lot of time and David to do a really nice job with his website. So please take some time and have a look.

Last thing I want to share is the QR code that you can go here and click on it and also join our Investor Relations team. I'll leave that up on the screen for a few moments as I just wrap here. I just finished just over 3 years with Nephros. And I wake up every day more excited than the day I started. I see the opportunities. I see the products I work with great people, great investors. The team here is fantastic. They execute well. They work really hard. They put in way more effort than I could ever ask him to. And that shows us. I think that shows in our product. That shows them where our customers stay with us. And I think that really is why the Nephros product is so different and so special. And it's what keeps me coming back everyday.

So I really just want to thank everybody for joining the call, for your fantastic questions. for continuously reaching out to us. I want to thank Judy is my partner here for really taking us through the financial world. It's so complicated being a public company. And I think this is -- we've built something that you and we and all can be proud of. So thank you again for joining, and I just feel free to reach out any way you could want to connect with us, and we'll look forward to doing this again sometime in the future. Thanks everybody.

Good day, and welcome to the Nephros, Inc. First 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 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 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, and 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.

[Operator Instructions] The first question comes from Nick Sherwood with Maxim Group.

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

So the certification or -- 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 2 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 engaging those who are deciding to use Nephros earlier in that process.

So the capability of the certifications is just getting started. We are still kind of rolling that out and getting -- formalizing the offering as a product that we offer going forward, and we're pretty excited about it and lots of interest and so far, so good. 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 the New York itself. Can you kind of explain what that opportunity is in the New York City area or New York region?

Yes. Absolutely. Yes. If you look at New York City, the greater region, 5 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 4 or 5 large regions. And the person covering all of New York, [indiscernible], was not able to really focus on the New York City region when it's a completely different, I guess, sales cycle, sales process and value proposition. In addition, there's been a number of outbreaks from Legionella and other in that region that have kind of really got a lot of questions coming to us.

So we took the step to look for someone who knows the 5 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 and educate and 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.

[Operator Instructions] The next question is from [ Ankur Sagar ], who's a private investor.

Congratulations to you on this milestone for the company achieving north of $5 million revenue in 1 quarter for the first time.

Thank you.

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

Yes, it is indeed. Robert, 23% growth, programmatic growth, I mean, is great. I think it [ masculates ] the sort of like the overall growth. Could you -- 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 just really great on year-over-year from what the company did even in '25, in prior 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 -- while we turn 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. And just to clarify, I mean, this is great. I mean like -- so normally, the emergency response is up to like 10% to 15%, but you're saying this, over $5 million quarterly number, is entirely or mostly programmatic revenue?

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

Okay. Okay. And one part of your strategy has been to really grow beyond the health care vertical over -- since you joined as CEO. Anything you could share in terms of -- I mean, what sort of like subverticals have you been able to penetrate, get some early success within that commercial segment?

Sure. I can characterize that a little bit. Nephros being originally in dialysis, we -- our 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 the competitors who can come in and sell 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 or hospitality or government, municipal buildings, retail, real estate management, large properties, of that nature, schools, 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 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. So seeing traction in these other areas that I just mentioned is important and growing. And what we're finding and what we saw in healthcare is, most of our new sales come from referrals, meaning someone who used us somewhere, had great success and then told a friend, or they went and worked somewhere else. Similar occurrences are starting, not happened yet, but just starting to take place in some of the other commercial applications that I mentioned in locations. So one place might use us and then the management team leaves or go somewhere else, but at the same time, some management team comes in, and they're used to using somebody else, so it becomes a bit stiffer competition for holding on to some of those spaces.

So some of it, the business is a little less sticky. Much, 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 always probably be that as well. But I do like the large scale, because a margin dollar versus a percent is also very important, especially as we scale to some of these larger numbers.

So when we figure out how to conquer those spaces and get the same, similar types of competitive advantage and our name out there, you'll start to see those grow at some of the same paces that we do grow in the healthcare space. So it's exciting. I wouldn't look for quarter 2, quarter 3 for it to be something significantly moving the needle, but it is part of the long-term strategy, especially if there's any ups or downs in the healthcare space that we want to kind of make us a bit immune to. We want other ways to make money and grow, not just the place we're the best at.

And a couple of examples that you mentioned like large buildings or airports or airlines. I mean, just -- 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 large flow rates at one time. I mean we're not doing the entire building. It would be fixture by fixture. And they do seem attractive. But some of those -- they're just -- even though it makes sense, they're not always making a decision that would make sense to us. Say like, cruise ships, for example, when we reach out to them and try to get them to adopt some of the filters, it still comes down to price. And more often than not, our competition is against doing nothing, not a competitor.

So it still takes a lot of education, and that's why the education arm of pillar that we're really focusing on now is going to be so important, because it's really going to be kind of creating the market as we're building and growing it. And that's what that blank space, that white space of sales is super exciting. It does take some time, effort in development, but that's -- I see it as another frontier that we can start to open up.

Okay. One last one. I'll make it a 2 part. EPA has -- there is a new push on from the EPA with new regulations for PFAS and microplastics. I think you have talked about those 2 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 the second part for Judy is, I mean, 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, guidelines, even if it's not a rule, but it's a suggestion, we do see the activity and the churn. The issue we have now is that there is not enough of a driver to overcome the cost. Adding a filter of any kind is a cost. And when we're talking to the average homeowner, when they're trying to decide between the price of gas or a filter, they start to make certain choices that are pretty clear.

But we do get a ton of questions about nanoplastics, microplastics. Every time an article comes out in a different periodic publication, we see that as an opportunity for us to market our product as a solution for that. Right now, it tends to be limited to bigger spenders or people with some other need because the plastics and forever chemicals problem is not such an acute right now problem. It's something that you're preventing injury longer term. So it has to be an education so that people do see the long-term benefit of spending the extra money to have safer water.

So I really am excited and looking forward to kind of the discussions that we continue to have. We've got some excellent people in our team who are sharing that message and how to make things change. Brianne McGuire's work with the Water Institute, and all of our sales team, Shane Sullivan and the guys and gals are really good at going in and solving some of these problems for our customers. And a lot of times it's just curiosity plants the seed. And when they decide to make a move, they come to us. So that's a really fun part of our job, and I'm fortunate enough to be able to participate in many of those conversations as well.

So for the second part, I'll turn it 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, tariffs weren't there. If you look at sort of the gross margin from Q4 of last year to Q1, it was only slightly lower. And so if you think about it, we did mention our tariff cost is over $200,000 this quarter. When tariffs moved from 15% to 10%, 1/3 of that, we would not have experienced. So you can sort of do the math, 1/3 of that tariff would not have been there, which really will improve our margins.

I think as most of you know who are familiar with the business, we buy inventory ahead of time to be prepared, and we have been growing inventory to support higher sales. So as the 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. Are there -- can we pass on some of this tariff to our customers as we watch what customers or our other competitors are doing. So we're looking for ways to mitigate this as well.

And of course, we'll see how successful commercial is as a percent of business, but don't forget 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 a great job on this 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 headways 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, et cetera. 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 3 of those points. And at the end of this, if I missed any of the point, please just reask. First thing you asked about was price pressures. At Nephros, we've never been seeking the lowest cost per filter. And the price pressures we've always faced has been a purchasing agent that looks at a SKU and compares our filter to the next. Well, that's fine and dandy, but if our filter costs 20% more, but it lasts 100% longer, 60 days instead of 30 or 6 months instead of 3 months, then that price per SKU goes out the window.

What we have been seeing is that the low end is getting more competition where we see some entrants come in. But what I've noticed in the field, and I've been getting reports from our friends out in the West Coast and Kelly down in the South, is that the filters start to crack and leak and cause problems, and it's a great opportunity for us to step in with our products.

So price pressures, yes. We've been able to incrementally raise prices year-over-year, and we do that each year. It does not keep up with inflation necessarily, but it is something that we try to make sure we try to stay on top of. We really want to talk about value and what we provide with our filters, how much water we filter, the contaminants that we're removing, because there isn't really a filter doing the same thing. So the price comparison becomes inadequate comparison when the 2 filters do and can accomplish different tasks.

We're always looking at that market situation and trying to capture price where necessary. We're making sure that we create customers that stay with us for a long time. We have a very high retention rate. And we look -- we're in it for solving their problems and providing them more value than what they pay us in price. So we're always happy to have that discussion when it comes up, and it's easy when you have kind of a product like Nephros to be able to get past that and win the opportunity.

As far as PFAS. PFAS, forever chemicals, we do hear a lot about that. We see a lot about that. But it's not too difficult, quite the opposite. PFAS is actually fairly easy. There's quite a few species and more specific types that we're trying to remove. You have to take a look at what we're trying to address at any particular application. Our filters, our solutions for PFAS are slightly different. They also remove other contaminants, iron and some other things as well. So we try to provide some differentiation.

But because there are a number of solutions out there, and it just becomes a little bit harder to command the price that we want or to prove it when there's other people making claims as well that maybe don't have as much rigor as we do. So we continue to see PFAS as something where we're opportunistic about. I don't know that it's going to eclipse sales in our infection control product line to that extent. So it's more of a commercial product line. But always happy to address and look at any of the opportunities because at a minimum, it starts the dialogue where I can go and talk to them about infection control and other filters that they have needs for.

Now speaking about the home market and the potential there. The home space is huge. There are millions -- tens of millions of people filtering water in their homes, whether they're on well water, city water, whether they're concerned about contaminants coming from surface, lots of different needs and questions. And there's a lot of commodity filters providers out there, anything from the pictures of water filters or the ones that go in your tap. What I started to see more and more today that I have not seen in the past is people concerned about what's coming in their water from a biological perspective. So once the conversation starts turning towards infection control, that's where we shine, and we have great solutions for either point of use -- fixture points, and not yet for the whole home, but that's something that we're exploring.

But to your point, when we start dealing with the average homeowner, there's a lot of regulation out there saying that you've got to remove a certain amount of viruses or bacteria or endotoxins from your water. So we rely on an educated customer who can come in and request it. We have partners that do very well and service those homeowners in different markets, typically high-end homes or maybe homebuilders. And we're starting to form more and more arrangements with those partners. And that's how I tend to address the home market. And I hope that, in the quarters to come, maybe a couple, 4, 6 quarters out that we have some meaningful movement in those areas to report and share with you. But that is an exciting market that I hope to figure out how to penetrate without sacrificing our infection control product lines in the healthcare space.

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. And guys, 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 guys who are just rock solid. I mentioned the Shane in the West. And with Dana's expertise in New York City and Jim with his years and years and years of sales experience, I just feel really comfortable with this team. By adding our service pillar and what Alfred is doing to really help the team install and get safety, it's been a big boost. And now augmenting it with education to kind of grow it and see that market upstream, I have full confidence that Brianne and other webinars and the full team support behind, we'll just do phenomenal things going forward. So look forward to the future growth and more great stuff. So thanks for joining and all the continued support. Bye, everybody.

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

Good afternoon, everyone, and welcome to the Nephros Inc. Fourth Quarter 2025 Financial Results Conference Call.

[Operator Instructions]

Please also note today's event is being recorded. At this time, I would like to turn the floor over to Kirin Smith, Investor Relations. Please go ahead.

Thank you, Jamie, and good afternoon, everyone. This is Kirin Smith with PCG Advisory. Thank you all for participating in Nephros' Fourth Quarter and Fiscal Year 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 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, March 12, 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. Good afternoon, everyone, and thank you for taking the time to join us today. 2025 was a great year, and I'm extremely proud of the team and all their amazing accomplishments. I've been excitedly awaiting this day so I can share with you the results of the great things that have happened since our last full year's recap. Clean water is essential for health care, hospitality, food services and everyday life. We have the right products to address these needs and have been doing so successfully in patient care situations.

We've made great progress in non-patient care applications over the past year. We look forward to developing channels to penetrate other markets, such as residential and commercial through key relationships that we are creating. Over the past several years, we've built a clear strategy to deliver on that message. And today, the strategy is anchored around 3 core pillars: products; services; and education. Together, these pillars are driving our growth and positioning Nephros as a leader in water safety solutions.

Our first pillar, Products is our differentiated portfolio. It remains the foundation of our success. Nephros develops advanced filtration technologies designed to remove bacteria, viruses and other contaminants that threaten water safety. These products are trusted in hospitals, laboratories and commercial facilities where reliability is critical. Innovation continues to expand our reach.

Recent product launches allow us to address new high-impact applications, including ice machines, drinking fountains, bottle filling stations and sterile processing environments. These are everyday touch points where water safety matters. By delivering filtration solutions that are both high performance and easy to deploy, we are expanding our addressable market well beyond traditional patient care applications. This product innovation pipeline is a key driver core to our continued growth.

In 2025, we launched our second pillar, Services. While products start the relationship with customers, Services sustain it. Water filtration systems require regular replacement, monitoring and installation expertise. Historically, this has been fragmented and difficult for facility operators to manage. Nephros is solving that problem. Under the leadership of our service organization, we've expanded our installation and replacement capabilities, enabling us to provide customers with a complete lifestyle -- life cycle solution. This includes rapid product delivery, professional installation, scheduled replacement programs and ongoing technical support and training.

By offering these services directly, we reduced barriers to adoption and strengthen long-term customer relationships. Most importantly, this model supports recurring revenue to programmatic filter replacements, which creates a more predictable and scalable business. Our newest and recently launched pillar is the strategy around Education. It represents one of the most exciting developments for our company. We've touched over 1,000 people through our webinar series and conducted numerous site-based training sessions. Water safety is becoming an increasingly important topic across health care, hospitality and public facilities. However, many organizations lack the expertise needed to manage waterborne pathogen risks effectively.

To address this gap, we launched the Nephros Water Institute, this institute is dedicated to expanding knowledge around waterborne pathogen mitigation, facility water safety programs and compliance-driven filtration solutions. Through education and engagement with industry stakeholders, we are establishing Nephros as a trusted authority in water safety. This initiative does more than just share knowledge, it builds a long-term demand for filtration, services and compliance solutions.

In other words, education strengthens our entire ecosystem. The impact of this 3-pillar strategy is already visible in our financial performance. In 2025, Nephros delivered 33% revenue growth, reaching $18.8 million in total revenue, while continuing to scale our operations. We also reported net income of approximately $1.2 million, marking our second consecutive year of profitability, a significant milestone for the company. These results reflect strong order reactivity, growth in active customer sites, expansion of service capabilities and increasing demand for our solutions.

At the same time, we remain debt-free and financially disciplined with approximately $5.4 million in cash at the year-end. Looking forward, we believe Nephros is positioned at the intersection of several powerful trends, increased awareness of waterborne pathogens, rising regulatory expectations around water safety, aging infrastructure in health care and hospitality and a growing need for a reliable filtration solution. Our integrated strategy, products, services and education, allows us to address all 3 challenges simultaneously. It also creates a business model built not just on filter sales, but on long-term relationships and recurring value creation. I'd like to thank the entire Nephros team for their hard work and commitment.

Now let me turn it over to our CFO, Judy Krandel to go over the financials. Judy?

Thanks, Robert. I will now provide a closer look at Nephros' financial performance in the fourth quarter and full year of 2025. We reported fourth quarter 2025 net revenue of $4.7 million a 22% increase over the corresponding period in 2024. And for the full year 2025, net revenue grew 33% to $18.8 million from $14.2 million. This increase was primarily driven by higher programmatic revenue, reflecting strong reorder activity and the addition of several new active sites. In addition, we experienced solid growth in our emergency response business as well as significant growth in service revenue.

Active customer sites continued to grow, and we're just over 1,680 as of the end of 2025 as compared to just over 1,500 as of December 31, 2024. Gross margin was 62% for both of the years ending December 31, 2025 and 2024, respectively. Gross margin for the fourth quarter of 2025 was 58% compared with 64% in the fourth quarter of 2024. Although, we achieved higher margins during the first half of fiscal 2025, those margins eroded somewhat during the second half of the year, primarily due to the impact of tariffs.

Since April 2025, we have been subject to a 15% tariff on all goods imported from Italy which was reduced to 10% as of February 22, 2026. While this reduction provides some near-term relief, U.S. tariff policy remains unpredictable, creating uncertainty around potential future margin impacts. Research and development expenses for the years ended December 31, 2025 and 2024, were $1.3 million and $0.9 million, respectively. R&D expenses for the fourth quarter of 2025 were $0.4 million compared with $0.3 million in the fourth quarter of '24, an increase of 57%, primarily due to higher headcount and bonuses.

Selling, general and administrative expenses for the year ended 2025 were $9 million compared with $7.7 million in 2024, an increase of 17% due to an increase in bonuses and sales commissions. Selling, general and administrative expenses for the fourth quarter of 2025 were approximately $2.3 million compared with $1.9 million in '24, an increase of 24% due primarily to an increase in bonuses and sales commissions. SG&A expenses in the fourth quarter also had some onetime expenses associated with product development and market analysis work.

Net income for the year ended December 31, 2025, was $1.2 million compared with $0.1 million in '24. Net income for the fourth quarter of '25 was $0.1 million compared with $0.3 million during the same period in 2024, primarily reflecting the decline in gross margins and increase in bonuses and sales commissions. Our improvement in 2025 net income was largely due to our increased sales revenue. We are extremely pleased to report positive net income for the second consecutive year, the only 2 in the company's history.

Adjusted EBITDA in the fourth quarter was a positive $131,000 compared to positive $481,000 during the same period in '24. For the full year 2025, adjusted EBITDA was a positive $1.6 million versus positive $548,000 in 2024. Net cash provided by operating activities was $1.6 million for the year ended December 31, 2025, compared to net cash used in operating activities of approximately $0.5 million for the year ended December 31, '24.

Net cash provided by operating activities in '25 was primarily due to net income of approximately $1.2 million, an increase in accrued expenses of approximately $1 million, an increase in accounts payable of approximately $0.3 million, offset by an increase in accounts receivable of approximately $0.6 million and an increase in inventory of approximately $0.7 million.

Net cash used in operating activities in '24 was primarily due to an increase in accounts receivable of approximately $0.3 million, a decrease in accounts payable and accrued expenses of approximately $0.2 million each, offset by an increase in inventory impairments and write-offs of approximately $0.3 million. Our cash balance on December 31, 2025, was $5.4 million compared to $5.2 million as of September 30, 2025, and $3.8 million as of December 31, 2024, and we continue to be debt-free.

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 additional information about our results can be found in our filing on Form 10-K, which we filed earlier today.

I will now turn the call back to Robert for some closing remarks. Robert, please go ahead.

Thank you, Judy. In closing, Nephros is proving that a focused, disciplined company with the right technology and strategy can create meaningful impact. We are improving water safety. We are expanding into new markets, and we are building a durable platform for long-term growth.

Thank you for your time today and your continued interest in Nephros. This concludes our formal presentation remarks. We'll now take time for questions from the audience. Operator, please open the call for questions.

[Operator Instructions]

And our first question today comes from Anthony Vendetti from Maxim Group.

Yes, a couple of questions. One is on the programmatic sales, what percent of revenues for the fourth quarter and the full year were programmatic sales? And do you have an outlook on how you expect that to evolve in 2026? And then your active customer sites, do you have a count on that number as of 12/31, '25?

Yes, certainly, I'll answer the second part, first and then turn it over to Judy for the other -- for the first part of your question. Programmatic sales, just under 1,700. So that was 1,681 sites, and that's a significant and steady growth, well above what we were when we finished the year ahead. And it's really due to some efforts that we're making for customer retention, and also outreach in areas of conferences, trade shows, but most of that new business is coming from customers who tell a friend, who are happy and delightful what they've experienced with us, the problems we've solved and then they have a neighboring facility or related and they let them know. So we pick up that business as well. So really proud of that active sites number. And as it continues to grow, it just reflects the excellent work from our sales women and men who have been doing a great of selling our products. Judy?

Yes. We don't give out exact numbers. But Anthony, the fourth quarter, what's programmatic was certainly 90% plus of our business, which is similar for the year. Emergency response was helpful and did grow, but sort of high single digits, similar type number.

High single-digit growth in programmatic sales. Okay.

No, no, you talked -- I mean I think you wanted to know what percent, if I recall, apologize, of our sales were programmatic versus emergency response?

Yes, yes. Okay. Okay. And emergency response, what was the number you cut out for a second.

Okay. Yes. High single digits, round figures similarly -- was a little less in the fourth quarter than it was for the full year, but somewhat similar.

Okay. Okay. Great. And then just maybe just on an even higher level. Just as -- I think, obviously, I'm sure you agree, clean water, whether it's hospital-based or outside of the hospital is probably a growing trend and a growing need worldwide. I'm just wondering, as you look towards the other opportunities outside of medical, in the commercial space, whether that's hospitality or restaurants. Can you talk a little bit about that pipeline potential and how you see that sort of evolving either in '26 or over the next couple of years?

Sure, certainly. When you think about the business, the core business of Nephros, getting it start in dialysis and then really focusing on the hospital market, patient care, those are areas that are highly regulated. We've got different rules and joint commissions and inspections, all really drive action. Testing occurs and there are results and problems that need to be solved. Once you step outside of the patient care world, you don't have those same regulatory environments that are driving the growth. And that's why this pillar I introduced recently, the education is so important. We've got to let different people in different markets know why it's important, why it matters, the impact to their facilities and really the return on investment for -- investing in the Nephros filtration as a medical device in a nonmedical application.

So I see that growth happening as the education improves as we get more and more people that we touch via outreach. And that's the main barrier you're selling against doing nothing. The second barrier that we have to overcome is the -- what may be perceived complexity around installation. It's not just as simple as when you walk up to your refrigerator, or a filter and then your sink, where you twist it off and put a new one on. There's some cleaning and sanitations involved. So that's why our services group and portfolio is so important. We start to remove the barriers for why someone might be interested in a solution because they may not be interested in going through some of the, I guess, work required in order to get an effective result from the filtration system.

So as we grow and build those markets, we create an ecosystem of people that understand that there is a solution. They don't have to handle and deal with microplastics or other problems they might be dealing with, and we have the answers for those. Building that whole solution from just you've got a problem, here's your problem, here's how you can solve it to let us implement that solution for you and take care of it going forward, is how we're growing that business. If you remember, it took a while, even after some of the regulations in the hospital market for us to really capitalize on that and grow that hospital business. And it's -- I anticipate it will take the same as we're going into the non-healthcare, non-patient care market as we work to build those markets up.

Okay. So if I had to sum it up, you would say this is a multiyear strategy to build these other verticals.

Yes. But we've been starting on this for some time already. We're not entering it fresh in '26. So as those markets in past mature, we already have seen a few of those in some of the big areas. It's not a significant part of our business right now. I anticipate it will be a larger and larger portion going forward.

[Operator Instructions]

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

I really -- it must have been an accident or a b*** call, but since I didn't have a question prepared, can you just -- and I know you're talking about the new markets and what you're doing there and how you're going about it with the education, et cetera, et cetera. Can you elaborate a little more on some of the successes that you may have had so far? And I know it doesn't come easily when you're trying to penetrate new markets. But can you -- just comment a little about the successes so far.

Yes. So you're referring to the education successes or just anything, in general?

Yes. No, we're in the newer markets, I mean, hospitals have been your big market and medical facilities. In the newer markets that you've entered, can you comment just a little more on where you may have seen successes on which you're basing your optimism going forward. And I really didn't press the button. But since it was a b*** call.

I understand, Ralph. So if I can try to address that. If you think about where we've been focusing, we're in a hospital in patient care. So non-patient care applications where we've found some successes. We were looking at areas where there's large populations of people. We've got a party that's interested in keeping the mass of people under them, healthy. If you think of correctional facilities where if someone gets sick or ill, they can spread and contaminate to other places, schools and universities where there are groups of people in one room or one area. Not to say that a school is similar to a jail, but where you've got large groups of people who might be susceptible to different pathogens spreading.

We've also seen in some aviation facilities where governments are concerned about what might be passed through water there. And I'm really surprised that the number of just drinking water fountain applications where people have felt that may have been shut down since COVID where they're facing the risk -- situation where they either rip them off the wall, which is very expensive or try to get them running again. We're able to go in, clean them up and reopen fountains that have been shut down for quite some while.

So wherever we see large numbers of bottle fillers and drinking fountains, those are also the targets. I think some of the newer non-patient has also been sterile processing. Facilities that have instruments and probes and other stuff that go -- that come in contact with humans by rinsing them with water that's free of viruses and the toxins and other potential contaminants, we are finding a good amount of success there. Some of the newer areas, which are starting to gain traction are eyewash stations, shower -- emergency showers, those types of applications that are found outside of patient care as well when you have water sitting stagnant where bacteria have a chance to grow.

So it's very numerous. It's not one area. It's lots of pockets here and there, which is why the education part of what we're doing is so important. Really getting the word out and letting people know where and how what we're doing can help with what they are trying to do and the mission that they're trying to accomplish, meaning we've had hundreds -- over 1,000 people attending these seminars that we're hosting, and I encourage anyone who is interested to listen and find out, you'll see an interaction and a level of transparency and information sharing that you don't get from any of the other related types of parks.

So it really does showcase Nephros as being experts in the field and willing to talk agnostically about how to solve some of these problems, which people really appreciate to come back, they trust us, whether it's a property management company or others who have just people under their responsibility that they don't want to get in the situation where they're contaminated.

So it's really exciting. It's been really refreshing and fun. It's been us learning how to speak something other than hospital language. And I think the team has really risen to the occasion and been doing a fantastic job of making that education inroads and penetrating other areas.

[Operator Instructions]

Okay. So it looks like there is not any other calls in the queue. So just to close it out, I just want everyone to know, I'm extremely excited about Nephros products. and what the future holds. Just thank you so much for your support and believing in Nephros. And please stay tuned and give us a call and reach out if you do have any questions or want to know more. Thank you and have a great rest of your evening.

And with that, everyone, we'll be concluding today's conference call and presentation. We do thank you for joining. You may now disconnect your lines.

Good day, and welcome to the Nephros, Inc. Third Quarter 2025 Financial Results Conference Call. [Operator Instructions] 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, the 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, 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, 0 debt and the 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, which reflects 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 primarily 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 and service revenue also showed 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 expense, increased employee bonus accruals and higher stock-based compensation expense.

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?

[Operator Instructions] 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 an effort to meet the needs of our customers instead of turning them away to maybe potentially one of our competitors, 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 have implications over some broader period of time. So we're getting closer to more of the commercial and sometimes even high-end residential people that are asking us these questions. So the -- what we have to do at Nephros is figure out how do we turn that opportunity into something that we can make commercialable 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're going to 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, being the -- 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 guys look at your business long term?

That's a good question. The strategy has always been and will be to grow the core and make sure that the items that we're most differentiated at, that's our [indiscernible], sorry, our infection control product line. And where I see the new products that were launched like the HydraGuard or even the -- all the other items that will address ST108, what that's doing is allowing us to meet some of the needs specified in ST108 and other regulations that hospitals are working with today.

So those are pretty stringent, and they're asking our customers to do more and more, test more and be able to have mediation against endotoxins, some of the most difficult pathogen particles to remove. And that's what's driving a lot of our growth today. Customers are trying to understand what that means, how to create water management safety programs around those regulations and what products they might need to do in order to make sure that they're compliant.

And the good part about that is we're very well educated on how to do that. We've got experts that are willing to talk. And it doesn't always mean that they're going to buy more Nephros filters. They may have to install more testing tasks, for example, or change the order of their equipment or how they maintain their equipment. Just the fact that we're there educating them on how to meet some of these guidelines usually means that they turn to us for other solutions and filtration needs as well.

The philosophy I like to think about is an educated customer is a Nephros customer. The more we can teach them about how to meet their water needs and handle some of these more challenging environments, the more likely they are to not turn to a competitor who has technology that may not be able to do what they're trying to do and towards a Nephros product, which is able to handle the most tough conditions.

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 and more prevalent, there are not solutions out there today that can easily handle it.

And 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 have one more and then I'll hop back in the queue. You guys did call out specifically the filter and installation program is continuing to support growth in programmatic business, which is great to see.

One thing that I didn't hear on the call was comments on the tracking app. I just wanted to see if we could get an update on that. And maybe if you could break out, as you see it at least, kind of this record programmatic sales, how much of that -- you have to get super specific, but just kind of high level, how much of that growth in programmatic business do you think is attributable to this filter installation program versus the tracking app itself?

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 see -- 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 are -- 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 talked about PFASs and you've talked about microplastics. And hopefully, you will have solutions for both of them. And I'm just wondering whether you are going to be doing this and trying to enter these businesses on your own through your distributors or with joint ventures or partnerships with people who are already -- or companies, I should say, who are already in the field and where you could work with them or they could work with you at penetrating the market with your new products. That's one thing.

And the second question I have at this point is there's been a tremendous amount of publicity about Legionella disease. And I'm wondering whether that has had an effect on your quarter and also whether the government realizing that this is a significant problem with the old water pipes and thinks, et cetera, et cetera, that the government regulations, whether they be the word we've heard in the past so many times, ASHRAE or any others, whether they will be more stringently enforced and thus become more meaningful to you going forward?

Rob, thanks for joining, and thanks for the 2 questions. And I'll answer the first one about penetrating the markets, and then we'll touch on Legionella after that. And if I don't answer any of them clearly or completely, just please ask more. So how will we penetrate the market? When we look at new technologies such as PFAS, and I mentioned this initially that it's not always the same customer that we're talking to today. So penetrating the market is a good question and a key one that we think about.

At the end of the day, we sell our products to the market directly and through distribution. And that is -- those are the 2 channels that we'll continue to enter the market with. And one of the things that we're figuring out is do we have the right partners to talk about PFAS? Do we have the right internal arrangement in order to answer the questions and calls that might come in from organizations that are not the typical hospital networks. And that's the question we answer and look at every day. And we are having to change our model slightly. We're actively pursuing it.

But what we find is that at the end of the day, it's still our salespeople are experts internally that end up explaining how their remediation is done. They're still the ones, whether it's through an introduction to a distributor or whether it's through a direct phone call or on marketing leads or a trade show, they still are the ones that are explaining the solution, giving the quote and helping the customer through that solution as they work to remediate that problem.

So we're excited about the new opportunity. We're excited about the new audiences that it brings us to and the new conversations that we're able to have. And as our distributors and partners, some who are firmly entrenched in markets where it's health care and some that are not, both have had opportunities. We've seen the non-health care partners more so than the health care-focused partners, bringing up some of those opportunities. And that's fine. That's quite all right, and that's exactly why we have those partners.

We don't currently have all of the reach and breadth and relationships that our partners do have, and they've been instrumental in growth. And we still do what we can to make sure that they're successful and that we support them in their needs and their efforts going forward. And that's been working for us. So microplastics, it's not quite as far down the road as I would think that PFAS is, and that's just my observation.

And as I think it's because of 2 things. One, measuring a nanoplastic or microplastic is hard. It's difficult to have equipment that can take and separate the microplastics, identify the species and run the centrifuges. It's just hard to do that on large volumes of water to be able to test and identify, but it's more of a reactive and anecdotal based on what's seen as a result of everything.

And two, it's -- there's no regulations driving what should be good enough or not good enough. So like the other markets, it just takes time for that to develop. It takes time for just enough people that are smart enough with technology good enough to measure it and to be able to track it and trend it and see what's harmful and not harmful. We remain very well poised to address that when the time comes and even try to drive that market and prompt some of those conversations.

So very excited about that and those 2 opportunities. They are, as I mentioned, in summary of that question, first part, different customers usually than we're talking to today, which is often more exciting than anything else. It's a new segment, new bubbles, new TAMs and [indiscernible] to augment. And we remain focused on making sure that the water quality needs of our customers are met, however difficult that might be.

Now, regarding your question on Legionella, there has been a lot of publicity. Legionella tends to get the most publicity out of all of the different situations, whether it's norovirus, rotavirus and some of the more difficult. But the truth remains that Legionella still is not the most-costly thing that health care networks are going to deal with. It's those other more difficult to remove pathogens that I just mentioned.

I do see more questions being asked about it often, like several in New York City, it's related to air systems such as cooling towers where people are inhaling some of those situations -- some of the viruses and bacteria. So it's not always a water situation that we will address, but happy to have that conversation and give that education.

And we do see that those -- that fuel the questions coming in more and more. And it's making us more aware of where the situations are occurring and also proactively able to have the discussion and get people addressing it and looking at it within their facilities. So it's definitely had an effect, I think, on awareness. And as previously mentioned, awareness and education brings customers towards Nephros in the long run every time.

We prefer educated customers that do ask those questions, and we're able to talk to them about the creating water safety management programs and the like. So it's very exciting for us. And we hope that the momentum continues along those lines, and we don't hope that people get sick and injured from Legionella, but we do have solutions that will treat that when that does happen.

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.

Yes. So I'd love to share names and locations, but we -- our customers often don't want that information out there. But I often am seeing now where people that share the characteristics of patient care facilities when their populations have those same characteristics, they're often very strong candidates for our solution because you're looking at a market segment that shares a similar buying criteria.

They may have populations at risk or elderly, younger immune compromised or they may have high-end populations of people just concerned about getting sick at all. But people in close proximity, people that have to share space, share appliances such as bathroom fixtures and shower fixtures, those are all opportunities. So think about correctional facilities, maybe schools, municipal buildings, and the like.

So those are places where we are seeing deployment. And it's been that way, not just this quarter, but that's been a trend over the past 3 quarters or more, especially as the team goes out and focuses on more than just the 8,000 or 9,000 or so hospitals that are out there. Hospitals are still and will always be a very strong market for us because they are driven by some of the guidelines and even regulations and sometimes accreditations.

So they're driven not just by desire for remediating the problems, but also the potential for losing business in customers and patients. So it's been -- I'm not sure if that answered the question, but those are really some of the other places we're looking and reaching out and it's been successful and a major driver for us, especially these past 3, 4 quarters or so.

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

I just wanted to hop back in queue to ask about the margins. So you guys explained it. I know you guys source a lot of your components or maybe not a lot, but some of your components, at least from Italy. It seems like tariffs have had somewhat of an impact.

Just as we look at the fourth quarter and '26, should we expect this kind of -- you guys were operating around 63% gross margin, this closer to 61%, kind of more in line with some historicals. Is this a better run rate for us as we look forward? Or do you think that there will be some things that will alleviate some of the pressures you're seeing now on margin?

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. And so 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?

The service revenue refers to -- when we're going in, there's 2 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 would often put these quick connect fittings and make it so it's a properly installed scenario, maybe it's some manifolds as well. So there's that initial install, it tend to take a little bit longer.

And there's also just the regular replacement business where after 3 months, after 6 months, whatever the filter expiration or the rated life of it might be, we would go in and change out that filter as well. So that service revenue refers to those activities that are charged and billed under either contract or onetime services with that customer for performing those 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 get -- 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.

And they basically 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. 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. And it's using both direct and indirect channels. But in addition, it's trying to meet those decision-makers where they are.

And 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. Has 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 talking engagement, seeking 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. And really when we're scaling and getting more speaking engagements and going to more of these conferences and 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. And 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.