Nephros, Inc.

Good day and welcome to the Nefros, Inc. first quarter 2026 financial results conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on a touch-tone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Karen Smith, Investor Relations. Please go ahead.

Good afternoon, everyone. This is Karen Smith with PCG Advisory. Thank you all for participating in NEPHROES' 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 NEPHROES. I encourage you to review NEPHROES' filings with the Securities and Exchange Commission, including, without limitation, Companies Forms 10-K and 10-Q. to 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, Netflix's 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 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 7th, 2026. The company takes no obligation to revise or update any statements to reflect the times or circumstances after the date of this conference call, except as required by law. I would now like to turn the call over to NAFSA's President and Chief Executive Officer, Robert Banks. Robert, please go ahead. Thank you, Karen, and good afternoon, everyone. I'm very pleased to welcome you to the call. Q1 2026 was a milestone quarter for Netflix. We delivered 5.2 million in revenue, representing a new all-time high for the company and marking the first time we crossed the 5 million dollar threshold in a single quarter. This performance reflects continued execution across our core business, expanding adoption of our products and new applications, and increasing contributions from our service and installation capabilities. Importantly, this growth is 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 active opportunity that did not repeat. Despite the normal proliferation, we still achieved record revenue, which speaks to the strength and durability of the underlying business. Now, let me address margins directly. First margin for the first quarter came in at 57%. compared to 65% the prior year, and that decline was driven by three very clear factors. First, tariffs created a meaningful headwind, contributing over 200,000 in incremental cost 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, US 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 strength of the 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, other high-use water applications. These represent a much larger addressable market than our traditional segments. While this impacts margin in the new term, it positions us for scale, diversification, and long-term growth. Beyond products, we are seeing strong traction across our broader strategy. 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. Number 30. And our education initiative, including the Netflix Water Institute, are positioning us earlier in the customer's 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 inflations 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 our 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 Crandall, for a closer look at the financials.

Thank you, Robert. I will now provide a closer look at NetVose's 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, Close 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 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, or an increase of 12%, reflecting increased headcount and professional fees. As a result of the 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 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?

Indeed, Judy, this quarter demonstrates the strength of what we're building at Nefros. 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.

We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the key. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question comes from Nick Sherwood with Maxim Group. Please go ahead.

Hi, good evening. Thank you for taking my question. My first question is about the certification for the water management program development as a service, you know. How are you charging it? Is that 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 I fall under the necros education arm of our pillar. We're not currently charging for It's something that we're training and getting our partners up to speed on, and we do have an employer, too, that are capable of creating these water safety management plans. This is a 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 up 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 give reference earlier in that process so the capability of certifications is just getting started we are still 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 hope to report more wins in the future as we get that further developed understood and then my next question is you know about hiring the sales leader and your focus in the new york market you know part of that increased focus was due to um sort of increased regulatory focus from, you know, New York itself. You know, 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, five boroughs, there are a very high density of hospitals and others with infection control needs in that area. In the past, we've broken out our sales force into kind of these four or five large regions. And the person covering all of New York, New England, was not able to really focus on the New York City region when it's a completely different, I guess, sales cycle, sales process, value proposition. In addition, there's been a number of outbreaks from Regionella and other in this, in that region that has kind of really got a lot of questions coming to us. So we put this up to look for someone who knows the 5-0s 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 pipe-saved, so it does take some time to seed and educate and build and sell. So we're still early in the game with the 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 decided to really put our focused effort in that area. Understood. Thank you for the detail. Then 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, continuing steady active customer site growth, and for some reason that shouldn't continue past 1,700. Lots of adoption and we're quickly as well pretty well staying. All right, great. Thank you for answering all my questions, and I'll return to the queue.

Again, if you have a question, please press star then 1. The next question is from Ankur Sagar, who's a private investor. Please go ahead.

Yeah, hi. Good afternoon, Robert and Judy. Thank you for taking my questions. Congratulations to you on this milestone. for the company achieving north of $5 million revenue in one quarter for the first time. Thank you. Thank you. I was quite proud of that and very excited for us. Yes, it is indeed. Robert, 23% growth, programmatic growth, I mean, it's great. I think it masquerades the, you know, sort of like the overall growth, you know, Could you – I know you only break it out, but could you provide some number on what portion of the revenue came from automatic and what was emergency response? Because, you know, 23% is just, you know, really great on year-over-year from what the company did even, you know, in prior year. Yeah, and you're right. We don't typically break that out. In the past, we've been seeing emergency response can average anywhere between 10-15% of our sales. In T1, 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 NECROS is someone that you can call in these situations. That comes from our presence in trade shows and networking and word of mouth because many of our new customers come from referrals and even our partners who run into problems and they call NECROS, they can solve this. So, what we're seeing is that recognition bringing up these emergency response opportunities more and more frequently when it's a really hot 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 of that. No, I appreciate that, and just to clarify, I mean, this is great. I mean, like, so, you know, normally the emergency response is you know, up to like 10 to 15%, but you're saying this, you know, over 5 million quarterly number is entirely or mostly, you know, programmatic revenue? Yeah, it can characterize how much of it. They sort of list it if they can't be less than what we've been seeing in the past. Okay. Okay. And, you know, you know, one part of your strategy has been to really go beyond the healthcare vertical you know, since you joined as CEO, anything you could share in terms of, you know, what sort of like sub-verticals, you know, have you been able to penetrate, you know, get some early success within that commercial segment? Sure. I can start that in a little bit. nephros being a rich land analysis, our healthcare is our sweet spot. That's really where we shine. Mainly because that's a regulated environment. FDA is regulated in many cases. Our medical devices, being hot too, give us an edge. We've got the competitors who can come in and sell and make claims. They don't have the clearances and FDA certifications we've got to give up. When I go into other spaces, such as maybe 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, we kind of 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 tell them to 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 told a friend that 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 goes 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 of a complication for holding on to some of those things. So some of it, the business is a little less shaky. Much, much larger TAM, if you're looking at TAMs and batches, but it is more competitive and so a lot more churn. So we do have to balance what our core sweet spot is, and that still remains the lion's share margins are coming from the healthcare space, and will 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 competitive advantage that they're getting out there, you'll start to see those grow from the same basis that we do grow in the healthcare space. I wouldn't look for, you know, quarter two, quarter three 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 more immune to. We want other ways to make money and grow, not just the place where we're the best at. A couple of examples that you mentioned, like, you know, large buildings or airports, airlines. I assume these would be larger in size compared to what the company has done, you know, typically in healthcare. I'd say larger in points of application, but not necessarily large floor rates at one time. I mean, we're not doing the entire building. It would be, you know, 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. So, 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 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 the, that landscape, that wide space of sales is super exciting. It does take some time and 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 two-part. You know, EPA has, there's a new push from the EPA with new regulations for PFAS and microplastics. I think you have talked about those two in the past where you have some parts 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, you know, was light, you know, due to the external factors, but how do you expect that to trend, you know, further out in the year in Q2, Q3, Q4? I'll answer the first part and 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 in 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 and 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 standards or people with another 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 on our team who are sharing that message and how to make things change. Brianne Negrar's worked with the latter of the two. And all of our sales team, Shane Sullivan and the guys and gals are really good at kind of pulling in and solving some of these problems for our customers. And a lot of times, it's just curiosity. Plants succeed. 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 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 cuts was over $200,000 this quarter. When tariffs moved from 15 to 10%, one-third of that we would not have experienced. So you can sort of do the math. A third 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. Can we pass on some of this cash to our customers as we watch what customers or 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, either just some external factors.

Got it. Got it. I know it takes a lot to produce this number, so great job on this programmatic revenue numbers and turnaround. That's all. Thank you for taking my questions.

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

Hi. Nice quarter in the problematic business. Good to talk to you. Have there been any pricing pressures from your competitors in the business that may have been more so than normal? And, you know, maybe I missed it, but I heard about the nanomicroplastic 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 to 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, you know, 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 and at this point in time.

I can talk to all two of those points. And if at the end of this I miss any of the points, please just re-ask. First thing we asked about was price pressures. We, at Netflix, 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 us and compares our filters to the next. Well, that's fine and dandy, but if our filter costs 20% more but it lasts 100% longer, 50 days instead of 30, or six months instead of three months, then that price per skew 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 my friends on the West Coast and Kelly down in the South, is that these 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, 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've built in the contaminants that we're removing, because there isn't really a filter doing the same thing. So, the price comparison becomes And then adequate comparison when the two filters do and accomplish different tasks. We're always looking at 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'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. to get past that and win the opportunity. As far as PFAS, PFAS, river chemicals, we do see 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, et cetera, 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, you know, prove it when there's other people making claims as well that maybe don't have as much rigor as we do. So, if 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 the commercial product line. But I'll be 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 focus that they have needs for. 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 the 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 on your tap. What I started to see more and more today that I had not seen in the past is people concerned about what's coming in the 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 home builders. And we're starting to form more and more arrangements with those partners. And based on that, how I tend to address the home market. And I hope that you know, in the quarters to come, maybe a couple, four, six quarters out, that we have some meaningful movement in those areas to report and share with you. But that is an economy market that I hope to figure out how to penetrate without sacrificing our infection control pipelines in the healthcare space. Thank you. Great questions.

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 rock stars across the board. You know, Stacy with dialysis is just phenomenal. Kelly and Nick, shout out to those guys who are just rock solid. I mentioned Shane in the West and with Dana's expertise in New York City and 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's 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 them and see that market upstream. I'm so confident that 300 other webinars and the full team support will just do phenomenal things going forward. and more great stuff, so continue to support. Bye, everybody.

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