NEPH

• Overall Strategic Progress

  • Q2 2026 delivered record quarterly revenue and the highest quarterly net income and adjusted EBITDA in company history, marking a major step forward in Nephros' development.
  • Growth is broad and diversified across products, channels, and customers, rather than dependent on a single product, geography, or revenue source, making the business more durable for long-term sustained growth.
  • Management has shifted the company from a pure filter product business to an integrated 3-pillar water safety platform: differentiated products, accessible customer services, and customer education, all mutually reinforcing growth.

• Key Operational Milestones

  • Service revenue growth was driven by expanded installation, scheduled replacement, and ongoing customer support offerings, which lower adoption barriers and deepen customer relationships.
  • The Nephros Water Institute and ongoing education outreach (including webinars, trade show presentations, and on-site customer training) build market awareness of water safety risks and position Nephros as an industry expert, driving new demand.
  • The company's filter tracker QR code app has reached maturity, automating filter replacement reminders and streamlining recurring revenue generation, reducing reliance on manual processes.
  • Investor and market visibility initiatives were completed in the quarter: a virtual investor event, participation in the Maxim Health, Wellness, and Longevity Conference, inclusion in the Russell Microcap Index, and increased communication around emerging water quality concerns including microplastics and nanoplastics.
  • Ongoing investment is allocated to five core growth priorities: expanding market presence in key regions including Greater New York and Puerto Rico, increasing service adoption, growing education-led demand, launching new products for emerging use cases, and strengthening investor awareness.

• Financial Context

  • A $600,000 tariff refund was recognized in Q2 2026 after the U.S. Supreme Court ruled 2025 IEEPA-imposed tariffs invalid; most of the refund relates to inventory sold in prior periods, so the strong underlying business growth is not driven by accounting timing.

• Management did not issue explicit numerical financial guidance for full-year 2026, but reaffirmed its existing strategic priorities and growth outlook for the second half of 2026, expecting underlying core and service revenue growth to continue.
  • New products addressing PFAS, microplastics, and nanoplastics are expected to become meaningful growth drivers in 2 to 3 quarters as market education and customer adoption progress, with growth accelerating as regulatory requirements for these contaminants increase.
  • Management expects ongoing margin pressure from remaining effective tariffs, foreign exchange impacts, and the growing share of lower-margin service revenue, but is actively working to improve underlying margins through adjustments to pricing, sourcing, freight costs, product mix, and operational efficiency.
  • Service revenue growth is expected to remain at the elevated new run rate established in Q2 2026, as the expanded service offerings have resonated with customers and meet ongoing unmet demand for outsourced water safety support amid healthcare staffing challenges.

Nephros reported total second quarter 2026 net revenue of $6 million, a 36% year-over-year increase from $4.4 million in Q2 2025, and a 15% sequential increase from Q1 2026. Core programmatic product revenue grew 27% year-over-year, representing the majority of total revenue as the recurring foundation of the business. Service-only revenue nearly tripled year-over-year, and emergency response revenue increased meaningfully but fluctuates and does not drive long-term strategy. For the first half of 2026, total revenue increased 21% year-over-year to $11.2 million, with growth in programmatic and service revenue offset by a slight decline in emergency response revenue. Gross profit margin was 67% in Q2 2026 (up from 63% in Q2 2025), with the 4 percentage point increase driven by a one-time $600,000 tariff refund; 9 percentage points of the Q2 2026 margin gain came from the portion of the refund related to prior period inventory sales, with only $100,000 related to Q2 2026 sales. Excluding the one-time refund impact, underlying margin pressure remains from an ongoing 10% effective tariff, euro appreciation against the U.S. dollar that increased shipping costs, and the growing share of lower-margin service and commercial revenue compared to higher-margin core infection control products. First half 2026 gross margin was 63% (down 1 percentage point year-over-year), after a 3 percentage point benefit from the tariff refund. Net income for Q2 2026 was $1.2 million, a more than 400% increase from $237,000 in Q2 2025, and adjusted EBITDA increased 260% to $1.3 million from $355,000 year-over-year. For the first half of 2026, net income increased 68% to $1.3 million from $800,000, and adjusted EBITDA increased 46% to $1.5 million from $1 million year-over-year. R&D expense increased 18% year-over-year in Q2 2026 and 17% in H1 2026, driven by higher salary expenses from increased R&D headcount. SG&A expense increased 10% year-over-year in Q2 2026 and 11% in H1 2026, driven by higher headcount, sales commissions, and professional fees. As of June 30, 2026, Nephros held $4.7 million in cash and remained debt-free.

• Uncertainty around U.S. tariff policy: after invalid 2025 IEEPA tariffs were overturned, the current administration has imposed new tariffs under other statutory authorities that remain in effect, continuing to impair gross profit margins.
  • Foreign exchange volatility: appreciation of the euro against the U.S. dollar has increased shipping and product costs, putting downward pressure on gross margins.
  • Product mix margin pressure: growing contributions from lower-margin commercial products and service revenue relative to higher-margin core infection control products continues to reduce overall gross margin compared to prior periods.
  • New product adoption risk: new PFAS and micro/nanoplastic filter products require time for market education, customer trials, and adoption, so revenue contributions from these new lines will be delayed, and growth is dependent on future regulatory changes that increase customer demand for these solutions.
  • Forward-looking statements are inherently uncertain, and actual results may differ materially based on factors including the company's ability to market products cost-effectively, the rate of customer adoption, regulatory changes, and competitive pressures.

Q: Are the newly launched PFAS, microplastic, and nanoplastic products already contributing to Q2 2026's strong revenue results, or is all growth from legacy core products? / A: Most of the new emerging contaminant products were only recently released, so they have not yet gained meaningful market traction. Market education and customer trials are still ongoing, and management expects these products to become material growth drivers in 2 to 3 future quarters, with growth accelerating as new regulations targeting these contaminants increase. All broad-based growth in Q2 2026 comes from core legacy products and expanded services. New products will diversify Nephros' growth over time as R&D investments pay off.

Q: The Q2 revenue came in well ahead of expectations even excluding the tariff refund. Is the strong growth driven by new customer sites, higher revenue per existing site, or emergency response activity? Where does the growth come from? / A: Growth was broad-based across the entire portfolio, not concentrated in one region, customer type, or product line. Emergency response revenue was steady at a low level with no exceptional spikes that skewed results. The vast majority of growth came from higher revenue per existing customer site, as Nephros offers existing customers more complementary products and services. Increased market education and outreach, including heightened awareness around Legionnaires' disease events, has driven more customer inquiries and orders, and the company's consolidated partner network is stronger and more effective at generating opportunities than in prior years.

Q: Service revenue tripled year-over-year. Is this the new stable run rate, and can we expect this level of service growth to continue? / A: The tripled service revenue reflects successful adoption of Nephros' expanded installation and recurring replacement service offerings, which remove adoption barriers for customers with limited internal staffing and capabilities. The mature filter tracker app has automated recurring replacement reminder processes, supporting sustained recurring service revenue. Management classifies the strong growth as the result of consistent operational execution, and expects the elevated service level to continue going forward, as services also drive additional core filter product sales.

Q: How does Nephros' education pillar work financially? Do you charge for education services, and will it become a standalone revenue stream? / A: Education is currently the third core pillar of Nephros' platform, focused on building market awareness of water safety risks and driving demand for Nephros' filter and service offerings rather than being a standalone revenue stream. At this stage, all education offerings (including webinars, on-site training, and educational content) are provided to drive filter product adoption, and the company has no immediate plans to monetize education. Management will re-evaluate monetization in the future, but it is not a near-term revenue priority.