NEPH 10-K & 10-Q changes, risk factors and insider trading

Significant developments resulting from recent and potential changes in United States tariff policies could have a material adverse effect on us.

Beginning in the first quarter of 2025, the current U.S. presidential administration has imposed tariffs on various goods from various countries, including the European Union (“EU”), and has announced intentions to impose further significant tariffs on certain United States imports. The administration relied on the U.S. International Emergency Economic Powers Act (IEEPA) as the statutory basis for its authority to impose most of such tariffs. However, on February 20, 2026, the U.S. Supreme Court ruled that the IEEPA did not grant the president authority to impose tariffs, rendering such previously imposed tariffs invalid. Following the Supreme Court’s decision, the U.S. administration announced its intention to invoke other laws to impose tariffs by executive order and thereafter imposed new tariffs on imports from all countries, in addition to any existing non-IEEPA tariffs. We rely on suppliers operating in, and exporting from, the EU, including our exclusive supplier of the filtration materials and technology used in certain of our filtration products. To the extent that tariffs and other restrictions imposed by the United States increase the price of, or limit the amount of, materials and finished goods imported into the United States, the costs of our materials, which we may be unable to pass onto customers, may be adversely affected, which could adversely affect our revenues and profitability. We cannot predict the effect these and potential additional tariffs will have on our supplier and our business, including in the context of escalating trade tensions. Further tariffs, additional taxes, or trade barriers, both domestically and internationally, may affect our costs and margins, the competitiveness of our products, and our ability to sell products or purchase necessary equipment and supplies, and consequently materially and adversely affect our business, results of operations, and financial conditions.

We rely on both employees and third-party contractors to install and service our water filtration products, and any failure by these parties to perform adequately could adversely affect our business and reputation.

The proper installation and servicing of our water filtration products are critical to ensuring their performance, safety and regulatory compliance. We rely on employees and third-party contractors and service providers to install and service our water filtration products. These contractors are not our employees, and we have limited control over the quality, timeliness, and consistency of their work. Their performance is influenced by factors that may be beyond our control, including the availability and training of their personnel. If we or our third-party service providers fail to perform installation or service work to our standards or to our customers’ expectations, our products may not function as intended, our reputation and customer satisfaction may be harmed. Poor workmanship or noncompliance with our installation and servicing specifications or applicable regulations could result in product malfunctions, water quality issues, property damage, customer complaints, personal injury, or other claims against us. Such failures could also expose us to increased warranty claims, as well as costs associated with corrective actions, replacements, or recalls. In addition, even isolated incidents of improper installation or servicing – whether caused by us or by third-party providers engaged by us – could negatively impact our brand and reputation, leading to reduced repeat or referral sales. Any of these outcomes could materially and adversely affect our reputation, results of operations, and financial condition.

We have identified a material weakness in our internal control over financial reporting. If we are unable to remediate this material weakness, or if we identify additional material weaknesses in the future or otherwise fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately or timely report our financial condition or results of operations, which may adversely affect investor confidence in us and the value of our common stock.

In connection with the preparation of our financial statements as of and for the quarterly period ended March 31, 2025, we identified a material weakness in our internal control over financial reporting. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our financial statements will not be prevented or detected on a timely basis. Specifically, our management concluded that we had designed or maintained effective controls to ensure that we properly recognize revenue from service-based sales contracts. See “PART II – Item 9A. Controls and Procedures” in this Annual Report.

Although these items did not result in a material misstatement to our financial statements, this material weakness could have resulted in a material misstatement to our annual or interim financial statements that would not be prevented or detected. While we are designing and implementing measures to remediate our existing material weakness, we cannot predict the success of such measures. Our current controls and any new controls that we develop may become inadequate because of changes in conditions in our business, personnel, information technology systems or other factors. If we fail to remediate our existing material weakness or identify new material weaknesses in our internal control over financial reporting, or if we are unable to conclude that our internal control over financial reporting is effective, it is possible that a material misstatement of our financial statements would not be prevented or detected on a timely basis, investors may lose confidence in the accuracy and completeness of our financial reports, and the value of our common stock could be materially and adversely affected.

Nephros is a commercial-stage company that develops and markets high-performance water filtration solutions for points of use, with a core focus on medical-grade water filtration. Our medical filtration portfolio includes two product lines: infection control and dialysis water. The infection control products feature both microfilters (0.1 micron), which retain bacteria, and ultrafilters (0.005 micron), which retain bacteria, viruses, and endotoxins to address a broader spectrum of waterborne pathogens including and beyond Legionella and Pseudomonas. The dialysis products consist exclusively of ultrafilters, extending the same microbial and endotoxin retention capabilities to the purification of water and bicarbonate concentrate used in dialysis treatment, where endotoxin control is especially critical. All of our medical-grade filters are FDA 510(k)-cleared as Class II medical devices—a distinguishing feature that affirms their validated safety and performance in critical-use environments. While these filters are widely used in healthcare settings, they have also been adopted across a range of other industries—including manufacturing, laboratories, aviation, and federal facilities—where water purity is essential to operational safety and compliance.

In addition, we offer a line of commercial water filters that improve taste and odor, reduce biofilm formation and scale buildup, and remove cysts, particulates, and lead from water systems. With the recent release of our newest solution, validated for the reduction of Total PFAS (a mixture of seven PFAS compounds including PFOA, PFOS, PFHxS, PFNA, PFHpA, PFBS, and PFDA), our portfolio of products is further enhanced with the ability to address a broad spectrum of emerging and persistent waterborne contaminants. Our commercial filtration products are broadly applicable across industries and are especially valuable when used in tandem with our medical-grade filters to deliver comprehensive water-quality protection. Whether in clinical care, industrial operations, or public infrastructure, Nephros solutions support the universal need for safe, high-quality water.

Across our product portfolio, we characterize revenue as either programmatic or emergency response. Programmatic revenue reflects recurring procurement of filters used within ongoing clinical, treatment, or operational workflows, and following a replacement schedule based on filter life. Emergency response revenue represents the rapid deployment of filtration solutions in response to acute water-quality events, such as outbreaks, contamination concerns, system disruptions, or precautionary advisories, and is predominantly associated with infection control filtration. Emergency response orders are generally non-recurring in nature, although emergency deployments may lead to subsequent routine purchasing.

Revenue Recognition

A majority of our revenue is product sales which is recognized at a point-in-time when the product is shipped via external logistics providers and the other criteria of ASC 606 are met. Product revenue is recorded net of variable consideration which includes prompt pay discounts, other discounts, and returns and allowances.

In addition to product revenue, the Company recognizes revenue related to royalty, service, and other agreements in accordance with the five-step model in ASC 606. Sales-based royalties, for which the license is the predominant item to which the royalties relate, are recognized (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied).

Service revenue is recognized at a point in time when service is completed. The Company is not entitled to payment until the point at which the service is completed.

To recognize revenue for contracts that include a combination of products and services, we allocate the transaction price for the contract among the identified performance obligations on a relative standalone selling price basis. We establish standalone selling price for our products based on the observable price of the respective product. For services where the standalone selling price is not directly observable through historical transactions, we estimate standalone selling price using expected cost-plus margin based on management judgment by considering available data, such as labor cost of providing the services and internal margin objectives which include market and competitive conditions. Standalone selling prices for our products and services are evaluated on a periodic basis using updated observable inputs and market information to ensure they continue to reflect an appropriate estimate of the price at which we would sell each promised good or service on a standalone basis.

Total net revenues increased 33% in the year ended December 31, 2025. 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 our service revenue.

Gross profit margin was approximately 62% for the years ended December 31, 2025 and December 31, 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. We anticipate that tariffs will continue to affect our gross profit margins in future periods unless there is a change in U.S. tariff policy.

As of December 31, 2025, we had an accumulated deficit of $143.1 million. Although, we were profitable in the quarter and year ended December 31, 2025, and the full year ended December 31, 2024, we may incur future operating losses if we are unable to maintain or increase our revenue.

Recent Developments

Supreme Court Tariff Ruling

In February 2026, the U.S. Supreme Court issued a ruling striking down certain tariffs previously imposed under the International Emergency Economic Powers Act (“IEEPA”). The U.S. presidential administration subsequently invoked additional tariffs under other U.S. laws resulting in a rapidly changing tariff environment. In April 2026, the U.S. Customs and Border Protection agency (“CBP”) launched a platform to allow for the submission of IEEPA tariff refund requests.

During the six months ended June 30, 2026, we were notified by CBP that a refund of approximately $647,000 had been approved. Accordingly, during the six months ended June 30, 2026, we recognized a $624,000 reduction in cost of goods sold in our consolidated statements of operations, representing the expense for IEEPA tariffs to be refunded with respect to inventory sold to customers since the tariffs were imposed in February 2025. Additionally, we recognized a $23,000 reduction in the carrying value of inventories on hand on our consolidated balance sheet as of June 30, 2026 for IEEPA tariffs previously capitalized as cost of inventory. We recorded a receivable of approximately $647,000 related to the refunds as of June 30, 2026, as the cash had not yet been received.

We expect to receive approximately $22,000 of statutory interest in connection with the refund. Interest will be recognized in other income when realized or realizable.

Our unaudited condensed financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates.

In the absence of specific U.S. GAAP applicable to tariff refunds, we apply the loss-recovery model in ASC 410-30 by analogy and evaluate whether recovery is probable under ASC 450-20. Under this policy, we recognize a tariff refund receivable when recovery is probable, limited to the amount of previously incurred tariff costs. We elected to recognize recoveries related to both tariff costs previously recognized in earnings and tariff costs remaining capitalized in inventory. Amounts related to inventory previously sold are recognized as a reduction of cost of goods sold, while amounts related to inventory remaining on hand are recognized as a reduction of inventory. Determining whether recovery is probable requires significant judgment and consideration of the applicable legal rulings, the status and requirements of the CBP refund process, the eligibility and status of individual import entries, confirmations from our customs broker and other available evidence regarding collectability. Statutory interest associated with tariff refunds is accounted for separately as a gain contingency and is recognized when realized or realizable.

Except for the adoption of this tariff-refund accounting policy, there were no material changes to our critical accounting policies during the six months ended June 30, 2026.

Gross profit margin was approximately 67% for the three months ended June 30, 2026, compared to approximately 63% for the corresponding 2025 period. The increase of approximately four percentage points was primarily attributable to our recognition during the period of IEEPA tariff refunds of approximately $0.6 million, which was recognized as a reduction of cost of goods sold during the three months ended June 30, 2026. The benefit resulting from the tariff refund was offset 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 than we realize from product sales. With respect to the tariff refund, the refund represents duties paid by us between the period from April 2025 to February 2026 and that were imposed by executive order in April 2025 under the IEEPA, which the U.S. Supreme Court ruled were invalid in February 2026. However, approximately $0.50 million of the entire tariff refund amount relates to purchased 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 $0.1 million of the tariff refund related to purchased inventory that was converted to revenue during the three-month period ended June 30, 2026. The $0.50 million of tariff refund corresponding to product sales made in prior periods increased our gross profit margin by approximately nine percentage points for the three months ended June 30, 2026. Approximately $0.03 million of the tariff refund related to purchased inventory that was converted to revenue during the three-month period ended June 30, 2025. Including that $0.03 million, our gross profit margin for such period would have increased by approximately one percentage point. Although the IEEPA tariffs were declared invalid, the current administration has imposed tariffs using other statutory bases, which remain in effect. Accordingly, we expect that our gross profit margin will continue to face headwinds as a result of current U.S. tariff policy.

Six Months Ended June 30, 2026 Compared to the Six Months Ended June 30, 2025

The following table sets forth our summarized results of operations for the six months ended June 30, 2026 and 2025 (in thousands, except percentages):

Net Revenues

Net revenue increased by $1.9 million, or 21%, for the six months ended June 30, 2026, compared to the same period in 2025. This increase was primarily driven by increased product revenue due to programmatic growth. The growth in programmatic revenue was offset somewhat by a decline in emergency response business. We had significant emergency response business in the first half of 2025 that did not fully repeat in 2026. We also experienced strong growth in both our commercial products and service revenue.

Gross Profit Margin

Gross profit margin was approximately 63% for the six months ended June 30, 2026, compared to approximately 64% for the corresponding 2025 period. The decrease of approximately one 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 products offerings and services revenue, both of which yield lower gross margins than our infection control business. However, our gross margins significantly benefited from our recognition during the 2026 period of the IEEPA tariff refund of approximately $0.6 million, which was recognized as a reduction of cost of goods sold during the six months ended June 30, 2026. This refund reflects tariffs paid by us between the period from April 2025 to February 2026. Approximately $0.3 million of this tariff refund corresponds to purchased inventory that we converted to revenue in 2026, which amount accounts for an approximately three percentage point improvement in our gross profit margin for the six months ended June 30, 2026. The remaining approximately $0.3 million of the refunded tariffs correspond to purchased inventory that we converted to revenue in 2025, of which approximately $0.03 million corresponds to purchased inventory that we converted to revenue in the six months ended June 30, 2025. Although the IEEPA tariffs were declared invalid by the U.S. Supreme Court in February 2026, the current U.S. administration has imposed tariffs using other statutory bases, which remain in effect. Accordingly, we expect that our gross profit margin will continue to face headwinds as a result of current U.S. tariff policy.

Selling, General and Administrative Expense

Selling, general and administrative expense increased $484,000, or 11%, primarily due to an increase in headcount and an increase in professional fees.

Research and Development Expense

Research and development expense increased by approximately $106,000, or 17%, primarily due to higher salary expense driven by increased headcount.

Depreciation and Amortization Expense

Depreciation and amortization expenses were approximately $58,000 and $74,000, respectively, for the six months ended June 30, 2026 and 2025. The decrease was primarily due to the extension of the Medica license period.

Interest Income

Interest income was approximately $62,000 for the six months ended June 30, 2026 compared to approximately $44,000 for the six months ended June 30, 2025.

Other Income (Expense), net

Other expense was approximately $21,000 for the six months ended June 30, 2026, and $53,000 for the six months ended June 30, 2025, primarily as a result of gains and losses on foreign currency transactions.