Quarterly Report for Quarter Ending June 30, 2026 (Form 10-Q)

Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion should be read in conjunction with our financial statements and notes thereto included in Item 1 of Part I of this Quarterly Report on Form 10-Q. This discussion includes forward-looking statements about our business, financial condition and results of operations including discussions about management's expectations for our business. These statements represent projections, beliefs and expectations based on current circumstances and conditions and in light of recent events and trends, and these statements should not be construed either as assurances of performances or as promises of a given course of action. Instead, various known and unknown factors are likely to cause our actual performance and management's actions to vary, and the results of these variances may be both material and adverse.

Business Overview

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.

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 Products

Water Filtration Products

We develop and sell point-of-use water filtration products used in both medical and commercial applications. Our water filtration products employ multiple filtration technologies, as described below.

For medical applications, we manufacture both ultra- and microfilters using polysulfone hollow fiber membranes that retain microbiological contaminants through physical size exclusion. Our ultrafilters, with a 0.005-micron pore size, retain bacteria, viruses, and endotoxins, provide a unique alternative to charged membrane solutions and feature one of the smallest pore sizes available. Our microfilters, with a 0.1-micron pore size, also retain bacteria, a critically important function given the prevalence of Legionella in premise plumbing and the risks associated with Legionnaires' disease. Across both filter types, Nephros filters are distinguished by exceptional membrane surface area and longer service life, particularly in comparison to our competitors, making Nephros filters well-suited to support improved water safety within the demands of highly regulated environments.

Our primary sales strategy for medical applications is to sell within healthcare through distributors (also termed as value-added resellers, or "VARs"). Leveraging VARs has enabled us to rapidly expand our access to target customers with limited sales staff expansion. In addition, while we are currently focused on healthcare as a primary customer base, the VARs that support these facilities also support a wide variety of commercial and industrial businesses. We believe that our VAR relationships have and will continue to facilitate growth in filter sales outside of the medical industry. In addition to VARs, we also utilize a direct salesforce that targets key geographic regions throughout the country, while focusing on the hospital and dialysis customers.

For commercial applications, we develop filters to improve water quality through the reduction of aesthetic and functional contaminants. This segment includes both carbon-based and carbon-free solutions to reduce a number of issues including taste, odor, scale buildup, fine particulate, lead, cysts, and Total PFAS (otherwise known as "forever chemicals"). Like our infection control segment, our commercial filters support a wide range of applications; they also play a key role in enhancing equipment performance and reducing maintenance needs.

Our commercial application sales model also combines both direct and indirect channels. Through our internal sales team, we sell directly to customers across a range of industries, including healthcare, where our commercial solutions are an effective complement to our medical-grade, infection control filters. We also partner with VARs, including one non-exclusive partner focused only on food service and hospitality sectors, such as quick-service restaurants (QSRs), convenience stores, and restaurants. In contrast to our channel partners who offer both medical and commercial products, this VAR expands our reach in high-volume, commercial food and beverage markets.

Target Markets

We currently serve the following primary and emerging markets through our portfolio of medical-grade and commercial water filtration products:

	●	Hospitals and Other Healthcare Facilities: Our ultrafilters and microfilters support infection control across a wide range of water outlets and equipment, including sinks, showers, ice machines and sterile processing. These filters are FDA 510(k)-cleared Class II medical devices, offering validated performance that helps facilities address waterborne pathogen control under CMS Conditions of Participation and The Joint Commission's water management expectations.
	●	Dialysis Settings: Our ultrafilters are used for advanced purification and polishing of water or bicarbonate concentrate in dialysis environments. They are typically installed post-reverse osmosis in water treatment rooms or upstream of dialysis machines. These filters assist in achieving hemodialysis-quality water that exceeds the ISO 23500-5 standard for ultrapure dialysate production and are FDA 510(k)-cleared as Class II medical devices.
	●	Foodservice and Hospitality: Our commercial filters are ideal for foodservice and hospitality operations where they improve water quality, equipment performance, and operational efficiency. These filters are commonly installed at beverage dispensers, coffee machines, and ice makers, supporting restaurants, convenience stores, hotels, and similar venues in enhancing taste and customer experience.

Additional Use Cases

Beyond healthcare and foodservice settings, Nephros filters are also deployed in laboratories, manufacturing facilities, aviation environments, and government buildings, where water purity is critical to safety, compliance, or system performance. With the recent addition of Total PFAS reduction capability, we also anticipate growing relevance in schools and other federally regulated facilities, where adherence to standards such as the Safe Drinking Water Act is a key consideration. We continue to evaluate opportunities to expand into new verticals where our filtration technologies provide measurable value.

Hospitals and Other Healthcare Facilities. Nephros infection control filters are a leading tool for proactive protection to patients in high-risk areas (e.g., ice machines, surgical rooms, NICUs) and reactive protection to patients in broader areas during periods of water pathogen outbreaks. Our products are used in hundreds of medical facilities to aid in infection control, both proactively and reactively.

According to the American Hospital Association's most recent annual survey data (2023), there are approximately 6,093 hospitals in the U.S., representing more than 913,000 beds and approximately 34.4 million inpatient admissions annually. These facilities rely on extensive internal water systems to support patient care, including handwashing, bathing, medical device reprocessing, dialysis, and other clinical and operational uses.

According to a June 2025 report from the U.S. Centers for Disease Control and Prevention ("CDC"), on any given day, approximately one in 31 hospitalized patients has at least one healthcare-associated infection ("HAI"), underscoring the scale of infection risk within hospital environments. The CDC further identifies waterborne pathogens such as Legionella, Pseudomonas, and nontuberculous mycobacteria as significant contributors to HAIs, noting that these organisms can proliferate in aging, complex premise plumbing systems commonly found in healthcare facilities and be transmitted through sinks, showers, ice machines, and other water outlets.

CDC surveillance of waterborne disease outbreaks indicates that premise plumbing is a leading source of water-related illness, hospitalizations, and deaths in the United States, with healthcare facilities representing a higher-risk environment due to susceptible patient populations and frequent water exposure. These factors underscore the importance of effective water management and point-of-use filtration strategies to mitigate microbiological risk in critical-use healthcare settings.

Since 2017, Centers for Medicare and Medicaid Services ("CMS") has required Medicare- and Medicaid-certified healthcare facilities to implement policies and procedures to reduce the risk of growth and spread of Legionella and other opportunistic waterborne pathogens in building water systems. Compliance with these expectations is evaluated through routine survey and certification activities, during which CMS surveyors and accrediting organizations review whether facilities have established and implemented formal water management programs ("WMPs"), including documented governance, monitoring protocols, corrective actions, and records demonstrating ongoing execution. CMS guidance directs facilities to align their WMPs with prevailing industry standards, including ASHRAE Standard 188 and the Centers for Disease Control and Prevention ("CDC") water management toolkit. While the underlying CMS expectations have remained in effect since 2017, enforcement and documentation requirements have become increasingly embedded in standard survey practice over time, particularly as healthcare facilities have faced heightened scrutiny of waterborne infection risks. We believe that continued enforcement of these requirements and the growing emphasis on effective water management programs may have a positive impact on demand for our HAI-inhibiting micro- and ultrafilters.

Nephros filters are validated for physical retention of bacteria, viruses, and endotoxins through size exclusion. All models are FDA 510(k)-cleared and installed at the point of use, where they can support compliance goals, align with evolving standards, and provide additional protection for patients, staff, and visitors.

Dialysis Settings. Nephros dialysis water filters are widely deployed in both acute and chronic dialysis environments to enhance water safety and support the production of ultrapure dialysate. Our solutions provide retention of bacteria, viruses, and endotoxins in water and bicarbonate lines used to treat patients with kidney failure.

Hemodialysis requires the use of large volumes of purified water, often more than 100 liters per treatment. Clinics rely on reverse osmosis systems to generate this water and use ultrafilters downstream as a final barrier against microbial contaminants. Our filters are used in both fixed RO loops and portable systems and are validated for up to 12 months of service life in dialysis applications.

To perform hemodialysis, dialysis clinics rely on dedicated water purification systems to produce ultrapure water and bicarbonate concentrate, the two essential ingredients for preparing dialysate, the fluid used to remove waste material from the blood during treatment. As of early 2025, there are approximately 7,556 dialysis clinics in the United States serving more than 500,000 patients. While precise counts of hemodialysis machines in use are not publicly reported on a routine national basis, industry sources indicate that the installed base in the United States likely exceeds 200,000 hemodialysis units, consistent with estimates used in market analyses. These dialysis facilities and machines represent a significant sustained demand environment for water purification and treatment technologies that support patient safety and the reliable operation of clinical dialysis care.

Nephros dialysis filters are validated for physical retention of bacteria, viruses, and endotoxins through size exclusion. All models are FDA 510(k)-cleared and installed within dialysis water systems, where they support the production of ultrapure water and bicarbonate concentrate used in hemodialysis treatment.

Foodservice and Hospitality. Our commercial product portfolio includes both carbon-based and carbon-free filtration solutions that address a variety of water-quality concerns common in foodservice and hospitality industries. These include but are not limited to taste and odor compounds, scale-forming minerals, and various particulates, with several membrane-based models capable of retaining particles down to 0.005 micron. In addition, our newest offering supports the validated reduction of Total PFAS, expanding our reach to customers concerned with long-term exposure to "forever chemicals" in water-fed equipment.

Over time, we believe that the same water safety management programs currently underway at medical facilities may migrate to commercial markets. As the epidemiology of waterborne pathogens expands, links to contamination sources will become more efficient and the data more readily available. In cases where those sources are linked to restaurants, hotels, office buildings and residential complexes, the owners of those facilities may face increasing liability exposure. We expect that building owners will come to understand ASHRAE-188, which outlines risk factors for buildings and their occupants, and provides water safety management guidelines. We believe, in time, most commercial buildings will need to follow the basic requirements of ASHRAE-188: create a water management plan, perform routine testing, and establish a plan to treat the building in the event of a positive test.

As demand for water testing and microbiological filtration grows, we intend to be ready to deploy our expertise and solutions based on our years of experience servicing the medical market. We believe that we have an opportunity to offer unique expertise and products to the commercial market.

Critical Accounting Policies, Significant Judgements and Use of Estimates

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.

Our critical accounting policies are described in our Annual Report on Form 10-K for the year ended December 31, 2025 filed with the SEC on March 12, 2026. During the six months ended June 30, 2026, we adopted an accounting policy for expected tariff refunds.

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.

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.

Recent Accounting Pronouncements

We are subject to recently issued accounting standards, accounting guidance and disclosure requirements. For a description of these new accounting standards, see Note 2, "Basis of Presentation and Liquidity," of the Notes to our Unaudited Interim Financial Statements contained in Item 1 of Part I of this Quarterly Report on Form 10-Q, which is incorporated herein by reference.

Results of Operations

Fluctuations in Operating Results

Our results of operations have fluctuated significantly from period to period in the past, including recently, and are likely to continue to do so in the future. We anticipate that our annual results of operations will be impacted in the foreseeable future by several factors, including market acceptance of our products, expense management, and our progress toward achieving positive operating cash flow.

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

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

										$				%
										Increase				Increase
		2026				2025				(Decrease)				(Decrease)
Total net revenues		$	6,017			$	4,419			$	1,598				36	%
Cost of goods sold			1,991				1,624				367				23	%
Gross margin			4,026				2,795				1,231				44	%
Gross margin %			67	%			63	%			-				4	%
Selling, general and administrative expense			2,418				2,201				217				10	%
Research and development expense			366				311				55				18	%
Depreciation and amortization expense			29				35				(6	)			(17	)%
Operating income			1,213				248				965				389	%
Interest expense			(1	)			(1	)			-				0	%
Interest income			30				31				(1	)			(3	)%
Other income (expense), net			(32	)			(32	)			-				0	%
Income before income taxes			1,210				246				964				392	%
Income tax expense			(13	)			(9	)			4				44	%
Net income		$	1,197			$	237			$	960				405	%

Net Revenues

Net revenue increased by $1.6 million, or 36%, in the second quarter of 2026 compared to the same period in 2025. This increase was primarily driven by increased product revenue due to programmatic growth. We also experienced strong growth in our emergency response and service revenue.

Gross Profit Margin

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.

Selling, General and Administrative Expense

Selling, general and administrative expense increased $217,000, or 10%, primarily due to an increase in headcount and an increase in sales commissions.

Research and Development Expense

Research and development expense increased by approximately $55,000, or 18%, primarily due to higher salary expense.

Depreciation and Amortization Expense

Depreciation and amortization expenses were approximately $29,000 and $35,000, respectively, for the three 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 $30,000 for the three months ended June 30, 2026 compared to approximately $31,000 for the three months ended June 30, 2025.

Other Income (Expense), net

Other expense was approximately $32,000 for the three months ended June 30, 2026 and June 30, 2025, respectively, primarily as a result of gains and losses on foreign currency transactions.

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):

										$				%
										Increase				Increase
		2026				2025				(Decrease)				(Decrease)
Total net revenues		$	11,229			$	9,296			$	1,933				21	%
Cost of goods sold			4,210				3,347				863				26	%
Gross margin			7,019				5,949				1,070				18	%
Gross margin %			63	%			64	%			-				(1	)%
Selling, general and administrative expense			4,939				4,455				484				11	%
Research and development expense			712				606				106				17	%
Depreciation and amortization expense			58				74				(16	)			(22	)%
Operating income			1,310				814				496				61	%
Interest expense			(1	)			(1	)			-				-	%
Interest income			62				44				18				41	%
Other income (expense), net			(21	)			(53	)			32				60	%
Income before income taxes		$	1,350			$	804			$	546				68	%
Income tax expense			(13	)			(9	)			4				44	%
Net income (loss)		$	1,337			$	795			$	542				68	%

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.

Liquidity and Capital Resources

The following table summarizes our liquidity and capital resources as of June 30, 2026 and December 31, 2025 and is intended to supplement the more detailed discussion that follows. The amounts stated are expressed in thousands.

Liquidity and Capital Resources		June 30, 2026				December 31, 2025
Cash and cash equivalents		$	4,697			$	5,400
Other current assets		$	8,899			$	5,823
Working capital		$	10,252			$	8,456
Stockholders' equity		$	11,968			$	10,202

As of June 30, 2026, we had an accumulated deficit of approximately $142 million. Although we were profitable in the three and six months ended June 30, 2026 and the full year ended December 31, 2025, we may incur future operating losses if we are unable to maintain or increase our revenue.

Based on cash that is available for our operations and projections of our future operations, we believe that our cash balances will be sufficient to fund our current operating plan through at least the next 12 months from the date of issuance of the financial statements in this Quarterly Report on Form 10-Q. Additionally, our operating plans are designed to help control operating costs and to increase revenue so we can continue to generate sufficient cash flows to fund operations. If there were a decrease in the demand for our products due to either economic or competitive conditions, or if we are otherwise unable to achieve our plan or achieve our anticipated operating results, there could be a significant reduction in liquidity due to our possible inability to cut costs sufficiently. In such event, the Company may need to take further actions to reduce its discretionary expenditures, including further reducing headcount, reducing spending on R&D projects, and reducing other variable costs.

Our future liquidity sources and requirements will depend on many other factors, including:

	●	the market acceptance of our products, and our ability to effectively and efficiently produce, market and sell our products;
	●	the costs involved in filing and enforcing patent claims and the status of competitive products; and
	●	the cost of litigation, including potential patent litigation and any other actual or threatened litigation.

We expect to put our current capital resources toward the development, marketing, and sales of our water filtration products and working capital purposes.

Net cash used in operating activities was approximately $1.0 million for the six months ended June 30, 2026, compared to net cash provided by operating activities of approximately $1.3 million for the six months ended June 30, 2025. Although we had negative cash flow in the first half of 2026, net income was $1.3 million for that period. In addition, accounts payable increased by $1.1 million. The favorable impacts were more than offset by an increase in accounts receivable of $1.7 million, an increase in inventory of $1.3 million, and a decrease in accrued expenses of approximately $0.5 million. The increase in inventory primarily reflects the timing of purchases to support revenue growth and our efforts to improve in-stock levels of fast-selling items. We also accelerated certain purchases ahead of our primary supplier's annual summer shutdown in August. Net cash provided by operating activities in 2025 was primarily due to net income of approximately $0.8 million, a decrease in inventory of approximately $0.3 million, offset by an increase in accounts receivable of approximately $0.3 million.

We had no investing activities for both the six months ended June 30, 2026 and June 30, 2025.

Net cash provided by financing activities was approximately $287,000 for the six months ended June 30, 2026, primarily due to cash exercises of stock options, compared to net cash used of approximately $2,000 for the same period in 2025, primarily due to payments on our equipment financing debt.

Off-Balance Sheet Arrangements

We did not have any off-balance sheet arrangements as of June 30, 2026.

Forward-Looking Statements

The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. Certain statements in this Quarterly Report on Form 10-Q constitute "forward-looking statements." Such statements include statements regarding the efficacy and intended use of our technologies under development, the timelines and strategy for bringing such products to market, the timeline for regulatory review and approval of our products, the availability of funding sources for continued development of such products, and other statements that are not historical facts, including statements which may be preceded by the words "intends," "may," "will," "plans," "expects," "anticipates," "projects," "predicts," "estimates," "aims," "believes," "hopes," "potential" or similar words. Forward-looking statements are not guaranties of future performance, are based on certain assumptions and are subject to various known and unknown risks and uncertainties, many of which are beyond our control. Actual results may differ materially from the expectations contained in the forward-looking statements. Factors that may cause such differences include, but are not limited to, the risks that:

	●	we face significant challenges in obtaining market acceptance of our products, which, if not obtained, could adversely affect our potential sales and revenues;
	●	product-related deaths or serious injuries or product malfunctions could trigger recalls, class action lawsuits and other events that could cause us to incur expenses and may also limit our ability to generate revenues from such products;

	●	we face potential liability associated with the production, marketing and sale of our products, and the expense of defending against claims of product liability could materially deplete our assets and generate negative publicity, which could impair our reputation;
	●	to the extent our products or marketing materials are found to violate any provisions of the U.S. Food, Drug and Cosmetic Act (the "FDC Act") or any other statutes or regulations, we could be subject to enforcement actions by the U.S. Food and Drug Administration (the "FDA") or other governmental agencies;
	●	we may not be able to obtain funding when needed or on terms favorable to us in order to continue operation;
	●	we may not have sufficient capital to successfully implement our business plan;
	●	we may not be able to effectively market our products;
	●	we may not be able to sell our water filtration products at competitive prices or profitably;
	●	we may encounter problems with our suppliers, manufacturers, and distributors;
	●	we may experience increased costs and/or disruptions in our supply chain due to the imposition of U.S. tariffs;
	●	we may encounter unanticipated internal control deficiencies or weaknesses or ineffective disclosure controls and procedures;
	●	we may not be able to obtain appropriate or necessary regulatory approvals to achieve our business plan;
	●	we may not be able to secure or enforce adequate legal protection, including patent protection, for our products; and
	●	we may not be able to achieve sales growth in key geographic markets.

More detailed information about us and the risk factors that may affect the realization of forward-looking statements, including the forward-looking statements in this Quarterly Report on Form 10-Q, is set forth in our filings with the U.S. Securities and Exchange Commission (the "SEC"), including our Annual Report on Form 10-K for the fiscal year ended December 31, 2025 and our other reports filed with the SEC. We urge investors and security holders to read those documents free of charge at the SEC's web site at www.sec.gov. We do not undertake to publicly update or revise our forward-looking statements as a result of new information, future events or otherwise, except as required by law.