Nephros, Inc. (NEPH) Earnings Call Transcript & Summary

Sure. Sure. I won't go into specific customer applications, but we definitely have applications within both the dental industry also extends into the just lab water as well, where water quality is extremely important. So we are helping some customers to create solutions around purifying water and making sure that they're addressing microorganisms. I think can be dangerous for the application, especially if you're getting some kind of oral surgery or in that space at the same time for, as I mentioned, in labwater, you have to have very high purity water to start with. If you're doing experiments, if you're -- so you want to make sure that what are you using for your experiments is actually interfering with your experiment. So that's another area that we're starting to see a lot of demand and interest as a concurrent industry to what we're already doing. So we have customers coming with the request for solutions from both of those spaces.

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

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

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

Thanks, Robert, and thanks, everyone, for joining us today. I'd like to just give a short recap of our first quarter earnings. And of course, I'm happy to answer any questions during our Q&A session when this is over. We reported our first quarter revenue of $5.2 million, which was a 7% increase over last year. This was really driven by strong growth in our programmatic revenue of over 20%, which did offset a year-over-year decline in our Emergency Response business. As we know, our emergency response business is lumpy and opportunistic of the growth in the programmatic business. We also showed significant growth in our service business, albeit from a small base. If you look at the fourth quarter relative to the first quarter, we had a 10% sequential growth in revenue, again, driven by programmatic and service revenue. I'd like to touch upon our gross margins a bit and go into those in a little bit more detail. So our gross margins in the first quarter of this year declined to 57% on from 65% in the first quarter of 2025. There were a number of things that affect gross margins quarter-to-quarter. And I'd like to walk through each of those now and share how they affected our margins in the first quarter. First and foremost, of course, are product costs. [indiscernible] have been relatively stable, there's been some minor inflationary increases in some noncore products, but we've managed through those fairly well. And we did put a small [indiscernible] through at the beginning of March, which did offset some of these inflationary price increases. The second point I'd like to talk about is tariffs. Since the tariffs were initiated originally, we were subject to a 15% tariff through February of this year. Our come from Italy, and Italy has a 15% tariff. In fact, tariffs cost us over $200,000 in the first quarter of 2026. Without that tariff, our gross margins would have been comfortably in the low 60s percentages. Now we have applied for a tariff refund at all tariffs paid through February of this year, and we do expect to receive that refund in the very near future. Our tariff rate was reduced to 10% from 15% at the end of February. This new round of tariffs were designed to last 150 days and at this point are scheduled to expire at the end of July. We certainly are hopeful that, that will be the case and potentially no new tariffs initiated after that. But certainly, we will see how that plays out and a 10% tariff certainly is easier to manage than 15% tariff. Point that can affect our gross margin quarter-to-quarter is the euro-dollar exchange rate. As we import much of our products from Italy, as I mentioned, changes in the euro dollar exchange rate affect our gross margins. Since the end of last year, the euro has strengthened against the dollar, which affected our gross margins negatively. Although since the end of March, the euro has actually weakened just slightly against the dollar. The next point that does affect our gross margins is our customer mix. We offer volume discounts to our larger customers that are tiered based on the business levels that they do each year. If we happen to have a quarter where much of our business came from those larger customers, it certainly would affect our realized margin that quarter. And that just moves around quarter-to-quarter. Finally, I'd like to discuss the mix of business, which also can affect our gross margins. Our infection control business has the highest gross margins. After that, our commercial and service businesses albeit incremental revenue that is very important to us, they have lower gross margins. Now in the first quarter of this year, we had faster growth year-over-year in those 2 businesses. So commercial and service grew even faster than our infection control business despite the strong growth in programmatic. And that mix would negatively affect the reported gross margin. So hopefully, those issues explain some things that we manage through every quarter and some movement, but we feel extremely healthy with our overall product margins, product costs and manufacturing ability to provide a great product at a continued high gross margin that we always have done. Our research and development expense in the first quarter increased 17% year-over-year. That was really due to increased head count in that department and our SG&A expense increased 12% year-over-year due to increased compensation expense as well as higher professional fees like accounting, audit, legal, et cetera. And so due to the items that I've just discussed throughout my portion here, this really affected our net income, which declined in the first quarter to $140,000 from $558,000 per year. Now at the end of March, our cash stood at $4.1 million, and that's down from $5.4 million at the end of last year. The decline in cash reflects both an increase in our accounts receivable due to growing sales and the timing of collections. We feel very good about the credit risk of our customers. We've worked hard in collections, and that's just a timing issue. We also had an increase in inventory of $400,000 as we support the growth in revenue that you're seeing and also working hard to improve in-stock positions in key items. We look forward to sharing our second quarter results with everybody in August. And again, any follow-up questions, I'm always available. Robert I think that's a good recap.

Thank you so much for sharing. There is so much that goes on behind the scenes, and your team works really hard to make sure all that does happen. So thank you for that great work there and reporting. So this brings me to the final segment that we have, the Q&A. Arguably my most aren't I like the most. I love answering live questions. I love hearing from you, the investor. I want to remind you that there's a couple of ways to ask questions. You can raise your hand. So if you go to the Teams window and there's a button where you can hit raise, and that allow you to speak live. I've got the Board helping me monitor that, and we can kind of bring people on to speak and interact real time, which is my favorite way. You can also type your question in the chat. I've tied a couple of questions or some comments. The board had to comment please don't be shy ask the question. This is your time. We've got plenty of time. But I've also, another way has received questions ahead of this meeting. So I've got a bunch of questions that I'm just going to answer, but I'm going to get priority to the live questions. So if you do have a hand raised or something you typed in a chat, that's going to get priority over the list of questions that I'm going to go through here in this portion. So with that being said, we'll go ahead and turn it over to question and answer. The first one I have from previous was a comment, and I think this may have already been answered, but I'll turn it over to you, Judy. Gross margins declined significantly. Should investors expect 57% going forward. So that's a great question, and I think you touched on it a little bit. I'll give you a chance to kind of reanswer that here and address that.

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

Thanks. Great answer. I do have a question that came to the chat. What do you see as the key to a successful innovation strategy at Nephros? How do you balance innovation between the medical business and more commercial business? Great question. Thank you, [ Nicolas], for asking. So what's interesting about innovation, when I think about it, and Mike and [ Brian ] touched on this quite a bit in the roundtable, key to that successful innovation strategy is execution. We really have to take what we get, listen to our customers and create value. Us being who we are, we're a smaller, nimbler with res and knowledge in certain areas, we often can provide and solve solutions for our customers and partners that they didn't even know were options. So they'll come to us with, hey, we want to buy a filter that can do this. And then we right away start asking questions, what problem are you trying to solve? What is the ultimate goal for what you're asking us for? Because it may or may not be our filter, it may or may not be the flow rate or the size that you're looking for. And that really is the key for how we are able to delight our customers and the value that we bring in providing those innovative solutions. And to the second part, balancing between medical and more commercial, that's always a challenge. Fortunately, they're not always the same resources. We do have people that are good at commercial and they're able to grow and focus. We've got partners that that's what they do all the time, only what they do, whereas we have another core team that is really good at infection control which mean by a medical business listed here. And so it's not always a trade-off of one or the other. So that's a good thing. I've got a lot of, I guess, bandwidth or a desire to have the right products on the shelf. So we don't struggle with trading up inventory. Meeting the customer when they meet us, where they need us, as Mike [indiscernible] talked about in testimonial initially, is really how we delay customers as well. So great question. It's not necessarily a balancing act, fortunately. It's how we can delight them wherever they need to be and where we're going to grow the business most. But it all comes down to execution. Great question. Next question, I see infection control. Any cells given the recent Ebola outbreak. Please provide an update on your initiatives in Mexico? Okay, 2 questions. Thanks, William, for the questions. I'll take them one at a time. When it comes to infection control and especially Ebola and things like that, there are an infection on a macro level, COVID, things like that, those are not always water-borne pathogens, really, what we focus on is water. Now that becomes dangerous or harmful when that water aerosolizes. When someone needs this call, it's flash [indiscernible] sink or shower and things get in the air, then they breathe in and they get into your lungs where they can mix with your lung tissue, and that's how they enter your bloodstream and thus prevent an infection. In hospitals when you're washing your hands out of the [indiscernible] come from that hand washing exercise. Again, things become aerosolized and they become inhaled or ingested. So when it comes to things like Ebola, method of transmission, whether it's human to animal or animal to animal or animal to human, the mechanism is a little different than premise water source being the cause of the infection. We're really addressing that water supply, that thing that becomes ingested. And those outbreaks and things that you're talking about won't necessarily generate business for us because that's not the source of the infection. So hope that answers it and happy to go into it more and maybe even pull some of my engineers and if I didn't answer that accurately or adequately enough? Second part of your question, love these questions guys. Come and keep teeing them up. Please provide an update to your strategy on Mexico. Mexico was a pretty important -- is a pretty important initiative for us. And the way that -- just an update on where that's going is Mexico is growing. It's just under $10 million as far as where I think the market is going to be. And it's important because it provides us a bulkhead for the Caribbean and other places in the region. With these types of sales, we have to do a number of things. We have to educate the market so they understand that there's even a need for water filtration. We have to have the proper support and I just realized I'm using Puerto Rico and Mexico, but the strategies aren't too different. The -- so actually back up a second before I continue answering. The initiative we announced was for Puerto Rico, and I'm not sure if you meant Puerto Rico or Mexico, but we haven't announced any strategic initiatives for Mexico. But I'll continue answering as if it were Puerto Rico because I think that's probably like you meant. So in addition, we have to have materials like support materials in Spanish that can accommodate the local languages. We have to have support that in service and install and also train the people that are installing and local inventory. So all those things we have in place, it does take time to build it. This is a rather new initiative that we announced in Puerto Rico within the last few months, but stay tuned, I'll continue to update us on future investor calls on how that's going or if we do decide to launch something for Mexico specifically. Is that right? Keep those live questions coming, as I mentioned before, I'll go to one of the ones that we've received previously. And it is how much of your growth came from core business versus onetime events? Is this growth sustainable? Okay. Good question. We do get questions often about the sustainability of this growth? And is it a one-off? I'm not going to speak to what's going to happen in the future. I will always talk about how well we're executing and how well we're operating the business. But recurring growth or programmatic sales revenue, really, that's this core that we talk about so often. And I shifted maybe 2 years ago to focus and kind of highlight the core as opposed to the emergency business, which is more of a onetime event, which often leads to programmatic business. But that is not the reorder that we're looking for or that we can predict always when we're looking at core growth. So much of our business I would say -- or we didn't give percentages to be [indiscernible] to you on how much, but I would say an increasingly large number amount of our business that is growing is coming from this core repeatable business. Just by the nature of there's not more emergencies just because Nephros is a bigger company. There's kind of a steady amount of emergencies. It's just becoming a smaller portion as we grow our top line revenue more and more.

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

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

Both in commercial that's been picking up.

Commercial growth. So yes, as a result, that onetime sale becomes less and less impactful, which is ultimately a good thing as we have a business that's more sustainable and predictable over time. So good stuff. Next question that I've received previously why are you investing in services instead of just selling builders? This is a question I actually have gotten from some of my partners who, in the past, have traditionally bought up Nephros as a distributor, meaning that we just provide you a filter, you take the filter and then go install at a customer site. As you heard in the segments that were previously discussed, even from our partner who gave the testimonial, it is so important that we can just not just sell a product, but build a relationship with the customer. And the way I have really tried to focusing the growth is, first, educate the customer, then service, install the customer and then replace the filter when it breaks. And then through the tools like the tracking, all this is providing recurring revenue. And we're investing in services because a lot of the barrier for installing this medical device, which does require some sanitization. It requires every 6 months or 3 months, changing it. It's been -- it's a little bit more than just changing a roll of toilet paper. So a lot of people just don't have the staff or the dedication to treat the filter in the way that it's going to perform as designed and sold. So by taking that illness off the customer, where they may want to put their staff on working on why the AC failed, we can do that for them. And as we start to build these contracts, maybe it's multiyear, it's a type of business that is more predictable, sustainable, and we can grow it. So we're really excited about those services and investing in service, not just for the service revenue, but what it enables when selling the filter itself. Okay. We got another live question here. I'd like to go just go ahead. Impressive pressor presentation shows the passion of Nephros team. Question, please talk about the efforts to grow in verticals beyond health care and what traction has been achieved so far. Can you share examples of recent wins outside of health care? Will these verticals also help in improving overall growth rates? Great question, [ Ankur ]. When I talk about the efforts to grow verticals beyond health care, okay, so you saw the start of our business, it was articulated quite nicely with Mike [ Kennedy ] as far as how we started in dialysis. That in itself going outside to health care was a or into a different vertical. And then now beyond health care into what I'd like to sometimes refer to as patient care a couple of years ago has now gone even broader, whether it be places like government buildings, correctional facilities, universities, schools, airports, we're going into a lot more places that we hadn't had before. Even Mike Milman, our VP of Engineering Technology, talked about chicken coops and water filtration for pizza makers to have a consistent product. Unfortunately, I can't give a lot of names, but those are just examples of places where we're providing value, whether it be dental just a lot of customers are coming to us and are realizing the value of having water that is safe and clean and that having a filter like what we sell, how it can help them achieve their goals. It does involve often asking what problem they're trying to solve and then how do we get to a product that fits that problem. If we've got the broad product. If not, we can [indiscernible] dissolve and solve the problem other ways. But PFOS, microfiltration, nanofiltration, all those are beyond health care specifically, and they're showing ways that we get traction and wins outside of that space. And we're continually having to evolve and adapt our business to be able to accommodate those types of customers. So very exciting stuff and all going to contribute to growth rate. It doesn't happen instantly. You have to build the market, educate the market and make sure that we're aligned with delivering a service in value because we're not going to do anything halfway. We're really going to do it in a way that keeps and provides the net first quality, which this is the reputation that's too important for us to damage. So a great question. Continue to look forward for me to sharing more as we do more work with different verticals, all exciting stuff to come. Okay. Next, how do you see hiring a external talent in your efforts to build Nephros's capabilities? What does competition for [indiscernible] look like? Great question, [ Nicolas]. When I think about talent and Judy, you can comment on this as well, this company is nothing without the people. It's our most expensive part of what we spend money on. And it is Nephros, it's the passion. It's the intelligence what expertise that this staff is bringing to this company and this product. That's really what's coming through. I'm just here to remove a lot of the barriers that help keep our products from getting out and growing more. But when I see what this team does, we've got low attrition rates. We -- all gauges, I guess, to come in that people are pretty happy. So it's very important to me that this is a place that -- and I've said this before that I would feel proud that my daughter could come in to work. And I think that when I think about hiring talent internally, my first goal is to have the talent in-house and to develop and grow because we really want the people owning what happens. But we do have a number of very good third-party partners that help us and we have no problems with finding the right person, hiring the right talent and the competition for people that are in the space. I mean, it's really weird, but there's not a whole lot of people that are experts in water. So it becomes a pretty small community, and we all get to know each other pretty well. We see each other at trade shows year after year, competition. We even have sales with some of our competitors. So it's all in the name of kind of solving some of the problems that our customers see, but I think that the talent and capabilities is so important that we make sure that we nurture that. So great question, Nicolas, and I don't know if you have anything to add on that, but ...

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

Great. Next question I see from Jaime Santiago. Greetings and [ Salud]. I live in Puerto Rico, private industry experience and for the last decade or so [indiscernible] professor at the graduate level. Congratulations very important work there. The vast majority of technical documentation is dealt with in English, not Spanish. This includes marketing material, not granted. You may need some documentation in Spanish for an individual customer, but it shouldn't be a big deal. Good comment. I will say that the first couple of times I've been in the Puerto Rico under the Metro umbrella. And I'm working with people at the executive level, the problem even management level, the problem, but the ones who actually have to work with deal, install, stock, purchase our filters they want the information in Spanish. They kind of look at pictures and try to work through it. But yes, they can translate there's even some local apps where you can take a picture and translate it. But it's also important for them to understand every line of our instruction manual for installation. If they forget to sanitize that last line from the filter to the outlet of the spot, you've really negated the whole purpose of having a sterile system and process. So the importance of having our filter it being the medical device FDA Class II cleared with all the different caveats that come with that is critical. The training part is so important, following the instructions. So we have felt that it is important to have the language locally. That's why we hired somebody who is native to Puerto Rico as well to help service. So it's something I'm thinking seriously. Prior to Nephros, I've worked and lived in different countries. I was in quite a bit of time in Europe. I was in charge of all the subs here in Africa in 42 countries. I was in India for a year or so with my family. Having the local language has always meant so much more adoption adherence to the way the things are cleaned and kept and maintained. And I'm taking this my lessons learned from the past and that we also assuming that we need that type of support in local language as well in Puerto Rico. So if it proves it it's not important or that we can branch out into other places, no harm. We still have it locally. We still have the only versions as well. So -- but thanks for reaching out. I appreciate your background. Give me a call. I'd love to kind of meet you down there some day and find out what he needs you might have and help me grow the Puerto Rico story. See [indiscernible], good question here. In recent weeks, there's been an leaders, disease outbreak apartments in New York City. Is there a potential market for Nephros? I'm glad you brought that up, Joe. And again, let me tell you, I'm thrilled that so many of the investment community has been reaching out to me directly via e-mail and also my team. sending me articles, letting them know that, hey, there's this problem here. These 3 blocks were shut down. The lead ones outbreak in New York City is one [indiscernible] national attention, and it's also thrills me even more that people think about Nephros when you hear led generics disease. That's the right answer. Yes, think about Nephros whenever you have waterborne type pathogens. The problem in New York City is a specific unique and regulated primarily around cooling towers. So these are large flow rates. I don't know if you're familiar with the type of cooling tower there, where you've got water spread over lubes, which comes down and creates an error rated situation were. So what you see coming from cooling towers, not smoke. It's actually water vapor water droplets. And then that water drop lit on the roof of many of these apartment buildings is also right next to the air intake for much of the HVAC systems. So you've got the water droplets. You've got the water circulating right around and now it's being pumped into the buildings. Lesion [indiscernible] disease or the lesion the mold, the bacteria that causes it is very prevalent. It's in most cooling towers, actually. Unless you've got a pristine coin tower with no sentiment, those things act like giant air scrubbers. So I get less excited about the fact that there's a [indiscernible] disease and more excited that they don't have the [indiscernible] properly angle that it's set right next to an air intake that doesn't have the proper filtration on it. And I don't think that there is a water Nephros and the fact that the cooling tower is going to spell out contaminated water vapor. But I do know that when you are drinking water, when you are taking a shower or when you're using potable water that [indiscernible] rates it, and it's a situation where you can breathe it in, that we can help. So it's dealing more with the premise plumbing, which [ Brian ] talked about earlier, that is where we had that initial play. We can come in and evaluate and check it out, what other sources of [indiscernible] might there be in the building? What are you not doing or doing from a hygiene perspective. We have a bunch of partners who focus on this as well. and we call those partners in to help us address those needs, too. But yes, so if you guys do hear about things like that, please keep those leads coming in. We do follow up on every single one of them. We might not always get back and close the loop but they're always of interest. And my regional managers who live and breathe in those areas where these things are happening are on top of it. They see the new stories and they really want to make sure that they solve and are being a good steward of their community as well. So thanks for pointing that out and keep those leads coming in. Okay. All right. So I'll go to one of my other pre questions. This one was interesting, what makes Nephros different from much larger filtration companies? And I think what this was about was we've got some competitors who have been doing this from a while and then you lost some other things as well. But what I found is they often have a lot of problems like maybe they round of inventory or here's what we're selling, and that's it. Really what's different about Nephros is our technology, which we did highlight a bit today, our medical device quality. I mean, this hollow-fiber unit here this is an FDA Class I medical device. It's tested by a third party, that this is very different than other filters you're going to see out in the world. the education. We're going to come in and help and train your staff, teach you how to work with the filter, clean it service. We can come in and sell it for you, change it out. And once it's expired, we can provide technical support if you got a problem in that you can't solve, all those different things build this relationship that makes Nephros very different than some of these larger companies that won't take that time and go through all these different problems that you might have. I'm very proud of that and proud of what this team offers in those regards, and we look forward to continuing to do neckline board. What does success look like 5 years from now? That's a good one. I believe Nephros has become or can become one of the most trusted water partners out there and not just health care but [indiscernible] facilities, which we talk about in most market segments where water matters. Not just the scale, but I think industrial application, which I often get asked questions about, that's not on our short-term radar or long-term radar. But did addressable market segments where we do have patient care and all these other different places that I talked about, they're huge. We have a lot of room to grow, and we're trying to make sure we solve those needs and those needs as best we can, and the team is really well positioned to do that.

Just to add to sort of translate to sort of financial results, that we'd like to look like in 5 years from now, certainly continue to grow our active customer sites and continue to work on sort of revenue per customer site. So we hope to have significantly larger number of both Obviously, that would translate to a lot of gross margin dollars that could come and we'd like to truly grow our cash flow and profitability. If we continue on this front alone, we could be sort of self-sustainable cash flow from a cash flow perspective. And potentially, success would be finding strategic opportunities that we could add to the mix and there could be acquisitions that help broaden our product line to our existing customer base, we're potentially broad in the markets that we are serving. So I think success also brings stern strategic opportunities based on our positioning and knowledge of butter that make us address a much larger market 5 years from now.

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

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

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

Yes. Great question. And -- just question properly. When Mike especially was talking about some of his OEM and other development for product, does that have room to grow? Can it branch out into other areas, other companies? Is it something that can scale into something larger? I'll say that just from a historical perspective, that's what we've done. We've had a number of these relationships, these OEM relationships that become something greater. And if I think about it loosely, metros kind of formed that way. We were solving a problem. The problem didn't -- the solution didn't exist in that form the basis for how the core technology was created, which something branch out to many others. I know specifically, there is an OEM we're working with right now that doesn't mind us once the solution is developed sharing with others because when it helps them spread development costs out over a larger amount of products. So to answer your question, yes and yes, we'd love to do that. And whenever those opportunities will arise and we're allowed to, we will take advantage of that every single time. I personally love the OEM development route. We can't usually talk about it much because it is very specific to customers and what they need and the problems they're solving for them. That's why we kind of spent so much time on it today just because as an investor, I think it's important that you realize that that's a way that we're generating a tremendous amount of value for customers, and that does scale up, just not something that I can share specifics. And it's a super exciting area. I see another question here from Nick. With rising consumer concerns around PFOS and nanoplastics, do you see a significant DTC opportunity for Nephros filters? Example, Amazon, leveraging our superior removal capabilities. several similar products already show strong review traffic suggesting an enormous TAM. What are your thoughts on testing this channel? Good question, Nick. When I think about microplastics, nano plastics, PFOS, it's different than our typical clientele. Patient care and hospitals, they're dealing usually with more acute situations, someone gets sick and they can die within a week or microplastics, nano plastics, their industry disruptors, for example, that take a long time to impact. And in fact, children are growing up and your ability to reproduce and things like that, that you don't always see in a short time period. So it's a different tends to be more residential or high-end commercial areas. And that is interesting. And the channel to market or direct-to-consumer, as you say here, is something that -- it's not a muscle that Nephros has developed today. We're constantly evaluating, is this something that we want to develop? Is there a [indiscernible] we can talk to? Is there a way to make that channel viable for us as far as distribution and getting our product out in the world. Those are all interesting. I won't comment further about it, but we are constantly exploring ways that we can take these products and solutions and open up our [indiscernible] and as even larger. I will say I'll always make sure that we do have a focus and continue to support our core technology. That is something that is very different and unique for us, and it is very sustainable and hard to replicate. So while doing both at the same time because I think it's a different set of expertise at different clientele, very, very interesting and exciting area for us just for future costs as we develop more into those areas. I love the participation in questions that I get, very good feedback from the group. All of these are also making my head think about different ways that I can take Nephros in the future. Another question that came in from previous was, how are you thinking about capital allocation? I'll turn to Judy about that because this one is interesting for me, not just capital, but just how the companies run in general and how I choose to -- how we choose to run the company and keep it in a very healthy financial state. So maybe touch on that, maybe what our priorities are and how we're thinking about company allocation.

Yes, I'd love to. That's a great question. One of the things we're very proud of is that we have a solid balance sheet. You saw about a little over $4 million in cash at the end of March, no debt. Obviously, leverage plays a point in growing companies when you think about your cost of capital. Right now, debt is not inexpensive, as everyone knows, interest rates are fairly high. And to bring on debt or line of credit, you do need to support it. On their opportunities to fund some type of lending credit against the inventory that we have. But frankly, what we're looking for our rock solid balance sheet to do right now: a, is to give customers total confidence that they can do business with us, and we will be there for years to come; B, opportunistically, of course, we could do stock buybacks if we felt there was a time that our stock was really undervalued. But to me, the greater opportunity is it to use it for strategic growth initiatives. We've discussed publicly looking for acquisitions, merger partners, investing in business development opportunities, something with a significantly higher return on investment. We have been using it to invest in our people which, as you've seen, we've added select talent. But I think we will look forward to using our balance sheet to strengthen our position in the strategic realm as we find opportunities.

Another question. I haven't gotten more questions about this. I was a little surprised, but a question I did get was how is Nephros using AI today? When I think about artificial intelligence and all the hype around it and fast growing, it seems like any company that can attach AI to their name or something seems to be growing an incredible amounts at least getting the investment I do view AIS is as important, but I view it more as a productivity tool rather than a product strategy. Today, we use AI to accelerate content development or support engineering research, also for maybe customer communications even some software type development when we're looking at filter tracker type stuff, but it does increase our internal efficiency. As we continue to develop our digital platforms with the filter tracker app, we do see opportunities to incorporate it more into how we support our customers, maybe even predictive maintenance or data analytics. But today, it's not a product per se, but it's quite exciting, quite interesting. There's new development, it seems like every single day. The second part to that same question was could AI become part of your products? That I say potentially yes, but not necessarily inside the filter itself. It's more around that data generated by water management. I do think there's an opportunity to help customers maybe predict filter life or maybe even identify water quality trends help facilities improve what they're doing and how they're managing things in those areas. But interesting and stay tuned if I find some ways to really make AI a larger portion, I would totally explore that and figure out how to use it to generate more value for our customers. Okay. Right. So we're coming towards the end. I still do have a few more minutes left for questions that might come in live. Remember feel free to raise your hand and ask it live or type it in the chat. Otherwise I'm going to get to on with a few more of these questions. Judy did talk about tariffs earlier. So this question maybe it's answered mostly, but I'll give you another shot. How should investors think about tariffs going forward?

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

Yes. And from a business and a management perspective, I don't manage the business, assuming that today's environment is permanent. We know things change all the time. We adapt whether there's supplier diversification, pricing, operational efficiencies or product mix, I just continue to adjust while protecting the long-term shareholder value as best we run the business as best we can. All right. A couple of other questions here about -- about a recession or Medicare changes is probably when it might be more interesting. Are changes in Washington affecting your business, regulatory -- maybe you can talk a little bit about this, but the regulatory environment. I don't know. It's hard to say.

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

Yes. I totally agree. It's just -- if I focus just on trying to follow that and create policy and how we run the business and change it all the time, it's impossible. The changes happened so fast, really head down and it actually plays well to this last question that was asked here is what keeps you awake at night. It's not government policy. It's not tariffs, but it's execution. It's taking that Nephros ability to just make it better and larger than it's ever been. My focus is really just making sure we execute that we continue to innovate that we hire great people that we serve our customers exceptionally well that we just stayed disciplined in how we grow. So those are the things that we can control. And ultimately, it's what's going to determine our success. So that being said, I think -- that's good for questions for now that I have pre. Last call for anything that people might have online that they want to share with us. So in the meantime, I'd want to direct your attention to our website. This is something that I've been proud of the team's worked really hard on it. where you can find Nephros and our team, and including myself, if you clear our homepage, www.nephros.com, just go to about section quick events. This is where you'll see us. We're speaking engagements, what's happening. I'm going to be at the Minneapolis [ ASH ] Conference. I also WT at the convention center here at the Omni Hotel. But you can go and find one we're close to where you are, reach out, go at 10, you can kick on any of these links. It takes you into a little bit more detail about where how did attend the show and things like that. But lots of great stuff on here on our resources on our page. Team spends are really a lot of time and David to do a really nice job with his website. So please take some time and have a look. Last thing I want to share is the QR code that you can go here and click on it and also join our Investor Relations team. I'll leave that up on the screen for a few moments as I just wrap here. I just finished just over 3 years with Nephros. And I wake up every day more excited than the day I started. I see the opportunities. I see the products I work with great people, great investors. The team here is fantastic. They execute well. They work really hard. They put in way more effort than I could ever ask him to. And that shows us. I think that shows in our product. That shows them where our customers stay with us. And I think that really is why the Nephros product is so different and so special. And it's what keeps me coming back everyday. So I really just want to thank everybody for joining the call, for your fantastic questions. for continuously reaching out to us. I want to thank Judy is my partner here for really taking us through the financial world. It's so complicated being a public company. And I think this is -- we've built something that you and we and all can be proud of. So thank you again for joining, and I just feel free to reach out any way you could want to connect with us, and we'll look forward to doing this again sometime in the future. Thanks everybody.