Good day. Welcome to CloudStructure, Inc. second quarter, 2026, business update conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the form of presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, Rob Kelly, Vice President of Investor Relations at KCSA. Rob, you may begin.

Good afternoon, everyone. Thank you all for participating in today's conference call. On the line with us today are James McCormick, Chief Executive Officer of Cloudestructure, and Greg Smitherman, Chief Financial Officer. Earlier today, the company issued a press release announcing its operating results for the second quarter into June 30, 2026. The release is available on our website at cloudestructure.com. Also earlier today, the company filed a Form 12B-25 with the SEC notifying the commission that it requires additional time to complete the review of its financial results for the quarter cloud structure expects to file its form 10q within the five day calendar day extension period provided under that rule and the report will be available on our website and at www.sec.gov once filed because the review is ongoing the results discussed on today's call are preliminary and potentially subject to change please also note that on july 31 2026 the company affected a one for 30 reverse stock split of all classes of its issued and outstanding common stock. Unless otherwise noted, share and per share figures discussed on today's call reflect that adjustment. Before Mr. McCormick reviews the company's operating results for the second quarter ended June 30, 2026, and provides a business update, I want to remind everyone that today's call may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements include, among other things, statements regarding our expected business performance, strategy, market opportunities, customer demand, deployment activity, recurring revenue, operating results, liquidity, and growth plans. Forward-looking statements are based on the current expectations and assumptions and are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or applied by these statements. Important factors that could cause actual results to differ materially are described in today's earnings release and cloud of structures filings with the SEC, including the risk factors discussed in our most recent annual report on form 10k and subsequent filings forward-looking statements made on this call speak only as of today and cloud structure undertakes no obligation to update them except as required by law and they also discuss non-gap financial measures on today's call reconciliations to the most direct comparable gap measures where applicable are included in today's earnings release and related materials available on our investor relations website i would now like to turn the call over to james and cormick chief executive officer officer of cloud structure okay thank you rob and thank you all for joining us

today we spoke with many of you just four weeks ago on our first quarter call so i'll keep the background brief and focus our time on what changed during the second quarter so turning to the second quarter the most important development was the continued growth of the recurring portion of our business in the impact that is beginning to have on our revenue mix and margins. Our annualized recurring revenue run rate increased to approximately 3.1 million exiting the second quarter compared with approximately 2.6 million exiting the first quarter. Revenue for the quarter was approximately 1.2 million, representing a 13% year-over-year growth rate. Recurring subscription revenue increased 164% year-over-year to approximately $764,000, while hardware revenue declined 49% and installation revenue declined 32%. Recurring revenue now represents approximately 62% of total revenue compared with 27% a year ago. That growing mix of recurring revenue is translating directly into improved economics. Gross profit increased 51% year over year, while gross margin expanded approximately 13 percentage points to nearly 50%. The decline in hardware and installation revenue is a direct result of the kind of business we are winning. and it reflects a deliberate choice about how we compete. In 2025, 57% of the cameras we signed to new contracts were taking over from a previous vendor. Through the first six months of 2026, that figure is 77%. We do not require a customer to rip out equipment that still works in order to adopt our platform. That is central to how we win competitive displacements, and it is why that percentage is climbing. Excuse me. The trade is straightforward. A takeover generates, apologies, I just had a blip in my communication line. A takeover generates materially less hardware and installation revenue up front, and it gets us to the recurring subscription faster and at a higher margin. We are not walking away from installation work, though. Where a customer needs infrastructure built, as in Southern California and Baltimore, we build it and we capture that revenue as well. But we would rather win the recurring seat on a customer's existing camera system than lose the account defending a hardware sale. It's also worth putting that growth in context. Our customer retention rate is approximately 99%. That means substantially every dollar we add is a net new dollar rather than a dollar replacing something we lost. Many companies at our stage have to rebuild a meaningful portion of their revenue base each year before they grow at all. We do not. Combined with expansion inside existing accounts, that is what allows growth that looks modest in any single quarter to compound into a durable, recurring base. Our objective for the second half is straightforward. Convert more of the pipeline we have already built into deployed customers and recurring revenue. More on this shortly. Multifamily remains our largest and most established vertical, and we continue to see meaningful opportunity within the customer relationships we have already built. Earlier this month, we announced our third deployment with a luxury multifamily operator in Houston, bringing cloud infrastructure into approximately 38% of that customer's Texas portfolio. That progress is important. We started with an individual property, demonstrated the platform's value in production, and earned subsequent deployments across the portfolio. That is the land and expand model we have discussed in the past, and we're pleased to continue to see tangible evidence of it within our customer base. And because our retention is high, expansion inside an existing account adds to the base rather than replacing something that left it. We also continue to serve eight of the 10 largest NMHC-ranked multifamily property managers in the United States. We're also beginning to see our platform gain traction beyond multifamily, particularly in commercial real estate. Earlier this month, we announced a five-building Southern California office portfolio managed by one of the world's largest commercial real estate services and investment firms. What makes this deployment particularly important is that we are not replacing another technology provider. We are replacing the property's dedicated on-site security guards with AI-powered surveillance and live remote guarding. This represents our first commercial office portfolio, where remote guarding is replacing an on-site guard program outright across multiple buildings. We will also design and install the camera infrastructure across all five properties from the ground up, creating both installation revenue and a larger recurring subscription footprint. The opportunity came through a referral from a sister property within the same institutional portfolio, providing another example of how successful deployments can create additional opportunities within an existing customer ecosystem. More broadly, we believe rising labor costs, staffing challenges, and demand for consistent 24 by 7 coverage are creating a meaningful opportunity for technology-enabled remote guarding to replace portions of the traditional on-site guard model. One of the advantages of our cloud-native architecture is that it allows us to engage customers at multiple points in the lifecycle of a property. In Southern California, we are designing and installing an entirely new surveillance infrastructure across a five-building office portfolio where no lobby camera coverage previously existed. Last week, we also announced another example of that flexibility with a new multifamily development in Baltimore, where we were selected during the construction phase based on the performance of our platform across the developer's existing portfolio. Because the property is still under construction, the initial phase consists of the surveillance installation, with AI surveillance and remote guarding expected to be added as the building nears completion. Being specified into a project before a building is completed changes how early we can establish a customer relationship. Rather than competing to replace an incumbent system after the fact, we're becoming part of the property's security infrastructure from the beginning. More broadly, these engagements demonstrate that customers can adopt cloud structure at multiple stages of a property's lifecycle, from new construction to existing portfolios that expand over time as customers gain confidence in the platform. While the Southern California deployment is expected to begin contributing this year, the Baltimore installation aligns with the property's construction schedule and is expected to begin in the first half of 2027. That timing difference is important, but both engagements reflect the same underlying trend. Customers are bringing cloud structure into their portfolio's earlier and expanding the relationship over time. As we scale our business, we are also strengthening the team responsible for converting this opportunity into revenue. Separately this morning, we were pleased to announce the appointment of Niall Coates as Chief Revenue Officer. Niall joins us from Ecamm Secure, a Garda World company, and one of the largest physical security services organizations in the world, where he most recently served as Vice President of Sales for the United States. In that role, he led the U.S. sales organization and oversaw the integration of the Ecamm Secure and Stealth Monitoring sales teams. Before that, he spent nearly 18 years at Reynolds & Reynolds, most recently as director of sales for the East. Across his career, he has built and scaled enterprise sales organizations and closed complex multi-million dollar agreements. His experience is especially relevant because he understands both sides of the market we are addressing, traditional security service and technology-enabled remote monitoring. And Niall's mandate at Cloudestructure is very clear. We have established meaningful customer relationships and built a growing pipeline across multiple verticals. The next step is converting those opportunities into deployments and recurring revenue more consistently at a greater scale. Nile will be responsible for building the sales organization, processes, and channel strategy required to accelerate that conversion. We believe bringing in a revenue leader with experience operating at substantially greater scale is an important step as we move into the next phase of cloud structures growth. So across these deployments, the common thread is that customers are looking for a more proactive, scalable, and cost-efficient approach to physical security. Whether we are protecting a multifamily property, commercial office portfolio, or critical infrastructure site, the proposition remains the same. Use AI to identify activity earlier, combine that intelligence with live intervention, and provide customers with consistent coverage without relying exclusively on on-site personnel. So, overall, Q2 demonstrated meaningful progress in the underlying economics of our business. Recurring revenue increased 164%. Gross profit increased 51%. And gross margin expanded approximately 13 percentage points. Just as importantly, that recurring revenue is not a spike in a single period. It is the base we carry into every quarter that follows and add to. At the same time, we recognize that the pace of top-line revenue growth needs to accelerate. We've built significant customer relationships, established a growing presence across multiple verticals, and demonstrated that customers are willing to expand after initial deployment. The work now is converting that opportunity into deployed, recurring revenue more consistently and at greater scale, and strengthening our commercial leadership through Niall's appointment is an important part of that effort. And with that, I'd like to turn the call over to Greg Smitherman.

Thanks, James. James, you know, with that context, let me walk you through our financial results for the quarter. Revenue in the second quarter was approximately $1.2 million, as James said, representing a 13% growth compared to the same period last year. As James had continued to shift during the quarter, subscription revenue increased 164% year-over-year to approximately $764,000, driven by continued strength in both our cloud video surveillance business, while hardware and installation revenue declined compared to the prior year as customer activity shifted towards higher-value recurring services. As we've discussed in prior periods, our business includes a mix of recurring subscription revenue and deployment-related revenue, and the balance between those revenue streams will vary from quarter to quarter depending upon customer implementation, timing, type of deal. The sold decreased 9% year-over-year to approximately $623,000, primarily reflecting lower hardware and installation activity during the quarter, which carry a higher cost of sale than our recurring services. At the same time, gross profit increased 51% year-over-year to approximately $610,000, supported by the continued growth in our recurring subscription business. Gross margin expanded to approximately 49% compared to approximately 37% in the prior year period as recurring revenue represented a larger percentage of total revenue. We believe this continued improvement in revenue mix is an important component of our path forward to improved operating leverage and profitability. For the quarter, totaled approximately $2.7 million compared to approximately $2.3 million in the prior year period. These increases primarily reflect continued investment in the business, including expanding our sales and marketing organizations, increased operational capacity to support deployment activity and remote guarding, and continued investment in the infrastructure required to support future growth. General and administrative expenses declined approximately 15% year-over-year, reflecting lower professional services costs. Loss from the operations for the quarter was $2.1 million compared to approximately $1.9 million in the prior year period. Net loss was approximately $1.8 million compared to approximately $2.2 million in the prior year period. The improvement reflects stronger gross profits partially offset by higher operating expenses together with a non-cash gain related to the change in fair value of derivative liabilities. For the quarter, adjusted EBITDA loss was approximately $3.8 million compared to approximately $3.1 million in the prior period. Stock-based compensation was approximately $376,000 this quarter compared to approximately $542,000 a year ago and remains our largest non-cash expense. From a balance sheet perspective, we ended the quarter with approximately $3.8 million in cash and approximately $4.5 million in working capital. We believe our current cash position together with available financing under our equity line and at the market facility provides flexibility as we continue investing in the business, although our ability to access additional capital remains subject to market conditions and the terms of those facilities. On July 31st, we completed a one for 30 reverse stock split of all classes of our capital stock. Our common stock continues to trade on NASDAQ capital markets under the symbol CSAI, and the reverse split supports our efforts to maintain compliance with NASDAQ's minimum bid price requirement. Overall, we are encouraged by the continued growth in recurring revenue, meaningful gross margin expansion, improved profitability, and the progress we are making towards building a stronger, more scalable business. And I will turn it back over to James.

Okay, thank you, Greg. Well, we're demonstrating two important paths to growth. expanding within customers that already use the platform and entering new verticals where our technology can replace or modernize traditional security infrastructure. Our priority for the balance of 2026 is converting those opportunities into deployed revenue at a faster and more consistent pace. With Niall joining the organization to lead that effort, a growing recurring revenue base, and an expanding addressable market, we believe we have the right pieces in place to drive the next stage of the business. And with that, operator, we'll open the line for questions.

Thank you. At this time, we'll be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. The first question today is coming from Jack van der Aarde from Maxim Group. Jack, your line is live.

Okay, great. Good morning. Good afternoon, Greg and James. Great results on the growth engine for the SaaS side of the business. Maybe just a quick housekeeping question. I'm not sure if I missed it. Is the 10Q, will that be filed in the coming days or today?

Yes, that is imminently to be filed, Jack.

Excellent. And so that we'll have a full financial statement break yet. But there's great detail here in the press release, obviously, and you've covered a lot of this. Can we touch on maybe, has anything changed in terms of how you're thinking about the installation in hardware out of the business? Or is it still, is it lumpy? or is there an intentional focus to shift more towards SaaS, just pure play?

Just would like to get you through that. Yeah, sure, sure. The answer is sort of a hybrid, right, of a number of things you just posited, Jack. We're not specifically looking at deals, right, takeovers, as we call them, that would, you know, essentially boost the recurring revenue piece. Our model is the same, right? And we said that earlier in our remarks, which is we approach customers. Some have existing infrastructure, some don't. For the ones that don't, where a facility is already built or it's new construction, we're happy to provide installation and hardware components. What we were just seeing in the first half of this year is that a substantial portion of the transactions that we closed on were takeovers. And people understood our differentiation, what we could do better. And, you know, accordingly, it was easier for us to take over those cameras, you know, install our cloud video recorder and get up and running with the customer very quickly. So not really a fundamental change in anything we're doing. It's just the way things sort of, the way that things played out in the first half of this year is how I would put it.

And it is a bit lumpy, right? Because you just don't know what does a customer, you know, when we talk to customers, what are their particular needs? And it really does vary.

No, it makes sense to me. I was just curious because the mix is definitely noticeable in terms of the staff size for the quarter. Now, I guess as I look at your operating expenses as well, it looks like you guys have been doing a good job of controlling those. I think they've dipped down quite a bit this quarter. Is there anything, any takeaways there, especially the G&A line? Is this a new kind of normal base level, or is this just a snapshot of this quarter?

No, you know, I think if we, especially when you're comparing it to last year where you had just come out of our direct listing and a lot of expenses of switching from a private company to a public company. It's not an inexpensive endeavor. And substantially higher last year. And I think we've, as you said, we've got them under control. We are, everything's smoothing out. And obviously, cost control for any business is something to really pay attention to. And it's something we always have our eye on.

And, you know, another thing, just if I double click on the gross margins here, I'm not sure if I have a full breakout of every segment, revenue segment stream. But, you know, the 49% blended average, it seems like things are picking up again, I guess, year over year there. I'm not sure what the breakout is there for hardware and other, but can you talk about maybe kind of the threshold, the range remind us for the cloud video and the remote guarding gross margin levels as you continue to gain scale?

It does vary for the service side of business, right? Like any SaaS business, the bigger that gets, the better the margins get because you do have sort of fixed infrastructure costs. And when you can apply more revenue to that same fixed infrastructure, your margins go up. It's straightforward. Although, given the growth that we're seeing, we will be and actually have already ordered some additional infrastructure equipment to deal with the continued customer increases, which is great. Our hardware margins are pretty substantial. they're generally north of 50%. It's the installation revenue that's generally pretty small. It's in the 10% range, we'll call it. Again, varies by deal. Some a little more, some a little less, but it's a ballpark figure.

But the bulk of it is, right, the more we can continue to build and drive to just be pure SaaS, those margins will continue to uh okay great and maybe a follow-on for uh for uh james um the large project that was kind of emphasized here you put a press release out on it you know you're now 38 percent of this customer's texas portfolio i guess once that's installed and i think it's early 2027 that's on track for? Yep, yep, yep. What do you, what do you kind of, how does this compare across your entire, I guess, installed base of properties and opportunity? Is this a good, is this a good, I guess, case study of what to expect? And also just kind of, how much higher can you, can you penetrate a customer like this? Yeah. Hypothetical of this specific customer?

Yeah. Excellent question. Hard to put definitives around it, right? Because we're, we're sort of, we're sort of experiencing some of this in real time. So let's start with the basics, right? So, you know, we've talked for the past year about land and expand, right? And indeed, that is exactly what's happening. So with this Baltimore property, right? We're across 38% of their, their portfolio. If you're asking for modeling purposes or just general thinking purposes, is 38% a good number to use for, you know, all the multifamily partners that we have? I'd say it's too early to assume that, right? I mean, just think about it. You know, we work with Cushman and Wakefield. 38% of their properties, by golly, that'd be a heck of a business, wouldn't it? That's what I'm exploring here.

Exactly.

No, I understand. I would put it this way, Jack. Each customer or partner, if you will, that we work with, each one moves at their own pace and their own velocity. I can tell you that, you know, for the larger customers that we have, you know, we do have a concerted effort in meeting with those folks and building relationships at the highest levels of their organizations to facilitate that additional expansion. And it's going pretty well. It's going pretty well. So I think it's just a little too soon for us to start giving some guidance on uh what we think percentage expansion in a particular customer portfolio might look like um but i uh but i we think you should see additional expansion opportunities across a broad range of our customer base in the second half of this year.

Okay, excellent. And maybe just one more follow-up, and then I'll hop back in the queue. Are you seeing any, is there any bottlenecks that you're working on to unlock an acceleration of growth even further? I mean, you're growing very fast. Just curious with your footprint, your overhead, and your remote guards themselves. They have quite a bit of scale, I believe, that they can service. Anything that you're working on that could speed up installations, or do you need more personnel as well? I'd just be curious to know if that's a growth driver. Yeah.

Yep. Indeed, Jack, that is something that we focus on. Right. You know, time to complete installations, number of installations, you know, that we we believe as we model things out, we can get to during the course of a month. Right. You know, we announced previously that we brought Ed Burnett on board as our chief security and operations officer. And Ed is heading those efforts from an installation standpoint. Internal personnel. Yeah, we constantly look at that. Right. To kind of support the installations. And but but that's a small handful, right? That's not hundreds of people. Remember, we outsource most of our installations to third party providers and people that we've worked with and we trust. And that's relatively easy to scale as we continue to expand our footprint across the United States. I will also say we are at the front end of conversations with a third party that might give us the opportunity to tap into their complete nationwide installation network just just to kind of further that momentum, if you will. But we're pretty satisfied with where we're at right now from a monthly installation standpoint. When we have everything hitting on all cylinders, that number is probably something, Jack, like 45 installations a month or so, theoretically. So there's a lot of untapped capacity that as we bring in new sales opportunities, we should be able to get implemented in the customer up and running.

Okay, no, that sounds great. I look forward to the next update, and that's it for me. Thanks, guys.

All right. Thanks, Jack.

Thank you. The next question will be coming from James Kisner from Water Tower Research. James, your line is live.

Hi, thanks for taking my questions. And congrats on the very nice gross margin here and the recurring revenue. Could you just, you know, it's been a month here, I think, since your last call, and you talked about the second half being stronger than the first. I'm just kind of wondering if you can maybe update on kind of your confidence, you know, in the last four weeks, you know, how pipeline may have changed, just some general commentary on how the second half might be looking versus even a month ago, but obviously versus the first half?

Well, I could take a shot at that, James. Again, I just want to start by saying, as you well know, we don't provide revenue guidance, right? We talk about things generically. But I think what we would say is, you know, So multifamily, as well as the other verticals that we're working to operate in, right, commercial properties, construction, et cetera, none of those are, you know, instantaneous, like, you know, you do a site walk, you give a proposal to the customer, and boom, right, you're ready to go. So we would say the pipeline continues to build. It continues to build as we add senior members to our sales organization. And I'm talking about direct reps, right? Right. All of that, on top of, you know, the new guidance and leadership of Niall Coates, all has us feeling very optimistic about the second half of this year. I'm trying to say something without saying something, James. I believe, we believe the second half of the year will equate to substantially more revenue than the first half of the year in the numbers that were reported. And I think that's as far as I can push it without, right, really getting deeper. But the pipeline continues to build. We continue to add salespeople. We continue to monitor every, you know, active transaction, and we're confident that that will translate to demonstrable growth as we go forward in the future, in the second half.

Yeah, that's helpful. So, you know, that looks like a great addition here. You know, background is a good fit. But anything that is changing, perhaps, in terms of focus in the go-to-market motion here, potentially, or, you know, is it just kind of more of executing the current playbook better? Like, any kind of general thoughts on what that might signify, that hire?

Yeah. Mm-hmm. Well, I think a few things. I think a few things, James. One, yes, it's taking the playbook and making it better. It's kind of like a coaching change in the NFL, right? The right where you read that, you know, the quarterback's like, well, geez, you know, I had this system that I played under for six years with a previous coach. And I got this new guy with all these crazy ideas. And, you know, it takes a while to learn the new playbook, right? And I think that's part of what Niall brings to the equation as well. You know, he has his own thoughts and experiences from companies exactly in our space, but generating significantly more revenue. And I believe we all see his, you know, guidance and where he wants to take the organization, you know, in a short period of time, we can already see demonstrable actions and results, for lack of a better phrase. So I think it's two things. I think it's improving the old playbook, but also adding a bunch of things to it. And honestly, James, when it goes to sales, and I'm not undermining anything from the hard efforts that a really great sales team puts in, but at the end of the day, it's just good old-fashioned hard work. Right. Understand the product, get in front of customers, be passionate about explaining the value proposition and be relentless. Or as someone said to me recently, professionally persistent. And that's what that's that's what our team is doing.

That makes sense. We're kind of looking here at your recurring revenue growth. You know, it's pretty substantial year over year. Looks like something like half a million or so. I don't know if there's any way to kind of – if you look at it this way at all, but is there a way to look at how much of this is coming from new deployments versus expansion with existing customers? I know you've said there's a pretty massive penetration opportunity with your existing customers, but maybe you could double-click and get some perspective on how much of that is coming from kind of same-store sales, for lack of a better term, versus totally new deployments, new customers.

Yeah. Greg, do you want to take that one?

Sure. So we don't break out the numbers exactly that way. But if we look at, let's just talk about our eight of the top ten. If we look at the sites year over year since last year, we're up 150. spectacular we continued to to build that and and while land and expand is especially since we have so many of the the top properties um continue to to from all aspects uh you know any customers um but yeah we we haven't we the incremental revenue how much is one versus one versus the other but But anecdotally, you know, it's kind of split even, but still new.

Actually, really good texture.

And you want both of those, right? You don't want to limit yourself to any one component. It's a tremendously large market.

That makes sense. One more, sort of a different angle on the same question. I'm kind of guessing that the multifamily is the vast majority of the revenue here, but you've had some forays into transportation, logistics, and retail. Guessing those are pretty de minimis right now and are mostly on, you know, potentially upside. You know, any kind of update on the verticals, ones that may be kind of already contributing or more likely contribute sooner than others? Just general thoughts on the kind of the vertical strategy. Yeah.

Yeah, I can take that one. So already contributing. Now, again, you know, it's all about scale, right? It takes a while, as we mentioned earlier, to get up to speed and really penetrating things from a new vertical standpoint. But already contributing would be critical infrastructure, commercial properties, transportation and logistics, and construction. so now are the dollars smaller yeah but uh you know like the commercial property uh deal that we announced about you know five uh open-air shopping malls um that will be the the portfolio of that particular company is pretty large, and once they have a little bit of experience under their belt with using our system, we're confident that we will get additional opportunities in that portfolio. Same with transportation and logistics, right? We're deployed at a few of these higher-end remote truck parking lots, and their plan is to grow exponentially throughout the United States, and we are their selected security provider, right? So it's, yes, it's still a bit nascent, as you said. some of these new verticals, but we're excited at the head of steam we're starting to see with them, all while multifamily keeps cranking away in the background.

All right, clear perspective. Thanks for taking my questions.

Okay, James. Thank you. And there were no other questions at this time, and this does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.