Earnings Call Transcript - TRAK Q2 2026

Operator, Operator

Greetings, and welcome to the ReposiTrak's Fiscal Second Quarter 2026 Earnings Conference Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce Jeff Stanlis with FNK IR. Please go ahead, sir.

Jeff Stanlis, IR Representative

Thank you, operator, and good afternoon, everyone. Thank you for joining us today for ReposiTrak's Fiscal Second Quarter 2026 Conference Call. Hosting the call today are Randy Fields, ReposiTrak's Chairman and CEO; and John Merrill, ReposiTrak's CFO. Before we begin, I would like to remind everyone that this call could contain forward-looking statements about ReposiTrak within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are statements that are not subject to historical facts. Such forward-looking statements are based upon current beliefs and expectations. ReposiTrak's remarks are subject to risks and uncertainties, and actual results may differ materially. Such risks are fully discussed in the company's filings with the Securities and Exchange Commission. The information set forth herein should be considered in light of such risks. ReposiTrak does not assume any obligation to update information contained in this conference call. Shortly after the market closed today, the company issued a press release overviewing the financial results that we will discuss on today's call. Investors can visit the Investor Relations section of the company's website to access this press release. With all that said, I would now like to turn the call over to John Merrill. John, the call is yours.

John Merrill, CFO

Thanks, Jeff, and good afternoon, everyone. As we reached the midpoint of fiscal 2026, it's important to reiterate our long-term strategy and provide performance metrics against those milestones. First, our goal was to convert all revenue streams largely to SaaS recurring revenue. Since 2020, we have converted over $7 million in onetime revenue to recurring SaaS and increased our recurring revenue from 62% of total revenue to over 98%. We have done this while simultaneously overcoming $2 million in the elimination of high-touch low-margin opportunities in order to make way for traceability. Next, pay down debt, keep expenses in check and increase contribution margin. Since 2020, we have paid off over $6 million in bank debt and reduced annual operating expenses from roughly $19 million to $16 million. Meanwhile, we have grown our net margin from 8% to north of 30% during the same period. Third, drive cash and return capital to shareholders. Since 2020, we have increased net cash by a 16% compounded annual growth rate. Net cash means total cash on the balance sheet, less bank debt and leases. We've grown net cash from $13.7 million in 2020 to almost $29 million in 2025. Simultaneously, we have bought back over 2.2 million shares of common stock, redeemed 640,000 shares of preferred stock and increased the common stock dividend now 3x by 10% each time over the previous 3 years. Finally, given our strong cash flow generation, we have invested heavily in our business. This quarter, the investments in our business involve three key initiatives: First, we continue to invest in our products, responding to customer pain points with new solutions. We are confident that these solutions will improve tracking accuracy and will reduce operating costs for any customer with a warehouse. Touchless Traceability fits perfectly with our ReposiTrak Traceability Network Solution, creating a comprehensive method for delivering end-to-end Traceability; second, we filed for two patents in the last few weeks, one for Touchless Traceability and a second for an innovative method for identifying and automatically correcting errors in the data we integrate for customers. ReposiTrak has not been shy about patenting our innovations. We have a portfolio of nine U.S. patents, and we are confident we will ultimately secure both these patents that are now in process. These patents serve as yet another moat around our business. Randy will add more color on Touchless Traceability and the patents in his section. The inventions involved in these two patents, and our innovation in general, continue to revolutionize the industry. We have carefully observed what others in the space envision to address issues like Traceability, and we know what has worked and what doesn't. We are confident that as our competitors recognize the optimal path forward, they will discover that we have patented the process and systems that make the correct approach possible; third, we continue to invest in our systems and core software stack, adding artificial intelligence and modernized features and setting us up for improved operational efficiency. Randy talked about this last quarter, and we do not anticipate a meaningful increase in our cash expenses or capital expenditures related to this initiative. Let's get to the numbers. Second fiscal quarter revenue increased 7% from $5.5 million to $5.9 million. Total operating expenses for the quarter were down 2%, inclusive of investment in RTN, including Wizard onboarding tools, more cybersecurity costs, database license fees and other direct costs associated with development. We've reached a point where incremental revenue does not require significant incremental expenses to support our growth. SG&A costs for the quarter were up 5% due to higher commissions and direct costs associated with higher revenues, increased insurance premiums and increases in employee benefit costs. Income from operations was up 34% to $1.8 million versus $1.4 million. GAAP net income for the second fiscal quarter of 2026 was $1.7 million, up 9% versus $1.6 million last year. As previously communicated, the company is at the end of the benefit period from utilized and expiring net operating losses for both federal and state income tax. Accordingly, it is reasonable to assume a 20% effective tax rate going forward. GAAP net income to common shareholders increased 13% to $1.6 million from $1.5 million. Earnings per share for the quarter was $0.09 basic and diluted, this is based on 18.2 million basic shares outstanding and 19.1 million shares diluted, resulting in a year-over-year EPS growth of 13% when factoring in higher income taxes. Total cash increased to $28.7 million from $28.6 million at June 30, and the company continues to have zero bank debt. Fiscal 2026 year-to-date total revenue increased 8% from $10.9 million to $11.8 million. Total operating expenses for the fiscal year-to-date were $8.1 million versus $8.1 million for the same period last year, essentially flat. Income from operations was up 31% for the fiscal year-to-date, $3.7 million versus $2.8 million. GAAP net income increased 9% from $3.2 million to $3.5 million. GAAP net income to common shareholders increased 13% from $3 million in fiscal 2025 to $3.4 million in the year-to-date period in fiscal 2026. Fiscal 2026 year-to-date earnings per share was $0.19 basic and $0.18 diluted. This is a 13% increase when compared to $0.17 basic and $0.16 diluted for the same period last year. We are experiencing growth in all lines of business, while traditional sales of one service to solve one problem are growing, our cross-sell initiatives are delivering continued momentum. Again, our strategy has not changed. First and foremost, take exceptional care of the customer and execute flawlessly. Next, grow recurring revenue, increase profitability even faster, use cash to buy back common stock, redeem the preferred, and do it with no bank debt. At the same time, return capital to shareholders through a growing cash dividend. Finally, we have and will continue to build cash on the balance sheet, close to $29 million as of December 31, 2025. Continuing to bolster our balance sheet maintains our customers' confidence in our ability to be a durable partner in otherwise uncertain economic times. Common stock buyback. During the second quarter of fiscal 2026, the company repurchased roughly 80,000 common shares for a total of $1.1 million, an average of $13.75 per share. Since inception, the company has repurchased and canceled 2.22 million common shares for $14.5 million at an average price of $6.52 per common share. The company has approximately $6.7 million remaining of the $21 million total common share buyback authorization as approved by the Board of Directors and shareholders as of December 31, 2025. The company holds no treasury stock; common shares are repurchased and simultaneously canceled. Preferred stock redemption. During the second quarter of fiscal 2026, the company also redeemed 70,000 preferred shares at the stated redemption price of $10.70 per share for a total of $750,000. Since inception, the company has redeemed approximately 642,000 shares of preferred stock at the stated redemption price of $10.70 per share for a total of $6.9 million. We have 196,000 preferred shares left to redeem for a total of $2.1 million. At the current rate of redemption of $750,000 a quarter, I maintain our goal to redeem all the remaining preferred shares issued and outstanding on or before December of 2026, if not earlier. The quarterly dividend. On December 19, 2025, the Board declared a quarterly dividend of $0.02 per share to shareholders of record as of December 31, 2025, payable on or about February 14, 2026. This represents the third 10% increase in the company's dividend since the dividend was established in September of 2022. Subsequent dividends will be paid within 45 days of each fiscal quarter end; from time to time, the Board will evaluate our capital allocation strategy, making appropriate adjustments based on the approach most beneficial to all shareholders at that time. Our goal is to continue to return 50% of annual cash from operations to shareholders and putting the other half in the bank. That's all I have today. Thanks, everyone, for your time. At this point, I'll pass the call over to Randy. Randy?

Randall Fields, Chairman and CEO

Thanks, John. ReposiTrak had an eventful quarter. Some of that shows in our numbers, but much of what we accomplished was behind the scenes. While we're delivering profitable growth from each of our solutions, we continue to add to the moat around our business, specifically the Traceability business. The ReposiTrak Traceability Network, or RTN, is already the industry leader. The queue to join our network is much larger than our current installed base and each new supplier, distributor, and retailer adds to the network effect of our RTN solution. It's fair to say, and we've said it before, that Traceability for most suppliers is much more difficult than anyone has imagined. The difficulty affects suppliers and, therefore, ultimately impacts everyone upstream and downstream in the supply chain. It currently takes longer than we'd hoped to work with suppliers to get them up to speed and consistently able to provide the information they need to be able to do Traceability. I'll elaborate on this in just a minute. Remember that no one has ever done Traceability before. It's a new thing. It's a new activity, and it's one that requires complex process changes for everyone involved in the supply chain, end to end. As I mentioned, the primary issue with Traceability continues to be the consistent accuracy of supplier data. The error rate in data we initially received from suppliers, especially small suppliers, is somewhere between 50% and 70%. If a supplier has inaccurate data, that data propagates through the supply chain. The grower's bad data becomes the distributor's bad data, which becomes the wholesaler's bad data, which becomes the retailer's bad data. That bad data becomes even worse if additional errors are introduced on another link in the supply chain, making the information even less reliable, if not completely unusable. So now the question is, how do you fix an error? Since the errors ripple through many systems, it's more difficult than you can imagine. Each company will have to manually fix its records, conceivably hundreds or thousands of error fixes every day. This is ultimately the Achilles' heel of track and trace: bad data. Imagine the challenge this presents for a small family grower, most of whom don't even have an IT department. Now imagine the challenge for a large distributor, taking in thousands of shipments daily, each with a high error rate. Now imagine how a large retailer thinks about this if they need to hire dozens of employees just to trace down all of these different errors. It's just not going to happen. It would be cost prohibitive. Here's what's even stranger. Most people who are trying to think about Traceability have no idea that this error problem even exists. The errors are not obvious and require knowledge and skill to detect, much less to correct. For the most part, people who think about Traceability are simply relying on something called Electronic Data Interchange or EDI to gather their data and they're making the assumption that the data they're getting from suppliers is valid. Any approach that relies on EDI alone to track data through the system is not detecting or validating for erroneous data. We've invested heavily over the years. And remember, this is not our first rodeo with supplier data, and we know that the data quality is poor at best. But you have to be able to detect the errors to know that. Bad data is the disease that's difficult to detect, but actually is way at the core of Traceability. Our competitors' approach to Traceability has to go one of two ways. The first way is to trust the data, believing that EDI gives you accurate data. We've already said that it doesn't. All EDI does is check the format and structure of data but does not validate the accuracy. It doesn't even check. EDI is just the envelope. It's sort of like the post office. It only deals with the outside of the envelope, the size. Does it have the right postage? Does it have a ZIP code? Not the contents of the envelope. We, on the other hand, deal with the content inside the envelope, which is a fundamentally different idea and one that ultimately leads to good data. Alternatively, the second approach expects the retailer or distributor to scan each and every case and have electronic data. In addition, when something comes into the warehouse or goes out of the warehouse, that's a nonstarter economically. ReposiTrak has developed what might well be the only inexpensive and accurate way to do Traceability. We use our artificial intelligence tools to do this. It's extraordinarily robust and has the advantage that not only identifies the errors but is able to correct them without bothering the supplier that created the data in the first place. This process is self-learning, and as a result, we're getting better and better all the time at finding the errors. We have over 500 error detection algorithms in our arsenal, and we're growing the detection parameters day by day. Even more importantly, we can then correct most of them automatically and in near real-time. This detect and correct process saves the grower money, and the wholesaler sees a similar benefit in the distribution center. By the time the shipments and the data reach the retailer, the data is much cleaner. This error detection and correction process is a major time and money saver for our customers and produces an enormously more accurate data flow. We enable compliance with the FDA regulations and simultaneously reduce costs for our customers, keeping food safe from the farm to the table. Nobody else can say that. We recently filed through two critical patents to secure our approach in what we call Touchless Traceability. We're confident these patents will create another wide and durable moat around the business. We needed to begin the patent protection process before we initiated sales, and that's been a bit of a short-term headwind. But our Touchless Traceability creates the most comprehensive end-to-end solution for Traceability in the industry. Keep in mind that by year-end, the FDA deadline will be getting very close. So we expect acceleration of onboarding and interest in our solution. We're ready, and our patents position us well. But we're not just a Traceability company. We continue to grow our industry-leading compliance and supply chain offerings even as we expand our RTN. Our focus over the past few quarters on cross-selling is now generating significant traction, especially in our supply chain business. Success with one solution opens the door to adding another solution and so on and so forth. Since our software is built on a common platform and the process of gathering data is similar across all the different functions, adding additional solutions is efficient for both our customers and for us. All of this ties back to why we remain confident in the future even as AI impacts the SaaS industry. Companies that offer software but don't have proprietary data or proprietary process improvements are at risk from AI. That's obvious. If a problem is just an IT problem solved by software, then theoretically, businesses could create their own software using AI, but ReposiTrak is much more than just software. Software is just a delivery vehicle and only a part of the solution. In the short term, the AI craze may serve as a modest headwind for our business. Yes, AI will give the false impression to some companies that they can do it on their own. In the long term, AI cannot solve the problems that we solve for customers, and the value we provide will become even clearer. This trend also aligns well with our recent focus on smaller customers as well as our IP strategy. The hubris of thinking you can develop all your own software is primarily a big company obsession, not a small company obsession. Defending the inventions we've created around processes and data cleaning will further benefit our business in the long term. As I mentioned, the looming deadline from the FDA will be only 18 months away by the calendar year-end, and that will naturally accelerate the need for Traceability implementations. That said, while we're investing in our business in the form of code refreshes, cross-selling initiatives, development, and patent work for our Touchless Traceability, we're also reducing our operating expenses, that we were able to lower our operating expenses while increasing revenue is a testament to the industry-leading revenue per employee that we maintain. Efficiency is a key selling point of what we provide to our customers, and we mirrored this focus on our own internal operations. Moreover, our transition to a SaaS model has reached the point where we no longer need to aggressively invest in our own infrastructure to support our scale. Incremental revenue is disproportionately falling to the bottom line, and our contribution margin continues to increase. It's all part of the model. So with that, I'd like to now open the call for questions. Operator?

Operator, Operator

And we'll take a question from Thomas Forte with Maxim Group.

Thomas Forte, Analyst

Great. So John and Randy, congrats on the quarter. I have four, but as always, depending on your answers to these, I might have more. Randy, I have one warm-up question and then I have three real humdingers. So the boring warm-up question, John, I think you said, or it was Randy, that in fiscal '25, Traceability was only 8% of total revenue. Is there a more recent data point on how much total revenue is coming from Traceability?

John Merrill, CFO

Who are you aiming that at? I mean I would say it's between 8% and 10%, but it's hard because there's cross-selling.

Thomas Forte, Analyst

Okay. All right. So and then, Randy, I'll take the bait. Can AI improve the accuracy of Traceability data?

Randall Fields, Chairman and CEO

The way we utilize AI has been an integral part of our operations for many years. The current focus on large language models can be somewhat deceptive. To effectively identify and rectify errors, one must understand the nature of the error itself. Many attempting to ensure traceability might not even recognize the existence of errors, as they aren't always visible. A thorough database is essential to verify each field in every record and assess its accuracy within that context. It's somewhat analogous to how the post office operates; when you send a letter, the post office checks the envelope for size, postage, and a ZIP code, ensuring it's ready for delivery. However, the contents of that envelope could contain false information that remains undetected in that process. We have conducted extensive testing on our records, examining countless types of potential errors. The first step is identifying these errors, and AI aids us in this regard. Recognizing the significant issue of error rates, particularly when a supplier may send out a thousand files daily, with half possibly containing inaccuracies, we have developed a solution. Instead of simply identifying errors, our system, powered by AI, can autocorrect them. This is a significant advancement. While our system is AI-driven, it operates quite differently from what is typically referred to as a large language model. I apologize for the lengthy explanation, but I hope it clarifies the process.

Thomas Forte, Analyst

I appreciate the comparison to the EDI in the post office. So, is there any impact to ReposiTrak from MAHA?

Randall Fields, Chairman and CEO

Well, in a way, yes, especially in the long term. Let's discuss what MAHA is. MAHA and organic are fundamentally similar concepts. Organic refers to the notion that consuming organic food is healthier, while MAHA expands on this by suggesting that people should generally consume healthy food, including Whole Foods, and avoid ultra-processed foods that contain artificial colorings. This is set against a backdrop of a significant issue: according to Gallup, there has been a persistent decline in the U.S. regarding public trust in food safety. Each year, people's faith in the safety of food diminishes. Consequently, both MAHA and organic movements are increasing public concern regarding the safety of their food. This heightened awareness about safety works in our favor because it raises the economic and brand equity risks for retailers who make errors. Therefore, MAHA influences us by enhancing public awareness of food safety issues. It's as straightforward as that.

Thomas Forte, Analyst

This should be my most relevant question regarding Traceability on a buy ingredients basis. If I go to Stew Leonard's and purchase prepared foods, do you have any updates on that?

Randall Fields, Chairman and CEO

Well, we actually are capable of doing that. In other words, companies can sign up with us and determine, if you will, at a shipment level, at a product level that they have issues, but they can also use our system for specifications around ingredients. So within our system, you could say, wait a minute, if red dye #3 is a problem, let me search all of the items that I sell that have red dye #3 in it. And that's an interesting problem because Traceability, and the reason I'll come back to it in a minute, the FDA has designated certain products like products that contain nut butters, as being on their food traceability list, but you have to think about that for a moment. There's not a retail chain in the country that can tell you the products it has on the shelf that contain a nut butter, have no idea, literally, no idea because retailers don't maintain a list of ingredients, and they just can't track them, strangely enough. Within our system, we have the capability of doing that. So over time, what we suspect happens is people move from being oriented toward the product. And from the product, they'll drop down to the ingredient. We're fully capable of doing that today.

Thomas Forte, Analyst

All right. And then this is one of those questions where I have no idea what your answer is. So these are fun ones. All right. Does food inflation have a direct or indirect impact on your business? And I have three specific examples. Cocoa, coffee, and beef.

Randall Fields, Chairman and CEO

The answer is, indirectly they do. To the extent that we are in a period where increasing costs to the supermarket, the inputs can't be passed on to the consumer, inevitably, supermarkets and everyone in that space has a margin squeeze. In which case, every element of cost, potentially including us, is something that they will look at. So inflation without the ability to pass it on is problematic in general, and it's certainly something that we think about. We haven't seen anything over the very short term, but that doesn't mean that it couldn't be something that pops itself up in the future.

Thomas Forte, Analyst

Excellent. Two more. This one I'll direct towards John. So John, you talked about investment spending, but I'm trying to understand how that showed up in your results because you've talked about how it seems that you reduced the amount of OpEx required. So where does the investment spending, where do I see that in the P&L?

John Merrill, CFO

We have allocated more funds towards development and reduced spending on sales and marketing, though some expenses overlap between these categories. Since we have cut back on marketing, some personnel have been redirected to development. It is essential to consider our overall expenses rather than focusing solely on specific line items. Overall, our spending has decreased, and we are concentrating our resources more effectively. As Traceability gains importance, our marketing efforts are being intensified. We have made significant progress in marketing and messaging, but we are now prioritizing development, which may not be reflected in individual line items. It's important to examine the overall expenses.

Thomas Forte, Analyst

Are you capitalizing any of those costs?

John Merrill, CFO

There are some costs associated with the patent, but they are minimal.

Thomas Forte, Analyst

Okay. And then last question, unless you answer in a way that inspires me to ask one more. Current thoughts on strategic M&A?

John Merrill, CFO

I mean, look, Randy and I see things every month, but we have so much on our plate right now. It's a distraction. Reemphasizing our stack and our code base and Traceability, remember what Randy said, while it may seem like it's two years out, at the end of this year, Traceability is going to be right around the corner. We've got plenty on our plate to keep us busy. But of course, if the right opportunity came around, yes, we're acquisitive, but we have plenty on our plate at this moment. Unless Randy, you've got a different opinion.

Randall Fields, Chairman and CEO

Yes, John, let me add something to that. As we look ahead to the next 12 months, it's very likely that there will be a significant surge in demand and interest regarding Traceability. We believe it takes at least two years to fully prepare your entire supplier base for Traceability. We know this from our experience. Currently, we have nearly two million records, and to my knowledge, we are the only company offering end-to-end Traceability. We're tracking products from suppliers to distribution centers and then to retail stores, generating all of those records. We are actively engaged in this, and it's quite impressive. Although we haven't advertised our capabilities much, we intend to do so. The challenge is that as organizations consider Traceability, they will soon realize that they've exhausted the timeframe the FDA provided, which was originally set at 30 months. We're approaching a critical moment, as by the end of this year, we'll reach the 18-month mark. We don't believe that companies with numerous suppliers can achieve readiness in that timeframe. We anticipate it will take a full two years, but many may mistakenly think the 18-month mark is sufficient. As this year progresses, likely by summer or early fall, people will be reminded that Traceability is urgent and will need to take action. Thus, we are currently focused on preparing for that rather than pursuing acquisitions at this time.

Operator, Operator

Thank you. That will conclude the question-and-answer session. I would now like to turn the floor back to Randy Fields for closing remarks.

Randall Fields, Chairman and CEO

Okay. Well, we appreciate everybody taking the time this afternoon. Not much more to say. Have a good one. Talk to you soon. Take care.

Operator, Operator

Thank you. This does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time.