Good day. Welcome to Cloud of Structure, 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 formal 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 Cloudastructure, and Greg Smitherman, Chief Financial Officer. Earlier today, the company issued a press release announcing its operating results for the second quarter ended June 30th, 2026. The release is available on our website at cloudastructure.com. Also earlier today, the company filed a form 12B25 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 implied by these statements. Important factors that could cause actual results to differ materially are described in today's earnings release and in Cloud Structure's filings with the SEC. including the risk factors discussed in our most recent annual report on Form 10-K 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. We may also discuss non-GAAP financial measures on today's call. Reconciliations to the most direct comparable GAAP 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 McCormick, Chief Executive Officer of Cloud Structure. James?

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 and 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 in 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 structure 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 ten largest and 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 portfolios 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 Garter 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 ECAM secure and stealth monitoring sales teams. Before that, he spent nearly 18 years at Reynolds and 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 Niles' mandate at Cloudastructure 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 of 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 Niles appointment is an important part of that effort. And with that, I'd like to turn the call over to Greg Smitherman.

Thanks, James. 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 also said earlier, the composition of our revenue 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 and our remote guarding 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, etc. Cost of goods 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 improve operating leverage and profitability. Operating expenses 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 year 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 with that, 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 will 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. And 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. Okay. Yeah.

Excellent. And so that will have a full financial statement break at. But there's great detail here in the press release, obviously. 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.

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. 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 accordingly, it was easier for us to take over those cameras. 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's positive, right? It is a bit lumpy, right? Because you just don't know what There's a customer, you know, when we talk to customers, what are their particular needs? And it really does vary.

Yep. 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. Yeah. 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, right? It's not an inexpensive endeavor. And so they were substantially higher last year. And I think, as you said, we've got them under control. 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 others. 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?

So it does vary by quarter. For the service side of business, Like any SaaS business, the bigger that gets, the better the margins get because you do have fixed infrastructure costs. 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 the more we can continue to build and drive to just be pure SaaS, those margins will continue to move upward.

Okay, great. And maybe a follow-on for James. The large project that was kind of emphasized here, you put a press release out on it, You're now 38% of this customer's Texas portfolio, I guess, once that's installed. I think it's early 2027 that's on track for it? Yep. How does this compare across your entire, I guess, installed base of properties and opportunity? Is this a good, I guess, case study of what to expect? And also, just kind of how much higher can you penetrate a customer like this? What is hypothetical of this specific customer?

Yeah. Excellent question. Hard to put definitives around it, right? Because we're sort of experiencing some of this in real time. So let's start with the basics, right? So 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 portfolio. If you're asking for modeling purposes or just general thinking purposes, is 38% a good number to use for all the multifamily partners that we have? I'd say it's too early to assume that. Just think about it. 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 for the larger customers that we have, 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 what we think percentage expansion in a particular customer portfolio might look like. But I think but 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 and many more.

Yep, indeed, Jack, that is something that we focus on, right? You know, time to complete installations, number of installations, you know, that we believe as we model things out we can get to during the course of a month, right? Yeah. 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 to kind of support the installations, but that's a small handful, right? That's not hundreds of people. Remember, we outsourced 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 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 we're at some very nice gross margin here in the recurring revenue. Could you just, you know, it's been a month here, I think, since your last call. 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 in the last four weeks, 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 can 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, multifamily as well as the other verticals that we're working to operate in, commercial properties, construction, etc. None of those are instantaneous like you do a site walk, you give a proposal to the customer and boom, 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? 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. 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 really getting deeper. But the pipeline continues to build. We continue to add salespeople. We continue to monitor every active transaction, and we're confident that that will translate to demonstrable growth as we go forward in the future, in the second half.

That's helpful. So, you know, that looks like a great addition here. You know, background is a good fit. Anything that is changing, perhaps, in terms of focus in the go-to-market motion here, potentially, or, you know, is this 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? Where you read that the quarterback's like, well, geez, 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 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. 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 guidance and where he wants to take the organization 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 our 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 our team is doing.

That makes sense. As we're kind of looking here at your recurring revenue growth, it's pretty substantial year over year. It 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. If we look at the sites that were deployed year over year since Q2 of last year, we're up 150%. which is spectacular. We continue to build that. And while Land and Expand is very important to us, especially since we have so many of the top properties, we're not solely focused on that. So we continue to build from all aspects. Any customer is a good customer, put it that way, right? But yeah, we haven't said, oh, of the incremental revenue, how much is one versus the other? But anecdotally, you know, it's...

I'd say it's kind of split evenly, right?

Good land and expand, but still new good logo growth.

Actually, really good texture.

And you want both of those, right? You don't want to... 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 the multifamily is the vast majority of the revenue here, but you've had some forays into transportation, logistics, and retail. I'm guessing those are pretty de minimis right now and are mostly on potentially upside, you know, any kind of update on the verticals, ones that may be kind of already contributing or more likely to 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 like the commercial property deal that we announced about five open-air shopping malls. That will be 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.