CSAI

Good day. Welcome to Cloudastructure Inc.'s 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 12b-25 with the SEC, notifying the commission that it requires additional time to complete the review of its financial results for the quarter. Cloudastructure expects to file its Form 10-Q within the five 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, 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 Cloudastructure'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 Cloudastructure 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 Cloudastructure. 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. 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 Cloudastructure 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 are pleased to continue to see tangible evidence of it within our customer base. 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 are 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 24/7 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 life cycle 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 are becoming part of the property's security infrastructure from the beginning.

More broadly, these engagements demonstrate that customers can adopt Cloudastructure at multiple stages of a property's life cycle, 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 Cloudastructure 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 Nile Coates as Chief Revenue Officer. Nile joins us from ECAMSECURE, a GardaWorld 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 ECAMSECURE 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 multimillion-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. Nile's 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 Cloudastructure's growth. 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 multi-family 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. 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 Nile's appointment is an important part of that effort. 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 had also said earlier, the composition of our revenue continued to shift during the quarter. Subscription revenue increased a 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 improved 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 in 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 Market 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. 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 Nile 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. 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 one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two 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 Vander Aarde from Maxim Group. Jack, your line is live.

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

Yes.

Just wondering-

That is-

What to expect

That is imminently to be filed, Jack.

Okay.

Yeah.

Excellent. And so that will have a full financial statement breakout. But there is great detail here in the press release, obviously, and you have covered a lot of this. Can we touch on maybe, has anything changed in terms of how you are thinking about the installation in hardware side of the business, or is it still lumpy, or is there an intentional focus to shift more towards SaaS, just pure play? Just would like to get your-

Yeah. Sure. The answer is sort of a hybrid, right, of a number of things you just posited, Jack. We are not specifically looking at deals, right. Takeovers, as we call them, that would 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 do not. For the ones that do not, where a facility is already built or it is new construction, we are 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. Not really a fundamental change in anything we are doing. It is just the way that things played out in the first half of this year, is how I would put it.

Yep. And it is a positive, right. It is a bit lumpy, right, just because you just do not know what does a customer. When we talk to customers, what are their particular needs? And it really does vary.

Yep. No, it makes sense to me because I was just curious because the mix is definitely noticeable in terms of the SaaS stuff for the quarter. 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 dipped down quite a bit this quarter. Is there any takeaways there from, especially the G&A line? Is this a new kind of normal base level, or is this just a snapshot of this quarter?

No. I think especially when you are comparing it to last year, where we 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 is not an inexpensive endeavor. They were substantially higher last year. I think as you said, we have got them under control. Everything is smoothing out. Obviously, cost control for any business is something to really pay attention to, and it is something we always have our eye on.

Another thing, just if I double-click on the gross margins here, I am not sure if I have a full breakout of every revenue segment stream, but the 49%, blended average, it seems like things are picking up again, I guess, year-over-year there. I am not sure what the breakout is there for hardware and other. 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 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 is straightforward. Although, given the growth that we are 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 are generally north of 50%. It is the installation revenue that is generally pretty small. It is in the 10% range, we will call it. Again, varies by deal. Some a little more, some a little less, but it is 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 are now 38% of this customer's Texas portfolio, I guess once that is installed-

Yeah.

...And I think it is early 2027 that is on track for?

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?

Yeah.

Not a hypothetical-

Yeah.

...but 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. Let's start with the basics, right? 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 multi-family partners that we have? I'd say it's too early to assume that, right? Just think about it. We work with Cushman & 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. 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 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. Is there any bottlenecks that you're working on to unlock an acceleration of growth even further? You're growing very fast. Just curious with your footprint, your overhead, and your remote guards themselves.

Yeah.

They have quite a bit of scale, I believe, that they can service.

Yep.

Anything that you are working on that could speed up installations, or do you need more personnel as well? I would just be curious to know if that is a growth driver.

Yeah. Indeed, Jack, that is something that we focus on, right? Time to complete installations, number of installations, that we believe as we model things out, we can get to during the course of a month, right? 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 support the installations. That is a small handful, right? That is not hundreds of people. Remember, we outsource most of our installations to third-party providers.

Okay.

People that we have worked with and we trust, and that is 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 further that momentum, if you will. But we are pretty satisfied with where we are 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 is 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 is 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. 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 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 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? Generically. But I think what we would say is multifamily, as well as the other verticals that we're working to operate in, right? Commercial properties, construction, etc., none of those are instantaneous, like you do a site walk, you give a proposal to the customer, and boom, right, you're ready to go. 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 the new guidance and leadership of Nile 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 and the numbers that were reported and I think that's as far as I can push it without really getting deeper.

Okay.

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.

Yeah, that's helpful. Nile looks like a great addition here. Background is a good fit. Anything that is changing, perhaps, in terms of focus in the go-to-market motion here potentially, or is this kind of more of executing the current playbook better? 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? I think that's part of what Nile brings to the equation as well. He has his own thoughts and experiences from companies exactly in our space, but generating significantly more revenue. 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, right? I think it's two things. I think it's improving the old playbook, but also adding a bunch of things to it. 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. That's what our team is doing.

Yeah, that makes sense. As we're kind of looking here at your recurring revenue growth, it's pretty substantial year-over-year. Looks like something like $500,000 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 give us just 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-

Yeah

...take that one?

Sure. We do not break out the numbers exactly that way. But if we look at, let's just talk about our eight of the top 10.

Excuse me.

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. While land 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? We haven't said, "Oh, of the incremental revenue, how much is one versus the other?" But anecdotally, I'd say it's kind of split evenly, right? Good land and expand, but still new good logo growth.

Actually, really good texture.

Right. 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 here 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. 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. I can take that one. Already contributing. Again, it's all about scale, right? 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. Are the dollars smaller? Yeah. But like the commercial property deal that we announced about five open-air shopping malls, 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? 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. Great perspective. Thanks. Those are my questions.

Okay, James.

Thank you. 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.

Please note this conference is being recorded. I will now turn the conference over to Valter Pinto, Managing Director at KCSA Strategic Communications. Sir, the floor is yours.

Good afternoon, everyone. Thank you for joining. On the call with us today are James McCormick, Chief Executive Officer, and Greg Smitherman, Chief Financial Officer. Earlier today, the company issued a press release announcing its operating results for the three months ending March 31, 2026. The release is available on our website at cloudastructure.com. Our Form 10-Q can also be found on our website and at sec.gov. Before I turn the call over to management to review the company's operating results and provide 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 statements regarding our expected business performance, strategy, market opportunities, customer demands, deployment activity, recurring revenue, operating results, liquidity, and growth plans.

Forward-looking statements are based on 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. In the company'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 the company undertakes no obligation to update them as required by law, except as required by law. We may also discuss non-GAAP financial measures on today's call. Reconciliations to the most directly comparable GAAP measures, where applicable, are included in today's earnings release and related materials available on our investor relations website. I'd now like to turn the call over to James McCormick, Chief Executive Officer. James?

Thank you, Valter, and thank you to all of us for joining us today. Before we get into the numbers, I want to take a moment to speak directly to something that's been on a lot of your minds and certainly ours. As part of preparing this quarter's filing, we identified a technical accounting classification issue related to how our Series 1 Preferred Stock and Series 2 Preferred Stock were presented on the balance sheet. This was solely related to a classification matter on our balance sheet, not a change in our cash, operations, or assets. Greg Smitherman will walk through the specifics in a few minutes. We have since taken action to resolve the underlying issue at the source, amending the terms of our Series 2 Preferred Stock so that this is avoided going forward.

I want to thank our shareholders for your patience and continued confidence in Cloudastructure while we worked through this. I am very glad to put it behind us. We remain focused, continuing to execute against our business plan. Let's turn to our first quarter financial results. Q1 was another strong quarter as we continued to execute on our strategy and build momentum across the business. We made meaningful progress expanding our customer base, deepening existing relationships, and scaling our AI-driven security platform across multiple markets. We are seeing increasing demand for proactive AI-powered security solutions, and our platform continues to resonate with customers who are looking for measurable outcomes and real-time deterrence. Importantly, as I have mentioned many times, this is a platform proving effective across many verticals already, including multifamily housing, logistics, commercial, and infrastructure environments, reinforcing the true strength and scalability of our model.

Revenue for the quarter was approximately $1.3 million, representing 78% year-over-year growth. While Q4 2025 was an exceptionally strong quarter, driven by a high level of year-end deployments, as we moved into Q1, we saw expected seasonality where customers established budgets and planned deployments for the remainder of the year. This has historically resulted in our revenue activity building throughout the second half of the year. Based on our current pipeline and customer engagement, we are planning for activity to build as we move through 2026. Demand remains strong, supported by both new customer wins and expansion within existing accounts. At the same time, we continue to see increasing contribution from recurring subscription and remote guarding revenue, which builds as deployment scale. You can see the demand most clearly in multifamily, which continues to be one of our strongest verticals.

We recently reached an important milestone, now serving 8 of the 10 largest multifamily property managers in the U.S. These are large, sophisticated operators, and their adoption reflects the value our platform delivers in real-world environments. Customers typically begin with a limited deployment and expand after validating results. In several recent cases, customers have expanded from a handful of properties to broader portfolio rollouts with additional sites under evaluation. This pattern reinforces the strength of our land and expand model, where demonstrated customer results drive broader adoption across portfolios. We are also making meaningful progress in the transportation and logistics vertical with significant and measurable security challenges.

As an example, at just one commercial truck parking facility, the customer reported zero cargo theft incidents over a three-month period following deployment of our platform, which we estimate prevented over $6 million of stolen goods based on information provided by the customer. During that time, the system deterred numerous unauthorized access attempts and helped identify and resolve operational issues in real time. That performance led to a Master Service Agreement and expansion across additional locations. This is a strong example of how our platform can move beyond surveillance support, improved operational and financial results. In this vertical, we are also introducing additional AI-driven capabilities tailored to logistics environments, further expanding the value proposition. We also recently signed a Master Services Agreement with a national retail REIT to deploy our platform across open-air shopping centers in California, marking our first large-scale entry into the retail vertical.

The initial deployment covers three properties with the MSA structure establishing a framework for potential expansion across as many as 36 shopping centers. This reflects the same pattern we are seeing elsewhere. Once a large operator validates the platform, the MSA structure lets them scale it across a broader portfolio without renegotiating terms property by property. Our cloud-based architecture also means far less capital investment is required to deploy at scale, making it easier for large operators to commit across a broad portfolio rather than commit property by property. More broadly, these examples highlight how flexible our platform is across very different environments and use cases. That flexibility is something we continue to build on as we expand how and where the platform can be deployed. During the quarter, we advanced deployments of our AI-powered security enclosure, including multi-site rollouts for a national construction customer.

We also extended solar-powered deployments, enabling security coverage in off-grid and infrastructure-limited environments. These capabilities allow us to serve a broader range of use cases, including construction, infrastructure, and remote sites. At the same time, we continue to evolve our platform with mobile and autonomous capabilities, further increasing flexibility and scalability. The key takeaway is that our strategy is centered on the platform, not a single hardware configuration. This allows us to integrate into diverse environments and expand alongside our customer needs over time. As we scale, we are also strengthening our leadership team. We recently welcomed Ed Burnett as our Chief Security and Operations Officer. Excuse me. Ed brings more than 30 years of enterprise security experience, including over two decades at UPS, leading large-scale security and fraud investigations. His experience is highly relevant to the markets we are expanding into, particularly logistics and enterprise environments.

In this role, he will lead hardware development and production, remote guarding, and deployments while contributing to product development and strategic growth initiatives. Alongside Ed, we also grew our direct sales organization by more than 30%, adding capacity across lead development, solution design, and customer success. This investment supports our land and expand strategy and positions us to convert a growing pipeline across multifamily, logistics, transportation, and now retail. We believe these additions strengthen our ability to combine advanced AI technology with real-world operational expertise. Across our markets, customers are shifting towards proactive security models that focus on prevention rather than response. They are looking to reduce incidents, lower costs, and improve visibility across their operation. Our platform addresses these needs through AI-powered detection, cloud-based architecture, and real-time intervention. Whether in multifamily, logistics, or infrastructure, the value proposition remains consistent.

Detect threats early, respond in real time, and prevent incidents before they escalate. Overall, Q1 reflects continued momentum across the business. We are expanding within core markets, gaining traction in new verticals, extending our platform capabilities, and strengthening our leadership team. We remain focused on execution and scaling the platform as demand for AI-driven security continues to grow. With that, I'll turn the call over to Greg Smitherman to walk through the financials.

Thanks, James. As James mentioned earlier in the call, we did an accounting classification resolution, which is what took so long to get this taken care of. Before I get to the quarterly numbers, let me give you a little insight into the technical details behind what this was all about. In preparing this quarter's filing, we identified two classification errors related to our Series 1 and Series 2 convertible preferred stock. How the embedded conversion feature should be accounted for under accounting standard ASC 815-15, and how the preferred stock itself should be classified on the balance sheet under ASC 480-10-S99-3A. As I said, very technical accounting stuff. We assessed both matters under SAB Topic 1.M and 1.N and concluded that neither was material, individually or in aggregate, to any previously filed financial statements.

Based on that, we have revised the prior period comparative figures in this quarter's Form 10-Q, rather than restating previous issued financials. The most important point is that these changes have zero effect on our cash, total assets, or operations of the business in any period. They affect only how the Series 1 and Series 2 instruments were presented on the balance sheet, and how non-cash mark-to-market changes in its estimated fair value flow through the income statement. Subsequent to quarter end, we amended the Series 2 certificate of designations to eliminate this variable conversion price feature and the deemed liquidation event provision that gave rise to this classification question, which supports classifying the Series 2 preferred stock within permanent equity on a prospective basis. This is a significant improvement to our capitalization structure for our shareholders.

Separately, we entered into an exchange agreement with Streeterville, our Series 2 holder, exchanging a portion of those shares for an unsecured promissory note. With that context, let me walk you through our financial results for the quarter. Revenue for Q1 was approximately $1.3 million, as James mentioned before, representing a 78% growth compared to the same period last year. Growth in the quarter continued to be driven by expansion across our core revenue streams, particularly in cloud video surveillance and remote guarding, as well as continued contribution from hardware and installation activities. As we discussed in prior periods, our business includes a mix of recurring subscription revenue and deployment-related revenue, and we continue to see both components contribute to the overall growth.

Cost of goods sold increased by 49% year-over-year as a result of the increased sales and completion of more installations compared to the similar period in 2025. At the same time, we saw an increase in gross profit of 115% year-over-year as we continue to build that recurring revenue stream. Gross margin expanded year-over-year as a percentage of recurring revenue increased compared to last year. This is part of the path to profitability as recurring revenue is the core engine of any SaaS company. Operating expenses for the quarter totaled approximately $3.3 million, compared to approximately $2.8 million in the prior year period. This increase reflects continued investment in the business, including expanding our sales and marketing efforts, increased headcount and compensation costs across administrative and support functions, scaling our operational infrastructure.

We also saw increased costs associated with operating as a public company and supporting our growth initiatives. Loss from operations for the quarter was approximately $2.6 million, compared to approximately $2.4 million in the prior year period, after revision for the prior year amount to reflect the technical accounting issue discussed. These results reflect a continued investment in scaling the platform and supporting long-term growth. We believe these investments are necessary to position the business for continued expansion across multiple markets. For the quarter, adjusted EBITDA loss was approximately $2.1 million, compared to a loss of approximately $1.8 million in the prior year period. The delta is mainly driven by differences in stock-based compensation, for last year, a big swing in the derivative liability, complete non-cash gain last year versus non-cash loss this quarter, combined with a lower stock-based compensation add back.

The stock-based compensation was approximately $414,000 for this quarter, compared to approximately $627,000 a year ago, and remains our largest non-cash item. From a balance sheet perspective, we ended the quarter with approximately $5.7 million in cash. On the balance sheet, we did see an increase in accounts receivable during the quarter, which reflects growth in customer activity and deployments. We believe our current cash position, along with available financing options, provides us with flexibility as we continue to invest in the business. Our ability to access additional financing remains subject to market conditions and the terms of those arrangements. Overall, we're encouraged by the combination of continued revenue growth, expansion in recurring revenue, and progress in scaling the business. With that, I'll turn it back to James.

Thanks, Greg. Well, to close, we believe the progress we are making is beginning to demonstrate the strength of our platform and the potential size of the opportunity ahead of us. We are scaling our business across multiple verticals, increasing recurring revenue, continuing to strengthen our operational capabilities. At the same time, we remain focused on clearly communicating our story and ensuring the market understands the value we are building. We are encouraged by the momentum we are seeing and remain focused on execution as we move through 2026. With that, we will open the line for questions.

Thank you. Ladies and gentlemen, at this time, we will be conducting our question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove 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. Thank you. Our first question is coming from Jack Vander Aarde with Maxim Group. Your line is live.

Okay, great. Good morning, James and Greg, or good afternoon. Appreciate the thorough update. Thanks for taking my questions.

Of course.

James, you have eight now. I think last time we talked, you had six of the-

Right

10 largest property managers in the U.S. I guess you mentioned these customers, and you guys are still kind of early stage in the public space here. Your business-

Yeah

does go back for quite some time. You mentioned that these customers will start with a single location or maybe a modest deployment-

Yep

that significant expansion opportunity is kind of the game plan. Are you feeling like any of those earlier deployments from last year or two years ago, are you starting to see that any of them come to the table for meaningful expansion with these large property managers? Thanks.

Yeah, sure. The short answer, Jack, is yes. Next question. No, I'm kidding. No. The short answer is yes. That progress happens through a few different mechanisms, right? In the past, as we were scaling our business or working to scale the business, any expansion in additional properties, we were pretty happy with, and we continue to be. We've shifted our focus. As we look at some of our key customers, these large operators, we continue to move up the food chain, if you will, in talking to the CXO-level type of people and making sure they understand our value proposition as well as the people that are making decisions a few levels down. In most instances, what we're finding is that we have an ability, after those conversations, to start negotiating master service agreements.

Right now, I believe the answer is we have three, and it might be four, MSAs on the table being negotiated. That doesn't mean that one of these large operators, like a Cushman & Wakefield, is going to say, "Oh, great. We have an agreement signed. Now we're going to give every one of our properties." It removes significant barriers to us getting into those additional properties because the terms have been agreed to between both companies. It's just up to us to continue the sales efforts and get those properties to close. Yes, we are seeing momentum. We are seeing traction. As we said in the call, we anticipate that we'll see more of these agreements closing in the second half of the year with, we would assume, a corresponding increase in associated revenue. Does that answer, did that give you a feel?

Yes. I appreciate both the short and the long answer there. James.

Yeah

maybe just kind of a follow on there. Looking at the first quarter.

Yeah

revenue result the gross margin very strong last year, I know you're not providing guidance, but last year I look at.

Yeah

sort of the revenue between the quarters, and first quarter was the seasonal low.

Yeah.

It's going to depend on the segment mixes and the installation and the hardware revenue.

Right.

It seems like you're set up for that as well this year. Is that a fair assessment, or?

Yeah, I think that is a fair assessment, and again, you are correct. We don't provide guidance. We said it early on in the call, right? Just historically, and we're drawing this off of, let's just call it three meaningful years of operation and revenue results. What we are seeing is that the first half of the year is, let's just call it lighter than the second half of the year for a variety of reasons, and yeah, I think it is fair to expect that that trend continues in 2026.

Okay, great. Got it there. Then maybe a question for Greg. Greg, on the operating expenses, we did see those tick up a bit. Some of it was offset by the stronger gross margins. I guess just to read through here, was any of this one time in nature, or is this sort of a good go forward run rate on the operating expense line? I'm talking about G&A, R&D, and sales and marketing. There's some non-cash stuff in there as well.

Yeah

wanted to get your thoughts.

Sure. Certainly you've got to separate out the non-cash because that's less important. I think it's a good baseline. We really have been, right? As you start to get to different levels of scale, you just need a beefier organization, right? A lot of that is because we do anticipate significant growth. We want to make sure that it's not just the front end salespeople, but it's the support infrastructure behind that. It's the deployment team behind that. It's the pre-sales to go out. We're putting out a lot of proposals, and that takes a lot of work. There's just some natural, inherent, as you become a larger company, infrastructure that you need, and that's what we've done to make sure that we can support the growth as it comes online.

Got you. Okay. That's helpful.

Yeah. Jack, if I could just put just a little bit more of a point on that.

Yeah.

What Greg said, obviously 100% true. Getting the customer is hard enough. Keeping the customer, delighting the customer, and expanding with the customer is a whole different program, right? We as an organization, we believe one of our differentiators is, for lack of a better phrase, white glove customer service. We take it seriously, we staff appropriately for it, and we believe that is a huge component, along with our technology actually working as we advertise, to our 99% customer retention rate. Yeah. It's just an important additional set of points, I guess I would say.

Yep. Understood there as well. I guess just one more for you guys. Since we're now in July, the second quarter has been finished, like completed. Maybe the books haven't yet. Just how are you feeling about the second quarter? Does it look similar to last year from the Q1, Q2 turn? Just any comments would be helpful. Thanks.

Jack. You're trying to corner us into the revenue guidance thing. I will let Greg give his opinion. I think all I would feel personally comfortable in saying is that we expect, as in previous years, for the second half of the year of 2026 to be stronger than the first half. That's what I would say. Greg, do you have any additional thoughts that you feel comfortable sharing?

No, I think that pretty much sums it up.

Excellent.

Excellent. Well, hey, no, that's a solid answer, and I'm glad to hear things are continuing to grow rapidly. 75% growth is definitely a positive. Congrats on the strong work, guys, and look forward to tracking the story.

All right. Thanks, Jack.

Thanks so much. Appreciate the questions.

Thank you. Our next question is coming from James Kisner with Water Tower Research. Your line is live

Hi guys. Thanks for taking my question. Congrats on a solid Q1, solid gross margin, and getting these accounting matters behind you.

Thanks, James.

Yeah. I guess one thing here is that subscription revenue, I think it nearly tripled here year-over-year, and it's now roughly half of revenue. Is that mix shift kind of running ahead of plan? Any thoughts on how that mix might kind of evolve through the year, kind of knowing that it's likely to be variable?

Part of that, it does vary by quarter, as you said, right? It is variable. We've actually seen this year more takeover opportunities that we've won than greenfield builds. Right? I think part of that is our name is just getting stronger and stronger in the industry. People are like, "Wow, they've attracted the attention of eight of the top 10 managers. There must be something real there." We really do provide some unique services. People that have competitive solutions say, "You know what? We kind of like what these guys at Cloudastructure are doing.

We've already got all of our cameras, we don't need a big installation, it's really low cost for us to just switch over." I've said before, I'd love installation going up, even though it's a smaller margin, because it means we're growing, I'm also happy to do the takeovers. Yeah, it impacts your revenue a little bit because you're not doing that installation. That's all right, because the core, the long-term core growth of this company is the recurring revenue stream. As long as we're getting takeovers, great margin, great business, quick flip, to get that customer turned on. That mix and how that develops each quarter will impact the quarter-over-quarter revenue. Certainly in our pipeline, we see some big new builds, too. Installation and hardware revenues are not going away each quarter will vary based on the makeup of the contracts that get signed.

Peter, did you say that?

Go ahead.

Oh, I'm sorry. I just want to add one additional thing. We're all so close to the business and pretty facile in understanding with some of the phrases we use. Just to be clear perhaps for other people on the call that might not know, when we say a takeover, that means we're coming in, replacing a competitor, right, that was offering a similar service. In most instances, we are utilizing the existing camera infrastructure that already exists. When we say takeover, that's what we're talking about. Sorry, James.

It's a key distinction because we do work with almost any camera that's on the market, where some of our competitors require you rip out whatever you got and put in their proprietary cameras. We'll work with almost anything, and customers like that.

That's helpful. Maybe to cut things a little differently, if you kind of look at your growth here, you talk a lot about penetrating existing accounts more. Obviously it seems like those would be easier than winning new business. Maybe you talk about how your mix of growth and mix of pipeline looks from the existing customer versus new logos perspective.

Yeah. I'll take a crack at that, James. Excuse me. Remember one thing, right? From a pipeline standpoint, it's not just new logos, it's new logos in additional verticals, right? We are very bullish and incredibly excited about all the customers that we either currently service or will have an opportunity to service in the future. One thing we would point to, certainly from a pipeline and our expectations of it turning into future revenue, is some of the additional verticals that we talked about that we're now starting to see real traction in, specifically transportation and logistics, right? We've demonstrated great results. By the way, our start in transportation and logistics is a takeover situation, and we've just provided, we think, spectacular service for the customer. That's leading to an MSA.

Commercial, where we talked about the open air, the opportunities for us to protect the outsides, I guess you would say, of open air shopping malls in California. There's three properties, and there's 33 more to go, right? We're excited about that. Construction. Same type of environment where we've had an ability to deploy some of our new hardware products, specifically our enclosure, and we're really excited about that as well. Without giving specific numbers and guidance, the pipeline as it exists today is a mix, obviously, of recurring revenue from existing customers, expansion into existing customers, which we talked about, and then getting new logos, but new logos across all the verticals we've historically serviced and the ones that we're making inroads into now. Does that help?

Yeah, that's just good texture. I guess the follow-on to that is it possible that the sales cycle for these new verticals, could it look different in multi-family? Perhaps because you're in more takeover situations, how does that compare?

Short answer, yes. Absolutely. When you expand with an existing customer, particularly once we have MSAs that are executed, that is a quicker sales cycle. Getting a new logo in multi-family, a little bit shorter, but still sort of the same as what we've seen historically. I think part of the help, or we think part of what's helping us there is our name is more well-known than it was two or three years ago. That certainly helps. In the new verticals that we're talking to, it really depends on the particular vertical and the particular opportunity. Certainly, if it is a takeover, once we agree on pricing and the customer understands our potential or what we offer, it's much quicker, right? It could be up to half less time to land a takeover client than a brand-new client with the full cameras and installation and speakers and all that stuff.

Okay, that's helpful. One more from my end here. You've got a number of new form factors out there, the enclosures, the solar-active systems, mobile units. Are you seeing any particular strength in those areas or the particular product line might have become more material contributor by themselves? I think this may be kind of relatedly, I don't know if this is a correct correlation, it looks like your hardware gross margin was stronger than usual. I'm wondering if that might be related.

I'll let Greg answer the second part. The first part, we believe that our enclosure products in different configurations, right? Be they either hardwired or solar-powered or whatever, we believe that holds amazing potential for us as we continue on through 2026 and beyond. That is probably the number 1 new product that we are very excited about. Again, maybe for the benefit of other people on the call that don't know what an enclosure is, it's basically the exact same AI Platform, and the same protection we provide with a fixed system, right? That would include multiple cameras spread out across a property. In an enclosure, all the technology is encapsulated into one device, which can attach to a building, attach to a pole, sit on a stand. It includes cameras, generally two to three cameras, a speaker, strobe lights, our cloud video recorder, et cetera. It is a, for lack of a better phrase, all-in-one type of product that can protect a number of environments. We're very bullish on that right now, James. Then Greg.

Yeah. On the gross margin, gross margin was very strong this quarter, and really ties to two things, as I said. Continued growth in the recurring revenue, which obviously is a good margin product. It wasn't so much that we were getting a better contribution from our hardware. It was, as I said, a little bit higher takeover ratio than maybe in some quarters past. The installation revenue was comparatively lower from a percentage perspective. Last year, we had a couple of very large installation deals, and we just didn't have any of those in Q1. It was really, again, continue to grow the core business, the core recurring, but it was just more of a mix. Every quarter, we're going to have that mix being different, the margin will move around a little bit.

Long term, we see that because the recurring will just continue to build on itself, that the overall trend will be up. Even though there might be some up and down quarter-to-quarter, the general trend will be slowly increasing margins.

All right. Thanks for taking my questions and congrats again.

Yeah. Thanks, James.

Thanks, James. Appreciate it.

Thank you. Ladies and gentlemen, we have reached the end of our question and answer session and our call. This will conclude today's conference, and you may disconnect your lines at this time, and we thank you for your participation.

Thanks, everyone