Greetings, and welcome to the ReposiTrak Fiscal First Quarter 2025 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference call is being recorded. It is now my pleasure to introduce your host, Rob Fink with FNK IR. Mr. Fink, you may begin.

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

Thanks, Rob, and good afternoon, everyone. As you know, we communicated just a short time ago, our fiscal 2024 results. Since then, our strategy has not changed and our September financial results further validates our long-term strategy. Many of you have asked me when will we see the hockey stick and traceability revenue. As we've always said, we will add customers at a governed pace, regardless of opportunity, deadline product, service or short-term expectations. We will never trade speed for flawless execution, never happen. As you know, food contamination is Front Page News, almost daily. E.coli with diarrhoea, and salmonella. Eggs, deli, meat, basil, cheeses, and even frozen waffles and pancakes, just to name a few Household names such as McDonald's, Boar’s Head, Trader Joe's, and BrucePac have all been affected. Big or small no company is immune to the risk of food contamination. ReposiTrak’s suite of food safety applications to address these issues is unmatched. However, it is a complex, multi-step process. There's a discovery phase to establish FDA requirements and help a supplier identify what and where the required data lives. Remember, as we communicated before, more than 70% of suppliers, do not even have an IT department. Then there is an evaluation phase whereby we investigate how we can assist them in distracting the required data. Data is collected in files and various emails written manually or live in one of the suppliers several systems. Then there is an implementation phase whereby the data needs to be extracted routinely, stored, and forged along the supply chain accurately and in accordance with the FSMA 204 requirements. It's not a one size fits all. It is Complex, but that's what we excel. While traceability is top of mind, all of our lines of business deliver a significant customer advantage…

Thanks, John. It's really just been a short time since we’ve reported our fiscal fourth quarter results, but since then, tracing all foods, not just FSMA 204 has significantly expanded. Why? Two major candlesticks have exerted pressure along with the approaching deadline. A significant consumer confidence drop in food safety and major retailers moving forward and going past the FDA list has been primary. The bottom-line is that our confidence that traceability will double the size of our company in the next three years or so. And more importantly, permanently alter the food industry and in a good way, grows stronger by the day. Let me add a little color to the catalyst that I've mentioned. First, Wal-Mart and Target have now joined Kroger in announcing that all food suppliers, not just those providing FSMA Rule 204 products, but all food products will need to provide end-to-end traceability information on or before the January 2026 deadline or product may be refused, think about that, refused at the distributor or the store full stop. Second, cost and simplicity. Why in a world would you try and separate Rule 204 products from regular products, expand the labor cost and confuse all of your operations? It's easier just to have honestly one process. And third this whole issue of food safety, retailers facing obviously highly publicized recalls in food safety made possible by traceability is critical to their business. They will represent more than just a marketing message, food safety will become a differentiator for retailers. Three of the largest retailers have now arrived at the same conclusion. One process, price it all. It's not surprising that Kroger, Wal-Mart and Target have determined that maintaining two processes. One for the so-called Rule 204 products and one for everything else is simply not practical.…

Thank you. [Operator Instructions] Our first question comes from Thomas Forte with Maxim group. Please proceed with your question.

Great. So first off, Randy and John congrats on the quarter. My initial list has five questions. But depending on your answers, I might add one or two. So the first question I'll go one at a time. Randy, are Wal-Mart, Target and Kroger setting the industry standard or our smaller food retailers unable to follow suit?

Well, my guess is that, given those three guys, those three companies have really smart leadership. They saw an opening based on what was happening in the area of food safety. And I think they decided to claim the high ground. The question is, can smaller companies compete? And the answer is, yeah, if they use us and I don't mean that to sound arrogant. If they use us they certainly can be at least competitive. But, this just changes the landscape. Think of the marketing advantage of being able to say, everything you buy from us, everything you buy from us, we'll be able to trace back to its origin. If something happens, we'll be pronto. We'll get the product off the shelf and make it a safer environment. I think competitively it’s better to do that then say, hey, our food might kill you, but it's cheaper. I don't see that. So I think the answer really is, the big guys have established what the market basics are going to be in terms of how to compete and everybody else over time will have to find a way to do the same thing.

Okay. And then you gave a lot of comments on this question. So, I'll try to simplify, 6% of sales in the September quarter were traceability. What could it be in the year?

Well, what you're going to see, remember, I did say, it was so fun to say, we are inflicted. What that implies is that, maybe not every single quarter, but probably most quarters, the percentage of our business coming from traceability will be increasing. At some point in the next three years, you can fully expect that number goes to 50%. How do we get to that number? It's pretty easy. It's derivative. If we double our revenue and say year three, call it $40 million of revenue and we have our same $20 million base, that $20 million incremental is all coming from traceability. So it's perfectly reasonable to assume that half of our revenue in three years – two to three years will come from traceability and then the couple of years after that, it'll probably go even higher.

Okay. And then, apologize some of these are repeats. Ones I like to ask every quarter. Your current thoughts on adjacent markets and then I consider restaurants, food adjacents and healthcare, regulatory adjacents.

Well, there's certainly tremendous opportunities in the non-retail food space and that includes restaurants, that includes all of those outlets, convenience stores, where people buy food. But we see those markets as substantially smaller. The way we go to market then the retail food business. So we'll inevitably be in those areas by virtue of the fact that the suppliers that we work with sell to both segments. So for example, if you buy products from Kraft, those products could end up being bought and sold in a retail food channel or in a restaurant. So the supplier crossover is very high, which means inevitably we will be doing business in those industry segments, as well. We just don't see them off the bat as having the same potential and critically important, just critically important is for us to keep heads down. The, I want to be cautious how I say this be incredibly focused on the customer experience. Something to remember is, there's almost nothing our company has done historically. That wasn't what I call improve on the current state. So, for example, when it came to compliance management, did we invent the idea of compliance manager? Nope. But we certainly developed a technology in a way of doing it that was superb by standards of the market. And that's why we're so dominant in that compliance management space. So, almost everything we've done, supply chain, forecasting, ordering has existed. But no one has done traceability before. It's never been done. So it's a space that not only are we I'm going to call it inventing. Not only are we incrementing how people think of it. But there's a business reality that people have not done traceability before. So they have to figure out how do we get this…

Okay. So I'm adding a question to my list. So maybe John can answer this one. How should we think of the composition of the growth of the 94% of revenue that wasn't traceability?

You mean, in terms of compliance and supply chain?

Yeah. Was one product in particular?

Pretty much 50/50? They are complementary. So it's pretty much 50/50.

Okay. So you're saying that all the business that wasn't a traceability. It's performed well as a group. There were no outliers?

No, no.

Okay good. All right. And then, capital allocation, I apologize if this sounds greedy, but you're paying off the preferred. You have a quarterly dividend and you've historically bought back shares. Under what conditions would we have a and situation where you would pay off the preferred and buyback the common?

I don't think our strategy has changed. It is take half the cash from operations, put half in the bank and buy basically either common or preferred or increase the dividend. I think we continue to Redeem preferred that will not change. I think we've done now, call it $750,000 each quarter for the last, I don’t know four, five quarters. I don’t expect that to change. We just increase the dividend. We have no debt. And obviously, once the preferred is bought back, we would resume the common or increase the dividend. The capital allocation strategy won’t change. Obviously, with the cash generation that we have it's not a bad problem to have. But we've solved a lot of a things that other companies have which are debt or a complicated cap structure. So I don’t believe that will change over the next two to three years. And if you look at the mathematics, it's not a forecast, but if you double the size of the company, from a revenue standpoint and recurring revenue, then you have no debt. You’ve paid off the preferred. Obviously, you are doing either M&A, building even a more of a fortress balance sheet or you are returning more and more capital to shareholders. Sorry for the longwinded answer. But at least Randy was longer than I was.

So, all right. John, I don't know if I heard the number from you. Do you like to give the number on the cost of running the business? Has that changed?

Except for - I’ve always said it takes $12 million to run the place. Well, obviously, with an increase in revenue, you’ve got more commission. There is payroll taxes that go along with it. We did invest as you’ve seen in the sales and marketing, that’s not a – that’s an investment for the future, but obviously as the education increases and traceability is a household name, we – I can’t tell you how much we have spent in terms of time and dollars educating people on traceability. As that awareness grows, then our expenditures on sales and marketing, and I would say I would go back to kind of the pre-education time. But absent variable costs associated with sales, I maintain the same thing. Fix $12 million to run this place. Take the accounting of bad debt and stock comp out of it. It's the same amount. And I don't expect it to grow materially. Will it be up before up 10% in revenue, it grows, 2%, I think that’s reasonable.

All right, and I'm trying to think of the way to phrase this other than the firing the customer away. Can you give your updated thoughts on the efforts you've undertaken to make sure that all your customers are of the highest margin?

What does that mean? What do you mean? You mean, revenue margin?

Sorry, you John, you’ve been pretty explicit for I think the last, I don't know, 12 to 18 months about turning out of some customers where you weren't getting as favorable margins. I didn't hear that in your prepared remarks, so I just - I don't know if that means you're done, done or what does that mean?

Well there's probably, yeah let me interject go ahead.

We may never be done with that meaning, as a company, we think it's important that our customers experience us successfully. And that we experience them successfully. That makes for a relationship. So over time, it's possible that if we change our offerings, et cetera we sunset other services, we're brave enough to say, it's no longer a good fit for the customer. So over the years, we've been, I think pretty good about what I call pruning the business to the advantage of the customer, meaning we're leaving you behind, because we're going in the different direction. And then secondarily, from a focus perspective and I know this is hard for Wall Street by staying focused on fewer things executed hopefully, more brilliantly with a higher level of automation, we actually net improve the margins across the business. So we don't have any plans now to do anything. We love where we currently are. You're going to see this I love this word, we be inflected. So, as the inflection starts to show up more and more in the numbers, we feel better and better about where we are. But we're brave enough. Tom, if a year from now it turns out we have some area of the business that doesn't look to have a future. We will sunset it. It's just our nature. Pruning is a good thing.

Okay. Right. I remember pruning for next quarter. All right. And then, you like to use the word automation a lot. I'm going to use the sexier word AI. Can I get your quarterly update on your AI efforts?

Yes. Yeah. What - the way we approach a scaling activity is that it's not a people problem, it's a process problem. Now, I don't know that that's universally true in the world, but for us, it's always true that when we're trying to scale something go from doing one a week to one a minute, when we see that as the goal. We assemble our literally our best and brightest the highest level people in our company, you'll be flabbergasted, that the size of the team. It's a significant proportion of our total team. And we pull apart the process. We document every single step to get it done. We work backwards from what's the result and where are we today? And we dissect that. Then we build a tool that leads the customer through that process just as if a human were doing it. And maybe we're not as smart as we are to be. But I can tell you that every time we do that, we have to tune it. So literally, I wasn't kidding with my remarks, when I said today, we talked about our wizard being introduced on nine months ago, year ago, whenever it was. It's out there in the wild. And wow, most companies would say, oh, look at this, you've gone from just a few to dozens per day or 100 or 200 a week. But that's not how we think. How we think is every day, every single day, have that team meet, digest what we're doing, figure out what's wrong in the wizard. In fact, you'll get a kick out of this. Guess what we call the meetings to talk about getting the wizard better. We call it the baby is ugly. And we start from a pretty negative perspective,…

Okay. So, one last question and if you answer in a way that I want to ask another one. So, can you give your current thoughts on strategic M&A? But I want to add a layer to it. Could you acquire a business to accelerate your onboarding efforts?

We don't think so. Not at this point. And the reason is, even if it could, we've got what I call, intersectionality problem, meaning, suppose we buy something, it takes us a year to integrate it. It distracts us, but a year from now it triples us. We're going to triple and we're going to triple our onboarding in a year without doing anything else. In other words, it might get in the way. And we can't take the risk. That's really kind of where we are. We cannot take the risk. We can afford the risk, obviously. But it's not worth the risk to the shareholders and more importantly, the customers to try and do more faster by buying a company that says, they'll help us. We're as good at this as anybody in the planet. Seriously, we're already that good. But now, I want to go to a whole different level of good. And I think we know how to do that. We've done it before. We did it in our compliance management. Year one in compliance management, we had five people and we did 200 connections. The next year, we had 10 people and we did 2500 connections. And the year after that, we had ten people and we did 10,000 connections. So we get scaling. Whoa, do we get scaling? But it requires automation not people. So another company couldn't really bring us a set of tools. Our tools are integral to the applications we have. And it's part of our competitive advantage. This is amazing development environment that lets us build things quickly and effectively to deploy on behalf of our customers. I'm sorry, I'm not touting just really good at this.

Are you successfully take away my desire to ask another question or need?

I'm sorry.

Thank you. Randy. Thank you, John.

Thank you.

Thanks Tom.

Thanks Tom.

[Operator Instructions] We have reached the end of the question and answer session. At this point, I'd like to turn the call back over to Randy Fields for closing comments.

Operator, thank you. John, thank you. We really feel very good about where we are. We're happy to ask that answer any questions as they come up. But we're to fasten your seatbelts point. So everybody buckle up. Thank you.

Thanks everybody

This concludes today's conference. You may disconnect your lines at this time. And we thank you for your participation.