Rekor Systems, Inc. (NASDAQ:REKR) Q2 2023 Earnings Call Transcript

Rekor Systems, Inc. (NASDAQ:REKR) Q2 2023 Earnings Call Transcript August 14, 2023

Operator: Good afternoon, ladies and gentlemen, and welcome to today’s Rekor Systems Inc. Conference Call. My name is Maria, and I will be your coordinator for today. [Operator Instructions] As a reminder, this conference call is being recorded for replay purposes. Before we start, I want to read you the Company’s abbreviated Safe Harbor statement. I want to remind you that statements made in this conference call concerning future revenues, results of operations, financial position, markets, economic conditions, products and product releases, partnerships and any other statements that may be construed as a prediction of future performance or events are forward-looking statements. Such statements can involve known and unknown risks, uncertainties, and other factors, which may cause actual results to differ materially from those expressed or implied by such statements.

We ask that you refer to the full disclaimer in our earnings release. You should also review a description of the risk factors contained in our annual and quarterly filings with the SEC. Non-GAAP results will also be discussed on the call. The company believes the presentation of non-GAAP information provides useful supplementary data concerning the company’s ongoing operations and is provided for informational purposes only. I want to turn the presentation over to Mr. Eyal Hen, CFO of Rekor Systems.

Eyal Hen: Hi everyone. Thank you for joining us to discuss our results for the six and three-months ending June 30, 2023. We are excited to share our continuing progress with you. I would like to begin by underscoring our continuous revenue momentum and the accelerated achievements we have seen recently. Our journey on the rapid growth trajectory began with a strategic acquisition of the company formerly known as Waycare in September of 2021. This acquisition not only marked a significant milestone for us, but was seamlessly integrated, becoming the cornerstone of our command AI transportation management platform. Building on that milestone, in June of 2022, we closed the acquisition of the company, formerly known as Southern Traffic Services, STS, which has now been integrated and Floris as the record traffic services division of Rekor.

The second integration was the late – to the recent introduction of our Rekor Discover Urban Mobility Platform, delivering a breakthrough AI-based approach to come, class and speed studies for the state departments of transportation and municipalities. All this underscores our ability to recognize growth catalyst swiftly execute on them, and successfully achieve synergies and drive expansion by integrating people, processes, and technologies into the heart of our business operation. As a result of this achievements, we are pleased to highlight an unprecedented top line growth. We have witnessed consecutive quarters of remarkable quarter over quarter growth above 35%. It is notable that we were also able to achieve this quarterly results while seamlessly reducing our SSG&A expenses.

We think we have demonstrated that we can be financially prudent even as we integrated significant acquisitions. It is also notable to mention that we achieved this while continuing to make key investment in our future through research and development. While we are seeing expansion in both our non-current and recurring revenue channels, our recurring revenue as a proportion of our total revenue is on an upward trajectory. We are confident that this trend will persist, as we tap into the abandoned opportunities that lie ahead. As such, we are maintaining our earnings guidance for 2023 as announced before. Now let’s talk about some other significant additional details for Q2. Highlighting the tangible growth and forward momentum we have experienced, we are pleased to share that the proportion of recurring revenue in our overall revenue portfolio for the three-months ending June 30, 2023, stood an impressive 67.4%, up from 56.2% in the same period the prior year.

This upward trajectory was sustained over the first half of 2023, registering at 67.6% compared to 56.5% during the same time frame in 2022. These figures underscore the successful execution of our strategy to concentrate in generating recurring revenue, putting us on the path toward enduring strength and stability. Our fiscal discipline is further highlighted in the first half of 2023, where we achieved commendable reduction cash used for operation down to $19.2 million from $23.1 million in the same period last year. It is worth noting that our 2023 figures include one-time payments for accrued accounts payable from 2022 professional fees and deployment of new systems. Adjusting for this, our actual cash expenditure was approximately $12.5 million for first six-months and just a bit over $5.5 million for Q2 of 2023.

This showcases our commitment to efficient financial management as we position Recor for growth and scale. Turning your attention to the financial metrics for the period ending June 30, 2023, and other recent developments, I will cover several promising trends in all of our key metrics. Due to 2023 revenue, we achieved a robust $8.6 million in revenue, suppressing consensus expectations and showcasing a remarkable 132.4% surge from this $3.7 million recorded during the same period in 2022. Our first six-months of 2023 revenues, totaled $14.7 million, up 121% from the $6.7 million of the same period in 2020. As mentioned earlier, our revenues have continued to grow organically in all of the quarters since the operations of our recent acquisitions have been fully included, as demonstrated by revenue increases of more than 35% quarter-over-quarter.

Turning to adjusted gross margins. We have also seen remarkable improvements in this category, up to 51.8% for the second quarter of 2023 from 39.4% in the second quarter of 2022. This performance has been fueled by new valuable technology advancements in the years of automation and process controls, enabling us to optimize costs and bolster margins. Operating losses, as a result of our improved margins and reduction in SG&A expenses, we have successfully decreased our operating loss from $15.7 million in the second quarter of 2022 to $10.3 million in the second quarter of 2023. Furthermore, the first half of 2023 saw a reduction from $28.4 million in the corresponding period in 2022 down to $23.0 million even as we worked intently to complete the integration of the STS acquisition.

Adjusted EBITDA for the second quarter of 2023, the loss sense at $7.2 million, a significant improvement of over 40% from the $12 million in the same period last year. For the first six-months of 2023, reduced the EBITDA loss by 23.5% to 16.5 million, down from $21.6 million in the same period last year. The quarter-to-quarter improvement from Q1 2023 was roughly a $2.3 million reduction or approximately 24%. We anticipate this trend to continue as we continue to grow our top line and manage our operating expenses prudently. As we have moved forward, we are borrowing1x expenses linked to payable management asset and inventory systems deployment and associated professional services. We continue to maintain a discipline approach on operating expenses and diligently review each of our financial metrics with the objective of strategically allocating resources to areas that provide the best opportunities to drive revenue acceleration.

To provide a more granular insight into our upward trajectory, we have been providing enrich key performance indicators. Our goal is to empower you to assess not only our powers in obtaining new contracts, but to appreciate the enduring value this contract brings to our performance commitments. In the second quarter of 2023, we secured contracts worth of $17.6 million at 411% increase over the 3.5 million total contract value in the same quarter of 2022. Additionally, through the six-months ended June 30th, 2023, we secured contracts worth of $29.7 million at 497% increase over the $5 million total contract value in the same period of 2022. Finally, as of June 30, 2023, our remaining contract performance obligations stood at $31.8 million, a notable jump of $10.4 million or 48% when compared with $21.4 million as of December 31, 2022.

We project that approximately 69% of the residual performance obligation as of June 30, 2023 will be realized in the coming 12-months. Moving to our financial conditions and liquidity. In January, we completed the closing of senior secure notes in the aggregated amount of up to $15 million led by our CEO Robert Berman with participation from other new and existing investors. At closing, $12.5 million was funded in March, 2023. We also completed a registered direct offering for $10 million. This transaction gave us the liquidity we needed to continue and execute our strategy. Our cash balance on June 30, 2023 was $2.4 million, an increase from $1.9 million as of December 31, 2022. In July, a warrant holder exercised his warrants, which resulted cash proceeds of approximately $11 million.

Our working capital position has also improved significantly. As of June 30, 2023, we had a working capital deficit of $1.7 million as compared to a deficit of $6.2 million as of December 31, 2022. The improvement in working capital was primarily due to an increase in cash and cash equivalence and accounts receivable. In summary, we are pleased to see continuing strong results and synergy and synergistic impacts from our strategic moves. This continues to give us confidence in our forward-looking guidance and the company’s upward trajectory, operational efficiencies and commitment to long-term growth and shareholder value generation. With that, I will now turn the call over to David. David.

David Desharnais: Thanks Eyal. Good afternoon to everyone joining us on the call today. As Eyal covered with the financial metrics, Q2 represented another quarter of solid execution and revenue growth across all business lines. This was accompanied by new breakthrough product and technology deployments, operational efficiency gains contributing to significant margin improvements, new key public private partnerships for the Rekor partner network, and significant national news and media coverage on the unique value that we are delivering to customers. All of this contributes to our record 17.6 million in total contract value and margin improvements achieved in Q2, a new high watermark for Rekor. In the quarter, we have gained new customers and expanded contracts with existing customers across all of our product lines, including public safety and licensing, urban mobility and transportation management.

For public safety and licensing, some Q2 highlights include a significant increase in the adoption and contract expansion for our AI based vehicle recognition and insights across OEM licensing partners, reseller channels, and through our direct sales efforts for leading law enforcement agencies in New Jersey, Illinois, California, Florida, Oklahoma and more. Given that 70% of all crime involved a vehicle, our leading scout platform, which provides AI-based real-time vehicle recognition, continues to be a proven mission critical solution that local, state and federal law enforcement agencies increasingly depend on to support officers as they work to reduce crime in the cities and communities they serve. One example for Q2 was the national news coverage Rekor received in Fox Business for the indispensable role that our AI technology played in aiding Westchester County in New York to crack a major and very public drug trafficking and weapons investigation.

In addition to our direct sales efforts in the quarter, w also added and expanded multiple value-added reseller relationships that will further accelerate our go-to-market activities moving forward. Switching gears to our Urban Mobility product line. In Q2, we continue to see significant interest, engagement and expanded deployments of our Discover platform’s count, class, and speed applications for permanent and short term studies across Departments of Transportation in South Carolina, Georgia and Florida as well as 11 additional states across the U.S., that are in initial stages of deployment and assessment. In addition to gaining footprint in Q2, Rekor was also featured across multiple local and state television news stations in South Carolina, Georgia, and Florida highlighting the important work that we are doing to help states use our leading edge vehicle classification, count and speed to prove and to recover federal dollars back to their states to fund infrastructure investments.

For the Urban Mobility product line, we are heads down and in full execution mode here and believe our technology continues to significantly outperform all other approaches currently on the market. In addition to being able to uniquely capture all 13 specialized Departments of Transportation and vehicle classes across multiple lanes at highway speeds at high volumes day and night in all kinds of weather, our Discover platform does all of this in real time at a fraction of the cost and without having to block traffic for long periods or having to dig up the roadway. Our solution is non-intrusive and is implemented using AI from the side of the road without shutting down lanes for construction, and or putting roadway workers in harms way. In addition, over the past quarter, we have been building and proving out a commercial based solution using the same Discover AI technology, that has proven to unlock unprecedented customer insights and growth for brick-and-mortar businesses, enabling them to better attract, engage and serve their customers.

We call this newly launched Discover application Vehicle Insight. By fusing our cutting edge AI and unmatched expertise in Roadway Intelligence, our new Vehicle Insight application goes beyond near data to provide businesses with unparalleled immersion into the end-to-end customer journey right from the moment a customer drives onto a property as a part of the Vehicle Insight application. Companies can access and facilitate a rich set of features and capabilities on demand, including loyalty programs, premier customer services and access visitation metrics that assist in the analysis of traffic flow patterns, helping organizations to better understand, prepare and plan for customer volume fluctuations, vehicle characteristics that provides vehicle analytics, such as state of origin of the vehicle, to help with geo-based marketing efforts, plus electric vehicle statistics delivering EV volumes and patterns to support data-driven EV services and initiatives.

From restaurants, shopping malls and major retail outlets to hotels, theme parks, casinos, resorts and more, our Vehicle Insight application gets bricks and mortar businesses real insight into customers’ desires and needs in real time so they can better shape the customer experience and drive growth. Turning our attention our third product line Transportation Management. In Q2 we also continue to expand our footprint and presence with our command platform, while at the same time delivering new innovations into the market. Building on our recent win in Q1 with Texas Department Transportation, where we are being deployed at the backbone of their entire new traffic management system across the state, which by the way, is the largest roadway network in the United States.

Well in Q2, we extended our relationship into multiple other districts across Texas, including our new contract and expansion into the Central Texas Regional Mobility Authority, otherwise known as CTRMA for incident management. This new multi-year contract with CTRMA further solidifies and enables our ability to service multiple agencies across Texas with a single source of truth and a single pane of glass as they work to build smarter, safer, greener, and more equitable roads based on our Rekor partner network and our Rekor technologies. One final area to highlight for Q2 is the public-private partnership that we have forged with some of the most prominent academic institutions in the U.S. and on an international scale. In the areas of data and analytics, transportation, traffic, and infrastructure engineering.

Along this line, we are pleased to announce our collaboration with Tel Aviv University, specifically with our distinguished laboratory for AI, machine Learning, Business and Data Analytics, or LAMBDA for short. Much more to come in this domain, and I look forward to providing continued updates on this front. In conclusion, I want to thank our talented team for their ceaseless dedication, our partners for their trust, and our shareholders for their unwavering confidence in our journey. The future is bright and we are driving it full speed. At this point, I will turn the call over to Robert Berman, our CEO and Chairman of Rekor for final remarks. Robert.

Robert Berman: Thank you, David. Good afternoon, everyone. First and foremost, I want to take this moment to extend my heartfelt gratitude to our dedicated team. The accomplishments we have discussed today aren’t just numbers on the spreadsheet. Their testament to the hard work innovation, and relentless drive of every single member of our Rekor family, driving such significant revenue growth within the short span is no small feat. It is the result of countless hours of dedication, tireless effort, and a shared vision and while our financial achievements are indeed laudable. I want to particularly emphasize the seamless assimilation of our two strategic acquisitions. This integration showcases our team’s ability and adaptability and commitment, ensuring that we not only acquire, but truly incorporate the value of these new entities into Rekor.

We have ventured beyond and have pioneered an entirely new category AI roadway intelligence. This isn’t just a niche, it is a revolution in the way we perceive, analyze, and utilize roadway data. And it is a category that we at Rekor are proud to lead. This dominance in AI roadway intelligence is a testament to our team’s innovative spirit and positions us at the forefront of our industry. Hence more good news, I’m pleased to share that we have nominated two new directors for election at the upcoming shareholder meeting this fall. The two new additions are Professor, Sanjay Sharma, Head of Mechanical Engineering at MIT, and President, CEO and Dean of the Asia School of Business; and Mr. Tim Davenport, Chief Operating and Chief Compliance Officer for Arcus Global.

Professor Sarma has long been recognized as a thought leader in urban mobility, and as a co-founder at MIT of the Auto ID Center and a pioneer who helped develop the Internet of things. Mr. Davenport also brings a vast wealth of financial and operational expertise to the board. His keen financial insight will be invaluable in helping to shape Rekor financial strategies. In closing, I want to express my deep gratitude to our shareholders. Your trust, support, and belief in our vision have been the foundation of our achievements Together. We are not just navigating the future, we are shaping it. Now, I would like to open the floor for any questions you may have, so please don’t hesitate to ask. We are here to provide transparency and clarity, and we are eager to address any concerns or inquiries you may have.

Operator.

Q&A Session

Operator: Our first question comes from Michael Lana with Northland Capital Markets.

Michael Lana: In terms of the total contract value one is it fair to say that the contributor there sort of was public safety first, urban mobility second and transportation third given? That is kind of how you laid out the drivers here.

Robert Berman: I’m going to – Mike, I think Eyal should answer that for you.

Eyal Hen: I would say, the order that you said it is not quite right. It was urban mobility and then the licensing services and profit management all contributed significant values to this DCV.

Michael Lana: And then on the urban mobility opportunity here, I just want to be clear. So is it fair to say you have – it sounds like you have contracts in South Carolina Florida and Georgia. So just wanted to clarify that you do have official contracts there for production.

Robert Berman: Yes, that is right. Yes.

Eyal Hen: Yes, you are right. We have official contracts with the state that you mentioned.

Michael Lana: Are the type of payments there, kind of the fully recurring model, or would some of them be by the hardware and then pay maintenance?

Robert Berman: It is a combination of both, Mike.

Michael Lana: And then so you have basically 11, sounds like 11 other state trials going on, is that right?

Robert Berman: Mike, we are working with almost half the states in the United States right now, and we are doing everything that we can to try to line them up like an air traffic controller would. Based on our resources and based on timing and so forth. We are focused where the revenue and the margin is right now and are looking for that. And as we sort things out, we will work with the states as best we can, but everybody is interested in this technology. And that is the most important thing. I think in Urban Mobility, we introduced this product not that long ago and we thought significant adoption. And Eyal said, that is the majority of the additional total contract value, and it is just started. It is just starting.

Michael Lana: Last one, I guess, just in terms of those that led interest, how many dates do you think might make a decision on a kind of commercial rollout by your end?

Robert Berman: I think, David, I mean, do you have a sense of that?

David Desharnais: At year end, I would expect almost three quarters of those to have made, the decision to move forward.

Operator: Our next question comes from Zach Cummins with B. Riley Securities. Please proceed with your question.

Zach Cummins: Robert, can you just give us a sense of maybe the size of the opportunities that you are looking at within that Urban Mobility pipeline? I know you have some pretty substantial contracts South Carolina and Florida, but just trying to get a sense of maybe the size of some of the opportunities in the pipeline.

Robert Berman: Zach, that is a good question, and we are still sorting it out, but they are all very substantial opportunities. And I think when you when you would look at total contract value increase of 2023 over 2022 of 400 plus percent, you get a sense of what those are. So this is simply new technology that is just introduced replacing legacy technology that is been around for seven, eight decades. And the states spend a lot of money to collect this data and get their funding from the federal government. So they are all large, Zach. They are all very large. They are all seven, eight, nine figure contracts. So, we are just getting going. So we are just getting our footing and our sea legs. So I think we are excited about it, but I’m hesitant to lung in numbers, but I will say that it is coming. It is happening. It is coming, and we see it. We see it right now.

Zach Cummins: And Robert, I mean, In terms of the overall landscape, is it essentially that Rekor just displacing all these legacy technologies within that Urban Mobility segment, or are you seeing other approaches or competitors in this front, with this new emerging opportunity?

Robert Berman: I’m going to answer half that question, and I’m going to ask David to answer the other half. Rekor is absolutely unequivocally displacing the legacy technology for the legacy reasons that the states have had to collect this data. Okay. Where we are headed in the future has to do with the Internet of things. And I’m going to let David answer that, because that is where things converge, and it is a much different world. So maybe, David, you can take it from there.

David Desharnais: What is interesting, Zack, is when you look at a footprint that footprint extends into multiple different value-added services. So when you think about, replacement of legacy TACIAP, absolutely, for sure. I don’t think, a road tube across the road is really going to be the way a state goes from now on knowing that AI is available, and that is what we are seeing. But in addition to that when you think about new legislation coming down the path for things like greenhouse gas emissions, that is a big deal. And how would you do that with the road tube? You really couldn’t. And so, the way we go to market is actually quite different and extensible. Once you are in, you are in, and once you are in, you are able to expand into multiple value-added services with the same exact footprint, with the same exact device that we already have out there doing the fundamental class count and speed.

I’m going to pause there for a second, Zach, so I want to make sure I’m answering your question.

Zach Cummins: I think that completely covers it there and sounds like a lot of great opportunities into adjacent areas. And my final question, maybe geared towards the Eyal is ending the quarter, I think just under three million in cash, but you did get proceeds from more and exercises in July. I mean, how should we think about necessary proceeds to continue to execute upon your growth plans, as we go second half of 2023 and into 2024?

Eyal Hen: Yes. As I mentioned, we reduced significantly our cash burn and the – our ability to have the additional funds in July help us a lot and take us further into 2024. And back then, we will look for other opportunities. But as I mentioned, we are closing the GAAP of cash burn and reducing it significantly. So this cash that is raise in July will take us long way.

Robert Berman: Yes. I think, Zach, I just want to add to what Al said. I think, look, we are managing resources okay, with revenue and margin, all right. And we have got our people out there chasing the revenue and the margin. So we can’t be everywhere at the same time, because we do have limited resources. The company is very focused on acquiring a debt facility to be able to implement its systems, right. Because doing it with equity is inefficient, right. It doesn’t make much sense. And as we close the gap here and come towards profitability later this year, and it is coming, we hope to be able to do that with, with debt, Zach. And I think that is what we are working on. So we are very cognizant of that. And I think that, the reduction of cash burn has given us the ability to extend our life much longer with much shorter dollars today. So we are getting closer and closer every day, because the revenue and the margins are there.

Operator: Our next question comes from Michael Latimore with Northland Capital Markets.

Michael Latimore: So on the South Carolina, Florida, and Georgia deals, what percent of those have been deployed? And then I guess generally, I mean, it looks like you are going to have a very strong growth curve here. How are you feeling about your resources and ability to deploy major new contracts?

Eyal Hen: So, Mike, as you alluded to earlier, we have two models, right? One is completely pay for data. The other is a combination of hardware acquisition and pay for data. And where we are focused now is where we can get revenue and margin with cash, right. So that would be hardware pay for data. So we are trying to extend ourselves where we can very small percentage, very small percentage. We barely begin to even touch the tip of the iceberg with regard to how large this opportunity is just in a few states within our footprint. And as David said earlier, I mean, we have got half the country looking at this technology right now, and as you suggested, three quarters of them probably going to convert. We will get to them when we can, right.

So we are just trying to manage our way through with the resources we have as best we can until we deploy, we can deploy the capital efficiently. That is all like any new technology, right. You can’t — you got to figure the capital deployment out, right. So, that is what we are trying to figure out. And the good news is the margins are good, the demand is there, the technology is being adopted. We have much more demand right now, and we do the ability to provide the resources to go do it. So it is just a question of figuring all out and getting there.

Michael Latimore: Is there a current number per day you could deploy or like, what is sort of the run rate?

Robert Berman: Well, again, we are shifting resources around from state to state, depending on, maybe David, you can answer this, but from state to state, depending on where margin and revenue is, right. So, David, can you help here?

David Desharnais: Yes. When you are local meaning within a hundred mile radius of where we have resources, I mean, we are looking at anywhere from five to 10 a day, depending on distances between if you are jumping on a flight to go somewhere and getting bucket trucks and everything over there. It is a little different story. But I would say once our boots on the ground, it is a very efficient process for getting things installed. The majority of our crews are located in the southeast and east, east coast. So as we roll West coast, we will be looking to expand as well.

Robert Berman: I think, Mike, I think that the good news is that the margins pay for data is great and we’d love that model, what the margins on the, all, all of what we do has a recurring revenue component, right. So there is a maintenance software component, so the margins just on the hardware software as well. You know, they are very high margins. So we are happy to do it either way. And it is a question of balancing resources. When you are small, fledgling, you are starting to grow. We are just getting more – the good news is the adoption is there, the demand is there. So we are trying to figure it out as best we can. It is a high class problem, you know.

Operator: There are no further questions at this time. I would now like to turn the floor back over to Robert Berman for closing comments.

Robert Berman: Thank you, Operator. So, Mike, Zach, thank you for those questions. I know there is a lot of people out there listening that didn’t ask questions, but look, this Company’s made tremendous progress in a relatively short period of time when you think about the introduction of new technology into especially when you are dealing with government, right. But the good news is, we see the results, the adoption is there, the technology is working. It is not easy to do what we are doing, but I think we have made it through the toughest period. We have got a great team, we have got great leadership, and we are just getting ready to catapult. I mean, this company is off to the races now, and I think we have made it through the most difficult period of the last few years. So, thanks everybody for your support and continued interest. Thank you.

Operator: This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation.