Rekor Systems, Inc. (REKR) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, and welcome to today's Rekor Systems, Inc. Conference Call. My name is Maria, and I'll 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 may be construed as predictions 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 disclaimers 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 be also discussed on this 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.

Hi, everyone. Thank you for joining us to discuss our results for the 6- and 3-months ending June 30, 2023. We're excited to share our continuing progress with you. I'd like to begin by underscoring our continuous revenue momentum and the accelerated achievements we've seen recently. Our journey on the rapid growth trajectory begin with the 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 Rekor 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 flourished as the Rekor Traffic Services Division of Rekor. The second integration was the linchpin to the recent introduction of our Rekor Discover Urban Mobility platform, delivering a breakthrough AI-based approach to count, class, and speed studies for the state departments of transportation and municipalities. All this underscores our ability to recognize growth catalysts, swiftly execute on them, and successfully achieve synergies and drive expansion by integrating people, processes, and technologies into the heart of our business operations. As a result of these achievements, we are pleased to highlight an unprecedented top line growth. We have witnessed a consecutive quarter of remarkable quarter-over-quarter growth above 35%. It's notable that we were also able to achieve this quarterly result while simultaneously reducing our SG&A expenses. We think we have demonstrated that we can be financially prudent even as we integrated significant acquisitions. It's also notable to mention that we achieved this while continuing to make key investments in our future through research and development. While we are seeing expansion in both our non-recurring 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 abundant 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 3-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 towards enduring strength and stability. Our fiscal discipline is further highlighted in the first half of 2023, where we achieved a commendable reduction in cash used for operations down to $19.2 million from $23.1 million in the same period last year. It's worth noting that our 2023 figures include onetime 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 the first 6-months and just a bit of $5.5 million for Q2 of 2023. This showcases our commitment to efficient financial management as we position Rekor for growth and scale. Turning your attention to the financial metrics for the period ending June 30, 2023, and other recent developments, I'll cover several promising trends in all of our key metrics. Q2 2023 revenue, we achieved a robust $8.6 million in revenue, suppressing consensus expectations and showcasing a remarkable 132.4% surge from the $3.7 million recorded during the same period in 2022. Our first 6-months of 2023 revenue totaled $14.7 million, up 121% from the $6.7 million of the same period in 2022. 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 margin. 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 and the use of automation and process control, enabling us to optimize cost and bolster margins. Operating losses as a result of our improved margin 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 group's corresponding period in 2022, down to $23.0 million, even as we work intently to complete the integration of the STS acquisition. Adjusted EBITDA for the second quarter of 2023, the loss stands at $7.2 million, a significant improvement of over 40% from the $12 million in the same period last year. For the first 6-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've borne onetime expenses linked to payable management, assets and inventories, systems deployment, and associated professional services fee. We continue to maintain a disciplined 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've been providing a rich key performance indicators. Our goal is to empower you to assess not only our prowess in obtaining new contracts, but to appreciate the enduring value these contracts bring to our performance commitments. In the second quarter of 2023, we secured contracts worth of $17.6 million, a 411% increase over the $3.5 million total contract value in the same quarter of 2022. Additionally, through the 6-months ended June 30, 2023, we secured contracts worth of $29.7 million, a 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 obligations as of June 30, 2023, will be realized in the coming 12-months. Moving to our financial condition and liquidity. In January, we completed the closing of senior secured 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 of $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 exercise is worked, which resulted in 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 equivalents and accounts receivables. In summary, we are pleased to see continuing strong results and synergistic impacts from our strategic moves. This continues to give us confidence in our forward-looking guidance in 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?

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've 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 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, we 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 continued to see significant interest, engagement and expanded deployments of our Discover platform 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 Department of Transportation and vehicle classes across multiple lanes and 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 bought traffic for long periods or having to dig up the roadway. Our solution is nonintrusive and is implemented using AI from the side of the road without shutting down lanes for construction and/or putting roadway workers in harm's way. In addition, over the past quarter, we've 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 Insite. By fusing our cutting-edge AI and unmatched expertise in roadway intelligence, our new Vehicle Insite 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 Insite 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 provide 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 Insite application gives bricks-and-mortar businesses real insight in the customers' desires and needs in real time so they can better shape the customer experience and drive growth. Turning our attention to our third product line, Transportation Management. In Q2, we also continued 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 of Transportation, where we are being deployed as 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. While 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 multiyear 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 her 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're driving at full speed. At this point, I'll turn the call over to Robert Berman, our CEO and Chairman of Rekor for final remarks. Robert?

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've discussed today aren't just numbers on spreadsheet. They are 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 2 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've ventured beyond and have pioneered an entirely new category, AI roadway intelligence. This isn't just a niche. It's a revolution in the way we perceive, analyze and utilize roadway data, and it's 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. And more good news, I'm pleased to share that we have nominated 2 new directors for election at the upcoming shareholder meeting this fall. The 2 new additions are Professor Sanjay Sarma, 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 Arctis Global. Professor Sarma has long been recognized as a thought leader in urban mobility and as a cofounder 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's 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'd like to open the floor for any questions you may have. So please don't hesitate to ask. We're here to provide transparency and clarity, and we're eager to address any concerns or inquiries you may have. Operator?

[Operator Instructions] Our first question comes from Michael Latimore with Northland Capital Markets. Please proceed with your question.

Thanks and congrats on the really strong results here. Looks good. 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's kind of how you laid out the drivers here?

I'm going to -- Mike, I think Eyal should answer that for you.

Yes. Mike, thank you for the question. I'll say the order that you said it's not quite right. It was over mobility and then the licensing services, the profit management all contributed significant value to the TCV.

Okay. Got it. 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 I just wanted to clarify that you do have official contracts there for production rollouts?

We have... Yes, that's right. Eyal?

Yes, you're right. We have official contracts with the states that you mentioned.

And are those -- 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?

It's a combination of both -- it's a combination of both, Mike.

Exactly.

Got it. And then so you have basically 11 -- some like 11 other state trials going on, is that right?

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

Great. Last one, I guess, just in terms of those that interest, how many states do you think might make a decision on a kind of commercial rollout by year-end?

I think -- David, I mean, do you have a sense of that?

By year-end, I would expect almost 3/4 of those to have made the decision to move forward.

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

Thanks for taking my question and congrats on strong results here in Q2. Robert, can you just give us a sense of maybe the size of the opportunities that you're looking at within that urban mobility pipeline? I know you have some pretty substantial contracts with South Carolina and Florida, but just trying to get a sense of maybe the size of some of the opportunities in the pipeline.

Zach, that's a good question, and we're sorting it out, but they're all very substantial opportunities. And I think when you look at the total contract value increase of 23% over '22 100-plus percent, you get a sense of what those are, right? So this is simply new technology that's just introduced, replacing legacy technology that's been around for 7, 8 decades. And the state spends a lot of money to collect this data and get their funding from the federal government. So they're all large, Zach. They're all very large. They're all 7-, 8-, 9-figure contracts. So we're just getting going. So we're just getting our footing in our sea legs. So I think we're excited about it but I'm hesitant to lunge some numbers, but I will say that it's coming. It's happening, it's coming. And we see it. We see it right now. So...

Understood. That's helpful. And Robert, I mean, in terms of the overall landscape, is it essentially that Rekor is just displacing all these legacy technologies within that urban mobility segment? Or are you seeing other approaches or competitors on this front with this new emerging opportunity?

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're headed in the future has to do with the Internet of Things, and I'm going to let David answer that because that's where things converge, and it's a much different world. So maybe, David, you can take it from there.

Yes. It's interesting, Zach, is when you look at a footprint, that footprint extends into multiple different value-added services. So when you think about replacement of legacy tech; yes, 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's what we're seeing. But in addition to that, when you think about new legislation coming down the path for things like greenhouse gas emissions, that's a big deal, and how would you do that with a road tube, you really couldn't. And so the way we go to market is actually quite different and extensible. Once you're in, you're in, and once you're in, you're 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 back because I want to make sure I'm answering your question.

I think that completely covers it there, and it sounds like a lot of great opportunities into adjacent areas. And my final question, maybe geared towards Eyal is ending the quarter, I think just under $3 million in cash, but you did get proceeds from warrant 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 '23 and into 2024?

As I mentioned, we reduced significantly our cash burn in the -- our ability to have the additional funds in July, helped us a lot when you take us further into 2024. Back then, we will look for other opportunities. But as I mentioned, we are closing the gap of cash burn and reduce it significantly so the cash that we raised in July will take us a long way.

Yes. I think, Zach, I just -- I want to add to what Eyal said, I think, look, we're managing resources, okay, with revenue and margin. All right. And we've got our people out there chasing revenue and the margin so we can't be everywhere at the same time because we do have one of the resources. The company is very focused on acquiring a debt facility to be able to implement systems, right? Because doing it with equity is inefficient. It doesn't make much sense. And as we close the gap here and come towards profitability later this year, and it's coming. We hope to be able to do that with debt, Zach, and I think that's what we're working on. So we're 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're getting closer and closer every day because the revenue and the margins are.

Understood. Well, thanks for taking my questions and best of luck with the rest of the quarter.

Yes. Thank you.

Our next question comes from Michael Latimore with Northland Capital Markets. Please proceed with your question.

Great. Thanks. Yes. 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're going to have a very strong growth curve here. How are you feeling about your resources and ability to deploy major new contracts?

So Mike, as you alluded to earlier, we have 2 models, right? One is completely pay-for-data. The other is a combination of hardware acquisition and pay-for-data. And where we're focused now is where we can get revenue and margin with cash, right? So that would be hardware paid-for-data. So we're trying to extend ourselves where we can -- very small percentage, a very small percentage. We barely began 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've got half the country looking at this technology right now and as you suggest that 3/4 of them probably going to convert, we'll get to them when we can, right? So we're just trying to manage our way through with the resources we have as best we can until we can deploy the capital efficiency. That's all. Like any new technology, right? You've got to figure the capital deployment out, right? So that's what we're 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 than we do the ability to provide the resources to go do it. So it's just a question of figuring all getting there.

Got it. Is there a current number per day you could deploy? Or like what's sort of the run rate?

Well, again, it's -- we're 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?

Yes. When you're a local mining within a 100-mile radius of where we have resources, I mean, we're looking at anywhere from 5 to 10 a day depending on distances between. If you're jumping on a flight to go somewhere and get in bucket trucks and everything over there, it's a little different story. But I would say, once their boots on the ground, it's a very efficient process for getting things installed. But the majority of our crews are located in the Southeast and East Coast, as we roll West Coast, we'll be looking to expand as well. So...

I think, Mike, I think the good news is that the margins -- pay for data is great, and we love that model. But the margins on the -- all of what we do has a recurring revenue component, right? So there's a maintenance of -- so the margins just on the hardware software as well, they're very high margins. So we're happy to do it either way, and it's a question of balancing resources when you're small budgeting -- you're starting to grow. We're just getting our ceilings. The good news is the adoption is there, the demand is there. So we're trying to figure it out as best we can. It's a high-class problem.

Yes, for sure.

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

Thank you, operator. So, Mike, Zach, thank you for those questions. I know there's a lot of people out there listening that didn't ask questions. But look, this company has made tremendous progress in a relatively short period of time when you think about the introduction of new technology into a marketplace, especially when you're dealing with government, right? But the good news is we see the results. The adoption is there. The technology is working. It's not easy to do what we're doing. I think we've made it through the toughest period. We've got a great team. We've 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've made it through the most difficult period of the last few years. So thanks, everybody, for your support and continued interest. Thank you.

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