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

Good afternoon, ladies and gentlemen, and welcome to the Rekor Systems Special Investor Conference Call. My name is Diego, 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 disclaimers in our earnings release. Should you 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 that the presentation of non-GAAP information provides useful supplementary data concerning the company's ongoing operations and is provided for informational purposes only. It is now my pleasure to introduce your host, Robert Berman, Chief Executive Officer. Thank you. You may begin.

Welcome, everybody. Thanks for joining. I'm here today to tell you about a significant development of Rekor Systems. As you probably know, we're working hard to lead the way in roadway intelligence, and that requires us to deploy our groundbreaking technology as quickly as we can. So let me get straight to the heart of the matter. Rekor Systems just completed the sale of a registered offering of $15 million in revenue sharing notes. We plan to put the proceeds to work immediately to provide working capital and fund near-term expansion of our operations. While this is just the first series in an innovative program, we have developed to fund our growth going forward. We're at a pivotal moment in our journey, and I'd like to explain why this offering is of immense importance to all of our valued investors. First and foremost, this unique financing mechanism has allowed us to unlock the incredible value of our existing stream of recurring revenues, which we've been intently focused on at the core component of our contract obligations. Our success in generating recurring revenues under our pay for data model has been enabled by the development of our advanced technology. But we need to do installations to put it to work and to put it to work quickly. Rekor needs the ability to finance the installations required for the implementation of thousands of multipurpose IoT nodes across the country and beyond. The innovative note structure this offering uses is designed to significantly reduce the need for us to rely on equity-based financing to fund the installations that fuel the growth of our recurring revenue. I would also like to point out that the 3-year note term on average is more than twice the time needed to recover our investment. This is a game changer for us, and we expect it to ensure a more stable and sustainable path forward. The innovative solutions that we've been developing over the last few years are designed for use by departments of transportation and other large governmental agencies and commercial users. The structure of our new revenue-sharing note program allows us to tap into the value of our existing revenue stream on a strategic basis, just long enough to finance the installations that grow that stream without having to permanently dilute shareholder value with additional equity raises or saddle our balance sheet with long-term debt financing. This is a win-win structure. The noteholders are amply secured by a revenue account held by the Indenture Trustee, which is the first stop for the revenues generated from a pool of existing contracts with our best customers. After monthly interest payments are made and prudent reserves are maintained, the remaining revenues are released to support our ongoing operations. Meanwhile, the funds raised can support the installations necessary to generate additional revenues from new contracts. And those contracts can be added to the pool to support the implementation of additional contracts. So the quicker the pool increases, the quicker we expect to be able to implement new installations and these will further fuel our recurring revenue growth. So I want to emphasize that this is just the beginning of a longer-range plan. The indenture allows additional series of notes to be issued and secured on a parity basis and for the contract pool providing those revenues to be expanded as additional installations are brought online. By using this innovative note program to fund installations instead of permanently dilutive equity offerings, we expect it to play a pivotal role in our future growth and development, allowing us to rapidly solidify our position as a leader in roadway intelligence technology. Lastly, I'd like to mention that we've structured these notes to be able to trade in the secondary market, providing an avenue for a new class of investors, those with the need for monthly cash returns to participate in Rekor's journey. As long as I have you here, I also wanted to take a moment to briefly address a concern that many small NASDAQ-listed companies, including Rekor Systems have faced in recent years. It's a practice known as short reports. These reports often claim to be based on thorough research, but are in reality self-serving and speculative in nature. Short reports are typically written with the sole purpose of driving down a company's stock price, benefiting those who have short positions in the company's shares. They often distort facts, make exaggerated prognostications and are designed to create a negative narrative about the company. Like others, we have, at times, been subject to these questionable practices. However, we want to assure our investors and stakeholders that we remain steadfast in our commitment to transparency, integrity and providing accurate information about our operations and financial performance. We believe that the best way to address these challenges is to continue to execute on our strategic initiatives, deliver strong results and focus on our long-term growth prospects. We encourage our investors to rely incredible sources of information and conduct their own research when evaluating their investment decisions. In closing, I want to express my gratitude to each and every one of you for your unwavering support of Rekor Systems. Together, we're paving the way for a smarter, more connected future on our roadways and I'm confident that this note offering is a major step in securing a bright future for Rekor. Thank you. And the operator will now open up your telephone lines for questions.

[Operator Instructions] Our first questions come from the line of KC Ambrecht with Shay Capital.

Thank you very much for hosting the call today. I think it goes a long way in explaining the structure. And congratulations on the [ sales ] offering, it seems like it's a big milestone accelerating the company's growth. So Robert, a question that I've had and I've received from other investors is how big is this IoT kind of nodes TAM or total addressable market. I mean one as I'm speaking to things that like there's only like 15,000 installs at a couple of hundred dollars a month. Like what are we looking at here in terms of like if you could roll [ the stator fingers ] and roll it out.

Well, I have to answer that in several parts. So first of all, there are over -- that we know of just done by the states alone, over 5 million trap accounts a year, okay? And you don't have to take my word for it, you can go to any state DOT site and go to their traffic data collection section. You'll see a map. You've seen us use that map before on investor calls and presentations, right? And it shows where all their account systems are, right? So they're required to do this each and every year for the federal government to get their distribution of highway funding. When you go back decades, okay, this was done with pneumatic tubes and in some cases, where permanent sites were installed. These were induction loops and cases which require digging up the ground and so forth. That technology existed from, let's say, the late '50s through maybe the early '90s. In the early '90s, we saw the introduction of a technology called the side firing radar made by a number of different companies. And that technology is still out there today. You can see them on most interstates and highways and they collect 4 of the 13 bins. So just to show you that how it just doesn't have the ability to do all 13, so they're getting part of the data. And as best we know between the mid-'90s and like the 2010s, there were over 400,000 of those installed across the United States. As a matter of fact, STS, a company we acquired back in June installed thousands over the years for their DOT customers. So I think the market is massive. And I think it goes beyond just the concept of count, class, and speed because these are connected nodes, you can do more things like virtual way in motion and other data that comes from systems related to emissions and SMOG scores and so forth. And think about it, if you're going to go out and install a piece of technology in the roadway, right, why do you want to put something in that either degrades or doesn't give you the ability to do something that you may need to do 2 or 3 years from now without having to go back out to the site. So look, the market is massive, okay? In the states that we're talking to are talking about large numbers of systems, because if they do portable counts on one road 10 times a year, it makes more sense to put in a permanent system to go out there and keep doing it 10 times a year, right? So I don't think anybody exactly knows. But if you look at the history of the technology, when you transition from one technology to a newer technology in the '90s, there were over 400,000 of those installed. Those are now being replaced. So that can give you a sense.

Okay. And then the next question, can you give us more color on the pipelines of the state contract? And then generally, just how are these contracts structured? Are they 1 year, 5 year? And then does the value of the contract go up as the devices are installed across kind of the footprint?

Well, the history of it, so STS pioneered the concept of pay for data. They started that with Georgia 7 years ago. And they've had the relationship with Georgia since the late '90s. So it's -- that's the nature of this business. So that contract for several hundred induction loops at the time was about $30 million over 7 years, just to give you a sense, right? So these contracts are -- in some cases, they could be 3 years with 4-year 1-year renewals. They could be 5 years with a 5-year renewal. It could be any mix and match. But once the equipment is in the ground, it's from the history of looking at it. I mean we've not seen a cancellation of any contract that our companies have had going back more than almost a decade than they have, right? So they're long term.

Well, that was going to be my next question. I mean once the equipment is installed, and it's a 5-year contract, like at the end of the contract, the equipments have ripped out. It's just once the cameras are the equipment installed up forever, right, always collecting the data.

Well, that's the point. I mean the thing about AI, this is a really important point. So think about an induction loop, right? It's a metal device that goes under the roadway that along with [ piezos is ] counting axles and distances and so forth. And it's tied back to a controller on the side of the road and blah-blah-blah, right? So in certain parts of the country, it degrades faster like in the Northeast, when you're running snow piles over these things, they often have to be fixed every year or 2, so you're [ taking ] the road up again and you're moving the stuff around. And when a road is milled and paved, then you have to go relocate all the loops and piezos, right? So the idea of what we're putting in doesn't degrade. It gets smarter over time, okay? It's all designed to push over-the-air updates out. We don't have to go back out to the site, okay? We're not limited by location because we can use solar, so we don't have to have shore power or fiber because we use cell. Cellular right, we started with 3G back a few years ago and now, obviously, 5G is making it easier to do that. So just think of the fact that these sites don't degrade, they get smarter and better over time, and you can do more with them by pushing over the software updates as we've been doing. I mean, look, we just started countless and speed, and I don't know what version went to, but we've already pushed out several updates, right? So we're constantly pushing updates of software that's getting smarter and better.

Okay. And then if we track the state DOT contract award kind of the website, does that give us a full picture of what's been awarded to Rekor and other companies? Or is there like a lag between what you're posting and what's being...

Yes. Look, every state is different. Some things are done under contract vehicles, okay, where it's a task order. Some are specialty contracts, right? So it can be tracked, but you have to do a bit of homework going there and do it. And look, I know there's been a question about our contracts. That's what I referred to in my latter part of the statement that I said before, but I just want everybody on the call to know that like, look, our performance obligations are reviewed by the Audit Committee and our auditors each quarter and obviously, they're audited at the end of the year. We did this note offering, all of those contracts that are in that $30 million pool, okay? We're available on the data room for the investors and their attorneys and everybody else to look at. So -- you can track it. It's hard because, again, some of that are contract vehicles and some of that are task orders and it depends each state, those business differently.

Okay. Great. And in the last conference call, you kind of alluded to the debt structure and then also maybe a couple -- maybe an acquisition or 2. I mean how do we think about plugging an acquisition into this new financing?

Well, I can't really talk about any -- there's no specific -- there's nothing definitive on the table with respect to an acquisition. But the problem that Rekor has, and it's a high-class problem is we're negotiating and installing new systems and negotiating new contracts within our footprint, which was STS is primarily footprint within the Southeast. We installed a bunch of proof of capability sites across the country. And there's at least half a dozen, if not more, of those states that we're engaged with that, that want to enter into a contract with us, and we're trying to address how we physically get out there and do the work. So we're working on that, and I'm sure you'll hear more about it in the near future, but it's a good problem to have, let's just put it that way.

Our next questions come from the line of Mike Latimore with Northland Capital Markets.

Yes. This is Aditya on behalf of Mike Latimore. So... could you tell... when did you sign the letter of intent?

The letter of intent for -- I'm not following you. Letter of intent for -- what are you referring to?

This particular sale of the $15 million notes.

There's no letter of intent for the notes. We sold the notes under an offering of our shelf.

All right. All right. And could you give some color on the capital expense do you need, say, like for every $100 of SaaS sales, how much capital expense do you need?

Well, like I said in the earlier statement, the term of these notes are 36 months, right? And I want to make it clear that, that pool of contracts, that value of $30 million, and we've agreed internally just our own self governance and the way we structured this note offering. Nobody has ever done anything like this that we're aware of, that we wouldn't do more than 50% leverage against that. But the contract value -- the total contract value of those contracts in that $30 million pool may be more than $30 million because they extend out past 36 months, right? So as I said there, without getting into too much detail, if you think about what I said, the 36 months, okay, the income stream from the payments monthly from our customers, okay, on average, is more than twice the time that we need to recover the investment of that system, right? And I'd love to give more detail on that. But I don't think it would be wise for us to get into the specifics of our pricing and so forth on this call, right? So I think the point is there's a very quick recovery for the implementation of the system. And then there's very little expense in operating that system going forward. It's just -- there's really nothing other than maintenance, and we have not had value rates. In the early days, we had issues with configurations and lane mapping and power, but we've worked through all those things because, again, nobody has ever developed a system like this. And so the recovery is very quick and the operating cost going forward is extremely limited. The margin on some of those contracts are in the high 80s, low 90%.

We have reached the end of our question-and-answer session. I would now like to turn the floor back over to Robert Berman for closing remarks.

Yes. Look, thanks, everybody. Appreciate your patience. Again, I can't tell you how important this is. Again, to the best of our knowledge, nobody has ever done or seen anything like this. We came up with this idea a while back, and it's a medicine we need because it gives us the ability to install systems and then recover that capital by issuance of notes. And we expect over time, this was the first series that the interest rate is a little high. But over time, as the company grows and stabilizes, we think we can bring that interest rate down. And at some point, we'll look to get these notes even rated, which will bring the cost further down. So it's a fantastic financing vehicle for us. And I want to say that some of our customers, okay, have talked to us and said, how can we talk about the contract of this magnitude, how would you finance it, right? I mean what comfort level can you give us that you guys have the ability to actually finance a contract of this size. And having this note offering completed is the answer that we can now give them and I think we'll be fully comfortable with it. So I appreciate everybody's time and look forward to seeing you on our next call. Thanks, everyone.

Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.