Rekor Systems, Inc. (NASDAQ:REKR) Q1 2023 Earnings Call Transcript May 15, 2023

Rekor Systems, Inc. misses on earnings expectations. Reported EPS is $-0.29 EPS, expectations were $-0.2.

Operator: Good afternoon, ladies and gentlemen, and welcome to today’s Rekor Systems Inc. Conference Call. My name is John and I will be your coordinator for today. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [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. And now I want to turn the presentation over to Mr. Eyal Hen, CFO of Rekor Systems. Please proceed.

Eyal Hen: Hi everyone. Thank you for joining us to discuss our results for the first three months ending March 31, 2023. We are excited to share our continuing progress with you. Our President and COO, David Desharnais, is on the call with me today together with our CEO, Robert Berman. David will brief you on recent developments in our business and Robert will provide a summary and closing remarks. But first, I will go over some relevant metrics. As indicated in our comments last quarter, given current market conditions, we continue to prioritize our efforts and investments in near term execution versus longer range development and continue our efforts to accelerate growth in recurring revenue. This has resulted in continued growth in both non-recurring and recurring revenue, while at the same time our recurring revenue as a percentage of total revenue is increasing.

This is a trend we believe will continue as we concentrate on a significant near-term opportunity we are focused on now. The percentage of recurring revenue reflected in total revenue was 68% for the three months ended March 31, 2023 compared to 57% for the three months ended March 31, 2022. This provides us with a solid foundation for strength and stability over the long-term and is being achieved despite the streamlining measures we made during the last few months of 2022 and into this year. In the first quarter of 2023, we saw significant reduction in our cash used for operations from $12.3 million in the first three months of 2022 to $9.5 million in the first three months of 2023. Furthermore, in the first quarter of 2023, the company made one-time payments for accrued accounts payable from 2022 and professional fees, which resulted a true cash burn of approximately $7 million.

In addition, the full effect of the additional reductions we made in the first three months of the year will be reflected in the second quarter of 2023. We also incurred a high level of research and development expenses in the period as we completed and began production deployment of our count, class and speed offerings for Departments of Transportation, as David will discuss later. Now, let me highlight some other details in the financial results for the three months ending March 31, 2023, and some more recent developments. Revenue for the three months ended March 31, 2023 was $6.2 million compared to $3 million in the same period last year, a significant increase of 108%. In January 2023, we finalized $15 million senior secured note transaction led by our CEO, Robert Berman.

In March 2023, we finalized $10 million registered direct offering priced at the market under NASDAQ rules. As I mentioned earlier, our percentage of recurring avenue continues to increase. Recurring avenue for the three months ended March 31, 2023 increased by $2.5 million compared to the same period last year. This represents an increase in recurring revenues of 148%. Performance obligations increased to $24.3 million as of March 31, 2023 compared to $21.4 million as of December 31, 2022. Our adjusted EBITDA for the three months ended March 31, 2023 and 2022 was steady at $2.4 million. We continue to take a disciplined approach on operating expenses and are evaluating our results carefully. The first quarter of 2023 has an increase in operating expenses compared to the first quarter of 2022 due to higher depreciation expenses and the addition of key employees as part of our STS acquisition.

However, adjusted gross margin for the comparable periods improved and increased to 53.6% from 48.3%. We also experienced one-time expenses associated with professional fees and we’re making significant investments in the completion deployment and implementation of our new urban mobility offerings. We’ll continue to measure our expenses and cash while investing in our growth and expect to see continuing effect for our streamlining efforts. The increase in our adjusted gross margin was primarily attributable to a higher mix of software revenue. We are continually working to improve our margin by implementing new technology to further drive down cost and increase our margin. I’ve also been providing you with enhanced key performance indicators to give you a more detailed view of progress and better insight into our business over time.

We want you to be able to not only measure our success at winning new contracts, but evaluate the long-term value of those contracts in terms of their contribution to our performance obligation. During the three months ended March 31, 2023, we won $12.1 million of new contracts compared to only $1.5 million in total new contract value won during the same period in 2022. This represents an increase of $10.6 million, or 692%, compared to the three month period ended March 31, 2022. As of March 31, 2023, our remaining performance obligations amounted to $24.3 million. This represents an increase of $2.9 million or 13.6% compared to $21.4 million of remaining performance obligation as of December 31, 2022. We expect to recognize approximately 67% of the remaining performance obligations as of March 31, 2023 over the succeeding 12 months.

Moving to our financial condition and liquidity. As discussed above, in January, we completed the closing of senior secured notes in the aggregate 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. These transactions gave us the liquidity we needed to continue and execute our strategy. Our cash balance on March 31, 2023 was $12.1 million, an increase from $1.9 million as of December 31, 2022. Our walking capital as of March 31, 2023 was $7 million, up from a deficit in working capital of $6.2 million as of December 31, 2022. The increase in working capital was primarily due to an increase in cash and cash equivalent and accounts receivable.

To sum up, we are confident regarding Rekor’s growth prospects because we are experiencing strong momentum in all of our key markets. And we have been addressing the most prudent ways to capitalize on those prospects by continuing to raise funds, stream administrative expenses, and focus our investment in product on near-term revenue producing opportunities. As you will hear from David in just a moment, we are taking a strategic approach to our technology investments, focusing on rapidly increasing our margins to maximize profitability. Our revenue continues to grow and our efforts to concentrate on sales with recurring revenue continue to be rewarded. Recurring revenue in the first quarter of 2023 was more than double the level in 2022. Much of this was due to our acquisition of STS and the synergies of this acquisition are becoming apparent.

The first quarter of 2023 also marks the completion and initial customer deployment of a new set of offerings designed to meet the pressing needs of large Departments of Transportation for roadway data that is more advanced and safer to collect. With more – with proven success in this area, we are now well-positioned to secure additional long-term contracts from large DOTs and expect to see sustained growth in recurring revenue during 2023. With this focus, we also fully expect to see significant improvement in our margins in the future. As such, we maintain our revenue guidance for the fiscal year 2023 to be in the range of $45 million to $55 million in revenue with EBITDA loss of $26 million to $28 million this year and profitability by the end of 2023.

Rekor remains firmly committed to creating shareholder value and making decisions that will benefit our long-term shareholders. We are dedicated to delivering consistent growth and are excited about the opportunity that lies ahead. Thank you for your continued support as we work towards achieving our goals together. With that, I will now turn the call over to David. David?

David Desharnais: Thank you, Eyal. Good afternoon everybody. Rekor continues to make progress and build momentum across all three of our primary business segments. Specifically, number one is our urban mobility segment. This segment of our business includes our leading AI-based vehicle classification count and speed technology for Departments of Transportation, as well as our ability to uniquely monitor and measure transportation, greenhouse gas emissions, roadway volume, electric vehicle recognition, and multiple other real-time mobility analytics. Number two is our transportation management segment. This segment includes our AI-powered incident detection and traffic management capabilities, targeting Departments of Transportation traffic management centers and metropolitan planning organizations.

And third, our public safety and licensing segment. This is where we first began our foundational and advanced work in AI, machine learning and computer vision, where we licensed our vehicle recognition technology to public safety, tolling transit and commercial customers. During the first quarter, we achieved many significant milestones, including advancing the state-of-the-art of our AI-based technologies, launching new breakthrough products, deepening our relationships and partnerships across the ecosystem, and adding significant new customers across each of these business segments. First, starting with the Urban Mobility segment. In Q1, we rolled out our new Rekor Discover platform using our artificial intelligence, Rekor Discover, fully automates the safe capture of Federal Highway Administration, 13 vehicle classifications, vehicle counts and speed, utilizing high resolution video streams to deliver ground truth traffic studies.

Our edge-based IoT network devices are deployed at the roadside where they utilize AI and machine learning to automatically analyze live video streams of active traffic to provide powerful roadway intelligence. This is a big deal. Why? Because it’s Rekor’s immediate path to driving massive scale revenue growth and profitability. Already in Q1, we were awarded multiple and multi-year DOT statewide traffic count and classification contracts with South Carolina, Florida, Pennsylvania, Mississippi, Alabama, and Ohio Departments of Transportation with strong forward momentum and a significant pipeline ahead. Switching gears to our Transportation Management segment. In Q1, we delivered and announced our new Rekor Command platform, setting a new standard for the future of roadway management with a breakthrough AI-driven roadway intelligence platform that provides departments of transportation and traffic management centers with real time and holistic view of what is happening on their roadways.

For the launch of our new platform, we were proud to be joined by AWS as a foundational technology partner, as well as the state of Texas DOT, the fastest growing state in the country, where they shared that our new Rekor Command platform is at the core to helping them absorb and adapt to significant increases in population and drivers. And to more quickly identify and respond to incidences, enhance traffic incident management, improve traffic flow, minimize the risk of secondary accidents, and enhance safety for roadway users and emergency responders across what is by far the largest roadway network in the United States. In addition, this quarter, the North Carolina Department of Transportation secured a significant SMART Grant award for the implementation of our new Rekor Command platform, along with our unique connected vehicle ecosystem for its automated actionable road anomalies project.

And finally, when it comes to our public safety and vehicle recognition licensing business segment, we continue to see new and significant progress here as well. Some highlights from Q1 include deploying our technology with a large U.S. federal agency for public safety, securing the largest scale statewide vehicle recognition and roadway intelligence system deployment in Mexico’s history, winning Six Flags, one of the world’s largest theme and waterpark operators as a customer across its properties. Signing Las Vegas Palms Resort Casino as our eighth major resort casino customer strengthening our position as the leader in gaming and hospitality segments. Licensing our vehicle recognition solution to one of the largest parking operators with over 15,000 customer locations across all major U.S. cities and Canada, and entering into a multi-year license agreement with Safe Fleet for our AI-based vehicle identification and license plate recognition technology at the core of its next generation violation detection platform for transit, law enforcement, as well as school bus arm violation detection.

Working with Safe Fleet we are already being deployed in two of the largest metro areas in the United States. Thank you all for the opportunity to discuss Rekor’s progress and potential. As you can see from my remarks, our Q1 achievements demonstrate the significant and momentum and progress we are making in delivering new cutting-edge innovation and providing value to our diverse set of customers across each of our business segments. Thank you for your continued support. I look forward to updating you on our continued future progress. At this point, I will turn the call over to Mr. Robert Berman, CEO and Chairman of Rekor for final remarks and Q&A. Robert?

Robert Berman: Thank you, David, and welcome everybody. Appreciate your joining our call. Before I open the call up for questions, let me underscore what David said earlier and add some context. Rekor Discover is, as David said, our path to massive scale and revenue. The demand over the next decade for new permanent data collection sites is estimated to be in the hundreds of thousands, which includes replacing tens of thousands of decade – decades old existing legacy systems providing antiquated, limited and in adequate data. And in many instances, they are no longer even operational. Once our AI is deployed in addition to providing highly accurate, always operating count, class and speed, we become the IoT nodes necessary to build the roadway operating system and network.

Now, I’d like to open the floor for any questions you may have. 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?

Q&A Session

Operator: Thank you, sir. [Operator Instructions] And the first question comes from the line of Zach Cummins with B. Riley Securities. Please proceed with your question.

Operator: And the next question comes from the line of Mike Latimore with Northland Capital. Please proceed with your question.

Operator: [Operator Instructions]

Operator: And I would like to turn the floor back over to Robert Berman for any closing comments.

Robert Berman: Yes, so look, first of all, thanks everybody again for, joining the call. Thanks for your support. Thanks for your continued patience. Again, I see names here that, I’ve seen for years. Thanks for, staying with us. We’re not going to let you down. Rekor is here. Rekor has developed its business segments. Our products now have been productized, thanks to the work that the team has done here. And we see a clear path to substantial scale and profitability and tremendous growth and just a really amazing future. And this is probably since my being involved with the Company; this is the most exciting time that I’ve ever seen for this company. And it’s around the corner. So thanks again for joining the call and we look forward to talking to you soon.

Operator: Thank you everyone. This does conclude today’s conference. You may disconnect your lines at this time. Thank you for your participation and have a great day.