Rekor Systems, Inc.

Good afternoon ladies and gentlemen and welcome to today's ReCore Systems Incorporated conference call. My name is Katherine and I will be your coordinator for today. At this time all participants are in a listen-only mode. As a reminder, this conference call is being recorded for replay purposes. Before we get started, I'd like to read you the company's abbreviated Safe Harbor Statement. I'd like to remind you that the statements made in this conference call concerning future revenues, results of operations, financial position, markets, economic conditions, product 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 risk. uncertainties and other factors which may cause actual results to differ materially from those expressed or implied in such statements. We ask that you refer to the full disclaimers in our earnings release. You should also review the description of the risk factors contained in our annual and quarterly filings with the SEC. Non-GAAP results will also be 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 would now like to turn the presentation over to Mr. Eyal Ten, CFO of Recor Systems.

Thank you, operator, and good afternoon, everyone. Thank you for joining us. Today, we'll discuss Recor's results for the second quarter ended June 30, 2021, as well as provide an update on key business topics. On the call with me today is Robert Berman, President and CEO, who will be giving you additional updates as soon as I finish with the relevant metrics. Following our prepared remarks, we'll take your questions. We continue to generate strong revenue growth year over year. Revenue for the second quarter of 2021 was 4.3 million, a healthy increase of 60% compared to 2.7 million in revenue for the same period last year. Revenue for six months ended June 30, 2021, with $8.5 million compared to $4.3 million for the same period last year. This is a robust growth of nearly 100% year-over-year. Our working capital increased to $79.8 million, up from $18.2 million as of December 31, 2020, as a result of our public offering in February 2021. Similar to the first quarter of this year, the increase in our revenues in the second quarter is primarily due to the expansion of our product and service offerings. We are also now reaping the benefits of the strategic marketing initiative we launched at the beginning of 2021. Revenue for our high-margin SaaS e-commerce platform increased to $405,000 for the three-month period ended June 30, 2021. up 106% year-over-year from $197,000 for the comparable period in 2020. The Oklahoma Uninsured Vehicle Enforcement Diversion program generated revenue of $387,000 in the second quarter and $635,000 for the six months ended June 30, 2021. This is a program we began working on in January for this year to assist the state of Oklahoma in identifying uninsured vehicles on the road. This program can generate significant revenue for a state and, more importantly, can play a significant role in improving highway safety as a contactless compliance measure. Other states and municipalities have shown an interest in this program and are studying it seriously. Our gross margin for the quarter ended June 30, 2021, with 66%. An increase from the 52% we reported in the comparable 2020 period. The increase in margin for the second quarter and the June 30, 2021 is primarily attributable to the higher margin software sales, including the increase in the e-commerce revenue, which was higher margin than those associated with our hardware products. Gross margin for the first half of the year and the June 30, 2021 or 60% compared to 59% in the same period last year. While we anticipate our long-term gross margin to be on the range of 60-65%, our gross margins can fluctuate quarter to quarter based on our sales mix. Total operating expenses for the second quarter of 2021 were $7.5 million compared to $4.2 million in the same period last year. We recorded a significant increase in payroll expenses as we continued to add to our headcount in our engineering and sales and marketing teams. In addition, we expanded our sales and marketing efforts and added additional resources to promote our products and services. Finally, we grew our spend on research and development projects to develop new technologies and improve our line of products. We'll continue to invest in innovation to retain our competitive edge and continue to develop more and better state-of-the-art solutions to address the growing need of our customers. Adjusted EBITDA for the second quarter ended June 30, 2021 was a loss of $2.9 million as compared to a loss of $2.1 million the same period last year. Adjusted EBITDA for the six months ended June 30, 2021 was a loss of $6 million as compared to the loss of $4.1 million for the year-ago comparable period. The increase in loss was also due to the aforementioned investments in growth initiatives. Financial condition liquidity. Our cash balance on June 30, 2021, was 69 million, up from 21 million as of December 31, 2020. We also have 13 million held in short-term investments which have maturity dates greater than three months, but less than 12 months. The increase was primarily due to net proceeds from our public offering in the first quarter of this year. Our working capital at the end of the quarter stood at 79.8 million. Obviously, this is more than what is necessary to support our near-term operations, but has been held to support our M&A activity, which Robert will discuss shortly. In summary, We feel very good about the strength of our balance sheet, which provides us financial flexibility to pursue organic and inorganic growth opportunities. We continue to invest in our business in a disciplined manner to position Ricoh to be a key participant in the stillness and market for intelligent infrastructure. Now, I would like to turn the call over to our chief executive officer, Ovid Berman. Ovid.

Thank you, Eyal. Good afternoon, everyone, and welcome. Today, I want to provide a brief update on the path ahead in our strategy. Please note that we will be providing further details on our strategy following our annual shareholder meeting on September 14th. When we decided to focus on our technology business in 2019, we began the journey with the goal of establishing ReCore as a leader in the emerging intelligent infrastructure sector, the backbone of smart cities. Smart cities are no longer an abstract idea, but becoming reality due to necessity. Three years ago, the United Nations published a report which projected that 68% of the world's population will be living in urban areas by 2050, up from 55% today. This poses a significant challenge to the existing infrastructure and current approach to managing cities. Sustainable urbanization is key to successful development, as the United Nations pointed out in its report. With the growth in urban population and a focus on sustainability, aging infrastructure and resource scarcities have become a severe challenge to governments. All this boils down to a very strong tailwind that can drive demand for our solutions in a rapidly growing market. Engineers and infrastructure experts in the United States have been sounding the alarm for a renewed national focus on overhauling our country's infrastructure. The U.S. interstate highway system dates to the 1950s. According to the American Society of Civil Engineers, crowded and poorly maintained roads cost the US more than $160 billion in wasted fuel and time each year. Since 2008, congestion on roads has increased at a compounded annual growth rate of 1 to 3%, outpacing population growth. The average American is estimated to spend 54 hours a year in traffic, up from 42 hours in 2014. Poor road surface conditions result in motorists spending nearly $130 billion in extra vehicle repairs and operating costs each year. The American Society of Civil Engineers estimates the US needs to spend as much as $2 trillion on infrastructure over the next five years alone. The Biden administration and a bipartisan coalition of Congress has recognized this and we are finally seeing a willingness to allocate the billions if not trillions of dollars needed for the development of renewed infrastructure. Other developed and developing nations around the globe are also showing a willingness to meet these challenges and commit the funding necessary. But novel approaches need to be taken to address these basic problems. The efficient movement of billions of people and the goods that sustain them through increasingly congested spaces requires the ability to capture, analyze, and act on vast amounts of relevant data quickly reliably, and intelligently. This is important in every aspect from initial design to daily management. The foundation of smart cities and the networks that connect them in the future will be intelligent infrastructure that is designed and managed using the best data and analytical tools available. Our ambition here at RECOR is to be a leader in this effort to improve the lives, safety, and well-being of people living in large and small communities around the world. At ReCore, we're committed to providing the technology and solutions needed to build and maintain intelligent infrastructure and believe that three key pillars are necessary to be a leader in this nascent and promising industry. First, the ability to collect holistic and real-time data, combine this with third-party sourced information, connected vehicles, and crowdsourced entities. Second, the ability to analyze this data using cutting-edge AI-driven software to provide customized solutions for real problems with measurable results, and last, the ability to monetize these solutions and rapidly expand our geographic footprint. All three pillars are essential to our building an artificial intelligence-based ecosystem around smart cities that will enable us to capitalize on the need to improve the efficiency and effectiveness of how cities and communities are run. By aggregating data processing data, and ultimately providing immediate solutions to immediate problems. Our goal is to optimize the use of limited resources while improving the well-being and safety of citizens around the world. The first pillar, the ability to collect real-time data, is the bloodline of our AI engine. Our hardware uses the latest cutting-edge technology to conduct on-device edge AI processing. we're able to aggregate real-time data with very high accuracy, even in adverse conditions. Based on our clients' needs, we can then combine our data with acquired third-party data to create a holistic and accurate view of what's happening. Our customers have the ability to view real-time images and videos as well as historic videos on demand. Our edge processing with on-device AI allows us to offer solutions at a fraction of the data-related cost clients would have to pay for products that need consistent data transfer to the cloud. And the beauty of our approach is that our customers don't have to upgrade to sophisticated optical sensors for our solutions to be effective. We can integrate data from almost any IP camera into our solutions to lower the cost through legacy integration. This is especially important as we address the needs of our commercial clients. With the WayCare acquisition, we have significantly strengthened our ability to access third-party data. We can overlay this data with our own real-time data to provide a holistic view of the roads. The WayCare acquisition accelerated efforts that were already in progress and would have involved considerably more time and expense. In particular, it would have been difficult to replicate what WayCare has already achieved in terms of its vendor relationships. What sets us apart from the competition is our software and our algorithms. This is the second pillar, the ability to provide customized solutions via cutting-edge AI-driven software. Our AI-based solutions can analyze the status quo to provide immediate answers. To do so, the AI needs to be taught. This is not any different than how we humans develop. We crawl, we walk, and then we run. It takes time for AI to learn. and it becomes increasingly better and smarter. The more data the AI processes, the smarter it gets and the more effective it gets in providing optimized AI-driven insights and solutions. And that puts us years ahead of others who are just trying to start developing this technology and is another reason why Waycare's AI-based technology integrates so well with our overall effort. Finally, the third pillar is expanding geographic footprint. There is a significant first mover advantage as relationships tend to be sticky, resulting in recurring revenues. This is why we are focusing on growing our footprint. We can do this through acquisitions, as we will discuss later, or we can achieve this organically. This entails putting a stake in the ground, and we will do this town by town, county by county, and city by city. We get a lot of questions from investors who are asking about specific revenue opportunities from our pilot programs. Since we're building an ecosystem, I'd like to help you take a long-term view at our process. As we develop a relationship with a customer providing one solution, our clients typically ask for additional help in addressing their growing needs. This provides an opportunity to upsell our various products. There are no stronger advocates than happy customers. Word of mouth advertising is the best advertising, and what we have seen is that if one municipality buys your product and sees immediate benefits, the neighboring municipality wants the same one. There is a multiplier effect, which is not apparent when we initially sign a contract. Our experience is similar to that of WayCare. If you remember from the presentation we provided last week, WayCare entered a small pilot program in southern Nevada, which expanded to northern Nevada. growing total contract value by a factor of 161 times in only three years. This is similar to what we have experienced with other customers. Each market entry is an investment into future growth, and we are just getting going. We have seen the benefits of moving to SAS model with recurring revenue. A small revenue opportunity can grow to a stream of recurring revenues with the right solution. This will happen over time. If we are ready for this and continue to provide our customers with remarkable solutions to their problems. With ReCore, one, we provide a complete disruptive intelligence platform that has no equals. We offer hybrid cloud native solutions from the get-go that are system agnostic and able to integrate with a multitude of hardware and software products. We can also integrate and deploy our solutions across multiple agencies in a given region. incorporating our real-time data with third-party provided data to generate solutions for better outcomes. ReCore One uses a modular approach. We have the ability to turn on and off various modules to provide exactly what the client needs. Our roadway intelligence solutions, which are an element of what we define as intelligent infrastructure, can be provided within the same unified platform. Our short-term goal is to add additional functionality and solutions with each module. And our long-term ambition is to expand the platform to become a provider of all the holistic intelligent infrastructure solutions which will form the foundations of smart cities. Each module that we add to the platform will depend on the needs of our clients. So we have provided solutions for a large number of use cases. This allowed us to monetize these relationships, assess our solutions, and make improvements as needed, whether this is assisting with perimeter traffic and fleet management, permit issuance and usage, hazardous waste enforcement, or improving forest fire monitoring. The use cases are many, and we can use our technology to provide customized solutions to numerous challenges. However, with data comes responsibility. We take privacy concerns very seriously and our proprietary algorithms are created to be in full compliance with the security and privacy requirements of each end user. All our data we collect passes through our sophisticated and proprietary personally identifiable information PII filter that de-identifies and anonymizes the data in an irreversible way before it is incorporated into our roadway intelligence platform. With ReCore One, there are significant economies of scale to be had. ReCore One helps bridge gaps in information and communication, allowing humans to more efficiently use technology to better collaborate using data, monitoring, analysis, and ultimately collaboration. So we are intently focused on three ingredients, data, software, and geographic footprint. With them, we can provide a multitude of products and solutions to reduce congestion, improve infrastructure, increase safety and security, promote sustainability, improve efficiency, and enhance customer experience. We talked about this on our call last week, but I want to reiterate how the way care acquisition fits into our broader strategy. As we mentioned, there is a first mover advantage in this nascent industry. Time is money, and we can save both time and money by integrating with WayCare. We are accelerating speed to market by gaining expansive geographic footprint, faster access to third-party vendor relationships, and diverse data sources and adding an innovative software product that complements our offering and differentiates us from our competitors as we are building a comprehensive intelligence platform. Waycare's current footprint, as well as potential opportunities to further expand it and put flags on the map in more states, is very valuable. Once we have entered a market and established relationships, we can cross-sell and up-sell products, gaining a larger share of customers' wallet. To provide the right solution, we need to feed our AI software an increasing amount of data. it would take us time to replicate what WayCare has already achieved in terms of its relationships with data partners and its investment in analyzing that data. These partnerships including leading OEMs, connected vehicle data providers, telematic solutions, and many more vendors and partners. Our ReCore One platform was built to generate a holistic view of roadways, and now we can feed more data into our system by leveraging WayCare's relationships. Each set of data makes our products smarter and our solutions more sophisticated and valuable. Coming to market with a broad range of products is a key differentiator, and there is an advantage to speed to market and putting flags on the map, especially when dealing with public entities. On many calls, we get asked about the progress on various states and cities. Our answer is the same. When you're working with government, states, cities, and municipalities, it takes time to get a yes. It is a long sales cycle that involves proving yourself and building trust. However, once you have won a contract, the same long sales cycle creates a moat. Revenues tend to be recurring, and there is a significant opportunity to cross-sell to other agencies. While the way care acquisition nicely adds to our footprint, we continue to focus on organic growth and are executing smartly. In July, we announced that the capital of New York, the city of Albany, in partnership with the Albany Police Department, selected ReCore One as a solutions provider for vehicle recognition. We were selected to help maintain the safety and security of the community and its citizens. Some key takeaways from the press release we put out. First, we want a competitive bid process meeting and exceeding various performance requirements, including lane capture, solar power operation, easy integration with third-party applications, unlimited storage, and robust vehicle identification capabilities. This speaks to the strength of our hardware and software, and there should not be any doubts about the strength of our technology. Second with this win, we have grown our footprint in the U.S. Our partnership with Albany follows successful implementation in 24 states nationwide. As mentioned earlier, wins like this generally result in additional wallet share for other cities and municipalities inquiring about our services. This leads me to the final point. Is this a big revenue contributor? No, not at this point, but allows us to build a relationship that can have a multiplier effect. The same is true regarding the press release we put out regarding Waukesha County Park System selecting ReCore One to help maintain the security of each of its eight public parks and to ensure entrance fee compliance. And with each win, we grow our real estate. We gather additional data to help our AI learn, and we build relationships that could drive meaningful revenue opportunities. With each new win, we're improving our product and enhancing our capabilities. This positions us well in pursuit of becoming a finding contributor to intelligent infrastructure. We will provide a strategic roadmap on how we plan on doing this following our upcoming annual shareholder meeting on September 14th. And with that, I would like to turn the call back to our coordinator for questions.