Rekor Systems, Inc.

Good afternoon ladies and gentlemen and welcome to today's vCore Systems, Inc. conference call. My name is Diego and I will be your coordinator for today. At this time all participants are in the listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference call is being recorded for replay purposes. Before we get started, I would like to read you the company's abbreviated Safe Harbor Statement. I would like 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. 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 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 would now like to turn the presentation over to Mr. Eyal Hen, CFO of Recourse Systems.

Good afternoon, and thank you for joining us. Today, we'll discuss Recourse results for the quarter-ended March 31st, 2022, and provide you with an update on key business topics. On the call with me today is Robert Barron, CEO, and he will speak briefly on the exciting news we announced just this morning regarding our acquisition of STS and be giving you additional color on our business after I go over our relevant metrics. In the first quarter of 2022, we continue to show growth in recurring revenue under our new sales model compared to the fourth quarter of 2021. We shifted our emphasize from point in time revenue to recurring revenue in the third quarter of 2021. While we will continue to engage in point in time hardware sales in appropriate circumstances, our new sales model provides for retaining ownership of hardware and providing software and data services on a subscription basis. This has had a near-term impact on our overall revenue, but with the strong growth we are seeing in recurring revenue, we are confident that the emphasis on developing subscription revenues will have a positive impact on our overall growth for the long term. With that, let me get into some of the details in the financial results for the quarter ended March 31st, 2022 compared to the first quarter of 2021. Revenues for the quarter ended March 31st, 2022 was 3.6 million compared to 4.2 million in the same period last year, a decrease of 14%. Recurring revenue was 1.7 million for the quarter ended March 31st, 2022, which represented an increase of 0.8 million or 96% compared to 0.9 million for the quarter ended March 31st, 2021. The quarter-to-quarter decrease in total revenue reflects a 43% decrease in products and services revenues, primarily due to a quarter-to-quarter reduction in point-in-time hardware sales, which was only partially offset during the quarter by the 26% increase in recurring revenue. As I just mentioned, we expect to continue point-in-time hardware sales in appropriate circumstances, and that may result in strong increases in product revenue in future quarters, like the increase we saw in the first quarter of 2021. But with our current emphasize on building SaaS-based revenue for subscription sales, we expect to generate a stable base for long-term growth well beyond what we could have achieved under the previous model. Total operating expenses for the quarter ended March 31st, 2022 were 14.2 million compared to 7.6 million during the same period in 2021. We recorded a significant increase in payroll and payroll-related expenses. The addition of headcount due to the WACRE acquisition played a part in this increase and we continue to add important new hires to our engineering and sales and marketing teams. We have expanded and will continue to expand our sales and marketing efforts as we add additional resources to promote our growing suite of products and service offerings. Finally, we continue to make strategic investments in research and development to develop new solutions and improve our line of products. This investment will enhance our competitive edge as we continue developing additional state-of-the-art solutions that address our customers' growing needs. Our adjusted gross margin for the quarter ended March 31, 2022 was 45%, a decline from the 54.4% reported on March 31, 2021. The decline in margin for the quarter ended March 31st, 2022 is primarily attributable to increased investment in winning and implementing new projects as we make efforts to quickly expand our presence in key areas. You should expect to see an improvement in our adjusted gross margin as our land and expense strategy continues to evolve in the future. Adjusted EBITDA for the quarter ended March 31st, 2022 was a loss of $9.3 million as compared to a loss of $3.9 million the same period last year. This increase is loss was due to the investment to position record for future growth that I've just discussed. Since we changed the revenue model, we have released enhanced key performance indicators to help provide visibility and more concise view into our success and progress. We hope that over time, These KPIs will provide our shareholders a better insight into our business. As explained before, recurring revenue for the first quarter of 2022 increased by 96% to 1.7 million from 0.9 million in the same period, 2021. In the first quarter of 2022, we won 1.5 million of new contracts. This is a decrease of 40% compared to 2.5 million of the total contract value worn during the quarter ended March 31st, 2021, related primarily to the decrease in point in time hardware sales discussed earlier. As of March 31st, 2022, remaining contract performance obligations were 21.3 million. We expect to recognize approximately 41% of this amount over the succeeding 12 months. This represents decrease of 1.6 million or 6% compared to 22.6 million of performance obligations as of December 31st, 2021. The decrease in total contract value and performance obligations is partially related to our go-to-market strategy. This includes our willingness based on our experience with renewals to accommodate customers whose budget constraints require shorter-term subscriptions than we have previously used. Also, as we continue to focus on building relationships and expanding our public safety network, we aim to bring customers through pilot programs which are typically short in nature. As we continue to convert and expand our pilot programs to large-scale contracts, We expect to see these KPIs improve. Moving to our financial condition liquidity, our cash balance on March 31st, 2022 was 14.6 million down from 25.8 million as of December 31st, 2021. Working capital on March 31st, 2022 was 9.3 million down from 17 million as of December 31st, 2021. The decrease in cash and cash equivalents was primarily due to the increase in our loss from operations as we build the company for future growth. This decrease in cash was partially offset by a net cash inflow of 3.1 million as part of our 2022 at the market sales agreement. The decrease in working capital was primarily due to the decrease in our cash position described above. In summary, We are enthusiastic about our growth prospects. The enhanced sales team has been extremely busy winning new client relationships, dipping existing ones, and forming new partnerships. We continue to feel a strong momentum in our market. While the investments we are making now to rapidly increase our market share will restrain our margins in the near term, we fully expect our margins to improve significantly as we reap the benefits of this investment. There is significant operating leverage embedded in our business model and will remain focused on creating shareholder value and making decisions that will benefit our long-term shareholders. With that, I will now turn the call over to Robert. Robert?

Thank you, Eyal. Good afternoon, everyone, and welcome. I will first briefly speak about the exciting news we issued this morning regarding Southern Traffic Services, STS. The addition of STS accelerates the company's urban mobility strategy while adding high growth, highly recurring revenue that combined with recourse solutions offers tremendous value for its clients and the communities they serve. STS is a company that shares our vision of enabling an entire transportation industry that is just beginning to undergo a once-in-a-lifetime transformation. We have always said the company is and remains opportunistic when it comes to potential acquisitions, and STS is an absolutely perfect fit for ReCore. Southern Traffic Systems is a trusted traffic engineering firm specializing in data collection. Founded in 1988, STS is a leading traffic data collection company that pioneered pay-for-data contracts with departments of transportation. In addition to the traffic data collection, STS provides traffic engineering services that include design, planning, and traffic study services, primarily to government agencies across the United States with a strong footprint in the Southeast. A key growth accelerator for RECOR centers around acquisitions, precisely like STS. Companies that are aligned to high-growth markets with increasing margin profiles. STS's existing customer base across an impressive geographic footprint will be exposed to our urban mobility technology to create expanded market penetration, growth opportunities, and solutions. We are absolutely over the moon with this acquisition. That follows our acquisition of the company formerly known as Waycare. Fast-forward. I know you have many questions and the company will set a date in the near future for a special conference call to discuss STS and our overall vision when it comes to acquisitions. Now allow me to change gears here and talk to you about Q1. During this quarter, we made significant investments to accelerate the advancement of our AI ML models, algorithms, and other proprietary IP. It is our algos that extract, transform, recognize patterns, identify objects. Nobody sees it, but we are constantly evolving our algorithms and training our ReCore One platform to simultaneously accomplish multiple missions. We take information from multiple sources, triangulate the data to draw better and better insights that create new and better solutions and applications for our customers. Our platform is designed to continuously improve as we apply what we are learning from new data. ReCore One delivers knowledge in the form of insights, actions, and recommendations to our users. It's a constant feedback loop that increases roadway intelligence. Simply put, ReCore One is our brain, the intelligence engine that powers our products. It takes in comprehensive data, processes it, and serves three key markets, public safety, urban mobility, and transportation management. ReCore is an early-stage technology company in a massive, massive market. Our rapid growth demonstrates proof of concept and shows that we are poised to expand exponentially. We develop mission-critical solutions, services, and devices that have different capabilities. We deliver vertical analytics and insights through our specialized platforms. We generate dynamic and intelligent infrastructure through trusted relationships that help us acquire valuable real estate. And finally, our intelligent infrastructure solutions have provided us with a significant go-to-market operating and strategic advantages, which at the end of the day leads to a significant market advantage. So now I'd like to turn the call back to our operator who will moderate the Q&A session.