Rekor Systems, Inc.

Good afternoon, ladies and gentlemen, and welcome to today's Recore Systems Incorporated conference call. My name is Latonya, 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. If anyone should require operator assistance during a conference, please press star zero on your telephone keypad. As a reminder, this conference 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 the statements made in this conference call concerning future revenues, results of operations, financial positions, 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 risk 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 financial 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 operation and is provided for informational purposes only. I would now like to turn the presentation over to Mr. Ayo Henn, CFO of Record Systems. Please proceed, sir.

Good afternoon, and thanks for joining us. Today we'll discuss Record's results for the three and six months and the June 30, 2022, and provide you with an update on key business topics. Our CEO, Robert Berman, will be on the call with me today and will provide additional color on our business After I go over our relevant metrics. In the second quarter of 2022, we continue to accelerate growth in recurring revenue under our new sales model. As explained previously, since the third quarter of 2021, we've been shifting our emphasis from point-in-time revenue to recurring revenue. While we continue to engage in point-in-time hardware sales In appropriate circumstances, our new model emphasizes providing software and data services on a subscription basis. This has had a near-term impact on our overall revenues, but with the strong growth we are seeing in recurring revenues, the confidence about the positive impact it will have on our overall strength and stability for the long term. With that in mind, Let me get into some of the details in the financial results for the second quarter ended June 30, 2022. Highlights include the completed acquisition of Southern Traffic Solutions . Revenue for the three months ended June 30, 2022 was consistent at $4.3 million. Revenue for the six months ended June 30, 2022 was $7.9 million compared to $8.5 million in the same period last year, a decrease of 6%. Recurring revenue for the three and six months ended June 30, 2022 increased to $1.2 million and $2 million respectively compared to the same period last year. This increase represents growth in recurring revenue of 133% and 115% for the three- and six-month period ended June 30, 2022, compared to the same period last year. Performance obligation increased to $31.9 million as of June 30, 2022, compared to $22.6 million as of December 31, 2021. As you can see, in less than a year, since the change in our sales model, we have reached a point where the growth in our recurring revenues has essentially compensated for the decline in point-in-time revenue. The percentage of recurring revenue reflected in total revenue was 48% for the three and six months ended June 30, 2022, compared to 21% for the three and six months ended June 30, 2021. As I mentioned, We expect to continue point-in-time hardware and software 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 emphasis on building SaaS-based revenue through 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 six months and the June 30, 2022 were $28.2 million, compared to $10 million during the same period in 2021. Increases in operating expenses stem from significant increases in pay-on and pay-related expenses. The addition of headcount due to the way care acquisition played a part in this increase. and we added new hires to our engineering, sales, and marketing teams as we integrated their technology into our growing suite of product and service offerings. With the acquisition of STS, we're continuing to enhance and improve our line of products with important investment that will enhance its competitive edge. However, in view of the near-term opportunities that this acquisition has provided us with, We expect to narrow and consolidate sales and marketing efforts and defer some development efforts, as Robert will discuss later. Our adjusted gross margin for the three and six months ended June 30, 2022 and 2021 decreased to 38.5% from 67.7% and 41.5% from 61.1% respectively. The decline in margin for the quarter ended June 30, 2022 is primarily attributable to increased investment in winning and implementing new projects as we focus on larger implementation in order to quickly expand our technological presence in key areas. We expect to see an improvement in our adjusted gross margins as our lending expense strategy continues to evolve in the future. Adjusted EBITDA for the three and six months ended June 30, 2022 and 2021 decreased to a loss of $11.2 million from a loss of $2.9 million and a loss of $20.5 million from a loss of $6 million, respectively. This increase in 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 with a better insight into our business. As noted in our financial highlights, our recurring revenue for the three and six months and the June 30, 2022 increase to 133% and 115% compared to the same period, 2021. In the first half of 2022, we won $5 million of new contracts. This is a decrease of 14% compared to $5.8 million of new contract value won during the first half of 2021, related primarily to the decrease in point-in-time hardware sales discussed earlier. The decrease in total contract value was also partially related to our willingness, based on our experience with renewals, to accommodate customers as budget constraints require shorter-term subscriptions than we have previously offered. As of June 30, 2022, remaining contract performance obligations were $31.9 million. We expect to recognize approximately 57% of this amount over the succeeding 12 months. This represents an increase of $9.4 million or 41% compared to $22.6 million of performance obligation as of December 31st, 2021. This increase in performance obligation was primarily due to our STS acquisition. As we continue to focus on building relationships and expanding our presence We acquire customers through pilot programs, which are typically short in nature. As we continue to convert and expand our pilot programs to larger scale contracts, we will expect to see these KPIs improve. Moving to our financial condition and liquidity, our cash balance on June 30, 2022 was $14 million, down from $25.8 million as of December 31, Working capital in June 30, 2022 was $7.3 million, down from $17 million as of December 31, 2021. The decrease in working capital was primarily due to a decrease in cash and cash equivalent. This decrease was primarily due to the increase in our loss from operations as we positioned the company for future growth, and also reflects cash used in the acquisition of STS. The decrease in cash was partially offset by a net cash inflow of $20.4 million as part of our 2022 at-the-market sales agreement. In summary, we are passionate about our growth prospects and continue to experience a strong momentum in our market. As Robert will discuss with you next, we are concentrating our investments now on rapidly increasing our margins and fully expect them to improve significantly. We 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. So let's talk about our revenue and expenses. About this time last year, we made the decision to concentrate on developing a stream of recurring revenue, and we've said there would be tradeoffs. When you go from depending primarily on point-in-time revenue model to recurring revenue model, you can expect to have a negative impact on near-term revenue growth. The question is, how long does it take for growth and recurring revenue to make up for the reductions in the point-of-time revenue? With the success of our efforts over the past few quarters, I think we are at the point where we've achieved that transition. As Eyal just described, in less than a year, we were able to transition from where recurring revenue were 21% of our total quarterly revenues to one where recurring revenues generated 48% of our total quarterly revenue. while total revenue for the second quarter of 2022 was essentially the same as the corresponding period of 2021. But that's not the only thing we have to be focused on. At the end of the day, we want to emerge as a highly profitable enterprise. We haven't invested in major technology advances just to provide us with a slight edge in a narrow, crowded market segment. We've set our sights high and want to exploit high-value propositions that were never feasible before. At the same time, we've been concentrating on building a more stable revenue base. We've been concentrating on developing a package of solutions that can both make the roadways of the future measurably safer and more efficient and provide us with a profitable return on investment. With the acquisition of WayCare and now STS, we've been able to dramatically increase our geographic coverage and enhance our customer base. We're now working jointly with many of the world's largest roadway services and vehicle manufacturing companies to deliver cutting-edge products and services around the world. And in just the last three months, we won assignments from three state DOTs to provide different types of innovative new services. As the world seeks to reimagine and rebuild the infrastructure of the past, ReCore is already an active partner helping to define its future. ReCore is well on the road to becoming the trusted operating system for digital infrastructure on our roadways. Our ReCore One brain captures multiple sources of data, examines patterns and provides insights, decisions, and actions to support multiple missions using AI to continuously reinforce the learning curve. We pull in the data from our devices and third-party data sources and from existing infrastructure. Our brain then uses its AI and puts our proprietary IP and machine learning to work, to intelligently process this big pool of data and visualize not only what is happening but what might happen. This results in actionable insights for our three key market segments, transportation management, urban mobility, and public safety. In and of itself, that doesn't make us profitable right now. It's given us the tools we need to become profitable over the next year. As you know, we play a significant role in the improvements envisioned by the Infrastructure Investment and Jobs Act, which are just beginning to be funded as we speak. The main focus of that initial funding will be the data collection and analysis. This will not be a build and then it will come re-imaging of our nation's infrastructure, but a data-driven reimagining of infrastructure looking for advances in efficiency and safety. We've been developing the proprietary technologies and capabilities needed to address this massive undertaking in a way that's both constructive and profitable. We've been doing this by developing a modular platform that can be ingesting enormous amounts of data and deliver mission-critical digital infrastructure solutions and insights to government and commercial users. And we've been positioning the company to deploy it profitably over the remainder of 2022. In Q2, we saw a lot of what I just mentioned. ReCore was selected for the launch of a multi-year program with the Missouri Department of Transportation, MoDOT, to not only make roads less congested and safer, but to help rid the state of severe traffic crashes. All key objectives of Missouri's Show Me Zero Strategic Highway Safety Plan for 21 to 2025. ReCore's transportation management platform was certified by AWS as well-architected, to improve traffic and incident management, increase public safety and security, and optimize urban mobility. This certification objectively validates ReCore's solutions as achieving highest distinctions in security, reliability, performance efficiency, and scale for customers to adopt and deploy with confidence, and also opens up new growth channels through AWS's extensive global partner network and marketplace. Recor was also selected by the Israel National Infrastructure Company for AI-driven intelligent infrastructure on Israel's highways. As the core system for integrating and processing data into a single source of truth, Recor's traffic management solution will bring digital and physical infrastructure together to extract the most data possible from the roadway and the environment. The project will use data from multiple Recor edge-based optical roadway sensors and consolidate this real-time traffic analytics data with seven other diverse real-time datasets, including dash cam footage, public transit analytics, and video footage of roadway incidents, enhancing traffic enforcement and incident response capabilities. We also completed the acquisition of STS near the end of June. The impact of this acquisition isn't really a factor in our Q2 earnings, but it is expected to be an important contributor to our profitability as we move forward. Historically, STS has annually generated $15 million of revenue, of which 50% is recurring and $3 million of EBITDA. And we have every reason to expect to build on this. This acquisition combined two complementary companies with the primary objective of accelerating ReCore's path to profitability going forward, putting 30 years of traffic engineering and data collection expertise from STS together with ReCore's next-generation artificial intelligence, Machine Learning Technologies has positioned us to become the leader provider of data services for the agencies in the U.S. that are working right now to plan the intelligent infrastructure of the future. In just the last few weeks since the acquisition, STS has already significantly expanded its relationship with the Florida and Ohio DOTs to incorporate the roadway AI that ReCore brings to the table into their operations. So, with WayCare and STS acquisitions, we've secured our position as a cutting-edge technology provider as well as a trusted source of data services for departments of transportation throughout the United States. Our next task, particularly under current market conditions, is to ensure that we use that position to become profitable as quickly and efficiently as possible. So before we open it up for questions, I'd like to address the current state of the capital markets and its impact on our plans for growth. There's no doubt that the uncertainty in these markets has resulted in a downturn that has impacted just about every public company, especially technology companies. Like many, many other companies in the tech space, we'll have to do more with less. We're in an economic environment that demands more intensity and we've already been taking steps to do, maintain our growth using fewer resources. Since the acquisition of STS, we've been working to consolidate operations, concentrate on near-term profitability, and steadily reduce headcount growth. Many of our teams are going to shrink so that we can shift energy to other areas inside the company. And we've given our leaders the ability to decide within their teams where to restructure, where to double down, and where to backfill attrition. In this process, we'll be prioritizing the positions we're in to take advantage of the funding that's beginning to flow from the Infrastructure Investment and Jobs Act. We expect to see both cost efficiencies and continued revenue growth reflected in the future quarters as we continue to unlock the value from the unique opportunities for growth the last year has provided us with. So despite the current challenges, I'm very confident for the long term. Now I'd like to turn the call back to our operator who will moderate the Q&A session.