Rekor Systems, Inc.

Good afternoon, ladies and gentlemen, and welcome to today's Recourse Systems, Inc. conference call. My name is Diego, 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 a 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 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 and uncertainties and other factors. which may cause actual results to differ materially from those expressed or implied by such statements. We ask you 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 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. I would now like to turn the presentation over to Mr. David Darnays, President and CEO of ReCore Systems.

Good afternoon, and thank you for joining us today. As I conclude my first full quarter as President and CEO of ReCore Systems, I am pleased to share our solid progress in the quarter and strategic vision for the future. Over the past 90 days since stepping into this role, I've delved deeply into every aspect of our business. I've been focusing on refining our financial processes, enhancing the work that we are doing in government relations, and driving operational excellence across our sales team and field operations. My commitment is to establish and strengthen the governance structures and scaling mechanisms that will help transform ReCore into a more predictable growth engine. And I'm encouraged by the team's positive response to the direction and priorities that I've set and the substantial progress we've made so far. Also, over the past three months, I've had the privilege of engaging with many of our investors and shareholders globally. Your insights have been invaluable to me, and I want you to know that I'm listening. Our conversations have reinforced three key themes, strong enthusiasm for our market position and opportunities, concerns about securing necessary capital to continue our significant growth trajectory amidst macroeconomic uncertainty and slow government contracting cycles, and finally, eagerness for meaningful customer traction. Today, I'll address these three areas and provide insight into our path forward. To begin with, Let me stress that navigating the complex procurement processes of federal, state, and local government agencies is challenging, but it also provides an opportunity with unparalleled long-range stability and growth potential. While we've been fielding our AI-based solutions in the transportation and traffic segments for just over a year at this point, namely our Discover and Command platforms, we have moved at a rapid pace. gaining awareness, preference, and adoption across multiple states, including South Carolina, Georgia, Florida, New Mexico, Texas, Colorado, Ohio, Maryland, Oklahoma, Kansas, Oregon, and multiple others in the works. However, it is important that we remain realistic, given that the government contracting process is opaque at best and has its own pace and timeline. It is something that we will continue to be conservative with in setting expectations as it relates to timing of deals and expansion. Along this line, and as an update to our last earnings call, I wanted to update you on the upcoming deployment of up to 1,000 Discover and Edge units, equating to a potential upside of approximately $35 million in revenue in one of the largest states in the U.S. as they finalized their AI policy. As of today, I'm pleased to share that we've initiated deployments in the region. However, progress has been hampered by continuous interruptions resulting from multiple storms this hurricane season, most recently by Hurricane Debbie. We don't control these things, of course, but the state does not permit anybody to work roadside in hazardous weather conditions in the period leading up to the storm, during the storm itself, of course, but also in the immediate aftermath. Understandably, this has impacted our expected timeline for deployments as the state is prioritizing emergency response efforts for its citizens. But the initial sites we have already activated have performed flawlessly under these extreme conditions and have already proven to be mission critical, delivering vital insights to the state's Emergency Operations Center to support evacuation routes during these storms. This underscores the essential role our technology plays further cementing RECOR as a trusted and indispensable partner in this state, which will pay dividends. As I also highlighted in the previous call, the transportation infrastructure industry is undergoing a massive and generational technology refresh, and that within our existing southeast footprint alone, we see the potential to add 6,000 to 8,000 sites, which could generate an estimated 200 to 300 million in cash flows over the coming years. RCOR's reputation as a trusted partner in the southeastern states has never been stronger, and our success is being closely monitored by other states nationwide as we continue to execute our growth strategy. Given our recent performance with these states during these crises, it only positions us more strongly for our continued expansion in the region. Our growing recognition and reputation along with the ongoing infrastructure overhaul that is happening, puts us in an ideal spot to capitalize on this transformative period in the industry. So while we must continue to navigate the complex and often slow-moving procurement processes of state and local governments, it also provides us a unique opportunity for long-term and durable growth that we believe will benefit our investors in the long run. Despite the relatively short time we've been deploying our technology in the market, we're experiencing continuous, accelerated growth, and I'm confident and our ability to sustain this momentum. Later in the call, I'll discuss some of the new contracts we've secured during the last quarter and examples of meaningful traction we're experiencing. Before diving into these details, I'll now hand the call over to Eyal Hen, Recourse CFO. He'll review our financial highlights for the quarter and discuss the proactive steps we're taking to solidify our capital position and protect our shareholders as we navigate the uncertainties of the current macroeconomic environment and B2G domain. Eyal?

Thank you, David. Hello, everyone, and thanks for joining us today to discuss our results for the sixth and three months and the June 30, 2024. I would like to start with our recent announcement that we have just infused $15 million into the company for a facility that can provide up to another $20 million in capital should we need it. The agreement is designed with strong shareholder protection. including a $2.6 million monthly cap on prepaid balance conversions to equity and a ban on short selling by the counterparty, which minimizes dilution and allows us to draw less capital or repay the notes early once our expected contracts materialize. Full details about this agreement have been provided in our 8 concerning the financing, and I won't delve into them now. Suffice it to say that this gives us the necessary resources to address the recent government contract delays we've been facing. This injection of funds positions us to meet our 2024 growth targets. And as is shown by our Q2 performance, we are making solid progress against this. We've continued to drive operational efficiencies and carefully manage our cash flow to ensure it is used effectively At the same time, we have improved our metrics year-over-year and quarter-over-quarter. Going forward, some of the larger recurring revenue contracts we are pursuing may involve significant upfront installation expenses. If additional capital is needed for this implementation, we plan to prioritize non-diluted financing options, such as issuing an additional series to our revenue sharing We expect to continue to address our capital needs prudently, expanding our industry leadership and fulfilling our customer commitment as new. In this regard, we have engaged VC Ziegler and Company, a specialty investment bank, to service as placement agent and market maker in connection with future issuances of our revenue sharing notes. Over the past few months, we've been in discussions with them as well as with rating agencies to work on getting these notes rated, which should help reduce overall costs and improve their marketability. We anticipate continuing to use this structure, which aligns potential future debt to the growth of fully performing contracts as a primary funding source of additional growth capital. Now I'm pleased to talk about our financial highlights. for the three and six months ended June 30, 2024. In the second quarter of 2024, our revenue reached a record revenue of $12.4 million, marking a significant growth of 45% increase from the $8.6 million in the same period last year. We also demonstrated a robust revenue growth quarter over quarter at over 27% above Q1, 2024. In the six months and the June 30, 2024, we achieved $22.2 million in revenue, an increase of 51% from the $14.7 million we marked in the same period last year. Recurrent revenue also increased by 8.9% from $5.8 million in the same quarter of 2023, compared to $6.3 million in the same quarter of 2024. Our adjusted gross margin for the three months ended June 30, 2024, was 53.5%, an increase from 51.8% in the second quarter of 2023. This increase was primarily due to higher margin mix of sales during this quarter. As previously explained, we expect a primary benefit of our technology refresh efforts to allow us to move from lower margins to higher margin sales over time. However, during the early growth phase we are in, this evolution may be choppy, as we saw at the beginning of this year. The adjusted gross margin for the six months ended June 30, 2024 was 50.2%, a decrease from 52.5% for the same period last year. The decrease is mainly due to lower margins we experienced at the beginning of the year. We also continue to see improvements in our adjusted EBITDA loss. For our second quarter, it now stands at $5.8 million, an improvement of over 19% from the $7.2 million in the same period last year. The adjusted EBITDA loss for the six months ended June 30, 2024, was down to $15.2 million from $16.5 million the same period last year. Lastly, another significant development in the second quarter of 2024 was the exercise of 3,675,000 warrants in June 2024, which resulted in $5.2 million of cash to the company, of which $3.2 million was received in July after the balance sheet date. Also in July, we sold our remaining 19.9% ownership of global public safety for $1.5 million. And of course, as I highlighted earlier, we received $15 million under our prepaid advance agreement, which has been structured to provide up to $35 million under appropriate circumstances. In summary, we are very pleased with our solid second quarter results and the synergetics and accretive impact of our recent acquisitions. Our capital raise and the engagement with Ziegler are instrumental enablers in continuing to secure our leadership position in the industry. Our financial and operational strategies are designed to capitalize on future growth opportunities. Looking forward, we continue to be confident in the potential of our technological developments, strategic acquisition, and are grateful for continued support of our investors. Now I will turn the call back to David to cover additional business highlights from the quarter. David?