Rekor Systems, Inc.

Good afternoon, ladies and gentlemen, and welcome to today's ReCore Systems, Inc. conference call. My name is Joe, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance, please press star zero on your telephone keypad. As a reminder, this conference call is being recorded for replay purposes. Before we start, I must 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 also be discussed on the call today. 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 Recourse CEO, Mr. Robert Berman.

Good afternoon, everyone, and thank you for joining us. I want to be direct about where we are and where we are headed because I think the story is clearer now than it has been in some time. Toward the end of 2025 and into Q1 2026, we decided to take a hard look at every part of this organization, every headcount, every contract, every expense. Nothing was exempt from that review. The question we asked was simply, does this make the company better? If the answer was no, or even maybe we adjusted to improve our core business. That process produced real structural change. We reduced headcount by approximately 45 positions, roughly 16% of our workforce. between year-end 2025 and the end of Q1 2026. We found efficiencies and optimized engineering activities that were core to our path forward. We right-sized the cost and organizational structure to match where the business actually is today. The financial impact of those decisions were not fully visible in Q1. Some of those actions were taken mid-quarter. Some carried one-time costs. that hit Q1 but will not repeat. And Joe will walk you through all that in detail. What I want the investors to understand is that this work is done. The organization we are running today is leaner, faster, and more focused than the one we had a year ago. And Q2 will be where you start to see what that means in the numbers. Our target is to reach EBITDA positive by the end of the year. and we expect to be very close to EBITDA neutral by the end of Q2 or in early Q3. That is not a wish. It is where the math takes us when you run the full impact of the cost reductions we've already executed against our current revenue trajectory. Now let me turn to the revenue side. Because the business itself is performing well, revenue grew 12% year over year, and every product line, Scout, Discover, and Command grew. Gross margins reached 53% up from 48% a year ago. These are not small moves. They reflect the business that is executing. Finally, we previously announced the creation of ReCore Labs. And before I close, I want to spend a moment on ReCore Labs because I think it deserves attention. ReCore Labs was established to develop technology that extends into public safety and the commercial markets. Its first product, GoSecure, is on track for commercial release in Q3 2026. GoSecure answers a question a law enforcement customer put to us way back in 2024. That question was, can video evidence captured by your platform be faked? Prosecutors and defense attorneys were using that footage in court and they needed a definitive answer. We built one. GoSecure certifies with mathematical certainty whether video or photo content has been altered down to a single frame. It verifies the camera of origin, the timestamp, the GPS location, and the integrity of the file from the moment of capture In a world where deep fake technology is becoming wildly accessible, the credibility of surveillance video is increasingly under threat. The ability to authenticate video evidence is therefore becoming essential for law enforcement, insurers, and the courts. Recore Labs is chaired by Professor Sanjay Sarma, MIT Professor of Mechanical Engineering and former Vice President for Open Learning at MIT. Professor Sarma also previously served as a director of Recore Systems. His involvement underscores both the technical rigor behind the platform and the seriousness with which we are bringing this technology to market. We look forward to sharing more about GoSecure as we move towards its planned Q3 launch. I'll now turn the call over to Joe Nalepa to review the Q1 financial results. Joe?

Thank you, Robert. Q1 came in largely as we planned. We expected the quarter to include normal seasonality as well as certain one-time charges tied to the cost reduction actions we executed during the period. We also expected that the full benefit of those actions would not be meaningfully reflected until Q2. What is important to highlight is that when comparing Q1 2026 to Q1 2025, the underlying trajectory of the business is positive. Revenue increased, adjusted gross margin improved, and we continued to identify and execute on meaningful cost efficiencies, the majority of which are expected to show in Q2 2026. Revenue increased 12% year-over-year, approximately $1.1 million in growth, realized across each of our product lines. Scout contributed $281,000 to that increase, while Discover contributed 682,000 and Command contributed approximately 102,000. Adjusted gross margins rose to 53% in Q1, 2026, compared to 48% in Q1, 2025. This five percentage point improvement reflects revenue growth, which allows us to be more efficient when we operate deployments, a favorable product mix with higher margin software sales and reoccurring revenue representing a larger portion of our total revenue. EBITDA loss came in at approximately $6.5 million, an improvement from $7.4 million loss in Q1 2025. Importantly, the Q1 2026 results do not fully reflect the benefit of the cost optimization measures implemented during the quarter and also include certain one-time costs related to those actions. Despite those items, we still delivered year-over-year improvement, and we believe that improvement will continue through 2026. The improvement in EBITDA was driven by revenue growth and a discipline focused on cost containment. Payroll and payroll-related costs declined as a result of the headcount reductions Robert referenced, a significant portion of which were implemented during Q1 and will begin to have their full impact in Q2. P1 also reflected normal seasonality, which typically results in lower activity relative to later quarters. Beyond those specific actions, we have evaluated every line item and policy across our cost structure. Where spending was not critical, it was eliminated, and where spending was deemed necessary, we evaluated how to improve efficiency, optimize processes, and reduce costs. This detailed review of our current operating model has already produced meaningful improvements and we expect it to help lower overall operating costs going forward. We ended Q1, 2026 with 12.2 million in cash compared to 16.6 million at the end of 2025. The sequential decline was expected and reflects the seasonal Q1 pattern as well as the one-time restructuring costs. On a year-over-year basis, Our operating cash consumption improved, which reinforces our view that the underlying business is moving in the right direction. We are actively evaluating options to refinance our existing prime revenue sharing notes with a goal of reducing our cost of capital. Our growing contract portfolio supports the refinancing, and we expect to have more to report on this as we get further into 2026. Looking ahead, the cost reductions executed during Q1 were not fully reflected in our quarter end results because many were implemented mid-quarter. In Q2 and the remainder of the year, those savings are expected to be reflected and combined with our revenue growth trajectory. We believe the business is positioned for continued EBITDA improvement as we move through 2026. We remain focused on discipline execution, cost efficiency, and driving sustainable growth across the business. Thank you again for your time and continued support. And with that, I'll turn it back to our operator for Q&A.

Thank you. Ladies and gentlemen, if you would like to ask a question, please press star 1 on your telephone keypad, and a confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we pull for questions. And the first question comes from the line of Alex Lattimore with Northland Capital Markets. Please proceed.

Hey, guys. Thanks for taking my question. Um, my first question, I was just wondering about the status of the Georgia DOT deployment. Um, and then how should we think about that building throughout the year? Thank you.

Um, Hey, Mike, Robert, how are you? Thanks for asking. So, you know, Georgia took a little longer to finalize, but we got it done, um, you know, last fall. And we're seeing substantial growth already because it's a contract vehicle, meaning that it's not just with the central office of GDOT, but gives the ability to all other entities in the state of Georgia to buy through that contract vehicle. So without getting into specific details, which I can't, we're already working with several other counties, a couple of large cities, and so forth. So as I think we said when we announced the contract, we think the value will be substantially higher than the base value, which was, you know, roughly $60 million. And I think we're doing well with it. Plus we've got a price bump on stuff we already have, which is equipment that's in the ground. So that means higher margins. So overall, headed in the right direction.

Great. Good to hear. And then thinking about expenses throughout the year, do you expect the 1Q expense level to be, you know, about right for the rest of the year, or do you expect a change?

I think that's a question for Joe.

Yeah, so we – thank you for the question. We expect Q1 to be on the higher end of expenses. A lot of the cost-cutting measures that we ended up taking in Q1 didn't get their full impact as they were made towards the end of the quarter, and it bore some one-time costs with them. I think as we get into Q2, you'll see a stark drop in expenses, especially within our operating expenses that will continue throughout the rest of the year.

Yeah, Mike, just to add to what Joe said, but as he said, the severance related to all those employees, office shutdowns, which required, you know, negotiating out of leases and so forth, really all took place by the time it was finalized. It was towards the end of, you know, Q1. So I think, Joe, correct me, but I think we're going to see, you know, all of that in Q2, right? So it's behind us as of Q1. Maybe a few days that we pick up, but mostly Q2, that you'll see the results of that.

Cool. Great. And then around the Oklahoma UVED program here, I was wondering if there's any additional prospects that might enter into an uninsured vehicle program that you expect to get approved this year or maybe sitting in the pipeline currently?

We are talking to several other states. I scratch my head you know, thinking given the benefits that the states get from this type of program and the insurance industry, you know, the natural question is why the hell aren't all the states doing this right? But, you know, government takes time. But I think, you know, we're proud of the fact that they renewed for quite a long period with us, and hopefully we'll see, you know, others realizing that You know, we need to be doing this. It's just there's no reason not to, right? So it's a good thing, right? Things just, you know, take time.

And then just one quick final one. What percent of revenue was recurring in the quarter?

This quarter we had about 64% of our revenue was recurring.

Awesome. Thank you. I appreciate it, guys.

All right, Mike, thank you. Thank you.

There are no further questions at this time, and I would like to turn the call back to Robert Berman for closing remarks.

Yeah, operator, I just want to make sure that there's nobody in the queue and there are no further questions. Just please double-check.

Yes, sure. Ladies and gentlemen, as a reminder, please press star 1 on your telephone keypad to ask a question.

It's not. Operator, are you seeing anything or we're good? No, there seems to be no further questions. Okay. So, look, just in closing, you know, again, thank everybody for, you know, joining the call, your attendance, your patience. What we did in late Q4-25, and all through Q1 26 was long overdue, and we needed to do it, and we focused on it, and we got it done, and I think we'll see the results of that now going into Q2 and beyond, and we just, again, thank everyone for their support and patience.

Thank you. This concludes today's conference. you may disconnect your lines at this time. And we thank you for your participation.