Rekor Systems, Inc. (REKR) CEO Robert Berman on Q4 2021 Results - Earnings Call Transcript

Rekor Systems, Inc. (NASDAQ:REKR) Q4 2021 Earnings Conference Call March 31, 2022 4:30 PM ET

Company Participants

Robert Berman - President and CEO

Eyal Hen - CFO

David Desharnais - President

Conference Call Participants

Max Michaelis - Lake Street Capital Markets

Zach Cummins - B. Riley

Operator

Good afternoon, ladies and gentlemen, and welcome to Rekor Systems Conference Call. My name is Robin. I'll be your coordinator for today. [Operator instructions] As a reminder, this conference call is being recorded for replay purposes.

Before we can start, 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, 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 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 disclaimer 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 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'd now turn the call over to Mr. Eyal Hen, CFO of Rekor Systems.

Eyal Hen

Good afternoon and thank you for joining us. Today we'll discuss Rekor's results for the year ended December 31, 2021 and to provide you with an update on key business topics. On the call with me today Robert Berman, CEO and David Desharnais, President will be giving you additional color on our business after I go over our relevant.

2021 was an important and defining year in Rekor's young history. In 2021, we had a follow-on offering allowed for acquisition in our nine-year old investor base where we presented our Rekor platform to the investment community. The introduction of Rekor and the acquisition of the company, formally known as Waycare has put us in a position to jumpstart the adoption of our operating platform, accelerate our growth and claim our place as the leader in the emerging intelligent infrastructure market. David will provide more details regarding our go-to-market strategy and our near terms and forward-looking opportunity.

Since the second quarter of 2021, we've been moving from a product oriented transactional revenue model to a solution-oriented recurring revenue models. The sales solution, as compared to products, spread revenues out over a longer period of time, thus reducing revenue in the short term. This shift from point in time to revenue to recurring revenue or had an important impact on near term revenue, but we continue to generate year-over-year revenue growth as our newly refined go-to-market strategy also had a positive impact on our growth.

With that as we go over the financial results for the year ended December 31, 2021, our company achieved significant revenue growth for the year ended December 31, 2021 compared to 2020. Revenue for the year ended 2021 was $14.3 compared to $9.2 million in the same period last year, a robust increase of 55%. Recurring revenue was $4.6 million for the year ended seven 31, 2021, which represented an increase of $1 million or 28% compared to $3.6 million for the year ended December 31, 2020.

The year-over-year increase in revenue is primarily due to the expansion of our product and service offerings. Our current sales model emphasized starts revenues generated through direct sales, but we've also seen increases in our eCommerce revenue and customer support revenue. We benefited from this strategic marketing initiative that we launched at the beginning of 2021 and are seeing measurable results from our focus on recurring revenue.

We expect the update on SaaS [ph] based new in our current go-to-market strategy to generate long term growth well beyond of what we could have achieved under the previous model. We will however, continue to monetize the opportunities with are transactional nature.

Total operating expenses for the year ended December 31, 2021 were $39.3 million compared to $17.6 million during the same period in 2020. We've recorded a significant increase in payroll and federal related distances. The addition of headcount due to the Waycare acquisition played a part in this increase.

While we continue to add important new hires to our engineering and sales and marketing teams, we have extended -- we continue to extend our sales and marketing efforts as we add additional resources to promote our products and services.

Finally, we've strategically invested in research and development, develop new solutions and improve our products. This investment will enhance our competitive edge as we continue developing additional state of the art solutions to address our customer's growing needs.

Our adjusted gross margin for the year ended December 31, 2021, what 66% a decline from the 62% we reported on December 31, 2020. The decline in margin for the year ended December 31, 2021 is primarily at attributable to the evolution of our go-to-market policy as we continue to focus our near term efforts on sales that generate higher margin recurring revenue should expect to see and improving in our adjusted go to market.

Adjusted EBITDA for the year ended December 31, 2021 was a loss of $21.8 million as compared to a loss of $9 million in the period last year. This increase in loss was due to the investment into position record for future growth that I've just discussed.

During 2021, we released enhanced key performance indicators to help provide visibility and a more concise view into our success and progress. We hope that over time, this KPIs will provide our shareholders better insights into our business.

In 2021, we post contract value at $8.9 million during the year ended December 31 2021. This is an increase of 35% compared to $6.6 million of total cultural value during the year ended December 31, 2020. As of December 31, 2021, remaining contract performance obligations was $22.6 million an increase of 35% from the $16.7 million reported as of December 31, 2020.

Moving to our financial condition and liquidity, our cash balance on December 31, 2021 was $25.8 million up from $20.6 million as of December 31, 2020. We raised $70.1 million in net cash proceeds in a public offering in February, 2021 and used $39.9 million for the acquisition of the company formally known as Waycare Technologies in August, 2021.

Working capital on December 31, 2021 was $17 million down from $18.2 million as of December 31, 2020. The increase in cash and cash equivalent was primarily due to the net project for our public offering in the first quarter of this year, partially offered by cash payment as part of the total consideration offers for the Waycare acquisition.

The decrease in working capital was primarily due to an increase in accounts payable and accrued expenses to avoid supply chain issued and secured vital components of our product, as well as the expansion of our sales, marketing and resource and development efforts.

In summary, we are enthusiastic about our growth prospects. The enhanced of teams has been extremely busy winning new clients relationships, keeping existing ones and forming new partnerships. We feel very good about our pipeline and the strong momentum we are experiencing.

When the investments we're making in our go-to-market strategy will negatively impact our margins in the early years, we fully expect our margins to improve significantly in later years as we reach the benefits of these investments. There is significant operating leverage investing in our business model and we'll 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?

Robert Berman

Thank you, Eyal. Good afternoon, everyone and welcome. Today, you are going to hear a brief overview of our business and the progress we have made during the past 12 months. First, I would like to highlight our strategic acquisition of Waycare in August of 2021. This support and development has propelled our company forward.

There's a lot going on here at Rekor that already marks us as an establishing infrastructure sector. Rekor is actively innovating and building to expand our software portfolios so that we can address not only our customer's current challenges, but also the evolving challenges they will face in the future.

There's no mistake about it. We are a development stage company. Yet we can compare ourselves to the other large cap, private equity and venture capital back companies that are scrambling to get off the launchpad. We've already cleared the launchpad and are miles ahead when it comes to understanding the intelligent infrastructure market.

We excel at AI and machine learning, as it relates to vehicle recognition. Intelligent data processing, 5G, edge processing, and cloud computing. Technology is one of the three pillars of our business model. Technology stands alongside real estate and expertise. We will continue to grow our capabilities, adding all three pillars.

As Rekor begins the next leg of its journey, like most great companies with a bright future, we're attracting amazing talent. I'd like to mention how proud we are that David Desharnais has joined Rekor as our President. David's background is quite remarkable. I'll let him get into the details and we formally introduce himself, but with his vast tech product and marketing experience, as a senior veteran of the management teams at IDEMIA, American Express and Amazon Web Services, we are pleased, he has chosen to lead the world of blue chip companies and join Rekor as we begin to reimagine the future of intelligent infrastructure.

With that, I will now turn the call over to our President. David?

David Desharnais

Thank you, Robert. I'm honored to throw [indiscernible] at Rekor and part of its senior leadership team. Good afternoon, everybody. It's a pleasure to be with you today. My way of introduction, perhaps some quick background on me would be helpful. For more than 25 years, I've been deeply involved in building leading edge software and technologies, building cloud, big data and AI platforms, building global high performing teams and building strong strategic partner networks. I've also had the opportunity to build multiple billion dollar businesses and in the process, built myself as a passionate leader in digital transformation and scale.

During my career, I have served in global senior leadership roles at large publicly traded companies, VC backed startups and private equity led firms and have headed up multiple technology, product and business organizations around the world, numbering in the thousands. I've had the opportunity to learn for mentors, such as Jeff Bezos, Ken Chanel, Steve Quayle, Liz Button, Andy Jazzy, and more along the way.

I absolutely love what I get to do every day. I'm passionate about technology, people and connecting the dots to find solutions for big problems and big opportunities. All of these experiences with technology and product have led me to Rekor.

As I have joined Rekor as President a little over eight weeks ago, I've been focused on engaging with our global teams, technology and capabilities, meeting with and listening to key customers and partners and diving deeper into our position and opportunities within the emerging intelligent infrastructure market.

Mobility of people, vehicles, materials and information is integral to nearing every aspect of our daily lives. We step from our homes into a road system that leads to work and school to get our food and to many of our daily family and social functions. Infrastructure is the backbone of a functioning economy and depends on well-maintained, synchronized networks systems.

Unfortunately, many areas of the world face aging and legacy infrastructure today, resulting from decades of neglect and underinvestment, creating an unprecedented mobility, equity, sustainability and public safety challenge to cities, states and municipalities. The myriad of problems with our roadways is well known and we feel it every day. Globally crashes on roads cause nearly 1.3 million preventable deaths and 50 million serious injuries every year. It is the leading killer of children and young people worldwide. These numbers in both absolute and relative terms have remained largely unchanged for the past 20 years and it is unacceptable.

Keeping pace with fast changing global technology, sustainability and public safety dynamics and concerns requires inventive approaches to modernize our infrastructure backbone. Advancements and data collection, analytics and communications must be employed at the core and alongside of infrastructure, thereby making it intelligent. Spurred by the 2021 infrastructure investment and jobs active in the United States, a once in a generation, $1.2 trillion surge of investment is being dedicated to improve existing transportation infrastructure and increased public safety and sustainability to modern, efficient, connected infrastructure. This is creating a massive new intelligent infrastructure market opportunity.

Now, companies looking to successfully meet the demands of this emerging and massive intelligent infrastructure economy must not only have scalable software solution, modern platform architectures and operate in the cloud, they must also have an AI or artificial intelligence playbook and be armed with data, algorithms and machine learning models that fuel their solutions. This is exactly where Rekor is highly differentiated and this is where Rekor will be creating the most shareholder value.

As I look forward, I believe that our strength and data, proprietary AI technology, deep domain expertise and the mission critical solutions we deliver, coupled with the privileged position of access and trust that we have earned with our customers puts us in an advantaged market position and at the forefront of this new intelligent infrastructure economy. We are at the right place and time with the right talent and technology to capture significant growth in an inevitable future. I firmly believe that for Rekor, the best is yet to come.

Once again, it is a pleasure to be with you today and I look forward to speaking with you and to update you on our progress. At this point, I would like to turn the call back to Robert for closing remarks.

Robert Berman

Thanks, David. And I'd like to close by saying first that I agree with David, we are seeing exceptional growth and we are attracting exceptional talent like David and our new Chief People Officer, Deb Hennessy. We're growing organic and will remain opportunistic when it comes to exploring additional accretive acquisitions. So stay tuned.

At this point. I'd like to turn the call back to our investor conference call coordinator for questions.

Question-and-Answer Session

Operator

[Operator instructions] Our first question today comes from the line of Max Michaelis with Lake Street Capital Markets. Please proceed with your question.

Max Michaelis

Hey guys. Nice quarter. I was wondering if you could just give me a fourth quarter number for your recurring revenue segment and as well as given the quarter is almost over for Q1, how has that trended in the last 90 days? Thank you.

Robert Berman

Sorry about that. Yeah. Sorry. I might be a little muffled, I was just wondering if you could give me a solid Q4 number for your recurring revenue because I know you only gave the full year and then as well as how that is trended over Q1, given quarters pretty much wrapped up here.

Robert Berman

…make any reference in Q1 because it's not public information, but Q1 overall revenues, we have $3.2 million compared to Q4, sorry, $3.2 million as compared to Q3 $1.6 [ph] million and that's quarter substantially changed the revenue model [ph] to return that.

Max Michaelis

Okay. And then just given your statements about gross margin -- gross margin improvement, how is that trending you guys see directionally over fiscal year 2022. When should we start seeing improvement? Is that, should we see it first half or are we think more second half of the year?

Robert Berman

Yeah, as we say also in September in the last investor call, we'll see substantial improvement in the gross margin and some other KPIs as we get into the second and third quarter of 2022. So we can start to see this improvement on the back end of 2022.

Max Michaelis

Okay. Thanks. That's it for me. We're good.

Operator

Our next question comes from the line of Zach Cummins with B. Riley Securities. Please proceed with your questions.

Zach Cummins

Yeah. David, just starting with you, appreciate you getting on the call for an introduction. Can you talk about what really attracted you to Rekor from the get go and what really is your overall vision for the company as you start to build out your teams?

David Desharnais

Yeah, I'd love to do that, Zach. Thanks for the question. So looking at the opportunities in the market, what is always interested to me is a high growth opportunity. And if I look at Rekor Inc. really a growth company, a start-up company, the way I view it, the way I think the market should view it, this is a very, very large fragmented market. There's a lot of money being pulled into the market. And when I think of the opportunity ahead, it was very attractive, very compelling. Of course the people that I met during that sort of introduction process also compelled me.

I like the mindset of the leadership team here and I like the technology that we're sitting on that I think has a lot of room to run. So, I would say as a headline, those are some of the big attractors for me. When I look at the path forward here, I think in many ways, the company would've been cast as a hardware company or really in a very defined segment around law enforcement or public safety over time. I don't see that. I think that is a component of our business. I look at this very much as a big data company. I look at it very much as really as the transportation market and the whole infrastructure build kicks and not only here in the US, clearly, we see indicator of that, but just globally.

There's a lot of problems to fix and it's going to be data driven. The old way of managing infrastructure, monitoring it improving it is going to change it. It's going to be very, very rooted in data, very rooted in AI. And these are areas that I I'm well versed in it. I've spent my career in that segment and I look at what we have today as technology. I look at the data that we currently even consume and just transform and the market opportunities there.

So I really had no logical choice, if I can say it, but yeah, I'm thrilled about the conditions for success here and we're going to go after.

Zach Cummins

Understood that's helpful. And Robert, can you provide us any sort of update around your current pilot programs that you have with Rekor 1? Is there any sort of sense you could give us of the potential square mileage opportunity under coverage and maybe when we should start to see some of these pilots converting the contract?

Robert Berman

Sure. I think, the ones that the market is aware of such as Chattanooga, Winchester, Philly, those are moving along nicely. The implementations are near completion in some cases completed in segments of those cities. I'm pleased to say that we've added a number of smaller deployments and I don't have, the exact square miles, but I will tell you that the footprint is growing.

And I think as we get into the second and third quarter this year, we're going to see some of those things start converting and the results of the effort of getting those pilots going give us better KPIs, better information that we can, see forward with, but we're still very confident about the value of what we think this technology is.

I think, when David joined one of my concerns frankly, with having him here, folks said he was going to uncover something where maybe we were drinking our own Kool-Aid and I think, we've confirmed that we think that the value of the data and we've learned that there are so many more use cases outside of government that some of the numbers that we've kind of thrown around, not formally yet, but you, we all talk about those are realistic and maybe in some cases might even be on the low side. David, do you want to add anything to that?

A - David Desharnais

Yeah, I, totally agree. I think when we looked at the market sizing back in the Investor Day, it predates my time, but I was a team observer and watched the numbers and also dug into the data. I think it's looking at a very really narrow view of what is possible and when I think of both commercial aspects and what you would traditionally view as government or B2G the commercial side was really even not contemplated in that.

And second of all, it was rooted in sort of a legacy mindset starting from an ATMS or Automatic Traffic Management System, like signaling sort of legacy infrastructure approach. And when I think of this concept with intelligent infrastructure, there is infrastructure out there. We see it every day, right? We drive on it, we see it on roadways. The idea of digitizing that, and being able to marry physical and digital infrastructure is really the opportunity and that's something that is I would say new, really large and new opportunity for us and the monetization is quite significant.

If you think about, if you have intelligent infrastructure in a location, the ability to serve multiple missions, you think about traffic moving across a roadway, if think about the value that information provides to commercial entities and even some something as simple as commercial real estate with like that idea and how they build and where they build and how they monetize resale and how they think about that whole space, that was never contemplated in back in the Investor Day in terms where the value or pocket to value sit.

So I do think it's pretty insignificant. I do think that the approach that we're taking is quite unique and I do believe that we'll have a disproportionate value to customers as we look across not only BTG, but commercially.

Zach Cummins

Understood. That's helpful. And final question for me geared more towards the Eyal. Can you discuss the cash burn that we saw here in the quarter, kind of some of the items that were impacting that amount. I realize you're making some pretty aggressive investments and headcount expansions, but how we should think about available cash when it comes to execute on your plan going forward?

Eyal Hen

Again, we cannot discuss anything that not here, but as you can see in the cash flow, we make significant investment capital investment to secure inventory to make sure we have enough inventory on hand, as we see aware the supply chain constraint. So you can see a significant investment topics. But other than that, Q4 burn rate increase is $2 million for operating cash flow and that's what we expect maybe to grow as we hire more people in 2022.

Zach Cummins

That's helpful. Well, thanks for taking my questions and best of luck here going forward.

Eyal Hen

Thanks Zach.

Operator

[Operator instructions] The next question is from the line of Mike Latimore with Northland Capital Markets. Please proceed with your question.

UnidentifiedAnalyst

Hi, this is [indiscernible] on behalf of Mike Latimore. Could you tell me what needs to happen or the key milestones that needs to be achieved in order for you to give guidance?

Robert Berman

Mike, that's a fair question. It's a good question. I think I need to do my best to frame the answer by starting as an example, the company that you're covering that was acquired by Stack, looking at what they do it a similar business model, different sector to a certain degree, but, I think that the point is that what it's very difficult to do when you're public and you are fledgling, right.

That company was around for 20 years. I learned today looking at crunch based data that the average startup from founding to IPO roughly nine to 11 years right? So, we're three years into this from the standpoint of recor Rekor as we look at it today.

And if you look at the effort in those three years, I think 50% of our resources went into other things that are not related to the core business. 2022 is the first year that this is a 100% focused on what we're doing. So I think that if folks are willing to have little patience and, and you guys have been great with us and we appreciate, and we've got a good group of shareholders, it's not that far out.

I think we need a little bit more maturity with some of the pilots, some of the use cases that David and his team are working on for us to be able to start to give guidance. I think that that's possible okay towards the end of this year. And I believe that if we get there before the end of the year and able to give guidance going into '23, I think, frankly, I think that's quite remarkable given that we're 36 months into this, right?

So that's the best answer that I can give you. We just don't want to put stuff out there that is not going to be accurate and that can't be relied upon. So we're getting there. We're almost there. And again, now that this business plan, I think when read the Business section of the K, this is the first time we filed the document where there's no legacy issues and things related to businesses that were not in and so forth.

So a 100% of the focus and the effort and the time, and the resources are going into the business. You see? And this should be a pivotal year for us and I think it's not unrealistic that by the end of the year, we've been like a position give, guidance.

UnidentifiedAnalyst

All right. Can you also give some color on how cities are tech deploying your platform? Is it across all square miles or is it like a subset? Just on the PCS [ph].

Robert Berman

Yeah. It's both. It depends. It's very location dependent where they see the need, where they see traffic is where the focus is it's where we bring the value for analytics, as well as observability and security. So it's a little bit of both, I would say.

UnidentifiedAnalyst

All right, fine. Fine. Thank you.

Robert Berman

Thank you, Mike. Appreciate it.

Robert Berman

To summarize, we are confident that Rekor is well positioned to serve the needs of our customers while maintaining financial discipline, combined with the strong fundamentals of our business, this will enable us to deliver long term value to our shareholders. We will be looking at strategic acquisitions, but we are intently focused on continuing to improve our business with growing sales and an expanded global customer base.

The future continues to look very bright for Rekor as the government and commercial markets continue to adopt our technology and experience the growing opportunities that provides for their missions. Thank you all once again, for your support as we look forward to another exciting year.

Operator

This concludes today's conference. Thank you for your participation.