Rekor Systems, Inc.
Q1 2021 Earnings Call Transcript

Published: 10 May 2021

[Company Representatives:]

Robert Berman - President, Chief Executive Officer Eyal Hen - Chief Financial Officer

[Operator:]

Good afternoon ladies and gentlemen, and welcome to today's Rekor Systems, Inc. Conference Call. My name is Darrel and I’ll be your coordinator for today. At this time all participant lines are in a listen-only mode. The question-and-answer session will follow the formal presentation. . As a reminder, this conference call is being recorded for replay purposes. Before we get started, I'd like to read you the company's abbreviated safe harbor statement. I'd 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.

[Eyal Hen:]

Thank you, Darrel. Good afternoon everyone and thank you for joining us today. Today we’ll discuss Rekor’s results for the first quarter ended March 31, 2021 as well as provide an update on key business topics. On the call with me today is Robert Berman, our President and CEO who will be giving you further update as soon as I finished with the relevant metrics. Our company achieved significant revenue growth for the first quarter ended March 31, 2021 compared to the same period of 2020. Revenue for the first quarter of 2021 was $4.2 million compared to $1.6 million in the same period last year, a robust increase of 164%. Our working capital increased to $84.4 million as of March 31, 2021 from $18.3 million as of December 31, 2020. During the first quarter of 2021 we raised $70.4 million in net cash profits in a public offering. The increase in our revenues attributable to an expansion of our product and services offerings during this period, as well as significant increase in revenue to our SaaS e-commerce platform as we started marketing initiatives at the beginning of 2021. In the first quarter of 2021, we initiated the Uninsured Vehicle Enforcement Diversion Program or UVED with recognized revenue of $244,000 in this quarter. We also had increase in revenue related to our direct sales and partner program. Our eCommerce revenue grew from $177,000 in the first three months of 2020 to $442,000 in the first three month period of 2021, which represent approximately 150% growth on a quarter-over-quarter basis. Gross margin for the three months ended March 31, 2021 was 53% compared to 69% in the same period of 2020. The lower margin for the month ended March 31, 2021 is attributable to higher level of hardware sales during the quarter, which had a lower margin. The hardware sales included sales of subscription software, which we really recognize over time.

[Robert Berman:]

Thank you, Eyal. Good afternoon everyone and welcome. In today's call I'm going to give you an update on some key developments and a brief overview of our business as it stands today. I'm going to review some highlights, but before I want to let you know that we expect to continue to explore M&A efforts when we see opportunities to work with counterparties who are interested in mutually creating accretive shareholder value. We see a bright future as the country's infrastructure is rebuilt to meet demands of the future and believe we have set remarkable technologies that can make us a leader in responding to those demand. If we see potential partners and think we can help each other, we’ll reach out to them. If they don't respond right away, we'll continue our efforts where we think they can be most productive, including aggressive efforts to continue our organic growth. Rekor is more than capable of moving forward on its own. As we have passed the first quarter in 2021, I would like to reiterate what I said on the last call. It is important for you to know what Rekor is and what it is not. We are a new entrant in some of our markets and there's been a tendency to dismiss us as just another ALPR company competed in a crowded market. Yes, we compete in the public vertical, because its low hanging fruit and we're already established and do quite well there. But our products and services have been adopted around the world for smart cities, highways, parking systems, fleet management, campus safety, private security and drive-through retail just to name a few, and there's a reason why, we can be competitive in all those markets.

[Operator:]

Thank you. We will now be conducting a question-and-answer session. . Our first question comes from the line of Jaeson Schmidt with Lake Street. Please proceed with questions.

[Jaeson Schmidt:]

Hey guys, thanks for taking my questions. Robert, I appreciate all the color on the differ builds in each state. But just curious given what has happened recently, if you still think a goal of getting another state this year is on the table.

[Robert Berman:]

[Jaeson Schmidt:]

Okay, that's helpful. And then just based on your comments on Texas, I’m curious if you guys are thinking about maybe negotiating or talking with cites, instead at the state level if that would make sense in some of these states.

[Robert Berman:]

Well, we were approached by a city in Texas that has Home Rule, you can imagine it's one of the larger cities and they recently passed an ordinance where if they, through the law enforcement identified uninsured motor vehicle on the road, they can pull over and they can impound it, and then you have to pay the impound fees and do a whole host of other things and they did this because it's such a problem down there. Frankly, we hadn't thought about Home Rule and we hadn’t thought about cities like that. We were trying more the approach of you know going the state route, which we're going to continue to do, this is our first year at it. But it's opened up a whole new mindset for us with respect to cities with Home Rule. So our Government Affairs Groups is hard work at that. We've identified a number of cities where they have the right type of Home Rule, where they can be able to do that, and there's plenty of them. We just never thought about it. So it’s something that came to us and we are looking at it. And I would imagine that plenty of these cities need money to and it also plays into the contactless law enforcement, narrative, which I can't say enough about. I just think that that's something that's coming. Look, we all know how political things happen in this country, right. We have these horrific things that happened and the politics are the politics, but there's no real solutions to all this stuff. But the less you can have highway or traffic stops by our patrol vehicles, the better off everybody would be. And there's no reason in the 21st century to have a police officer pulling over a vehicle for an expired tag an uninsured motor vehicle or lapsed inspection or registration, and we just see it coming that way, so. And thinking about Home Rule, we're going to explore that as well, because the system is capable of doing all that at the same time without – you know the same camera could be doing 50 things, right. So it’s certainly something we're looking at.

[Jaeson Schmidt:]

Okay, and then just a last one for me and I'll jump back into queue. I mean OpEx is obviously up sequentially in Q1. How should we think about that ramping here the rest of the year?

[A - Robert Berman:]

I think we're getting you know pretty close to you know where we're going to be from the standpoint of the overhead of this organization, you know without thinking about maybe future R&D, but you know we have to scale this thing to a certain size to be able to build frankly the Rekor One platform. Mostly the – you know most of the cost went into our engineering department you know to develop a platform, right. It's more – I keep saying that the ecosystem here is more than just you know algorithms. It's the edge processing devices, the distribution, the privacy filters, the backend of data processing system and so forth and you know we had a scale to the level to be able to build all this stuff to get it in the market as quickly as we did. And look, from previous discussions you guys know that we've always said that we thought you know we get towards breakeven at you know that, you know roughly $10 million a quarter in revenue and I think when the margin shifts because of the mix of software as things move more towards SaaS and less from the hardware side, I think that's consistent with where you know the cost of operating Rekor is going to be.

[Jaeson Schmidt:]

Okay, thanks a lot guys.

[A - Robert Berman:]

Yes, thank you.

[Operator:]

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

[Zach Cummins:]

Yeah, hi! Good afternoon. Thanks for taking my questions. Robert, can you give us an update on the Oklahoma UVED program. I think you said just under $250,000 in revenue during Q1. So I was wondering if you could give us a little more granularity in terms of the mix of just enrollments versus maybe what you're seeing with early interaction – early traction on the insurance side.

[A - Robert Berman:]

Yeah, so the diversion program is growing every day. There are different cycles in it that we're learning, because when you get a notice out there's a second notice in 60 days. People have a certain period of time to respond and we've noticed when that second notice goes out that you know people that maybe were a little ways in responding earlier, respond then, so… But the revenues are increasing. They are certainly going to be higher in this quarter than they were in the last quarter and wouldn’t have the program fully operational in Q1, because part of the quarter was beta testing it. What's interesting is, the good news is that people are getting insurance and you know that from real time database and we're tied in with the insurance industry, but they are not all getting insured through us. The conversion rate hasn't been as high as we’d expect it, but we are getting you know quite a few conversions. We've been short of a number of people and I think the reason for it is that we're learning. You know as we go, we were partners. The freeway have been changing the way they issue quotes and providing premium finance and other things that make the path easier for people to get insurance from the platform. But remember, our primary goal was to get people through the diversion program compliant and from that perspective I can tell you that the state's hotlist, which by the way was when we were paying it in real time against the insurance industry database compared to the states database, the state's database was completely inaccurate. So the insurance database was much more accurate and frankly was a lower number, but you know – but it's coming down. So it means that the program is doing a really good job and the state is very happy with it, the state's very happy with it. So look, it's a small state and they were running a prior program there a different way, so we had to step into a mess and try to clean it up and there's been some confusion there, because they had a prior website out with a different vendor, so there was some confusion there for you know a month or so as you know are had to clear up that other website, but the program's going really well and I think that there's no question that it's fulfilling its mission for Oklahoma, so it's doing well.

[Zach Cummins:]

I understood, and can you talk about some of your development with some of your major holding partners to start this year. It seems like that side of the business has done a good job ramping up versus what you did in 2020.

[A - Robert Berman:]

Yes. So – you know we had – in 2020 we were only doing processing primarily for Colorado E470 and doing a pilot for a major roadway up in Canada, and in the middle or latter part of Q1 we picked up one of the largest tolling operators in the country. We do all of their image processing right now. It's a variation of the card check product that we use on e-commerce, although it’s not an e-commerce product, just a variation of it. So it's automated and it's very high volume, but it's very low price, but it's ramping. I think right now they are – what are we processing there?

[Eyal Hen:]

We’re processing over 8,000 rates per hour right now.

[A - Robert Berman:]

Yeah, and that's – I think that's 24 hours 7 days a week.

[Eyal Hen:]

24/7.

[A - Robert Berman:]

Right and that's this customer has only added one customer. So what happens when they add the second customer and we're in the process of onboarding their additional customers. You know we have to – they gave us a dataset and we have to you know key it up in the system and we're in the process of onboarding more of the customers and we believe unless something changes that they intend to use our source of primary image processor. You know that would include all their customers across the country and they've got you know –in large part they’ve got the major, you know the major metropolitan areas of the U.S. and all four corners and the middle. So that's progressed interest in some other tolling operators as well, which is a good thing, because it's a nice business act. Look, again it's not you know where we’re focused, but it's all a means to an end. Because its revenue that's not going to disappear as we do other things, but I think Rekor One is the platform that we believe is where this company's value and it’s hard for people to see that now, because it's a business model that is kind of a little bit you know grey. Folks don’t understand it's really a big data business and we're going to be rolling that out and we're probably going to be demoing of the Rekor One platform at our shareholder meetings. So for those of you who are on the call that are going to be at the meeting, you'll see it, and I think when folks see it and understand the amount of data that we collect and the different data points from sustainability to greenhouse gases to you know smart scores to counting electric vehicles to you know weight and tonnage and all the different things that we built this platform to do, I think everyone will understand the value of this platform to you know where we're headed with regard to intelligent roadways, so you know that's where the focus is. But the tolling business is a nice business and we think it'll continue to grow, just you know like the other things that we do every day.

[Zach Cummins:]

Understood! And just a final question for me. I mean can you provide us any sort of update with MasterCard? It seems like they're moving closer to a national rollout, but with kind of larger pilots with White Castle.

[A - Robert Berman:]

Yes, so look, as we always say, MasterCard, it’s their product. We can't push them. They did roll this thing out in Orlando at the White Castle there and sure folks have seen some of the articles that were put out on it, and they are out in the middle now of doing that and we expect to have an update with them fairly soon, but look, we don't know. I mean it could turn into nothing. But I just would find it unimaginable that MasterCard would invest the time, effort, money and resources into the solution that they did and not make a sincere effort to penetrate the market and again, I don't think there's another solution out there that does everything that their solution does, so we'll see. But again remember, so you know folks, this is MasterCard, a gigantic company, dealing with a lot of large companies right. So they're dealing with the big fast food franchises and you know none of these folks move quickly, but you know when they move forward, they move forward. But again, Rekor is not going to live or die by what we do with MasterCard right, so we hope that they start to scale and that will benefit us and we’ll see.

[Zach Cummins:]

I understood. Well, thanks for taking my questions. I appreciate the time.

[A - Robert Berman:]

Yeah, yeah, thank you.

[Operator:]

Thank you. Our next question comes from the line of Mike Latimore with Northland Capital. Please proceed with your questions.

[Aditya Dagaonkar:]

Hi! This is Aditya on behalf of Michael Latimore. Could you tell me what is the status of the New York legislation. Like do you expect it to get past by end of this year?

[Robert Berman:]

Yeah, you know it's hard to say what's happening in New York. The legislation there was taking a different route and New York has some unique political problems right there. So things are kind of going sideways, while the Governor of New York is wrestling with some of his issues, so it's hard to say; I mean it's really hard to say. Everything in New York has become very politicized because the problems that one of the stakeholders has there, so we don't know. I mean we just have to sit back and watch, but again, I mean I think look, you know the concept of Uninsured Motor Vehicles is a great program. I think that again, it sits right next to expired tags and all the other things that you can avoid making a traffic stop by a patrol car for. And this is the 21st century, it makes sense to do this, and I think that the narrative in the country that’s moving in that direction and I think we've all seen editorials in major newspapers. And we’ve all seen Talking Heads on cable news networks on all sides, you know calling out for this. So we think that it's you know the right time, right place, because it makes sense right. And even our government affairs group in our discussions with the folks that we work with on the hill, say that you know the administration is keen on it as well. I mean they think that providing maybe resources or helping you know larger cities and municipalities use technology to reduce the number of traffic stops for ministerial violations is a good thing, right. So it has to end up there, just logic, right, it just has to; I mean it doesn’t make any sense. So that's what you know we believe.

[Aditya Das:]

Alright, fine. And did you see any revenue coming from the border patrol use cases in this quarter?

[Robert Berman:]

The border?

[A - Eyal Hen:]

The what? Sorry.

[Aditya Das:]

The border patrol use cases.

[Robert Berman:]

The boarder stuff, yeah absolutely.

[Aditya Das:]

Yeah.

[Robert Berman:]

Yeah absolutely.

[Aditya Das:]

Okay, and do you see anything in the – yeah, tell me.

[Robert Berman:]

There is you know, there is a major contract up there where we compete in August, which you know is held now by an incumbent and we’ve been replacing a lot of equipment the prior vendor had with respect with lanes covered by them, and we’re also working with the other vendors as well, so we’ll see you know. We think we are pretty well positioned for whoever bids it and wins it. But we’ve – our stuff has been used quite extensively there in the last quarter.

[Aditya Das:]

Alright, alright, fine. Thank you, that’s it.

[Robert Berman:]

You’re welcome.

[Operator:]

Thank you. There are no further questions via the phone at this time. I'd like to turn the call back over to management for any potential webcast questions or closing comments.

[Robert Berman:]

Okay. Well, in summary you know look, we are confident that Rekor is well positioned to serve the needs of our customers even the ones that don't know that we exist, right, and combined with the strong fundamentals on business, it’s going to enable us to deliver long term value to our shareholders and we'll be looking at strategic acquisitions still. But I want to say with regard to M&A, you know we're just not going to go out and buy something for the sake of buying it. You know we’re looking as it relates mostly to real estate and we have other ways to acquire the same real estate, you know less expensively than we're not going to pay for it in an acquisition. But you know we're intently focused on continuing to improve our business with growing sales and expanded global customer base, and the future looks bright and we think we are in the right place, at the right time, with the right products and we spent the last you know 2.5 years, 3 years, putting ourselves in a position to do exactly what we're doing now, and it's all about data and you know for those of you that go far enough back with us to remember the discussions, it's all about data. So you know keep an eye on it and thanks for the support and I appreciate everybody's time this afternoon, and we’ll speak to you soon.

[Operator:]

Thank you for your participation. This does conclude today's teleconference. You may disconnect your lines at this time. Have a great day!