Q3 2022 Rekor Systems Inc Earnings Call
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Good afternoon, ladies and gentlemen, and welcome to today's record Systems, Inc Conference call.
My name is John and I'll be your coordinator for today.
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 get started I would 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 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 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 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 you Mr. Johan CFO of Records systems. Please go ahead Sir.
Hi, everyone. Thanks for joining us today to discuss.
Our results for the three and nine months ended September 32022, and update you on key business topics on the call with me today are our CEO , Robert Berlin, and our President and CEO , David Harney, David will provide additional color on our business I'm sorry.
Over our relevant metrics.
With a full quarter of thousand traffic services revenue in the first quarter of 2022 we have accelerated growth and recurring revenue and then all of a sales model.
As I've explained previously we've shifted our emphasis from pointing time records. So recurring revenue since the third quarter of 2021 what.
While we continue to engage in any point in time hardwood sales in appropriate circumstances, our new model.
Is it providing data services and software on a subscription basis.
Had a near term impact on our overall revenues earlier in the year, but the strong growth. We are now seeing current revenues is laying a solid foundation for our overall strength and stability over the long term.
Let me get into some of the details and the financial results for the third quarter ended September 32022.
Highlights include.
South and traffic solution or yeah.
He's also a operation are fully consolidated third quarter revenue for the three months ended September 32020 was $7 $4 million compared with $2 $6 million in the same period last year.
Nicky can increase of 184%.
Revenue for the nine months ended September 32022 was $15 $4 million compared to $11 $1 million in the same period last year, an increase of 38%.
Recurring revenue for the three and nine months ended September 32022 increased by $3 $6 million and $5 5 million respectively.
Compared to the same period last year.
This increase represents growth in recurring revenue of 292% and 174% for the three and nine months periods ended September 32022, compared to the same periods last year.
The phone its obligations increased to $28 $6 million as of September 32022, compared to $22 6 million years, all as of December 31st 2021.
As a result of an interim assessment under current market conditions record, a goodwill impairment of $34 8 million.
As you can see we've continued to see significant improvement in revenues and retiring debt.
What's the comparison to second quarter 2022.
The percentage of recurring revenue and.
Total revenue was 65% and 66% for the three and nine months ended September 32022, respectively, compared to 47% and 28% for the three and nine months ended September 30, 2021 respectively.
We also began to see reduction in our G&A as a result, the streamlining activities. We started at the end of the first quarter of 2022.
Total operating expenses for the nine months ended September 30.
Two were $47 5 million.
Not including a goodwill impairment compares with $26 million.
During the same period in 2021.
And Kristen operating expenses stemming from significant increases in payroll and curling maintenance expense.
During the year, we added new hires to our engineering sales and marketing teams as we integrated the technology into.
Our growing.
Product and service offerings. However, in the current period, we have been.
In evaluating our results carefully and focused on managing our operating expenses.
This resulted in a reduction in operating expenses for the second quarter was 2022 at <unk>.
Turning to the 2020, so even with the inclusion of a full quarter yeah, it's expensive.
During the third quarter when he went too we experienced a significant decline no market capitalization, which we deemed a triggering event relates to goodwill.
As a result, we performed an interim impairment assessment as of September 30, 2022.
In determining this we had an impairment related to goodwill in the amount of 34.835 million Boe.
Our adjusted gross margin for the three months ended September 30, 2022 2021 stays consistent and approximately 45% and decrease for the nine months ended September 32022% to 43% from 58% the same period last year.
The decline in margins for nine months ended September 32022.
Merrily I can beautiful to increase investment in infrastructure.
Expansion of our copper network and solid base, we expect to see improvement in our adjusted gross margin in the future.
This is the.
Highlights in the improvement of our third quarter adjusted gross margin.
Compared to the second quarter of 2022 as we pursued improvement operation and will close larger transaction with higher margins.
Adjusted EBITDA for the three.
Nine months ended September 30, 'twenty, 'twenty, two and 2021 increased to a loss of <unk>.
$9 2 million Golar from a loss of $6 7 million.
And the loss of $29 6 million dollar so when the loss of $1.8 million respectively.
The increase in loss was due to the investments to position <unk> for future growth.
<unk> for us.
However, as a result of the streamlining activities.
We see a decrease in loss from the second quarter when it went to.
Since we changed our revenue model, we have released enhanced key performance indicators, so help from biopsies agility and more detailed view into our success and progress.
And we hope that over time this API will provide our shareholders with a better insight into our business.
As noted you know financial highlight.
Our recurring revenue for the three and nine months ended September 32022 increased 292% and 174% compared to the same period 2021.
During the nine months ended September 32022, we won $8 3 million dollar new contract compared to $7 3 million.
New contract value one during the same period in 2021.
This is an increase of 14% related primarily to the STS acquisition.
As of September 32022 remaining contract performance obligation were $28 6 million.
We expect to recognize approximately 68% of this amount over the succeeding.
In 12 months.
This represents an increase of $6 million or 27% compared to the $22 6 million dollar performance obligation.
As of December 31st 2021.
Recent performance obligation was primarily due to the two hour Sps acquisition.
As we build relationships and extend our presence.
Acquire many customers through pilot programs, which are typically short in nature.
As these pilot programs convert and extends the lungs can contract.
Expect to see these kpis.
Moving to our financial condition and liquidity our cash balance on September 32022 was $7 9 million.
A decrease from $25 8 million as of December 31st 2021.
We have the working capital deficit.
And look there is 120 to $1 $1 million down.
Down from working capital of $17 million as of December 31, 21.
The decrease in working capital was primarily due to a decrease in cash and cash equivalents.
This decline was primarily due to the increase in our loss from operation as we position the company for future.
<unk> growth and reflects cash used in the acquisition of it yeah.
The reduction in cash was partially offset by a net cash inflow of $22 8 million dollar as part of our 'twenty to 'twenty two at the market sales agreement.
In summary, we're passionate about our growth prospects and continue to experience a strong momentum in our market.
As David will discuss with you that we are concentrating our investments now on rapidly increase increasing our margin and fully expect that significantly.
We remain focused on creating shareholder value and making the signal.
Benefits, our long term shareholders.
With that I'll now turn the call over to David.
David.
Thank you al good afternoon, everyone and welcome.
I'd like to start by talking about our revenues and expenses.
Last quarter, we discussed the trade offs when you transitioned from primarily a point in time revenue model to a recurring revenue model and the need to invest in the establishment of long term relationships that provide a stable revenue base.
Now that the results of S. T S. Our weekend recent acquisition are fully reflected in this quarter's financial results you can see that we were able to accelerate that transition to recurring revenue.
As al just described and less than a year, we've been able to transition from recurring revenues up 28% of our quarterly revenues to one where recurring revenue generated.
65% of our total quarterly revenues.
Total revenue for the quarter increased 184% from the corresponding period of 2021.
But that's really just the beginning.
The combination of our weight care and STS acquisitions in the past year have placed us securely in the position that we've been working to put ourselves in for the last three years, which is to provide the key technology components needed by leading agencies and operators on the forefront in the development.
Of the intelligent infrastructure needed to address the challenges at urban migration.
Congestion.
Crash fatalities sustainability.
Alrighty of life and equity and public safety.
Over the past year.
As the United States has begun the implementation of a massive effort to improve its mobility infrastructure.
A growing consensus has emerged that better data collection management and distribution is a priority in this effort.
For decades, the federal government has mandated states to collect traffic data for receipt of highway funds.
This currently results in over 1 million Traffics studies across the U S. Each year.
The way that roadway data is currently being collected from our aging road weight network suffers from the same underinvestment, but the basic roadwork network.
Suffers from.
Current collection methods used inductive loops that are expensive and dangerous to install and side firing radars and one offs samplings that capture only a fraction of the data required to fully evaluate conditions and support decisions and investments for agencies that are responsible to manage.
Roadways.
Its federal and state agencies gained access to broader and more accurate data that can be collected from the roadway. They also gain access to the tools needed to drive tangible and meaningful results against their responsibilities to bring smarter safer greener roadways to their citizens.
This can only be achieved when that data collected is aggregated and combined with connected vehicle data.
Our outsourced and other third party data sources analyzed in real time and integrated into an interactive and active intelligence system that delivers actionable insights on a continuous basis.
We of course technology can improve the quality cost and efficiency of these mandated traffic studies and data collection efforts.
States transition to a digitized approach and digitized transportation network, which is being accelerated by the 1.2 trillion dollar.
Investment in infrastructure.
In short we are in the right place at the right time.
We have had a busy and exciting past quarter I would like to highlight several examples of where we have made meaningful progress against our goals and key wins that are emblematic of.
What we can expect moving forward.
On the technology front, we launched the edge flex system, a first of its kind networked extensible, knocking a roadway intrusive AI driven traffic data collection system.
The system uses state of the art computer vision and machine learning to deliver the utmost safety accuracy performance and simplicity.
For federally mandated vehicle classifications of data and more.
As you look recall from my previous remarks, the U S complete more than 1 million obese traffic studies annually and this represents a tremendous growth opportunity ahead for Nicole.
Now since the launch.
Of our edge flex system, we have seen strong engagement.
More than 40% of the U S States.
Interacted with they are keen to deploy this innovative technology and we are doing our initial deployments this quarter with a strong pipeline behind us.
We have begun to upgrade the data collection system in South Carolina expansion of roadway data collection to include bicycles and pedestrians and Florida and are implementing implementing state and regional pilot projects to provide predictive analytics and integrated cross modal management programs in Alabama and Ohio.
On the transportation and mobility ecosystem front I am pleased to announce that we were also chosen for the Amazon Web services or AWS Smart city competency for smart urban transportation.
This is a unique distinction and recognizes record once again for its unique technical proficiency and proven customer success supporting city governments and city developers, who are witnessing an unprecedented wave of urban growth.
In addition.
We also announced the formation and formal launch of the record partner network.
An industry first connected private and public mobility data hub for our customers and the ecosystem.
At the launch we also announced the addition of blinks he predict IQ Tomorrow Dot I O and wage to already dozens of others and our partner network.
The record partner network and our ability to provide a single pane of glass for roadway intelligence took center stage recently to how our customers in North Carolina and Florida.
Able to Holistically manage vehicle and roadway routing and provides citizen safety in what is an unprecedented hurricane season in the South east.
On the customer front.
We've also made significant progress with key customers and key states in the past quarter.
This includes Alabama Department of Transportation, where we were selected for the U S Department of Transportation Federal Highway administration $5 million Grant for proactive route operations to avert congestion and traffic.
We also announced a win with the Central Ohio Transit authority, otherwise known as Cotter.
With record being selected for its two and a half million dollar program to improve traffic and transit services for Ohio.
We also announced a key win with the state of Texas and its department of transportation that chose to standardize on the record roadway intelligence platform and we are now deploying there.
And then my another major win in the quarter was with Oregon Department of transportation on a 10 year contract, where we were down selected from a pool of 14 major roadway infrastructure and architecture firms to be the technology platform for Oregon statewide connected vehicle data ecosystem and technology.
As you can see it's been a busy quarter for record across the technology ecosystem and customer fronts <unk>.
Momentum is building quickly and we are increasingly excited about the results and what they tell us about and of course future potential with our computer vision systems and recall one platform.
We deliver customer value efficiently rapidly and cost effectively.
Yeah.
To date we.
We have invested more than $100 million and our proprietary instated there are technologies, including hardware software machine learning and AI or artificial intelligence a.
A year ago. This past September we acquired wake her technologies, a leader in sourcing and managing third party roadway data for more than 60 partners.
More recently, we acquired S. T S. A three decade leader and roadway data collection, who pioneered the pay for data model with several key state departments of transportation.
We've incorporated all of these unique and differentiated capabilities into we call one.
Our ever expanding roadway intelligence engine and operating system.
That turns data into roadway knowledge.
We aggregate.
We transform.
Data into knowledge with our AI and other IP and we deliver actionable insights and analytics as a service.
Most importantly, we are trusted by our customers as a data services company and we are poised for rapid near term and long term growth.
I look forward to providing you continued updates on our progress.
As the U S States look to digitize the transportation network accelerated by the 1.2 trillion dollar federal infrastructure Bill and spend.
In short record is well positioned for the growth ahead.
Thank you all once again for your time and attention we really appreciate it and look forward to speaking with you all again on our next quarterly conference call.
I will now turn the call over to Robert Drummond for final remarks, and a question and answer session.
Robert.
David Thank you.
So before we open it up for questions.
No. There are some of you have concerns about our liquidity and resources under current market conditions.
Needless to say this has been occupying a great deal of our attention recently at.
At this point there is little that I can say, except that we are working diligently on a number of options and we'll be narrowing our focus soon.
We will try to answer your questions as best we can but please understand that we're not in a position to provide many of the details you might be seeking at this time.
Operator.
Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your thoughts on your telephone keypad, a confirmation tone will indicate that your line is in the question queue. You May Press Star two if you would like to remove your question from the queue and its.
Participants using speaker equipment, it may be necessary to pick up your handset before pressing any star keys.
One moment, please while we poll for any questions.
And our first question comes from the line out.
Cummins with B Riley. Please proceed with your question.
Yeah. Thanks, good afternoon, Thanks for taking my questions and congrats on the building momentum that you have across the variety of Dot's I know you cant share any plans around a potential near term funding here up to kind of give you a bridge to that operating breakeven point, but I mean can you give us a sense of the timeline.
When you are still expecting for this business to transition towards that breakeven adjusted EBITDA. It seems like revenues building right now and it seems like you undertook some cost reduction actions near the end of Q3, So just give us a sense of any sort of update you can give there.
Yeah, Jack Robert Thanks, Thanks for the question I'll take it.
Hum.
We believe you know.
Acquiring the resources that we need and we think we will.
The record will scale to substantial revenue probably high eight figures by this time next year and the company will be profitable.
We believe we have the visibility with customers that are adopting our technology now to.
To get there.
So that's what we're looking towards.
Understood and just digging a little bit deeper on some of these new relationships that David was speaking about I mean can you give us a sense of how youre getting in the door with these customers as the STS having prior relationships that are opening the door for you to get deals with state of Alabama, Texas, and Oregon, just just curious of whats really.
Driving this are building momentum across there.
You know.
Zach.
Charlie are you able to Oh.
Come on the call here.
I'm here.
I have our head of government relations on the call.
And I didn't plan for him to speak, but Charlie and I worked together for decades, and he's got quite an extensive background in government affairs and I'll, let him speak to what's happening with the states as we're rolling the checkout Charlie.
Yeah, it's it's been beyond a pleasant surprise typically when you're.
Calling on government entities, there very circumspect, nobody gets rewarded for being a tech forward and kind of leaning into new technology, but I could tell everyone. Here that we've probably have discussed our new technology, our vehicle classification technology with them.
13, or 14 different state D O Ts and not one.
Not one has said this is not a welcomed.
<unk> solution.
For their roadways, and really what we're able to do is to do the.
With the F HW way that the department of transportation on the federal level requires states municipalities and M. P. O's to do which is the basically report 13 bins of classification data because we've been in this for so long and we are a I use very sophisticated when it comes to the vehicle recognition.
The result has been like nothing that ive ever experienced talking to government entities.
Yeah.
Understood and.
Just along that line I know that there's a big demand tailwind regarding the funding from the infrastructure Bill or are you starting to see customers that are getting funds into their hands now and I'm. Just curious I'm curious as to what could be any sort of gating factor that could impede any progress with the Oh Geez you know what was that.
We're starting to see is we're starting to see the.
And then maybe David could speak to this but we can't go too deep into it we're starting to see the ideas the government.
The federal level of sharing with the states about the way they envision roads, becoming.
I went to the digital age more somewhat of an operating system.
I think you know the went out in Oregon is emblematic of that my David do you want to talk a little bit about this yeah I'm happy to do that if you can hear me okay.
Yeah. So so when we think about the path forward certainly we're seeing an uptake.
From our states and how this works at <unk>.
You've got a federal funding available and the states need to apply against projects. They submit and that those funds are released so where things are in the infrastructure built today is that the projects are being submitted.
And the funds will be released when they are accepted and so to me. This is this is right on track with what we're seeing we've seen a pretty significant uptick in terms of pipeline and.
And availability on key projects from state that we've been working with and it's not just on the classification of contents in our transportation management, and our traffic management capabilities as well across the board, but I would say that it seems to be on track from what we can tell.
The funds are or subject to approval.
Just on projects that are submitted and projects are now been submitted so that's kind of where we are today.
Oregon.
Where this has been a.
Journey with them to identify.
The next generation of road usage charges.
A weighted charge for road usage and you can imagine with the.
The continued evolution of evs or electric vehicles that they're not filling up at the gas pump as much anymore. So states are rightfully trying to determine what is that next generation solution for road usage, if it's not going to be gas and so when you think about what that what that requires it really requires the ability.
We need to understand everything that's moving in our roadmap with connected vehicles et cetera, and that's really a sweet spot for us.
Our ecosystem, so we feel very well positioned.
And we're seeing that now transition and transform them to real contracts and opportunities.
It's off the idea stage of moving into more of an implementation stage.
Again, all powered by the infrastructure Bill.
Yeah.
It's Robert I would just add to that you know what David said is so true because if you think about the last 60 70 years in the United States, you know that the the framework that the federal government's shut off the share revenue to support our roadways with the states has been to recover gasoline excise taxes, and then redistribute those.
Well, that's going to have to change okay, because evs are forcing that right in California, we have 17% electric vehicles. So the equitable way to read just to distribute gasoline excise taxes has been collecting the FH W. A 13, Ben which is what we were talking about earlier, so doing it in a non obtrusive way, where you're not digging up the road.
<unk> not putting in a doctor loops, you youre doing it in a safe friendly way, but also you you won't have the ability to have that same system tie into.
The back end of this for other purposes for you know for you know.
The redistribution of that money it really comes down to it's all about the money and if you think about it theres been hundreds of billions of dollars redistributed by the federal government to the states.
CT highways and roads based on gasoline excise taxes that no longer works, okay with the technology, that's out there with Evs and other things, there's a better way to do it right, but it takes a company like record that has both the connected vehicle side and other third party data side tied to the ground troops side, which is what we got from S.
T S.
Bringing the new technology into that.
And you know part of your question earlier was STS help with respect to the relationships Charlie's had an easy time open the door because they want the technology like yeah bring it here. If you don't have to dig up a roche how do we do this well.
But you just don't walk in with technology is the fact that STS for three decades has been counting right for D. O. T is primarily throughout the south east that brings a level of trust that you know that these dot's need to have because they need to have the data to liberate a certain way and they want to know the company that's delivering to them.
Understands that and that's why we made that acquisition. So I hope that helps right, but it's the whole bundle right and more importantly, the money too.
Collect the the mandate right. This Saturday February 13, that's not part of the transportation Bill that that money is there every year and it's been it's being done now it's been done for the last 60 70 years right. So it's you know it's part of you know the old way of doing it converting to the new way and then figuring out a way to recalibrate.
Which is what that when women wasn't working off.
David you know something about that but I want to harp on that I mean, you know that started three years ago, Okay, Oregon, putting all our phy out three years ago looking for an ecosystem that will incorporate an operating system for the roadways that would allow for an easy use of charge right and it took three years. There were 14 came so I'm not going to match.
Competitors, but a lot of them are multinationals and companies are people on this call would know we were down selected for most 14th two and you know the award letter was issued last week and I think that speaks volume more technology right.
Right.
We were able to you know beat all of those other companies out and Thats. One of 50 states, it's going to have to do the same thing right.
So Oregon got ahead of it so hopefully that's helpful.
Yeah.
Absolutely extremely helpful well I don't want to pick up all the time here. The key yourself I'll go ahead and pass it along but thanks for taking my questions.
Sure. Thank you.
And as a reminder, if you'd like to ask a question. Please press star one. Our next question comes from the line of David Hargreaves, a private Investor. Please proceed with your question.
Hi, congratulations on transitioning the revenue model I'm wondering if you could talk a little bit about the receivables on the balance sheet, if they mostly government entities.
They are government type entities with a high.
Probability of collection is it something that might be securitized Abel.
Okay.
Dale.
Yes, so you're right most of our a R. A they are government entities and as we've mentioned before we're looking on all options.
Right now, but most of them are government entities are not more than 30 60 days outstanding.
Yeah.
I think Jay will add to that I think when you look at the performance obligation getting more to your question.
No recourse starting to build a substantial contract value or governmental contracts around five 710 years right. So we're going to get to a point, where we will be able to access traditional.
Commercial that from a commercial bank right and.
Equity loves that right and I think that's something that we're hoping that we're going to see the intersection of our P&L with next year or so that we can pursue.
Finishing the rollout of our capital expenditures with with bank debt right and we're going to get there. So.
I just I'm, hoping that we don't see a straight line and we've got three quarters with you.
Negative 29 million of EBITDA, and then the 10 million for the last quarter.
She is there any reason, we think that there would be a deviation in the fourth quarter.
Yeah.
Lessons.
Yeah I'll go ahead.
Right. So David it's a good point, but I think if you if you look on a.
The trend from Q2, when we said that we're going to reduce expenses you can see a reduction in our quarterly that'd be the losses and as we mentioned previously.
Previously our expectation is through the.
Fourth or 'twenty 'twenty, three we'll start to see a breakeven that'd be dying profitability.
Yeah.
Okay well. Thank you congrats again, thanks very much yeah. Thank you. Thank you. Thank you.
Thank you there are no further questions at this time I would like to turn the floor back over to Robert for any closing comments.
Oh well.
Well thanks, everybody appreciate your patience and look this is tough.
Markets has beaten us up well as well as a lot of other companies, but this is not easy to do as David mentioned you know this has been years in the making we've invested over $100 million in this technology. We've made two very important and synergistic acquisitions and it's coming.
Together and we think 'twenty three is gonna be a year that we're going to see the results of that and we're going to do everything we can to.
Maintain the value of this company for our shareholders long term that that's the plan and we think we'll get there. So I appreciate your time.
Thank you everyone. This does conclude today's conference you may disconnect. Your lines at this time. Thank you for your participation and have a great day.
Yeah.
Yes.
Okay.
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