Rekor Systems, Inc. (REKR) Q4 2021 Earnings Call Transcript

Rekor Systems, Inc. (REKR -2.17%)
Q4 2021 Earnings Call
Mar 31, 2022, 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good afternoon, ladies and gentlemen, and welcome to Rekor Systems conference call. My name is Rob and I'll be your coordinator for today. [Operator instructions] 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 would 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. 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 refer to the full disclaimers in our earnings release. You should also review a description of the risk factors contained in our annual and quarterly filings with the SEC.

Non-GAAP results will also be discussed on the call. The company believes the presentation of non-GAAP information provides useful supplementary data concerning the company's ongoing operations and is provided for informational purposes only. I would now like to turn the presentation over to Mr. Eyal Hen, CFO of Rekor Systems.

Eyal Hen -- Chief Financial Officer

Good afternoon and thank you for joining us. Today will discuss record results for the year ended December 31st, 2021, and provide you with an update on key business topics. On the call with me today, Robert Berman, CEO; and David Desharnais, president, who will be giving you additional color on our business after I go over our relevant metrics. 2021 was an important and defining year in recorded young history.

In 2021, we had the following offering a lot of strategic acquisitions in our inaugural Investor Day, where we presented our record one platform to the investment community. The introduction of Rekor One and the acquisition of the company formerly known as Waycare has put us in a position to jump-start 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 term and forward-looking opportunities. In the second quarter of 2021, we have been moving from a product-oriented transactional revenue model to a solution oriented, recurring revenue model.

The sale of solutions as compared to product spread revenues out over a longer period of time, thus reducing revenue in the short term. This shift from point in time revenue to recurring revenue has had an important impact on near-term revenues, but we continue to generate year-over-year revenue growth as our newly refined go-to-market strategy has also had a positive impact on our growth. With that, let me go over the financial results for the year ended December 31st, 2021. Our company achieved significant revenue growth for the year ended December 31st, 2021 compared to 2020.

Revenue for the year ended 2021 was $14.3 million, 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 December 31st, 2021, which represented an increase of $1 million or 28%, compared to $3.6 million for the year ended December 31st, 2020. The year-over-year increase in revenue is primarily due to the expansion of our product and service offerings.

Our current sales model emphasize such revenues generated through direct sales, but we have also seen increases in our e-commerce 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 revenues. We expect the emphasis on sales-based revenue in our current go-to-market strategy to generate long-term growth well beyond what we could have achieved under the previous model. We will, however, continue to monetize opportunities that are transactional in nature.

Total operating expenses for the year ended December 31st, 2021 were $39.3 million, compared to $17.6 million during the same period in 2020. We recorded a significant increase in payroll and payroll-related expenses. The addition of headcounts 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 expanded and we continue to expand 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 to develop new solutions and improve our line of products. This investment will enhance our competitive edge as we continue developing additional state-of-the-art solutions that address our customer's growing needs. Our adjusted gross margin for the year ended December 31st, 2021 was 56%, a decline from the 62% we reported on December 31st, 2020. The decline in margin for the year ended December 31st, 2021, is primarily attributable to the evolution of our go-to-market strategy.

As we continue to focus our near-term efforts to generate high margin recurring revenues, you should expect to see an improvement in our adjusted gross margin. Adjusted every dollar for the year ended December 31st, 2021, or the loss of $21.8 million, compared to a loss of $9 million the same period last year. This increase in loss was due to the investments in the position recorded for future growth that I've just discussed. During 2021 release enhanced key performance indicators to help provide visibility and a more concise view into our success and progress.

We hope that over time these KPIs will provide our shareholders better insights into our business. In 2021, we boost contract value to $8.9 million during the year ended December 31st, 2021. This is an increase of 35%, compared to $6.6 million of total contract value won during the year ended December 31st, 2020. As of December 31st, 2021, remaining contract performance obligations were $22.6 million, an increase of 35% from the $16.7 million reported as of December 31st, 2020.

Moving to our financial condition and liquidity. Our cash balance on December 31st, 2021, was $25.8 million, up from $20.6 million as of December 31st, 2020. Raised $70.1 million in net cash proceeds in a public offering in February 2021 and use $39.9 million for the acquisition of the company formerly known as Waycare Technologies in August 2021. Working capital on December 31st, 2021 was $17 million, down from $18.2 million as of December 31st, 2020.

Increase in cash and cash equivalents was primarily due to the net proceeds from our public offering in the first quarter of this year, partially offset by a cash payment as part of the total consideration offered 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 research and development efforts. In summary, we are enthusiastic about our growth prospects. The enhanced team has been extremely busy winning new client relationship, deepening existing ones, and forming new partnerships.

We feel very good about our pipeline and the strong momentum we are experiencing with 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 reap the benefits of this investment. There is significant operating leverage embedded in our business model, and we will 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 -- Chief Executive Officer

Thank you, Eyal. Good afternoon, everyone, and welcome. Today, we're 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 important development has propelled our company forward. There's a lot going on here, a record that already marks us as an established big data company working in the intelligence infrastructure sector. Rekors actively innovating and building to expand our software portfolio so that we can address not only our customer's current challenges but also the evolving challenges they will face in the future. Make 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-backed 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 to all three of these 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 more formally introduce himself. With his vast tech product and marketing experience. As a seasoned veteran of the management teams at Idemia, American Express, and Amazon Web Services, we are pleased he has chosen to leave the world of Bluechip 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 -- President

Thank you, Robert. I'm honored and thrilled to be here at Rekor and a part of the senior leadership team. Good afternoon, everybody. It's a pleasure to be with you today.

By 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, build 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 start-ups, 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 from mentors such as Jeff Bezos, Ken Chenal, Steve Squeri, Lip-Bu Tan, Andy Jassy, 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 products 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 nearly every aspect of our daily lives. We step from our homes into a road system that leads us 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 and systems.

Unfortunately, many areas of the world face aging and legacy infrastructure today, resulting from decades of neglect and underinvestment, creating 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 caused 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 in 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 Act 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 through modern, efficient, and 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 solutions, 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 in 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 again to update you on our progress. At this point, I would like to turn the call back to Robert for closing remarks.

Robert Berman -- Chief Executive Officer

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 Hennessey. We're growing organically, and we'll 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.

Questions & Answers:

Operator

Thank you. [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 -- Lake Street Capital Markets -- Analyst

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, given the quarter is almost over for Q1, how has that trended in the last 90 days? Thank you.

Eyal Hen -- Chief Financial Officer

Can you repeat the question, please?

Robert Berman -- Chief Executive Officer

Sorry about that.

Max Michaelis -- Lake Street Capital Markets -- Analyst

Yep. 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 has trended over Q1, given the quarter is pretty much wrapped up here.

Eyal Hen -- Chief Financial Officer

Obviously, we cannot make any reference to Q1, 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, $2.6 million. So it's a nice quarter over quarter since we changed the revenue model to a recurring event.

Max Michaelis -- Lake Street Capital Markets -- Analyst

OK. And then just given your statements about gross margin improvement, how is that trending? Do 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 thinking more second half of the year?

Eyal Hen -- Chief Financial Officer

Yeah. As we said anything also on the investor call in September and last investor call, we'll see -- start to see improvement in the gross margin and some of the KPIs as we get into the second and third quarter of 2022. So we can start to see the improvement on the back end of 2022, obviously in 2023 as well.

Max Michaelis -- Lake Street Capital Markets -- Analyst

OK. Thanks. That's it for me. Good quarter, guys.

Eyal Hen -- Chief Financial Officer

Thank you.

Robert Berman -- Chief Executive Officer

Thank you.

Operator

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

Zach Cummins -- B. Riley Securities -- Analyst

Great. Hi, Robert, Eyal. Hi, David. Thanks for taking my questions.

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

David Desharnais -- President

Yep. I'm happy to do that, Zach. Thanks for the question. So looking at the opportunities in the market, what is always interesting to me is a high-growth opportunity.

And if I look at Rekor being really a growth company, a start-up company, the way I view it in the way I think the market should view it -- this is a very, very large fragmented market. There's a lot of money being poured 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 the 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 mean I would say the headline, those are some of the bigger tractors for me. When I look at the path forward here, I think in many ways, the company would have been cast as a hardware company or really in a very defined segment around law enforcement our public safety over time. I don't see that.

I think that is a component of our business. I look at it very much as a big data company. I look at it very much as really as the transportation market and the whole infrastructure bill kicks in not only here in the U.S. clearly, I mean, we see indicators 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, and it's going to be very, very rooted in data, very rooted in AI. And these are areas that I'm well versed in. 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, ingest, and transform and the market opportunities there. So I really have no logical choice, if I can say. But yes, I'm thrilled about the conditions for success here, and we're going to go after it.

Zach Cummins -- B. Riley Securities -- Analyst

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

Robert Berman -- Chief Executive Officer

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, Zach, but I will tell you that the footprint is growing. And I think as we get into the second and third quarter of this year, we're going to see some of those things start converting in 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 side was going to uncover something where maybe we were drinking our own cool-aid, and I think we've confirmed that we think that the value 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 we've all talked about those are realistic and maybe in some cases, might even be on the low side. I mean, David, do you want to add anything to that?

David Desharnais -- President

Yes. I totally agree. I think when we looked at the market sizing back in the Investor Day, it predates my time that 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 even 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 of intelligent infrastructure, there is infrastructure out there. We see it every day, right? We drive on it. We see it on the 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, a new -- really a 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 and you think about the value that information provides to commercial entities and even something as simple as commercial real estate like that idea and how they build and where they build and how they monetize retail and how they think about that whole space that was never contemplated back in the Investor Day in terms of where the value or pocket design sit.

So I do think it's pretty significant. 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 B2G but commercial.

Zach Cummins -- B. Riley Securities -- Analyst

Understood. That's helpful. And final question for me, geared more toward 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 in headcount expansion, but how we should think about available cash when it comes to executing on your plan going forward?

Eyal Hen -- Chief Financial Officer

Again, we cannot discuss anything that is not public. But as you can see in the cash flow, we made significant investment in capital investment to secure inventory to make sure we have enough inventory on hand as we see aware of the supply chain constraints. So you can see a significant investment in capex. Other than that, Q4 burn rate increased a little to $2 million from operating cash flow.

And that's what we expect maybe to grow as we hire more people in 2022.

Zach Cummins -- B. Riley Securities -- Analyst

Understood. That's helpful. Thanks for taking my questions and best of luck here going forward.

Robert Berman -- Chief Executive Officer

Thanks, Zach.

Operator

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

Aditya Dagaonkar -- Northland Capital Markets -- Analyst

This is Aditya on behalf of Mike Latimore. Could you tell me what needs to happen or the key milestones that need to be achieved in order for you to give guidance?

Robert Berman -- Chief Executive Officer

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 SPAC. Looking at what they do, it's a similar business model, a different sector to a certain degree.

But I think the point is that what is very difficult to do when you're public and your pledging, right? That company was around for 20 years. I learned today looking at crunch-based data that the average start-up from founding to IPO roughly 9 to 11 years, right? So we're three years into this from the standpoint of 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 was the first year that this is 100% focus on what we're doing.

So I think that if folks are willing to have a little patience 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 now working on for us to be able to start to give guidance. I think that that's possible, OK, toward the end of this year.

And I believe that if we get there before the end of the year and we're 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 you read the business section of the K, this is the first time we filed a document where there's no legacy issues and things related to businesses that we're not in and so forth. So 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 might be in a position to give guidance.

Aditya Dagaonkar -- Northland Capital Markets -- Analyst

All right. All right. Can you also give some color on how cities are deploying your platform? Is it across all square miles? Or is it like a subset just around the busiest areas?

Robert Berman -- Chief Executive Officer

Yeah. It's both. It depends -- it's very location dependent, where they see the need when they see traffic is where the focus is, and 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.

Aditya Dagaonkar -- Northland Capital Markets -- Analyst

All right. Perfect. Thank you.

Robert Berman -- Chief Executive Officer

Thank you, Mike. Appreciate it.

David Desharnais -- President

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 adapt our technology and experience the growing opportunities it provides for their missions.

Thank you all once again for your support as we look forward to another exciting year.

Operator

[Operator signoff]

Duration: 34 minutes

Call participants:

Eyal Hen -- Chief Financial Officer

Robert Berman -- Chief Executive Officer

David Desharnais -- President

Max Michaelis -- Lake Street Capital Markets -- Analyst

Zach Cummins -- B. Riley Securities -- Analyst

Aditya Dagaonkar -- Northland Capital Markets -- Analyst

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