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

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. [Operator Instructions].

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.

Such statements can involve known or unknown risks, uncertainties and other factors, which may cause actual results to differ materially from those expressed or implied by such statements. We ask that you refer to the full disclaimers in our earnings release.

You should also review a description of the risk factors contained in our annual and quarterly filings with the SEC. Non-GAAP results will also be discussed on the call.

The company believes the presentation of the 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..

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.

Total operating expenses for the first quarter of 2021 was $7.6 million compared to $3.7 million in the same period last year. This rise is attributable to professional services related to M&A activities and recruiting additional manpower to support our growth, as well as increases in our marketing initiated and sales efforts.

We also continue to increase our R&D expenses as we see opportunities to develop new technologies and improve our line of products that keep us ahead of the curve in sectors we service. Adjusted EBITDA for the quarter was a loss of $3.1 million as compared to a loss of $2 million in the same period last year.

The increase in loss was due to the increases in operating and R&D expenses explained before. Our cash and short term investments balance on March 31, 2021 was $86.8 million and our working capital was $84.4 million.

As mentioned before, during the first quarter of 2021 we completed a public offering and raised $70.4 million in net cash proceeds, which significantly increased our capitalization and boosted or financial flexibility. In summary, we plan to continue with our M&A activities where we see potential market opportunities.

Our customer base is growing across all sales channels and we are excited about the many opportunities that lie ahead of us. Now, I would like to turn the call over to Robert. Robert. .

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. What actually is Rekor is not simply an ALPR company.

Rekor is an entire platform for real time and historical roadway intelligence. The platform is capable of enhanced anonymized metadata capture. A platform that provides advanced features for privacy protection and compliance with rapidly evolving laws.

A platform with groundbreaking analytics, built in that can deliver both near term alerts and long term insights. And most importantly, it's a platform that is scalable and already designed to connect with the networks of the future. So, let's start with the fundamentals; first our software.

Our core AI engine simply captures more information more accurately. It provides a complete vehicle signature, plate number, state, body type, make, model, color and direction of travel. It can also detect erratic behavior and process data in real-time on the edge for additional traffic insights.

So more data simply provides better intelligence that results in better decisions. Next, our hardware. Our advance sensors provide on-device processing with complete awareness by capturing and processing at the source versus remotely.

Rekor provides scalability through hybrid cloud edge systems that enable faster, real time alerting, lower bandwidth costs. Recently we finalized a development with Rekor Box, which is unique processing system that allows almost any algorithm to be deployed on the edge.

Rekor Box is ruggedized to operate alongside the roadway in all weather conditions and climates. Next, user experience. Rekor Vision provides unprecedented system monitoring and remote service tools. It's intuitive, easy to use and enables technicians to keep their finger on the pulse of a large number of interconnected devices.

Next, is our open architecture. Rekor One platform provides for seamless legacy integration. We can integrate with almost every IP camera to lower hardware cost and can deploy mobile device issues in Rekor’s smartphone apps.

And finally, and this is key, our platform can conduct multiple mission specific applications simultaneously with policy aware sharing and retention that provides both IT Filtered and enhanced process data and sure, once the platforms installed for one use, it provides us with dramatic market expandability.

With our revolutionary scout software formally known as Open ALPR, we expand license plate recognition into data rich vehicle recognition. This quarter we have started to introduce our expanded Rekor One platform to potential customers in various government sectors.

Rekor One bridges a multitude of multi-dimensional approach to addressing the comprehensive needs of modern cities and metropolitan areas. It is a single source platform for roadway intelligence providing actionable data that helps cities, counties and states improve infrastructure, promote sustainability, increase safety and security.

And furthermore, Rekor One supports all these initiatives with an embedded revenue generation capability that enables forming of all the components and more. Rekor One takes a smart city concept to the learning city of the future, meaning the platform continuously evolves as date and information improves over time.

First quarter ‘21 was a great start for the year and I can briefly review some of the highlights. We launched the Rekor One platform and is ready to show in this quarter to all commercial and public sector potential customers. We also finalized the development of the Rekor Box and Vision Dashboard.

North Dakota's parks and recreation department selected Rekor One to help State Park leadership understand visitor usage patterns and plan for future needs.

Oklahoma as you know is now using Rekor One for statewide Uninsured Vehicle Enforcement Diversion Program and this has been an ideal first use case for the Rekor One platform and I'll tell you more about it a little later.

We saw a significant revenue growth in our e-commerce platform and we also expanded our channel partner program and launched our partner portal which will connect Rekor Partners with relevant training and collateral resources, as well as enable opportunity tracking and support inquiries.

So our financial results are demonstrating in a tangible way that Rekor is not just an ALPR company. Oklahoma and North Dakota chose Rekor not just to read license plates, but to receive actionable information collected from statewide data points.

As Oklahoma said in their ward, Rekor was the only bidder who could service the entire needs of the program with a single source accountability. I just want to add a note about UVED. As many of you know, we've been working hard to see bills that produce that would authorize similar programs in other states.

Form years of experience with political process, I can tell you it's never easy and more often than not, bills that are brought up the first time has significant headwinds. While we’ve seen some disappointments in this legislative session, it wasn't a total let down and here's why. In Florida the budget bill did not move our preferred use of language.

We understand that the Florida Department of Highway Safety Expressed concerns to legislative and administrative officials that they are in the middle of a department technology modernization program and did not want to stand up a unit program in isolation from the technology modernization program.

The result is that we now offered a high level meeting with the department director to talk through what can be done to advance things and integrate both. This will bring additional opportunities for us to discuss Rekor One with the department and the States CFO. In Tennessee legislature amended and decided to conduct the summer study session on UVED.

This study session will help flush out any complications before the legislation gathers back in. In Texas we still don’t know what is happening as there are few more weeks of session there.

We did determine that the larger cities in that state are interested and have the ability to [inaudible] the legislation on their own through the process of Home Rule. In sum, we are on a path and have a solid strategy no matter how the political sands shift. We're excited about the new pilot program with the State Park system in North Dakota.

Here we’ll have the chance to use many of our recently patented innovations to address the unique, but pressing needs of park systems around the world as they address the challenges of climate change and rapidly escalating demands for access and responsible use.

We ultimately see Rekor One as the heart of the network that includes solar-power and stations, using advanced communications to assist with perimeter traffic and fleet management, permit issuance and usage hazardous waste enforcement and even improvement in the forest fire monitoring.

With Rekor One we’ve enabled our customers to unlock the many possibilities that full vehicle signature is prepared from your license plate reading can provide. To further unlock this potential with the launch of our new commerce platform in the first quarter of 2021 and we are already seeing results.

The sales channel that can provide a broad array of international customers' quick access to roadway intelligence and Vehicle Identification Solutions with just a credit card and a click. So we’ve been working to develop the most advanced sales technology in the industry, as well as the most advanced roadway management technology tools.

We believe that every aspect of our organization should be on par with our ground breaking technology. As this point I'd like to turn the call back to our coordinator for questions. .

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

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. .

I do. I said many times over that if Rekor could add a state in 2021, that that would make us happy and that is you know a still a very definite possibility. You know these legislatures don’t just gather out. They have some recessions because of ongoing budget issues.

You know there's a whole bunch of different things going on in different states, and I've lived through this in the gaming industry and I can tell you that it's never over till it's over, and you know no one said no to us; it’s just the way the bills have moved forward and sometimes you have other parties, other state agencies get involved because they become party too and would have to administer and you know they wanted a little bit more of a vocal role.

It’s amazing how much these state legislators actually have to do. I mean, for those of you that watched the live hearing in Texas, I mean what you saw was a few minutes of hearing that went on for hours, not about us, but about a whole bunch of things before that committee. They had 80 sanctions in front of that committee that evening.

So you know they’ve got a lot to think about and not all of them have all the details. So it's the legislative process and you know people refer to it as you know making sausage, and there's a reason for it.

So look, we have a whole bunch of enthusiastic and supportive shareholders and you know everybody is trying to figure out what these legislators are doing and what the states are doing, but it's just going to move forward the way it moves forward and sometimes it takes a turn and a twist, but I still believe we'll get there with the state this year, and maybe even more than one, so we’ll see.

I mean, the year is far from over. .

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. .

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. .

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?.

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.

.

Okay, thanks a lot guys. .

Yes, thank you. .

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

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. .

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.

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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. .

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?.

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

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

24/7. .

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. .

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. .

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..

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

Yeah, yeah, thank you..

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

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?.

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. .

Alright, fine.

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

The border?.

The what? Sorry. .

The border patrol use cases. .

The boarder stuff, yeah absolutely. .

Yeah. .

Yeah absolutely. .

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

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. .

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

You’re welcome. .

Thank you. [Operator Instructions] 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. .

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. .

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

Have a great day!.