Operator:
Good afternoon, ladies and gentlemen, and welcome to today's Rekor Systems, Inc. Conference Call. My name is Matt, and I'll be your coordinator for today. At this time all participants are in a listen-only mode. A question-and-answer session will follow the presentation. [Operator Instructions] As a reminder, this conference is being recorded. Before we start, I want to review the company's abbreviated safe harbor statement. I want 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 prediction of future performance or events are forward-looking statements. Such statements can involve known and unknown risks, uncertainties and other factors, which may cause actual results to differ materially from those expressed or implied by such statements. We ask that you refer to the full 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 conference over to Mr. Robert Berman, Interim President and CEO of Rekor Systems. Thank you. You may begin.

Robert Berman:
Thank you, Matt, and good afternoon, everyone. We appreciate you joining us today to discuss Rekor Systems' first quarter 2025 results. Normally, we begin our presentation by having our CFO Eyal Hen, review the numbers. But as described in our last earnings call, we've been going through an extensive review and realignment of our operations since the end of last year. We anticipated that the market and the economy might face a period of uncertainty. For the long-term benefit of our shareholders, we felt it would be less important to concentrate on future projects at this point than it would be to emphasize the revenue potential of what we've already achieved. As you've been told repeatedly, Rekor has seen adoption of its tech and is now in the early stages of launching into larger markets that are overdue for it. Competitors are racing to catch up, but everyone is meeting the current challenges in the markets and the economy. So for now, we want to remain focused on exploiting the commercial potential of what we've already produced. So it is important to put the numbers Eyal discusses into perspective as we began our review process. We prioritized steps that would immediately reduce our expenses. In some cases, this led to a temporary increase in expenses, but you'll see solid evidence of the success of these efforts. These expense reductions haven't been done blindly and they are not finished. But our overall objective was to position Rekor for stronger, more predictable and scalable growth moving forward. We've learned that our prior approach, while visionary was not sufficiently grounded in the revenue driven execution our shareholders deserve. We spent too much time building a company in anticipation of growth rather than ensuring that our approach and leadership were structured toward delivering revenue sustaining revenue against defined milestones. That was a mistake and it needed to be addressed. Beginning in Q2, Rekor is implementing a new general manager structure to sharpen our focus on customers and accelerate the adoption of our products in a way that produces a business with sustainable revenues. We've been in the process of evolving the structure over the last few months and expect you to see the benefits very shortly. Under this structure, each core business unit is led by a dedicated general manager with clear profit and loss responsibility. By reorganizing into focused units, we aim to improve operational accountability, foster greater innovation and enhance our customer focus. This structure also positions Rekor to scale revenue more effectively as we expand our reach into domestic and international markets. Our new GM structure is anchored by experienced leaders who bring deep industry expertise and a global perspective to Rekor. One of these is Mark Phillips, a seasoned roadway technology executive with significant international experience. Mark's global background of Q-Free and elsewhere in scaling businesses will help position Rekor solutions on a worldwide stage. He will leverage his international expertise to drive global market penetration and ensure that Rekor's offerings meet the needs of customers across different regions. Mark's leadership is also expected to strengthen Rekor's domestic presence, aligning our products with international opportunities and partnerships. Mark is both a talented business leader and a skilled electrical engineer. In the early 2000s, Mark founded a company that developed an innovative data logger used by DOTs around the world, which was later acquired by Q-Free, a Norwegian technology company specializing in intelligent traffic systems. The company operates globally with offices in Europe, Asia, Australia and the Americas, and following the acquisition, he remained with Q-Free to help establish a global distribution network. We expect the full scope of our organizational changes to be completed and are formally announced in Q2. Leaders will manage their respective business units with an entrepreneurial approach, enabling each unit to respond quickly and effectively to customers' needs. The GMs will be supported by shared services, including engineering which is now led by Shobhit Jain as Chief Product and Technology Officer. Shobhit has held senior leadership roles at both Verra Mobility and HERE Technologies. He served as Vice President of Product and innovation for Government Solutions at Verra Mobility, a leading provider of smart mobility technology solutions for government agencies and commercial fleets. He was previously Head of Innovation at HERE Technologies, a global leader in mapping and location-based platform services. Under the GM structure, Rekor's operations are now organized into dedicated business units centered around our customers' needs in each of our core solution areas. Each unit is empowered to focus on its product portfolio and customer base enabling more agility and specialized attention. While restructuring Rekor around these solution-focused units, each led by strong management, we can better serve the needs of each new and existing customer. Customer centricity is a core objective and each GM is tasked with staying close to the customer base and their domain and rapidly responding to feedback and tailoring offerings to solve specific problems for those user groups. The shift to a GM structure led organization is designed to deliver several strategic benefits: greater accountability, where each GM will be responsible to build a team that focuses on sustainable growth within their own segment, enhanced innovation. By giving them more control, each unit will be able to concentrate on innovations that are most valuable to their customers on a near-term basis. Top priority in product development will be given to customer value, improved customer focus, by concentrating more intensively on the needs of new and existing customers, our teams will be more focused on learning what their current needs are rather than imagining what their needs might be in the future; scalable revenue growth. By concentrating on distinct product lines and regions, each unit can pursue growth opportunities more effectively. Mark Phillips international expertise, for example, will help replicate successful go-to-market strategies across global markets. This focused approach lays the groundwork for scalable revenue streams as each business unit expands its market share. The new structure also makes it easier to integrate future acquisitions or partnerships directly into the relevant unit fueling further growth. We expect the structure to unlock new levels of performance, resulting in a more agile company that can sustainably scale revenue and maintain a leadership role in our industry. So thank you for your continued support as we embark on this new chapter, and we are confident that these changes will drive meaningful improvements in our operations and accelerate Rekor's growth trajectory on a global stage. Now I'll turn the call over to our CFO, Eyal Hen for a deeper look at our financial results for Q1 2025. Eyal?

Eyal Hen:
Thank you, Robert, and thanks to all of you joining us today to discuss our first quarter of 2025 results. We reported revenue of $9.2 million for Q1 2025, representing a 6% decrease compared to the same quarter last year. Despite this reduction, we achieved a $2 million improvement in our adjusted EBITDA loss, thanks to meaningful reductions in our operating expenses. Revenue was impacted across all three of our business segments. Factors such as adverse weather conditions in the Southeast, delays in contract signings and budget constraints from DOTs and public safety agencies, largely due to the uncertainties surrounding the new administration created significant headwinds to sales execution. That said, we did see stability in our recurring revenue which totaled $5.1 million for the quarter, making a modest 3% increase from Q1 2024. Adjusted gross margin for the first quarter of 2025 was 48.2%, up from 46% in the same period last year, primarily driven by a higher mix of margin accretive offerings. Looking forward, we anticipate continued gross margin expansion, supported by growing share of SaaS-based revenue and increased contributions from our pay for data contracts. Adjusted EBITDA loss was $7.4 million, significantly improved from $9.4 million in Q1 2024. This was a result of the efforts Robert mentioned to optimize our cost structure, which we started in November of 2024. Moving forward, we will continue to work towards steady declines in adjusted EBITDA losses as revenue grows, supported by an improving gross margin. It is worth noting that our cost optimization initiatives, which include targeted workforce realignment and voluntary compensation reductions in exchange for equity were initiated to improve our cash flow and operational efficiencies. By sharpening our focus and reducing expenses, we have been able to deliver tangible financial benefits. As a result, operating expenses in Q1 2025 were significantly lower than they would have been without these initiatives, contributing directly to our newer EBITDA loss. We remain diligent in managing our cost structure, as we balance growth investment with path to profitability. Our first quarter in 2025 was affected by seasonal and other factors that we do not expect to continue throughout the year. Looking ahead, we anticipate continued improvement in adjusted EBITDA as we progress through 2025. The combination of revenue growth and expanding gross margin gives us confidence that our adjusted EBITDA losses will keep narrowing down in upcoming quarters. We expect gross margins to improve steadily, driven by an increasing mix of higher-margin SaaS revenue and data services, as well as efficiency in our delivery of solutions. At the same time, our cost optimization efforts are ongoing. We will maintain the discipline that we established last year, ensuring that any expense growth stays well below our revenue growth rate. In practical terms, this means we plan to deliver sequentially better EBITDA results as the year unfolds, supported by both top-line momentum and margin expansion. Our sales pipeline remains strong and remain encouraged by the traction we are seeing with state department of transportation and public safety agencies. As these opportunities convert into revenue, the incremental sales should flow through at higher contribution margin, further bolstering our profitability. We are also targeting additional operation efficiencies in 2025, which we expect will help offset inflationary pressures and sustain the trajectory of EBITDA in progress. Overall, our goal is to exit 2025 on significantly stronger financial footing than we entered it. We are working towards achieving breakeven adjusted EBITDA in the foreseeable future and each quarter, we intend to move closer to that milestone. The first quarter results, while not where we ultimately wanted to be show that we are making progress in the right direction. Before I conclude, I want to acknowledge our shareholders. We recognize that our Q1 performance came in below our expectations and likely below the expectation of some of you listening today. We do not take this lightly, rest assured the entire management team is focused on improving execution and delivering the results you expect from us. We have a clear plan in place to drive growth and margin improvement, and we are confident in our path forward. Importantly, we are grateful for the continued support and patience of our investors as we navigate these changes and strive to unlock Rekor's full potential. Your support has been crucial as we implement necessary changes and invest for future success. We remain committed to building shareholder value and rewarding that trust through our actions and results in the coming quarters. Thank you for your attention and for your support. We are confident that the steps we've taken to optimize costs directing our capital structure and drive growth will position Rekor for improved performance throughout 2025. Now I'll turn the call back to Robert. Robert?

Robert Berman:
Yes, thank you. I'd now like to open the call for questions from our shareholders. Operator?

Operator:
Thank you. At this time we will be conducting a question-and-answer session. [Operator Instructions] First question is from Mike Latimore from Northland Capital. Please go ahead.

Aditya Dagaonkar:
Hi. This is Aditya on behalf of Mike Latimore. Could you give some color on the pipeline for Scout and how are the bookings in 1Q for Scout?

Eyal Hen:
Sorry, I'm not clear with the question.

Aditya Dagaonkar:
So how has the pipeline been for Scout and bookings -- how are the bookings for Scout in 1Q?

Robert Berman:
I think that's a fair question. We were just looking at Scout the other day since launching Scout in 2019, it is grown by more than 700% revenue. And frankly, we dropped the ball with it a bit in 2024 and part of this reorganization is getting back to Scout, less on the law enforcement side and more on the commercial side, which is where the majority of our ARR is from Scout. So I think that you'll see a lot more activity with Scout as a product over the next actually 30 to 60 days.

Aditya Dagaonkar:
Got it. And are there any partnerships that you're working on just like sound thinking last year?

Robert Berman:
We do have some that are actively in discussion that we just can't talk about because they're not concluded, and it's not public, but we are always working on those and primarily with Scout for sure. But also with Discover now having brought Mark Phillips on in changing a little bit the way we approach the sales methodology with Discover as a piece of technology that's fully productized that we can sell out of the box through distributors and others in markets that we've not penetrated yet. We're just entering now.

Aditya Dagaonkar:
All right. Thank you.

Operator:
Next question is from Tim Moore from Clear Street. Please go ahead.

Tim Moore:
Thanks. Just trying to build a bit more conviction the possibility for maybe double-digit organic sales growth drivers this year. I know there was a weather issue and the election overhang in the March quarter. I think the September quarter was probably negative organic growth. If you strip out the ETD acquisition contribution. So we know that many legacy transportation and monitoring device systems are inaccurate or not effective. And they're pretty much simply obsolete. Can you provide us maybe a better sense of how the task order side, not big projects or new big wins, but the task order size might backfill or help sales growth this year instead of waiting for a lumpy new sales state win. Are you expecting to roll out a lot of Discover and Edge units for repair and placement this year waves?

Robert Berman:
That's a really good question. And I think as we said earlier in the call with regard to the reorg, the way we're structured now with this GM structure. Discover is fully productized. It takes time to get governments to adopt technology. We are seeing broad adoption with Discover. And I think as we get deeper into this quarter, okay? And we announced a reorg, we'll be able to give you some clarity with respect to the growth in that. And I think you're going to see a substantial change with that because of a little bit of modification with our pricing structure on Discover and the go-to-market strategy with it. Look, we it is been a learning process, right? We're dealing with government. We're replacing legacy technology that they've been using for decades and decades. And to think that we were trying to push certain business models into the way governments do business, maybe was a mistake on our part. And I think, now that we understand more the way that the DOTs buy, I think you're going to see a lot more growth with Discover. And it is a fantastic model because it's got a strong ability to deliver a piece of a device that does provides a service, but also has strong recurring revenue and higher margins to it. So a little bit of a learning curve, right, but having launched in 2022, takes some time, but I think we're there. And I think they'll see more than in the coming weeks.

Tim Moore:
That's helpful to hear on that color. Now just switching gears. As you mentioned, you narrowed the EBITDA loss by $2 million despite the sales decline. That was pretty good. Just wondering how much of the $15 million annualized cost savings, expense realignment, have you implemented this year? And I was just wondering if that $15 million figure from -- I think it was November. Is that dependent on a certain level of sales growth this year? Like you got to put up teens growth to achieve that? I'm just curious if you have any color on cost implementation.

Robert Berman:
Yes, I think it's realizing that we've got things that are fully productized, and we're focusing on those. We have a lot of expenses that were related to R&D of products that we can't tie revenue to in the near term. So it is changing our focus and looking at things that we can do today. And I think you're going to see more reductions. And I think as you see additional revenue, you are going to see incremental margin along with the reduction in cost. Eyal would you agree with that?

Eyal Hen:
Yes, absolutely. That's true. And then as we said, the $15 million will go along the year and not just the first quarter. So we will see as we mentioned, continued reduction in the cost improved in the EBITDA as we go.

Robert Berman:
Look, it is a really good point you're raising. We're developing technology to replace a decades-old legacy tech, and it is a learning curve, and we had to get there and understand the customer. And I think now with the approach we're taking to it, we get it. We don't need to do the R&D, the products there works. It's just delivering a product and not thinking about 3 years from now, it's about thinking about today. And I think that's the big change here. And I think you'll see the incremental savings as well as the revenue growth come from that, which is going to give us margin to eliminate the burn and drive the company to profitability.

Tim Moore:
No. That would be really good if you can come up with the $15 million. My last question is really a different question. I mean, you aggregate I think, more than 20 trillion data points for roadway intelligence. Is there any other way to maybe monetize that? Or can you license some of that out to maybe a user fee to some cities that you don't have any contracts with?

Robert Berman:
That is also a good question. I think I'm going to drop back and say, what we've realized is we've got three really healthy product platforms here, Discover, Command and Scout. Scout is the most mature. Obviously, it is been out there for a while. We're focused more on the commercial side now than on law enforcement. But with the Command and Discover, I think what I'm trying to say is we're going to stop where we are and sell what we have, and we've realized that, that's what we need to do because there's demand for it. So that's where we're going to stay focused. And the nice thing about the way the technology has developed is that we can always import additional data and provide additional services, But that's not a necessity in driving revenue today and growth today and profit today. And I think that was the mistake that we made historically. And as I said earlier, building a company for future growth in revenues as opposed to focusing and realizing what we have is, I hate to say good enough, but it is good enough, okay? And there is demand for it, and we're seeing adoption, and that's where we need to focus rather than confusing customers, right, with just more and more and more.

Tim Moore:
Understood. Thanks for the color and taking my question.

Operator:
Thank you. [Operator Instructions] Next question is from Noah Levitz from William Blair. Please go ahead.

Noah Levitz:
Good afternoon. Thanks for taking my question. To start off, I thought it was interesting about your new GM structure, your particular hire of Mart. You noted that he has a lot of international experience in particular. And I'm curious if with the procurement environment being as difficult as it is in the U.S. Are you already selling in international markets? Or do you see a particularly high level of demand there and opportunity there? That mark for example, could help Rekor take advantage of?

Robert Berman:
We do. Almost every developed nation uses some form of collection of data for planning, but also for traffic operations. And that's the thing about Rekor Discover. It does both. So it eliminates the need for multiple devices out on the roadway. And we do see demand, and it is just -- it's a subtle difference of classifications here in the U.S., we have 13 bends in places like Ireland, as an example, they have 7. Other countries have more or less, but they're all pretty much the same. It's just a matter of machine learning and training, and I think our customers understand that. Mark is actually in Europe right now, doing an installation for a pilot in another country. So we think there is demand for this product across the board. And that's our point about being box ready and the point about having the GM structure because we've got these products, they're proven. The adoption is there, and we need the ability for the people that are leading each one of these verticals to be able to control the P&L be responsible for sales and make it happen. And I think we are shifting from this mentality of R&D for this tech for this changing world that we're living in to, hey, we've got some good stuff here, let's go sell it, and let's go from there. And I think that's where we are.

Noah Levitz:
That's great. And then my last question is on your partnership for PlateRanger with SoundThinking. Can you just provide a little bit of color on the adoption of that system and whether or not you're currently recognizing any revenue or when you would hope to see that start to hit? Thanks.

Robert Berman:
So we have a contract that was negotiated with SoundThinking that gives us guaranteed revenue at '25, '26 and '27. They're out there selling, and they're a great company. And I think the law enforcement market is a market that they're built to operate in, a lot of blocking and tackling and so forth. So you will have to talk to them about that, but we think they're going to be successful with it. And the early indications are that they will be. They've committed to it, put some dollars behind it. So we'll let them do that while we are working on the commercial side of it because that's what differentiates what Scout does from folks that are purely in law enforcement and doing LPR, right? And frankly, that's the majority of the ARR in Scout. And it's just that -- I said it earlier, we dropped the ball with it in 2024, having grown it from over 4,000% in a few years, mostly on the commercial side, we just dropped the ball, and we are going back to that now. So -- but I think SoundThinking will do well with the product, and I think their focus is there, and you should chat with them about that.

Operator:
Next question is from [ indiscernible] a private investor.

Unidentified Analyst:
Thank you for taking my call. A couple of questions. Actually, the last caller tapped into my question. I had mentioned a couple of quarters ago to David about overseas contracts. And you mentioned there was enough revenue to be focused in U.S. What I saw, I believe you will be attending the ITS European Congress May 19. Can we expect more of that?

Robert Berman:
Yes, we are over there. And I think that's one of the things that we are trying to point out here. Once you have a technology that's productized, that's let's call it, box ready. And you have the support materials necessary to sell that through channel partners. Then you can go ahead and do that. And again, there are -- every develop nation does some form of count class of speed, just like we do here in the U.S., and they use that same data for traffic operations and -- we have the ability to sell that product now internationally, and that is exactly what we're doing. Not that we've even penetrated the tip of the iceberg here in the U.S. but we are starting to see the adoption. Things take a little longer. We know we've talked about a lot of states and contracts and other things, but nothing's changed. We think those things are coming. But there is no reason for us not to be focused on the international market because there is demand for the product, and we can send it there. So that's our plan.

Unidentified Analyst:
And last quarter, you mentioned a little over 15 proof of concepts. And I would have thought maybe by this today's release of the new revenue that we would have maybe heard 1 or 2. Can we expect that full drift to continue throughout the year? Or would they be a little bit of a quicker process?

Robert Berman:
I can tell you that almost all of the states where we have proof-of-concept systems. New York, as an example, has actually acquired technology in the majority of the other states. When I say adoption, we are now seeing more orders, we're seeing larger contracts. And I think that to be frank about it, I think we had the sales approach and pricing in such a way that wasn't consistent with the way that these agencies procure. And if you think about how complicated it is, we needed to make sure that we configured the way we sell and to the way they buy as opposed to swimming upstream. And I think, we figured that out over the last few months, and we made those changes. And I think you'll see the results of that very soon.

Unidentified Analyst:
In today's press release, you mentioned about the adverse weather conditions with a slowdown in the revenue. With Hurricane seen not too far away, do you focus on planning on having more personnel in that area before that happens? Or --.

Robert Berman:
Well, it's funny, but like in one of our customers in the most southern state, we actually had to get out there and help them in between the 2 hurricanes they had last year. and the technology performed well. I don't think it's a question of having the personnel out there. I think it's the ability to have the product ready to be deployed as a technology company as opposed to being a contractor. And that's the difference. At the end of the day, Rekor is technology software data company and not a construction company and -- that's why we've changed the model of the way we run the company and manage the company because we can deploy the technology, and we don't necessarily have to do that work. And we can get the same revenue and recurring revenue from having others do it because the products are ready to be deployed that way. But it took a little bit of time to get it there, and now we are there. So I think it is not a question of how much manpower we have. I think it is a question of the demand for the product. And I think now that we've modified the way we are doing business, I think you are going to see the scale coming with that. And that's frankly what we were hoping to do -- that's what we are hoping to do. So...

Unidentified Analyst:
And my last question, is, I mentioned a couple of quarters ago to David, and he said, stay tuned. But is the QSR kind of a debt sector right now? Or are you still focused on that or revenue isn't high there?

Robert Berman:
That's a good question. So I can tell you that the -- it's an interesting area because Scout started out as LPR vehicle recognition. We produce a lot more data from Scout and hold a variety of patents on how to anonymize that data. So privacy information that goes out doesn't become a problem with respect to commercial customers not wanting the same information that, let's say, a law enforcement agency would have. And I think that, that sector is going to open up more floors. We've had success with it in the past with companies like Six Flags and others, casino companies that we've announced, and we see a lot more value to that data today than we did even six months or a year ago. And again, it is the way we were marketing and where we were focused. And I think we're turning our focus back towards commercial. So the answer is yes, QSRs are very much a part of that. Look, there is an article you guys can Google and go search it, but Chick-fil-A was flying drones over their properties to look at the traffic flow coming in and out of some of their stores. So if you can just envision that and think about -- and it's all on our websites, the data that we can produce from Scout for our customers, there's a lot of valuable data there for folks that are in retail businesses, whether it's a QSR, a big box store, a sports stadium, a casino, whatever it might be, and that's where our focus is now. And I think you're going to see more of that in the coming weeks and months.

Unidentified Analyst:
And you believe we're still on track then for profitability by the end of the year?

Robert Berman:
I personally believe that we’re on track for profitability before the end of the year. I don't want to commit to it, but I think we are going to get there. I think it's around the corner. And that's what we're doing. We're working to drive the company to scale revenue, become efficient, not just from the standpoint of being efficient, I mean cutting costs and overhead by being able to deliver the product to the customer with less bureaucracy. And look, Rekor was just overbuilt, okay, too bureaucratic for its size, with great products that there was demand for that we couldn't get out the door because we just had this process here that just didn't work. And we are going to fully announce the structural changes that are coming with this GM structure and the Board has looked actively looking. I'll stay here as long as it takes to make this work and help to continue to stay on the Board because I believe in the company, but we are going to find the right person to manage it and write people to do what we're doing. And I think we have that structure in place now. And I think you are going to see the results of that, and it's not going to take a long time.

Unidentified Analyst:
Okay. And will there be any update on Mexico?

Robert Berman:
I can't speak to that right now because it's just -- again, it's non-public stuff. But as soon as we have something to update, we will.

Unidentified Analyst:
I understand. That's all I have. I appreciate your time.

Operator:
This concludes the question-and-answer session. I'd like to turn the floor back to management for any closing comments.

Robert Berman:
Yes. Thank you. And look, everybody, thanks again for your patience and I think every company has growing pains, and I think Rekor is on the backside of ours because I think we realized some of the things that we were doing that were inhibiting the growth and the scale and the profitability and the margins. And look the Board is fully involved in this, and we think we've come up with the right structure, the right plan. We think we have the right people as GMs in place. And again, we're going to be talking more about that in the coming weeks this quarter. And we'll also continue to look for a permanent person to -- I'm here as an interim CEO, but not going anywhere until we make this work, right? And when we find the right person, we will make those changes as well. But we are going to get through this. And I think you'll see that, and it's not going to be quarters and quarters away. I think it's just a matter of weeks here. So appreciate everybody's patience and thank you so much for staying with us.

Operator:
This concludes today's teleconference. You may disconnect your lines at this time. Thank you again for your participation.