Good afternoon, ladies and gentlemen, and welcome to today's Rekor Systems, Inc. Conference Call. My name is John, and I will 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 ask that you refer to the full disclaimer in our earnings release.

You should also review the 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. Please go ahead, sir..

Hi, everyone. Thanks for joining us today to discuss our results for the three and nine months ended September 30, 2022, and update you on key business topics. On the call with me today are our CEO, Robert Berman; and our President and COO, David Desharnais. David will provide additional color on our business after I go over our relevant metrics.

With a full quarter of 1,000 traffic services revenue in the third quarter of 2022, we have accelerated growth in recurring revenue under our sales model. As I've explained previously, we've shifted our emphasis from point-in-time revenue to recurring revenue since the third quarter of 2021.

While we continue to engage in point-in-time hardware sales in appropriate circumstances, our new models and sizes providing data services and software on a subscription basis.

This had a near-term impact on our overall revenues earlier in the year, but the strong growth we are now seeing in recurring revenues is laying a solid foundation for our overall strength and stability over the long-term. Let me get into some of the details in the financial results for the third quarter ended September 30, 2022.

Highlights include Southern Traffic Solution or STS, results of operations are fully consolidated for the third quarter. Revenue for the three months ended September 30, 2022, was $7.4 million, compared to $2.6 million in the same period last year, a significant increase of 184%.

Revenue for the nine months ended September 30, 2022, was $15.4 million compared to $11.1 million in the same period last year, an increase of 38%. Recurring revenue for the three and nine months ended September 30, 2022, increased by $3.6 million and $5.5 million, respectively, compared to the same period last year.

This increase represents growth in recurring revenue of 292% and 174% for the three and nine months period ended September 30, 2022, compared to the same period last year. Performance obligations increased to $28.6 million as of September 30, 2020, compared to $22.6 million as of December 31, 2021.

As a result of an interim assessment and the current market conditions, recognized a goodwill impairment of $34.8 million. As you can see, we've continued to see significant improvements in revenues and recurring value in the third quarter compared to the second quarter of 2022.

The percentage of recurring revenue reflected in total revenue was 65% and 66% for the three and nine months ended September 30, 2022, respectively, compared to 47% and 28% for the three and nine months ended September 30, 2021, respectively.

We also began to see reduction in our SG&A as a result of streamlining activities, which started at the end of the third quarter of 2022. Total operating expenses for the nine months ended September 30, 2022, were $47.5 million, not including our goodwill impairment compared to $26 million during the same period in 2021.

Increase in operating expenses stems from significant increases and correlated expenses. Earlier in the year, we added new hires to our engineering, sales and marketing teams as we integrated the technology into our growing set of products and service offerings.

However, in the current period, we've been evaluating our results carefully and focused on managing our operating expenses. This resulted in a reduction in operating expenses from the second quarter of 2022 as compared to the third quarter of 2022, even with the inclusion of a full quarter of SPS expenses.

During the third quarter of 2022, we experienced a significant decline in our market capitalization, which we deemed a triggering event related to goodwill. As a result, we performed an interim impairment assessment as of September 30, 2022 and determined that we had an impairment related to goodwill in the amount of $34,835,000.

Our adjusted gross margin for the three months ended September 30, 2022, and 2021, stayed consistent at approximately 45%, and decrease for the nine months ended September 30, 2022, to 43% from 58% in the same period last year.

The decline in margins for nine months ended September 30, 2022, is primarily attributable to increased investment in infrastructure. The expansion of our coverage network and installed base, we expect to see improvement in our adjusted gross margin in the future.

This is highlighted in the improvement of our third quarter adjusted gross margin as compared to the second quarter of 2022 as we pursue improvement in our operations and we're able to close larger transactions with higher margins.

Adjusted EBITDA for the three and nine months ended September 30, 2022 and 2021, increased to a loss of $9.2 million from a loss of $6.7 million and a loss of $29.6 million from a loss of $12.8 million, respectively. The increase in loss was due to the investment to position Rekor for future growth that I've discussed previously.

However, as a result of the streamlining activities, we see a decrease in loss from the second quarter of 2022. Since we changed the revenue model, we have released enhanced key performance indicators to help provide visibility and more detailed view into our success and progress.

We hope that over time, these KPIs will provide our shareholders with a better insight into our business. As noted in our financial highlights, our recurring revenue for the three and nine months ended September 30, 2022, increased 292% and 174% compared to the same period 2021.

During the nine months ended September 30, 2022, we won $8.3 million of new contracts compared to $7.3 million of new contract value won during the same period in 2021. This is an increase of 14% related primarily to the STS acquisition. As of September 30, 2022, remaining contract performance obligation were $28.6 million.

We expect to recognize approximately 58% of this amount over the succeeding 12 months. This represents an increase of $6 million or 27% compared to the $22.6 million of performance obligation as of December 31, 2021. This increase in performance obligation was primarily due to the -- to our STS acquisition.

As we build relationships and expand our presence, we acquired many customers through pilot programs, which are typically short in nature. As these pilot programs convert and expand to larger-scale contracts, we will expect to see these KPIs improve. Moving to our financial condition and liquidity.

Our cash balance on September 30, 2022, was $7.9 million, a decrease from $25.8 million as of December 31, 2021. We had a working capital deficit as of September 30, 2022 of $1.1 million, down from working capital of $17 million as of December 31, 2021. The decrease in working capital was primarily due to a decrease in cash and cash equivalents.

This decline was primarily due to the increase in our loss from operations, as we position the company for future growth and reflects cash used in the acquisition of STS. The reduction in cash was partially offset by a net cash inflow of $22.8 million as part of our 2022 as the market sales agreement.

In summary, we are passionate about our growth prospects and continue to experience a strong momentum in our markets. As David will discuss with you next, we are concentrating our investments now on rapidly increasing our margins and fully expect them to improve significantly.

We 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 David.

David?.

Thank you, Eyal. Good afternoon, everyone, and welcome. I'd like to start by talking about our revenues and expenses.

Last quarter, we discussed the trade-offs, when you transition from primarily a point-in-time revenue model, to a recurring revenue model and the need to invest in the establishment of long-term relationships, that provide a stable revenue base.

Now that the results of STS, our recent acquisition are fully reflected in this quarter's financial results, you can see that we were able to accelerate that transition to recurring revenue.

As Eyal just described, in less than a year, we've been able to transition from recurring revenues of 28% of our quarterly revenues to one where recurring revenue generated is 65% of our total quarterly revenues, while total revenue for the quarter increased 184% from the corresponding period of 2021. But that's really just the beginning.

The combination of our Waycare and STS acquisitions in the past year have placed us securely in the position that we've been working to put ourselves in for the last three years, which is to provide the key technology components, needed by leading agencies and operators on the forefront in the development of the intelligent infrastructure needed to address the challenges of urban migration, congestion, increased crash fatalities sustainability, quality of life, in equity and public safety.

Over the past year, as United States has begun the implementation of a massive effort to improve its mobility infrastructure, a growing consensus has emerged that better data collection management and distribution is a priority in this effort.

For decades, the federal government has mandated states to collect traffic data for receipt of highway funds. This currently results in over 1 million traffic studies across the US each year.

The way that roadway data is currently being collected from our aging roadway network, suffers from the same underinvestment, but the basic roadwork network suffers from.

Current collection methods use inductive loops that are expensive, and dangerous to install and signed firing radars and one-off samplings that capture only a fraction of the data required to fully evaluate conditions and support decisions and investments for agencies that are responsible to manage roadways.

As federal and state agencies gain access to broader and more accurate data that can be collected from the roadway, they also gain access to the tools needed to drive tangible and meaningful results against their responsibilities to bring smarter, safer, greener roadways to their citizens.

This can only be achieved when that data collected is aggregated and combined with connected vehicle data, crowd sourced and other third-party data sources, analyzed in real time and integrated into an interactive an active intelligence system that delivers actionable insights on a continuous basis.

Rekor's technology can improve the quality, cost and efficiency of these mandated traffic studies and data collection efforts, as states transition to a digitized approach and digitized transportation network, which is being accelerated by the $1.2 trillion federal investment in infrastructure. In short, we are in the right place at the right time.

We have had a busy and exciting past quarter. I would like to highlight several examples of where we have made meaningful progress against our goals and key wins that are emblematic of what we can expect moving forward.

On the technology front, we launched the Edge Flex system, a first-of-its-kind networked extensible non-roadway intrusive AI-driven traffic data collection system.

The system uses state-of-the-art computer vision and machine learning to deliver the utmost in safety, accuracy, performance, and simplicity for federally-mandated vehicle classifications of data and more.

As you will recall from my previous remarks, the US completes more than 1 million of these traffic studies annually and this represents a tremendous growth opportunity ahead for Rekor. Now, since the launch of our Edge Flex system, we have seen strong engagement from more than 40% of the US states we've interacted with.

They are keen to deploy this innovative technology and we are doing our initial deployments this quarter with a strong pipeline behind us.

We have begun to upgrade the data collection system in South Carolina, the expansion of roadway data collection to include bicycles and pedestrians in Florida, and are implementing state and regional pilot projects to provide predictive analytics and integrated cross-modal management programs in Alabama and Ohio.

On the transportation and mobility ecosystem front, I'm pleased to announce that we were also chosen for the Amazon Web Services, or AWS, Smart City Competency for smart urban transportation.

This is a unique distinction and recognizes Rekor once again for its unique technical proficiency and proven customer success supporting city governments and city developers who are witnessing an unprecedented rate of urban growth.

In addition, we also announced the formation and formal launch of the Rekor Partner Network, an industry-first connected private and public mobility data hub for our customers and the ecosystem. At the launch, we also announced the addition of Blyncsy, PredictiQ, tomorrow.io and Waze to already dozens of others in our partner network.

The Rekor Partner Network and our ability to provide a single pane of glass for roadway intelligence to set a stage recently to how our customers in North Carolina and Florida were able to holistically manage vehicle and roadway routing and provide citizen safety in what is an unprecedented hurricane season in the Southeast.

On the customer front, we have also made significant progress with key customers and key states in the past quarter. This includes Alabama Department of Transportation, where we were selected for the US Department of Transportation Federal Highway Administration $5 million grant for proactive route operations to over congestion and traffic.

We also announced a win with the Central Ohio Transit Authority, otherwise known as COTA with Rekor being selected for its $2.5 million program to improve traffic and transit services for Ohio.

We also announced a key win with the state of Texas and its Department of Transportation that chose to standardize on the Rekor Roadway Intelligence platform, and we are now deploying there.

And another major win in the quarter was with Oregon Department of Transportation on a 10-year contract where we were down selected from a pool of 14 major roadway infrastructure and architecture firms to be the technology platform for Oregon statewide connected vehicle and data ecosystem and technology.

As you can see, it's been a busy quarter for Rekor across the technology, ecosystem and customer fronts, momentum is building quickly, and we are increasingly excited about the results and what they tell us about Rekor's future potential with our computer vision systems and Rekor operating platform that we deliver customer value efficiently, rapidly and cost-effectively.

To-date, we've invested more than $100 million in our proprietary and state-of-the-art technologies, including hardware, software, machine learning and AI or artificial intelligence. A year ago, this past September, we acquired Waycare technologies, a leader in sourcing and managing third party roadway data for more than 60 partners.

More recently, we acquired STS, a three-decade leader and roadway data collection, who pioneered the pay-for-data model with several key state departments of transportation.

We've incorporated all of these unique and differentiated capabilities into Rekor One, our ever-expanding roadway intelligence engine and operating system that turns data into roadway knowledge. We aggregate -- we transform data into knowledge with our AI and other IP, and we deliver actionable insights and analytics as a service.

Most importantly, we are trusted by our customers as a data services company, and we are poised for rapid near-term and long-term growth. I look forward to providing you continued updates on our progress as the US states look to digitize the transportation network accelerated by the $1.2 trillion federal infrastructure bill and spend.

In short, Rekor is well positioned for the growth ahead. Thank you all, once again for your time and attention. We really appreciate it, and I look forward to speaking with you all again on our next quarterly conference call. I will now turn the call over to Robert Berman for final remarks and the question-and-answer session.

Robert?.

David, thank you. So, before we open it up for questions, I know there are some of you who have concerns about our liquidity and resources under current market conditions. Needless to say, this has been occupying a great deal of our attention recently.

At this point, there is little that I can say except that we are working diligently on a number of options, and we'll be narrowing our focus soon. We'll try to answer your questions as best we can, but please understand that we're not in a position to provide many of the details you might be seeking at this time.

Operator?.

Thank you. We will now be conducting a question-and-answer session. [Operator instructions] And our first question comes from the line of Zach Cummins with B. Riley. Please proceed with your question..

Yes. Thanks. Good afternoon. Thanks for taking my questions, and congrats on the building momentum that you have across the variety of DOTs. I know, you can't share any plans around potential near-term funding here to kind of give you a bridge to that operating breakeven point.

But I mean, can you give us a sense of the time line of when you're still expecting for this business to transition towards that breakeven adjusted EBITDA. It seems like revenues building right now, and it seems like you undertook some cost reduction actions nearly into Q3.

So just give us a sense of any sort of update you can give there?.

Yes. Zach, this is Robert. Thanks for the question. I'll take it – Eyal. We believe acquiring the resources that we need, and we think we will that Rekor will scale to substantial revenue probably high eight figures by this time next year, and the company will be profitable.

We believe we have the visibility with customers that are adopting our technology now to get there, right? So that's what we're looking towards..

Understood.

And just digging a little bit deeper on some of these new relationships that David was speaking about, I mean – can you give us a sense of how you're getting in the door with these customers? Is it SDS having prior relationships that are opening the door for you to get deals with state of Alabama, Texas and Oregon, just curious of what's really kind of driving this building momentum across there?.

Zach, Charlie, are you able to just come on the call here?.

I'm here..

I have our Head of Government Relations on the call. And I didn't plan for him to speak. But Charlie, and I have worked together for decades, and he's got quite an extensive background in government affairs, and I'll let him speak to what's happening with the states as we're rolling the tech out, Charlie..

Yeah. It's been beyond a pleasant surprise. Typically, when you're calling on government entities, they're very circumspect nobody gets rewarded for being tech forward, and kind of leaning into new technology.

But I can tell everyone here that, we've probably have discussed our new technology, our vehicle classification technology with about 13 or 14 different state DOTs and not one, not one has said this is not a welcomed solution for their roadways.

And really, what we're able to do is to do the – with the FHWA, the Department of Transportation on the federal level requires states, municipalities and MPOs to do, which is to basically report 13 bins of classification data, because we've been in this for so long, and we – our AI is very sophisticated when it comes to vehicle recognition.

The result has been like nothing that I've ever experienced talking to government entities..

Understood. And just along that line, I know that, there's a big demand tailwind regarding the funding from the infrastructure bill.

Are you starting to see customers that are getting funds into their hands now, I'm just curious as to what could be any sort of gating factor that could impede any progress with the DOTs?.

You know, Zach, what we're starting to see is we're starting to see the – and maybe David could speak to this, but we can't get too deep into it. We're starting to see the ideas that the government at the federal level is sharing with the states about the way they envision roads becoming to the digital age, more somewhat of an operating system.

I think we're out in Oregon is emblematic of that, right.

David, do you want to talk a little bit about this?.

David Desharnais:.

We've seen a pretty significant uptick in terms of pipeline and availability on key projects from state that we've been working with. And it's not just on the classification front, it's in our transportation management and our traffic management capabilities as well across the board. But I would say that it seems to be on track from what we can tell.

The funds are subject to approval based on projects that are submitted and projects are now being submitted. So that's kind of where we are today. Oregon is an example of a state where this has been a journey with them to identify the next generation of road usage charges and the way to charge for road usage.

And you can imagine with the continued evolution of EVs or electric vehicles that they're not filling up at the gas pump as much anymore. So states are rightfully trying to determine what is that next-generation solution for road usage if it's not going to be gas.

And so when you think about what that requires, it really requires the ability to understand everything that's moving in a roadway with connected vehicles, et cetera. And that's really a sweet spot for us in our ecosystem. So we feel very well-positioned. And we're seeing that now transition and transform into real contracts and opportunities.

So it's off the idea stage and moving into more of an implementation stage. Again, all powered by the infrastructure bill..

Yes. Zach, it's Robert.

I would just add to that, what David said is so true because if you think about the last 60, 70 years in the United States, the framework that the federal government set up to share revenue to support our roadways with the states has been to recover gasoline excise taxes and then redistribute those, right? Well, that's going to have to change, okay, because EVs are forcing that, right? In California, we have 17.5% electric vehicles.

So the equitable way to distribute gasoline excise taxes has been collecting the FHWA 13 Bin, which is what we were talking about earlier. So doing it in a non-intrusive [ph] way where you're not digging up the roadways, you're not putting in a duct tape loops [ph], you're doing it in a safe, friendly way.

But also, you want to have the ability to have that same system tie into the back end of this for other purposes for the redistribution of that money. It really comes down to it's all about the money.

And if you think about it, there's been hundreds of billions of dollars redistributed by the federal government to the states to support highways and roads based on gasoline excise taxes.

That no longer works, okay, with the technology that's out there with EVs and other things, there's a better way to do it, right? But it takes a company like Rekor that has both the connected vehicle side, and other third-party data side tied to the ground troop side, which is what we got from STS and bringing the new technology into that.

And part of your question earlier was does STS help with respect to the relationships? Charlie has had an easy time opening the door because they want the technology is like, yes, bring it here. You don't have to dig up a roads, how do we do this? But you just don't walk in with technology.

The fact that STS for three decades has been counting vehicles, right, for DoTs primarily throughout the Southeast, that brings a level of trust that these DoTs need to have because they need to have the data to deliver in a certain way, and they want to know that the company that's delivering to them understands that.

And that's why we made that acquisition. So I hope that helps, right? It's -- but it's the whole bundle, right? And more importantly, the money to collect the big data, right, the FHWA-13. That's not part of the transportation bill. That money is there every year, and it's spent, it’s being done now.

It's been done for the last 60, 70 years, right? So it's part of the old way of doing it, converting to the new way and then figuring out a way to recalibrate it, which is what that win was in Oregon. David said something about that, but I want to harp on that.

I mean, that started three years ago, okay? Oregon put an RFI out three years ago looking for an ecosystem that would incorporate an operating system for the roadways that would allow for an easy use to charge, right? And it took three years.

There were 14 teams of -- I'm not going to mention competitors, but a lot of them are multinationals and companies that people on this call would know. We were down selected from those 14 to two, and the award letter was issued last week. And I think that speaks volume more technology, right, that we were able to beat all those other companies out.

And that's one of 50 states, it's going to have to do the same thing, right? So Oregon got ahead of it. So hopefully, that's helpful..

Absolutely extremely helpful. Well, I don't want to pick up all the time here in the queue, so I'll go ahead and pass it along. Thanks for taking my questions..

Sure. Thank you..

[Operator Instructions] Our next question comes from the line of David Hargreaves, a private investor. Please proceed with your question..

My congratulations on transitioning the revenue model. I'm wondering if you could talk a little bit about the receivables on the balance sheet, if they mostly government entities.

If there are government type entities with a high probability of collection, is it something that might be securitizable?.

Yes. Yes. So you're right, most of our AR, they are government entity. And as Robert mentioned before, we're looking at all options right now. But most of them are government entities not more than 30, 60 days outstanding. Yes..

Yes. I think will add to that.

I think when you look at the performance obligation, getting more to your question, Rekor is starting to build a substantial contract value of governmental contracts that run five, seven, 10 years, right? So we're going to get to a point where we will be able to access traditional, commercial debt from a commercial bank, right, and equity loss debt, right? And I think that's something that we're hoping that we're going to see the intersection of our P&L with next year so that we can pursue financially the rollout of our capital expenditures with bank debt, right? And we're going to get there.

.

I just -- I'm hoping that we don't see a straight line. I mean, we've got three quarters with negative $29 million of EBITDA and then like $10 million for the last quarter. Is there any reason we think that there would be a deviation in the fourth quarter – less than….

I think that….

Eyal, go ahead..

Right. Sorry, David, it's a good point, but I think if you look on the trend from Q2, when we said that we're going to reduce expenses, you can see a reduction in our quarterly EBITDA losses. And as we mentioned previously, our expectation is through the third quarter of 2023, we'll start to see a breakeven EBITDA and some profitability..

Okay. Well, thank you. Good progress again. Thanks very much..

Yeah. Thank you..

Thank you..

Thank you..

Thank you. There are no further questions at this time. I would like to turn the floor back over to Robert for any closing comments..

Well, look thanks everybody. Appreciate your patience. And look, this is tough. The markets have beaten us up as well as a lot of other companies, but this is not easy to do. As David mentioned, this has been years in the making. We've invested over $100 million in this technology. We've made two very important and synergistic acquisitions.

And it's coming together, and we think 2023 is going to be a year that we're going to see the results of that. And we're going to do everything we can to maintain the value of this company for our shareholders long-term. That's the plan, and we think we'll get there. So appreciate your time..

Thank you, everyone. This does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation, and have a great day..