Rekor Systems, Inc.

Good afternoon, ladies and gentlemen, and welcome to today's Record Systems, Inc. conference call. My name is John, and I will be your coordinator for today. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference call is being recorded for replay purposes. Before we get started, I would like to read you the company's abbreviated safe harbor statement. I 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 disclaimers in our earnings release. You should also review a description of the risk factors contained in our annual and quarterly filings with the SEC. Non-GAAP results will also be discussed on the call. The company believes the presentation of non-GAAP information provides useful supplementary data concerning the company's ongoing operations and is provided for informational purposes only. I would now like to turn the presentation over to Mr. Eyal Henn, CFO of Record Systems. Please go ahead, sir.

Hi, everyone. Thanks for joining us today to discuss our results for the three and nine months and the 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 DeHarney. David will provide additional code 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 model emphasizes 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 Solutions, or STS. Results of operation 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, 2022, compared to $22.6 million as of December 31st, 2021. As a result of an interim assessment on the current market conditions, we recognize a goodwill impairment of $34.8 million. As you can see, we've continued to see significant improvements in revenues and recurring revenues in the first quarter compared to the second quarter of 2022. The percentage of recurring revenue reflected in total revenue was 65% and 56% for the three and nine months as of September 30, 2022 respectively, compared to 47% and 28% for the three and nine months as of 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 in payroll and payroll-related expenses. Earlier in the year, we added new hires to our engineering, sales, and marketing teams as we integrated the technology into our growing suite of products and service offerings. However, in the current period, we have 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 million Our adjusted gross margin for the three months ended September 30, 2022 and 2021 stayed consistent at approximately 45% and decreased for the nine months ended September 30, 2022 to 43% from 58% the same period last year. The decline in margin for the nine months ended September 30, 2022 is primarily attributable to increased investment in infrastructure. With 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 pursued improvement in our operation and were able to close larger transactions with higher margins. Adjusted dividend 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 investments to position record 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, this KPI 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 and the September 30, 2022 increased 292% and 174% compared to the same period, 2021. During the nine months and the 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 31st, 2021. This increase in performance obligation was primarily due to our SPS acquisition. As we build relationships, and extend our presence, we acquire many customers through pilot programs, which are typically short in nature. As these pilot programs convert and extend 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 equivalent. This decline was primarily due to the increase in our loss from operation as we position the company for future growth and reflect cash use 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 at-the-market sales agreement. In summary, we are passionate about our growth prospects and continue to experience a strong momentum in our market. 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 shareholders of 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 tradeoffs 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 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 SDS 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, inequity, and public safety. Over the past year, as the United States has begun the implementation of a massive effort to improve its mobility infrastructure, a growing consensus has emerged that better data collection, management, and distribution is a priority in this effort. For decades, the federal government has mandated states to collect traffic data for receipt of highway funds. This currently results in over 1 million 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 that the basic roadwork network suffers from. Current collection methods use inductive loops that are expensive and dangerous to install and side-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 and active intelligent system that delivers actionable insights on a continuous basis. Recourse 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 U.S. completes more than 1 million of these traffic studies annually, and this represents a tremendous growth opportunity ahead for RECOR. Now, since the launch, of our EDGEflex 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 RECOR 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 RECOR 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 Blinksy, PredictIQ, Tomorrow.io, and Waze, to already dozens of others in our partner network. The ReCore partner network and our ability to provide a single pane of glass for roadway intelligence took center stage recently to how our customers in North Carolina and Florida 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 in key states in the past quarter. This includes Alabama Department of Transportation, where we were selected for the U.S. Department of Transportation Federal Highway Administration $5 million grant for proactive route operations to avert congestion and traffic. We also announced a win with the Central Ohio Transit Authority, otherwise known as COTA, with RECOR 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 RECOR 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's statewide connected vehicle and data ecosystem and technology. As you can see, it's been a busy quarter for ReCore 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 Recore's future potential with our computer vision systems and Recore One 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 in 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 ReCore 1. our ever-expanding roadway intelligence engine and operating system that turns data into roadway knowledge. We aggregate, we transform data into knowledge with our AI and other IP, and we deliver actionable insights and analytics as a service. Most importantly, we are trusted by our customers as a data services company, and we are poised for rapid near-term and long-term growth. I look forward to providing you continued updates on our progress as the U.S. states look to digitize the transportation network accelerated by the $1.2 trillion federal infrastructure bill and spend. In short, RECOR 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.