Rekor Systems, Inc.

Good afternoon, ladies and gentlemen, and welcome to today's Recore Systems, Inc. conference call. My name is Shamali, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. 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 start, I want to read you 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 positions, 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 poor 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 of 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 want to turn the presentation over to Mr. Eyal Hen, CFO of Recourse Systems.

Hi, everyone. Thank you for taking the time to join us for Recourse year-end results. We are excited to share our team's progress over the year that ended December 31, 2022, and update you on key business topics. On the call with me today, our CEO, Robert Berman, and our president and COO, David DeHart. They will provide additional color on our business, and others will have remarks on recent offerings and provide a summary. But first, I will review our relevant metrics. With the revenue from Southern Traffic Services in the last six months of 2022, we have accelerated growth in recurring revenue under our sales model. As you may recall, in the third quarter of 2021, we made a strategic shift in our business model, to emphasize recurring revenue more than point-in-time revenue. Our goal is to provide more value and flexibility to our customers through subscription-based data services and software offerings. As consequences, we saw strong growth in recurring revenues in 2022. The percentage of recurring revenue reflected in total revenue was 66% over the 12 months ended December 31, 2022. compared to 40% for the 12 months ended December 31, 2021. This has provided us with a solid foundation for strength and stability in our revenues for the long term. In the third quarter of 2022, we also undertook significant streamlining measures to achieve a notable reduction in operating expenses. During the fourth quarter, we saw the full impact of these activities, Operating expenses across our general administrative sales and marketing and research and development expenses decreased by $4 million during the fourth quarter of 2022 compared to the third quarter of 2022. These reductions were designed to scale back longer-range projects as we concentrate on near-term infrastructure spending opportunities in North America. Now, let me highlight some other details in the financial results for the 12 months ending December 31st, 2022, and some more recent developments. As a result of significant change in market capitalization, we recognize a goodwill impairment of $34.8 million in the third quarter of 2022. In December 3rd, 2022, we sold our low-margin legacy automated traffic safety enforcement business unit for $3.4 million, and its results are categorized as discontinued operation on our P&F. In January 2023, we finalized a $15 million Senior Secure Note transaction led by our CEO, Robert Bell. On Friday, we also finalized a $10 million Registered Direct offering, which was priced at the market under NASDAQ rules. Revenue for the year ended December 31st, 2022 was $19.9 million compared to $11.6 million in the same period last year, an increase of 72%. Total revenue with discontinued operations was $22.3 million for the year ended December 31st, 2022 compared to $14.3 million for the year ended December 31st, 2021. Recurring revenue for the 12-month and the December 31, 2022 increased by $8.5 million compared to the same period last year. This represents an increase in recurring revenue of 182% for the 12-month period and the December 31, 2022 compared to the same period the previous year. Performance obligations increased to $21.1 million as of December 31, 2022, compared to $14.7 million as of December 31, 2021. We are particularly pleased to share that our revenue and recurring revenue have continued to climb, with significant improvements in 2022 compared to 2021. In fact, 56% of total revenue for the 12 months ended December 31, 2022, with recurring revenue. compared to only 40% of the same period in the previous year. As I mentioned before, we've been hard at work streamlining our business. We invested in our growth by adding new hires to our engineering, sales, and marketing teams in the first part of 2022 as we integrated the latest technology into our suite of product and service offerings. We also experienced increases in payroll and payroll-related expenses relating to our SDS acquisition. Total operating expenses for the year ended December 31st, 2022 were $16 million, not including the goodwill impairment, compared to $38.9 million during the year ended December 31st, 2021. But we have been keeping a watchful eye on our expenses evaluated our results carefully, and managed to maintain a firm grip on our operating expenses. These efforts have already paid off, and we are pleased to share that we have managed to reduce our expenses by $3.9 million in the last six months of 2022 compared to the first six months of the year. This despite the inclusion of a full six months of FTS expenses. While we are excited about the future, we continue to manage our expenses while investing in our growth and delivering the best possible value to our stakeholders. With these remarkable results, we are enthusiastic about the future and look forward to continuing to drive growth and profitability. 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 made an internment assessment as of September 30, 2022, and determined that we had an internment related to goodwill in the amount of $34.8 million. Our adjusted gross margin for the year ended December 31, 2022, decreased to 45% from 61% in the same period last year. The decline in margins for the year ended December 31st, 2022 is primarily attributable to lower margin on SPS revenue, which we are working to improve with new technology. With the expansion of our customer footprint and installed technology base, we expect to see improvements in our adjusted gross margin in the future. Adjusted EBITDA for the year ended December 31st, 2022 and 2021 increased to a loss of $37.4 million from a loss of $22.8 million, respectively. This increase in loss was due to the investment I've discussed previously to position us for future growth. However, as a result of the more recent streamlining activities, we have seen a decrease in loss from the second quarter of 2022. ReCore has released enhanced key performance indicators to provide better visibility and a more detailed view of our success and progress, and we've changed our revenue model in September 2021. We believe that these KTIs give our shareholders a better insight into our business over time. During the year and December 31, 2022, we won $22 million in of new contracts compared to only $8.9 million in total contract value won during the same period in 2021. As of December 31st, 2022, our remaining contract performance obligation amounted to $21.1 million. We expect to recognize approximately 59% of this amount over the succeeding 12 months. This represents a remarkable increase of $6.7 million, or 45%, compared to $14.7 million of performance obligations as of December 31, 2021. We believe that our KPIs will continue to improve as we continue to build relationships and expand our presence. Moving to our financial condition and liquidity, On Friday, we announced an extra direct offering for $10 million. The transaction provides us with the liquidity we need to continue and execute our strategy. Robert will elaborate on the transaction later. As a result of the transaction, we will file our 10-K shortly. Our cash balance on December 31, 2022, was $2.5 million, a decrease from $24.1 million as of December 31st, 2021. We had a working capital deficit as of December 31st, 2022 of $6 million, down from working capital of $16.9 million as of December 31st, 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 operations as we positioned the company for future growth and reflect the cash required to acquire 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. which was terminated in December of this year. In January, we announced the closing of Senior Secure Notes in the aggregate amount of up to $15 million, led by our CEO, Robert Berman, with participation from other new and existing investors. At closing, $12.5 million was funded. We are confident regarding recourse growth prospects because we are experiencing strong momentum in our market. As you'll hear from David in just a moment, we are taking a strategic approach to our investment, focusing on rapidly increasing our margins to maximize profitability. With this approach, we fully expect to see significant improvements in our margins in the near future. Our company remains firmly committed to creating shareholder value and making decisions that will benefit our long-term shareholders. We are dedicated to delivering consistent growth and are excited about the opportunities that lie ahead. Thank you for your continued support as we work toward achieving our goals together. With that, I will now turn the call over to David. David?

Thank you, Eyal. Good afternoon, everyone, and thank you for joining us today. I'm David DeHarne, the president and COO of ReCore. I've just recently passed the one-year mark as part of the leadership team here, and I must say it's been an incredible privilege and honor to shape the future of our company and to have the opportunity to change the course of an entire industry. Though it has been quite a challenging year, given the geopolitical, macroeconomic, and overall market volatility and uncertainty, It has also been a remarkable year of transformation, growth, and opportunity for ReCore. I'm looking forward to sharing some highlights of what we've accomplished in the past year and our plans for future growth. ReCore stands at the forefront of innovation, leading the charge as the premier provider of roadway intelligence and data-driven mobility insights on a global scale. As a technology company, we are changing the course of the public safety urban mobility, and transportation market segments with our cutting-edge, AI-driven solutions, enabling smarter, safer, and more sustainable streets for all communities. Over the past year, as you've just heard from Eyal, we have prioritized driving key performance indicators such as revenue, annual recurring revenue, performance obligations, and operational efficiencies across people, processes, and technology. And as Eyal also highlighted in his remarks, we have achieved significant progress on all of these metrics in 2022, both quarter over quarter and year over year. Starting with operational efficiencies, like many tech companies, we continue to make tough but important choices to help right-size our business and instill financial and operational disciplines across people, processes, and technologies. As part of our operational efficiencies, In late 2022, we divested our automated traffic safety enforcement business, commonly known as the red light and speed camera ticket business. This move was a strategic shift towards prioritizing our core data services businesses as the ATSE business was labor intensive and had low profit margins and was entering into a heavy technology refresh cycle, which would serve as a distraction from our core focus. While we divested our ATSE interests, at the same time, we focused on completing the integration of RECOR's two strategic acquisitions, WayCare and Southern Traffic Services, or STS. This has resulted in significant advantages and synergies on the technology and business front for RECOR as we enter 2023, allowing us to advance our leading technology and vertical expertise in the transportation markets and expand our footprint while simultaneously increasing our visibility and momentum with major industry influencers, such as the U.S. Department of Transportation, Federal Highways Administration, Intelligent Transportation Systems, or ITS, and the American Association of State Highways, or AASHTO, as well as forge new partnerships with dozens of transportation data and technology leaders, including Safe Fleet, Drakewell, Sintra, Wejo, Blink-C, PredictIQ, Tomorrow.io, Waze, Amazon Web Services, and many others. An example of significant advantages and synergies from our acquisitions, we recently announced the formation of the ReCore Partner Network, which extends the work that WayCare started with third-party data providers several years ago, and now has been expanded and considered to be one of the most comprehensive hubs for mobility data and transportation information in the industry. Today, Recore Partner Network boasts 40 partners connecting data from various sources that cover 95% of U.S. roadways, 28 auto OEMs, close to 14 million connected and electric vehicles, and 20 trillion data points globally. Why does this matter? With 65% of U.S. roadways rated in poor condition, traffic congestion, and greenhouse gas emissions measuring the highest ever recorded, and a tragic 43,000 fatalities and millions more seriously injured every year on our roadways. There's never been more demand and call for states, municipalities, city, and roadway managers to understand exactly what is moving on their streets and in their communities in real time and predictably, and to take proactive and immediate informed decisions. RECOR is uniquely positioned to answer that call with our growing, expanding RECOR partner network. Another example of where our acquisitions have brought significant advantages and synergies is with STS's 30 years of traffic engineering and data collection expertise, coupled with the deep relationships they have forged across multiple state departments of transportation and commercial entities. In the second half of 2022, We successfully integrated STS's traffic and data collection expertise with RECOR's next generation AI and machine learning technologies and IoT edge devices, always on, always connected, always learning, forming a connected digital infrastructure and a new operating system for the roadways. It is important to note that every public and private roadway or intersection project always starts with planning, and planning always starts with collecting data from the roadway. This is where RECOR's strength and differentiation really shines. And there are literally millions of these traffic studies conducted across the U.S. annually, and every state and municipality in the country is required to provide traffic, class, count, and speed reports to the Federal Highways Administration to receive federal transportation funds. This integration of STS and RECOR has positioned us to be the leading provider of non-intrusive, AI-driven real-time traffic data collection and analytic services in the industry. With over 30,000 data collection sites, more than 60,000 lanes, and hundreds of thousands of miles of roadway already under management, we are now expanding this footprint across the U.S. with our recently announced breakthrough EdgeMax and EdgeFlex solutions for both permanent and short-term traffic studies. We see these solutions as significant growth drivers for revenue and pipeline into 2023. Now I would like to provide some key highlights in each of our business segments coming into the year, including urban mobility, transportation management, and the licensing of our vehicle identification software and license plate recognition technology across public agencies and commercial entities around the world. First, let's talk about our progress in urban mobility. Additional approaches to capturing roadway and infrastructure analytics for planning and engineering employ expensive manual processes that use antiquated technology to capture a fraction of the information needed for a fraction of the time. This market segment is ripe for disruption, and we are well positioned to benefit from this industry transformation. Seeing this opportunity emerging, in the fall of 2022, We pre-announced our new AI-based EdgeMax and EdgeFlex roadway data collection systems designed to help our customers capture high-resolution roadway data using AI and transform it into holistic traffic insights for vehicle classification, counts, and speed according to the exacting standards of the Federal Highways Administration and U.S. Department of Transportation. Whether it be passenger vehicles or mixed axle commercial trucks or any of the 13 specific DOT vehicle classes present on our roadways, ReCOR pulls ground truth insights both in real time and historically, allowing agencies to better organize and execute roadway planning and city building initiatives in a smart, safe, and future-proof way. In addition to government agencies, many businesses also need to understand and manage the vehicle flow patterns, types, and other important analytics regarding vehicles in their geographies. Whether it is an engineering firm collecting roadway data for their customers, a corporation monitoring traffic across campuses, or a real estate developer planning a specific area, the capture of accurate, holistic roadway data is valuable for each of these unique use cases. Since announcing our new EdgeMax and EdgeFlex solutions, We are encouraged by the multiple reverse inquiries and strong engagement from more than 40% of the U.S. states so far and have confirmed interest to deploy our non-intrusive AI-driven data collection systems across their states. This is all new pipeline for us, and it is growing rapidly. I'm pleased to highlight several significant customer wins as examples, including a seven-year contract to provide AI-based traffic data collection to the Florida Department of Transportation and the City of Tallahassee. including 18 counties in the Panhandle region of Florida. We're also proud to have secured new and extended contracts and task orders with state departments of transportation across the U.S., such as Pennsylvania, Mississippi, Alabama, and Ohio. Our advanced non-intrusive edge-based data collection technology is being used to support the digitization of transportation infrastructure and the shift to ubiquitous AI-based traffic studies across these states. I'm also pleased to highlight that our project with the Philadelphia Navy Yard and the City of Brotherly Love as a real-world, large-scale laboratory site to push the boundaries of our traffic analytics capabilities and solutions in a one-of-a-kind public-private partnership with Amazon Web Services. Recourse technology is analyzing traffic patterns across the full scope of the metro area, providing critical insights into traffic flow, visitors, volume, types of vehicles, and the impact of those visitors and vehicles, including environmental insights such as electric vehicle volumes, electric vehicle charge station placement, and greenhouse gas emission analytics. The work that we've done with Philadelphia is a shining example of practical here and now AI-based smart city applications. The icing on the cake here is that this project also earned us the AWS smart city competency for smart urban transportation, which is a distinction held by only a handful of companies worldwide. Another key milestone to highlight is our recently announced partnership with Drakewell, the newest ReCore partner network partner. Drakewell is providing fast, accurate, and easily shareable traffic data analytics for transportation agencies and corporations and private firms worldwide. Red Bull seamlessly integrates with our Edge Max and Edge Flex data collection systems, covering all aspects of the Department of Transportation's traffic data programs. Red Bull customers include eight U.S. and two international departments of transportation, and our partnership is a launching pad for multiple expansion opportunities, making it simple for departments of transportation everywhere to adopt and access our next-generation AI-based approach for real-time traffic analytics. Now, let me shift gears to another one of our segments called Transportation Management. In this business segment, our mission is to help traffic management centers and agencies shift from being siloed and reactive to being integrated, interoperable, and proactive in their approach to managing roadways, providing the necessary modern tools to help them save lives, improve traffic flow, and reduce pollution in their cities. Recourse Traffic Management Platform revolutionizes the way traffic operations and management centers operate, providing an unparalleled set of real-time and predictive tools and the most complete and holistic view of their roadways. With this insight, the platform empowers decision-makers to take swift and effective action to enhance safety, sustainability, and efficiency for citizens across their communities, setting a new standard for intelligent traffic management. Our traffic management solutions have consistently proven to identify more incidents faster than conventional methods, to enable proactive traffic management through advanced crash risk predictions, and to do this in a collaborative way, connecting agencies and stakeholders, including notifications and alerts to citizens and the public. As a comprehensive cross-agency platform, RECOR offers specific applications for traffic management freeway service patrol, first responders, and maintenance crews, aligning all to better address traffic challenges while arming them with the vital information needed to identify, manage, and recover from incidents, events, and irregularities on the roadways. Now, as funds from the $1.2 trillion bilateral infrastructure law continue to be unlocked in 2023, we are seeing an increase in our opportunities and pipeline growth as well. Along this line, I'm excited to highlight some of the recent customer wins and milestones in our transportation management business segment. One example is our recent multi-year contract win with Texas, the second largest state in the U.S. Using RECOR, the Texas Department of Transportation, or TxDOT, is building a first-ever comprehensive real-time source of roadway intelligence for the state. Our RECOR traffic management platform will serve as the hub for TxDOT. providing accurate insights for predictive, high-potential crash hotspots, leveraging real-time connected vehicle data, and multiple third-party data sources. This means traffic management in TxDOT will be able to receive alerts for incidents like crashes, abandoned vehicles, and roadway debris in real time and from a single source of truth. This will enable the agency to collaborate and respond quickly and proactively to high-risk areas and enhance safety of its vast network of roadways. Our program with TxDOT is a significant achievement for RECOR as it expands our value and presence across one of the largest and most extensive traffic management centers in the nation. As another example of progress in this segment is RECOR being chosen by the Central Ohio Transit Authority, or COTA, for their Integrated Mobility Innovation Transit Program. an initiative designed to improve roadway safety and transit services across 13 Ohio counties. In addition, we have also been selected by the Missouri Department of Transportation for their new strategic highway safety plan called Show Me Zero, as they aim to reverse rising traffic fatalities on their roadways. Tapping into the new infrastructure bill funding with Missouri, we are combining our traffic management expertise integration of multiple data sets across multiple ecosystem players, as well as bringing our deep expertise in marrying our record edge IoT devices to connect the dots across software, data, and hardware systems, providing the most comprehensive and complete view of Missouri's highways for the state's traffic management center. Other bellwether successes in 2022 included partnership Cintra, one of the largest private developers of transportation infrastructure in the world, where together we secured a multi-year contract to serve as the technology platform for Oregon's connected vehicle and data ecosystem. This program supports the Oregon Statewide Road Usage Charge Initiative, and our selection was the result of being down-selected from a pool of 14 major competitors. This is an important achievement given that electric vehicle ownership is rapidly deplacing federal and state gas tax revenues, and the work we are doing with Oregon is being monitored closely by multiple other states. In addition to our partnership with Oregon and Sintra, we also expanded our solutions in other departments of transportation across the U.S. in 2022, including California's Metropolitan Transportation Commission, as well as Colorado, Kansas, and Alabama states, all representing new multi-year contracts to re-corp. And in addition, we achieved a significant contract extension with Ailon Highways in Israel, highlighting our reputation for excellence on our global scale. These successes are tangible evidence of the differentiation we deliver to our customers every day and the ability to serve the evolving needs of the transportation industry. While our urban mobility and transportation management business segments have gained significant traction and growth in the past year, I'm also pleased to highlight our momentum in the direct sale and licensing of our software and technology across public safety, law enforcement, security industries, and various commercial use cases. In the past year, we've secured multiple new major contracts and partnerships and continue to extend our leadership in AI-driven vehicle identification, license plate recognition, and comprehensive roadway intelligence solutions in the public safety business segment. For example, We've made significant inroads in the commercial market over the past year with our vehicle identification and LPR software and systems being chosen by a major American amusement park corporation to improve traffic management and security capabilities. A household name you would know, this corporation owns the most theme parks and water parks combined of any amusement park company, hosts over 30 million guests annually, and ranks seventh in the world in terms of attendance. In addition to this, Ricor also added the Las Vegas Palms Casino Resort as its eighth major casino customer, cementing our vehicle identification and LPR solutions as a new gold standard for the gaming industry, with leading casino operators in Nevada, New York, and California selecting Ricor for their security across properties. Our partnership with SafeSuite is another prime example of traction and growth in the past year across our public safety business segments. As a renowned provider of safety solutions for fleet vehicles nationally, Safe Fleet leads the market in a wide range of industries, including law enforcement, transit, and the school bus market nationwide. We recently announced a multi-year licensing agreement with Safe Fleet deploying our advanced technology in their next generation violation detection platforms for transit, for law enforcement, and for school bus stop arm violation detection platforms. All three platforms are focused growth pillars for Safe Fleet's business, and we are pleased to play a role in helping them achieve their objectives. This also presents a significant growth opportunity for RECOR with the potential to be inside and connected to thousands of fleet vehicles across states and nationally with our advanced vehicle recognition and enforcement technologies. In addition, RECOR is also playing a mission-critical role in safeguarding the security of our nation. Our vehicle recognition technology meets the exacting standards of the federal agencies and being utilized at key locations worldwide. We are proud to serve the federal government across multiple agencies already, and they have received yet another significant purchase order extension for our technology and software for deployment domestically and internationally. And speaking of international growth, I'm pleased to also highlight that one of the largest states in Mexico has selected and is now deploying our vehicle recognition software and hardware across 1,800 locations across the region, representing the largest vehicle recognition and roadway intelligence deployment in Mexico's history as they aim to improve the public safety and security of millions of Mexican citizens. There's one more area that I wanted to highlight with you as part of my business update. This is regarding our record e-commerce platform, the channel that deserves recognition. Our e-commerce platform offers a secure and seamless shopping experience for vehicle identification and LPR technology licensing, serving customers worldwide in over 90 countries around the world, highlighting the expanding demand for our products and services globally. The growth of our software as a service or SaaS licensing business has been remarkable over the past years, with revenue increasing from 0.4 million in 2019 to 1.7 million in 2022, representing an astounding 280% growth over the period and surpassing 1,200 active monthly subscribers in 2022, all with little investment in marketing. As we look ahead in 2023, we expect continued and accelerated growth of our e-commerce channel and, of course, across each of our business segments as well. For RECOR, we are moving into scale now and truly believe the best is yet to come. To conclude my remarks today, once again, it has been an honor and a privilege to help guide the transformation of RECOR over this past year as president and COO. It has been a remarkable year of transformation, growth, and opportunity, and we are reshaping the industry. Our progress and advancements in 2022 were significant and made possible by our leading edge technology and strategic partnerships and by the dedicated and committed employees who work tirelessly to navigate the challenging business climate and deliver against our growth objectives and financial results. Looking forward, ReCore is well positioned for growth and scale. We have technical differentiation in each of our business lines, a first mover advantage, massive market tailwinds, strong partnerships and clients that hold us to the highest standards and a growth flywheel, all contributing to our continued success. We're excited about our path forward as a company and grateful to our shareholders' continued support and trust in the company and leadership. I'd like to thank you all for joining me today, and I look forward to speaking with you soon. I'm pleased now to hand the call over to Robert Berman, our CEO, for final remarks and for Q&A. Robert?