Rekor Systems, Inc.

Good afternoon, ladies and gentlemen, and welcome to today's Recore Systems, Inc. conference call. My name is Kevin, and I'll be your coordinator for today. At this time, all participants are in a listen-only mode. If anyone should require operator assistance, please press star zero on your telephone keypad. A question and answer session will follow the formal presentation. You may be placed into question queue at any time by pressing star one on your telephone keypad. As a reminder, this conference call is being recorded for replay purposes. Before we start, I want to read 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 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 you to 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 a presentation of non-GAAP information provides useful supplementary data that concerning the company's ongoing operations and is provided for informational purposes. I'd now like to turn the conference over to Mr. David DeHarne, President and CEO of ReCore Systems.

Thank you, Operator, and thanks to everyone for joining us today. I'll start with a brief update on customer activity, followed by an overview of the current market and our strategic priorities. They all will walk through our Q3 2024 financial results And I'll conclude with an update on our market position, goals for 2025, and the path forward. I'm pleased to report that the pipeline we've been nurturing for months is now entering the deployment phase, validating our growth strategy across all three core product areas. Urban mobility with Discover, transportation management with Command, and public safety with Scout. In each area, we're seeing steady platform expansion, increasing customer engagement, and expanding strategic partnerships. Starting with Discover, we recently achieved the much anticipated inclusion of our systems on Florida's approved product list, or APL, and have now begun the first wave of statewide deployments spearheaded by the Central Office of Florida DOT. These deployments are part of a statewide effort to provide comprehensive coverage across every district, ensuring precise roadway data and advanced analytics for emergency operations and beyond. I'm especially proud to report that our first installations have already been battle tested and proved their value. During one of the most challenging hurricane seasons in Florida's history, RECOR was a reliable and accurate source of traffic data for the state and its emergency operations, facilitating the safe evacuation of millions. While these back-to-back hurricanes required Florida DOT to prioritize emergency operations and evacuations for citizen safety during this time, we are now excited to be making renewed forward progress in Q4. With our inclusion on the APL, and strong endorsement from Florida DOT's central office, we are collaborating with multiple districts to expand the reach of Discover, leveraging existing and discretionary budgets for wider implementation across the region. With our existing involvement in servicing Florida's legacy data collection network, we believe we are well positioned to modernize thousands of outdated sites across the state. many of which are currently underperforming or in disrepair. With APL approval of our advanced technology now behind us, our established relationships and operational momentum make Florida a cornerstone for our growth this year and beyond. Although the approval took longer than expected, it marks a pivotal step allowing us to expand the delivery of reliable and mission critical insights that validate our strategic direction. As we prepare to deploy hundreds and eventually thousands of units in Florida, this continued rollout not only positions us for sustained growth in one of the nation's largest and most influential states, but also sets the stage for expansion beyond. Florida has built a strong reputation with the Federal Highways Administration as a leading state for advanced data collection approaches, serving as a model for other states. Florida's exceptional results through the recent hurricanes has been particularly instructive for other coastal regions and states that face similar and severe weather challenges. We are confident that our ongoing work in the region sets a powerful example and will help to facilitate accelerated adoption nationwide. Securing an initial order in a new state requires winning the competence of key decision makers, as well as successfully navigating a challenging procurement process. Complex state procurement policies can present unexpected challenges that lead to frustrating delays. To address this, we've streamlined our approach by codifying essential elements such as documenting our steps to eliminate AI risks, implementing robust cybersecurity and data protection measures, and establishing predefined contract vehicles all into a structured framework. This framework is designed to simplify our collaboration with procurement departments, reduce friction, and accelerate timelines in future engagements. Building on our growing momentum with Discover, I'm pleased to also announce that New York, our latest customer and another one of the largest and most influential states in the country, has officially advanced ReCore Discover from proof of concept through procurement. This achievement grants us access to approximately 115,000 miles of public roadways and serves as a critical entry point for a potential broader rollout statewide. With this milestone, Ricoh can now engage with various local union engineering and construction firms to install our edge AI devices for use at numerous data collection sites across the state. Based on their experience with our currently installed systems, New Mexico has also made the recent decision to move away from outdated 1990s side-firing radar technology. opting instead to leapfrog directly to our AI-based solutions for a major interstate highway upgrade project. The state is investing over $200 million in a multi-year roadway infrastructure project, and we are well-positioned to capture a portion of that spend. They have designated ReCore as the official system of record for advanced data collection, and we are collaborating closely with state leadership to plan further expansion. Now onto our transportation management area. In Q3, we were pleased to see our command solution for traffic management continue to gain additional ground in Texas, where Texas DOT Austin and the Central Texas Regional Mobility Authority, or CTRMA, have implemented command as its AI-based incident detection and response platform, as well as for work zone management and real-time public notifications. To date, the performance has been impressive, with TxDOT reporting a 29% reduction in secondary crashes and the ability to restore normal traffic flows on average 44 minutes faster using command. TxDOT has also presented our solution to the Texas House Legislature as a model for future roadway management. Our deployment and its outcomes were highlighted in a recent video featuring testimonials from senior leaders at TxDOT, including the state CIO and head of traffic management. This video underscores Command's value as a transformative tool for helping to create safer, smarter, and more efficient roadways in communities, and highlights their plans for statewide enterprise-level deployment of ReCORP. If you haven't seen the video, it's available on our website and various social media channels. We are excited about our ongoing progress here and believe that both Texas and Florida have the potential to become some of our top revenue generating states in the coming years. In addition to these specific projects, we are currently engaged with over a dozen states that manage 1.2 million miles of roadway data collection in aggregate. Our expanding footprint now includes Hawaii through our new partnership with a large and trusted local infrastructure service provider for the state. This collaboration will bring our advanced solutions closer to many communities in Hawaii, providing the most advanced digital infrastructure for their departments of transportation and public safety. Speaking of public safety, we are pleased to see the continued momentum building for our Scout platform. With increasing concerns about crime across communities in the United States, this is a market segment that is expected to see significant growth in the coming years. Notably, more than 70% of all crime involves a vehicle, underscoring the need for high performance and accurate vehicle recognition technology and roadway intelligence. We recently announced our partnership with Sound Thinking, a leading public safety company trusted by thousands of public safety agencies nationwide. Our collaboration and joint offering is already seeing positive initial results in the market, with sound thinking reporting multiple millions of dollars of new pipeline already established and with more to come. In addition, our participation at the recent International Association of Chiefs of Police, otherwise known as IACP, was well received, with other companies in the public safety domain approaching us for potential partnerships as well. This reinforces our confidence in the growth outlook for Scout and our public safety segment over the coming months and years ahead. Also, we're pleased to announce that Scout has recently passed an initial technology approval for New Jersey's statewide networked ALPR program, or NJSNAP. marking an important milestone on our journey to establish Scout as the trusted vehicle recognition solution for New Jersey law enforcement agencies and public safety initiatives. As part of our growth strategy, we are continuing to forge industry leading partnerships that enhance our capabilities and strengthen our market position. Notably, as industry leaders, Amazon Web Services and NVIDIA are intensifying their focus on public safety and transportation infrastructure, and they are aligning with strategic partners they believe will be the leaders in this space. They have chosen Recall and are putting weight behind our solutions. We previously highlighted our deep collaboration with AWS across each of our business segments. Now, NVIDIA has published a case study on our integration with their full-stack accelerated computing platform. By leveraging NVIDIA's AI and Neural Inference Microservices, or NIM, we harness generative AI to accelerate deployments and strengthen data security. We are also running multiple large language and computer vision models on NVIDIA's Triton AI inference server. This provides critical capabilities for data annotation, workflow automation, and camera calibration, and advances the state of the art for our AI driven roadway intelligence. Maintaining visibility and influence is critical for ReCore as it fuels innovation and keeps us at the forefront of a rapidly evolving industry. In Q3, ReCore had a strong presence at over 30 industry events reinforcing our role as a thought leader and strengthening ties with current and future clients. Our national profile is also on the rise. We were recently featured on Motor Week, the nation's longest running automotive television series, where our brand and technology reached a broad audience, reinforcing ReCore as a leader in enabling the future of safer, smarter transportation. I'm also honored to share a significant milestone for my personal commitment to advancing transportation and infrastructure. In addition to serving on the board of directors for the US Department of Transportation Center for Multimodal Mobility for the past year, I'm now pleased to share that I was recently inducted to the board of directors of ITS America as well, the leading authority in the intelligent transportation industry. This is a strong recognition of ReCore's vision and role in shaping the future of digital infrastructure and roadway intelligence nationwide. Together, we will set the standard for safer, smarter, and more connected communities. As I've shared in previous calls and outlined in my recent shareholder letter, all indicators point to what is an inevitable decade-long wave of transformation toward digital infrastructure, a seismic technology shift that will fundamentally redefine roadways and communities across the U.S. and beyond. Ricoh is poised to lead this transition with our innovative AI-based technology and unparalleled expertise in roadway intelligence. However, navigating government procurement cycles requires adaptability and patience. as timelines in the B to G sector can be unpredictable. Since assuming the CE role this past summer, I have focused on creating a leaner, more efficient ReCore 2.0, a company ready to capitalize on significant breakout opportunities in 2025 and beyond. While progress toward our long-term goals may not always be linear, our growing customer momentum Expanding backlog and meaningful partnerships have strengthened our opportunities for sustainable, self-funded growth. Together with my senior management team, we are fully committed to executing our plans and creating lasting value for shareholders, customers and employees alike. To stay resilient in this environment, we've taken the necessary steps to adjust to the unpredictability of government procurement timelines and trim our expenses. This expense realignment is designed to achieve up to 15 million in annualized savings and gave us the confidence to eliminate an additional $20 million in optional advances we had in place with Yorkville. These actions demonstrate our commitment to operating within our means, reducing reliance on external capital, and positioning ourselves firmly on the path to positive cash flow in 2025. With industry-leading technology platforms across all business segments and strong partnerships within the ecosystem, Ricoh is poised to transform 4.2 million miles of U.S. roadways, setting the standard for smart, AI-driven infrastructure. Our statewide engagements are stronger than ever, steadily propelling us toward our vision of becoming the global leader in roadway intelligence. I'm immensely proud of our team's daily dedication to making that happen. Today, we're on an exciting journey to build safer, smarter communities, and I am confident in the road ahead. I'll now hand the call over to Eyal Hem, Recourse CFO, to review our Q3 financial highlights.

Eyal? Thank you, David. And thanks for joining us today to discuss our results for the three and nine months ended September 30th I'd like to begin by highlighting recent strategic actions we've taken to optimize our cost structure, which are projected to reduce 2025 expenses by up to $15 million compared to 2024. These initiatives include workforce restructuring to better align our cost base with current business needs. we have placed our emphasis firmly on current operations and near-term revenue-producing opportunities, while ensuring that we retain key talent and maintain the operational capacity required to deliver high-quality service to our customers. In addition to a thorough evaluation, the timeline for our longer-range development efforts and reduction of other expenses We have implemented targeted compensation adjustments that include more equity-based compensation in the total compensation packages. This demonstrates the long-term fate of our top employees in our future success. Now for the third quota numbers. We had revenues of $10.5 million, an increase of 16% compared to Q3, 2023. And for the nine months ended September 30th, 2024, we achieved $32.8 million in revenue, an increase of $8.9 million or 37% over the same period last year. Our urban mobility segment, which consists of revenue derived from roadway data aggregation activities was the main driver of our growth in the quarter. Recurring revenue reached $5.5 million in the third quarter of 2024, an increase of 14% over the same period last year. For the nine months ended September 30, 2024, recurring revenue totaled $16.8 million, an increase of 13% compared to the same period last year. Adjusted gross margin for the three months ended September 30th, 2024 was 44%, a decrease from 52.6% for the same period last year. For the nine months ended September 30th, 2024, adjusted gross margin was 48.2%, a decrease from 52.6% for the same period last year. As indicated in previous calls, we're still in an early growth phase, and margins can fluctuate on a quarterly basis. The decline in Q3 2024 was largely driven by lower gross margin projects and some adverse weather conditions over the late summer months. We expect gross margins to bounce back over the coming quarters, driven by new wins in delivery of our higher margin offerings. Adjusted EBITDA loss for the third quarter of 2024 was $9.2 million, an increase from $6.6 million in the same period of last year. The higher adjustable EBITDA loss was largely due to the aforementioned lower gross margin. For the nine-month period ended September 30, 2024, adjusted EBITDA loss was $24.3 million from $23.2 million for the same period last year. Our Q3 2024 financial results reflect the variability we have previously noted in serving government sector clients. to help smooth out this unpredictability without proactively optimizing our cost structure, focusing intently on near-term revenue generation and trimming back personnel in longer-range development areas, as well as other non-essential expenses. Although these decisions are challenging, they are necessary to streamline our operation accelerate our path to profitability, and strengthen our balance sheets. We anticipate implementing the majority of our targeted reduction on an annual full run rate basis by year end. As part of our commitment to prudent financial management, we have made strategic adjustments to our financing arrangements. In October, We amended our prepaid advance agreement with Yorkville Advisors and eliminated the option for an additional advance of $20 million. This decision reflects our confidence in our current realignment, growing operating momentum, and commitment to delivering value to our shareholders. Despite some near-term challenges, our financial and operational strategies are laying solid foundation for strong future growth and profitability. I want to reiterate that our actions position us to operate within our means and reduce our reliance on external capital. This will put us on the path to achieve positive cash flow in 2025. We are confident in our forward outlook and grateful for the continued support of our investors. Now, I will turn the call back to David to cover additional business highlights and the path forward. David?