Rekor Systems, Inc.

Good afternoon, ladies and gentlemen, and welcome to today's ReCore Systems, Inc. conference call. My name is Melissa, 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 is being recorded for replay purposes. Before we start, I must 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 statement that is made to 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 that the presentation of non-GAAP information provides useful supplementary data concerning the company's ongoing operations and is provided for informational purposes only. I now would like to turn the presentation over to ReCore CEO, Mr. Robert Berman.

Thank you, and good afternoon, everyone. I'll keep this brief. Q2 shows the impact of the actions we said we were taking in the second half of 26. Revenue grew, gross margins expanded, and our adjusted EBITDA loss narrowed sharply year-over-year to approximately $1.2 million. Joe will walk you through the details. The key point is that this is not a one-quarter effect. We're nearing the end of a judicious cost-reduction program and have absorbed many of the one-time costs associated with that. So the savings are showing up in the run rate now. and we continue to expect additional cost efficiencies and further expansion of our recurring revenue base in the second half of 26. Our focus now is on continued execution, recurring growth and reaching profitability. On growth, I would like to start with Go Secure. We launched Go Secure video in June to cryptographically sign video at capture and prove frame by frame whether it has been altered. This is not a probability score, it's a determination. We've now extended the same approach to recorded audio, addressing splicing, deletion, and synthetic replacement under one authenticity framework. In a world of inexpensive voice cloning, altered clips, and disputed evidence, we believe the need to prove that both video and audio are real will only grow. We're now in active discussions with prospective launch partners, and we're being deliberate about commercial terms because we believe Go Secure can extend beyond the initial launch markets and has the potential to become an important media authenticity standard. Based on where those discussions stand today, our objective is to finalize initial launch partner commercial terms during the third quarter with definitive agreements to follow as appropriate. While we see great potential in GoSecure, demand remains meaningful in our core transportation business. As reflected in recent procurement trends, agencies are moving away from in-road sensors towards non-intrusive AI-driven systems. Discover and our data as a service model have positioned us well for that shift, and our recurring revenue continues to grow in that area. I also want to address ALPR. This environment is more challenging with increased public scrutiny, new rules around retention sharing and access, and a more active litigation environment around data practices. That has affected sales cycles across the industry. But over time, we believe the scrutiny favors companies like ours that have taken privacy, responsible use, customer control, auditability seriously, and Ricor has been deliberate across these issues for years. When agencies and oversight bodies demand demonstrable compliance rather than after the assurance that the problems will be addressed in the future, we believe vendors whose offerings have been designed to address these issues from the start will be better positioned. To summarize, the efficiency work is shown through the numbers. We remain confident in achieving our goals in the back half of 26. and see meaningful opportunities and go secure recurring roadway data revenue and responsible vehicle recognition. And with that, I'll now turn it over to Joe.

Thanks, Robert, and good afternoon, everyone. I'm going to walk you through the second quarter and first half of 2026, then close with cash and our outlook. Second quarter revenue was $12.7 million, up 2% from $12.4 million in the second quarter of 2025. For the first six months, revenue was $22.9 million, up 6% year-over-year. An important indicator for us is recurring revenue. Compared with the respective prior year periods, recurring revenue grew 14% in the quarter to $6.7 million and increased 21% for the first six months of the year to $13.3 million. That growth rate is running ahead of total revenue, indicating the mix of business is shifting towards the type of revenue We've been focused on growing. Contracted, repeatable, and higher margin. The improvement in revenue this quarter did not depend on a large non-recurring software transaction. It reflects the ongoing economics of the business as it is structured today. Turning now to adjusted gross profit. Adjusted gross profit increased for both the three and six month periods. Adjusted gross margin expanded to 56% in the second quarter For the first half of 2026, adjusted gross margin rose to 55% from 49%. Two things primarily drove that improvement. First, revenue growth allowed us to operate more efficiently across deployments, and second, the improvement in our product mix. Adjusted gross margin in our business is largely a function of how much higher-margin software and recurring revenue we carry relative to service-related work, and that mix has been moving in our favor. Shifting to operating expenses, this is where the work from the first half of the year becomes visible. Across all major areas, general and administrative, selling and marketing, and research and development, Expenses decreased by $4 million in the quarter and $4.3 million for the first six months ended June 30, 2026, compared to the prior year periods. That reduction comes from the actions we've discussed over the past few quarters. We reduced headcount during the first half of the year and worked towards optimizing our engineering operations. But we've also identified further efficiencies unrelated to workforce that we expect to produce several million dollars worth of additional annualized savings. We expect to execute on these in the third quarter with the noticeable impact in the fourth quarter of 2026 and into 2027. The quarter also included a one-time gain of 2.8 million associated with the re-measurement of one of our lease liabilities. This was an expected non-cash item that was tied to our continued operational realignment. As a result, the company recorded income from operations in the second quarter. This was driven by the one-time gain related to the remeasurement, along with revenue growth, higher adjusted gross profit, and the organizational efficiency measures we took at the beginning of the year now flowing through the numbers. Adjusted EBITDA loss for the quarter was $1.2 million, up a 79% improvement from the second quarter of 2025. Lower payroll and payroll-related costs drove most of that improvement, with revenue growth and margin expansion contributing as well. Turning to cash, we ended Q2 2026 with a healthy amount of cash, slightly exceeding $10 million, while our operating cash burn for the quarter was reduced to $2.4 million. For the six months ended June 30, 2026 compared to 2025, Our cash used from operations improved by $9.6 million, or 61%. This highlights the improvement in our cash consumption and reinforces our belief that the underlying business is moving in the right direction. We are actively evaluating options to refinance our existing prime revenue sharing nodes. Our growing contract portfolio and the impact of our recent win in South Carolina should help support the refinancing. We will provide additional information when there's something definitive to report. Looking to the back half of the year, three things give us confidence. First, the full period benefit of the majority of the cost reductions. Many of these actions were taken during the first half, so the third and fourth quarter should reflect a cleaner expense base than the first half of the year did. Second, continued revenue growth and our recurring revenue. continued discipline around capital management. Taken together, we expect to reach profitability on an adjusted EBITDA basis during the second half of 2026, assuming continued execution and cost discipline. Thank you for your time and your continued support. With that, I will turn it back to the operator for questions.