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…

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…

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?

. : 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…

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.