Good afternoon, everyone, and thank you for joining today's Rekor Systems, Inc. conference call. My name is Latanya, and I will be facilitating the call. As a reminder, this call is being recorded for future playback. Before we begin, I want to share the company's safe harbor statement. Please note that the statements made during this conference call regarding future revenues, operational results, financial conditions, markets, economic factors, products and product launches, partnerships, and any predictions about future performance or events are forward-looking statements. These statements involve known and unknown risks, uncertainties, and various factors that could cause actual outcomes to differ significantly from what is stated. We encourage you to look at the complete disclaimers in our earnings release. Additionally, please review the risk factors listed in our annual and quarterly financial reports filed with the SEC. We will also discuss non-GAAP results during this call, which the company believes provide useful information about its ongoing operations and is intended for informational purposes only. Now, I would like to turn the call over to Mr. Eyal Hen, CFO of Rekor Systems. Please go ahead, sir.

Good afternoon, and thanks for joining us. Today, we'll discuss Rekor's results for the 3 and 6 months ended June 30, 2022, and provide you with an update on key business topics. Our CEO, Robert Berman, will be on the call with me today and will provide additional color on our business after I go over our relevant metrics. In the second quarter of 2022, we continue to accelerate growth in recurring revenue under our new sales model. As explained previously, since the third quarter of 2021, we've been shifting our emphasis from point-in-time revenue to recurring revenue. While we continue to engage in point-in-time hardware sales in appropriate circumstances, our new model emphasizes providing software and data services on a subscription basis. This has had a near-term impact on our overall revenues. But with the strong growth we are seeing in recurring revenues, we're confident about the positive impact it will have on our overall strength and stability for the long term. With that in mind, let me get into some of the details in the financial results for the second quarter ended June 30, 2022. Highlights include the completed acquisition of Southern Traffic Solutions, STS. Revenue for the 3 months ended June 30, 2022, was consistent at $4.3 million. Revenue for the 6 months ended June 30, 2022, was $7.9 million compared to $8.5 million in the same period last year, a decrease of 6%. Recurring revenue for the 3 and 6 months ended June 30, 2022, increased to $1.2 million and $2 million, respectively, compared to the same period last year. This increase represents growth in recurring revenue of 133% and 115% for the 3- and 6-month period ended June 30, 2022, compared to the same period last year. Performance obligations increased to $31.9 million as of June 30, 2022, compared to $22.6 million as of December 31, 2021. As you can see, in less than a year, since the change in our sales model, we have reached a point where the growth in our recurring revenue has essentially compensated for the decline in point-in-time revenues. The percentage of recurring revenue reflected in total revenue was 48% for the 3 and 6 months ended June 30, 2022, compared to 21% for the 3 and 6 months as of June 30, 2021. As I mentioned, we expect to continue point-in-time hardware and software sales in appropriate circumstances. And that may result in strong increases in product revenue in future quarters like the increase we saw in the first quarter of 2021. But with our current emphasis on building SaaS-based revenue through subscription sales, we expect to generate a stable base for long-term growth, well beyond what we could have achieved under the previous model. Total operating expenses for the 6 months ended June 30, 2022, were $28.2 million compared to $10 million during the same period in 2021. Increases in operating expenses stem from significant increases in payroll and payroll-related expenses. The additional headcount due to the Waycare acquisition played a part in this increase. And we added new hires to our engineering, sales and marketing teams as we integrated their technology into our growing suite of product and service offerings. With the acquisition of STS, we're continuing to enhance and improve our line of products with important investments that will enhance its competitive edge. However, in view of the near-term opportunities that this acquisition has provided us with, we expect to narrow and consolidate sales and marketing efforts and defer some development efforts, as Robert will discuss later. Our adjusted gross margin for the 3 and 6 months ended June 30, 2022 and 2021 decreased to 38.5% from 67.7% and 41.5% from 61.1%, respectively. The decline in margin for the quarter ended June 30, 2022, is primarily attributable to increased investments in winning and implementing new projects as we focus on larger implementations in order to quickly expand our technological presence in key areas. We expect to see an improvement in our adjusted gross margins as our land-and-expand strategy continues to evolve in the future. Adjusted EBITDA for the 3 and 6 months ended June 30, 2022 and 2021 decreased to a loss of $11.2 million from a loss of $2.9 million and a loss of $20.5 million from a loss of $6 million, respectively. This increase in loss was due to the investment to position Rekor for future growth that I've just discussed. Since we changed the revenue model, we have released enhanced key performance indicators to help provide visibility and more concise view into our success and progress. We hope that over time, these KPIs will provide our shareholders with a better insight into our business. As noted in our financial highlights, our recurring revenue for the 3 and 6 months ended June 30, 2022, increased by 133% and 115% compared to the same period 2021. In the first half of 2022, we won $5 million of new contracts. This is a decrease of 14% compared to $5.8 million of new contract value won during the first half of 2021, related primarily to the decrease in point-in-time hardware sales discussed earlier. The decrease in total contract value was also partially related to our willingness based on our experience with renewals to accommodate customers as budget constraints require shorter-term subscriptions than we had previously offered. As of June 30, 2022, remaining contract performance obligations were $31.9 million. We expect to recognize approximately 57% of this amount over the succeeding 12 months. This represents an increase of $9.4 million or 41% compared to $22.6 million of performance obligation as of December 31, 2021. This increase in performance obligation was primarily due to our STS acquisition. As we continue to focus on building relationships and expanding our presence, we acquire customers through pilot programs, which are typically short in nature. As we continue to convert and expand our pilot programs to larger-scale contracts, we will expect to see these KPIs improve. Moving to our financial condition and liquidity. Our cash balance on June 30, 2022, was $14 million, down from $25.8 million as of December 31, 2021. Working capital on June 30, 2022, was $7.3 million, down from $17 million as of December 31, 2021. The decrease in working capital was primarily due to a decrease in cash and cash equivalents. This decrease was primarily due to the increase in our loss from operations as we position the company for future growth and also reflects cash used in the acquisition of STS. The decrease in cash was partially offset by a net cash inflow of $20.4 million as part of our 2022 at-the-market sales agreement. In summary, we are passionate about our growth prospects and continue to experience strong momentum in our market. As Robert 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 shareholder value and making decisions that will benefit our long-term shareholders. With that, I will now turn the call over to Robert.

Thank you, Eyal. Good afternoon, everyone, and welcome. So let's talk about our revenue and expenses. About this time last year, we made the decision to concentrate on developing a stream of recurring revenue, and said there would be trade-offs. When you go from depending primarily on point-in-time revenue model to recurring revenue model, you can expect to have a negative impact on near-term revenue growth. The question is, how long does it take for growth in recurring revenue to make up for reductions in the point-of-time revenue? With the success of our efforts over the past few quarters, I think we are at the point where we've achieved that transition. As Eyal just described, in less than a year, we were able to transition from where recurring revenue was 21% of our total quarterly revenues to one where recurring revenues generated 48% of our total quarterly revenue. While total revenue for the second quarter of 2022 was essentially the same as the corresponding period of 2021. But that's not the only thing we have to be focused on. At the end of the day, we want to emerge as a highly profitable enterprise. We haven't invested in major technology advances just to provide us with a slight edge in a narrow, crowded market segment. We've set our sights high and want to exploit high-value propositions that were never feasible before. So at the same time, we've been concentrating on building a more stable revenue base. We've been concentrating on developing a package of solutions that can both make the roadways of the future measurably safer and more efficient and provide us with a profitable return on investment. With the acquisition of Waycare and now STS, we've been able to dramatically increase our geographic coverage and enhance our customer base. We're now working jointly with many of the world's largest roadway services and vehicle manufacturing companies to deliver cutting-edge products and services around the world. And in just the last 3 months, we won assignments from 3 state DOTs to provide different types of innovative new services. As the world seeks to reimagine and rebuild the infrastructure of the past, Rekor is already an active partner helping to define its future. Rekor is well on the road to becoming the trusted operating system for digital infrastructure on our roadways. Our Rekor One brand captures multiple sources of data, examines patterns and provides insights, decisions and actions to support multiple missions using AI to continuously reinforce the learning curve. We pull in the data from our devices and third-party data sources and from existing infrastructure. Our brain then uses its AI and puts our proprietary IP and machine learning to work to intelligently process this big pool of data and visualize not only what is happening but what might happen. This results in actionable insights for our 3 key market segments: transportation management, urban mobility and public safety. In and of itself, that doesn't make us profitable right now. It's given us the tools we need to become profitable over the next year. As you know, we play a significant role in the improvements envisioned by the Infrastructure Investment and Jobs Act, which are just beginning to be funded as we speak. The main focus of that initial funding will be the data collection and analysis. This will not be a "build and then it will come" reimagining of our nation's infrastructure but a data-driven reimagining of infrastructure looking for advances in efficiency and safety. We've been developing the proprietary technologies and capabilities needed to address this massive undertaking in a way that's both constructive and profitable. We've been doing this by developing a modular platform that can be ingesting enormous amounts of data and deliver mission-critical digital infrastructure solutions and insights to government and commercial users. And we've been positioning the company to deploy it profitably over the remainder of 2022. In Q2, we saw a lot of what I just mentioned. Rekor was selected for the launch of a multiyear program with the Missouri Department of Transportation, MoDOT, to not only make roads less congested and safer but to help rid the state of severe traffic crashes, all key objectives of Missouri's Show-Me Zero Strategic Highway Safety Plan for '21 to 2025. Rekor's Transportation Management Platform was certified by AWS as Well-Architected to improve traffic and incident management, increase public safety and security and optimize urban mobility. The certification objectively validates Rekor's solutions as achieving highest distinctions in security, reliability, performance efficiency and scale for customers to adopt and deploy with confidence and also opens up new growth channels through AWS's extensive global partner network and marketplace. Rekor was also selected by the Israel National Infrastructure Company for AI-driven intelligent infrastructure on Israel's highways. As the core system, we're integrating and processing data into a single source of truth. Rekor's traffic management solution will bring digital and physical infrastructure together to extract the most data possible from the roadway and the environment. The project will use data from multiple Rekor Edge-based optical roadway sensors and consolidate this real-time traffic analytics data with 7 other diverse real-time data sets, including dash cam footage, public transit analytics and video footage of roadway incidents enhancing traffic enforcement and incident response capabilities. We also completed the acquisition of STS near the end of June. The impact of this acquisition isn't really a factor in our Q2 earnings, but it is expected to be an important contributor to our profitability as we move forward. Historically, STS has annually generated $15 million of revenue, of which 50% is recurring, and $3 million of EBITDA. And we have every reason to expect to build on this. This acquisition combined 2 complementary companies with the primary objective of accelerating Rekor's path to profitability going forward. Putting 30 years of traffic engineering and data collection expertise from STS together with Rekor's next-generation artificial intelligence, machine learning technologies, has positioned us to become the leader provider of data services for the agencies in the U.S. that are working right now to plan intelligent infrastructure of the future. In just the last few weeks since the acquisition, STS has already significantly expanded its relationship with the Florida and Ohio DOTs to incorporate the roadway AI that Rekor brings to the table into their operations. So with Waycare and STS acquisitions, we've secured our position as a cutting-edge technology provider as well as a trusted source of data services for departments of transportation throughout the United States. Our next task, particularly under current market conditions, is to ensure that we use that position to become profitable as quickly and efficiently as possible. So before we open it up for questions, I'd like to address the current state of the capital markets and its impact on our plans for growth. There's no doubt that the uncertainty in these markets has resulted in a downturn that has impacted just about every public company, especially technology companies. Like many other companies in the tech space, we will have to do more with less. We're in an economic environment that demands more intensity, and we've already been taking steps to maintain our growth using fewer resources. Since the acquisition of STS, we've been working to consolidate operations, concentrate on near-term profitability and steadily reduce headcount growth. Many of our teams are going to shrink so that we can shift energy to other areas inside the company. And we've given our leaders the ability to decide within their teams where to restructure, where to double down and where to backfill attrition. In this process, we'll be prioritizing the positions we're in to take advantage of the funding that's beginning to flow from the Infrastructure Investment and Jobs Act. We expect to see both cost efficiencies and continued revenue growth reflected in the future quarters as we continue to unlock the value from the unique opportunities for growth the last year has provided us with. So despite the current challenges, I'm very confident for the long term. Now I'd like to turn the call back to our operator who will moderate the Q&A session.

Our first question comes from Mike Latimore with Northland Capital Markets.

Great. So on the Florida and Ohio expansions, can you just elaborate on those a little more and maybe mention how much incremental business came from those expansions?

Sure. Eyal?

So Mike, this contract does not have a dollar attached to it. We just signed this contract. And it's not yet public information that we can disclose. What we can say, as we announced before, extend these contracts, we increased our relationship with these significant DOTs. And once we have more numbers and more information to share, we definitely will share it with the market.

Okay. And then the focus on near-term profitability, when should we think about you're hitting, say, EBITDA breakeven? Is that a first quarter of '23 kind of timeframe? Or what are you thinking there?

Mike, I think...

Sorry. Go ahead, Robert.

No. Go ahead, Eyal.

I said as Robert mentioned in the earnings release, we are working to make our organization more efficient. We cannot provide yet the exact time. But we believe that sometime in the next 12 months, we'll be breakeven.

Could you clarify your guidance that STS is generating approximately $15 million in revenue? As we project over the next year, should we include that figure in our models, or should we expect a slight decline due to integration, or possibly an increase from some of these expansions?

Mike, that's a good question. It's fair to say that STS was a pioneer in data services. All states are required to collect traffic data annually for the federal government. STS started about five years ago by installing systems with inductive loops and other technologies in the roadways for states, selling the collected data back to them instead of just being a contractor who installs and maintains the system. They have a significant presence in the Southeastern United States and have built strong relationships with customers over decades. By integrating Rekor's technology and moving away from outdated data collection methods, we anticipate growth within the STS footprint. This is why we acquired STS; there is a trusted relationship with the department of transportation. You cannot just enter a DOT and begin working with them immediately; they need to trust your integrity and have a history with you. The growth will stem from combining Rekor and STS by introducing our technology into STS's operations. We expect overall growth for the company, which we are currently witnessing with our expansion in Florida and Ohio.

Our next question comes from Zach Cummins with B. Riley.

Eyal, just talking about gross margins during the quarter, I know we took down to 38.5%. I think a lot of that is upfront costs associated with some of these project implementations. But can you talk about just maybe if there's any other impacts to gross margin in the quarter? And as you start to get more of these pilots converting to revenue, what's going to be more of a, I would say, normalized gross margin range, especially with STS in the fold in the future?

Zach, good question. As you mentioned, yes, the gross margin decline is really an upfront cost that we have. And as we announced in the past, we believe that STS together with the current businesses we have will contribute to our gross margin and increase for the midterm to about 60% to 70% gross margin. That's what we anticipate. That's what we always say. And for the long run, once we have more data services revenues coming in, we do anticipate to be in the 70% to 80% gross margin.

Understood. And Robert, with you prioritizing profitability here in the near term, I mean I know it's still kind of early days in terms of your strategy. But can you give us any sort of insight into maybe which specific areas that you're considering kind of maybe reducing some spend or even cutting back some headcount? And I know that you're going to be having a more focused approach when it comes to kind of near-term revenue opportunities. So can you speak to, I guess, just which opportunities would be the low-hanging fruit or the fastest time to revenue for you in the sales force?

That's a really good question, and it's an important one. We've spent three years developing technology because we believe the world is moving towards integrating infrastructure into the digital age. We're witnessing this transformation with the $1 trillion infrastructure investment happening in the U.S., aimed at modernizing infrastructure. Over the past three years, we've engaged in various projects, some of which were transactional and one-time efforts, all related to different aspects of the platform we were building. We had to create certain hardware components ourselves due to supply issues, and we've worked on software algorithms and firmware as well. At this point, we're confident that we can shift our focus away from those other businesses and concentrate our efforts on what we originally intended, which is becoming a data services company and developing an operating system for roadways. Starting in the second quarter of this year, we plan to continue this approach throughout 2022 and into 2023. This means we expect an increasing portion of our revenue each quarter to come from data services, including data aggregation, repurposing, and sales to both commercial and governmental clients. This strategy offers higher margins and long-term contracts of greater value, which will lead us to profitability. To support the products we've created, we need a strong engineering department. Many of our budget cuts will focus on the operational side of the business, where we were previously conducting one-off transactions and installations that were not core to our mission. We engaged in those activities mainly to test our products and platform in real-world conditions. Now, we can streamline our operations and concentrate on being a data services company that aggregates and sells data. In just three years, we've made significant progress, and I'm proud of what we've accomplished. By acquiring Waycare, we integrated external data into our platform. STS will help us penetrate the market. Moving forward, our focus will be on data services rather than transactional projects. It's really that straightforward, and we are ready to make this shift now.

Understood. That's helpful, Robert. And final question for me is in terms of the contract that you announced with the Florida DOT a few weeks ago, it seems like a pretty significant opportunity. But can you talk about if this opens the door to other agencies within Florida or if this sort of contract is something that could be replicated in different states? Just speak a little more to kind of the opportunity beyond even just that Florida contract.

It's a contract that relates to, again, data, okay, and managing and monitoring what happens on bicycles and pedestrian pathways, and there's a safety component to it. And absolutely, it can be replicated not only in Florida but in other states and throughout Florida. And with the way the contract is structured, we have the liberty of designing the system to meet their needs and introducing components of safety into it, using tools that they had not had the ability to do before. And our understanding of it, through STS, the way the DOT works is it's a contract that's multiyear, but the funding is there for it. If they can see the utility of the products, then they'll do it all immediately and then just re-up it and move it to another piece of the state. So that's a good question, Zach. And that's the whole point of all of this, all of these things that we're doing. I would encourage everybody on this call to look at not the value of the contracts that Rekor has been announcing, but look at the nature of the contracts Rekor is announcing. They're quite unique. And I don't think you're going to find any other company saying some of what we're doing. So that's the nature of that contract, Zach. It relates to bikes and pedestrians and the data around that and also a safety component. And then using the new technology to change the way it's been done in the past and bring a safety component to it. So hopefully, that's helpful.

Our next question comes from KC Ambrecht with Shay Capital.

Just following up on some of these other revenue opportunities. Could you just kind of briefly update us on where we are with the border patrol contract? Any update on Mastercard just kind of rolling out? Is there any visibility on that? And then if there's any other reseller opportunities that the company might be able to kind of tap into to supplement some of the revenues?

Yes, thanks, KC. First, regarding Custom Border Patrol, we have no control over it. The information we have is the same as what is publicly available: they've selected four primary contractors, and Rekor is partnered with all of them. An announcement is expected sometime later this fall. We have publicly stated that we are partnered with the incumbent, who continues to use our technology, extending it into early next year, presuming they are also waiting for a decision on whether they will retain the contract or someone else will take over. That's what we know. As for Mastercard, we are still in the pilot phase with them. I can't provide details on their process, but everything else we have worked on is positive. Those transactional efforts are strong, generating revenue and margin. They are valuable opportunities, and we will focus on them if they arise. However, we do want to remain focused on our current initiatives with states and data services. Eyal, do you have anything to add?

No, no. Sorry. Robert said it all.

I have one last question regarding the STS deal. It seems like a promising opportunity, and we are seeing other elements integrating with it. As we consider profitability over the next 12 months, specifically by the second quarter of next year, how does that appear? Should we simply combine the revenues of both companies and expect them to grow, or should we look at the expense structure and possibly reduce costs? Can you provide some clarity on this from a high-level perspective?

I think that you can look at STS and you can assume there's going to be growth and probably at a higher margin, okay, because we're introducing new technology into the way they do what they do. And I think with respect to our expenses, you're going to see our SG&A stabilize across some of the verticals inside the company and come down in others. So it's going to be a combination of those 2 things. And look, we've said we think we can get there within 12 months. So we're talking about this time next year or sooner. And we believe that. And we think, again, it's going to come from a combination of revenue and stabilizing expenses or having slight reductions.

Okay. And one last question. Just on the KPIs you guys have kind of talked about. Do you know when we're going to have a time when we get a little bit more visibility on when these contracts convert from pilot to contract and how the pricing is going and...

Yes, you will begin to see that. We've owned STS for less than two weeks of the quarter, and we already secured a contract there. The nature of this business, including STS and the broader infrastructure sector, typically involves contracts of three, five, or even seven years, which are significantly larger in dollar value. Hopefully, that’s what you will start to see from us, reflecting in our performance obligations, especially with just a few weeks of STS as part of Rekor, as well as in our annual recurring revenue. We expect both of those key performance indicators to continue to grow. As margins recover, you'll see how the company advances, I believe.

Our next question comes from a private investor.

Thanks for taking my call. I've been a shareholder for a while. But can you touch on the pilots that were mentioned about 10 months ago, the Philadelphia Navy Yard; Winchester, Virginia; and I believe the other one was Chattanooga, Tennessee? And also, roughly how many pilots are ongoing at this time?

These pilots are still ongoing, and there are others, but that's a good question. We've shifted our business approach regarding pilots. In the earlier stages when technology is new and a company is young, we did everything possible to deploy our technology and collaborate with customers, including pilots with very low or no revenue. We've moved beyond that now, so we are no longer conducting those types of pilots. What you'll see is the company moving straight to contracts now, so I wouldn't focus on pilots. Many of the pilots we executed helped prove the technology and led us to certifications like the one with AWS that we discussed, along with other factors that are driving our progress. Our current strategy is to transition away from pilots to demonstrating our capability and asking if customers want to use our products. Most of what you're asking about is still ongoing and expanding. For instance, in Philadelphia, they continue to add components to the pilot there, including a commercial component. We view these pilots as experimental phases, and they typically run for six months or longer, so they are still in progress.

And my final question is, are you still open to any future acquisitions if the opportunity arises?

That's a really good question. And I'll tell you that from where I sit here today, and this is just my view, I don't see it. I think we have the pieces we need now to scale this business. And I think our focus is going to be on scale and growth and profitability. And if an acquisition came along, it would have to be directly related to what we're doing every day and be accretive immediately and add lots of business, but not for the purposes of why we acquired Waycare when we were integrating it and not why we acquired STS. We have the pieces that we need now to do what we need to do.

Okay, that's all I have. Much thanks, and I appreciate you keeping the investors up to speed as often as you do. Thanks again.

There are no further questions in queue at this time. I would like to turn the floor back over to Mr. Robert Berman, Chief Executive Officer.

Thank you, everyone. I appreciate your time and patience. As we close, I want to emphasize that we have been working on this for three years, dedicating significant time, effort, and resources, all thanks to the support of our shareholders and stakeholders. We have developed some impressive technology, and now is the right time to deploy and monetize it. We are excited about our position in light of the industry changes in how both individuals and governments view infrastructure, as well as how automotive companies are considering the movement of their vehicles on these roadways. We believe we are well positioned and hope to demonstrate this through the results of our operations in the coming year. Thank you all.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time, and thank you for your participation.