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. 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 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 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 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 3 and 9 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 Southern 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 model emphasizes 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 Services, or STS. Results of operations are fully consolidated for the third quarter. Revenue for the 3 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 9 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 3 and 9 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 the 3 and 9 month period ended September 30, 2022, compared to the same period last year. Performance obligations increased to $28.6 million as of September 30, 2022, compared to $22.6 million as of December 31, 2021.
As a result of an interim assessment on the current market conditions, we recognized a goodwill impairment of $34.8 million. As you can see, we've continued to see significant improvements in revenues and recurring revenues in the third quarter compared to the second quarter of 2022. The percentage of recurring revenue reflected in total revenue was 65% and 56% for the 3 and 9 months ended September 30, 2022 respectively, compared to 47% and 28% for the 3 and 9 months ended September 30, 2021 respectively. We also began to see reduction in our SG&A as a result of streamlining activities we started at the end of the third quarter of 2022.
Total operating expenses for the 9 months ended September 30, 2022 were $47.5 million, not including our goodwill impairment, compared to $26 million during the same period in 2021. Increase in operating expenses stemmed from significant increases in payroll and payroll-related expenses. Earlier in the year, we added new hires to our engineering, sales, and marketing teams as we integrated the technology into our growing suite of products and service offerings. However, in the current period, we have been evaluating our results carefully and focused on managing our operating expenses.
This resulted in a reduction in operating expenses from the second quarter of 2022 as compared to the third quarter of 2022, even with the inclusion of a full quarter of STS expenses. 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 performed an interim impairment assessment as of September 30, 2022, and determined that we had an impairment related to goodwill in the amount of $34,835,000. Our adjusted gross margin for the 3 months ended September 30, 2022 and 2021 stayed consistent at approximately 45% and decreased for the 9 months ended September 30, 2022 to 43% from 58% the same period last year.
The decline in margin for the 9 months ended September 30, 2022 is primarily attributable to increased investment in infrastructure. With the expansion of our coverage network and installed base, we expect to see improvements in our adjusted gross margin in the future. This is highlighted in the improvement of our third quarter adjusted gross margin as compared to the second quarter of 2022, as we pursued improvement in our operations and were able to close larger transactions with higher margins. Adjusted EBITDA for the 3 and 9 months ended September 30, 2022 and 2021 increased to a loss of $9.2 million from a loss of $6.7 million, and a loss of $29.6 million from a loss of $12.8 million, respectively.
The increase in loss was due to the investments to position Rekor for future growth that I've discussed previously. However, as a result of the streamlining activities, we see a decrease in loss from the second quarter of 2022. Since we changed the revenue model, we have released enhanced key performance indicators to help provide visibility and more detailed 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 9 months ended September 30, 2022 increased 292% and 174% compared to the same period, 2021.
During the 9 months ended September 30, 2022, we won $8.3 million of new contracts compared to $7.3 million of new contract value won during the same period in 2021. This is an increase of 14% related primarily to the STS acquisition. As of September 30, 2022, remaining contract performance obligations were $28.6 million. We expect to recognize approximately 68% of this amount over the succeeding 12 months. This represents an increase of $6 million or 27% compared to the $22.6 million of performance obligations as of December 31st, 2021. This increase in performance obligations was primarily due to our STS acquisition. As we build relationships and extend our presence, we acquire many customers through pilot programs, which are typically short in nature.
As these pilot programs convert and expand to larger scale contracts, we will expect to see these KPIs improve. Moving to our financial condition and liquidity. Our cash balance on September 30, 2022 was $7.9 million, a decrease from $25.8 million as of December 31, 2021. We had a working capital deficit as of September 30, 2022 of $1.1 million, down from working capital of $17 million as of December 31, 2021. The decrease in working capital was primarily due to a decrease in cash and cash equivalents. This decline was primarily due to the increase in our loss from operations as we position the company for future growth and reflects cash use in the acquisition of 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. In summary, we are passionate about our growth prospects and continue to experience a strong momentum in our markets. As David will discuss with you next, we are concentrating our investments now on 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 David. David?
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. 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 3 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, inequity, and public safety. Over the past year, as the 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 U.S. each year.
The way that roadway data is currently being collected from our aging roadway network suffers from the same underinvestment that the basic roadwork network suffers from. Current collection methods use inductive loops that are expensive and dangerous to install, and side-firing radars and one-off samplings that capture only a fraction of the data required to fully evaluate conditions and support decisions and investments for agencies that are responsible to manage roadways. As federal and state agencies gain access to broader and more accurate data that can be collected from the roadway, they also gain access to the tools needed to drive tangible and meaningful results against their responsibilities to bring smarter, safer, greener roadways to their citizens.
This can only be achieved when that data collected is aggregated and combined with connected vehicle data, crowdsourced and other third-party data sources analyzed in real time and integrated into an interactive and active intelligence system that delivers actionable insights on a continuous basis. Rekor's technology can improve the quality, cost, and efficiency of these mandated traffic studies and data collection efforts as states transition to a digitized approach and digitized transportation network, which is being accelerated by the $1.2 trillion federal investment in infrastructure. In short, we are in the right place at the right time. We have had a busy and exciting past quarter. I would like to highlight several examples of where we have made meaningful progress against our goals and key wins that are emblematic of what we can expect moving forward.
On the technology front, we launched the Edge Flex system, a first of its kind, networked, extensible, non-roadway intrusive, AI-driven traffic data collection system. The system uses state-of-the-art computer vision and machine learning to deliver the utmost in safety, accuracy, performance, and simplicity for federally mandated vehicle classifications of data and more. As you will recall from my previous remarks, the U.S. completes more than 1 million of these traffic studies annually, and this represents a tremendous growth opportunity ahead for Rekor. Now, since the launch of our Edge Flex system, we have seen strong engagement from more than 40% of the U.S. states we've interacted with. They are keen to deploy this innovative technology, and we are doing our initial deployments this quarter with a strong pipeline behind us.
We have begun to upgrade the data collection system in South Carolina, the expansion of roadway data collection to include bicycles and pedestrians in Florida, and are implementing implementing state and regional pilot projects to provide predictive analytics and integrated cross-modal management programs in Alabama and Ohio. On the transportation and mobility ecosystem front, I'm pleased to announce that we were also chosen for the Amazon Web Services, or AWS, Smart City Competency for smart urban transportation. This is a unique distinction and recognizes Rekor once again for its unique technical proficiency and proven customer success supporting city governments and city developers who are witnessing an unprecedented rate of urban growth. In addition, we also announced the formation and formal launch of the Rekor Partner Network, an industry-first connected private and public mobility data hub for our customers and the ecosystem.
At the launch, we also announced the addition of Blyncsy, PredictHQ, Tomorrow.io, and Waze to already dozens of others in our partner network. The Rekor Partner Network and our ability to provide a single pane of glass for roadway intelligence took center stage recently to how our customers in North Carolina and Florida were able to holistically manage vehicle and roadway routing and provide citizen safety in what is an unprecedented hurricane season in the Southeast. On the customer front, we have also made significant progress with key customers in key states in the past quarter. This includes Alabama Department of Transportation, where we were selected for the U.S. Department of Transportation Federal Highway Administration $5 million grant for proactive route operations to avert congestion and traffic.
We also announced a win with the Central Ohio Transit Authority, otherwise known as COTA, with Rekor being selected for its $2.5 million program to improve traffic and transit services for Ohio. We also announced a key win with the state of Texas and its Department of Transportation that chose to standardize on the Rekor roadway intelligence platform, and we are now deploying there. Another major win in the quarter was with Oregon Department of Transportation on a 10-year contract where we were down selected from a pool of 14 major roadway infrastructure and architecture firms to be the technology platform for Oregon's statewide connected vehicle and data ecosystem and technology. As you can see, it's been a busy quarter for Rekor across the technology, ecosystem, and customer fronts.
Momentum is building quickly, and we are increasingly excited about the results and what they tell us about Rekor's future potential with our computer vision systems and Rekor One platform that we deliver customer value efficiently, rapidly, and cost-effectively. To date, we've invested more than $100 million in our proprietary and state-of-the-art technologies, including hardware, software, machine learning, and AI or artificial intelligence. A year ago, this past September, we acquired Waycare Technologies, a leader in sourcing and managing third-party roadway data for more than 60 partners. More recently, we acquired STS, a 3 decade leader in roadway data collection, who pioneered the pay-for-data model with several key state departments of transportation. We've incorporated all of these unique and differentiated capabilities into Rekor One, our ever-expanding roadway intelligence engine and operating system that turns data into roadway knowledge.
We aggregate, we transform data into knowledge with our AI and other IP, and we deliver actionable insights and analytics as a service. Most importantly, we are trusted by our customers as a data services company, and we are poised for rapid near-term and long-term growth. I look forward to providing you continued updates on our progress as the U.S. states look to digitize the transportation network accelerated by the $1.2 trillion federal infrastructure bill and spend. In short, Rekor is well positioned for the growth ahead. Thank you all once again for your time and attention. We really appreciate it, and I look forward to speaking with you all again on our next quarterly conference call. I will now turn the call over to Robert Berman for final remarks and the question and answer session. Robert?
David, thank you. 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. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing any star keys. One moment please, while we poll for any questions. Our first question comes from the line of Zach Cummins with B. Riley. Please proceed with your question.
Yep. 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. I mean, can you give us a sense of the timeline of when you're still expecting for this business to transition towards that breakeven adjusted EBITDA? It seems like revenue's building right now, and it seems like you undertook some cost reduction actions near the end of Q3. Just give us a sense of any sort of update you can give there.
Yeah. Zach, Robert, thanks. Thanks for the question. I'll take it. Look, we believe, you know, acquiring the resources that we need, and we think we will. That Rekor will scale to substantial revenue, probably high 8 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. That, that's what we're looking towards.
Understood. 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 STS 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.
You know, Zach, Charlie, are you able to 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. 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 kinda leaning into new technology. I can tell everyone here that we probably have discussed our new technology, our vehicle classification technology, with about 13 or 14 different state DOTs, and not one has said this is not a welcomed solution for their roadways. Really what we're able to do is to do what 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 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. 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 DOTs.
You know, Zach, what we're starting to see is 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, you know, into the digital age, more somewhat of an operating system. I think, you know, the win out in Oregon is you know, emblematic of that, right? David, do you wanna talk a little bit about this?
Yeah, I'm happy to do that, if you can hear me okay. When we think about the path forward, certainly we're seeing an uptake from our states. How this works, Zach, is you've got federal funding available, and the states need to apply against projects they submit, and that those funds are released. Where things are in the infrastructure bill today is that the projects are being submitted, and the funds will be released when they're accepted. To me, this is right on track with what we're seeing. We've seen a pretty significant uptick in terms of pipeline and availability on key projects from states that we've been working with.
It's not just on the classification front, it's on our transportation management and our traffic management capabilities as well across the board. I would say that 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. That's kinda where we are today. Oregon is a-
Yeah.
This is an example of a state where this has been a journey with them to identify, you know, the next generation of road usage charges, and the way to charge for road usage. You can imagine with the, you know, the continued evolution of EVs or electric vehicles, that they're not filling up at the gas pump as much anymore. States are rightfully trying to determine what is that next generation solution for road usage, if it's not gonna be gas. 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. That's really a sweet spot for us in our ecosystem.
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.
Yeah. You know, Zach, it's Robert, I would just add to that. You know, what David said is so true because if you think about the last 60, 70 years in the United States, you know, 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 gonna 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.
Doing it in a non-intrusive way where you're not digging up the roadways, you're not putting in inductive loops, you know, you're doing it in a safe, friendly way. You wanna have the ability to have that same system tie into, you know, the back end of this for other purposes, you know, for the redistribution of that money. It really comes down to it's all about the money. If you think about it, there's been $hundreds of billions 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?
It takes a company like Rekor that has both the connected vehicle side and other third-party data side tied to the ground truth side, which is what we got from STS and, you know, and bringing the new technology into that. You know, part of your question earlier was, does STS help with respect to the relationships? Charlie's had an easy time opening the door because they want the technology. It's like, "Yeah, bring it here. You don't have to dig up our roads. How do we do this?" You just don't walk in with technology. The fact that STS for 3 decades has been counting vehicles, right?
For DOTs primarily throughout the southeast, that brings a level of trust that, you know, that these DOTs need to have because they need to have the data delivered a certain way, and they wanna know that the company that's delivering to them understands that. That's why we made that acquisition. I hope that helps, right? It's the whole bundle, right? More importantly, the money to collect the bin data, right, this FHWA 13-bin, that's not part of the transportation bill. That money's there every year and it's spent. It's being done now. It's been done for the last 60, 70 years, right?
It's, you know, it's part of, you know, the old way of doing it, converting to the new way, and then figuring out a way to recalibrate it, which is what that win-win was in Oregon. You know, David said, you know, something about that, but I wanna harp on that. I mean, you know, that started 3 years ago, okay? Oregon put an RFI out 3 years ago looking for an ecosystem that would incorporate an operating system for the roadways that would allow for an EV usage charge, right? It took 3 years. There were 14 teams of, I'm not gonna mention competitors, but a lot of them are multinationals and companies that people on this call would know. We were down selected from those 14 to 2. You know, the award letter was issued last week.
I think that speaks volumes of our technology, right? That, you know, we were able to you know beat all those other companies out. That's one of 50 states that's gonna have to do the same thing, right? Oregon got ahead of it. Hopefully that's helpful.
Absolutely. Extremely helpful. Well, I don't wanna take 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.
As a reminder, if you'd like to ask a question, please press star one. Our next question comes from the line of David Hargreaves, a Private Investor. Please proceed with your question.
Hi. 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're mostly government entities. If they are government type entities, with a high probability of collection, is it something that might be securitizable?
Eyal?
Yes. You're right. Most of our AR are government entities. As Robert Berman mentioned before, we're looking at all options right now. Most of them are government entities, not more than 30-60 days outstanding. Yes.
I think, you know, just to add to that, I think when you look at the performance obligation, getting more to your question, you know, Rekor is starting to build a substantial contract value of governmental contracts that run 5, 7, 10 years, right? We're going to get to a point where we will be able to access traditional commercial debt from a commercial bank, right? Equity loves debt, right? I think, you know, that's something that we're hoping that we're gonna see the intersection of, you know, our P&L with next year so that we can pursue financing the rollout of our capital expenditures with bank debt, right? We're gonna get there.
I just, I'm hoping that we don't see a straight line. I mean, we've got 3 quarters with, you know, 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? Or less than-
I think that.
Eyal, go ahead. Sorry. Sorry, David. It's a good point, but I think if you look at the trend from Q2 when we said that we're going to reduce expenses, you can see a reduction in our quarterly EBITDA losses. As we mentioned previously, our expectation is through the third quarter of 2023, we'll start to see a break-even EBITDA and some profitability.
Okay. Well, thank you. Congrats 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. Look, this is tough, right? The markets have beaten us up as well as a lot of other companies. Look, this is not easy to do. As David mentioned, you know, this has been years in the making. We've invested, you know, over $100 million in this technology. We've made 2 very important and synergistic acquisitions. It's coming together, and we think 2023 is gonna be a year that we're gonna see the results of that. We're gonna 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. 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.