Good afternoon, ladies and gentlemen, and welcome to today's Rekor Systems Incorporated conference call. Robert, I will be your coordinator for today. At this time, all participants are on a listen-only. A question and answer session will follow the formal presentation. If anyone should require operator assistance, please press star zero on your telephone keypad. 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 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 risk disclosures in our November 12, 2026, earnings release available in the investor relations section of our website, rekor.ai. 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 Rekor's CFO, Joseph Nalepa. Thank you. You may begin.
Good afternoon, and thank you for joining Rekor's third quarter 2026 earnings call. Third quarter revenue was $10.9 million compared with $14.2 million a year ago. The decline from the third quarter of 2025 was primarily attributable to high-margin perpetual ALPR software licenses in our public safety business, that did not occur this year. In our view, the ALPR market is in a period of transition as customers evaluate evolving privacy expectations and await clear industry standards. We believe this uncertainty has contributed to slower purchasing decisions. Although we are not assuming those sales will return on a particular timetable, we are confident that we are uniquely positioned to address the industry's concerns, as Robert will address later. Importantly, recurring revenue grew 16% to $7.5 million in the quarter and represented 69% of total revenue, up from 46% a year ago.
For the first nine months, total revenue was $33.8 million compared with $35.8 million, while recurring revenue increased 19% to $20.8 million. Adjusted gross profit was $5.3 million in the quarter compared with $9 million a year ago, and adjusted gross margin was 48.2% compared with 63.4%. The principal factor was the absence of unusually high-margin perpetual ALPR licenses recorded in the prior year quarter, rather than a decline across the recurring revenue base. For the first nine months, adjusted gross margin was 52.4% compared with 54.7% last year. We are addressing controllable costs by moving portable traffic data processing onto our own platform, deploying existing paid inventory, and applying greater discipline to pricing and contract execution. Turning to operating expenses, 2026 has been a year of intense but necessary rightsizing.
Judiciously reducing headcount, simplifying our operations, and exiting costly facilities while still supporting customers and pursuing growth requires sustained focus across the company. The operational rightsizing is now substantially complete, and we are preparing targeted sales and marketing initiatives for the first quarter of 2027. GAAP operating expenses for the third quarter declined 41% to $7.6 million, including the $1.75 million benefit from our lease exits, which I will discuss in a moment. General and administrative, sales and marketing, and research and development expenses declined by a combined $3.2 million for the quarter and $7.5 million for the first nine months. These reductions are a central part of the more efficient operating foundation we are building for 2027. The quarter also included two one-time items tied to lease exits.
As part of our operational realignment, we entered a termination agreement at our Columbia location effective August 31 and exited our Tel Aviv lease in September. Those actions produced $3.9 million of a gain related to the lease remeasurement, which was partially offset by a $2.2 million write-off of leasehold improvements and other property and equipment at the Columbia location, for a net benefit of about $1.75 million. On the cash side, we made one-time termination payments of approximately $2.6 million during the quarter, and in exchange, we eliminated roughly $9.7 million of lease liabilities and the remaining rent obligations of those locations. As a result, total operating lease liabilities on our balance sheet declined to $0.8 million at September 30, down from $13.3 million at the prior year end.
We expect these lease exits to save more than $2 million annually and plan to move into a more cost-efficient Maryland headquarters in late December. Net loss for the quarter narrowed to $2.9 million, or $0.02 per share, from $4.1 million, or $0.03 per share. Adjusted EBITDA loss for the quarter increased to $2.6 million from $1.5 million, reflecting the absence of the prior year perpetual license sales and higher urban mobility delivery costs. For the first nine months, however, net loss narrowed to $12.8 million from $23.7 million, and Adjusted EBITDA loss improved by $4.2 million, or 29%, to $10.3 million from $14.5 million last year. Net cash used in operating activities declined 49% to $10.6 million. These year-to-date improvements reflect the effect of the cost actions taken throughout 2026, even as we continue to work on delivery margins and revenue conversion.
We ended the quarter with $5.1 million in cash and cash equivalents, plus $0.3 million of restricted cash. Addressing our $15 million Prime Revenue Sharing Notes maturing December 15 remains a near-term priority. Since those notes were issued in 2023, our contract portfolio has grown meaningfully, and our operating results have improved substantially. We believe that combination strengthens our position in these discussions. We are in discussions with multiple lenders and are shortly expecting term sheets. Our objective is a larger credit facility that reflects our improved operating results and larger contract portfolio. However, no definitive agreement has been reached, and there can be no assurance that we will obtain sufficient financing before maturity or on acceptable terms. We will provide an update when appropriate. Before I turn it over to Robert, let me summarize where we stand.
The cost actions we have taken in 2026 represent estimated annualized savings of more than $10 million. We've also cut cash use in operations nearly in half and eliminated almost all of our operating lease liabilities. Recurring revenue made up over 60% of our total revenue for the first nine months and continues to grow. Those are structural changes, and they give us a far more efficient base than we had at the start of the year. Looking ahead, we've identified specific high-margin sales opportunities that we plan to pursue in 2027, with the goal of growing our high-margin revenue as quickly as possible. Our financial priorities are clear: resolve the December note maturity, improve delivery margins, and convert on contractual opportunities by turning them into recurring revenue while holding the line on costs.
We know there is more work ahead, and we intend to keep showing progress against these priorities each quarter. With that, I'll turn it over to Robert.
Thank you, Joe. I want to put this quarter in the context of what we've been working to accomplish throughout 2026. Growing a business is difficult enough, particularly in a fast-paced environment of technological innovation. Continuing to grow it while judiciously aligning its cost base, reducing headcount, and streamlining operations is even more challenging. That's been the central task for our management team this year. We've made difficult decisions, consolidated facilities, reduced our overhead to sharpen our focus on where we believe Rekor can create the greatest value, and we did this while continuing to serve our customers, develop our technology, and pursue important new business. It hasn't been an easy process, but it wasn't done just to make Rekor smaller. It was necessary to build a stronger, more efficient company with the capacity to grow. We are not alone in this regard.
Many companies have faced the same challenges in the current business environment. This distinction matters. We now believe the heavy lifting of our operational right-sizing is substantially behind us. The foundation we put in place is stronger, our recurring revenue is growing, and we have meaningful commercial opportunities ahead. We enter 2027 with a leaner cost structure and a cleaner plan to turn those opportunities into deployments, recurring revenue, and improved operating performance. Our focus is shifting from restructuring the business to executing on the foundation we've built. We entered 2026 with a specific objective to reshape Rekor's cost structure so that the business could operate profitably at approximately $50 million in annual revenue.
That's the operating model we've been working towards, not a claim that we've already achieved profitability or a forecast that it will occur at a particular date. Achievement depends on revenue mix, margin, and financing costs. Our headcount reductions, facility exits, and operating changes have been guided by that goal. Equally important, given the many business opportunities that we still see before us, we've spent several months developing a more focused sales and marketing plan and reviewing suggested retail pricing across our portfolio to improve pricing discipline and maximize potential gross margins. That preparatory work is now complete, and we're moving forward with the planned sales and marketing initiatives that are expected to contribute to improved commercial execution in 2027. There are tangible reasons for confidence in this transition, as indicated by our continued contract growth this year.
South Carolina selected Rekor for a seven-year statewide contract with potential value above $22 million, subject to final negotiations. Oregon issued an intent to award a five-year driver alert program with anticipated value of $1.4 million, subject to final terms and annual renewals after year two. Although potential contract value shouldn't be treated as revenue already earned or guaranteed, these are important commercial milestones that reflect confidence on the part of our sophisticated customer base. Since quarter end, Florida increased our contract ceiling by 94% to $9.5 million. While actual revenue remains dependent on funding and work orders, that significantly expands our ability to serve an important customer. In addition, our new Southern Nevada RTC contract has a potential value of $1.54 million if both extension options are exercised.
Collectively, these developments demonstrate continued customer interest in our solutions and provide opportunities for future deployments, subject to the relevant contract conditions. Although we can't assume that all contemplated orders will materialize, we've already paid for approximately $2 million in Discover core components inventory that can give us a starting point for execution of anticipated 2027 deployments. At the same time, bringing portable traffic data processing in-house, tightening pricing discipline, and strengthening sales management have all positioned us to improve project-level economics as deployments scale. We're also continuing to build on our technology portfolio. Born Authentic now supports both video and audio authentication, and we continue to work with launch partners towards a planned launch, and also planned retail e-commerce launch introduction in the first quarter of 2027.
Our Scout Axis Agent brings recognition and video integrity verification to compatible existing cameras, potentially expanding the addressable installed base without requiring customers to replace every device. These initiatives are promising, but their commercial contribution will depend on successful launches and customer adoption. In public safety, the ALPR industry remains unsettled as public pressure grows on policymakers and customers to address privacy, retention, and access standards. We believe that uncertainty has contributed to slower decisions around perpetual license purchases across parts of this market. While this has affected our expected growth in this area, we have not lost a single Scout customer as a result of this privacy debate. We believe we've been responsible in developing our systems with privacy and authenticity in mind, and are engaging with House and Senate offices and state policymakers to advocate workable, consistent safeguards.
Our white paper calls for protections for non-hotlist records, warrants for historical searches of protected records, purpose-based limits on retention, and verification of video integrity. These are all features we've been designing our systems to accommodate for years. Although the timing and eventual shape of any standards remain uncertain, we believe that clearer rules should help restore confidence in responsible ALPR deployments and preserve their important role in protecting our communities and making them safer. We also recognize the importance of our capital markets obligations. NASDAQ has given us through April 26, 2027, to regain minimum bid price compliance, and we are evaluating appropriate steps while remaining focused on operating execution. We continue to examine beneficial ownership reporting and trading activity in Rekor shares, including questions raised by market surveillance information, and to share our concerns with the appropriate regulators.
Any further action will depend on the evidence and applicable law. Let me close with the point I most want investors to take away. The actions we've taken in 2026 have been difficult, particularly because we needed to make them while continuing to grow customer relationships and invest in the products that will drive our future. But those decisions were deliberate, and they have left Rekor with a more focused organization, a materially leaner cost structure, and a stronger operating foundation for 2027. Our task now is execution, resolving our near-term debt maturity, translating contract opportunities into funded deployments and revenue, continuing to grow our recurring revenue base, improving delivery margins, and bringing our planned launches to market with spending discipline. In short, we have done the difficult work of resetting the cost base and preparing the commercial engine.
Our objective is straightforward: convert a larger base of contract opportunities into funded deployments and recurring revenue while maintaining the discipline required to make the business profitable as it scales. None of that is automatic, and we aren't declaring victory. While we believe the foundation is solid, the direction is right, and we are much better positioned to pursue growth in 2027 than we were at the beginning of this year. We thank you for your continued support, and operator, with that, we can open the call for questions.
Thank you. At this time, we'll be conducting a question-and-answer session. If you'd like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Our first question comes from Thomas Grossman with Union Avenue Advisors. Your line is now live.
Good afternoon. You briefly just touched on capital markets issues, and I just wanted to know if there was any update on or any plan for what compensatory damages could be from that Viraj Mehta mess, which has caused us. We've lost $175 million in market cap since that happened. Then specifically, with regards to the NASDAQ listing, whether a reverse split is one of the options that you're looking at.
Thomas, this is Robert. Thanks for the question. I'll start with the second part. Obviously, we have some time to meet the minimum bid requirement, and we have no plans for a reverse split. We think we'll get there through executing our business plan. Frankly, the value of the company, when you look at the company's ARR and you think about realistic valuations, I think we all know that the company is grossly undervalued. You're right to point out the loss in market cap. I think with respect to that, you kind of answered your own question, but we can't comment on litigation, so I'm sorry, I can't really talk more about that.
Okay.
Hello?
As a reminder, if you'd like to ask a question, please press star one on your telephone keypad. One moment, please, while we poll for questions. There are no questions at this time. I'd like to turn the floor back over to your host, Mr. Robert Berman. Thank you.
Well, listen, everyone, thanks again for the support and sticking with us, and we hope to be back to you shortly about the debt and moving forward into 2027. So, thank you all for participating this evening. Have a good night.
This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.