Rekor Systems, Inc. (NASDAQ:REKR) Q3 2021 Earnings Conference Call November 15, 2021 4:30 PM ET
Eyal Hen – Chief Financial Officer
Robert Berman – President and Chief Executive Officer
Conference Call Participants
Zach Cummins – B. Riley
Good evening, everybody. And I do apologize on behalf of the vendor providing today's call as it was a technical flaw on our part that caused a delay. And it was [Technical Difficulty] I do apologize once again. And I'd like to say good evening at this time 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 will read you the company's abbreviated Safe Harbor statement. I remind you that statements made in this conference call concerning future revenues, results of operations, financial position, markets, economic conditions, product 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 will now turn the call over to Mr. Eyal Hen, CFO of Rekor Systems.
Thank you, John, and good afternoon, everyone. Thank you for joining us on our earnings call today. Today, we’ll discuss record results for the third quarter ended September 30, 2021, as well as provide an update on key business topic. On the call with me today is Robert Berman, President and CEO will give you additional updates as soon as I finish sharing relevant metrics with you. Following our prepared remarks, Robert and I will take your questions.
Third quarter was a defining moment in Rekor’s young history. During our inaugural Investor Day in September [Technical Difficulty] investment community as products that we’ve been working on for the past two years, a lot of time capital and know-how went into creating this operating platform. So that it can serve multiple agencies using a modular approach. Introduction for Rekor One and the acquisition of Waycare finally put us in a position to jumpstart the adoption of our operating platform, accelerate our growth and claim our place as the leader in the emerging intelligent infrastructure market.
With the introduction of our new multi-mission operating platform, we refined our go-to-market strategy to capitalize on the tremendous growth opportunity this market presents. We believe there is significant first mover advantage in this emerging market. So speed is of the essence to build the strong moat. The evolution of our business model, we intend to capture our fair share of this emerging market.
Since the second quarter of this year, we've been moving away from a product-oriented transactional revenues model to a solution-oriented recurring revenue model. Certainly while the sale of solutions as compared to products, spread out revenues over a longer period of time introduces them in the short-term. And this has had an impact on near-term revenues. However, we are confident that the flexibility, scalability and agility inherent in this delivery model will result in significant revenues growth.
Once our customers have experienced the benefits of our AI driven technology, we can upsell and cross-sell our solutions. We fully expect the increasing adoption of Rekor One by customers who have a snowball effect as their farther revenue growth, as we expand our geographic footprint.
With that, let me go over the financial results for the third quarter. We continued to generate year-over-year revenue growth, even as our newly refined go-to-market strategy impacted our growth within the quarter. Revenue for the third quarter of 2021 was $2.6 million, an increase of 23% compared to $2.1 million in revenue for the same period last year.
Revenues declined sequentially from the $4.3 million reported in the second quarter of 2021. Please note that revenues for the third quarter of 2021 includes approximately six weeks of Waycare contribution. Recurring revenues, which includes SaaS revenues, licensing and subscription revenues, e-commerce revenue and customer support revenue was $1.2 million for the three months ended September 30, 2021. This presents an increase of $269,000 or 28% compared to $964,000 for the three months ended September 30, 2020.
Revenue for the nine months ended September 30, 2021 was $11.1 million compared to $6.4 million for the same period last year. This represents a robust year-over-year growth of nearly 74%. Remaining performance obligations in the third quarter of 2021 were $23.8 million, an increase of 57% from the $15.2 million reported as of June 30, 2021.
For the first time, we are also introducing total contract value as a KPI to provide investors with a metric to measure our progress. We won contracts valued at $7.7 million during the nine months ended September 30, 2021. This is an increase of 108% compared to $3.7 million of total contract value won during the same period in 2020. Lastly, following the acquisition of Waycare, our working capital at the end of the third quarter decreased to $28.2 million from $79.8 million in the second quarter, but remains well above the $18.2 million we reported as of December 31, 2020.
The year-over-year increase in third quarter revenue is primarily due to the expansion of our product and service offerings. We are continuing to benefit from the strategic marketing initiative that we launch at the beginning of 2021. And we are seeing initial success of our focus on recurring revenues. Be clear, we expect our go-to market strategy with an emphasize on subscription-based revenue to generate long-term growth well beyond of what we could have achieved under the previous model.
However, we will continue to monetize opportunities which are transactional in nature that generated 19% year-over-year increase in product and services revenue in the third quarter of 2021. This cohort is comprised of implementation revenue, perpetual license sales, hardware sales and compliance-based revenues. The Oklahoma Uninsured Vehicle Enforcement Diversion Program, our contactless compliance solution generated $345,000 revenue in the third quarter and $975,000 for the nine months ended September 30, 2021.
While this program generates meaningful revenues for the state, there is also a social component to contactless compliance. Research has shown that there are indications of racial disparity when it comes to the decision about whom to stop for traffic violation. This can lead to unnecessary and unintended complications. Recently, the city of Philadelphia inactive legislation to prevent police stops for minor traffic infraction. From here, the mayor will establish a policy on how persons will commit this violation and receive a warning or citation in the mail.
As the success of Oklahoma UVED Program demonstrates our technology can help to enforce contactless compliance without the need to stop motorists or minor traffic violation. This is significant given the over 20 million Americans estimated to be pulled over for every year. Our adjusted gross margin for the quarter ended September 30, 2021 was 46% a decline on the 54% we reported in the comparable 2020 period.
The decline in margin for the third quarter ended September 30, 2021 is primarily attributable the evolution of our go-to-market strategy. We have maintained our cost structure related to selling and servicing our clients. Even as we have deemphasized upfront hardware sales but as software related sales continued to ramp up, we should expect to see an improvement in margins.
Adjusted gross margin for the nine months of the year ended September 30, 2021 was 58% compared to 57% in the same period last year. We would expect 2022 adjusted gross margin to be in this range with the margins improving meaningfully in later years. Total operating expenses for the third quarter of 2021 were $10.9 million, compared to $4.5 million during the same period last year. We recorded a significant increase in payroll expenses. Half of this increase was due to the addition of headcount to the Waycare acquisition. In addition, like last quarter we continued to add to our headcount to our engineering and sales and marketing teams
Furthermore, we expanded and continue to expand ourselves and marketing efforts and added additional resources to promote our products and services. Finally, we grew our spent on research and development projects to develop new technologies and improve our line of products. We plan to continue investing in innovation to build out our competitive edge and to continue developing more and better state-of-the-art solution that address our customer growing needs.
Adjusted EBITDA for the third quarter ended September 30, 2021 was a loss of $6.7 million as compared to a loss of $2.7 million the same period last year. Adjusted EBITDA for the nine months ended September 30, 2021 was the loss of $12.7 million as compared to loss of $6.8 million for the year ago comparable period. This increase in loss was also due to the aforementioned investment that will set us up for growth.
Moving to our financial condition and liquidity, our cash and cash equivalent balance on September 30, 2021 were $35.1 million, up from $20.6 million as of December 31, 2020. Our working capital at the end of the third fourth of stood at $28.2 million, up from $18.2 million as of December 31, 2020. The increase in both cash and cash equivalents and working capital was primarily due to the net proceeds from the public offering in the first quarter of this year, partially offset by cash payment of $40.8 million as part of the $61.1 million in the total consideration offered for the Waycare acquisition.
In summary, we are excited about our growth prospect. The team have been extremely busy winning new clients relationship, deepening existing ones and forming partnerships. If you could tell by the numbers of new announcements, we put out. We feel very good about our pipeline and the strong momentum we have enjoyed since last quarter. And we’ll continue to invest in the company to build out the infrastructure necessary to grow our footprint.
This investment will negatively impact our margins in the early years, but we expect our margins to improve significantly in later years, as we rip the benefits of this investment. There is significant operating leverage embedded in the business model, and we’ll 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.
Thanks, Eyal. Good afternoon, everyone, and welcome. The third quarter marks a pivotable point in our company’s young history and one in which there were many first at Rekor. In September, we held our first Analyst Day. At this inaugural event in New York City, we laid out our strategy and provided a roadmap to where we are heading.
Prior to this event, we can only share bits and pieces of the overall plan. At our Analyst Day, we were able to present a clear picture of our vision for the company and the opportunities that the emerging intelligent infrastructure market provide. If you haven’t seen the recording of the presentation, you can still find the link to it on the rekor.ai Investor Relations page. Demonstrates the extraordinary depth and breadth of our offerings for the intelligent infrastructure market and how we plan on winning and this newly developing market.
We’re uniquely positioned to improve the safety and quality of life and communities all around the globe, because we can provide on a single platform, the data and the analytics to effectively execute multiple client missions. A number of our competitors have been addressing some of the individual components, but we’re not aware of anyone who can provide a uniform platform like ours.
With Rekor One, we can deliver the full range of hardware and software solutions required to fully and truly implement benefits of intelligent infrastructure. Truly intelligent infrastructure requires multiple channels or real-time communications. By this we mean real time data exchange between the physical infrastructure, multiple agencies that manage and service that infrastructure. And ultimately, the vehicles that use that infrastructure.
Our value proposition is simple. We can provide exceedingly cost effective means of transforming static lines into dynamic intelligent roadways. We achieve this by aggregating data through networks of sensor systems, overlaying that with data provided by OEMs, crowdsource data and other third-party acquired information. All of this data runs through our AI engine produced solutions that can reduce congestion and have safety on the roads and improve the health and wellbeing of communities by reducing emissions.
This is no longer an abstract idea, but something that has been tested and is being currently implemented. We’ve already started working with numerous clients on several use cases. One example is partnership with Volvo, which selected Rekor for strategic research initiative. This initiative will evaluate how artificial intelligence can be used to improve predictable awareness in a smart city context.
This marks the first deployment in Europe of our crash prediction technology. This pilot is being performed in conjunction with the Swedish transportation administration and the Gothenburg traffic management center. These agencies will have access to our cloud-based platform to view and manage roadway incidents, traffic hazards, zones at risk and more. The platform will incorporate data from a variety of sources including anonymized data from Volvo Cars, hazard light alert and slippery load alert technologies.
In addition to navigation apps, physical infrastructure and anonymized connected vehicle data. We’re excited to help Gothenburg in Sweden better understand how AI enabled insights and provide significant benefits, including more efficient use of public funding and improve safety for drivers. We’re in an enviable position, because we cannot only create significant shareholder value, but also do good for the communities we work with. We can make money while saving our clients money as well as they do more and do it better.
So how large is the total addressable market we are pursuing? Well, in another first for Rekor, we commissioned the first serious study of the total addressable market for intelligent infrastructure. The result was a projected TAM of $148 billion by 2026. This estimate was made by KPMG, focusing on just the capabilities Rekor can provide today. They divided Rekor’s offerings into four categories, traffic and infrastructure analytics, multi-modal analytics, incident management, and video management systems, and public safety and contactless compliance. For each category, KPMG applies the subscription or asset-based model to estimate the size of the U.S. market growth factors were then applied to categories based on comparable market studies, bottom up analysis and inputs from customers, they interviewed in each segment.
Global TAM values were extrapolated based on the relative regional market share of the IoT and smart city markets. This was a very detailed analysis that involved a significant amount of modeling. However, the TAM analysis did not include sustainability and green initiatives or commercial use cases and other opportunities for the continuing sale of hardware that we expect to pursue as appropriate.
So we currently believe that we can capture a half of 1% of this TAM provided that we execute our business plan. Why do we think we can succeed in capturing a significant share of this market? Because Rekor One just think of a world where traffic flow can be coordinated and optimized using algorithms on an exchanging data between vehicles and sensors embedded and infrastructure. Implications are obvious. Variable speed can reduce congestion, less than emissions and decrease accidents without having to build evermore roads and lanes. And that same coordinated data exchange can improve emergency responses to everything from a tragic roadside incident to an area with a natural disaster.
It can provide better tools to plan for the future, as well as analyzing long-term patterns such as commuter, seasonal and holiday traffic. While simultaneously incorporating the expected impact of near-term events, such as sports events and concerts. All this is what has motivated us to build our Rekor One operating platform over the past few years.
Most of these features are available today. Others, we will be rolling out in the near-term. When we started our effort two years ago, we had an idea of the technical capabilities needed to truly implement intelligent infrastructure, but most of it simply didn’t exist. So we started with a concept, develop the technology to turn this concept into reality, and then meaningfully expedited our time to market by acquiring a rare asset Waycare. That was a perfect match for us bringing in valuable connected vehicle and other third-party data sources to complement our roadside data collection and distribution capabilities, plus adding additional groundbreaking analytical tools to our AI Arsenal.
Our Rekor One operating platform serves multiple missions and enables interoperability among multiple agencies. With Rekor One customers who’ve tested and experienced the product’s capabilities in one area now have the ability to easily add-on additional modules that address other areas. In a sense it’s the Swiss army knife of intelligent roadways a simple to use device with multiple applications.
We now have six different verticals available through the Rekor One platform, on demand traffic view, cross agency incident management, public safety and contactless compliance, traffic and infrastructure analytics, sustainability and green initiatives and commercial use cases. Each of these verticals has multiple product offerings and yet the incremental CapEx to serve additional clients with the same market is negligible once a sensor system using Rekor One has been enabled.
We use the same sensors, the same distribution system and the same customer friendly interface to serve multiple missions. All we need to do for the client to subscribe to additional Rekor One modules is turn them on. This is a powerful operating leverage embedded into our business model. It’s what gives us the ability to land and expand and makes Rekor One the win-win solution for intelligent infrastructure for both us and our clients.
But to capture market share, we needed to concentrate a hard on how we sell. So we hired an experienced leader to lead the change on our land and expand strategy and have thoroughly rebuilt our revenue model with his guidance. Mike Dunbar joined us as our Chief Revenue Officer and was tasked with restructuring the sales organization and implementing a high direct touch value-added consultative sales process.
Our market research indicated a need to educate our prospects and customers about what we can provide using our innovative technology. The key to providing solutions that meets the needs of prospective clients is simple, know what they want before they do and deliver beyond their expectations. To accomplish this, Mike started hiring new talent with deep experience in the ITS and enterprise software markets, individuals who can effectively communicate our value proposition and can managing more complex, consultative sales process.
We’ve also thoroughly refined our revenue and pricing model. We believe we have a significant first mover advantage and we are highly focused on expanding our geographic footprint quickly. So we want to enter a market quickly by providing customers a strong value proposition and work the upsell and cross-sell our products. We’re now entering market choosing a modular sales approach offering an attractively priced operating system as a base platform.
This requires us to build the necessary infrastructure and invest in the relationship. But from this pace, we can then offer additional modules depending on the evolving needs of our client. And we can provide sophisticated solutions to additional agencies within the same market by deploying the interoperability between agencies that’s built into the platform. That’s why our sales efforts have been structured to heavily focus on selling our solutions via a subscription model.
As you can imagine, once we’ve installed the infrastructure revenue profitability per square mile or per population will increase significantly as more agencies within a market subscribe to our solutions. And we can provide these new customers with AI powered solutions by simply activating a module on our Rekor One platform. Our solutions can be very attractively priced for our clients and still become increasingly lucrative for us as we broaden our relationship within a market. Thus for us, most important initial clients in the intelligent infrastructure segment, our governments and governmental agencies, they aren’t acquiring technology for its own sake.
They are looking for verifiable results that work for them in their unique environments. So we’ve been concentrating our efforts on entering this market with attractively priced pilot programs. We want to eliminate any barriers to entry, such as budget constraints. We want the client to touch and feel and experience our solutions. The strength of our products gives us the confidence to enter pilot and proof-of-concept programs, where we charge a very reasonable price. As we demonstrate the value of the products capabilities to our clients and gain and maintain their trust, we expect them to spread the word to others.
This includes similar entities and other jurisdictions, but even more importantly, coordinate agencies within their own jurisdiction. It just makes sense to serve multiple agencies and ultimately the general public, I’m making use of the data collection and analytical capabilities you already have. Time, and again, we’ve seen that there is virtually zero attrition that pilots can turn into multi-year extensions with the opportunity to upsell and that other agencies take a serious interest once they see positive impact our solutions have in nearby communities or similar agencies elsewhere.
This can give us significant economies of scale and a powerful competitive advantage. With our user-friendly solutions, there’s no need to add additional sensors or hardware to accomplish multiple missions, providing a solution to an additional agency for a governmental client we already serve is as simple as enabling an additional module on the Rekor One operating platform or the client.
So how are we doing with our new go-to-market strategy so far? Well, our pipeline is growing and we expect this trend to continue as we execute our land and expand strategy. Since the end of the second quarter, we announced a number of wins that include the following. Wisconsin’s Waukesha County selected the Rekor One vehicle recognition system for implementation at eight of its public park entrances.
We were passed to help maintain the security of each location and to ensure entrance fee compliance. Albany, the third most populous metropolitan region in New York, selected Rekor One’s vehicle recognition system to help maintain the safety and security of the community and the citizens.
Louisiana’s Department of Transportation and Development selected Rekor One’s traffic management technology to aid in real-time automated incident identification, crash prediction and forecasting. We expect that the pilot program will help reduce congestion and collisions in the Baton Rouge area and promote speed harmonization for a safer driver experience.
Utah’s Department of Transportation and Utah’s Department of Public Safety selected Rekor One’s traffic management technology to enable quicker, more efficient incident management and mitigation strategies, in addition to improving its collaboration and reporting capabilities. We announced our collaboration with the Toyota Mobility Foundation in Thailand, and this program AMCs traffic congestion, significantly reduce traffic fatalities, increased vehicle emissions provide economic savings and improve citizens’ quality of life.
Once the project is fully implemented, the Toyota Mobility Foundation will explore expanding the program across the country. Our traffic management solution is one that can be replicated throughout Southeast Asia, where traffic has been a recognized social problem for the last two decades. The City of Maryland, New Jersey selected Rekor One’s vehicle intelligence platform in partnership with their police department, online launched with 14 optical sensors by the end of 2021.
Likewise, the New Rochelle, New York selected the Rekor One vehicle intelligence platform in partnership with their police department. We initially will deploy 41 optical sensor streams. The Greenburgh, New York Police Department also chose to significantly expand its use of the Rekor One platform.
The City of Chattanooga, Tennessee chose Rekor One to provide real-time traffic analytics and support of the smart city card or infrastructure initiative. This is a citywide deployment with approximately 150 sensors with each sensor providing multiple solutions. Our comprehensive offering will help reduce congestion, improve forecasting, estimate emissions from real-time data and increase public safety.
Sensors can be accessed directly for real-time roadway viewing, as well as historical recording of significant events for future analysis. The Police Department of Topeka, the capital city of Kansas selected Rekor One for a city wide deployment. We will launch with 20 optical sensors with an initial law enforcement focus and anticipated expansion within that use case.
This is another example, Rekor One winning a contract that will provide a strong platform for future growth through upselling and cross-selling. Yet, in another city-wide deployment, the Napa Police Department chose our Rekor operating system. We won’t enter this market with a law enforcement focus installing 25 obstacles sensors. This will provide us with another opportunity to put a stake in the ground and upsell and cross-sell our solutions and services.
Finally, last but not least, we have been awarded a patent for an algorithm that takes historical and real-time data from internal and external sources, and turns it into a time-based dynamic model to help cities take action against a regular congestion that is outside the norm. There’s no better product advocate than a happy customer. So we continue to elevate our customer’s product and service experience and are continuing to improve our product offerings to better serve them.
To that end, we announced in October, our enhanced relationship with Tomorrow.io. Prior to this agreement, we would incorporate basic weather forecasts. Now jointly, we are moving forward on developing advanced solutions, that one has to use case where transportation agencies. We will deploy weather monitors across Rekor One that will provide alerts for users beyond basic forecast and customized severe weather alerts, such as winter storms, wizards, icy conditions, flooding, tornadoes and so forth.
So we plan on continuing to grow aggressively and increase our geographic footprint. And as mentioned earlier, while we’re growing our footprint and doing good for society, we won’t lose sight of creating shareholder value. Our focus will be on predictable sticky revenue. So we’re going to be concentrating on leasing hardware and we’ll pursue less predictable non-recurring hardware sales only when it makes sense opportunistically. This revenue model is an integral part of our land and expand strategy. Retaining ownership of the hardware and charging recurring fee allows us to rapidly expand our footprint and lay the foundation for a strong revenue growth.
And we’ll build out our sales force to monetize our technology offerings and solutions using this foundation. You should expect us to have a significantly larger sales force than we do today. And we’ll focus on bringing in experienced individuals with specific domain expertise who can become trusted client partners.
As Eyal mentioned, we’ll be providing investors with additional metrics to measure our progress as we emphasize generating recurring revenue. While we anticipate that our near-term results will continue to be impacted by the change in the revenue model, we expect these additional metrics to make it easier for analysts and investors to assess our growth and forecast our ultimate long-term top line expansion with less uncertainty.
So we’re committed to helping you measure our progress and over the next 12 months, we expect to provide you with additional key performance indicators, so you will be able to judge for yourself how we are doing an execution of our business plan. Our growth will be driven by a combination of organic growth and acquisitions. This brings me to my next first in the quarter, and that is the closing on our first acquisition since we decided in 2019 to focus on our technology business.
Waycare is a tremendous asset in terms of human capital technology and vendor relationships. It brings to the organization. This acquisition accelerated our capability by years and enhances our ability to provide a never seen before situational awareness of what’s happening and will happen on the roads in real time.
With Waycare, we increased the breadth and depth of the solutions that we know are fundamental to success. We expect additional acquisitions as we will continue to supplement our organic growth. As many of you are aware, we’ve been continuously assessing opportunities and we brought in an experienced M&A banker to head these initiatives in house and make sure that every acquisition we consider as well thought out, because we’re committed to being a good steward of capital.
The opportunities we evaluate will have to either help us expand our geographic footprint or bring in new capabilities that further enhance our product mix and allow us to serve our customers better. And finally, before we conclude our prepared remarks, another first for Rekor, we have been awarded the Intelligent Traffic System World Congress Hall of Fame Industry Award for the Americas. The industry award recognizes exceptional companies that have deployed innovative solutions, accelerating ITS programs in certain regions. Well, that in a nutshell is why they were such a perfect fit for Rekor.
With that, I’ll turn the call back to our coordinator for questions.
Thank you. And before we begin the Q&A period today, I would like to extend another apology on behalf of Issuer Direct for the technical difficulties that were encountered prior to today’s call. The fault of this issue was entirely with Issuer Direct and we do apologize to Rekor Systems and to all participants who joined here today. All interested parties and here a full replay of today’s event using the same link that they access the live event through. So once again, a full replay of today’s event will be available using the same link that you use to access the live event today. Once again, I would like to extend the apology on behalf of Issuer Direct to both Rekor Systems and to participants joining today’s call. I would now like to begin the Q&A period. [Operator Instructions] And the first question today is coming from [indiscernible] Capital. Casey, your line is live. Please go ahead.
Thanks very much for taking the question. A couple of questions to start, please. If we look at – when you’re originally, if we pick Rekor’s target revenue of $740 million by 2026 and divide by around $50,000 per square mile. That would imply Rekor would have to roll about 15,000 square miles on the Rekor One platform. How many miles do you have visibility on today through these pilots and pilots in the pipeline right now?
Casey, thanks for the question. It’s just been a lie afternoon here. So let me just – let us catch our breath. I think when we put a press release out on Chattanooga, we mentioned that city is 143 square miles and some of the other pilots that we’re working on, I think folks can – they can look at the cities and municipalities and you can Google the square miles and you can discover that for yourselves. But I think that there’s a good chance square miles will definitely be a component of the KPIs that the company is looking at going forward. But they’ll also be a relationship to density and some other factors. But those things, as we said, during Analyst Day, will clear themselves up over the next few quarters as we hone in on these KPIs.
You have to understand that going to market with a technology globally and making sure that you have your pricing correct, it’s very sensitive before we want to be locked into any specific, actual pricing. But I wouldn’t say that your thesis is wrong by looking at it that way. I think that’s a good early way to look at it. So you would be correct then you’d be at like 15,000 square miles, if that’s the way things turn out, right.
Okay. And then, looking from what you guys announced inter-quarter and on the topics called tonight, it looks like you’ve had almost 10 contracts with the early launch a week or one. How do we think about the kind of the performance revenue growth obligation as you start scaling your sales force? I mean, does it – do we – I mean, the 57% link quarter growth was a pretty big number.
I think that’s a great question. I mean, I think if you look in the Q, you’re going to see that we expect over the next 12 months to recognize 36% of that performance obligation. So that’s just shy of $9 million. And if you think about our year-to-date revenue, the expansion of that performance obligation is pretty significant overall, right, considering we just modified the business plan. So good catch.
Yes. And then just lastly, there’s a lot of talk in the Philadelphia and Pittsburgh looking at implementing contactless compliance solutions. I’m just wondering how you think about and how could Rekor potentially be involved in that? Any plan on that.
I personally think that that’s one of the greatest opportunities we have because once our systems deployed these entities can make use of contactless compliance. Obviously this is something that is going to require a lot of public debate. But I think we can all see that the narrative is moving in our direction, right? First you had Philadelphia and Pittsburgh, I think you have Montgomery County here in Maryland. And we hear rumblings of other cities around the country that are looking at it as well. Look, it only makes sense at the end of the day that in the 21st century that law enforcement make use of technology to deal with minor traffic infractions rather than point people over. It’s just – it’s a silly concept if you think about it. So we feel strongly that it’s going to be a good – it’s going to be a component of the system. And we’re glad we’ve got the UVED Program running in Oklahoma because it proves that we can do it.
Thank you. Your next question is coming from Zach Cummins from B. Riley. Zach, your line is live. Please go ahead.
Yes. Hi, Robert. Hi, all thanks for taking my questions. I appreciate all the additional commentary. Robert, can you walk me through kind of the typical process when you start a pilot and kind of how those conversations evolved to potentially securing a contract? And I would imagine, I mean, as Casey was referencing with Chattanooga having almost 145 square miles. If you’re converting to contract, are you converting all of those miles at once or typically how does this process work?
Well, so it’s our intent to offer the value proposition of what we call Tier 1 Rekor One platform. So that includes a law enforcement component, traffic analytics and an incident management and the incident tools that Waycare provides, right? So that’s the goal. The goal is to provide that platform and if you think about different modules, like things that may come to the U.S. like variable speed or contactless compliance or other things, they can plug into the system that way. So we have a variety of different entry points. So some are through at the state level, such as you have with the relationship with Nevada or in Missouri and others at the city or local municipality level either through the DoT or the law enforcement agencies themselves. So we may go in with one module of the platform, and then that leaves to the other components, because in order to install the system, you have to have access.
So if you’re going through law enforcement and the police sign on, they have to go to their colleagues at DoT for that particular entity and they have to get your access. So that brings them into the conversation. But just to [Audio Dip] just inside the U.S., right? So when you start thinking about the possibility of – globally of getting to the TAM that we projected by 2026, it’s not – it doesn’t sound as grandiose when you look at it that way. So it’s land and expand. I mean, you get in, you’re doing paid pilots, you’re putting up a system, all the stakeholders are using it and then you believe that it becomes very sticky and they don’t frankly like to give up their new tools and that converts into a long-term contract. And that’s what we have been seeing with some of the smaller pilots that we’ve been doing. And we just literally started this new effort a couple months back. So we’ll see how that goes with some of the new entities that we recently signed with.
Understood. And in terms of the RPO number, I mean, can you just confirm what exactly that metric, but assuming it’s not all recurring revenue, but I’m just trying to get a better sense of what’s driving the big jump that we saw sequentially from Q3 to Q2?
The performance obligation is already turned into revenue that the nature of finishing for our performance obligation. And as Robert mentioned we anticipate to use 36% of it as a recurring revenues.
Understood. And the same thing just a little more insight into the total contract value. I mean, I’m assuming this is all just recurring revenue that you’re doing this metric off of. I’m just trying to get a sense of how these two metrics should combine together and kind of give us a sense of where the business is going over – not just the next couple of quarters, but if we’re thinking 12 plus months down the road.
Yes. Both goes together, you’re correct, but total contract value is, as we defined it in the 10-Q is what we signed in this year as a performance obligation, is the remaining revenue recognition that we have from these contracts. So they go together, but the total contract value is the total contract, performance obligation is less – total contract value less the revenue that we already recognized.
But we anticipate both to grow as we go when we add contracts into the pipeline, you’ll see the total contract value increase as well as the performance obligation, not necessarily the same ratio, because remember we recognized part of the performance obligation as revenue overtime what total contract value is a set number.
Understood. And I think Casey kind of touched on this a little bit in some of his questions. But what are some of the other metrics you’re going to consider providing going forward as you guys really make this full revenue model transition and how we should think about tracking your progress against that?
As Robert mentioned, we are still considering a few other metrics, and we mentioned in the Investor Day in square mile and density, and some other metrics that we still figuring out with the contractors we currently have. So it’s evolving and we’ll provide more as we have more information.
Understood. And final question for me is, you have a little over $35 million in cash on the balance sheet after the Waycare acquisition. I mean, how are you thinking about the total burn rate for cash going forward? It seems like you’re remaining committed to investing in both sales and marketing and R&D. I’m just trying to get a sense of kind of the available capital you have to execute upon that plan.
As you know, we have a shelf, so we would be able to apply it if we need, but for the burn rate, if you go through our cash flow and you see the cash flow from operations, we obviously, we cannot provide more guidance on this. But if you look on what we have in the operating cash flow for the nine months, probably with Waycare now going full steam here and with the increase in sales this burn rate will increase. But again, we have access to the capital market and we can – when we need it, we’ll be able to use it.
Understood. That’s helpful. Yes. Thanks. Appreciate that. I think that’s all I have for now. So thanks for taking my questions and best of luck going forward.
Thank you very much.
And we have time for one more question and that question is coming from Mike Latimore with Northland Capital. Mike, your line is live. Please go ahead.
Hi. This is Aditya on behalf of Mike Latimore. Could you give some color on which of your applications could benefit from the new federal infrastructure bill and when do you see the funding to flow through your related projects?
Yes. Thanks. Thanks. That’s a great question. I wish we had more time to really discuss the infrastructure bill. There’s quite an extensive amount of money in the bill for everything related to congestion and emissions reduction and using for purposes of digitizing infrastructure. I mean, I think the word smart as you 66 times in the bill, okay, relating to technology and what’s different this time around as opposed to just building more roads. So, there’s an awful lot in that bill, and I think there’s just not enough time to go into it here. But you can imagine when you’re spending the amount of money that they’re spending, a lot of that is – it’s going to come towards technology that can help actually prove things quickly, which is what they need to do.
All right. Could you also give an update on the status of border control opportunity?
So the last we heard was that a custom border patrol put another milestone date on IT2, which is the contract for November 30. And we expect that the remaining bidders – we’re team with all of them will probably go through that final round and then be down select, and then hopefully we’ll make an award here soon. I mean, we frankly expected it by now, but for whatever reason, they just haven’t made a final decision yet.
Thank you. And due to time constraints, that will be the final question. And that will conclude today’s Q&A and conference call. Once again, on behalf of Issuer Direct, we would like to apologize for the technical difficulties that led to the delay of starting today’s call. And we do thank you for your participation today. That does conclude today’s conference and webcast. You may disconnect your phone lines at this time and have a wonderful day. Thank you again for your patience and participation.