Patriot One Technologies Inc.

Hi everyone, welcome to the Patriot One's live third quarter earnings call. This is Will Mays with RB Milestone. For those of you who aren't already aware, Patriot One Technologies is an emerging disruptor in the stadium and public space security industry and has developed a multi-sensor threat detection platform. The company's shares are traded on the TSX under the symbol PAT and on the OTCQX under the symbol PTOTF. Joining us today is the company CEO and director, Peter Evans, and CFO, Karen Hirsch. Today's earnings call will include a discussion about the state of the business, third quarter results, and some of Patriot One's recent milestones. This will be followed by a question and answer session based on questions investors have submitted prior to and during the webcast. This call is being recorded today, June 9th, 2022. and will be available on the company's website after the earnings call. Before we start the presentation, I'd like to note that all dollars are in Canadian unless otherwise specified. Today's call may contain forward-looking statements that are subject to risk and uncertainties that may cause the actual results, performance, or developments to differ materially from those contained in the statements and are not guarantees of future performance of the company. No assurance can be given that any of these events anticipated by forward-looking statements will occur, or if they do, what benefits the companies will obtain from them. Also, some risks and uncertainties may be out of the control of the company. Patriot One has a full disclosure contained in their presentation. Today's call should be reviewed along with the company's third quarter financial statements, MD&A, and earnings press release issued today and available on the company's website and CDAR profile. Lastly, RBMG is not a registered investment advisor or broker dealer. For more information, please visit rbmilestone.com. And now it's my pleasure to introduce Mr. Peter Evans, Chief Executive Officer of Patriot One. Peter, the stage is yours.

Well, thank you, Will. And first off, I'd like to thank everyone today for joining us for Patriot One's first formal earnings call. It's a very large milestone for us. And I'm also very excited to be joined by Karen Hirsch, my partner here, running the business and driving us successfully forward, our chief financial officer. Later, Karen's going to take us through the quarterly financial results and the key financial trends that we are seeing for fiscal 2022. Let's start a little bit for those new investors to understand a little bit of a background and an update on your business. Page one creates industry leading technologies of touchless threat detection solutions for high traffic venues. Our primary market focus today is on stadiums, theaters and casinos and other live entertainment venues and rent spaces where we've identified about a four point six billion dollar market in North America alone. And what we believe that we have a very unique product market fit. Touchless patron screening, enhancing the patron experience without risking security itself, continues to be a very hot topic in the security and entertainment industries, and particularly with what we're seeing going on in society today. There's a growing interest from stadiums, teams, and patrons who all want to take part in rich entertainment experiences. However, the patrons are also demanding a very safe and secure way to do so without necessarily reducing that experience itself. However, true of any industry, and it's particularly true of ours, is increased safety and enhanced experiences are typically in opposition to each other. We see conflict. All of us on this call have experienced a scenario where perhaps cybersecurity solutions have added multi-factor authentication, which has become a detriment to the experience. The same thing is true in physical security. The more layers of security were put into the ability to enter your favorite sports stadium, the more people get frustrated and the experience degrades. Digital innovation offers an answer to this. As it has in so many other parts of society. We've seen digital transformation change the way we interact with each other, how we hold this call itself, the way we get education, the way we buy online. The same sort of technology can work to make patron experience and patron safety work in harmony with each other instead of in conflict with each other. There are also many other intersecting factors that go along these two objectives. Entertainment and security operators right now are facing their own challenges in terms of basic staffing shortages and the ability to attract enough talent, as well as pressure to continuously reduce operating budgets. We see this as immense opportunity to digitally transform this industry as we've seen so many other industries digitally transform for benefit using our technology and our solutions. In the last three months or so, we publicly announced three wins, specifically with Kia Georgia, one of the largest auto manufacturing plants, with the Moody Center in Austin, a brand new venue that is just unbelievably beautiful, and with the Central Bank Center and the new Rupp Arena facility that they're building, home of the University of Kentucky Wildcats. These key wins represent important milestones for us at Patriot One and are few of the many opportunities that we've delivered over the last quarter. As we were to become the preferred patron screening solution in our chosen market of live entertainment venues, we're very pleased to be working with organizations such as these. We're very excited to also be working with the Oakview Group at the Moody Center and Central Bank Center. OVG has been a wonderful organization for us to partner with, and we look forward to working with them in future opportunities at any of the other 330 venues that they currently manage globally. In addition to this, we continue to work with our customers through the sales cycle and continue to see incredible growth opportunities as our qualified pipeline is growing and now sits at about $50 million. Over the last quarter, we continue to complete on average one to two on-site customer demonstrations per week in live environments with live patrons going into their favorite sports event, their favorite concert, or other activity. These demonstrations that are during game time are one of many number of steps that are required by each organization to verify that not only does our solution fit their business requirements, but they can also tailor and redesign their security operations processes to get maximum benefit and again, drive that patron experience in a very positive way. In the most recent quarter, we participated in demonstrations with multiple Major League Baseball teams, NHL teams, NBA teams, including at the NBA All-Star Game itself held in Cleveland. And with a number of NFL teams, particularly during offseason when they're holding concerts or draft events in their venues. We've also done a number of other very large sporting events for very large organizations that everyone here on this call would be familiar with. In these demonstrations, customers get the opportunity to have that hands-on experience and get that wow factor and understand how our product actually positively affects their environment and positively affects their customers and patrons. As an anecdote, I was watching a video this morning that we took from an event that we did last night and seeing the patron saying, this was really amazing. 10 out of 10, you know, makes me feel very proud of the work we do here. We found that these demonstrations are a critical step in the sales cycle for all of the customers and for organizations to partner with us to help them redefine their security operations. And we've also seen that the outcome of these demonstrations also determines whether a customer will progress with us further in the sales cycle. Looking at our overall customers and closed opportunities from the last quarter, a number of the projected deals that we expected to close in Q3 slipped into Q4. I'm very pleased to say, though, that none of these opportunities have gone away. They just took a little longer to get through the contracting process. And in some cases, this delay is due to customers contemplating and planning for a much bigger installation of the solution than originally planned. As a quick example, we have one large manufacturing organization that slipped their expected contract out by the last quarter to this quarter. That's OK. We've been working with this customer and innovation partner who's been helping us design the product very well since April of last year. The good news is the delay resulted in them increasing the deal size probably about 350%, as they've asked us to protect more than just the first location, but multiple locations. So we're pleased, and I guess this is just my way of saying it's a great example of good things come to those who wait. When I think about our business just a little bit more, we also announced the smart gateway. This is the next phase of our threat detection multi-sensor solution, the Smart Gateway, that was actually a product that was specifically designed for stadiums after getting their feedback. I like to say it was designed by customers for customers, and we just had the pleasure of actually delivering their needs. This is a product that was specifically designed for those environments, and it's very flexible, highly accurate. We increased the accuracy, we increased the flexibility, the deployability, and the practicality of using our technology in these venues. So far, we've been very, very pleased with feedback from the marketplace and from customers with new leads and demonstration requests specifically coming from those that were triggered by the announcement. And in some cases, customers who helped design and put input into the system capabilities are now re-engaging us so they can now run the demonstrations and trials that they've been looking to run for a period of time. We see smart gateways kind of as manifestation of all the customers' input and all their business needs captured into a purpose-built solution for stadiums and live entertainment activities. And as a result, we've delivered a solution that is consistently demonstrating increased throughput, a very, very high accuracy rate for detection, and detecting significantly more of the prohibited items as requested and required by the pro leagues, and a much significantly lower level of false positives in comparison to the technology previously being used in these venues. We're doing this at a much more cost-effective price point than the competition, and I'm very pleased with the output of our organization to respond to the customer marketplace. Before I turn things over to Karen, I also want to share some final thoughts on kind of some of the near-term and longer-term drivers for the business and the things that I think about almost daily. Near-term, the tragic events that we've seen recently that have occurred and have shone a light and increased focus for us on these kind of concerns in society and the market need for a solution like ours. We're listening, we're engaging, we're creating awareness, but we're always gonna try and do so in a way of respect and integrity for those who are affected by these events. It's important to understand that our gateway solutions, our core business is only one piece of the puzzle. We're accelerating our work and market awareness activities specifically for our VRS solution, which uniquely provides proactive and preemptive insights to a business or a school before the incident occurs. These solutions, the VRS solutions offer the advantage of time and early alerting long before the attacker has entered that building and when it may be too late. This also provides a foundation for us as we think about how we start to spend more time driving VRS out in the marketplace. That actually allows us to drive more revenue streams. Longer term, as with the introduction of the Smart Gateway solution, we're going to continue to engage our customer base to understand their unique challenges and where we can actually solve some of those unique challenges with our AI platform. That platform has been designed in a manner that we can listen to customers, understand their problems, and quickly respond by leveraging that platform and delivering those outcomes they require. This, for our investors, will deliver incremental revenue streams that are layered on top of our deployed platforms over time and will continue to shift us to more and more of a SaaS-based business model as we help those customers solve real and complex problems. At this point, I'm actually going to turn it over to Karen, right, to provide all of our investors with a financial update. Thank you.

Thanks, Peter. And hello, everyone. I'm very excited to be here today speaking to all of you and to share with you our Q3 financial update. As this is our first earnings call, I'll remain fairly high level and walk you through some of the financial highlights and key milestones we've hit in our third quarter. This quarter, we continue to accelerate our revenue growth with approximately 2.8 million of revenue recognized during the first nine months of the fiscal year. Of this amount, approximately 900,000 was from the current quarter. This is compared to 200,000 and 800,000 for the same periods in 2021, representing an increase of 515% and 246% for the three and the nine months respectively. We've continued to build the company's backlog of sales commitments, which now total just over 2.6 million, with an additional 1.6 million pending successful trials. This is a 155% increase in comparison to the 1 million of backlog that we had at April 30, 2021. We expect that this result in revenue will be recognized in future periods as many of these trials are converted into subscription agreements. Our backlog from platform sales notably increased by 47% when compared to April 30th, 2021, which is a testament to our growing sales efforts and the growing demand for our products. Our backlog continues to be one of the most important measures of the company's performance. As we sign long-term subscription agreements, revenue gets recognized over the term of the contract and initially sits in our backlog. Today, approximately 60% of our platform contracts are done through these types of subscription agreements. Our revenue and backlog figures reflect some delays in installations, as Peter alluded to before, partially due to supply chain constraints and just other delays that happen throughout the quarter. The good news is that these delays are not an indicator of decreased market demand, but rather are just a delay in our sales process. Accordingly, we expect revenue to grow at an accelerated rate going forward based on our current backlog and growing sales pipeline. Right now, we are in an early stage of our commercialization efforts and are focused on customer engagement to create a backlog of sales commitments. As our backlog grows and revenues begin to stabilize, we may consider disclosing a few non-GAAP measures such as annual and monthly recurring revenues. At this point, we're not anticipating presenting any of these metrics for the next few quarters as the company continues to focus on increasing revenues. in terms of our operating expenses in q3 we continue to be mindful of our operating expenses which have continued to decline dramatically from prior periods we look for new opportunities to reduce non-strategic expenses and we want and we choose to invest in short-term and near-term revenue generating activities we're very focused on top-line growth and continue to invest in our sales and marketing efforts to drive revenue for the business Sales and marketing expenses were $500,000 and $1.4 million for the three- and nine-month periods ending April 30, 2022, as compared to $300,000 and $1.1 million for the same periods last year. This increase relates to the company's intensified sales efforts as we work to capitalize on the existing market activity and interest for touchless patron screening solutions. We expect sales and marketing expenses will remain steady or increase slightly in the upcoming quarters as we continue to invest in our sales and grow in the upcoming periods. Research and development costs, which were presented net of grants in our financial statements, were $1.9 million and $2.4 million for the three and the nine-month periods ending April 30, 2022. as compared with $1 million and $1.8 million for the same periods in 2021, representing an increase of 97% and 33%, respectively. When we look at revenue R&D costs before grants, they did remain fairly consistent with the same periods in 2021, decreasing by just 1% or 100,000 for the nine-month period. The company will continue to invest in R&D activities as we continue to refine, improve and expand our platform solutions based on feedback that we receive from our customers personnel costs which exclude those costs associated with research and development activities were 1.4 million and 3.5 million for the three and the nine month periods ending april 30th 2022 as compared to 1.3 million and 3.5 million for the same periods ended april 30th 2021 representing an increase of 12 and 1% respectively. We expect that personnel costs will increase slightly in the upcoming quarters as we continue to grow revenue and as a result of salary market conditions. Loss and comprehensive loss was $4.4 million and $8.6 million for the three and nine month periods ending April 30, 2022, compared with $3.2 million and $9.7 million for the same periods in 2021. The decrease in loss pertains primarily to two factors. One, an increase in revenue year over year, and two, the non-dilutive funding that we received from Raytheon in fiscal 2022. Basic and diluted loss per share was three and six cents for the three and nine month periods ended April 30th, 2022, compared to two cents and six cents for the same periods in 2021. In terms of cash flow, The nine month period ending April 30th, 2022, we had positive cash flow of 1 million compared with negative cash flow of 9.9 million for the same period in 2021. A significant change. This change was comprised of two factors in terms of the cash flow used in operating activities, which was 5 million for the nine month period ending 2022 compared to 9 million for the same period in 2021. representing a decrease of $4 million or 44%. The decrease in negative cash flow from operating activities can be attributed primarily to the reduction in the loss for the period, as I alluded to before, as well as a change in non-cash operating working capital of $3.6 million. Finally, this quarter, we also raised $6.9 million of gross proceeds with the completion of a public offering in March of 2022, providing further capital in support of the company's operations and to drive growth in our backlog of sales commitments. And with that, Peter and I are pleased to turn it over for questions that any investors may have.

We'll now move to the Q&A portion of the presentation. We've received a number of questions from investors, so let's get started. Our first question is from John Hyde of JP Strategic Investments. He asks, aside from the obvious security advantages and the potential to increase patron spending, you've recently highlighted that a key selling point for venues is significant operational cost savings. Unfortunately, you've also touched on the fact that this is something that is often hard for potential investors to really grasp. Why do you think this concept is hard to convey to potential customers? And do you see this as a selling point when the current economic environment might cause a lot of these venues to cut spending?

Yeah, it's a very good question, Will. Conceptually, security, whether it's physical security or cybersecurity, has always been challenged to demonstrate an ROI. It's a little bit like insurance. The question has always been, how much do I need? How much security do I need? How much insurance do I need? Do I have enough? Do I have too much? Am I overspending? And what is the probability that an event will actually occur in my facility or business? Right. So when ROI calculation actually helps, and it's a very unique thing for the business we're in to be able to calculate an ROI based on the number of security staff, for example, that might no longer be required or the increased food and beverage sales. Right. But the ROI calculation for every venue is very different and very specific. And more often than not, because security staff are unfamiliar with building a business model based on an ROI. it's not a concept that's very familiar with them that they can build themselves or that they're comfortable with actually understanding and accepting that this is a true value for them. It's a new idea, right? The other thing is with the ROI calculation is every venue is different. Every entrance in every venue is different. And oftentimes what we find is the outcome is very, very venue specific. In some venues, there are distinct strategies to redeploy security staff during event for a second or third role. Therefore, the ROI may not be as hard and cast in stone as one would expect. So the opportunity to save on that staff may be a little bit of a misnomer. It's for this reason that we like to engage every single stadium and understand their unique security operations and design that ROI calculator around them versus some generic number. And then we can also tailor a solution that best fits them so they can actually receive those benefits. So there's no hard and fast rule that an ROI calculator will always lead to a solution, but it is one part of the puzzle of ensuring that we're delivering the right solution for our customers.

Peter, we've had a lot of questions come in on the VRS. Can you tell investors about the status of the product and do customers buy the complete package of the Gateway and VRS?

Yeah, that's another great question, Will. We get a lot of that and have recently, very recently received a lot of questions on VRS. First, I think we need to discuss the value of the VRS product and its architecture. Six months ago, I think VRS, the efficacy of the solution was very, very good at detecting weapons. But architecturally, it was a little complex for many different deployments. We've solved that problem, which now allows us to take it out to a broader marketplace, such as schools, retail organizations, and things like that. What VRS does is provides customers with a layer of AI on top of their existing cameras. So very easy to deploy, very scalable. Right. And one doesn't have to significantly change or at all change the security operations or the behaviors of patrons, the students coming into the venue. It provides customers the ability to detect threats proactively from a distance out in the parking lot, for example, of the school. Right. And from that, that allows you to kind of see the threat early and prevent the threat before the risk even occurs. As you can imagine, this type of product meets certain needs of certain venues that perhaps a smart gateway does not. For example, namely that ability to identify those threats at a distance versus upon entry. So I can proactively and preemptively stop that threat. The investor group has always heard me talk about things like product market fit and very tight alignment of which products to what markets to what buying cycles. The gateway solutions themselves are more aligned to preventing, for example, in schools, a child bringing weapon into the school in their backpack and things like that. where VRS is more oriented around that malicious attacker who's on their way to the school. Gateway solutions have their place. VRS solutions have their place. Both have a place in a multilayered approach to security where I'm looking for multiple sets of capabilities to provide me a holistic security approach. So the way we're positioning our products right now is that the two could be working hand in hand. In some cases, VRS on its own can provide a very good outcome and option for the customers who potentially are more budget constrained or have concerns about changing their operational procedures. Or they simply don't have the space in the venue for a gateway solution at every single entrance. So having said that, we speak to all our customers about both Gateway and the VRS, and we work with them to determine what is the right application that best fits their business needs and their specific requirements, right? And where we can, we tailor that offering to meet their needs to the best extent that we are able to do so.

And along the same lines, Peter, some investors have asked whether you've had any inbound interest from schools after your recent offer to help provide your VRS solutions to defend against gun violence.

I'm very pleased to say that we have. And it's important for us to work with those schools to see what we can do about helping them cost effectively provide a proactive and preemptive solution. We've had multiple individual schools contact us. And more importantly, larger school districts reach out to us who are looking for a holistic solution to take care of and address all of the school's needs within their vicinity. Just earlier this week, we were in a discussion with a specific city in the northeast to discuss a citywide initiative to protect all the schools with vrs and potentially rolling some other state government facilities into that conversation under the same umbrella this to me is very very promising and it matches our objective to bring the needed discussions to a much higher level at a district level a state level a city level right so we can solve this problem much more holistically but look there's a lot of work to be done here Right. It takes time to understand how this deploys, how this organizations can use it correctly. So we're on the journey now. And I'm very pleased to say that we are engaging and the schools are engaging with us.

We've had a question come in from Dave Cipollone of Grace Street Capital and Consulting. He asks, you know, at Grace Street, we've been following PIT closely for five years. In our view, the opportunity has been never been better. And yet the company is still valued at a mere 60 million Canadian, despite boasting a disruptive market defining and market ready technology with a steady growing order book. Investors are clearly reluctant to buy the story. In your words, why is now the time to be buying the Patriot One story?

Yeah, it's a good question, too. There's no doubt in my mind and quite frustrating to me that the company is undervalued. I think this is a reflection of many things, right, including but not limited to the overall state of the financial marketplace right now. If you look at what's happening in the world, we've actually held up our stock price very, very well since the beginning of the year. Well, the overall small cap marketplace and micro cap marketplace has been essentially getting crushed. So I'm pleased that we've been able to hold our own and actually grow the stock value and the stock price while the rest of the market has been declining. From my perspective, though, the quality of engagements that we have right now, the contracts that are under discussion or that we've recently closed, those organizations that we're talking to who are exploring our solution, it tells me that we're in a very, very good position. But we are at the early stages, but we're on a very good trajectory. We've taken a lot of time over the last six months, 12 months to lay the foundation for the business. And we're now just starting to see kind of the rewards of all that work coming to fruition, like those three contract announcements we talked about earlier. We're much certainly better positioned and in a much healthier place as a company than we were a year ago or even six months ago. And, you know, my perception here, quite frankly, is the investor community is looking for repeated predictable revenue over one quarter to the next to the next to actually prove out the vision that we've put in place.

market timing is never an easy thing right and when is the right time for an investor to get in and i'm not your financial advisor however i personally feel very very confident that we're perfectly positioned at the right turning point in this industry hey we've got a follow-up here for karen uh given how the market ready and timely uh how market ready and timely the patriot one story is to the american experience and we believe exposure to the mainstream U.S. exchange is more critical now than ever, we see access to the capital and valuation changing fundamentally with the NASDAQ listing. In our view, this is a direct path to responsibly unlocking shareholder value at this inflection point for the company. Karen, can you please share if you have the intentions to uplist Patriot One to the NASDAQ this year? If not, why not?

So we've had a lot of discussions about a dual listing or an up listing to NASDAQ, and it's no secret that we aspire to do that. I agree certainly with your comments that the access to capital and the valuation certainly is beneficial by being on NASDAQ, and certainly it's something that we're looking at doing. But I think it's important that we do it at the right time to maximize shareholder value. Companies that list on NASDAQ are under significantly more scrutiny by sell-side analysts, by investors who are looking for a high degree of predictability in the financials. and accuracy in forecasting in terms of bookings and revenue, profitability. These are all really important factors, and we're not quite there yet. But we're moving to that level, and we hope to get there at some point soon. And I think at that point, we would certainly consider an uplisting as we reach a more predictable revenue stream. I think that's something we'll certainly look to do. And we would certainly want to do it in conjunction maybe with a key milestone So it's definitely in the works for us. It's a question of doing it at the right time so that everybody benefits from it and we get true shareholder value.

Along those lines, similar theme, the questions around news releases. You've mentioned in the past that many customers will restrict one's ability to announce their purchases. If this is the case, how else can investors know about the progress that Patriot One is making when it comes to sales? Karen, do you want to take this one?

Yes, certainly. I'd be happy to. I mean, I think we've mentioned this before, that many venues don't want to publicly announce any details about their security because they don't want to provide that information to the public and the concern that it could harm their patrons. To the extent that we're able to, we'll always announce these wins to the market. Another way that investors can see the progress that we're making is to look at our quarterly financial statements and MD&A disclosure. And we've tried to outline as best as we can the sales commitments and the backlog that we have, as well as any of the value of the signed contracts that are pending successful trial. While the specific names of customers are not provided, these figures demonstrate our sales momentum, period over period, quarter over quarter, as I spoke to previously. And we'll continue to show as much disclosure as we can, given that many of our customers just don't want to have their information publicly disclosed.

Great. And thank you, guys. Is there anything else you'd like to leave investors with today before we sign off?

Well, from my perspective, we expect a very solid last fiscal quarter of the year and the next fiscal year for Patriot One. Everything is lining up the way we've been looking to line it up and the way we've strived to kind of make things come to fruition. We've laid out a very good foundation for business. We've got a very solid product set now. We've got our eye exactly on the target of the customers that we're engaging with. We're getting engagements that a year ago I could only dream about. We've got a really good team here, really do like what we're doing from an engineering perspective, from a sales and marketing perspective. And that team is very, very focused, singularly focused and hyper-focused on driving out new innovation where we see that customer interest and to go close those deals. Our number one priority is around bookings and closing deals right now. And I think we've laid the foundation to do that well.

Great. Well, thank you, Peter and Karen, and thanks everyone for joining today's earnings call. Today's webinar recording will soon be made available on Patriot One's website at patriotonetechnologies.com. If you have any additional questions that have not been addressed on the webinar, please feel free to email us at patriotone, that's the numeral one, patriotone at rbmilestone.com. Thanks again, everybody. And this concludes our presentation.