Route1 Inc.

Good day, ladies and gentlemen, and welcome to the Route 1 Third Quarter 2022 Investor Update Conference Call and Webcast. At this time, all participants are in a listen-only mode. Shortly, we will begin the formal presentation. As a reminder, ladies and gentlemen, this call is being recorded today, Friday, November 18, 2022. I would now like to turn the call over to Tony Buseri, Route 1's President and Chief Executive Officer.

Thank you. Good morning, everyone, and thank you for attending the call today. As described on the accompanying slide, I would like to inform listeners that this presentation contains statements that are not current or historical factual statements that may constitute forward-looking statements. These statements are based on certain factors and assumptions, including expected financial performance, business prospects, technological developments, and development activities and like matters. While Route 1 considers these factors and assumptions to be reasonable based on the information currently available, they may prove to be incorrect. These statements involve risks and uncertainties, including but not limited to the risk factors described in the reporting documents filed by the company earlier today. Actual results could differ materially from those projected as a result of these risks and should not be relied upon as a prediction of future events. The company undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made, or to reflect the occurrence of unanticipated events, except as required by law. Estimates used in this presentation are from company resources. I also need to point out that on today's call, we used names that were either registered trademarks or trademarks of Route 1, Inc., in the United States and or Canada. So let's get into it now that we're done the formal part of it. As we're moving forward today, we're going to be talking about the financial results as well as the business model. So why don't we start with the business model part of it. The company continues to be around 34, 35 employees. Its focus is working with video capture technologies creating data that can be used to act on that data, excuse me, for outcomes for our clients are principally within the parking industry as well as in public safety law enforcement. We also continue to have a strong business unit or a proponent of business that's tied to MobiKey and our remote access technology. And we continue, lastly, have the element that's related to the rugged device reselling. About a year ago, we started that strong pivot towards focusing on leveraging video capture technologies and the professional services and support we can bring in that arena. And that's really been our focus over the last couple of quarters to drive improvement and growth in that area. So let's take that a little farther, if we may. Page four summarizes where we've been as a company. And the changes we've made to deal with market acceptance first of the multi-key technology, being less than widespread accepted and more of a niche technology. In 2018, we moved towards a more integrated or larger business model that dealt with using data for the benefit of our clients. We delivered security. We delivered that data to you so you can use it. We can analyze it. And then about a year ago, we got more specific and we went really up through the video capture element of the technology arena. We've had some good success in it. It's driven by where the market's going. And we think, again, that we're going to be quite productive with that going forward. To summarize on the marketplace for license plate recognition technology, we have a fairly strong view in this area. And specifically, it helped us frame the business that we're in today and we want to continue to evolve in going forward. Specifically, we have a disconnect. We have clients wanting to use technology to deliver outcomes that are not transactional, that are long-term in nature. In the industry, our mind has been very transactional, where there's great OEMs with great intellectual property, and the services delivered to them have been Again, very much just a fix or install versus working with the client to create the experience or the outcome over a longer period of time. So this is where we see the opportunity. Lots of turnkey engineering services companies that are very transactional, that install video surveillance, that install LPR, that install body-worn cameras or other video capture-based technologies. We think bringing engineering to it that could be using the data in a way that drives a new outcome. It's a real time, actionable intelligence is the area that specifically we can add value in and do some different things. So there's a consolidation opportunity. So we're quite excited about this marketplace. We think it's fairly immature from the services element and we're all over that and working very hard to grow into a bigger position. The way we do that is there's a set of services the industry expects or historically come to know, and then there's the Route 1 differentiation. And the differentiation is not just installing hardware, not just setting up the technology, but it's working with that client to use the data that's being captured or created in a way that's productive for them. And that productivity on the public safety side, fairly easy and understandable how you use data to provide a more safer community. But the other aspect is the parking vertical, where we have clients investing in this technology to provide better experiences for the clients or better profitability. Our clients would range from university parking lots to larger corporations that have multiple parking garages. So it's not just in the public sector with universities that we work with. We also work with corporate America in providing a better client experience or a better employee experience. So going a step further about the Route 1 difference, we've talked about the relationship we have with Genentech. But the reason they're so positive on this, excuse me, It really goes to the fact that we're engaged in delivering an outcome for the clients. I can't hammer that enough. That working with the client beyond the initial transaction. The initial transaction would deal with elements such as scoping it out, mapping out where the cameras would go, understanding how the technology would fit within other technologies or systems the company that we're serving has. and working with them to get that installed perfectly right off the hop, and then continuing on with them because there'll be configuration changes, there'll be adjustments to the cameras, there'll be expansion to the use of the technology, et cetera, et cetera. We think it's that latter area, operations optimization, help desk and support, training, and continue to work with the client to get the maximum outcome out of their investment. This is the area, again, that we feel the industry is somewhat immature in and it's an area that we're aggressively investing in. Talked a little bit about the Genetech partnership. We think they're a really good partner to work with, not just on the LPR side of the equation. They obviously are big players within video surveillance and we are trained in that area and we are starting to grow that aspect of our business. So there's a lot more to Route 1 than just thinking about license plate recognition technology and our partnership with Genetech. It will go beyond. But specific to LPR, there are other technologies in the marketplace. We feel that Genetech is a first-class technology and the right company to partner with. They're highly supportive, and we've enjoyed that working relationship, and we think it's getting broader and deeper as we're moving forward here. So that's a little bit, again, about the technology, about the focus we have as a corporation. So you say, well, what are you going to do for the next couple months, Tony? Like, what's the focus? And some of these things are somewhat similar to past comments we've made as a corporation. But the next 120 days continues to have an operational focus driving further cash flow of the business. And what's that mean? It means improving the working capital position, paying down our debt position, building a deeper pipeline so that the future of our business has a more robust profitability attached to it. We've had success with the Spirus Solutions acquisition we did about 13 months ago. We'll talk a little bit about that today. where the inventory we acquired has basically been used up. So we're moving into the area of manufacturing again. Addition Pocketball P3X product. There continues to be robust demand in our vernacular, in our terms. So we are investing in that. And then you'll note with today's quarter, the third quarter was a very good quarter. Some of that's driven by the fact that Some transactions that we expected in the fourth quarter got done in the third. So when we think of the fourth quarter that's following after this, it's going to be a little lighter than the third quarter. And our focus right now as we stand here in November is it's finishing up this year strong and getting ready for a very healthy 23 and building off the third quarter as hopefully more of a common quarter as we go into Q1 and Q2. We are continuing to research and develop. I quite often get asked the question, Tony, where are we with MobiKey? Where is the cloud-based offering? What else are we doing from a software engineering perspective? I will tell you the last six months has been heavily focused, even though we've had a reduction in MobiKey user base, or the user base with the DoD, evolving the Route 1 MobiKey technology so it has a longer life and it's more applicable to a broader number of client types, and we'll talk a little bit about that. Mobi LPR, we launched about a year ago. It has had some acceptance, but we are tweaking it now to fit better with the parking vertical. We think there's going to be traction there. We think it's a differentiator. When we sell Genentech's AutoView LPR technology, we can add in then the ability to use an Android device to scan plates, and that's a pretty good value add. So really, the next 120 days is continuing to do what we've been doing, do it better, do it more, and evolve the technologies we're bringing into the marketplace. It's setting up for 23, where we'll start acquiring again. And the question's going to be, well, Tony, how'd you acquire with where you're at? It's going to have to be careful. We're going to have to be opportunistic. But we do think there are companies out there that can be bought right, that will be accretive for us as a business, and we'll selectively go after that. We also think the stock price where it is today is disappointing and doesn't fully reflect where the business currently is at. So I think you'll have to wait and see a little bit on 23, but I would expect your company to do acquisitions. So moving ahead. Let's talk a little bit about the results of the business. As you can see, the third quarter was an improvement over the second quarter. For us, what's neat about that is we did have, as we have prior to announced, some moving key losses, which impacted our subscription revenue. But as a business, we were able to overcome that and do even better than prior quarters. Unfortunately, because of seasonality and bringing in So Q3, Q4 deals into Q3, Q4 will likely not continue that trend. It will be a positive quarter, but we're really pleased with what we were able to get done in the third quarter. We think the business is tracking well. I want to dive a little further into these numbers so that you understand where we're at. Well, looking specifically at that recurring revenue number of about $1.3 million, as I just said, the big impact to us is related to application software or mobile key revenue. Most of the losses associated with DOD accounts are now through, with the exception of a little bit more from an August renewal, so we still have one month. that we had a couple months of recognizing that revenue in the third quarter that won't be there in the fourth quarter. So our run rate application software revenue is more towards 575 to 600,000 a quarter. And that's where we stand right now as a business. We continue to grow the support contracts. We'll dig into that. We'll continue to hopefully grow our professional services business And so our support contracts are anywhere from one to five years. We do see them as recurring revenue and a nice base of business to build. So moving ahead then and going beyond the recurring revenue and talking more specifically about the support contracts, we have set a goal and I think we have talked about it internally for sure and through communications in the public marketplace We had really hoped to grow our book of contracts, support agreements from last year's number of slightly shy of 600,000 to more towards 850 for this year. We've already met that goal and we suspect we'll be bigger than that by the end of the year. But there is an appetite in the marketplace for a more comprehensive support plan, a more professional set of services, and we're enjoying that benefit. We also have inflation. Our costs are up. I'm not naive to that, and therefore, some of that price increase related to better support contracts is related to the cost environment we're in. Talking a little bit about LTR accounts, by changing the type of service provider we are to one that's lifecycle or adds more value after the primary transaction, We have had some losses with accounts as we've shifted the nature of the support plan and the cost of it, but we've also had a number of new logos. So our net organic growth today is about 4%. We think that number will grow by the end of the year because we still have the fourth quarter new logos to add in. The other metric to note is of our 150 accounts, 18% of them have accepted something above what we call our baseline elemental plan. And elemental was a step up to the prior year pricing. The step up above elemental is called comprehensive. So we're pleased with the direction of where we're going with our support program and growing the recurring revenue related to it.

If we move ahead and