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spk00: Good day, ladies and gentlemen, and welcome to the Route 1 fourth quarter and full year 2023 business update conference call and webcast. At this time, all participants are in listen-only mode. Shortly, we will begin the formal presentation. As a reminder, ladies and gentlemen, this call is being recorded today, Thursday, April 25th, 2024. I would now like to turn the call over to Tony Busseri, Route 1's President and Chief Executive Officer.
spk01: Thank you. Good afternoon, folks. It's been a couple months since I've spoken this format with you. Always as a reminder, if parties want updates or questions, they can email me or reach out to me on my mobile device at 480-578-0287. That's always on the bottom of our news releases. Before we get going in today's presentation, I have to read the disclaimer, so bear with me. Again, good afternoon and thank you for attending today's call. As described on the company's 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 REL 1 considers these factors and assumptions to be reasonable based on information currently available, they may prove to be inaccurate or incorrect. These statements involve risks and uncertainties, including but not limited to the risk factors described in reporting documents filed by the company on CDAR. Actual results could differ material 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 sources. I also need to point out that on today's call, we use names that are either registered trademarks or trademarks of Route 1 in the United States or Canada. So let's dig in. Always as a reminder, I'd like to just touch on our business model. We continue to pivot where the sales are principally generated from, from being a pure play software cybersecurity company to one that's much more of a services company that's outcome-based, focusing on delivering usable data for clients through video capture-based technologies in a secure format. to help them with their outcomes, whether that's improved profitability or better safety. The core technology we work with today, as we have over the last couple of quarters, is automatic license plate recognition technology that's provided by Genentech, and we act as the services provider, the delivery system, the planner, the integrator, and most importantly, the party that helps our clients with the outcomes they're looking to achieve. We'll talk more about that as we go through today's presentation. But first, let's dig into the numbers we recently put up. We put out a news release last night. That release reflected a year that ended much stronger in the second half of the year than the first half. In aggregate, the results reflect that pivot or turn that started in 2021, moved through 2023, and 24 should be a year that we see much more progress as some of those larger mobile key contracts that are no longer with us leave the results historically and we see what the benefit of our turnkey engineering services model looks like. Quickly to highlight again, and we'll talk about this in a little more detail, the revenue was impacted in 2023 from a lessening of value-added reseller business, reselling rugged devices like laptops and tablets, and a lessening of the MobyKey subscriber base. In aggregate, it took us down from the prior year by about $4.5 million. The impact on gross margin was around $700,000, which to me is interesting because we lost more in MobyKey business subscription revenue that basically is at 100% margin than that $700,000. So what that says is the balance of the business grew and was successful. Ultimately, we get judged by the EBITDA and the net income or operating income we generate. So 23 is not what I would describe as the end state for us with this pivot or adjustment in our sales model. It's a step along the way. We talked about in our news release after our third quarter results, stability was the theme for us. And unfortunately, when you look at a full year results, especially the type of year we had, the first half being a little weaker than the second half, It's always hard to see it. But when we do look at the results by quarter as shown here on page five, the thing that jumps out at you is the fourth quarter looked a lot like the third quarter. So a little more stability again. Do we want operating income to get above zero? Yes. Do we want EBITDA to grow above $300,000? Yes. I look forward to showing what the first half of this year can be in 2024. But ultimately, we are taking steps in the right directions. Just, again, to point at this, and we can see the details much better in the coming two slides, but we lost about $225,000 in quarterly subscriber revenue from Mobikey, but the GP, and more importantly, the EBITDA, did not decrease in the same way, which says to us our service plan, our business model around delivering professional services, multi-year support contracts, the recurring theme of our business, Aside from MobiKey and software as a service or cybersecurity as a service, we're seeing the balance of the business pick up and grow. And I think for me, that's the key theme coming out of this. Again, it's hard to see it. We're pleased with Q4 in the context of showing another quarter where we're stabilizing. And again, the first half of 2024 should really give you that strong feeling. And as we exit the first half of this year, we believe that the trailing four quarters will then show EBITDA that, you know, if you add the last two quarters of 23 with the first two quarters of 24, should be in excess of a million dollars. So heading the right direction. Let's drill into that revenue model just a little bit further so it becomes more clear. As I stated a few seconds ago, Application software is where Mobikey used to live as a much more robust piece of our business. For all the reasons we talked about before, basically Microsoft doing a very good job of integrating this service or this capability into their suite in an enterprise model have displaced us with a couple of DOD accounts of size. That's taken down our application software revenue base. Do we think it will go to zero? No. It's a much smaller number and no longer is the core to who Route 1 is. What you can see also from the slide that's numbered page six is the growth in professional services, those services related to delivering video capture-based technologies, to supporting our customers more importantly in using that and affecting outcomes they believe they want and new outcomes that we're able to educate as subject matter experts with them or to them and help them grow in the use of the technology, creating a much more sticky position for Genentech and ourselves with that end user. So moving ahead, if I may, again, just highlighting the value of our support agreements, which is a key part of our business. One can see that we're growing and growing and growing. We crossed in Q1, and you'll see more about this, for me at least, the magic of a million dollars U.S. a year in support contracts, and that will become very transparent when we go through the Q1 results, but I am hinting at here quite strongly that that's what we delivered in the first quarter of 2024, more than $250,000 in revenue that's related to support contracts. So meeting a metric that's important to us. Talking about metrics, let's jump right into then those three metrics I keep on pointing in the press releases that describe success or will describe the success or failure for us. And the first one is, as we said, the non-Mobikey gross profit generation on a quarterly basis needed to get above $1,150,000 a quarter. We've done that two of the last four Obviously, the goal is to have four successive quarters in this arena, so we have confidence that's now who we are. We talked about the recurring license plate recognition technology support agreements. I've said very clearly, Q124 is now in excess of a million dollars in aggregate on an annualized basis. And then, obviously, fixed cost control. You want to grow your cash generation, and ensure that you're not growing on an equal basis your indirect costs. So those two things working together should expand the EBITDA for us. That is growing GP from this new business model and controlling the fixed costs, so getting greater leverage on the investments that we've made in people, talent, and other third-party costs. So again, we think we're moving in the right direction. Stability comes before growth, and we'll talk about that as we move forward. I've touched on this slide a little bit, the quarterly support contract revenue. I'm going to skip over this and go to slide nine right away. The indirect costs we've touched on, not a lot to talk about, except that there's a consistency in that fixed cost structure, and we have it well under control. So if we move forward here and talk a little less about the numbers and the outcomes from the last quarter and the last year, in a little more detail, what is Turnkey Engineering Services? And I know I'm going to talk in maybe a little bit MBA terms, but it's about working with our clients to use technology to achieve, again, things they believe they need now and we can help them get even more. In a world that's all about artificial intelligence, that's about turning things over to a computer or algorithm or systems, what we believe very strongly is we do not live in a world where technology survives on its own. When we work with a higher learning center where it's a university or college or we work with a police force, or other public safety group, they believe they need something, and that's why they're investing in LPR. We're able to work with them with some of our talent that has a lot of experience, not just to help them with that immediate need, but something much more so they get greater value out of the technology, again, enhance profitability, enhance public safety. So it's about outcomes-based, not just selling its operations, and it's constantly being in front of our clients. So on the day and age where we're very comfortable on a mobile device or using a video-based app to talk to people, we like going out and working with them and spending the time to talk, to hear their issues and concerns, and deliver a better outcome than they expect. Quite candidly, we have a number of accounts that we've grown quite sizably over the last couple of years, because of that, because we get out, because we work with them, because we work relentlessly, that there is an issue with the use of the technology. Ourselves with Genetech are able to create the engineered outcome so that it does get fixed and the technology goes further than they expect to meet their objectives. Ultimately, we think this level of service, which might historically have been called a white glove service package, we're unique in delivering this in the video capture-based technology arena. For sure in LPR, we're very proud of the relationship we have with Genetech. I believe they would openly recognize us as a different type of dealer or service provider, and we see a lot of growth still in this area. The use of LPR leads to video surveillance and other technologies, but holistically, we're using cameras and video to capture data on a real-time basis and be able to use that for an outcome. And that, to me, is what we're at a core all about. When using that data, we obviously have an expertise in authenticating users, in securing protocols, or that data when it's at rest and in transit and use. And so those things coupled together really puts us in a unique position relative to our peers in this arena. Going a little further, if I may, talking about our target audience and customer segments, what are we going after this year is very direct. Our install base, we'll call it the 130 to 150 current LPR, unique LPR accounts. Our goal is to work with them. And you're going to say, well, why haven't you done that historically? Well, we have. It's to continue the investment to get to know the client and grow the relationship. And so we keep on hiring talent that has subject matter expertise, has been using a like technology that can work with our client base across the country. Again, that could be a college, university. It could be a corporate headquarters with parking, and it could be a public safety agency. I won't be repetitive, but I also need to drill into the fact that we work with a number of great partners in the parking arena, whether it be a Passport, a T2, an LAZ, and I can mention many more, and if I don't mention the names, there's no disrespect or saying one's more important than the other. There are a number of players in the parking space that we work with openly to help them, help their end users, and their end users become our end users, and collectively we deliver a really good outcome. The persona of end user we're looking for is someone that wants more than a transaction or a blue-collar party to come in and turn a wrench and install a piece of hardware. We're looking for a party that recognizes their limitations in using a technology and wants to work with a party like ourselves to get more than what's just described in the instructions on a camera. It helps them expand their investment in LPR technology. technology. That's a little bit of what we're doing. So we do do direct selling. We also work through partners. But in all cases, we support that end user in the use of the technology. Now, I talked a little bit about or a lot about LPR relative to other meetings. I quite often get asked about what about your cybersecurity offerings? What about Mobikey? What about Pocket Vault? Where do you stand with them? Where are you with the government? Look, I've been communicating that MobiKey is a technology that has an even more niche use case today. It's for those that continue to use VPN and want the most secure approach to accessing data when they're mobile. So we have a much smaller base of revenue today. I don't see us ever exiting that business. But I do see us using that technology in combination with the Pocket Vault P3X technology we acquired with Spiris a couple years ago. So two different use cases for mobility. Spiris is when you're offline or you don't trust the Internet or Wi-Fi. You're like one of our clients, the State Department for the U.S. government. They use the Pocket Vault P3X technology with their embassy employees around the world. So I like the idea of ultimately being able to support them when they're in a secure and unsecure environment with Mobikey and or Pocket Vault. Pocket Vault definitely has become a more robust revenue generator for us. In the world we live in today with a lot of insecurity and distrust for networks or if you're on the internet in specific countries, Pocket Vault has been a very secure way to leverage and use enterprise data in very fragile or insecure environments. And so, quite candidly, we're seeing greater interest in Pocket Vault as a cybersecurity tool than MobiTX. Both of them are smart card-based technologies that authenticate users or two-factor or multi-factor authentication. But the Pocket Vault technology certainly has a better niche and a better, at this time, in our mind, offering because it delivers where they're in an environment where Microsoft or others can't because they need a cloud-based or internet to back up their delivery system. So my guidance to you is MobiKey is not going away, but MobiKey is much smaller and is one of our cybersecurity offerings and also gives us a bona fide or credibility when we act with public safety groups that we meet certain certification levels. We deal with highly sensitive data, and we're not a rookie in this area. Again, we're not just an installer. We're an outcomes-based player that has a great skill set in the cybersecurity arena. So moving ahead and talking a little bit, again, back to financial metrics, our balance sheet, I think the one thing I really want to talk on here is, Tony, I get asked, I say, Tony, hey, man, when are we going to see that strong improvement in working capital or cash flow or the debt levels you have? It is happening. It is hard to see it, but it takes time with the pivot. So the cash flow generation first goes to immediate principal payments and interest payments. You improve your vendor relationships with a little better trade credit repayment timing. And eventually you start seeing that improvement in your absolute dollars of debt outstanding or the net working capital position. So this slide 14 summarizes our current debt position. And so what should you expect from us? Windsor will be paid down by the end of the year. I don't believe our lines of credits will grow above these levels. They will come down in Q1 for sure, because I know that. And we should see a decline through the course of 2021. so that we finish the year with less debt and a better working capital position. That's what I expect 24 to be. So ultimately what this stability means, repetitively creating cash flow, using that cash flow to improve your working capital position and reduce your debt load. That for us is the definition of stability. So as a shareholder, I look at this and sometimes I get, hey, are you guys going to be around a year from now? Do you need to raise capital? Well, I think we're going to be around a year from now, and for sure we will not be raising capital to deliver on the current business model. Again, so growth in capital, or if we were to raise more debt or we were to raise equity, would be tied to an initiative where our balance sheet wasn't in a position to carry that load on its own. But today with where I am, And what we're doing for the first half of 2024 is, hey, build that pipeline up. Because pipeline will lead to sales orders or purchase orders, which leads to cash flow. Organically grow our cybersecurity practice. Four quarters of trailing EBITDA that lead to a total in excess of a million dollars. Improve working capital and reduce third-party debt levels. So if I get through that in the next two quarters, and basically we're through one, so we obviously have a good feeling how the first quarter of 24 went. I think we'll be in a position in the second half of this year to make a compelling argument why we're maybe the stock price should be a little more robust or we should be looking at growth. And the growth, I always hope we're able to do it without diluting our shareholders. But we will be looking at acquisition later this year in early 25. And that's where we're setting up as a company. When we started this pivot, the goal wasn't just to survive. The goal wasn't just to have a nice, solid baseline and harvest this. It was to take us into an arena where we could leverage core competencies in software engineering, certain products that create cash flow, and drive into a services model more robustly that was leveraging the Genetech LPR technology and or leveraging other types of video capture-based technology. So we're getting there, and I know it's never fast enough for our shareholder base, but we as a team of mid-20s employees are working very hard to continue to build our brand, more robust pipelines, greater cash flow, and ultimately a clear balance sheet where you say, hey, man, this stock probably should be worth a little bit more. I wonder what they're going to do next. And scaling the business model is the next for us. So I'm going to leave it there and say I know I'm leaving you hanging a little bit, But I should be doing that. And I should be talking to you again, not after the first quarter results, but after the second quarter. And we're talking about the trailing four quarters. And we're talking about the improvement of work X. And we're talking about the reduction in debt. That's what I want to be talking about in our next call. I'll make it more of a Q&A session. I felt today would be appropriate just to lay out information because we're not there yet. And we do have more work to do, and we're very focused on that. So I wind up today with my comments of saying thank you to those that continue to believe that have taken their capital and invested in our stock. We're excited about the next year, the next couple years for sure. And so I'll turn it back over to the operator and say, look, just before that, thank you for joining us for today's conference call. If you joined halfway through it or want to hear a replay of it, know you can call 1-877-481-4010. Use passcode 45656, and you should be able to pick up a replay. If at any time you have any difficulty with that, you can contact me. Copy it today. Slide deck will get on our website a little later today. And again, to be repetitive, if you want to reach out and chat, 480-578-0287. My name is Tony Buseri. I'm the president and CEO of Route 1, and we're proudly driving the business forward. Thank you. Operator?
spk00: Certainly. Thank you. That will conclude today's conference call. You may disconnect at this time and have a wonderful day. Thank you for your participation.
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