Tony Busseri - Route1's Chief Executive Officer

Thank you very much and good morning everyone. It’s been a few weeks since we spoke last and glad to be with you here again today.

As you know, I start off with the formal statements, so just bear with me for a few seconds. As described in the accompanying slide, I would like to inform all 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 Route1 considers these factors and assumptions to be reasonable based on 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 this morning. 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 obligations 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'll use names that are either registered trademarks or trademarks of Route1 in the United States and/or Canada. Route1 is an advanced North American technology company that empowers our clients with data-centric solutions necessary to drive greater profitability, improve operational efficiency and gain sustainable competitive advantages, while always emphasizing a strong cyber-security and information assurance posture.

We are building a smart secure community. As you’ve heard from me before, we have four pillars of strength.

One is our data security area, which is defined most prominently by MobiNET and the MobiKEY remote access solution. Our second pillar is data acquisition and analytics or advanced analytics is another catch phrase today.

That is led by obviously are LTR Technology and ActionPLAN. Data visualization is the third pillar, which is where we resell various devices that help those clients use or reflect upon the analytics that we are securely providing to them.

And then our fourth pillar deals with our unique engineering services and software development capabilities. So let’s move forward with the questions that we presented to you a couple of weeks ago when we spoke at the end – while we spoke about our year-end financial results.

Those questions at that time dealt with what are the lingering impact of the second round or second phase of COVID-19? What will be the impact of the new administration on public policy and spend?

And what will state and local police safety agencies budgets look like in ’21 as a result of the pivot in certain states or communities around how law enforcement is delivered. Well, what we talked about a few weeks ago and continue to be consistent is this: License plate recognition is hot as an offering.

The uses of video is real and robust in the communities we serve. Local government funding for public safety agencies has been modest to robust but not completely cut back and some have been speculated.

Colleges and universities across our nation have had a checkered restart, let’s call it or reopening. For California that's been slower than other states, to more aggressive states like Texas and Arizona.

We've seen different universities engage and move forward with their ALPR projects and so I would say that this continues to be still a strong growth driver for the company, as all states reopen and become much more active on campus. The other point I would like to specifically pull out is related to the global chip shortage.

We talked a little bit about this on our call a few weeks ago and again, I wanted to reiterate. It is having an impact in the rugged device vertical and its impact is that the way traditional three to four week delivery cycle to somewhere between six and 12 weeks.

So there has been deferment of shipments that move from Q1 into Q2 and we’ll talk a little bit about that later today. The offset again is to the very strong LPR marketplace that we’ve been able to take advantage of and we are still continuing with a number of orders.

So speaking about that, lets dive in now to our results for the first quarter of 2021. They are presented.

We filed them in the last hour. We had a good Q1.

Punch line is, we made money, our EBITDA was consistent with the last couple of quarters. The mix of revenue was more pending towards projects and recurring revenue than it was a one-time transaction, and overall what that meant is that gross margin that was slightly greater than gross profit, excuse me – in normal dollars, slightly greater than the fourth quarter of last year and enhanced margin and EBITDA of $764,000.

So let’s dig into that a little bit and let’s look at the trends that are related to key areas of the P&L for us. So on the initial glance you would say, well revenue was as strong as Q4, your right, but again it details with the mix issue, less one time transactions and much more in the project area, and you can see the result of that with gross profit that’s up from Q4, much higher gross margin as a result and very consistent EBITDA.

So that would be the third straight quarter of being around stuff that’s greater than CAN750,000 of EBITDA and we would expect this to start growing, because as you will remember, the acquisition of DataSource Mobility didn’t happen unit May 29, so right at the end of the first quarter. Drilling into the revenue mix a little bit, what you can see around the services revenue number is application software revenue came down a little bit versus Q4.

That is all FX related. Again, there's been a material erosion in the strength of the U.S.

dollar versus the Canadian dollar and as we report in Canadian, most of our revenues generated here in the U.S., there will be an impact to that. Technology as a service was a little more robust than expected.

We had one client where we negotiated with them to buy them out of their FAS contract, so we had a small pick-up in the first quarter. And then you see other services that are principally related to our LPR offerings and that's growing, and we're pleased with that and we should see that continue to grow in the quarters ahead.

As we move forward to quickly comment on our indirect costs or those costs below gross profit, fairly consistent quarter-over-quarter, no surprises, again controlling our indirect cost structure and growing our gross profit. That comes through I think ultimately in the metric we'll talk about in a little bit, but we continue to be highly efficient with the use of sales and marketing dollars.

A couple of other notes related to the first quarter. I would like to point out again the DSM acquisition happened right at the end of March.

So impact is that you get no EBITDA or net income related to it basically, but you are showing the cost of that investment on your balance sheet. As an example, you shift away from cash and you increase long term assets or intangible assets, impacting your working capital numbers.

It is what it is and we look forward to great contributions from DSM over the balance of the quarters for this year and obviously into next year. To talk briefly about the FX impact, it’s been quite dramatic and we will see even more of that relative to the second quarter of this year, when we have a large renewal with the Pentagon and the impact is real, it’s about $21,000 a month starting in April, related to the lower Canadian dollar.

As I said on our last call, it's ultimately our job to manage that and so in aggregate if the FX impact is negative for us, we got to be stronger in other areas of the business in driving incrementally EBITDA. So my message to you is not to guide your expectations lower, but just to tell you, and you know we’ve been very blunt in this, the impact of the foreign exchange impact.

The last point I’ll bring up is that towards the end of the quarter we also have an increase in the number of common shares outstanding. That dealt with the original seller of the Group Mobile International Business, being express par, cashing in the warrant on a cashless exercise basis, those 3 million warrants and converting them into about 1.36 million common shares.

So there is a small increase in our common shares outstanding at the end of the quarter. So the trailing 12 month performance for the company, I think this is an important metric.

When we look at the EBITDA in the quarter, we don’t always get a feel for how the business has evolved and chanced. And what this particular slide hopes to identify is what’s the growth?

And you can see it’s the trailing 12 months of TTM and from the fourth quarter where the four months or the four quarters prior generated an EBITDA of about $2.46 million a year. You can see based off of the results after them in Q1, we are off to about $2.87 million a year of EBITDA.

So the company gets stronger and stronger on an annual basis and we obviously expect that Q2 will continue to be strong for us and will help us continue to grow this metric. Again, one of those operational metrics that I like target and we work very hard to improve on is the number of gross profit dollars we drive as a result of $1 of sales and marketing expense.

And you can see in the first quarter of this year, again there is a step up. There is 3.4 gross profit dollars every $1 of sales and marketing expense, versus the 3.3 in the prior quarters.

I think I also mentioned on our last call, everything will always be a straight line up to the right, but we are quite pleased about what we are able to accomplish during the first quarter and as we continue to grow through acquisitions, and layer on organic growth opportunities into the investment we already have, we expect this metric to get better and better. The balance sheet, I guess we can touch on real quickly here.

You know again the working capital number adjusted itself principally as a result of acquisition at the end of the quarter. We continue to be in a strong position where on a net cash basis we have about $1.2 million of debt and that number gets lower, and a little higher depending upon the week we’re in, but there's no need to raise capital.

We generate cash flow on a monthly basis from operations and so we are crystal clear, the move forward, we do not need to generate any or raise any capital. If we were to acquire, our next move would be related to looking to layer on debt.

We are not in the market place to raise new equity. One of the metrics that’s used at times to look at how our management team is working with the dollars they’ve been empower to use by their shareholders is the return on average assets.

In this case it’s EBITDA adjusted by foreign exchange cost, divided by average assets used during the period. What you see here is the rate of return has gone from 18% now into north of 20% over the last five quarters, and again that number for Q1 is impacted by the $1.3 million purchase price for DataSource Mobility without any numerator growth, because again the timing of when we did the acquisition.

So we are pleased with where the direction is heading on a return basis, and we would expect this metric begin into the mid-20’s as we go through the quarters during the course of this year. Touching real briefly then on what you can expect from us during the second quarter and beyond quite candidly is this.

We continue to invest in ALPR, our License Plate Recognition Technology, whether it be through people and support, but it’s also through the pricing model and how we’re actually treated by our clients. If we are going to deliver continuing improved service and support that delivers to them a better outcome, we want pricing to reflect that.

So we are working to continue to deliver a better pricing model or value proposition to our client. The third point is important for us.

We've been working since we announced the California Department of General Services contract for License Plate Recognition as an offering, with the appropriate body with the state to insure that the Genentech Technology is approved for law enforcement. We're on the cusp of that and we expect the first order very shortly.

And when we do get that first order, we will communicate it publicly. We are excited about that.

We are also excited about the fourth point, and that's a new video offering that we expect to come out with this quarter, early in Q3, calendar Q3, that leverages the Genetech AutoVU Technology and delivers it on a mobile operating system which currently it's not available. And in today's environment where law and enforcement and security is delivered on foot or in bicycle, it makes a lot of sense to be able to use the camera that's embedded on the smartphone that do plate scans and searches and get important information.

So we think we’ve taken a positive step with our partner there, Genetech, and we’ll talk more about that over the coming couple of weeks as we look to launch that new technology. Five, shouldn’t be a surprise to you, merger and acquisitions.

We are not done growing by M&A this year. Our focus continues to be to look at businesses that deliver public safety accounts where we can bring additional value add and drive additional revenue items with that account.

We are also looking to acquire companies with strong engineering capabilities and/or IP that will augment our current offering. So expect this to grow again this year.

The last one I would comment on is that with the Department of the Navy, as they move from one point, a perspective to a new one, Lighthouse [ph], all publicly disclosed. We’re waiting for the hand-off.

It was originally supposed to be June 1 of this year; it's now August 1. Once that happens we'll be working with Lighthouse to grow our MobiKey user base off of that new dawned deferment that we worked so hard to get it credited and installed and grow the users there, and we’re excited about the opportunity to work with Lighthouse and see what fruit that will bear in the months and quarters to come.

So that would be my quick update at this particular time and we’d like to take questions from those who have joined us today. So operator, I’ll turn it over to you please.

Good day everyone! How much of your revenue is denominated in U.S.

dollars?

Oh! About 97% to 99%.

Well, if that's the case, I mean – cause you got new setbacks going to hit you again going forward, right, and why don’t you just report in U.S. dollar, you know because this is obviously the revenue head, when you changed over, it’s pretty significant, when you changed over to Canadian.

Well, it is considered by our audit committee and the Board continuously. We have a significant amount of costs in Canadian dollars, of denominated in Canadian dollars, so one way or the other there will be some form of translation that happens and have an impact as the dollar goes up and down.

So it's just a data point that's out there and continues to be considered by the audit committee about what’s right to do for the company.

Yeah, well I think – from my point of view, I think the right thing, if you're 99% U.S. the issue is to – this yield for investors, that one of the main metrics is revenue; like are you a going company or not and what is the revenue growth in all the sub-businesses too and now we can't really see it anymore, right, with… [Cross Talk] the dollar goes up and down 5% right, and we can't – we got to, well I mean work it out, but it's certainly buried.

Ed, this has been a consistent thing for most of with the history of the company and quite candidly revenue is not that important a metric to us. We've been very outspoken around the fact that gross profit is the metric we work on and that is the one we look to grow, because that ultimately drives free cash flow for the business.

I do understand your point and again, we'll make sure that the board considers that as we move forward. But it's an issue like there’s been a period – windows where the foreign exchange is working for us and then there's other windows where it doesn't work for us.

I hear your point on that.

Yeah, I mean the other point would be that you know there are – I’m sure you have a few investors or hopefully more growing that are U.S. investors and so it will be easier for them too to see it in their own currency rate.

So given it's really a U.S. business that does a lot of business with the U.S.

government etc. right, so.

So one of the questions, a couple of years ago you used to talk quite a bit about your factory software. I think it was called Spotlight.

Where is that in the line items now and how is that doing?

The name of that is ActionPLAN and it’s under application software. It continues to evolve as a technology with one principle account that’s providing a lot of inflight into the design of the offering.

Without naming their name, they are a multi-billion dollar, tier I automotive parts manufacturer and I think over the course of the quarters this year in particular you'll see significant growth in that area, our advanced analytics technology. Again ActionPLAN is one that we think has a lot of value.

The way we originally went to market place with it was good, but it's clear from the feedback from a number of different paying points that there's a better way of delivering the information they are looking for and we continue to evolve the technology to meet that.

Okay. So it’s mainly with that one auto parts manufacturer now?

Yeah, there isn’t a lot, but we made the decision that until that technology is we’re fine and net-net the market of requirements that aggressively push that is somewhat counter-productive.

Sure, sure. Yeah, I mean you got to be careful with your dollars, right.

But, so is your plan, is that – do you think that'll be ready to roll out in a broader way and what's your timeline for that?

Q3.

Q3, okay. Okay, we'll look for that and it sounds like you have a few other things coming up this summer, so that should be exciting.

Thank you very much.

Thanks Ed.

Thank you. For any of you who may have joined part way through the call, let me go through the replay of numbers real quickly.

After 4.00 p.m. today we’ll be available toll free 1 (877) 481-4010 or our toll international 1 (919) 882-2331.

In both cases use passcode 41276 and that replay will be available until 9.00 a.m. Eastern on Thursday, June 3, 2021.

Thank you for joining us today. We will be formally talking I would expect in August to review Q2 results, but we’ll have – I expect also communications into the market place on interesting execution over the next 100 days.

Thanks again for your time and have a great day folks. Cheers!