**Numbers delayed by one Quarter
Company: Route1 Inc
Ticker: ROI-TSX.V: ROIUF-OTCQB
Current Price: $0.85
52 Week Hi/Low: $0.32 - $0.90
Average Daily Volume (3month): 42K
Issued and Outstanding: 35,730,796
Options: 3,232,500
Warrants: 3,000,000 at $0.50
Fully Diluted: 41,963,296
Market Capitalization: $30M
Insider Ownership: 6.5% - 2,315,095
TTM Net Profit: $305K
TTM Revenues: $30.4M
TTM Recurring Revenues: $9.09M
TTM Adj. EBITDA: $2.33M
TTM Gross Profit: $10.66M
P/S: 0.98x
P/Recurring Revenue: 3.1x
P/E: 92x
Debt: 1.19M
Cash: $100K
Last Financing: 2010 – $1.9M / 38,000,000 units at $0.05 full warrant at $0.15 (pre-consolidation)
Highlights:
- 9x year stock breakout
- Growth in recurring revenue – Up 40% Y/Y
- Cheap valuation trading at 3.1x ARR
- Adj. EBITDA profitable since 2012
- Acquisitions – expanded revenue growth opportunities
- Normal course issuer bids since 2012
- Clean structure – Post 10/1 rollback
- Misunderstood and undiscovered
What is Route1 Inc?
Route1 is an advanced North American technology company that empowers their clients with data-centric solutions necessary to drive greater profitability, improve operational efficiency and gain sustainable competitive advantages, while always emphasizing a strong cybersecurity and information assurance posture. Route1 delivers exceptional client outcomes through real-time secure delivery of actionable intelligence to decision-makers, whether it be in a manufacturing plant, in-theater or in a university parking lot. With offices and staff in Boca Raton, FL, Chandler, AZ, Chattanooga, TN, Cincinnati, OH, Denver, CO, Glen Allen, VA, and Toronto, Canada, Route1 provides leading-edge solutions to public and private sector clients around the world.
History:
Route1 Inc:
Route1 Inc was founded by Andrew White and raised $4.4M on its reverse takeover transaction in 2004. Over the next five years, Mr. White and the Route1 team successfully marketed and commercialized its technology. At that time, Mr. White was foundational to the Company’s success and the largest reporting shareholder.
By 2009, after the Company had landed its largest contract in history, worth about USD$8 million in revenue and USD$5.5 million annually thereafter in recurring revenue, the Board of Directors unexpectedly fired Mr. White as the CEO for “underperformance”. Mr. White was offered a transition role as Vice Chairman and Chief Architect, while an existing Board Member was announced as interim CEO.
These bizarre actions by the Board of Directors were strongly contested by both Mr. White and the existing shareholders. The Board of Directors, in pursuit of entrenching themselves, became under the legal spotlight for their actions. Upon legal review, there was no reason for the termination cause of Mr. White, who was quickly reinstated as CEO.
Thereafter, Tony Busseri was asked to be a director-at-large and work with Mr. White and Route1 to identify and retain new additions to the Board of Directors and management. In 2010, Tony Busseri was announced as president and CEO of Route1 and Mr. White stepped down from Vice-Chairman after defending the Company.
Tony Busseri:
From 1997 to 2000, Mr. Busseri was the founding president and CEO of Capital Environmental Resource Inc. Renamed Waste Services Inc. (WSI), the Burlington, Ontario-based company was listed on the Nasdaq. (WSII: NYSE). Through a number of mergers and acquisitions, Waste Services wound up as a part of Waste Connections (WCN: NYSE).
In 2004, Mr. Busseri was announced as the CEO of Environmental Management Solutions, which was formerly listed on the TSX (EMS-TSX). Mr. Busseri was named as the CEO after the previous CEO, Frank D’Addario, misappropriated company funds and fired the company’s auditor. Mr. Busseri managed to save the fledgling company which eventually rebranded as Englobe (EG: TSX). Mr. Busseri eventually resigned as the CEO in 2008.
As for Mr. Busseri’s background, he is a graduate of the honours business administration program at the Richard Ivey School of Business at the University of Western Ontario and holds a Certified Management Accountant designation. Additionally, Mr. Busseri is a principal of Growth Equity Partners (“GEP”), a full-service business advisory firm.
What’s the business model and how does it work?
Route1 is a technology company with a suite of hardware and software products serving a US-centric customer base. Route1 operates in four key sectors: data security, data analytics and data acquisition, visualization and lastly, data services.
The Company currently serves a variety of industries including, financial services, the federal government, healthcare, first responders, manufacturing, oil, gas and utilities, parking lot operator and public safety.
Route1’s evolving sales strategy has shifted from selling rugged devices and remote access technologies, to focus on selling a bundle of software applications and devices to address their clients’ data requirements in delivering better decisions on a real-time basis.
A critical component of Route1’s business model and a key growth driver, has been its recent acquisitions. Route1 has made two transformational acquisitions since 2018, acquiring Group Mobile and PCS Mobile.
The acquisition strategy has helped Route1 geographically expand and grow its sales team. Core to the acquisition strategy is leveraging the embedded relationships and placement of rugged devices, creating an opportunity to sell data security, analytics, and other software solutions as an integrated offering – Like a trojan horse model.
Through the acquisition of Group Mobile and PCS Mobile Route1 has expanded its service and product offerings suitable to the earlier mentioned industries. Route1 sells rugged devices such as laptops, notebooks, tablets, handheld scanners, vehicle docking stations, wifi networks, mobile wireless, mobile video and accessories, computing, printing, and scanning accessories and mobile antennas and wireless accessories.
Route1 partners with established innovators and market leaders to provide more complete, feature-rich information assurance solutions to governments, enterprise customers, and small and mid-sized businesses. The partners provide the integration, hardware, software, security and networking requirements that differentiate and define Route1 solutions in today’s digital environment.
Through its acquisition strategy, Route1 is geographically expanding and penetrating new verticals which are diversifying its revenue base, customers and creating opportunities to grow its recurring revenues. By selling a fully integrated data solution, Route1 is seeking to strengthen their customer relationships, increasing the value of the long-term recurring revenue growth. These synergies will drive performance and ultimately the future cashflow.
Route1 has a number of key patents including U.S. Patents 7,814,216, 7,739,726, 9,059,962, 9,059,997, 9,319,385, 10,135,807, 10,148,641, and 10,320,774.
A Core Recurring Revenue Solution:
MobiNET - A universal identity management and service delivery platform. It provides a consistent accurate means of identifying and authenticating users within all levels of classified and unclassified networks. MobiNET is a private cloud infrastructure (for enterprise clients) and is also called DEFIMNET when dealing with the arm of the U.S. government.
MobiKEY - A patented mobile access solution developed for a remote workforce. MobiKEY works on any device from a computer to a tablet to a phone. It uses comprehensive multifactor authentication and identity management to securely connect your organization’s assets with your employees, mobile workers, and contractors. The MobiKEY product is sold on a 1-year subscription basis and paid annually in advance. To date, there are 16,058 MobiKEY subscribers paying annual subscription fees, which amounts to $740K monthly.
What’s changed? Why now?
Recurring Revenue
Firstly, we would like to highlight the accelerating growth in recurring revenue. Over the last twelve months, Route1 has $9.1M in recurring revenues, comprised of technology-as-a-service, application software and other services – Representing a 40% increase.
Most recently, Route1 received a purchase order for 4,000 annual MobiKEY subscriptions, which can also increase by increments of 1,000 without having to go back out to bid. The additional MobiKEY subscriptions have not been fully recognized on the income statement and will be recognized in future quarters.
From this recent contract, the MobiKEY total subscription revenues increase from $400K a month to $740K a month - $8.88M per annum. This represents an 85% increase in recurring revenues for this one segment. Moreover, while Route1 currently has 16,058 MobiKEY subscribers, management will continue to grow and is targeting 20,000 subscribers.
This is not the only recurring revenue stream for Route1. The Company also has a technology-as-a-service, and service revenues which have generated $1.56M thus far in Fiscal 2020 (6 months). In comparison, in Fiscal 2019 Route1 recognized $800K in recurring revenues for these two segments – a 95% increase year over year.
Therefore, when analyzing all recurring revenues, not accounting for future growth, Route1 should be generating total recurring revenues of roughly $12.7M – a material increase and a record for the Company.
Gross Profit
Next, we would like to highlight that Route1 has been increasing its sales force. While sales and marketing have been increasing, impacting profitability, and operating cash flow, management is showing strong execution in capital allocation.
What’s important to recognize here is that each time the Company is investing $1 in sales and marketing initiatives, they are generating about $3.31 in gross profit as of the third quarter (metric released in the business update before official Q3) – A metric that has been historically improving.
Gross Profit to Sales and Marketing
Q3 2019 2.78
Q4 2019 2.66
Q1 2020 2.94
Q2 2020 3.14
Q3 2020 3.31
As the trend has been improving, it is showcasing that the Company is better at spending each $1, showing the responsibility of management on the behalf of its shareholders. And even more importantly, given that there’s recurring revenue attached to many of these sales, these numbers will continue to improve because there are no new initiatives to continue that yearly recurring number – Management believes it can increase that metric to 3.5x and 4.0x.
Financially, the above-noted trends are beginning to show an impact on the Company’s bottom line. The profitability has been consistently improving over the past three years. Through the first six months, Adjusted EBITDA has improved by 100% compared to Fiscal 2019, and by 200% compared to Fiscal 2020. We anticipate this trend to continue and recognize the growing gross profit will contribute to the bottom line. Moreover, the Company is demonstrating it can invest in sales and marketing initiatives to grow its recurring revenues, have a large impact on cash flow and profitability.
Share Structure
Route1 currently has 35,730,796 shares issued and outstanding. In addition, there are dilutive securities comprised of 3,232,500 options and 3,000,000 warrants for a fully diluted amount of 41,963,296.
The warrants are exercisable at $0.50 and expire March 22, 2021. These warrants were issued during the acquisition of Group Mobile. At that time XpresSpa was issued 2.5M (post-consolidation) or about 7% of the Company.
The acquisition of PCS Mobile also included share compensation where the owners (Pekkebier and Murphy) received a combined 1.12M (post-consolidation) shares.
Insiders own, 2,315,095 shares or about 6.5%. The Chairman, Michael Harris and Mr. Busseri, are the two largest insiders with roughly 680K and 675K respectively. While insider ownership is quite low, we do recognize that the insiders did not receive the founder’s shares or cheap stock.
Route1 has consistently repurchased shares under a normal course issuer bid. Since 2016, the Company has purchased just over $1.6M worth of shares up to $0.53. Insiders also supported the corporate buyback and have been adding shares through open market purchases during the same period.
Valuation
Through the combination of both hardware and software sales, Route1 has generated $30.4M in revenues over the last twelve months. While the Company’s margins tend to fluctuate, depending on the revenue mix, we think it is more important to evaluate the Company on its core recurring revenue engine and gross profit, as opposed to the fluctuating yearly gross margin. Moreover, below is an overview showcasing the recent acceleration of recurring revenue.
Over the last twelve months, Route1 has generated $9.1M in recurring revenue. Through the first half of Fiscal 2020, Route1 has generated $4.45M in recurring revenue - a 40% increase Y/Y.
As earlier noted, the additional MobiKEY subscriptions are not fully reflected in these recurring revenue numbers, therefore we expect the growth in recurring revenue to continue. Based on the monthly MobiKEY subscriptions combined with the technology-as-a-service and other services revenue, on a full-year basis, we anticipate Route1 will be generating roughly $12.7M in recurring revenue.
At today’s market capitalization of $30M that would put Route1’s price to recurring revenue of 3.1x for their last twelve months, and on an annualized basis 2.3x. For a SAAS company with recurring revenues, we recognize this is quite cheap, especially compared to industry peers. As an example, a big cap company such as CrowdStrike Holdings (CRWD: NASDAQ) is trading a 51x ARR, whereas a small-cap company such as Rekor Systems (REKR: NASDAQ) is trading at 15x ARR. While we do not expect Route1 to achieve the same multiple, we recognize the large disparity between multiples for larger peers.
Route1 has been adjusted EBITDA profitable since 2012 and has not financed since 2010. We do not think there is much dilution risk with the Company given its growing recurring revenues and operating cash flow – although an acquisition could alter the thesis.
Outlined above is the company’s gross profits and adjusted EBITDA, which are both trending in a positive direction. Route1 achieved a record gross profit last quarter of $2.78M, and we anticipate the growth in recurring revenues will continue to drive both gross profit and EBITDA.
For every incremental sale, there are additional recurring revenues. With sticky customers, and management’s ability to effectively invest in sales and marketing strategies, the overall growth in gross profit will be a critical metric for evaluating the execution of the Company.
It should also be noted, the recurring revenue distorts Route1’s balance sheet. Working capital looks constrained because the additional subscription revenue is recorded as a liability. Contract liability (otherwise known as deferred revenue) has grown to $4.2M up from $1.75M over the prior year.
Moreover, as of the second quarter, when excluding the contract liability, the working capital is positive $800,000. With relatively limited debt amounting to $1.2M, which consists of bank debt and sellers notes from acquisitions, Route1 has adequate working capital and sufficient lines of credit for continued expansion.
Route1 has generated $305K in net income over the last twelve months. We want to highlight that on an earnings-based valuation, Route1 appears to be quite richly valued trading at 92x. However, as we have outlined above, we think the Company should be valued on its recurring revenues, as they are the core engine of the business and increasingly delivering more value to the bottom line.
Currently trading at 3.1x ARR – and expected to become significantly lower on an annualized basis, the market has mispriced the core business. We think Route1 deserves at minimum a 5x multiple, which puts the share price much higher than today, while still significantly cheaper than its market comparables. Notably, as the core business continues to grow, we do recognize the adj. EBITDA and net income should also materially improve. Moreover, additional metrics such as P/E and EV/EBITDA should become increasingly attractive.
The market is beginning to recognize how undervalued the Company’s shares are as Route1 is breaking out to a new 9-year high.
What to look out for
Air Watch Lawsuit
Since 2017, Route1 has had a lawsuit with AirWatch, a subsidiary of VMware Inc. Route1 has spent a considerable amount of both time and capital in the pursuit of litigiously defending its intellectual property which they claim AirWatch infringed. In fact, over this period Route1 has spent more than $2.6M cumulatively on patent litigation expense.
One of the latest developments of the lawsuit is an order granting AirWatch payment in the amount of $1,666,672.78 for attorneys’ fees. Route1 expects to appeal the decision, but it is another potentially large sum of cash. However, it should be noted that the Company has collateral on the balance sheet to offset this sum of cash.
In 2013, Route1 announced a judgement in a defamation lawsuit. The Company was awarded $200,000 in damages against a Stockhouse user for defamatory posts against CEO, Mr. Busseri.
Based on history, it is our understanding that Mr. Busseri and Route1 are not afraid to legally protect the Company and utilize the legal system. While not necessarily a negative, it can implicate the investment thesis as it can deter new shareholders and capitalize precious resources, chiefly, time and capital.
Acquisition Overhang
As earlier noted, Route1 has made two significant acquisitions, Group Mobile and PCS Mobile. Both acquisitions included shares in the transaction - totalling 3.62M shares.
Since these shareholders are not reporting insiders, or individually breaching the 10% reporting threshold, there is the potential for an overhang of stock if these shareholders wanted to sell their positions.
Additionally, as part of the Group Mobile acquisition, Route1 issued 3M warrants exercisable at $0.50 which expires March 22, 2021. At the current prices, the warrants are in-the-money and likely to be exercised. There likely will be some overhang and selling from these warrants.
Final Thought
Route1 has a long-standing operational history and has been operating off their internal cash flows for the past decade. After executing multiple acquisitions, Route1 has grown beyond its founding business and has a refined business strategy. The latest acquisitions expand the revenue and growth opportunity by exploiting geographic expansion and new verticals. Route1 is early in a growth phase and has a large total addressable market to further penetrate.
Financial metrics validate the growth thesis, with revenues, cash flow and profitability all improving. More importantly, the core business of recurring revenues is accelerating after growing 40% Y/Y. With a robust recurring revenue profile, the profitability is expected to improve, and cash will continue to accrue on the balance sheet. The balance sheet is adequate, with minimal debt, and positive working capital the Company can facilitate current demand.
We believe litigation costs are coming to an end, providing the Company with additional resources to invest in growth. Historically, the Company has been proficient at allocating capital towards share buybacks and investments in growth. An end to litigation costs will provide additional cash for the Company to focus on growth and shareholder-friendly investments.
We believe Route1 has been overlooked by the capital markets for several reasons, including the historically high share count, litigation costs, and lack of broker or institutional support because the Company has not financed in a decade. With many of these issues being overcome and the recent acceleration of growth, we believe the Company represents an outstanding investment opportunity.
Based on current metrics, with a focus on the valuation of the recurring revenue, Route1 shares are both cheap for a SAAS company, and even cheaper compared to market peers. With an ARR of $9.1M, which we expect to increase to $12.7M on a full-year basis, Route1 is trading at roughly 3.1x and 2.3x, which at a minimum we think is worth 5x. Based on our analysis, if the Company executes on its business and addresses some of the capital markets misunderstandings, we think it’s a function of time before new investors begun to understand the core engine driving Route1’s profitability.
We think Route1 is a strong buy up to $1.00
Disclosure: Paul and Trevor own shares in Route1 Inc.
Financing History
2010 - $1.9M at $0.05 38,000,000 units 1 warrant at $0.15
2007 - $7.8M at $0.12 64,720,666 units 1/2 warrant at $0.155
2006 - $5.2M at $0.08 65,309,618 units 1 warrant at $0.10
2006 - $5M at $0.12 41,666,666 unit 1 warrant at $0.155
2005 - $4M at $0.30 13,333,335 unit 1/2 warrant at $0.40
2004 - $4.4M on Prospectus RTO
Recent Headlines
2020 - Route1 Provides Third Quarter 2020 Business Update
2020 - Route1 Provides AirWatch Litigation Update
2020 - Route1 Announces Normal Course Issuer Bid
2020 - Route1 Announces Q2 2020 Financial Results
2020 - Route1 Wins State of California Department of General Services LPR Contract
2020 - Route1 Announces Q1 2020 Financial Results Notification
2020 - Route1 Announces Amendment to Normal Course Issuer Bid
2020 - Route1 Announces Q4 and Full Year 2019 Financial Results
2020 - Route1 Announces Q4 and Full Year 2019 Financial Results Notification
2020 - Route1 Provides Operations Update
2020 - Route1’s MobiKEY Technology Playing an Important Role in Supporting the U.S. Government’s Work from Home Plan During the COVID-19 Outbreak
2020 - Route1 Announces Dr. Barry C. West to Chair US Government Advisory Board
2020 - Route1’s PCS Mobile Named Genetec AutoVu Premier Partner of the Year – North America
2020 - Route1 Announces Q1 2020 Financial Results
2019 - Route1 Provides Third Quarter 2019 Operations Update
2019 - Route1 Expands with Genetec to the Province of Ontario, Canada
2019 - Route1 Announces Normal Course Issuer Bid
2019 - Route1 Announces the Launch of a Technology based Solution called ScreenSTOP powered by MobiNET
2019 - Route1 Announces Q2 2019 Financial Results Notification
2019 - Route1 to Commence Trading on a Consolidated Basis at the Opening of the Market on Tuesday, August 13, 2019
2019 - Court Grant’s AirWatch’s Motion for Summary Judgement of Non-Infringement
2019 - Route1 Announces Its Intention to Consolidate Its Common Shares
2019 - Route1 Signs Definitive Agreement to Acquire PCS Mobile
