Patriot One: Security Of The Future?

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About: Patriot One Technologies Inc. (PTOTF), Includes: CSCO, SSTI
by: Matthew McConnell

Summary

Patscan CMR, the revolutionary, covert, cognitive microwave technology designed to detect all weapons, has over 90% accuracy rate with AI/ML to continue improving detection rate.

Pre-revenue (backlog over $4 million) with sales launching in coming months as it has taken out a $40 million bought deal after partnering with Cisco under its Innovation Program.

Patriot One management and background includes affiliation with DARPA on initial sponsorship, technology utilization in Iraq and Afghanistan, and it has added Tom Ridge (first DHS Secretary) to their advisory board.

Patriot One board members have met with officials from the White House and Congress in recent months and Canadian police, military, and governmental officials in November, in addition to having a backlog in sales to Pretoria, South Africa.

Though there is strong upside, risks include: the company is pre-revenue, its product may not become adopted, government funding may go elsewhere, and larger companies may develop their own proprietary products.

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Patriot One Technologies (OTCQX:PTOTF) specializes in an untapped, underdeveloped market in public security. In 2017 the public security market was an astonishing $277 billion and is projected to double to an astounding $532 billion global market within the next four years (CAGR ~15%, but other research projects upwards of a 35% CAGR for certain niche public security markets). The exact market Patriot One is in, the transportation system vertical, is the most promising one with the highest projected CAGR and most avenues for funding. Already a company with a presence in schools ranging from Florida to North Dakota, and hotels in Las Vegas, Patriot One seeks to expand not only within the public market through government contracts, but also the private market in hotels and other businesses. With the amount of different avenues for sales, the upside potential is stark.

There are over 100,000 schools in the nation and an estimated 3 million schools in the world. There are over 500,000 hotels, and over 100 million businesses (STR Global). Notwithstanding the numbers in the CAGR and estimated size in the public security business, the rise of nationalistic tendencies, rising domestic and international terrorism, and the intrinsic fear instilled in those witnessing the heinous events occurring more often around the world cannot be underestimated. There are currently no products marketed that are able to detect as accurately with innovative proprietary technology as Patriot One's Patscan and other pending products promise to do. As a supplement to metal detectors and security guards, or to cost-cut or promote cost-efficiency in the market, or to provide the first form of security in any soft-spot building without security features, the $10,000 cost of the Patscan may be the most effective form of covertly identifying any weapon, anywhere. This is all while TSA bodyscanners and metal detectors cost a whopping $150,000 and $30,000, respectively. From 2008 onwards, the government paid over $160 million on airport security for these products alone. According to Politico,

Senate Homeland Security Chairman Ron Johnson has such low confidence in the scanners’ ability to catch explosives and weapons that he says the agency should make fliers walk through metal detectors after passing through the body imaging machines.

There had been other security devices sponsored by the federal government that too woefully failed. This raises the question: why spend $150,000 for a bodyscanner, or $180,000 for both that and a metal detector, rather than cut costs by over 90% for a covert, more accurate detection system?

If Patriot One were to have received this contract alone, for about 1,000 American airports, they would have made $10 million in revenue in initial sales (not taking into account recurring software as a service revenue). That too, is solely based off of one product: the Patscan CMR. South Carolina Representative Gillard has also proposed a bill to mandate security metal detectors at the entrance of every school in his state, costing $14.4 million up front (lower-end detectors cost only a few thousand dollars and may be circumvented easily or through other points of entry). Such a deal for Patriot One would see revenue likely three times that for the state alone. The backlog Patriot One does have in sales is represented through 400+ units pre-ordered, or $4 million. The current valuation of over 50x expected sales is lofty right now, but it is important to note that the product has yet to launch, and pre-order numbers have not been updated in months. If Patriot One may penetrate 10% of airports and 10% of schools in the nation, revenue from those two avenues alone would amount to over $100 million in sales. Keep in mind that Patriot One is launching globally, with prospective sales to regions ranging from South Africa to Europe.

Having a product more versatile, more discreet, and more innovative than traditional metal detectors, which have many of their own flaws to begin with (compliance to go through, walking around, only detecting metal), the Patscan may detect any weapon by analyzing the shape rather than solely the composition. Pressure plates, knives, any firearm, can be detected with supreme accuracy. In situations where an active threat may be on the outside, or if the threat bypassed a certain Patscan entryway, the next additions to the Patriot One product pipeline include interior and exterior (parking lots, outdoor venues) scanners that traditional security equipment have no way in detecting.

The Patscan $10,000 initial price (70% gross margin) is the first stride in branding both a leader in global security and a profitable company. The other products launching in 2019 do not have a current price tag, yet would likely price at a similar gross margin. CEO Martin Cronin is seeking to add a recurring revenue source as well by means of using the software as a service by encompassing the several units into one online platform that may connect to cloud services within the building, to high-speed internet cables, and thus to local police as well. This is why the partnership with Cisco (CSCO) is so essential for Patriot One. In addition to the possibility of a buyout by Cisco, which happens quite often in the Cisco Innovation pipeline, the connection between Patriot One's products and Cisco's network may only enhance the scalability, the efficiency, the brand-name, and the rollout with possible additional funding.

Funding seems to be another way for Patriot One to insulate itself from the high operating costs and cost of revenue that many rising technology stars have. As a disruptive technology comparison, Square (SQ), Roku (ROKU), and Netflix (NFLX), with market values between $6 billion and over $130 billion, are the classic tech plays that are prone to cash burn and an unfriendly junk bond market that only increases interest payments on continuing operations in the income statement. Patriot One, on the other hand, has the ability to tap revolvers and middle market lending (yet at high rates as well), but a more strategic move is one they have already been pursuing. Having met with Congress twice this year, as well as with White House representatives, Canadian officials, and the South African government (pre-sales in Pretoria), Patriot One may have the means to cover costs through government funding. The US, as of March 23, 2018, has provided an omnibus spending bill to school security through the Consolidated Appropriations Act to allot a $1 billion matching grant programs through the Department of Justice. Between 2008 and 2015, the Law Enforcement Terrorism Prevention Activity (LETPA) Funding hit $10 billion in conjunction with the following purposes, among others:

(A) information sharing and analysis;

(B) target hardening;

(C) threat recognition;

(D) terrorist interdiction;

(E) training exercises to enhance preparedness for and response to mass casualty and active shooter incidents and security events at public locations, including airports and mass transit systems;

(F) overtime expenses consistent with a State homeland security plan, including for the provision of enhanced law enforcement operations in support of Federal agencies, including for increased border security and border crossing enforcement;...

Once again, in an infantile market without much competition, just look to Shotspotter (SSTI). A few partnerships on "Smart Cities" and about $30 million in revenue, they had quadrupled YTD until the recent selloff. Trading at 15x sales and over 200x forward PE, the company launched an innovative product in an untapped public security industry. As Patriot One is proactive, rather than reactive like Shotspotter, there is no reason Patriot One and its capable board and products should perform any worse than their industry peer.

Moving forward, getting a small position below $2 a share could be a good first move before adding more exposure. The company has yet to launch their product, naturally adding a degree of risk in the timetable for the rest of their products. Though there are also possible competitors with billions of dollars in cash on their balance sheets, such as IBM (IBM) or Northrop Grumman (NOC), there has yet to be a product launched with the same covert design, the AI/ML that refines the technology, and the covert nature of the machine. There is no certainty that companies, public facilities, and venues will adopt this technology on a broad scale. There are security measures in many places already, as rudimentary and costly as they may be. However, having patents, international exposure, a well-connected board, and a major partnership with Cisco, Patriot One is situated well for a pre-revenue company. With a prospective launch in the coming months, a small position can be augmented with higher conviction trades as the security roles out. However, being early to a promising company may have greater upside potential than downside, especially with its established credibility.

Disclosure: I am/we are long PTOTF.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.