Gatekeeper Article (Check it out on SeekingAlpha) If you are like me, you would love to say that you invested in a giant company that started out of a guy's garage or apartment. Perhaps the most famous story about that (even though it's not entirely true) is Jeff Bezos and Amazon (AMZN). Or Kevin Plank and Under Armour (UA). While millions of people have invested in AMZN and UA at some point, most of those investors came long after the company moved out of the garage! And the fact of the matter is, most of us will never have the opportunity, let alone the foresight, to invest in a future giant company when it's just a startup.
Still, the idea of investing in a young company that can one day become huge is one of the reasons I am attracted to small cap stocks. And although I did not start investing in Gatekeeper Systems (OTCPK:GKPRF) until well after they moved out of founder and CEO Doug Dyment's apartment, I am still in early for a company that could become a multi-bagger.
In this article, I will discuss how GKPRF, a video and data solutions provider for public transit and "smart cities," went from a small private company in Dyment's apartment, to a company a few years later selling to the likes of Boeing and Lockheed Martin, with the main focus now being on GKPRF's target markets of K-12 transportation and public transit/smart cities. I will also show in my "Valuation" section why I believe the company could fairly quickly expand their market cap by nearly 150% from current levels.
Company Background
As mentioned, GKPRF is a video and data solutions provider for public transit and smart cities. According to people familiar with the company, GKPRF hopes to become a $1B data company, and to be recognized as one of Canada's top tech corporations. The company is certainly making strides towards this that have been recognized. For example, GKPRF was recently named one of the top 10 technology companies in the 2021 TSX Venture 50.
GKPRF sells both hardware and software. Much of its multi-source hardware comes from China (which dented gross margins recently, in part due to tariffs, as I will discuss more below). But GKPRF's real gold mine is their software, which they can integrate with other companies' hardware. Overall, GKPRF's specialty is their data collection/integration.
At this time, GKPRF has 34,000 mobile data collectors in use, in over 3,500 school districts. In addition, the company has a prominent relationship with the Southeastern Pennsylvania Transportation Authority that I will discuss in more detail below. But GKPRF's primary goal, in any market it serves, is to leverage its AI capabilities to make smarter decisions. This, then, leads to what GKPRF refers to as its platform as a service (PaaS) strategy. PaaS is a combination of its hardware and software (SaaS-based) offerings (although the software integration with other hardware still allows the company to provide SaaS stand-alone service on non-GKPRF hardware, as I will discuss further below). For GKPRF, a video camera is not just a camera, but a solutions-based product that allows for data collection that can then be trained to make decisions.
Primary Markets & Explosive Growth Opportunities
K-12 Schools
As noted, GKPRF already services 3,500 school districts to various degrees. The primary service has been the use of GKPRF's mobile data collectors. Again, GKPRF's approach allows them to either: (a) sell a school district its own mobile video cameras; (b) sell a school district its own cameras PLUS the SaaS-based software solutions; or (c) sell a school district its SaaS-based software to be used on existing (i.e. another company's) video cameras.
School bus video is important for numerous reasons. Not only does it allow the school district to review situations such as "bullying," but it can also be used to ensure things like social distancing in this Covid environment. More importantly, however, is the fact that the National Transportation Safety Board (NTSB) has recommended all states pass legislation allowing video to be used in stop-arm violations. Stop-arm violations are when a bus's stop sign is out and its lights flashing, but a car passes the bus anyway. With GKPRF's PaaS-based solution, when a violator passes the bus, a picture can be taken and a ticket automatically issued to the owner of the vehicle.
While many school districts have expressed interest in this type of solution, from my research I have learned that most of them were unable to find the proper funding. However, that potential problem was recently removed with the passage of the latest federal stimulus related to the Covid-19 pandemic. Specifically, public K-12 schools will now be receiving approximately $130B from the "American Rescue Plan" to help with re-opening related to Covid. I expect some of that money to be used for GKPRF's technology, especially considering the ability the company's solution has to measure a child's temperature. This ability, combined with federal stimulus and the urging of the NTSB, will provide schools with a funding bucket from which they may purchase GKPRF's solutions.
To this point, GKPRF has recently issued multiple related press releases. The first was a school district win for interior and stop-arm video evidence recorders. The second relates to GKPRF's ability to provide a solution for an OEM-installed camera system. Notably, in this press release, CEO Dyment noted the following abilities: "passenger counting and contact tracing." And then, in the third press release, the company noted a new add-on SaaS layer to its PaaS capabilities: using "intelligent video search software to view, analyze and extract video segments to assist in situations such as locating a missing child, or analyzing student and driver behavior."
And although the future for GKPRF looks bright in the US, the company recently indicated via a press release that Canada also provides huge potential. In fact, the company just recently entered into a pilot program agreement with British Columbia and Ontario to equip buses with GKPRF's video and data solutions suite, which includes interior cameras, infraction cameras, 360-degree cameras, and wireless-enabled mobile data collectors.
Source: GKPRF Website
This pilot program evidently stems from the 2020 "Strengthening School Bus Safety in Canada" report issued by the Council of Ministers Responsible for Transportation and Highway Safety. That report recommended that all Canadian jurisdictions explore the application of a number of key safety measures, including infraction cameras and exterior 360-degree cameras, both of which fit well into GKPRF's wheelhouse. From my research, I have determined that GKPRF is one of only two vendors selected for this pilot. In the end, GKPRF has more capabilities/offerings with their full suite of products than their competitor, so I believe this pilot is theirs to lose.
In addition to the British Columbia/Ontario pilot program just mentioned, GKPRF just announced yet another cooperative pilot program with Toronto schools. This pilot combines GKPRF's capabilities with their new partner, United Safety. Together with GKPRF's platform, the combined offering will also include United Safety's child safety and air purification solutions. While the pilot begins with only three vehicles, the press release makes clear the opportunity is much larger, with over 1,800 school purpose vehicles used daily in the pilot program's broader network.
Finally, as it relates to the K-12 opportunity for GKPRF, the company recently announced a partnership with ByteCurve to deliver "Clarity." Clarity is a software solution for school bus scheduling and dispatch, school bus driver time and attendance, as well as driver communications. ByteCurve's solutions have been embraced by a global leading transportation provider and under the partnership, Gatekeeper becomes ByteCurve's only video integration partner for the school bus market. Clarity will also interface with Gatekeeper's on-board mobile data collectors and video devices on school buses to integrate additional data elements such as GPS location, passenger counting, and video analysis for social distancing. Clarity provides school districts with the scheduling and on-bus video and data analysis tools they need to efficiently manage the logistics of their school bus operations.
To date, the K-12 school bus video/monitoring market has been GKPRF's bread-and-butter. With the passage of the American Rescue Plan, the addition of Clarity, the pilot program in Canada, and the strong sales pipeline at GKPRF, I expect the K-12 transit segment to continue to shine in the future.
Transit
The Southeastern Pennsylvania Transportation Authority (SEPTA) accounts for a large portion of GKPRF's transit business since 2018. The company started with SEPTA as a service provider, taking care of maintenance on current systems on trains/buses. The company is currently displaying its capability as a data tech company, while also continuing the service side of the business with SEPTA. In speaking with people familiar with the company, they pointed to GKPRF's stop arm camera business and how that technology can help an organization like SEPTA capitalize on the lane infraction violations that currently go un-ticketed. With GKPRF's cameras already on board their transit vehicles, SEPTA simply needs to add GKPRF's AI software to expand into that arena. The person with whom I spoke believes that GKPRF's business with SEPTA-which currently stands at around $25M in bookings-could grow into $100M in revenue. How could that happen?
According to sources familiar with the process, GKPRF quoted a contract to SEPTA after performing a proof-of-concept for just shy of $20M US annually to manage lane infractions. Apparently, SEPTA was "blown away" with GKPRF's capabilities. Allegedly, SEPTA's operations staff "loved GKPRF's software." If this proof-of-concept were to turn into an actual contract, it is likely that in addition to the flat fee, GKPRF would also likely receive a service (i.e. variable) portion based on the number of tickets issued that could lead to additional revenue in the eight digit figures. My belief is that a contract of this nature, with its recurring revenue component, should lead to an immediate doubling of GKPRF's current market cap (more below in the "Valuation" section).
SEPTA serves as a model contract and a strategic reference customer for GKPRF that could lead to additional business with other transit authorities and/or cities interested in becoming "smart cities." Below, I will discuss a few possibilities that have come up in my research.
City of Philadelphia
As the main metropolis in Southeast Pennsylvania, it should come as no surprise that GKPRF's contract and performance with SEPTA has led to interest in the company's solutions from the City of Philadelphia. According to a person I spoke with who has knowledge about the city, they claim that the city estimates it loses about $90M/year in non-ticketed parking violations and lane infractions. GKPRF's platform on buses, as I mentioned in the section above, can communicate to automatically issue tickets, which could help the City of Philadelphia address the problem of lane infractions. The parking violations issue could be resolved by putting cameras on garbage trucks. The SEPTA contract already helped GKPRF land a deal with Philadelphia schools. People I spoke with who are familiar with the company also indicate GKPRF may be on the brink of a deal with the city for buses-and possibly even garbage trucks-in order to automate the issuance of citations for lane/parking violations.
City of Toronto
As mentioned above, the province of Ontario, in which Toronto is of course located, just recently began the pilot program with GKPRF on school buses. Unsurprisingly, then, my sources indicate that the City of Toronto is also highly interested in GKPRF's solutions for public transit, citations issuances, etc. In fact, according to one of my sources, Toronto is actually working with GKPRF to write the request-for-proposal that will be used to bid the contract (if it is not sole-sourced). This obviously gives GKPRF an upper-hand in landing the deal. The deal would, at a minimum, include cameras to capture drivers who blow past open street cars. This article on the issue is quite informative.
Additional Cities
While I believe several cities have shown interest in GKPRF's solutions for public transit, the most interested cities, according to my sources, include New York, Dallas, and San Francisco. Any of these cities (including the two mentioned in more detail above) would be huge wins for GKPRF, likely leading to a doubling or more of revenue from this side of their business. And that would all be on top of additional possible business from the existing SEPTA contract.
Financials & Guidance
For its last fiscal year, GKPRF reported just over $20M in revenue. It seems that current implied guidance (the company does not give official guidance) for the current fiscal year would put GKPRF at $23.5-30M in revenue. Those numbers come from GKPRF highlighting that first half revenue numbers have historically been 27-35% of their revenue, and extrapolating from the $8.3M in revenue in the first half of this fiscal year.
However, I believe there is a chance GKPRF blows those numbers out of the water. While a lot of this is timing, it is possible GKPRF could attain $40M of revenue this fiscal year, all depending on when they land some of these new contracts. That said, in the grand scheme, it really does not matter whether GKPRF lands the contracts this fiscal year or next because all of them would be multi-year contracts and/or recurring revenue in nature. I add that caveat because I think investors would be unwise to emphasize year-over-year or quarter-over-quarter numbers at this still early stage of GKPRF's development. Rather, the focus should be what GKPRF is on the brink of landing, whether it be this fiscal year or the next. Because when the company does land those deals, they will lead to significant recurring revenue for years to come.
Source: GKPRF Website
One recent concern with GKPRF has been the hit to their gross margins. The gross margin contraction has been related to two primary factors: (1) the tariffs imposed between the US & China; and (2) the relative higher revenue from equipment sales vs PaaS recurring revenue. According to my sources, the equipment business has around 40% margins and the recurring revenue component will have more like 60% margins (perhaps into the 70% range long-term). Now, obviously, the current lower margins from equipment sales is good in the sense that this will likely lead later to the much higher PaaS margins.
In fact, we are already starting to see that (refer to the last earnings release I linked above). Specifically, although revenue in Q2 was lower than Q1, margins were significantly higher, rising from 41% in Q1 to 49% in Q2. Again, this is partially from more recurring revenue. But, importantly, it is also due to some cost controls GKPRF recently put in place, which means that these margins should remain closer to 50% moving forward than to that 40% number from Q1.
The final thing to note here is that the company has been both EPS and operating cash flow positive. In the first half of their current fiscal year, operating cash flow was over $8.5M. EPS was at break-even, but we should expect positive EPS on the back side of the year. In the past fiscal year, EPS was $0.04/share. The company ended the past quarter with $3.4M in cash.
Risks
GKPRF investors should be aware of several risks. The first is that GKPRF is still a small company, and despite the fact that they currently operate on thousands of K-12 buses, SEPTA has been their only finalized contract in public transit. While GKPRF has huge opportunities in public transit, as I discussed above, there is the possibility they do not win any of those. I do believe, however, that GKPRF will likely win some business from Philadelphia and Toronto. I also think it's likely their contract with SEPTA will expand to be higher dollars.
Related to that, GKPRF may need to raise additional funds. Some of these big cities like to see more cash on the balance sheet. Although GKPRF does not "need" cash to survive, they may "want" cash to look better to prospective clients. Ultimately, I would view such a raise as being bullish because, again, GKPRF is not needing the money to simply keep their doors open. Still, such a raise could cause at least a temporary hit to the stock price depending on the nature of the deal. My thought is that GKPRF would be looking to raise from a position of strength, and so the deal terms would certainly not be disastrous or overly dilutive.
Another risk is actually the opposite of the first risk I mentioned-i.e. not winning business. This risk would be that GKPRF, as a small company, would "bite off more than it can chew." With so many opportunities in front of them, there is the chance that GKPRF becomes overextended. While this certainly is possible, I would note that management was strategic about the new relationship with SEPTA, starting small and then expanding methodically and strategically. From my discussions with people familiar with the company's thinking, I think the company tends to be conservative in this respect, and will be sure they do not become overextended.
Valuation
In valuing GKPRF, I think there are a few important factors to consider. First, unlike many US high growth/SaaS-style companies, GKPRF is already profitable ($0.04/share, as noted earlier, in their last fiscal year) and also generates good operating cash flow. Second, compared to some public-traded comparable companies, I believe GKPRF's valuation is extremely low. That's likely because the company is on the Toronto Venture exchange. My research indicates that the company is planning-as soon as practicable-to uplist either to the US NASDAQ or to the main Toronto exchange.
In any case, I view GKPRF as massively undervalued since it currently trades around a ~20 P/E ratio. That is extremely low given both GKPRF's solid growth and margins. On a P/S ratio, GKPRF trades at less than 4 on a trailing basis. Note how low this is for a company with a significant percentage of recurring revenue!
The main comp I am using for GKPRF is Rekor Systems (REKR), another company focused on smart cities. Now, there are a couple of qualifiers in using this comp, all of which I factor into my valuation model. (1) REKR has 70% gross margins, which is where GKPRF should eventually come in on PaaS revenue once that ramps more fully; (2) REKR has three analysts covering them, compared to zero for GKPRF; (3) but REKR is not profitable, with both significant negative EPS and negative EBITDA; REKR cannot, therefore, be valued on a P/E basis; however, on a P/S basis they trade at a forward valuation of nearly 40 and a trailing valuation of over 100!!! Again, for perspective, GKPRF trades at a trailing P/S of 4.
In this context, I offer the following assumptions and valuation of GKPRF. (1) by EOY 2021 PaaS revenue will represent 50% of revenue, or ~$20M CAD; (2) PaaS revenue valued at 10x sales, WAY below REKR, and very reasonable for fast-growing, recurring revenue; (3) device sales valued at 2x sales (in part because these sales almost inevitably lead to future PaaS revenue).
Taken together these assumptions lead to a $150M valuation on PaaS revenue ($15M times 10) and $30M on device sales ($15M times 2). Add cash of roughly $5M by EOY 2021, and you get to a market cap of $185M CAD, or over 140% increase from current prices (~$0.87/share CAD). As you can see, with significant opportunities on the near horizon (1-2 years) that could lead to even further upside, GKPRF is cheap. Why?
I think there are two main reasons: (1) the company is under-covered, being on the Toronto venture exchange, something they will likely remedy sooner than later; and (2) investors likely misunderstand their gross margins, which until recently had been shrinking for the reasons I discussed above. As these margins inevitably begin to expand again, I look for more investors to figure out just how undervalued GKPRF is at current levels.
Conclusion
While GKPRF started out of its CEO's apartment, the company is now growing rapidly and has shown with its SEPTA contract and numerous large school district wins that it is ready for "primetime." The company sits perfectly aligned at the intersection of the American Rescue Plan in the US and the Strengthening School Bus Safety initiative in Canada. In addition, the company is primed to make further in-roads in the cities of Philadelphia and Toronto in the near-term. While gross margins had been hurt by tariffs, the company has found cost savings to help, and now has a higher percentage of revenue coming from high-margin, recurring revenue business. And even amidst their rapid growth, GKPRF has been able to attain profitability. Based on what I believe to be a reasonable valuation that I provided above, I think GKPRF shares should be valued nearly 150% higher than current prices, and are a smart investment for a small-cap investor's portfolio.