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Good morning, and welcome to today's conference call. I will now hand the call over to Wayne Andrews.
Thank you, Sylvie. Good afternoon, and welcome to the mCloud Technologies Fiscal 2022 First Quarter Earnings Conference Call. Today, the company will discuss the unaudited results for the 3 months ended March 31, 2022. Presenting from mCloud is Russ McMeekin, our Chief Executive Officer; Chantal Schutz, our Chief Financial Officer; and Vincent Higgins, President, Oil and Gas Digitization. Before we proceed further, please note that remarks made on this conference call may contain forward-looking statements about mCloud Technologies' current and future plans, expectations, intentions, results, levels of activity, performance, goals or achievements or any other future events or developments. Forward-looking statements are based on information currently available to management and on investments and assumptions based on factors that management believes are appropriate and reasonable in the circumstances. However, there can be no assurance that such estimates and assumptions will prove to be correct. Many factors could cause actual results, levels of activity, performance, achievements, future events or developments to differ materially from those expressed or implied by the forward-looking statements. As a result, mCloud Technologies cannot guarantee that any forward-looking statements will materialize, and you are cautioned not to place undue reliance on any forward-looking statements. Except as may be required by law, mCloud Technologies has no obligation to update or revise any forward-looking statements as a result of new information, future events or otherwise. For additional information on these assumptions and risks, please consult the cautionary statement regarding forward-looking information contained in the company's most recent MD&A available on SEDAR. At this time, I'm going to turn the call over to Russ McMeekin, Chief Executive Officer of mCloud. Please go ahead, Russ.
Thank you, Wayne, and good morning, everyone. First of all, I want to thank everyone on this call for your patience for the last 1.5 years. It seems a lot longer, but 1.5 years has been fairly challenging. And I thank you all for your patience. This is, however, all behind us now. So we're ready to move on and rock you. Thirdly, I want to just provide that we have now in place a structure to take out the debenture. I know it's on many people's mind and it accommodates the needs and requirements of candidates in the Middle East, who we've been talking to, and U.S. So that's favorable to all parties. And as things are appropriate, we will update everyone, but that's the path we're on, and we're very bullish about that path forward. Now let me move to more general updates. First of all, Q1 results were in line with what I said on the last call that we'd pretty much be flat quarter-on-quarter, reflecting the constraints we had. Again, those are behind us. However, late in the month of March, we were able to connect a number of things. I'm here in Calgary right now. Alberta is open for business. Pretty much the whole world is open for business. So we were able to eke in 774 connected assets. So we're just about 65,000 connected assets, but our goal for this year is to get to 90,000 connected assets. And I'll walk you through the geographic trajectory of those impacts and adjustments and all the things related to pandemic restrictions behind us. So now we're moving forward. So let me talk about the distribution of the assets to get 25,000. So first of all, that's a combination of assets and workers. About 75% of those 25,000 are assets, 25% of those are workers. North America makes up about half of that, 45%; MENA, which is primarily Saudi Arabia, just a little under 30%; U.K., EU, which is primarily wind, is about 12%; and Asia Pacific, which is Australia, Southeast Asia, and we'll see later on this year how China plays out, but for now, our assumption is very little to no China, primarily Asia Pacific without China. So breaking this up into segments, it's 40% industrial; 50% buildings, which includes auto dealerships; and 10% of that 25,000 will be wind. Let me now turn the call over to Chantal and she'll walk you through the quarter.
Thanks so much, Russ, and thanks, everyone, for joining us here today. And I just want to echo Russ' sentiments from the opening. Thanks for your patience in the last 1.5 years. For those of you who have access to the slides, Slide 5 highlights Q1 2022 revenues compared both year-over-year and quarter-over-quarter, being Q1 2022 and Q4 2021. Building on Russ' earlier comments about what was said at the April 4 conference call, we thought it's important to note that the decline reflects the unusual circumstances on certain customers' ability to benefit from mCloud solutions. When compared to Q4 2021, we saw a modest improvement in revenues in Q1 2022. What we've seen since March is promising. Businesses and our customers across all of mCloud segments appear to be on path to returning to normal. On May 2, 2022, we filed our 20-F with the SEC. And on May 11, we filed an F-1. I'm super mindful of SEC rules. So for those looking for more detail on the F-1, I'll refer you to our press release. In other areas, salaries, wages and benefits, along with marketing expenses, they were up on a year-over-year basis but in line with Q4 2021. R&D and G&A were also lower than Q4 2021, and that's due to the timing of certain expenses in these categories. I know some of you on this call might be looking to model our operating expenses going forward, so what I would suggest for you is looking at Q1 expenses for salaries, marketing and R&D as relatively consistent expenditures from quarter-to-quarter, while G&A and other categories like consulting and professional services will continue to vary based on corporate activity like the SEC filings. I'll continue to highlight these varying expenses in future calls for everyone. And for now, I will turn things back to Russ.
Thanks, Chantal. So I want to give some highlights by region like -- somewhat like I did last time but being very specific around countries per se. Canada is returning to work, as I mentioned, and we're seeing good pickup to begin in industry. So those are mainly oil and gas and building. So we have -- as you saw, we went live in our first large building with IAQ. We expect that with data showing before and after, which is incredibly compelling of IAQ air quality results once our system is up and running. And so we expect more and more people who want to return to work, wanting to have that standard indoor air quality available to their employees, to their customers. So we will be pushing that starting here in Canada a fair amount and then moving it into the U.S. In the United States, we're moving very strongly on multiple fronts. We talked about EV charging, both in state of New York and the state of California. We signed an amazing deal with Carbon Royalty Corp. That affords us not just capital but the ability to go and monetize credits. There's a very significant amount of credits even before you do any trading of credits in the state of New York and in the state of California. We have very robust teams on both sides. We have -- we're way ahead of the curve on making sure we have all the systems on order that one needs to be successful here. And we have iconic dealerships that was recently with the executives of Mercedes in Miami. And there's no doubt they want every dealer, as an example, to have their EV systems to be optimal as it relates to how they use energy with utilities in the U.S. and worldwide. Saudi Arabia, I'll be back there soon here in early June. That is all the holidays and the religious holidays and the time off is behind us now. And I will be there and the team is getting ready to ramp up Aramco. Just a reminder, that's a master purchase agreement. I keep getting asked, "When are you going to sign the contract?" It's a master purchase agreement. So it's in place. We have all those things in place. Now we just need to fulfill based on the specific needs, specific projects. And it's under the ESG budget, which is probably the largest corporate budget Aramco has on a company-wide basis. So we're in good hands there with Aramco and other companies like them in Saudi Arabia. Asia Pacific. We see Southeast Asia coming back to business. Australia is now open again. That was a very restricted country for the longest time. We're back there. As you know, we acquired a company called kanepi, which is very key to us around the world. You're going to hear from Vincent Higgins here in a bit. That technology is core to everything we do, but they're back to work in Asia Pacific. And then in the U.K. and EU, we went -- we are going live. We signed our first contract, one of the largest, most iconic wind operator in Europe. They're in multiple countries. They are -- almost any literature you read, they push the edge since the inception of wind from the onset. So we expect not only that to scale but them as a reference to scale in the U.K. and Europe. And United States looks to Europe as thought leaders in the area of wind. So we believe this will have a global positive impact. Now let me turn the call over to Vincent Higgins, our President of Oil and Gas based in Houston. Vincent?
Thank you, Russ. Just a few updates. Our first digital wells are now proceeding forward, expecting to go live in June of 2022 with further wells coming on board with other customers and the growth of this customer up to 500 wells by the end of the year. This specific customer faces a number of key issues. They have some production issues, getting more oil out of the ground, issues around limited personnel, but their biggest concern is around maintenance, equipment, pumps breaking and supply chain issues. So we are with our solution, which includes AI for artificial lift, predictive maintenance, the production management side of our business, which includes connecting to more than 10 existing business systems, bringing those all together in a single dashboard and our 3D and mobility solutions together are going to -- they believe and as we do that they are going to strongly affect their concerns and their issues. One thing in my discussions with a number of operators and owners are the concerns around ESG and the government regulations that are coming. They are quite nervous about where that's heading and they want to be prepared. So a number of customers are talking to us about our solution that includes a strong ESG play. And if you go back just a few months to COP26, the Climate Change Summit in Glasgow, President Biden shared the EPA's bold 4-point plan, which brings forth new regulations to reduce methane emissions for both new and existing facilities for oil and gas. And this would profoundly affect the operations of some of these operators and owners. So again, they're turning to mCloud as an end-to-end solution for both production and maintenance concerns but also the ESG side. Another update on some of the activities in Houston, we had our VIP mobility launch event. It was at the top of the iconic Memorial Hermann Tower, which has never been used of an event space before. It's a 360 view of the city. We have 41 senior decision-makers there. The feedback I've got, a dozen or so e-mails, most great level of people, excellent space, wonderful VIP experience. We had set up -- the team came down. We set up 3 mobile stations for demonstrations of our -- some of our mobility solutions, including our well site solution. And on the other side of the room, the circular room, we had these large dashboards that we're actually updating in real time. So people really got the sense that this is something real, which it was. It wasn't -- it was not smoke and mirrors, a true demo set of systems that were up and running. A second event 2 weeks ago, the Oil & Gas Connected Worker Summit. We had about 200 senior delegates there. I gave the plenary keynote titled, the Great Resignation and the Future of Work, why connected worker and workforce technologies were vital for the future of work. I was thankful it was really well received. A lot of folks came to our booth afterwards. We had a beautifully set-up booth. There's also a podcast that was broadcast over 1 million listeners through the OGG Network the week after. So making presence felt in Houston, building a footprint here, we have an office opened and business is moving forward. Generally speaking, from these events and my conversations with the oil and gas executives, they really like the mCloud subscription-only go-to-market, whereby it touches on both production improvement and downtime as well as ESG. There is no upfront cost that's instrument the well and those obviously amortized over the life of the contract. And they particularly like and want to hear more about what we're doing in ESG around methane and our micro leak solution, with our mobility platform. I think there's a lot of good things happening here in Houston, and I'm excited to be part of the mCloud team. Back to you, Russ.
Thanks, Vincent. Following the theme of being highly integrated into the operator's -- operation in your case, oil and gas, but the next example for those who have slides is around wind performance and analytics. This shows you, if -- those you have the slide, the exact dashboards that the customer will see in Europe. So just like Vincent described in oil and gas, where we become pervasive and highly integrated, there will be opportunity to add connected worker as well for those who climb the tower for wind and so on. So the solution around subscription, not only is an oil and gas well-received business model, it applies to all our industries. The wind people absolutely love it. Being able to add a turbine, a farm, multiple turbines, multiple turbine types at a time is very strategic. In this case, this customer, as it says, has 40 wind farms and every vendor type, all of them. So we are in a very unique position here and we're quite excited. In Europe, wind is a big component of the energy they produce, for many reasons, we all know, many of its sad reasons. The need to be less reliant on foreign country's gas and more independent and self-sufficient around electricity is very key, and these customers see us as very strategic. So I will summarize here our prepared remarks with, we are now pleased to see an uptick in sales and growth activities around the world. I think Vincent gave you an example of what's happening in the U.S., similar things here in Canada. I just talked about Europe, Southeast Asia. Our key initiatives are all ramped up, ready to roll and are rolling, Aramco, EV, auto dealerships, upstream oil and gas, operating companies in oil and gas, wind. In June, we are laser-focused, Chantal and I, on getting the debenture retired. We have some pretty impressive people we're dealing with on that front. And so we will work here in the next several weeks to make that happen and make sure we're aligned with the SEC as the F-1 gets approved and so on. And we need and will remain relentlessly focused to the top line and margin contribution to generate a positive operating EBITDA before year-end. That's a key focus of ours. Debt reduction, positive operating EBITDA, those are key -- very key focuses of ours. And how to do that is with connected assets and being well connected with people. I will turn it back to the operator for any questions.
[Operator Instructions] And your first question will be from Brian Kinstlinger at Alliance Global Partners.
So with no headwinds to stop new installations, which obviously is great to hear for us, and I'm sure for you internally, too, can you quantify the number of assets added roughly in April and half of May, so we can get a sense of the accelerating pace? And how then should we think about the ARPU increasing with some of these assets coming on board?
Yes. There's a couple of thousand in the month -- started in April, and then in May, a couple of thousand. I don't have a very precise number. A couple of thousand assets already in place. And how should you think of ARPU? I don't know that that's the right -- I don't know that I can give you an intelligent crisp answer right now. So we'll take that offline. But obviously, an increase in ARPU, yes.
1,000 per month, it sounds like you're back on track. So that's good to hear. And then...
You asked me April, May, so 1,000 in 6 weeks, right? So yes, so a clip of 1,000 per month is a fair assumption, yes.
Yes. And then on Slide 7, you named a number of countries open and industries, can you kind of rank these with a region or solution in terms of adds in 2Q? And then maybe more so in the second half of the year. I assume Saudi is the top catalyst in the second half. Just maybe top 1 or 2 or 3 in terms of the number of connected assets?
Yes, U.S.A. is definitely #1, for sure. Because EV, you're coming with 40, 50 plus assets per dealership oil wells. So U.S. definitely #1 and not much constraint to make that happen. And starting in the second half -- so I think you summarized it well, I think that's obviously -- and Alberta -- here in Alberta. So Alberta -- so U.S.A., Alberta, Saudi Arabia, that's the way I would look at it.
Let me just ask about the U.S. When you say EV, it sounds like 50 dealerships. So that doesn't touch in the 1,000. So maybe I misunderstood it.
Some dealers are very large. There's lots of assets per dealer, right? So inverters, HVAC units, whereas in some cases, some of the dealers are -- you're talking about multiple hundreds of assets and the dealer, right? So it's -- for example, the Mercedes that's going live, it's huge, I mean, it's a lot of assets, yes.
Got it. And then last quarter, you talked about one of the reasons revenue last quarter, I think, and this quarter had dropped, where connected assets have been turned off. I assume all connected assets are turned for the most part back on, and we'll see that in 2Q.
Yes.
Yes. And then the last thing I want to talk about, and then I'll get back in the queue with one more question probably is the $15 million of funding from carbon royalty, that's to fund the first 50 dealerships. Can these funds also be used for other purposes or only the dealership? Is that separate from only the dealership?
Only dealership.
So this $15 million in funding is different from what I -- at least I thought I understood was a Middle East organization providing strategic funding. Is that right?
Correct. This middle -- the F-1 filed, the perpetual preferred structure is a structure that is -- fits all investment type, Shariah, you name it. And so that structure is not just for U.S. but it's also for the Europe or the Middle East. It fits the requirements of the Middle East, but it is not the same as Carbon Royalty.
Great. I'm going to ask my last question in, when you get to 90,000 connected assets, which I think is the goal by the end of the year, as you exit in the fourth quarter, what is that gross margin goal you hope to have?
Yes, we'll still be adding assets, which is all with hardware in the mix. So it will be dilutive to gross margin, so you're still looking in the low 60s because in the fourth quarter, without headwind using your term, we should be adding materially big numbers of assets, which we'll be passing through hardware through the income statement while adding recurring revenue. So I think low to mid-60s is a reasonable number. But as long as we keep adding assets that have devices in it, it will be dilutive to gross margin, as you know.
Next question will be from Martin Toner at ATB Capital.
This is Brenna Cunnington for Martin. Do you see a perpetual preferred being financed with the investors in the convertible debenture or with your new group of investors?
New group, number one. And secondly, I mean there may be -- well, first of all, it's not filed for Canada, right? So they'd have to be able to use a U.S. registration statement, number one. Number two, we can't convert one to the other. It needs to be -- it will be repaid. So there's no mechanism to say I want to go from X to become Y. So someone could elect to participate as an American in the -- or Canadian that has an American ability to participate. But you can't -- you won't be able to flip from X to Y. That -- there's no mechanism to do that.
Okay. And how incremental revenue per asset can the tax credit you still have the 50% rights?
Yes, yes, 50% of the credit. That's a good question, and it's going to be a question later on and how do you treat that? Is that a -- is the credit an offset towards COGS and increase the margins? Or is it incremental revenue? I don't know Chantal and I have an answer to that because basically, what you're saying to the credit people is I've done all this. This is cost X. I want to offset the cost and therefore, how does it get recorded as revenue or as margin enhancement? I guess we'll deal with that later. The good news is we have the ability to go get credits. We'll go get credits and figure out how to account for it and let you know once we figure that out later.
Okay. Wonderful. And you exclude professional service and consulting fees from operating EBITDA. What's in that expense? And how many assets would 500 oil wells likely be?
I'm not sure I understand your question. So the professional -- you're talking about the -- I didn't quite get your question.
So the professional service and consulting fees being excluded from operating EBITDA. So just wondering what's in that expense. And then how many assets would 500 oil wells be?
So 500 oil wells, on average, one oil well is a couple of controllers, a couple of measurement devices, so 4 to 5 assets per oil well. And then I think Vincent, you have to answer, but I think every 5 oil wells is 1 connected worker, so that's how the math works. But not all oil wells are built the same, right? Some are conventional, some are unconventional. There's varying number of controllers. Controllers is what defines the asset pretty much. Not all of them have the same number of controllers. So it's not an easy -- it's never less than 3 and it's never probably more than 6. So there is an average number. Chantal, can you talk about the professional -- or what the term that she's referring to below the line?
Sure. So those would typically be nonrecurring or nonoperational type expenses. Happy to discuss them in more detail with Martin when we got on the call later today.
For sure. And if I can just sneak in one last one. Could you just give us an update on the deployments with Aramco and the car dealership?
With Aramco is what you're referring to? I think I gave an update on Aramco, right? We'll start here later in June. And then the car dealership, first one is going live now and then it's going to be, hopefully, every other week, every couple of weeks, we keep adding a dealership, a dealership, a dealership for the rest of the year. And there will be primarily in New York and California.
And at this time, Mr. McMeekin, we have no further questions. Please proceed.
Okay. Well, on that note, we will call it a day, and we'll see you at the next call. Thank you very much.
Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we do ask that you please disconnect your lines.