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Good afternoon, and welcome to Universal mCloud's Fiscal 2019 Second Quarter Earnings Conference Call. Today, the company will discuss the unaudited results of the second quarter ended June 30, 2019. Joining the call today from Universal mCloud is Russ McMeekin, Chief Executive Officer; and Chantal Schutz, Chief Financial Officer. Before we proceed further, please note that the remarks made on this conference call may contain forward-looking statements about Universal mCloud's current and future plans, expectations, intentions, results, levels of activity, performance, goals or achievements or any other future event or development. 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, level of activity, performance, achievements, future events or developments to differ materially from those expressed or implied by the forward-looking statements. As a result, Universal mCloud 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, Universal mCloud 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.com. At this time, I will turn over the call to Russ McMeekin, Chief Executive Officer of Universal mCloud.
Thank you, Craig, and welcome, everyone, to the second quarter conference call. Let me start first by recapping since -- activity since January 2019. First of all, we've had a high velocity of asset connections. Right now, we said just over 35,000 connected assets. Revenues grew quarter-on-quarter, about 36%. That's -- if you annualize that, that's 160% compounded annual growth rate. We closed the Agnity transaction in January, Autopro in July. We oversubscribed the debenture, $23 million. We had announced $10 million and we closed a $13 million debt facility, all to help with the growth of this business and pulling in all these assets I just described. We received conditional approval for the CSA acquisition and now using management bandwidth, we will be able to focus on that completion phase here by September. Looking very specifically at Q2, we had a very -- we have a very detailed MD&A filed this morning in SEDAR. So I encourage you to look at that. There's a lot of detail in that filing. And Chantal will get into a lot more details later. If you want to compare apples to apples 2018 to Q2 2019, it would be about $500,000 in 2018 to $2.4 million this year in the same quarter. So $3 million was the total, but apples to apples, it's about $2.4 million. Very strong gross margin overall, which is very good. We had direct expense -- we have a good balance of direct expenses to growth versus corporate development expenses for things like acquisition, financing, integration of acquired technologies and new market development. So we're well balanced there. Getting very specific into connecting smart buildings, we now have 5,500 buildings connected worldwide, and those are in 2 continents. Within those 5,500 buildings, we have greater than 30 major retail brands and very soon to happen, more shopping malls and more multi-tenant retail operations. Connecting wind turbines, we now have greater than 100 turbines connected in 3 countries. We expect to have approximately 1,000 by year-end. In fact, we may even have some in Canada that we're working on at this time. Connecting midsized transformers, we've seen a significant uptick in demand here. I don't want to step on burnt trees here, however, a lot of mishaps in the municipal utilities have caused things to be rethought and remote connection of transformers is something they're seriously looking at. There are over 1,000 municipal utilities in North America, and that's our low-hanging fruit starting point. So this is a very exciting asset class we'll be looking at very seriously in the second half. Oil and gas, we connected our first 6 plants. There's approximately 700 similar plants in Alberta and approximately 14,000 of these look-alike plants worldwide. These are based mainly in Midwest United States, Australia and in the Kingdom of Saudi Arabia. In fact, in October, we have a very significant meeting in -- with Saudi Aramco already planned. From a technology perspective, I have 2 main observations and spending a lot of time with our salespeople and our technology people. And that is the cloud is now not only being used by major players for some data, it's being used a lot for a lot of data. So we're very pleased with our partnership with Microsoft and Azure. That's really opened up a lot of possibilities to put a lot of data in the cloud and therefore, lend itself to machine-to-machine learning and AI. Additionally, with our acquisition of Agnity and our use of RealWear, we see tremendous opportunity with mobile connected AssetCare, so AssetCare Mobile, and in oil and gas, we see that with constantly on cameras on the head mount displays as a way to roam plants and keep things current. So there's a complete paradigm shift in how plants are being maintained by simple things like mobile applications, off-the-shelf headset devices connected to the AI and to the cloud. Looking forward, we are set to exceed 40,000 connected assets by year-end. We have a very solid foundation in 4 large asset classes: buildings, wind turbines, electric transformer and midstream oil and gas. At midyear, we did -- if we combine all of our businesses, we were just over $2 million of -- $20 million of revenue, approximately $22 million of revenue, if you combine all of our businesses and just under $3 million of normalized income. So we are in a very strong position going into the second half of 2019 and even more so going into 2020. The closing of Autopro and bringing Autopro into the -- as an integrated part of mCloud has greatly enhanced our talent position. The timing of this transaction couldn't be better, what we are seeing in midstream oil and gas is phenomenal. And from a technology perspective, which are the 3 measures we look at, technology, timing and talent, they've added significant talent, and the timing of all this couldn't be better. And the application of our technology within this domain knowledge has been outstanding in the very short period of time we've been together. Now I'll turn the call over to Chantal.
Thanks, Russ. So drawing everyone's attention to our MD&A, I want to point out, we calculate and communicate normalized income to effectively demonstrate the strong financial operating results of our technology and our products. Our normalized income looks to isolate expenditures related to new product marketing, new product development, which has not yet been assessed for capitalization and onetime nonrecurring general and administrative expenses related to a variety of transaction costs. By doing this, we can see strong financial performance of our core business activities outside of all these activities related to our acquisitions. The key to improving the health of our balance sheet as well as demonstrating the true future potential economic strength of our research and development expenditures, is ensuring that we capture and account for these items appropriately. Management is currently underway with a detailed review of our R&D spend in order to identify those costs, which meet the criteria for capitalization. As an interim review, management's identified approximately $445,000 for this quarter and $873,000 year-to-date, which we believe do meet the criteria of IAS 38. In connection with this analysis, management is also working with scientific research and experimental development advisers to assess the potential of attaining these tax credits. This is a top priority as we head into the second half of the year. Looking forward, there is a strong emphasis in finalizing the purchase accounting for all the M&A activities undertaken in the past few quarters. So that going forward, our year-end numbers will fully reflect all finalized purchase accounting. This forward-looking emphasis is also on cash flow. With the acquisition of Autopro and closing of the $23 million debenture, our interest and principal payments will reach approximately $1.1 million per quarter. Autopro's cash flows are predictable and support these additional cash outflows.
Now I'll turn it over back to the operator for questions.
[Operator Instructions] Your first question comes from Gianluca Tucci with Echelon Wealth Partners.
I'm just trying to think here, how should we and the market be thinking about your consolidated pro forma run rate into 2020 and beyond if you consolidate all of the announced and pending acquisitions?
Yes. So if you look at year to date, so the actuals was $22 million, about $22 million top line, $3 million normalized income. That's on an upward trend. So run rate in the fourth quarter, probably running closer to $50 million to $60 million annualized. So use that velocity going into next year, run rate basis.
Okay. Yes. And I noticed that on a sequential basis, it could be just seasonality, but the pro forma from Q2 to Q1 dipped a bit, is that just typical of those seasonality across the businesses?
No. We cut off the work in progress at Autopro. We just did an arbitrary cut. We just said we're closing the acquisition. So on June 30, we just said, we just did an arbitrary cut. Their fiscal year-end will actually be July 11, which is a fairly weird one because we closed the acquisition on July 11. So combination, I'll let Chantal address that further. But arbitrary cut and then an odd stub month in July, is what caused that. There's no seasonality. It's just an arbitrary line in the sand.
Okay. That's good color. So I guess on your disclosed $3 million in Q2 sales, the gross margins were pretty strong at 74%. As you consolidate the Fulcrum and Autopro in Q3 and beyond, I'm imagining that, that's going to have a bit of a drag on your gross margin profile. How much should we be expecting to pull down your consolidated margin profile?
Yes. So if you look backwards, we're blended about 55%, let's say mid-50s. It will improve a bit because about 40% of our revenues is the high-margin AssetCare stuff. When you put it all together, 60% is 44% gross margin, which is Autopro. So at year-end, blended, you'll be in the mid-50s, but that's a key metric going into 2020, is to not only watch solid top line growth, but the mix, the margin expansion. So mid-50s for now, going to high 50s, with the objective in a couple of years to be in the 60s. And then obviously, there's always going to be about $35 million of these professional -- high-value professional services that will maintain the blend in that 60% to high 60s going forward, a couple of years down the road.
Okay. And just a question here on your geographical distribution. So of all the markets and of all the verticals that you're in today across your consolidated business, like where are you seeing the most traction today? And if there is an area that you can pinpoint, is an area of focus for investment and growth in the future, where is that in industry or geography around the world?
Yes. So for oil and gas, Canada, Australia -- or Canada is our big chunk of -- so if you take that combination because we're now all one happy family, so we have to look at Alberta revenues, that's a big chunk, right? So Canada, obviously. We'll call it, AssetCare classic or mCloud classic was largely United States, with the beginnings of China and a little bit in Canada starting. Australia, Middle East will start a little bit later this year for oil and gas, but that's primarily a next year story. U.K. for wind turbines, again, you'll start seeing pickup later this year, but that's the next year story. So we're still heavily between, call it, mCloud classic, U.S.-heavy and Autopro classic, Canada-heavy. That's kind of the way to think of the world.
Okay. Okay. That's good color. And just one more question here in terms of your go-to-market strategy across your 3 or 4 different verticals that you're in, your 4 verticals. Are you at all relying on channel partners? Or is it predominantly today direct marketing into your end customers?
Yes. So now again, if you look at the combination, which we have to know because we are combined, in oil and gas, it's direct. I mean people in oil and gas assets want to deal with the throats they can choke. So we deal direct. And so that's going to become more and more of what we do. And that's a big reason why we did the Autopro transaction is because for 30 years, they've been the trusted technical adviser of many asset owners, which makes -- which we'll see in the adoption of AI technology in those customers very quickly because they're highly trusted people.
Your next question comes from Nehal Chokshi with Maxim Group.
So nice 37% Q-o-Q increase on an organic basis. Is it fair to say that, that's largely smart facility-driven?
Yes. Yes, it is.
Okay. And within that, was that largely the TELUS flagship office in Heiwado? Or is there more...
No. No. That was less. No. No, that would be about -- if you add those 2 together in Q2, that'll be about $350,000.
Got it. Okay. Great. And then you did have a nice $0.5 million Q-over-Q increase in deferred revenue, that's purely attributable to AssetCare? Or is that something else?
Yes. Yes. Yes. And that's going to continue to grow. That will be a metric that we can pay attention to. It's -- yes.
Okay, great. Sorry...
Good observation. That's a very good observation.
Yes. That's a good thing as well. Very good thing. All right. The GAAP gross margin declined from 85% in the first quarter to 74% in the second quarter. Presumably, it's a higher hardware.
Yes. So if you go in the MD&A, if you go in the MD&A, we showed the hardware, we broke out the hardware. You'll see it.
Yes. Okay. And so I think in the MD&A, it shows 319? 319,526. But I think that is on a 6-month basis, on a 3-month basis, is that correct?
But most -- no, that all happened in Q2, though. That's basically the 2 customers you just outlined, those 2...
Okay. Because it shows that it's $5.2 million when you add up all the line items, which is equivalent to the 2 quarters that you have reported?
Yes, revenue. Yes, but most of that hardware was in Q2.
Yes.
Yes. Yes and yes. Yes. Yes and yes.
Okay. Got it. Understood. And then...
And then that kind of fluctuation is, I mean, obviously, now that we're all combined, you're going to see that margin drop as I just answered to Gianluca because the overall -- we have a lot of 44% revenue business. But we'll be able to absorb these small hardware blips from quarter-to-quarter pretty easily because there'll be noise in the system now. We've been very sensitive at -- on a $3 million quarter, $500,000 of hardware picks out, right?
Yes. Absolutely. All right. And then you did publish a CSA number of 100,000. That's down pretty significantly, albeit it's not going to be significant going forward relative to Autopro, but can you just talk to that -- why that trend...
Yes. Again, same year -- same thing at year-end cutoff. So they have a work in progress. We just did a cutoff. You're going to see it pick up in the second -- on a year-on-year basis, no change, it's same stuff. It's a pretty flat business that's embedded. And it's going to be -- actually, it's going to be the #1 driver in oil and gas, Nehal, because that's what people want to see is the digital twin. So CSA, as it used to be, will grow very quickly. But CSA as the nuclear software that -- what you see in those numbers, it's about -- it's really no change. Just -- you just saw a timing of a cutoff. That's all. It's not any better or any worse, so it's pretty flat.
Okay. On the last page of your presentation, you're providing a pro forma revenue guidance of $50 million to $55 million. I believe that's -- you're now providing a range relative to previously a point guidance of $55 million. So that's interpreted effectively as a takedown. So can you just talk to that real quickly?
Yes. Well, it's either a takedown or it's how we're seeing that combination of cutoffs, purchase accounting. And so we don't want to play around with where these things -- where the numbers are going to fall in what given period. So there is $55 million of business that's happening as a result of all this, where the rev rec will occur is in that range. Yes, there's no take down.
Understood. Okay. And same thing with respect to the EBITDA because that goes from $8 million -- a point guidance of $8 million to $3.5 million to $6 million?
Yes. So one -- yes, it's the same scenario. It's not a takedown, it's where this is all going to end up when the accounting is all done.
So I can definitely understand that with respect to the revised revenue guidance because that's now just a range. But in this case, on the EBITDA, it's gone from a point guidance of $8 million to a range that does not include the prior point guidance.
It does not include what? Say it again.
So previously, it was an $8 million EBITDA guidance, now it's between $3.5 million to $6 million guidance. And so I can absolutely understand that purchase accounting and where revenue rec is represents a range, but this now represents actually a reduction as far as I can tell. And I'm just trying to understand qualitatively how that actually results in what looks like quantitatively, a takedown.
Yes. It's not a -- but it's not a quantity, it's just a bigger range, but I see what you're getting at. But it's -- we're just giving a bigger range because they're trying not to -- there is no takedown. So I'm not going to debate it with you any further, but it's not a takedown. It's just how we see the cookies fall when the accounting is all done. That's all.
Okay. But I mean the range does not include the prior point guidance, though?
Of $8 million, you mean? It's...
Yes.
Are you saying it should say $3 million to $8 million, so it shouldn't say $3 million to $8 million.
No, it's $3.5 million to $6 million, that it should have been said.
Yes. That's it. [indiscernible].
Okay. And then in the statement of cash flow, you have this $3.8 million of equity of NCI that impacted the cash from operations. What is that?
Chantal?
That's the net of the assets and liabilities from Agnity.
Got you. Okay. Why does that include in statement of cash flow? I mean cash from operations...
This item is not affecting cash. It's included in the items, not affecting cash section.
But does hit the GAAP net income statement?
Pardon me?
That hit the GAAP net income statement?
I'm not -- I don't think I understand your question.
It's included -- it's an add-back on the cash from operations. Because usually, you do an add-back because it was included somehow in the GAAP income statement.
So we included all the assets and the liabilities and the net equity, and we consolidated the income and expenses. So that's why it's sitting in the items not affecting the cash.
Your next question comes from Gianluca Tucci with Echelon Wealth Partners.
Russ, just want to confirm, like, if you talk about the normalized income, do you mean adjusted EBITDA? Or is that actually like normalized net profit?
It's normalized net profit. It was that terminology that we defined in the MD&A.
Okay. So it's fair to assume that your EBITDA would naturally be higher than your normalized net profit for your target 2019 numbers?
Not necessarily, no.
I think we're mixing -- he's mixing terms. Best is just go to the MD&A. It's explicitly defined as how it's calculated.
There are currently no further questions at this time. I'll turn the call back to the presenters for closing remarks.
Okay. Well, thank you very much, and we look forward to the next call. Thank you very much for taking your time. Bye.
This concludes today's conference call. Thank you for joining us. You may now disconnect.