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Good afternoon, and welcome to mCloud Technologies' Fiscal 2020 Second Quarter 2020 Earnings Conference Call. Today, the company will discuss the unaudited results for the second quarter ended June 30, 2020. Joining the call today from mCloud is Russ McMeekin, Chief Executive Officer; and Chantal Schutz, Chief Financial Officer.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.com.At this time, I'll turn the call over to Russ McMeekin, Chief Executive Officer of mCloud.
Thank you, and good afternoon and welcome everyone. Today, we'll be using slides as we did last time, and we're going to pause quickly between slides or briefly between slides to allow them to catch up with the narrative. So we can move to H1 2020 highlights slide, please?Year-on-year, we grew 383%. That [indiscernible] $11.6 million total revenue. If you look on first quarter versus second quarter just AssetCare only, that was 33% growth. Look year-on-year on AssetCare only, that's approximately 150% growth. We're now at 51,347 connected assets. So we're making progress despite the environment we're in, making good progress. We announced the acquisition of kanepi Technology -- kanepi Group out of Australia. Chantal will walk you through the details related to the closing in her prepared remarks. We closed an $11.5 million brokered capital raise. We brought on another very seasoned executive, former Honeywell Executive, Patrick O'Neill, Dr. O'Neill, very seasoned in smart buildings and connected technology, AI and analytics. And Chantal will update you later on the progress we are making -- we continue to make on uplisting to 2 primary exchanges.Move to the next slide, please. So as I said, we grew 50% -- 52% year-on-year growth in connected assets. You can see here the trend. We're driving towards 70,000 connected assets by year-end. We have very good visibility to 70,000 connected assets. Those consist of about 67,000 connected building -- assets within buildings at year-end, a little over 2,500 -- or a little over 2,000 -- between 2,000 and 2,500 oil and gas. And we have a pretty good line of sight on wind turbines both in Europe and in China. Those are going to pick up here soon, and that would add to the fleet, getting us to 70,000 by year-end. So that's our goal is to drive ourselves to 70,000. But ultimately, we see breaking the 100,000 connected assets sometime in 2021 as a real milestone for the company to really make what we're doing very exciting. So 100,000 is what we're focused on.Next slide, please. Again, highlights for the quarter. 53% of it was AssetCare over time. Again, that's primarily a function of the fact that we weren't able to connect as many as we wanted to or we had planned to or we had in our pipeline to connect, and projects were down quite significantly due to COVID-19. So fortunately, we have a recurring revenue business. AssetCare is very robust, very sticky. In fact, it was a key component to a lot of customers' business during the second quarter to allow them to do many things they otherwise could not do if they didn't have connected assets. We're pretty excited by that, and we just want to have significantly more connected assets.So we drove 2,675 connected assets in the quarter. The team came up with some very innovative ways in doing that, very collaboratively with customers and some very specifically in oil and gas and getting these assets connected. As we've mentioned before, the MRR on connected oil and gas assets is 5 times greater than smart buildings or rooftop units. So whenever we add a connected oil and gas asset, it's very accretive to revenue. And gross margins continue to be robust since the predominance is AssetCare. Next slide, please.Chantal, I'll let you take over the financial highlights.
Thank you, Russ, and thank you to everyone who has joined us for the call today. It's been a year since the first quarterly reporting at mCloud that I've been personally responsible for. And it's incredible to think of all the progress that we have made since that time both as a company and as a finance team, from the convertible debenture financing and acquisition of Autopro that took place last July to the multiple successful financings and acquisitions since that time as well as the exceptional strides our research and development team has made on the advances in AssetCare 2.0 and the integration of technologies from all the acquisitions that we've done.In the first half of 2020 alone, we have integrated exceptional technology from our acquisitions of both CSA and AirFusion. Alongside all of this corporate growth and excitement, we've also seen a tremendous change in both our internal and external finance, financial reporting and technical accounting talents. With the introduction of KPMG Vancouver as our auditors last year, to the appointment of BDO from Vancouver as our valuation specialists for all the acquisitions that we've been undertaking, to our internal team of designated accountants and staff, we've really created the groundwork for our future growth. In addition, we tackled the internal controls head on, and we're feeling very confident with the progress we've made to remediate deficiencies and implement systems and processes that will and do support a company of mCloud's current and projected size.More specifically, I'd like to comment on some current and ongoing activities that have and will impact our financial results, as Russ noted, is the impending acquisition of kanepi in Australia. As a company, we're very excited about this acquisition. The technology that kanepi has combined with mCloud will take us to over 1 million directly addressable assets across all corners of the oil and gas world. Our team was able to work closely with kanepi and key regulators during a time of great uncertainty in the world.The COVID-19 pandemic, which we're all now too familiar with, has created new and additional challenges. However, as a team, we're balancing all of this. On the specifics of the steps COVID-19 have created in Australia and the final closing of kanepi, our DLA legal team in Australia are working with the regulators to address all the needs of FIRB. FIRB is the Foreign Investment Review Board in Australia, and they're now assessing all target acquisitions of Australian entities by nonforeign nationals which are greater than $1. In the past, this type of deep analysis and review was only conducted on acquisitions greater than $1 billion.On March 29, 2020, in response to the impacts of the coronavirus outbreak, the Treasury announced that due to the impacts of this outbreak, all monetary screening thresholds were temporarily reduced to 0. And this extended statutory time frames for reviewing applications from 30 days to 6 months, anywhere within that time frame. As such, we do expect the approval to happen before the end of this fiscal year. However, in the meantime, there will continue to be delays and costs associated with this.If you can go forward to the next slide, please, and I'll take a second to pause to make sure everyone is there. We've also been working diligently in our TSX uplist and our NASDAQ listing application. This, of course, has been a very laborious process. It's involved the engagement of various external advisers and legal professionals. On July 16, the company issued a material change report as requested by the NASDAQ, demonstrating on a pro forma basis the impact of recent financing which closed post-Q2. As previously mentioned, the first half of 2020 saw the closing of the CSA acquisition as well as the AirFusion asset purchase. We have now successfully consolidated the CSA record-keeping, and we work closely with BDO on the preliminary valuation and purchase price accounting.COVID-19 continues to be a hot topic for many. As a company, we've seen some unique opportunities that are really well aligned with what we can offer through AssetCare. Russ touched a little bit on this in his prepared remarks. While air quality and remote workers are becoming more and more priority for companies across the globe, this has really opened the door for mCloud to great opportunity as we move through the second half of this year.In the same breath, we've also been impacted in ways similar to other companies. We were successful in accessing many of the COVID funding opportunities offered by the U.S. government and to some degree, the Canadian government. We qualified to receive wage subsidies of approximately $658,000 as well as low-interest forgivable loans totaling $1.1 million at 0% to 1% interest rates. We are expecting partial or full forgiveness of the loans given that we meet the qualification criteria. Our applications for those have been submitted, and we expect to get a response in Q3.At this point, I will hand the floor back to Russ for the balance of our presentation.
Thank you, Chantal, and if we can move to the next slide. So the bottom line, we are commercially ready but logistically challenged is how I would put it with COVID-19. So we are commercially onboard with a solid pipeline, as I said before, approximately 70,000 connectable assets by year-end. So we have 20,000 approximately to go here. When we do achieve that quarter, which we expect by fourth quarter we'll be on track with that revenue rate that is supported by these kind of connected assets, that should drive us to sustainable profitability that allows us to harvest the R&D investments we've made, the sales investments we made and the marketing investments we've done on a global basis to create a sustainably cash flow positive business. We see all this driving growth in connected assets. And as we drive connected assets, we have more initially AssetCare as they initialize, which drives revenue, and then AssetCare over time, which is the recurring revenues we all love.On that note, I'll turn it back to the operator for questions.
[Operator Instructions] And your first question comes from Brian Kinstlinger with Alliance Global Partners.
I got 2. The first one is can you talk about the environment and how it's changed during July and August? Obviously, the June quarter was very tough. Has that changed at all in your ability to install and initialize new connected assets at a better rate than you did, say, in the June quarter?
So as of today -- Brian, great question -- no, the answer is no and not much. Alberta is actually the first to start easing up, so there's oil and gas connectable assets there. In Europe, in the wind. In the U.S., we are heavily focused on Texas, California, and I don't think I need to say much more about that. It's fairly challenged right now. So -- but we are -- the words from customers who are still working every day and connectable on phone calls with us every day is they see a light at the end of the tunnel. And so as I said in my closing remarks, we're commercially in good shape with them. Now we just need to be logistically ready to roll, and we will be when they're ready.
Great. And then notwithstanding your ability to install new systems, which we've talked about, can you talk about order flow and if you're building a backlog that when installations can happen, it will just be a matter of execution? And if you can, can you quantify maybe the number of assets that await installation?
Yes. So it's the difference between now -- the number now and 70,000. So 20,000 is in pretty robust, we call it, solid backlog to closing backlog. So that's -- in TCV terms, we don't put that number out. We will someday start putting TCV out, but we don't -- we haven't done that yet, and we won't start today. So to answer your question is, is it commercially robust to get on with it and go install? The answer is yes, and it's to the tune of another 20,000 connectable assets.
Your next question comes from Kevin Krishnaratne with Eight Capital.
Russ, question for you as well on the backlog. Great to see the confidence in the 70,000 maintained. I'm wondering if you can talk maybe current versus a few months ago if the composition of that backlog has changed. What I mean is that is there a different mix of assets coming from new versus existing? You've introduced even more assets now as part of AssetCare. You talked about refrigeration, air quality. So I'm wondering if you're seeing any difference there where you're getting better traction with existing customers given they already know the history and what mCloud can do for them. Or have things kind of just remained relatively the same in terms of the composition?
No, it's a great question, and things have changed somewhat. So we'll call it priorities have changed a bit. So those who have been connected in their buildings, who have air quality challenges -- and if you don't think you have air quality challenges, I think you have a problem in its own, right? So they all believe they have air quality challenges. The priority has switched to instead of adding more things to drive down energy use just for the sake of energy use, air quality is a hotter topic. So in that 67,000 connectable assets by year-end, the mix has changed in the last couple of months in terms of priority. So same dollars, different priorities in terms of asset type and very likely, higher MRRs.Oil and gas, I don't know we were bullish 2 months or last conference call in oil and gas. I think we were, but not to this degree. And I have to say I'm quite impressed with the progress being made there in the Autopro acquisition. If it wasn't for that, we wouldn't be anywhere near in the position as we are now to be solving these kind of digital connections of assets with key customers. There's no doubt about it. So that's very fortuitous. So a lot -- I would say more confidence in oil and gas, and perhaps there's even definitely more confidence there.Wind is about the same. I think that's one industry that went through a fair amount of furloughs. So if you work for a utility and you work in the wind business, you probably are laid off right now. So it's been basically a pause, just stop. But the management we deal with, the nonunion management we deal with, are ready to roll when people are back to work.
Okay. That's a lot. And then just on the oil and gas, can you just confirm, at the end of Q2, did you have 1,000 oil and gas assets connected, or did you add 1,000? So I'm just -- I was trying to understand the language there. Just remind me on...
Had, had installed. Therefore, look, using your terminology, looking backwards, it would have been in the blended ARPU, which is why you saw the jump in ARPU quarter-to-quarter, yes.
Yes. So there was 1,000 at the end of Q2, and then I think you suggested you've got sort of a line of sight of getting to 2,500 by the end of the year. So it's sort of like you would add another 1,500 [ adamant ] at least?
Yes. I would -- as I said before, as I said to Brian, Texas, Kuwait, Alberta. So Kuwait is incredibly hot right now like it is here in Arizona, 120 or 117 degrees. So we got to get things there. Texas is pandemic-driven, and Alberta is pretty optimistic. So that's kind of the geographic split for those 1,500.
Okay. Great. Next question just on -- again, you've got some really good tools that you've been working on. The remote worker, Connected Worker, you had previously discussed hopefully getting to around $8 million to $10 million sometime this year towards the back half. Is that still on track?
That's very much tied to COVID, Kevin. So in terms of $8 million, you have to recognize [ right now, is the ] $8 million a contract -- sort of contractable business there? Yes. Is it rev rec? That's a tough question, Kevin, because if they don't turn them on and have people working with them, you can't recognize revenue. And if that doesn't happen till way late in the year, that's a tough one, right? So the answer is are we as optimistic. There are 3 or 4 major users of Connected Worker that other customers are looking to see how they're doing. Once they're back to more normal work, that will create a, call it, a multiplier effect of number of Connected Workers. But from a rev rec point of view, that's a dangerous question for me to answer because contract's one thing, revenue is another.
Sure. Understood. Okay. Great. One last one for me and then I'll jump into the queue, more on the OpEx side of things. So it looked to me, at least versus my model, that some of the line items like sales and marketing, G&A came in a little lighter than it was expected and even sequentially. I'm assuming some of that was due to the impact of travel restrictions, potentially pause in hiring. So I'm wondering if you can kind of talk about, in a way, quantifying, I don't want to call it benefit, but if there were any kind of pauses that happened in the quarter with respect to expenses and how you see OpEx sort of tracking into Q3 and into Q4, just to help with understanding the bottom line impact.
Yes. We are a global business, and a lot of our experts are required in various parts of the world. And therefore, we have had, historically, a fair amount of travel, which has ended up being almost 0. And I see travel because it's on our corporate credit card, therefore it pops up on my display all the time. So it's been 0 for months now, wherein before it used to be quite frequently. So that's one variable. That will pick up when we can travel again, but that dropped significantly. As well as a lot of, call it, programmatic things that we do -- go out and do. Trade shows, things of that nature did not happen. So I'd say the predominance of those kinds of things, Kevin, I won't call it productivity per se, just circumstances of the world we're in. So...
Yes. Yes. Understood. Maybe just the last one there. I'm going to pull up the numbers. I think in the quarter you had, what is it, roughly $2 million in sort of what you'd call the extraordinary items that you would take out of EBITDA. I'm wondering if you can comment on how to think about that level in Q3 and in Q4.
I'll let Chantal address it more, but I think some of the stuff as it relates to uplisting and as it relates to dealing with Australian regulators is still undergoing. Lawyers aren't getting any cheaper just because of COVID. I can assure you that. But Chantal, do you want to address Kevin's question more specifically?
Yes, I think we will probably see a fairly consistent spending in that regard. So you can probably keep your estimates consistent with what you've already seen.
Keep -- sorry, so it would remain at the sort of $4 million in Q3 and then again in Q4?
Yes.
No, no, no. Well, Q4, no; Q3, yes. Q4, we hope by then, yes, everything is done. I mean all these things are done, right? In Q4, we hope to stop all this stuff. But Q3, we're doing it right now. It's the middle of August. So we're working on all these things right now. So...
Yes, we anticipate that the acquisition will close in Q3, but we can't guarantee that.
Yes.
Of course. [ Understood ].
And then there will be post-acquisition integration costs go.
Your next question comes from Bill Zhang with Raymond James.
Looking at your nybl partnership, the first 2,000 set of oil wells you're looking to connect. Is the time line still over an 18-month period? And how has that progressed thus far?
So the first 200 are ready to go. I think I made mention to the fact that the temperature is pretty -- so that's to put IoT devices on the wellheads. So right now, there are nobody putting anything on wellheads in Kuwait for the targeted [ 4 ]. We are seeing some definite demand here in the U.S. and in Canada. We are tied up in Texas, as I mentioned before. So the 18 months seems very feasible, but you need to be aware that there are 3 geographies in which we're doing that in. The primary geographies: Middle East, which is Kuwait; Texas, primarily; and Alberta. So those are the ones impacted by weather, which is normal in the summer. The other one by COVID, in Texas. In Alberta, I think we're in pretty good shape there still for the balance of the year. And then moving into 2021, Kuwait is a go as fast as you can. Hopefully, Texas is go as fast as you can, and Alberta will be pretty normalized.
Okay. Great. Yes. And a point of clarification, the 2,000 additional wells, is that on top of your 70,000 guidance? Or is that baked in?
There is very little of the -- very little nybl in our 20,000 guidance for this year. The 200 wells is what I just told you, right, are built in -- 200 wells is about -- there's 3 assets per well. That's baked into the 70,000 -- or the incremental 20,000. But the rest of the wells, we're assuming very little activity in that 20,000 connectable assets for all the reasons I just gave you.
Right. Makes sense. And last one for me. So looking at your Q3 free cash flow, do you think we'll see a similar cash flow burn or a significant improvement over Q2?
Well, there should be more revenue, so that will offset some cash burn. We're not doing another financing of this type. And I would say there's some leverage in expense, but we're driving it to be less burn in Q3 and positive in Q4. That's what we're driving right now internally. With all of the caveats and variables we just discussed, that's our internal game plan.
[Operator Instructions] And your next question comes from Jack Vander Aarde with Maxim Group.
Good to hear you still see potential to hit that 70,000 asset target despite the obviously challenging environment. Russ, first question for you. And I appreciate the additional color, too, as it relates to that connected asset target. I think you said you expect 67,000 or so of those -- of the target to be Smart Buildings. Any color you can provide on maybe if you expect 3Q and 4Q connected assets to be kind of similar? Or do you expect a more loaded fourth quarter in terms of the remaining connected assets?
It's definitely going to have to be fourth quarter loaded because we're on August 13. And for the Smart Building, the predominance of the province -- the province, but mainly the state, are in total lockdown right now, are pretty much in total lockdown, California being a big one, right? So -- and Texas. So there's also building there that we have on our forecast with California. So it's going to -- it will occur a hurry up and get it done in Q4 kind of thing for buildings for sure.
Okay. Got you. That's helpful. And then on the project revenue or non-AssetCare-related revenue front. It came in -- obviously, it was a challenging environment for those initiatives. Do you expect project revenues to remain under $1 million in 3Q and 4Q based on whatever limited visibility you have right now?
No, no. We have contracts now that will drive above that. So that was unprecedentedly low. We did see some projects -- contracts come in early in this quarter that will be implemented, that will drive revenues up. I can't give you a full handicap based on utilization and the ability to get to site, how much above $1 million, but it won't be -- I think we've seen a little -- I'm hoping -- I hope everybody in this -- I think everybody in this call is hoping that we've seen the COVID low point; if not, we got bigger problems. Therefore, I would say that's the low point you saw, and that's 100% logistical constraint and the wacky oil prices you saw early in the second quarter.
Got it. Okay. Well, that's at least encouraging to -- at least expect it to pick up going forward. And then just for clarity, Chantal, you did a good job of kind of laying out the process going on with the kanepi acquisition and just like the delays with the new policy changes. But I mean, does this impact at all your guys' progress in collaboration efforts with kanepi to begin connecting those oil and gas assets that are in their pipeline or in their customer base? Does it -- okay.
No. No, absolutely not. We've got an agreement that we're working with them, and everyone is collaborating and super excited about the opportunity. So it hasn't slowed that down.
Got it. But it would -- am I correct to expect that to maybe slow or prevent you guys from being able to report recognized revenue contribution from kanepi until that acquisition's close? Or you'll probably put it in the MDA pro forma stuff, but okay...
Yes, we can't report any of their revenues until they're fully acquired and we consolidate.
But nonetheless, it's not going to hamper your guys' ability to connect the assets, which is what's important, so that's good to know. All right. That's it for me.
That is all the time we have for questions. I'll turn the call back to Russ for closing remarks.
Yes. So I think on Jack's question, I'd like to just add on kanepi. I'd say on the selling front, it's been very exciting. So our people are very much engaged both at kanepi and mCloud, soon to be all one happy family, and so that is very exciting. So on the sales front that drives the connections, it's been very exciting. So thank you very much, everyone, for taking the time. We appreciate your time in giving you this update and look forward to next quarter. Thank you.
This concludes today's conference call. Thank you for joining. You may now disconnect.