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Good afternoon, and welcome to Universal mCloud's Conference Call for the Third Quarter ended September 30, 2018. Joining the call from Universal mCloud today is Russ McMeekin, the company's CEO; and Darren Anderson, the company's CFO.Today, Russ and Darren will go through a series of prepared remarks. First Russ will provide an update on the company's strategic initiatives, including recent successes and customer wins. Then Darren will cover the operating results for the third quarter ended September 30, 2018. Russ will then conclude his prepared remarks and will proceed to a brief Q&A. Before we proceed further on the call, I will read through the typical forward-lookings information language before passing the call off to Russ and Darren. Please note that remarks on this conference call may contain forward-looking statements of the Universal mCloud's 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's 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, Universal mCloud cannot guarantee that any forward-looking statements will materialize and you are cautioned not to place undue reliance on these forward-looking statements. Except as may be required by law, Universal mCloud has no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.For additional information on these assumptions and risks, please consult the cautionary statements regarding forward-looking information contained in the company's MD&A dated November 27, 2018, available at sedar.com.At this time, I'll turn the call over to Russ McMeekin, Universal mCloud's CEO.
Thank you, Chris. Welcome everyone to our first formal conference call as mCloud. As mentioned in our press announcement, we'll be covering the quarter but also an update on our progress since going public, which is almost a year ago. First I'd like to focus on the velocity of the business, which we are very pleased with. Our velocity, we can be measured and tracked by first: connected assets, we reached by October 22,000 connected assets, we expect to be by year-end at 25,000 connected assets. We commenced the year at 6,000 connected assets, so that's tremendous growth in a very short period of time. Our top line revenues CAGR growth rate of 40%, annualized $14 million top line. So the way Darren and I look at the total business, we look at the $14 million business that comprises our components.We put that into context, when we went public almost a year ago, we were less than $2 million per annum, so significant growth across the board.And last but not least, we're moving to EBITDA -- adjusted EBITDA breakeven in a very short period of time, which is also a key focus of ours.Let me turn over to customer traction. In the quarter, we signed a large contract and completed the implementation of a very large airport here in Canada. We signed a very large multiyear contract with a 750,000 square-foot shopping mall in China, that is an extensive contract for us and will serve as a beachhead for us in that very strategic market. We now have over 10 major branded service retail and food corporations with one in particular having over 1,000 locations now connected to the cloud in the state of California. We also announced in the quarter that we have Cinemark as a very strategic flagship customer, and we're connected to multiple locations, multiple sites and we expect that to continue to grow.Carrying on with customers, as a typical technical company would do, a technology company would do, we held our first inaugural customer user group in Las Vegas recently. We had over 80 people attend with a very interactive session. A very key part of this session was the rolling out of 2 new applications on AssetCare. First of all, AssetCare mobile, which leverages the RealWear headset, leveraging also the Agnity platform, to provide us voice, data and video.Additionally, we rolled out another asset on AssetCare, which is a electrical transformer, which is actually live here on approximately 8 transformers in Ontario. So that represents 2 major rollouts, we were very busy getting ready for the Las Vegas user group and both of these were very well received. Last but not least, during the Las Vegas customer event, we announced the Ascent AeroSystems acquisition, which provides us very unique drone technology that we can combine with AssetCare, combining it with our AI intelligence and our full data continuum. Also Ascent provides great synergies with our NGRAIN acquisition with a number of activities going on with the U.S. defense department.This is now a segue over to acquisitions. As an update, we have 3 transactions moving to close. Tomorrow, we expect to submit one of those transactions for final approval with the exchange. Later on this week, perhaps by Friday, we will submit the second. The third, we are continuing to complete the audits of their foreign subsidiary. Darren and team are concluding that. We expect in the next couple of weeks that will be completed. Once that's done, effectively, we will have submitted all 3 transactions to the exchange for approval. Currently, we have no sizable projects or acquisitions underway. So this will represent a very busy year, ending on a very positive note.On the -- over to technology and our progress with technology. In my 30 years of being involved with some of the brightest people and some of the most complex mission-critical technologies period, I have to say that at mCloud some of the most brilliant people I've ever worked with, are within the company, and that is just absolutely outstanding. From what have they developed, very proven rugged AI technology that's focused on very complex applications. There's a lot of hoopla around AI, a lot of activity around AI, we can absolutely say that we have real customers using real AI, solving real-world problems on a daily, hourly, minute basis.Over on the visualization developments, things that -- look at 3D and things of that nature, the digital twin. We have our first wind turbine digital twin, fully captured, leveraging all the technologies we've required, and we've rolled that out in the quarter and presented that also at the recent Las Vegas event.All these things are underpinned by world leading communication technologies in the area of 4G and LTE. Everyone knows that our relationship with TELUS is extremely important to us. This technology, including the AssetCare mobile is being rolled out by one of the largest service providers that owns the largest footprint of buildings in the world. As a number of the largest banks in the world occupy their footprint. And they intend to roll out AssetCare mobile in their facilities in 2019. So that was very well received.Last but not least, on the technology front, is our migration to add Microsoft Azure to -- as one of the platforms we support. This is very critical in countries like China, Canada and the U.K. Just recently, we had major developments in the U.K. with large owners of -- owner of large footprint of wind turbines. Data residencies in those countries are very important, and Microsoft Azure allows us to comply with those rules.Now moving over to geographic expansion. Our continuing with geographic expansion. As I mentioned, we recently had very, very favorable meetings in the U.K. Tino Lanza just recently returned. We expect to have a large commercial contract or agreement in place by the first quarter of next year with a owner operator of our big footprint of wind turbines.China continues to be a very strategic market for us. As I mentioned, we have our first shopping mall contracted. We're making great progress on the wind turbine front, and we expect this to have a material impact starting in the first half of 2019.Last but not least, in terms of geography, here in Canada, the momentum with TELUS is very strong nationwide. The smart transformers that I mentioned previously was very well received by the salespeople at TELUS. So we expect that to have meaningful impact in 2019.Now I'm going to move over to investments made and cash used in the quarter. We invested approximately $1 million in the quarter in M&A, corporate development and our launch into China. This obviously, creates near-term growth opportunity, but these are going to set the stage for some very large growth going forward, so these are near-term investments with very large return opportunities.Secondly in the quarter, we launched, as I mentioned, in the Las Vegas event that we used about $350,000 for that event. That was a user group for customers and 2 products released during that event, so that was a very good investment that we made in rolling out these 2 new product sets, which as I mentioned before, AssetCare mobile, being used now by the largest owner and maintainer of buildings in the world. And our AssetCare transformer being used here in the province of Ontario, all coupled together with that investment. And then last but not least, where it makes sense, we capitalized R&D, our technology investments, we used about $350,000 for that activity.I will now pass the call over to Darren to continue.
Thanks, Russ, and good afternoon, everyone. I'm going to talk a little bit about our Q3 2018 operating results. So as mentioned earlier by the operator, our comprehensive financial disclosure for the 3 and 9 months ending September 30, 2018, is available in our filed MD&A and financial statements on sedar.com.For the purposes of this call, I'll focus on our pro forma financials, which were included in this morning's press release, covering our Q3 2018 operating results. These results are prepared on an unaudited basis and include revenues, cost of goods sold and recurring operating expenses of NGRAIN, CSA and Ascent AeroSystems and a transaction with Flow Capital, as all these acquisitions have been in place and were in effect for the periods discussed for comparability purposes.Please review the press release in its entirety, including all forward-looking information and cautionary statements. Listeners are cautioned that the company's results would differ if 1 or more of these acquisitions are not completed. To begin, combined operating revenue grew to $3.5 million in Q3 2018, which translates to an annualized revenue run rate of $14 million. This represents a 46% increase compared to Q1 2018. During the same period, connected assets grew in excess of 300% to approximately 22,000, and we're expecting to close the year with in excess of 25,000 connected assets.Gross margin for Q3 2018 improved to 68% from 64% in the prior quarter, increases to gross margin of revenue were primarily driven by the expansion of existing customer relationships, new customer wins and a successful integration of high-margin companies such as NGRAIN.Total operating expenses for the quarter increased from $2.3 million in Q2 2018 to $2.6 million in Q3 2018. Contributing to higher operating expenses with an increase in the sales and marketing expense in the third quarter of 2018, mCloud continued to grow its market presence and expand its customer base through its sales and marketing efforts. Quarter-over-quarter, sales and marketing expenditure increased by $145,000 to $1.2 million in Q3 2018.Research and development expenses also increased quarter-over-quarter from $445,000 in Q2 2018 to $503,000 in Q3 2018.As of September 30, 2018, R&D expenses for the year totaled $1.3 million. In addition to the noted 2018 spend, as Russ alluded to a moment ago, the company has also invested substantially more in R&D, which management deemed was eligible to be capitalized as an intangible asset and is yet to reach commercialization. This ongoing investment ensures that mCloud continues to develop leading edge technologies as it strives to be the industry leader in the AI and analytic space, supporting a more efficient future.The remainder of the company's operating expenses for the third quarter of 2018 went towards general and administrative expenses, which increased by $93,000 to $885,000 in Q3 2018. Contributing to higher G&A expenses was continued investment, building on prior quarters in the company's corporate infrastructure to support its growth. Managing the previously mentioned recurring expenses and deploying capital in areas that support growth, continue to drive improvements towards adjusted EBITDA breakeven with a 40% improvement quarter-over-quarter.Lastly, our recent cash position is approximately $2.5 million while current on corporate development efforts. This is before any customer cash receipts expected at month end and through to the end of the year.That concludes my remarks, and I'd now like to turn the call back over to Universal mCloud CEO, Russ McMeekin, before we open things up to questions.
Thanks, Darren. So let me wrap up. Our velocity as a pure play AI IoT cloud analytics company is tracking very well. We expect to exceed 25,000 connected assets by year-end. We are doing business with many of the most admired companies in the world and government agencies in the world. Our top line growth as a very robust rate as well as our trajectory to EBITDA cash breakeven.In summary, the 3 things we focused on as a high-performing tech company are, first of all, timing in the market. We see the timing as being exceptional right now. The demand for AI and the things we are doing, energy rates are rising, what we're doing being very well received: so the first T in our metric of timing is moving very well; second T is technology. As I mentioned before, we're on the leading edge with technology, and we are doing extremely well, getting extremely positive customer feedback, leading the way with AI technology as our flagship; but last but not least of Ts is talent. As I mentioned before, the underpinning of this company is talent. And I have to say, sometimes I have to pinch myself with the quality of the people we have in this company and this is very exciting. So the 3 Ts, from my perspective, are proceeding very well.I will move over to Q&A. We'll take about 10 minutes. We'll, first of all, set priority with analyst first. I see a number of analysts on the list. Also we want to be mindful that we have NDAs with some of the acquisitions, some very tight NDAs with some of the acquisitions and customer activities and government activities we have. So we have to be sensitive to those NDAs. And last but not least as I can see on the list here, we have some people from Silicon Valley who'd like to learn a little bit more from us and we're willing to tell them. So we'll be sensitive to that as well.Over to Q&A.
[Operator Instructions] Your first question is from Gianluca Tucci from Echelon Wealth Partners.
Nice work in the quarter. I was going through the MD&A. Can you talk a bit about that big TELUS project that you completed in Q3, and how that partnership is rolling out in Canada? And like what the expectation is into 2019?
So it's the airport that I referred to, I won't mention the airport but it's pretty obvious, which airport is the large project. And then your second part of your question, how that will impact? I would say, TELUS like every smart telco is success breeds success. So we just recently held and we're having again next week sales training, sales activities, sales update with over 30 salespeople within the organization. So having successes with new customer wins which we've had, new installations which we have, installations south of the border that are applicable north of the border, all those things combined have created a lot of positive bud -- buzz with TELUS. So I would say, going into 2019, TELUS continues to be, but I'd say more so a player in what we're looking at.
Okay, and just changing gears over at China. How is China developing from a smart building and energy perspective? Or in particular wind perspective? I mean, as a proportion of your consolidated pro forma, how big do you think China can get over the next year or 2?
That's a good question. So first of all, let's talk about the qualitative side then we'll get into the quantitative side. So a smart building with shopping mall is very well, SCN as a partner. In fact, they just won a recent award and during this award they flagged the shopping mall and AI as a future trajectory of the SCN's award in China, and how they intend to do their business going forward. So not only is it good for us but SCN as a partner is using what we do to differentiate themselves in the Chinese market, which is a good thing. There is a region in China that we're opening up as a tech center for smart building. We're working collaboratively with the government there, which is probably bigger than most countries but in terms of a local -- regional government. So that will begin to occur next year, that comes with their own buildings plus some additional, call it success with companies that operate in that region. So we expect that to have impact, trying to put a number on that for next year is pretty tough.As it relates to win, that's more going to be headed out of Beijing with a -- actually the -- one of the world's largest wind turbine companies. We signed an agreement, our contract with them just recently, that will be -- we'll talk about that more when we're able to give approval for a press announcement later this month or in the next month. And sizing that, I think the first installation will be hundreds of wind turbines throughout the year, next year. But again, this is like early days, and it's -- but they are major operator, they own, I think something like a 1/4 -- 200,000 wind turbines around the world, so it's a pretty big operation and they have a lot of subsidiaries. so that's a major undertaking. So as a percentage of total revenue, if any one of these things happen and they are adapted in that, they could be a very substantial piece. But I remind everyone to be very cautious about China in near term. So...
Okay. Yes, I know that's fair. And are you doing any marketing or sales efforts at the moment in the EU region?
Well, U.K. is no longer in EU, I suppose. So U.K. definitely, Tino just returned, and we will be announcing a pretty exciting deal there. In Europe proper, not yet, we do have capabilities. As you probably recall, we acquired the IPs for one of the midsized wind makers that formed the basis of our AI technology. The founders still work for us, so they're in Europe, they're very well known in Europe, but we've targeted U.K. to this market in the Sedan Terrace there, look a lot like California, in terms of how they operate. So we've been focusing using our European talent on the U.K. markets. So that's kind of our -- been our focus. Again, a press announcement will come out when that contract is signed and ready to roll.
Okay. And we're just on the outstanding acquisitions and it sounds like everything should be closed prior to the end of this calendar year, if all goes as you're going to plan. So I guess, the assumption there is that the pro formas will alter into actuals as of Q1 if that happens. Right?
They -- as soon as they are closed, audited and consolidated, no one will be happier than us than to consolidate them and have one set of books and that will be it. So the answer is yes. And I've tried a handicap timing before, I can only submit and comply. That's the best I can do.
Okay, excellent. And then on the gross margin side. I mean, the operating model is clear, as there are more assets on the platform, greater the contribution of each incremental sales dollar. So I mean, how big do you think gross margins can scale up to over time as you hit your targets in terms of assets on the AssetCare platform, Russ?
Yes, I'll be careful with gross margin. So we were fortunate that in the quarter a lot of the assets we connected, customers had their own hardware that they -- they are largely in California. So they had a lot of their own hardware through their incentive program. They had a lot of thermostats and blah, blah, blah. So you didn't see much hardware flow through the income statement. You could see a quarter, in fact, you could very well see this quarter lower margins because hardware will go through -- contracted through us and that will -- even though it adds asset count, and if you were to stop adding new assets, your margin go up, I would be very sensitive to going too crazy on margins because every time we pass through hardware, it's dilutive to margin.
Okay. No -- well I appreciate the insight there. And then just 2 housekeeping items here. If you could provide an update on the NASDAQ listing expectation there? And then across all of your SBUs the approximate headcount, at Q3 end. Keep up the good work.
Okay, NASDAQ. As we've retained a banking sponsor in New York to help us with that process, there are some things that we have to comply with. One being close the year and have 4 quarters reported and fully audit the year. And it would behoove us to have all of our transaction closed and not talking about pro forma versus actual, so that will hopefully all occur and take place. Then there is a market cap requirement of $75 million market cap. That's a -- I don't control that directly, so that needs to occur. So that's in place. Timing wise, your guess is as good as mine, in terms of headcount, just under 50 people as of this point.
Your next question is from Jack Vander Aarde with Maxim Group.
Sounds like there's a number of developments tracking well according to plan, so that's good to hear. I have just one question for you regarding the pro forma, GM, gross margin for Q3. So that improved 400 basis points Q-over-Q, and I'm trying to get an idea of what was contributing to that growth or that expansion as it relates as well to the 8,000, I believe, connected assets were increased Q-over-Q. So how does that tie into the hardware pass-through, which I think you already alluded to a little bit? And then also what else contributed to the 400 basis points of expansion?
So every time there is no hardware, you'll get about 400 basis point improvement. So if you stop adding assets -- then I'll get into the phenomenon that occurred in the quarter that made things even better because we did add assets and I did allude to it. That is about our gross margin. So 70% or 68% is about the gross margin of the business, that's the platform of the AssetCare business at steady state. What occurred is the number -- a lot of those assets were in California and the hardware that we connected to were already subsidized or provided through rebate programs in the state of California. So there was very little to no hardware, less than a $100,000 of hardware. Even though, about 20% of our revenues was onetime in the quarter, a lot of that was services around scanning and doing things of that nature. So even then, services are better margins than hardware, hardware is 20%, so there's no magic to that. Services when they are 1x are about 40% or 45%. So it -- I think it's more a luck than good planning around gross margin improvement. Typically, you'll see mid-60s when we're adding hardware, high 60s to low 70s when we are not adding hardware through the income statement, Jack.
Got it. That's very helpful. And then if I can just follow up quick on the 8,000, I think it's 8,000 assets or so. Did you close out the third quarter? That was the quarter end. Or is that October?
October was the number we reported 19,600 is to -- number to use for end of the quarter. So if you are trying to tie apples and apples and apples, 19,600.
This concludes the Q&A portion of the call. I'd now like to turn it back over to Russ for any closing remarks.
Thank you, everyone, for joining the call and we look forward to the next one. And have a good day.
This concludes today's conference call. You may now disconnect.