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Good afternoon, and welcome to Universal mCloud's Conference Call. Today, the company will be providing a corporate update and discussing the unaudited results for the fourth quarter ended December 31, 2018. Joining the call today from Universal mCloud is Russ McMeekin, the company's CEO; and Barry Po, the company's Chief Product Officer. Before we proceed further on the call, please note that the remarks on this conference call may contain forward-looking statements about Universal mCloud's current and future plans, expectations, intentions, results, level of activity, performance, goals or achievements or any other future events or developments. Looking -- 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 be proved 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 because 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, dated November 27, 2018, available at sedar.com. At this time, I would like to turn the call over to Russ McMeekin, Universal mCloud's CEO.
Thank you. And thank you, everyone. Welcome to the call. Let me first start by recapping 2018 and Q4. And first of all, let me point to March 28, we provided a press release outlining the P&Ls of the 2 target companies that we're acquiring, Agnity via the transaction with Flow Capital, which closed in January of this year, and CSA, which is on track to close later in May. On April 29, we'll be filing our formal year-end audited report through SEDAR. And in that filing, we will be providing a full reconciliation of 2018 with those 2 target companies combined with mCloud, not combining as one P&L, but as separate entities, separate companies, as you saw in the March 28 press announcement. We'll then provide reconciliations from press announcements provided earlier this year in 2018. We also, in March -- as of March 28, we'll be recording approximately -- just a little bit more than $800,000 revenues for the fourth quarter, which will be added into our mCloud statements. So when you combine the March 28 and the -- what we'll be putting into the MD&A coming up on the 29th, I'll provide the totality of fourth quarter and the full year 2018. So if we look at that, if you combine those as an operating velocity, you'd have revenues in the fourth quarter of approximately $3.8 million. If you look at an annualized velocity, that's between $15 million and $16 million annualized, and that will tie all those units together into one reconciliation in that filing statement. Moving on to connected assets. We ended the year at 28,800 connected assets, that's versus 6,000 at year-end 2017. And we are now very active in multiple states in the United States. Canada, now we're involved in assets and buildings in the West of Canada and East of Canada. Wind Turbines, we are now active in the United Kingdom. We'll be starting soon in the United States. So we'll be seeing a lot more activity in the asset class of Wind Turbines later this year, but we're off to a very good start. Then in China, we've already gone live in a first shopping mall in China. There are more buildings coming. We have more channels in China. In addition, we've started in the Wind Turbine space. We actually have started quite a nice opportunity there. We'll be seeing some connected Wind Turbines later this year. The operator is one of the largest in the world so that footprint will be very attractive later on this year. Over to technology. We've completed the move to Microsoft Azure. The feedback to date has been very positive that puts us in a very strong position in many of the markets we serve. And as we enter other vertical markets, which we'll be talking about later in oil and gas, Microsoft Azure is a strong standard in those markets. Following on in technology, our 3D virtual assets through the CSA pending acquisition and our mobile communications through the Agnity acquisition. We're off to an excellent start with the asset care mobile and the virtual asset within asset care. And that is definitely forming a strong underpinning for our Fulcrum, Autopro transaction that we announced this morning. Our AI team continued to make major advancements, and we look forward to adding our capabilities to more assets and more asset types. Our team are very focused on making sure we're scalable to the minimum of 500,000 connected assets, that's the goal we've set for our team, and we're well underway. Now over to the announcement we made this morning of Fulcrum, Autopro. First of all, the details were put out in the press announcement this morning. And if you go to our website, there is an updated slide presentation that provides a more wholesome picture of that whole of how we go forward in that transaction. Why did we do this deal? First of all, it greatly accelerates our market position in oil and gas. Secondly, Autopro comes with extremely talented and very knowledgeable, extensive experience in oil, gas and refining. And it allows us to set a very significant unfair advantage for our AI training and our AI development for that asset class. We've learned in buildings where we've taken HVAC expertise through our Field Diagnostics acquisition, apply that to our AI. That has put us in a very strong position with our AI, making it very accurate and very compelling vis-a-vis other like applications. Similarly, in wind turbines, we acquired the technologies of [indiscernible] Wind earlier last year. We applied that know how to our AI technology. That also puts us in this 1 plus 1 equals 3 position, which we like to call our unfair advantage. So doing this in oil and gas, we believe, puts us in extremely strong position and Autopro -- the team at Autopro provides that to us very strongly. Also, they bring approximately 185 people to the team, predominantly based in Alberta and British Columbia. So the team is going to be very active working with the mCloud team here in Vancouver to build a best-in-class solution for the market. From a financial perspective, they add trailing 12 months, $35 million of top line revenue, and $5.5 million of trailing EBITDA. So greatly enhances our financial operating position so it makes us a significantly stronger operating company with a lot of great talent. And this deal is set to close sometime in July this year. Now I'm going to provide some forward-looking thoughts. First of all, from a connected asset perspective, we are targeting to have, not including oil and gas, greater than 40,000 connected assets by year-end. So going up from 28,800 to greater than 40,000 by year-end, and these will be in the markets that I've just described. We'll add to the count later with how oil and gas will play out. We'll be looking very -- in fact, we have a team in Alberta right now. We'll be looking a lot more granularly on what asset types we want to tackle first and then scale from there.Now giving forward-looking guidance or estimates. If we did not have Fulcrum, Autopro and it was simply mCloud, Agnity and CSA, for the full year of 2019, simply as the business starting from January 1 to year-end, our revenue top line range would have been $18.5 million to $21 million is the range we estimated for 2019 as a guidance range. And our EBITDA percentage, positive EBITDA of 5% to 8%. That is largely due to a continued strong reinvestment in the technology to do all the things I've just summarized. Now we add Autopro to the combination for the full year 2019, again, same basis, January 1 to year-end, the combination would be or will be $55 million revenue top line with a 15% EBITDA margin, and that is because a lot of the revenues that we bring forward with Autopro do not require at all any incremental R&D. There's a lot of synergies in what we are doing that are applicable over a significantly higher revenue base, therefore, you see productivity in the EBITDA margins. Also, lastly, on forward looking, we're very comfortable with forward-looking 30% CAGR growth. That's -- we have very good visibility as a combined company with all our segments. So we feel very strongly that our obviously, our growth through acquisition, but as importantly, if not more importantly, our organic growth is in good shape. So now wrapping up before I take questions and turn it back to the operator, 2018 was a very rewarding year. A lot of great things occurred in 2018. We made a lot of inroads. We made a lot of inroads in a lot of markets. We pioneered a lot of things in the AI technology, cloud, 3D space, a lot of things that people haven't done before, we've done and we're very proud of it. In 2019, we're off to an amazing start. We have a huge organic tailwind behind us. And then obviously, the acquisition of Fulcrum Autopro, and adding the Autopro team just sets us in 2019 for great things to happen. The things that excite me the most here is, first of all, we're well positioned for very significant results here. We're applying AI. We're driving real results with AI and as an operating business, result is very clear, and we're very focused on that. That's very exciting. And then when you look at the talent of the company, we have now with CSA coming on board, Agnity onboard, mCloud, the original people, now with Autopro, I couldn't be more excited by the talent we have as a company. And talent is key in our business. When you're a tech company, that's all you have is your talent and your people. So now I'm going to turn it over to take questions. I'll turn it back to you to the operator.
[Operator Instructions] The first question comes from Gianluca Tucci of Echelon Wealth Partners.
Russ, congrats on a great acquisition this morning, Russ.
Thank you.
So I guess just firstly here, are you going to still be disclosing pro forma data of all pending the deals that have not closed yet?
So I think the method we'll use is like we did in March 28, just to lay them out as their historical operations, just as their own stand-alone entities. We attempted to put them together, and I think we created more confusion than we did good. So we will put them as layers like we put in the 2018 -- March 28 press announcement. You will see that in the MD&A. We're putting a lot of detail into the MD&A for the April 29 filing. So we'll be able to layer this on. We'll be adding, obviously, for Q1, Autopro, what it did as its own stand-alone company. That's something we'll put out there. And then Q2 until we close. And then once we close, then we'll start reporting everything as a closed combined company.
Okay. Awesome. So you said that if you sum up all of the top line of all your pending and closed acquisitions that for Q4, it's some $3.8 million, is that correct?
That's correct. A little bit more than that.
Okay. And can you talk about how the gross margin, how that compared to the Q3?
Yes. So it's exactly as I said in the last call, that there would be some heavy hardware. So it was in the low 60%, like, 63%, something like that combined, blended. We're not finished the mCloud audit and a lot of that hardware flows through the mCloud audit financials. So it's in the low 60s. It's exactly what we said in the last call. What's going to happen, did happen.
That's right. Okay. Perfect. Russ, and then, I guess, can you talk a bit about the gross margin profile of your 2 acquisitions that you announced this morning, Fulcrum and Autopro, and how that's going to change the profile of your margin structure going forward?
Yes. So first of all, Autopro is the operating business, so it is gross margin. I would refer you to the slide deck so we don't have multiple numbers going on, but it's in the low -- anyway, go to the slide deck, you'll see, obviously, the blended margin rate will reduce. The EBITDA margin rate goes up because the R&D is not necessary to be carried all the way through all the revenue types. But I would refer to our slide presentation on the -- on our website and stick to those kind of those metrics and those numbers.
Okay. Russ, will do. So I guess, just walk me through the thought process of acquiring Fulcrum and Autopro as opposed to just partnering with them. Like what are the key advantages of having them as a subsidiary as opposed to just a partner?
Yes. So speed, number one. So the rate at which we can do it versus training up a partnership. There's the economics, there's no revenue splitting. From an AI perspective, you heard that we have Barry here on the call. From an AI perspective, there's nothing more valuable to AI than experience and expertise. So if you look at the Autopro organization as being a treasure trove of knowledge to train the AI, that to us is tremendous intellectual capital that we can now apply to our AI, and he can elaborate if he wishes. And then in the oil and gas industry, as my partner and I, Tino and I come from that industry. I used be the President of Honeywell's advanced software group, of which oil and gas was our primary market, our only market. A lot of these operating assets -- the people operate these assets rely on more on third parties than most industries. So Autopro is that third-party chosen supplier in Alberta for a lot of critical customers. So it's not like buildings where it's pretty generic who they use. It's very specialized in the oil and gas space because the assets and the criticality of the assets is much higher. So it makes a lot more sense to be part of the organization than to be at arm's length.
Okay. Awesome. Just keeping up to speed on your oil and gas activity. You signed earlier this year that agreement with Fulcrum to target oil and gas assets. Have you had any early stage discussions into potential customers? And if so, like are there trials out there at the moment? Or I'm just curious in some of the things that those potential customers are telling you about how your software could help them?
Yes. So trials active right now, no. Discussions, many, very many. In the near term, I would expect to see 3D virtual assets in the coming months. And what we've done for nuclear power plants, which we have most nuclear power plants in the United States, use our 3D software is directly applicable to oil and gas so that moved pretty quickly. We're in pretty advanced discussions, as I think I mentioned before in the press announcement in the Middle East with the large -- one of the largest operators in the world, Aramco. So that will happen between now and year-end. Things move a little bit slower in big oil. And then on the data front side, on the asset care data, which is where we're basically putting data in the cloud with Azure. Now that we're Azure ready, I think onboarding a number of these customers that are -- have assets all over Alberta and all over Texas and places who want to aggregate their data but can't afford to have on-premise data aggregation systems but want the cloud, those will be early hits; for us. And those are, certainly in Alberta, sweet spot customers for Autopro. So that's where we'll see activity later this summer.
Okay. Great. Yes. So by the end of this calendar year, I'm sure that we'll have some customer announcements on the oil and gas front.
Yes, customer announcement -- well, announcements probably, but revenue, for sure. So -- announcements are always tricky with big operators, but revenues aren't. You just record them and it's in your income statement.
Awesome. Perfect, Russ. And then just lastly from me, how should we be thinking about seasonality from Q4 into Q1?
Yes. So Agnity is a significant component of our business now, the platform business. It's Q1 and you'll see, if you go back to the March 28 press announcement, you see it ramp beginning of the year all the way to the end. It starts again that way. Now it starts at a much larger base from year-on-year. So we'll see growth year-on-year. But Agnity, as a percentage of our revenue, as you can see from the March 28 is a pretty large piece. And Q1 is seasonally low. So it's our only -- Agnity is really our only term software business of size, and it does have Q1 seasonality. Good question, by okay.
Your next question comes from the line of Nehal Chokshi of Maxim Group.
Russ, okay, quite a few questions. So can you describe the Autopro business in more detail in terms of any customer concentration, any seasonality, backlog, duration of that backlog? Let's start off with that.
Yes. So we're not closed yet, and we're still under call it, fairly tight NDA on a number of stuff. So I think over and above what we've said already. I don't think there's much more I can say. I gave forward-looking guidance based on real contracted backlog. So I think that's pretty -- that's very robust. Your other question is seasonality. A bit. Concentration, not by name, but by geography, Alberta. By definition, they're in -- based in Alberta, and it's primarily a Canadian Alberta, British Columbia revenue base. Beyond that, I don't know there's much more I can say.
Okay. So you talked about the synergies that you expect the theme combined with Autopro effectively. What are the risk of dissynergies that you're concerned about? And then, of course, what are you doing to mitigate those risks?
Very, very good question as always. So the risk always are when you have an organization where the #1 thing -- #1 asset is people, right? Preserving and keeping engaged with the people is the most critical thing. And having done now well over 40 of these in my life. You got to manage the people side very, very carefully. There's a lot of people on this call, I'm assuming a lot of them are from Autopro. We just have to manage the whole people side, and we're pretty good at it. We've done a pretty good job, I think, but we're not perfect, but we need to be perfect. So it's all people related. So if you lose some key talent, that's not good. So we've got to be very mindful of it. We are. We have 3 people over there today that are extremely good, and are very good at dealing with kind of issues that excite people and getting -- get people thinking about the future. So it's all -- in a people business, all the issues are around things that excite people. And that's something we pride ourselves with, but we always want to get better at, but it's -- that's the risk as well. Is that what we don't achieve that, then what's in it for me? Then it gets risky.
Right. Okay. What about from a business combination perspective, i.e., on the Autopro website, one of the things they talked about is being vendor independent. And being now a subsidiary of mCloud, does that violate that vendor independence?
Fortunately, aren't there any AI, oil and gas, cloud companies that if they did, it's pretty light, right? I'd say -- I mean, that's a good question. I don't know I have an intelligent answer for it. Does it violate? That's a big word, right? Does it change it? Somewhat, because obviously, we wouldn't want them providing Aspentech technology to their customers, obviously, or to our customers. So to that degree. But as a cloud AI company, I think we're pretty much -- we're more of a tool in the toolbox that we're providing that we're getting a monthly recurring revenue for, than we are Honeywell selling -- I think what they mean vendor independent is Foxboro versus Honeywell versus Yokogawa, which is the world we come from. I can assure you, when you work at Yokogawa, the enemy is Honeywell and vice versa. That's what they're referring to. Those platforms are very competitive. And they literally act like multiple religions that are at war. So that's not the kind of things we do. I'm not sure I fully addressed your question, but...
Yes, that's helpful. Okay. Your press release states that you expect $5.5 million EBITDA from the Fulcrum acquisition. At the last page, your presentation implies it will add $6.8 million. Can you just clarify which one is the right one?
No, it's -- one's trailing, the other one is forward-looking. Yes. One is looking backwards, the other one is looking forward. And we're on different calendar years, fiscal years. So the one is the cut-off from the previous period. The other one is the previous period.
Okay. And what is the depreciation and amortization that you expect for calendar year '19 on a pro forma basis?
I don't know. We're going to close out 2018 right now, then we're going to do purchase accounting on this deal. That's going to be a moving target to add to the mix. There's accounting pronouncement changes that's kind of holding things up at it causes complication. So we're dealing with that as well. So it will be a number that will probably won't be robust for 2019 in the MD&A coming up. But when we have a good handle of it as a result of this purchase accounting, we'll be able to definitely articulate it.
Okay. All right. And then you talked about Agnity having heavy seasonality here, but you do expect year-over-year growth from Agnity. Can you give a sense as to what is that year-over-year growth trajectory that they are currently on? Because I would presume that this big step-up that you saw from 2Q '18 to 3Q '18, all that seasonality, some of that is actually growth.
Yes, definitely. So they're definitely consistent with the guidance I gave of no less than 30% CAGR. They're definitely consistent with that. The backlog is there now to support that. Very strong, actually. Of all of our units, Agnity's backlog is phenomenon.
There are no further questions at this time. I would like to turn the call over to Russ McMeekin for closing remarks.
I think Nehal may add some additional questions. Nehal?
Nehal Chokshi.
Yes, I'm sorry, I just wanted to make sure I was being polite to everybody else. All right. So in the March 28 disclosures, CSA had a roughly declining [ Q on Q ] profile, what's the narrative behind that?
Yes, it's rev rec, timing of rev rec? Nothing material. Just small company on $2 million is a little bump in [indiscernible] or rev rec and you get a small change in revenue, but nothing material. It's a pretty flat business year-on-year. The growth is going to come from Autopro, virtual assets, 3D, you get 2 contracts. So they come in large sizes, you'll double that business real fast, and that's what I would expect.
Why buy Autopro through Fulcrum? Why not Autopro directly?
Well, we started our licensing agreement -- we had a $15 million licensing agreement with Fulcrum. Secondly, Fulcrum has a lot of other tentacles in a lot of great strategic things. So they're a great partner. And of course, that was the deal we entered in. When we got into the partnership was let's find out just what's here. Let's get going, and if it does make sense, we'll make it as one thing. So it was an agreement, and we're very happy with it. We're extremely excited to work with the Fulcrum people. They're very strategic in the way they think and their analytics and how they look at things just alleviates a lot of bandwidth from us to make sure we don't -- we can't afford and don't want to make mistakes and they help mitigate that. So...
Great. Okay. All right. All right. So the calendar '19 guidance of $18.5 million to $21 million, that looks like that's going to be significant growth from $8.8 million on an apples-to-apples basis. Is that $8 million, correct?
It's a little bit closer to $10 million if you -- on an apples to apples basis.
Okay. For that $10 million, what percent of that was directly attributable to collecting an asset care fee.
Well, everything above what you saw in that March 28 report, plus some of that March report had I'd say about 40% -- over 40% comes directly from asset care like things. And then the rest is from what we've acquired. Consistent with what we've always talked about. Nothing really changed.
Okay. And then for the $18.5 to $21 million for calendar '19, what percent of that do you expect to come from asset care fees?
Largest preponderance of the growth will come from asset care. Second will be Agnity, and then CSA will be flat. I mean, under the current assumptions. So the first synergies to really hit with Autopro will be from a rev rec point of view, is 3D, because they come in big chunks. So that one, you'll see a big step change. So one Aramco, you double CSA right away. So right now, none of it is assumed in that. And all the guidance I've given you, nothing is assumed for something like the Aramco, zero. And similarly, with China, I talked a lot about China, very small numbers in the assumption for China. That could be big asset care uptake. I put very little assumptions in there. Even though I have big aspirations, I have very little estimates.The estimates are based as a good quarter are based on doing what we did in 2018, more of it, with some slight increments in some wind turbines in the U.K., very slight and some modest increase in China. So if China takes off or the Brit win deal takes off quite aggressively, numbers get much bigger fast. But that's not in any of those assumptions. That's upside.
Got it. All right. Now given that March Q has been completed for 24 days now, I guess you've already provided effective guidance saying that look at Agnity, that's a significant portion, you should expect that similar level of seasonality to flow through?
Yes. You got it. Yes. So I would adjust Q1 to be -- don't -- we continue -- asset care growth quarter-on-quarter as it continues. The only thing that is exempt from that rule is Agnity in Q1. But for the full year -- but on the other hand, in the second half, they're extremely robust in the backlog is there. And we follow the rev rec rules. It's one of those -- we used -- and we discussed this before. If you use backlog, our TCV, our business is materially bigger than it is than we show for it. We don't use either metric. We don't use software backlog. And we don't use TCV. Therefore, all you see is revenue as it's recognized.
So what's the reason for heavy seasonality with Agnity? That would imply that a significant portion of the overall revenue is not asset care driven.
Or a portion, I wouldn't say significant, but a portion. That's correct. The maintenance fees related to AT&T, SoftBank, all those things we talked about before. It's a rev rec thing. It's not -- we use the term seasonality because it's what we say, but it's a rev rec thing.
So then you would expect significant deferred revenue in 1Q '19?
Yes, significant. Definitely, you'll definitely see an uptick in deferred revenue, for sure.
Okay. My final question is that the 28,000 assets under management, that was end of calendar '18? Or is that current?
No, end of calendar year '18, December 31 cutoff date.
And do you want to give an update as far as where it is currently then?
No, we're going to give it to you at year-end based on legal guidance and other guidance that -- do it on an annual basis. So that's easily reconcilable, it's auditable, it's robust. Quarter -- the effort required to provide quarterly before we're a total pain, and I don't think they added much, so we'll give it to you at year-end as a full reconciliation.Operator, I think we're done. Unless there's any further questions, we can wrap up here.
We have no further questions at this time.
Thank you very much.
This concludes today's conference call. You may now disconnect.