Good morning, welcome to the mCloud Technologies Fiscal 2021 Q1 Earnings Call. I will now introduce Wayne Andrews, the head of investor relations for mCloud.
Thank you, Teresa. Today, we'll discuss the unaudited results for the three months ended 31 March 2021. Presenting today from mCloud is Russ McMeekin, our Chief Executive Officer, and Chantal Schutz, our Chief Financial Officer. Following the presentation, we will conduct a question-and-answer session with the analysts. I also note an updated investor presentation has been posted on our website. Financials and MD&A can be found on both our website at www.mcloudcorp.com and on SEDAR. Before I turn the call over to Russ, please note that remarks made on this conference call may constitute forward-looking statements about mCloud Technologies' current and future plans, expectations, intentions, results, levels of activity, performance, goals or achievements or any other future events or developments. Forward-looking statements are based on information currently available to management and on investments and assumptions based on factors that management believes are appropriate and reasonable in the circumstances.
However, there can be no assurance that such estimates and assumptions will prove to be correct. Many factors could cause actual results, levels of activity, performance, achievements, future events or developments to differ materially from those expressed or implied by the forward-looking statements. As a result, mCloud Technologies cannot guarantee that any forward-looking statements will materialize, and you are cautioned not to place undue reliance on any forward-looking statements. Except as may be required by law, mCloud Technologies has no obligation to update or revise any forward-looking statements as a result of new information, future events or otherwise. For additional information on these assumptions and risks, please consult the cautionary statement regarding forward-looking information contained in the company's most recent MD&A available on SEDAR. At this time, I'll turn the call over to Russ McMeekin, chief executive officer of mCloud. Please go ahead, Russ.
Thanks, Wayne. Good morning, everyone. Let me walk you through some Q1 highlights. Total AssetCare revenues of CAD 7.3 million, compared to CAD 3.1 million in Q1 2020. AssetCare over time recurring revenues were CAD 6.2 million versus in the same period in Q1 2020, CAD 1 million. We signed three very strategic deals, one in the state of N.Y. with Con Edison, one in the state of California with BayREN, and in British Columbia with BC Hydro. This gives us a partnering relationship with key utilities focused on kilowatt-hour reduction and indoor air quality. We already have customers signed, in some cases, in the case of N.Y., buildings running and new ones being added on a pretty aggressive basis here. January and February, we saw very heavy pandemic restrictions. With existing customers, we continue to connect assets.
The logistics there are more straightforward. Where we could, we had AssetCare solutions connected with remote, connected worker type technologies so that we could facilitate that. The bottom line is, where it was logistically possible through this pandemic-restricted period, which continues here in the month of May, we were able to connect where we could. Operator, please move slide. Continuing with highlights, we see demand from oil and gas customers focused on ESG solutions. It's one of the hottest topics I've ever seen. It consumes a lot of our business development people's time, and it's quite an exciting growth trajectory for us in the future. We have key talent aligned in the global market. In North America, you saw some recent announcements. We have Kim Claus, who's helping us as our VP of HR and talent and recruitment.
Arnel Santos, who joins us from NOVA Chemicals. He was the executive of operations and digitization at NOVA. He now joins us as the President of Americas. Darryl Meyer, who was once a Honeywell top sale executive, has joined us to run North America sales. In the period, we raised CAD 20.4 million in equity, and combined with debentures. We also secured a CAD 5 million credits facility with ATB. Operator, please move slide. I'm gonna recap this slide again. I know at the last call I went through this. I've been asked by a number of you to keep this theme going so people understand, you know, kinda where all the pieces, all the bricks in the wall fit.
When we started the company, FDSI in the upper right-hand side, that was our core technology used in building optimization, still a very key component of our building optimization technology. NGRAIN, which provided us visual analytics, again, very key technology and very precise visual analytics. Agnity for connected worker and anything mobile. Autopro in Alberta, which positioned us super well with customers in Alberta. Today, this is paying huge dividends as we're connected with some very strategic customers, NOVA Chemicals being one of them. CSA, that added some significant 3D technology. The nuclear industry uses our technology quite extensively.
Air Fusion in Europe, that's again starting to pay dividends as things open up in Europe. Kanopi in Australia, which was our last transaction, it's now the foundation for AssetCare Enterprise, which is being used not only in oil and gas now, but will be applied in all of our vertical markets and used for all multi-site, multi-location, multi-asset customers. All in all, these bricks in the wall are working extremely well. Our team's done a great job combining them all into AssetCare, so that is our platform for the market. Operator, please move to the next slide. TCV is a very important component of ours. It's how we see contracts, commercial contracts being signed, but that's driven by the assets we connect. COVID aside, we should be moving at significantly faster rates, which we will as soon as it lifts.
We expect in the H2 to get back to the kind of cadence that we had or better than we had on a quarterly basis. You can see from Q4 of last year to Q1, we added 2,000 assets. Q2, again, will be impeded in some of the markets. N.Y.'s opening up, California will open up. Alberta was a surprise to us. We didn't expect it to be this constrained. It's actually very constrained. That too will pass with the pandemic, with vaccines and so on. We'll be back there this summer. We expect by late summer, early fall to be at this 70,000 connected asset.
If you go to our presentation on our website that Wayne mentioned, you'll see the P&L pro forma impact of being at 70,000 connected assets and what that means to us. Then again, once we're done with 70,000 connected assets, we drive to 100,000 connected assets, which I believe 100,000 will be getting from 6,000 to 100,000 will be the toughest journey. Then 100,000 to scale beyond, since it's going to be many customers already. Now we just need to do more of with existing customers. The journey beyond 100,000 will be significantly simpler than it was to 100,000, putting COVID aside. I will now turn the presentation over to Chantal.
Thank you, Russ, good morning, everyone who's joined us here today. Operator, can you turn to the next slide, please? I'll just give it a second to catch up with us. We're very pleased to report that our revenue in the 1st quarter was CAD 8.3 million, and this compares to CAD 6.6 million in Q1 2020, representing an increase of 27% quarter-over-quarter. Our total AssetCare revenue was up CAD 4.2 million or 139%. Q1 2021 was CAD 7.4 million versus CAD 3.1 million in Q1 2020. AssetCare overtime recurring revenue was up over 500%. Q1 2020 was CAD 6.2 million versus just under CAD 1 million in Q1 2020. Our gross margins remained relatively consistent at 62%, despite a significantly higher percentage of the total revenues coming from AssetCare over time.
This is a function of AssetCare initialization passing through an increased level of third-party expenses such as services and hardware. We are pleased to report that our direct payroll expenses are down just over CAD 1 million year-on-year. In this presentation and the press release that was provided last night, we are showing the impact of operating EBITDA as gross margin less direct expenses. Operating EBITDA improved from a loss of CAD 3.4 million in Q1 2020 to CAD 2 million in the Q1 of 2021. Our professional and consulting expenses were down year-on-year. However, we do expect that in Q2, this number will increase as we had closed the CAD 14.5 million of equity offering in April.
In Q1, we accounted for additional specific R&D expenses to reflect the third-party cost directly associated with our ongoing efforts to advance our AssetCare solution. This is in response to market demand and ensuring we maintain our competitive advantage. These expenses, classified as research and development operating expenses, are driving our revenue performance now and into the future. We've completed the integration of our recent acquisitions, as Russ previously spoke about a few slides back, and we're now building new features and functions into the AssetCare platform. We will continue to explore the ability to capitalize certain of these expenses under the IFRS rules. Operator, can you move to slide 7, please? We'll just give that a second to catch up with us. On this slide, you'll notice that we illustrate our three-year growth trajectory.
Our compound annual growth over the 3 Q1 results is an excellent 373%. Note that the SaaS performance metrics we showed at year-end, as a reminder, we will update these annually or when there are any material changes. Operator, can you move to slide eight, please? We'll just give it a second to catch up here. Slide eight demonstrates the significant growth in our high-margin AssetCare overtime revenue. This more than offsets our declining engineering services, which we do expect to remain low until Alberta pandemic restrictions are lifted, as Russ previously spoke to. Operator, can you turn to slide nine, please? We'll just give it a second to catch up. The slides are a little bit slower than we are here.
Slide nine demonstrates the solid growth of our most valuable revenue stream that's generated by connecting our customers with our subscription-based AssetCare platform. Operator, if you can please move to slide 10. Again, we'll just give it a second to catch up with us. As this slide demonstrates, we continue to drive AssetCare overtime revenues while minimizing, yet leveraging direct expenses. We expect AssetCare overtime revenues to exceed direct expenses and generate positive operating EBITDA once we've reached 70,000 connected assets. Russ spoke to this a couple of slides ago. We expect to reach that inflection point by late summer or fall, depending on the pandemic conditions now centered mostly here in Canada. Before turning the call back to Russ, I do wanna make a couple of more comments about the balance sheet.
As you're well aware, we closed several additional tranches of debenture financing and a CAD 14 million equity offering since the year-end. To reflect our current capitalization, we filed on SEDAR and announced a pro forma balance sheet on April the 23rd. We announced the signing of a credit facility with ATB. Highlights of the pro forma balance sheet and other items I'd like to summarize at this time. Cash and cash equivalents were CAD 14.3 million, and the credit facility with up to CAD 5 million of availability will create significantly improved flexibility in working capital financing to grow the company domestically and internationally, and this was specifically put in place to grow the company. I am going to now turn the call back to Russ.
Thank you, Chantal. If we can move to slide 11. Targeting CAD 80 million of new TCV is our focus in the H2 of 2021. We have the business development people in place on a global basis. The drivers they're focused on are obviously, as I discussed previously, connected buildings around HVAC energy efficiency and indoor air quality for buildings. The second area of growth, and TCV focus is AssetCare with ESG solutions. This is targeting decarbonizing industrial oil and gas assets. We should have by late summer our fugitive gas detection technology working collaboratively with one large customer and a regulator in the province of Alberta. That, in addition to all the other applications we have around AssetCare ESG solutions, should be a major driver for additional TCV in this CAD 80 million range in the H2 of 2021. Next slide.
As a reminder of how we do indoor air quality and its implications, we obviously connect and drive down kilowatt hour consumption. On the right-hand side, as you can see, when we apply active air indoor air quality technology, we're able to make indoor air significantly more effective or more efficient and safer with this technology. You probably saw some of our announcements. We have buildings in British Columbia. We have buildings going live in New York. This will continue to be a driver for us, but you can see very precise results with our technology. Customers appreciate the fact that we have the ability to track these things, measure these things, and store this data, which is a tremendous feature for them. Moving to the next slide.
Showing around ESG and decarbonization on the left-hand side, the areas we focus on, mainly leak detection and the reduction of methane. That is a key component of this industry. It's what gives this industry a pretty bad reputation. Our technology is well designed and effective in micromanaging this phenomenon. These on the right, again, are these kinds of reports that allow customers to see in real time the data, store the data, report the data to be compliant. This is pretty exciting and it's in demand everywhere from Malaysia to Alberta to Australia, you name it. Customers are all focused on this ESG decarbonization of oil and gas, and we're very well positioned in all these markets. Moving to the next slide.
What is foundational to most of these customers and, with Arnel joining the team who led digitization at Nova, having a digital workplace in this day and age, and these are all the layers you can see here of what a digital business looks like. First of all, AssetCare plays a perfect role in all those layers. Secondly, customers that are highly digitized, both at the asset level and connecting of the worker, and you can see on the right-hand side the types of reports that they get, they tend to operate significantly better. They tend to be a lot more compliant in their ESG and decarbonization standards. This has been a major focus.
Not going to go back to the brick wall presentation again. This is where all those technologies in AssetCare come to life in making all these layers in the digitization of the workplace possible. We're very well positioned on a global basis. Moving slides. In summary, AssetCare saw a very strong year-on-year growth. We will see significantly increased connected assets as pandemic restrictions lift. Every time we add a connected asset, that adds to our recurring revenue base. Our backlog was strong coming into 2021. It continues to grow. There's no impediment of selling. That's not a problem. There's only impediment to getting things connected. That is short-lived. As you can see here, we start seeing activities happening in New York now, California in June. We started seeing some activities in Southeast Asia.
We will soon see activities in the Middle East, Western Canada later this summer, as Chantal mentioned. Recapping, we closed approximately CAD 20.4 million of growth capital. We have a new facility that provide this working capital, non-dilutive working capital that we can take our contracts and turn into working capital. We are very well-positioned for growth in 2021 and beyond. Moving to the next slide. Looking ahead, again, recapping 70,000 connected assets is the near-term focus, with an absolute laser focus to get to 100,000 as quick as we can after that. Doubling our AssetCare revenues year-on-year over 2020 is a key focus of ours. Once we get to 70,000 connected assets, beginning to generate positive operating EBITDA is an important focus of ours.
Gross margin from recurring revenue is it's a natural effect, so we tend to as long as we focus on AssetCare and recurring revenue, margins will be robust. Leveraging our new home base in Alberta has been extremely rewarding. We've worked with a lot of people, even though we're restricted pandemically from meeting in person. We're very active in getting ready for what will things look like when things open around decarbonization, ESG, methane, you name it. A lot of great activities. In summary, one question I've been getting a lot in the last several weeks is around the stock price and what's going on. All I can say is, first of all, I don't know who's the sellers, so that's the first thing. Operationally, we are never been in a better shape.
I can't explain the stock price activity, but what I can explain is operationally, we've never been better. Once the pandemic lifts, we'll be even better, but that's not a function of operational challenge. That's just a fact of life. Talent has never been better. On a global basis, we have tremendous talent aligned to our mission and to our goal, aligned to customers. I've mentioned in my early presentation some of the new adds that are phenomenal. The technology, I would argue, is probably the best in class period, globally, at an asset level in terms of accuracy, ease of implementation, and the way we supply it on a subscription basis. We'll move over to questions from analysts, but that's the end of our prepared remarks.
To ask a question, press star one on your telephone keypad. To remove your question, press the pound key. We will pause for just a moment to compile the Q&A roster. Your first question comes from Martin Toner with ATB Capital Markets.
Thanks so much for taking my question, guys. Congrats on all your progress.
Thanks, Martin.
I joined a little late, so apologies if this has been covered, but, can you talk a little bit about, your sort of backlog of assets that, you know, people wanna connect when lockdowns kind of, allow?
Yeah. We, as I mentioned, have an easy trajectory to 70,000 in backlog, so we're at 62. The 8,000 needed to get to 70,000 is robustly in backlog. We have more than that now. We actually probably could get easily to 80,000 connected assets, logistics lifted, which probably in the H2 would be the case. We, as I said at the end of my presentation, wanna get far beyond that. You know, we wanna get, you know, backlog into the 100,000 of connectable assets as we run into 2022.
Super. That's great. How should we think about the 2020 debenture?
Yeah. If you go to our website, you'll see the impact of 70,000 connected asset and what that means to operating EBITDA. You use an operating EBITDA number at this time next year, around the time the debenture is due. There's adequate EBITDA to support, you know, an increased credit facility to take out the debenture, and that has a couple positives. One is we can do it at significantly lower cost than 10%, and we take out the share overhang that continues to fit into our, call it, fully diluted calculation. We see that as a mission for next summer or next spring, and we see EBITDA as the mechanism to do that through by using a credit facility with a great firm that you know very well.
Nice. Excellent. Can you tell us what your cash, what the cash on hand is like as of now?
Yeah. Chantal put out a pro forma balance sheet on 15 April , so that was less than, what, a month ago. It's about a month ago. We will be putting into place the credit facility that will help in terms of pulling some capital forward on some contracts. We're in that transition period of paying down HSBC, which we did, and then enabling the credit facility, and then again, I'd point to that balance sheet as a pretty reasonable proxy of where we're at.
Great. How would you compare the level of interest in the sort of building pipeline of opportunities for AssetCare for energy efficiency versus air quality?
In New York State, you would think that indoor air quality would be the higher priority, but energy efficiency still is. Part of that is because our partnership with Con Edison has it very focused on kilowatt hour reduction. That being said, when you bring to the attention of customers the impact we can create on a subscription basis of, you know, less than CAD 0.12 a sq ft per month, basically is the way to think of it. The reason I use that number is that's typically the janitorial cost of a building. You can keep your air at, call it, greater than a CDC level. That piques people's interest. I think a lot of people don't believe that you can get on a subscription basis, something that can create indoor air quality of the levels we create.
It creates for a great discussion. The starting interest still is kilowatt hours a lot in N.Y. State. In Canada, it's more indoor air quality 'cause rates for electricity is a bit lower, and California is a mix.
Great. Thank you very much. I'll pass the line.
Your next question comes from Bill Zhang with Raymond James.
Hey, guys. As things start to open up in the H2, how should we think about the sales and marketing expense and that ramp up compared to what we had in the quarter?
We have pretty much everybody that is aligned to the TCV I mentioned is in the SG&A now. We will add people in SG&A, but it's only humans, right? You can only hire at such a rate. I don't think there's gonna be a radical increase in selling expense. I would think of some modest growth, but nothing too crazy.
Okay. On the different geographies, for China's been open for about a little over a year now. Could you just give us an update on your partnerships there with SCN, Huayan, and how that's going on the commercial side of it?
Great question, and there's a good answer. Our next mall will go live here shortly. I tend to not talk too much about it because I'd rather it be operating, and then I just talk about new malls being operational versus going to be operating. Anyways, the next big mall is going live here pretty soon. The results from the other malls is obviously quite compelling, so it creates a, you know, a referenceable effect. I think you'll see call it well-thought-through growth throughout the balance of the year. When I say well-thought-through growth is with people that, A, will pay their bills so that they have, you know, foreign currency or at least currency that we can collect from, shopping malls that are of the high quality that we like. We're going to mindfully keep adding shopping malls.
Similarly, on the wind turbine side, I think we're about to really ramp up there in the late Q2, early third. There's a quite a number of deals in the wind area coming our way that are quite exciting. China is actually one of those, I wouldn't say a secret, but it's one of those quiet things that I've been keeping that it's coming along actually much better than I thought. For the reasons you just articulated, they're opening up, and they're getting back to work, so.
Yeah, great. That's awesome to hear. Final one for me. You talked about your backlog and pipeline last quarter. Last I checked, it was, you know, the CAD 30 million, and then the TCV was CAD 178. Could you just talk a little bit about that for this quarter?
Yes. It grew, we converted some to revenue. I don't have a precise number for you other than I have what we got targeted for the H2 to add on the current base of CAD 80 million in the H2. Other than what we, you know, converted to revenue, we added, you know, double digits of millions just recently. Yeah, we're trending in the right direction, but with a pretty aggressive plan in the H2 for adding about another CAD 80 million in the H2.
Okay, great. That's all for me.
Again, to ask a question, press star one on your telephone. Your next question comes from Brian Kinstlinger with Alliance Global Partners.
Great. Thanks so much, Hi Russ. I guess I'm just a bit confused on the impact of COVID during the current quarter we're in. Seems like domestic travel has no restrictions in the U.S. What and where are the current challenges that you're facing in the current quarter, that is slowing you to think that you won't get to 70,000 till early summer?
Alberta, it's simple. One simple one. We had a pretty significant number in Alberta. Alberta and British Columbia, but mainly Alberta. It's very simple. One place, one area, and it couldn't be more locked down. Yeah, therefore, thank God we have New York, and thank God we have California. You're right, those two states are not encumbered. Where we had backlog and we have backlog to connect in Q2 is Alberta.
Can you quantify, or at least maybe break down by percantage your backlog? How much is Alberta versus how much is, you know, U.S. versus rest of the world?
Oh, not sure. Yeah, rough percentage. In CAD term, Alberta would be quite significant because a lot of it's oil and gas in Alberta. I'd say half our-
I guess I'm just trying to take a look and, I mean, I guess I'm trying to look at, you know, you added 2,000 in the March quarter, which was the lowest in a couple of quarters. I'm trying to understand, is that slowdown because everything that we're expecting to come on is Alberta?
No, no.
Is there a significant piece in the U.S., for example, or other areas you can install?
I thought you were talking about Q1. Let's take Q1 and let's dissect it. January, February was near zero anywhere, that's New York, California, Alberta, everywhere. In fact, existing customers made up a lot of them in Alberta, which in the month of March. I thought you were talking about Q2. Q2 March is in Alberta is pretty much zero right now. What we have to rely on is New York State, California in June, and the beginnings of the Middle East. We probably will do a little better in terms of connected assets in Q2. We should have done a lot better because we should have had Alberta. That shouldn't have happened. That was never planned for Alberta not to happen.
Q2 should have been New York, California, Middle East, call it Alberta. Take Alberta out of that assumption for Q2. In Q3, we get aggressive on all those.
What was different in the March quarter when you added 2,000 versus September and December of last year where you added 4,700 and 3,400?
Yeah. Most of it came from Alberta only. It was a couple of existing customers. It came from existing customers.
Got it. Okay. Then can you talk about, you know, you mentioned the partnerships with Con Ed in New York and a couple of others that you mentioned. Are those utilities selling the solution, or do you also have a direct sales force that's selling that? You know, how are utilities customers, you know, becoming aware of this solution?
The customers are aware by way of their own, the utilities marketing programs. We're part of their marketing program. They think of it as probably a platinum lead, for lack of a better term. Yes, we have a direct sales force. In fact, we have a very good direct sales force in your backyard, in the state of New York, in New Jersey. They take these, call it, highly qualified leads and sell to the Con Ed customer base with Con Ed to some degree, but largely we do most of the heavy lifting. At the end of the period, when they demonstrate the savings that we've been creating, we get our monthly AssetCare fee, we demonstrate the savings. Our savings are greater than the fees we charge.
If there's demonstrable savings in accordance to the Con Ed or BayREN programs in California, they get an additional incentive from the utility. Their motivation is to be connected to that program, use our technology because it qualifies and get that additional incentive.
Great. Thanks so much.
You do have a follow-up question from Martin Toner with ATB Capital Markets.
Thanks, guys. Wanted to ask about engineering services revenue. How fast and to what extent do you expect it to bounce back, as we start coming out of COVID?
Slow again in Q2 for all the reasons I've just mentioned. Pick up in Q3 and a reasonable Q4. I don't know that we ever want to get back to the levels it used to be. First of all, we don't have part of that payroll reduction that you saw, that Chantal mentioned, comes from right sizing that group. We'll probably get to the CAD two and a half million range per quarter. That's about CAD two and a half million to CAD 3 million max is the range that we'll probably end up being in. Let's assume that by Q4, we could be at that level to specifically answer your question.
Okay, great. Thanks very much. That's it for me.
There are no further questions. I'll turn it back to Russ McMeekin.
Thank you very much, everyone, and we'll speak to you at the next quarterly conference call. Thank you.
Thank you for your participation. You may now disconnect.