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Correction: Operating loss in "Q3" was just under $7.6M
Initialization Revenue:
I think the issue of Initialization Revenue (IR) needs a little more attn in regard to any profitability or cash flow analysis, as I'm not certain I fully understand the accounting.
My understanding is that approx 20% of the Total Contract Value (TCV) is booked as IR at the time the asset is connected, but no cash is collected up front (booked as a Receivable). This would mean that the "over-time" revenue booked each Qtr is actually only 80% of the cash being generated from the connected asset base.
Do I have this right? If so, as the connected asset pace begins to ramp each Qtr, it should result in bottom line growth outpacing cash flow generation.
It's very possible I have something wrong here. Any thoughts?
Their operating loss in Q2 was just under $7.6M.
If we take an optimistic view and reduce their "prof and consulting fees" by a full $2M, then they have about a deficit of $5.5M to make up to break even.
Let's take your $8M "over-time" estimate on 70K assets, which I think is fairly reasonable. That would be an increase of approx 4.4M over the Q3 number. Apply a 65% margin and you get $2.86M in additional gross profit (only about half the qtrly deficit).
How much Project revenue would need to be generated to make that up. At a 40% margin, you'd need about $6.5M in Qtrly Proj Rev to make up the diff.
And of course, this crude analysis assumes no increases to any indirect expenses not included in the cost of sales. You can see why I'm skeptical that 70K assets is the magic number to profitability.
There are, of course, other variables to consider like potential rev from the Connected Worker segment and 3D digital twins that could help make up the difference. In addition, increasing the % of industrial assets will boost the avg rev per connected asset. Also, as you mentioned, Initialization Rev has to be taken into account when projecting profitability.
So, it's certainly possible they could be profitable at 70K assets, but it appears to me to depend on a host of other factors.
SNN Network virtual presentation.
McMeekin presented on Thursday. The company posted a link in their bi-weekly newsletter yesterday but it was to the wrong video. You can find the actual presentation on the SNN Network website. Not a ton of new info, in fact they didn't even update the presentation slides from 11/12, but there were a few things I took note of.
1. There are more tranches of convert offerings in the pipeline with "family offices" in the US.
2. Bank of America renewed 3 yr contract and is looking at IAQ solutions on a state by state basis (not sure how "new" the contract renewal news is but thought it was significant esp if the old contract was at a much lower monthly rate than std pricing)
3. McDonald's and Planet Fitness revealed as a couple of the new brands signed up for their connected building solutions (surprised this isn't getting hyped more but I'm guessing it's with very limited franchises at this point. Regardless, adding the golden arches to your customer portfolio is a big deal imo).
4. Regarding contract activity, McMeekin noted "a lot of activity picking up in Jan" in addition to the awards received in Dec.
5. During Q&A someone asked why the stock was down so much. McMeekin's response was both odd and confusing. He first cited that it was partly "the market we trade in" apparently blaming not being on the TSX big board and Naz. Then it got even stranger when he blamed the recent acquisition financing (referring to kanepi I presume) by saying "I don't know that the financing was done totally the right way" Say what? What does that even mean? I think maybe the stock performance can be better explained by guiding 70-72M in rev for 2020 at the end of May and then reporting 17.7M at the end of Q3.
6. There was another question regarding when they will see "consistent profitability". McMeekin reiterated the 70K asset number and said "70K is the number that generates adequate Qtrly revenues to be sustainably profitable". All I can say about that is if anyone has crunched the numbers to demonstrate how 70k assets gets them profitable, I'd very much like to see it.
I miss anything significant?
I've read all the quotes and listened to all the commentary and have learned my lesson the hard way regarding "targets" and "clear paths" and "visibility".
The 2nd half 2020 connection pace is actually much higher than 6K. They connected 3,423 in Q3 and it appears about 5k in Q4, so that's closer to 8.5K. I think that is pretty impressive all things considered.
However, I'd be careful with the assumption that "nearing 70K is positive cash flow." You'll notice that Russ avoided that in his remarks by saying that positive cash flow would be achieved by an "adequate number of connected assets". It's hard to get much more vague than that.
I can't even venture a guess on share price right now. Still significant financing risk and too much uncertainty regarding pandemic restrictions.
Here's the CEO's year-end pre-recorded message. The only remark i found to be of any substance was that they will be close to 60K connected assets at year-end. Considering they started the Qtr w/ 54,770, that implies approx 5K connected assets in the Qtr. Given the current state of pandemic restrictions, that's more than I was expecting.
https://www.mcloudcorp.com/blog/news/mcloud-2020-year-review
RCA e-mail ...
mClouds campaign aimed at businesses operating portfolios of small- and medium-sized buildings in New York and California, where Indoor Air Quality (IAQ) regulations and electricity costs are formidable, is delivering results.
No surprise the first customers are high energy intensive per square foot retail franchises for notable brands including some of the world's largest restaurant chains (think hambergers), automotive dealers, and fitness centers. While just adding more outdoor air sounds like the right solution for IAQ, heating or cooling of outdoor air is expensive. That’s why mClouds AssetCare AI platform, which optimizes energy consumption at regulated IAQ parameters, is being rapidly adopted.
"mCloud's AI-enabled Connected Buildings offering is the easiest solution for these operators, period," said Dr. Patrick O'Neill, mCloud's President for North America. "The unique and compelling economics offered by AssetCare and our partnership with local providers allow us to offer an unbeatable, no capital expenditure, subscription solution to these businesses who now
have no choice but to adapt."
Company expects Connected Buildings segment to thrive in 2021 as new campaign targets over 20,000 businesses in New York and California.
mClouds “first mover advantage” delivering subscription based AssetCare Service should lead to continued recurring revenue growth. Covid, which was a headwind in 2020, has now shifted to a tailwind for 2021.
Read the full press release here:
https://investor.mcloudcorp.com/press-releases/press-releases-details/2020/mCloud-Connects-First-Ten-New-York-Buildings-in-New-Multi-Site-Commercial-Building-Campaign/default.aspx
RCA sent out their follow-up e-mail that typically adds a couple extra nuggets from the initial PR. The only thing I picked up on was the addition of (think hambergers) after "some of the world's largest restaurant chains". Of course, we're all thinking about the same couple names when we combine those two things. Could it be?
... and yes, they spelled hamburger wrong, not me. LOL
Based on the PR heading, I think it's safe to assume they actually connected them. My question is, how many buildings were actually included in the 10 contracts? Were the 10 buildings that were connected all that was included in these contracts, or did these contracts include multiple buildings for each franchise yet to be connected? I mean, if we're just talking 10 total buildings here then how is this even news? It should be a regular weekday afternoon. Also, what exactly is "new" about this campaign? Isn't this what the company should have been focused on for the past 9 mos?
Then again, it wouldn't be an mCloud PR without a significant amount of ambiguity would it?
When the board moderator throws in the towel, the contrarian in me perks up a bit. However, the realist needs some answers out of the annual meeting.
One thing I'd push back on a little bit is the "no credit market" comment. According to info the company has disclosed, they do have the ability to tap the HPE credit facility. Although, the details have been sketchy on that. But if they really do have a > C$55M contract backlog as reported then you'd figure they should be able to continue to borrow against that. Of course, you could argue that if that's the case then why the debenture offering? I do tend to agree w/ Prime that the debenture offering may have been made to insiders. If you read the details, the debentures are not only convertible but the company has the option to pay the interest in stock as well. Seems to me like "insider" terms but it's not my area of expertise.
Rod, an authorization of share consolidation does not necessarily mean they are going to do it. It just means they have the option available to them. Although, I share your general concern.
The best way out of this mess that I can see is the rapid adoption of their heat exchanger optimization tech. This could be a game changer considering the market size and the potential rev/asset. Unfortunately, as you know, we've heard basically nothing on this front since the initial PR in Aug. I'm going to wait until the Annual Meeting to see what we can learn before making a decision on whether I'm going to bail out.
It's been an absolutely miserable experience for sure.
Meeting Info from the Information Circular ...
Attending the Meeting Online
In an effort to adopt measures that assist our community in slowing the spread of the evolving global
COVID-19 (coronavirus) public health emergency, the Corporation is providing access to the Meeting in
a virtual-only format, which will be conducted via live audio webcast.
Attending the Meeting online enables registered shareholders to participate at the Meeting and ask
questions, all in real time. Registered shareholders can vote at the appropriate times during the Meeting.
To access the Meeting online, log in online at https://www.virtualshareholdermeeting.com/MCLD2020
using your 16-digit Control Number included on the form of proxy or on the instructions that accompany
your proxy materials
__________________________________________________________________
Here's a summary of what is up for vote:
1. Board Members
2. KPMG as Auditor
3. Reapprove equity incentive plan
4. Authorize Share Consolidation (up to 1 for 3)
5. New class of Preferred Shares
Hotel Valley Ho!
The Annual and Special Meeting of the shareholders of mCloud Technologies Corp. will be held on December 29, 2020 at 10:00 a.m. (Scottsdale time) at the Hotel Valley Ho, 6850 E Main Street, Scottsdale, Arizona, USA.
Not sure why they need to have an in-person meeting during a pandemic, not to mention their obvious cash flow problem. Was hoping this would be all online so we could participate in the Q&A. Hopefully, we'll be able to submit questions online still, because I've got a lot of them.
It's certainly possible that "existing US shareholders" included insiders. I'm not sure if that would be required to be disclosed or not.
There was a follow-up release by their IR firm, RCA Partners, that included the following link. It's not clear to me how exactly this fits into their "pull-forward" arrangements from existing customers and their "strategic partner". It was my understanding that the referred to partner was the maker of the IOT devices, but apparently HPE Financial Services is somehow involved as well. Perhaps HPE (Hewlett Packard Enterprises) is the maker of their IOT sensors? I guess that could maybe explain it.
https://www.hpe.com/us/en/newsroom/press-release/2020/04/hpe-financial-services-offers-2-billion-in-financing-and-new-programs-to-help-customers-and-partners-weather-covid-19.html
The financing news doesn't sound terrible to me, maybe the fact that there was "significant participation from existing US shareholders" helped. At 8% and convertible at $1.48, I guess it could have been worse. Not a whole lot of money though, so perhaps more of a stop-gap to see if pull-forwards can pick up. Found it interesting that there were no specifics regarding the pull-forward closings.
On the contract news front, I'm guessing that "an engagement with a major communication technology provider in Asia Pacific" is the connected worker deal in China that the CEO referred to in the CC? So combined with what was reported in the CC, the TCV backlog should now be over C$55M. A bit disappointed that the contract update didn't include anything related to air-quality solutions. This sector should be booming, right? Maybe we'll get a separate PR on that at some point.
Now that financing news is out, can we get some insider buying before year-end?
I really hoped we'd get some news this week on the financing front. At a minimum, a PR regarding closing on some of that "pull-forward" revenue. And still not a single insider purchase at these levels. I'm hoping that means there's something in the works.
Rod, if the "downgraded" revenue target cited in that article of C$70M is actually hit next year, I think we'd all be very happy, considering it would represent an almost 200% y/y increase. That target is most likely just based on this comment from the CEO during the latest CC,
"The $70 million didn’t happen in 2020 so we should make it happen in 2021. Right? So that’s a simplistic way of looking at it. But it’s, again, simplistic. So we’re doing it bottoms
up, asset by asset, region by region, salesman by salesman to build that model up. I would assume it’ll be
no less than $70 million. That would be a reasonable way of thinking of it."
Pretty lazy analyst work if you ask me. It irritates the heck out of me that he had the audacity to say "Right?", like somehow anybody would accept it as a given that C$70M would be a starting point for next year's guidance after how badly they missed this year. Of course, nobody called him out for it and they just ran with it.
If you recall, the company did a brokered offering in part to finance the Kanepi deal:
"The net proceeds of the Offering will be used, in part, to satisfy payment of the Closing Cash Consideration under the Acquisition Agreement, with the remaining net proceeds to be used for working capital and general corporate purposes"
I do not know the legal ramifications here, but I would imagine that if you raise money via public offering to finance an acquisition and then don't use the money to actually finance the acquisition, then you might have a bit of a problem on your hands.
Regarding BuildingIQ, there is a lawsuit filed in the Delaware court system. You can find this mentioned in the Q1 CC transcript.
If I had a one on one with the CEO these would be the questions I'd ask (in no particualr order):
1. Where are you with the 18-mos "target" of 2000 oil wells optimized as part of the Nybl partnership?
2. Where are you with the "targeted" 1000 heat exchangers by year-end in West. Canada? How much rev are they generating per month on avg? What's been the customer feedback on this so far?
3. Where are you with the "targeted" 1000 connected workers in China by year-end? How many have actually been connected and how much rev will they generate per month on avg?
4. Why is their so little news regarding your indoor air quality solutions? How much in TCV have you actually booked in this space and how many installations have actually been done?
5. Where are you with the "pull-forward" revenue arrangements. You said C$3M should be closed in Oct, then said $1M was collected and C$2M in process of being collected in Nov? Where is the money, and will this arrangement be sufficient until you're cash flow positive? If not, what are your plans to bridge the gap?
6. How is it possible you were still guiding C$70-72M in revenue as recently as the end of May and then reported C$17.7M thru Sept? What was it that you did not see coming in May, in the middle of the pandemic, that has caused you to miss so badly?
7. How does 70K assets translate to C$45M in AssetCare revenue as projected in May? You'd need to more than double your current avg rev/asset. Show us the math based on the backlogged asset breakdown you provided.
8. Why are there so many assets generating so little in monthly rev that your avg monthly rev per asset is < $25. When will these contracts expire and will they be renewed at std rates?
... anything else??
I don't really disagree with any of that. The one caveat would be if they could raise the sufficient capital via a combo of the "pull-forward" arrangements and a private placement to insiders. I have no idea how deep the pockets are of their executive team, but I think that's one scenario that could maybe prevent further selling. I don't know how realistic it is though.
Compare their B/S to mCloud's and you'll have your answer. CloudMD had about $34M in cash and very little debt at the end of 3Q. Not to mention they only burned a little over C$4M in cash through the 1st 3Q's. Also, compare that to mCloud.
Yes, it's a b-weekly update that the company sends out via e-mail. You can sign up for it under the Investor Relations section of the website (scroll to bottom "Subscribe to our Newsletter")
Shareholder Meeting 12/29.
From today's newsletter:
"We announced the date of our Annual & Special Meeting of Shareholders which has been filed with the securities commissions.
The meeting will take place on December 29, 2020. We will provide an update on the venue in the coming weeks!"
This should be interesting ...
My hope is that they have been unable to buy since the earnings release because of legal restrictions (e.g. material info not yet publicly disclosed). Because if the insider window is open and there are no other current legal restrictions, then insiders not buying at these prices should be very worrisome imo.
If you recall, after the Q2 release there was some very tepid insider buying, which I thought was a bit of a red flag. Unfortunately for me, I did not act on it and held on.
Not sure what you're referring to. Do you mean an investor conference call of some type? If so, I'm not aware. There's nothing scheduled on the website. Where are you seeing this?
They are basically pulling cash forward from new contracts and booking it as Deferred Revenue. The way it was explained in the CC is that this up-front cash provision is being included in their contracts with "high credit-worthy" customers. It's not really clear to me either why customers would agree to this, or why "credit-worthiness" would be a criterion for paying cash up front. They also have indicated that their strategic partner, who supplies the IOT sensors, is involved with this financing arrangement, which makes more sense to me, but they didn't go into detail about how that part of it works.
Totally agree about the vague statements and lofty projections. A lot of talk about "targeting" this many assets/workers and "record requests" and stuff like that. As for the most recent notable company they signed a contract with, Russ did say this during the CC,
"And since this slide was created, here in North America, we have Shell Midstream gas coming on board."
But again, what does "coming on board" mean? Is there a contract? How much is it for? How many assets? One site or multiple? Shell midstream Gas is a multi-billion dollar company so it sure would be nice to hear more about it as we have to watch this stock get pummeled every day of the week.
Agreed about Covid, but I'm still a bit puzzled by just how short they've missed on rev targets to date. Of course Covid has restricted some access to O&G facilities, I don't doubt that, but do you see that as being justification for their Proj Services to have been hit so hard? They were projecting C$25M for the year and have done < C$1M in each of the past 2 Qtrs. These facilities are still operational, right? Why were they unable to get in there over the summer and complete more of this work?
I remember you saying you were in the industry, so thought you might have some insight into that.
With no insider purchases since earnings were released almost 2 weeks ago, I can only assume one of two things.
1. The financial situation is even more bleak than I realize if insiders are unwilling to step in and buy shares at these depressed price levels.
(or)
2. There is a financing deal (or some other deal) in the works which is preventing insider transactions from being carried out at this time.
The insiders were at least nibbling after the past 2 earnings releases at significantly higher prices. So far this time ... nothing. Let's hope it's #2.
Any other thoughts?
I don't think an oil sector rebound alone will lift mCloud. IMO, there are 2 main things weighing on the stock price.
1. Financing risk. The company absolutely has to update the market on their cash situation, including the status of the "pull-forward" financings and how they will bridge any remaining gap. I am not entirely confident that "pull-forward" alone can get them much past year-end.
2. The Covid situation in Alberta is worsening and it looks like further restrictions are imminent. Russ was optimistic that 2500 O&G asset goal could get hit by year-end, which I thought was a bright spot in the CC, but that will certainly be in jeopardy with more lockdowns.
A wild-card could be some news on the connected worker front from China. Russ seemed cautious optimistic during the call and even made reference to a "very large" deal. A PR announcing a go-live with 1000 workers or something like that could do wonders.
There should be an additional C$3M in revenue from licensing in Q4.
This is from the 2019/Q4 CC transcript:
"Q4 2019, a few highlights; for the quarter, we did $10 million. Thirty percent of that revenue was
from AssetCare Solutions. Thirty percent of that—every year in fourth quarter you will see a pretty
robust licensing. That's primarily from Agnity Mobile platform and our ingrained 3D technology and
precision analytics technology, and then 40 percent of it came from project services in the fourth
quarter, adding up to $10 million."
I'm not sure how much of that, if any, has already been collected and booked as "Deferred Revenue" throughout the year. Anyone know how those licensing fees are collected? Would be nice if that was an additional C$3M cash added in Q4.
1. The analyst sort of implied that the full $2M could come out of the prof/consulting fees, but that wasn't really confirmed if I recall correctly. The CFO indicated that there were still some spill over expenses in Q4. Could end up something in between $1-$2M.
2. I don't know what the cash impact from Kanepi in Q4 will be so I am going with net $0 in my estimate
3. I don't think either one of us know what the legal ramifications of trying to cancel the Kanepi deal would have been. No idea what the contract stipulates. But, in my opinion, the Kanepi tech is one of the most exciting things going on at the co, so I'm definitely glad it wasn't cancelled.
4. The question isn't whether or not they could make it to 12/31 without running out of cash, we already know that their cash on hand to start the Qtr was not enough. So the question is how much will they have to raise to ensure that doesn't happen.
5. As far as my confidence in Mgmt goes, read my last post.
Yes, it's possible. But this company has to prove to the market it can hit their revenue targets. The guidance they gave during the 5/26 CC is just incredible looking back at it 6 mos later. Keep in mind that guidance was given in the middle of the pandemic, so it wasn't an unknown risk at that point. But the CEO was STILL guiding 2020 revs of between C$70-72M with AssetCare revs comprising 65% ($45M). Think about that, they just reported $17M in TOTAL revs through 3 Qtrs and he was still guiding $70-72M 6 mos ago!
So, my point is that as much as I still believe in the potential of this company, they have A LOT to prove to the market in terms of some of these projections starting to materialize. I was at least happy to hear them report their Total Contract Value (TCV) backlog from their 10 biggest cutomers during the call. At least we got some kind of indication of progress on the deals front if we're not seeing it in the revs.
I continue to hold onto my full position and hope.
This is the way I calculated the $2.5M-$4M cash shortage for Q4.
(+) Cash balance as of Q3 = C$5.2M
(-) Cash Pymt made to Kanepi = C$4.75M (5M AUD)
(+) Pull-forward rev of C$3M (closed or near closing)
(-) Qtrly Cash burn rate from Ops = C$7M (based on Q1-Q3)
= - C$3.55 (at the high end)
(+) C$1M reduction in non-recurring prof/consulting fees
(+) C$1M improvement in gross profit from increase in assets
= - C$1.55 (at the low end)
so my estimate actually should have been $1.5-$3.5 (my mistake)
I am certainly hopeful that a bigger increase in Gross profit in Q4 could help drive the low-end down, but "hope" isn't good for much.
Also, I don't think cancelling the Kanepi deal was an option. They were way too far along with that integration, not to mention they seem very excited about the prospects of the merged tech.
The way I see it, raising C$3M in "pull-forward" rev still leaves them C$2.5-4.0M deficient in cash thru the end of the year (barring a big "game-changing" type deal in Q4.) I think a private placement to executives at mCloud is our best bet here in terms of raising cash. I don't want to see a public offering at C$2.00/sh + warrant coverage and fees. That would make me nauseous.
It's the least Mgmt could do after the absolutely atrocious guidance they issued during the Q1 call. It would at least demonstrate some confidence by the Mgmt team and hopefully support the stock a bit while they continue to try to weather this storm.
Anyone see the numbers any differently?
Also, you would imagine that the company would not want to risk the loss of asset connections, given how they've made that their key benchmark, so I'm sure they will have to be very sensitive about raising prices to any of these legacy customers. If you do some basic calculations, you'll see that the number of these legacy Building assets generating revs far below $50 has to be quite high.
Yes, it's a great question. You'd figure that if/when those contracts renewed it would create a big bump in AssetCare revenues, but definitely don't know that for sure. What I don't understand is how asset connections at those rates was ever an economically viable business to begin with.