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spk00: Good day, and welcome to the Oblong, Inc. First Quarter 2021 Earnings Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Brett Moss, Hayden Investor Relations. Please go ahead, sir.
spk01: Thank you, Operator. I would like to welcome everybody to the call. Hosting the call today are Oblong's Chairman and CEO, Peter Holst, and CFO, David Clark. Please be aware that some of the comments made during our call may contain forward-looking statements within the meaning of federal securities laws. Statements about our beliefs and expectations containing words such as may, could, would, will, should, believe, expect, anticipate, and similar expressions constitute forward-looking statements. These statements involve risks and uncertainties regarding our operations and our future results that could cause actual results to differ materially from management's current expectations. In addition, today's call includes non-GAAP financial measures. A reconciliation of such measures to GAAP measures is contained in the press release issued today. We encourage you to review the safe harbor statement. and risk factors containing the company's earnings release and filings with the SEC, including, without limitation, our most recent annual report on Form 10-K and other periodic reports that identify specific risk factors and may also cause actual results or events to differ materially from those described in the following statement. Copies of the company's most recent reports on Form 10-K and 10-Q may be obtained on the company's website, oblong.com, or the SEC website, sec.gov. The company does not undertake... publicly update or revise any forward-looking statements after the call or date of this call. I would also like to remind everyone that this call will be available for replay through May 27th. A link to the website replay of the call is also provided in the earnings release and available on the company's website, oblong.com. I will now turn the call over to CEO of Oblong, Peter Hulse. Pete, the floor is yours.
spk03: Thanks, Brett. Good afternoon. Thank you, everyone, for joining us today. We achieved a number of notable accomplishments during and subsequent to the first quarter and are increasingly optimistic about the long-term positioning and market opportunity for our solutions. As I'm sure you're aware, more and more companies are announcing plans for reopening their offices and returning employees to the workplace. There are strong indications we are gaining the upper hand on the pandemic with the rate of infection decelerating and more and more people being vaccinated every day. There are countless reasons to be hopeful. More and more large-scale enterprises are preparing for a return to work that includes reconfiguring workspaces with innovative technology solutions that can bring people together in the most engaging manner possible. While we believe the market will be fundamentally open in 2022, the pace and timing of office reopenings will vary significantly from region to region. Leaders are now reimagining how their businesses need to operate and how they can reinvigorate employees and recapture direct engagement that was lost with the abrupt dislocation of employees to remote work environments. We continue to see a strong pull for more advanced tools and intelligent technologies to improve productivity and the work experience. Across the spectrum, this includes new and innovative ways to collaborate across a distributed workforce including the engagement employees that may remain remote indefinitely. Most telling of this demand is the size and quality of our pipeline. Today, our pipeline is approximately $25 million in total deal value, more than double where it was a year ago, with a median deal size of approximately $40,000, also about twice the size of where we were last year. In particular, and as we prepare for a shift to annual recurring revenue pricing models, We believe many of our current and prospective customers have user bases and real estate footprints that have addressable revenue well over $100,000 in annual recurring revenue. Based on substantial feedback in recent months from our customers, we believe many of them will welcome a shift to how they consume and purchase our services. By and large, most decision makers we speak with are optimistic about the future. although many remain cautious about technology investments as they await the actual return to office environments to better gauge employee traffic and how conference room resources will be utilized. As a result, our sales cycles have elongated, and we will remain in lockstep with IT leaders and facilities planners across our target market as their process continues to evolve. Messaging from customers and distributors in our core market and through our primary channel partner, Cisco, indicates that as the return to office accelerates, so will sales velocity. As we discussed during our last call, one indicator we use to gauge demand is the number of demonstrations we are conducting. We continue to see both initial and follow-on growth in demonstration inquiries for both our in-room and our early-stage cloud services. During the first quarter, we shipped approximately 2 million of mezzanine products to our distribution and system integration partners, including an order of nearly 1.6 million. It is important to note that we did not recognize the $1.6 million order as revenue or in our financials in the first quarter as there were implementation delays beyond our control, primarily due to coronavirus, that were not anticipated when the orders were placed. This particular order included more than 150 systems to a distributor for a potential deployment in a national healthcare system over the next 12 to 18 months. Importantly, we believe this is just the first of several tranches that could culminate in systems being deployed across that entire footprint in nearly 400 rooms. In the event the customer accepts these orders and we meet revenue recognition criteria in accordance with GAAP, we would expect to recognize revenue related to this customer deployment in future periods. While the macro environment remains fluid, there are some clear examples of how even when businesses are in the process of reopening, it can sometimes be two steps forward and one step back. But directionally, our momentum is both very positive and forward. Subsequent to the end of the quarter and as planned, we released an MVP version of our cloud offering to a select group of existing and prospective customers. We are now in the process of collecting key data and feedback that we will coalesce and circle back to our development professionals. We are keeping this initial pilot effort concentrated around specific users and verticals and will continue iterating based on feedback. Investment in solutions that can be consumed as a service remain a priority as the shift to a cloud-first world continues and demand for more advanced and engaging cloud-based cloud-based technologies continues to grow. We estimate that the addressable market for our solutions could be millions of users with immense growth potential. More importantly, sales of cloud-based solutions will provide a recurring base of revenue at higher margins that does not have to be resold quarter to quarter as is the case with our current product mix. As we discussed last quarter, we pre-sold our first annual recurring revenue cloud deal. based solely on an early prototype of our service, generating 75,000 in annual recurring revenue in 2021, and believe many of our existing and future customers will migrate to this style of consumption. Over the course of 2021, we expect to expand our investments in both engineering and sales distribution as we look to shift our product mix from one time to recurring. We have made several key hires in the last five months on the product design and development team, to help us accelerate development of our cloud offering. We've also recently added more resources and sales to promote and expand awareness of our product offerings through new channels. I will now turn the call over to David to review the financial results.
spk04: Thank you, Pete. Good afternoon, everyone. Revenue for the first quarter of 2021 was $1.9 million compared to $5.3 million for the first quarter of 2020. This decrease was mainly due to delayed orders in our distribution channels as a direct result of customer implementation schedules shifting due to the ongoing COVID-19 pandemic. Our gross profit for the first quarter of 2021 was 33%, which compares to 55% for the first quarter of last year. This decrease was primarily due to lower revenue between these periods, and higher levels of operating costs as a percentage of revenue. Net loss for the first quarter of 2021 was $3.4 million compared to a net loss of $3.1 million for the first quarter of 2020. Our adjusted EBITDA loss was $2.4 million in the first quarter of 2021 compared to an adjusted EBITDA loss of $1.5 million for the first quarter of 2020. This change was primarily due to lower revenue and gross profit between these periods, partially offset by lower operating expenses. Turning to our balance sheet and capitalization, at the end of the first quarter, we had a total cash balance of $4 million compared to $5.3 million at the end of 2020. Our only outstanding debt at the end of the first quarter was a $2.4 million loan from the Paycheck Protection Program. Earlier this month, we applied for forgiveness with our lender, and we currently expect the entire amount of the loan will be forgiven in the next several months. On February 12th of this year, our common stock began trading on the NASDAQ capital market, and we simplified our capital structure as all Series D and Series E preferred stock converted to common stock. As of that date, we had no remaining preferred stock outstanding. With that, we can now open the call for questions.
spk00: Thank you. And if you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, please press star 1 to ask a question. We'll pause for just a quick moment. All right. And we'll take a question from Jim McElry with Dawson James. Please go ahead.
spk02: Thank you, and good afternoon. This $1.6 million of mezzanine that was pushed to the right, did you say that's with one customer or with more than one customer?
spk03: Yeah, hey, Jim, that's with one specific customer.
spk02: And a lot of times when companies have this scenario, when things get pushed to the right, You know, they say that they haven't lost the order and it's just going to get pushed to the right. But, you know, you never really see it. And so are there other orders that are potentially deployed in Q1 or excuse me, Q2 and Q3 and then give to it? Or is it, you know, or is it like the typical situation where somehow it just kind of gets lost?
spk03: Well, I can't speak to other situations. You know, we don't have any particular – I assume when you mean Q2 and Q3, are you speaking to 2020 in terms of those periods in the past, or are you speaking forward? Forward. Forward. Yeah. So, you know, this has sort of been a one-time instance for us in Q1. And with respect to how we feel about this particular opportunity – we feel pretty strongly, given our relationship with the customer and with the partner in this case, that given the nature of their consumption in IT, given where they are in their deployment schedule of rooms in general, we just believe that, you know, in that particular country, they've fallen back in the queue as it relates to some delays they've had with recent events in coronavirus. But we feel good about where that's going to queue in the future. We're not going to give any guidance about specific times or dates, but we feel pretty strongly that that's an excellent order and that it will come about sometime in 2020, we hope, or 2021, I should say, rather.
spk02: So, do you have to allocate resources to this specific implementation? in order to book it as revenue? And because of that, you put other orders and their revenue recognition at risk? That is, do you have enough capacity to- We do, we do. And the others that are out there?
spk03: We do, yeah. We have access capacity right now and plenty of infrastructure on hand from an implementation perspective at the hardware level. and certainly enough folks on the implementation level to support this and every other project that we have in the queue right now. So there won't be any delays as a result of anything on our side.
spk02: So I know you're not guiding, and I'm not trying to get you to give me a number, but let me just throw out a scenario and see if that's a possibility. So, you know, if you had – booked this mezzanine order, you would have done somewhere around $2 million in mezzanine this quarter. Somewhere in that neck of the woods. In Q2 or Q3, presumably you have other orders that might be of similar size or let's call it $1 to $2 million. In some quarter going forward, wouldn't it be reasonable to expect a A spike as this one gets booked and then the other stuff that you have in the pipeline also gets booked?
spk03: Yeah, certainly a spike from this quarter, no doubt about it. But I think it's fair to say that, you know, whenever this order comes to pass, we do clearly have additional orders in the queue that are similarly sized. The period over which they'll be recognized will be a function of how the customer decides to consume the product. As I said earlier in the script, some customers are coming to us with OpEx versus CapEx consumption models, so we may get into more annual recurring revenue or monthly recurring revenue models. But, yes, it's certainly conceivable that we'll see a spike in the couple quarters ahead as a result.
spk02: And the cloud offering, it sounds like you're going to be – I'm going to use the word cautious, but that's not right. Let's call it measured, cased. You're going to be very deliberate in its rollout. So is that something that, you know, we're going to continue to hear about pilots and demos for the rest of the year, and it's really a next-year meaningful revenue – well, actually not even a revenue contribution. It's going to be a meaningful deployment next year and not this year. Is that reasonable to think of it that way?
spk03: No, I think directionally that's reasonable. I think you'll continue to hear about us iterating and getting to a beta and then going to general availability in a normal sequence and continuing to collect a lot of feedback both from customers extremely sized and then those maybe more mid-sized. And having revenue be at a starting point, more likely a material starting point in 2022 and hoping to exit the end of 2022 with a more meaningful amount of revenue on a monthly basis. Okay.
spk02: And just to get back to the delayed Well, it's not a delayed order, but the delayed installation. Is that a direct sale, or was that done through distribution?
spk03: It was done through distribution, yeah. It was done in partnership, in concert with Cisco, actually. Cisco is a very meaningful partner, and we also have a very large distributor in that particular market who has also been very helpful in the process.
spk02: Okay. And then you talked a little bit about this is the first tranche. Yep. And this is one of three, I think you said. So would the other two tranches be of similar size, or are they potentially bigger or smaller?
spk03: Yeah, no, we've sized the opportunity at around 400 rooms or 400 facilities. The rooms vary in size and type. So, you know, we've sort of measured the first tranche. Around 140 was the initial order that was placed by the distributor. So we believe they will be similarly sized tranches through phases two and three of this implementation.
spk02: Okay. And since you've built these systems and you've shipped them to somewhere. Yes. Am I seeing that in the inventory levels? I mean, it was up a little bit. It didn't seem like it was up that much. Is that where I'm seeing these systems? They're in inventory now?
spk04: That's a good David question. Yeah, this is David. That's right. They're still recorded in our inventory as of March 31. Okay.
spk02: And you talked about I'm not sure how you phrased it, if you just said increased headcount or investment, but, you know, you're expanding in sales this year. Can you frame that for a numbers guy? I mean, that's, you know, how big are we talking those expense items get?
spk03: Sure, sure. So, you know, on a relative headcount basis, and I think we published in our 10K, you know, this is a company around 50 folks, right, generally a moving target, at the end of 1231 last year. You know, we added and will continue to add, we added three or four new folks in dev. We just recently added three folks in the sales department on mostly the account management and growth side of things. particularly around expanding distribution channels. So I will continue to do that. Generally, as I said in the last call, based on buying signals and indicators from customers. So, you know, we are seeing strong signals from customers about reopening. No one can predict what that means or when that happens. And certainly in the engineering side of things, you've got to plan ahead, sometimes three to six, nine months ahead, of when you anticipate some of these buying signals to kind of happen. So, you know, at this point, we've added five or six, seven new people, Jim, in the last 90 days, 120 days. Equal amounts on both the sales side and on the engineering side. We will certainly add more on the engineering side in the coming months ahead and add to sales – in parallel with where I see forward demand signals on the buy side for our customer base. So that gives you a sense of heads. I know I won't get into specific metrics about cost and economics, but, you know, they'll show up, obviously, and you'll see larger expenses, certainly in Q2 and Q3, as we continue to invest in both of those areas, rationally, but we'll continue to grow each of those domains along the way.
spk02: Okay. And tell me to stop if I'm hogging too much. You're fine. The deal pipeline that you talked about at the very beginning of the call, $25 million in total deal value. Correct. Can you just explain a little bit more what that is and essentially I'm trying to figure out what the likelihood of that closing is. And, you know, some companies when they report numbers like that will just throw everything in. And it's somewhat of an inflated and meaningless number. So I'm trying to understand, you know, where you are with that $25 million.
spk03: Well, I mean, I think, yeah, no, I think the first comment I would make on the subject is, you know, When we think about pipeline, we think about qualified pipeline first and foremost. So, you know, we vet our opportunities very carefully. Certainly many of our leads in the last nine to 12 months have come through our Cisco partnership, but we also have a number of others that have come elsewhere. And those leads are pretty carefully vetted, typically because Cisco is normally the incumbent customer or the incumbent manufacturer or solution. as many of those leads come to us. So these aren't leads that are unqualified, if you will. So just to sort of set that as the premise, the 25 million that we count in tangible pipeline is qualified ahead of time. When you dig into that a little further, you know, we look across the spectrum of all the opportunities that we have today, and then we look into the verticals specifically where we see where our product is going to add significant value immediately, we then obviously correlate that into timelines and weight those opportunities accordingly. So as we talk about $25 million in pipeline, A, it's very qualified. B, the challenge always is to map that against a predictable outcome in a market where you don't have rational predictability as you would in a normal sales cycle, a traditional enterprise sales cycle. And I think that's kind of the challenge before us right now as we think about when these things are, when these opportunities and deals are going to come to bear. But the $25 million is clearly predicated on existing deals with our existing product mix today. We look at the user bases of each of those customers obviously, as tremendous upside for the business, like tremendous significant upside for our cloud service downstream. And we don't map that in our pipeline metrics at all right now. We simply stick with the product as it's built, as it's priced in the market today. The only variance to that, obviously, is that $25 million is predicated on how we sell it, which is one time in the revenue mix right now. And we – we are seeing increasing demand for us to shift that, at least balance it out, if you will, from a CapEx to an OpEx. And so you may see us at $25 million, may still have total contract value at $25 million, but perhaps over a one-, two-, or three-year period of time. And so that would be the shift that, you know, we've long contemplated. We've talked about in prior calls. And, frankly, I think it's going to make sense at some point in the near term to make that pivot and make that shift.
spk02: And would it be reasonable to look at that $25 million in a similar way that this $1.6 million delayed order has – it's not a delayed order. This delayed implementation has taken place. I mean, you're looking at that as the first of three – Is it reasonable to think that $25 million is the first of three tranches?
spk03: I'm not sure I'd correlate the two of them directly. One is pipeline and one is, you know, a very, very tangible deal opportunity that we've been working on for a long time, just getting into the last phases of implementation here. So I wouldn't tie the two together, Jim. But I'd say from a quantitative purpose, which is, The $1.6 million that we would have recognized theoretically in Q1 had the implementation started, and the $25 million over some defined period of time are using essentially the same metric, right, which is one-time revenue as it stands today. But that's where probably the commonality starts and stops.
spk02: Yeah, I'm asking something a little bit different, and I – I'm not sure if you're agreeing with me or not, but the 1.6 million is the customer is buying something today, and then the intent is if everything goes well, they'll buy another round and then another round. That's right. That's right. At the 5 million pipeline, you have customers in there who have a similar kind of scenario, is that they're buying today and then it doesn't work. Sure.
spk03: That's absolutely right. That's right. And so – Yeah, there are certainly a number of customers in our pipeline today that implementation will be in phases, without a doubt, right?
spk02: Right. And so the ultimate deployment of that $25 million might be 50% higher or it might be five times higher. I mean, we just don't know. It could be.
spk03: That's right. No, that's right. That's right, because we put in preliminary deals and pipelines, not the entirety of a deal, right, out of the gate. That's right. Right, and that's what I was trying to get at. Okay.
spk02: No, you're right. All right, and so back to the expense increase. David, can you talk about how that's going to impact cash management? Because it sounds like, you know, some of these, obviously you're going to have increased cash personnel expenses. You know, but particularly if, as Pete is describing it, some of this is going to be front and loaded in order to respond to what you're seeing from customers, the cash from a sale might not come until later. So how does that – how are you looking at cash management over the rest of the year?
spk04: Well, I think on those deals we would get certain payments up front. to offset our costs on that sort of ARR model. I mean, you would get sort of payment terms up front. But in terms of cash management, I mean, we ended the quarter with $4 million in cash. We're going to, you know, be prudent about when we look to raise capital and look to do it in a in a smart way and in an opportunistic way. So, Pete, I don't know if you want to add anything to that.
spk03: No, that's right. I mean, I think we shared that same methodology on the last call as well, which is we'll continue to invest in the right areas when we see buying signals, right, when we see pipeline growth and demand. And you've got to front run it to some degree. Every business has to contemplate and plan for investments well ahead of when a product is going to be designed or released and well, certainly well ahead of when a customer is ready to buy. But, you know, you can't be too far ahead. So I think we're making the right decisions at the right moment based on the indications we're getting back from the market. And with 4 million cash at the end of March, you know, it's clear that we burned a little over a million dollars in the quarter and, and that we're, we're pretty judicious and, with our cash and will continue to be, you know, for the foreseeable future, clearly. Okay.
spk02: All right. And just finally, on the PPP loan, did I hear you right? You apply for forgiveness? And if that's the case, when is the decision made on that?
spk04: Yeah, that's right. So we applied for forgiveness actually earlier this month, and that's with our lender. And so the lender typically, the process is the lender would approve the forgiveness. And then down the road, it's potentially subject to audit by the SBA. But we expect that initial forgiveness by the lender to occur probably in the next month to two months at the latest. The SBA process, I've heard that that varies, but that could be a while. But we'd have a loan that's forgiven and then just subject to audit later.
spk02: And is that an all or none proposition? Can they say, well, we're going to forgive, you know, make up a number, a million, but the other 1.4 million, that's yours? Yes.
spk04: I think that's a possible scenario. I think based on all the data and, you know, the support we've put together in the application, we believe it will be entirely forgiven. And the way that would be, that would just be booked as a, you know, you'd reduce the debt on your balance sheet and it would run through other income. So, yeah. So, yeah, that's how we think that will play out. But, again, you can never guarantee that the SBA won't come back and look at some calculation and include an adjustment.
spk02: Yeah, no, I get it. I get it. Do you have a revolver or a working capital line or any other facilities out there you can draw on?
spk04: We don't at this time. We don't have any other debt outside this PPP loan or revolvers. Okay.
spk02: Well, you guys have been very generous with your time and patience with me. I appreciate that a lot, and good luck with that. Thank you. Thanks, Jim.
spk00: And that is all the time we have for Q&A today. I'll hand the call back over to our speakers for additional or closing remarks.
spk03: Thanks, Orlando. Clearly, the return to work and corporate investment in innovative technology solutions are near-term catalysts for our business, which we believe are poised for incredible acceleration in the coming course. More importantly is the longer-term view and the opportunities for our extremely unique and highly differentiated services, and the evolution to both a hybrid and a cloud-based platform. Equipped with years of domain expertise and intellectual property against a backdrop of improving business conditions, we are in an enviable position to grow our market opportunity and be a key part of workplace transformation in the future. Thank you for participating in today's call, and we look forward to speaking with you again in 90 days.
spk00: And this concludes today's call. We thank you again for your participation. You may now disconnect.
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