SITO Mobile's (SITO) CEO Tom Pallack on Q1 2019 Results - Earnings Call Transcript

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About: SITO Mobile, Ltd. (SITO)
by: SA Transcripts
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Earning Call Audio

SITO Mobile, Ltd. (NASDAQ:SITO) Q1 2019 Earnings Conference Call May 15, 2019 4:30 PM ET

Company Participants

Rob Fink – Hayden, Investor Relations

Tom Pallack – Chief Executive Officer

Terry Lynn – Chief Financial Officer

Conference Call Participants

Mike Malouf – Craig-Hallum

Mark Argento – Lake Street Capital Markets

Paul Sans – Sans Partners

Mike Malouf – Craig-Hallum

Andy Greenberg – Saker Management

Operator

Greetings, and welcome to the SITO Mobile First Quarter 2019 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Rob Fink. Thank you, sir. You may begin.

Rob Fink

Thank you, operator. Hosting the call today are Tom Pallack, Chief Executive Officer; and Terry Lynn, Chief Financial Officer.

Before beginning, we would like to remind you that the information provided during this call may contain forward-looking statements relating to current expectations, estimates, forecasts and projections about future events that are forward-looking as defined in the Private Securities Litigation Reform Act of 1995.

These forward-looking statements generally relate to the company's plans, objectives and expectations for future operations and are based on management's current estimates and projections, future results or trends. Actual future results may differ materially from those projected as a result of certain risk factors and uncertainties. For a discussion of such risks and uncertainties, please see risk factors as described in SITO's annual report on Form 10-K and quarterly report on Form 10-Q that are filed with the SEC.

Before I turn the call over to management, I would like to remind everyone that a press release disclosing the company's financial results was issued today after the close. It can be accessed on SITO's website at sitomobile.com, under the News and Events link that's found on the Investor Relations tab.

With all that said, I'd now like to turn the call over to Tom. Tom, the call is yours.

Tom Pallack

Thanks, Rob. First of all, I want to apologize, I'm fighting off a bug. So hopefully, this is going to come through okay here.

In our last 10-K, we disclosed that we had a $10 million-plus deal that was running in March and April. At the time of the earnings call, we were delivering on the deal and still had execution risks on performing. So we declined our point further on the deal until now.

Aviron Pictures was our movie production partner on this initial transaction and the After movie was the goal to promote. We also improved concept with another production company for the movie Unplanned and for a time was in the top 10 rated movies. Both of these successful movie campaigns further suggest that our vertical approach is working. It also help confirmation of multiple new customers confirms that our strategy is working. So I'd like to take the opportunity to now contextualize these deals against our evolving products and strategy.

The mainstay of our traditional business is simply delivering advertisements on mobile devices with tight selection criteria around location and consumer attributes. Post campaign, we deliver analytics reports that give further insights into targeted customer attributes and how we've affected them through advertising. We sell directly to brands and to marketing agencies.

But we knew we could do more. So we incubated a program within the company to launch a new product that would allow us to deliver cross media sales against targeted customers. This means we now have the ability to target audiences through mobile app device or apps ads as current – currently we offer, but also mobile device browser ads, Google, Facebook, Snapchat, TV and radio, digital billboards, PC browser ads and SEM or search engine marketing. We are trying all this together in a proprietary way to allow our clients to better market against the media identity of their customers. Of course, we combine all of this together with our geo data to understand ROI and give more predictable outcomes.

Finally, we're not stopping there. This knowledge of customer behavior can be leveraged beyond marketing and is useful to many organizations to run other aspects of their business. We hope to, and it does not exist yet, and we haven't sold it yet, solve these problems on enterprise basis by selling software-as-a-service, also known as SaaS.

Now, let me turn this over to Terry to quantify the strategic push. Terry?

Terry Lynn

Thank you, Tom. As a CFO, I'm going to start with the bad news. We don't have a ton of cash and our sales declined 24% from Q1 of 2018 to Q1 of 2019. These are not new trends. That said, I'm excited to begin to tell you the growth story that’s been happening inside our company. Let me dig in deeper on that.

So what are we doing about cash? As mentioned in the earnings release, our plans to improve cash flow include accelerating receivables collection through improvements in the collection process, monitoring and/or reducing expenditures in non-critical areas, continuing to execute our plan to seek longer and more profitable customer agreements and seeking additional capital as needed.

Now addressing revenue. Please allow me to delayer the fiscal year for 2018 and also Q1 of 2019 revenue along the two product lines that Tom mentioned earlier. First, if I look at our traditional SITO revenue, approximately $34 million or 87% of revenue landed last year. In Q1 of 2019, this was $4.9 million or 59% of revenue. Excluding certain one-time revenue deals that occurred in 2018 and correcting for seasonality, I estimate an approximate 18% secular decline in our traditional business. Some of this can be attributable to account attrition that occurred as we reorganize the sales team as mentioned in our 10-K call.

Turning to the positive. We expect to be able to stem this decline and grow this business through two basic business tactics; improving our product and applying more discipline to our sales management techniques. Now for the great news. The remainder of our delayer revenue is this new business that Tom mentioned. For 2018 this business did $5 million. For 2019, we've already recognized $12.2 million, $3.4 million of that, which was done in Q1. And by the way, for those who heard me last time, this is the closest I'm going to get to earnings guidance today. We have a healthy pipeline.

Let me expound a little on Tom's commentary about this new business and tell a story about where this came from and where it's going. To begin with, our team recognized certain customer problems that weren't being solved. So we attempted to solve this with a customer approach and a minimum viable product. Necessarily, this approach was industry-specific. We validated that the customer demand was real and we delivered.

In the early phases, we didn't always delight our customers and our performance was inconsistent. However, we iterated and continually improved our product. We’ll continue to evolve and refine our product, but I think we're hitting our stride. The results of the two movies speak for themselves and the quality of our product. Now, as we shift sales into high gear, I'm happy to reiterate we have a healthy pipeline. Also, I should mention that we're not going to niche ourselves in the theatrical. We plan to apply our learnings and tools as we expand into other industries.

Finally, I imagine that people are interested in the margins on this new product area. Candidly, our gross margins are lower than the traditional line of business. However, we priced ourselves aggressively to win early deals. Further, as we add bells and whistles to the product at near 100% gross margins, this will lift the aggregate gross margins. Finally, as we move towards delivering ROI rationalized solutions, we expect gross margins to improve even further.

Now, importantly, let's consider the operating expense impact of this new product. In addition to being a next generation solution that provides more flexibility to meet client needs, this new product is significantly less expensive to run. As such, the bottom line marginal profitability inclusive of COGS and OpEx is expected to be better than our traditional business.

Finally, to reiterate a point from earlier, since our financial results are overviewed in the press release that we issued this afternoon and are further detailed in our file 10-Q, I'm ready to open this thing up for Q&A

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, at this time we will be conducting the question-and-answer session. [Operator Instructions] Our first question comes from the line of Mike Malouf with Craig-Hallum. Please proceed with your question.

Mike Malouf

Yes. Thanks guys for taking the question. Given that you guys had $12 million, I'm just trying to get a sense of, of how this whole works this new business, especially on the theatrical side. So if we take a look at Unplanned and After, I think Unplanned basically has done about $18 million and After has done about $12 million. So that's about $30 million in total. And you guys have about $12 million or lower than that in revenues from those two movies. So can you just kind of help us through that whole process as we sort of look at this new business? Thanks.

Tom Pallack

Terry, can you address that?

Terry Lynn

Sure. Obviously, these two movies are different gales in terms of their cost of production relative to their aggregate margins on these things. If you look at in terms of like actual performance based upon our marketing spend, Unplanned actually killed it. There's no two ways about it, where we are – that we knocked out of the park. For After, we have done well and I think the number that I saw is I think they hit $50 million in global revs on that. So looking at that, I understand you're probably looking at the U.S. domestic budget. Yes, that is still a positive experience that we have. So, yes, does that answer your question?

Mike Malouf

Yes. I'm just trying to get a sense of, if we take a movie that has, let's say, $30 million or $40 million at the box office, or maybe if it's $50 million, how much of that is marketing and how much of that marketing spend are they allocating to SITO?

Terry Lynn

That's a great question. In terms of their specific economics inside of there, I can only speak to the amount of business that we got out of it and the satisfaction that we're seeing. But, yes, my understanding is they are making money. I don't have specific breakouts beyond that.

Mike Malouf

Okay. And then just kind of explore the gross profits just a little bit more. It looks like if you take a look at the gross profit of your historical run of the base business, it looks like gross profits were just under 20%. And I'm just trying to get a sense of, I know you’ve priced this, I think you said aggressively in that release that you had. Can you give us a sense of how aggressively you priced it? I know that previously the movie business, when you had a one-time business a year ago was around 20% to 25%. So should we expect that going forward or is this more sort of the norm?

Terry Lynn

Well – do you mind if I take this one, Tom?

Tom Pallack

Yes, go ahead.

Terry Lynn

Sure. So, when gross margin, there's multiple components, one is of which is going to be, some technology costs are going to end up there that are fixed in nature. The other piece to it, there's going to be variable in nature, really inventory that we're buying to fulfill various campaigns. So, you have to consider that mix a little bit as we're looking at this.

But secondly, if you just look in aggregate kind of the inventory costs, and I think your question was more around this new line of business kind of what is, if I just use, consider the revenue we're getting kind of minus the cost of the inventory. Certainly, if I use that definition for gross margin, I do think you're accurate from the beginning that it's going to be closer in the mid-20%s. And as I said, we've priced that aggressively. That is one way that we think as we go forward we'll be able to get some. If we don't have to price as aggressively, we'll get some lifts there.

The other piece to it is, this is the beginning. We have a lot of bells and whistles we'll be adding to the product. And when those do, and we sell those into the same client, they don't really cost this much. So as a result, that's near 100% gross margin additional business. So that should lift up as an aggregate.

The other thing that we're doing is due to the nature of what we built here and what we continue to build, it's very much around what is the ROI of specific channels and how does one optimize that and get a predictable outcome. So as we shift into those gears and we get away from one of the challenges that is in the media industry, which is how do we really get paid for performance, that's where the gross margins really unlock.

However, all that said, I do want to reemphasize the point in terms of what I'll call marginal profitability, which is really all the variable costs, revenue minus all the variable costs, including those that paid down in – down in OpEx. So when I consider that, I just want to emphasize that the cost – I’d say the total cost of running that particular revenue line, not that we have a dedicated business or anything like that, but when I go through and get back into the envelope, it's cheaper. It's actually more profitable than our existing business.

Mike Malouf

Okay. Great. And then just one final follow-up. You mentioned in the 10-K that this particular, basically the $10 million was for one movie from March 23rd to April 14th and now you mentioned two movies. So should we expect – should we have expected the $10 million was for one movie and then the additional over $2 million – $2.2 million was for the other movie? And so, I guess that's sort of my first question. And then as a follow-up to that. Does that mean that these movies can vary drastically between $10 million and $2 million per movie? It's kind of a wide range. Thanks.

Terry Lynn

Sure. So the first part of the question is generally – the thing that happens with these movies is, you get the first like and that was the one that we disclosed which is $10 million. If it goes well, the loss and do what they call a chase campaign. And the chase campaign is really a follow-on, it says, hey, this thing is doing pretty well on the box office, let's put some more money behind it and get more people in, and that's indicative of a success. So we had chase campaigns for both movies. So I know that doesn't give you the exact breakdown of which is which, but I think it obviously tells you that we did more than $10 million on the Aviron Pictures.

Secondly, your question was really around the scale of these things. So one of the things that we have found in here is that there's different kind of two levels within the people that we can sell into. Of course there's the – let's just say the approximately, roughly the $1 million range of movies and we have some expertise in those. And then the nice thing about this Aviron on deal is it literally was an order of magnitude larger. Now is that the end of the line? Do we stop at $10 million, no, not at all. We plan to continue to moving up market here and starting to go after some of the larger budgets that are out there.

And then finally, we'll continue to service our existing tiers of clients, we also want to move upstream on that to the larger players as well. But I do want to emphasize here, this doesn't mean that we're going to niche ourselves in a theatrical business. Much of the product that we have built here can be reapplied to other industries. But we importantly tailor it to the specific needs of those industries. So we are very likely going to take what we've built and then port it over and go after other industries once we’ve – we're on the path here.

Mike Malouf

Okay. Thanks guys.

Tom Pallack

All right. Thanks, Mike.

Operator

Thank you. Our next question comes from the line of Mark Argento with Lake Street Capital Markets. Please proceed with your question.

Mark Argento

Hi. Good afternoon. Just a question in terms of the product. Can you kind of maybe provide a little bit more color as to what the actual product is? And then could you talk a little bit about the balance sheet? I know you talked about short on cash, I know you guys put an agreement in with Fast Pay, I think it is a receivables line, just talk about it if you've drawn on that at all? What are some of your options from a liquidity perspective?

Terry Lynn

Sure. Okay. So let's see, so for the balance sheet one, I mean, it's the same stuff that we've been iterating on or not iterating on, we've been saying in all the stuff. I mean the standard ways that you make sure that you've got cash, of course we're going to do everything we can organically to help out with working capital. We're going to try to – and that's one of the efforts that I've done here is try to improve my collections process to bring my day sales outstanding down. We have a lot of opportunity in there to bring down that AR balance and just running normally. So that of course is a – it’s a low hanging fruit. We do – we're seeing results from that, we'll continue to see results from that.

We have the Fast Pay agreement, which is a factoring arrangement, we've disclosed that. We continue to pull down cash associated with that as it becomes available. No change at all on that one. And then the other ones, trying to remember exactly the way that we phrased it. Candidly, I pulled that from our language on the required language that we put, but it's still accurate that we put in the queue and monitoring and/or reducing expenditures in critical area. And that basically means, let's not waste any money and let's reduce where we can.

And then of course, we're looking to look for more profitable top line customers. We're also I'm always going to look for areas where I can get prepaid and I can turn the working capital situation around, that's always an emphasis. And then I've got the final one that's always in there, which is seeking to capital, additional capital was needed. And that's the standard one we put in all this stuff. If you don't mind my asking, what was your first question, again?

Mark Argento

I was talking about – this quote-unquote, product that you guys – that you launched and I've been following the story for a while. I'm just trying to better conceptualize what the product is. Was it basically – you're providing advertising and marketing services specifically to a vertical and you're productizing that? Or are you guys doing something unique and different? Just trying to get my head around that.

Terry Lynn

Sure. So in one of the things that I'm trying to do with a lot of the verbiage that we're using is just use non-jargon laden terms. So I apologize if I'm coming across simplistically in some of this. But I just think it's important that you guys have a solid understanding of what we're doing. So that, I'm going to answer the question, it's very straight away as possible. But what are the amounts to is, we have geo data on devices, okay. So if you take a bricks and mortar establishment of any sort, we can get a good sense of who is walking into the business and aggregates in anonymous way, and really help you understand your customer. And that's part of the promise that we've been working with quite some time. Now we had traditionally only really applied that to, okay, how do I sell ads to you as you're looking add in-app advertisements. And that was pretty much a scope.

What we realized when we were going into these various brands and agencies is they didn't want to stop there, if a person is walking into a place and they're a customer and you want to approach them, then we need the ability to hit them in a multichannel way. So what we've done on this, and I've got some other people who can probably speak about this with more of the jargon laden terminology, but we have the ability to tie together all of the associated ways people interact with the Internet. So as a result, think of it as a federated identity around a SITO IB. So now all of a sudden, if I want to approach the person, I can do search engine marketing towards you, I can hit you on Facebook, I can hit you on Instagram.

And so the ability that, that significantly expands the inventory available to change the behavior of these customers to where they buy more stuff, visit more often, whatever kind of behavior or particular customers are trying to do. And then of course, because we also see the change in behavior in terms of do people walk-in the restaurant, we long use this verified walk-in score. But the beautiful thing here is that we can use that walk-in score and get a sense of attribution by channel.

So now all of a sudden, I can tell you, and this would be an example. Let's say that you're talking with somebody like me who's over the age of 40, well, maybe I'm a Facebook person and that's an effective channel for reaching. versus if you go after a Millennial, maybe they're not on Facebook, maybe they're on something else, a different form. So it's the ability to capture these people in their preferred medium in advertise to them. So that's one of the things. And as all this is assembled and this is where I think a lot of my experience comes into play here. I began my career with Procter & Gamble and I understand exactly how people like that think about ROI in marketing spend.

So when I look at what we built here and I look at the dashboards and the data that's available, I know that this is tremendously valuable information that for bricks and mortar businesses in particular, they don't have and I look at that and said, how wonderful, what it have been for me to have had this information available, so I can better understand my customer, and that can be applied beyond marketing in other areas. So that certainly is another way to push into these businesses and become an essential business partner to CMOs and other people in the organization, so that's an aspirational thing. I want to be crystal clear, we haven't built it in terms of a product that I can do that with and we haven't sold it, but that's where we want to go.

Mark Argento

Thank you.

Tom Pallack

Thanks, Mark.

Operator

Thank you. Our next question comes from the line of Paul Sans with Sans Partners. [ph] Please proceed with your question.

Paul Sans

Hi. I had a few questions. First do you have follow-up deals? Could you give us a little more color on any follow-up deals in the Cinema segment?

Terry Lynn

I'm traditionally adverse to giving out guidance. So I don’t just mean quantification of the quarters are, but I will say this is, we will have continuing business and we have a healthy pipeline.

Paul Sans

Okay. Did you get the full bonus potential? Did you realize the full bonus potential that we talked about on the $10 million deal? And if so, when will it be paid?

Tom Pallack

Terry, you got that?

Terry Lynn

Yes, the – that is still a TBD and we'll talk about that when we finalize that one.

Paul Sans

Okay. And then let me ask you a question about the product and how it's different. I know that when I go on the Internet and if I click on anything, I click on shoes or whatever, I find out over the next few days, I'm being followed around by companies that are associated with whatever I just clicked on, right? It's almost sometimes I click on things just for fun to see how fast I'll be bombarded with ads. So how is that different from what you do? In other words, if somebody already knows who I am and is showing me ads on something I clicked on. So how is what you do different?

Terry Lynn

Sure. So primarily what people are doing when you're seeing something like that, it's a really simple technique called retargeting. So what will happen is you'll click on an ad, they'll set a cookie or even if they don't set a cookie, they have something that kind of looks like a synthetic cookie. So they'll take what's called a user agent, which is going to be everything from your font type to the IP address to the machine is running on and even the screen with. So they'll have a variety of these things because they found out that that's unique, relatively unique for people on the same IP address.

So they kind of fingerprint you based upon how you're viewing out in the browser. Regardless, think about that as a cookie. So now that you browse it on the cookie, wherever you go, they just do simply retargeting and says, okay, wherever you are, there you go. And you might notice sometimes that if you browse in incognito mode, you can foil their plans. The difference here is, our ability to not only like for example, let's just say you walk into Starbucks Coffee and I’m Peet's Coffee and I want to market against you. I can see that again, in aggregate, not on a personal basis, but I can see that a certain group of people walked into there and I want to address them. So not only can I send them mobile ads there, based upon frankly an offline activity. I can now hit them wherever they live. So I can go even down to the point of doing in-home smart TV advertisement.

So it’s much broader, there's a lot more inventory available and it's not quite as simplistic as the retargeting [indiscernible].

Paul Sans

Got it. Okay. Last question. And I'm just trying to get the nomenclature straight here. Earlier on we talked about wanting to do big data deals and now we're talking about a new product and we're talking about the different verticals and whatnot. And I'm not sure whether what we talked about before data deals is different from what we're doing now. Could you explain that to me?

Terry Lynn

Sure. So when I look back in the past and I wasn't here, it wasn't always clear to me, what those things were. So when I looked at that, I realized that there was a little bit of confusion, if you will, in terms of [indiscernible]. So part of this call and that Tom and I talked about was let's lay out what our products are and let's use kind of plain English avoid the jargon, and let's just be crystal clear with people about what we're doing. And that's really the effort behind redefining some of this. And I can speak more to that, the – but hopefully we did a good job on that and you guys kind of, you get it, there's no mystery here, will you be effective in all that?

Paul Sans

Well, I'm – not particularly, no, because I'm still little confused on – I understand what you're saying and I’m trying to understand how this relates to the concept of having three or four years data on the large number of mobile devices and where they residing, where they go to. And in the past, we’ve talked about that you want to be at the top of the food chain, the bottom of the food chain is certainly at the top of the food chain, if someone calls you up and said, I’ve got an idea, and I want to run it through your data, your data shifter to see whether it holds water. And so I’m getting a sense that we’ve shifted away from that and more into just using the data in a different way. That’s – so that’s where I am. And maybe I’m just not sure.

Terrance Lynn

Do you want to talk about it, Tom?

Tom Pallack

I don’t think there’s really – we’re using – every one of the deals we’ve done in the past – centered around using our data meaning, even just basic ads, direct ads, we use our data to help supplement in, be able to target certain arenas. So it’s always been involved, what we’re doing now is with Terry’s put together is, as we’re being able to segregate the products better and determine how and what we’re using, and make it more clear. So that’s one but each one of these, there’s a huge amount of data being incorporated into these movies because of being able to target the correct type of people that would want to focus in on a certain gender of the movie itself.

So the after movie which was basically focused on teenage girls, I mean it was very – that was a huge part of what we used to be able to zero in and focus in. And it honestly, taking not some of the past exploits that we’ve been able to address and it was honestly put together, rearranged in multiple different ways with some other associated products. In fact, brilliantly by Sean Clayton who is our CSO, he’s done a superb job of being able to see through the leads and build the draw the correct type of menu of what the customer wants and what we can deliver. And by doing that, his game plan is to be able to continually build this up for other niches too because using the same format, it allows us to get in some other high-profile walk-in candidates like retail and healthcare and things like that. So it’s ideally a lot the same but there’s definitely some secret sauce overlay frond end that is – as I said brilliantly put together by Sean.

Paul Sans

Great. What should be next milestone that investors should look to see how you’re doing? Beside [indiscernible] is there anything in between?

Tom Pallack

I think, and I can’t remember, which, I think Mark asked it little bit in, and so the geo have in, do we have anything more than this movie and obviously, we’re – there are constraints about doing multiple movies on one time in, regards to cash. So that’s one issue that we have, but we’re definitely – by performing well and specially the Unplanned movie was phenomenal, the return we got on that. We’re getting great buzz outside specially in Hollywood in regards to that. So you will be able to see that we’re going to focusing on not only that but some larger studios now I’ll take notice. So that when Terry says we have a, go ahead.

Paul Sans

What did you guys do for Breakthrough? Because you’ve mentioned something about Breakthrough in the beginning, but I wasn’t clear what you’ve been part because obviously that was I think extremely successful movie as well with some big and one woman there a very big star. I think her names is Metz, I don’t know.

Tom Pallack

No. I can’t answer that because I have to look it up. What we did for and if we did and Terry, do you know?

Terry Lynn

No. The two movies I mentioned were called Unplanned and After.

Paul Sans

I’m sorry, I misunderstood, I thought I heard you say something about Breakthrough but never mind it. All right.

Terry Lynn

If I did, it might have been a breakthrough in our business because it would’ve been well will in a place, so not a movie, but my point here is we’re in place were we’re feeling really good about the product, that we’ve developed here, and we’ve reiterated on and it’s works. So we are now shifting into high gear on sales. We’ve got a healthy pipeline. I think I would add to Tom’s point in terms of what to look for next, the press releases announcing deals.

Paul Sans

Excellent. I think that’s a good point to end up.

Terry Lynn

Thank you.

Paul Sans

All right. Thanks a lot.

Operator

Our next question is a follow-up from the line of Mike Malouf with Craig-Hallum. Please proceed with your question.

Mike Malouf

Hi, guys. Thanks for taking my follow-up question. Can you take us through a little bit about how global this product is? Or my assumption is that all this geo data right now is U.S. centric but maybe that’s mistaken.

Tom Pallack

You want me to jump on that one. Tell me you want to take it?

Terry Lynn

Yes. Well I’ll give my two bits real quick but you can back me up here my friend. Mike, our focus right now, obviously was domestic that we have avenues that we are approaching to be able to expand outside that using the same tools, the same avenues to be able to collect data, all we need to do is turn it on in certain areas. We’re very much focused in on specific region because there’s geared towards a couple of our ongoing prospects. We’re going to do that, and I foresee as in the future, doing a movie or two opening in the Pacific region also.

Tom Pallack

I would add to the point and say that, our limitations in realistically, we have to consider that if this is not a regular environment, it would be a regulated environment. And so what we do is, we make every effort and we do this is in a clean and well lighted way and makes sure that we are compliant with non-PII. We are – basically, only constraint really to rolling out on a larger basis is making sure that we’re compliant with regulatory structures that are there. So if we were to go abroad, we would need to find some way to solve that issue, and that would be a critical piece. We’re not only planning for the days when there’s less regulation on it, if you look at domestic U.S. and exclude California. We are preparing ourselves for the situation where this is a much more regulated area, and we want to be there and fully compliant in the well lighted place. In some ways I think we’ll benefit relative to our competition because we are taking that clean approach to this. So yes. I don’t know if that answers your question but combine with Thomas, maybe those.

Mike Malouf

Yes. That’s exactly what I was looking for. So maybe you could just help me with, trying to understand if someone spends $10 million to promote a movie here in the U.S. and the domestic box office is $12 million. How is that a good outcome? I guess I just don’t see ROI that specialty. Actually a production budget of $14 million, so I just – I’m having trouble understanding the payoff there. Thanks.

Tom Pallack

Yes. Well again, that’s again I can’t open the details of the production studios and exactly how they get to their numbers. I would say that philosophically, I mean, certainly for targeting mobile device ads, then we know exactly we’re hitting people on the domestic U.S. but if you know, a lot of this cross media as well is on global platforms, and this is things like Facebook, YouTube and things like that in really getting some of the marketing message you got in those platforms. And as you know, those aren’t things that necessarily can simply be contained within the four walls, if you will in the United States.

So we hope that we had some of the larger benefits of the global deal associated with some of that. So – but again, I’m not the production company. So I can’t get into details on it. I think if – my thoughts on this are more related to specifically – and I’m getting to paid on this, do you feel this is derisk, yes, I do. Getting into the specifics of their ROI, I don’t have it. Did we get a chase campaign from those guys, yes, we did.

Mike Malouf

Okay. Thanks.

Tom Pallack

Okay. Thanks, Mike.

Operator

Our next question comes from the line of Andy Greenberg with Saker Management. Please proceed with your question.

Andy Greenberg

Hi, Tom, Hi, Terry. Any focus for second on the balance sheet. Accounts receivable, so I just have couple of questions. First, I guess, broadly, what’s your payment terms look like now and what do you want to evolve – what are you expected to evolve into? And how will you enforce it? And then, the other question I have is, it’s not clear to me how if you’re operating at a, let’s just say, 50% gross margin and you’re doing $10 million deal, you’re filling out a whole lot of cash. So how we’re going to finance these deals? And what percentage of the $10.8-ish million that was in receivables at the end of the year got paid down? And as I guess what percent of the 8.7 at the end of Q1 is new receivables for the quarter versus aging receivables? So I’m just not very good at finance, what you have in front of you.

Terry Lynn

Sure. Well, there’s a few metrics. I’ll tell you the traditional way that I do business when I look at AR in collections. I’m a pretty simple guy and I have done this. And we don’t disclose, if I could act at my auditors look at that if I were to disclose, my actual DSO is, which is day sales outstanding or DDSO, which is delinquent day sales outstanding, whatever the terms are 30, 60, whatever, whatever the kind of outcomes are. So what I traditionally do when I look at this is, it’s not fancy collection process. I literally have share online spreadsheet, invoice-by-invoice and if somebody is hit over a certain threshold, perhaps 31-days DDSO. Then I will hit those guys daily. In a very polite and gentle way, and say, where’s my money. That in the past, in my previous expenses that are not SITO, I’ve been able to reduce a DDSO that literally get it 180 days, now was able to reduce it to 60 days within a couple of months, and literally $5 million. I’ve done before. I am attempting to do that as we speak, and I have seen improvements in my DDSO. So that is an ongoing effort. I think we’ll continue to see efficient operations in terms of just collections. So that’s the first question. And then the other is, we call we do have that fast-paced factoring agreement and that’s another way that to help out these working capital issues

Andy Greenberg

Okay. Could you help me understand if you have $8 million of potential revenue that would consume. I assume something along the line of $4.5 million, $5 million of cash just to front that business, correct?

Tom Pallack

I have to be careful here because my audited financials, which my auditors have approved only go through 331. I’ve specific allowance for them to talk about the rev rec because I’ve already booked, and I’ve already run it. I have not got into the specific allowance to go through and find on my specific cost of goods associated with the Q2 portion of that. So unfortunately, I hate to hide behind the auditors but as a public company have to be careful. So unfortunately, I can’t give you the details there.

Andy Greenberg

All right. I understand what you are saying. It’s also not really helpful. But I understand where you’re coming from. So thank you. All right.

Tom Pallack

Thanks, Andy

Operator

Ladies and gentlemen, we have reached the end of our question-and-answer session. And this does conclude today’s teleconference. We thank you for your participation and you may disconnect your lines at this time.