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spk05: Good morning, ladies and gentlemen. My name is Chantal and I'll be your conference operator. Today we are hosting a conference call to discuss the second quarter 2022 financial results for VIQ Solutions Inc. At this time, all participants are in a listen only mode. For those that have dialed in, should you require any assistance during the call, please press star then zero on your touch tone phone. We will have a question and answer session at the end of the call, at which time all participants wishing to ask a question will be instructed to press star 1 and identify themselves before asking a question. Your host for today is Ms. Laura Kiernan, Head of Investor Relations for VIQ. Please go ahead.
spk06: Thank you, Chantal. Good morning, everyone, and welcome to the VIQ Solutions second quarter and first half results conference call. Before we begin, I would like to point out that certain statements made on today's call contain forward-looking information subject to known and unknown risk uncertainties, and other factors. For a complete discussion of the risks and uncertainties facing VIQ, we refer you to the company's MD&A and other continuous disclosure filings, which are available on CDAR at cdar.com and on sec.gov. As a reminder, all dollar amounts are in U.S. dollars unless otherwise stated. With us today, we have Sebastian Paré, CEO, Alexi Edwards, CFO, and Susan Sumner, President and Chief Operating Officer of VIQ, all of whom will be available for questions following the prepared remarks. I will now turn the call over to Sebastian Paré to begin.
spk01: Thank you, Laura. Really appreciate everyone joining the call today, and I hope that you and your families are doing well. During today's call, I will provide some high-level remarks on the quarter and the first half of the year. Next, Alexi will speak about our financial results, followed by Susan, who will discuss our operating results. We will then open the phone line to answer your questions. We've made great progress in Q2 against several of our priorities. We reported a 51% growth in revenue, net new bookings of $4.4 million, which are up to 159% versus the first quarter of this year, and a 20% increase in the number of net new clients, also versus the first quarter. This shows strong momentum going into the third quarter driven by organic revenue growth. Additionally, we reaffirm our previously announced full year 2022 goals. We're in a strong position. Our tech platform and digital infrastructures, products, and human editing expertise in all regions are better than they've ever been, and we are more competitive than ever. The choppy waters are behind us as our customers reassert their quest to confront the productivity and the delivery challenges amid the labor constraints that are evident in the global verbatim document industry today. After navigating COVID headwinds for 26 months, we placed a sharper focus on our key performance indicators to provide greater transparency and measures of success. Based on our bookings and the recovery in our production capacity for the first half of the year, we anticipate organic revenue growth, excluding acquisitions, to meet the expectations. Our KPIs related to net new bookings, active clients, production volumes, and annual delivered content all have increased to new high, while the cost to produce a minute of documentation dropped by 8.5% when compared to Q1. We achieve a positive EBITDA in the month of June, and we're on track to achieve positive adjusted EBITDA in the second half of the year. We are reaffirming our goals for 2022, including generating at least $50 million in revenue with a gross margin in the range of 47% to 55%. Now, Alexi will provide you with some details on the results and will speak about the raise we've made after the quarter close. Alexi? Thank you, Sebastian.
spk04: And depending on where you are, good morning, good afternoon, and good evening, everyone. We reported a revenue of $12.4 million compared to $8.2 million in the same quarter of 2021. The increase of approximately 4.2 million, or 51%, was primarily driven by the acquisitions of Oscript and the transcription agency. Our bookings of 4.4 million represent an increase of 159% over the previous quarter. This positive indicator will take time to flow through as revenue, as it will positively contribute to organic growth starting in the second half of the year. Our gross profit was $6.1 million or 49.3% of revenue compared to $4 million or 48.6% of revenue last year. The increase in gross profit for the three months ending June 30, 2022 is primarily driven due to the Q4 2021 acquisitions and productivity gains versus the comparative period in 2021. The comparative 2021 period includes $0.2 million in COVID-19 wage subsidies versus $0.1 million in the three months ending June 30, 2022. Our net loss was $3.2 million or $0.11 per diluted share versus net loss of $10.5 million or $0.42 per diluted share last year. And our adjusted EBITDA was negative $0.7 million versus a negative adjusted EBITDA of 0.3 million in the second quarter of 2021. The decrease in adjusted EBITDA was driven primarily by lower COVID-19 wage subsidies, which included 0.2 million reduction in expenses for the current quarter versus 0.6 million recorded in the comparative quarter period in 2021, higher DNO insurance, and professional fees for regulator filing. The decrease in adjusted EBITDA was partially offset by productivity gains relating to the migration of customers to NetScribe, powered by AI Assist. In the first half of 2022, our revenue was $23.9 million compared to $16.4 million in the first half of 2021. As a reminder, in early February, 15 days of lockdown in Australia negatively impacted revenue by an estimated $0.5 million. Our gross profit was $11.6 million or 48.5% of revenue, compared to $8 million or 48.6% of revenue in the same period in 2021. The increase in gross profit is primarily due to Q4 2021 acquisitions and productivity gains, partially offset by lower technology revenue versus the comparative period in 2021. In addition, The comparative 2021 period includes 0.3 million in COVID-19 wage subsidies versus 0.1 million in the six months ending June 30, 2022. Our net loss was 5.2 million or 17 cents per diluted share versus net loss of 12.2 million or 49 cents per diluted share last year. And our adjusted EBITDA was negative 1.7 million versus adjusted EBITDA of essentially nil for the first half of 2021. The decrease in adjusted EBITDA for the six months ending June 30, 2022 was driven by selling and administrative expenses relating to professional fees or regulator filings and DNO insurance. Also, incremental increase in cloud services expenses and a decrease in traditional one-time license sales. In addition, The six months ending June 30, 2022 included $0.2 million reduction in expenses relating to COVID-19 wage subsidies versus $0.9 million recorded in the comparative period 2021. The decrease in adjusted EBITDA was partially offset by productivity gains through migration of customers to NetScribe, powered by AISIS. we saw the recovery in production capacity in June, which led to a positive EBITDA for that month. We expect to generate positive cash flow from operations and improving liquidity in the back half of 2022 relative to the first half. And we are pleased that despite the impact of the great resignation primarily in Australia, we still expect to achieve our full year 2022 revenue and gross margin goals. Also, Based on the first half of the year and positive June results and preliminary July numbers, we expect the revenue run rate and gross margin for the second half of the year to be higher than the first half. Following the close of the quarter, we announced a pipe of about $4.8 million, which was very strategic for the company. We leveraged the opportunity to raise the funds to invest in special commercial opportunities and strengthen our balance sheet ahead of some anticipated commercial agreements. Now, I would like to hand it over to Susan. Susan?
spk08: Thank you, Alexi. As Sebastian mentioned earlier, we delivered a strong second quarter with bookings of $4.4 million, which represented an increase of 159% over Q1 2022. With our strong client relationships and comprehensive solution portfolio, we capitalized on healthy demand across the market served, adding new customers with newly launched solutions, new customers with traditional solutions, and additional services to current clients. The quarter also had high levels of renewals for critical accounts that confirm not only that what we have been developing has demand, but that what we are delivering is also well received by our customers across the globe. Seeing this pivot in our bookings is a positive indicator. And while it takes time to flow through as revenue, it will positively contribute to our overall organic growth. In previous calls, we discussed the active trials taking place that we consider to be disruptive in terms of the way the clients are utilizing the technology that we have deployed. Let me take a minute and update you on those trials. Last year, we collaborated with the 8th District of Kansas to help them solve a critical issue impacting their courts. The resources to produce court transcripts by court reporters were going to be depleted due to retirements taking place in the near term. As a trusted partner to the courts, they have been using our Capture Pro software for many years. Our challenge now was to help them solve the resourcing issue with improved technologies that connected to Capture Pro to make their resources more efficient while remaining cost effective. We added Netscribe and First Draft to their Capture Pro footprint to help the courts manage the flow of audio files captured and provide the delivery of a First Draft to their team, both administrative and judicial, for their court reporters to create their final court report. This beta was hugely successful. Not only did it lead to an upgrade in the Capture solution, but they also purchased both Netscribe and and first, which quickly became an integral part of the court workflow. This trial was a first for us, allowing us to validate that we can be used to improve overall efficiency and fill the gap of the critical workforce that is eroding daily. We will help the courts meet their demand that poses risk to the continuity of the judicial process. Our second trial, which also has been highly successful, is with a large governmental body that employs over 80 in-house editors and has four major outsourced contracts to deliver content. We are moving from phase one of the proof of concept to a paid trial in the fall. We've proven that with our ability to manage content workflow within the NetScribe technology gives more control to the agency. And that first draft, with its incredibly high accuracy and usability, is saving both time and money. This agency has looked for years for a solution that would allow them to incorporate speech-to-text into their environment and have commented that nothing has even come close to the VIQ solution. In the third trial, again to a major court system, we had to prove to the courts that the utilization of first draft would provide an accurate and usable document to judges while they wait for the final court report. The ability to segment, select, and annotate specific elements of the court record for a draft as a new concept that will ultimately improve the efficiency of both the judges and the court is critical. Across the thousands of files selected for the trial, our accuracy rates average 97%. This is a testament to the quality of the audio captured by CapturePro that provides the foundation for the accuracy of the first draft. In addition, The customization of AI that supported the unique needs of this customer delivered the high levels of usability of the documents that we tested. While the build of revenue associated with SAS has certainly been slower than we expected due to the shutdowns that delayed availability for trials just like the ones we've discussed today, it is very clear that we are now at the beginning of the intersection of markets that are in place and ready to invest in disruption and the availability of our technology that has been years in the making. Later this year, we will also launch services that will enable access to all capture technologies, including those of our competitors, to further reduce the upfront cost for SaaS solutions and to accelerate innovation for court, law enforcement, insurance, and media. I would also like to take a minute to review the carbon acquisition that was announced a few weeks ago. The media space is key to our global expansion. The overlap in the core requirements of these segments allow us to capitalize on both technologies but also our global organization. Media never sleeps, and neither does the VIQ team. Carbon provided us a unique platform to engage with editorial staff, producers, and journalists to collaborate in near real time, incorporating video into the content development process. We are very lucky to have a base of loyal customers that are actively helping to influence the direction of this technology. We now see crossover applications for law enforcement agencies that need access to both audio and video in content production. And we are very excited about what this brings to the VIQ portfolio. While the NetScribe technologies are driving efficiency improvements for our customer, it is also driving efficiencies to our service organization, as evidenced by our improvements in gross margin. The usability of drafts continue to improve, and so does the efficiency of the editors using that technology. This is proven by the 8.5% reduction in the cost to produce a minute of transcription. We continue to improve our global scale We are better at evaluating, planning, and implementing our technologies. We have also seen a dramatic improvement in growth margin from TTA and deficiencies in organizational consolidation in Australia, and we are only at the early stages. We still have approximately 70% of our revenue, largely in Australia, to migrate to AI-assisted NetScrub. There is no doubt that we will see growth margin improvements continue. While our booking numbers are exciting, it is the adaptation of the organization to changes in the workforce, the enablement of our technology, and the acceleration of demand that has been our focus and we are seeing the results now. Cost containment has also been a key consideration to all of our operating units. We join many technology companies in building a culture of doing more with less. Our leadership team is committed to the investments of the past to show favorable bottom line results going forward in 2022 and beyond. Operator, I'll hand it back to you to open the Q&A.
spk05: At this time, I would like to remind everyone to ask a question, please press star one. We'll pause for just a moment to compile the Q&A roster. Our first question comes from Scott Buck with HC Rainwright. Your line is open.
spk02: Hi, good morning, guys. Congratulations on your progress. I guess my first question is, in terms of the year revenue guide, what is left to meet that $50 million that's not currently in the bookings or current pipeline? I mean, how much incremental business do you need to meet that, or can you do it with the current customer base? Susan, do you want to take that one?
spk08: Well, I think if you look at the run rate, Scott, that kind of answers the question that we're very, very well positioned with what we did in the first half of the year to achieve the objectives in the second half, and we're very excited about what the incremental bookings might mean to that as well.
spk02: Okay, so you feel like you have a pretty good sight line on that?
spk04: We do. Yes. Yes, Scott.
spk02: All right, great.
spk04: Yes, Scott, I was going to add that. When we look at the first half of the year, based on what's in the bookings pipeline. If you remember, in Q1, our bookings was $1.6 million, and in Q2, it's $4.4 million. So we have a healthy bookings pipeline that will start to flow through in the second half of the year to achieve our goal.
spk02: Great. I appreciate that, guys. And then on some of these new announcements that have come out over the past couple of weeks in terms of new business, I know we're expecting kind of longer-term gross margin expansion, but is near-term pressure on gross margin when you start up with a new or expand with a customer? Susan?
spk08: Well, so there are a couple of things. The big expansion that we were expecting this year with the Queensland contract that we've talked about, we were able to offset some of that what would normally, Scott, have been a pressure on the gross margin. We saw some of that gross margin impact in Q2 because we began the integration of the DJ contract through the off script acquisition. We also saw some constraints and capacity in C2 related to more of a global distribution and acceleration to the new technologies for the law enforcement agencies, meaning if it's going on the new technologies while we're training editors, there's a higher percentage of work that goes over to quality assurance. So we saw that in capacity constraints that impacted revenue in a negative way in the second quarter. But we did see that rebound as capacity balanced out in June. So you start to see that recovery. Most of the big bookings contracts that we have, while they may put a slight constraint on gross margin, they generally, because of the limitations of their internal organization, will have a slow migration. So you'll see the revenue build slowly. And you'll also see the gross margin adjustment to that a lot more favorable than you would if you had a major, very quick migration to those customers.
spk02: That's very helpful, Susan. And then last one from me, you talked about organic growth getting you to the 50 million annual number. I'm curious what the appetite is here for some additional roll-up M&A.
spk01: I mean, we always, as we mentioned before, the M&A pipeline has always been there, as a matter of fact, coming out of the COVID and the great resignation and the labor shortages. So the pipeline is getting stronger and stronger, but we also are very, very focused on replicating the June results to make sure that they get carried across in Q3. we have done, I think, something that was outstanding in terms of navigating the labor shortages in the last several months, really until mid-May. And we stayed really close to all our customers. And that was really key, the retention of the revenue and then the rebuild of the capacity. And all of that came together in the month of June. So while we still have really obviously a number of active discussions with a lot of good assets out there, our primary focus right now is really about replicating the June results and making sure that we go from one month to a quarter in terms of profitability, and that's where we stand. But clearly, coming out of this period in the industry, we're starting to see more and more RFPs where now they're starting to introduce first draft, speech-to-text, digital workflow in the RFP, and you can appreciate from small companies companies that might have been doing really well in the manual world for the last 30 years, it's becoming increasingly difficult for them to compete with those highly complicated where there's a lot of emphasis on technology, cloud infrastructure, I also certification, all of that. So the pipeline is healthier than ever before. But we are very, very selective who we're talking to. And at this point, we're focusing on making sure that we go from one month of profitability to a full quarter profitability.
spk02: Makes sense. Well, I appreciate the time, guys. Thank you very much.
spk01: Thank you, Scott.
spk05: Thanks, Scott. Our next question comes from Brian Kinslender with Alliance Global Partners. Your line is open.
spk11: Hi, guys. Good morning, and thanks for taking my questions. With the new Queensland contract starting and being mostly automated, is automated transcription a gradual process, or is everything in place in It's basically turned on and automated from the get-go.
spk01: Susan, do you want to take that one?
spk08: Well, I would say that Queensland is probably not the best example of the way that we utilize our technology because it's a very complex and new way that the courts are engaging with technology. The answer for The majority of our onboarding, Brian, is that absolutely they will start out in the new technology. There certainly is what I would call a migration period where we are training internal and external resources, and that really does depend on the size of the contract. A couple of examples I'll give you. In this quarter, we will be launching a mobile application that will allow for complete self-sufficiency of a small customer. That typically, in the past, the onboarding of a small customer was very similar to the onboarding of a major customer. To be able to allow small customers to self-activate, to self-manage, was a really important piece to us to be able to add that small to medium self-sufficiency sector that was kind of missing in the overall client base that we had. On the big customers, and again, they go immediately into our core technologies. They go in through a mobile application with an e-commerce adaptation that allows for immediate billing, immediate access into standardized templates, and the ability to opt out from that technology to send to full editing if first draft isn't sufficient for them. So that end-to-end begins in our technology, it ends in our technology, and there's no manual process from the start. On the major contracts where you have judicial organizations in the multi-millions of dollars, it really doesn't depend on us. It depends on where those customers are in their migration of technology. So some of them, like the 8th District, are starting with a complete revamp of workflow, whereas Other small court entities will absolutely begin to adapt our technology for their internal purpose. But all of those companies begin with our technology as the creator of the content that we distribute back to them. Does that answer your question?
spk11: Kind of. I mean, it certainly gives good clarity into how things progress over time and transition. But specifically on the Queensland contract because it's such a driver and a big piece of business that you've won and is transitioning from Auscript, I think, to your business. Is the new contract going to gradually recognize better margins over, say, three, six, nine months or whatever you want to communicate of how that's going to happen? Or does right at the beginning the new margin profile take place?
spk08: It will migrate over time because while the Oscrypt technology is technology that we will use for our own internal deployment, therefore reducing the negative impact, the gross margin that you might have when you're bringing on a new customer like that. That was part of the strategy in the original Oscrypt acquisition. You will also see that the way we are deploying the solution for the DJAG changes it's a slow progression in the way that they're bringing that on board. And also it is an internal training for our teams because they're changing the way they're actually building that documentation. So it won't be immediate, but we will see margin improvement over the course of the, probably the first six months from the, um, from the baseline that we had in the off script acquisition.
spk11: Great. One more question in Queensland. I promise I won't ask any more. He, um, The manual process of transcription, was that done through third-party contractors that were subcontracted out or that company's own employees? And as it transitions, I take it those services will no longer be needed? Is that right?
spk08: Not exactly. Everything that we do in Australia is a combination of employee-based transcriptionists as well as independent contractors. We don't use third-party organizations. We do use independent contractors because we have very rigid security requirements around background checks that we need to control. But the profile of how we source that work will remain consistent from the prior contract to the new contract. And any incremental resources that may not be needed because of efficiency gains in the new technologies are going to be used to source the new booking contracts that we have in that region. So we've got plenty of demand to utilize all the resources that we have there.
spk11: Great. I joined late, so maybe this was addressed, but there were some COVID lockdowns unexpectedly in Australia during the second quarter. Did that have an impact on revenue and expenses, and if all, and can you quantify either?
spk01: No, the last impact of COVID was actually in Australia. So you're correct, but it was in March. So it was really at the end of the first quarter. And that was the reference that Alexi made. There was also that everybody knows about the international use when they saw the historical flooding that took place in the Brisbane area. that really put the state of Queensland under emergency. So all of that was kind of Q1 related hit. And with the help of our auditors, we were able to assess roughly about half a million dollars in revenue. So all of that now is behind us. But in Q2, the major headwind was really at the start of Q2 in terms of the labour capacity and all the work that we had to go through in Australia to collaborate with our clients to make sure that not only we retain all that revenue, but that we work collaboratively with them. And I think we did because starting in June, you saw what happened when there's no COVID and there's no labor shortage and we get our production capacity back, then it started to really show. And I think the other piece that we talk about at the early of the call is none of that revenue yet in Australia has been fully migrated. So now for us, this is really starting to be a very different ballgame moving forward because we've proven the model in the United States. We're now in the process of getting everybody in the UK fully migrated. And now the heavy lifting has started in Australia. And that's where we've been modeling. So we're going into the second half of the year with a different kind of mindset and different kind of confidence because COVID is behind us after 26 years, and the majority of the labor shortages that we've experienced, like everybody else in the industry, is behind us. So for us, June was the new benchmark, and basically we're going from this point.
spk11: Great. And then touching on the $4.4 million of annual run rate bookings, was Kansas a major piece of that? And a follow-up on that is maybe any details around
spk08: where you're seeing that is it courts is it media u.s courts insurance um you know just just some details on where that yeah you know those bookings are starting to pick up well maybe so kansas i'm sorry go ahead sub not go ahead to then sir i was going to say kansas wasn't a major piece of it kansas um is a small a small court system um and while we're very excited about the the contract it is a it is a SAS contract bar technologies, the big impacts to the bookings were in courts in Australia, media in North America, and in courts in the United States. So largely on the services side. The technology SAS revenue, we're really, really excited about it. We have trials like the 8th District in probably eight different locations around the US. But that's going to be a slower build, right? As you know, when you go from licensing agreements into SAS contracts, there is a bridge while you're building those very high margins, but monthly lower revenue contracts. And so the big hits were still on hybrid services contracts. And we did have healthy growth, though, in the number of peer SAS contracts that we signed in the quarter.
spk01: If I could add, Ryan, please. There was also in the 4.4 included was a major insurance contract that came in out of the United States. And I think this is aligned with what we've been saying for the last two years during COVID. And I think your report does a good job as far as explaining all of that. But we tend to deal with the insurance claims six to 10 months after the accidents happen. So if you really model this out, we've been seeing that all along that our insurance revenue in the United States got impacted during COVID back to 2021 and 2020. But now that, you know, we're back into kind of normal and quasi-normal capacity on the roads, accidents started to happen again, and sure enough. So now the insurance revenue started to climb up again. And I think that was a big contribution also in the $4.4 million in that sector as well. And Brad's question...
spk04: And Brian, I just want to clarify your comment when you said 4.4 annualized. The 4.4 is the contract value. And the reason why that's important is because including in that 4.4, there's one contract that has a two-year value of about $2.2 million.
spk03: Got it. Okay. That actually was important.
spk11: Now, that's backward-looking. If I look last question forward-looking, do you see more opportunity insurance? courts in the US, courts in Australia, media, I know, you know, there's opportunity probably in each of them, but maybe rank where you see the most growth opportunity, you know, in the pipeline. Thank you.
spk09: Wow, it's an interesting question.
spk08: And I would say yes. I would say in order, probably the SAS clients in the in the court space, the utilization of first draft in Filling that labor shortage and the way we're deploying that technology around the world, we're having very good results with the trial for NetScribe. So I would say the deployment of the NetScribe and First Draft technology to the court systems is a very big part of our current pipeline. But we are very excited about what's going on with the introduction of carbon to media around the globe. It is a very unique platform. And as we put development into that to accelerate the integration to our core technologies, it opens up a wide range of opportunities around the world that really will provide us with acceleration of both technology and hybrid services sales. So those would be the two at the top of the list. Insurance is really at a great place. But I think it's going to take a little longer to be able to get them to the concepts around migration to the mobile applications that we're just now launching and to the first draft applications that are in trial with a couple of our major insurance companies right now. Thank you so much. That was helpful.
spk03: Thank you, Brian. Thanks, Brian.
spk05: Our next question comes from Daniel Rosenberg with Paradigm Capital. Your line is open.
spk10: Hi. Good morning. I wanted to ask a question around the Queensland contract. Could you just remind us on timing of how revenue impacts you this year and just kind of what you're expecting in terms of lumpiness? Is there, you know, upfront or backend impact?
spk08: uh portions to it uh any info would be helpful thanks um yeah i will just say that that it's hard to comment on that because we're in the middle of deployment first of all and and second some of that is constrained to uh the customer agreements but it it is a migration daniel so we will see it won't be lumpy i think that you will see a a very consistent transition certainly a slower start than I think what we expected but I think that the overall expectation of the revenue profile is consistent with what we had expected in the projections for the year and then just on that profile I mean since it's
spk10: was first announced, the multi-year agreement, has it changed in terms of what you were expecting initially versus now what's actually being deployed?
spk09: You mean the total contract value?
spk10: Yes.
spk09: No, it hasn't changed at all.
spk10: And then in terms of the bookings number, just kind of a similar question in terms to understand how you see that being deployed going forward. Just the bookings pipeline that you have, any visibility in terms of when we can expect to see that incremental revenue hit the statements?
spk04: Daniel, what's going to happen? It varies by contract. But we anticipate seeing some of that flowing through the revenue line starting in July, ramping up to Q4. As I made my earlier comment stated that included in the Q2 bookings number 4.4 is about 2.2 for a two-year contract. So that will take a longer time to flow through. But the other portion, the Q1 and the balance of the contracts making up Q2 will flow starting in Q3. Q3 and Q4 and into next year as well.
spk01: And I think if I could add as well, Daniel, that's what we, you know, the last couple of earning calls, we made it very clear that we wanted to improve the transparency and the visibility of those early KPIs into our operation. And if you take a look at the MD&A, we have introduced about six key KPIs that we felt comfortable that will provide you an early indicators of what's coming. And obviously, the net new booking is in there. Also, the number of minutes that is going through, the number of pages, the volume that is now flowing to the eye. So now you can start to see. And what we're trying to achieve with this is to give our shareholders enough visibility at the early stage of what's coming next, knowing that when net new bookings do happen, then it does take a couple of months to get them going, get them connected with the platform, Then there's the obviously training that takes place early on, but then it starts flowing to the revenue. And we did that because now we are pretty bullish about the second half of the year. And a big part of that is not only the current run rate with the existing customers, but as a portion of that net new bookings that start flowing in starting in July. So all of this is coming to basically together in the second half of the year. And we've been seeing all along, everybody has been really patiently waiting to see, but we're post-COVID. and we're post-major labor constraint. And we've always said to everybody, what's going to happen when we get our production back and there's no such thing as lockdowns or major constraint on the resources? And we saw that with the results in June. So that's where we stand, and that's what we felt comfortable today to share with all of you, what we think about the second half of the year in terms of revenue, but also potentially on the gross margin. As Alexi stated earlier, in terms of we believe that the gross margin will be higher in the second half of the year compared to the first half of the year.
spk10: And can I ask on the acquisitions that were completed last year, are those client bases on NetScribe or what percentage of them are on the more productive platform today and can we expect some synergies going forward?
spk01: Yeah, so in the UK, as we stated before, in the UK, that process is well underway. And this summer is the time where now everybody has been turned on, on the new platform. The editors have been cross-trained, all the cybersecurity compliance with all the different regions, all the different clients. So the UK is in good shape as far as on the platform before the end of the summer, fully productive with that, with first draft coming in. And what we stated is basically Australia is the one that now the heavy lifting is all hands on deck. So we expect Australia to take several months because obviously it's 70% of our revenue right now. And Australia will be mostly migrated and mostly up and running with first draft before the end of the year. And it might go a little bit towards the beginning of next year. And at that point, we're talking about a completely different organization moving forward where now first draft is now de facto the standard across the organization for the production of the various documentations. And then you start layering on top of it what we've been doing with carbon and why we went after carbon is to bring the next level up. Now that we're able to generate the first draft in a really rapid way and still show the productivity and the cost that really for the customer base Now we're moving towards the near real-time, and that's what the carbon piece was so important in terms of what's going to happen towards the second half of the year, but also going into 2023. So we're really bullish about it, and that carbon piece is the beginning of what you're going to expect to see towards the end of the year once everybody has been migrated and once the margins have been pushed to where they need to be with Australia fully productive on the platform, then what you're going to start to see in 2023 is is the next step above that, which is the near real time and the ability to bring in a lot more self-driven transactions by our own employees, but also by our customers and partners. So that's why we did it that way. And that's what today we felt was really important to acknowledge that we've all been waiting for 26 months for this kind of intersection to take place. And it finally happened in June.
spk10: Thanks for that. And lastly for me, just on the balance sheet, I mean, last year you guys, you know, renegotiated your debt position and had to make a payment there. And recently you did the financing. So could you just explain to me priorities and uses of cash and then how you're thinking about financing operations in the near term and medium term, whether equity or debt and just the decisions around that? for your capital means?
spk04: Daniel, in terms of the raise, it was specifically funds were raised specifically for commercial agreements and commercial contracts that we're looking at right now and some very good commercial opportunities and also for working capital. Those are specific relating to that and maybe one or two small acquisitions. as we contemplate the pipeline and if they are creative enough, we'll take advantage of those. In terms of in the near term, everything that we have been talking about, we are bullish about it because we know based on the June results and preliminary results for July that we will be able to generate enough cash from operations to fund the business in the near term. And as we progress through the latter half of this year and even to next year, when we start to realize some more synergies from consolidation of the Q4 acquisition that we did, especially in Australia, we expect to generate lower OPEX that will flow to the EBITDA line and ultimately to the cash. So we think in the near term, short term and near term, we'll have enough cash generated from operations to fund the business.
spk03: Okay, thanks for taking my questions. Thank you, Daniel. Thanks, Daniel.
spk05: Our next question comes from Marla Marin with Zax. Your line is open.
spk07: Thank you. I wanted to follow up on an answer you gave earlier to the question about organic growth. You know, we've been talking about COVID and the disruptions, the port disruptions, but would it be fair to also think that there was a little bit of positive coming out of COVID in terms of you know, driving awareness of the shift to digital generally in many sectors. And would you think that there's some benefit you're seeing there now in terms of driving your existing customers and growing interest in the platform?
spk01: Yeah, Marla, it's at the core. of what we've been, if you look at the analysis of every earning transcript for the last two years, what we've seen in Q2 with that kind of net booking is directly related to one single challenge faced by our customers, productivity. Productivity amid a workforce that is getting older, really hard to recruit, yet the KPIs for faster turnaround while maintaining their accuracy has never been greater. If you look at any media news, whether or not it's media, whether or not it's government agencies, courts, law enforcement, their biggest issue right now is all the delays in the system related to the time it takes to create all the verbatim documentation that is required for the evidence to be going forward. So what we've seen, whether or not it's the 8th District, whether or not it's in the the UK that we've been talking about as far as the trial, more than ever now, they now understand that the old days of doing all that work manually is not going to cut it. So now it's post-COVID, and then they're facing the same labor shortages and labor constraints that we've been facing as well. And now they've got an issue of retirement on top of that. Then you combine those three kind of macro trends together, then you've got a major crisis on your hands. And I think that's what when Susan said it's kind of the intersection of what we've been building up for the last couple of years coming to term with the fact that now the market is receptive and we're right there. And in a way, COVID, it's been really, really tough on everybody. But coming out of COVID, the reception level is much higher. The desire to explore technology to push the productivity of people has ever been greater. So to answer your question, the answer is yes. you know, very clearly that COVID and all of what created around that has pushed our agencies and our clients to look at new ways of continuing delivery because the volumes are going up and then the accuracy has ever been more critical and yet they cannot really expect that the manual workflow for the last 30 years is going to work for them moving forward. And I think most customers have come to realize that now in a post-COVID environment. So we're really bullish about it. It's just, you know, obviously COVID put a dent into that. But in a way, COVID also contributed to acknowledging the crisis around productivity. And that's what we're driving on right now with our revenue.
spk07: Okay, thank you. Now, switching gears a little bit, the media vertical, I mean, that's a relatively new vertical for you. And, you know, with the carbon acquisition, it looks like you're strengthening your offering there. Do you anticipate any kind of a bump? That vertical is kind of correlated to the political cycle, I believe. So are you thinking about that in terms of, you know, how you foresee revenue in that vertical, and if so, any expected bump because of the midterm elections? Susan?
spk08: So the short answer is absolutely. The media space is very important to us. There's really three elements to the media space. One is the governmental pieces of it that are really tied to what happens on the Hill. So you saw a lot of incremental demand as we go through Supreme Court hearings and any kind of committee meetings on the Hill. The carbon product is really more toward live news media. Journalists in the field, people that are recording video and need to be able to engage with that video content for production reasons almost real time. So while we've historically done morning news shows as an example, this will allow us to do not just the recorded media, but also much more of the field and real-time work that's being produced out there. So we're really excited about that. And yes, not only should the midterms and the election cycle that seems to actually start almost after it ends, the actual midterms as well as the incremental business and the new subsegment of the live news market will be incremental to us. Also, we've been isolated in media to the United States. We now believe that the applications that we have will now begin to be populated in our pipeline in both the UK and Australia as we look for extended media opportunities around the world.
spk07: Okay, thank you, Susan, and that's leads to my next and last question, which is the M&A pipeline. And you've been pretty consistent over the last few quarters with saying that M&A will not be a focus as you look to integrate and consolidate and strengthen the existing business and deal with business changing in a post-COVID environment. But in terms of potential M&A tuck-ins, Would it be fair to think that you would be looking to strengthen an existing vertical rather than expanding into a new one, as you did a while back when you moved into media? I think that would be very fair to say.
spk01: Yeah, Marla, I think if we go back, the answer is yes. And I also want to reiterate why we purposely went into media. If you go back to that earning call that month when we did the acquisition, we talk about that what's happening in the industry of media is a leading indicator of where courts, insurance, and law enforcement will be. And we've compared that. Really, the reason we got our foot into media is because it's moving the organization towards where we want it to be. So from our perspective, the carbon acquisition was kind of the second leg to that statement that we're now obviously media will remain absolutely critical we're actually expanding in media but number three is what you start to see happening in media as far as going towards near real time journalists self-editing and editors self-editing not only audio but now we've introduced video all of what we're seeing in media internally, without going into the competitive nature of what we do, internally, if you look at our labs and you look at our roadmap on the technology, it's all falling from that in terms of what's going to happen with the courts, with NetScribe Live, what's going to happen with the insurance industry, with the self-serve, and the mobility aspect of it. So we're using media really as our leader in terms of what's happening with the verbatim content and how we manipulate it, how we produce it, And then we basically take that innovation across the other sectors. So that's where we stand right now. And in terms of acquisition, obviously, we believe that for us, if there's going to be anything, it will be about strengthening the existing markets in terms of where we're at. We have been very careful not to get into verticals where some of the magic recipe for us doesn't apply. And one of them is where a draft is good enough. We're always looking for market where the first draft is highly usable, but ultimately there's also a good price and a good value attached to the final edited version of it because that's where the markets that we serve and that's where we want to stay. So to answer your question, if there's any, it will be 100% about strengthening the four verticals that we're in today.
spk05: Thank you.
spk01: Thank you, Marla. Thanks, Marla.
spk05: Our next question comes from Brian Kinslinger with Alliance Global Partners. Your line is open.
spk11: Great. Just one follow-up on the expense side, maybe, Lexi, if you will. I thought in the first quarter there were some items in SG&A that may have fell off, and I had expected that might tail off in the June quarter. So take me through the $6.5 million SG&A. Were there any non-recurring items in there? And I'm just trying to understand, as you get to profitability, what that assumes on overhead in SG&A.
spk04: Yeah, great question, Brian. So in Q2, we had some one-time expenses relating to regulator filings. As you may remember, we filed 20F for the first time in the history of the company, and that came with some professional services fees, additional professional services fees. So if we back those out, We expect Q3 and Q4 OPEX to be lower than Q2.
spk11: Okay. And I take it that doesn't, you're not including in that lower any fees related to transaction costs such as your capital raise or anything else. Like that's non-recurring. So you're just talking about on a go-forward basis.
spk04: That's correct. Any cost relating to capital raises is offset against equity. So the net proceeds is what usually flow through the balance sheet on the capital side of the balance sheet.
spk11: And can you disclose how much those professional fees, were they half a million dollars in the second quarter? Were they more? Were they less?
spk03: They were less than half a million dollars. I think you're breaking out of there. Sorry. Brian?
spk11: Yeah, you're coming in and out a lot, so I couldn't get in here. Sorry.
spk04: Right. Well, I'm saying that the professional fees were lower than half a million dollars. Got it.
spk11: Okay. But other than that, there's nothing coming out. I mean, there's no cost-cutting efforts in SG&A that's driving that further lower than that filing. Is that right?
spk04: In addition to that, there's also synergies that we expect to get as we consolidate the organization in Q3 and Q4 as we flow through the migration of customers onto NetScribe. There are some OPEX-related expenses for the consolidation as we realize the synergies from the Q4 acquisition. So we expect some of that to manifest itself in Q3 and Q4 in terms of lower OPEX. Great.
spk11: Just trying to get to that profitability and see where you are. Thank you so much.
spk04: You're welcome. Thank you, Brian.
spk05: There are no further questions at this time. I would now like to turn the conference back over to Sebastian Perrier for closing remarks.
spk01: Well, I would like to thank everyone for joining our call today. I think the Q&A was really, really positive in terms of the depth of the questions, and hopefully we've answered most of them. If there's any follow-up by anybody, please do not hesitate to book one-on-one, and we can go a little bit further. Also, please note that we will be participating virtually in the upcoming H.C. Wainwright Global Investment Conference that is being held in New York City on September the 12th to the 14th. Meetings are starting to be booked and if you're interested with that, just make sure that you register or you get in touch with Laura Kernan to do the follow-up. So thank you everyone for joining us today. It's been quite a journey to get to this point. But I think you can appreciate where we stand in terms of what we've got in store for what's coming next. And we're pretty bullish about it. So we look forward to speaking with you in a few months when we review our Q3 results. Thank you.
spk05: This concludes today's conference call. You may now disconnect.
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