VIQ Solutions Inc.

Good morning, ladies and gentlemen. My name is Julie Anne and I'll be your conference operator. Today we are hosting a conference call to discuss the first quarter 2023 financial results for VIQ Solutions, Inc. At this time, all participants are in a listen only mode. For those that 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 one and identify themselves before asking a question. Your host for today is Ms. Laura Kiernan, Head of Investor Relations for VIQ. Please go ahead.

Thank you, Julianne. Good morning, everyone, and welcome to our first quarter 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 risks, 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 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 COO of CIQ, all of whom will be available for questions following the prepared remarks. I will now turn the call over to Sebastian Paré to begin.

Thank you, Laura. Welcome, everyone, to our first quarter. I'll provide some high-level remarks on our results, then I'll hand it over to Susan, who will discuss some of our operating results. which will be followed by Alexi, who will discuss some of our financial results. Then we'll open up for questions. The increasing demand for digital content by global organizations requires the implementation of innovative, specialized technology to process data more swiftly and in a secure and precise manner. Transcribers play a critical role in leveraging artificial intelligence to achieve greater productivity and accuracy rates to meet inventory standards. During the quarter with the seasonality factor due to the year-end holiday recess in our court segments, we remain focused and committed to delivering a strong and consistent value to our customers and partners. As a continuation of our record level of net new bookings last year, we are encouraged by our strong Q1 bookings that represent an increase of 69% when compared to the same period in 2022. Net new bookings are an early indication of organic growth. Contracts take some time to ramp and revenue to be recognized. As of March 31st, our total contracted net new bookings were $9.4 million, of which 20% has been recognized as revenue so far. The remaining 80% will be recognized over time. Increasingly, New customers have recognized the value of the IQ offering. After a detailed procurement evaluation, these new clients, including Fortune 500 organizations, have told us that our velocity offering is unique in its end-to-end approach. Utilizing innovative technology to speed up the capture of high-end quality audio and video, industry-specialized workflow, cybersecurity protocols, and engine agnostic AI that includes machine learnings ensure the accurate, actionable information is created in an expedited manner. We will continue to expand our solution suite, focusing on SaaS solutions to simplify content acquisition and accelerate documentation creation. Our intellectual property is changing the industry and is the catalyst to organic growth in 2023 and 2024. We're pleased to have completed the migration of the Queensland contract. Despite the short-term revenue impacts, it is a crucial step in providing us with revenue predictability as we continue to scale. We believe this contract, combined with the effects of foreign currency exchange, will have normalized quarter-over-quarter revenue, showing growth in Australia. Susan will speak more about the whole DJAC factor in the makeup of Q1 to make sure everyone understands this new contract. During the quarter, we also completed the refinancing of our debt with BD Capital. BD's approach, striking a measure balance between innovations, advancement in REI, and competitive leadership, SAS scalability and growth, versus costs and a return to positive EBITDA, became very important at this stage of our growth. BD's depth in technology and transition to SAS knowledge is exceptional. with incredible depth in financials and market analysis. Our partnership with BD at this stage of our growth is crucial. Finally, we implemented significant cost containment measures, which enable us to significantly reduce our overall operating cost. Alexi will provide you with more details on that topic. I will now pass the call over to Susan to discuss our operating results in greater details. Susan?

Thank you, Seb. As Seb mentioned, we made key operational achievements this quarter in addition to continuing to work on the integration of our acquisitions, especially in the Queensland, Australia. Let me first provide you with background on the Australian contract, the Auscript acquisition, and how the integration impacted the total value of the contract. We have spoken of this in prior scripts, but it is worth reviewing in a bit more detail as it can be confusing. In December of 2020, Prior to the OSCRIPT acquisition, DIQ announced the award of the Queensland contract, or DJAG, which was awarded to us and one other provider to deliver transcription services to replace the current services delivered by OSCRIPT, who at the time was owned by FTR. While the OSCRIPT contract was for both transcription and recording services, The new contract was exclusively for transcription services. Queensland, at the time, was totally revamping the end-to-end technology that drove how recordings were captured and transcripts ordered and processed, moving much of the technology in-house. Once live, it was expected that that contract value would be approximately 50% of the value of the transcription services piece of the original contract with Oscript, which, again, was for both recording and transcription. In December of 2021, VIQ closed on the Oscript acquisition, knowing at the time that their contract with Queensland had been lost and that we would be delivering services for that contract until it was flipped to the new VIQ agreement. It was expected that this new agreement would begin implementation in February of 2022. But it did not commence until July of 2022. This rollout was very challenging for both of the new vendors and was phased in over three stages that went to full go live in October of 2022. Q1 of 2023 is the first full quarter of revenue under this new agreement. When compared to Q1 of 2022, there is a reduction in revenue of approximately $1.2 million year over year. The reduction in this revenue also impacted gross margin for Australia, as the recording revenue component of the off-script contract was also moved in-house and was at a significantly higher margin than the transcription revenue. It is important, as we did not lose a customer, we did not lose unexpected revenue. The variance was anticipated after the purchase of OSCRIPT and was certainly built into the expected revenue announced with the OSCRIPT transaction. In sub-reference that we are now fully operational with this contract, we reference not only the full integration of the new contract, but also the stabilization of the operational challenges associated with their new technologies that had a dramatic impact on our operation, in Q3 and Q4 of last year. So, in summary, there are three stages of this contract. One, pre-OSCRIPT acquisition. The contract was awarded to VIQ, but it was OSCRIPT revenue. Two, post-acquisition. The OSCRIPT contract continued until July 2022, and the contracts were in transition from July until October, both revenue and operational stability. And the third stage, VIQ revenue Q1, is the first full quarter of this new VIQ contract. The good news is that the gross margins expected from this customer are solid as we exit Q1, and the volumes are tracking slightly higher than planned. Our team in Australia has done an amazing job in responding to this new, very complex, and very substantial award. Now, regarding the achievements of the quarter, We had 2.8 million of net new bookings sold for the quarter, representing a 69% increase from Q1 of 2022. This is very exciting, as it represents a full range of products and services and segments. Several large SAS contracts for NetScribe and First Draft Technologies, a service agreement for one of the top five insurance companies in the United States, and geographic expansion as well. We had our first active installation of Netscribe where it was sold in India for an international transcription company. This contract will allow our partner in India to offer Netscribe to transcription companies throughout India as a staff offering or in collaboration with customers to deliver transcription services. As transcription providers begin to deliver more multi-speaker verbatim content, helping to fill the demand for increasing capacity globally, it is the right time for this product to support the required workflows in this very important geography. We also closed our initial sales for the Ordiginal Agreement, and we believe that this relationship will bring great opportunities across EMEA and Asia-Pac. Our technology has been upgraded to enable self-management by distributors and resellers and to provide resellers with tools to easily onboard, train, support, and bill their customers, accelerating the scale and the sale of our SaaS and pro services revenue. We launched Capture Pro Mobile, expanding our commitment to building technologies that advance the need for tight integration of video with fully integrated editing in all mobile applications. As we begin our beta for this product, the pipeline is quickly building with large opportunities across all key segments, particularly media. As we pivot to meet market demands for SaaS solutions, there will be an impact to the revenue mix for organic and run-rate revenue. This change is expected to protect long-term revenue and ultimately lead to significant margin improvement, but will impact our top-line revenue in the short term. Q1 had a slight decline in our U.S. revenue due to the acceleration of speech-to-text and SAS sales and insurance and law enforcement. Reduced transcription, editing, and reporting capacity globally, along with the need to gain efficiencies driven by current economic conditions, provide the optimal environment to strategically introduce our first draft technology to new named customers, as well as our current customer base. AI generated content has progressed enough to deliver highly usable documents in terms of accuracy, prioritization, and formatting. The IQ will lead the disruption that the acceleration of this technology provides. Organic growth has certainly offset some of the revenue from this change in Australian contracts. Organic growth from 2022 sales begins to weave into the ARR mix in Q1, but we expect the full value of these larger contracts will mostly impact Q3 and Q4. As evidenced in Queensland, these larger contracts require significant change management for our customers. and therefore take longer to fully ramp. While we see a slow recovery in insurance and law enforcement from the downward trends of late last year, we are very excited to see our new insurance customers embracing products and technologies that augment and substitute traditional services. We are leading the path to change this industry. We have recently launched our new brand Velocity. Velocity is defined as speed of motion, action, or operation, and this truly defines VIQ at the moment. We are using our technology to build velocity to accelerate the motion and the actions of internal operations and the clients that we support. I will now pass the call over to Alexi to discuss our financial results in greater detail, as well as the cost containment initiative and related impacts on our cash. Alexi.

Thank you, Susan. Good day, everyone. Let me recap a few of our first quarter 2023 financial highlights for you. As Sebastian mentioned, our revenue was $10.1 million, a decrease of $1.5 million, or 13%, in the same period of the prior year. The decrease was primarily due to the expected contractual change in the Queensland contract, which accounts for 81% of the variance. Our gross profit was $4.4 million, or 44% of revenue, compared to $5.5 million, or 47.6% of revenue, in the same period of the prior year. The decrease in the gross margin was primarily due to the anticipated change in the Queensland contract, as Susan mentioned earlier. Our net loss of $3.5 million, or $0.10 per diluted share, versus a net loss of $2 million, or 7 cents per diluted share last year. And finally, our adjusted EBITDA was negative 1.1 million versus negative adjusted EBITDA of 0.9 million in the same period last year. The items that impacted our adjusted EBITDA included decreased gross profit, as previously mentioned, partially offset by decreased selling and administrative expenses, primarily due to lower insurance premiums, Reduction in IT-related costs because of system integration. And thirdly, lower headcount-related costs due to organizational restructuring. While we are continuously working to improve our cash flow and with a focus on cost containment, coupled with the refinancing completed in January, we were able to shore up our balance sheet. Additionally, we expect the migration of the Australian customers to NetScribe and the implementation of net new bookings to have a positive impact on cash. As of March 31, 2023, we had a total of $2.5 million in cash. On January 13, 2023, we entered a senior debt facility with BIDIC Investments Limited. With maximum available funds of $15 million, $12 million of the loan was provided to us as an additional advance with an additional $3 million available to the company, subject to the company satisfying certain conditions. Now I would like to hand it over to the operator for a Q&A session.

Thank you. If you would like to ask a question, please press star followed by the number 1 on your telephone keypad. To withdraw your question, please press star 1 again. We'll pause for just a moment to compile the Q&A roster. Our first question comes from Scott Buck from HC Wainwright. Please go ahead, your line is open.

Hi, good morning. Thank you for taking my questions. First one, you guys have done a really nice job on cost containment the last couple of quarters. I'm curious whether or not you can sustain these OpEx levels as revenue starts to move higher again in the second half of the year.

So I'm going to go first, Scott. This is, you know, Sebastian. So what we've disclosed previously is if you look back at what we achieve in the United States and the UK and what we're about to go to in Australia, all the cost reduction in terms of OPEX and COGS as well, we're all related to the success of the migrations into the Netscribe platform, turning on the AI, retraining our people to become editors. Once that stability has been reached, then we actually go ahead and actually make the restructuring. So we've gone through basically so far two major restructures in the context of the gross margin attainment of the United States last year, as well as the UK. And then what we're going through now is the migrations in Australia. So it's all directly tied to the migration and then the gain in the gross margins before in the manual world versus post into the net scribe AI system.

Alexi? Yes, thanks, and Scott, to add to Sebastian's point, right, when we look at this, we're very confident of the OPEX level, and as I said on the last call, we will always monitor the OPEX to ensure that we're containing costs, and if you listen to what we're saying, we're saying that we're going to move our customers in Australia to Netscribe, and that's strictly an automation of the workflow And so, we don't anticipate in seeing a significant increase in our OPEX as we do that migration, which, as you pointed out, when we look at our OPEX, selling in G&A over the past, I would say, four quarters. In Q2, it was 6.5. In Q3, 6 million. Q4, 5.9. Q1, we are reporting 5.3. and we will continue to analyze and evaluate as we move forward. But the goal is to ensure that our cost base is manageable to support the revenue.

Scott, I'll jump in really quickly because you get the trifecta, but you did hear in my remarks that we had automated Netscribe to make it more self-serving, and that's going to make a major difference as we begin to onboard more customers from these resellers. From onboarding all the way through servicing and building templates, the technology is meant now to be much more low labor in terms of scale.

Great. That's helpful, guys. And my second one, I was hoping just to get a little bit of color on how you guys are thinking about the cash balance and cash needs. You know, you ended the quarter with $2.5 million. I think you still have $3 million you can access from BD. Is that going to give you, that $5.5 million, does that give you enough runway to get to the point where you're generating meaningful cash internally to fund the business?

Yeah, absolutely, Scott. And I'm going to continue from the previous statement that Susan made, right? We expect to see an increase in our gross margin as we migrate these customers to NetScribe. That's your goal. That's what we have been saying for a while. And we saw the benefits of that in the U.S., where we made significant improvements in gross margin. We expect to see the same results or better in Australia. And that will generate cash in itself. And if we continue to maintain our cost within a certain level, with access to additional $3 million from B2, we think we're in a position in a good place.

Great, that's helpful. And then just quick last one for me. Sequential change in bookings. I know you guys gave a year-over-year number, but I can't remember what the 4Q number was. Can you just tell me where we are there?

Yeah, so last year, the total met new bookings was $7.7 million. And what we've disclosed last night is we've booked $2.8 million in the first quarter. So they're running right now. is about 9.4, of which 20% have started to be recognized as revenue. The rest will be recognized throughout the year and over the next couple of quarters. But for us, this was really important because we've gone through some significant acquisitions during the pandemic in the last two years, and that was our focus. And I think if you look back, this is something we want to report on moving forward, is the results of taking those assets from the manual world into a digitized net scribe AI assist power environment and the gross margin achievements of 55% in the United States last year and over 65% in the UK was all basically a large exercise to get us to where we need to be, which is Australia representing 60% of our revenue in courts where we expect significant gross margin gains. So when you combine all of that together, I think you're starting to see that our customers with the net new bookings have also started to recognize that the technology that we've got, the R&D investment, and the intellectual property that we secure is really starting to yield some results. And I think that's what's really important because now we're pivoted from basically inorganic, focusing on acquisition, and now we're really increasingly going back to organic being the primary driver. But in order to generate organic growth, you need the net new bookings, which means your product and technology and offering needs to be validated by the marketplace. And I have to say, like, it's something that we're really, really delighted. And it's a big reason why BD came forward during the financing as well. They see it as well. We have a very important lead right now on the technology. And I think the net bookings are good evidence on where we're headed in terms of the recognition by the customers.

Great. Sebastian, I'm sorry. The net bookings, are they coming from existing customers or are they new customers or likely a combination of both?

They're all new customers. If you look at our, if you look, absolutely 100% net new. And we have a very strict definition in our MD&A, but it's all coming from net new names.

Great. Appreciate the additional color, guys. Thank you.

Thank you, Scott.

Our next question comes from Brian Kinslinger from Alliance Global Partners. Please go ahead. Your line is open.

Hi there. This is Shervin in for Brian. Thanks for taking our questions. I'm just going to roll off of the conversation on bookings. I heard you mention a 30% figure and I wanted to clarify what that was about. You talked about how onboarding these programs is challenging given your resources were mostly focused on Queensland. Can you tell us what percentage of this value of contracts has been onboarded? And then also during the March quarter, was there any revenue from these contracts?

Yeah, so maybe let me start with Sherburn with the first part of your question. So out of the total new bookings so far between last year and this quarter, what we've said is we recognize at the moment in terms of revenue, 20% of that value has now started to flow into our revenue. So that's the first piece of it. And what we said last time when we reported year-end is we wanted to be in the 30, 40% range last year, which would have made up the difference in the fourth quarter. But because of the labor constraints and everything that we've just been talking about, we were not able to do that. Now we're picking up our speed. We're picking up our cadence. DJAG is behind us in terms of that. And now that revenue is starting to flow in. But it's going to hit Q2, Q3, and Q4 as we continue.

Okay, thank you. And then I think on the last call, you said that you expected to have all of these contracts onboarded by the end of June. Is this still on track?

Yeah, so at the moment- Do you want me to take that? Yeah, go ahead, Susan.

Oh yeah, I would just say that, well, we will have all of the contracts that we sold in 2020 uh two onboarded we had really good bookings in the first quarter of this year and a lot of that will will push through um q3 and q4 okay um do you think that you can return yeah yeah these clients when we start them they they migrate so it even accounts that we brought on in q4 of last year um you regardless of whether they're fully onboarded at the end of June, you may not see all of the revenue potential until later quarters as they begin to inject the processes into their internal organization. So you're going to see that acceleration, much like we have in the larger contract last year, build progressively quarter over quarter.

If I could add, Sherburn, to that point, remember we did a good job, I think, a couple quarters ago explaining the ramp and the onboarding of new clients and behind the scene there's the cyber security compliance that takes place behind the scene there's an api that gets connected to the customer's repository behind the scene there's an integration with larger case management in the case of insurance for claims uh criminal criminal investigation in terms of police so we do all that work up front and obviously we've automated a lot of that as susan pointed out it's becoming a lot more self you know, driven, but that's a key component of the stickiness of our revenue and why the technology is gaining that kind of level of traction is we don't talk much about it in our disclosure, but that's a key component to win those net new bookings, the offering and everything else, but also the underpinning infrastructure and how tightly integrated we become with our large customers as well.

All right. Thank you. So do you think that you can return to year-over-year growth in the second quarter with these contracts onboarded? And if not, when do you think you can expect to return to year-over-year growth?

We expect to have year-over-year growth second quarter.

That's great to hear. And last question, you mentioned that the lower gross margin year over year was a result of the Queensland contract. Is it because you had higher resources on the contract along with the lower volume? And then as resources fall off for onboarding other programs, will this contract still weigh on overall gross margin for the remainder of the year?

There were two elements that were really explained in my comments. The first is that a large percentage of the revenue that came from the OSC contract contained recording revenue. That recording revenue was at almost 100% margin. When you take that revenue out of the mix, it's going to have a negative impact on the overall revenue attained from that region. So while we are seeing greater than expected gross margins on transcription services from DJAG, the removal of the revenues associated with the recordings certainly did have a negative impact on the gross margin, and it was all expected, by the way. This was not a surprise. We also, in Q3 and Q4 and in Q1, had what I would call adaptations to the new implementations. While you have large groups of transcribers learning to take on a new account and learning a new way of doing business, this was a very different way of of bringing this process through, you have a downward trend in gross margin and then a hockey stick spike up. And we are now at a business as usual state with them, so you'll see a significant recovery from that.

And Sherwin, if I may quantify all of what Susan just said, in terms of comparative purposes, if you back out the high margin recorded revenue and the additional transcriptional revenue from the DJAQ contract that existed in Q1 2022. If you back that out, the gross margin reported last year normalized would have been 43.5%. We're reporting 44% for Q1 2023. All right.

That's great. Thank you so much. Thanks, Ervin.

We have no further questions. This will conclude today's conference call. Thank you for your participation. You may now disconnect. Have a great day.