mdf commerce inc.

Thank you for standing by. This is the conference operator. Welcome to the MDF Commerce Q2 Fish Hold 2023 Financial Results Investor Conference Call. Today's call will provide information and commentary on the company with a focus on the financial results released this morning before the market opened. We will hear from Luke Filiotro, President and Chief Executive Officer, and Deborah Dumoulin, Chief Financial Officer. If you have any questions following the call, you can reach MDF Commerce at the address at their website, www.mdfcommerce.com. First, here are a couple of housekeeping notices. All participants are in listen-only mode for the duration of the call. This call is being recorded, and we expect that the recording will be available on the MDF Commerce website later today. The information in today's remarks, including any forward-looking statements, has been prepared as of September 30, 2022, unless otherwise indicated. MDF Commerce assumes no obligation to update or revise the forward-looking statements to reflect any new events or circumstances, except as may be required pursuant to securities law. We remind you that today's remarks will include forward-looking statements and non-IFRS measures that are subject to important risks and uncertainties. For more information on these risks and uncertainties, please see the reader advisory at the bottom of MDF Commerce news release, which is on their website and has been filed on www.stedar.com. The company's actual performance could differ materially from these statements. I will now hand the call over to Mr. Ferriatro. Please go ahead, sir.

Good morning, everyone, and thanks for joining us for our Q2 Fiscal 23 result call. We will turn to the results we filed this morning in a moment. But first, I would like to take a bit of time to tell you about MDF Commerce and the state of operation. MDF is a developer and operator of digital commerce platforms that facilitate billions of dollars a year of digital commerce transactions for well over 550,000 end-user companies, mostly in North America. Our mission is to enable the flow of commerce. Subsequent to the end of the second quarter, we executed a consequential transaction that significantly improved our balance sheet and further streamlines our strategic focus. As we've announced previously, the sale of InterTrade generated cash proceeds of approximately 66 million Canadian that we used to repay long-term debt, which has strengthened our balance sheet. Debra, our CFO, will provide more details on the positive financial impact of this transaction in just a few minutes. In Q2 fiscal 23 results release, we also disclose a non-cash goodwill impairment charge of Canadian $85 million. This non-cash accounting charge has no impact on the availability of working capital, debt covenants, cash flows, our operations, or on our ability to execute our strategic plan. This impairment is due to significant increases in the interest rates by the U.S. Federal Reserve, as well as a revised financial forecast on the expected timing of achieving certain growth objectives, particularly in our e-procurement line of business. This essentially means that some of the deals that are in our pipeline are taking longer than previously expected to convert. As you know, conversion cycles for the public sector are typically longer than in the private sector, and U.S. states have not awarded any significant e-procurement contracts in the last year. In order to address our go-to-market strategy, we recently hired Thierry Jaffery, e-procurement chief growth officer, who comes to us with more than 15 years of experience in selling large procurement systems. Deborah will go into more detail about the impairment chart during the prepared remarks. When we look at our Q2 performance, we're pleased to report that with prudent cost management, operational streamlining, and strategic focus, we've achieved a positive adjusted EBITDA of $1.4 million in the quarter. We are focused on maintaining positive adjusted EBITDA going forward, and we remain focused on our organic growth objectives. Now, in terms of operations, our focus remains on two core platforms, eProcurement and Unified Commerce, which includes eCommerce and the recently sold Intertrade, our supply chain collaboration platform. After this quarter, we will report on this platform simply as eCommerce. Current market conditions remain favorable for our eProcurement technology, which targets states and local governments across North America. Despite uncertain global macroeconomic conditions that are impacting many sectors of the economy, these government agencies continue to digitize their procurement functions. In August 2021, at the time of the Periscope acquisition, we were active on less than five large ePro TRX state opportunities. Today, I am pleased to say that we are now active on approximately a dozen different ePro TRX opportunities across Canada and in the U.S. Our leadership position in North American public eProcurement, combined with our innovative transactional model that we call the TRX, position us favorably to capitalize on this growing market. For example, subsequent to quarter end, we announced that Walmart, is now integrated in our Arkansas TRX model branded AR Buy. We are working to bring more suppliers to our platform in order to capture maximum spending budgets and create more long-term stickiness for the states that we are deploying. We have now fully gone live with our contract lifecycle management solution and fully integrated with ePRO in Massachusetts. and we are progressing on the TRX deployment in New Jersey. Switching to e-commerce, for the quarter, the total revenue was slightly down by $0.7 million, but the recurring revenue as a percentage of total revenue was up from 57% to 61% this year, as we have completed the integration for certain customers. We continue to see some challenging market conditions for the e-commerce business where the order volume and the opportunities pipeline have been impacted by sustained inflation even more significantly over the past three quarters. For example, there continues to be a pullback online ordering in some of our key inflation sensitive verticals like grocery. We continue to right size operations for current market conditions with an emphasis on improving profitability. That being said, we have had success during the quarter, launching two sites for Hawk, which is a Danaher subsidiary, and renewing Dollarama for another three years. Last quarter, we announced that we changed our sales emphasis in e-commerce away from large platform sales to focus on our order management system that we call the OMS. This helps retailers ensure an optimal consumer experience within a hybrid shopping environment. This out-of-the-box product does not require a client to replatform and can easily be layered onto existing tech stacks in a much shorter timeframe. Another product that we are focusing on is our integrated payment solution for small-medium businesses where we've made solid sales progress. Moving forward, after the sale of InterTrade, the unified commerce platform will simply be renamed e-commerce. Our e-marketplaces perform well during the quarter, primarily due to the unique market conditions created by the supply chain challenges in both the electronic and automotive market sectors. Cash flow from our legacy solutions remains helpful to fuel investments in our two core platforms. Finally, I'd like to update you on some changes within our board of directors. Zoya Choupac and Christian Dumont have resigned effective November 11, 2022. The members of our board and the management team are very grateful to both for their support and valuable contribution over the years. Now, I'd like to ask Deborah to provide information on the company's financial results.

Thanks, Luc. Good morning, everyone. I'd like to remind you that you can find our Q2 results, press release, MD&A, and financial statements both on CDAR and on our website. Subsequent to quarter end, on October 4th, we closed the sale of InterTrade. For total cash consideration of 65.8 million Canadians, that's US $48.5 million, subject to certain closing adjustments and amounts held in escrow of approximately $3 million. The net cash proceeds represents approximately five times revenue on a last 12 months basis based on the year ended March 31st, 2022. By executing on tax planning strategies, the net proceeds from the sale are expected to be completely sheltered from taxes payable. We also benefited from the US to Canadian FX rate that was 1.3574 at closing, which was favorable to the corporation with the cash consideration from the sale being in US dollars. While we close out Q2 with long-term debt, net of cash at 57.5 million, which compares to 49.5 million in June of 2022. With the net cash at closing, We fully repaid the term facility, which was $16 million U.S., or approximately $20.1 million Canadian dollars, and the remaining amount was used to pay down the revolving facility. This debt repayment, subsequent to quarter end, significantly leverages the balance sheet, therefore improving our capital structure and liquidity, and provides additional flexibility to execute on our strategic plans. As a consequence of the closing of the transaction, a third amendment to the credit agreement was signed on October 4th, 2022. It provides for a waiver of the fixed charge coverage ratio, which is replaced by a minimum EBITDA. And this is EBITDA as defined under the credit agreement, which is more similar to adjusted EBITDA that we publish publicly. And this is required for the quarters ending December 31st, 2022 March 31st of 2023 and June 30th of 2023. As well, until June 30th, 2023, any borrowings in excess of $30 million will require approval of the lender. The company is in compliance with all of its financial covenants at Q2 of this year. The repayment of debt combined with the minimum EBITDA and the cost containment strategies that were initiated and executed on in Q2 and in early Q3 further solidify our focus on managing the business to positive adjusted EBITDA. As Luke mentioned earlier, I'll provide a bit of further context on the $85 million goodwill impairment loss that we recorded in the quarter on the Periscope cash generating unit. The impairment loss is based on an impairment test, which was performed in accordance with the International Financial Reporting Standards, or RFRS. The goodwill impairment charge represents the amount by which the carrying value or the book value of the Periscope cash generating unit exceeds the estimated recoverable amount. As at September, the recoverable amount was determined using a value-in-use approach which uses management's estimates of the discounted future cash flow forecast for the next several years. there were two main factors that contributed to the goodwill impairment law. First, interest rate increases by the U.S. Federal Reserve in both Q1 and Q2 of this year at 125 and 150 basis points respectively had a significant impact on the pre-tax discount rates that we use in calculating the value in use and the recoverable amount for this Periscope cash generating unit. And this interest rates are quite a bit higher than they were at March and accounts for approximately 35 million of the impairment loss that was recorded. Second, longer new business sales cycles in the U.S. public sector has resulted in slower sales growth ramp up as compared to the original business plan and resulted in a downward revision of forecasts for Periscope. I reiterate what Luc said earlier. that this non-cash IFRS impairment charge does not impact our cash position or cash flow from operations, financial debt, covenants, or liquidity, and does not have an impact on our future operations or on our strategic plan. So I'll move on now to the financial highlights of the second quarter, and I'll cover Q2 of this year, which you can find summarized on page 7 of the investors' presentations. And I'll refer you also to page 8 for the year-to-date results, which I won't cover specifically in my remarks. Q2 revenue was $33.2 million compared to $25 million in Q2 of last year. This represents an increase of 32% year-over-year and an increase of 3.2% sequentially from the $32 million in Q1. Q2 recurring revenue represents $26.5 million compared to 19.4 in Q2 prior year, representing an increase of 36.5% year-over-year. Recurring revenue as a percentage of total revenue was 79% for Q2, compared to 74.3 in Q2 last year. This recurring revenue is now trending towards 80% recurring revenue. Subsequent to the August 31, 2021 acquisition of Periscope, Revenue from U.S. clients represents a larger portion of our business in 2023, at just under 61% for Q2 this year, compared to 50% last year. For the eProcurement platform, the largest of our two core platforms, it generated revenue of $19.3 million, an increase of 71% compared to $11.3 million in Q2 2022, which included only one month post-acquisition of Periscope. Due to Periscope's U.S. focus, the corporation's U.S. e-procurement revenue grew by 106.6% to $14.4 million in Q2 compared to $7 million reported in the same quarter of the prior year. Total consolidated U.S.-based e-procurement revenue represents $14 million or 74.7% of the 19.5 million for Q3, sorry, per Q2 2023, compared to 61.9% of Q2 2022 revenues, which were 11.3. Ever since the acquisition of Periscope, we've been disclosing that there was an unfavorable impact on revenues of a fair value adjustment on deferred revenues at the closing balance sheet date of the acquisition And this was an accounting adjustment that was required as part of the acquisition accounting. For Q2 this year, this adjustment resulted in a reduction in revenue of $0.3 million compared to $1 million in Q2 of last year and $1.3 million in Q1 of this year. Q2 represents the last quarter of this adjustment. Monthly recurring revenue for the e-procurement platforms was $16.9 million for Q2 this year, compared to $10.8 million in Q2 of the prior year. Recurring revenue as a percentage of total revenue was $86.3 compared to $87.8 for Q2 of the prior year. Our other core platform, e-commerce, which includes both e-commerce and supply chain collaboration solutions, generated $9.2 million for Q2 this year, compared to $10 million for Q2 of the prior year. a decrease of 7.9%. The decrease is partly explained by lower transaction volumes this quarter compared to prior year, but more significantly due to lower professional services revenue of 0.7 million. As we complete customer deployments and integration work, we expect that total revenue from this platform will decrease. However, the percentage of recurring revenue will increase. Recurring revenue from the unified commerce platform represents $5.9 million, or 63.5% of platform revenue, compared to $5.8 or $57.4 for Q2 last year. As previously mentioned, as customer deployments are completed, the percentage of recurring revenue will increase. For e-marketplaces, generated revenue of $44.7 million in Q2 of this year, which is an increase of 24.1%. compared to revenues in the same quarter of last year of 3.7. The revenue growth in e-marketplaces continues to be driven primarily by the broker forum, which is an electronic parts marketplace where transaction volumes have increased, mainly due to the global supply chain shortages. Turning now to gross margins for Q2 of this year, it was 19.4 million, or 58.3%, compared to $14.3 million, or 56.9% for Q2 of last year. The improvement in gross margin percentage is mainly from lower professional services expenses, which have lower margins than our typical right-of-use revenue. For Q2, total operating expenses were $23.3 million, an increase of 1%, compared to $23.1 million for Q2, of the previous year, which included only one month of Periscope. Q2 2023 had a significant decrease in acquisition-related costs of $4.6 million in Q2 of last year and only $0.8 million in Q2 of this year relating to the sale of InterTrade. The corporation recorded an operating loss in Q2 of 2023 of $3.9 million compared to $8.8 million in Q2 of the previous year. The lower operating loss is mainly due to the decrease in acquisition-related costs, as previously mentioned, offset by higher amortization and depreciation, mainly on intangible assets from the Periscope acquisitions. While net loss was $89.8 million or $2.04 per share, basic and diluted, in Q2 of this year, $85 million of this is the non-cash goodwill impairment charge. Therefore, adjusted net loss, which excludes the goodwill impairment charge, was $4.8 million or $0.11 per share, basic and diluted, compared to $6.3 million, or $0.19 per share, basic and diluted in Q2 of the previous year. Adjusted EBITDA was positive for Q2 at $1.4 million, compared to an adjusted EBITDA loss of $0.4 million in the previous year's Q2, and an adjusted EBITDA loss of $1.1 million that we reported in Q1 of this year. Year-to-date, Q2 2023 positive adjusted EBITDA is 0.3 million compared to 1.9 million EBITDA loss for the first six months of last year. With the sale of InterTrade, our annual consolidated revenue is expected to decrease by approximately 14 million on a going forward basis. With that, I'll turn the call back over to Luke.