OneSoft Solutions Inc.

Good morning and thank you for joining us for OneSoft Solutions financial conference call to discuss its financial results for the second fiscal quarter of 2024, ended June 30th, 2024. On the call today, we have OneSoft CEO, Duane Kushneruk and CFO, Paul Johnson. Following the presentation, there will be a question and answer session. Participants on the webcast may submit a question in writing using the form in the lower section of the webcast frame. Please be advised that this conference is being recorded. Before management discusses the results, I'd like to remind everyone that certain statements on this call may be forward-looking in nature. These include statements involving known and unknown risks, uncertainties, and other factors that could cause actual results to differ materially from those expressed or implied in our forward-looking statements. For caveats about forward-looking statements and risk factors, please see OneSoft's MD&A for the year ended December 31st, 2023 and Q2 ended June 30th, 2024, which can be accessed on the company's profile on CDAR Plus and on the company's website. I will now pass the call over to OneSoft's President and COO, Brandon Taylor.

Thanks, Gayle Ann. Good morning, everyone, and welcome to the call. During this meeting, we're going to provide a very brief update on operations and cover our Q2 2024 results. Then going to spend the majority of this call and discussion around the pending sale of OneSoft to Earth. It was announced two weeks ago to review our rationale and the process that we went through and take Q&A. I have a few remarks before Paul Johnson reviews the financial information, and Duane's going to lead the conversation and discussion about the sale of the company. Then we'll wrap up by addressing investor questions. We are assuming that attendees of today's meeting are familiar with our company, so we're going to dispense with any of the history of the business. However, for those who may want more detail regarding our history and progress to date, You can please log on to our website at www.onesoft.ca. If you want a quick summary of our company's history and progress, review our first conference call on Q2 of 2023 report, the link of which is accessible as shown here on this slide under investor heading and AGM and financial information. Now just a little bit about the Q2 24 Operational highlights. The team has been, product development has been continuing to work on a number of fronts. We've progressed our technology and product roadmaps. We continue to work closely with our customers' implementations and new module rollouts. And then after a long sales cycle, we finalized a SIEM contract with our first South American customer and commenced the implementation with Accenture. who will be trained to support other customers in Central and South America. And then we're really pleased to bring all of our employees together in an in-person meeting in June of this year, which is something we try to do every 12 to 18 months. And then over the course of a few days, we had the opportunity to conduct a SWOT analysis which was really an analytical approach to consider all of the items and tasks that are open and on the table and planned and consider the company's strengths, the weaknesses and opportunities and threats to kind of address those. And then we reviewed feedback that we've been aggregating from customers and then our customer facing employees and where we're seeing any potential need to basically reprioritize our roadmap, et cetera. Putting all of that information together really helped us assess and kind of determine go-forward priorities and alternatives. And part of that feedback went into the process we'll talk about later in this call. This meeting was particularly useful to Gardner, a lot of that valuable, which basically let us finalize what we call our market check, and you're going to see slides related to that. I will now pass the call to Paul Johnson, who will provide a summary of Q2 financial information.

Thank you, Brandon. All figures reported today are in Canadian dollars. I will comment on the graphs in the first column, which portray the financial results of Q2 2024. On a comparative basis, revenue in Q2 2024 increased $609,000 or 24% over Q2 2023. Of our 17 SIM customers, three customers were new since Q2 last year, and they generated $527,000 in new revenue. Fourteen customers generated $415,000 in additional revenue, and the revenue from four customers decreased due to timing changes in their patterns of SIM use. The revenue from our IM operations group decreased $263,000. Looking at the upcoming projects this group has, We believe this is a timing difference and projects to be completed later this year should generate revenue at least equal to that earned last year. Gross profit increased 25% due to the increase in revenue and the gross margin was identical to last year at 76%. Operating expenses have not been pictured graphically in this column, but we comment as follows. Operating expenses have increased $329,000 primarily due to the addition of new staff and an across-the-board cost of living adjustment that saw the salaries of all staff increase 2.5%. We continue to face high demands from our customers for increased SIM functionality, and our addressing that demand through additions to the company headcount are assisting in driving higher revenue. Other expenses increased $203,000, of which the majority portion of this was due to the increase in share-based compensation expense caused by restricted share units granted last year to select staff, which caused this expense line to increase by $289,000. The net loss for the quarter was $615,000 as compared to $558,000 in Q2 2023. Higher staff costs and non-cash expenses absorbed the increase in gross profit and caused the net loss to be higher. I will now comment on the graph in the second column, which reflect the results of the six months ended June 30th, 2024 and 2023. Revenue increased 1,307,028%. Analyzing the revenue increase, new customers generated $941,000 in new revenue and the increased use of SIM by our existing customers generated $732,000 in additional revenue. Similar to the Q2 2024 revenue summary, IM operations revenue was down $210,000 compared to last year, but a number of projects should complete by year-end, which should result in revenues equal to or slightly higher than last year. The company has not suffered any churn in its customer base this year. Gross profit increased by $1,093,000 due to the higher sales revenue and the gross margin increased by 2.2% to 75.6%. The net loss increased by $133,000 on a comparative basis. Operating expenses increased $930,000 in the period. Of this, an increase in staff count and higher salaries for existing staff increased expense by $505,000. Also in 2024, the company incurred $410,000 in gauging external legal, accounting, and tax advisors who assisted management to analyze different opportunities where one soft was the acquisition or investment target. The earth transaction detailed in our press release of August the 12th was one of these and discussion of that is on today's agenda. Other expense rose by $297,000 in this period where higher stock-based compensation was a major contributor to the increased loss. One of the company goals is to generate positive cash flow in the year. Looking at the adjusted EBITDA charts on the upper right-hand side of the screen, one can see that in Q2, 2024, the company experienced a $17,000 adjusted EBITDA loss. And in the six month period in 2024, the loss on the same basis was $261,000. Both results are an improvement over last year and are trending towards the stated management objectives. Next slide. We wish to show this slide as it shows our steady progress of increasing revenue by quarter with the Q2 2024 revenue, which is on the right-hand side of the chart, being the highest column. Over the 32 quarters shown here, we have averaged 13.6% compound quarterly revenue growth. We wish to comment on our cash flow. In the six months ended June 30th, 2024, we point out the significant amount of non-cash expense, which totaled $1,204,000 and which is in near proximity to the net loss. Changes in operating assets and liabilities generated cash of $1,289,000, which was driven by the increase of $1,813,000 in deferred revenue. as almost all our SIM customers pay their annual SIM contracts upon signing their initial contract or upon the anniversary of the contract when the upcoming year's fees are paid. In summary, in the six months ended June 30, 2024, the company generated $942,000 cash, which increased cash balances to $5,750,000 at period end. We wish to make a few comments on the guidance we published in February of 2024. While revenue has increased over last year, there were several delays in the signing of new customers, which included the new customer in South America. Management believes the opportunities it expected to close have only been delayed, not lost, and management believes they should sign new customers in the second half of the year to increase revenue. As well, Our current customer base are adopting new SIM functionality, and this is a source of new revenue. Other customers are expanding SIM usage to additional operating divisions in their companies, while others are increasing their pipeline miles to acquisition. For these factors, management believes the guidance revenue target remains achievable, and therefore revenue guidance is not being changed at this time. In a similar vein, the guidance for net loss and adjusted EBITDA are not being revised provided the new provided the revenue guidance can be achieved this will bolster the company earnings which will drive the achievement of these two metrics i will now pass the call to dwayne kushner to talk about the pending sale of one soft thanks paul good morning everyone i would like to discuss the recently announced transaction with earth

we are very pleased that the sale to earth represents a significant premium to the pre-announcement value of one soft 88 cents per share on a fully diluted basis equates to a sale price of a little over 113 million dollars and this represents a 49 and 42 percent premiums to the OSS market cap and share price respectively. That's based on the closing price on the day prior to signing the arrangement agreement. All of the sale price multiples are higher than median and average multiples that are typical for SaaS companies. Our acquisition price equates to a 10.5X multiple based on trailing or fiscal 2023 revenue. And it equates to a 7.3x and about a 64x multiple of 2024 forecasted revenue and EBITDA. And that's based on the financial guidance we published earlier in the year. The chart on the right displays valuation patterns between January 2018 and April 2024 for various public software companies that generate ARR or annual recurring revenue. So what this shows is that the enterprise value divided by last 12 months revenue multiples, everything peaked in 2021 and have since declined to between a 4X and somewhere around a 7X. And note that these multiples are based on the last 12 months and not forecasted revenues. And again, our number was 10.5x when you calculate the EV divided by LTM. The next slide, another metric we looked at is the median value based on the next 12 months of forecasted revenue. And as you can see, this ranges between 2.6x and 7.4x of forecasted revenue. So the acquisition price based on OneSoft's 2024 financial guidance equates to a multiple of 7.3, which puts us in the top third of the revenue grower cohort. I want to explain how and why we arrived at the conclusion that we did to sell OneSoft to Earth. Management initiated a SWOT analysis about a year ago to research and to determine go-forward alternatives for the company. Our goal was to accelerate revenue and business growth with the objective being to increase shareholder value. We embarked on a market check process which included discussions with private and public companies that included Canadian, US and international companies. We talked to investment professionals to explore the possibility of raising capital to fund accelerated growth. And we considered growing OneSoft as a standalone company and also under an M&A scenario that involved putting several companies together to create a higher revenue conglomerate. We also explored the feasibility of uplisting to a major exchange that could potentially provide more access to capital and better liquidity for shareholders. During our market check, we signed NDAs with four counterparties and we entered into two non-binding LOIs with the most promising candidates. We ultimately concluded that the EARTH transaction offers the best alternatives for all of our stakeholders. Slide 14. There we are. Our market check boiled down to consideration of essentially four alternatives that we investigated. And following our market check research, consultations with our advisors, and assessment of all of the information we gathered and considered, we determined that the sale to earth provides the best go-forward alternative for our shareholders, employees, and customers. This led to compelling reasons to accept the Earth offer. The key benefits for shareholders is that this transaction will provide certainty of outcome with no further risk at a premium to one source value. The pursuit of other alternatives will result in a less certain future outcome with continued risks, uncertainty, of share price and liquidity and dilution for shareholders if a capital raise is done to fund a more aggressive growth plan. Our conclusion to sell the company is bolstered by the third party fairness opinion, which confirms fair value for shareholders. The arrangement agreement we entered into contains procedural safeguards to protect interests of shareholders And the transaction is also beneficial on the go-forward basis for our employee and customer stakeholder groups. The next steps in the process and the approximate timelines are displayed on this slide. Essentially, we expect to conclude the transaction and have shareholders paid out by the end of October. In closing, we respectfully ask that all shareholders vote for this transaction. And with this, we'll open up our meeting for Q&A.

Thank you. Once again, participants on the webcast may submit a question in writing by using the form on the webcast frame. I would now like to hand the floor over to Sean Peasgood, who will moderate the question and answer session.

Thank you and good morning, everyone. Thanks for submitting questions throughout the call. As per usual, I'll try to get to all of them. If we don't have sufficient time, we will get back to you via email. So let's get going. Several of them are similar. So first off, the fiscal guidance for 2024 is a net loss of $435,000 to $178,000. But the first half of the year shows a net loss Does this mean management expects the company to achieve profitability in the second half of 2024? And I guess you can answer that first and then I'll do the follow up.

Paul, do you want to take that?

The observation made is accurate that the company does expect to achieve profitability in the second half of the year, provided the sales forecast that we have occurs. I'll address that point. Dwayne, I'll let you just follow up to that.

Okay. Yeah. The follow-up is why is the sale price so cheap? Okay.

Yeah, I think, Dwayne, maybe just answer the question as to, you know, why are we selling now? I have a number of questions for people, you know, of similar, you know, I think people want to just understand why we're selling now. Some of the questions that are coming in are about, you know, the company's growing, the company has cash, would we need to raise capital? So I think we can cover all that off, most likely on one question.

Okay, the... Really, this boils down to one of two decisions. Either we have to go and raise more capital to accelerate the growth of this business. If we raise more capital, now think back to where we were prior to signing this agreement. We would have been raising capital at a discount to market. Our share price was in the 60, 65 cent range for the summer. So we would have been raising money at a discount to that market. And incurring all the risks that go along with trying to accelerate the business. The alternative here is that we have an opportunity to provide a very, very fair return at a premium, at a significant premium to market. And that's really what this boiled down to. I think the fact that the company continues to do well, if that wasn't the case, our multiple would have been down in the 2x range, not in the 10x range. So that just helped us put a deal together. We also noticed, I mean, it's not surprising that any company who would look at acquiring one soft, they're not going to look at this quarter or the last quarter or the next quarter. They're going to look at these quarters within the context of the past, the last few years, and also what the future few years looks like. And that's what they're basing decisions on, not on the results of a single quarter.

Great. We'll see if some more follow-ups come in on the back of that, but I tried to address that question with a number of people just asking on the timing, and we also kind of went through it in the conference call. I'm just going through here because a lot of them are. Why did you not hire an investment banker to run the process?

We actually talked with a couple of investment bankers and we were involved extensively in discussions with them. At the end of the day, what the investment bankers told us was if we wanted to raise money, we would do it at a discount to market. If we wanted to sell the company, we could expect to get a purchase price that was in line with the market. which is, uh, so just think back to those graphs, I think on page 10, 11 of our slideshow and there we have already done, or we had identified the deal that had already surpassed the median and average. There was really no point in, uh, in hiring a banker to, um, to run the process, which we did. We did it in our own way. We still engaged all of the professional advice that was required. We just chose to do it ourselves rather than hand the project over to a banker per se.

um you know you talked about the company would require more capital and it was you know uncertain in the market to be able to raise that capital so this question is why would more capital be required to accelerate revenue sim has all the essential features it needs and now there are european and south american office american offices open looking for clients i guess i would answer that generally by

stating we identified a large TAM, potential addressable market. We did a lot of research on that in 2023 and updated those numbers and published them in our fiscal 2023 year end. Now, here we are looking at the prize of 300 or 400 million of annual recurring revenue. Here we are a $10 million company. And there is no way we can get to address that market with $5 million in the bank. When we looked at it, suppose we raised $15 million to increase product development, to increase sales and marketing, that would have meant somewhere between a 17 to 20% dilution for shareholders. And that just didn't make sense when you look at all the alternatives. There is also a bit of a changing landscape that we see on the horizon with respect to AI. Things are happening a lot quicker these days than they were five and seven years ago when we started in this industry, when we were pioneers in this industry. And we see other groups who have a lot more resources than we have or that we could get at a reasonable price that we believe will become competitors in the future. So putting all of that together, you know, it makes sense. The decision that we made makes sense. Brandon, Paul, do you have anything to add?

Yeah, maybe I'll jump in here a little bit, Duane, just to add a little bit on the, we have all the features and the growth. So we have 17 customers now. As you onboard these Fortune 500, 100 companies, right, new white space comes out and new customer-specific demands. One of our latest implementations required us to build vendor portal. And that seems to be a pattern as we go during implementation. So we've had to increase the team, and that's why space you want to go get, but you have to go hire people to do that so you don't dilute the development effort on your roadmap. And when we look at what we still have left, and we've been publishing this for some time now, external corrosion, risk management, which is a longer running thread that we know we're breaking in new ground there with probabilistic risk, and geohazards. When you look at these things that we're building, not only with our client implementations that are going and these new products that we still have to get to market, that requires us to do resources. We're expanding internationally, so we put a salesperson in the U.K., we put one in South America, but it's not enough to go actually attack that market. So when we went and did a stack rank and prioritization related to what we have left, that's what Duane's talking about. We want to stay ahead. That's the game and technology as we all know. We could just keep doing what we're doing, which is fine, but we want to be able to make sure that nobody can catch us. That's the game in tech. So that requires that we continually move the technology forward. Hence, we would look at putting a plan together to go get the people and the resources and be able to grow quicker than organically, because it's quite frankly in the US, It's not likely we've been doing really good at 50% growth, but ultimately, unless we break out of that and get into international and other different light spaces, which are not markets we're in today, it's going to be very difficult to maintain a 50% top line growth. I think that's the net of that. And we did that math. And when we looked at that on what that would take, that's what Duane's talking about.

Go back to just some mechanics here. The Canadian dollar has been volatile late. What exchange rate should we use to determine the value of OSFIF shares? So for U.S. investors who hold the U.S. listed stock, what's the transaction price there? How's that calculated?

Sean, I'll take that. Paul, I'll take that question. The offer from Earth is $4.88 Canadian. And when we go through the mechanics at that time, the exchange rate, I believe will be used, the exchange rate of the day will be used to pay US shareholders, the US equivalent of the Canadian 88 cent price.

Why would AI disrupt Or potentially, I guess I'll just read the question. Why would AI disrupt if you have proprietary data? You said as recently as last call, you have the largest pipeline data set. You need proprietary data to train a model. No one else could create a competitive model unless there's something that's changed or something different.

Brandon, do you want to take that? Yeah, I'll take that as best as I can. While we do have probably industry-wide a lot of ILI data, really what you need is other data sets to be able to train. And in AI right now, what we're seeing is these language models are basically starting to take those different data sets and basically being able to basically aggregate those. So we've seen some evidence. nothing out in the market, but even our customers are actually, IT teams are actually starting to dabble in this area a little bit, which would imply to us that as that technology adapts and starts to move faster and more easily for people to basically connect to data sets up, that we have to stay ahead. Hence, it's factored into our roadmap to make sure that we start getting a little more aggressive in Microsoft Copilot and all of the AI models. So we need to hire resources to make sure that we move that forward.

There are a few questions on pricing power and raising prices. Maybe talk a little bit about why you didn't believe you could raise prices. And I mean, there's several questions on this. People just wondering if that could have been an option and if you think that's something that could easily have been done.

Brandon, do you want to talk about that? Yeah, I'll take that one. We've spent a lot of time over the last year on calls like this about, you know, you're not charging enough, why don't you raise prices? We believe that, yeah, in certain scenarios, there's potential to be able to raise prices. We've spent a lot of time trying to normalize our pricing model so it's scalable and repeatable across all the hierarchy of pipeline operators, 1,000 miles up to, you know, 100,000 miles. And then we can basically do consumption economics on that. When we look at that across the board, we don't think that we'd be able to raise prices to the sufficient level that would basically help basically fund us rather than the need to go out and get, you know, 15, $20 million, some number that basically lets us go, you know, really expand quickly. And those are typically built on annual agreements. One of our things has always been customer retention. So we have real practical evidence when we've done some prices that there's been a lot of pushback. And in some deals in our prospect things, we still get feedback that our prices are expensive to some customers, given on where they are within their own digital transformation and SaaS and cloud adoption and stuff like that. So we're still breaking down some of those barriers. So we don't think we're in a position where we can just wholesale say, let's just move it all up to here. When we had 30, 50 customers, maybe that's true. But right now, I don't think that we think that's true without losing customers.

I'll just jump in. This has been a sort of perennial discussion point. And from our perspective, we have pushed pricing to the top of where we think we can. It's obviously in our benefit to receive as much revenue as we can. And I guess the, you know, what we keep hearing, you know, from a small number of people who think that we're underpriced, I guess all I would say is, you know, my view is that these people don't know what they don't know about this operation. And I think we're doing the best job that could be done. from, you know, given the information and the factors that we have to consider.

Next question. You know, since announcing the sale, have you had any inbounds that would suggest another party is interested in paying a higher price or any inbound interests or checks in at all? No. But others could bid, right? People are just asking, like, there is an opportunity for others to be able to bid if they wanted to?

Yes, the agreement provides the opportunity, and we actually, as a board, have the obligation to look at a superior offer. And the agreement, I believe that's filed on CDAR, explains all of the terms and conditions around that.

Okay. A lot of these are omens, not questions. Does Earth have a right to match if someone bids?

Yes.

It has to be a bona fide offer, and Earth does have the right of first refusal.

Anyone has any other questions they can put in here? Many are the same. I think we've, I mean, people are asking about how we arrived at the valuation. I think we've covered that off.

Good question, maybe, Sean. What's been the reaction? We've overwhelmingly got very positive reaction on the multiples and the transaction stuff. So just, I mean, I think that through some of these questions we're looking at, we'll want to probably respond. Hopefully this information we're providing helps, but just generally the investors we've talked to have been pretty positive from our perspective.

Here's another one. You mentioned a concern about losing customers if you push pricing. Looks like you said you did a lot of studying of the topic. Can you describe your analysis about what the alternatives are for a customer who is presented with a zero to 50% increase in pricing? I mean, same questions around pricing. I don't know if you've already covered it.

Yeah. What's the question again?

Really just what you, like, you already mentioned you arrived at the, you know, that you didn't want to lose customers by raising prices. So I think this person is just trying to understand, you know, if a customer is presented with a 50% increase in pricing, you know, if you think they would walk away.

Depending on the customer, the bigger customers, you know, we have innovation escalators already built into our SaaS agreements. And so those are negotiated, you know, typically in a three to five year, and even then there's pushback on those. So it would be, we started doing 50%, I suspect if I'm noticing anecdotally, but that yes, we would have severe pushback. Um, if we even got close to something like that. This is a really small industry as well. Uh, very large, but small, small number of operators at the top end of the scale. Same conferences, they talk. So you always have to consider those types of things. This isn't a B2C, as we all know, right? It's B2B. And they very much have an awareness across what that looks like. If things 50% went out, there would be work quickly, but there'd be some concerns, I think, among our customer base for sure.

A couple more come in here. What happens if you don't get the majority of the minority? Well, I guess maybe talk about that and then someone saying in the event this doesn't go through, what are the financing options you would be considering? So maybe talk about, have you spoken to any big shareholders? What you're hearing from the largest shareholders? And it sounds like people just wanna understand what would happen in the case of if enough shareholders didn't vote for the transaction. I think maybe give some people some context about who you've been talking to and if you can.

I'll jump in here. So I've talked to a number of the major shareholders and we have overwhelming support for the transaction. For those, you know, from groups I've talked to, there are some some shareholders who have contacted us who are not happy with the price. And so we understand that there's some disagreement there, but from our perspective, we have good confidence that this deal is gonna go. Now, having said that, we're not going to take anything for granted and we're going to do everything we can to help shareholders vote. for the transaction and so we're going to push that. If this deal does not go, I have no prediction at this point. The business will continue to run and what we will do is sit back and regroup and figure out next steps. That's really as far as we've looked at this point. I think that from our perspective, we're planning our future with the assumption that this deal will be accepted by shareholders. And I just, you know, that's really it.

I have no idea if this is right or not, but Earth is a small company with about 100 employees versus OneSoft at about 50. How do they give you more resources?

I'll take that. So Earth is actually 153 employees. One of the things that was attractive to us, given our development roadmap, is they actually have offshore development of 83 different developers that can be ramped up to whatever. So that basically gives you capacity to basically start. And it's something that we've looked at. As well, we have an offshore team, but we'd really need to ramp that up, really start recruiting actively to make sure that we can get through our roadmap here. And we want to do it faster, right? It's about, like Duane said, accelerating the business to make sure that we just keep that lead from a technology perspective. But that would happen on day one that infrastructure is in place. So there's about 153 employees today. over 200, and obviously capital resources to go along with it.

I would just add to that.

Sorry, Dwayne. Just for listeners on the call, there are a bunch of questions about Earth. Earth is not one soft, and so we're not at liberty to answer all these questions. So we'll refrain from providing too much information about Earth. If you have questions about that, you can look it up on the Internet. I don't think we should be answering those.

Sorry, I cut you off, Dwayne. Go ahead. Yeah, that's okay. Go ahead, Sean. Next question.

I think we have one more. I mean, a lot of these are the same, so I've been really trying to work through them. And we will review them after, and if there's anything here that needs to be addressed. feel free to definitely reach out directly to myself or anybody else. And we also have your emails and we'll get back to you because some of these are comments. I guess this last one, because I didn't ask it properly, has been asked again.

Sean, did we lose you?

His line is still connected, but there is no audio coming from it, obviously. Does anyone know which question he was about to read? Would you like to read it in? No.

We're looking at a whole bunch of questions here, and a lot of these I think were asked prior to us doing our presentation, so I think we addressed most of this in our presentation, which will be posted after this. You can go back and review the slides and look at the metrics and so on.

Sorry, not sure what happened there. I just dialed back in. I'm not sure what happened. I think I just caught the tail end. So I think we're probably finished here. We'll follow up with anybody who has put something in the question box that we have not been able to get to. Please send any emails directly to anybody on the slide and I'll pass it back to Dwayne for closing remarks.

Well, that's it. I'd like to thank everyone for submitting questions and for attending this meeting. If you think of anything else after the call or if we've left anything unanswered, please feel free to reach out to us, reach out to me using the contact information on the screen. And thanks for your time this morning. I'll pass the call back to management or back to... Gaylene.

Thank you. This concludes OneSoft Solutions second quarter 2023 conference call. Thank you for participating and have a pleasant day.