Earnings Transcript for QUISF - Q3 Fiscal Year 2023

Operator: Good afternoon and welcome to Quisitive Third Quarter 2023 Earnings Conference Call. Joining us for today's call are Quisitive’s Chief Executive Officer; Mike Reinhart; and Chief Financial Officer, Scott Meriwether. Following the remarks, we will open the call for your questions. Before we begin today, I'd like to remind everyone that during the conference call, management will be making statements that contain forward-looking statements within the meaning of applicable Canadian securities legislation. Please refer to the company's forward-looking information disclaimer statement which can be found on the notice for this call, the website and the third quarter 2023 earnings release. Now, I would like to turn the call over to Mike Reinhart. Sir, please proceed.

Mike Reinhart: Thank you, operator and good afternoon, everyone. We appreciate you taking the time to join our Q3, 2023 earnings call. Let me begin by addressing the announcement we made yesterday regarding the sale of PayiQ to Fulcrum IT Partners. Our decision which I will detail shortly, comes as part of a strategic review process over the past few quarters by management and the Board, including the work in partnership with William Blair. This comprehensive evaluation aims to realign our resources and strategies to maximize shareholder value. It comes as a necessary step, shaped by our understanding of the PayiQ business' needs and the current public market environment. PayiQ has arrived at a critical point where consistent capital investment is essential for growth. Our journey towards commercialization has seen remarkable advancements, notably establishing direct connections with Visa and Mastercard. The next phase crucially involves investing in capital for acquisitions, focusing on acquiring companies that offer technological advancements, improving connectivity and scalability. Such strategic acquisitions are key to accelerating PayiQ's growth trajectory. In the current public market environment, such levels of investment and execution pose significant challenges for Quisitive. We recognize that to unlock the potential of PayiQ, a different path was needed. Under the agreement, Quisitive will transfer ownership of PayiQ to Fulcrum in exchange for an equity stake. This allows us to not only benefit from the financial returns as PayiQ grows in the market but also to maintain a connection with its future development. The divestiture reduces our annual capital allocation by nearly $12 million, a strategic move to optimize our financial resources and focus on key growth areas. This transition allows us to channel our efforts and investments more intensely into the cloud solution business, reinforcing our core competencies. The partnership with Fulcrum will include a close strategic alliance to support the commercialization of PayiQ, as well as leverage Quisitive's partnership with Microsoft and our Microsoft IT solutions capabilities, creating incremental synergy between Fulcrum's IT services companies and Quisitive's cloud solutions business. The BankCard business will be retained as our focused Payments division. This step is the first in our strategic review process, marketing a move towards greater focus and strategic alignment. It's a decision that we believe positions both Quisitive and PayiQ for greater success in the future. Next, let's talk about Q3 performance. During the quarter, our company navigated a rapidly changing market environment, building upon the challenges encountered in the second quarter. Amidst these obstacles, our resilience and strategic flexibility have shown through. A highlight has been the performance of our Cloud Solutions sector which stood out as a pillar of success, showcasing strong performance and significant recovery. While we take pride of the notable improvement seen in our Cloud Solutions business during the quarter, it's important to acknowledge that this period also brought some challenges in our BankCard business due to market conditions starting in the second quarter and persisting into the third which had a tangible impact on Q3 results. On a positive note, the BankCard management team has shared directly with me that they feel like the business has stabilized exiting Q3 and anticipate steady performance in Q4. On the sales front, the team is working to deploy new SMB market products to look for ways to increase merchant applications to drive volume. Scott will address the financial components and key payments metrics in more depth. But from a strategic standpoint, I plan to work closely in collaboration with the BankCard leadership team to fortify the business in aspects we can influence and tailor our strategy to align with the prevailing economic environment. Now, on to the Cloud business. In Q3, our Cloud division demonstrated a strong return to margin growth, a testament to our cost -- or to our strategic cost-saving initiatives. We're witnessing a promising rebound in this sector. For over 6 months, sales have been consistent, underscoring the robustness of our fundamental business proposition. A key factor has been our team's rigorous approach to financial discipline and cost efficiency, leading to improved margins and utilization in the recent quarter. I'd like to express my gratitude to the entire Cloud Solutions team and their leaders for their unwavering commitment and contribution to these enhanced outcomes. With our prudent management and cost reduction strategies, we expect these positive trends to persist, laying strong groundwork for sustained future growth. Scott will elaborate further but it's important to mention that while we're on a positive track, our revenue-generating capacity has been impacted by this year's cost-cutting measures. Therefore, year-over-year comparisons don't fully represent our progress throughout the year. Implementing strategic expense management was essential for enhancing our operational efficiency, especially considering the increased challenges we faced this year. Nonetheless, a quarter-over-quarter analysis reveals a boost in both gross profit and adjusted EBITDA margins. Our recurring revenues now represent 37% of cloud revenue, up from 31% last year. This trend bolsters our confidence in the financial stability we've achieved and sets a solid foundation for the business. In our sales and marketing efforts, we've been actively engaged in advancing our pipeline, establishing Quisitive as a reliable partner for our clients and aligning with Microsoft's key initiatives to boost sales. In the third quarter, we closed 6 large deals, each providing over $1 million in contract value and the total contract value of our Top 5 deals exceeded $10 million. Notably, there are several encouraging trends within these figures. While we continue to thrive in specific sectors like the health care and state and local government, our top deals are spread across various industries, including health care, state and local government, oil and gas and technology. This diversification shows the effectiveness and broad reach of our go-to-market strategy. Moreover, these significant deals underscore the success of our Cloud Solutions approach. Our customers are increasingly seeking service providers capable of offering comprehensive integrated services across various domains to facilitate a complete cloud transformation. This quarter, our commitment to excellence was further underscored by the notable achievement of securing the information protection and governance and service advanced specializations with Microsoft. The recognition highlights our commitment to staying at the forefront of innovation and providing best-in-class solutions as well as dedication to our partnership with Microsoft. In the quarter, we are proud to collaborate with Microsoft as a preview partner, leveraging Microsoft fabric for health care data solutions. We implemented the new health care data solutions in Microsoft Fabric to the Ontario Workers Network and Ottawa Hospital, among others within the network. And our efforts and positive results were showcased by Microsoft as a featured case study. The continued robust demand in this sector underscores our success in meeting the evolving needs of health care providers and we are committed to leveraging our trusted partnership with Microsoft to continue exploring new collaborative ways to advance and innovate in pursuit of improved patient experiences and health outcomes. As you might be aware, Microsoft is at the forefront of the AI revolution, showcased by their industry collaborations and advancements in products like Copilot and Azure AI. The strategic emphasis on AI is a significant boost for our pipeline as we align our services to this wave of innovation. We are confident that the surge in AI will spur demand for our core services as customers need solid IT infrastructure, data management, application development and modernization to effectively adopt AI and harness its benefits. Most businesses currently lack the necessary foundation to integrate AI meaningfully. So, we've positioned ourselves as a strategic partner to guide them into this new era of enterprise technology. Recently, we organized a 4-city event series, introducing AI concepts which received considerable positive feedback from customers, highlighting the need for education and implementation bridges from their present to an AI inclusive future. We're fully aligned with Microsoft's AI vision and are focusing on the offerings and technical expertise required to be Microsoft's most effective partner. Meanwhile, we continue to concentrate on our core services to prepare customers for future innovations. While our team consistently delivers strong performance, important to remember that due to the holiday period and associated paid time off, Q4 traditionally experiences a slowdown in the Cloud Solutions sector. Despite the seasonal trend, we are committed to seizing every available opportunity and maintaining solid performance for the rest of the year. Before I pass the mic to Scott, I recognize that this is our final call of the calendar year and wanted to provide a brief reflection. 2023 presented new and real challenges to our business but we've demonstrated adaptability and resilience that have generated measurable outcomes. In the Cloud business, our strategic cost reduction and careful management and collective efforts of the team have honed our execution and strengthened the business. You'll see the stabilization in the financials from Scott shortly. In Payments, the sale of PayiQ is the result of a careful strategic review of the business and is an incredibly positive next step in the platform's journey. I feel proud of the contributions Quisitive has made to get PayiQ to this point. We look forward to the closing of that deal and in the future of the platform as it transforms the payments industry. Our BankCard business continues to be a significant asset and look to leverage this business to help drive future value. Considerable effort is still required and we are committed to further investing in our sales and marketing initiatives to enhance our business and achieve robust growth. We are digitally monitoring the upcoming market trends and staying prepared to adjust our strategy accordingly. However, I believe that our activities over the past 1.5 quarters has strategically positioned for stability, innovation and future growth. Thank you all for joining us as shareholders and supporters. I'll turn it over now to our CFO, Scott Meriwether, to discuss Q3, 2023 financial results. Scott?

Scott Meriwether: Thanks, Mike and thank you to all who are joining us for today's call. To reiterate Mike's message from before, we are very proud of the Q3 results and the turnaround was accomplished within our Cloud segment. Our revenue within cloud has stabilized and we have made appropriate changes to our cost structure to align to market demand and to return to our expected margins. The relative strength of our cloud performance was somewhat offset by reductions in payments as BankCard experienced greater operating costs and PayiQ expenses increased. We will break down the impact of PayiQ and our move of our future investments in the platform in later discussion. As a result of the revenue-producing headcount reductions we made, year-over-year comparisons aren't indicative of performance. Quarter-over-quarter changes are a better to picture the company's progress, so we will present better from this discussion. Moreover, Q3 of 2022 was a record quarter for Quisitive which further impacts meaningful comparisons. Revenue in the third quarter of 2023 decreased 2% from the prior quarter as cloud revenue increased quarter-over-quarter and payments revenue decreased quarter-over-quarter. Comparing to the prior year, revenue decreased 9% to $44.4 million in Q3 of '23 from $48.8 million for Q3 of '22. The prior year trends here are opposite of the quarter-over-quarter trends as cloud revenue was the primary driver of the year-over-year decrease, reflecting overall market trends and our reduced professional services headcount. Payments revenue in the third quarter was up more than 6.5% year-over-year. The most indicative financial metric that best depicts the progress made during the third quarter is gross margin. Overall, gross margin was up almost 10% for Q3 of '23 from last quarter, reflecting the cost structure changes made within the Cloud segment. Gross margin as a percentage of revenue increased to 41.3% in Q3 of '23 from 36.9% last quarter. Overall, gross margin decreased 10% to $18.3 million in Q3 of '23 from $20.3 million in Q3 of '22. Gross margin as a percentage of revenue was more similar, albeit slightly less in Q3 of '23 at 41.3% compared to 41.6% in Q3 at '22. Adjusted EBITDA increased 61% from the prior quarter to $7.0 million for Q3 of '23 from $4.4 million for Q2 of '20 -- or Q2 of 2023. Adjusted EBITDA as a percentage of revenue was 15.8% for Q3 of '23, an increase from 9.6% in Q2 of '23. Compared to the prior year, adjusted EBITDA decreased 7.7% to $7 million for Q3 of '23 from $7.6 million for Q3 of '22. Adjusted EBITDA as a percentage of revenues was 15.8% for Q3 of '23, an increase from 15.6% in Q3 of '22. We'll now dive in further on the specific performance of our segments. Revenue in our Global Cloud Solutions segment increased mildly, approximately 1.5% to $30.7 million for Q3 of '23 from $30.2 million in the prior quarter. Revenue from the Cloud segment has stabilized over the past 2 quarters and we expect similar revenue trends in Q4 after adjusting for the normal holiday seasonality. Our gross margin within cloud was a record 43%. This was despite the extra staff costs we carried in July prior to the staffing changes. Our professional services teams have been running at high utilization ratios as we overcame the prior quarter's weakness. Our teams have leaned in and produced a very strong quarter. We have some outstanding team members and we're thankful for their commitment to quickly ride the ship after Q2. Going forward, we expect our streamline cost structure to continue to produce strong gross margins. We will need to further invest in our AI teams and sales expense in FY '24. So, we don't expect our gross margins to grow in FY '24 from the current run rates. The Cloud segment's adjusted EBITDA after the allocation of corporate costs was $5.7 million in Q3 of '23 compared to $2.9 million in Q2 of '23. EBITDA margin increased 18.7% in Q3 of '23 from 9.6% in Q2 of '23. We removed non-global resources as part of the staff reductions we made to start August which had a significant EBITDA margin impact. We also focused on cost containment in Q3 and as a result, produced a very strong EBITDA quarter. On our last earnings call, we noted that we believe we had brought our cost structure back into line and that we have set the company on proper footing. I believe the Q3 results speak to the success of those efforts. Pivoting to the Global Payments segment. Revenue increased over 6.5% to $13.7 million for Q3 of '23 from $12.8 million for Q3 of '22. However, revenue was down 9% from Q2 of '23. Card volume on our direct portfolios was down 4% year-over-year. The revenue growth was driven by the volume growth on our third-party revenue streams which grew to $157 million in Q3 of '23 from $76 million in Q3 of '22. When combined, our total volume grew 3.5% in Q3 of '23 over Q3 of '22. On prior calls, we have noted that these third-party portfolios are more seasonal in nature. We saw a decrease in the charge volume from $204 million in Q2 to $157 million in Q3 and we expect further decreases in Q4. Last quarter, we noted that Q2 of '23 included some one-time residual expenses of BankCard that reduced gross margins from historical levels. The gross margin percentage of BankCard was 34% for Q2. Gross margin returned to 38% in Q3, in line with our expectations. Adjusted EBITDA for our Payments segment decreased to $1.3 million in Q3 of '23 from the $1.4 million recognized last quarter and the $2.9 million recognized in Q3 of '22. The decrease reflects greater expenses at PayiQ, a larger allocation of corporate expenses and reduced performance at BankCard. Before the allocation of corporate costs, BankCard contributed $3.9 million of EBITDA in Q3 as compared to $4.1 million in EBITDA in Q2 of '23 and $4.7 million of EBITDA in the prior year or Q3 of '22. We incurred almost $0.5 million of one-time expenses in Q3 of '23 that impacted the quarterly results. EBITDA for the Payments division includes spending on the PayiQ platform which reduced Payments EBITDA by $1.8 million as compared to the $1.6 million in Q2 of '23 and $1.6 million in the prior year or Q3 of '22. We noted on the last earnings call that our staff reductions in August and we expected Q2 and Q3 of '23 to have similar EBITDA impacts. Ultimately, we expect our quarterly EBITDA losses from PayiQ will be approximately $1.5 million in Q4 and this could vary if the sale closes prior to December 31. To reiterate prior points, PayiQ will be removed from our results in FY '24 which will add back approximately $6 million of annual EBITDA to our consolidated EBITDA. From a cash flow perspective, another $5 million to $6 million will be added back in FY '24 from the reduced CapEx spending on PayiQ. We believe this will strengthen our balance sheet as we move forward. One separate administrative point related to the income statement and the sale of PayiQ. After November, we will no longer have minority interest. So, Q4 of '23 results will be the last time that minority interest will be reflected on our income statement. Moving to the balance sheet and cash flows. At September 30, we had $71 million of term loans outstanding and $5.6 million of cash on hand. As of September 30, our total leverage ratio was 2.6x. Our quarterly debt paydowns were $2.4 million. Cash flows from operations in Q3 of '23 were $5.2 million, an increase from $3.0 million in Q2 and $2.3 million in Q1. Our cash flow used in investing activities was $2.0 million, similar to the $2.1 million last quarter. These investments were primarily driven by investments in PayiQ. CapEx is expected to decrease below $1.5 million in Q4. After the sale of PayiQ, we expect CapEx to run closer to $1 million to $1.5 million annually at our current run rate, depending on future investments that we choose to make. One item to highlight on the balance sheet. All of our debt is classified as current at September 30. During our review of some legal agreements in October, we found a default provision in a contract that triggered a cross default provision in our credit agreement. We brought this to the bank's attention and subsequently obtained a waiver for the default. But however, we did not have the waiver in place at September 30. So, our entire credit agreement balance is classified as current at September 30 under IFRS rules. Our debt will go back to its traditional short-term and long-term classification as of October 1. Our working capital deficit as at September 30, after adjusting for the debt that will be reclassed back to long term on October 1, was $7.4 million. We did not make any earnout payments in Q3. We continue to have $10 million of projected earnout payments and short-term liabilities on the balance sheet at September 30 related to the BankCard earnout. Of this $10 million, $5 million will ultimately be paid with equity for the contractual terms of the purchase agreement. There's another $2 million in accrued liabilities related to the MazikCare earnout. Quisitive has discretion on how it will make that payment in cash and equity. As a result, our working capital deficit at September 30 of $7.4 million as overstated includes earnout amounts expected to be paid with equity. The current weighted average interest rate on our term loans is 8.12%. Q3 brought several changes to Quisitive. Given the strength of cloud, the Q4 holiday seasonality, the change to PayiQ and some of the related expenses related to the sale and some softness we have seen at BankCard, we are updating our Q4 guidance as follows. Revenue for Q4, a low of $41.5 million to a high of $43.5 million. EBITDA for Q4, a low of $6.75 million to a high of $7.75 million. This concludes our prepared remarks. Thank you all for your time this afternoon. We're now ready to open the call for your questions. Operator?

Operator: Thank you. [Operator Instructions] Our first question will come from the line of Christian Sgro with Eight Capital.

Christian Sgro: I'll ask both questions today on the PayiQ business and relationship going forward. First, on the cost side for Quisitive. You guys quantified the $12 million of capital allocation annually. What's the path to realizing that savings? Is there a bit of a step function through Q1, Q2? Or is the headcount and the cost sort of moved over on day 1? Like how would you think about the margin progression through the year?

Scott Meriwether: Day 1 savings. So that $1.5 million on average of EBITDA burn per quarter should begin on January 1 and the CapEx should decrease to 0 as of January 1. They are taking -- the buyer is taking full responsibility for PayiQ as soon as close happens. So, assuming that's a 12/31 close, if not before, you'll see an immediate impact and immediate lift in our financials.

Christian Sgro: And the second question will be more on the revenue side. Could you talk a little bit more about the continued relationship with Fulcrum and the PayiQ platform? And then talk a little bit about the earnouts at the end of the 3-year period and your ability to achieve those full earnouts?

Mike Reinhart: Yes. So first, just relative to the way the relationship has evolved and there's multiple facets to it. Obviously, Fulcrum has a large portfolio of IT services companies and we've had ongoing discussions and interactions with them and actually are doing some joint sales activities with them, leveraging our Microsoft capabilities to go to market together with them. So that's been in flight and been something we've been activating will continue to expand and invest in. As it relates to PayiQ, similar to what we've discussed before, we'll look to use our Cloud Solutions sales engine to be able to be a reseller of the PayiQ platform as they activate and go-to-market in bringing those things together. So, you'll see us working through our partnership model as a joint resale relationship, leveraging our Cloud Solution services back into their customer base and us doing the same with our capabilities, bringing in PayiQ as it is commercialized into our customer base, similar the way that we had thought about it when it was part Quisitive. On the revenue side, there are step functions related to revenue targets that will trigger over each year, the earn-out payments as described and it's a step function year 1, 2, 3 with the value of the earnout as well as the target increasing each year knowing that year 1 with PayiQ has a much smaller revenue contribution opportunity based on first completing commercialization, things like that and stepping up from there. And each of those will be measured as part of volume flow and revenue generated on the PayiQ platform through the various forms that may happen, whether it's us selling to our customers, whether it's them selling into their retail customer base which Fulcrum has a big portfolio of retail customers that are future targets, as well as one of the key things that Fulcrum is in a position to do that was difficult for us as described in our commentary, both yesterday and today is doing aggressive acquisitions in the payments space, looking to acquire gateway platforms with volume and acquiring potentially other ISOs and things like that to build scale within their portfolio of payments to create volume. And all of that revenue that flows through the PayiQ platform as they bring it to life, we get credit for as part of that earnout structure.

Operator: Our next question comes from the line of Rob Goff with Echelon.

Rob Goff: My question would be with respect to your backlog or your pipeline, could you give an update on where that stands? And if there's any crystal balling in terms of where you do see the momentum picking up on the cloud side? Is that something you won't know until January?

Mike Reinhart: I mean we obviously, have backlog. We don't report backlog metrics. We're working to benchmark those things as we get more mature in our processes. But nonetheless, as I mentioned, we're starting to see some of the larger deals, if you remember back earlier in the year, in particular, Q1, Q2, where we talked about some of those larger deals deferring. Part of the commentary I had today was some of those larger deals coming to life and total contract value of $10-plus million on some of those deals in the quarter. So, the good news, we're starting to see some of that larger deal size which is important to creating meaningful backlog. We've got some long-standing customer relationships that we're doing the annual renewals that occur here in the month of December typically that we're looking at and seeing those renew consistent with what we've had in the past. So, all of those things are positive signs. If you look around and you follow any of the other major players, they're all talking about the first half of next year, continuing to have some softness. So, we're not planning significant growth through the first half of the year but we are seeing the ability, as we've talked about to consistently maintain our revenue streams and we think there's opportunity of growth. We do believe that all this AI momentum that Microsoft is doing will start to create meaningful opportunity in the back half of next year. We're starting to see some of that already materialize in conversations with customers and things like that. So again, our plan is for modest growth in the first half of the year and see demand, again, with sizable deals starting to come together and getting much better at both identifying and delivering those and then building momentum as we go through the year.

Rob Goff: And perhaps first, Scott, could you give us a sense for the ebbs and flows within the working capital components, noticing that your prepaids were up Q-on-Q, accounts payable drawn down? Are these ongoing trends or may just flow back the other way in Q4?

Scott Meriwether: Nothing specific to note as far as anything there other than it being just normal seasonality. So, there's nothing core changing within the business. I think you'll see us maintain. Lot of that just has to do with timing and where payment schedules fall at the end of the month and where it falls in our weekly payment time. So, I wouldn't project -- take anything specific out of those trends. I think we'll stay within our normal run rates that are kind of average out over time.

Operator: Our next question comes from the line of Jerome Dubreuil with Desjardins.

Jerome Dubreuil: So, you've been very nimble in addressing the cost base of the company to kind of match the revenues there. When we start seeing more growth coming back, do we need to see costs going up maybe before we see those revenues go up again or this can be done pretty much at the same time?

Mike Reinhart: We're certainly looking, as Scott referenced in his commentary about -- we anticipate making investments in sales and marketing, not significant but there will be incremental investments in some of the savings from the PayiQ operation will get allocated to help drive some of that investment to drive sales and marketing across our business to help build the momentum to that back half of the year. Obviously, you don't make an investment in sales and marketing and have it return immediately. I wish that were the case. But -- so we'll -- you'll start to see some of that come in, in Q1 and Q2 to drive that growth as we move to the back half of the year. It will be modest investments but there will be some of the reallocation of PayiQ savings to that process on both the cloud side as well as the BankCard business.

Jerome Dubreuil: And then again, something that Scott has mentioned but just maybe some more color on this one. In terms of the CapEx reduction or the free cash flow reduction, the second $6 million for PayiQ. So the first $6 million is on the EBITDA side, you provided kind of color on this one. For the second one that almost matches all of the CapEx you have been spending over the years. So, what's left in terms of the CapEx investment? I think you might have mentioned $1 million to $1.5 million but just if you can clarify that?

Scott Meriwether: Yes. I mean there's some mild PP&E that comes with computers and furniture and those kind of things but that's a very small amount, $100,000 a quarter or less. The rest of it is really investing in our other proprietary products within cloud. Specifically, the MazikCare product has been one that has led the way. And that will ebb and flow based on what we think we need to bring to market, customer demand. And that will be the primary driver for us in FY '24 is investment in that product and/or any other products that we just think are opportunities for us to develop as we move forward. But historically, looking at the numbers for the last few years, it has been dominated by the PayiQ spending. And so this frees us up to make some more of those investments as we see fit and as we see market opportunity but our CapEx spending will decrease dramatically as noted.

Jerome Dubreuil: And then last one for me. There's been a lot of action in your Payments division over the last couple of months. Should we expect that the operations are running smoothly now?

Mike Reinhart: Yes. I mean the business has been operating, I mean, obviously, the PayiQ has been operating independent of the BankCard business until that commercialization occurred anyway. So, the BankCard team and management team continues to operate the business, almost daily conversations recently. We've had lots of good discussions about the business giving us update. So, the team is working hard to help us drive the business. And everybody is professional about that and doing our jobs and we're working together to drive value in that business.

Operator: Our next question comes from the line of Stephen Boland with Raymond James.

Stephen Boland: Scott, just the guidance you gave is -- I apologize, I'm just trying to go back to my notes. For Q4, is that guidance down from the previous guidance that you gave, I thought you were more in the 46 to 48 [ph] for Q4 in terms of revenue and now it's down in the low-40s. Did I misread that or do I have that [ph]?

Scott Meriwether: You're correct. A lot of -- some of that was driven by just some of the Q4 seasonality that we're expecting in the cloud side. Our margins have held and are stronger than where we had originally projected. We have a slight -- I'll come back to revenues, we have a slight pullback in the EBITDA numbers just based on -- driven some by that revenue but then also just based on some of these expenses that we see that we're going to have related to a lot of the activity we've had. But back to revenue, some of that is cloud driven. And then some of it is also due to some softness we've seen in BankCard. The growth rates we've been experiencing over the last several quarters are leveling out. And then we are seeing some attrition on some of that third-party seasonal revenue that is going -- is trading more aggressively than what we had in that last projection. And so we felt the need to update that range. So, we brought revenue down more but we believe it will be at higher margins. So, while we did bring EBITDA down, we did not bring it down as aggressively.

Stephen Boland: I guess the second question I have is definitely on the BMO loan agreement, the classification from long term to short term. I think that reverses. I'm just trying to get an idea of what is the -- what is your required payback on the BMO facilities or any of the debt heading into 2024? Like I know the number is $70 million, something like that. So...

Scott Meriwether: We paid down a $2.4 million pay down every quarter. It's -- that's a static number and has been that number for some time now. So, that's our -- that $2.4 million is our pay down every quarter through the life the loan.

Stephen Boland: So basically, some of that language in there about the waiver and all that, that has no impact in 2024 in terms of them calling debt or facilities or things of that sort? The $2.4 million per quarter is what is required from your point?

Scott Meriwether: Correct. That's no change from prior quarters or going forward.

Mike Reinhart: It literally was an issue for one day.

Scott Meriwether: Yes. The labor -- we will flip back to the historical presentation between short and long term on October 1. We call it a contractual thing and just had to bring it to everyone's attention because we noted it but let's call it more of a legal drafting issue than anything else that we thought. But that said, because of IFRS rules and the timing of when it was caught, it caused some noise in the balance sheet but everything will return to its historical presentation within the next quarter.

Stephen Boland: I'll sneak one more in. Just on BankCard. So, this is maybe a little bit puzzling. As you sold PayiQ, part of BankCard and getting into the ISO business was to funnel merchants over to PayiQ with that as part of another organization. Is the incentive still there at the BankCard level to move clients over to PayiQ? I mean I presume they could still go out and find their own payment processors or use the existing ones that they have. So, is that still one of the strategies to basically get more business into PayiQ going forward?

Mike Reinhart: Yes. I mean, obviously, as Quisitive is now a shareholder in Fulcrum and their payments business and have opportunity for earnouts and things, we're obviously as a group of shareholders incented to drive volume. So, as the commercialization occurs, we would still look to participate as part of that partnership to do that because it would be mutually beneficial to us as organizations from both our current preferred share position as Quisitive entity as well as the opportunity to leverage earnout.

Stephen Boland: And BankCard, as I think you've said it tonight and last night is still part of this ongoing strategic review in terms of there's still many possibilities or several possibilities that you may do with that entity? Is that a fair read?

Mike Reinhart: Nothing specific about that entity other than we continue to look at the company and the assets the company has and making sure that through that strategic alternatives evaluation, we look at the best way to unlock value for the company, creating growth and activating value is what we'll do. And that's what management board and the outside advisors with William Blair are helping us work through.

Operator: Our next question will come from the line of Gavin Fairweather with Cormark Securities.

Unidentified Analyst: This is Graham [ph] on for Gavin Fairweather. So, just back on the BankCard business, I was wondering if you guys could maybe give a bit more color on your sort of short-term but as well like the longer-term strategy of the business. Like how you guys are going to reaccelerate growth longer term, assuming that you guys don't sell this part of that strategic review?

Mike Reinhart: Yes. I mean -- so aside the strategic review kind of thing, we had good discussions today with some of the members of the BankCard team talking about kind of go-to market. There's some new offerings and we'll get more detail on that but they're rolling out with our sales team, some new product offerings in the terminal devices, cloud-based terminal devices, some new product offerings that they're taking into the SMB market that complement and arm their sales team. They'll actually be deploying that to their sales team this weekend. So as part of that, creating new offerings and bringing those to market, looking at ways to -- I know they discussed with me as well, some things they're working on around an agent channel and how do they better leverage agent channel to help complement sales. So, in that whole payments universe, the ISO ecosystem, they're doing the kinds of things we're working together with them to activate those channels independent of the PayiQ and always have been about how to go drive merchants. They've got their direct sales source that continues to work and they're arming them with new tools to go and look to capture applications and drive increased volume and do those things as well as doing some things from an agent side that maybe they haven't emphasized as much in the past. So, we'll continue to look at those opportunities again, to continue to drive sales. And there's some other industry things that we'll look at. As you know, we've got some industry concentration and the team has been looking at some different areas that we might be able to drive some of the unique capabilities from an underwriting and risk management perspective that have always been part of their core DNA. How do we really continue to enhance those and look at other industries that we could potentially drive momentum in. Continue expanding banking relationships is a big part of that and some discussions we've had on that front as well. So again, all those things continue in motion and exploring them. And the team has been working to kind of ideate through some of those things, especially as we begin to move into the New Year and we'll be putting together kind of our game plan for 2024 and working collaboratively as I outlined, to put that thought process together and go-to-market.

Unidentified Analyst: And then just one quick one on the contingent consideration for the MazikCare and BankCard. You guys might have answered this on the call, so I apologize in advance. But can you maybe just give a bit more clarity on the timing of those? Are you expecting to take them in Q4?

Scott Meriwether: Our expectation there is, as debt covenants allow to get that paid. So, our goal is to do what we can to get those paid as much as possible in Q4. Otherwise, if it progresses beyond that, we'll pay them as soon as we can given the credit agreement constraints. The Q2 weakness we had put some limitations on us. So, very happy about what Q3 has done. The sale of PayiQ further frees up some available cash for us and some pressure underneath those covenants as it relates to some of our fixed charges. So, we're working with the bank constructively right now to how we're going to treat everything. So -- but we remain committed to get those paid as quickly as possible.

Operator: Our next question will come from the line of Robert Young with Canaccord Genuity.

Robert Young: Could you maybe give a little more color around the gross margin improvement quarter-over-quarter, year-over-year? Just what is -- is that driven mostly by the utilization? I think that's what you've said on the call. Is there anything else in pricing? The 6 large deals, is there something in there? Is there any mix shift or anything that would be a contributor? Or is that really just utilization?

Scott Meriwether: It's two factors, Rob. One is recurring revenue has increased as a percentage. And so that -- most of that recurring revenue falls at higher margin, sometimes 100% margins of software to the bottom line. So, recurring revenue helps drive that. We will continue to focus on driving recurring revenue in future quarters and our sales channels to continue to drive that up. The other part of it, just from Q2 to Q3 was we didn't carry the bench that we carried. We had way too much bench strength in Q2 compared to where we sat -- compared to what the market demand was and compared to what our sales channel have in the pipeline. So, we had a lot of extra sub-costs or just debt cost, bench costs in Q2. We responded to that accordingly, right-sized the team. As part of that, too, we also -- there was a mix of both direct and indirect costs, that's why you also see a greater impact to our EBITDA margin even beyond the gross margin changes. But most of it was realigning the our staff size to just overall market, some that aligning our cost structure that goes with that, our cost outside of just the headcount and then recurring revenue going out. So, those were the 3 major drivers. But I think we're -- this run rate going forward is -- I wouldn't expect it to increase -- to increase from here because we do need to reinvest in the company but I do think we can continue to achieve this low-40s gross margin percentages, especially in cloud as we move forward.

Robert Young: That's a lot of detail. And then maybe just a couple of clarifications on previous questions. Just on the BMO data, I believe that the maturity is 2026, I think, if I remember, that hasn't changed. August, 2026. Is that still the same?

Scott Meriwether: Right. Correct. Other than -- you can go back to our June 30 financials and that's what our 12/31 will look like other than just the quarterly $2.4 million pay down. So that...

Robert Young: So the switch to current, there's no need to renegotiate or to replace that debt in any way in the short run, I guess, is the core of the question?

Scott Meriwether: Correct. That was -- like I said, that was -- we crossed the reporting period and I love IFRS. And as a result, everything gets reclassed. The waiver was received and taken care of. So, we're good there. But just that's -- all we want to address the balance sheet noise immediately and lets you know the details of what it was as opposed to anyone getting nervous about it.

Robert Young: And then maybe it might be helpful just to -- if you can share the details, just maybe any color on where you are in the strategic review, what's left? I know there's 2 big questions that others have raised already. Just what is the value of BankCard sort of under Quisitive banner without PayiQ there? And then what's the -- maybe AgeChecker, if you -- did that move with PayiQ? Or is that still part of the business? And is that a payment-related business that maybe would be better served in another place? And then I'll pass the line.

Mike Reinhart: Yes. So, AgeChecker is embedded into the BankCard business and connected into its merchant base and things like that and tightly coupled and so the intent would be for that to continue. Could it be sold off potentially but I'm not sure that there would be strategic value to consider that but certainly something that we look at across all of our businesses, some other subsets of our business that could potentially be partitioned out. But that -- the focus as we look at what we're doing, BankCard is a good business that we've had a little bit of downward pressure and we need to work and kind of, go realign sales and some of the things to position. The things we're feeling an impact we're feeling is relatively consistent across the marketplace in general. There's some pressure in terms of especially smaller businesses. You got a lot of them that are feeling stress and going out of business. You're starting to see some of that happen in doing those things. So, you get a little bit of attrition for some of those kinds of things. But yes, so generally, we'll continue to look at where and how to scale and grow those at the same time, always be looking at where are the ways unlock value from all the assets of the company to, again, return shareholder value. But no specific actions that we have happening at the moment. Step 1, as we described is PayiQ and we'll continue to evaluate other alternatives as we go forward.

Operator: [Operator Instructions] Our next question comes from the line of Divya Goyal with Scotiabank.

Divya Goyal: Mike, I wanted to get a little bit more clarity on this valuation for PayiQ. So overall, it's a $45 million valuation you mentioned. You provided the details about $27 million investment. I was just curious, why did we cap the earnouts to $18 million? Like when I look at some of the payments acquisitions and the potential of PayiQ, it just -- I'm just trying to understand what was the rationalization for capping the earnouts at any number there?

Mike Reinhart: Well, there's two things about it. Remember, we're getting shares in an entity and the intent is for those shares to be part of a public vehicle in the future that we should have the opportunity to benefit from. So, there should be potentially future upside in that space as well. But set that aside for a second. You got to remember, valuations in the payments space have come down dramatically. And for something that's a pre-revenue free and basically, still in a B, C [ph] mode, those valuations are very difficult to have a metric to drive it around. And second of all, right now in the marketplace, those are challenging to get high value from. So like everything else, those values are down over the last 18 months or so for things that -- everything is valued based on EBITDA and things like that. And so pre-revenue, B, C level kind of things, valuations are a bit tricky. We work with William Blair to kind of create a range that we thought it looked like and this gave us an opportunity in that range, along with what we think could be some interesting upside assuming that they're successful and we're successful in helping them be successful in delivering and scaling through M&A and building growth and taking it public and having future upside in that regard. But yes, very difficult on a pre-revenue product in this current market, unfortunately, from a valuation side, given that it is fundamentally a VC investment at this stage.

Divya Goyal: No, that makes sense. Just another question here on the Fulcrum specifically. So yesterday, you mentioned that like Fulcrum IT and QUIS [ph] and today, you highlighted that again are an partner; just curious to understand. So, is it going to be that you're going to join bid on projects? Or what kind of partnership, to what extent are we looking at the partnership here beyond the PayiQ and the PayiQ commercialization? What exactly is Fulcrum and QUIS going to do together on a go-forward basis?

Mike Reinhart: Yes. So some things that we have in process now. They've got -- one of their segments has a pretty large health care customer base and they don't have Microsoft services capabilities. They've got other IT services that they provide, mostly network infrastructure services, some managed services around data centers and things like that and they do a great job of that. They resell hardware. But these customers are using -- looking for IT and sophisticated solutions within these health care environments that they can't address. And they're going to be our sales arm and we'll have joint economics as part of it but we'll bring that expertise. And we've got some sales pursuits that we're jointly working on that very way where we'll complement them in their customer base where maybe a competitor might come in and capture that, they get to kind of control -- they've got these great long-standing relationships, sometimes 20-plus years in these accounts and having worked with them, trusted relationships with buyers but yet they didn't have this capability. So, as part of our partnership is we'll bring that expertise into those accounts to do that and we'll have some shared economics as part of how we participate in that. So that's the focus of what you'll see us doing. We've got some active pursuits on that right now and we'll continue to expand that into their REIT. They've also got a retail account base which is not only for PayiQ is a great footprint but also, obviously, broader Microsoft solutions capabilities and beyond that as well. But those are 2 of the core areas that we've had ongoing discussions and have active pursuits already underway.

Divya Goyal: And so this business that on the IT front, is that going to be with a different subsidiary at Fulcrum?

Mike Reinhart: Yes. So, they have a holding company and there's kind of 2 branches of the holding company, I'll call it. One branch is what they have is their IT Services Groups. They've got businesses in Canada, businesses in the U.K. and businesses in the United States that are part of that where our Microsoft partnership will be focused relative to what I just described. And then they created a second arm of their holding company that is Fulcrum Payment Solutions as outlined in our press release which is where the PayiQ business is. And as they do future acquisitions and things like that, it's my understanding, they would have to give you more detail on this but my understanding from my discussions is they will be doing all of that acquisition activity for the payments related in that arm of the business. So, we'll be working with them across both areas. They're a $1 billion enterprise business, $1 billion revenue enterprise business. So, they are size and scale in their IT services. They've got some things that they're really unique things they're doing in cyber insurance and other kinds of things. We're actually the development arm for that cyber insurance platform. They've chosen Quisitive to be their software development arm as part of that business. So again, we've had ongoing things with them that this just was a natural extension of that in a different way.

Operator: Thank you. At this time, this concludes the company's question-and-answer session. If your question was not taken, you may contact Quisitive Investor Relations team at QUIS@gateway-grp.com. I'd now like to turn the call back over to Mr. Reinhart for his closing remarks.

Mike Reinhart: Well, thanks, everyone, for joining us today. I want to once again especially thank all of our employees for all the things that they're doing for us in our business and really helping us navigate through some of the challenges we've had on many fronts, both across our payments business, our PayiQ team as well as our cloud business. Certainly, all our partners and investors and customers for their support as we continue to build and grow and scale our business. We certainly appreciate your continued interest and look forward to updating all of you on our next call. Given I may not speak to all of you. I hope everybody has a wonderful holiday and look for an exciting New Year in 2024. Thanks and have a great night. Operator?

Operator: Thank you for joining us today for Quisitive third quarter 2023 earnings conference call. You may now disconnect.