UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
(Mark One)
| ☐ | REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 |
OR
| ☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2022
OR
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
OR
| ☐ | SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Date of event requiring this shell company report
Commission File Number 001-40717
VIQ SOLUTIONS INC.
(Exact name of Registrant as specified in its charter and translation of Registrant’s name into English)
Province of Ontario, Canada
(Jurisdiction of incorporation or organization)
5915 Airport Road
Suite 700
Mississauga, Ontario L4V 1T1
Canada
(Address of principal executive offices)
Sebastien Paré
5915 Airport Road
Suite 700
Mississauga, Ontario L4V 1T1
Canada
Telephone: (905) 948-8266
(Name, Telephone, Email and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Shares (no par value per share) | VQS | The Nasdaq Stock Market LLC |
Securities registered or to be registered pursuant to Section 12(g) of the Act. None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act. None
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report: 34,649,697
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ☐ Yes ☒ No
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. ☐ Yes ☒ No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ | Accelerated filer ☐ | Non-accelerated filer ☒ | Emerging growth company ☒ |
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act. ☐
† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing: U.S. GAAP ☐ International Financial Reporting Standards as issued by the International Accounting Standards Board ☒ Other ☐
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow. ☐ Item 17 ☐ Item 18
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No
TABLE OF CONTENTS
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MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS | 70 | ||
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| Management’s Annual Report on Internal Control Over Financial Reporting | 70 | |
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Purchases of equity securities by the issuer and affiliated purchasers | 73 | ||
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I. | Disclosure Regarding Foreign Jurisdictions that Prevent Inspections | 75 | |
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GENERAL INFORMATION
All references in this Annual Report on Form 20-F, or Annual Report, to “VIQ” the “Company,” “we,” “us” and “our” refer to VIQ Solutions Inc. and its consolidated subsidiaries, except where the context otherwise requires.
This Annual Report includes trademarks, tradenames and service marks, certain of which belong to us and others that are the property of other organizations. Solely for convenience, trademarks, tradenames and service marks referred to in this Annual Report appear without the ®, ™ and SM symbols, but the absence of those symbols is not intended to indicate, in any way, that we will not assert our rights or that the applicable owner will not assert its rights to these trademarks, tradenames and service marks to the fullest extent under applicable law. We do not intend our use or display of other parties’ trademarks, trade names or service marks to imply, and such use or display should not be construed to imply, a relationship with, or endorsement or sponsorship of us by, these other parties.
Our audited consolidated financial statements have been prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board (“IFRS”). Our fiscal year is the 12-month period ending December 31. Amounts stated herein are in United States dollars, unless otherwise indicated. All references to “CDN$” are to Canadian dollars, all references to “AUD” are to Australian dollars and all references to “GBP” are to Great British Pounds . Certain totals, subtotals and percentages throughout this report may not reconcile due to rounding.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report contains forward-looking statements that involve substantial risks and uncertainties. In some cases, you can identify forward-looking statements by the words “may,” “might,” “will,” “could,” “would,” “should,” “expect,” “intend,” “plan,” “objective,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “continue” and “ongoing,” or the negative of these terms, or other comparable terminology intended to identify statements about the future. These statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, levels of activity, performance or achievements to be materially different from the information expressed or implied by these forward-looking statements. The forward-looking statements and opinions contained in this Annual Report are based upon information available to us as of the date of this Annual Report and, while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. Forward-looking statements include, but are not limited to, statements about:
| ● | our transition to a SaaS revenue model; |
| ● | our ability to grow revenue; |
| ● | the COVID-19 pandemic and its impacts on our business and operations; |
| ● | our ability to identify and acquire suitable acquisition targets; |
| ● | our ability to successfully integrate acquired businesses; |
| ● | our ability to integrate our products into clients’ workspaces; |
| ● | effective operation of our products in changing mobile operating system environments; |
| ● | the success of our products; |
| ● | our ability to protect against and respond to any cybersecurity incidents; |
| ● | the development and improvement of our products; |
| ● | our ability to anticipate industry changes; |
| ● | our ability to compete; |
| ● | international operations; |
| ● | intellectual property rights and protection of such rights; |
| ● | products liability and insurance coverage; |
| ● | successful management of growth; |
| ● | conflicts of interest; |
| ● | need for additional financing; |
| ● | accuracy of accounting estimates; |
| ● | sufficiency of available cash resources to fund operations; |
| ● | expected levels of expenses and revenues; |
| ● | the effects of a delisting from the Nasdaq; |
| ● | taxation and foreign currency; and |
| ● | internal controls. |
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PART I
Item 1.Identity of Directors, Senior Management and Advisers.
Not applicable.
Item 2.Offer Statistics and Expected Timetable.
Not applicable.
Item 3.Key Information.
A.[Reserved]
Not applicable.
B.Capitalization and indebtedness.
Not applicable.
C.Reasons for the offer and use of proceeds.
Not applicable.
D.Risk factors.
Due to the nature of VIQ’s business, the legal and economic climate in which it operates and its present stage of development, VIQ is subject to significant risks. The risks presented below should not be considered to be exhaustive and may not be all of the risks that VIQ may face. Additional risks and uncertainties not presently known to VIQ or that VIQ currently considers immaterial may also impair its business and operations. If any of the following or other risks occur, the Company’s business, prospects, financial condition, results of operations and cash flows could be materially adversely impacted. In that event, the trading price of the Company’s common shares, no par value (the “Common Shares”), could decline and investors could lose all or part of their investment. There is no assurance that risk management steps taken will avoid future loss due to the occurrence of the risks described below or other unforeseen risks. Readers should carefully consider all such risks and other information elsewhere in this Annual Report before making an investment in VIQ and should not rely upon forward-looking statements as a prediction of future results. Risk factors relating to VIQ include, but are not limited to, the factors set out below.
Business Risks
Our transition to SaaS revenue model will cause our revenues to decline initially.
The Company is in the process of transitioning its software product offerings from license sales to a SaaS offering. License sales allow the Company to recognize the full amount of revenue upon the initial sale of the software to a client. But revenues from SaaS are recognized ratably over the period of time contracted with the client and their use of the software. Therefore, we expect that initial SaaS revenue will be lower compared to prior periods, but should recover over the course of the contract.
We may be unable to grow revenue and may never become profitable.
To increase our revenue and achieve and maintain profitability, we must regularly add new customers or sell additional solutions to our existing customers. Numerous factors may impede our ability to add new customers and sell additional solutions to our existing customers, including:
| ● | our inability to convert companies that have been referred to us by our existing network into paying customers, |
| ● | failure to attract and effectively train new sales and marketing personnel, |
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| ● | failure to retain and motivate our current sales and marketing personnel, |
| ● | failure to develop relationships with partners or resellers, and |
| ● | failure to ensure the effectiveness of our marketing programs. In addition, if prospective customers do not perceive our solutions to be of sufficiently high value and quality, we will not be able to attract the number and types of new customers to become profitable. |
Further, if the resellers and integrators that we work with fail to devote sufficient resources to provide effective sales and marketing support of our products, sales to our customers would be hurt.
COVID-19
Since December 2019, the outbreak of COVID-19 has resulted in governments worldwide enacting emergency measures to combat the spread of the virus. These measures, which include the implementation of travel bans, mandatory quarantine periods and social distancing, have caused material disruption to business globally, resulting in an economic slowdown. Global equity markets have experienced significant volatility and weakness. Although vaccines have been effective to date in reducing the prevalence of COVID-19 in the largest markets for our products and services, additional mutations of the COVID-19 virus may evade the protection offered by vaccines and prolong the adverse effects of the pandemic on the economy, the Company and our customers.
Fluctuations in Periodic Results
The Company’s operating results can vary substantially from period to period. Planned operating expenses are normally targeted to planned revenue levels for the period and are incurred equally throughout the period. If expenses remain relatively fixed, but the Company’s revenues are less than planned in any quarter, the Company’s operating results would be adversely affected for that quarter. In addition, incurring unplanned expenses could adversely affect operating results for the period in which such expenses are incurred. Failure to achieve periodic revenue, earnings and other operating and financial results could result in an immediate and adverse effect on the market price of the Common Shares. The Company may not discover, or be able to confirm, revenue or earnings shortfalls until the end of a quarter, which could result in a greater immediate and adverse effect on the price of the Common Shares.
If we cannot continue to identify and acquire suitable acquisition targets, our Company will not grow as planned.
The Company’s strategy has historically involved pursuing accretive acquisitions. The Company may not be able to identify suitable new acquisition targets that are available to purchase at a reasonable value. Even if a suitable acquisition can be identified the acquisition may not proceed if suitable terms cannot be negotiated. Even if the Company is able to complete additional acquisitions in the future, there are risks inherent in any such acquisition. When conducting due diligence on a potential acquisition, we may not identify all the risks and costs inherent in the business being acquired. If an acquisition of an identified business were to proceed in which a portion or all of the consideration consisted of cash, additional funding maybe required through public or private financings if internally generated cash resources are not sufficient, and such funding may not be available to us on acceptable terms, or at all.
If we are not able to successfully integrate acquired businesses, our financial results would suffer.
Our ability to integrate recent and future acquisitions into our business is subject to a number of risks including the following:
| ● | failure to integrate successfully the personnel, information systems, technology and operations of the acquired business; failure to maximize the potential financial and strategic benefits of the acquisition; failure to realize the expected synergies of the acquired business; possible impairment of relationships with employees and clients as a result of any integration of new businesses and management personnel; impairment of goodwill; increased demand on human resources and operating systems, procedures and controls; and reductions in future operating results as a result of the amortization of intangible assets. |
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Future acquisitions are accompanied by the risk that obligations and liabilities of an acquired business may not be adequately reflected in the historical financial statements of that business and the risk that historical financial statements may be based on assumptions, which are incorrect or inconsistent with the Company’s assumptions or approach to accounting policies. If we do not manage effectively the acquisition and integration of businesses, this could lead to disruptions in the overall activities of the Company, a loss of clients and revenue, and increased expenses. If we assume contingent liabilities in connection with the acquisitions of businesses, which are unknown at the time of acquisition or turn out to be more than expected, our financial condition could be impaired
If we are unable to effectively integrate our products into clients’ workplaces and adapt to clients’ changes, our revenues and reputation will suffer.
A portion of our sales are made into applications that require our products to be interfaced with other enterprise workflows, enterprise information technology environments or software functionalities. Any significant changes to those enterprise workflows, IT environments or software programs may limit the use or functionality of or demand for our products. As our customers advance technologically, we must continue to advance, modify and adapt our products to effectively interface our products with customer technologies to remain competitive.
If our products cannot continue to effectively operate with changing mobile operating systems and computer networks, our sales will suffer.
The functionality of certain of our products depends upon the continued interoperability of these products with popular mobile operating systems to deliver a high-quality user experience. Any changes in these systems that degrade our products’ functionality or give preferential treatment to competitive offerings could adversely affect the operability and usage of our software products on mobile devices and, thereby, result in lower sales of our products.
If our products fail for any of a large number of reasons, our reputation, market share and financial results would suffer.
Our business is dependent upon providing customers with fast, efficient and reliable services. Any reduction in the performance, reliability or availability of required network infrastructure may harm our ability to distribute content to our customers, which would damage our reputation and ability to attract and retain customers.
Our operations are susceptible to, and could be damaged or interrupted by, outages caused by fire, flood, power loss, telecommunications failure, Internet or mobile network breakdown, earthquake and similar events. Our solutions are also subject to human error, security breaches, power losses, computer viruses, break-ins, “denial of service” attacks, sabotage, intentional acts of vandalism and tampering designed to disrupt our computer systems and network communications. Our failure or our customers’ failure to protect the networks against damage from any of these events could have a material adverse effect on our business.
Our operations also depend on web browsers, internet service providers and mobile networks operated by others to provide our customers’ end-users with access to websites, streaming and mobile content. Many of these providers have experienced outages in the past, and could experience outages, delays and other difficulties due to system failures unrelated to our solutions. Any such outage, delay or difficulty could adversely affect our ability to effectively provide our products and services, which would harm our business.
The continuing risk of evolving and more sophisticated cyber-threats could be very costly and hurt our reputation.
Despite having implemented numerous security features, malware, viruses, hacking, phishing attacks, social engineering, and other electronic threats on businesses have become more prevalent, have occurred on our systems in the past, and are likely to occur on our systems in the future. While we continue to advance measures to safeguard our solutions and services from cybersecurity threats and vulnerabilities, cyber-attacks and other security incidents continue to evolve in sophistication and frequency and have become increasingly challenging to stop. An attack on our systems could serve as a way to obtain access into our customers’ systems, which could result in liability and reputational damage for us. Businesses have experienced material sales declines after discovering data breaches, and our business could be similarly impacted. The costs to continuously improve the security of our solutions and reduce the likelihood of a successful attack are high and are expected to continue to increase. Furthermore, some jurisdictions have enacted laws requiring companies to notify consumers of data security breaches involving their personal data. These mandatory disclosures regarding a security breach often lead to widespread negative publicity, which may cause our customers to lose confidence in the effectiveness of the data security measures of our solutions. Any negative incidents can quickly erode trust and confidence, particularly if they result in adverse mainstream and social media publicity, governmental investigations or litigation. Any failure to maintain performance, reliability, security and availability of our products and technical infrastructure to the satisfaction of our customers may harm our
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reputation, impair our ability to retain existing customers and attract new customers and expose us to legal claims and government action, each of which could have a material adverse impact on our business, results of operations and financial condition.
If we cannot timely develop new and technologically improved products, we will not be able to enter new markets or further penetrate existing markets
The industry in which the Company operates is subject to rapid technological change. Our ability to attract new customers and increase revenue from existing customers will depend in large part on our ability to enhance and improve our solutions, to introduce new features and services in a timely manner, to sell into new markets and to further penetrate our existing markets. The success of any enhancement or new feature or service depends on several factors, including the timely completion, introduction and market acceptance of the enhancement or new feature or service If we are unable to successfully develop or acquire new features, products or services, enhance existing products or services to meet customer requirements, sell products and services into new markets or sell our product and services to additional customers in our existing markets, our revenue will not grow as expected. Moreover, we are frequently required to enhance and update our products and services as a result of changing standards and technological developments, which makes it difficult to recover the cost of development and forces us to continually qualify new features with our customers.
If we do not accurately anticipate industry changes and adapt rapidly to technological developments with cost-effective solutions, we will lose existing and potential customers.
The industry in which we operate is evolving at a rapid pace. Our ability to attract new customers and increase revenue from customers will depend in significant part on our ability to anticipate industry changes and to continue to enhance our solutions or introduce or acquire new solutions on a timely basis to keep pace with technological developments. The success of new solution depends on several factors, including the timely completion and market acceptance of the enhancement or new solution. Any new solution we develop or acquire might not be introduced in a timely or cost-effective manner and might not achieve the broad market acceptance necessary to generate significant revenue.
If we cannot compete effectively in the highly competitive business segments in which we operate, we could lose market share, or be forced to cut our prices and margins.
VIQ competes with a number of firms in various business segments that are very competitive. Competitors in courts, for example, are different from the ones we are competing against in public safety, medical, and legal sectors. Many of these companies have greater financial, technological, and personnel resources and experience than those of VIQ and therefore, we may be at competitive disadvantages.
Competitors may be able to respond to new or emerging technologies and changes in customer requirements more effectively than VIQ can, or may devote greater resources to the development, promotion and sale of products than VIQ can. Current and potential competitors may establish cooperative relationships among themselves or with third parties, including through mergers or acquisitions, to increase the ability of their products to address the needs of VIQ’s current or prospective customers. If these competitors were to acquire significantly increased market share, it could have a material adverse effect on VIQ’s business. VIQ’s competitors may also establish or strengthen co-operative relationships with systems integrators, third-party consulting firms or other parties with whom VIQ currently has relationships, thereby limiting VIQ’s ability to promote its products and services.
To remain competitive, VIQ must continue to provide:
| ● | technologically advanced products and solutions that anticipate and satisfy the demands of end-users; |
| ● | continuing advancements and innovations in VIQ’s product offerings, including products with price-performance advantages or value-added features in security, reliability or other key areas of customer interest; |
| ● | a responsive and effective sales force; |
| ● | a dependable and efficient sales distribution network; |
| ● | superior customer service; and |
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| ● | high levels of quality and reliability. |
Competition may result in price reductions by VIQ, lower gross profit margins, increased discounts to customers and loss of market share, and could require increased spending by VIQ on research and development, sales and marketing and customer support, which would hurt our results of operations.
Our international operations expose us to additional risks that could harm our business.
We currently operate in the United States, Australia, the United Kingdom and Canada and our products and services are sold internationally. There are certain risks inherent in international operations including, but not limited to:
| ● | remote management, |
| ● | unexpected changes in regulatory requirements, |
| ● | export restrictions, tariffs and other trade barriers, |
| ● | difficulties in staffing and managing foreign operations, |
| ● | longer payment cycles, |
| ● | problems in collecting accounts receivable, |
| ● | fluctuations in currency exchange rates, and |
| ● | potential adverse tax consequences. |
If we are affected by any of these risks, our operating results and financial condition will suffer.
If we are unable to protect our intellectual property rights, we may not be able to compete effectively in our markets.
Our success is heavily dependent on our ability to protect our intellectual property. Although we seek to protect proprietary intellectual property in part through confidentiality agreements with corporate resellers, strategic partners, employees, consultants and certain contractors, these agreements could be breached and we may not have adequate remedies. Even if these agreements are not breached, our trade secrets could otherwise become known or independently discovered by our competitors. Any such disclosures could hurt our competitive position.
Claims that we infringe the intellectual property rights of others, may prohibit or delay the use or sale of our products and services and would be very expensive to defend.
It is possible that our products or processes will infringe, or will be found to infringe, on patents not owned or controlled by us. Companies in the technology industry often own large numbers of patents, copyrights, trademarks and trade secrets and frequently enter into litigation based on allegations of infringement or other violations of intellectual property rights. If any relevant claims of patents owned by others are upheld as valid and enforceable, we could be prevented from practicing the subject matter claimed in such patents or would be required to obtain licenses or redesign our products and processes to avoid infringement. If such licenses are not available at all or on terms commercially reasonable to us, we may be forced to redesign our products or processes to avoid infringement, which could require significant effort and expense or be infeasible. If we cannot license or develop technology for the infringing aspects of our business, we may be forced to limit product and service offerings and may be unable to compete effectively. Any of these results could harm VIQ’s brand and prevent VIQ from generating sufficient revenue or achieving profitability. Litigation may be necessary to defend against claims of infringement or to protect trade secrets. Such litigation could result in substantial costs and diversion of management efforts regardless of the results of such litigation and an adverse result could subject the Company to significant liabilities to third parties, require disputed rights to be licensed or require the Company to cease using such technology.
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If our insurance is inadequate to cover product liability and other claims, our financial position could deteriorate.
Our business faces an inherent risk of exposure to product liability and other claims in the event that the development or use of our technology or products is alleged to have resulted in adverse effects on our customers or others. Although we currently carry product liability insurance, coverage may be insufficient and we may not be able to obtain product liability insurance in the future at acceptable cost or adequate to protect against potential product liability claims. An uninsured claim could prevent or inhibit the commercialization of products developed by us and have a material adverse effect on our financial condition.
Inability to managing our growth would hurt our operating results.
To manage growth and changes in strategy effectively, we must:
| ● | maintain adequate systems to meet customer demand, |
| ● | expand sales and marketing, distribution capabilities, and administrative functions, |
| ● | expand the skills and capabilities of our current management team, |
| ● | attract and retain additional qualified management and employees, and |
| ● | expand our internal operational and financial controls significantly, so that we can maintain control over operations and provide support to other functional areas as the number of personnel and size of business increases. |
We expect to invest any earnings and capital to support our growth, but may incur additional unexpected costs, which could impair our ability to expand quickly enough to capitalize on potential market opportunities. Our inability to achieve any of these objectives could harm our business, financial condition and results of operations.
If we cannot attract and retain skilled personnel, our business will suffer.
The loss of any member of our management team could have a material adverse effect on our business. In addition, the inability to hire, or the increased costs of hiring, new personnel, including members of executive management, could have a material adverse effect on our business. The expansion of marketing and sales of its products will require us to find, hire and retain additional capable employees who can understand, explain, and successfully market and sell our products. There is intense competition for capable personnel in all of these areas and if we are not successful in attracting, training, integrating, motivating, and retaining new personnel, vendors, or subcontractors for these required functions, our business will not grow. New employees often require significant training and in many cases, take a significant amount of time before they achieve full productivity. As a result, we may incur significant costs to attract and retain employees, including significant expenditures related to salaries and benefits and compensation expenses issued in connection with equity awards, and we may lose new employees to competitors or other companies before we realize the benefit of our investment in recruiting and training them. In addition, as we move into new jurisdictions, we will need to attract and recruit skilled employees in those new areas.
If we are not effective in managing conflicts of interest, our competitive position could be harmed.
If any directors or officers of VIQ become directors or officers of, or have significant shareholdings in, other companies that may participate in ventures in which VIQ may participate, such directors and officers of VIQ may have a conflict of interest in negotiating and concluding terms respecting the extent of such participation. Such other companies may also compete with VIQ. In the event that any such conflict of interest arises, a director who has such a conflict is required to disclose the conflict to a meeting of the directors of VIQ, not participate in any relevant discussions and abstain from voting for or against the approval of such participation or such terms. In accordance with applicable laws, the directors of VIQ are required to act honestly, in good faith and in the best interests of VIQ. In determining whether or not VIQ will participate in a particular transaction, the directors will primarily consider the potential benefits to VIQ, the degree of risk to which VIQ may be exposed and its financial position at that time. If any such conflicts are not properly disclosed or an officer or director fails to be fully removed from all relevant discussions and consideration, VIQ’s competitive position could be harmed.
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Financial and Accounting Risks
We expect to need additional financing, which may not be available on acceptable terms, or at all.
We may need to raise additional funds to bring additional products to market, enhance marketing capabilities, and pursue potential future acquisitions. Our future capital requirements will depend on many factors, including continued progress in research and development programs, competing technological and market developments, the cost of production scale-up, effective commercialization activities and arrangements and other factors, some of which are not within our control. If additional funding is not available when needed through public or private financings on acceptable terms, we may be precluded from developing or bringing to market new products, or from making acquisitions that could be of benefit to us.
Inaccurate estimates or judgments relating to critical accounting policies could result in operating results that fall below the expectations of investors, resulting in a decline in the share price of VIQ.
The preparation of consolidated financial statements in accordance with IFRS requires management to make estimates and assumptions that affect the application of the Company’s accounting policies and the amounts reported in the consolidated financial statements and the related notes. These estimates are based on management’s best knowledge of current events and actions that the Company may undertake in the future. These estimates have been applied in a manner consistent with that in prior periods and there are no known trends, commitments, events or uncertainties that the Company believes will materially affect the assumptions utilized in these consolidated financial statements. Estimates and underlying assumptions are reviewed on an ongoing basis and revisions to estimates are recognized prospectively. The estimates are impacted by many factors, some of which are highly uncertain and actual results may differ from those estimates.
The continuing uncertainty around the outbreak of COVID-19 pandemic required the use of judgments and estimates in the preparation of the consolidated financial statements for the year ended December 31, 2022. The future impact of COVID-19 uncertainties could generate, in future reporting periods, a significant impact to the reported amounts of assets, liabilities, revenue and expenses in these and any future consolidated financial statements. Examples of accounting estimates and judgments that may be impacted by the pandemic include, but are not limited to, impairment of goodwill and intangible assets and allowance for doubtful accounts.
VIQ’s operating results may be adversely affected if the assumptions change or if actual circumstances differ from those in the assumptions, which could cause VIQ’s operating results to fall below the expectations of investors, resulting in a decline in the share price of VIQ. Significant assumptions and estimates used in preparing the financial statements include those related to the credit quality of accounts receivable, income taxes, income tax credits receivable, share based payments, warrants, internally generated development costs, functional currency, impairment of non-financial assets, purchase price allocation, contingent consideration, incremental borrowing rate used to discount leases, allocation of the transaction price to multiple performance obligations in contracts with customers, as well as revenue and cost recognition.
Uncertainty regarding tax laws and liabilities in multiple jurisdictions could have a negative financial impact on us.
VIQ’s operations are subject to income tax and other forms of taxation in multiple jurisdictions. Taxation laws and rates which determine taxation expenses may vary significantly in different jurisdictions, and legislation governing taxation laws and rates are also subject to change. Therefore, VIQ’s earnings may be impacted by changes in the proportion of earnings taxed in different jurisdictions, changes in taxation rates, changes in estimates of liabilities and changes in the amount of other forms of taxation. VIQ may have exposure to greater than anticipated tax liabilities or expenses. VIQ may be subject to income taxes and non-income taxes in a variety of jurisdictions and its tax structure may be subject to review and challenge by both domestic and foreign taxation authorities and the determination of VIQ’s provision for income taxes and other tax liabilities will require significant judgment.
Foreign currency fluctuations could cause unexpected foreign exchange losses and reduce the trading price of our stock.
VIQ’s monetary assets and liabilities denominated in currencies other than the Canadian dollar will give rise to a foreign currency gain or loss reflected in its comprehensive earnings. To the extent the United States dollar or Australian dollar weakens against the Canadian dollar, VIQ may incur foreign exchange losses. Such losses would be included in VIQ’s financial results and, consequently, may have an adverse effect on the price of the Common Shares. As VIQ currently has a global client base, a significant portion of VIQ’s income is in US dollars and Great Britain pounds. The exchange rates between the Canadian dollar, the US dollar and the Great Britain pound are subject to daily fluctuations in the currency markets and these fluctuations in market exchange rates are expected to continue in the future. Such fluctuations affect both VIQ’s consolidated revenues as well as its consolidated expenses. Also, changes in foreign exchange
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rates may affect the relative costs of operations and prices at which VIQ and its foreign competitors sell products in the same market. VIQ currently does not engage in currency hedging through financial instruments.
Internal Controls Risk
Effective internal controls are necessary for VIQ to provide reliable financial reports and effectively prevent fraud. Under Canadian and United States securities law requirements, VIQ’s Chief Executive Officer and Chief Financial Officer are required to certify that they are responsible for establishing and maintaining disclosure controls and internal controls over financial reporting for the Company, that those disclosure controls and internal controls have been designed and are effective in providing reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with IFRS. VIQ maintains compliance with Canadian and United States securities law requirements by strengthening, assessing and testing the system of internal controls to provide the basis for the certification. However, the continuous process of strengthening VIQ’s internal controls and complying with Canadian and United States securities law requirements is expensive and time consuming. Furthermore, as VIQ grows its business, the controls will become more complex and the Company could require more resources to ensure its internal controls remain effective. If the measures VIQ is taking are not adequate to ensure that it maintains adequate control over financial processes and reporting or if VIQ fails to implement required new or improved controls, or encounters difficulties in their implementation, VIQ could fail to meet its reporting obligations. If VIQ or its independent registered public accounting firm discover a material weakness, the disclosure of that fact, even if quickly remedied, could reduce the market’s confidence in VIQ’s audited consolidated financial statements and harm its share price. In addition, future non-compliance with the Canadian and United States reporting obligations or other securities law requirements could subject VIQ to a variety of administrative sanctions, including the suspension of trading or delisting of the Common Shares, which could materially adversely affect its share price.
We are subject to the requirements of the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”) since our Common Shares are listed on Nasdaq. Section 404 of Sarbanes-Oxley (“Section 404”) requires companies subject to the reporting requirements of the U.S. securities laws to complete a comprehensive evaluation of our internal controls over financial reporting. To comply with this statute, we will be required to document and test our internal control procedures and our management will be required to assess and issue a report concerning our internal controls over financial reporting. Pursuant to the Jumpstart Our Business Startups Act (“JOBS Act”), we are classified as an “emerging growth company”. Under the JOBS Act, emerging growth companies are exempt from certain reporting requirements, including the independent auditor attestation requirements of Section 404(b) of Sarbanes-Oxley. Under this exemption, our independent auditor will not be required to attest to and report on management’s assessment of our internal control over financial reporting during a transition period of up to five years from our initial registration with the United States Securities and Exchange Commission (the “SEC”). We will need to prepare for compliance with Section 404(b) by strengthening, assessing and testing our system of internal controls to provide the basis for our report. However, the continuous process of strengthening our internal controls and complying with Section 404(b) is complicated and time-consuming. Furthermore, we believe that our business will grow in the United States, in which case our internal controls will become more complex and will require significantly more resources and attention to ensure our internal controls remain effective overall. During the course of our testing, our management may identify material weaknesses or significant deficiencies, which may not be remedied in a timely manner to meet the deadline imposed by Sarbanes-Oxley. If our management cannot favorably assess the effectiveness of our internal controls over financial reporting, or our independent registered public accounting firm identifies material weaknesses in our internal controls, investor confidence in our financial results may weaken, and the market price of our securities may suffer.
The covenants in our credit agreement with Beedie Investments Ltd. (“Beedie”) impose restrictions that may limit our operating and financial flexibility.
On January 13, 2023, the Company entered into a senior debt facility (the “Loan”) with Beedie, with maximum available funds of $15 million. $12 million of the Loan has been advanced to the Company as an initial advance with an additional $3 million available to the Company to be drawn in subsequent advances in a minimum of $1 million tranches. The credit agreement contains financial covenants, including but not limited to, covenants related to a minimum balance of unrestricted cash and cash equivalents, minimum adjusted monthly EBITDA and maximum total secured debt leverage ratio, and limitations on liens, indebtedness, guarantees and contingent liabilities, loans and investments, distributions, leases, asset sales, share repurchases and mergers and acquisitions. These covenants and limitations may limit our ability to, among other things:
| ● | create, incur or assume liens; |
| ● | make investments and loans; |
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| ● | create, incur, assume or guarantee additional indebtedness; |
| ● | engage in mergers, acquisitions, consolidations, sale-leasebacks and other similar transactions; |
| ● | pay dividends, or redeem or repurchase our capital stock; |
| ● | alter the business that we conduct; |
| ● | engage in certain transactions with officers, directors and affiliates; |
| ● | prepay, redeem or purchase other indebtedness; |
| ● | enter into certain agreements; and |
| ● | make material changes to accounting and reporting practices. |
Operating results below current levels or other adverse factors, including increases in interest rates, could result in us being unable to comply with certain covenants contained in the credit agreement with Beedie. If we violate these covenants and are unable to obtain waivers, our debt under the credit agreement with Beedie would be in default, could be accelerated and could permit our lenders to foreclose on our assets securing the debt thereunder. If the indebtedness is accelerated, we may not be able to repay our debt or borrow sufficient funds to refinance it. Even if we are able to obtain new financing, it may not be on commercially reasonable terms or on terms that are acceptable to us. If our debt is in default for any reason, our cash flows, operating results, or financial condition could be materially and adversely affected. In addition, complying with these covenants may also cause us to take actions that may make it more difficult for us to successfully execute our business strategy and compete against companies that are not subject to such restrictions.
Risks Related to the Common Shares
Continued volatility in the market price for our Common Shares could cause investors to lose money.
We have experienced in the past and expect to continue to experience volatility and wide fluctuations in the market price of our Common Shares. Fluctuations in the market price of the Common Shares could cause an investor to lose all or part of its investment in Common Shares. Factors that could cause fluctuations in the trading price of the Common Shares include:
| ● | announcements of new offerings, products, services or technologies, commercial relationships, acquisitions or other events by VIQ or its competitors; |
| ● | price and volume fluctuations in the overall stock market from time to time; |
| ● | significant volatility in the market price and trading volume of technology companies; |
| ● | fluctuations in the trading volume of the Common Shares or the size of VIQ’s public float; |
| ● | actual or anticipated changes or fluctuations in VIQ’s results of operations; |
| ● | whether VIQ’s results of operations meet or exceed the expectations of securities analysts or investors; |
| ● | actual or anticipated changes in the expectations of investors or securities analysts; |
| ● | litigation involving VIQ, its industry, or both; |
| ● | regulatory developments in Canada and other countries; |
| ● | general economic conditions and trends; |
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| ● | major catastrophic events; |
| ● | escrow releases or sales (or expected sales) of large blocks of the Common Shares; |
| ● | departures of key employees or members of management; or |
| ● | an adverse impact on VIQ from any of the other risks cited herein. |
We have never paid cash dividends and investors should not expect VIQ to do so in the foreseeable future.
VIQ has not declared or paid cash dividends on the Common Shares. VIQ intends to retain future earnings to finance the operation, development, and expansion of the business. VIQ does not anticipate paying cash dividends on the Common Shares in the foreseeable future. Payment of future cash dividends, if any, will be at the discretion of the Board and will depend on VIQ’s financial condition, results of operations, contractual restrictions, capital requirements, business prospects and other factors that the Board considers relevant.
Your ownership interest could be diluted and our stock price could decline when we issue additional shares.
VIQ may issue Common Shares or securities convertible into Common Shares from time to time in connection with a financing, acquisition or otherwise. Any such issuance could result in substantial dilution to existing shareholders and cause the trading price of VIQ’s securities to decline.
Our failure to meet the continuing listing requirements of Nasdaq could result in a delisting of our securities.
On September 27, 2022, the Company received a letter from Nasdaq indicating that the Company was not in compliance with Nasdaq Listing Rule 5550(a)(2) because the closing bid price per share for the Company’s common shares had closed below $1.00 for the previous 30 consecutive business days (the “Bid Price Rule”). The Company was given until March 27, 2023, to regain compliance with the Bid Price Rule. On March 28, 2023, the Company was granted an additional 180-day grace period, or until September 25, 2023, to regain compliance with the Bid Price Rule following the Company’s notification to Nasdaq that it would seek to implement a reverse stock split, if necessary, to regain compliance with the Bid Price Rule. To regain compliance with the Bid Price Rule and qualify for continued listing on the Nasdaq Capital Market, the minimum bid price per share of the Company’s Common Shares must be at least $1.00 for at least 10 consecutive business days on or prior to September 25, 2023. If the Company fails to regain compliance during the additional compliance period, then Nasdaq will notify the Company of its determination to delist the Company’s Common Shares, at which point the Company would have an opportunity to appeal the delisting determination to a Nasdaq Listing Qualifications Panel (the “Panel”), but there can be no assurance that the Panel would grant the Company’s request for continued listing.
If we fail to satisfy the continuing listing requirements of Nasdaq, such as minimum closing bid price requirements, as discussed above, the corporate governance, or stockholders’ equity or minimum closing bid price requirements, Nasdaq may take steps to delist our Common Shares. Such a delisting would likely have a negative effect on the price of our Common Shares and would impair our stockholders’ ability to sell or purchase our Common Shares. In the event of a delisting, we would likely take actions to restore our compliance with Nasdaq’s listing requirements, but we can provide no assurance that any such action taken by us would allow our Common Shares to become listed again, stabilize the market price or improve the liquidity of our securities, prevent our Common Shares from dropping below the Nasdaq minimum bid price requirement or prevent future non-compliance with Nasdaq’s listing requirements.
Item 4.Information on the Company.
A.History and development of the company.
VIQ Solutions Inc. was incorporated pursuant to the Business Corporations Act (Ontario) on November 10, 2004 and was continued under the Business Corporations Act (Ontario), on April 14, 2017. The Company’s head and registered offices are located at 5915 Airport Road, Suite 700, Mississauga, Ontario, Canada L4V 1T1, and its telephone number is (905) 948-8266.
The Company is a reporting issuer in Canada in each of the provinces of Canada other than Quebec, and its Common Shares are listed on the Toronto Stock Exchange in Canada and the Nasdaq Capital Market in the United States under the trading symbol “VQS.”
The Company’s registered agent in the United States is C T Corporation System. The address of the Company’s registered agent in the United States is 1015 15th Street N.W., Suite 1000 Washington, D.C., 20005.
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Since January 1, 2021, the following important events in the development of the Company’s business have occurred:
| ● | On January 21, 2021, the Company’s Common Shares began trading on the Toronto Stock Exchange (the “TSX”) under the symbol “VQS.” The Common Shares had previously traded in Canada on the TSX Venture Exchange, a capital marketplace for early-stage companies. |
| ● | On August 12, 2021, the Company’s Common Shares began trading on the Nasdaq Capital Market under the symbol “VQS”. The Common Shares had previously traded in the United States since December 5, 2019 under the symbol “VIQLF” on the OTCQX Best Market, a marketplace for the over-the-counter trading of stocks. |
| ● | On October 1, 2021, the Company acquired 100% of the issued and outstanding shares of The Transcription Agency (“TTA”), a leading supplier of secured outsourced transcription services to clients in private and public sectors throughout the United Kingdom. The purchase price paid for the TTA acquisition was approximately $1.7 million, with approximately $0.85 million paid in cash on closing and approximately $0.85 million to be paid through a deferred payment structure over the six months following closing. |
| ● | On December 13, 2021, the Company announced the closing of the asset acquisition of Auscript Australasia Pty Ltd. (“Auscript”), the leading supplier of secure recording and transcription services for courts and law firms throughout Australia. The Company acquired Auscript for a total purchase price of approximately $7.65 million. |
| ● | On February 8, 2022, the Company announced that the United States Patent and Trademark Office granted a patent for its Parallel Processing Framework for Voice to Text Digital Media. This patent recognizes methods for extracting critical information from multi-speaker, multi-channel business interactions recorded on digital media. The patent protects ten unique aspects of VIQ’s innovative aiAssist processing designs and the proprietary Parallel Processing Framework for Voice to Text Digital Media |
| ● | On July 18, 2022, the Company entered into a securities purchase agreement (the “July Purchase Agreement”) with two U.S. institutional investors, for the purchase of an aggregate of 3,551,852 Common Shares and warrants to purchase up to 3,551,852 Common Shares, at a combined purchase price of US$1.35 (the “July Private Placement”), resulting in total gross proceeds of approximately US$4.8 million before deducting placement agent commissions and other offering expenses.The warrants have an exercise price of US$1.39, are exercisable any time after January 21, 2023 and will expire on July 21, 2027. The Company closed on the July Private Placement on July 21, 2022. A.G.P./Alliance Global Partners (“A.G.P”) acted as the sole placement agent for the July Private Placement. On August 15, 2022, The Company filed a registration statement on Form F-3 (File No. 333-266874) to register the Common Shares and the Common Shares underyling the warrants sold in the July Private Placement.The registration statement on Form F-3 was declared effective on August 29, 2022. |
| ● | On October 26, 2022, the Company announced a strategic partnership with ORdigiNAL, a specialized value-added distributor of document creation solutions, ranging from speech recognition, dictations solutions, document capture and communication solutions. ORdigiNAL, one of the largest distributors of Nuance technologies across the globe, leverages an immense, well-positioned dealer network who the Company believes will drive the expansion of VIQ’s technology in Europe and Asia Pacific. |
As part of the distribution agreement, ORdigiNAL will offer VIQ’s NetScribe and FirstDraft, powered by aiAssist, to its dealer network operating in judicial, law enforcement and legal markets throughout Europe and Asia Pacific.
| ● | On August 2, 2022, the Company announced the launch of AccessPoint, which provides court personnel and legal professionals around the world with instant access to court recordings through a secure, cloud-based portal. |
AccessPoint delivers self-guided search, request and export features to quickly access audio recordings captured during court proceedings. Advanced security settings provide granular control of authorized users and auto-logging of access and events to simplify the chain of custody tracking. AccessPoint is an integral part of VIQ’s end-to-end solution suite for Courts designed to deliver secure, real-time access to high-quality recordings.
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| ● | On January 13, 2023, the Company entered a entered into the Loan with Beedie, with maximum available funds of $15 million. $12 million of the Loan has been advanced to the Company as an initial advance with an additional $3 million available to the Company to be drawn in subsequent advances in a minimum of US$1 million tranches. |
| ● | On February 22, 2023, the Company announced the integration of VIQ Carbon media platform and Sony Ci Media Cloud to streamline the media production process simplifying content creation. VIQ Carbon, a cloud-based media content and text workflow platform, was developed to address broadcast production needs, including administrative controls for organizations with complex workflows and a need for a high level of security. The integration of Sony Ci will remove redundant steps and the need to transfer files across system platforms, while allowing the users to remain within the secure infrastructure of Sony Ci. |
Capital Expenditures
We incur capital expenditures mainly in relation to leases of our head office in Toronto, Ontario, Canada, our office spaces in Melbourne, Brisbane and Perth Australia and recording equipment used by our Australian operations. See “Item 5.B, Operating and Financial Review and Prospects—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Cash Flows.” We do not own or lease any other office space, manufacturing facilities or equipment and do not have any current plans to construct or acquire any facilities.
Internet Availability of Company Information
The SEC maintains an Internet site that contains reports, proxy information statements and other information regarding issuers that file electronically with the SEC. The address of that site is http://www.sec.gov. Our website address is www.viqsolutions.com. Information contained in, or that can be accessed through, our website is not a part of, and shall not be incorporated by reference into, this document. We have included our website address in this document solely as an inactive textual reference.
B.Business overview.
VIQ Solutions combines artificial intelligence (AI)-driven voice and video capture technology and services to securely manage digital content in the most rigid security environments including governments, courts, insurance, law enforcement, media content, news and conferencing. VIQ’s products and services help cybersecurity focused entities securely speed the capture, creation, and management of large volumes of information, preserve the unique value of the spoken word and video image, and deliver meaningful data that they can utilize.
VIQ offers its clients a technology services platform comprised of six core software solutions: MobileMic Pro, CapturePro™, NetScribe, First Draft, Editing Services and aiAssist that are integrated to create a seamless, end to end digital platform, as outlined further below.
Through this established commercial platform, VIQ ingests multi-speaker content across its markets and delivers immediate value to customers in the form of high-quality evidentiary documentation. The effective aggregation of customer information in the platform, which may appear as a by-product, is in fact a valuable asset that is driving accuracy and usability of the Company products and services. The Company’s AI aims at improving the efficiency of the verbatim transcription process by delivering a progressively better first draft. In turn, this capability enabled the delivery of First Draft, a service where a machine-generated version of a multi speakers recording is presented to the user, all the while, feeding back into the system the quality-controlled version of the documents we delivered, refining our linguistic and industry specific corpus models, and progressively enhancing the outcome of our services, in a virtuous circle.
VIQ operates worldwide with a network of partners including security integrators, audio-video specialists, and hardware and data storage suppliers. The Company’s revenue is strategically segmented both by geography and industry markets: Approximately 38% of its recent revenue has been from located in the United States, 57% from Australia and a growing 5% from Canada, Europe and Africa.
VIQ’s solutions serve a growing customer base across a variety of vertical and horizontal markets, the primary of which are as follows:
| ● | 12% of revenue in Criminal Justice; |
| ● | 61% in Legal Courts; |
| ● | 12% in Insurance; and |
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| ● | 15% in Media, Corporate Finance, Government |
VIQ delivers its products and services to clients primarily through a network of resellers and integrators, as well as through direct sales, offering a variety of deployment methodologies and business models to meet customer demand including software, SaaS and managed services.
Looking ahead, VIQ intends on utilizing this content to extend the scope of solutions that it offers and to expand the value of the content it collects. To that end, VIQ’s ML-driven AI engine selection process drives the platform to serve emerging needs and unlocks the additional value in the data stream. VIQ takes advantage of all available technologies to accelerate its strategy, as the system is designed intentionally to integrate both VIQ’s internal intellectual property and external applications.
VIQ’s vision is to create an environment where it can cultivate the relationships with its customers through a portfolio of value-added complementary services.
VIQ is transitioning its technology services offerings towards a SaaS revenue model, in which clients are charged recurring monthly and/or quarterly fees based on a number of variables. Given the size, nature, and visibility of its sales pipeline, VIQ anticipates this SaaS option will continue to gain traction in the markets in which VIQ’s software is offered.
Sales Cycles and Seasonality
VIQ’s sales cycles are largely dependent on the size and complexity of individual customers. Based on VIQ’s history and information available to date, the Company has identified that fourth and first quarter’s revenues are generally lower than revenues generated during other interim periods, specifically due to decreased historic revenues in the months of December and January related to annual holidays and seasonality in the Courts segment.
Sales and Marketing
Target Sectors and Verticals
The vertical markets for the Company technology solutions and services include legal (courts), criminal justice, insurance, media, corporate finance and government organizations. These markets were selected based on core competencies, cost considerations, and the desire to make a meaningful difference with the technology that drives positive client experience and gross margin improvement.
Our suite of technology solutions and services are highly scalable and can be implemented to support country-wide deployments, large Fortune 500 companies, and down to small, local law enforcement agencies. The sales cycle can range from three days for small service requests to 12-18 months for large, complex platform technology sales.
Market Strategy
We have established several routes to markets and regions which follow a land-and-expand strategy. We seek to increase our integrated Technology and Technology Services footprint and volumes within client environments incrementally over time.
Our sales and marketing capabilities are aimed at expanding our footprint by selling our complete suite of services to new clients and cross-selling additional services into our existing client base. We employ a direct sales force, which we augment through channel partners and other marketing initiatives.
Our sales and marketing strategy is designed to increase brand awareness, establish the benefits of the solutions and services portfolio, and to build credibility through client proof points within our targeted markets. We utilize a direct marketing strategy to generate sales pipeline for new and current clients through targeted digital marketing campaigns, thought leadership, social media and through exhibitions at industry events and trade shows.
Regional Sales Operations
Our direct sales force is deployed across the United States, Canada, Australia, and the United Kingdom and is segmented by geography and industry segment. Our sales force is supported by our marketing organization, that provides specialized support for promotional and
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sales efforts. Our sales team works collaboratively with prospective clients to understand their needs, develop service proposals, and negotiate contracts to enable the execution of our solutions and services.
In addition to our direct sales team, we maintain business relationships/channel partnerships with third parties that promote and/or support our technology solutions within specific industries or geographic regions. These relationships are under agreements and compensate our channel partners for selling, implementing, and/or supporting products within our solutions portfolio. We operate worldwide with a network of partners including security integrators, audio/video specialists, and hardware and data storage suppliers.
Diversification
VIQ is segmented by both geography and industry markets. VIQ’s revenues are well diversified between a number of long term and short term contracts and arrangements.
Patents and Intellectual Property
Protection of intellectual property is integral to VIQ’s success. As such, VIQ has and will continue to pursue patent protection, register trademarks, and protect other intellectual property through trade secrets, copyright, confidential disclosure agreements, and other mechanisms as appropriate. This includes the use of confidential disclosure agreements with all prospective vendors and partners.
In order to maximize the duration of patent protection during the commercial life a potential product and/or allow the generation of data to strengthen a potential patent, VIQ may on occasion delay patent filing, while ensuring it does not risk the product protection during this delay. VIQ has in progress applications for several trademarks associated with its newer brand names.
VIQ holds three patents on technology, has one patent-pending and one patent application work in progress. The patent rights held by VIQ are summarized in the tables below:
No. | Patent | Jurisdiction | Status | Expiry |
1. | Evidence Based Digital Training | United States | Granted | August 18, 2037 |
2. | Evidence Based Digital Training | United States | Granted | August 18, 2037 |
3. | Parallel Processing Framework | United States | Granted | November 27, 2039 |
4. | Securing And Managing Offline | United States | Pending | -- |
Competition
Although VIQ has many competitors in the manual documentation automatic speech recognition/artificial intelligence segment, VIQ’s offerings are performing competitively as they are focused on and tuned to multi-speaker evidence-based markets. In addition, VIQ holds patents and patent-pending status on key intellectual property rights associated with the design and workflow of its key platforms.
Regulation
VIQ is subject to laws, regulations and rules including, among others, those related to data privacy and security. Violations of any of these laws and regulations may result in fines or penalties and/or commercial and reputational harm.
Laws Related to Individually Identifiable Information and Personal Health Information
VIQ receives, processes, transmits and stores information relating to identifiable individuals. As a result, VIQ is subject to numerous laws and regulations in the United States (both federal and state) and foreign laws and regulations designed to protect both individually
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identifiable information and personal health information, including (i) the Health Insurance Portability and Accountability Act of 1996, as amended, or HIPAA, and the regulations promulgated under HIPPA governing, among other things, the privacy, security and electronic transmission of individually identifiable health information, and (ii) the European Union General Data Protection Regulation (effective May 25, 2018), or GDPR, which imposes stringent data protection requirements and significant penalties for non-compliance and has had a significant impact on how we process and handle certain data.
Additional laws of the United States and foreign jurisdictions apply to our processing of individually identifiable information. These laws have been subject to frequent changes, and new legislation in this area may be enacted at any time. For example, the GDPR and the invalidation of the U.S.-EU Safe Harbor regime have required us to implement alternative mechanisms for some of our data flows from Europe to the United States to comply with applicable law.
Laws Relating to Processing Certain Financial Transactions
VIQ processes, support and executes financial transactions, and disburse funds, on behalf of its customers. This activity includes receiving debit and credit card information, processing payments for and due to VIQ customers and disbursing funds on payment or debit cards to payees of these customers. As a result, VIQ is subject to numerous laws and regulations in the United States (both federal and state) and in foreign jurisdictions, including the Electronic Fund Transfer Act, as amended, the Currency and Foreign Transactions Reporting Act of 1970 (commonly known as the Bank Secrecy Act), as amended, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (including the so-called Durbin Amendment), as amended, the Gramm-Leach-Bliley Act (also known as the Financial Modernization Act of 1999), as amended, and the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (USA PATRIOT ACT), as amended. Other United States (both federal and state) and foreign jurisdiction laws apply to our processing of certain financial transactions and related support services. These laws are subject to frequent changes, and new statutes and regulations in this area may be enacted at any time.
Obligations to Maintain Industry Standards and Best Practices
VIQ is subject to certain industry best practices and data security standards. These data security standards include credit card brand operating rules, certification requirements and rules governing electronic funds transfers, including the Payment Card Industry Data Security Standard (PCI DSS), a data security standard applicable to companies that collect, store or transmit payment card data. Any failure to comply fully or materially with PCI DSS or other applicable industry standards now or at any point in the future may negative impact VIQ’s contractual relationships. In addition, failure to meet PCI DSS standards could result in the loss of VIQ’s ability to accept credit card payments and the failure to meet applicable standards could impact VIQ’s ability to service customers in the markets we serve.
C.Organizational structure.
The Company was incorporated pursuant to the Business Corporations Act (Alberta) on November 10, 2004, under the name “VIQ Solutions Inc.”. The Company was continued under the Business Corporations Act (Alberta) on April 14, 2017.
The Company’s head and registered offices are located at 5915 Airport Road, Suite 700, Mississauga, Ontario L4V 1T1, Canada.
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The corporate structure of the Company and its material subsidiaries are as indicated in the following chart:.
D.Property, plant and equipment.
We do not own any real property. Our corporate headquarters and other principal offices are leased pursuant to customary lease agreements. We believe our current facilities are adequate for our business and operations, and actively evaluate the adequacy of our facilities on an ongoing basis.
Corporate Headquarters; Ontario, Canada: On July 1, 2017, we entered into a lease for the entirety of a 6,458 square foot building located at 5915 Airport Road, Mississauga, Ontario. This lease expires November 30, 2025. We have an option to extend the least for an additional 5-year term. The current basic rent is $68,648 annually. The property operates as our corporate headquarters.
VIQ Australia Properties; Perth and Brisbane City, Australia: On December 13, 2021, we entered into two leases relating to our VIQ Australia business, located at 233 Adelaide Terrace, Perth, Australia (the “Perth Lease”) and 102 Adelaide St, Brisbane City QLD Australia (the “Brisbane Lease,” and together with the Perth Lease, the “VIQ Australia Leases”), for 4,036 and 7,911 square foot facilities, respectively. The Perth Lease expires November 1, 2023, and the Brisbane Lease expires August 1, 2025. We have an option to extend the Perth Lease for an additional 2 year-term, and an option to extend the Brisbane Lease for an additional 3-year term. The current basic rent for the Perth Lease is $95,430 annually, and $245,354 annually for the Brisbane Lease.
VIQ Australia Property: Melbourne: On November 1, 2022, we entered into a lease relating to our VIQ Australia business, located at 355 Spencer Street,West, Melbourne (“Melbourne Lease”), VIC Australia for 4,445 square foot facility. The Melbourne lease expires October 30, 2024 and we have option to extend the Melbourne Lease for an additional one year term. The current basic rent for the Melbourne Lease is $173,800 annually.
VIQ UK Property: Hythe: On October 1, 2022, we entered into a lease relating to our VIQ UK business, located at 28 High Street, Hythe,,United Kingdom, (“Hythe Lease”), for 302 square foot facility. The Hythe lease expires September 30, 2024. The current basic rent for the Hythe Lease is $30,424 annually.
Item 4A.Unresolved Staff Comments.
Not Applicable.
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Item 5.Operating and Financial Review and Prospects.
A.Operating Results
The following Management’s Discussion and Analysis (“MD&A”) comments on the financial condition and results of operations of VIQ Solutions Inc. for the years ended December 31, 2022, 2021 and 2020. This MD&A should also be read in conjunction with our audited financial statements for the years ended December 31, 2022, 2021 and 2020, prepared in accordance with International Financial Reporting Standards (“IFRS”), as issued by the International Accounting Standards Board (“IASB”).
Basis of Presentation
Our audited consolidated financial statements have been prepared in accordance with IFRS. Our fiscal year is the 12-month period ending December 31. Amounts stated in this MD&A are in United States dollars, unless otherwise indicated.
Cautionary Note Regarding Non-IFRS Measures and Industry Metrics
The Company prepares its financial statements in accordance with IFRS. Non-IFRS measures are used by management to provide additional insight into our performance and financial condition. We believe non-IFRS measures are an important part of the financial reporting process and are useful in communicating information that complements and supplements the consolidated financial statements.
We use the following non-IFRS financial performance measures in our MD&A:
| ● | Adjusted EBITDA |
| ● | EBITDA |
| ● | Annual Recurring Revenue (“ARR”) |
| ● | Bookings |
| ● | Average Technology Services Revenue per Day |
| ● | Technology Services Cost of Sales without COVID-19 Subsidies per Minute of Audio |
| ● | Gross Margin for Technology Services without COVID-19 Subsidies |
| ● | Gross Margin for Technology and related revenue |
For a detailed description of each of the non-IFRS measures used in this MD&A and a detailed reconciliation to the most directly comparable measure under IFRS, please refer to the Key Operating Metrics – Non-IFRS Measures section of this MD&A. The non-IFRS measures set out in this MD&A are intended to provide additional information to investors and do not have any standardized meaning under IFRS, and therefore may not be comparable to other issuers, and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with IFRS.
18
We define such non-IFRS measures and industry metrics as follows:
“Adjusted EBITDA,” as defined by management, refers to net income (loss) before stock-based compensation, depreciation, amortization, interest expense, accretion and other financing costs, (gain) loss on revaluation of conversion feature liability, loss on repayment of long-term debt, gain on revaluation of options, gain on revaluation of restricted share units (“RSUs”), gain on revaluation of derivative warrant liability, restructuring costs, impairment of PPE, impairment of goodwill and intangibles, business acquisition costs, other expense (income), foreign exchange (gain) loss, current and deferred income tax expense (recovery). We believe that the items excluded from Adjusted EBITDA are not connected to and do not represent the operating performance of the Company. “EBITDA” is a non-IFRS financial measure and is not a standardized financial measure under the financial reporting framework used to prepare the financial statements of the Company and accordingly might not be comparable to similar financial measures disclosed by other issuers. We believe that Adjusted EBITDA is useful supplemental information as it provides an indication of the results generated by the Company’s main business activities prior to taking into consideration how those activities are financed and taxed as well as expenses related to stock-based compensation, depreciation, amortization, restructuring costs, acquisition, other expense (income), and foreign exchange (gain) loss. Accordingly, we believe that this measure may also be useful to investors in enhancing their understanding of the Company’s operating performance.
“ARR,” as defined by management, is the annualized equivalent value of the 1- Software Support Maintenance (SSM), 2- Software Subscriptions 3 – SaaS and 4- Technology Services revenue of all existing contracts as of the date being measured. This excludes non-recurring revenue from implementation, support, and maintenance fees. The majority of our Editing Services contracts are volumes based. Accordingly, our calculation of ARR assumes that the clients will renew the contractual commitments on a periodic basis as those commitments come up for renewal. A portion of the contract renewals are through a competitive tender process. Contracts agreements may be subject to contract value increases upon renewal reflecting both inflationary increases and the additional value and added products and services provided by our solutions. ARR is not adjusted for the impact of any projected future client cancellations, loss of renewals, service upgrades or downgrades or price increases or decreases. We use ARR as a measure of our revenue trend and an indicator of our future revenue opportunity from existing recurring client contracts. We believe that this measure provides a fair real-time measure of performance in a volume and subscription-based environment. ARR provides us with the visibility for consistent and predictable growth to our cash flows. Our total revenue growth coupled with increasing ARR indicates the continued strength in the expansion of our business and will continue to be our focus on a go-forward basis.
“EBITDA,” as defined by management, refers to earnings before depreciation, amortization, interest expense, current and deferred income tax expense (recovery).
“Bookings” as defined by management, is the calculated “Bookings” for a given period as the estimated contract value (for services tied to volume) of our recurring client contracts entered into during the period from (i) new clients and (ii) net upgrades by existing clients within the same workload, plus the actual (not annualized) estimated value of professional services consulting, advisory or project-based orders received, software licenses, subscriptions, SaaS, and hardware during the period.
Recurring client contracts are any contracts entered into on a multi-year or month-to-month basis, but excluding any professional services contracts for consulting, advisory or project-based work, software license and hardware.
We use Bookings to measure the amount of new business generated in a period, which we believe is an important indicator of new client acquisition and our ability to cross-sell new services to existing clients. Bookings are also used by management as a factor in determining performance-based compensation for our sales force. While we believe Bookings, in combination with other metrics, are an indicator of our near-term future revenue opportunity, it is not intended to be used as a projection of future revenue. Booking information is a non-IFRS measure, which involves judgments, estimates and assumptions, which does not have a standard industry definition. Our calculation of Bookings may differ from similarly titled metrics presented by other companies.
While we continue to acquire new clients, we also aim to deepen relationships with these clients through high-margin technology services and software bookings. In addition, we are investing in initiatives to drive sales productivity improvements.
“Average Technology Services Revenue per Day”, as defined by management, is calculated by region based on the total technology services revenue divided by the total billing days during the period. This number is highly impacted by seasonality and should be looked at for monthly trends. As an example, average revenue per day will likely drop in November and December in the US and December and January in Australia and the UK.
19
“Technology Services Cost of Sales per Minute of Audio without COVID-19 Subsidies”, as defined by management, the direct labor cost of edited content divided by the volume of audio content delivered.
“Gross Margin for Technology Services without COVID-19 Subsidies”, as defined by management, is as reported on the Company’s MD&A less COVID-19 related subsidies received related to technology services employees.
“Gross Margin for Technology and Related revenue”, as defined by management, is as reported on the Company’s MD&A.
Overview
VIQ Solutions is a leading provider of capture software and cloud-based transcription workflow automation solutions to assist government agencies and commercial enterprises securely digitize information-intensive voice and video content.
Our technology, which delivers a seamless, proprietary workflow and documentation platform securely captures, transforms, distributes, and manages complex digital voice and video content for over 4,293 active clients in the criminal justice, legal, insurance, media, government, and financial services verticals. We have operations in the U.S., Canada, Australia, and Europe.
Our scalable technology utilizes artificial intelligence (AI) designed to ingest significant amounts of evidentiary content to produce accurate, verbatim, diarized transcripts for mission critical events that have lasting financial and social impacts. In 2022, our platform processed over 17.4 million minutes of recorded, multi-speaker, multi-channel audio and video and created 9.4 million pages of secure, industry specific evidence documentation creating actionable information for use by our clients.
Our technology solutions are proven to deliver productivity enhancements, which drive down our overall production costs and speed of delivery, leading to meaningful gross margin improvements. Our automated workflow has enabled profitable growth while improving the overall service levels, strengthening our AI learning, and bolstering our competitive advantage.
Key Operating Highlights
| ● | Total revenue for the year ended December 31, 2022, was $45,843,929, an increase of $14,797,117 or 48% from $31,046,812 recognized in the comparative period in 2021. |
| ● | Gross margin for the year ended December 31, 2022, was $21,925,703 representing 47.8% of revenue versus 48.1% of revenue in the comparative period in 2021. Excluding COVID-19 wage subsidies, Gross Margin for the year ended December 31, 2022, would be 47.5% vs. 45.9% in the comparative period in 2021. |
| ● | Net loss for the year ended December 31, 2022, was $8,706,015, a decrease of $10,972,734 or 56% from a net loss of $19,678,749 recognized in the comparative period in 2021. |
| ● | Adjusted EBITDA, for the year ended December 31, 2022, was a deficit of $3,414,786, a decrease of $1,541,507, from an Adjusted EBITDA deficit of $4,956,293 recognized in the comparative period in 2021. The improvement in Adjusted EBITDA for the year ended December 31, 2022, was primarily due to increased gross profit resulting from increased revenue versus comparative period 2021. Also, comparative period 2021 includes approximately $3.0M in one-time professional services fees related to Nasdaq listing and D&O insurance, SEC registration, and M&A activity. The decrease in Adjusted EBITDA deficit was partially offset by higher selling and administrative expenses related to Q4 2021 acquisitions and incremental increase in cloud services expenses related to supporting the expansion of our infrastructure. In addition, the year ended December 31, 2022, included $224,812 reduction in expenses related to COVID-19 wage subsidies versus $1,661,812 recorded in the comparative period in 2021. |
Results of Operations (Unaudited; Non-IFRS)
Key financial performance indicators that we use to manage our business and evaluate our financial results and operating performance include revenue, expenses, net income (loss) and Adjusted EBITDA. We evaluate our performance on these metrics by comparing our actual results to management budgets, forecasts, and prior period performance. The data presented is intended to provide additional information and should not be considered in isolation or as a for measures of performance prepared in accordance with IFRS. Investors are cautioned that Adjusted EBITDA should not be construed as an alternative to net income (loss) as determined substitute in accordance with IFRS. These non-IFRS measures should be read in conjunction with the financial statements of the Company.
20
The following table sets forth a summary of our results of operations for the year ended December 31, 2022, 2021 and 2020:
| | | | | | | | | | | | | | |
| | Year ended | | Period over Period | | Period over Period | ||||||||
| | December 31 | | Change 2022 vs 2021 | | Change 2021 vs 2020 | ||||||||
|
| 2022 |
| 2021 |
| 2020 |
| $ |
| % |
| $ |
| % |
Revenue |
| 45,843,929 |
| 31,046,812 |
| 31,749,693 |
| 14,797,117 | | 48 | | (702,881) | | (2) |
Cost of sales |
| 23,918,226 |
| 16,123,853 |
| 15,599,437 |
| 7,794,373 | | 48 | | 524,416 | | 3 |
Gross profit |
| 21,925,703 |
| 14,922,959 |
| 16,150,256 |
| 7,002,744 | | 47 | | (1,227,297) | | (8) |
Expenses |
| |
| |
| |
| | | | | | | |
Selling and administrative expenses |
| 24,526,303 |
| 19,119,713 |
| 11,034,902 |
| 5,406,590 | | 28 | | 8,084,811 | | 73 |
Research and development expenses |
| 734,115 |
| 1,092,108 |
| 1,074,178 |
| (357,993) | | (33) | | 17,930 | | 2 |
Loss (Gain) on contingent consideration |
| 80,071 |
| (332,569) |
| (946,503) |
| 412,640 | | (124) | | 613,934 | | (65) |
Stock-based compensation |
| 2,779,312 |
| 8,495,189 |
| 725,316 |
| (5,715,877) | | (67) | | 7,769,873 | | 1,071 |
Depreciation |
| 579,249 |
| 257,099 |
| 445,995 |
| 322,150 | | 125 | | (188,896) | | (42) |
Amortization |
| 5,508,954 |
| 4,384,502 |
| 4,813,248 |
| 1,124,452 | | 26 | | (428,746) | | (9) |
Interest expense |
| 1,052,618 |
| 1,331,100 |
| 4,934,517 |
| (278,482) | | (21) | | (3,603,417) | | (73) |
Accretion and other financing costs |
| 1,231,194 |
| 967,106 |
| 1,216,949 |
| 264,088 | | 27 | | (249,843) | | (21) |
Loss on revaluation of conversion feature liability |
| — |
| — |
| 1,308,440 |
| — | | — | | (1,308,440) | | (100) |
Loss on repayment of long-term debt |
| 747,865 |
| — |
| 1,497,804 |
| 747,865 | | 100 | | (1,497,804) | | (100) |
Gain on revaluation of options |
| (1,511,399) |
| (1,028,055) |
| — |
| (483,344) | | 47 | | (1,028,055) | | (100) |
Gain on revaluation of RSUs |
| (550,260) |
| (242,595) |
| — |
| (307,665) | | 127 | | (242,595) | | (100) |
Gain on revaluation of the derivative warrant liability |
| (4,255,017) |
| (1,368,180) |
| — |
| (2,886,837) | | 211 | | (1,368,180) | | (100) |
Restructuring Costs |
| 323,075 |
| 432,702 |
| — |
| (109,627) | | (25) | | 432,702 | | (100) |
Impairment of goodwill and intangibles |
| — |
| — |
| 2,258,369 |
| — | | — | | (2,258,369) | | (100) |
Impairment of PPE | | 15,246 | | — | | — | | 15,246 | | 100 | | — | | — |
Business acquisition costs |
| 433,372 |
| 539,734 |
| 19,058 |
| (106,362) | | (20) | | 520,676 | | 2,732 |
Other expense (income) |
| (1,291) |
| (12,003) |
| (10,373) |
| 10,712 | | (89) | | (1,630) | | 16 |
Foreign exchange (gain) loss |
| (452,068) |
| 22,130 |
| (132,306) |
| (474,198) | | 2,143 | | 154,436 | | (117) |
Loss before income taxes |
| (9,315,636) |
| (18,735,022) |
| (12,089,338) |
| 9,419,386 | | 50 | | (6,645,684) | | (55) |
Current income tax recovery (expense) |
| 105,256 |
| 875 |
| (106,986) |
| 104,381 | | 11,929 | | 107,861 | | (101) |
Deferred income tax recovery (expense) |
| 504,365 |
| (944,602) |
| 1,051,018 |
| 1,448,967 | | (153) | | (1,995,620) | | (190) |
Income tax recovery (expense) |
| 609,621 |
| (943,727) |
| 944,032 |
| 1,553,348 | | 165 | | (1,887,759) | | 200 |
Net Loss |
| (8,706,015) |
| (19,678,749) |
| (11,145,306) |
| 10,972,734 | | 56 | | (8,533,443) | | (77) |
| | | | | | | | | | | | | | |
Adjusted EBITDA (1) |
| (3,414,786) |
| (4,956,293) |
| 4,987,679 |
| 1,541,507 | | 31 | | (9,943,972) | | (199) |
| | | | | | | | | | | | | | |
Weighted average number of common shares outstanding |
|
|
|
|
|
|
|
| |
| |
| |
|
Basic |
| 31,648,001 | | 26,448,594 |
| 18,080,533 |
| | | | |
| |
|
Diluted |
| 31,648,001 | | 26,448,594 |
| 18,080,533 |
| | | | |
| |
|
Net income (loss) per share |
|
| |
|
|
|
| | | | |
| |
|
Basic |
| (0.28) | | (0.74) |
| (0.62) |
| | | | |
| |
|
Diluted |
| (0.28) | | (0.74) |
| (0.62) |
| | | | |
| |
|
21
The following table sets forth a reconciliation of technology services, support and maintenance, SaaS and Subscription revenues to non-IFRS measure ARR, as described above:
| | | | | | |
|
| 2022 |
| 2021 | ||
Technology Services |
| | 41,812,479 |
| | 26,676,738 |
Support & Maintenance |
| | 1,872,620 |
| | 1,772,203 |
SaaS |
| | 89,692 |
| | 65,187 |
Subscription |
| | 493,845 |
| | 189,359 |
Add: The Transcription Agency Revenue Jan 1 - Oct 1, 2021 |
| | — |
| | 1,083,415 |
Add: Auscript Revenue Jan 1 - Dec 13, 2021 |
| | — |
| | 10,163,719 |
Add: Client Adjustments |
| | (1,532,468) |
| | 8,684,589 |
Total Annual Recurring Revenue | | $ | 42,736,168 | | $ | 48,635,210 |
The following is a reconciliation of Net Loss to Adjusted EBITDA, the most directly comparable IFRS measure for the year ended December 31, 2022, 2021 and 2020:
| | | | | | |
| | Year ended December 31 | ||||
|
| 2022 |
| 2021 |
| 2020 |
Net Loss |
| (8,706,015) |
| (19,678,749) |
| (11,145,306) |
Add: |
|
|
|
|
|
|
Depreciation |
| 579,249 |
| 257,099 |
| 445,995 |
Amortization |
| 5,508,954 |
| 4,384,502 |
| 4,813,248 |
Interest expense |
| 1,052,618 |
| 1,331,100 |
| 4,934,517 |
Current income tax recovery (expense) |
| (105,256) |
| (875) |
| 106,986 |
Deferred income tax recovery |
| (504,365) |
| 944,602 |
| (1,051,018) |
EBITDA |
| (2,174,815) |
| (12,762,321) |
| (1,895,578) |
Accretion and other financing costs |
| 1,231,194 |
| 967,106 |
| 1,216,949 |
Loss (gain) on revaluation of conversion feature liability |
| — |
| — |
| 1,308,440 |
Loss on repayment of long-term debt |
| 747,865 |
| — |
| 1,497,804 |
Gain on revaluation of options |
| (1,511,399) |
| (1,028,055) |
| — |
Gain on revaluation of RSUs |
| (550,260) |
| (242,595) |
| — |
Gain on revaluation of the derivative warrant liability |
| (4,255,017) |
| (1,368,180) |
| — |
Impairment of goodwill an intangibles |
| — |
| — |
| 2,258,369 |
Impairment of PPE | | 15,246 | | — | | — |
Restructuring Costs |
| 323,075 |
| 432,702 |
| — |
Business acquisition financing costs |
| 433,372 |
| 539,734 |
| 19,058 |
Other expense (income) |
| (1,291) |
| (12,003) |
| (10,373) |
Stock-based compensation |
| 2,779,312 |
| 8,495,189 |
| 725,316 |
Foreign exchange (gain) loss |
| (452,068) |
| 22,130 |
| (132,306) |
| | | | | | |
Adjusted EBITDA |
| (3,414,786) |
| (4,956,293) |
| 4,987,679 |
22
Components of Results of Operations
Revenue
The recurring nature of our revenue base is a key indication of performance. Most of our revenue is tied to major contracts and is expected to remain the same or increase in terms of the overall contribution to the Company. Also, these clients are tied to government entities and multinational Fortune 500 companies that provide little credit risk and accordingly provide a reliable revenue stream. Our revenue consists of transcription services, software license fees, support and maintenance and other recurring fees, professional service fees, and hardware sales. Transcription, service revenue consists of fees charged for recurring editing documentation services provided to our clients. Technology service revenue consists of fees charged for recurring automated transcription services. Software license revenue is comprised of license fees charged for the use of our software products generally licensed under perpetual arrangements and to a lesser extent sale of third-party software licenses. These license sales are larger contracts with longer sales cycles and are more variable in nature. Support and maintenance and other recurring revenue primarily consist of fees charged for client support on our software products post-delivery. Professional service revenue consists of fees charged for customization, implementation, integration, training and ongoing services associated with our software products and technology services. Hardware revenue includes the resale of third-party hardware that forms part of our client solutions. Occasionally, our clients may purchase a combination of software, maintenance, professional services and hardware, although the type, mix and quantity vary by client to create a solution for the client’s unique requirements.
Cost of Sales
Cost of sales consists primarily of staff costs, professional services and the cost of hardware and third-party licenses to fulfill client arrangements.
Selling and Administrative Expenses
Selling and administrative expenses consist primarily of personnel and related costs for our sales and marketing functions, including salaries and benefits, contract acquisition costs including commissions earned by sales personnel, direct marketing campaigns, public relations and other promotional activities. Selling and administrative expenses also consist primarily of personnel and related costs associated with the administrative functions of our business including corporate, finance, and internal information system support as well as legal, accounting, other professional fees, investor relations, occupancy costs and insurance.
We continue to invest globally in sales, marketing and business development to continue to diversify across segments, industries and geographies building awareness in our global brand to increase the future revenue growth of the Company.
Research and Development Expenses
Research and development expenses include personnel and related costs for ongoing research, development and product management initiatives.
Results of Operations
Comparison of the Years Ended December 31, 2022, and 2021
Revenue
Total revenue for the year ended December 31, 2022, was $45,843,929 an increase of $14,797,117, or 48%, from $31,046,812 recognized in the comparative period in 2021. The increase in revenue for the year ended December 31, 2022, was primarily due to revenue generated from Q4 2021 acquisitions which were partially offset by lower organic technology service revenue generated from Insurance, Criminal Justice, and lower technology sales versus the comparative period 2021. The foreign exchange impact for the year ended December 31, 2022 resulted in a reduction in revenue of $0.9M.
Cost of Sales
Cost of Sales for the year ended December 31, 2022, increased by $7,794,373, or 48%, to $23,918,226 from $16,123,853 for the comparative period in 2021.
23
The increase in Cost of Sales for the year ended December 31, 2022, is primarily due to Cost of Sales related to Q421 acquisitions which were partially offset by productivity gains achieved through NetScribe, powered by aiAssist, and our global workforce. Our Cost of Sales for the year ended December 31, 2022 was impacted positively by approximately $0.6M respectively due to weakening Australia and UK currencies in comparison to the USD.
We continued to utilize our global labor force which provides scale and real-time capacity, lower costs and 24-hour production. This stimulated gross margin improvements that began in Q4 2021.
During the year ended December 31, 2022, the Company received and recorded in cost of sales $129,247 of COVID-19 wage subsidies vs. $673,281 in the comparative period in 2021.
Gross Profit
Gross Profit for the year ended December 31, 2022, increased by $7,002,744, or 47%, to $21,925,703, from $14,922,959, for the comparative period in 2021. The increase in Gross Profit for the year ended December 31, 2022, is primarily due to Q4 2021 acquisitions and productivity gains, partially offset by lower technology revenue vs. the comparative period in 2021. In addition, the comparative period in 2021 includes $673,281 in COVID-19 wage subsidies vs. $129,247 in the year ended December 31, 2022. Excluding COVID-19 wage subsidies, Gross Profit Margin for the year ended December 31, 2022, would be 47.5% vs. 45.9% in the comparative period in 2021 which has increased due to productivity gains achieved through NetScribe, powered by aiAssist, and lower labour costs due to continued expanded use of our global workforce. Our Gross Profit for the year ended December 31, 2022 was impacted negatively by approximately $0.3M due to the weakening Australia and UK currencies in comparison to the USD.
Selling and Administrative Expenses
Selling and Administrative Expenses for the year ended December 31, 2022, increased by $5,406,590, or 28%, to $24,526,303, from $19,119,713, for the comparative period in 2021. The increase for the year ended December 31, 2022, includes Selling and Administrative Expenses related to Q4 2021 acquisitions, and incremental costs associated with cloud services of approximately $800,000 to support expansion of our infrastructure. The increase in selling and administrative expenses was partially offset by approximately $3,000,000 in one-time professional service fees reported in comparative period 2021 relating to capital raise, Nasdaq listing fees and M&A activity. In addition, the year ended December 31, 2022, included $95,565 recorded in selling and administrative expenses for COVID-19 wage subsidies versus $988,531 in the comparative period in 2021.
Research and Development Expenses
Research and Development Expenses for the year ended December 31, 2022, decreased by $357,993, or 33%, to $734,115, from $1,092,108, for the comparative period in 2021. The decrease in Research and Development Expenses for the year ended December 31, 2022, is primarily due to lower project costs than the comparative period in 2021.
Loss (Gain) on Contingent Consideration
For the year ended December 31, 2022, Contingent Consideration changed by $412,640, from a gain of $332,569, recognized in the comparative period in 2021 to a loss of $80,071. The change for the year ended December 31, 2022, is mainly due to changes in anticipated acquisition earnout payments primarily as a result of revised forecasted revenue for the wordZXpressed, Inc. (“WordZ”) acquisition. In addition, the prior year gain on contingent consideration related to the earnout of the ASC acquisition which was settled in Q4 2021. Revenue forecasts are updated on a quarterly basis and the related anticipated acquisition earnout payment accruals are updated accordingly.
Stock-Based Compensation
For the year ended December 31, 2022, Stock Based Compensation decreased by $5,715,877 to $2,779,312 from $8,495,189, recognized in the same period of 2021. The decrease in Stock Based Compensation is due to the impact of 805,947 options, 803,463 RSUs and 195,000 PSUs granted during the year ended December 31, 2022 compared to 1,115,086 stock options and 1,023,378 RSUs granted for the year ended December 31, 2021. In addition, the 2022 RSUs, PSUs and stock options were recorded at lower fair value due to lower share price.
24
Depreciation
For the year ended December 31, 2022, depreciation increased by $322,150, to $579,249, from $257,099 recognized in the comparative period in 2021. The increase in depreciation for the three months and year ended December 31, 2022, is due primarily to the addition of right of use assets acquired with Q4 2021 acquisitions and capital assets purchased during the period.
Amortization
For the year ended December 31, 2022, Amortization increased by $1,124,452, to $5,508,954, from $4,384,502 recognized in the comparative period in 2021. The increase in amortization for year ended December 31, 2022, is mainly attributable to the amortization of intangible assets related to Q4 2021 acquisitions and accelerated amortization recorded on VIQ legacy brands. The increase in amortization is partially offset by the reduction in amortization of capitalized internally generated intangible assets due to the timing of projects partially offset by amortization of intangible assets related to Q4 2021 acquisitions.
Interest Expense
For the year ended December 31, 2022, Interest Expense decreased by $278,482, to $1,052,618, from $1,331,100 recognized in the comparative period in 2021. The decrease in Interest Expense for the three months and year ended December 31, 2022, is primarily due to $4,005,768 principal repayment on long term debt, which occurred in Q1 2022.
Accretion and Other Financing Costs
For the year ended December 31, 2022, Accretion and Other Financing Costs increased by $264,088 to $1,231,194 from $967,106 recognized in the comparative period in 2021. The increase in Accretion and Other Financing Costs for the year ended December 31, 2022 is primarily due to incremental amendment fees incurred on debt financing partially offset by extinguishment of debt.
Loss on Extinguishment of Debt
On July 14, 2022, the Company amended the terms of the debt agreement with Crown Capital Partner Funding, LP (the “Crown Debt Facility”). The amendment resulted in the terms of the Crown Debt Facility being substantially modified, as such the transaction is accounted for as an extinguishment of the old debt. The Company recognized a loss on extinguishment of debt of $747,865 for the year ended December 31,2022 and the new debt was recognized at a fair value of $7,706,896.
Gain on Revaluation of Options
For the year ended December 31, 2022, Gain on Revaluation of Options increased by $483,344, to $1,511,399, from $1,028,055 recognized in the comparative period in 2021. This increase is due to the revaluation of cash-settled options recorded under share-based payment liability, due to the decrease in stock price from the date of initial measurement compared to the re-measurement and the forfeiture of these options.
Gain on Revaluation of RSUs
For the year ended December 31, 2022, Gain on Revaluation of RSUs increased by $307,665, to $550,260, from $242,595 recognized in the comparative period in 2021. This decrease is due to the revaluation of RSUs recorded under share-based payment liability and due to the larger decrease in share price compared to the comparative year.
Gain on Revaluation of Derivative Warrant Liability
For the year ended December 31, 2022, Gain on Revaluation of Derivative Warrant Liability increased by $2,886,837, to $4,255,017, from $1,368,180 recognized in the comparative period in 2021. The Gain on Revaluation of Derivative Warrant Liability for the year ended December 31, 2022 is due to a decrease in share price on an increased number of warrants which results in a gain recognized.
25
Restructuring Costs
For the year ended December 31, 2022, Restructuring Costs decreased by $109,627, to $323,075, from $432,702 recognized in the comparative period in 2021. The decrease in Restructuring Costs for year ended December 31, 2022 is due to lower organizational restructuring costs.
Impairment of PPE
For the year ended December 31, 2022, impairment of PPE increased by $15,246, recognized due to write-off of capitalized software that is no longer in use.
Business Acquisition Costs
For the year ended December 31, 2022, Business Acquisition costs decreased by $106,362, to $433,372, from $539,734 recognized in the comparative period in 2021. The decrease in Business Acquisition Costs for the year ended December 31, 2022, is primarily due lower business acquisition costs incurred than comparative period 2021.
Other Income
For the year ended December 31, 2022, Other Income decreased by $10,712, to $1,291, from $12,003 recognized in the comparative period in 2021. The decrease in Other Income for the year ended December 31, 2022 is due to lower interest earned on term deposits.
Foreign Exchange (Gain) Loss
For the year ended December 31, 2022, Foreign Exchange Gain increased by $474,198, from a loss of $22,130 recognized in the comparative period in 2021 to a gain of $452,068. The gain/loss on foreign exchange is due to fluctuations in the foreign exchange rates. Our businesses are organized geographically so many of our expenses are incurred in the same currency as our revenues, which mitigates some of our exposure to currency fluctuations. Foreign exchange gain and losses are primarily related to the unrealized foreign translation gains and losses of certain USD, AUD and GBP denominated working capital balances to CAD and USD denominated working capital balances to AUD.
Income Tax Recovery (Expense)
We operate globally and we calculate our tax provision in each of the jurisdictions in which we conduct business. Our effective tax rate on a consolidated basis is, therefore, affected by the realization and anticipated relative profitability of our operations in those various jurisdictions, as well as different tax rates that apply and our ability to utilize tax losses and other credits. For the year ended December 31, 2022, Income tax recovery increased by $1,553,348 to a tax recovery of $609,621, from a tax expense of $943,727 in the comparative period in 2021. The increase for the year ended December 31, 2022, is primarily due to the recording of a valuation allowance on deferred tax asset recorded for our U.S. entities in 2021 based on forecasted profitability and taxable profit recognized for our Australian subsidiaries.
Net Loss and Earnings Per Share
Net loss for the year ended December 31, 2022, was $8,706,015 compared to a net loss of $19,678,749, for the same period in 2021. On a per weighted average share basis, this translated into a net loss per share of $0.28 in the year ended December 31, 2022, compared to a net loss per weighted average share of $0.74 for the comparative period in 2021.
26
Comparison of the Years Ended December 31, 2021, and 2020
Revenue
Total revenue for the year ended December 31, 2021, was $31,046,812, a decrease of $702,881, or 2%, from $31,749,693 recognized in the comparative period in 2020. The decrease in revenue for the year ended December 31, 2021, is primarily due to 163 days of COVID billing days in Australia and slower recovery in the United States in car accident claims due to reduced movement of people and traffic from the lockdowns. It was also due to slower local Policing activities from the government mandated lockdowns in various states and local communities. These resulted in lower volume of insurance and police interviews and transcription revenue in the insurance and law enforcement segments which was partially offset by higher revenues recorded by the Australian business and higher technology sales. Without the pandemic, billings for an additional 163 billing days would have increased year end revenue by $1,200,000 to approximately $32,200,000 versus reported revenue.
Cost of Sales
Cost of sales for the year ended December 31, 2021, increased by $524,416, or 3%, to $16,123,853, from $15,599,437 for the comparative period in 2020. The increase in cost of sales for the year ended December 31, 2021, is primarily due to reduction of COVID-19 wage subsidies and Q421 acquisitions which were partially offset by productivity gains through NetScribe, powered by aiAssist, and the global workforce. Also increasing the cost of sales in Q2 and Q3 2021 was the subsidies. Even as subsidies to our independent contractor labor force were reduced, challenges remained in driving full pre pandemic productivity levels from that labor. A rapid pivot to utilizing global capacity supported increased capacity and reduced costs in the last quarter of the year. During the year ended December 31, 2021, the Company received $673,281 of COVID-19 subsidies vs. $2,830,986 received in the comparative period in 2020. Throughout 2021 management was forced to maintain capacity in anticipation of a rapid recovery.
Gross Profit
Gross profit for the year ended December 31, 2021, decreased by $1,227,297, or 8%, to $14,922,959, from $16,150,256, for the comparative period in 2020. The decrease in Gross Profit for the year ended December 31, 2021, is primarily due to lower COVID-19 wage subsidies received and reduction in revenue due to delayed revenue from client contracts resulting from COVID-19 impact. Excluding COVID-19 wage subsidies, gross profit margin for the year ended December 31, 2021, would be 46% vs. 42% in the comparative period in 2020.
Selling and Administrative Expenses
Selling and administrative expenses for the year ended December 31, 2021, increased by $8,084,811, or 73%, to $19,119,713, from $11,034,902, for the comparative period in 2020. The increase for the year ended December 31, 2021, includes selling and administrative expenses related to Q421 acquisitions of approximately $900,000, professional service fees related to listing fees for the TSX and Nasdaq of approximately $585,000 and the remainder of increase is due to higher professional services fees and increase in headcount. Selling and administrative expenses for the year ended December 31, 2021, were reduced by $988,531 for COVID-19 wage subsidies vs. $1,203,326 in the comparative period in 2020.
Research and Development Expenses
Research and development expenses for the year ended December 31, 2021, increased by $17,930, or 2%, to $1,092,108, from $1,074,178, for the comparative period in 2020. The increase in Research and development expenses for the year ended December 31, 2021, is primarily due to project costs and additional hires to support growth in innovation and acceleration of research and development projects.
Loss (Gain) on Contingent Consideration
For the year ended December 31, 2021, gain on contingent consideration decreased by $613,934 to $332,569, from $946,503 recognized in the comparative period in 2020.
27
Stock-Based Compensation
For the year ended December 31, 2021, stock based compensation increased by $7,769,873, to $8,495,189, from $725,316, recognized in the same period of 2020. The increase in stock based compensation is due to the impact of 1,023,378 RSUs and 1,115,086 stock options granted during the year ended December 31, 2021, compared to 396,000 options granted during the comparative period ended 2020. The RSU’s and stock options granted during the year ended December 31, 2021, were under the Company’s omnibus equity incentive plan (the “Omnibus Equity Incentive Plan”) that was approved by shareholders on April 29, 2021. A number of the options and RSUs that were granted during the year ended December 31, 2021, vested immediately, and therefore, a higher expense was recognized.
Depreciation
For the year ended December 31, 2021, depreciation decreased by $188,896, to $257,099, from $445,995 recognized in the comparative period in 2020. The decrease in depreciation for the year ended December 31, 2021, is due primarily to a decrease in right of use assets’ depreciation as leases with extended period terms (i.e., greater than one year) came to an end.
Amortization
For the year ended December 31, 2021, amortization decreased by $428,746, to $4,384,502 from $4,813,248 recognized in the comparative period in 2020. The decrease in amortization expense is attributable to the reduction in amortization on capitalized internally generated intangible assets due to timing of projects.
Interest Expense
For the year ended December 31, 2021, interest expense decreased by $3,603,417, to $1,331,100, from $4,934,517 recognized in the comparative period in 2020. The decrease in interest expense for the year ended December 31, 2021, is primarily due to the conversion of the convertible notes to equity that occurred in 2020. Interest expense of $3,503,797 related to the convertible note were recognized for the year ended December 31, 2020.
Accretion and Other Financing Costs
For the year ended December 31, 2021, accretion and other financing costs decreased by $249,843, to $967,106, from $1,216,949 recognized in the comparative period in 2020. The decrease in accretion and other financing costs for the year ended December 31, 2021, is primarily due to conversion of the convertible notes that occurred in 2020.
Loss on Revaluation of Conversion Feature Liability
For the year ended December 31, 2021, loss on revaluation of conversion feature liability decreased by $1,308,440, to $0, from a loss of $1,308,440 recognized in the comparative period in 2020. The decrease in loss on revaluation of conversion feature liability for the year ended December 31, 2021, relates to the conversion of convertible notes to equity that occurred in 2020. All convertible notes have been fully converted at the end of 2020.
Loss on Repayment of Long-term Debt
For the year ended December 31, 2021, loss on repayment of long-term debt decreased by $1,497,804, to $0, from $1,497,804 recognized in the comparative period in 2020. The loss on repayment of long-term debt amount recorded in comparative period 2020 was due to the re-pricing of the conversion price on the convertible notes to CDN$2.18 per share resulting in a charge of $1,497,804 reflecting the incremental fair value of the reduced exercise price.
Gain on Revaluation of Options
For the year ended December 31, 2021, gain on revaluation of options increased by $1,028,055, to $1,028,055, from $0 recognized in the comparative period in 2020. This increase is due to the revaluation of cash-settled options recorded under share-based payment liability, due to the decrease in fair value from the date of initial measurement compared to the re-measurement at the close of December 31, 2021.
28
Gain on Revaluation of RSUs
For the year ended December 31, 2021, gain on revaluation of RSUs increased by $242,595 to $242,595, from $0 recognized in the comparative period in 2020. This increase is due to the revaluation of RSUs recorded under share-based payment liability, due to the decrease in fair value from the date of initial measurement compared to the re-measurement at the close of December 31, 2021.
Gain on Revaluation of Derivative Warrant Liability
For the year ended December 31, 2021, gain on revaluation of derivative warrant liability increased by $1,368,180, to $1,368,180, from $0 recognized in the comparative period in 2020. The Company closed a registered direct offering (the “RDO”) with institutional investors on September 15, 2021. Under the RDO, the Company sold 4,235,294 units (the “Units”) at a price of $4.25 per Unit for gross proceeds to the Company of approximately $18,000,000 before deducting fees and other estimated RDO expenses. Each Unit consists of one common share of the Company and one-half of one common share purchase warrant (each whole common share purchase warrant, a “Warrant”). Each Warrant shall entitle the holder thereof to purchase one common share (a “Warrant Share”) at an exercise price of $5.00, subject to adjustment in certain circumstances. The Warrants are exercisable beginning on the date that is six months following the issuance date thereof (the “Issuance Date”) and will expire five years from the Issuance Date. The 2,117,647 Warrants issued were classified as derivative warrant liability since they were denominated in a currency other than the Company’s functional currency. As a result, revaluation of the derivative warrant liability is required at period end reporting dates. The decrease in the Company’s share price from the date of initial measurement to the close of December 31, 2021, resulted in the gain to be recognized.
Restructuring Costs
For the year ended December 31, 2021, restructuring costs increased by $432,702, to $432,702, from $0 recognized in the comparative period in 2020. The increase in restructuring costs for the year ended December 31, 2021, is primarily due to organizational restructuring costs.
Business Acquisition Costs
For the year ended December 31, 2021, business acquisition costs increased by $520,676, to $539,734, from $19,058 recognized in the comparative period in 2020. The increase in business acquisition costs for the year ended December 31, 2021, is primarily due to an increase in acquisition related activities.
Other Income
For the year ended December 31, 2021, other income increased by $1,630, to $12,003, from $10,373 recognized in the comparative period in 2020. The increase for other income for the year ended December 31, 2021, is primarily due to interest income on short-term deposit.
Foreign Exchange (Gain) Loss
For the year ended December 31, 2021, foreign exchange (gain) loss increased by $154,436, from a gain of $132,306 recognized in the comparative period in 2020 to a loss of $22,130. The gain on foreign exchange is due to fluctuations in the foreign exchange rates. Our businesses are organized geographically so many of our expenses are incurred in the same currency as our revenues, which mitigates some of our exposure to currency fluctuations. Foreign exchange gain and losses are primarily related to the unrealized foreign translation gains and losses of certain USD and AUD denominated working capital balances to CAD.
29
Income Tax Recovery (Expense)
We operate globally and we calculate our tax provision in each of the jurisdictions in which we conduct business. Our effective tax rate on a consolidated basis is, therefore, affected by the realization and anticipated relative profitability of our operations in those various jurisdictions, as well as different tax rates that apply and our ability to utilize tax losses and other credits. For the three months ended December 31, 2021, Income tax expense, net of deferred income tax recovery, decreased by $1,533,746 to a tax recovery of $87, from a tax recovery of $1,533,833 in the comparative period in 2020. For the year ended December 31, 2021, Income tax expense, net of deferred income tax expense, increased by $1,887,759, to an expense of $943,727, from a tax recovery of $944,032 in the comparative period in 2020. The increase for the year ended December 31, 2021, is primarily due to the reversal of deferred tax asset which was recorded in comparative period 2020 for our US entities, partially offset by deferred tax recovery recorded for our Australia entities and book to file change in estimates for our US entities.
Net Loss and Earnings Per Share
Net loss for the year ended December 31, 2021, was $19,678,749 compared to net loss of $11,145,306, for the same period in 2020. On a per weighted average share basis, this translated into a net loss per share of $0.74 in the year ended December 31, 2021, compared to a net loss per weighted average share of $0.62 for the comparative period in 2020.
B.Liquidity and Capital Resources
Liquidity
As of December 31, 2022, we held cash of $1,657,571 as compared to $10,583,534 as of December 31, 2021.
On January 13, 2023, the Company entered into the Loan with Beedie, with maximum available funds of $15 million. $12 million of the Loan has been advanced to the Company as an initial advance with an additional $3 million available to the Company to be drawn in subsequent advances in a minimum of US$1 million tranches.
We believe that ongoing operations, working capital and associated cash flows in addition to our cash resources provide sufficient liquidity to support our ongoing business operations and satisfy our obligations as they become due. If we continue to acquire accretive businesses, we may need additional external funding depending upon the size and timing of the potential acquisitions.
Cash Flows
The following table summarizes the primary sources and uses of cash for each period presented:
| | | | | | |
| | Year ended December 31, | ||||
|
| 2022 |
| 2021 |
| 2020 |
Cash provided by (used in) operating activities | | (2,335,876) | | (8,238,407) | | 3,423,083 |
Cash used in investing activities | | (4,104,065) | | (14,440,714) | | (6,639,191) |
Cash provided by financing activities | | (2,373,816) | | 16,521,996 | | 18,162,619 |
Net increase (decrease) in cash for the year | | (8,813,757) | | (6,157,125) | | 14,946,511 |
Cash, beginning of Year | | 10,583,534 | | 16,835,671 | | 1,707,654 |
Effect of foreign exchange | | (112,206) | | (95,012) | | 181,506 |
Cash, end of year | | 1,657,571 | | 10,583,534 | | 16,835,671 |
Comparison of the Years Ended December 31, 2022 and 2021
Cash Provided by (used in) Operating Activities
The Company utilized cash of $2,335,876 in operating activities for the year ended December 31, 2022. This resulted from $8,706,015 in net loss plus $4,975,042 of non-cash adjustments and $1,395,097 attributable to movements in working capital with changes primarily arising from an increase in accounts receivable, accounts payable, contract liabilities which was offset with a decrease in inventories and prepaid expenses.
30
Cash Provided by (used in) Investing Activities
For the year ended December 31, 2022, cash used in investing activities was $4,104,065 which consisted of purchase of property and equipment of $1,202,489 development costs related to internally generated intangible assets of $1,828,983, business acquisition cost of $298,927 related to the Auscript acquisition and settlement of final working capital, a deferred consideration and earnout payout for WordZ and Auscript of $539,380, and change in restricted cash of $234,286.
Cash Provided by (used in) Financing Activities
Cash used by Financing Activities for the year ended December 31, 2022, was $2,373,816, which consisted of $4,053,476 of cash provided by issuance of share capital net of issuance costs, cash used in repayment of debt of $4,761,890 payment of amendment fees on debt of $239,880, repayment of lease obligations of $270,795, payment of interest on lease obligations of $114,131, and payment of interest on debt of $1,040,596.
Comparison of the Years Ended December 31, 2021 and 2020
Cash Provided by (used in) Operating Activities
We used cash of $8,238,407 in operating activities for the year ended December 31, 2021. This resulted from $19,678,749 in net loss plus $13,556,701 of non-cash adjustments and $2,002,506 attributable to movements in noncash working capital with changes primarily arising from a decrease in accounts receivable, inventories, prepaid expenses, accounts payable, and contract liabilities. Additionally, $113,853 was used for taxes.
Cash Provided by (used in) Investing Activities
For the year ended December 31, 2021, cash used in investing activities was $14,440,714 which consisted of purchase of property and equipment of $79,204, business acquisitions of $9,135,131, development costs related to internally generated intangible assets $2,364,733, earnout payout for ASC and WordZ $2,600,536, and change in restricted cash of $261,110.
Cash Provided by (used in) Financing Activities
Cash provided by financing activities for the year ended December 31, 2021 was $16,521,996, which consisted of proceeds from the exercise of stock options and warrants of $246,160 and $2,092,276 respectively, issuance of share capital from the RDO net of issuance costs of $16,715,000, issuance cost reimbursement of $1,673, offset by repayment of debt of $1,070,274, repayment of lease obligations of $150,924, repayment of interest on lease obligations of $34,712, and repayment of interest on debt of $1,277,203.
Use of Proceeds
See “Item 14, Material Modifications to the Rights of Security Holders and Use of Proceeds – E. Use of Proceeds” of this Annual Report for more information.
Indebtedness
In accordance with our debt agreement dated November 28, 2018 by and among the Company, our subsidiaries and Crown Capital Partner Funding, LP, or Crown Capital (as amended, the “Crown Capital Agreement”), the Company is required to maintain quarterly (1) a Fixed Charge Coverage Ratio (“FCCR”) of greater than 1.25 calculated based on EBITDA for such period less liabilities paid in cash in connection with the Company’s share appreciation rights plan, cash dividends paid and capital expenditures divided by debt service for such period and (2) Net Debt to EBITDA Ratio less than 3. The Company received a waiver in March 2021 to remove the FCCR covenant for all four quarters of 2021. The Company received a waiver in August 2021, to remove the Net Debt to EBITDA Ratio covenant for the remainder of fiscal 2021. In addition, the Company received a waiver to remove the FCCR covenant for the first three quarters of 2022. The Company was in compliance of other covenants as at December 31, 2022.
31
On March 30, 2022, the Company entered into a fourth amendment to the Crown Capital Agreement to, among other things, waive the application of certain covenants contained in the Crown Capital Agreement with respect to the maintenance of certain financial ratios. In consideration, the Company paid $4,005,768 of the principal balance on March 30, 2022 and a fee of approximately $235,000. Following the fourth amendment, the Crown Capital Agreement waives the Fixed Charge Coverage Ratio for Q4, 2022 and the Net Debt to EBITDA ratio for Q1 and Q2 2022. Additional financial covenants were added to the Crown Capital Agreement, which include restrictions on the amount of selling, administrative and research and development costs and restrictions on capital expenditure (including internally generated intangible assets and capitalized assets) in each of Q2 2022, Q3 2022 and Q4 2022.
On July 14, 2022, the Company signed an amendment to the Crown debt facility which removed entirely the Fixed Charge Coverage Ratio and Net Debt to EBITDA covenants for the term of the facility. The covenants relating to the restrictions on the amount of selling, administrative and research and development costs and restrictions on capital expenditure for the quarter ending December 31, 2022 were unchanged. In addition, the Company has agreed to make certain payments to the lender in the event that there is a balance outstanding under the debt facility as at certain periods in time. Such fees, if applicable, are payable in cash or Common Shares, in the Company’s sole discretion. During Q4 2022, the Company issued 1,078,901 Common Shares to Crown Capital Funding, LP in connection with these payments. The 1,078,901 Common Shares issued are subject to a statutory hold period of four months plus a day.
On January 13, 2023, the Company entered the Loan with Beedie, with maximum available funds of $15 million. $12 million of the Loan has been advanced to the Company as an initial advance with an additional $3 million available to the Company to be drawn in subsequent advances in a minimum of US$1 million tranches (“Standby Facility”). The amount outstanding under the Loan will bear interest at 12.5% per annum, comprised of cash interest of 9.5% per annum, calculated and paid monthly, and paid-in-kind interest will be charged at a rate of 3.0% per annum, compounded monthly and added to the outstanding principal amount of the Loan. A standby fee will be charged monthly at a rate of 1.5% per annum on the undrawn amount of the Standby Facility. The Company paid a commitment fee of 1.5% of the Loan. The lender has also been granted a board observer right. The loan is secured by a general security agreement covering all assets of the Company. The outstanding principal balance of the loan is repayable on January 13, 2027.
On initiation of the Beedie Loan on January 13, 2023, 7,968,750 common share purchase warrants were issued to Beedie. Each warrant is convertible into one common share in the capital of the Company at a price per share equal to $0.256 until January 16, 2030. In addition, the Company has agreed to issue additional common share purchase warrants in connection with the subsequent advances, with such number of Warrants to be equal to 17% of the amount of such subsequent advance divided by the exercise price of such subsequent warrants. The subsequent warrants are to have an exercise price equal to the 5-day volume weighted average price of the Common Shares immediately prior to the earlier of: (i) the announcement of the applicable subsequent advance, and (ii) the funding of the applicable subsequent advance. The subsequent warrants will expire seven years from the date of issuance.
Under the Loan, the Company has undertaken to comply with financial covenants regarding a minimum balance of unrestricted cash and cash equivalents, minimum adjusted monthly EBITDA and maximum total secured debt leverage ratio.
On January 13, 2023, the Company utilized the proceeds of the initial advance to fully repay the loan with Crown Capital Funding Partner in the amount of $7,805,497.
Other Indebtedness
Unsecured promissory notes have been issued to the former owners of acquired companies. As part of the acquisition of Transcription Express, the Company issued an unsecured promissory note to the former owners of Transcription Express with a face value of $1,666,227, bearing interest at 10% per annum. During the year ended December 31, 2019, the terms of the Transcription Express unsecured promissory note were amended with the principal and accrued interest to be paid monthly beginning on July 31, 2019 to the period ended April 30, 2021. As at December 31, 2022, this unsecured promissory note has been paid in full.
As part of the acquisition of HomeTech, the Company issued an unsecured interest-free promissory note to the former owners of HomeTech with a face value of $1,200,000, to be paid monthly for 60 months in equal installments of $20,000 beginning February 25, 2019 to the period ending January 25, 2024. The Company recorded the unsecured promissory note by discounting the principal amounts due using a market annual interest rate of 12%. The difference between the present value and the face value is being accreted over the term of the unsecured promissory notes
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An additional note was issued to the former owners of WordZ with a face value of $1,200,000 bearing interest at 5% to be paid quarterly for 36 months beginning January 5, 2021 to the period ending October 5, 2023. The fair value of the unsecured promissory notes was determined on a market annual interest rate of 12%. The difference between the face value and the ascribed value of the notes is being accreted over life of the notes.
On November 28, 2018, the Company issued unsecured convertible notes with a face value of $1,000 bearing interest at a rate of 10% per annum for gross proceeds of $3,717,934 maturing in five years after issuance.
On December 20, 2018, the Company issued unsecured convertible notes with a face value of $1,000 bearing interest at a rate of10% per annum for gross proceeds of $1,150,000 maturing in five years after issuance.
On May 7, 2019, the Company issued unsecured convertible notes with a face value of $1,000 bearing interest at a rate of 10%per annum for gross proceeds of $1,925,000 maturing in five years after issuance.
During the year ended December 31, 2020, the Company entered into agreements (the “Amending Agreements”) with the holders of unsecured convertible notes (each, a “Note”) in the aggregate principal amount of approximately $6,792,934, granting the holders of such Notes (each a “Noteholder”) the option to convert the principal and the aggregate interest payable on their Notes from the date of issuance to the maturity date (the “Total Interest Payable”) into shares. The modification of the convertible notes resulted in in a charge of $1,497,804 reflecting the incremental fair value of the reduced exercise price. This charge was recorded as a loss on repayment of long-term debt in the consolidated statements of loss and comprehensive loss. Concurrent with their entry into the Amending Agreements, Noteholders holding all of the outstanding Notes exercised the Conversion Option during the year ended December 31, 2020. As a result of the exercise of the Conversion Option, the Company recognized $3,503,797 in interest expense reflecting interest charges from the date of the conversion through the maturity date. For the year ended December 31, 2020, the Company recognized a loss of $1,308,440 on the revaluation of the conversion feature liability.
The Company issued 6,785,651 Common Shares to settle its outstanding Notes having an aggregate principal amount of $6,871,003, total interest payable of $4,296,999, and a loss on revaluation of conversion feature liability to the date of exercise of $1,260,360 for a total amount of $12,428,362 credited to share capital of the Company. The amount is nil for convertible notes at December 31, 2022 and December 31, 2021.
Contractual Obligations
The following table summarizes our contractual obligations as at December 31, 2022, including commitments relating to leasing contracts:
| | | | | | | | |
|
| 2023 |
| 2024 |
| 2025 |
| Total |
Trade and other payables |
| 5,937,880 |
|
|
|
|
| 5,937,880 |
Lease obligations |
| 679,718 |
| 496,123 |
| 232,461 |
| 1,408,302 |
Crown Capital debt |
| 7,701,650 |
|
|
|
|
| 7,701,650 |
Contingent Consideration - WordZ |
| 236,808 |
|
|
|
|
| 236,808 |
WordZ promissory note |
| 432,939 |
|
|
|
|
| 432,939 |
HomeTech VTB loan |
| 260,000 |
| 20,000 |
|
|
| 280,000 |
Total |
| 15,248,995 |
| 516,123 |
| 232,461 |
| 15,997,579 |
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The following table summarizes our contractual obligations as at December 31, 2021, including commitments relating to leasing contracts:
| | | | | | | | | | |
|
| 2022 |
| 2023 |
| 2024 |
| 2025 |
| Total |
Trade and other payables |
| 5,380,701 |
| — |
| — |
| — |
| 5,380,701 |
Lease obligations |
| 446,571 |
| 477,290 |
| 337,842 |
| 247,211 |
| 1,508,914 |
Crown Capital debt |
| 308,892 |
| 12,165,330 |
| — |
| — |
| 12,474,222 |
Contingent Consideration - WordZ |
| 77,249 |
| 352,626 |
| 282,537 |
| — |
| 712,412 |
Contingent Consideration - Auscript |
| 150,000 |
| — |
| — |
| — |
| 150,000 |
WordZ SBA Loan |
| 114,507 |
| — |
| — |
| — |
| 114,507 |
WordZ promissory note |
| 357,323 |
| 212,901 |
| — |
| — |
| 570,224 |
HomeTech VTB loan |
| 240,000 |
| 240,000 |
| 20,000 |
| — |
| 500,000 |
Total | | 7,075,243 | | 13,448,146 | | 640,379 | | 247,211 | | 21,410,979 |
Off-Balance Sheet Arrangements
We have not engaged in any off-balance sheet financing transactions.
Transactions Between Related Parties
See “Item 7.B, “Major Shareholders and Related Party Transactions—Related Party Transactions.”
Internal Controls over Financial Reporting and Disclosure Controls and Procedures
See “Item 15, Disclosure Controls & Procedures.”
Share Information
The Common Share trade on the Toronto Stock Exchange and the Nasdaq Capital Market under the symbol “VQS.” The Company is authorized to issue an unlimited number of Common Shares. As at March 20, 2023 there were (i) 34,649,697 Common Shares issued and outstanding, (ii) 97,850 stock options outstanding with a weighted average exercise price per Common Share of $2.91 CAD expiring between 2023 and 2025 under the Company’s legacy stock option plan (iii) 865,947 stock options outstanding with a weighted average exercise price per Common Share of $1.08 CAD expiring 2031 and 2032 under the Omnibus Equity Incentive Plan, (iv) 66,667 deferred share units outstanding with an average exercise price per Common Share of $1.29 CAD with no expiry date (v) 821,219 RSUs outstanding expiring 2024 and 2031 and selective units with no expiry dates under the Omnibus Equity Incentive Plan (vi) 165,000 PSUs with no expiry dates (vii) warrants to purchase 2,117,647 Common Shares at an exercise price of $5.00 USD expiring 2026(viii) warrants to purchase 3,551,852 Common Shares at an exercise price of $1.39 USD expiring July 21, 2027 and (ix) 7,968,750 warrants to purchase Common Shares at an exercise price of $0.26 USD expiring January 16, 2030.
Additional Information
Additional information regarding the Company including in its annual information form for its fiscal year ended December 31, 2022, is available on SEDAR at www.sedar.com. Information regarding the Company is also available through the EDGAR system of the U.S. Securities and Exchange Commission’s website at www.sec.gov.
C.Research and Development
| | | | | | | | | |
| | Year Ended December 31, | |||||||
|
| 2022 |
| 2021 |
| 2020 | |||
Cash flows used in devlopment costs related to internally generated intangible assets | | $ | 1,828,983 | | $ | 2,364,733 | | $ | 1,642,783 |
Research and develpoment expenses | | $ | 734,115 | | $ | 1,092,108 | | $ | 1,074,178 |
Total | | $ | 2,563,098 | | $ | 3,456,841 | | $ | 2,716,961 |
The Company incurs research and development programs to enhance existing product offerings as well as develop new ones to maintain our competitive advantage.
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Management monitors the progress of internal research and development projects and uses judgment to distinguish research from the development phase. Expenditures during the research phase are expensed as incurred. Development costs are recognized as an intangible asset when the Company can demonstrate certain criteria in accordance with IAS 38, Intangible Assets.
JOBS Act
As a company with less than US$1.235 billion in revenue during the last fiscal year, we qualify as an “emerging growth company” pursuant to the JOBS Act. An emerging growth company may take advantage of specified exemptions from various requirements that are otherwise applicable generally to public companies in the United States.
The JOBS Act also permits an emerging growth company such as us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. We will remain an emerging growth company until the earliest of:
·the last day of our fiscal year during which we have total annual gross revenues of at least $1.235 billion;
·the last day of our fiscal year following the fifth anniversary of the completion of an initial public offering;
·the date on which we have, during the previous three-year period, issued more than $1 billion in non-convertible debt securities; or
·the date on which we are deemed to be a large accelerated filer under the Securities Exchange Act of 1934, as amended (the “Exhange Act”), which would occur if the market value of our Common Shares that are held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter.
As a result of our status as an emerging growth company, the information that we provide shareholders may be less comprehensive than what you might receive from other public companies that are not emerging growth companies. When we are no longer deemed to be an emerging growth company, we will not be entitled to the exemptions provided in the JOBS Act.
D.Trend Information
Annual Recurring Revenue (“ARR”) for the year ended December 31, 2022, decreased by 12% to $42.7M USD from $48.6M for the comparative period in 2021. The decrease in ARR is primarily due to anticipated changes in volume to Criminal Justice and due to the shift of the Queensland contract, which was fully migrated to the new contract as of Oct 10, 2022. In addtion, ARR was impacted by capacity constraints in quality assurance as we expand our global capacity and retrain, reduction in insurance and criminal justice demand and the weakening Australian dollar.
ARR is the annualized equivalent value of the 1- Software Support Maintenance (SSM), 2- Software Subscriptions 3 – SaaS and 4- Technology Services revenue of all existing contracts as of the date being measured. This excludes non-recurring revenue from implementation, support, and maintenance fees. The majority of our Editing Services contracts are volumes based. Accordingly, our calculation of ARR assumes that the clients will renew the contractual commitments on a periodic basis as those commitments come up for renewal. A portion of the contract renewals are through a competitive tender process. Contracts agreements may be subject to contract value increases upon renewal reflecting both inflationary increases and the additional value and added products and services provided by our solutions. ARR is not adjusted for the impact of any known or projected future client cancellations, loss of renewals, service upgrades or downgrades or price increases or decreases.
We use ARR as a measure of our revenue trend and an indicator of our future revenue opportunity from existing recurring client contracts, assuming minor cancellations.
We believe that this measure provides a fair real-time measure of performance in a volume and subscription-based environment. ARR provides us with the visibility for consistent and predictable growth to our cash flows. Our total revenue growth coupled with increasing ARR indicates the continued strength in the expansion of our business and will continue to be our focus on a go-forward basis.
See “Item 5.A, Operating and Financial Review and Prospects—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Operating Results.”
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E.Critical Accounting Estimates
Our audited consolidated financial statements have been prepared in accordance with IFRS. The preparation of our financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. While our significant accounting policies are more fully described in the notes to our audited consolidated financial statements, we believe that the following accounting policies and estimates are critical to our business operations and understanding our financial results.
The following are the key judgments and sources of estimation uncertainty that we believe could have the most significant impact on the amounts recognized in our audited consolidated financial statements. See Note 3 to the December 31, 2022 consolidated financial statements for a detailed description of our accounting policies.
Intangible assets
Intangible assets with infinite lives that are acquired separately are measured at fair value. Intangible assets with finite lives that are acquired separately are measured on initial recognition at fair value, which comprises its purchase price plus any directly attributable costs of preparing the asset for its intended use.
Our acquired intangible assets consist of customer relationships, acquired technology, non-compete agreements and brands acquired in business combinations. These intangible assets are recorded at their fair value at the respective acquisition date. We use the income approach as a valuation technique that calculates the fair value of an intangible asset based on the present value of future cash flows that the asset can be expected to generate over its remaining useful life. The discounted cash flow (“DCF”) is the methodology used, which is a form of the income approach that begins with a forecast of the annual cash flows a market participant would expect the subject intangible asset to generate over a discrete projection period. The future cash flow for each of the years in the discrete projection period are then converted to their present value equivalent using a rate of return appropriate for the risk of achieving the intangible assets’ projected cash flows, again, from a market participant perspective. The Company relies on the relief-from-royalty method to value the acquired technology and brand and the Multi-Period Excess Earnings of (“MEEM”) method to value customer relationship assets. After initial recognition, intangible assets are measured at cost less accumulated amortization and impairment losses.
The estimated useful lives at acquisition date for the Company’s classes of intangible assets are as follows:
| ● | Acquired Technology: 5 years |
| ● | Customer Relationships: 4.8 - 13 years |
| ● | Brand: 1-2 years |
| ● | Non-Compete agreements: Term of agreement |
The estimated useful life and amortization methods are reviewed annually, with the effect of any change in estimate being accounted for on a prospective basis. These assets are subject to an impairment test as described below. Our internally generated intangible assets consist of developed technologies. The Company incurs costs associated with the design and development of new products. Expenditures during the research phase are expensed as incurred. Expenditures during the development phase are capitalized if the Company can demonstrate each of the following criteria: (i) the technical feasibility of completing the intangible asset so that it will be available for use or sale, (ii) its intention to complete the intangible asset and use or sell it, (iii) its ability to use or sell the intangible asset, (iv) how the intangible asset will generate probable future economic benefits, (v) the availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset, and (vi) its ability to measure reliably the expenditure attributable to the intangible asset during its development; otherwise, they are expensed as incurred. Costs associated with maintaining computer software programs are recognized as an expense as incurred. Internally generated software development costs recognized as intangible assets are carried at cost less any accumulated amortization on a straight- line basis over 3 years after they are completed. These assets are subject to an impairment test as described below.
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Business combinations
IFRS 3, Business Combinations (“IFRS 3”), requires business combinations to be accounted using the acquisition method. Under this method, the cost of an acquisition is measured as the aggregate of the consideration transferred, measured at acquisition date fair value and the amount of any non-controlling interest in the acquiree.
When the Company acquires a business, it assesses the financial assets and liabilities assumed for appropriate classification and designation based on the facts and circumstances at the acquisition date. Business acquisition costs incurred are expensed and included in transaction costs. Measurement period adjustments are adjustments that arise from additional information obtained during the ‘measurement period’ (which cannot exceed one year from the acquisition date) about facts and circumstances that existed at the acquisition date. The excess of (i) the consideration transferred, the amount of any non-controlling interest in the acquiree and the acquisition-date fair value of any previous equity interest in the acquiree over the (ii) fair value of the net identifiable assets acquired is recorded as goodwill.
Goodwill arising on an acquisition of a business is carried at cost as established at the date of acquisition of the business less accumulated impairment losses, if any. For the purposes of impairment testing, goodwill is allocated to each cash generating unit (“CGU”)or a group of CGUs that is expected to benefit from the synergies of the combination.
A CGU to which goodwill has been allocated is tested for impairment annually, or more frequently when there is indication that the unit may be impaired. If the recoverable amount of the CGU is less than its carrying amount, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit pro rata based on the carrying amount of each asset in the unit. Any impairment loss for goodwill is recognized directly in the consolidated statements of loss and comprehensive loss. An impairment loss recognized for goodwill is not reversed in subsequent periods.
On disposal of the relevant CGU, the attributable amount of goodwill is included in the determination of the profit or loss on disposal. Determining whether goodwill is impaired requires an estimation of the higher of fair value less costs of disposal and value in use of the CGUs which goodwill has been allocated. The value in use calculation requires management to estimate the future cash flows expected to arise from the cash-generating unit and a suitable discount rate in order to calculate present value.
Impairment of financial assets
The Company recognizes a loss allowance for the expected credit losses associated with its financial assets, other than financial assets measured at fair value through profit or loss. Expected credit losses are measured to reflect a probability-weighted amount, the time value of money, and reasonable and supportable information regarding past events, current conditions and forecasts of future economic conditions.
The Company applies the simplified approach for trade receivables. Using the simplified approach, the Company records a loss allowance equal to the expected credit losses resulting from all possible default events over the assets’ contractual lifetime.
The Company assesses whether a financial asset is credit-impaired at the reporting date. Regular indicators that a financial instrument is credit-impaired include significant financial difficulties as evidenced through borrowing patterns or observed balances in other accounts and breaches of borrowing contracts such as default events or breaches of borrowing covenants. For financial assets assessed as credit-impaired at the reporting date, the Company continues to recognize a loss allowance equal to lifetime expected credit losses. For financial assets measured at amortized cost, loss allowances for expected credit losses are presented in the consolidated balance sheet as a deduction from the gross carrying amount of the financial asset. Financial assets are written off when the Company has no reasonable expectations of recovering all or any portion thereof.
Impairment of property and equipment, definite life intangibles, indefinite life intangibles and goodwill
For purposes of assessing impairment under IFRS, assets are grouped in CGUs, the lowest levels for which the group of assets can generate largely independent cash inflows. The Company has six CGUs, which consist of VIQ Australia, VIQ US, VIQ Media, VIQ UK, Dataworx and VIQ Solutions Inc. and the CGUs with goodwill or indefinite lived intangibles are tested for impairment at least annually. All other long-lived assets and finite life intangible assets are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.
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An impairment loss is recognized for the amount by which the asset’s or CGU’s carrying amount exceeds its recoverable amount, which is the higher of fair value less costs to sell or value-in-use. To determine the value-in-use, management estimates expected future cash flows from the cash-generating unit and determines a suitable pre-tax discount rate in order to calculate the present value of those cash flows. The data used for impairment testing procedures are directly linked to the Company’s latest approved budget, adjusted as necessary to exclude the effects of future reorganizations and asset enhancements.
Discount rates have been determined for each of the CGUs and reflect their respective risk profile as assessed by management. Impairment losses for the CGUs reduce first the carrying amount of any goodwill allocated to that CGU, with any remaining impairment loss charged pro rata to the other assets in the CGU.
With the exception of goodwill, all assets are subsequently reassessed for indications that an impairment loss previously recognized may no longer exist. An impairment charge is reversed if the assets’ recoverable amount exceeds its carrying amount only to the extent that the new carrying amount does not exceed the carrying value of the asset had it not originally been impaired.
Property and equipment and definite life intangibles are tested for impairment when events or changes in circumstances indicate that the carrying value may not be recoverable. For the purpose of measuring recoverable values, assets are grouped at the lowest levels for which there are separately identifiable cash flows, which are its CGUs. The recoverable value is the higher of an asset’s fair value less costs of disposal and value in use (being the present value of the expected future cash flows of the relevant asset or CGU). In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risk specific to the asset. An impairment loss is recognized for the value by which the asset’s carrying value exceeds its recoverable value.
Revenue recognition
Revenue represents the amount of consideration the Company expects to receive for the delivery of products and services in its contracts with customers, net of discounts and sales taxes. The Company reports revenue mainly under seven revenue categories being, Technology services, Software license, Support and maintenance, SaaS, Professional services, and Hardware and other.
Revenue is recognized upon transfer of control of products or services to customers at an amount that reflects the transaction price the Company expects to receive in exchange for the products or services. The Company’s contracts with customers often include the delivery of multiple products and services, which are generally capable of being distinct and accounted for as separate performance obligations. The accounting for a contract or contracts with a customer that contain multiple performance obligations requires the Company to allocate the contract or contracts’ transaction price to the identified distinct performance obligations.
Technology services revenue consists of fees charged for recurring services provided to our customers. Technology service revenue is recognized when the service is delivered to the customer. The Company has select customers where a flat rate is charged and revenue is recognized on a monthly basis.
Software license revenue is comprised of non-recurring license fees charged for the use of our software products generally licensed under perpetual arrangements and to a lesser extent sale of third - party license software. The Company sells on- premises software licenses on a perpetual basis. On-premises software licenses are bundled with software maintenance and support services for a term. The license component and maintenance and support components are each allocated revenue using their relative estimated SSP. Revenue from the license of distinct software is recognized at the time that both the right- to-use software has commenced and the software has been made available to the customer.
Support and maintenance and other recurring revenue primarily consist of fees charged for customer support on our software products post-delivery. Certain of the Company’s contracts with customers contain provisions that require the customer to agree to first year support and maintenance in order to maintain the active right to use a perpetual license. Support and maintenance and other recurring revenue primarily consists of fees charged for customer support on software products post- delivery.
Revenue from software-as-a-service (SaaS) arrangements, which allows customers to use hosted software over a term without taking possession of the software, are provided on a subscription basis. Revenue from the SaaS arrangement, which includes the hosted software and maintenance is recognized ratably over the term of the subscription.
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Professional service revenue consists of fees charged for customization, implementation, integration, training and ongoing services associated with our software products and technology services. Professional services are typically billed on a time and material basis and revenue is recognized over time as the services are performed. For professional services contracts billed on a fixed price basis, revenue is recognized over time based on the proportion of services performed. Hardware revenue includes the resale of third-party hardware that forms part of the overall customer solutions. Hardware revenue is recognized when the goods are shipped.
Item 6.Directors, Senior Management and Employees
A.Directors and senior management.
The following table sets forth information regarding members of our executive officers and our directors, including their ages as of the date hereof.
Name |
| Age |
| Position(s) |
Executive Officers: |
| | ||
Sebastien Paré | | 52 | | Chief Executive Officer and Director |
Larry Taylor | | 66 | | Executive Chair |
Alexie Edwards | | 55 | | Chief Financial Officer |
Susan Sumner | | 59 | | Chief Operating Officer, President and Director |
Vahram Sukyas | 42 | Chief Technology Officer | ||
Non-Executive Directors: | | | | |
Christine Fellowes | | 60 | | Director |
Harvey Gordon | | 74 | | Director |
Shing Pan | | 56 | | Director |
Joseph Quarin | | 57 | | Director |
Larry Taylor | | 66 | | Director |
Bradley Wells | | 57 | | Director |
Executive Officers
Sebastien Paré – Chief Executive Officer and Director
Mr. Paré has been the Chief Executive Officer of the Company since January 2015, a director since February 2015 and served as the President of the Company from August 2014 until February 2021. Prior thereto, Mr. Paré served as President of CSDC Systems Inc. since May of 2004. Mr. Paré is a leading digital transformation expert driving VIQ to deliver intelligent automation, enhanced with human review, to drive transformation in the way evidentiary content in highly secured and regulated agencies is captured, secured, and repurposed into actionable information. He has worked in North America, the Middle East, and West Africa. Prior to his position at the Company, he was President and Chief Operating Officer of an enterprise technology platform company dedicated to public sector digital services. Mr. Paré received a Bachelor of Science from the University of Quebec at Montreal and a Master of Science from the University of British Columbia.
Larry Taylor – Executive Chair and Director
Mr. Taylor has been Executive Chair since November 15, 2022. Mr. Taylor has been CEO Group Leader of CEO Global Network since 2011 and President of Taylor Made Solutions since 2009. He currently sits as a board member for Dillion Consulting Inc. Mr. Taylor is Board Chair VIQ Solutions Inc (TSX and Nasdaq: VQS). Mr. Taylor is a Chartered Professional Accountant and a Certified Management Consultant. Mr. Taylor has previously held key senior executive positions with several companies including Travelex Americas and Cap Gemini Ernst & Young Canada Inc. Mr. Taylor has experience working with private equity firms to identify, acquire and combine companies to create shareholder value.
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Alexie Edwards – Chief Financial Officer
Mr. Edwards has been Chief Financial Officer of VIQ since May 1, 2019. Mr. Edwards has 20+ years’ experience in finance and accounting spanning various industries, namely Real Estate and Software. Mr. Edwards is a proven finance leader who has built and shaped first-class finance teams, led the integration of numerous acquisitions in various jurisdictions, and overseen implementation of incredibly challenging accounting changes. Mr. Edwards previously served as Vice President of Finance for Jonas Software (Subsidiary of Constellation Software), an international provider of market-leading software. Mr. Edwards holds a Post Graduate Diploma from the University of Manchester and is a Chartered Professional Accountant and Chartered Accountant.
Susan Sumner – Chief Operating Officer, President and Director
Ms. Sumner has been Chief Operating Officer since July 2018, President since February 2021 and director since April 2022. Ms. Sumner has held executive leadership, consulting and operations management roles in Fortune 500 companies for the past 30 years. Ms. Sumner has deep insight and experience in building world-class operational infrastructure for IT companies. Ms. Sumner has successfully combined several middle-market operating companies in the medical transcription space generating a successful exit for capital providers. Ms. Sumner oversaw the acquisition and integration of multiple transcription and IT businesses at Nuance Corporation.
Vahram Sukyas – Chief Technology Officer
Mr. Sukyas has been Chief Technology Officer since November 2, 2021. Mr. Sukyas is a 20+ year veteran of the technology industry with a diverse background in engineering and scaling B2B/B2C/B2E digital products and platforms, cloud technologies and cloud native architectures, cybersecurity, infrastructure, and technology operations. Prior to joining VIQ, Mr. Sukyas was the SVP of Application & Network Technologies at Warner Bros., where he had responsibility for a portfolio of B2C/B2B applications, global network and infrastructure, cloud engineering and architecture, and employee productivity tools. Prior to that, Mr. Sukyas was a technology executive at Technicolor’s M-GO division, where he played an instrumental role in launching and scaling the M-GO platform to millions of devices across multiple platforms
Non-Executive Directors
Christine Fellowes – Director
Ms. Fellowes is a seasoned business leader and experienced board member with more than 30 years of experience leading growth businesses across strategy, marketing, brand development, and operations roles through major transformations for prominent US multinationals in media, entertainment and technology companies in Asia.
Ms. Fellowes currently serves as a Director on NBCUniversal Global Networks Executive Boards and Bravo TV New Zealand, a JV of NBCUniversal and Discovery/Mediaworks. She is also the founder and Co-Chairman at NINEby9, a not-for-profit multi-year research initiative driving gender equality in Asia. Ms. Fellows holds Board Certification from Harvard Business School.
Harvey Gordon – Director
Mr. Gordon has served as a director since June 2014. Mr. Gordon is the Managing Director of Channel Solutions Inc., where he provides CEO mentoring and strategic development guidance to growth-oriented technology companies. Mr. Gordon has extensive software, professional services and technology leadership experience as the CEO of international, US and Canadian companies, both public and private. He has held key senior executive positions during high growth phases of industry leading software and service firms, including Algorithmics Inc., Changepoint Corporation, Infonet Services Corporation and Magic Lantern Group. Mr. Gordon holds a Master of Science degree in Computer Science from the University of Toronto and a Bachelor of Applied Science in Engineering Science.
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Shing Pan – Director
Ms. Pan has served as a director since April 2022. Ms. Pan is an industry-recognized business leader with more than 25 years of experience in technology innovation, speech technology, and AI. She has extensive industry and domain knowledge, and a deep understanding of competitive landscapes helping companies strategically position for growth. Ms. Pan currently serves as an M&A advisor and investment banker at Woodside Capital Partners, a global, independent investment bank in Silicon Valley, California. Ms. Pan has served as Co-founder, Managing Director, Chief Marketing Officer, Head of Product Marketing, and Vice President of Business and Corporate Development for many companies, from cutting-edge high-tech startups to large corporations, and led strategic growth and innovation initiatives, business and corporate development, venture financing, and marketing. Ms. Pan has an MBA from Cornell University, an MS in Engineering from Northern Illinois University, and received her Board Certification from Harvard Business School.
Joseph Quarin – Director
Mr. Quarin has served as director since November 2016. Mr. Quarin is an experienced corporate executive and director. He played an integral role in Progressive Waste Solutions’ growth to US$2 billion, and was Chief Executive Officer and a Director from January 2012 until the reverse-merger with Waste Connections in 2016. He is currently the President and Chief Executive Officer of Q5 Capital Inc., a private investment company and strategic management advisor. He currently serves as a Board member of Spark Power Group Inc. (TSX:SPG), Edo Revenue Royalty GP and EJ Trademark GP, Eagle River Capital, LLC, GRT Holdings Ltd, and The Fertility Partners. He is also a Director of the Humber River Hospital Board. Mr. Quarin holds a Master of Business Administration (with Distinction) from the Ivey Business School at Western University, a Bachelor of Commerce (Honours) from the Smith School of Business at Queen’s University, and is a CPA, CA. Mr. Quarin was named one of Canada’s Top 40 Under 40TM in 2004.
Bradley Wells – Director
Mr. Wells has served as a director since November 2019. Mr. Wells has been President and CEO of Momentum Group Ltd. since he founded it in 2004. He served as CEO of Sym-Tech Dealer Services for the past 25 years until the company was successfully sold in 2019. Mr. Wells currently runs operating companies in Canada, the United States and Central America.
Family Relationships
There are no family relationships among any of our executive officers or directors.
B.Compensation
During the last completed fiscal year of the Company, the Company had four named executive officers, namely, its Chief Executive Officer, Sebastien Paré, its Chief Financial Officer, Alexie Edwards, Larry Taylor Executive Chair, its President and Chief Operating Officer Susan Sumner and President, and Chief Technology Officer, Vahram Sukyas.
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Compensation of Executive Officers
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | Non-equity | | | | | | |
| | | | | | | | | | | | incentive | | | | | | |
| | | | |
| Share-based |
| Option-based | | |
| plan |
| Pension |
| All other |
| Total |
Name and | | | | Salary | | awards | | awards | | Bonus |
| compensation | | value | | compensation | | compensation |
principal position |
| Year |
| ($) |
| ($) |
| ($)(1)(5) |
| ($) |
| ($) |
| ($) |
| ($)(2) |
| ($) |
Sebastien Pare Chief Executive Officer(3) |
| 2022 |
| 375,000 |
| 448,836 |
| (147,410) |
| Nil |
| Nil |
| Nil |
| 13,832 |
| 690,258 |
Alexie Edwards, Chief Financial Officer |
| 2022 |
| 275,000 |
| 214,156 |
| (27,050) |
| Nil |
| Nil |
| Nil |
| Nil |
| 462,106 |
Susan Sumner President and Chief Operating Officer(3) |
| 2022 |
| 320,000 |
| 41,894 |
| 57,433 |
| Nil |
| Nil |
| Nil |
| 16,858 |
| 436,185 |
Vahram Sukyas, Chief Technology Officer |
| 2022 |
| 221,019 |
| 18,979 |
| 39,702 |
| 20,207 |
| Nil |
| Nil |
| Nil |
| 299,907 |
Larry Taylor, Executive Chair(4) | | 2022 | | 45,000 | | 3,922 | | 1,623 | | Nil | | Nil | | Nil | | Nil | | 50,545 |
| (1) | The value of share and option based awards are based on the grant date assumptions as disclosed in note 11 “Capital Stock” in our 2022 audited consolidated financial statements. 2022 included reversal of stock-based compensation expense for forfeitures of options for cash settled options. |
| (2) | The dollar amounts set forth under this column are related to contributions to the senior management’s respective amounts provided for health care benefits and car allowance by the Company. |
| (3) | None of the compensation paid to Mr. Pare and Ms. Sumner relate to their role as a directors of the Company. |
| (4) | Larry Taylor was appointed November 2022 and salary represents amounts paid in 2022. |
| (5) | Negative amounts relate to reversal of stock-based compensation expense for forfeiture of option-based award |
Executive Officer Employment Agreements
Larry Taylor
On November 15, 2022, the Company entered into an employment agreement with Larry Taylor, the current Board Chairman of the Company to the position of Executive Chair. The agreement is for an initial fixed term of one year commencing on November 15, 2022 unless otherwise terminated pursuant to the terms of such agreement. At the end of the initial one year period, the agreement may be extended if both the Company and Mr. Taylor provide written agreement. Pursuant to the agreement, Mr. Taylor is entitled to a base salary of $180,000 and was granted 125,000 restricted share units that vest in twelve equal tranches on a monthly basis starting November 1, 2022 and 250,000 stock option that vest in tweleve equal tranches monthly starting December 15, 2022. Mr. Taylor is also entitled to certain other benefits. The agreement provides for payments of varying amounts not exceeding 12 months’ salary lieu of notice if the executive officer is terminated without cause from his position at any time during the term of the agreement. Upon termination resulting from a change of control of the Company, the executive officer will be entitled to receive all of the restricted share units and stock options.
Sebastien Paré
On June 7, 2021, the Company entered into an amended and restated employment agreement with Sebastien Paré, the current Chief Executive Officer of the Company. The agreement is for an indefinite term unless otherwise terminated pursuant to the terms of such agreement. Pursuant to the agreement, Mr. Paré is entitled to a base salary of $375,000. Mr. Paré is also entitled to (i) participate in the Company’s long-term incentive program, (ii) an annual performance bonus, and (iii) certain other benefits. The agreement provides for payments of varying amounts not exceeding 24 months’ salary and bonus in lieu of notice if the executive officer is terminated without cause from his position at any time during the term of the agreement. Upon termination resulting from a change of control of the Company, the executive officer will be entitled to receive a cash amount of up to 24 months’ salary and bonus. Pursuant to the terms of his employment agreement, Mr. Paré has agreed to refrain from competing with and interfering in the business of the Company for a period of one year subsequent to his termination for any reason.
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Susan Sumner
On June 7, 2021, the Company entered into an amended and restated employment agreement with Susan Sumner, the current President and Chief Operating Officer of the Company. The agreement is for a three year-period unless otherwise terminated pursuant to the terms of such agreement. At the end of the initial three year period, the agreement shall automatically renew for additional three year periods, unless Ms. Sumner or the Company provides written notice to the other party no later than ninety days prior to the end of the applicable period, of its intent not to renew the agreement Pursuant to the agreement, Mrs. Sumner is entitled to a base salary of $320,000. Ms. Sumner is also entitled to (i) participate in the Company’s long-term incentive program, (ii) an annual performance bonus, and (iii) certain other benefits. If Ms. Sumner is terminated without cause from her position at any time during the term of the agreement, she will be entitled to (i) continued payment on normal payroll dates of base salary for 12 months, (ii) payment of continuation of health insurance premiums, (iii) any bonus to the extent earned but not yet paid for the prior fiscal year and (iv) a pro rata payment of the bonus for the portion of the fiscal year completed through the date of termination. Pursuant to the terms of her employment agreement, Ms. Sumner has agreed to refrain from competing with and interfering in the business of the Company for a period of one year subsequent to his termination for any reason.
Alexie Edwards
On June 7, 2021, the Company entered into an amended and restated employment agreement with Alexie Edwards, the current Chief Financial Officer of the Company. The agreement is for an indefinite term unless otherwise terminated pursuant to the terms of such agreement. Pursuant to the agreement, Mr. Edwards is entitled to a base salary of $275,000. Mr. Edwards is also entitled to (i) participate in the Company’s long-term incentive program, (ii) an annual performance bonus, and (iii) certain other benefits. If Mr. Edwards is terminated without cause from his position at any time during the term of the agreement, in lieu of notice the Company shall pay Mr. Edwards an amount equal to: (i) his annual base salary up to the termination date, (ii) accrued and outstanding vacation, (iii) and reimbursement for business expenses properly incurred up to the termination date. Additionally, the Company shall pay Mr. Edwards any bonus awarded in respect of the year preceding the year of termination but not yet paid, his annual performance bonus for the year in which his employment terminates, pro-rated, and all premiums to provide all benefits. The Company shall provide a lump sum payment in an amount equivalent to the greater of: (i) Mr. Edwards’ base salary or the minimum wages in lieu of notice and severance pay. Pursuant to the terms of his employment agreement, Mr. Edwards has agreed to refrain from competing with and interfering in the business of the Company for a period of one year subsequent to his termination for any reason.
Vahram Sukyas
On July 7, 2021, the Company executed an offer letter with Vahram Sukyas, the current Chief Technology Officer of the Company. Pursuant to the offer letter, Mr. Sukyas shall be employed as a full-time employee and is entitled to an annual base salary of $210,000. Mr. Sukyas is also entitled to (i) an annual performance bonus of 20% of his base salary, subject to the Company’s goals and objectives in accordance with Company policy, (iii) upon board approval, 35,000 restricted stock units, and (iii) certain other benefits.
Director Compensation
The following table sets forth the value of all compensation paid to the directors, excluding Sebastien Paré and Susan Sumner who are paid as officer and not as a director:
| | | | | | | | | | | | | | |
| | | | | | | | Non-equity | | | | | | |
| | | | | | | | incentive | | | | | | |
| | Fees | | Share-based | | Option-based | | plan | | Pension | | All other | | |
| | earned | | awards | | awards | | compensation | | value | | compensation | | Total |
Name |
| ($) |
| ($) |
| ($)(1) |
| ($)(2) |
| ($)(3) |
| ($)(4) |
| ($) |
Christine Fellowes |
| 22,500 |
| 13,800 |
| 24,232 |
| Nil |
| Nil |
| Nil |
| 60,532 |
Harvey Gordon |
| 35,000 |
| 13,800 |
| 24,232 |
| Nil |
| Nil |
| Nil |
| 73,032 |
Shing Pan |
| 22,500 |
| 13,800 |
| 24,232 |
| Nil |
| Nil |
| Nil |
| 60,532 |
Joseph Quarin |
| 40,000 |
| 20,553 |
| 24,232 |
| Nil |
| Nil |
| Nil |
| 84,785 |
Larry Taylor |
| 55,000 |
| 41,470 |
| 28,271 |
| Nil |
| Nil |
| Nil |
| 124,741 |
Bradley Wells | | 30,000 | | 13,800 | | 24,232 | | Nil | | Nil | | Nil | | 68,033 |
Michael Kessel(5) |
| 7,500 |
| Nil |
| Nil |
| Nil |
| Nil |
| Nil |
| 7,500 |
| (1) | These amounts represent the “grant date fair value” of options granted to the respective director, which have been determined by using the Black-Scholes model, a mathematical valuation model that ascribes a value to an option based on a number of factors in |
43
| valuing the option-based awards, including the exercise price of the option, the price of the underlying security on the date the option was granted, and assumptions with respect to the volatility of the price of the underlying security and the risk-free rate of return. Calculating the value of options using this methodology is very different from a simple “in-the-money” value calculation. In fact, options that are well out-of-the-money can still have a significant “grant date fair value” based on a Black-Scholes valuation, especially where, as in the case of the Company, the price of the Common Shares underlying the option is highly volatile. Accordingly, caution must be exercised in comparing grant date fair value amounts with cash compensation or an in-the-money option value calculation. The same caution applies to the total compensation amounts shown in the last column above, which are based in part on the grant date fair value amounts set out in the column for Option-based awards. These values are consistent with the accounting values used in the Company’s financial statements. The Company selected the Black-Scholes model given its prevalence of use within North America. |
| (2) | The Company does not have a non-equity incentive plan. |
| (3) | The Company does not have any pension plans. |
| (4) | The Company does not have any other benefit plans for its directors. |
| (5) | Effective April 5, 2022, Michael Kessel resigned from the Board. |
Outstanding Equity Awards, Grants and Option Exercises (amounts in CDN$)
| | | | | | | | | | | | | | | | | |
Option-based Awards | | Share-based Awards | |||||||||||||||
| | | | | | | | | | | | | Market or | | | Market or | |
| | | | | | | | | | | Number of | | payout value | | | payout value | |
| | | | | | | | | | | shares or | | of share- | | | of vested | |
| | Number of | | | | | | | Value of | | units of | | based | | | share-based | |
| | securities | | Option | | | | unexercised | | shares | | awards | | | awards not | ||
| | underlying | | exercise | | Option | | in-the-money | | that have | | that have | | | paid out or | ||
| | unexercised | | price | | expiration | | options | | not vested | | not vested | | | distributed | ||
Name |
| options (#) |
| (CDN$) |
| Date |
| ($) |
| (#) |
| (CDN$) |
| | (CDN$) | ||
Sebastien Pare Chief Executive Officer |
| 56,250 | | $ | 1.35 |
| May 15/32 |
| nil |
| n/a |
| | n/a |
| | n/a |
|
| n/a | |
| n/a |
| n/a |
| nil |
| 66,667 | | $ | 24,140 |
| $ | 79,964 |
Alexie Edwards, Chief Financial Officer |
| 56,250 | | $ | 1.35 |
| May 15/32 |
| nil |
| n/a | |
| n/a |
| | n/a |
|
| nil | |
| nil |
| nil |
| nil |
| 33,333 | | $ | 12,070 |
| | 30,175 |
Susan Sumner President and Chief Operating Officer |
| 56,250 | | $ | 1.35 |
| May 15/32 |
| nil |
| n/a | |
| n/a |
| | n/a |
|
| n/a | |
| n/a |
| n/a |
| n/a |
| 3,618 | | $ | 1,332 |
| | 3,995 |
Vahram Sukyas, Chief Technology Officer |
| 35,000 | | $ | 2.80 |
| Dec 14/31 |
| nil |
| n/a | |
| n/a |
| | n/a |
| | nil | | | nil | | nil | | nil | | n/a | | $ | n/a | | | 10,683 |
Larry Taylor Director | | 10,938 | | $ | 1.35 | | May 15/32 | | nil | | n/a | | | n/a | | | n/a |
| | 50,964 | | $ | 0.98 | | Sep 13/32 | | nil | | n/a | | | n/a | | | n/a |
| | 250,000 | | $ | 0.45 | | Nov 17/32 | | nil | | n/a | | | n/a | | | n/a |
| | nil | | | nil | | nil | | nil | | 104,167 | | $ | 37,719 | | | 28,866 |
Harvey Gordon Director | | 9,375 | | $ | 1.35 | | May 15/32 | | nil | | n/a | | | n/a | | | n/a |
| | 43,684 | | $ | 0.98 | | Sep 13/32 | | nil | | n/a | | | n/a | | | n/a |
| | nil | | | nil | | nil | | nil | | n/a | | | n/a | | | 7,490 |
Joseph Quarin Director | | 9,375 | | $ | 1.35 | | May 15/32 | | nil | | n/a | | | n/a | | | n/a |
| | 43,684 | | $ | 0.98 | | Sep 13/32 | | nil | | n/a | | | n/a | | | n/a |
| | nil | | | nil | | nil | | nil | | n/a | | | n/a | | | 10,840 |
Bradley Wells Director | | 9,375 | | $ | 1.35 | | May 15/32 | | nil | | n/a | | | n/a | | | n/a |
| | 43,684 | | $ | 0.98 | | Sep 13/32 | | nil | | n/a | | | n/a | | | n/a |
| | nil | | | nil | | nil | | nil | | n/a | | | n/a | | | 7,490 |
Christine Fellowes Director | | 9,375 | | $ | 1.35 | | May 15/32 | | nil | | n/a | | | n/a | | | n/a |
| | 43,684 | | $ | 0.98 | | Sep 13/32 | | nil | | n/a | | | n/a | | | n/a |
| | nil | | | nil | | nil | | nil | | n/a | | | n/a | | | 7,490 |
Shing Pan Director | | 9,375 | | $ | 1.35 | | May 15/32 | | nil | | n/a | | | n/a | | | n/a |
| | 43,684 | | $ | 0.98 | | Sep 13/32 | | nil | | n/a | | | n/a | | | n/a |
| | nil | | | nil | | nil | | nil | | n/a | | | n/a | | $ | 7,490 |
(1) Mike Kessel resigned as a director of the Company effective April 5, 2022.
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Equity Incentive Plans
Omnibus Equity Incentive Plan
On April 29, 2021, the Company adopted a new omnibus equity incentive plan (the “Omnibus Equity Incentive Plan” or the “2021 Equity Incentive Plan”) by way of a Shareholder Resolution. The Omnibus Equity Incentive Plan is a “rolling” plan which, subject to certain adjustment provisions, provides that the aggregate maximum number of Common Shares that may be issued upon the exercise or settlement of awards granted under the Omnibus Equity Incentive Plan shall not exceed 10% of the Company’s issued and outstanding Common Shares from time to time. The Omnibus Equity Incentive Plan is considered an “evergreen” plan, since the Common Shares covered by awards which have been exercised, settled or terminated shall be available for subsequent grants under the Omnibus Equity Incentive Plan, and the number of awards available to grant increases as the number of issued and outstanding Common Shares increases. As such, the Omnibus Equity Incentive Plan must be approved by the majority of the Company’s Board and its Shareholders every three years following its adoption pursuant to the requirements of the TSX.
Under the Omnibus Equity Incentive Plan, the Company is able to grant equity-based incentive awards in the form of Stock Options, Restricted Share Units (“RSUs”), Performance Share Units (“PSUs”) and Deferred Share Units (“DSUs”). All future grants of equity-based awards will be made pursuant to the Omnibus Equity Incentive Plan, and no further equity-based awards will be made pursuant to the Company’s Stock Option Plan, DSU plan, and Stock Appreciation Rights Plan (collectively, the “Legacy Plans”). The Legacy Plans will continue to be authorized for the sole purposes of facilitating the vesting and exercise of existing awards previously granted under the Legacy Plans. Once the existing awards granted under the Legacy Plans are exercised or terminated, the Legacy Plans will terminate and be of no further force or effect.
Insider Participation Limit
The 2021 Equity Incentive Plan provides that the aggregate number of Common Shares: (a) issuable to insiders at any time cannot exceed 10% of the Company’s issued and outstanding Common Shares; and (b) issued to insiders within any one year period cannot exceed 10% of the Company’s issued and outstanding Common Shares (across all of the Company’s security based compensation arrangements).
Any Common Shares issued by the Company through the assumption or substitution of outstanding stock options or other equity-based awards from an acquired company shall not reduce the number of Common Shares available for issuance pursuant to the exercise of awards granted under the 2021 Equity Incentive Plan.
Administration of the 2021 Equity Incentive Plan
The Plan Administrator (as defined in the 2021 Equity Incentive Plan) is determined by the Board and is initially the Compensation, Nominating and Governance Committee. The Plan Administrator determines which directors, officers, consultants and employees are eligible to receive awards under the 2021 Equity Incentive Plan, the time or times at which awards may be granted, the conditions under which awards may be granted or forfeited to the Company, the number of Common Shares to be covered by any award, the exercise price of any award, whether restrictions or limitations are to be imposed on the Common Shares issuable pursuant to grants of any award, and the nature of any such restrictions or limitations, any acceleration of exercisability or vesting, or waiver of termination regarding any award, based on such factors as the Plan Administrator may determine.
In addition, the Plan Administrator interprets the 2021 Equity Incentive Plan and may adopt guidelines and other rules and regulations relating to the 2021 Equity Incentive Plan, and make all other determinations and take all other actions necessary or advisable for the implementation and administration of the 2021 Equity Incentive Plan.
Eligibility
All directors, employees and consultants are eligible to participate in the 2021 Equity Incentive Plan. The extent to which any such individual is entitled to receive a grant of an award pursuant to the 2021 Equity Incentive Plan will be determined in the sole and absolute discretion of the Plan Administrator.
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Types of Awards
Awards of stock options (“Stock Options”), restricted share units (“RSUs”), performance share units (“PSUs”) and deferred share units (“DSUs”) may be made under the 2021 Equity Incentive Plan. All of the awards described below are subject to the conditions, limitations, restrictions, exercise price, vesting, settlement and forfeiture provisions determined by the Plan Administrator, in its sole discretion, subject to such limitations provided in the 2021 Equity Incentive Plan, and will generally be evidenced by an award agreement. In addition, subject to the limitations provided in the 2021 Equity Incentive Plan and in accordance with applicable law, the Plan Administrator may accelerate or defer the vesting or payment of awards, cancel or modify outstanding awards, and waive any condition imposed with respect to awards or Common Shares issued pursuant to awards.
Stock Options
A Stock Option entitles a holder thereof to purchase a prescribed number of Common Shares at an exercise price set at the time of the grant. Such grant may be settled in Common Shares, cash or combination thereof in the discretion of the Plan Administrator. If settled in cash, such payment will be equal to the “in the money” amount, being an amount equal to the Market Price (as defined below) of the Common Shares issuable on the exercise of such Stock Option as of the date such Stock Option is exercised, less the aggregate exercise price of the Stock Option. The Plan Administrator will establish the exercise price at the time each Stock Option is granted, which exercise price must in all cases be not less than the volume weighted average trading price of the Common Shares on the TSX for the five trading days immediately preceding the date of grant (the “Market Price”) on the date of grant. Subject to any accelerated termination as set forth in the 2021 Equity Incentive Plan, each Stock Option expires on its respective expiry date. The Plan Administrator will have the authority to determine the vesting terms applicable to grants of Stock Options. Once a Stock Option vests, it shall remain vested and shall be exercisable until expiration or termination of the Stock Option, unless otherwise specified by the Plan Administrator, or as otherwise set forth in any written employment agreement, award agreement or other written agreement between the Company or a subsidiary of the Company and the participant. The Plan Administrator has the right to accelerate the date upon which any Stock Option becomes exercisable. The Plan Administrator may provide at the time of granting a Stock Option that the exercise of that Stock Option is subject to restrictions, in addition to those specified in the 2021 Equity Incentive Plan, such as vesting conditions relating to the attainment of specified performance goals.
Unless otherwise specified by the Plan Administrator at the time of granting a Stock Option and set forth in the particular award agreement, an exercise notice must be accompanied by payment of the exercise price. At the election of the participant but subject to the approval of the Plan Administrator, a participant may, in lieu of exercising a Stock Option pursuant to an exercise notice, elect to surrender such Stock Option to the Company (a “Cashless Exercise”) in consideration for an amount from the Company equal to: (a) the Market Price of the Common Shares issuable on the exercise of such Stock Option (or portion thereof) as of the date such Stock Option (or portion thereof) is exercised, less (b) the aggregate exercise price of the Stock Option (or portion thereof) surrendered relating to such Common Shares (the “In-the-Money Amount”) by written notice to the Company indicating the number of Stock Options such participant wishes to exercise using the Cashless Exercise, and such other information that the Company may require. Subject to the provisions of the 2021 Equity Incentive Plan and the policies of the TSX, the Company will satisfy payment of the In-the-Money Amount by delivering to the participant: (a) such number of Common Shares having a fair market value equal to the In-the-Money Amount; (b) a cash payment equal to the In-the-Money Amount; or (c) a combination of Common Shares and cash having an aggregate value equal to the In-the-Money Amount.
A RSU is a unit equivalent in value to a Common Share credited by means of a bookkeeping entry in the books of the Company that entitles the holder to receive one Common Share, cash payment or a combination thereof for each RSU after a specified vesting period. The Plan Administrator may, from time to time, subject to the provisions of the 2021 Equity Incentive Plan and such other terms and conditions as the Plan Administrator may prescribe, grant RSUs to any participant in respect of a bonus or similar payment in respect of services rendered by the applicable participant in a taxation year (the “RSU Service Year”).
Upon settlement of a RSU, holders will redeem each vested RSU for the following at the election of such holder but subject to the approval of the Plan Administrator: (a) a Common Share in respect of each vested RSU; (b) a cash payment; or (c) a combination of Common Shares and cash. Any such cash payments made by the Company shall be calculated by multiplying the number of RSUs to be redeemed for cash by the Market Price per Common Share as at the settlement date. Subject to the provisions of the 2021 Equity Incentive Plan and except as otherwise provided in an award agreement, no settlement date for any RSU shall occur, and no Common Share shall be issued or cash payment shall be made in respect of any RSU any later than the final business day of the third calendar year following the applicable RSU Service Year.
46
Performance Share Units
A PSU is a unit equivalent in value to a Common Share credited by means of a bookkeeping entry in the books of the Company that entitles the holder to receive one Common Share, cash payment or a combination thereof for each PSU after specific performance-based vesting criteria determined by the Plan Administrator, in its sole discretion, have been satisfied. The performance goals to be achieved during any performance period, the length of any performance period, the amount of any PSUs granted, the effect of termination of a participant’s service and the amount of any payment or transfer to be made pursuant to any PSU will be determined by the Plan Administrator and by the other terms and conditions of any PSU, all as set forth in the applicable award agreement. The Plan Administrator may, from time to time, subject to the provisions of the 2021 Equity Incentive Plan and such other terms and conditions as the Plan Administrator may prescribe, grant PSUs to any participant in respect of a bonus or similar payment in respect of services rendered by the applicable participant in a taxation year (the “PSU Service Year”).
The Plan Administrator shall have the authority to determine any vesting terms applicable to the grant of PSUs. Upon settlement, holders will redeem each vested PSU for the following at the election of such holder but subject to the approval of the Plan Administrator: (a) a Common Share in respect of each vested PSU; (b) a cash payment; or (c) a combination of Common Shares and cash. Any such cash payments made by the Company to a participant shall be calculated by multiplying the number of PSUs to be redeemed for cash by the Market Price per Common Share as at the settlement date. Subject to the provisions of the 2021 Equity Incentive Plan and except as otherwise provided in an award agreement, no settlement date for any PSU shall occur, and no Common Share shall be issued or cash payment shall be made in respect of any PSU any later than the final business day of the third calendar year following the applicable PSU Service Year.
Deferred Share Units
A DSU is a unit equivalent in value to a Common Share credited by means of a bookkeeping entry in the books of the Company that entitles the holder to receive one Common Share, cash payment or a combination thereof for each DSU on a future date. The Board may fix from time to time a portion of the total compensation (including annual retainer, board meeting committee meeting, and any Chair fees, if any) paid by the Company to a director in a calendar year for service on the Board (the “Director Fees”) that are to be payable in the form of DSUs. In addition, each director is given, subject to the provisions of the 2021 Equity Incentive Plan, the right to elect to receive a portion of the cash Director Fees owing to them in the form of DSUs.
Except as otherwise determined by the Plan Administrator or as set forth in the particular award agreement, DSUs shall vest immediately upon grant. Upon settlement, holders will redeem each vested DSU for the following at the election of such holder but subject to the approval of the Plan Administrator: (a) a Common Share in respect of each vested DSU; or (b) a cash payment; or (c) a combination of Common Shares and cash Any cash payments made under the 2021 Equity Incentive Plan by the Company to a participant in respect of DSUs to be redeemed for cash shall be calculated by multiplying the number of DSUs to be redeemed for cash by the Market Price per Common Share as at the settlement date.
U.S. Taxpayers
The 2021 Equity Incentive Plan provides that Stock Options issued to U.S. Taxpayers (as defined in the 2021 Equity Incentive Plan) may be non-qualified stock options or incentive stock options (each an “ISO”) qualifying under Section 422 of the United States Internal Revenue Code of 1986 (as amended) (the “Code”). Subject to the aggregate limits imposed in the 2021 Equity Incentive Plan, the aggregate number of Common Shares reserved for issuance in respect of granted ISOs shall not exceed 10,000,000 Common Shares.
If an ISO is granted to a person who owns shares representing more than 10% of the voting power of all classes of shares of the Company or of a “parent corporation” or “subsidiary corporation”, as such terms are defined in Sections 424(e) and (f) of the Code, on the date of grant, the term of the ISO shall not exceed five years from the time of grant of such ISO and the exercise price shall be at least 110% of the Market Price of the Common Shares subject to the ISO.
To the extent the aggregate Market Price as at the date of grant of the Common Shares for which ISOs are exercisable for the first time by any person during any calendar year (under all plans of the Company and any “parent corporation” or “subsidiary corporation”, as such terms are defined in Sections 424(e) and (f) of the Code) exceeds US$100,000, such excess ISOs shall be treated as non-qualified stock options.
47
Dividend Equivalents
Except as otherwise determined by the Plan Administrator or as set forth in the particular award agreement, RSUs, PSUs and DSUs shall be credited with dividend equivalents in the form of additional RSUs, PSUs and DSUs, as applicable, as of each dividend payment date in respect of which normal cash dividends are paid on Common Shares. Dividend equivalents shall vest in proportion to, and settle in the same manner as, the awards to which they relate. Such dividend equivalents shall be computed by dividing: (a) the amount obtained by multiplying the amount of the dividend declared and paid per Common Share by the number of RSUs, PSUs and DSUs, as applicable, held by the participant on the record date for the payment of such dividend, by (b) the Market Price at the close of the first business day immediately following the dividend record date, with fractions computed to three decimal places.
Black-out Periods
In the event an award expires, at a time when a scheduled blackout is in place or an undisclosed material change or material fact in the affairs of the Company exists, the expiry of such award will be the date that is 10 business days after which such scheduled blackout terminates or there is no longer such undisclosed material change or material fact.
Expiry Date of Awards
While the 2021 Equity Incentive Plan does not stipulate a specific term for awards granted thereunder, as discussed below, the expiry date of a Stock Option may not be more than 10 years from its date of grant, except where shareholder approval is received or where an expiry date would have fallen within a blackout period of the Company. All awards must vest and settle in accordance with the provisions of the 2021 Equity Incentive Plan and any applicable award agreement, which award agreement may include an expiry date for a specific award.
Termination of Employment or Services
Certain events, including termination for cause, resignation, termination without cause, disability, death or retirement, subject, in each case, to the terms of a participant’s applicable employment agreement, award agreement or other written agreement will impact such participant as further described in the 2021 Equity Incentive Plan.
Change in Control
Under the 2021 Equity Incentive Plan, except as may be set forth in an employment agreement, award agreement or other written agreement between the Company or a subsidiary of the Company and a participant if within 12 months following the completion of a transaction resulting in a Change in Control (as defined below), a participant’s employment, consultancy or directorship is terminated by the Company or a subsidiary of the Company without Cause (as defined in the 2021 Equity Incentive Plan), without any action by the Plan Administrator:
| (a) | any unvested awards held by the participant at Termination Date may vest in the sole discretion of the Plan Administrator; and |
| (b) | any vested awards may be exercised, surrendered to the Company, or settled by the participant at any time during the period that terminates on the earlier of: (A) the expiry date of such award; and (B) the date that is 90 days after the Termination Date. Any award that has not been exercised, surrendered or settled at the end of such period being immediately forfeited and cancelled. |
Subject to certain exceptions, a “Change in Control” includes (a) any transaction pursuant to which a person or group acquires the right to exercise control or director over more than 50% of the outstanding Common Shares; (b) the sale of all or substantially all of the Company’s assets (c) the dissolution or liquidation of the Company; (d) the occurrence of a transaction requiring approval of the Corporation’s shareholders whereby the Corporation is acquired via consolidation, merger, exchange of securities, purchase of assets, amalgamation, statutory arrangement or otherwise; (e) individuals who comprise the Board at the last annual meeting of Shareholders (the “Incumbent Board”) cease to constitute at least a majority of the Board, unless the election, or nomination for election by the Shareholders, of any new director was approved by a vote of at least a majority of the Incumbent Board, in which case such new director shall be considered as a member of the Incumbent Board; or (f) any other event which the Board determines to constitute a change in control of the Company.
48
Non-Transferability of Awards
Except as permitted by the Plan Administrator and to the extent that certain rights may pass to a beneficiary or legal representative upon death of a participant, by will or as required by law, no assignment or transfer of awards, whether voluntary, involuntary, by operation of law or otherwise, vests any interest or right in such awards whatsoever in any assignee or transferee and immediately upon any assignment or transfer, or any attempt to make the same, such awards will terminate and be of no further force or effect. To the extent that certain rights to exercise any portion of an outstanding award pass to a beneficiary or legal representative upon the death of a participant, the period in which such award can be exercised by such beneficiary or legal representative shall not exceed one year from the participant’s death.
Amendments to the 2021 Equity Incentive Plan
Subject to certain exceptions, the Plan Administrator may also from time to time, without notice and without approval of the holders of Common Shares, amend, modify, change, suspend or terminate the 2021 Equity Incentive Plan or any awards granted pursuant thereto as it, in its discretion, determines appropriate. Notwithstanding the above, and subject to the rules of the TSX, the approval of Shareholders is required to effect certain amendments to the 2021 Equity Incentive Plan, as further described in the 2021 Equity Incentive Plan.
C.Board Practices
Each of the directors of the Company is elected to hold office until the end of the next annual meeting of Shareholders. Nominees will be nominated by the Nominating and Governance Committee, in each case for election by our shareholders as directors in accordance with the provisions of our constating documents and applicable corporate and securities laws. All nominees who are nominated by the Nominating and Governance Committee will be included in the proxy-related materials to be sent to shareholders prior to each annual meeting of our shareholders.
Audit Committee
Audit Committee Mandate and Terms of Reference
The Audit Committee is a committee established for the purpose of overseeing the accounting and financial reporting process of the Company and annual external audits of the consolidated financial statements.
Composition of the Audit Committee
The members of the Audit Committee, being Messrs. Quarin (Chair) and Gordon and Ms. Pan, are independent under Nasdaq listing rules, and “audit committee financial experts” in accordance with United States Securities and Exchange Commission rules. In addition, the members of the Audit Committee have education and experience relevant to the performance of their responsibilities as Audit Committee members, as described in their biographies.
Audit Committee Oversight
At no time since the commencement of the Company’s most recently completed financial year was a recommendation of the Audit Committee to nominate or compensate an external auditor not adopted by the Board.
Pre-Approval Policies and Procedures
The Audit Committee reviews and pre-approves all non-audit services to be provided to the Company by its external auditors.
Nominating and Governance Committee
Our Nominating and Governance Committee (our “NGC”) is currently comprised of:
| ● | Christine Fellowes (Chair), Harvey Gordon and Bradley Wells |
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The board has adopted a written charter for the NGC that sets forth the purpose, composition, authority and responsibility of the NGC. A copy of the written charter of the NGC has been posted on our website at https://viqsolutions.com/investors/governance-documents. The primary function of the NGC is to assist the board o in fulfilling its responsibilities by:
| ● | identifying individuals qualified to become members of the board of directors and recommending to nominees for election as directors at the next annual meeting of shareholders, |
| ● | establishing and reviewing corporate governance policies, |
| ● | adopting a corporate code of business conduct and ethics applicable to all directors, officers and employees and |
| ● | monitoring compliance with and periodically reviewing the code of ethics. |
Compensation Committee
Our Compensation Committee is currently comprised of:
| ● | Harvey Gordon (Chair), Christine Fellowes and Bradley Wells |
The board has adopted a written charter for the Compensation Committee that sets forth the purpose, composition, authority and responsibility of the Compensation Committee. A copy of the written charter of the Compensation Committee has been posted on our website at https://viqsolutions.com/investors/governance-documents. The primary function of the Compensation Committee is to assist the board o in fulfilling its responsibilities by:
| ● | discharging the board’s responsibilities relating to the compensation of VIQ’s executive officers; |
| ● | the administration of any equity, incentive or related compensation plans as may be approved by the board and shareholders from time to time; and |
| ● | assisting the board with respect to management succession and development. |
Business Code of Conduct
We have adopted a written Business code of conduct (the “Code”) that applies to all of our directors, officers and employees. The objective of the Code is to provide guidelines for maintaining our and our subsidiaries’ integrity, reputation, honesty, objectivity and impartiality. The Code addresses conflicts of interest, protection of our assets, confidentiality, fair dealing with our Shareholders, competitors and employees, insider trading, compliance with laws and reporting any illegal or unethical behavior. As part of the Code, any person subject to the Code is required to avoid or fully disclose interests or relationships that are harmful or detrimental to our best interests or that may give rise to real, potential or the appearance of conflicts of interest. Our Board has ultimate responsibility for the stewardship of the Code and it monitors compliance through the Nominating and Governance Committee. Directors, officers and employees are required to annually certify that they have not violated the Code.
The Code was amended and restated on July 9, 2021. During the year ended December 31, 2022, no waivers or requests for exemptions from the Code were either requested or granted. The Code, as amended and restated, may be viewed on our website at www.viqsolotuions.com/investors/governance-documents.
Disclosure Policy
The Board has adopted a Disclosure Policy to deal with the timely dissemination of all material information (the “Disclosure Policy”). The Disclosure Policy, which will be reviewed annually, establishes consistent guidance for determining what information is material and how it is to be disclosed to avoid selective disclosure and to ensure wide dissemination. The board, directly and through its committees, reviews and approves the contents of major disclosure documents, including annual and interim consolidated financial statements, prospectuses, the annual information form, management’s discussion and analysis and the management information circular. We seek to communicate to our shareholders through these documents as well as by means of news releases, our website and investor relations calls and meetings.
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Disclosure Committee
A Disclosure Committee comprised of senior management of the Company (the “Disclosure Committee”) oversees the Company’s disclosure process as outlined in the Disclosure Policy. The Disclosure Committee’s mandate includes ensuring that effective controls and procedures are in place to allow the Company to satisfy all of its continuous disclosure obligations, including certification requirements. The Disclosure Committee is also responsible for ensuring that the policies and procedures contained in the Disclosure Policy are in compliance with regulatory requirements. Our Audit Committee is responsible for reviewing our disclosure relating to our financial reporting.
D.Employees
As of December 31, 2022, VIQ had approximately 483 employees.
| | |
| | At |
| | December 31, |
|
| 2022 |
Function: | | |
Client Experience |
| 13 |
General & Administration |
| 28 |
Human Resources |
| 3 |
Information Technology |
| 27 |
Marketing |
| 4 |
Product & Strategy |
| 2 |
Production |
| 390 |
Professional Services |
| 8 |
Research & Development |
| 1 |
Sales |
| 7 |
Total |
| 483 |
Geography: | | |
USA |
| 60 |
Australia |
| 402 |
EMEA |
| 21 |
Total |
| 483 |
E.Share Ownership
For information regarding the share ownership of our directors and executive officers, see “Item 6.B, Compensation” and “Item 7.A, Major Shareholders.”
Item 7.Major Shareholders and Related Party Transactions
A.Major Shareholders
The following table sets forth information with respect to the beneficial ownership of our Common Shares as of March 20, 2023 for:
| ● | each beneficial owner of 5% or more of our outstanding ordinary shares and non-voting ordinary shares; |
| ● | each of our directors and executive officers; and |
| ● | all of our directors and executive officers as a group. |
Beneficial ownership is determined in accordance with the rules of the SEC. These rules generally attribute beneficial ownership of securities to persons who possess sole or shared voting power or investment power with respect to those securities and include ordinary shares issuable upon the exercise of options that are immediately exercisable or exercisable within 60 days of March 20, 2023. Percentage ownership calculations are based on 34,649,697 Common Shares outstanding as of March 20, 2023.
Except as otherwise indicated, all of the shares reflected in the table are Common Shares and all persons listed below have sole voting and investment power with respect to the shares beneficially owned by them, subject to applicable community property laws. The information is not necessarily indicative of beneficial ownership for any other purpose.
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Except as otherwise indicated, the addresses of the persons listed in the table is c/o VIQ Solutions Inc., 5915 Airport Road, Suite 700, Mississauga, Ontario, Canada.
| | | | | |
| | | | Percent of |
|
| | Number of | | Common |
|
| | Common Shares | | Shares |
|
| | Beneficially | | Beneficially |
|
Name of Beneficial Owner |
| Owned (#) |
| Owned (%) | |
5% or Greater Shareholders: | | | | | |
AWM Investment Company Inc.(1) |
| 1,784,067 |
| 3.6 | % |
Beedie Investment Ltd. (2) |
| 7,968,750 |
| 16.0 | % |
Executive Officers and Directors: | | |
|
| |
Sebastien Pare(3) |
| 921,740 |
| 1.9 | % |
Susan Sumner(4) |
| 788,879 |
| 1.6 | % |
Alexie Edwards(5) | | 148,783 | | 0.3 | % |
Vahram Sukyas(6) | | 56,725 | | 0.1 | % |
Shing Pang (7) | | 71,745 | | 0.1 | % |
Christine Fellowes (8) | | 72,745 | | 0.1 | % |
Larry Taylor(9) |
| 1,228,362 |
| 2.5 | % |
Harvey Gordon(10) |
| 236,077 |
| 0.5 | % |
Joe Quarin(11) |
| 599,474 |
| 1.2 | % |
Bradley Wells(12) |
| 4,187,203 |
| 8.4 | % |
All current directors and executive officers as a group (10 persons) | | 8,311,733 | | 16.7 | % |
| (1) | According to a Schedule 13G/A filed with the SEC on February 14, 2023, AWM Investment Company, Inc. (“AWM”) beneficially owned 1,784,067 Common Shares, consisting of 986,947 Common Shares and 941,023 Common Shares issuable upon exercise of warrants held by Special Situations Fund III (“SSFQP”), 294,387 Common Shares and 279,601 Common Shares issuable upon exercise of warrants held by Special Situations Cayman Fund, L.P. (“Cayman”), 78,973 Common Shares and 75,511 Common Shares issuable upon exercise of warrants held by Special Situations Technology Fund, L.P. (“Tech”), and 423,760 Common Shares and 403,865 Common Shares issuable upon exercise of warrants held by Special Situations Technology Fund II, L.P. (“Tech II”, and together with SSFQP, Cayman, and Tech, the “Funds”). AWM is the investment advisor to the Funds. David M. Greenhouse and Adam C. Stettner are members of SSCayman, L.L.C., the general partner of Cayman. David M. Greenhouse and Adam C. Stettner are members of MGP Advisers Limited Partnership, the general partner of SSFQP and SST Advisers, L.L.C., the general partner of TECH and TECH II. David M. Greenhouse and Adam C. Stettner are also controlling principals of AWM. The business address AWM Investment Company, Inc. is c/o Special Situations Funds, 527 Madison Avenue, Suite 2600, New York, NY 10022. |
| (2) | According to a Schedule 13G filed with the SEC on January 25, 2023, as of January 16, 2023, Beedie beneficially owned 7,968,750 common shares, consisting of 7,968,750 common shares issuable upon the exercise of warrants issued to Beedie in connection with the Loan. Each of (i) Beedie Holdings Limited, a British Columbia corporation (“BHL”), which 100% owns and controls Beedie; (ii) Beedie (2020) Family Trust (the “Trust”), a Canadian Resident Trust, which 100% owns and controls BHL; (iii) 4358 Investments Limited, a British Columbia corporation (“4358”), which is the trustee and has sole control of the Trust; and (iv) Ryan Beedie, an individual Canadian citizen, who 100% owns and controls 4358, may be deemed to beneficially own the 7,968,750 Common Shares issuable upon the exercise of the warrants held directly by Beedie. |
| (3) | Represents 682,157 shares held directly by Mr. Pare, 172,500 vested options or options that vest within 60 days of March 20, 2023 and does not include 18,750 unvested options. 220,833 vested restricted share units or restricted share units that vest within 60 days of March 20, 2023 and does not include 66,667 of restricted share units not yet vested. |
| (4) | Represents 759,095 shares held directly by Ms. Sumner, 18,750 vested options or options that vest within 60 days of March 20, 2023 and does not include 37,500 unvested options. 11,034 vested restricted share units or restricted share units that vest within 60 days of March 20, 2023 and does not include 3,678 of restricted share units not yet vested. |
| (5) | Represents 17,323 shares held directly by Mr. Edwards, 18,750 vested options or options that vest within 60 days of March 20, 2023 and does not include 37,500 unvested options. 83,334 vested restricted share units or restricted share units that vest within 60 days of March 20, 2023 and does not include 33,333 of restricted share units not yet vested. |
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| (6) | Represents 15,058 shares held directly by Mr. Sukyas, 11,667 vested options or options that vest within 60 days of March 20, 2023 and does not include 23,333 unvested options, 30,000 vested restricted share units or restricted share units that vest within 60 days of March 20, 2023 and no unvested portion. |
| (7) | Represents 2,000 shares held directly by Ms. Pang, 53,059 vested options or options that vest within 60 days of March 20, 2023 and there are no unvested options, 17,686 vested restricted share units or restricted share units that vest within 60 days of March 20, 2023 and no unvested portion at March 20, 2023. |
| (8) | Represents 1,000 shares held directly by Ms. Fellowes, 53,059 vested options or options that vest within 60 days of March 20, 2023 and there are no unvested options, 17,686 vested restricted share units or restricted share units that vest within 60 days of March 20, 2023 and no unvested portion at March 20, 2023. |
| (9) | Represents 888,826 shares held directly by Mr. Taylor, 207,735 vested options or options that vest within 60 days of March 20, 2023 and does not include 104,167 unvested options, 131,801 vested restricted share units or restricted share units that vest within 60 days of March 20, 2023 and 52,083 restricted share units not yet vested. |
| (10) | Represents 162,332 shares held directly by Mr. Gordon, 53,059 vested options or options that vest within 60 days of March 20, 2023 and there are no unvested options, 20,686 vested restricted share units or restricted share units that vest within 60 days of March 2-, 2023 and no unvested portion at March 20, 2023 |
| (11) | Represents 516,479 shares held directly by Mr. Quarin, 53,059 vested options or options that vest within 60 days of March 20, 2023 and there are no unvested options, 29,936 vested restricted share units or restricted share units that vest within 60 days of March 20, 2023 and no unvested portion at March 20, 2023. |
| (12) | Represents 4,113,458 shares held directly by Mr. Wells, 53,059 vested options or options that vest within 60 days of March 20, 2023 and there are no unvested options, 20,686 vested restricted share units or restricted share units that vest within 60 days of March 20, 2023 and no unvested portion at March 20, 2023. |
Changes in ownership by major shareholders
To the best of the Company’s knowledge, there have been no changes in the ownership of the Company’s shares by its significant shareholders other than as disclosed herein.
Voting Rights
The Company’s major shareholders do not have different voting rights.
Shares Held in the United States
The following table indicates, as of March 20, 2023, the total number of Common Shares issued and outstanding, the approximate total number of holders of record of Common Shares, the number of holders of record of Common Shares with U.S. addresses, the portion of the outstanding Common Shares held by U.S. holders of record, and the percentage of Common Shares held by U.S. holders of record. This table does not indicate beneficial ownership of Common Shares.
| | | | | | | | | |
| | | | | | Number of | | Percentage of |
|
| | Total Number of | | | | Common Shares | | Common Shares |
|
| | Common Shares | | Number of U.S. | | Held by U.S. | | Held by U.S. |
|
Total Number of | | Issued and | | Holders of | | Holders of | | Holders of |
|
Holders of Record |
| Outstanding |
| Record) |
| Record(1) |
| Record |
|
4,019 |
| 34,649,697 |
| 705 |
| 6,052,568 |
| 17.4 | % |
B.Related Party Transactions
Not applicable
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Policies and Procedures for Related Party Transactions
Our Audit Committee reviews and approves all related-party transactions; however, we have not established a formal related transaction policy.
Our Audit Committee also reviews and pre-approves all non-audit services to be provided to the Company by its external auditors.
C.Interests of Experts and Counsel
Not applicable
Item 8.Financial Information.
A.Consolidated Statements and Other Financial Information
Financial Statements
Our financial statements are appended at the end of this Annual Report, starting at page F-1.
Dividend Distribution Policy
While there are no restrictions in the Company’s articles or pursuant to any agreement or understanding that prevent the Company from paying dividends or distributions, VIQ has not declared or paid cash dividends on the Common Shares in any of the three most recently completed financial years. VIQ intends to retain future earnings to finance the operation, development and expansion of the business, and accordingly, VIQ does not anticipate paying cash dividends on Common Shares in the foreseeable future. Payment of future cash dividends, if any, will be at the discretion of the Board and will depend on VIQ’s financial condition, results of operations, contractual restrictions, capital requirements, business prospects and other factors that the board considers relevant.
Legal Proceedings and Regulatory Actions
Legal Proceedings
In the ordinary course of business, VIQ may be subject to certain contingent liabilities with respect to existing or potential claims, lawsuits and other proceedings, including those involving tax, social security, labor lawsuits and other matters. VIQ will accrue liabilities when it is probable that future costs will be incurred and such costs can be reasonably estimated. The Company’s management is not aware of any current or contemplated legal proceedings material to the Company to which it is a party or of which any of its property is the subject matter.
Regulatory Actions
During the financial year ended December 31, 2022, there were no: (a) penalties or sanctions imposed against the Company by a court relating to securities legislation or by a securities regulatory authority; (b) other penalties or sanctions imposed by a court or regulatory body against the Company that would likely be considered important to a reasonable investor in making an investment decision; and (c) settlement agreements the Company entered into before a court relating to securities legislation or with a securities regulatory authority.
B.Significant Changes
Except as otherwise disclosed herein, there have been no significant changes in our financial condition since the most recent audited consolidated financial statements for the fiscal year ended December 31, 2022.
Item 9.The Offer and Listing.
A.Offer and Listing Details
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Our Common Shares have been listed on the Nasdaq Capital Market since August 12, 2021 under the symbol “VQS” and on the TSX since January 21, 2021 under the symbol “VQS”. Prior to listing on the Nasdaq Capital Market, our Common Shares were listed on the OTCQX Best Market under the symbol “VIQLF.”
We are authorized to issue an unlimited number of Common Shares, without par value. Shareholders are entitled to receive notice of, attend, and vote at any meeting of the shareholders, and to cast one vote for each common share held on the applicable record date in respect of any matter put to vote at such a meeting. Shareholders are entitled to receive dividends if, as and when declared by the board. Shareholders are entitled to share equally in the remaining property of the Company upon the liquidation, dissolution or winding-up of the Company.
On September 27, 2022, the Company received a letter from Nasdaq indicating that the Company was not in compliance with Bid Price Rule because the closing bid price per share for the Company’s common shares had closed below $1.00 for the previous 30 consecutive business days. The Company was given until March 27, 2023, to regain compliance with the Bid Price Rule. On March 28, 2023, the Company was granted an additional 180-day grace period, or until September 25, 2023, to regain compliance with the Bid Price Rule following the Company’s notification to Nasdaq that it would seek to implement a reverse stock split, if necessary, to regain compliance with the Bid Price Rule. To regain compliance with the Bid Price Rule and qualify for continued listing on the Nasdaq Capital Market, the minimum bid price per share of the Company’s Common Shares must be at least $1.00 for at least 10 consecutive business days on or prior to September 25, 2023. If the Company fails to regain compliance during the additional compliance period, then Nasdaq will notify the Company of its determination to delist the Company’s Common Shares, at which point the Company would have an opportunity to appeal the delisting determination to a Panel, but there can be no assurance that the Panel would grant the Company’s request for continued listing.
B.Plan of Distribution
Not applicable.
C.Markets
See “Item 9.A, The Offering and Listing—Offer and Listing Details”.
D.Selling Shareholders
Not applicable.
E.Dilution
Not applicable.
F.Expenses of the Issue
Not applicable.
Item 10.Additional Information.
A.Share Capital
Not applicable.
B.Articles of Association
The Company was incorporated pursuant to the Business Corporations Act (Alberta), on November 10, 2004 under the name “VIQ Solutions Inc.”VIQ was continued under the Business Corporations Act (Ontario), on April 14, 2017.
The following is a summary of certain provisions of the Company’s articles of continuance dated August 14, 2017 and the articles of amendment dated November 27, 2019 (the “Articles”), and by-laws (“By-Laws”) as well as the material terms and provisions of the Common Shares and other outstanding securities issued by the Company.
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Objects and Purposes of the Company
Under the Articles, the Company is not restricted from carrying on any business or businesses or from exercising any power or powers.
Voting on Certain Proposal, Arrangement, Contract or Compensation by Directors
A director of the Company (each a “Director” and together the “Directors”) who is a party to, or who is a director or officer of or has a material interest in any person who is a party to, a material contract or transaction or proposed material contract or transaction with the Company must disclose in writing to the Company, or request to have entered in the minutes of the related board of directors of the Company (the “Board”) meeting, the nature and extent of his or her interest at the time and in the manner provided by the Business Corporations Act (Ontario) (the “Act”). Such a Director must not vote on any resolution to approve the same except as provided by the Act.
The Act provides that a material contract between the Company and one or more of the Directors, or between the Company and another person of which a Director is a director or officer or in which the Director has a material interest, is neither void nor voidable by reason only of that relationship or by reason only that the Director is present at or is counted to determine the presence of a quorum at the Board or committee meeting that authorized the contract, if the Director disclosed his or her interest, in accordance with the applicable provisions of the Act, and the contract or transaction was reasonable and fair to the Company at the time it was approved. In addition, notwithstanding the other conflict of interest provisions in the Act, where such Director is acting honestly and in good faith, such contract, if it was reasonable and fair to the Company at the time it was approved, is neither void nor voidable by reason only of the Director’s interest therein where the contract is confirmed or approved by special resolution at a meeting of shareholders and the nature and extent of the Director’s interest in the contract is disclosed in reasonable detail in the notice calling the meeting or the applicable information circular.
The Directors are paid such remuneration for their services as the Board may from time to time determine. The Directors are also entitled to be reimbursed for travelling and other expenses properly incurred by them in attending meetings of the Board or any committee thereof. The By-Laws do not preclude any Director from serving the Company in any other capacity and receiving remuneration in connection therewith.
Borrowing Powers of Directors
The Board may, without authorization from the shareholders of the Company: (a) borrow money upon the credit of the Company; (b) issue, reissue, sell or pledge bonds, debentures, notes or other debt obligations or guarantees of the Company, whether secured or unsecured; (c) give, directly or indirectly, financial assistance to any person by means of a loan or a guarantee on behalf of the Company to secure performance of any present or future indebtedness, liability or obligation of any person, or otherwise; and (d) mortgage, hypothecate, pledge or otherwise create a security interest in all or any currently owned or subsequently acquired real or personal, movable or immovable, property of the Company, including accounts, rights, powers, franchises and undertakings to secure any such bonds, debentures, notes or other debt obligations or guarantees or any other present or future indebtedness, liability or obligation of the Company.
Qualifications of Directors
The Act provides that unless the articles of a corporation provide otherwise, a director of a corporation is not required to hold shares issued by the corporation. There is no provision in the Articles imposing a requirement that a Director hold any shares issued by the Company. Additionally, neither the Articles nor the By-Laws impose a requirement for retirement or non-retirement of Directors under an age limit requirement.
Authorized and Outstanding Share Capital
The Company’s authorized share capital consists of an unlimited number of the Common Shares, all without nominal or par value.
Common Shares
The holders of Common Shares are entitled to vote at all meetings of the shareholders of the Company either in person or by proxy. The holders of Common Shares are also entitled to dividends, if and when declared by the Board, and the distribution of the residual assets
56
of the Company in the event of a dissolution of the Company. Any dividend unclaimed after a period of six years from the date on which it has been declared to be payable will be forfeited and revert to the Company.
All Common Shares rank equally as to all benefits which might accrue to the holders thereof, including the right to receive dividends, voting powers, and participation in assets and in all other respects, on liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary, or any other disposition of the assets of the Company among its shareholders for the purpose of winding up its affairs after the Company has paid out its liabilities. The Common Shares are not subject to any call or assessment rights, any pre-emptive rights, any conversion or any exchange rights. The Common Shares are not subject to any redemption, retraction, purchase for cancellation, surrender, sinking or purchase fund provisions. Additionally, the Common Shares are not subject to any provisions permitting or restricting the issuance of additional securities and any other material restrictions or any provisions requiring a securityholder to contribute additional capital to the Company.
Procedures to Change the Rights of Shareholders
The rights, privileges, restrictions and conditions attaching to the Common Shares are contained in the Articles and such rights, privileges, restrictions and conditions may be changed by amending the Articles. In order to amend the Articles, the Act requires a resolution to be passed by a majority of not less than two-thirds of the votes cast by the shareholders entitled to vote thereon. Under the Act, if the Company resolves to make particular types of amendments to the Articles, a holder of Common Shares may dissent with regard to such resolution and, if such shareholder so elects, the Company must pay such shareholder the fair value of the Common Shares held by the shareholder in respect of which the shareholder dissents, determined as of the close of business on the day before the resolution was adopted. The types of amendments that would be subject to shareholder dissent rights include, without limitation: (i) to add, remove or change restrictions on the issue, transfer or ownership of shares of a class or series of the Company’s shares; and (ii) to add, remove or change any restriction upon the business that the Company may carry on or upon the powers that the Company may exercise.
Annual and Special Meetings
The annual meeting of shareholders of the Company is held at such time in each year and, at such place as the Board may from time to time determine, for the purpose of considering the minutes of an earlier meeting, considering the financial statements and reports required by the Act to be placed before the annual meeting, electing Directors, appointing or waiving the appointment of an auditor, fixing or authorizing the Directors to fix the remuneration payable to any such auditor and for the transaction of such other business as may properly be brought before the meeting. The Board has the power to call a special meeting of shareholders at any time.
A meeting of the shareholders of the Company may be held by telephonic or electronic means. A shareholder who, through these means, votes at the meeting or establishes a communications link to the meeting is deemed to be present at the meeting.
For every meeting of shareholders, the Company must prepare a list of shareholders entitled to receive notice of the meeting, arranged in alphabetical order and showing the number of shares held by each shareholder entitled to vote at the meeting. If a record date for the meeting is fixed, the shareholders listed must be those registered at the close of business on that record date. If no record date is fixed, the shareholders listed must be those registered at the close of business on the day immediately preceding the day on which notice of the meeting is given or, where no such notice is given, on the day on which the meeting is held. The list is available for examination by any shareholder during usual business hours at the registered office of the Company or at the place where the central securities register is maintained and at the meeting for which the list is prepared. Where a separate list of shareholders has not been prepared, the names of persons appearing in the securities register at the requisite time as the holder of one or more shares carrying the right to vote at such a meeting will be deemed to be a list of shareholders. Every person named in the list is entitled to vote the shares shown on the list opposite his or her name at the meeting to which the list relates.
Notice of the time and place of each meeting of shareholders must be given not less than 21 days and, not more than 50 days before the date of the meeting to each Director, to any auditor and to each shareholder who at the close of business on the record date for notice is entered in the securities register as the holder of one or more shares carrying the right to receive notice of or vote at the meeting.
A quorum of shareholders is present at a meeting of shareholders of the Company irrespective of the number of persons actually present at the meeting, if two or more holders of shares carrying not less in aggregate than 5% of the votes entitled to be voted at the meeting are present in person or represented by proxy.
57
Limitations on Ownership of Securities
Neither the Articles nor the By-Laws contain any provision limiting the right to own securities, including the rights of non-resident or foreign shareholders to hold or exercise voting rights on the securities imposed by foreign law.
Change in Control
Neither the Articles nor the By-Laws contain any provision that would have the effect of delaying, deferring or preventing a change in control of the Company and that would operate only with respect to a merger, acquisition or corporate restructuring involving the Company.
Ownership Threshold
The By-Laws do not contain any provision governing the ownership threshold above which shareholder ownership must be disclosed. However, Canadian securities laws require that the Company disclose in the Company’s proxy information circular for the annual meeting and certain other disclosure documents, holders who beneficially own more than 10% of the issued and outstanding Common Shares. Under United States federal securities laws, the Company is required to disclose, in the annual reports on Form 20-F, holders who to the knowledge of the Company beneficially own 5% or more of the issued and outstanding Common Shares.
Change in Capital
Neither the Articles nor the By-Laws contain any provision governing changes in the capital of the Company, where such provision is more stringent than required under the Act.
C.Material Contracts
In addition to the contracts described elsewhere in this Annual Report, the following are summaries of each material contract to which we are a party for the two years preceding the date of this Annual Report.
Securities Purchase Agreement – September 13, 2021
On September 15, 2021, the Company closed a registered direct offering (the “September 2021 Offering”) and issued an aggregate of 4,235,294 units (each, a “Unit”) at a price of $4.25 per Unit, pursuant to a securities purchase agreement (the “Purchase Agreement”) entered into between the Company and the purchasers thereto, for gross proceeds of US$18,000,000. Each Unit consists of one common share and one-half of one common share purchase warrant (each whole warrant, a “Warrant”). Each Warrant entitles the holder thereof to purchase one common share at an exercise price of US$5.00 per common share. The Warrants are exercisable beginning on the date that is six months following the September 15, 2021 issuance date and will expire five years from the issuance date.
Placement Agency Agreement – September 13, 2021
In connection with the September 2021 Offering, the Company and A.G.P. entered into a placement agency agreement (the “September Placement Agency Agreement”) dated September 13, 2021, pursuant to which A.G.P. agreed to serve as the placement agent to the Company in the September 2021 Offering. Pursuant to the terms of the September Placement Agency Agreement, the Company paid A.G.P. a cash fee equal to 6.5% of the gross proceeds from the securities placed by A.G.P. in the September 2021 Offering. The Company also agreed to reimburse A.G.P. for (i) reasonable accountable legal expenses incurred by the A.G.P. in connection with the September 2021 Offering up to the amount of US$100,000 and (ii) non-accountable expenses up to the amount of US$15,000 including, but not limited to, IPREO software related expenses, background check(s), tombstones, marketing related expenses; i.e. roadshow, et. al, and any other expenses incurred by the A.G.P. in connection with the September 2021 Offering. The non-accountable expenses were paid to A.G.P. on September 15, 2021.
Securities Purchase Agreement – July 18, 2022
On July 18, 2022, the Company entered into the July Purchase Agreement with two U.S. institutional investors, for the purchase of an aggregate of 3,551,852 Common Shares and warrants to purchase up to 3,551,852 Common Shares, at a combined purchase price of US$1.35, resulting in total gross proceeds of approximately US$4.8 million before deducting placement agent commissions and other offering expenses. The warrants have an exercise price of US$1.39, are exercisable any time after January 21, 2023 and will expire on
58
July 21, 2027. The Company closed on the July Private Placement on July 21, 2022. On August 15, 2022, The Company filed a registration statement on Form F-3 (File No. 333-266874) to register the Common Shares and the Common Shares underyling the warrants sold in the July Private Placement. The registration statement on Form F-3 was declared effective on August 29, 2022.
Placement Agency Agreement – July 18, 2022
In connection with the July Private Placement, the Company and A.G.P entered into a placement agency agreement (the “July Placement Agency Agreement”) dated June 18, 2022, pursuant to which A.G.P. agreed to serve as the placement agent to the Company in the July Private Placement. Pursuant to the terms of the July Placement Agency Agreement, the Company paid A.G.P. a cash fee equal to 6.5% of the gross proceeds from the securities placed by A.G.P. in the July Private Placement. The Company also agreed to reimburse A.G.P for (i) reasonable accountable legal expenses incurred by the A.G.P. in connection with the July Private Placement up to the amount of US$50,000 and (ii) non-accountable expenses up to the amount of US$15,000 including, but not limited to, IPREO software related expenses, background check(s), tombstones, marketing related expenses; i.e. roadshow, et. al, and any other expenses incurred by the A.G.P. in connection with the July Private Placement. The non-accountable expenses were paid to A.G.P. on July 21, 2022.
Credit Agreement – January 13, 2023
On January 13, 2023, the Company entered the Loan with Beedie with maximum available funds of $15 million. $12 million of the Loan has been advanced to the Company as an initial advance with an additional $3 million available to the Company to be drawn in subsequent advances in a minimum of US$1 million tranches. The amount outstanding under the Loan will bear interest at 12.5% per annum, comprised of cash interest of 9.5% per annum, calculated and paid monthly, and paid-in-kind interest will be charged at a rate of 3.0% per annum, compounded monthly and added to the outstanding principal amount of the Loan. A standby fee will be charged monthly at a rate of 1.5% per annum on the undrawn amount of the Standby Facility. The Company paid a commitment fee of 1.5% of the Loan. The lender has also been granted a board observer right. The loan is secured by a general security agreement covering all assets of the Company. The outstanding principal balance of the loan is repayable on January 13, 2027.
On initiation of the debt facility on January 13, 2023, 7,968,750 common share purchase warrants were issued to Beedie. Each warrant is convertible into one common share in the capital of the Company at a price per share equal to $0.256 until January 16, 2030. In addition, the Company has agreed to issue additional common share purchase warrants in connection with the subsequent advances, with such number of warrants to be equal to 17% of the amount of such aubsequent advance divided by the exercise price of such subsequent warrants.
Under the Credit Facility, the Company has undertaken to comply with financial covenants regarding a minimum balance of unrestricted cash and cash equivalents, minimum adjusted monthly EBITDA and maximum total secured debt leverage ratio.
D.Exchange Controls
As of the date hereof, we are not aware of any governmental laws, decrees or regulations in Canada that restrict the export or import of capital, including, but not limited to, foreign exchange controls, or that affect the remittance of dividends or other payments to nonresident holders of our Common Shares.
We are not aware of any limitations under the laws of Canada or the Province of Ontario, or in the Articles of Incorporation or any other of our constituent documents on the right of nonresidents of Canada or persons who are not Canadian citizens to hold and/or vote Common Shares.
E.Taxation
The following summary describes the principal Canadian federal income tax considerations pursuant to the Income Tax Act (Canada) and the regulations thereunder (the “Tax Act”) generally applicable to the acquisition, holding and disposition of the Common Shares by a holder who acquires, as beneficial owner, the Common Shares pursuant to the offering and who, for purposes of the Tax Act and at all relevant times, holds the Common Shares as capital property, deals at arm’s length with the Company and each underwriter and is not affiliated with the Company or any underwriter (a “Holder”). Generally, the Common Shares will be considered to be capital property to a Holder provided the Holder does not acquire or hold the Common Shares in the course of carrying on a business of trading or dealing in securities and has not acquired them in one or more transactions considered to be an adventure or concern in the nature of trade.
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This summary does not apply to a Holder (i) that is a “financial institution” for the purposes of the mark-to-market rules contained in the Tax Act; (ii) that is a “specified financial institution” as defined in the Tax Act; (iii), an interest in which would be, or for whom a Common Share would be, a “tax shelter investment” as defined in the Tax Act; (iv) that has made a functional currency reporting election under the Tax Act to report in a currency other than the Canadian currency; (v) that has or will enter into a “derivative forward agreement”, a “synthetic disposition arrangement” or a “dividend rental arrangement”, each as defined under the Tax Act, with respect to the Common Shares. Such Holders should consult their own tax advisors with respect to an investment in the Common Shares or (vi) that carries on, or is deemed to carry on, an insurance business in Canada and elsewhere. Such Holders should consult their own tax advisors with respect to an investment in the Common Shares.
Additional considerations, not discussed herein, may be applicable to a Holder that is a corporation resident in Canada, and that is or becomes, or does not deal at arm’s length for purposes of the Tax Act with a corporation resident in Canada that is or becomes, as part of a transaction or event or series of transactions or events that includes the acquisition of the Common Shares, controlled by a non-resident person or group of non-resident persons not dealing with each other at arm’s length for purposes of the “foreign affiliate dumping” rules in section 212.3 of the Tax Act. Such Holders should consult their own tax advisors with respect to the possible application of these rules.
In addition, this summary does not address the deductibility of interest by a Holder who has borrowed money or otherwise incurred debt in connection with the acquisition of the Common Shares.
This summary is based upon the provisions of the Tax Act in force as of the date hereof, all specific proposals to amend the Tax Act that have been publicly announced by or on behalf of the Minister of Finance (Canada) prior to the date hereof (the “Proposed Amendments”) and counsel’s understanding of the current administrative policies and assessing practices of the Canada Revenue Agency (“CRA”) made publicly available prior to the date hereof. This summary assumes the Proposed Amendments will be enacted in the form proposed, however, no assurance can be given that the Proposed Amendments will be enacted in the form proposed, if at all. This summary is not exhaustive of all possible Canadian federal income tax considerations and, except for the Proposed Amendments, does not take into account or anticipate any changes in law or the administrative policies or assessing practices of the CRA, whether by legislative, governmental or judicial action or decision, nor does it take into account provincial, territorial or foreign tax considerations, which may differ significantly from those discussed herein.
Subject to certain exceptions that are not discussed in this summary, for the purposes of the Tax Act, all amounts relating to the acquisition, holding or disposition of Common Shares, including dividends, must be determined in Canadian dollars using the relevant exchange rate determined in accordance with the Tax Act.
This summary is of a general nature only and is not intended to be, nor should it be construed to be, legal or tax advice to any particular holder or prospective holder of the Common Shares, and no representations with respect to the income tax consequences to any holder or prospective holder are made. Consequently, holders and prospective holders of the Common Shares should consult their own tax advisors for advice with respect to the tax consequences to them of acquiring the Common Shares, having regard to their particular circumstances.
Holders Resident in Canada
This portion of the summary applies to a Holder who, at all relevant times, for purposes of the Tax Act and any applicable income tax treaty or convention, is or is deemed to be resident in Canada (a “Resident Holder”).
Certain Resident Holders who might not otherwise be considered to hold their Common Shares as capital property may, in certain circumstances, be entitled to have the Common Shares, and all other “Canadian securities” (as defined in the Tax Act) owned by such Resident Holders in the taxation year of the election and any subsequent taxation year, treated as capital property by making the irrevocable election permitted by subsection 39(4) of the Tax Act. Resident Holders should consult their own tax advisors regarding the availability or advisability of this election.
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Dividends on the Common Shares
Dividends received or deemed to be received on the Common Shares by a Resident Holder who is an individual (other than certain trusts) will generally be included in the individual’s income and will be subject to the gross-up and dividend tax credit rules applicable to taxable dividends received from taxable Canadian corporations, including the enhanced dividend tax credit rules applicable to any dividends designated by the Company as “eligible dividends” in accordance with the Tax Act. There may be limitations on the ability of the Company to designate dividends as “eligible dividends.”
In the case of a Resident Holder that is a corporation, the amount of any such taxable dividend that is included in its income for a taxation year will generally also be deductible in computing its taxable income for that taxation year. In certain circumstances, a dividend received or deemed to be received by a Resident Holder that is a corporation may be deemed to be proceeds of disposition or a capital gain pursuant to subsection 55(2) of the Tax Act. Resident Holders that are corporations should consult their own tax advisors having regard to their own particular circumstances.
A Resident Holder that is a “private corporation” or a “subject corporation”, each as defined in the Tax Act will generally be liable to pay a refundable tax under Part IV of the Tax Act on dividends received or deemed to be received on the Common Shares to the extent such dividends are deductible in computing its taxable income for the taxation year. Such additional tax may be refundable in certain circumstances.
Dispositions of Common Shares
Upon a disposition (or a deemed disposition) of a common share, a Resident Holder generally will realize a capital gain (or a capital loss) equal to the amount, if any, by which the proceeds of disposition of such common share, net of any reasonable costs of disposition, are greater (or are less) than the adjusted cost base of such common share to the Resident Holder.
The adjusted cost base to a Resident Holder of Common Shares acquired hereunder will be determined by averaging the cost of such Common Shares to the Resident Holder with the adjusted cost base of all other Common Shares, if any, held by the Resident Holder as capital property immediately before the acquisition.
Taxation of Capital Gains and Capital Losses
Generally, one-half of any capital gain (a “taxable capital gain”) realized by a Resident Holder in a taxation year must be included in the Resident Holder’s income for the year and one-half of any capital loss (an “allowable capital loss”) realized by a Resident Holder in a taxation year must be deducted from taxable capital gains realized by the Resident Holder in that year. Allowable capital losses in excess of taxable capital gains realized in a taxation year generally may be carried back and deducted in any of the three preceding taxation years or carried forward and deducted in any subsequent taxation year against net taxable capital gains realized in such years, to the extent and under the circumstances described in the Tax Act.
The amount of any capital loss realized by a Resident Holder that is a corporation on the disposition of a Common Share may be reduced by the amount of dividends received or deemed to be received by it on such Common Share, to the extent and under the circumstances described in the Tax Act. Similar rules may apply where a Common Share is owned by a partnership or trust of which a corporation, trust or partnership is a member or beneficiary. Resident Holders to whom these rules may be relevant should consult their own tax advisors.
Aggregate Investment Income
A Resident Holder that is, throughout the relevant taxation year, a “Canadian-controlled private corporation”, as defined in the Tax Act, may be liable to pay a refundable tax on its “aggregate investment income”, which is defined in the Tax Act to include an amount in respect of taxable capital gains and dividends or deemed dividends that are not deductible in computing such corporation’s income.
Alternative Minimum Tax
Capital gains realized and dividends received or deemed to be received by an individual (including certain trusts) may give rise to liability for alternative minimum tax as calculated under the detailed rules set out in the Tax Act. Resident Holders who are individuals should consult their own tax advisors in this regard.
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Holders Not Resident in Canada
This portion of the summary applies to a Holder who, at all relevant times, for purposes of the Tax Act and any applicable income tax treaty or convention (i) is neither resident nor deemed to be resident in Canada, and (ii) does not, and is not deemed to, use or hold the Common Shares in a business carried on in Canada (a “Non-Resident Holder”). In addition, this portion of the summary does not apply to an insurer who carries on an insurance business in Canada and elsewhere or an “authorized foreign bank” (as defined in the Tax Act) and such Non-Resident Holders should consult their own tax advisors.
Dividends on the Common Shares
Any dividends paid or credited, or deemed to be paid or credited, on the Common Shares, as the case may be, to a Non-Resident Holder will generally be subject to Canadian withholding tax at the rate of 25% of the gross amount of the dividend, subject to any reduction in the rate of withholding to which that Non-Resident Holder may be entitled under an applicable income tax treaty or convention. For instance, where the Non-Resident Holder is a resident of the United States that is entitled to applicable benefits under the Canada-United States Income Tax Convention (1980), as amended, and is the beneficial owner of the dividends, the rate of Canadian withholding tax applicable to dividends is generally reduced to 15%. The rate of withholding tax is generally further reduced to 5% if the beneficial owner of such dividend is a company that owns, directly or indirectly, at least 10% of the voting stock of the Company. Non-Resident Holders should consult their own tax advisors to determine their entitlement to relief under an applicable income tax treaty or convention.
Disposition of the Common Shares
A Non-Resident Holder will not be subject to tax under the Tax Act in respect of any capital gain realized by such Non-Resident Holder on a disposition of a common share unless such share constitutes “taxable Canadian property” (as defined in the Tax Act) of the Non-Resident Holder at the time of disposition and the Non-Resident Holder is not entitled to relief under an applicable income tax treaty or convention.
Generally, the Common Shares will not constitute “taxable Canadian property” of a Non-Resident Holder at any particular time provided that the Common Shares are then listed on a “designated stock exchange” for the purposes of the Tax Act (which currently includes the Nasdaq), unless at any time during the 60-month period immediately preceding such time: (i) at least 25% or more of the issued shares of any class or series of the capital stock of the Company were owned by or belonged to any combination of (x) the Non-Resident Holder, (y) persons with whom the Non-Resident Holder did not deal at arm’s length (for the purposes of the Tax Act), and (z) partnerships in which the Non-Resident Holder or a person described in (y) holds a membership interest directly or indirectly through one or more partnerships; and (ii) more than 50% of the fair market value of such shares was derived directly or indirectly from one, or any combination of, real or immovable property situated in Canada, Canadian resource property (as defined in the Tax Act), timber resource property (as defined in the Tax Act) or options in respect of, interests in or for civil law rights in, any such property (whether or not such property exists). Notwithstanding the foregoing, the Common Shares may also be deemed to be “taxable Canadian property” in certain circumstances.
In cases where a Non-Resident Holder disposes (or is deemed to have disposed) of a common share that is “taxable Canadian property” to that Non-Resident Holder, and the Non-Resident Holder is not entitled to an exemption under an applicable income tax treaty or convention, the consequences described above under the headings “Holders Resident in Canada — Dispositions of Common Shares” and “Taxation of Capital Gains and Capital Losses” will generally be applicable to such disposition. Non-Resident Holders for whom a common share is, or may be, “taxable Canadian property” should consult their own tax advisors.
Certain Material U.S. Federal Income Tax Considerations
The following discussion is a general summary of certain material U.S. federal income tax considerations with respect to the ownership and disposition of shares of our Common Shares. This summary is based on current U.S. federal income tax laws (including provisions of the U.S. Internal Revenue Code of 1986, as amended (the “Code”), U.S. Treasury regulations promulgated thereunder and administrative rulings and court decisions, all in effect as of the date hereof), all of which are subject to change at any time, possibly with retroactive effect.
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For purposes of this discussion, the term “U.S. Holder” means a beneficial owner of one or more of our Common Shares that is for U.S. federal income tax purposes one of the following:
| ● | an individual citizen or resident of the United States, including individuals treated as residents of the United States solely for tax purposes; |
| ● | a corporation created or organized in or under the laws of the United States or any political subdivision thereof; |
| ● | an estate the income of which is subject to U.S. federal income taxation regardless of its source, or; |
| ● | a trust if (1) a court within the United States can exercise primary supervision over it, and one or more United States persons have the authority to control all substantial decisions of the trust, or (2) the trust has a valid election in effect under applicable U.S. Treasury regulations to be treated as a United States person. |
This discussion applies only to a U.S. Holder that holds Common Shares as “capital assets” within the meaning of Section 1221 of the Code (generally, property held for investment). Unless otherwise provided, this summary does not discuss reporting requirements. In addition, this discussion does not address any tax consequences other than U.S. federal income tax consequences, such as U.S. state and local tax consequences, U.S. estate and gift tax consequences, and non-U.S. tax consequences, and does not describe all of the U.S. federal income tax consequences that may be relevant in light of a U.S. Holder’s particular circumstances, including alternative minimum tax consequences, the net investment income tax, and tax consequences to holders that are subject to special provisions under the Code, including, but not limited to, holders that:
| ● | are tax exempt organizations, qualified retirement plans, individual retirement accounts, or other tax deferred accounts; |
| ● | are financial institutions, underwriters, insurance companies, real estate investment trusts, or regulated investment companies; |
| ● | are brokers or dealers in securities or currencies or holders that are traders in securities that elect to apply a mark-to-market accounting method; |
| ● | have a “functional currency” for U.S. federal income tax purposes that is not the U.S. dollar; |
| ● | own Common Shares as part of a straddle, hedging transaction, conversion transaction, constructive sale, or other arrangement involving more than one position; |
| ● | acquire Common Shares in connection with the exercise of employee stock options or otherwise as compensation for services; |
| ● | are partnerships or other pass-through entities for U.S. federal income tax purposes (or investors in such partnerships and entities); |
| ● | are required to accelerate the recognition of any item of gross income with respect to the Common Shares as a result of such income being recognized on an applicable financial statement; |
| ● | own or will own (directly, indirectly, or constructively) 10% or more of our total combined voting power or value; |
| ● | are controlled foreign corporations; |
| ● | are passive foreign investment companies; |
| ● | hold the Common Shares in connection with trade or business conducted outside of the United States or in connection with a permanent establishment or other fixed place of business outside of the United States; or |
| ● | are former U.S. citizens or former long-term residents of the United States. |
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If an entity or arrangement treated as a partnership for U.S. federal income tax purposes holds shares of our securities, the tax treatment of a person treated as a partner for U.S. federal income tax purposes generally will depend on the status of the partner and the activities of the partnership. Persons that for U.S. federal income tax purposes are treated as a partner in a partnership holding shares of our securities should consult their tax advisors.
We have not sought, and do not expect to seek, a ruling from the United States Internal Revenue Service (the “IRS”), as to any United States federal income tax consequence described herein. The IRS may disagree with the discussion herein, and its determination may be upheld by a court. Moreover, there can be no assurance that future legislation, regulations, administrative rulings or court decisions will not adversely affect the accuracy of the statements in this discussion.
Except as otherwise noted, this summary assumes that the Company (nor any of its subsidiaries) is not a passive foreign investment company (a “PFIC”) for U.S. federal income tax purposes. A non-U.S. entity’s possible status as a PFIC must be determined annually and therefore may be subject to change. If the Company (or any of its subsidiaries) were to be a PFIC in any year, materially adverse consequences could result for U.S. Holders.
All prospective investors should consult with their own tax advisors regarding the U.S. federal, state, local, non-U.S. income and other tax considerations of acquiring, holding and disposing of the Common Shares.
WE RECOMMEND THAT PROSPECTIVE HOLDERS OF OUR COMMON SHARES CONSULT WITH THEIR TAX ADVISORS REGARDING THE TAX CONSEQUENCES TO THEM (INCLUDING THE APPLICATION AND EFFECT OF ANY FEDERAL, STATE, LOCAL, NON-U.S. INCOME AND OTHER TAX LAWS) OF THE OWNERSHIP AND DISPOSITION OF OUR COMMON SHARES.
U.S. Holders
Taxation of Distributions to U.S. Holders
Subject to the PFIC rules discussed below, a U.S. Holder generally will be required to include in gross income, in accordance with such U.S. Holder’s method of accounting for United States federal income tax purposes, as dividends the amount of any distribution of cash or other property (other than certain distributions of the Company’s shares or rights to acquire the Company’s shares) paid on the Company’s Common Shares to the extent the distribution is paid out of the Company’s current or accumulated earnings and profits (as determined under United States federal income tax principles). Distributions in excess of such earnings and profits generally will be applied against and reduce the U.S. Holder’s basis in its Common Shares (but not below zero) and, to the extent in excess of such basis, will be treated as gain from the sale or exchange of such Common Shares (the treatment of which is described under “— Gain or Loss on Sale, Taxable Exchange or Other Taxable Disposition of Common Shares to U.S. Holders” below). [Because we do not intend to determine our earnings and profits on the basis of U.S. federal income tax principles, we expect that distributions, if issued, will generally be reported to U.S. Holders as dividends.]
Dividends paid by us will be taxable to a corporate U.S. Holder at regular rates and will not be eligible for the dividends-received deduction generally allowed to domestic corporations in respect of dividends received from other domestic corporations. With respect to individuals and other non-corporate U.S. Holders, dividends generally will be taxed at the lower applicable long-term capital gains rate (see ”— Gain or Loss on Sale, Taxable Exchange or Other Taxable Disposition of Common Shares to U.S. Holders” below) applicable to “qualified dividend income,” provided that certain conditions are satisfied, including that (1) our Common Shares on which the dividends are paid are readily tradable on an established securities market in the United States or the Company is eligible for the benefits of the U.S.-Canada income tax treaty (the “Treaty”), (2) we are not a PFIC (nor treated as such with respect to a U.S. Holder) at the time the dividend was paid or in the previous year, and (3) certain other requirements are met. U.S. Holders should consult their tax advisors regarding the availability of such lower rate for any dividends paid with respect to our Common Shares.
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For U.S. foreign tax credit purposes, dividends paid on our Common Shares generally will be treated as foreign source income and generally will constitute passive category income. The amount of a dividend will include any amounts withheld by us in respect of Canadian income taxes. Subject to applicable limitations, some of which vary depending upon the U.S. Holder’s particular circumstances, Canadian income taxes withheld from dividends on the Common Shares, at a rate not exceeding any reduced rate pursuant to the Treaty, will be creditable against the U.S. Holder’s U.S. federal income tax liability. In lieu of claiming a foreign tax credit, U.S. Holders may, at their election, deduct foreign taxes, including any Canadian income taxes, in computing their taxable income, subject to generally applicable limitations under U.S. law. An election to deduct foreign taxes instead of claiming foreign tax credits applies to all foreign taxes paid or accrued in the taxable year. The rules governing foreign tax credits are complex and U.S. Holders should consult their tax advisers regarding the creditability or deductibility of foreign taxes in their particular circumstances.
The amount of any dividend paid in Canadian dollars will equal the U.S. dollar value of the Canadian dollars received, calculated by reference to the exchange rate in effect on the date the dividend is received by you, in the case of Common Shares, regardless of whether the Canadian dollars are converted into U.S. dollars. If the Canadian dollars received as a dividend are converted into U.S. dollars on the date of receipt, a U.S. Holder generally will not be required to recognize foreign currency gain or loss in respect of the dividend income. If the Canadian dollars received as a dividend are not converted into U.S. dollars on the date of receipt, a U.S. Holder will have a basis in the Canadian dollars equal to their U.S. dollar value on the date of receipt. Any gain or loss realized on a subsequent conversion or other disposition of the Canadian dollar will be treated as U.S. source ordinary income or loss.
Gain or Loss on Sale, Taxable Exchange or Other Taxable Disposition of Common Shares to U.S. Holders
Subject to the PFIC rules discussed below, a U.S. Holder generally will recognize capital gain or loss on the sale or other taxable disposition of our Common Shares. The amount of gain or loss recognized by a U.S. Holder on a sale or other taxable disposition generally will be equal to the difference between (i) the sum of the amount of cash and the fair market value of any property received in such disposition and (ii) the U.S. Holder’s adjusted tax basis in its Common Shares so disposed of. A U.S. Holder’s adjusted tax basis in its Common Shares generally will equal the U.S. Holder’s acquisition cost reduced by any prior distributions treated as a return of capital.
Any capital gain or loss recognized generally will be long-term capital gain or loss if the U.S. Holder’s holding period for such Common Shares exceeds one year. Long-term capital gain realized by a non-corporate U.S. Holder may be taxed at rates of taxation lower than the rates applicable to ordinary income and short-term capital gains, while short-term capital gains are subject to U.S. federal income tax at the rates applicable to ordinary income. The deductibility of capital losses is subject to various limitations.
Any gain or loss recognized by a U.S. Holder will generally be U.S. source gain or loss for foreign tax credit purposes. Consequently, a U.S. Holder may not be able to use the foreign tax credit arising from any non-U.S. tax imposed on the disposition of the Common Shares unless such credit can be applied (subject to applicable limitations) against tax due on other income treated as derived from non-U.S. sources.
Passive Foreign Investment Company (“PFIC”) Rules
A non-U.S. corporation will be classified as a PFIC for United States federal income tax purposes if either (i) at least 75% of its gross income in a taxable year, including its pro rata share of the gross income of any corporation in which it is considered to own at least 25% of the shares by value, is passive income or (ii) at least 50% of its assets in a taxable year (ordinarily determined based on fair market value and averaged quarterly over the year), including its pro rata share of the assets of any corporation in which it is considered to own at least 25% of the shares by value, are held for the production of, or produce, passive income. Passive income generally includes, among other things, dividends, interest, rents and royalties (other than rents or royalties derived from the active conduct of a trade or business) and gains from the disposition of assets giving rise to passive income.
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Although our PFIC status is determined annually, an initial determination that our Company is a PFIC generally will apply for subsequent years to a U.S. Holder who held Company Shares while we were a PFIC, whether or not we meet the test for PFIC status in those subsequent years. If we are determined to be a PFIC for any taxable year (or portion thereof) that is included in the holding period of a U.S. Holder of our Common Shares and the U.S. Holder did not make either a timely mark-to-market election or a qualified electing fund (“QEF”) election for our first taxable year as a PFIC in which the U.S. Holder held (or was deemed to hold) Common Shares, as described below, such U.S. Holder generally will be subject to special rules with respect to (i) any gain recognized by the U.S. Holder on the sale or other disposition of its Common Shares (which may include gain realized by reason of transfers of Common Shares that would otherwise qualify as nonrecognition transactions for United States federal income tax purposes) and (ii) any “excess distribution” made to the U.S. Holder (generally, any distributions to such U.S. Holder during a taxable year of the U.S. Holder that are greater than 125% of the average annual distributions received by such U.S. Holder in respect of the Common Shares during the three preceding taxable years of such U.S. Holder or, if shorter, such U.S. Holder’s holding period for the Common Shares). Under these special tax rules:
| ● | the U.S. Holder’s gain or excess distribution will be allocated ratably over the U.S. Holder’s holding period for the Common Shares; |
| ● | the amount allocated to the U.S. Holder’s taxable year in which the U.S. Holder recognized the gain or received the excess distribution, or to the period in the U.S. Holder’s holding period before the first day of our first taxable year in which we are a PFIC, will be taxed as ordinary income; |
| ● | the amount allocated to other taxable years (or portions thereof) of the U.S. Holder and included in its holding period will be taxed at the highest tax rate in effect for that year and applicable to the U.S. Holder without regard to the U.S. Holder’s other items of income and loss for such year; and |
| ● | an additional amount equal to the interest charge generally applicable to underpayments of tax will be imposed on the U.S. Holder with respect to the tax attributable to each such other taxable year of the U.S. Holder. |
In general, if we are determined to be a PFIC, a U.S. Holder may be able to avoid application of the PFIC tax consequences described above in respect to our Common Shares by making a timely and valid QEF election (if eligible to do so) to include in income its pro rata share of our net capital gains (as long-term capital gain) and other earnings and profits (as ordinary income), on a current basis, in each case whether or not distributed, in the taxable year of the U.S. Holder in which or with which our taxable year ends. A U.S. Holder generally may make a separate election to defer the payment of taxes on undistributed income inclusions under the QEF rules, but if deferred, any such taxes will be subject to an interest charge. There is no assurance that we will have timely knowledge of our status as a PFIC in the future or of the required information to be provided. Accordingly, U.S. Holders should assume that they will not be able to make a QEF election with respect to the Common Shares.
Alternatively, if a U.S. Holder, at the close of its taxable year, owns shares in a PFIC that are treated as marketable stock, the U.S. Holder may make a mark-to-market election with respect to such shares for such taxable year. If the U.S. Holder makes a valid mark-to-market election for the first taxable year of the U.S. Holder in which the U.S. Holder holds (or is deemed to hold) Common Shares in us and for which we are determined to be a PFIC, such U.S. Holder generally will not be subject to the PFIC rules described above in respect to its Common Shares. Instead, in general, the U.S. Holder will include as ordinary income in each taxable year the excess, if any, of the fair market value of Common Shares at the end of its taxable year over its adjusted basis in its Common Shares. These amounts of ordinary income would not be eligible for the favorable tax rates applicable to qualified dividend income or long-term capital gains. The U.S. Holder also generally will recognize an ordinary loss in respect of the excess, if any, of its adjusted basis in its Common Shares over the fair market value of its Common Shares at the end of its taxable year (but only to the extent of the net amount of previously included income as a result of the mark-to-market election). The U.S. Holder’s basis in its Common Shares will be adjusted to reflect any such income or loss amounts, and any further gain recognized on a sale or other taxable disposition of its Common Shares will be treated as ordinary income.
The mark-to-market election is available only for stock that is regularly traded on a national securities exchange that is registered with the Securities and Exchange Commission or on a foreign exchange or market that the IRS determines has rules sufficient to ensure that the market price represents a legitimate and sound fair market value. If made, a mark-to-market election would be effective for the taxable year for which the election was made and for all subsequent taxable years unless the Common Shares ceased to qualify as “marketable stock” for purposes of the PFIC rules or the IRS consented to the revocation of the election. U.S. Holders are urged to consult their own tax advisors regarding the availability and tax consequences of a mark-to-market election in respect to our Common Shares under their particular circumstances.
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If we are or become a PFIC and, at any time, have a non-U.S. subsidiary that is classified as a PFIC, U.S. Holders generally would be deemed to own a portion of the shares of such lower-tier PFIC, and generally could incur liability for the deferred tax and interest charge described above if we receive a distribution from, or dispose of all or part of our interest in, the lower-tier PFIC or the U.S. Holders otherwise were deemed to have disposed of an interest in the lower-tier PFIC. There can be no assurance that we will have timely knowledge of the status of any such lower-tier PFIC. In addition, we may not hold a controlling interest in any such lower-tier PFIC and thus there can be no assurance we will be able to cause the lower-tier PFIC to provide such required information. A mark-to-market election generally would not be available with respect to such lower-tier PFIC. U.S. Holders are urged to consult their tax advisors regarding the tax issues raised by lower-tier PFICs.
A U.S. Holder that owns (or is deemed to own) shares in a PFIC during any taxable year of the U.S. Holder, may have to file an IRS Form 8621, or any successor form, (whether or not a QEF or mark-to-market election is made) and such other information as may be required by the U.S. Treasury Department. Failure to do so, if required, will extend the statute of limitations until such required information is furnished to the IRS (potentially including with respect to items that do not relate to a U.S. Holder’s investment in Common Shares).
The rules dealing with PFICs and with the QEF and mark-to-market elections are very complex and are affected by various factors in addition to those described above. Accordingly, U.S. Holders of our Common Shares should consult their own tax advisors concerning the application of the PFIC rules to our Common Shares under their particular circumstances.
Information Reporting and Backup Withholding
Payments of dividends or sales proceeds that are made within the United States or through certain U.S.-related financial intermediaries may be subject to information reporting and backup withholding, unless (i) the U.S. Holder is a corporation or other exempt recipient, or (ii) in the case of backup withholding, the U.S. Holder provides a correct U.S. taxpayer identification number and certifies that it is not subject to backup withholding.
Backup withholding is not an additional tax. Any amounts withheld under the U.S. backup withholding rules will be allowed as a credit against a U.S. Holder’s U.S. federal income tax liability, if any, or will be refunded, if such U.S. Holder furnishes required information to the IRS in a timely manner. Each U.S. Holder should consult its own tax advisor regarding the information reporting and backup withholding rules in their particular circumstances and the availability of and procedures for obtaining an exemption from backup withholding.
Reporting Obligations for Certain Owners of Foreign Financial Assets
Certain U.S. Holders may be required to file an IRS Form 926 (Return by a U.S. Transferor of Property to a Foreign Corporation) to report a transfer of property (including cash) to us. Substantial penalties may be imposed on a U.S. Holder that fails to comply with this reporting requirement, and the period of limitations on assessment and collection of United States federal income taxes will be extended in the event of a failure to comply. Furthermore, certain U.S. Holders who are individuals and certain entities will be required to report information with respect to such U.S. Holder’s investment in “specified foreign financial assets” on IRS Form 8938 (Statement of Specified Foreign Financial Assets), subject to certain exceptions. Specified foreign financial assets generally include any financial account maintained with a non-U.S. financial institution and should also include the Common Shares if they are not held in an account maintained with a U.S. financial institution. Persons who are required to report specified foreign financial assets and fail to do so may be subject to substantial penalties, and the period of limitations on assessment and collection of United States federal income taxes may be extended in the event of a failure to comply. Potential investors are urged to consult their tax advisors regarding the foreign financial asset and other reporting obligations and their application to an investment in our Common Shares.
The discussion of reporting obligations set forth above is not intended to constitute an exhaustive description of all reporting obligations that may apply to a U.S. Holder. A failure to satisfy certain reporting obligations may result in an extension of the period during which the IRS can assess a tax, and under certain circumstances, such an extension may apply to assessments of amounts unrelated to any unsatisfied reporting obligation. Penalties for failure to comply with these reporting obligations are substantial. U.S. Holders should consult with their own tax advisors regarding their reporting obligations under these rules, including the requirement to file an IRS Form 8938.
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Non-U.S. Holders
This section applies to you if you are a “Non-U.S. Holder.” As used herein, the term “Non-U.S. Holder” means a beneficial owner of our Common Shares that is for United States federal income tax purposes that is not a U.S. Holder, as defined above.
Taxation of Distributions to Non-U.S. Holders
A Non-U.S. Holder of our Common Shares will generally not be subject to U.S. federal income or withholding tax on dividends received on our Common Shares, unless such income is effectively connected with the conduct by the holder of a U.S. trade or business.
Any distribution not constituting a dividend will be treated as first reducing the adjusted basis in the Non-U.S. Holder’s shares of our Common Shares and, to the extent it exceeds the adjusted basis in the Non-U.S. Holder’s shares of our Common Shares, as gain from the sale or exchange of such shares. Any such gain will be subject to the treatment described below under “— Gain on Sale or Other Disposition of our Common Shares to Non-U.S. Holders”.
Gain or Loss on Sale, Taxable Exchange or Other Taxable Disposition of Common Shares to Non-U.S. Holders
A Non-U.S. Holder of our Common Shares will not be subject to U.S. federal income or withholding tax on gain realized on the sale or other taxable disposition of our Common Shares, unless: such gain is effectively connected with the conduct by the holder of a U.S. trade or business; or in the case of gain realized by an individual holder, the holder is present in the United States for 183 days or more in the taxable year of the sale and certain other conditions are met.
F.Dividends and Paying Agents
Not applicable.
G.Statement by Experts
Not applicable.
H.Documents on Display
We are subject to the information reporting requirements of the Exchange Act applicable to foreign private issuers and under those requirements will file reports with the SEC. Those reports may be inspected without charge at the locations described below. As a foreign private issuer, we are exempt from the rules under the Exchange Act related to the furnishing and content of proxy statements, and our officers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act. In addition, we are not required under the Exchange Act to file periodic reports and financial statements with the SEC as frequently or as promptly as United States companies whose securities are registered under the Exchange Act.
Nevertheless, we will file with the SEC an Annual Report on Form 20-F containing financial statements that have been examined and reported on, with and opinion expressed by an independent registered public accounting firm.
We maintain a corporate website at www.viqsolutions.com. We intend to post our Annual Report on our website promptly following it being filed with the SEC. Information contained on, or that can be accessed through, our website does not constitute a part of this Annual Report. We have included our website address in this Annual Report solely as an inactive textual reference.
The Securities and Exchange Commission maintains a website (www.sec.gov) that contains reports, proxy and information statements and other information regarding registrants, such as us, that file electronically with the SEC.
With respect to references made in this Annual Report to any contract or other document of our company, such references are not necessarily complete and you should refer to the exhibits attached or incorporated by reference to this Annual Report for copies of the actual contract or document.
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I.Subsidiary Information
Not applicable.
Item 11.Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
Item 12.Description of Securities Other than Equity Securities.
A.Debt Securities
Not applicable.
B.Warrants and Rights
Not applicable.
C.Other Securities
Not applicable.
D.American Depositary Shares
Not applicable.
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PART II
Item 13.Defaults, Dividend Arrearages and Delinquencies.
Not applicable.
Item 14.Material Modifications to the Rights of Security Holders and Use of Proceeds.
Not applicable.
Item 15.Disclosure Controls and Procedures.
Evaluation of Disclosure Controls & Procedures
Management is responsible for establishing and maintaining a system of disclosure controls and procedures to provide reasonable assurance that all material information relating to the Company is gathered and reported to senior management, including the Chief Executive Officer (“CEO”) and the Chief Financial Officer (“CFO”), on a timely basis so that appropriate decisions can be made regarding public disclosure, including to ensure that information required to be disclosed by the Company in reports that the Company files or submits under Canadian securities legislation and the Exchange Act is recorded, processed, summarized and reported within the time periods specified in securities legislation. Management, under the oversight of the CEO and CFO, has evaluated the design and effectiveness of the Company’s disclosure controls and procedures as of December 31, 2022. Based on this evaluation, the CEO and the CFO concluded that, as of December 31, 2022 the Company’s disclosure controls and procedures (as defined in National Instrument 52-109 – Certification of Disclosure in Issuers’ Annual and Interim Filings and in Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act) were ineffective as a result of material weaknesses identified in the Company’s internal control over financial reporting, which is further described below.
The Company’s disclosure controls and procedures are designed to provide reasonable assurance that material information relating to the Company is made known to us by others, particularly during the period in which the annual filings are being prepared and of achieving their objectives, and the CEO and CFO do not expect that the disclosure controls and procedures will prevent all errors and fraud. A control system, no matter how well conceived or operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.
Notwithstanding the material weaknesses, management has concluded that the Company’s audited consolidated financial statements as at and for the year ended December 31, 2022, present fairly, in all material respects, the Company’s financial position, statement of loss and comprehensive loss, changes in shareholders’ equity and cash flows in accordance with IFRS.
Management’s Annual Report on Internal Controls over Financial Reporting
Management is also responsible for establishing and maintaining adequate internal controls over financial reporting (“ICFR”) to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial reports for external purposes in accordance with IFRS. There are inherent limitations in the effectiveness of any system of internal control, including the possibility of human error and overriding of controls. Consequently, an effective internal control system can only provide reasonable, not absolute assurance, with respect to reporting financial information. Further, because of changes in conditions, effectiveness of internal control over financial reporting may vary over time. Except for the material weaknesses described below, there were no changes in the Company’s Internal Control over Financial Reporting that occurred during the period ended December 31, 2022 that has materially affected or reasonably likely to materially affect the Company’s Internal Control over Financial Reporting.
An evaluation of the design and effectiveness of the Company’s internal controls over financial reporting was carried out by management, under the supervision of the CEO and CFO. In making this evaluation, the CEO and CFO used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) Internal Control – Integrated Framework (2013). Based on this evaluation, the CEO and CFO have concluded that the Company’s internal control over financial reporting was ineffective as of December 31, 2022 due to the material weaknesses described below. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.
70
The material weaknesses that our management identified related to the following:
| ● | Company did not have sufficient resources, including contractors, in place throughout the reporting period with the appropriate training and knowledge of internal controls to monitor the design, implementation and operating effectiveness of internal control over financial reporting |
| ● | the Company’s review controls in various financial reporting processes did not operate with sufficient precision, particularly with respect to the determination of the appropriate period in which to recognize revenue and expenses; |
| ● | the Company did not maintain adequate review controls to ensure that complex accounting areas such as business combinations, impairment of non-financial assets, financial instruments, revenue recognition and accounting for income tax provisions were appropriately recorded in accordance with IFRS; and |
| ● | the Company did not effectively design and maintain appropriate segregation of duties and controls over the effective preparation, review and approval, and associated documentation of journal entries. |
These material weaknesses resulted in material misstatements, which were corrected, prior to the release of the consolidated financial statements as of and for the year ended December 31, 2022.
Remediation
We intend to implement a remediation plan that involves a third-party software solution to formalize the documentation and evidence of our review and approval of subjective and higher risk journal entries in our financial reporting system including implementing improved process over cut off of transactions. We will implement more formalized documentation and evidence of review over complex accounting transactions. The plan will include the involvement of management and sufficient training of all relevant personnel. We will take the measures necessary to address the material weaknesses, which may require significant management attention, and our efforts may not prove to be successful in remediating the material weaknesses and do not guarantee that we will not suffer additional material weaknesses and/or significant deficiencies in the future. The CEO and CFO do not expect that internal controls over financial reporting will prevent all misstatements. The design of a system of internal controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that the design will succeed in achieving the stated goals under all potential future conditions.
Attestation Report of the Registered Public Accounting Firm
The effectiveness of our internal control over financial reporting as of December 31, 2022, has not been audited by our independent registered public accounting firm due to an exemption for emerging growth companies established by the JOBS Act.
Changes in Internal Control over Financial Reporting
During the year ended December 31, 2022, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 16.[Reserved]
Item 16A.Audit Committee Financial Expert.
Our Board has determined that Messrs. Quarin and Gordon and Ms. Pan are each an “audit committee financial expert” as defined by SEC rules and each has the requisite financial sophistication under the applicable rules and regulations of the Nasdaq Stock Market. Messrs. Quarin and Gordon and Ms. Pan are each independent as such term is defined in Rule 10A-3 under the Exchange Act and under the listing standards of the Nasdaq Stock Market.
71
Item 16B.Code of Business Conduct and Ethics.
We have adopted a written business code of conduct (the “Code”) that applies to all of our directors, officers and employees. The objective of the Code is to provide guidelines for maintaining our and our subsidiaries’ integrity, reputation, honesty, objectivity and impartiality. The Code addresses conflicts of interest, protection of our assets, confidentiality, fair dealing with our Shareholders, competitors and employees, insider trading, compliance with laws and reporting any illegal or unethical behavior. As part of the Code, any person subject to the Code is required to avoid or fully disclose interests or relationships that are harmful or detrimental to our best interests or that may give rise to real, potential or the appearance of conflicts of interest. Our Board has ultimate responsibility for the stewardship of the Code and it monitors compliance through the Nominating and Governance Committee. Directors, officers and employees are required to annually certify that they have not violated the Code.
The Code was amended and restated on July 9, 2021. During the year ended December 31, 2022, no waivers or requests for exemptions from the Code were either requested or granted. The Code, as amended and restated, may be viewed on our website at www.viqsolotuions.com/investors/governance-documents.
Item 16C. Principal Accountant Fees and Services.
We have appointed Ernst & Young LLP as our independent registered public accounting firm. The following table sets forth information regarding the amount billed and accrued to us by Ernst & Young LLP for the fiscal year ended December 31, 2022 and 2021:
| | | | | | |
Type of Service Provided |
| 2022 |
| 2021 | ||
Audit fees(1) | | $ | 497,000 | | | NIL |
Audit-related fees(2) | | | NIL | | | NIL |
Tax fees(3) | | $ | NIL | | | NIL |
Total | | $ | 497,000 | | | NIL |
Notes:
| (1) | “Audit fees” include the aggregate fees billed by the Company’s external auditor for professional services rendered by the external auditor for the audit of the Company’s financial statements, reviews of interim financial statements or services that are normally provided by the external auditor in connection with statutory and regulatory filings or engagements. |
| (2) | “Audit-related fees” include the aggregate fees billed for assurance and related services by the Company’s external auditor that are reasonably related to the performance of the audit of the Company’s financial statements and are not reported under “Audit Fees”. |
| (3) | “Tax fees” include the aggregate fees billed for professional services rendered by the Company’s external auditor for tax compliance, tax advice, and tax planning and include corporate tax returns |
KPMG LLP acted as our independent registered public accounting firm until September 29, 2022. The following table sets forth information regarding the amount billed and accrued to us by KPMG for the fiscal year ended December 31, 2021 and the first two quarter of 2022:
| | | | | | |
Type of Service Provided |
| 2022 |
| 2021 | ||
Audit fees(1) | | $ | 277,000 | | $ | 981,857 |
Audit-related fees(2) | |
| NIL | | $ | 64,200 |
Tax fees(3) | |
| NIL | | $ | 83,416 |
Total | | $ | 277,000 | | $ | 1,129,473 |
The Audit Committee reviews and pre-approves all non-audit services to be provided to the Company by its external auditors.
Item 16D.Exemptions from the Listing Standards for Audit Committees.
Not applicable.
72
Item 16E.Purchases of Equity Securities by the Issuer and Affiliated Purchasers.
Not applicable.
Item 16F.Change in Registrant’s Certifying Accountant.
On September 29, 2022, our independent registered public accounting firm, KPMG LLP resigned at the Company’s request. The reports of KPMG LLP on our financial statements for the fiscal years ended December 31, 2021 and 2020 and the related statements of operations and comprehensive income (loss), changes in shareholders’ equity (deficit), and cash flows for the fiscal years ended December 31, 2021 and 2020 did not contain an adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles. The decision to change the independent registered public accounting firm was recommended and approved by our Board.
During our fiscal years ended December 31, 2021 and 2020 and through September 29, 2022, the date of resignation, (a) there were no disagreements with KPMG LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of KPMG LLP, would have caused it to make reference thereto in its reports on the financial statements for such years and (b) there were no “reportable events” that would be required to be described under Item 16F(a)(1)(v) of Form 20-F in connection with our Annual Report, except that, in connection with the preparation of our financial statements as of December 31, 2021 management identified material weaknesses in our internal controls as described in Item 15(b) of the Company’s annual report on Form 20-F for the year ended December 31, 2021. These material weaknesses have not been remediated as of December 31, 2022.
On September 29, 2022, our Board approved the the resignation of KPMG LLP and appointment of Ernst & Young LLP as our new independent registered public accounting firm to audit our financial statements. During the two most recent fiscal years ended December 31, 2022 and 2021 and any subsequent interim periods through the date hereof prior to the engagement of Ernst & Young LLP, neither we, nor someone on our behalf, has consulted Ernst & Young LLP regarding:
| (i) | either: the application of accounting principles to a specified transaction, either completed or proposed; or the type of audit opinion that might be rendered on our consolidated financial statements, and either a written report was provided to us or oral advice was provided that the new independent registered public accounting firm concluded was an important factor considered by us in reaching a decision as to the accounting, auditing or financial reporting issue; or |
(ii) | any matter that was either the subject of a disagreement as defined in paragraph 304(a)(1)(iv) of Regulation S-K or a reportable event as described in paragraph 304(a)(1)(v) of Regulation S-K. |
Item 16G.Corporate Governance.
The Canadian securities regulatory authorities have issued corporate governance guidelines pursuant to National Policy 58-201 - Corporate Governance Guidelines (the “Corporate Governance Guidelines”), together with certain related disclosure requirements pursuant to National Instrument 58-101 - Disclosure of Corporate Governance Practices (the “NI 58-101”). The Corporate Governance Guidelines are recommended as “best practices” for issuers to follow. The Company recognizes that good corporate governance plays an important role in its overall success and in enhancing shareholder value and, accordingly, it has adopted certain corporate governance policies and practices which reflect its consideration of the recommended Corporate Governance Guidelines.
The Company is a “foreign private issuer” as defined in Rule 3b-4 under the Exchange Act and its Common Shares are listed on the Nasdaq Capital Market and the TSX. Rule 5615(a)(3) of Nasdaq Stock Market Rules permits foreign private issuers to follow home country practices in lieu of certain provisions of Nasdaq Stock Market Rules. A foreign private issuer that follows home country practices in lieu of certain provisions of Nasdaq Stock Market Rules must disclose ways in which its corporate governance practices differ from those followed by domestic companies either on its website or in the annual report that it distributes to shareholders in the United States. A description of the ways in which the Company’s governance practices differ from those followed by domestic companies pursuant to Nasdaq standards are as follows:
73
Majority Independent Directors: The Company does not follow Nasdaq Stock Market Rule 5605(b)(1), which requires companies to have a majority of the board of directors comprised of “Independent Directors” as defined in Nasdaq Stock Market Rule 5605(a)(2). In lieu of following Nasdaq Stock Market Rule 5605(b)(1), the Company follows the rules of the TSX as set out in the TSX Company Manual (the “TSX Policy”). The TSX Policy requires that at least two (2) members of the board of directors be “Independent Directors” as defined in the TSX Policy. It is not a requirement that a majority of the directors be independent. In addition, the Company follows the Corporate Governance Guidelines, which require that a majority of the directors be independent.
Executive Sessions: The Company does not follow Nasdaq Stock Market Rule 5605(b)(2), which requires companies to have their Independent Directors regularly schedule meetings at which only Independent Directors are present (“executive meetings”). In lieu of following Nasdaq Stock Market Rule 5605(b)(2), the Company follows the Corporate Governance Guidelines, which require that independent directors should hold regularly scheduled meetings at which non-independent directors and members of management are not in attendance.
Audit Committee Charter: The Company does not follow Nasdaq Stock Market Rule 5605(c)(1), which requires companies to adopt a formal written audit committee charter that specifies the scope of its responsibilities and the means by which it carries out those responsibilities; the outside auditor’s accountability to the audit committee; and the audit committee’s responsibility to ensure the independence of the outside auditor. In lieu of following Nasdaq Stock Market Rule 5605(c)(1), the Company follows the rules set out in National Instrument 52-110 - Audit Committees (“NI 52-110”), which states that the audit committee must have a written charter that sets out the audit committee’s mandate and responsibilities. A few of the audit committee’s responsibilities include the nomination and compensation of an external auditor and review the Company’s financial statements, among others.
Compensation Committee Charter: The Company does not follow Nasdaq Stock Market Rule 5605(d)(1), which requires companies to adopt a formal written compensation committee charter and have a compensation committee review and reassess the adequacy of the charter on an annual basis. In lieu of following Nasdaq Stock Market Rule 5605(d)(1), the Company follows the Corporate Governance Guidelines, which provide that a compensation committee should have a written charter that outlines the committee’s purpose, responsibilities, member qualifications, member appointment and removal, structure and operations (including any authority to delegate to individual members or subcommittees), and the manner of reporting to the board.
Composition of Compensation Committee: The Company does not follow Rule Nasdaq Stock Market 5605(d)(2), which requires companies to have a compensation committee comprised of at least two members, with each member being Independent Director as defined under Nasdaq Stock Market Rule 5605(a)(2). In lieu of following Nasdaq Stock Market Rule 5605(d)(2), the Company follows the rules of the Corporate Governance Guidelines which provide that the compensation committee should be composed entirely of independent directors.
Independent Director Oversight of Director Nominations: The Company does not follow Nasdaq Stock Market Rule 5605(e)(1), which requires Independent Director involvement in the selection of director nominees, by having a nominations committee comprised solely of Independent Directors. In lieu of following Rule Nasdaq Stock Market 5605(e)(1), the Company follows the Corporate Governance Guidelines which provide that an issuer should have a nominating committee composed entirely of independent directors.
Nominations Committee Charter: The Company does not follow Nasdaq Stock Market Rule 5605(e)(2), which requires companies to adopt a formal written nominations committee charter or board resolution, as applicable, addressing the director nomination process and such related matters as may be required under the federal securities laws. In lieu of following Nasdaq Stock Market Rule 5605(e)(2), the Company follows the Corporate Governance Guidelines, which provide that the nominating committee should have a written charter that clearly establishes the committee’s purpose, responsibilities, member qualifications, member appointment and removal, structure and operations (including any authority to delegate to individual members and subcommittees), and manner of reporting to the board.
Shareholder Meeting Quorum Requirements: The Company does not follow Nasdaq Stock Market Rule 5620(c) which requires that the minimum quorum requirement for a meeting of shareholders be 33 1/3 % of the outstanding common shares. In addition, Nasdaq Stock Market Rule 5620(c) requires that an issuer listed on Nasdaq state its quorum requirement in its by-laws. In lieu of following Nasdaq Stock Market Rule 5620(c), the Company follows Canadian corporate law. The Company’s by-laws provide that two or more holders of shares carrying not less in aggregate than 5% of the votes entitled to be voted at the meeting present in person or represented by proxy shall be considered quorum. The quorum requirement in the by-laws is consistent with applicable Canadian laws and corporate practices.
74
Shareholder Approval Requirements: The Company does not follow Nasdaq Stock Market Rules 5635(a) and (b), which require shareholder approval for certain dilutive events (such as issuances that will result in a change of control, certain transactions other than a public offering involving issuances of a 20% or greater interest in us and certain acquisitions of the stock or assets of another company). Additionally, the Company does not follow Nasdaq Stock Market Rule 5635(c), which requires shareholder approval of most equity compensation or purchase plans or arrangements and material amendments thereto (with a few limited exceptions), and this applies whether the securities issuable pursuant to such plan or arrangement are newly issued or bought over the open market. In lieu of following Nasdaq Stock Market Rules 5635(a), (b) and (c), the Company follows the TSX Policy, which requires shareholder approval for any transaction that materially affects control of a company and most securities based compensation arrangements, among other things.
A description of how our corporate governance guidelines differ from those required by Nasdaq Stock Market Rules is also available on our website at https://viqsolutions.com/investors/governance-documents.
Board Diversity Matrix (as March 30, 2023)
| | |
Country of Principal Executive Offices: |
| Canada |
Foreign Private Issuer |
| Yes |
Disclosure Prohibited Under Home Country Law |
| No |
Total Number of Directors |
| 8 |
| | | | | | | | | | |
|
| |
| | | |
| Non- |
| |
|
| Female |
| Male |
| |
| Binary |
| Did Not Disclose Gender |
Part I: Gender Identity | | | | | | | | | | |
Directors |
| 3 |
| 5 | | |
| — |
| — |
Part II: Demographic Background | | | | | | | | | | |
Underrepresented Individual in Home Country Jurisdiction |
| |
|
| | 1 |
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|
LGBTQ+ |
| |
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| | — |
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Did Not Disclose Demographic Background |
| |
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| | — |
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Item 16H.Mine Safety Disclosure.
Not applicable.
Item 16I.Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.
Not applicable.
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PART III
Item 17.Financial Statements.
See “Item 18, “Financial Statements”.
Item 18.Financial Statements.
Our audited consolidated financial statements for the years ended December 31, 2022, 2021 and 2020 are included at the end of this Annual Report. The auditors’ report of Ernst & Young LLP for the year ended December 31, 2022 and KPMG LLP for the year ended December 31, 2021 and 2020 are included herein immediately preceding the audited consolidated financial statements.
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Item 19.Exhibits.
Exhibit |
| Description |
| Incorporation by Reference | ||||||
Schedule/ |
| File |
| Exhibit |
| File Date | ||||
1.1 |
|
| 20-F |
| 001-40717 |
| 1.1 |
| May 2, 2022 | |
| | | | | | | | | | |
1.2 | | | S-8 | | 333-257263 | | 4.1 | | June 18, 2021 | |
| | | | | | | | | | |
1.2 | | | S-8 | | 333-257263 | | 4.2 | | June 18, 2021 | |
| | | | | | | | | | |
1.3 | | | S-8 | | 333-257263 | | 4.3 | | June 18, 2021 | |
| | | | | | | | | | |
1.4 | | | S-8 | | 333-257263 | | 4.4 | | June 18, 2021 | |
| | | | | | | | | | |
1.5 | | | S-8 | | 333-257263 | | 4.5 | | June 18, 2021 | |
| | | | | | | | | | |
1.6 | | | S-8 | | 333-257263 | | 4.6 | | June 18, 2021 | |
| | | | | | | | | | |
2.1* | | | | | | | | | | |
| | | | | | | | | | |
6.1 | | | 6-K | | 001-40717 | | 99.1 | | July 21, 2022 | |
| | | | | | | | | | |
6.2 | | | 6-K | | 001-40717 | | 99.2 | | July 21, 2022 | |
| | | | | | | | | | |
6.3 | | | 6-K | | 001-40717 | | 99.4 | | July 21, 2022 | |
| | | | | | | | | | |
6.4 | | | 6-K | | 001-40717 | | 99.5 | | July 21, 2022 | |
| | | | | | | | | | |
6.5† | | | 6-K | | 001-40717 | | 99.1 | | January 25, 2023 | |
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8.1* |
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12.1* |
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12.2* |
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13.1** |
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13.2** | | | | | | | | | | |
| | | | | | | | | | |
19.1* | | | | | | | | | | |
| | | | | | | | | | |
23.1* | | | | | | | | | | |
| | | | | | | | | | |
23.2* | | | | | | | | | | |
| | | | | | | | | | |
99.1* | | | | | | | | | | |
| | | | | | | | | | |
101.INS* | | XBRL Instance Document | | | | | | | | |
| | | | | | | | | | |
101.SCH* | | XBRL Taxonomy Extension Schema Document | | | | | | | | |
| | | | | | | | | | |
101.CAL* | | XBRL Taxonomy Extension Calculation Linkbase Document | | | | | | | | |
| | | | | | | | | | |
101.DEF* | | XBRL Taxonomy Extension Definition Linkbase Document | | | | | | | | |
| | | | | | | | | | |
101.LAB* | | XBRL Taxonomy Extension Label Linkbase Document | | | | | | | | |
| | | | | | | | | | |
101.PRE* | | XBRL Taxonomy Extension Presentation Linkbase Document | | | | | | | | |
*Filed herewith.
**Furnished herewith.
†Certain portions of this exhibit (indicated by asterisks) have been redacted in accordance with Regulation S-K, Item 601(b)(10).
#Indicates a management contract or any compensatory plan, contract or arrangement.
77
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
|
| VIQ SOLUTIONS INC. |
|
|
|
| By: | /s/ Sebastien Paré |
|
|
|
|
| Chief Executive Officer (Principal Executive Officer) |
|
|
|
Date: March 31, 2023 |
|
|
78
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page | |
|
|
Report of Independent Registered Public Accounting Firm (PCAOB ID: 1263) | |
Report of Independent Registered Public Accounting Firm (PCAOB ID: 85) | |
Consolidated Statements of Financial Position as at December 31, 2022 and 2021 | F-5 |
F-6 | |
F-7 | |
Consolidated Statements of Cash Flow for the Years Ended December 31, 2022, 2021 and 2020 | F-8 |
F-9 |
68
VIQ Solutions Inc.
Consolidated Financial Statements
and Report of Independent Registered Public Accounting Firm thereon
As of December 31, 2022 and December 31, 2021 and for the three years ended December 31, 2022
(Expressed in United States dollars)
F-1
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of VIQ Solutions Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated statement of financial position of VIQ Solutions Inc. (the “Company”) as of December 31, 2022, the related consolidated statements of loss and comprehensive loss, changes in shareholders’ equity and cash flow for the year then ended, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2022, and its financial performance and its cash flows for the year then ended in conformity with International Financial Reporting Standards (“IFRSs”) as issued by the International Accounting Standards Board.
We also audited the adjustments described in Note 4 that were applied to restate the 2021 consolidated financial statements for measurement period adjustments in accordance with IFRS 3 Business Combinations. In our opinion, such adjustments are appropriate and have been properly applied. However, we were not engaged to audit, review, or apply any procedures to the 2021 and 2020 consolidated financial statements of the Company other than with respect to the adjustments and, accordingly, we do not express an opinion or any other form of assurance on the 2021 and 2020 consolidated financial statements taken as a whole.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
/s/ Ernst & Young LLP
Chartered Professional Accountants
Licensed Public Accountants
We have served as the Company’s auditor since 2022.
Toronto Canada
March 30, 2023
F-2
KPMG LLP
Vaughan Metropolitan Centre
100 New Park Place
Suite 1400
Vaughan, ON Canada L4K 0J3
Telephone (905) 265-5900
Fax (905) 265-6390
www.kpmg.ca
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of VIQ Solutions Inc.:
Opinion on the Consolidated Financial Statements
We have audited, before the effects of the adjustments made to retrospectively adjust the purchase price allocation relating to measurement period adjustments for the business combination as described in Note 4, the consolidated statement of financial position of VIQ Solutions Inc. (the Company) as of December 31, 2021, the related consolidated statements of loss and comprehensive loss, changes in shareholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2021, and the related notes (collectively, the consolidated financial statements). The 2021 consolidated financial statements before the effects of the adjustments described in Note 4 are not presented herein. In our opinion, the consolidated financial statements, before the effects of the adjustments made to retrospectively adjust the purchase price allocation relating to measurement period adjustments for the business combination as described in Note 4, present fairly, in all material respects the financial position of the Company as of December 31, 2021 and its financial performance and its cash flows for each of the years in the two-year period ended December 31, 2021, in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board.
We were not engaged to audit, review, or apply any procedures to the adjustments related to the retrospective change described in Note 4 and, accordingly, we do not express an opinion or any other form of assurance about whether such adjustments are appropriate and have been properly applied. Those adjustments were audited by other auditors.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
F-3
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ KPMG LLP
Chartered Professional Accountants, Licensed Public Accountants
We served as the Company’s auditor from 2020 to 2022.
Vaughan, Canada
May 2, 2022
F-4
VIQ Solutions Inc.
Consolidated Statements of Financial Position
(Expressed in United States dollars)
| | | | | | |
|
| December 31, 2022 |
| December 31, 2021 | ||
| | | | | Restated (note 4) | |
Assets |
| |
|
| |
|
Current assets |
| |
|
| |
|
Cash | | $ | 1,657,571 | | $ | 10,583,534 |
Trade and other receivables, net of allowance for doubtful accounts (notes 5, 6) | |
| 5,305,728 | |
| 5,594,368 |
Income tax recoverable (note 21) | | | 104,670 | | | — |
Inventories | |
| 37,807 | |
| 49,557 |
Prepaid expenses and deposits | |
| 2,050,661 | |
| 2,054,793 |
Non-current assets | |
| 9,156,437 | |
| 18,282,252 |
| |
| | |
| |
Restricted cash | |
| 463,743 | |
| 303,945 |
Property and equipment (note 7) | |
| 1,432,133 | |
| 460,974 |
Right-of-use assets,net (note 19) | |
| 1,058,600 | |
| 1,134,493 |
Intangible assets, net (notes 4, 8) | |
| 10,731,917 | |
| 14,928,984 |
Goodwill (notes 4, 8) | |
| 12,047,048 | |
| 12,440,557 |
Deferred tax assets (note 21) | |
| 655,004 | |
| 464,800 |
Total assets | | $ | 35,544,882 | | $ | 48,016,005 |
| | | | | | |
Liabilities | |
| | |
| |
Current liabilities | |
|
| |
|
|
Trade and other payables and accrued liabilities | | $ | 5,937,880 | | $ | 5,679,628 |
Income tax payable (note 21) | |
| 45,212 | |
| 97,784 |
Share-based payment liability (note 11) | | | 31,487 | | | 551,201 |
Derivative warrant liability (note 10) | | | 290,712 | | | 1,862,876 |
Current portion of long-term debt (note 9) | |
| 8,634,258 | |
| 1,109,713 |
Current portion of lease obligations (note 20) | |
| 487,673 | |
| 287,901 |
Contract liabilities | |
| 1,745,415 | |
| 1,003,187 |
Non-current liabilities | |
| 17,172,637 | |
| 10,592,290 |
| |
| | |
| |
Deferred tax liability (note 21) | |
| 868,643 | |
| 1,224,640 |
Long-term debt (note 9) | |
| 19,812 | |
| 11,999,108 |
Long-term contingent consideration (note 4) | |
| — | |
| 166,603 |
Long-term lease obligations (note 20) | |
| 718,575 | |
| 900,868 |
Other long-term liabilities | |
| 1,121,805 | |
| 1,042,938 |
Total liabilities | |
| 19,901,472 | |
| 25,926,447 |
| | | | | | |
Shareholders’ Equity | |
|
| |
|
|
Capital stock (note 11) | |
| 74,690,527 | |
| 72,191,764 |
Contributed surplus | |
| 5,892,192 | |
| 4,842,208 |
Accumulated other comprehensive income (loss) | |
| (1,214,354) | |
| 74,526 |
Deficit | |
| (63,724,955) | |
| (55,018,940) |
Total shareholders’ equity | | | 15,643,410 | | | 22,089,558 |
Total liabilities and shareholders’ equity | | $ | 35,544,882 | | $ | 48,016,005 |
Subsequent events (note 24)
See accompanying notes to consolidated financial statements.
| | |
Approved by the Board | Signed “Larry Taylor” | Signed “Sebastien Paré” |
| Larry Taylor, Director | Sebastien Paré, CEO and Director |
F-5
VIQ Solutions Inc.
Consolidated Statements of Loss and Comprehensive Loss
(Expressed in United States dollars)
| | | | | | | | | |
|
| Year ended December 31 | |||||||
|
| 2022 |
| 2021 |
| 2020 | |||
Revenue (note 16) | | $ | 45,843,929 | | $ | 31,046,812 | | $ | 31,749,693 |
Cost of sales | |
| 23,918,226 | |
| 16,123,853 | | | 15,599,437 |
Gross profit | |
| 21,925,703 | |
| 14,922,959 | | | 16,150,256 |
| | | | | | | | | |
Expenses (note 17) | |
|
| |
|
| | |
|
Selling and administrative expenses | |
| 24,526,303 | |
| 19,119,713 | | | 11,034,902 |
Research and development expenses | |
| 734,115 | |
| 1,092,108 | | | 1,074,178 |
Stock-based compensation (note 12) | |
| 2,779,312 | |
| 8,495,189 | | | 725,316 |
Gain on revaluation of options (note 11) | | | (1,511,399) | | | (1,028,055) | | | — |
Gain on revaluation of RSUs (note 11) | | | (550,260) | | | (242,595) | | | — |
Gain on revaluation of the derivative warrant liability (note 10) | | | (4,255,017) | | | (1,368,180) | | | — |
Foreign exchange loss (gain) (note 22) | |
| (452,068) | |
| 22,130 | | | (132,306) |
Depreciation (notes 7, 19) | |
| 579,249 | |
| 257,099 | | | 445,995 |
Amortization (note 8) | |
| 5,508,954 | |
| 4,384,502 | | | 4,813,248 |
Interest expense (note 9) | |
| 1,052,618 | |
| 1,331,100 | | | 4,934,517 |
Accretion and other financing costs (note 9) | |
| 1,231,194 | |
| 967,106 | | | 1,216,949 |
Loss (gain) on contingent consideration (note 4) | |
| 80,071 | |
| (332,569) | | | (946,503) |
Loss on revaluation of conversion feature liability (note 9) | |
| — | |
| — | | | 1,308,440 |
Loss on repayment of long-term debt (note 9) | |
| — | |
| — | | | 1,497,804 |
Loss on extinguishment of debt (note 9) | | | 747,865 | | | — | | | — |
Impairment of goodwill and intangible assets | | | — | | | — | | | 2,258,369 |
Impairment of property and equipment (note 7) | |
| 15,246 | |
| — | | | — |
Restructuring costs | | | 323,075 | | | 432,702 | | | — |
Business acquisition costs | | | 433,372 | | | 539,734 | | | 19,058 |
Other income | |
| (1,291) | |
| (12,003) | | | (10,373) |
Total expenses | |
| 31,241,339 | |
| 33,657,981 | | | 28,239,594 |
| | | | | | | | | |
Current income tax (recovery) expense (note 21) | |
| (105,256) | |
| (875) | | | 106,986 |
Deferred income tax (recovery) expense (note 21) | |
| (504,365) | |
| 944,602 | | | (1,051,018) |
Income tax (recovery) expense (note 21) | |
| (609,621) | |
| 943,727 | | | (944,032) |
Net loss for the year | | $ | (8,706,015) | | $ | (19,678,749) | | $ | (11,145,306) |
Exchange gain (loss) on translating foreign operations | |
| (1,288,880) | |
| 153,432 | | | 56,152 |
Comprehensive loss for the year | | $ | (9,994,895) | | $ | (19,525,317) | | $ | (11,089,154) |
Net loss per share (note 13) | |
|
| |
|
| | |
|
Basic | | | (0.28) | | | (0.74) | | | (0.62) |
Diluted | | | (0.28) | | | (0.74) | | | (0.62) |
Weighted average number of common shares outstanding – basic (note 13) | |
| 31,648,001 | |
| 26,448,594 | | | 18,080,533 |
Weighted average number of common shares outstanding – diluted (note 13) | |
| 31,648,001 | |
| 26,448,594 | | | 18,080,533 |
See accompanying notes to consolidated financial statements.
F-6
VIQ Solutions Inc.
Consolidated Statements of Changes in Shareholders’ Equity
(Expressed in United States dollars)
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | Accumulated other | | Total | ||
| | Capital stock | | Contributed | | | | | comprehensive | | Shareholders’ | ||||||
|
| Number |
| Amount |
| surplus |
| Deficit |
| income (loss) |
| equity | |||||
Balance as at December 31, 2021 |
| 29,881,717 | | $ | 72,191,764 | | $ | 4,842,208 | | $ | (55,018,940) | | $ | 74,526 | | $ | 22,089,558 |
Comprehensive loss for the year |
| — | |
| — | |
| — | |
| (8,706,015) | |
| (1,288,880) | |
| (9,994,895) |
Shares issued due to Private Placement (note 10) |
| 3,551,852 | |
| 1,898,271 | |
| — | |
| — | |
| — | |
| 1,898,271 |
Shares issued due to Crown Capital debt amendment (note 9) |
| 1,078,901 | |
| 442,626 | |
| — | |
| — | |
| — | |
| 442,626 |
Shares issued due to exercise of restricted share units (note 11) |
| 137,227 | | | 157,866 | | | (214,539) | | | — | | | — | | | (56,673) |
Stock-based compensation (note 12) |
| — | |
| — | |
| 1,264,523 | |
| — | |
| — | |
| 1,264,523 |
Balance as at December 31, 2022 |
| 34,649,697 | | $ | 74,690,527 | | $ | 5,892,192 | | $ | (63,724,955) | | $ | (1,214,354) | | $ | 15,643,410 |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | Accumulated other | | Total | ||
| | Capital stock | | Contributed | | | | | comprehensive | | Shareholders’ | ||||||
|
| Number |
| Amount |
| surplus |
| Deficit |
| loss |
| equity | |||||
Balance at December 31, 2020 |
| 23,591,427 | | $ | 50,234,551 | | $ | 4,970,945 | | $ | (35,340,191) | | $ | (78,906) | | $ | 19,786,399 |
Comprehensive income (loss) from continuing operations for the period |
| — | |
| — | |
| — | |
| (19,678,749) | |
| 153,432 | |
| (19,525,317) |
Shares issued due to Private Placement (note 10) |
| 4,235,294 | |
| 13,485,003 | |
| — | |
| — | |
| — | |
| 13,485,003 |
Shares issued due to exercise of stock options (note 11) |
| 203,333 | |
| 393,313 | |
| (147,153) | |
| — | |
| — | |
| 246,160 |
Shares issued due to exercise of warrants (note 11) |
| 1,123,878 | |
| 2,746,706 | |
| (654,430) | |
| — | |
| — | |
| 2,092,276 |
Shares issued due to exercise of restricted share units (note 11) | | 727,785 | | | 5,332,191 | | | (6,006,736) | | | — | | | — | | | (674,545) |
Stock-based compensation (note 12) |
| — | |
| — | |
| 6,679,582 | |
| — | |
| — | |
| 6,679,582 |
Balance at December 31, 2021 |
| 29,881,717 | | $ | 72,191,764 | | $ | 4,842,208 | | $ | (55,018,940) | | $ | 74,526 | | $ | 22,089,558 |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | Accumulated | | | | |
| | | | | | | | | | | | | other | | Total | ||
| | Capital stock | | Contributed | | | | | comprehensive | | Shareholders’ | ||||||
|
| Number |
| Amount |
| surplus |
| Deficit |
| loss |
| equity | |||||
Balance as at December 31, 2019 |
| 10,852,617 | | $ | 21,987,937 | | $ | 4,552,528 | | $ | (24,194,885) | | $ | (135,058) | | $ | 2,210,522 |
Comprehensive income (loss) for the year |
| — | |
| — | |
| — | |
| (11,145,306) | |
| 56,152 | |
| (11,089,154) |
Issuance of common shares in private placement, net of issuance costs (notes 10,11) |
| 4,705,900 | |
| 13,747,345 | |
| — | |
| — | |
| — | |
| 13,747,345 |
Shares issued due to exercise of stock options (note 11) |
| 92,500 | |
| 129,982 | |
| (46,416) | |
| — | |
| — | |
| 83,566 |
Shares issued due to exercise of warrants and warrant repricing (notes 10, 11) |
| 1,154,759 | |
| 1,940,925 | |
| 3,324 | |
| — | |
| — | |
| 1,944,249 |
Shares issued due to convertible note (note 9) | | 6,785,651 | | | 12,428,362 | | | — | | | — | | | — | | | 12,428,362 |
Stock-based compensation (note 12) |
| — | |
| — | |
| 461,509 | |
| — | |
| — | |
| 461,509 |
Balance as at December 31, 2020 |
| 23,591,427 | | $ | 50,234,551 | | $ | 4,970,945 | | $ | (35,340,191) | | $ | (78,906) | | $ | 19,786,399 |
See accompanying notes to consolidated financial statements.
F-7
VIQ Solutions Inc.
Consolidated Statements of Cashflow
(Expressed in United States dollars)
| | | | | | | | | |
| | Year ended December 31 | |||||||
|
| 2022 |
| 2021 |
| 2020 | |||
Cash provided by (used in) |
| |
|
| |
| | | |
Operating activities |
| |
|
| |
| | | |
Net loss for the year | | $ | (8,706,015) | | $ | (19,678,749) | | $ | (11,145,306) |
Items not affecting cash: | |
|
| |
|
| | | |
Depreciation (notes 7, 19) | |
| 579,249 | |
| 257,099 | | | 445,995 |
Amortization (note 8) | |
| 5,508,954 | |
| 4,384,502 | | | 4,813,249 |
Stock-based compensation (notes 11, 12) | |
| 2,779,312 | |
| 8,495,189 | | | 725,316 |
Loss on revaluation of conversion feature liability (note 9) | |
| — | |
| — | | | 1,308,440 |
Loss on repayment of long-term debt (note 9) | |
| — | |
| — | | | 1,497,804 |
Accretion and other financing costs (note 9) | |
| 1,231,194 | |
| 967,106 | | | 1,216,949 |
Interest expense (note 9) | |
| 1,052,617 | |
| 1,331,100 | | | 4,934,517 |
Income tax (recovery) expense (note 21) | |
| (609,621) | |
| 943,727 | | | (944,032) |
(Loss) gain on contingent consideration (note 4) | |
| 80,071 | |
| (332,569) | | | (946,503) |
Gain on revaluation of options, RSUs, and derivative warrant liability (notes 10,11) | | | (6,316,676) | | | (2,638,830) | | | — |
Impairment of goodwill and intangibles (note 4) | |
| — | |
| — | | | 2,258,369 |
Impairment of property and equipment (note 7) | | | 15,246 | | | — | | | — |
Payment of taxes (note 21) | | | — | | | (113,853) | | | — |
Loss on extinguishment of debt (note 9) | | | 747,865 | | | — | | | — |
Other income | |
| (1,291) | |
| (12,003) | | | (10,373) |
Foreign exchange (gain) loss (note 22) | |
| (452,068) | |
| 22,130 | | | (132,306) |
Unrealized foreign exchange (gain) loss | |
| 360,190 | |
| 139,250 | | | 174,251 |
Changes in non-cash operating working capital (note 14) | |
| 1,395,097 | |
| (2,002,506) | | | (773,287) |
Cash provided by (used in) operating activities | |
| (2,335,876) | |
| (8,238,407) | | | 3,423,083 |
Investing activities | |
|
| |
|
| | |
|
Purchase of property and equipment (note 7) | |
| (1,202,489) | |
| (79,204) | | | (202,297) |
Business acquisitions (note 4) | |
| (298,927) | |
| (9,135,131) | | | (4,411,500) |
Earn out payment (note 4) | |
| (539,380) | |
| (2,600,536) | | | (377,312) |
Development costs related to internally generated intangible assets (note 8) | |
| (1,828,983) | |
| (2,364,733) | | | (1,642,783) |
Change in restricted cash | |
| (234,286) | |
| (261,110) | | | (5,299) |
Cash used in investing activities | |
| (4,104,065) | |
| (14,440,714) | | | (6,639,191) |
| | | | | | | | | |
Financing activities | |
|
| |
|
| | |
|
Issuance of share capital, net of issuance costs (notes 10, 11) | |
| 4,053,476 | |
| 16,715,000 | | | 13,747,345 |
Issuance cost reimbursement | | | — | | | 1,673 | | | — |
Proceeds from debt, net of issuance costs (note 9) | | | — | | | — | | | 4,827,175 |
Proceeds from exercise of stock options (note 11) | |
| — | |
| 246,160 | | | 10,568 |
Proceeds from exercise of warrants (note 11) | |
| — | |
| 2,092,276 | | | 1,859,963 |
Payment of amendment fees on debt (note 9) | | | (239,880) | | | — | | | — |
Repayment of debt (note 9) | |
| (4,761,890) | |
| (1,070,275) | | | (838,031) |
Repayment of lease obligations (note 20) | |
| (270,795) | |
| (150,924) | | | (338,276) |
Payment of interest on debt (note 9) | |
| (1,040,596) | |
| (1,277,202) | | | (1,052,576) |
Payment of interest on lease obligations (note 20) | |
| (114,131) | |
| (34,712) | | | (53,549) |
Cash provided by (used in) financing activities | |
| (2,873,816) | |
| 16,521,996 | | | 18,162,619 |
| | | | | | | | | |
Net increase (decrease) in cash for the year | |
| (8,813,757) | |
| (6,157,125) | | | 14,946,511 |
Cash, beginning of year | |
| 10,583,534 | |
| 16,835,671 | | | 1,707,654 |
Effect of exchange rate changes on cash | |
| (112,206) | |
| (95,012) | | | 181,506 |
Cash, end of year | | $ | 1,657,571 | | $ | 10,583,534 | | $ | 16,835,671 |
See accompanying notes to consolidated financial statements.
F-8
VIQ Solutions Inc.
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
1.Nature of operations
VIQ Solutions Inc. (“VIQ” or the “Company”) is a technology and service platform provider for digital evidence capture, retrieval, and content management. VIQ’s modular software allows customers to easily integrate the platform at any stage of their organization’s digitization, from the capture of digital content from video and audio devices through to online collaboration, mobility, data analytics, and integration with sensors, facial recognition, speech recognition, and case management or patient record systems. VIQ operates worldwide with a network of partners including security integrators, audio-video specialists, and hardware and data storage suppliers.
The Company also provides recording and transcription services directly to a variety of clients including medical, courtrooms, legislative assemblies, hearing rooms, inquiries and quasi-judicial clients in numerous countries including Canada, the United Kingdom, the United States and Australia.
VIQ was incorporated by articles of incorporation in the province of Alberta in November 2004. On June 21, 2017, the Company continued under articles of continuance in the province of Ontario. The Company’s head offices are located at 700 – 5915 Airport Road, Mississauga, Ontario, L4V 1H1. VIQ is a public company and the Company graduated from the Toronto Venture Exchange to the Toronto Stock Exchange in 2021. The Company’s common shares began trading on the TSX and Nasdaq, under trading symbol VQS, at the market open on January 21, 2021, and August 12, 2021, respectively.
On December 13, 2021, the Company acquired the assets of Auscript Australasia Pty Ltd. (“Auscript”). Refer to note 4 for details on the acquisition.
2.Basis of preparation
| (a) | Statement of compliance |
These consolidated financial statements have been prepared in accordance with IFRS as issued by the International Accounting Standards Board (“IASB”). These consolidated financial statements have been prepared using the accounting policies in note 3. The preparation of consolidated financial statements in compliance with IFRS requires management to make certain critical accounting estimates. It also requires management to exercise judgment in applying the Company’s accounting policies. The areas involving a higher degree of judgment and complexity, or areas where assumptions and estimates are significant to the consolidated financial statements, are disclosed in note 2d and 3.
These consolidated financial statements have been authorized for issue in accordance with a resolution from the Board of Directors on March 30, 2023.
| (b) | Basis of measurement |
The consolidated financial statements have been prepared under the historical cost convention, except for the revaluation of certain financial assets and financial liabilities to fair value as noted below. Presentation of the consolidated statements of financial position differentiates between current and non-current assets and liabilities. The consolidated statements of loss and comprehensive loss are presented using the function classification of expenses.
F-9
VIQ Solutions Inc.
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
| (c) | Functional currency, presentation currency and foreign currency translation |
The financial results of each subsidiary consolidated in the Company’s consolidated financial statements are measured using the subsidiary’s functional currency, which is the currency of the primary economic environment in which the entity operates for each of the Company’s wholly owned subsidiaries. The following are the functional currencies of each of the subsidiaries:
| | |
Company/Subsidiary |
| Functional currency |
VIQ Solutions Inc. |
| CAD |
Dataworxs Systems Limited |
| CAD |
VIQ Solutions, Inc. |
| USD |
VIQ Australia PTY Ltd. |
| AUD |
Dataworxs Systems Australia Ltd. |
| AUD |
VIQ Solutions PTY Ltd. |
| AUD |
VIQ Solutions Australia PTY Ltd. |
| AUD |
VIQ PTY Ltd. |
| AUD |
VIQ Australia Services PTY Ltd. |
| AUD |
VIQ Services Inc. |
| USD |
Net Transcripts, Inc. |
| USD |
Hometech, Inc. |
| USD |
Transcription Express, Inc. |
| USD |
VIQ Media Transcription Inc. |
| USD |
wordZexpressed, Inc. |
| USD |
VIQ Solutions (UK) Limited |
| GBP |
VIQ Services (UK) Limited |
| GBP |
The Transcription Agency LLP |
| GBP |
Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of foreign currency transactions and from the translation at period-end exchange rates of monetary assets and liabilities denominated in currencies other than an operation’s functional currency are recognized in the consolidated statements of loss and comprehensive loss.
| | | | | | |
USD / CAD exchange rate |
| December 31, 2022 |
| December 31, 2021 |
| December 31, 2020 |
Closing at the reporting date |
| 0.7370 |
| 0.7874 | | 0.7847 |
Average rate for the year |
| 0.7685 |
| 0.7976 | | 0.7480 |
| | | | | | |
USD / AUD exchange rate |
| December 31, 2022 |
| December 31, 2021 |
| December 31, 2020 |
Closing at the reporting date |
| 0.6805 |
| 0.7261 | | 0.7708 |
Average rate for the year |
| 0.6940 |
| 0.7525 | | 0.6901 |
| | | | | | |
USD / GBP exchange rate |
| December 31, 2022 |
| December 31, 2021 |
| December 31, 2020 |
Closing at the reporting date |
| 1.2103 |
| 1.3510 | | 1.3648 |
Average rate for the year |
| 1.2368 |
| 1.3762 | | 1.2831 |
The financial statements of entities that have a functional currency different from the presentation currency of USD are translated into USD as follows: assets and liabilities at the closing rate at the date of the consolidated statement of financial position and income and expenses at the average rate of the period as this is considered a reasonable approximation to actual rates. All resulting changes are recognized in other comprehensive income (loss) as Exchange gain (loss) on translating foreign operations.
The Company has monetary items that are receivable from foreign operations. A monetary item for which settlement is neither planned nor likely to occur in the foreseeable future is, in substance, a part of the parent company’s net investment in that foreign operation. Such exchange differences are recognized initially in other comprehensive income and reclassified from equity to net loss on disposal of the net investment in foreign operations.
F-10
VIQ Solutions Inc.
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
| (d) | Use of estimates and judgements |
The preparation of the consolidated financial statements in accordance with IFRS requires management to make estimates and assumptions that affect the application of the Company’s accounting policies and the amounts reported in the consolidated financial statements and the related notes. These estimates are based on management’s best knowledge of current events and actions that the Company may undertake in the future. These estimates have been applied in a manner consistent with that in prior periods and there are no known trends, commitments, events or uncertainties that the Company believes will materially affect the assumptions utilized in these consolidated financial statements. Estimates and underlying assumptions are reviewed on an ongoing basis and revisions to estimates are recognized prospectively. The estimates are impacted by many factors, some of which are highly uncertain, and actual results may differ from those estimates
The continuing uncertainty around the outbreak of the novel coronavirus (“COVID-19”) pandemic required the use of judgments and estimates in the preparation of the consolidated financial statements for the years ended December 31, 2022 and 2021. The future impact of COVID-19 uncertainties could generate, in future reporting periods, a significant impact to the reported amounts of assets, liabilities, revenue and expenses in these and any future consolidated financial statements. Examples of accounting estimates and judgments that may be impacted by the pandemic include, but are not limited to, impairment of goodwill and intangible assets and allowance for doubtful accounts.
The areas with significant judgements and estimates are as follows:
| ● | Stock-based compensation – Management uses judgment to determine the inputs to the Black-Scholes option pricing model including the expected option life volatility and forfeiture rates for equity issued under the Company’s stock option plan. Changes in these assumptions will impact the calculation of fair value and the amount of compensation expense recognized in the consolidated statements of loss and comprehensive loss. |
| ● | Warrants – Similar to other stock-based compensation, management uses judgment to determine the inputs to the Black-Scholes option pricing model including the volatility and expected life. Changes in these assumptions will impact the calculation of fair value and the value attributed to the warrants. |
| ● | Internally generated development costs – Management monitors the progress of internal research and development projects and uses judgment to distinguish research from the development phase. Expenditures during the research phase are expensed as incurred. Development costs are recognized as an intangible asset when the Company can demonstrate certain criteria in accordance with IAS 38, Intangible Assets. |
| ● | Functional currency – The functional currency of the Company and its subsidiaries requires management judgment and it has been assessed by management based on consideration of the currency and economic factors that mainly influence revenues, operating costs, financing and related transactions. Changes to these factors may have an impact on the judgment applied in the future determination of the Company’s and its subsidiaries’ functional currency. |
| ● | Income taxes – At the end of each reporting period, the Company assesses whether the realization of deferred tax benefits is sufficiently probable to recognize deferred tax assets. This assessment requires the exercise of judgment on the part of management with respect to, among other things, benefits that could be realized from available income tax strategies and future taxable income, as well as other positive and negative factors. The recorded amount of total deferred tax assets could be reduced if estimates of projected future taxable income and benefits from available income tax strategies are lowered, or if changes in current income tax regulations are enacted that impose restrictions on the timing or extent of the Company’s ability to utilize deferred tax benefits. The Company’s effective income tax rate can significantly vary quarter-to-quarter for various reasons, including the mix and volume of business in lower income tax jurisdictions and in jurisdictions for which no deferred income tax assets have been recognized because management believed it was not probable that future taxable profit would be available against which income tax losses and deductible temporary differences could be utilized. The Company’s effective income tax rate can also vary due to the impact of foreign exchange fluctuations. |
F-11
VIQ Solutions Inc.
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
| ● | Allocation of the transaction price to multiple performance obligations in contracts with customers - Contracts with customers sometimes include promises to deliver multiple products and services. Determining whether such bundled products and services are considered i) distinct performance obligations that should be separately recognized, or ii) non-distinct and therefore should be combined with another good or service and recognized as a combined unit of accounting may require judgment. The determination of the standalone selling price (“SSP”) is based on the selling prices charged by the Company when it sells each of the products and services separately. The total transaction price is allocated to each of the distinct performance obligations using the relative SSP of the various products and services. In general, SSP for support and maintenance is established as a percentage of the software license fee as supported by internal analysis of similar vendor contracts. SSP for licenses as well as for professional services is established based on observable prices for the same or similar services when sold separately. Management exercises judgment in determining whether a contract’s outcome can be estimated reliably. Management also applies estimates in the calculation of future contract costs and related profitability as it relates to labour hours and other considerations, which are used in determining the value of amounts recoverable on contracts and timing of revenue recognition. Estimates are continually and routinely revised based on changes in the facts relating to each contract. |
| ● | Allowance for doubtful accounts - The Company performs impairment testing annually for accounts receivable in accordance with IFRS 9, Financial Instruments (“IFRS 9”). The expected credit loss (“ECL”) model requires judgment, including consideration of how changes in economic factors affect ECLs, which are determined on a probability-weighted basis. The Company applies the simplified approach to determine ECLs on trade receivables by using a provision matrix based on historical credit loss experiences. The historical results were used to calculate the run rates of default, which were then applied over the expected life of the trade receivables, adjusted for forward-looking estimates. |
| ● | Goodwill impairment testing and recoverability of assets – Goodwill and indefinite-life intangible assets are reviewed annually for impairment, or more frequently when there are indicators that impairment may have occurred, by comparing the carrying value of the asset, or the cash-generating unit (“CGU”) reflecting the lowest level at which assets generate independent cash flows, to the asset or CGU’s recoverable amount. Management uses judgment in assessing the CGUs and estimates the recoverable values of the Company’s CGUs by using internally developed valuation models that consider various factors and assumptions including earnings margins, revenue growth rates, discount rates and terminal growth rates.. The use of different assumptions and estimates could influence the determination of the existence of impairment and the valuation of goodwill and indefinite-life intangible assets. The recoverable amounts of the CGUs are estimated based on the assessment of the higher of their value in use using a discounted cash flow approach and fair value less cost to sell. |
| ● | Purchase price allocation – In a business combination, all identifiable assets acquired, and liabilities and contingent liabilities assumed are recorded at their fair values. For any intangible asset acquired, management or where the complexity of the estimate requires, an independent valuation expert at the direction of management, develops the fair value using appropriate valuation techniques, which are generally based on a forecast of the revenue attributable to the acquired business, annual customer attrition rates and royalty rates, earnings before interest, taxes, depreciation and amortization and discount rates. The valuations are linked closely to the assumptions made by management regarding the future performance of the assets concerned and any changes in the discount rate applied. All acquisitions have been accounted for using the acquisition method. Certain fair values may be estimated at the acquisition date pending confirmation or completion of the valuation process. Where provisional values are used in accounting for a business combination, they may be adjusted retrospectively in subsequent periods. However, the measurement period will last no greater than one year from the acquisition date. |
| ● | Contingent consideration - The Company measures the contingent consideration payable in a business combination at the estimated fair value at each reporting date. The fair value is estimated based on the range of possible outcomes and management’s assessment of the likelihood of each outcome. |
| ● | Incremental borrowing rate used to discount leases – The Company’s incremental borrowing rate is used to estimate the initial value of the lease liability and associated right-of-use asset. The Company’s incremental borrowing rate is determined with reference to the Company’s long-term debt, which represents the amount that the Company could borrow at within a similar time frame. |
F-12
VIQ Solutions Inc.
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
| ● | Property and equipment and definite life Intangible assets - the recoverability of plant and equipment and definite life intangible assets are amortized over their useful economic lives and assessed for impairment whenever there is an indication that the intangible assets may be impaired. The amortization period and the amortization method for intangible assets with finite useful lives are reviewed at least at the end of each reporting period. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the assets are accounted for by changing the amortization period or method, as appropriate, and are treated as changes in accounting estimates. |
3.Significant accounting policies
| i) | Significant accounting policies |
Basis of consolidation
The consolidated financial statements of the Company include the accounts of VIQ and the consolidated accounts of all of its wholly owned subsidiaries including (i) the operations of VIQ Solutions, Inc.; (ii) the operations of Dataworxs Systems Limited and its wholly owned subsidiary Dataworxs Australia Pty Ltd. (collectively, “Dataworxs”); (iii) the operations of VIQ Australia Pty. Limited and its wholly-owned subsidiaries VIQ Solutions Pty. Ltd. , VIQ Solutions Australia PTY Ltd, VIQ Pty Ltd and VIQ Australia Services Pty Ltd. (collectively, “VIQ Australia Pty Limited”), (iv) the operations of VIQ Services Inc. and its wholly owned subsidiaries, Net Transcripts, Inc., Transcription Express, Inc., HomeTech, Inc., VIQ Media Transcription Inc. (“VIQ Media”), and wordZXpressed, Inc., and (v) the operations of VIQ Solutions (UK) Limited, and its wholly owned subsidiary VIQ Services (UK) Limited and The Transcription Agency LLP (“TTA”).
Subsidiaries are entities controlled by the Company where control is defined as the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. Subsidiaries are included in the consolidated financial statements from the date control is obtained until the date control ceases. All intercompany balances, transactions, income and expenses have been eliminated on consolidation.
Inventories
Inventories of finished goods and raw materials and supplies are valued at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business less any applicable selling expenses. Cost is determined on a weighted average basis. Reversals of previous write-downs to net realizable value are recognized when there is a subsequent increase in the value of inventories.
Restricted cash
Restricted cash is recorded at fair value. Changes to fair value are recorded in the consolidated statements of loss and comprehensive loss in the period incurred. Restricted cash is required to satisfy operating lease and customer contractual requirements.
Property and equipment
Property and equipment are recorded at cost less accumulated depreciation and accumulated impairment losses. Rates and basis of depreciation applied to write off the cost of property and equipment to their residual values over their estimated useful lives are as follows:
| | |
Furniture and fixtures |
| 10-13 years |
Computer , software and transcription in equipment |
| 3-4 years |
Leasehold improvements |
| Over the term of the lease |
F-13
VIQ Solutions Inc.
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
An asset’s residual value, useful life and depreciation method are reviewed, and adjusted prospectively if appropriate, on an annual basis. Repairs and maintenance costs are charged to the consolidated statements of loss and comprehensive loss during the period which they are incurred. Gains and losses on disposals of property and equipment are determined by comparing the proceeds with the carrying amount of the asset and are included as part of selling and administrative expenses in the consolidated statements of loss and comprehensive loss.
Intangible assets
Intangible assets with finite lives that are acquired separately are measured on initial recognition at fair value, which comprises the purchase price plus any directly attributable costs of preparing the asset for its intended use.
The Company’s acquired intangible assets consist of customer relationships, acquired technology, non-compete agreements and brands acquired in business combinations. These intangible assets are recorded at their fair value at the respective acquisition date. The Company uses the income approach as a valuation technique that calculates the fair value of an intangible asset based on the present value of future cash flows that the asset can be expected to generate over its remaining useful life. The discounted cash flow (“DCF”) is the methodology used, which is a form of the income approach that begins with a forecast of the annual cash flows a market participant would expect the subject intangible asset to generate over a discrete projection period. The future cash flows for each of the years in the discrete projection period are then converted to their present value equivalent using a rate of return appropriate for the risk of achieving the intangible assets’ projected cash flows, again, from a market participant perspective. The Company relies on the relief-from-royalty method to value the acquired technology and brand and the Multi-Period Excess Earnings Method (“MEEM”) to value customer relationship assets. After initial recognition, intangible assets are measured at cost less accumulated amortization and impairment losses.
The estimated useful lives at acquisition date for the Company’s classes of intangible assets are as follows:
| | |
Acquired technology |
| 5 years |
Customer relationships |
| 4.8 – 13 years |
Brands |
| 1 – 2 years |
Non-compete agreements |
| Term of agreement |
The estimated useful life and amortization methods are reviewed annually, with the effect of any change in estimate being accounted for on a prospective basis. These assets are subject to an impairment test as described below. The Company’s internally generated intangible assets consist of developed technologies. The Company incurs costs associated with the design and development of new products. Expenditures during the research phase are expensed as incurred. Expenditures during the development phase are capitalized if the Company can demonstrate each of the following criteria: (i) the technical feasibility of completing the intangible asset so that it will be available for use or sale, (ii) its intention to complete the intangible asset and use or sell it, (iii) its ability to use or sell the intangible asset, (iv) how the intangible asset will generate probable future economic benefits, (v) the availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset, and (vi) its ability to measure reliably the expenditure attributable to the intangible asset during its development; otherwise, they are expensed as incurred. Costs associated with maintaining computer software programs are recognized as an expense as incurred. Internally generated software development costs recognized as intangible assets are carried at cost less any accumulated amortization on a straight- line basis over 3 years after they are completed. These assets are subject to an impairment test as described below.
Business combinations
IFRS 3, Business Combinations (“IFRS 3”), requires business combinations to be accounted using the acquisition method. Under this method, the cost of an acquisition is measured as the aggregate of the consideration transferred, measured at acquisition date fair value and the amount of any non-controlling interest in the acquiree.
F-14
VIQ Solutions Inc.
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
When the Company acquires a business, it assesses the financial assets and liabilities assumed for appropriate classification and designation based on the facts and circumstances at the acquisition date. Business acquisition costs incurred are expensed and included in transaction costs. Measurement period adjustments are adjustments that arise from additional information obtained during the “measurement period” (which cannot exceed one year from the acquisition date) about facts and circumstances that existed at the acquisition date. The excess of (i) the consideration transferred, the amount of any non-controlling interest in the acquiree and the acquisition-date fair value of any previous equity interest in the acquiree over the (ii) fair value of the net identifiable assets acquired is recorded as goodwill.
Goodwill arising on an acquisition of a business is carried at cost as established at the date of acquisition of the business less accumulated impairment losses, if any. For the purposes of impairment testing, goodwill is allocated to each CGU or a group of CGUs that is expected to benefit from the synergies of the combination.
A CGU to which goodwill has been allocated is tested for impairment annually, or more frequently when there is indication that the unit may be impaired. If the recoverable amount of the CGU is less than its carrying amount, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit pro rata based on the carrying amount of each asset in the unit. Any impairment loss for goodwill is recognized directly in the consolidated statements of loss and comprehensive loss. An impairment loss recognized for goodwill is not reversed in subsequent periods.
On disposal of the relevant CGU, the attributable amount of goodwill is included in the determination of the profit or loss on disposal. Determining whether goodwill is impaired requires an estimation of the higher of fair value less costs of disposal and value in use of the CGUs to which goodwill has been allocated. The value in use calculation requires management to estimate the future cash flows expected to arise from the CGU and a suitable discount rate in order to calculate present value.
Capital stock
Common shares are classified as equity. Incremental costs directly attributable to the issuance of shares are recognized as a deduction from equity. The proceeds from the issuance of units (shares and warrants) are bifurcated between capital stock and warrants, with the value of the warrants determined using the Black-Scholes option pricing model.
Financial instruments
Financial assets
Recognition and initial measurement
The Company recognizes financial assets when it becomes party to the contractual provisions of the instrument. Financial assets are measured initially at their fair value plus, in the case of financial assets not subsequently measured at fair value through profit or loss (“FVTPL”), transaction costs that are directly attributable to their acquisition. Transaction costs attributable to the acquisition of financial assets subsequently measured at fair value through profit or loss are expensed in the consolidated statements of loss and comprehensive loss when incurred.
Classification and subsequent measurement
On initial recognition, financial assets are classified as subsequently measured at amortized cost, fair value through other comprehensive income (“FVOCI”) or FVTPL. The Company determines the classification of its financial assets, together with any embedded derivatives, based on the business model for managing the financial assets and their contractual cash flow characteristics.
F-15
VIQ Solutions Inc.
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
Financial assets are classified as follows:
| ● | Amortized cost - Assets that are held for collection of contractual cash flows where those cash flows are solely payments of principal and interest are measured at amortized cost. Interest revenue is calculated using the effective interest method and gains or losses arising from impairment, foreign exchange and derecognition are recognized in the consolidated statements of loss and comprehensive loss. Financial assets measured at amortized cost are comprised of trade receivables. |
| ● | FVOCI – Assets that are held for collection of contractual cash flows and for selling the financial assets, and for which the contractual cash flows are solely payments of principal and interest, are measured at FVOCI. Interest income calculated using the effective interest method and gains or losses arising from impairment and foreign exchange are recognized in the consolidated statements of loss and comprehensive loss. All other changes in the carrying amount of the financial assets are recognized in other comprehensive income. Upon derecognition, the cumulative gain or loss previously recognized in other comprehensive income is reclassified to net loss. The Company does not hold any financial assets measured at FVOCI. |
| ● | Mandatorily FVTPL– Assets that do not meet the criteria to be measured at amortized cost or fair value through other comprehensive income are measured at fair value through profit or loss. All interest income and changes in the financial assets’ carrying amount are recognized in profit or loss. Financial assets mandatorily measured at FVTPL are comprised of cash and cash equivalents. |
| ● | Designated at FVTPL – On initial recognition, the Company may irrevocably designate a financial asset to be measured at FVTPL in order to eliminate or significantly reduce an accounting mismatch that would otherwise arise from measuring assets or liabilities, or recognizing the gains and losses on them, on different bases. All interest income and changes in the financial assets’ carrying amount are recognized in the consolidated statements of loss and comprehensive loss. The Company does not hold any financial assets designated to be measured at FVTPL. |
Business model assessment
The Company assesses the objective of its business model for holding a financial asset at a level of aggregation that best reflects the way the business is managed and information is provided to management. Information considered in this assessment includes stated policies and objectives.
Contractual cash flow assessment
The cash flows of financial assets are assessed as to whether they are solely payments of principal and interest on the basis of their contractual terms. For this purpose, “principal” is defined as the fair value of the financial asset on initial recognition. “Interest” is defined as consideration for the time value of money, the credit risk associated with the principal amount outstanding, and other basic lending risks and costs. In performing this assessment, the Company considers factors that would alter the timing and amount of cash flows such as prepayment and extension features, terms that might limit the Company’s claim to cash flows, and any features that modify consideration for the time value of money. The Company measures all equity investments at fair value. Changes in fair value are recorded in the consolidated statements of loss and comprehensive loss. The Company does not hold any equity investments.
Impairment of financial assets
The Company recognizes a loss allowance for the expected credit losses associated with its financial assets, other than financial assets measured at FVTPL. Expected credit losses are measured to reflect a probability-weighted amount, the time value of money, and reasonable and supportable information regarding past events, current conditions and forecasts of future economic conditions.
The Company applies the simplified approach for trade receivables. Using the simplified approach, the Company records a loss allowance equal to the expected credit losses resulting from all possible default events over the assets’ contractual lifetime.
F-16
VIQ Solutions Inc.
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
The Company assesses whether a financial asset is credit-impaired at the reporting date. Regular indicators that a financial instrument is credit-impaired include significant financial difficulties as evidenced through borrowing patterns or observed balances in other accounts and breaches of borrowing contracts such as default events or breaches of borrowing covenants. For financial assets assessed as credit-impaired at the reporting date, the Company continues to recognize a loss allowance equal to lifetime expected credit losses. For financial assets measured at amortized cost, loss allowances for expected credit losses are presented in the consolidated statements of financial position sheet as a deduction from the gross carrying amount of the financial asset. Financial assets are written off when the Company has no reasonable expectations of recovering all or any portion thereof.
Financial liabilities
Recognition and initial measurement
The Company recognizes a financial liability when it becomes party to the contractual provisions of the instrument. At initial recognition, the Company measures financial liabilities at their fair value plus transaction costs that are directly attributable to their issuance, with the exception of financial liabilities subsequently measured at FVTPL for which transaction costs are immediately recorded in the consolidated statements of loss and comprehensive loss.
Where an instrument contains both a liability and equity component, these components are recognized separately based on the substance of the instrument, with the liability component measured initially at fair value and the equity component assigned the
Classification and subsequent measurement
Subsequent to initial recognition, all financial liabilities are measured at amortized cost using the effective interest rate method. Interest, gains and losses relating to a financial liability are recognized in profit or loss.
IFRS 9 contains three classification categories for financial assets: measured at amortized cost, FVOCI and FVTPL. The classification for each class of the Company’s financial assets and financial liabilities is as follows:
| | |
Financial assets and liabilities |
| IFRS 9 Classification |
Cash and restricted cash |
| Amortized cost |
Trade and other receivables |
| Amortized cost |
Trade and other payables |
| Amortized cost |
Long-term debt |
| Amortized cost |
Share-based payment liability | | FVTPL |
Derivative warrant liability |
| FVTPL |
Compound financial instruments
Convertible notes issued with warrants are evaluated as to whether any embedded derivatives need to be separated from the host instrument. In accordance with IAS 32.31 for compound financial instruments, because equity instruments are defined as contracts evidencing a residual interest in the assets of an entity after deducting all of its liabilities, the warrants are assigned the residual amount of the consideration after deducting the fair value of the liability components and are subsequently carried at historical cost. The liability components represent the host debt and the embedded conversion feature.
The embedded derivative conversion option is separated from its host contract on the basis of its stated terms and initially measured at fair value using the Black-Scholes model, with the host debt contract being the residual amount after separation. Subsequently, the loan payable component is measured at amortized cost using the effective interest method over the term of the loan. The loan component is accreted to the face value by recording accretion expense. The values of the conversion feature are re-measured at each reporting date until settlement, with changes in the fair value recorded in the consolidated statements of loss and comprehensive loss.
F-17
VIQ Solutions Inc.
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
Unit issuances comprising one common share and one-half or one warrant share are segregated between the capital stock and warrant value components at the date of issue. The fair value of the capital stock component is calculated using the share price at the date of the issuance. The fair value of the warrants is calculated using the Black-Scholes pricing model. Amounts allocated to each component are allocated using the relative fair value basis.
Leases
In accordance with IFRS 16, Leases (“IFRS 16”), at inception of a contract, the Company assesses whether the contract is or contains a lease based on whether the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. The Company recognizes a right-of-use asset and a lease liability at the lease commencement date. The right-of-use asset is initially measured at cost, based on the initial amount of the lease liability. The assets are depreciated to the earlier of the end of the useful life of the right-of-use asset or the lease term using the straight-line method as this most closely reflects the expected pattern of consumption of the future economic benefits. The lease term includes periods covered by an option to extend if the Company is reasonably certain to exercise that option. In addition, the right-of-use asset is periodically adjusted for certain remeasurements of the lease liability.
The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the Company’s incremental borrowing rate. The lease liability is measured at amortized cost using the effective interest method. It is remeasured when there is a change in future lease payments, if there is a change in the Company’s estimate of the amount expected to be payable under a residual value guarantee, or if the Company changes its assessment of whether it will exercise a purchase, extension or termination option.
When the lease liability is remeasured in this way, a corresponding adjustment is made to the carrying amount of the right- of-use asset or is recorded in profit or loss if the carrying amount of the right-of-use asset has been reduced to zero.
Impairment of property and equipment, definite-life intangible assets and goodwill
For purposes of assessing impairment under IFRS, assets are grouped in CGUs, the lowest levels for which the group of assets can generate largely independent cash inflows. The Company has six CGUs, which consist of VIQ Australia, VIQ US, VIQ Media, VIQ UK, Dataworx and VIQ Solutions Inc., and the CGUs with goodwill or indefinite-lived intangible assets are tested for impairment at least annually. All other long-lived assets and finite life intangible assets are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.
An impairment loss is recognized for the amount by which the asset’s or CGU’s carrying amount exceeds its recoverable amount, which is the higher of fair value less costs to sell or value-in-use. To determine the value in use, management estimates expected future cash flows from the CGU and determines a suitable pre-tax discount rate in order to calculate the present value of those cash flows. The data used for impairment testing procedures is directly linked to the Company’s latest approved budget, adjusted as necessary to exclude the effects of future reorganizations and asset enhancements.
Discount rates have been determined for each of the CGUs and reflect their respective risk profile as assessed by management. Impairment losses for the CGUs reduce first the carrying amount of any goodwill allocated to that CGU, with any remaining impairment loss charged pro rata to the other assets in the CGU.
With the exception of goodwill, all assets are subsequently reassessed for indications that an impairment loss previously recognized may no longer exist. An impairment charge is reversed if the asset’s recoverable amount exceeds its carrying amount only to the extent that the new carrying amount does not exceed the carrying value of the asset had it not originally been impaired.
F-18
VIQ Solutions Inc.
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
Property and equipment and definite life intangibles are tested for impairment when events or changes in circumstances indicate that the carrying value may not be recoverable. For the purpose of measuring recoverable values, assets are grouped at the lowest levels for which there are separately identifiable cash flows, which are its CGUs. The recoverable value is the higher of an asset’s fair value less costs of disposal and value in use (being the present value of the expected future cash flows of the relevant asset or CGU). In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risk specific to the asset. An impairment loss is recognized for the value by which the asset’s carrying value exceeds its recoverable value.
Revenue recognition
Revenue represents the amount of consideration the Company expects to receive for the delivery of products and services in its contracts with customers, net of discounts and sales taxes. The Company reports revenue mainly under eight revenue categories, being, Technology services, Software license, Support and maintenance, Software as a service (“SaaS”), Subscription, Professional services, and Hardware and other.
Revenue is recognized upon transfer of control of products or services to customers at an amount that reflects the transaction price the Company expects to receive in exchange for the products or services. The Company’s contracts with customers may include the delivery of multiple products and services, which are generally capable of being distinct and accounted for as separate performance obligations. The accounting for a contract or contracts with a customer that contain multiple performance obligations requires the Company to allocate the contract or contracts’ transaction price to the identified distinct performance obligations.
Technology services revenue consists of fees charged for recurring services provided to our customers. Technology service revenue is recognized when the service is delivered to the customer. The Company has select customers where a flat rate is charged and revenue is recognized over time.
Software license revenue is composed of non-recurring license fees charged for the use of the Company’s software products generally licensed under perpetual arrangements and to a lesser extent sale of third-party license software. The Company sells on- premises software licenses on a perpetual basis. On-premises software licenses are bundled with software maintenance and support services for a term. The license component and maintenance and support components are each allocated revenue using their relative estimated SSP. Revenue from the license of distinct software is recognized at the time that both the right to use the software has commenced and the software has been made available to the customer.
Support and maintenance and other recurring revenue primarily consist of fees charged for customer support on the Company’s software products post-delivery. Certain of the Company’s contracts with customers contain provisions that require the customer to agree to first-year support and maintenance in order to maintain the active right to use a perpetual license. Support and maintenance and other recurring revenue primarily consists of fees charged for customer support on software products post- delivery.
Revenue from SaaS arrangements, which allows customers to use hosted software over a term without taking possession of the software, is provided on a subscription basis. Revenue from the SaaS arrangement, which includes the hosted software and maintenance and digital transcription services, is recognized ratably over the term of the subscription.
Professional service revenue consists of fees charged for customization, implementation, integration, training and ongoing services associated with the Company’s software products and technology services. Professional services are typically billed on a time and material basis and revenue is recognized over time as the services are performed. For professional services contracts billed on a fixed price basis, revenue is recognized over time based on the proportion of services performed. Hardware revenue includes the resale of third-party hardware that forms part of the overall customer solutions. Hardware revenue is recognized when the goods are shipped.
Cost of sales
Cost of sales for the technology segment includes the cost of finished goods inventory, costs related to shipping and handling and expenses relating to software support services. Cost of sales for the technology services segment includes production wages and other associated costs.
F-19
VIQ Solutions Inc.
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
Income taxes
The income tax provision comprises current and deferred tax. Income tax is recognized in the consolidated statements of loss and comprehensive loss except to the extent that it relates to items recognized directly in equity, in which case the income tax is also recognized directly in equity.
Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted, or substantively enacted, at the end of the reporting period, and any adjustment to tax payable in respect of previous years.
Deferred tax is determined on a non-discounted basis using tax rates and laws that have been enacted or substantively enacted at the end of the reporting period and are expected to apply when the asset is realized or liability is settled. Deferred tax assets are recognized for deductible temporary differences, unused tax losses and other income tax deductions to the extent that it is probable the Company will have taxable income against which those deductible temporary differences, unused tax losses and other income tax deductions can be utilized. The extent to which deductible temporary differences, unused tax losses and other income tax deductions are expected to be realized is reassessed at the end of each reporting period.
In a business combination, temporary differences arise as a result of differences in the fair values of identifiable assets and liabilities acquired and their respective tax bases. Deferred tax assets and liabilities are recognized for the tax effects of these differences. Deferred tax assets and liabilities are not recognized for temporary differences arising from goodwill or from the initial recognition of assets and liabilities acquired in a transaction other than a business combination that do not affect either accounting or taxable income or loss.
Net loss per common share
Basic net loss per common share is calculated by dividing the net loss by the weighted average number of common shares outstanding during the period. Diluted net loss per common share is calculated by dividing the applicable net loss by the sum of the weighted average number of common shares outstanding and all additional common shares that would have been outstanding if potentially dilutive common shares had been issued during the period. The dilutive effect of outstanding stock options and warrants on earnings per share is calculated by determining the proceeds for the exercise of such securities which are then assumed to be used to purchase common shares of the Company.
Stock-based compensation
The Company has a stock option plan, a Deferred Share Units (“DSU”) plan, a Performance Share Units (“PSU”) plan and a Restricted Share Units (“RSU”) plan, with units under such plans awarded to certain employees and directors.
The fair value of the stock options granted that represent equity awards are measured using the Black-Scholes option pricing model. For stock options, the model considers each tranche with graded vesting features as a separate share option grant. Forfeitures for the stock options are estimated on the grant date and revised if the actual forfeitures differ from previous estimates. This fair value is recognized as share-based compensation expense over the vesting periods, with a related credit to contributed surplus. The contributed surplus balance is reduced as options are exercised through a credit to share capital. The consideration paid by option holders is credited to share capital when the options are exercised.
The fair value of PSUs and RSUs granted that represent equity awards are measured at the value of the common shares. This fair value is recognized as share-based compensation expense over the vesting periods, with a related credit to contributed surplus. The contributed surplus balance is reduced as PSUs and RSUs are exercised through a credit to share capital.
Eligible executives and directors may elect to receive RSUs equivalent in value of common shares of the Company in lieu of certain cash payments. Share-based compensation expense is recorded in the year of receipt of the RSUs and changes in the fair value of outstanding RSUs, including deemed dividend equivalents, are recorded as an expense in the period that they occur with a corresponding increase to the liability.
F-20
VIQ Solutions Inc.
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
Eligible directors and officers may be granted awards of DSUs, PSUs and RSUs equivalent in value of the Shares of the Company. DSUs, PSUs and RSUs vest after three to five years and are settled in equity or cash at the end of the restriction period or in the case of DSUs when the executive is no longer employed with the Company.
The holders of the DSUs will only be able to redeem the DSUs in shares upon cessation of their service with the Company; therefore, the Company records DSUs as equity. Grants of DSUs are recorded at fair value in selling and administrative expense at the time of grant. The quoted market price of the underlying shares on the grant date is considered to be equivalent to fair value for the DSUs. The charge to equity for DSUs is not updated to fair value at each subsequent reporting period. Upon settlement, the amount recognized in contributed surplus for the award is reclassified to share capital, with any premium or discount applied to deficit.
Government assistance
The Company recognizes government grants when there is reasonable assurance that the grant will be received, and any conditions associated with the grant have been met. Grants that compensate the Company for expenses incurred are recognized in the consolidated statements of loss and comprehensive loss as a reduction of the related expenses in the period in which they are earned, provided the conditions for receiving the grant are met in that period.
Research and development credits
Investment tax credits are accrued when qualifying expenditures are incurred and there is reasonable assurance that the credits will be realized. Investment tax credits earned with respect to current expenditures for qualified research and development activities are included in the consolidated statements of loss and comprehensive loss as a reduction of expenses. Investment tax credits associated with capital expenditures are reflected as reductions in the carrying amounts of capital assets.
Comprehensive loss
Comprehensive loss consists of net loss and other comprehensive income (loss). Other comprehensive income (loss) represents changes in shareholders’ equity and includes foreign exchange gains and losses on the translation of the financial statements of the Company’s foreign operations into its presentation currency and is presented as accumulated other comprehensive income (loss) on the consolidated statements of financial position. The Company’s net loss per share presented on the consolidated statements of loss and comprehensive loss is based upon its net loss and not its comprehensive loss.
(ii) Standards and interpretations issued and effective
IAS 37, Provisions, Contingent Liabilities and Contingent Assets (“IAS 37”)
Amendments to IAS 37 were issued in May 2020, and are effective for annual periods beginning on or after January 1, 2022, with earlier application permitted. The amendments address identifying onerous contracts and specify the cost of fulfilling a contract, which includes all costs directly related to the contract. These include incremental direct costs and allocations of other costs that relate directly to fulfilling the contract. The Company has concluded that there is no impact of adopting these amendments on its consolidated financial statements.
IFRS 3, Business Combinations (“IFRS 3”)
Amendments to IFRS 3 were issued in May 2020, and are effective for annual periods beginning on or after January 1, 2022, with earlier application permitted. The amendments update references within IFRS 3 to the 2018 Conceptual Framework and require that the principles in IAS 37 be used to identify liabilities and contingent assets arising from business combination. The Company has concluded there is no impact of adopting these amendments on its consolidated financial statements.
The following new and amended standards did not have a significant impact on the Company’s consolidated financial statements.
| ● | COVID-19-Related Rent Concessions beyond 30 June 2021 (Amendment to IFRS 16). |
F-21
VIQ Solutions Inc.
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
| ● | Annual Improvements to IFRS Standards 2018–2020. |
| ● | Property, Plant and Equipment: Proceeds before Intended Use (Amendments to IAS 16). |
(iii) Standards and interpretations issued but not yet effective
Deferred Tax related assets and liabilities arising from a Single Transaction (Amendments to IAS 12)
The amendments narrow the scope of the initial recognition exemption to exclude transactions that give rise to equal and offsetting temporary differences – e.g. leases and decommissioning liabilities. The amendments apply for annual reporting periods beginning on or after January 1, 2023. For leases and decommissioning liabilities, the associated deferred tax asset and liabilities will need to be recognized from the beginning of the earliest comparative period presented, with any cumulative effect recognized as an adjustment to retained earnings or other components of equity at that date. For all other transactions, the amendments apply to transactions that occur after the beginning of the earliest period presented. The amendments are effective for annual periods beginning on or after January 1, 2023. Earlier adoption is permitted. The Company is currently assessing the impact of this new amendment.
Disclosure of Accounting Policies (Amendments to IAS 1 and IFRS Practice Statement 2)
In February 2021, the IASB issued Disclosure of Accounting Policies (Amendments to IAS 1 and IFRS Practice Statement 2). The amendments provide guidance to help entities disclose their material (previously “significant”) accounting policies. The amendments are effective for annual reporting periods beginning on or after January 1, 2023. Earlier application is permitted. The Company is currently assessing the impact of these amendments.
Definition of Accounting Estimates (Amendments to IAS 8)
In February 2021, the IASB issued Definition of Accounting Estimates (Amendments to IAS 8 - Accounting Policies, Changes in Accounting Estimates and Errors). The amendments define accounting estimates and clarify the distinction between changes in accounting estimates and changes in accounting policies. The amendments are effective for annual reporting periods beginning on or after January 1, 2023. Earlier application is permitted. The Company is currently assessing the impact of these amendments.
Other standards
The following new and amended standards are not expected to have a significant impact on the Company’s consolidated financial statements.
| ● | Reference to Conceptual Framework (Amendments to IFRS 3). |
| ● | Classification of Liabilities as Current or Non-current (Amendments to IAS 1). |
| ● | IFRS 17, Insurance Contracts and amendments to IFRS 17, Insurance Contracts. |
4.2021 Acquisition
On December 13, 2021, the Company, through its Australia subsidiary VIQ Solutions Australia Pty Ltd., acquired certain assets of Auscript Australasia Pty Ltd. (“Auscript”). Auscript is a leading supplier of secure court recording and transcription services for courts and law firms throughout Australia and complements the Company’s transcription services business. As part of this transaction, $150,000 was paid as contingent consideration via a performance-based earn-out paid in August 2022. The acquisition was funded by utilizing cash on hand; $7,496,856 was paid during 2021 and an additional $298,927 was paid for the final working capital adjustment contemplated in the purchase agreement and based on final negotiations between the Company and the Seller on August 5, 2022.
F-22
VIQ Solutions Inc.
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
The acquisition completed during the year ended December 31, 2021 was determined to be a business combination and was accounted for using the acquisition method in accordance with IFRS 3, with the results of operations consolidated with those of the Company effective December 13, 2021 for Auscript.
The Company has retrospectively adjusted the purchase price allocation and restated the previously reported consideration and goodwill, intangible customer relationship, intangible brands and deferred tax liabilities in accordance with the requirements of IFRS 3 in regards to measurement period adjustments. The measurement period adjustment of $298,927 relates to additional consideration paid upon the finalization and settlement of the working capital adjustment with the seller. The total consideration for the Auscript acquisition and the purchase price allocation (“PPA”) is as follows:
| | | | | | | | | |
|
| Previously |
| |
| | | ||
| | Reported at | | | | Restated at | |||
| | December 31, | | | | December 31, | |||
| | 2021 | | Adjustment | | 2021 | |||
Consideration |
| |
|
| | | | |
|
Cash (i) | | $ | 7,496,856 | | $ | 298,927 | | $ | 7,795,783 |
Contingent consideration | |
| 150,000 | |
| — | | | 150,000 |
Total consideration | | $ | 7,646,856 | | $ | 298,927 | | $ | 7,945,783 |
| | | | | | | | | |
Identifiable assets acquired and liabilities assumed | |
|
| |
| | | |
|
Trade and other receivables, net of allowance for doubtful accounts | | | 2,124,687 | | | — | | | 2,124,687 |
Prepaid expenses and deposits | | | 168,009 | | | — | | | 168,009 |
Property and equipment | | | 283,394 | | | — | | | 283,394 |
Right-of-use assets | | | 912,910 | | | — | | | 912,910 |
Trade and other payable and accrued liabilities | | | (1,886,414) | | | — | | | (1,886,414) |
Current portion of contract liabilities | | | (44,313) | | | — | | | (44,313) |
Lease obligations | | | (911,101) | | | — | | | (911,101) |
Deferred tax liability | | | (852,557) | | | (25,374) | | | (877,931) |
Customer relationships | |
| 2,552,075 | |
| 152,940 | | | 2,705,015 |
Non-compete | |
| 57,030 | |
| — | | | 57,030 |
Brand | |
| 734,256 | |
| 13,904 | | | 748,160 |
Goodwill | | $ | 4,508,880 | | $ | 157,457 | | $ | 4,666,337 |
(i) | Cash consideration was recorded in Trade and other payables and accrued liabilities as at December 31, 2021 and was paid on August 5, 2022. |
2020 acquisition:
On January 31, 2020, the Company through its US subsidiary, VIQ Media Transcription Inc., acquired 100% of the assets of ASC. ASC was a provider of transcription services focused on the multi-speaker transcription market, serving both government and public ‘content creation space’ and complementing the Company’s transcription services business. As part of this transaction, an estimated $2,038,596 was to be paid as contingent consideration via a performance-based earn-out payable quarterly over 30 months. With respect to the contingent consideration, the Company had agreed to make quarterly payments to the sellers between July 15, 2020 and April 15, 2023 based on the achievement of quarterly revenue targets as defined in the purchase agreement. At the date of acquisition, contingent consideration was measured on a discounted cash flow basis, reflecting the present value of undiscounted expected future payments of $2,948,083 which is the expected payout based on forecast revenues at that date, discounted using a risk-adjusted discount rate of 20.6 percent.
On December 23, 2021, the Company entered into a settlement agreement with the former owners of ASC to settle all earnout payment obligations in the amount of $1,165,770 and recorded a gain on settlement of $130,220. The total contingent consideration payable to ASC at December 31, 2022 was $nil (2021 - $nil and 2020 - $1,145,677).
F-23
VIQ Solutions Inc.
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
On February 26, 2020, the Company, through its US subsidiary VIQ Services Inc., acquired 100% of the shares of WordZXpressed Inc. WordZ is a provider of English transcription services to medical service providers and to insurance companies in the USA and complements the Company’s transcription services business. As part of this, an estimated $1,671,670 was to be paid as contingent consideration via a performance-based earnout payable quarterly over 36 months. The Company had agreed to make quarterly payments to the sellers between October 1, 2020 and July 1, 2023 based on the achievement of quarterly revenue targets as defined in the purchase agreement. At the date of acquisition, contingent consideration was measured on a discounted cash flow basis, reflecting the present value of undiscounted expected future payments of $2,175,231, which is the expected payout based on forecast revenues, discounted using a risk-adjusted discount rate of 16.1%.
The acquisitions completed during the year ended December 31, 2020 were each determined to be a business combination and were accounted for using the acquisition method in accordance with IFRS 3 with the results of operations consolidated with those of the Company effective January 31, 2020 for ASC and February 26, 2020 for WordZ During the year ended December 31, 2022, the Company further revised the forecasted quarterly revenue target achievements and reported a loss on contingent consideration of $80,071 for Wordz (2021 - $202,350, which is comprised of a loss on contingent consideration of $32,621 for the additional earnout payable for WordZ and a gain on contingent consideration of $234,971 for the reduction in earnout payable for ASC and 2020 - $946,503 was reported as a gain on contingent consideration of which $89,449 was recorded as additional earnout payable for ASC and $1,035,952 was recorded as a reduction in earnout payable for WordZ). Additionally, accretion expense of $29,669 was recorded during the year ended December 31, 2022 for WordZ (2021 - $455,675 and 2020 - $377,312 was recorded for ASC and WordZ). Earnout payments totaling $389,380 (2021 - $1,434,766 and 2020 - $377,312 were made to previous owners of ASC and WordZ) were made to the previous owners of WordZ.
As at December 31, 2022, total contingent consideration payable to WordZ sellers is $258,003 (December 31, 2021 - $523,926 and 2020 - $744,696), of which $258,003 (December 31, 2021 - $357,323 and 2020 - $314,845) is recorded as trade and other payables and accrued liabilities, and $nil has been recorded as long-term contingent consideration (December 31, 2021 - $166,603 and 2020 - $429,851).
5.Trade and other receivables
| | | | | | |
|
| December 31, 2022 |
| December 31, 2021 | ||
Trade accounts receivable | | $ | 4,956,613 | | $ | 4,423,315 |
Other receivable (note 6) | |
| 748,585 | |
| 1,487,255 |
Less: allowance for doubtful accounts | |
| (399,470) | |
| (316,202) |
| | $ | 5,305,728 | | $ | 5,594,368 |
As at December 31, 2022, other receivable relates to unbilled revenue of $634,226 (December 31, 2021 - $807,067), government assistance receivable of $nil (December 31, 2021 – $574,703) and sales tax receivable and other receivables of$114,359 (December 31, 2021- $105,485).
6.Government assistance
Australian Business Wage Subsidies
During 2021, the Australian government introduced programs to support Australian businesses whose revenues were impacted by the COVID-19 pandemic. During the year ended December 31, 2022, there were no government wage subsidies (2021 – $208,077 and 2020 - $2,017,189) recognized as a reduction to the related payroll expenses in the consolidated statements of loss and comprehensive loss.
U.S. Employee Retention Credit Program
During 2021, the Company determined it was qualified for the U.S. Employee Retention Credit. The Company received $224,812 as at December 31, 2022 (2021 - $1,453,735 and 2020 - $nil).
F-24
VIQ Solutions Inc.
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
As at December 31, 2022, there is no outstanding balance reported on the consolidated statements of financial position for assistance receivable (2021 - $574,703) in trade and other receivables. The $574,703 receivable at December 31, 2021 was collected during the year ended December 31, 2022.
7.Property and equipment
Details of the Company’s property and equipment as of December 31, 2022 and December 31, 2021 are listed as follows:
| | | | | | | | | | | | |
| | Balance | | | | | | | | Balance | ||
| | December 31, | | | | | | Foreign | | December 31, | ||
|
| 2021 |
| Additions |
| Impairment |
| exchange |
| 2022 | ||
Cost |
| |
|
| | |
|
|
|
| |
|
Furniture and fixtures | | $ | 321,833 | | 12,086 | | — | | (15,040) | | $ | 318,879 |
Computer, software, and transcription equipment | |
| 1,812,771 | | 1,180,809 | | (15,246) | | (93,264) | |
| 2,885,070 |
Buildings – leasehold improvements | |
| 43,051 | | 9,594 | | — | | (2,090) | |
| 50,555 |
| | | 2,177,655 | | 1,202,489 | | (15,246) | | (110,394) | | | 3,254,504 |
Accumulated depreciation | |
|
| | | |
| |
| |
|
|
Furniture and fixtures | | | 240,611 | | 12,022 | | — | | (15,362) | | | 237,271 |
Computer, software, and transcription equipment | |
| 1,473,012 | | 152,157 | | — | | (90,711) | |
| 1,534,458 |
Buildings – leasehold improvements | |
| 3,058 | | 48,284 | | — | | (700) | |
| 50,642 |
| | | 1,716,681 | | 212,463 | | — | | (106,773) | | | 1,822,371 |
Net book value | | $ | 460,974 | | | | | |
| | $ | 1,432,133 |
| | | | | | | | | | | | | | | |
| | Balance | | | | | | | | | | | Balance | ||
| | December 31, | | Acquisitions | | Additions/ | | Foreign | | December 31, | |||||
|
| 2020 |
| (Note 4) |
| Disposals |
| exchange |
| 2021 | |||||
Cost |
| |
|
| | |
| |
|
| |
|
| |
|
Furniture and fixtures | | $ | 268,018 | | | 31,842 | | | 746 | | | 21,227 | | $ | 321,833 |
Computer, software, and transcription equipment | |
| 1,499,729 | | | 218,696 | |
| 78,458 | |
| 15,888 | |
| 1,812,771 |
Buildings – leasehold improvements | |
| 4,920 | | | 38,114 | |
| — | |
| 17 | |
| 43,051 |
| | | 1,772,667 | | | 288,652 | | | 79,204 | | | 37,132 | | | 2,177,655 |
Accumulated depreciation | |
| | | | | |
| | |
| | |
| |
Furniture and fixtures | | | 219,306 | | | — | | | 13,844 | | | 7,461 | | | 240,611 |
Computer, software, and transcription equipment | |
| 1,335,406 | | | — | |
| 111,884 | |
| 25,722 | |
| 1,473,012 |
Buildings – leasehold improvements | |
| 2,120 | | | — | |
| 938 | |
| — | |
| 3,058 |
| | | 1,556,832 | | | — | | | 126,666 | | | 33,183 | | | 1,716,681 |
Net book value | | $ | 215,835 | | | | | | | |
|
| | $ | 460,974 |
F-25
VIQ Solutions Inc.
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
8.Intangible assets and goodwill
Details of the Company’s intangible assets as of December 31, 2022 and December 31, 2021 are listed as follows:
| | | | | | | | | | | | |
| | Balance | | | | | | | | |||
| | December 31, 2021 |
| |
| Foreign |
| Balance | ||||
|
| (Restated) | | Additions | | exchange | | December 31, 2022 | ||||
Cost |
| |
|
| |
|
| |
| | |
|
Customer relationships | | $ | 15,612,098 |
| | — |
| | (308,448) | | $ | 15,303,650 |
Technology | |
| 470,000 |
| | — |
| | — | |
| 470,000 |
Non-compete | |
| 176,140 |
| | — |
| | (57,195) | |
| 118,945 |
Brand | |
| 2,389,443 |
| | — |
| | (10,154) | |
| 2,379,289 |
Patents | | | 15,232 | | | — | | | — | | | 15,232 |
Internally generated intangible assets | |
| 9,371,951 |
| | 1,828,983 |
| | (613,556) | |
| 10,587,378 |
| | $ | 28,034,864 |
| | 1,828,983 |
| | (989,352) | | $ | 28,874,495 |
Accumulated amortization | |
|
|
| |
|
| |
| |
|
|
Customer relationships | | | 6,361,535 |
| | 2,722,780 |
| | (25,830) | |
| 9,058,485 |
Technology | |
| 290,499 |
| | 179,501 |
| | — | |
| 470,000 |
Non-compete | |
| 56,744 |
| | 69,687 |
| | — | |
| 126,431 |
Brand | |
| 349,495 |
| | 1,601,285 |
| | (5,619) | |
| 1,945,161 |
Patents | | | — | | | — | | | — | | | — |
Internally generated intangible assets | |
| 6,047,607 |
| | 935,701 |
| | (440,807) | |
| 6,542,501 |
| | | 13,105,880 |
| | 5,508,954 |
| | (472,256) | | | 18,142,578 |
Net book value | | $ | 14,928,984 |
| |
|
| |
| | $ | 10,731,917 |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | Balance | ||
| | Balance | | | | | | | | | December 31, | ||||
|
| December 31, |
| Acquisitions |
| |
| Foreign |
| 2021 | |||||
| | 2020 | | (note 4) | | Additions | | exchange | | (Restated) | |||||
Cost | |
| | |
| | |
| | |
| | |
| |
Customer relationships | | $ | 11,775,697 | | | 3,785,815 | | | — | | | 50,586 | | $ | 15,612,098 |
Technology | |
| 470,000 | | | — | | | — | | | — | |
| 470,000 |
Non-compete | | | 51,031 | | | 124,580 | | | — | | | 529 | | | 176,140 |
Brand | |
| 1,520,899 | | | 856,141 | | | — | | | 12,403 | |
| 2,389,443 |
Patents | | | — | | | — | | | 15,232 | | | — | | | 15,232 |
Internally generated intangible assets | |
| 7,015,035 | | | — | | | 2,349,501 | | | 7,415 | |
| 9,371,951 |
| | $ | 20,832,662 | | | 4,766,536 | | | 2,364,733 | | | 70,933 | | $ | 28,034,864 |
Accumulated amortization | |
|
| | |
| | |
| | |
| |
|
|
Customer relationships | | | 4,099,565 | | | — | | | 2,260,372 | | | 1,598 | | | 6,361,535 |
Technology | |
| 196,499 | | | — | | | 94,000 | | | — | |
| 290,499 |
Non-compete | | | 19,638 | | | — | | | 37,105 | | | — | | | 56,743 |
Brand | | | 133,921 | | | — | | | 215,574 | | | — | | | 349,495 |
Patents | | | — | | | — | | | — | | | — | | | — |
Internally generated intangible assets | |
| 4,264,687 | | | — | | | 1,777,451 | | | 5,470 | |
| 6,047,608 |
| | | 8,714,310 | | | — | | | 4,384,502 | | | 7,068 | | | 13,105,880 |
Net book value | | $ | 12,118,352 | | | | |
|
| |
|
| | $ | 14,928,984 |
F-26
VIQ Solutions Inc.
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
Details of the Company’s goodwill as of December 31, 2022 and December 31, 2021 are listed as follows:
| | | | | | | | | | |
|
| Balance |
|
| |
| | |||
| | December 31, 2021 | | | Foreign | | Balance | |||
| | (Restated) | | | exchange | | December 31, 2022 | |||
VIQ Australia | | $ | 5,350,379 | | | $ | (313,564) | | $ | 5,036,815 |
Dataworxs | | | 141,504 | | | | (9,058) | | | 132,446 |
VIQ US |
| | 3,570,275 |
|
| | — |
| | 3,570,275 |
VIQ Media |
| | 2,614,802 |
|
| | — |
| | 2,614,802 |
VIQ UK | | | 763,597 | | | | (70,887) | | | 692,710 |
| | $ | 12,440,557 | | | $ | (393,509) | | $ | 12,047,048 |
| | | | | | | | | | | | |
| | | | | | | | Balance | ||||
|
| Balance |
| Acquisitions |
| Foreign |
| December 31, 2021 | ||||
| | December 31, 2020 | | (note 4) | | exchange | | (Restated) | ||||
VIQ Australia |
| $ | 650,001 |
| $ | 4,666,337 |
| $ | 34,041 |
| $ | 5,350,379 |
Dataworxs |
| | 141,018 |
| | — |
| | 486 |
| | 141,504 |
VIQ US |
| | 3,570,275 |
| | — |
| | — |
| | 3,570,275 |
VIQ Media | | | 2,614,802 | | | — | | | — | | | 2,614,802 |
VIQ UK | | | — | | | 763,597 | | | — | | | 763,597 |
| | $ | 6,976,096 |
| $ | 5,429,934 |
| $ | 34,527 | | $ | 12,440,557 |
Impairment testing for cash-generating units containing goodwill
The annual impairment test of goodwill was performed as of December 31, 2022. The recoverable amount of the Company’s CGUs were assessed using the higher of value in use or fair value less cost to sell.
| ● | Value in use was estimated using a discounted cash flow approach over a discrete period. Cash flows for the terminal years are estimated using terminal growth rate. The risk premiums expected by market participants related to uncertainties about the industry and assumptions relating to future cash flows may differ or change quickly, depending on economic conditions and other events. The Company has made certain assumptions in determining the cash flow projections based over a five-year period from 2023 to 2027 and include management’s best estimate of expected market conditions. These assumptions may differ or change quickly depending on economic conditions or other events. It is therefore possible that future changes in assumptions may negatively affect future valuations of CGUs and goodwill, which could result in impairment losses. The Company determined the forecasted cash flows based on earnings margins, revenue growth rate and the terminal revenue growth rate based on past performance and its expectations for market development. The pre-tax discount rates used reflect specific risks in relation to the CGUs. |
| ● | Fair value less cost to sell was estimated by using a discounted cash flow approach, similar to the approach under the value in use amounts, but adjusted for market participant assumptions and estimates. The market participant assumptions and estimates include cost savings for outsourcing of cost of sales and the assessment of multiples of operating performance of comparable entities and precedent transactions. |
The Company made certain assumptions when deriving expected future cash flows, which may include assumptions pertaining to the earnings margins, revenue growth rates, discount rates and terminal growth rates.
Goodwill is allocated to groups of CGUs, based on the level at which management monitors goodwill, which cannot be higher than an operating segment. The allocation of goodwill is made to groups of CGUs that are expected to benefit from the synergies and future growth of the business combination from which the goodwill arose. The Company makes judgments in determining CGUs and the allocation of goodwill to groups of CGUs for the purpose of impairment testing. During 2022, we have grouped the VIQ Solutions PTY Ltd. and Auscript CGUs into the VIQ Australia CGU on the basis that the VIQ Australia CGU is the level in which management monitors goodwill.
F-27
VIQ Solutions Inc.
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
With respect to the VIQ Solutions Inc. CGU, there are no goodwill or indefinite-life intangible assets associated with that CGU and no triggering events as at December 31, 2022. Consequently, no further impairment analysis was performed on that CGU.
For each of the following CGUs, or group of CGUs, the following are key assumptions on which management based its determinations of the recoverable amount for goodwill based on value in use:
| | | | | | | | | | |
| | | | | Revenue | | Terminal | | |
|
| | Carrying value of | | growth | | growth | | |
| |
|
| goodwill |
| rate |
| rate |
| Pre-tax discount | | |
VIQ Australia | | $ | 5,036,815 | | 3 | % | 2 | % | 12.9 | % |
Dataworxs |
| | 132,446 | | 3 | % | 2 | % | 12.9 | % |
VIQ US |
| | 3,570,275 | | 3 | % | 2 | % | 12.9 | % |
VIQ Media | | | 2,614,802 | | 3 | % | 2 | % | 12.9 | % |
VIQ UK |
| | 692,710 | | 3 | % | 2 | % | 12.9 | % |
| | $ | 12,047,048 | | | | | | | |
The Company did not recognize an impairment charge related to its goodwill in 2022 because the recoverable amounts of the CGUs, or groups of CGUs, exceeded their carrying values.
9.Long-term debt
| | | | | | | | | | | | | | | |
| | | | Word Z | | | | HomeTech | | | | ||||
| | Crown | | Promissory | | WordZ SBA | | VTB Loan | | | | ||||
|
| Capital (a) |
| note (b) |
| Loan |
| (b) |
| Total | |||||
Balance as at December 31, 2021 | | $ | 11,472,235 | | $ | 323,551 | | $ | — | | $ | 203,322 | | $ | 11,999,108 |
Add: current portion | |
| 308,892 | |
| 446,552 | |
| 114,269 | |
| 240,000 | |
| 1,109,713 |
| | $ | 11,781,127 | | $ | 770,103 | | $ | 114,269 | | $ | 443,322 | | $ | 13,108,821 |
Interest expense | |
| 900,202 | |
| 29,667 | |
| 238 | |
| — | |
| 930,107 |
Accretion expense | |
| 244,611 | |
| 64,521 | |
| — | |
| 40,217 | |
| 349,349 |
Interest payment | |
| (1,005,758) | |
| (34,600) | |
| (238) | |
| — | |
| (1,040,596) |
Debt repayment | |
| (4,015,669) | |
| (411,952) | |
| (114,269) | |
| (220,000) | |
| (4,761,890) |
Amendment fee | | | (239,880) | | | — | | | — | | | — | | | (239,880) |
Loss on extinguishment of debt | | | 747,865 | | | — | | | — | | | — | | | 747,865 |
Foreign exchange translation | |
| (439,707) | |
| — | |
| — | |
| — | |
| (439,707) |
Balance as at December 31, 2022 | | $ | 7,972,791 | | $ | 417,739 | | $ | — | | $ | 263,540 | | $ | 8,654,070 |
Less: Current portion | |
| (7,972,791) | |
| (417,739) | |
| — | |
| (243,728) | |
| (8,634,258) |
| | $ | — | | $ | — | | $ | — | | $ | 19,812 | | $ | 19,812 |
| | | | | | | | | | | | | | | | | | |
|
| | | Word Z | | | | | Transcription | | | | | | ||||
| | Crown Capital | | Promissory | | WordZ SBA | | Express VTB | | HomeTech | | | | |||||
|
| (a) |
| note (b) |
| Loan |
| Loan (b) |
| VTB Loan (b) |
| Total | ||||||
Balance as at December 31, 2020 | | $ | 11,093,400 | | $ | 617,751 | | $ | 45,923 | | $ | — | | $ | 381,725 | | $ | 12,138,799 |
Add: current portion | | | 304,746 | | | 446,552 | | | 214,307 | | | 280,531 | | | 240,000 | | | 1,486,136 |
| | $ | 11,398,146 | | $ | 1,064,303 | | $ | 260,230 | | $ | 280,531 | | $ | 621,725 | | $ | 13,624,935 |
Interest expense | |
| 1,232,349 | |
| 49,890 | | | — | | | 5,892 | |
| — | |
| 1,288,131 |
Accretion expense | |
| 347,372 | |
| 102,462 | | | — | | | — | |
| 61,597 | |
| 511,431 |
Interest payment | |
| (1,231,369) | |
| (39,109) | | | (832) | | | (5,892) | |
| — | |
| (1,277,202) |
Debt repayment | |
| — | |
| (407,443) | | | (145,129) | | | (280,531) | |
| (240,000) | |
| (1,073,103) |
Foreign exchange translation | |
| 34,629 | |
| — | | | — | | | — | |
| — | |
| 34,629 |
Balance as at December 31, 2021 | | $ | 11,781,127 | | $ | 770,103 | | $ | 114,269 | | $ | — | | $ | 443,322 | | $ | 13,108,821 |
Less: Current portion | |
| (308,892) | |
| (446,552) | | | (114,269) | | | — | |
| (240,000) | |
| (1,109,713) |
| | $ | 11,472,235 | | $ | 323,551 | | $ | — | | $ | — | | $ | 203,322 | | $ | 11,999,108 |
F-28
VIQ Solutions Inc.
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
During the year ended December 31, 2018, the Company entered into a secured debt facility with Crown Capital Funding Partner LP (“Crown”) of $11,055,000 (CAD$15,000,000) bearing an interest rate of 10% payable quarterly. The loan is secured by a general security agreement covering all assets of the Company. The outstanding principal balance of the loan is repayable on November 28, 2023. Additionally, during the period ended September 30, 2020, the Company cancelled 450,000 previously issued common share purchase warrants and reissued new warrants to reflect a price per share equal to CAD$2.06 (the “Exercise Price”) until expiry on November 28, 2023. As a result of this modification, the Company recorded $84,287 (CAD$111,387) reflecting the incremental fair value of the warrant associated with the amendment as a reduction in the carrying value of the note payable as at September 30, 2020. The Company incurred fees of $353,115 (CAD$450,000) associated with establishing the amended debt facility, which was recorded as a reduction in the carrying value of the note payable. These fees remain unpaid and is added to the Company’s outstanding principal. These fees accrue interest at 10% and repayment is due on November 28, 2023. During the year ended December 31, 2022, the Company recorded interest expense of $900,202 (2021 - $1,232,349 and 2020 - $1,409,961).
The difference between the face value and ascribed value of the Crown Capital note payable is being accreted over the remaining life of the debt facility. Corresponding transaction costs were netted against the face value of the debt facility and are recognized as accretion and other financing expense over the term of the loan. During the year ended December 31, 2022, there was $244,611 recorded (2021 - $347,372 and 2020 - $313,112) as accretion and other financing expense related to the note payable in the consolidated statements of loss and comprehensive loss.
The Company signed an amendment related to the Crown debt facility that required the Company to pay $4,005,768 (CAD$5,000,000) of the principal balance on March 30, 2022 and pay an amendment fee of approximately $239,880 (CAD $300,000). The interest on the Crown Debt facility remained at 10% annual interest and future interest payments were reduced to the reduced principal amount. The amendment did not result in the terms of the original agreement being substantially modified; as such the transaction is accounted for as a modification of the old debt. The amended secured debt facility waived the Fixed Charge Coverage Ratio for the quarter ended December 31, 2022 and the Net Debt to EBITDA ratio for quarters ended March 31, 2022 and June 30, 2022. Additional financial covenants were added to the amended Crown debt facility, which include restrictions on the amount of selling, administrative and research and development costs and restrictions on capital expenditure (including internally generated intangible assets and capitalized assets) in each of the respective quarters ended June 30, 2022, September 30, 2022 and December 31, 2022. As at December 31, 2022, the Company was in compliance with the additional financial covenants.
On July 14, 2022, the Company signed an amendment to the Crown debt facility which removed entirely the Fixed Charge Coverage Ratio and Net Debt to EBITDA covenants for the term of the facility. The covenants relating to the restrictions on the amount of selling, administrative and research and development costs and restrictions on capital expenditure for the quarter ended September 30, 2022 and December 31, 2022 were unchanged.
The July 14, 2022 amendment resulted in the terms of the agreement being substantially modified; as such the transaction is accounted for as an extinguishment of the old debt. The Company recognized a loss on extinguishment of debt of $747,865 and the new debt was recognized at fair value of $7,701,650.
In addition, the Company has agreed to make certain payments to the lender in the event that there is a balance outstanding under the debt facility as at certain periods in time. Such fees, if applicable, are payable in cash or common shares, at the Company’s sole discretion. As at December 31, 2022, the Company issued 1,078,901 common shares to Crown Capital Funding, LP in connection with these payments. Total payments were valued at $442,626.
See Note 24 for subsequent events for repayment of Crown debt facility on January 13, 2023.
F-29
VIQ Solutions Inc.
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
Unsecured promissory notes have been issued to the former owners of acquired companies. As part of the acquisition of Transcription Express, the Company issued an unsecured promissory note to the former owners of Transcription Express with a face value of $1,666,227, bearing interest at 10% per annum. During the year ended December 31, 2019, the terms of the Transcription Express unsecured promissory note were amended, with the principal and accrued interest to be paid monthly beginning on July 31, 2019 to the period ended April 30, 2021. As at December 31, 2021, this unsecured promissory note has been paid in full.
As part of the acquisition of HomeTech, the Company issued an unsecured interest-free promissory note to the former owners of HomeTech with a face value of $1,200,000, to be paid monthly for 60 months in equal installments of $20,000 beginning February 25, 2019 to the period ending January 25, 2024. The Company recorded the unsecured promissory note by discounting the principal amounts due using a market annual interest rate of 12%. The difference between the present value and the face value is being accreted over the term of the unsecured promissory notes.
An additional note was issued to the former owners of WordZ with a face value of $1,200,000 bearing interest at 5% to be paid quarterly for 36 months beginning January 5, 2021 to the period ending October 5, 2023. The fair value of the unsecured promissory notes was determined on a market annual interest rate of 12%. The difference between the face value and the ascribed value of the notes is being accreted over life of the notes.
During the year ended December 31, 2020, the Company entered into agreements (the “Amending Agreements”) with the holders of unsecured convertible notes (each, a “Note”) in the aggregate principal amount of approximately $6,792,934, granting the holders of such Notes (each a “Noteholder”) the option to convert the principal and the aggregate interest payable on their Notes from the date of issuance to the maturity date (the “Total Interest Payable”) into shares at a conversion price of CAD$2.18 per share (the “Conversion Option”). The modification of the convertible notes resulted in in a charge of $1,497,804 reflecting the incremental fair value of the reduced exercise price. This charge was recorded as a loss on repayment of long-term debt in the consolidated statements of loss and comprehensive loss.
Concurrent with their entry into the Amending Agreements, Noteholders holding all of the outstanding Notes exercised the Conversion Option during the year ended December 31, 2020. As a result of the exercise of the Conversion Option, the Company recognized $3,503,797 in interest expense reflecting interest charges from the date of the conversion through the maturity date. For the year ended December 31, 2020, the Company recognized a loss of $1,308,440 on the revaluation of the conversion feature liability.
During the year ended December 30, 2022, the Company repaid $114,269 of the loan balance (2021 - $145,129).
The minimum remaining principal repayments of debt under all agreements are as follows:
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | Crown | | wordZ promissory | | HomeTech | | | | |||
|
| Capital |
| note |
| VTB loan |
| Total | ||||
2023 | | $ | 7,701,650 | | $ | 432,939 | | $ | 260,000 | | $ | 8,394,589 |
2024 | |
| — | |
| — | |
| 20,000 | |
| 20,000 |
| | $ | 7,701,650 | | $ | 432,939 | | $ | 280,000 | | $ | 8,414,589 |
F-30
VIQ Solutions Inc.
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
10.Derivative warrant liability
On July 21, 2022, the Company completed a private placement offering to institutional investors (“PIPE”). Under the PIPE, the Company sold 3,551,852 units (the “Units”) at a price of $1.35 per Unit for gross proceeds to the Company of approximately $4,800,000 before the deduction of any fees and other PIPE expenses. Each Unit consists of one common share of the Company (a “Common Share”) and one Common Share purchase warrant (“Warrant”). Each Warrant entitles the holder thereof to purchase one Common Share at an exercise price of $1.39. The Warrants will be exercisable beginning on January 21, 2023 and will expire on July 21, 2027. Issuance costs of $741,000 were incurred with $344,000 being recorded as a reduction of common shares and $397,000 recorded in accretion and other financing costs.
On September 15, 2021, the Company closed its direct offering with institutional investors (the “Offering”). Under the Offering, the Company sold 4,235,294 units (the “Units”) at a price of $4.25 per Unit for gross proceeds to the Company of approximately $18,000,000 before the deduction of any fees and other estimated Offering expenses. Each Unit consists of one and one-half of one Common Share purchase warrant (each whole Common Share purchase warrant, a “Warrant”). A total of 2,117,647 Warrants were issued. Each Warrant entitles shareholder thereof to purchase one Common Share (a “Warrant Share”) at an exercise price of $5.00. The Warrants is exercisable as at March 15, 2022 and will expire five years from the issuance date on September 14, 2026.
In accordance with IFRS, a contract for the issuance of equity instruments that fails to meet the fixed for fixed criteria, i.e., issue a fixed number of shares for a fixed amount of cash or another financial asset, fails to meet the definition of equity. The exercise price for the Warrants issued under the PIPE and Offering are denominated in USD currency, which differs from the CAD functional currency of the issuing entity. As a result, the warrants are recorded as a derivative warrant liability since the Company will be receiving cash in a currency other than the issuing entity’s functional currency and therefore is deemed to be variable.
The derivative warrant liabilities are measured at fair value with changes in fair value recognized in the consolidated statements of loss and comprehensive loss at each year-end. The derivative warrant liabilities will ultimately be converted into the Company’s equity (common shares) when the Warrants are exercised or will be extinguished on the expiry of the outstanding Warrants and will not result in the outlay of any cash by the Company.
The Company uses the Black-Scholes pricing model to estimate fair value at initial recognition and at each reporting date. The Company considers expected volatility of its common shares in estimating its future stock price volatility. The risk-free interest rate for the life of the Warrants was based on the yield available on government benchmark bonds with an approximate equivalent remaining term at the time of issue and at the time of revaluation. The life of warrant is based on an estimated exercise term. The following are assumptions used by the Company to fair value at initial recognition and the year ended December 31, 2022:
PIPE July 21, 2022
| | | | | | | |
|
| December 31, 2022 |
| July 21, 2022 initial |
| ||
| | year end | | recognition |
| ||
Fair value (CAD) | | $ | 0.10 | | $ | 0.93 | |
Share price (CAD) | | $ | 0.36 | | $ | 1.41 | |
Exercise price (CAD) | | $ | 1.89 | | $ | 1.79 | |
Expected volatility | |
| 77.1 | % |
| 69.9 | % |
Risk free rate | | | 3.50 | % | | 3.06 | % |
Expected life (years) | |
| 4.55 | |
| 5.0 | |
Expected dividends | |
| 0 | % |
| 0 | % |
F-31
VIQ Solutions Inc.
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
Offering September 15, 2021
| | | | | | | | | | |
| | December 31, 2022 | | December 31, 2021 | | September 15, 2021 |
| |||
|
| Year end |
| Year End |
| initial recognition |
| |||
Fair value (CAD) | | $ | 0.02 | | $ | 1.12 | | $ | 1.93 | |
Share price (CAD) | | $ | 0.36 | | $ | 3.11 | | $ | 4.43 | |
Exercise price (CAD) | | $ | 6.78 | | $ | 6.35 | | $ | 6.33 | |
Expected volatility | |
| 75 | % | | 64.7 | % |
| 62 | % |
Risk free rate | | | 3.67 | % | | 1.22 | % | | 0.83 | % |
Expected life (years) | |
| 3.71 | | | 4.71 | |
| 5.0 | |
Expected dividends | |
| 0 | % | | 0 | % |
| 0 | % |
For the year ended December 31, 2022, a gain on revaluation of derivative warrant liabilities was recorded in the amount of $4,255,017 (2021 - $1,368,180).
As at December 31, 2022, there were 5,669,499 warrants outstanding and nil exercised (2021 – 2,117,647 and nil exercised).
11.Capital stock
Omnibus Equity Incentive Plan
On April 29, 2021, the Company adopted a new omnibus equity incentive plan (the “Omnibus Equity Incentive Plan”) by way of a Shareholder Resolution. The Omnibus Equity Incentive Plan is a “rolling” plan that, subject to certain adjustment provisions, provides that the aggregate maximum number of Common Shares that may be issued upon the exercise or settlement of awards granted under the Omnibus Equity Incentive Plan shall not exceed 10% of the Company’s issued and outstanding Common Shares from time to time. The Omnibus Equity Incentive Plan is considered an “evergreen” plan, since the Common Shares covered by awards that have been exercised, settled or terminated shall be available for subsequent grants under the Omnibus Equity Incentive Plan, and the number of awards available to grant increases as the number of issued and outstanding Common Shares increases. As such, the Omnibus Equity Incentive Plan must be approved by the majority of the Company’s Board and its Shareholders every three years following its adoption pursuant to the requirements of the TSX.
Under the Omnibus Equity Incentive Plan, the Company is able to grant equity-based incentive awards in the form of stock options, restricted share units (“RSUs”), performance share units (“PSUs”) and deferred share units (“DSUs”). All future grants of equity-based awards will be made pursuant to the Omnibus Equity Incentive Plan, and no further equity-based awards will be made pursuant to the Company’s Stock Option Plan, DSU plan, and Stock Appreciation Rights Plan (collectively, the “Legacy Plans”). The Legacy Plans will continue to be authorized for the sole purposes of facilitating the vesting and exercise of existing awards previously granted under the Legacy Plans. Once the existing awards granted under the Legacy Plans are exercised or terminated, the Legacy Plans will terminate and be of no further force or effect.
No equity incentive securities have been granted under the Legacy Plans for the year ended December 31, 2022 (2021 – nil and 2020 – 396,000).
F-32
VIQ Solutions Inc.
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
Common shares
The Company’s authorized capital consists of an unlimited number of common shares with no par value. As at December 31, 2022, common shares of the Company were reserved as follows:
| | | | | | | |
| | Exercise price | | | | | |
|
| (CAD) |
| Expiry dates |
| Number outstanding | |
Options – Legacy Plan | | | $2.84 - $6.00 |
| January 2023 – December 2023 |
| 123,750 |
| | | $2.20 - $3.10 |
| January 2024 – December 2024 |
| 220,350 |
| | | $3.13 |
| January 2025 – December 2025 |
| 376,000 |
Options – Omnibus Equity Incentive Plan | | | $2.80 - 8.84 | | January 2031 – June 2031 | | 318,000 |
| | | $0.45 - 1.35 | | January 2032 – December 2032 | | 805,947 |
Deferred share units – Legacy Plan | | | $1.20 - $2.10 | | N/A | | 66,667 |
Restricted share units – Omnibus Equity Incentive Plan | | | N/A | | January 2024 – December 2024 | | 16,667 |
| | | N/A | | January 2031 – June 2031 | | 168,017 |
| | | N/A | | N/A | | 636,535 |
Performance share units – Omnibus Equity Incentive Plan | | | N/A | | N/A | | 165,000 |
Warrants
During the year ended December 31, 2022, there were no warrants exercised (2021 - 1,123,878 and 2020 – 1,154,759) for $nil proceeds (2021 - $2,092,276 and 2020 - $1,859,963). During the year ended December 31, 2022, there were no warrants issued under the Legacy Plans (2021 and 2020 – nil).
As at December 31, 2022, there were no warrants outstanding other than those classified as derivative warrant liabilities in Note 10 (2021 – nil).
Stock option plan
The Company has an incentive stock option plan for its directors, officers, employees, and contractors. The Company’s legacy stock option plan allows for the granting of options (and DSUs as described below) up to an aggregate amount equal to 10% of the aggregate number of common shares of the Company outstanding. The options, which have a term not exceeding five years when issued, generally vest as follows:
| ● | 1/3 at time of issue |
| ● | 1/3 after one year |
| ● | 1/3 after two years |
Under the Omnibus Equity Incentive Plan, the stock options that are granted have a term not exceeding ten years when granted, and can be fully vested on date of grant or vest as follows:
| ● | 1/3 after one year |
| ● | 1/3 after two years |
| ● | 1/3 after three years |
During the year ended December 31, 2021, certain stock options granted included cash settlement alternatives at the discretion of the stock option holder, subject to the approval of the Company’s Plan Administrator. The option holder could elect to perform the following on the settlement date:
| ● | acquire common shares of the Company on a 1:1 basis to vested options |
F-33
VIQ Solutions Inc.
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
| ● | receive cash payment, net of withholding taxes, equal to vested options multiplied by the market price of common shares of the Company |
| ● | acquire and receive a combination of common shares and cash payment, respectively, as noted above |
Since the election and choice of settlement method lies with the stock option holder, which includes a cash settlement, the Company recorded the associated grants with this option as a cash-settled share-based payment and recorded a share-based payment liability, which is remeasured at each reporting period. On June 11, 2021, the Company initially recorded a share- based payment liability of $141,186 related to the 155,517 options that are deemed to be cash-settled share-based payments. As a result of additional vesting of the options as well as the result of remeasuring the options classified as cash-settled share-based payments related to the Omnibus Equity Incentive Plan at fair value, the Company recorded a gain on revaluation of options of $1,511,399 for the year ended December 31, 2022 (2021 - $1,028,055 and 2020 - $nil). As at December 31, 2022, the Company had no options outstanding that are to be cash-settled as these options were all forfeited.
As at December 31, 2022, 720,100 options were vested related to the Legacy Plan (2021 – 749,267 and 2020 – 770,283) with a weighted average exercise price of CAD $2.88 per share (2021 – CAD $3.16 and 200 - $2.62 ).
As at December 31, 2022, 486,864 options were vested related to the Omnibus Equity Incentive Plan (2021 – 46,500 and 2020 - nil) with a weighted average exercise price of CAD $1.67 per share (2021 – CAD $8.84 and 2020 - $nil).
During the year ended December 31, 2022, the Company granted 805,947 stock options respectively to directors, officers, employees, and contractors (2021 – 1,115,086 and 2020 – 396,000). The Company utilized the Black-Scholes option pricing model to fair value the stock options granted and included the following assumptions:
| | | | | |
| | Year ended December 31, 2022 | | Year ended December 31, 2021 |
|
|
| Omnibus Equity Incentive Plan |
| Omnibus Equity Incentive Plan |
|
Fair value at grant date (CAD) | | $0.20 - $ 0.81 | | $2.30 - $7.29 | |
Share price at grant date (CAD) | | $0.34 - $1.32 | | $2.80 - $8.93 | |
Exercise price (CAD) | | $0.45 - $1.35 | | $8.84 - $8.93 | |
Expected volatility | | 62.5% - 72.3% | | 81.60% - 82.7% | |
Expected option life | | 5.5 – 6.5 | | 10.0 | |
Expected dividends | | 0% | | 0% | |
Risk-free interest rate (based on government bonds) | | 2.90% - 3.16% | | 1.38% - 1.43% | |
During the year ended December 31, 2022, nil options were exercised (2021 – 203,333 and 2020 – 92,500), for $nil proceeds (2021 - CAD$312,833 and 2020 – CAD$113,500). There were 886,253 stock options forfeited during the year ended December 31, 2022 (2021 and 2020 – nil) and 72,000 stock options that expired during the year ended December 31, 2022 (2021 – 33,333 and 2020 – 53,667).
The following information applies to stock options outstanding per the Legacy Plan as at December 31, 2022, along with their respective exercise prices and related weighted average remaining contractual life:
| | | | | | | | | | | | |
|
| | | Weighted average |
| | | | | | ||
Range of exercise | | |
| remaining | | Weighted average | | |
| Weighted average | ||
prices | | Options | | contractual | | exercise price |
| Options | | exercise price | ||
(CAD) | | outstanding | | life | | (CAD) | | exercisable | | (CAD) | ||
$2.84 – $6.00 |
| 123,750 |
| 0.9 years | | $ | 3.01 |
| 123,750 | | $ | 3.01 |
$2.20 - $3.10 |
| 220,350 |
| 1.5 years | | $ | 2.37 |
| 220,350 | | $ | 2.37 |
$3.13 |
| 376,000 |
| 2.3 years | | $ | 3.13 |
| 376,000 | | $ | 3.13 |
|
| 720,100 |
| 1.8 years | | $ | 2.88 |
| 720,100 | | $ | 2.88 |
F-34
VIQ Solutions Inc.
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
The following information applies to stock options outstanding per the Omnibus Equity Incentive Plan as at December 31, 2022, along with their respective exercise prices and related weighted average remaining contractual life:
| | | | | | | | | | | | |
|
| |
| Weighted |
| Weighted |
| |
| Weighted | ||
Range of exercise | | | | average | | average exercise | | | | average exercise | ||
prices | | Options | | remaining | | price | | Options | | price | ||
(CAD) | | outstanding |
| contractual life |
| (CAD) | | exercisable |
| (CAD) | ||
$2.80 - $8.84 |
| 318,000 |
| 8.9 years | | $ | 3.25 |
| 118,000 |
| $ | 3.82 |
$0.45 – $1.35 |
| 805,947 |
| 9.7 years | | $ | 0.92 |
| 368,864 | | $ | 0.98 |
|
| 1,123,947 | | 9.5 years | | $ | 1.58 |
| 486,864 | | $ | 1.67 |
Deferred Share Units Plan
The Company established a DSU Plan to provide non-employee directors to participate in the long-term success of the Company. DSUs are fully vested upon being granted.
The Board of Directors may grant DSUs (and the number of options to purchase shares described above) up to a maximum of 10% of common shares outstanding and up to a maximum of 100,000 units.
Maximum allowable grants under the option and DSU plans in aggregate as at December 31, 2022 were 3,464,970 (2021 – 2,988,172 and 2020 – 2,359,143) of which 1,844,047 were outstanding stock options, 66,667 were outstanding DSUs, 821,219 were outstanding RSUs, and 165,000 of outstanding PSUs for a total of 2,896,933 (2021 – 2,259,036 and 2020 – 1,184,600).
The Company did not grant any DSU’s to Directors of the Company during the year ended December 31, 2022 (2021 and 2020 – nil).
Restricted Share Units Plan
Under the Omnibus Equity Incentive Plan, the Company established a RSU Plan. RSUs have a term not exceeding ten years to indefinite expiry when granted and can fully vest after one year, vest each month, or vest as follows:
| ● | 1/3 after one year |
| ● | 1/3 after two years |
| ● | 1/3 after three years |
During the year ended December 31, 2021, certain RSUs granted included cash settlement alternatives at the discretion of the RSU holder, subject to the approval of the Company’s Plan Administrator. The RSU holder could elect to perform the following on the settlement date:
| ● | acquire common shares of the Company on a 1:1 basis to vested RSUs |
| ● | receive cash payment, net of withholding taxes, equal to vested RSUs multiplied by the market price of common shares of the Company |
| ● | acquire and receive a combination of common shares and cash payment, respectively, as noted above |
Certain RSUs issued by the Company included the choice of settlement method lies with the RSU holder, which includes a cash settlement, the Company has recorded the associated RSU grants as a cash settled share-based payments and recorded a share-based payment liability. As at December 31, 2022, there are 155,517 RSUs outstanding that are classified as cash-settled share-based payments.
F-35
VIQ Solutions Inc.
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
As a result of remeasuring the RSUs classified as cash-settled share-based payments related to the Omnibus Equity Incentive Plan at fair value, the Company recorded a gain of $550,260 for the year ended December 31, 2022 (2021 – $242,595 and 2020 - $nil). The RSUs were valued at the following fair values:
| | | | | |
| | Year ended December 31, 2022 | | Year ended December 31, 2021 | |
|
| Omnibus Equity Incentive Plan | | Omnibus Equity Incentive Plan |
|
Fair value (CAD) | | $0.36 | | $3.11 | |
Share price (CAD) | | $0.36 | | $3.11 |
|
During the year ended December 31, 2022, 803,463 RSUs were granted to directors, officers, employees, and contractors (2021 – 1,023,378 and 2020 - nil) which are equity accounted for. 689,469 RSUs were vested and 175,261 RSUs were exercised for the year ended December 31, 2022 (2021 – 842,861 vested and 827,361 RSUs exercised and 2020 – nil). The Company recorded the RSUs granted which have a zero exercise price at the following fair values:
| | | | |
| | Year ended December 31, 2022 | | Year ended December 31, 2021 |
|
| Omnibus Equity Incentive Plan | | Omnibus Equity Incentive Plan |
Fair value (CAD) | | $0.35 - $1.32 | | $2.75 - $8.93 |
Share price (CAD) | | $0.35 - $1.32 | | $2.75 - $8.93 |
Performance Share Units Plan
Under the Omnibus Equity Incentive Plan, the Company established a PSU Plan. The PSUs have an indefinite term when granted and vest 100% after one year if the performance vesting conditions are met. As at December 31, 2022, the Company has determined that it is probable that the performance vesting condition will be met by the respective employees.
On May 16, 2022, 195,000 PSUs were granted to employees, of which 30,000 shares were forfeited during the year ended December 31, 2022. The PSUs were recorded at the fair value on the day of the grant. The PSUs were valued at the following fair value:
| | | | |
|
| Year ended December 31, 2022 |
| |
| | Omnibus Equity | | |
| | Incentive Plan |
| |
Fair value (CAD) | | $ | 1.32 |
|
Share price (CAD) | | $ | 1.32 | |
| | | | |
12.Stock-based compensation
The total compensation expense relating to the value assigned to the stock options, RSUs, and PSUs granted to directors, officers, employees and contractors for the December 31, 2022 was $2,779,312 (2021 - $8,495,189 and 2020 - $725,316), which was included in the stock-based compensation expense with a corresponding charge to contributed surplus of $1,264,523 (2021 – $6,679,582 and 2020 - $461,509) and share-based payment liability of $1,514,789 (2021 - $1,815,607 and 2020 - $nil) which was subsequently reversed through gain on revaluation of options in 2022.
F-36
VIQ Solutions Inc.
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
13.Net loss per share
| | | | | | | | | |
| | Year ended December 31, | |||||||
|
| 2022 |
| 2021 |
| 2020 | |||
Numerator for basic and diluted net loss per share: | | |
| | |
| | |
|
Net loss for the year | | $ | (8,706,015) | | $ | (19,678,749) | | $ | (11,145,306) |
Denominator for basic net loss per share: | |
|
| |
|
| |
|
|
Weighted average number of common shares outstanding | |
| 31,648,001 | |
| 26,448,594 | |
| 18,080,533 |
Effect of potential dilutive securities | |
| — | |
| — | |
| — |
Adjusted denominator for diluted net loss per share | |
| 31,648,001 | |
| 26,448,594 | |
| 18,080,533 |
Basic net loss per share | | $ | (0.28) | | $ | (0.74) | | $ | (0.62) |
Diluted net loss per share | | $ | (0.28) | | $ | (0.74) | | $ | (0.62) |
For the year ended December 31, 2022, 8,566,432 of potentially dilutive common shares (2021 – 4,376,683 and 2020 – 2,308,478) issuable upon the exercise of warrants, DSUs, RSUs, PSUs, and options were not included in the computation of loss per share because their effect was anti-dilutive.
14.Supplemental cash flow information
Components of the net change in non-cash working capital are as follows:
| | | | | | | | | |
| | Year ended December 31, | |||||||
|
| 2022 |
| 2021 |
| 2020 | |||
Trade and other receivables | | $ | 72,230 | | $ | 1,180,069 | | $ | (316,778) |
Inventories | |
| 11,750 | |
| (176) | |
| 18,473 |
Prepaid expenses and deposits | |
| 4,132 | |
| (1,630,088) | |
| (53,416) |
Trade and other payables and accrued liabilities | |
| 669,427 | |
| (1,170,715) | |
| (40,937) |
Taxes | | | (104,670) | | | — | | | — |
Contract liabilities | |
| 742,228 | |
| (381,596) | |
| (380,629) |
Total | | $ | 1,395,097 | | $ | (2,002,506) | | $ | (773,287) |
Other supplemental cash flow information as follows:
| | | | | | | | | |
| | Year ended December 31, | |||||||
|
| 2022 |
| 2021 |
| 2020 | |||
Cash received for interest | | $ | 1,718 | | $ | 22,725 | | $ | 1,068 |
Cash paid for interest | |
| 1,154,727 | |
| 1,311,915 | |
| 1,105,298 |
15.Segmented financial information
The Company has determined it has two reportable business segments, namely technology and related revenue and technology services. The technology and related revenue segment develops, distributes licenses computer-based digital solutions based on the Company’s proprietary technology; and the technology service segment, provides recording and transcription services.
The Company’s reportable segments are strategic business segments that offer different products and/or services. These business segments work on different business models and operate autonomously. The Company does not segregate sales and associated costs by individual technology products. Accordingly, segmented information on revenue and associated costs is only provided for the transcription services and computer-based digital solutions currently offered by the Company.
The Chief Executive Officer, President and Chief Operating Officer, and Chief Financial Officer are the operating decision makers and regularly reviews our operations and performance by segment. They review segment income (loss) as the key measure of profit for the purpose of assessing performance of each segment and to make decisions about the allocation of resources.
F-37
VIQ Solutions Inc.
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
Financial information by reportable business segment is as follows:
| | | | | | | | | | | | |
| | Year ended December 31, 2022 | ||||||||||
| | Technology |
| | | | | | | | ||
| | and related | | Technology | | | | | | | ||
|
| revenue |
| services |
| Corporate |
| Total | ||||
Consolidated income (loss) | | |
|
| |
|
| |
|
| |
|
Revenue | | $ | 4,031,450 | | $ | 41,812,479 | | $ | — | | $ | 45,843,929 |
Gross profit | |
| 2,818,137 | |
| 19,107,566 | |
| — | |
| 21,925,703 |
Selling and administrative expenses | |
| 2,156,808 | |
| 19,796,235 | |
| 2,573,260 | |
| 24,526,303 |
Stock-based compensation | |
| 244,409 | |
| 2,534,903 | |
| — | |
| 2,779,312 |
Research and development expenses | |
| 64,557 | |
| 669,558 | |
| — | |
| 734,115 |
Depreciation and amortization | |
| 312,219 | |
| 5,729,361 | |
| 46,623 | |
| 6,088,203 |
Foreign exchange gain | |
| — | |
| — | |
| (452,068) | |
| (452,068) |
Interest, accretion and other financing costs | |
| — | |
| — | |
| 2,283,812 | |
| 2,283,812 |
Loss on contingent consideration | | | — | | | 80,071 | | | — | | | 80,071 |
Gain on revaluation of options | |
| — | |
| — | |
| (1,511,399) | |
| (1,511,399) |
Gain on revaluation of RSUs | |
| — | |
| — | |
| (550,260) | |
| (550,260) |
Gain on revaluation of the derivative warrant liability | |
| — | |
| — | |
| (4,255,017) | |
| (4,255,017) |
Loss on extinguishment of debt | | | — | | | — | | | 747,865 | | | 747,865 |
Restructuring costs | |
| — | |
| — | |
| 323,075 | |
| 323,075 |
Business acquisition costs | |
| — | |
| — | |
| 433,372 | |
| 433,372 |
Impairment of property and equipment | | | — | | | 15,246 | | | — | | | 15,246 |
Other income | |
| — | |
| – | |
| (1,291) | |
| (1,291) |
Current income tax recovery | |
| — | |
| (105,256) | |
| — | |
| (105,256) |
Deferred income tax recovery | |
| (33,063) | |
| (471,302) | |
| — | |
| (504,365) |
Segment income (loss) | |
| 73,207 | |
| (9,141,250) | |
| 362,028 | |
| (8,706,015) |
F-38
VIQ Solutions Inc.
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
| | | | | | | | | | | | |
| | Year ended December 31, 2021 | ||||||||||
| | Technology |
| | | | | | | | ||
| | and related | | Technology | | | | | | | ||
|
| revenue |
| services |
| Corporate |
| Total | ||||
Consolidated income (loss) | | |
|
| |
|
| |
|
| |
|
Revenue | | $ | 4,370,074 | | $ | 26,676,738 | | $ | — | | $ | 31,046,812 |
Gross profit | |
| 3,249,849 | |
| 11,673,110 | |
| — | |
| 14,922,959 |
Selling and administrative expenses | |
| 7,467,520 | |
| 6,799,249 | |
| 4,852,944 | |
| 19,119,713 |
Stock-based compensation | |
| 1,195,762 | |
| 7,299,427 | |
| — | |
| 8,495,189 |
Research and development expenses | |
| 1,092,108 | |
| — | |
| — | |
| 1,092,108 |
Depreciation and amortization | |
| 1,902,822 | |
| 2,738,779 | |
| — | |
| 4,641,601 |
Foreign exchange loss (gain) | |
| 110,098 | |
| (87,968) | |
| — | |
| 22,130 |
Interest, accretion and other financing expense | |
| 24,543 | |
| 10,169 | |
| 2,263,494 | |
| 2,298,206 |
Gain on contingent consideration | |
| — | |
| (332,569) | |
| — | |
| (332,569) |
Gain on revaluation of options | | | (144,707) | | | (883,348) | | | — | | | (1,028,055) |
Gain on revaluation of RSUs | | | (34,147) | | | (208,448) | | | — | | | (242,595) |
Gain on revaluation of the derivative warrant liability | | | (192,582) | | | (1,175,598) | | | — | | | (1,368,180) |
Restructuring costs | | | 312,794 | | | 119,908 | | | — | | | 432,702 |
Business acquisition costs | | | — | | | — | | | 539,734 | | | 539,734 |
Other income | | | (21,372) | | | 9,369 | | | — | | | (12,003) |
Current income tax recovery | | | — | | | (875) | | | — | | | (875) |
Deferred income tax expense | | | — | | | 944,602 | | | — | | | 944,602 |
Segment loss | |
| (8,462,990) | |
| (3,559,587) | |
| (7,656,172) | |
| (19,678,749) |
| | | | | | | | | | | | |
|
| Year ended December 31, 2020 | ||||||||||
| | Technology | | | | | | | | | | |
| | and related | | Technology | | | | | | | ||
|
| revenue |
| services |
| Corporate |
| Total | ||||
Consolidated income (loss) |
| |
|
| |
|
| |
|
| |
|
Revenue | | $ | 3,201,837 | | $ | 28,547,856 | | $ | — | | $ | 31,749,693 |
Gross profit | |
| 2,169,414 | |
| 13,980,842 | |
| — | |
| 16,150,256 |
Selling and administrative expenses | |
| 6,012,270 | |
| 4,606,557 | |
| 416,075 | |
| 11,034,902 |
Stock-based compensation | |
| — | |
| — | |
| 725,316 | |
| 725,316 |
Research and development expenses | |
| 1,074,178 | |
| — | |
| — | |
| 1,074,178 |
Depreciation and amortization | |
| 2,429,329 | |
| 2,829,914 | |
| — | |
| 5,259,243 |
Foreign exchange gain | |
| (65,303) | |
| (67,003) | |
| | |
| (132,306) |
Interest, accretion and other financing expense | |
| 26,746 | |
| — | |
| 6,124,720 | |
| 6,151,466 |
Other income | | | (25) | | | (10,348) | | | — | | | (10,373) |
Loss on revaluation of conversion feature liability | |
| — | |
| — | |
| 1,308,440 | |
| 1,308,440 |
Gain on contingent consideration | | | — | | | (946,503) | | | — | | | (946,503) |
Impairment of intangibles | | | — | | | 2,258,369 | | | — | | | 2,258,369 |
Loss on repayment of long-term debt | | | — | | | — | | | 1,497,804 | | | 1,497,804 |
Business acquisition costs | | | — | | | — | | | 19,058 | | | 19,058 |
Current income tax expense | | | — | | | 106,986 | | | — | | | 106,986 |
Deferred income tax expense (recovery) | |
| 61,879 | |
| (1,112,897) | |
| — | |
| (1,051,018) |
Segment income (loss) | |
| (7,369,660) | |
| 6,315,767 | |
| (10,091,413) | |
| (11,145,306) |
The comparative figures income statement below gross profit have been adjusted for the year ended December 31, 2021 to reflect the current year’s presentation. The segment loss originally reported for the year ended December 31, 2021 for technology and related revenue was $8,462,990. For technology services, segment loss originally reported for the year ended December 31, 2021 was $3,559,587.
The adjustments were not considered material and did not affect the Company’s consolidated revenue or consolidated net loss.
F-39
VIQ Solutions Inc.
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
Property and equipment are located in the following countries:
| | | | | | |
|
| Year ended December 31, | ||||
| | 2022 | | 2021 | ||
Australia | | $ | 1,316,010 | | $ | 325,228 |
United States | | | 67,307 | | | 113,242 |
Canada | |
| 35,331 | |
| 14,084 |
United Kingdom | | | 13,485 | | | 8,420 |
| | $ | 1,432,133 | | $ | 460,974 |
16.Revenue
The Company generates revenue primarily from the delivery of technology and transcription services to its customers. Revenue from contracts with customers is disaggregated by primary geographical market, major products and services and timing of revenue recognition. The table also includes a reconciliation of the disaggregated revenue with the Company’s reportable segments (note 15).
| | | | | | | | | |
| | Year ended December 31, | |||||||
Primary geographic markets |
| 2022 |
| 2021 |
| 2020 | |||
Australia | | $ | 26,332,938 | | $ | 9,523,257 | | $ | 8,531,854 |
United States | |
| 17,473,030 | |
| 18,980,591 | |
| 22,180,946 |
United Kingdom | |
| 1,718,537 | |
| 1,948,321 | |
| 611,666 |
Canada | |
| 205,656 | |
| 160,372 | |
| 305,166 |
Other | |
| 113,768 | |
| 434,271 | |
| 120,061 |
Total | | $ | 45,843,929 | | $ | 31,046,812 | | $ | 31,749,693 |
| | | | | | | | | |
| | Year ended December 31, | |||||||
Major products/service lines |
| 2022 |
| 2021 |
| 2020 | |||
Technology services | | $ | 41,812,479 | | $ | 26,676,738 | | $ | 28,190,993 |
Software licenses | |
| 352,473 | |
| 1,365,882 | |
| 1,013,854 |
Support and maintenance | |
| 1,872,620 | |
| 1,772,203 | |
| 1,519,424 |
SaaS | |
| 89,692 | |
| 65,187 | |
| 42,662 |
Subscription | | | 493,845 | | | 189,359 | | | — |
Professional services | |
| 950,605 | |
| 451,695 | |
| 288,597 |
Hardware | |
| 272,215 | |
| 442,077 | |
| 657,711 |
Other | |
| — | |
| 83,671 | |
| 36,452 |
Total | | $ | 45,843,929 | | $ | 31,046,812 | | $ | 31,749,693 |
The Company had two customers who contributed greater than 10 % of consolidated total revenues during the year ended December 31, 2022 comprising of 18.7 % and 14.1 % respectively (2021 – one customer at 11.7 % and 2020 – one customer and 11.3 %).
Technology services, software licenses, hardware and other revenue are recognized at a point in time, except for revenue for select customers over time. Professional services, support and maintenance, SaaS, and subscription revenue is recognized over time.
F-40
VIQ Solutions Inc.
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
17.Expenses by nature
Expenses incurred by nature are as follows:
| | | | | | | | | |
| | Year ended December 31, | |||||||
|
| 2022 |
| 2021 |
| 2020 | |||
Employee and contractor expenses (note 18) | | $ | 39,054,160 | | $ | 33,603,690 | | $ | 22,682,199 |
Third-party vendors and other cost of sales | |
| 3,577,368 | |
| 1,719,616 | |
| 1,043,844 |
Depreciation and amortization | |
| 6,088,203 | |
| 4,641,601 | |
| 5,259,243 |
Facilities | |
| 646,894 | |
| 470,773 | |
| 279,028 |
Professional and consulting fees | |
| 1,648,274 | |
| 4,099,129 | |
| 1,566,224 |
Investor relations and other shareholder expenses | |
| 371,389 | |
| 792,457 | |
| 288,778 |
Bad debt | |
| 100,163 | |
| 283,964 | |
| 18,116 |
Marketing and advertising/promotion expenses | |
| 294,997 | |
| 177,894 | |
| 226,104 |
Software license and IT expenses | |
| 3,999,468 | |
| 1,620,816 | |
| 1,318,239 |
Telephone and internet | |
| 568,813 | |
| 283,207 | |
| 260,634 |
Travel | |
| 264,238 | |
| 202,703 | |
| 78,467 |
Insurance | |
| 1,143,358 | |
| 630,066 | |
| 103,702 |
Office, administrative, and other operating expenses | |
| 288,834 | |
| 946,548 | |
| 568,498 |
Foreign exchange loss (gain) | |
| (452,068) | |
| 22,130 | |
| (132,306) |
Total | | $ | 57,594,091 | | $ | 49,494,594 | | $ | 33,560,770 |
18.Employee and contractor expenses
Expenditures for employee and contractor salaries and benefits are as follows:
| | | | | | | | | |
| | Year ended December 31, | |||||||
|
| 2022 |
| 2021 |
| 2020 | |||
Salaries and wages and employee benefits | | $ | 25,731,132 | | $ | 14,575,551 | | $ | 11,060,315 |
Contract labour | |
| 10,082,646 | |
| 9,550,731 | |
| 9,818,222 |
Stock-based compensation | |
| 2,779,312 | |
| 8,495,189 | |
| 725,316 |
Other staff expense | |
| 461,070 | |
| 982,219 | |
| 1,078,346 |
Total | | $ | 39,054,160 | | $ | 33,603,690 | | $ | 22,682,199 |
F-41
VIQ Solutions Inc.
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
19.Right-of-use assets
Details of the Company’s right-of-use assets are the following:
| | | | | | | | | | | | | | |
|
| Balance |
| | | | |
| | |
| Balance | ||
|
| December 31, | | | | | |
| Foreign |
| December 31, | |||
|
| 2021 |
| Additions |
| Adjustments |
| exchange |
| 2022 | ||||
Cost | | | | | | | | | | | | | | |
Buildings | | $ | 2,042,126 | | | 365,303 | | — | | | (431,355) | | $ | 1,976,074 |
Equipment | |
| 75,169 | | | — | | (12,255) | | | 1,472 | |
| 64,386 |
| | $ | 2,117,295 | | | 365,303 | | (12,255) | | | (429,883) | | $ | 2,040,460 |
Accumulated depreciation | |
|
| |
|
| | | | |
| |
|
|
Buildings | | | 952,901 | | | 351,702 | | — | | | (368,197) | | $ | 936,406 |
Equipment | |
| 29,901 | | | 15,084 | | — | | | 469 | |
| 45,454 |
| | | 982,802 | | | 366,786 | | — | | | (367,728) | | $ | 981,860 |
Net book value | | $ | 1,134,493 | | | | | | |
|
| | $ | 1,058,600 |
| | | | | | | | | | | | | | | |
|
| Balance |
| | |
| | |
| | |
| Balance | ||
|
| December 31, | | | | | | |
| Foreign |
| December 31, | |||
|
| 2020 |
| Acquisitions |
| Additions |
| exchange |
| 2021 | |||||
Cost |
| |
|
| |
|
| |
|
| |
|
| |
|
Buildings | | $ | 1,105,554 | | | 915,203 | | | — | | | 21,369 | | $ | 2,042,126 |
Equipment | |
| 36,268 | |
| 38,901 | |
| — | |
| — | |
| 75,169 |
| | $ | 1,141,822 | | | 954,104 | | | — | | | 21,369 | | $ | 2,117,295 |
Accumulated depreciation | |
|
| |
|
| |
|
| |
|
| |
|
|
Buildings | | | 810,295 | | | — | | | 122,600 | | | 20,006 | | | 952,901 |
Equipment | |
| 21,961 | |
| — | |
| 7,833 | |
| 107 | |
| 29,901 |
| | | 832,256 | | | — | | | 130,433 | | | 20,113 | | | 982,802 |
Net book value | | $ | 309,566 | | | | |
|
| |
|
| | $ | 1,134,493 |
| | | | | | | | | | | | | | | |
|
| Balance | | | | | | |
| | |
| Balance | ||
|
| December 31, | | | | | | |
| Foreign |
| December 31, | |||
|
| 2019 |
| Additions | | Disposals |
| exchange |
| 2020 | |||||
Cost | | | | | | | | | | | | | | | |
Buildings | | | 1,048,596 | | | 56,925 | | | (44,725) | | | 44,758 | | | 1,105,554 |
Equipment | |
| 36,268 | | | — | | | — | | | — | |
| 36,268 |
| | $ | 1,084,864 | | | 56,925 | | | (44,725) | | | 44,758 | | $ | 1,141,822 |
Accumulated depreciation | |
|
| | | | | |
| | |
| |
|
|
Buildings | | | 426,516 | | | 333,725 | | | (22,363) | | | 72,417 | | | 810,295 |
Equipment | | | 11,302 | | | 10,659 | | | — | | | — | |
| 21,961 |
| | | 437,818 | | | 344,384 | | | (22,363) | | | 72,417 | | | 832,256 |
Net book value | | $ | 647,046 | |
| | | | | |
|
| | $ | 309,566 |
F-42
VIQ Solutions Inc.
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
20.Lease obligations
Below is a summary of the activity related to the Company’s lease liabilities for the year ended December 31, 2022, 2021 and 2020:
| | | | | | | | | |
| | Year ended December 31, | |||||||
|
| 2022 |
| 2021 |
| 2020 | |||
Lease obligations, December 31, 2021 | | $ | 1,188,769 | | $ | 354,199 | | $ | 689,644 |
Additions | |
| 386,090 | |
| 953,868 | |
| 12,199 |
Disposals | |
| — | |
| — | |
| (67,787) |
Interest on lease liabilities | |
| 114,131 | |
| 34,712 | |
| 53,549 |
Interest payments on lease liabilities | |
| (114,131) | |
| (34,712) | |
| (53,549) |
Principal payments of lease liabilities | |
| (270,795) | |
| (150,924) | |
| (338,276) |
Foreign exchange difference | |
| (97,816) | |
| 31,626 | |
| 58,419 |
Lease obligations, end of year | | $ | 1,206,248 | | $ | 1,188,769 | | $ | 354,199 |
The Company and its subsidiaries have entered into agreements to lease office premises until 2025. The annual rent expenses for premises consist of minimum rent and do not include variable costs. The minimum payments under all agreements are as follows:
| | | |
2023 |
| $ | 679,718 |
2024 |
| | 496,123 |
2025 |
| | 232,461 |
| | $ | 1,408,302 |
21.Income taxes
The reconciliation of the combined Canadian federal and provincial statutory income tax rate of 26.5% (2021 and 2020 - 26.5%) to the effective tax rate is as follows:
| | | | | | | | | |
|
| 2022 |
| 2021 |
| 2020 | |||
Net loss before income taxes | | $ | (9,315,636) | | $ | (18,735,022) | | $ | (12,089,338) |
Expected income tax recovery |
| | (2,468,644) | | | (4,964,781) | | | (3,203,675) |
Difference in foreign tax rates |
| | 258,214 | | | 163,190 | | | 202,331 |
Share-based compensation and non-deductible expenses |
| | (1,075,684) | | | (3,470) | | | (114,257) |
Prior year true-ups |
| | (205,361) | | | (48,507) | | | 75,227 |
Tax rate changes and other adjustments |
| | 21,067 | | | 9,619 | | | 2,210 |
Recognition of previously unrecognized deferred tax assets |
| | — |
| | — |
| | (317,387) |
Change in tax benefits not recognized |
| | 2,860,787 | | | 5,787,676 | | | 2,411,519 |
Income tax expense (recovery) | | $ | (609,621) | | $ | 943,727 | | $ | (944,032) |
The Company’s income tax expense (recovery) is allocated as follows:
| | | | | | | | | |
|
| 2022 |
| 2021 |
| 2020 | |||
Current income tax expense (recovery) | | $ | (105,256) | | $ | (875) | | $ | 106,986 |
Deferred income tax expense (recovery) |
| | (504,365) |
| | 944,602 |
| | (1,051,018) |
Income tax expense (recovery) | | $ | (609,621) | | $ | 943,727 | | $ | (944,032) |
F-43
VIQ Solutions Inc.
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
The significant components of deferred tax assets and liabilities are as follows:
| | | | | | |
|
| 2022 |
| 2021 | ||
| | | | | (restated - note 4) | |
Non-capital losses carried forward | | $ | 529,525 | | $ | 288,655 |
Right-of-use assets |
| | 1,056 |
| | — |
Reserves |
| | 124,423 |
| | 176,145 |
Deferred tax assets | | $ | 655,004 | | $ | 464,800 |
Non-capital losses carried forward | | | 126,029 | | | — |
Intangible assets | |
| (978,114) | |
| (1,217,527) |
Reserves | |
| (16,558) | |
| (7,113) |
Deferred tax liabilities | |
| (868,644) | |
| (1,224,640) |
Net deferred tax liabilities | | $ | (213,639) | | $ | (759,840) |
The following tables present tax effects of temporary differences and carry forwards, as well as movements in the deferred tax balances:
| | | | | | | | | | | | |
| | Balance at | | Recognized | | | | | Balance at | |||
| | December 31, | | in profit | | | | December 31, | ||||
|
| 2021 |
| and loss |
| Adjustments |
| 2022 | ||||
Deferred tax assets (liabilities): |
| | |
| | |
| | |
| | |
Non-capital losses carried forward | | | 288,655 | | | 366,900 | | | — | | | 655,555 |
Intangible assets |
| | (1,148,280) |
| | 170,166 |
| | — |
| | (978,114) |
Right-of-use assets |
| | — |
| | 1,056 |
| | — |
| | 1,056 |
Reserves |
| | 176,145 |
| | (68,280) | | | — | | | 107,864 |
Other |
| | (76,360) |
| | 34,523 | | | 41,837 | | | — |
| | $ | (759,840) | | $ | 504,365 | | $ | 41,837 | | $ | (213,639) |
| | | | | | | | | | | | |
| | Balance at | | Recognized | | | | | Balance at | |||
| | December 31, | | in profit | | | | | December 31, | |||
|
| 2020 |
| and loss |
| Adjustments |
| 2021 | ||||
| | | | | | | | | | | (restated) note 4 | |
Deferred tax assets (liabilities): |
| |
|
| |
|
| |
|
| |
|
Non-capital losses carried forward |
| | 154,406 |
| | 134,249 |
| | — |
| | 288,655 |
Intangible assets |
| | 16,104 |
| | 27,655 |
| | (1,192,039) |
| | (1,148,280) |
Reserves |
| | 1,227,868 |
| | (1,051,723) |
| | — |
| | 176,145 |
Other |
| | (17,023) |
| | (54,783) |
| | (4,554) |
| | (76,360) |
| | $ | 1,381,355 | | $ | (944,602) | | $ | (1,196,593) | | $ | (759,840) |
F-44
VIQ Solutions Inc.
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
Deferred taxes are provided as a result of temporary differences that arise due to the differences between the income tax values and the carrying amount of assets and liabilities. Deferred tax assets have not been recognized in respect of the following deductible temporary differences:
| | | | | | |
|
| 2022 |
| 2021 | ||
Property and equipment | | $ | 168,259 |
| $ | 317,392 |
Right-of-use assets | | | (432,053) | | | — |
Intangible assets |
| | 13,483,871 | | | 10,691,053 |
Share issuance costs – 20(1)(e) |
| | 149,410 | | | 474,873 |
Non-capital losses carried forward – Canada |
| | 22,769,811 | | | 21,725,215 |
Non-capital losses carried forward – US |
| | 14,371,217 | | | 10,537,511 |
Non-capital losses carried forward – Australia | | | 684 | | | 195,574 |
Non-capital losses carried forward – UK | | | 153,842 | | | — |
Capital losses carried forward – Canada |
| | 324,281 | | | 346,457 |
Capital losses carried forward – Australia |
| | 503,570 | | | 537,322 |
Investment tax credits |
| | 558,951 | | | 597,175 |
SR&ED pool |
| | 1,748,848 | | | 1,868,445 |
Ontario SR&ED credit |
| | 86,586 | | | 92,507 |
Contract liabilities | | | 130,834 | | | 270,320 |
Lease obligations |
| | 332,306 | | | (58,111) |
Accrued vacation | | | 1,004 | | | 38,584 |
Accrued liabilities | | | — | | | 12,409 |
Accrued interest | | | 1,786,594 | | | 1,257,173 |
Difference between cash and accrual basis | | | — | | | (676,122) |
Financing cost - Crown Capital loan | | | (165,079) | | | — |
AFDA reserve | | | 262,849 | | | 117,163 |
Contingent consideration liabilities | | | 136,663 | | | 445,972 |
Stock-based compensation | | | 397,153 | | | 149,343 |
Business acquisition expenses |
| | 691,321 | | | 314,633 |
Charitable contributions | | | 250 | | | — |
|
| $ | 57,461,172 | | $ | 49,254,888 |
The Company has available Canadian non-capital losses of approximately $22,769,811 and capital losses of approximately $324,281. The net capital loss carry forward may be carried forward indefinitely but can only be used to reduce capital gains. The Company’s Canadian non-capital income tax losses expire between the years 2026 to 2042.
During the year ended December 31, 2022, the Company utilized Canadian loss carryforwards of approximately $nil (2021 and 2020 - $nil) to reduce taxable income in the current year.
The Company also has investment tax credits available to reduce future federal taxes payable of approximately $558,951 which if not utilized will expire between the years 2025 to 2034.
The effective and statutory tax rate in the Company’s Australian subsidiaries is 30.0% (2021 – 26.0% and 2020 – 27.5%). These subsidiaries have non-capital losses of approximately $2,061,281 (2021 - $1,541,287 and 2020 - $nil) and capital losses of approximately $503,570 (2021 – $537,322 and 2020 - $570,372) available to offset future taxable capital gains. These losses do not expire.
The Company’s US subsidiaries have non-capital losses of approximately $14,371,217 available to reduce future taxable. These losses do not expire.
The Company’s UK subsidiaries have non-capital losses of approximately $316,120 available to reduce future taxable income. These losses do not expire.
F-45
VIQ Solutions Inc.
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
Unrecognized deferred tax liabilities
The aggregate amount of temporary differences associated with investments in subsidiaries for which the Company has not recognized deferred tax liabilities is approximately $1,033,312 as the Company ultimately controls whether the liability will be incurred and is satisfied that it will not be incurred in the foreseeable future.
22.Risk management for financial instruments
The estimated fair values of cash, trade and other receivables, restricted cash, trade and other payables and accrued liabilities approximate their carrying values due to the relatively short-term nature of the instruments. The estimated fair values of current and long-term debt and obligations under finance lease also approximate carrying values due to the fact that effective interest rates are not significantly different from market.
Fair value measurements recognized in the consolidated statement of financial position must be categorized in accordance with the following levels:
a. | Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities; |
b. | Level 2: inputs other than quoted prices included in Level 1 that are observable for the asset or liability either directly (i.e. as prices) or indirectly (i.e. derived from prices); and |
c. | Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs). |
The Company’s financial instruments carried at fair value on the consolidated statements of financial position consist of cash and restricted cash. Cash and restricted cash are valued using quoted market prices (Level 1). Share-based payment liability, contingent consideration, and derivative warrant liability are categorized using observable market inputs (Level 2). The Company did not value any financial instruments using valuation techniques based on non-observable market inputs (Level 3) as at December 31, 2022.
Liquidity risk
Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they become due. The Company’s approach in managing liquidity is to ensure, to the extent possible, that it will have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, by continuously monitoring actual and budgeted cash flows.
The Company has sustained losses over the last number of periods and has financed these losses mainly through a combination of equity and debt offerings. Management believes that it has raised sufficient cash to meet all of its contractual debt that is coming due in 2023 and has the ability to fund any operating losses that may occur in the upcoming periods.
The table below summarizes the Company’s contractual obligations into relevant maturity groups at the consolidated statement of financial position date based on the expected contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows for operations:
| | | | | | | | | | | | |
|
| 2023 |
| 2024 |
| 2025 |
| Total | ||||
Trade and other payables | | $ | 5,937,880 | | $ | — | | $ | — | | $ | 5,937,880 |
Lease obligations |
| | 679,718 |
| | 496,123 |
| | 232,461 |
| | 1,408,302 |
Crown Capital debt |
| | 7,701,650 |
| | — |
| | — |
| | 7,701,650 |
Contingent consideration - WordZ |
| | 236,808 |
| | — |
| | — |
| | 236,808 |
WordZ promissory note | | | 432,939 | | | — | | | — | | | 432,939 |
HomeTech VTB loan |
| | 260,000 |
| | 20,000 |
| | — |
| | 280,000 |
Total | | $ | 15,248,995 | | $ | 516,123 | | $ | 232,461 | | $ | 15,997,579 |
F-46
VIQ Solutions Inc.
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
Credit risk
Credit risk arises from the potential that a customer or counterparty will fail to perform its obligations. The Company is exposed to credit risk from its customers; however, the Company has a significant number of customers, minimizing the concentration of credit risk. Further, a large majority of the Company’s customers are economically stable organizations such as government agencies or departments with whom the Company transacts with on a regular basis, further reducing the overall credit risk.
Historically, the Company has suffered losses under trade receivables. In order to minimize the risk of loss from trade receivables, the Company’s extension of credit to customers involves review and approval by senior management and conservative credit limits for new or higher-risk accounts.
The Company reviews its trade receivable accounts regularly and writes down these accounts to their expected realizable values, by making an allowance for expected credit losses based on aging and historic collection of receivables. The allowance is recorded as an expense in the consolidated statements of loss and comprehensive loss. Shortfalls in collections are applied against this provision. Estimates for allowance for expected credit losses are determined by a customer-by-customer evaluation of collectability at each consolidated statement of financial position reporting date, taking into account the amounts that are past due and any available relevant information on the customers’ liquidity and going concern issues. Normal credit terms for amounts due from customers call for payment within 30 to 60 days.
The Company’s exposure to credit risk for trade receivables by geographic area was as follows:
| | | | | |
|
| December 31, 2022 |
| December 31, 2021 |
|
United States | | 48 | % | 48 | % |
Australia |
| 29 | % | 31 | % |
United Kingdom |
| 16 | % | 14 | % |
Rest of world |
| 7 | % | 7 | % |
|
| 100 | % | 100 | % |
The Company is subject to risk of non-payment of accounts receivable. The Company mitigates credit risk by assessing the credit worthiness of customers prior to extending credit and monitoring the aging and size of credit extended to customers. All of the Company’s cash is held with major financial institutions and thus the exposure to credit risk is considered low. Management actively monitors the Company’s exposure to credit risk under its financial instruments, including with respect to trade receivables.
The following is a breakdown of trade receivables aging, net of allowance of doubtful accounts:
| | | | | | |
|
| December 31, 2022 |
| December 31, 2021 | ||
0 to 30 days | | $ | 2,723,119 | | $ | 2,490,940 |
31 to 60 days |
| | 1,034,627 |
| | 973,641 |
61 to 90 days |
| | 816,221 |
| | 623,990 |
91 days and older |
| | 731,761 |
| | 1,505,797 |
| | $ | 5,305,728 | | $ | 5,594,368 |
At December 31, 2022, the allowance for doubtful accounts recorded against trade receivables is $399,470 (2021 - $316,202 and 2020 - $123,338). The activity of the allowance for doubtful accounts provision is as follows:
| | | | | | |
|
| December 31, 2022 |
| December 31, 2021 | ||
Beginning of year | | $ | 316,202 | | $ | 123,338 |
Add: provision for allowance for doubtful accounts |
| | 100,163 |
| | 283,964 |
Less: write-offs |
| | (6,635) |
| | (112,116) |
Foreign exchange adjustments |
| | (10,260) |
| | 21,016 |
Expected credit loss – end of year | | $ | 399,470 | | $ | 316,202 |
F-47
VIQ Solutions Inc.
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
Interest rate risk
Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate due to changes in market interest rates. The Company’s interest rate risk is primarily related to the Company’s interest-bearing debts on its consolidated statement of financial position. The Company does not have a material amount of long-term debt with variable interest rates, thereby minimizing the Company’s exposure to cash flow interest rate risk.
Foreign currency risk
Foreign currency risk arises because of fluctuations in exchange rates. The Company conducts a significant portion of its business activities in foreign currencies, primarily the U.S. and Australian dollars and Great Britain pounds with a large portion of the Company’s sales and operating costs being realized in these foreign currencies. The Company’s objective in managing its foreign currency risk is to minimize its net exposure to foreign currency cash flows by transacting, to the greatest extent possible, with third parties in Great Britain pounds, Canadian, U.S., and Australian dollars.
The financial assets and liabilities that are denominated in foreign currencies will be affected by changes in the exchange rate between the United States dollar and these foreign currencies. This primarily includes cash, restricted cash, trade and other receivables, trade and other payables, provisions and obligations under finance lease which were denominated in foreign currencies.
The Company’s Australian subsidiaries have a majority of revenue and expenses being transacted in Australian dollars. As of December 31, 2022, fluctuations of the Australian dollar relative to the United States dollar of 5% would result in an exchange gain or loss on the net financial assets, impacting the Company’s comprehensive income by approximately $6,000 (2021 – $23,000 and 2020 - $58,000).
The Company’s Canadian operations are exposed to exchange rate changes in the U.S. dollar relative to the Canadian dollar since a substantial portion of this business unit’s sales are denominated in U.S. dollars with most of the related expenses in Canadian dollars. A 5% fluctuation of the U.S. dollar would result in an exchange gain or loss on the net financial assets of approximately $53,000 as at December 31, 2022 (2021 – $22,000 and 2020 - $78,000).
The Company’s UK subsidiaries are exposed to exchange rate changes in the Great Britain pound relative to the United States dollar since a portion of this business unit’s sales are denominated in Great Britain pounds with most of the related expenses in United States dollars. A fluctuation of the Great Britain pound of 5% would result in an exchange gain or loss on the net financial assets of approximately $3,000 as at December 31, 2022 (2021 – $30,000 and 2020 - $23,000).
The Company does not currently use foreign exchange contracts to hedge its exposure of its foreign currencies cash flows as management has determined that this risk is not significant at this point in time. The Company recognized a foreign exchange gain from operations of $452,068 for the year ended December 31, 2022 (2021 – foreign exchange loss from operations of $22,130 and 2020 – foreign exchange gain of $132,306).
Capital management
The Company considers its capital structure to consist of shareholders’ equity and long-term debt. The Company’s objective in managing capital is to ensure sufficient liquidity to pursue its organic growth strategy, fund research and development and undertake selective acquisitions, while at the same time taking a conservative approach toward financial leverage and management of financial risk.
F-48
VIQ Solutions Inc.
Notes to Consolidated Financial Statements
(Expressed in United States dollars)
23.Related party transactions
Key management personnel comprise the Company’s directors and executive officers. In addition to their salaries, key management personnel also participate in the Company’s Legacy Plan and Omnibus Equity Incentive Plan share option program and DSU Plan (note 11). Key management personnel compensation for the year ended December 31, 2022, 2021 and 2020 as follows:
| | | | | | | | | |
|
| 2022 |
| 2021 |
| 2020 | |||
Salaries and short-term employee benefits (i) | | $ | 1,258,191 | | $ | 1,821,211 | | $ | 1,141,349 |
Stock-based compensation (ii) |
| | 663,145 |
| | 7,600,415 |
| | 169,969 |
| | $ | 1,928,836 | | $ | 9,421,626 | | $ | 1,311,318 |
| (i) | Short-term employee benefits include bonuses and car allowances. |
| (ii) | 2022 included reversal of stock-based compensation expense for forfeitures of options for cash-settled options. |
24.Subsequent events
On January 13, 2023, the Company entered a entered into a senior debt facility (the “Loan”) with Beedie Investments Ltd. (“Beedie”), with maximum available funds of $15 million. $12 million of the Loan has been advanced to the Company as an initial advance with an additional $3 million available to the Company to be drawn in subsequent advances in a minimum of $1 million tranches (“Standby Facility”). The amount outstanding under the Loan will bear interest at 12.5% per annum, composed of cash interest of 9.5% per annum, calculated and paid monthly, and paid-in-kind interest charged at a rate of 3.0% per annum, compounded monthly and added to the outstanding principal amount of the Loan. A standby fee will be charged monthly at a rate of 1.5% per annum on the undrawn amount of the Standby Facility. The Company paid a commitment fee of 1.5% of the Loan. The Lender has also been granted a board observer right. The loan is secured by a general security agreement covering all assets of the Company. The outstanding principal balance of the loan is repayable on January 13, 2027.
On initiation of the Beedie Loan on January 13, 2023, 7,968,750 common share purchase warrants were issued to Beedie. Each warrant is convertible into one common share in the capital of the Company at a price per share equal to $0.256 until January 16, 2030. In addition, the Company has agreed to issue additional common share purchase warrants in connection with the subsequent advances, with such number of warrants to be equal to 17% of the amount of such subsequent advance divided by the exercise price of such subsequent warrants. The subsequent warrants are to have an exercise price equal to the 5-day volume weighted average price of the Company’s common shares immediately prior to the earlier of: (i) the announcement of the applicable subsequent advance, and (ii) the funding of the applicable Subsequent Advance. The subsequent warrants will expire seven years from the date of issuance.
Under the Loan, the Company has undertaken to comply with financial covenants regarding a minimum balance of unrestricted cash and cash equivalents, minimum adjusted monthly EBITDA and maximum total secured debt leverage ratio.
On January 13, 2023, the Company utilized the proceeds of the initial advance to fully repay the loan with Crown Capital in the amount of $7,805,497 (note 9).
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