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Edited Transcript of VPY.V earnings conference call or presentation 27-Nov-19 2:00pm GMT

Q3 2019 Versapay Corp Earnings Call

Toronto Nov 28, 2019 (Thomson StreetEvents) -- Edited Transcript of Versapay Corp earnings conference call or presentation Wednesday, November 27, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Craig O'Neill

VersaPay Corporation - CEO & Director

* Shouvik Roy

VersaPay Corporation - CFO

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Conference Call Participants

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* Brenna Phelan

Raymond James Ltd., Research Division - Equity Analyst

* Daniel Rosenberg

Haywood Securities Inc., Research Division - Analyst of Technology

* David Kwan

PI Financial Corp., Research Division - Technology Analyst

* Suthan Sukumar

Eight Capital, Research Division - Principal

* Babak Pedram

Virtus Advisory Group Inc. - President

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and welcome to the VersaPay Q3 2019 Financial Results Conference Call. (Operator Instructions) I would like to remind everyone that this call is being recorded on November 27, 2019. And I would now like to turn the conference over to Babak Pedram, Head of Investor Relations. Please go ahead.

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Babak Pedram, Virtus Advisory Group Inc. - President [2]

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Thanks very much. Before we begin, I will read our cautionary notes regarding forward-looking information. Certain information to be discussed during this corporate update contains forward-looking statements within the meaning of applicable securities laws, including, among others, statements concerning the company's 2019 objectives; the company's strategies to achieve those objectives; as well as statements with respect to management's beliefs, plans, estimates and intentions; and similar statements concerning anticipated future events, results, circumstances, performance or expectations that are not historical facts.

Such forward-looking statements reflect management's current beliefs and are based on information currently available to management and is subject to a number of significant risks and uncertainties that could cause actual results to differ materially from those anticipated.

I'd now like to turn the call over to Shouvik Roy, CFO of VersaPay Corporation. Please go ahead, Mr. Roy.

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Shouvik Roy, VersaPay Corporation - CFO [3]

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Thanks, Babak, and good morning, everyone, and welcome to VersaPay's Third Quarter 2019 Investor Call. I will provide a brief overview of the third quarter 2019 financial results followed by CEO, Craig O'Neill, who will provide further commentary about our performance and strategy. After our remarks, we look forward to your questions and comments. With that, I'll summarize the Q3 2019 consolidated results.

Revenues for the third quarter were $2.23 million, 90% higher than the $1.17 million in revenues for the same period last year. We converted 52% of our subscription backlog, which is committed but not yet build contracts from the end of Q2 but added another $1 million, bringing our total to $1.57 million in subscription backlog at the end of Q3 2019. We expect this level of conversion to continue into next quarter.

Gross margin percentage was 83% for the third quarter of 2019 compared to 76% in Q3 2018. The year-over-year improvement continues to be the result of ARC becoming more and more of our overall business. In Q3 2019, ARC represented 76% of our overall recurring revenue business versus 57% in Q3 2018.

Total operating expenses were $4.28 million in Q3 2019 compared to $3.81 million for the same period last year. This represents an increase of $0.47 million or 12%. The increase is mainly comprised of a mark-to-market adjustment of share-based compensation, an increase in depreciation and amortization due to the adoption of IFRS 16 lease accounting standard, higher consulting fees incurred for internal development and engineering work and marketing and promotional spend. This was offset somewhat by a lower overall salary spend in the quarter versus 2018.

And just as a reminder, looking at G&A relative to prior years, please note that most of that increase is due to reorganization of people in their departments and how they roll up in 2019.

Adjusted EBITDA was a loss of $1.79 million in Q3 2019 compared to a loss of $2.78 million in Q3 2018. Comprehensive net loss for Q3 2019 was $2.53 million or negative $0.06 per share on a diluted basis compared to a loss of $2.9 million the third quarter of last year or a loss of $0.08 per share on a fully diluted basis.

Turning to the balance sheet. At September 30, 2019, we had cash and cash equivalents of $4.82 million compared to $11.12 million at December 31, 2018, and $6.55 million at the end of Q2 2019. This represents a cash decrease of $6.3 million 2019 year-to-date and a decrease of $1.73 million for the -- for Q3 2019, respectively. As you can see, our cash burn is improving markedly as expected each quarter, and we expect that to continue as our business continues to scale.

Last quarter, we announced that we had signed a term sheet with a Canadian bank for a line of credit, and the details of that deal was announced last month when we closed. We don't expect to access the credit facility at this time, but it is there should we require some additional liquidity.

Our accounts receivable balance increased to $2.13 million by the end of September 30, 2019, compared to $1.25 million at the end of December 31, 2018, mainly due to the increase in revenues. The majority of the balance is current in nature. And although some of the AR has aged, it is mainly comprised of very large customers who have negotiated to pay their balance upon completion of implementation. Therefore, we consider this low credit risk at this time. Subsequent to quarter end, we collected close to 40% of our outstanding receivables.

With that, I would like to hand it over to our CEO, Craig O'Neill, who will speak further about the business.

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Craig O'Neill, VersaPay Corporation - CEO & Director [4]

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Terrific. Thank you, Shouvik, and good morning, everyone. Thanks for joining us today. As usual, I'm going to add some perspective to Shouvik's comments on our financial results. I'll outline our usage metrics and how they've been trending. Plus, I'm going to spend a few minutes on our sales results in the quarter and give you an update on our key channel partners.

And this morning, I'm going to start with our sales results. Really, the most noteworthy item in our financials is not actually found on our financial statements. It's the result that our go-to-market team has achieved in Q3. Q3 was a record quarter of $1.25 million ARR and new signings of ARC.

We're really excited about this for a few reasons. First of all, it's our biggest sales quarter ever. So that's an obvious one. Secondly, it was achieved in the summer quarter. If you've ever worked in any sort of B2B sales role, you would know the challenges of closing deals during the summer. And thirdly, there were some great wins that made up the results, including 7 new clients in our 2 focus markets of distribution and commercial real estate and 4 add-on merchant services or credit card processing contracts with existing clients and a total of 20 new contracts in the quarter. The biggest deal of the quarter was a large U.S. distributor where we were head-to-head with one of our most successful competitors, and we signed the contract despite that competitor getting very aggressive on price.

Over to revenue. And here, I'm talking about IFRS reported revenue versus ARR. We'll come back to ARR in just a minute. The most important component of our revenue is ARC recurring revenue, and that's up nicely from $584,000 a year ago and $1.36 million last quarter to $1.48 million in this most recent quarter, Q3. That's growth of about 9% quarter-over-quarter and 154% year-over-year.

If I take the total ARC-related revenue, that is the ARC recurring revenue I just described plus ARC-related services revenue for implementing new customers -- or new clients, I should say, and for doing additional services work with existing clients, the year-over-year growth rate is 161%. We're clearly very pleased with this year-over-year growth rate. It's exactly the kind of momentum that we've been working hard to achieve.

As for the quarter-over-quarter, although we're pleased with the close to 10% growth, we've been seeing north of 20% growth lately, and so this bears some explaining. There were really 2 factors at play that impacted our quarter-over-quarter growth number.

First, like sales, there's the seasonal effect. During vacation time, projects tend to slow down. And because of this, several of the deals that we closed in Q2 had extended billing start dates as clients knew that they wouldn't be live sometime in the summer. This was reflected by our lower-than-normal backlog conversion rate of 52%. We're often seeing more like 60%, 65% backlog conversion. But as I mentioned on our call last time, we expected a lower conversion rate coming into Q3, thanks to the summer season. And that's exactly what happened.

Secondly, we renegotiated the MRR of the contract with an existing large client that recently went through a change of control. While they're very happy with the platform and they plan to continue offering it to their customers, they needed to suspend their rollout indefinitely as projects were being reprioritized as a result of the acquisition. This impacted subscription revenue in the quarter by about $26,000 and ARR for ARC by about $310,000.

Bottom line, despite these 2 factors, we still experienced strong year-over-year growth and pretty good quarter-over-quarter growth. So we're pleased with this outcome.

I should mention that both of these factors will not be factors in Q4. We went into the quarter with a strong ARR backlog, and we'll see a somewhat higher conversion rate from backlog to revenue. Also, we entered the quarter with more than $1 million in services backlog, and we're forecasting to work down this backlog somewhat even with the holidays approaching.

Of course, countering this, to a certain extent, is the reduced contract I just mentioned. We'll experience 3 months of reduction in Q4 versus 1 month of reduction in Q3. However, we still expect to see stronger growth in ARC in Q4.

One more point that I'll note on revenue. Our revenues related to PayPort were down about $100,000 or 20% quarter-over-quarter as 2 of our largest PayPort clients' transaction volume decreased significantly. We don't expect these clients to return to their previous volumes. And so we're forecasting PayPort revenue to run at levels similar to this past quarter going forward. This is actually in line with our long-term expectation for PayPort. And while PayPort and the seasonal effect on ARC flattened our quarter-over-quarter overall revenue, revenue was still up 90% year-over-year as we've had a similar seasonal effect on revenues in the summer of 2018.

As I've said before, more important than our book revenue in the quarter, the real financial metric that we watch, and I've been suggesting and continue to suggest that you watch, is outlined on Page 17 of the MD&A. In the document, we've been calling it ARC subscription backlog. But someone recently shared a better term with me, called committed ARR, and I'll start using that term, committed ARR.

Committed ARR is the ARR -- total ARR based on billings and ARR under contract but not yet built, and that's what we call backlog. Our version of committed ARR only includes subscription fees in the backlog to be a little conservative. And that is, it's excluding the expected payment revenues associated with the new client.

At the end of the quarter, committed ARR for ARC has grown to just north of $7.5 million, and that's up 98% year-over-year. This important metric has been growing consistently between 10% to 20% and sometimes higher quarter-over-quarter.

Total committed ARR, now I'm talking ARC plus PayPort, is now approaching $10 million as of the end of Q3. One important perspective takeaway from -- to take away from this number. If you consider committed ARR as the baseline for future revenue then make conservative assumptions about sales in Q4, add in growth in payment revenue that happens over time and services revenue, we'll be headed into 2020 with a solid revenue base of approximately $12 million for the year.

I won't speak to expenses other than to say that they're in line with our plans for the year and down materially from Q2, and this is largely due to timing of expenses. As a result, our bottom line is up and our cash burn is down quite nicely for the quarter from about $800,000 a month in Q1 to $675,000 a month in Q2 and now in Q3, about $575,000 per month. We've been telling you to expect this trend since mid-last year, and now you're seeing it play out. And you can expect this trend to continue as our revenues grow while our expenses remain relatively stable.

Okay. So now I'm going to turn to ARC's platform metrics. A number of our larger distribution clients began rolling out midyear, and this is having a sizable impact on platform usage. Here are the latest numbers. As of the end of Q3, over 215,000 end customers were active on the platform. That is up in the quarter by about 33,000 customers or 18% growth of end customers on the platform in the quarter.

Just under 1 million invoices were delivered worth almost $3 billion, and 310,000 invoices were paid worth about $305 million. That's up from Q2 where we delivered about 680,000 invoices worth about $1.5 billion and had about 280,000 invoices paid valued at about $265 million. So significant growth in both of those metrics.

The number of customers added in the quarter grew by 65% over the number added in Q2, while the number of invoices delivered grew by 42% over Q2, and they grew by 95% in terms of the value of those invoices. In total, 135 payments were made on the platform. And adoption is remaining stable at about 80% e-adoption and about 40% to 45% payment adoption.

By the way, a reminder, we expect payment adoption to lag behind e-adoption when new customers come onto the platform. They first start to use the service to receive invoices and to collaborate with their supplier. And then we start to see payments 1 to 3 months later as they get comfortable with the platform. And so the big bump in active customers bodes well for future further payment growth.

As of the end of last week, we're seeing some of the metrics continue to trend up very nicely. By Friday, Saturday last week, 244,000 customers are on the platform. That's an increase of another close to 30,000 customers in under 2 months. Over 1 million new invoices have been delivered so far already beating Q2, which was by far our biggest quarter ever, and over 275,000 invoices have been paid worth about $330 million. That's at about the level of all of Q3. So all in all, some pretty great trends in terms of how the platform is being used by our clients and by their customers.

Speaking of really great trends, we've been meeting with many of Mastercard's largest bank partners and seeing a very positive response to the Virtual Card Receivables Service program that we announced a couple of months ago with Mastercard. We've now spoken to a dozen large banks, 10 of them U.S. and 2 European, and all of them have an expressed interest in rolling out the program to their customers. So far, 5 of them have signed up, one is just starting testing and one is just kicking off the setup process. We actually expect all 12 of these banks and more to be processing sometime next year.

We're also seeing a very positive trend with our First Data offering that we launched last year. As I briefly mentioned, at the outset, we closed 4 add-on deals in Q3 for credit card processing with existing clients. And an existing number of new clients are opting to sign up for credit card processing through VersaPay and First Data either coincident with the MSA, they're signing up for the software or within 3 to 6 months after signing the MSA.

We're actually finding that about 9 out of 10 times, we can reduce the cost of processing for our clients and still net about 10 to 20 basis points in revenue. Now that doesn't mean they're all ready to sign up right away, but many are, a growing number are, and the others are building a nice pipeline for us.

At RBC, we're making progress on larger opportunities. While we've yet to close any of the recent larger deals, we've closed some mid-sized deals, and there are a growing number of large deals in the pipeline.

And finally, since announcing our partnership with U.S. Bank, our work together has gotten off to a quick start. We've held meetings with all 3 of the regions in the West and Central and East to train relationship managers. Each RM has brought forward 5 target accounts from their patch. Account planning is underway one-on-one with RMs for a joint approach on each of their target accounts. We are working to offer a branded package that includes ARC, the bank's lockbox service and credit card processing through Elavon, which is partly owned by U.S. Bank -- or perhaps wholly owned by U.S. Bank and now a VersaPay processing partner. And I'm pleased to announce that our first joint client, a large U.S. REIT, received their end user training last week and will go live very soon. So a great start with U.S. Bank and much more to come.

All right. So that's it for me today. Let's go ahead and move to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question is from Suthan Sukumar from Eight Capital.

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Suthan Sukumar, Eight Capital, Research Division - Principal [2]

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Congrats on the quarter. So guys, first question for me is on the partner contribution. So you guys are clearly seeing consistently strong customer win activity quarter-over-quarter, but part of the contribution this quarter was actually lower than we've seen in prior quarters. How do you expect the partner ecosystem to be engaged in coming quarters? And what type of contribution do you guys expect over next year from the partner ecosystem?

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Craig O'Neill, VersaPay Corporation - CEO & Director [3]

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Yes. Yes. Great question. We have learned over the last couple of years to be very cautious about producing too much more partners. In theory, there's a great deal that they can contribute, U.S. Bank, RBC and certainly Mastercard. That's in theory. They're large businesses. They move at their own pace. So we love the potential of those partnerships. We're seeing them do the right things, especially at U.S. Bank and Mastercard. But we're cautious about trying to predict -- in fact, we're being very conservative of predicting when we start to actually see revenues hit the financials.

And so I think I'd probably leave you with that, that -- think a little bit long term. And when I say long term, kind of think about over the course of 2020 and into '21. We think that they can contribute a lot. But quarter-over-quarter, right now, we're working hard with them but being pretty conservative about our expectations with them.

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Suthan Sukumar, Eight Capital, Research Division - Principal [4]

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Okay. Great. That's helpful. And on the Mastercard channel, you guys talked about one bank that's in the process of currently rolling out. What types of volume expectations do you have with this specific bank as they do start to ramp up into 2020?

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Craig O'Neill, VersaPay Corporation - CEO & Director [5]

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Yes. Well, I'll start by saying that the banks we've been talking to, for the most part, are some of the largest banks in the world. So their volumes are, therefore, large. They're banks. So while they immediately love the idea, they take a little while, of course, to kind of adjust course and do something they hadn't been planning on. So a little bit of time to do that. And then really, it's going to be interesting to see how they roll it out.

One course of action is they could just switch it on because really, there's no impact other than it solves problems for the receiver of the payment. There's really no impact that's transparent to the corporate buyer. The corporate spender is using virtual credit cards. So it's pretty easy to turn on. However, they're big banks. So they're going to probably be a little bit cautious.

I expect the first couple, maybe the first few, will roll out incrementally and be very careful. And then as other banks come onto the program, I expect they'll roll out a lot faster because now it's me too. Others have done it and it's popular, and they're going to follow suit. But that's only in theory. We've yet to see how they roll out.

Suffice to say, though, each of these -- most of these dozen banks have very significant volumes. So once they do start to roll out -- and I should be clear by rollout. It's really just turn on. There's no additional work or implementation to widen the scope of how our technology impacts their transaction. It's really just turning it on. So it's going to be up to them how quickly they turn it on. But I think once it starts rolling, I think it will start to pick up some speed.

But time will tell. I think we're going to probably see over the next 2 quarters, Q4 and into Q1, the first 1 or 2 live. And then we'll start to get a bit of a sense of how quickly they move.

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Suthan Sukumar, Eight Capital, Research Division - Principal [6]

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Great. Got it. And on the payment side of the business, you're obviously seeing very encouraging adoption trends within your existing base. More broadly speaking, what trends have you been seeing with payments adoption across your existing base and with new clients, if you've been seeing particular strength in any given vertical?

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Craig O'Neill, VersaPay Corporation - CEO & Director [7]

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Well, certainly, the verticals we're focused on, first and foremost, in terms of our direct region where we spend our go-to-market dollars are distribution and commercial real estate. In both of those industries, and that's where we have most of our clients, we're seeing good payment adoption and a growing conviction that clients, even new ones, are beginning to really believe that they can get many, many, many, a high percentage of their customers online, active on our platform, really aiming for at least 80% adoption and then a large proportion of those paying on the platform as well.

So it's causing them to rethink their challenges. So the large distributor that we won, for instance, just at the end of the quarter, they were looking for, yes, an online sort of service, something like ARC. And this is before they met us and fully understand what that could entail but some kind of online service and then some solution to handle the tens of thousands of checks that they get every month.

After really getting to know ARC, they sort of signed up with us with a strong conviction that we're going to eliminate checks. There's going to be very few checks left over once we roll this out. So maybe we don't need a solution to handle checks because the problem is going to sort of go away or it's going to be really minimized. So that belief that customers will come online and pay online is really growing.

And part of that is the trends that we've got in our data, the experiences that our current clients are receiving. And part of it is, as our clients think through the everyday experience of you and I as consumers and how we tend to go online to get things done, they're beginning to believe that, that's actually what their business customers want. They want an online experience that includes billing and payment.

So the trends are good. We think that, as I mentioned in my comments, the kind of e-adoption growth that we're seeing bodes really well for increased payment adoption. So we think that's just the beginning. We don't want to get ahead of ourselves, but I think we're going to see those trends keep moving nicely upward.

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Suthan Sukumar, Eight Capital, Research Division - Principal [8]

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Great. That's helpful. And then the last one for me is on the competitive landscape. I'm starting to see a little bit more noise here. One of your competitors is making a bigger push into Europe, and one of your competitors also just filed for an IPO. So curious to see how -- what you're seeing in terms of the competitive landscape evolving. Are you guys seeing any newer entrants now in some of the more competitive bids that you're involved in?

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Craig O'Neill, VersaPay Corporation - CEO & Director [9]

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Yes. I mean I'd say relatively speaking, there's more competition. But I use that word relatively really intentionally. There's more competition, but still, given the size of the space, there's relatively little competition. There's a handful of us with very strong industrial strength, proven offerings in a market space where there's tens of thousands of potential customers.

So probably our biggest competition for all of us right now is do nothing. And the do nothing comes from either the client, the prospect is not aware of what's possible or they're not ready. But when they're ready to move, we are seeing, again relatively speaking, 1 or 2 competitors in more of our deals, where as of a year ago, often, most of our deals did not have any competition in the middle.

So we're seeing more competition. We think the space is still relatively untapped. There's room for many companies to be very successful. But when we go head-to-head with our largest and most successful competitors, we've got a great track record of winning against them. And I mentioned in Q3, our largest win was against one of our most successful competitors. And they actually got extremely aggressive slashing their price to try and win against us and we still won the deal. So we're pretty confident that we can win more than our fair share of deals when we do have competition.

And by the way, I think increased competition is actually good for everyone. It gives us raising awareness in the market. And that means that the biggest competitor that do nothing because customers don't know about it or they're not ready, that will actually go down as we collectively create more awareness in the market.

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Operator [10]

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Your next question is from Brenna Phelan from Raymond James.

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Brenna Phelan, Raymond James Ltd., Research Division - Equity Analyst [11]

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So I wanted to start with the channel sales in the quarter, that 18% of the $1.25 million ARC you sold. Is this mostly the midsized RBC deals that you referenced? Or is this also from some of our partners?

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Craig O'Neill, VersaPay Corporation - CEO & Director [12]

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Yes. It's sort of a scattering of all the different partner types. I wouldn't say that any single partner really stood out in that result.

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Brenna Phelan, Raymond James Ltd., Research Division - Equity Analyst [13]

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Okay. And then the $300,000 negative impact from the change of control with one customer, can you tell us the name? Is this Amer Sports?

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Craig O'Neill, VersaPay Corporation - CEO & Director [14]

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No. It's not a recent customer. It's a customer from a couple of years ago. They were going very slowly with the rollout. And then (inaudible) control and basically said, "It's going well, but we're really not in a position to move any further for the foreseeable future."

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Brenna Phelan, Raymond James Ltd., Research Division - Equity Analyst [15]

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Okay. Great. And just in the context of your commentary on how the payments and e-adoption are all turning in the right direction, how is this impacting your success in going to market with the cash app module?

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Craig O'Neill, VersaPay Corporation - CEO & Director [16]

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Yes. Great question. It's been a little slow getting it to market. I think partly, it's our team figuring it out and understanding how to sell it. Partly, ironically, we've had situations like the large distributor that I mentioned earlier, our largest deal of Q3 was actually in the market to buy both our core platform, ARC, and the cash app module. And we did such a good job helping them see the vision of what could be with the online service.

They actually said, "You know what? Let's park the cash app decision for now because we're actually thinking we might not need it because if we get the kind of adoption it looks like we can get, that whole problem kind of is minimized, and we don't need to spend more money on that."

So long term, we actually -- that's our message that we believe that the online service, our core product eliminates checks and many other outside payments. And we get payments on the platform, and the cash app problem goes away. But in the interim, and the interim might be 5 or 10 years, there's a need to solve this problem, and that's what the cash app module does.

So ironically, in Q3, we -- just the nature of the wins, where there was an interesting cash app they ended up parking that thinking, "Hey, we think the online device is so good, we might not need cash app." Having said all of that, we do have -- those couple of cases may, and I think likely will, come back and take the cash app module. And we are building quite a good pipeline of cash app-interested parties, but getting that first sale is taking a little while.

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Brenna Phelan, Raymond James Ltd., Research Division - Equity Analyst [17]

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Okay. So no sales yet?

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Craig O'Neill, VersaPay Corporation - CEO & Director [18]

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Correct.

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Brenna Phelan, Raymond James Ltd., Research Division - Equity Analyst [19]

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Okay. And on the RBC partnership, is there anything tangible, milestones that you're looking to in the near future such as -- similar to meetings like you're having with U.S. Bank? Or any ideas you can leverage like perhaps bundling another offering to their customers?

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Craig O'Neill, VersaPay Corporation - CEO & Director [20]

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Yes. Great question. We've had those discussions with RBC. I'd say they're not quite ready for that just yet. But what they have done, which is tangible and positive, is they put a couple of key roles in place to focus on the program specifically. And those folks are quite new to their role. So they're learning both, I think, their own sales organization and learning about the product, learning how to speak about it and to sell it. But it speaks to the commitment RBC has to the program and making it successful.

So we'll give them a little more time. We certainly want to use some of the things that we're doing at U.S. Bank as a good example for RBC to consider at least. But beyond the 2 key roles being put in place, and I'd say as well more focused on larger deals because we were for -- a lot of them are getting mostly small business, small-ish businesses into the pipeline. Now they're kind of really getting aligned with us on mid to large businesses.

Those are probably the most tangible things that have happened in the last 3 or 4 months. But we're cautiously optimistic with these 2 roles in place that we'll start to get a bit more traction. And we think when we can win the first large deal, and there's a couple in the hopper that are quite close, we thought we had a chance at Q4, but we're now -- we're gunning for Q1, we think that can make a real difference as well.

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Brenna Phelan, Raymond James Ltd., Research Division - Equity Analyst [21]

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Okay. And then as it relates to the outlook for Q4, like you said, a very strong sales quarter given the seasonality of the slow summer months. Is it fair to expect Q4 to accelerate from there in terms of ARC ARR sold?

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Craig O'Neill, VersaPay Corporation - CEO & Director [22]

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Yes. I'd say the jury is still out on that, Brenna. There's a lot in our sights. We're moving into kind of the holiday season in the U.S. And so we're not taking this event that we're going to be working hard to close everything that's very close.

So I think it will be a good quarter. There's a chance it will be a great quarter. But of course, we never count our chickens before they hatch. There are lots in the pipeline. We're working hard to close it.

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Brenna Phelan, Raymond James Ltd., Research Division - Equity Analyst [23]

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Okay. And then some goalposts on how -- so the monthly cash burn in the quarter down to $575,000. Was that declining sequentially? And will that step down every month in Q4?

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Craig O'Neill, VersaPay Corporation - CEO & Director [24]

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Shouvik, do you want to speak to that one?

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Shouvik Roy, VersaPay Corporation - CFO [25]

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Yes. Good question, Brenna. So cash burn, I think, the Q3 expenses were -- there's no onetime expenses or anything like that or onetime pickup or something like that, that drove our expenses lower. So we expect Q4 to be very close to Q3. But historically, we've seen Q4 tend to be a little bit higher than Q3 just because there's a lot of annual true-ups and expenses and things like that.

So the -- so cash flow would be, I would say, at this point, barring anything that's unforeseen, probably a slight decline. Again, we expect our cash flow to improve again quarter-over-quarter.

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Brenna Phelan, Raymond James Ltd., Research Division - Equity Analyst [26]

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Okay. And then last one for me, a clarification. The commentary in your financial statements that says your credit line requires $5 million of cash to be raised by February 2020. Does that only appear to draw on the credit line?

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Craig O'Neill, VersaPay Corporation - CEO & Director [27]

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It's to have that facility available to us past February. So yes, it requires a $5 million raise. It's certainly something that we've been considering. And we've actually got lots of really good options between existing shareholders, both individual and institutional, new investors that have been approaching us interested in getting involved with the company and strategic.

We've got several options we've been considering, and we'll continue to do that. But yes, that -- it kind of gives us a window that we need to put something else on the balance sheet between now and February to keep that line of credit in place.

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Operator [28]

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The next question is from Daniel Rosenberg of Haywood Securities.

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Daniel Rosenberg, Haywood Securities Inc., Research Division - Analyst of Technology [29]

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I had a follow-up regarding the commentary that you mentioned. You had 12 banks in the pipeline and 5 signed up. I just want to understand, how many of those banks are currently in the backlog?

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Craig O'Neill, VersaPay Corporation - CEO & Director [30]

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There's nothing -- there's no amount, there's no dollars in the backlog. In our backlog measurement, we keep that somewhat conservative in that we only state subscription revenue in the backlog, so no transaction or payment revenue. And all of the Mastercard-related revenue will be transaction/payment revenue. So it's not affecting the backlog whatsoever.

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Daniel Rosenberg, Haywood Securities Inc., Research Division - Analyst of Technology [31]

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Okay. And then to understand the -- as that -- the number of banks ramp and get more traction through the Mastercard partnership, could you give some color on plans on monetizing? What are the kind of next add-on services that might be able to be -- to have some cross-sell into these customers?

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Craig O'Neill, VersaPay Corporation - CEO & Director [32]

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Yes. That's a great question and a big topic, but I'll give you kind of a brief answer. I think maybe I'll limit it to 2 things. There's some other things as well, but I'll limit to 2. First of all, doing the Mastercard program is kind of part and parcel of something bigger than we had in mind, and starting out with Mastercard is a great way to start.

It has long been our aspiration to be able to say to buyers, to spenders, "Hey, you can send payments electronically to all your customers and we can help with that. We can receive and make those payments much easier to digest, both in terms of the dollars and the data for the suppliers receiving those payments."

And of course, we would target that message to the end customers on the platform, as I mentioned, well over 200,000 on the platform. There's well over 300,000 end customers in the pipeline. By pipeline, I mean clients that are rolling out. There's over 300,000 of their customers yet to be invited onto the platform. We think most of those will come on the platform.

So we think in the -- within 2020, we'll have 0.5 million businesses on the platform. We want to be able to say to them, "Hey, you can pay all of your suppliers through us, not just the supplier who has reached out to you and onboarded you onto ARC." And that's exactly what we're doing with Mastercard.

So we're going to extend that, the technology we've put in place from Mastercard to let our end customers pay all their suppliers. So that's a big one. It's a very strategic thing for us. And by the way, by doing that, we're getting our foot in the door with those suppliers, with the, call it, the freemium version of ARC, if you will, and then have a good opportunity to upsell them to the paid version. So that's number one.

Number two, there is the straight -- just with Mastercard and their partner banks, the straight upsell to the suppliers. And Mastercard is interested in that and so are a number of the banks, where they believe as we do that once many, many suppliers in the tens of thousands that receive virtual card payments today, once they start using the free version of ARC, we can interest them in upgrading and provide them with an incremental upgrade path to take on more and more of ARC for a fee. So it's very much a part of the strategy as well.

There's some other odds and sods as well, but those are 2 of the most important sort of ancillary effect of the Mastercard program.

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Daniel Rosenberg, Haywood Securities Inc., Research Division - Analyst of Technology [33]

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Okay. I also wanted to ask, you had mentioned in the quarter you had won a contract going up against one of your largest competitors who ended up pricing aggressively. I was wondering what are the aspects that you think led to your win. And did you have to compromise on pricing somewhat to win that client?

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Craig O'Neill, VersaPay Corporation - CEO & Director [34]

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So yes, 2 questions there. I'll take them kind of in order. So why did they choose us? It's really why customers' prospects tend to choose us in general. We talk about the end customer experience, first and foremost. We call it customer-centric ARR. We say to our prospective clients and our clients, "If you give your customers a great online customer experience to get their bills, their invoices and statements, collaborate with you to solve problems and to get information that might be missing or to resolve disputes about pricing and whatnot and pay online, if you make that great for them, a, they will use it; b, they'll thank you for it; and c, you'll get paid faster."

And in all of that, as a side effect, you eliminate checks. You eliminate many, many, many, if not most or all of the problems that you currently experience with ARR. And so first and foremost, we're about that customer experience and getting high adoption. And then secondarily, now with our cash app module, we say, "Hey, the laggards, the ones that still either won't come online or that are going to pay off the platform, we've got a module to help solve those problems as well."

Our competitors, you can think of them at a high level as flipping that on its head. And really, they're first and foremost about tools to address and facilitate and streamline today's manual processes. So dealing with checks, dealing with inbound payments coming from outside the platform, dealing with collections and so on. And also, we have this online service that they can use if they like, but they tend to get much, much, much lower adoption than we do because it's not their area of focus.

So our message is all about put customer experience first, you'll get a much better result. And really, if you take that approach, we're the only vendor that does that extremely well, in our humble opinion. And we told that story to this large distributor. And they conclude, as we do, that we have the strongest offering by far and they believed in that approach and hence, they chose us.

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Daniel Rosenberg, Haywood Securities Inc., Research Division - Analyst of Technology [35]

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Great. And did you have to give some pricing, I mean, given that was a competitive bidding or offering?

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Craig O'Neill, VersaPay Corporation - CEO & Director [36]

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Right. Yes. Sorry, I forgot the second question. I got carried away with the first question. Yes, so we did give a small discount. So -- and we are always under pressure to do that, competitive or not. Customers, especially very large customers, are smart and they negotiate hard. So we usually give a small discount and try and get the right fit price versus value. And so we did do that, but nothing sort of out of the normal course, not out of the ordinary course of our business. We were able to preserve our price pretty well.

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Daniel Rosenberg, Haywood Securities Inc., Research Division - Analyst of Technology [37]

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Okay. Good to hear. And last one for me, just the mix of ARR. It's tilted heavily towards the U.S., and it seems to be increasingly so in recent quarters. Is there anything structurally different between Canada and the U.S. that's causing that? Or is it just the nature of a larger market and your sales efforts targeting a larger market?

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Craig O'Neill, VersaPay Corporation - CEO & Director [38]

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Yes. It's a great question. So first of all, there's no doubt we're focusing most, not all but very close to all of our resources. And our go-to-market team, our marketing spend and our folks are focused on the U.S. Our history has been if we do a good job in the U.S. and our marketing speaks to the U.S., Canadian customers sort of get that and are impacted by that. And so we would expect to see -- obviously, it's a 10x market versus Canada. So we would expect to see outsized results in the U.S. versus Canada.

In the recent quarters, so a couple of recent quarters, it's been a little bit more coincidental. So we had 2 -- we have still. We haven't lost them. They're still very much in play, but a couple of large deals that could have closed in Q3 in Canada. And had they closed in Q3, then the results would have been more even. And so those deals are still there. We will -- we're comfortable in those deals. So it's -- in some ways, it's just going to be the ebb and flow of when deals actually close. But at a macro level, we definitely put a lot more focus and a lot more resource on the U.S.

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Operator [39]

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The next question is from David Kwan from PI Financial.

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David Kwan, PI Financial Corp., Research Division - Technology Analyst [40]

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Just a few additional questions here. First off, just looking at the penetration rate both for invoices paid and payment volumes, those ticked down a bit this quarter. Wondering to what extent that might be related to seasonality as we saw something similar last year, if something else is going on. And then just looking forward, what you can do -- what you're doing to help drive those numbers higher.

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Craig O'Neill, VersaPay Corporation - CEO & Director [41]

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Right. So I think first of all, in terms of -- when you say penetration rate, if you mean kind of the proportion of invoices getting paid, it is a little -- and I've wondered about whether we should try and make -- get more sophisticated measures. When you consider -- what we're giving you at a point in time is here's the invoices that we have delivered in a quarter that got published in a quarter's customers. Here's what got paid, but what's getting paid is largely from either early in that quarter or previous quarters because there's not many customers that pay within 30 or even 40 days. There's a bit of a lag between getting an invoice in the time the invoice is actually paid.

So when you've got big growth in the number of invoices being delivered like we've had in Q3, it starts to distort the percentages a little bit because in some ways, you might want to consider how many got paid compared to what was delivered in Q2. That might be a bit better sort of comparable versus what got delivered in Q3 because a large proportion of those will be just delivered in the mid to the end part of Q3. We wouldn't expect them to get paid until Q4.

So we see our -- allowing for that kind of time lag, we see that the payment is trending really nicely. We don't have any concern about erosion there. We think it's actually picking up. But I can see how -- the way we kind of explained in the metrics, it may not necessarily sound like that. So that's part one.

Part two, what are we doing to make sure it keeps improving? We're working with clients all the time. Our client success managers work with our clients about adoption all the time. And we think adoption both in terms of, "Hey, we're going to help you get your end customers using the service," and b, "We're going to help you get your end customers paying on the service as well."

And so there's a number of things that we do ongoing, and those are having good success. We'll continue to do those, and we'll keep looking for new ways to drive payment adoption. But really, back to my first point, we're not seeing it eroding. We're seeing it improve. It's probably more about just the way we state the metrics.

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David Kwan, PI Financial Corp., Research Division - Technology Analyst [42]

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And how many people, Craig, do you have right now working on the client success side?

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Craig O'Neill, VersaPay Corporation - CEO & Director [43]

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Yes. We have 3 CSMs, they're called 3 -- we have 3 terrific CSMs that our clients love. And that's one of the areas of the company that will grow over time as we add to our client base. We want to make sure, like any good SaaS company, that we're proactively serving our customers and watching and monitoring their metrics, speaking with them regularly to make sure that they get as much success as possible from the platform. Not waiting for them to have a problem but really being ahead of that and advising them and really consulting with them to make their experience great and their outcomes really positive.

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David Kwan, PI Financial Corp., Research Division - Technology Analyst [44]

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That's great. Just on the pipeline, at the very -- so towards -- at the start of this year, you had -- I think Q1 in particular was, I think, a pretty strong quarter. That really kind of helped drain the pipeline from a channel standpoint. And I think you've been looking to kind of rebuild that especially as we have, I guess, nearer-term opportunities. When do you think we could start to see kind of that conversion rate and contribution from the channel return to what we've seen historically?

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Craig O'Neill, VersaPay Corporation - CEO & Director [45]

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Yes. As I said earlier, we're cautious about trying to predict, what channels we'll do very cautious these days. So keeping that in mind, we do -- we are cautiously optimistic that certainly, U.S. Bank is going to start to have an impact. It's fairly recent, but they're off to a great start. So we think that will have an impact.

We do see some really good deals in the pipeline with RBC. That was actually one of the -- like I mentioned, there's a couple of earlier -- a couple of Canadian large deals that could have closed in Q3. One of those is RBC, a large Canadian deal, and they have some others as well. So we see some good deals from RBC in the pipeline which could be possible. It won't be this quarter, but it could be possible certainly in Q1.

And then the -- as the dozen banks begin to roll out, we do expect that Mastercard will have a very tangible impact on our financials in the new year. So it's coming, although we're definitely cautious about it. When we think of it longer term, we're really excited about our current partners and what they can do. In the shorter term, we're a bit careful about expecting too much.

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David Kwan, PI Financial Corp., Research Division - Technology Analyst [46]

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That's fair. And just on the balance sheet. You had some comments around the receivable. The DSOs ticked up this quarter. So without primarily related to, like you were talking about, Craig, some of these larger customers that were -- or I guess, are able to pay once, I guess, the deployments are completed? Or is there something else going on that happened this quarter?

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Craig O'Neill, VersaPay Corporation - CEO & Director [47]

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Shouvik, can you take that one?

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Shouvik Roy, VersaPay Corporation - CFO [48]

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Yes. I can take that one. David, yes. So accounts receivable, it -- I mean it did increase mainly due to the increase in revenues obviously. The aging, if you look at our aging schedule there, most of it is current. And I did mention we collected more than [40] (inaudible) the quarter end.

The ones that are aged are those larger customers that there's, in our mind, very low risk of any sort of default or anything like that. It's really the very large customers. They have a lot of clout and they're willing to pay, but they have a longer implementation schedule. So they have negotiated to pay once that implementation is complete.

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David Kwan, PI Financial Corp., Research Division - Technology Analyst [49]

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Okay. And then the other thing I noticed was the ADA as a percentage of the gross receivable. That's picked up notably, I guess, since the end of last year. I think it was about 1.5% last year. It came in closer to 6.5% this quarter. Just wondering about if you have any concerns related to, I guess, the receivables and having not to set aside allowances for them.

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Shouvik Roy, VersaPay Corporation - CFO [50]

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No. I mean we go through our regular diligence in terms of reviewing all of our accounts receivables, the allowance for double accounts that represent specific accounts that we identified not being able to collect only because essentially, those are very small mines that effectively churned. And they were kind of legacy customers that signed on in early days. And really, we never really got going on the platform.

So we don't really see that with our -- over the last, call it, 1.5 years, 2 years, customers that we signed on. They're typically larger customers that sign on and commit to a larger subscription amount. So these are small guys that we -- that just added up and then there's 1 or 2 large amounts that were just kind of disputed invoices as opposed to any sort of real credit risk.

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David Kwan, PI Financial Corp., Research Division - Technology Analyst [51]

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So you expect that number to go down then, I guess? It sounds like most of that's kind of gone through the system.

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Shouvik Roy, VersaPay Corporation - CFO [52]

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Yes. I mean there's always going to be that. We'll do that regular diligence in terms of reviewing all of our accounts. But there isn't anything identified right now that is in addition to what we already have provided for.

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Operator [53]

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Your next question is a follow-up from Suthan Sukumar from Eight Capital.

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Suthan Sukumar, Eight Capital, Research Division - Principal [54]

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Sorry, just had a couple of follow-up questions. The first one is, I mean, obviously, it appears that deal size has been steadily increasing over the past several quarters. I'm curious, is this more of a function of larger customer wins? Or are there other factors at play here?

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Craig O'Neill, VersaPay Corporation - CEO & Director [55]

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Yes. Kind of a combination of certainly larger customers and then a higher percentage at the time we're adding credit card into the mix. And this is really what we had planned for or what we were aiming for. And so we're pleased to see that playing out.

So while I wouldn't say that it's going to keep trending up and up and up and up, we think that the sort of deal size that we're achieving now, there's some room to get bigger. But yes, we're -- we had new plans in by the way. When we start selling cash app more frequently, that will increase the deal size as well. So kind of product mix and customer size are the contributors, and we see a little bit more of that in the future.

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Suthan Sukumar, Eight Capital, Research Division - Principal [56]

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Okay. Great. That's helpful. And the last one for me, guys, is that I noticed an uptick in R&D this quarter and you kind of touched on it in the press release as well. Can you speak to some of the investments you're making from a platform perspective then? And should we expect any investments in the sales organization given some of the recent successes you've been having on the go-to-market front?

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Craig O'Neill, VersaPay Corporation - CEO & Director [57]

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Great questions. And so we're always working on and addressing what I think is a very exciting product pipeline full of great product ideas. The rate at which we do that is really governed by what we can afford to spend. There's enough in our pipeline, I think, great revenue-generating ideas that we could spend more in R&D, but that's discretionary. We'll spend what makes sense based on our cash flows. So there's great stuff that's been done in the last quarter, lots of terrific stuff to come, stuff that will keep getting the attention of our existing clients and our new prospects.

And the same really goes for sales as well. You've often heard me say that there's such a big growth opportunity in this market. We could spend a lot more both in R&D and sales and marketing. And so we're making decisions based on what we can afford to spend to go after this market and to achieve a certain rate of growth. We've had competitors that have raised much more money than us and are going after the market hard.

We recognize we're a small-cap Canadian public company. It's -- we have to be mindful of cash burn and we're doing that. We're managing our cash burn down and we'll keep doing that. And so really, quarter-over-quarter, thinking about kind of quarterly results and sort of half year to full year results, we're being careful to sort of make investments wisely but also manage cash burn.

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Operator [58]

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There are no further questions at this time. You may proceed.

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Craig O'Neill, VersaPay Corporation - CEO & Director [59]

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Okay. Great. Well, thanks again, everyone, for spending time with us today. In the past, I've said, I think many times actually, that our financials don't really tell our story very well, but I think I can stop saying that now with this quarter. With the ARC revenue growth, our stable expenses and shrinking cash burn that we've demonstrated in Q3, I trust you're beginning to see where VersaPay is headed. We're going to keep working hard delivering results like these in the coming quarters. So thank you again.

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Operator [60]

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Ladies and gentlemen, this concludes your conference call for today. We thank you for participating, and we ask that you please disconnect your lines.