1 CONSOLIDATED FINANCIAL STATEMENTS For the fiscal year ended March 31, 2014 INDEX Page Condensed Consolidated Statement of Operations and Comprehensive Income (Loss) 3 Condensed Consolidated Balance Sheet 4 Condensed Consolidated Statement of Shareholders Equity 5 Condensed Consolidated Statement of Cash Flows 6 Notes to the Condensed Consolidated Financial Statements 7 29
2 July 31, 2014 Independent auditor s report To the Shareholders of Nightingale Informatix Corporation We have audited the accompanying consolidated financial statements of Nightingale Informatix Corporation and its subsidiaries, which comprise the consolidated balance sheets as at March 31, 2014 and March 31, 2013 and the consolidated statements of operations and comprehensive loss, shareholders equity, and cash flows for the years ended March 31, 2014 and March 31, 2013, and the related notes, which comprise a summary of significant accounting policies and other explanatory information. Management s responsibility for the consolidated financial statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards, as issued by the International Accounting Standards Board (IASB), and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditor s responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion. PricewaterhouseCoopers LLP PwC Tower, 18 York Street, Suite 2600, Toronto, Ontario, Canada M5J 0B2 T: , F: , PwC refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership.
3 Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Nightingale Informatix Corporation and its subsidiaries as at March 31, 2014 and March 31, 2013 and their financial performance and their cash flows for the years ended March 31, 2014 and March 31, 2013 in accordance with International Financial Reporting Standards. Chartered Professional Accountants, Licensed Public Accountants
4 CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME AND LOSS Note March 31, 2014 March 31, 2013 Revenue 15,297,008 20,924,852 Cost of sales 1,762,503 2,342,467 Gross profit 13,534,505 18,582,385 Expenses General and administration 3,313,888 3,489,350 Sales and marketing 2,808,039 3,366,065 Research and development 3,523,188 5,500,278 Client services 4,615,652 4,258,158 Business acquisition, integration and other - 675,804 14,260,767 17,289,655 Operating income (726,262) 1,292,730 Interest 13 1,027, ,598 Other finance (gain) loss 7c 658,963 (134,942) Foreign currency (gain) loss 481,433 (23,029) Income (loss) before tax (2,893,851) 913,103 Current tax expense (benefit) 18 95,405 (1,079,452) Income (loss) and comprehensive income (loss) (2,989,256) 1,992,555 Basic and diluted income (loss) per share Basic and diluted income per share $ (0.04) $ 0.03 Weighted number of common shares - basic 81,173,948 76,310,915 Weighted number of common shares - diluted 81,173,948 92,882,264 The accompanying notes form an integral part of these consolidated financial statements. 3.
5 CONSOLIDATED BALANCE SHEET Note March 31, 2014 March 31, 2013 ASSETS Current assets Cash and cash equivalents 532,038 3,491,780 Accounts receivable and unbilled accounts receivable 15 5,016,958 5,820,214 Other receivables 82, ,127 Prepaid expenses 289, ,958 5,921,333 9,924,079 Long-term assets Unbilled accounts receivable 415, ,752 Financial derivative asset 7c 149, ,694 Property and equipment 9 1,225, ,270 Intangible assets 10 11,153,240 7,974,606 Goodwill 10 4,792,399 4,792,399 Total assets 23,657,503 24,696,800 LIABILITIES Current liabilities Line of credit 7a 1,000,000 1,000,000 Accounts payable and accrued liabilities 5,102,303 4,271,996 Income taxes payable 20,000 - Current portion of deferred revenue 3,791,558 4,176,876 Current portion of finance lease obligations ,731 64,397 Current portion of term loan 7b 1,634,461 1,521,720 Current portion of convertible debentures 7c - 1,064,428 11,653,053 12,099,417 Long-term liabilities Term loan 7b 1,403,557 2,686,704 Convertible debentures 7c 5,015,180 5,353,050 Deferred revenue 978,015 1,713,326 Finance lease obligations 17 82,745 36,739 Total liabilities 19,132,550 21,889,236 SHAREHOLDERS EQUITY Capital stock 34,177,890 29,629,683 Contributed surplus 5,909,371 5,781,073 Equity portion of convertible debentures 841, ,558 Warrants 12 4,407 4,407 Deficit (36,408,413) (33,419,157) 4,524,953 2,807,564 Total liabilities and shareholders equity 23,657,503 24,696,800 Legal 22 Approved on behalf of the Board of Directors: Brian Schachter David Atkins Director Director The accompanying notes form an integral part of these consolidated financial statements. 4.
6 CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY Equity portion Capital Contributed of convertible Note stock surplus debentures Warrants Deficit Total Balance at March 31, ,629,683 4,811, , ,452 (35,411,712) 64,687 Income and comprehensive income ,992,555 1,992,555 Issuance of convertible debentures and warrants 7 216, ,750 4, ,211 Expiration of warrants, net of tax ,770 (701,452) (87,682) Stock-based compensation - 139, ,793 Balance at March 31, ,629,683 5,781, ,558 4,407 (33,419,157) 2,807,564 Loss and comprehensive loss (2,989,256) (2,989,256) Issuance of convertible debentures and warrants 7c , ,140 Issuance of common shares on conversion of debentures 11 2,112, ,112,000 Issuance of common shares for cash, net of costs 11 2,436, ,436,207 Stock-based compensation - 128, ,298 Balance at March 31, ,177,890 5,909, ,698 4,407 (36,408,413) 4,524,953 The accompanying notes form an integral part of these consolidated financial statements. 5.
7 CONSOLIDATED STATEMENT OF CASH FLOWS Note March 31, 2014 March 31, 2013 Cash flow from operating activities Income (loss) from operations: (2,989,256) 1,992,555 Adjustments for: - Depreciation and amortization 1,524,108 1,625,089 Provision for bad debts 55,847 63,115 Amortization of transaction costs related to debt financing 230,791 65,310 Stock based compensation 128, ,793 Tax recovery on items charged to equity 18 - (399,229) Other financial (gain) loss 7c 658,963 (134,942) Unrealized foreign exchange (gain) loss 427,263 (53,507) Interest accretion 288, , ,569 3,520,343 Changes in non-cash working capital balances ,421 (5,201,670) Cash flows provided by (used in) operating activities 946,990 (1,681,327) Cash flow from investing activities Purchase of property and equipment (509,374) (711,684) Capitalized development costs (4,414,489) (3,455,981) Cash flows used in investing activities (4,923,863) (4,167,665) Cash flow from investing activities Proceeds from line of credit borrowing - 330,000 Leasehold inducement 9-120,000 Proceeds from convertible debt, net of costs 7c 1,428,628 4,705,723 Proceeds from term loan, net of costs 7b (28,232) 1,946,850 Proceeds from issuance of common stock 2,436,207 - Repayment of term loan (1,620,574) (882,087) Repayment of convertible debentures (1,141,000) - Repayment of capital lease obligations (60,946) (88,486) Cash flows used in financing activities 1,014,083 6,132,000 Foreign exchange losses on cash in foreign currency 3,048 9,714 Net increase (decrease) in cash (2,959,742) 292,722 Cash and cash equivalents Beginning of year 3,491,780 3,199,058 End of year 532,038 3,491,780 Interest paid $ 1,099,530 $ 682,671 Income taxes paid $ 75,405 $ 11,689 Non-cash investing and financing activities: Assets acquired under finance lease $ 147,286 $ 29,567 Expiration of warrants $ - $ 701,452 Issuance of warrants $ - $ 4,407 Amounts paid for interest and taxes are included in cash flows from operating activities in the condensed consolidated statement of cash flows. The accompanying notes form an integral part of these consolidated financial statements. 6.
8 1. BUSINESS DESCRIPTION Nightingale Informatix Corporation ("Nightingale" or the "Company") is engaged in the development, sale and support of application software and related services to customers in the healthcare industry in Canada and the United States. Nightingale is incorporated under the Ontario Business Corporations Act in Canada, is domiciled in Canada, and its principal place of business is located at 55 Renfrew Drive, Suite 200, Markham, Ontario, Canada. 2. LIQUIDITY RISK The Company believes that its operating plans allow the Company to achieve and sustain positive operating cash flow, working capital and profitability. Consequently, the Company will need to continue to generate revenues from non-recurring sources, protect its recurring revenues and capital resources and may need to make additional changes to its cost structure and operating plan in order to achieve its plans and in order to meet its financial covenants. The Company has not generated consistent positive cash flow from operating activities. The Company also remains dependent on new sales to minimize its use of cash and to the extent that the Company s utilization model, which does not generally require a large upfront payment, is favoured in future periods, the Company may experience a decrease in up-front cash flows from new sales which would have a negative impact on cash from operations. Also the Company may need to seek to raise additional funds for working capital purposes, capital expenditures or other strategic investments. The Company is subject to certain financial covenants under its senior loan facility. The Company must maintain a minimum cash balance, a minimum rolling 6 month EBITDA and have restricted capital expenditures under its financial covenants. The Company has received a signed amendment to the facility agreement that allows them to have a lower minimum cash balance on hand from June 9, 2014 to the earlier of August 15, 2014 and the occurrence of receiving net cash proceeds in the amount of not less than $1,500,000 from the sale or issuance of equity securities, convertible debt or Subordinated debt. The Company is also not required to comply with the rolling 6 month EBITDA requirement after the receipt of the $1,500,000 referred to above. In the event that alternative financing cannot be obtained in order to meet the August 15, 2014 date set out in the covenants the Company has received a commitment from a director of the Company to provide funding of $1.5 million in the form of a term loan bearing interest at 11% per annum and expiring no earlier than July 30, The Company believes that its current business plan provides for the risk factors noted above and as such believes that its cash and cash equivalents will be sufficient to meet the Company s cash flow needs for the foreseeable future. Despite the Company s financial management efforts, however, there can be no assurance that the Company s plans will succeed or that the Company will be able to comply with its financial covenants. 3. BASIS OF PREPARATION These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ( IFRS ) as issued by the International Accounting Standards Board ( IASB ). The policies applied in these consolidated financial statements are based on IFRS policies effective as of March 31, These consolidated financial statements for the year ended March 31, 2014 were authorized for issuance by the Board of Directors of the Company on July 31, SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of presentation These condensed consolidated financial statements have been prepared on the historical cost basis except for financial assets and embedded derivatives classified as at fair value through profit and loss, which are measured at fair value. Basis of consolidation The financial statements are prepared on a consolidated basis and include Nightingale and its wholly owned subsidiaries, Nightingale VantageMed Corporation, Nightingale HealtheNet Corporation (amalgamated with Nightingale VantageMed Corporation in December 2013), Nightingale HealtheNet Canada Corporation and VisionMD (2002) Inc. All intercompany balances and transactions have been eliminated. 7.
9 Revenue recognition Revenue is measured at the fair value of consideration received or receivable for the gross inflow of economic benefits during the period, arising in the ordinary course of the Company s activities. The Company generates revenue by selling perpetual licenses of the Company s application software, related support and maintenance or utilization services as well as professional services including project management, implementation, training, electronic transaction services and custom development. The Company s sale of perpetual software licenses are accounted for as sales of products as the customer has a perpetual right to use the software freely and the Company has no remaining obligations to perform after delivery of the software. The Company recognizes revenue on its product sales, including perpetual software licenses and sales of hardware, when the entity has transferred to the buyer the significant risks and rewards of ownership of the goods, the entity retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold, the amount of revenue can be measured reliably, it is probable that the economic benefits associated with the transaction will flow to the entity, and the costs incurred or to be incurred in respect of the transaction can be measured reliably. These criteria are generally met when the software has been delivered. In certain cases where custom development is important to the customer s use of the software, the Company recognizes revenue from the sale of perpetual licenses on a percentage of completion method as the customized development work is completed. The Company s service revenue includes support, maintenance, hosting and utilization, project management, implementation, training, electronic transaction services and custom development. The Company s utilization fee model combines software license, hosting, support and maintenance fees in a single flat monthly fee or a monthly transaction based fee. For electronic transaction services, Nightingale charges a flat monthly fee per provider or a per claim fee and for statements, Nightingale charges a per statement fee. The Company uses the percentage-of-completion method of accounting for its professional services and custom development arrangements. At each reporting period, the Company estimates the services performed to date as a proportion of the total services to be performed. This method of accounting is used when the outcome of a transaction involving the rendering of services can be estimated reliably. The outcome of a transaction can be estimated reliably when the amount of revenue can be measured reliably, it is probable that the economic benefits associated with the transaction will flow to the entity, the stage of completion of the transaction at the end of the reporting period can be measured reliably, and the costs incurred for the transaction and the costs to complete the transaction can be measured reliably. Revenue on a given contract is recognized proportionately with its percentage of completion. The stage of completion is measured on the basis of direct expenses incurred as a percentage of the total direct expenses to be incurred. Support and maintenance revenues are recognized ratably over the period of maintenance and support, on a straight-line basis and utilization services are recognized monthly as services are earned. The Company enters into contracts that include multiple-elements which typically include software licenses with training and implementation services and support and maintenance and hosting services. The components in the arrangement are assessed to determine whether they can be sold separately and can be treated as a separately identifiable component for the purpose of revenue recognition. When there are separately identifiable components in an arrangement, the arrangement consideration is allocated to the separate components on a relative fair value basis. If components are not separately identifiable, revenue recognition is deferred until all revenue recognition criteria have been met. The revenue recognition policy described above is then applied to each unit of accounting. Deferred revenue results from advance payments of support and maintenance, payments made in advance of the delivery of implementation or customization services, and license revenues where the Company has not met the criteria for revenue recognition as described above. Accounts receivable and unbilled accounts receivable Unbilled accounts receivable represent amounts for which revenue has been recognized but invoices have not yet been sent to customers due to the need to meet certain contractual milestones prior to invoicing. Classification between current and long term assets is based on the estimated invoice timing. Foreign currency translation The Company s functional and presentation currency is the Canadian dollar. Functional currency is also determined for each of the Company s subsidiaries, and items included in the financial statements of the subsidiary are measured using that functional currency. The functional currency of all of the Company s subsidiaries has also been determined to be the Canadian Dollar. 8.
10 Transactions in currencies other than the functional currency are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Monetary assets and liabilities not denominated in the functional currency are translated at the period end rates of exchange. Foreign exchange gains and losses are recognized in the statement of operations. Research and development costs Research costs are expensed as incurred. Costs related to the development of software are expensed as incurred, unless certain criteria are met for recognition as an intangible asset. Software development costs are capitalized as intangible assets when costs are attributable to a clearly defined product, technical feasibility has been established, a market has been identified, the Company intends to market the software and has adequate resources expected to be available to complete the project. Amortization of capitalized development costs commences when development of the software is complete and the product is ready for its intended use which when it is available for sale to customers. Borrowing costs Borrowing costs directly related to the development of qualifying assets are capitalized and included in the carrying value of the asset. Qualifying assets are those that necessarily take a substantial period of time to get ready for their intended use or sale. The Company s qualifying assets include longer-term development projects where development costs are capitalized. Government grants Government grants, including investment tax credits, are recognized when the Company has reasonable assurance that they will be received and that it is in compliance with the conditions underlying the agreement under which the government grants were granted. They are accounted for as a reduction in the related expenditure for items of a current expense nature and a reduction of the related equipment cost for items of a capital nature. Financial instruments The Company recognizes financial assets and financial liabilities when the Company becomes a party to a contract. Financial assets and financial liabilities, with the exception of financial assets classified as at fair value through profit or loss, are measured at fair value plus transaction costs on initial recognition. Financial assets at fair value through profit or loss are measured at fair value on initial recognition and transaction costs are expensed when incurred. At initial recognition, the Corporation classifies its financial instruments in the following categories depending on the purpose for which the instruments were acquired, as follows: Financial assets at fair value through profit or loss (FVTPL) Financial assets are classified as FVTPL when acquired principally for the purpose of trading, if so designated by management. Financial assets classified as FVTPL are initially and subsequently measured at fair value, with changes recognized in the consolidated statements of income. The Company does not currently hold any financial assets classified as FVTPL. Loans and Receivables Loans and receivables are non-derivative financial assets that have fixed or determinable payments and are not quoted in an active market. Loans and receivables are initially recognized at fair value. Subsequent to initial recognition, loans and receivables are carried at amortized cost using the effective interest method, less a provision for impairment. Cash and cash equivalents, accounts receivable, unbilled accounts receivable and other receivables are classified as loans and receivables. Financial derivative instruments One series of the Company s convertible debentures contains an embedded derivative related to the Company s ability to convert the debenture to equity at maturity regardless of the share price at that point in time. The embedded derivatives are recognized at fair value at inception and subsequently revalued at each reporting date, with the resulting difference being recorded as other finance gains or losses. The three levels of fair value hierarchy are: Level 1 Unadjusted quoted prices in active markets for identical assets and liabilities; Level 2 Inputs other than quoted prices that are observable for assets or liabilities, either directly or indirectly; and Level 3 Inputs for assets for assets and liabilities that are not based on observable market data The embedded derivative is classified as Level 2 (note 7d). 9.
11 Other financial liabilities Other financial liabilities are financial liabilities that are not derivative liabilities or classified as FVTPL. Other financial liabilities are initially recognized at fair value. Subsequent to initial recognition, other financial liabilities are measured at amortized cost using the effective interest method. The Company s other financial liabilities include the line of credit, accounts payable and accrued liabilities, subordinated debt, the term loan and the debt component of the convertible debentures. The effective interest method is a method of calculating the amortized cost of an instrument and of allocating interest income over the relevant period. The effective interest rate is the rate that discounts estimated future cash receipts (including all transaction costs and other premiums or discounts) through the expected life of the debt instrument to the net carrying amount on initial recognition. Financial liabilities are classified as current liabilities if payment is due within 12 months (or within the normal operating cycle of the business if longer). Otherwise, they are presented as non-current liabilities. Cash and cash equivalents Cash and cash equivalents are defined as cash and highly liquid financial instruments that are readily convertible into a known amount of cash and which are subject to an insignificant risk of changes in value. Due to the short-term nature of these assets, the fair value of these instruments is not significantly different from their carrying value. Property and equipment Property and equipment are stated at cost less accumulated amortization and accumulated impairment losses. Cost includes expenditures that are directly attributable to the acquisition of the asset. Subsequent cost are included in the asset s carrying amount or recognized as a separate asset, as appropriate, only when it is probable that the future economic benefits associated with the item will flow to the company and the cost can be measured reliably. Repairs and maintenance costs are charged to the statement of operation during the period in which they are incurred. The major categories of property and equipment are amortized to operations on a straight line basis over their estimated useful lives as follows office equipment (3 years), furniture and fixtures (5 years), leasehold improvements (lesser of the estimated useful life or the remaining lease term). The company allocates the amount initially recognized in respect of an item of property and equipment to its significant parts and depreciates separately each such part. The carrying amount of a replaced part is recognized when replaced. Residual values, method of amortization and useful lives of the assets are reviewed annually and adjusted if appropriate. Intangible assets Intangible assets are stated at cost less accumulated amortization and accumulated impairment loss. Intangible assets are amortized over their estimated useful lives on a straight line basis over their estimated useful lives as follows Proprietary software and technology (3 to 5 years), capitalized development costs (3-7 years), customer relationships (5 to 8 years) and cross sell opportunities (10 years). The method of amortization and useful lives of the assets are reviewed at least annually and adjusted if appropriate. Capitalized development costs are amortized over the estimated useful life of the software product developed. Goodwill Goodwill represents the excess of the consideration transferred business acquisitions over the fair value of identifiable net assets acquired in such acquisitions. Goodwill is determined as at the date of the business combination. Goodwill is not amortized but is tested for impairment annually or more frequently if events or changes in circumstances indicate the asset might be impaired. Impairment of non-financial assets At each reporting date the Company s assets are reviewed to determine whether there is an indication that those assets are impaired. If such an indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment, if any. For the purpose of measuring recoverable amounts, assets are grouped at the lowest levels for which there are separately identifiable cash inflows (cash-generating units or CGUs ). The recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted at a rate that reflects current market assessments of the time value of money and the risks specific to the asset or CGU, as determined by management. If the recoverable amount of an asset is 10.
12 estimated to be less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount and the impairment loss is recognized in the statement of operations. Goodwill is reviewed for impairment annually or at any time if an indicator of impairment exists. Goodwill acquired through a business combination is allocated to each CGU or group of CGUs that is expected to benefit from the related business combination. A group of CGUs represents the lowest level within the entity at which goodwill is monitored for internal management purposes, which is not higher than an operating segment. The Company has one CGU for the purposes of goodwill impairment testing at the operating segment level given this is the level at which goodwill is monitored. Goodwill is not amortized. An impairment loss is reversed if there is a change in the estimates used to determine the recoverable amount, with the exception of impairment losses on goodwill which are not reversed. When an impairment loss is reversed, the carrying amount of the asset is increased to the revised estimate of its recoverable amount so that the increased carrying amount does not exceed what the carrying amount would have been had no impairment losses been recognized for the asset in prior years. Leases Leases are classified as either finance or operating leases. Finance leases are those that substantially transfer the benefits and risks of ownership of an asset to the lessee. All leases other than finance leases are operating leases. Assets held under finance leases are recognized as assets, and a corresponding liability is recognized as a finance lease obligation. Lease payments are apportioned between interest expense and reduction of the lease obligation to achieve a constant rate of interest on the remaining liability. Total payments under operating leases are expensed on a straight-line basis over the term of the relevant lease. Incentives received upon entry into an operating lease are recognized straight-line over the lease term. Income taxes Income tax consists of current and deferred tax. Income tax is recognized in the statement of operations 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. In general deferred income tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities, as well carry forwards of unused tax losses and unused tax credits and are measured using the substantively enacted tax rates and laws that will be in effect when the differences are expected to reverse. However, deferred income tax is not recognized if it arises from the initial recognition of goodwill or initial recognition of an asset or liability in a transaction other than a business combination that, at the time of the transaction, affects neither accounting nor taxable profit of loss. Deferred income tax is provided on temporary differences arising on investments in subsidiaries, except, in the case that the timing of the reversal of the temporary difference is controlled by the Company and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax is determined on a non-discounted basis using tax rates and laws that have been enacted or substantially enacted at the balance sheet date and are expected to apply when the deferred tax asset is realized or liability is settled. Deferred income tax assets are recognized to the extent that realization is considered probable. Deferred income taxes are presented as non-current. Income (loss) per common share Basic income (loss) per common share has been calculated by dividing the loss from the consolidated financial statements by the weighted average number of common shares outstanding during the year. The fully diluted income (loss) per share would be calculated using a common share balance increased by the number of common shares that could be issued under outstanding stock options and convertible debentures of the Company. The effect of the stock options and convertible debentures are excluded from the calculation of the fully diluted loss per share when they are anti-dilutive. Stock-based compensation and other stock-based payments Stock options granted are settled with shares of the Company. The expense is determined based on the fair value of the award granted and recognized over the period which services are received, which is usually the vesting period. For awards with graded vesting, the fair value of each tranche is recognized over its respective vesting period. At the end of each reporting period, the Company re-assesses its estimates of the number of awards that are expected to vest and recognizes the impact of the revisions in the statement of operations. 11.
13 5. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS The Company makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a material change to the carrying amounts of assets and liabilities within the next financial year are addressed below. Revenue recognition The Company uses the percentage-of-completion method of accounting for its professional services and custom development arrangements. Use of this percentage-of-completion method requires the Company to estimate the services performed to date as a proportion of the total services to be performed. This estimate impacts both the amount of revenue recognized by the Company as well as the amount of deferred revenue. Were the proportion of services performed to total services to be performed differ by 10% from management's estimates, the amount of revenue recognized in the year ended March 31, 2014 would be impacted by approximately $389,532. In addition, revenue from sales arrangements that include multiple components is allocated amongst the separately identifiable components based on the relative fair value of each component included in the contract. In order to allocate total revenue to the individual components, management is required to estimate the fair value of each of those elements. A change in the estimated fair value of any component may impact the value assigned to other components which also impacts the timing of revenue recognition over the term of the sales arrangement. Capitalized development costs Software development costs are capitalized as intangible assets when costs are attributable to a clearly defined product, technical feasibility has been established, a market has been identified, the Company intends to market the software and has adequate resources expected to be available to complete the project. Management is required to make judgments as to when the criteria for recognition as intangible assets is met as well as judgments regarding the market for the product and the Company s ability to complete the asset and recover its investments through future sales of the product. As of March 31, 2014, the Company has capitalized internally developed software costs totaling $10,508,888 ( $6,094,399) relating to projects that the Company believes are eligible for capitalization. Had the projects not qualified for capitalization the Company would have recognized additional expense in the year ended March 31, 2014 the amount of $4,193,310 ( $3,167,560). Impairment of goodwill In assessing the goodwill for impairment, the Company compares the recoverable amount, based on the fair value less cost to sell, of the entity as a whole to its carrying value. If the carrying value exceeds the recoverable amount an impairment charge is recognized to the extent that the carrying value exceeds the recoverable amount. No impairment charge has arisen as a result of the review performed as at March 31, 2014 and Reasonably possible changes in key assumptions would not cause the recoverable amount of goodwill to fall below the carrying value. Financial Derivative Instruments One series of the Company s convertible debentures contains an embedded derivative related to the Company s ability to convert the debenture to equity at maturity regardless of the share price at that point in time. In determining the fair value of the embedded derivative the Company uses level 2 assumptions with the main inputs including the price of the Company s stock on the valuation date, the volatility of the Company s stock, the CAD risk free interest rate and the credit spreads of the Company. The most significant assumption is the price of the Company s stock and its volatility. A significant change in either assumption could result in a significant change in the value of the embedded derivative asset. Refer to note 7d for further information on the embedded derivative. Income Tax Management is required to apply judgment in determining whether it is probable deferred income tax assets will be realized. At March 31, 2014 and 2013, management had determined that future realization of its deferred income tax assets did not meet the threshold of being probable, and as such, has not recognized any deferred income tax assets in the consolidated balance sheet. In making this determination, management must make assumptions and judgments about the Company s future performance including estimated revenues, expenses and tax profitability. A change in these assumptions or judgments could result in additional deferred tax assets or liabilities. 12.
14 In addition, the measurement of income taxes payable and deferred income tax assets and liabilities requires management to make judgments in the interpretation and application of the relevant tax laws. The actual amount of income taxes due only becomes final upon filing and acceptance of the tax return by the relevant authorities, which occurs subsequent to the issuance of the financial statements. 6. CHANGES IN ACCOUNTING POLICIES New Accounting Standards, Amendments and Interpretations Adopted The following is a description of the new standards adopted in preparation of these consolidated financial statements: IFRS 10, Consolidated Financial Statement ( IFRS 10 ), replaces the guidance in IAS 27 Consolidated and Separate Financial Statements and SIC-12 Consolidation Special Purpose Entities, and provides a single model to be applied in the control analysis for all investees, including entities that are currently special purpose entities in the scope of SEC-12. The Company adopted IFRS 10 in its consolidated financial statements for the period beginning on April 1, 2013, and its adoption did not have a material impact on these consolidated financial statements. IFRS 11, Joint Arrangements ( IFRS 11 ), requires a venturer to classify its interest in a joint arrangement as a joint venture or joint operation. Joint ventures will be accounted for using the equity method of accounting, whereas for a joint operation the venturer will recognize its share of the assets, liabilities, revenue and expenses of the joint operation. Under existing IFRS, entities have the choice to proportionately consolidate or equity account for interests in joint ventures. IFRS 11 supersedes IAS 31, Interests in Joint Ventures, and SIC-13, Jointly Controlled Entities - Non-monetary Contributions by Venturers. The Company adopted IFRS 11 in its consolidated financial statements for the period beginning on April 1, 2013, and its adoption did not have a material impact on these consolidated financial statements. IFRS 12, Disclosure of Interests in Other Entities ( IFRS 12 ), establishes disclosure requirements for interests in other entities, such as joint arrangements, associates, special purpose vehicles and off-balance sheet vehicles. The standard carries forward existing disclosures and also introduces significant additional disclosure requirements that address the nature of, and risks associated with, an entity s interests in other entities. The Company adopted IFRS 12 in its consolidated financial statements for the period beginning on April 1, 2013, and its adoption did not have a material impact on these consolidated financial statements. IFRS 13, Fair Value Measurement ( IFRS 13 ), is a comprehensive standard for fair value measurement and disclosure requirements for use across all IFRS standards. The new standard clarifies that fair value is the price that would be received to sell an asset, or paid to transfer a liability in an orderly transaction between market participants, at the measurement date. It also establishes disclosures about fair value measurement. Under existing IFRS, guidance on measuring and disclosing fair value is dispersed among the specific standards requiring fair value measurements and, in many cases, does not reflect a clear measurement basis or consistent disclosures. The Company adopted IFRS 13 in its consolidated financial statements for the period beginning on April 1, 2013, and its adoption did not have a material impact on these consolidated financial statements. IAS 1, Presentation of Financial Statements, has been amended to require entities to separate items presented in the comprehensive income (loss) into two groups, based on whether or not items may be recycled in the future. Entities that choose to present the comprehensive income (loss) items before income taxes will be required to show the amount of income taxes related to the two groups separately. The Company adopted the amendments in its consolidated financial statements for the period beginning on April 1, 2013, and as the amendments only require changes to the presentation of items in other comprehensive income, their adoption did not have a material impact on these consolidated financial statements. Accounting Standards, Amendments and Interpretations Not Yet Implemented The following is summary of new standards, amendments to standards and interpretations not yet effective for the year ended March 31, 2014, which have not been applied in preparing these consolidated financial statements. IFRS 9 Financial Instruments ( IFRS 9 ) replaces the guidance in IAS 39 Financial Instruments: Recognition and Measurement, on the classification and measurement of financial assets and liabilities. The mandatory effective date of IFRS 9, which supersedes previous versions, has been left open by the IASB. Early adoption of IFRS 9 is permitted. The Company does not intend to adopt IFRS 9 in its consolidated financial statements for the year beginning April 1,
15 Amendments to IAS 32 Offsetting Financial Assets and Liabilities, clarify when an entity has a legally enforceable right to set-off and net versus gross settlement mechanisms. The Company intends to adopt the amendments to IAS 32 in its consolidated financial statements for the year beginning April 1, 2014 and does not expect the amendments to have a material impact on the consolidated financial statements. Amendments to IAS 36 Impairment of Assets, clarify IASB s original intention to require disclosure of the recoverable amount of impaired assets as well as additional disclosures about the measurement of the recoverable amount of impaired assets. The Company intends to adopt the amendments to IAS 36 in its consolidated financial statements for the year beginning April 1, 2014 and does not expect the amendments to have a material impact on the consolidated financial statements. 7. SENIOR LOAN FACILITY AND CONVERTIBLE DEBENTURES In December 2011, the Company extinguished its term loan with a previous lender and entered into a new line of credit (note 7a) and term loan arrangement (note 7b) with its current lender and established Export Development Canada (EDC) as a guarantor for its line of credit and term loan. In March 2013, the Company completed an increase in its Senior Loan Facility with the addition of a $2,000,000 term loan. The Company s US $1,000,000 revolving line of credit, US $3,500,000 term loan and US $2,000,000 term loan are collectively referred to as the Senior Loan Facility. The Senior Loan Facility is secured by the lender with a first priority general security interest on all of assets of the Company (including intellectual property) including that of its subsidiaries. a. Line of credit This credit facility bears interest at a variable rate of the prime rate plus 1.75%. At March 31, 2014, the Company had drawn Cdn. $1,000,000 under the revolving line of credit. The line of credit is collateralized by a security interest in the Company s assets. The line of credit expires September 30, b. Term loan The US $3,500,000 term loan ( First term loan ) is repayable in 48 equal monthly installments of principal plus all accrued interest commencing January 1, This loan bears interest at a variable rate of the prime rate plus 2.25%. The US $2,000,000 term loan ( Second term loan ) is repayable in 36 equal monthly installments of principal plus all accrued interest commencing April This loan bears interest at a variable rate of the prime rate plus 2.25%. The term loans are collateralized by a security interest in the Company s assets. Pursuant to the Company s debt agreement with the lender, the Company is subject to certain covenants with respect to its balance sheet and financial performance. The Company incurred costs of $130,775 related to the establishment of the first term loan facility and $78,472 with the second term loan. These costs have been netted against the carrying amount of the debt and thus recorded as interest expense using the effective interest rate method over the term of the facility. March 31, 2014 March 31, 2013 First term loan 1,692,797 2,389,788 Second term loan 1,474,000 1,986,317 3,166,797 4,376,105 Unamortized deferred financing charges (128,779) (167,681) Total term loan 3,038,018 4,208,424 Current portion of term loan (1,634,461) (1,521,720) Term loan, net of deferred finance charges and current portion 1,403,557 2,686,704 c. Convertible Debentures 14.
16 Series A In March 2013, the Company redeemed $925,000 of the Series A Debentures in exchange for investments in Series C as described more fully below. As a result of this exchange the unamortized portion of the notional interest and costs on the Series A Debentures totaling $102,376 was charged to interest expense in the year ended March 31, In the quarter ended June 30, 2013, the Company redeemed the balance of the Series A Debentures totaling $1,141,000 and wrote off the remaining unamortized transaction costs of $7,108 and remaining interest accretion of $69,464. Series B In September 2012, the Company issued $2,750,000 in Series B unsecured Convertible Debentures ( Series B ) that bear interest at a rate of 12% per annum, payable monthly and are scheduled to mature on January 15, Series B include multiple elements including the debt itself and a conversion feature whereby the holder can convert the debt to equity at the price specified in the debenture of $0.35. The conversion feature includes an additional provision whereby the Company can force a conversion of the debt to equity at the conversion price of $0.35 regardless of the then current share value. This conversion feature meets the accounting definition of a derivative instrument. The Company performed a valuation of all these elements to determine their fair value. This resulted in the recording of a derivative financial asset of $673,752, convertible debt of $2,492,107 (representing the fair value of the future contractual cash flows from the debt using an interest rate of 15.2%) and equity of $715,591 (representing the fair value of the conversion feature). The net difference of these three elements and the face value of $2,750,000 was recorded as contributed surplus of $216,054. The transaction costs related to the Series B Debentures totaled $40,968 of which $35,000 was allocated to the debt portion and $5,968 to the equity portion. The estimated fair value of the financial derivative asset was determined using level 2 assumptions with the main inputs being the price of the Company s stock on the valuation date, the volatility of the Company s stock, the CAD risk free interest rate and the credit spread of the Company. At inception, the fair value attributed to the embedded derivative was $673,752. This was subsequently revalued at March 31, 2013 at $808,694 and the related gain of $134,942 was recorded as other finance gain. In December 2013, Series B holders were given special exchange and conversion options for their Series B debentures. Holders were given the option to (1) exchange their Series B investment for an investment in Series C (up to an additional aggregate investment of $228,000) or (2) convert their Series B investment to common shares at a reduced rate of $0.25 per common share, subject to approval by the TSX Venture Exchange. As a result of this special exchange and conversion offering, a total of $228,000 in Series B was converted to Series C, $2,112,000 was converted to equity (including $1,150,000 held by two directors and one officer of the Company) resulting in the issuance of 8,448,000 common shares and the holders of $410,000 in Series B did not exercise either of the special exchange or conversion options. Approval for the issuance of the shares was received from the TSX Venture Exchange in December The embedded derivative was valued as of December 18, 2013, the transaction date, and the portion of the derivative associated with both the exchanged and converted investments, $727,933, was written off and recorded as a finance loss due to the fact that the conversion right no longer exists. This loss, net of the increase in the value of the derivative of $27,644, is recorded as other finance loss of $658,963 in the income statement. In addition, the previously capitalized and unamortized transaction costs and notional interest of $17,103 and $126,025, respectively, were written off and recorded as interest expense. The continuity of the embedded derivative and the related finance gains and losses reflected in the income statement is as follows: March 31, 2014 March 31, 2013 Financial Derivative Asset, beginning of year 808,694 - Recognized on issuance of Series B debentures - 673,752 Write-off on conversion to Series C and common shares (686,607) - Finance gain recorded during the year 27, ,942 Financial Derivative Asset, end of year 149, ,
17 Fair value at March 31, 2014 Quoted prices in active markets for Significant other Significant Carrying amount identical instruments observable inputs unobservable inputs at March 31, 2014 Level 1 Level 2 Level 3 Embedded Derivative Asset 149, ,731 - The embedded derivative asset is carried at its fair value of $149,731 at March 31, 2014 ( $808,694). The fair value of the embedded derivative, which is categorized as Level 2, was determined using the following significant inputs: The fair value of the underlying stock as determined by the quoted stock prices on the TSX-V. Volatility as determined using an average of the underlying stock s historical volatility and its reference index s historical volatility. The credit spread for the Company as determined by observing the credit spreads for 8 comparable companies. The CAD risk free interest rate as quoted by the Bank of Canada. The embedded derivative will be revalued and marked to market at each subsequent balance sheet date with the resulting difference being recorded as a gain or loss in the income statement. Series C In March 2013, the Company raised an additional $3,265,000 in Series C unsecured Convertible Debentures that bear interest at a rate of 10% per annum, payable monthly and are scheduled to mature in March Certain holders of $925,000 aggregate principal amount of the Series A Debentures agreed to tender such Debentures for early redemption by the Company and directed the proceeds thereof towards the subscription for an equivalent aggregate principal amount of the Series C Debentures. The Series C unsecured Convertible Debentures include two elements, the debt itself and a conversion feature whereby the holder can convert the debt to equity at the price specified in the debenture of $0.60. The Company performed a valuation of the convertible debt which valued the debt at $3,185,614 representing the fair value of the future contractual cash flows from the debt using an interest rate of 10.1%, with the difference between this and the face value of $3,265,000 being recorded as equity of $79,386. The transaction costs related to the Series C Debentures totaled $347,880 of which $339,422 was allocated to the debt portion and $8,458 to the equity portion. The difference between the face value and fair value of the convertible debt of $79,386 will be amortized to interest expense over the term of the debt as will the costs allocated to the debt. In August 2013 and September 2013, the Company raised an additional $650,000 and $857,000, respectively, on the same terms as the original raise in March 2013, bringing the total Series C principal to $4,772,000. The Company performed a valuation of the convertible debt issued in August and September 2013, which valued the debt at $1,476,860 representing the fair value of the future contractual cash flows from the debt using an interest rate of 10.1%, with the difference between this and the face value of $1,507,000 being recorded as equity of $30,140. The transaction costs related to the Series C Debentures totaled $78,372 of which $76,741 was allocated to the debt portion and $1,631 to the equity portion. The difference between the face value and fair value of the convertible debt of $30,140 will be amortized to interest expense over the term of the debt as will the costs allocated to the debt. In December 2013, as further described above, the Company issued additional Series C Debentures totaling $228,000 in connection with the Series B special exchange offering. 16.
18 Maturity and Redemption Terms Following the first year anniversary of the Debentures and prior to their maturity, the Company has the right to redeem the Debentures in cash, in whole or in part, at a price equal to their principal amount plus accrued and unpaid interest. At maturity, the Debentures will be redeemed by the issuance of fully-paid common shares at the conversion price. The principal balance of all Convertible Debentures outstanding at March 31, 2014 will mature as follows: Series B Series C Total $ January 15, , ,000 March 14, ,000,000 5,000,000 Total principal 410,000 5,000,000 5,410,000 The following table summarizes the various components of the Convertible Debenture balance as of March 31, Series B Series C Total $ Principal balance 410,000 5,000,000 5,410,000 Unamortized notional interest (21,378) (87,171) (108,549) Unamortized costs (2,870) (283,401) (286,271) Net amount 385,752 4,629,428 5,015, BUSINESS ACQUISITION, INTEGRATION AND OTHER COSTS The Company incurred certain costs that are classified as business acquisition, integration and other costs. In the year ended March 31, 2013, these costs included costs related to the planned closure of an office of $349,079 and compensation due to severed employees of $326,725. There were no such expenses in the year ended March 31, PROPERTY AND EQUIPMENT Office Furniture Assets under Leasehold equipment and fixtures capital lease improvements Total $ Cost, as at March 31, ,053, ,116 1,852, ,182 5,005,370 Additions 356,683 25, , , ,660 Cost, as at March 31, ,410, ,980 1,970, ,869 5,662,030 Accumulated Depreciation, As at March 31, ,866, ,881 1,787, ,761 4,148,100 Charge for the period 110,991 15,818 53, , ,254 Accumulated Depreciation, As at March 31, ,977, ,699 1,840, ,889 4,436,354 Net carrying amount, As at March 31, ,960 60,235 64, , ,270 As at March 31, ,652 70, , ,980 1,225,676 For the year ended March 31, 2014, depreciation expense of $288,254 ( $334,970) is included in the consolidated statements of operations and comprehensive income (loss). This depreciation expense is allocated $16,342 ( $28,458) to sales and marketing, $131,581 (2013 $83,671) to general and administration, $104,666 ( $247,796) to research and development and $35,665 ( $95,291) to client services. 17.
19 The Company received $120,000 in inducement payments from its landlord in the year ended March 31, This payment reduced the amount of cost that was capitalized as property and equipment that year. 10. INTANGIBLE ASSETS AND GOODWILL Proprietary Capitalized Intangible software and development Customer Cross sell Assets Goodwill technology costs relationships opportunities Subtotal Total $ Cost As at March 31, ,792,399 3,876,899 6,094,399 6,103,984 1,222,644 17,297,926 22,090,325 Additions - - 4,414, ,414,489 4,414,489 As at March 31, ,792,399 3,876,899 10,508,888 6,103,984 1,222,644 21,712,415 26,504,814 Accumulated Amortization As at March 31, ,471, ,195 4,456, ,039 9,323,320 9,323,320 Charge for the period - 276, , , ,672 1,235,855 1,235,855 As at March 31, ,748, ,266 5,043,108 1,049,711 10,559,175 10,559,175 Net carrying amount, As at March 31, ,792, ,481 5,628,204 1,647, ,605 7,974,606 12,767,005 As at March 31, ,792, ,809 9,790,622 1,060, ,933 11,153,240 15,945,639 For the year ended March 31, 2014, amortization expense of $1,235,855 (2013-$1,290,119) is included in the consolidated statements of operations and comprehensive loss. Amortization expense for the year ended March 31, 2014 is allocated $803,815 ( $656,155) to sales and marketing and $432,040 ( $633,964) to research and development. For the year ended March 31, 2014 interest costs totaling $558,888 ( $432,543) were capitalized included in capitalized development costs. 11. CAPITAL STOCK In December 2013, Series B holders were given special exchange and conversion options for their Series B debentures. On December 17, 2013, $2,112,000 in Series B debentures (including $1,150,000 held by two directors and one officer of the Company) were converted to equity resulting in the issuance of 8,448,000 common shares On December 31, 2013, the Company s stockholders authorized the issuance of 10,000,000 common shares to the Chairman of the Board of the Company, upon the conversion of a $2,500,000 unsecured convertible note (the "Note") issued on November 27, The Note was outstanding for 34 days until such time that its conversion could be approved by the stockholders. The Company incurred costs and expenses totaling $63,793 associated with the issuance of the Note and subsequent conversion of the Note to shares. These costs were recorded as a reduction to the associated equity balance. Authorized Unlimited Preference shares Unlimited Common shares Issued and Outstanding The Company had 94,758,915 ( ,310,915) common shares outstanding as at March 31,
20 a. Stock Option Plan The Company has adopted a stock option plan that permits the Board of Directors to grant employees, officers, directors and consultants of the Company non-transferable stock options to purchase up to 10% of the common shares issued and outstanding at any time. Under the plan, no individual person may own greater than 5% of the outstanding stock options. Generally, the stock options vest over four years and are exercisable for a maximum term of five years. The fair value of each stock option on the date of grant was estimated using the Black-Scholes option pricing model with the following assumptions at the measurement date: March 31, 2014 March 31, 2013 Fair value per share $ 0.08 $ 0.09 Risk-free interest rate 1.35% 1.28% Estimated volatility 42% 48% Dividend yield 0% 0% Expected life 4 years 4 years Total stock-based compensation expenses included in the Company s operating expenses for the year ended March 31, 2014 was $128,298 ( $139,793). i. Summarized information relative to the Company s stock option plan March 31, 2014 March 31, 2013 Weighted Weighted Average Average Number of Exercise Number of Exercise Stock Options Price Stock Options Price Balance, beginning of year 6,618,912 $ ,651,011 $ 0.31 Issued 1,965,000 $ ,462,500 $ 0.24 Cancelled/Expired (2,098,428) $ 0.26 (1,494,599) $ 0.74 Balance, end of year 6,485,484 $ ,618,912 $
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DIRECTORS REPORT Dear Members, The Directors have pleasure in presenting their Annual Report and Audited Accounts for the year ended March 31, 2015. 1. FINANCIAL HIGHLIGHTS: Particulars 2014-2015 2013-2014
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