For the quarter ended June 30, 2014 Management s Discussion and Analysis (MD&A) supplements, but does not form part of the consolidated financial statements and notes of Nightingale Informatix Corporation ( Nightingale or the Company ) for the period. This MD&A, prepared as of August 27, 2014, should be read in conjunction with the Company s March 31, 2014 Audited Consolidated Annual Financial Statements and Notes.
This MD&A provides an overview of significant developments that have affected Nightingale Informatix Corporation s ( Nightingale or the Company ) performance during the quarter period ended June 30, 2014. ADOPTION OF INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) The consolidated financial statements referred to in this MD&A have been prepared in accordance with International Financial Reporting Standards ( IFRS ). Nightingale does however use Non-IFRS measures such as Adjusted EBITDA herein (see Section 4 Non-IFRS Measures). IFRS replaced Canadian GAAP for publicly accountable enterprises, including the Company, effective for interim and annual financial statements relating to fiscal years beginning on or after January 1, 2011. Accordingly, the accompanying consolidated financial statements for the quarter ended June 30, 2014 have been prepared in accordance with IFRS. All figures herein are expressed in Canadian dollars unless otherwise noted. This MD&A contains forward-looking statements within the meaning of the United States Private Securities Litigation Reform Act of 1995 and applicable Canadian securities legislation. Generally, forward-looking statements can be identified by the use of forward-looking terminology such as plans, expects or does not expect, is expected, budget, scheduled, estimates, forecasts, intends, anticipates or does not anticipate, or believes, or variations of such words and phrases or state that certain actions, events or results may, could, would, might or will be taken, occur or be achieved, as well as those specifically identified herein. Cautionary Note Regarding Forward-Looking Statements Forward-looking statements are subject to known and unknown risks, uncertainties and other factors that may cause the actual results, level of activity, performance or achievements of Nightingale to be materially different from those expressed or implied by such forward-looking statements, including but not limited to: risks related to the speculative nature of the medical software industry, which is affected by numerous factors beyond Nightingale s control; the ability of Nightingale to successfully develop and introduce its products to the marketplace, secure customer contracts and the timing of securing such contracts; the ability of Nightingale to complete and successfully integrate its acquisitions on an accretive basis, Nightingale s access to debt and capital facilities, including compliance with current debt arrangements; the existence of present and possible future government regulation; the significant competition that exists in the medical software industry; the early stage of Nightingale s business, and risks associated with early stage companies, including uncertainty of revenues, markets and profitability and the need to raise additional funding. All material assumptions used in making forward-looking statements are based on management s knowledge of current business conditions and expectations of future business conditions and trends. Certain material factors or assumptions applied by management in making forward-looking statements, include without limitation, factors and assumptions regarding future trends in healthcare spending, economic conditions affecting Nightingale and North American economies; Nightingale's ability to continue to fund its business, rates of customer defaults, relationships with, and payments to lenders, as well as Nightingale's operating cost structure. Although Nightingale has attempted to identify important factors that could cause actual results to differ materially from those contained in forward-looking statements, there may be other factors that cause results not to be as anticipated, estimated or intended. There can be no assurance that such statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements. Accordingly, readers should not place undue reliance on forwardlooking statements. Nightingale does not undertake to update any forward-looking statements that are incorporated by reference herein, except in accordance with applicable securities laws. Non-IFRS Measures The Company internally measures its performance and results of initiatives through a number of measures that are not recognized under IFRS and may not be comparable to similar measures used by other companies. Measures such as Adjusted EBITDA and Recurring and Non-Recurring Revenue are used by the Company, as it believes this information would be useful to investors to help evaluate the performance of the Company. Investors should be cautioned, however, that Adjusted EBITDA and Recurring and Non-Recurring Revenue should not be construed as an alternative to total revenues or net income (loss) as determined in accordance with IFRS (see Section 4 under Non-IFRS Measures for more information). 1.
1. OVERVIEW Business Description Established in 2002, Nightingale (TSX-V: NGH) is a recognized industry leader in cloud-based clinician and community-based Electronic Health Records (EHR). The Company s EHR and integrated Practice Management products enable physicians and nurse practitioners at primary care practices, multi-physician outpatient clinics and hospitals, as well as government and regional health organizations to automate business and clinical functions. Nightingale provides healthcare practitioners with the tools to effectively migrate from a paper-based environment to a secure digital platform, enhancing patient care, increasing revenue opportunities and optimizing their clinic operations. Nightingale s Strategy Nightingale is a leading cloud-based Electronic Health Record and Practice Management software provider in Canada. The Company has agreements in place with hospitals, regional groups and provincial governments, and in fiscal 2012, Nightingale won one of the largest EHR contracts ever awarded in Canada (approximately $17.0 million 10-year contract with the Association of Ontario Health Centres, or AOHC ). Nightingale is also expanding its presence in the US healthcare industry. The Company has implemented its US EHR at a number of US clinics that have been using the Company s Practice Management products, and in fiscal 2012, Nightingale purchased all of the assets related to a US-based company s Software as-a-service (SaaS) Practice Management business. With the AOHC contract win and US acquisition that have propelled the business forward and bolstered the Company s presence in French speaking EHR markets, the Company s broadening North American footprint, and its technology leadership, Nightingale believes that it is well positioned to capture the increasing opportunities within the Canadian and US EHR markets. Nightingale focuses on helping physicians overcome EHR, and other healthcare technology adoption hurdles by providing solutions to what the Company considers to be the three main adoption hurdles: Adoption Hurdle Apprehension to Technology IT Infrastructure Cost The Economics Nightingale s Solution Technology leadership Flexibility with input devices (tablets, digital pen) Expert implementation and support staff Track record of success SaaS approach No local servers Automated backups and updates Full support from a team of experts Funding approved Varying payment models Additional revenue streams Nightingale has established itself as a major player in its domain through technology leadership. However, the emergence of multiple competitors in the marketplace and the Company s entrance into the highly competitive US EHR market has magnified the need for Nightingale to differentiate itself in a clear and compelling way. The Company is achieving this through further technology innovation, leveraging recent advancements in hardware and operating systems to enhance user adoption, and set new industry standards for service levels. Nightingale provides products and services under the banner of The Nightingale Promise, its Company brand promise. The Nightingale Promise has four pillars: 1. Superior technologies 2. Unparalleled customer service 3. Superior education programs 4. Dedicated ethical people 2.
Going forward, Nightingale plans to focus on its proven strengths growing its EHR business organically, while seeking opportunistic strategic acquisitions that could help expand the Company s presence in key regional markets. Nightingale is focused on demonstrating operational and monetary efficiency to its users to help them eliminate their reliance on government subsidies. This positions Nightingale to further penetrate markets that benefit from government funding programs, while also enabling the Company to better enter markets where there are no subsidies. In Canada, Nightingale aims to continue to leverage its successful track record in the enterprise and small business market and to further expand its customer footprint. In the US, the Company s product has been certified under the Meaningful Use Funding Criteria and Nightingale has developed a cost effective self-service adoption model that it will implement with its next generation EHR product, NightingaleEHR (formerly referred to as Nexia). The Company is also focused on selling value-added services tied to the use of the EHR and cross selling its EHR into its existing customer base to those clients currently using the Company s Practice Management offering. Across North America, Nightingale will continue to establish new revenue streams; evolving its healthcare technology platform to create clear differentiators that further bolster the Company s technology leadership and helps Nightingale gain additional market share. EHR is Nightingale s key growth driver, and management believes the market is opening up. Large enterprises along with small and medium-sized clinics are increasingly recognizing the value, technology leadership and cost efficiencies of Nightingale s cloud-based EHR offering. In addition, the Company s target market is expanding. Peripheral healthcare practitioners and markets in Canada are starting to use EHRs, creating a net new opportunity for Nightingale. Revenue Model Nightingale s revenue model is based primarily on generating revenue from physicians and health-care providers directly or indirectly through their buying groups, such as hospitals, health-care associations and government agencies, through the delivery of proprietary software and services. Nightingale s revenue is derived from a variety of software and related service offerings. For its software solutions, Nightingale often charges an up-front software licence fee along with annual support and maintenance fees; however, the Company also offers a monthly transaction based fee structure, and a SaaS model that combines software license, hosting, support and maintenance fees in a single flat monthly fee. The utilization model has become much more prevalent as the Company has transitioned to the SaaS-based model and this is an important part of the Company s strategy. Implementation, training and other services are offered under all models and are recognized as services are rendered. Outlook See Cautionary Note Regarding Forward-Looking Statements. Nightingale believes that its AOHC contract win and established US footprint will act as catalysts for growth. Furthermore, the Company completed its transition to a pure-play technology Company by moving away from increasingly commoditized revenue cycle management and transcription healthcare services. The Company recently launched its next generation EHR platform, NightingaleEHR (formerly referred to as Nexia). NightingaleEHR was developed to address a number of the key obstacles hampering the adoption of EHR including fear of workflow disruption and commitment to expensive and time consuming training and implementation programs. Management believes that the resulting platform delivers near zero-based training, thereby greatly reducing the perceived barriers to adoption. Furthermore, a zero-based training makes the platform suitable for a self-serve sales approach to the large but fragmented SMB market. The platform is browser agnostic, uses the latest technology and provides a platform for Nightingale to integrate additional functionality and third-party products, making it the basis for an EHR eco-system. Management believes that through added functionality and third-party products, the Company will be able to unlock new recurring revenue streams. Despite the short-term revenue volatility experienced as practitioners hold off on making investments pending the commercial availability of NightingaleEHR, as well as due to the effects of its transition to a SaaS based model for the SMB market, Management believes that the attributes of the platform, the self-serve sales model for the SMB market, as well as its initiatives to unlock additional revenue streams will contribute to future growth and help towards reaching its objective of achieving profitability on the basis of recurring revenues alone. 3.
Nightingale plans to focus its attention and investments on key areas of the business that best position the Company to acquire new customers and expand its market share. However, the Company remains committed to managing expenses and cash in pursuit of achieving consistent positive cash flow, positive Adjusted EBITDA and bottom line profitability. Overall, Nightingale will work to grow its EHR business organically, particularly with the recent launch of its next-generation EHR platform, NightingaleEHR, while considering complementary strategic acquisition opportunities that could help expand the Company s presence in key regional markets. In Canada, Nightingale expects to see further opportunity for expansion. In Ontario, due to the credibility and brand awareness the Company s major contract wins are creating, new opportunities are emerging in both the enterprise and SMB markets. Other provinces are looking to adopt EHR funding initiatives, other healthcare practitioners have become a new sales opportunity and more of a mainstream market will evolve over the long-term. In addition, Nightingale will soon offer bilingual products and services, which will allow the Company to participate more fully in bilingual or French-speaking communities. In the US, the government stimulus programs and EHR adoption incentive payments are increasing the level of interest in and adoption of EHR solutions. The Company believes that there is a significant long-term opportunity available in the US market. Q1 Fiscal 2015 Financial and Operational Summary Revenue was $3.7 million, down 1% compared to $3.8 million in Q1 F2014, and down 7% from $4.0 million in Q4 F2014. The variance from F2014 primarily reflects a decrease in non-recurring revenues which was partially offset by a 9% increase in recurring revenues. Gross profit was $3.3 million, or 88% of revenue, compared to $3.3 million, or 89% of revenue, in Q1 F2014 and $3.6 million, or 90% of revenue, in Q4 F2014. Operating Expenses, excluding stock based compensation, depreciation and amortization costs were $2.9 million compared to $3.2 million in Q1 F2014 and $3.2 million in Q4 F2014. Adjusted EBITDA 1 was $0.3 million, 9% of revenue, an increase of 19% from $0.1 million, or 3% of revenue, in Q1 F2014 and down from $0.4 million or 10% of revenue, in Q4 F2014. Net loss was $0.1 million compared to a net loss of $0.8 million in Q1 F2014 and net loss of $0.6 million in Q4 F2014. Cash provided by operations was $1.6 million compared to cash provided by operations of $0.2 million in Q1 F2014. Total deferred revenue was $5.5 million up from $4.8 million at March 31, 2014. In May 2014, the Company announced the promotion of Jamie Cappelli to Executive Vice President of Operations and in July 2014, the Company announced the appointment of Ray Payette as Chief Technology Officer. In July 2014, unveiled its next generation cloud-based EHR Nightingale EHR (Nexia). In August 2014, the Company announced a commitment for an investment of $3.5 million in the form of a subordinated term loan to fund the sales and marketing programs to capitalize on its next generation product Nexia. 4.
2. DISCUSSION OF OVERALL PERFORMANCE, RESULTS OF OPERATIONS AND FINANCIAL CONDITION Year Year Quarter In $000's Quarter Ended Ended Quarter Ended Ended Ended (except per Sept. 30, Dec. 31, March 31, March 31, June 30, Sept. 30, Dec. 31, March 31, March 31, June 30, share data) 2012 2012 2013 2013 2013 2013 2013 2014 2014 2014 Revenue $ $ $ $ $ $ $ $ $ Recurring 2,665 2,625 2,606 10,601 2,602 2,794 2,798 2,817 11,012 2,832 Non-recurring 2,403 2,471 2,594 10,324 1,167 964 1,002 1,152 4,285 860 Total 5,068 5,096 5,200 20,925 3,769 3,758 3,800 3,969 15,297 3,692 Gross Profit 4,570 4,336 4,736 18,582 3,338 3,259 3,360 3,576 13,534 3,254 Operating Expenses 4,040 3,949 4,784 17,289 3,618 3,396 3,614 3,633 14,261 2,924 Adjusted EBITDA 962 828 1,027 3,733 131 266 140 389 926 330 Operating Income (Loss) 529 387 (48) 1,293 (279) (136) (254) (57) (726) (76) Income (Loss) and Comprehesive Income (Loss) 624 227 893 1,994 (780) (245) (1,404) (560) (2,989) (62) Per share Basic $ 0.01 $ - $ 0.01 $ 0.03 $ (0.01) $ - $ (0.01) $ (0.01) $ (0.04) $ - Diluted $ 0.01 $ - $ 0.01 $ 0.03 $ (0.01) $ - $ (0.01) $ (0.01) $ (0.04) $ - Weighted Avg. # of Common Shares Basic 76,311 76,311 76,311 76,311 76,311 76,311 77,518 94,759 81,174 76,311 Diluted 90,086 90,083 92,870 92,882 76,311 76,311 77,518 94,759 81,174 76,311 Total Assets 19,761 19,059 24,697 24,697 22,787 23,493 23,709 23,658 23,658 24,288 Total Long-Term Liabilities 8,421 7,861 9,790 9,790 9,386 10,083 7,651 7,479 7,479 7,261 Total Deferred Revenue 6,605 5,913 5,890 5,890 5,837 5,473 5,233 4,770 4,770 5,520 5.
FIRST QUARTER FISCAL 2014 RESULTS OF OPERATIONS COMPARED TO FIRST QUARTER FISCAL 2013 RESULTS Revenue: For the quarter ended June 30, 2014 was $3.7 million compared to $3.8 million for the quarter ended June 30, 2013 representing a 1%, or $76,966, decrease. These decreases are primarily associated with decreases in non-recurring revenues which were offset by a 9% increase in recurring revenues. Recurring Revenue (see definition in Section 4.b under Non-GAAP Measures) is comprised of SaaS fees, hosting, support and maintenance revenue, transactional fees, data management and transcription services. Recurring Revenue for the quarter ended June 30, 2014 was $2.8 million compared to $2.6 million for the quarter ended June 30, 2013, representing a 9%, or $0.2 million increase. This increase in Recurring Revenue was primarily the result of an increase in revenues from the Company s Nightingale On Demand EHR product. Non-Recurring Revenue (see definition in Section 4.b under Non-GAAP Measures) is comprised of revenues generated from sales of software and systems and related training, data conversion and installation services. Non-Recurring Revenue for the quarter ended June 30, 2014 was $0.9 million compared to $1.2 million for the quarter ended June 30, 2013, representing a 12%, or $0.3 million decrease. This decrease in Non-Recurring Revenue is the result of a decrease in revenues from professional services, including custom development services related to the Nightingale on Demand platform, as well as a decrease in software license revenue related to the AOHC contract. Over the quarter ended June 30, 2014, the Company generated 39% of its revenue from the US market. During this period, the Company estimates that the impact of the fluctuation in the rate of exchange between the US Dollar and the Canadian Dollar was negligible. The Company s deferred revenue balance, an indicator of the Company s revenue backlog, increased $0.7 million to $5.5 million at June 30, 2014 from $4.8 million at March 31, 2014. Gross Profit: For the quarter ended June 30, 2014, gross profit was $3.3 million, or 88% of revenue, compared to $3.3 million, or 89%, of revenue, for the quarter ended June 30, 2013. Gross margin can also vary significantly from quarter to quarter depending on the timing of enterprise software license sales and the related revenue recognition. Expenses: Expenses for the quarter ended June 30, 2014 were $3.3 million compared to $3.6 million for the quarter ended June 30, 2013, representing an 6%, or $3.0 million, decrease from the quarter ended March 31, 2013. These decreases were primarily the result of a decrease in research and development spending on non-core products. Nightingale continues to be focused on prudent expense management. However, the Company expects to continue to make focused investments in activities designed to support its revenue growth initiatives, particularly as the Company prepares to launch its next generation EHR product into the marketplace. Nightingale s expenses are affected by changes in the US dollar exchange rate, with approximately 30% of the Company s expenses during the quarter ended June 30, 2014 generated in the US, providing the Company with a natural hedge position that has offset some of the effects on revenue of the decrease in value of the US Dollar. 6.
General and administration expenses for the quarter ended June 30, 2014 were $0.7 million compared to $0.8 million for the quarter ended June 30, 2013, a decrease of 5%, or $45,000. Sales and marketing expenses for the quarter ended June 30, 2014 were at $0.6 million compared to $0.7 million for the quarter ended June 30, 2013. The decrease is associated with decreased costs associated with the Company s small-to-medium business sales efforts as the Company focused on enterprise business and began to transition to a lower-cost self-service market for the small-to-medium business as well as timing of certain marketing events. Although the Company is lowering its costs associated with selling to the small-to-medium business sector, the Company plans to make increased investments in other sales and marketing costs. Research and development expenses for the quarter ended June 30, 2014 were $0.7 million compared to $1.0 million for the quarter ended June 30, 2013, a decrease of 21%, or $0.3 million. Research and development expenses are presented net of reimbursements pursuant to the Company s participation in Canadian research assistance and tax credit programs and are impacted by reductions in expenses associated with the Company s capitalization of certain qualifying development costs. The reimbursement of costs incurred pursuant to the research assistance and tax credit programs are classified as a reduction to both the Company s operating expenses and capitalized software costs. Gross research and development expenditures before capitalization of development costs and reimbursements pursuant to government programs, decreased at $0.4 million in the quarter ended June 30, 2014 compared to the year ago period. The decrease in gross research and development expense can be primarily attributed to a reduction in research and development activities associated with non-core products and the Company s increased focus on development of its next generation EHR product. The table below demonstrates the impact of these credits on research and development expense in the periods presented. Quarter Ended Quarter Ended Jun 30, 2014 Jun 30, 2013 $ $ Gross research and development expenditures 1,492,047 1,854,400 Expense (reimbursement) pursuant to government programs - (300,000) Capitalized development costs (1,120,526) (967,335) Net research and development expenditures 371,521 587,065 Information technology and hosting costs 380,932 458,445 Research and development costs 752,453 1,045,510 Client services expenses for quarter ended June 30, 2014 were $1.2 million compared to $1.1 million in the quarter ended June 30, 2013, an increase of $57,818 million, or 5%. Stock-based compensation is included in each of general and administration expense, sales and marketing expense, research and development expense and client services expense as described above. Stock-based compensation increased 1% to $20,523 for the quarter ended June 30, 2014. 7.
The following amounts representing stock-based compensation have been included in the operating expense categories: Quarter Ended Quarter Ended June 30, 2014 June 30, 2013 $ $ General and administration 1,847 2,286 Sales and marketing 2,258 2,972 Research and development 12,313 17,833 Client services 4,105 6,402 20,523 29,493 Depreciation and amortization expense is included in each of general and administration expense, sales and marketing expense, research and development expense and client services expense as described above. Depreciation and amortization expense increased 1% to $385,610for the quarter ended June 30, 2014 compared to the quarter ended June 30, 2013. The following amounts representing depreciation and amortization expense have been included in the operating expense categories: Quarter Ended Quarter Ended June 30, 2014 June 30, 2013 $ $ General and administration 31,542 24,851 Sales and marketing 207,691 204,374 Research and development 132,440 142,967 Client services 13,937 8,694 385,610 380,886 Adjusted EBITDA (non-ifrs measure, see Section 4.a for a definition): Adjusted EBITDA for the quarter ended June 30, 2014 was $0.3 million compared to $0.1 million for the quarter ended June 30, 2013. Operating Profit / Loss: For the quarter ended June 30, 2014, operating loss was $61,732compared to operating loss of $47,895 for the quarter ended June 30, 2013. Interest and Other Income / Loss: Interest charges for the quarter ended June 30, 2014 decreased 40% to $94,368 from the quarter ended June 30, 2013. Included in other income/loss are foreign currency adjustments related to monetary translations, which was a gain of $91,456 for the quarter ended June 30, 2014 compared to a loss of $0.3 million for the quarter ended June 30, 2013. Other finance gain: For the quarter ended June 30, 2014, we recognized a financial gain of $29,483 representing the increase in value of the derivative. Income (Loss) and Comprehensive Income (Loss): For the quarter ended June 30, 2014 income and comprehensive loss was a loss of $81,013 compared to income and comprehensive loss of $0.8 million for the quarter ended June 30, 2013. Going forward, the Company s financial results will continue to be impacted by changes in the rate of exchange between the US dollar and the Canadian dollar. 8.
3. LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents on March 31, 2014 were $0.1 million, a decrease of $0.4 million, or 11%, from March 31, 2014. Current assets were $5.9 million at June 30, 2014 compared to $5.9 million at March 31, 2014. Cash Flow from Operating Activities: Cash provided by operating activities for the quarter ended June 30, 2014 was $1.3 million compared to cash provided for the quarter ended June 30, 2013 of $0.2 million. An increase in accounts payable and accrued liabilities of $1.5 million contributed to the cash provided by operations. Cash Flow from Investing Activities: During the quarter ended June 30, 2014, cash used in investing activities was $1.2 million including $1.1 million relating to capitalized development projects and $0.1 million related to the purchase of property, plant and equipment compared to cash used in investing activities of $1.1 million for the previous year including $0.1 million in capitalized development expenditures and $0.1 million for purchases of property, plant and equipment. Cash Flow from Financing Activities: Cash used by financing activities for the quarter ended June 30, 2014 was $0.4 million compared to cash used in the same period of the previous year of $1.1 million. Cash used for the quarter ended June 30, 2014 included repayments of a bank term loan of $0.4 million. In the year ago period, cash used included $1.1 million from repayments of convertible debentures as well as $0.4 million for repayment of a bank term loan. Current assets were $5.7 million at June 30, 2014 and $5.9 million at March 31, 2014 and current liabilities increased $0.1 million to $12.7 million. Working capital excluding deferred revenue decreased to a negative $2.5 million from a negative $1.9 million at March 31, 2014. 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 June 30, 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, 2014. 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, 2012. 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 2013. 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. 9.
Year Ended June 30, 2014 March 31, 2013 $ $ First term loan 1,402,078 2,389,788 Second term loan 1,246,292 1,986,317 2,648,370 4,376,105 Unamortized deferred financing charges (116,093) (167,681) Total term loan 2,532,277 4,208,424 Current portion of term loan (1,573,877) (1,521,720) Term loan, net of deferred finance charges and current portion 958,400 2,686,704 c. Convertible Debentures 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, 2013. 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, 2016. 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 2013. 10.
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: June 30, 2014 June 30, 2013 $ $ Financial Derivative Asset, beginning of year 149,731 808,694 Recognized on issuance of Series B debentures - - Write-off on conversion to Series C and common shares - - Finance gain recorded during the year 29,483 (1,633) Financial Derivative Asset, end of year 179,214 807,061 Fair value at June 30, 2014 Quoted prices in active markets for Significant other Significant Carrying amount identical instruments observable inputs unobservable inputs at June 30, 2014 Level 1 Level 2 Level 3 $ $ $ $ Embedded Derivative Asset 179,214-179,214 - The embedded derivative asset is carried at its fair value of $179,214 at June 30, 2014 (March 31, 2014 - $149,731). 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 2016. 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 11.
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. 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, 2016 410,000-410,000 March 14, 2016-5,000,000 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, 2014. Series B Series C Total $ $ $ Principal balance 410,000 5,000,000 5,410,000 Unamortized notional interest (18,492) (76,275) (94,767) Unamortized costs (2,478) (247,769) (250,247) Net amount 389,030 4,675,956 5,064,986 In October 2011, the Company entered into a new lease for its head office space in Markham, Ontario. The lease obligates the Company to make rental and estimated operating expense payments totalling $2.5 million over an eight year term. 12.
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 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 could not be obtained in order to meet the August 15, 2014 date set out in the covenants, the Company had received a commitment from a director of the Company to provide funding of $1.5 million in the form of a secured note bearing interest at 11% per annum and expiring no earlier than July 30, 2015. Pursuant to this commitment, in August 2014, the Company issued a $1,500,000 secured note to a party related to a director of the Company (see 6 Subsequent Events). 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. 4. NON-IFRS MEASURES The Company internally measures its performance and results of initiatives through a number of measures that are not recognized under International Financial Reporting Standard (IFRS) and may not be comparable to similar measures used by other companies. a. Adjusted EBITDA The Company has included an Adjusted EBITDA measurement since it believes that this information would be useful to investors to help evaluate the performance of the Company. Investors should be cautioned, however, that Adjusted EBITDA should not be construed as an alternative to net earnings as determined in accordance with IFRS. The Company's method of calculating Adjusted EBITDA may differ from the methods used by other companies and, accordingly, it may not be comparable to similarly titled measures used by other companies. Adjusted EBITDA is a non-ifrs measure that management believes is a useful supplemental measure of operating performance prior to other loss (income), interest, income taxes, depreciation, amortization, and stock-based compensation. Management believes it is useful to exclude these items as they are either non-cash expenses, items that cannot be influenced by management in the short term, or items that do not impact core operating performance, and management uses this information internally for forecasting and budgeting purposes. 13.
The following provides a reconciliation of EBITDA to Income (Loss) and Comprehensive Income (Loss) from Continuing Operations: Three Months Ended June 30, 2014 June 30, 2013 $ $ Income (Loss) and Comprehensive Income (Loss) (61,732) (779,629) Adjustments for Current Tax Expense (Recovery) 12,508 2,183 Other Income (Loss) (92,048) 308,561 Interest 94,368 187,758 Depreciation and Amortization 385,610 380,886 Stock-Based Compensation 20,523 29,493 Other financing gain (loss) (29,483) 1,633 Acquisition, Integration and Other - - Adjusted EBITDA 329,746 130,885 b. Recurring and Non-Recurring Revenue The Company has included recurring revenue and non-recurring revenue measurements since it believes that this information is useful to investors to evaluate its performance. Investors should be cautioned, however, that recurring revenue and nonrecurring revenue should not be construed as an alternative to revenue as determined in accordance with IFRS. Recurring Revenue is comprised of utilization fees, hosting, support and maintenance revenue, data management and transcription services, billing and financial management services and transactional fees. Non-Recurring Revenue is comprised of revenues generated from sales of perpetual software and systems licenses and related training, data conversion and installation services. The following provides a reconciliation of Recurring Revenue and Non-Recurring Revenue to Revenue: Three Months Ended June 30, 2014 June 30, 2013 $ $ Non-Recurring Revenue 860,687 1,166,784 Recurring Revenue 2,831,528 2,602,397 3,692,215 3,769,181 5. TRANSACTIONS WITH RELATED PARTIES During the year ended March 31, 2014 the Company redeemed Series A Debentures totaling $1,141,000, of that total $125,000 was held by a director of the company. One director and two officers participated in the Series C debentures raised in the year ended March 31, 2014 with an aggregate investment of $382,000. One director and two officers participated in the special conversion offering and converted Series B investments totaling $1,150,000 to common shares at a special exchange rate of $0.25 per share. On that same date the Company offered the Series B Convertible Debenture holders the right to convert their debt to equity at that same rate of $0.25 per common share. In November 2013, the Company issued a $2,500,000 convertible note to the Company s Chairman of the Board which was converted to common stock at the rate of $0.25 per share on December 31, 2013. 14.
Three directors and two officers participated in the Series B Convertible Debenture offering described in note 7 with an aggregate investment totaling $2,125,000. Certain holders of $925,000 aggregate principal amount of the Series A Debentures including one director holding $500,000 in 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. These transactions were recorded at the exchange amount, which is the amount of consideration established and agreed to by the related parties. 6. SUBSEQUENT EVENTS In August 2014, the Company completed a non-brokered private placement of a secured note (the "Note") in the principal amount of $1,500,000. The Note was purchased by 1604697 Ontario Inc. (the Lender ), a company controlled by a party related to a director of the Corporation. The Note will become payable on the date (the Maturity Date ) that is the earlier of: (i) August 18, 2015; (ii) the date that Nightingale enters into a loan agreement with either the Lender or a third party regarding a loan in the minimum amount of $1,500,000; and (iii) the date Nightingale completes an equity financing resulting in net proceeds to Nightingale of at least $1,500,000. The Note bears interest at a fixed rate of 11% per annum, calculated and payable monthly in arrears on the last day of each month, starting on August 31, 2014. The Note is secured by all of the Corporation s present and subsequently acquired property and assets and shall be subordinated to certain defined senior indebtedness. In connection with the Note, the Lender has also received a commitment fee in the amount of $45,000. The proceeds of the Note are intended to be used by the Corporation for general corporate purposes. Also in August 2014 the Company received a commitment from Beedie Capital Partners to provide a secured loan of $3,500,000 (the Term Loan ). The commitment is subject to a number of conditions, including, the completion of definitive documentation and the receipt of all necessary third party approvals, including the approval of the TSX Venture Exchange. The Term Loan, which is expected to close in September 2014, will bear interest at a rate of 12% with monthly interest payments being due on the last day of each month and will mature in December 2016. In connection with the Term Loan, the Lender will receive 6.25 million warrants to purchase Nightingale Informatix Corporation Common Shares with an exercise price of $0.16 per share. The warrants will expire on December 31, 2016 if not exercised prior to that time. The Term Loan shall be subordinate to the Company s existing senior loan facilities and will contain customary covenants, including specific financial and change of control covenants. The Company will pay a commitment fee equal to 2% at the time of Closing. 7. RECENT ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED The following is summary of new standards, amendments to standards and interpretations not yet effective, 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 has not yet adopted IFRS 9 in its consolidated financial statements. 15.
8. RISKS AND UNCERTAINTIES Readers are encouraged to read the section entitled "Risk Factors" in the Company s fiscal 2014 Management's Discussion and Analysis for a discussion of the factors that could affect the Company s future performance. 9. DISCLOSURE OF OUTSTANDING SHARE DATA The Company had 94,758,915 common shares outstanding as at June 30, 2014. The following table sets forth common shares, stock options and warrants outstanding as at June 30, 2014. Authorized Issued And Outstanding Common Shares, Voting Unlimited 94,758,915 Preferred Shares Unlimited - Stock Options - Issued and Outstanding 5,169,109 Warrants - Issued and Outstanding 280,250 As described further in Section 3 Liquidity and Capital Resources, the Company has issued Convertible Debentures that are scheduled to mature at various dates from January 2016 through September 2016. The Debentures bear interest at rates ranging from 10% to 12% per annum, payable monthly. Following the first year anniversary of the Debentures, the Company has the right to redeem the Debentures, in whole or in part, at a price equal to their principal amount plus accrued and unpaid interest. The Debentures are convertible at the holder s option into fully-paid common shares of the Company at any time prior to maturity or redemption at conversion prices of either $0.35 or $0.60 per share. The principal balance outstanding on the Debentures at June 30, 2014 was $5.4 million. 10. ADDITIONAL INFORMATION Additional information on Nightingale can be found at www.sedar.com under Nightingale Informatix Corporation. 16.