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As filed with the Securities and Exchange Commission on June 10, 2016.

Registration no. 333-206748

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Amendment No. 2 to

Form F-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

POINTCLICKCARE CORP.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Ontario, Canada   7372   N/A

(State or Other Jurisdiction of

Incorporation or Organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

PointClickCare Corp.

5570 Explorer Drive

Mississauga, ON L4W 0C4

(905) 858-8885

(Address, Including ZIP Code, and Telephone Number, including Area Code, of Registrant’s Principal Executive Offices)

 

 

CT Corporation System

111 Eighth Avenue, 13th Floor

New York, NY 10011

(212) 894-8940

(Name, Address, Including ZIP Code, and Telephone Number, including Area Code, of Agent for Service)

Copies to:

 

Kenneth J. Gordon, Esq.

Joseph C. Theis, Jr., Esq.

Goodwin Procter LLP

Exchange Place

Boston, MA 02109

(617) 570-1000

 

Perry Dellelce, Esq.

Robert Wortzman, Esq.

Wildeboer Dellelce LLP

Wildeboer Dellelce Place

Suite 800, 365 Bay Street

Toronto, Ontario M5H 2V1

(416) 361-3121

 

Riccardo A. Leofanti, Esq.

Thomas J. Ivey, Esq.

Skadden, Arps, Slate,

Meagher & Flom LLP

222 Bay Street, Suite 1750

P.O. Box 258

Toronto, Ontario M5K 1J5

(416) 777-4700

 

Rob Lando, Esq.

Osler, Hoskin & Harcourt LLP

620 Eighth Avenue

P.O. Box 258

New York, NY 10018

(212) 867-5800

Approximate date of commencement of proposed offering to the public:

As soon as practicable after this Registration Statement becomes effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨


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If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of

Securities To be Registered

  Proposed
Maximum
Aggregate
Offering Price(1)(2)
  Amount of
Registration Fee(3)

Common shares, no par value

  US$100,000,000   US$11,620

 

 

(1)  Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(o) under the Securities Act of 1933, as amended (the “Securities Act”).
(2)  Includes common shares the underwriters have the option to purchase to cover over-allotments, if any.
(3)  US$11,620 of this registration fee was previously paid by the Registrant.

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

SUBJECT TO COMPLETION DATED JUNE 10, 2016

PROSPECTUS

             Shares

 

LOGO

Common shares

 

 

This is PointClickCare Corp.’s initial public offering. We are offering                  common shares.

We expect the initial public offering price to be between US$              and US$              per share. Currently, no public market exists for our common shares. We have applied for listing of our common shares on the NASDAQ Global Market under the symbol “PCLK.” We have also applied for the listing of our common shares on the Toronto Stock Exchange under the symbol “PCC.”

Concurrently with the closing of this offering, we expect to use approximately US$13.0 million of the proceeds of this offering to pay our common shareholders a special dividend to be declared prior to the completion of this offering and approximately US$4.5 million of the proceeds of this offering to pay our Class A redeemable convertible preferred shareholders a return of capital to be declared prior to the completion of this offering.

We are an “emerging growth company” as that term is used in the Jumpstart Our Business Startups Act of 2012 and have elected to adopt certain reduced public company reporting requirements.

 

 

Investing in our common shares involves risks that are described in the “Risk Factors” section beginning on page 17 of this prospectus.

 

     Per
Share
     Total  

Public offering price

   US$                    US$                

Underwriting commissions(1)

   US$         US$     

Proceeds, before expenses, to us

   US$         US$     

 

(1) See “Underwriting” for a description of compensation payable to the underwriters.

The underwriters may also purchase up to an additional                  common shares from us at the public offering price, less the underwriting commissions, within 30 days from the date of this prospectus to cover over-allotments, if any.

Neither the Securities and Exchange Commission, or the SEC, nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the common shares on or about                     , 2016.

 

 

 

J.P. Morgan    Goldman, Sachs & Co.      RBC Capital Markets   
William Blair         Canaccord Genuity   

 

 

                    , 2016.


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TABLE OF CONTENTS

 

Prospectus Summary

     1   

Risk Factors

     17   

Cautionary Note Regarding Forward-Looking Statements

     44   

Industry and Market Data

     45   

Use of Proceeds

     46   

Dividend Policy

     47   

Capitalization

     48   

Dilution

     50   

Selected Consolidated Financial Data

     52   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     56   

Business

     96   

Management

     123   

Certain Relationships and Related-Party Transactions

     142   

Principal Shareholders

     146   

Description of Share Capital

     148   

Shares Eligible for Future Sale

     155   

Taxation

     157   

Underwriting

     165   

Expenses Related to this Offering

     170   

Legal Matters

     171   

Experts

     171   

Where You Can Find More Information

     171   

Index to Consolidated Financial Statements

     F-1   

Neither we nor the underwriters have authorized anyone to provide you with any additional information or information that is different from the information contained in this prospectus. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. This prospectus and any free writing prospectus prepared by us or on our behalf may only be used where it is legal to sell these securities. The information in this prospectus or any free writing prospectus prepared by us or on our behalf is only accurate as of the date of this prospectus or such free writing prospectus.

Until             , 2016 (25 days after the date of this prospectus), all dealers that buy, sell or trade our common shares, whether or not participating in this offering, may be required to deliver a prospectus. This delivery requirement is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

Unless otherwise indicated, all references in this prospectus to “PointClickCare,” or “we,” “our,” “us” or similar terms refer to PointClickCare Corp. and its consolidated subsidiaries.

We express all amounts in this prospectus in U.S. dollars, except where otherwise indicated. References to “$” and “US$” are to U.S. dollars and references to “C$” are to Canadian dollars. On June 7, 2016, the Bank of Canada closing rate was $1.00 = C$1.2771.

We are offering to sell, and seeking offers to buy, common shares only in jurisdictions where offers and sales are permitted. Persons who come into possession of this prospectus in jurisdictions outside the United States or Canada are required to inform themselves about and to observe any restrictions as to this offering and the distribution of this prospectus applicable to those jurisdictions.

 

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Prospectus Summary

This summary highlights certain information contained elsewhere in this prospectus. This summary does not contain all of the information you should consider before investing in our common shares. You should read this entire prospectus carefully, especially the “Risk Factors” section of this prospectus and our consolidated financial statements and related notes appearing elsewhere in this prospectus, before making an investment decision. References in this prospectus to our “solutions” mean a combination of one or more products and services we offer and deliver to a customer to meet their business requirements.

Overview

We are a leading provider of comprehensive cloud-based software solutions for the North American senior care industry. Our software-as-a-service, or SaaS, platform is designed specifically to enable critical business functions across the care continuum of skilled nursing facilities, senior living facilities and in-home care, including care management, financial management, marketing and relationship management, analytics and compliance. We believe the PointClickCare platform is the system of record for senior care providers that helps our customers improve quality of care and demonstrate better patient outcomes, enhance financial performance, facilitate patient movement across the continuum of care, and simplify regulatory compliance.

The senior care industry is in a period of transformation, presenting a range of challenges for senior care providers. Driven by the confluence of a rapidly aging population and increasing healthcare costs, patient care delivery for seniors continues to transition from hospitals to senior care facilities, with senior care facilities experiencing a corresponding increase in patient acuity. At the same time, the industry is facing a changing reimbursement and payment landscape, growing demand to improve quality of care and demonstrate better patient outcomes, greater emphasis on managing patients across multiple facilities in the continuum of care, and an increasingly complex regulatory and compliance environment. We believe that in order to meet these challenges and stay competitive, senior care providers need to adopt scalable and adaptable technology solutions that centralize key patient information, streamline daily operations, improve financial performance, facilitate care delivery across care settings and meet regulatory requirements.

We offer an integrated software platform, specifically designed for the senior care industry, which utilizes advanced cloud computing and data management technologies. Our multi-tenant architecture allows us to deliver applications that are highly functional, flexible and fast, and that can be easily deployed on a variety of devices within our customers’ operations. Our platform is comprised of our long-term post-acute care core platform, add-on applications and our patient analytics applications and tools. Our core platform is an integrated electronic health record, or EHR, and revenue cycle management, or RCM, solution. Our add-on applications are built on top of our core platform, and include additional electronic health record extensions, financial management and customer relationship management applications. Our patient analytics applications and tools allow providers to analyze quality outcomes and will enable population health capabilities through improved management of risk and better tracking of patient outcomes. Our platform also includes an interoperability engine, which allows our customers to integrate with a wide variety of external entities critical to their operation. Our solutions achieved the number one ranking as the category leader for long-term care as reported by KLAS in its “2015/2016: Best in KLAS: Software and Services” report, released January 28, 2016.

Strong customer relationships have been a key component of our success since we began marketing our SaaS platform in 2000. We provide our solutions to approximately 2,400 senior care providers. At January 31, 2016, these providers were using our platform in approximately 12,200 senior care facilities, serving approximately 925,000 residents per day. Our customers range from small, individually-owned, senior care facilities to regional and national chains, including nine of the ten largest skilled nursing facility providers and

 



 

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five of the ten largest senior living providers in the United States and Canada. We estimate that there are approximately 51,000 senior care facilities in the United States and Canada, based on data from Statistics Canada, Canada Mortgage and Housing Corporation, the American Health Care Association Research Department and the National Center for Assisted Living. Therefore, approximately 24% of the senior care facilities in the United States and Canada currently use our platform, and we believe that the remaining 76% of the facilities, or approximately 38,800 facilities, represents an attractive pool of potential new customers.

We entered the in-home care market in June 2015 with our acquisition of the in-home care assets of Smart Data Solutions, Inc., referred to as Nobility Health. We currently do not generate a significant amount of revenue from our in-home care products, as we have continued to develop our cross-continuum solution subsequent to the acquisition of these assets. We do, however, consider the in-home care market to be a significant market opportunity for us, as there are approximately 18,000 private duty, 12,000 home health and 4,000 hospice agencies in the United States.

Our core market today is represented by customers providing senior care across the continuum of long-term and post-acute care in the United States and Canada, including skilled nursing facilities, senior living facilities and in-home care providers. Across our core market we are seeing an increase in the number of customers providing senior care in all three care settings. We estimate that our total addressable opportunity for full implementation of software products in our core market is approximately $3.3 billion annually, representing an estimated $1.5 billion in addressable opportunity for products that are currently available, $0.4 billion in addressable opportunity for products that are in development and $1.4 billion of future product development. We believe that our 2015 revenue represents approximately 4% of the total opportunity within our core market of senior care facilities and in-home care providers in North America. According to data from the Centers for Medicare and Medicaid Services, or CMS, and the Organisation for Economic Co-operation and Development, or OECD, expenditures in North American senior care facilities and in-home care are expected to grow approximately 6% annually from 2015 to 2024. As those expenditures grow we expect that our core addressable opportunity within North America will continue to increase as well, and could reach $5.5 billion annually by 2024. Additionally, we believe that attractive markets for our software products exist in senior care facilities and in-home care providers in international markets. We estimate that our total addressable opportunity in eight countries outside of North America that we believe are most attractive to us could exceed $2 billion annually. Our total addressable market opportunity, as comprised of our core market and select international markets, is therefore estimated to be approximately $5.3 billion annually. See “Business—Our Addressable Market” for more information and “Risk Factors—The market size estimates included in this prospectus may prove to be inaccurate and may not be indicative of our future growth” for a discussion of the risks in relying on the addressable market estimates included in this prospectus.

We have strong visibility into our operating results based on our subscription revenue model and high customer retention rates. For fiscal years 2014 and 2015, and the three months ended January 31, 2016, our annual customer facility retention rates were approximately 99%. Our total revenue increased from $102.2 million in fiscal 2014 to $125.4 million in fiscal 2015, representing a 23% year-over-year increase, and increased from $28.6 million in the three months ended January 31, 2015 to $36.5 million in the three months ended January 31, 2016, representing a 28% period-over-period increase. Our subscription and support revenue increased from $90.6 million in fiscal 2014 to $117.1 million in fiscal 2015, representing a 29% year-over-year increase, and increased from $26.7 million in the three months ended January 31, 2015 to $34.2 million in the three months ended January 31, 2016, representing a 28% period-over-period increase. Subscription and support revenue represented 89%, 93% and 94% of total revenue in fiscal 2014, fiscal 2015 and the three months ended January 31, 2016, respectively. We had a net loss of $11.0 million in fiscal 2014 and a net loss of $3.1 million in fiscal 2015. We had a net loss for the three months ended January 31, 2015 of $0.5 million and a net loss for the three months ended January 31, 2016 of $3.1 million. Our Adjusted EBITDA was a loss of $1.2 million in fiscal 2014, $7.4 million in fiscal 2015, $1.6 million in the three months ended January 31, 2015 and $3.1 million in the

 



 

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three months ended January 31, 2016. See “—Summary Consolidated Financial Data—Adjusted EBITDA” for our definition of Adjusted EBITDA and its reconciliation to net income (loss).

Industry Background

Overview of the Senior Care Industry

The senior care industry is large and growing. According to projections prepared by the Department of Health & Human Services Administration on Aging, or AOA, and the Deloitte Center for Health Solutions, seniors - those individuals 65 years of age and older - make up only 15% of the current population of the United States, yet they account for approximately 37% of healthcare costs. According to data from CMS, spending on facility-based and in-home senior care in the United States was projected to be $254 billion in 2015 and is projected to grow to $430 billion by 2024. Growth in senior care expenditures is expected to continue, driven by growth in the senior population, increasing acuity of patients, and the rapidly escalating costs of delivering care to seniors. We believe similar trends exist in other countries.

The senior care continuum includes many settings. Senior care is delivered in a wide range of settings, including acute care, ambulatory care and post-acute care facilities and in patients’ homes. After receiving treatment in an acute care or ambulatory care facility, seniors are often discharged to lower cost, post-acute care settings for further treatment. Generally, these post-acute care settings, listed in decreasing order of patient acuity and cost, include skilled nursing facilities, or SNFs, senior living facilities (such as assisted living facilities, or ALFs, independent living facilities, or ILFs, and continuing care retirement communities, or CCRCs) and the patient’s home (where in-home care services such as home health care, hospice care, private duty care or informal care are delivered).

There is a critical need for long-term post-acute care for seniors. As overall healthcare expenditures continue to rise, payors are increasingly focused on providing services in lower-cost care settings. Post-acute providers offer services to seniors that may include living quarters, daily nursing, therapeutic rehabilitation, social services, housekeeping, nutrition and administrative services for a fraction of the cost as compared to higher acuity care settings. According to data from the U.S. Census Bureau and Medicare Payment Advisory Commission March 2016 Report, an average Medicare cost per patient day is approximately $450 in a skilled nursing facility and $48 in a patient’s home. Comparatively, the average Medicare cost per day within an acute care hospital is $2,000. Consequently, post-acute settings have become a preferred alternative for payors and providers to offer high quality, lower-cost care.

Key Trends Transforming the Senior Care Industry

Growing senior population. Due to longer life spans and the baby boom generation reaching retirement age, the number of seniors in the United States is projected to grow 53% over the next 15 years, from 47 million seniors, or 15% of the population in 2015, to 71 million seniors, or 20% of the population, by 2030, according to the AOA. In Canada, the senior population is expected to grow by 62% over the same time period, from 5.7 million seniors, or 16% of the population in 2015, to 9.3 million seniors, or 24% of the population, by 2031, according to Statistics Canada.

Changing reimbursement and payment landscape. The reimbursement environment for senior care providers remains challenging. With approximately 82% of SNF industry revenue coming from Medicare and Medicaid in the United States according to NHE Data, a market research organization, and increasing pressure to reduce government spending, federal and state funded per patient day reimbursement rates have not kept pace with medical cost inflation and, in many cases, have actually declined. Furthermore, as government and commercial payors introduce new payment and risk-sharing models such as bundled payments, value-based

 



 

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purchasing, and accountable care organizations, or ACOs, it is likely reimbursement pressure on senior care providers will continue to increase. In Canada, there are periodic healthcare reform demands at the federal and provincial levels of government that may also pressure industry funding.

Need to improve quality of care and demonstrate better patient outcomes. As the healthcare system continues to emphasize high quality care in lower cost settings, effective senior care providers that can improve quality of care and demonstrate better patient outcomes are typically rewarded with greater patient volumes. Additionally, as many payors and acute care providers implement new strategies to lower healthcare costs, such as narrower networks of post-acute providers and new payment models that emphasize risk sharing, a senior care provider’s ability to prove better patient outcomes has become a critical component in their ability to become part of those networks and generate more patient referrals.

Need to better manage patients across the continuum of care. According to CMS and the American Health Care Association Research Department, facility-based senior care providers have seen an increase in the average acuity levels of their patients over the last several years. Although this increased acuity can translate to higher reimbursement rates, providers must enhance their clinical capabilities and hire or train staff to provide services that were previously reserved for facilities upstream in the continuum of care. Additionally, while patient acuity in senior care facilities has increased on average over the last five years, we believe the average length of stays has decreased over that same period. Patients are being moved through the continuum of care to lower cost settings, including to the home, more quickly. Some facility-based senior care providers are enhancing their value proposition to referral sources by providing comprehensive post-acute care that manages a patient across multiple senior care settings, including skilled nursing, senior living and in-home care.

Increasing costs require more operational efficiency. Labor and employee benefit costs, insurance costs and regulatory compliance costs continue to increase for senior care providers. As payroll is the largest expense of senior care providers, increasing operational efficiencies and automating tasks can significantly reduce staffing, overtime and agency costs. Additionally, due to high annual personnel turnover in the senior care industry, expenses to train new staff have been growing, driving demand to simplify operational and training processes.

Pressure to adopt a complete, comprehensive electronic patient record. Focus on higher quality of care and reduction of errors in healthcare has prompted the adoption of technologies that support informed decision-making and promote accurate patient data capture, retention, and sharing across multiple settings of care. Implementation of a comprehensive electronic patient record can provide a complete view of a patient’s medical history, medications and plan of care. As acute and post-acute care providers are increasingly interdependent, there is a demand to have a comprehensive electronic patient record supporting the smooth transition of patients’ health information across the care continuum.

Increasingly complex regulatory and compliance laws. The senior care industry is heavily regulated at both the federal and state or provincial levels, requiring each provider to comply with multiple layers of regulation. With increased focus by government payors both on improving quality, and on reducing fraud, waste and abuse within the healthcare system, there are increased pressures to justify reimbursement through better documentation of care, to better protect patient information, and to comply with mandated operating guidelines. These increased regulatory and compliance demands require greater levels of administrative oversight, potentially increasing costs and decreasing operating margins of senior care providers.

Need to update legacy IT systems that do not address the current challenges of the senior care industry. Many senior care providers continue to use a collection of disparate and non-integrated clinical and financial products that have limited functionality and are not mobile friendly. These legacy IT systems often require cumbersome, time-consuming and inefficient paper-based processes to supplement critical workflows, and lack

 



 

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analytics and business intelligence capabilities that provide real-time, actionable operational insights. Senior care providers require IT systems that enable them to address key clinical, financial, operational and regulatory challenges quickly and effectively, and that are easy to deploy and maintain.

PointClickCare’s Solutions

Our solutions are designed to serve as the system of record for senior care providers. Our technology enables senior care providers to effectively manage their businesses and to address critical industry challenges.

Our Strengths

The key strengths of our solutions are:

 

    Purpose-built for the senior care industry. Our platform is purpose-built for the senior care industry, by a team with deep knowledge of the operational needs of the industry. The senior care industry is unique, in that it includes aspects of the healthcare, residential, nutrition and hospitality industries, and operates under a complex and ever-changing regulatory framework. The unique workflows and needs of the senior care industry are not easily captured by generic or horizontal software solutions.

 

    Comprehensive technology platform. We offer a comprehensive technology platform to manage the core functions of our customers’ operations, making us their system of record. Our core platform is embedded throughout their workflows from bedside care through billing and financial management. Because we offer integrated modular add-on applications, our customers often expand their use of the PointClickCare solutions over time.

 

    Multi-tenant software-as-a-service model. Our solutions use a multi-tenant architecture that allows multiple customers to leverage our hardware and software infrastructure while keeping each customer’s data securely separated in individual databases. Benefits to customers of our SaaS platform include our extensive development capability, rapid deployment model, ease of configuration, and our high performance, high reliability, 24x7 monitored, hosted infrastructure. Our PointClickCare solution is deployed in all 50 states in the United States and 10 provinces in Canada and can be easily adapted to support ongoing billing and regulatory requirements.

 

    Scalable enterprise solution. We have built a highly scalable enterprise solution with the functionality required to manage multiple facilities serving tens of thousands of patients, and to grow with our customers as they acquire or open new facilities. We enable our customers to roll up data and reporting from their facilities to centralize billing and other back office functions. This scalability is particularly important to our regional and national chain customers, which generally have facilities in multiple states.

 

    Deep integration with extensive ecosystem of provider partners. In order to deliver high quality patient care, senior care providers need to integrate closely and seamlessly with other care providers, inside and outside the facility. We enable our customers to communicate with physicians, hospitals, pharmacies, laboratories and various health information exchanges, or HIEs, electronically. This enables caregivers to create, transmit and access actionable information across the continuum of care, minimizing duplicative data entry, which can lead to lower risk of errors and better operational efficiency.

 

    Facilitates cross-continuum care, including in-home care. Our cross-continuum platform strategy will solve challenges that arise as patients transition between care settings by giving senior care providers access to comprehensive historical patient records that allow for more effective and efficient care delivery.

 



 

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The Benefits of Our Solutions

We believe our solutions provide the following benefits, which contribute to the success of our customers by enabling them to:

 

    Improve quality of care and demonstrate better patient outcomes. We have a strong focus on helping our customers improve patient outcomes by:

 

    embedding industry-leading, evidence-based care protocols into our core platform;

 

    facilitating early identification of high-risk issues, which can reduce hospital admissions and readmissions;

 

    enabling a reduction in medication errors;

 

    allowing clinical staff to spend more time on patient care, rather than on administrative tasks; and

 

    improving continuity of care by providing better information about patient condition and care plan.

 

    Increase operating efficiency and reduce our customers’ operating costs. Our customers are focused on improving operating efficiency and reducing their costs. Our solutions help our customers achieve these goals by:

 

    lowering the cost of implementing and maintaining clinical and financial systems through our cloud-based model;

 

    reducing head-count and improving efficiencies by more effectively running centralized management functions such as billing, collections and marketing; and

 

    providing analytics and benchmarking analyses which allow our customers to improve operations.

 

    Enable complete and accurate revenue capture. We believe our solutions can make a meaningful improvement in our customers’ ability to completely and accurately capture revenue by:

 

    improving data capture at the point of care and providing a systematic electronic approach to capturing reimbursable and billable services;

 

    reducing the time it takes to receive payment through better data accuracy and faster reimbursement processes, resulting in better cash flow and fewer claim rejections; and

 

    providing clinical tools to better manage higher-acuity patients and to thereby improve overall revenue mix.

 

    Facilitate interoperability across healthcare providers and movement across the continuum of care. We provide the means for our clients to seamlessly coordinate with many providers and levels of care by:

 

    improving connectivity across HIEs, hospitals, pharmacies, lab providers, physicians and other healthcare providers through a comprehensive electronic record of patient care;

 

    enabling safer transitions of care between care settings, including from acute care hospitals to SNFs and patient homes and vice versa; and

 

    enabling physicians to better monitor and care for patients remotely through our mobile applications.

 

    Better manage risk and simplify regulatory compliance. Our platform helps our customers manage risk and regulatory compliance by:

 

    reducing the risk of occurrence of adverse events such as medication errors through better clinical decision support tools and monitoring;

 



 

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    providing tools to promote adherence to clinical and documentation policies; and

 

    allowing our customers to respond to regulatory, compliance and legal audits by easily generating required reports.

Our Growth Strategy

We intend to further strengthen our position as a leading provider of software to the senior care industry by:

 

    Increasing our market share. We intend to continue to increase our market share by:

 

    continuing to expand our customer base organically;

 

    driving increased awareness of our PointClickCare brand;

 

    expanding into the in-home care market to extend our cross-continuum offering to senior care providers;

 

    continuing to extend our technology leadership and develop innovative solutions; and

 

    reducing barriers to adoption of our platform.

 

    Increasing our wallet share. We believe that we have the opportunity to substantially increase our revenue from our existing customers by:

 

    selling more of our products to our existing customer base;

 

    selling new products to our existing customer base;

 

    acquiring new solutions;

 

    continuing to focus on customer satisfaction; and

 

    expanding across the continuum of care.

 

    Expanding into adjacent markets. As our customers enter other markets, such as new senior care settings, we believe they would prefer to use our platform across all of their operations, providing us with an opportunity to expand into these markets with our customers.

 

    Expanding into select international markets. Some of our current customers operate internationally and have asked us to adapt our solution to the requirements of those overseas markets to offer seamless integration across their operations. We will continue to evaluate various international markets and may expand into select markets that have substantial potential, independent of our customers.

Risk Factors

Our business is subject to many risks and uncertainties, as more fully described under “Risk Factors” in this prospectus, of which you should be aware before investing in our common shares. These risks could materially and adversely impact our business, financial condition, operating results and cash flow, which could cause the trading price of our common shares to decline and could result in a loss of your investment. Some of these risks are:

 

    We have had a history of losses and negative cash flow from operations, we expect to continue to incur further losses, and we may be unable to achieve or sustain profitability.

 

    If we are unable to retain our existing customers, increase sales to our existing customers or attract new customers, our business, results of operations and financial condition will be adversely affected.

 



 

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    Failure to effectively manage rapid growth in the number of facilities and agencies we serve could increase our expenses faster than we increase our revenue, result in operational challenges and increase the risk that we are unable to successfully implement our business strategy.

 

    Our quarterly operating results have fluctuated in the past, may continue to fluctuate and may not meet our expectations, causing the value of our common shares to decline substantially.

 

    Our financial statements provide disclosure relating to the misappropriation of assets prior to July 2014 by a former employee that was conducted over an extended period of time. This misappropriation was enabled by material weaknesses in our internal control over financial reporting relating to inadequate segregation of duties and inadequate controls over the initiation, approval and processing of manual journal entries. Separate from the misappropriation, we discovered an immaterial overstatement in the capitalization of internal use software and an understatement of amortization of internal use software that had accumulated in fiscal 2014 and 2015. The internal use software errors occurred due to a material weakness in the design of a control to verify the accuracy and integrity of operational data used to calculate the capitalization of internal use software. If we fail to remediate one or more of our material weaknesses, or if we are unable to implement and maintain effective internal control over financial reporting, we might not be able to report financial results accurately and on a timely basis or prevent fraud. Additionally, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common shares may be negatively affected.

 

    If we are unable to continue to innovate and deliver enhancements to our products and services in response to new technologies or changes in the senior care or adjacent industries, our products may be less desirable and our business, results of operations and financial condition could be adversely affected.

 

    If we are unable to integrate our platform and our applications with a growing number and range of third-party software, systems, hardware and services, then we may fail to retain our existing customers, increase sales to our existing customers or attract new customers.

 

    Changes in the healthcare industry or regulatory environment could adversely affect our business.

 

    If we fail to manage our technical infrastructure, our existing customers may experience service outages and our new customers may experience delays in the implementation of our platform.

 

    If our security measures are breached or unauthorized access to customer data or funds is otherwise obtained, our solutions may be perceived as not being secure, we may lose current or future customers, our reputation and business may be harmed and we may incur significant liabilities.

 

    We may acquire other companies or technologies, which could divert our management’s attention, result in additional dilution to our shareholders and otherwise disrupt our operations and adversely affect our business, operating results or financial position. We may not be able to integrate the services, products, acquired personnel, operations or technologies successfully, profitably or effectively manage the combined business following the acquisition.

 

    Government regulation of the areas in which we operate creates risks and challenges with respect to our compliance efforts and our business strategies.

 

    Any failure to protect our intellectual property rights could impair our ability to protect our proprietary technology and our brand.

 

    Insiders will continue to have substantial control over us after this offering, beneficially owning, in the aggregate, approximately         % of our outstanding common shares following this offering, which may limit our shareholders’ ability to influence corporate matters and delay or prevent a third party from acquiring control over us.

 



 

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    We are a “foreign private issuer” and have disclosure obligations that are different from those of U.S. domestic reporting companies. As a foreign private issuer, we are subject to different U.S. securities laws and rules than a domestic U.S. issuer, which may limit the information publicly available to our shareholders.

As a result of these risks and other risks described under “Risk Factors”, there is no guarantee that we will experience growth and profitability in the future.

Our Corporate Information

The legal name of our company is PointClickCare Corp. Our business was originally conducted by Wescom Solutions Inc., a corporation formed under the Business Corporations Act (Ontario), or the OBCA, by articles of incorporation dated August 23, 1995. On October 25, 2005, Wescom Inc. was incorporated under the OBCA and on October 31, 2005 Wescom Inc. acquired all of the issued and outstanding shares of Wescom Solutions Inc. On February 25, 2011, Wescom Inc. amalgamated with PCC Acquisition Corporation pursuant to an amalgamation agreement between Wescom Inc. and PCC Acquisition Corporation dated as of the same day. The amalgamated entity assumed the name “Wescom Inc.” On May 28, 2014, Wescom Inc. changed its name to “PointClickCare Corp.” pursuant to articles of amendment.

Our principal and registered office is located at 5570 Explorer Drive, Mississauga, ON L4W 0C4. Our agent for service of process in the United States is CT Corporation System located at 111 Eighth Avenue, 13th Floor, New York, NY 10011 and our telephone number is 1-800-277-5889.

Our website address is www.pointclickcare.com. Information contained on, or accessible through, our website is not a part of this prospectus, and the inclusion of our website address in this prospectus is an inactive textual reference.

Payments to our Shareholders

Prior to the completion of this offering, we will declare a special dividend on our common shares in the

amount of approximately $0.74 per share, or approximately $13.0 million in the aggregate, to be paid in cash from the proceeds of this offering, or the Special Dividend.

On September 26, 2015, our shareholders approved a reduction in the paid up capital of our Class A redeemable convertible preferred shares in the amount of approximately $4.5 million, to be paid out of the proceeds from this offering as a return of capital, or the Return of Capital, contemporaneously with and conditional on the payment of the Special Dividend. This payment will provide holders of our Class A redeemable convertible preferred shares, on an as-converted basis, with a cash distribution equal to the per share Special Dividend.

See “Use of Proceeds,” “Dividend Policy,” “Certain Relationships and Related-Party Transactions—Special Dividend,” “Certain Relationships and Related-Party Transactions—Return of Capital” and “Risk Factors—We have broad discretion in the use of the net proceeds from this offering and might not use them effectively, which could affect our results of operations and cause our share price to decline” for additional information.

 



 

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The Offering

 

Common shares offered by us     common shares
Common shares to be outstanding immediately after this offering     common shares
Over-allotment option offered by us     common shares
NASDAQ trading symbol  

PCLK

 
TSX trading symbol   PCC  
Use of proceeds   We estimate that we will receive net proceeds from this offering of approximately $        million, or approximately $        million if the underwriters exercise their option to purchase additional common shares in full, based upon an assumed initial public offering price of $        per common share, the midpoint of the estimated price range set forth on the cover page of this prospectus, after deducting estimated underwriting commissions and estimated offering expenses payable by us.
  We currently expect to use the net proceeds from this offering for working capital and general corporate purposes, including funding the costs of operating as a public company. We also expect to use approximately $38.1 million of the net proceeds to repay all of the outstanding balance on our revolving line of credit, approximately $13.0 million to pay our common shareholders a special dividend to be declared prior to the completion of this offering and approximately $4.5 million to pay our Class A redeemable convertible preferred shareholders a return of capital to be declared prior to the completion of this offering. See “Use of Proceeds,” “Dividend Policy,” “Certain Relationships and Related-Party Transactions—Special Dividend,” “Certain Relationships and Related-Party Transactions—Return of Capital” and “Risk Factors—We have broad discretion in the use of the net proceeds from this offering and might not use them effectively, which could affect our results of operations and cause our share price to decline” for additional information.
Risk factors   See “Risk Factors” and other information included in this prospectus for a discussion of risks you should carefully consider before investing in our common shares.

The number of common shares to be outstanding after this offering is based on 23,805,926 common shares outstanding as of January 31, 2016 and excludes:

 

    2,140,500 common shares issuable upon the exercise of stock options outstanding as of January 31, 2016 at a weighted average exercise price of $18.40 per share (based on the Bank of Canada closing rate on January 31, 2016 of $1.00 = C$1.4006);

 

                     additional shares reserved for issuance under our 2012 Amended and Restated Stock Option Plan; and

 

                    common shares reserved for future issuance under our 2016 Equity Incentive Plan, which will become effective upon closing of this offering.

 



 

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Except as otherwise indicated, the information in this prospectus reflects or assumes:

 

    an initial public offering price of $        per common share, the midpoint of the estimated price range set forth on the cover page of this prospectus;

 

    the filing of articles of amendment, which will occur in connection with the consummation of this offering;

 

    the conversion of all of our outstanding Class A redeemable convertible preferred shares into 6,151,743 common shares in connection with this offering;

 

    no exercise by the underwriters of their option to purchase up to an additional                 common shares to cover over-allotments, if any, in connection with this offering; and

 

    the lapse of vesting restrictions on 34,218 common shares issued and outstanding under Restricted Share Agreements with certain employees.

 



 

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Summary Consolidated Financial Data

The following tables set forth our summary consolidated financial data. You should read the following summary consolidated financial data in conjunction with “Selected Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus.

We have derived the summary consolidated statements of operations data for the fiscal years ended October 31, 2013, 2014, 2015, and the balance sheet data as of October 31, 2013, 2014, and 2015 from our audited consolidated financial statements. We have derived the summary consolidated statements of operations data for the three months ended January 31, 2015 and 2016 and the balance sheet data as of January 31, 2016 from our unaudited interim condensed consolidated financial statements. The unaudited interim condensed consolidated financial statements have been prepared on a basis consistent with the audited consolidated financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments that management considers necessary to present fairly the financial information set forth in those statements. Our consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America, or U.S. GAAP, and are presented in U.S. dollars except where otherwise indicated. Our historical results are not necessarily indicative of the results that should be expected in any future period, and the results for the three months ended January 31, 2016 are not necessarily indicative of the results to be expected for the fiscal year ending October 31, 2016 or any other future annual or interim period.

 



 

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Consolidated Statements of Operations Data

 

    Year ended October 31,     Three months ended
January 31,
 
    2013     2014     2015         2015             2016      
    (dollars in thousands, except per share and per facility amounts)  

Revenue:

         

Subscription and support

  $ 70,529      $ 90,645      $ 117,115      $ 26,704      $ 34,232   

Professional services and other

    11,604        11,565        8,267        1,916        2,243   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

    82,133        102,210        125,382        28,620        36,475   

Cost of revenue:

         

Subscription and support

    13,846        19,100        29,604        6,378        7,637   

Professional services and other

    13,400        11,722        8,265        1,808        2,275   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

    27,246        30,822        37,869        8,186        9,912   

Gross profit

    54,887        71,388        87,513        20,434        26,563   

Operating expenses:

         

Product development

    23,592        30,925        32,786        7,515        8,979   

Sales and marketing

    14,974        21,728        27,486        6,247        7,883   

General and administrative

    17,057        24,307        28,441        6,006        12,635   

Loss from misappropriation(1)

    2,408        2,546        (24     (41     (2
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    58,031        79,506        88,689        19,727        29,495   

Operating income (loss)

    (3,144     (8,118     (1,176     707        (2,932

Other income (expenses):

         

Interest income

    19        (152     (653     (124     (324

Foreign exchange loss

    (161     (3,044     (1,243     (1,049     167   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

    (3,286     (11,314     (3,072     (466     (3,089

Income taxes

           324                        

Net income (loss)

  $ (3,286   $ (10,990   $ (3,072   $ (466   $ (3,089
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) per share-basic and diluted:(2)

         

Net income (loss) per share-basic

  $ (3.99   $ 0.30      $ (0.90   $ (0.02   $ 0.42   

Weighted average common shares used in computing basic net income (loss) per share

    13,731,032        14,870,358        17,654,183        17,654,183        17,654,183   

Net income (loss) per share-diluted

  $ (3.99   $ (0.55   $ (0.90   $ (0.02   $ (0.13

Weighted average common shares used in computing diluted net income (loss) per share

    13,731,032        20,052,035        17,654,183        17,654,183        23,805,926   

Pro forma income (loss) per share-basic and diluted:(3)

         

Pro forma net income (loss) per share-
basic and diluted

      $          $     

Pro forma weighted average common shares used in computing basic and diluted net income (loss) per share

         

Other Financial and Operating Data:

         

Adjusted EBITDA(4)

  $ 4,018      $ (1,190   $ 7,426      $ 1,575      $ 3,122   

Number of customer facilities served under subscriptions (at period end)(5)

    8,000        10,200        11,700        10,500        12,200   

Average monthly subscription revenue per customer facilities served (during period)(6)

  $ 757      $ 798      $ 882      $ 848      $ 943   

 

(1) See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 3 to our audited consolidated financial statements for further information on a misappropriation of assets committed against us by a former employee.

 



 

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(2) See Note 23 to our audited consolidated financial statements for an explanation of the calculation of our actual basic and diluted net loss per share attributable to our common shareholders.
(3) See Note 23 to our audited consolidated financial statements and Note 11 to our unaudited condensed consolidated financial statements for an explanation of the method used to calculate the unaudited pro forma basic and diluted net loss per share for the year ended October 31, 2015 and the three months ended January 31, 2016.
(4) See “—Adjusted EBITDA” below for information regarding our use of non-GAAP financial measures and a reconciliation of such measures to their nearest GAAP equivalents.
(5) Represents the number of customer facilities utilizing PointClickCare’s cloud-based platform at the end of a given period. Customers’ facilities utilizing the acquired legacy software of Accu-Med Services LLC, or Accu-Med, have been excluded until they are converted to the PointClickCare platform.
(6) Represents customer subscription revenue generated from the PointClickCare cloud-based platform, divided by average number of customer facilities serviced for a given period. Subscription revenue used in the calculation adds back (excludes) subscription and maintenance relating to the Accu-Med legacy software.

Consolidated Balance Sheet Data

 

     As of January 31, 2016
     Actual     Pro Forma(1)      Pro Forma
as Adjusted(2)
     (in thousands)

Cash

   $ 4,892      $ 4,892      

Working capital

     (28,453     (28,453   

Total assets

     81,536        81,536      

Total debt

     39,679        57,179      

Total liabilities

     74,213        91,713      

Class A redeemable convertible preferred shares

     125,024             

Total shareholders’ equity/(deficit)(3)

     (117,701 )(3)      (10,177   

 

(1) Pro forma gives effect to (i) the conversion of all outstanding shares of our Class A redeemable convertible preferred shares into common shares, (ii) the declaration of a special dividend on our common shares of approximately $13.0 million to be paid out of the proceeds of this offering, and (iii) the approval of a return of capital to our Class A redeemable convertible preferred shareholders of approximately $4.5 million.

 

(2) Pro forma as adjusted gives effect to (i) the sale by us of the common shares offered by this prospectus at an initial public offering price of $         per share, the midpoint of the price range on the cover of this prospectus, and after deducting the underwriting commissions and estimated offering expenses payable by us, (ii) the payment of approximately $13.0 million to our common shareholders as a result of a special dividend to be declared prior to the completion of this offering, and (iii) the payment of approximately $4.5 million to our Class A redeemable convertible preferred shareholders as a return of capital to be declared prior to the completion of this offering. A $1.00 increase (decrease) in the assumed initial public offering price of $         per share would increase (decrease) our pro forma as adjusted cash, working capital, total assets and total shareholders’ deficit by $         million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting commissions and estimated offering expenses payable by us.

 

(3) Total shareholders’ deficit includes a charge of $102.7 million related to the accretion of the Class A redeemable convertible preferred shares from their original carrying value to their fair value at January 31, 2016.

 



 

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Adjusted EBITDA

To provide investors with additional information about our financial results, we disclose within this prospectus Adjusted EBITDA, a non-GAAP financial measure. EBITDA consists of GAAP net income (loss) plus depreciation and amortization, interest income (expense) and income tax expense. Adjusted EBITDA consists of EBITDA plus our non-cash stock-based compensation expense, the loss from the misappropriation of assets by a former employee and lease abandonment charges. We present this non-GAAP measure because it is one of the measures used by our board of directors and management to evaluate our operating performance, and we consider it an important supplemental measure of performance. We believe this metric is commonly used by the financial community, and we present it to enhance investors’ understanding of our operating performance and cash flows. We believe this non-GAAP measure is useful to an investor in evaluating our operating performance because it can be used to measure a company’s operating performance without regard to items such as stock-based compensation and depreciation and amortization, which can vary depending upon accounting methods and the book value of assets, and to present a meaningful measure of performance exclusive of our capital structure and the method by which assets were acquired.

Our management uses Adjusted EBITDA:

 

    as a measure of operating performance to assist in comparing performance from period to period on a consistent basis; and

 

    as a measure for planning and forecasting overall expectations and for evaluating actual results against such expectations.

Adjusted EBITDA is not in accordance with, or alternative to, measures prepared in accordance with U.S. GAAP. In addition, this non-GAAP measure is not based on any comprehensive set of accounting rules or principles. As a non-GAAP measure, Adjusted EBITDA has limitations in that it does not reflect all of the amounts associated with our results of operations as determined in accordance with U.S. GAAP. In particular:

 

    Adjusted EBITDA does not reflect interest income we earn on cash; interest expense, or the cash requirements necessary to service interest or principal payments, on our debt and capital leases;

 

    Adjusted EBITDA does not reflect the amounts we paid in income taxes or other components of our income tax provision;

 

    Adjusted EBITDA does not include amortization expense from property and equipment or amortization expense from acquired and internally generated intangible assets;

 

    Adjusted EBITDA does not include the impact of stock-based compensation;

 

    Adjusted EBITDA does not include the loss from misappropriation of assets by a former employee and related investigation costs net of recoveries. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Controls and Procedures”;

 

    Adjusted EBITDA does not include lease abandonment charges related to the estimated future net cash flows under lease agreements where we have vacated the leased premise; and

 

    others may calculate Adjusted EBITDA differently than we do and these other companies’ calculations may not be comparable to our Adjusted EBITDA metric. Because of these limitations, you should consider Adjusted EBITDA alongside other financial performance measures, including net income (loss) and our financial results presented in accordance with U.S. GAAP.

 



 

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The table below presents a reconciliation of net income (loss) to Adjusted EBITDA for each of the periods indicated:

 

     Year ended October 31,      Three months ended
January 31,
 
     2013      2014      2015      2015      2016  
     (in thousands)         

Net income (loss)

   $ (3,286    $ (10,990    $ (3,072    $ (466    $ (3,089

Income tax expense (recovery)

             (324                        

Depreciation and amortization

     3,806         5,286         6,903         1,485         2,379   

Interest expense (income), net

     (19      152         653         124         324   

Stock-based compensation

     1,109         2,140         2,493         473         1,043   

Lease abandonment

                     473                 2,467   

Loss from misappropriation

     2,408         2,546         (24      (41      (2
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted EBITDA

   $ 4,018       $ (1,190    $ 7,426       $ 1,575       $ 3,122   

 



 

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RISK FACTORS

An investment in our common shares involves a high degree of risk. You should carefully consider the risks and uncertainties described below, together with all of the other information contained in this prospectus, including our financial statements and related notes thereto, before deciding to invest in our common shares. The occurrence of any of the following risks could have a material adverse effect on our business, financial condition, results of operations and future prospects. In these circumstances, the market price of our common shares could decline, and you may lose all or part of your investment. This prospectus also contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of specific factors, including the risks described below. See “Cautionary Note Regarding Forward-Looking Statements.”

Risks related to our business

We have had a history of losses and negative cash flow from operations, we expect to continue to incur further losses, and we may be unable to achieve or sustain profitability.

We experienced a net loss of $3.3 million in our 2013 fiscal year, a net loss of $11.0 million in our 2014 fiscal year and a net loss of $3.1 million in our 2015 fiscal year. We experienced a net loss of $0.5 million in the three months ended January 31, 2015 and a net loss of $3.1 million in the three months ended January 31, 2016. We expect to make significant future expenditures to develop and expand our business. These will include, among other things, improvement and enhancement of our current products, development and marketing of new products and services, growing our sales and account management teams, investment in our infrastructure and enhancements to our general and administrative functions. We also expect to invest in geographic expansion as well as potential expansion into new segments of the market. These increased expenditures will make it harder for us to achieve and maintain profitability as we may be unable to generate sufficient increases in our revenue to achieve or maintain profitability. We may incur significant losses in the future for a number of reasons, including the other risks described in this prospectus, and we may encounter unforeseen expenses, difficulties, complications, delays and other unknown events. Accordingly, we may not be able to achieve or maintain profitability and we may incur significant losses for the foreseeable future.

If we are unable to retain our existing customers, increase sales to our existing customers or attract new customers, our business, results of operations and financial condition will be adversely affected.

Our customer contracts are typically structured as automatically-renewing monthly subscriptions, which our customers may terminate without cause and on short notice. Our ability to grow depends on the continuance of our customer contracts, selling additional solutions to existing customers and acquiring new customers. We may not be able to accurately predict future trends in customer terminations, and our adoption or termination rates may rise or fluctuate because of several factors, including:

 

    levels of satisfaction with our products and services;

 

    the cost of our products and services as compared with the cost of products and services offered by our competitors;

 

    reductions in our current or potential customers’ spending levels;

 

    service outages;

 

    our ability to attract, hire and maintain qualified personnel to meet customer needs;

 

    loss of other customers, particularly our larger or high-profile customers; and

 

    our ability to anticipate and respond to various competitive factors affecting the senior care market, including new technologies, products and services that may be introduced by our competitors, changes in consumer preferences, demographic trends, new regulatory requirements, economic conditions, and discount pricing and other strategies that may be implemented by our competitors.

 

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If our customers terminate their contracts for our products, negotiate less favorable terms, or do not purchase additional products or add-on applications, our revenue may grow more slowly than expected or decline, and our profitability and gross margins may be negatively impacted. In addition, loss of one or more of our key customers could adversely impact our competitive position in the marketplace and hurt our credibility and ability to add new customers.

Failure to effectively manage rapid growth in the number of facilities we serve could increase our expenses faster than we increase our revenue, result in operational challenges and increase the risk that we are unable to successfully implement our business strategy.

The number of facilities we serve has grown significantly over the past three years and we intend to focus on continuing to grow our business for the foreseeable future. For instance, we implemented approximately 2,100 new facilities in fiscal 2013, 2,200 new facilities in fiscal 2014, 1,500 new facilities in fiscal 2015 and 500 new facilities in the three months ended January 31, 2016 onto our PointClickCare platform. Included in the number of new facilities implemented onto our PointClickCare platform are 472 facilities in fiscal 2013, 302 facilities in fiscal 2014 and 11 facilities in fiscal 2015 transitioned from support-based customers acquired in our September 2012 acquisition of Accu-Med. This rapid growth in the number of facilities we serve puts a significant strain on our business, requires significant capital expenditures and increases our operating expenses. To manage this growth effectively, we must attract, train, and retain a significant number of qualified sales, implementation, customer service, software development, information technology and management personnel. We must also maintain and enhance our technology infrastructure and our financial and accounting systems and controls. If we fail to effectively manage our growth or we over-invest or under-invest in our business, our business, results of operations and financial condition could suffer materially from the weaknesses in our infrastructure, systems or controls. We could also suffer operational mistakes, a loss of business opportunities, employee losses and damage our brand. If our management is unable to effectively manage our growth, our expenses might increase more than expected, our revenue could decline or might grow more slowly than expected, and we might be required to divert financial resources from other projects, such as the development of new or enhanced products and services, or otherwise be unable to implement our business strategy.

Our quarterly operating results have fluctuated in the past, may continue to fluctuate and may not meet our expectations, causing the value of our common shares to decline substantially.

Our quarterly operating results have fluctuated in the past and may continue to fluctuate or decline for a variety of factors, some of which are outside our control. Our expectations for future performance based on our operating results may not be realistic and we may not meet those expectations. If our operating results fall below such expectations, the price of our common shares could decline substantially.

Some key factors that may cause reductions in our quarterly operating results and their possible impacts include:

 

    a failure to maintain market acceptance of our products resulting in loss of customers or failure to attract new customers at the same rate;

 

    our ability to introduce new products and enhancements and updates to our existing products on a timely basis;

 

    competitive pressures and the introduction of enhanced products and services from competitors;

 

    pressure on customer budgets and increased requirements in customer procurement policies resulting in reductions in our selling prices;

 

    the amount and timing of our investment in research and development activities and whether such investments are capitalized or expensed as incurred;

 

    lower than expected acceptance of our products and services;

 

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    timing of recognition of revenues and expenses;

 

    costs related to acquisitions, or unanticipated increases of operating expenses;

 

    customer retention rates;

 

    the effects of fluctuations in exchange rates between our functional currency of the United States dollar and the Canadian dollar;

 

    changes in regulatory requirements and the environment related to the products and services which we offer; and

 

    unforeseen legal expenses, including litigation and settlement costs.

In addition, a significant portion of our operating expenses are related to compensation and other items which are relatively fixed in the short-term, and we plan expenditures based in part on our expectations regarding future needs and opportunities. Accordingly, changes in our business or revenue shortfalls could decrease our gross and operating margins and could cause significant changes in our operating results from period to period. If this occurs, the trading price of our common shares could fall substantially, either suddenly or over time.

Our financial statements provide disclosure relating to the misappropriation of assets prior to July 2014 by a former employee that was conducted over an extended period of time. This misappropriation was enabled by material weaknesses in our internal control over financial reporting relating to inadequate segregation of duties and inadequate controls over the initiation, approval and processing of manual journal entries. Separate from the misappropriation, we discovered an immaterial overstatement in the capitalization of internal use software and an understatement of amortization of internal use software that had accumulated in fiscal 2014 and 2015. The internal use software errors occurred due to a material weakness in the design of a control to verify the accuracy and integrity of operational data used to calculate the capitalization of internal use software. If we fail to remediate one or more of our material weaknesses, or if we are unable to implement and maintain effective internal control over financial reporting, we might not be able to report financial results accurately and on a timely basis or prevent fraud. Additionally, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common shares may be negatively affected.

In July 2014, we discovered irregularities relating to certain credit card purchases made by our accounting manager and began an internal investigation utilizing the assistance of external legal and forensic accounting advisors. The investigation revealed that between May 2009 and July 2014, the accounting manager incurred unauthorized charges totaling approximately $6.6 million on a corporate credit card. Our investigation revealed that the accounting manager had sole and unrestricted access to the electronic credit card portal, allowing the accounting manager to conceal the credit card statements, make online payments to pay the credit card balance and record manual journal entries to conceal the nature of the purchases by characterizing them as expenditures within sales and marketing such as travel, trade shows and prospecting costs. The accounting manager’s control of the online credit card portal allowed her to bypass our internal process of recording credit card purchases through the expense reporting process followed by all other cardholders. Our investigation did not identify any misconduct on the part of any of our other employees. Following the discovery of the misappropriation of assets, the accounting manager’s employment was terminated.

In connection with the investigation of this loss from misappropriation, we identified certain material weaknesses in our internal control over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of a company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weaknesses allowed a misappropriation of funds to be conducted over a prolonged period of time without our detection:

 

   

Inadequate segregation of duties within significant accounts or processes. We have identified instances where there is insufficient segregation of duties that could lead to a material error in financial reporting

 

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and/or the misappropriation of assets. Insufficient segregation of duties in the administration of our corporate credit card process allowed the misappropriation of assets to occur and go undetected over a prolonged period of time.

 

    Inadequate controls over the initiation, approval and processing of manual journal entries. We have identified a weakness in the controls over the initiating, approving and processing of manual journal entries which evidences a lack of appropriate segregation of duties such that the same person could initiate, approve and process manual journal entries.

We have completed our material weakness remediation efforts related to the misappropriation of assets which include, among other things, hiring additional personnel, improving the segregation of duties among incompatible duties, redesigning our credit card program administration, improving our manual journal entry process, enhancing our code of business conduct and introducing a whistleblower telephone line.

In connection with our fiscal 2015 audit, we discovered an overstatement in the capitalization of internal use software and an understatement of amortization of internal use software that had accumulated in fiscal 2014 and 2015. We have corrected the accounting for internal use software in the quarter ending July 31, 2015 reducing the internal use software asset on the balance sheet by $1.0 million, increasing product development expenses by $0.8 million and increasing subscription and support cost of goods sold by $0.2 million as an immaterial out of period adjustment. This adjustment increases the net loss and other comprehensive loss by $1.0 million in the quarter ending July 31, 2015. We have determined that no prior period financial statements were materially misstated as a result of the overcapitalization.

Management has identified a material weakness in our internal control over financial reporting in connection with the internal use software errors. Specifically, we did not adequately design a control to verify the accuracy and integrity of operational data utilized to calculate the capitalization of internal use software.

We have taken measures to remediate this material weakness, including introducing new procedures designed to validate the completeness and accuracy of the underlying data, but these measures may not fully address the material weakness and we cannot conclude that the weakness has been fully remediated.

Maintaining effective internal control over financial reporting is necessary for us to produce reliable financial reports and is important in helping to prevent financial fraud. If we are unable to maintain adequate internal controls, our business and operating results could be harmed. Although we have augmented our internal controls and related staff in anticipation of becoming a public company and in response to this misappropriation of our assets, we are not currently required to comply with Section 404 of the Sarbanes-Oxley Act of 2002, or Sarbanes-Oxley, or National Instrument 52-109—Certification of Disclosure in Issuers’ Annual and Interim Filings of the Canadian Securities Administrators, or NI-52-109. As a result, we are not currently required to make an assessment of the effectiveness of our internal controls, or to deliver a report that assesses the effectiveness of our internal control over financial reporting.

We have begun to evaluate, document and test our internal control procedures to satisfy the requirements of Section 404 of Sarbanes-Oxley and the related rules of the SEC and NI-52-109, which will require, among other things, our management to assess annually the effectiveness of our internal control over financial reporting and, if we are no longer an emerging growth company under the Jumpstart Our Business Startups Act, or the JOBS Act, our independent registered public accounting firm to issue a report on that assessment.

The process of designing and implementing effective internal controls and procedures, and expanding our internal accounting capabilities, is a continuous effort that requires us to anticipate and react to changes in our business and the economic and regulatory environments and to expend significant resources to establish and maintain a system of internal controls that is adequate to satisfy our reporting obligations as a public company. The standards that must be met for management to assess the internal control over financial reporting as effective

 

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are complex, and require significant documentation, testing and remediation. We cannot be certain at this time whether we will be able to successfully complete the implementation of controls and procedures or the certification and attestation requirements of Section 404 of Sarbanes-Oxley and NI-52-109.

If we fail to correct the control deficiencies described above related to the capitalization of internal use software, or fail to discover and address any other control deficiencies in the future, we may fail to meet our future reporting obligations, we may need to restate our financial results and the price of our common shares may decline. Any failure of our internal controls could also adversely affect the results of the periodic management evaluations and annual independent registered public accounting firm attestation reports regarding the effectiveness of our internal control over financial reporting that will be required when Section 404 of Sarbanes-Oxley or NI-52-109 become fully applicable to us. Effective internal controls are necessary for us to produce reliable financial reports and are important to helping prevent financial fraud. If we cannot provide reliable financial reports or prevent fraud, our business and results of operations could be harmed, investors could lose confidence in our reported financial information, and the trading price of our shares could drop significantly. For a description of the identified material weaknesses in our internal control over financial reporting, the remediation efforts undertaken by us to date and the circumstances relating to the misappropriation of funds, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Controls and Procedures.”

If we are unable to continue to innovate and deliver enhancements to our products and services in response to new technologies or changes in the senior care and adjacent industries, our products may be less desirable and our business, results of operations and financial condition would be adversely affected.

The software industry is subject to rapid technological change. The introduction of new technologies in the software industry, including mobile technologies, will continue to have a significant effect on competitive conditions in our industry. We may not be able to develop and introduce new solutions and enhancements to our existing products that respond to technological changes on a timely basis. If we are unable to develop and sell new products and new features for our existing products that keep pace with rapid technological and regulatory change as well as developments in the senior care and adjacent industries such as home health care, our business, results of operations and financial condition could be adversely affected.

Our success also depends in substantial part on our continuing ability to anticipate and respond to changes in technology, industry standards, regulatory requirements and customer requirements, and to provide products and services that organizations will find superior to our competitors’ offerings and will continue to use. We intend to continue to invest significant resources in research and development to enhance our existing products and services and introduce new high-quality products that customers will want. If we are unable to predict or quickly react to user preferences or changes in the senior care industry, or its regulatory requirements, or if we are unable to modify our products and services on a timely basis or to effectively bring new products to market, our sales may suffer.

In addition, we may experience difficulties with software development, design, integration with third-party software or hardware, or marketing that could delay or prevent our introduction, deployment or implementation of new solutions and enhancements. The introduction of new solutions by competitors, the emergence of new industry standards or the development of entirely new technologies to replace existing offerings could render our existing or future solutions obsolete.

We may not have sufficient resources to make the necessary investments in software development and our technical infrastructure, and we may experience difficulties that could delay or prevent the successful development, introduction or marketing of new products or enhancements. In addition, our products or enhancements may not meet the increasingly complex customer requirements of the senior care market or achieve market acceptance at the rate we expect, or at all. Any failure by us to anticipate or respond adequately to technological advancements, customer requirements and changing industry standards, or any significant delays in

 

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the development, introduction or availability of new products or enhancements, could undermine our current market position and negatively impact our business, results of operations or financial condition.

If we are unable to integrate our platform and our applications with a growing number and range of third-party software, systems, hardware and services, then we may fail to retain our existing customers, increase sales to our existing customers or attract new customers.

Integration of our solutions with other systems and services allows customers to take advantage of capabilities in our platform which enhance functionality for our customers. We derive revenue from our customers and from third-party vendors in connection with the establishment and support of such integrations. If we are unable to maintain technical interoperation, our customers may not be able to effectively integrate our platform with other systems and services they use. We may also be unable to maintain our relationships with certain third-party vendors if we are unable to integrate our solution with theirs. Further, third party vendors are under no obligation to continue such integration with us on commercially reasonable terms, or at all, and if we seek to integrate with competing vendors, certain vendors may stop supporting integration with our platform. In addition, acute care electronic health record, or EHR, vendors may pressure physicians or other providers not to utilize our software or connect to our platform. Any loss of a vendor integration partner could have an adverse effect on our customers and decrease demand for our solutions.

If we are unable to release periodic updates to our solutions on a timely basis, the market acceptance of our products may be adversely affected and our revenues could decline.

Our solutions are affected by changes in healthcare, reimbursement, privacy and other laws and regulations and generally must be updated regularly to maintain their accuracy and competitiveness. Although we believe our SaaS platform provides us with flexibility to release updates in response to these changes, we cannot be certain that we will be able to make the necessary changes to our solutions and release updates on a timely basis, or at all. Failure to do so could have an adverse effect on our customers, potential customers, the market acceptance of our solutions and decrease demand for our solutions.

Changes in the healthcare industry or regulatory environment could adversely affect our business.

The healthcare industry, including the senior care segment, is highly regulated and is subject to changing political, legislative, regulatory and other influences. Changes that affect the healthcare industry, including new regulations or new interpretations of existing regulations, reductions in funding, changes in pricing for healthcare services or impediments to third-party reimbursement for healthcare costs may cause deterioration in the financial or business condition of our customers and cause them to reduce their spending on information technology. As a result, these developments could adversely affect our business, results of operations and financial condition.

In addition, our customers’ expectations regarding pending or potential industry developments may also affect their budgeting processes and spending plans with respect to our solutions. The healthcare industry has changed significantly in recent years and we expect that significant changes will continue. For example, recently enacted, pending and proposed legislation at the federal and state levels in the United States (including those enacted through healthcare reform) could continue to pressure reimbursement rates for senior care providers. However, the timing and impact of developments in the healthcare industry are difficult to predict. We cannot guarantee that the markets for our solutions will continue to exist at current levels or that we will have adequate technical, financial and marketing resources to react to changes in those markets.

Foreign exchange rate fluctuations may negatively affect our profitability and our cash.

Most of our revenues are denominated in U.S. dollars. The percentage of our revenues denominated in Canadian dollars accounted for 10% and 6% of our revenues in fiscal 2014 and 2015, respectively, and 5% in the three months ended January 31, 2016. We incur expenses primarily in Canadian dollars, however, and our

 

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expenses in Canadian dollars accounted for 73% and 66% of our expenses in fiscal 2014 and 2015, respectively, and 67% in the three months ended January 31, 2016. As a result, any appreciation of the Canadian dollar relative to the U.S. dollar would adversely impact our profitability due to the portion of our expenses that are incurred in Canadian dollars. Our existing hedging arrangements to reduce our exposure to foreign currency fluctuations have limitations and we are required to report gains or losses based upon changes in the fair market value of those instruments over time. If we choose not to have such arrangements in place in the future, or if our exposure to foreign currency risks exceeds the protections in place in the arrangements that we maintain, then we may be unsuccessful in protecting against currency exchange rate fluctuations and our income and cash assets may suffer. Future currency exchange rate fluctuations could adversely affect our profitability. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Quantitative and Qualitative Disclosures About Market Risk—Foreign Currency Exchange Risk.”

The market size estimates included in this prospectus may prove to be inaccurate and may not be indicative of our future growth.

The senior care industry is in the early stages of market acceptance of EHR and management solutions. Because of rapid and significant technological, reimbursement and regulatory changes, it is difficult to predict the size of the market and the rate at which the market for our products and services will grow or be accepted. While our estimate of the total addressable market included in this prospectus was made in good faith and is based on assumptions and estimates we believe to be reasonable, this estimate may not prove to be accurate. This is particularly the case with respect to estimating the size of the in-home and international care components of the market, where we have less experience.

We entered the in-home care market in June 2015 and have spent the past 12 months preparing our in-home care products for this market. We currently do not generate a significant amount of revenue from in-home care products and so our estimate of the addressable opportunity for products that are currently available assumes market acceptance of those products of the nature we have seen in the facility-based market, which may not prove to be accurate.

If we fail to manage our technical infrastructure, our existing customers may experience service outages and our new customers may experience delays in the implementation of our platform.

We have experienced, and may in the future experience, website disruptions, outages and other performance problems. These problems may be caused by a variety of factors, including infrastructure changes, human or software errors, viruses, security attacks, fraud, spikes in customer usage and denial of service issues. In some instances, we may not be able to identify the cause or causes of these performance problems within an acceptable period of time. If we do not accurately predict our infrastructure requirements, our existing customers may experience service outages that may subject us to customer losses or financial penalties or other liabilities.

In addition, our ability to deliver our cloud-based applications depends on the development and maintenance of internet infrastructure by third parties. This includes maintenance of reliable networks with the necessary security, speed, data capacity and bandwidth. While our services are designed to operate without interruption, we have experienced, and may in the future experience, interruptions and delays in services and availability from time to time. In the event of a catastrophic event with respect to one or more of our systems, we may experience an extended period of system unavailability, which could negatively impact our relationship with customers.

Threats to the security and uninterrupted availability of our platform include:

 

    software and hardware errors, failures and crashes;

 

    security breaches, computer viruses, hacking, denial-of-service attacks and similar disruptive problems;

 

    communications failures;

 

    damage from fire, power loss, natural disasters and other force majeure events outside our control; and

 

    other potential interruptions.

We also rely on computer hardware purchased or leased, and software and services licensed, from third parties in order to offer our services. These licenses and hardware are generally commercially available on

 

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varying terms. However, it is possible that this hardware and software might not continue to be available on commercially reasonable terms, or at all. Any loss of the right to use any of this hardware or software could result in delays in the provisioning of our services until equivalent technology is either developed by us, or, if available, is identified, obtained and integrated.

Any disruption in the services provided through third-party web-based services or our data centers could adversely affect our business.

We host our applications and serve our customers from third-party data centers located in Chicago in the United States and Toronto in Canada, with a disaster recovery partner in Mississauga, Ontario. In addition, we host certain of our applications through a third-party web-based service provider. We do not utilize redundant data centers. We may also decide to employ additional offsite data centers in the future to accommodate growth.

Problems faced by our third-party providers, with the telecommunications network providers with whom we or they contract, or with the systems by which our telecommunications providers allocate capacity among their clients could adversely affect the availability and processing of our solutions and related services and the experience of our customers. If our third-party providers are unable to keep up with our growing needs for capacity, this could have an adverse effect on our business and cause us to incur additional expenses. In addition, any financial difficulties faced by our third-party data centers’ operators or any of the service providers with whom we or they contract may have negative effects on our business, the nature and extent of which are difficult to predict. Any changes in service levels at our third-party providers or any errors, defects, disruptions or other performance problems with our applications could adversely affect our reputation and may damage our customers’ stored files or result in lengthy interruptions in our services. Interruptions in our services might reduce our revenues, subject us to potential liability or other expenses or adversely affect our renewal rates or our ability to attract new customers. Additionally, the operators of these facilities have no obligation to renew their agreement with us on commercially reasonable terms, or at all. If we are unable to renew these agreements on commercially reasonable terms, or if operators are acquired, we may be required to transfer our servers and other infrastructure to a new data center facility, and we may incur significant costs and experience service interruptions in doing so.

In addition, the third-party disaster recovery data center provides equipment from non-dedicated shared inventory. If we need to implement our disaster recovery plan, there might not be sufficient equipment capacity from the third-party disaster recovery operator, which could impact our ability to quickly restore services.

If our security measures are breached or unauthorized access to customer data or funds is otherwise obtained, our solutions may be perceived as not being secure, we may lose current or future customers, our reputation and business may be harmed and we may incur significant liabilities.

Our solutions involve the storage and transmission of proprietary and confidential information of our customers and their patients, including personal and healthcare information, financial information, identification numbers and system passwords. In addition, we collect and maintain personal information on our own employees in the ordinary course of our business. As a result, unauthorized access or security breaches of our systems or the systems of our customers could result in the unauthorized disclosure of confidential information, theft, litigation, indemnity obligations and other significant liabilities. Because the techniques used to obtain unauthorized access or sabotage systems change frequently and generally are not identified until they are employed, we may be unable to anticipate these techniques or to implement adequate preventative measures in advance. Our security measures and controls to protect confidential information and prevent data loss, theft and other security breaches, including penetration tests of our systems by independent third parties, may not be effective to prevent breaches of our security measures or non-authorized access to our systems which could cause substantial harm to our business and cause us to incur significant liabilities. In addition, we might be subject to federal, state, provincial or other legal proceedings or requirements, which could require us to disclose our data to third parties. Any such breach, unauthorized access or disclosure could negatively affect our ability to attract new customers, cause

 

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existing customers to terminate their agreements with us, result in reputational damage and subject us to lawsuits, including lawsuits related to the Health Insurance Portability and Accountability Act of 1996, or HIPAA, regulatory fines or other actions or liabilities which could materially and adversely affect our business, operating results and financial condition.

There can be no assurance that the limitations of liability in our contracts would be enforceable or adequate or would otherwise protect us from any such liabilities or damages with respect to any particular claim related to a breach or unauthorized access. We also cannot be sure that our existing general liability insurance coverage and coverage for errors or omissions will continue to be available on acceptable terms or in sufficient amounts to cover one or more large claims, or that the insurer will not deny coverage as to any future claim. The successful assertion of one or more large claims against us that is not covered by our insurance programs or exceeds available insurance coverage, or the occurrence of changes in our insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, could have a material adverse effect on our business, results of operations and financial condition.

We could become subject to claims from end users of our products or residents that result in significant liability and damages claims against us.

Customers use our products in connection with providing critical healthcare services. If any of our products contain errors that produce inaccurate results upon which our customers or their patients rely we could be subject to liability claims from our customers or directly from users or residents. Provisions in our customer contracts that are intended to limit our exposure to such claims may not be effective in limiting our exposure. Contractual limitations we use may not be enforceable and may not provide us with adequate protection against product liability claims in certain jurisdictions. A successful claim relating to personal injury or death brought against us could result in substantial cost to us and divert management’s attention from our operations.

Any future litigation against us could be costly and time-consuming to defend.

We may become subject to legal proceedings and claims relating to our customers’ compliance with legislative and regulatory requirements. We may also become subject to legal proceedings and claims that arise in the ordinary course of business such as claims brought by our customers in connection with commercial disputes or employment claims made by our current or former employees. Litigation might result in substantial costs and may divert management’s attention and resources, which might seriously harm our business, overall financial condition, and operating results. Insurance might not cover such claims, might not provide sufficient payments to cover all the costs to resolve one or more such claims and might not continue to be available on terms acceptable to us. A claim brought against us that is uninsured or underinsured could result in unanticipated costs, thereby harming our operating results and leading analysts or potential investors to lower their expectations of our performance, which could reduce the trading price of our shares.

Real or perceived errors or failures in our products may cause us to lose customers or subject us to liability for breach of warranty claims.

Customers use our products in connection with providing healthcare services and obtaining accurate and complete reimbursement for healthcare services. If any of our products contain errors that produce inaccurate results upon which users rely, or cause users to misfile or fail to file required information, we could be subject to product liability claims from our customers or, indirectly, pursuant to indemnification obligations, from residents.

Because we offer complex products hosted in large-scale infrastructure environments, undetected errors or failures may exist or occur, especially when products are first introduced or when new versions are released. Despite testing by us, we may not identify all errors, failures or bugs in new products or releases until after

 

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commencement of commercial sales or installation. In the past, we have discovered software errors, failures and bugs in some of our product offerings after their introduction.

Product errors will affect the performance of our products and could delay the development or release of new products or new versions of products, adversely affect our reputation and our customers’ willingness to buy products from us, and adversely affect market acceptance or perception of our products. In addition, because our software is used to manage functions that are critical to our customers, the licensing and support of our products may involve the risk of product liability claims. We also may face liability for breaches of our product warranties, product failures or damages caused by faulty installation of our products. Provisions in our contracts relating to warranty disclaimers and liability limitations may be unenforceable or otherwise ineffective.

Because of the large amount of data that we collect and manage, it is possible that hardware failures or errors in our systems could result in data loss or corruption, or cause the information that we collect to be incomplete or contain inaccuracies that our customers, their employees and taxing and other regulatory authorities regard as significant. The costs incurred in correcting any errors or in responding to regulatory authorities or to resulting claims or liability might be substantial and could adversely affect our operating results.

The market for electronic healthcare solutions is competitive and growing more competitive, and if we do not compete effectively, our business operating results and financial condition could be adversely affected.

The market for health technology solutions is fragmented, competitive and rapidly changing. Several other electronic healthcare providers are larger, have greater name recognition, longer operating histories and significantly greater resources than we do. As a result, our potential competitors may be able to develop products and services better received by our current and potential customers or may be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, regulations or customer requirements.

We also believe that competition will grow as acceptance of automated solutions and technology increases. Furthermore, downward pressure on reimbursement coupled with regulatory changes that increase operational complexity will cause providers to seek new solutions or replace ones that may cease to offer adequate return on investment and compliance. New or replacement solutions may come from larger healthcare or horizontal market software companies with extensive resources, including, for example, providers of acute care information systems. In addition, current and potential competitors have established, and might in the future establish, partnerships or form other cooperative relationships with vendors of complementary products, technologies or services to enable them to offer new products and services, to compete more effectively or to increase the availability of their products in the marketplace. New competitors might emerge that have a larger customer base, more widely adopted proprietary technologies, greater marketing expertise, greater financial resources, and larger sales forces than we have, which could put us at a competitive disadvantage. In light of these advantages, current or potential customers might accept competitive offerings in lieu of purchasing our offerings. We expect intense competition to continue for these reasons, and such competition could negatively impact our sales, profitability or market share.

Failure to support our customers with training and implementation in the use of our products could result in delayed and cancelled deployments.

Because our customers rely on our products, services and maintenance support to manage a wide range of operations, the incorrect or improper use of our products, our failure to properly train customers on how to efficiently and effectively implement and use our products, or our failure to properly provide implementation or maintenance services to our customers may result in negative publicity or legal claims against us. As we continue to expand our customer base, any failure by us to properly support the training of our customers (directly or through third parties) and provide these other services may delay or result in the cancellation of the deployment of our products and also likely result in lost opportunities for follow-on sales of our products and services. These results would adversely affect our business, results of operations and financial condition.

 

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Any failure to offer high-quality customer services may adversely affect our relationships with our customers and our financial results.

Our customers depend on our customer service organization to resolve issues relating to our solutions and to train them to use our platform. High-quality customer services are important for the successful marketing and sale of our products and for the retention of existing customers and to sell additional add-on applications to our existing customers. If we do not help our customers quickly resolve issues and provide effective ongoing support, our ability to sell additional products to existing customers would suffer and our reputation with existing or potential customers would be harmed.

In addition, our sales process is highly dependent on our applications and business reputation and on positive recommendations from our existing customers. Any failure to maintain high-quality customer services, or a market perception that we do not maintain high-quality customer services, could adversely affect our reputation, our ability to sell our solutions to existing and prospective customers, and our business, results of operations and financial condition.

If we fail to maintain and enhance our brand, we may fail to attract enough new customers or retain our existing customers.

We believe that maintaining and enhancing awareness of our brand is critical to continuing the widespread acceptance of our existing solutions and is an important element in attracting new customers. Successful promotion of our brand will depend largely on the effectiveness of our marketing efforts and on our ability to provide reliable and useful services at competitive prices. If we fail to successfully maintain our brand, we may fail to attract enough new customers or retain our existing customers to the extent necessary to realize a sufficient return on our brand-building efforts.

We depend on our senior management team and other key employees, including our co-founders, and the loss of these persons or an inability to attract and retain highly skilled employees could adversely affect our business.

Our success depends largely upon the continued services of our key executive officers. We rely on our leadership team in the areas of research and development, sales, services and general and administrative functions. From time to time, there may be changes in our executive management team resulting from the hiring or departure of executives, which could disrupt our business. While we have employment agreements with certain of our executive officers, including our co-founders Mike Wessinger and Dave Wessinger, these employment agreements do not require them to continue to work for us for any specified period and, therefore, they could terminate their employment with us at any time. The loss of one or more of our executive officers or key employees could have an adverse effect on our business and require significant amounts of time, training and resources to find suitable replacements and integrate them within our business.

If we fail to adequately expand our direct sales force with qualified and productive persons, we may not be able to grow our business effectively.

We primarily sell our products and implementation services through our direct sales force. To grow our business, we intend to focus on growing our customer base for the foreseeable future. Our ability to add customers and to achieve revenue growth in the future will depend upon our ability to grow and develop our direct sales force and on their ability to productively sell our solutions. Identifying and recruiting qualified personnel and training them in the use of our software require significant time, expense and attention. The amount of time it takes for our sales representatives to be fully trained and to become productive varies widely. While we have expanded and will continue to expand our sales force, our sales structure is reliant upon a limited number of representatives to sell to our largest accounts. In addition, if we hire sales representatives from

 

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competitors or other companies, their former employers may attempt to assert that these employees have breached their legal obligations, resulting in a diversion of our time and resources.

If our sales organization does not perform as expected, our revenues and revenue growth could suffer. In addition, if we are unable to hire, develop and retain talented sales personnel, if our sales force becomes less efficient as it grows or if new sales representatives are unable to achieve desired productivity levels in a reasonable period of time, we may not be able to grow our customer base and revenues and our sales and marketing expenses may increase.

If we are unable to recruit and retain skilled product development and other technology experienced employees, our ability to develop and deploy widely accepted products could be impaired and our business could be harmed.

We believe that to grow our business and be successful, we must continue to develop products that are technologically-advanced, are highly integrable with third-party services, provide significant mobility capabilities and are user-friendly. To do so, we must attract and retain highly qualified personnel, particularly employees with high levels of experience in designing and developing software and internet-related products and services. Competition for these personnel in the greater Toronto area and elsewhere is intense and significant amounts of time and resources are required to train such personnel. If we fail to attract new personnel or fail to retain and motivate our current personnel, our business and future growth prospects could be severely harmed. We follow a practice of hiring the best available candidates wherever located, but as we grow our business, the productivity of our product development and other research and development may be adversely affected. In addition, if we hire employees from competitors or other companies, their former employers may attempt to assert that these employees have breached their legal obligations, resulting in a diversion of our time and resources.

We may acquire other companies or technologies, which could divert our management’s attention, result in additional dilution to our shareholders and otherwise disrupt our operations and adversely affect our business, operating results or financial position.

We have in the past acquired, and intend in the future to acquire or invest in, other businesses or technologies. For example, in June 2015 we acquired the software solution and related assets of the home health division of Smart Data Solutions, Inc., referred to as Nobility Health. This acquisition and the pursuit of other potential acquisitions or investments may disrupt our ongoing business, divert the attention of management and cause us to incur various expenses in identifying, investigating and pursuing suitable acquisitions, whether or not they are consummated.

We have limited experience in acquiring other businesses. We may not be able to integrate the services, products, acquired personnel, operations or technologies successfully, profitably or effectively manage the combined business following our most recent acquisition or future acquisitions. We also may not achieve the anticipated benefits from the acquired business due to a number of factors, including:

 

    difficulty integrating the accounting systems, operations and personnel of the acquired business;

 

    difficulties and additional expenses associated with supporting legacy products and hosting infrastructure of the acquired business;

 

    difficulty converting the customers of the acquired business onto our applications and contract terms, including disparities in the revenues, licensing, support or professional services model of the acquired company;

 

    adverse effects to our existing business relationships with business partners and customers as a result of the acquisition;

In addition, a significant portion of the purchase price of companies we acquire may be allocated to acquired goodwill and other intangible assets, which must be assessed for impairment at least annually. In the future, if

 

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our acquisitions do not yield expected returns, we may be required to take charges to our operating results based on this impairment assessment process, which could adversely affect our results of operations.

Acquisitions could result in a substantial reduction in our available cash. Acquisitions could also result in dilutive issuances of equity securities or the incurrence of debt, which could adversely affect our operating results or our share price, or result in issuances of securities with superior rights and preferences to those of common shares or restrictive covenants that may impact our future uses of capital in pursuit of business opportunities. If any of these issues occur, our operating results, business and financial condition may be adversely affected.

Future sales to customers outside of North America or with international operations might expose us to risks inherent in international sales which, if realized, could adversely affect our business.

We are in the process of beginning to expand outside of North America into new geographies. Operating in international markets requires significant resources and management attention and will subject us to regulatory, economic, and political risks that are different from those in the United States and Canada. Because of our limited experience with international operations, our international expansion efforts might not be successful in creating demand for our products and services outside of North America or in effectively selling our solutions in the international markets we enter. In addition, we will face risks in doing business internationally that could adversely affect our business, operating results and financial condition, including:

 

    the need to localize and adapt our solutions for specific countries, including translation into foreign languages, product changes required to meet local regulations and associated expenses;

 

    data privacy laws which require that customer data be stored and processed in a designated territory;

 

    difficulties in staffing and managing foreign operations;

 

    compliance challenges related to the complexity of multiple, conflicting and changing governmental laws and regulations, including employment, tax, privacy, and data protection laws and regulations;

 

    increased management, travel, infrastructure and legal compliance costs associated with having international operations;

 

    the prices we can charge for our platform and add-on applications may be lower in certain international markets than they are in the United States and Canada;

 

    adverse tax consequences; and

 

    unstable regional economic and political conditions.

If we are required to collect sales and use taxes in additional jurisdictions, we might be subject to tax liability for past sales. New tax laws could be enacted or existing laws could be applied to us or our customers, which could increase the costs of our services and adversely impact our business.

The application of federal, state, provincial and local tax laws to services provided electronically is evolving. New income, sales, use or other tax laws, statutes, rules, regulations or ordinances could be enacted at any time (possibly with retroactive effect), and could be applied solely or disproportionately to services provided over the internet. These enactments could adversely affect our sales activity due to the inherent cost increase the taxes would represent and ultimately result in a negative impact on our operating results and cash flows.

We might lose sales or incur significant expenses if states successfully impose broader guidelines on state and/or provincial sales and use taxes. A successful assertion by one or more states requiring us to collect sales or other taxes on the subscription service revenue could result in substantial tax liabilities for past transactions and otherwise harm our business. Each state and province has different rules and regulations governing sales and use taxes, and these rules and regulations are subject to varying interpretations that change over time. We review

 

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these rules and regulations periodically and, when we believe we are subject to sales and use taxes in a particular state or province, voluntarily engage state or provincial tax authorities in order to determine how to comply with their rules and regulations. We cannot assure you that we will not be subject to sales and use taxes or related penalties for past sales in states or provinces where we currently believe no such taxes are required.

Vendors like us are typically held responsible by taxing authorities for the collection and payment of any applicable sales and similar taxes. If one or more taxing authorities determines that taxes should have, but have not, been paid with respect to our services, we might be liable for past taxes in addition to taxes going forward. Liability for past taxes might also include substantial interest and penalty charges. Our customer contracts typically provide that our customers must pay all applicable sales and similar taxes. Nevertheless, our customers might be reluctant to pay back taxes and might refuse responsibility for interest or penalties associated with those taxes. If we are required to collect and pay back taxes and the associated interest and penalties, and if our customers fail or refuse to reimburse us for all or a portion of these amounts, we will incur unplanned expenses that may be substantial. Moreover, imposition of such taxes on us going forward will effectively increase the cost of our platform to our customers and might adversely affect our ability to retain existing customers or to gain new customers in the areas in which such taxes are imposed.

Our loan agreement contains operating and financial covenants that may restrict our business and financing activities.

We currently have a senior secured credit facility, or the Wells Fargo Facility, with Wells Fargo Capital Finance Corporation Canada, or Wells Fargo, pursuant to which we may borrow up to an aggregate of $50.0 million (or the Canadian dollar equivalent) on a revolving basis. The Wells Fargo Facility was used to pay off and terminate a prior credit facility, or the Comerica Facility, with Comerica Bank, or Comerica, and for working capital, capital expenditures, and general corporate expenses. Advances under the Wells Fargo Facility are limited to a variable ceiling, which is a function of our subscription revenue for the most recently completed trailing twelve month period. Subject to terms of the loan agreement, amounts borrowed under the Wells Fargo Facility may be repaid and re-borrowed at any time, without penalty or premium, prior to the June 30, 2020 maturity date, at which time all amounts borrowed are due and payable. Advances under the Wells Fargo Facility bear interest at LIBOR + 2.75% to 3.50%, based on available borrowing capacity under the Wells Fargo Facility. The Wells Fargo Facility is subject to an unused line fee equal to 0.375% per annum times the unused portion of the Wells Fargo Facility. Under the Wells Fargo loan agreement, we are subject to a financial covenant to maintain a minimum level of pro forma EBITDA for the most recently completed trailing consecutive twelve month period, as well as a specified minimum amount of liquidity, defined as the sum of unrestricted cash and cash equivalents, and available borrowing capacity under the revolver. The minimum liquidity required increases from $5.0 million at January 31, 2016 to $5.5 million at July 31, 2016, $6.0 million at October 31, 2016 and to $7.0 million at July 31, 2017.

We have made customary affirmative and negative covenants in connection with the Wells Fargo Facility that may restrict our business and financing activities. In the event of a default, including, among other things, our failure to make any payment when due or our uncured default in the performance or observance of any term, covenant, condition or agreement we are required to perform, Wells Fargo may declare all obligations immediately due and payable. The Wells Fargo Facility is collateralized by substantially all of our assets. Future credit facilities may require us to meet specified minimum financial measurements. A failure to meet any of these measurements could result in a default under the Wells Fargo Facility, which could cause all of the outstanding indebtedness under the Wells Fargo Facility to become immediately due and payable and terminate all commitments to extend further credit.

 

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Risks related to regulation

Government regulation of the areas in which we operate creates risks and challenges with respect to our compliance efforts and our business strategies.

The healthcare information industry is highly regulated and is subject to changing political, legislative, regulatory, and other influences. Existing and new laws and regulations affecting the healthcare and healthcare information industry could create unexpected liabilities for us, cause us to incur additional costs and restrict our operations. These laws and regulations are complex and their application to specific products, services and relationships are not always clear and change frequently. In particular, many existing laws and regulations affecting healthcare, when enacted, did not anticipate the services that we provide, and these laws and regulations might be applied to our services in ways that we do not anticipate. Our failure to accurately anticipate the application of these laws and regulations, or our failure to comply, could create liability for us, result in adverse publicity, and negatively affect our business. Some of the risks we face from the regulation of healthcare and healthcare information are as follows:

False or Fraudulent Claim Laws. There are numerous federal and state laws that forbid submission of false information or the failure to disclose information in connection with submission and payment of claims for reimbursement from the government. In some cases, these laws also forbid abuse of existing systems for such submission and payment. Although our business operations are generally not subject to these laws and regulations, any contract we have with a government entity requires us to comply with these laws and regulations. Any failure of our services to comply with these laws and regulations could result in substantial liability, including but not limited to criminal liability and financial penalties, could adversely affect demand for our services, and could force us to expend significant capital, research and development, and other resources to address the failure. Any determination by a court or regulatory agency that our services with government clients violate these laws and regulations could subject us to civil or criminal penalties, invalidate all or portions of some of our government client contracts, require us to change or terminate some portions of our business, require us to refund portions of our services fees, cause us to be disqualified from serving not only government clients but also all clients doing business with government payors.

HIPAA and Other Privacy and Security Requirements. There are numerous Canadian, European and U.S. federal, state and provincial laws and regulations related to the privacy and security of personally identifiable information, and, specifically, personal health information. In particular, regulations promulgated pursuant to HIPAA established privacy and security standards that limit the use and disclosure of individually identifiable healthcare information, and require the implementation of administrative, physical, and technological safeguards to ensure the confidentiality, integrity, and availability of individually identifiable healthcare information in electronic form. HIPAA regulations apply to covered entities, which may include our customers, as well as to “business associates” of a covered entity. We are considered a business associate of some of our customers for purposes of HIPAA and as such, we have direct legal and regulatory compliance obligations, both directly under HIPAA and pursuant to the business associate agreements we have entered into with our customers that are HIPAA covered entities or business associates. If we are unable to protect the privacy and security of health information processed on our platform or otherwise maintained by us, we could be found to have breached our contracts with our customers or we could face civil and criminal penalties under HIPAA and, with respect to other personally identifiable information that is not subject to HIPAA (for which there is no private right of action), potential class action lawsuits. We cannot be sure that the physical, technical and administrative safeguards and processes we have implemented are adequate to protect personal health information and other personally identifiable information.

In addition to HIPAA’s privacy standards and security standards, most states and provinces have enacted patient confidentiality laws that protect against the disclosure of confidential medical and/or healthcare information, and many states and provinces have adopted or are considering further legislation in this area, including privacy safeguards, security standards, and data security breach notification requirements. Such state

 

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and provincial laws, if more stringent than HIPAA requirements, are not preempted by the federal requirements and our customers are required to comply with them.

We might not be able to adequately address the business, technical and operational risks created by HIPAA and other privacy and security requirements. Furthermore, we are unable to predict what changes to HIPAA or other laws or regulations might be made in the future or how those changes could affect our business or the costs of compliance.

Prescribing Laws. The use of our software by physicians to perform a variety of functions, including electronic prescribing, electronic routing of prescriptions to pharmacies and dispensing of medication, is governed by state and federal law, including fraud and abuse laws, drug control regulations and state departments of health regulations. States have differing prescription format requirements. Many existing laws and regulations, when enacted, did not anticipate methods of e-commerce now being developed. For example, while federal law and the laws of many states permit the electronic transmission of prescription orders, the laws of several states neither specifically permit nor specifically prohibit the practice. Given the rapid growth of electronic transactions in healthcare, and particularly the growth of the Internet, we expect the remaining states to directly address these areas with regulation in the near future. Regulatory authorities such as the U.S. Department of Health and Human Services’ Centers for Medicare and Medicaid Services may impose functionality standards with regard to electronic prescribing and electronic medical record technologies. A determination that we or our clients have violated prescribing laws may expose us to liability, loss of reputation and loss of business. These laws and requirements may also increase the cost and time necessary to market new services and could affect us in other respects not presently foreseeable.

Meaningful Use Standards. The American Recovery and Reinvestment Act of 2009 established a “meaningful use” EHR program to incentivize certain Medicare/Medicaid health care providers to adopt and use EHR technology. Failing to achieve meaningful use within certain timeframes can result in reduced reimbursement. Among other requirements for meaningful use, providers/facilities must use a certified EHR. We have currently achieved Stage 1 and Stage 2 meaningful use certifications. On March 30, 2015, CMS published a proposed rule for Stage 3 meaningful use which would specify the meaningful use criteria that eligible parties must meet to qualify for Medicare/Medical EHR incentive payments. The EHR certification program is rigorous, and failure to meet certification in the future could result in liability or reputational loss. Further, research and development related to meeting future Meaningful Use requirements could potentially be costly.

Medical Device Laws. The U.S. Food and Drug Administration, or FDA, has asserted that computer software could be considered a medical device under the 1976 Medical Device Amendments to the Federal Food, Drug and Cosmetic Act. Although it does not currently do so, the FDA has indicated that it could regulate certain aspects of products like ours (including products with clinical decision support tools, patient monitoring, or “mobile medical apps”). To the extent that computer software is a medical device under the policy, we could be required to register and list our products with the FDA, demonstrate to the FDA substantial equivalence to other products on the market before marketing our functionality or obtain FDA approval by demonstrating safety and effectiveness before marketing our functionality. The FDA can impose extensive requirements regarding service investigation, approval, labeling, development controls and quality assurance processes.

Privacy laws and regulations are extensive, open to various interpretations, complex to implement and may reduce demand for our products, and failure to comply may impose significant liabilities.

Our customers can use our products to collect, use, process and store personally or identifiable information regarding their patients. Federal, state and foreign government bodies and agencies have adopted, are considering adopting, or may adopt laws and regulations regarding the collection, use, processing, storage and disclosure of personally identifiable information obtained from consumers and individuals. In addition to government regulatory activity, privacy advocacy groups and the technology industry and other industries are considering various new, additional or different self-regulatory standards that may place additional burdens directly on our

 

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customers and target customers, and indirectly on us. Our products are expected to be capable of use by our customers in compliance with such laws and regulations. The functional and operational requirements and costs of compliance with such laws and regulations may adversely impact our business, and failure to enable our products to comply with such laws and regulations could lead to significant fines and penalties imposed by regulators, as well as claims by our customers or third parties. Additionally, all of these domestic and international legislative and regulatory initiatives could adversely affect our customers’ ability or desire to collect, use, process and store personally identifiable information, including, without limitation, health and medical related information using our products, which could reduce demand for our products.

Changes in laws and regulations related to the Internet or changes in the Internet infrastructure itself may diminish the demand for our applications, and could have a negative impact on our business.

The future success of our business depends upon the continued use of the Internet as a primary medium for commerce, communication and business applications. Federal, state or foreign government bodies or agencies have in the past adopted, and may in the future adopt, laws or regulations affecting the use of the Internet as a commercial medium. Changes in these laws or regulations could require us to modify our applications in order to comply with these changes. In addition, government agencies or private organizations may begin to impose taxes, fees or other charges for accessing the Internet or commerce conducted via the Internet. These laws or charges could limit the growth of internet-related commerce or communications generally, resulting in reductions in the demand for internet-based applications such as ours.

In addition, the use of the Internet as a business tool could be adversely affected due to delays in the development or adoption of new standards and protocols to handle increased demands of internet activity, security, reliability, cost, ease of use, accessibility, and quality of service. The performance of the Internet and its acceptance as a business tool has been adversely affected by “viruses,” “worms” and similar malicious programs, and the Internet has experienced a variety of outages and other delays as a result of damage to portions of its infrastructure. If the use of the Internet is adversely affected by these issues, demand for our applications could suffer.

Furthermore, the availability or performance of our applications could be adversely affected by a number of factors, including clients’ inability to access the Internet, the failure of our network or software systems, security breaches or variability in user traffic for our services. For example, our clients access our solutions through their Internet service providers. If a service provider fails to provide sufficient capacity to support our applications or otherwise experiences service outages, such failure could interrupt our clients’ access to our solutions, adversely affect their perception of our applications’ reliability and reduce our revenues. In addition to potential liability, if we experience interruptions in the availability of our applications, our reputation could be adversely affected and we could lose clients.

Regulatory requirements placed on our software and services could impose increased costs on us, delay or prevent our introduction of new products and services, and impair the function or value of our existing products and services.

Our products and services may become subject to increasing regulatory requirements, and as these requirements proliferate, we may be required to change or adapt our products and services to comply. Changing regulatory requirements might render our products and services obsolete or might block us from developing new products and services. This might in turn impose additional costs upon us to comply or to further develop our products and services. It might also make introduction of new products and services more costly or more time-consuming than we currently anticipate. It might even prevent introduction by us of new products or services or cause the continuation of our existing products or services to become more costly.

 

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Risks related to our intellectual property

Any failure to protect our intellectual property rights could impair our ability to protect our proprietary technology and our brand.

Our success is dependent, in part, upon protecting our proprietary technology. We rely on a combination of copyrights, trademarks, service marks, trade secret laws and contractual restrictions to establish and protect our proprietary rights in our products and services. Our proprietary technologies are not covered by any issued patents or patent applications in process or any registered copyright or application therefor. The steps we take to protect our intellectual property may be inadequate. We will not be able to protect our intellectual property if we are unable to enforce our rights or if we do not detect unauthorized use of our intellectual property. Despite our precautions, it may be possible for unauthorized third parties to copy our products and use information that we regard as proprietary to create products and services that compete with ours. Some license provisions protecting against unauthorized use, copying, transfer and disclosure of our products may be unenforceable under the laws of certain jurisdictions and foreign countries.

We enter into confidentiality and invention assignment agreements with our employees and consultants and enter into confidentiality agreements with the parties with whom we have strategic relationships and business alliances. No assurance can be given that these agreements will be effective in controlling access to and distribution of our products and proprietary information. The confidentiality agreements on which we rely to protect certain technologies may be breached, may not be adequate to protect our proprietary technologies and may not provide an adequate remedy in the event of unauthorized use or disclosure of our confidential information, intellectual property or proprietary technology. Further, these agreements do not prevent our competitors from independently developing technologies that are substantially equivalent or superior to our solutions. In addition, others may independently discover our trade secrets and confidential information, and in such cases, we might not be able to assert any trade secret rights against such parties. We also depend, in part, on technology of third parties licensed to us for our solutions, and the loss or inability to maintain these licenses or errors in the software we license could result in increased costs, reduced service levels or delayed sales of our solutions.

In order to protect our intellectual property rights, we may be required to spend significant resources to monitor and protect these rights. Litigation may be necessary in the future to enforce our intellectual property rights, to protect our trade secrets, to determine the validity and scope of the intellectual property rights of others or to defend against claims of infringement or invalidity. Litigation brought to protect and enforce our intellectual property rights could be costly, time consuming and distracting to management and could result in the impairment or loss of portions of our intellectual property. Furthermore, our efforts to enforce our intellectual property rights may be met with defenses, counterclaims and countersuits attacking the validity and enforceability of our intellectual property rights. Our inability to protect our proprietary technology against unauthorized copying or use, as well as any costly litigation or diversion of our management’s attention and resources, could delay further sales or the implementation of our solutions, impair the functionality of our solutions, delay introductions of new solutions, result in our substituting inferior or more costly technologies into our solutions, or injure our reputation. In addition, we may be required to license additional technology from third parties to develop and market new solutions, and we cannot assure you that we could license that technology on commercially reasonable terms, or at all. Although we do not expect that our inability to license this technology in the future would have a material adverse effect on our business or operating results, our inability to license this technology could adversely affect our ability to compete.

We may be sued by third parties for alleged infringement of their proprietary rights.

There is considerable intellectual property development activity in our industry and the software industry generally is characterized by the existence of a large number of patents and frequent claims and related litigation regarding patents and other intellectual property rights. Our success depends, in part, upon our not infringing upon the intellectual property rights of others. Our competitors, as well as a number of other entities and

 

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individuals, may own or claim to own intellectual property relating to our industry. From time to time, third parties may claim that we, our customers, our partners, or those from whom we license technology and intellectual property are infringing upon or misappropriating their intellectual property rights, and we or they may be found to be infringing upon or misappropriating such rights. In the future, others may claim that our products and underlying technology infringe or violate their intellectual property rights. However, we may be unaware of the intellectual property rights that others may claim cover some or all of our technology or services. Any claims or litigation could cause us to incur significant expenses and, if successfully asserted against us, our customers, our partners, or those from whom we license technology and intellectual property, could require that we pay substantial damages or ongoing royalty payments, prevent us from offering our products or services, or require that we comply with other unfavorable terms. We may also be obligated to indemnify our customers or business partners or pay substantial settlement costs, including royalty payments, in connection with any such claim or litigation and to obtain licenses, modify applications, or refund fees, which could be costly. Even if we were to prevail in such a dispute, any litigation regarding our intellectual property could be costly and time-consuming and divert the attention of our management and key personnel from our business operations.

The use of open source software in our products and solutions may expose us to additional risks and harm our intellectual property rights.

Some of our products and solutions use or incorporate software that is subject to one or more open source licenses. Open source software is typically freely accessible, usable and modifiable. Certain open source software licenses require a user who intends to distribute the open source software as a component of the user’s software to disclose publicly part or all of the source code to the user’s software. In addition, certain open source software licenses require the user of such software to make any derivative works of the open source code available to others on potentially unfavorable terms or at no cost.

The terms of many open source licenses to which we are subject have not been interpreted by U.S. or foreign courts. Accordingly, there is a risk that those licenses could be construed in a manner that imposes unanticipated conditions or restrictions on our ability to commercialize our solutions. By the terms of certain open source licenses, we could be required to release the source code of our proprietary software, and to make our proprietary software available under open source licenses, if we combine our proprietary software with open source software in a certain manner. In the event that portions of our proprietary software are determined to be subject to an open source license, we could be required to seek licenses from third parties in order to continue offering our products or solutions, to re-develop our products or solutions, to discontinue sales of our products or solutions, or to release our proprietary software code under the terms of an open source license.

In addition to risks related to license requirements, usage of open source software can lead to greater risks than use of third-party commercial software, as open source licensors generally do not provide warranties or controls on the origin of the software. Many of the risks associated with usage of open source software cannot be eliminated and could adversely affect our business.

Despite our efforts to monitor the compliance of our use of open source software, it is possible that such use may have inadvertently occurred in deploying our proprietary solutions. For instance, we rely on multiple software programmers to design our proprietary technologies, and although we take steps to prevent our programmers from including open source software in the technologies and software code that they design, write and modify, we do not exercise complete control over the development efforts of our programmers and we cannot be certain that our programmers have not incorporated open source software into our proprietary products and technologies or that they will not do so in the future. In addition, if a third-party software provider has incorporated certain types of open source software into software we license from such third party for our products and solutions without our knowledge, we could, under certain circumstances, be required to disclose the source code to our products and solutions. This could harm our intellectual property position and our business, results of operations and financial condition.

 

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We and our customers rely on technology and intellectual property of third parties, the loss of which could limit the functionality of our products and disrupt our business.

We use technology and intellectual property licensed from unaffiliated third parties in certain of our products, and we may license additional third-party technology and intellectual property in the future. Any errors or defects in this third-party technology and intellectual property could result in errors that could harm our brand and business. In addition, licensed technology and intellectual property may not continue to be available on commercially reasonable terms, or at all. The loss of the right to license and distribute this third-party technology could limit the functionality of our products and might require us to redesign our products.

Further, although we believe that there are currently adequate replacements for the third-party technology and intellectual property we presently use and distribute, the loss of our right to use any of this technology and intellectual property could result in delays in producing or delivering affected products until equivalent technology or intellectual property is identified, licensed or otherwise procured, and integrated. Our business would be disrupted if any technology and intellectual property we license from others or functional equivalents of this software were either no longer available to us or no longer offered to us on commercially reasonable terms. In either case, we would be required either to attempt to redesign our products to function with technology and intellectual property available from other parties or to develop these components ourselves, which would result in increased costs and could result in delays in product sales and the release of new product offerings. Alternatively, we might be forced to limit the features available in affected products. Any of these results could harm our business and impact our results of operations.

Risks related to this offering and ownership of our common shares

Insiders will continue to have substantial control over us after this offering, which may limit our shareholders’ ability to influence corporate matters and delay or prevent a third party from acquiring control over us.

Following completion of this offering, our directors, executive officers and holders of more than 5% of our common shares, together with their respective affiliates, will beneficially own (as determined in accordance with the rules of the SEC), in the aggregate, approximately         % of our outstanding common shares and our principal shareholders, including our co-founders Mike Wessinger and Dave Wessinger, Bill Dillane and JMI Equity Fund VII, L.P., will beneficially own (as determined in accordance with the rules of the SEC), in the aggregate, approximately         % of our outstanding common shares. This significant concentration of ownership may adversely affect the trading price for our common shares because investors often perceive disadvantages in owning shares in companies with controlling shareholders. In addition, these shareholders will be able to exercise influence over all matters requiring shareholder approval, including the election of directors and approval of corporate transactions, such as a merger or other sale of us or our assets. This concentration of ownership could limit our investors’ ability to influence corporate matters and may have the effect of delaying or preventing a change in control, including a merger, consolidation, or other business combination involving us, or discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control, even if that change in control would benefit our other shareholders. For information regarding the ownership of our outstanding shares by our principal shareholders, executive officers and directors and their affiliates, please see the section entitled “Principal Shareholders.”

Future sales of shares by existing shareholders could cause our share price to decline.

If our existing shareholders sell, or indicate an intent to sell, substantial amounts of our common shares or warrants in the public market after the lapse of 180-day contractual lock-up period and other legal restrictions on resale discussed in this prospectus, the trading price of our common shares or warrants could decline significantly and could decline below the initial public offering price. We cannot predict the effect, if any, that future public sales of these securities or the availability of these securities for sale will have on the market price

 

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of our securities. If the market price of our securities was to drop as a result, this might impede our ability to raise additional capital and might cause remaining shareholders to lose all or part of their investments. Our officers, directors and certain shareholders have executed lock-up agreements preventing them from selling any units, common shares or warrants they hold for a period of 180 days from the date of this prospectus, subject to certain limited exceptions described under the section entitled “Underwriting.” The representatives of the underwriters may, in their sole discretion, permit our officers, directors and current shareholders to sell common shares or warrants prior to the expiration of these lock-up agreements.

We might require additional capital to support business growth, and this capital might not be available or may not be available on desirable or favorable terms.

We intend to continue to make investments to support our business growth and might require additional funds to respond to business challenges or opportunities, including the need to develop new products and services or enhance our existing services, enhance our operating infrastructure, and acquire complementary businesses and technologies. Accordingly, we might need to engage in equity or debt financings to secure additional funds. If we raise additional funds through further issuances of equity or convertible debt securities, our existing shareholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our common shares. Any debt financing secured by us in the future could involve restrictive covenants relating to our capital-raising activities and other financial and operational matters, which might make it more difficult for us to obtain additional capital and to pursue business opportunities and to grow our business. In addition, we might not be able to obtain additional financing on terms desirable or favorable to us, if at all. If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, our ability to continue to support our business growth and to respond to business challenges could be significantly limited.

We have broad discretion in the use of the net proceeds from this offering and might not use them effectively, which could affect our results of operations and cause our share price to decline.

We will have considerable discretion in the use of the net proceeds from this offering. We currently expect to use the net proceeds from this offering for working capital and general corporate purposes, to pay approximately $13.0 million to our common shareholders as a special dividend to be declared prior to the completion of this offering, to pay approximately $4.5 million to our Class A redeemable convertible preferred shareholders as a return of capital to be declared prior to the completion of this offering, to repay approximately $38.1 million outstanding principal and accrued interest on our Wells Fargo Facility, or for any of the purposes described in “Use of Proceeds.” Accordingly, investors will be relying on the judgment of our management with respect to the use of the proceeds, with only limited information concerning management’s specific intentions. We may use some or all of the net proceeds from this offering in ways that do not yield a favorable return for our shareholders or that shareholders do not agree with. Pending their use, we might invest the net proceeds from this offering in a manner that does not produce income or that loses value.

We are an emerging growth company and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common shares less attractive to investors.

We are an emerging growth company. For as long as we continue to be an emerging growth company, we intend to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies including, but not limited to, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved, and exemptions from the requirements of auditor attestation reports on the effectiveness of our internal control over financial reporting. We cannot predict if investors will find our common shares less attractive because we will rely on these exemptions. If some investors find our common shares less attractive as a result, there may be a less active trading market for our common shares and our share price may be more volatile.

 

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We will remain an emerging growth company until the earliest of (i) the end of the fiscal year in which the market value of our common shares that is held by non-affiliates exceeds $700 million as of April 30 of that fiscal year, (ii) the end of the fiscal year in which we have total annual gross revenue of $1 billion or more during such fiscal year, (iii) the date on which we issue more than $1 billion in non-convertible debt in a three-year period or (iv) five years from the date of this prospectus.

An active, liquid and orderly market for our common shares may not develop.

Prior to this offering, there was no market for our common shares. An active trading market for our common shares might never develop or be sustained, which could depress the market price of our common shares, impair our ability to raise additional capital or acquire other companies using shares as consideration and affect our investors’ ability to sell our shares. The initial public offering price will be determined through negotiations between us and the representatives of the underwriters and might bear no relationship to the price at which our common shares will trade following the completion of this offering. The trading price of our common shares following this offering is likely to be highly volatile and could be subject to wide fluctuations in response to various factors, some of which are beyond our control. These factors include:

 

    our operating performance and the operating performance of similar companies;

 

    the overall performance of the equity markets;

 

    announcements by us or our competitors of acquisitions, business plans or commercial relationships;

 

    any major change in our board of directors or senior management;

 

    changes in laws or regulations relating to the use, storage or transfer of personal information or healthcare information;

 

    publication of research reports or news stories about us, our competitors, or our industry, or positive or negative recommendations or withdrawal of research coverage by securities analysts;

 

    the public’s reaction to our press releases, our other public announcements and our filings with the SEC and Canadian securities regulators;

 

    sales of our common shares by our directors, executive officers and existing shareholders;

 

    adverse market reaction to any indebtedness we may incur or securities we may issue in the future;

 

    short sales, hedging and other derivative transactions in our common shares;

 

    the market’s reaction to our reduced disclosure as a result of being an emerging growth company under the JOBS Act;

 

    threatened or actual litigation;

 

    general political and economic conditions; and

 

    the other risk factors described in this section of the prospectus.

In addition, the stock market in general and the market for technology companies in particular have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. These fluctuations might be even more pronounced in the trading market for our shares shortly following this offering. Securities class action litigation has often been instituted against companies following periods of volatility in the overall market and in the market price of a company’s securities. This litigation, if instituted against us, could result in substantial costs, divert our management’s attention and resources, and harm our business, operating results, and financial condition.

 

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You will experience immediate and substantial dilution.

The initial public offering price will be substantially higher than the net tangible book value of each outstanding common share immediately after this offering. If you purchase common shares in this offering, you will suffer immediate and substantial dilution. At an assumed initial public offering price of $              with net proceeds to us of $             million, the midpoint of the estimated price range set forth on the cover page of this prospectus, after deducting estimated underwriting commissions and estimated offering expenses, investors who purchase shares in this offering will have contributed approximately          % of the total amount of funding we have received to date, but the shares purchased in this offering will represent only approximately         % of the total voting rights. The dilution will be $             per share in the net tangible book value of the common shares from the assumed initial public offering price. In addition, if outstanding options to purchase our common shares are exercised, there could be further dilution. For more information, refer to “Dilution.”

We will incur significantly increased costs and devote substantial management time as a result of operating as a public company.

As a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. For example, we will be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, the rules and regulations of the Canadian Securities Administrators, or CSA, and will be required to comply with the applicable requirements of Sarbanes-Oxley and the Dodd-Frank Wall Street Reform and Consumer Protection Act, as well as rules and regulations subsequently implemented by the SEC, the NASDAQ Global Market, or NASDAQ, and the Toronto Stock Exchange, or the TSX, including the establishment and maintenance of effective disclosure and financial controls and changes in corporate governance practices. We expect that compliance with these requirements will increase our legal and financial compliance costs and will make some activities more time consuming and costly. In addition, we expect that our management and other personnel will need to divert attention from operational and other business matters to devote substantial time to these public company requirements. In particular, we expect to incur significant expenses and devote substantial management effort toward ensuring compliance with the requirements of Section 404 of Sarbanes-Oxley and NI-52-109, which involve annual assessments of a company’s internal controls over financial reporting. Such requirements will increase when we are no longer an emerging growth company, as defined by the JOBS Act. We will need to hire additional accounting and financial staff with appropriate public company experience and technical accounting knowledge and may need to establish an internal audit function. We cannot predict or estimate the amount of additional costs we may incur as a result of becoming a public company or the timing of such costs.

If securities or industry analysts do not publish or cease publishing research or reports about our business, or if they publish inaccurate or unfavorable commentary or downgrade our common shares, our market price of our securities and trading volume could decline.

The trading market for our common shares will, to some extent, depend on the research and reports that securities or industry analysts publish about us, our industry and our business. We do not have any control over these analysts. If few securities analysts commence coverage of us upon the completion of this offering, or if one or more of the analysts who cover us publish inaccurate or unfavorable research about our business or downgrade our common shares or change their opinion of our common shares, our share price would likely decline. If one or more of these analysts cease coverage of us or fail to regularly publish reports on us, we could lose visibility in the financial markets, which could cause our share price or trading volume to decline.

We do not currently intend to pay dividends on our common shares and, consequently, any gains from an investment in our securities will likely depend on appreciation in the price of our common shares.

Other than a one-time special dividend to be declared prior to the completion of this offering, we do not currently intend to pay dividends on our common shares for the foreseeable future. We currently intend to invest

 

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our future earnings, if any, to fund our growth. Therefore, capital appreciation, if any, of our common shares will be your sole source of gain for the foreseeable future. There is no guarantee that our common shares will appreciate in value or even maintain the price at which our shareholders purchased their shares.

Our reported financial results may be adversely affected by changes in generally accepted accounting principles in the United States of America applicable to us and potential new accounting pronouncements.

Future changes in financial accounting standards may cause adverse, unexpected revenue fluctuations and affect our financial position or results of operations. New pronouncements and varying interpretations of pronouncements have occurred with greater frequency and are expected to occur in the future. From time to time, such changes may have an impact on our accounting and financial reporting, which may impact market perception of our financial condition or the reporting of our financial results or transactions completed before such changes. In addition, new legislation or regulations may lead to an increase in our costs related to audits in particular and regulatory compliance generally. Such impacts and failures to comply with new laws and regulations could materially harm our business, results of operations or financial condition.

Our amended articles enable our directors to issue preferred shares which may prevent a takeover of us by a third party.

Following this offering, our authorized share capital will consist of an unlimited number of common shares and an unlimited number of preferred shares, issuable in one or more series. Our board of directors will have authority to issue preferred shares and determine the price, designation, rights, preferences, privileges, restrictions and conditions, including dividend rights, of these shares without any further vote or action by shareholders. The rights of the holders of common shares will be subject to, and may be adversely affected by, the rights of holders of any preferred shares that may be issued in the future. For example, preferred shares may rank prior to common shares as to dividend rights, liquidation preference or both and may be convertible into common shares.

Our ability to issue preferred shares could make it more difficult for a third party to acquire a majority of our outstanding voting shares, particularly in the event we issue preferred shares with special voting rights, the effect of which may be to deprive our shareholders of a control premium that might otherwise be realized in connection with an acquisition of us.

Risks related to our incorporation and operations in Canada

We are a “foreign private issuer” and have disclosure obligations that are different from those of U.S. domestic reporting companies. As a foreign private issuer, we are subject to different U.S. securities laws and rules than a domestic U.S. issuer, which may limit the information publicly available to our shareholders.

We are a “foreign private issuer,” as such term is defined in Rule 405 under the Securities Act, and are not subject to the same requirements that are imposed upon U.S. domestic issuers by the SEC. Under the Exchange Act, we will be subject to reporting obligations that, in certain respects, are less detailed and less frequent than those of U.S. domestic reporting companies. We will be required to file or furnish to the SEC the continuous disclosure documents that we are required to file in Canada under Canadian securities laws. For example, we will not be required to issue quarterly reports, proxy statements that comply with the requirements applicable to U.S. domestic reporting companies, or individual executive compensation information that is as detailed as that required of U.S. domestic reporting companies. We will also have four months after the end of each fiscal year to file our annual reports with the SEC and will not be required to file current reports as frequently or promptly as U.S. domestic reporting companies. Furthermore, our officers, directors and principal shareholders are exempt from the insider reporting and short-swing profit recovery requirements in Section 16 of the Exchange Act. Accordingly, our shareholders may not know on as timely a basis when our officers, directors and principal shareholders purchase or sell their common shares, as the reporting deadlines under the corresponding Canadian

 

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insider reporting requirements are longer. As a foreign private issuer, we are also exempt from the requirements of Regulation FD (Fair Disclosure) which, generally, are meant to ensure that select groups of investors are not privy to specific information about an issuer before other investors. As a result of such varied reporting obligations, shareholders should not expect to receive the same information at the same time as information provided by U.S. domestic companies.

In addition, as a foreign private issuer, we have the option to follow certain Canadian corporate governance practices rather than those of NASDAQ, except to the extent that such laws would be contrary to U.S. securities laws, and provided that we disclose the requirements we are not following and describe the Canadian practices we follow instead. We intend to rely on this exemption with respect to NASDAQ requirements regarding the quorum for our shareholder meetings. We may in the future elect to follow home country practices in Canada with regard to other matters. As a result, our shareholders may not have the same protections afforded to shareholders of companies that are subject to all NASDAQ corporate governance requirements. See “Management—Corporate Governance Practices.”

We may lose foreign private issuer status in the future, which could result in significant additional costs and expenses to us.

We may in the future lose our foreign private issuer status if a majority of our common shares are held in the United States and we fail to meet the additional requirements necessary to avoid loss of foreign private issuer status, such as if: (i) a majority of our directors or executive officers are U.S. citizens or residents; (ii) a majority of our assets are located in the United States; or (iii) our business is administered principally in the United States. The regulatory and compliance costs to us under U.S. securities laws as a U.S. domestic issuer will be significantly more than the costs incurred as a Canadian foreign private issuer eligible to use the multijurisdictional disclosure system, or MJDS. If we are not a foreign private issuer, we would not be eligible to use the MJDS or other foreign issuer forms and would be required to file periodic and current reports and registration statements on U.S. domestic issuer forms with the SEC, which are generally more detailed and extensive than the forms available to a foreign private issuer. In addition, we may lose the ability to rely upon exemptions from NASDAQ corporate governance requirements that are available to foreign private issuers. Further, if we engage in capital raising activities after losing foreign private issuer status, there is a higher likelihood that investors may require us to file resale registration statements with the SEC as a condition to any such financing.

Canadian law differs from the laws in effect in the United States and may afford less protection to holders of our securities.

As a Canadian company, we are governed by Canadian law, which differs in some material respects from laws generally applicable to U.S. corporations and shareholders, including, among others, differences in shareholder suits, insider transactions, duties of officers and directors, shareholder rights. Accordingly, holders of our shares may have more difficulty protecting their interests than would holders of shares of a corporation incorporated in a jurisdiction of the United States.

It may be difficult to enforce a U.S. judgment against us, our officers and directors and the Canadian experts named in this prospectus in Canada or the United States, or to assert U.S. securities laws claims in Canada or serve process on our officers and directors and these experts.

We were incorporated in Canada, and our corporate headquarters are located in Canada. A majority of the directors and executive officers, and the experts named in this prospectus, reside principally in Canada and the majority of our assets and all or a substantial portion of the assets of these persons are located outside the United States. Therefore, it may not be possible for an investor, or any other person or entity, to enforce a U.S. court judgment based upon the civil liability provisions of the U.S. federal securities laws against us or any of these persons in a U.S. or Canadian court, or to effect service of process upon these persons in the United States.

 

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Additionally, it may be difficult for an investor, or any other person or entity, to assert U.S. securities law claims in original actions instituted in Canada. Canadian courts may refuse to hear a claim based on an alleged violation of U.S. securities laws against us or our officers and directors on the grounds that Canada is not the most appropriate forum in which to bring such a claim. Even if a Canadian court agrees to hear a claim, it may determine that Canadian law and not U.S. law is applicable to the claim. If U.S. law is found to be applicable, the content of applicable U.S. law must be proved as a fact, which can be a time-consuming and costly process. Certain matters of procedure will also be governed by Canadian law.

In general, Canadian courts might not enforce judgments rendered outside Canada which may make it difficult to collect on judgments rendered against us unless there is a real and substantial connection between the subject matter of the litigation and the foreign court that rendered the foreign judgment.

Our U.S. shareholders may suffer adverse tax consequences if we are characterized as a passive foreign investment company for U.S. federal income tax purposes.

Generally, if, for any taxable year, at least 75% of our gross income is passive income, or at least 50% of the value of our assets is attributable to assets that produce passive income or are held for the production of passive income, we would be characterized as a passive foreign investment company, or PFIC, for U.S. federal income tax purposes. Our status as a PFIC may also depend, in part, on how quickly we utilize the cash proceeds from this offering in our business. We do not expect to be a PFIC for our current taxable year nor do we believe we were a PFIC in our prior taxable year. However, since PFIC status depends on the composition of our income and assets and the value of our assets (which may be determined in large part by reference to the market value of our common shares, which may be volatile) from time to time, there can be no assurance that we will not be considered a PFIC for any taxable year. If we are characterized as a PFIC, our U.S. shareholders may suffer adverse tax consequences, including having gains realized on the sale of our common shares treated as ordinary income, rather than capital gains, the loss of the preferential rate applicable to dividends received on our common shares by individuals who are U.S. holders, and having interest charges apply to distributions by us and the proceeds of share sales. See “Taxation—U.S. Federal Income Tax Consequences—Passive Foreign Investment Company Consequences.”

We have applied for the listing of our common shares on the TSX under the symbol “PCC.” If we list on the TSX, the risks relating to this offering and our common shares as set out above will apply in similar respects to investors trading our common shares on the TSX. In addition, investors trading our common shares on the TSX should consider the following additional risks relating specifically to the admission to listing and trading of our common shares on the TSX:

In the event our common shares are dual-listed on NASDAQ and the TSX, the dual listing may adversely affect the liquidity and trading prices for our common shares on one or both of the exchanges as a result of circumstances that may be outside of our control.

Although we believe the dual listing of our common shares will be beneficial for the liquidity of our common shares, permitting a broader base of investors to purchase our common shares in secondary trading, such listings may also adversely affect liquidity and trading prices for our common shares on one or both of the exchanges as a result of circumstances that may be outside of our control. Listing on both the TSX and NASDAQ may increase share price volatility because trading will be split between the two markets, resulting in less liquidity on both exchanges. In addition, different liquidity levels, volume of trading, currencies and market conditions on the two exchanges may result in different prevailing prices. For example, transfers by investors of our common shares from trading on one exchange to the other could result in increases or decreases in liquidity and/or trading prices on either or both of the exchanges. In addition, investors could seek to sell or buy our common shares to take advantage of any price differences between the two markets through a practice referred to as arbitrage. Any arbitrage activity could create unexpected volatility in both the trading prices of our common shares on either exchange and the volumes of our common shares available for trading on either exchange.

 

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Securities class action litigation has been brought against companies following periods of volatility in the market price of their securities. We may in the future be the target of similar litigation. Securities litigation could result in substantial costs and damages and divert our management’s attention and resources, which could adversely affect our business, results of operations or financial condition. Any adverse determination in litigation against us could also subject us to significant liabilities.

In the event our common shares are dual-listed and trade in U.S. dollars on NASDAQ and in Canadian dollars on the TSX, the trading price of our common shares on the TSX and the value of dividends, if any, paid on our common shares to investors who elect to receive dividends in Canadian dollars may be materially adversely affected by fluctuations in the exchange rate between U.S. dollars and Canadian dollars.

In the event our common shares are dual-listed, we may choose to have our common shares trade in U.S. dollars on NASDAQ and in Canadian dollars on the TSX. Fluctuations in the exchange rate between U.S. dollars and Canadian dollars may affect the value of our common shares. We currently generate a significant portion of our sales in both U.S. and Canadian dollars, but many of our expenses are denominated only in Canadian dollars. To date, we have not used forward exchange contracts to hedge exposures denominated in currencies or any other derivative instrument for trading, hedging or speculative purposes. Specifically, as the value of the U.S. dollar relative to the Canadian dollar declines, each of the following values will also decline (and vice versa):

 

    the Canadian dollar equivalent of the U.S. dollar trading price of our common shares on NASDAQ, which may consequently cause the trading price of our common shares on the TSX to also decline; and

 

    the Canadian dollar equivalent of cash dividends paid in U.S. dollars on our common shares if investors holding our common shares on the TSX request dividends to be paid in Canadian dollars.

 

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements that are based on our management’s belief and assumptions and on information currently available to our management. Although we believe that the plans, intentions, expectations, assumptions and strategies reflected in these forward-looking statements are reasonable, these statements relate to future events or our future financial performance, and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements.

In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “could,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “projects,” “potential,” “continue” or the negative of these terms or other comparable terminology. These statements are only predictions. Forward-looking statements involve known and unknown risks, uncertainties and other factors, which are, in some cases, beyond our control and which could materially affect results. Factors that may cause actual results to differ materially from current expectations include, among other things, those listed in the Section entitled “Risk Factors” and elsewhere in this prospectus. If one or more of these risks or uncertainties occur, or if our underlying assumptions prove to be incorrect, actual events or results may vary significantly from those implied or projected by the forward-looking statements. No forward-looking statement is a guarantee of future performance. You should read this prospectus and the documents that we reference in this prospectus and have filed with the SEC as exhibits to the registration statement, of which this prospectus is a part, completely and with the understanding that our actual future results may be materially different from any future results expressed or implied by these forward-looking statements.

In particular, forward-looking statements in this prospectus include statements about:

 

    the expected applications of our products, the sizes of addressable markets and our ability to serve those markets;

 

    regulatory developments in North America and internationally;

 

    the achievement of advances in our technology platform;

 

    the success of our sales and marketing capabilities;

 

    our dual listing on NASDAQ and the TSX;

 

    our ability to obtain and maintain intellectual property protection for our products and processes and not infringe on others’ rights; and

 

    government regulatory and industry certification approvals for our products.

The forward-looking statements in this prospectus represent our views as of the date of this prospectus. We anticipate that subsequent events and developments may cause our views to change. However, while we may elect to update these forward-looking statements at some point in the future, we have no current intention of doing so except to the extent required by applicable law. Therefore, these forward-looking statements do not represent our views as of any date other than the date of this prospectus.

 

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INDUSTRY AND MARKET DATA

Unless otherwise indicated, information contained in this prospectus concerning our industry and the market in which we operate, including our general expectations and market position, market opportunity and market size, is based on information from various sources, on assumptions that we have made that are based on those data and other similar sources and on our knowledge of the markets for our solutions. While we believe the market position, opportunity and market size information included in this prospectus is generally reliable, such information involves a number of assumptions and limitations and is inherently imprecise. In addition, projections, assumptions and estimates of our future performance and the future performance of the industry in which we operate are necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in “Risk Factors” and elsewhere in this prospectus. These and other factors could cause results to differ materially from those expressed in the estimates made by the independent parties and by us.

Some of the industry and market data contained in this prospectus are based on independent industry sources and publications, and some is based on our good faith estimates, which are derived from our review of internal surveys, government publications or other publicly available information. This information involves a number of assumptions and limitations. The industry in which we operate is subject to a high degree of uncertainty and risk due to a variety of factors, including those described in “Risk Factors.” These and other factors could cause results to differ materially from those expressed in these publications.

 

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USE OF PROCEEDS

We estimate that we will receive net proceeds from this offering of approximately $             million based upon an assumed initial public offering price of $             per common share, the midpoint of the estimated price range set forth on the cover page of this prospectus, after deducting estimated underwriting commissions and estimated offering expenses payable by us.

A $1.00 increase (decrease) in the assumed initial public offering price of $             per common share, the midpoint of the estimated price range set forth on the cover page of this prospectus, would increase (decrease) the net proceeds to us from this offering by approximately $             million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting commissions and estimated offering expenses payable by us. Similarly, each increase (decrease) of one million shares in the number of common shares offered by us would increase (decrease) the net proceeds to us from this offering by approximately $             million, assuming the assumed initial public offering price remains the same and after deducting estimated underwriting commissions and estimated offering expenses payable by us.

The principal reasons for this offering are to increase our capitalization and financial flexibility, increase our visibility in the marketplace and create a public market for our common shares. We currently expect to use the net proceeds from this offering for working capital and general corporate purposes, including investing further in our sales and marketing and research and development efforts, as well as funding the costs of operating as a public company. We also expect to use approximately $38.1 million to repay outstanding principal and accrued interest on the Wells Fargo Facility which matures on June 30, 2020, and which we have used for general working capital purposes and to repay the prior Comerica Facility. Advances under the Wells Fargo Facility bear interest at LIBOR + 2.75% to 3.50%, based on available borrowing capacity under the Wells Fargo Facility. We also expect to use approximately $13.0 million to pay a special dividend to be declared on our common shares prior to the completion of this offering and approximately $4.5 million to pay a return of capital to be declared on our Class A redeemable convertible preferred shares prior to the completion of this offering. See “Dividend Policy,” “Certain Relationships and Related-Party Transactions—Special Dividend,” “Certain Relationships and Related-Party Transactions—Return of Capital” and “Risk Factors—We have broad discretion in the use of the net proceeds from this offering and might not use them effectively, which could affect our results of operations and cause our share price to decline” for additional information. In addition, we expect to use proceeds from this offering to fund our growth strategies described elsewhere in this prospectus. See “Business – Our Growth Strategy.”

As of the date of this prospectus, we cannot specify any more specific uses for the net proceeds from this offering. The amounts and timing of our actual expenditures may vary significantly from our current expectations depending upon numerous factors, including the progress of our research and development efforts, our operating costs and capital expenditures and the other factors described under “Risk Factors” in this prospectus. Accordingly, we will retain the discretion to allocate the net proceeds of this offering among the identified uses described above, and we reserve the right to change the allocation of the net proceeds among the uses described above.

Pending these uses, we intend to invest the net proceeds to us from the offering in short-term, investment-grade, interest-bearing instruments, or hold them as cash.

We had negative operating cash flow for our most recently completed financial year and most recently completed interim period. In the future, additional financing may be required to support our expected investments in sales and marketing and research and development activities. To the extent we have negative cash flow in future periods, we may use a portion of our general working capital (including the proceeds of this offering) to fund such negative cash flow.

 

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DIVIDEND POLICY

Other than a one-time special dividend to be declared prior to the completion of this offering, we do not have any present plan to pay cash dividends on our common shares and we do not anticipate paying any cash dividends on our common shares in the foreseeable future. We currently intend to invest our future earnings, if any, to fund our growth. Any future determination as to the declaration and payment of dividends, if any, will be at the discretion of our board of directors and will depend on then existing conditions, including our financial condition, operating results, contractual restrictions, capital requirements, business prospects and other factors our board of directors may deem relevant. Investors should not purchase our common shares with the expectation of receiving cash dividends.

Prior to the completion of this offering, we will declare a special dividend on our common shares in the amount of approximately $0.74 per share, or approximately $13.0 million in the aggregate, to be paid in cash from the proceeds of this offering, or the Special Dividend. See “Use of Proceeds,” “Certain Relationships and Related-Party Transactions—Special Dividend” and “Risk Factors—We have broad discretion in the use of the net proceeds from this offering and might not use them effectively, which could affect our results of operations and cause our share price to decline” for additional information.

Under the Income Tax Act (Canada), a Canadian private corporation may pay “capital dividends” on a tax-free basis to its Canadian resident shareholders up to the amount of its “capital dividend account.” The capital dividend account includes, among other items, the tax-free portion of any capital gain previously realized by the private corporation from the sale of capital property. Upon the completion of this offering, under the Income Tax Act (Canada), we will no longer be eligible to pay this tax-free capital dividend. As a result, prior to the completion of this offering we will declare a one-time capital dividend in the amount of our capital dividend account for tax planning purposes.

On September 26, 2015, our shareholders approved a reduction in the paid up capital of our Class A redeemable convertible preferred shares in the amount of approximately $4.5 million, to be paid out of the proceeds from this offering as a return of capital, subject to the payment of the Special Dividend. This payment will provide holders of our Class A redeemable convertible preferred shares, on an as-converted basis, with a cash distribution equal to the per share Special Dividend, and is contemporaneous with, and conditional upon, the payment of the Special Dividend. See “Use of Proceeds,” “Certain Relationships and Related-Party Transactions—Return of Capital” and “Risk Factors—We have broad discretion in the use of the net proceeds from this offering and might not use them effectively, which could affect our results of operations and cause our share price to decline” for additional information.

 

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CAPITALIZATION

The following table sets forth our cash and capitalization as of January 31, 2016:

 

    on an actual basis;

 

    on a pro forma basis to give effect to (i) the conversion of all of our outstanding Class A redeemable convertible preferred shares into 6,151,743 common shares in connection with this offering (ii) the declaration of a special dividend on our common shares of approximately $13.0 million to be paid out of the proceeds of this offering, (iii) the approval of a return of capital to our Class A redeemable convertible preferred shareholders of approximately $4.5 million; and

 

    on a pro forma as adjusted basis to also give effect to (i) the issuance by us of              common shares in this offering at an assumed initial public offering price of $             per share, the midpoint of the estimated price range set forth on the cover page of this prospectus, after deducting estimated underwriting commissions and estimated offering expenses payable by us, (ii) the payment of approximately $13.0 million to our common shareholders as a result of a special dividend to be declared prior to the completion of this offering, and (iii) the payment of approximately $4.5 million to our Class A redeemable convertible preferred shareholders as a return of capital to be declared prior to the completion of this offering.

The pro forma and pro forma as adjusted information below is illustrative only, and our cash and capitalization following the completion of this offering will be adjusted based on the actual initial public offering price and other terms of our initial public offering determined at pricing. You should read this table together with “Selected Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Use of Proceeds,” “Dividend Policy” and our consolidated financial statements and related notes included elsewhere in this prospectus.

 

    January 31, 2016  
    Actual     Pro Forma     Pro Forma
as Adjusted(1)
 
    (dollars in thousands, except per share amounts)  

Cash

  $ 4,892      $ 4,892     
 

 

 

   

 

 

   

Revolving credit facility and term loans

    38,506        38,506     

Notes payable for special dividend and return of capital

           17,500     

Class A redeemable convertible preferred shares, 4,784,689 shares authorized, issued and outstanding, actual; no shares issued and outstanding, pro forma and pro forma as adjusted

    125,024            

Shareholders’ equity (deficit):

     

Common shares, 45,538,771 shares authorized, 17,654,183 shares issued and outstanding, actual; unlimited shares authorized, 23,805,926 shares issued and outstanding, pro forma; unlimited shares authorized,              shares issued and outstanding, pro forma as adjusted

    5,305        130,329     

Additional paid-in capital

    4,179        4,179     

Accumulated other comprehensive income

    (4,549     (4,549  

Accumulated deficit

    (122,636     (140,136  
 

 

 

   

 

 

   

Total shareholders’ deficit

    (117,701     (10,177  
 

 

 

   

 

 

   

Total capitalization

  $ 45,829      $ 45,829      $     
 

 

 

   

 

 

   

 

(1)

A $1.00 increase (decrease) in the assumed initial public offering price of $             per common share, the midpoint of the estimated price range set forth on the cover page of this prospectus, would increase

 

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  (decrease) pro forma as adjusted total shareholders’ deficit and total capitalization by $             million, assuming that the number of shares offered by us, as set forth on the cover of this prospectus, remains the same, and after deducting the estimated underwriting commissions and estimated offering costs payable by us.

The number of shares shown as outstanding in the table above is based on 23,805,926 common shares outstanding as of January 31, 2016 and excludes:

 

    2,140,500 shares issuable upon the exercise of stock options outstanding as of January 31, 2016 at a weighted average exercise price of $18.40 per share (based on the Bank of Canada closing rate on January 31 of $1.00 = C$1.4006);

 

                     additional shares reserved for future issuance under our 2012 Amended and Restated Stock Option Plan; and

 

                     common shares reserved for future issuance under our 2016 Equity Incentive Plan, which will become effective upon closing of this offering.

 

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DILUTION

If you invest in our common shares in this offering, your interest will be immediately diluted to the extent of the difference between the initial public offering price per common share and the pro forma as adjusted net tangible book value per common share immediately after this offering.

Our historical net tangible book value (deficit) as of January 31, 2016 was ($147.0) million, or ($8.33) per share. The historical net tangible book value per share represents the amount of our total tangible assets less our total liabilities, divided by the number of shares outstanding as of January 31, 2016.

Our pro forma net tangible book value (deficit) as of January 31, 2016 was ($39.4) million, or ($1.66) per share. Pro forma net tangible book value (deficit) per share represents the amount of our total tangible assets less our total liabilities, divided by the number of shares outstanding as of January 31, 2016, after giving effect to (i) the automatic conversion of all of our outstanding Class A redeemable convertible preferred shares into 6,151,743 common shares in connection with the consummation of our initial public offering, (ii) the declaration of a special dividend on our common shares of approximately $13.0 million to be paid out of the proceeds of this offering, and (iii) the approval of a return of capital to our Class A redeemable convertible preferred shareholders of approximately $4.5 million.

After giving effect to (i) the sale by us of common shares in this offering at an assumed initial public offering price of $             per common share, the midpoint of the estimated price range set forth on the cover of this prospectus, after deducting estimated underwriting commissions and estimated offering expenses payable by us, (ii) the payment of approximately $13.0 million to our shareholders as a result of a special dividend to be declared prior to the completion of this offering, and (iii) the payment of approximately $4.5 million to our Class A redeemable convertible preferred shareholders as a return of capital to be declared prior to the completion of this offering, our pro forma as adjusted net tangible book value as of January 31, 2016 would have been $             million, or $             per share. This amount represents an immediate increase in pro forma as adjusted net tangible book value of $             per share to our existing shareholders and an immediate dilution in pro forma as adjusted net tangible book value of $             per share to new investors purchasing shares in this offering. We determine dilution by subtracting the pro forma as adjusted net tangible book value per share after this offering from the amount of cash that a new investor paid for a share. The following table illustrates this dilution on a per share basis:

 

Assumed initial public offering price per share

   $                

Pro forma net tangible book value (deficit) per share as of January 31, 2016

   $     

Increase in pro forma as adjusted net tangible book value per share attributable to new investors purchasing shares in this offering

  

Pro forma as adjusted net tangible book value per share after this offering

  

Dilution in pro forma as adjusted net tangible book value per share to new investors in this offering

   $     

A $1.00 increase (decrease) in the assumed initial public offering price of $             per share, the midpoint of the estimated price range set forth on the cover of this prospectus, would increase (decrease) the pro forma as adjusted net tangible book value per share after this offering by $             per share and increase (decrease) the dilution to new investors by $             per share, in each case assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting estimated underwriting commissions and estimated offering expenses payable by us.

 

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The following table summarizes, as of January 31, 2016, on a pro forma as adjusted basis as described above, the number of shares, the total consideration and the average price per share (a) paid to us by existing shareholders and (b) to be paid by new investors acquiring our shares in this offering at an assumed initial public offering price of $                  per share, the midpoint of the estimated price range set forth on the cover page of this prospectus, before deducting estimated underwriting commissions and estimated offering expenses payable by us.

 

     Shares Acquired     Total Consideration     Average Price
per Share
 
     Number      Percent     Amount      Percent    

Existing shareholders

     23,805,926         %      $ 27,482,147         $ 1.15   

New investors

             $     
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Totals

        100   $           100  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

The total number of shares reflected in the discussion and tables above is based on 23,805,926 common shares outstanding as of January 31, 2016. The discussion and tables above assume the conversion of 4,784,689 Class A redeemable convertible preferred shares and no exercise of any outstanding stock options. As of January 31, 2016, there were 2,140,500 common shares issuable upon exercise of outstanding options at a weighted average exercise price of $18.40 per share (based on the Bank of Canada closing rate on January 31, 2016 of $1.00 = C$1.4006). To the extent that any of these options exercised, there will be further dilution to new investors. In addition, if the underwriters’ option to purchase additional shares is exercised in full, the number of shares held by the existing shareholders after this offering would be reduced to         % of the total number of shares outstanding after this offering, and the number of shares held by new investors would increase to shares, or         % of the total number of shares outstanding after this offering.

 

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SELECTED CONSOLIDATED FINANCIAL DATA

The following tables set forth our selected consolidated financial data. You should read the following selected consolidated financial data in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus.

We have derived the selected consolidated statements of operations data for the years ended October 31, 2013, 2014 and 2015 and the balance sheet data as of October 31, 2013, 2014 and 2015 from our audited financial statements. We have derived the selected consolidated statements of operations data for the three months ended January 31, 2015 and 2016 and the balance sheet data as of January 31, 2016 from our unaudited interim condensed consolidated financial statements. The unaudited interim condensed consolidated financial statements have been prepared on a basis consistent with the audited consolidated financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments that management considers necessary to present fairly the financial information set forth in those statements. Our historical results are not necessarily indicative of the results that should be expected in any future period, and the results for the three months ended January 31, 2016 are not necessarily indicative of the results to be expected for the fiscal year ending October 31, 2016 or any other future annual or interim period. Our consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America, or U.S. GAAP and are presented in U.S. dollars except where otherwise indicated.

 

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Consolidated Statements of Operations Data

 

     Year ended October 31,     Three months ended
January 31,
 
     2013     2014     2015     2015     2016  
     (dollars in thousands, except per share amounts and per facility amounts)  

Revenue:

          

Subscription and support

   $ 70,529      $ 90,645      $ 117,115      $ 26,704      $ 34,232   

Professional services and other

     11,604        11,565        8,267        1,916        2,243   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     82,133        102,210        125,382        28,620        36,475   

Cost of revenue:

          

Subscription and support

     13,846        19,100        29,604        6,378        7,637   

Professional services and other

     13,400        11,722        8,265        1,808        2,275   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

     27,246        30,822        37,869        8,186        9,912   

Gross profit

     54,887        71,388        87,513        20,434        26,563   

Operating expenses:

          

Product development

     23,592        30,925        32,876        7,515        8,979   

Sales and marketing

     14,974        21,728        27,486        6,247        7,883   

General and administrative

     17,057        24,307        28,441        6,006        12,635   

Loss from misappropriation(1)

     2,408        2,546        (24     (41     (2
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     58,031        79,506        88,689        19,727        29,495   

Operating income (loss)

     (3,144     (8,118     (1,176     707        (2,932

Other income (expenses):

          

Interest income

     19        (152     (653     (124     (324

Foreign exchange loss

     (161     (3,044     (1,243     (1,049     167   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     (3,286     (11,314     (3,072     (466     (3,089

Income taxes

            324                        

Net income (loss)

   $ (3,286   $ (10,990   $ (3,072   $ (466   $ (3,089
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) per share-basic and diluted:(2)

          

Net income (loss) per share-basic(2)

   $ (3.99   $ 0.30      $ (0.90   $ (0.02   $ 0.42   

Weighted average common shares used in computing basic net income (loss) per share

     13,731,032        14,870,358        17,654,183        17,654,183        17,654,183   

Net income (loss) per share- diluted

   $ (3.99   $ (0.55   $ (0.90   $ (0.02   $ (0.13

Weighted average common shares used in computing diluted net loss per share

     13,731,032        20,052,035        17,654,183        17,654,183        23,805,926   

Pro forma net income (loss) per share-basic and diluted:

          

Pro forma net income (loss) per share-basic and diluted(3)

       $          $     

Pro forma weighted average common shares used in computing basic and diluted net income (loss) per share

          

Other Financial and Operating Data:

          

Adjusted EBITDA(4)

   $ 4,018      $ (1,190   $ 7,426      $ 1,561      $ 3,122   

Number of customer facilities served under subscriptions (at period end)(5)

     8,000        10,200        11,700        10,500        12,200   

Average monthly subscription revenue per customer facilities served (during period)(6)

   $ 757      $ 798      $ 882      $ 848      $ 943   

 

(1) See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 3 to our audited consolidated financial statements for further information on a misappropriation of assets committed against us by a former employee.

 

(2) See Note 23 to our audited consolidated financial statements for an explanation of the calculations of our actual basic and diluted net loss per share attributable to common shareholders.

 

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(3) See Note 23 to our audited consolidated financial statements and Note 11 to our unaudited condensed consolidated financial statements for an explanation of the method used to calculate the unaudited pro forma basic and diluted net loss per share for the year ended October 31, 2015 and the three months ended January 31, 2016.

 

(4) See “—Adjusted EBITDA” below for information regarding our use of non-GAAP financial measures and a reconciliation of such measures to their nearest GAAP equivalents.

 

(5) Represents the number of customer facilities utilizing PointClickCare’s cloud-based platform at the end of a given period. Customers’ facilities utilizing the acquired legacy software of Accu-Med Services LLC, or Accu-Med, have been excluded until they are converted to the PointClickCare platform.

 

(6) Represents customer subscription revenue generated from the PointClickCare cloud-based platform, divided by average number of customer facilities serviced for a given period. Subscription revenue used in the calculation adds back (excludes) subscription and maintenance relating to the Accu-Med legacy software.

Consolidated Balance Sheet Data

 

     As of October 31,      As of
January 31,
 
     2013      2014      2015      2016  
     (in thousands)  

Cash

   $ 14,156       $ 5,082       $ 3,426       $ 4,892   

Working capital

     9,904         (3,941      (22,089      (28,453

Total assets

     41,355         51,531         72,286         81,536   

Total debt

     295         8,838         26,179         39,679   

Total liabilities

     18,008         37,034         60,811         74,213   

Class A redeemable convertible preferred shares

     143,206         125,311         138,182         125,024   

Total shareholders’ deficit(1)

     (119,859      (110,814      (126,707      (117,701

 

(1) Total shareholders’ deficit includes a cumulative charge of $120.9 million in fiscal 2013, $103.0 million in fiscal 2014, $115.9 million in fiscal 2015, and $102.7 million in the three months ended January 31, 2016 related to the accretion of the Class A redeemable convertible preferred shares from their original carrying value to their fair value at October 31, 2013, 2014 and 2015, respectively, and January 31, 2016.

Adjusted EBITDA

To provide investors with additional information about our financial results, we disclose within this prospectus Adjusted EBITDA, a non-GAAP financial measure. EBITDA consists of GAAP net income (loss) plus depreciation and amortization, interest income (expense) and income tax expense. Adjusted EBITDA consists of EBITDA plus our non-cash, stock-based compensation expense, the loss from misappropriation of assets committed against our company by a former employee and lease abandonment charges. We present this non-GAAP measure because it is one of the measures used by our board of directors and management to evaluate our operating performance, and we consider it an important supplemental measure of performance. We believe this metric is commonly used by the financial community, and we present it to enhance investors’ understanding of our operating performance and cash flows. We believe this non-GAAP measure is useful to an investor in evaluating our operating performance because it can be used to measure a company’s operating performance without regard to items such as stock based compensation and depreciation and amortization, which can vary depending upon accounting methods and the book value of assets, and to present a meaningful measure of performance exclusive of our capital structure and the method by which assets were acquired.

 

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Our management uses Adjusted EBITDA:

 

    as a measure of operating performance to assist in comparing performance from period to period on a consistent basis; and

 

    as a measure for planning and forecasting overall expectations and for evaluating actual results against such expectations.

Adjusted EBITDA is not in accordance with, or an alternative to, measures prepared in accordance with U.S. GAAP. In addition, this non-GAAP measure is not based on any comprehensive set of accounting rules or principles. As a non-GAAP measure, Adjusted EBITDA has limitations in that it does not reflect all of the amounts associated with our results of operations as determined in accordance with U.S. GAAP. In particular:

 

    Adjusted EBITDA does not reflect interest income we earn on cash; interest expense, or the cash requirements necessary to service interest or principal payments on our debt and capital leases;

 

    Adjusted EBITDA does not reflect the amounts we paid in income taxes or other components of our income tax provision;

 

    Adjusted EBITDA does not include amortization expense from property and equipment or amortization expense from acquired and internally generated intangible assets;

 

    Adjusted EBITDA does not include the impact of stock-based compensation;

 

    Adjusted EBITDA does not include the loss from misappropriation of assets by a former employee and related investigation costs net of recoveries. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Loss from misappropriation” and “—Controls and Procedures”;

 

    Adjusted EBITDA does not include lease abandonment charges related to the estimated future net cash flows under lease agreements where we have vacated the leased premise; and

 

    others may calculate Adjusted EBITDA differently than we do and these other companies’ calculations may not be comparable to our Adjusted EBITDA metric. Because of these limitations, you should consider Adjusted EBITDA alongside other financial performance measures, including net income (loss) and our financial results presented in accordance with U.S. GAAP.

The table below presents a reconciliation of net income (loss) to Adjusted EBITDA for each of the periods indicated:

 

    

Year ended October 31,

    

Three months ended

January 31,

 
         2013              2014              2015              2015              2016      
     (in thousands)                

Net income (loss)

   $ (3,286    $ (10,990    $ (3,072    $ (466    $ (3,089

Income tax expense (recovery)

             (324                        

Depreciation and amortization

     3,806         5,286         6,903         1,485         2,379   

Interest expense (income), net

     (19      152         653         124         324   

Stock-based compensation

     1,109         2,140         2,493         473         1,043   

Lease abandonment

                     473                 2,467   

Loss from misappropriation

     2,408         2,546         (24      (41      (2
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted EBITDA

   $ 4,018       $ (1,190    $ 7,426       $ 1,575       $ 3,122   

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements and the related notes and the other financial information included elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed below and elsewhere in this prospectus, particularly those under “Risk Factors.” See “Cautionary Note Regarding Forward-Looking Statements.” Dollars in tabular format are presented in thousands, except per share amounts, or otherwise indicated.

Our audited consolidated financial statements have been prepared in accordance with U.S. GAAP. All amounts are in U.S. dollars.

Overview

We are a leading provider of comprehensive cloud-based software solutions for the North American senior care industry. Our SaaS platform is designed specifically to enable critical business functions across the care continuum of skilled nursing facilities, senior living facilities and in-home care, including care management, financial management, marketing and relationship management, analytics and compliance. We believe the PointClickCare platform is the system of record for senior care providers that helps our customers improve quality of care and demonstrate better patient outcomes, enhance financial performance, facilitate patient movement across the continuum of care, and simplify regulatory compliance. Our headquarters are in Mississauga, Canada.

The senior care industry is in a period of transformation, presenting a range of challenges for senior care providers. Driven by the confluence of a rapidly aging population and increasing healthcare costs, patient care delivery for seniors continues to transition from hospitals to senior care facilities, with senior care facilities experiencing a corresponding increase in patient acuity. At the same time, the industry is facing a changing reimbursement and payment landscape, growing demand to improve quality of care and demonstrate better patient outcomes, greater emphasis on managing patients across multiple facilities in the continuum of care, and an increasingly complex regulatory and compliance environment. We believe that in order to meet these challenges and stay competitive, senior care providers need to adopt scalable and adaptable technology solutions that centralize key patient information, streamline daily operations, improve financial performance, facilitate care delivery across care settings and meet regulatory requirements.

We offer an integrated software platform, specifically designed for the senior care industry, which utilizes advanced cloud computing and data management technologies. Our multi-tenant architecture allows us to deliver applications that are highly functional, flexible and fast, and that can be easily deployed on a variety of devices within our customers’ operations. Our platform is comprised of our long-term post-acute care core platform, add-on applications and our patient analytics applications and tools.

Our core platform is an integrated electronic health record, or EHR, and revenue cycle management, or RCM, solution. Our add-on applications are built on top of our core platform, and include additional electronic health record extensions, financial management and customer relationship management applications. Our patient analytics applications and tools allow providers to analyze quality outcomes and will enable population health capabilities through improved management of risk and better tracking of patient outcomes. Our platform also includes an interoperability engine, which allows our customers to integrate with a wide variety of external entities critical to their operation. As of January 31, 2016, more than 2,400 senior care providers were using our

 

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platform to operate approximately 12,200 senior care facilities in the United States and Canada, currently serving approximately 925,000 residents per day.

We sell our solutions through our direct sales force in North America. We derive substantially all of our recurring subscription and support revenue from our PointClickCare solution. Revenue from acquired businesses includes maintenance fees for licensed software from the date of acquisition until we enter into a subscription and support agreement with and complete the transition of the acquired company customers to the PointClickCare platform. Recurring subscription and support revenue generated by our PointClickCare platform is generally based on our customers’ resident or unit capacity. We generally price customer subscription and support on a price per bed for a skilled nursing provider, or per unit for a senior living provider, per day. The subscription and support price is typically calculated based on the number of licensed beds, or available residential units, in the providers’ facilities. This pricing model aligns with the way our provider customers are paid. We calculate our subscription and support fees for the PointClickCare platform and add-on applications using this model and generally invoice and receive payment from customers on a monthly basis. We also offer an option for customers to subscribe and pay in advance for annual or multi-year terms, in which case the amount invoiced is treated as deferred revenue and recognized as revenue over the term as the service is provided. As most of our customers choose a monthly billing frequency, we do not have a large deferred revenue amount on our balance sheet related to long term prepaid subscription contracts, and as such, the change in deferred revenue from one period to the next is not necessarily a good indicator of our future revenue growth. We offer volume discounts to our customers based on the number of beds or units used by each customer. Our subscription and support fees for our core platform and for add-on applications are based on other factors such as value to the provider and the complexity of the vertical market such as skilled nursing or senior living and on the specific requirements of geographic markets.

Our subscription and support revenue growth has been derived primarily from implementing new customers on the PointClickCare platform, the continuation of existing customers’ rollout of our PointClickCare platform at their facilities, and an increase in sales of our add-on applications to existing customers. New customer implementations generally start with the core PointClickCare platform, which is typically implemented over a period of three to twelve months, although larger customers may require as much as two to three years to implement our solution across all of their facilities. Customers have typically adopted add-on applications over time.

Our revenue for the years ended October 31, 2013, 2014 and 2015 was $82.1 million, $102.2 million, and $125.4 million, respectively. Our revenue for the three months ended January 31, 2015 and 2016 was $28.6 million and $36.5 million, respectively. Our revenue included $70.5 million of recurring subscription and support revenue in fiscal 2013, $90.6 million in fiscal 2014, and $117.1 million in fiscal 2015. Our revenue included $26.7 million of recurring subscription and support revenue in the three months ended January 31, 2015 and $34.2 million in the three months ended January 31, 2016. This subscription and support revenue base represented 86% of total revenue in fiscal 2013, 89% of total revenue in fiscal 2014, 93% of total revenue in fiscal 2015, 93% of total revenue in the three months ended January 31, 2015, and 94% of total revenue in the three months ended January 31, 2016. Professional services represented 14% of total revenue in fiscal 2013, 11% of total revenue in fiscal 2014, 7% of total revenue in fiscal 2015, 7% of total revenue in the three months ended January 31, 2015, and 6% of total revenue in the three months ended January 31, 2016. We expect the proportion of revenue attributable to professional services to continue to decline as more new customers select our SmartPath subscription training service. In fiscal 2013, 2014 and 2015 and in the three months ended January 31, 2016, we continued to experience high customer retention, with approximately 99% of our customer facilities continuing to subscribe to our solutions. No single customer exceeded 5% of our total revenue in fiscal 2013, 2014 or 2015 or in the three months ended January 31, 2016. We incurred a net loss of $3.3 million for fiscal 2013, a net loss of $11.0 million for fiscal 2014, and a net loss of $3.1 million for fiscal 2015. We had a net loss for the three months ended January 31, 2015 of $0.5 million and a net loss of $3.1 million for the three months ended January 31, 2016. Our Adjusted EBITDA was $4.0 million for fiscal 2013, a loss of $1.2 million for fiscal 2014, and $7.4 million for fiscal 2015. Our Adjusted EBITDA was $1.6 million for the three months ended

 

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January 31, 2015 and $3.1 million for the three months ended January 31, 2016. See “Prospectus Summary—Summary Consolidated Financial Data—Adjusted EBITDA” for an explanation of our calculation of Adjusted EBITDA.

To extend our technology and leadership position in our market we intend to continue to expand our PointClickCare platform and to develop more add-on applications to win new customers and meet our existing customers’ needs. As a result, we have increased our expenditures in product development to introduce new add-on applications to meet more of our existing customers’ current and future needs. We have recently accelerated the pace of development of add-on applications and we have introduced six new add-on applications during the 12 month period ended January 31, 2016, bringing our current total of add-on applications to 20, which we expect will contribute to future revenue growth. In addition, we have increased the size of our sales, account development and marketing teams and expect to continue to invest in these areas in the future. We also intend to continue to assess opportunities to accelerate our growth through select acquisitions, which can assist in market share growth, or provide additional products or technology, and by continuing to expand our partner referral network. Our long-term growth strategy includes adjacent markets such as in-home care, which we entered with our Nobility Health acquisition in fiscal 2015, and international markets. We are currently analyzing these additional market opportunities to determine which represent the best opportunities for us and to assess timing. We also expect general and administrative expense to increase as a result of becoming a public company.

We made these investments in order to increase our subscription and support revenue base and assist in maintaining a high retention of this base. To the extent these investments result in revenue increasing faster than the increase in sales and marketing, research and development and general and administrative expenses, our gross and operating margins will increase in the long term. However, we may incur losses in the short term. If we are unable to achieve our revenue growth objectives, and maintain a high rate of renewals with our customers, we may not be able to achieve or maintain profitability.

Acquisitions

Although we have historically grown our business organically, we completed several acquisitions in the past three years.

In September 2012, we completed the acquisition of Accu-Med for cash consideration of $5.3 million. Prior to the acquisition, Accu-Med provided electronic health record and billing solutions to the senior care market, generating revenue primarily from the sale of licenses and maintenance services. Since the date of acquisition we have transitioned substantially all of the acquired customers to the PointClickCare platform. Accu-Med is based in Milford, Ohio. The results of operations of Accu-Med have been consolidated with our financial statements from October 1, 2012.

In November 2013, we completed the acquisition of Meal Metrics Inc., or Meal Metrics, for cash consideration of $1.2 million. Meal Metrics provides solutions for meal planning to the senior care market. The acquisition provided us with an additional product to sell into the senior care market. The meal planning software provides senior care facilities with organization-wide access to resident nutritional care information, automated updates, and the flexibility for care givers to adjust and modify nutritional management at a single point of control. The results of operations of Meal Metrics have been consolidated with our financial statements for periods beginning November 1, 2013. On September 30, 2015, we amalgamated the business of Meal Metrics into Wescom Solutions Inc.

In June 2015, we completed the acquisition of the software solution and related assets of the home health division of Smart Data Solutions, Inc., referred to as Nobility Health, for cash consideration of $9.8 million. Nobility Health was a development stage enterprise engaged in the development of a software-as-a-service platform for the home care market. This acquisition accelerates our entry into the home care market and supports our strategic plan to provide a long-term and post-acute care cross-continuum solution to our existing and future customers.

 

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In May 2016, we acquired all of the outstanding shares of TouchStream Solutions Inc., or TouchStream, for total consideration of $3.8 million, with $1.9 million paid in cash and $1.9 million paid through the issuance of 82,526 of our common shares. TouchStream is a tablet-based monitoring system that helps people live independently by providing assistance in managing medications, chronic health conditions, doctor appointments, and other activities. Bluetooth-enabled wireless health devices enable the tracking of weights and vitals such as blood sugar, weight or blood pressure. These devices promote remote access to family and caregivers to assist in the early detection of problems through a web portal and through mobile alerts. The results of operations for TouchStream will be included in our consolidated financial statements beginning May 31, 2016.

Key Metrics

We monitor the key operating metrics set forth in the following table to help us evaluate trends, establish budgets, measure the effectiveness and efficiency of our operations and gauge our cash generation.

 

     Year ended October 31,      Three months ended
January 31,
 
       2013          2014           2015              2015              2016      
     (in thousands, except facility and per facility data)  

Adjusted EBITDA

   $ 4,018       $ (1,190   $ 7,426       $ 1,575       $ 3,122   

Number of customer facilities served under subscription (at period end)

     8,000         10,200        11,700         10,500         12,200   

Average monthly subscription revenue per customer facilities served (during period)

   $ 757       $ 798      $ 882       $ 848       $ 943   

Adjusted EBITDA. EBITDA consists of net income (loss) plus depreciation and amortization, interest income (expense) and income tax expense. Adjusted EBITDA consists of EBITDA plus our non-cash, stock-based compensation expense, the loss from misappropriation of assets committed by a former employee and lease abandonment costs incurred as a result of premises vacated. We use this non-GAAP measure because it assists us in comparing performance on a consistent basis across reporting periods. We believe this metric is commonly used by the financial community, and we present it to enhance investors’ understanding of our operating performance and cash flows. We believe this non-GAAP measure is useful to an investor in evaluating our operating performance because it can be used to measure a company’s operating performance without regard to items such as stock based compensation and depreciation and amortization, which can vary depending upon accounting methods and the book value of assets, and to present a meaningful measure of performance exclusive of our capital structure and the method by which assets were acquired. You should not consider Adjusted EBITDA as an alternative to net income (loss), determined in accordance with U.S. GAAP, as an indicator of ongoing performance, or as an alternative to cash provided by operating activities, determined in accordance with U.S. GAAP, as an indicator of our cash flow. We discuss this non-GAAP measure more fully in the section titled “Prospectus Summary—Summary Consolidated Financial Data.”

Number of customer facilities served. We measure the number of customer facilities using our PointClickCare solution subscription and support services at the end of each reporting period rounded to the nearest 100 facilities. We believe that the number of facilities served is useful to our management and to investors as a measure of our market penetration and growth.

Average monthly subscription revenue per customer facilities served. We measure customer subscription revenue generated from the PointClickCare cloud-based platform, divided by average number of customer facilities serviced for a given period. Subscription revenue used in the calculation adds back (excludes) subscription and maintenance relating to the Accu-Med legacy software. We believe that the average monthly subscription revenue per customer facility is useful to our management and to investors as a measure of our ability to sell additional subscription services to our existing customer base.

 

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Components of Consolidated Statements of Operations and Comprehensive (Loss) Income

Revenue

Our revenue has grown from $82.1 million during the year ended October 31, 2013 to $102.2 million during the year ended October 31, 2014 to $125.4 million during the year ended October 31, 2015. Our revenue has grown from $28.6 million during the three months ended January 31, 2015 to $36.5 million during the three months ended January 31, 2016.

We generate revenue from two sources: (1) subscription and support; and (2) professional services and other. Subscription and support revenue includes subscription fees from customers accessing our cloud-based application suite and support fees from customers purchasing support. Professional services revenue includes activities such as configuration, data migration, integration and training services. Other revenue consists primarily of referral fees from partners. As discussed further in “Critical Accounting Policies and Estimates,” we recognize revenues when persuasive evidence of an arrangement exists, service is being provided to the customer, collection of the fees is reasonably assured and the amount of fees to be paid by the customer is fixed or determinable.

Subscription and support revenue

Subscription and support revenue is recognized ratably over the contract period, commencing when the subscription and support service is made available to the customer. Subscription and support arrangements generally do not have a fixed term, but provide for cancellation with one month’s notice. An insignificant number of contracts have fixed contractual terms of one to three years. We charge in advance for contracts with fixed contractual terms. Amounts charged in advance for fixed contractual terms are deferred and recognized on a straight line basis over the term of the fixed contractual term as services are provided. For contracts that do not have a fixed contractual term, we recognize revenue on a monthly basis as services are performed.

Subscription and support revenue is generally invoiced to our customers in advance on a monthly basis and typical payment terms provide for the customer to pay us within 30 to 60 days of invoice. Deferred subscription and support revenue consists of billings for subscription and support services in advance of revenue recognition and is recognized as the revenue recognition criteria are met. Deferred subscription and support revenue that will be recognized during the succeeding twelve-month period is recorded as current deferred revenue, and the remaining portion is recorded as long-term deferred revenue. Amounts invoiced but not yet collected relating to deferred revenue are netted against deferred revenue.

The subscription and support agreements generally provide service level commitments of 99.6% uptime for each calendar year, excluding scheduled maintenance. The failure to meet this level of service availability could result in a customer’s immediate cancellation of its agreement. Upon cancellation for a breach of the service level commitment, we could be required to refund any prepaid subscription and support fees. As the majority of our customers are on month-to-month contracts, the value of any such refund would approximate one month’s subscription and support fees. In light of our historical uptime performance, we do not have any liabilities on our balance sheet related to these service level commitments.

Professional services and other revenue

The majority of our professional services contracts are on a fixed fee basis and are recognized using the proportional performance method as the project progresses. Professional services are generally invoiced in advance upon contract signing or in accordance with an agreed billing schedule. Amounts invoiced in excess of amounts earned are recorded as deferred revenue. Amounts invoiced but not yet collected relating to deferred revenue are netted against deferred revenue.

In November 2013, we introduced a new implementation and training delivery model called SmartPath that we believe reduces barriers to implementing our platform. SmartPath is a subscription-based implementation and training program offering our customers’ unlimited access to a wide variety of prerecorded and web-based

 

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product training courses. SmartPath leverages our one-to-many service delivery model thereby making our delivery of implementation and training services more efficient. The SmartPath subscription is invoiced on a monthly basis as a combined offering together with other subscriptions and is included in subscription and support revenue.

Other revenue includes referral fees generated under partner and reseller agreements, which are recognized when earned, generally on a monthly basis over the term of the referral entitlement period.

Cost of revenue

Cost of subscription and support revenue primarily consists of costs related to hosting our cloud-based application suite, our SmartPath implementation and training program offering, providing customer support, data communications expenses, salaries and benefits of operations and support personnel, software license fees, technology partner fees, amortization expense associated with capitalized internal use software and acquired technology assets and property and equipment depreciation. Cost of professional services revenue primarily consists of costs to provide implementation consulting services and training to our customers and costs associated with certain client reimbursable out-of-pocket expenses.

Operating expenses

Product development

Product development expenses consist of costs for our research and development personnel, including salaries, benefits, bonuses and stock-based compensation, software license fees, and cost of third-party contractors net of cash refundable investment tax credits.

At January 31, 2016 we continued to be a “Canadian Controlled Private Corporation” and as such qualified for cash refundable investment tax credits, or ITCs, on eligible expenditures on account of scientific research and development. These expenditures are subject to review by the Canada Revenue Agency and the actual amount could be materially different from the amount accrued.

Refundable ITCs relating to capital expenditures and internally developed software are reflected as a reduction of the cost of such assets. Refundable investment tax credits relating to product development expenses are recorded as a reduction of such expenses in the year the credits are earned.

We recorded ITCs in the amounts of $2.4 million, $2.1 million and $1.7 million as an offset to the related product development expenses and capitalized internal-use software for the years ended October 31, 2013, 2014 and 2015, respectively. We recorded ITCs in the amounts of $0.5 million and $0.4 million as an offset to the related product development expenses and capitalized internal-use software for the three months ended January 31, 2015 and 2016, respectively. Upon becoming a public company, we will cease to be eligible to receive cash refundable ITCs. The ITCs earned subsequent to becoming a public company will be earned at a lower rate and will be available to reduce Canadian taxes otherwise payable. As a result, we expect our future product development expenses to increase in the absence of refundable ITCs.

Product development expenses are expensed as they are incurred unless they qualify for capitalization. We capitalized $1.1 million, $2.3 million, and $3.7 million of product development expenses during the years ended October 31, 2013, 2014 and 2015, respectively, and $0.7 million and $1.6 million of product development expenses during the three months ended January 31, 2015 and 2016, respectively, related to certain development costs incurred in connection with our internal use software. These capitalized costs generally relate to the development of additional applications that are integrated with our platform. Costs incurred in the preliminary stages of development are expensed as incurred. Once an application has reached the development stage, internal and external costs, if direct and incremental, are capitalized until the software is substantially complete and ready for its intended use. Capitalization ceases upon completion of all substantial testing. Capitalized internal use software development costs are amortized over the estimated useful life of the application, which is generally three to seven years, and are included as a cost of subscription and support revenue.

 

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We plan to sustain our product innovation by continuing to hire strong technical talent, improving our core technology, and maintaining an agile organization that supports rapid release cycles. During the twelve months ended January 31, 2016, we released six new product applications that we are currently selling to existing customers. We plan to continue to introduce new product applications in the future, integrate third-party applications where appropriate as well as continue to make strategic product acquisitions such as our acquisitions of Meal Metrics, Nobility Health and TouchStream. We expect to incur additional development costs prospectively related to our investment in the in-home care product, however, we expect that in the near term, a large portion of these costs will be capitalized as internal use software. We intend to continue to develop additional features and functionality for our existing solutions as well as develop new applications for the senior care market and expect research and development costs to continue to increase in absolute dollars, although they may fluctuate as a percentage of revenue.

Sales and marketing

Sales and marketing expenses consist of costs for our sales and marketing personnel, including salaries, benefits, bonuses, stock-based compensation and sales commissions, costs of marketing and promotional events, corporate communications, software license fees, online marketing, product marketing and management and other brand-building activities, and travel expense. During the years ended October 31, 2013 and 2014, commission expense approximated their related cash outflows. As of 2015, commission payments are made in advance of revenue recognition and are capitalized and amortized over the initial contract term effective from the date services are first provided.

We expect sales and marketing expenses to increase in absolute dollars in the foreseeable future as we increase the number of our sales and marketing employees to support growth in our business, although they may fluctuate as a percentage of revenue.

General and administrative

General and administrative expenses consist primarily of costs for administrative, finance, IT, legal and human resource personnel, including salaries, benefits, bonuses and stock-based compensation, software license fees, professional fees, insurance premiums, other corporate expenses and occupancy costs. We expect our general and administrative expenses to continue to increase in absolute dollars as we transition to being a public company, although they may fluctuate as a percentage of revenue. We expect additional general and administrative expenses to include increased personnel costs, insurance costs, costs required to comply with the regulatory requirements of the SEC as well as costs associated with enhancing our internal controls and accounting systems.

In April 2015, we entered into a lease expiring in 2027 to occupy approximately 185,000 square feet in a facility in Mississauga, Canada. Occupation of the Mississauga facility commenced December 4, 2015. In the three months ended January 31, 2016, we recorded a lease abandonment charge of $2.5 million in relation to our vacated facilities equaling the fair value of our estimated future net cash flows under the lease agreements. These estimated cash flows include future payments owing under the agreements less estimated sublet fees based on current market conditions.

At January 31, 2016, the gross future undiscounted lease payments for the vacated facilities that have not yet been sublet were approximately $3.2 million including estimated operating expenses. In the event management’s estimates relating to the timing and/or recovery of fees related to a potential sublet of the vacated facilities are revised, additional charges or partial recovery of the current lease abandonment charge may be recorded in the consolidated statement of operations in future periods.

Loss from misappropriation

In July 2014, we discovered irregularities relating to certain credit card purchases made by our accounting manager. On July 15, 2014, we began an internal investigation utilizing the assistance of external legal and

 

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forensic accounting advisors. The investigation revealed that between May 2009 and July 2014, the accounting manager incurred unauthorized charges totaling approximately $6.6 million on a corporate credit card. Of the total charges of $6.6 million, approximately 90% related to numerous purchases of electronic devices from an online retailer between January 2011 and July 2014. In addition to these purchases, the accounting manager used a corporate credit card to acquire other types of assets and services for personal benefit. Our investigation revealed that both an inadequate segregation of duties within significant accounts or processes and inadequate controls over the initiation, approval and processing of manual journal entries resulted in a failure to prevent and detect the misappropriation on a more timely basis. Our investigation did not identify any misconduct on the part of any of our other employees. Following the discovery of the misappropriation of funds, the accounting manager’s employment was terminated for cause.

Losses resulting from the misappropriation of assets were $2.4 million and $2.5 million during the fiscal years ended October 31, 2013 and 2014, respectively. There were no losses incurred for the fiscal year ended October 31, 2015 or for the three months ended January 31, 2015 and 2016.

In addition to these losses, we have incurred fees and expenses related to the investigation and efforts to recover assets from the former accounting manager and third parties that we believe assisted in the misappropriations. Our investigation is complete. Through January 31, 2016, we have recovered $0.3 million worth of assets. Although we are attempting to recover further amounts misappropriated by the former employee and third parties we believe assisted in the misappropriations, we may not be successful in such efforts. Costs directly related to the investigation and efforts to recover assets of $0.9 million were incurred in fiscal 2014. There were no significant investigation or recovery costs incurred for the fiscal years ended October 31, 2013 or October 31, 2015, or for the three months ended January 31, 2015 and 2016.

Other income (expense)

Other income (expense) primarily consists of foreign exchange gains (losses), interest income and interest expense. Foreign exchange gains (losses) relate to transactions denominated in currencies other than the functional currency. Interest income represents interest received on our cash. Interest expense is primarily associated with our capital leases, term loans, and revolving credit facility.

Foreign exchange gain (loss)

We enter into foreign exchange forward contracts to manage our currency exposure on Canadian dollar operational cash flows. These forward contracts allow us to sell specific amounts of U.S. dollars in exchange for Canadian dollars at a set price at specific future dates. In fiscal 2013 and 2014, our forward exchange contracts were not designated as hedging instruments for accounting purposes. Therefore, the instruments were marked-to-market at the end of each reporting period with changes in the fair value recorded as other income or expense. Commencing in March 2015, we designated our hedging instruments such that they qualify for hedge accounting. Foreign exchange gains and losses related to instruments that qualify for hedge accounting are disclosed on the Company’s balance sheet as assets or liabilities with a corresponding offset in Accumulated Other Comprehensive Income within Total Shareholders’ Deficit. These gains or losses are released to the profit and loss statement as the instruments mature or as the hedged item is recorded in the statement of operations.

While most of our revenues are denominated in U.S. dollars, the majority of our operating expenses are incurred in Canadian dollars. As a result, our net income (loss) will be adversely impacted by an increase in the value of the Canadian dollar relative to the U.S. dollar. Correspondingly, the significant recent depreciation in the value of the Canadian dollar relative to the U.S. dollar has favorably impacted our cost of revenue and operating expenses. In addition, a portion of our revenue is denominated in Canadian dollars and as a result, a decrease in the Canadian dollar will adversely impact our revenue.

For fiscal 2013 and 2014 and the period from November 1, 2014 to March 31, 2015, our Canadian dollar expenses and revenues were directly impacted by the change in the U.S. to Canadian dollar exchange rate. For

 

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the period from April 1, 2015 to October 31, 2015, hedged Canadian expenses in the amount of $34.2 million were translated at an average exchange rate of C$1.2614 equal to US$1.00 and our unhedged Canadian dollar expenses were directly impacted by the change in the U.S. to Canadian dollar exchange rate. During the three months ended January 31, 2016, hedged Canadian expenses in the amount of $17.9 million were translated at an average exchange rate of C$1.2558 equal to US$1.00 and our unhedged Canadian dollar expenses were directly impacted by the change in the U.S. to Canadian dollar exchange rate.

The following is a summary of the movement in the average foreign exchange rates between the Canadian and U.S. dollar based on the Bank of Canada closing rates:

 

US$1.00

   Fiscal 2013     Fiscal 2014     Fiscal 2015     Three months ended
January 31, 2015
    Three months ended
January 31, 2016
 

Average foreign exchange rates between U.S. and Canadian dollar

   C$ 1.0198      C$ 1.0906      C$ 1.2451      C$ 1.1669      C$ 1.3736   

Percentage change from prior period

     1.50     6.94     14.20     9.10     17.70

The average foreign exchange rate we experienced on hedged and unhedged transactions was C$1.2507 equal to US$1.00 during fiscal 2015 and C$1.3087 equal to US$1.00 during the three months ended January 31, 2016 for a period over period depreciation of 14.7% from fiscal 2014 to fiscal 2015 and 12.15% from the three months ended January 31, 2015 to the three months ended January 31, 2016.

Income tax expense

We operate in several tax jurisdictions and are subject to taxes in each country or jurisdiction in which we conduct business. To date we have incurred cumulative net losses and maintain a full valuation allowance on our net deferred tax assets. Therefore, we have not recorded any significant tax provisions and our effective tax rate differs from statutory rates.

 

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Results of operations

The following table sets forth our consolidated statements of operations data for each of the periods presented. The period to period comparison of financial results is not necessarily indicative of financial results to be achieved in future periods.

 

    Year ended October 31,     Three months ended
January 31,
 
    2013     2014     2015     2015     2016  
    (dollars in thousands, except per share amounts)  

Revenue:

         

Subscription and support

  $ 70,529      $ 90,645      $ 117,115      $ 26,704      $ 34,232   

Professional services and other

    11,604        11,565        8,267        1,916        2,243   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

    82,133        102,210        125,382        28,620        36,475   

Cost of revenue:

         

Subscription and support

    13,846        19,100        29,604        6,378        7,637   

Professional services and other

    13,400        11,722        8,265        1,808        2,275   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

    27,246        30,822        37,869        8,186        9,912   

Gross profit

    54,887        71,388        87,513        20,434        26,563   

Operating expenses:

         

Product development

    23,592        30,925        32,786        7,515        8,979   

Sales and marketing

    14,974        21,728        27,486        6,247        7,883   

General and administrative

    17,057        24,307        28,441        5,965        12,633   

Loss from misappropriation(1)

    2,408        2,546        (24              
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    58,031        79,506        88,689        19,727        29,495   

Operating income (loss)

    (3,144     (8,118     (1,176     707        (2,932

Other income (expenses):

         

Interest income

    19        (152     (653     (124     (324

Foreign exchange loss

    (161     (3,044     (1,243     (1,049     167   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

 

 

 

 

(3,286

 

 

 

 

 

(11,314

 

 

 

 

 

(3,072

 

 

 

 

 

(466

 

 

 

 

 

(3,089

 

Income taxes

           324                        

Net income (loss)

 

 

$

 

(3,286

 

 

 

$

 

(10,990

 

 

 

$

 

(3,072

 

 

 

$

 

(466

 

 

 

$

 

(3,089

 

 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) per share-basic and diluted:(2)

         

Net income (loss) per share-basic

  $ (3.99   $ 0.30      $ (0.90   $ (0.02   $ 0.42   

Weighted average common shares used in computing basic net income (loss) per share

    13,731,032        14,870,358        17,654,183        17,654,183        17,654,183   

Net income (loss) per share- diluted

  $ (3.99   $ (0.55   $ (0.90   $ (0.02   $ (0.13

Weighted average common shares used in computing diluted net income (loss) per share

    13,731,032        20,052,035        17,654,183        17,654,183        23,805,926   

Other Financial Data:

         

Adjusted EBITDA(3)

  $ 4,018      $ (1,190   $ 7,426      $ 1,575      $ 3,122   

 

(1) See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 3 to our audited consolidated financial statements for further information on a misappropriation of assets committed against us by a former employee.

 

(2) See Note 23 to our audited consolidated financial statements for an explanation of the calculation of our actual basic and diluted net loss per share attributable to our common shareholders.

 

(3) See “Selected Consolidated Financial Data—Adjusted EBITDA” for an explanation of our calculation of Adjusted EBITDA.

 

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Comparison of three months ended January 31, 2015 and 2016

Revenue

 

     Three months ended January 31,  
     2015     2016     Change  
     Amount      % of
Revenue
    Amount      % of
Revenue
    Amount      %  
     (in thousands)  

Subscription and support

   $ 26,704         93.3   $ 34,232         93.9   $ 7,528         28.2

Professional services and other

     1,916         6.7        2,243         6.1        327         17.1   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total revenue

   $ 28,620         100   $ 36,475         100   $ 7,855         27.4
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Subscription and support revenue. Subscription and support revenue increased by $7.5 million, or 28.2%, from the three months ended January 31, 2015 compared to the three months ended January 31, 2016. The $7.5 million increase in revenue was primarily attributable to a 16.2% increase in the number of new facilities implemented on the PointClickCare platform and an 11.2% increase in the average monthly subscription revenue per facility inclusive of add-on applications implemented during the period. The number of senior care facilities using our PointClickCare subscription solution grew from approximately 10,500 as at January 31, 2015, to approximately 12,200 as at January 31, 2016.

Professional services and other revenue. Professional services and other revenue increased by $0.3 million, or 17.1%, from the three months ended January 31, 2015 compared to the three months ended January 31, 2016. The revenue increase primarily resulted from the increase in the number of new facilities implemented from approximately 400 in the three months ended January 31, 2015 to 500 in the three months ended January 31, 2016. In the future we expect the number of facilities implemented each quarter to vary depending upon the mix between the number of new customers implemented and the number of existing customer implementations of add-on applications.

Cost of Revenue and Gross Margin

 

     Three months ended January 31,        
     2015     2016     Change  
     Amount     % of
Revenue
    Amount     % of
Revenue
    Amount      %  
     (in thousands)  

Subscription and support

   $ 6,378        22.3   $ 7,637        20.9   $ 1,259         19.7

Professional services and other

     1,808        6.3        2,275        6.2        467         25.8   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Total cost of revenue

   $ 8,186        28.6   $ 9,912        27.2   $ 1,726         21.1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Gross Margin

             

Subscription and support

     76.1       77.7       

Professional services and other

     5.6          (1.4       
  

 

 

     

 

 

        

Total gross margin

     71.4       72.8       
  

 

 

     

 

 

        

Cost of subscription and support revenue. Cost of subscription and support revenue increased by $1.3 million, or 19.7%, from the three months ended January 31, 2015 compared to the three months ended January 31, 2016. The increase in cost of subscription and support revenue was primarily attributable to the increase in our staffing and infrastructure costs to support the increased volume of subscription and support customers on the PointClickCare platform.

Our direct costs, including third-party licenses and web hosting costs, increased by 82.2%, or $0.5 million, from the three months ended January 31, 2015 to $1.1 million for the three months ended January 31, 2016 due

 

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to increased infrastructure required to support our revenue growth. Our depreciation and amortization costs increased by $0.3 million from the three months ended January 31, 2015 to the three months ended January 31, 2016 as a result of increased investment in infrastructure and amortization of capitalized internal use software.

Our subscription and support gross margin increased from 76.1% in the three months ended January 31, 2015 to 77.7% in the three months ended January 31, 2016 given revenue growth of 28.2% and headcount costs growth of only 8.0%. The total change in cost of subscription and support revenue period over period was also impacted by the 12.2% experienced depreciation in the Canadian dollar against the U.S. dollar on our Canadian dollar-denominated expenditures period over period.

Cost of professional service and other revenue. Cost of professional service and other revenue increased by $0.5 million, or 25.8%, from the three months ended January 31, 2015 compared to the three months ended January 31, 2016. This increase was driven largely by the increase in cost of professional service and other revenue headcount required to implement the higher volume of new customers using the PointClickCare platform. Costs associated with our professional service and other revenue headcount increased by 26.4% or $0.5 million from the three months ended January 31, 2015 to the three months ended January 31, 2016. Gross margin on professional service and other revenue declined from 5.6% in the three months ended January 31, 2015 to (1.4)% in the three months ended January 31, 2016 as the increase in implementation and training headcount costs was higher than the increase in professional services revenue.

The total change in cost of professional services and other revenue period over period was also impacted by the 12.2% experienced depreciation in the Canadian dollar against the U.S. dollar on our Canadian dollar-denominated expenditures period over period.

Operating expenses

 

     Three months ended January 31,  
     2015     2016     Change  
     Amount      % of
Revenue
    Amount      % of
Revenue
    Amount      %  
     (in thousands)  

Product development

   $ 7,515         26.3   $ 8,979         24.6   $ 1,464         19.5

Sales and marketing

     6,247         21.8        7,883         21.6        1,636         26.2   

General and administrative

     5,965         20.9        12,633         34.6        6,668         111.8   

Product development

Product development costs increased by $1.5 million from the three months ended January 31, 2015 to the three months ended January 31, 2016. The increase is primarily due to increased headcount-related costs partially offset by the impact of the 12.2% experienced depreciation in the Canadian dollar against the U.S. dollar on our Canadian dollar-denominated expenditures period over period.

Costs associated with product development headcount increased 22.8%, or $1.9 million, from the three months ended January 31, 2015 to the three months ended January 31, 2016. This increase in costs was primarily attributable to the increase in product development headcount and third-party development contractors used to enhance our existing product offerings, keep current with health care and privacy regulatory changes, expand product capability, integrate acquired and third-party applications, expand offerings for the skilled nursing facility market (including practitioner engagement, analytics, medication management and relationship management), invest in the core functionality related to home health care, develop additional products in areas of mobile and analytics, scale our products’ infrastructure and enhance our quality and assurance teams to keep pace with the increase in product development activities. These costs are partially offset by the impact of the depreciation of the Canadian dollar against the U.S. dollar.

 

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Included in product development headcount costs are purchased services from contractors in the areas of mobile technology, analytics and our interoperability engine. Purchased services increased from $1.9 million in the three months ended January 31, 2015 to $2.0 million in the three months ended January 31, 2016.

We capitalized $0.7 million and $1.6 million of product development costs during the three month periods ended January 31, 2015 and 2016, respectively, related to certain development costs incurred in connection with our internal use software. These capitalized costs generally relate to the development of additional applications that are integrated with our platform. Capitalized internal use software development costs are amortized over the estimated useful life of the application, which is generally three to seven years, and the amortization expense is included as a cost of subscription and support revenue.

We recorded cash refundable investment tax credits in the amounts of $0.5 million and $0.4 million for the three month periods ended January 31, 2015 and 2016, respectively, as an offset to product development expenses for the same periods.

Sales and marketing

Sales and marketing costs increased by $1.6 million, or 26.2%, from the three months ended January 31, 2015 compared to the three months ended January 31, 2016. This increase in costs was primarily attributable to the increase in sales and marketing headcount required to increase our customer base, partially offset by the impact of the 12.2% experienced depreciation in the Canadian dollar against the U.S. dollar experienced on our Canadian dollar-denominated expenditures period over period. Our sales and marketing compensation costs increased by $0.8 million, or 21.9%, from the three months ended January 31, 2015 to the three months ended January 31, 2016.

As a result of the growth in headcount and sales volumes, commissions increased by $0.7 million from the three months ended January 31, 2015 to the three months ended January 31, 2016.

General and administrative

General and administrative costs increased by $6.7 million, or 111.8%, from the three months ended January 31, 2015 compared to the three months ended January 31, 2016. This increase in costs was attributable to increased occupancy costs of $3.2 million, including a lease abandonment charge recorded in the three months ending January 31, 2016 of $2.5 million, an increase in headcount costs of $1.0 million required to support the growth of the business, increased depreciation and amortization of $0.6 million related to infrastructure and premises improvements, a loss on disposal of furniture and fixtures of $0.5 million, and an increase in bad debt expense of $0.4 million.

In April 2015, we entered into a lease expiring in 2027 to occupy approximately 185,000 square feet in a facility in Mississauga, Canada. Occupation of the Mississauga facility commenced December 4, 2015. In the three months ended January 31, 2016, we recorded a lease abandonment charge of $2.5 million in relation to our vacated facilities equaling the fair value of our estimated future net cash flows under the lease agreements. These estimated cash flows include future payments owing under the agreements less estimated sublet fees based on current market conditions.

Cost associated with general and administrative headcount increased by 28.2%, or $1.0 million, from the three months ended January 31, 2015 to the three months ended January 31, 2016. The total change in general and administrative costs was also impacted by the 12.2% depreciation in the Canadian dollar against the U.S. dollar experienced on our Canadian dollar-denominated expenditures.

 

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Other income (expenses)

 

     Three months ended January 31,  
     2015     2016     Change  
     Amount     % of
Revenue
    Amount     % of
Revenue
    Amount     %  
     (in thousands)  

Interest income (expense), net

   $ (124     (0.4 )%    $ (324     (0.9 )%    $ (200     161.3

Foreign exchange gain (loss)

     (1,049     (3.7     167        0.5        1,216        (115.9

Interest income (expense)

Net interest expense increased primarily due to the increase in the amount drawn on our revolving credit facility from $11.8 million at January 31, 2015 to $38.1 million, an increase of $26.3 million.

Foreign exchange gain (loss)

Foreign exchange loss decreased by $1.2 million primarily due to the application of hedge accounting in March 2015 and reduced mark-to-market losses on foreign exchange forward contracts.

From October 31, 2015 to January 31, 2016, the Canadian dollar depreciated against the U.S. dollar by 7.6%. The foreign exchange gain of $0.2 million for the three months ended January 31, 2016 reflects gains on our net current liabilities denominated in Canadian dollars. From October 31, 2014 to January 31, 2015, the Canadian dollar depreciated against the U.S. dollar by 12.8%. The foreign exchange loss of $1.0 million for the three months ended January 31, 2015 primarily reflects the losses realized when settling foreign exchange contracts and the loss on the forward contracts held at January 31, 2015 prior to the application of hedge accounting in March 2015.

Comparison of Years Ended October 31, 2014 and 2015

Revenue

 

     Year ended October 31,  
     2014     2015     Change  
     Amount      % of
Revenue
    Amount      % of
Revenue
    Amount     %  
     (in thousands)  

Subscription and support

   $ 90,645         88.7     117,115         93.4   $ 26,470        29.2

Professional services and other

     11,565         11.3        8,267         6.6        (3,298     (28.5
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total revenue

   $ 102,210         100   $ 125,382         100   $ 23,172        22.7
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Subscription and support revenue. Subscription and support revenue increased by $26.5 million, or 29.2%, from the year ended October 31, 2014 to the year ended October 31, 2015.

The $26.5 million increase in revenue was primarily attributable to a 14.7% increase in the number of new facilities implemented on the PointClickCare platform and a 10.5% increase in the average monthly subscription revenue per facility inclusive of add-on applications implemented during the period. The number of senior care facilities using our PointClickCare subscription solution grew from approximately 10,200 as at October 31, 2014, to 11,700 as at October 31, 2015.

Professional services and other revenue. Professional services and other revenue decreased by $3.3 million, or 28.5%, from the year ended October 31, 2014 to the year ended October 31, 2015. The revenue

 

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decrease primarily resulted from the decrease in the number of new facilities implemented, from approximately 2,200 in the year ended October 31, 2014 to approximately 1,500 in the year ended October 31, 2015, and the increase in the number of new customers that were onboarded through our SmartPath subscription model as opposed to our traditional services model. In the future, we expect the number of facilities implemented each quarter to vary depending upon the mix between the number of new customers implemented and the number of add-on applications implemented for existing customers.

Cost of Revenue and Gross Margin

 

     Year ended October 31,              
     2014     2015     Change  
     Amount     % of
Revenue
    Amount     % of
Revenue
    Amount     %  
     (in thousands)  

Subscription and support

   $ 19,100        18.7   $ 29,604        23.6   $ 10,504        55.0

Professional services and other

     11,722        11.5        8,265        6.6        (3,457     (29.5
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Total cost of revenue

   $ 30,822        30.2   $ 37,869        30.2   $ 7,047        22.9
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Gross Margin

            

Subscription and support

     78.9       74.7      

Professional services and other

     (1.4       0.0         
  

 

 

     

 

 

       

Total gross margin

     69.9       69.8      
  

 

 

     

 

 

       

Cost of subscription and support revenue. Cost of subscription and support revenue increased by $10.5 million, or 55.0%, from the year ended October 31, 2014 to the year ended October 31, 2015. The increase in cost of subscription and support revenue was primarily attributable to the increase in our staffing and infrastructure costs to support the increased volume of subscription and support customers on our platform and the reassignment of staffing from cost of professional services to cost of subscription and support relating to our SmartPath offering that is sold on a subscription basis.

Costs associated with our subscription and support headcount increased by 58.4%, or $7.4 million, from the year ended October 31, 2014 to the year ended October 31, 2015. Our depreciation and amortization costs increased from the year ended October 31, 2014 to the year ended October 31, 2015 by $1.1 million as a result of increased investment in infrastructure and amortization of additional capitalized internal use software.

Our subscription and support gross margin decreased from 78.9% in fiscal 2014 to 74.7% in fiscal 2015, primarily due to the introduction of SmartPath. Our total gross margin, however, remained consistent year over year.

Cost of professional service and other revenue. Cost of professional service and other revenue decreased by $3.5 million, or 29.5%, from the year ended October 31, 2014 compared to the year ended October 31, 2015. This decrease was driven largely by the reassignment of staffing from cost of professional services to cost of subscription and support relating to our SmartPath offering that is sold on a subscription basis. Costs associated with our professional service and other revenue headcount decreased by 34.2%, or $4.0 million, from fiscal 2014 to fiscal 2015. Gross margin on professional service and other revenue increased from (1.4%) in fiscal 2014 to nil in fiscal 2015 primarily due to the 14.7% experienced depreciation of the Canadian dollar on Canadian denominated expenses.

 

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     Year ended October 31,  
     2014     2015     Change  
     Amount      % of
Revenue
    Amount     % of
Revenue
    Amount     %  
     (in thousands)  

Product development

   $ 30,925         30.3   $ 32,786        26.1   $ 1,861        6.0

Sales and marketing

     21,728         21.3        27,486        21.9        5,758        26.5   

General and administrative

     24,307         23.8        28,441        22.7        4,134        17.0   

Loss from misappropriation

     2,546         2.5        (24     (0.0     (2,570     (100.9

Product development

Product development costs increased by $1.9 million, or 6.0%, from the year ended October 31, 2014 to the year ended October 31, 2015. This increase in costs was primarily attributable to the increase in product development headcount and third-party development contractors used to enhance our existing product offerings, keep current with health care and privacy regulatory changes, expand product capability, integrate acquired and third-party applications, expand offerings for the skilled nursing facility market (including practitioner engagement, analytics, medication management and relationship management), invest in the core functionality related to home health care, develop additional products in areas of mobile and analytics, scale our products’ infrastructure and enhance our quality and assurance teams to keep pace with the increase in product development activities.

Costs associated with product development headcount increased by 4.7%, or $1.6 million, from fiscal 2014 to fiscal 2015. Other cost increases include $0.5 million in software subscriptions and a $0.7 million increase in office, general and travel expenses, offset by an increase in capitalization of product development costs of $1.6 million related to certain development costs incurred in connection with our internal use software. These capitalized costs generally relate to the development of additional applications that are integrated with our platform. Capitalized internal use software development costs are amortized over the estimated useful life of the application, which is generally three to seven years, and the amortization expense is included as a cost of subscription and support revenue.

Included in product development headcount costs are purchased services from contractors in the areas of mobile technology, analytics and our interoperability engine. Purchased services decreased by 7.8% from $8.0 million in fiscal 2014 to $7.4 million in fiscal 2015 due primarily to the 14.7% experienced depreciation of the Canadian dollar on Canadian denominated expenses.

We recorded cash refundable investment tax credits in the amounts of $2.1 million and $1.7 million as an offset to product development expenses for the years ended October 31, 2014 and 2015, respectively.

Sales and marketing

Sales and marketing costs increased by $5.8 million, or 26.5%, from the year ended October 31, 2014 to the year ended October 31, 2015. This increase in costs was primarily attributable to the increase in sales and marketing headcount required to increase our customer base. Our sales and marketing compensation costs increased by $2.0 million from the year ended October 31, 2014 to the year ended October 31, 2015. In addition, costs of tradeshows and conferences increased by $0.7 million, or 38.4%, as we continued to expand our market focus, particularly in the senior living space.

General and administrative

General and administrative costs increased by $4.1 million, or 17.0%, from the year ended October 31, 2014 to the year ended October 31, 2015. This increase in costs was driven by a $2.3 million, or 18.9%, increase in headcount costs as well as a $2.3 million increase in occupancy costs primarily related to a premises lease

 

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entered into during April 2015 for our 185,000 square foot facility in Mississauga, Canada. These cost increases were required to facilitate the continued growth of our business and were partially offset by a 14.7% experienced depreciation in the Canadian dollar against the U.S. dollar, as the majority of our general and administrative expenses are denominated in Canadian dollars.

Other income (expenses)

 

     Year ended October 31,  
     2014     2015     Change  
     Amount     % of
Revenue
    Amount     % of
Revenue
    Amount     %  
     (in thousands)  

Interest income (expense), net

   $ (152     (0.1 )%    $ (653     (0.5 )%    $ (501     329.6

Foreign exchange loss

     (3,044     (3.0     (1,243     (1.0     1,801        (59.2

Income tax recovery (expense)

     324        0.3                      (324     (100.0

Interest income (expense)

Interest expense increased by $0.5 million from the year ended October 31, 2014 to the year ended October 31, 2015 primarily due to the $19.9 million increase in the amount drawn on our revolving credit facility from $3.2 million at October 31, 2014 to $23.1 million at October 21, 2015.

Foreign exchange gain (loss)

Foreign exchange loss decreased by $1.8 million, or 59.2%, primarily due to the application of hedge accounting that commenced in March 2015. The foreign exchange loss of $1.2 million in fiscal 2015 reflects losses on the mark-to-market adjustment of outstanding forward contracts entered into prior to March 2015, offset in part by gains on our net current liabilities denominated in Canadian dollars. In fiscal 2014, mark-to-market losses on foreign exchange forward contracts was recorded in the consolidated statement of operations as other income and expenses as they occurred. With the introduction of hedge accounting in March 2015, market-to-market gains and losses on effective foreign exchange forward contracts are deferred and recognized as operating expenses along with the item hedged as contracts mature.

Income tax expense (recovery)

The Company realized an income tax recovery in the year ended October 31, 2014 of $324 as a result of recognizing a deferred tax asset, previously unrecognized, to offset a deferred tax liability that arose on the acquisition of Meal Metrics.

Comparison of Years Ended October 31, 2013 and 2014

Revenue

 

     Year ended October 31,  
     2013     2014     Change  
     Amount      % of
Revenue
    Amount      % of
Revenue
    Amount     %  
     (in thousands)  

Subscription and support

   $ 70,529         85.9   $ 90,645         88.7   $ 20,116        28.5

Professional services and other

     11,604         14.1        11,565         11.3        (39     0.3   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total revenue

   $ 82,133         100   $ 102,210         100   $ 20,077        24.4
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

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Subscription and support revenue. Subscription and support revenue increased by $20.1 million, or 28.5%, from the year ended October 31, 2013 to the year ended October 31, 2014. The increase was driven by a $24.7 million, or 35%, increase in PointClickCare subscription and support revenue offset by a decrease of $4.5 million, or 6.4%, related to our September 28, 2012 acquisition of Accu-Med as the Accu-Med customers transitioned to become direct customers on the PointClickCare platform.

The $24.7 million increase in revenue was primarily attributable to a 32% increase in the number of new facilities implemented on the PointClickCare platform and a 5% increase in the average monthly subscription revenue per facility inclusive of add-on applications implemented during the period. The number of senior care facilities using our PointClickCare subscription solution grew from approximately 7,900 as at October 31, 2013 to 10,200 as at October 31, 2014.

Included in our October 31, 2013 and 2014 subscription and support revenue is $6.9 million and $2.4 million, respectively, of support revenue related to the legacy products and services acquired in the Accu-Med business acquisition. Effective March 31, 2014, we discontinued providing technical updates for the legacy Accu-Med products.

Professional services and other revenue. Professional services and other revenue remained unchanged from the year ended October 31, 2013 to the year ended October 31, 2014 which is consistent with the number of new facilities implemented in each year. We implemented 2,100 new facilities in the year ended October 31, 2013 and 2,200 in the year ended October 31, 2014.

Cost of Revenue and Gross Margin

 

     Year ended October 31,        
     2013     2014     Change  
     Amount     % of
Revenue
    Amount     % of
Revenue
    Amount     %  
     (in thousands)  

Subscription and support

   $ 13,846        16.9   $ 19,100        18.7   $ 5,254        37.9

Professional services and other

     13,400        16.3        11,722        11.5        (1,678     (12.5
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Total cost of revenue

   $ 27,246        33.2   $ 30,822        30.2   $ 3,576        13.1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Gross Margin

            

Subscription and support

     80.4       78.9      

Professional services and other

     (15.5       (1.4      
  

 

 

     

 

 

       

Total gross margin

     66.8       69.8      
  

 

 

     

 

 

       

Cost of subscription and support revenue. Cost of subscription and support revenue increased by $5.3 million, or 37.9%, from the year ended October 31, 2013 to the year ended October 31, 2014. The increase in cost of subscription and support revenue was primarily attributable to the increase in our staffing and infrastructure costs to support the increased volume of subscription and support customers on our platform and the reassignment of staffing from cost of professional services to cost of subscription and support relating to our SmartPath implementation and training offering that is sold on a subscription basis.

Costs associated with our subscription and support headcount increased by $3.8 million, or 42.5%, from the year ended October 31, 2013 to the year ended October 31, 2014. Our depreciation and amortization costs increased from the year ended October 31, 2013 to the year ended October 31, 2014 by $0.7 million as a result of increased investment in infrastructure and a full year of amortization of capitalized internal use software.

Costs incurred to support Accu-Med products prior to transitioning the Accu-Med customers to our platform were $1.6 million in the year ended October 31, 2013 and nil in the year ended October 31, 2014.

 

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Our subscription and support gross margin decreased from 80.4% in fiscal 2013 to 78.9% in fiscal 2014, primarily due to the introduction of SmartPath.

Cost of professional service and other revenue. Cost of professional service and other revenue decreased by $1.7 million, or 12.5%, from the year ended October 31, 2013 compared to the year ended October 31, 2014. This decrease was driven largely by the reassignment of staffing from cost of professional services to cost of subscription and support relating to our SmartPath implementation and training offering. Costs associated with our professional service and other revenue headcount decreased by 9.1%, or $1.2 million, from fiscal 2013 to fiscal 2014. Gross margin on professional service and other revenue increased from (15.5%) in fiscal 2013 to (1.4%) in fiscal 2014, primarily due to the impact of reassignment of staff from cost of professional services to cost of subscription and support relating to our SmartPath implementation and training offering.

Operating expenses

 

     Year ended October 31,  
     2013     2014     Change  
     Amount      % of
Revenue
    Amount      % of
Revenue
    Amount      %  
     (in thousands)  

Product development

   $ 23,592         28.7   $ 30,925         30.3   $ 7,333         31.1

Sales and marketing

     14,974         18.2        21,728         21.3        6,754         45.1   

General and administrative

     17,057         20.8        24,307         23.8        7,250         42.5   

Loss from misappropriation

     2,408         2.9        2,546         2.5        138         5.7   

Product development

Product development costs increased by $7.3 million, or 31.1%, from the year ended October 31, 2013 to the year ended October 31, 2014. This increase in costs was primarily attributable to the increase in product development headcount and third-party development contractors used to enhance our existing product offerings, keep current with health care and privacy regulatory changes, position our product for the assisted living vertical, integrate acquired and third-party applications, develop additional products in areas of mobile and analytics, and scale our products’ infrastructure and quality and assurance teams to keep pace with the increase in product development activities. Costs associated with product development headcount increased by 33.7%, or $8.7 million, from fiscal 2013 to fiscal 2014.

Included in product development costs are purchased services from contractors in the areas of mobile technology, analytics and our interoperability engine. Purchased services increased from $6.2 million in fiscal 2013 to $8.0 million in fiscal 2014, an increase of 29%.

We capitalized $1.1 million and $2.3 million of product development costs during the years ended October 31, 2013 and 2014, respectively, related to certain development costs incurred in connection with our internal use software. These capitalized costs generally relate to the development of additional applications that are integrated with our platform. Capitalized internal use software development costs are amortized over the estimated useful life of the application, which is generally three to seven years, and the amortization expense is included as a cost of subscription and support revenue.

We recorded cash refundable investment tax credits in the amounts of $2.4 million and $2.1 million as an offset to product development expenses for the years ended October 31, 2013 and 2014, respectively.

Sales and marketing

Sales and marketing costs increased by $6.8 million, or 45.1%, from the year ended October 31, 2013 to the year ended October 31, 2014. This increase in costs was driven largely by the increase in sales and marketing

 

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headcount required to increase our customer base. Our sales and marketing compensation costs increased by $4.4 million from the year ended October 31, 2013 to the year ended October 31, 2014.

As a result of the growth in revenues in fiscal 2014, commissions increased by $2.1 million from the year ended October 31, fiscal 2013 to the year ended October 31, 2014.

General and administrative

General and administrative costs increased by $7.3 million, or 42.5%, from the year ended October 31, 2013 to the year ended October 31, 2014. This increase in costs was driven largely by a $4.9 million increase in compensation expense, $1.3 million increase in occupancy and other general and administrative costs and an increase in depreciation and amortization expense of $0.7 million related to infrastructure and leasehold improvements. These cost increases were required to facilitate the growth of our business.

Other income (expenses)

 

     Year ended October 31,  
     2013     2014     Change  
     Amount     % of
Revenue
    Amount     % of
Revenue
    Amount     %  
     (in thousands)  

Interest income (expense), net

   $ 19          $ (152       $ (171     (900 )% 

Foreign exchange loss

     (161     0.2        (3,044     3.0        (2,883     1790.7   

Income tax recovery (expense)

                   324        0.4        324        100.0   

Interest income (expense)

Interest income (expense) increased by $0.2 million primarily due to the interest on our revolving credit facility that was put into place in September 2014 and interest on debt that we entered into to finance acquisitions of capital assets.

Foreign exchange gain (loss)

Foreign exchange loss increased by $2.9 million primarily due to an increase in realized losses on foreign exchange forward contracts. From October 31, 2013 to October 31, 2014, the Canadian dollar depreciated against the U.S. dollar by 7%. The foreign exchange loss of $3.0 million reflects losses during the year of $1.4 million when settling foreign exchange contracts with an average exchange rate of C$1.05 equal to US$1.00, losses on the mark-to-market adjustment of outstanding forward contracts at October 31, 2014 of $1.2 million and revaluation of Canadian dollar-denominated assets and liabilities of $0.4 million.

Income tax expense (recovery)

We realized an income tax recovery in the year ended October 31, 2014 of $0.3 million as a result of recognizing a deferred tax asset, previously unrecognized, to offset a deferred tax liability that arose on the acquisition of Meal Metrics.

 

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Consolidated Statements of Operation by Quarter

 

     Apr 30,
2014
    Jul 31,
2014
    Oct 31,
2014
    Jan 31,
2015
    Apr 30,
2015
    Jul 31,
20151
    Oct 31,
2015
    Jan 31,
2016
 
     (in thousands)        

Revenue:

                

Subscription and support

   $ 21,411      $ 23,615      $ 25,312      $ 26,704      $ 27,927      $ 29,936      $ 32,548      $ 34,232   

Professional services and other

     3,401        2,682        2,378        1,916        2,112        2,050        2,189        2,243   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     24,812        26,297        27,690        28,620        30,039        31,986        34,737        36,475   

Cost of revenue:

                

Subscription and support

     4,909        4,901        5,241        6,378        7,579        7,750        7,897        7,637   

Professional services and other

  

 

 

 

2,704

 

  

 

 

 

 

3,031

 

  

 

 

 

 

2,918

 

  

 

 

 

 

1,808

 

  

 

 

 

 

1,813

 

  

 

 

 

 

2,144

 

  

 

 

 

 

2,500

 

  

 

 

 

 

2,275

 

  

  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

  

 

 

 

 

 

7,613

 

 

  

 

 

 

 

 

 

7,932

 

 

  

 

 

 

 

 

 

8,159

 

 

  

 

 

 

 

 

 

8,186

 

 

  

 

 

 

 

 

 

9,392

 

 

  

 

 

 

 

 

 

9,894

 

 

  

 

 

 

 

 

 

10,397

 

 

  

 

 

 

 

 

 

9,912

 

 

  

  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

  

 

 

 

 

 

17,199

 

 

  

 

 

 

 

 

 

18,365

 

 

  

 

 

 

 

 

 

19,531

 

 

  

 

 

 

 

 

 

20,434

 

 

  

 

 

 

 

 

 

20,647

 

 

  

 

 

 

 

 

 

22,092

 

 

  

 

 

 

 

 

 

24,340

 

 

  

 

 

 

 

 

 

26,563

 

 

  

  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

                

Product development

     7,503        8,108        7,648        7,515        8,206        8,050        9,015        8,979   

Sales and marketing

     4,815        5,334        6,394        6,247        5,962        6,726        8,551        7,883   

General and administrative

     5,290        6,443        7,469        6,006        5,777        7,475        9,183        12,633   

Loss from misappropriation plus costs

  

 

 

 

452

 

  

 

 

 

 

1,899

 

  

 

 

 

 

56

 

  

 

 

 

 

(41

 

 

 

 

 

18

 

  

 

 

 

 

(1

 

 

 

 

 

 

  

 

 

 

 

 

  

  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

  

 

 

 

 

 

18,060

 

 

  

 

 

 

 

 

 

21,784

 

 

  

 

 

 

 

 

 

21,567

 

 

  

 

 

 

 

 

 

19,727

 

 

  

 

 

 

 

 

 

19,963

 

 

  

 

 

 

 

 

 

22,250

 

 

  

 

 

 

 

 

 

26,749

 

 

  

 

 

 

 

 

 

29,495

 

 

  

  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

  

 

 

 

 

 

(861

 

 

 

 

 

 

 

 

(3,419

 

 

 

 

 

 

 

 

(2,036

 

 

 

 

 

 

 

 

707

 

 

  

 

 

 

 

 

 

684

 

 

  

 

 

 

 

 

 

(158

 

 

 

 

 

 

 

 

(2,409

 

 

 

 

 

 

 

 

(2,932

 

 

  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest income

  

 

 

 

7

 

  

 

 

 

 

0

 

  

 

 

 

 

(163

 

 

 

 

 

(124

 

 

 

 

 

(127

 

 

 

 

 

(203

 

 

 

 

 

(199

 

 

 

 

 

(324

 

Foreign exchange gain (loss)

  

 

 

 

917

 

  

 

 

 

 

1,025

 

  

 

 

 

 

(1,081

 

 

 

 

 

(1,049

 

 

 

 

 

177

 

  

 

 

 

 

(960

 

 

 

 

 

589

 

  

 

 

 

 

167

 

  

  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

  

 

 

 

63

 

  

 

 

 

 

(2,394

 

 

 

 

 

(3,280

 

 

 

 

 

(466

 

 

 

 

 

734

 

  

 

 

 

 

(1,321

 

 

 

 

 

(2,019

 

 

 

 

 

(3,089

 

Income taxes

  

 

 

 

 

  

 

 

 

 

 

  

 

 

 

 

 

  

 

 

 

 

 

  

 

 

 

 

 

  

 

 

 

 

 

  

 

 

 

 

 

  

 

 

 

 

 

  

  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  

 

 

$

 

 

63

 

 

  

 

 

 

$

 

 

(2,394

 

 

 

 

 

$

 

 

(3,280

 

 

 

 

 

$

 

 

(466

 

 

 

 

 

$

 

 

734

 

 

  

 

 

 

$

 

 

(1,321

 

 

 

 

 

 

 

 

(2,019

 

 

 

 

 

 

 

 

(3,089

 

 

  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Revenue:

                

Subscription and support

     86     90     91     93     93     94     94     94

Professional services and other

     14        10        9        7        7        6        6        6   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     100        100        100        100        100        100        100        100   

Cost of revenue:

                

Subscription and support

     20        19        19        22        25        24        23        21   

Professional services and other

     11        12        11        6        6        7        7        6   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

     31        30        29        29        31        31        30        27   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     69        70        71        71        69        69        70        73   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

                

Product development

     30        31        28        26        27        25        26        25   

Sales and marketing

     19        20        23        22        20        21        25        22   

General and administrative

     21        25        27        21        19        23        26        35   

Loss from misappropriation

     2        7        0        0        0        0        0        0   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     73        83        78        69        66        70        77        81   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (3     (13     (7     2        3        0        (7     (8
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest income

     0        0        (1     (0     (0     (1     (1     (1

Foreign exchange gain (loss)

     4        4        (4     (4     1        (3     2        0   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     0        (9     (12     (2     2        (4     (6     (8

Income taxes

     0        0        0        0        0        0        0        0   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     0     (9 )%      (12 )%      (2 )%      2     (4 )%      (6 )%      (8 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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(1) Subsequent to the original issuance of our interim unaudited condensed consolidated financial statements for the three and nine months ended July 31, 2015, we discovered an overstatement in the capitalization of internal use software and an understatement of amortization of internal use software. The overstatement of the internal use software asset occurred due to a material weakness in internal control over financial reporting related to the inadequate design of a control to verify the accuracy and integrity of operational data used to calculate financial results.

We have corrected the accounting for internal use software in the quarter ending July 31, 2015 reducing the internal use software asset on the balance sheet by $1.0 million, increasing product development expenses by $0.8 million and increasing subscription and support cost of goods sold by $0.2 million as an immaterial out of period adjustment. This adjustment increases the net loss and other comprehensive loss by $1.0 million in the quarter ending July 31, 2015. We have determined that no prior period financial statements were materially misstated as a result of the overcapitalization.

Capitalization and amortization of internal use software are non-cash items and therefore the out of period adjustment does not impact current or future cash balances. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Controls and Procedures” for a discussion of our material weaknesses in internal control over financial reporting and our remediation efforts to date.

Our quarterly revenue has increased sequentially for all periods presented, primarily due to an increasing number of customers and in the increased number of add-on applications that we have available to sell to new and existing customers. We expect both upselling to the existing customer base as well as new customer acquisitions to continue to be a significant driver of revenue growth. Our professional services revenue as a percentage of total revenue has declined with the continued growth of new customers’ onboarding through our subscription-based SmartPath model, as opposed to the traditional professional services model.

Our total costs and expenses continue to trend upward due to increased salary and related costs coinciding with an increase in the number of employees required to run our growing business. During the fiscal quarters ended January 31, 2015 and April 30, 2015, total costs and expenses declined marginally due to the impact the depreciation of the Canadian dollar against the U.S. dollar had on our Canadian denominated costs and expenses. Costs increased in the quarters ended October 31, 2015 and January 31, 2016 as a result of headcount increases as well as costs incurred as a result of a new lease for premises in Mississauga, Canada to facilitate continued headcount growth, including a $2.5 million lease abandonment charge recorded in the three months ended January 31, 2016.

Total gross profit margin has remained fairly consistent; however, there has been a shift in costs from professional services and other to subscription and support resulting from the reassignment of staffing from cost of professional services and other to cost of subscription and support relating to our SmartPath implementation and training offering. Gross profit margin increased to 73% during the first quarter of fiscal 2016 due to the continued depreciation in the Canadian dollar on Canadian denominated expenses and as headcount cost increases did not keep pace with revenue growth.

Product development costs fluctuate as a percentage of revenue based on increases in the number of fulltime employees and third-party development contractors used to enhance our existing product offerings, as well as the impact of the Canadian dollar on Canadian denominated expenses and the amount we capitalize as internal use software in each period. Product development costs increased from the three months ended April 30, 2014 to the three months ended July 31, 2014 due to the appreciation of the Canadian dollar against the U.S. dollar and a reduction in the amount that qualified for capitalization as internal use software in the period. Product development costs increased from the three months ended July 31, 2015 to the three months ended October 31, 2015, as we had maximized the amount of investment tax credits, or ITCs, on eligible expenditures on account of scientific research and development, reducing the amount recorded as an offset to such expenses.

Sales and marketing expenses as a percentage of revenue were generally consistent for the periods presented. The increase in sales and marketing costs is the result of increases in sales and marketing headcount

 

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required to increase our customer base and an increase in commissions and referral fees in line with our growth in revenues. Sales and marketing expenses in the quarter ended October 31, 2015 were higher primarily related to commission charges on the achievement of certain bonus quota objectives.

General and administrative expenses as a percentage of revenue increased in the quarter ended July 31, 2014 at which time we incurred additional costs related to additional leased facilities for our growing employee population and additional compensation costs as a result of headcount additions to support the growing business. General and administrative costs decreased in the quarters ending January 31, 2015 and April 30, 2015 primarily due to the impact of the depreciation of the Canadian dollar against the U.S. dollar and a recovery of $1.5 million related to the collection of historical sales tax amounts previously unapplied to certain customer billings. General and administrative expenses increased in the quarters ending October 31, 2015 and January 31, 2016 as a result of the costs associated with the lease of our new premises and the $2.5 million lease abandonment charge that was recorded in the three months ended January 31, 2016 related to our vacated facilities.

Foreign exchange gain and loss fluctuated significantly starting with the quarter ended January 31, 2014 as the fluctuation in the Canadian to U.S. dollar was very volatile which resulted in significant swings in the mark-to-market value of our foreign exchange contracts. With the introduction of hedge accounting in March 2015, mark-to-market fluctuations in our effective foreign exchange forward contracts are recorded in other comprehensive income until the contracts mature, at which point the gain or loss is included with operating expenses along with the item hedged. Foreign exchange fluctuations on ineffective hedges as well as Canadian dollar-denominated assets and liabilities continue to be recorded as foreign exchange gains and losses in other income and expenses.

Our quarterly results may fluctuate due to various factors affecting our performance.

Liquidity and capital resources

Since our inception, we have financed the growth of our business primarily with funds generated from the business, supplemented from time to time with bank financing to support growth in working capital needs and to finance acquisition activity. In February 2011, we completed a financing transaction with a private equity investor which provided net proceeds of $23.3 million. As of October 31, 2015 and January 31, 2016, we had $3.4 million and $4.9 million of cash, respectively. In September 2014, we entered into a Comerica Facility agreement that allowed for borrowing of up to $20.0 million, which we replaced in June 2015 with a new $40.0 million Wells Fargo Facility. On December 29, 2015, we amended the facility, increasing the amount available from $40.0 million to $50.0 million. As at January 31, 2016, we have drawn down $38.1 million of the available Wells Fargo Facility. We believe our cash, cash flows from operations and our Wells Fargo Facility will be sufficient to meet our working capital and capital expenditure requirements for at least 12 months.

Comerica facility

In September 2014, we entered into loan and security agreements with Comerica Bank, or Comerica, pursuant to which we were able to borrow up to an aggregate of $20.0 million (or the Canadian dollar equivalent) on a revolving basis. Advances under this revolving credit facility, or the Comerica Facility, were limited to a variable ceiling which was a function of our monthly recurring revenue less canceled subscription revenue, as adjusted by annualized renewal rate and revenue mix factors. Subject to the terms of the loan agreement, amounts borrowed under the Comerica Facility could be repaid and re-borrowed at any time, without penalty or premium, prior to the September 24, 2016 maturity date, at which time all amounts borrowed would be due and payable. Canadian dollar advances under the Comerica Facility bore interest at the Canadian prime rate plus 1.00% and U.S. dollar advances bore interest at the U.S. prime rate plus 1.00%. Under the Comerica Facility we were also able to enter into foreign exchange transactions with Comerica, in each case due no later than October 26, 2016.

 

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We made customary affirmative and negative covenants in connection with the Comerica Facility. In the event of a default, including, among other things, our failure to make any payment when due or our uncured default in the performance or observance of any term, covenant, condition or agreement we were required to perform, Comerica would be able to declare all obligations immediately due and payable. The Comerica Facility was collateralized by substantially all of our assets. The Comerica Facility was repaid in full and terminated on June 30, 2015 using proceeds from our Wells Fargo Facility, as further described below.

Wells Fargo facility

In June 2015, we entered into a senior secured credit facility, or the Wells Fargo Facility, with Wells Fargo Capital Finance Corporation Canada, or Wells Fargo, pursuant to which we may borrow up to an aggregate of $40.0 million (or the Canadian dollar equivalent) on a revolving basis. The Wells Fargo Facility was used to pay off and terminate the Comerica Facility, and for working capital, capital expenditures, and general corporate expenses. Advances under the Wells Fargo Facility are limited to a variable ceiling, which is a function of our subscription revenue for the most recently completed trailing twelve month period. On December 29, 2015, we amended the Wells Fargo Facility increasing the amount available from $40.0 million to $50.0 million and as at January 31, 2016, we had access to draw on the full $50.0 million in available funding. To date we have drawn $38.1 million. The amendment also waived an event of default that occurred on September 29, 2015 resulting from our failure to dissolve an inactive subsidiary within 90 days of the closing of the Wells Fargo Facility and extended the period in which all inactive subsidiaries must be dissolved to June 30, 2016. Subject to terms of the loan agreement, amounts borrowed under the Wells Fargo Facility may be repaid and re-borrowed at any time, without penalty or premium, prior to the June 30, 2020 maturity date, at which time all amounts borrowed are due and payable. Advances under the Wells Fargo Facility bear interest at LIBOR + 2.75% to 3.50%, based on available borrowing capacity under the Wells Fargo Facility. The Wells Fargo Facility is subject to an unused line fee equal to 0.375% per annum times the unused portion of the Wells Fargo Facility. Under the Wells Fargo loan agreement, we are subject to a financial covenant to maintain a minimum level of pro forma EBITDA for the most recently completed trailing consecutive twelve month period, as well as a specified minimum amount of liquidity, defined as the sum of unrestricted cash and cash equivalents, and available borrowing capacity under the revolver. The minimum liquidity required increases from $5.0 million at January 31, 2016 to $5.5 million at July 31, 2016, $6.0 million at October 31, 2016 and to $7.0 million at July 31, 2017.

We have made customary affirmative and negative covenants in connection with the Wells Fargo Facility that may restrict our business and financing activities. In the event of a default, including, among other things, our failure to make any payment when due or our uncured default in the performance or observance of any term, covenant, condition or agreement we are required to perform, Wells Fargo may declare all obligations immediately due and payable. The Wells Fargo Facility is collateralized by substantially all of our assets. Future credit facilities may require us to meet specified minimum financial measurements. A failure to meet any of these measurements could result in a default under the Wells Fargo Facility, which could cause all of the outstanding indebtedness under the Wells Fargo Facility to become immediately due and payable and terminate all commitments to extend further credit.

 

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Cash flows

The following summary of cash flows for the periods indicated has been derived from our consolidated financial statements included elsewhere in this prospectus:

 

     Years ended October 31,            Three months ended January 31,        
     2013      2014      2015            2015                  2016        
     (in thousands)         

Net cash provided by (used in) operating activities

   $ 1,705       $ (1,737    $ 5,196       $ (5,360    $ (4,986

Net cash provided by (used in) financing activities

     (410      4,538         15,903         7,826         13,361   

Net cash used in investing activities

     (5,268      (11,489      (22,163      (1,124      (6,854

Net increase (decrease) in cash

   $ (3,973    $ (8,688    $ (1,064    $ 1,342       $ 1,521   

Net cash provided by operating activities. Cash provided by operating activities consists of significant components of the statements of operations adjusted for changes in various working capital items including accounts receivable, other current assets, investment tax credits, accounts payable and accrued liabilities and deferred revenue. Cash provided by operating activities is influenced by the investment we make in personnel and infrastructure costs necessary to support the anticipated growth of the business, the increase in subscription and support revenue, and the timing of customer payments.

Our cash used in operating activities during the three months ended January 31, 2016 was primarily due to a net loss of $3.1 million adjusted for non-cash expenses of $6.7 million and offset by a net increase in working capital of $8.5 million. Non-cash expenses included a $2.5 million lease abandonment charge related to vacated facilities, $2.4 million of depreciation and amortization, a $1.1 million lease inducement charge related to our new premises, $1.0 million in stock-based compensation and a $0.5 million loss on disposal of fixed assets, offset by unrealized foreign exchange losses in the amount of $0.6 million. Net increases in working capital of $8.5 million were attributable primarily to a decrease in accounts payable and accrued liabilities of $6.3 million, an increase in accounts receivable of $1.9 million, an increase in other current assets of $0.6 million, and a net increase in investment tax credits recoverable of $0.4 million, offset by a $0.7 million increase in deferred revenue.

Our cash used in operating activities during the three months ended January 31, 2015 was primarily due to our net loss of $0.5 million adjusted for $1.0 million of net non-cash expenses and a net increase in working capital of $5.9 million. Non-cash expenses included $1.5 million of depreciation and amortization, $0.5 million in stock-based compensation, offset by unrealized foreign exchange gains of $1.0 million. Net increases in working capital of $5.9 million were attributable primarily to a decrease in accounts payable and accrued liabilities of $6.4 million, an increase in accounts receivable of $0.9 million, and a decrease in deferred revenue of $0.3 million offset by a decrease in investment tax credits recoverable in the amount of $1.8 million.

Our cash used in operating activities during the year ended October 31, 2015 was primarily due to our net loss of $3.1 million adjusted for $10.4 million of net non-cash expenses and a net increase in working capital of $2.1 million. Net non-cash expenses included $6.9 million of depreciation and amortization, $2.5 million in stock-based compensation, unrealized foreign exchange losses on forward contracts in the amount of $1.1 million and a $2.0 million increase in leasehold inducements related to a free rent period for a new leased facility. Net increases in working capital of $2.1 million were attributable primarily to an increase in accounts receivable of $4.5 million, an increase in other assets of $4.2 million, offset by an increase in accounts payable and accrued liabilities of $3.8 million, a decrease in investment tax credits recoverable of $2.3 and an increase in deferred revenue of $0.4 million.

 

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Our cash used in operating activities during the year ended October 31, 2014 was primarily due to our net loss of $11.0 million adjusted for $9.1 million of non-cash expenses and a net decrease in working capital of $0.2 million. Non-cash expenses included $5.3 million of depreciation and amortization, $2.1 million in stock-based compensation, and unrealized foreign exchange losses on forward contracts in the amount of $1.7 million. Net decreases in working capital of $0.2 million were attributable primarily to an increase in accounts payable and accrued liabilities of $7.2 million, an increase in deferred revenue of $1.2 million, offset by an increase in other current assets in the amount of $4.5 million and increases in accounts receivable and investment tax credits recoverable of $3.7 million in aggregate.

Our cash provided by operating activities during the year ended October 31, 2013 was primarily due to our net loss of $3.3 million adjusted for $4.8 million of non-cash expenses and a net decrease in working capital of $0.2 million. Non-cash expenses included $3.8 million of depreciation and amortization, $1.1 million in stock-based compensation, and unrealized foreign exchange gains on forward contracts in the amount of $0.1 million. Net decreases in working capital of $0.2 million were attributable primarily to an increase in accounts payable and accrued liabilities of $1.6 million, an increase in deferred revenue of $1.1 million, offset by an increase in investment tax credits recoverable in the amount of $2.3 million and increases in accounts receivable and other current assets of $0.1 million in aggregate.

Net cash used in investing activities. Our primary investing activities have consisted of business acquisitions, capital expenditures to purchase computer equipment, software licenses and internal use software, customer relationships, office equipment and leasehold improvements to our facilities necessary to support the expansion of our infrastructure and workforce. As our business grows, we expect our capital expenditures and our investment activity to continue to increase.

For the three months ended January 31, 2016, cash used in investing activities consisted of $4.2 million in connection with the purchase of capital equipment, $1.8 million related to software and internal use software, and a $0.9 million increase in restricted cash.

For the three months ended January 31, 2015, cash used in investing activities consisted of purchases of $0.8 million in capital equipment, $1.0 million related to internal use software and other intangibles, and $0.4 million related to the acquisition of customer relationships, offset by a $1.0 million reduction in restricted cash.

For the year ended October 31, 2015, cash used in investing activities consisted of purchases of $5.5 million in capital equipment and leasehold improvements, $5.8 million related to software, internal use software and other intangibles, $1.0 million related to restricted cash, and $9.8 million in connection with the acquisition of Nobility Health.

For the year ended October 31, 2014, cash used in investing activities consisted of purchases of $4.0 million in capital equipment and leasehold improvements, $2.5 million related to software and internal use software, $2.2 million related to restricted cash, and $2.5 million in connection with the acquisition of Meal Metrics and investment in other intangibles in aggregate.

For the year ended October 31, 2013, cash used in investing activities consisted of purchases of $3.1 million in capital equipment and leasehold improvements, $1.8 million related to internal use software and $0.6 million in connection with the acquisition of customer relationships, offset by a tenant inducement in the amount of $0.2 million.

Net cash provided by (used in) financing activities. Our primary financing activities have consisted of proceeds from equipment debt obligations issued to finance equipment leases and purchased software costs as well as draws on our revolving credit facility.

 

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During the three months ended January 31, 2016, cash received in financing activities consisted of $15.1 million in net draws from our revolving credit facility, offset by $1.6 million in debt and term loan repayments and a $0.1 million payment related to financing costs.

During the three months ended January 31, 2015, we borrowed additional funds of $9.2 million from our revolving credit facility net of a $2.0 million repayment and repaid debt and term loans in the amount of $1.5 million.

During the year ended October 31, 2015, cash provided by financing activities consisted of net draws of $19.9 million from our revolving credit facilities, and $0.5 million from issuance of debt, offset by the repayment of $2.9 million of debt, $0.6 repayment of term loans and the payment of deferred financing and offering costs of $0.4 million and $0.6 million respectively.

During the year ended October 31, 2014, cash provided by financing activities consisted of $3.2 million from a revolving credit facility, $1.6 million from the issuance of a term loan, $2.9 million from the issuance of long-term liabilities, offset by $2.2 million in repayment of long-term liabilities, and $1.1 million of capitalized deferred initial public offering costs.

During the year ended October 31, 2013, we repaid term loans in the amount of $0.3 million and advanced loans in the amount of $0.1 million.

Contractual obligations and commitments

Our principal commitments consist of obligations under leases for our office space, non-cancelable purchase obligations relating to the purchase of third-party software and services, computer equipment, furniture and fixtures. The following table summarizes these contractual obligations at October 31, 2015:

 

     Payment Due by Period  
     Total      Less than
1 Year
     1-2 Years      3-5 Years      More
than 5
years
 
     (in thousands)  

Operating lease obligations

   $ 34,847       $ 864       $ 5,398       $ 10,334       $ 18,251   

Non-cancelable purchase commitments

     7,073         5,339         1,734                   

Capital leases and long-term debt

     3,522         3,057         465                   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

  

 

$

 

45,442

 

  

  

 

$

 

9,260

 

  

  

 

$

 

7,597

 

  

  

 

$

 

10,334

 

  

  

 

$

 

18,251

 

  

  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

In April 2015 we entered into a lease expiring in 2027 to occupy approximately 185,000 square feet in a facility in Mississauga, Canada. We vacated pre-existing premises to occupy the new facility in December 2015. In the three months ended January 31, 2016, we recorded a lease abandonment charge of $2.5 million related to the vacated premises equal to the fair value of our estimated future net cash flows under the existing agreements less estimated sublet income based on current market conditions. At January 31, 2016, the undiscounted future minimum lease payments related to vacated facilities are $2.1 million and are included above in operating lease obligations.

Off-balance sheet arrangements

During the periods presented, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

 

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Related-party transactions

Please refer to “Certain Relationships and Related-Party Transactions” for a discussion of transactions between us and related parties.

Controls and Procedures

A company’s internal control over financial reporting is a process designed by, or under the supervision of, a company’s principal executive and principal financial officers, or persons performing similar functions, and effected by a company’s board of directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with generally accepted accounting principles. As a private company, we have designed our internal control over financial reporting to provide reasonable assurance to our management and board of directors regarding the preparation and fair presentation of financial statements. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

Management has identified three material weaknesses in internal controls over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of a company’s annual or interim financial statements will not be prevented or detected on a timely basis. The restatements corrected errors related to a misappropriation of assets through an employee fraud and an error in the capitalization of internal use software. These material weaknesses and management’s remediation efforts are set out below.

Misappropriation of Assets Restatement

In July 2014, we discovered irregularities relating to certain credit card purchases made by our former accounting manager. On July 15, 2014, we began an internal investigation utilizing the assistance of external legal and forensic accounting advisors. The investigation revealed that between May 2009 and July 9, 2014, the accounting manager incurred unauthorized charges totaling approximately $6.6 million on a corporate credit card. Our investigation revealed that the accounting manager had unrestricted access to the electronic credit card portal, allowing the accounting manager to conceal the credit card statements, make online payments to pay the credit card balance and record manual journal entries to conceal the nature of the purchases by characterizing them as expenditures within sales and marketing such as travel, trade shows and prospecting costs. The accounting manager’s control of the online credit card portal allowed her to bypass our internal process of recording credit card purchases through the expense reporting process followed by all other cardholders. Our investigation did not identify any misconduct on the part of any of our other employees. Following the discovery of the misappropriation of funds, the accounting manager’s employment was terminated for cause. Although we are in the process of attempting to recover amounts misappropriated by the former accounting manager and third parties that we believe assisted in the misappropriation, there can be no assurance that we will be successful in such efforts. Through January 31, 2016, we have recovered $0.3 million worth of assets.

In connection with the investigation of this loss from misappropriation, we identified certain material weaknesses in our internal control over financial reporting. The following material weaknesses allowed a misappropriation of funds to be conducted over a prolonged period of time without our detection:

 

    Inadequate segregation of duties within significant accounts or processes. We identified instances where there was insufficient segregation of duties that could lead to a material error in financial reporting and/or the misappropriation of assets. Insufficient segregation of duties in the administration of our corporate credit card process allowed the misappropriation of funds to occur.

 

   

Inadequate controls over the initiation, approval and processing of manual journal entries. We identified a weakness in the controls over the initiating, approving and processing of manual journal

 

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entries which evidences a lack of appropriate segregation of duties such that the same person could initiate, approve and process certain manual journal entries. Insufficient segregation of duties in the initiation, approval and processing of journal entries allowed the misappropriation of funds to be concealed.

We have completed our remediation efforts related to these material weaknesses which include, among other things, hiring additional personnel, improving the segregation of duties among incompatible duties, redesigning our credit card program administration, improving manual journal entry process, enhancing our Code of Business Conduct and Ethics and introducing a whistleblower telephone line. The actions that were taken were subject to senior management review and audit committee oversight. Management believes these efforts have effectively remediated the material weakness in the first quarter of 2016. These remediation efforts are more fully described below.

 

    Hired additional personnel. In the lead up to and preparation for our initial public offering, we identified the need for additional financial accounting and controls expertise within our finance function. As a result, in fiscal 2014 we hired a Senior Vice President of Finance and a Director of Finance. Improvements in controls undertaken in 2014 uncovered the fraudulent activities. In fiscal 2015 we hired a new Chief Financial Officer and a Director of Internal Controls. We also hired three additional internal legal counsel throughout fiscal 2014 and fiscal 2015, including a Vice President, Legal & Compliance.

 

    Improved segregation of duties. With the assistance of third-party advisors, we have conducted an initial assessment of our segregation of duties as it relates to access to our accounting software applications and processing of financial accounting activities. We developed new user profiles to separate accounting roles to increase the effectiveness of our segregation of duties. In those areas where we were not able to practically achieve appropriate levels of segregation of duties, we implemented compensating controls including review, approval and oversight to mitigate the risks of error and misappropriation.

 

    Redesigned our credit card program administration. We have redesigned our credit card program administration to include the following, among other things:

 

    We have three individuals with administrative rights to the online corporate credit card program. The administrators do not have a corporate credit card. The administrators review expenditures made by employees and the nature of such expenditures through the utilization of online tools provided by the credit card issuer. Unusual transactions are flagged and investigated.

 

    We have disabled the ability to make credit card payments online. Credit card payments are now made by wire and are subject to processes and controls to ensure that there is appropriate support prior to issuing payment.

 

    Improved manual journal entry process. We have improved the controls and procedures related to journal entries to include improved segregation of duties including approval of all manual journal entries by an employee who is neither the initiator nor processor of the journal entry. In those limited instances where the initiator is also the approver, we review these journal entries on a monthly basis to identify unusual transactions.

 

   

Enhanced Code of Business Conduct and Ethics and Whistleblower Line. We have adopted an enhanced Code of Business Conduct and Ethics applicable to all of our directors and employees, including our Chief Executive Officer, Chief Financial Officer, principal accounting officers, and other persons performing similar functions, which is a “code of ethics” as defined in Item 16B of Form 20-F promulgated by the SEC and which is a “code” under National Instrument 58-101-Disclosure of Corporate Governance Practices of the CSA. We introduced comprehensive training on the Code of Business Conduct and Ethics and require annual acknowledgment from all employees that they have read and understand the code of ethics. We have engaged a third-party service provider to provide a

 

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whistleblower line to enhance accountability and transparency by enabling all employees to voice concerns in a responsible and effective manner when they discover information which they believe shows serious malpractice and non-compliance with our Code of Business Conduct and Ethics.

Internal Use Software Out of Period Adjustment

In connection with our fiscal 2015 audit, we discovered an overstatement in the capitalization of internal use software and an understatement of amortization of internal use software that had accumulated in fiscal 2014 and 2015. We have corrected the accounting for internal use software in the quarter ending July 31, 2015 reducing the internal use software asset on the balance sheet by $1.0 million, increasing product development expenses by $0.8 million and increasing subscription and support cost of goods sold by $0.2 million as an immaterial out of period adjustment. This adjustment increases the net loss and other comprehensive loss by $1.0 million in the quarter ending July 31, 2015. We have determined that no prior period financial statements were materially misstated as a result of the overcapitalization. See “Consolidated Statements of Operation by Quarter.”

Management has concluded that a material weakness in internal control over financial reporting existed in the calculation of the capitalization of internal use software. Specifically, we did not adequately design a control to verify the accuracy and integrity of operational data used to calculate the capitalization of internal use software.

Management has improved the design of the control over verifying the accuracy and integrity of operational data used to calculate the capitalization of internal use software to include ensuring completeness and accuracy of the underlying data. Although management has redesigned the control, management is currently waiting for a sufficient amount of time to lapse in order to permit further testing of the effectiveness of the redesigned control.

The actions we have and will continue to take are subject to continued review supported by confirmation and testing by management as well as audit committee oversight. As we continue to evaluate and work to improve our internal control over financial reporting, we may take additional measures to address any additional control deficiencies we may identify. While we are implementing a plan to remediate the remaining material weakness, we cannot assure you that we will be able to remediate this weakness, which could impair our ability to accurately and timely report our financial position, results of operations or cash flows. See “Risk Factors—Risk Relating to Our Business—Our financial statements provide disclosure relating to the misappropriation of assets prior to July 2014 by a former employee that was conducted over an extended period of time. This misappropriation was enabled by material weaknesses in our internal control over financial reporting relating to inadequate segregation of duties and inadequate controls over the initiation, approval and processing of manual journal entries. Separate from the misappropriation, we restated our financial statements for the three and nine months ended July 31, 2015 due to an over-capitalization of internal use software and an understatement of amortization of internal use software. These errors occurred due to a material weakness in the design of a control to verify the accuracy and integrity of operational data used to calculate the capitalization of internal use software. If we fail to remediate one or more of our material weaknesses, or if we are unable to implement and maintain effective internal control over financial reporting, we might not be able to report financial results accurately and on a timely basis or prevent fraud. Additionally, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common shares may be negatively affected.”

Critical accounting policies and estimates

Our financial statements are prepared in conformity with U.S. GAAP. We will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the

 

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reporting period. Actual results could differ from those estimates. To the extent that there are material differences between our estimates and our actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected. See also Note 2 of our consolidated financial statements included elsewhere in this prospectus for information about these critical accounting policies as well as a description of our other significant accounting policies.

In many cases, the accounting treatment of a particular transaction is specifically dictated by U.S. GAAP and does not require management’s judgment in its application, while in other cases, significant judgment is required in selecting among available alternative accounting standards that allow different accounting treatment for similar transactions. We consider these policies requiring significant management judgment to be critical accounting policies. These critical accounting policies are:

 

    Revenue recognition and related deferred revenue;

 

    Capitalization of internal use software costs;

 

    Fair value of stock-based compensation;

 

    Fair value of purchased intangible assets in a business combination

 

    Recoverability of intangible assets; and

 

    Realization of tax assets and related components of the valuation allowance.

A description of our critical accounting policies and judgments for those areas are presented below. In addition, please refer to the Notes to Consolidated Financial Statements for further discussion of our accounting policies.

Revenue recognition and deferred revenue

We generate revenue from two sources: (1) subscription and support; and (2) professional services and other. Subscription and support revenue includes subscription fees from customers accessing its cloud-based application suite and support fees from customers purchasing support. Subscription arrangements with customers do not provide the customer with the right to take possession of the software supporting the cloud-based application service at any time. Subscription arrangements provide customers with access to PointClickCare’s cloud-based application as updated from time to time, and access to our help desk service. Professional services revenue includes activities such as configuration, data migration, integration and training services. Other revenue consists primarily of referral fees from partner and reseller agreements. We commence revenue recognition for all revenue streams when all of the following conditions are met:

 

    There is persuasive evidence of an arrangement;

 

    The service is being provided to the customer;

 

    The collection of the fees is reasonably assured; and

 

    The amount of fees to be paid by the customer is fixed or determinable.

In most instances, revenue from new customer acquisition is generated under subscription and services sales agreements with multiple elements, comprised of subscription and support fees from customers accessing our cloud-based platform and professional services. We evaluate each element in a multiple-element arrangement to determine whether it represents a separate unit of accounting. An element constitutes a separate unit of accounting when the delivered item has standalone value and delivery of the undelivered element is probable and within our control. Subscription and support have standalone value because we routinely sell them separately. Professional services have standalone value because we have sold professional services separately and there are several third-party vendors certified by PointClickCare that routinely provide similar professional services to our customers.

 

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We allocate revenue to each element in an arrangement based on a selling price hierarchy. The selling price for a deliverable is based on its vendor-specific objective evidence, or VSOE, if available, third-party evidence, or TPE, if VSOE is not available, or estimated selling price, or ESP, if neither VSOE nor TPE is available. As we have been unable to establish VSOE or TPE for the elements of its arrangements, we established the ESP for each element primarily by considering the weighted average of actual sales prices of professional services sold on a standalone basis and subscription and support including various add-on applications when sold together without professional services, and other factors such as gross margin objectives, pricing practices and growth strategy.

Subscription and support revenue

Subscription revenues are recognized ratably over the contract period commencing when the subscription service is made available to the customer. Subscriptions generally do not have a fixed term, but provide for cancellation with one month’s notice. An insignificant number of contracts have fixed contractual terms from one to three years. We charge in advance for contracts with fixed contractual terms. Amounts charged in advance for fixed contractual terms are deferred and recognized on a straight line basis over the term of the fixed contractual term as services are performed. For contracts that do not have a fixed contractual term, we recognize revenue on a monthly basis as services are performed.

In November 2013, the Company introduced a new implementation and training delivery model called SmartPath. SmartPath is a prerecorded and web-based training portal allowing customers unlimited access to prerecorded and live training content. Customers can subscribe to the Company’s software as a service with or without SmartPath. Prior to the introduction of SmartPath, all new customers contracted for implementation and training services for a separate fee, which is our traditional model. For new customers that subscribe under the SmartPath model, separate fees for implementation services are not charged. Customers can chose to subscribe to the Company’s services under either the traditional or SmartPath model.

The Company has determined that for customers subscribing to the Company’s services under the SmartPath model, subscriptions are a multi element arrangement including subscription and support and implementation services. The Company has also determined that the subscription and support consideration earned under the SmartPath model is contingent on the Company continuing to provide the subscription services. For customers choosing to subscribe for the Company’s services under the SmartPath model, there is no noncontingent consideration to allocate to the implementation services, as such all revenue is allocated to subscription and support and recognized on a monthly basis. Costs related to performing implementation services for SmartPath customers are expensed as incurred.

The subscription agreements generally provide service level commitments of 99.6% uptime for each calendar year, excluding scheduled maintenance. The failure to meet this level of service availability could result in a customer’s immediate cancellation of its agreement. Upon cancellation for a breach of the service level commitment, we could be required to refund any prepaid subscription fees. As the majority of our customers are on month-to-month contracts, the value of any such refund would approximate one month’s subscription fees. In light of our historical uptime performance, we do not currently have any liabilities on our balance sheet related to these service level commitments.

Support revenue when billed separately is recognized on a straight line basis over the contract period.

Professional and other revenue

The majority of our professional services contracts are on a fixed fee basis and are recognized using the proportional performance method based on hours incurred as the project progresses. Costs related to professional services are expensed as incurred.

 

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Other revenue includes referral fees generated under partner and reseller agreements and are recognized when earned, generally on a monthly basis over the term of the referral entitlement period.

Internal use software development costs

We capitalize certain development costs incurred in connection with our internal use software. These capitalized costs generally relate to the development of additional applications that are integrated with our platform that we host and are accessed by our customers on a subscription basis. Costs incurred in the preliminary stages of development are expensed as incurred. Once an application has reached the development stage, internal and external costs, if direct and incremental, are capitalized until the software is substantially complete and ready for its intended use. Capitalization ceases upon completion of all substantial testing. We also capitalize costs related to specific upgrades and enhancements when it is probable the expenditures will result in additional functionality. Capitalized costs are recorded as part of intangible assets. Maintenance and training costs are expensed as incurred. Internal use software is amortized on a straight line basis over its estimated useful life, generally three to seven years. Management evaluates the useful lives of these assets on an annual basis and tests for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets. There were no impairments to internal use software during the years ended October 31, 2013, 2014 and 2015 or in the three months ended January 31, 2016.

We exercise judgment in determining the point at which various projects may be capitalized, in assessing the ongoing value of the capitalized costs and in determining the estimated useful lives over which the costs are amortized. To the extent that we change the manner in which we develop and test new features and functionalities related to our solutions, re-assess the ongoing value of capitalized assets or the estimated useful lives over which the costs are amortized, the amount of internal-use software development costs that are capitalized and amortized could change in future periods.

Accounting for stock-based compensation

Prior to the completion of this offering, we have maintained a 2012 Amended and Restated Stock Option Plan, or the 2012 Plan, for the purpose of granting stock options to our employees and directors. Under the 2012 Plan, options to purchase common shares are granted at an exercise price of not less than the market value on the effective date of the grant. Options generally vest on a straight line basis over four years and have a maximum life of ten years. In connection with the completion of this off