Management s Discussion & Analysis For the three and six month interim period ended June 30, Medworxx Solutions Inc. 700 121 Richmond St W. Toronto, ON M5H 2K1
This Management s Discussion and Analysis ( MD&A ) comments on the financial condition and operations of Medworxx Solutions Inc. ( Medworxx or the Company ), for the three and six months, and updates our MD&A for fiscal year. The information contained herein should be read in conjunction with the Consolidated Financial Statements and Auditor s Report for fiscal and the unaudited Interim Consolidated Financial Statements for the three and six months,. The Company prepares its Consolidated Financial Statements in accordance with International Financial Reporting Standards ( IFRS ) as set out in the Handbook of the Canadian Institute of Chartered Accountants ( CICA Handbook ). In 2010, the CICA Handbook was revised to incorporate IFRS, and requires publicly accountable enterprises to apply such standards effective for years beginning January 1, 2011. Accordingly, the Company has reported on this basis in these consolidated financial statements. All financial information contained in this MD&A and in the consolidated financial statements has been prepared in accordance with IFRS except for certain Non IFRS Measures on page 21 of this MD&A. COMPANY PROFILE Founded in 2004 and based in Toronto, Ontario, Medworxx Solutions Inc. (Medworxx) delivers health information technology solutions to hospitals in Canada, the United States and the United Kingdom. Medworxx helps more than 300 hospitals meet daily challenges in patient flow and requirements in compliance and education. Powered by principles of utilization management, Medworxx Patient Flow Solution is based on clinical evaluations of every patient, every day from admission to discharge. Medworxx Patient Flow data enables hospitals to assess and analyze patient flow barriers, interruptions and delays to optimize care intensity, advance care plans and to gain insight into strategic indicators of quality and performance. Medworxx Patient Flow serves more than 34% of acute care beds in Canada. Medworxx Compliance and Education platform enables healthcare organizations to create and deploy relevant content, and to support regulatory and compliance requirements. Hospitals engage the power of knowledge to increase competency, improve quality, reduce costs and simplify distribution of information to staff. Medworxx s Management Team is comprised of experienced leaders in healthcare, sales, marketing, IT development, and finance. Management s Discussion and Analysis Page 2
COMPANY HIGHLIGHTS The Annualized Contract Value of recurring revenue at June 30, was 4.9M as compared to 4.8M at December 31,, an increase of 2.1%. Revenue for the three months, was 1,443,007, representing a decrease of 6.2% over revenues of 1,538,648 for the three months,. Revenue for the six months, was 3,042,312, representing an increase of 1.7% over revenues of 2,991,454 for the six months ended June 30,. The reason for the decrease in revenue for the three months, versus June 30, was the absence of new licence sales in either the Patient Flow or Compliance and Education platforms primarily due to the delays in the sales/ procurement cycle. Management believes with the sales pipeline being developed that the business will continue to grow in the future quarters. Revenue from the Patient Flow Platform for the three months, decreased to 1,043,200 from revenues of 1,160,951 for the three months, while revenue for the six month, increased to 2,230,638 from revenues of 2,084,726 for the six months,, an increase of 145,911 representing a 7.0% growth. Revenue from the Compliance and Education Platform for the three months, decreased to 362,765 from revenues of 369,343 for the three months,. Revenue for the six months, decreased to 765,742 from revenues of 875,502 for the six months ended June 30,, a decrease of 109,760 representing a decline of 12.5%. International deployment of the Medworxx Patient Throughput Review ( PTR ) program (previously referred to as the Appropriate Length Stay Audit ALSA ) is underway. Since the official launch of the program in June, thirty two PTRs have been delivered in five countries; Australia, Canada, France, the United States and the United Kingdom. PTR s have been performed in several hospitals including: Jewish General Hospital, QC, Canada; Bedford Hospitals NHS Trust, UK; St. Joseph's Healthcare, ON, Canada; Niagara Health System, ON, Canada (Greater Niagara General and Welland Hospital); Capio Santé, France; Derby Hospitals NHS Foundation Trust, UK; and Groupe Hospitalier Paris Saint Joseph, France. Management s Discussion and Analysis Page 3
COMPANY STRATEGY Medworxx strategy is highlighted as follows: To become the de facto standard platform for patient flow management To expand distribution channels by developing relationships with healthcare management consulting organizations in new and existing markets To continuously develop or acquire synergistic products To enter new healthcare related markets in international geographies using existing technologies To leverage the Medworxx Patient Flow software Patient Throughput Review program as a review and diagnostic solution, prior to hospitals implementing the solution operationally Management s Discussion and Analysis Page 4
Operating Results Medworxx Solutions Inc., Summary Financial Analysis: Three months Three months % Increase ended June 30 % Increase Revenues 1,443,007 1,538,648 (6.2%) 3,042,312 2,991,454 1.7% Cost of sales 184,925 136,783 35.2% 386,350 284,284 35.9% Selling, marketing and administrative expenses 1,260,355 1,244,239 1.3% 2,525,148 2,419,773 4.4% Research and development expenses 424,798 427,459 (0.6%) 900,940 882,577 2.1% Net Loss (430,238) (236,319) (742,188) (558,135) SUMMARY OF OPERATING RESULTS This report analyses the results for the three and six month periods,, with comparisons to the same periods for the prior year. The interim unaudited consolidated financial statements for the period ended June 30, (the Financial Statements) form an integral part of this Management s Discussion and Analysis. The Financial Statements can be found at www.sedar.com. Medworxx Solutions Inc., Summary of Operating Results: Three months Three months ended June 30 Revenue 1,443,007 1,538,648 3,042,312 2,991,454 Net Loss (430,238) (236,319) (742,188) (558,135) Net Loss per Share Basic (0.016) (0.009) (0.028) (0.021) Weighted average number of shares outstanding Basic 26,937,587 26,330,127 26,824,426 26,304,506 Net Loss per Share Fully Diluted (0.016) (0.009) (0.028) (0.021) Weighted average number of shares outstanding Diluted 28,090,336 27,540,208 27,940,036 27,595,177 Management s Discussion and Analysis Page 5
Types of Revenue The Company generates revenue from the sale of software perpetual licences, sale of annual renewable software licences, maintenance and hosting services, and consulting services. Certain agreements provide for the delivery of application software and continuing post contract services (PCS), such as support and maintenance for the application software sold. Revenue is allocated to multiple elements using the relative fair value method. For the three months,, the Company generated total revenue of 1,443,007, representing a decrease of 6.2% over revenue of 1,538,648 for the same period last year. The decrease is attributable to no new licence sales being closed in the second quarter for either the Patient Flow or Compliance and Education platform due to delays in the procurement cycles of the Company s prospective clients. Management believes with the sales pipeline being developed that the business will continue to grow in the future quarters. For the six months,, the Company generated total revenue of 3,042,312, representing an increase of 1.7% over revenue of 2,991,454 for the same period last year. The increase is attributable to growth in the Patient Flow platform of 7.0% across multiple products and geographies. Management s Discussion and Analysis Page 6
Revenue Composition Management s Discussion and Analysis Page 7
Recurring revenue includes annual renewable software licence fees, maintenance services and hosting fees. Recurring revenue comprised of 84% ( 77%) of total revenue for the three months, and 79% ( 77%) of total revenue for the six months,. Recurring revenue is a non IFRS measure. Annual renewable software licences include the right to use the software for a year, technical support and maintenance services. These arrangements are accounted for as royalties as the customer only has the right to use the software for a specified period of time. These services are similar in substance to a subscription as the Company does not sell one year licences without technical support and maintenance services and the revenue is recognized on a straight line basis over the term of the agreement from the date the licence term commences. Revenue from annual renewable software licences for the three months, was 728,809, representing a 0.5% decrease from revenue of 732,673 for the three months,. For the six months, revenue was 1,463,112, representing a 3.5% increase from revenue of 1,414,187 for the six months,. Software perpetual licences and other perpetual revenue are accounted for as sales of products, as the customer has a perpetual right to use the software freely and the Company has no remaining obligations to perform after delivery of the software. The revenue from these products is recognized when the Company has transferred to the customer the significant risks and rewards of ownership of the software, the Company does not retain continuing managerial involvement with or effective control over the software, the amount of revenue can be measured reliably, it is probable the economic benefits associated with the sale will flow to the Company and the costs incurred or to be incurred in respect of the transaction can be measured reliably. These conditions generally are met when the application software has been delivered. Revenue from software perpetual licences for the three months, was 44,782 compared to revenue of 234,119 for the three months,. For the six months, revenue was 201,176 compared to revenue of 391,314 for the six months,. The reason for the decrease in revenue was the absence of any new licence sales in either the Patient Flow or Compliance and Education platforms primarily due to the delays in the sales/ procurement cycle. As part of the sale of either a perpetual or an annual renewable licence, a client can acquire, for a separate fee, maintenance and support services for the software. Also accounted as maintenance and support, the client may Management s Discussion and Analysis Page 8
also acquire hosting services from the Company whereby the software is hosted on the Company s servers and the client is charged a recurring monthly fee for these services. These maintenance and support services are renewable by the client on an annual basis as of the anniversary date of software purchase. Given the nature of this revenue stream and high probabilities of renewals, management classifies this revenue stream as recurring. Maintenance and support revenue for the three months, was 482,297, representing a 3.2% increase from revenue of 467,512 for the three months,. For the six months, revenue was 947,632, representing a 4.6% increase from revenue of 906,049 for the six months ended June 30,. Consulting Services include installation, implementation, training, and integration related to Medworxx software. Customers are charged on a time and materials basis. Consulting services revenue for the three months ended June 30, was 187,118 representing a 79.3% increase in revenue of 104,343 for the three months ended June 30,. For the six months, consulting services revenue was 430,396, representing a 53.8% increase from revenue of 279,903 for the six months,. The revenue growth of the Company has been derived from the growth of the Patient Flow platform and partially offset by the decline in revenue in the Compliance and Education platform. The patient flow platform increased by 7.0% to 2,230,638 for the six months, from 2,084,726 for the six months,. Management s Discussion and Analysis Page 9
The following table highlights Revenue by product information for the eight consecutive quarters, : Revenue by Product Q2 Q1 Q4 Q3 Q2 Q1 2012 Q4 2012 Q3 Compliance & Education () 362,765 402,977 471,613 439,664 369,343 506,159 383,398 1,174,537 Growth on Prior Year's Quarter (1.8%) (20.4%) 23.0% (62.6%) (27.7%) 28.4% (21.2%) 200.7% Growth on Prior Quarter (10.0%) (14.6%) 7.3% 19.0% (27.0%) 32.0% (67.4%) 129.9% Patient Flow () 1,043,200 1,187,438 1,064,800 919,436 1,160,951 923,775 852,068 885,115 Growth on Prior Year's Quarter (10.1%) 28.5% 25.0% 3.9% 35.0% 13.6% 25.0% 37.9% Growth on Prior Quarter (12.1%) 11.5% 15.8% (20.8%) 25.7% 8.4% (3.7%) 2.9% Other () 37,042 8,890 13,396 27,428 8,353 22,872 81,083 25,310 Growth on Prior Year's Quarter 343.5% (61.1%) (83.5%) 8.4% (79.9%) (53.6%) (0.4%) (72.8%) Growth on Prior Quarter 316.7% (33.6%) (51.2%) 228.4% (63.5%) (71.8%) 220.4% (39.1%) Total () 1,443,006 1,599,305 1,549,808 1,386,529 1,538,647 1,452,806 1,316,548 2,084,962 Growth on Prior Year's Quarter (6.2%) 10.1% 17.7% (33.5%) 8.9% 15.6% 5.4% 85.2% Growth on Prior Quarter (9.8%) 3.2% 11.8% (9.9%) 5.9% 10.3% (36.9%) 47.6% While revenue decreased in the second quarter of over last quarter and prior year s quarter, the recurring revenue did increase. The reason for the decrease in revenue for the three months, versus June 30, was the absence of new licence sales in either the Patient Flow or Compliance and Education platforms primarily due to the delays in the sales/ procurement cycle. Management believes with the sales pipeline being developed that the business will continue to grow in the future quarters across multiple geographies. Medworxx is working to build its distribution channels in Canada, the United States, the United Kingdom, Australia, and France. Revenue for the three months, was approximately 86.5% (72.8% ) from Canadian clients, 6.6% (16.7% ) from the United Kingdom clients, and 6.9% (9.1% ) from United States clients. The Company s revenue by geographic region is as follows: Three months Three months Canada 1,247,924 1,120,207 2,565,378 2,341,531 UK 95,944 257,441 253,326 324,805 USA 99,139 139,999 185,425 304,118 France 38,183 Management s Discussion and Analysis Page 10
The Company defines Annualized Contract Value ( ACV ) of recurring revenue as the contracted annual renewable software licence fees, maintenance services and hosting fees. The ACV of recurring revenue at June 30, with existing clients was 4,901,752 as compared to 4,891,146 at March 31, and as compared to 4,810,269 at June 30,, a 1.9% increase. The growth in ACV of recurring revenue is comprised of growth of 8%, 247,361 for the Patient Flow platform, and reduction in Compliance and Education platform of 11%, (149,076) and in Other of 14%, (6,802). As the full value of such contracts is recognized as revenue over 12 months, the growth in this value is an important metric for the Company. This is a non IFRS measure. Management s Discussion and Analysis Page 11
Medworxx Patient Flow platform, consisting of three modules Critical Criteria, Bed Management, and Forms and Assessment, is licensed on a per bed basis and the revenue generated per bed is primarily dependent on a number of factors such as the number of beds licensed, modules purchased, price increases and support upgrades. The following table highlights: the Annualized Contract Value ( ACV ) of Patient Flow recurring revenue the contracted annual renewable software licence fees, maintenance services and hosting fees related to the Patient Flow platform; the revenue generated per bed the ACV, less revenue generated from Patient Throughput Reviews, related to the number of beds licensed; and modules licensed represents the total number of modules sold for the eight consecutive quarters, : Revenue Generating Units Q2 Q1 Q4 Q3 Q2 Q1 2012 Q4 2012 Q3 ACV of Patient Flow recurring revenue 3,661,849 3,634,342 3,520,904 3,479,080 3,414,488 3,208,550 2,956,441 2,956,024 Growth on Prior Years Quarter 7.2% 13.3% 19.1% 17.7% 18.1% 28.0% Growth on Prior Quarter 0.8% 3.2% 1.2% 1.9% 6.4% 8.5% 0.0% 2.2% Total beds under licence 28,358 28,358 27,816 27,598 27,598 27,578 26,469 26,584 Growth on Prior Years Quarter 2.8% 2.8% 5.1% 3.8% 6.2% 26.8% Growth on Prior Quarter 0.0% 1.9% 0.8% 0.0% 0.1% 4.2% (0.4%) 2.3% Average revenue generated per bed () 124.87 123.90 122.24 121.69 119.35 116.34 111.69 111.20 Growth on Prior Years Quarter 4.6% 6.5% 9.4% 9.4% 7.3% 1.0% Growth on Prior Quarter 0.8% 1.4% 0.5% 2.0% 2.6% 4.2% 0.4% (0.1%) Total modules licensed 40,025 40,025 38,773 37,754 34,678 34,548 32,010 32,125 Growth on Prior Years Quarter 15.4% 15.9% 21.1% 17.5% 10.5% 27.3% Growth on Prior Quarter 0.0% 3.2% 2.7% 8.9% 0.4% 7.9% (0.4%) 2.4% Average revenue generated per licence () 88.47 87.78 87.69 88.95 94.98 92.87 92.36 92.02 Management s Discussion and Analysis Page 12
Expenses Operating expenses before loss/gain on foreign exchange and interest on long term debt for the three months, were 1,685,153, an increase of 0.8% over expenses of 1,671,698 for the three months,. For the six months, operating expenses were 3,426,088, an increase of 3.7% over expenses of 3,302,350 for the six months,. The increase is due primarily to the planned sales and marketing investment in resources and other operating costs to build the sales force and channels for Medworxx Patient Flow Solution in multiple geographies. Sales, marketing and administrative expenses for the three months, were 1,260,355 representing an increase of 1.3% over expenses of 1,244,239 for the same period last year. For the six months, sales, marketing and administrative expenses were 2,525,148 representing a 4.4% increase over expenses of 2,419,773 for the same period last year. The increase is due primarily to the planned sales and marketing investment in resources and other operating costs to build the sales force and channels for Medworxx Patient Flow Solution in multiple geographies. Research and Development expenses for the three months, were 424,798 representing a 0.6% decrease over expenses of 427,459 for the same period last year. For the six months ended June 30, research and development expenses were 900,940 representing a 2.1% increase over expenses of 882,577 for the same period last year. The increase is due to the development of the Company s new Patient Flow product including the development of new modules. Management s Discussion and Analysis Page 13
Results of Operations The following table highlights selected financial information for the eight consecutive quarters, : Q2 Q1 Q4 Q3 Q2 Q1 2012 Q4 2012 Q3 Revenues () 1,443,007 1,599,305 1,549,809 1,386,529 1,538,648 1,452,806 1,316,548 2,084,962 Net Income / (Loss) () (430,238) (311,948) (330,723) (453,623) (236,319) (321,815) (298,440) 323,003 EBITDA () (390,213) (275,304) (243,337) (426,874) (210,649) (298,212) (259,613) 512,695 Adjusted EBITDA () (352,928) (262,896) (221,722) (377,534) (161,110) (244,064) (178,884) 579,898 Net income (loss) per share Basic () (0.016) (0.012) (0.012) (0.017) (0.009) (0.012) (0.011) 0.013 Weighted average number of shares outstanding Basic 26,937,587 26,682,125 26,470,321 26,343,278 26,330,127 26,265,158 26,213,380 25,734,309 Net income (loss) per share Diluted () (0.016) (0.012) (0.012) (0.017) (0.009) (0.012) (0.011) 0.012 Weighted average number of shares outstanding Diluted 28,090,336 27,790,374 27,707,366 27,726,268 27,540,208 27,658,884 27,544,187 27,206,181 For the three months, the Company incurred a net loss of 430,238 on revenue of 1,443,007 versus a net loss of 236,319 on revenue of 1,538,648 for the same period last year. This change is attributable to lower sales in the second quarter of as a result of no new licence sales being closed in the quarter for either the Patient Flow or Compliance and Education platform due to delays in the procurement cycles of the Company s prospective clients. Management believes with the sales pipeline being developed that the business will continue to grow in the future quarters. EBITDA, defined as Earnings Before Interest, Taxation, Depreciation, and Amortization, a non IFRS measure, for the three months, was (390,213) as compared to an EBITDA of (210,649) for the same period last year, as described in the Reconciliation and Definition of Non IFRS Measures section of this MD&A. Adjusted EBITDA, defined as Earnings Before Interest, Taxation, Depreciation, Amortization, and Stock Option Expense, a non IFRS measure, for the three months, was (352,928) as compared to an Adjusted EBITDA of (161,110) for the same period last year, as described in the Reconciliation and Definition of Non IFRS Measures section of this MD&A. Management s Discussion and Analysis Page 14
Financial Condition A discussion of the significant changes in our Consolidated Balance Sheets: June 30, December 31, Change Cash 1,580,091 2,900,649 (1,320,558) Trade and other receivables 895,183 1,174,336 (279,153) Deferred revenue 1,831,355 2,614,489 (783,134) Cash was 1,580,091, a decrease of 1,320,558 from December 31,. The primary reason for the decrease in cash is the funding of operating activities of 1,367,836 (616,041 of the decrease is due to fund operating losses and the balance is due to changes in non cash working capital) as well as the absence of new licence sales in either the Patient Flow or Compliance and Education platforms. This is primarily due to the delays in the sales/ procurement cycle. Management believes with the sales pipeline being developed that the business will continue to grow in the future quarters (refer to Liquidity and Capital Assets for a discussion of the changes in cash). Trade and other receivables were 895,183, a decrease of 279,153 which is driven by the timing of the customer billing cycle and the absence of new licence sales in the quarter (approximately 70% of the Company s billings occur in the last six months of the year). Deferred revenues were 1,831,355 representing a decrease of 783,134 from December 31, which is driven by the timing of the customer billing cycle of recurring contracts and the absence of new licence sales in the quarter. Obligations and Commitments COMMITMENTS The Company s contractual obligations and commitments consist of its lease on its head office facilities located in Toronto, ON. The lease provides for payment of utilities, property taxes and operating costs. In addition, the Company is committed to operating lease payments for computer software, equipment and office furniture. Management s Discussion and Analysis Page 15
The Company has also entered into a lease agreement with Royal Bank of Canada, effective June 12,. RBC has acquired and leased to the Company, office furniture and equipment (see Credit Facilities section). STOCK BASED PAYMENTS During the year ended December 31, 2007 and prior to the reverse takeover transaction with Medworxx Inc., the board of directors approved loans totalling 79,887 to members of the Company s senior executive, for the purpose of exercising 998,215 vested stock options. These loans are secured by the shares acquired. The loans bear simple interest at 5% per annum. To the extent that these loans receivable by the Company from related parties are secured against shares of the Company, these shares are excluded from outstanding shares for the purposes of calculating basic earnings per share and are considered contingently returnable for the purposes of calculating diluted earnings per shares. The loans and interest are to be repaid quarterly over the following 16 months and are repayable in full by October 12, 2015, due to an extension granted by the board of directors. At June 30, the outstanding loans receivable of 37,148 (June 30, 41,505) and accrued interest was included in contributed surplus and secured against 280,957 Class A common shares. Interest for the six months, amounted to 1,058 (June 30, 1,058) and is included in contributed surplus. INCOME TAXES As at January 1,, the Company had 4,894,240 of non capital losses in Canada, which can be used to reduce taxable income in future years. Management s Discussion and Analysis Page 16
Liquidity and Capital Assets The Company s cash position at June 30, was 1,580,091 and 2,769,549 at June 30,. Trade and other receivables were 895,183, a decrease of 279,153 which is driven by the timing of the customer billing cycle and the absence of new licence sales in the quarter (approximately 70% of the Company s billings occur in the last six months of the year). CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES Change Change % Net income (loss) (742,188) (558,135) (184,053) (33.0%) Items not affecting cash 126,147 203,241 (77,094) 37.9% Net change in non cash working capital (751,794) (456,857) (294,937) (64.6%) Cash used in operating activities (1,367,836) (811,751) (556,085) (68.5%) The company incurred a net loss of 742,188 for the six months, compared to a net loss of 558,135 in the same period last year, as described in the Operating Results section of this MD&A. Items not affecting cash decreased by 77,094 represented by the decrease in stock based compensation and accrued interest on exercised loans of 93,664, partially offset by the increase in amortization and depreciation of 16,570. Changes in non cash working capital decreased 294,937 in comparison to prior year. This is primarily due to the decrease in accounts payable and accrued liabilities from 2012 to of 693,340 partially offset by the decrease in trade and other receivables from 2012 to of 371,164 caused by timing of billings and the absence of new licence sales in the quarter. Management s Discussion and Analysis Page 17
CASH USED IN INVESTING ACTIVITIES Favourable (Unfavourable) Favourable (Unfavourable) % Cash used in investing activities (85,273) (42,467) (42,806) 100.8% Cash used in investing activities relates to the purchase of equipment and intangible assets for the six months,. CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES Favourable (Unfavourable) Favourable (Unfavourable) % Cash provided (used) in financing activities 132,551 (419,432) 551,983 (131.6%) Cash provided by financing activities was 132,551 for the six months, and the cash used in financing activities was 419,432 for the same period in the prior year. In the six months,, the Company repaid the convertible debentures (407,050 including interest). In the six months,, broker warrants were exercised realizing 149,299 of cash. CREDIT FACILITIES The Company signed an agreement with Royal Bank of Canada, dated July 27, 2012, to provide a 500,000 revolving demand facility, bearing interest at the Royal Bank prime rate plus 3.5%. This borrowing cannot exceed the aggregate of 75% of certain accounts receivable. The bank has a first ranking security interest in all property of the Company. As the company did not borrow against this facility, there was no interest incurred and paid on the Royal Bank loan for the three and six months, and. The Company is in compliance with all debt covenants at June 30,. Management s Discussion and Analysis Page 18
The Company has entered into a performance based loan agreement with the Health Technology Exchange, effective March 31, 2011. The Health Technology Exchange is a program that supports the Government of Ontario to accelerate innovation, commercialization and growth of Ontario s medical and assistive technologies sector. The Company distributes and sells the Medworxx Patient Flow Solution platform in the United Kingdom (the project). The loan is a non revolving term loan in the maximum principal amount of up to 50,000 to assist the Company with partial financing of the project. Interest is payable at 4.25% per annum. Repayment is based on the commercialization of the project. Each payment shall be equal to 10% of the gross revenue derived from the Continuum Solutions licence for the preceding fiscal year. Repayment will be required on June 30, for sales occurring within the fiscal year and annually, thereafter, until the obligations are repaid. At January 9, 2012, the company received 45,000 under the loan. The first repayment of 7,474 was made on the performance based loan on August 15, and as at June 30,, 37,526 is outstanding. The Company has entered into a lease agreement with Royal Bank of Canada, effective June 12,. RBC has acquired and leased to the Company, property and equipment. Interest is payable at 6.00% per annum with a lease term of 60 months and an option to purchase the equipment for 1.00. At December 31,, the company received 206,770 and accounted for it as a finance lease. CONTINGENT OFF BALANCE SHEET AND OTHER ARRANGEMENTS The Company has obligations with respect to licence, maintenance and support arrangements for any 12 month period. This obligation is reflected on the Company s balance sheet through its deferred revenue balance. Outside of deferred revenue, the Company has no material obligations or contingencies, other than described below. On October 19, 2011, a former employee filed suit against the Company claiming wrongful dismissal and breach of contract in the amount of 323,471. The Company believes that the claims are without merit and the Company will take such action as is advised to protect the Company s interests. The proceedings are still in an early stage and as such there is uncertainty surrounding the final outcome. However, the Company does not believe that the final outcome will have a material adverse effect on the financial position and results of operations. Management s Discussion and Analysis Page 19
Critical Accounting Policies and Estimates A description of the Company s accounting estimates that are critical to determining the Company s financial results and changes to accounting policies. The Company s interim consolidated financial statements are prepared in accordance with IFRS, which require the Company to make estimates and assumptions that affect the amounts reported in its consolidated interim financial statements. It has identified several policies as critical to the business operations and essential for an understanding of the results of operations. The application of these and other accounting policies are described in note 2 of the Company s interim consolidated financial statements. The Company believes there have been no significant changes in its critical accounting estimates from what was previously disclosed in its MD&A for the year ended December 31,. These policies are incorporated herein by reference. Preparation of the interim consolidated financial statements requires the Company to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of the interim consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could vary significantly from those estimates. Significant areas requiring the Company to make estimates include: intangible assets impairment testing, royalty liabilities, accounts receivable and convertible debentures. Internal Control over Financial Reporting There were no changes that are likely to affect or materially affect the internal control over the Company s financial reporting. Management s Discussion and Analysis Page 20
Reconciliation and Definition of Non IFRS Measures A description and calculation of certain measures used by management Recurring Revenue Recurring revenue is defined as annual renewable software licence fees, maintenance services and hosting fees. The Company defines annualized contract value of deferred revenue as the contracted annual renewable software licence fees, maintenance services and hosting fees. The following charts reflect the Company s revenue composition as reported in the interim condensed consolidated statements of operations and comprehensive loss: Three months Annual Renewable (Licences and Other) Perpetual (Licences and Other) Maintenance and Support Services & Hosting Consulting Services Ending Balance as per Financial Statement Software licences 728,809 17,017 745,827 Maintenance and support 482,297 482,297 Services and other 27,765 187,118 214,883 Ending Balance as per MD&A 728,809 44,782 482,297 187,118 1,443,006 Three months Annual Renewable (Licences and Other) Perpetual (Licences and Other) Maintenance and support Consulting Services Ending Balance as per Financial Statement Software Licences 731,923 234,119 966,042 Maintenance and support 467,513 467,513 Services and other 750 104,343 105,093 Ending Balance as per MD&A 732,673 234,119 467,513 104,343 1,538,648 Management s Discussion and Analysis Page 21
Annual Renewable (Licences and Other) Perpetual (Licences and Other) Maintenance and support Consulting Services Ending Balance as per Financial Statement Software Licences 1,462,363 173,347 1,635,710 Maintenance and support 947,632 947,632 Services and other 749 27,826 430,396 458,970 Ending Balance as per MD&A 1,463,112 201,173 947,632 430,396 3,042,312 Annual Renewable (Licences and Other) Perpetual (Licences and Other) Maintenance and support Consulting Services Ending Balance as per Financial Statement Software Licences 1,413,437 377,444 1,790,882 Maintenance and support 906,049 906,049 Services and other 750 13,870 279,903 294,523 Ending Balance as per MD&A 1,414,187 391,314 906,049 279,903 2,991,453 Earnings before interest, taxation, depreciation and amortization ( EBITDA ) EBITDA is a measure used by management to evaluate operational performance. It is also a common measure that is reported on and used by investors in determining a company s ability to incur and service debt as well as a valuation methodology. Management believes that EBITDA enhances the information provided in the consolidated interim financial statements. EBITDA is a non IFRS measure and should not be considered an alternative to operating income or net income (loss) in measuring the Company s performance. EBITDA should not be used as an exclusive measure of cash flows because it does not consider the impact of working capital growth, capital expenditures, debt principal reductions and other sources and uses of cash which are disclosed in the consolidated interim statements of cash flows. Management s Discussion and Analysis Page 22
The following chart reflects the Company s calculation of EBITDA: EBITDA Three months Three months ended June 30 Net income (loss) (430,238) (236,319) (742,188) (558,135) Add: Interest (758) (5,361) (1,052) (11,881) Add: Amortization and impairment 40,784 31,031 77,722 61,154 EBITDA (390,213) (210,650) (665,518) (508,862) Adjusted EBITDA Adjusted EBITDA, defined as Earnings before Interest, Taxation, Depreciation, Amortization, and Stock Option Expense is an additional measure used by management to evaluate cash flows and the Company s ability to service debt. Adjusted EBITDA is a non IFRS measure and should not be considered an alternative to operating income or net income (loss) in measuring the Company s performance. The following chart reflects the Company s calculation of Adjusted EBITDA: Adjusted EBITDA Three months Three months ended June 30 EBITDA as above (390,213) (210,650) (665,518) (508,862) Add: Stock option expense 37,285 49,539 49,693 103,687 Adjusted EBITDA (352,928) (161,110) (615,825) (405,175) Risks and Uncertainties The Company operates in a dynamic environment that exposes it to a number of risks and uncertainties. For a description of the risks to which the Company is exposed, please refer to the audited Consolidated Financial Statements of the Company for the year ended December 31, and Management s Discussion and Analysis, which can be found on SEDAR at www.sedar.com. Management s Discussion and Analysis Page 23
FORWARD LOOKING STATEMENTS This MD&A contains forward looking statements. Often, but not always, forward looking statements can be identified by the use of words such as plans, expects or does not expect, is expected, budgets, estimates, intends, anticipates or does not anticipate, or believes, or recurring or variations of such words and phrases or state that certain actions, events or results may, could, would, might or will be taken, occur or be achieved. Forward looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by the forward looking statements. Actual results and developments are likely to differ, and may differ materially, from those expressed or implied by the forward looking statements contained in this MD&A. Such forward looking statements are based on a number of assumptions which may prove to be incorrect, including, but not limited to: the ability of the issuer to obtain financing if required; the economy generally; consumer interest in the services and products of the Company; competition; and anticipated and unanticipated costs. While the Company anticipates that subsequent events and developments may cause its views to change, the Company specifically disclaims any obligation to update these forward looking statements except as may be required by applicable securities legislation. These forward looking statements should not be relied upon as representing the Company s views as of any date subsequent to the date of this MD&A. Although the Company has attempted to identify important factors that could cause actual actions, events or results to differ materially from those described in forward looking statements, there may be other factors that cause actions, events or results not to be as anticipated, estimated or intended. There can be no assurance that forward looking statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements. Accordingly, readers should not place undue reliance on forward looking statements. The factors identified above are not intended to represent a complete list of the factors that could affect the Company. Management s Discussion and Analysis Page 24