Year End Management s Discussion and Analysis For the Years Ended September 30, 2015 and September 30, Patient Home Monitoring Corp.

Transcription

1 Year End 2015 Management s Discussion and Analysis For the Years Ended September 30, 2015 and September 30, 2014 Patient Home Monitoring Corp.

2 The following Management s Discussion and Analysis ( MD&A ) of the financial condition and results of operations of Patient Home Monitoring Corp. ( PHM or the Company ), prepared as of January 1, 2016 and should be read in conjunction with the consolidated financial statements for the years ended September 30, 2015 and 2014, including the notes therein. The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ( IFRS ). Unless otherwise specified, all financial data is presented in Canadian dollars. The words we, our, us, Company, and PHM refer to Patient Home Monitoring Corp and/or the management and employees of the Company. Additional information relevant to the Company is available for review on SEDAR at Table of Contents Page 2 Page 3 Page 4 Page 8 Page 10 Page 13 Page 14 Caution Regarding Forward-Looking Statements Selected Annual Information About Our Business and Operating Results Financial Condition Accounting and Disclosure Matters Financial Instruments and Risk Management Risk Factors CAUTION REGARDING FORWARD-LOOKING STATEMENTS Information included or incorporated by reference in this report may contain forward-looking statements. This information may involve known and unknown risks, uncertainties, and other factors which may cause our actual results, performance, or achievements to be materially different from the future results, performance, or achievements expressed or implied by any forward-looking statements. Forward-looking statements, which involve assumptions and describe our future plans, strategies, and expectations, are generally identifiable by use of the words may, will, should, expect, anticipate, estimate, believe, plan, intend or project or the negative of these words or other variations on these words or comparable terminology. Readers are cautioned regarding statements discussing profitability; growth strategies; anticipated trends in our industry; our future financing plans; and our anticipated needs for working capital. Actual events or results may differ materially from those discussed in forward-looking statements. There can be no assurance that the forward-looking statements contained in this report will in fact occur. The Company bases its forward-looking statements on information currently available to it, and assumes no obligation to update them. THE FORWARD-LOOKING INFORMATION CONTAINED IN THIS MD&A PRESENTS THE EXPECTATIONS OF THE COMPANY AS OF THE DATE OF THIS MD&A AND, ACCORDINGLY, IS SUBJECT TO CHANGE AFTER SUCH DATE. READERS SHOULD NOT PLACE UNDUE IMPORTANCE ON FORWARD-LOOKING INFORMATION AND SHOULD NOT RELY UPON THIS INFORMATION AS OF ANY OTHER DATE. WHILE THE COMPANY MAY ELECT TO, THE COMPANY DOES NOT UNDERTAKE TO UPDATE THIS INFORMATION AT ANY PARTICULAR TIME EXCEPT AS REQUIRED BY APPLICABLE SECURITIES LEGISLATION. 2

3 FISCAL 2015 HIGHLIGHTS Completed equity financing of $67,250,000 for acquisitions and organic grow th Completed seven acquisitions during the year, w ith combined annualized revenues of $57,869,832, giving the Company a National footprint and strengthening the company s product offering. Closed on an additional acquisition, Patient Aids, in October 2015 Generated revenues of $71,704,531 for the year and $29,506,051 for the fourth quarter As compared to $21,191,600 from the previous year, an increase of 238%, and as compared to $19,354,728 from the prior quarter, an increase of 52% Generated Adjusted EBITDA (1) of $11,818,221 for the year and $3,585,611 for the fourth quarter. As compared to $4,354,683 from the previous year, an increase of 171%, and as compared to $2,997,288 from the prior quarter, an increase of 20% Cash on hand of $51,952,888 at September 30, 2015 as compared to $14,050,4 36 at September 30, 2014 SELECTED ANNUAL INFORMATION For the years ended September 30, 2015 September 30, 2014 September 30, 2013 Revenue Gross margin Gross margin % Adjusted EBITDA (1) $ 71,704,531 $ 21,191,600 $ 3,975,742 $ 47,042,594 $ 13,594,711 $ 2,602,358 66% 64% 65% $ 11,818,221 $ 4,354,683 $ (1,890,337) Cash $ 51,952,888 $ 14,050,436 $ 3,360,823 (1) Refer to page five (5) for definition of Adjusted EBITDA 3

4 ABOUT OUR BUSINESS PHM business objective The explosive grow th in the number of elderly patients in the US healthcare market is creating pressure to provide more efficient delivery systems. Healthcare providers, such as hospitals, physicians and pharmacies, are seeking partners that can offer a range of products and services that improve outcomes, reduce hospital readmissions, and help control costs. PHM fills this need by delivering a grow ing number of specialized products and services to achieve these goals. PHM is a positive cash flow and profit able company that serves patients w ith heart disease and other chronic health conditions, and provides a platform for acquisitions and organic grow th. PHM is focused on a highly fragmented and developing market of small privately-held companies servicing chronically ill patients w ith multiple disease states caused mainly by age and obesity. Because of the new and highly fragmented nature of the market, PHM is actively w orking to identify and evaluate profitable, annuity-based companies to acquire their patient databases and technical expertise at favorable prices. PHM' s post acquisition organic grow th strategy is to increase annual revenue per patient by offering multiple services to the same patient, consolidating the patient' s services and making life easier for the patient. The expected result is grow ing earnings per share w ith each acquisition and grow ing revenue and profits from the cross selling efforts. Future outlook PHM continues to generate net profit and positive EBITDA, excluding IFRS treatment of non-cash items. Our top priority continues to be the generation of operational net profit, positive cash flow, and positive EBITDA in fiscal year 2016 and beyond. As w e continue to expand in our existing market s, w e plan to leverage our business platforms to enter into new markets. We are actively w orking to acquire companies w ith additional service and product lines. As w e continue to grow and achieve scale, the increasing cash generated from operations w ill be used to market our service and to gain market share. Going forw ard, w e seek to find w ays to continue to grow our customer base and penetrate these markets, w hile continuing to streamline our operational platform and generate positive cash flow and operational profits. We w ill continue to improve on operational efficiencies and call center management as they are key execution points in order to maintain our healthy gross margin w hile grow ing revenues via the cross selling of services to existing and acquired patients. Accounting policies and estimates 4 OPERATING RESULTS The consolidated financial statements for the period ended September 30, 2015 are prepared under International Financial Reporting Standards ( IFRS ) issued by the governing body of the International Accounting Standards Board ( IASB ). The preparation of financial statements in conformity w ith IFRS requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities, disclosers of contingent assets and liabilities, and the reported amounts of revenues and expenses for the period of consolidated financial statements. IFRS accounting treatment Management does not rely upon non-cash IFRS accounting treatment of certain items such as impairment of goodw ill, changes in the fair value of financial derivatives, stock based compensation and amortization of intangible assets w hen planning, monitoring, and evaluating the company s performance or in making financial decisions. Non-IFRS measures Throughout this MD&A, references are made to a number of measures w hich are believed to be meaningful in the assessment of the Company s performance. All of these metrics are non-standard measures under IFRS, and may not be identical to similarly titled measures reported by other companies. Also, in the future, w e may disclose different non- IFRS financial measures in order to help our investors more meaningfully evaluate and compare our future results of operations to our previously reported results of operations. Readers are cautioned that the disclosure of these items is meant to add to, and not replace, the discussion of financial results as determined in accordance w ith IFRS. The primary purpose of these non-ifrs measures is to provide supplemental information that may prove useful to investors w ho w ish to consider the impact of certain non-cash or uncontrollable items on the Company s operating performance. EBITDA and Adjusted EBITDA In calculating EBITDA and adjusted EBITDA certain items (mostly non-cash) are excluded from net income or loss including interest, taxes, depreciation, amortization, gain/loss on derivative financial liability, st ock-based compensation and goodw ill impairment charges. Set forth below are descriptions of the financial items that have been excluded from net income or loss to calculate EBITDA and Adjusted EBITDA and the material limitations associated w ith using these non-ifrs financial measures as compared to net income or loss.

5 - Depreciation and amortization expense may be useful for investors to consider because they generally represent the w ear and tear on our property and equipment used in our operations and amortization of intangibles valued in purchase accounting. How ever, w e do not believe these charges necessarily reflect the current and ongoing cash charges related to our operating costs. - The amount of interest expense w e incur or interest income w e generate may be useful for investors to consider and may result in current cash inflow s or outflow s. How ever, w e do not consider the amount of interest expense or interest income to be a representative component of the day-to-day operating performance of our business. - Gain/loss on derivative financial liability may be useful for investors to consider as it represents changes in the fair value of w arrants and exchangeable shares of subsidiaries, driven predominantly by changes in the company s stock price and exchange rat es. These changes are non-cash, as is the settlement of the underlying derivative liability, w hich occurs upon the conversion of the derivative instrument into PHM stock. - Income tax expense may be useful for investors to consider because it generally represents the taxes w hich may be payable for the period and the change in deferred income taxes and may reduce the amount of funds otherw ise available for use. How ever, w e do not consider the amount of income tax expense to be a representative component of the day-to-day operating performance of our business. - Stock-based compensation may be useful for investors to consider because it is an estimate of the non-cash component of compensation received by the Company s directors, officers, employees and consultants. How ever, stock-based compensation is being excluded from the Company s operating expenses because the decisions w hich gave rise to these expenses w ere not made to increase revenue in a particular period, but w ere made for the Company s long-term benefit over multiple periods. While strategic decisions, such as those to issue stock-based aw ards are made to further the Company s long-term strategic objectives and do impact the Company s earnings under IFRS, these items affect multiple periods and management is not able to change or affect these items w ithin any particular period. - Goodw ill impairment may be useful for investors to consider because it represents a w rite-dow n in the value of goodw ill acquired in business combinations. Goodw ill arises as a result of the difference in the purchase price of a business and the fair value of the underlying identifiable tangible and intangible assets. Goodw ill impairment charges arise w hen the present value of forecasted cash flow s are insufficient to support the carrying value of net assets. How ever, impairment charges are non-cash and since they relate to an adjustment of the carrying value of an intangible asset on the balance sheet are not indicative of current period or necessarily future period earnings. Management uses both IFRS and non-ifrs measures w hen planning, monitoring, and evaluating the company s performance. The follow ing table show s our Non-IFRS measures reconciled to our net loss for the indicated periods: Fiscal Year Fiscal Year Fiscal Year Ended Ended Ended September 30, 2015 September 30, 2014 September 30, 2013 Net (loss) $ (24,600,317) $ (1,564,391) $ (2,546,394) Add back: Depreciation and amortization 11,640,398 2,462, ,035 Interest expense (net of interest income) 1,501, , ,768 Provision for income taxes 1,291,070 (109,000) - EBITDA $ (10,167,284) $ 1,205,162 $ (1,953,591) Stock-based compensation 9,162,835 1,476,288 63,214 Goodwill impairment 12,763,264 1,673,233 - (Gain) loss on derivative 59, Adjusted EBITDA $ 11,818,221 $ 4,354,683 $ (1,890,377) 5

6 Consolidated operating results Fiscal Year Fiscal Year Fiscal Year Ended Ended Ended Consolidated statement of income September 30, 2015 September 30, 2014 September 30, 2013 Revenue $ 71,704,531 $ 21,191,600 $ 3,975,742 Cost of revenue 24,661,937 7,596,889 1,373,384 Gross margin 47,042,594 13,594,711 2,602,358 Gross margin % 66% 64% 65% Selling, general and administrative 39,830,351 11,025,362 2,242,279 Net gain before stock based compensation & derivative gain/loss $ 7,212,243 $ 2,569,349 $ 360,079 Other income (59,226) - - (Gain)/loss on disposal of property and equipment (84,732) 17,407 - Stock based compensation 9,162,835 1,476,288 63,214 Interest expense (net of interest income) 1,501, , ,768 Amortization 7,178,378 1,195,732 - Goodwill impairment 12,763,264 1,673,233 - Loss (gain) on financial derivative liabilities 59,406 (446,833) 2,636,491 Provision for income tax 1,291,070 (109,000) - Net loss after tax $ (24,600,317) $ (1,564,391) $ (2,546,394) Earnings (loss) per share $ (0.107) $ (0.012) $ (0.037) Revenue For the 12 month period ended September 30, 2015 revenue totaled $71.7 million up $50.5 million (or 238%) from the same period in The increase in revenue for the year w as driven primarily by the acquisitions of Black Bear, Black Bear North, Black Bear NH, West Home Health, Sleep Management and Legacy Oxygen in 2015, and Care Medical in June of Combined these acquisitions generated approximately $ 47.2 million revenue in the year from their respective date of acquisition. In addition favorable exchange rates benefited revenue by approximately $4.1 million. Cost of revenue and gross margin For the 12 months ended September 30, 2015 cost of revenue totaled $24.7 million and gross margin w as $47 million, an increase of $33.4 million versus the same period in Gross margin percent improved from 6 4% to 66%. The increase in both gross margin and gross margin percent w as primarily driven by the acquisitions of Black Bear, Black Bear North, Black Bear NH, West Home Health, Sleep Management and Legacy Oxygen in 2015, and Care Medical in June of 2014, w hich combined contributed $32.4 million of the increase. Selling, general & administrative expense For the 12 month period ended September 30, 2015, total selling, general and administrative expenses w ere $ 39.8 million, an increase of $28.8 million from the same period in This increase w as primarily driven by the acquisitions of Black Bear, Black Bear North, Black Bear NH, West Home Health, Sleep Management and Legacy Oxygen in 2015, and Care Medical in June of 2014, w hich combined contributed approximately $23.2 million of the increase. The remaining $5.6 million of the increase is from increased depreciation and amortization, increased bad debt provision and expenses related to building out the company s corporate infrastructure, including investment in acquisition-related resources and costs associated w ith the purchase of Sleep Management. In addition exchange rates account for approximately $2 million of the increase. Stock based compensation For the 12 months ended September 30, 2015 stock based compensation increased by $7.7 million compared to the same period in The increases w ere driven by an increase in amortization related to a greater number of outstanding options granted to employees. 6

7 Interest expense Interest expense increased for the year ending September 30, 2015 due to the issuance of unsecured debentures of $8.625 million bearing an interest rate of 7.5% in August The increase can be attributed primarily to the timing of the issuance of the debentures, resulting in interest being incurred for only tw o months in 2014 versus a full year in Gain loss on financial derivative liabilities For the 12 months ended September 30, 2015 the decrease in derivative loss w as as a result a decrease in the fair value of outstanding w arrants issued in connection w ith a private placement in May, The decrease in value w as attributable to a low er stock price at September 30, 2015 compared to the date of issue of the w arrants. This w as partially offset by a loss on the fair value of exchangeable shares. Net profit / loss after tax For the 12 month period ended September 30, 2015 net loss w as $24.1 million vs. loss of $1.6 million for the same period in 2014, This change is mainly driven by non-operational factors primarily the increased stock based compensation expense (from $1.5 million in 2014 to $9.2 million in 2015), goodw ill impairment (from $1.7 million in 2014 to $12.8 million in 2015), and amortization of intangible assets (from $1.2 million in 2014 to $7.2 million in 2015). Changes in foreign exchange rates had a negligible impact on net income. Quarterly Operating Results Year ended September 30, 2015 Quarter ended Quarter ended Quarter ended Quarter ended Sep. 30, 2015 Jun. 30, 2015 Mar. 31,2015 Dec. 31, 2014 Revenue 29,506,051 19,354,728 12,676,087 10,167,665 Net income (loss) after tax (2,640,349) (15,976,218) (3,156,790) (2,826,960) Year ended September 30, 2014 Quarter ended Quarter ended Quarter ended Quarter ended Sep. 30, 2014 Jun. 30, 2014 Mar. 31,2014 Dec. 31, 2013 Revenue 9,640,201 5,523,280 3,664,897 2,363,222 Net income (loss) after tax (3,003,639) 1,118, ,769 11,387 Results of operations for the healthcare services market in w hich the Company operates show little seasonality from quarter to quarter. Below are some of the key items that had a significant impact on financial results over the last eight quarters. The increase in quarterly revenues in the quarter ended March 31, 2014 w as as a result of the acquisition of Resource Medical Group, LLC, Palmetto Medical Holdings, LLC and Resource Medical Group, Charleston LLC in January, The increase in revenues in the quarter ended June 30, 2014 w as a result of a full quarter of revenues from acquisitions closed in the second quarter, 2014, as w ell as the acquisition of Care Medical Partners, LLC on May 31, The acquisition of Care Medical, also drove the increase in revenues for the fourth quarter ended September 30, The increase in revenues in the quarter ended March 31, 2015, w as primarily due to the acquisition of Black Bear Medical, Inc., Black Bear Medical North, Inc. and Black Bear Medical NH, Inc. on January 26, The increase in revenues in the quarter ended June 30, 2015 w as a result of the acquisition of West Home Healthcare, LLC on March 1, 2015 and the acquisitions of Sleep management, LLC, Home Sleep Delivered, LLC and Legacy Oxygen and Home Care Equipment, LLC on June 1, These acquisitions also drove the increase in revenues in the quarter ended September 30, Changes in quarterly net income are driven by the acquisitions listed above, as w ell as changes in non-cash charges related to stock-based compensation, amortization of intangibles and change in fair value of financial derivative liability. The net loss after tax in the quart er ended September 30, 2014 versus net income after tax in the prior quarter w as driven by a goodw ill impairment charge of $1.7 million, increased amortization of intangibles and stock -based compensation and a loss on change in value of financial derivative liability of $0.2 million compared to a gain of $0.6 million in the prior quarter. The increase in net loss after tax in the quarter ended June 30, 2015 w as driven by an increase in net loss on change in value of financial derivative liability to $12.6 million from a loss of $4.3 million in the quarter ended March 31, The increase in the value of financial derivative liability w as primarily a result of an increase in the number of outstanding w arrants issued in connection w ith the private placement on May 4, 2015, as w ell as an increase in the Company s stock price. The loss in the quarter ended June 30, 2015 w as also driven by an increase in stock-based compensation expense of $4.6 million versus the prior quarter, due to an increase in the issuance of options. Net loss after tax in the quarter ended September 30, 2015 benefited from a gain on change in fair value of financial derivative liability of $20.6 million (due to the decline in the company s share price), partially offset by 7

8 a goodw ill impairment charge of $12.8 million and higher amortization expense due to the finalization of the valuation of identifiable intangibles acquired in business combinations completed during the year. FINANCIAL CONDITION At At At September 30, September 30, September 30, Cash $ 51,952,888 $ 14,050,436 $ 3,360,823 Accounts receivable and other current assets 32,105,860 8,853,013 2,998,354 Property and equipment 23,168,914 9,169,576 1,101,142 Other assets 106,199,339 8,896,841 1,356,356 Total assets $ 213,427,001 $ 40,969,866 $ 8,816,675 Accounts payable and other current liabilities 20,016,103 8,848,911 2,615,129 Fair value of derivatives libilities 7,048,942 12,354,654 4,587,266 Long term liabilities 10,624,608 5,662, ,136 Total liabilities $ 37,689,653 $ 26,866,418 $ 7,644,531 Share capital and contributed surplus 190,071,057 22,195,033 7,887,882 Deficit (32,771,861) (8,171,544) (6,607,153) Accumulated other comprehensive income (loss) 18,438,152 79,959 (108,585) Shareholders' equity $ 175,737,348 $ 14,103,448 $ 1,172,144 Liquidity As of September 30, 2015 the Company had cash on hand of $51,952,888. Management considers liquid assets to consist of cash and cash equivalents, accounts receivable, inventory, prepaid expenses and other current assets, According to this definition, the company' s liquid assets equal the current assets totaling $84,058,748. While w orking capital is traditionally used as a measure of a company' s liquidity, management believes that a more accurate view of the Company' s liquidity is liquid assets less current liabilities. The Company' s liquid assets less current liabilities, excluding fair value of financial derivatives (w hich are to be settled in shares), equals $64,042,645. Capital management The company considers its capital to be shareholders equity, w hich is comprised of share capital, contributed surplus, accumulated other comprehensive loss and deficit, w hich totaled $175,737,348 at September 30, The company plans to raise capital, as necessary, to meet its needs and take advantage of perceived opportunities and, therefore, does not have a numeric target for its capital structure. Funds are primarily secured through debt instruments; equity capital raised by w ay of private placements and convertible notes. There can be no assurance that the company w ill be able to continue raising capital in this manner. Management review s its capital management approach on an ongoing basis and believes that this approach, given the relative size of the Company, is reasonable. The company invests all capital that is surplus to its immediate operational needs in short -term, liquid and highly rated financial instruments, such as cash and short-term guarantee deposits, held w ith major Canadian and US financial institutions. Outstanding stock shares, w arrants, and options information as of December 31, 2015 Common stock shares: 338,436,067 Warrants: 26,904,000 Stock options: 29,905,560 Financing The company has financed its operations primarily from equity financing and through the issuance of shares to acquire businesses. During the fiscal year period end September 30, 2015, the Company raised approximately $67.2 million (net of share issuance cost) from the issuance of 44,850,000 common shares in a brokered private placement. Each common share included the issuance of one-half (1/2) of one common share purchase w arrant to acquire one common 8

9 share for an exercise price of $1.80 for a period of 36 months after closing. In addition, the company issued broker w arrants to purchase 2,691,000 common shares at an exercise price of $1.50 per common share. During the fiscal year period end September 30, 2015, the Company issued a total of 61,370,958 common shares plus 854,043 to be issued w ith a combined total value of $75,550,003 in connection w ith certain of the business acquisition transactions completed during the year (Note 4 of the consolidated financial statements for the year ended September 30, 2015). During the fiscal year period end September 30, 2015, a total of 16,534,702 common shares w ith a fair value of $16,023,601 w ere issued pursuant to the conversion of various Class A shares that had previously been issued in connection w ith certain business combinations. During the fiscal year period end September 30, 2015, the Company issued a total of 3,113,343 common shares in connection w ith the conversion of previously issued convertible debt. During the fiscal year period end September 30, 2015, the Company issued a total of 55,721,388 common shares as a result of the exercise of 37,681,459 w arrants and 18,039,929 options that had been previously issued by the Company. These options and w arrant s w ere exercised at a w eighted average exercise price of $0.62 for total proceeds of $34,547,261. Further details on the above-mentioned transactions can be found in the footnotes to the Company s consolidated statement of financials for the year ended September 30, Commitments Leases Leases under which the Company assumes substantially all the risks and rewards of ownership are classified as finance leases. Upon initial recognition, the leased asset is measured at an amount equal to the lesser of its fair value and the present val ue of the minimum lease payments. Subsequent to initial recognition, the asset is accounted for in accordance with the accounting policy applicable to the asset. The associated lease liability is drawn down over the life of the lease by allocating a portion of each lease payment to the liability with the remainder being recognized as finance charges. Leases that do not transfer the risks and rewards of ownership to the Company are treated as operating leases and are expensed as incurred. (a) Operating leases The Company leases certain facilities under the terms of non-cancelable operating leases. Future payments pursuant to these commitments are as follows: Operating leases Less than 1 year $ 7,194,375 Between 1 and 4 years 3,651,247 Five years or more 1,902,696 Total $ 12,748,318 (b) Other commitments The Company has an advisory agreement as descried under related party transactions. Minimum future payments in U.S $ pursuant to these agreements are as follows: Less than 1 year $ 477,610 Between 1 and 5 years 1,034,822 Total $ 1,512,432 Related party transactions Effective December 1, 2013, a non-exclusive five year Advisory Agreement was negotiated with a corporation affiliated with two directors Michael Dalsin and Roger Greene. Under the terms of the agreement, this corporation will receive monthly payments starting at US $2,500 for a five year period and increasing as revenue increases. In addition, the Company committed to paying success fees provided the Company reaches certain performance thresholds, as defined in the Advisory Agreement. The success fees range from US $25,000, for acquiring a target company, to US $500,000, for listing the Company on a major US stock exchange. Additional success fees may be earned based on the EBITDA 9

10 of an acquired target and the increase in EBITDA of the target over a two year period. This agreement was amended on November 1, (Note 16 of the consolidated statement of financials for the year ended September 30, 2015) 2015 incentive fees due from the Company pursuant to this Advisory Agreement were waived. Payments of $108,000 were made during fiscal 2015, all of which related to In 2014, the Company incurred $140,000 in expenses during the fiscal year, of which $32,000 was paid. The expense has been recorded as general and administrative expenses. There are no balances outstanding as of September 30, In addition, the acquisition of B.C. Ltd, a British Columbia corporation, the details of which are described in Note 4 of the consolidated financial statements for the year ended September 30, 2015, was a related party transaction. In addition to the above, on August 1, 2015, the Company entered into a ten year triple net lease agreement for office space with a rental company that is affiliated with the Company s CEO and COO, Casey Hoyt and Mike Moore. Rental payments under this lease agreement are US $14, per month, plus taxes, utilities and maintenance. During 2015, expenses of $39,169 were incurred pursuant to this lease, all of which had been paid as of September 30, The expense has been recorded as general and administrative expenses. All transactions are at the exchange amount and any amounts outstanding are unsecured and non-interest bearing. Key management personnel are comprised of the Company s directors and executive officers. In addition to their salaries key management personnel also participate in the Company s share option program. In addition to the above agreements, the Company paid key management personnel the following: Salaries and benefits $ 723,495 $ 609,000 Stock-based compensation 5,087,843 1,090,104 Total $ 5,811,338 $ 1,699,104 Off balance sheet arrangements The Company has no material undisclosed off-balance sheet arrangements that have or are reasonably likely to have, a current or future effect on its results of operations or financial condition. Financial reporting controls ACCOUNTING AND DISCLOSURE MATTERS The Company is not required to certify the design and evaluation of its disclosure controls and procedures and internal controls over financial reporting and has not completed such an evaluation. There w ere no substantive changes in the Company s disclosure controls and procedures and internal controls over financial reporting during the period ended September 30, 2015 that have materially affected, or are reasonably likely to materially affect, the Company s disclosure controls and procedures and internal controls over financial reporting. Critical accounting estimates The preparation of financial statements in conformity w ith IFRS requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities in the consolidated financial statements. We constantly evaluate these estimates and assumptions. We base our estimates and assumptions on past experience and other factors that are deemed reasonable under the circumstances. This involves varying degrees of judgment and uncertainty, thus the amounts currently reported in the consolidated financial statements could prove to be inaccurate in the future. We consider the estimates and assumptions described in this section to be an important part in understanding the consolidated financial statements. These estimates and assumptions are subject to change, as they rely heavily on management s judgment and are based on factors that are inherently uncertain. 10

11 Revenue recognition Revenue consists of net patient service revenue. Net patient service revenue is recognized at the time services are provided net of contractual adjustments based on an evaluation of expected collections resulting from the analysis of current and past due accounts, past collection experience in relation to amounts billed and other relevant information. Contractual adjustments result from the differences betw een the rates charged for services and reimbursements by government-sponsored healthcare programs and insurance companies for such services. Accounts receivable Accounts receivable are recorded at the time revenue is recognized and are presented on the balance sheet net of an allow ance for doubtful accounts. It is possible that our estimates of the allow ance for doubtful accounts could change, w hich could have a material impact on our operations and cash flow s. The Company w ill w rite-off receivables w hen the likelihood for collection is remote, the receivables have been fully reserved, and w hen the Company believes collection efforts have been fully exhausted and it does not intend to devote additional resources in attempting to collect. Stock-based compensation The Company accounts for stock-based compensation, including stock options and w arrants, using the fair value method as prescribed by IFRS 2. Under this method, the fair value of stock options and w arrants at the date of grant is amortized over the vesting period and the offsetting credit is recorded as an increase in contributed surplus. The Company accounts for forfeitures as they happen. For the fiscal year ended September 30, 2015, the Company recorded stock-based compensation expense of $9,162,835 ( $1,476,288). The fair value of the vested stock options have been charged to the statement of operations and deficit and credited to contributed surplus for the fiscal year ended September 30, 2015, using the Black-Scholes option pricing model w ith the follow ing assumptions: Share price $.58 - $1.46 Risk-free interest rate 1% Expected volatility % Expected life of options Between 5 and 10 years Expected dividend yield Nil Income taxes The Company is subject to income taxes in numerous jurisdictions. Significant judgment is required in determining the provision for income taxes and the Company s income tax provisions reflect management s interpretation of countryspecific tax law. There are many transactions and calculations for w hich the ultimate tax determination is uncertain during the ordinary course of business and may remain uncertain for several years after their occurrence. The Company recognizes assets and liabilities for taxation w hen it is probable that the relevant taxation authority w ill require the Company to receive or pay taxes. Where the final outcome of the determination of tax assets and liabilities is different from the amounts that w ere initially recorded, such differences w ill impact the current and deferred income taxes provision in the period in w hich such determination is made. Changes in tax law or changes in the w ay tax law is interpreted may also impact the Company s effective tax rate as w ell as its business and operations. Deferred income tax assets and liabilities are recognized for the future income tax consequences attributable to temporary differences betw een the financial statement carrying value of assets and liabilities and their respective income tax bases. Deferred income tax assets or liabilities are measured using enacted or substantively enacted income tax rates expected to apply to taxable income in the years in w hich those temporary differences are expected to be recovered or settled. The calculation of current and deferred income taxes requires management to make estimates and assumptions and to exercise a certain amount of judgment concerning the carrying value of assets and liabilities. The current and deferred income tax assets and liabilities are also impacted by expectations about future operating results and the timing of reversal of temporary differences as w ell as possible audits of tax filings by regulatory agencies. Changes or differences in these estimates or assumptions may result in changes to the current and deferred tax assets and liabilities on the consolidated statements of financial position and a charge to or recovery of income tax expense. Acquisition accounting Accounting for business combinations requires the allocation of the Company s purchase price to the various assets and liabilities of the acquired business at their respective fair values. The Company uses all available information to make 11

12 these fair value determinations. In some instances, assumptions w ith respect to the timing and amount of future revenues and expenses associated w ith an asset or group of assets may be used to determine fair value. Actual timing and amount of net cash flow s from revenues and expenses related to that asset over time may differ materially from those initial estimates, and if the timing is delayed significantly or if the net cash flow s decline significantly, the asset could become impaired. Significant accounting judgments The follow ing are the critical judgments, apart from those involving estimations, that have been made in the process of applying the Company' s accounting policies and that have the most significant effect on the amounts recognized in the consolidated financial statements. Acquisition accounting Management also applied judgment in the recognition and measurement of the intangible assets acquired in the business combinations, as disclosed in Note 4 of the consolidated financial statements for the year ended September 30, These transactions have been recorded in the consolidated financial statements based on management s assessment of fair value for the acquired assets and liabilities. Functional currency Management has exercised judgment in selecting the functional currency of each of the entities that it consolidates based on the primary economic environment in w hich the entity operates and in reference to the various indicators including the currency that primarily influences or determines the selling prices of goods and services and the cost of production, including labor, material and other costs and the currency w hose competitive forces and regulations mainly determine selling prices. The consolidated financial statements of the Company are presented in Canadian dollars, w hich is the parent company s presentation currency but w hich differs from its functional currency, the US dollar, w hich w as determined using managements assumption that the primary economic environment from w hich it w ill deriv e its revenues and the expenses incurred to generate those revenues is the US. Segmented reporting Management has assessed the information that is provided to the chief operating decision maker and how the business is monitored and has exercised judgment in determining that there is only one operating segment. Asset impairment and cash generating units For purposes of the assets impairment testing, the Company identifies cash generating units as the smallest identifiable groups of assets that generate independent cash inflow s. Impairment testing is performed on these groups of assets on an annual basis or w hen events or circumstances indicate that the cash generating unit may become impaired taking into account the assessed and projected recoverable values of the cash generating unit. The company has elected to perform the annual impairment testing in the fourth quarters. Exchangeable class A shares of certain subsidiaries Management has exercised judgment in determining that the non-voting Class A shares of certain subsidiaries w hich are exchangeable for shares of the Company on a one-to-one basis do not represent a minority interest but rather are a complex compound instrument that management has elected to measure at fair value. Management has exercised judgment in considering these shares as being converted in the measurement of earnings per share. Valuation of derivative instruments Management has exercised judgment in the determination of the fair value of the derivative instruments. Estimating fair value for the derivatives requires determining the most appropriate valuation model, w hich is dependent on the terms and conditions of the instrument. This estimate also requires the judgment in the determination of the most appropriate inputs to the valuation model including the expected life of the option or w arrant, volatility and dividend yield and making assumptions about them. Recognition of leases Management has exercised judgment in the determination of w hether or not a contract to rent equipment represents a financing lease. Using historical returns and other operational data management has determined that in cases w here the Company is the lessor no rental agreements represent financing leases. Goodwill impairment Management has evaluated the recoverable amount of cash generating units and applied judgment in the discount rate and other underlying assumptions used in impairment analysis of goodw ill. 12

13 FINANCIAL INSTRUMENTS AND RISK MANAGEMENT Financial instrument risk exposure The Company s activities expose it to a variety of financial risks: market risk (including price risk, currency risk and interest rate risk), credit risk and liquidity risk. These risks arise from the normal course of operations and all transactions are undertaken to support the Company s ability to continue as a going concern. Risk management is carried out by management under policies approved by the Board of Directors. Management identifies and evaluates the financial risks in co-operation w ith the Company s operating units. The Company s overall risk management program seeks to minimize potential adverse effects on the Company s financial performance. Credit risk Credit risk is the risk that one party to a financial instrument will fail to discharge an obligation and cause the other party to incur a financial loss. Financial instruments that potentially subject the Company to credit risk are primarily cash and accounts receivable. Each subsidiary places its cash with one major financial institution. At times, the cash in the financial institution is temporarily in excess of the amount insured by the Federal Deposit Insurance Corporation. Substantially all accounts receivable are due under fee-for-service contracts from third party payors, such as insurance companies and government-sponsored healthcare programs, directly from patients or for rebates due from manufacturers. Receivables generally are collected within industry norms for third-party payors and from manufacturers. The Company continuously monitors collections from its clients and maintains an allowance for bad debts based upon any specific payor collection issues that are identified and historical experience. The Company recorded bad debt expense of $5,561,247 for the year ended September 30, 2015 ( $955,480). As of September 30, 2015 no one customer represented more than 10% of outstanding accounts receivable. The Company does have more than 10% of receivables through Medicare. As this is a Federal program there is very little credit risk associated with these balllances. Currency risk Currency risk is the risk that the Company will be subject to foreign currency fluctuations in satisfying obligations related to its foreign activities. The Company realizes approximately 95% of its sales and makes a significant amount of its purchases in US dollars. Consequently, assets and liabilities are exposed to foreign exchange fluctuations. The Company s objective in managing its foreign currency risk is to minimize its net exposures to foreign currency cash flows by holding approximately 90% of its cash and cash equivalents in US dollars. The Company monitors and forecasts the values of net foreign currency cash flow and statement of financial position exposures and from time to time could authorize the use of derivative financial instruments such as forward foreign exchange contracts to economically hedge a portion of foreign currency fluctuations. Based on the above net exposure at fiscal year ended September 30, 2015, a 10% depreciation or appreciation of the US dollar against the Canadian dollar would result in an approximately $12,031 decrease or increase respectively in both net loss and comprehensive loss (2014 $145,491). The Company has not employed any currency hedging programs during the years ended. The follow ing are the values of the financial instruments denominated in US dollars at year end: Liquidity risk Cash $ 33,526,136 $ 1,462,037 Accounts receivable 18,083,683 7,441,611 Trade and accrued liabilities 6,672,818 5,224,201 Liquidity risk is the risk that the Company w ill not be able to meet its financial obligations as they become due. The Company s approach in managing liquidity is to ensure, to the extent possible, that it w ill have sufficient liquidity to meet its liabilities w hen due, under both normal conditions, by continuously monitoring actual and budgeted cash flow s. As of September 30, 2015, the Company faces no material liquidity risk and is able to meet all of its current financial obligations as they become due and payable. The Company has $ 27,065,045 of liabilities that are due w ithin one year.

14 Included in that amount is $7,048,942 of conversion liability w arrants and exchangeable shares of subsidiary. The Company has $84 million of current assets to meet those obligations. Interest rate risk Interest rate risk is the risk that the future cash flow s of a financial instrument w ill fluctuate because of changes in market interest rates. Interest rate risk is limited to potential decreases on the interest rate offered on cash and cash equivalents held w ith Chartered Canadian and registered US financial institutions. The Company considers this risk to be immaterial. The interest on the convertible notes is not subject to cash flow interest rate risk as these instruments bear interest at fixed rates. Risk factors While it is impossible to identify all such risk factors, factors that could cause actual results to differ materially from those estimated by us include: We may need to raise additional capital to fund future operations, w hich may involve high transaction costs, dilution to shareholders, high interest rates or unfavorable terms and conditions. The Company cannot likely obtain traditional debt financing until it has a profitable and longer operating history. Our stock price may fluctuate up or dow n for reasons unrelated to the performance of the Company, including lack of analyst coverage, limited investor relations and public relations support, limited trading liquidity and limited exposure of the Company to Canadian retail and institutional investors. CMS policies of health insurance for Medicare in the United States may affect the amount of revenue the Company receives. The Company is subject to risk that reimbursement rates for its services from both federal and private payers w ill decline over time. Reimbursement from federal programs is subject to constant regulatory review and increasing audits by federal authorities, the effect of w hich may be to increase costs of service and delay or affect reimbursement, w hich could negatively impact cash flow and/or revenue. Audits may be costly and time consuming, and could delay cash flow, even if the Company acted properly in all respects. The policies of health insurance carriers in the United States may affect the amount of revenue the Company receives. The Company may not successfully market its services. We operate in an industry that is subject to extensive federal, state, and local regulation and changes in law and regulatory interpretations. Healthcare rules and regulations have changed dramatically in recent times, and may change dramatically in the future. Changes in United States federal or state law s, rules, and regulations, including those governing the corporate practice of medicine, and fee splitting. Changes in the United States Anti-Kickback Statute and Stark Law and/or similar state law s, rules, and regulations. If w e are unable to manage grow th, w e may be unable to achieve our expansion strategy. Our senior management has been key to our grow th, and w e may be adversely affected if w e lose any member of our senior management. There are few suppliers of equipment for the Company, w hich may make it difficult for the Company to obtain supplies on prices or terms that are favorable. There could be interruptions in supplies or recalls that w ould adversely affect the Company. Changes in the healthcare industry, the US government deficit and the economy in general may affect the Company s business. The Company receives payments from a small number of entities, w ith the Medicare program of the US government being the primary entity making payments. If that entity w ere to slow payments of Company receivables for any reason, the Company w ould be adversely impacted. Technological advances in patient care, improved pharmaceutical products that do not require anticoagulation monitoring or w ith lesser side effects and technological advances in equipment or changes in patient management practices could severely reduce demand for the Company s services. The FDA has already approved three drugs w here no anticoagulation monitoring is mandated, and there may be additional approvals in the future. In addition, the approved drugs may gain market share over time. There may also be advances in or FDA approval of medical devices designed to manage anticoagulation. The management team has not competed in providing this service in the past, and some management is done on an interim basis. The Company competes against larger and substantially better funded competitors. Evolving regulation of corporate governance and public disclosure may result in additional expenses and continuing uncertainty. We may not be able to recruit and retain sufficient qualified staff and other licensed providers. If the Company fails to achieve certain volume of sales, prices of meters may increase. The market for financing home testing meters and other supplies needed by the Company is limited. 14

15 MANAGEMENT S DISCUSSION AND ANALYSIS We may be subject to product liabilit y and medical malpractice claims, w hich may adversely affect our operations. Our industry is highly regulated, and w e may be subject to regulatory scrutiny for violations of regulations and law s. The Company could be adversely affected by the time and cost involved w ith regulatory investigations even if it has operated in compliance w ith all law s. Investigations could also adversely affect the timely payment of receivables. We may have difficulty identifying or acquiring suitable acquisition targets. Significant variations in the foreign exchange rate betw een Canadian and U.S. currency may adversely affect the Company. The liquidity of trading in the stock may be adversely affected if more than 50% of the shares of the Company are acquired by US investors. Shareholders may be subject to dilution if the Company raises additional capital. 15