MANAGEMENT S DISCUSSION AND ANALYSIS ( MD&A ) For the three month interim period ended June 30, 2013

Transcription

1 For the three month interim period ended June 30, 2013 Management s Discussion and Analysis (MD&A) supplements, but does not form part of the consolidated financial statements and notes of Nightingale Informatix Corporation ( Nightingale or the Company ) for the period. This MD&A, prepared as of August 15, 2013, should be read in conjunction with the Company s March 31, 2013 Audited Consolidated Annual Financial Statements and Notes.

2 This MD&A provides an overview of significant developments that have affected Nightingale Informatix Corporation s ( Nightingale or the Company ) performance during the three month period ended June 30, ADOPTION OF INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) The consolidated financial statements referred to in this MD&A have been prepared in accordance with International Financial Reporting Standards ( IFRS ). Nightingale does however use Non-IFRS measures such as Adjusted EBITDA herein (see Section 4 Non-IFRS Measures). IFRS replaced Canadian GAAP for publicly accountable enterprises, including the Company, effective for interim and annual financial statements relating to fiscal years beginning on or after January 1, Accordingly, the accompanying consolidated financial statements for the years ended March 31, 2013 and March 31, 2012 have been prepared in accordance with IFRS. All figures herein are expressed in Canadian dollars unless otherwise noted. This MD&A contains forward-looking statements within the meaning of the United States Private Securities Litigation Reform Act of 1995 and applicable Canadian securities legislation. Generally, forward-looking statements can be identified by the use of forward-looking terminology such as plans, expects or does not expect, is expected, budget, scheduled, estimates, forecasts, intends, anticipates or does not anticipate, or believes, or variations of such words and phrases or state that certain actions, events or results may, could, would, might or will be taken, occur or be achieved, as well as those specifically identified herein. Cautionary Note Regarding Forward-Looking Statements Forward-looking statements are subject to known and unknown risks, uncertainties and other factors that may cause the actual results, level of activity, performance or achievements of Nightingale to be materially different from those expressed or implied by such forward-looking statements, including but not limited to: risks related to the speculative nature of the medical software industry, which is affected by numerous factors beyond Nightingale s control; the ability of Nightingale to successfully secure customer contracts and the timing of securing such contracts; the ability of Nightingale to complete and successfully integrate its acquisitions on an accretive basis, Nightingale s access to debt and capital facilities, including compliance with current debt arrangements; the existence of present and possible future government regulation; the significant competition that exists in the medical software industry; the early stage of Nightingale s business, and risks associated with early stage companies, including uncertainty of revenues, markets and profitability and the need to raise additional funding. All material assumptions used in making forward-looking statements are based on management s knowledge of current business conditions and expectations of future business conditions and trends. Certain material factors or assumptions applied by management in making forward-looking statements, include without limitation, factors and assumptions regarding future trends in healthcare spending, economic conditions affecting Nightingale and North American economies; Nightingale's ability to continue to fund its business, rates of customer defaults, relationships with, and payments to lenders, as well as Nightingale's operating cost structure. 1.

3 Although Nightingale has attempted to identify important factors that could cause actual results to differ materially from those contained in forward-looking statements, there may be other factors that cause results not to be as anticipated, estimated or intended. There can be no assurance that such statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements. Accordingly, readers should not place undue reliance on forward-looking statements. Nightingale does not undertake to update any forward-looking statements that are incorporated by reference herein, except in accordance with applicable securities laws. Non-IFRS Measures The Company internally measures its performance and results of initiatives through a number of measures that are not recognized under IFRS and may not be comparable to similar measures used by other companies. Measures such as Adjusted EBITDA and Recurring and Non-Recurring Revenue are used by the Company, as it believes this information would be useful to investors to help evaluate the performance of the Company. Investors should be cautioned, however, that Adjusted EBITDA and Recurring and Non-Recurring Revenue should not be construed as an alternative to total revenues or net income (loss) as determined in accordance with IFRS (see Section 4 under Non-IFRS Measures for more information). 1. OVERVIEW Business Description Established in 2002, Nightingale (TSX-V: NGH) is a recognized industry leader in cloud-based clinician and community-based Electronic Medical Records (EMR). The Company s EMR, Electronic Health Records (EHR), and integrated Practice Management products enable physicians and nurse practitioners at primary care practices, multi-physician outpatient clinics and hospitals, as well as government and regional health organizations to automate business and clinical functions. Nightingale provides healthcare practitioners with the tools to effectively migrate from a paper-based environment to a secure digital platform, enhancing patient care, increasing revenue opportunities and optimizing their clinic operations. Nightingale s Strategy Nightingale is a leading cloud-based Electronic Medical Record and Practice Management software provider in Canada. The Company has agreements in place with hospitals, regional groups and provincial governments, and in fiscal 2012, Nightingale won one of the largest EMR contracts ever awarded in Canada (approximately $17.0 million 10-year contract with the Association of Ontario Health Centres, or AOHC ). Nightingale is also expanding its presence in the US healthcare industry. The Company has implemented its US EMR and Practice Management product at a number of US clinics, and in December 2011, Nightingale purchased all of the assets related to a US-based company s Software as-a-service (SaaS) Practice Management business. With the recent events (AOHC contract win and US acquisition) that have propelled the business forward, the Company s broadening North American footprint, and its technology leadership, 2.

4 Nightingale believes that it is well positioned to capture the increasing opportunities within the Canadian and US EMR markets. Nightingale will work to leverage its ability to help physicians overcome EMR, and other healthcare technology adoption hurdles. Nightingale provides solutions to what the Company considers to be the three main adoption hurdles: Adoption Hurdle Apprehension to Technology IT Infrastructure Cost The Economics Nightingale s Solution The Nightingale Promise Technology leadership Flexibility with input devices (i.e. tablets, digital pen) Web-based solution Hosted solution No local servers Funding approved Varying payment models Additional revenue streams Nightingale has established itself as a major player in its domain through technology leadership. However, the emergence of multiple competitors in the marketplace has magnified the need for Nightingale to differentiate itself in a clear and compelling way. The Company is achieving this through further technology innovation, leveraging recent advancements in hardware and operating systems to enhance user adoption, and set new industry standards for service levels. Nightingale provides products and services under the banner of The Nightingale Promise, its Company brand promise. The Nightingale Promise has four pillars: 1. Superior technologies 2. Unparalleled customer service 3. Superior education programs 4. Dedicated ethical people Going forward, Nightingale plans to focus on its proven strengths growing its EMR business organically, while seeking opportunistic strategic acquisitions that could help expand the Company s presence in key regional markets. Nightingale is focused on demonstrating operational and monetary efficiency to its users to help them eliminate their reliance on government subsidies. This positions Nightingale to further penetrate markets that benefit from government funding programs, while also enabling the Company to better enter markets where there are no subsidies. In Canada, Nightingale will work to continue to leverage its successful track record in the enterprise and small business market and to further expand its customer footprint. In the US, now that the Company is certified under the Meaningful Use Funding Criteria, Nightingale is working to replicate its direct sales efforts that have proven successful in Canada. The Company will also continue to focus on cross selling 3.

5 its EMR into its existing customer base to those clients currently using the Company s Practice Management offering. Across North America, Nightingale will continue to establish new revenue streams; evolving its healthcare technology platform to create clear differentiators that further bolster the Company s technology leadership and helps Nightingale gain additional market share. EMR is Nightingale s key growth driver, and management believes the market is opening up. Large enterprises along with small and medium-sized clinics are increasingly recognizing the value, technology leadership and cost efficiencies of Nightingale s cloud-based EMR offering. In addition, the Company s target market is expanding. Peripheral healthcare practitioners and markets in Canada are starting to use EMRs, creating a net new opportunity for Nightingale. Nightingale continues to gain market share, and the Company expects that trend to continue. The Company plans to further expand its customer footprint in Canada, strengthen its position in the US and augment organic growth with strategic acquisitions where appropriate. Nightingale believes it is well positioned to deliver continued long-term growth. Revenue Model Nightingale s revenue model is based primarily on generating revenue from physicians and health-care providers directly or indirectly through their buying groups, such as hospitals, health-care associations and government agencies, through the delivery of proprietary software and services. Nightingale s revenue is derived from a variety of software and related service offerings. For its software solutions, Nightingale often charges an up-front software licence fee along with annual support and maintenance fees. The Company also offers a monthly transaction based fee structure, and a utilization fee model that combines software license, hosting, support and maintenance fees in a single flat monthly fee. The Company believes that the utilization model could become more prevalent as it is an attractive alternative for customers that are interested in limiting their upfront investment. Implementation, training and other services are offered under all models and are recognized as services are rendered. Q1 Fiscal 2014 Financial and Operational Summary Revenue was $3.8 million, down 32% compared to $5.6 million in Q1 F2013, primarily reflecting a decrease in software license revenues from enterprise contracts resulting from the impact of extended sales cycles due to the pending launch of Nexia and the transition to a SaaS (Software as a Service) model for the SMB market. Revenue related to the AOHC contract was $0.5 million compared to $1.6 million in Q1 F2013, as the rollout of the project shifts from the initial phase where the bulk of the license revenue was recognized to the implementation phase when the revenue is largely professional services and the recurring revenue commences. Gross profit was $3.3 million, or 89% of revenue, compared to $4.9 million, or 89% of revenue, in Q1 F2013 and $4.7 million, or 91% of revenue, in Q4 F

6 Operating Expenses, excluding stock based compensation, depreciation, amortization and one-time business acquisition, integration and other one-time costs were $3.2 million compared to $4.0 million in Q1 F2013 and $3.7 million in Q4 F2013. Adjusted EBITDA 1 was $0.1 million, 3% of revenue, down from $0.9 million, or 16% of revenue in Q1 F2013 and $1.0 million in Q4 F2013, or 20% of revenue. Net income was a loss of $0.8 million compared to net income of $0.25 million in Q1 F2013 and net income of $0.9 million in Q4 F2013. A major contributor to the loss in the quarter was a $0.3 million unrealized exchange loss on the Company s US dollar debt. Cash provided by operations was $0.2 million compared to a use of cash of $0.5 million in Q1 F2013. Total deferred revenue was $5.8 million down from $5.9 million at March 31,

7 2. DISCUSSION OF OVERALL PERFORMANCE, RESULTS OF OPERATIONS AND FINANCIAL CONDITION Year Q1 Q2 Q3 Q4 Year Q1 Q2 Q3 Q4 Year Q1 Ended Ended Ended Ended Ended Ended Ended Ended Ended Ended Ended Ended In $ 000 s (Except per Share Amounts) March 31, 2011 June 30, 2011 Sept 30, 2011 Dec 31, 2011 March 31, 2012 March 31, 2012 June 30, 2012 Sept 30, 2012 Dec 31, 2012 Mar 31, 2013 March 31, 2013 Jun 30, 2013 Recurring Revenue $10,679 $2,463 $2,367 $2,473 $2,889 $10,192 $ 2,705 $ 2,665 $ 2,625 $2,606 $10,600 $2,602 Non-Recurring Revenue 6,695 1,342 1,439 2,620 2,486 7,888 2,856 2,403 2,471 2,594 10,324 1,167 Revenue 17,374 3,805 3,807 5,093 5,376 18,080 5,561 5,068 5,096 5,200 20,925 3,769 Software business revenue 14,780 3,344 3,382 4,679 5,017 16,422 5,480 4,993 5,014 5,145 20,633 3,767 Gross Profit 14,047 3,175 2,961 4,384 4,509 15,030 4,940 4,570 4,336 4,736 18,582 3,338 Operating Expenses 14,466 3,500 3,225 4,369 4,804 15,897 4,516 4,040 3,949 4,784 17,290 3,618 Adjusted EBITDA (non-ifrs measure) 1, , ,028 3, Operating Income (Loss) for the Period (419) (325) (263) 16 (295) (868) (48) 1,293 (279) Income (Loss) and Comprehensive Income (Loss) (989) (425) (353) (155) (285) (1,218) ,993 (780) Income (Loss) and Comprehensive Income (Loss) per Common Share Basic and Diluted $(0.01) $(0.00) $(0.00) $(0.00) $(0.01) $(0.02) $0.00 / $0.01 $0.01 / $0.01 $0.00 / $0.00 $0.01 / $0.01 $0.03 / $0.03 $(0.01) Weighted Avg. # of Common Shares - Basic 75,979 76,311 76,311 76,311 76,311 76,311 76,311 76,311 76,311 76,311 76,311 76,311 Weighted Avg. # of Common Shares - Diluted 75,979 76,311 76,311 76,311 76,311 76,311 82,360 90,086 90,083 92,870 92,882 76,311 Total Assets $16,216 $15,334 $15,042 $17,794 $17,204 $17,204 $17,962 $19,761 $19,059 $24,697 $24,697 $22,787 Total Long-Term Liabilities $6,115 $5,819 $5,972 $8,102 $7,434 $7,434 $7,244 $8,421 $7,861 $9,790 $9,790 $9,386 6.

8 FIRST QUARTER FISCAL 2014 RESULTS OF OPERATIONS COMPARED TO FIRST QUARTER FISCAL 2013 RESULTS Revenue: For the three months ended June 30, 2013, revenue was $3.8 million compared to $5.6 million for the three months ended June 30, 2012 representing a 32%, or $1.8 million, decrease. The decrease is primarily associated with a decrease in revenue from the AOHC contract of approximately $1.5 million. Revenues from enterprise software sales can vary significantly from quarter to quarter. A decrease in revenue from the Company s low-margin revenue cycle management services business also had a negative impact on revenues. Recurring Revenue (see definition in Section 4.b under Non-GAAP Measures) is comprised of utilization fees, hosting, support and maintenance revenue, transactional fees, data management and transcription services. Recurring Revenue for the three month periods ended June 30, 2013 was $2.6 million compared to $2.7 million for the three months ended June 30, 2012, representing a 4%, or $0.1 million decrease. This decrease in Recurring Revenue was primarily the result of the decrease in revenues from the Company s low-margin revenue cycle management business existed in fiscal Non-Recurring Revenue (see definition in Section 4.b under Non-GAAP Measures) is comprised of revenues generated from sales of software and systems and related training, data conversion and installation services. Non-Recurring Revenue for the three months ended June 30, 2013 was $1.2 million compared to $2.9 million for the three months ended June 30, 2012, representing a 59%, or $1.7 million decrease. This decrease in Non-Recurring Revenue is the result of a decrease in revenues from enterprise software license sales related to the AOHC contract. Over the three months ended June 30, 2013, the Company generated 38% of its revenue from the US market. During this period, the Company estimates that the impact of the fluctuation in the rate of exchange between the US Dollar and the Canadian Dollar was negligible. The Company s deferred revenue balance, an indicator of the Company s revenue backlog, decreased $0.1 million to $5.8 million at June 30, 2013 from $5.9 million at March 31, Cost of Revenue and Gross Profit: Cost of revenue includes costs associated with hardware and third party software, costs related to professional and data services and costs associated with the Company s electronic transaction based services. For the three month period ended June 30, 2013, gross profit was $3.3 million, or 89% of revenue, compared to $4.9 million, or 89%, of revenue, for the three months ended June 30, Gross margin can also vary significantly from quarter to quarter depending on the timing of enterprise software license sales and the related revenue recognition. Expenses: Expenses for the three month period ended June 30, 2013 were $3.6 million compared to $4.5 million for the three months ended June 30, 2012, representing a 20%, or $0.9 million, decrease 7.

9 from the three months ended June 30, This decrease was primarily the result of the Company s recording of expenses in the three months ended March 31, 2013 related to the departure of an executive as well as a reserve for unoccupied office space. Nightingale continues to be focused on prudent expense management. However, the Company expects to continue to make focused investments in activities designed to support its revenue growth initiatives, particularly as the Company is seeing an increase in buying activity in the North American EMR market. Nightingale s expenses are affected by changes in the US dollar exchange rate, with approximately 28% of the Company s expenses during the three months ended June 30, 2013 generated in the US, providing the Company with a natural hedge position that has offset some of the effects on revenue of the decrease in value of the US Dollar. The Company estimates that the impact of fluctuations in the rate of exchange between the US Dollar and Canadian Dollar on operating expenses during this period were negligible. General and administration expenses for the three months ended June 30, 2013 were $0.8 million compared to $0.9 million for the three months ended June 30, 2012, a decrease of 8%, or $0.07 million. This decrease was primarily related to a decrease in facility costs associated with a lease for office space that is no longer occupied. Sales and marketing expenses for the three months ended June 30, 2013 were $0.7 million compared to $1.1 million for the three months ended June 30, 2012, a decrease of 38%, or $0.4 million. The decrease is associated with the timing of certain marketing events as well as decreased costs associated with the Company s small-to-medium business sales efforts as the Company focused on enterprise business and began to transition to a lower-cost self-service market for the small-to-medium business. Although the Company is lowering its costs associated with selling to the small-to-medium business sector, the Company plans to make increased investments in other sales and marketing costs. Research and development expenses for the three months ended June 30, 2013 were $1.0 million compared to $1.5 million for the three months ended June 30, 2012, a decrease of 31%, or $0.5 million. Research and development expenses are presented net of reimbursements pursuant to the Company s participation in Canadian research assistance and tax credit programs and are impacted by reductions in expenses associated with the Company s capitalization of certain qualifying development costs. The reimbursement of costs incurred pursuant to the research assistance and tax credit programs are classified as a reduction to both the Company s operating expenses and capitalized software costs. Gross research and development expenditures before capitalization of development costs and reimbursements pursuant to government programs, increased by $0.1 million, or 3%, in the three months ended June 30, 2013 compared to the year ago period. The increase in gross research and development expense can be primarily attributed to the Company s increased investments in developing its next generation EMR product and costs of maintaining its existing products. 8.

10 The table below demonstrates the impact of these credits on research and development expense in the periods presented. Three Months Ended June 30, 2013 Three Months Ended June 30, 2012 Gross research and development expenditures $ 1,854,400 $ 1,798,576 Reimbursements from government programs (300,000) - Capitalized development costs (967,335) (765,398) Information technology and hosting costs 458, ,428 Total Research and Development expense $ 1,045,510 $ 1,522,606 Client services expenses for the three month periods ended June 30, 2013 was $1.1million compared to $1.0 million in June 30, Business acquisition and integration costs represent the costs associated with the planned closure of an office. These costs totaled $0.05 million in the quarter ended June 30, Stock-based compensation is included in each of general and administration expense, sales and marketing expense, research and development expense and client services expense as described above. Stock-based compensation increased 56%, or $0.04 million, to $0.03 million for the three months ended June 30, The following amounts representing stock-based compensation have been included in the operating expense categories: Three Months Three Months Ended Ended June 30, 2013 June 30, 2012 General and administration $ 2,286 $ 23,763 Sales and marketing 2,972 6,272 Research and development 17,833 15,056 Client services 6,402 21,332 Total stock-based compensation $ 29,493 $ 66,423 9.

11 Depreciation and amortization expense is included in each of general and administration expense, sales and marketing expense, research and development expense and client services expense as described above. Depreciation and amortization expense increased 2%, or $0.006 million, to $0.4 million for the three months ended June 30, 2013 compared to the three months ended June 30, The following amounts representing depreciation and amortization expense have been included in the operating expense categories: Three Months Three Months Ended Ended June 30, 2013 June 30, 2012 General and administration $ 24,851 $ 12,000 Sales and marketing 204, ,000 Research and development 142, ,000 Client services 8,694 27,877 Total depreciation and amortization expense $ 380,886 $ 374,877 Adjusted EBITDA (non-ifrs measure, see Section 4.a for a definition): Adjusted EBITDA for the three months ended June 30, 2013 was $0.1 million compared to $0.9 million for the three months ended June 30, Operating Profit / Loss: For three months ended June 30, 2013, operating loss was $0.3 million compared to operating income of $0.4 million for the three months ended June 30, Interest: Interest charges for the three months ended June 30, 2013 increased 101% to $0.2 million from the three months ended June 30, Foreign currency loss: Foreign currency loss for the three months ended June 30, 2013 was$0.3 million compared to a loss of $0.07 million for the three months ended June 30, The loss from foreign currency in the three months ended June 30, 2013 was predominantly the result of the re-measurement of the Company s term loans (denominated in US Dollars) into Canadian Dollars as of June 30, Income (Loss) and Comprehensive Income (Loss): For the three months ended June 30, 2013 loss and comprehensive loss was $0.8 million compared to income and comprehensive income of $0.25 million for the three months ended June 30, Going forward, the Company s financial results will continue to be impacted by changes in the rate of exchange between the US dollar and the Canadian dollar. 3. LIQUIDITY AND CAPITAL RESOURCES 10.

12 Cash and cash equivalents on June 30, 2013 were $1.1 million, a decrease of $2.4 million, or 70%, from March 31, Of this decrease, $1.1 million was related to the repayment of Series A convertible debentures. Current assets were $7.4 million at June 30, 2013 compared to $9.9 million at March 31, Cash Flow from Operating Activities: Cash provided by operating activities for the three months ended June 30, 2013 was $0.2 million compared to cash used in the three months ended June 30, 2012 of $0.5 million. A decrease in accounts receivable of $0.5 million contributed to the cash provided by operations. This was partially offset by an increase in prepaids of $0.3 million. Cash Flow from Investing Activities: During the three months ended June 30, 2013, cash used in investing activities was $1.1 million including $1.0 million relating to capitalized development projects and $0.1 million related to the purchase of property, plant and equipment compared to cash used in investing activities of $1.1 million in the previous year including $0.8 million of capitalized development costs. Cash Flow from Financing Activities: Cash used in financing activities for the three months ended June 30, 2013 was $1.6 million compared to cash used of $0.1 million in the previous year. Cash used in financing activities for the three months ended June 30, 2013 included $1.1 million related to the repayment of the Company s Series A convertible debentures and $0.4 million for the repayment of its term loan. In the three months ended June 30, 2012, cash used in financing activities included $0.2 million for the repayment of the Company s term loan as well as $0.02 million for the repayment of finance lease obligations. Current assets were $7.3 million at June 30, 2013 and $9.9 million at March 31, 2013 and current liabilities decreased $0.8 million to $11.3 million. Working capital excluding deferred revenue decreased from $2.0 million at March 31, 2013 to $0.3 million at June 30, In December 2011, the Company extinguished its term loan, entered into a new line of credit and term loan arrangement and established Export Development Canada (EDC) as a guarantor for its line of credit and term loan. The Company s US $1 million revolving line of credit and US $3.5 million term loan are collectively referred to as the Senior Loan Facility. The Senior Loan Facility is secured by the lender with a first priority general security interest on all of assets of the Company (including intellectual property) including that of its subsidiaries. a. Line of credit This credit facility bears interest at a variable rate of the prime rate plus 1.75%. At June 30, 2013, the Company had drawn $1,000,000 under the revolving line of credit. The line of credit is collateralized by a security interest in the Company s assets. The line of credit expires March 31, b. Term loan 11.

13 The $3,500,000 term loan is repayable in 48 equal monthly installments of principal plus all accrued interest commencing January 1, This loan bears interest at a variable rate of the prime rate plus 2.25%. The $2,000,000 term loan is repayable in 36 equal monthly installments of principal plus all accrued interest commencing April This loan bears interest at a variable rate of the prime rate plus 2.25%. The term loans are collateralized by a security interest in the Company s assets. Pursuant to the Company s debt agreement with the lender, the Company is subject to certain covenants with respect to its balance sheet and financial performance. The Company was in compliance with all financial covenants as at June 30, The Company incurred costs of $130,775 related to the establishment of the original term loan facility and $78,472 with the additional term loan. These costs have been netted against the carrying amount of the debt and thus recorded as interest expense using the effective interest rate method over the term of the facility. c. Convertible Debentures Series A The Series A unsecured Convertible Debentures bear interest at a rate of 12% per annum, payable monthly and were originally scheduled to mature in July In December 2011, the maturity date of certain Debentures totaling $1,225,000 was extended from July 29, 2013 to January 15, 2016 (the Modified Debentures ). The change in the fair value of the Modified Debentures was determined to be $118,630 by discounting the difference between the remaining future contractual cash flows under the original Convertible Debentures and the future contractual cash flows of the Modified Debentures using an interest rate of 19%. This reduction in fair value was recorded as a decrease in the carrying value of the debt. As a result of the increased time to maturity, the value of conversion option increased by $63,298 which was recorded as an increase to the equity portion of the convertible debentures in the consolidated balance sheet. The difference between the decrease in the carrying value of the debt and the increase in the equity component of $54,702, was recognized in the statement of operations and comprehensive loss for the year ended March 31, 2012 as other finance gain. In January 2012, the Company redeemed Series A Debentures totaling $133,000 and re-issued Series A Debentures totaling $125,000 resulting in a net reduction to the principal balance outstanding. The reissued Series A Debentures mature on January 15, In March 2013, the Company redeemed $925,000 of the Series A Debentures in exchange for investments in Series C as described more fully below. As a result of this exchange the unamortized portion of the notional interest and costs on the Series A Debentures totaling $102,376 was charged to interest expense in the year ended March 31, In the quarter ended June 30, 2013, the Company redeemed the balance of the Series A Debentures totaling $1,141,000 and wrote off the remaining unamortized transaction costs of $7,108 and remaining interest accretion of $69,

14 Series B In September 2012 the Company issued $2,750,000 in Series B unsecured Convertible Debentures that bear interest at a rate of 12% per annum, payable monthly and are scheduled to mature on January 15, The Series B Convertible Debentures include multiple elements including the debt itself and a conversion feature whereby the holder can convert the debt to equity at the price specified in the debenture of $0.35. The conversion feature includes an additional provision whereby the Company can force a conversion of the debt to equity at the conversion price of $0.35 regardless of the then current share value. This conversion feature meets the accounting definition of a derivative instrument. The Company performed a valuation of all these elements to determine their fair value. This resulted in the recording of a derivative financial asset of $673,752, convertible debt of $2,492,107 (representing the fair value of the future contractual cash flows from the debt using an interest rate of 15.2%) and equity of $715,591 (representing the fair value of the conversion feature). The net difference of these three elements and the face value of $2,750,000 was recorded as contributed surplus of $216,054. The transaction costs related to the Series B Debentures totaled $40,968 of which $35,000 was allocated to the debt portion and $5,968 to the equity portion. The estimated fair value of financial derivative asset was determined using level 2 assumptions with the main inputs being the price of the Company s stock on the valuation date, the volatility of the Company s stock, the CAD risk free interest rate and the credit spread of the Company. At inception, the fair value attributed to the embedded derivative was $673,752. This was subsequently revalued at March 31, 2013 at $808,694 and the related gain of $134,492 was recorded as other finance gains. For the quarter ended June 30, 2013 the embedded derivative was revalued to $807,061 and the related loss of $1,633 was recorded as other finance losses in the quarter. The embedded derivative will be revalued and marked to market at each subsequent balance sheet date with the resulting difference being recorded as a gain or loss in the income statement. The difference between the face value and fair value of the convertible debt of $257,893 will be amortized to interest expense over the term of the debt as will the costs allocated to the debt. Series C In March 2013 the Company raised an additional $3,265,000 in Series C unsecured Convertible Debentures that bear interest at a rate of 10% per annum, payable monthly and are scheduled to mature in March Certain holders of $925,000 aggregate principal amount of the Series A Debentures agreed to tender such Debentures for early redemption by the Company and directed the proceeds thereof towards the subscription for an equivalent aggregate principal amount of the Series C Debentures. The Series C unsecured Convertible Debentures include two elements, the debt itself and a conversion feature whereby the holder can convert the debt to equity at the price specified in the debenture of $0.60. The Company performed a valuation of the convertible debt which valued the debt at $3,185,614 representing the fair value of the future contractual cash flows from the debt using an interest rate of 13.

15 10.1%, with the difference between this and the face value of $3,265,000 being recorded as equity of $79,386. The transaction costs related to the Series C Debentures totaled $347,880 of which $339,422 was allocated to the debt portion and $8,458 to the equity portion. The difference between the face value and fair value of the convertible debt of $79,386 will be amortized to interest expense over the term of the debt as will the costs allocated to the debt. Maturity and Redemption Terms Following the first year anniversary of the Debentures and prior to their maturity, the Company has the right to redeem the Debentures in cash, in whole or in part, at a price equal to their principal amount plus accrued and unpaid interest. At maturity, the Debentures will be redeemed by the issuance of fully-paid common shares at the conversion price. The principal balance of all Convertible Debentures outstanding at June 30, 2013 will mature as follows: Series B Series C Total $ $ $ January 15, ,750,000-2,750,000 March 14, ,265,000 3,265,000 Total principal 2,750,000 3,265,000 6,015,000 The following table summarizes the various components of the Convertible Debenture balance as of June 30, Series B Series C Total $ $ $ Principal balance 2,750,000 3,265,000 6,015,000 Unamortized notional interest (199,868) (71,759) (271,627) Unamortized costs (27,125) (306,816) (333,941) Net amount 2,523,007 2,886,425 5,409,432 In October 2011, the Company entered into a new lease for its head office space in Markham, Ontario. The lease obligates the Company to make rental and estimated operating expense payments totalling $2.5 million over an eight year term. The Company s previous lease for head office space expired in January 2012 and was extended through March 31, At June 30, 2013, the Company had $1.1 million of cash and cash equivalents and working capital excluding deferred revenue of $0.3 million. The Company is required to adhere to certain financial covenants pursuant to the terms of its senior term loan. Although the Company believes that its 14.

16 operating plans allow the Company to achieve and sustain positive operating cash flow, working capital or profitability and in order to meet its financial covenants, the Company will need to continue to generate revenues from non-recurring sources, protect its recurring revenues and capital resources and may need to make additional changes to its cost structure and operating plan. While Nightingale has recently begun to generate positive cash flows from its operations, this has not been consistent. The Company also remains dependent on new sales to minimize its use of cash and to the extent that the Company s utilization model, which does not generally require a large upfront payment, is favoured in future periods, the Company may experience a decrease in up-front cash flows from new sales which would have a negative impact on cash from operations. The Company may seek to raise additional funds for working capital purposes, capital expenditures or other strategic investments. Based on its historical financial performance and the current condition of the credit markets, financing may not be available on terms acceptable to the Company or at all. If adequate funds are not available on acceptable terms, the Company s ability to fund operations, make investments or take advantage of opportunities could be limited without an increase in sales. The impact of expenditures for investments in the Company s infrastructure or capital equipment on cash resources will be minimized by attempting to align spending with the availability of third party equipment financing. The Company believes that its current business plan provides for these factors and as such believes that its cash and cash equivalents will be sufficient to meet the Company s cash flow needs for the foreseeable future. Despite the Company s financial management efforts, however, there can be no assurance that the Company s plans will succeed or that the Company will be able to comply with its financial covenants. Although the Company has been able to obtain waivers for breach of financial covenants in the past, there can be no assurances that such waivers would be granted in the event of any future violation of covenants and the Company s ability to repay the debt in such as case would be limited. 4. NON-IFRS MEASURES The Company internally measures its performance and results of initiatives through a number of measures that are not recognized under International Financial Reporting Standard (IFRS) and may not be comparable to similar measures used by other companies. a. Adjusted EBITDA The Company has included an Adjusted EBITDA measurement since it believes that this information would be useful to investors to help evaluate the performance of the Company. Investors should be cautioned, however, that Adjusted EBITDA should not be construed as an alternative to net earnings as determined in accordance with IFRS. The Company's method of calculating Adjusted EBITDA may differ from the methods used by other companies and, accordingly, it may not be comparable to similarly titled measures used by other companies. 15.

17 Adjusted EBITDA is a non-ifrs measure that management believes is a useful supplemental measure of operating performance prior to other loss (income), interest, income taxes, depreciation, amortization, and stock-based compensation. Management believes it is useful to exclude these items as they are either non-cash expenses, items that cannot be influenced by management in the short term, or items that do not impact core operating performance, and management uses this information internally for forecasting and budgeting purposes. The following provides a reconciliation of EBITDA to Income (Loss) and Comprehensive Income (Loss) from Continuing Operations: Three Months Three Months Ended Ended Definition June 30, 2013 June 30, 2012 Income (loss) and comprehensive income (loss) $ (779,629) $ 249,637 Adjustments for: Current tax expense 2,183 $ 13,480 Other loss 308,561 68,171 Interest 187,758 93,214 Depreciation and amortization 380, ,877 Stock-based compensation 29,493 66,423 Other financing loss 1,633 - Acquisition, integration and other 49,971 49,971 Adjusted EBITDA $ 130,885 $ 915,773 b. Recurring and Non-Recurring Revenue The Company has included recurring revenue and non-recurring revenue measurements since it believes that this information is useful to investors to evaluate its performance. Investors should be cautioned, however, that recurring revenue and non-recurring revenue should not be construed as an alternative to revenue as determined in accordance with IFRS. Recurring Revenue is comprised of utilization fees, hosting, support and maintenance revenue, data management and transcription services, billing and financial management services and transactional fees. Non-Recurring Revenue is comprised of revenues generated from sales of perpetual software and systems licenses and related training, data conversion and installation services. The following provides a reconciliation of Recurring Revenue and Non-Recurring Revenue to Revenue: Three Months Three Months 16.

18 Ended Ended Definition June 30, 2013 June 30, 2012 Non-Recurring Revenue $ 1,166,784 $ 2,856,388 Recurring Revenue 2,602,397 2,704,729 Revenue $ 3,769,181 $ 5,561, TRANSACTIONS WITH RELATED PARTIES During the fiscal year ended March 31, 2013 the Company entered into a three year agreement with MCI Medical Clinics Inc., a subsidiary of Altima HealthCare Inc. ( MCI ) to provide the Company s enterprise EMR and practice management solution to 20 MCI family practice and walk-in clinics (the MCI Agreement ). The Company recognized revenue of $0.2 million in the quarter ended June 30, 2013 related to the MCI Agreement. The President and Chairman of Altima HealthCare is a member of the Company s Board of Directors. During the quarter the Company redeemed Series A Debentures totaling $1,141,000, of that total $125,000 was held by a director of the company Certain holders of $925,000 aggregate principal amount of the Series A Debentures including one director holding $0.5 million in Series A Debentures, agreed to tender such Debentures for early redemption by the Company and directed the proceeds thereof towards the subscription for an equivalent aggregate principal amount of the Series C Debentures. These transactions were recorded at the exchange amount, which is the amount of consideration established and agreed to by the related parties. 6. RECENT ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED The IASB has issued the following standards, which have not yet been adopted by the Company. Unless otherwise noted, each of the new standards is effective for annual periods beginning on or after January 1, 2013, with early adoption permitted. The Company has not yet begun the process of assessing the impact that the new and amended standards will have on its consolidated financial statements or whether to early adopt any of the new requirements. The following is a description of the new standards: IFRS 9, Financial Instruments ( IFRS 9 ), was issued in November 2009 and contains requirements for financial assets. This standard addresses classification and measurement of financial assets and replaces the multiple category and measurement models in IAS 39 for debt instruments, with a new mixed measurement model having only two categories: amortized cost and fair value through profit or loss. IFRS 9 also replaces the models for measuring equity instruments, and such instruments are either recognized at fair value through profit or loss or at fair value through other comprehensive income 17.

19 (loss). Where such equity instruments are measured at fair value through other comprehensive income (loss), dividends are recognized in profit or loss to the extent not clearly representing a return of investment; however, other gains and losses (including impairments) associated with such instruments remain in accumulated other comprehensive income (loss) indefinitely. The new standard is effective for annual periods beginning on or after January 1, 2015, with early adoption permitted. Requirements for financial liabilities were added in October 2010 and they largely carried forward existing requirements in IAS 39, Financial Instruments: Recognition and Measurement, except that fair value changes due to credit risk for financial liabilities designated at fair value through profit or loss would generally be recorded in other comprehensive income (loss). IFRS 10, Consolidated Financial Statement ( IFRS 10 ), requires an entity to consolidate an investee when it is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Under existing IFRS, consolidation is required when an entity has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. IFRS 10 replaces Standing Interpretations Committee ( SIC ) 12, Consolidation: Special Purpose Entities, and parts of IAS 27, Consolidated and Separate Financial Statements. IFRS 11, Joint Arrangements ( IFRS 11 ), requires a venturer to classify its interest in a joint arrangement as a joint venture or joint operation. Joint ventures will be accounted for using the equity method of accounting, whereas for a joint operation the venturer will recognize its share of the assets, liabilities, revenue and expenses of the joint operation. Under existing IFRS, entities have the choice to proportionately consolidate or equity account for interests in joint ventures. IFRS 11 supersedes IAS 31, Interests in Joint Ventures, and SIC-13, Jointly Controlled Entities - Non-monetary Contributions by Venturers. IFRS 12, Disclosure of Interests in Other Entities ( IFRS 12 ), establishes disclosure requirements for interests in other entities, such as joint arrangements, associates, special purpose vehicles and offbalance sheet vehicles. The standard carries forward existing disclosures and also introduces significant additional disclosure requirements that address the nature of, and risks associated with, an entity s interests in other entities. IFRS 13, Fair Value Measurement ( IFRS 13 ), is a comprehensive standard for fair value measurement and disclosure requirements for use across all IFRS standards. The new standard clarifies that fair value is the price that would be received to sell an asset, or paid to transfer a liability in an orderly transaction between market participants, at the measurement date. It also establishes disclosures about fair value measurement. Under existing IFRS, guidance on measuring and disclosing fair value is dispersed among the specific standards requiring fair value measurements and, in many cases, does not reflect a clear measurement basis or consistent disclosures. IAS 1, Presentation of Financial Statements, has been amended to require entities to separate items presented in the comprehensive income (loss) into two groups, based on whether or not items may be recycled in the future. Entities that choose to present the comprehensive income (loss) items before 18.

20 income taxes will be required to show the amount of income taxes related to the two groups separately. The amendment is effective for annual periods beginning on or after July 1, 2012 with earlier application permitted. Amendments to other standards In addition, there have been amendments to existing standards, including IAS 27, Consolidated and Separate Financial Statements ( IAS 27 ), and IAS 28, Investments in Associates and Joint Ventures ( IAS 28 ). IAS 27 addresses accounting for subsidiaries, jointly controlled entities and associates in nonconsolidated financial statements. IAS 28 has been amended to include joint ventures in its scope and to address the changes in IFRS 10 to RISKS AND UNCERTAINTIES Readers are encouraged to read the section entitled "Risk Factors" in the Company s fiscal 2013 Management's Discussion and Analysis for a discussion of the factors that could affect the Company s future performance. 8. DISCLOSURE OF OUTSTANDING SHARE DATA The Company had 76,310,915 common shares outstanding as at June 30, The following table sets forth common shares, stock options and warrants outstanding as at June 30, Authorized Issued as at June 30, 2013 Common Shares, Voting Unlimited 76,310,915 Preferred Shares Unlimited - Stock Options Issued and Outstanding 6,599,787 Warrants Issued and Outstanding 280,250 As described further in Section 3 Liquidity and Capital Resources, the Company has issued Convertible Debentures that are scheduled to mature in July 2013, January 2016 and March The Debentures bear interest at rates ranging from 10% to 12% per annum, payable monthly. Following the first year anniversary of the Debentures, the Company has the right to redeem the Debentures, in whole or in part, at a price equal to their principal amount plus accrued and unpaid interest. The Debentures are convertible at the holder s option into fully-paid common shares of the Company at any time prior to maturity or redemption at conversion prices of either $0.35 or $0.60 per share. The principal balance outstanding on the Debentures at June 30, 2013 was $6.015 million. 9. OUTLOOK See Cautionary Note Regarding Forward-Looking Statements. 19.