The following discussion should be read in conjunction with the attached
financial statements and notes thereto included in Part I, Item 1 of this
Quarterly Report on Form 10-Q, as well as our audited financial statements and
related notes thereto and management's discussion and analysis of financial
condition and results of operations for the year ended December 31, 2019
included in our Annual Report on Form 10-K filed with the U.S. Securities and
Exchange Commission on March 11, 2020 and with the securities commissions in all
provinces and territories of Canada on March 11, 2020. This Quarterly Report on
Form 10-Q, including the following sections, contains forward-looking statements
within the meaning of the U.S. Private Securities Litigation Reform Act of 1995.
These statements are subject to risks and uncertainties that could cause actual
results and events to differ materially from those expressed or implied by such
forward-looking statements. As a result of many factors, including without
limitation those set forth under "Risk Factors" under Item 1A of Part II below,
and elsewhere in this Quarterly Report on Form 10-Q, our actual results may
differ materially from those anticipated in these forward-looking statements. We
caution the reader not to place undue reliance on these forward-looking
statements, which reflect management's analysis only as of the date of this
Quarterly Report on Form 10-Q. We undertake no obligation to update
forward-looking statements which reflect events or circumstances occurring after
the date of this Quarterly Report on Form 10-Q. Throughout this discussion,
unless the context specifies or implies otherwise, the terms "CRH," "we," "us,"
and "our" refer to CRH Medical Corporation and its subsidiaries.
Overview
CRH is a North American company focused on providing GIs with innovative
services and products for the treatment of GI diseases. In 2014, CRH acquired a
full service gastroenterology anesthesia company, GAA, which provides anesthesia
services for patients undergoing endoscopic procedures. CRH has complemented
this transaction with twenty-four additional acquisitions of GI anesthesia
companies since GAA.
According to the CDC, colorectal cancer is the second leading cause of
cancer-related deaths in the United States and recent research indicates that
the incidence of colon cancer in young adults is on the rise. The CDC has
implemented campaigns to raise awareness of GI health and drive colorectal
cancer screening rates among at risk populations. Colon cancer is treatable if
detected early and screening colonoscopies are the most effective way to detect
colon cancer in its early stages. Anesthesia-assisted endoscopies are the
standard of care for colonoscopies and upper endoscopies.
CRH's goal is to establish itself as the premier provider of innovative products
and essential services to GIs throughout the United States. The Company's CRH
O'Regan System distribution strategy focuses on physician education, patient
outcomes, and patient awareness. The O'Regan System is a single use, disposable,
hemorrhoid banding technology that is safe and highly effective in treating
hemorrhoid grades I - IV. CRH distributes the CRH O'Regan System, treatment
protocols, operational and marketing expertise as a complete, turnkey package
directly to physicians, allowing CRH to create meaningful relationships with the
physicians it serves.
The Company has financed its cash requirements primarily from revenues generated
from the sale of its product directly to physicians, GI anesthesia revenue,
equity financings, debt financing and revolving and term credit facilities. The
Company's ability to maintain the carrying value of its assets is dependent on
the evolving COVID-19 pandemic and the easing of related governmental
restrictions and on the Company successfully marketing its products and
services, obtaining reasonable rates for anesthesia services and maintaining
future profitable operations, the outcome of which cannot be predicted at this
time. The Company has also stated its intention to acquire or develop additional
GI anesthesia businesses. In the future, it may be necessary for the Company to
raise additional funds for the continuing development of its business plan,
including additional acquisitions.
Recent Events
COVID-19 - March 2020
In March 2020, a pandemic relating to a novel coronavirus known as COVID-19
occurred causing significant financial market disruption and social dislocation.
The pandemic is dynamic with various cities, counties, states and countries
around the world responding in different ways to address and contain the
outbreak, including the declaration of a global pandemic by the World Health
Organization, a National State of Emergency in the United States and state and
local executive orders and ordinances forcing the closure of non-essential
businesses and persons not employed in or using essential services to "stay at
home" or "shelter in place". At this stage, we have no certainty as to how long
the pandemic will last, what regions will be most effected or to what extent
containment measures will be applied. As a result of the pandemic, the Company's
operations were impacted in the last half of March 2020 and continue to be
significantly impacted to the date of this report. Many of our ambulatory
surgery center customers have had to temporarily close centers through this
phase of the pandemic. While we expect the Anesthesia Service Centers ("ASCs")
that we service to re-open in the near-term with the easing of coronavirus
restrictions, there is no certainty regarding timing and extent of these
locations re-opening, nor is there a guarantee of remaining open should the
pandemic recur.
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Starting in mid-March 2020, as a result of the COVID-19 pandemic, patients in
the United States have cancelled or deferred non-emergent procedures or
otherwise avoided medical treatment, resulting in reduced patient volumes and
operating revenues and income from both our Products and Anesthesia Services
businesses. These cancellations and deferrals have continued throughout April
and the first half of May and are expected to significantly impact our results
during the second quarter of 2020. Until the centres that we serve are open and
fully operational, we will see significant declines in revenue and operating
income. See "Risk Factors - Our operations and financial results have been and
could be further harmed by the COVID-19 pandemic."
Paycheck Protection Program - April 2020
On April 17, 2020, the Company received loan proceeds of $2,945,620 under the
Paycheck Protection Program ("PPP"). The PPP was established as part of the
Coronavirus Aid, Relief and Economic Security Act ("CARES Act") in order to
enable small businesses to pay employees during the coronavirus crisis, and
provides loans to qualifying businesses for up to 2.5 times their average
monthly payroll costs. The amount borrowed under the PPP is expected to be
eligible to be forgiven provided that the borrower uses the loan proceeds during
the eight week period after receiving them, and provided that the proceeds are
used to cover payroll costs (including benefits), rent, mortgage interest, and
utility costs. The amount of loan forgiveness will be reduced if, among other
reasons, the borrower does not maintain staffing or payroll levels.
Principal and interest payments on any unforgiven portion of the PPP Loan will
be deferred for six months and will accrue interest at a fixed annual rate of
1%. Additionally, the remaining PPP Loan balance will carry a two year maturity
date. There is no prepayment penalty on the PPP Loan.
New Director - April 2020
Effective April 23, 2020, the Company appointed Brian Griffin to its Board of
Directors, replacing Anthony Holler who resigned as director on March 19, 2020.
Mr. Griffin has a proven track record of over 35 years of senior leadership and
operational experience in healthcare. He most recently served as Chairman and
Chief Executive Officer of Diplomat Pharmacy Inc., one of the nation's largest
independent Specialty Pharmacies and Pharmacy Benefit Managers (PBM), until it
was recently acquired by UnitedHealth Group Inc. (NYSE: UNH). Previously, Mr.
Griffin joined Anthem (NYSE: ANTM), in 2013, initially as President and Chief
Executive Officer of its Empire BlueCross BlueShield - New York Company, and
ultimately assuming the role of President of Anthem's Commercial Business,
including its 14 BlueCross BlueShield plans nationwide. Thereafter, Mr. Griffin
was named Chief Executive Officer of IngenioRx, Anthem's wholly owned national
PBM. Mr. Griffin also held positions of increasing responsibility with Medco
Health Solutions, Inc. and US Healthcare, Inc.
Critical Accounting Policies and Estimates
There are no changes to our critical accounting policies and estimates from
those disclosed in our annual MD&A contained in our Annual Report Form 10-K for
the year ended December 31, 2019.
Recent Accounting Pronouncements
From time to time, new accounting pronouncements are issued by the FASB or other
standard setting bodies that are adopted by us as of the specified effective
date. Unless otherwise discussed, we believe that the impact of recently issued
standards that are not yet effective will not have a material impact on our
financial position or results of operations upon adoption.
Please refer to Note 3 to our condensed consolidated interim financial
statements included in Part I, Item 1, "Financial Statements" of this Quarterly
Report on Form 10-Q for a description of recent accounting pronouncements
applicable to our business.
Results of Operations
The following tables provide a detailed analysis of our results of operations
and financial condition. For each of the periods indicated below, we present our
revenues by business segment, as well as present key metrics, such as operating
expenses, operating income and net and comprehensive income attributable to
shareholders of the company and non-controlling interest, from our statements of
operations.
The selected financial information provided below has been prepared in
accordance with United States Generally Accepted Accounting Principles ("US
GAAP").
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SELECTED US GAAP FINANCIAL INFORMATION
Three months ended March 31,
2020 2019 % Change
Anesthesia services revenue $ 23,150,397 $ 26,692,966 (13)%
Product sales revenue $ 2,304,395 $ 2,426,124 (5)%
Total revenue 25,454,792 29,119,090 (13)%
Total operating expenses, including: 28,051,654 25,294,241 11%
Depreciation and amortization expense 9,408,874 8,667,984 9%
Stock based compensation expense 652,548 564,251 16%
Operating income (loss) (2,596,862 ) 3,824,849 (168)%
Operating margin (10.2 )% 13.1 %
(Gain) Loss from equity investment 15,666 (125,179 ) (113)%
Net finance expense 496,840 2,391,979 (79)%
Tax expense (recovery) (974,411 ) 167,259 (683)%
Net and comprehensive income (loss) $ (2,134,957 ) $ 1,390,790 (254)%
Attributable to:
Shareholders of the Company $ (2,078,494 ) $ (76,968 ) 2,600%
Non-controlling interest2 $ (56,463 ) $ 1,467,758 (104)%
Net cash provided by operating activities $ 7,784,817 $ 12,375,716 (37)%
Distributions to non-controlling interest
(2,229,510 ) (4,034,800 ) (45)%
Net cash provided by operating activities
less distributions to non-controlling interest $ 5,555,307 $ 8,340,916 (33)%
Earnings per share attributable to shareholders:
Basic and diluted
$ (0.029 ) $ (0.001 )
NON-GAAP FINANCIAL MEASURES
In addition to results reported in accordance with US GAAP, the Company uses
certain non-GAAP financial measures as supplemental indicators of its financial
and operating performance as we believe these non-GAAP measures will be useful
to investors as this presentation is in line with how our management assesses
our Company's performance. These non-GAAP financial measures include Adjusted
operating EBITDA, Adjusted operating EBITDA margin and Adjusted operating
expenses. The Company believes these supplementary financial measures reflect
the Company's ongoing business in a manner that allows for meaningful
period-to-period comparisons and analysis of trends in its business.
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