July – September 2017

Dear Shareholders and Prospective Shareholders,

As we enter the fourth quarter of 2017, we would like to update you on our activities over the past three months.

Second Quarter 2017 (“Q2 2017”) Results Announced

We announced our second quarter results on August 2. Below are the highlights:

  • We increased consolidated revenues to $22.1 million, up 33% from Q2 2016
  • We increased total adjusted operating EBITDA* to $10.2 million, up 19% from Q2 2016
  • We served 46,188 patient cases compared with 29,336 patient cases served during Q2 2016
  • We generated approximately $5.9 million in free cash flow
  • We increased our credit facility with Scotiabank from $55 million to $100 million and welcomed JP Morgan to the syndicate of lenders. This allowed us to retire the higher interest Crown debt
  • As of June 30, 2017 we had trained 2,653 physicians to use the O’Regan System at 985 practices, compared with 2,290 physicians trained at 870 practices as of June 30, 2016

*Total adjusted operating EBITDA is a non-IFRS measure defined as operating income before interest, taxes, depreciation, and related expenses, amortization, stock-based compensation, acquisition-related expenses, and asset impairment charges. Refer to the end of the Company’s Financial Report for the quarter ended June 30, 2017, for a reconciliation of reported financial results to non-IFRS measures.

To view our Q2 2017 report, please visit http://investors.crhsystem.com/financial-information/.

Anesthesia Acquisitions

The pace of our anesthesia acquisitions has picked up in the second half of the year. We completed four transactions during the third quarter (“Q3 2017”):

  1. On August 1, we announced the acquisition of a 55% interest in West Florida Anesthesia Associates (“WFAA”) in Fort Myrs, Florida. WFAA’s total annual estimated revenue is $3 million and it serves one ASC
  2. On September 11, we announced the acquisition of a 51% interest in an anesthesia practice in Central Colorado (“Central Colorado”). Central Colorado’s total annual estimated revenue is $5.6 million and it serves three ASCs
  3. On September 22, we announced the acquisition of a 51% interest in an anesthesia practice in Raleigh, North Carolina (“Raleigh”). Raleigh’s total annual estimated revenue is $5.3 million and it serves three ASCs
  4. On September 28, we announced the acquisition (100% interest) of an anesthesia practice in San Antonio, Texas (“Alamo”). Alamo’s total annual estimated revenue is $1.8 million and it serves one ASC

All four transactions are EBITDA and cash flow accretive and were financed through a combination of credit and cash on hand. Having completed 15 anesthesia acquisitions since December 2014, we now have exclusive professional services agreements with 35 ASCs in seven states and serve approximately 235,000 patient cases annually. Year-to-date, we have spent over $34 million in anesthesia acquisitions.

Outlook for Q3 2017 Results

On September 22, we provided an outlook for our Q3 2017 results. This outlook reflects: (a) recent data implying that commercial insurance patient cases will not increase as much as expected in Q3 2017 compared with Q2 2017, (b) the expected impact of Hurricane Irma on facilities we serve in the Southeastern United States resulting in approximately 1,500 procedures being cancelled, and (c) the positive impact of our recently announced acquisitions. For more details, please view our news release.

We will issue our Q3 2017 results in early November. The details will be announced via news release and posted on our events page in late October.

CMS Proposed Changes to 2018 Physician Fee Schedule

On July 13, the Centers for Medicare and Medicaid (“CMS”), issued the proposed 2018 physician fee schedule to update payment policies in 2018. The schedule proposes to replace the two codes currently used to bill anesthesia for upper and lower GI endoscopic procedures with five new codes: two for upper endoscopic procedures and three for lower endoscopic procedures. The key issue for CRH is the reduction of the base units for diagnostic and screening colonoscopies.

We assume that the proposed changes will be adopted by Medicare, Medicaid and commercial payors effective January 1, 2018. Based on our operations at the time the proposal was published, we estimate that if the changes are implemented as proposed, our anesthesia revenue would decline by approximately 8.5% and our total revenue by approximately 7.5%, annually. This would also impact our total adjusted operating EBITDA* by approximately 13.5%. Total adjusted operating EBITDA margins are expected to be approximately 47%. The final schedule is expected to be announced in November 2017. For more details, view our press release dated July 17, 2017.

Marketing

In addition to our ongoing marketing initiatives, we took part in the following events:

  • On August 9, we participated in the Canaccord Global Healthcare Conference in Boston
  • On September 25 and 26, we participated in a non-deal roadshow and the Cantor Fitzgerald Healthcare Conference, both in NYC
  • On September 27 and 28, we participated in a non-deal roadshow and the RBC Small Cap Conference, both in Toronto

Edward Wright was joined by Richard Bear at these events, where they presented a company update and held one-on-ones with investors. During the quarter, we also discussed our business with prospective and existing investors from Canada, the US and Europe.

Upcoming Events

As more details of upcoming events become available, we will post them on our website.

If you have any questions, please email me at ir@crhmedcorp.com.

Sincerely,

Kettina Cordero

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