CRH Medical Corporation Announces 2018 Second Quarter Results
Despite changes to CMS codes, shareholder adjusted operating EBITDA increases 15% compared to Q2 2017
VANCOUVER, B.C. – August 1, 2018 – CRH Medical Corporation (TSX: CRH) (NYSE MKT: CRHM) (the “Company”), today announced its financial results for the quarter ended June 30, 2018.
Edward Wright, Chief Executive Officer of CRH commented, “We are pleased with our strong second quarter results, driven by the integration of our recent GI anesthesia acquisitions and the execution of our operational objectives. We are also very excited to have completed our first Managed Anesthesia Care development program with the recently announced acquisition of 51% of Lake Washington Anesthesia.” Wright further stated, “Lastly, of note and as expected; CMS’ recently proposed 2019 physician fee schedule does not reference any future changes to GI anesthesia reimbursements.”
This news release should be read in conjunction with the Company’s audited financial statements and management discussion and analysis for the three and six months ended June 30, 2018 and 2017 that have been filed on SEDAR and are available at www.sedar.com and on the Company’s website at www.crhmedcorp.com
Consolidated Financial Highlights (expressed in USD)
Results of Operations – Three and Six Months Ended June 30, 2018
Revenues for the quarter ended June 30, 2018 were $27,330,518 compared to $20,928,003 for the three months ended June 30, 2017. Revenues for the six months ended June 30, 2018 were $51,996,019, an increase of $9,699,364 when compared to the six months ended June 30, 2017.
Revenues from anesthesia services for the three months ended June 30, 2018 were $24,676,618 compared to $18,140,325 for the three months ended June 30, 2017. As noted below, the increase was primarily due to the Company’s anesthesia acquisitions completed mid-year in 2017 and in 2018; however, there were a number of factors which impacted the change in revenue between the second quarter of 2018 and the second quarter of 2017. The $6.5 million increase in revenue from the prior period is reflective of the following:
- growth through acquisitions completed in 2017 and 2018 contributed $7.9 million of the increase when comparing the two periods. This is comprised of growth from acquisitions completed in 2017 ($5.6 million) and growth from acquisitions completed in 2018 ($2.3 million);
- the impact of the CMS final fee schedule resulted in a decrease in revenue of approximately $1.6 million when compared to the second quarter of 2017;
- executing contracts with non-contracted payors and changes in payor mix, primarily related to entities acquired in 2016 and 2017, decreased revenue in the second quarter of 2018 by $0.3 million when compared to the second quarter of 2017; and
- the company incurred a positive adjustment as a result of a non-recurring change in estimate of $0.5 million.
Anesthesia revenues for the six months ended June 30, 2018 were $46,785,243 compared to $36,732,662 for the six months ended June 30, 2017. The $10.1 million increase in revenue from the prior period is reflective of the following:
- growth through acquisitions completed in 2017 and 2018 contributed $14.9 million of the increase when comparing the two periods. This is comprised of growth from acquisitions completed in 2017 ($12.4 million) and growth from acquisitions completed in 2018 ($2.5 million);
- the impact of the CMS final fee schedule resulted in a decrease in revenue of approximately $3.3 million when compared to the first six months of 2017;
- executing contracts with non-contracted payors and changes in payor mix, primarily related to entities acquired in 2016 and 2017, decreased revenue in the first six months of 2018 by $1.3 million when compared to the first six months of 2017;
- a negative adjustment as a result of the change in the impact of revenue estimates of $0.5 million; and
- revenue growth from our exclusive agreement to develop and manage a monitored anesthesia care program with Puget Sound Gastroenterology of approximately $0.3 million.
As adjusted operating expenses are largely fixed in nature, changes in revenue primarily drive changes in operating income and adjusted operating EBITDA.
In the three months ended June 30, 2018, the anesthesia services segment serviced 66,537 patient cases compared to 46,188 patient cases during the three months ended June 30, 2017. In the six months ended June 30, 2018, the anesthesia services segment serviced 124,043 patient cases compared to 88,551 patient cases during the six months ended June 30, 2017.
Revenues from product sales for the three months ended June 30, 2018 were $2,653,900 compared to $2,787,678 for the second quarter of 2017. Revenues from product sales for the six months ended June 30, 2018 were $5,210,776 compared to $5,563,993 for the six months ended June 30, 2017. The decrease in product sales is the result of decreased sales of the CRH O’Regan System at previously trained practices due to changes in practice emphasis and to a lesser extent the introduction of competitive products. We have initiated additional practice support initiatives, including a greater emphasis on re-training physicians in practices where usage has decreased. Additionally, we plan to increase marketing support to enhance awareness of the CRH O’Regan System to both patients and physicians. The Company continues to successfully execute on the Company’s direct to physician program that allows physicians to purchase our hemorrhoid banding technology, treatment protocols, marketing and operational experience. As of June 30, 2018, the Company has trained 2,808 physicians to use the O’Regan System, representing 1,076 clinical practices. This compares to 2,563 physicians trained, representing 985 clinical practices, as of June 30, 2017.
For the three months ended June 30, 2018, total adjusted operating expenses were $14,437,408 compared to $10,697,966 for the three months ended June 30, 2017. For the six months ended June 30, 2018, total adjusted operating expenses were $26,689,220 compared to $21,018,808 for the six months ended June 30, 2017. Increases in adjusted operating expenses are primarily related to adjusted operating expenses in the anesthesia services business. Factors impacting the fluctuation of total adjusted operating expenses are consistent with those impacting operating expenses.
Anesthesia services adjusted operating expenses for the three months ended June 30, 2018 were $12,102,420, compared to $8,712,101 for the three months ended June 30, 2017. Anesthesia services adjusted operating expenses for the six months ended June 30, 2018 were $22,518,468, compared to $17,011,429 for the six months ended June 30, 2017. Anesthesia services adjusted operating expenses primarily include labor related costs for Certified Registered Nurse Anesthetists and MD anesthesiologists, billing and management related expenses, medical drugs and supplies and other related expenses. The Company’s first anesthesia acquisition was in the fourth quarter of 2014, with sixteen further acquisitions completed in 2015, 2016, 2017 and 2018. As a result, the second quarter of 2018 and first half of 2018 is not directly comparable to 2017, with the majority of the increase relating to operating expenses for acquired companies. Though quarterly revenue may fluctuate significantly, quarterly adjusted operating expenses, which are primarily employee related costs, due to their fixed nature, increase as a result of the Company’s acquisition strategy. Total adjusted operating expenses per case for the anesthesia segment were $182 and $182 per case for the three and six months ended June 30, 2018, respectively, as compared to $189 and $192 per case for the three and six months ended June 30, 2017, respectively. The decrease in expense per case is reflective of the leverage of our existing infrastructure and the cost profile of acquisitions completed subsequent to June 30, 2017.
Product sales adjusted operating expenses for the three months ended June 30, 2018 were $1,271,226 compared to $1,141,975 for the three months ended June 30, 2017. Product sales adjusted operating expenses for the six months ended June 30, 2018 were $2,364,060 compared to $2,178,954 for the six months ended June 30, 2017. Employment and related costs have remained consistent with the second quarter of 2017, with the increase relating to higher product support costs, specifically related to marketing and training. In the future, the Company expects adjusted operating expenses to increase as the Company continues to invest in activities aimed at increasing demand for training and use of the CRH O’Regan System.
Corporate adjusted operating expenses for the three months ended June 30, 2018 were $1,063,762 compared to $843,890 for the three months ended June 30, 2017. Corporate adjusted operating expenses for the six months ended June 30, 2018 were $1,806,692 compared to $1,828,425 for the six months ended June 30, 2017. The increase in corporate adjusted operating expense is a reflection of higher professional fees, and employee related costs when compared to the second quarter of 2017. The increase reflects the timing of corporate activities.
Adjusted operating EBITDA attributable to shareholders of the Company for the three months ended June 30, 2018 was $8,429,439, an increase of $1,077,305 from the three months ended June 30, 2017. Adjusted operating EBITDA attributable to shareholders of the Company for the six months ended June 30, 2018 was $16,660,777, an increase of $1,589,336 from the six months ended June 30, 2017. The increases in adjusted operating EBITDA attributable to shareholders is primarily a reflection of the contributions from acquisitions completed in 2017 and 2018, offset by the impacts of the CMS final rule, and the impact of moving from non-contracted to in contract status for commercial payors. Adjusted operating EBITDA is also favourably impacted by the decrease in adjusted anesthesia operating expense per case.
Adjusted operating EBITDA attributable to non-controlling interest was $4,463,671 for the three months ended June 30, 2018. This comprises the non-controlling interests’ share of revenues of $7,748,310 and adjusted operating expenses of $3,284,639. Adjusted operating EBITDA attributable to non-controlling interest was $8,646,022 for the six months ended June 30, 2018. This comprises the non-controlling interests’ share of revenues of $14,690,790 and adjusted operating expenses of $6,044,768.
Total adjusted operating EBITDA was $12,893,110 for the three months ended June 30, 2018, an increase of $2,663,073 from the same period in 2017. Total adjusted operating EBITDA was $25,306,799 for the six months ended June 30, 2018, an increase of $4,028,952 from the same period in 2017.
At June 30, 2018, the Company had $4,469,617 in cash and cash equivalents compared to $12,486,884 at the end of 2017. The decrease in cash and equivalents is primarily a reflection of cash generated from operations, less cash used to finance normal course issuer bid repurchases, the SSA and WOSA acquisitions, debt repayments and tax payments during the six months ended June 30, 2018.
Working capital was $12,660,872 compared to working capital of $20,102,948 at December 31, 2017. The Company expects to meet its short-term obligations, including short-term obligations in respect of its notes payable, deferred consideration and earn-out obligation through cash earned through operating activities. The average number of days receivables outstanding at June 30, 2018 was 53 days. Excluding the Company’s most recent acquisitions, WOSA and SSA, days receivable outstanding was 50 days at June 30, 2018. At December 31, 2017, the average number of days receivables outstanding was 42 days. Impacting the days receivable outstanding as of June 30, 2018 is the implementation of the new CMS billing codes in the first quarter of 2018, which resulted in delays in the processing of payments by payors. This has had a continued impact in the second quarter of the year, but is expected to improve.
CRH will host a conference call to discuss its results on Thursday, August 2, 2018, at 11:00 am EST (08:00 am PST). To participate in the conference, please dial 1-800-319-4610, or 1-604-638-5340. An audio replay will be available shortly after the call by dialing 1-855-669-9658 or (604) 674-8052 and entering access code 1985. The replay will be available for two weeks after the call.
About CRH Medical Corporation
CRH Medical Corporation is a North American company focused on providing gastroenterologists throughout the United States with innovative services and products for the treatment of gastrointestinal diseases. In 2014, CRH became a full-service gastroenterology anesthesia company that provides anesthesia services for patients undergoing endoscopic procedures in ambulatory surgical centers. To date, CRH has completed 18 anesthesia acquisitions. CRH now serves 43 ambulatory surgical centers in ten states and performs approximately 290,000 procedures annually. In addition, CRH owns the CRH O’Regan System, a single-use, disposable, hemorrhoid banding technology that is safe and highly effective in treating all grades of hemorrhoids. CRH distributes the O’Regan System, treatment protocols, operational and marketing expertise as a complete, turnkey package directly to gastroenterology practices, creating meaningful relationships with the gastroenterologists it serves. CRH’s O’Regan System is currently used in all 48 lower US states.
This document makes reference to certain non-IFRS measures. These non-IFRS measures are not recognized measures under IFRS and do not have a standardized meaning prescribed by IFRS, and are therefore unlikely to be comparable to similar measures presented by other companies. When used, these measures are defined in such terms as to allow the reconciliation to the closest IFRS measure. These measures are provided as additional information to complement those IFRS measures by providing further understanding of the Company’s results of operations from management’s perspective. Accordingly, they should not be considered in isolation nor as a substitute for analyses of the Company’s financial information reported under IFRS. Management uses non-IFRS measures such as operating expenses – adjusted and operating EBITDA to provide investors with a supplemental measure of the Company’s operating performance and thus highlight trends in the Company’s core business that may not otherwise be apparent when relying solely on IFRS financial measures. Management also believes that securities analysts, investors and other interested parties frequently use non-IFRS measures in the evaluation of issuers. Management also uses non-IFRS measures in order to facilitate operating performance comparisons from period to period, prepare annual operating budgets, and to assess its ability to meet future debt service, capital expenditure, and working capital requirements.
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. Certain risks underlying our assumptions are highlighted below; if risks materialize, or if assumptions prove otherwise to be untrue, our results will differ from those suggested by our forward looking statements and our results and operations may be negatively affected. Forward looking statements in this report include statements regarding profitability, additional acquisitions, increasing revenue and Operating EBITDA, continued growth of our business in line with historical growth rates, trends in our industry, financing plans, our anticipated needs for working capital and leveraging our capabilities. Actual events or results may differ materially from those discussed in forward-looking statements. There can be no assurance that the forward-looking statements currently contained in this report will in fact occur. The Company bases its forward-looking statements on information currently available to it. The Company disclaims any intent or obligations to update or revise publicly any forward-looking statements whether as a result of new information, estimates or options, future events or results or otherwise, unless required to do so by law.
Forward-looking information reflects current expectations of management regarding future events and operating performance as of the date of this document. Such information involves significant risks and uncertainties, should not be read as guarantees of future performance or results, and will not necessarily be accurate indications of whether or not such results will be achieved. A number of factors could cause actual results to differ materially from the results discussed in forward-looking information, including, without limitation: our ability to identify and complete corporate transactions on favorable terms or achieve anticipated synergies relating to any acquisitions or alliances; our ability to manage growth and achieve our expansion strategy; changes to payment rates or methods of third-party payors, including United States government healthcare programs, changes to the United States laws and regulations that regulate payments for medical services, the failure of payment rates to increase as our costs increase, or changes to our payor mix; decreases in our revenue and profit margin under our fee for service contracts and arrangements, where we bear the risk of changes in volume, payor mix, Radiology, Anesthesiology and Pathology benefits, and third-party reimbursement rates; Ambulatory Surgical Centers or other customers may terminate or choose not to renew their agreements with us; our need to raise additional capital to fund future operations; the effect of various restrictive covenants and events of default under the Credit Facilities; we may still be able to incur substantially more debt, which could further exacerbate the risks associated with increased leverage; significant price and volume fluctuation of our share prices; the risk that we may write-off intangible assets; the operating margins and profitability of our anesthesia segment could be adversely affected if we are unable to maintain or increase anesthesia procedure volumes at our existing Ambulatory Surgical Centers; we may not be able to successfully recruit and retain qualified anesthesiologists or other independent contractors; adverse events related to our product or our services may subject us to risks associated with product liability, medical malpractice or other legal claims, insurance claims, product recalls and other liabilities, which may adversely affect our operations; our industry’s health and safety risks; Affordable Care Act reform in the United States may have an adverse effect on our business, financial condition, results of operations and cash flows and the trading price of our securities, financial condition, results of operations and cash flows and the trading price of our securities; failure to manage third-party service providers may adversely affect our ability to maintain the quality of service that we provide; income tax audits and changes in our effective income tax rate could affect our results of operations; our dependence on suppliers could have a material adverse effect on our business, financial condition and results of operations; unfavorable economic conditions could have an adverse effect on our business; we may be subject to a variety of regulatory investigations, claims, lawsuits, and other proceedings; if we are unable to adequately protect or enforce our intellectual property, our competitive position could be impaired; we may not be successful in marketing our products and services; our employees and third-party contractors may not appropriately record or document services that they provide; failure to timely or accurately bill for services could have a negative impact on our net revenue, bad debt expense and cash flow; we may be unable to enforce the non-competition and other restrictive covenants in our agreements; our senior management has been key to our growth, and we may be adversely affected if we lose any member of our senior management; our industry is already competitive and could become more competitive; if there is a change in federal or state laws, rules, regulations, or in interpretations of such federal or state laws, rules or regulations, we may be required to redeem our physician partners’ ownership interests in anesthesia companies under the savings clause in our joint venture operating agreements; changes in the United States federal Anti-Kickback Statute and Stark Law and/or similar state laws, rules, and regulations could result in criminal offences and potential sanctions; our employees and business partners may not appropriately secure and protect confidential information in their possession; we are dependent on complex information systems; we may be subject to criminal or civil sanctions if we fail to comply with privacy regulations regarding the protection, use and disclosure of patient information; we have a legal responsibility to the minority owners of the entities through which we own our anesthesia services business, which may conflict with our interests and prevent us from acting solely in our own best interests; a significant number of our affiliated physicians could leave our affiliated Ambulatory Surgical Centers; if regulations or regulatory interpretations change, we may be obligated to re-negotiate agreements of our anesthesiologists or other contractors; the continuing development of our products and provision of our services depends upon us maintaining strong relationships with physicians; we operate in an industry that is subject to extensive federal, state, and local regulation, and changes in law and regulatory interpretations; unfavorable changes or conditions could occur in the states where our operations are concentrated; government authorities or other parties may assert that our business practices violate antitrust laws; if we were to lose our foreign private issuer status under United States federal securities laws, we would likely incur additional expenses associated with compliance with United States securities laws applicable to United States domestic issuers; significant shareholders of the Company could influence our business operations, and sales of our shares by such significant shareholders could influence our share price; anti-takeover provisions could discourage a third party from making a takeover offer that could be beneficial to our shareholders; changes in the medical industry and the economy may affect the Company’s business; our industry is the subject of numerous governmental investigations into marketing and other business practices which could result in the commencement of civil and/or criminal proceedings, substantial fines, penalties, and/or administrative remedies, divert the attention of our management, and have an adverse effect on our financial condition and results of operations; evolving regulation of corporate governance and public disclosure may result in additional expenses and continuing uncertainty; we may face exposure to adverse movements in foreign currency exchange rates.
For a complete discussion of the Company’s business including the assumptions and risks set out above, see the Company’s annual information form which is available on SEDAR at www.sedar.com.