Management'sDiscussionandAnalysis
ForthethreemonthperiodsendedMarch31,2020and2019
Dated:May12,2020
IndexOurBusiness................................................................................................................................................................. 4
Highlights...................................................................................................................................................................... 5
StrategicPriorities......................................................................................................................................................... 9
GrowthStrategiesandOutlook.................................................................................................................................... 9
SelectedFinancialInformation..................................................................................................................................... 11
ResultsofContinuingOperations................................................................................................................................. 12
LiquidityandCapitalResources.................................................................................................................................... 15
ContractualCommitments............................................................................................................................................ 18
Equity............................................................................................................................................................................ 19
TransactionswithRelatedParties................................................................................................................................. 21
SummaryofQuarterlyResults...................................................................................................................................... 22
DisclosureControlsandProceduresandInternalControlOverFinancialReporting................................................... 24
CriticalAccountingPoliciesandEstimates.................................................................................................................... 24
RisksandUncertainties................................................................................................................................................. 25
ReconciliationofNon-IFRSMeasures........................................................................................................................... 32
ProposedTransactions.................................................................................................................................................. 33
Off-BalanceSheetArrangements................................................................................................................................. 33
CentricHealthCorporation2020FirstQuarterManagement'sDiscussionandAnalysis 2
Management'sDiscussionandAnalysis(ForthethreemonthperiodsendedMarch31,2020and2019)
CertainstatementsinthisManagement'sDiscussionandAnalysis("MD&A")constituteforward-lookingstatementswithinthemeaningofapplicablesecuritieslaws.Forward-lookingstatementsinclude,butarenotlimitedto,statementsmadeundertheheadings“StrategicPriorities","GrowthStrategiesandOutlook”and“RisksandUncertainties”andotherstatementsconcerningCentricHealthCorporation's,(“CentricHealth”,"Centric"orthe“Company”)2020objectives,strategiestoachievethoseobjectives,AdjustedEBITDAMarginprojections,aswellasstatementswithrespecttomanagement'sbeliefs,plans,estimates,andintentions,andsimilarstatementsconcerninganticipatedfutureevents,results,circumstances,performanceorexpectationsthatarenothistoricalfacts.Forward-lookingstatementsgenerallycanbeidentifiedbytheuseofforward-lookingterminologysuchas“outlook”,“objective”,“may”,“will”,“expect”,“intend”,“estimate”,“anticipate”,“believe”,“should”,“plans”or“continue”,orsimilarexpressionssuggestingfutureoutcomesorevents.Suchforward-lookingstatementsreflectmanagement'scurrentbeliefsandarebasedoninformationcurrentlyavailabletomanagement.
Forward-lookingstatementsinvolverisksanduncertaintiesthatcouldcauseactualresultstodiffermateriallyfromthosecontemplatedbysuchstatements.FactorsthatcouldcausesuchdifferencesincludetheCompany’sliquidityandcapitalrequirements,governmentregulationandfunding,thehighlycompetitivenatureoftheCompany’sindustry,relianceoncontractswithkeycustomersandothersuchriskfactorsdescribedfromtimetotimeinthereportsanddisclosuredocumentsfiledbytheCompanywithCanadiansecuritiesregulatoryagenciesandcommissions.ThislistisnotexhaustiveofthefactorsthatmayimpacttheCompany'sforward-lookingstatements.TheseandotherfactorsshouldbeconsideredcarefullyandreadersshouldnotplaceunduerelianceontheCompany'sforward-lookingstatements.Asaresultoftheforegoingandotherfactors,noassurancecanbegivenastoanysuchfutureresults,levelsofactivityorachievementsandneithertheCompanynoranyotherpersonassumesresponsibilityfortheaccuracyandcompletenessoftheseforward-lookingstatements.Thefactorsunderlyingcurrentexpectationsaredynamicandsubjecttochange.
Althoughtheforward-lookingstatementscontainedinthisMD&Aarebasedonwhatmanagementbelievesarereasonableassumptions,therecanbenoassurancethatactualresultswillbeconsistentwiththeseforward-lookingstatements.CertainstatementsincludedinthisMD&Amaybeconsidered“financialoutlook”forpurposesofapplicablesecuritieslaws,andsuchfinancialoutlookmaynotbeappropriateforpurposesotherthanthisMD&A.Allforward-lookingstatementsinthisMD&Aarequalifiedbythesecautionarystatements.Otherthanspecificallyrequiredbyapplicablelaws,weareundernoobligationandweexpresslydisclaimanysuchobligationtoupdateoraltertheforward-lookingstatementswhetherasaresultofnewinformation,futureeventsorotherwiseexceptasmayberequiredbylaw.TheseforwardlookingstatementsaremadeasofthedateofthisMD&A.
ThefollowingisadiscussionoftheconsolidatedstatementoffinancialpositionandtheconsolidatedstatementofincomeandcomprehensiveincomeoftheCompanyforthethreemonthperiodsendedMarch31,2020and2019andofcertainfactorsthattheCompanybelievesmayaffectitsprospectivefinancialcondition,cashflowsandresultsofoperations.TheMD&AshouldbereadinconjunctionwiththeunauditedcondensedinterimconsolidatedfinancialstatementsandnotestheretoforthethreemonthperiodsendedMarch31,2020and2019.TheunauditedcondensedinterimconsolidatedfinancialstatementsforthethreemonthperiodsendedMarch31,2020and2019arepreparedinaccordancewithInternationalFinancialReportingStandards34InterimFinancialReportingasoutlinedbyInternationalFinancialReportingStandards("IFRS")anditsinterpretationsasissuedbytheInternationalAccountingStandardsBoard("IASB").TheCompany'ssignificantaccountingpoliciesaresummarizedindetailinnote2oftheconsolidatedfinancialstatementsfortheyearendedDecember31,2019.Unlessotherwisespecified,amountsreportedinthisMD&Aareinmillions,exceptsharesandpershareamountsandpercentages.ThefollowingMD&AispresentedasofMay12,2020.AllamountsaredisclosedinCanadiandollars.AdditionalinformationabouttheCompany,includingthemostrecentlyfiledAnnualInformationForm,isavailableonwww.sedar.com.
CentricHealthCorporation2020FirstQuarterManagement'sDiscussionandAnalysis 3
OurBusiness
CentricHealth’svisionistobetheleadingproviderofpharmacyandotherhealthcareservicestoCanadianseniors.
TheCompanyisoneofCanada’sleading,andmosttrustedprovidersofcomprehensivespecialtypharmacyservicesandsolutionstoseniors.Weoperatealargenationalnetworkofpharmacyfulfilmentcentresthatdeliverhigh-volumesolutionsforthecost-effectivesupplyofchronicmedicationandotherspecialtyclinicalpharmacyservices,servingmorethan50,000residentsinover850seniorsandothercommunities(long-termcarehomes,retirementhomes,assistedlivingfacilitiesandgrouphomes)nationally.
WithservicesthataddressthegrowingdemandwithintheCanadianhealthcaresystem,CentricHealth’sunparallelednationalcaredeliveryplatformprovidessignificantpotentialforfutureexpansionandgrowth.
Ourlong-termstrategyfocusesondeliveringorganicgrowth,pursuinggeographicexpansionandM&Aopportunities,andbroadeningourportfolioofserviceofferingsintheseniorshealthcarespace.
Ourdedicatedteamandorganizationalculturehasanunwaveringcommitmenttoachievingthehighestserviceandethicalstandardsanddeliveringasuperiorqualityofcaretoseniors.Thisisouruniquebrandofcare.
YourCare.OurFocus.
CentricHealthCorporation2020FirstQuarterManagement'sDiscussionandAnalysis 4
HighlightsfortheThreeMonthPeriodEndedMarch31,2020
QuarterlyRevenuefromContinuingOperations
($millions)
$30.4$30.4$29.5$29.5
Q12020 Q12019
HighlightsfortheFirstQuarterof2020(Allcomparativefiguresareforthefirstquarterof2019)
• Revenuefromcontinuingoperationsincreased3.0%to$30.4millionforthethreemonthperiodendedMarch31,2020,comparedto$29.5millioninthesameperiodintheprioryear
– Growthwasdrivenbyanincreaseof3.4%intheaveragenumberofbedsservicedinthequarterto31,387,comparedto30,341inthesameperiodintheprioryear;and
– Growthfromtheincreaseintheaveragenumberofbedsservicedyear-over-yearwaspartiallyoffsetbytheimpactoftheamendmentstotheOntarioDrugBenefitAct("ODBA")thatcameintoeffectonJanuary1,2020.
• AdjustedEBITDA1fromcontinuingoperationsincreasedby10.0%to$2.0millionforthethreemonthperiodendedMarch31,2020,comparedto$1.9millioninthesameperiodintheprioryear
– Growthwasdrivenbyayear-over-yearreductionincorporatecostsof22.3%to$1.2millionfrom$1.5million,primarilyasaresultoflaboursavingsachieved;and
– GrowthfromthecorporatecostsavingswaspartiallyoffsetbyaslightdeclineinSpecialtyPharmacyAdjustedEBITDAof4.3%to$3.2millionfrom$3.3million,asanticipated,astheimpactoftheamendmentstotheODBAmorethanoffsettheimpactoftheincreaseintheaveragenumberofbedsservicedandcostsavinginitiativesthatwereexecutedinthequarter.
QuarterlyAdjustedEBITDAfromContinuingOperations
($millions)
$2.0$2.0$1.9$1.9
Q12020 Q12019
• CompletedacquisitionofRemedy'sRxSpecialtyPharmacy("Remedy's")
– Subsequenttoquarter-end,onMay7,2020,theCompanycompletedtheacquisitionofRemedy'sforatotalpurchasepriceofupto$44.0million;
– Remedy'sisaleadingspecialtypharmacyservingmorethan18,500residentsoflong-termcare,assistedlivingandotherinstitutionalsettingsacrossOntarioandWesternCanada,generatingapproximately$60.0millionofrevenueannually;
– Thetransactionalsoincludesarecentlycompletedtuck-inacquisitionbyRemedy'sofIntegrityPharmacyInc.("iPharm"),aregionalOntariospecialtypharmacythatservicesmorethan800beds;
– Upontheclosingofthetransaction,theCompanybecametheleadingCanadianproviderofspecialtypharmacyservicestoseniorscommunities,servingover50,000residents;and
– Thepurchasepriceiscomprisedof(i)$8.0millionofcashconsideration,(ii)$23.0millionofcommonsharesoftheCompany,issuedatanimpliedissuepriceof$0.184percommonshare,(iii)$4.0millionofdeferredconsiderationdue12monthsfollowingclosing,(iv)$4.0millionofconsiderationpayableunderavendortake-backnotedue18monthsfollowingclosingand(v)earn-outconsiderationofupto$5.0millionifcertainperformancetargetsareachievedoverthetwoyearsfollowingclosing.
CentricHealthCorporation2020FirstQuarterManagement'sDiscussionandAnalysis 5
• Completedrefinancingtransactionsfortotalgrossproceedsofupto$42.7million
– OnMarch31,2020,theCompanysigneddefinitivecreditagreementswithCrownCapitalPartnerFunding,LP("CrownCapital")andYorkvilleAssetManagementInc.forandonbehalfofcertainmanagedfunds("Yorkville");
– CrownCapitalwilladvancecreditfacilitiesofupto$30.0millioninthreetranches:(i)aninitialtrancheof$22.0million,whichwasadvancedonMarch31,2020andwasusedtorepaytheCompany'soutstandingCreditFacilities,(ii)asecondtrancheof$5.0million,whichwasadvancedonMay7,2020tofundthecashconsiderationfortheRemedy'sacquisitionand(iii)athirdtrancheof$3.0millionupontheCompanyreachingcertainfinancialmilestones(the"CrownCapitalFacility");
– InterestontheCrownCapitalFacilitywillaccrueatarateof10%perannum,butmaybereducedto8%perannumupontheCompanyreachingcertainfinancialmilestones.TheCrownCapitalFacilitywillberepayablefiveyearsfromclosing,subjecttocertainprepaymentrights.Inaddition,theCompanyissued7,200,000warrantstoCrownCapital,witheachwarrantentitlingtheholderthereoftoacquireonecommonshareatanexercisepriceof$0.25percommonshareforaperiodoffiveyears;
– YorkvilleadvancedasubordinatedloantotheCompanyof$12.7million(the"YorkvilleFacility")intwotranches:(i)aninitialtrancheof$6.3million,whichwasadvancedonMarch31,2020,and(ii)asecondtrancheof$6.4million,whichwasadvancedonMay7,2020,contemporaneouslywiththeclosingoftheRemedy'sacquisition;and
– TheYorkvilleFacilityranksinprioritytotheCompany’sexistingsubordinatedconvertibledebenturesbutsubordinatetotheCrownCapitalFacility.InterestontheYorkvilleFacilitywillaccrueatarateof12%perannum.TheYorkvilleFacilitywillmature24monthsfromclosing,subjecttocertainprepaymentrightsoftheCompanyorthemutualagreementoftheCompanyandYorkvilletoextendthematuritydate.
• RegulatorychangesimpactingOntariolong-termcarebusiness
– OnJanuary1,2020,thepreviouslyannouncedamendmentstotheODBAcameintoeffect,enactingthenewfundingmodelforOntariopharmaciesservingresidentsinlong-termcarehomes;
– Thenewfundingframeworkreplacedthepreviousfee-for-servicemodelthatallowedlong-termcarepharmaciesinOntariotochargeadispensingfee,co-paysandotherclinicalbillingssuchas
MedsChecks,instead,imposingacapitationmodelwherebylong-termcarepharmacyserviceprovidersreceiveafixedprofessionalfeeforallpharmacyservicesprovidedtoresidentsinlong-termcarehomes;
– Theprofessionalfeeisbasedonthenumberofbedsinthelong-termcarehomeservicedandbeginsat$1,500dollarsperbedserviced,annually,graduallydecliningto$1,200dollarsperbedinthefourthyearfollowingimplementation;
– Inthefirstquarterof2020,thenetimpactoftheODBAamendmentswasareductiontoAdjustedEBITDAofapproximately$0.5million;and
– ThequarterlyimpactoftheODBAamendmentsisexpectedtodeclineinthesecondquarterof2020andonwardsasthefullquarterimpactofcertaincostsavinginitiativesimplementedinresponsetotheregulatorychangespartwaythroughthefirstquarterof2020willberealized.
• CompletedexecutionofdeleveragingplanandnewstrategicdirectiontoestablishtheCompanyastheleadingproviderofpharmacyandotherhealthcareservicestoCanadianseniors
– DivestedtheCompany'sretailpharmacyoperationlocatedinMedicineHat,ABonFebruary14,2019;
– Issued30,000,000convertiblepreferredsharesoftheCompanyonMarch12,2019atanissuepriceof$0.40pershareforgrossproceedsof$12.0milliontofundsandaccountsmanagedbyEwingMorris&Co.InvestmentPartnersLtd.("EwingMorris");
– DivestedtheCompany'sretailpharmacyoperationlocatedinGrandePrairie,ABonJune24,2019;
– Issued64,500,000commonsharesoftheCompanyatanissuepriceof$0.12pershareforgrossproceedsof$7.7million,andissuedtheConvertibleDebenturesonNovember22,2019forgrossproceedsof$27.5million;
– Exchanged$12.5millionofconvertiblepreferredsharesoftheCompanyforanequivalentamountof8%unsecuredconvertibledebentures("EwingConvertibleDebentures");
– DivestedtheSurgicalandMedicalCentresbusinessforgrossproceedsof$35.0milliononNovember26,2019;
– EnteredintodefinitivecreditagreementsonMarch31,2020withCrownCapitalandYorkvilleforupto$42.7millionintotalgrossproceedstorefinancetheCompany'sexistingCreditFacilitiesandfinancetheRemedy'sacquisition;and
– AcquiredRemedy'sonMay7,2020foratotalpurchasepriceofupto$44.0million,establishingtheCompanyastheleadingproviderofspecialtypharmacyservicestoseniorscommunities,servicingmorethan50,000residentsacrossCanada.
CentricHealthCorporation2020FirstQuarterManagement'sDiscussionandAnalysis 6
• AppointedJeffMayasChiefOperatingOfficer
– Subsequenttoquarter-end,onMay7,2020,theCompanyappointedJeffMayastheChiefOperatingOfficer.JeffMaypreviouslyservedastheExecutiveVice-PresidentandGeneralManagerofRemedy'ssince2015.
• ContinuedresponsetoCOVID-19pandemic
– DuringthethreemonthperiodendedMarch31,2020,theCOVID-19pandemicbegan,causingsignificantfinancialmarketdisruptionandsocialdislocation.Thesituationisdynamicwithvariouscitiesandcountriesaroundtheworldrespondingindifferentwaystoaddresstheoutbreak;
– TheCompanyhasdevelopedprotocolsandproceduresshouldtheyberequiredtodealwithanypotentialepidemicsandpandemics,andhasputtheseprotocolsandproceduresinplacetoaddressthecurrentCOVID-19pandemic;
– Throughthefirstquarterof2020,theCOVID-19pandemichasnothadamaterialimpactontheCompany'sfinancialperformanceoroperations.However,despiteappropriatestepsbeingtakentomitigatesuchrisks,andthefactthattheCompany'sbusinessisanessentialserviceanditslargestpayersaretheprovincialgovernments,thedurationandtheextentoftheeffectoftheCOVID-19pandemicontheCompany'sactivitiesisuncertain;and
– TheCompanycontinuestomonitortheCOVID-19situationandistakingproactivemeasurestomanageanyrisksthatarisethatmayimpactthebusiness.Inaddition,theCompanycontinuestoworkcloselywithitslong-termcareandretirementhomepartnerstosupporttheirstaffandresidentsintheirhomes.
1DefinedandcalculatedinReconciliationofNon-IFRSMeasures
CentricHealthCorporation2020FirstQuarterManagement'sDiscussionandAnalysis 7
KeyPerformanceMetrics-FirstQuarterof2020
SpecialtyPharmacyAdjustedEBITDA
($thousands)
3,342
3,703
4,038 3,955
3,197
Q12019
Q22019
Q32019
Q42019
Q12020
AverageBedsServiced
30,341
31,265 31,28131,457 31,387
Q12019
Q22019
Q32019
Q42019
Q12020
TheCompanyusesanumberoffinancialandnon-financialmetricstoassessitsperformance.Thetablebelowsummarizesourmostrelevantmetrics.Thefullresultsanddiscussionofeachmetricaresubsequentlypresentedinthisreport.
Growth TotalRevenue lBedsServiced l
Profitability AdjustedEBITDA lAdjustedEBITDAMargin l
Quality Reportedincidents lLiquidity CashFlowsfromOperations l
NetDebttoAdjustedEBITDA lFreeCashFlow l
l=Favourablel=Stablel=Unfavourable
CentricHealthCorporation2020FirstQuarterManagement'sDiscussionandAnalysis 8
StrategicPriorities
1. Groworganically
• LeveragetheCompany’svaluepropositionwithseniorstowinnewcontracts
• Expandscopeofservicestoutilizeexistingcustomerbaseandattractnewcustomers
• Maximizescaleandefficienciesatexistingfacilities
2. Makestrategicacquisitions
• Pursueopportunitiesthatwillstrengthenvaluepropositionandexpandnationalplatform,achievingoperationalefficienciesthroughincreasedscaleandconsolidationofacquisitions
• Applystrictcriteriatoensurealignment,accretionandreturnoninvestedcapital
3. Reducedebtandstrengthenbalancesheet
• ReductionoftotaldebttoAdjustedEBITDAoverthemediumterm
• Utilizeeffectiveworkingcapitalmanagementtoimprovecashflows
4. Improvebusinessoperations
• Optimizelabourmodelsandrelyoninnovativetechnologyandeconomiesofscaletodriveefficiencies
• Maintainstandardsofexceptionalcare• Managecostsatcorporateofficetoensurealean
sharedservicemodelandmaximizeoverallprofitability
• Enhancequalityreportingmetricsthatdemonstratevaluetocustomerswithemphasisonbesthealthcareoutcomes
GrowthStrategiesandOutlook
CentricHealthispursuingamulti-facetedgrowthstrategytoincreaserevenueandexpandAdjustedEBITDAmarginsthroughthediversificationofitsofferingsandleveragingitsbest-in-classplatformtoofferthehighestlevelsofservicetomoreCanadians,withafocusonthefollowingareas:
• MaximizeutilizationofitsexistinginfrastructurethroughnewRFPwinswithlocal,regionalandnationalseniorscommunityoperators;
• Expandclinicalcapabilitiestostrengthenitsvaluepropositiontoitscustomersanddrivenew,highermarginrevenuestreams;
• Executeonstrategicacquisitionopportunitiestoexpanditsnetworkandgeographiccoverageandbenefitfromeconomiesofscale;
• Increaseproductandserviceofferingstoseniors;and• Reducecoststructureandbenefitfromeconomiesof
scale.
Giventhepublicfundingmodelandlimitedpayerbaseforitsspecialtypharmacyservices,theCompanyisactivelypursuingstrategiestomitigateitsexposuretogovernmentregulatorychangesandgeographicconcentrationbydiversifyingitsproductandserviceofferingsandexpandingitspayerbase.
TomeetthegrowingdemandsoftheCanadianhealthcaresystem,thescopeofpracticeofpharmacistscontinuestobroaden,presentinganopportunityfortheCompanytoexpanditsserviceofferings.
CentricHealthCorporation2020FirstQuarterManagement'sDiscussionandAnalysis 9
Alongertermopportunityisalsoavailablethroughservingtheneedsofseniorsremainingintheirhomes.
Withsixmillionseniorsalreadycurrentlylivingathome,coupledwiththeincreasedlifeexpectancyofCanadians,asignificantfavourabledemographictrendexistsforspecialtypharmacy.
Topursuetheopportunitiesprovidedbythesedemographictrends,andinlinewithitsdesiretoexpanditsproductandserviceofferingstoseniors,theCompanysignedastrategicdistributionandsupplyagreementandmadeanaccompanyingstrategicinvestmentinAceAgeInc.("AceAge")foritshome-basedautomateddrugdeliveryappliance,Karie.
Designedforindividualstakingmultiplemedications,particularlyseniorslivingindependentlyorwithoutfull-timecare,Karieisaninnovativedevicethatsimplifiescomplexmedicationregimesbyautomaticallydeliveringprescriptiondrugs,inthecorrectdosageandattherighttime.AsthedeviceiscompletelycompatiblewiththeCompany'sautomateddispensingandpackagingsystems,thispartnershipwillprovidetheCompanywithopportunitiesforadditionalspecialtypharmacyserviceofferingstoseniorslivingintheCompany'scontractedseniorscommunitiesaswellasthoselivingintheirownhomes.
Tofurtherenhanceanddiversifyitsserviceofferings,theCompanyhasalsodevelopedamedicalcannabisstrategywithintheseniorscommunitiesthatitserves.TheCompanyisuniquelypositionedthroughitspresenceinlong-termcareandretirementhomes,aswellasitsexpansiontoseniorscurrentlylivingathome,toprovideacomprehensiveservicethataddressesthecomplexitiesofmedicalcannabisusebyseniors.TheCompanycontinuestopartnerwithhomeoperatorsandleverageitsstrategicpartnershipwithCanopytoachievethebestpossiblesolutionsfortheseniorsthatitserves.
CentricHealthCorporation2020FirstQuarterManagement'sDiscussionandAnalysis 10
SelectedFinancialInformation
ThefollowingselectedfinancialinformationasatandforthethreemonthperiodendedMarch31,2020,2019,and2018,havebeenderivedfromtheconsolidatedfinancialstatementsandshouldbereadinconjunctionwiththosefinancialstatementsandrelatednotes.Theresultsofacquisitionsareaddedfromtheirrespectivedatesofcompletion.Non-IFRSmeasuresaredefinedandreconciledintheReconciliationofNon-IFRSMeasuressection.
ForthethreemonthperiodsendedMarch31,
2020 2019 2018
(thousandsofCanadianDollars) $ $ $
Revenuefromcontinuingoperations 30,426 29,533 31,588
Lossfromcontinuingoperations (2,281) (1,498) (726)
Lossfromcontinuingoperationsbeforeinterestexpenseandincometaxes (2,575) (2,223) (939)
EBITDA2fromcontinuingoperations (261) (15) 915
AdjustedEBITDA2fromcontinuingoperations 2,045 1,859 2,084
Pershare-Basic3 $0.01 $0.01 $0.01
Pershare-Diluted3 $0.00 $0.01 $0.01
AdjustedEBITDAMarginfromcontinuingoperations 6.7% 6.3% 6.6%
AdjustedEBITDA2 2,045 3,140 3,825
Pershare-Basic3 $0.01 $0.01 $0.02
Pershare-Diluted3 $0.00 $0.01 $0.02
AdjustedEBITDAMargin 6.7% 7.8% 8.6%
Netincome(loss) 5,314 (5,271) (1,853)
Pershare-Basic3 $0.02 ($0.03) ($0.01)
Pershare-Diluted3 $0.01 ($0.03) ($0.01)
Cashprovidedby(usedin)operations (1,450) 2,547 (316)
Totalassets 92,566 138,967 144,278
Totalliabilities 105,163 153,751 125,2022DefinedinReconciliationofNon-IFRSMeasures
3EarningspershareisbasedontheearningsattributabletoshareholdersofCentricHealthCorporation.
CentricHealthCorporation2020FirstQuarterManagement'sDiscussionandAnalysis 11
ResultsofContinuingOperationsfortheThreeMonthPeriodsEndedMarch31,2020and2019
OperatingandOtherExpensesasaPercentageofRevenue
ForthethreemonthperiodsendedMarch31,
2020 2019
$millions $ % $ %
Revenue 30.4 é 100 % 29.5 100 %
Operatingexpenses:
Healthcareservicesandsupplies 21.7 é 71.4 % 20.3 68.8 %
Employeecosts 2.7 ê 8.9 % 2.8 9.5 %
Otheroperatingexpenses 2.9 ê 9.5 % 3.1 10.5 %
Corporateofficeexpenses 1.2 ê 3.9 % 1.5 5.1 %
Totaloperatingexpenses 28.5 é 93.8 % 27.7 93.9 %
Otherexpenses:
Depreciationandamortization 2.3 é 7.6 % 2.2 7.5 %
Share-basedcompensationexpense 0.4 ê 1.3 % 0.5 1.7 %
Transaction,restructuringandothercosts 1.7 é 5.6 % 0.7 2.4 %
Finance(income)costs,net (8.0) ê (26.3) % 2.8 9.5 %
Incometaxexpense — ê — % 1.2 4.1 %
Totalother(income)expenses (3.6) ê (11.8) % 7.4 25.1 %
AdjustedEBITDA 2.0 é 6.7 % 1.9 6.3 %
• RevenuefromcontinuingoperationsforthethreemonthperiodendedMarch31,2020increasedby3.0%to$30.4millionfrom$29.5millionforthesameperiodintheprioryear.
• Revenueincreasedprimarilyasaresultofgrowthdrivenbyanincreaseintheaveragenumberofbedsserviced.ThisincreasewaspartiallyoffsetbytheamendmentstotheODBAthatcameintoeffectonJanuary1,2020.
• Goingforward,theCompanyexpectscontinuedorganicgrowthinrevenue;however,thetimingandcyclesofthecontractprocurementprocess(andtimerequiredtorealizerevenuefromformalprocurementRFPprocesses),andtheimpactofCOVID-19pandemiccouldresultinsomefluctuationoforganicgrowthratesovertime.
Operatingexpensesconsistoffourmajorcomponents:• healthcareservicesandsupplies,whichincludesthe
salariesandbenefitsofemployeesdirectlyinvolvedintheprovisionofservices,practitionerconsultantfees,thecostofmedicalsuppliesandthecostofpharmaceuticalssold;
• employeecosts,whichincludessalariesandbenefitsofemployeesthatarenotdirectlyinvolvedintheprovisionofservices;
• otheroperatingexpenses,whichincludesoccupancycosts,communication,insurance,advertisingandpromotionandadministrativeexpensesincurredattheoperationallevel;and,
• corporateofficeexpenses,whichincludessharedservicecosts,salariesandbenefits,occupancycosts,communication,advertisingandpromotion,insurance,publiccompanycosts,boardofdirectorsandsub-committeefeesandothercostsofthecorporateoffice.
• OveralloperatingexpensesforthethreemonthperiodendedMarch31,2020increasedby2.6%to$28.5million ascomparedto$27.7millionforthesameperiodintheprioryear.
• CostofhealthcareservicesandsuppliesforthethreemonthperiodendedMarch31,2020increasedby7.2%to$21.7millionascomparedto$20.3millionforthesameperiodintheprioryear,largelyduetoincreasedpharmaceuticalcostsasaresultoftheincreasednumberofbedsserviced.
• EmployeeexpensesforthethreemonthperiodendedMarch31,2020decreasedby3.8%to$2.7millionascomparedto$2.8millionforthesameperiodintheprioryear,largelyduetolabourefficienciesachieved
CentricHealthCorporation2020FirstQuarterManagement'sDiscussionandAnalysis 12
throughincreasedscaleandcostsavinginitiativesexecutedduringthequarter.
CorporateofficeexpensesforthethreemonthperiodendedMarch31,2020decreasedby22.2%to$1.2millionascomparedto$1.5millionforthesameperiodintheprioryearprimarilyduetolabourefficienciesachieved.
Transaction,restructuringandothercostsincludelegal,consultingandduediligencefeesdirectlyrelatedtobusinesscombinationsorbusinessrestructuring,andcostsassociatedwithnewcustomercontractimplementation,aswellasseverancecosts,start-upcostsfornewinitiativesandlegalandconsultingcostsforbusinessrestructuring.
• Transaction,restructuringandothercostsforthethreemonthperiodendedMarch31,2020 increasedby144.2%to$1.7millionascomparedto$0.7millionforthesameperiodintheprioryearlargelyduetoincreasedtransactioncostsincurredrelatedtotheRemedy'sacquisitionandrestructuringcostsfromlaboursavingsinitiatives.
Financecosts,netincludeinterestexpenseandaccretionexpense(income)relatingtotheCompany'sborrowingsandinterestexpenserelatingtotheCompany'sfinanceleases.
Finance(income)costs,netforthethreemonthperiodendedMarch31,2020resultedinincomeof$8.0million,netascomparedtoanexpenseof$2.8million,netforthecomparableperiodintheprioryear.
Financecosts,netexcludingaccretionforthethreemonthperiodendedMarch31,2020were$1.5millionascomparedto$2.4millioninthesameperiodintheprioryear,largelyduetoareductioninoutstandingindebtednesswhichresultedinlowerinterestpaidontheCompany'sCreditFacilities.
AccretionforthethreemonthperiodendedMarch31,2020wasincomeof$9.5millionascomparedtoanexpenseof$0.4millioninthesameperiodintheprioryear,largelydueto$9.8millionofaccretionincomerecognizedtoadjusttheliabilitycomponentoftheConvertibleDebenturestoitsamortizedcostfollowingtherepaymentoftheCompany'sCreditFacilities.
IncometaxexpenseforthethreemonthperiodendedMarch31,2020wasnilascomparedtoanexpenseof$1.2millionforthesameperiodintheprioryear,largelyduetotheimpactofpreviouslyunrecognizeddeferredtaxassetsthatwererecognizedduringthethreemonthperiodendedMarch31,2020whichoffsetcurrentincometaxexpense.AsatMarch31,2020andDecember31,2019,theCompanyhadgrosslosscarryforwardsamountingto$51.1millionand$50.8million,respectively,thatcanbecarriedforwardagainstfuturetaxableincome.Baseduponthelevelofhistoricaltaxableincomeandprojectionsforfuturetaxableincomeovertheperiodsinwhichthedeferredtaxassetsaredeductible,thefullamountoftheselosscarry-forwardswerenotrecognizedasatMarch31,2020andDecember31,2019.
CentricHealthCorporation2020FirstQuarterManagement'sDiscussionandAnalysis 13
RevenueandAdjustedEBITDA
ThissectionpresentstheresultsofoperationsforthethreemonthperiodendedMarch31,2020fortheCompany'ssoleoperatingsegment,SpecialtyPharmacy,aswellascorporateofficecosts.
ThesupportservicesprovidedthroughthecorporateofficelargelysupporttheoperationsoftheCompany.CertainamountsofthesecostshavebeenallocatedtoSpecialtyPharmacybasedontheextentofcorporatemanagement'sinvolvementintheoperationsofthethosebusinessesduringtheperiod.
ForthethreemonthperiodsendedMarch31, Revenue AdjustedEBITDA
2020 2019 2020 2019
(thousandsofCanadianDollars) $ $ $ % $ %
SpecialtyPharmacy 30,426 29,533 3,197 10.5 3,342 11.3
Corporate — — (1,152) — (1,483) —
Total 30,426 29,533 2,045 6.7 1,859 6.3
SpecialtyPharmacy
ThreeMonthPeriodEndedMarch31,2020:
• Revenueincreasedby3.0%to$30.4millionfrom$29.5millionforthesameperiodintheprioryear.
• AdjustedEBITDAdecreased4.3%to$3.2millionfrom$3.3millionforthesameperiodintheprioryearandAdjustedEBITDAmargindecreasedto10.5%from11.3%.
ForthethreemonthperiodendedMarch31,2020,therevenueincreasecomparedtothesameperiodintheprioryearwasduetotheincreaseintheaveragenumberofbedsservicedinthefirstquarterof2020.
Comparedtothesameperiodintheprioryear,AdjustedEBITDAforthethreemonthperiodendedMarch31,2020wasaffected,asexpected,bytheimpactoftheregulatorychangesthatcameintoeffectonJanuary1,2020.TheimpactoftheamendmentstotheODBAwaspartiallyoffsetbycostsavinginitiativesimplementedduringthequarterandthehigheraveragenumberofbedsthatwereservicedcomparedtothepriorperiod.
CorporateOffice
Comparedtothesameperiodintheprioryear,CorporateofficeexpensesforthethreemonthperiodendedMarch31,2020decreasedprimarilyduetolabourefficienciesachieved.
DiscontinuedOperations
DuringtheyearendedDecember31,2019,theCompanydivestedtheoperatingassetsofitsretailpharmacyoperationsinGrandePrairie,ABandMedicineHat,ABandtheCompany'sSurgicalandMedicalCentresbusiness.OnJanuary1,2020,theCompanydivesteditsPerformanceOrthoticsbusiness.Theresultsoftheseoperationshavebeenincludedaspartofdiscontinuedoperationsontheconsolidatedstatementofincomeandcomprehensiveincome.
RevenueandAdjustedEBITDAfromdiscontinuedoperationsforthethreemonthperiodendedMarch31,2020werebothnilascomparedto$10.7millionand$1.3million,respectively,forthesameperiodintheprioryear.
CentricHealthCorporation2020FirstQuarterManagement'sDiscussionandAnalysis 14
LiquidityandCapitalResources
TheCompanymanagesitscapitalstructurebasedonthefundsavailabletotheCompanyinordertosupportthecontinuationandexpansionofitsoperations,whichprimarilyoperatesinanenvironmentinwhichgovernmentregulationsandfundingplayakeyrole.TheCompanydefinescapitaltoincludesharecapital,warrantsandthestockoptioncomponentofitsshareholders'equityaswellasitsborrowingsandcontingentconsideration.Inadditiontothecashflowsgeneratedbyoperations,theCompanyreliesondebtandequityfinancingfrombotharm'slengthandrelatedpartiestoexecuteonitsstatedbusinessstrategyandcontinueitsoperationsasagoingconcern.Inordertomaintainoradjustitscapitalstructure,theCompanymayseekfinancingthroughtheissuanceofsecuritiessuchasequity,convertibledebenturesorsubordinateddebt,orbyreplacingexistingdebtwithdebtontermsmoreconsistentwiththeCompany'sneeds.
AsatMarch31,2020,theCompanyhad$58.6millionofborrowingsoutstanding.
TheCompanyiscommittedtoexecutingonitsoperatingplansandtofurtherreduceitsleverageand,assuch,theCompanyhaspursuedseveralstrategicopportunities,includingthedivestitureofexistingbusinessesandothernon-coreassets,therecapitalizationofthebalancesheetthroughtheissuanceofadditionalequity,convertibledebenturesandsubordinateddebtandstrategicacquisitionswithinitscorebusiness.AllstrategicalternativesbeingconsideredbytheCompanywereandcontinuetobefocusedonfurtherdeleveragingthebalancesheetandmaximizingshareholdervalue.
DuringthethreemonthperiodendedMarch31,2020,theCompany:
• CompletedthedivestitureofitsownershipinterestinthePerformanceOrthoticsbusiness;
• EnteredintodefinitivecreditagreementsonMarch31,2020withCrownCapitalandYorkvilleforupto$42.7millionintotalgrossproceedstorefinancetheCompany'sexistingCreditFacilitiesandfinancetheRemedy'sacquisition;and
• AcquiredRemedy'sonMay7,2020foratotalpurchasepriceofupto$44.0million,establishingtheCompanyastheleadingproviderofspecialtypharmacyservicestoseniorscommunitiesandotherinstitutionalsettings,servicingover50,000residentsacrossCanada.
CreditFacilities
TheCompany’screditfacilitieswerepreviouslywithasyndicateoflenderscomprisedofthreemajorCanadianbanksandprovidedforcreditfacilitiesofuptoanaggregateamountof$113.5millionatinception.Thecreditfacilitiesweremadeupofupto$100.0millioninseniorsecuredfacilities(the"SeniorFacilities")and$13.5millioninasecuredsubordinatedtermcreditfacility(the"SubordinatedFacility")(collectively,the"CreditFacilities").AllborrowingsundertheSeniorFacilitieshadoriginalmaturitiesoffiveyearsafterthedateoftheagreement.
TheSeniorFacilitieswerestructuredasfollows:(i)arevolvingcreditfacilityintheamountofupto$18.0million(upto$20.0millionpriortoMay30,2019),includingaswinglineofupto$3.0million("RevolvingFacility"),(ii)anon-revolvingtermloanfacilityintheamountofupto$60.0million("TermFacility"),and(iii)alimitedrevolvingacquisitionandcapitalexpendituretermloanfacilityintheamountofupto$4.8million(upto$20.0millionpriortoMay30,2019)tobeavailableinmultipledraws("AcquisitionFacility").OnNovember26,2019,theCompanyrepaidalloutstandingbalancesundertheTermFacilityandAcquisitionFacility.
OnMarch31,2020,theCompanyrepaidalloutstandingbalancesremainingundertheCreditFacilitieswiththenetproceedsreceivedfromthefirsttranchesoftheCrownCapitalFacilityandYorkvilleFacility.
Crown Capital Facility
OnMarch31,2020,theCompanyenteredintoacreditagreementwithCrownCapital,underwhichCrownCapitalwilladvancealoantotheCompanyofupto$30millioninthreetranches:(i)aninitialtrancheof$22million,whichwasadvancedonMarch31,2020andwasusedtorepaytheCompany'soutstandingCreditFacilities,(ii)asecondtrancheof$5million,whichwasadvancedonMay7,2020contemporaneouslywiththeclosingoftheRemedy'sacquisition,andwasusedbytheCompanytofundthecashconsiderationfortheRemedy'sacquisition,and(iii)athirdtrancheof$3millionatanytimepriortoMay31,2021upontheCompanyreachingcertainfinancialmilestones(the"CrownCapitalFacility").
InterestontheCrownCapitalFacilitywillaccrueatarateof10%perannum,butmaybereducedto8%perannumupontheCompanyreachingcertainfinancialmilestones.TheCrownCapitalFacilityisrepayablefiveyearsfromclosing,subjecttocertainprepaymentrights.TheCrownCapitalFacilitycontainsanumberofcustomarypositiveandnegativecovenants,includingarequirementtocomplywithcertainfinancialcovenants.Theseincluderestrictionsonincurringadditionalindebtedness,makingcertain
CentricHealthCorporation2020FirstQuarterManagement'sDiscussionandAnalysis 15
investmentsoracquisitions,sellingassetsoftheCompanyandmakingregularlyscheduledinterestpaymentsontheCompany’ssubordinatedindebtednessunlesstheCompanyhassufficientliquiditytodoso.
Yorkville Facility
OnMarch31,2020,theCompanyenteredintoacreditagreementwithYorkvilleunderwhichYorkvilleadvancedasubordinatedfacilitytotheCompanyofupto$12.7million(the"YorkvilleFacility")intwotranches:(i)aninitialtrancheof$6.3million,whichwasadvancedonMarch31,2020,and(ii)asecondtrancheof$6.4million,whichwasadvancedonMay7,2020contemporaneouslywiththeclosingoftheRemedy'sacquisition.TheYorkvilleFacilityranksinprioritytotheCompany’sexistingConvertibleDebenturesandEwingConvertibleDebentures,butsubordinatetotheCrownCapitalFacility.
InterestontheYorkvilleFacilitywillaccrueatarateof12%perannum,increasingto14%totheextentthattheCompanydoesnotmeetcertainfinancialcovenantsbythethirdquarterof2021.
TheYorkvilleFacilitywillmature24monthsfromclosing,subjecttocertainprepaymentrightsoftheCompanyorthemutualagreementoftheCompanyandYorkvilletoextendthematuritydate.
CentricHealthCorporation2020FirstQuarterManagement'sDiscussionandAnalysis 16
CashFlow
CashflowactivitiesforthethreemonthperiodendedMarch31,2020wereasfollows:
Cashusedin/providedbyoperatingactivities
Cashusedinoperatingactivitieswas$1.5millioncomparedtocashprovidedbyoperatingactivitiesof$2.5millionforthesameperiodintheprioryear:
-CashusedbyoperatingactivitiesinthecurrentyearcomparedtothecashprovidedbytheoperatingactivitiesinthesameperiodintheprioryearrelatedtothetimingofcertainpaymentsthatoccurredinthecurrentyearaswellastransactioncostsrelatedtotheRemedyacquisitionandrefinancingtransactions.
-TheCompanyhashistoricallygeneratedpositivecashflowsfromoperatingactivitiesandanticipatesthatthesewillcontinuetobepositivegoingforward.
Cashusedin/providedbyinvestingactivities
Cashusedininvestingactivitieswas$0.7millioncomparedtocashprovidedbyinvestingactivitiesof$0.9millionforthesameperiodintheprioryear:
-CashusedininvestingactivitiesinthecurrentyearrelatedtopurchasesofpropertyandequipmentandintangibleassetsaswellasapaymentmaderelatedtothefinalworkingcapitalsettlementforthedivestitureoftheSurgicalandMedicalCentresbusiness.
-CashprovidedbyinvestingactivitiesinthesameperiodintheprioryearrelatedtotheproceedsfromthedispositionoftheassetsoftheretailpharmacyoperationinMedicineHat,Alberta,partiallyoffsetbypurchasesofpropertyandequipmentandintangibleassetsandpaymentsofearn-outsrelatedtohistoricalacquisitions.
Cashprovidedby/usedinfinancingactivities
Cashprovidedbyfinancingactivitieswas$8.2millioncomparedtocashusedinfinancingactivitiesof$1.3millionforthesameperiodintheprioryear:
-CashprovidedbyfinancingactivitiesinthecurrentyearrelatedtonetproceedsfromtheCrownCapitalFacilityandYorkvilleFacilitypartiallyoffsetbypaymentsofinterestandrepaymentsmadeontheCreditFacilitiesandfinanceleasesandtransfertorestrictedcash.
-Cashusedinfinancingactivitiesinthesameperiodintheprioryearrelatedtopaymentsofinterestandrepaymentsofborrowingsandfinanceleases,offsetbynetproceedsfromtheissuanceoftheconvertiblepreferredsharestoEwingMorris.
CentricHealthCorporation2020FirstQuarterManagement'sDiscussionandAnalysis 17
ContractualCommitments
The Company's contractual commitments at March 31, 2020, are as follows:
Total 2020 2021-2022 2023-2024 Thereafter
$ $ $ $ $
Tradepayablesandotherliabilities 17.8 17.8 — — —
ConvertibleDebentures 27.6 — 13.8 13.8 —
CrownCapitalFacility 22.0 — 2.5 5.9 13.6
EwingConvertibleDebentures 13.2 — — 13.2 —
YorkvilleFacility 6.3 — 6.3 — —
Financeloans 0.1 — 0.1 — —
Financeleases 11.6 1.6 4.0 2.9 3.1
Interestpaymentsonborrowings 23.0 4.5 11.4 6.8 0.3
Contingentconsideration 4.9 2.4 2.5 — —
Total 126.5 26.3 40.6 42.6 17.0
Inthenormalcourseofbusiness,theCompanyentersintosignificantcommitmentsforthepurchaseofgoodsandservices,suchasthepurchaseofinventory,mostofwhichareshort-terminnatureandaresettledundernormaltradeterms.
CentricHealthCorporation2020FirstQuarterManagement'sDiscussionandAnalysis 18
Equity
AsatMarch31,2020,theCompanyhadtotalsharesoutstandingof295,150,099.Theoutstandingsharesinclude4,054,232shareswhicharerestrictedorheldinescrowandwillbereleasedtocertainvendorsofacquiredbusinessesbasedontheachievementofcertainperformancetargetsandcertaincustomers.Intheeventthatperformancetargetsarenotmet,escrowedsharesaresubjecttoreductionandcancellationbasedonformulasspecifictoeachtransaction.EscrowedandrestrictedsharesarenotreflectedinthesharesreportedontheCompany'sfinancialstatements.Accordingly,forfinancialreportingpurposes,theCompanyreported291,095,867commonsharesoutstandingasatMarch31,2020and283,923,811sharesoutstandingatDecember31,2019.
Fortheperiodended March31,2020 December31,2019
Commonshares
Balance,beginningofperiod 283,923,811 210,355,022
Issuanceofcommonshares 744,632 70,507,952
Commonsharesissuedfromtreasuryforcontingentconsideration 6,378,675 200,000
RSUsandwarrantsexercised 48,749 2,269,928
Commonsharesreleasedfromescrow — 500,000
Deferredconsiderationforacquisitions — 90,909
Balance,endofperiod 291,095,867 283,923,811
IssuanceofDeferredStock-basedCompensation
As at March 31, 2020, there were a total of 13,069,918 restricted share units and deferred share units outstanding to grant anequivalent number of common shares.
Fortheperiodended March31,2020 December31,2019
RSUsandDSUs
Balance,beginningofperiod 7,815,473 6,045,903
RSUsandDSUsgranted 5,359,861 5,400,751
RSUsandDSUsreleased (48,749) (2,269,928)
RSUsandDSUsforfeited (56,667) (1,361,253)
Balance,endofperiod 13,069,918 7,815,473
IssuanceofWarrants
AsatMarch31,2020,therewere23,030,333warrantsoutstandingataweightedaverageexercisepriceof$0.21. Fortheperiodended March31,2020 December31,2019
SharepurchasewarrantsBalance,beginningofperiod 17,730,333 2,822,000
Warrantsgranted 7,200,000 14,908,333
Warrantsexpired (1,900,000) —
Balance,endofperiod 23,030,333 17,730,333
Exercisable,endofperiod 22,108,333 16,808,333
CentricHealthCorporation2020FirstQuarterManagement'sDiscussionandAnalysis 19
IssuanceofStockOptions
AsatMarch31,2020,therewereatotalof917,000optionsoutstandingtopurchaseanequivalentnumberofcommonshares,withaweightedaverageexercisepriceof$0.40,expiringatvariousdatesthrough2021.ThenumberofexercisableoptionsatMarch31,2020,was682,750withaweightedaverageexercisepriceof$0.40.
Fortheperiodended March31,2020 December31,2019
CommonshareoptionsBalance,beginningofperiod 1,670,000 1,838,750
Optionsexpired (685,000) (148,750)
Optionscancelled/forfeited (68,000) (20,000)
Balance,endofperiod 917,000 1,670,000
Exercisable,endofperiod 682,750 1,435,000
ShouldalloutstandingoptionsandwarrantsthatwereexercisableatMarch31,2020beexercised,theCompanywouldreceiveproceedsof$4.9million.
Asatthedateofthisreport,May12,2020,thenumberofsharesoutstanding,includingescrowedshares,is420,850,645;thenumberofoptionsoutstandingis917,000;thenumberofrestrictedshareunitsanddeferredshareunitsoutstandingis12,369,372;andthenumberofwarrantsoutstandingis23,030,333.Includedinthesharesoutstandingare4,054,232restrictedshares,sharesheldinescrow,orintrust,andarenotfreelytradeable.
CentricHealthCorporation2020FirstQuarterManagement'sDiscussionandAnalysis 20
TransactionswithRelatedParties
Inthenormalcourseofoperations,theCompanymayenterintocertainrelatedpartytransactions,whichmayincludetransactionsenteredintowiththeCompany'sdirectorsandmanagement.Allrelatedpartytransactionswouldbeforconsiderationestablishedwiththerelatedparties,generallyonmarketterms,andapprovedbytheindependentnon-executivedirectorsoftheCompany.
CertaindirectorshelpmanagefundsthatowntheConvertibleDebentures,EwingConvertibleDebenturesandcommonsharesoftheCompany,andthatprovidedtheYorkvilleFacility.
CentricHealthCorporation2020FirstQuarterManagement'sDiscussionandAnalysis 21
SummaryofQuarterlyResultsQ12020
$Q42019
$Q32019
$Q22019
$
(thousandsofCanadianDollars)
Revenuefromcontinuingoperations 30,426 32,206 31,397 31,490
AdjustedEBITDAfromcontinuingoperations 2,045 2,470 2,807 2,242
AdjustedEBITDApersharefromcontinuingoperations:
Basic $0.01 $0.01 $0.01 $0.01
Diluted $0.00 $0.01 $0.01 $0.01
Netincome(loss)fromcontinuingoperations 5,393 (35,275) (2,601) (1,519)
Earningspersharefromcontinuingoperations:
Basic $0.02 ($0.15) ($0.01) ($0.01)
Diluted $0.01 ($0.15) ($0.01) ($0.01)
AdjustedEBITDA 2,045 3,313 2,690 3,548
AdjustedEBITDApershare:
Basic $0.01 $0.01 $0.01 $0.02
Diluted $0.00 $0.01 $0.01 $0.02
Netincome(loss) 5,314 (18,939) (3,501) (1,596)
Earningspershare:
Basic $0.02 ($0.08) ($0.02) ($0.01)
Diluted $0.01 ($0.08) ($0.02) ($0.01)
Q12019$
Q42018$
Q32018
$Q22018
$
Revenuefromcontinuingoperations 29,533 29,854 27,922 29,555
AdjustedEBITDAfromcontinuingoperations 1,859 604 (42) 1,025
AdjustedEBITDApersharefromcontinuingoperations:
Basicanddiluted $0.01 $0.00 $0.00 $0.01
Netlossfromcontinuingoperations (6,282) (8,766) (3,749) (20,133)
Earningspersharefromcontinuingoperations:
Basicanddiluted ($0.03) ($0.04) ($0.02) ($0.10)
AdjustedEBITDA 3,140 1,944 1,551 3,406
AdjustedEBITDApershare:
Basicanddiluted $0.01 $0.01 $0.01 $0.02
Netloss (5,271) (8,072) (2,901) (20,693)
Earningspershare:
Basicanddiluted ($0.03) ($0.04) ($0.01) ($0.10)
CentricHealthCorporation2020FirstQuarterManagement'sDiscussionandAnalysis 22
RevenueandAdjustedEBITDAfromContinuingOperationsbyQuarter(in$000)
Revenue EBITDA
Q22018 Q32018 Q42018 Q12019 Q22019 Q32019 Q42019 Q1202020,000
25,000
30,000
35,000
40,000
-1,000
0
1,000
2,000
3,000
Beginninginthesecondquarterof2018,theCompany'srevenueandAdjustedEBITDAwasimpactedbytheregulatorychangesinAlbertaandnationally,whichresultedinreductionstofeerevenuesearnedinAlbertaandthereductioninthepricesofnearly70ofthemostcommonlyprescribeddrugsinCanada,whichwerereducedby25%to40%,resultinginoveralldiscountsofupto90%offthepriceoftheirbrand-nameequivalent.
Inthefourthquarterof2018,theCompanyachievedquarter-over-quartergrowthinrevenueandAdjustedEBITDAasaresultofcostsavingsandincrementalrevenuesachievedthroughtheBusinessRe-EngineeringPlanaswellasadditionalbedsservicedduringthequarter.Thisquarter-over-quartergrowthinAdjustedEBITDAcontinuedinthefirst,secondandthirdquartersof2019asthenumberofbedsservicedcontinuedtoincreaseandthefullimpactofcostsavingsmeasuresfromtheBusinessRe-EngineeringPlanwererealized,inadditiontotheimpactoftheadoptionofIFRS16inthefirstquarterof2019.
Inthefourthquarterof2019,theCompanyachievedquarter-over-quartergrowthinrevenueasthenumberofbedsservicedcontinuedtoincrease.Despitethisincreaseinrevenue,theCompanyexperiencedaslightdeclineinquarter-over-quarterAdjustedEBITDAinthefourthquarterof2019asresultoftransitioncostsassociatedwiththenewlyonboardedhomesandaslightchangeinthecompositionofbedsserviced,asfundingmodelsvarybygeographyandbetweentypesofbedssuchaslong-termcareandretirement.
Beginninginthefirstquarterof2020,theCompany'srevenueandAdjustedEBITDAwereimpactedbytheregulatorychangesinOntario,wheretheexistingfee-for-servicefundingmodelforlong-termcarepharmacieswasreplacedwithacapitationmodelwherebypharmacyserviceprovidersreceiveafixedprofessionalfeeforallpharmacyservicesprovidedtoresidentsinlong-termcarehomes.
Inthefirstquarterof2020,theCompany'srevenueandAdjustedEBITDAdeclinedcomparedtothepreviousquarterasaresultoftheimpactoftheseregulatorychangesinOntario.TheimpactoftheregulatorychangesonAdjustedEBITDAwaspartiallyoffsetbycostsavinginitiativesthatwereexecutedthroughoutthefirstquarterinresponsetothechanges.Thefullquarterimpactofthecostsavinginitiativesimplementedthroughthefirstquarterwillberealizedinthesecondquarterof2020andbeyond.
CentricHealthCorporation2020FirstQuarterManagement'sDiscussionandAnalysis 23
DisclosureControlsandProceduresandInternalControlOverFinancialReporting
DisclosurecontrolsandprocedureshavebeendesignedtoensurethatinformationrequiredtobedisclosedbytheCompanyisaccumulatedandcommunicatedtotheCompany'smanagementasappropriatetoallowtimelydecisionsregardingrequireddisclosure.
TheChiefExecutiveOfficerandtheChiefFinancialOfficer(collectivelythe“CertifyingOfficers”)areresponsibleforestablishingandmaintainingdisclosurecontrolsandprocedures(“DC&P”)andinternalcontroloverfinancialreporting(“ICFR”),asthosetermsaredefinedinNationalInstrument52-109CertificationofDisclosureinIssuer'sAnnualandInterimFilings,fortheCompany.
TheCertifyingOfficershaveconcludedthat,asatMarch31,2020,theCompany'sDC&Phasbeendesignedeffectivelytoprovidereasonableassurancethat(a)materialinformationrelatingtotheCompanyismadeknowntothembyothers;and(b)informationrequiredtobedisclosedbytheCompanyinitsannualfilings,interimfilingsorotherreportsfiledorsubmitted,recorded,processed,summarizedandreportedwithinthetimeperiodsspecifiedinthesecuritieslegislation.
TherehavebeennosignificantchangestotheCompany'sICFRforthethreemonthperiodendedMarch31,2020,whichhasmateriallyaffected,orisreasonablylikelytomateriallyaffecttheCompany'sICFR.TheCompanyusedtheCOSOcontrolframeworktoevaluateDC&PandICFR.
ItshouldbenotedthatwhiletheCompany'sCertifyingOfficersbelievethattheCompany'sDC&Pprovidesareasonablelevelofassurancethattheyareeffective,theydonotexpectthatthedisclosurecontrolswillpreventallerrorsandfraud.Acontrolsystem,nomatterhowwellconceivedoroperated,canonlyprovidereasonable,notabsolute,assurancethattheobjectivesofthecontrolsystemaremet.
ICFRisdesignedtoprovidereasonableassuranceregardingthereliabilityoffinancialreportingandthepreparationofthefinancialstatementsforexternalreportingpurposesinlinewithInternationalFinancialReportingStandards.ManagementisresponsibleforestablishingandmaintainingadequateICFRappropriatetothenatureandsizeoftheCompany.However,anysystemofICFRhasinherentlimitationsandcanonlyprovidereasonableassurancewithrespecttofinancialstatementpreparationandpresentation.
CriticalAccountingPoliciesandEstimates
CriticalAccountingPolicies
TheunauditedcondensedinterimconsolidatedfinancialstatementshavebeenpreparedinaccordancewithIFRSanditsinterpretationsasissuedbytheIASBthatareeffectivefortheyearendedDecember31,2020.
TheCompany'ssignificantaccountingpoliciesaresummarizedindetailinnote2oftheunauditedcondensedinterimconsolidatedfinancialstatementsforthethreemonthperiodsendedMarch31,2020and2019.Nosignificantchangesinaccountingpolicieshaveoccurred.
CriticalAccountingEstimatesandJudgments
TheCompanydescribesitscriticalaccountingestimatesandjudgementsaswellasanychangesinaccountingestimatesandjudgementinNote2oftheunauditedcondensedinterimconsolidatedfinancialstatementsforthethreemonthperiodsendedMarch31,2020and2019.
CentricHealthCorporation2020FirstQuarterManagement'sDiscussionandAnalysis 24
RisksandUncertaintiesThebusinessofCentricHealthissubjecttoanumberofrisksanduncertainties.PriortomakinganyinvestmentdecisionregardingtheCompany,investorsshouldcarefullyconsider,amongotherthingstherisksdescribedherein(includingthesectiononcautionregardingforwardlookingstatements).
GovernmentRegulationandFunding
TheCompany'scorebusinessisfocusedontheprovisionofspecialtypharmacyservicestoseniors.TheCompanyisreliantonprescriptiondrugsalesforasignificantportionofitssalesandprofits.Prescriptiondrugsandtheirsalesaresubjecttonumerousfederal,provincial,territorialandlocallawsandregulations.Changestotheselawsandregulations,ornon-compliancewiththeselawsandregulations,couldadverselyaffectthereputation,operationsorfinancialperformanceoftheCompany.
Federalandprovinciallawsandregulationsthatestablishpublicdrugplanstypicallyregulateprescriptiondrugcoverage,patienteligibility,pharmacyreimbursement,drugproducteligibilityanddrugpricingandmayalsoregulatemanufacturerallowancefundingthatisprovidedtoorreceivedbypharmacyorpharmacysuppliers.Withrespecttopharmacyreimbursement,suchlawsandregulationstypicallyregulatetheallowabledrugcostofaprescriptiondrugproduct,thepermittedmark-uponaprescriptiondrugproduct,theprofessionalordispensingfeesthatmaybechargedonprescriptiondrugsalestopatientseligibleunderthepublicdrugplan,thefrequencyinwhichsuchprofessionalordispensingfeesmaybecharged,theco-paymentsthatmaybechargedtoapatient,andotherclinicalbillingsthatpharmacistsmaybeentitledtocharge.Withrespecttodrugproducteligibility,suchlawsandregulationstypicallyregulatetherequirementsforlistingthemanufacturer’sproductsasabenefitorpartialbenefitundertheapplicablegovernmentaldrugplan,drugpricingand,inthecaseofgenericprescriptiondrugproducts,therequirementsfordesignatingtheproductasinterchangeablewithabrandedprescriptiondrugproduct.Inaddition,otherfederal,provincial,territorialandlocallawsandregulationsgoverntheapproval,packaging,labeling,sale,marketing,advertising,handling,storage,distribution,dispensinganddisposalofprescriptiondrugs.
Salesofprescriptiondrugs,pharmacyreimbursementanddrugpricesmaybeaffectedbychangestothehealthcareindustry,includinglegislativeorotherchangesthatimpactpatienteligibility,drugproducteligibility,theallowablecostofaprescriptiondrugproduct,themark-uppermittedonaprescriptiondrugproduct,theamountofprofessionalordispensingfeespaidbythird-partypayersortheprovisionorreceiptofmanufacturerallowancesbypharmacyandpharmacysuppliers.
Themajorityofprescriptiondrugsalesarereimbursedorpaidbythird-partypayers,suchasgovernments,insurersoremployers.Thesethird-partypayershavepursuedandcontinuetopursuemeasurestomanagethecostsoftheirdrugplans.Eachprovincialjurisdictionhasimplementedlegislativeand/orothermeasuresdirectedtowardsmanagingpharmacyservicecostsandcontrollingincreasingdrugcostsincurredbypublicdrugplansandprivatepayerswhichimpactpharmacyreimbursementlevelsandtheavailabilityofmanufacturerallowances.Legislativemeasurestocontroldrugcostsincludeloweringofgenericdrugpricing,restrictingorprohibitingtheprovisionofmanufacturerallowancesandplacinglimitationsonprivatelabelprescriptiondrugproducts.
OnJanuary29,2018,thePan-CanadianPharmaceuticalAlliance,whichrepresentsparticipatingfederal,provincial,andterritorialpublicdrugplans,announcedthatitreachedanew5-yearagreementwiththeCanadianGenericPharmaceuticalAssociationwithrespecttothepricingofgenericdrugsinCanada.AsofApril1,2018,thepricesofnearly70ofthemostcommonlyprescribeddrugsinCanadawerereducedby25%-40%,resultinginoveralldiscountsofupto90%offthepriceoftheirbrand-nameequivalents.Thesedrugsincludethoseusedtotreathighbloodpressure,highcholesterol,anddepression,andarecollectivelyusedbymillionsofCanadians.
Furthermore,onFebruary28,2018,AlbertaHealthannouncedanewfundingframeworkthatwasenteredintowiththeAlbertaPharmacists’AssociationthattookeffectMay17,2018andrunsuntilMarch31,2022.Amongstotherthings,thechangesreduceddispensingfeesintheProvincefrom$12.30to$12.15andplacedalimitonthenumberoffrequentdispensingfees.ThenewfundingframeworkalsocontemplatesanAuthorizedAdjustmentPolicy(the“AuthorizedAdjustment”)wherebyAlbertaBlueCross,theplanadministrator,isauthorizedtoadjusttheamountowedtopharmaciestoensurethatprojectedbudgetedsavingsaremet.WhileAlbertaHealthhasindicatedthat,basedoncurrenttrends,theAuthorizedAdjustmentmayinitiallybesetatzeroforitsfiscalyearbeginningApril1,2020,itreservestherighttorevisitthispolicy.
OnApril25,2019,followingthereleaseofthe2019Ontarioprovincialbudget,theOntarioMinistryofHealth("MOH")releaseddraftproposedamendmentstotheregulationundertheODBAamendingO.Reg.201/9.Followingcertainconsultationsbythepharmacyassociations,theMOHinformedlong-termcarepharmaciesinOntariothatitwasmovingaheadwithanamendedversionoftheseproposals(the“ODBAAmendments”).Notably,theODBAAmendmentsremovethepaymentofadispensingfeefordrugproductssuppliedforalong-termcarehomeresidentbyapharmacyserviceproviderandinsteadimposingacapitationmodel
CentricHealthCorporation2020FirstQuarterManagement'sDiscussionandAnalysis 25
wherepharmacyserviceproviderswouldreceiveaprofessionalfeeforallpharmacyservicesprovidedtothelong-termcarehomethatisbasedonthenumberofbedsinthehome.Thefeeis$1,500dollarsperbedperyearin2019-2020and2020-2021,decreasingto$1,400dollarsin2021-2022,$1,300dollarsin2022-2023and$1,200dollarsin2023-2024(withallyearsabovereferringtotheGovernment'sfiscalyearfromApril1toMarch31).Inaddition,the$2dollarperprescriptionco-paymentsforresidentsoflong-termcarehomeswasalsoremovedandlong-termcarepharmaciesarenowprecludedfrombillingotherformsofclinicalbillings,suchasMedsChecks.Inaddition,theMOHalsointroducedotheramendmentstotheODBAthatmayaffecttheCompany'snon-long-termcareoperationsinOntario.Undertheseotherproposedamendments,theMOHimplementedcertainadjustmentswherebyitdeductsapercentagefromthesumofthedispensingfeeandmark-upforalldrugclaimsdependingonthepriceofthedrug,withareconciliationadjustmentintheeventthattheMOHachievesitsdesiredsavings.TheCompanyhastaken,andcontinuestotakeanumberofactionstooffsettheimpactoftheODBAAmendments.Afterconsideringtheseactions,theCompanyestimatestheODBAAmendmentstohaveanannualizednetimpacttoAdjustedEBITDAof$1.5millionin2020.Thesechanges,aswellasotherongoingchangesimpactingpharmacyreimbursementprograms,prescriptiondrugpricingandmanufacturerallowancefunding,legislativeorotherwise,areexpectedtocontinuetoputdownwardpressureonprescriptiondrugsalesandpaymentsrelatingthereto.ThesechangesmayhaveamaterialadverseimpactontheCompany’sbusiness,salesandprofitability.
UncertaintyofLiquidityandCapitalRequirements
ThefuturecapitalrequirementsoftheCompanywilldependonmanyfactors,includingthenumberandsizeofacquisitionsconsummated,rateofgrowthofitsclientbase,thecostsofexpandingintonewmarkets,thegrowthofthemarketforhealthcareservices,thecostsofadministrationanditsdebtservicingobligations.Inordertomeetsuchcapitalrequirements,theCompanymayconsideradditionalpublicorprivatefinancing(includingtheincurrenceofdebtandtheissuanceofadditionalcommonorpreferredsharesorothersecuritiesexchangeablefororconvertibleintocommonshares)tofunditsworkingcapitalneedsorallorapartofaparticularventureorinconnectionwithacquisitions,whichcouldentaildilutionofcurrentinvestors'interestintheCompany.Therecanbenoassurancethatadditionalfundingwillbeavailableor,ifavailable,thatitwillbeavailableonacceptableterms.Ifadequatefundsarenotavailable,theCompanymayhavetoreducesubstantiallyorotherwiseeliminatecertainexpenditures.TherecanbenoassurancethattheCompanywillbeabletoraiseadditionalcapitalifitscapitalresourcesaredepletedorexhausted.
Further,duetoregulatoryimpediments,alackofinvestordemandormarketconditionsbeyonditscontrol,theabilityoftheCompanytoissueadditionalcommonsharesorothersecuritiesexchangeablefororconvertibleintocommonsharesmayberestricted.
TheCompanycurrentlyhastheCrownCapitalFacilityandtheYorkvilleFacility,aswellastheConvertibleDebenturesandEwingConvertibleDebentures,pursuanttowhichitissubjecttoanumberofcustomaryaffirmativeandnegativefinancialcovenants.Theseinclude,butarenotlimitedto,requirementstocomplywithcertainfinancialcovenants,restrictionsonincurringadditionalindebtedness,payingdividendsorotherdistributions,makingcertaininvestments/acquisitions,sellingassetsoftheCompany,andmakingregularlyscheduledinterestpaymentsontheCompany’ssubordinatedindebtednessunlesstheCompanyhassufficientliquiditytodoso.
Inaddition,theCompany'sborrowingsundertheCrownCapitalFacilityandtheYorkvilleFacilityarecollateralizedbysubstantiallyalloftheCompany’sassets.Intheeventofadefault,including,amongotherthings,afailuretomakeanypaymentwhendueornon-observanceofanytermoftheagreements,alloftheCompany’sobligationsmayimmediatelybecomedueandpayable,andthelenderswouldalsobeentitledtorealizeontheirsecurityandliquidatetheassetsoftheCompany.IftheCompany'slendersacceleratetherepaymentofborrowings,theCompanycannotassurethatitwillhavesufficientassetstorepaytheamountsoutstanding,whichcouldhaveamaterialadverseeffectontheCompany’sbusiness,financialconditionandresultsofoperations.
Managementhasoffsettheimpactofpreviousregulatorychangesthroughafocusonre-engineeringthebusinessestoachieveoperationalefficienciesthroughworkflowimprovements,enhancedlabourmodels,expandingserviceandproductofferings,identifyingotherrevenuegeneratingopportunitiesandutilizationoftechnologyforautomatingprocesses.Intheeventtheseinitiatives,combinedwithcontinuedorganicandacquisition-relatedgrowthandmanagementofworkingcapital,donotgeneratesufficientcashflowfromoperationstomeetitsobligationsastheycomedue,theCompanymayneedtogeneratefundsfromothersourcesoffinancingorotherstrategicalternatives.
CashFlowtoServiceDebt
AsatMarch31,2020,theCompanyhadapproximately$58.6millionofoutstandingindebtedness.TheCompanycurrentlyestimatesitsdebtserviceforthenext12monthsundertheCreditFacilitieswillbeapproximately$6.2million,includingrequiredprincipalandinterestpayments.TheCompany’ssubstantialdebtsservicingcostscouldhavesignificantadverseconsequencesontheCompanyanditsbusiness,including:requiringasubstantialportionofitscashflowstobededicatedtothepaymentofprincipaland
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interestonitsindebtedness,thereforereducingitsabilitytousecashflowstofunditsoperations,capitalexpendituresandpotentialfuturebusinessopportunities;makingitmoredifficultfortheCompanytomakepaymentsonitsindebtedness,whichcouldresultinaneventofdefaultundertheCrownCapitalFacility,theYorkvilleFacility,theConvertibleDebenturesortheEwingConvertibleDebentures;limitingitsabilitytoobtainadditionalfinancing;reducingtheCompany’sflexibilityinplanningfor,orreactingto,changesinitsoperationsorbusiness;prohibitingtheCompanyfrommakingstrategicacquisitions,introducingnewtechnologiesorexploitingbusinessopportunities;placingtheCompanyatacompetitivedisadvantageascomparedtoitsless-highly-leveragedcompetitors;andnegativelyaffectingtheCompany’sabilitytorenewkeycustomercontracts.ForadditionalinformationontheCompany’soutstandinglong-termdebt,see“LiquidityandCapitalResources”.
ExposuretoEpidemicorPandemicOutbreak
AsCentricHealth'sbusinessesarefocusedonhealthcare,itsemployeesand/orfacilitiescouldbeaffectedbyanepidemicorpandemicoutbreak(includingCOVID-19),eitherwithinafacilityorwithinthecommunitiesinwhichtheCompanyoperates.
DuringthethreemonthperiodendedMarch31,2020,theCOVID-19pandemicbegan,causingsignificantfinancialmarketdisruptionandsocialdislocation.Thesituationisdynamicwithvariouscitiesandcountriesaroundtheworldrespondingindifferentwaystoaddresstheoutbreak.
Whilepharmaciesareanessentialserviceandexpectedtocontinuetooperateduringanyepidemicorpandemic,thereisthepotentialthattheremaybedisruptionsinsupplychainsthatcouldthreatentheabilityoftheCompanytoprocuremedicationsandpersonalprotectiveequipmentinatimelymanner.ThereisalsothepotentialthatapandemicsuchasCOVID-19couldforcethetemporaryclosureofapharmacysitetotheextentthatastaffmemberbecomesillandthepharmacyisrequiredtobesanitized,causelabourshortagesorstaffingissuestotheextentthatemployeesbecomeillorareotherwiseunabletocometowork,andlimittheabilityofclinicalpharmaciststovisitresidentsinseniorshomes.COVID-19has,andisexpectedtocontinuetohave,someimpactontheCompany'sclinicalservicesbillingsastheCompany'sstaffarecurrentlypreventedfromenteringseniorshomestoperformtheseservices.Lastly,COVID-19outbreakshavebeenprevalentinseniorshomesacrossCanada.TotheextentthatresidentsthatarebeingservedbytheCompanyinlong-termcareandretirementhomesbecomeillandareremovedfromthehomes,orthatoccupancyatseniorshomesisreducedduetoconcernsoverCOVID-19,revenueandthenumberofbedsservicedmaybeimpacted.
TheCompanyhasdevelopedprotocolsandproceduresshouldtheyberequiredtodealwithanypotentialepidemicsandpandemics,andhasputtheseprotocolsandproceduresinplacetoaddressthecurrentCOVID-19pandemic.Despiteappropriatestepsbeingtakentomitigatesuchrisks,andthefactthattheCompany'sbusinessisanessentialserviceanditslargestpayersaretheprovincialgovernments,thedurationandtheextentoftheeffectoftheCOVID-19pandemicontheCompany'sactivitiesisuncertain.TherecanbenoassurancethatthesepoliciesandproceduresandthenatureoftheCompany'sbusinesswillensurethattheCompanywillnotbeadverselyaffected.Theremaybeuncertaintyaboutjudgments,estimatesandassumptionsmadebymanagementduringthepreparationoftheCompany’sunauditedcondensedinterimconsolidatedfinancialstatementsrelatedtopotentialimpactsoftheCOVID-19outbreakonrevenue,expenses,assets,liabilities,andnotedisclosuresandanychangestothesejudgments,estimatesandassumptionscouldresultinamaterialadjustmenttothecarryingvalueoftheassetorliabilityaffected.
Additionally,theCOVID-19pandemiccouldresultinawidespreadhealthcrisisthatcouldadverselyaffecttheeconomiesandfinancialmarketsofmanyregionsandcountries.InternationalstockmarketshavereflectedtheuncertaintyassociatedwiththepotentialeconomicimpactoftheoutbreakandthesignificantdeclinesintheTSXCompositeIndexandothermajorindicesaroundtheworldhaslargelybeenattributedtotheeffectsofCOVID-19.Therecanbenoassurancethatadisruptioninfinancialmarkets,regionaleconomiesandtheworldeconomywouldnotnegativelyaffectCentricHealth’saccesstocapitalorthefinancialperformanceoftheCompany.
RelianceonContractswithKeyCustomers
RevenuesattributabletotheCompany’sbusinessesaredependentuponcertainsignificantcustomers.TherecanbenoassurancethattheCompany’scontractswithitskeycustomerswillberenewedorthattheCompany’sserviceswillcontinuetobeutilizedbythosekeycustomers.TherecouldbematerialadverseeffectsonthebusinessesoftheCompanyifakeycustomerdoesnotrenewitscontractswiththeCompany,orelectstoterminateitscontractswiththeCompanyinfavourofanotherserviceprovider.Further,thereisnoassurancethatanynewagreementorrenewalenteredintobytheCompanywithitscustomerswillhavetermssimilartothosecontainedincurrentarrangements,andthefailuretoobtainthosetermscouldhaveanadverseeffectontheCompany’sbusinesses.
SupplyChain
TheCompanysourcesthemajorityofitspharmaceuticalproductsfromasinglesupplier.Therefore,theCompany’sdistributionoperationsandsupplychainareexposedtopotentialdisruptions,includingthosecausedbyanepidemic
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orpandemic,whichcouldaffectthecostandtimelydeliveryofpharmaceuticalproducts.WhiletheCompanyhasmadeprovisionforanydisruptionofservice,anydisruption,eveniftemporary,couldnegativelyaffecttheCompany’ssalesandfinancialperformance.Inaddition,theCompanyhasestablishedcertaincredittermsandlimitswithitssuppliers.AnyunforeseenchangeinthenatureofthesecredittermscouldhaveanegativeimpactontheCompany'soperations.
LitigationandInsuranceCover
FromtimetotimetheCompanyisinvolvedinlitigation,investigationsorproceedingsrelatedtoclaimsarisingoutofitsoperationsintheordinarycourseofbusiness.IntheopinionoftheCompany,theseclaimsandlawsuitsintheaggregate,whensettled,arenotexpectedtohaveamaterialimpactontheCompany'sfinancialposition.However,totheextentthatmanagement’sassessmentoftheCompany’sexposureinrespectofsuchmattersiseitherincorrectorchangesasaresultofanydeterminationsmadebyjudgesorotherfindersoffact,orrequiresanysignificantone-timepaymentsofcash,theCompany’sexposurecouldexceedcurrentexpectations,whichcouldhaveamaterialadverseeffectonitsfinancialposition,resultsofoperationsorcashflows.
TheCompanymakesacquisitionsofvarioussizesthatmayinvolveconsiderationtovendorsintheformofcashandsecuritiesoftheCompany,aswellasadjustmentorcontingentconsiderationthatmaytaketheformofpriceprotection,earn-outsorperformancerewardsoveraperiodoftime.Contestationthroughlitigationbyvendorsatafuturedateofactual,orapplicable,entitlementsunderthenegotiatedagreementscanhappen,andmayresultinliabilitiesandcontingenciestotheCompanyorstrainedworkingrelationshipswithvendorsturnedkeyemployeesinconnectionwiththeacquisition.TheCompanyalsocompletesdivestituresofvarioussizesandtheCompanymayfromtime-to-timebeapartytoadisputerelatingtothetransaction,whichcouldresultinliabilitiesand/orcontingenciestotheCompany.Currently,theCompanyisundergoingaconfidentialarbitrationwiththevendorsofoneofthepreviousacquisitionsithasmadeinrelationtothenon-paymentofanearn-out.Theoutcomeofthatarbitrationisuncertain,butifdecidedagainsttheCompany,couldhaveamaterialadverseeffectontheCompany’sfinancialpositionandcashflows.
Inrecentyears,liabilityinsurancecoveragehasbecomeconsiderablymoreexpensiveandtheavailabilityofcoveragehasbeenreducedincertaincases.Thereisnoassurancethattheexistingcoveragewillcontinuetobesufficientorthat,inthefuture,policieswillbeavailableatadequatelevelsofinsuranceoratacceptablecosts.TheCompanymaintainsprofessionalmalpracticeliabilityinsurance,directors'andofficers'andgeneralliabilityinsuranceinamountsitbelievesaresufficienttocoverpotentialclaimsarisingoutofitsoperations.Someclaims,however,couldexceedthescope
ofitscoverageorthecoverageofparticularclaimscouldbedenied.
DuetothenatureofthehealthcareservicesprovidedbytheCompany,generalliability,errorandomissionsclaimsandmalpracticeclaims,amongstothertypesofclaims,maybecommencedagainsttheCompany.AlthoughtheCompanycarriesinsuranceinamountsthatmanagementbelievestobecustomary,therecanbenoassurancethattheCompanywillhavecoverageofsufficientscopetosatisfyanyparticularliabilityclaim.TheCompanybelievesthatitwillbeabletoobtainadequateinsurancecoverageinthefutureatacceptablecosts,buttherecanbenoassurancethatitwillbeabletodosoorthatitwillnotincursignificantliabilitiesinexcessofpolicylimits.Anysuchclaimsthatexceedthescopeofcoverageorapplicablepolicylimits,oraninabilitytoobtainadequatecoverage,couldhaveamaterialadverseeffectontheCompany'sbusiness,financialconditionandresultsofoperations.
Dilution
TheCompany'sby-lawsauthorizetheCompany,incertaincircumstances,toissueanunlimitednumberofsharesfortheconsiderationandonthosetermsandconditionsasareestablishedbytheBoardwithouttheapprovaloftheShareholders,whohavenopre-emptiverightsinconnectionwithsuchissuances.Inaddition,theCompanyhas,andmaycontinueinthefuture,toissuecommonsharesorwarrantsinconnectionwithacquisitionsandcustomerorsupplierarrangementstobetteraligntheinterestsofcertainstakeholderswiththatoftheCompany.IntheeventthattheCompanyproposestoissueadditionalcommonsharesorsecuritiesconvertibleintocommonshares,certainsignificantshareholdersoftheCompanyhavepre-emptiverightsthatenablethemtosubscribeforsecuritiesoftheCompanyinordertomaintaintheirprorataownership,whichcouldfurtherincreasedilution.Anyfurtherissuanceofsharesmaydilutetheinterestsofexistingshareholders.
Competition
ThemarketsforCentricHealth'sproductsandservicesareintenselycompetitive,subjecttorapidchangeandsignificantlyaffectedbymarketactivitiesofotherindustryparticipants.OtherthanrelationshipstheCompanyhasbuiltupwithhealthcareproviders,retirementhomesandlong-termcarehomesandpatients,thereislittletopreventtheentranceofthosewishingtoprovidesimilarservicestothoseprovidedbyCentricHealthanditssubsidiaries.Competitorswithgreatercapitaland/orexperiencemayenterthemarketandoutcompeteCentricHealth.TherecanbenoassurancethatCentricHealthwillbeabletocompeteeffectivelyforbusinesswithexistingcompetitors.
IncreasedCostsofaChangeofControl
CertainprovisionsoftheEwingConvertibleDebenturesissuedtoEwingMorriscouldmakeitmoredifficultormore
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expensiveforathirdpartytoacquiretheCompany.Forexample,ifachangeofcontrolweretooccurortheCompanyweretosellallorsubstantiallyallofitsassets,holdersoftheEwingConvertibleDebentureshavetherighttoredeemtheirEwingConvertibleDebenturesatcertainpremiumstotheirliquidationpreference.Inaddition,theholderoftheEwingConvertibleDebentureshastherighttoforceanacquireroftheCompanytomaintaintheEwingConvertibleDebenturesinthecapitalstructureoftheresultingentityincertaincircumstances.ThesefeaturesoftheEwingConvertibleDebenturescouldincreasethecostofacquiringtheCompanyorotherwisediscourageathirdpartyfromacquiringit.
AcquisitionsandIntegration
TheCompanyhasandcontinuestoexpecttomakeacquisitionsofvarioussizesthatfitparticularnicheswithinCentricHealth'soverallcorporatestrategy,includingtherecentlyannouncedRemedy'sacquisition.Thereisnoassurancethatitwillbeabletoacquirebusinessesonsatisfactorytermsoratall.Theseacquisitionswillinvolvethecommitmentofcapitalandotherresources,andtheseacquisitionscouldhaveamajorfinancialimpactintheyearofacquisitionandbeyond.ThespeedandeffectivenesswithwhichCentricHealthintegratestheseacquiredcompaniesintoitsexistingbusinessesandtheupfrontcapitalthatmayberequiredtorealizeanysynergiesmayhaveasignificantshort-termimpactonCentricHealth'sabilitytoachieveitsgrowthandprofitabilitytargets.
ThesuccessfulintegrationandmanagementofacquiredbusinessesinvolvesnumerousrisksthatcouldadverselyaffectCentricHealth'sgrowthandprofitability,includingthat:
(a) Managementmaynotbeabletomanagesuccessfullytheacquiredoperationsandtheintegrationmayplacesignificantdemandsonmanagement,therebydivertingitsattentionfromexistingoperations;
(b) Operational,financialandmanagementsystemsmaybeincompatiblewithorinadequatetointegrateintoCentricHealth'ssystemsandmanagementmaynotbeabletoutilizeacquiredsystemseffectively;
(c) Acquisitionsmayrequiresubstantialfinancialresourcesthatcouldotherwisebeusedinthedevelopmentofotheraspectsofthebusiness;
(d) AcquisitionsmayresultinliabilitiesandcontingencieswhichcouldbesignificanttotheCompany'soperations;and
(e) PersonnelfromCentricHealth'sacquisitionsanditsexistingbusinessesmaynotbeintegratedasefficientlyorattherateforeseen.
Theacquisitionofhealthcare-relatedcompaniesorassetsinvolvesalongcostrecoverycycle.FailuresbytheCompany
inachievingsignedcontractsaftertheinvestmentofsignificanttimeandeffortinthesalesprocesscouldhaveanadverseimpactontheCompany`soperatingresults.
CreditRisk
TheCompanyisexposedtocreditrisktotheextentthatitsclientsbecomeunabletomeettheirpaymentobligations.TheCompany'sexposuretoconcentrationsofcreditriskislimited.Accountsreceivablearefromtheworkerscompensationboards,governmentagencies,employers,insurancecompaniesandresidents.
InformationTechnologySystems
CentricHealth'sbusinessesdepend,inpart,onthecontinuedanduninterruptedperformanceofitsinformationtechnologysystems.SustainedsystemfailuresorinterruptionscoulddisrupttheCompany'sabilitytooperateeffectively,whichinturncouldadverselyaffectitsbusiness,resultsofoperationsandfinancialcondition.
TheCompany'scomputersystemsmaybevulnerabletodamagefromavarietyofsources,includingphysicalorelectronicbreak-ins,computervirusesandsimilardisruptiveproblems.Likeothercompanies,theCompanyissubjecttophishing,spear-phishingandotherattemptstocircumventtheCompany'sfirewallsfromtime-to-time.Theobjectiveofthesecampaignsisoftentogainunauthorizedaccesstoconfidentialinformationorinfecthostcomputerswithmalwareorransomwarewherethehackerattemptstoextortapaymentfromtargets.Despiteprecautionstaken,unanticipatedproblemsaffectingtheinformationtechnologysystemscouldcauseinterruptionsforwhichCentricHealth'sinsurancepoliciesmaynotprovideadequatecompensation.
ConfidentialityofPersonalandHealthInformation
CentricHealthanditssubsidiaries'employeeshaveaccess,inthecourseoftheirduties,topersonalinformationofclientsoftheCompanyandspecificallytheirmedicalhistories.TherecanbenoassurancethattheCompany'sexistingpolicies,proceduresandsystemswillbesufficienttoaddresstheprivacyconcernsofexistingandfutureclients.Ifaclient'sprivacyisviolated,orifCentricHealthisfoundtohaveviolatedanylaworregulation,itcouldbeliablefordamagesorforcriminalfinesorpenalties.
KeyPersonnel
TheCompanybelievesthatitsfuturesuccesswilldependsignificantlyuponitsabilitytoattract,motivateandretainhighlyskilledexecutivemanagement.Inaddition,thesuccessoftheCompanydependsonemployingorcontracting,asthecasemaybe,qualifiedhealthcareprofessionals.Thelossofhighlyskilledexecutivesandhealthcareprofessionalsortheinabilitytorecruittheseindividualsinmarketsthatthe
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CompanyoperatesincouldadverselyaffecttheCompany'sabilitytooperateitsbusinessefficientlyandprofitably.
Accounting,TaxandLegalRulesandLaws
Anychangestoaccounting,legaland/ortaxstandardsandpronouncementsintroducedbyauthorizedbodiesmayimpactontheCompany'sfinancialperformance.Additionally,changestoanyofthefederalandprovinciallaws,regulationsorpoliciesinjurisdictionswheretheCompanyoperatescouldmateriallyaffecttheCompany'soperationsanditsfinancialperformance.TheCompanymayalsoincursignificantcostsinordertocomplywithanyproposedchanges.Further,theCompanymaytakepositionswithrespecttotheinterpretationofaccounting,taxandlegalrulesandlawsthatmaybedifferentthantheinterpretationtakenbyapplicableregulatoryauthorities.AlthoughtheCompanybelievesthatitsprovisionforitslegalandtaxliabilitiesisreasonable,determiningthisprovisionrequiressignificantjudgmentandtheultimateoutcomemaydifferfromtheamountsrecordedinitsfinancialstatementsandmaymateriallyaffectitsfinancialresultsintheperiodorperiodsforwhichsuchdeterminationismade.TheCompany'sfailuretocomplywithlaws,regulationsorpoliciesmayexposetheCompanytolegalorregulatoryproceedingswhichcouldhaveamaterialimpactontheCompany'sfinancialperformance.
InternalControloverFinancialReportingandDisclosureControlsandProcedures
TheCompanymayfacerisksiftherearedeficienciesinitsinternalcontroloverfinancialreportinganddisclosurecontrolsandprocedures.Internalcontrolsoverfinancialreportingaredesignedtoprovidereasonableassuranceregardingthereliabilityoffinancialreportingandthepreparationofthefinancialstatementsforexternalreportingpurposes.ManagementisresponsibleforestablishingandmaintainingadequateinternalcontrolsoverfinancialreportingappropriatetothenatureandsizeoftheCompany.
TheBoard,inconjunctionwithitsAuditCommittee,isresponsibleforassessingtheprogressandsufficiencyofinternalcontrolsoverfinancialreportinganddisclosurecontrolsandproceduresandwillmakeadjustmentsasnecessary.However,theseinitiativesmaynotbeeffectiveatremedyinganydeficienciesininternalcontroloverfinancialreportinganddisclosurecontrolsandprocedures.Anydeficiencies,ifuncorrected,couldresultintheCompany'sfinancialstatementsbeinginaccurateandinfutureadjustmentsorrestatementsofitsfinancialstatements,whichcouldadverselyaffectthepriceofthesharesandCentricHealth'sbusiness,financialconditionandresultsofoperations.
CapitalInvestment
ThetimingandamountofcapitalexpendituresbytheCompanywillbedependentupontheCompany'sabilityto
utilizecreditfacilities,raisenewdebt,generatecashfromoperations,meetworkingcapitalrequirementsandselladditionalsharesinordertoaccommodatetheseitems.TherecanbenoassurancethatsufficientcapitalwillbeavailableonacceptabletermstotheCompanyfornecessaryordesirablecapitalexpendituresorthattheamountrequiredwillbethesameascurrentlyestimated.LackofthesefundscouldlimitthefuturegrowthoftheCompanyanditssubsidiariesandtheirrespectivecashflows.
SignificantShareholders
TherearesignificantshareholdersoftheCompanythatmaybelong-termholdersofthecommonsharesintheCompany.Thishastheeffectofreducingthepublicfloatforthecommonshares,whichmay,inturn,impacttheliquidityfortheshares.Inaddition,relativelylowliquiditymayadverselyaffectthepriceatwhichthecommonsharesoftheCompanytradeonthelistedmarket.Significantshareholdersmayalsobeabletoexercisesignificantinfluenceoveranymatterrequiringshareholderapprovalinthefuture.
EthicalBusinessConduct
Aviolationoflaw,thebreachofCompanypoliciesorunethicalbehaviourmayimpacttheCompany'sreputationwhichinturncouldnegativelyaffecttheCompany'sfinancialperformance.TheCompanyhasestablishedpoliciesandprocedures,includingaCodeofBusinessConduct,tosupportaculturewithhighethicalstandards.
VolatileMarketPriceforSecuritiesoftheCompany
Themarketpriceforsecuritiesmaybevolatileandsubjecttowidefluctuationsinresponsetonumerousfactors,manyofwhicharebeyondtheCompany’scontrol,including:
i actualoranticipatedfluctuationsintheCompany’squarterlyresultsofoperations;
ii changesinestimatesoffutureresultsofoperationsbytheCompanyorsecuritiesresearchanalysts;
iii changesintheeconomicperformanceormarketvaluationsofothercompaniesthatinvestorsdeemcomparabletotheCompany;
iv additionordepartureoftheCompany’sexecutiveofficersandotherkeypersonnel;
v releaseorothertransferrestrictionsonoutstandingsecurities;
vi salesorperceivedsalesofadditionalsecurities;
vii significantacquisitionsorbusinesscombinations,strategicpartnerships,jointventuresorcapitalcommitmentsbyorinvolvingtheCompanyoritscompetitors;and,
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viii newsreportsrelatingtotrends,concernsorcompetitivedevelopments,regulatorychangesandotherrelatedissuesintheCompany’sindustryortargetmarkets.
Financialmarketshaverecentlyexperiencedsignificantpriceandvolumefluctuationsthathaveparticularlyaffectedthemarketpricesofsecuritiesofcompaniesandthathave,inmanycases,beenunrelatedtotheoperatingperformance,underlyingassetvaluesorprospectsofsuchcompanies.Accordingly,themarketpriceofthesecuritiesoftheCompanymaydeclineeveniftheoperatingresults,underlyingassetvaluesorprospectshavenotchanged.
Additionally,thesefactors,aswellasotherrelatedfactors,maycausedecreasesinassetvaluesthataredeemedtobeotherthantemporary,whichmayresultinimpairmentlosses.Aswell,certaininstitutionalinvestorsmaybasetheirinvestmentdecisionsonconsiderationoftheCompany’senvironmental,governanceandsocialpracticesandperformanceagainstsuchinstitutions’respectiveinvestmentguidelinesandcriteria,andfailuretomeetsuchcriteriamayresultinalimitedornoinvestmentintheCompany’ssecuritiesbythoseinstitutions,whichcouldadverselyaffectthetradingpriceoftheCompany’ssecurities.Therecanbenoassurancethatcontinuingfluctuationsinpriceandvolumewillnotoccur.Ifsuchincreasedlevelsofvolatilitycontinue,theCompany’soperationsandthetradingpriceoftheCompany’ssecuritiesmaybeadverselyaffected.
TheCompanyNeedstoComplywithFinancialReportingandOtherRequirementsasaPublicCompany
TheCompanyissubjecttoreportingandotherobligationsunderapplicableCanadiansecuritieslawsandTSXrules,includingNationalInstrument52-109.ThesereportingandotherobligationsplacesignificantdemandsontheCompany’smanagement,administrative,operationalandaccountingresources.Moreover,anyfailuretomaintaineffectiveinternalcontrolscouldcausetheCompanytofailtomeetitsreportingobligationsorresultinmaterialmisstatementsinitsconsolidatedfinancialstatements.IftheCompanycannotprovidereliablefinancialreportsorpreventfraud,itsreputationandoperatingresultscouldbemateriallyharmed,whichcouldalsocauseinvestorstoloseconfidenceintheCompany’sreportedfinancialinformation,whichcouldresultinalowertradingpriceofitssecurities.
ManagementdoesnotexpectthatCompany’sdisclosurecontrolsandproceduresandinternalcontrolsoverfinancialreportingwillpreventallerrorsandallfraud.Acontrolsystem,nomatterhowwelldesignedandimplemented,canprovideonlyreasonable,notabsolute,assurancethatitsobjectiveswillbemet.Further,thedesignofacontrolsystemmustreflectthefactthatthereareresourceconstraints,andthebenefitsofcontrolsmustbeconsideredrelativetotheircosts.Duetotheinherentlimitationsinall
controlsystems,noevaluationofcontrolscanprovideabsoluteassurancethatallcontrolissueswithinacompanyaredetected.Theinherentlimitationsincludetherealitiesthatjudgmentsindecision-makingcanbefaulty,andthatbreakdownscanoccurbecauseofsimpleerrorsormistakes.Controlscanalsobecircumventedbyindividualactsofsomepersons,bycollusionoftwoormorepeopleorbymanagementoverrideofthecontrols.Duetotheinherentlimitationsinacost-effectivecontrolsystem,misstatementsduetoerrororfraudmayoccurandnotbedetected.
FutureSalesoftheCompany’sSecuritiesbyDirectorsandExecutiveOfficers
Subjecttocompliancewithapplicablesecuritieslaws,directorsandexecutiveofficersandtheiraffiliatesmaysellsomeoralloftheirsecuritiesintheCompanyinthefuture.Nopredictioncanbemadeastotheeffect,ifany,suchfuturesaleswillhaveonthemarketpriceoftheCompany’ssecuritiesprevailingfromtimetotime.However,thefuturesaleofasubstantialnumberofsecuritiesbytheCompany’sdirectorsandexecutiveofficersandtheircontrolledentities,ortheperceptionthatsuchsalescouldoccur,couldadverselyaffectprevailingmarketpricesfortheCompany’ssecurities.
DirectorsandOfficersMayHaveConflictsofInterest
CertainofthedirectorsandofficersoftheCompanymayalsoserveasdirectorsand/orofficersofothercompanies,whileotherdirectorsserveasnomineesofcertainsignificantshareholdersoftheCompany,includingthosewhoholdsubordinatedindebtednessoftheCompanyandwho’sinterestsmaynotbeentirelyalignedwiththoseofcommonshareholders.Consequently,thereexiststhepossibilityforsuchdirectorsandofficerstobeinapositionofconflict.AnydecisionmadebyanyofsuchdirectorsandofficersinvolvingtheCompanyarebeingmadeinaccordancewiththeirdutiesandobligationstodealfairlyandingoodfaithwithaviewtothebestinterestsoftheCompany.
ThirdPartyServiceProviders
TheCompanyisreliantuponthird-partyserviceprovidersinrespectofcertainofitsoperations.Itispossiblethatnegativeeventsaffectingthesethird-partyserviceproviders,oranynegligenceorfailuretoperformtheservicesascontemplated,could,inturn,negativelyimpacttheCompany.Inordertominimizeoperatingrisks,theCompanyactivelymonitorsandmanagesitsrelationshipswithitsthird-partyserviceproviders.
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ReconciliationofNon-IFRSMeasures
ThisMD&AincludescertainmeasureswhichhavenotbeenpreparedinaccordancewithIFRSsuchasEBITDA,AdjustedEBITDAandAdjustedEBITDApershare.Thesenon-IFRSmeasuresarenotrecognizedunderIFRSand,accordingly,usersarecautionedthatthesemeasuresshouldnotbeconstruedasalternativestonetincomedeterminedinaccordancewithIFRS.Thenon-IFRSmeasurespresentedareunlikelytobecomparabletosimilarmeasurespresentedbyotherissuers.
EBITDA,AdjustedEBITDA,AdjustedEBITDAMarginandAdjustedEBITDAPerShareTheCompanydefinesEBITDAasearningsbeforedepreciationandamortization,finance(income)costs,net,andincometaxexpense(recovery).AdjustedEBITDAisdefinedasEBITDAbeforetransactionandrestructuringcosts,changeinfairvalueofcontingentconsiderationliability,impairments,changeinfair
valueofderivativefinancialinstruments,gainondisposalofpropertyandequipmentandstockbasedcompensationexpense.AdjustedEBITDAMarginisdefinedasAdjustedEBITDAdividedbyrevenue.AdjustedEBITDApershareisdefinedasAdjustedEBITDAdividedbytheweightedaverageoutstandingsharesonbothabasicanddilutedbasis.TheCompanybelievesthatAdjustedEBITDAisameaningfulfinancialmetricasitmeasurescashgeneratedfromoperationswhichtheCompanycanusetofundworkingcapitalrequirements,serviceinterestandprincipaldebtrepaymentsandfundfuturegrowthinitiatives.TheCompany'sagreementswithlendersarestructuredwithcertainfinancialperformancecovenantswhichincludesAdjustedEBITDAasakeycomponentofthecovenantcalculations.EBITDAandAdjustedEBITDAarenotrecognizedmeasuresunderIFRS.
ForthethreemonthperiodsendedMarch31,
2020 2019
(thousandsofCanadianDollars) $ $
Netincome(loss)fromcontinuingoperations 5,393 (6,282)
Depreciationandamortization 2,314 2,208
Finance(income)costs,net (7,968) 2,836
Incometaxexpense — 1,223
EBITDAfromoperations (261) (15)
Transactionandrestructuringcosts 1,656 678
Changeinfairvalueofcontingentconsiderationliability 74 54
Share-basedcompensationexpense 358 475
Changeinfairvalueofderivativefinancialinstruments 220 671
Gainondisposalofpropertyandequipment (2) (4)
AdjustedEBITDAfromcontinuingoperations 2,045 1,859
AdjustedEBITDAfromdiscontinuedoperations — 1,281
AdjustedEBITDA 2,045 3,140
Weightedaveragenumberofshares-basic 288,853 210,713
AdjustedEBITDApersharefromcontinuingoperations-basic $0.01 $0.01
AdjustedEBITDApershare-basic $0.01 $0.01
Weightedaveragenumberofshares-diluted 494,982 210,713
AdjustedEBITDApersharefromcontinuingoperations-diluted $0.00 $0.01
AdjustedEBITDApershare-diluted $0.00 $0.01
CentricHealthCorporation2020FirstQuarterManagement'sDiscussionandAnalysis 32
ProposedTransactions
There are no significant proposed transactions which have not been disclosed.
Off-BalanceSheetArrangements
The Company does not have any off-balance sheet arrangements.
CentricHealthCorporation2020FirstQuarterManagement'sDiscussionandAnalysis 33
UnauditedCondensedInterimConsolidatedFinancialStatements
ForthethreemonthperiodsendedMarch31,2020and2019
(inthousandsofCanadiandollars)
Dated:May12,2020
Index
ConsolidatedStatementsofFinancialPosition 2
ConsolidatedStatementsofIncomeandComprehensiveIncome 3
ConsolidatedStatementsofChangesinEquity(Deficit) 4
ConsolidatedStatementsofCashFlows 5
NotestotheCondensedInterimConsolidatedFinancialStatements:
1.CorporateInformation 6
2.SignificantAccountingPolicies 7
3.ContingentConsideration 7
4.Goodwill,IntangibleAssetsandPropertyandEquipment 9
5.IncomeTaxes 10
6.TradePayablesandOtherLiabilities 10
7.Borrowings 10
8.OtherDeferredAmounts 13
9.Shareholders'EquityandEarningsperShare 13
10.FinancialInstruments,FairValueMeasurementsandFinancialRiskManagement 17
11.RelatedPartyTransactionsandBalances 20
12.GeneralandAdministrativeExpenses 21
13.Transaction,RestructuringandOtherCosts 21
14.FinanceCosts,net 22
15.Contingencies 22
16.SupplementaryDisclosuretotheConsolidatedStatementsofCashFlows 22
17.CapitalManagement 23
18.DiscontinuedOperations 23
1CentricHealthCorporationMarch31,2020and2019UnauditedCondensedInterimConsolidatedFinancialStatements
ConsolidatedStatementsofFinancialPosition(inthousandsofCanadiandollars)
March31,2020 December31,2019
$ $AssetsCurrentassetsCashandcashequivalents 6,040 61Restrictedcash 600 —Tradeandotherreceivables 12,224 12,550Inventories 5,857 5,243Prepaidexpensesandothercurrentassets 1,556 897Assetsofdisposalgroupsclassifiedasheldforsale(note18) — 358
26,277 19,109Non-currentassetsPropertyandequipment(note4) 19,591 20,048Investments(note10) 1,950 1,950Goodwillandintangibleassets(note4) 44,748 45,976Totalassets 92,566 87,083
LiabilitiesCurrentliabilitiesTradepayablesandotherliabilities(note6) 17,763 18,563Incometaxespayable(note5) 65 53Currentportionofborrowings(note7) 612 44,270Currentportionofcontingentconsideration(note3) 2,422 3,413Currentportionoffinanceleaseliabilities 1,368 1,364Liabilitiesofdisposalgroupsclassifiedasheldforsale(note18) — 358
22,230 68,021Non-currentliabilitiesBorrowings(note7) 58,007 12,995Otherdeferredamounts(note8) 15,199 15,972Contingentconsideration(note3) 2,509 2,452Deferredincometaxliabilities(note5) 6 18Financeleaseliabilities 7,212 7,586Totalliabilities 105,163 107,044
Equity(Deficit)Sharecapital(note9) 142,244 141,109Warrants 1,679 1,734Contributedsurplus 31,075 30,105EquitycomponentofConvertibleDebentures(note7) 9,029 9,029Deficit (196,624) (201,938)Totaldeficit (12,597) (19,961)
Totalliabilitiesanddeficit 92,566 87,083
The accompanying notes are an integral part of these unaudited condensed interim consolidated financial statements
ApprovedbytheBoard
"KevinDalton" "YazdiBharucha"KevinDalton,Director YazdiBharucha,Director
2CentricHealthCorporationMarch31,2020and2019UnauditedCondensedInterimConsolidatedFinancialStatements
ConsolidatedStatementsofIncomeandComprehensiveIncome(inthousandsofCanadiandollars,exceptpershareamounts)
ForthethreemonthperiodsendedMarch31,
20202019
(Note18)
$ $
Revenue 30,426 29,533
Costofhealthcareservicesandsupplies 21,695 20,274
Generalandadministrativeexpenses(note12) 9,356 10,079
Transaction,restructuringandothercosts(note13) 1,656 678
Lossfromoperations (2,281) (1,498)
Finance(income)costs,net(note14) (7,968) 2,836
Changeinfairvalueofderivativefinancialinstruments(note10) 220 671
Changeinfairvalueofcontingentconsiderationliability(note3) 74 54
Income(loss)beforeincometaxes 5,393 (5,059)
Incometaxexpense(note5) — 1,223
Netincome(loss)fromcontinuingoperations 5,393 (6,282)
Income(loss)fromdiscontinuedoperations(note18) (79) 1,011
Netincome(loss)fortheperiod 5,314 (5,271)
Netincome(loss)fromcontinuingoperationsattributableto:
ShareholdersofCentricHealthCorporation 5,393 (6,282)
Netincome(loss)fromdiscontinuedoperationsattributableto:
ShareholdersofCentricHealthCorporation (79) 988
Non-controllinginterests(note18) — 23
Basicearnings(loss)percommonshareattributabletoshareholdersofCentricHealthCorporation:
Fromcontinuingoperations $0.02 ($0.03)
Fromdiscontinuedoperations $0.00 $0.00
Fromearnings(loss)fortheperiod $0.02 ($0.03)
Dilutedearnings(loss)percommonshareattributabletoshareholdersofCentricHealthCorporation:
Fromcontinuingoperations $0.01 ($0.03)
Fromdiscontinuedoperations $0.00 $0.00
Fromearnings(loss)fortheperiod $0.01 ($0.03)
Weightedaveragenumberofcommonsharesoutstanding(inthousands)(note9):
Basic 288,853 210,713
Diluted 494,982 210,713
Theaccompanyingnotesareanintegralpartoftheseunauditedcondensedinterimconsolidatedfinancialstatements
3CentricHealthCorporationMarch31,2020and2019UnauditedCondensedInterimConsolidatedFinancialStatements
ConsolidatedStatementsofChangesinEquity(Deficit)(inthousandsofCanadiandollars,exceptnumberofcommonshares)
Numberofcommonshares1
Sharecapital$
Warrants$
Contributedsurplus
$
Equitycomponent
ofConvertibleDebentures(Note7)
$Deficit
$
Deficitattributable
totheshareholdersofCentricHealth
Corporation$
Non-controllinginterest(Note18)
$Total$
BalanceatDecember31,2018 210,355,022 132,107 757 29,517 — (172,646) (10,265) 188 (10,077)
RSUsandwarrantsexercised 220,831 76 — (76) — — — — —
Issuanceofwarrants — — 89 — — — 89 — 89
Deferredcompensationexpense — — — 475 — — 475 — 475
Netincome(loss)fortheperiod — — — — — (5,294) (5,294) 23 (5,271)
BalanceatMarch31,2019 210,575,853 132,183 846 29,916 — (177,940) (14,995) 211 (14,784)
BalanceatDecember31,2019 283,923,811 141,109 1,734 30,105 9,029 (201,938) (19,961) — (19,961)
Issuanceofcommonshares(note9) 744,632 100 — — — — 100 — 100
RSUsexercised(note9) 48,749 27 — (27) — — — — —
Sharesissuedrelatedtocontingentconsideration(note3,12) 6,378,675 1,008 — — — — 1,008 — 1,008
Issuanceofwarrants(note9) — — 584 — — — 584 — 584
Warrantsexpired(note9) — — (639) 639 — — — — —
Deferredcompensationexpense — — — 358 — — 358 — 358
Netincomefortheperiod — — — — — 5,314 5,314 — 5,314
BalanceatMarch31,2020 291,095,867 142,244 1,679 31,075 9,029 (196,624) (12,597) — (12,597)1Excludes 4,054,232 of shares held in escrow and restricted shares as at March 31, 2020 (note 9).
Theaccompanyingnotesareanintegralpartoftheseunauditedcondensedinterimconsolidatedfinancialstatements
4CentricHealthCorporationMarch31,2020and2019UnauditedCondensedInterimConsolidatedFinancialStatements
ConsolidatedStatementsofCashFlows(inthousandsofCanadiandollars)
ForthethreemonthperiodsendedMarch31,
2020 2019Cashprovidedby(usedin): $ $
OperatingactivitiesNetincome(loss)fortheperiod 5,314 (5,271)Adjustmentsfor:Finance(income)costs,net(note7,14) (7,968) 3,063Changeinfairvalueofderivativefinancialinstruments(note10) 220 671Gainondisposalofproperty,equipmentandintangibleassets(note12) (2) (4)Depreciationofpropertyandequipment(note4) 1,041 978Amortizationoffinitelifeintangibleassets(note4) 1,272 1,307Incometaxespaid — (89)Incometaxexpense — 1,610Share-basedcompensationexpense(note12) 358 475Changeinthefairvalueofcontingentconsiderationliability(note3) 74 54Loss(gain)onsaleofbusiness(note18) 79 (426)Supplyagreementarrangements,netofamortization(note8) (429) (429)Cannabisagreements,netofamortization(note8) (344) (345)
Netchangeinnon-cashworkingcapitalitems(note16) (1,065) 953Cashprovidedby(usedin)operatingactivities (1,450) 2,547
InvestingactivitiesProceedsondisposalofproperty,equipmentandintangibleassets 2 18Purchaseofpropertyandequipment(note4) (607) (992)Purchaseofintangibleassets(note4) (44) (211)Paymentofcontingentconsideration(note3) — (225)Proceeds(workingcapitalsettlement)fromsaleofbusinesses(note18) (74) 2,286Cashprovidedby(usedin)investingactivities (723) 876
Financingactivities
NetproceedsfromCrownCapitalFacilityandYorkvilleFacility(note7) 26,646 —
NetproceedsfromMarch2019PrivatePlacement — 11,344Transfertorestrictedcash (600) —Interestpaid (957) (1,045)
RepaymentofSubordinatedFacility(note7) (11,673) —
RepaymentofRevolvingFacility,netofwithdrawals(note7) (4,690) (10,702)
Repaymentoffinanceloans(note7) (12) (14)Repaymentoffinanceleases (562) (897)Cashprovidedby(usedin)financingactivities 8,152 (1,314)
Increaseincashandcashequivalents 5,979 2,109Cashandcashequivalents,beginningofperiod 61 —Cashandcashequivalents,endofperiod 6,040 2,109
Theaccompanyingnotesareanintegralpartoftheseunauditedcondensedinterimconsolidatedfinancialstatements
5CentricHealthCorporationMarch31,2020and2019UnauditedCondensedInterimConsolidatedFinancialStatements
1.CorporateInformation
Centric Health Corporation, together with its subsidiaries (collectively, "Centric Health" or the "Company"), is incorporatedunder the Canada Business Corporations Act. The Company is listed on the Toronto Stock Exchange and is incorporated anddomiciled in Canada. The address of the Company’s registered office is 20 Eglinton Avenue West, Suite 2100, Toronto,Ontario.
The Company’s principal business is providing specialty pharmacy services and solutions to seniors in Canada.
Acquisition of Remedy'sRx Specialty Pharmacy business
On May 7, 2020, the Company completed the acquisition of the Remedy'sRx Specialty Pharmacy business ("Remedy's") for atotal purchase price of up to $44,000. The purchase price is comprised of (i) $8,000 of cash consideration, (ii) $23,000 ofcommon shares of the Company, issued at an implied issue price of $0.184 per common share, (iii) $4,000 of deferredconsideration due twelve months following closing, (iv) $4,000 of consideration payable under a vendor take-back note due18 months following closing and (v) earn-out consideration of up to $5,000 if certain performance targets are achieved overthe two years following closing.
COVID-19 pandemic
During the three month period ended March 31, 2020, the COVID-19 pandemic began, causing significant financial marketdisruption and social dislocation. The situation is dynamic with various cities and countries around the world respondingindifferent ways to address the outbreak.
While pharmacies are an essential service andare expected to continue to operate during any epidemic orpandemic, there isthe potential that there may be disruptions in supply chains that could threaten the ability of the Company to procuremedications and personal protective equipment in a timely manner. There is also the potential that a pandemic such asCOVID-19 could force the temporary closure of a pharmacy site to the extent that a staff member becomes ill and thepharmacy is required to be sanitized, cause labour shortages or staffing issues to the extent that employees become ill orareotherwise unable to come to work, and limit the ability ofclinical pharmacists to visit residents in seniors homes. Lastly, tothe extent that residents that are being served by the Company in long-term care and retirement homes become ill and areremoved from the homes, revenue and the number of beds serviced may be impacted.
The Company has developed protocols and procedures should they be required to deal with any potential epidemics andpandemics, and has put these protocols and procedures in place to address the current COVID-19 pandemic. Despiteappropriate steps being taken to mitigate such risks, and the fact that the Company's business is an essential service and itslargest payors are the provincial governments, the duration and the extent of the effect of the COVID-19 pandemic on theCompany's activities is uncertain. There can be no assurance that these policies and procedures and the nature of theCompany's business will ensure that the Company will not be adversely affected. Therefore, there may be uncertainty aboutjudgments, estimates and assumptions made by management during the preparation of the Company’s unaudited condensedinterim consolidated financial statements related to potential impacts of the COVID-19 outbreak on revenue, expenses,assets, liabilities, and note disclosures and any changes to these judgments, estimates and assumptions could result in amaterial adjustment to the carrying value of the asset or liability affected.
NotestotheCondensedInterimConsolidatedFinancialStatements(inthousandsofCanadiandollars,unlessotherwisenoted)
6CentricHealthCorporationMarch31,2020and2019UnauditedCondensedInterimConsolidatedFinancialStatements
2.SignificantAccountingPolicies
Basis of preparation
These unaudited condensed interim consolidated financial statements have been prepared in accordance with IAS, 34 InterimFinancial Reporting as outlined by International Financial Reporting Standards ("IFRS") and its interpretations as issued by theInternational Accounting Standards Board ("IASB"). They do not include all the information required for a complete set ofannual financial statements prepared in accordance with IFRS and therefore should be read in conjunction with theCompany's audited annual consolidated financial statements and notes thereto for the year ended December 31, 2019.However, selected explanatory notes are included to explain events and transactions that are significant to the understandingof the changes in the Company's financial position and performance since December 31, 2019.
The accounting policies, critical accounting estimates and judgments applied in these unaudited condensed interimconsolidated financial statements are consistent with the significant accounting policies, critical accounting estimates andjudgments used in the preparation of the annual consolidated financial statements for the year ended December 31, 2019.The Company has consistently applied the same accounting policies throughout all periods presented as if these policies hadalways been in effect.
These unaudited condensed interim consolidated financial statements were approved by the Board of Directors (the "Board")on May12, 2020.
New and amended standards adopted by the Company
A number of amended standards became effective from January 1, 2020. The Company was not required to change itsaccounting policies or make retrospective adjustments as a result of adopting these standards.
New standard and amendments not yet adopted by the Company
IFRS 17, Insurance contracts ("IFRS 17") and amendments to IAS 1, Presentation of financial statements ("IAS 1"), have beenpublished but are not mandatory for December 31, 2020 reporting periods. IFRS 17 is not relevant to the Company, and theamendments to IAS 1 have not been early adopted by the Company and are not expected to have a material impact on theCompany.
3.ContingentConsideration
The fair value of contingent consideration is an estimate. The valuation model considers possible scenarios of forecast EBITDAor other performance metrics, the amount to be paid under each scenario and the probability of each scenario. The fair valueis dependent on certain inputs such as forecast EBITDA, non-financial metrics, risk adjusted discount rates and the Company'sshare price.
The continuity of the contingent consideration liability to be settled in cash, common shares and warrants is as follows:
CareRx GrandePrairie Salus Other Total
$ $ $ $ $
BalanceatDecember31,2019 1,774 1,008 1,284 1,799 5,865
Changeinfairvalueduringtheperiod — — 38 36 74
Contingentconsiderationsettledinshares — (1,008) — — (1,008)
BalanceatMarch31,2020 1,774 — 1,322 1,835 4,931
Less:Currentportion 1,774 — 415 233 2,422
Non-currentportionatMarch31,2020 — — 907 1,602 2,509
NotestotheCondensedInterimConsolidatedFinancialStatements(inthousandsofCanadiandollars,unlessotherwisenoted)
7CentricHealthCorporationMarch31,2020and2019UnauditedCondensedInterimConsolidatedFinancialStatements
3. Contingent Consideration - continued
On October 7, 2016, the Company recorded a contingent consideration liability as part of the consideration for the acquisitionof CareRx. The ending liability as at March 31, 2020 of $1,774 relates to outstanding payments based on the share price of theCompany's common shares issued as consideration at the closing of the transaction.
On February 3, 2020, the Company issued 6,378,675 common shares to settle the remaining contingent consideration liabilityfor the acquisition of Grande Prairie (note 9).
On November 15, 2017, the Company recorded a contingent consideration liability as part of the consideration for theacquisition of Salus in the amount of $1,384, which represented its fair value at the date of acquisition, payable over a five-year period. The fair value on acquisition consisted of $774 in performance cash (up to a maximum of $1,533), $250 inperformance shares (up to a maximum of 696,968 shares) and $269 in warrants (up to a maximum of 1,000,000 warrants)subject to certain performance benchmarks being achieved over the five-year period. On the acquisition date, the Companyestimated a 70% probability of meeting the performance benchmarks. As at March 31, 2020, the Company estimated a 100%probability of meeting the performance benchmarks. The warrants will vest on renewal of a long-term contract, allowing theholder to purchase one common share of the Company for each warrant at an exercise price of $0.6455 over a two-year term.In addition, the fair value of contingent consideration on the date of acquisition included $91, which is payable depending onthe Company's share price on a future date. This amount was estimated based on a risk-adjusted discount rate of 10% and theCompany's share price on the acquisition date. As at March 31, 2020, the expected range of potential undiscounted amountspayable remaining is between $200 and $1,668.
NotestotheCondensedInterimConsolidatedFinancialStatements(inthousandsofCanadiandollars,unlessotherwisenoted)
8CentricHealthCorporationMarch31,2020and2019UnauditedCondensedInterimConsolidatedFinancialStatements
4.Goodwill,IntangibleAssetsandPropertyandEquipment
Goodwill$
IntangibleAssets$
GoodwillandIntangibleAssets
$
PropertyandEquipment
$
FortheperiodendedMarch31,2020CostBalanceatDecember31,2019 53,018 76,249 129,267 34,435
Additions — 44 44 713
Disposals — — — (174)BalanceatMarch31,2020 53,018 76,293 129,311 34,974
AccumulatedamortizationandimpairmentlossesBalanceatDecember31,2019 (25,779) (57,512) (83,291) (14,387)Amortizationcharge — (1,272) (1,272) (1,041)Disposals — — — 45BalanceatMarch31,2020 (25,779) (58,784) (84,563) (15,383)
NetcarryingvalueAsatDecember31,2019 27,239 18,737 45,976 20,048AsatMarch31,2020 27,239 17,509 44,748 19,591
Included in the net carrying value of property and equipment are right-of-use assets of $7,708 (December 31, 2019 - $8,127).
The right-of-use assets as at March 31, 2020 and December 31, 2019 consist of the following:
March31,2020 December31,2019$ $
Right-of-useassets-Properties 7,030 7,361Right-of-useassets-Equipment 177 202
Right-of-useassets-Vehicles 501 564
Total 7,708 8,127
During the three month period ended March 31, 2020, additions of property and equipment related to right-of-use assetswere $106.
DuringthethreemonthperiodendedMarch31,2020,amortizationchargesrelatedtoright-of-useassetswere$396.
As at March 31, 2020 and December 31, 2019 the Company has $630 of indefinite life intangible assets.
The Company performs its annual impairment testing of goodwill and indefinite life intangible assets as at June 30. As atMarch 31, 2020, the Company assessed whether the effects of the global COVID-19 pandemic resulted in an indicator ofimpairment requiring goodwill and indefinite-lived intangible assets to be tested outside the annual cycle. Based on thisassessment, the Company found no indicators of impairment requiring goodwill and indefinite-lived intangible assets to betested for impairment as at March 31, 2020.
NotestotheCondensedInterimConsolidatedFinancialStatements(inthousandsofCanadiandollars,unlessotherwisenoted)
9CentricHealthCorporationMarch31,2020and2019UnauditedCondensedInterimConsolidatedFinancialStatements
5.IncomeTaxes
The effective tax rate for the three month periods ended March 31, 2020 and 2019 was 0.01% and 24.17%, respectively.Deferred tax assets in excess of deferred tax liabilities have not been recognized as it is not probable that the Company will beable to use these benefits. As at March 31, 2020, the Company has gross non-capital tax loss carry-forwards of $51,128(December 31, 2019 - $50,803), which expire between 2031 to 2040, that can be carried forward against future taxableincome. The full amount of these loss carry-forwards was not recognized as at March31, 2020 and December 31, 2019. As atMarch31, 2020, the Company had gross capital tax loss carry-forwards of $3,000, the full amount of these loss carry-forwardswas not recognized as at March31, 2020.
6.TradePayablesandOtherLiabilities
Tradepayablesandotherliabilitiesarecomprisedofthefollowing:
March31,2020 December31,2019$ $
Tradepayables 11,552 11,761Accruedliabilities 5,549 6,086Severancecosts(note13) 662 716Total 17,763 18,563
7.Borrowings
Borrowingsconsistofthefollowing:
March31,2020 December31,2019
$ $CrownCapitalFacility 20,736 —LiabilitycomponentofConvertibleDebentures 18,147 27,742EwingConvertibleDebentures 10,960 10,563EwingConvertibleDebenturesembeddedderivatives 2,668 2,448YorkvilleFacility 5,971 —Financeloans 137 149SubordinatedFacility — 11,673RevolvingFacility — 4,690Totalborrowings 58,619 57,265
Lesscurrentportionofborrowings:LiabilitycomponentofConvertibleDebentures 472 27,742EwingConvertibleDebentures 85 110Financeloans 55 55SubordinatedFacility — 11,673RevolvingFacility — 4,690
Totalcurrentportionofborrowings 612 44,270Totalnon-currentportionofborrowings 58,007 12,995
NotestotheCondensedInterimConsolidatedFinancialStatements(inthousandsofCanadiandollars,unlessotherwisenoted)
10CentricHealthCorporationMarch31,2020and2019UnauditedCondensedInterimConsolidatedFinancialStatements
7. Borrowings - continued
Substantially all of the Company's assets are pledged as security for the above borrowings.
Crown Capital Facility
On March 31, 2020, the Company entered into a credit agreement with Crown Capital Partner Funding LP ("Crown Capital"),under which Crown Capital will advance a loan to the Company of up to $30,000 in three tranches: (i) an initial tranche of$22,000, which was advanced on March 31, 2020 and was used to repay the Company's outstanding Credit Facilities, (ii) asecond tranche of $5,000, which was advanced on May 7, 2020 contemporaneously with the closing of the Remedy'sacquisition, and was used by the Company to fund the cash consideration for the Remedy's acquisition, and (iii) a thirdtranche of $3,000 at any time prior to May 31, 2021 upon the Company reaching certain financial milestones (the "CrownCapital Facility").
Interest on the Crown Capital Facility will accrue at a rate of 10% per annum, but may be reduced to 8% per annum upon theCompany reaching certain financial milestones. The Crown Capital Facility is repayable five years from closing, subject tocertain prepayment rights. The Crown Capital Facility contains a number of customary positive and negative covenants,including a requirement to comply with certain financial covenants. These include restrictions on incurring additionalindebtedness, making certain investments or acquisitions, selling assets of the Company and making regularly scheduledinterest payments on the Company’s subordinated indebtedness unless the Company has sufficient liquidity to do so.
The Company incurred $1,724 in transaction costs, of which $1,264 were allocated towards the initial tranche, and $460 weredeferred and recognized as prepaid expenses as at March31, 2020. Included within the transaction costs were 7,200,000warrants issued by the Company to Crown Capital (note 9).
Yorkville Facility
On March 31, 2020, the Company entered into a credit agreement with Yorkville Asset Management Inc. for and on behalf ofcertain managed funds ("Yorkville") under which Yorkville will advance a subordinated facility to the Company of up to$12,702 (the "Yorkville Facility") in two tranches: (i) an initial tranche of $6,319, which was advanced on March 31, 2020, and(ii) a second tranche of $6,383, which was advanced on May 7, 2020 contemporaneously with the closing of the Remedy'sacquisition. The Yorkville Facility ranks in priority to the Company’s existing Convertible Debentures and Ewing ConvertibleDebentures, but subordinate to the Crown Capital Facility.
Interest on the Yorkville Facility will accrue at a rate of 12% per annum, increasing to 14% to the extent that the Companydoes not meet certain financial covenants by the third quarter of 2021.
The Yorkville Facility will mature 24 months from closing, subject to certain prepayment rights of the Company or the mutualagreement of the Company and Yorkville to extend the maturity date.
The Company incurred $378 in transaction costs, of which $349 were allocated towards the initial tranche, and $29 weredeferred and recognized as prepaid expenses as at March31, 2020.
NotestotheCondensedInterimConsolidatedFinancialStatements(inthousandsofCanadiandollars,unlessotherwisenoted)
11CentricHealthCorporationMarch31,2020and2019UnauditedCondensedInterimConsolidatedFinancialStatements
7. Borrowings - continued
Convertible Debentures
On November 22, 2019, the Company issued 8.25% unsecured debentures convertible into common shares of the Company inthe aggregate principal amount of $27,500 (the "Convertible Debentures"). The Company has ascribed the following carryingvalues to the components of the Convertible Debentures at the time of initial recognition on November 22, 2019:
Initialcarryingvalue$
Financingcosts$
Netcarryingvalue$
LiabilitycomponentofConvertibleDebentures 17,210 2,108 15,102
EquitycomponentofConvertibleDebentures 10,290 1,261 9,029
Embeddedderivatives — — —
Total 27,500 3,369 24,131
The outstanding principal amount of the Convertible Debentures is payable in cash under certain circumstances, including adefault by the Company on its other indebtedness. Subsequent to initial recognition, although the Company receivedcovenant waivers and further amended its agreements for the Credit Facilities subsequent to December 31, 2019, consistentwith the presentation of the Subordinated Facility and Revolving Facility, the Company adjusted the liability component of theConvertible Debentures to its principal amount of $27,500, presented the liability component of the Convertible Debenturesas a current liability as at December 31, 2019 and recognized accretion expense with respect to the Convertible Debentures inthe amount of $12,404 for the year ended December 31, 2019.
As at March 31, 2020, following the advances of the first tranches of the Crown Capital Facility and Yorkville Facility, and therepayment of the Subordinated Facility and Revolving Facility, the Company has remeasured the liability component of theConvertible Debentures to its amortized cost of $18,147, presented the liability component of the Convertible Debentures asa non-current liability as at March 31, 2020 and recognized accretion income with respect to the Convertible Debentures inthe amount of $9,825 for the three month period ended March 31, 2020 (note 14).
Ewing Convertible Debentures
On November 22, 2019, the Company exchanged the $12,540 of the previously issued convertible preferred shares of theCompany held by funds and accounts managed by Ewing Morris & Co. Investment Partners Ltd. ("Ewing Morris") for anequivalent amount of 8% unsecured debentures convertible into common shares of the Company (the "Ewing ConvertibleDebentures").
The Ewing Convertible Debentures have been accounted for as a compound financial instrument comprised of: (i) a financialliability component representing the contractual cash flows of 8% in annual interest payments and a cash repayment of$12,540 on maturity; and (ii) a derivative liability component representing the fair value of the conversion and redemptionfeatures. The derivative liability component is fair valued at each reporting date (note 10).
The Ewing Convertible Debentures provide for the ability to pay interest payments in-kind, in lieu of cash interest payments,adding the interest that would otherwise be payable to the principal amount of the convertible debentures in an amountequal to an annual rate of 10% of the outstanding principal amount of the convertible debentures. Interest that has beenaccrued to the principal balance continues to accrue interest at a rate of 8% per annum until such accrued interest is paid.During the three month period ended March 31, 2020, the Company added $627 to the principal amount of the EwingConvertible Debentures.
NotestotheCondensedInterimConsolidatedFinancialStatements(inthousandsofCanadiandollars,unlessotherwisenoted)
12CentricHealthCorporationMarch31,2020and2019UnauditedCondensedInterimConsolidatedFinancialStatements
7. Borrowings - continued
Credit Facilities
The Company’s credit facilities were previously with a syndicate of lenders comprised of three major Canadian banksproviding for credit facilities of up to an aggregate amount of $113,500 at inception. The credit facilities were made up of upto $100,000 in senior secured facilities (the "Senior Facilities") and $13,500 in a secured subordinated term credit facility (the"Subordinated Facility") (collectively, the "Credit Facilities"). All borrowings under the Senior Facilities had original maturitiesof five years after the date of the agreement.
The Senior Facilities were structured as follows: (i) a revolving credit facility in the amount of up to $18,000 (up to $20,000prior to May 30, 2019), including a swingline of up to $3,000 ("Revolving Facility"); (ii) a non-revolving term loan facility in theamount of up to $60,000 ("Term Facility"); and (iii) a limited revolving acquisition and capital expenditure term loan facility inthe amount of up to $4,786 (up to $20,000 prior to May 30, 2019) to be available in multiple draws ("Acquisition Facility"). OnNovember 26, 2019, the Company repaid all outstanding balances under the Term Facility and Acquisition Facility.
On March 31, 2020, the Company repaid all outstanding balances remaining under the Credit Facilities with the net proceedsreceived from the Crown Capital Facility and Yorkville Facility.
8.OtherDeferredAmounts
Preferred drug supplier
The remaining unamortized balance as at March 31, 2020 was $10,486 (December 31, 2019 - $10,915).
Preferred cannabis partner
The remaining unamortized balance as at March 31, 2020 was $4,713 (December 31, 2019 - $5,057).
9.Shareholders’EquityandEarningsperShare
Authorized share capital consists of an unlimited number of common shares. The number of common shares issued andoutstanding is as follows:
Fortheperiodended($thousands,exceptshareamounts) March31,2020 December31,2019
CommonSharesCommonShares Statedvalue
$CommonShares Statedvalue
$
Balance,beginningofperiod 283,923,811 141,109 210,355,022 132,107Issuanceofcommonshares 744,632 100 70,507,952 7,951Commonsharesissuedfromtreasuryforcontingentconsideration 6,378,675 1,008 200,000 43
RSUsandwarrantsexercised 48,749 27 2,269,928 931
Commonsharesreleasedfromescrow — — 500,000 63
Deferredconsiderationforacquisitions — — 90,909 14Balance,endofperiod 291,095,867 142,244 283,923,811 141,109
NotestotheCondensedInterimConsolidatedFinancialStatements(inthousandsofCanadiandollars,unlessotherwisenoted)
13CentricHealthCorporationMarch31,2020and2019UnauditedCondensedInterimConsolidatedFinancialStatements
9. Shareholders’ Equity and Earnings per Share - continued
The number of common shares considered to be issued for financial reporting purposes is exclusive of restricted sharesissued, common shares issued in trust or held in escrow pending the achievement of certain stated milestones orperformance targets.
ThetotalcommonsharesinaggregateasatMarch31,2020are:
TypeofcommonsharesFreelytradeable 291,095,867Escrowedandrestricted 4,054,232Total 295,150,099
Issuanceofcommonshares
On February 3, 2020, the Company issued 6,378,675 common shares to settle the remaining contingent consideration liabilityfor the acquisition of Grande Prairie (note 3).
During the three month period ended March 31, 2020, the Company issued 744,632 common shares to the Company'sfinancial advisor as payment for services rendered.
During the three month period ended March 31, 2020, the Company issued 48,749 common shares related to RSUs issued tomanagement, employees and directors that vested.
Issuance of RSUs and DSUs
TheCompany'soutstandingRSUsandDSUsareasfollows:
Fortheperiodended March31,2020 December31,2019RSUsandDSUs Units UnitsBalance,beginningofperiod 7,815,473 6,045,903RSUsandDSUsgranted 5,359,861 5,400,751RSUsandDSUsreleased (48,749) (2,269,928)RSUsandDSUsforfeited (56,667) (1,361,253)Balance,endofperiod 13,069,918 7,815,473
The weighted-average remaining term to vest for RSUs and DSUs outstanding as at March 31, 2020 is 1.77 years.
During the three month period ended March 31, 2020, the Company had the following RSU and DSU grants:
Grantdate Unitsgranted Grantedto VestingconditionsFairvaluedbasedonthequotedmarketpriceof
issuancepercommonshare
January30,2020 194,338DSUs DirectorsoftheCompany VestImmediately $0.15
January30,2020 161,350RSUs DirectorsoftheCompany VestImmediately $0.15
February4,2020 392,157RSUs EmployeeoftheCompany VestImmediately $0.16
March30,2020 432,342DSUs DirectorsoftheCompany VestImmediately $0.16
March30,2020 289,986RSUs DirectorsoftheCompany VestImmediately $0.16
March31,2020 300,000DSUs ManagementoftheCompany Vestoverthreeyears $0.16
March31,2020 3,589,688RSUs ManagementandemployeesoftheCompany Vestoverthreeyears $0.16
NotestotheCondensedInterimConsolidatedFinancialStatements(inthousandsofCanadiandollars,unlessotherwisenoted)
14CentricHealthCorporationMarch31,2020and2019UnauditedCondensedInterimConsolidatedFinancialStatements
9. Shareholders’ Equity and Earnings per Share - continued
Issuance of warrants
The Company’s outstanding and exercisable warrants are as follows:
Fortheperiodended March31,2020 December31,2019
Sharepurchasewarrants WarrantsWeightedaverage
exerciseprice WarrantsWeightedaverage
exerciseprice
Balance,beginningofperiod 17,730,333 $0.28 2,822,000 $0.76Warrantsgranted 7,200,000 $0.25 14,908,333 $0.19Warrantsexpired (1,900,000) $1.00 — $—Balance,endofperiod 23,030,333 $0.21 17,730,333 $0.28Exercisable,endofperiod 22,108,333 $0.21 16,808,333 $0.28
On March 31, 2020, 7,200,000 warrants were issued to Crown Capital in relation to the Crown Capital Facility, with eachwarrant entitling the holder to acquire one common share in the capital of the Company for a period of five years from theclosing date at an exercise price of $0.25 per common share (note 7). The fair value of the warrants issued was calculatedusing the Black-Scholes pricing model with the following assumptions:
Grantdate March31,2020
Numberofwarrantsissued 7,200,000
Dividendyield Nil
Expectedvolatility 74.17%
Risk-freeinterestrate 0.6%
Expectedlifeinyears 5.0
Strikeprice $0.25
Sharepriceatdateofissue $0.16
Fairvalueperwarrant $0.081
The weighted average remaining contractual life and weighted average exercise price of warrants outstanding as at March 31,2020 are as follows:
WarrantsOutstanding WarrantsExercisable
RangeofExercisePriceNumber
Outstanding
WeightedAverageExercise
Price
WeightedAverageRemaining
ContractualLife(years)
NumberExercisable
WeightedAverageExercise
Price
$0.12-$0.14 3,125,000 $0.12 1.65 3,125,000 $0.12$0.15-$0.20 6,333,333 $0.15 1.65 6,333,333 $0.15$0.21-$0.33 12,450,000 $0.25 4.70 11,600,000 $0.25$0.34-$0.45 1,050,000 $0.40 0.95 1,050,000 $0.95$0.46-$0.52 72,000 $0.51 3.70 — $0.00
Balance,endofperiod 23,030,333 $0.21 2.46 22,108,333 $0.21
NotestotheCondensedInterimConsolidatedFinancialStatements(inthousandsofCanadiandollars,unlessotherwisenoted)
15CentricHealthCorporationMarch31,2020and2019UnauditedCondensedInterimConsolidatedFinancialStatements
9.Shareholders’EquityandEarningsperShare-continued
Issuance of stock options
TheCompany’soutstandingandexercisablestockoptionsareasfollows:
Fortheperiodended March31,2020 December31,2019
Commonshareoptions OptionsWeightedaverage
exerciseprice OptionsWeightedaverage
exerciseprice
Balance,beginningofperiod 1,670,000 $0.40 1,838,750 $0.40
Optionsexpired (685,000) $0.40 (148,750) $0.40Optionscancelled/forfeited (68,000) $0.40 (20,000) $0.40Balance,endofperiod 917,000 $0.40 1,670,000 $0.40Exercisable,endofperiod 682,750 $0.40 1,435,000 $0.40
The weighted average remaining contractual life and weighted average exercise price of options outstanding as at March 31,2020 are as follows:
OptionsOutstanding OptionsExercisable
RangeofExercisePriceNumber
OutstandingWeightedAverage
ExercisePrice
WeightedAverageRemaining
ContractualLife(years) NumberExercisable
WeightedAverageExercisePrice
$0.24-$0.30 95,000 $0.24 1.2 85,000 $0.24$0.31-$0.40 425,000 $0.36 1.5 300,000 $0.36$0.41-$0.48 100,000 $0.44 1.6 75,000 $0.44$0.49-$0.52 297,000 $0.52 1.7 222,750 $0.52
Balance,endofperiod 917,000 $0.40 1.6 682,750 $0.40
Earningspershare
Earnings per share has been calculated on the basis of profit or loss for the period divided by the weighted average number ofcommon shares outstanding during the period. Diluted earnings per share, for all periods presented, was calculated based onthe weighted average number of common shares outstanding and takes into account the effects of contingently issuablecommon shares, unvested share options, RSUs and DSUs, warrants and convertible debentures outstanding during the period.A loss per share is not adjusted for anti-dilutive instruments. The diluted weighted average calculation is based on a timeweighting factor that includes all stock options, RSUs, warrants and conversion features that were issued at exercise priceslower than the market price of the Company’s common shares at the respective period-ends. These instruments were anti-dilutive for the three month period ended March 31, 2019.
The following table illustrates the basic and diluted weighted average common shares outstanding for the three monthperiods ended March 31, 2020 and 2019:
ForthethreemonthperiodsendedMarch31,
2020 2019
Weightedaveragecommonsharesoutstanding-basic 288,852,657 210,712,949
Dilutiveeffectofconvertibledebentures 183,333,333 —
Dilutiveeffectofcontingentlyissuableshares 267,541 —
DilutiveeffectofRSUsandDSUs 13,069,918 —
Dilutiveeffectofin-the-moneywarrants 9,458,333 —
Weightedaveragecommonsharesoutstanding-diluted 494,981,782 210,712,949
NotestotheCondensedInterimConsolidatedFinancialStatements(inthousandsofCanadiandollars,unlessotherwisenoted)
16CentricHealthCorporationMarch31,2020and2019UnauditedCondensedInterimConsolidatedFinancialStatements
10.FinancialInstruments,FairValueMeasurementsandFinancialRiskManagement
As at March 31, 2020 and 2019, the Company's financial instruments consisted of cash and cash equivalents, trade and otherreceivables, interest rate swaps, investments, trade and other payables, contingent consideration, finance lease liabilities andborrowings.
Fair value hierarchyFinancial instruments carried at fair value have been categorized under the three levels of fair value hierarchy as follows:
• Level 1: Unadjusted quoted prices in active markets for identical assets or liabilitiesFair value is determined based on quoted prices of regularly and recently occurring transactions that take place.
• Level 2: Inputs that are observable for the assets or liabilities either directly or indirectlyThis level of the hierarchy includes derivative financial instruments with major Canadian chartered banks.
• Level 3: Inputs for assets or liabilities that are not based on observable market data.This level of the hierarchy includes contingent consideration settled with the Company's common shares andderivative liabilities associated with convertible loans.
The following table presents the Company's financial assets (liabilities) measured and recognized at fair value as at March 31,2020 on a recurring basis:
Level3$
Total$
Contingentconsideration (4,931) (4,931)Derivativefinancialinstruments (2,668) (2,668)Investments 1,950 1,950Total (5,649) (5,649)
The following table presents the Company's financial assets (liabilities) measured and recognized at fair value as at December31, 2019 on a recurring basis:
Level3$
Total$
Contingentconsideration (5,865) (5,865)Derivativefinancialinstruments (2,448) (2,448)Investments 1,950 1,950Total (6,363) (6,363)
There were no non-recurring fair value measurements as at March 31, 2020 and December 31, 2019. There were no financialinstruments classified as Level 1 or Level 2 as at March 31, 2020 and December 31, 2019. There were no transfers betweenlevels during the three month period ended March 31, 2020.
Details regarding Level 3 fair value measurements for contingent consideration can be found in note 3 in these unauditedcondensed interim consolidated financial statements and note 3 in the annual consolidated financial statements for the yearended December 31, 2019.
There were no changes in the valuation techniques used during the three month period ended March 31, 2020.
NotestotheCondensedInterimConsolidatedFinancialStatements(inthousandsofCanadiandollars,unlessotherwisenoted)
17CentricHealthCorporationMarch31,2020and2019UnauditedCondensedInterimConsolidatedFinancialStatements
10. Financial Instruments, Fair Value Measurements and Financial RiskManagement - continued
The continuity of the embedded derivatives liability is as follows:
March31,2020 December31,2019
$ $Fairvalueofembeddedderivatives,beginningofperiod 2,448 —Embeddedderivativesrecognized — 6,372Includedinlossonfinancialliabilityextinguishment — (1,424)Changeinfairvalueofembeddedderivatives 220 (2,500)Embeddedderivatives,endofperiod 2,668 2,448
The Ewing Convertible Debentures contain an embedded derivative liability component (note 7). The fair value of the EwingMorris conversion option embedded derivative is calculated using the Black-Scholes pricing model using the followingassumptions as at March 31, 2020:
Estimatednumberofcommonshares 52,887,330
Dividendyield Nil
Expectedvolatility 57.6%
Risk-freeinterestrate 0.55%
Expectedlifeinyears 3.95
Strikeprice $0.25
Sharepriceatvaluationdate $0.16
Fairvalue $0.050
Other conversion and redemption features were determined to have nil values. Their fair values will be reassessed by theCompany at each reporting date.
Financial instruments measured at amortized cost
The carrying value of financial assets and financial liabilities that are measured at amortized cost is an approximation of thefair value for the following financial assets and financial liabilities unless otherwise disclosed below:
March31,2020 December31,2019
$ $Financialassetsmeasuredatamortizedcost:Tradereceivables 11,928 12,040
Financialliabilitiesmeasuredatamortizedcost:Tradepayablesandotherliabilities 17,101 17,847
Financeleaseliabilities 8,580 8,950CrownCapitalFacility 20,736 —LiabilitycomponentofConvertibleDebentures 18,147 27,742EwingConvertibleDebentures 10,960 10,563YorkvilleFacility 5,971 —Financeloans 137 149SubordinatedFacility — 11,673RevolvingFacility — 4,690
NotestotheCondensedInterimConsolidatedFinancialStatements(inthousandsofCanadiandollars,unlessotherwisenoted)
18CentricHealthCorporationMarch31,2020and2019UnauditedCondensedInterimConsolidatedFinancialStatements
10. Financial Instruments, Fair Value Measurements and Financial RiskManagement - continued
Investment in AceAge
As at March 31, 2020 the Company's ownership interest in AceAge was 20.8%.
As at March 31, 2020 the Company has concluded that cost is representative of the fair value of the investment and willcontinue to perform an assessment at each reporting date to determine if cost is still the best estimate of fair value at thattime. There were no indicators of impairment as at March 31, 2020.
Financial risk management
The Company is exposed to certain financial risks, including credit risk, liquidity risk and interest rate risk. The following is adescription of those risks and how the exposures are managed:
Creditrisk
The Company is exposed to credit risk to the extent that its clients become unable to meet their payment obligations. TheCompany’s exposure to concentrations of credit risk is limited. Trade receivables include amounts receivable from the sale ofgoods and services to government agencies, employers, insurance companies and individual patients.
Tradereceivablesaging(netofprovision)wasasfollows:
March31,2020 December31,2019$ $
0-30days 9,352 10,19331-60days 1,394 88361-90days 254 195Over90days 928 769
11,928 12,040
Included in trade and other receivables at March 31, 2020 are $4,048 (December 31, 2019 - $4,579) of amounts receivablefrom government funding related to product sales and services rendered.
An impairment analysis is performed at each reporting date using a provision matrix to measure expected credit losses. Theprovision rates are based on days past due for groupings of various customer segments with similar loss patterns. Thecalculation reflects the probability-weighted outcome, historical credit losses and reasonable and supportable informationthat is available at the reporting date about past events, current conditions and forecasts of future economic conditions,including consideration of the impact of the COVID-19 pandemic as part of the Company's impairment analysis as at March31, 2020.
Themovementintheprovisionforimpairmentagainsttradeandotherreceivableswasasfollows:
March31,2020 December31,2019$ $
Provision,beginningofperiod 370 218Provisionforreceivablesimpairment 9 191Write-offschargedtothevaluationallowance — (39)Provision,endofperiod 379 370
The Company’s cash and cash equivalents are held through Canadian chartered banks. The Company is not exposed tosignificant credit risk arising from its financial instruments.
NotestotheCondensedInterimConsolidatedFinancialStatements(inthousandsofCanadiandollars,unlessotherwisenoted)
19CentricHealthCorporationMarch31,2020and2019UnauditedCondensedInterimConsolidatedFinancialStatements
10. Financial Instruments, Fair Value Measurements and Financial RiskManagement - continued
Liquidity risk
Liquidity risk is the risk that the Company may encounter difficulty in meeting the obligations associated with its financialliabilities that are settled by delivering cash, another financial asset or equity instrument. The following table presents thecontractual terms to maturity of the financial liabilities owned by the Company as at March 31, 2020:
Total 2020 2021-2022 2023-2024 Thereafter$ $ $ $ $
Tradepayablesandotherliabilities 17,763 17,763 — — —ConvertibleDebentures 27,500 — 13,750 13,750 —CrownCapitalFacility 22,000 — 2,475 5,940 13,585EwingConvertibleDebentures 13,167 — — 13,167 —YorkvilleFacility 6,319 — 6,319 — —Financeloans 137 41 96 — —Financeleases 11,684 1,639 3,999 2,922 3,124Interestpaymentsonborrowings 22,979 4,451 11,396 6,803 329Contingentconsideration 4,931 2,422 2,509 — —Total 126,480 26,316 40,544 42,582 17,038
In the normal course of business, the Company enters into significant commitments for the purchase of goods and services,such as the purchase of inventory, most of which are short-term in nature and are settled under normal trade terms.
Interest rate risk
Interest rate risk is the risk borne by an interest bearing asset or liability as a result of fluctuations in interest rates. As atMarch 31, 2020, the Company is not exposed to interest rate risk as all of the Company's borrowings have fixed interest rates.
Currency risk
Virtually all of the Company’s transactions are denominated in Canadian dollars. As at March 31, 2020, the Company held nosignificant financial instruments that were denominated in a currency other than Canadian currency.
11.RelatedPartyTransactionsandBalances
In the normal course of operations, the Company may enter into certain related party transactions, which may includetransactions entered into with the Company's directors and management. All related party transactions would be forconsideration established with the related parties, generally on market terms, and approved by the independent non-executive directors of the Company.
CertaindirectorshelpmanagefundsthatowntheConvertibleDebentures,EwingConvertibleDebenturesandcommonsharesoftheCompany,andthatprovidedtheYorkvilleFacility(note7).
NotestotheCondensedInterimConsolidatedFinancialStatements(inthousandsofCanadiandollars,unlessotherwisenoted)
20CentricHealthCorporationMarch31,2020and2019UnauditedCondensedInterimConsolidatedFinancialStatements
12.GeneralandAdministrativeExpenses
Thecomponentsofgeneralandadministrativeexpensesareasfollows:
ForthethreemonthperiodsendedMarch31,
20202019
(Note18)
$ $Employeecosts 2,666 2,772Otheroperatingexpenses 2,868 3,147Corporateofficeexpenses 1,152 1,481Depreciationandamortization 2,314 2,208Share-basedcompensationexpense 358 475Gainondisposalofproperty,equipmentandintangibleassets (2) (4)Total 9,356 10,079
13.Transaction,RestructuringandOtherCosts
Transaction, restructuring and other costs are expensed as incurred. Transaction costs are comprised primarily of legal,consulting, due diligence and other professional fees directly related to business combinations and divestitures. Start-up costsfor new initiatives are costs incurred by the Company for a new business initiative prior to this initiative generating anyrevenue. Restructuring and other costs include legal, consulting and other professional fees associated with businessrestructuring, costs associated with new customer contract implementation, as well as severance and other costs associatedwith corporate reorganization and other staffing reductions.
Transaction, restructuring and other costs for the three month periods ended March 31, 2020 and 2019 consist of thefollowing:
ForthethreemonthperiodsendedMarch31,
20202019
(Note18)
$ $Transactionandstart-upcosts 972 74Restructuringandothercosts 684 604Total 1,656 678
As at March 31, 2020, the Company had accrued liabilities from continuing operations related to severance of $662(December 31, 2019 - $716) included in trade payables and other liabilities consisting of the following:
Severance$
BalanceatDecember31,2019 716Additions 521Payments (575)BalanceatMarch31,2020 662
NotestotheCondensedInterimConsolidatedFinancialStatements(inthousandsofCanadiandollars,unlessotherwisenoted)
21CentricHealthCorporationMarch31,2020and2019UnauditedCondensedInterimConsolidatedFinancialStatements
14.FinanceCosts,Net
Financecosts,netforthethreemonthperiodsendedMarch31,2020and2019iscomprisedofthefollowing:
ForthethreemonthperiodsendedMarch31,
2020 2019
$ $
InterestonSubordinatedFacility 355 539
AccretiononSubordinatedFacility 183 96
InterestonRevolvingFacility 141 388
InterestonConvertibleDebentures 566 —
AccretiononConvertibleDebentures(note7) (9,825) —
InterestonEwingConvertibleDebentures 252 —
AccretiononEwingConvertibleDebentures 145 —
Interestonfinanceleases 215 300
InterestonTermFacility — 1,104
AccretiononTermFacility — 303
InterestonAcquisitionFacility — 109
Total (7,968) 2,839
15.Contingencies
From time to time the Company is involved in litigation, investigations or proceedings related to claims arising out of itsoperations in the ordinary course of business and the completion of acquisitions or divestitures. The Company believes thatthese claims and lawsuits in the aggregate, when settled, are not expected to have a material impact on the Company’sfinancial position, results of operations or cash flows.
16.SupplementaryDisclosuretotheConsolidatedStatementsofCashFlows
Thenetchangeinnon-cashworkingcapitalcomprisesthefollowing:
ForthethreemonthperiodsendedMarch31,
2020 2019$ $
Tradeandotherreceivables 339 (182)Inventories (614) (362)Prepaidexpenses 32 62Tradepayablesandotherliabilities (822) 1,435Total (1,065) 953
NotestotheCondensedInterimConsolidatedFinancialStatements(inthousandsofCanadiandollars,unlessotherwisenoted)
22CentricHealthCorporationMarch31,2020and2019UnauditedCondensedInterimConsolidatedFinancialStatements
17.CapitalManagement
The Company manages its capital structure based on the funds available to the Company in order to support the continuationand expansion of its operations, which primarily operates in an environment in which government regulations and fundingplay a key role. The Board establishes a quantitative return on capital criteria, which it reviews with management on a regularbasis. The Company defines capital to include share capital, warrants and the stock option component of its shareholders'equity as well as its borrowings and contingent consideration. In addition to the cash flows generated by operations, theCompany relies on debt and equity financing from both arm's length and related parties to execute on its stated businessstrategy and continue its operations as a going concern. In order to maintain or adjust its capital structure, the Company mayseek financing through the issuance of securities such as equity, convertible debentures or subordinated debt, or by replacingexisting debt with debt on terms more consistent with the Company's needs.
18.DiscontinuedOperations
TheresultsfromdiscontinuedoperationsbelowhavebeensegmentedtoalignwiththehistoricaloperatingsegmentsoftheCompany.Thecompositionofsegmenteddiscontinuedoperationsisasfollows:
• Pharmacy discontinued operations includes three retail pharmacy operations divested during 2019 and 2018, locatedin Medicine Hat, Alberta, Grande Prairie, Alberta and Richmond, British Columbia.
• Surgical and Medical Centres discontinued operations includes the Surgical and Medical Centres operating segment.The Surgical and Medical Centres operating segment includes one of Canada's largest independent surgical providerswith five facilities across four provinces divested in 2019, as well as the Performance Orthotics business in Ontario.
As at December 31, 2019 the assets and liabilities of the Performance Orthotics business held for sale were as follows:
AsatDecember31,2019
$
Accountsreceivable 18
Prepaidexpenses 46
Propertyandequipment 294
TotalAssetsofDisposalGroupsHeldForSale 358
Tradepayablesandotherliabilities 57
Financeleases 294
Deferredtaxliabilities 7
TotalLiabilitiesofDisposalGroupsHeldForSale 358
On January 1, 2020, the Company completed the divestiture of its 75% ownership interest in the Performance Orthoticsbusiness for nominal proceeds.
NotestotheCondensedInterimConsolidatedFinancialStatements(inthousandsofCanadiandollars,unlessotherwisenoted)
23CentricHealthCorporationMarch31,2020and2019UnauditedCondensedInterimConsolidatedFinancialStatements
18.DiscontinuedOperations-continued
Resultsfromdiscontinuedoperations
TheresultsfromdiscontinuedoperationsforthethreemonthperiodsendedMarch31,2020and2019areasfollows:
ForthethreemonthperiodsendedMarch31,2020
Pharmacy$
SurgicalandMedicalCentres
$Total$
Lossonsaleofbusiness 4 75 79Lossbeforeincometaxesfromdiscontinuedoperations (4) (75) (79)
Incometaxexpense — — —Netlossfromdiscontinuedoperations (4) (75) (79)
During the three month period ended March 31, 2020, the final working capital settlement in relation to the Surgical andMedical Centres sale resulted in an adjustment of $74 recorded in the first quarter of 2020 being the difference between thepreliminary estimate at closing and the final settlement amount.
ForthethreemonthperiodsendedMarch31,2019
Pharmacy$
SurgicalandMedicalCentres
$Total$
Revenue 1,419 9,294 10,713Expenses 1,249 8,189 9,438Depreciationandamortization 77 — 77Interestexpense — 226 226Gainonsaleofbusiness (426) — (426)Incomebeforeincometaxesfromdiscontinuedoperations 519 879 1,398
Incometaxexpense — 387 387Netincomefromdiscontinuedoperations 519 492 1,011
The cash flows from discontinued operations for the three month periods ended March 31, 2020 and 2019 are as follows:
ForthethreemonthperiodsendedMarch31,
2020 2019$ $
Operatingcashflows (5) 1,443Investingcashflows (74) (20)Financingcashflows — (399)Totalcashflows (79) 1,024
NotestotheCondensedInterimConsolidatedFinancialStatements(inthousandsofCanadiandollars,unlessotherwisenoted)
24CentricHealthCorporationMarch31,2020and2019UnauditedCondensedInterimConsolidatedFinancialStatements