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Welcome to the quarterly conference call for Protech Home Medical Corp. This call is being recorded.Please note that remarks in this conference call may provide certain information regarding our expectations, future plans and intentions that may constitute forward-looking statements within the meaning of applicable security laws. I would refer to our most recently filed management discussion and analysis and annual information form, which include a summary of the significant assumptions underlying such forward-looking statements and certain risks and factors that could affect our future performance and our ability to deliver on these forward-looking statements. The second quarter earnings release, the related financial statements and the management's discussion and analysis are available on SEDAR as well as the Investor Relations section on the company's website at protechhomemedical.com.At this point, I'd like to turn the call over to the Chief Executive Officer and Chairman, Greg Crawford.
Thank you for joining us on the call today. My name is Greg Crawford, and I'm the Chief Executive Officer and Chairman of Protech Home Medical. Joining me on the call today will be Hardik Mehta, our Chief Financial Officer.I would like to start this call by reiterating our corporate strategy and business today before getting into the details of the second quarter financials and an update on our M&A strategy. For those of you new to the story, Protech Home Medical, previously Patient Home Monitoring, provides a diverse offering of home medical equipment and services for treating patients in the United States with chronic disease.The company provides a range of products, including respiratory, oxygen, various medical supplies, power mobility and Coumadin home monitoring. We operate in 13 states across the Midwest and the East Coast, completing hundreds of thousands of deliveries each year to our more than 75,000 active patient customers.Our growth strategy is focused on utilizing technology to make life easier for the patient, the physician and improve health care outcomes.Today, for example, if a patient needs respiratory equipment, a patient would typically have to drive to a location to pick up the equipment and receive some level of in-person training. If the patient has trouble with the device, either someone drives to them or they're forced to come back to the location where they acquired the device. We know that we can use technology to reduce or eliminate these points of friction, resulting in more successful treatment and management of these chronic conditions and not unimportantly, at a higher-margin yield per patient.With that background, I would like to start this call by reviewing our achievements over the last quarter. Our first and most immediately impactful goal, and incidentally, where we've had measurable success, is achieving the financial performance we set out to achieve. Compared to our first quarter, the second quarter shows an increase in net revenue and EBITDA and an incrementally and meaningfully stronger balance sheet. We understand that it has been difficult for our shareholders to fully appreciate our financial strength as we have assumed and begun to unburden the full cost of the spinoff and associated transaction expenses over the last several quarters.We are not only pleased with our financial results, which we believe will incrementally improve quarter-over-quarter, but are pleased now our shareholders are able to see a more accurate operating performance picture of the underlying business.Some facts. Second quarter revenue increased to $18.72 million, an increase of 1.1% compared to our first quarter. During the first fiscal quarter, our first quarter under current management control and board direction, we were able to complete key projects focused on unifying our locations in respect to strategy, vision, expectations, best practices and culture. These efforts certainly played a large part in our second quarter revenue growth and profitability.We also had second quarter adjusted EBITDA increase to $2.3 million. Adjusted EBITDA margins increased from 8.2% to 12%, a margin increase of more than 46% quarter-to-quarter. We feel very good about this quarter-over-quarter improvement. We believe the increase was a combination of 2 central factors. The first is that all the residual spinoff-related expenses were paid off in the first quarter. The second critical impact resulted directly from enterprise-wide improvements in our intake processes and billing collections.If we can continue to improve these processes over the year, we'll continue to see margins improve. This will remain a principal focus in the third quarter, and the processes and visibility thus far developed will be subject to continuous improvement and measurement.I also want to draw your attention to our balance sheet improvements. We had close to $4 million in operating cash flow from the quarter, while our cash balance increased almost $1 million. Our total liabilities decreased by $273,000.With that overview, I would like to provide our shareholders with third quarter guidance. We believe revenue will continue to be on track between $18.5 million and $19 million, and strongly believe the AR balance resulting from this revenue is clean and valued appropriately. We will continue to increase and exceed our year-to-date adjusted EBITDA margins that our balance sheet will continue to have meaningfully improvement.I also would like to address our access to debt capital. Generally, while we work with several lenders and have received preliminary term sheets, we have decided to forgo the associated interest and fees for this capital prior to executing an LOI on an acquisition target.Before turning to acquisitions, I would like to turn the call over to Hardik Mehta, our Chief Financial Officer, to get into some of the specifics of our financial performance over the last quarter.
Thanks, Greg. In giving the financial results for the second fiscal quarter ending March 31, 2018, note that all outcomes are in Canadian dollars and the full results are available on SEDAR.The company generated revenue of $18.7 million compared to first quarter 2018 revenue of $18.5 million. The biggest product category that saw an increase was respiratory products, which resulted in 11.2% growth year-over-year between 2018 and 2017.We had an improvement in our gross margins as well. Our gross margin increased from -- up to 72% as compared to 68% in our Q1.Our adjusted EBITDA, which excludes depreciation, amortization, stock-based compensation and onetime spinoff professional fees in addition to noncash charges or changes in financial derivatives, et cetera, totaled $2.3 million compared to first quarter adjusted EBITDA of $1.5 million.In respect to our balance sheet, as Greg mentioned, the company ended the quarter with close to $4 million in cash and an increase of almost $1 million compared to Q1 2018.Our total liabilities marginally decreased by $273,000 compared to our first fiscal quarter.As reported, our current assets totals more than $23 million compared to $17.5 million on current liabilities, representing a stable and very efficient current ratio of 1.3:1. On an adjusted basis, when we eliminate current portion of equipment leases because they correspond to long-term assets, our adjusted current ratio is 2.3:1, which is pretty healthy and very strong.Looking at our current asset -- current long-term assets and long-term liabilities, we have $18.1 million of net book value of medical equipment and just $1.2 million of associated equipment leases. Whichever way we look at our balance sheet, which is current assets versus current liabilities and long-term assets versus long-term debt, we are pretty solid and solvent. So I do want to emphasize that we did not need a line of credit or an additional capital for operating reasons.Overall, our total debt picture is made up of capital leases and the debentures, which matures at the end of 2019. From a capital perspective, we continue to finance major equipment purchases with leases from our major vendors, and we believe that we will be able to fund our future growth using the same financial instruments.We have made improvements in our second quarter on our billing collections. For background and to give new shareholders a sense of why we have bad debt, our top client revenue reflects all the revenue that can be generated from the services provided. Nevertheless, not all intakes, which include the physician forms and documentations are submitted correctly from hospitals and practitioners the first time. This results in some bad debt eventually. At this point, some of our locations perform better than others in this critical area. But as a whole, the company is doing a good job of collecting for the services rendered.Our efficiencies of billing and cash collections continue to improve, and our collection rates continue to be at all-time high and much improved over our first quarter. That said, we continue to believe this is still room for improvement and that improvement will reduce our bad debt allocation and improve profits on dollar-for-dollar basis. As Greg mentioned, this continues to be a focus and I'm confident we will see steady, measurable and gradual improvements.To summarize, our balance sheet continues to be strong. Our receivables are clean and valued conservatively. We believe we can secure debt capital as needed for acquisitions. As such, we remain highly optimistic regarding our ability to grow and excel.Thank you. And with that update, I will turn the call back to Greg.
Thank you, Hardik. As I mentioned on our previous call, a key driver of our strategy is acquiring strategic businesses for their distribution volume and synergies. We have developed a specific acquisition profile and post-acquisition integration process. Our M&A experience and developed processes are geared to maximize value. These features include positive cash flow, complementary product mix, certain billing processes, strategic geographic presence among other key attributes.What we found to date is that many of the smaller acquisitions ranging from $3 million to $8 million in revenue have failed to meet our criteria in some way. And while we continue to source and qualify smaller targets, we aren't expecting to quickly find and close a small tuck-in acquisition in the current quarter.What we are seeing is that most of our desired targets are much larger, ranging from $15 million to $30 million in revenue. These larger acquisition targets, in our view, will have a significant material impact on our overall revenue and profits. Nevertheless, engaging in these deals is generally more complex and more time consuming, and we are also seeing competition from our buyers for these larger deals, driving up valuations compared to deals at the smaller end of the market.We, nonetheless, feel that we have some real advantages in this arena, especially since many of these large -- larger acquisition opportunities are full-service DMEs with a wide, and for us, full complementary product and service range. Many of the products offered aren't of high value to the bigger roll up acquires. Some of these acquisitions have the ability to be highly transformative and we are pursuing these in this light.With that update, I would like to finish the call by discussing our continued commitment to shareholder communication. We feel we have a very strong, diversified business with excellent growth opportunities, both organic and inorganic. As shareholders understand our business model as Protech Home Medical, not Patient Home Monitoring, we feel we will be able to attract more institutional shareholders.We've been able to demonstrate, over 2 quarters, our ability to grow revenue and profits and expect that trend to continue. I'm also look forward to meeting with institutional shareholders in Canada in the next 30 days as we finalize our first roadshow. At these share price levels, I think we're very undervalued in the marketplace.I, once again, want to thank all of you for being on the call. With our second quarter of financial results released and our positive guidance for another quarter of revenue and profit growth, I feel we are moving in the right direction. We look forward to continuing to demonstrate improving financial results, and we'll continue to communicate with our retail and institutional shareholders the progress we're making towards our goals.This concludes our prepared remarks, and we will now open for further questions. Thank you.
[Operator Instructions] And we'll take our first question.
Greg, it's Doug Cooper. A couple of things. First of all, I just want to focus on organic growth. So year-over-year, just on Canadian dollar terms, you alluded to 1.1%, But the Canadian dollar strengthened, I guess, year-over-year. So I have U.S. dollar organic growth around 4% or 5%. Is that in line with what the underlying business has been running now, you think?
Yes. Yes. Depending on the certain product categories and things, for sure. Since we really gained control of the business and got the board direction, we were really able to execute on our strategy. And just a couple of things there. On the year-to-date 2017 to 2018, our higher-margin products of respiratory are up -- were up about 11% and that -- compared to year-over-year 2018 year-to-date.
So is that the...
Go ahead.
I was just going to say, when I see the line item -- well, not -- in the notes, you talk about respiratory supply -- sorry, respiratory resupply setups. Looks like that's up about 30% year-over-year. I guess, that's whatever kits or something, whatever you're sending out. Is that the sort of what I would call ancillary revenues for the CPAPs, like the hoses or what have you? And is that...
Yes. That would be a part of the 11.2% that -- that's not the only part of the 11.2% growth on our respiratory.
Okay. The other growth in respiratory is just more patients at the end of the day?
More patients, oxygen, other product categories that we are introducing that we did not in the past. So all of the above.
Okay. What does respiratory represent of the revenue right now?
60% to 70%.
60% to 70%. And then oxygen and mobility would be -- make up the remainder?
Well, oxygen is included in the 60% to 70%.
Right, right. When we say respiratory, that includes our oxygen, our PAP business, our sleep business, all of that.
Okay. And then mobility and Coumadin and the others would make up the rest?
Yes.
Yes.
Okay. Just on the -- again, getting back the sort of year-over-year comparisons, which is -- I guess, to me it's a little -- underscores or underplays your growth and your margins, I guess, right? Because if I took -- take a look at EBITDA last year, it's in the quarter at $2.2 million. But really, obviously, you had a big adjustment to bad debt expense that rolled through into Q4. So on an adjusted basis, I would think that would be -- the improvement is more striking, I guess, on a year-over-year basis, given that adjustment that came through in Q4 of last year. So I know you spoke to it in the prepared remarks, just about the AR. Is that fully scrubbed now, you think, in terms of any bad debts that might be in there? Maybe you could just sort of expand on that a little bit.
I'll let Hardik answer that question for you, Doug.
Thanks, Greg. Absolutely, Doug. I mean, we feel more confident than ever on our AR. We specifically mentioned that it is conservative. And let me explain why. Before I talk about 2018, our current AR, let me take a moment here to explain what happened last quarter of 2017, right? Agreed that there was a big write-off on AR, which resulted into a higher bad debt expense in Q4. But I want to explain, and I want to take the time for every investor to understand that a big portion of that write-down was completely out of period. It had nothing to do with 2017. So when our investors take the write-down of Q4 2017 and distribute that across 2017, it kind of doesn't give us a true picture. A lot of that write-down was associated with 2016 and prior period. Having said that, typically, a DME business, you would see AR ranging somewhere in the range of 2 to 3x monthly -- cash collection monthly revenue. I mean, currently, we are trending around 1.4 to 1.5, which kind of indicates how conservative we are and how cautious we are in booking our revenue to address concerns of our investors of what happened in 2017. As far as AR is concerned, we are way beyond having another allocation of bad debt down the road.
Okay. Maybe just on the...
[indiscernible]
Okay. And bad debt as a percentage of revenue this quarter came in about 12.5%, give or take. Where do you see that, sort of -- is 11%, 12% is that the range? Or can you get to down to 10% or below potentially?
Right. So the typical range is between 10% to 13% in this industry depending on how -- some people recognize revenue a little bit differently, but the way we recognize, somewhere between 10% to 13% is the zone. We continue to progress on our billing collections and our goal is to tend that -- tend our bad debt allocation to less than 10%. Somewhere around 9% to 10% is where we are hoping to be by end of Q4.
End of Q4, okay. And I guess, the part and parcel, that would be the EBITDA margin running 12%. You indicated, again, in your sort of outlook that you would see incremental expansion in that over the balance of the year. What are you thinking that could be in 2019 when you've streamlined all the costs, got your billing under control, maybe cut your bad debt expense down. What would be your target for an EBITDA margin in this DME business, excluding any acquisitions?
Yes. We -- no less than 18%. I think we are -- more between 18% and 22% is where we would be guiding at the time -- we hope to be guiding at the time. But no less than 18% by the end of 2018.
Sorry, 2018?
No. By the end of Q4, we should be trending at least 18% on an annualized basis. So looking forward into 2019, we want to be -- we believe our EBITDA would be between 18% to 22%.
Right. So just to be clear, you think Q4 EBITDA could be in that range of 18%?
Yes.
Okay. And just final question, Greg. Just sort of a housekeeping item. What is the percentage now of your business between government pay and private insurance pay?
Yes. The government pay is approximately 30% from there. Then about 60% is divided up amongst multiple commercial payers, and then the balance there would just be patient pay.
Okay. So 30% government, 60% insurance and 10% patient pay.
Yes.
We are very diversified when it comes to payers.
Yes. And even the 30% on the government, I mean, there is a division in there between the states, the state Medicaids that pay versus the national government Medicare program there. So operating in 13 states, that's kind of diversified too. So it's probably about approximately 22% government and 8% state of that 30%.
Okay, got it. And just final question for me. Obviously, health care service companies' reimbursement risk is always a concern. Not that you have a crystal ball, but maybe you can just talk a little bit about your products in particular, and what the chances of that -- those are for any reimbursement cuts in the near future, and I'll leave it at that.
Yes. Very good question. We feel that we've hit bottom, and we feel on the reimbursement fees schedule from multiple insurance companies, and that [ will ] actually have contract negotiations out that kind of negotiate higher rates and things, and there's also some things that have passed inside Congress on the Medicare side in certain areas of the country and certain areas that we operate in that would actually give us a temporary increase in our fee schedule for the last 2 quarters of the calendar year 2018. And I think that with that indication of that recent roll last week that, that indicates that we're headed in the right direction that we have hit bottom.
And there are no further questions at this time.
Thanks, everyone.
And that concludes today's presentation. We thank you for your participation. You may now disconnect.