Exhibit 99.4
|
Greenbrook TMS Inc.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For the three- and nine-month periods ended September 30, 2020 and 2019
November 10, 2020
|
TABLE OF CONTENTS
BASIS OF PRESENTATION | 3 |
CAUTIONARY NOTE REGARDING NON-IFRS MEASURES AND INDUSTRY METRICS | 3 |
CAUTIONARY NOTE REGARDING FORWARD-LOOKING INFORMATION | 4 |
BUSINESS OVERVIEW | 5 |
FACTORS AFFECTING OUR PERFORMANCE | 6 |
SEGMENTS | 6 |
COMPONENTS OF OUR RESULTS OF OPERATIONS AND TRENDS AFFECTING OUR BUSINESS | 6 |
FACTORS AFFECTING THE COMPARABILITY OF OUR RESULTS | 8 |
KEY HIGHLIGHTS AND RECENT DEVELOPMENTS | 9 |
RESULTS OF OPERATIONS | 11 |
ANALYSIS OF RESULTS FOR Q3 2020 AND YTD 2020 | 12 |
QUARTERLY FINANCIAL INFORMATION | 16 |
EBITDA AND ADJUSTED EBITDA | 17 |
RECONCILIATION OF LOSS ATTRIBUTABLE TO THE COMMON SHAREHOLDERS OF GREENBROOK TO EBITDA AND ADJUSTED EBITDA | 17 |
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES | 17 |
INDEBTEDNESS | 19 |
OFF-BALANCE SHEET ARRANGEMENTS | 19 |
SHARE INFORMATION | 19 |
RELATED PARTY TRANSACTIONS | 19 |
RISKS AND UNCERTAINTIES | 20 |
DISCLOSURE CONTROLS & PROCEDURES AND INTERNAL CONTROL OVER FINANCIAL REPORTING | 22 |
CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS | 22 |
RISK FACTORS | 23 |
ADDITIONAL INFORMATION | 23 |
2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management’s Discussion and Analysis (“MD&A”) provides information concerning the financial condition and results of operations of Greenbrook TMS Inc. (the “Company”, “Greenbrook”, “us” or “we”). This MD&A should be read in conjunction with our unaudited condensed interim consolidated financial statements for the three- and nine-month periods ended September 30, 2020 and 2019, including the related notes thereto, and our audited consolidated financial statements, including the related notes thereto, for the fiscal years ended December 31, 2019 and 2018 and the related MD&A.
BASIS OF PRESENTATION
Our unaudited condensed interim consolidated financial statements have been prepared in accordance with International Accounting Standard (“IAS”) 34 – Interim Financial Reporting, as issued by the International Accounting Standards Board (“IASB”). Our fiscal year is the 12-month period ending December 31. The next fiscal year will occur in the 12-month period ending December 31, 2020 (“Fiscal 2020”).
All references in this MD&A to “Q3 2020” are to our fiscal quarter for the three-month period ended September 30, 2020 and all references to “Q3 2019” are to our fiscal quarter for the three-month period ended September 30, 2019. All references in this MD&A to “Q2 2020” are to our fiscal quarter for the three-month period ended June 30, 2020 and all references to “Q2 2019” are to our fiscal quarter for the three-month period ended June 30, 2019. All references in this MD&A to “Q1 2020” are to our fiscal quarter for the three-month period ended March 31, 2020. All references in this MD&A to “YTD 2020” or “year-to-date 2020” are to the nine-month period ended September 30, 2020 and all references to “YTD 2019” or “year-to-date 2019” are to the nine-month period ended September 30, 2019. All references in this MD&A to “Fiscal 2019” are to our fiscal year ended December 31, 2019.
Amounts stated in this MD&A are in United States dollars, unless otherwise indicated.
CAUTIONARY NOTE REGARDING NON-IFRS MEASURES AND INDUSTRY METRICS
This MD&A makes reference to certain non-International Financial Reporting Standards (“IFRS”) measures including certain metrics specific to the industry in which we operate. These measures are not recognized measures under IFRS, do not have a standardized meaning prescribed by IFRS and, therefore, may not be comparable to similar measures presented by other companies. Rather, these measures are provided as additional information to complement those IFRS measures by providing further understanding of our results of operations from management’s perspective. Accordingly, these measures are not intended to represent, and should not be considered as alternatives to, loss attributable to the common shareholders of Greenbrook or other performance measures derived in accordance with IFRS as measures of operating performance or operating cash flows or as a measure of liquidity. In addition to our results determined in accordance with IFRS, we use non-IFRS measures including, “EBITDA” and “Adjusted EBITDA”. This MD&A also refers to “Same-Region Sales Growth”, which is an operating metric used in the industry in which we operate but may be calculated differently by other companies. These non-IFRS measures, including industry metrics, are used to provide investors with supplemental measures of our operating performance and thus highlight trends in our core business that may not otherwise be apparent when relying solely on IFRS measures. We also believe that securities analysts, investors and other interested parties frequently use non-IFRS measures, including industry metrics, in the evaluation of issuers. Our management also uses non-IFRS measures, including industry metrics, to facilitate operating performance comparisons from period to period, to prepare annual operating budgets and forecasts and to determine components of management compensation.
3
We define such non-IFRS measures, including industry metrics, as follows:
“Adjusted EBITDA” is defined as net income (loss) before amortization, depreciation, interest expenses, interest income and income taxes, adjusted for share-based compensation expenses, center development costs, and non-recurring expenses. We believe our Adjusted EBITDA metric is a meaningful financial metric as it measures the ability of our current TMS Center (as defined below) operations to generate earnings while eliminating the impact of costs incurred related to our TMS Center growth plans and share-based compensation expenses, neither of which has an impact on the operating performance of our existing TMS Center network.
“EBITDA” is defined as net income (loss) before amortization, depreciation, interest expenses, interest income and income taxes.
“Same-Region Sales Growth” is a metric used to compare the percentage change in sales derived from established management regions in a certain period as compared to the sales from the same management regions in the same period of the prior year and functions as an indicator of organic growth. We monitor our business on a regional basis to focus on increasing patient volume within a management region in addition to assessing individual TMS Center locations on a standalone basis. As a result, we will from time to time establish a TMS Center that may, over the short term, negatively impact the patient volume at another TMS Center, but which is expected to add incremental patient volume to the management region as a whole in an economically beneficial manner. We believe our Same-Region Sales Growth metric helps quantify our sales growth within regional management areas and the related growth opportunities associated with adding TMS Center density within established management regions. Same-Region Sales Growth is calculated based on management regions containing open TMS Centers that have performed billable TMS services for a period of at least one full year prior to each of the comparable periods. Our Same-Region Sales Growth is unique to our financial management strategy and may be calculated differently compared to other companies.
See “Reconciliation of Loss Attributable to the Common Shareholders of Greenbrook to EBITDA and Adjusted EBITDA” for a reconciliation of certain of the foregoing non-IFRS measures to their most directly comparable measures calculated in accordance with IFRS.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING INFORMATION
Some of the information contained in this MD&A, including the impact of the COVID-19 (coronavirus) pandemic (“COVID-19”) and the Company’s response thereto, the proposed debt financing, and the anticipated listing of our common shares on The Nasdaq Stock Market LLC, constitutes forward-looking information. This information is based on management’s reasonable assumptions and beliefs in light of the information currently available to us and is current as of the date of this MD&A. Actual results and the timing of events may differ materially from those anticipated in the forward-looking information contained in this MD&A as a result of various factors.
Particularly, information regarding our expectations of future results, performance, growth, achievements, prospects or opportunities or the markets in which we operate is forward-looking information. In some cases, forward-looking information can be identified by the use of forward-looking terminology such as “plans”, “targets”, “expects” or “does not expect”, “is expected”, “an opportunity exists”, “budget”, “scheduled”, “estimates”, “outlook”, “forecasts”, “projection”, “prospects”, “strategy”, “intends”, “anticipates”, “does not anticipate”, “believes”, or variations of such words and phrases or statements that certain actions, events or results “may”, “could”, “would”, “should”, “might”, “will”, “will be taken”, “occur” or “be achieved”. In addition, any statements that refer to expectations, intentions, projections or other characterizations of future events or circumstances contain forward-looking information. Statements containing forward-looking information are not facts but instead represent management’s expectations, estimates and projections regarding future events or circumstances.
4
Many factors could cause our actual results, level of activity, performance or achievements or future events or developments to differ materially from those expressed or implied by the forward-looking statements, including, without limitation, the factors discussed in the “Risks and Uncertainties” section of this MD&A. Additional risks and uncertainties are discussed in the Company’s materials filed with the Canadian securities regulatory authorities from time to time, including the Company’s annual information form dated March 10, 2020 in respect of the fiscal year ended December 31, 2019. These factors are not intended to represent a complete list of the factors that could affect us; however, these factors should be considered carefully.
The purpose of the forward-looking information is to provide the reader with a description of management’s current expectations regarding the Company’s financial performance and may not be appropriate for other purposes; readers should not place undue reliance on forward-looking information contained herein. To the extent any forward-looking information in this MD&A constitutes future-oriented financial information or financial outlook, within the meaning of applicable securities laws, such information is being provided to demonstrate the potential of the Company and readers are cautioned that this information may not be appropriate for any other purpose. Future-oriented financial information and financial outlook, as with forward-looking information generally, are based on current assumptions and are subject to risks, uncertainties and other factors. Furthermore, unless otherwise stated, the forward-looking statements contained in this MD&A are made as of the date of this MD&A and we have no intention and undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable securities law. The forward-looking statements contained in this MD&A are expressly qualified by this cautionary statement.
BUSINESS OVERVIEW
We are a leading provider of Transcranial Magnetic Stimulation (“TMS”) therapy in the United States for the treatment of Major Depressive Disorder (“MDD”) and other mental health disorders. The predecessor to the Company, TMS NeuroHealth Centers, Inc. (“TMS US”) was established in 2011 to take advantage of the opportunity created through the paradigm-shifting technology of TMS, an FDA-cleared, non-invasive therapy for the treatment of MDD. Our business model takes advantage of the opportunity for a new, differentiated service channel for the delivery of TMS – a patient-focused, centers-based service model to make TMS treatment easily accessible to all patients while maintaining a high standard of care.
After opening our first center in 2011 in Tysons Corner in Northern Virginia, we have grown to control and operate a network of outpatient mental health service centers that specialize in TMS treatment across the United States (each, a “TMS Center”). The Company offers TMS treatment facilities in convenient locations to provide easy access to patients and physicians. As of September 30, 2020, and as of the date of this MD&A, the Company owned and operated 125 TMS Centers in the Commonwealth of Virginia, and the States of North Carolina, South Carolina, Maryland, Delaware, Missouri, Illinois, Ohio, Connecticut, Florida, Texas, Michigan, Alaska, Oregon and California.
Our regional model seeks to develop leading positions in key regional markets, leveraging operational efficiencies by combining smaller local TMS treatment centers that are strategically located within a single region for convenient patient and physician access, with regional management infrastructure in place to support center operations. Management regions typically cover a specific metropolitan area that meets a requisite base population threshold. The management region is typically defined by a manageable geographic area in terms of size, which facilitates the use of regional staff working across the various TMS Center locations within the management region, and which resides within a marketing capture area that allows for efficiencies in advertising cost. Management regions often have similar economic characteristics and are not necessarily defined by state lines, other geographic borders, or differentiating methods of services delivery, but rather are defined by a functional management area.
5
FACTORS AFFECTING OUR PERFORMANCE
We believe that our performance and future success depend on a number of factors that present significant opportunities for us. These factors are also subject to a number of inherent risks and challenges, some of which are discussed below. See also the “Risks and Uncertainties” section of this MD&A.
Number of TMS Centers
We have a meaningful opportunity to continue to grow the number of our TMS Centers in the United States through organic in-region growth, establishing new regions and potential future acquisitions. The opening and success of new TMS Centers is subject to numerous factors, including our ability to locate the appropriate space, finance the operations, build relationships with physicians, and negotiate suitable lease terms and local payor arrangements, and other factors, some of which are beyond our control.
Competition
The market for TMS is becoming more competitive. We compete principally on the basis of our reputation and brand, the location of our centers and the quality of our TMS services and the reputation of our partner physicians. In the markets in which we are operating, or anticipate operating in the future, competition predominantly consists of individual psychiatrists that have a TMS device, an FDA-regulated medical device specifically manufactured to transmit the magnetic pulses required to stimulate the cortical areas in the brain to effectively treat MDD and other mental health disorders (each, a “TMS Device”), in their office and who can offer TMS therapy directly to their patients. We also face competition from a limited number of multi-location psychiatric practices or behavioral health groups that offer TMS therapy as part of their overall practice, as well as a few other specialist TMS providers.
Industry Trends
Our revenue is impacted by changes to United States healthcare laws, our partners’ and contractors’ healthcare costs, the ability to secure favorable pricing structures with device manufacturers and payors’ reimbursement criteria and associated rates.
Technology
Our revenues are affected by the availability of, and reimbursement for, new TMS indications, new technology or other novel treatment modalities and our ability to incorporate the new technology into our TMS Centers.
SEGMENTS
We evaluate our business and report our results based on organizational units used by management to monitor performance and make operating decisions on the basis of one operating and reportable segment: Outpatient Mental Health Service Centers. We currently measure this reportable operating segment’s performance based on revenues and regional operating income.
COMPONENTS OF OUR RESULTS OF OPERATIONS AND TRENDS AFFECTING OUR BUSINESS
In assessing our results of operations and trends affecting our business, we consider a variety of financial and operating measures that affect our operating results.
Total Revenue
Total revenue consists of service revenue attributable to the performance of TMS treatments. In circumstances where the net patient fees have not yet been received, the amount of revenue recognized is estimated based on an expected value approach where management considers such variables as the average of previous net patient fees received by the applicable payor and fees received by other patients for similar services and management’s best estimate leveraging industry knowledge and expectations of third-party payors’ fee schedules. Third party payors include federal and state agencies (under the Medicare programs), managed care health plans and commercial insurance companies.
6
Regional Operating Income (Loss) and Direct Center and Regional Costs
Regional operating income (loss) is calculated as total revenue less direct center and regional costs. Direct center and regional costs consist of direct center and patient care costs, regional employee compensation, regional marketing expenses, and depreciation. These costs encapsulate all costs (other than incentive compensation such as share-based compensation granted to senior regional employees) associated with the center and regional management infrastructure, including the cost of the delivery of TMS treatments to patients and the cost of our regional patient acquisition strategy. Beginning Q1 2020, the Company has excluded amortization from regional operating income (loss) based on the nature of the expense as it is not associated with center and regional infrastructure. We have retrospectively updated our quarterly financial information below to reflect this change (see “Quarterly Financial Information” below).
Center Development Costs, Capital Expenditure and Working Capital Investment
Center development costs represent direct expenses associated with developing new TMS Centers, including small furnishings and fittings, wiring and electrical and, in some cases, the cost of minor space alterations. However, the main cash requirement for center development relates to working capital investment. This includes rental deposits or other non-capital costs required to open TMS Centers and the cost of TMS treatment delivery while collections initially lag until payor contracting, credentialing and enrollment processes are completed.
Corporate Employee Compensation
Corporate employee compensation represents compensation incurred to manage the centralized business infrastructure of the Company, including annual base salary, annual cash bonuses and other non-equity incentives.
Corporate Marketing Expenses
Corporate marketing expenses represent costs incurred that impact the Company on an overall basis including investments in website functionality and brand management activities.
Other Corporate, General and Administrative Expenses
Other corporate, general and administrative expenses represent expenses related to the corporate infrastructure required to support our ongoing business including insurance costs, professional and legal costs and costs incurred related to our corporate offices.
We have invested in this area to support the growing volume and complexity of our business and anticipate continuing to do so in the future. We have already started to scale into our centralized business infrastructure and leverage these fixed costs as we continue to expand our TMS Center network.
Transaction Costs
Transaction costs represent accounting, legal and professional fees incurred as part of significant transactions, including the acquisition of Achieve TMS Centers, LLC and Achieve TMS Alaska, LLC (collectively, “Achieve TMS”) in Q3 2019 (the “Achieve TMS Acquisition”). See “Factors Affecting the Comparability of Our Results – Acquisition of Achieve TMS” below.
Earn-Out Consideration
A portion of the purchase price payable in respect of the Achieve TMS Acquisition (see “Factors Affecting the Comparability of Our Results – Acquisition of Achieve TMS” below) is subject to an earn-out based on the earnings before interest, tax, depreciation and amortization achieved by Achieve TMS during the twelve-month period following September 26, 2019, the closing date of the Achieve TMS Acquisition (the “Earn-Out”). 70% of the Earn-Out consideration will be settled in cash and the remainder will be settled through the issuance of common shares of the Company (“Common Shares”) to the vendors, subject to applicable regulatory and stock exchange approvals. The amount recognized as at September 30, 2020 is based on management’s best estimate of the Earn-Out payable and is subject to estimation uncertainty.
7
Share-Based Compensation
Share-based compensation represents stock options granted as consideration in exchange for employee and similar services to align personnel performance with the Company’s long-term goals.
Amortization
Amortization relates to the reduction in useful life of the Company’s intangible assets that were realized as part of the Achieve TMS Acquisition.
Interest
Interest expense relates to interest incurred on loans and lease liabilities. Interest income relates to income realized as a result of investing excess funds into investment accounts.
Adjusted EBITDA and Non-Recurring Expenses
Adjusted EBITDA is a non-IFRS measure that deducts non-recurring expenses, which represent one-time costs incurred for purposes of enhancing the performance of the business and to achieve our TMS Center growth. This includes the recognition of a one-time cost with respect to the Earn-Out payable in connection with the Achieve TMS Acquisition. This also includes one-time professional and legal fees incurred in connection with the anticipated listing of our Common Shares on The Nasdaq Stock Market LLC (“NASDAQ”). The listing of our Common Shares on NASDAQ remains subject to the approval of NASDAQ and the satisfaction of all applicable listing and regulatory requirements, including the United States Securities and Exchange Commission (the “SEC”) declaring the Form 20-F Registration Statement effective.
FACTORS AFFECTING THE COMPARABILITY OF OUR RESULTS
COVID-19
While all of our active TMS Centers are open, and are expected to remain open going forward, we experienced a temporary decline in both patient visits/treatments and new patient starts in YTD 2020 as a result of the restrictions imposed in response to the COVID-19 pandemic (see “Key Highlights and Recent Developments – COVID-19 Business Impact” and “Risks and Uncertainties” below).
Acquisition of Achieve TMS
On September 26, 2019, we, through our wholly-owned subsidiary, TMS US, completed the acquisition of all of the issued and outstanding membership interests of each of Achieve TMS Centers, LLC and Achieve TMS Alaska, LLC for a purchase price of $10,596,912 (net of Achieve TMS’ cash), of which $2,611,044 of the purchase price was satisfied through the issuance of an aggregate of 1,431,736 Common Shares to the vendors and the remainder was settled in cash, less deferred and contingent consideration of $1,274,402. Achieve TMS currently operates 22 active TMS Centers, with an additional TMS Center in development, in California, Oregon and Alaska. Achieve TMS has a particular focus on deep TMS therapy. We believe that the Achieve TMS Acquisition will allow us to accelerate our expansion in the western United States in future periods.
8
A portion of the purchase price payable in respect to the Achieve TMS Acquisition is subject to the Earn-Out. 70% of the Earn-Out consideration will be settled in cash and the remainder will be settled through the issuance of Common Shares to the vendors. See “Components of Our Results of Operations and Trends Affecting Our Business – Earn-Out Consideration” above.
Regional Development Activity
Our regional model seeks to develop leading positions in key markets, and to leverage operational efficiencies by combining smaller local TMS treatment centers within a region under a single shared regional management infrastructure. Part of our core strategy is to continue to develop new TMS Centers within our existing regions as well as in new management regions, in each case, organically or through acquisitions of existing centers or businesses, which may affect comparability of results.
KEY HIGHLIGHTS AND RECENT DEVELOPMENTS
During Q3 2020, despite the challenging operating environment imposed by the COVID-19 pandemic, we achieved our second highest quarterly revenue results to date and marked our return to strong regional operating income. We showed resilient performance through the COVID-19 pandemic, as we delivered strong year-over-year revenue growth of 43% compared to YTD 2019 and 42% compared to Q3 2019, respectively. We also experienced record monthly highs in new patient starts throughout Q3 2020, which we anticipate will be a catalyst for accelerated future growth (see “Cautionary Note Regarding Forward-Looking Information” above).
Disciplined cost containment strategies remained in place through Q3 2020 and we also added one new active TMS Center during the quarter, while an additional 11 TMS Centers remain in development. Our current total TMS network is comprised of 125 TMS Centers.
Growth in Total Revenue
Despite the impact of COVID-19, consolidated revenue increased by 42% to $12.0 million in Q3 2020 (Q3 2019: $8.5 million) representing our second highest quarterly revenue results to date. Furthermore, consolidated revenue increased by 43% during YTD 2020 to $33.2 million (YTD 2019: $23.1 million) and 23% as compared to Q2 2020 (Q2 2020: $9.8 million).
With an additional 11 TMS Centers in development as at the end of Q3 2020, coupled with a new record high in new patient starts in Q3 2020, we believe that we are well positioned for accelerated future growth as COVID-19 related market conditions and patient sentiment improves (see “Cautionary Note Regarding Forward-Looking Information” above).
COVID-19 Business Impact
All of the Company’s active TMS Centers remained open despite the COVID-19 pandemic to both current and new patients (including as “essential businesses”) and are expected to continue to remain open going forward. However, as a result of an initial decline in treatments and new patient starts earlier in Fiscal 2020 due to the pandemic, we took the following measures in order to control costs:
• | approximately 20% of the Company’s employees were furloughed as of May 1, 2020. During the period of furlough, Greenbrook paid 100% of employer and employee medical premiums; |
• | a Company-wide hiring freeze was implemented; |
• | each member of the Company’s executive management team agreed to a 10% salary deferral; and |
9
• | budgeted discretionary expenses are expected to be reduced by approximately $2 million for Fiscal 2020 (of which $1.7 million was realized during YTD 2020 as compared to our plan to date). |
As operating conditions and volumes of patient treatments began to normalize, the Company re-instated furloughed employees to match increased mental health treatment demand, removed the Company-wide hiring freeze and ended the salary deferral for the Company’s executive management team. The Company, however, continues to reduce discretionary spending. Our entire team continues to work tirelessly to deliver the highest quality of care at all of our TMS Centers, while at the same time taking all possible steps to safeguard the health and well-being of our patients, employees and physician partners. We see these challenging operating conditions as temporary and we are starting to see a positive change in sentiment. However, as we navigate through this unprecedented and challenging period, we will continue to assess the need for additional measures to control costs. See “Risks and Uncertainties”.
Regional Operating Income
Q3 2020 resulted in strong regional operating income despite the challenging operating environment caused by COVID-19. We realized regional operating income of $1.0 million in Q3 2020 as compared to regional operating loss of $0.2 million in Q2 2020. Regional operating income for Q3 2020 increased by 26% (Q3 2019: $0.8 million) and decreased by 38% to $1.5 million during YTD 2020 (YTD 2019: $2.4 million). The increase in Q3 2020 is primarily attributable to an increase in patient starts and a decrease in discretionary budgeted spending during the period. This is despite the inclusion of one newly active TMS Center and 11 TMS Centers in development, which will take time to generate positive regional operating income.
Investment in the Centralized Business Infrastructure and Rationalization of Aggregate Corporate Costs
Aggregate corporate costs (including corporate employee compensation, corporate marketing expenses and other corporate, general and administrative expenses and excluding non-recurring expenses) increased by 22% to $3.3 million for Q3 2020 (Q3 2019: $2.7 million) and by 30% to $10.4 million in YTD 2020 (YTD 2019: $7.9 million). Aggregate corporate costs increased by 7% compared to Q2 2020 (Q2 2020: $3.1 million). This is the result of investments in our business infrastructure as market conditions stabilized, offset by disciplined measures implemented to control costs as a result of the COVID-19 pandemic.
As anticipated, the Q3 2020 and YTD 2020 aggregate corporate costs growth rate has decreased significantly as compared to Fiscal 2019 as we continue to scale into our centralized business infrastructure. This is further highlighted by the growth in revenue of 42% in Q3 2020 and 43% during YTD 2020, eclipsing the growth rate in aggregate corporate costs of 22% in Q3 2020 and 30% during YTD 2020.
Continued Development of our TMS Center Network
We added one active TMS Center during Q3 2020 with an additional 11 TMS Centers in development as at September 30, 2020. This brings our total network to 125 TMS Centers, which is an increase of 18% from Q3 2019.
We believe our development pipeline remains robust and primed for further expansion. We have, however, temporarily curtailed development activity due to the COVID-19 pandemic. See “Cautionary Note Regarding Forward-Looking Information”.
May 2020 Offering
On May 21, 2020, the Company completed a public offering of 9,093,940 Common Shares at an aggregate offering price of C$1.65 per Common Share for aggregate gross proceeds of C$15,005,001 (the “Offering”). The Company is using the net proceeds from the Offering to fund operating activities and for other working capital and general corporate purposes.
10
Proposed Debt Financing
On November 10, 2020, the Company entered into a non-binding term sheet with a third party lender in respect of a secured term loan facility in an aggregate amount of up to $30 million (the “Proposed Debt Financing”). Completion of the Proposed Debt Financing remains subject to customary conditions, including completion of due diligence and negotiation of definitive documentation; however, there can be no assurances that the Proposed Debt Financing will be completed on the terms set forth in the non-binding term sheet, or at all. See “Financial Condition, Liquidity and Capital Resources”.
RESULTS OF OPERATIONS
Selected Financial Information
The following table summarizes our results of operations for the periods indicated. The selected consolidated financial information set out below have been derived from our unaudited condensed interim consolidated financial statements and related notes.
(US$) | Q3 2020 (unaudited) | Q3 2019 (unaudited) | YTD 2020 (unaudited) | YTD 2019 (unaudited) | ||||||||||||
Total revenue | 12,006,570 | 8,459,103 | 33,215,627 | 23,148,860 | ||||||||||||
Direct center and patient care costs | 5,473,759 | 4,267,769 | 16,521,201 | 11,655,616 | ||||||||||||
Regional employee compensation | 2,569,958 | 1,670,037 | 7,419,487 | 4,460,213 | ||||||||||||
Regional marketing expenses | 1,584,426 | 742,482 | 3,539,227 | 1,881,054 | ||||||||||||
Depreciation | 1,410,843 | 1,008,002 | 4,253,530 | 2,751,998 | ||||||||||||
Total direct center and regional costs | 11,038,986 | 7,688,290 | 31,733,445 | 20,748,881 | ||||||||||||
Regional operating income | 967,584 | 770,813 | 1,482,182 | 2,399,979 | ||||||||||||
Center development costs | 65,291 | 496,509 | 435,659 | 1,176,180 | ||||||||||||
Corporate employee compensation | 2,555,515 | 1,420,069 | 7,577,540 | 4,336,220 | ||||||||||||
Corporate marketing expenses | 202,435 | 578,330 | 806,120 | 1,210,219 | ||||||||||||
Transaction costs | – | 378,407 | – | 378,407 | ||||||||||||
Other corporate, general and administrative expenses | 780,402 | 748,297 | 2,165,361 | 2,395,084 | ||||||||||||
Share-based compensation | 171,056 | 117,112 | 455,908 | 573,426 | ||||||||||||
Amortization | 115,832 | – | 347,498 | – | ||||||||||||
Interest expense | 708,665 | 513,138 | 2,060,707 | 1,316,795 | ||||||||||||
Interest income | (8,857 | ) | (116,035 | ) | (18,418 | ) | (140,144 | ) | ||||||||
Earn-out consideration | 4,045,000 | – | 9,295,000 | – | ||||||||||||
Loss before income taxes | (7,667,755 | ) | (3,365,014 | ) | (21,643,193 | ) | (8,846,208 | ) | ||||||||
Income tax expense | – | – | – | – | ||||||||||||
Loss for the period and comprehensive loss | (7,667,755 | ) | (3,365,014 | ) | (21,643,193 | ) | (8,846,208 | ) | ||||||||
(Loss) income attributable to non-controlling interest | (31,623 | ) | 65,995 | (371,283 | ) | 29,315 | ||||||||||
Loss attributable to the common shareholders of Greenbrook | (7,636,132 | ) | (3,431,009 | ) | (21,271,910 | ) | (8,875,523 | ) | ||||||||
Net loss per share (basic and diluted) | (0.11 | ) | (0.06 | ) | (0.34 | ) | (0.17 | ) |
11
Selected Financial Position Data
The following table provides selected financial position data for the years and periods indicated:
(US$) | As at September 30, | As at December 31, | ||||||||||
2020 (unaudited) | 2019 (unaudited) | 2019 | ||||||||||
Cash | 9,170,131 | 11,569,134 | 7,947,607 | |||||||||
Current assets (excluding cash) | 14,122,145 | 13,550,697 | 12,003,831 | |||||||||
Total assets | 60,813,316 | 62,667,384 | 56,964,106 | |||||||||
Current liabilities | 25,657,532 | 11,524,502 | 13,183,677 | |||||||||
Non-current liabilities | 23,385,217 | 21,200,222 | 20,834,296 | |||||||||
Total liabilities | 49,042,749 | 32,724,724 | 34,017,973 | |||||||||
Non-controlling interests | (70,378 | ) | 523,380 | 444,405 | ||||||||
Shareholders’ equity | 11,770,567 | 29,942,660 | 22,946,133 |
Selected Operating Data
The following table provides selected operating data for the years and periods indicated:
As at September 30, | As at December 31, | |||||||||||
(unaudited) | 2020 | 2019 | 2019 | |||||||||
Number of active TMS Centers(1) | 114 | 94 | 102 | |||||||||
Number of TMS Centers-in-development(2) | 11 | 12 | 17 | |||||||||
Total TMS Centers | 125 | 106 | 119 | |||||||||
Number of management regions | 13 | 13 | 13 | |||||||||
Number of TMS Devices installed | 191 | 164 | 178 | |||||||||
Number of regional personnel | 286 | 253 | 273 | |||||||||
Number of shared-services / corporate personnel(3) | 47 | 36 | 44 | |||||||||
Number of TMS providers(4) | 113 | 102 | 109 | |||||||||
Number of consultations performed | 7,718 | 5,560 | 8,039 | |||||||||
Number of patient starts | 4,017 | 2,888 | 4,080 | |||||||||
Number of TMS treatments performed | 141,584 | 104,096 | 155,343 | |||||||||
Average revenue per TMS treatment | $ | 235 | $ | 222 | $ | 230 |
Notes:
(1) | Active TMS Centers represent TMS Centers that have performed billable TMS services. |
(2) | TMS Centers-in-development represents TMS Centers that have committed to a space lease agreement and the development process is substantially complete. |
(3) | Shared-services / corporate personnel is disclosed on a full-time equivalent basis. The Company utilizes part-time staff and consultants as a means of managing costs. |
(4) | Represents physician partners that are involved in the provision of TMS therapy services from our TMS Centers. |
Analysis of Results for Q3 2020 and YTD 2020
The following section provides an overview of our financial performance during Q3 2020 compared to Q3 2019 and during YTD 2020 compared to YTD 2019.
Total Revenue
Despite the impact of COVID-19, consolidated revenue increased by 42% to $12.0 million in Q3 2020 (Q3 2019: $8.5 million) representing our second highest quarterly revenue results to date. Furthermore, consolidated revenue increased by 43% during YTD 2020 to $33.2 million (YTD 2019: $23.1 million). This growth was primarily attributable to a strong bounce back from the initial onset of COVID-19 with record monthly highs in new patient starts throughout Q3 2020. Key efforts to provide greater access to patients virtually, through the expanded use of online platforms, focused marketing efforts on the safety and accessibility of our TMS Centers, coupled with the Achieve TMS Acquisition, were key contributors to our revenue growth. We also believe that the COVID-19 pandemic has increased demand for mental health services (including TMS therapy), which we believe will continue to promote growth as operating conditions normalize.
12
Same-Region Sales Growth was 2% in Q3 2020 and 2% in YTD 2020. As operating conditions continue to normalize, we believe this metric will revert back to pre-COVID-19 pandemic levels (see “Cautionary Note Regarding Forward-Looking Information” and “Cautionary Note Regarding Non-IFRS Measures and Industry Metrics” above).
Average revenue per treatment increased by 5% to $235 in Q3 2020 (Q3 2019: $222 and by 6% to $235 during YTD 2020 (YTD 2019: $222). This increase was predominantly attributable to our expansion into more favorable reimbursement jurisdictions, including as a result of the Achieve TMS Acquisition.
Accounts Receivable
Accounts receivable increased by $2.1 million to $12.2 million in Q3 2020 (Fiscal 2019: $10.1 million) and increased by $1.3 million compared to Q2 2020 ($10.9 million) primarily due to the significant quarter-over-quarter increase in revenue in Q3 2020 and slightly slower reimbursement timelines experienced from payors due to the disruption caused by COVID-19. We expect accounts receivable to stabilize throughout the balance Fiscal 2020 and into 2021. See “Cautionary Note Regarding Forward-Looking Information”.
Regional Operating Income and Direct Center and Regional Costs
Regional operating income for Q3 2020 increased by 26% to $1.0 million (Q3 2019: $0.8 million) and decreased by 38% to $1.5 million during YTD 2020 (YTD 2019: $2.4 million). The increase in regional operating income in Q3 2020 compared to Q3 2019 is primarily attributable to an increase in patient starts and a decrease in discretionary budgeted spending during the period, offset by the inclusion of one newly active TMS Center and 11 TMS Centers in development, which will take time to generate positive regional operating income. Compared to YTD 2019, the decrease in YTD 2020 regional operating income is primarily attributable to the impact of COVID-19 on revenue. The regional operating income margin was 8.1% in Q3 2020 as compared to 9.1% in Q3 2019. The regional operating income margin was 4.5% in YTD 2020 compared to 10.4% in YTD 2019, primarily due to the impact of COVID-19.
Direct center and regional costs increased by 44% to $11.0 million in Q3 2020 (Q3 2019: $7.7 million) and by 53% to $31.7 million during YTD 2020 (YTD 2019: $20.7 million). The increase in direct center and regional costs was primarily due to the addition of regional employee costs and regional marketing costs associated with the addition of new regions and the Achieve TMS Acquisition, offset slightly by the cost containment measures implemented in response to the COVID-19 pandemic (see “Key Highlights and Recent Developments – COVID-19 Business Impact”).
Center Development Costs, Capital Expenditures and Working Capital Investment
Center development costs decreased by 87% to $0.1 million in Q3 2020 (Q3 2019: $0.5 million) and by 63% to $0.4 million during YTD 2020 (YTD 2019: $1.2 million) predominantly as a result of the curtailment of development activity, which started in late Q1 2020 due to the COVID-19 pandemic. Average cash investment to establish new TMS Centers (including center development costs, capital expenditures and working capital investment) remained relatively consistent at $0.16 million in Q3 2020 and YTD 2020 (Q3 2019 and YTD 2019: $0.17 million).
13
Corporate Employee Compensation
Corporate employee compensation incurred to manage the centralized business infrastructure of the Company increased by 80% to $2.6 million in Q3 2020 (Q3 2019: $1.4 million) and by 75% to $7.6 million during YTD 2020 (YTD 2019: $4.3 million). The increase was primarily due to significant increases in staffing in respect of our shared-services functions in addition to employees inherited in connection with the Achieve TMS Acquisition.
As anticipated, the Q3 2020 corporate employee compensation growth rate has decreased significantly as compared to the Fiscal 2019 corporate employee compensation growth rate of 171% as we are starting to scale into our centralized business infrastructure and leverage these fixed costs as we continue to expand our TMS Center network.
Corporate Marketing Expenses
Corporate marketing expenses decreased by 65% to $0.2 million in Q3 2020 (Q3 2019: $0.6 million) and by 33% to $0.8 million during YTD 2020 (YTD 2019: $1.2 million). The decrease was a result of the cost containment measures implemented in response to the COVID-19 pandemic (see “Key Highlights and Recent Developments – COVID-19 Business Impact”).
Other Corporate, General and Administrative Expenses
Other corporate, general and administrative expenses remained relatively consistent at $0.8 million in Q3 2020 (Q3 2019: $0.7 million) and decreased by 10% to $2.2 million during YTD 2020 (YTD 2019: $2.4 million). The decrease was primarily a result of cost containment measures implemented in response to the COVID-19 pandemic (see “Key Highlights and Recent Developments – COVID-19 Business Impact”).
As anticipated, the other corporate, general and administrative expenses growth rate has decreased as compared to the Fiscal 2019 growth rate of 72% (after excluding non-recurring expenses). We expect that the other corporate, general and administrative expenses growth rate will continue to normalize throughout Fiscal 2020 and that we will be able to scale our investments and leverage fixed costs as we expand our TMS Center network in the future. See “Cautionary Note Regarding Forward-Looking Information”.
Earn-Out Consideration
The estimated Earn-Out consideration increased by $4.0 million in Q3 2020 and $9.3 million during YTD 2020 (Q3 2019 and YTD 2019: nil). The increase is a result of the Company’s estimate of the purchase price payable with respect of the Earn-Out, with strong performance from Achieve TMS, specifically in Alaska. See “Factors Affecting the Comparability of our Results – Acquisition of Achieve TMS”. The amount recognized is based on management’s best estimate of the Earn-Out payable and is still subject to estimation uncertainty until a final determination is made.
Share-Based Compensation
Share-based compensation increased by 46% to $0.2 million in Q3 2020 (Q3 2019: $0.1 million) and decreased by 20% to $0.5 million during YTD 2020 (YTD 2019: $0.6 million), predominantly due to the timing of stock options granted to key personnel to ensure retention and long-term alignment with the goals of the Company.
14
Amortization
Amortization increased by $0.1 million in Q3 2020 (Q3 2019: nil) and by $0.3 million during YTD 2020 (YTD 2019: nil). The increase was a result of the intangible assets acquired as part of the Achieve TMS Acquisition, which occurred at the end of Q3 2019.
Interest
Interest expense increased by 38% to $0.7 million in Q3 2020 (Q3 2019: $0.5 million) and by 56% to $2.1 million during YTD 2020 (YTD 2019: $1.3 million). The increase in interest expense is primarily due to the addition of new lease liabilities in line with the execution of our regional growth strategy.
Interest income decreased by 92% to $0.01 million in Q3 2020 (Q3 2019: $0.12 million) and by 87% to $0.02 million during YTD 2020 (YTD 2019: $0.14 million) as a result of a decrease in the amount of excess funds invested.
Loss for the Period and Comprehensive Loss and Loss for the Period Attributable to the Common Shareholders of Greenbrook
The loss for the period and comprehensive loss, excluding the Earn-Out consideration, increased by 8% to $3.6 million in Q3 2020 (Q3 2019: $3.4 million) and by 40% to $12.3 million during YTD 2020 (YTD 2019: $8.8 million). The loss for the period and comprehensive loss, including the Earn-Out consideration, increased by 128% to $7.7 million in Q3 2020 (Q3 2019: $3.4 million) and by 145% to $21.6 million during YTD 2020 (YTD 2019: $8.8 million). This increase is primarily a result of the impact of COVID-19, the increase in Earn-Out consideration estimated with respect to the Achieve TMS Acquisition, the inclusion of one newly active TMS Center and 11 TMS Centers in development (which will take time to generate positive regional operating income), as well as marginally higher corporate costs due to investments in the centralized business infrastructure as outlined in “Regional Operating Income and Direct Center and Regional Costs”, “Corporate Employee Compensation” and “Other Corporate, General and Administrative Expenses” in this MD&A.
The loss attributable to the common shareholders of Greenbrook, excluding the Earn-Out consideration, increased by 5% to $3.6 million in Q3 2020 (Q3 2019: $3.4 million) and by 35% to $12.0 million during YTD 2020 (YTD 2019: $8.9 million). The loss attributable to the common shareholders of Greenbrook, including the Earn-Out consideration, increased by 123% to $7.6 million in Q3 2020 (Q3 2019: $3.4 million) and by 140% to $21.3 million during YTD 2020 (YTD 2019: $8.9 million). This increase is primarily a result of the impact of COVID-19, the increase in Earn-Out consideration estimated with respect to the Achieve TMS Acquisition, the inclusion of one newly active TMS Center and 11 TMS Centers in development (which will take time to generate positive regional operating income), as well as higher corporate costs due to investments in the centralized business infrastructure as outlined in “Regional Operating Income and Direct Center and Regional Costs”, “Corporate Employee Compensation” and “Other Corporate, General and Administrative Expenses” in this MD&A.
Adjusted EBITDA and Non-Recurring Expenses
The Adjusted EBITDA loss position decreased by 9% to $0.9 million in Q3 2020 (Q3 2019: $1.0 million). However, the Adjusted EBITDA loss position increased by 51% to $4.3 million during YTD 2020 (YTD 2019: $2.8 million) predominately due to the impact of COVID-19, the inclusion of one newly active TMS Center and 11 TMS Centers in development (which will take time to generate positive regional operating income) and slightly higher corporate costs as outlined in “Corporate Employee Compensation”, “Other Corporate, General and Administrative Expenses”, “Regional Operating Income and Direct Center and Regional Costs” in this MD&A.
Due to their nature, the Earn-Out consideration with respect to the Achieve TMS Acquisition as well as other one time professional and legal fees are non-recurring expenses incurred during Q3 2020 and YTD 2020 and were therefore excluded from Adjusted EBITDA. One-time professional and legal fees incurred in Q3 2020 in connection with the anticipated listing of our Common Shares on NASSDAQ have also been excluded from Adjusted EBITDA due to their non-recurring nature. The listing of our Common Shares on NASDAQ remains subject to the approval of NASDAQ and the satisfaction of all applicable listing and regulatory requirements, including the SEC declaring the Form 20-F Registration Statement effective. In Q3 2019 and YTD 2019, transaction costs included professional and legal fees associated with the Achieve TMS Acquisition which are non-recurring in nature and therefore excluded from Adjusted EBITDA. Our TMS Center development costs relate to our TMS Center growth and, accordingly, have also been excluded from Adjusted EBITDA.
15
QUARTERLY FINANCIAL INFORMATION
The following table summarizes the results of our operations for the eight most recently completed fiscal quarters.
(US$) | Q3 2020 | Q2 2020 | Q1 2020 | Q4 2019 | Q3 2019 | Q2 2019 | Q1 2019 | Q4 2018(2) | ||||||||||||||||||||||||
(unaudited) | ||||||||||||||||||||||||||||||||
Revenue | 12,006,570 | 9,788,555 | 11,420,502 | 12,536,671 | 8,459,103 | 8,082,559 | 6,607,198 | 7,092,455 | ||||||||||||||||||||||||
Regional operating income (loss)(1) | 967,584 | (225,198 | ) | 739,796 | 2,056,836 | 770,813 | 1,002,166 | 627,000 | 1,418,347 | |||||||||||||||||||||||
Net loss attributable to shareholders of Greenbrook | (7,636,132 | ) | (9,477,504 | ) | (4,158,274 | ) | (7,034,356 | ) | (3,431,009 | ) | (2,874,092 | ) | (2,570,422 | ) | (949,031 | ) | ||||||||||||||||
Adjusted EBITDA | (937,073 | ) | (1,665,671 | ) | (1,648,053 | ) | (1,296,201 | ) | (1,033,876 | ) | (957,428 | ) | (827,557 | ) | (865,210 | ) | ||||||||||||||||
Net loss per share – Basic | (0.11 | ) | (0.15 | ) | (0.08 | ) | (0.13 | ) | (0.06 | ) | (0.06 | ) | (0.05 | ) | (0.01 | ) | ||||||||||||||||
Net loss per share – Diluted | (0.11 | ) | (0.15 | ) | (0.08 | ) | (0.13 | ) | (0.06 | ) | (0.06 | ) | (0.05 | ) | (0.01 | ) |
Notes:
(1) | Regional operating income for the fourth quarter ended December 31, 2019 has been updated to exclude amortization (see “Components of our results of our operations and trends affecting our business” above). |
(2) | The Company adopted IFRS 16, Leases (“IFRS 16”) effective as at January 1, 2019 using the modified retrospective approach. As a result of this approach, the prior period figures were not adjusted. |
Robust performance, despite the impact of COVID-19, resulted in consolidated revenue increasing by 23% to $12.0 million in Q3 2020 (Q2 2020: $9.8 million).
We experienced regional operating income in the amount of $1.0 million in Q3 2020 as compared to a regional operating loss of $0.2 million in Q2 2020, predominantly attributable to an increase in patient starts and a decrease in discretionary budgeted spending during the period (see “Key Highlights and Recent Developments – COVID-19 Business Impact”).
The loss attributable to the common shareholders of Greenbrook, excluding the Earn-Out consideration, decreased by 15% to $3.6 million in Q3 2020 (Q2 2020: $4.2 million). The loss attributable to the common shareholders of Greenbrook, including the Earn-Out consideration, decreased by 19% to $7.6 million in Q3 2020 (Q2 2020: $9.5 million). The decrease in the loss attributable to the common shareholders of Greenbrook was predominately due to an incremental adjustment to the estimated Earn-Out consideration with respect to the Achieve TMS Acquisition that was smaller in Q3 2020 relative to the prior quarter.
The Adjusted EBITDA loss position decreased by 44% to $0.9 million in Q3 2020 (Q2 2020: $1.7 million) despite the impact of COVID-19. This was primarily due to record monthly highs in patient starts in the period and continued implementation of cost containment measures to mitigate the impact of COVID-19 on revenue.
16
EBITDA AND ADJUSTED EBITDA
The table below illustrates our EBITDA and Adjusted EBITDA for the periods presented:
(US$) | Q3 2020 (unaudited) | Q3 2019 (unaudited) | YTD 2020 (unaudited) | YTD 2019 (unaudited) | ||||||||||||
EBITDA | (5,409,649 | ) | (2,025,904 | ) | (14,628,593 | ) | (4,946,874 | ) | ||||||||
Adjusted EBITDA | (937,073 | ) | (1,033,876 | ) | (4,250,797 | ) | (2,818,861 | ) |
See “Cautionary Note Regarding Non-IFRS Measures and Industry Metrics” in this MD&A.
RECONCILIATION OF LOSS ATTRIBUTABLE TO THE COMMON SHAREHOLDERS OF GREENBROOK TO EBITDA AND ADJUSTED EBITDA
The table below illustrates a reconciliation of loss attributable to the common shareholders of Greenbrook to EBITDA and Adjusted EBITDA for the periods presented:
(US$) | Q3 2020 (unaudited) | Q3 2019 (unaudited) | YTD 2020 (unaudited) | YTD 2019 (unaudited) | ||||||||||||
Loss attributable to the common shareholders of Greenbrook | (7,636,132 | ) | (3,431,009 | ) | (21,271,910 | ) | (8,875,523 | ) | ||||||||
Add the impact of: | ||||||||||||||||
Interest expense | 708,665 | 513,138 | 2,060,707 | 1,316,795 | ||||||||||||
Amortization | 115,832 | – | 347,498 | – | ||||||||||||
Depreciation | 1,410,843 | 1,008,002 | 4,253,530 | 2,751,998 | ||||||||||||
Less the impact of: | ||||||||||||||||
Interest income | (8,857 | ) | (116,035 | ) | (18,418 | ) | (140,144 | ) | ||||||||
EBITDA | (5,409,649 | ) | (2,025,904 | ) | (14,628,593 | ) | (4,946,874 | ) | ||||||||
Add the impact of: | ||||||||||||||||
Share-based compensation | 171,056 | 117,112 | 455,908 | 573,426 | ||||||||||||
TMS Center development costs | 65,291 | 496,509 | 435,659 | 1,176,180 | ||||||||||||
Add transaction costs: | ||||||||||||||||
Acquisition related legal and professional fees | – | 378,407 | – | 378,407 | ||||||||||||
Add other non-recurring expenses: | ||||||||||||||||
Earn-out consideration | 4,045,000 | – | 9,295,000 | – | ||||||||||||
NASDAQ listing related professional and legal fees | 191,229 | – | 191,229 | – | ||||||||||||
Adjusted EBITDA | (937,073 | ) | (1,033,876 | ) | (4,250,797 | ) | (2,818,861 | ) |
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Overview
The Company’s primary uses of capital are to finance operations, finance new TMS Center development costs, increase non-cash working capital and fund investments in its centralized business infrastructure. The Company’s objectives when managing capital are to ensure that the Company will continue to have enough liquidity to provide services to its customers and provide returns to its shareholders.
17
The Company, as part of its annual budgeting process, evaluates its estimated annual cash requirements to fund planned expansion activities and working capital requirements of existing operations. As a result of the negative impact of COVID-19 on the Company’s business, the Company has had to revise its annual budget, estimated annual cash requirements and working capital requirements. Based on this updated cash budget and considering its anticipated cash flows from regional operations, the cost containment measures implemented by the Company as a result of the COVID-19 pandemic and its holdings of cash, the Company believes that it has sufficient capital to meet its future operating expenses, capital expenditures and future debt service requirements for approximately the next 6 months. However, our ability to fund operating expenses, capital expenditures and future debt service requirements will depend on, among other things, our future operating performance, which will be affected by the velocity of our regional development strategy and general economic, financial and other factors, including factors beyond our control such as COVID-19. See “Cautionary Note Regarding Forward-Looking Information”, “Risks and Uncertainties” and “Factors Affecting our Performance” in this MD&A.
On April 21, 2020, Greenbrook entered into a promissory note with U.S. Bank National Association (the “Lender”), evidencing an unsecured loan in the amount of $3,080,760 (the “Loan”) made to the Company under the United States Paycheck Protection Program (the “PPP”). The PPP is a program organized by the U.S. Small Business Administration established under the recently-enacted Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The Loan bears interest at a fixed rate of 1.0% per annum with a maturity date of two years from the date of the Loan. Payments are deferred for the first six months under the Loan, and the Loan may be forgiven in its entirety provided that the proceeds from the Loan are used by Greenbrook to cover payroll costs, rent and utilities.
On November 10, 2020, we entered into a non-binding term sheet with a third party lender in respect of the Proposed Debt Financing. See “Key Highlights and Recent Developments – Proposed Debt Financing”.
Analysis of Cash Flows for YTD 2020
The following table presents our cash flows for each of the periods presented:
(US$) | YTD 2020 | YTD 2019 | ||||||
Net cash used in operating activities | (6,234,922 | ) | (7,131,681 | ) | ||||
Net cash generated from financing activities | 7,681,848 | 16,940,015 | ||||||
Net cash used in investing activities | (224,402 | ) | (7,620,800 | ) | ||||
Increase in cash | 1,222,524 | 2,187,534 |
Cash Flows used in Operating Activities
For YTD 2020, cash flows used in operating activities (which includes the full cost of developing new TMS Centers) totaled $6.2 million, as compared to $7.1 million in YTD 2019. The decrease in cash flows used in operating activities is primarily attributable to the cost containment measures implemented as a result of the COVID-19 pandemic (see “Key Highlights and Recent Developments – COVID-19 Business Impact”) as well as enhanced collection activity.
Cash Flows generated from Financing Activities
For YTD 2020, cash flows generated from financing activities amounted to $7.7 million as compared to $16.9 million in YTD 2019. This change is largely driven by the difference in net proceeds received by the Company in connection with the Offering in Q2 2020 and the PPP compared to the net proceeds received by the Company in connection with the public offering and concurrent private placement of Common Shares completed during Q2 2019.
18
Cash Flows used in Investing Activities
For YTD 2020, cash flows used in investing activities totaled $0.2 million as compared to $7.6 million in YTD 2019, which primarily relates to the Achieve TMS Acquisition which occurred in Q3 2019.
INDEBTEDNESS
During Fiscal 2018, the Company assumed loans from four separate banking institutions that were previously extended for the purchase of TMS Devices to non-controlling interest holder partners. The device loans were assumed as part of partnerships with local physicians, behavioral health groups or other investors, which own minority interests in certain TMS Center subsidiaries. These device loans bear an average interest rate of 10% with average monthly blended interest and capital payments of $1,575 and mature or matured, as applicable, during the years ended December 31, 2019 to December 31, 2023. There are no significant financial covenants associated with these loans. The loans related to one of the banking institutions were repaid during Fiscal 2019.
During Fiscal 2019, the Company assumed loans from two separate banking institutions that were previously extended for the purchase of TMS Devices to non-controlling interest holder partners. The device loans were assumed as part of partnerships with local physicians, behavioral health groups or other investors, which own minority interests in certain TMS Center subsidiaries. These device loans bear an average interest rate of 13% with average monthly blended interest and capital payments of $1,756 and mature during the year ended December 31, 2021. There are no significant financial covenants associated with these loans.
During YTD 2020, the Company was released from its obligations pertaining to one of the bank loans assumed during Fiscal 2019 as a result of the disposal of the related TMS Device.
On April 21, 2020, Greenbrook entered into a promissory note with the Lender, evidencing the Loan made to the Company under the PPP. See “Financial Condition, Liquidity and Capital Resources” above.
Off-Balance Sheet Arrangements
The Company has not engaged in any off-balance sheet financing transactions.
Share Information
The Company is authorized to issue an unlimited number of Common Shares and an unlimited number of preferred shares, issuable in series. As of September 30, 2020, there were 67,512,383 Common Shares and nil preferred shares issued and outstanding. In addition, there were 3,795,668 stock options and 564,540 broker warrants, each representing a right to acquire one Common Share, issued and outstanding. As of the date of this MD&A, assuming exercise and exchange of all outstanding options and broker warrants, there are 71,872,591 equity securities of the Company issued and outstanding on a fully-diluted basis.
Related Party Transactions
Compensation of key management personnel
The Company transacts with key individuals from management who have authority and responsibility to plan, direct, and control the activities of the Company. Key management personnel are defined as the executive officers of the Company, including the President and Chief Executive Officer (“CEO”), the Chief Operating Officer, the Chief Financial Officer (“CFO”), the Chief Marketing Officer and the Chief Medical Officer.
19
Transactions with significant shareholder – Greybrook Health Inc.
As at September 30, 2020, $0.1 million was included in accounts payable and accrued liabilities related to payables for management services and other overhead costs rendered by Greybrook Health Inc. (“Greybrook Health”) to the Company in the ordinary course of business under the MSA (as defined below) (December 31, 2019: $0.1 million).
During Q3 2020 and YTD 2020, the Company recognized $0.1 million and $0.3 million in corporate, general and administrative expenses, respectively (Q3 2019 and YTD 2019: $0.1 million and $0.4 million, respectively) related to transactions with the significant shareholder.
On January 1, 2015, we entered into a management and consulting services agreement (the “MSA”) with our significant shareholder, Greybrook Health, pursuant to which Greybrook Health provides us and our subsidiaries with certain incidental services, including financial advisory services, business development advisory services and business and operating consulting services (collectively, the “Services”). More specifically, these Services include: (i) the provision of office space for our head office in Toronto, Ontario, and (ii) compensation for our chief financial officer, chief operating officer and twelve other employees consisting of our general counsel and, ten full-time employees and one part-time employee that, together, provide customary administrative, finance and accounting services to the Company and one part-time employee that provides customary IT infrastructure services to the Company. All of the Services provided by Greybrook Health are provided on a cost basis whereby the Company reimburses Greybrook Health for costs incurred in connection with the provision of such Services. There is no mark-up charged by Greybrook Health for the provision of the Services. The MSA will expire on January 1, 2021 or earlier if either party provides the other with at least 30 days’ notice of termination.
Subsequent to September 30, 2019, compensation for all employees noted above, except for the Chief Operating Officer and the part time employee that provides customary IT infrastructure services to the Company, is no longer being provided by Greybrook Health and is being paid directly by the Company.
Risks and Uncertainties
We are exposed to a variety of financial risks in the normal course of our business, including interest rate, credit, currency and liquidity risk. Our overall risk management program and business practices seek to minimize any potential adverse effects on our consolidated financial performance.
Risk management is carried out under practices approved by our Board of Directors (the “Board”). This includes identifying, evaluating and hedging financial risks based on the requirements of our organization. Our Board provides guidance for overall risk management, covering many areas of risk including interest rate risk, credit risk, currency risk, and liquidity risk.
COVID-19
In December 2019, the novel coronavirus, COVID-19 surfaced in Wuhan, China. The World Health Organization (declared a global emergency on January 30, 2020 with respect to the outbreak and then characterized it as a pandemic on March 11, 2020. The outbreak has spread globally, causing companies and various international jurisdictions to impose restrictions, such as quarantines, closures, cancellations and travel restrictions. While these effects are expected to be temporary and may be relaxed or rolled back if and when COVID-19 abates, the actions may be reinstated as the pandemic continues to evolve and in response to actual or potential resurgences. The duration of the resulting business disruptions and related financial impact cannot be reasonably estimated at this time. While all of our TMS Centers remain open, and are expected to remain open, during the pandemic, we experienced a temporary decline in both patient visits/treatments and new patient treatment starts in YTD 2020 as a results of the restrictions imposed in response to the COVID-19 pandemic. This decline negatively impacted our business, and it is likely that the Company’s consolidated results for Fiscal 2020, and potentially for future periods, will be negatively impacted by this event.
20
The Company relies on third-party suppliers and manufacturers for its TMS devices. This outbreak has resulted in the extended shutdown of certain businesses around the globe, which may in turn result in disruptions or delays to the Company’s supply chain. These may include disruptions from the temporary closure of third-party supplier and manufacturer facilities, interruptions in TMS device supply or restrictions on the export or shipment of TMS devices. Any disruption to the Company’s suppliers and their contract manufacturers will likely impact the Company’s revenue and operating results. The outbreak of COVID-19 may also impact patient visits due to various “stay at home” and/or “shelter in place” orders, the availability of key TMS device components, logistics flows and the availability of other resources to support critical operations.
A local, regional, national or international outbreak of a contagious disease, including, but not limited to, COVID-19, Middle East Respiratory Syndrome, Severe Acute Respiratory Syndrome, H1N1 influenza virus, avian flu or any other similar illness, or a fear of any of the foregoing, could adversely impact the Company by causing operating delays and disruptions, labor shortages and shutdowns (including as a result of government regulation and prevention measures). If the Company is unable to mitigate the impacts of COVID-19 on its operations, the Company’s costs may increase, and its revenue could decrease. It is unknown whether and how the Company may be affected if such an epidemic persists for an extended period of time. A widespread health crisis could adversely affect the global economy, resulting in an economic downturn that could impact demand for the services the Company provides.
The future impact of the outbreak is highly uncertain and cannot be predicted, and there is no assurance that the outbreak will not have a material adverse impact on the future results of the Company. The extent of the impact will depend on future developments, including actions taken to contain COVID-19.
Interest Rate Risk
We are exposed to changes in interest rates on our cash and long-term debt. Debt issued at variable rates exposes us to cash flow interest rate risk. Debt issued at fixed rates exposes us to fair value interest rate risk. As of September 30, 2020, we only have fixed interest rate debt. The impact of future interest rate expense resulting from future changes in interest rates will depend largely on the gross amount of our borrowings at such time.
Credit Risk
Credit risk is the risk of an unexpected loss if a customer or counterparty to a financial instrument fails to meet its contractual obligations. The Company’s financial instruments that are exposed to concentrations of credit risk are primarily cash and accounts receivable. The Company limits its exposure to credit risk with respect to cash by dealing with large creditworthy financial institutions. The Company’s accounts receivable consist primarily of receivables from large creditworthy medical insurance companies and government-backed health plans. Collectability of the receivables is reviewed regularly and an allowance is established as necessary.
Currency Risk
Currency risk is the risk to our earnings that arises from fluctuations in foreign exchange rates and the degree of volatility of those rates. We have minimal exposure to currency risk as substantially all of our revenue, expenses, assets and liabilities are denominated in U.S. dollars.
21
Liquidity Risk
Liquidity risk is the risk that we cannot meet a demand for cash or fund our obligations as they come due. We manage liquidity risk by continuously monitoring actual and projected cash flows, taking into account our revenues, income and working capital needs. See “Critical Accounting Estimates and Judgments – COVID-19” below regarding the impact of COVID-19 on our liquidity.
DISCLOSURE CONTROLS & PROCEDURES AND INTERNAL CONTROL OVER FINANCIAL REPORTING
Disclosure Controls & Procedures
Management is responsible for establishing and maintaining a system of disclosure controls and procedures to provide reasonable assurance that all material information relating to the Company is gathered and reported to senior management, including the CEO and the CFO, on a timely basis so that appropriate decisions can be made regarding public disclosure.
There has been no change in the Company’s disclosure controls and procedures that occurred during the three and nine months ended September 30, 2020 that has materially affected, or is reasonable likely to materially affect, the Company’s disclosure controls and procedures.
Internal Controls over Financial Reporting
Management is also responsible for establishing and maintaining adequate internal controls over financial reporting (“ICFR”) to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial reports for external purposes in accordance with IFRS. In designing such controls, it should be recognized that, due to inherent limitations, any controls, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives and may not prevent or detect misstatements. Additionally, management is required to use judgment in evaluating controls and procedures.
There has been no change in the Company’s ICFR that occurred during the three months ended September 30, 2020 that has materially affected, or is reasonable likely to materially affect, the Company’s ICFR.
Critical Accounting Estimates and Judgments
There have been no changes to the Company’s critical accounting estimates and judgments since the fiscal year ended December 31, 2019, except as noted below.
Government Grants
Interest free or less than market interest government loans or government-backed loans are measured at amortized cost using the effective interest rate method. The interest rate used is based on the market rate for a comparable instrument with a similar term. The difference between the fair value at inception and the loan proceeds received is recorded as a government grant. The grant portion is presented separately as deferred grant income on the condensed interim consolidated statement of financial position. It is amortized over the useful life of the loan and is deducted against the related interest expense on the condensed interim consolidated statements of net loss and comprehensive loss.
COVID-19
The uncertainties around the outbreak of COVID-19 require the use of judgements and estimates. The future impact of COVID-19 uncertainties could generate, in future reporting periods, a significant risk of material adjustment to the carrying amounts of the following: goodwill and intangible assets impairment, leases, business combinations, provisions, litigations and claims.
22
The Company has experienced losses since inception and has negative cash flow from operating activities of $6.2 million for the nine-months ended September 30, 2020 ($7.1 million – nine-months ended September 30, 2019) and negative working capital as at September 30, 2020. Given the impact that the COVID-19 pandemic, including the related government-imposed social distancing and “shelter-in-place” measures, has had on the overall volumes of patient treatments, the overall cash flows of the Company have been negatively impacted. Although the Company anticipates that it will have positive cash flow from operating activities in the future, the Company anticipates that its overall cash flows may continue to be negatively impacted until the global economic impact of COVID-19 subsides. The Company expects it will require additional financing to fund its operating and investing activities and such additional financing is required in order for the Company to repay its short-term obligations. These conditions indicate the existence of a material uncertainty that may cast significant doubt as to the Company’s ability to continue as a going concern. The Company also has strong supportive shareholders and a proven track record of successfully raising capital when required. The failure to raise such capital when required could result in the delay or indefinite postponement of current business objectives and additional financing may not be available on favorable terms or at all.
The condensed interim consolidated financial statements do not reflect adjustments that would be necessary if the going concern assumptions were not appropriate. If the going concern basis was not appropriate for the condensed interim consolidated financial statements, then adjustments would be necessary to the carrying value of assets and liabilities, the reported expenses, and the condensed interim consolidated statements of financial position classification used.
Changes in Significant Accounting Policies
There are no recent accounting pronouncements that are applicable to the Company or that are expected to have a significant impact on the Company.
RISK FACTORS
For a detailed description of risk factors associated with the Company, refer to the “Risk Factors” section of the Company’s annual information form dated March 10, 2020 for its fiscal year ended December 31, 2019, which is available on SEDAR at www.sedar.com, and the “Risks and Uncertainties” section in this MD&A.
ADDITIONAL INFORMATION
Additional information relating to the Company, including the Company’s annual information form, is available on SEDAR at www.sedar.com. The Company’s Common Shares are listed for trading on the Toronto Stock Exchange under the symbol “GTMS”.
23