special situations · special situations richard ryan may 21, 2020 (612) 376-4162;...

Special Situations

May 21, 2020

Richard Ryan(612) 376-4162; [email protected]

Price C$1.0752 Week Range C$0.47 - C$1.19Mkt Cap (MM) $94EV (MM) $96Shares Out (MM) 88.3Avg Daily Vol (000) 384Long-term Growth 10%

Revenues (MM) FY 19A FY 20E FY 21EDec C$20.5 C$22.8A C$25.0Mar C$21.9 C$24.1A C$26.5Jun C$21.1 C$24.3 C$27.2Sep C$17.4 C$24.4 C$27.3FY C$81.0 C$95.6 C$106.1EV/Sales 1.2x 1.0x 0.9x EPS FY 19A FY 20E FY 21EDec C$0.00 C$(0.02)A C$(0.00)Mar C$(0.01) C$0.02A C$0.02Jun C$(0.14) C$(0.00) C$0.03Sep C$0.07 C$(0.00) C$0.03FY C$(0.09) C$(0.01) C$0.08 Adj EBITDA (MM) FY 19A FY 20E FY 21EDec C$3.7 C$4.4A C$5.1Mar C$4.0 C$4.9A C$5.6Jun C$3.9 C$5.2 C$5.8Sep C$3.2 C$4.7 C$5.8FY C$14.8 C$19.2 C$22.3EV/Adj. EBITDA 6.5x 5.0x 4.3x

Protech Home Medical Corp., provides in-home monitoringand disease management services for patients in the UnitedStates healthcare market. It seeks to continue to expandits offerings to include the management of several chronicdisease states focusing on patients with heart or pulmonarydisease, sleep disorders, reduced mobility and other chronichealth conditions.

Protech Home Medical Corp. PTQ - TSX Rating: BuyReason for Report: Initiating Coverage

Price Target: C$2.25

Beneficiary Of Patients Moving From The Hospital To Home Health Care. InitiatingCoverage With A Buy Rating And C$2.25 PT.

Investment Conclusion:Protech Home Medical Corp., (Protech) is a U.S. based provider of a broad range of homerespiratory products – oxygen therapy and sleep apnea - and other medical equipmentfor chronic, home-bound patients. The Company operates in 10 states with 42 locations(Midwest and East Coast), serving over 85K patients with a network of over 17K referringphysicians.

Large demographic trends - ever-growing population of older patients along withburgeoning chronic conditions – support attractive organic and acquisitive growthinitiatives. Protech is ideally positioned to take advantage of such underlying dynamicfundamentals by moving along the continuum of care - providing more of its respiratoryproduct offerings to patients.

On a company-specific basis, we believe Protech is trading at an attractive discount topeers and that it has the infrastructure in place to leverage growth in the near-termwithout requiring fixed expenses. Thus, margin leverage is becoming more apparent.

We are initiating coverage of Protech Home Medical Corp., under Dougherty &Company's Special Situations coverage with a Buy Rating and C$2.25 Price Target.

Key Points:Protech Home Medical Corp., a story in transition. The optics for Protech are improving,as it has strong fundamentals with operations solely in the U.S. But, through its path tobeing a public concern, Protech reports results in Canadian dollars, and in accordanceto International financial Reporting Standards (IFRS). The shares are listed on the TSXVenture Exchange and are now approved for an upcoming listing on the OTCQX. Thus,we believe its visibility to U.S. based investors should start to improve.

Large demographic problem exists. Protech’s growth opportunities rely heavily on theaging U. S. population and the growing incidence of chronic illnesses. It is estimated thatbetween 2020 and 2060, the older population (65 and older) will increase 69% from~56M to ~95M. According to the CDC, 6 in 10 adults in the U.S. have a chronic diseaseand 4 in 10 have two or more. The Home Health Equipment (HHE) industry has benefitedfrom these demographic trends and according to CMS, HHE expenditures grew at a 10-year CAGR of 5% to 2018 ($102 Billion), with even faster growth – 6.3% CAGR – for the10-year period ending 2028 ($201 Billion).

Recent results. For 2Q20 (March) revenue increased 16% to C$24.1M from C$20.8M ayear ago. With better efficiency, gross margin increased to 73% from 71%. Net incomewas $1.6M, or $0.02 per share, with adjusted EBITDA of $4.9M (20.4% margin). Patientsserved increased 28% to ~40K in 2Q20.

Valuation. We are initiating coverage on Protech with a Buy rating and a Price Targetof C$2.25. This Price Target is based on using a 10x multiple of FY21 Adj. EBITDA anda 1.5x multiple of FY21 Sales. The multiple is in line with what comparable companiesare trading at currently.

Analyst certification and disclosures begin on page 1090 SOUTH SEVENTH STREET SUITE 4300 MINNEAPOLIS, MINNESOTA 55402-4108

612.376.4000 800.328.4000MEMBER SIPC & FINRA

WWW.DOUGHERTYMARKETS.COM

1

mailto:[email protected]

Investment Thesis:

The Protech Home Medical story. Protech provides a broad range of home respiratory products and other medical equipment tochronic, home-bound patients in the U.S. Products address oxygen therapy, sleep apnea, and other power mobility products. TheCompany operates in 10 states with 42 locations, primarily in the Midwest and East Coast, serving over 85K patients with a networkof over 17K referring physicians.

Large demographic problem exists. Growth opportunities rely heavily on the aging U. S. population and the growing incidence ofchronic illnesses. It is estimated that between 2020 and 2060, the older population (65 and older) will increase 69% from~56M to ~95M– per Population Reference Bureau. According to the CDC, 6 in 10 adults in the U.S. have a chronic disease and 4 in 10 have two or more.Chronic diseases are the leading causes of death and the leading drivers of the Nation’s $3.5 Trillion in annual health care costs. TheHome Health Equipment (HHE) industry has benefited from these demographic trends and according to CMS, HHE expenditures grewat a 10-year CAGR of 5% to 2018 ($102 Billion), with even faster growth – 6.3% CAGR – for the 10-year period ending 2028 ($201 Billion).

Underlying healthcare industry. The U.S. healthcare market is being burdened by the ever-growing number of elderly patients,especially those with chronic conditions. The search for more efficient delivery mechanisms that improve outcomes and reduce costsfor such patients is increasing the outlook for home-based solutions. This is a macro trend that is only going to see stronger underlyinggrowth needs. And, a largely fragmented industry of solutions providers continues to be ripe for consolidation. Between November2010 and October 2019, there has been a 36.7% decrease in DME suppliers in the US from 9,769 to 6,180, respectively.

Graph 1 - Historical and Projected DME Expenditures in the US

$46.5 $48.2

$50.6 $53.2

$56.4

$60.2

$-

$10.0

$20.0

$30.0

$40.0

$50.0

$60.0

$70.0

2015 2016 2017 2018 2019 2020E

Bill

ion

s o

f U

SD

CAGR: 5.3%

Source: Company Filings

Graph 2 - Number of DME Providers in the US

8,600 8,400 8,250 8,200

6,800 6,650 6,500 6,350

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17

Source: Company filings

Protech’s pillars for growth. To capitalize on these industry dynamics, Protech has a three-pronged growth strategy consisting of organicgrowth, technological implementation for increased patient compliance, and expanding its geographic footprint through acquisitions.With its game plan in place, management has highlighted its aspirational goals of: 1) Attaining an annualized revenue run rate ofC$100M during the CY 2020; 2) Over a 1 – 2 year timeframe, achieving C$125M revenue rate with EBITDA margin of 20% - 25%.Strategic acquisitions, accelerating its technology implementation and economies of scale will drive this growth; and 3) Over a 3 – 5year timeframe, achieve C$200M revenue level with ~25% EBITDA margin. By this time, we believe Protech’s footprint will be morenational than regional and its technological efforts and other integration initiatives take hold.

Reimbursement/Competitive Bidding. Protech earns revenues by seeking reimbursement from Medicare and private health insurancecompanies, with the Medicare program of the U.S. government being the primary entity making payments. What is evident duringthe last ten years of competitive bidding is that reimbursement rates have fallen dramatically, in some cases over 60%, which hasbeen a driver in the inevitable consolidation within the industry. Medicare represents ~40% of Protech’s payer mix and within thatsegment management suggests about 25% of that business is subject to competitive bidding. CMS has chosen to withdraw non-invasiveventilators (NIV) from the Round 2021 bidding. As this is an important contributor to Protech we view this as a positive decision. Notall DME providers participate in in-home ventilator product/service offerings. Protech can now put in place growth initiatives – moresales/clinicians – without having to worry about whether its bid is accepted and potentially being eliminated from providing services.

90 SOUTH SEVENTH STREET SUITE 4300 MINNEAPOLIS, MINNESOTA 55402-4108612.376.4000 800.328.4000

MEMBER SIPC & FINRAWWW.DOUGHERTYMARKETS.COM

2

Valuation. We are initiating coverage on Protech with a Buy rating and a Price Target of C$2.25. This Price Target is based on usinga 10x multiple of FY21 Adj. EBITDA and a 1.5x multiple of FY21 Sales. The multiple is in line with what comparable companies aretrading at currently.

Company Description:

Protech Home Medical Corp., provides in-home monitoring and illness management services for patients in the south central regionof the United States. Protech’s current footprint encompasses 42 locations across 10 states, with over 17,000 referring physicians. TheCompany seeks to continue to expand its offerings to include the management of several chronic diseases focusing on patients withheart or pulmonary disease, sleep apnea, reduced mobility, and other chronic health conditions requiring home-based services in theU.S.

To understand the Protech Home Medical Corp. of today we believe it is a good exercise to provide historical perspective of thecompany’s transition. Back in the mid-1990s, Mr. Crawford (current Chairman and CEO) invested in a DME company and grew itorganically until he bought out two partners in 2004. Into 2012, Mr. Crawford doubled revenues to ~$9.0M through organic growth withapproximately 40% coming from respiratory end markets. With five respiratory-focused acquisitions during 2012 – 2014, revenues grewto ~$18M. During 2015, the company was acquired by Patient Home Monitoring Corp., today known as Protech Home Medical Corp.

Mr. Crawford became the COO of the company and during a major restructuring during late 2017/early 2018, he was named Chairmanand CEO. During this restructuring period, the company spun-out Viemed Healthcare Inc., and made no acquisitions.

Since 2018, Protech Home Medical has completed five acquisitions and has 42 locations in 10 states with 12 retail store fronts.

COVID-19 Impacts:

Management saw some shifts in business due to COVID-19 but we believe the overall impacts largely offset. Given that sleep apnea ismore of a voluntary decision, this business line, encompassed in Protech’s PAP revenue bucket, has seen some slowdown. However,its sleep therapy supply business has seen some upticks as it is easier for the company to contact people for reorders when most ofthe population is in the stay-at-home mode. Additionally, as hospitals seek ways to open up occupancy they are discharging patientsperhaps earlier than normal, thus creating a need for more home care in respiration and ventilation. The company placed orders forventilators and respirators before the pandemic widened and believes its inventory of product is sufficient, although it is monitoringthe situation closely.

For funding, Protech received more than C$1.5M in cash (not a loan) as part of the CARES Act Provider Relief Fund to support healthcareproviders, and more than C$5.97M in a loan under the Payroll Protection Program (PPP) administered by the U.S. Small BusinessAdministration. The PPP loan is forgivable should Protech maintain its payroll at current levels, which is management’s plan.

Competitive Bidding:

Protech earns revenues by placing home medical equipment and then seeking reimbursement from Medicare and private healthinsurance companies, with the Medicare program of the U.S. government being the primary entity making payments.

Looking back, in an effort to help reign in spending on durable medical devices, CMS instituted the DMEPOS (Durable Medical EquipmentProsthetics/Orthotics, and Supplies) competitive bidding process back in 2010 – for the plan year of 2011. Eligible suppliers submittedbids in various equipment categories and CMS set the reimbursement rate. Subsequently, bid rounds were held in 2013 and 2016,which expanded rates nation-wide in 2017. For 2019, the competitive bid was delayed until 2021.

The CMS commissioned a gap period running from 1 January 2019 through 31 December 2020 in which any DMEPOS supplier canprovide products and services to Medicare beneficiaries. The next round, called Round 2021, will cover contracts running 1 January2021 through 31 December 2023.

This new round of bidding will also change the way bids are processed. According to management, bidding will now be based on thehighest bid on each lead item. Instead of bidding on every individual product in a single product category, the CMS will now implementa “lead item” bidding methodology. This is done by allowing DMEPOS suppliers to make a bid on a single “lead” product in one of itsnine categories and have all of the ancillary products and supplies included in that bid. For example, Protech can bid on a CPAP machinewhile the tubing, mask, and other supplies for the machine to function are included in the bid.

In recent days, CMS has chosen to withdraw non-invasive ventilators (NIV) from the Round 2021 bidding. The withdrawal of the NIVsfrom the Round 2021 bidding can be looked at as an overall benefit for Protech. In any region in which Protech currently operates, thecompany will be able to sell NIVs, which helps Protech’s ventilation therapy segment that made up 17% of revenue in FY19.



3

What is evident during the last ten years of competitive bidding is that reimbursement rates have fallen dramatically, in some casesover 60%, which has been a driver in the inevitable consolidation within the industry. Each respective bidding program has been lessonerous in regard to rate cuts and perhaps we are approaching a period where rates are showing some stabilization. Yet, we believethis remains a sector where consolidations will continue due to the need for scalability.

Product Mix – FY 2019:

Protech’s focus on providing in-home products and services to patients with chronic diseases creates an attractive business modelwith a high-volume of recurring revenue – 68% for FY19 – which largely consists of rental business. Sales – 32% for FY19 – representsdisposable supplies and retail sales for DME products. Respiratory sales are the fastest growing businesses and they represent ~80%of Protech’s revenues.

FY2019 Revenue Mix:

Protech provides end-to-end respiratory solutions and other medical products/services.

Chart 1 - PTQ FY19 Revenue Mix

Sales 32%

Recurring Revenue 68%


Chart 2 - PTQ Product Mix FY19

Oxygen Therapy 23%

PAP Therapy 21%

Sleep Therapy Supplies

19%

Ventilation Therapy 17%

Home Med. Equipment

11%

Mobility 9%


Oxygen Therapy represented 23% of total revenue in FY19 and consists of oxygen tanks and portable oxygen concentrators. Thissegment contributes lower relative margins to ventilation but the sheer size of market growth offers scalability. This segment is expectedto experience mid-to-low single digit growth into the foreseeable future and is largely driven by the growing incidence of ChronicObstructive Pulmonary Disease (COPD) patients. According to the American Lung Association, COPD is the third leading cause of deathby disease in the U.S. More than 16M people have been diagnosed, with many millions more having it but not diagnosed. The averageuseful life of these products is typically around five years. This segment is run mostly on a home delivery model where oxygen tanksare delivered to consumers’ homes. There is a non-delivery model as well where consumers are able to visit physical store locationsto pick up, replace, or fill their oxygen tanks.

PAP Therapy addresses a large, growing and often an undiagnosed market and was 21% of total revenues in FY19. In a Cleveland ClinicJournal of Medicine article (September 1, 2019), obstructive sleep apnea is cited in studies as prevalent and is underddiagnosed andunderestimated. Resmed (RMD - not covered) cites in its April 30, 2020 slide deck, "sleep apnea is more than 80% undiagnosed and ishighly prevalent in other chronic conditions" This segment consists of the initial set-up of CPAP machines only. The break-even pointis around 9 months after the initial set-up, and is contingent on the patient’s compliance with the usage of the machine. Margins arerelatively low on the CPAP device side.

Sleep Therapy Supplies made up 19% of total revenues in FY19 and resupply is the real profit generator within the sleep therapyoffering. Sleep therapy supplies consists of CPAP machines and parts such as tubing and masks. This is one of the largest and fastestgrowing sectors within the industry and for Protech as well.

There are challenges in growing a profitable Sleep Therapy business. Patients are monitored for payer compliance with the use of theirCPAP machines. Typically, compliance requires the use of the machine for at least 4 hours during each period of sleep and for 30 days



4

within the initial 90-day approval period. Protech is guaranteed three months’ worth of reimbursement for each machine, but receivesnothing if the patient isn’t in compliance after that point.

Protech can track the compliance of each patient since the machines connect to Wi-Fi and the usage can be tracked. The industryaverage compliance rate is ~65% and Protech hovers between 70% - 80% on any given quarter, according to management. It is a bigincentive for the company to ensure patients are compliant early on following the initial set-up. Protech takes aggressive early actionto ensure compliance as best they can. Compliance works in favor of the patients to ensure a better night’s sleep and overall health.

Ventilation Therapy in FY19 made up 17% of total revenue with higher end margins and strictly represents sales of ventilators. Thesegment has done well in that the patient count served in 2019 doubled that of 2018. Protech owns/controls its own fleet of ventilators.This segment has the best margins of all other segments. Each machine is sold for roughly $6,400 and rented at an average rate ofabout ~$1,000 per month, which generates ~$475 per month of gross profit. Each machine’s useful life is about 5-7 years and is typicallywith a single patient for only about 10 - 12 months. Therefore, a single machine can be used by up to ~7 patients in its lifetime, whichincludes a turnaround time in cleaning and repairs between each patient of about a month. Thus, from a high level, the amount ofgross profit received per machine can approximate ~$30,000 per useful life.

Home Medical Equipment consists of beds, walkers, ambulatory devices, disposable supplies and other aids to help day-to-day living.Sales for these products also occur at Protech’s retail locations. This segment represented about 11% of revenue in FY19.

Mobility is the smallest segment making up about 8.5% of total revenue in FY19 and represents the lowest profitability margins.Within this segment, power mobility scooters tend to be bought by patients and are large ticket items, potentially up to C$20,000 perscooter. While we do not believe this business is core to Protech’s future growth but we detect an element of hesitancy on the part ofmanagement to divest of this unit as the optics of a top line reduction may be misperceived. Yet, we believe overall EBITDA marginswould be boosted by such a divestiture.

Payer Mix - FY19

We believe Protech has a broad-based mix of payers, essentially in line with leading companies within the space. Perhaps the keytakeaway with this diverse payor mix is that this is more of a function of where the respective company operates in geographically,rather than determining a specific mix and pursuing an appropriate patient-base.

Chart 3 - PTQ Payer Mix in FY19

Medicare 40%

Private Insurance 38%

Medicaid 11%

Private/Patient Pay 11%


Market Opportunity:

Growth opportunities rely heavily on the aging U. S. population and the growing incidence of chronic illnesses. These appear to belong-term tailwinds benefitting Protech’s growth initiatives. Although data will be forthcoming with the 2020 census, it is estimatedthat between 2020 and 2060, the older population (65 and older) will increase 69% from~56M to ~95M – per Population ReferenceBureau. According to the CDC, 6 in 10 adults in the U.S. have a chronic disease and 4 in 10 have two or more. Chronic diseases are theleading causes of death and the leading drivers of the Nation’s $3.5 Trillion in annual health care costs.



5

Protech’s Pillars for Growth

To capitalize on these industry dynamics, Protech has a three-pronged growth strategy, consisting of:

• Organic Growth: Industry growth drivers suggest annual organic growth of ~3% - 5% is reasonable per year. But, managementbelieves they can double such growth rates with a focus of increasing market share in its targeted regions. To accomplish this,management remains active in hiring and training sales representatives. With a keen focus on respiratory and sleep-aids, Protechcan take advantage of the strong growth trends underlying the use of oxygen among COPD patients and the largely undiagnosedsleep apnea market;

• Technology Implementation: Protech has invested in technology and enhancing its distribution platform to make it more seamlessfor its patients to order products or other service offerings. Tele-Health encapsulates initial patient set up and ongoing training, allto help increase patient compliance and ultimately profitability; and

• M&A: Protech’s management has a proven track-record of successfully acquiring and integrating numerous acquisitions, to the pointof increasing EBITDA margins of 17 acquired businesses. M&A will focus on companies within its geographic served area so theyincrease the chances of successful integration by consolidating distribution channels and driving efficiencies. Specifically, geographicpreference will be in the Midwest and the East coast. Ideally, targeted revenue will be between $4M - $12M with (consistent) EBITDAmargins of 5% - 10%.

We believe there are additional levers to further the increase in adjusted EBITDA margins. And, management has highlighted itsaspirational goals of;

• Attaining an annualized revenue run rate of C$100M during the CY 2020;

• Over a 1 – 2 year timeframe, achieving C$125M revenue rate with EBITDA margin of 20% - 25%. Strategic acquisitions, acceleratingits technology implementation and economies of scale will drive this growth; and

• Over a 3 – 5 timeframe, achieve C$200M revenue level with ~25% EBITDA margin. By this time, we believe Protech’s footprint willbe more national than regional and its technological efforts and other integration initiatives take hold.

Acquisitions and Active Subsidiaries:

Protech has had a successful run in acquiring smaller competitors in order to expand its regional footprint and patients served. Hereare the most recent acquisitions since 2014:

Table 1 - Acquisitions Since 2014

Company Date DescriptionResource Medical Group Jan-14 Offers various DMEs focused on pulmonary disease services, sleep apnea, and chronic

obstructive pulmonary disease (COPD) treatments. Resource Medical offers the following

products: bariatric equipment, bathroom safety products, BiPAP (bi-level positive airway

pressure), canes/crutches, continuous positive airway pressure (“CPAP”) and CPAP masks

and accessories, hospital beds, humidifiers, nebulizer and compressors, oxygen

concentrator, patient lifts, walkers, wheelchairs, and products for wound care

Care Medical Partners LLC Jun-14 Focuses on CPAP and sleep apnea equipment and supplies, mobility equipment, oxygen,

and other related equipment and medical suppliesBlack Bear Medical, Inc. Jan-15 Offers mobility solutions and other DMEsWest Home Healthare, Inc. Mar-15 Provides mobility servicesLegacy Oxygen & Home Care

Equipment, LLC

May-15 Offers products for patients with chronic pulmonary conditions

Patient-Aids, Inc. Oct-15 Aids patients with chronic power mobility conditions, respiratory conditions, and patients

requiring traditional DMEs based in the homeCoastal Med-Tech Corp. Aug-18 Provides sales of nebulizers, oxygen concentrators, CPAP/BiPAP machines, non-invasive

ventilation equipment, and other durable medical equipment and servicesCentral Oxygen, Inc. Oct-18 Provides nebulizers, oxygen concentrators, CPAP/BiPAP machines, non-invasive ventilation

equipment, and other durable medical equipment and servicesRiverside Medical, Inc. Oct-18 Provides nebulizers, oxygen concentrators, CPAP/BiPAP machines, non-invasive ventilation

equipment, and other durable medical equipment and servicesCooley Medical Equipment, Inc. Oct-19 Provides nebulizers, oxygen concentrators, CPAP and BiPAP units, traditional and non-

traditional DMEs and services, and non-invasive ventilation equipment, supplies, and

servicesAcadia Medical Supply, Inc. Dec-19 Supplies power mobility equipment, vehicle lifts, nebulizers, oxygen concentrators, CPAP

and BiPAP units, traditional and non-traditional DMEs and services for respiratory issues

and non-invasive ventilation equipment and supplies




6

Cyber Attack Incident:

In May 2019, Protech had an unlawful hack of its email system, which resulted in fraudulent banking information being relayedregarding the wire transfer of C$9.2M to redeem outstanding debentures. Through quick action by management, its consultants andlegal authorities the perpetrator’s account in Hong Kong was successfully “frozen” and ~C$8.6M in funds was returned. The remainingfunds were transferred to another account in China and the company is pursuing legal ramifications to recover the estimated C$608Kin funds. During this episode, ~C$2.7M was provided in a loan from CEO, Mr. Crawford.

Recent Results:

FY 2019 Results – September Year-End:

For FY19, revenue totaled C$81.0M, for an increase of 15% versus revenue of C$70.5M in FY18. The increase in revenues from FY18to FY19 is due to the Company’s integration efforts in FY19 to standardize regional processes and operations as well as the acquisitionof two businesses.

Gross margin was C$57.4M, or 71% versus C$48.8M or 69% in FY18. The gross margin improvement was largely driven by the bettermix of higher gross margin rental revenue, consolidation of vendor accounts to secure pricing and terms across all companies, andmore efficient ordering practices across the company.

Total selling, general, and administrative expenses were C$42.6M or 52.5% versus C$38.4M or 54.5% in FY18. Expense increases werelargely due to the acquisitions of two businesses, higher payroll expenses to support the revenue growth, and higher bad debt expensecommensurate with the revenue growth.

Adjusted EBITDA increased 40% to c$14.8M. CFFO was C$10.5M, increasing 20% Y/Y.

2Q20 (March) Results:

Revenue increased to C$24.1M from C$20.5M in 1Q19, with rentals of medical equipment comprising C$14M or 58.1% of 2Q20 revenue,and sales of equipment and supplies contributing C$10.1M, or 41.9%. This compares to rentals of 62.8% and sales of 37.2% in 2Q19.

Gross profit was C$17.6M, or 73% compared to C$15.6M or 71% of revenues. Improved gross margin reflects management’s continuedefficiency efforts.

Operating expenses were C$17.4M, up from C$15.1M in 1Q19. As a percentage of revenue, SG&A was 52.9%. The operating incomewas C$171K versus C$493K a year ago, a decrease of 65.3% Y/Y.

Net income from continuing operations was C$1.6M, versus a loss of C$0.5M a year ago. For 2Q20, the diluted EPS from continuingoperations was C$0.02 versus a loss of C$0.01 a year ago. Adjusted EBITDA for the quarter was C$4.9M, or 20.4% of revenue versusC$4M, or 18.2% a year ago.

Financial Position:

For the six month period ended March, CFFO was $6.0M versus $4.1M in the year ago period. Cash was C$6.2M with total debt of C$28.7M, including lease liabilities. Protech recently announced that it has received ~C$7.5M in cash payments related to COVID-19 reiiefpayments. These are payments to healthcare providers, not loans, and will not need to be repaid. Protech plans to fully utilize thesepayments to procure additional equipment and products to prepare and respond to the anticipated demand related to the pandemic.

Estimates/Future Outlook:

• For 3Q20 (June), we are estimating top line sales growth of 15% to C$24.3M from C$21.1M in 3Q19. We are expecting AdjustedEBITDA to grow 33.1% from C$3.9M in 3Q19 to C$5.2M in 3Q20.

• For FY20 (Sept.), we are expecting revenue to grow 18% to C$95.6M, with Adj. EBITDA of C$19.2M, which is an increase of 29.7%from FY19.

• Going forward, we expect to see a modest revenue increase of ~11% to C$106M in FY21. We believe Protech is on the path toprofitability which should be achieved in FY21. We believe Adjusted EBITDA should approach C$22.3M, or ~21% of revenues.



7

Management/Board Leadership:

Mr. Crawford has been Chairman of the Board and Chief Executive Officer of Protech Home Medical Corp. since December 2017. FromApril 2016 to December 2017, Mr. Crawford served as Chief Operating Officer and Managing Director of Patient Home Monitoring Corp.Mr. Crawford joined PHM when PHM acquired Patient-Aids, Inc. for which he was the owner. Mr. Crawford began working at Patient-Aids in 1994, becoming a partner within 3-years and then Patient-Aids' sole owner by 2004. During this time, Patient-Aids grew at anannual rate of 25%, and from 2013 to 2015 the Company more than doubled revenue and quadrupled earnings as it acquired, andsuccessfully integrated, several home medical equipment businesses.

Hardik Mehta, is the Chief Financial Officer of Protech Home Medical Corp., having joined the company in 2018. Before joining Protech,Mr. Mehta was an investment banker and financial advisor at Silverstone Capital Advisors for about ten years. Mr. Mehta has significantacquisition, transaction finance, and accounting experience, with an understanding of financial and operational aspects of the HME/DME industry.

Thomas Roehrig is EVP of Finance at Protech and has over 30 years of experience in accounting and finance, including public companies.

Mark Greenberg is a Director and is the founder and managing partner of Silverstone Capital Advisors. Mr. Greenberg has over 30 yearsof senior executive operating and transaction expertise and experience.

D. Eugene Ewing is a Director and has over 30 years of professional experience in a broad range of executive positions in a varietyof industries. He currently serves on the Board of Directors for Darling Ingredients, Inc., Compass Diversified Holdings, and DeeperWater Consulting.

Conclusion/Valuation:

Protech Home Medical Corp., (PHM) is a U.S. based provider of a broad range of home respiratory products – oxygen therapy and sleepapnea - and other medical equipment to chronic, home-bound patients in the U.S.

Protech is an off-the-radar provider ideally positioned to take advantage of such underlying dynamic fundamentals. On a company-specific basis, we believe Protech is trading at attractive discount to peers and that the company has the infrastructure in place toleverage growth in the near-term without requiring fixed expenses. Thus, margin leverage is becoming more apparent.

We are initiating coverage on Protech with a Buy rating and a Price Target of C$2.25. This Price Target is based on using a 10x multipleof FY21 Adj. EBITDA and a 1.4x multiple of FY21 Sales. The multiple is in line with what comparable companies are trading at currently.

Exhibit 1 - Comparable Companies

Source: FactSet



8

Protech Home Medical Corp.thousands of CAD, except per share Dec-17 Mar-18 Jun-18 Sep-18 Dec-18 Mar-19 Jun-19 Sep-19 Dec-19 Mar-20 Jun-20 Sep-20 Dec-20 Mar-21 Jun-21 Sep-21

1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19 1Q20 2Q20 3Q20E 4Q20E 1Q21E 2Q21E 3Q21E 4Q21E FY17 FY18 FY19 FY20E FY21E

Revenue

Total revenue 18,524 18,724 19,716 13,550 20,509 21,913 21,123 17,422 22,769 24,101 24,291 24,391 25,046 26,511 27,206 27,318 76,369 70,514 80,967 95,552 106,081

Cost of revenue 5,881 5,171 5,938 4,747 6,230 6,356 6,337 4,604 6,029 6,502 6,559 6,829 7,013 7,423 7,618 7,649 22,256 21,737 23,527 25,919 29,703 Gross profit 12,643 13,553 13,778 8,803 14,279 15,557 14,786 12,818 16,740 17,599 17,733 17,561 18,033 19,088 19,589 19,669 54,113 48,777 57,440 69,633 76,378

SG&A 11,135 11,329 10,169 5,768 10,543 11,402 10,927 9,710 12,552 12,740 12,632 12,927 13,024 13,521 13,875 13,932 53,056 38,401 42,582 50,851 54,352 Depreciation 4,061 3,890 4,046 2,478 3,167 2,985 3,334 3,880 4,551 4,495 4,646 3,823 4,053 3,128 2,414 1,863 11,202 14,475 13,366 17,514 11,456 Amortization of intangible assets 167 155 149 150 151 151 153 148 239 167 166 163 161 142 133 126 4,247 621 603 735 562 Stock-based compensation 443 1,225 404 56 530 361 446 726 42 92 92 92 92 92 92 92 (1,500) 2,128 2,063 318 368 Goodwill and intangible asset impairment - - - - - - - 531 - - - - - - - - 12,342 - 531 - - Other expense 7 (15) 19 4 6 - 1,401 1,535 (146) (55) (55) (55) (55) (55) (55) (55) 22 15 2,942 (311) (220) Loss (gain) from distribution on spin-off (21,703) 194 - 21,509 - - - - - - - - - - - - - - - - - Fraud related expenses - - - - - - 9,184 (9,184) - - - - - - - - - - - - - (Gain) loss on disposal of PPE (19) (5) (11) (238) (2) 165 (39) (144) (79) (11) (11) (11) (11) (11) (11) (11) (11) (273) (20) (112) (44)

Continuing Operating Expenses (5,909) 16,773 14,776 29,727 14,395 15,064 25,406 7,202 17,159 17,428 17,469 16,939 17,263 16,816 16,448 15,947 79,358 55,367 62,067 68,995 66,474

Operating income (loss) - EBIT 18,552 (3,220) (998) (20,924) (116) 493 (10,620) 5,616 (419) 171 264 622 770 2,272 3,141 3,722 (25,245) (6,590) (4,627) 638 9,905

Financing Expenses:

Interest on subordinated debentures 211 529 230 938 - 162 430 1,952 - 300 243 298 406 392 378 365 1,235 1,908 2,544 841 1,542 Other interest expense 76 82 166 (326) 396 182 516 (1,128) 604 320 - - - - - - 114 (2) (34) 924 - Other expense - - - - - 420 1,105 305 - - - - - - - - - - 1,830 - - Loss (gain) on derivative financial liability (139) (99) 49 22 (68) 96 (161) 38 735 (2,549) - - - - - - 60 (167) (95) (1,814) - Net gain (loss) from continuing operations before taxes 18,404 (3,732) (1,443) (21,558) (444) (367) (12,510) 4,449 (1,758) 2,100 21 325 364 1,880 2,762 3,357 (26,654) (8,329) (8,872) 687 8,363 Provision for income taxes (1) 90 - 41 (58) 163 29 135 - 44 0 7 8 39 58 70 440 130 269 51 175

Net gain (loss) before disc. ops. 18,405 (3,822) (1,443) (21,599) (386) (530) (12,539) 4,314 (1,758) 2,056 20 318 356 1,841 2,704 3,287 (27,094) (8,459) (9,141) 636 8,188

Discontinued Operations:

Net income from net assets held for dist. 4,205 - - 1,492 521 - - 1,234 - (416) (416) (416) (416) (416) (416) (416) 3,335 5,697 1,755 (1,248) (1,664) Gain on settlement of distribution liability - - - 21,509 - - - - - - - - - - - - - 21,509 - - -

Combined Operations:Net gain (loss) from continued operations 22,610 (3,822) (1,443) 1,402 135 (530) (12,539) 5,548 (1,758) 1,640 (396) (98) (60) 1,425 2,288 2,871 (23,759) 18,747 (7,386) (612) 6,524

EBITDA 22,780 825 3,197 (18,296) 3,202 3,209 (8,238) 11,170 4,371 4,833 5,075 4,608 4,983 5,541 5,687 5,711 (9,856) 8,506 9,343 18,887 21,923 Adjusted EBITDA 1,520 2,611 3,669 2,834 3,732 3,990 3,882 3,198 4,413 4,925 5,167 4,700 5,075 5,633 5,779 5,803 995 10,634 14,802 19,205 22,291

Other Comprehensive Income (Loss):

Cumulative translation adjustment 62 725 473 (417) 1,455 (492) (708) 416 (538) 2,567 2,567 2,567 2,567 2,567 2,567 2,567 (6,036) 843 671 7,163 10,268 Comprehensive income (loss) 22,672 (3,097) (970) 985 1,590 (1,022) (13,247) 5,964 (2,296) 4,207 2,171 2,469 2,507 3,992 4,855 5,438 (29,795) 19,590 (6,715) 6,551 16,792

Net income (loss) per share:

EPS - Basic 0.06 (0.01) (0.00) 0.02 0.00 (0.01) (0.15) 0.07 (0.02) 0.02 (0.00) (0.00) (0.00) 0.02 0.03 0.03 (0.06) 0.25 (0.09) (0.01) 0.08 EPS - Diluted 0.05 (0.01) (0.00) 0.02 0.00 (0.01) (0.14) 0.07 (0.02) 0.02 (0.00) (0.00) (0.00) 0.02 0.03 0.03 (0.06) 0.23 (0.09) (0.01) 0.08

Weighted average shares outstanding - basic 377,864 379,096 379,096 75,757 80,853 82,176 83,529 82,860 83,589 83,657 83,657 83,657 83,657 83,657 83,657 83,657 377,084 75,757 82,860 82,860 82,860 Weighted average shares outstanding - diluted 412,919 379,096 422,796 80,744 85,790 87,625 89,093 82,860 83,589 88,496 88,496 88,496 88,496 88,496 88,496 88,496 377,084 80,744 82,860 82,860 82,860



9

RISKS (PTQ)·Limited Business History. The Company has a limited operating history in its current form. Results will likely remain volatile with little assurances that consistent profitability can be generated.

·Critical Relationships: Protech is dependent on reimbursement from Medicare, Medicaid and private insurance entities. Stretch outs of payments could impact cash flow. Protech also relieson key suppliers for equipment and pricing and supply/demand issues can impact future performance. Adoption by patients and physicians can depend on education of products and servicesand, therefore, take time.

·Competitive Bids: The new round of competitive bidding is underway with results likely during the summer of 2020, for contracts taking place between January 2021 and December 31, 2023.The company may or may not be awarded its bids in some or all of the Competitive Bidding Areas (CBAs) and/or some or all of its product categories.

·Government regulations: Certain aspects of the Company’s operations require licenses and certifications by U.S. government agencies. Adverse regulatory actions could impact operationsof the Company.

·Highly Competitive Markets: The DME market is highly competitive and other companies may be better capitalized.

·Common Share Liquidity: The Company is currently pursuing listing shares on the OTCQX exchange in an attempt to increase liquidity. Up to this point, the shares were listed on the TSX-V and have experienced substantial volatility in the past.

·Access to Capital: The Company may require additional funds to further its growth plans and there can be no assurances that such funding may be available, on reasonable terms.

·Reimbursement Rates: Reimbursement for services provided by Protech will come primarily from Medicare and private health insurance companies. The reimbursement rates offered areoutside the control of the Company. Reimbursement rates are subject to continual reductions as health insurers and governmental entities attempt to control health care costs. Reductionsin reimbursement rates can have a material impact on the profitability of the Company’s operations.

·Related Party Transactions: The Company has entered into six market rate leases for office, warehouse, and retail space with a rental Company affiliated with the Company’s Chief ExecutiveOfficer. Lease payments under these leases are approximately C$68,000 per month, plus taxes, utilities and maintenance.

I, Richard Ryan, certify that the views expressed in this research report accurately reflect my personal views about the subject securities and issuers. We believe structural changes in the markets have created strong headwinds for active money managers. Along with a smaller audience for small/micro-cap issues, the current investmentenvironment may offer inefficiencies in valuations for such companies. Our research frequently identifies undiscovered small and micro-cap stocks that may present an opportunity for attractiveinvestment returns. As a result, it is our opinion that the value of the underlying businesses often may be understated due to lack of institutional audience, insufficient trading liquidity, listingon smaller exchanges, inconsistent fundamental results or a misunderstanding of the underlying business. Our Special Situation Coverage is being produced to help identify these stocks andgive our clients an opportunity to capitalize on under-appreciated investment opportunities. As many of these companies may have volatile business models, investors need to be cognizantof the speculative nature of these companies.

The ratings used in Dougherty & Company LLC research reports are defined as:

Buy: Expected to outperform the broader market and/or its sector over the next six to twelve months.

Neutral: Expected to perform generally in-line to moderately below the broader market and/or its sector over the next six to twelve months.

Sell: Expected to materially underperform the broader market and/or its sector over the next six to twelve months.



10

IMPORTANT DISCLOSURES

RATINGS DISPERSION AND BANKING RELATIONSHIPS AS OF (May 21, 2020)

Rating % IB %Buy 82.9 24.1

Neutral 17.1 5.6

Sell 0.0 0.0

This report has been prepared solely for informative purposes and is not a solicitation or an offer to buy or sell any security. The information contained herein has been taken from trade andstatistical services believed, but not guaranteed, to be accurate, reliable or purported to be complete. Any opinions or estimates expressed in this report reflect a judgement made of this date,and are subject to change. The securities described may not be qualified for purchase in all jurisdictions. Because of individual requirements, advice regarding securities mentioned hereinshould not be construed as suitable for all accounts. Some securities mentioned herein relate to small speculative companies (these securities are currently below investment grade), which maybe unsuitable for some accounts. Recommendations are made in a general sense, suitability for individual acquisition or sale should be a matter of discussion between the Investment Executiveand the client before any transactions occur. Past performance does not guarantee future results. From time to time, Dougherty & Company LLC, or its officers, directors or agents, or membersof their families, may have a position in securities mentioned and may make purchases or sales of the same in the open market or otherwise, and may own options, rights or warrants to purchasethe same. Dougherty & Company LLC as a market maker may act as principal or agent with respect to the sale or purchase of securities mentioned. All the views expressed in this research reportaccurately reflect my personal views about this security. No part of my compensation was, is or will be directly or indirectly related to the views expressed in this report. My compensationmay be derived from various factors including a percentage of hard dollar sales of research products to customers, trading commissions received from customer trades in stocks that I cover forresearch purposes and total firm or departmental revenues which may, in part, be generated by Dougherty's investment banking activities. Additional information is available upon request.

This research report is being distributed on the basis that each person in the United Kingdom to whom it is issued is reasonably believed to be an investment professional (as defined in theFinancial Services and Markets Act 2000). Non-investment professionals may not act upon the information contained in this report and must return it to the sender immediately.

This document is for the use of intended recipients only and should not be forwarded to any third party.



11

Equity Capital Markets DirectorySteven Frankel 617-652-0179 David Edwards 612-317-2152Senior Vice President, Director of Research Senior Vice President, Equity Capital Markets

Research Institutional Sales and TradingSales:

Charles Anderson 612-376-4157 Anthony Felling 612-317-2123Senior Research Analyst - Mobile Computing Senior Vice President, Head of Sales

Kyle Bauser, Ph.D. 612-376-4191 Tom Meader 612-376-4176Senior Research Analyst - Healthcare Vice President - Sales

Steven Frankel 617-652-0179 David Morgan 612-376-4146Senior Vice President, Analyst - Digital Media Vice President - Sales

Gene Mannheimer 858-412-5485 Joel Rosenthal 612-376-4144Senior Research Analyst - Healthcare Vice President - Sales

Richard Ryan 612-376-4162 David Sortland 612-317-2192Senior Research Analyst - Industrials Vice President - Sales

Michael Shlisky 212-831-3025 Dan Waggoner 612-376-4193Senior Research Analyst - Industrials/Consumer Vice President - Sales

Catharine Trebnick 612-376-4117 Trading:Senior Research Analyst - Data and IP Networking David Edwards 612-317-2152

Senior Vice President - Equity Capital Markets

Mark Kjesbo 612-317-2047Vice President - Sales Trading

Bill Schaeder 612-376-4113Vice President - Sales Trading

Jesse Wallace 612-376-4069Vice President - Sales Trading

Trading Desk 888-817-8664

special situations · special situations richard ryan may 21, 2020 (612) 376-4162;...

Documents