VIEMED HEALTHCARE, INC. 10-Q

Item 1. Financial Statements VIEMED HEALTHCARE, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Expressed in thousands of U.S. Dollars, except outstanding shares) Note At September 30, 2020 At December 31, 2019 (Unaudited) (Audited) ASSETS Current assets Cash and cash equivalents $ 32,396 $ 13,355 Accounts receivable, net of allowance for doubtful accounts of $ 8,788 and $ 7,782 at September 30, 2020 and December 31, 2019, respectively 2 11,489 11,534 Inventory, net of inventory reserve of $ 805 and $ 0 at September 30, 2020 and December 31, 2019, respectively 2 2,762 1,360 Prepaid expenses and other assets 2 3,333 1,562 Total current assets $ 49,980 $ 27,811 Long-term assets Property and equipment, net 3 56,317 54,772 Equity method investment 79 13 Deferred tax asset 10 7,593 — Total long-term assets $ 63,989 $ 54,785 TOTAL ASSETS $ 113,969 $ 82,596 LIABILITIES Current liabilities Trade payables $ 7,553 $ 4,700 Deferred revenue 3,612 3,315 Income taxes payable 368 86 Accrued liabilities 4 12,793 8,968 Current portion of lease liabilities 5 4,207 7,093 Current portion of long-term debt 5 1,815 1,750 Total current liabilities $ 30,348 $ 25,912 Long-term liabilities Accrued liabilities 7 1,210 2,317 Long-term lease liabilities 5 952 3,039 Long-term debt 5 6,261 7,629 Total long-term liabilities $ 8,423 $ 12,985 TOTAL LIABILITIES $ 38,771 $ 38,897 Commitments and Contingencies — — SHAREHOLDERS' EQUITY Common stock - No par value: unlimited authorized; 39,145,182 and 37,952,660 issued and outstanding as of September 30, 2020 and December 31, 2019, respectively 7 9,085 3,366 Additional paid-in capital 6,019 6,377 Accumulated other comprehensive loss ( 478 ) ( 157 ) Retained earnings 60,572 34,113 TOTAL SHAREHOLDERS' EQUITY $ 75,198 $ 43,699 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 113,969 $ 82,596 See accompanying notes to the condensed consolidated financial statements Page 3 VIEMED HEALTHCARE, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (Expressed in thousands of U.S. Dollars, except share and per share amounts) (Unaudited) Three Months Ended September 30, Nine Months Ended September 30, Note 2020 2019 2020 2019 Revenue 2 $ 33,447 $ 20,368 $ 100,107 $ 58,808 Cost of revenue 13,994 6,318 39,174 17,045 Gross profit $ 19,453 $ 14,050 $ 60,933 $ 41,763 Operating Expenses Selling, general and administrative 13,550 10,231 40,555 31,207 Research and development 243 208 688 645 Stock-based compensation 7 1,234 1,064 3,581 2,978 Depreciation 202 193 612 460 Loss (gain) on disposal of property and equipment 203 167 ( 2,424 ) 308 Other (income) expense 9 ( 19 ) 1 ( 3,593 ) ( 1 ) Income from operations $ 4,040 $ 2,186 $ 21,514 $ 6,166 Non-operating expenses Unrealized gain on warrant conversion liability 6 — ( 800 ) — ( 363 ) (Gain) loss from equity method investment ( 21 ) 26 ( 36 ) 77 Interest expense, net of interest income 5 116 56 409 102 Net income before taxes 3,945 2,904 21,141 6,350 Provision (benefit) for income taxes 10 1,141 51 ( 5,318 ) 213 Net income $ 2,804 $ 2,853 $ 26,459 $ 6,137 Other Comprehensive Income Change in unrealized gain (loss) on derivative instruments, net of tax 24 ( 88 ) ( 321 ) ( 236 ) Other Comprehensive Loss $ 24 $ ( 88 ) $ ( 321 ) $ ( 236 ) Comprehensive Income $ 2,828 $ 2,765 $ 26,138 $ 5,901 Net income per share Basic 11 $ 0.07 $ 0.08 $ 0.69 $ 0.17 Diluted 11 $ 0.07 $ 0.07 $ 0.66 $ 0.15 Weighted average number of common shares outstanding: Basic 11 39,107,640 37,812,921 38,603,267 37,775,775 Diluted 11 41,155,668 40,051,422 40,377,608 39,768,877 See accompanying notes to the condensed consolidated financial statements Page 4 VIEMED HEALTHCARE, INC. CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Expressed in thousands of U.S. Dollars, except share and per share amounts) (Unaudited) Common Stock Additional paid-in capital Accumulated other comprehensive loss Total Shareholders' equity Shares Amount Retained earnings Shareholders' equity, December 31, 2018 37,500,815 $ 71 $ 5,390 $ — $ 27,110 $ 32,571 Stock-based compensation - options — — 578 — — 578 Stock-based compensation - restricted stock — — 302 — — 302 Exercise of options 2,418 4 — — — 4 Shares issued for vesting of restricted stock units 539,965 2,202 ( 2,202 ) — — — Shares repurchased and canceled under the Normal Course Issuer Bid ( 365,100 ) — — — ( 1,522 ) ( 1,522 ) Net Income — — — — 1,958 1,958 Shareholders' equity, March 31, 2019 37,678,098 $ 2,277 $ 4,068 $ — $ 27,546 $ 33,891 Stock-based compensation - options — — 705 — — 705 Share-based compensation - restricted stock — — 329 — — 329 Exercise of warrants 8,280 16 — — — 16 Exercise of options 4,725 18 — — — 18 Shares issued for vesting of restricted stock units 6,432 39 ( 39 ) — — — Change in accumulated other comprehensive loss — — — ( 148 ) — ( 148 ) Net Income — — — — 1,326 1,326 Shareholders' equity, June 30, 2019 37,697,535 $ 2,350 $ 5,063 $ ( 148 ) $ 28,872 $ 36,137 Stock-based compensation - options — — 745 — — 745 Stock-based compensation - restricted stock — — 319 — — 319 Exercise of warrants 124,890 245 — — — 245 Exercise of options 35,025 114 — — — 114 Shares issued for vesting of restricted stock units 95,210 657 ( 657 ) — — — Change in accumulated other comprehensive loss — — — ( 88 ) — ( 88 ) Net Income — — — — 2,853 2,853 Shareholders' equity, September 30, 2019 37,952,660 $ 3,366 $ 5,470 $ ( 236 ) $ 31,725 $ 40,325 See accompanying notes to the condensed consolidated financial statements Page 5 VIEMED HEALTHCARE, INC. CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Expressed in thousands of U.S. Dollars, except share and per share amounts) (Unaudited) Common Stock Additional paid-in capital Accumulated other comprehensive loss Total Shareholders' equity Shares Amount Retained earnings Shareholders' equity, December 31, 2019 37,952,660 $ 3,366 $ 6,377 $ ( 157 ) $ 34,113 $ 43,699 Stock-based compensation - options — — 891 — — 891 Stock-based compensation - restricted stock — — 260 — — 260 Exercise of options 4,737 15 — — — 15 Shares issued for vesting of restricted stock units 529,375 3,276 ( 3,276 ) — — — Change in accumulated other comprehensive loss — — — ( 312 ) — ( 312 ) Net Income — — — — 4,243 4,243 Shareholders' equity, March 31, 2020 38,486,772 $ 6,657 $ 4,252 $ ( 469 ) $ 38,356 $ 48,796 Stock-based compensation - options — — 933 — — 933 Stock-based compensation - restricted stock — — 263 — — 263 Exercise of options 596,160 1,757 — — — 1,757 Change in accumulated other comprehensive loss — — — ( 33 ) — ( 33 ) Net Income — — — — 19,412 19,412 Shareholders' equity, June 30, 2020 39,082,932 $ 8,414 $ 5,448 $ ( 502 ) $ 57,768 $ 71,128 Stock-based compensation - options — — 945 — — 945 Stock-based compensation - restricted stock — — 289 — — 289 Exercise of options 2,400 8 — — — 8 Shares issued for vesting of restricted stock units 59,850 663 ( 663 ) — — — Change in accumulated other comprehensive income — — — 24 — 24 Net Income — — — — 2,804 2,804 Shareholders' equity, September 30, 2020 39,145,182 $ 9,085 $ 6,019 $ ( 478 ) $ 60,572 $ 75,198 See accompanying notes to the condensed consolidated financial statements Page 6 VIEMED HEALTHCARE, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Expressed in thousands of U.S. Dollars) (Unaudited) Nine Months Ended September 30, Note 2020 2019 Cash flows from operating activities Net income $ 26,459 $ 6,137 Adjustments for: Depreciation 6,745 4,398 Change in allowance for doubtful accounts 2 7,031 6,937 Share-based compensation 7 3,581 2,978 Unrealized gain on warrant conversion liability 6 — ( 363 ) (Gain) loss on equity method investment ( 36 ) 77 (Gain) loss on disposal of property and equipment ( 2,424 ) 308 Deferred income taxes (benefit) ( 7,593 ) — Net change in working capital Increase in accounts receivable ( 6,986 ) ( 9,827 ) (Increase) decrease in inventory ( 1,402 ) 1,621 Increase in prepaid expenses and other current assets ( 1,771 ) ( 1,321 ) Increase (decrease) in trade payables 2,739 ( 1,813 ) Increase in deferred revenue 297 770 Increase in accrued liabilities 2,397 1,909 Increase (decrease) in income tax payable 282 ( 124 ) Net cash provided by operating activities $ 29,319 $ 11,687 Cash flows from investing activities Purchase of property and equipment ( 8,204 ) ( 10,582 ) Investment in equity method investment ( 30 ) — Proceeds from sale of property and equipment 5,187 350 Net cash used in investing activities $ ( 3,047 ) $ ( 10,232 ) Cash flows from financing activities Proceeds from exercise of options 1,780 136 Proceeds from exercise of warrants — 261 (Principal payments) net proceeds on notes payable 5 ( 104 ) 4,837 (Principal payments) net proceeds on term note 5 ( 1,199 ) 4,966 Shares repurchased and canceled under the Normal Course Issuer Bid — ( 1,522 ) Repayments of lease liabilities ( 7,708 ) ( 7,916 ) Net cash (used in) provided by financing activities $ ( 7,231 ) $ 762 Net increase in cash and cash equivalents 19,041 2,217 Cash and cash equivalents at beginning of year 13,355 10,413 Cash and cash equivalents at end of period $ 32,396 $ 12,630 Supplemental disclosures of cash flow information Cash paid during the period for interest $ 437 $ 91 Cash paid during the period for income taxes, net of refunds received $ 1,975 $ 338 Supplemental disclosures of non-cash transactions Property and equipment financed through finance leases $ 3,002 $ 14,735 Property and equipment financed through leases under FASB ASC 842 $ 57 $ 2,052 See accompanying notes to the condensed consolidated financial statements Page 7 VIEMED HEALTHCARE, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Tabular dollar amounts expressed in thousands of U.S. Dollars, except per share amounts) (Unaudited) September 30, 2020 and 2019 1. Nature of Business and Operations Viemed Healthcare, Inc. (the "Company"), through its subsidiaries, is a provider of in-home durable medical equipment ("DME") and post-acute respiratory healthcare services in the United States. The Company’s service offerings are focused on effective in-home treatment with clinical practitioners providing therapy and counseling to patients in their homes using cutting edge technology. The Company currently serves patients in 36 states in the United States. The Company was incorporated under the Business Corporations Act (British Columbia) on December 14, 2016. The Company's registered and records office is located at Suite 2800, Park Place, 666 Burrard Street, Vancouver, British Columbia V6C 2Z7 and its corporate office is located at 625 E. Kaliste Saloom Road, Lafayette, Louisiana 70508. As of June 30, 2020, the Company determined that it no longer qualifies as a "foreign private issuer," as defined in Rule 3b-4 of the Securities and Exchange Act of 1934, as amended (the "Exchange Act"), for the purposes of the informational requirements of the Exchange Act. As a result, effective January 1, 2021, the Company will become subject to the proxy solicitation rules under Section 14 of the Exchange Act and Regulation FD, and the Company's officers, directors, and principal shareholders will become subject to the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act. The Company will continue to file annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K with the Securities and Exchange Commission (the "SEC"). The Company is an "emerging growth company," as defined in the Jumpstart Our Business Startups Act (the "JOBS Act"), and as such, has elected to comply with certain reduced U.S. public company reporting requirements. The Company’s shares are traded in Canada on the Toronto Stock Exchange under the symbol VMD.TO and in the U.S. on the Nasdaq Capital Market under the symbol VMD. 2. Summary of Significant Accounting Policies Principles of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and pursuant to the rules and regulations of the SEC. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The accompanying condensed consolidated financial statements are unaudited, but reflect all adjustments consisting of normal recurring accruals, which, in the opinion of management, are necessary to present fairly our Condensed Consolidated Balance Sheets, Condensed Consolidated Statements of Income and Comprehensive Income, Condensed Consolidated Statements of Changes in Shareholders’ Equity and Condensed Consolidated Statements of Cash Flows for the interim periods presented. Our fiscal year ends on December 31. The condensed consolidated balance sheet as of December 31, 2019 was derived from audited consolidated financial statements but does not include all disclosures required by GAAP. These condensed consolidated financial statements should be read in conjunction with the annual consolidated financial statements and the notes thereto and the report of our independent registered public accounting firm included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. The nature of our business is such that the results of any interim period may not be indicative of the results to be expected for the entire year. Basis of consolidation These consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany transactions have been eliminated. Use of estimates The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Management bases these estimates and assumptions upon historical experience, existing and known circumstances, authoritative accounting pronouncements and other factors that management believes to be reasonable. Significant areas requiring the use of management estimates relate to revenue recognition, accounts receivable and the related allowance for doubtful accounts, income tax provisions, and fair value of financial instruments. Actual results could differ from these estimates. As of September 30, 2020, the COVID-19 pandemic is ongoing and the impacts of the pandemic on our business, financial condition and results of operations continue to evolve as of the date of this report. As a result, the impacts remain uncertain and Page 8 VIEMED HEALTHCARE, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Tabular dollar amounts expressed in thousands of U.S. Dollars, except per share amounts) (Unaudited) September 30, 2020 and 2019 difficult to predict and will depend on, among other factors, the duration and severity of the pandemic, as well as any negative economic conditions arising from the pandemic, our ability to assess potential patients in hospitals and set up and treat patients in the home, and the impacts of government actions and administrative regulations on the healthcare industry and broader economy, including through existing and any future stimulus efforts . As events continue to evolve and additional information becomes available, our estimates may change materially in future periods. Accounts receivable Accounts receivable are regularly reviewed for collectability and an allowance is recorded to cover the estimated bad debts and billing modifications. The accounts receivable are presented on the Condensed Consolidated Balance Sheets net of the allowance for doubtful accounts. It is possible that the estimates of the allowance for doubtful accounts could change, which could have a material impact on our operations and cash flows. The Company writes off receivables when the likelihood for collection is remote, and when the Company believes collection efforts have been fully exhausted and it does not intend to devote additional resources in attempting to collect. The write-offs are charged against the allowance for doubtful accounts. For the nine months ended September 30, 2020, our assessment considered business and market disruptions caused by the COVID-19 pandemic and estimates of expected emerging credit and collectability trends. The continued volatility in market conditions and evolving shifts in credit trends are difficult to predict causing variability and volatility that may have a material impact on our allowance for credit losses in future periods. The estimates and write-offs for the allowance for doubtful accounts for each reporting period were as follows: September 30, 2020 September 30, 2019 Balance, beginning of year $ 7,782 $ 4,266 Change in allowance for doubtful accounts 7,031 6,937 Amounts written off ( 6,025 ) ( 3,539 ) Balance, end of period $ 8,788 $ 7,664 As of September 30, 2020 and 2019, no one customer represented more than 10% of outstanding accounts receivable. The Company does have receivables at September 30, 2020 from Medicare and Medicaid, representing 59 % and 6 %, respectively, and 65 % combined, of total outstanding receivables (December 31, 2019 - 58 %). As these receivables are both from government programs, there is little credit risk associated with these balances; however, these receivables are subject to billing modifications and other adjustments and estimates of the amounts of such adjustments are included in the allowance for doubtful accounts. Revenues from Medicare and Medicaid as percentages of the Company's traditional revenue streams, excluding COVID-19 response sales and services, for the three and nine month periods ended September 30, 2020, were as follows: Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Medicare Revenues 57 % 57 % 60 % 59 % Medicaid Revenues 9 % 7 % 9 % 7 % Total Medicare and Medicaid 66 % 64 % 69 % 66 % Inventory Inventory represents non-serialized respiratory supplies that consist of equipment parts, consumables, and associated product supplies and is expensed at the time of sale or use. The Company values inventory at the lower of cost or net realizable value. Obsolete and unserviceable inventories are valued at estimated net realizable value . Inventory is presented net of a reserve balance of $ 805,000 and $ 0 at September 30, 2020 and December 31, 2019, respectively, that relates to COVID-19 response supplies. Page 9 VIEMED HEALTHCARE, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Tabular dollar amounts expressed in thousands of U.S. Dollars, except per share amounts) (Unaudited) September 30, 2020 and 2019 Property and equipment Property and equipment is presented on the Condensed Consolidated Balance Sheets at historic cost less accumulated depreciation. Major renewals and improvements that extend the useful life of assets are capitalized to the respective property accounts, while maintenance and repairs, which do not extend the useful life of the respective assets, are expensed as incurred. Management has estimated the useful lives of equipment leased to customers. Depreciation is computed using the straight-line method over the estimated useful lives of the respective assets. Property and equipment are amortized on a straight-line basis over their estimated useful lives. The estimated useful lives of the property and equipment are as follows: Description Estimated Useful Lives Medical Equipment 1 - 10 Years Computer Equipment 5 Years Office Furniture & Fixtures 5 - 10 Years Leasehold Improvements Shorter of Useful Life or Lease Vehicles 5 Years Building 15 - 39 Years Land Indefinite Life Depreciation of medical equipment commences at the date of service, which represents the date that the asset has been deployed to a patient’s address and is put in use and continues through the useful life of the asset. Property and equipment and other non-current assets with definite useful lives are tested for impairment whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. Prepaid expenses and other assets Prepaid expenses and other current assets consists primarily of prepaid expenses such as insurance, rent, and supplier deposits for rental equipment. Comprehensive income Comprehensive income reflects the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. Our comprehensive income represents net income adjusted for unrealized gains and losses on derivative instruments. Accumulated other comprehensive loss is presented on the accompanying Condensed Consolidated Balance Sheets as a component of shareholders' equity. Revenue recognition Revenue from a customer consists of any combination of the sale and rental of DME and/or patient medical services. Revenues are billed to and collections received from Medicare, Medicaid, third-party insurers, co-insurance and patient-pay. Revenue is recognized net of contractual adjustments and bad debt based on contractual arrangements with third-party payors, an evaluation of expected collections resulting from the analysis of current and past due accounts, past collection experience in relation to amounts billed and other relevant information. Contractual adjustments result from the differences between the rates charged for services and reimbursement rates paid by government-sponsored healthcare programs and insurance companies for such services. The Company's contracts with customers often include multiple products and services, and the Company evaluates these arrangements to determine the unit of accounting for revenue recognition purposes based on whether the product or service is distinct from other products or services in the arrangement and should be accounted for as a separate performance obligation. A product or service is distinct if the customer can benefit from it on its own or together with other readily available resources and the Company's ability to transfer the goods or services is separately identifiable from other promises in the contractual arrangement with the customer (e.g. patient). Revenue is then allocated to each separately identifiable good or service based on the standalone price of the items underlying the performance obligations. Most of the Company’s products fall in the Medicare Fee-for-Service (“FFS”) program which is a payment model where services are unbundled and paid for separately. These services are paid based on a Medicare determined price that is publicly available on the website for the Centers for Medicare & Medicaid Services (“CMS”). Page 10 VIEMED HEALTHCARE, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Tabular dollar amounts expressed in thousands of U.S. Dollars, except per share amounts) (Unaudited) September 30, 2020 and 2019 For commercial payors, DME companies must negotiate in-network pricing separately, though in general, the Company’s payors tend to benchmark their contract rates and coverage policies closely to those of Medicare. The Company considers performance obligations for sales and rentals to be met when the customer receives the equipment, and revenue for rentals is recognized over time, over the respective rental period. For revenue associated with DME rentals, the Company recognizes revenue in accordance with FASB ASC 842, “Leases,” (Topic 842). For any DME sales and services, the Company recognizes revenue under FASB ASU 2014-09, “Revenue from Contracts with Customers,” (Topic 606) and related amendments. The Company recognizes equipment rental revenue over the non-cancelable lease term, which is one month , less estimated adjustments, in accordance with Topic 842. The Company has separate contracts with each patient that are not subject to a master lease agreement with any third-party payor. The Company would first consider the lease classification issue (sales-type lease or operating lease) and then appropriately recognize or defer rental revenue over the lease term . The revenues from each major source are summarized in the following table: Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Revenue from rentals under Topic 842 Ventilator rentals, non-invasive and invasive $ 19,962 $ 17,213 $ 58,672 $ 50,990 Other durable medical equipment rentals 2,649 1,449 7,184 3,464 Revenue from sales and services under Topic 606 Equipment and supply sales 1,890 1,349 3,962 3,202 COVID-19 response sales and services 8,553 — 29,306 — Service revenues 393 357 983 1,152 Total Revenues $ 33,447 $ 20,368 $ 100,107 $ 58,808 Revenue Accounting under Topic 842 The Company leases DME such as non-invasive and invasive ventilators, positive airway pressure ("PAP") machines, percussion vests, oxygen concentrator units and other small respiratory equipment to customers for a fixed monthly amount on a month-to-month basis. The customer generally has the right to cancel the lease at any time during the rental period. The Company considers these rentals to be operating leases. Under FASB Accounting Standards Codification Topic 842, the Company recognizes rental revenue on operating leases on a straight-line basis over the contractual lease term which varies based on the type of equipment rental. The lease term begins on the date products are delivered to patients, and revenues are recorded at amounts estimated to be received under reimbursement arrangements with third-party payors, including Medicare, private commercial payors, and Medicaid. Certain customer co-payments are included in revenue when considered probable of payment, which is generally when paid. Due to the nature of the industry and the reimbursement environment in which the Company operates, certain estimates are required to record net revenue and accounts receivable at their net realizable values. Inherent in these estimates is the risk that they will have to be revised or updated as additional information becomes available. Specifically, the complexity of many third-party billing arrangements and the uncertainty of reimbursement amounts for certain services from certain payors may result in adjustments to amounts originally recorded. Such adjustments are typically identified and recorded at the point of cash application or claim denial. Revenue Accounting under Topic 606 The Company sells DME, replacement parts and supplies to customers and recognizes revenue based on contractual payment rates as determined by the payors at the point in time where control of the good or service is transferred through delivery to the customer. The customer and, if applicable, the payors are generally charged at the time that the product is sold. For sales of equipment previously placed in service, proceeds associated with these sales are recorded to gain (loss) on disposal of property and equipment. The Company also provides sleep study services to customers and recognizes revenue when the results of the sleep study are complete as that is when the performance obligation is met. The transaction price on both equipment sales and sleep studies is the Page 11 VIEMED HEALTHCARE, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Tabular dollar amounts expressed in thousands of U.S. Dollars, except per share amounts) (Unaudited) September 30, 2020 and 2019 amount that the Company expects to receive in exchange for the goods and services provided. Due to the nature of the DME business, gross charges are retail charges and generally do not reflect what the Company is ultimately paid. As such, the transaction price is constrained for the difference between the gross charge and what is estimated to be collected from payors and from patients. The transaction price therefore is predominantly based on contractual payment rates as determined by the payors. The Company does not generally contract with uninsured customers. The payment terms and conditions of customer contracts vary by customer type and the products and services offered. The Company determines its estimates of contractual allowances and discounts based upon contractual agreements, its policies and historical experience. While the rates are fixed for the product or service with the customer and the payors, such amounts typically include co-payments, co-insurance and deductibles, which vary in amounts, and are due from the patient. The Company includes in the transaction price only the amount that the Company expects to be entitled, which is substantially all of the payor billings at contractual rates. The transaction price is initially constrained by the amount of customer co-payments, which are included in the transaction price when considered probable of payment and included in revenue if the product or service has already been provided to the customer. Due to the nature of the industry and the reimbursement environment in which the Company operates, certain estimates are required to record net revenue and accounts receivable at their net realizable values. Inherent in these estimates is the risk that they will have to be revised or updated as additional information becomes available. Specifically, the complexity of many third-party billing arrangements and the uncertainty of reimbursement amounts for certain services from certain payors may result in adjustments to amounts originally recorded. Such adjustments are typically identified and recorded at the point of cash application or claim denial. Returns and refunds are not accepted on either equipment sales or sleep study services. The Company does not offer warranties to customers in excess of the manufacturer’s warranty. Any taxes due upon sale of the products or services are not recognized as revenue. The Company does not have any partially or unfilled performance obligations related to contracts with customers and as such, the Company has no contract liabilities as of September 30, 2020. Stock-based compensation The Company accounts for its stock-based compensation in accordance with ASC 718 , "Compensation—Stock Compensation" , which establishes accounting for share-based awards exchanged for employee services and requires companies to expense the estimated fair value of these awards over the requisite employee service period. Stock–based compensation cost for stock options are determined at the grant date using the Black-Scholes option pricing model. Stock-based compensation costs for restricted stock units are determined at the grant date based on the closing stock price. The expense of such stock-based compensation awards is recognized using the graded vesting attribution method over the vesting period and the offsetting credit is recorded as an increase in additional paid-in capital. Forfeitures are recorded as incurred. Any excess tax benefit or deficiency is recognized as a component of income taxes and within operating cash flows upon vesting of the share-based award. Interest rate swaps The Company utilizes an interest rate swap contract to reduce exposure to fluctuations in variable interest rates for future interest payments on the Term Note (as defined below). For determining the fair value of the interest rate swap contract, the Company uses significant other observable market data or assumptions (Level 2 inputs) that market participants would use in pricing similar assets or liabilities, including assumptions about counterparty risk. These fair value estimates reflect an income approach based on the terms of the interest rate swap contract and inputs corroborated by observable market data including interest rate curves. The Company includes unrealized gains in Prepaid expenses and other assets, as a component of Long-term Assets, and unrealized losses in Accrued Liabilities, as a component of Long-term Liabilities on the Condensed Consolidated Balance Sheets. The Company recognizes any differences between the variable interest rate payments and the fixed interest rate settlements from its swap counterparty as an adjustment to interest expense over the life of the swap. If determined to be an effective cash flow hedge, the Company will record the changes in the estimated fair value of the swaps to Accumulated other comprehensive income or loss on the Condensed Consolidated Balance Sheets. To the extent that interest rate swaps are determined to be ineffective, the Company would recognize the changes in the estimated fair value of swaps in Interest and other non-operating expenses, net in its Condensed Consolidated Statements of Income. Page 12 VIEMED HEALTHCARE, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Tabular dollar amounts expressed in thousands of U.S. Dollars, except per share amounts) (Unaudited) September 30, 2020 and 2019 Recently adopted accounting pronouncements In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. The new guidance modifies the disclosure requirements on fair value measurements. The Company adopted this standard on January 1, 2020 and the adoption of this standard did not have a material impact on the Company's condensed consolidated financial statements. Recently issued accounting pronouncements The Company is an “emerging growth company” as defined by the JOBS Act. The JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, for complying with new or revised accounting standards. In other words, an emerging growth company can selectively delay the adoption of all accounting standards until those standards would otherwise apply to private companies. The Company has elected to utilize this exemption and, as a result, our condensed consolidated financial statements may not be comparable to the financial statements of issuers that are required to comply with the effective dates for new or revised accounting standards that are applicable to public companies. To date, however, the Company has not delayed the adoption of any accounting standards except as noted below. Section 107 of the JOBS Act provides that the Company can elect to opt out of the extended transition period at any time, which election is irrevocable. In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses,” to require the measurement of expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable forecasts. The ASU will be effective for interim and annual periods beginning January 1, 2020 for issuers and annual periods beginning January 1, 2023 for non-issuers. The Company anticipates adopting this ASU on January 1, 2023 given its smaller reporting company status and is still evaluating the impact of adoption on the consolidated financial statements in future periods. In November 2019, the FASB issued ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments – Credit Losses. Among other things, the ASU expands the scope of the practical expedient that allows entities to exclude the accrued interest component of amortized cost from various disclosures required by ASC 326 to also include certain disclosures required by Topic 320. Entities that elect to apply the practical expedient must disclose the total amount of accrued interest that they exclude from their disclosures of amortized cost. The amendments have the same effective dates as ASU 2016-13 (Topic ASC 326) for entities that have not yet adopted that standard. For entities that early adopted ASU 2016-13 (Topic ASC 326), the amendments are effective for fiscal years beginning after December 15, 2019 and interim periods therein. Entities that early adopted ASU 2016-13 (Topic ASC 326) may early adopt the amendments. In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The new guidance simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The new guidance also improves consistent application of and simplifies U.S. GAAP for other areas of Topic 740 by clarifying and amending the existing guidance. The ASU is effective for fiscal years beginning after December 15, 2020, with early adoption permitted. The Company is currently evaluating the effect of the new guidance. 3. Property and Equipment The Company’s fixed assets consist of its medical equipment held for rental, furniture and equipment, real property and related improvements, and vehicles and other various small equipment. The following table details the Company’s fixed assets: September 30, 2020 December 31, 2019 Medical equipment $ 62,490 $ 56,202 Furniture and equipment 2,606 2,350 Land 2,138 2,138 Buildings 6,132 6,351 Leasehold improvements 290 301 Vehicles 922 1,110 Less: Accumulated depreciation ( 18,261 ) ( 13,680 ) Property and equipment, net of accumulated depreciation and amortization $ 56,317 $ 54,772 Page 13 VIEMED HEALTHCARE, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Tabular dollar amounts expressed in thousands of U.S. Dollars, except per share amounts) (Unaudited) September 30, 2020 and 2019 Depreciation in the amount of $ 2,224,000 and $ 1,465,000 is included in cost of revenue for the three months ended September 30, 2020 and 2019, respectively, and in the amount of $ 6,133,000 and $ 3,937,000 for the nine months ended September 30, 2020 and 2019, respectively. Included in medical equipment above is equipment acquired under finance lease obligations whose cost and accumulated depreciation at September 30, 2020 total $ 8,087,000 and $ 801,000 , respectively. At December 31, 2019, cost and accumulated depreciation on equipment acquired under finance lease obligations was $ 15,680,000 and $ 1,337,000 , respectively. Medical equipment purchases with a cost of $ 2,931,000 and $ 2,817,000 were included in accounts payable at September 30, 2020 and December 31, 2019, respectively. 4. Current Liabilities The Company’s short-term accrued liabilities are included within current liabilities and consist of the following: September 30, 2020 December 31, 2019 Accrued trade payables $ 1,682 $ 1,023 Accrued commissions payable 321 371 Accrued bonuses payable 4,483 2,292 Accrued vacation and payroll 1,577 1,502 Current portion of phantom share liability 4,427 3,129 Accrued other liabilities 303 651 Total accrued liabilities $ 12,793 $ 8,968 5. Debt and lease liabilities Senior Credit Facility On February 20, 2018, the Company entered a Commercial Business Loan Agreement that provides for Term Loans and Lines of Credit with Hancock Whitney Bank. Line of Credit The Company maintains a line of credit in the amount of $ 10.0 million that expires May 1, 2023 under the Commercial Business Loan Agreement. Any amounts advanced on this line will be subject to an interest rate equal to the WSJ prime rate plus a margin of 0.50 %, with a 3.50 % interest rate floor and will be secured by substantially all of the Company's assets. There were no borrowings against this line of credit at September 30, 2020 or December 31, 2019. Commercial Term Notes On May 30, 2019, the Company entered into a term note (the “Building Term Note”) under the Commercial Business Loan Agreement in the principal amount of $ 4,845,000 . The proceeds of the Building Term Note were used to purchase the Company's corporate headquarters. Beginning July 1, 2019, the Company began making monthly payments towards the outstanding balance. The Building Term Note matures on May 30, 2026 and is secured by substantially all of the assets of the borrower, including the real property acquired with the proceeds of the Building Term Note. The Building Term Note bears interest at a variable rate equal to the one month ICE LIBOR index plus a margin of 2.45 % per annum. The Company is required to maintain a loan to value ratio of 85 % with respect to the appraised value of the real property. In connection with the Building Term Note, the Company entered into an interest rate swap transaction (the "Interest Rate Swap Transaction") with Hancock Whitney Bank effectively fixing the interest rate for the Building Term Note at 4.68 %. On September 19, 2019, the Company entered into an additional loan agreement providing for a term note (the “Term Note") under the Commercial Business Loan Agreement in the principal amount of $ 5,000,000 . The proceeds of the Term Note were utilized for general corporate purposes. Beginning October 19, 2019, the Company started making monthly principal payments of $ 139,000 towards the outstanding balance. The Term Note matures on September 19, 2022 and is secured by substantially all of the assets of the borrower. The Term Note bears interest at the rate of 4.60 % per annum. Page 14 VIEMED HEALTHCARE, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Tabular dollar amounts expressed in thousands of U.S. Dollars, except per share amounts) (Unaudited) September 30, 2020 and 2019 The Company incurred immaterial financing costs related to the above term notes. These deferred financing costs are amortized over the term of the loans using the effective interest method. The Company has recognized these term notes, which have terms greater than twelve months, as follows: September 30, 2020 December 31, 2019 Notes payable $ 8,076 $ 9,379 Less: Current portion of notes payable ( 1,815 ) ( 1,750 ) Net long-term notes payable $ 6,261 $ 7,629 Under the terms of the Commercial Business Loan Agreement, the Company is subject to the following financial covenants: Financial Covenant Required Ratio Ratio at September 30, 2020 Total Debt to Adjusted EBITDA (Quarterly) not more than 1.50:1.00 0.35 Fixed Charge Coverage Ratio (Quarterly) not less than 1.35:1.00 2.75 Loan-to-Value Ratio (Quarterly) not more than 0.85 0.71 The Company was in compliance with all covenants under the Commercial Business Term Loan Agreement in effect at September 30, 2020. Leases The Company has recognized finance lease liabilities for medical equipment and operating leases for land and buildings that have terms greater than twelve months, as follows: September 30, 2020 December 31, 2019 Lease liabilities $ 5,159 $ 10,132 Less: Current portion of lease liabilities ( 4,207 ) ( 7,093 ) Net long-term lease liabilities $ 952 $ 3,039 Finance lease liabilities The Company has various finance leases for equipment with an implied interest rate at fixed rates up to 9.64 %, secured by equipment, due between 2020 and 2022. The Company's weighted average interest rate was 3.17 % and 1.83 % for all finance lease liabilities outstanding as of September 30, 2020 and 2019, respectively. At September 30, 2020 and 2019, the weighted average lease term was approximately 0.73 years and 1.01 years, respectively. Interest expense related to these finance lease obligations for the three and nine months ended September 30, 2020 amounted to $ 34,000 and $ 128,000 , respectively. Interest expense related to these finance lease obligations for the three and nine months ended September 30, 2019 amounted to $ 56,000 and $ 102,000 , respectively. Operating lease liabilities The Company has recognized operating lease liabilities that relate primarily to the lease of land and buildings. These leases contain renewal options that we have not included as part of the Company's assessment of the lease term as it is not reasonably certain that we will exercise these options. These lease liabilities are recorded at present value based on a discount rate of 5.50 %, which was based on the Company's incremental borrowing rate at the time of assessment. At September 30, 2020, the weighted average lease term was approximately 3.41 years. Operating rental expenses were $ 191,000 and $ 575,000 for the three and nine months ended September 30, 2020, respectively, and $ 100,000 and $ 278,000 for the three and nine months ended September 30, 2019. The related assets for operating lease liabilities have been included with property and equipment on the Condensed Consolidated Balance Sheets. Page 15 VIEMED HEALTHCARE, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Tabular dollar amounts expressed in thousands of U.S. Dollars, except per share amounts) (Unaudited) September 30, 2020 and 2019 Included within these operating lease liabilities are real property leases for real estate from a related party. Rental payments under these related party lease agreements are $ 20,000 per month, plus taxes, utilities and maintenance. Total rental payments for the use of these properties were $ 58,000 and $ 180,000 for the three and nine months ended September 30, 2020, respectively, and $ 61,000 and $ 182,000 for the three and nine months ended September 30, 2019, respectively. The expense for these related party rents has been included within general and administrative expenses. 6. Fair value measurement Under ASC Topic 820, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (i.e., an exit price). ASC Topic 820 establishes a hierarchy for inputs to valuation techniques used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that reflect assumptions market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company's own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. There are three levels to the hierarchy based on the reliability of inputs, as follows: Level 1 - Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets. Level 2 - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets or liabilities in active markets, or quoted prices for identical or similar assets and liabilities in markets that are not active. Level 3 - Unobservable inputs for the asset or liability. The degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized in Level 3. The Company’s cash and cash equivalents are measured using Level 1 inputs and include cash on hand, deposits in banks, and money market funds. Due to their short-term nature, the carrying amounts reported in the consolidated balance sheets approximate the fair value of cash and cash equivalents. The fair value of debt is classified as Level 2 for the periods presented and approximates its carrying value. Warrants During 2019, the Company had warrants to purchase one common share of the Company denominated in Canadian dollars which is different from the functional currency of the Company, which is U.S. dollars. The conversion feature is treated as a derivative financial liability and the fair value movement during the period is recognized in the Condensed Consolidated Statement of Income and Comprehensive Income. The change in the value of warrants has been recorded as an unrealized (gain) loss on derivative financial liability in the Condensed Consolidated Statements of Income and Comprehensive Income. All unexercised warrants expired during the year ended December 31, 2019. The warrant derivative financial liability was valued using Level 3 inputs from the fair value hierarchy. There were no warrants issued or outstanding during the three and nine month periods ended September 30, 2020. A summary of the change in fair value of warrant conversion liability is as follows for the period ended September 30, 2019: Warrant Conversion Liability Balance December 31, 2018 $ 363 Warrants issued — Unrealized gain on warrant conversion liability ( 363 ) Balance September 30, 2019 $ — Page 16 VIEMED HEALTHCARE, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Tabular dollar amounts expressed in thousands of U.S. Dollars, except per share amounts) (Unaudited) September 30, 2020 and 2019 Derivative instruments and hedging activities The Company has one interest rate swap contract in place, which became effective on May 31, 2019 and has been designated as a cash flow hedge. This swap contract matures on May 30, 2026. This swap contract converts the variable interest rate to a fixed interest rate on borrowings under the Building Term Note. As of September 30, 2020, the notional amount of the interest rate swap was $ 4.7 million and will be amortized over the term of the swap. The fair value was $ 0.5 million (determined based on Level 2 inputs) and is included in Accrued liabilities, as a component of Long-term liabilities as of September 30, 2020. In the first nine months of 2020, losses recognized as a result of ineffectiveness were immaterial. 7. Shareholders' Equity Authorized share capital The Company’s authorized share capital consists of an unlimited number of common shares . Issued and outstanding share capital The Company has only one class of stock outstanding, common shares. The authorized stock consists of an unlimited number of common shares with no stated par value, of which 39,145,182 and 37,952,660 shares were issued and outstanding as of September 30, 2020 and December 31, 2019, respectively. Stock-based compensation The purpose of the Company's RSU and Option Plans (collectively, the "Former Plan") is to provide incentive to employees, directors, officers, management companies, and consultants who provide services to the Company or any of its subsidiaries. The Former Plan is a “fixed” stock plan, whereby the maximum number of the Company's shares reserved for issuance, combined with any equity securities granted under all other compensation arrangements adopted by the Company, may not exceed 7,582,000 shares (equal to 20 % of the issued and outstanding shares of the Company as of the date of the adoption of the Plan). As of September 30, 2020, the Company had outstanding issuances of options of 3,068,000 and restricted stock units of 679,000 under the Former Plan. Effective June 11, 2020 (the "Effective Date"), the Company’s shareholders approved the Company's 2020 Long Term Incentive Plan (the "Omnibus Plan"), and the Former Plan was frozen. No future awards will be made under the Former Plan, and the common shares that were not settled or awarded under the ‎Former Plan as of the Effective Date are available for awards under the Omnibus Plan. The maximum number of common ‎shares that are available for awards under the Omnibus Plan ‎and under any other security based compensation arrangements adopted by the Company, including the ‎Former Plan, may not exceed 7,758,000 shares (equal to 20 % of the issued and outstanding common shares of the Company on the ‎Effective Date). The maximum amount of the foregoing common shares that may be awarded under the Omnibus Plan as “incentive stock options” is 2,600,000 Common Shares. The following table summarizes stock-based compensation for the three and nine months ended September 30, 2020 and 2019 (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Stock-based compensation - options $ 945 $ 745 $ 2,769 $ 2,028 Stock-based compensation - restricted stock units 289 319 812 950 Total $ 1,234 $ 1,064 $ 3,581 $ 2,978 At September 30, 2020, there was approximately $ 3,671,000 of total unrecognized pre-tax stock option expense under our equity compensation plans, which is expected to be recognized over a weighted-average period of 2.16 years. As of September 30, 2020, there was approximately $ 938,000 of total unrecognized pre-tax compensation expense related to outstanding time-based restricted stock units that is expected to be recognized over a weighted-average period of 0.47 years. Page 17 VIEMED HEALTHCARE, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Tabular dollar amounts expressed in thousands of U.S. Dollars, except per share amounts) (Unaudited) September 30, 2020 and 2019 Options The following table summarizes stock option activity for the nine months ended September 30, 2020: Number of options (000's) Weighted average exercise price (1) Weighted average remaining contractual life Aggregate Intrinsic Value (2) Balance December 31, 2019 2,683 $ 3.36 6.7 years $ 7,790 Issued 1,053 6.10 Exercised ( 603 ) 3.20 Expired / Forfeited ( 65 ) 4.81 Balance September 30, 2020 3,068 $ 4.29 8.1 years $ 13,867 (1) For presentation purposes, stock options issued with a CAD exercise price have been translated to USD based on the prevailing exchange rate on the date of grant. (2) The aggregate intrinsic value of options outstanding represents the difference between the exercise price of the option and the closing stock price of our common stock on the last trading day of the period. The aggregate intrinsic value of options outstanding was $ 13,867,000 and options exercisable were $ 5,767,000 at September 30, 2020. For the nine months ended September 30, 2020, 603,297 shares of common stock were issued pursuant to the exercise of stock options. At September 30, 2020, the Company had 1,008,000 exercisable stock options outstanding with a weighted average exercise price of $ 2.94 and a weighted average remaining contractual life of 6.8 years. At December 31, 2019, the Company had 1,037,000 exercisable stock options outstanding with a weighted average exercise price of $ 2.95 and a weighted average remaining contractual life of 3.5 years. The fair value of the stock options has been charged to the Condensed Consolidated Statements of Income and Comprehensive Income and credited to additional paid-in capital over the vesting period, using the Black-Scholes option pricing model calculated using the following assumptions for issuances during the nine months ended September 30, 2020: Exercise price $ 5.70 - $ 10.44 Risk-free interest rate 0.39 % - 1.63 % Expected volatility 65.73 % - 85.38 % Expected term 5.63 - 10 years Expected dividend yield Nil Fair value on date of grant $ 4.10 - $ 7.23 Page 18 VIEMED HEALTHCARE, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Tabular dollar amounts expressed in thousands of U.S. Dollars, except per share amounts) (Unaudited) September 30, 2020 and 2019 Restricted stock units The Company also grants restricted stock units to directors, officers, and employees. The Company accounts for restricted stock units using fair value. The fair value of the restricted stock units has been charged to the Condensed Consolidated Statements of Income and Comprehensive Income and credited to additional paid-in capital over the vesting period, based on the stock price on the date of grant. Restricted stock units vest generally over a one or three -year period. The Company accounts for forfeitures on restricted stock units under ASU 2016-09 and recognizes forfeitures in the period in which they occur. The following table summarizes restricted stock unit activity for the nine months ended September 30, 2020: Number of Restricted Stock Units (000's) Weighted average grant price (1) Weighted average remaining contractual life Aggregate Intrinsic Value (2) Balance December 31, 2019 1,139 $ 2.16 0.55 years $ 7,129 Issued 134 7.19 Vested ( 589 ) 2.33 Expired / Forfeited ( 5 ) 5.70 Balance September 30, 2020 679 $ 2.97 0.47 years $ 5,878 (1) All future equity grants will be awarded in USD, therefore, restricted stock units issued with a CAD grant price have been translated to USD based on the prevailing exchange rate on the date of grant for presentation purposes. (2) The aggregate intrinsic value of time-based restricted stock units outstanding was based on our closing stock price on the last trading day of the period. During the three months ended September 30, 2020, the Company issued 42,147 restricted stock units with a fair value of $ 10.44 per share. During the nine months ended September 30, 2020, the Company issued 134,235 restricted stock units, with a vesting term of one to three years and a fair value between $ 5.70 and $ 10.44 per share. Phantom share units The Company has a phantom share unit plan, which it uses for grants to directors, officers, and employees. Phantom share units granted under the plan are non-assignable and are settled in cash at vesting based on the fair value of the Company's common stock on the vesting date. Phantom share units vest annually over a three -year period. The following table summarizes phantom share unit activity for the nine months ended September 30, 2020: Number of Phantom Share Units (000's) Balance December 31, 2019 1,350 Issued 346 Vested ( 601 ) Expired / Forfeited ( 76 ) Balance September 30, 2020 1,019 Page 19 VIEMED HEALTHCARE, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Tabular dollar amounts expressed in thousands of U.S. Dollars, except per share amounts) (Unaudited) September 30, 2020 and 2019 The cash-settled phantom share units are accounted for as liability awards and are re-measured at fair value each reporting period until they become vested with accrued liability and related expense being recognized over the requisite service period. The change in fair value of the phantom share units has been charged to the Condensed Consolidated Statements of Income and Comprehensive Income and recorded as a liability included in accrued liabilities and long-term accrued liabilities, using a valuation method with the following inputs: Nine Months Ended September 30, 2020 Share price (Nasdaq closing price on September 30, 2020) $ 8.64 Remaining life of phantom share units 0.61 - 2.61 Years Calculated fair value of phantom share units $ 5,159 The total liability associated with phantom share units at September 30, 2020 is $ 5,159,000 , with $ 4,427,000 of this amount included in current accrued liabilities and the remaining portion of $ 732,000 included in long-term accrued liabilities. Expense associated with the phantom stock units is recorded in "Selling, general, and administrative" within the unaudited Condensed Consolidated Statements of Income and Comprehensive Income. The following table summarizes expense associated with the phantom stock units for the three and nine months ended September 30, 2020 and 2019 (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Selling, general, and administrative $ 459 $ 1,054 $ 4,070 $ 5,654 The Company paid cash settlements of $ 4,201,000 and $ 3,386,000 during the nine months ended September 30, 2020 and 2019, respectively, pertaining to vestings of cash-settled phantom stock units. 8. Commitments and Contingencies Litigation We accrue estimates for resolution of any legal and other contingencies when losses are probable and reasonably estimable in accordance with ASC 450, Contingencies (“ASC 450”). No less than quarterly, we review the status of each significant matter underlying a legal proceeding or claim and assess our potential financial exposure. We accrue a liability for an estimated loss if the potential loss from any legal proceeding or claim is considered probable and the amount can be reasonably estimated. Significant judgment is required in both the determination of probability and the determination as to whether the amount of an exposure is reasonably estimable, and accruals are based only on the information available to our management at the time the judgment is made, which may prove to be incomplete or inaccurate or unanticipated events and circumstances may occur that might cause us to change those estimates and assumptions. Furthermore, the outcome of legal proceedings is inherently uncertain, and we may incur substantial defense costs and expenses defending any of these matters. In March 2020, we (through our subsidiary Sleep Management LLC) entered into a purchase order (the “Purchase Order”) with Vyaire Medical, Inc. d/b/a CareFusion Respiratory Technologies (“Vyaire”) for respiratory equipment and paid $ 1.4 million (the “Deposit”) towards the delivery of such respiratory equipment. As of September 30, 2020, outstanding supplier deposits in the amount of $ 0.9 million related to such Deposit are included within other prepaid and other current assets. Vyaire has been unable to deliver the vast majority of the respiratory equipment referenced in the Purchase Order. On July 29, 2020, we (through our subsidiary Sleep Management LLC) filed a lawsuit against Vyaire in the United States District Court for the Western District of Louisiana (the “Court”) seeking a declaratory judgment that the Company is not required to pay any further funds to Vyaire and demanding Vyaire refund all amounts currently held by Vyaire as a result of the Deposit. On September 23, 2020, Vyaire filed its Defense and Counterclaim (“Counterclaim”) with the Court alleging breach of contract and seeking damages of $ 4.7 million, purportedly for the improper cancellation of the Purchase Order. On October 16, 2020, we filed an answer and affirmative defenses with the Court in response to the Counterclaim and intend to pursue further legal action. We continue to believe that we have valid legal and equitable grounds to recover our outstanding Deposit as a result of Vyaire’s failure to deliver the vast majority of the respiratory equipment referenced in the Purchase Order. We have not concluded that a loss Page 20 VIEMED HEALTHCARE, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Tabular dollar amounts expressed in thousands of U.S. Dollars, except per share amounts) (Unaudited) September 30, 2020 and 2019 related to the Counterclaim is probable, nor have we accrued a liability related to this claim. Although a loss may be reasonably possible (as defined in ASC 450), we do not have sufficient information to determine the amount or range of reasonably possible loss with respect to the Counterclaim given that the dispute is in the early stages of the legal process. 9. Other Income "CARES" Act Funds Received The Coronavirus Aid, Relief and Economic Security Act ("CARES Act") created a Provider Relief Fund to support health care-related expenses or lost revenue attributable to the COVID-19 pandemic. The Company received $ 3.5 million of the Provider Relief Funds in April 2020 and has recognized this amount within other income on its Condensed Consolidated Statements of Income. The Department of Health and Human Services has stated that Provider Relief Fund payments are not loans and will not need to be repaid. However, as a condition to the receipt of funds, the Company and any other providers must agree to a detailed set of terms and conditions. CMS has indicated that the terms and conditions may be subject to ongoing changes and reporting. To the extent that reporting requirements and terms and conditions are modified, it may affect the Company’s ability to comply and may require the return of funds. In accordance with the terms of acceptance for the grant, the Company has utilized these funds to prevent, prepare for, and respond to the COVID-19 pandemic. 10. Income Taxes At September 30, 2020 and 2019, the Company had no amounts recorded for uncertain tax positions and does not expect any material changes in uncertain tax benefits during the next 12 months. The Company recognizes interest and penalties related to income tax matters in income tax expense. The CARES Act which was signed into law on March 27, 2020 includes various income and payroll tax provisions. As of September 30, 2020, the CARES Act has not had a material impact on our condensed consolidated financial statements, however, the Company is still analyzing these provisions of the CARES Act. The Company is subject to U.S. federal income tax as well as income tax in various states. The Company is generally not subject to examination by taxing authorities for years prior to 2016. Our annual estimated effective tax benefit rate for 2020 is ( 19.20 )%. Our effective tax rate is based on forecasted annual results which may fluctuate significantly through the rest of the year, in particular due to the uncertainty in our annual forecasts resulting from the unpredictable impact of the COVID-19 pandemic on our operating results. Included in the annual estimated effective tax rate of ( 19.20 )% are discrete permanent differences that make up ( 3.0 )% of the rate and a discrete benefit described below accounting for ( 31.50 )%. The Company recognizes deferred tax assets to the extent that the Company believes that these assets are more likely than not to be realized. In making such a determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. Pursuant to ASC 740, any change in judgment relating to the beginning of the year valuation allowance balance should be recognized discretely in continuing operations in the interim period in which the change occurs. At June 30, 2020, the Company determined that it was more likely than not that the deferred tax asset would be realized, and made an adjustment to the deferred tax asset valuation allowance, which reduced the provision for income taxes by $ 7.8 million. Page 21 VIEMED HEALTHCARE, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Tabular dollar amounts expressed in thousands of U.S. Dollars, except per share amounts) (Unaudited) September 30, 2020 and 2019 11. Earnings Per Share Income per common share is calculated using earnings for the year divided by the weighted average number of shares outstanding during the year . Using the treasury stock method, diluted income per share amounts are calculated giving effect to the potential dilution that would occur if securities or other contracts to issue common shares were exercised or converted to common shares by assuming the proceeds received from the exercise of stock options, restricted stock units, and warrants are used to purchase common shares at the prevailing market rate. The following reflects the earnings and share data used in the basic and diluted earnings per share computations: Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Numerator - basic and diluted: Net income attributable to shareholders $ 2,804 $ 2,853 $ 26,459 $ 6,137 Denominator: Basic weighted-average number of common shares 39,107,640 37,812,921 38,603,267 37,775,775 Diluted weighted-average number of shares 41,155,668 40,051,422 40,377,608 39,768,877 Basic earnings per share $ 0.07 $ 0.08 $ 0.69 $ 0.17 Diluted earnings per share $ 0.07 $ 0.07 $ 0.66 $ 0.15 Denominator calculation from basic to diluted: Basic weighted-average number of common shares 39,107,640 37,812,921 38,603,267 37,775,775 Stock options and other dilutive securities 2,048,028 2,238,501 1,774,341 1,993,102 Diluted weighted-average number of shares 41,155,668 40,051,422 40,377,608 39,768,877 12. Subsequent Events Conversion of Accounts Payable into Short-term Capital Lease Subsequent to September 30, 2020, the Company entered into a capital lease agreement with a third party and, as a result, $ 2.5 million of accounts payable was converted to a short-term lease payable. Page 22 VIEMED HEALTHCARE, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS (Tabular amounts expressed in thousands of US Dollars, except per share amounts) September 30, 2020 and 2019