Attached files
file | filename |
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EX-32.2 - EXHIBIT 32.2 - Nobilis Health Corp. | exhibit32-2.htm |
EX-32.1 - EXHIBIT 32.1 - Nobilis Health Corp. | exhibit32-1.htm |
EX-31.2 - EXHIBIT 31.2 - Nobilis Health Corp. | exhibit31-2.htm |
EX-31.1 - EXHIBIT 31.1 - Nobilis Health Corp. | exhibit31-1.htm |
EX-10.2 - EXHIBIT 10.2 - Nobilis Health Corp. | exhibit10-2.htm |
EX-10.1 - EXHIBIT 10.1 - Nobilis Health Corp. | exhibit10-1.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2016
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________to __________.
COMMISSION FILE NUMBER: 001-37349
NOBILIS HEALTH CORP.
(Exact name of registrant as specified in its charter)
British Columbia | 98-1188172 |
(State or other jurisdiction of | (I.R.S. Employer |
incorporation or organization) | Identification No.) |
11700 Katy Freeway, Suite 300, Houston, Texas | 77079 |
(Address of principal executive offices) | (Zip Code) |
(713)355-8614
(Registrants telephone number,
including area code)
N/A
(Former name, former address and former
fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [ X ] NO
[ ]
(Note: As a voluntary filer not subject to the filing requirements of Sections 13 or 15(d) of the Exchange Act, the registrant has filed all reports pursuant to Section 13 or 15(d) of the Exchange Act during the preceding 12 months as if it were subject to such filing requirements.)
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation
S-T (§232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files).
YES [ X ] NO [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [ ] | Accelerated filer [ X ] |
Non-accelerated filer [ ] | Smaller reporting company [ ] |
Indicate by check mark whether
the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).
YES [ ] NO [ X ]
Indicate the number of shares outstanding of each of the
registrants classes of common stock as of the latest practicable date.
76,781,728 common shares as of July 28, 2016.
TABLE OF CONTENTS
In this Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2016 (Quarterly Report), the terms "Nobilis", "we", "us", "our", "ours", or "the Company" refers to Nobilis Health Corp. and all of its subsidiaries.
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Table of Contents
Part I Financial Information
Item 1. Financial Statements
Nobilis Health Corp.
Consolidated Balance Sheets
June
30, 2016 and December 31, 2015
(in thousands, except share
amounts)
June 30, 2016 |
December 31, 2015 | |||||
(unaudited) | ||||||
Assets |
||||||
Current Assets: |
||||||
Cash |
$ | 18,823 | $ | 15,666 | ||
Trade accounts receivable, net of allowance of $2,494 at June 30, 2016 and $5,165 at December 31, 2015 |
77,608 | 92,569 | ||||
Medical supplies |
4,724 | 4,493 | ||||
Prepaid expenses and other current assets |
3,573 | 2,789 | ||||
Total current assets |
104,728 | 115,517 | ||||
Property and equipment, net |
34,976 | 35,303 | ||||
Intangible assets, net |
18,601 | 19,619 | ||||
Goodwill |
44,833 | 44,833 | ||||
Deferred tax asset |
27,805 | 25,035 | ||||
Other long-term assets |
1,997 | 1,720 | ||||
Total Assets |
$ | 232,940 | $ | 242,027 | ||
Liabilities and Shareholders' Equity |
||||||
Current Liabilities: |
||||||
Trade accounts payable |
$ | 20,588 | $ | 23,381 | ||
Accrued expenses |
13,640 | 16,648 | ||||
Lines of credit |
3,000 | - | ||||
Current portion of capital leases |
3,793 | 5,193 | ||||
Current portion of long-term debt |
1,693 | 1,243 | ||||
Current portion of warrant and stock option derivative liabilities |
801 | 332 | ||||
Other current liabilities |
5,377 | 5,025 | ||||
Total current liabilities |
48,892 | 51,822 | ||||
Lines of credit |
3,500 | 3,000 | ||||
Long-term capital leases, net of current portion |
13,603 | 13,654 | ||||
Long-term debt, net of current portion |
20,397 | 21,469 | ||||
Warrant and stock option derivative liabilities, net of current portion |
983 | 2,619 | ||||
Other long-term liabilities |
3,663 | 3,386 | ||||
Total liabilities |
91,038 | 95,950 | ||||
Commitments and Contingencies |
||||||
Contingently redeemable noncontrolling interest |
9,393 | 12,225 | ||||
Shareholders' Equity: |
||||||
Common shares, no par value, unlimited shares authorized, 76,757,229 and
73,675,979 shares |
- | - | ||||
Additional paid in capital |
216,865 | 211,827 | ||||
Accumulated deficit |
(85,650 | ) | (85,491 | ) | ||
Total shareholders equity attributable to Nobilis Health Corp. |
131,215 | 126,336 | ||||
Noncontrolling interests |
1,294 | 7,516 | ||||
Total shareholders' equity |
132,509 | 133,852 | ||||
Total Liabilities and Shareholders' Equity |
$ | 232,940 | $ | 242,027 |
The accompanying notes are an integral part of the interim unaudited consolidated financial statements.
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Table of Contents
Nobilis Health Corp.
Consolidated Statements of
Operations
(in thousands, except share data)
(unaudited)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||
Revenues: |
||||||||||||
Patient and net professional fees |
$ | 55,176 | $ | 45,366 | $ | 101,533 | $ | 80,424 | ||||
Contracted marketing revenues |
4,668 | 2,839 | 8,150 | 3,649 | ||||||||
Factoring revenues |
2,027 | 662 | 3,461 | 2,645 | ||||||||
Total revenue |
61,871 | 48,867 | 113,144 | 86,718 | ||||||||
Operating expenses: |
||||||||||||
Salaries and benefits |
12,591 | 9,028 | 25,168 | 16,672 | ||||||||
Drugs and supplies |
12,177 | 8,850 | 24,197 | 13,860 | ||||||||
General and administrative |
27,474 | 20,402 | 52,483 | 33,600 | ||||||||
Bad debt expense |
- | 200 | - | 200 | ||||||||
Depreciation and amortization |
1,981 | 955 | 4,510 | 1,592 | ||||||||
Facility operating expenses |
54,223 | 39,435 | 106,358 | 65,924 | ||||||||
Corporate expenses: |
||||||||||||
Salaries and benefits |
2,030 | 1,001 | 3,312 | 1,992 | ||||||||
General and administrative |
4,497 | 6,524 | 10,408 | 12,515 | ||||||||
Legal expenses |
990 | 741 | 2,575 | 1,212 | ||||||||
Depreciation |
76 | 30 | 130 | 56 | ||||||||
Total corporate costs |
7,593 | 8,296 | 16,425 | 15,775 | ||||||||
Income (loss) from operations |
55 | 1,136 | (9,639 | ) | 5,019 | |||||||
Other (income) expense: |
||||||||||||
Change in fair value of warrant and stock option derivative liabilities |
(1,657 | ) | (1,670 | ) | (1,699 | ) | 1,704 | |||||
Interest expense |
687 | 294 | 1,371 | 784 | ||||||||
Other income, net |
(1,159 | ) | (1,321 | ) | (2,813 | ) | (1,469 | ) | ||||
Total other (income) expense |
(2,129 | ) | (2,697 | ) | (3,141 | ) | 1,019 | |||||
Income (loss) before income taxes and noncontrolling interests |
2,184 | 3,833 | (6,498 | ) | 4,000 | |||||||
Income tax (benefit) expense |
(331 | ) | 454 | (2,249 | ) | 606 | ||||||
Net income (loss) |
2,515 | 3,379 | (4,249 | ) | 3,394 | |||||||
Net (loss) income attributable to noncontrolling interests |
(2,291 | ) | 3,745 | (4,090 | ) | 8,242 | ||||||
Net income (loss) attributable to Nobilis Health Corp. |
$ | 4,806 | $ | (366 | ) | $ | (159 | ) | $ | (4,848 | ) | |
Net income (loss) per basic common share |
$ | 0.06 | $ | (0.01 | ) | $ | (0.00 | ) | $ | (0.08 | ) | |
Net income (loss) per fully diluted common share |
$ | 0.06 | $ | (0.01 | ) | $ | (0.00 | ) | $ | (0.08 | ) | |
Weighted average shares outstanding (basic) |
76,754,950 | 63,531,390 | 75,780,695 | 61,872,658 | ||||||||
Weighted average shares outstanding (fully diluted) |
77,616,886 | 63,531,390 | 75,780,695 | 61,872,658 |
The accompanying notes are an integral part of the interim unaudited consolidated financial statements.
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Table of Contents
Nobilis Health Corp.
Consolidated Statements of
Changes in Shareholders Equity
(in thousands, except share amounts)
(unaudited)
Attributable to shareholders | |||||||||||||||||||||
Common Shares | |||||||||||||||||||||
Contingently | |||||||||||||||||||||
Redeemable | |||||||||||||||||||||
Additional Paid In | Accumulated | Equity Attributable | Noncontrolling | Noncontrolling | |||||||||||||||||
Shares | Capital | Deficit | to Nobilis Health | Interest | Total Equity | Interests | |||||||||||||||
BALANCE December 31, 2014 |
59,418,227 | $ | 176,356 | $ | (136,687 | ) | $ | 39,669 | $ | 4,133 | $ | 43,802 | $ | 12,867 | |||||||
Net (loss) income |
- | - | (4,848 | ) | (4,848 | ) | 1,412 | (3,436 | ) | 6,830 | |||||||||||
Deconsolidation of investment |
- | (613 | ) | 356 | (257 | ) | 307 | 50 | - | ||||||||||||
Distributions to noncontrolling interests |
- | - | - | - | (1,846 | ) | (1,846 | ) | (3,798 | ) | |||||||||||
Vesting of restricted stock |
75,000 | - | - | - | - | - | - | ||||||||||||||
Reclassification of vested non-employee stock options |
- | (468 | ) | - | (468 | ) | - | (468 | ) | - | |||||||||||
Exercise of stock warrants |
3,088,091 | 13,160 | - | 13,160 | - | 13,160 | - | ||||||||||||||
Exercise of stock options |
336,121 | 430 | - | 430 | - | 430 | - | ||||||||||||||
Share-based compensation, net |
- | 10,126 | - | 10,126 | - | 10,126 | - | ||||||||||||||
Proceeds from private equity offering |
4,029,668 | 15,598 | - | 15,598 | - | 15,598 | - | ||||||||||||||
Acquisition of Peak |
89,749 | 650 | - | 650 | - | 650 | - | ||||||||||||||
Recoupment of indemnified expenses |
3,830,638 | (5,685 | ) | - | (5,685 | ) | - | (5,685 | ) | - | |||||||||||
BALANCE June 30, 2015 |
70,867,494 | $ | 209,554 | $ | (141,179 | ) | $ | 68,375 | $ | 4,006 | $ | 72,381 | $ | 15,899 | |||||||
|
|||||||||||||||||||||
BALANCE December 31, 2015 |
73,675,979 | $ | 211,827 | $ | (85,491 | ) | $ | 126,336 | $ | 7,516 | $ | 133,852 | $ | 12,225 | |||||||
Net loss |
- | (159 | ) | (159 | ) | (3,918 | ) | (4,077 | ) | (172 | ) | ||||||||||
Distributions to noncontrolling interests |
- | - | - | - | (2,304 | ) | (2,304 | ) | (2,660 | ) | |||||||||||
Vesting of restricted stock |
2,000,000 | - | - | - | - | - | - | ||||||||||||||
Reclassification of vested non-employee stock options |
- | (533 | ) | - | (533 | ) | - | (533 | ) | - | |||||||||||
Exercise of stock options |
1,081,250 | 2,067 | - | 2,067 | - | 2,067 | - | ||||||||||||||
Share-based compensation, net |
- | 3,504 | - | 3,504 | - | 3,504 | - | ||||||||||||||
BALANCE June 30, 2016 |
76,757,229 | $ | 216,865 | $ | (85,650 | ) | $ | 131,215 | $ | 1,294 | $ | 132,509 | $ | 9,393 |
The accompanying notes are an integral part of the interim unaudited consolidated financial statements.
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Table of Contents
Nobilis Health Corp.
Consolidated Statements of Cash
Flows
(in thousands)
(unaudited)
Six months ended June 30, | ||||||
2016 | 2015 | |||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||
Net (loss) income | $ | (4,249 | ) | $ | 3,394 | |
Adjustments to reconcile net (loss) income to net cash provided by operating activities: | ||||||
Depreciation and amortization | 4,640 | 1,648 | ||||
Provision for bad debts | - | 200 | ||||
Share-based compensation | 3,504 | 10,126 | ||||
Change in fair value of warrant and stock option derivative liabilities | (1,699 | ) | 1,704 | |||
Recoupment of indemnified expenses | - | (1,700 | ) | |||
Deferred income taxes | (2,770 | ) | - | |||
Gain on sale of property and equipment | (265 | ) | - | |||
Earnings from equity method investment | (1,078 | ) | - | |||
Amortization of deferred financing fees | 66 | 33 | ||||
Changes in operating assets and liabilities, net of assets acquired and liabilities assumed: | ||||||
Trade accounts receivable | 14,961 | (6,949 | ) | |||
Medical supplies | (231 | ) | (425 | ) | ||
Prepaids and other current assets | (785 | ) | 701 | |||
Other long-term assets | 174 | (39 | ) | |||
Trade accounts payable and accrued liabilities | (5,801 | ) | (2,432 | ) | ||
Other current liabilities | 352 | (942 | ) | |||
Other long-term liabilities | 275 | (103 | ) | |||
Distributions from equity method investments | 1,085 | - | ||||
Net cash provided by operating activities | 8,179 | 5,216 | ||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||
Purchase of property and equipment | (3,027 | ) | (1,177 | ) | ||
Investment in associate | - | (120 | ) | |||
Purchase of equity method investment | (609 | ) | - | |||
Note receivable, net | 150 | (197 | ) | |||
Acquisition of Victory | - | (1,436 | ) | |||
Acquisition of Peak | - | (850 | ) | |||
Deconsolidation of imaging centers and urgent care clinic | - | (166 | ) | |||
Net cash used for investing activities | (3,486 | ) | (3,946 | ) | ||
Distributions to non controlling interests | (4,964 | ) | (5,644 | ) | ||
Proceeds from exercise of stock options | 2,067 | 432 | ||||
Proceeds from exercise of stock warrants | - | 4,335 | ||||
Proceeds from private placement | - | 28,395 | ||||
Payments on capital lease obligations | (1,451 | ) | (304 | ) | ||
Proceeds from line of credit | 3,500 | 1,500 | ||||
Proceeds from debt | - | 20,000 | ||||
Payments of debt | (688 | ) | (25,227 | ) | ||
Deferred financing fees | - | (657 | ) | |||
Net cash (used for) provided by financing activities | (1,536 | ) | 22,830 | |||
NET INCREASE IN CASH | 3,157 | 24,100 | ||||
CASH Beginning of period | 15,666 | 7,568 | ||||
CASH End of period | $ | 18,823 | $ | 31,668 |
The accompanying notes are an integral part of the interim unaudited consolidated financial statements.
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Table of Contents
Nobilis Health Corp.
Notes to Consolidated
Financial Statements
NOTE 1 COMPANY DESCRIPTION
Nobilis Health Corp. (Nobilis or the Company) was incorporated on March 16, 2007 under the name "Northstar Healthcare Inc." pursuant to the provisions of the British Columbia Business Corporations Act. On December 5, 2014, Northstar Healthcare Inc. changed its name to Nobilis Health Corp. The Company owns and manages health care facilities in the States of Texas and Arizona, consisting primarily of ambulatory surgery centers and acute-care surgical hospitals. In 2014, through its acquisition of Athas Health, LLC (Athas), the Company expanded its service offering within the health care industry to include providing contracted marketing services and accounts receivable factoring.
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
The accompanying interim consolidated financial statements have not been audited by the Companys independent registered public accounting firm, except that the consolidated balance sheet at December 31, 2015, is derived from previously audited consolidated financial statements. In the opinion of management, all material adjustments, consisting of normal recurring adjustments, necessary for fair presentation have been included. These interim consolidated financial statements include all accounts of the Company. All significant intercompany transactions and accounts have been eliminated upon consolidation.
Certain reclassifications have been made to prior period amounts to conform to current period financial statement classifications. The reclassifications included in these comparative consolidated financial statements are (i) a change in presentation of other comprehensive income and (ii) a reclassification from cost of goods sold to operating expenses. The reclassifications were deemed to be immaterial to the consolidated financial statements both individually and in the aggregate.
These consolidated financial statements have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (SEC) for interim financial information. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States of America (U.S. GAAP) for complete financial statements. Therefore, these interim consolidated financial statements should be read in conjunction with the Companys audited consolidated financial statements and notes thereto included in the Companys Annual Report on Form 10-K for the year ended December 31, 2015 (2015 Annual Report) filed with the SEC on March 15, 2016. The operating results for interim periods are not necessarily indicative of results that may be expected for any other interim period or for the full year.
There have been no material changes to the Companys critical accounting policies or estimates from those disclosed in the 2015 Annual Report.
Recent Accounting Pronouncements
In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments-Overall (Topic 825): Recognition and Measurement of Financial Assets and Financial Liabilities. (ASU 2016-01) This update changes how entities account for and measure the fair value of certain equity investments and updates the presentation and disclosure of certain financial assets and liabilities. This new ASU is effective for annual and interim periods beginning on or after December 15, 2017, and for interim periods within those fiscal years, with early adoption permitted. The Company is currently evaluating the impact that ASU 2016-01 will have on the Companys consolidated financial position and disclosures.
In March 2016, the FASB issued ASU 2016-07, Investments - Equity Method and Joint Ventures (Topic 323). This amendment eliminates the requirement to retroactively adopt the equity method of accounting when a previous investment becomes qualified as a result of an increase in the level of ownership interest or degree of influence. ASU 2016-07 is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal periods. Early adoption is permitted. The Company adopted this ASU in the first quarter of 2016 with no impact on the Companys consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal Versus Agent Considerations (Reporting Revenue Gross Versus Net). (ASU 2016-08) The amendments address how an entity should assess whether it is the principal or the agent in contracts that include three or more parties. The ASU clarifies that an entity should evaluate whether it is the principal or the agent for each specified good or service promised in a contract with a customer. The amendments affect the guidance in ASU 2014-09 which is not yet effective. The effective date and transition requirements for the amendments in this ASU are the same as the effective date and transition of ASU 2014-09, which will be effective for the Company for reporting periods beginning after December 15, 2017. The Company does not expect these amendments to have a material effect on its consolidated financial statements.
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In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. ASU No. 2016-09 impacts several aspects of the accounting for share-based payment transactions, including classification of certain items on the Consolidated Statement of Cash Flows and accounting for income taxes. Specifically, the ASU requires that excess tax benefits and tax deficiencies (the difference between the deduction for tax purposes and the compensation cost recognized for financial reporting purposes) be recognized as income tax expense or benefit in the Consolidated Statement of Operations, introducing a new element of volatility to the provision for income taxes. ASU No. 2016-09 is effective on January 1, 2017, with early adoption permitted. The transition method varies for each of the areas in the ASU. The Company is currently evaluating the impact of adopting this new accounting standard on its results of operations and financial position.
In April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing, which clarifies the guidance in ASU 2014-09 regarding assessing whether promises to transfer goods or services are distinct, and whether an entity's promise to grant a license provides a customer with a right to use or right to access the entity's intellectual property. The effective date and transition requirements for the amendments in this ASU are the same as the effective date and transition of ASU 2014-09, which will be effective for the Company for reporting periods beginning after December 15, 2017. The Company does not expect these amendments to have a material effect on its consolidated financial statements.
In May 2016, the FASB issued ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients. (ASU 2016-12) This Update provides for amendments to ASU 2014-09, amending the guidance on transition, collectability, noncash consideration and the presentation of sales and other similar taxes. Specifically, ASU 2016-12 clarifies that, for a contract to be considered completed at transition, all (or substantially all) of the revenue must have been recognized under legacy GAAP. In addition, ASU 2016-12 clarifies how an entity should evaluate the collectability threshold and when an entity can recognize nonrefundable consideration received as revenue if an arrangement does not meet the standards contract criteria. The effective date and transition requirements for the amendments in this ASU are the same as the effective date and transition of ASU 2014-09, which will be effective for the Company for reporting periods beginning after December 15, 2017. The Company does not expect these amendments to have a material effect on its consolidated financial statements.
NOTE 3 SUPPLEMENTAL CASH FLOWS
The supplemental cash flows information for the six months ended June 30, 2016 and 2015 are comprised of the following (in thousands):
Six months ended June 30, | ||||||
2016 | 2015 | |||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||
Cash paid for interest | $ | 1,329 | $ | 846 | ||
Cash paid for taxes | $ | 2,257 | $ | 603 | ||
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: | ||||||
Non-cash deconsolidation of property and equipment | $ | - | $ | 2,828 | ||
Non-cash deconsolidation of goodwill | $ | - | $ | 701 |
NOTE 4 ACQUISITIONS
Scottsdale Liberty Hospital (SLH)
In November 2015, the Company announced the closing of a transaction to jointly own and operate Freedom Pain Hospital (n/k/a SLH) located in Scottsdale, Arizona. The Company acquired a 60% interest and management control of the entity which was formed to own and operate the successor hospital.
The fair values assigned to certain assets acquired and liabilities assumed in relation to the Company's acquisition have been prepared on a preliminary basis with information currently available and are subject to change. Specifically, the Company is still in the process of assessing the fair value of a capital lease associated with the real property being utilized by the facility, property and equipment and the terms of an anti-dilution provision of the agreement to assess if it is a derivative and if a fair value needs to be estimated. During the measurement period, the Company made an adjustment of $0.9 million from current to long-term portion of capital leases reflected in the table below. The Company expects to finalize its analysis during 2016.
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The following table summarizes the fair values of the identifiable assets acquired and liabilities assumed at the date of acquisition (in thousands):
November 1, 2015 |
|||
Net assets acquired: | |||
Trade accounts receivable | $ | 82 | |
Prepaid expenses and other current assets | 36 | ||
Inventory | 69 | ||
Property and equipment | 13,266 | ||
Other long-term assets | 113 | ||
Goodwill | 6,932 | ||
Tradename | 160 | ||
Hospital license | 12 | ||
Net assets acquired | $ | 20,670 | |
Net liabilities assumed: | |||
Trade accounts payable | $ | 2,668 | |
Accrued liabilities | 419 | ||
Current portion of capital leases | 658 | ||
Long-term portion of capital leases | 12,213 | ||
Total liabilities assumed | $ | 15,958 | |
Consideration: | |||
Cash, net of cash acquired | $ | 3,180 | |
Noncontrolling Interest | 1,532 | ||
Total consideration | $ | 4,712 |
Unaudited Supplemental Pro Forma Information
The following unaudited supplemental pro forma financial information includes the results of operations for SLH, and is presented as if the acquired company had been consolidated as of the beginning of the year immediately preceding the year in which the company was acquired. The Company utilized all historical data that was available and practicable to obtain. The pro forma financial information excluded certain information that was not practicable to obtain for Herman Drive Surgical Hospital (f/k/a Victory Medical Center Houston) and Plano Surgical Hospital (PSH) due to the bankruptcy proceedings of their former parent company, Victory Parent Company, LLC. The unaudited supplemental pro forma financial information has been provided for illustrative purposes only and does not purport to be indicative of the actual results that would have been achieved by combining the companies for the periods presented, or of the results that may be achieved by the combined companies in the future. Further, results may vary significantly from the results reflected in the following unaudited supplemental pro forma financial information because of future events and transactions, as well as other factors.
There were no acquisitions during the period ended June 30, 2016, thus the consolidated financial statements for the period include full financial results of all consolidated subsidiaries. The following table shows our pro forma results for the six months ended June 30, 2015 (in thousands, except per share data):
June 30, 2015 |
|||
Revenue | $ | 87,291 | |
Income from operations | $ | 4,352 | |
Net income attributable to noncontrolling interests | $ | 7,985 | |
Net loss attributable to common stockholders | $ | (5,483 | ) |
Net loss per basic common share | $ | (0.09 | ) |
NOTE 5 TRADE ACCOUNTS RECEIVABLE, NET
A detail of trade accounts receivable, net as of June 30, 2016 and December 31, 2015 is as follows (in thousands):
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June 30, 2016 | December 31, 2015 | |||||
Trade accounts receivable | $ | 78,031 | $ | 95,114 | ||
Allowance for doubtful accounts | (2,494 | ) | (5,165 | ) | ||
Receivables transferred | (699 | ) | (298 | ) | ||
Receivables purchased | 2,770 | 2,918 | ||||
Trade accounts receivable, net | $ | 77,608 | $ | 92,569 |
Bad debt expense was nil for the three and six months ended June 30, 2016 and was $0.2 million for the three and six months ended June 30, 2015.
From time to time, we transfer to third parties certain of our accounts receivable payments on a non-recourse basis in return for advancement on payment to achieve a faster cash collection. As of June 30, 2016 and December 31, 2015, there remained a balance of $0.7 million and $0.3 million, respectively, in transferred receivables pursuant to the terms of the original agreement. For the three months ended June 30, 2016 and 2015, the Company received advanced payments of $0.2 million and $0.5 million, respectively. During the same time period, the Company transferred $2.0 million and $2.1 million of receivables, net of advancement of payment. Concurrently, upon collection of these transferred receivables, payment will be made to the transferee. For the six months ended June 30, 2016 and 2015, the Company received advanced payments of $0.5 million and $1.1 million, respectively. During the same time period, the Company transferred $4.1 million and $3.8 million of receivables, respectively. Concurrently, upon collection of these transferred receivables, payment will be made to the transferee.
Athas Health (Athas), Peak Neuromonitoring (Peak) and Nobilis Surgical Assist (First Assist) purchase receivables from physicians, at a discount, on a non-recourse basis. The discount and purchase price vary by specialty and are recorded at the date of purchase, which generally occurs 30 to 45 days after the accounts are billed. These purchased receivables are billed and collected by Athas, Peak and First Assist and they retain 100% of what is collected after paying the discounted purchase price. Following the transfer of the receivable, the transferor has no continued involvement and there are no restrictions on the receivables. Gross revenue from purchased receivables was $3.5 million and $2.1 million for the three months ended June 30, 2016 and 2015, respectively. Gross revenue from purchased receivables was $6.6 million and $5.0 million for the six months ended June 30, 2016 and 2015, respectively. Revenue, net of the discounted purchase price, was $2.0 million and $0.7 million for the three months ended June 30, 2016 and 2015, respectively. Revenue, net of the discounted purchase price, was $3.5 million and $2.6 million for the six months ended June 30, 2016 and 2015, respectively. Accounts receivable for purchased receivables was $2.8 million and $2.9 million for the six months ended June 30, 2016 and year-ended December 31, 2015, respectively. Revenue from receivables purchased is recorded in the factoring revenue line item within the Consolidated Statements of Operations.
NOTE 6 INVESTMENTS IN ASSOCIATES
During the first quarter of 2015, The Company completed the deconsolidation of two imaging centers and one urgent care clinic in Houston, which consisted of the following entities: Spring Northwest Management, LLC, Spring Northwest Operating, LLC, Willowbrook Imaging, LLC, GRIP Medical Diagnostics, LLC and KIRPA Holdings, LLC. The Company resigned as the manager of these facilities resulting in loss of control and its rights to exercise significant influence. The Company retained investments in these facilities that are accounted for as cost method investments beginning January 1, 2015. The carrying value as of June 30, 2016 and December 31, 2015 was $0.7 million. The investments are classified as other long-term assets in the Consolidated Balance Sheets.
In March 2016, the Company acquired a 58% interest in Athelite Holdings LLC ("Athelite") a holding company with a 70% interest in Dallas Metro Surgery Center LLC ("Dallas Metro"), a company formed to provide management services to a Hospital Outpatient Department (HOPD). In April 2016, Athelite interest in Dallas Metro was reduced to 62%. The Athelite investment is accounted for as an equity method investment as the Company did not obtain the necessary level of control for the investment to be accounted for as a business combination. This is due to the fact that the Company does not have the ability to directly appoint a majority of the board members of Dallas Metro or independently make strategic operational decisions. The carrying value as of June 30, 2016 was $0.6 million. The investment is classified as a other long-term asset in the Consolidated Balance Sheets.
NOTE 7 FINANCIAL INSTRUMENTS AND CONCENTRATION
In common with all other businesses, the Company is exposed to risks that arise from its use of financial instruments. This note describes the Companys objectives, policies and processes for managing those risks and the methods used to measure them. Further quantitative information in respect to these risks is presented throughout these consolidated financial statements.
Principal financial instruments
The principal financial instruments used by the Company, from which financial instrument risk arises, are as follows:
| Accounts receivable and other receivables | |
| Investments in associates |
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| Accounts payable, accrued liabilities and other current liabilities | |
| Other liabilities and notes payable | |
| Capital leases | |
| Lines of credit | |
| Debt | |
| Warrants | |
| Non-employee stock options |
The carrying amounts of the Companys cash, accounts receivable and other receivables, accounts payable, accrued liabilities, other current liabilities and other liabilities as reflected in the consolidated financial statements approximate fair value due to their short term maturity. The estimated fair value of the Company's other long-term debt instruments approximate their carrying amounts as the interest rates approximate the Company's current borrowing rate for similar debt instruments of comparable maturity, or have variable interest rates.
Financial instruments - risk management
The Companys financial instrument risks include, but are not limited to the following:
| Credit risk | |
| Fair value risk | |
| Foreign exchange risk | |
| Other market price risk | |
| Liquidity risk | |
| Interest rate risk |
Credit risk
Credit risk is the risk of financial loss to the Company if a patient, non-partner surgeon or insurance company fails to meet its contractual obligations. The Company, in the normal course of business, is exposed mainly to credit risk on its accounts receivable from insurance companies, other third-party payors, and physicians. Accounts receivables are net of applicable bad debt reserves, which are established based on specific credit risk associated with insurance companies, payors and other relevant information.
Liquidity risk
Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due and arises from the Companys management of working capital. The Companys objective to managing liquidity risk is to ensure that it will have sufficient cash to allow it to meet its liabilities when they become due. To achieve this objective, it seeks to maintain cash balances (or agreed credit facilities) to meet expected requirements. The liquidity risk of the Company and its subsidiaries is managed centrally by the Companys finance function. The Company believes that there are currently no concerns of its ability to meet its liabilities as they become due for the foreseeable future.
The following tables set forth certain information with respect to the Companys payor concentration. Patient and net professional fee revenues by payor are summarized below for the applicable periods:
MEDICAL SEGMENT
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||
Payors | 2016 | 2015 | 2016 | 2015 | |||||||||
Private insurance and other private pay | 96.4% | 95.0% | 96.2% | 95.0% | |||||||||
Workers compensation | 3.1% | 4.6% | 3.4% | 4.5% | |||||||||
Medicare | 0.5% | 0.4% | 0.4% | 0.5% | |||||||||
Total |
100.0% | 100.0% | 100.0% | 100.0% |
MARKETING SEGMENT
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||
Payors | 2016 | 2015 | 2016 | 2015 | |||||||||
Private insurance and other private pay | 100.0% | 100.0% | 100.0% | 100.0% | |||||||||
Workers compensation | 0.0% | 0.0% | 0.0% | 0.0% | |||||||||
Medicare | 0.0% | 0.0% | 0.0% | 0.0% | |||||||||
Total |
100.0% | 100.0% | 100.0% | 100.0% |
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CONSOLIDATED SEGMENTS
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||
Payors | 2016 | 2015 | 2016 | 2015 | |||||||||
Private insurance and other private pay | 96.9% | 95.5% | 96.7% | 95.3% | |||||||||
Workers compensation | 2.7% | 4.1% | 3.0% | 4.2% | |||||||||
Medicare | 0.4% | 0.4% | 0.3% | 0.5% | |||||||||
Total | 100.0% | 100.0% | 100.0% | 100.0% |
Two facilities represent approximately 81.3% and 75.9% of the Companys contracted marketing revenue for the three and six months ended June 30, 2016, and two facilities represent approximately 72.0% of the Companys contracted marketing accounts receivable as of June 30, 2016.
Market risk
Market risk is the risk that the fair value of future cash flows of financial instruments will fluctuate due to changes in interest rates and/or foreign currency exchange rates.
Interest rate risk
The Company entered into a revolving line of credit that, from time to time, may increase interest rates based on market index.
Foreign exchange risk
Foreign exchange risk arises because the Company has certain expenses that are incurred in Canadian dollars.
The Company is also exposed to currency risk on purchases made from vendors based in Canada. The Company has Canadian denominated cash (Cdn) of $0.2 million and a nominal amount of trade payables at June 30, 2016. The Company had Cdn of $0.3 million and a nominal amount of trade payables at December 31, 2015.
NOTE 8 ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
The following table presents a summary of items comprising accrued expenses and other current liabilities in the accompanying Consolidated Balance Sheets as of June 30, 2016 and December 31, 2015 (in thousands):
June 30, 2016 | December 31, 2015 | |||||
Accrued expenses: | ||||||
Accrued salaries and related benefits | $ | 3,345 | $ | 5,309 | ||
Other | 10,295 | 11,339 | ||||
Total accrued expenses | $ | 13,640 | $ | 16,648 | ||
Other current liabilities: | ||||||
Estimated amounts due to third party payors | $ | 5,102 | $ | 3,795 | ||
Other | 275 | 1,230 | ||||
Total other current liabilities | $ | 5,377 | $ | 5,025 |
NOTE 9 OTHER LONG-TERM LIABILITIES
The Company assumed real property leases as part of certain acquisitions which required the Company to pay above market rentals through the remainder of the lease terms. Of the $3.7 million balance in other long-term liabilities at June 30, 2016, approximately $3.3 million of that balance relates to unfavorable leases. The unfavorable lease liability is amortized as a reduction to rent expense over the contractual periods the Company is required to make rental payments under the leases. Estimated amortization of unfavorable leases for the five years and thereafter subsequent to December 31, 2015 is $0.2 million for the remainder of 2016, $0.3 million for 2017, 2018, 2019, 2020, and $2.2 million thereafter.
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NOTE 10 LINES OF CREDIT
On March 31, 2015, the Company secured a $5.0 million revolving line of credit from Healthcare Financial Services, LLC (f/k/a General Electric Capital Corporation), or HFS (the HFS Revolver) maturing in March 2020. The HFS Revolver bears interest at a rate of 4% plus LIBOR per annum (effective rate of 5.24% at June 30, 2016) and requires quarterly payments. Principal amounts borrowed under the HFS Revolver may be repaid and re-borrowed periodically. The HFS Revolver is collateralized in the same manner as the HFS term loan discussed in NOTE 11 Debt. As of June 30, 2016 and December 31, 2015, $3.5 million and $3.0 million, respectively, were outstanding under the HFS Revolver.
The revolving line of credit is subject to certain restrictive covenants in conjunction with the HFS term loan, as defined in NOTE 11 - Debt.
On July 30, 2015, the Company issued a $1.5 million letter of credit to the Landlord of the PSH (PSH Landlord) facility in connection with the execution of the hospital facility lease. The PSH Landlord shall have the right to draw upon the letter of credit in an event of default. The letter of credit is secured by the $5.0 million HFS Revolver.
On May 18, 2016, the Company secured a $3.0 million revolving line of credit from Legacy Texas Bank (the Legacy Revolver). The Legacy Revolver bears interest at a rate of 4% plus LIBOR per annum (4.47% at June 30, 2016) on drawn funds and requires monthly payments of interest. Monthly payments of principal commenced in June 2016. As of June 30, 2016, the outstanding balance was $3.0 million, which matures within one year.
NOTE 11 DEBT
On March 31, 2015, the Company secured a $20.0 million term loan from HFS (the HFS Term Loan). The HFS Term Loan bears interest at a rate of 4% plus LIBOR per annum (effective rate of 5.24% at June 30, 2016) and requires quarterly payments of principal and interest until it matures in March 2020. The HFS Term Loan provides for a 0.70% LIBOR floor. The HFS Term Loan is collateralized by the accounts receivable and physical equipment of all of the Companys 100% owned subsidiaries as well as the Companys ownership interest in all less than wholly owned subsidiaries.
The HFS Term Loan primarily served to refinance all previously held debt and lines of credit. Debt issuance costs associated with the new credit facility approximated $0.6 million. The issuance costs are a direct deduction from the carrying value of the HFS Term Loan, amortized using the interest method and reported as interest expense on our statement of operations. As of June 30, 2016, the outstanding balance of the HFS Term Loan was $18.6 million.
The Company entered into the Sixth Amendment to Credit Agreement (the "Sixth Amendment") dated as of August 1, 2016 among Northstar Healthcare Acquisitions, L.L.C., HFS and the Credit Parties named therein amending, among other things, added a cap on Investments in Nobilis Health Anesthesia Network, PLLC of $2.0 million; increased the permitted indebtedness of the Company pursuant to that certain Loan Agreement, dated as of July 30, 2015 between PSH and Legacy Texas Bank from $7.0 million to $7.05 million; modified the maximum leverage ratio as of March 31, 2016 to 3.05 to 1.00; and modified the definition of "Subsidiary" to exclude the following entities: Athelite, Dallas Metro, Marsh Lane Surgical Hospital, LLC, Nobilis Health Network, Inc. ("NHN") and the subsidiaries of NHN. As a result, the Company was in compliance with its covenants under the HFS Term Loan as of June 30, 2016.
In addition, as required by the Sixth Amendment, the Company shall satisfy the following conditions subsequent on or prior to August 22, 2016 (the “Post-Closing Date”), as such date may be extended by HFS in its sole discretion; delivery by the Company, a joinder agreement adding an additional company facility to the credit parties and the termination and delivery of certain UCC financing statements. If the Company fails to satisfy such conditions subsequent by the Post-Closing Date, then the Sixth Amendment and the limited waiver shall automatically and without further action be rendered null and void and the specified events of default shall be reinstated. In addition, the Company shall pay to HFS on the Post-Closing Date, a sum equal to 0.50% of the aggregate amount of the commitments.
On July 30, 2015, the Company secured a $4.5 million term loan from Legacy Texas Bank (the Legacy Bank Term Loan). The term loan bears interest at a rate of 4% plus LIBOR per annum (4.47% at June 30, 2016) and requires monthly payments of interest. Monthly payments of principal will commence in August 2016. The Legacy Bank Term Loan matures in July 2020 and is subordinated to the Companys term loan and revolver with HFS. As of June 30, 2016, the outstanding balance was $4.0 million.
As of June 2016, the Legacy Texas Bank Term Loan requires the Company to maintain a fixed charge coverage ratio of 1.05 to 1.00 and to maintain its days cash on hand of no less than 30 days. The Company was in compliance with its covenants under the Legacy Bank Term Loan as of June 30, 2016.
Loan origination fees are deferred and the net amount is amortized over the contractual life of the related loans.
Debt at June 30, 2016 and December 31, 2015 consisted of the following (in thousands):
June 30, 2016 | December 31, 2015 | |||||
Gross debt | $ | 22,586 | $ | 23,275 | ||
Less: unamortized loan fees | 496 | 563 | ||||
Debt, net of unamortized loan fees | 22,090 | 22,712 | ||||
Less: current portion of term loan | 1,693 | 1,243 | ||||
Long-term debt, net of unamortized loan fees | $ | 20,397 | $ | 21,469 |
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NOTE 12 FAIR VALUE MEASUREMENTS
The Company measures certain financial assets and liabilities at fair value on a recurring basis, including warrant and stock option derivative liabilities. There have been no transfers between fair value measurement levels during the six months ended June 30, 2016 and 2015.
The following table summarizes our assets and liabilities measured at fair value on a recurring basis as of June 30, 2016 and December 31, 2015, aggregated by the level in the fair value hierarchy within which those measurements fall (in thousands):
Fair Value Measurements Using | ||||||||||||
Quoted Prices in | ||||||||||||
Active Markets for | ||||||||||||
Identical Assets and | Significant Other | Significant | ||||||||||
Liabilities | Observable Inputs | Unobservable Inputs | ||||||||||
(Level 1) | (Level 2) | (Level 3) | Total | |||||||||
December 31, 2015: | ||||||||||||
Warrant and stock option derivative liabilities | $ | - | $ | - | $ | 2,951 | $ | 2,951 | ||||
Total | $ | - | $ | - | $ | 2,951 | $ | 2,951 | ||||
June 30, 2016: | ||||||||||||
Warrant and stock option derivative liabilities | $ | - | $ | - | $ | 1,784 | $ | 1,784 | ||||
Total | $ | - | $ | - | $ | 1,784 | $ | 1,784 |
In certain cases, where there is limited activity or less transparency around inputs to valuation, securities are classified as Level 3 within the valuation hierarchy. Level 3 liabilities that were measured at estimated fair value on a recurring basis consist of warrant and stock option derivative liabilities. The estimated fair values of the warrant and stock option derivative liabilities were measured using the Black-Scholes valuation model (refer to Note 14 Warrants and Options Liabilities). Due to the nature of valuation inputs, the valuation of the warrants is considered a Level 3 measurement.
NOTE 13 SHARE BASED COMPENSATION
Restricted Share Units (RSUs)
The Company recorded stock compensation expense relative to RSUs of nil and $5.1 million for the three months ended June 30, 2016 and 2015, respectively. The Company recorded stock compensation expense relative to RSUs of nil and $5.4 million for the six months ended June 30, 2016 and 2015, respectively. There were no grants during the three or six months ended June 30, 2016 and 2015, respectively.
The Company had no outstanding RSUs at June 30, 2016 and 4,650,000 outstanding RSUs at June 30, 2015.
Stock Options
The Company granted a total of 112,075 and 2,107,075 stock options during the three and six months ended June 30, 2016, respectively. Of the options granted during the six months ended June 30, 2016, 222,075 of those vest immediately and 1,885,000 vest ratably over a three-year period.
The Company granted a total of 3,166,782 stock options during the year ended December 31, 2015. Of the options granted during the year ended December 31, 2015, 451,782 of those vest immediately, 450,000 vest ratably over a one-year period, 1,865,000 vest ratably over a three-year period, and 400,000 cliff vest at the end of a five-year period.
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The following table summarizes stock option activity for the six months ended June 30, 2016 and 2015:
Weighted- | Weighted-Average | ||||||||
Shares Underlying | Average Exercise | Remaining Life | |||||||
Options | Price | (years) | |||||||
Outstanding at January 1, 2015 | 3,118,218 | $ | 1.45 | 9.80 | |||||
Granted | 1,301,782 | $ | 4.33 | 9.77 | |||||
Exercised | (336,120 | ) | $ | 1.24 | - | ||||
Forfeited | (407,213 | ) | $ | 1.14 | - | ||||
Outstanding at June 30, 2015 | 3,676,667 | $ | 2.13 | 9.69 | |||||
Exercisable at June 30, 2015 | 1,257,611 | $ | 2.59 | 9.76 | |||||
Outstanding at January 1, 2016 | 5,465,000 | $ | 2.97 | 9.20 | |||||
Granted | 2,107,075 | $ | 2.03 | 9.60 | |||||
Exercised | (1,081,250 | ) | $ | 1.91 | - | ||||
Forfeited | (500,000 | ) | $ | 1.64 | - | ||||
Outstanding at June 30, 2016 | 5,990,825 | $ | 2.89 | 9.10 | |||||
Exercisable at June 30, 2016 | 2,129,575 | $ | 2.24 | 8.70 |
The above table includes 710,000 options issued to non-employees, 650,000 of which are still outstanding at June 30, 2016. Refer to Note 14 Warrants and Options Liabilities for discussion regarding the classification of these options within the consolidated balance sheet.
The total intrinsic value of stock options exercised was $1.3 million and $2.7 million during the six months ended June 30, 2016 and 2015, respectively. The total intrinsic value for all in-the-money vested outstanding stock options at June 30, 2016 was $1.6 million. Assuming all stock options outstanding at June 30, 2016 were vested, the total intrinsic value of in-the-money outstanding stock options would have been $3.0 million at June 30, 2016.
The Company recorded total stock compensation expense relative to employee stock options of $1.7 million and $1.0 million for the three months ended June 30, 2016 and 2015, respectively, and $3.4 million and $3.0 million for the six months ended June 30, 2016 and 2015, respectively.
The fair values of the employee stock options used in recording compensation expense are computed using the Black-Scholes option pricing model. The table below shows the assumptions used in the model for options awarded during the six months ended June 30, 2016 and 2015.
Six months ended June 30, | ||||||
2016 | 2015 | |||||
Expected price volatility | 116% - 117% | 113% - 122% | ||||
Risk free interest rate | 1.33% - 1.53% | 1.34% - 1.87% | ||||
Expected annual dividend yield | 0% | 0% | ||||
Expected option term (years) | 5 - 6 | 5 - 6 | ||||
Expected forfeiture rate | 0.5% - 11.0% | 0% - 8.8% | ||||
Grant date fair value per share | $ | 1.73 - $2.34 | $ | 2.53 - $6.10 | ||
Grant date exercise price per share | $ | 1.99 - $2.78 | $ | 2.97 - $4.94 |
For stock options, the Company recognizes share-based compensation net of estimated forfeitures and revises the estimates in the subsequent periods if actual forfeitures differ from the estimates. Forfeiture rates are estimated based on historical experience as well as expected future behavior.
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NOTE 14 WARRANTS AND OPTIONS LIABILITIES
Warrants and Options Issued in Private Placements
The Company issued warrants and compensatory options in connection with private placements completed in December 2013, September 2014 and May 2015. These warrants and options have exercise prices denominated in Canadian dollars and as such may not be considered indexed to our stock which is valued in U.S dollars. Hence, these warrants and options are classified as liabilities under the caption Warrants and Options Derivative Liability and recorded at estimated fair value at each reporting date, computed using the Black-Scholes valuation method. Changes in the liability from period to period are recorded in the Consolidated Statements of Operations under the caption Change in fair value of warrant and stock option derivative liabilities.
The estimated fair values of warrants and options accounted for as liabilities were determined on the date of the private placements and at each balance sheet date following using the Black Scholes pricing model with the following inputs:
Six months ended June 30, | ||||||
2016 | 2015 | |||||
Risk free interest rate | 0.26% - 0.59% | 0.11% - 0.64% | ||||
Expected life in years | 0.25 - 1.15 | 0.5 - 1.9 | ||||
Expected volatility | 91% - 112% | 71% - 82% | ||||
Expected dividend yield | 0% | 0% |
The changes in fair value of the warrants and options (excluding non-employees) liability during the six months ended June 30, 2016 and 2015 were as follows (in thousands):
2016 | 2015 | |||||
Balance at beginning of year | $ | 2,109 | $ | 6,657 | ||
Issuance of warrants and options | - | 12,797 | ||||
Transferred to equity upon exercise | - | (8,823 | ) | |||
Change in fair value recorded in earnings | (1,308 | ) | 1,109 | |||
Balance as of June 30, 2016 and 2015 | $ | 801 | $ | 11,740 |
The following warrants and options were outstanding at June 30, 2016:
Number of warrants and | Remaining contractual | ||||||||
Exercise price in Cdn$ | options | life (years) | |||||||
2014 Warrants | $ | 1.80 | 9 | 0.25 | |||||
2014 Options | $ | 1.37 | 117,810 | 0.25 | |||||
2015 Warrants | $ | 11.50 | 3,923,834 | 0.90 | |||||
2015 Options | $ | 9.00 | 392,383 | 0.90 | |||||
Outstanding and exercisable as of June 30, 2016 | 4,434,036 |
Options Issued to Non-Employees
As discussed in Note 13 Share Based Compensation, in 2014 the Company issued options to professionals providing services to the organization. These professionals do not meet the definition of an employee under U.S. GAAP. At June 30, 2016, there were 650,000 options outstanding to these non-employees.
Under U.S. GAAP, the value of these option awards is determined at the performance completion date. The Company recognizes expense for the estimated total value of the awards during the period from their issuance until performance completion since the professional services are being rendered during this time. The total expense recognized is adjusted to the final value of the award as determined on the performance completion date.
The estimated values of the option awards are determined using the Black Scholes pricing model with the following inputs:
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Six months ended June 30, | ||||||
2016 | 2015 | |||||
Risk free interest rate | 0.86% - 1.01% | 0.28% - 1.85% | ||||
Expected life in years | 4 - 5 | 1 - 6 | ||||
Expected volatility | 112% - 116% | 76% - 119% | ||||
Expected dividend yield | 0% | 0% |
For the three months ended June 30, 2016 and 2015, the Company recorded expense for non-employee stock options of a nominal amount and $0.6 million, respectively. For the six months ended June 30, 2016 and 2015, the Company recorded expense for non-employee stock options of $0.1 million and $1.7 million, respectively.
Options issued to non-employees are reclassified from equity to liabilities on the performance completion date. Under U.S. GAAP, such options may not be considered indexed to our stock because they have exercise prices denominated in Canadian dollars. Hence, these will be classified as liabilities under the caption Warrant and stock option liabilities and recorded at estimated fair value at each reporting date, computed using the Black-Scholes valuation method. Changes in the liability from period to period will be recorded in the Consolidated Statements of Operations under the caption Change in fair value of warrant and stock option liabilities. At June 30, 2016, there were no unexercised non-employee options requiring liability classification as the performance completion date has not been reached.
NOTE 15 EARNINGS PER SHARE
Basic net earnings attributable to Nobilis common shareholders, per common share, excludes dilution and is computed by dividing net earnings attributable to Nobilis common shareholders by the weighted-average number of common shares outstanding during the period. Diluted net earnings attributable to Nobilis common shareholders, per common share, is computed by dividing net earnings attributable to Nobilis common shareholders by the weighted-average number of common shares outstanding during the period plus any potential dilutive common share equivalents, including shares issuable upon the vesting stock option awards, warrants and RSUs as determined under the treasury stock method. A detail of the Companys earnings per share is as follows (in thousands except for share and per share amounts):
Three months ended June 30, | Six months ended June 30, | |||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||
Basic: | ||||||||||||
Net income (loss) attributable to Nobilis Health Corp. | $ | 4,806 | $ | (366 | ) | $ | (159 | ) | $ | (4,848 | ) | |
Weighted average common shares outstanding | 76,754,950 | 63,531,390 | 75,780,695 | 61,872,658 | ||||||||
Net income (loss) per common share | $ | 0.06 | $ | (0.01 | ) | $ | (0.00 | ) | $ | (0.08 | ) | |
Diluted: | ||||||||||||
Net income (loss) attributable to Nobilis Health Corp. | $ | 4,806 | $ | (366 | ) | $ | (159 | ) | $ | (4,848 | ) | |
Weighted average common shares outstanding | 76,754,950 | 63,531,390 | 75,780,695 | 61,872,658 | ||||||||
Dilutive effect of stock options, warrants, RSUs | 861,936 | - | - | - | ||||||||
Weighted average common shares outstanding assuming dilution | 77,616,886 | 63,531,390 | 75,780,695 | 61,872,658 | ||||||||
Net income (loss) per fully diluted share | $ | 0.06 | $ | (0.01 | ) | $ | (0.00 | ) | $ | (0.08 | ) |
NOTE 16 NONCONTROLLING INTERESTS
Noncontrolling interests at June 30, 2016 and December 31, 2015 represent an 8.1% interest in The Palladium for Surgery - Houston, Ltd, 75% interest in the Medical Ambulatory Suites, L.P., 65% interest in Microsurgery Institute, LLC., 2.3% interest in Houston Microsurgery Institute, LLC., 50% in Northstar Healthcare Dallas Management, LLC., 65% in NHC ASC Dallas, LLC., 49% in First Nobilis, LLC., 40% in First Nobilis Hospital Management, LLC., 45% in Hermann Drive Surgical Hospital, LP., and 40% in Perimeter Road Surgical Hospital, LLC.
Agreements with the third party equity owners in NHC - ASC Dallas and First Nobilis give these owners limited rights to require the Company to repurchase their equity interests upon the occurrence of certain events, none of which were probable of occurring as of June 30, 2016 and December 31, 2015. The contingently redeemable noncontrolling interests associated with these entities are classified in the Companys Consolidated Balance Sheets as temporary or mezzanine equity. Changes in contingently redeemable noncontrolling interests are as follows (in thousands):
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NHC - ASC Dallas | First Nobilis | Total | |||||||
Balance at January 1, 2015 | $ | 6,654 | $ | 6,213 | $ | 12,867 | |||
Distributions | (3,892 | ) | (7,617 | ) | (11,509 | ) | |||
Net income attributable to noncontrolling interests | 631 | 10,236 | 10,867 | ||||||
Total contingently redeemable noncontrolling interests at December 31, 2015 | $ | 3,393 | $ | 8,832 | $ | 12,225 | |||
Balance at January 1, 2016 | $ | 3,393 | $ | 8,832 | $ | 12,225 | |||
Distributions | (2,060 | ) | (600 | ) | (2,660 | ) | |||
Net income (loss) attributable to noncontrolling interests | 2 | (174 | ) | (172 | ) | ||||
Total contingently redeemable noncontrolling interests at June 30, 2016 | $ | 1,335 | $ | 8,058 | $ | 9,393 |
Certain of our consolidated subsidiaries that are less than wholly owned meet the definition of a Variable Interest Entity (VIE), and we hold voting interests in all such entities. We consolidate the activities of VIEs for which we are the primary beneficiary. In order to determine whether we own a variable interest in a VIE, we perform qualitative analysis of the entitys design, organizational structure, primary decision makers and relevant agreements. Such variable interests include our voting interests, and may also include other interests and rights, including those gained through management contracts.
Since our core business is the management and operation of health care facilities, our subsidiaries that are determined to be VIEs represent entities that own, manage and operate such facilities. Voting interests in such entities are typically owned by us, by physicians practicing at these facilities (or entities controlled by them) and other parties associated with the operation of the facilities. In forming such entities, we typically seek to retain operational control and, as a result, in some cases, voting rights we hold are not proportionate to the economic share of our ownership in these entities, which causes them to meet the VIE definition. We consolidate such VIEs if we determine that we are the primary beneficiary because (i) we have the power to direct the activities that most significantly impact the economic performance of the VIE via our rights and obligations associated with the management and operation of the VIEs health care facilities, and (ii) as a result of our obligation to absorb losses and the right to receive residual returns that could potentially be significant to the VIE, which we have through our equity interests.
The following table summarizes the carrying amount of the assets and liabilities of our material VIEs included in the Companys consolidated balance sheets (after elimination of intercompany transactions and balances) (in thousands):
June 30, 2016 | December 31, 2015 | |||||
Total cash and short term investments | $ | 709 | $ | 191 | ||
Total accounts receivable | 6,478 | 8,660 | ||||
Total other current assets | 1,693 | 1,582 | ||||
Total property and equipment | 17,624 | 5,227 | ||||
Total other assets | 49 | 144 | ||||
Total assets | $ | 26,553 | $ | 15,804 | ||
Total accounts payable | $ | 3,190 | $ | 2,286 | ||
Total other liabilities | 6,190 | 7,059 | ||||
Total accrued liabilities | 2,383 | 2,664 | ||||
Long term - capital lease | 12,118 | 780 | ||||
Noncontrolling interest | (6,604 | ) | (1,488 | ) | ||
Total liabilities | $ | 17,277 | $ | 11,301 |
NOTE 17 INCOME TAXES
The Company is a corporation subject to federal income tax at a statutory rate of 35% of pretax earnings. The Company estimates an annual effective income tax rate of 30.7% for U.S. and none for Canada based on projected results for the year and applies this rate to income before taxes to calculate income tax expense. The following items caused the second quarter effective income tax rate to be significantly different from the statutory rate:
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Canada is excluded from the worldwide annual effective tax rate calculation because Canada has losses but does not expect to realize them, which reduces the second quarter effective tax rate by approximately 4% for the six months ended June 30, 2016. |
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All of the Partnerships earnings are included in the Companys net income; however, the Company is not required to record income tax expense or benefit with respect to the portion of the Partnerships earnings allocated to its noncontrolling public limited partners, which reduces the second quarter effective tax rate by approximately 5.8% for the six months ended June 30, 2016. | |
| ||
|
The Company adjusted the projected income for the year, which increased the estimated federal statutory tax rate from 34% to 35%. The adjustment to the existing deferred tax assets and liabilities increases the second quarter effective tax rate by approximately 12.5% for the six months ended June 30, 2016. | |
| ||
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The second quarter effective tax rate includes a discrete item for the stock compensation shortfall, which reduces the effective tax rate by approximately 4.8% for the six months ended June 30, 2016. The net tax benefit for the three and six months ended June 30, 2016 was $0.3 million and $2.2 million, respectively, resulting in an effective tax rate of approximately -15.4% and 34.6% respectively. The net tax benefit include $0.3 million and $0.5 million of state tax expense, respectively. The Company did not recognize any federal or foreign tax expense or benefit for the three and six months ended June 30, 2015 as the Company had a full valuation allowance against deferred tax assets at that time. The state tax expense for the three and six months ended June 30, 2015 was $0.5 million and $0.6 million, respectively. |
On April 22, 2016, the Company received notification from the Internal Revenue Service to examine our December 31, 2014 and 2013 Federal income tax return. Based on management tax analysis, the Company did not have any uncertain tax positions as of June 30, 2016.
NOTE 18 BUSINESS SEGMENT INFORMATION
A summary of the business segment information for the three months ended June 30, 2016 and 2015 is as follows (in thousands):
Three months ended June 30, 2016 | ||||||||||||
Medical | ||||||||||||
Services | Marketing | Corporate | Total | |||||||||
Revenues | $ | 55,295 | $ | 6,576 | $ | - | $ | 61,871 | ||||
Operating expenses | 50,084 | 4,139 | - | 54,223 | ||||||||
Corporate costs | - | - | 7,593 | 7,593 | ||||||||
(Loss) income from operations | 5,211 | 2,437 | (7,593 | ) | 55 | |||||||
Interest expense | 352 | 2 | 333 | 687 | ||||||||
Change in fair value of warrant and option liabilities | - | - | (1,657 | ) | (1,657 | ) | ||||||
Other income | (310 | ) | (128 | ) | (721 | ) | (1,159 | ) | ||||
(Loss) income before income taxes | $ | 5,169 | $ | 2,563 | $ | (5,548 | ) | $ | 2,184 | |||
Other data: | ||||||||||||
Depreciation and amortization expense | $ | 1,593 | $ | 388 | $ | 76 | $ | 2,057 | ||||
Income tax expense (benefit) | $ | 281 | $ | 47 | $ | (659 | ) | $ | (331 | ) | ||
Capital expenditures | $ | 1,206 | $ | - | $ | 296 | $ | 1,502 |
Three months ended June 30, 2015 | ||||||||||||
Medical | ||||||||||||
Services | Marketing | Corporate | Total | |||||||||
Revenues | $ | 43,644 | $ | 5,223 | $ | - | $ | 48,867 | ||||
Operating expenses | 34,696 | 4,739 | - | 39,435 | ||||||||
Corporate costs | - | - | 8,296 | 8,296 | ||||||||
(Loss) income from operations | 8,948 | 484 | (8,296 | ) | 1,136 | |||||||
Interest expense | - | 1 | 293 | 294 | ||||||||
Change in fair value of warrant and option liabilities | - | - | (1,670 | ) | (1,670 | ) | ||||||
Other income | (3 | ) | (320 | ) | (998 | ) | (1,321 | ) | ||||
(Loss) income before income taxes | $ | 8,951 | $ | 803 | $ | (5,921 | ) | $ | 3,833 | |||
Other data: | ||||||||||||
Depreciation and amortization expense | $ | 612 | $ | 343 | $ | 30 | $ | 985 | ||||
Income tax expense | $ | 400 | $ | 54 | $ | - | $ | 454 | ||||
Capital expenditures | $ | 878 | $ | 127 | $ | - | $ | 1,005 | ||||
Non-cash acquisition of property | $ | 4,860 | $ | - | $ | - | $ | 4,860 | ||||
Non-cash acquisition of intangibles and goodwill | $ | 11,998 | $ | - | $ | - | $ | 11,998 |
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A summary of the business segment information for the six months ended June 30, 2016 and 2015 is as follows (in thousands):
Six months ended June 30, 2016 | ||||||||||||
Medical | ||||||||||||
Services | Marketing | Corporate | Total | |||||||||
Revenues | $ | 101,503 | $ | 11,641 | $ | - | $ | 113,144 | ||||
Operating expenses | 97,600 | 8,758 | - | 106,358 | ||||||||
Corporate costs | - | - | 16,425 | 16,425 | ||||||||
(Loss) income from operations | 3,903 | 2,883 | (16,425 | ) | (9,639 | ) | ||||||
Interest expense | 745 | 3 | 623 | 1,371 | ||||||||
Change in fair value of warrant and option liabilities | - | - | (1,699 | ) | (1,699 | ) | ||||||
Other income | (1,483 | ) | (248 | ) | (1,082 | ) | (2,813 | ) | ||||
(Loss) income before income taxes | $ | 4,641 | $ | 3,128 | $ | (14,267 | ) | $ | (6,498 | ) | ||
Other data: | ||||||||||||
Depreciation and amortization expense | $ | 3,462 | $ | 1,048 | $ | 130 | $ | 4,640 | ||||
Income tax expense (benefit) | $ | 457 | $ | 71 | $ | (2,777 | ) | $ | (2,249 | ) | ||
Intangible assets | $ | 5,292 | $ | 13,309 | $ | - | $ | 18,601 | ||||
Goodwill | $ | 25,822 | $ | 19,011 | $ | - | $ | 44,833 | ||||
Capital expenditures | $ | 2,731 | $ | - | $ | 296 | $ | 3,027 | ||||
Total assets | $ | 146,251 | $ | 42,838 | $ | 43,851 | $ | 232,940 | ||||
Total liabilities | $ | 56,750 | $ | 5,103 | $ | 29,185 | $ | 91,038 |
Six months ended June 30, 2015 | ||||||||||||
Medical | ||||||||||||
Services | Marketing | Corporate | Total | |||||||||
Revenues | $ | 77,488 | $ | 9,230 | $ | - | $ | 86,718 | ||||
Operating expenses | 58,063 | 7,861 | - | 65,924 | ||||||||
Corporate costs | - | - | 15,775 | 15,775 | ||||||||
(Loss) income from operations | 19,425 | 1,369 | (15,775 | ) | 5,019 | |||||||
Interest expense | - | 80 | 704 | 784 | ||||||||
Change in fair value of warrant and option liabilities | - | - | 1,704 | 1,704 | ||||||||
Other income | (124 | ) | (320 | ) | (1,025 | ) | (1,469 | ) | ||||
(Loss) income before income taxes | $ | 19,549 | $ | 1,609 | $ | (17,158 | ) | $ | 4,000 | |||
Other data: | ||||||||||||
Depreciation and amortization expense | $ | 901 | $ | 691 | $ | 56 | $ | 1,648 | ||||
Income tax expense | $ | 527 | $ | 79 | $ | - | $ | 606 | ||||
Intangible assets | $ | 5,739 | $ | 14,476 | $ | - | $ | 20,215 | ||||
Goodwill | $ | 12,645 | $ | 19,011 | $ | - | $ | 31,656 | ||||
Capital expenditures | $ | 1,365 | $ | 127 | $ | - | $ | 1,492 | ||||
Non-cash acquisition of property | $ | 4,860 | $ | - | $ | - | $ | 4,860 | ||||
Non-cash acquisition of intangibles and goodwill | $ | 11,998 | $ | - | $ | - | $ | 11,998 | ||||
Total assets | $ | 85,714 | $ | 41,545 | $ | 26,259 | $ | 153,518 | ||||
Total liabilities | $ | 23,168 | $ | 5,604 | $ | 36,467 | $ | 65,239 |
NOTE 19 RELATED PARTY TRANSACTIONS
The minority interest holder of First Nobilis Hospital, a fully consolidated entity, is also a partial owner of First Street Hospital, L.P. and First Street Surgical Center, L.P., both of which have an ongoing business relationship with the Company. At June 30, 2016, the Company has a net amount due from these related parties of $0.6 million. In addition, the Company leases certain medical equipment and facility space from these related parties. Equipment lease costs of approximately $0.5 million and $0.6 million were incurred during the quarter ended June 30, 2016 and 2015, respectively. Facility lease costs of approximately $0.4 million were incurred during both the three months ended June 30, 2016 and 2015. Equipment lease costs of approximately $1.1 million were incurred during both the six months ended June 30, 2016 and 2015, respectively. Facility lease costs of approximately $0.9 million were incurred during both the six months ended June 30, 2016 and 2015, respectively.
In March 2016, the Company acquired an interest in Athelite, a holding company which owns an interest in Dallas Metro, a company formed to provide management services to an HOPD. The Athelite investment is accounted for as an equity method investment (refer to Note 6 Investments in Associates). At June 30, 2016, the Company had $1.1 million in accounts receivable from Dallas Metro. The Company also rents, on a monthly basis, certain medical equipment to Dallas Metro and subleases operation facility to Benton Transitional.
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Physician Related Party Transactions
Nobilis maintains certain medical directorship, consulting and marketing agreements with various physicians who are also equity owners in Nobilis entities. Material related party arrangements of this nature are described below:
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In October 2014 the Company entered into a marketing services agreement with an entity controlled by a physician equity owner. In June 2015, the Company expanded the relationship with this physician equity owner to include consulting, medical directorship and on-call agreements. The Company has paid $1.2 million and $1.6 million to the marketing services entity as of June 30, 2016 and 2015, respectively. The Company has paid to the physician equity owner $1.1 million and nil in fees owed pursuant to the service agreements as of June 30, 2016 and 2015, respectively. | |
|
In July 2014, the Company entered into a marketing services agreement with a physician equity owner and an entity owned by that physician equity owners brother. The Company has paid $0.6 million and $0.2 million to the marketing services entity as of June 30, 2016 and 2015, respectively. | |
|
In September 2013, the Company entered into a book deal with a physician equity owner. In March 2015, the Company entered into a marketing agreement with that physician equity owner and a marketing services company owned by the physician equity owners father. The Company has paid $2.2 million and $1.4 million to the marketing services entity as of June 30, 2016 and 2015, respectively. |
NOTE 20 COMMITMENTS AND CONTINGENCIES
Litigation
In the normal course of our business, we are subject to legal proceedings brought by or against us and our subsidiaries. In the opinion of management, the amount of ultimate liability with respect to these actions will not materially impact the financial position, results of operations or liquidity of the Company.
Shareholder Lawsuits
After the Company announced it would be restating its 2014 annual financial statements and 2015 first and second quarter interim financial statements, one complaint, Schott v. Nobilis Health Corp. et al, was filed in the United States District Court for the Southern District of Texas against the Company, our former chief executive officer and our current chief financial officer. The complaint seeks class action status on behalf of our shareholders and alleges violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 arising out of the restatement and seeks undisclosed damages. The defendants intend to vigorously defend against these claims and filed a motion to dismiss the consolidated complaint for failure to plead particularized facts supporting a strong inference of scienter on the part of the individual defendants. In response, the Plaintiff filed an amended complaint on March 7, 2016. The Company subsequently filed a motion to dismiss the amended complaint for failure to plead particularized facts supporting a strong inference of scienter on the part of the individual defendants. On June 1, 2016 the court heard oral arguments on the Companys pending motion to dismiss. The motion is under advisement. At this early stage, we are not yet able to determine the likelihood of loss, if any, arising from this matter.
In addition, a statement of claim (complaint), Vince Capelli v Nobilis Health Corp. et. al, was filed on January 8, 2016 in the Ontario Superior Court of Justice under court file number CV-16-544173 naming Nobilis Health Corp., certain current and former officers and the Companys former auditors as defendants. The statement of claim seeks to advance claims on behalf of the plaintiff and on behalf of a class comprised of certain of our shareholders related to, among other things, alleged certain violations of the Ontario Securities Act and seeks damages in the amount of C$80 million plus interest. The defendants intend to vigorously defend against these claims. At this early stage, we are not yet able to determine the likelihood of loss, if any, arising from this matter.
NOTE 21 SUBSEQUENT EVENTS
The Company entered into the Sixth Amendment that among other things, added a cap on Investments in Nobilis Health Anesthesia Network, PLLC of $2.0 million; increased the permitted indebtedness of the Company pursuant to that certain Loan Agreement, dated as of July 30, 2015 between PSH and Legacy Texas Bank from $7.0 million to $7.05 million; modified the maximum leverage ratio as of March 31, 2016 to 3.05 to 1.00; and modified the definition of "Subsidiary" to exclude the following entities: Athelite, Dallas Metro, Marsh Lane Surgical Hospital, LLC, Nobilis Health Network, Inc. ("NHN") and the subsidiaries of NHN. As a result, the Company was in compliance with its covenants under the HFS Term Loan as of June 30, 2016.
In addition, as required by the Sixth Amendment, the Company shall satisfy the following conditions subsequent on or prior to August 22, 2016 (the “Post-Closing Date”), as such date may be extended by HFS in its sole discretion; delivery by the Company, a joinder agreement adding an additional company facility to the credit parties and the termination and delivery of certain UCC financing statements. If the Company fails to satisfy such conditions subsequent by the Post-Closing Date, then the Sixth Amendment and the limited waiver shall automatically and without further action be rendered null and void and the specified events of default shall be reinstated. In addition, the Company shall pay to HFS on the Post-Closing Date, a sum equal to 0.50% of the aggregate amount of the commitments.
On August 1, 2016, Northstar Healthcare Acquisitions, LLC, a Delaware limited liability company (Buyer), and the Company, executed an asset purchase agreement (the Purchase Agreement) whereby the Buyer agreed to acquire from Dr. L. Philipp Wall (Owner) substantially all of the operating assets of (i) Arizona Center for Minimally Invasive Surgery, LLC, an Arizona limited liability company (ACMIS), (ii) L. Philipp Wall, M.D., P.C., an Arizona professional corporation (PC), and (iii) Arizona Vein & Vascular Center, LLC, an Arizona limited liability company and wholly owned subsidiary of PC (AVVC and with ACMIS and PC, each a Seller and collectively Sellers) (the Transaction). Buyer, NHC, Sellers and Owner are referred to collectively as the Parties and each individually as a Party.
The material provisions in the Purchase Agreement and related transactions are described below.
The Purchase Agreement
Upon the closing of the Transaction, the Buyer will receive substantially all of the operating assets of Sellers, consisting of inventory, fixed assets and certain intellectual property in exchange for an aggregate purchase price of approximately $22.0 million consisting of $17.5 million cash, $2.25 million worth of the Companys common stock (the Closing Shares), and $2.25 million in the form of a convertible promissory note between Buyer and ACMIS.
In addition, the Sellers may receive an additional earn out payment based on
the growth in trailing twelve month earnings before interest, income taxes, depreciation and amortization (EBITDA) of the new vascular division on the
twelve-month anniversary of closing (as compared to the trailing twelve month
EBITDA for the twelve months prior to closing). The earn out payment shall be
equal to fifty percent (50%) of such growth.
A portion of the cash purchase price in the amount of $1.05 million will be held back pursuant to Article VI
of the Purchase Agreement and will be subject to the Purchase Agreements
indemnifications. On the twelve-month anniversary of closing, fifty percent
(50%) of the amount held back, less any amounts paid as, or claimed as,
indemnification, will be paid to the Owner. The remaining amounts held back,
less any amounts paid as, or claimed as, indemnification, will be paid to the
Owner on the twenty-four-month anniversary of closing.
The Closing Shares will be issued at a price per share based on the NYSE MKT closing price of the Company's common shares on the day prior to Closing. The Closing Shares will be restricted under Rule 144, and will also be subject to an additional contractual lock-up provisions, which lift in one-quarter increments on the twelve-month, fifteen-month, eighteen-month and twenty-first month anniversaries of closing.
In addition to receiving substantially all of the operating assets of Sellers,
the Company and Buyer (or one or more assignees thereof) will assume liabilities related
to Sellers capital leases, Sellers accounts payable, Sellers non-debt
liabilities arising post-closing, and all taxes related to the purchased assets
from and after the date of signing. Certain assets and liabilities will remain
with Sellers as described in more detail in the Purchase Agreement. The Company and
Buyer (or one or more assignees thereof) will make offers of employment to
substantially all of Sellers employees.
The Transaction is subject to customary closing conditions. In the event that
the Transaction does not close within 90 days of the execution of the Purchase
Agreement, Sellers shall be entitled to receive from NHC and Buyer liquidated
damages in the amount of $0.3 million.
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations Forward-Looking Statements
This Quarterly Report and the documents that are incorporated herein by reference in this Quarterly Report contain certain forward-looking statements within the meaning of Canadian and United States securities laws, including the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, as amended. Forward-looking statements include all statements that do not relate solely to historical or current facts and may be identified by the use of words including, but not limited to the following: may, believe, will, expect, project, estimate, anticipate, plan, continue or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy. These forward-looking statements are based on current plans and expectations and are subject to a number of risks, uncertainties and other factors which could significantly affect current plans and expectations and our future financial condition and results. These factors, which could cause actual results, performance and achievements to differ materially from those anticipated, include, but are not limited to the following:
|
our ability to successfully maintain effective internal controls over financial reporting, including the impact of material weaknesses identified by management and our ability to remediate such control deficiencies; | |
|
our ability to implement our business strategy, manage the growth in our business, and integrate acquired businesses; | |
|
the risk of litigation and investigations, and liability claims for damages and other expenses not covered by insurance; | |
|
the risk that payments from third-party payers, including government healthcare programs, may decrease or not increase as costs increase; | |
| adverse developments affecting the medical practices of our physician limited partners; | |
| our ability to maintain favorable relations with our physician limited partners; | |
| our ability to grow revenues by increasing case and procedure volume while maintaining profitability; | |
| failure to timely or accurately bill for services; | |
| our ability to compete for physician partners, patients and strategic relationships; | |
| the risk of changes in patient volume and patient mix; | |
|
the risk that laws and regulations that regulate payments for medical services made by government healthcare programs could cause our revenues to decrease; | |
|
the risk that contracts are cancelled or not renewed or that we are not able to enter into additional contracts under terms that are acceptable to us; and | |
| the risk of potential decreases in our reimbursement rates. |
The foregoing are significant factors we think could cause our actual results to differ materially from expected results. There could be additional factors besides those listed herein that also could affect us in an adverse manner.
This Quarterly Report should be read completely and with the understanding that actual future results may be materially different from what we expect. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date hereof, when evaluating the information presented in this Quarterly Report or other disclosures because current plans, anticipated actions, and future financial conditions and results may differ from those expressed in any forward-looking statements made by or on behalf of Nobilis.
We have not undertaken any obligation to publicly update or revise any forward-looking statements. All of our forward-looking statements speak only as of the date of the document in which they are made or, if a date is specified, as of such date. Subject to mandatory requirements of applicable law, we disclaim any obligation or undertaking to provide any updates or revisions to any forward-looking statement to reflect any change in our expectations or any changes in events, conditions, circumstances or information on which the forward-looking statement is based. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the foregoing factors and the risk factors set forth elsewhere in this report and in our 2015 Annual Report filed with the SEC on March 15, 2016.
The following discussion relates to the Company and its consolidated subsidiaries and should be read in conjunction with our consolidated financial statements and accompanying notes included under Part I, Item 1Financial Statements of this Quarterly Report, as well as our consolidated financial statements, accompanying notes and Managements Discussion and Analysis of Financial Condition and Results of Operations (MD&A) included in our 2015 Annual Report.
Executive Overview
Our operations consist primarily of two reportable business segments, the Medical Segment and the Marketing Segment, each of which is described in more detail in the following paragraphs. Our Medical Segment owns and/or manages outpatient surgery centers and surgical hospitals. It focuses on improving patient outcomes by providing minimally invasive procedures that can be performed in low-cost, outpatient settings. Our business also utilizes innovative direct-to-patient marketing and proprietary technologies to drive patient engagement and education. We provide these marketing services to the facilities that comprise our Medical Segment; we also provide these marketing services to third parties as a stand-alone business line, which is a separate reportable business segment (the Marketing Segment).
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Medical Segment
Our Medical Segment broadly includes our ownership and operation of healthcare facilities (the Nobilis Facilities)(which include outpatient surgery centers and hospitals) and ancillary service providers (Nobilis Ancillary Service Lines).
There are nine Nobilis Facilities, consisting of four hospitals (the Nobilis Hospitals) (three in Texas and one in Arizona) and five ambulatory surgery centers (the Nobilis ASCs)(three in Houston, Texas, one in Dallas, Texas and one in Scottsdale, Arizona). We earn revenue in our Medical Segment from the facility fees or technical fees third party payors or to patients for the services rendered at the Nobilis Facilities. The Nobilis Facilities are each licensed in the state where they are located and provide surgical procedures in a limited number of clinical specialties, which enables them to develop routines, procedures and protocols to maximize operating efficiency and productivity while offering an enhanced healthcare experience for both physicians and patients. These clinical specialties include orthopedic surgery, podiatric surgery, ear nose and throat (ENT), pain management, gastro-intestinal, gynecology and general surgery. The Nobilis ASCs do not offer the full range of services typically found in traditional hospitals, allowing the Nobilis ASCs to operate with lower operating expenses. The Nobilis Hospitals do offer the services typically found in traditional hospitals and, as a result, have ability to take on more complex cases and cases that may require an overnight stay.
There are three Nobilis Ancillary Service Lines: intraoperative monitoring, surgical assist and anesthesia. Peak Neuromonitoring oversees our intraoperative monitoring service line, and Nobilis Surgical Assist oversees our surgical assist service line. There are several small subsidiaries through which we provide anesthesia services. Over time, and provided that third party payors do not materially lower reimbursements, the Company plans to add ancillary service lines such as laboratory services and imaging.
Marketing Segment
Our Marketing Segment provides marketing services, patient education services and patient care coordination management services to the Nobilis Facilities, to third party facilities in states where we currently do not operate, and to physicians. We market several minimally- invasive medical procedures and brands, which include the following:
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North American Spine: promotion of minimally invasive spine procedures (pain management musculoskeletal, musculoskeletal and spine) |
|
Migraine Treatment Centers of America: promotion of procedures related to chronic migraine pain (interventional headache procedure) |
| NueStep: a surgical procedure designed to treat pain in the foot, ankle and leg (podiatry) |
| Evolve-The Experts in Weight Loss Surgery: promotion of surgical weight loss procedures (bariatrics) |
| Minimally Invasive Reproductive Surgery Institute (MIRI): promotion of womens health related procedures |
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Onward Orthopedics: promotion of general orthopedics, sports medicine related to orthopedics (orthopedics, pain management musculoskeletal, and musculoskeletal interventions) |
We do not directly provide medical services to patients; rather, we identify candidates for our branded procedures, educate these potential patients about the relevant procedure and direct those patients to affiliated physicians who diagnosis and treat those patients at affiliated facilities. Through our Marketing Segment, we have contractual relationships with facilities and physicians in several states.
We earn service fees from our partner facilities that, depending on the laws of the state in which a partner facility is located, are either charged as a flat monthly fee or are calculated based on a portion of the facility fee revenue generated by the partner facility for a given procedure.
Our revenues from physician-related services are, depending on the laws of the state in which a partner-physician practices, either earned directly from professional fees or through the purchase of accounts receivable. In Texas, we engage physicians through entities exempt from Texas corporate practice of medicine laws that directly earn professional fees for partner-physician services and, in turn, pay partner-physicians a reasonable fee for rendering those professional services. In other states, we manage our partner-physicians practices and purchase the accounts receivable of those practices through accounts receivable purchase agreements.
Recent Developments
On August 1, 2016, Northstar Healthcare Acquisitions, L.L.C., a wholly owned subsidiary of the Company (the “Buyer”), and the Company executed an asset purchase agreement (the “Purchase Agreement”) whereby the Buyer agreed to acquire from Dr. L. Philipp Wall (“Owner”) substantially all of the operating assets of Arizona Center for Minimally Invasive Surgery, LLC, an Arizona limited liability company (“ACMIS”), L. Philipp Wall, M.D., P.C., an Arizona professional corporation (“PC”) and Arizona Vein & Vascular Center, LLC, an Arizona limited liability company and wholly owned subsidiary of PC (“AVVC” and with ASMIS and PC, each a “Seller” and collectively the “Sellers”) (the “Transaction”).
Upon closing of the Transaction, the Buyer will receive substantially all of the operating assets of Sellers, consisting of inventory, fixed assets, and certain intellectual property in exchange for an aggregate purchase price of approximately $22.0 million, consisting of $17.5 million cash, $2.25 million worth of the Company’s common shares, and $2.25 million in the form of a convertible promissory note between Buyer and ACMIS.
Upon closing, the Transaction will add five locations (five clinics and four surgery centers) in the Phoenix and Tucson, Arizona metropolitan areas and will launch a new vascular brand that we will offer to our other markets. In addition to a new brand, we expect to drive additional volume into these clinics and multi-specialty surgical centers using our proprietary marketing and sales capabilities.
See Part I, Item 1–“Financial Statements, Note 21 – Subsequent Events” of this Quarterly Report for more information on the Transaction.
Operating Environment
The Medical Segment depends primarily upon third-party reimbursement from private insurers to pay for substantially all of the services rendered to our patients. The majority of the revenues attributable to the Medical Segment are from reimbursement to the Nobilis Hospitals and Nobilis ASCs as out-of-network providers. This means the Nobilis Facilities are not contracted with a major medical insurer as an in-network participant. Participation in such networks offer the benefit of larger patient populations and defined, predictable payment rates. The reimbursement to in-network providers, however, is typically far less than that paid to out of network providers. To a far lesser degree, the Nobilis Facilities earn fees from governmental payor programs such as Medicare. For the three and six months ended June 30, 2016 and 2015, we derived approximately 0.4% and 0.3%, respectively, of our Medical Segments net revenues from governmental healthcare programs, primarily Medicare and managed Medicare programs, and the remainder from a wide mix of commercial payers and patient co-pays, coinsurance, and deductibles.
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Seasonality of the Business
The surgical segment of the healthcare industry tends to be impacted by seasonality because most benefit plans reset on a calendar year basis. As patients utilize and reduce their remaining deductible, surgical ASCs and hospitals typically experience an increase in volume throughout the year, with the biggest impact coming in the fourth quarter. Historically, approximately 35% to 40% of our annual revenues have been recognized in the fourth quarter.
Same Center, Organic and New Facility Growth
In certain instances, in this MD&A, we analyze growth and trends by bifurcating our business into same center facilities and new facilities. Same center facilities can be defined as any facility that has been acquired as of January 1, 2015. All other facilities are considered to be new facilities until the following year.
The Nobilis Facilities focus on non-emergency surgical procedures. The case mix at each Nobilis Facility is a function of the clinical specialties of the physicians on the medical staff and the equipment and infrastructure at each facility. The Nobilis Facilities intend to continue to refine their case mix as opportunities arise.
Revenue Model and Case Mix
Revenues earned by the Nobilis Facilities vary depending on the procedures performed. For every medical procedure performed there are usually three separately invoiced patient billings:
|
the surgical center fee for the use of infrastructure, surgical equipment, nursing staff, non-surgical professional services, supplies and other support services, which is earned by the Nobilis Facilities; | |
|
the professional fee, which is separately earned, billed and collected by the physician performing the procedure, separate and apart from the fees charged by the Nobilis Facilities; and | |
|
the anesthesiology fee, which is separately earned, billed and collected by the anesthesia provider, separate and apart from the fees charged by the Nobilis Facilities and the physicians. |
Overall facility revenue depends on procedure volume, case mix and payment rates of the respective payors.
THREE MONTHS ENDED JUNE 30, 2016 AND 2015
The following table sets out our comparable changes in revenue and case volume for same center and new facilities for the three months ended June 30, 2016 and 2015:
Three Months Ended June 30, | ||||||||||||||||||
Net Patient Service Revenue | Number of Cases (1) | Net Patient Service Revenue | ||||||||||||||||
(in thousands) | per Case (2) | |||||||||||||||||
2016 | 2015 | 2016 | 2015 | 2016 | 2015 | |||||||||||||
Hospitals | $ | 42,960 | $ | 20,274 | 2,710 | 1,020 | $ | 15,852 | $ | 19,877 | ||||||||
ASCs | 9,889 | 23,079 | 1,876 | 3,257 | 5,271 | 7,086 | ||||||||||||
Total | $ | 52,849 | $ | 43,353 | 4,586 | 4,277 | $ | 11,524 | $ | 10,136 |
Notes
(1) |
This table refers to all cases performed, regardless of their contribution to net patient service revenue. |
(2) |
Calculated by dividing net patient service revenues by the number of cases. |
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The following table sets forth the combined number of cases by medical specialty performed for three months ended June 30, 2016 and 2015:
MEDICAL SEGMENT
CASE MIX
FOR THE THREE
MONTHS ENDED JUNE 30, 2016 AND 2015
2016 | 2016 % | 2015 | 2015 % | |||||||||
Specialty | Cases | Cases | Cases | Cases | ||||||||
Pain Management | 1,629 | 35.5% | 1,237 | 29.0% | ||||||||
Orthopedics | 440 | 9.6% | 275 | 6.4% | ||||||||
Spine | 458 | 10.0% | 513 | 12.0% | ||||||||
Podiatry | 97 | 2.1% | 145 | 3.4% | ||||||||
Gastro-intestinal | 49 | 1.0% | 95 | 2.2% | ||||||||
General Surgery | 153 | 3.3% | 181 | 4.2% | ||||||||
Plastic & Reconstructive | 438 | 9.6% | 421 | 9.8% | ||||||||
Bariatrics | 962 | 21.0% | 1,006 | 23.6% | ||||||||
Gynecology | 192 | 4.2% | 241 | 5.6% | ||||||||
Urology | - | 0.0% | 6 | 0.1% | ||||||||
ENT | 168 | 3.7% | 157 | 3.7% | ||||||||
TOTAL | 4,586 | 100.0% | 4,277 | 100.0% |
The following table for the Marketing Segment only includes cases generated through our marketing activities and performed at the non-Nobilis Facilities.
MARKETING SEGMENT
CASE MIX
FOR THE THREE
MONTHS ENDED JUNE 30, 2016 AND 2015
2016 | 2016 % | 2015 | 2015 % | |||||||||
Specialty | Cases | Cases | Cases | Cases | ||||||||
Pain Management | 109 | 39.4% | 150 | 44.4% | ||||||||
Orthopedics | 2 | 0.7% | - | 0.0% | ||||||||
Spine | 162 | 58.5% | 188 | 55.6% | ||||||||
Podiatry | 3 | 1.0% | - | 0.0% | ||||||||
Bariatrics | 1 | 0.4% | - | 0.0% | ||||||||
TOTAL | 277 | 100.0% | 338 | 100.0% |
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CONSOLIDATED SEGMENTS
CASE MIX
FOR THE THREE
MONTHS ENDED JUNE 30, 2016 AND 2015
2016 | 2016 % | 2015 | 2015 % | |||||||||
Specialty | Cases | Cases | Cases | Cases | ||||||||
Pain Management | 1,738 | 35.8% | 1,387 | 30.1% | ||||||||
Orthopedics | 442 | 9.1% | 275 | 6.0% | ||||||||
Spine | 620 | 12.7% | 701 | 15.2% | ||||||||
Podiatry | 100 | 2.1% | 145 | 3.1% | ||||||||
Gastro-intestinal | 49 | 1.0% | 95 | 2.1% | ||||||||
General Surgery | 153 | 3.1% | 181 | 3.9% | ||||||||
Plastic & Reconstructive | 438 | 9.0% | 421 | 9.1% | ||||||||
Bariatrics | 963 | 19.8% | 1,006 | 21.8% | ||||||||
Gynecology | 192 | 3.9% | 241 | 5.2% | ||||||||
Urology | - | 0.0% | 6 | 0.1% | ||||||||
ENT | 168 | 3.5% | 157 | 3.4% | ||||||||
TOTAL | 4,863 | 100.0% | 4,615 | 100.0% |
Notes:
(1) The tables listed above are exclusive of ancillary services which include neuromonitoring, surgical assist and anesthesia services. |
Cases performed for the three months ended June 30, 2016, totaled 4,863, an increase of 248 cases, or 5.4%, compared to 4,615 from the prior corresponding period. The Marketing Segment generated 277 cases, 61 cases less than 338 cases generated from the Marketing Segment in the prior corresponding period. Cases at our same center facilities were 3,020, representing an 877 case decrease primarily attributable to the discontinued Microsurgery Institute of Dallas (MSID). Cases at our new facilities were 1,566. The acquisition of new facilities has helped to ensure the continuation of expanding marketing programs, recruiting new physicians, and rendering positive net results against any unfavorable trends in our same center facilities.
We receive payments for surgical procedures and related services from private health insurance plans, workers compensation, directly from patients and from government payor plans. A substantial portion of net patient service revenues generated by the Nobilis Facilities is based on payments received from private (non-government) insurance plans. We receive a relatively small amount of revenue from Medicare. We also receive a relatively small portion of revenue directly from uninsured patients, who pay out of pocket for the services they receive. Insured patients are responsible for services not covered by their health insurance plans, deductibles, co-payments and co-insurance obligations under their plans. The amount of these deductibles, co-payments and coinsurance obligations has increased in recent years but does not represent a material component of the revenue generated by the Nobilis Facilities. The surgical center fees of the Nobilis Facilities are generated by the physician limited partners and the other physicians who utilize the Nobilis Facilities to provide services. The surgical center fees are billed and collected directly by the Nobilis Facilities.
Patient and net professional fees and contracted marketing revenues are reported as the estimated net realizable amounts from patients, third-party payors, and others for services rendered. Revenue is recognized upon the performance of the patient service. The amounts we actually collect from third-party payors, including private insurers, may vary for identical procedures performed. An additional factor in the determination of net patient service revenue is our payor mix, as between private health insurance plans, workers compensation, directly from patients, and from government payor plans. Management reviews and evaluates historical payment data, payor mix, and current economic conditions on a periodic basis and adjusts the estimated collections as a percentage of gross billings, which are used to determine net patient service revenue, as required based on final settlements and collections.
The following tables set out our comparable changes in revenue and case volume for same center and new facilities for the three months ended June 30, 2016 and 2015 (in thousands, except cases):
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MEDICAL SEGMENT
TOTAL REVENUE SAME CENTER
FACILITIES
FOR THE THREE MONTHS ENDED JUNE 30, 2016 AND 2015
2016 Revenue | 2015 Revenue | Variance | |||||||
Hospitals | $ | 27,028 | $ | 17,896 | $ | 9,132 | |||
ASCs | 9,889 | 23,079 | (13,190 | ) | |||||
TOTAL MEDICAL SEGMENT | $ | 36,917 | $ | 40,975 | $ | (4,058 | ) |
MEDICAL SEGMENT
TOTAL REVENUE NEW FACILITIES
FOR THE THREE MONTHS ENDED JUNE 30, 2016 AND 2015
2016 Revenue | 2015 Revenue | Variance | |||||||
Hospitals | $ | 15,931 | $ | 2,379 | $ | 13,552 | |||
Ancillary services | 2,447 | 290 | 2,157 | ||||||
TOTAL | $ | 18,378 | $ | 2,669 | $ | 15,709 |
MARKETING SEGMENT
TOTAL REVENUE
FOR THE THREE
MONTHS ENDED JUNE 30, 2016 AND 2015
2016 Revenue | 2015 Revenue | Variance | |||||||
Marketing | $ | 6,576 | $ | 5,223 | $ | 1,353 | |||
TOTAL | $ | 6,576 | $ | 5,223 | $ | 1,353 |
CONSOLIDATED SEGMENTS
TOTAL REVENUE
FOR THE
THREE MONTHS ENDED JUNE 30, 2016 AND 2015
2016 Revenue | 2015 Revenue | Variance | |||||||
Medical Segment: | |||||||||
Hospitals | $ | 42,959 | $ | 20,275 | $ | 22,684 | |||
ASCs | 9,889 | 23,079 | (13,190 | ) | |||||
Ancillary services | 2,447 | 290 | 2,157 | ||||||
Total Medical Segment | $ | 55,295 | $ | 43,644 | $ | 11,651 | |||
Marketing Segment: | |||||||||
Marketing | $ | 6,576 | $ | 5,223 | $ | 1,353 | |||
Total Marketing Segment | $ | 6,576 | $ | 5,223 | $ | 1,353 | |||
TOTAL CONSOLIDATED SEGMENTS | $ | 61,871 | $ | 48,867 | $ | 13,004 |
MEDICAL SEGMENT
TOTAL CASES - SAME CENTER
FACILITIES
FOR THE THREE MONTHS ENDED JUNE 30, 2016 AND 2015
2016 Cases | 2015 Cases | Variance | |||||||
Hospitals | 1,144 | 640 | 504 | ||||||
ASCs | 1,876 | 3,257 | (1,381 | ) | |||||
TOTAL | 3,020 | 3,897 | (877 | ) |
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MEDICAL SEGMENT
TOTAL CASES - NEW FACILITIES
FOR THE THREE MONTHS ENDED JUNE 30, 2016 AND 2015
2016 Cases | 2015 Cases | Variance | |||||||
Hospitals | 1,566 | 380 | 1,186 | ||||||
TOTAL | 1,566 | 380 | 1,186 |
MARKETING SEGMENT
TOTAL CASES
FOR THE THREE
MONTHS ENDED JUNE 30, 2016 AND 2015
2016 Cases | 2015 Cases | Variance | |||||||
Marketing | 277 | 338 | (61 | ) | |||||
TOTAL | 277 | 338 | (61 | ) |
CONSOLIDATED SEGMENTS
TOTAL CASES
FOR THE
THREE MONTHS ENDED JUNE 30, 2016 AND 2015
2016 Cases | 2015 Cases | Variance | |||||||
Medical Segment: | |||||||||
Hospitals | 2,710 | 1,020 | 1,690 | ||||||
ASCs | 1,876 | 3,257 | (1,381 | ) | |||||
Total Medical Segment | 4,586 | 4,277 | 309 | ||||||
Marketing Segment: | |||||||||
Marketing | 277 | 338 | (61 | ) | |||||
Total Marketing Segment | 277 | 338 | (61 | ) | |||||
TOTAL CONSOLIDATED SEGMENTS | 4,863 | 4,615 | 248 |
The following tables set out the contract mix of cases performed that were in network (INN) compared to cases performed that were out of network (OON) at our Medical Segment, our Marketing Segment and on a consolidated basis for the three months ended June 30, 2016 and 2015. This information is not intended to provide a comprehensive comparison of financial results, as reimbursement by insurance carriers vary based on deductibles, plan coverage and cases performed. The Company is currently INN with United Healthcare and Cigna at the Kirby Surgical Center (KIRBY) and INN with BlueCross BlueShield, Cigna, United Healthcare and Aetna at the Herman Drive Surgical Hospital (HDSH).
MEDICAL SEGMENT
INN - OON CONTRACT MIX OF TOTAL
CASES PERFORMED
FOR THE THREE MONTHS ENDED JUNE 30, 2016 AND 2015
Contract Network Type | 2016 Contract Mix | 2015 Contract Mix | |||||||
OON | 85.7% | 89.2% | |||||||
INN | 14.3% | 10.8% | |||||||
TOTAL | 100.0% | 100.0% |
MARKETING SEGMENT
INN - OON CONTRACT MIX OF TOTAL
CASES PERFORMED
FOR THE THREE MONTHS ENDED JUNE 30, 2016 AND 2015
Contract Network Type | 2016 Contract Mix | 2015 Contract Mix | |||||||
OON | 32.1% | 24.2% | |||||||
INN | 67.9% | 75.8% | |||||||
TOTAL | 100.0% | 100.0% |
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CONSOLIDATED SEGMENTS
INN - OON CONTRACT MIX OF
TOTAL CASES PERFORMED
FOR THE THREE MONTHS ENDED JUNE 30, 2016 AND 2015
Contract Network Type | 2016 Contract Mix | 2015 Contract Mix | ||
OON | 82.7% | 84.2% | ||
INN | 17.3% | 15.8% | ||
TOTAL | 100.0% | 100.0% |
Despite new acquisitions of OON facilities, the Company continues to implement strategies to blend both INN and OON cases. For the three months ended June 30, 2016, we saw an increase shift towards INN cases based on our total cases performed compared to the corresponding period in 2015.
The following tables set out the payor mix at our Medical Segment, our Marketing Segment and on a consolidated basis for the three months ended June 30, 2016 and 2015. This information is not intended to provide a comprehensive comparison of financial results, as reimbursement by insurance carrier varies based on deductibles, plan coverage and cases performed.
MEDICAL SEGMENT
PATIENT AND NET PROFESSIONAL FEE
REVENUE BY PAYORS
FOR THE THREE MONTHS ENDED JUNE 30, 2016 AND 2015
Payors | 2016 Patient and Net Professional Fee | 2015 Patient and Net Professional Fee | ||
Revenue by Payor Mix | Revenue by Payor Mix | |||
Private insurance and other private pay | 96.4% | 95.0% | ||
Workers compensation | 3.1% | 4.6% | ||
Medicare | 0.5% | 0.4% | ||
Total | 100.0% | 100.0% |
MARKETING SEGMENT
PATIENT AND NET PROFESSIONAL
FEE REVENUE BY PAYORS
FOR THE THREE MONTHS ENDED JUNE 30, 2016 AND 2015
Payors | 2016 Patient and Net Professional Fee | 2015 Patient and Net Professional Fee | ||
Revenue by Payor Mix | Revenue by Payor Mix | |||
Private insurance and other private pay | 100.0% | 100.0% | ||
Workers compensation | 0.0% | 0.0% | ||
Medicare | 0.0% | 0.0% | ||
Total | 100.0% | 100.0% |
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CONSOLIDATED SEGMENTS
PATIENT AND NET
PROFESSIONAL FEE REVENUE BY PAYORS
FOR THE THREE MONTHS ENDED JUNE 30, 2016
AND 2015
Payors | 2016 Patient and Net Professional Fee | 2015 Patient and Net Professional Fee | ||
Revenue by Payor Mix | Revenue by Payor Mix | |||
Private insurance and other private pay | 96.9% | 95.5% | ||
Workers compensation | 2.7% | 4.1% | ||
Medicare | 0.4% | 0.4% | ||
Total | 100.0% | 100.0% |
RESULTS OF OPERATIONS AS A PERCENTAGE OF PATIENT AND NET PROFESSIONAL FEES FOR THE THREE MONTHS ENDED JUNE 30, 2016 AND 2015
Three months ended June 30, | ||||||
2016 | 2015 | |||||
Revenues: | 100% | 100% | ||||
Operating expenses: | ||||||
Salaries and benefits | 20.4% | 18.5% | ||||
Drugs and supplies | 19.7% | 18.2% | ||||
General and administrative | 44.4% | 41.8% | ||||
Bad debt expense | 0.0% | 0.4% | ||||
Depreciation and amortization | 3.2% | 2.0% | ||||
Facility operating expenses | 87.7% | 80.9% | ||||
Corporate expenses: | ||||||
Salaries and benefits | 3.3% | 2.0% | ||||
General and administrative | 7.3% | 13.4% | ||||
Legal expenses | 1.6% | 1.5% | ||||
Depreciation | 0.1% | 0.1% | ||||
Total corporate costs | 12.3% | 17.0% | ||||
Income from operations | 0.0% | 2.1% | ||||
Other (income) expense: | ||||||
Change in fair value of warrant and stock option liabilities | -2.7% | -3.4% | ||||
Interest expense | 1.1% | 0.6% | ||||
Other income, net | -1.9% | -2.7% | ||||
Total other (income) expense | -3.5% | -5.5% | ||||
Net income before income taxes and noncontrolling interests | 3.5% | 7.5% | ||||
Income tax (benefit) expense | -0.5% | 0.9% | ||||
Net income | 4.1% | 6.7% | ||||
Net income (loss) attributable to noncontrolling interests | -3.6% | 7.6% | ||||
Net income (loss) attributable to Nobilis Health Corp. | 7.7% | -0.8% |
Revenues
Total revenues for the three months ended June 30, 2016, totaled $61.9 million, an increase of $13.0 million or 26.6%, compared to $48.9 million from the prior corresponding period. Total cases increased 248 or 5.4% versus the prior corresponding period. The Medical Segment revenue increased by $11.7 million to $55.3 million, or 26.7% compared to $43.6 million from the prior corresponding period, while the Marketing Segment accounted for $1.4 million of the increase. New center facilities for the Medical Segment increased $15.7 million or 588.5% primarily due to the acquisition of three hospitals in 2015. Same center facilities for the Medical Segment decreased $4.1 million or 9.9% primarily attributable to a decline in ASC revenue, due to the closing of operations of an ASC in Dallas, whose cases were shifted to a new Hospital in Dallas.
Salaries and Benefits
Operating salaries and benefits for the three months ended June 30, 2016, totaled $12.6 million, an increase of $3.6 million, or 40.0%, compared to $9.0 million from the prior corresponding period. The Medical Segment increased by $3.3 million, or 48.3%, while the Marketing Segment increased $0.3 million period over period. The Staffing costs for the Medical Segment at new facilities accounted for $4.1 million of the increase, while the remaining $0.8 decrease is attributable to staffing at same center facilities driven by case volumes. Operating salaries and benefits as a percent of revenues increased to 20.4% compared to 18.5% in the prior corresponding period. The increase as a percent of revenue is primarily attributable to the acquisition of three hospitals in 2015. Hospitals require higher staff levels than ASCs as a result of performing more complex and higher acuity cases.
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Drugs and Supplies
Drugs and medical supplies expense for the three months ended June 30, 2016, totaled $12.2 million, an increase of $3.3 million or 37.1% compared to $8.9 million from the prior corresponding period. The Medical Segment increased by $3.7 million or 47.2%, while the Marketing Segment decreased $0.4 million period over period. Medical supplies costs for the Medical Segment at new facilities accounted for $5.4 million of the increase, while the remaining $1.7 million decrease was attributable to same center facilities. Drugs and medical supplies as a percent of revenues increased to 19.7% compared to 18.2% from the prior corresponding period. The increase as a percent of revenue is primarily attributable to the acquisition of three hospitals in 2015. Hospitals require higher drugs and supply costs than ASCs as a result of performing more complex and higher acuity cases.
General and Administrative
Operating general and administrative expense for three months ended June 30, 2016, totaled $27.5 million, an increase of $7.1 million, or 34.8%, compared to $20.4 million from the prior corresponding period. The Medical Segment accounted for $6.9 million of the increase. The Medical Segment new facilities contributed to $8.9 million of the increase while the remaining $2.0 million decrease was attributable to same center facilities. The $6.9 million increase in the Medical Segment is due to an increase in marketing expenses, general infrastructure development, such as rent, telecommunication, travel, and consulting, and an increase in operations associated with the new center Medical Segment facilities, primarily due to the acquisition of three hospitals in 2015. For the three months ended June 30, 2016, marketing expenses allocated to the Medical Segment increased by $0.9 million to $7.0 million, compared to $6.1 million for the corresponding period. The increase in marketing expenses is attributable to the continued strategic growth initiatives for expansion including our bariatric, spine, podiatry and gynecological brands, primarily related to marketing these programs for the three hospitals acquired in 2015. Expenses related to general infrastructure development for same center and new facilities increased by $0.7 million to $2.4 million in 2016, compared to $1.7 million in 2015.
Depreciation and Amortization
Depreciation for the three months ended June 30, 2016, totaled $2.0 million, an increase of $1.0 million or 100.0%, compared to $1.0 million the prior corresponding period. This increase is primarily due to an increase in property and equipment from new facilities.
Total Corporate Costs
To illustrate our operational efficiency, corporate costs are presented separate of operating expenses of the revenue generating facilities. Corporate costs for the three months ended June 30, 2016, totaled $7.6 million, a decrease of $0.7 million or 8.4%, compared to $8.3 million from the prior corresponding period. Corporate salaries and benefits for the three months ended June 30, 2016, totaled $2.0 million, an increase of $1.0 million or 100.0%, compared to $1.0 million from the prior corresponding period. The increase in salaries and benefits is primarily due to the recoupment of indemnified expenses of $0.7 million for the three months ended June 30, 2015, as a result of the confidential agreement with Athas. The additional $0.3 million increase is due to the hiring of additional corporate staff in 2016 related to accounting, finance and information technology. Legal expenses for the three months ended June 30, 2016, totaled $0.1 million, an increase of $0.3 million or 42.9%, compared to $0.7 million from the prior corresponding period. The increase in legal expenses was attributable to mergers and acquisitions and litigation expenses. General and administrative expenses for the three months ended June 30, 2016, totaled $4.5 million, a decrease of $2.0 million or 30.8%, compared to $6.5 million from the prior corresponding period. The decrease in general and administrative expense was primarily attributable to a decline in non-cash compensation expense for the three months ended June 30, 2016, partially offset by an increase in insurance and corporate marketing expense.
Other (Income) Expense
For the three months ended June 30, 2016, the Company recognized $2.1 million of other income comprised of $0.7 million in interest expense and $1.2 million in other income and a change in warrant and stock option derivative liability fair value of $1.7 million compared to $2.7 million of income comprised of $0.3 million in interest expense, $1.3 million other income and a change in warrant and option liability fair value of $1.7 million for the prior corresponding period.
Income tax (benefit) expense
The net tax benefit for the three months ended June 30, 2016 was $0.3 million, compared to an income tax expense of $0.5 million from the prior corresponding period. The temporary differences attributable to the projected taxable income include goodwill amortization, net operating loss carryforward-U.S. and other accrued liabilities. For the three months ended June 30, 2016, the effective tax rate differs from the annual tax rate primarily due to equity compensation and a 1.0% effective deferred tax rate change. The Companys state tax expense was $0.3 million for the three months ended June 30, 2016. Our effective tax rate during the three months ended June 30, 2016 was approximately -15.4%. The Company estimates an annual effective income tax rate of 30.7% for U.S., and none for Canada, based on projected results for the year.
Noncontrolling Interests
Net income attributable to non-controlling interests are based on ownership percentages in the Nobilis Facilities that are owned by third parties.
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SIX MONTHS ENDED JUNE 30, 2016 AND 2015
The following tables set out our comparable changes in revenue and case volume for same center and new facilities for the six months ended June 30, 2016 and 2015:
Six Months Ended June 30, | ||||||||||||||||||
Net Patient Service Revenue | Number of Cases (1) | Net Patient Service Revenue | ||||||||||||||||
(in thousands) | per Case (2) | |||||||||||||||||
2016 | 2015 | 2016 | 2015 | 2016 | 2015 | |||||||||||||
Hospitals | $ | 79,115 | $ | 32,953 | 4,574 | 1,501 | $ | 17,297 | $ | 21,954 | ||||||||
ASCs | 18,747 | 44,245 | 3,752 | 6,007 | 4,997 | 7,366 | ||||||||||||
Total | $ | 97,862 | $ | 77,198 | 8,326 | 7,508 | $ | 11,754 | $ | 10,282 |
Notes
(1) | This table refers to all cases performed, regardless of their contribution to net patient service revenue. | |
(2) | Calculated by dividing net patient service revenues by the number of cases. |
The following table sets forth the combined number of cases by medical specialty performed for six months ended June 30, 2016 and 2015:
MEDICAL SEGMENT
CASE MIX
FOR THE SIX MONTHS
ENDED JUNE 30, 2016 AND 2015
2016 | 2016 % | 2015 | 2015 % | |||||||||
Specialty | Cases | Cases | Cases | Cases | ||||||||
Pain Management | 2,900 | 34.8% | 2,286 | 30.6% | ||||||||
Orthopedics | 764 | 9.2% | 646 | 8.6% | ||||||||
Spine | 759 | 9.1% | 738 | 9.8% | ||||||||
Podiatry | 171 | 2.1% | 244 | 3.2% | ||||||||
Gastro-intestinal | 77 | 0.8% | 182 | 2.4% | ||||||||
General Surgery | 327 | 3.9% | 315 | 4.2% | ||||||||
Plastic & Reconstructive | 796 | 9.6% | 785 | 10.5% | ||||||||
Bariatrics | 1,809 | 21.7% | 1,676 | 22.3% | ||||||||
Gynecology | 390 | 4.7% | 340 | 4.5% | ||||||||
Urology | 2 | 0.1% | 7 | 0.1% | ||||||||
ENT | 331 | 4.0% | 289 | 3.8% | ||||||||
TOTAL | 8,326 | 100% | 7,508 | 100% |
The following table for the Marketing Segment only includes cases generated through our marketing activities and performed at the non-Nobilis Facilities.
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MARKETING SEGMENT
CASE MIX
FOR THE SIX MONTHS
ENDED JUNE 30, 2016 AND 2015
2016 | 2016 % | 2015 | 2015 % | |||||||||
Specialty | Cases | Cases | Cases | Cases | ||||||||
Pain Management | 200 | 39.1% | 278 | 44.6% | ||||||||
Orthopedics | 2 | 0.4% | - | 0.0% | ||||||||
Spine | 305 | 59.7% | 345 | 55.4% | ||||||||
Podiatry | 3 | 0.6% | - | 0.0% | ||||||||
Bariatrics | 1 | 0.2% | - | 0.0% | ||||||||
TOTAL | 511 | 100% | 623 | 100% |
CONSOLIDATED SEGMENTS
CASE MIX
FOR THE SIX
MONTHS ENDED JUNE 30, 2016 AND 2015
2016 | 2016 % | 2015 | 2015 % | |||||||||
Specialty | Cases | Cases | Cases | Cases | ||||||||
Pain Management | 3,100 | 35.1% | 2,564 | 31.5% | ||||||||
Orthopedics | 766 | 8.7% | 646 | 7.9% | ||||||||
Spine | 1,064 | 12.0% | 1,083 | 13.3% | ||||||||
Podiatry | 174 | 2.0% | 244 | 3.0% | ||||||||
Gastro-intestinal | 77 | 0.8% | 182 | 2.2% | ||||||||
General Surgery | 327 | 3.7% | 315 | 3.9% | ||||||||
Plastic & Reconstructive | 796 | 9.0% | 785 | 9.7% | ||||||||
Bariatrics | 1,810 | 20.5% | 1,676 | 20.6% | ||||||||
Gynecology | 390 | 4.4% | 340 | 4.2% | ||||||||
Urology | 2 | 0.1% | 7 | 0.1% | ||||||||
ENT | 331 | 3.7% | 289 | 3.6% | ||||||||
TOTAL | 8,837 | 100% | 8,131 | 100% |
Notes:
(1) |
The tables listed above are exclusive of ancillary services which include neuromonitoring, surgical assist and anesthesia services. |
Cases performed for the six months ended June 30, 2016, totaled 8,837, an increase of 706 cases, or 8.7%, compared to 8,131 from the prior corresponding period. The Marketing Segment generated 511 cases, 112 cases less than 623 cases generated from the Marketing Segment in the prior corresponding period. Cases at our same center facilities were 5,401, representing a 1727 case decrease primarily attributable to the discontinued MSID. Cases at our new facilities were 2,925, representing an increase of 2,545 cases. The acquisition of new facilities has helped to ensure the continuation of expanding marketing programs, recruiting new physicians, and rendering positive net results against any unfavorable trends in our same center facilities.
We receive payments for surgical procedures and related services from private health insurance plans, workers compensation, directly from patients and from government payor plans. A substantial portion of net patient service revenues generated by the Nobilis Facilities is based on payments received from private (non-government) insurance plans. We receive a relatively small amount of revenue from Medicare. We also receive a relatively small portion of revenue directly from uninsured patients, who pay out of pocket for the services they receive. Insured patients are responsible for services not covered by their health insurance plans, deductibles, co-payments and co-insurance obligations under their plans. The amount of these deductibles, co-payments and coinsurance obligations has increased in recent years but does not represent a material component of the revenue generated by the Nobilis Facilities. The surgical center fees of the Nobilis Facilities are generated by the physician limited partners and the other physicians who utilize the Nobilis Facilities to provide services. The surgical center fees are billed and collected directly by the Nobilis Facilities.
Patient and net professional fees and contracted marketing revenues are reported as the estimated net realizable amounts from patients, third-party payors, and others for services rendered. Revenue is recognized upon the performance of the patient service. The amounts we actually collect from third-party payors, including private insurers, may vary for identical procedures performed. An additional factor in the determination of net patient service revenue is our payor mix, as between private health insurance plans, workers compensation, directly from patients, and from government payor plans. Management reviews and evaluates historical payment data, payor mix, and current economic conditions on a periodic basis and adjusts the estimated collections as a percentage of gross billings, which are used to determine net patient service revenue, as required based on final settlements and collections.
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The following tables set out our comparable changes in revenue and case volume for same center and new facilities for the six months ended June 30, 2016 and 2015 (in thousands, except cases):
MEDICAL SEGMENT
TOTAL REVENUE - SAME CENTER
FACILITIES
FOR THE SIX MONTHS ENDED JUNE 30, 2016 AND 2015
2016 Revenue | 2015 Revenue | Variance | |||||||
Hospitals | $ | 44,334 | $ | 30,574 | $ | 13,760 | |||
ASCs | 18,747 | 44,245 | (25,498 | ) | |||||
TOTAL | $ | 63,081 | $ | 74,819 | $ | (11,738 | ) |
MEDICAL SEGMENT
TOTAL REVENUE - NEW FACILITIES
FOR THE SIX MONTHS ENDED JUNE 30, 2016 AND 2015
2016 Revenue | 2015 Revenue | Variance | |||||||
Hospitals | $ | 34,781 | $ | 2,379 | $ | 32,402 | |||
Ancillary services | 3,641 | 290 | 3,351 | ||||||
TOTAL | $ | 38,422 | $ | 2,669 | $ | 35,753 |
MARKETING SEGMENT
TOTAL REVENUE
FOR THE SIX
MONTHS ENDED JUNE 30, 2016 AND 2015
2016 Revenue | 2015 Revenue | Variance | |||||||
Marketing | $ | 11,641 | $ | 9,230 | $ | 2,411 | |||
TOTAL | $ | 11,641 | $ | 9,230 | $ | 2,411 |
CONSOLIDATED SEGMENTS
TOTAL REVENUE
FOR THE
SIX MONTHS ENDED JUNE 30, 2016 AND 2015
2016 Revenue | 2015 Revenue | Variance | |||||||
Medical Segment: | |||||||||
Hospitals | $ | 79,115 | $ | 32,953 | $ | 46,162 | |||
ASCs | 18,747 | 44,245 | (25,498 | ) | |||||
Ancillary services | 3,641 | 290 | 3,351 | ||||||
Total Medical Segment | $ | 101,503 | $ | 77,488 | $ | 24,015 | |||
Marketing Segment: | |||||||||
Marketing | $ | 11,641 | $ | 9,230 | $ | 2,411 | |||
Total Marketing Segment | $ | 11,641 | $ | 9,230 | $ | 2,411 | |||
TOTAL CONSOLIDATED SEGMENTS | $ | 113,144 | $ | 86,718 | $ | 26,426 |
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MEDICAL SEGMENT
TOTAL CASES - SAME CENTER
FACILITIES
FOR THE SIX MONTHS ENDED JUNE 30, 2016 AND 2015
2016 Cases | 2015 Cases | Variance | |||||||
Hospitals | 1,649 | 1,121 | 528 | ||||||
ASCs | 3,752 | 6,007 | (2,255 | ) | |||||
TOTAL | 5,401 | 7,128 | (1,727 | ) |
MEDICAL SEGMENT
TOTAL CASES - NEW FACILITIES
FOR THE SIX MONTHS ENDED JUNE 30, 2016 AND 2015
2016 Cases | 2015 Cases | Variance | |||||||
Hospitals | 2,925 | 380 | 2,545 | ||||||
TOTAL | 2,925 | 380 | 2,545 |
MARKETING SEGMENT
TOTAL CASES
FOR THE SIX
MONTHS ENDED JUNE 30, 2016 AND 2015
2016 Cases | 2015 Cases | Variance | |||||||
Marketing | 511 | 623 | (112 | ) | |||||
TOTAL | 511 | 623 | (112 | ) |
CONSOLIDATED SEGMENTS
TOTAL CASES
FOR THE SIX
MONTHS ENDED JUNE 30, 2016 AND 2015
2016 Cases | 2015 Cases | Variance | |||||||
Medical Segment: | |||||||||
Hospitals | 4,574 | 1,501 | 3,073 | ||||||
ASCs | 3,752 | 6,007 | (2,255 | ) | |||||
Total Medical Segment | 8,326 | 7,508 | 818 | ||||||
Marketing Segment: | |||||||||
Marketing | 511 | 623 | (112 | ) | |||||
Total Marketing Segment | 511 | 623 | (112 | ) | |||||
TOTAL CONSOLIDATED SEGMENTS | 8,837 | 8,131 | 706 |
The following tables set out the contract mix of cases performed that were INN compared to cases performed that were OON at our Medical Segment, our Marketing Segment and on a consolidated basis for the six months ended June 30, 2016 and 2015. This information is not intended to provide a comprehensive comparison of financial results, as reimbursement by insurance carriers vary based on deductibles, plan coverage and cases performed. The Company is currently INN with United Healthcare and Cigna at the KIRBY and INN with BlueCross BlueShield, Cigna, United Healthcare and Aetna at the HDSH.
MEDICAL SEGMENT
INN - OON CONTRACT MIX OF TOTAL
CASES PERFORMED
FOR THE SIX MONTHS ENDED JUNE 30, 2016 AND 2015
Contract Network Type | 2016 Contract Mix | 2015 Contract Mix | |||||||
OON | 85.2% | 92.7% | |||||||
INN | 14.8% | 7.3% | |||||||
TOTAL | 100.0% | 100.0% |
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MARKETING SEGMENT
INN - OON CONTRACT MIX OF TOTAL
CASES PERFORMED
FOR THE SIX MONTHS ENDED JUNE 30, 2016 AND 2015
Contract Network Type | 2016 Contract Mix | 2015 Contract Mix | |||
OON | 28.6% | 32.0% | |||
INN | 71.4% | 68.0% | |||
TOTAL | 100.0% | 100.0% |
CONSOLIDATED SEGMENTS
INN - OON CONTRACT MIX OF
TOTAL CASES PERFORMED
FOR THE SIX MONTHS ENDED JUNE 30, 2016 AND 2015
Contract Network Type | 2016 Contract Mix | 2015 Contract Mix | |||
OON | 82.0% | 87.9% | |||
INN | 18.0% | 12.1% | |||
TOTAL | 100.0% | 100.0% |
Despite new acquisitions of OON facilities, the Company continues to implement strategies to blend both INN and OON cases. For the six months ended June 30, 2016, we saw an increase shift towards INN cases based on our total cases performed compared to the corresponding period in 2015.
The following tables set out the payor mix at our Medical Segment, our Marketing Segment and on a consolidated basis for the six months ended June 30, 2016 and 2015. This information is not intended to provide a comprehensive comparison of financial results, as reimbursement by insurance carrier varies based on deductibles, plan coverage and cases performed.
MEDICAL SEGMENT
PATIENT AND NET PROFESSIONAL FEE
REVENUE BY PAYORS
FOR THE SIX MONTHS ENDED JUNE 30, 2016 AND 2015
2016 Patient and Net | 2015 Patient and Net | ||||
Payors | Professional Fee Revenue | Professional Fee Revenue | |||
by Payor Mix | by Payor Mix | ||||
Private insurance and other private pay | 96.2% | 95.0% | |||
Workers compensation | 3.4% | 4.5% | |||
Medicare | 0.4% | 0.5% | |||
Total | 100.0% | 100.0% |
MARKETING SEGMENT
PATIENT AND NET PROFESSIONAL
FEE REVENUE BY PAYORS
FOR THE SIX MONTHS ENDED JUNE 30, 2016 AND 2015
2016 Patient and Net | 2015 Patient and Net | ||||
Payors | Professional Fee Revenue | Professional Fee Revenue | |||
by Payor Mix | by Payor Mix | ||||
Private insurance and other private pay | 100.0% | 100.0% | |||
Workers compensation | 0.0% | 0.0% | |||
Medicare | 0.0% | 0.0% | |||
Total | 100.0% | 100.0% |
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CONSOLIDATED SEGMENTS
PATIENT AND NET
PROFESSIONAL FEE REVENUE BY PAYORS
FOR THE SIX MONTHS ENDED JUNE 30, 2016
AND 2015
2016 Patient and Net | 2015 Patient and Net | ||||
Payors | Professional Fee Revenue | Professional Fee Revenue | |||
by Payor Mix | by Payor Mix | ||||
Private insurance and other private pay | 96.7% | 95.3% | |||
Workers compensation | 3.0% | 4.2% | |||
Medicare | 0.3% | 0.5% | |||
Total | 100.0% | 100.0% |
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RESULTS OF OPERATIONS AS A PERCENTAGE OF PATIENT AND NET PROFESSIONAL FEES FOR THE SIX MONTHS ENDED JUNE 30, 2016 AND 2015
Six months ended June 30, | ||||||
2016 | 2015 | |||||
Revenues: | 100% | 100% | ||||
Operating expenses: | ||||||
Salaries and benefits | 22.2% | 19.2% | ||||
Drugs and supplies | 21.4% | 16.0% | ||||
General and administrative | 46.4% | 38.7% | ||||
Bad debt expense | 0.0% | 0.2% | ||||
Depreciation and amortization | 4.0% | 1.8% | ||||
Facility operating expenses | 94.0% | 76.0% | ||||
Corporate expenses: | ||||||
Salaries and benefits | 2.9% | 2.3% | ||||
General and administrative | 9.2% | 14.4% | ||||
Legal expenses | 2.3% | 1.4% | ||||
Depreciation | 0.1% | 0.1% | ||||
Total corporate expenses | 14.5% | 18.2% | ||||
Income (loss) from operations | -8.5% | 5.8% | ||||
Other (income) expense: | ||||||
Change in fair value of warrant and stock option liabilities | -1.5% | 2.0% | ||||
Interest expense | 1.2% | 0.9% | ||||
Other (income), net | -2.5% | -1.7% | ||||
Total other (income) expense | -2.8% | 1.2% | ||||
Net (loss) income before income taxes and noncontrolling interests | -5.7% | 4.7% | ||||
Income tax (benefit) expense | -2.0% | 0.7% | ||||
Net (loss) income | -3.8% | 4.0% | ||||
Net income attributable to noncontrolling interests | -3.6% | 9.5% | ||||
Net income attributable to Nobilis Health Corp. | -0.2% | -5.5% |
Revenues
Total revenues for the six months ended June 30, 2016, totaled $113.1 million, an increase of $26.4 million or 30.4%, compared to $86.7 million from the prior corresponding period. Total cases increased 706 or 8.7% versus the prior corresponding period. The Medical Segment revenue increased by $24.0 million to $101.5 million, or 31.0% compared to $77.5 million from the prior corresponding period, while the Marketing Segment accounted for $2.4 million of the increase. New center facilities for the Medical Segment increased $35.8 million or 1339.3% primarily due to the acquisition of three hospital in 2015. Same center facilities for the Medical Segment decreased $11.7 million for the six-month period, primarily attributable to a decline in ASC revenue due to the closing of operations of an ASC in Dallas whose cases were shifted to a Hospital in Dallas that was acquired in 2015 and a shift in cases from an ASC in Houston to a hospital in Houston.
Salaries and Benefits
Operating salaries and benefits for the six months ended June 30, 2016, totaled $25.2 million, an increase of $8.5 million, or 50.9%, compared to $16.7 million from the prior corresponding period. The Medical Segment increased by $8.3 million, or 67.8%, while the Marketing Segment increased $0.2 million period over period. Staffing costs for the Medical Segment at new facilities accounted for $8.9 million of the Medical Segments increase, while the remaining $0.6 decrease is attributable to staffing at same center facilities driven by case volumes. Operating salaries and benefits as a percent of revenues increased to 22.2% compared to 19.2% in the prior corresponding period. The increase as a percent of revenue is primarily attributable to the acquisition of three hospitals in 2015. Hospitals require higher staff levels than ASCs as a result of performing more complex and higher acuity cases.
Drugs and Supplies
Drugs and medical supplies expense for the six months ended June 30, 2016, totaled $24.2 million, an increase of $10.3 million or 74.1% compared to $13.9 million from the prior corresponding period. The Medical Segment increased by $10.2 million or 78.9%, while the Marketing Segment increased by $0.2 million period over period. Medical supplies costs for the Medical Segment at new facilities accounted for $10.9 million of the increase, while the remaining $0.7 million decrease was attributable to same center facilities. Drugs and medical supplies as a percent of revenues increased to 21.4% compared to 16.1% from the prior corresponding period. The increase as a percent of revenue is primarily attributable to the acquisition of three hospitals in 2015. Hospitals require higher drugs and supply costs than ASCs as a result of performing more complex and higher acuity cases.
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General and Administrative
Operating general and administrative expense for six months ended June 30, 2016, totaled $52.5 million, an increase of $18.9 million, or 56.3%, compared to $33.6 million from the prior corresponding period. The Medical Segment accounted for $17.9 million of the increase, while the Marketing Segment accounted for $1.0 million of the increase. The Medical Segments new facilities contributed to $18.4 million of the increase offset by a same center facilities decrease of $0.7 million. The $17.9 million increase in the Medical Segment is due to an increase in marketing expenses, general infrastructure development, such as rent, telecommunication, travel, and consulting, and an increase in operations associated with same center and new facilities, specifically the acquisition of three hospitals in 2015, at the Medical Segment facilities. For the six months ended June 30, 2016, marketing expenses allocated to the Medical Segment increased by $4.0 million to $15.7 million, compared to $11.7 million for the corresponding period. The increase in marketing expenses is attributable to the continued strategic growth initiatives for expansion including our bariatric, spine, podiatry and gynecological brands. Expenses related to general infrastructure development for same center and new facilities increased by $1.3 million to $ 4.4 million in 2016, compared to $3.1 million in 2015.
Depreciation and Amortization
Depreciation for the six months ended June 30, 2016, totaled $4.5 million, an increase of $2.9 million or 181.3%, compared to $1.6 million the prior corresponding period. This increase is primarily due to an increase in property and equipment from new facilities.
Total Corporate Costs
To illustrate our operational efficiency, corporate costs are presented separate of operating expenses of the revenue generating facilities. Total corporate costs for the six months ended June 30, 2016, totaled $16.4 million, an increase of $0.7 million or 4.4%, compared to $15.8 million from the prior corresponding period. Corporate salaries and benefits for the six months ended June 30, 2016, totaled $3.3 million, an increase of $1.3 million or 65.0%, compared to $2.0 million from the prior corresponding period. The increase in salaries and benefits is primarily due to the recoupment of indemnified expenses of $0.7 million for the six months ended June 30, 2015, as a result of the confidential agreement with Athas. The additional $0.6 million increase is due to the hiring of additional corporate staff in 2016 related to accounting, finance and information technology. Legal expenses for the six months ended June 30, 2016, totaled $2.6 million, an increase of $1.4 million or 116.7%, compared to $1.2 million from the prior corresponding period. The increase in legal expenses was attributable to mergers and acquisitions and litigation expenses. General and administrative expenses for the six months ended June 30, 2016, totaled $10.4 million, a decrease of $2.1 million or 16.8%, compared to $12.5 million from the prior corresponding period. The decrease in general and administrative expense was primarily attributable to a decline in non-cash compensation expense for the six months ended June 30, 2016, partially offset by an increase in insurance, audit and corporate marketing expense.
Other (Income) Expense
For the six months ended June 30, 2016, the Company recognized $3.1 million of other income comprised of $1.4 million in interest expense and $2.8 million in other income and a change in warrant and stock option derivative liability fair value of $1.7 million compared to $1.0 million of other expense comprised of $0.8 million in interest expense, $1.5 million other income and a change in warrant and option liability fair value of $1.7 million.
Income tax (benefit) expense
The net tax benefit for the six months ended June 30, 2016 was $2.2 million, compared to a tax expense of $0.6 million from the prior corresponding period. The temporary differences attributable to the projected taxable income include goodwill amortization, net operating loss carryforwards-U.S. and other accrued liabilities. Our effective tax rate during the six months ended June 30, 2016 was approximately 34.6%. The Company estimates an annual effective income tax rate of 30.7% for U.S., and none for Canada, based on projected results for the year.
Noncontrolling Interests
Net income attributable to non-controlling interests are based on ownership percentages in the Nobilis Facilities that are owned by third parties.
Balance Sheet
The Company experienced material variances in certain balance sheet accounts as discussed herein.
Trade Accounts Receivable, net
Accounts receivable as of June 30, 2016, totaled $77.6 million, a decrease of $15.0 million or 16.2%, compared to $92.6 million for the year-ended December 31, 2015. The decrease is a result of strong collections for the six months ended June 30, 2016.
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Liquidity and Capital Resources
Liquidity refers to an entitys ability to meet its financial obligations and commitments as they become due. We are dependent upon cash generated from our operations, which is the major source of financing for our operations and for meeting our contractual obligations. We currently believe we have adequate liquidity to fund operations during the near term through the generation of operating cash flows, cash on hand and access to our senior secured revolving credit facility provided under the Loan Agreement. Our ability to borrow funds under Loan Agreement is subject to, among other things, the financial viability of the participating financial institutions. While we do not anticipate any of our current lenders defaulting on their obligations, we are unable to provide assurance that any particular lender will not default at a future date.
Cash and cash equivalents at June 30, 2016 and December 31, 2015 were $18.8 million and $15.7 million, respectively.
For the six months ended June 30, 2016, the Company experienced an increase in net cash provided by operating activities of $3.0 million attributable to a decrease in trade accounts receivable due to lower case volume during the period due to seasonality and cash collections on 2015 accounts. The Company experienced a decrease in net cash used for investing activities of $0.5 million attributable to the purchase of property and equipment and an investment in a surgical facility management company. Net cash used for financing activities decreased $24.4 million primarily due to proceeds from a one-time private placement in 2015, that did not reoccur in 2016.
As of June 30, 2016, the Company had consolidated net working capital of $55.8 million compared to $63.7 million as of December 31, 2015. The decrease is primarily due to a net decrease of accounts receivables and accounts payables.
We have a $25.0 million debt financing facility with Healthcare Financial Services, LLC (the successor in interest to General Electric Capital Corporation). Pursuant to the Credit Agreement and ancillary agreements (collectively, the Loan Agreement), the term loan bears interest at a rate of 4% plus LIBOR per annum and amortizes over 20 years with required quarterly payments of principal and interest until the loan matures in March 2020. The revolving loan also bears interest at a rate of 4% plus LIBOR per annum and amounts borrowed under the revolver may be repaid and re-borrowed periodically with a maturity of March 2020. The credit facility is collateralized by the accounts receivable and physical equipment of all 100% owned subsidiaries as well as the Companys ownership interest in all less-than-wholly owned subsidiaries.
We entered into the Sixth Amendment (the Sixth Amendment) to Credit Agreement dated as of August 1, 2016 among Northstar Healthcare Acquisitions, L.L.C., HFS and the Credit Parties named therein amending, among other things, added a cap on Investments in Nobilis Health Anesthesia Network, PLLC of $2.0 million; increased the permitted indebtedness of the Company pursuant to that certain Loan Agreement, dated as of July 30, 2015 between PSH and Legacy Texas Bank from $7.0 million to $7.05 million; modified the maximum leverage ratio as of March 31, 2016 to 3.05 to 1.00; and modified the definition of "Subsidiary" to exclude the following entities: Athelite, Dallas Metro, Marsh Lane Surgical Hospital, LLC, Nobilis Health Network, Inc. ("NHN") and the subsidiaries of NHN. As a result, we were in compliance with our covenants under the HFS Term Loan as of June 30, 2016.
In addition, as required by the Sixth Amendment, the Company shall satisfy the following conditions subsequent on or prior to August 22, 2016 (the “Post-Closing Date”), as such date may be extended by HFS in its sole discretion; delivery by the Company, a joinder agreement adding an additional company facility to the credit parties and the termination and delivery of certain UCC financing statements. If the Company fails to satisfy such conditions subsequent by the Post-Closing Date, then the Sixth Amendment and the limited waiver shall automatically and without further action be rendered null and void and the specified events of default shall be reinstated. In addition, the Company shall pay to HFS on the Post-Closing Date, a sum equal to 0.50% of the aggregate amount of the commitments.
On July 30, 2015, the Company secured a $4.5 million term loan from Legacy Texas Bank (the Legacy Bank Term Loan). The term loan bears interest at a rate of 4% plus LIBOR per annum (4.47% at June 30, 2016) and requires monthly payments of interest. Monthly payments of principal will commence in August 2016. The Legacy Bank Term Loan matures in July 2020 and is subordinated to the Companys term loan and revolver with HFS. As of June 30, 2016, the outstanding balance is $4.0 million. On May 18, 2016, the Company secured a $3.0 million revolving line of credit from Legacy Texas Bank (the “Legacy Revolver”). The Legacy Revolver bears interest at a rate of 4% plus LIBOR per annum (4.47% at June 30, 2016) on drawn funds and requires monthly payments of interest. As of June 30, 2016 we were in compliance with our covenants under the Legacy Bank Term Loan and Legacy Revolver.
Critical Accounting Policies
Our critical accounting policies are further described 2015 Annual Report. There have been no changes in the nature of our critical accounting policies or the application of those policies since December 31, 2015.
Recent Accounting Pronouncements
In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments-Overall (Topic 825): Recognition and Measurement of Financial Assets and Financial Liabilities. (ASU 2016-01) This update changes how entities account for and measure the fair value of certain equity investments and updates the presentation and disclosure of certain financial assets and liabilities. This new ASU is effective for annual and interim periods beginning on or after December 15, 2017, and for interim periods within those fiscal years, with early adoption permitted. We are evaluating the impact that ASU 2016-01 will have on our consolidated financial position and disclosures.
In March 2016, the FASB issued ASU 2016-07, Investments - Equity Method and Joint Ventures (Topic 323). This amendment eliminates the requirement to retroactively adopt the equity method of accounting when a previous investment becomes qualified as a result of an increase in the level of ownership interest or degree of influence. ASU 2016-07 is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal periods. Early adoption is permitted. The Company adopted this ASU in the first quarter of 2016 with no impact on our consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal Versus Agent Considerations (Reporting Revenue Gross Versus Net). (ASU 2016-08) The amendments address how an entity should assess whether it is the principal or the agent in contracts that include three or more parties. The ASU clarifies that an entity should evaluate whether it is the principal or the agent for each specified good or service promised in a contract with a customer. The amendments affect the guidance in ASU 2014-09 which is not yet effective. The effective date and transition requirements for the amendments in this ASU are the same as the effective date and transition of ASU 2014-09, which will be effective for our reporting periods beginning after December 15, 2017. We do not expect these amendments to have a material effect on our consolidated financial statements.
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In April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing, which clarifies the guidance in ASU 2014-09 regarding assessing whether promises to transfer goods or services are distinct, and whether an entity's promise to grant a license provides a customer with a right to use or right to access the entity's intellectual property. The effective date and transition requirements for the amendments in this ASU are the same as the effective date and transition of ASU 2014-09, which will be effective for our reporting periods beginning after December 15, 2017. We do not expect these amendments to have a material effect on our consolidated financial statements.
In May 2016, the FASB issued ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients. (ASU 2016-12) This Update provides for amendments to ASU 2014-09, amending the guidance on transition, collectability, noncash consideration and the presentation of sales and other similar taxes. Specifically, ASU 2016-12 clarifies that, for a contract to be considered completed at transition, all (or substantially all) of the revenue must have been recognized under legacy GAAP. In addition, ASU 2016-12 clarifies how an entity should evaluate the collectability threshold and when an entity can recognize nonrefundable consideration received as revenue if an arrangement does not meet the standards contract criteria. The effective date and transition requirements for the amendments in this ASU are the same as the effective date and transition of ASU 2014-09, which will be effective for our reporting periods beginning after December 15, 2017. We do not expect these amendments to have a material effect on our consolidated financial statements.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources other than operating leases disclosed in Note 15 included in Part II, Item 8 "Financial Statements and Supplementary Data in our 2015 Annual Report.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The following market risk disclosures should be read in conjunction with the unaudited consolidated financial statements and notes thereto included in this Quarterly Report.
We are subject to market risk from exposure to changes in interest rates based on our financing, investing and cash management activities. We do not, however, hold or issue financial instruments or derivatives for trading or speculative purposes. At June 30, 2016, the following components of our Loan Agreement bears interest at variable rates at specified margins above either the agent banks alternate base rate or the LIBOR rate: (i) a $20 million, 5-year term loan; and (ii) a $5 million, 5-year revolving credit facility; and (iii) a $4.5 million, 5-year term loan; and (iv) a $3 million, 1-year revolving credit facility.
Although changes in the alternate base rate or the LIBOR rate would affect the cost of funds borrowed in the future, we believe the effect, if any, of reasonably possible near-term changes in interest rates on our remaining variable rate debt or our consolidated financial position, results of operations or cash flows would not be material. Holding other variables constant, including levels of indebtedness, a 0.125% increase in current interest rates would have no estimated impact on pre-tax earnings and cash flows for the next twelve month period given the 0.70215% LIBOR floor that exists in our Loan Agreement.
Foreign Currency Exchange Rate Risk
The Company holds cash balances in both U.S. and Canadian dollars. We transact most of our business in U.S. and Canadian dollars. As a result, currency exchange fluctuations may impact our operating costs. We do not manage our foreign currency exchange rate risk through the use of financial or derivative instruments, forward contracts or hedging activities.
In general, the strengthening of the U.S. dollar will positively impact our expenses transacted in Canadian dollars. Conversely, any weakening of the U.S dollar will increase our expenses transacted in Canadian dollars. We do not believe that any weakening of the U.S. dollar as compared to the Canadian dollar will have an adverse material effect on our operations.
Interest Rate Risk
The Companys investment policy for its cash and cash equivalents is focused on the preservation of capital and supporting the liquidity requirements of the Company. The Companys interest earned on its cash balances is impacted on the fluctuations of U.S. and Canadian interest rates. We do not use interest rate derivative instruments to manage exposure to interest rate changes. We do not believe that interest rate fluctuations will have any effect on our operations.
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Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, consisting of controls and other procedures designed to give reasonable assurance that information we are required to disclose in the reports we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms and that such information is accumulated and communicated to management, including our chief executive officer (CEO) and our chief financial officer (CFO), to allow timely decisions regarding such required disclosure.
Under the supervision and with the participation of our management, including our CEO and our CFO, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, at the end of the period covered by this report (the evaluation date). In conducting its evaluation, management considered the material weaknesses in our disclosure controls and procedures and internal control over financial reporting described in Part II, Item 9AControls and Procedures of our 2015 Annual Report. In addition, during the first quarter of 2016, management identified the following material weakness: in connection with our investment in Athelite Holdings LLC, an Equity method investment. We did not have proper controls in place around the review of legal documents and interpretation of accounting treatment of this significant non-routine transaction.
We are currently working to remediate the material weaknesses identified in our 2015 Annual Report and in this Quarterly Report. As of the evaluation date, our CEO and CFO have concluded that we did not maintain disclosure controls and procedures that were effective in providing reasonable assurances that information required to be disclosed in our reports filed under the Securities Exchange act of 1934 was recorded, processed, summarized and reported within the time periods prescribed by SEC rules and regulations, and that such information was not accumulated and communicated to our management to allow timely decisions regarding required disclosures.
In light of these material weaknesses, in preparing our financial statements as of and for the quarters ended June 30, 2016 and 2015, we performed additional analyses and procedures to ensure that our consolidated financial statements included in this Quarterly Report have been prepared in accordance with U.S. GAAP.
Our management has been actively engaged in remediation efforts to address the material weaknesses, as well as other identified areas of risk. These remediation efforts, outlined below, are intended to address the identified material weaknesses and to enhance our overall control environment:
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On July 9, 2015, we appointed Mr. Kenneth Klein to serve as the Companys Chief Financial Officer. Our previous CFO assumed other responsibilities with our accounting and finance organization. | |
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On May 9, 2016, we appointed Mr. Marcos Rodriguez to serve as the Companys Chief Accounting Officer. | |
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We strengthened our accounting and financial reporting group with the addition of several new professionals with knowledge, experience and training in the application of U.S. GAAP to our accounting and finance organization. We also engaged third party accountants during the fourth quarter of 2015 who are providing assistance with significant, infrequently occurring transactions. | |
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We are currently reviewing and implementing remediation steps providing for more detailed supervisory review processes as part of our financial statement close process. | |
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On September 21, 2015, we appointed Dr. Lee McMillian to serve as the Companys Vice President of Information Technology. This was a newly created position for the Company. | |
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During the fourth quarter of 2015 and the first quarter of 2016, we strengthened our information technology department by adding six information technology professionals with knowledge of security, networking and infrastructure. | |
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We have also invested approximately $320 thousand in hardware and software upgrades. | |
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As of January 2016, we implemented a process to review third party service providers Service Organization Controls reports. | |
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In February 2016, we implemented a control to periodically review the access granted in order to ensure that users of our information systems had the appropriate access relative to the users job responsibilities. A new user access form was created that captured appropriate authorizations, not only for access to financial systems but for other sensitive systems as well. Furthermore, certain sensitive levels of access have been identified, which require further approvals from Companys management. | |
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In February 2016, we created controls to ensure that policies and procedures are followed with respect to application change management in certain of the Companys proprietary software, which involves multiple levels of approval and periodic change management review. | |
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In February 2016, we began restricting and maintaining network access accounts to only employees in the information technology department and implemented compensating controls, including periodic audits of network access. |
Management believes that the foregoing efforts will effectively remediate the material weaknesses. As we continue to evaluate and work to improve our internal control over financial reporting, management may determine to take additional measures to address the material weaknesses or to modify the remediation plan described above. The material weaknesses will not be considered remediated until the enhanced controls have been tested and determined to be designed and operating effectively.
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Our executive management team, together with our Board of Directors, is committed to achieving and maintaining a strong control environment, high ethical standards, and financial reporting integrity.
Changes in Internal Control Over Financial Reporting
Except as discussed immediately above in the Evaluation of Disclosure Controls and Procedures, there has been no change in our internal control over financial reporting during the six months ended June 30, 2016 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Part II Other Information
Item 1. Legal Proceedings
See Part I, Item 1"Financial Statements, Note 20 Commitments and Contingencies" of this Quarterly Report for an update on ongoing legal proceedings. Such information is incorporated into this Part II, Item 1"Legal Proceedings" by reference.
Item 1A. Risk Factors
There have been no material changes in our risk factors from those disclosed in our 2015 Annual Report.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits
*filed herewith
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Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
NOBILIS HEALTH CORP.
Date: August 2, 2016 | ||
By: | /s/ Kenneth Klein | |
Kenneth Klein | ||
Chief Financial Officer | ||
(Principal Financial and Duly Authorized Officer) |
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