Note 4 – Acquisitions

On December 31, 2015, the Company closed the acquisition comprising substantially all of the hospital assets and hospital operating entity of University General Health Systems, Inc. (“UGHS”), consisting primarily of a sixty-nine bed acute care hospital located in the Medical City area of Houston, Texas (referred to as University General Hospital, LP or “UGH”). Subsequent to the acquisition, UGH is being operated as Foundation Surgical Hospital of Houston.

The acquisition of UGH was based on management’s belief that UGH fits into the Company’s acquisition and development strategy and operating model that enables the Company to grow by taking advantage of highly-fragmented markets, an increasing demand for short stay surgery and a need by physicians to forge strategic alliances to meet the needs of the evolving healthcare landscape while also shaping the clinical environments in which they practice. The Company expects the acquisition of UGH will generate positive earnings and cash flow that will be accretive to the earnings and cash flow of the Company. The Company expects the goodwill attributable to UGH to be tax deductible.

The Company paid $25.1 million in cash for the net assets acquired from UGHS.

The fair value amounts have been initially recorded using preliminary estimates. The Company has engaged a third-party valuation company to complete a valuation of the fair value of the assets acquired and liabilities assumed in the acquisition. A portion of the valuation has been completed and management believes the valuation will be fully completed by September 30, 2016. The preliminary estimates will be revised in future periods and the revisions may materially affect the presentation of the Company’s consolidated financial results. Any changes to the initial estimates of the fair value of the assets and liabilities will be recorded as adjustments to those assets and liabilities and residual amounts will be allocated to goodwill. The preliminary purchase allocations for the acquisition of UGHS are as follows:

	Preliminary		Adjustments			Adjusted
Accounts receivable	$	7,229,000	$	—		$	7,229,000
Supplies inventories		1,689,000		—			1,689,000
Other current assets		395,000		—			395,000
Total current assets		9,313,000		—			9,313,000
Property and equipment		40,363,000		(733,000	)		39,630,000
Other assets		307,000		—			307,000
Intangible, net		—		3,930,000			3,930,000
Goodwill		9,450,000		(2,822,000	)		6,628,000
Total assets acquired		59,433,000		375,000			59,808,000
Liabilities assumed:
Accounts payable and accrued liabilities		1,589,000		375,000			1,964,000
Current portion of long-term debt and capital lease obligations		4,740,000		—			4,740,000
Total current liabilities		6,329,000		375,000			6,704,000
Long-term debt and capital lease obligations, net of current portion		28,004,000		—			28,004,000
Total liabilities assumed		34,333,000		375,000			34,708,000
Net assets acquired	$	25,100,000	$	—		$	25,100,000

On May 11, 2016, the Company closed the acquisition of 51% of Ninety Nine Healthcare Management, LLC (“99 Mgmt”). 99 Mgmt has developed a clinically and financially integrated multi-specialty practice model which can increase participating physicians’ revenues.

The acquisition of 99 Mgmt was based on management’s belief that 99 Mgmt will allow the Company to offer services to its physician partners that lead to higher revenues by aligning the goals and incentives for patients, physicians, hospitals, employers and payers. The Company expects the acquisition of 99 Mgmt to generate positive earnings and cash flow. The Company expects the goodwill attributable to 99 Mgmt will not be tax deductible.

The Company paid $440,000 in cash and issued 700,000 shares of the Company’s common stock for purchase of 99 Mgmt. In addition, the Company has agreed to issue an additional 200,000 shares of the Company’s common stock upon 99 Mgmt’s completion of a signed network contract with BCBS of Texas that allows for one of the Company’s hospitals to participate as a contracted hospital provider. There is no time limit for completion of the contract.

The fair value amounts have been initially recorded using preliminary estimates. The Company will complete a valuation of the fair value of the assets acquired and liabilities assumed in the acquisition. The preliminary estimates will be revised in future periods and the revisions may materially affect the presentation of the Company’s consolidated financial results. Any changes to the initial estimates of the fair value of the assets and liabilities will be recorded as adjustments to those assets and liabilities and residual amounts will be allocated to goodwill. The preliminary purchase allocations for the acquisition of 99 Mgmt are as follows:

	Preliminary
Cash	$	282,000
Accounts receivable		613,000
Total current assets		895,000
Property and equipment		47,000
Goodwill		5,936,000
Other assets		16,000
Total assets acquired		6,894,000
Liabilities assumed:
Accounts payable and accrued liabilities		628,000
Contingent consideration		550,000
Total liabilities assumed		1,178,000
Noncontrolling interests		2,801,000
Net assets acquired	$	2,915,000

During the three months and six months ended June 30, 2016, the Company incurred approximately $234,000 and $268,000, respectively, in expenses related to the acquisitions. The expenses incurred related primarily to legal fees related to the purchase agreement and structure of the transaction, professional fees related to the audits of the 2015 and 2014 financial statements of UGH and additional professional fees related to the valuation of the fair value of the acquisitions.

Since the UGHS acquisition occurred on December 31, 2015, there are no acquisition revenues and earnings included in the Company’s consolidated statements of operations for the year ended December 31, 2015. The revenue and earnings of the combined entity had the acquisition dates of UGHS and 99 Mgmt been January 1, 2015 are as follows:

									Attributable to Foundation HealthCare common stock
	Revenue		Loss From Continuing Operations			Net Income (Loss)			Net Loss			Net Loss Per Share
Actual:
From 1/1/2016 to 6/30/2016	$	21,511,000	$	(7,227,000	)	$	(7,227,000	)	$	(7,227,000	)	$	(0.41	)
Supplemental Pro Forma:
From 1/1/2016 to 6/30/2016	$	67,834,000	$	(12,048,000	)	$	(12,064,000	)	$	(11,833,000	)	$	(0.66	)
From 1/1/2015 to 12/31/2015	$	184,169,000	$	(939,000	)	$	5,792,000		$	(1,560,000	)	$	(0.09	)

The pro forma information is presented for informational purposes only and is not necessarily indicative of the results of operations that actually would have been achieved had the acquisition been consummated as of that time, nor is it intended to be a projection of future results.