10-Q 1 form10q.htm FORM 10-Q Nobilis Health Corp. - Form 10-Q - Filed by newsfilecorp.com

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 September 30, 2015

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
(Registrant’s 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 registrant’s classes of common stock as of the latest practicable date.
73,638,978 common shares as of January 8, 2016.

 
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TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION 5
             Item 1. Financial Statements 5
             Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 31
             Item 3. Quantitative and Qualitative Disclosures about Market Risk 51
             Item 4. Controls and Procedures 51
   
PART II. OTHER INFORMATION 52
             Item 1. Legal Proceedings 52
             Item 1A. Risk Factors 52
             Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 52
             Item 3. Defaults Upon Senior Securities 52
             Item 4. Mine Safety Disclosures 52
             Item 5. Other Information 52
             Item 6. Exhibits 53
   
Signatures 54

A list of our healthcare facilities (the “Nobilis Facilities”) and the abbreviations by which we refer to them in this Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2015 (“Quarterly Report”) appear below:

     Healthcare Facility              Abbreviation
     Northstar Healthcare Surgery Center - Houston   NHSC-H
     Kirby Surgical Center   Kirby
     Microsurgery Institute of Dallas   MSID
     Northstar Healthcare Surgery Center - Scottsdale   NHSC-S
     First Nobilis Hospital   FNH
     First Nobilis Surgical Center   FNSC
     Hermann Drive Surgical Hospital (f/k/a Victory Medical Center Houston)   HDSH
     Plano Surgical Hospital   PSH

In this Quarterly Report, the terms "Nobilis", "we", "us", "our", "ours", or "the Company" refers to Nobilis Health Corp and all of its subsidiaries.

 
Page 3 of 54

Preliminary Note

As described in the Current Report on Form 8-K filed on January 5, 2016, we announced that the previously issued consolidated financial statements covering the Company’s fiscal year ended December 31, 2014 (including financial information contained therein for prior periods) and the consolidated financial statements for the fiscal quarters ended March 31, 2015 and June 30, 2015 (collectively, the “Restatement Reports”), require restatement and should no longer be relied upon. The Company amended the Restatement Reports to correct the errors (such corrected Restatement Reports referred to in this Quarterly Report as the “Amended Reports”) and filed them with the Securities and Exchange Commission immediately prior to the filing of this Quarterly Report.

The Amended Reports corrected errors related to (1) accounting for warrants and options issued in the Company’s private placements in 2013, 2014 and 2015 and options granted to non-employees; (2) business combination accounting with respect to the Athas (including correction to our accounting policies related to accounts receivable factoring activities that commenced with the Athas transaction) and First Nobilis transactions that occurred in December and September 2014, respectively; (3) reclassification of contingently redeemable noncontrolling interests to temporary equity; (4) share-based compensation matters; and (5) calculations of fully diluted shares outstanding for application of the treasury stock method.

Certain details regarding those errors and adjustments are more fully discussed in Note 1-Nature of Operations – Restatement included in Part I – Item 1 of this Quarterly Report and Note 1, Company Description – Restatement to the consolidated financial statements included in Part II — Item 8 (Financial Statements and Supplementary Data) in Amendment No. 1 to the Annual Report on Form 10-K for the fiscal year ended December 31, 2014 (the “10-K/A”) as well as the Explanatory Note in the 10-K/A.

 
Page 4 of 54

Item 1. Financial Statements

PART I.
FINANCIAL INFORMATION
NOBILIS HEALTH CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)

 

  September 30,     December 31,  

 

  2015     2014  

 

  (Unaudited)     (Restated)  

 

           

Assets

           

Current Assets:

           

   Cash

$  21,093   $  7,568  

   Trade accounts receivable, net

  57,068     40,461  

   Medical supplies

  3,567     1,412  

   Prepaid expenses and other current assets

  5,907     3,554  

         Total current assets

  87,635     52,995  

Property and equipment, net

  21,875     9,087  

Intangible assets, net

  19,906     19,609  

Goodwill

  33,174     21,589  

Notes receivable

  150     659  

Investments in associates

  2,570     880  

Other long-term assets

  212     234  

         Total Assets

$  165,522   $  105,053  

Liabilities and Shareholders' Equity

           

Current Liabilities:

           

   Trade accounts payable

$  12,865   $  10,528  

   Accrued liabilities

  13,581     8,558  

   Lines of credit

  -     5,420  

   Subordinated notes payable

  -     635  

   Current portion of warrant and stock option derivative liabilities

  910     300  

   Current portion of debt

  868     3,437  

   Current portion of capital leases

  3,019     257  

   Other current liabilities

  585     1,485  

         Total current liabilities

  31,828     30,620  

Long-term capital leases, net of current portion

  3,592     573  

Lines of credit

  -     -  

Long-term debt, net of current portion

  22,270     10,582  

Warrant and stock option derivative liabilities, net of current portion

  7,338     6,357  

Other long-term liabilities

  72     252  

         Total liabilities

  65,100     48,384  

Contingently redeemable noncontrolling interest

  15,689     12,867  

Shareholders' Equity:

           

    Common stock (no par value; authorized unlimited shares, 70,988,979 and 59,418,227 shares
       issued and outstanding, respectively)

  -     -  

   Additional paid in capital

  210,251     176,356  

   Accumulated deficit

  (130,145 )   (136,576 )

   Accumulated other comprehensive loss

  (57 )   (111 )

         Total shareholders’ equity attributable to Nobilis Health Corp.

  80,049     39,669  

Noncontrolling interests

  4,684     4,133  

         Total shareholders' equity

  84,733     43,802  

Total Liabilities and Shareholders' Equity

$  165,522   $  105,053  

The accompanying notes are an integral part of the unaudited consolidated financial statements.

 
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NOBILIS HEALTH CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share amounts)
(Unaudited)

    Three months ended September 30,     Nine months ended September 30,  
    2015     2014     2015     2014  
          (Restated)           (Restated)  
                         
Revenues:                        
   Patient and net professional fees $  46,237   $  17,193   $  126,661   $  44,428  
   Contracted marketing revenues   4,410     -     8,059     -  
   Factoring revenues   1,836     -     4,481     -  
     Total revenue   52,483     17,193     139,201     44,428  
Cost of revenues   284     -     1,255     -  
     Gross Profit   52,199     17,193     137,946     44,428  
Operating expenses:                        
   Salaries and benefits   10,255     2,964     26,927     6,882  
   Drugs and supplies   8,121     2,267     21,010     6,236  
   General and administrative   21,025     6,164     54,625     18,076  
   Bad debt expense   929     -     1,129     -  
   Depreciation and amortization   1,522     344     3,114     947  
     Total operating expenses   41,852     11,739     106,805     32,141  
Corporate costs:                        
   Salaries and benefits   1,540     636     3,532     1,665  
   General and administrative   5,192     690     17,707     1,926  
   Legal expenses   521     204     1,733     826  
   Depreciation   43     26     99     87  
     Total corporate costs   7,296     1,556     23,071     4,504  
     Income from operations   3,051     3,898     8,070     7,783  
Other expense (income):                        
   Change in fair value of warrant and stock option derivative liabilities   (6,381 )   2     (4,677 )   (744 )
   Interest expense   322     22     1,106     135  
   Bargain purchase gain   (4,358 )   -     (4,358 )   -  
   Other income, net   (106 )   (40 )   (1,518 )   (106 )
     Total other (income) expense   (10,523 )   (16 )   (9,447 )   (715 )
Net income before income taxes and noncontrolling interests   13,574     3,914     17,517     8,498  
Income tax   256     94     862     332  
     Net income   13,318     3,820     16,655     8,166  
Net income attributable to noncontrolling interests   2,375     2,580     10,617     6,444  
Net income attributable to Nobilis Health Corp. $  10,943   $  1,240   $  6,038   $  1,722  
Net income per basic common share $  0.15   $  0.03   $  0.09   $  0.04  
Net income per fully diluted common share $  0.14   $  0.03   $  0.08   $  0.04  
Weighted average shares outstanding (basic)   70,935,587     44,591,772     65,310,610     43,736,386  
Weighted average shares outstanding (fully diluted)   77,656,264     45,475,000     75,067,623     44,441,948  

The accompanying notes are an integral part of the unaudited consolidated financial statements.

 
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NOBILIS HEALTH CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)

    Three months ended September 30,     Nine months ended September 30,  
    2015     2014     2015     2014  
          (Restated)           (Restated)  
                         
Net income $  13,318   $  3,820   $  16,655   $  8,166  
Less: net income attributable to noncontrolling interests   2,375     2,580     10,617     6,444  
Net income attributable to Nobilis Health Corp.   10,943     1,240     6,038     1,722  
Other comprehensive income (loss):                        
     Foreign currency translation adjustments   3     (142 )   54     (195 )
       Total other comprehensive income (loss)   3     (142 )   54     (195 )
Comprehensive income attributable to Nobilis Health Corp. $  10,946   $  1,098   $  6,092   $  1,527  

The accompanying notes are an integral part of the unaudited consolidated financial statements.

 
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NOBILIS HEALTH CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

    Nine months ended September 30,  
    2015     2014  
          (Restated)  
             

CASH FLOWS FROM OPERATING ACTIVITIES:

           

   Net income

$  16,655   $  8,166  

   Adjustments to reconcile net income attributable to Nobilis to net cash provided by operating activities:

       

   Depreciation and amortization

  3,213     1,034  

   Provision for bad debts

  1,129     -  

   Share-based compensation

  12,469     404  

   Change in fair value of warrant and stock option derivative liabilities

  (4,677 )   (744 )

   Recoupment of Indemnified expenses

  (1,700 )   -  

   Gain on sale of fixed asset

  -     (39 )

   Gain on bargain purchase of a business

  (4,358 )   -  

   Amortization of deferred financing fees

  66     -  

   Changes in operating assets and liabilities, net of assets acquired:

           

       Trade accounts receivable

  (11,962 )   (4,054 )

       Medical supplies

  (612 )   (32 )

       Prepaids and other current assets

  (2,095 )   (715 )

       Intangible assets

  -     15  

       Other long-term assets

  (37 )   538  

       Trade accounts payable and accrued liabilities

  (4,372 )   (7 )

       Other current liabilities

  (900 )   -  

       Other long-term liabilities

  19     (43 )

       Net cash provided by operating activities

  2,838     4,523  

 

           

CASH FLOWS FROM INVESTING ACTIVITIES:

           

   Purchase of property and equipment

  (2,533 )   (1,682 )

   Investment in associate

  (206 )   (150 )

   Note receivable

  (197 )   -  

   Purchase of interest acquired in subsidiary

  -     (346 )

   Proceeds of sale of property and equipment

  -     39  

   Proceeds of sale of ownership interests in subsidiary

  -     830  

   Acquisition of Hermann Drive, net of cash acquired

  (1,436 )   -  

   Acquisition of Peak, net of cash acquired

  (849 )   -  

   Acquisition of Marsh Lane, net of cash acquired

  (1,299 )   -  

   Deconsolidation of imaging centers and urgent care clinic

  (166 )   -  

       Net cash used for investing activities

  (6,686 )   (1,309 )

 

           

CASH FLOWS FROM FINANCING ACTIVITIES:

           

   Distributions to non controlling interests

  (9,015 )   (4,195 )

   Proceeds from exercise of stock options

  521     166  

   Proceeds from exercise of stock warrants

  4,343     2,958  

   Proceeds from private placement

  28,395     -  

   Payments on capital lease obligations

  (719 )   (45 )

   Payments on line of credit

  (5,420 )   -  

   Proceeds from debt

  20,000     -  

   Payments of debt

  (20,124 )   (316 )

   Deferred financing fees

  (662 )   -  

   Proceeds from private placement

  -     6,100  

       Net cash provided by financing activities

  17,319     4,668  

 

           

EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS

  54     (195 )

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

  13,525     7,687  

CASH AND CASH EQUIVALENTS — Beginning of period

  7,568     5,602  

CASH AND CASH EQUIVALENTS — End of period

$  21,093   $  13,289  

The accompanying notes are an integral part of the unaudited consolidated financial statements.

 
Page 8 of 54

NOBILIS HEALTH CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts and as otherwise noted)

1. Nature of Operations, Restatement and Basis of Presentation

Nature of Operations

Nobilis Health Corp. was incorporated on March 16, 2007 under the name "Northstar Healthcare Inc." pursuant to the provisions of the British Columbia Business Corporations Act ("BCBCA" ) . On December 5, 2014, Northstar Healthcare Inc. changed its name to Nobilis Health Corp. (the “Company”, “we”, “our”, “us”).

We own and manage healthcare facilities (the "Nobilis Facilities") in Texas and Arizona; including hospitals and ambulatory surgery centers (“ASC”), referred to as the "Nobilis ASCs". The Nobilis ASCs are licensed ASCs that provide scheduled 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. In December 2014, the Company expanded its services to health care marketing and factoring of receivables when it acquired 100% interests of Athas Health, LLC (“Athas”).

The Nobilis ASCs do not offer the full range of services typically found in traditional hospitals, but instead focus on certain clinical specialties, including orthopedic surgery, podiatric surgery, ENT, pain management, gastro- intestinal, gynecology, and general surgery. Nobilis’ hospitals focus on these same specialties with the ability to take on more complex cases.

Restatement

In connection with the preparation of our financial statements for the quarter ended September 30, 2015, we identified errors related to: (1) accounting for warrants and options issued in the Company’s private placements in 2013, 2014 and 2015 and options granted to non-employees; (2) business combination accounting with respect to the Athas (including correction to our accounting policies related to accounts receivable factoring activities that commenced with the Athas transaction) and First Nobilis transactions that occurred in December and September 2014, respectively, (3) reclassification of contingently redeemable noncontrolling interests to temporary equity, (4) share-based compensation matters and (5) calculations of fully diluted shares outstanding for application of the treasury stock method. As a result of these errors, we filed the Amending Filings restating our financial statements for the periods therein. In this Form 10-Q, we have included in our consolidated financial information the restated amounts reflected in the Form 10-K/A.

On December 29, 2015, our Audit Committee of the Board of Directors, after consultation with management and the Company's predecessor auditors concluded that the Company's financial statements as of and for the nine months ended September 30, 2014, should be restated because the financial statements did not properly account for the following items:

  • Accounting for warrants and options issued in private placements and options issued to non-employees as liabilities – The Company determined that FASB ASC 815-40-15-7I (“ASC 815-40”), Contracts in entities own equity, should have been applied to the accounting for warrants and options issued in private placements and for options issued to non-employees. This accounting would have resulted in the Company classifying warrants and options issued in connection with 2013 and 2014 private placements by the Company as liabilities rather than as stockholders’ equity. Similarly, this same accounting is applicable to stock options issued to non-employees once the performance conditions of such awards are completed. The Company first issued options to non-employees during the second quarter of 2014. Once recorded as liabilities, the warrants and options must be revalued each quarter with changes in their valuation reflected in earnings.

    At December 31, 2013, the warrant and stock option liabilities recognized for the proper application of ASC 815-40 in the Company’s balance sheet totaled $2.4 million. During the three months ended September 30, 2014, $2 thousand of expense was recognized for increases in the value of such liabilities (a total of $744 thousand of income for the nine months ended September 30, 2014). At December 31, 2014, the warrant and stock option liabilities recognized for the proper application of ASC 815-40 in the Company’s balance sheet totaled $6.7 million.

 

  • Recognition of the full fair value of noncontrolling interests in the acquisition of First Nobilis as required by U.S. GAAP instead of at a pro-rata value permitted under IFRS – We initially adopted accounting principles generally accepted in the United States of America (“U.S. GAAP”) effective January 1, 2013 in connection with our filings made with the U.S. Securities & Exchange Commission for registration of our stock in early 2015. Previously we prepared our financial statements under International Financial Reporting Standards (“IFRS”). The Company determined that FASB ASC 805, Business Combinations (“ASC 805”) was not properly applied in the initial adoption of U.S. GAAP by the Company and its application to the First Nobilis acquisition completed in September 2014. Under U.S. GAAP, noncontrolling interests should be measured at fair value on the acquisition date [ASC 805-20-30-1] whereas under IFRS these may be measured at their proportionate share of the recognized amount of the acquiree’s identifiable net assets [IFRS 3.19].

    The impact of the proper application of ASC 805 as of the date of acquisition (September 2014) is a reduction in noncontrolling interests of $2.0 million; a decrease in acquired intangible assets of $1.4 million and a decrease in recognized goodwill of $0.6 million. Amortization expense recognized since the acquisition date will decrease by $15 thousand quarterly because of this change.

 
Page 9 of 54

  • Other Adjustments – We have also identified and made correction for certain other accounting matters affecting our previous financial statements. These include (i) corrections for stock-based compensation expense for expected term, forfeitures and related assumptions in determining the grant date valuations of option awards, (ii) corrections to the accounting for options issued to non-employees to measure such awards as of the date that performance was completed, and (iii) corrections to the calculations of fully diluted shares outstanding for application of the treasury stock method. The combined impact of these other corrections was a decrease in compensation expense of $16 thousand for the quarter ended September 30, 2014 (decrease of $215 thousand for the nine months ended September 30, 2014).

We initially became aware of the above matters as part of the preparation of our financial statements during the third quarter of 2015 and review by the Company’s newly engaged independent registered public accounting firm. The adjustments do not impact the Company's previously reported total revenues, cash, cash equivalents or cash flows from operating, financing or investing activities.

The Company has restated certain amounts included in these financial statements as follows:

CONSOLIDATED BALANCE SHEET      
    As of December 31, 2014  
    As Reported     Adjustments     Restated  
Assets                  
Current Assets:                  
 Cash $  7,568   $  -   $  7,568  
 Trade accounts receivable, net   42,175     (1,714 )   40,461  
 Medical supplies   1,412     -     1,412  
 Prepaid expenses and other current assets   3,554     -     3,554  
         Total current assets   54,709     (1,714 )   52,995  
Property and equipment, net   9,087     -     9,087  
Intangible assets, net   19,543     66     19,609  
Goodwill   22,470     (881 )   21,589  
Notes receivable   659     -     659  
Investments in associates   880     -     880  
Other long-term assets   234     -     234  
       Total Assets $  107,582   $  (2,529 ) $  105,053  
Liabilities and Equity                  
Current Liabilities:                  
 Trade accounts payable $  10,528   $  -   $  10,528  
 Accrued liabilities   9,112     (554 )   8,558  
 Lines of credit   5,420     -     5,420  
 Subordinated notes payable   635     -     635  
 Current portion of warrant and stock option liabilities   -     300     300  
 Current portion of debt   3,437     -     3,437  
 Current portion of capital leases   257     -     257  
 Other current liabilities   1,485     -     1,485  
         Total current liabilities   30,874     (254 )   30,620  
Long-term capital leases, net of current portion   573     -     573  
Lines of credit                  
Long-term debt, net of current portion   10,582     -     10,582  
Warrant and stock option liabilities, net of current portion   -     6,357     6,357  
Other long-term liabilities   252     -     252  
         Total liabilities   42,281     6,103     48,384  
Contingently redeemable noncontrolling interest   -     12,867     12,867  
Shareholders' Equity:                  
 Common stock, no par value   -     -     -  
 Additional paid in capital   179,293     (2,937 )   176,356  
 Accumulated deficit   (132,866 )   (3,710 )   (136,576 )
 Accumulated other comprehensive income   (111 )   -     (111 )
         Total shareholders’ equity attributable to Nobilis Health Corp.   46,316     (6,647 )   39,669  
Noncontrolling interests   18,985     (14,852 )   4,133  
         Total shareholders' equity   65,301     (21,499 )   43,802  
Total Liabilities and Shareholders' Equity $  107,582   $  (2,529 ) $  105,053  
Page 10 of 54



CONSOLIDATED STATEMENT OF OPERATIONS      
    Quarter Ended September 30, 2014  
    As Reported     Adjustments     Restated  

Revenues - Patient and net professional fees

$  17,193   $  -   $  17,193  

Operating expenses:

                 

 Salaries and benefits

  2,964     -     2,964  

 Drugs and supplies

  2,267     -     2,267  

 General and administrative

  6,164     -     6,164  

 Depreciation and amortization

  352     (8 )   344  

   Total operating expenses

  11,747     (8 )   11,739  

Corporate costs:

                 

 Salaries and benefits

  636     -     636  

 General and administrative

  706     (16 )   690  

 Legal expenses

  204     -     204  

 Depreciation

  26     -     26  

   Total corporate costs

  1,572     (16 )   1,556  

   Income from operations

  3,874     24     3,898  

Other expense (income):

                 

 Change in fair value of warrant and stock option liabilities

  -     2     2  

 Interest expense

  22     -     22  

 Other income, net

  (40 )   -     (40 )

   Total other (income) expense

  (18 )   2     (16 )

Net income before income taxes and noncontrolling interests

  3,892     22     3,914  

Income tax

  94     -     94  

   Net income

  3,798     22     3,820  

Net income attributable to noncontrolling interests

  2,576     4     2,580  

Net (loss) income attributable to Nobilis Health Corp.

$  1,222   $  18   $  1,240  

Net (loss) income per basic common share

$  0.03   $  -   $  0.03  

Net (loss) income per fully diluted common share

$  0.03   $  -   $  0.03  

Weighted average shares outstanding (basic)

  44,591,772     -     44,591,772  

Weighted average shares outstanding (fully diluted)

  45,711,687     (236,687 )   45,475,000  

 
Page 11 of 54


CONSOLIDATED STATEMENT OF OPERATIONS      
    Nine Months Ended September 30, 2014  
    As Reported     Adjustments     Restated  
Revenues - Patient and net professional fees $  44,428   $  -   $  44,428  
Operating expenses:                  
 Salaries and benefits   6,882     -     6,882  
 Drugs and supplies   6,236     -     6,236  
 General and administrative   18,076     -     18,076  
 Depreciation and amortization   955     (8 )   947  
   Total operating expenses   32,149     (8 )   32,141  
Corporate costs:                  
 Salaries and benefits   1,665     -     1,665  
 General and administrative   1,947     (21 )   1,926  
 Legal expenses   826     -     826  
 Depreciation   87     -     87  
   Total corporate costs   4,525     (21 )   4,504  
   Income from operations   7,754     29     7,783  
Other expense (income):                  
 Change in fair value of warrant and stock option liabilities   -     (744 )   (744 )
 Interest expense   135     -     135  
 Other income, net   (106 )   -     (106 )
   Total other (income) expense   29     (744 )   (715 )
Net income before income taxes and noncontrolling interests   7,725     773     8,498  
Income tax   332     -     332  
   Net income   7,393     773     8,166  
Net income attributable to noncontrolling interests   6,440     4     6,444  
Net (loss) income attributable to Nobilis Health Corp. $  953   $  769   $  1,722  
Net (loss) income per basic common share $  0.02   $  0.02   $  0.04  
Net (loss) income per fully diluted common share $  0.02   $  0.02   $  0.04  
Weighted average shares outstanding (basic)   43,736,386     -     43,736,386  
Weighted average shares outstanding (fully diluted)   44,357,988     83,960     44,441,948  

 
Page 12 of 54


CONSOLIDATED STATEMENT OF CASH FLOWS      
    Nine Months Ended September 30, 2014  
    As Reported     Adjustments     Restated  

CASH FLOWS FROM OPERATING ACTIVITIES:

                 

Net loss

$  7,393   $  773   $  8,166  

Adjustments to reconcile net loss to net cash provided by operating activities:

                 

Depreciation and amortization

  1,042     (8 )   1,034  

Change in fair value of warrant and stock option liabilities

  -     (744 )   (744 )

Share-based compensation

  425     (21 )   404  

Gain on sale of fixed assets

  (39 )   -     (39 )

Changes in operating assets and liabilities:

                 

   Trade accounts receivable

  (4,054 )   -     (4,054 )

   Medical supplies

  (32 )   -     (32 )

   Prepaids and other current assets

  (715 )   -     (715 )

   Intangible assets

  15     -     15  

   Other long-term assets

  538     -     538  

   Trade accounts payable and accrued liabilities

  (7 )   -     (7 )

   Other current liabilities

  (43 )   -     (43 )

   Net cash provided by operating activities

  4,523     -     4,523  

 

                 

CASH FLOWS FROM INVESTING ACTIVITIES:

                 

Purchase of property and equipment

  (1,682 )   -     (1,682 )

Investment in associate

  (150 )   -     (150 )

Purchase of interest acquired in subsidiary

  (346 )   -     (346 )

Proceeds of sale of ownership interests of subsidiary

  830     -     830  

Proceeds from sale of PPE

  39     -     39  

   Net cash used for investing activities

  (1,309 )   -     (1,309 )

 

                 

CASH FLOWS FROM FINANCING ACTIVITIES:

                 

Distributions to non controlling interests

  (4,195 )   -     (4,195 )

Proceeds from exercise of stock options

  166     -     166  

Proceeds from exercise of stock warrants

  2,958     -     2,958  

Proceeds from private placement

  6,100     -     6,100  

Payments on capital lease obligations

  (45 )   -     (45 )

Payments of debt and lines of credit

  (316 )   -     (316 )

   Net cash provided by (used for) financing activities

  4,668     -     4,668  

 

                 

EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS

  (195 )   -     (195 )

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

  7,687     -     7,687  

CASH AND CASH EQUIVALENTS — Beginning of period

  5,602     -     5,602  

CASH AND CASH EQUIVALENTS — End of period

$  13,289   $  -   $  13,289  

The adjustments also affect tables and disclosures within Notes 4, 5, 8, 11, 12, 13 and 15.

Basis of Presentation

The accompanying consolidated financial statements should be read in conjunction with the consolidated financial statements incorporated by reference in the 10-K/A December 31, 2014. If not materially different, certain footnote disclosures included in the Annual Report have been omitted from this Quarterly Report on 10-Q.

The interim consolidated financial information in this report has not been audited. In the opinion of management, all adjustments, which consist of normal recurring adjustments necessary for a fair presentation of the interim period consolidated financial statements, have been made. Results of operations reported for the interim periods are not necessarily indicative of results for the entire year.

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses, and the disclosures of contingent assets and liabilities. These accounting estimates reflect the best judgement of management, but actual results could differ.

 

 
Page 13 of 54

Recent Accounting Pronouncements

In May 2014, Financial Accounting Standards Board (“FASB”) issued guidance that introduces a new five-step revenue recognition model in which an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This guidance also requires disclosures sufficient to enable users to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers, including qualitative and quantitative disclosures about contracts with customers, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. Following an intial delay of the effective date, the guidance was issued in August 2015 under ASCU 2015-14. The guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within that reporting period. The Company is currently evaluating the new guidance to determine the impact it will have on its consolidated financial statements.

In June 2014, the FASB issued amended guidance on the accounting for certain share-based employee compensation awards. The amended guidance applies to share-based employee compensation awards that include a performance target that affects vesting when the performance target can be achieved after the requisite service period. These targets are to be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant-date fair value of the award and compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved. The amendments are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. The Company does not expect adoption will have a material impact on its consolidated financial statements.

In February 2015, the FASB issued amended guidance on the consolidation of legal entities including limited partnerships and limited liability corporations. The guidance modifies the consolidation models to be analyzed in determining whether a reporting entity should consolidate certain types of legal entities. The guidance must be applied using one of two retrospective application methods and will be effective for fiscal years beginning after December 15, 2015, and for interim periods within those fiscal years. Early adoption is permitted, including adoption in any interim period. The Company does not expect adoption will have a material impact on its consolidated financial statements.

In April 2015, the FASB issued guidance in order to simplify the presentation of debt issuance costs. The guidance requires that debt issuance costs related to a recognized debt liability be presented as a direct deduction from the carrying amount of the debt liability rather than as a deferred charge asset as required under current guidance. The guidance also requires that the amortization of debt issuance costs be reported as interest expense. The guidance is effective for the Company starting January 1, 2016 and must be applied on a retrospective basis. Early adoption is permitted. The Company has chosen to early adopt this guidance as of the interim period ended March 31, 2015. No retrospective application was deemed necessary, as the Company did not have any debt issuance costs prior to the three months ended March 31, 2015. Approximately $0.6 million of debt issuance costs have been deducted from the carrying amount of debt as of September 30, 2015.

In September 2015, the FASB issued Accounting Standards Update ("ASU") 2015-16, "Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments." The update requires than an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined, including the cumulative effect of the change in provisional amount as if the accounting had been completed at the acquisition date. The adjustments related to previous reporting periods since the acquisition date must be disclosed by income statement line item either on the face of the income statement or in the notes. The Company adopted this ASU during the three months ended September 30, 2015. Accordingly, we applied the amendments in this update to the measurement period adjustments made during the three months ended September 31, 2015 with no material effect on previous-period or current-period earnings.

2. Deconsolidations

During the first quarter of the fiscal year, we 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. and Willowbrook Imaging, LLC. We resigned as the manager of these facilities resulting in loss of control and our rights to exercise significant influence. We retained investments in these facilities that are accounted for as cost method investments beginning January 1, 2015. The revaluation of our remaining investments in these facilities resulted in no gain or loss due to the short term these investments were held. The carrying value as of September 30, 2015 is $1.4 million, which approximates calculated fair value. The investments are classified as assets in the consolidated balance sheets under the caption “Investment in Associates”.

The fair value of investments in the operating entities (Spring Northwest Operating, LLC; and Spring Northwest Management, LLC and wholly owned subsidiaries; Spring Creek Urgent Care, LLC and Spring Creek Imaging LLC), were primarily determined by the discounted future cash flow method, except for Willowbrook Imaging, LLC and GRIP Medical Diagnostics, LLC, which were valued using the cost approach. The investment in holding entities (KIRPA Holdings, LLC and Northstar Healthcare Northwest Management, LLC), were valued based on the adjusted net asset value method.

The primary inputs for the operating entities included the discount rate, long-term growth rate and discount for lack of marketability.

The discount rate for the operating entity engaged in the leasing businesses were 3% and 4%, for Class B units and Class A units, respectively, which represent the estimated after-tax cost of debt of the counter party. The discount rate for the imaging and urgent care center was 14.5% and 15.5% for Class B units and Class A units, respectively, which represents the estimated cost of equity. The long-term growth rate for Spring Northwest Management, LLC and wholly owned subsidiaries was 3%. The discount for lack of marketability for the operating entities was 25%.

The primary input for the holding entity, KIRPA Holdings, LLC, includes a 5% discount for lack of control and a 10% discount for lack of marketability.

 

 
Page 14 of 54

3. Investments in Associates

In March 2014, the Company acquired an ownership interest in Group of Pioneers Diagnostics (“GOP”), LLC, representing 40% of the outstanding share interests in GOP. The investment was previously accounted for using the equity method of accounting. In March 2015, the Company resigned as manager of GOP resulting in the loss of ability to exercise significant influence over the operating and financial activities of the investee. As a result, the investment will be accounted for under the cost method accounting. The carrying value of this investment at September 30, 2015 was $0.2 million, and is reflected in investments in associates in the consolidated balance sheets.

The Company has other investments using the cost method which aggregate to $0.7 million.

4. Business Combinations

Imaging Centers and Urgent Care Clinic

In January 2014, the Company acquired an ownership interest in two imaging centers and one urgent care clinic in Houston. The Company acquired a 32.14% interest in Spring Northwest Operating, LLC., a 31.78% interest in Spring Northwest Management, LLC. and a 22.22% interest in Willowbrook Imaging, LLC. The aggregate cost of the acquisition is comprised of $0.3 million in cash, net of acquired cash, and 431,711 shares of Nobilis stock representing a combined value of $1.4 million.

This transaction was treated as a business combination. The fair value of the assets and liabilities acquired were determined with the assistance of independent third party valuation experts. As a result of the acquisition, the Company recognized $0.7 million of goodwill within our medical services segment which is deductible for tax purposes. The Company believes that the goodwill is primarily comprised of the ability to further diversify the Company’s revenue stream while creating a valuable presence in the Northwest region of the Houston, Texas market.

Effectiving January 1, 2015, there entities were deconsolidated. See Note 2.

The following table summarizes the fair values of the identifiable assets acquired and liabilities assumed at the date of acquisition (in thousands):

    January 16, 2014  
       
Net assets acquired:      
   Cash $  563  
   Prepaid expenses   48  
   Property and equipment   2,271  
   Other assets   40  
   Goodwill   701  
Net assets acquired $  3,623  
       
Net liabilities assumed:      
   Accounts payable $  697  
   Debt   1,544  
Net liabilities assumed $  2,241  
       
Consideration:      
   Cash, net of cash acquired $  346  
   Stock issued for acquisition   514  
   Noncontrolling interest   522  
Total Consideration $  1,382  

First Nobilis, LLC (“First Nobilis”)

In September 2014, the Company formed First Nobilis, a Texas limited liability Company. First Nobilis is owned 51% by the Company and 49% by a third party. First Nobilis formed two subsidiary Texas limited liability companies to be the new operating entities.

Upon formation of First Nobilis, effective September 1, 2014, Nobilis contributed $7.5 million in cash to the new entity. For a 49% ownership interest, a third party contributed medical supplies, intangible assets, and certain accounts payables and accounts receivables. As part of the transaction, certain of the Company’s assets were used as collateral on lines of credit for the landlord which were satisfied in December 2015. The Company entered into the First Nobilis arrangement in order to establish its first hospital platform in the Houston market for serving a broader patient population with higher acuity.

This transaction was treated as a business combination. The fair value of the intangible assets and liabilities acquired were determined with the assistance of independent third party valuation experts. As a result of the acquisition, the Company recognized $0.6 million of goodwill within our medical services segment which is deductible for tax purposes. As this transaction has resulted in the Company’s first acute care facility in the Houston market, the Company believes that the goodwill is primarily comprised of our enhanced service option to provide patients with a higher acuity of care.

 
Page 15 of 54

The fair value of the noncontrolling interest was also determined with the assistance of a third party valuation expert using both Level 2 inputs, which include observable market data other than quoted prices and Level 3 inputs, which include unobservable data. The implied noncontrolling interest value, as calculated using the implied equity value of the Company and the 49% minority interest percentage, was discounted for both lack of control and lack of marketability using various inputs, including volatility, certain market control premiums from similar market transactions and the estimated amount of time it would take to sell the equity in the market without affecting the price.

The following table summarizes the fair values of the identifiable assets acquired and liabilities assumed at the date of acquisition (in thousands):

    September 2014  
    (Restated)  
Net assets acquired:      
   Accounts receivable $  6,509  
   Inventory   598  
   Trade name   1,000  
   Physician relationships   2,800  
   Goodwill   649  
Net assets acquired $  11,556  
       
Net liabilities assumed:      
   Accounts payable $  6,060  
   Unfavorable lease   290  
Total liabilities assumed $  6,350  
       
Consideration:      
   49% ownership interest $  5,206  

Athas Health, LLC (“Athas”)

In December 2014, the Company completed its acquisition of Athas for total consideration of approximately $31.2 million (all $ denominations in US dollars). Athas is based in Dallas, Texas, and focuses on the delivery of specialized healthcare services in seven states through the use of contracted marketing services and factoring of receivables. They are a nationwide direct-to-consumer marketing company with multiple established campaigns in various clinical service lines. Through the acquisition of Athas, the Company is able to vastly expand its marketing infrastructure.

The purchase price for Nobilis to acquire all of the ownership interests in Athas was broken down as follows: $3.0 million in cash upon closing, the issuance of a promissory note by Nobilis to the sellers for $12.0 million, the issuance at closing of 6,666,666 shares of Nobilis common stock that are subject to a lock up of up to two years, and the issuance of an additional 4,666,666 shares of Nobilis common stock to be issued over two years with half issued on the first anniversary of the closing and the second half issued on the second anniversary of the closing. Under the two year lock up period, the stock issued as part of the purchase price is subject to restrictions on transfer and may not be sold or pledged until the lock out period is released.

The fair value of the assets acquired were determined with the assistance of independent third party valuation experts.

The fair value of the stock issued for consideration was also determined with the assistance of a third party valuation expert using both Level 1 inputs, which include quoted market prices, and Level 2 inputs, which include observable data other than quoted prices. The value was determined using the published stock price on the date of closing, less a discount for lack of marketability as a result of the two year lock up period on the shares issued. The discount for lack of marketability was calculated using observable volatility rates from comparable companies, quoted risk free rates and the expected holding period as a result of the two year lock up period. The discount for lack of marketability range from 18% to 30%.

As a result of the acquisition, the Company recognized $19.0 million of goodwill within our marketing segment which is deductible for tax purposes. The Company believes that the goodwill is primarily comprised of the potential benefit of having a marketing platform with proprietary technology in customer relation management that further distinguishes us from other healthcare providers, in addition to being able to enhance our marketing capabilities by broadening the Company’s reach to new patient markets.

The following table summarizes the fair values of the identifiable assets acquired and liabilities assumed at the date of acquisition (in thousands):

 
Page 16 of 54


    December 2014  
    (Restated)  
Net assets acquired:      
   Cash $  (53 )
   Trade accounts receivable   4,713  
   Other receivable   450  
   Prepaid expenses   226  
   Investment in associate   730  
   PP&E   752  
   Trademark   5,610  
   Internally developed software   1,980  
   Non-compete agreements   1,920  
   Trade secret medical technology   5,620  
   Goodwill   19,011  
Net assets acquired $  40,959  
       
Net liabilities assumed:      
   Trade accounts payable $  1,531  
   Accrued liabilities   2,915  
   Line of credit   4,120  
   Subordinated notes payable   635  
   Note payable   157  
   Other current liabilities   102  
   Other long-term liabilities   260  
Total liabilities assumed $  9,720  
       
Consideration:      
   Cash, net of cash acquired $  3,000  
   Debt issued for consideration   12,000  
   Stock issued for consideration   16,239  
Total consideration $  31,239  

Hermann Drive Surgical Hospital (“Hermann Drive”) (f/k/a Victory Medical Center Houston)

In April 2015, the Company acquired a 55% ownership interest in Victory Medical Center Houston, L.P. (n/k/a Hermann Drive Surgical Hospital, LP), which owns and operates Victory Healthcare Houston Hospital (n/k/a Hermann Drive Surgical Hospital), a surgical hospital located in the Texas Medical Center in Houston, Texas. The Company paid $1.4 million in cash and assumed certain leases and loans of Hermann Drive. The acquisition of Hermann Drive provides the Company with managed care contracts spread across several major insurance carriers. Through this acquisition, the Company will also establish greater geographical coverage with this facility being located in the Texas Medical Center with a group of established physician partners.

The fair value of the intangible assets and physical equipment were determined with the assistance of independent third party valuation experts. As a result of the acquisition, the Company has preliminarily recognized $10.9 million of goodwill within our medical services segment which is deductible for tax purposes. The Company believes that the goodwill is primarily comprised of the business opportunities to be gained through the expanded geographical coverage as well as the access to a new physician group. In addition, the managed care contracts at this facility allow the Company to offer its services to a broader market segment.

The fair value of the noncontrolling interest was also determined with the assistance of a third party valuation expert using both Level 2 inputs, which include observable market data other than quoted prices and Level 3 inputs, which include unobservable data. The implied noncontrolling interest value, as calculated using the implied equity value of the Company and the 45% minority interest percentage, was discounted for both lack of control and lack of marketability using various inputs, including volatility, certain market control premiums from similar market transactions and the estimated amount of time it would take to sell the equity in the market without affecting the price.

Subsequent to the acquisition date of April 24, 2015, Hermann Drive had $5.7 million in revenues and a loss of $1.7 million which is included in the Company’s September 30, 2015 consolidated statements of operations.

The costs related to the transaction were nominal and were expensed during the three months ended June 30, 2015. These costs are included in the corporate general and administrative expenses in the nine months ended September 30, 2015 consolidated statements of operations.

During the measurement period, management determined certain adjustments to the acquired assets and liabilities which are detailed in the table below. FASB Accounting Standards Codification 805, “Business Combinations”, as amended by ASU 2015-16, requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. During the three months ended September 30, 2015, the Company made the adjustments specified below with a corresponding adjustment to goodwill, and with no material effect on previous-period or current-period earnings or other comprehensive income.

 
Page 17 of 54

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 further assessing the valuation of certain tangible and intangible assets acquired and obligations assumed pending the final appraisals. The Company expects to finalize its analysis during 2016.

The following table summarizes the fair values of the identifiable assets acquired and liabilities assumed at the date of acquisition (in thousands):

    As Previously     Measurement Period        
    Determined     Adjustments     Revised  
                   
Net assets acquired:                  
   Cash $  64   $  -   $  64  
   Trade accounts receivable   2,500     -     2,500  
   Other receivables   6,325     -     6,325  
   Prepaid expenses and other current assets   44     -     44  
   Inventory   662     -     662  
   Property and equipment   4,860     -     4,860  
   Other long-term assets   2     -     2  
   Trademark   280     -     280  
   Medicare license   940     -     940  
   Hospital license   13     -     13  
   Goodwill   9,447     1,464     10,911  
Net assets acquired $  25,137   $  1,464   $  26,601  
                   
Net liabilities assumed:                  
   Trade accounts payable $  6,266   $  -   $  6,266  
   Accrued liabilities   3,198     -     3,198  
   Long-term portion of Capital Leases   2,278     -     2,278  
   Long-term portion of Note Payable   6,052     -     6,052  
Total liabilities assumed $  17,794   $  -   $  17,794  
                   
Consideration:                  
   Cash, net of cash acquired $  1,436   $  -   $  1,436  
   Debt assumed   5,907     -     5,907  
   Non-controlling interest   -     1,464     1,464  
Total consideration $  7,343   $  1,464   $  8,807  

Peak Surgeon Innovations, LLC (“Peak”)

In June 2015, the Company acquired Peak, a provider of intraoperative neuromonitoring ("IOM") services for hospitals, surgery centers and other healthcare facilities. The acquisition serves to expand the Company’s service coverage into multiple locations across multiple states. The Company acquired a 100% ownership interest in Peak for cash consideration of $0.9 million and stock consideration of $0.7 million provided to Bryan Hasse (the “Seller”). In addition to such cash and stock consideration, the Seller is eligible to receive a potential earnout payment (in cash or stock at the option of Seller) upon achievement by the IOM service line of certain EBITDA performance metrics.

Subsequent to the acquisition date of June 1, 2015, Peak had $1.0 million in revenues and income of $0.1 million which is included in the Company’s September 30, 2015 consolidated statements of operations.

The costs related to the transaction were nominal and were expensed during the nine months ended September 30, 2015. These costs are included in the corporate general and administrative expenses in the September 30, 2015 consolidated statements of operations.

During the measurement period, management determined certain adjustments to the acquired assets and liabilities which are detailed in the table below. FASB Accounting Standards Codification 805, “Business Combinations”, as amended by ASU 2015-16, requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. During the three months ended September 30, 2015, the Company made the adjustments specified below with a corresponding adjustment to goodwill, and with no material effect on previous-period or current-period earnings or other comprehensive income.

 
Page 18 of 54

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 further assessing the earn-out calculation, the valuation of certain tangible and intangible assets acquired and obligations assumed pending the final appraisals. The Company expects to finalize its analysis during 2016.

The Company is currently in the process of determining the fair value of any potential intangible assets with the assistance of independent third party valuation expert. As a result of the acquisition, the Company has preliminarily recognized $1.4 million of goodwill within our medical services segment which is deductible for tax purposes. The Company believes that the goodwill is primarily comprised of the business opportunities to be realized through Peak’s existing service infrastructure and relationships with health care facilities across the U.S. In addition, the acquisition of Peak allows the Company to vertically integrate its surgical services and capture revenues which have previously been realized by external service providers.

The capital leases assumed consist of medical equipment and contain a bargain purchase option.

The following table summarizes the fair values of the identifiable assets acquired and liabilities assumed at the date of acquisition (in thousands):

    As Previously     Measurement Period        
    Determined     Adjustments     Revised  
                   
Net assets acquired:                  
   Cash $  1   $  -   $  1  
   Trade accounts receivable   315     54     369  
   Prepaid expenses and other current assets   4     (4 )   -  
   Property and equipment   -     315     315  
   Goodwill   1,318     57     1,375  
Net assets acquired $  1,638   $  422   $  2,060  
                   
Net liabilities assumed:                  
   Trade accounts payable $  138   $  -   $  138  
   Accrued expense   -     107     107  
   Capital lease liability   -     315     315  
Net liabilities assumed $  138   $  422   $  560  
                   
Consideration:                  
   Cash, net of cash acquired $  850   $  -   $  850  
   Stock issued as consideration   650     -     650  
Total consideration $  1,500   $  -   $  1,500  

Marsh Lane Surgical Hospital, LLC (“Marsh Lane”)

In July 2015, the Company formed Marsh Lane, a Texas limited liability company and wholly owned subsidiary of the Company, and closed the purchase of certain assets (the “Acquisition”) of Victory Medical Center Plano, LP, a Texas limited partnership (“Victory Plano”). The Acquisition was closed following the conclusion of bankruptcy proceedings in the U.S. Bankruptcy Court for the Northern District of Texas, Fort Worth Division, initiated by Victory Plano. The acquisition of Victory Plano serves to establish the Company’s first hospital platform in the Dallas, Texas market for serving a broader patient population with higher acuity.

The total purchase price paid by Marsh Lane for the Acquisition was approximately $5.8 million, consisting of $1.3 million in cash to be used by Victory Plano to cure and pay certain defaults under contracts assumed by Marsh Lane and the $4.5 million assumption of Victory Plano’s indebtedness. Marsh Lane also assumed Victory Plano’s capital equipment leases and its real estate lease.

The fair value of the intangible assets acquired were determined with the assistance of independent third party valuation experts.

Subsequent to the acquisition date of July 30, 2015, Marsh Lane had $3.1 million in revenues and a nominal loss which is included in the Company’s September 30, 2015 consolidated statements of operations.

The costs related to the transaction were nominal and were expensed during the nine months ended September 30, 2015. These costs are included in the corporate general and administrative expenses in the September 30, 2015 consolidated statements of operations.

 
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Fair value of property and equipment was determined based on the cost approach, which considers the replacement cost less economic depreciation. 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 further assessing the valuation of certain tangible and intangible assets acquired and obligations assumed pending the final appraisals. The Company expects to finalize its analysis during 2016.

The capital leases assumed consist of medical equipment and contain a bargain purchase option.

The following table summarizes the fair values of the identifiable assets acquired and liabilities assumed at the date of acquisition (in thousands):

    July 31, 2015  
       
Net assets acquired:      
   Trade accounts receivable $  3,000  
   Medical supplies   881  
   Property and equipment   10,170  
   Hospital license   13  
Net assets acquired $  14,064  
       
Net liabilities assumed:      
   Capital leases $  3,907  
   Debt   4,500  
Total liabilities assumed $  8,407  
       
Consideration:      
   Cash, net of cash acquired $  1,299  
       
Bargain purchase gain: $  4,358  

Unaudited Supplemental Pro Forma Information

The following unaudited supplemental pro forma financial information includes the results of operations for Athas and First Nobilis, and is presented as if each 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 which was available and practicable to obtain. Certain information was not practicable to obtain for the three and nine months ended September 30, 2014 for Hermann Drive and Marsh Lane due to the bankruptcy proceedings of their former parent company. The unaudited supplemental pro forma financial information has been provided for illustrative purposes only and does not purport to be indicative of the actual result that would have been achieved by the combined 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.

Unaudited pro forma information for the Peak acquisition is not presented in the pro forma disclosure because the effects of such transaction is considered immaterial to the Company’s consolidated financial statements.

The unaudited supplemental pro forma financial information presented below has been prepared by adjusting the historical results of the Company to include historical results of the acquired businesses described above and was then adjusted: (i) to increase amortization expense resulting from the intangible assets acquired; (ii) to adjust earnings per share to reflect the common shares issued as part of the purchase consideration; (iii) to reduce interest expense from debt which was retained by the seller upon acquisition of the respective businesses; (iv) to adjust the carrying value of net property and equipment to its fair value and to increase depreciation expense for the incremental increase in the value of property and equipment; (v) to decrease expenses for management services which were provided by the preceding parent entity and to concurrently increase expenses for management services which are now provided by the Company; and (vi) to adjust noncontrolling interest to properly reflect the minority ownership percentages which were not purchased by the Company. The unaudited supplemental pro forma financial information does not include adjustments to reflect the impact of other cost savings or synergies that may result from these acquisition.

The Company’s unaudited supplemental pro forma financial information is as follows (in thousands except for per share amounts):

 
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    Three months ended     Three months ended     Nine months ended     Nine months ended  
    September 30, 2015     September 30, 2014     September 30, 2015     September 30, 2014  
                         
Revenue $  52,483   $  29,241   $  139,774   $  80,716  
Income before from operations   3,873     1,782     8,225     3,252  
Noncontrolling interests   2,375     2,073     10,360     4,697  
Net income (loss) attributable to common stockholders   11,765     (326 )   6,282     (1,511 )
Net income (loss) per basic common share $  0.17   $  (0.01 ) $  0.10   $  (0.03 )

5. Trade Accounts Receivable

A detail of accounts receivable as of September 30, 2015 and December 31, 2014 is as follows (in thousands):

    September 30, 2015     December 31, 2014  
Trade accounts receivable $  58,509   $  40,985  
Allowance for doubtful accounts   (2,742 )   (1,391 )
Receivables transferred   (224 )   (873 )
Receivables purchased   1,525     1,740  
   Trade accounts receivable, net $  57,068   $  40,461  

Bad debt expense was $0.9 million and nil for the three months ended September 30, 2015 and 2014, respectively, and $1.1 million and nil for the nine months ended September 30, 2015 and 2014, respectively.

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 September 30, 2015 and December 31, 2014, there remained a balance of $0.2 million and $0.9 million, respectively, in transferred receivables pursuant to the terms of the original agreement. The Company, from time to time, transfers to the third party certain of its accounts receivable payments on a non-recourse basis. For the three months ended September 30, 2015 and 2014, the Company received advanced payments of $0.3 million and $0.2 million, respectively. During the same time period, the Company transferred $1.4 million and $1.0 million of receivables, respectively. For the nine months ended September 30, 2015 and 2014, the Company received advanced payments of $1.4 million and $0.5 million, respectively. During the same time period, the Company transferred $5.2 million and $4.8 million of receivables, respectively. Concurrently, upon collection of these transferred receivables, payment will be made to the transferee.

Athas Health, LLC (“Athas”) purchases receivables from physicians, at a discount, on a nonrecourse basis. The discount and purchase price vary by speciality and are recorded at the date of purchase, which generally occurs 45 days after the accounts are billed. These purchased receivables are billed and collected by Athas, and Athas retains 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 $2.8 million and $7.8 million for the three and nine months ended September 30, 2015, respectively. Revenue, net of the discounted purchase price, was $1.2 million and $3.9 million for the three and nine months ended September 30, 2015, respectively. Accounts receivable for purchased receivables was $0.8 million as of September 30, 2015. Comparable prior period amounts are not presented, as Athas was acquired by Nobilis in December 2014.

Peak Surgeon Innovations, LLC (“Peak”) purchases receivables from a third party, at a discount, on a nonrecourse basis. The discount and purchase price vary by speciality and are recorded at the date of purchase, which generally occurs 30 days after the accounts are billed. These purchased receivables are billed and collected by Peak, and Peak retains 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 $0.4 million and $0.5 million for the three and nine months ended September 30, 2015, respectively. Accounts receivable for purchased receivables was $0.7 million as of September 30, 2015. Comparable prior period amounts are not presented, as Peak was acquired by Nobilis in December 2014.

Factoring Revenues

Factoring revenue is comprised of revenue generated from certain accounts receivables which are purchased from third parties through the regular course of business. Purchase price is determined either by a flat fee per case, as dictated per the agreement, or as a percentage of final collections. At the time of purchase, the Company assumes all financial risk and incurs all costs related to collections without any recourse to the third party seller. Net Factoring revenue is deferred until such time the receivables are purchased and is subsequently recognized on a straight-lined basis through the date of collection from third-party payors.

Accounts Receivable

Accounts receivable consists of net patient service revenues and factoring revenues recorded at net realizable value and contracted marketing revenues recorded at the fees due from the facilities for marketing services performed. Factoring receivables represent Athas Health, LLC (“Athas”) purchases of receivables from physicians, at a discount, on a nonrecourse basis. The discount and purchase price vary by speciality and are recorded at the date of purchase, which generally occurs 45 days after the accounts are billed. The purchased receivables are billed and collected by Athas, and Athas retains 100% of what is collected after paying the discounted purchase price.

 
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6. Concentrations

A summary of certain information about our payor concentration is as follows:

MEDICAL SERVICES SEGMENT
PATIENT AND NET PROFESSIONAL FEE REVENUE BY PAYORS OF THE NOBILIS FACILITIES
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2015 AND 2014

    2015 Patient and Net     2014 Patient and Net  
Payors   Professional Fee Revenue     Professional Fee Revenue  
    by Payor Mix     by Payor Mix  
             
Private insurance and other private pay   94.4%     97.4%  
Workers compensation   5.1%     1.6%  
Medicare   0.5%     1.0%  
      Total   100.0%     100.0%  

MARKETING SEGMENT
PATIENT AND NET PROFESSIONAL FEE REVENUE BY PAYORS OF THE NOBILIS FACILITIES
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2015 AND 2014

    2015 Patient and Net     2014 Patient and Net  
Payors   Professional Fee Revenue     Professional Fee Revenue  
    by Payor Mix     by Payor Mix  
             
Private insurance and other private pay   100.0%     0.0%  
Workers compensation   0.0%     0.0%  
Medicare   0.0%     0.0%  
     Total   100.0%     0.0%  

CONSOLIDATED SEGMENTS
PATIENT AND NET PROFESSIONAL FEE REVENUE BY PAYORS OF THE NOBILIS FACILITIES
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2015 AND 2014

    2015 Patient and Net     2014 Patient and Net  
Payors   Professional Fee Revenue     Professional Fee Revenue  
    by Payor Mix     by Payor Mix  
             
Private insurance and other private pay   95.1%     97.4%  
Workers compensation   4.5%     1.6%  
Medicare   0.4%     1.0%  
     Total   100.0%     100.0%  

 
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MEDICAL SERVICES SEGMENT
PATIENT AND NET PROFESSIONAL FEE REVENUE BY PAYORS OF THE NOBILIS FACILITIES
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2015 AND 2014

    2015 Patient and Net     2014 Patient and Net  
Payors   Professional Fee Revenue     Professional Fee Revenue  
    by Payor Mix     by Payor Mix  
             
Private insurance and other private pay   94.7%     96.3%  
Workers compensation   4.8%     2.7%  
Medicare   0.5%     1.0%  
     Total   100.0%     100.0%  

MARKETING SEGMENT
PATIENT AND NET PROFESSIONAL FEE REVENUE BY PAYORS OF THE NOBILIS FACILITIES
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2015 AND 2014

    2015 Patient and Net     2014 Patient and Net  
Payors   Professional Fee Revenue     Professional Fee Revenue  
    by Payor Mix     by Payor Mix  
             
Private insurance and other private pay   100.0%     0.0%  
Workers compensation   0.0%     0.0%  
Medicare   0.0%     0.0%  
     Total   100.0%     0.0%  

CONSOLIDATED SEGMENTS
PATIENT AND NET PROFESSIONAL FEE REVENUE BY PAYORS OF THE NOBILIS FACILITIES
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2015 AND 2014

    2015 Patient and Net     2014 Patient and Net  
Payors   Professional Fee Revenue     Professional Fee Revenue  
    by Payor Mix     by Payor Mix  
             
Private insurance and other private pay   95.2%     96.3%  
Workers compensation   4.3%     2.7%  
Medicare   0.5%     1.0%  
     Total   100.0%     100.0%  

Four facilities represent approximately 83% of the Company’s contracted marketing revenue and four facilities represent approximately 82% of the Company’s contracted marketing accounts receivable for the nine months ended and as of September 30, 2015.

7. Intangible Assets

Intangible assets at September 30, 2015 and December 31, 2014 consist of the following (in thousands):

 
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        September 30, 2015     December 31, 2014  
                                                           
  Term     Historical           Accumulated     Accumulated     Net Book     Historical      Accumulated     Accumulated     Net Book  
  (in years)     Cost     Additions     Amortization     Impairment     Value      Cost     Amortization     Impairment     Value  
Definite Life                                                          
Non-compete agreements 10-15   $  2,761   $  -   $  993   $  -   $  1,768   $  2,761   $  853   $  -   $  1,908  
Internally developed software 5     1,980     -     330     -     1,650     1,980     33     -     1,947  
Trade secret methodology 10     5,620     -     468     -     5,152     5,620     47     -     5,573  
Physician relationships 20     2,800     -     152     -     2,648     2,800     47     -     2,753  
Unfavorable lease 8     (290 )   -     (25 )   -     (265 )   (290 )   (11 )   -     (279 )
                                                           
Indefinite Life                   -     -                                
Tradenames       1,000           -     -     1,000     1,000     -     -     1,000  
Trademark       5,610     280     -     -     5,890     5,610     -     -     5,610  
Medicare license       8,498     940     -     7,401     2,037     8,498     -     7,401     1,097  
Hospital license       -     26     -     -     26                       -  
     Total     $  27,979   $  1,246   $  1,918   $  7,401   $  19,906   $  27,979   $  969   $  7,401   $  19,609  

Amortization expense was $0.3 million and nil for the three months ended September 30, 2015 and 2014, respectively, and $0.9 million and nil for the nine months ended September 30, 2015 and 2014, respectively. Estimated amortization expense of intangible assets is $0.3 million for the remainder of 2015, $1.2 million for each of the next four years and $5.3 million thereafter.

8. Goodwill

The following table provides information on changes in the carrying amount of goodwill, which is included in the accompanying consolidated balance sheets as of September 30, 2015 and December 31, 2014 (in thousands):

    September 30, 2015     December 31, 2014  
Cost $  47,474   $  35,889  
Accumulated impairment losses   (14,300 )   (14,300 )
 Total $  33,174   $  21,589  
             
Cost                                                       September 30, 2015     December 31, 2014  
BALANCE - beginning of period $  35,889   $  15,528  
January 2014 business combination   -     701  
First Nobilis business combination   -     649  
Athas business combination   -     19,011  
Deconsolidation of imaging centers and urgent care clinic   (701 )   -  
Hermann Drive business combination, as adjusted   10,911     -  
Peak business combination, as adjusted   1,375     -  
   Total cost $  47,474   $  35,889  
             
Accumulated impairment                                                
BALANCE - beginning of period $  (14,300 ) $  (14,300 )
Impairment charges during the period   -     -  
     Total accumulated impairment $  (14,300 ) $  (14,300 )

9. Lines of Credit

On March 31, 2015, the Company secured a $5.0 million revolving line of credit (the “revolver”) from Healthcare Financial Services, LLC (f/k/a General Electric Capital Corporation), or “HFS” maturing in March 2020. The revolver bears interest at a rate of 4% plus LIBOR per annum (effective rate of 4.70% at September 30, 2015) and requires quarterly payments. Principal amounts borrowed under the revolver may be repaid and re-borrowed periodically. The revolver is collateralized by the accounts receivable and physical equipment of all of the Company’s 100% owned subsidiaries as well as the Company’s ownership interest in all less than wholly owned subsidiaries. During the three months ended September 30, 2015, the Company paid down the previous $1.5 million balance outstanding on the revolver. The Company has no outstanding amount due on this revolver as of September 30, 2015.

On July 30, 2015, the Company issued a $1.5M Letter of Credit to the Landlord of the March Lane Surgical Hospital (“Marsh Landlord”) facility in connection with the execution of the hospital facility lease. The Marsh 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 revolving line of credit from HFS.

 
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10. Debt

On March 31, 2015, the Company secured a $20.0 million term loan from HFS. The term loan bears interest at a rate of 4% plus LIBOR per annum (effective rate of 4.70% at September 30, 2015) and requires quarterly payments of principal and interest until the term loan matures in March 2020. The term loan provides for a 0.70215% LIBOR floor. The term loan is collateralized by the accounts receivable and physical equipment of all of the Company’s 100% owned subsidiaries as well as the Company’s ownership interest in all less than wholly owned subsidiaries.

The $20.0 million 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.

In April 2015, the Company acquired a 55% ownership interest in Victory Medical Center, L.P. for cash and the assumption of certain liabilities and loans. The loan assumed was from UMB Bank n.a., in the amount of $6.1 million. In May 2015, the Company paid off the loan balance with UMB Bank n.a.

The credit facilities contain covenants, including a requirement to maintain a fixed charge coverage ratio of at least 2.0 times and a leverage ratio of 2.5 times. The Company was in full compliance of all credit facility covenants at September 30, 2015.

On July 30, 2015, The Company secured a $4.5 million term loan from LegacyTexas Bank. The term loan bears interest at a rate of 4% plus LIBOR per annum (4.19% at September 30, 2015) and requires monthly payments of interest. Monthly payments of principal will commence in August 2016. The term loan matures in July 2020. The term loan is subordinated to the Company’s term loan and revolver with HFS.

Loan origination fees are deferred and the net amount is amortized over the contractual life of the related loans.

Debt at September 30, 2015 consisted of the following (in thousands):

    September 30, 2015     December 31, 2014  
Gross debt $  23,734   $  20,074  
Less: unamortized loan fees   596     -  
Debt, net of unamortized loan fees   23,138     20,074  
Less: current portion of term loan   868     3,437  
Less: subordinated notes payable   -     635  
Less: lines of credit   -     5,420  
   Long-term debt, net of unamortized loan fees $  22,270   $  10,582  

11. Share Based Compensation

Restricted Share Units (RSU’s)

The Company did not grant any RSU’s during the three and nine months ended September 30, 2015 and granted 50,000 RSU’s and 700,000 RSU’s during the three and nine months ended September 30, 2014, respectively.

The Company recorded stock compensation expense relative to RSU’s of nil and $0.1 million for the three months ended September 30, 2015 and 2014, respectively, and $5.4 million and $0.1 million for the nine months ended September 30, 2015 and 2014, respectively.

In June 2015, two key executives of the Company experienced triggering events, as defined in their employment agreements, which accelerated all unrecognized stock compensation expense on their outstanding RSU’s. As a result of the acceleration, the Company recognized an additional $4.5 million of stock compensation expense during the nine months ended September 30, 2015.

Stock Options

The Company granted a total of 1,300,000 stock options during the three months ended September 30, 2015. Of the options granted during the three month period, 900,000 of those vest ratably over a three year period, 400,000 cliff vest at the end of a five year period. The Company granted a total of 2,601,782 stock options during the nine months ended September 30, 2015. Of the options granted during the nine month period, 451,782 vest immediately, 450,000 vest ratably over a one year period, 1,300,000 vest ratably over a three year period and 400,000 cliff vest at the end of a five year period.

The following table summarizes stock option activity for the nine months ended September 30, 2015.

 
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    Shares     Weighted-     Weighted-Average  
    Underlying     Average Exercise     Remaining Life  
    Options     Price     (years)  
                   
Outstanding at December 31, 2014   3,118,218   $  1.45     9.80  
   Granted   2,601,782   $  5.50     9.78  
   Exercised   (447,787 ) $  1.26     -  
   Forfeited   (372,213 ) $  1.11     -  
Outstanding at September 30, 2015   4,900,000   $  3.65     9.47  
                   
Exercisable at September 30, 2015   1,408,461   $  2.54     9.47  

The above table includes 650,000 options issued to nonemployees. See Note 13 for discussion regarding the classification of these options in the balance sheet.

The total intrinsic value of stock options exercised during the nine months ended September 30, 2015 and 2014 was $2.9 and $0.6, respectively. The total intrinsic value for all in-the-money vested outstanding stock options at September 30, 2015 was $4.6 million. Assuming all stock options outstanding at September 30, 2015 were vested, the total intrinsic value of in-the-money outstanding stock options would have been $12.1 million.

The Company recorded total stock compensation expense relative to employee stock options of $1.3 million and $0.1 for the three months ended September 30, 2015 and 2014, respectively, and $4.3 and $0.2 for the nine months ended September 30, 2015 and 2014, 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 three months ended September 30, 2015.

    Nine months ended  
    September 30, 2015  
       
Expected price volatility   113% - 122%  
Risk free interest rate   1.34% - 1.87%  
Expected annual dividend yield   0%  
Expected option term (years)   5 - 6  
Expected forfeiture rate   1.3% - 8.8%  
Grant date fair value per share $ 2.97 - $6.31  

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.

12. Shareholders’ Equity

In April 2015, the Company issued, through a private placement agreement, 7,847,668 Units, at a price of Cdn$9.00 per Unit. Each Unit is comprised of one treasury unit (a “Treasury Unit”) and one-half of one common share from Donald L. Kramer, Healthcare Ventures, Ltd (a company wholly owned by Dr. Kramer), Harry Fleming or from treasury. Each Treasury Unit is comprised of one-half of one common share of the Company and one-half of one common share purchase warrant exercisable for one additional share at a price of Cdn$11.50. Through the private placement, the Company raised proceeds of $28.4 million, net of offering costs and commissions of $1.9 million. As part of the private placement, the Company also granted 392,383 options to the underwriter at a price of Cdn$9.00.

Earnings per share (“EPS”)

A detail of the Company’s EPS is as follows (in thousands except for share and per share amounts):

 
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    Three months ended     Three months ended     Nine months ended     Nine months ended  
    September 30, 2015     September 30, 2014     September 30, 2015     September 30, 2014  
                         

Net income for the period

$  10,943   $  1,240   $  6,038   $  1,722  

 

                       

Issued common shares at beginning of period

  70,867,494     43,411,318     59,418,227     42,729,547  

Effect of investment in subsidiary

  -     -     -     406,466  

Effect of private placement

  -     242,104     2,066,496     -  

Effect of June 2015 acquisition

  -     -     37,478     -  

Effect of stock based compensation

  61,884     184,783     303,426     264,835  

Effect of stock warrants

  6,209     753,567     2,194,072     253,949  

Athas share consideration

  -     -     1,290,911     81,589  

Weighted average common shares at end of period

  70,935,587     44,591,772     65,310,610     43,736,386  

 

                       

Basic net income per common share

$  0.15   $  0.03   $  0.09   $  0.04  

A detail of the Company’s dilutive EPS is as follows (in thousands except for share and per share amounts):

    Three months ended     Three months ended     Nine months ended     Nine months ended  
    September 30, 2015     September 30, 2014     September 30, 2015     September 30, 2014  
                         

Net income for the period

$  10,943   $  1,240   $  6,038   $  1,722  

 

                       

Weighted average common shares (basic)

  70,935,587     44,591,772     65,310,610     43,736,386  

Effect of stock based compensation

  6,597,870     785,161     6,242,470     641,344  

Effect of stock warrants

  122,806     98,067     420,527     64,218  

Athas share consideration

  -     -     3,094,017     -  

Weighted average common shares (diuluted) at end of period

  77,656,264     45,475,000     75,067,623     44,441,948  

 

                       

Dilutive net income per common share

$  0.14   $  0.03   $  0.08   $  0.04  

Options to purchase 1,875,000 shares of common stock, warrants with the right to purchase 3,923,824 shares of common stock and options issued to underwriters to purchase 392,383 shares of common stock were not included in the computation of diluted earnings per share in the 2015 period because the effect would have been anti-dilutive as a result of the securities being “out of the money” with a strike price greater than the average fair market value during the period presented.

13. Warrants and Options Derivative Liabilities

Warrants and Options Issued in Private Placements

The Company issued warrants and compensatory options in connection with private placements completed in December 2013 and September 2014. These warrants and options have exercise prices denominated in Canadian dollars and as such may not be considered indexed to our stock in accordance with ASC 815-40-15-7I. 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 Statements of Operations under the caption “Change in fair value of warrants and options liability”.

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:

    September 30, 2015     December 31, 2014  
             
Risk free interest rate   0.11% - 0.64%     0.13% - 0.67%  
Expected life in years   0.25 - 2     1 - 2  
Expected volatility   71% - 89%     73% - 146%  
Expected dividend yeild   0%     0%  

The changes in fair value of the warrants and options liability during the quarter ended September 30, 2015 were as follows:

 
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    September 30, 2015     December 31, 2014  
             
Balance at beginning of year $  6,657   $  2,401  
Issuance of warrants and options   12,797     2,143  
Transferred to equity upon exercise   (8,882 )   (1,440 )
Change in fair value recorded in earnings   (4,741 )   (744 )
Balance at September 30, 2015 and 2014 $  5,831   $  2,360  

The following warrants and options were outstanding at September 30, 2015:

          Number of warrants and     Remaining contractual life  
    Exercise price in Cnd$     options     (years)  
                   
2013 Options   Cnd$0.95     37,000     0.25  
2014 Warrants   Cnd$1.80     9     1.00  
2014 Options   Cnd$1.37     117,810     1.00  
2015 Warrants   Cnd$11.50     3,923,834     1.75  
2015 Options   Cnd$9.00     392,383     1.75  
Outstanding and exercisable at September 30, 2015         4,471,036        

Options Issued to Non-Employees

As discussed in Note 11, the Company has issued options to professionals providing services to the organization. These professionals do not meet the definition of an employee under U.S. GAAP. At September 30, 2015, there were 650,000 options issued and outstanding to these non-employees.

Under U.S. GAAP, the value of these option awards is determined at the performance completion date (e.g. vesting date). The Company recognizes expense for such 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 and final values of the non-employee option awards are determined using the Black Scholes pricing model with the following inputs:

    September 30, 2015     December 31, 2014  
             
Risk free interest rate   1.37% - 1.56%     0.67% - 2.00%  
Expected life in years   5 - 6     2 - 6  
Expected volatility   113% - 115%     113% - 127%  
Expected dividend yield   0%     0%  

The Company recorded expense for non-employee stock options of $1.1 and $0.1 million for the three months ended September 30, 2014 and 2015, respectively and $2.8 million and $0.1 million for the nine months ended September 30, 2015 and 2014, respectively.

After the performance completion date, options issued to non-employees will become subject to ASC 815. Under U.S. GAAP, such options may not be considered indexed to our stock in accordance with ASC 815-40-15-7I because they have exercise prices denominated in Canadian dollars. Hence, these will be classified as derivative liabilities under the caption “Warrant and 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 Statements of Operations under the caption “Change in fair value of warrant and option liabilities”. At September 30, 2015, the performance completion date was reached for 333,333 non-employee options. Accordingly, the Company reclassified $1.5 million from equity to liabilities during the nine months ended September 30, 2015 for the value of the options at the performance completion date. At September 30, 2015, these options had increased in value to $1.6 million. The change in value of these options totaling $64 thousand has been recognized in earnings.

14. Income Taxes

The Company files a consolidated federal income tax return. Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

 
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Deferred tax assets are recognized to the extent that the realization of the related tax benefit through future taxable profits is probable. The Company provided a full valuation allowance on the net deferred tax asset, consisting of net operating loss carry forwards, because management has determined that it is more likely than not that we will not earn income sufficient to realize the deferred tax assets during the carry forward period.

The Company applies recognition thresholds and measurement attributes for the financial statement recognition and of a tax position taken or expected to be taken in a tax return as it relates to accounting for uncertainty in income taxes. In addition, it is the Company’s policy to recognize interest accrued and penalties, if any, related to unrecognized benefits as income tax expense in its consolidated statement of operations.

15. Business Segment Information

A summary of the business segment information as of September 30, 2015 is as follows (in thousands):

    Nine months ended September 30, 2015  
                         
                         
    Medical Services     Marketing     Corporate     Total  
                         
Revenues $  123,638   $  15,563   $  -   $  139,201  
Cost of goods sold   -     1,255     -     1,255  
Gross Profit   123,638     14,308     -     137,946  
Operating expenses   94,589     12,216     -     106,805  
Corporate costs   -     -     23,071     23,071  
Income (loss) from operations   29,049     2,092     (23,071 )   8,070  
Interest expense   169     65     872     1,106  
Change in fair value of warrant and option liabilities   -     -     (4,677 )   (4,677 )
Bargain purchase   (4,358 )   -     -     (4,358 )
Other income   1,383     (446 )   (2,455 )   (1,518 )
Income before income taxes $  31,855   $  2,473   $  (16,811 ) $  17,517  
                         
Other data:                        
     Depreciation and amortization expense $  2,079   $  1,035   $  99   $  3,213  
     Income tax expense $  703   $  159   $  -   $  862  
     Intabgible assets $  5,734   $  14,172   $  -   $  19,906  
     Goodwill $  14,163   $  19,011   $  -   $  33,174  
     Capital expenditures $  2,406   $  127   $  -   $  2,533  
     Non-cash acquisition of property and equipment $  15,345   $  -   $  -   $  15,345  
     Non-cash acquisition of intangibles and goodwill $  13,532   $  -   $  -   $  13,532  
     Total assets $  103,836   $  43,528   $  18,158   $  165,522  
     Total liabilities $  38,360   $  3,909   $  22,831   $  65,100  

    Three months ended September 30, 2015  
                         
                         
                         
    Medical Services     Marketing     Corporate     Total  
                         
Revenues $  46,150   $  6,333   $  -   $  52,483  
Cost of goods sold   -     284     -     284  
Gross Profit   46,150     6,049     -     52,199  
Operating expenses   36,466     5,386     -     41,852  
Corporate costs   -     -     7,296     7,296  
Income (loss) from operations   9,684     663     (7,296 )   3,051  
Interest expense   169     (15 )   168     322  
Change in fair value of warrant and option liabilities   -     -     (6,381 )   (6,381 )
Bargain purchase   (4,358 )   -     -     (4,358 )
Other income   1,583     (205 )   (1,484 )   (106 )
Income before income taxes $  12,290   $  883   $  401   $  13,574  
                         
Other data:                        
     Depreciation and amortization expense $  1,178   $  344   $  43   $  1,565  
     Income tax expense $  176   $  80   $  -   $  256  
     Capital expenditures $  1,041   $  -   $  -   $  1,041  
     Non-cash acquisition of property $  10,485   $  -   $  -   $  10,485  
     Non-cash acquisition of intangibles and goodwill $  1,534   $  -   $  -   $  1,534  

 
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The Company created the Marketing & Factoring operation segment in December 2014 following the acquisition of Athas. Prior to the acquisition of Athas, the Company operated under one operating segment and therefore, has not presented a prior period comparison of segment information.

16. 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.

Elite Ambulatory Surgery Centers, LLC (“Elite”) filed suit against Athas Health, LLC (“Athas”) and Nobilis Health Corp. in Harris County Texas in early 2015. The lawsuit alleged that our acquisition of Athas caused Athas to violate an exclusive marketing services between itself and Elite, and also caused Athas to violate a non-competition covenant contained in the operating agreements of Elite-affiliate entities in which Athas was an equity owner. As of September 30, 2015 parties to the Elite Litigation are in settlement discussions. The Company currently maintains a revenue of $0.4 million for potential exposure, which we consider adequate.

17. Supplemental Cash Flow Information

    Nine months ended September 30,  
    2015     2014  
             

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

           

   Cash paid for interest

$  1,129   $  332  

   Cash paid for taxes

$  633   $  88  

 

           

SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:

           

   Non-cash acquisition of property and equipment

$  15,345   $  2,271  

   Non-cash acquisition of goodwill and intangibles

$  13,532   $  4,449  

   Non-cash deconsolidation of property and equipment

$  2,828   $  -  

   Non-cash deconsolidation of goodwill

$  701   $  -  

   Non-cash purchase of medical equipment through capital lease

$  -   $  214  

   Stock consideration given for purchase of interest in subsidiary

$  -   $  514  

   Athas settlement in lieu of contingent shares

$  5,685   $  -  

The accompanying notes are an integral part of the unaudited consolidated financial statements.

18. Subsequent Events

Scottsdale Liberty Hospital

In November, 2015, the Company announced the closing of a transaction to jointly own and operate Freedom Pain Hospital (n/k/a Scottsdale Liberty Hospital) located in Scottsdale, Arizona. The Company acquired a 60% stake and management control of the joint venture entity which was formed to own and operate the successor hospital.

In the transaction, Nobilis contributed approximately $3.2 million to acquire its 60% stake. In addition to managing the corporate affairs of the new hospital, Nobilis will provide day to day management services pursuant to a management agreement executed as part of the transaction.

Upon closing, the joint venture had approximately $4.2 million in working capital. In addition, Nobilis has agreed to facilitate, in a manner consistent with its obligations to HFS, a $4.5 million line of credit to provide additional working capital as needed.

Lefton Settelment

In December 2015, the Company executed a settlement agreement with its former Chief Marketing Officer. Pursuant to the settlement agreement, the Company paid a lump sum cash payment and shall grant 650,000 stock options at contractually agreed intervals. The aggregate expense associated with the settlement approximated $0.8 million and was accrued for at September 30, 2015.

Amended Credit Agreement

On November 30, 2015, Northstar Healthcare Acquisitions, LLC (“Acquisitions”), a wholly-owned subsidiary of the Company, entered into the Third Amendment to Credit Agreement by and among Acquisitions, Healthcare Financial Solutions, LLC (“Healthcare Financial”) (as successor in interest to HFS) and other Credit Parties named therein and the Conditional Waiver Letter Agreement by and between Acquisitions and Healthcare Financial. The Third Amendment amended the form of the Compliance Certificate set forth in the Credit Agreement. Under the Waiver Letter, Healthcare Financial granted Northstar additional time to submit financial statements for fiscal quarters ended June 30, 2015 and September 30, 2015, and to join to the Credit Agreement two new subsidiaries of the Company.

 
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

This Quarterly Report on Form 10-Q (this “Quarterly Report”) and the documents that are incorporated 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. 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 such as “may,” “believe,” “will,” “expect,” “project,” “estimate,” “anticipate,” “plan” or “continue.” 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 risk that we may face challenges managing our new Marketing Segment and may not realize anticipated benefits;
  • 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 at the Nobilis Facilities;
  • 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. However, there could be additional factors besides those listed herein that also could affect us in an adverse manner.

You should read this Quarterly Report completely and with the understanding that actual future results may be materially different from what we expect. You are cautioned not to unduly rely on forward-looking statements when evaluating the information presented in this Quarterly Report or our 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 an 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 10-K/A filed on January 12, 2016.

Executive Overview

Prior to December 1, 2014, our business was solely the ownership, operation and management of outpatient surgery centers and surgical hospitals (the “Medical Services Segment”). On December 1, 2014, we completed the acquisition of Athas Health, LLC (“Athas”) in a cash and stock transaction. The acquisition of Athas added marketing services as a stand-alone business line, which is now a separate reportable business segment (the “Marketing Segment”). In addition to providing services to third parties, we provide marketing services provider to our own healthcare facilities, which allows us to operate those facilities in many instances with few, if any, physician partners.

As a result of the Athas acquisition, our operations now consist primarily of two divisions, Medical Services Segment and the Marketing Services Segment.

Medical Services Overview

We own and manage eight healthcare facilities (the “Nobilis Facilities”) in Texas and Arizona; three hospitals (the “Nobilis Hospitals”) and five ambulatory surgery centers, referred to as the “Nobilis ASCs” of which three are located in Houston, Texas, one in Dallas, Texas and one in Scottsdale, Arizona. The Nobilis ASCs consist of Northstar Healthcare Surgery Center- Houston, Kirby Surgical Center, Microsurgery Institute of Dallas, Northstar Healthcare Surgery Center – Scottsdale and First Nobilis Surgery Center. The Nobilis Hospitals consist of First Nobilis Hospital, Hermann Drive Surgical Hospital and Plano Surgical Hospital. 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. The Nobilis Facilities focus on certain clinical specialties, including orthopedic surgery, podiatric surgery, 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. We earn revenue in our Medical Services Segment from the “facility fees” or “technical fees” charged to third party payers or to patients for the services rendered at the Nobilis Facilities.

 
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Marketing Services Overview

Our Marketing Services segment provides marketing services, patient education services and patient care co-ordination 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:

  • AccuraScope® procedures: minimally invasive laser spine procedures
  • Omega™ procedure: a surgical procedure for patients with migraine pain,
  • NueStep procedure: a surgical procedure designed to treat pain in the foot, ankle and leg
  • Evolve Weight Loss Experts: promotion of weight loss procedures
  • MIRI: promotion of women’s health related procedures

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 directs those patients to affiliated physicians who diagnosis and treat those patients at affiliated facilities. Through our Marketing Services 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 Nobilis Health Network, Inc., an entity exempt from Texas corporate practice of medicine laws that directly earns 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.

Operating Environment

The Medical Service 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 Services Segment are from reimbursement to the Nobilis ASCs and Nobilis Hospitals as “out-of-network” providers. This means that the Nobilis ASC or Nobilis Hospital is 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. However, the reimbursement to in-network providers is typically far less than that paid to out of network providers. To a far lesser degree Nobilis ASCs and Nobilis Hospitals earn fees from governmental payer programs such as Medicare. For the three months and nine months ended September 30, 2015, we derived approximately 0.5% and 0.5%, respectively, of our Medical Services Segment 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.

Recent Developments

On November 1, 2015, we completed a joint venture pursuant to which we agreed to own and operate with our joint venture partners an Arizona licensed specialty hospital, Scottsdale Liberty Hospital (the “Hospital”) located in Scottsdale, Arizona (collectively, the “Joint Venture”). Our contribution to the joint venture was approximately $3.2 million in exchange for a 60% interest in Perimeter Road Surgical Hospital, LLC (“Perimeter Road”), an Arizona limited liability company formed to operate the Hospital. Under the terms of the Joint Venture, Perimeter Road will assume certain liabilities one of the joint venture partners, SH Operating, LLC, which the parties estimate will total approximately $3.9 million. Further, the Joint Venture contemplates that we extend a line of credit to Perimeter Road in an amount up to $4.5 million in a manner consistent with our obligations under the credit agreement with GE Capital Corporation or, in the alternative, assist in establishing a commercial line of credit for Perimeter Road.

 
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The results of operations for Perimeter Road are not included in financial statements for the quarter ended September 30, 2015. See Part 1, Item 1 -- Note 18 – Subsequent Events in our accompanying consolidated financial statements for additional information on the Joint Venture.

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 revenue depends on procedure volume, case mix and payment rates of the respective payers.

The following table sets out the net patient service revenues, the number of procedures performed and the net patient service revenue per case at each of the Nobilis Facilities for nine months ended September 30, 2015 and 2014:

    Net Patient Service Revenue                 Net Patient Service Revenue  
    ($)(in thousands)     Number of Cases (1)     ($) per Case (2)  
Nobilis Facility   2015     2014     2015     2014     2015     2014  
                                     
NHSC-H $  14,047   $  13,400     1,411     782   $  9,956     17,136  
KIRBY   9,079     8,688     2,980     2,727     3,047     3,186  
MSID   23,500     19,081     2,303     1,214     10,204     15,717  
NHSC-S   11,393     631     829     66     13,743     9,564  
FNH   52,136     -     1,789     -     29,142     -  
FNSC   3,539     -     1,265     -     2,798     -  
HDSH   5,688     -     854     -     6,660     -  
PSH   3,084     -     128     -     24,094     -  
Total   122,465     41,800     11,559     4,789     10,595     8,728  
                                     
Year over Year Growth   193%           141%           21%        

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.

Same Store, 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, 2014. All other facilities are considered to be “new facilities” until the following year.

Seasonality of the Business

The surgical segment of the healthcare industry tends to be impacted by seasonality due to the nature of most benefit plans resetting on a calendar year basis. As patients utilize and reduce their remaining deductible throughout the year, surgical ASC’s and hospitals typically see a ramp in volume throughout the year with the biggest impact coming in the 4th quarter.

 
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The revenues recognized by Nobilis for the nine months ended September 30, 2014 represented 53% of the 2014 annual revenues. By comparison, the revenues recognized by Nobilis for the nine months ended September 30, 2015 represents 59% of 2015 annual revenue using the guidance issued by Nobilis for anticipated 4th quarter 2015 revenue. Approximately 35% - 40% of annual revenues have historically been recognized in the 4th quarter.

Three months ended September 30, 2015

The Nobilis Facilities focus on a limited number of high-volume, non-emergency procedures, some of which are billed on an “out of network” basis. Billing on an “out of network” basis means that we bill to entities not participating in the health insurance companies' ("Third Party Payers") provider networks, which negotiate discounted fees with providers and facilities in return for access to the patient populations covered by those Third Party Payers. 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. The following table sets forth the combined number of cases and procedures by medical specialty performed for three months ended September 30, 2015 and 2014:

MEDICAL SERVICES SEGMENT
CASE AND PROCEDURE MIX OF THE NOBILIS FACILITIES
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2015 AND 2014

          2015 %     2015     2015 %           2014 %     2014     2014 %  
Specialty   2015 Cases     Cases       Procedures     Procedures     2014 Cases     Cases     Procedures     Procedures  
                                                 
Pain Management   1,138     28.1%     3,608     38.9%     787     47.7%     2,955     54.7%  
Musculoskeletal Interventions   120     3.0%     336     3.6%     -     0.0%     -     0.0%  
Interventional Headache Procedure   39     1.0%     114     1.2%     -     0.0%     -     0.0%  
Orthopedics   300     7.4%     621     6.7%     171     10.4%     494     9.1%  
Spine   349     8.6%     436     4.7%     -     0.0%     -     0.0%  
Podiatry   130     3.2%     330     3.6%     64     3.9%     392     7.2%  
Gastro-intestinal   64     1.6%     79     0.9%     14     0.8%     17     0.3%  
General Surgery   187     4.6%     388     4.2%     155     9.4%     348     6.4%  
Plastic & Reconstructive   357     8.8%     741     8.0%     -     0.0%     -     0.0%  
Bariatrics   999     24.7%     1,976     21.3%     293     17.8%     697     12.9%  
Gynecology   231     5.7%     295     3.2%     1     0.1%     2     0.1%  
Urology   3     0.0%     3     0.1%     -     0.0%     -     0.0%  
Ear, Nose, Throat (E.N.T.)   134     3.3%     340     3.7%     164     9.9%     502     9.3%  
                                                 
TOTAL   4,051     100.0%     9,267     100.0%     1,649     100.0%     5,407     100.0%  

The following table for the Marketing Segment only includes cases generated through our marketing activities that are performed at the non-Nobilis Facilities during the reporting period after the acquisition of Athas.

MARKETING SEGMENT
CASE AND PROCEDURE MIX OF THE NOBILIS FACILITIES
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2015 AND 2014

            2015 %     2015     2015 %           2014 %     2014     2014 %  
Specialty   2015 Cases     Cases     Procedures     Procedures     2014 Cases     Cases     Procedures     Procedures  
                                                 
Pain Management   124     33.8%     124     33.8%     -     0.0%     -     0.0%  
Musculoskeletal Interventions   92     25.1%     92     25.1%     -     0.0%     -     0.0%  
Interventional Headache Procedure   71     19.3%     71     19.3%     -     0.0%     -     0.0%  
Spine   77     21.0%     77     21.0%     -     0.0%     -     0.0%  
Gynecology   3     0.8%     3     0.8%     -     0.0%     -     0.0%  
                                                 
TOTAL   367     100.0%     367     100.0%     -     0.0%     -     0.0%  

 
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CONSOLIDATED SEGMENTS
CASE AND PROCEDURE MIX OF THE NOBILIS FACILITIES
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2015 AND 2014

          2015 %     2015     2015 %           2014 %     2014     2014 %  
Specialty   2015 Cases     Cases     Procedures     Procedures     2014 Cases     Cases     Procedures     Procedures  
                                                 
Pain Management   1,262     28.6%     3,732     38.8%     787     47.7%     2,955     54.7%  
Musculoskeletal Interventions   212     4.8%     428     4.5%     -     0.0%     -     0.0%  
Interventional Headache Procedure   110     2.5%     185     2.0%     -     0.0%     -     0.0%  
Orthopedics   300     6.8%     621     6.4%     171     10.4%     494     9.1%  
Spine   426     9.6%     513     5.3%     -     0.0%     -     0.0%  
Podiatry   130     2.9%     330     3.4%     64     3.9%     392     7.2%  
Gastro-intestinal   64     1.4%     79     0.8%     14     0.8%     17     0.3%  
General Surgery   187     4.2%     388     4.0%     155     9.4%     348     6.4%  
Plastic & Reconstructive   357     8.1%     741     7.7%     -     0.0%     -     0.0%  
Bariatrics   999     22.6%     1,976     20.5%     293     17.8%     697     12.9%  
Gynecology   234     5.3%     298     3.1%     1     0.1%     2     0.0%  
Urology   3     0.2%     3     0.0%     -     0.0%     -     0.0%  
Ear, Nose, Throat (E.N.T.)   134     3.0%     340     3.5%     164     9.9%     502     9.4%  
                                                 
TOTAL   4,418     100.0%     9,634     100.0%     1,649     100.0%     5,407     100.0%  

Note:

The tables listed above are exclusive of ancillary services which include neuromonitoring, surgical assist, and anesthesia services.

A procedure is defined as the actual surgery or surgeries that are performed on the date of service for each patient (case). Each case typically includes numerous procedures. We calculated the total number of procedures performed on a case, regardless of the fact that the same procedure may have been performed numerous times. These tables refer to all cases and procedures performed, regardless of their contribution to net patient service revenue.

Our total cases performed for the three months ended September 30, 2015, were 4,418, representing a total increase of 2,769 cases, or 167.9%, from the 1,649 cases in the same period in 2014. Cases at our same center facilities were 2,404, representing 755 of the total increase. The consolidated marketing programs are attributable to 864 of the increase, with 367 cases reported under the Marketing segment, and the remaining under the Medical Services segment. Cases generated by new facilities during the reporting period are attributable to 1,647 of the increase. The increase in both same facility and new facility is a result of many factors including expanding our marketing programs, recruiting new physicians, and acquiring new facilities.

Our procedure volume for the three months ended September 30, 2015, increased by 78.2% to 9,634 from 5,407 during the prior corresponding period. This large variance is strictly driven from larger overall case volumes due to the addition of acquired centers in comparison to the same period in 2014. Since case reimbursement is based on case type, an increase or decrease in the number of procedures per case has no effect on our reimbursement and net patient service revenue per case. Relative values associated with individual procedures help determine time allocation, difficulty of the procedure, associated costs, and appropriate reimbursement.

We receive payments for surgical procedures and related services from private health insurance plans, workers’ compensation, directly from patients and from government payer 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 or Medicaid procedures. 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, and for 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 our physician limited partners and the other physicians who use 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 Payers, and others for services rendered. Revenue is recognized upon the performance of the patient service. The amounts that we actually collect from third-party Payers, including private insurers, may vary even for identical procedures performed. An additional factor in the determination of net patient service revenue is our payer mix, as between private health insurance plans, workers’ compensation, directly from patients and from government payer plans. We review and evaluate historical collections and payment data, payer mix and current economic conditions on a periodic basis and adjust the estimated collections as a percentage of gross billings, which we use 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 facilities and new facilities for the three months ended September 30, 2014 compared to the three months ended September 30, 2015.

MEDICAL SERVICES SEGMENT
TOTAL REVENUE OF THE SAME STORE NOBILIS FACILITIES
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2015 AND 2014
(In thousands of U.S. dollars)

                                                                   Facility     2015 Revenue     2014 Revenue     Variance  
                     
KIRBY   $  3,070   $  3,668   $  (598 )
NHSC-H     3,570     5,124     (1,554 )
MSID     6,609     5,242     1,367  
NHSC-S     3,242     601     2,642  
NW     -     193        
TOTAL     16,491     14,828     1,664  

MEDICAL SERVICES SEGMENT
TOTAL REVENUE OF THE NEW STORE NOBILIS FACILITIES
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2015 AND 2014
(In thousands of U.S. dollars)

Facility     2015 Revenue     2014 Revenue     Variance  
                     
FNH   $  21,562   $  2,062   $  19,500  
FNSC     822     303     519  
HDSH     3,309     -     3,309  
PSH     3,084     -     3,084  
PEAK-IOM     758     -     758  
NOBILIS ANESTHESIA     125     -     125  
TOTAL     29,660     2,365     27,295  

MARKETING SEGMENT
TOTAL REVENUE OF THE NOBILIS FACILITIES
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2015 AND 2014
(In thousands of U.S. dollars)

Facility     2015 Revenue     2014 Revenue     Variance  
                     
ATHAS   $  6,332   $  -   $  6,332  
TOTAL     6,332     -     6,332  

 
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CONSOLIDATED SEGMENTS
TOTAL REVENUE OF THE NOBILIS FACILITIES
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2015 AND 2014
(In thousands of U.S. dollars)

                                                                   Facility     2015 Revenue     2014 Revenue     Variance  
                     
KIRBY   $  3,070   $  3,668     (598 )
NHSC-H     3,570     5,124     (1,554 )
MSID     6,609     5,242     1,367  
NHSC-S     3,242     601     2,642  
NW     -     193     (193 )
FNH     21,562     2,062     19,500  
FNSC     822     303     519  
HDSH     3,309     -     3,309  
PSH     3,084     -     3,084  
PEAK-IOM     758     -     758  
NOBILIS ANESTHESIA     125     -     125  
ATHAS     6,332     -     6,332  
TOTAL     52,483     17,193     35,290  


MEDICAL SERVICES SEGMENT
TOTAL CASES OF THE SAME STORE NOBILIS FACILITIES
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2015 AND 2014

Facility     2015 Cases     2014 Cases     Variance  
                     
KIRBY     1,050     959     91  
NHSC-H     404     285     119  
MSID     670     344     326  
NHSC-S     280     61     219  
TOTAL     2,404     1,649     755  

MEDICAL SERVICES SEGMENT
TOTAL CASES OF THE NEW STORE NOBILIS FACILITIES
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2015 AND 2014

Facility     2015 Cases     2014 Cases     Variance  
                     
FNH     668     -     668  
FNSC     377     -     377  
HDSH     474     -     474  
PSH     128     -     128  
TOTAL     1,647     -     1,647  

MARKETING SEGMENT
TOTAL CASES OF THE NOBILIS FACILITIES
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2015 AND 2014

Facility     2015 Cases     2014 Cases     Variance  
                     
ATHAS     367     -     367  
TOTAL     367     -     367  

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 September 30, 2015 and 2014. 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. The Company is currently INN with United Healthcare and Cigna at the Kirby Surgical Center and INN with BlueCross BlueShield, Cigna, United Healthcare, and Aetna at the Hermann Drive Surgical Hospital.

 
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MEDICAL SERVICES SEGMENT
INN - OON CONTRACT MIX OF TOTAL CASES PERFORMED OF THE NOBILIS FACILITIES
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2015 AND 2014

Contract Network Type   2015 Contract Mix     2014 Contract Mix  
             
Out of Network   84.4%     84.5%  
In Network   15.6%     15.5%  
TOTAL   100.0%     100.0%  

MARKETING SEGMENT
INN - OON CONTRACT MIX OF TOTAL CASES PERFORMED OF THE NOBILIS FACILITIES
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2015 AND 2014

Contract Network Type   2015 Contract Mix     2014 Contract Mix  
             
Out of Network   23.9%     0.0%  
In Network   76.1%     0.0%  
TOTAL   100.0%     0.0%  

CONSOLIDATED SEGMENTS
INN - OON CONTRACT MIX OF TOTAL CASES PERFORMED OF THE NOBILIS FACILITIES
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2015 AND 2014

Contract Network Type   2015 Contract Mix     2014 Contract Mix  
             
Out of Network   78.5%     84.5%  
In Network   21.5%     15.5%  
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 September 30, 2015 we saw an increase shift towards INN cases based on our total cases performed compared to the corresponding period in 2014.

The following tables set out the payer mix at our Medical Segment, our Marketing Segment and on a consolidated basis for the three months ended September 30, 2015 and 2014. 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.

 
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MEDICAL SERVICES SEGMENT
PATIENT AND NET PROFESSIONAL FEE REVENUE BY PAYORS OF THE NOBILIS FACILITIES
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2015 AND 2014

    2015 Patient and Net     2014 Patient and Net  
Payors   Professional Fee Revenue     Professional Fee Revenue  
    by Payor Mix     by Payor Mix  
             
Private insurance and other private pay   94.4%     97.4%  
Workers compensation   5.1%     1.6%  
Medicare   0.5%     1.0%  
     Total   100.0%     100.0%  

MARKETING SEGMENT
PATIENT AND NET PROFESSIONAL FEE REVENUE BY PAYORS OF THE NOBILIS FACILITIES
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2015 AND 2014

    2015 Patient and Net     2014 Patient and Net  
Payors   Professional Fee Revenue     Professional Fee Revenue  
    by Payor Mix     by Payor Mix  
             
Private insurance and other private pay   100.0%     0.0%  
Workers compensation   0.0%     0.0%  
Medicare   0.0%     0.0%  
     Total   100.0%     0.0%  

CONSOLIDATED SEGMENTS
PATIENT AND NET PROFESSIONAL FEE REVENUE BY PAYORS OF THE NOBILIS FACILITIES
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2015 AND 2014

    2015 Patient and Net     2014 Patient and Net  
Payors   Professional Fee Revenue     Professional Fee Revenue  
    by Payor Mix     by Payor Mix  
             
Private insurance and other private pay   95.1%     97.4%  
Workers compensation   4.5%     1.6%  
Medicare   0.4%     1.0%  
     Total   100.0%     100.0%  

 
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RESULTS OF OPERATIONS AS A PERCENTAGE OF PATIENT AND NET PROFESSIONAL FEES
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2015
AND FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2014

  Three months ended September 30,  
  2015     2014  
             
Revenues:   100%     100%  
             
Cost of revenues   0.5%     0.0%  
             
         Gross Profit   99.5%     100%  
             
Operating expenses:            
   Salaries and benefits   19.5%     17.2%  
   Drugs and supplies   15.5%     13.2%  
   General and administrative   40.1%     35.9%  
   Bad debt expense   1.8%     0.0%  
   Amortization   2.9%     2.0%  
         Total operating expenses   79.7%     68.3%  
             
Corporate costs:            
   Salaries and benefits   2.9%     3.7%  
   General and administrative   9.9%     4.0%  
   Legal expenses   1.0%     1.2%  
   Amortization   0.1%     0.2%  
         Total corporate costs   13.9%     9.1%  
             
         Income from operations   5.9%     22.7%  
             
Other expense (income):            
   Change in fair value of warrant and stock option liabilities   -12.2%     0.0%  
   Interest expense   0.6%     0.1%  
   Bargain purchase gain   -8.3%     0.0%  
   Other expense (income), net   -0.2%     -0.2%  
         Total other expense (income)   -20.1%     0.0%  
             
Net income before income taxes and noncontrolling interests   26.0%     22.7%  
             
Income tax   0.5%     0.5%  
         Net income   25.5%     22.2%  
             
Net income attributable to noncontrolling interests   4.5%     15.0%  
Net income attributable to Nobilis Health Corp.   21.0%     7.2%  

Consolidated Revenues

Our total revenues for the three months ended September 30, 2015, totaled $52.5 million, an increase of $35.3 million or 205.2%, compared to $17.2 million from the prior corresponding period. The Marketing segment accounted for $6.3 million of the increase. The Medical Services segment increased by $29.0 million, or 168.6%, compared to $17.2 million from the prior corresponding period. Same center facilities represented an increase of $1.8 million for the three month period, while new facilities attributed the difference of $27.2 million for a consolidated increase in revenues.

Operating Salaries

Operating salaries and benefits for the three months ended September 30, 2015, totaled $10.3 million, an increase of $7.3 million, or 243.3%, from $3.0 million the prior corresponding period. The Marketing segment accounted for $2.1 million of the increase while the Medical Services segment increased by $5.2 million, or 173.3% . Staffing costs at newly acquired facilities accounted for $5.0 million of the Medical Services segment’s increase. Same center facilities totaled $2.4 million, an increase of $0.2 million, or 9.1%, from $2.2 million the prior corresponding period. Operating salaries and benefits as a percent of revenues were 19.5% compared to 17.2% in the prior corresponding period. The increase was a result of the higher staffing needs at newly acquired hospitals.

 
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Medical Supplies

Drugs and medical supplies expense for the three months ended September 30, 2015, totaled $8.1 million, an increase of $5.8 million or 252.2% from $2.3 million the prior corresponding period. Medical supplies costs at newly acquired facilities accounted for $4.8 million of the increase with the remaining $1.0 million attributable to same center growth. Drugs and medical supplies as a percent of revenues increased to 15.5% from 13.2% from the prior corresponding period due to lower operating margins at a newly acquired hospital as well as an overall increase in higher acuity cases which generally are more expensive to cover.

Operating General and Administrative

Our operating general and administrative expense for three months ended September 30, 2015, totaled $21.0 million, an increase of $14.8 million, or 238.7%, from $6.2 million the prior corresponding period. The Marketing Segment contributed to $2.8 million of the increase which primarily consists of advertising expense. The remaining $12.0 million increase is due to an increase in marketing expenses, physician contracting, general infrastructure development, such as rent, telecommunication, travel, and consulting, and an increase in operations associated with the newly acquired and same store medical services facilities. Newly acquired facilities contributed to $2.0 million of the increase and same store facilities contributed $0.6 million of the increase. Marketing expenses allocated to the Medical Services segment increased by $6.8 million to $7.3 million for the three months ended September 30, 2015, from $0.5 million for the corresponding period in 2014. The increase in marketing expenses is related to our strategic growth initiatives of growing our bariatric, spine, migraine, podiatry and gynecological brands. For the development of the marketing programs, the Company enters into independent contractor agreements with physicians to provide services to the Company including administrative, management and marketing services. This expense increased by $0.7 million to $2.0 million for the three months ended September 30, 2015 from $1.3 million for the corresponding period in 2014. Expenses related to general infrastructure development increased by $1.6 million to $2.4 million in 2015 from $0.8 million in 2014.

In addition, operating general and administrative expenses contained revenue cycle management expenses. 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. The advancement payment varies by specialty and on average represents between 20% and 50% of the amounts transferred. We do not have any other relationship with third parties of this nature other than the vendor relationship described herein. For three months ended September 30, 2015 and 2014 we received advancement payments of $0.3 million and $0.2 million, respectively. During the same period, we transferred $1.3 million and $1.0 million, respectively, of receivables, net of advancement payment, representing an increase in revenue cycle management expenses of $0.3 million.

Bad Debt Expense

Bad Debt Expense for the three months ended September 30, 2015 totaled $0.9 million, an increase of the same amount compared to the corresponding period in 2014. The Company recorded bad debt expenses of $0.9 million due to a medical center in Dallas, Texas that filed Chapter 11 in November 2015.

Depreciation

Depreciation for the three months ended September 30, 2015, totaled $1.5 million, an increase of $1.2 million or 400.0% from $0.3 million the prior corresponding period. This increase is primarily due to an increase in property and equipment from newly acquired facilities.

Corporate General and Administrative

In total, corporate costs for the three months ended September 30, 2015, totaled $7.3 million, representing an increase of $5.7 million or 356.3% from $1.6 million the prior corresponding period. The increase was primarily attributable to additional corporate staff and legal expenses related to mergers and acquisitions, and non-cash compensation expense. Corporate salaries and benefits had an increase of $0.9 million to $1.5 million for the three months ended September 30, 2015 from $0.6 million for the corresponding period in 2014. Legal expenses increased by $0.3 million to $0.5 million for the three months ended September 30, 2015 from $0.2 million for the corresponding period in 2014. Non-cash compensation increased by $2.8 million to $3.0 million for the three months ended September 30, 2015 from $0.2 million for the corresponding period in 2014. We present corporate costs as a separate section from the operating expenses of the revenue generating facilities to illustrate our operational efficiency.

Other Expense (Income)

The Company recognized $6.4 million of income for the change in the value of warrant and option liabilities for the three months ended September 30, 2015 (including the effect of additional issuances and exercises of such instruments).

 
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Noncontrolling Interests

Net income attributable to non-controlling interests are based on ownership percentages in the Nobilis Facilities that are owned by third parties.

Nine months ended September 30, 2015

The Nobilis Facilities focus on a limited number of high-volume, non-emergency procedures, some of which are billed on an “out of network” basis. 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. The following table sets forth the combined number of cases and procedures by medical specialty performed for nine months ended September 30, 2015 and 2014:

MEDICAL SERVICES SEGMENT
CASE AND PROCEDURE MIX OF THE NOBILIS FACILITIES
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2015 AND 2014

      2015     2015 %     2015     2015 %     2014       2014 %     2014     2014 %  
Specialty   Cases       Cases      Procedures     Procedures     Cases     Cases     Procedures     Procedures  
                                                 
Pain Management   3,424     29.6%     11,691     39.7%     2,188     45.7%     8,634     54.6%  
Musculoskeletal Interventions   478     4.1%     1,560     5.3%     -     0.0%     -     0.0%  
Interventional Headache Procedure   97     0.8%     269     0.9%     -     0.0%     -     0.0%  
Orthopedics   946     8.2%     1,920     6.5%     565     11.8%     1,674     10.6%  
Spine   671     5.8%     1,027     3.5%     -     0.0%     -     0.0%  
Podiatry   374     3.2%     1,193     4.1%     214     4.5%     1,229     7.8%  
Gastro-intestinal   246     2.1%     420     1.4%     52     1.0%     68     0.4%  
General Surgery   502     4.3%     1,070     3.6%     319     6.7%     721     4.6%  
Plastic & Reconstructive   1,142     9.9%     2,634     8.9%     -     0.0%     -     0.0%  
Bariatrics   2,675     23.1%     5,726     19.4%     1,000     20.9%     2,061     13.0%  
Gynecology   571     4.9%     670     2.3%     28     0.6%     38     0.2%  
Urology   10     0.1%     10     0.0%     -     0.0%     -     0.0%  
Ear, Nose, Throat (E.N.T.)   423     3.7%     1,259     4.3%     423     8.8%     1,400     8.8%  
                                                 
TOTAL   11,559     100.0%     29,449     100.0%     4,789     100.0%     15,825     100.0%  

The following table for the Marketing Segment only includes cases generated through our marketing activities that performed at the non-Nobilis Facilities during the reporting period after the acquisition of Athas.

MARKETING SEGMENT
CASE AND PROCEDURE MIX OF THE NOBILIS FACILITIES
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2015 AND 2014

          2015 %     2015     2015 %           2014 %     2014     2014 %  
Specialty   2015 Cases     Cases     Procedures     Procedures     2014 Cases     Cases     Procedures     Procedures  
                                                 
Pain Management   402     40.6%     402     40.6%     -     0.0%     -     0.0%  
Musculoskeletal Interventions   300     30.3%     300     30.3%     -     0.0%     -     0.0%  
Interventional Headache Procedure   188     19.0%     188     19.0%     -     0.0%     -     0.0%  
Spine   97     39.8%     97     9.8%     -     0.0%     -     0.0%  
Gynecology   3     0.3%     3     0.3%     -     0.0%     -     0.0%  
                                                 
TOTAL   990     100.0%     990     100.0%     -     0.0%     -     0.0%  

 
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CONSOLIDATED SEGMENTS
CASE AND PROCEDURE MIX OF THE NOBILIS FACILITIES
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2015 AND 2014

           2015 %      2015     2015 %           2014 %     2014     2014 %  
Specialty   2015 Cases     Cases     Procedures     Procedures     2014 Cases     Cases     Procedures     Procedures  
                                                 
Pain Management   3,826     30.5%     12,093     39.7%     2,188     45.7%     8,634     54.6%  
Musculoskeletal Interventions   778     6.2%     1,860     6.1%     -     0.0%     -     0.0%  
Interventional Headache Procedure   285     2.3%     457     1.5%     -     0.0%     -     0.0%  
Orthopedics   946     7.5%     1,920     6.3%     565     11.8%     1,674     10.6%  
Spine   768     6.1%     1,124     3.7%     -     0.0%     -     0.0%  
Podiatry   374     3.0%     1,193     3.9%     214     4.5%     1,229     7.8%  
Gastro-intestinal   246     2.0%     420     1.4%     52     1.0%     68     0.4%  
General Surgery   502     4.0%     1,070     3.5%     319     6.7%     721     4.6%  
Plastic & Reconstructive   1,142     9.1%     2,634     8.7%     -     0.0%     -     0.0%  
Bariatrics   2,675     21.3%     5,726     18.8%     1,000     20.9%     2,061     13.0%  
Gynecology   574     4.6%     673     2.3%     28     0.6%     38     0.2%  
Urology   10     0.0%     10     0.0%     -     0.0%     -     0.0%  
Ear, Nose, Throat (E.N.T.)   423     3.4%     1,259     4.1%     423     8.8%     1,400     8.8%  
                                                 
TOTAL   12,549     100.0%     30,439     100.0%     4,789     100.0%     15,825     100.0%  

Note:

The tables listed above are exclusive of ancillary services which include neuromonitoring, surgical assist, and anesthesia services.

A procedure is defined as the actual surgery or surgeries that are performed on the date of service for each patient (case). Each case typically includes numerous procedures. In Management’s Discussion and Analysis of Financial Condition and Results of Operations in the 2014 Annual Report, we provided the number of “unique” procedures per case as the total number of procedures during the period (i.e. a patient may have had three different procedures performed, however, one of the three procedures might have been performed numerous times during the case). In this Quarterly Report, we calculated the total number of procedures performed on a case, regardless of the fact that the same procedure may have been performed numerous times. These tables refer to all cases and procedures performed, regardless of their contribution to net patient service revenue.

Our total cases performed for the nine months ended September 30, 2015, were 12,549, representing a total increase of 7,760 cases, or 162.0%, from the 4,789 cases in the same period in 2014. Cases at same center facilities were 7,523, representing 2,734 of the total increase. The consolidated marketing programs are attributable to 2,435 of the increase, with 990 cases reported under the Marketing segment, and the remaining under the Medical Services segment. Cases generated by new facilities during the reporting period are attributable to 4,036 of the increase. Case volume primarily increased under the specialties of pain management, musculoskeletal interventions, spine and bariatric surgeries.

Our procedure volume for the nine months ended September 30, 2015, increased by 92.3% to 30,439 from 15,825 during the prior corresponding period. This large variance is strictly driven from larger overall case volumes due to the addition of acquired centers in comparison to the same period in 2014. Since case reimbursement is based on case type, an increase or decrease in the number of procedures per case has no effect on our reimbursement and net patient service revenue per case. Relative values associated with individual procedures help determine time allocation, difficulty of the procedure, associated costs, and appropriate reimbursement.

We receive payments for surgical procedures and related services from private health insurance plans, workers’ compensation, directly from patients and from government payer 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 or Medicaid procedures. 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, and for 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 our physician limited partners and the other physicians who use 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 payers, and others for services rendered. Revenue is recognized upon the performance of the patient service. The amounts that we actually collect from third-party payers, including private insurers, may vary even for identical procedures performed. An additional factor in the determination of net patient service revenue is our payer mix, as between private health insurance plans, workers’ compensation, directly from patients and from government payer plans. We review and evaluate historical collections and payment data, payer mix and current economic conditions on a periodic basis and adjust the estimated collections as a percentage of gross billings, which we use 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 facilities and new facilities for the nine months ended September 30, 2014 compared to the nine months ended September 30, 2015.

MEDICAL SERVICES SEGMENT
TOTAL REVENUE OF THE SAME STORE NOBILIS FACILITIES
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2015 AND 2014
(In thousands of U.S. dollars)

                                                                   Facility     2015 Revenue     2014 Revenue     Variance  
                     
KIRBY   $  9,079   $  8,688   $  391  
NHSC-H     14,047     13,400     647  
MSID     23,500     19,100     4,400  
NHSC-S     11,393     631     10,762  
NW     -     244     (244 )
TOTAL     58,019     42,063     15,956  

MEDICAL SERVICES SEGMENT
TOTAL REVENUE OF THE NEW STORE NOBILIS FACILITIES
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2015 AND 2014
(In thousands of U.S. dollars)

Facility     2015 Revenue     2014 Revenue     Variance  
                     
FNH   $  52,136   $  2,062   $  50,073  
FNSC     3,539     303     3,236  
HDSH     5,688     -     5,688  
PSH     3,084     -     3,084  
PEAK-IOM     1,048     -     1,048  
NOBILIS ANESTHESIA     125     -     125  
TOTAL     65,619     2,365     63,254  

MARKETING SEGMENT
TOTAL REVENUE OF THE NOBILIS FACILITIES
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2015 AND 2014
(In thousands of U.S. dollars)

Facility     2015 Revenue     2014 Revenue     Variance  
                     
ATHAS   $  15,563   $  -   $  15,563  
TOTAL     15,563     -     15,563  

 
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CONSOLIDATED SEGMENTS
TOTAL REVENUE OF THE NOBILIS FACILITIES
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2015 AND 2014
(In thousands of U.S. dollars)

                                                                   Facility     2015 Revenue     2014 Revenue     Variance  
                     
KIRBY   $  9,079   $  8,688     391  
NHSC-H     14,047     13,400     647  
MSID     23,500     19,100     4,400  
NHSC-S     11,393     631     10,762  
NW     -     244     (244 )
FNH     52,136     2,062     50,073  
FNSC     3,539     303     3,236  
HDSH     5,688     -     5,688  
PSH     3,084     -     3,084  
PEAK-IOM     1,048     -     1,048  
NOBILIS ANESTHESIA     125     -     125  
ATHAS     15,563     -     15,563  
TOTAL     139,201     44,428     94,773  

MEDICAL SERVICES SEGMENT
TOTAL CASES OF THE SAME STORE NOBILIS FACILITIES
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2015 AND 2014

Facility   2015 Cases     2014 Cases     Variance  
                   
KIRBY   2,980     2,727     253  
NHSC-H   1,411     782     629  
MSID   2,303     1,214     1,089  
NHSC-S   829     66     763  
TOTAL   7,523     4,789     2,734  

MEDICAL SERVICES SEGMENT
TOTAL CASES OF THE NEW STORE NOBILIS FACILITIES
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2015 AND 2014

Facility   2015 Cases     2014 Cases     Variance  
                   
FNH   1,789     -     1,789  
FNSC   1,265     -     1,265  
HDSH   854     -     854  
PSH   128     -     128  
TOTAL   4,036     -     4,036  

 
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MARKETING SEGMENT
TOTAL CASES OF THE NOBILIS FACILITIES
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2015 AND 2014

Facility   2015 Cases     2014 Cases     Variance  
                   
ATHAS   990     -     990  
TOTAL   990     -     990  

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 nine months ended September 30, 2015 and 2014. 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. The Company is currently INN with United Healthcare and Cigna at Kirby Surgical Center and INN with BlueCross BlueShield, Cigna, United Healthcare, and Aetna at the Hermann Drive Surgical Hospital.

MEDICAL SERVICES SEGMENT
INN - OON CONTRACT MIX OF TOTAL CASES PERFORMED OF THE NOBILIS FACILITIES
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2015 AND 2014

Contract Network Type   2015 Contract Mix     2014 Contract Mix  
             
Out of Network   87.8%     84.4%  
In Network   12.2%     15.6%  
TOTAL   100.0%     100.0%  

MARKETING SEGMENT
INN - OON CONTRACT MIX OF TOTAL CASES PERFORMED OF THE NOBILIS FACILITIES
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2015 AND 2014

Contract Network Type   2015 Contract Mix     2014 Contract Mix  
             
Out of Network   26.5%     0.0%  
In Network   73.5%     0.0%  
TOTAL   100.0%     0.0%  

CONSOLIDATED SEGMENTS
INN - OON CONTRACT MIX OF TOTAL CASES PERFORMED OF THE NOBILIS FACILITIES
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2015 AND 2014

Contract Network Type   2015 Contract Mix     2014 Contract Mix  
             
Out of Network   82.4%     84.4%  
In Network   17.6%     15.6%  
TOTAL   100.0%     100.0%  

 
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Despite new acquisitions of OON facilities, the Company continues to implement strategies to blend both INN and OON cases. For the nine months ended September 30, 2015 we saw an increase shift towards INN cases based on our total cases performed compared to the corresponding period in 2014.

The following tables set out the payer mix at our Medical Segment, our Marketing Segment and on a consolidated basis for the nine months ended September 30, 2015 and 2014. 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 SERVICES SEGMENT
PATIENT AND NET PROFESSIONAL FEE REVENUE BY PAYORS OF THE NOBILIS FACILITIES
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2015 AND 2014

    2015 Patient and Net     2014 Patient and Net  
Payors   Professional Fee Revenue     Professional Fee Revenue  
    by Payor Mix     by Payor Mix  
             
Private insurance and other private pay   94.7%     96.3%  
Workers compensation   4.8%     2.7%  
Medicare   0.5%     1.0%  
      Total   100.0%     100.0%  

MARKETING SEGMENT
PATIENT AND NET PROFESSIONAL FEE REVENUE BY PAYORS OF THE NOBILIS FACILITIES
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2015 AND 2014

    2015 Patient and Net     2014 Patient and Net  
Payors   Professional Fee Revenue     Professional Fee Revenue  
    by Payor Mix     by Payor Mix  
             
Private insurance and other private pay   100.0%     0.0%  
Workers compensation   0.0%     0.0%  
Medicare   0.0%     0.0%  
      Total   100.0%     0.0%  

CONSOLIDATED SEGMENTS
PATIENT AND NET PROFESSIONAL FEE REVENUE BY PAYORS OF THE NOBILIS FACILITIES
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2015 AND 2014

    2015 Patient and Net     2014 Patient and Net  
Payors   Professional Fee Revenue     Professional Fee Revenue  
    by Payor Mix     by Payor Mix  
             
Private insurance and other private pay   95.2%     96.3%  
Workers compensation   4.3%     2.7%  
Medicare   0.5%     1.0%  
     Total   100.0%     100.0%  

 
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RESULTS OF OPERATIONS AS A PERCENTAGE OF PATIENT AND NET PROFESSIONAL FEES
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2015
AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2014

  Nine months ended September 30,    
  2015     2014  
             
Revenues:   100%     100%  
             
Cost of revenues   0.9%     0.0%  
             
       Gross Profit   99.1%     100%  
             
Operating expenses:            
   Salaries and benefits   19.3%     15.5%  
   Drugs and supplies   15.1%     14.0%  
   General and administrative   39.2%     40.7%  
   Bad debt expense   0.8%     0.0%  
   Amortization   2.2%     2.1%  
       Total operating expenses   76.6%     72.3%  
             
Corporate costs:            
   Salaries and benefits   2.5%     3.7%  
   General and administrative   12.7%     4.3%  
   Legal expenses   1.2%     1.9%  
   Amortization   0.1%     0.2%  
       Total corporate costs   16.5%     10.1%  
             
       Income from operations   6.0%     17.5%  
             
Other expense (income):            
   Interest expense   -3.4%     -1.7%  
   Change in fair value of warrant and stock option liabilities   0.8%     0.3%  
   Bargain purchase gain   -3.1%     0.0%  
   Other expense (income), net   -1.1%     -0.2%  
       Total other expense (income)   -6.8%     -1.6%  
             
Net income before income taxes and noncontrolling interests   12.8%     19.1%  
             
Income tax   0.6%     0.7%  
       Net income   12.2%     18.4%  
             
Net income attributable to noncontrolling interests   7.6%     14.5%  
Net income attributable to Nobilis Health Corp.   4.6%     3.9%  

Consolidated Revenues

Our total revenues for the nine months ended September 30, 2015, totaled $139.2 million, an increase of $94.8 million or 213.5%, compared to $44.4 million from the prior corresponding period. The Marketing segment accounted for $15.6 million of the increase, while the Medical Services segment increased by $79.2 million, or 178.4%, compared to $44.4 million from the prior corresponding period. Same center facilities growth represented $16.2 million of the nine month period increase, while the remaining $63.0 million is attributable to newly acquired facilities.

Operating Salaries

Operating salaries and benefits for the nine months ended September 30, 2015, totaled $26.9 million, an increase of $20.0 million or 289.9%, from $6.9 million the prior corresponding period. The Marketing segment accounted for $6.5 million of the increase while the Medical Services segment increased by $13.5 million, or 195.7%. Staffing costs at newly acquired facilities accounted for $12.0 million of the Medical Services segment’s increase. The remaining $1.5 million increase is attributable to additional staffing at same center facilities driven by increased case volumes. Operating salaries and benefits as a percent of revenues were 19.3% compared to 15.5% in the prior corresponding period. The increase was a result of the higher staffing needs at newly acquired hospitals

 
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Medical supplies

Drugs and medical supplies expense for the nine months ended September 30, 2015, totaled $21.0 million, an increase of $14.8 million or 238.7% from $6.2 million the prior corresponding period. Medical supplies costs at newly acquired facilities accounted for $11.8 million of the increase with the remaining $3.0 million attributable to same center growth. Drugs and medical supplies as a percent of revenues increased to 15.1% from 14.0% from the prior corresponding period due to lower operating margins at a newly acquired hospital.

Operating General and Administrative

Our operating general and administrative expense for nine months ended September 30, 2015, totaled $54.6 million, an increase of $36.5 million, or 201.7%, from $18.1 million the prior corresponding period. The Marketing Segment contributed to $4.6 million of the increase. The remainder of the $31.9 million increase is due to an increase in marketing expenses, physician contracting, general infrastructure development, such as rent telecommunication, travel, and consulting, and an increase in operations associated with the newly acquired and same store medical services facilities. Newly acquired facilities contributed to $9.0 million of the increase and same store facilities contributed to $0.6 million of the increase. Marketing expenses allocated to the Medical Services segment increased by $16.5 million to $19.0 million for the nine months ended September 30, 2015, from $2.5 million for the corresponding period in 2014. The increase in marketing expenses is related to our purchase of Athas in December 2014, and the associate creation of our Marketing business segment, and strategic growth initiatives of growing our bariatric, spine, podiatry and gynecological brands. For the development of the marketing programs, the Company enters into independent contractor agreements with physicians to provide services to the Company including administrative, management and marketing services. This expense increased by $2.1 million to $5.1 million for the nine months ended September 30, 2015 from $3.0 million for the corresponding period in 2014. Expenses related to general infrastructure development increased by $3.3 million to $5.4 million in 2015 from $2.1 million in 2014.

In addition, our operating general and administrative expenses contained revenue cycle management expenses. 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. The advancement payment varies by specialty and on average represents between 20% and 50% of the amounts transferred. We do not have any other relationship with third parties of this nature other than the vendor relationship described herein. For nine months ended September 30, 2015 and 2014 we received advancement payments of $1.4 million and $0.5 million, respectively. During each respective periods, we transferred $5.2 million and $4.8 million, respectively, of receivables, net of advancement payment.

Bad Debt Expense

Bad Debt Expense for the nine months ended September 30, 2015 totaled $1.1 million, an increase of the same amount compared to the corresponding period in 2014. The Company recorded bad debt expense of $0.9 million due to a medical center in Dallas, Texas that filed Chapter 11 in November 2015.

Depreciation

Depreciation for the nine months ended September 30, 2015, totaled $3.1 million, an increase of $2.2 million or 244.4% from $0.9 million the prior corresponding period. This increase is primarily due to an increase in property and equipment from newly acquired facilities.

Corporate General and Administrative

In total, corporate costs for the nine months ended September 30, 2015, totaled $23.1 million, representing an increase of $18.6 million or 413.3% from $4.5 million the prior corresponding period. The increase was primarily attributable to additional corporate staff and legal expenses related to mergers and acquisitions, and non-cash compensation. Corporate salaries and benefits increased by $1.8 million to $3.5 million for the nine months ended September 30, 2015 from $1.7 million for the corresponding period in 2014. Legal expenses increased by $0.9 million to $1.7 million for the nine months ended September 30, 2015 from $0.8 million for the corresponding period in 2014. Non-cash compensation increased by $12.8 million to $13.2 million for the nine months ended September 30, 2015 from $0.4 million for the corresponding period in 2014. The increase in non-cash compensation is attributable to an accelerated vesting of senior executive share-based compensation related to a change of Company positions and additional stock based compensation granted to the company’s Chief Executive Officer. We present corporate costs as a separate section from the operating expenses of the revenue generating facilities to illustrate our operational efficiency.

Other Expense (Income)

The Company recognized $4.7 million of income for the change in the value of warrant and option liabilities for the nine months ended September 30, 2015 (including the effect of additional issuances and exercises of such instruments).

During the nine months ended September 30, 2015, the Company recorded other income of $1.5 million, approximately $1.0 million of which was attributable to the June 2015 Athas settlement as was previously disclosed in the Company's Quarterly Report on Form 10-Q/A filed on January 12, 2016.

 
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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.

Accounts Receivable

Accounts receivable increased from $40.5 million as of December 31, 2014 to $57.1 million as of September 30, 2015. The increase is a result of case volume increasing from 4,789 for the nine months ended September 30, 2014 to 12,549 for the nine months ended September 30, 2015.

Intangible Assets

Intangible assets did not change significantly from December 31, 2014 to September 30, 2015.

Goodwill

Goodwill increased due to the following activities from December 31, 2014 through September 30, 2015: ($0.7) million for deconsolidation of certain imaging centers that were previously controlled by the Company; $10.9 million for acquisition of a Houston hospital; $1.4 million for acquisition of nerve monitoring company. The goodwill account increased to $33.2 million as of September 30, 2015.

Liquidity, Capital Resources and Financial Condition

We are dependent upon cash generated from operating activities of the Nobilis Facilities, which are the major source of financing for our operations, growth initiatives, acquisitions and for meeting our contractual obligations. Our primary sources of liquidity are cash generated from operating activities of the Nobilis Facilities, available cash and cash equivalents, and available borrowings under our term loan with HFS (the “Term Loan”) described in Note 9 – Lines of Credit. We expect to be able to fund our operating activities for the ensuing twelve months with cash flows generated from our operations, available cash and cash equivalents, financing activities and access to the Term Loan.

For the nine months ended September 30, 2015, we experienced a decrease in operating cash flows of approximately -$1.7 million.

As of September 30, 2015, the Company had consolidated net working capital of $55.8 million compared to $22.3 million as of December 31, 2014. The increase is primarily due to increased cash related to a private placement (as described below), and increased accounts receivables related to increased case volumes. Total accounts receivable were $57.1 million with accounts payables and accrued liabilities totaling $26.4 million. Cash and cash equivalents at September 30, 2015 and December 31, 2014 were $21.1 million and $7.6 million, respectively. Medical supplies at September 30, 2015 and December 31, 2014 were $3.6 million and $1.4 million, respectively.

We have a $25 million debt financing facility with GE Capital, Healthcare Financial Services (“GE”). 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 Company’s ownership interest in all less-than-wholly owned subsidiaries. As of September 30, 2015, the Company is in compliance with all debt covenants.

In May 2015, the Company issued, through a private placement agreement, 7,847,668 Units, at a price of Cdn$9.00 per Unit. Each Unit is comprised of one treasury unit (a “Treasury Unit”) and one-half of one common share from Donald L. Kramer, Healthcare Ventures, Ltd (a company wholly owned by Dr. Kramer), Harry Fleming or from treasury. Each Treasury Unit is comprised of one-half of one common share of the Company and one-half of one common share purchase warrant exercisable for one additional share at a price of Cdn$11.50. Through the private placement, the Company raised proceeds of $28.4 million, net of offering costs and commissions of $1.9 million.

Critical Accounting Policies

A summary of significant accounting policies is included in our Form 10-K/A. Our critical accounting policies are further described under the caption “Critical Accounting Policies” in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Form 10-K/A. There have been no changes in the nature of our critical accounting policies or the application of those policies since December 31, 2014.

 
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Item 3. Quantitative and Qualitative Disclosures about Market Risk

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 September 30, 2015, the following components of our Loan Agreement bears interest at variable rates at specified margins above either the agent bank’s 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.

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.

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.

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 Company’s investment policy for its cash and cash equivalents is focused on the preservation of capital and supporting the liquidity requirements of the Company. The Company’s 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.

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 Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to management, including our chief executive officer and our chief financial officer, to allow timely decisions regarding such required disclosure.

Our CEO and our CFO have concluded that our Company’s disclosure controls and procedures were not effective as of September 30, 2015 as a result of identified material weaknesses in the Company’s internal control discussed below.

The following control deficiencies that constituted material weaknesses in connection with the preparation of our financial statements as of September 30, 2015 were identified:

We did not maintain a sufficient complement of personnel with an appropriate level of accounting knowledge, experience, and training in the application of U.S. GAAP necessary to support our operations, resulting in a restatement of previously issued financial statements as discussed in Note 1 to the financial statements; and

We did not apply the appropriate level of review and oversight to the accounting and disclosure for significant, infrequently occurring transactions such as for business combinations and private placements.


 
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Remediation Plan

In light of these material weaknesses, in preparing our financial statements as of and for the periods ended September 30, 2015 and 2014, we performed additional analyses and procedures to ensure that our consolidated financial statements included in this Form 10-Q 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.

On July 9, 2015, we appointed Mr. Kenny Klein to serve as the Company's Chief Financial Officer. Our previous CFO, assumed other responsibilities with our accounting and finance organization.

During the third quarter of 2015, the Company strengthened its accounting and financial reporting group with the addition of five new professionals with knowledge, experience, and training in the application of U.S. GAAP to our accounting and finance organization. This group is complemented by the engagement during the fourth quarter of 2015 of third-party accounting specialists who will assist us with significant, infrequently occurring transactions.

We are currently reviewing and implementing remediation steps providing for more detailed supervisory review processes as part of our financial statement close process.

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

There was no change in our internal control over financial reporting during the three months ended September 30, 2015 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting, except as noted above with the respect to the identified material weakness regarding personnel and oversight of significant, infrequently occurring tranasctions.

Part II

Item 1. Legal Proceedings

See Part I, Item 1, "Financial Statements, Note 16 – Litigation" and “Financial Statements, Note 17—Subsequent Events – Lefton Settlement” of this Form 10-Q 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 Form 10-K/A filed on January 12, 2016.

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.

 
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Item 6. Exhibits

Exhibit Description
   
31.1*

Certification of Chief Executive Officer pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes- Oxley Act of 2002

   
31.2*

Certification of Chief Financial Officer pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes- Oxley Act of 2002

   
32.1*

Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

   
32.2*

Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

*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:   January 12, 2016

By: /s/ Kenneth Klein  
  Kenneth Klein  
  Chief Financial Officer  
  (Principal Financial and Duly Authorized  
  Officer)  
 
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