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 June 30, 2016

OR

[  ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________to __________.

COMMISSION FILE NUMBER: 001-37349

NOBILIS HEALTH CORP.
(Exact name of registrant as specified in its charter)

British Columbia 98-1188172
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

11700 Katy Freeway, Suite 300, Houston, Texas 77079
(Address of principal executive offices) (Zip Code)

(713)355-8614
(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.
76,781,728 common shares as of July 28, 2016.


TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION 3
                       Item 1. Financial Statements 3
                                    Notes to Consolidated Financial Statements 7
                       Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 22
                       Item 3. Quantitative and Qualitative Disclosures about Market Risk 41 
                       Item 4. Controls and Procedures 42 
   
PART II. OTHER INFORMATION 43 
                       Item 1. Legal Proceedings 43 
                       Item 1A. Risk Factors 43
                       Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 43
                       Item 3. Defaults Upon Senior Securities 43 
                       Item 4. Mine Safety Disclosures 43
                       Item 5. Other Information 43 
                       Item 6. Exhibits 43 
   
Signatures 44 

In this Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2016 (“Quarterly Report”), the terms "Nobilis", "we", "us", "our", "ours", or "the Company" refers to Nobilis Health Corp. and all of its subsidiaries.

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Part I – Financial Information

Item 1. Financial Statements

Nobilis Health Corp.
Consolidated Balance Sheets
June 30, 2016 and December 31, 2015
(in thousands, except share amounts)

   
June 30, 2016
    December 31, 2015  
    (unaudited)        
             

Assets

           

Current Assets:

           

   Cash

$  18,823   $  15,666  

   Trade accounts receivable, net of allowance of $2,494 at June 30, 2016 and $5,165 at December 31, 2015

  77,608     92,569  

   Medical supplies

  4,724     4,493  

   Prepaid expenses and other current assets

  3,573     2,789  

           Total current assets

  104,728     115,517  

Property and equipment, net

  34,976     35,303  

Intangible assets, net

  18,601     19,619  

Goodwill

  44,833     44,833  

Deferred tax asset

  27,805     25,035  

Other long-term assets

  1,997     1,720  

         Total Assets

$  232,940   $  242,027  

Liabilities and Shareholders' Equity

           

Current Liabilities:

           

   Trade accounts payable

$  20,588   $  23,381  

   Accrued expenses

  13,640     16,648  

   Lines of credit

  3,000     -  

   Current portion of capital leases

  3,793     5,193  

   Current portion of long-term debt

  1,693     1,243  

   Current portion of warrant and stock option derivative liabilities

  801     332  

   Other current liabilities

  5,377     5,025  

           Total current liabilities

  48,892     51,822  

Lines of credit

  3,500     3,000  

Long-term capital leases, net of current portion

  13,603     13,654  

Long-term debt, net of current portion

  20,397     21,469  

Warrant and stock option derivative liabilities, net of current portion

  983     2,619  

Other long-term liabilities

  3,663     3,386  

           Total liabilities

  91,038     95,950  

Commitments and Contingencies

           

Contingently redeemable noncontrolling interest

  9,393     12,225  

Shareholders' Equity:

           

     Common shares, no par value, unlimited shares authorized, 76,757,229 and 73,675,979 shares
issued and outstanding, respectively

  -     -  

   Additional paid in capital

  216,865     211,827  

   Accumulated deficit

  (85,650 )   (85,491 )

           Total shareholders’ equity attributable to Nobilis Health Corp.

  131,215     126,336  

Noncontrolling interests

  1,294     7,516  

           Total shareholders' equity

  132,509     133,852  

Total Liabilities and Shareholders' Equity

$  232,940   $  242,027  

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

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Nobilis Health Corp.
Consolidated Statements of Operations
(in thousands, except share data)
(unaudited)

    Three Months Ended June 30,     Six Months Ended June 30,  
    2016     2015     2016     2015  

Revenues:

                       

     Patient and net professional fees

$  55,176   $  45,366   $  101,533   $  80,424  

     Contracted marketing revenues

  4,668     2,839     8,150     3,649  

     Factoring revenues

  2,027     662     3,461     2,645  

           Total revenue

  61,871     48,867     113,144     86,718  

Operating expenses:

                       

     Salaries and benefits

  12,591     9,028     25,168     16,672  

     Drugs and supplies

  12,177     8,850     24,197     13,860  

     General and administrative

  27,474     20,402     52,483     33,600  

     Bad debt expense

  -     200     -     200  

     Depreciation and amortization

  1,981     955     4,510     1,592  

           Facility operating expenses

  54,223     39,435     106,358     65,924  

Corporate expenses:

                       

     Salaries and benefits

  2,030     1,001     3,312     1,992  

     General and administrative

  4,497     6,524     10,408     12,515  

     Legal expenses

  990     741     2,575     1,212  

     Depreciation

  76     30     130     56  

           Total corporate costs

  7,593     8,296     16,425     15,775  

           Income (loss) from operations

  55     1,136     (9,639 )   5,019  

Other (income) expense:

                       

     Change in fair value of warrant and stock option derivative liabilities

  (1,657 )   (1,670 )   (1,699 )   1,704  

     Interest expense

  687     294     1,371     784  

     Other income, net

  (1,159 )   (1,321 )   (2,813 )   (1,469 )

           Total other (income) expense

  (2,129 )   (2,697 )   (3,141 )   1,019  

Income (loss) before income taxes and noncontrolling interests

  2,184     3,833     (6,498 )   4,000  

Income tax (benefit) expense

  (331 )   454     (2,249 )   606  

           Net income (loss)

  2,515     3,379     (4,249 )   3,394  

Net (loss) income attributable to noncontrolling interests

  (2,291 )   3,745     (4,090 )   8,242  

Net income (loss) attributable to Nobilis Health Corp.

$  4,806   $  (366 ) $  (159 ) $  (4,848 )

Net income (loss) per basic common share

$  0.06   $  (0.01 ) $  (0.00 ) $  (0.08 )

Net income (loss) per fully diluted common share

$  0.06   $  (0.01 ) $  (0.00 ) $  (0.08 )

Weighted average shares outstanding (basic)

  76,754,950     63,531,390     75,780,695     61,872,658  

Weighted average shares outstanding (fully diluted)

  77,616,886     63,531,390     75,780,695     61,872,658  

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

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Nobilis Health Corp.
Consolidated Statements of Changes in Shareholders’ Equity
(in thousands, except share amounts)
(unaudited)

          Attributable to shareholders                          
                                           
    Common Shares                                
                                        Contingently  
                                        Redeemable  
          Additional Paid In      Accumulated     Equity Attributable       Noncontrolling             Noncontrolling  
    Shares     Capital     Deficit     to Nobilis Health     Interest     Total Equity     Interests  
                                           

BALANCE — December 31, 2014

  59,418,227   $  176,356   $  (136,687 ) $  39,669   $  4,133   $  43,802   $  12,867  

   Net (loss) income

  -     -     (4,848 )   (4,848 )   1,412     (3,436 )   6,830  

   Deconsolidation of investment

  -     (613 )   356     (257 )   307     50     -  

   Distributions to noncontrolling interests

  -     -     -     -     (1,846 )   (1,846 )   (3,798 )

   Vesting of restricted stock

  75,000     -     -     -     -     -     -  

   Reclassification of vested non-employee stock options

  -     (468 )   -     (468 )   -     (468 )   -  

   Exercise of stock warrants

  3,088,091     13,160     -     13,160     -     13,160     -  

   Exercise of stock options

  336,121     430     -     430     -     430     -  

   Share-based compensation, net

  -     10,126     -     10,126     -     10,126     -  

   Proceeds from private equity offering

  4,029,668     15,598     -     15,598     -     15,598     -  

   Acquisition of Peak

  89,749     650     -     650     -     650     -  

   Recoupment of indemnified expenses

  3,830,638     (5,685 )   -     (5,685 )   -     (5,685 )   -  

BALANCE — June 30, 2015

  70,867,494   $  209,554   $  (141,179 ) $  68,375   $  4,006   $  72,381   $  15,899  

 

                                         

BALANCE — December 31, 2015

  73,675,979   $  211,827   $  (85,491 ) $  126,336   $  7,516   $  133,852   $  12,225  

   Net loss

  -           (159 )   (159 )   (3,918 )   (4,077 )   (172 )

   Distributions to noncontrolling interests

  -     -     -     -     (2,304 )   (2,304 )   (2,660 )

   Vesting of restricted stock

  2,000,000     -     -     -     -     -     -  

   Reclassification of vested non-employee stock options

  -     (533 )   -     (533 )   -     (533 )   -  

   Exercise of stock options

  1,081,250     2,067     -     2,067     -     2,067     -  

   Share-based compensation, net

  -     3,504     -     3,504     -     3,504     -  

BALANCE — June 30, 2016

  76,757,229   $  216,865   $  (85,650 ) $  131,215   $  1,294   $  132,509   $  9,393  

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

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Nobilis Health Corp.
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)

    Six months ended June 30,  
    2016     2015  
             
             
CASH FLOWS FROM OPERATING ACTIVITIES:            
   Net (loss) income $  (4,249 ) $  3,394  
   Adjustments to reconcile net (loss) income to net cash provided by operating activities:        
   Depreciation and amortization   4,640     1,648  
   Provision for bad debts   -     200  
   Share-based compensation   3,504     10,126  
   Change in fair value of warrant and stock option derivative liabilities   (1,699 )   1,704  
   Recoupment of indemnified expenses   -     (1,700 )
   Deferred income taxes   (2,770 )   -  
   Gain on sale of property and equipment   (265 )   -  
   Earnings from equity method investment   (1,078 )   -  
   Amortization of deferred financing fees   66     33  
   Changes in operating assets and liabilities, net of assets acquired and liabilities assumed:            
         Trade accounts receivable   14,961     (6,949 )
         Medical supplies   (231 )   (425 )
         Prepaids and other current assets   (785 )   701  
         Other long-term assets   174     (39 )
         Trade accounts payable and accrued liabilities   (5,801 )   (2,432 )
         Other current liabilities   352     (942 )
         Other long-term liabilities   275     (103 )
         Distributions from equity method investments   1,085     -  
         Net cash provided by operating activities   8,179     5,216  
             
CASH FLOWS FROM INVESTING ACTIVITIES:            
   Purchase of property and equipment   (3,027 )   (1,177 )
   Investment in associate   -     (120 )
   Purchase of equity method investment   (609 )   -  
   Note receivable, net   150     (197 )
   Acquisition of Victory   -     (1,436 )
   Acquisition of Peak   -     (850 )
   Deconsolidation of imaging centers and urgent care clinic   -     (166 )
         Net cash used for investing activities   (3,486 )   (3,946 )
   Distributions to non controlling interests   (4,964 )   (5,644 )
   Proceeds from exercise of stock options   2,067     432  
   Proceeds from exercise of stock warrants   -     4,335  
   Proceeds from private placement   -     28,395  
   Payments on capital lease obligations   (1,451 )   (304 )
   Proceeds from line of credit   3,500     1,500  
   Proceeds from debt   -     20,000  
   Payments of debt   (688 )   (25,227 )
   Deferred financing fees   -     (657 )
         Net cash (used for) provided by financing activities   (1,536 )   22,830  
             
NET INCREASE IN CASH   3,157     24,100  
CASH — Beginning of period   15,666     7,568  
CASH — End of period $  18,823   $  31,668  

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

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Nobilis Health Corp.
Notes to Consolidated Financial Statements

NOTE 1 – COMPANY DESCRIPTION

Nobilis Health Corp. (“Nobilis” or the “Company”) was incorporated on March 16, 2007 under the name "Northstar Healthcare Inc." pursuant to the provisions of the British Columbia Business Corporations Act. On December 5, 2014, Northstar Healthcare Inc. changed its name to Nobilis Health Corp. The Company owns and manages health care facilities in the States of Texas and Arizona, consisting primarily of ambulatory surgery centers and acute-care surgical hospitals. In 2014, through its acquisition of Athas Health, LLC (“Athas”), the Company expanded its service offering within the health care industry to include providing contracted marketing services and accounts receivable factoring.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and Principles of Consolidation

The accompanying interim consolidated financial statements have not been audited by the Company’s independent registered public accounting firm, except that the consolidated balance sheet at December 31, 2015, is derived from previously audited consolidated financial statements. In the opinion of management, all material adjustments, consisting of normal recurring adjustments, necessary for fair presentation have been included. These interim consolidated financial statements include all accounts of the Company. All significant intercompany transactions and accounts have been eliminated upon consolidation.

Certain reclassifications have been made to prior period amounts to conform to current period financial statement classifications. The reclassifications included in these comparative consolidated financial statements are (i) a change in presentation of other comprehensive income and (ii) a reclassification from cost of goods sold to operating expenses. The reclassifications were deemed to be immaterial to the consolidated financial statements both individually and in the aggregate.

These consolidated financial statements have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) for interim financial information. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States of America (“U.S. GAAP”) for complete financial statements. Therefore, these interim consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 (“2015 Annual Report”) filed with the SEC on March 15, 2016. The operating results for interim periods are not necessarily indicative of results that may be expected for any other interim period or for the full year.

There have been no material changes to the Company’s critical accounting policies or estimates from those disclosed in the 2015 Annual Report.

Recent Accounting Pronouncements

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments-Overall (Topic 825): Recognition and Measurement of Financial Assets and Financial Liabilities. (“ASU 2016-01”) This update changes how entities account for and measure the fair value of certain equity investments and updates the presentation and disclosure of certain financial assets and liabilities. This new ASU is effective for annual and interim periods beginning on or after December 15, 2017, and for interim periods within those fiscal years, with early adoption permitted. The Company is currently evaluating the impact that ASU 2016-01 will have on the Company’s consolidated financial position and disclosures.

In March 2016, the FASB issued ASU 2016-07, Investments - Equity Method and Joint Ventures (Topic 323). This amendment eliminates the requirement to retroactively adopt the equity method of accounting when a previous investment becomes qualified as a result of an increase in the level of ownership interest or degree of influence. ASU 2016-07 is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal periods. Early adoption is permitted. The Company adopted this ASU in the first quarter of 2016 with no impact on the Company’s consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal Versus Agent Considerations (Reporting Revenue Gross Versus Net). (“ASU 2016-08”) The amendments address how an entity should assess whether it is the principal or the agent in contracts that include three or more parties. The ASU clarifies that an entity should evaluate whether it is the principal or the agent for each specified good or service promised in a contract with a customer. The amendments affect the guidance in ASU 2014-09 which is not yet effective. The effective date and transition requirements for the amendments in this ASU are the same as the effective date and transition of ASU 2014-09, which will be effective for the Company for reporting periods beginning after December 15, 2017. The Company does not expect these amendments to have a material effect on its consolidated financial statements.

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In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. ASU No. 2016-09 impacts several aspects of the accounting for share-based payment transactions, including classification of certain items on the Consolidated Statement of Cash Flows and accounting for income taxes. Specifically, the ASU requires that excess tax benefits and tax deficiencies (the difference between the deduction for tax purposes and the compensation cost recognized for financial reporting purposes) be recognized as income tax expense or benefit in the Consolidated Statement of Operations, introducing a new element of volatility to the provision for income taxes. ASU No. 2016-09 is effective on January 1, 2017, with early adoption permitted. The transition method varies for each of the areas in the ASU. The Company is currently evaluating the impact of adopting this new accounting standard on its results of operations and financial position.

In April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing, which clarifies the guidance in ASU 2014-09 regarding assessing whether promises to transfer goods or services are distinct, and whether an entity's promise to grant a license provides a customer with a right to use or right to access the entity's intellectual property. The effective date and transition requirements for the amendments in this ASU are the same as the effective date and transition of ASU 2014-09, which will be effective for the Company for reporting periods beginning after December 15, 2017. The Company does not expect these amendments to have a material effect on its consolidated financial statements.

In May 2016, the FASB issued ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients. (“ASU 2016-12”) This Update provides for amendments to ASU 2014-09, amending the guidance on transition, collectability, noncash consideration and the presentation of sales and other similar taxes. Specifically, ASU 2016-12 clarifies that, for a contract to be considered completed at transition, all (or substantially all) of the revenue must have been recognized under legacy GAAP. In addition, ASU 2016-12 clarifies how an entity should evaluate the collectability threshold and when an entity can recognize nonrefundable consideration received as revenue if an arrangement does not meet the standard’s contract criteria. The effective date and transition requirements for the amendments in this ASU are the same as the effective date and transition of ASU 2014-09, which will be effective for the Company for reporting periods beginning after December 15, 2017. The Company does not expect these amendments to have a material effect on its consolidated financial statements.

NOTE 3 – SUPPLEMENTAL CASH FLOWS

The supplemental cash flows information for the six months ended June 30, 2016 and 2015 are comprised of the following (in thousands):

  Six months ended June 30,  
    2016     2015  
             
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:            
   Cash paid for interest $  1,329   $  846  
   Cash paid for taxes $ 2,257   $ 603  
             
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:            
   Non-cash deconsolidation of property and equipment $  -   $  2,828  
   Non-cash deconsolidation of goodwill $  -   $  701  

NOTE 4 – ACQUISITIONS

Scottsdale Liberty Hospital (“SLH”)

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

The fair values assigned to certain assets acquired and liabilities assumed in relation to the Company's acquisition have been prepared on a preliminary basis with information currently available and are subject to change. Specifically, the Company is still in the process of assessing the fair value of a capital lease associated with the real property being utilized by the facility, property and equipment and the terms of an anti-dilution provision of the agreement to assess if it is a derivative and if a fair value needs to be estimated. During the measurement period, the Company made an adjustment of $0.9 million from current to long-term portion of capital leases reflected in the table below. The Company expects to finalize its analysis during 2016.

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

   

November 1, 2015

 
       
Net assets acquired:      
   Trade accounts receivable $  82  
   Prepaid expenses and other current assets   36  
   Inventory   69  
   Property and equipment   13,266  
   Other long-term assets   113  
   Goodwill   6,932  
   Tradename   160  
   Hospital license   12  
Net assets acquired $  20,670  
       
Net liabilities assumed:      
   Trade accounts payable $  2,668  
   Accrued liabilities   419  
   Current portion of capital leases   658  
   Long-term portion of capital leases   12,213  
Total liabilities assumed $  15,958  
       
Consideration:      
   Cash, net of cash acquired $  3,180  
   Noncontrolling Interest   1,532  
Total consideration $  4,712  

Unaudited Supplemental Pro Forma Information

The following unaudited supplemental pro forma financial information includes the results of operations for SLH, and is presented as if the acquired company had been consolidated as of the beginning of the year immediately preceding the year in which the company was acquired. The Company utilized all historical data that was available and practicable to obtain. The pro forma financial information excluded certain information that was not practicable to obtain for Herman Drive Surgical Hospital (f/k/a Victory Medical Center Houston) and Plano Surgical Hospital (“PSH”) due to the bankruptcy proceedings of their former parent company, Victory Parent Company, LLC. The unaudited supplemental pro forma financial information has been provided for illustrative purposes only and does not purport to be indicative of the actual results that would have been achieved by combining the companies for the periods presented, or of the results that may be achieved by the combined companies in the future. Further, results may vary significantly from the results reflected in the following unaudited supplemental pro forma financial information because of future events and transactions, as well as other factors.

There were no acquisitions during the period ended June 30, 2016, thus the consolidated financial statements for the period include full financial results of all consolidated subsidiaries. The following table shows our pro forma results for the six months ended June 30, 2015 (in thousands, except per share data):

   

June 30, 2015

 
       
Revenue $  87,291  
Income from operations $  4,352  
Net income attributable to noncontrolling interests $  7,985  
Net loss attributable to common stockholders $  (5,483 )
Net loss per basic common share $  (0.09 )

NOTE 5 – TRADE ACCOUNTS RECEIVABLE, NET

A detail of trade accounts receivable, net as of June 30, 2016 and December 31, 2015 is as follows (in thousands):

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    June 30, 2016     December 31, 2015  
Trade accounts receivable $ 78,031   $  95,114  
Allowance for doubtful accounts   (2,494 )   (5,165 )
Receivables transferred   (699 )   (298 )
Receivables purchased   2,770     2,918  
     Trade accounts receivable, net $  77,608   $  92,569  

Bad debt expense was nil for the three and six months ended June 30, 2016 and was $0.2 million for the three and six months ended June 30, 2015.

From time to time, we transfer to third parties certain of our accounts receivable payments on a non-recourse basis in return for advancement on payment to achieve a faster cash collection. As of June 30, 2016 and December 31, 2015, there remained a balance of $0.7 million and $0.3 million, respectively, in transferred receivables pursuant to the terms of the original agreement. For the three months ended June 30, 2016 and 2015, the Company received advanced payments of $0.2 million and $0.5 million, respectively. During the same time period, the Company transferred $2.0 million and $2.1 million of receivables, net of advancement of payment. Concurrently, upon collection of these transferred receivables, payment will be made to the transferee. For the six months ended June 30, 2016 and 2015, the Company received advanced payments of $0.5 million and $1.1 million, respectively. During the same time period, the Company transferred $4.1 million and $3.8 million of receivables, respectively. Concurrently, upon collection of these transferred receivables, payment will be made to the transferee.

Athas Health (“Athas”), Peak Neuromonitoring (“Peak”) and Nobilis Surgical Assist (“First Assist”) purchase receivables from physicians, at a discount, on a non-recourse basis. The discount and purchase price vary by specialty and are recorded at the date of purchase, which generally occurs 30 to 45 days after the accounts are billed. These purchased receivables are billed and collected by Athas, Peak and First Assist and they retain 100% of what is collected after paying the discounted purchase price. Following the transfer of the receivable, the transferor has no continued involvement and there are no restrictions on the receivables. Gross revenue from purchased receivables was $3.5 million and $2.1 million for the three months ended June 30, 2016 and 2015, respectively. Gross revenue from purchased receivables was $6.6 million and $5.0 million for the six months ended June 30, 2016 and 2015, respectively. Revenue, net of the discounted purchase price, was $2.0 million and $0.7 million for the three months ended June 30, 2016 and 2015, respectively. Revenue, net of the discounted purchase price, was $3.5 million and $2.6 million for the six months ended June 30, 2016 and 2015, respectively. Accounts receivable for purchased receivables was $2.8 million and $2.9 million for the six months ended June 30, 2016 and year-ended December 31, 2015, respectively. Revenue from receivables purchased is recorded in the factoring revenue line item within the Consolidated Statements of Operations.

NOTE 6 – INVESTMENTS IN ASSOCIATES

During the first quarter of 2015, The Company completed the deconsolidation of two imaging centers and one urgent care clinic in Houston, which consisted of the following entities: Spring Northwest Management, LLC, Spring Northwest Operating, LLC, Willowbrook Imaging, LLC, GRIP Medical Diagnostics, LLC and KIRPA Holdings, LLC. The Company resigned as the manager of these facilities resulting in loss of control and its rights to exercise significant influence. The Company retained investments in these facilities that are accounted for as cost method investments beginning January 1, 2015. The carrying value as of June 30, 2016 and December 31, 2015 was $0.7 million. The investments are classified as other long-term assets in the Consolidated Balance Sheets.

In March 2016, the Company acquired a 58% interest in Athelite Holdings LLC ("Athelite") a holding company with a 70% interest in Dallas Metro Surgery Center LLC ("Dallas Metro"), a company formed to provide management services to a Hospital Outpatient Department (“HOPD”). In April 2016, Athelite interest in Dallas Metro was reduced to 62%. The Athelite investment is accounted for as an equity method investment as the Company did not obtain the necessary level of control for the investment to be accounted for as a business combination. This is due to the fact that the Company does not have the ability to directly appoint a majority of the board members of Dallas Metro or independently make strategic operational decisions. The carrying value as of June 30, 2016 was $0.6 million. The investment is classified as a other long-term asset in the Consolidated Balance Sheets.

NOTE 7 – FINANCIAL INSTRUMENTS AND CONCENTRATION

In common with all other businesses, the Company is exposed to risks that arise from its use of financial instruments. This note describes the Company’s objectives, policies and processes for managing those risks and the methods used to measure them. Further quantitative information in respect to these risks is presented throughout these consolidated financial statements.

Principal financial instruments

The principal financial instruments used by the Company, from which financial instrument risk arises, are as follows:

  Accounts receivable and other receivables
  Investments in associates

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  Accounts payable, accrued liabilities and other current liabilities
  Other liabilities and notes payable
  Capital leases
  Lines of credit
  Debt
  Warrants
  Non-employee stock options

The carrying amounts of the Company’s cash, accounts receivable and other receivables, accounts payable, accrued liabilities, other current liabilities and other liabilities as reflected in the consolidated financial statements approximate fair value due to their short term maturity. The estimated fair value of the Company's other long-term debt instruments approximate their carrying amounts as the interest rates approximate the Company's current borrowing rate for similar debt instruments of comparable maturity, or have variable interest rates.

Financial instruments - risk management

The Company’s financial instrument risks include, but are not limited to the following:

  Credit risk
  Fair value risk
  Foreign exchange risk
  Other market price risk
  Liquidity risk
  Interest rate risk

Credit risk

Credit risk is the risk of financial loss to the Company if a patient, non-partner surgeon or insurance company fails to meet its contractual obligations. The Company, in the normal course of business, is exposed mainly to credit risk on its accounts receivable from insurance companies, other third-party payors, and physicians. Accounts receivables are net of applicable bad debt reserves, which are established based on specific credit risk associated with insurance companies, payors and other relevant information.

Liquidity risk

Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due and arises from the Company’s management of working capital. The Company’s objective to managing liquidity risk is to ensure that it will have sufficient cash to allow it to meet its liabilities when they become due. To achieve this objective, it seeks to maintain cash balances (or agreed credit facilities) to meet expected requirements. The liquidity risk of the Company and its subsidiaries is managed centrally by the Company’s finance function. The Company believes that there are currently no concerns of its ability to meet its liabilities as they become due for the foreseeable future.

The following tables set forth certain information with respect to the Company’s payor concentration. Patient and net professional fee revenues by payor are summarized below for the applicable periods:

MEDICAL SEGMENT

      Three Months Ended June 30,     Six Months Ended June 30,  
                               Payors     2016      2015     2016     2015  
                           
Private insurance and other private pay     96.4%     95.0%     96.2%     95.0%  
Workers compensation     3.1%     4.6%     3.4%     4.5%  
Medicare     0.5%     0.4%     0.4%     0.5%  

       Total

    100.0%     100.0%     100.0%     100.0%  

MARKETING SEGMENT

      Three Months Ended June 30,     Six Months Ended June 30,  
                               Payors     2016     2015                        2016     2015  
                           
Private insurance and other private pay     100.0%     100.0%     100.0%     100.0%  
Workers compensation     0.0%     0.0%     0.0%     0.0%  
Medicare     0.0%     0.0%     0.0%     0.0%  

        Total

    100.0%     100.0%     100.0%     100.0%  

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CONSOLIDATED SEGMENTS

      Three Months Ended June 30,     Six Months Ended June 30,  
                               Payors     2016       2015            2016     2015  
                           
Private insurance and other private pay     96.9%     95.5%     96.7%     95.3%  
Workers compensation     2.7%     4.1%     3.0%     4.2%  
Medicare     0.4%     0.4%     0.3%     0.5%  
Total     100.0%     100.0%     100.0%     100.0%  

Two facilities represent approximately 81.3% and 75.9% of the Company’s contracted marketing revenue for the three and six months ended June 30, 2016, and two facilities represent approximately 72.0% of the Company’s contracted marketing accounts receivable as of June 30, 2016.

Market risk

Market risk is the risk that the fair value of future cash flows of financial instruments will fluctuate due to changes in interest rates and/or foreign currency exchange rates.

Interest rate risk

The Company entered into a revolving line of credit that, from time to time, may increase interest rates based on market index.

Foreign exchange risk

Foreign exchange risk arises because the Company has certain expenses that are incurred in Canadian dollars.

The Company is also exposed to currency risk on purchases made from vendors based in Canada. The Company has Canadian denominated cash (“Cdn”) of $0.2 million and a nominal amount of trade payables at June 30, 2016. The Company had Cdn of $0.3 million and a nominal amount of trade payables at December 31, 2015.

NOTE 8 – ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

The following table presents a summary of items comprising accrued expenses and other current liabilities in the accompanying Consolidated Balance Sheets as of June 30, 2016 and December 31, 2015 (in thousands):

    June 30, 2016     December 31, 2015  
Accrued expenses:            
Accrued salaries and related benefits $  3,345   $  5,309  
Other   10,295     11,339  
Total accrued expenses $  13,640   $  16,648  
             
Other current liabilities:            
Estimated amounts due to third party payors $  5,102   $  3,795  
Other   275     1,230  
Total other current liabilities $  5,377   $  5,025  

NOTE 9 – OTHER LONG-TERM LIABILITIES

The Company assumed real property leases as part of certain acquisitions which required the Company to pay above market rentals through the remainder of the lease terms. Of the $3.7 million balance in other long-term liabilities at June 30, 2016, approximately $3.3 million of that balance relates to unfavorable leases. The unfavorable lease liability is amortized as a reduction to rent expense over the contractual periods the Company is required to make rental payments under the leases. Estimated amortization of unfavorable leases for the five years and thereafter subsequent to December 31, 2015 is $0.2 million for the remainder of 2016, $0.3 million for 2017, 2018, 2019, 2020, and $2.2 million thereafter.

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NOTE 10 – LINES OF CREDIT

On March 31, 2015, the Company secured a $5.0 million revolving line of credit from Healthcare Financial Services, LLC (f/k/a General Electric Capital Corporation), or “HFS” (the “HFS Revolver”) maturing in March 2020. The HFS Revolver bears interest at a rate of 4% plus LIBOR per annum (effective rate of 5.24% at June 30, 2016) and requires quarterly payments. Principal amounts borrowed under the HFS Revolver may be repaid and re-borrowed periodically. The HFS Revolver is collateralized in the same manner as the HFS term loan discussed in NOTE 11 – Debt. As of June 30, 2016 and December 31, 2015, $3.5 million and $3.0 million, respectively, were outstanding under the HFS Revolver.

The revolving line of credit is subject to certain restrictive covenants in conjunction with the HFS term loan, as defined in NOTE 11 - Debt.

On July 30, 2015, the Company issued a $1.5 million letter of credit to the Landlord of the PSH (“PSH Landlord”) facility in connection with the execution of the hospital facility lease. The PSH Landlord shall have the right to draw upon the letter of credit in an event of default. The letter of credit is secured by the $5.0 million HFS Revolver.

On May 18, 2016, the Company secured a $3.0 million revolving line of credit from Legacy Texas Bank (the “Legacy Revolver”). The Legacy Revolver bears interest at a rate of 4% plus LIBOR per annum (4.47% at June 30, 2016) on drawn funds and requires monthly payments of interest. Monthly payments of principal commenced in June 2016. As of June 30, 2016, the outstanding balance was $3.0 million, which matures within one year.

NOTE 11 – DEBT

On March 31, 2015, the Company secured a $20.0 million term loan from HFS (the “HFS Term Loan”). The HFS Term Loan bears interest at a rate of 4% plus LIBOR per annum (effective rate of 5.24% at June 30, 2016) and requires quarterly payments of principal and interest until it matures in March 2020. The HFS Term Loan provides for a 0.70% LIBOR floor. The HFS Term Loan is collateralized by the accounts receivable and physical equipment of all of the Company’s 100% owned subsidiaries as well as the Company’s ownership interest in all less than wholly owned subsidiaries.

The HFS Term Loan primarily served to refinance all previously held debt and lines of credit. Debt issuance costs associated with the new credit facility approximated $0.6 million. The issuance costs are a direct deduction from the carrying value of the HFS Term Loan, amortized using the interest method and reported as interest expense on our statement of operations. As of June 30, 2016, the outstanding balance of the HFS Term Loan was $18.6 million.

The Company entered into the Sixth Amendment to Credit Agreement (the "Sixth Amendment") dated as of August 1, 2016 among Northstar Healthcare Acquisitions, L.L.C., HFS and the Credit Parties named therein amending, among other things, added a cap on Investments in Nobilis Health Anesthesia Network, PLLC of $2.0 million; increased the permitted indebtedness of the Company pursuant to that certain Loan Agreement, dated as of July 30, 2015 between PSH and Legacy Texas Bank from $7.0 million to $7.05 million; modified the maximum leverage ratio as of March 31, 2016 to 3.05 to 1.00; and modified the definition of "Subsidiary" to exclude the following entities: Athelite, Dallas Metro, Marsh Lane Surgical Hospital, LLC, Nobilis Health Network, Inc. ("NHN") and the subsidiaries of NHN. As a result, the Company was in compliance with its covenants under the HFS Term Loan as of June 30, 2016.

In addition, as required by the Sixth Amendment, the Company shall satisfy the following conditions subsequent on or prior to August 22, 2016 (the “Post-Closing Date”), as such date may be extended by HFS in its sole discretion; delivery by the Company, a joinder agreement adding an additional company facility to the credit parties and the termination and delivery of certain UCC financing statements. If the Company fails to satisfy such conditions subsequent by the Post-Closing Date, then the Sixth Amendment and the limited waiver shall automatically and without further action be rendered null and void and the specified events of default shall be reinstated. In addition, the Company shall pay to HFS on the Post-Closing Date, a sum equal to 0.50% of the aggregate amount of the commitments.

On July 30, 2015, the Company secured a $4.5 million term loan from Legacy Texas Bank (the “Legacy Bank Term Loan”). The term loan bears interest at a rate of 4% plus LIBOR per annum (4.47% at June 30, 2016) and requires monthly payments of interest. Monthly payments of principal will commence in August 2016. The Legacy Bank Term Loan matures in July 2020 and is subordinated to the Company’s term loan and revolver with HFS. As of June 30, 2016, the outstanding balance was $4.0 million.

As of June 2016, the Legacy Texas Bank Term Loan requires the Company to maintain a fixed charge coverage ratio of 1.05 to 1.00 and to maintain its days cash on hand of no less than 30 days. The Company was in compliance with its covenants under the Legacy Bank Term Loan as of June 30, 2016.

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

Debt at June 30, 2016 and December 31, 2015 consisted of the following (in thousands):

    June 30, 2016     December 31, 2015  
             
Gross debt $  22,586   $  23,275  
Less: unamortized loan fees   496     563  
Debt, net of unamortized loan fees   22,090     22,712  
Less: current portion of term loan   1,693     1,243  
Long-term debt, net of unamortized loan fees $  20,397   $  21,469  

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NOTE 12 – FAIR VALUE MEASUREMENTS

The Company measures certain financial assets and liabilities at fair value on a recurring basis, including warrant and stock option derivative liabilities. There have been no transfers between fair value measurement levels during the six months ended June 30, 2016 and 2015.

The following table summarizes our assets and liabilities measured at fair value on a recurring basis as of June 30, 2016 and December 31, 2015, aggregated by the level in the fair value hierarchy within which those measurements fall (in thousands):

    Fair Value Measurements Using        
                         
    Quoted Prices in                    
    Active Markets for                    
    Identical Assets and     Significant Other     Significant        
    Liabilities     Observable Inputs     Unobservable Inputs        
    (Level 1)   (Level 2)   (Level 3)   Total  
                         
December 31, 2015:                        
Warrant and stock option derivative liabilities $  -   $  -   $  2,951   $  2,951  
Total $  -   $  -   $  2,951   $  2,951  
                         
June 30, 2016:                        
Warrant and stock option derivative liabilities $  -   $  -   $  1,784   $  1,784  
Total $  -   $  -   $  1,784   $  1,784  

In certain cases, where there is limited activity or less transparency around inputs to valuation, securities are classified as Level 3 within the valuation hierarchy. Level 3 liabilities that were measured at estimated fair value on a recurring basis consist of warrant and stock option derivative liabilities. The estimated fair values of the warrant and stock option derivative liabilities were measured using the Black-Scholes valuation model (refer to Note 14 – Warrants and Options Liabilities). Due to the nature of valuation inputs, the valuation of the warrants is considered a Level 3 measurement.

NOTE 13 – SHARE BASED COMPENSATION

Restricted Share Units (“RSUs”)

The Company recorded stock compensation expense relative to RSUs of nil and $5.1 million for the three months ended June 30, 2016 and 2015, respectively. The Company recorded stock compensation expense relative to RSUs of nil and $5.4 million for the six months ended June 30, 2016 and 2015, respectively. There were no grants during the three or six months ended June 30, 2016 and 2015, respectively.

The Company had no outstanding RSUs at June 30, 2016 and 4,650,000 outstanding RSUs at June 30, 2015.

Stock Options

The Company granted a total of 112,075 and 2,107,075 stock options during the three and six months ended June 30, 2016, respectively. Of the options granted during the six months ended June 30, 2016, 222,075 of those vest immediately and 1,885,000 vest ratably over a three-year period.

The Company granted a total of 3,166,782 stock options during the year ended December 31, 2015. Of the options granted during the year ended December 31, 2015, 451,782 of those vest immediately, 450,000 vest ratably over a one-year period, 1,865,000 vest ratably over a three-year period, and 400,000 cliff vest at the end of a five-year period.

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The following table summarizes stock option activity for the six months ended June 30, 2016 and 2015:

          Weighted-     Weighted-Average  
    Shares Underlying     Average Exercise     Remaining Life  
    Options     Price     (years)  
                   
Outstanding at January 1, 2015   3,118,218   $  1.45     9.80  
   Granted   1,301,782   $  4.33     9.77  
   Exercised   (336,120 ) $  1.24     -  
   Forfeited   (407,213 ) $  1.14     -  
Outstanding at June 30, 2015   3,676,667   $  2.13     9.69  
                   
Exercisable at June 30, 2015   1,257,611   $  2.59     9.76  
                   
Outstanding at January 1, 2016   5,465,000   $  2.97     9.20  
   Granted   2,107,075   $  2.03     9.60  
   Exercised   (1,081,250 ) $  1.91     -  
   Forfeited   (500,000 ) $  1.64     -  
Outstanding at June 30, 2016   5,990,825   $  2.89     9.10  
                   
Exercisable at June 30, 2016   2,129,575   $  2.24     8.70  

The above table includes 710,000 options issued to non-employees, 650,000 of which are still outstanding at June 30, 2016. Refer to Note 14 – Warrants and Options Liabilities for discussion regarding the classification of these options within the consolidated balance sheet.

The total intrinsic value of stock options exercised was $1.3 million and $2.7 million during the six months ended June 30, 2016 and 2015, respectively. The total intrinsic value for all in-the-money vested outstanding stock options at June 30, 2016 was $1.6 million. Assuming all stock options outstanding at June 30, 2016 were vested, the total intrinsic value of in-the-money outstanding stock options would have been $3.0 million at June 30, 2016.

The Company recorded total stock compensation expense relative to employee stock options of $1.7 million and $1.0 million for the three months ended June 30, 2016 and 2015, respectively, and $3.4 million and $3.0 million for the six months ended June 30, 2016 and 2015, respectively.

The fair values of the employee stock options used in recording compensation expense are computed using the Black-Scholes option pricing model. The table below shows the assumptions used in the model for options awarded during the six months ended June 30, 2016 and 2015.

    Six months ended June 30,  
             
    2016     2015  
             
Expected price volatility   116% - 117%     113% - 122%  
Risk free interest rate   1.33% - 1.53%     1.34% - 1.87%  
Expected annual dividend yield   0%     0%  
Expected option term (years)   5 - 6     5 - 6  
Expected forfeiture rate   0.5% - 11.0%     0% - 8.8%  
Grant date fair value per share $ 1.73 - $2.34   $ 2.53 - $6.10  
Grant date exercise price per share $ 1.99 - $2.78   $ 2.97 - $4.94  

For stock options, the Company recognizes share-based compensation net of estimated forfeitures and revises the estimates in the subsequent periods if actual forfeitures differ from the estimates. Forfeiture rates are estimated based on historical experience as well as expected future behavior.

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NOTE 14 – WARRANTS AND OPTIONS LIABILITIES

Warrants and Options Issued in Private Placements

The Company issued warrants and compensatory options in connection with private placements completed in December 2013, September 2014 and May 2015. These warrants and options have exercise prices denominated in Canadian dollars and as such may not be considered indexed to our stock which is valued in U.S dollars. Hence, these warrants and options are classified as liabilities under the caption “Warrants and Options Derivative Liability” and recorded at estimated fair value at each reporting date, computed using the Black-Scholes valuation method. Changes in the liability from period to period are recorded in the Consolidated Statements of Operations under the caption “Change in fair value of warrant and stock option derivative liabilities”.

The estimated fair values of warrants and options accounted for as liabilities were determined on the date of the private placements and at each balance sheet date following using the Black Scholes pricing model with the following inputs:

    Six months ended June 30,  
    2016     2015  
             
Risk free interest rate   0.26% - 0.59%     0.11% - 0.64%  
Expected life in years   0.25 - 1.15     0.5 - 1.9  
Expected volatility   91% - 112%     71% - 82%  
Expected dividend yield   0%     0%  

The changes in fair value of the warrants and options (excluding non-employees) liability during the six months ended June 30, 2016 and 2015 were as follows (in thousands):

    2016     2015  
             
Balance at beginning of year $  2,109   $  6,657  
Issuance of warrants and options   -     12,797  
Transferred to equity upon exercise   -     (8,823 )
Change in fair value recorded in earnings   (1,308 )   1,109  
Balance as of June 30, 2016 and 2015 $  801   $  11,740  

The following warrants and options were outstanding at June 30, 2016:

          Number of warrants and     Remaining contractual  
    Exercise price in Cdn$     options     life (years)  
                   
2014 Warrants $ 1.80     9     0.25  
2014 Options $ 1.37     117,810     0.25  
2015 Warrants $ 11.50     3,923,834     0.90  
2015 Options $ 9.00     392,383     0.90  
Outstanding and exercisable as of June 30, 2016         4,434,036        

Options Issued to Non-Employees

As discussed in Note 13 – Share Based Compensation, in 2014 the Company issued options to professionals providing services to the organization. These professionals do not meet the definition of an employee under U.S. GAAP. At June 30, 2016, there were 650,000 options outstanding to these non-employees.

Under U.S. GAAP, the value of these option awards is determined at the performance completion date. The Company recognizes expense for the estimated total value of the awards during the period from their issuance until performance completion since the professional services are being rendered during this time. The total expense recognized is adjusted to the final value of the award as determined on the performance completion date.

The estimated values of the option awards are determined using the Black Scholes pricing model with the following inputs:

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    Six months ended June 30,  
    2016     2015  
             
Risk free interest rate   0.86% - 1.01%     0.28% - 1.85%  
Expected life in years   4 - 5     1 - 6  
Expected volatility   112% - 116%     76% - 119%  
Expected dividend yield   0%     0%  

For the three months ended June 30, 2016 and 2015, the Company recorded expense for non-employee stock options of a nominal amount and $0.6 million, respectively. For the six months ended June 30, 2016 and 2015, the Company recorded expense for non-employee stock options of $0.1 million and $1.7 million, respectively.

Options issued to non-employees are reclassified from equity to liabilities on the performance completion date. Under U.S. GAAP, such options may not be considered indexed to our stock because they have exercise prices denominated in Canadian dollars. Hence, these will be classified as liabilities under the caption “Warrant and stock option liabilities” and recorded at estimated fair value at each reporting date, computed using the Black-Scholes valuation method. Changes in the liability from period to period will be recorded in the Consolidated Statements of Operations under the caption “Change in fair value of warrant and stock option liabilities”. At June 30, 2016, there were no unexercised non-employee options requiring liability classification as the performance completion date has not been reached.

NOTE 15 – EARNINGS PER SHARE

Basic net earnings attributable to Nobilis common shareholders, per common share, excludes dilution and is computed by dividing net earnings attributable to Nobilis common shareholders by the weighted-average number of common shares outstanding during the period. Diluted net earnings attributable to Nobilis common shareholders, per common share, is computed by dividing net earnings attributable to Nobilis common shareholders by the weighted-average number of common shares outstanding during the period plus any potential dilutive common share equivalents, including shares issuable upon the vesting stock option awards, warrants and RSUs as determined under the treasury stock method. A detail of the Company’s earnings per share is as follows (in thousands except for share and per share amounts):

    Three months ended June 30,     Six months ended June 30,  
    2016     2015     2016     2015  
                         
Basic:                        
   Net income (loss) attributable to Nobilis Health Corp. $  4,806   $  (366 ) $  (159 ) $  (4,848 )
   Weighted average common shares outstanding   76,754,950     63,531,390     75,780,695     61,872,658  
   Net income (loss) per common share $  0.06   $  (0.01 ) $  (0.00 ) $  (0.08 )
                         
Diluted:                        
   Net income (loss) attributable to Nobilis Health Corp. $  4,806   $  (366 ) $  (159 ) $  (4,848 )
   Weighted average common shares outstanding   76,754,950     63,531,390     75,780,695     61,872,658  
   Dilutive effect of stock options, warrants, RSUs   861,936     -     -     -  
   Weighted average common shares outstanding assuming dilution   77,616,886     63,531,390     75,780,695     61,872,658  
   Net income (loss) per fully diluted share $  0.06   $  (0.01 ) $  (0.00 ) $  (0.08 )

NOTE 16 – NONCONTROLLING INTERESTS

Noncontrolling interests at June 30, 2016 and December 31, 2015 represent an 8.1% interest in The Palladium for Surgery - Houston, Ltd, 75% interest in the Medical Ambulatory Suites, L.P., 65% interest in Microsurgery Institute, LLC., 2.3% interest in Houston Microsurgery Institute, LLC., 50% in Northstar Healthcare Dallas Management, LLC., 65% in NHC ASC – Dallas, LLC., 49% in First Nobilis, LLC., 40% in First Nobilis Hospital Management, LLC., 45% in Hermann Drive Surgical Hospital, LP., and 40% in Perimeter Road Surgical Hospital, LLC.

Agreements with the third party equity owners in NHC - ASC Dallas and First Nobilis give these owners limited rights to require the Company to repurchase their equity interests upon the occurrence of certain events, none of which were probable of occurring as of June 30, 2016 and December 31, 2015. The contingently redeemable noncontrolling interests associated with these entities are classified in the Company’s Consolidated Balance Sheets as “temporary” or mezzanine equity. Changes in contingently redeemable noncontrolling interests are as follows (in thousands):

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    NHC - ASC Dallas     First Nobilis     Total  
                   
Balance at January 1, 2015 $  6,654   $  6,213   $  12,867  
Distributions   (3,892 )   (7,617 )   (11,509 )
Net income attributable to noncontrolling interests   631     10,236     10,867  
Total contingently redeemable noncontrolling interests at December 31, 2015 $  3,393   $  8,832   $  12,225  
                   
Balance at January 1, 2016 $  3,393   $  8,832   $  12,225  
Distributions   (2,060 )   (600 )   (2,660 )
Net income (loss) attributable to noncontrolling interests   2     (174 )   (172 )
Total contingently redeemable noncontrolling interests at June 30, 2016 $  1,335   $  8,058   $  9,393  

Certain of our consolidated subsidiaries that are less than wholly owned meet the definition of a Variable Interest Entity (“VIE”), and we hold voting interests in all such entities. We consolidate the activities of VIE’s for which we are the primary beneficiary. In order to determine whether we own a variable interest in a VIE, we perform qualitative analysis of the entity’s design, organizational structure, primary decision makers and relevant agreements. Such variable interests include our voting interests, and may also include other interests and rights, including those gained through management contracts.

Since our core business is the management and operation of health care facilities, our subsidiaries that are determined to be VIE’s represent entities that own, manage and operate such facilities. Voting interests in such entities are typically owned by us, by physicians practicing at these facilities (or entities controlled by them) and other parties associated with the operation of the facilities. In forming such entities, we typically seek to retain operational control and, as a result, in some cases, voting rights we hold are not proportionate to the economic share of our ownership in these entities, which causes them to meet the VIE definition. We consolidate such VIE’s if we determine that we are the primary beneficiary because (i) we have the power to direct the activities that most significantly impact the economic performance of the VIE via our rights and obligations associated with the management and operation of the VIE’s health care facilities, and (ii) as a result of our obligation to absorb losses and the right to receive residual returns that could potentially be significant to the VIE, which we have through our equity interests.

The following table summarizes the carrying amount of the assets and liabilities of our material VIE’s included in the Company’s consolidated balance sheets (after elimination of intercompany transactions and balances) (in thousands):

    June 30, 2016     December 31, 2015  
             
Total cash and short term investments $  709   $  191  
Total accounts receivable   6,478     8,660  
Total other current assets   1,693     1,582  
Total property and equipment   17,624     5,227  
Total other assets   49     144  
Total assets $  26,553   $  15,804  
             
Total accounts payable $  3,190   $  2,286  
Total other liabilities   6,190     7,059  
Total accrued liabilities   2,383     2,664  
Long term - capital lease   12,118     780  
Noncontrolling interest   (6,604 )   (1,488 )
Total liabilities $  17,277   $  11,301  

NOTE 17 – INCOME TAXES

The Company is a corporation subject to federal income tax at a statutory rate of 35% of pretax earnings. The Company estimates an annual effective income tax rate of 30.7% for U.S. and none for Canada based on projected results for the year and applies this rate to income before taxes to calculate income tax expense. The following items caused the second quarter effective income tax rate to be significantly different from the statutory rate:

 

Canada is excluded from the worldwide annual effective tax rate calculation because Canada has losses but does not expect to realize them, which reduces the second quarter effective tax rate by approximately 4% for the six months ended June 30, 2016.


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All of the Partnership’s earnings are included in the Company’s net income; however, the Company is not required to record income tax expense or benefit with respect to the portion of the Partnership’s earnings allocated to its noncontrolling public limited partners, which reduces the second quarter effective tax rate by approximately 5.8% for the six months ended June 30, 2016.

   

The Company adjusted the projected income for the year, which increased the estimated federal statutory tax rate from 34% to 35%. The adjustment to the existing deferred tax assets and liabilities increases the second quarter effective tax rate by approximately 12.5% for the six months ended June 30, 2016.

   

The second quarter effective tax rate includes a discrete item for the stock compensation shortfall, which reduces the effective tax rate by approximately 4.8% for the six months ended June 30, 2016. The net tax benefit for the three and six months ended June 30, 2016 was $0.3 million and $2.2 million, respectively, resulting in an effective tax rate of approximately -15.4% and 34.6% respectively. The net tax benefit include $0.3 million and $0.5 million of state tax expense, respectively. The Company did not recognize any federal or foreign tax expense or benefit for the three and six months ended June 30, 2015 as the Company had a full valuation allowance against deferred tax assets at that time. The state tax expense for the three and six months ended June 30, 2015 was $0.5 million and $0.6 million, respectively.

On April 22, 2016, the Company received notification from the Internal Revenue Service to examine our December 31, 2014 and 2013 Federal income tax return. Based on management tax analysis, the Company did not have any uncertain tax positions as of June 30, 2016.

NOTE 18 – BUSINESS SEGMENT INFORMATION

A summary of the business segment information for the three months ended June 30, 2016 and 2015 is as follows (in thousands):

          Three months ended June 30, 2016        
                         
    Medical                    
    Services     Marketing     Corporate     Total  
                         
Revenues $  55,295   $  6,576   $  -   $  61,871  
Operating expenses   50,084     4,139     -     54,223  
Corporate costs   -     -     7,593     7,593  
(Loss) income from operations   5,211     2,437     (7,593 )   55  
Interest expense   352     2     333     687  
Change in fair value of warrant and option liabilities   -     -     (1,657 )   (1,657 )
Other income   (310 )   (128 )   (721 )   (1,159 )
(Loss) income before income taxes $  5,169   $  2,563   $  (5,548 ) $  2,184  
                         
Other data:                        
       Depreciation and amortization expense $  1,593   $  388   $  76   $  2,057  
       Income tax expense (benefit) $  281   $  47   $  (659 ) $  (331 )
       Capital expenditures $  1,206   $  -   $  296   $  1,502  

          Three months ended June 30, 2015        
                         
    Medical                    
    Services     Marketing     Corporate     Total  
                         
Revenues $  43,644   $  5,223   $  -   $  48,867  
Operating expenses   34,696     4,739     -     39,435  
Corporate costs   -     -     8,296     8,296  
(Loss) income from operations   8,948     484     (8,296 )   1,136  
Interest expense   -     1     293     294  
Change in fair value of warrant and option liabilities   -     -     (1,670 )   (1,670 )
Other income   (3 )   (320 )   (998 )   (1,321 )
(Loss) income before income taxes $  8,951   $  803   $  (5,921 ) $  3,833  
                         
Other data:                        
       Depreciation and amortization expense $  612   $  343   $  30   $  985  
       Income tax expense $  400   $  54   $  -   $  454  
       Capital expenditures $  878   $  127   $  -   $  1,005  
       Non-cash acquisition of property $  4,860   $  -   $  -   $  4,860  
       Non-cash acquisition of intangibles and goodwill $  11,998   $  -   $  -   $  11,998  

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A summary of the business segment information for the six months ended June 30, 2016 and 2015 is as follows (in thousands):

          Six months ended June 30, 2016        
                         
    Medical                    
    Services     Marketing     Corporate     Total  
                         
Revenues $  101,503   $  11,641   $  -   $  113,144  
Operating expenses   97,600     8,758     -     106,358  
Corporate costs   -     -     16,425     16,425  
(Loss) income from operations   3,903     2,883     (16,425 )   (9,639 )
Interest expense   745     3     623     1,371  
Change in fair value of warrant and option liabilities   -     -     (1,699 )   (1,699 )
Other income   (1,483 )   (248 )   (1,082 )   (2,813 )
(Loss) income before income taxes $  4,641   $  3,128   $  (14,267 ) $  (6,498 )
                         
Other data:                        
       Depreciation and amortization expense $  3,462   $  1,048   $  130   $  4,640  
       Income tax expense (benefit) $  457   $  71   $  (2,777 ) $  (2,249 )
       Intangible assets $  5,292   $  13,309   $  -   $  18,601  
       Goodwill $  25,822   $  19,011   $  -   $  44,833  
       Capital expenditures $  2,731   $  -   $  296   $  3,027  
       Total assets $  146,251   $  42,838   $  43,851   $  232,940  
       Total liabilities $  56,750   $  5,103   $  29,185   $  91,038  

          Six months ended June 30, 2015        
                         
    Medical                    
    Services     Marketing     Corporate     Total  
                         
Revenues $  77,488   $  9,230   $  -   $  86,718  
Operating expenses   58,063     7,861     -     65,924  
Corporate costs   -     -     15,775     15,775  
(Loss) income from operations   19,425     1,369     (15,775 )   5,019  
Interest expense   -     80     704     784  
Change in fair value of warrant and option liabilities   -     -     1,704     1,704  
Other income   (124 )   (320 )   (1,025 )   (1,469 )
(Loss) income before income taxes $  19,549   $  1,609   $  (17,158 ) $  4,000  
                         
Other data:                        
       Depreciation and amortization expense $  901   $  691   $  56   $  1,648  
       Income tax expense $  527   $  79   $  -   $  606  
       Intangible assets $  5,739   $  14,476   $  -   $  20,215  
       Goodwill $  12,645   $  19,011   $  -   $  31,656  
       Capital expenditures $  1,365   $  127   $  -   $  1,492  
       Non-cash acquisition of property $  4,860   $  -   $  -   $  4,860  
       Non-cash acquisition of intangibles and goodwill $  11,998   $  -   $  -   $  11,998  
       Total assets $  85,714   $  41,545   $  26,259   $  153,518  
       Total liabilities $  23,168   $  5,604   $  36,467   $  65,239  

NOTE 19 – RELATED PARTY TRANSACTIONS

The minority interest holder of First Nobilis Hospital, a fully consolidated entity, is also a partial owner of First Street Hospital, L.P. and First Street Surgical Center, L.P., both of which have an ongoing business relationship with the Company. At June 30, 2016, the Company has a net amount due from these related parties of $0.6 million. In addition, the Company leases certain medical equipment and facility space from these related parties. Equipment lease costs of approximately $0.5 million and $0.6 million were incurred during the quarter ended June 30, 2016 and 2015, respectively. Facility lease costs of approximately $0.4 million were incurred during both the three months ended June 30, 2016 and 2015. Equipment lease costs of approximately $1.1 million were incurred during both the six months ended June 30, 2016 and 2015, respectively. Facility lease costs of approximately $0.9 million were incurred during both the six months ended June 30, 2016 and 2015, respectively.

In March 2016, the Company acquired an interest in Athelite, a holding company which owns an interest in Dallas Metro, a company formed to provide management services to an HOPD. The Athelite investment is accounted for as an equity method investment (refer to Note 6 – Investments in Associates). At June 30, 2016, the Company had $1.1 million in accounts receivable from Dallas Metro. The Company also rents, on a monthly basis, certain medical equipment to Dallas Metro and subleases operation facility to Benton Transitional.

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Physician Related Party Transactions

Nobilis maintains certain medical directorship, consulting and marketing agreements with various physicians who are also equity owners in Nobilis entities. Material related party arrangements of this nature are described below:

 

In October 2014 the Company entered into a marketing services agreement with an entity controlled by a physician equity owner. In June 2015, the Company expanded the relationship with this physician equity owner to include consulting, medical directorship and on-call agreements. The Company has paid $1.2 million and $1.6 million to the marketing services entity as of June 30, 2016 and 2015, respectively. The Company has paid to the physician equity owner $1.1 million and nil in fees owed pursuant to the service agreements as of June 30, 2016 and 2015, respectively.

 

In July 2014, the Company entered into a marketing services agreement with a physician equity owner and an entity owned by that physician equity owner’s brother. The Company has paid $0.6 million and $0.2 million to the marketing services entity as of June 30, 2016 and 2015, respectively.

 

In September 2013, the Company entered into a book deal with a physician equity owner. In March 2015, the Company entered into a marketing agreement with that physician equity owner and a marketing services company owned by the physician equity owner’s father. The Company has paid $2.2 million and $1.4 million to the marketing services entity as of June 30, 2016 and 2015, respectively.

NOTE 20 – COMMITMENTS AND CONTINGENCIES

Litigation

In the normal course of our business, we are subject to legal proceedings brought by or against us and our subsidiaries. In the opinion of management, the amount of ultimate liability with respect to these actions will not materially impact the financial position, results of operations or liquidity of the Company.

Shareholder Lawsuits

After the Company announced it would be restating its 2014 annual financial statements and 2015 first and second quarter interim financial statements, one complaint, Schott v. Nobilis Health Corp. et al, was filed in the United States District Court for the Southern District of Texas against the Company, our former chief executive officer and our current chief financial officer. The complaint seeks class action status on behalf of our shareholders and alleges violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 arising out of the restatement and seeks undisclosed damages. The defendants intend to vigorously defend against these claims and filed a motion to dismiss the consolidated complaint for failure to plead particularized facts supporting a strong inference of scienter on the part of the individual defendants. In response, the Plaintiff filed an amended complaint on March 7, 2016. The Company subsequently filed a motion to dismiss the amended complaint for failure to plead particularized facts supporting a strong inference of scienter on the part of the individual defendants. On June 1, 2016 the court heard oral arguments on the Company’s pending motion to dismiss. The motion is under advisement. At this early stage, we are not yet able to determine the likelihood of loss, if any, arising from this matter.

In addition, a statement of claim (complaint), Vince Capelli v Nobilis Health Corp. et. al, was filed on January 8, 2016 in the Ontario Superior Court of Justice under court file number CV-16-544173 naming Nobilis Health Corp., certain current and former officers and the Company’s former auditors as defendants. The statement of claim seeks to advance claims on behalf of the plaintiff and on behalf of a class comprised of certain of our shareholders related to, among other things, alleged certain violations of the Ontario Securities Act and seeks damages in the amount of C$80 million plus interest. The defendants intend to vigorously defend against these claims. At this early stage, we are not yet able to determine the likelihood of loss, if any, arising from this matter.

NOTE 21 – SUBSEQUENT EVENTS

The Company entered into the Sixth Amendment that among other things, added a cap on Investments in Nobilis Health Anesthesia Network, PLLC of $2.0 million; increased the permitted indebtedness of the Company pursuant to that certain Loan Agreement, dated as of July 30, 2015 between PSH and Legacy Texas Bank from $7.0 million to $7.05 million; modified the maximum leverage ratio as of March 31, 2016 to 3.05 to 1.00; and modified the definition of "Subsidiary" to exclude the following entities: Athelite, Dallas Metro, Marsh Lane Surgical Hospital, LLC, Nobilis Health Network, Inc. ("NHN") and the subsidiaries of NHN. As a result, the Company was in compliance with its covenants under the HFS Term Loan as of June 30, 2016.

In addition, as required by the Sixth Amendment, the Company shall satisfy the following conditions subsequent on or prior to August 22, 2016 (the “Post-Closing Date”), as such date may be extended by HFS in its sole discretion; delivery by the Company, a joinder agreement adding an additional company facility to the credit parties and the termination and delivery of certain UCC financing statements. If the Company fails to satisfy such conditions subsequent by the Post-Closing Date, then the Sixth Amendment and the limited waiver shall automatically and without further action be rendered null and void and the specified events of default shall be reinstated. In addition, the Company shall pay to HFS on the Post-Closing Date, a sum equal to 0.50% of the aggregate amount of the commitments.

On August 1, 2016,  Northstar Healthcare Acquisitions, LLC, a Delaware limited liability company (“Buyer”), and the Company, executed an asset purchase agreement (the “Purchase Agreement”) whereby the Buyer agreed to acquire from Dr. L. Philipp Wall (“Owner”) substantially all of the operating assets of (i) Arizona Center for Minimally Invasive Surgery, LLC, an Arizona limited liability company (“ACMIS”), (ii) L. Philipp Wall, M.D., P.C., an Arizona professional corporation (“PC”), and (iii) Arizona Vein & Vascular Center, LLC, an Arizona limited liability company and wholly owned subsidiary of PC (“AVVC” and with ACMIS and PC, each a “Seller” and collectively “Sellers”) (the “Transaction”). Buyer, NHC, Sellers and Owner are referred to collectively as the “Parties” and each individually as a “Party.”

The material provisions in the Purchase Agreement and related transactions are described below.

The Purchase Agreement

Upon the closing of the Transaction, the Buyer will receive substantially all of the operating assets of Sellers, consisting of inventory, fixed assets and certain intellectual property in exchange for an aggregate purchase price of approximately $22.0 million consisting of $17.5 million cash, $2.25 million worth of the Company’s common stock (the “Closing Shares”), and $2.25 million in the form of a convertible promissory note between Buyer and ACMIS.

In addition, the Sellers may receive an additional “earn out” payment based on the growth in trailing twelve month earnings before interest, income taxes, depreciation and amortization (“EBITDA”) of the new vascular division on the twelve-month anniversary of closing (as compared to the trailing twelve month EBITDA for the twelve months prior to closing). The earn out payment shall be equal to fifty percent (50%) of such growth.

A portion of the cash purchase price in the amount of $1.05 million will be held back pursuant to Article VI of the Purchase Agreement and will be subject to the Purchase Agreement’s indemnifications. On the twelve-month anniversary of closing, fifty percent (50%) of the amount held back, less any amounts paid as, or claimed as, indemnification, will be paid to the Owner. The remaining amounts held back, less any amounts paid as, or claimed as, indemnification, will be paid to the Owner on the twenty-four-month anniversary of closing.

The Closing Shares will be issued at a price per share based on the NYSE MKT closing price of the Company's common shares on the day prior to Closing. The Closing Shares will be restricted under Rule 144, and will also be subject to an additional contractual lock-up provisions, which lift in one-quarter increments on the twelve-month, fifteen-month, eighteen-month and twenty-first month anniversaries of closing.

In addition to receiving substantially all of the operating assets of Sellers, the Company and Buyer (or one or more assignees thereof) will assume liabilities related to Sellers’ capital leases, Sellers’ accounts payable, Seller’s non-debt liabilities arising post-closing, and all taxes related to the purchased assets from and after the date of signing. Certain assets and liabilities will remain with Sellers as described in more detail in the Purchase Agreement. The Company and Buyer (or one or more assignees thereof) will make offers of employment to substantially all of Sellers’ employees.

The Transaction is subject to customary closing conditions. In the event that the Transaction does not close within 90 days of the execution of the Purchase Agreement, Sellers shall be entitled to receive from NHC and Buyer liquidated damages in the amount of $0.3 million.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Forward-Looking Statements

This Quarterly Report and the documents that are incorporated herein by reference in this Quarterly Report contain certain forward-looking statements within the meaning of Canadian and United States securities laws, including the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, as amended. Forward-looking statements include all statements that do not relate solely to historical or current facts and may be identified by the use of words including, but not limited to the following: “may,” “believe,” “will,” “expect,” “project,” “estimate,” “anticipate,” “plan,” “continue” or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy. These forward-looking statements are based on current plans and expectations and are subject to a number of risks, uncertainties and other factors which could significantly affect current plans and expectations and our future financial condition and results. These factors, which could cause actual results, performance and achievements to differ materially from those anticipated, include, but are not limited to the following:

 

our ability to successfully maintain effective internal controls over financial reporting, including the impact of material weaknesses identified by management and our ability to remediate such control deficiencies;

  • 

our ability to implement our business strategy, manage the growth in our business, and integrate acquired businesses;

  • 

the risk of litigation and investigations, and liability claims for damages and other expenses not covered by insurance;

 

the risk that payments from third-party payers, including government healthcare programs, may decrease or not increase as costs increase;

  •  adverse developments affecting the medical practices of our physician limited partners;
  •  our ability to maintain favorable relations with our physician limited partners;
  •  our ability to grow revenues by increasing case and procedure volume while maintaining profitability;
  •  failure to timely or accurately bill for services;
  •  our ability to compete for physician partners, patients and strategic relationships;
  •  the risk of changes in patient volume and patient mix;
 

the risk that laws and regulations that regulate payments for medical services made by government healthcare programs could cause our revenues to decrease;

 

the risk that contracts are cancelled or not renewed or that we are not able to enter into additional contracts under terms that are acceptable to us; and

  •  the risk of potential decreases in our reimbursement rates.

The foregoing are significant factors we think could cause our actual results to differ materially from expected results. There could be additional factors besides those listed herein that also could affect us in an adverse manner.

This Quarterly Report should be read completely and with the understanding that actual future results may be materially different from what we expect. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date hereof, when evaluating the information presented in this Quarterly Report or other disclosures because current plans, anticipated actions, and future financial conditions and results may differ from those expressed in any forward-looking statements made by or on behalf of Nobilis.

We have not undertaken any obligation to publicly update or revise any forward-looking statements. All of our forward-looking statements speak only as of the date of the document in which they are made or, if a date is specified, as of such date. Subject to mandatory requirements of applicable law, we disclaim any obligation or undertaking to provide any updates or revisions to any forward-looking statement to reflect any change in our expectations or any changes in events, conditions, circumstances or information on which the forward-looking statement is based. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the foregoing factors and the risk factors set forth elsewhere in this report and in our 2015 Annual Report filed with the SEC on March 15, 2016.

The following discussion relates to the Company and its consolidated subsidiaries and should be read in conjunction with our consolidated financial statements and accompanying notes included under Part I, Item 1—Financial Statements of this Quarterly Report, as well as our consolidated financial statements, accompanying notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) included in our 2015 Annual Report.

Executive Overview

Our operations consist primarily of two reportable business segments, the Medical Segment and the Marketing Segment, each of which is described in more detail in the following paragraphs. Our Medical Segment owns and/or manages outpatient surgery centers and surgical hospitals. It focuses on improving patient outcomes by providing minimally invasive procedures that can be performed in low-cost, outpatient settings. Our business also utilizes innovative direct-to-patient marketing and proprietary technologies to drive patient engagement and education. We provide these marketing services to the facilities that comprise our Medical Segment; we also provide these marketing services to third parties as a stand-alone business line, which is a separate reportable business segment (the “Marketing Segment”).

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Medical Segment

Our Medical Segment broadly includes our ownership and operation of healthcare facilities (the “Nobilis Facilities”)(which include outpatient surgery centers and hospitals) and ancillary service providers (“Nobilis Ancillary Service Lines”).

There are nine Nobilis Facilities, consisting of four hospitals (the “Nobilis Hospitals”) (three in Texas and one in Arizona) and five ambulatory surgery centers (the “Nobilis ASCs”)(three in Houston, Texas, one in Dallas, Texas and one in Scottsdale, Arizona). We earn revenue in our Medical Segment from the “facility fees” or “technical fees” third party payors or to patients for the services rendered at the Nobilis Facilities. The Nobilis Facilities are each licensed in the state where they are located and provide surgical procedures in a limited number of clinical specialties, which enables them to develop routines, procedures and protocols to maximize operating efficiency and productivity while offering an enhanced healthcare experience for both physicians and patients. These clinical specialties include orthopedic surgery, podiatric surgery, ear nose and throat (“ENT”), pain management, gastro-intestinal, gynecology and general surgery. The Nobilis ASCs do not offer the full range of services typically found in traditional hospitals, allowing the Nobilis ASCs to operate with lower operating expenses. The Nobilis Hospitals do offer the services typically found in traditional hospitals and, as a result, have ability to take on more complex cases and cases that may require an overnight stay.

There are three Nobilis Ancillary Service Lines: intraoperative monitoring, surgical assist and anesthesia. Peak Neuromonitoring oversees our intraoperative monitoring service line, and Nobilis Surgical Assist oversees our surgical assist service line. There are several small subsidiaries through which we provide anesthesia services. Over time, and provided that third party payors do not materially lower reimbursements, the Company plans to add ancillary service lines such as laboratory services and imaging.

Marketing Segment

Our Marketing Segment provides marketing services, patient education services and patient care coordination management services to the Nobilis Facilities, to third party facilities in states where we currently do not operate, and to physicians. We market several minimally- invasive medical procedures and brands, which include the following:

North American Spine: promotion of minimally invasive spine procedures (pain management musculoskeletal, musculoskeletal and spine)

   

Migraine Treatment Centers of America: promotion of procedures related to chronic migraine pain (interventional headache procedure)

   
NueStep: a surgical procedure designed to treat pain in the foot, ankle and leg (podiatry)
   
Evolve-The Experts in Weight Loss Surgery: promotion of surgical weight loss procedures (bariatrics)
   
Minimally Invasive Reproductive Surgery Institute (“MIRI”): promotion of women’s health related procedures
   

Onward Orthopedics: promotion of general orthopedics, sports medicine related to orthopedics (orthopedics, pain management musculoskeletal, and musculoskeletal interventions)

We do not directly provide medical services to patients; rather, we identify candidates for our branded procedures, educate these potential patients about the relevant procedure and direct those patients to affiliated physicians who diagnosis and treat those patients at affiliated facilities. Through our Marketing Segment, we have contractual relationships with facilities and physicians in several states.

We earn service fees from our partner facilities that, depending on the laws of the state in which a partner facility is located, are either charged as a flat monthly fee or are calculated based on a portion of the “facility fee” revenue generated by the partner facility for a given procedure.

Our revenues from physician-related services are, depending on the laws of the state in which a partner-physician practices, either earned directly from professional fees or through the purchase of accounts receivable. In Texas, we engage physicians through entities exempt from Texas corporate practice of medicine laws that directly earn professional fees for partner-physician services and, in turn, pay partner-physicians a reasonable fee for rendering those professional services. In other states, we manage our partner-physicians’ practices and purchase the accounts receivable of those practices through accounts receivable purchase agreements.

Recent Developments

On August 1, 2016, Northstar Healthcare Acquisitions, L.L.C., a wholly owned subsidiary of the Company (the “Buyer”), and the Company executed an asset purchase agreement (the “Purchase Agreement”) whereby the Buyer agreed to acquire from Dr. L. Philipp Wall (“Owner”) substantially all of the operating assets of Arizona Center for Minimally Invasive Surgery, LLC, an Arizona limited liability company (“ACMIS”), L. Philipp Wall, M.D., P.C., an Arizona professional corporation (“PC”) and Arizona Vein & Vascular Center, LLC, an Arizona limited liability company and wholly owned subsidiary of PC (“AVVC” and with ASMIS and PC, each a “Seller” and collectively the “Sellers”) (the “Transaction”).

Upon closing of the Transaction, the Buyer will receive substantially all of the operating assets of Sellers, consisting of inventory, fixed assets, and certain intellectual property in exchange for an aggregate purchase price of approximately $22.0 million, consisting of $17.5 million cash, $2.25 million worth of the Company’s common shares, and $2.25 million in the form of a convertible promissory note between Buyer and ACMIS.

Upon closing, the Transaction will add five locations (five clinics and four surgery centers) in the Phoenix and Tucson, Arizona metropolitan areas and will launch a new vascular brand that we will offer to our other markets.  In addition to a new brand, we expect to drive additional volume into these clinics and multi-specialty surgical centers using our proprietary marketing and sales capabilities.

See Part I, Item 1–“Financial Statements, Note 21 – Subsequent Events” of this Quarterly Report for more information on the Transaction.

Operating Environment

The Medical Segment depends primarily upon third-party reimbursement from private insurers to pay for substantially all of the services rendered to our patients. The majority of the revenues attributable to the Medical Segment are from reimbursement to the Nobilis Hospitals and Nobilis ASCs as “out-of-network” providers. This means the Nobilis Facilities are not contracted with a major medical insurer as an “in-network” participant. Participation in such networks offer the benefit of larger patient populations and defined, predictable payment rates. The reimbursement to in-network providers, however, is typically far less than that paid to out of network providers. To a far lesser degree, the Nobilis Facilities earn fees from governmental payor programs such as Medicare. For the three and six months ended June 30, 2016 and 2015, we derived approximately 0.4% and 0.3%, respectively, of our Medical Segment’s net revenues from governmental healthcare programs, primarily Medicare and managed Medicare programs, and the remainder from a wide mix of commercial payers and patient co-pays, coinsurance, and deductibles.

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Seasonality of the Business

The surgical segment of the healthcare industry tends to be impacted by seasonality because most benefit plans reset on a calendar year basis. As patients utilize and reduce their remaining deductible, surgical ASCs and hospitals typically experience an increase in volume throughout the year, with the biggest impact coming in the fourth quarter. Historically, approximately 35% to 40% of our annual revenues have been recognized in the fourth quarter.

Same Center, Organic and New Facility Growth

In certain instances, in this MD&A, we analyze growth and trends by bifurcating our business into “same center facilities” and “new facilities”. “Same center facilities” can be defined as any facility that has been acquired as of January 1, 2015. All other facilities are considered to be “new facilities” until the following year.

The Nobilis Facilities focus on non-emergency surgical procedures. The case mix at each Nobilis Facility is a function of the clinical specialties of the physicians on the medical staff and the equipment and infrastructure at each facility. The Nobilis Facilities intend to continue to refine their case mix as opportunities arise.

Revenue Model and Case Mix

Revenues earned by the Nobilis Facilities vary depending on the procedures performed. For every medical procedure performed there are usually three separately invoiced patient billings:

 

the surgical center fee for the use of infrastructure, surgical equipment, nursing staff, non-surgical professional services, supplies and other support services, which is earned by the Nobilis Facilities;

 

the professional fee, which is separately earned, billed and collected by the physician performing the procedure, separate and apart from the fees charged by the Nobilis Facilities; and

 

the anesthesiology fee, which is separately earned, billed and collected by the anesthesia provider, separate and apart from the fees charged by the Nobilis Facilities and the physicians.

Overall facility revenue depends on procedure volume, case mix and payment rates of the respective payors.

THREE MONTHS ENDED JUNE 30, 2016 AND 2015

The following table sets out our comparable changes in revenue and case volume for same center and new facilities for the three months ended June 30, 2016 and 2015:

    Three Months Ended June 30,  
    Net Patient Service Revenue     Number of Cases (1)     Net Patient Service Revenue  
    (in thousands)         per Case (2)    
    2016     2015     2016     2015     2016     2015  
                                     
Hospitals $  42,960   $  20,274     2,710     1,020   $  15,852   $  19,877  
ASCs   9,889     23,079     1,876     3,257     5,271     7,086  
Total $  52,849   $  43,353     4,586     4,277   $  11,524   $  10,136  

Notes

(1)

This table refers to all cases performed, regardless of their contribution to net patient service revenue.

(2)

Calculated by dividing net patient service revenues by the number of cases.


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The following table sets forth the combined number of cases by medical specialty performed for three months ended June 30, 2016 and 2015:

MEDICAL SEGMENT
CASE MIX
FOR THE THREE MONTHS ENDED JUNE 30, 2016 AND 2015

    2016     2016 %     2015     2015 %  
Specialty   Cases     Cases     Cases     Cases  
                         
Pain Management   1,629     35.5%     1,237     29.0%  
Orthopedics   440     9.6%     275     6.4%  
Spine   458     10.0%     513     12.0%  
Podiatry   97     2.1%     145     3.4%  
Gastro-intestinal   49     1.0%     95     2.2%  
General Surgery   153     3.3%     181     4.2%  
Plastic & Reconstructive   438     9.6%     421     9.8%  
Bariatrics   962     21.0%     1,006     23.6%  
Gynecology   192     4.2%     241     5.6%  
Urology   -     0.0%     6     0.1%  
ENT   168     3.7%     157     3.7%  
                         
TOTAL   4,586     100.0%     4,277     100.0%  

The following table for the Marketing Segment only includes cases generated through our marketing activities and performed at the non-Nobilis Facilities.

MARKETING SEGMENT
CASE MIX
FOR THE THREE MONTHS ENDED JUNE 30, 2016 AND 2015

    2016     2016 %     2015     2015 %  
Specialty   Cases     Cases     Cases     Cases  
                         
Pain Management   109     39.4%     150     44.4%  
Orthopedics   2     0.7%     -     0.0%  
Spine   162     58.5%     188     55.6%  
Podiatry   3     1.0%     -     0.0%  
Bariatrics   1     0.4%     -     0.0%  
                         
TOTAL   277     100.0%     338     100.0%  

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CONSOLIDATED SEGMENTS
CASE MIX
FOR THE THREE MONTHS ENDED JUNE 30, 2016 AND 2015

    2016     2016 %     2015     2015 %  
Specialty   Cases     Cases     Cases     Cases  
                         
Pain Management   1,738     35.8%     1,387     30.1%  
Orthopedics   442     9.1%     275     6.0%  
Spine   620     12.7%     701     15.2%  
Podiatry   100     2.1%     145     3.1%  
Gastro-intestinal   49     1.0%     95     2.1%  
General Surgery   153     3.1%     181     3.9%  
Plastic & Reconstructive   438     9.0%     421     9.1%  
Bariatrics   963     19.8%     1,006     21.8%  
Gynecology   192     3.9%     241     5.2%  
Urology   -     0.0%     6     0.1%  
ENT   168     3.5%     157     3.4%  
                         
TOTAL   4,863     100.0%     4,615     100.0%  

Notes:

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

Cases performed for the three months ended June 30, 2016, totaled 4,863, an increase of 248 cases, or 5.4%, compared to 4,615 from the prior corresponding period. The Marketing Segment generated 277 cases, 61 cases less than 338 cases generated from the Marketing Segment in the prior corresponding period. Cases at our same center facilities were 3,020, representing an 877 case decrease primarily attributable to the discontinued Microsurgery Institute of Dallas (“MSID”). Cases at our new facilities were 1,566. The acquisition of new facilities has helped to ensure the continuation of expanding marketing programs, recruiting new physicians, and rendering positive net results against any unfavorable trends in our same center facilities.

We receive payments for surgical procedures and related services from private health insurance plans, workers’ compensation, directly from patients and from government payor plans. A substantial portion of net patient service revenues generated by the Nobilis Facilities is based on payments received from private (non-government) insurance plans. We receive a relatively small amount of revenue from Medicare. We also receive a relatively small portion of revenue directly from uninsured patients, who pay out of pocket for the services they receive. Insured patients are responsible for services not covered by their health insurance plans, deductibles, co-payments and co-insurance obligations under their plans. The amount of these deductibles, co-payments and coinsurance obligations has increased in recent years but does not represent a material component of the revenue generated by the Nobilis Facilities. The surgical center fees of the Nobilis Facilities are generated by the physician limited partners and the other physicians who utilize the Nobilis Facilities to provide services. The surgical center fees are billed and collected directly by the Nobilis Facilities.

Patient and net professional fees and contracted marketing revenues are reported as the estimated net realizable amounts from patients, third-party payors, and others for services rendered. Revenue is recognized upon the performance of the patient service. The amounts we actually collect from third-party payors, including private insurers, may vary for identical procedures performed. An additional factor in the determination of net patient service revenue is our payor mix, as between private health insurance plans, workers’ compensation, directly from patients, and from government payor plans. Management reviews and evaluates historical payment data, payor mix, and current economic conditions on a periodic basis and adjusts the estimated collections as a percentage of gross billings, which are used to determine net patient service revenue, as required based on final settlements and collections.

The following tables set out our comparable changes in revenue and case volume for same center and new facilities for the three months ended June 30, 2016 and 2015 (in thousands, except cases):

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MEDICAL SEGMENT
TOTAL REVENUE – SAME CENTER FACILITIES
FOR THE THREE MONTHS ENDED JUNE 30, 2016 AND 2015

    2016 Revenue     2015 Revenue     Variance  
                   
Hospitals $  27,028   $  17,896   $  9,132  
ASCs   9,889     23,079     (13,190 )
TOTAL MEDICAL SEGMENT $  36,917   $  40,975   $  (4,058 )

MEDICAL SEGMENT
TOTAL REVENUE – NEW FACILITIES
FOR THE THREE MONTHS ENDED JUNE 30, 2016 AND 2015

    2016 Revenue     2015 Revenue     Variance  
                   
Hospitals $  15,931   $  2,379   $  13,552  
Ancillary services   2,447     290     2,157  
TOTAL $  18,378   $  2,669   $  15,709  

MARKETING SEGMENT
TOTAL REVENUE
FOR THE THREE MONTHS ENDED JUNE 30, 2016 AND 2015

    2016 Revenue     2015 Revenue     Variance  
                   
Marketing $  6,576   $  5,223   $  1,353  
TOTAL $  6,576   $  5,223   $  1,353  

CONSOLIDATED SEGMENTS
TOTAL REVENUE
FOR THE THREE MONTHS ENDED JUNE 30, 2016 AND 2015

    2016 Revenue     2015 Revenue     Variance  
Medical Segment:                  
     Hospitals $  42,959   $  20,275   $  22,684  
     ASCs   9,889     23,079     (13,190 )
     Ancillary services   2,447     290     2,157  
 Total Medical Segment $  55,295   $  43,644   $  11,651  
Marketing Segment:                  
     Marketing $  6,576   $  5,223   $  1,353  
 Total Marketing Segment $  6,576   $  5,223   $  1,353  
TOTAL CONSOLIDATED SEGMENTS $  61,871   $  48,867   $  13,004  

MEDICAL SEGMENT
TOTAL CASES - SAME CENTER FACILITIES
FOR THE THREE MONTHS ENDED JUNE 30, 2016 AND 2015

    2016 Cases     2015 Cases     Variance  
                   
Hospitals   1,144     640     504  
ASCs   1,876     3,257     (1,381 )
TOTAL   3,020     3,897     (877 )

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MEDICAL SEGMENT
TOTAL CASES - NEW FACILITIES
FOR THE THREE MONTHS ENDED JUNE 30, 2016 AND 2015

    2016 Cases     2015 Cases     Variance  
                   
Hospitals   1,566     380     1,186  
TOTAL   1,566     380     1,186  

MARKETING SEGMENT
TOTAL CASES
FOR THE THREE MONTHS ENDED JUNE 30, 2016 AND 2015

    2016 Cases     2015 Cases     Variance  
                   
Marketing   277     338     (61 )
TOTAL   277     338     (61 )

CONSOLIDATED SEGMENTS
TOTAL CASES
FOR THE THREE MONTHS ENDED JUNE 30, 2016 AND 2015

    2016 Cases     2015 Cases     Variance  
Medical Segment:                  
     Hospitals   2,710     1,020     1,690  
     ASCs   1,876     3,257     (1,381 )
 Total Medical Segment   4,586     4,277     309  
Marketing Segment:                  
     Marketing   277     338     (61 )
 Total Marketing Segment   277     338     (61 )
TOTAL CONSOLIDATED SEGMENTS   4,863     4,615     248  

The following tables set out the contract mix of cases performed that were in network (“INN”) compared to cases performed that were out of network (“OON”) at our Medical Segment, our Marketing Segment and on a consolidated basis for the three months ended June 30, 2016 and 2015. This information is not intended to provide a comprehensive comparison of financial results, as reimbursement by insurance carriers vary based on deductibles, plan coverage and cases performed. The Company is currently INN with United Healthcare and Cigna at the Kirby Surgical Center (“KIRBY”) and INN with BlueCross BlueShield, Cigna, United Healthcare and Aetna at the Herman Drive Surgical Hospital (“HDSH”).

MEDICAL SEGMENT
INN - OON CONTRACT MIX OF TOTAL CASES PERFORMED
FOR THE THREE MONTHS ENDED JUNE 30, 2016 AND 2015

Contract Network Type         2016 Contract Mix     2015 Contract Mix  
                   
OON         85.7%     89.2%  
INN         14.3%     10.8%  
TOTAL         100.0%     100.0%  

MARKETING SEGMENT
INN - OON CONTRACT MIX OF TOTAL CASES PERFORMED
FOR THE THREE MONTHS ENDED JUNE 30, 2016 AND 2015

Contract Network Type         2016 Contract Mix     2015 Contract Mix  
                   
OON         32.1%     24.2%  
INN         67.9%     75.8%  
TOTAL         100.0%     100.0%  

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CONSOLIDATED SEGMENTS
INN - OON CONTRACT MIX OF TOTAL CASES PERFORMED
FOR THE THREE MONTHS ENDED JUNE 30, 2016 AND 2015

Contract Network Type   2016 Contract Mix   2015 Contract Mix
         
OON   82.7%   84.2%
INN   17.3%   15.8%
TOTAL   100.0%   100.0%

Despite new acquisitions of OON facilities, the Company continues to implement strategies to blend both INN and OON cases. For the three months ended June 30, 2016, we saw an increase shift towards INN cases based on our total cases performed compared to the corresponding period in 2015.

The following tables set out the payor mix at our Medical Segment, our Marketing Segment and on a consolidated basis for the three months ended June 30, 2016 and 2015. This information is not intended to provide a comprehensive comparison of financial results, as reimbursement by insurance carrier varies based on deductibles, plan coverage and cases performed.

MEDICAL SEGMENT
PATIENT AND NET PROFESSIONAL FEE REVENUE BY PAYORS
FOR THE THREE MONTHS ENDED JUNE 30, 2016 AND 2015

Payors   2016 Patient and Net Professional Fee   2015 Patient and Net Professional Fee
    Revenue by Payor Mix   Revenue by Payor Mix
         
Private insurance and other private pay   96.4%   95.0%
Workers compensation   3.1%   4.6%
Medicare   0.5%   0.4%
     Total   100.0%   100.0%

MARKETING SEGMENT
PATIENT AND NET PROFESSIONAL FEE REVENUE BY PAYORS
FOR THE THREE MONTHS ENDED JUNE 30, 2016 AND 2015

Payors   2016 Patient and Net Professional Fee   2015 Patient and Net Professional Fee
    Revenue by Payor Mix   Revenue by Payor Mix
         
Private insurance and other private pay   100.0%   100.0%
Workers compensation   0.0%   0.0%
Medicare   0.0%   0.0%
     Total   100.0%   100.0%

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CONSOLIDATED SEGMENTS
PATIENT AND NET PROFESSIONAL FEE REVENUE BY PAYORS
FOR THE THREE MONTHS ENDED JUNE 30, 2016 AND 2015

Payors   2016 Patient and Net Professional Fee   2015 Patient and Net Professional Fee
    Revenue by Payor Mix   Revenue by Payor Mix
         
Private insurance and other private pay   96.9%   95.5%
Workers compensation   2.7%   4.1%
Medicare   0.4%   0.4%
     Total   100.0%   100.0%

RESULTS OF OPERATIONS AS A PERCENTAGE OF PATIENT AND NET PROFESSIONAL FEES FOR THE THREE MONTHS ENDED JUNE 30, 2016 AND 2015

  Three months ended June 30,  
  2016     2015  
             
Revenues:   100%     100%  
             
Operating expenses:            
   Salaries and benefits   20.4%     18.5%  
   Drugs and supplies   19.7%     18.2%  
   General and administrative   44.4%     41.8%  
   Bad debt expense   0.0%     0.4%  
   Depreciation and amortization   3.2%     2.0%  
         Facility operating expenses   87.7%     80.9%  
Corporate expenses:            
   Salaries and benefits   3.3%     2.0%  
   General and administrative   7.3%     13.4%  
   Legal expenses   1.6%     1.5%  
   Depreciation   0.1%     0.1%  
         Total corporate costs   12.3%     17.0%  
         Income from operations   0.0%     2.1%  
Other (income) expense:            
   Change in fair value of warrant and stock option liabilities   -2.7%     -3.4%  
   Interest expense   1.1%     0.6%  
   Other income, net   -1.9%     -2.7%  
         Total other (income) expense   -3.5%     -5.5%  
Net income before income taxes and noncontrolling interests   3.5%     7.5%  
Income tax (benefit) expense   -0.5%     0.9%  
         Net income   4.1%     6.7%  
Net income (loss) attributable to noncontrolling interests   -3.6%     7.6%  
Net income (loss) attributable to Nobilis Health Corp.   7.7%     -0.8%  

Revenues

Total revenues for the three months ended June 30, 2016, totaled $61.9 million, an increase of $13.0 million or 26.6%, compared to $48.9 million from the prior corresponding period. Total cases increased 248 or 5.4% versus the prior corresponding period. The Medical Segment revenue increased by $11.7 million to $55.3 million, or 26.7% compared to $43.6 million from the prior corresponding period, while the Marketing Segment accounted for $1.4 million of the increase. New center facilities for the Medical Segment increased $15.7 million or 588.5% primarily due to the acquisition of three hospitals in 2015. Same center facilities for the Medical Segment decreased $4.1 million or 9.9% primarily attributable to a decline in ASC revenue, due to the closing of operations of an ASC in Dallas, whose cases were shifted to a new Hospital in Dallas.

Salaries and Benefits

Operating salaries and benefits for the three months ended June 30, 2016, totaled $12.6 million, an increase of $3.6 million, or 40.0%, compared to $9.0 million from the prior corresponding period. The Medical Segment increased by $3.3 million, or 48.3%, while the Marketing Segment increased $0.3 million period over period. The Staffing costs for the Medical Segment at new facilities accounted for $4.1 million of the increase, while the remaining $0.8 decrease is attributable to staffing at same center facilities driven by case volumes. Operating salaries and benefits as a percent of revenues increased to 20.4% compared to 18.5% in the prior corresponding period. The increase as a percent of revenue is primarily attributable to the acquisition of three hospitals in 2015. Hospitals require higher staff levels than ASCs as a result of performing more complex and higher acuity cases.

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Drugs and Supplies

Drugs and medical supplies expense for the three months ended June 30, 2016, totaled $12.2 million, an increase of $3.3 million or 37.1% compared to $8.9 million from the prior corresponding period. The Medical Segment increased by $3.7 million or 47.2%, while the Marketing Segment decreased $0.4 million period over period. Medical supplies costs for the Medical Segment at new facilities accounted for $5.4 million of the increase, while the remaining $1.7 million decrease was attributable to same center facilities. Drugs and medical supplies as a percent of revenues increased to 19.7% compared to 18.2% from the prior corresponding period. The increase as a percent of revenue is primarily attributable to the acquisition of three hospitals in 2015. Hospitals require higher drugs and supply costs than ASCs as a result of performing more complex and higher acuity cases.

General and Administrative

Operating general and administrative expense for three months ended June 30, 2016, totaled $27.5 million, an increase of $7.1 million, or 34.8%, compared to $20.4 million from the prior corresponding period. The Medical Segment accounted for $6.9 million of the increase. The Medical Segment new facilities contributed to $8.9 million of the increase while the remaining $2.0 million decrease was attributable to same center facilities. The $6.9 million increase in the Medical Segment is due to an increase in marketing expenses, general infrastructure development, such as rent, telecommunication, travel, and consulting, and an increase in operations associated with the new center Medical Segment facilities, primarily due to the acquisition of three hospitals in 2015. For the three months ended June 30, 2016, marketing expenses allocated to the Medical Segment increased by $0.9 million to $7.0 million, compared to $6.1 million for the corresponding period. The increase in marketing expenses is attributable to the continued strategic growth initiatives for expansion including our bariatric, spine, podiatry and gynecological brands, primarily related to marketing these programs for the three hospitals acquired in 2015. Expenses related to general infrastructure development for same center and new facilities increased by $0.7 million to $2.4 million in 2016, compared to $1.7 million in 2015.

Depreciation and Amortization

Depreciation for the three months ended June 30, 2016, totaled $2.0 million, an increase of $1.0 million or 100.0%, compared to $1.0 million the prior corresponding period. This increase is primarily due to an increase in property and equipment from new facilities.

Total Corporate Costs

To illustrate our operational efficiency, corporate costs are presented separate of operating expenses of the revenue generating facilities. Corporate costs for the three months ended June 30, 2016, totaled $7.6 million, a decrease of $0.7 million or 8.4%, compared to $8.3 million from the prior corresponding period. Corporate salaries and benefits for the three months ended June 30, 2016, totaled $2.0 million, an increase of $1.0 million or 100.0%, compared to $1.0 million from the prior corresponding period. The increase in salaries and benefits is primarily due to the recoupment of indemnified expenses of $0.7 million for the three months ended June 30, 2015, as a result of the confidential agreement with Athas. The additional $0.3 million increase is due to the hiring of additional corporate staff in 2016 related to accounting, finance and information technology. Legal expenses for the three months ended June 30, 2016, totaled $0.1 million, an increase of $0.3 million or 42.9%, compared to $0.7 million from the prior corresponding period. The increase in legal expenses was attributable to mergers and acquisitions and litigation expenses. General and administrative expenses for the three months ended June 30, 2016, totaled $4.5 million, a decrease of $2.0 million or 30.8%, compared to $6.5 million from the prior corresponding period. The decrease in general and administrative expense was primarily attributable to a decline in non-cash compensation expense for the three months ended June 30, 2016, partially offset by an increase in insurance and corporate marketing expense.

Other (Income) Expense

For the three months ended June 30, 2016, the Company recognized $2.1 million of other income comprised of $0.7 million in interest expense and $1.2 million in other income and a change in warrant and stock option derivative liability fair value of $1.7 million compared to $2.7 million of income comprised of $0.3 million in interest expense, $1.3 million other income and a change in warrant and option liability fair value of $1.7 million for the prior corresponding period.

Income tax (benefit) expense

The net tax benefit for the three months ended June 30, 2016 was $0.3 million, compared to an income tax expense of $0.5 million from the prior corresponding period. The temporary differences attributable to the projected taxable income include goodwill amortization, net operating loss carryforward-U.S. and other accrued liabilities. For the three months ended June 30, 2016, the effective tax rate differs from the annual tax rate primarily due to equity compensation and a 1.0% effective deferred tax rate change. The Company’s state tax expense was $0.3 million for the three months ended June 30, 2016. Our effective tax rate during the three months ended June 30, 2016 was approximately -15.4%. The Company estimates an annual effective income tax rate of 30.7% for U.S., and none for Canada, based on projected results for the year.

Noncontrolling Interests

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

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SIX MONTHS ENDED JUNE 30, 2016 AND 2015

The following tables set out our comparable changes in revenue and case volume for same center and new facilities for the six months ended June 30, 2016 and 2015:

    Six Months Ended June 30,  
    Net Patient Service Revenue     Number of Cases (1)     Net Patient Service Revenue  
    (in thousands)           per Case (2)
    2016     2015     2016     2015     2016     2015  
                                     
Hospitals $  79,115   $  32,953     4,574     1,501   $  17,297   $  21,954  
ASCs   18,747     44,245     3,752     6,007     4,997     7,366  
Total $  97,862   $  77,198     8,326     7,508   $  11,754   $  10,282  

Notes

  (1) This table refers to all cases performed, regardless of their contribution to net patient service revenue.
  (2)

Calculated by dividing net patient service revenues by the number of cases.

The following table sets forth the combined number of cases by medical specialty performed for six months ended June 30, 2016 and 2015:

MEDICAL SEGMENT
CASE MIX
FOR THE SIX MONTHS ENDED JUNE 30, 2016 AND 2015

    2016     2016 %     2015     2015 %  
Specialty   Cases     Cases     Cases     Cases  
                         
Pain Management   2,900     34.8%     2,286     30.6%  
Orthopedics   764     9.2%     646     8.6%  
Spine   759     9.1%     738     9.8%  
Podiatry   171     2.1%     244     3.2%  
Gastro-intestinal   77     0.8%     182     2.4%  
General Surgery   327     3.9%     315     4.2%  
Plastic & Reconstructive   796     9.6%     785     10.5%  
Bariatrics   1,809     21.7%     1,676     22.3%  
Gynecology   390     4.7%     340     4.5%  
Urology   2     0.1%     7     0.1%  
ENT   331     4.0%     289     3.8%  
                         
TOTAL   8,326     100%     7,508     100%  

The following table for the Marketing Segment only includes cases generated through our marketing activities and performed at the non-Nobilis Facilities.

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MARKETING SEGMENT
CASE MIX
FOR THE SIX MONTHS ENDED JUNE 30, 2016 AND 2015

    2016     2016 %     2015     2015 %  
Specialty   Cases     Cases     Cases     Cases  
                         
Pain Management   200     39.1%     278     44.6%  
Orthopedics   2     0.4%     -     0.0%  
Spine   305     59.7%     345     55.4%  
Podiatry   3     0.6%     -     0.0%  
Bariatrics   1     0.2%     -     0.0%  
                         
TOTAL   511     100%     623     100%  

CONSOLIDATED SEGMENTS
CASE MIX
FOR THE SIX MONTHS ENDED JUNE 30, 2016 AND 2015

    2016     2016 %     2015     2015 %  
Specialty   Cases     Cases     Cases     Cases  
                         
Pain Management   3,100     35.1%     2,564     31.5%  
Orthopedics   766     8.7%     646     7.9%  
Spine   1,064     12.0%     1,083     13.3%  
Podiatry   174     2.0%     244     3.0%  
Gastro-intestinal   77     0.8%     182     2.2%  
General Surgery   327     3.7%     315     3.9%  
Plastic & Reconstructive   796     9.0%     785     9.7%  
Bariatrics   1,810     20.5%     1,676     20.6%  
Gynecology   390     4.4%     340     4.2%  
Urology   2     0.1%     7     0.1%  
ENT   331     3.7%     289     3.6%  
                         
TOTAL   8,837     100%     8,131     100%  

Notes:

  (1)

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

Cases performed for the six months ended June 30, 2016, totaled 8,837, an increase of 706 cases, or 8.7%, compared to 8,131 from the prior corresponding period. The Marketing Segment generated 511 cases, 112 cases less than 623 cases generated from the Marketing Segment in the prior corresponding period. Cases at our same center facilities were 5,401, representing a 1727 case decrease primarily attributable to the discontinued MSID. Cases at our new facilities were 2,925, representing an increase of 2,545 cases. The acquisition of new facilities has helped to ensure the continuation of expanding marketing programs, recruiting new physicians, and rendering positive net results against any unfavorable trends in our same center facilities.

We receive payments for surgical procedures and related services from private health insurance plans, workers’ compensation, directly from patients and from government payor plans. A substantial portion of net patient service revenues generated by the Nobilis Facilities is based on payments received from private (non-government) insurance plans. We receive a relatively small amount of revenue from Medicare. We also receive a relatively small portion of revenue directly from uninsured patients, who pay out of pocket for the services they receive. Insured patients are responsible for services not covered by their health insurance plans, deductibles, co-payments and co-insurance obligations under their plans. The amount of these deductibles, co-payments and coinsurance obligations has increased in recent years but does not represent a material component of the revenue generated by the Nobilis Facilities. The surgical center fees of the Nobilis Facilities are generated by the physician limited partners and the other physicians who utilize the Nobilis Facilities to provide services. The surgical center fees are billed and collected directly by the Nobilis Facilities.

Patient and net professional fees and contracted marketing revenues are reported as the estimated net realizable amounts from patients, third-party payors, and others for services rendered. Revenue is recognized upon the performance of the patient service. The amounts we actually collect from third-party payors, including private insurers, may vary for identical procedures performed. An additional factor in the determination of net patient service revenue is our payor mix, as between private health insurance plans, workers’ compensation, directly from patients, and from government payor plans. Management reviews and evaluates historical payment data, payor mix, and current economic conditions on a periodic basis and adjusts the estimated collections as a percentage of gross billings, which are used to determine net patient service revenue, as required based on final settlements and collections.

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The following tables set out our comparable changes in revenue and case volume for same center and new facilities for the six months ended June 30, 2016 and 2015 (in thousands, except cases):

MEDICAL SEGMENT
TOTAL REVENUE - SAME CENTER FACILITIES
FOR THE SIX MONTHS ENDED JUNE 30, 2016 AND 2015

    2016 Revenue     2015 Revenue     Variance  
                   
Hospitals $  44,334   $  30,574   $  13,760  
ASCs   18,747     44,245     (25,498 )
TOTAL $  63,081   $  74,819   $  (11,738 )

MEDICAL SEGMENT
TOTAL REVENUE - NEW FACILITIES
FOR THE SIX MONTHS ENDED JUNE 30, 2016 AND 2015

    2016 Revenue     2015 Revenue     Variance  
                   
Hospitals $  34,781   $  2,379   $  32,402  
Ancillary services   3,641     290     3,351  
TOTAL $  38,422   $  2,669   $  35,753  

MARKETING SEGMENT
TOTAL REVENUE
FOR THE SIX MONTHS ENDED JUNE 30, 2016 AND 2015

    2016 Revenue     2015 Revenue     Variance  
                   
Marketing $  11,641   $  9,230   $  2,411  
TOTAL $  11,641   $  9,230   $  2,411  

CONSOLIDATED SEGMENTS
TOTAL REVENUE
FOR THE SIX MONTHS ENDED JUNE 30, 2016 AND 2015

    2016 Revenue     2015 Revenue     Variance  
Medical Segment:                  
     Hospitals $  79,115   $  32,953   $  46,162  
     ASCs   18,747     44,245     (25,498 )
     Ancillary services   3,641     290     3,351  
 Total Medical Segment $  101,503   $  77,488   $  24,015  
Marketing Segment:                  
     Marketing $  11,641   $  9,230   $  2,411  
 Total Marketing Segment $  11,641   $  9,230   $  2,411  
TOTAL CONSOLIDATED SEGMENTS $  113,144   $  86,718   $  26,426  

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MEDICAL SEGMENT
TOTAL CASES - SAME CENTER FACILITIES
FOR THE SIX MONTHS ENDED JUNE 30, 2016 AND 2015

    2016 Cases     2015 Cases     Variance  
                   
Hospitals   1,649     1,121     528  
ASCs   3,752     6,007     (2,255 )
TOTAL   5,401     7,128     (1,727 )

MEDICAL SEGMENT
TOTAL CASES - NEW FACILITIES
FOR THE SIX MONTHS ENDED JUNE 30, 2016 AND 2015

    2016 Cases     2015 Cases     Variance  
                   
Hospitals   2,925     380     2,545  
TOTAL   2,925     380     2,545  

MARKETING SEGMENT
TOTAL CASES
FOR THE SIX MONTHS ENDED JUNE 30, 2016 AND 2015

    2016 Cases     2015 Cases     Variance  
                   
Marketing   511     623     (112 )
TOTAL   511     623     (112 )

CONSOLIDATED SEGMENTS
TOTAL CASES
FOR THE SIX MONTHS ENDED JUNE 30, 2016 AND 2015

    2016 Cases     2015 Cases     Variance  
Medical Segment:                  
     Hospitals   4,574     1,501     3,073  
     ASCs   3,752     6,007     (2,255 )
 Total Medical Segment   8,326     7,508     818  
Marketing Segment:                  
     Marketing   511     623     (112 )
 Total Marketing Segment   511     623     (112 )
TOTAL CONSOLIDATED SEGMENTS   8,837     8,131     706  

The following tables set out the contract mix of cases performed that were INN compared to cases performed that were OON at our Medical Segment, our Marketing Segment and on a consolidated basis for the six months ended June 30, 2016 and 2015. This information is not intended to provide a comprehensive comparison of financial results, as reimbursement by insurance carriers vary based on deductibles, plan coverage and cases performed. The Company is currently INN with United Healthcare and Cigna at the KIRBY and INN with BlueCross BlueShield, Cigna, United Healthcare and Aetna at the HDSH.

MEDICAL SEGMENT
INN - OON CONTRACT MIX OF TOTAL CASES PERFORMED
FOR THE SIX MONTHS ENDED JUNE 30, 2016 AND 2015

Contract Network Type         2016 Contract Mix     2015 Contract Mix  
                   
OON         85.2%     92.7%  
INN         14.8%     7.3%  
TOTAL         100.0%     100.0%  

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MARKETING SEGMENT
INN - OON CONTRACT MIX OF TOTAL CASES PERFORMED
FOR THE SIX MONTHS ENDED JUNE 30, 2016 AND 2015

Contract Network Type   2016 Contract Mix   2015 Contract Mix  
           
OON   28.6%   32.0%  
INN   71.4%   68.0%  
TOTAL   100.0%   100.0%  

CONSOLIDATED SEGMENTS
INN - OON CONTRACT MIX OF TOTAL CASES PERFORMED
FOR THE SIX MONTHS ENDED JUNE 30, 2016 AND 2015

Contract Network Type   2016 Contract Mix   2015 Contract Mix  
           
OON   82.0%   87.9%  
INN   18.0%   12.1%  
TOTAL   100.0%   100.0%  

Despite new acquisitions of OON facilities, the Company continues to implement strategies to blend both INN and OON cases. For the six months ended June 30, 2016, we saw an increase shift towards INN cases based on our total cases performed compared to the corresponding period in 2015.

The following tables set out the payor mix at our Medical Segment, our Marketing Segment and on a consolidated basis for the six months ended June 30, 2016 and 2015. This information is not intended to provide a comprehensive comparison of financial results, as reimbursement by insurance carrier varies based on deductibles, plan coverage and cases performed.

MEDICAL SEGMENT
PATIENT AND NET PROFESSIONAL FEE REVENUE BY PAYORS
FOR THE SIX MONTHS ENDED JUNE 30, 2016 AND 2015

    2016 Patient and Net   2015 Patient and Net  
Payors   Professional Fee Revenue   Professional Fee Revenue  
    by Payor Mix   by Payor Mix  
           
Private insurance and other private pay   96.2%   95.0%  
Workers compensation   3.4%   4.5%  
Medicare   0.4%   0.5%  
     Total   100.0%   100.0%  

MARKETING SEGMENT
PATIENT AND NET PROFESSIONAL FEE REVENUE BY PAYORS
FOR THE SIX MONTHS ENDED JUNE 30, 2016 AND 2015

    2016 Patient and Net   2015 Patient and Net  
Payors   Professional Fee Revenue   Professional Fee Revenue  
    by Payor Mix   by Payor Mix  
           
Private insurance and other private pay   100.0%   100.0%  
Workers compensation   0.0%   0.0%  
Medicare   0.0%   0.0%  
     Total   100.0%   100.0%  

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CONSOLIDATED SEGMENTS
PATIENT AND NET PROFESSIONAL FEE REVENUE BY PAYORS
FOR THE SIX MONTHS ENDED JUNE 30, 2016 AND 2015

    2016 Patient and Net   2015 Patient and Net  
Payors   Professional Fee Revenue   Professional Fee Revenue  
    by Payor Mix   by Payor Mix  
           
Private insurance and other private pay   96.7%   95.3%  
Workers compensation   3.0%   4.2%  
Medicare   0.3%   0.5%  
     Total   100.0%   100.0%  

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RESULTS OF OPERATIONS AS A PERCENTAGE OF PATIENT AND NET PROFESSIONAL FEES FOR THE SIX MONTHS ENDED JUNE 30, 2016 AND 2015

    Six months ended June 30,  
    2016     2015  
             
Revenues:   100%     100%  
             
Operating expenses:            
   Salaries and benefits   22.2%     19.2%  
   Drugs and supplies   21.4%     16.0%  
   General and administrative   46.4%     38.7%  
   Bad debt expense   0.0%     0.2%  
   Depreciation and amortization   4.0%     1.8%  
     Facility operating expenses   94.0%     76.0%  
             
Corporate expenses:            
   Salaries and benefits   2.9%     2.3%  
   General and administrative   9.2%     14.4%  
   Legal expenses   2.3%     1.4%  
   Depreciation   0.1%     0.1%  
       Total corporate expenses   14.5%     18.2%  
       Income (loss) from operations   -8.5%     5.8%  
Other (income) expense:            
   Change in fair value of warrant and stock option liabilities   -1.5%     2.0%  
   Interest expense   1.2%     0.9%  
   Other (income), net   -2.5%     -1.7%  
       Total other (income) expense   -2.8%     1.2%  
Net (loss) income before income taxes and noncontrolling interests   -5.7%     4.7%  
Income tax (benefit) expense   -2.0%     0.7%  
       Net (loss) income   -3.8%     4.0%  
             
Net income attributable to noncontrolling interests   -3.6%     9.5%  
Net income attributable to Nobilis Health Corp.   -0.2%     -5.5%  

Revenues

Total revenues for the six months ended June 30, 2016, totaled $113.1 million, an increase of $26.4 million or 30.4%, compared to $86.7 million from the prior corresponding period. Total cases increased 706 or 8.7% versus the prior corresponding period. The Medical Segment revenue increased by $24.0 million to $101.5 million, or 31.0% compared to $77.5 million from the prior corresponding period, while the Marketing Segment accounted for $2.4 million of the increase. New center facilities for the Medical Segment increased $35.8 million or 1339.3% primarily due to the acquisition of three hospital in 2015. Same center facilities for the Medical Segment decreased $11.7 million for the six-month period, primarily attributable to a decline in ASC revenue due to the closing of operations of an ASC in Dallas whose cases were shifted to a Hospital in Dallas that was acquired in 2015 and a shift in cases from an ASC in Houston to a hospital in Houston.

Salaries and Benefits

Operating salaries and benefits for the six months ended June 30, 2016, totaled $25.2 million, an increase of $8.5 million, or 50.9%, compared to $16.7 million from the prior corresponding period. The Medical Segment increased by $8.3 million, or 67.8%, while the Marketing Segment increased $0.2 million period over period. Staffing costs for the Medical Segment at new facilities accounted for $8.9 million of the Medical Segment’s increase, while the remaining $0.6 decrease is attributable to staffing at same center facilities driven by case volumes. Operating salaries and benefits as a percent of revenues increased to 22.2% compared to 19.2% in the prior corresponding period. The increase as a percent of revenue is primarily attributable to the acquisition of three hospitals in 2015. Hospitals require higher staff levels than ASCs as a result of performing more complex and higher acuity cases.

Drugs and Supplies

Drugs and medical supplies expense for the six months ended June 30, 2016, totaled $24.2 million, an increase of $10.3 million or 74.1% compared to $13.9 million from the prior corresponding period. The Medical Segment increased by $10.2 million or 78.9%, while the Marketing Segment increased by $0.2 million period over period. Medical supplies costs for the Medical Segment at new facilities accounted for $10.9 million of the increase, while the remaining $0.7 million decrease was attributable to same center facilities. Drugs and medical supplies as a percent of revenues increased to 21.4% compared to 16.1% from the prior corresponding period. The increase as a percent of revenue is primarily attributable to the acquisition of three hospitals in 2015. Hospitals require higher drugs and supply costs than ASCs as a result of performing more complex and higher acuity cases.

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General and Administrative

Operating general and administrative expense for six months ended June 30, 2016, totaled $52.5 million, an increase of $18.9 million, or 56.3%, compared to $33.6 million from the prior corresponding period. The Medical Segment accounted for $17.9 million of the increase, while the Marketing Segment accounted for $1.0 million of the increase. The Medical Segments new facilities contributed to $18.4 million of the increase offset by a same center facilities decrease of $0.7 million. The $17.9 million increase in the Medical Segment is due to an increase in marketing expenses, general infrastructure development, such as rent, telecommunication, travel, and consulting, and an increase in operations associated with same center and new facilities, specifically the acquisition of three hospitals in 2015, at the Medical Segment facilities. For the six months ended June 30, 2016, marketing expenses allocated to the Medical Segment increased by $4.0 million to $15.7 million, compared to $11.7 million for the corresponding period. The increase in marketing expenses is attributable to the continued strategic growth initiatives for expansion including our bariatric, spine, podiatry and gynecological brands. Expenses related to general infrastructure development for same center and new facilities increased by $1.3 million to $ 4.4 million in 2016, compared to $3.1 million in 2015.

Depreciation and Amortization

Depreciation for the six months ended June 30, 2016, totaled $4.5 million, an increase of $2.9 million or 181.3%, compared to $1.6 million the prior corresponding period. This increase is primarily due to an increase in property and equipment from new facilities.

Total Corporate Costs

To illustrate our operational efficiency, corporate costs are presented separate of operating expenses of the revenue generating facilities. Total corporate costs for the six months ended June 30, 2016, totaled $16.4 million, an increase of $0.7 million or 4.4%, compared to $15.8 million from the prior corresponding period. Corporate salaries and benefits for the six months ended June 30, 2016, totaled $3.3 million, an increase of $1.3 million or 65.0%, compared to $2.0 million from the prior corresponding period. The increase in salaries and benefits is primarily due to the recoupment of indemnified expenses of $0.7 million for the six months ended June 30, 2015, as a result of the confidential agreement with Athas. The additional $0.6 million increase is due to the hiring of additional corporate staff in 2016 related to accounting, finance and information technology. Legal expenses for the six months ended June 30, 2016, totaled $2.6 million, an increase of $1.4 million or 116.7%, compared to $1.2 million from the prior corresponding period. The increase in legal expenses was attributable to mergers and acquisitions and litigation expenses. General and administrative expenses for the six months ended June 30, 2016, totaled $10.4 million, a decrease of $2.1 million or 16.8%, compared to $12.5 million from the prior corresponding period. The decrease in general and administrative expense was primarily attributable to a decline in non-cash compensation expense for the six months ended June 30, 2016, partially offset by an increase in insurance, audit and corporate marketing expense.

Other (Income) Expense

For the six months ended June 30, 2016, the Company recognized $3.1 million of other income comprised of $1.4 million in interest expense and $2.8 million in other income and a change in warrant and stock option derivative liability fair value of $1.7 million compared to $1.0 million of other expense comprised of $0.8 million in interest expense, $1.5 million other income and a change in warrant and option liability fair value of $1.7 million.

Income tax (benefit) expense

The net tax benefit for the six months ended June 30, 2016 was $2.2 million, compared to a tax expense of $0.6 million from the prior corresponding period. The temporary differences attributable to the projected taxable income include goodwill amortization, net operating loss carryforwards-U.S. and other accrued liabilities. Our effective tax rate during the six months ended June 30, 2016 was approximately 34.6%. The Company estimates an annual effective income tax rate of 30.7% for U.S., and none for Canada, based on projected results for the year.

Noncontrolling Interests

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

Balance Sheet

The Company experienced material variances in certain balance sheet accounts as discussed herein.

Trade Accounts Receivable, net

Accounts receivable as of June 30, 2016, totaled $77.6 million, a decrease of $15.0 million or 16.2%, compared to $92.6 million for the year-ended December 31, 2015. The decrease is a result of strong collections for the six months ended June 30, 2016.

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Liquidity and Capital Resources

Liquidity refers to an entity’s ability to meet its financial obligations and commitments as they become due. We are dependent upon cash generated from our operations, which is the major source of financing for our operations and for meeting our contractual obligations. We currently believe we have adequate liquidity to fund operations during the near term through the generation of operating cash flows, cash on hand and access to our senior secured revolving credit facility provided under the Loan Agreement. Our ability to borrow funds under Loan Agreement is subject to, among other things, the financial viability of the participating financial institutions. While we do not anticipate any of our current lenders defaulting on their obligations, we are unable to provide assurance that any particular lender will not default at a future date.

Cash and cash equivalents at June 30, 2016 and December 31, 2015 were $18.8 million and $15.7 million, respectively.

For the six months ended June 30, 2016, the Company experienced an increase in net cash provided by operating activities of $3.0 million attributable to a decrease in trade accounts receivable due to lower case volume during the period due to seasonality and cash collections on 2015 accounts. The Company experienced a decrease in net cash used for investing activities of $0.5 million attributable to the purchase of property and equipment and an investment in a surgical facility management company. Net cash used for financing activities decreased $24.4 million primarily due to proceeds from a one-time private placement in 2015, that did not reoccur in 2016.

As of June 30, 2016, the Company had consolidated net working capital of $55.8 million compared to $63.7 million as of December 31, 2015. The decrease is primarily due to a net decrease of accounts receivables and accounts payables.

We have a $25.0 million debt financing facility with Healthcare Financial Services, LLC (the successor in interest to General Electric Capital Corporation). Pursuant to the Credit Agreement and ancillary agreements (collectively, the “Loan Agreement”), the term loan bears interest at a rate of 4% plus LIBOR per annum and amortizes over 20 years with required quarterly payments of principal and interest until the loan matures in March 2020. The revolving loan also bears interest at a rate of 4% plus LIBOR per annum and amounts borrowed under the revolver may be repaid and re-borrowed periodically with a maturity of March 2020. The credit facility is collateralized by the accounts receivable and physical equipment of all 100% owned subsidiaries as well as the Company’s ownership interest in all less-than-wholly owned subsidiaries.

We entered into the Sixth Amendment (the “Sixth Amendment”) to Credit Agreement dated as of August 1, 2016 among Northstar Healthcare Acquisitions, L.L.C., HFS and the Credit Parties named therein amending, among other things, added a cap on Investments in Nobilis Health Anesthesia Network, PLLC of $2.0 million; increased the permitted indebtedness of the Company pursuant to that certain Loan Agreement, dated as of July 30, 2015 between PSH and Legacy Texas Bank from $7.0 million to $7.05 million; modified the maximum leverage ratio as of March 31, 2016 to 3.05 to 1.00; and modified the definition of "Subsidiary" to exclude the following entities: Athelite, Dallas Metro, Marsh Lane Surgical Hospital, LLC, Nobilis Health Network, Inc. ("NHN") and the subsidiaries of NHN. As a result, we were in compliance with our covenants under the HFS Term Loan as of June 30, 2016.

In addition, as required by the Sixth Amendment, the Company shall satisfy the following conditions subsequent on or prior to August 22, 2016 (the “Post-Closing Date”), as such date may be extended by HFS in its sole discretion; delivery by the Company, a joinder agreement adding an additional company facility to the credit parties and the termination and delivery of certain UCC financing statements. If the Company fails to satisfy such conditions subsequent by the Post-Closing Date, then the Sixth Amendment and the limited waiver shall automatically and without further action be rendered null and void and the specified events of default shall be reinstated. In addition, the Company shall pay to HFS on the Post-Closing Date, a sum equal to 0.50% of the aggregate amount of the commitments.

On July 30, 2015, the Company secured a $4.5 million term loan from Legacy Texas Bank (the “Legacy Bank Term Loan”). The term loan bears interest at a rate of 4% plus LIBOR per annum (4.47% at June 30, 2016) and requires monthly payments of interest. Monthly payments of principal will commence in August 2016. The Legacy Bank Term Loan matures in July 2020 and is subordinated to the Company’s term loan and revolver with HFS. As of June 30, 2016, the outstanding balance is $4.0 million. On May 18, 2016, the Company secured a $3.0 million revolving line of credit from Legacy Texas Bank (the “Legacy Revolver”). The Legacy Revolver bears interest at a rate of 4% plus LIBOR per annum (4.47% at June 30, 2016) on drawn funds and requires monthly payments of interest. As of June 30, 2016 we were in compliance with our covenants under the Legacy Bank Term Loan and Legacy Revolver.

Critical Accounting Policies

Our critical accounting policies are further described 2015 Annual Report. There have been no changes in the nature of our critical accounting policies or the application of those policies since December 31, 2015.

Recent Accounting Pronouncements

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments-Overall (Topic 825): Recognition and Measurement of Financial Assets and Financial Liabilities. (“ASU 2016-01”) This update changes how entities account for and measure the fair value of certain equity investments and updates the presentation and disclosure of certain financial assets and liabilities. This new ASU is effective for annual and interim periods beginning on or after December 15, 2017, and for interim periods within those fiscal years, with early adoption permitted. We are evaluating the impact that ASU 2016-01 will have on our consolidated financial position and disclosures.

In March 2016, the FASB issued ASU 2016-07, Investments - Equity Method and Joint Ventures (Topic 323). This amendment eliminates the requirement to retroactively adopt the equity method of accounting when a previous investment becomes qualified as a result of an increase in the level of ownership interest or degree of influence. ASU 2016-07 is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal periods. Early adoption is permitted. The Company adopted this ASU in the first quarter of 2016 with no impact on our consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal Versus Agent Considerations (Reporting Revenue Gross Versus Net). (“ASU 2016-08”) The amendments address how an entity should assess whether it is the principal or the agent in contracts that include three or more parties. The ASU clarifies that an entity should evaluate whether it is the principal or the agent for each specified good or service promised in a contract with a customer. The amendments affect the guidance in ASU 2014-09 which is not yet effective. The effective date and transition requirements for the amendments in this ASU are the same as the effective date and transition of ASU 2014-09, which will be effective for our reporting periods beginning after December 15, 2017. We do not expect these amendments to have a material effect on our consolidated financial statements.

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In April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing, which clarifies the guidance in ASU 2014-09 regarding assessing whether promises to transfer goods or services are distinct, and whether an entity's promise to grant a license provides a customer with a right to use or right to access the entity's intellectual property. The effective date and transition requirements for the amendments in this ASU are the same as the effective date and transition of ASU 2014-09, which will be effective for our reporting periods beginning after December 15, 2017. We do not expect these amendments to have a material effect on our consolidated financial statements.

In May 2016, the FASB issued ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients. (“ASU 2016-12”) This Update provides for amendments to ASU 2014-09, amending the guidance on transition, collectability, noncash consideration and the presentation of sales and other similar taxes. Specifically, ASU 2016-12 clarifies that, for a contract to be considered completed at transition, all (or substantially all) of the revenue must have been recognized under legacy GAAP. In addition, ASU 2016-12 clarifies how an entity should evaluate the collectability threshold and when an entity can recognize nonrefundable consideration received as revenue if an arrangement does not meet the standard’s contract criteria. The effective date and transition requirements for the amendments in this ASU are the same as the effective date and transition of ASU 2014-09, which will be effective for our reporting periods beginning after December 15, 2017. We do not expect these amendments to have a material effect on our consolidated financial statements.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources other than operating leases disclosed in Note 15 included in Part II, Item 8 —"Financial Statements and Supplementary Data” in our 2015 Annual Report.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

The following market risk disclosures should be read in conjunction with the unaudited consolidated financial statements and notes thereto included in this Quarterly Report.

We are subject to market risk from exposure to changes in interest rates based on our financing, investing and cash management activities. We do not, however, hold or issue financial instruments or derivatives for trading or speculative purposes. At June 30, 2016, the following components of our Loan Agreement bears interest at variable rates at specified margins above either the agent 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; and (iii) a $4.5 million, 5-year term loan; and (iv) a $3 million, 1-year revolving credit facility.

Although changes in the alternate base rate or the LIBOR rate would affect the cost of funds borrowed in the future, we believe the effect, if any, of reasonably possible near-term changes in interest rates on our remaining variable rate debt or our consolidated financial position, results of operations or cash flows would not be material. Holding other variables constant, including levels of indebtedness, a 0.125% increase in current interest rates would have no estimated impact on pre-tax earnings and cash flows for the next twelve month period given the 0.70215% LIBOR floor that exists in our Loan Agreement.

Foreign Currency Exchange Rate Risk

The Company holds cash balances in both U.S. and Canadian dollars. We transact most of our business in U.S. and Canadian dollars. As a result, currency exchange fluctuations may impact our operating costs. We do not manage our foreign currency exchange rate risk through the use of financial or derivative instruments, forward contracts or hedging activities.

In general, the strengthening of the U.S. dollar will positively impact our expenses transacted in Canadian dollars. Conversely, any weakening of the U.S dollar will increase our expenses transacted in Canadian dollars. We do not believe that any weakening of the U.S. dollar as compared to the Canadian dollar will have an adverse material effect on our operations.

Interest Rate Risk

The 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.

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Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, consisting of controls and other procedures designed to give reasonable assurance that information we are required to disclose in the reports we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to management, including our chief executive officer (“CEO”) and our chief financial officer (“CFO”), to allow timely decisions regarding such required disclosure.

Under the supervision and with the participation of our management, including our CEO and our CFO, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, at the end of the period covered by this report (the “evaluation date”). In conducting its evaluation, management considered the material weaknesses in our disclosure controls and procedures and internal control over financial reporting described in Part II, Item 9A—Controls and Procedures of our 2015 Annual Report. In addition, during the first quarter of 2016, management identified the following material weakness: in connection with our investment in Athelite Holdings LLC, an Equity method investment. We did not have proper controls in place around the review of legal documents and interpretation of accounting treatment of this significant non-routine transaction.

We are currently working to remediate the material weaknesses identified in our 2015 Annual Report and in this Quarterly Report. As of the evaluation date, our CEO and CFO have concluded that we did not maintain disclosure controls and procedures that were effective in providing reasonable assurances that information required to be disclosed in our reports filed under the Securities Exchange act of 1934 was recorded, processed, summarized and reported within the time periods prescribed by SEC rules and regulations, and that such information was not accumulated and communicated to our management to allow timely decisions regarding required disclosures.

In light of these material weaknesses, in preparing our financial statements as of and for the quarters ended June 30, 2016 and 2015, we performed additional analyses and procedures to ensure that our consolidated financial statements included in this Quarterly Report have been prepared in accordance with U.S. GAAP.

Our management has been actively engaged in remediation efforts to address the material weaknesses, as well as other identified areas of risk. These remediation efforts, outlined below, are intended to address the identified material weaknesses and to enhance our overall control environment:

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

 

On May 9, 2016, we appointed Mr. Marcos Rodriguez to serve as the Company’s Chief Accounting Officer.

We strengthened our accounting and financial reporting group with the addition of several new professionals with knowledge, experience and training in the application of U.S. GAAP to our accounting and finance organization. We also engaged third party accountants during the fourth quarter of 2015 who are providing assistance with significant, infrequently occurring transactions.

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

On September 21, 2015, we appointed Dr. Lee McMillian to serve as the Company’s Vice President of Information Technology. This was a newly created position for the Company.

During the fourth quarter of 2015 and the first quarter of 2016, we strengthened our information technology department by adding six information technology professionals with knowledge of security, networking and infrastructure.

 

We have also invested approximately $320 thousand in hardware and software upgrades.

 

As of January 2016, we implemented a process to review third party service providers’ Service Organization Controls reports.

In February 2016, we implemented a control to periodically review the access granted in order to ensure that users of our information systems had the appropriate access relative to the user’s job responsibilities. A new user access form was created that captured appropriate authorizations, not only for access to financial systems but for other sensitive systems as well. Furthermore, certain sensitive levels of access have been identified, which require further approvals from Company’s management.

In February 2016, we created controls to ensure that policies and procedures are followed with respect to application change management in certain of the Company’s proprietary software, which involves multiple levels of approval and periodic change management review.

In February 2016, we began restricting and maintaining network access accounts to only employees in the information technology department and implemented compensating controls, including periodic audits of network access.

Management believes that the foregoing efforts will effectively remediate the material weaknesses. As we continue to evaluate and work to improve our internal control over financial reporting, management may determine to take additional measures to address the material weaknesses or to modify the remediation plan described above. The material weaknesses will not be considered remediated until the enhanced controls have been tested and determined to be designed and operating effectively.

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Our executive management team, together with our Board of Directors, is committed to achieving and maintaining a strong control environment, high ethical standards, and financial reporting integrity.

Changes in Internal Control Over Financial Reporting

Except as discussed immediately above in the Evaluation of Disclosure Controls and Procedures, there has been no change in our internal control over financial reporting during the six months ended June 30, 2016 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Part II – Other Information

Item 1. Legal Proceedings

See Part I, Item 1—"Financial Statements, Note 20 – Commitments and Contingencies" of this Quarterly Report for an update on ongoing legal proceedings. Such information is incorporated into this Part II, Item 1—"Legal Proceedings" by reference.

Item 1A. Risk Factors

There have been no material changes in our risk factors from those disclosed in our 2015 Annual Report.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits

Exhibit Description
   
10.1*  

Sixth Amendment to Credit Agreement, Limited Waiver and Consent dated as of August 1, 2016 among Northstar Healthcare Acquisitions, L.L.C., the other Credit Parties named therein and Healthcare Financial Solutions, LLC

   
10.2* Purchase Agreement among Northstar Healthcare Acquisitions LLC, Nobilis Health Corp., Arizona Center for Minimally Invasive Surgery, LLC, Arizona Vein & Vascular Center, LLC and L. Philipp Wall, M.D., P.C. dated as of August 1, 2016
   
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
   
* 101.INS XBRL Instance Document
   
* 101.SCH XBRL Taxonomy Extension Schema Document
   
* 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
   
* 101.LAB XBRL Taxonomy Extension Label Linkbase Document
   
* 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document
   
* 101.DEF XBRL Taxonomy Extension Definition Linkbase Document

*filed herewith

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Signature

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

NOBILIS HEALTH CORP.

Date: August 2, 2016
     
By: /s/ Kenneth Klein  
  Kenneth Klein  
  Chief Financial Officer  
  (Principal Financial and Duly Authorized Officer)  

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